-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UQSgqDNCbtlH+8fCEmxvGyYjIr73ZutYtUVLxITvTWDhibVwk+twVixArAnpP7vn j5NpVaZ959bQ7N7miGkMwg== 0001047469-99-017358.txt : 19990503 0001047469-99-017358.hdr.sgml : 19990503 ACCESSION NUMBER: 0001047469-99-017358 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAMONTS APPAREL INC CENTRAL INDEX KEY: 0000785962 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [5651] IRS NUMBER: 752076160 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15542 FILM NUMBER: 99606682 BUSINESS ADDRESS: STREET 1: 12413 WILLOWS ROAD N.E. CITY: KIRKLAND STATE: WA ZIP: 98034-8711 BUSINESS PHONE: 4258145700 FORMER COMPANY: FORMER CONFORMED NAME: ARIS CORP DATE OF NAME CHANGE: 19920318 FORMER COMPANY: FORMER CONFORMED NAME: ARIS CORPORATION DATE OF NAME CHANGE: 19910903 FORMER COMPANY: FORMER CONFORMED NAME: TEXSTYRENE CORP DATE OF NAME CHANGE: 19881103 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended January 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the transition period from _______ to _______ COMMISSION FILE NUMBER 0-15542 LAMONTS APPAREL, INC. (Exact Name of Registrant as Specified in its Charter) Delaware #75-2076160 (State of Incorporation) (I.R.S. Employer Identification Number) 12413 Willows Road N.E., Kirkland, WA 98034 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (425) 814-5700 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE (TITLE OF CLASS) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Class A Common Stock, par value $0.01 per share and related Stock Purchase Rights Class A Warrants to purchase Class A Common Stock Class B Warrants to purchase Class A Common Stock Class C Warrants to purchase Class A Common Stock (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the Registrant's voting stock held by nonaffiliates of the Registrant as of April 15 ,1999, was approximately $4,477,000 (based on the average bid and ask price of such stock on such date). For purposes of this calculation, the voting stock held by Dallas C. Troutman has been included. 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 Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a Court. Yes /X/ No ---- ---- As of April 15, 1999, there were 9,000,000 shares of the Registrant's Class A Common Stock, par value $0.01 per share, outstanding and 10 shares of Registrant's Class B Common Stock, par value $0.01 per share, outstanding. Exhibit Index on Page 45 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CAUTION REGARDING FORWARD-LOOKING STATEMENTS Statements in this report containing the words "believes," "anticipates," "expects," and words of similar import, and any other statements which may be construed as a prediction of future performance or events, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, (i) national and local general economic and market conditions, (ii) demographic changes, (iii) liability and other claims asserted against the Company, (iv) competition, (v) the loss of a significant number of customers or suppliers, (vi) fluctuations in operating results, (vii) changes in business strategy or development plans, (viii) business disruptions, (ix) the ability to attract and retain qualified personnel, (x) ownership of Common Stock, (xi) volatility of stock price, (xii) delays on the part of the Company or suppliers or other third parties in achieving year 2000 compliance, and (xiii) the additional risk factors identified in the Company's Registration Statement on Form S-1 (No. 333-44311) initially filed with the SEC on January 15, 1998 (as amended from time to time), and those described from time to time in the Company's other filings with the SEC, press releases and other communications. The Company disclaims any obligations to update any such factors or to announce publicly the result of any revisions to any of the forward-looking statements contained or incorporated by reference herein to reflect future events or developments. PART I ITEM 1 - BUSINESS GENERAL BACKGROUND Lamonts Apparel, Inc. (the "Company" or "Lamonts") is a promotionally oriented, Northwest-based regional retailer with 38 stores in five states. The Company offers an assortment of moderately priced fashion apparel and home and fashion accessories at competitive prices for the entire family. The Company, which has been operating in the Northwest for over 30 years, is well recognized in the region as a retailer of nationally recognized brand name apparel such as Levi, Liz Claiborne, Lee, Bugle Boy, Jockey, Alfred Dunner, OshKosh, Adidas, Nike, and Health-Tex. Lamonts purchases goods from approximately 700 vendors and uses a distribution center in Kent, Washington for processing and warehousing merchandise for distribution to its stores. The Company employs approximately 1,500 people in salaried, hourly, or part-time positions. The Company's stores average approximately 47,000 square feet and are generally located in shopping centers and malls. CHAPTER 11 REORGANIZATION BACKGROUND On January 6, 1995, the Company filed a voluntary petition for relief under Chapter 11 ("Chapter 11") of title 11 of the United States Code in the United States Bankruptcy Court for the Western District of Washington at Seattle. The Company's Modified and Restated Plan of Reorganization (the "Plan") was confirmed by the Bankruptcy Court on December 18, 1997, and the Company emerged from bankruptcy on January 31, 1998 ("Plan Effective Date"). PLAN The overall purpose of the Plan was to (i) alter the debt and capital structure of the Company to permit it to emerge from Chapter 11 and (ii) settle, compromise or otherwise dispose of certain claims on terms that the Company considered to be reasonable. The Plan resulted in an approximate $90 million net reduction in the total indebtedness and liabilities subject to reorganization of the Company. The Plan provided generally for, among other things, payment in full by the Company of administrative expenses, certain other priority claims and secured claims, other than the claim of BankBoston, N.A. ("BankBoston"), the agent and lender under the Company's bank credit facility (the "BankBoston Facility"), (which was left unimpaired), cancellation of certain indebtedness in exchange for new equity securities of 2 the Company, the discharge of certain other pre-petition claims, the cancellation of then existing equity securities of the Company in exchange for new equity securities of the Company, the assumption or rejection of executory contracts and unexpired leases and the designation of a new board of directors. In addition, the Plan provided that the Company assume all of its obligations under the BankBoston Facility, including any unpaid accrued interest, fees, costs and charges. DEBTOR-IN-POSSESSION ("DIP") FINANCING AND EXIT FINANCING During its Chapter 11 case, the Company received debtor-in-possession financing from BankBoston pursuant to a loan and security agreement, dated June 4, 1996 (the "Prior Loan Agreement") between the Company and BankBoston. On September 26, 1997, the Prior Loan Agreement was amended and restated as set forth in the Amended and Restated Debtor-in-Possession and Exit Financing Loan Agreement (the "Loan Agreement"), between the Company and BankBoston. Pursuant to the Loan Agreement, BankBoston provides Lamonts with (i) a revolving credit facility (the "Revolver") with a maximum borrowing capacity of $32 million and (ii) a term loan in the amount of $10 million (the "Term Loan"). See Note 7 to the Consolidated Financial Statements for a description of the Term Loan, Revolver and BankBoston Facility. ACQUISITION OF SECURITIES BY TROUTMAN INVESTMENT COMPANY On January 4, 1999, Troutman Investment Company ("Troutman Investment") filed with the SEC a report stating that on December 23, 1998, Troutman Investment acquired 2,925,140 shares of Class A Common Stock, 1,810,380 Class A Warrants, and 581,181 Class B Warrants from certain investment companies and accounts indirectly controlled by FMR Corp. (collectively "Fidelity") with the stated intent of entering into discussions with the Company regarding a possible merger of the two Companies. Troutman Investment's principal business is the operation of retail stores selling fashion apparel and home and fashion accessories. In January, 1999, the Company commenced preliminary discussions with Troutman Investment with respect to a possible merger between the Company and Troutman Investment. Additionally, the Board of Directors of the Company adopted a Stockholder Rights Plan (See Note 12 to the Consolidated Financial Statements) and certain amendments to the Company's Bylaws . The Company does not intend to disclose any details of the discussions with Troutman Investment pending their outcome. On March 10, 1999, Troutman Investment transferred all of its securities of Lamonts Apparel, Inc. to Dallas C. Troutman, president and controlling stockholder of Troutman Investment. OPERATIONS Lamonts offers an assortment of moderately priced fashion apparel, and home and fashion accessories for the entire family at competitive prices. PROMOTION AND MARKETING - Sales promotion and inventory allocation decisions are made centrally by Lamonts' corporate staff. The Company generally maintains uniform inventory, pricing decisions, selection of promotional goods and markdown policies throughout all of its locations. Lamonts advertises primarily through radio, television, newspaper and newspaper inserts, direct mail, and charge statement inserts. The Company's promotional strategy targets specific merchandise products and consumer groups, including holders of its proprietary credit card, for sales events. SHOE LICENSEE - Lamonts utilizes a licensee, Shoe Corporation of America ("SCOA"), for its shoe department. Income derived from the rental fees charged to the licensee is reported as an offset to operating expenses. The rental fees paid to Lamonts by SCOA (approximately $1.4 million for the 52 weeks ended January 30, 1999 ("Fiscal 1998")) range from 10% to 12% of annual net sales generated by the licensee. The license agreement with SCOA expires in January 2001 with one three-year optional extension. PURCHASING - The Company's centralized buying organization includes general merchandise managers, divisional merchandise managers, and buyers responsible for maintaining vendor relationships. The Company purchases its merchandise from approximately 700 vendors and is not dependent on any single source of supply. The Company 3 also has a membership in Frederick Atkins, Inc. ("Atkins"), a merchandising consultant and buying cooperative, which provides certain private label merchandise to the Company. In connection with its membership, the Company maintains a noncurrent deposit of approximately $1.0 million. The Company maintains no long-term commitments with any supplier and believes that there will continue to be an adequate supply of merchandise to satisfy its current and anticipated requirements. However, like other apparel retailers, the Company is highly dependent upon its ability to obtain trade credit. On March 31, 1999, the Company informed Atkins that it was terminating its membership in Atkins in accordance with the terms of an agreement, which provides that either party may terminate the agreement at the end of any calendar month by giving at least 18 months prior written notice to the other party. In the opinion of management, the termination of its membership in Atkins will not have a material adverse effect on the business of Lamonts. DISTRIBUTION - The Company utilizes a contractor, Assembly Transportation Distribution Systems, Inc. ("ATD"), to operate its distribution center pursuant to an agreement dated April 30, 1998, that continues through February 2001. Monthly operating fees payable to ATD are $16,164, in addition to reimbursements for specified costs incurred in connection with the operations of the distribution center. Through its dedicated distribution center, the Company generally receives, tickets and ships merchandise to its stores within a two-to-three day period. The Company believes that this distribution center enables it to monitor vendor shipments effectively, reduce receiving and marking expenses, reduce related transportation costs, improve inventory control, and reduce inventory shrinkage. The current lease for the distribution center, which is guaranteed by the Company, covers 62,500 square feet of space through February 2001. The amount of lease payments guaranteed by the Company pursuant to the lease is approximately $21,000 per month. See "Item 2 - Properties." STORE OPERATIONS - The Company's store management team consists of a senior vice president, three regional directors and 36 store managers. Two of the three regional directors also serve as store managers. Store managers are primarily responsible for hiring and supervising store personnel and for day-to-day store operations. A typical Lamonts store employs a staff of 25 to 40 people, including the store manager, two to four area sales managers and 20 to 35 sales associates, approximately two-thirds of whom are part-time. EMPLOYEES - The Company employs approximately 1,500 people, approximately two-thirds of whom are part-time. Approximately 325 employees working in Seattle, Washington stores are represented by the United Food and Commercial Workers Union pursuant to a contract that expires June 12, 1999. Approximately 40 employees working in the Wenatchee, Washington store are represented by the United Food and Commercial Workers Union. These employees have not negotiated a collective bargaining agreement, and they work under the same working conditions as the Company's nonunion employees. Approximately 20 employees working in the Kirkland corporate office are represented by the United Food and Commercial Workers Union pursuant to a contract that expires on March 31, 2000. Management believes that its employee relations are good. COMPETITION - Lamonts competes with other specialty retail apparel stores, department stores and discount and mass merchandisers on the basis of product range, quality, fashion, price and service. The Company attempts to differentiate itself from its competitors by positioning itself as a focused specialty retailer with emphasis on casual wear and high quality branded products, as well as its private label, "Northwest Outfitters." Principal competitors in one or more of the Company's market areas include The Bon Marche (a division of Federated Department Stores, Inc.), Nordstrom, J.C. Penney Co., Inc., Sears Roebuck and Company, and Mervyn's (a division of Dayton-Hudson Corporation). Many of the Company's competitors have substantially greater financial resources than Lamonts. TRADEMARKS - The Company currently owns various registered trademarks which are part of its private label program. Management believes that, although these trademarks are significant, the Company's business is not dependent on any of the rights. CREDIT POLICY - The Company offers its customers various methods of payment including cash, check, Lamonts charge card, certain major credit cards and a lay-away plan. Since its inception in July 1988, the Company's charge card program has expanded to approximately 675,000 accounts, of which approximately 165,000 had transactions within the last year. The Company's proprietary charge card, administered and owned by Alliance Data Systems ("ADS"), provides for the option of paying in full within 30 days of the billed date with no finance charge or with revolving credit terms. Terms of the short-term revolving charge accounts require customers to make minimum monthly payments in 4 accordance with prescribed schedules. Through a contractual arrangement, as amended (the "Alliance Agreement"), ADS owns the receivables generated from purchases made by customers using the Lamonts charge card. The Alliance Agreement provides that the Company will be charged a discount fee of 1.95% of Net Sales, as that term is defined in the Alliance Agreement. Additionally, the Alliance Agreement provides for a supplemental discount fee equal to one-tenth of one percent (0.1%) of Net Sales for each one million dollar increment that Net Sales for a subject year are less than $48.0 million (the "Minimum Level") up to a total maximum fee of 3% of the Net Sales for the subject year. ADS waived the supplemental discount fee for the 52 weeks ended January 31, 1998 ("Fiscal 1997"). In the event of store closures, the Alliance Agreement provides that the Minimum Level may be decreased. The Company is not responsible for any net bad debt expense. Discount fees totaled approximately $0.8 million in Fiscal 1998 and $0.9 million in Fiscal 1997. The Alliance Agreement provides that either party may terminate the agreement after June 22, 1999 upon 180 days prior written notice. In December 1998, the Company gave notice of termination. The Company intends to enter into an agreement with a new administrator effective in mid-1999. RETURN POLICY - The Company exchanges or issues a credit if a customer is not completely satisfied with any Lamonts purchase. Management believes that the Company's customer return policy and experience is consistent with industry practices. INFORMATION SYSTEMS - In recent years the Company has invested in the development of management information systems (MIS) in the areas of merchandise reporting, distribution and allocation, customer service (full and promotional price look-up at the register), as well as financing, credit authorization, and store operations. The Company uses the Universal Product Code (UPC) on each ticket and automatic price look-up and electronic data interchange (EDI) for re-ordering basic merchandise and for vendor-provided advance ship notices (ASN's) which improves in-stock inventories on predictable, basic merchandise. The point-of-sale (POS) data provides the basis for merchandise unit reporting, merchandise allocation decisions and the electronic transmission of orders. In addition to running its own automatic basic stock replenishment system, the Company also uses automatic basic merchandise replenishment programs offered by key vendors. Sales and POS markdowns are monitored daily by using POS terminals to record ticketed information, which flows electronically from the stores to the corporate office and then to the service bureau referred to below. These sales and POS markdowns are combined with receipt, on-hand and on-order information to support merchant reports, and on-line screens at the department, vendor, class style, and in some cases, color/size or UPC level. Current MIS efforts are focused on enhancing vendor reporting and classification to the merchants and Year 2000 preparations, as well as a new POS platform to support enhanced customer service and future direct marketing initiatives. The Company utilizes an outside service bureau, Affiliated Computer Services, Inc. ("ACS"), for its mainframe computer processing pursuant to a contract that continues through February 2000. Fees payable to ACS under the contract are based on CPU utilization and other miscellaneous charges. The minimum monthly fee payable to ACS under the contract is $50,000. In addition, ACS licenses certain system and application software programs to the Company. REGULATIONS - The Company is subject to Federal, state and local laws and regulations affecting retail apparel stores generally. The Company believes that it is in substantial compliance with these laws and regulations. ITEM 2 - PROPERTIES The Company considers its ability to maintain attractive, high traffic store locations to be a critical element of its business and a key determinant of Lamonts' future growth and profitability. 5 The Company currently operates 38 stores in the following locations:
Alaska (7) Washington (23) Utah (1) - ------------------------ ---------------------------------- ---------------- - - Anchorage: 3 stores - Seattle: 6 stores - Logan - - Fairbanks - Bellevue/Eastside: 4 stores - - Juneau - Spokane: 2 stores - - Soldotna - Tacoma: 2 stores Oregon (2) ---------------- - - Wasilla - Aberdeen - Marysville - Astoria Idaho (5) - Moses Lake - Corvallis - ------------------------ - Olympia - - Coeur d'Alene - Port Angeles - - Idaho Falls - Silverdale - - Lewiston - Tri-Cities - - Moscow - Wenatchee - - Pocatello - Yakima
Of the 38 stores, 14 are located in regional malls, 15 are located in community malls, three are located in strip centers, and six are located in free-standing locations. All of the Company's stores are currently operated in facilities leased by the Company, except one which is operated in a building owned by the Company subject to a ground lease which expires in 2015. The leases for these facilities have terms up to 30 years, with an average remaining term of six years, not including additional option periods. The Company leases approximately 30,000 square feet for its principal office in Kirkland, Washington. The lease expires in May 2006. The Company's stores range from 20,700 to 80,000 square feet in size, with a typical store averaging approximately 47,000 square feet. The interiors of Lamonts' stores are decorated and organized to maximize traffic flow and merchandise exposure. Signage and service facilities, such as fitting rooms and customer service areas, are designed to create a pleasant and convenient shopping environment. The Company has an agreement with ATD, which provides distribution and merchandise processing services for Lamonts on a cost plus fee reimbursement basis. As part of the agreement, the Company is a guarantor of the lease of the distribution center located in Kent, Washington. The lease expires in February 2001. ITEM 3 - LEGAL PROCEEDINGS The Company is involved in various matters of litigation arising in the ordinary course of business. In the opinion of management, the ultimate outcome of all such matters will not have a material adverse effect on the financial position of the Company, but, if decided adversely to the Company, could have a material effect on quarterly or annual operating results during the period such matters are resolved. In March 1995, the Company brought an action against one of its landlords, Hickel Investment Company ("Hickel"), to recover overpayments of common area maintenance and other charges made to Hickel. The United States District Court for the District of Alaska has entered a judgment against Hickel for an amount in excess of $1.9 million. Hickel has since appealed the judgment and posted a bond to obtain a stay pending appeal. There can be no assurance that the Company will be successful on such appeal. No amounts related to this judgment have been recorded in the Consolidated Financial Statements. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the last quarter of Fiscal 1998. 6 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK Pursuant to the Plan, the Company's Class A Common Stock, par value $0.01 per share ("Common Stock"), was delivered to Norwest Bank Minnesota, N.A., as exchange agent, on January 31, 1998, for distribution to unsecured creditors and shareholders. The Common Stock is quoted on the OTC Bulletin Board ("OTC") and is listed under the symbol "LMNT." The average bid and ask price of the Common Stock on April 15, 1999 was $0.50. As of April 15, 1999, there were 1,100 holders of record of the Common Stock. The following table sets forth, for the periods indicated, the high and low bid prices of the Common Stock (Fiscal 1998) and the common stock issued to the former holders of Lamonts common stock ("Old Common Stock") (Fiscal 1997) as quoted on the OTC under the symbol "LMNT". The bid prices, as stated, represent inter-dealer prices without adjustments for retail mark-ups, markdowns or commissions and may not necessarily represent actual transactions.
- ---------------------------------------------------- -------------- Fiscal 1998 (Common Stock): High Low - ------------------------------------- ------------- -------------- Thirteen weeks ended May 2 2 5/8 Thirteen weeks ended August 1 1 5/16 3/8 Thirteen weeks ended October 31 13/16 3/8 Thirteen weeks ended January 30 1 1/2 1/4 - ---------------------------------------------------- -------------- Fiscal 1997 (Old Common Stock): High Low - ------------------------------------- ------------- -------------- Thirteen weeks ended May 3 1/8 1/16 Thirteen weeks ended August 2 1/8 1/16 Thirteen weeks ended November 1 3/16 1/16 Thirteen weeks ended January 31 1/4 1/16
DIVIDENDS The Company has never declared or paid cash dividends on its Common Stock or its Old Common Stock, or any other equity security, and does not anticipate paying cash dividends on the Common Stock or any other equity security in the foreseeable future. Any future determination as to the payment of dividends will depend upon certain debt instrument limitations, future earnings, results of operations, capital requirements, the financial condition of the Company, and such other factors as the Company's Board of Directors may consider. The ability of the Company to pay dividends is directly and indirectly restricted under the terms of the BankBoston Facility. Such restrictions prohibit the payment of dividends for the foreseeable future. ITEM 6 - SELECTED FINANCIAL DATA The following table sets forth certain selected financial data for the Company and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto, included in Item 8. The following financial data is not necessarily comparable for the periods presented because of the effects of Fresh-Start Reporting as of January 31, 1998, due to the inclusion of reorganization expenses prior to January 31, 1998. Accordingly, a vertical black line is shown to separate post-emergence operations from those prior to January 31, 1998 in the statement of operations data and to separate the January 31, 1998 consolidated balance sheet data from the prior year since it is not prepared on a comparable basis. 7 ITEM 6 - SELECTED FINANCIAL DATA LAMONTS APPAREL, INC. (Dollars in thousands, except per share data)
52 weeks ended | 52 weeks ended 52 weeks ended Jan 30, 1999 | Jan 31, 1998 Feb 1, 1997 -------------- | -------------- -------------- | STATEMENT OF OPERATIONS DATA | Revenues (1) $209,585 | $201,623 $203,602 Cost of merchandise sold 137,651 | 131,700 130,480 --------- | --------- --------- Gross profit 71,934 | 69,923 73,122 --------- | --------- --------- Operating and administrative expenses 63,343 | 67,844 67,173 Depreciation and amortization 8,024 | 7,141 7,999 Impairment of long-lived assets -- | -- 4,170 Store closure costs -- | -- -- --------- | --------- --------- Operating costs 71,367 | 74,985 79,342 --------- | --------- --------- | Income (loss) from operations before other | income (expense), reorganization | expenses, fresh-start revaluation, | and extraordinary item 567 | (5,062) (6,220) | Other income (expense): | Interest expense (2) (5,042) | (5,900) (5,053) Other income (expense) 14 | 8 12 --------- | --------- --------- Loss from operations before reorganization expenses, | fresh-start revaluation and extraordinary item (4,461) | (10,954) (11,261) Reorganization expenses -- | (5,995) (6,037) Fresh-start revaluation -- | 70,495 -- --------- | --------- --------- Income (loss) before income taxes and extraordinary item (4,461) | 53,546 (17,298) Income tax benefit -- | -- -- --------- | --------- --------- Income (loss) before extraordinary item (4,461) | 53,546 (17,298) Extraordinary item - gain on debt discharge 0 | 69,158 0 --------- | --------- --------- Net income (loss) ($4,461) | $122,704 ($17,298) --------- | --------- --------- --------- | --------- --------- Net income (loss) before extraordinary item per | Common Share, Basic and Diluted (3) ($0.50) | $3.00 ($0.97) --------- | --------- --------- --------- | --------- --------- Net income (loss) per Common Share, Basic and Diluted (3) ($0.50) | $6.86 ($0.97) --------- | --------- --------- --------- | --------- --------- Shares Used in Computing Earnings (Loss) per | Common Share (in thousands), Basic and Diluted (3) 9,000 | 17,876 17,900 --------- | --------- --------- --------- | --------- --------- BALANCE SHEET DATA (at end of period) Working capital (deficit) ($16,662) ($5,049) | ($3,357) Total assets 93,895 96,892 | 93,272 Liabilities subject to settlement under | reorganization proceedings -- -- | 102,858 Long term debt and obligations under capital | leases, net of current maturities 12,490 24,371 | 2,846 Stockholders' equity (deficit) 14,602 19,956 | (59,553)
(unaudited) 53 weeks ended 52 weeks ended Feb 3, 1996 (4) Jan 28, 1995 (4) --------------- ---------------- STATEMENT OF OPERATIONS DATA Revenues (1) $199,548 $231,199 Cost of merchandise sold 131,677 175,330 --------- --------- Gross profit 67,871 55,869 --------- --------- Operating and administrative expenses 71,372 87,807 Depreciation and amortization 9,232 11,355 Impairment of long-lived assets -- -- Store closure costs -- 7,200 --------- --------- Operating costs 80,604 106,362 --------- --------- Income (loss) from operations before other income (expense), reorganization expenses, fresh-start revaluation, and extraordinary item (12,733) (50,493) Other income (expense): Interest expense (2) (5,098) (11,858) Other income (expense) 196 27 --------- --------- Loss from operations before reorganization expenses, fresh-start revaluation and extraordinary item (17,635) (62,324) Reorganization expenses (7,240) (7,499) Fresh-start revaluation -- -- --------- --------- Income (loss) before income taxes and extraordinary item (24,875) (69,823) Income tax benefit -- 400 --------- --------- Income (loss) before extraordinary item (24,875) (69,423) Extraordinary item - gain on debt discharge -- --------- --------- Net income (loss) ($24,875) ($69,423) --------- --------- --------- --------- Net income (loss) before extraordinary item per Common Share, Basic and Diluted (3) ($1.39) ($4.13) --------- --------- --------- --------- Net income (loss) per Common Share, Basic and Diluted (3) ($1.39) ($4.13) --------- --------- --------- --------- Shares Used in Computing Earnings (Loss) per Common Share (in thousands), Basic and Diluted (3) 17,894 16,820 --------- --------- --------- --------- BALANCE SHEET DATA (at end of period) Working capital (deficit) ($2,248) $16,025 Total assets 102,361 120,269 Liabilities subject to settlement under reorganization proceedings 104,845 108,333 Long term debt and obligations under capital leases, net of current maturities -- -- Stockholders' equity (deficit) (42,556) (17,509)
- -------------------------- 1 The additional week during the 53 weeks ended February 3, 1996 ("Fiscal 1995") accounted for $2.2 million of revenues. 2 Interest expense includes amortization of discounts on the Company's long term debt and interest paid through issuance of additional debt. 3 See note 4 to the consolidated financial statements. 4 The Company changed its fiscal year end on March 9, 1995. For purposes of presenting the data for the 52 weeks ended January 28, 1995 ("Fiscal 1994"), the Company has provided data which is derived from unaudited financial records of the Company. 8 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In connection with this item, reference is made to the information appearing under "Caution Regarding Forward-Looking Statements" at the beginning of this report. The following information should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto included elsewhere in this report. BACKGROUND FRESH-START REVALUATION Effective January 31, 1998, the Company implemented the required accounting for entities emerging from Chapter 11 in accordance with the American Institute of Certified Public Accountant's (AICPA) Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" (also referred to as "Fresh-Start Reporting"). Under Fresh-Start Reporting, the reorganization value (determined as discussed below) of the Company was allocated to the reorganized Company's net assets on the basis of the purchase method of accounting, which required the adjustment of the Company's assets and liabilities to reflect their estimated fair value at the Plan Effective Date. In accordance with SOP 90-7, the Company's reorganization value was determined as of the Plan Effective Date. The reorganization value was derived by an independent public accounting firm (which was not the Company's independent accountants) using various valuation methods, including discounted cash flow analyses (utilizing the Company's projections), analyses of the market values of other publicly traded companies whose businesses are reasonably comparable, and analyses of the present value of the Company's equity. This value was viewed as the fair value of the Company before considering liabilities and approximated the amount a willing buyer would have paid for the assets of the Company immediately after restructuring. Management determined the value of the equity to be approximately $20 million by deducting the working capital deficit, operating debt, and the new debt from the reorganization value. The adjustments to reflect the consummation of the Plan and the adoption of Fresh-Start Reporting, including the adjustment to restate assets and liabilities at the fair value of net assets, including the establishment of excess reorganization value, and the gain on debt discharge for liabilities subject to settlement under reorganization proceedings, are reflected in the Fiscal 1997 Consolidated Statements of Operations under the captions "Fresh Start Revaluation" and "Extraordinary Item - Gain on Debt Discharge". See Note 2 to the Consolidated Financial Statements. Because Fresh-Start Reporting was adopted as of January 31, 1998, the consolidated results of operations for Fiscal 1998 are not comparable to Fiscal 1997 due to the inclusion of reorganization expenses prior to January 31, 1998, and the change in depreciation and amortization expenses related to the revaluation of assets. Accordingly, a vertical black line is shown to separate post-emergence operations from those prior to January 31, 1998, in the consolidated results of operations and to separate the January 31, 1998 consolidated balance sheet from the prior year since it is not prepared on a comparable basis. 9 RESULTS OF OPERATIONS FISCAL 1998 COMPARED TO FISCAL 1997 REVENUES. Comparable store revenues (i.e., stores open since the beginning of each of the periods presented) of $209.6 for Fiscal 1998 increased $8.0 million or 3.9% from $201.6 million for Fiscal 1997. Comparable store revenues increased due to higher average inventory levels, continued improvement in the quality of the merchandise offered in the stores, and strong sales in the Alaska market. There can be no assurance that a continuation of such factors will increase revenues in future periods. GROSS PROFIT. Gross profit of $71.9 million or 34.3% as a percentage of revenues for Fiscal 1998 decreased from $69.9 million or 34.7% for Fiscal 1997. Gross profit percentages include all anticipated markdowns. OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses were $63.3 million, or 30.2% of revenues for Fiscal 1998, compared to $67.8 million, or 33.6% of revenues, for Fiscal 1997. Excluding the curtailment gain of $1.0 million recognized in the first quarter of Fiscal 1998 (see Note 14 to the Consolidated Financial Statements), operating and administrative expenses for Fiscal 1998 were 30.7% of sales. Expense savings initiatives, including lower occupancy expense at the Company's leased distribution center and lower store payroll expense as a percentage of sales, partially offset by an increase in Year 2000 remediation costs, accounted for the remainder of the reduction in operating and administrative expenses for Fiscal 1998 as compared to Fiscal 1997. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was $8.0 million for Fiscal 1998 and $7.1 million for Fiscal 1997. The increase is primarily due to the revaluation of assets in connection with fresh-start reporting. INTEREST EXPENSE. Interest expense was $5.0 million in Fiscal 1998 compared to $5.9 million in Fiscal 1997. Interest expense is primarily related to outstanding borrowings under the Company's BankBoston Facility, referred to below. The decrease is primarily the result of an adjustment, totaling approximately $0.8 million, for a change in estimate recorded during Fiscal 1998 and lower average interest rates, partially offset by higher outstanding balances on the BankBoston Facility during Fiscal 1998. REORGANIZATION EXPENSES. Reorganization expenses of $6.0 million in Fiscal 1997 represent costs directly related to the Company's Chapter 11 case. No such costs were incurred in Fiscal 1998. See Note 1 to the Consolidated Financial Statements. FRESH-START REVALUATION. The Company recorded a fresh-start revaluation adjustment of $70.5 million in Fiscal 1997. See Note 2 to the Consolidated Financial Statements. EXTRAORDINARY ITEM - GAIN ON DEBT DISCHARGE. The Company recorded an extraordinary gain of $69.2 million in Fiscal 1997. See Note 2 to the Consolidated Financial Statements. NET INCOME. As a result of the foregoing, the Company recorded a net loss of $4.5 million for Fiscal 1998 compared to net income of $122.7 million in Fiscal 1997. The $12.5 million improvement (exclusive of the $70.5 million fresh-start revaluation and $69.2 million extraordinary item - gain on debt discharge recorded in Fiscal 1997) is primarily due to (i) the decrease in operating and administrative expenses of $4.5 million, (ii) the increase in gross profit of $2.0 million, due mainly to the increase in store revenues, (iii) the $0.9 million reduction in interest expense and (iv) the reduction in reorganization expenses of $6.0 million. These improvements were partially offset by the increase in depreciation and amortization expense of $0.9 million. 10 FISCAL 1997 COMPARED TO THE 52 WEEKS ENDED FEBRUARY 1, 1997 ("FISCAL 1996") REVENUES. Revenues of $201.6 million for Fiscal 1997 decreased $2.0 million on a total store basis from $203.6 million for Fiscal 1996. This decrease is attributable to the closure of the five stores that were operating during Fiscal 1996. Comparable store revenues, for the 38 stores, of $201.6 million for Fiscal 1997 increased 6.3% from $189.7 million for Fiscal 1996. Comparable store revenues are defined as revenues generated at stores open for at least 12 months in each of the periods. Management believes that comparable store revenues have increased due to higher inventory levels and continued improvement in the quality of the merchandise offered in the stores compared to the prior year. There can be no assurance that a continuation of such factors will increase revenues in future periods. GROSS PROFIT. Gross profit as a percentage of revenues of 34.7% for Fiscal 1997 decreased from 35.9% for Fiscal 1996 due to additional markdowns in Fiscal 1997. Reductions in the LIFO inventory layers impacted the Consolidated Statements of Operations by $0.2 million in Fiscal 1997 and Fiscal 1996. OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses of $67.8 million, or 33.6% of revenues for Fiscal 1997, compared to $67.2 million, or 33.0% of revenues, for Fiscal 1996. Operating and administrative expense savings of $3.6 million attributable to closed stores operating in the prior year were offset by increases in (i) credit card fees of $0.4 million, (ii) advertising of $1.0 million, (iii) payroll of $0.5 million, (iv) write-down supplies inventory and other current assets of $1.1 million, and (v) other expenses of $1.2 million, which included Year 2000 compliance expenses. Year 2000 costs included in operating and administrative expenses for Fiscal 1997 amounted to approximately $0.3 million. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense of $7.1 million for Fiscal 1997 decreased $0.9 million from $8.0 million for Fiscal 1996. The decrease was primarily related to assets retired as a result of store closures and assets becoming fully depreciated or amortized. IMPAIRMENT OF LONG-LIVED ASSETS. A non-cash charge of $4.2 million for the impairment of long-lived assets was recognized during Fiscal 1996 due to the adoption of Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). See Note 3 to the Consolidated Financial Statements. INTEREST EXPENSE. Interest expense of $5.9 million in Fiscal 1997 increased from $5.1 million in Fiscal 1996. Interest expense is primarily related to outstanding borrowings under the Company's bank credit facilities. The increase in interest expense is primarily due to facility fees incurred in connection with the Term Loan and Revolver (as discussed below in the "Financing" section). REORGANIZATION EXPENSES. During the course of the Chapter 11 case, the Company recognized $26.8 million of reorganization expenses, including approximately $13.2 million of non-cash charges, of which $6.0 million was incurred during Fiscal 1997 and $6.0 million during Fiscal 1996. The Fiscal 1997 expenses relate primarily to professional fees and bonuses paid to certain employees associated with the Company's Chapter 11 case. In addition, the Fiscal 1996 expenses include accrued or estimated costs associated with the rejection of real property leases and costs related to closing underperforming and nonprofitable stores. FRESH-START REVALUATION. The Company recorded as income, a fresh-start revaluation adjustment of $70.5 million in Fiscal 1997. See Note 2 to the Consolidated Financial Statements. EXTRAORDINARY ITEM - GAIN ON DEBT DISCHARGE. The Company recorded an extraordinary gain of $69.2 million in Fiscal 1997. See Note 2 to the Consolidated Financial Statements. NET INCOME. The net income for Fiscal 1997 was $122.7 million, compared to a net loss of $17.3 million for Fiscal 1996. The $0.3 million improvement (exclusive of the $70.5 million fresh-start revaluation and $69.2 million extraordinary item - gain on debt discharge) is primarily due to no impairment of long lived assets for Fiscal 1997 compared to the recognition of a $4.2 million for impairment in Fiscal 1996, and the decrease in depreciation and amortization expenses of $0.9 million, offset by (i) the decrease in gross profit of $3.2 million, (ii) the increase in operating and administrative expenses of $0.6 million, and (iii) the increase in interest expense of $0.8 million. 11 LIQUIDITY AND CAPITAL RESOURCES The Company used $1.9 million of cash for operating activities for Fiscal 1998. Cash for operating activities was used to fund higher inventory levels, for the payment of accrued reorganization expenses as required under the Plan, and to fund losses in Fiscal 1998. The Company's primary cash requirement is the procurement of inventory which is currently funded through borrowings under the BankBoston Facility, trade credit and cash generated from operations. Like other apparel retailers, the Company is highly dependent upon its ability to obtain trade credit, which is generally extended by its vendors and, when applicable, their factoring institutions that continually monitor the Company's credit worthiness. If the Company continues to obtain the trade credit terms it is currently receiving, the Company believes that borrowings under the BankBoston Facility and cash generated from operations will provide the liquidity necessary to fund the Company's cash requirements for the next 12 months. As of January 30, 1999, the Company had a working capital ratio of 0.7. At January 30, 1999, the Company had a working capital deficit of approximately $16.7 million. Approximately $10.0 million of the working captial deficit is primarily as a result of recording as a current liability the balance due on December 26, 1999 on the Company's Term Loan (as more fully described in Note 7 to the Consolidated Financial Statements). Subject to an extension of the Revolver (as more fully described in Note 7 to the Consolidated Financial Statements) for a sufficient period, the Company has the option to extend the maturity date of the Term Loan for two additional one-year periods and plans to do so. If the Term Loan is extended, the Company will record the balance due on the Term Loan as long-term debt. Based on discussions to date with BankBoston, the Company anticipates that the Revolver will be extended. In addition, the Company intends to continue implementing a plan, formulated by senior management, designed to increase gross margins and reduce operating expenses through a variety of department level merchandising strategies and cost containment initiatives. If this plan is successful it would further reduce the working capital deficit remaining after the reclassification of the Term Loan to long-term debt as discussed above. For additional information see Notes 1 and 7 to the Consolidated Financial Statements. The Company used $2.3 million of cash in investing activities for Fiscal 1998, representing an increase of $1.1 million as compared to $1.2 million used in Fiscal 1997. The increase was primarily attributable to higher capital expenditures. In addition, the Company received approximately $0.2 million from the sale of land during Fiscal 1997. Management continually evaluates store locations and operations to determine whether to close, downsize or relocate stores that do not meet performance objectives. Management has no current plans to close any of the 38 Lamonts stores. FINANCING The Company entered into the Amended and Restated Debtor-in-Possession and Exit Financing Loan Agreement, dated as of September 26, 1997 (the "Loan Agreement"), between the Company and BankBoston, N.A. ("BankBoston"), pursuant to which BankBoston provides Lamonts with (i) a revolving line of credit (the "Revolver") with a maximum borrowing capacity of $32 million, ($35 million for the period October 15, 1998 to December 15, 1998) and (ii) a term loan in the amount of $10 million (the "Term Loan" and, together with the Revolver, the "BankBoston Facility"). See Note 7 to the Consolidated Financial Statements for a further description of the BankBoston Facility. The Revolver will mature January 31, 2000 subject to earlier maturity (including, as a result of acceleration, mandatory prepayment or otherwise) of the Term Loan. The Term Loan will mature December 26, 1999, subject to earlier maturity (including, as a result of acceleration, mandatory prepayment or otherwise) of the Revolver. Lamonts may extend the maturity date of the Term Loan for two additional one-year periods (subject to earlier maturity of the Revolver), on the terms and conditions set forth in the Loan Agreement and upon payment of a fee equal to approximately 5% of the outstanding amount of the Term Loan on the relevant extension date. There are no extension options for the Revolver. As of April 14, 1999, the Company had $27.6 million of borrowings outstanding under the Revolver (with additional borrowing capacity of $4.4 million), and $9.85 million outstanding under the Term Loan To hedge the interest rate exposure from variable rate loans under the BankBoston Facility, on March 24, 1998, the Company entered into a forward interest rate swap letter agreement ("Swap Agreement") with BankBoston. Under the Swap Agreement, the Company pays a fixed rate of 5.73% per annum and receives the floating rate which is 12 tied to 3-month LIBOR as fixed quarterly. The Swap Agreement is for a notional amount of $20 million for a period of two years beginning March 25, 1998. Net periodic cash settlements under the Swap Agreement are recognized in the consolidated statements of operations in the related period. DIVIDENDS The Company has never declared or paid cash dividends on its Common Stock, Old Common Stock, or any other equity security, and does not anticipate paying cash dividends on the Common Stock or any other equity security in the foreseeable future. Any future determination as to the payment of dividends will depend upon certain debt instrument limitations, future earnings, results of operations, capital requirements, the financial condition of the Company, and such other factors as the Company's Board of Directors may consider. The ability of the Company to pay dividends is directly and indirectly restricted under the terms of the BankBoston Facility. Such restrictions prohibit the payment of dividends for the foreseeable future. SEASONALITY The Company's sales are seasonal, with the fourth quarter historically being the strongest quarter as a result of the holiday season. The table below sets forth the effect of seasonality on the Company's business for Fiscal 1998 and Fiscal 1997.
(dollars in thousands) --------------------------------------------------------------------------------------- 1ST QTR 2ND QTR 3RD QTR 4TH QTR TOTAL ------------ ------------ ------------- ------------ ------------ FISCAL 1998 Revenues $39,471 $50,591 $50,862 $68,661 $209,585 % of Total 18.8% 24.1% 24.3% 32.8% FISCAL 1997 Revenues $37,648 $49,483 $50,263 $64,229 $201,623 % of Total 18.7% 24.5% 24.9% 31.9%
INFLATION The primary items affected by inflation include the cost of merchandise, utilities, and labor. Retail sales prices are generally set to reflect such inflationary increases, the effects of which cannot be readily determined. Management believes that inflationary factors have had a minimal effect on the Company's operations during the past three years. YEAR 2000 Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000, which could cause a system failure or miscalculations, leading to disruptions in operations. The Company has established a compliance program to modify or replace existing information technology systems to prevent the generation of invalid or incorrect results in connection with processing year dates for the year 2000 and later ("Year 2000"). The Company believes that it will complete its Year 2000 modifications by the third quarter of the 52 weeks ending January 29, 2000 ("Fiscal 1999") and, based on its current understanding of its systems, does not currently anticipate any material disruption in its operations as a result of Year 2000 issues. However, if modifications or replacements are not properly made, or are not timely completed, the reasonably likely worst case scenario is that various nonessential stand-alone systems would be impaired and the Company would lose its ability to efficiently process merchandise through its leased distribution center, which might have a material adverse effect on its operations. 13 As of January 30,1999, the Company estimates that 90% of its mainframe and client server information technology ("IT") systems have been tested and are currently operating as Year 2000 compliant systems. The Company estimates that an additional 10% of its IT systems have been reviewed and modified, but not yet tested. Additionally, the Company is in the process of replacing its POS platform, which includes the replacement of in-store registers, and related computers and operating systems ("POS Project"). As of January 30, 1999, the Company estimates that 60% of the POS Project has been completed. Full testing of the POS Project is expected to be complete in April 1999, with the installation of new registers to begin in April 1999 and the rollout completed in the third quarter of Fiscal 1999. A summary of the expected completion dates for work currently in process to make all IT operating systems and application systems software Year 2000 compliant is as follows: First Quarter of Fiscal 1999: 1. Local area network, servers and desktop personal computers. 2. Pilot new POS platform in one store. Second Quarter of Fiscal 1999: 1. Mid-range computer operating systems and application systems software. 2. Leased distribution center. Third Quarter of Fiscal 1999: 1. Full test of all systems at a disaster recovery site which will emulate the changeover to the Year 2000. 2. Replacement of in-store registers, computers, and operating systems with new hardware and software. Suppliers of the Company and other third parties exchange information with the Company or rely on the Company's merchandising systems for certain sales and inventory information. The Company currently does not have complete information concerning the compliance status of its suppliers or other third parties. Although the Company is not dependent on any single supplier, Year 2000 noncompliance by suppliers or third parties could impact the company's sales and disrupt the flow of merchandise to the stores and/or impair the Company's ability to process credit card transactions. Because third-party failures could have a material adverse impact on the Company's ability to conduct business, the Company plans to request confirmations from major suppliers to certify that plans are being developed to address Year 2000 issues. Currently, the Company is developing contingency plans for all IT and non-IT systems, as well as developing contingencies for dealing with those suppliers and other third parties who have not responded to Year 2000 readiness questionnaires, or who are at risk of noncompliance. The Company spent $419,000 in Fiscal 1998 and $324,000 through Fiscal 1997 to make its computer systems Year 2000 compliant. The total cost of the project to date as of January 30,1999, was $743,000, and the Company estimates it will spend approximately $200,000 in Fiscal 1999 to complete the project. The total expected cost approximates the total budgeted project cost of $1,000,000, excluding costs related to the POS Project. The cost of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, cooperation of vendors and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in the area, the ability to locate and correct all relevant computer codes, and similar uncertainties. The Company presently believes that Year 2000 issues will not pose significant operational problems for the Company. However, if all Year 2000 issues are not properly identified, or assessment, remediation and testing are not effected timely with respect to Year 2000 problems that are identified, there can be no assurance that Year 2000 issues will not materially adversely impact the Company's results of operations or adversely affect the Company's relationships with customers, vendors, or others. Additionally, there can be no assurance that the Year 2000 issues of other entities will not have a material adverse impact on the Company's systems or results of operations. 14 NEW ACCOUNTING STANDARDS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities." ("SFAS No. 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for derivatives used for hedging activities. SFAS No. 133 requires that all derivatives be recognized either as an asset or liability, be measured at fair value and that the resulting measurements be included either in the income statement or stockholders' equity, depending on the nature of the transaction. SFAS 133 is effective for fiscal years beginning after June 15, 1999. The impact of the adoption of SFAS No. 133 on the Company's financial position and results of operations has not yet been determined. ITEM 7a - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is subject to the risk of fluctuating interest rates in the normal course of business, primarily as a result of borrowings, which generally bear interest at variable rates. The table below presents the principal (or notional) amounts, at book value, and related weighted average interest rates by year of maturity. All items described in the table are non-trading and are stated in U.S. dollars.
Principal / Notional Amount Maturing in: - ---------------------------------------------------------------------------------------------------------- Total Fair Value Fiscal Fiscal Fiscal Fiscal Fiscal January 30, January 30, 1999 2000 2001 2002 2003 Thereafter 1999 1999 - ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands, except percents) INTEREST RATE RISK: LIABILITIES: Borrowings under the Revolver $25,396 -- -- -- -- -- $25,396 $25,396 Variable average interest rate 8.36% --% --% --% --% --% 8.36% Short-term debt 9,900 -- -- -- -- -- 9,900 9,900 Variable average interest rate 8.0% --% --% --% --% --% 8.0% Long-term debt -- fixed 72 54 -- -- -- -- 126 112 Average interest rate 8.0% 8.0% --% --% --% --% 8.0% Long-term debt 256 211 -- -- -- -- 467 467 Variable average interest rate 7.0% 7.0% --% --% --% --% 7.0% Obligations under capital leases 1,841 1,775 1,738 1,227 918 6,372 13,871 13,871 Variable average interest rate 10.42% 10.42% 10.42% 10.42% 10.42% 10.42% 10.42% DERIVATIVES MATCHED AGAINST LIABILITIES: Swaps -- fixed rate (1) $20,000 $20,000 -- -- -- -- $20,000 $0.2 Average pay rate 5.73% 5.73% --% --% --% --% 5.73% Average receive rate 5.0% 5.0% --% --% --% --% 5.0%
(1) Interest rate swaps on which the Company is the fixed rate payor. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LAMONTS APPAREL, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE # ------------ 17 Independent Auditors' Report 18 Report of Independent Accountants 19 Consolidated Balance Sheets - January 30, 1999 and January 31, 1998 20 Consolidated Statements of Operations for the 52 weeks ended January 30, 1999, 52 weeks ended January 31, 1998, and 52 weeks ended February 1, 1997 21 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the 52 weeks ended January 30, 1999, 52 weeks ended January 31, 1998, and 52 weeks ended February 1, 1997 22 Consolidated Statements of Cash Flows for the 52 weeks ended January 30, 1999, 52 weeks ended January 31, 1998, and 52 weeks ended February 1, 1997 24 Notes to Consolidated Financial Statements 16 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors Lamonts Apparel, Inc. We have audited the accompanying consolidated balance sheet of Lamonts Apparel, Inc. and subsidiaries (the "Company") as of January 30, 1999 and the related consolidated statement of operations, changes in stockholders' equity (deficit) and cash flows for the 52 weeks then ended. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 30, 1999 and the results of its operations and its cash flows for the 52 weeks then ended, in conformity with generally accepted accounting principles. On January 31, 1998, the Company emerged from bankruptcy. As discussed in Note 2 to the consolidated financial statements, the Company adopted "Fresh-Start Reporting" principles in accordance with the American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." As a result of the reorganization and the adoption of Fresh-Start Reporting, the Company's January 30, 1999 consolidated statement of operations is not comparable to the Company's January 31, 1998 consolidated statement of operations. /s/ Deloitte & Touche LLP Seattle, Washington April 16, 1999 17 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors Lamonts Apparel, Inc. We have audited the accompanying consolidated balance sheet of Lamonts Apparel, Inc. (the "Company") as of January 31, 1998 and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for the 52 weeks ended January 31, 1998 and February 1, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above after the restatement described in Note 3, present fairly, in all material respects, the consolidated financial position of the Company as of January 31, 1998 and the consolidated results of operations and cash flows for the 52 weeks ended January 31, 1998 and February 1, 1997, in conformity with generally accepted accounting principles. /s/ PricewaterhouseCoopers LLP Seattle, Washington April 10, 1998, except as to the information presented in the last paragraph of Note 3, for which the date is April 16, 1999. 18 LAMONTS APPAREL, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
January 30, January 31, 1999 1998 ----------- ----------- Current Assets: Cash $1,594 $1,301 Receivables 2,124 1,703 Inventories 42,411 38,617 Prepaid expenses and other 1,412 1,500 Restricted cash and deposits 21 1,543 -------- ------- Total current assets 47,562 44,664 Property and equipment - net of accumulated depreciation and amortization of $ 5,590 and $0, respectively 28,896 32,154 Leasehold interests 7,134 8,749 Excess reorganization value 8,832 9,296 Deposits 1,078 1,130 Other assets 393 899 -------- ------- Total assets $93,895 $96,892 -------- ------- -------- ------- Current Liabilities: Borrowings under the Revolver $25,396 $18,967 Accounts payable 17,231 15,186 Accrued payroll and related costs 2,615 3,106 Accrued taxes 967 865 Accrued interest 419 1,007 Accrued reorganization expenses 15 2,497 Other accrued expenses 5,707 6,228 Current maturities of long-term debt 10,228 403 Current maturities of obligations under capital leases 1,646 1,454 -------- ------- Total current liabilities 64,224 49,713 Long-term debt, net of current maturities 265 10,536 Obligations under capital leases, net of current maturities 12,225 13,835 Other 2,579 2,852 -------- ------- Total liabilities 79,293 76,936 Commitments and Contingencies (Notes 6 and 11) Stockholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized; no shares issued and outstanding -- -- Common stock, $.01 par value; 40,000,000 authorized; Class A: 9,000,000 shares issued and outstanding 16,926 16,926 Class B: 10 shares issued and outstanding 1 1 Warrants - contributed capital 3,029 3,029 Accumulated deficit (4,461) -- Accumulated other comprehensive loss (893) -- -------- ------- Total stockholders' equity 14,602 19,956 -------- ------- Total liabilities and stockholders' equity $93,895 $96,892 -------- ------- -------- -------
The accompanying notes are an integral part of the consolidated financial statements. 19 LAMONTS APPAREL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share data)
52 Weeks | 52 Weeks 53 Weeks ended | ended ended January 30, | January 31, February 1, 1999 | 1998 1997 ----------- | ----------- ----------- | Revenues $209,585 | $201,623 $203,602 Cost of merchandise sold 137,651 | 131,700 130,480 --------- | --------- --------- Gross profit 71,934 | 69,923 73,122 --------- | --------- --------- Operating and administrative expenses 63,343 | 67,844 67,173 Depreciation and amortization 8,024 | 7,141 7,999 Impairment of long-lived assets -- | -- 4,170 --------- | --------- --------- Operating costs 71,367 | 74,985 79,342 --------- | --------- --------- Income (loss) from operations before other income (expense), | reorganization expenses, fresh-start revaluation, | and extraordinary item 567 | (5,062) (6,220) | Other income (expense): | Interest expense (5,042) | (5,900) (5,053) Other income (expense) 14 | 8 12 --------- | --------- --------- Loss from operations before reorganization | expenses, fresh-start revaluation, | and extraordinary item (4,461) | (10,954) (11,261) | Reorganization expenses -- | (5,995) (6,037) Fresh-start revaluation -- | 70,495 -- --------- | --------- --------- (Loss) income before extraordinary item (4,461) | 53,546 (17,298) | Extraordinary item - gain on debt discharge -- | 69,158 -- --------- | --------- --------- Net (loss) income ($4,461) | $122,704 ($17,298) --------- | --------- --------- --------- | --------- --------- Basic and Diluted Earnings (Loss) per Common Share | (Loss) income from operations before extraordinary item ($0.50) | $3.00 ($0.97) Extraordinary item - gain on debt discharge -- | $3.86 -- Net (loss) income ($0.50) | $6.86 ($0.97)
The accompanying notes are an integral part of the consolidated financial statements. 20 LAMONTS APPAREL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (dollars in thousands, except share data)
Old Warrants - Additional Number of Common Class A Class B contributed paid-in shares stock Common stock Common stock capital capital ---------- -------- ------------ ------------ ----------- ---------- Balance, February 3, 1996 17,900,053 $179 $-- $-- $- $62,921 Comprehensive loss Net loss for the 52 weeks ended February 1, 1997 -- -- -- -- -- -- Other comprehensive income, net of tax Minimum pension liability adjustment -- -- -- -- -- -- Comprehensive loss Compensation expense related to stock option plan -- -- -- -- -- 51 ---------- --------- ------- --------- ---------- -------- Balance, February 1, 1997 17,900,053 179 -- -- -- 62,972 Comprehensive income Net income for the 52 weeks ended January 31, 1998 -- -- -- -- -- -- Compensation expense related to stock option plan -- -- -- -- -- 38 Other comprehensive loss, net of tax Minimum pension liability adjustment -- -- -- -- -- -- Cancellation of the former equity and elimination of accumulated deficit under the Plan (17,900,053) (179) -- -- -- (63,010) Comprehensive income Issuance of new equity under the Plan 9,000,010 -- 16,926 1 3,029 -- ---------- --------- ------- --------- ---------- -------- Balance, January 31, 1998 9,000,010 -- 16,926 1 3,029 -- Comprehensive loss Net income for the 52 weeks ended January 30, 1999 -- -- -- -- -- -- Other comprehensive loss, net of tax Minimum pension liability adjustment -- -- -- -- -- -- Comprehensive loss ---------- --------- ------- --------- ---------- -------- Balance, January 30, 1999 9,000,010 $0 $16,926 $1 $3,029 $0 ---------- --------- ------- --------- ---------- -------- ---------- --------- ------- --------- ---------- --------
Accumulated Other Comprehensive Accumulated Comprehensive Loss deficit Loss Total ------------- ----------- -------------- ---------- Balance, February 3, 1996 ($250) ($105,406) ($42,556) Comprehensive loss Net loss for the 52 weeks ended February 1, 1997 -- (17,298) $(17,298) (17,298) Other comprehensive income, net of tax Minimum pension liability adjustment 250 -- 250 250 -------- Comprehensive loss ($17,048) -------- -------- Compensation expense related to stock option plan -- -- 51 --------- --------- -------- Balance, February 1, 1997 -- (122,704) (59,553) Comprehensive income Net income for the 52 weeks ended January 31, 1998 -- 122,704 $122,704 122,704 Compensation expense related to stock option plan -- -- 38 Other comprehensive loss, net of tax Minimum pension liability adjustment (438) -- (438) (438) Cancellation of the former equity and elimination of accumulated deficit under the Plan 438 -- 438 (62,751) -------- Comprehensive income $122,704 -------- -------- Issuance of new equity under the Plan -- -- 19,956 --------- --------- -------- Balance, January 31, 1998 -- -- 19,956 Comprehensive loss Net income for the 52 weeks ended January 30, 1999 -- (4,461) ($4,461) (4,461) Other comprehensive loss, net of tax Minimum pension liability adjustment (893) -- (893) (893) -------- Comprehensive loss ($5,354) -------- -------- --------- --------- -------- Balance, January 30, 1999 ($893) ($4,461) $14,602 --------- --------- -------- --------- --------- --------
The accompanying notes are an integral part of the consolidated financial statements. 21 LAMONTS APPAREL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
52 weeks ended | 52 weeks ended 52 weeks ended January 30, | January 31, February 1, 1999 | 1998 1997 -------------- | -------------- -------------- | Cash flows from operating activities: | Net (loss) income ($4,461) | $122,704 ($17,298) Adjustments to reconcile net (loss) income to net cash | used by operating activities: | Depreciation and amortization 8,024 | 7,141 7,999 Impairment of long-lived assets -- | -- 4,170 Curtailment gain (1,001) | Gain on sale of fixed asset -- | (177) -- Non-cash interest, including amortization of debt discount 987 | 321 -- Stock option compensation expense -- | 38 51 Net change in current assets and liabilities (5,189) | (639) (5,862) Other (225) | (1,092) (425) Reorganization expenses -- | 5,995 6,037 Fresh-start revaluation -- | (70,495) -- Gain on debt discharge -- | (69,158) -- ------- | --------- -------- | Net cash used by operating activities ($1,865) | ($5,362) ($5,328) ------- | --------- -------- | Cash flows from investing activities: | Capital expenditures (2,184) | (1,507) (699) Proceeds from sale of assets -- | 39 4,459 Other (75) | 257 90 ------- | --------- -------- | Net cash (used) provided by investing activities (2,259) | (1,211) 3,850 ------- | --------- -------- | Cash flows from financing activities: | Net Borrowings (Payments) under Revolver 6,429 | (4,174) 2,807 Proceeds from term loan -- | 10,000 -- Payments on long-term debt (446) | -- -- Principal payments on obligations under capital leases (1,566) | (900) (778) Assumption of liabilities subject to compromise -- | 939 -- Other -- | (57) (66) ------- | --------- -------- | Net cash provided by financing activities 4,417 | 5,808 1,963 ------- | --------- -------- | Net increase (decrease) in cash 293 | (765) 485 Cash, beginning of period 1,301 | 2,066 1,581 ------- | --------- -------- | Cash, end of period $1,594 | $1,301 $2,066 ------- | --------- -------- ------- | --------- --------
The accompanying notes are an integral part of the consolidated financial statements. 22 LAMONTS APPAREL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
52 weeks ended | 52 weeks ended 52 weeks ended January 30, | January 31, February 1, 1999 | 1998 1997 -------------- | -------------- -------------- | Reconciliation of net change in current assets and liabilities: | (Increase) decrease in: | Receivables ($421) | ($154) $818 Inventories (3,794) | 118 (7,158) Prepaid expenses and other (561) | (64) 548 Restricted cash and deposits 1,522 | -- -- | Increase (decrease) in: | Accounts payable 2,045 | 1,607 5,161 Accrued payroll and related costs (491) | 821 (111) Accrued taxes 102 | 53 (9) Accrued interest (588) | 547 409 Accrued reorganization costs (2,482) | (4,539) (3,241) Accrued store closure costs -- | (1,050) (2,204) Other accrued expenses (521) | 2,022 (75) ------- | ------- ------- | ($5,189) | ($639) ($5,862) ------- | ------- ------- ------- | ------- ------- Supplemental Cash Flow Information: | Cash interest payments made $5,257 | $6,565 $4,783 Non-cash transactions: | Capital leases relating to equipment 148 | 759 -- Capital lease relating to sale - leaseback of Alderwood store -- | -- 2,835
The accompanying notes are an integral part of the consolidated financial statements. 23 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 30, 1999 NOTE 1 - GENERAL BUSINESS DESCRIPTION, REORGANIZATION AND EMERGENCE FROM CHAPTER 11 Lamonts Apparel, Inc. (the "Company" or "Lamonts") is a promotionally oriented, Northwest-based regional retailer with 38 stores in five states. The Company offers an assortment of moderately priced fashion apparel and home and fashion accessories at competitive prices for the entire family. On January 6, 1995 ("Petition Date"), the Company filed a voluntary petition for relief under Chapter 11 ("Chapter 11") of title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court (the "Bankruptcy Court") for the Western District of Washington at Seattle. The Company's Modified and Restated Plan of Reorganization (the "Plan") was confirmed by the Bankruptcy Court on December 18, 1997 and became effective on January 31, 1998 ("Plan Effective Date"). Costs associated with the reorganization of the Company were expensed as incurred. Such costs include certain expenses of the committees that represented Lamonts' unsecured trade creditors, bondholders and equity holders (the "Committees"). The amounts charged to reorganization expense by the Company are as follows:
FISCAL FISCAL 1997 1996 ------ ------ Professional fees $2,344 $2,128 Lease related costs 196 1,036 Payroll related costs 1,924 411 Store closure costs, administrative and other 1,531 2,462 ------ ------ $5,995 $6,037 ------ ------ ------ ------
At January 30, 1999, the Company had a working capital deficit of approximately $16.7 million. Approximately $10.0 million of the working capital deficit is a result of recording as a current liability the balance due on December 26, 1999 on the Company's Term Loan (as more fully described in Note 7). Subject to an extension of the Revolver (as more fully described in Note 7) for a sufficient period, the Company has the option to extend the maturity date of the Term Loan for two additional one-year periods and plans to do so. If the Term Loan is extended, the Company will record the balance due on the Term Loan as long-term debt. Based on discussions to date with BankBoston, the Company anticipates that the Revolver will be extended. In addition, the Company intends to continue implementing a plan, formulated by senior management, designed to increase gross margins and reduce operating expenses through a variety of department level merchandising strategies and cost containment initiatives. If this plan is successful it would further reduce the working captial deficit remaining after the reclassification of the Term Loan to long-term debt as discussed above. NOTE 2 - BASIS OF PRESENTATION AND FRESH-START REPORTING Pursuant to the guidance provided by the American Institute of Certified Public Accountants in Statement 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") (also referred to as "Fresh-Start Reporting"), the Company adopted Fresh-Start Reporting for financial reporting purposes as of the Plan Effective Date. Therefore, the consolidated statement of operations for the 52 weeks ended January 30, 1999, are not comparable to the consolidated results of operations for the 52 weeks ended January 31, 1998, or the 52 weeks ended February 1, 1997. Accordingly, a vertical black line is shown to separate post-emergence operations from those ended prior to January 31, 1998, in the consolidated results of operations and to separate the January 31, 1998 consolidated balance sheet from the prior year since it is not prepared on a comparable basis. Under Fresh-Start Reporting, the reorganization value of the Company was allocated to the reorganized Company's net assets on the basis of the purchase method of accounting. This method required the adjustment of the Company's assets and liabilities to reflect their estimated fair value at the Plan Effective Date. 24 In accordance with SOP 90-7, the Company's reorganization value was determined as of the Plan Effective Date. The reorganization value was derived by an independent public accounting firm using various valuation methods, including discounted cash flow analyses (utilizing the Company's projections), analyses of the market values of other publicly traded companies whose businesses are reasonably comparable, and analyses of the present value of the Company's equity. The reorganization value was determined to be the fair value of the Company before considering liabilities and approximated the amount a willing buyer would have paid for the assets of the Company immediately after restructuring. The primary methodology used to determine the reorganization value was a weighted average of the historical market guideline method, projected guideline method, and the income approach using the discounted cash flow method. Under the income approach, the terminal value was determined using the discounted cash flow projected for the period from February 1, 1998 through February 3, 2002, using a discount rate of 14.1% and a long-term growth rate of 3.5%, with a capitalization rate at 10.6%. The adjustments to reflect the consummation of the Plan and adoption of Fresh-Start Reporting, including the adjustment to restate assets and liabilities at their respective estimated fair values, the gain on debt discharge for liabilities subject to settlement under reorganization proceedings of $69.2 million, and the elimination of $122.7 million of the prior accumulated deficit, are reflected in the accompanying consolidated financial statements at January 31, 1998. The effect of the reorganization on the Company's consolidated balance sheet as of January 31, 1998 is as follows: 25
Pre-Fresh-Start Balance Sheet (dollars in thousands) January 31, Debt Fresh-Start 1998 Discharge Reporting --------------- --------------- ------------ Current Assets: Cash $1,301 Receivables 1,703 Inventories 37,441 $ 1,176 (a) Prepaid expenses and other 1,500 Restricted cash and deposits 1,543 --------- --------- -------- Total current assets 43,488 -- 1,176 Property and equipment 27,255 4,899 (b) Leasehold interests 3,049 5,700 (b) Excess reorganization value -- 9,296 (b) Excess of cost over net assets acquired 11,266 (11,266) (c) Deferred financing costs 1,266 ($ 1,266) (d) Restricted cash and deposits 1,130 Other assets 899 --------- --------- -------- --------- --------- -------- Total assets $88,353 ($1,266) $9,805 --------- --------- -------- --------- --------- -------- Liabilities not subject to settlement under reorganization proceedings: Current Liabilities: Borrowings under the Revolver $18,967 Accounts payable 15,186 Accrued payroll and related costs 3,106 Accrued taxes 865 Accrued interest 1,163 ($ 156) (e) Accrued reorganization expenses 2,497 Other accrued expenses 6,442 $ 362 (f) (576) (g) Current maturities of long-term debt 403 Current maturities of obligations under capital leases 177 1,277 (e) --------- --------- -------- Total current liabilities 48,806 362 545 Long-term debt, net of current maturities 10,536 Obligations under capital leases, net of current maturities 3,444 10,391 (e) Other 1,023 835 (f) 994 (g) --------- --------- -------- Total liabilities not subject to settlement under reorganization proceedings 63,809 1,197 11,930 --------- --------- -------- Liabilities subject to settlement under reorganization proceedings: Related party 67,600 (67,600) (f) Other 33,846 (23,533) (f) (10,313) (e) --------- --------- -------- Total liabilities subject to settlement under reorganization proceedings 101,446 (91,133) (10,313) --------- --------- -------- Stockholders' equity (deficit): Preferred stock, $.01 par value, 10,000,000 shares authorized no shares issued or outstanding -- Common stock, $.01 par value; 40,000,000 shares authorized Class A: 9,000,000 shares issued and outstanding 179 88 (h) 16,659 (h) Class B: 10 shares issued and outstanding -- 1 (h) Warrants - contributed capital -- 3,029 (h) Additional paid-in-capital 63,010 19,424 (h) (82,434) (h) Minimum pension liability adjustment (438) 438 (g) Accumulated deficit (139,653) 69,158 (i) 70,495 (j) Accumulated other comprehensive loss -- --------- --------- -------- Total stockholders' equity (deficit) (76,902) 88,670 8,188 --------- --------- -------- Total liabilities and stockholders' equity (deficit) $88,353 ($1,266) $9,805 --------- --------- -------- --------- --------- --------
Fresh-Start Balance Sheet January 31, 1998 -------------- Current Assets: Cash $ 1,301 Receivables 1,703 Inventories 38,617 Prepaid expenses and other 1,500 Restricted cash and deposits 1,543 --------- Total current assets 44,664 Property and equipment 32,154 Leasehold interests 8,749 Excess reorganization value 9,296 Excess of cost over net assets acquired -- Deferred financing costs -- Restricted cash and deposits 1,130 Other assets 899 --------- Total assets $ 96,892 --------- --------- Liabilities not subject to settlement under reorganization proceedings: Current Liabilities: Borrowings under the Revolver $ 18,967 Accounts payable 15,186 Accrued payroll and related costs 3,106 Accrued taxes 865 Accrued interest 1,007 Accrued reorganization expenses 2,497 Other accrued expenses 6,228 Current maturities of long-term debt 403 Current maturities of obligations under capital leases 1,454 --------- Total current liabilities 49,713 Long-term debt, net of current maturities 10,536 Obligations under capital leases, net of current maturities 13,835 Other 2,852 --------- Total liabilities not subject to settlement under reorganization proceedings 76,936 --------- Liabilities subject to settlement under reorganization proceedings: Related party -- Other -- --------- Total liabilities subject to settlement under reorganization proceedings -- --------- Stockholders' equity (deficit): Preferred stock, $.01 par value, 10,000,000 shares authorized no shares issued or outstanding -- Common stock, $.01 par value; 40,000,000 shares authorized Class A: 9,000,000 shares issued and outstanding 16,926 Class B: 10 shares issued and outstanding 1 Warrants - contributed capital 3,029 Additional paid-in-capital -- Minimum pension liability adjustment -- Accumulated deficit -- Accumulated other comprehensive loss -- --------- Total stockholders' equity (deficit) 19,956 --------- --------- Total liabilities and stockholders' equity (deficit) $ 96,892 --------- ---------
26 (a) To adjust inventories to fair value. (b) To allocate fair value to identifiable net assets in accordance with purchase method accounting as follows: property and equipment, $4.9 million; leasehold interests, $5.7 million, and excess reorganization value, $9.3 million (c) To write off the balance of excess of cost over net assets acquired. (d) To write off the balance of deferred financing costs related to debt discharged . (e) To reclassify certain liabilities subject to settlement under reorganization proceedings, where the obligation was assumed. (f) To record the discharge of liabilities subject to settlement under reorganization proceedings, and reclassify pre-petition priority claims and cure amounts. (g) To restate liabilities, including pension liabilities at fair value. (h) To record cancellation of historical Stockholders' equity (deficit) and record reorganization value of $20.0 million, $16.9 million of which is classified as Class A and Class B Common Stock, $.01 par value, and $3 million which is classified as Warrants - contributed capital. (i) To record the extraordinary item - gain on debt discharge. (j) To recognize the value of the reorganized Company. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) The following unaudited pro forma consolidated statement of operations reflects the financial results of the Company during Fiscal 1997 as if the Plan had been consummated on February 2, 1997. The pro forma information does not purport to be indicative of the results of operations that would actually have been reported had such transactions actually been consummated on such date or of the results of operations that may be reported by the Company in the future.
As Reported Pro forma 52 Weeks Ended 52 Weeks Ended January 31, 1998 Adjustments January 31, 1998 ---------------- -------------- ---------------- Total revenue $201,623 $201,623 Total cost of merchandise sold, operating expenses, and depreciation and (1) (3) amortization and other income (expense) (4) (5) (212,577) $(466) (6) (7) (213,043) ------------ ------------ Loss from operations before reorganization expenses, fresh-start revaluation and extraordinary item (10,954) (11,420) Reorganization expenses (5,995) 5,995 (2) -- Fresh-start revaluation 70,495 (70,495) (8) -- ------------ ------------ Income (loss) before extraordinary item 53,546 (11,420) Extraordinary item 69,158 (69,158) (8) -- ------------ --------- ------------ Net income (loss) $122,704 ($134,124) ($11,420) ------------ --------- ------------ ------------ --------- ------------ Basic and diluted loss per share ($1.27) ------------ ------------ Weighted average number of shares 9,000,010 (9)
The unaudited pro forma statement of operations has been adjusted to reflect the following: 1) An increase in depreciation and amortization expense of approximately $1.4 million due to the change in the fair value of identifiable assets, property and equipment and leasehold interests. The increase in amortization expense of $0.5 million for excess reorganization value. 2) The elimination of approximately $6.0 million in reorganization costs. 3) The elimination of approximately $0.3 million for amortization of excess of cost over net assets acquired. 4) The elimination of approximately $0.7 million for amortization of deferred financing fees associated with outstanding warrants to purchase Old Common Stock which were canceled on the Plan Effective Date. 5) The amortization of approximately $0.5 million in facility fees for the working capital facility. 27 6) The reduction in rent expense of approximately $0.2 million for several stores in which the landlord has agreed to concessions upon assumption of the lease. 7) An increase in interest expense of $0.1 million associated with debt arising from deferred priority tax claims and deferred cure payments 8) The elimination of Fresh-Start Reporting adjustments totaling approximately $70.5 million and extraordinary item - gain on debt discharge of $69.2 million. 9) Pursuant to the Plan, the Company issued 9,000,010 shares of Common Stock and granted warrants and options to purchase Common Stock. Such warrants and options have not been included in the calculation of net loss per common share because the effect of assuming their exercise would be anti-dilutive. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The accompanying consolidated financial statements include the accounts of Lamonts Apparel, Inc. and its subsidiaries. All subsidiaries of the Company are currently inactive. All significant intercompany transactions and account balances have been eliminated in consolidation. CASH EQUIVALENTS The Company considers all short-term investments with original maturities of three months or less to be cash equivalents. INVENTORIES Inventories are valued at the lower of cost (using the retail last-in, first-out ("LIFO") method) or net realizable value. Inventories valued on a first-in-first-out ("FIFO") method would have approximated the inventories reported as of January 30, 1999 and January 31, 1998. The cost of inventory includes the cost of goods and delivery to the distribution center and to the retail stores. DEPOSITS Noncurrent deposits include approximately $1.0 million as of January 30, 1999, and January 31, 1998, held as a deposit by Frederick Atkins, Inc. ("Atkins"), a merchandising consultant and buying cooperative, which provides certain private label merchandise to the Company. PROPERTY AND EQUIPMENT The Company's adoption of Fresh-Start Reporting as of January 31, 1998, required property and equipment to be adjusted to fair value. The adoption of Fresh-Start Reporting did not result in any material change in the remaining useful lives of the Company's property and equipment. Depreciation is determined using the remaining useful lives based on the following original useful lives: buildings and improvements, 10-40 years; furniture, fixtures and equipment, 3-12 years; and leasehold improvements and property under capital leases, life of lease or useful life if shorter. Depreciation is computed primarily using the straight-line method. Upon sale or retirement of property and equipment, the related cost (or restated value) and accumulated depreciation are removed from the accounts of the Company and any gain or loss is reflected in the consolidated financial statements in the period the sale or retirement occurred. Maintenance and repair costs are expensed as incurred. Expenditures for renewals and improvements are generally capitalized. Software development costs incurred in connection with significant upgrades of management information systems are capitalized, in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Amortization of capitalized software development costs begins when the related software is placed in service using the straight-line method over estimated useful lives of three to five years. Work in progress primarily consists of costs related to the Company's new point-of-sale (POS) platform and local area network (LAN) projects. 28 LEASEHOLD INTERESTS The excess of the fair rental value of leased facilities under operating leases over the respective contractual rents was recorded as an asset under Fresh-Start Reporting at its discounted net present value and is being amortized on a straight-line basis over the respective remaining lease terms. The accumulated amortization of leasehold interests approximated $1.6 million at January 30, 1999. The adoption of Fresh-Start Reporting did not result in any significant change in the remaining useful lives of the Company's leasehold interests. IMPAIRMENT OF LONG-LIVED ASSETS During the 52 weeks ended February 1, 1997 ("Fiscal 1996"), the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If impairment has occurred, an impairment loss must be recognized. With the adoption of SFAS No. 121, assets are grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company has identified this lowest level as individual stores. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is measured by discounting expected future cash flows at a rate commensurate with the Company's borrowing rate. During Fiscal 1996, the Company recognized a non-cash impairment loss of $4.2 million. Of the total impairment loss, $2.3 million represented impairment of property and equipment, $1.3 million related to excess of cost over net assets acquired and $0.6 million pertained to leasehold interests. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. DEFERRED FINANCING COSTS Deferred financing costs are amortized using the effective interest method over the term of the related indebtedness. EXCESS REORGANIZATION VALUE Excess reorganization value represents the amount of reorganization value as of January 31, 1998, not attributable to tangible or other intangible assets. Excess reorganization value is being amortized on a straight-line basis over 20 years. The accumulated amortization approximated $0.5 million at January 30, 1999. ADVERTISING COSTS The Company expenses the production costs of advertising as the associated advertisement runs. Advertising expense was $13.1 million in Fiscal 1998, $13.2 million in Fiscal 1997, and $13.0 million in Fiscal 1996. RECENTLY ADOPTED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 was adopted in Fiscal Year 1998 with the restatement of earlier periods. 29 In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131"), which establishes annual and interim reporting standards for a Company's business segments and related disclosures about products and services, geographic areas, and major customers. The Company generates substantially all of its revenues through a common delivery infrastructure, and therefore the Company has only one reportable segment. Substantially all revenues are generated from domestic sources and all of the Company's long-lived assets are physically located within the United States. NEW ACCOUNTING STANDARDS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for derivatives used for hedging activities. It requires that all derivatives be recognized either as an asset or liability, be measured at fair value and that the results of such measurement be included either in the income statement or stockholders' equity, depending on the nature of the transaction. SFAS 133 is effective for fiscal years beginning after June 15, 1999. The impact of the adoption of SFAS No. 133 on the Company's financial position and results of operations has not yet been determined. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS AND RESTATEMENT Certain prior period amounts in the consolidated financial statements have been reclassified to conform with the current year presentation. The consolidated balance sheet as of January 31, 1998 has been restated to reflect a change to the allocation of the reorganization value to the reorganized Company's net assets under Fresh-Start Reporting. The restatement is the result of a fair value adjustment to certain noncurrent assets at January 31, 1998 used in the allocation. The change resulted in a combined decrease of approximately $9.3 million in property and equipment and leasehold interests and the establishment of an intangible asset "excess reorganization value" of approximately the same amount. There was no effect on previously reported current assets, total stockholders' equity (deficit) or net income (loss) related to these restatements or reclassifications. NOTE 4 - EARNINGS (LOSS) PER COMMON SHARE Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per common share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock. Options to purchase 1.6 million shares of Common Stock in Fiscal 1997 were not included in the computation of diluted earnings per common share because the option price was greater than the average market price of the Common Stock. Options and warrants to purchase common stock, with an exercise price of $0.01 per share, were not included in the computation of diluted loss per common share in Fiscal 1998 and Fiscal 1996 since the effect of assuming their exercise would be anti-dilutive. Net income (loss) per common share is computed by dividing net loss by the weighted average number of common shares outstanding. The weighted average number of shares outstanding for both basic and diluted calculations was 9,000,010, 17,875,602 and 17,899,906 for Fiscal 1998, Fiscal 1997, and Fiscal 1996, respectively. 30
Earnings (Loss) per Common Share Fiscal 1998 Fiscal 1997 Fiscal 1996 ----------- ----------- ----------- Basic and diluted (loss) earnings per common share (Loss) income from operations before extraordinary item $(0.50) $3.00 $(0.97) Extraordinary item - gain on debt discharge $ -- $3.86 $ -- ----------- ----------- ----------- Net (loss) income $(0.50) $6.86 $(0.97) ----------- ----------- ----------- ----------- ----------- -----------
Shares Used in Computing Earnings (Loss) per Common Share (in thousands) Fiscal 1998 Fiscal 1997 Fiscal 1996 ------------ ----------- ----------- Common Stock Old Common Stock ------------ ------------------------------ Basic and Diluted 9,000 17,876 17,900 ----------- ----------- ----------- ----------- ----------- -----------
NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment consists of the following:
JANUARY 30, JANUARY 31, 1999 1998 ----------- ----------- (dollars in thousands) Buildings and equipment under capital leases $9,482 $9,482 Buildings and improvements 2,100 2,100 Leasehold improvements 11,467 11,118 Furniture, fixtures, and equipment 8,575 8,006 Software costs 1,872 1,400 Work in progress 990 48 ----------- ----------- 34,486 32,154 Less accumulated depreciation and amortization (5,590) - ----------- ----------- $28,896 $32,154 ----------- ----------- ----------- -----------
NOTE 6 - LEASES All of the Company's stores are currently operated in facilities leased by the Company, except one which is operated in a building owned by the Company, subject to a ground lease, which expires in 2015. The Company also leases some of its equipment and its office facility. Generally, store leases provide for minimum rentals (which include payment of taxes and insurance in some cases) and contingent rentals (which are based upon a percentage of sales in excess of a stipulated minimum). The majority of lease agreements cover periods from 20 to 30 years, including multiple renewal options of up to five years each. Capital lease obligations were revalued under Fresh-Start Reporting. Operating lease rental expense is summarized as follows:
FISCAL FISCAL FISCAL 1998 1997 1996 ------ ------ ------ (dollars in thousands) Minimum rentals $6,277 $6,307 $7,095 Contingent rentals 726 616 660 Sublease rentals (1,025) (999) (959) ------ ------ ------ $5,978 $5,924 $6,796 ------ ------ ------ ------ ------ ------
31 The Company received sublease rentals related to capital leases of approximately $0.4 million during each of Fiscal 1998, Fiscal 1997 and Fiscal 1996. Capital lease interest expense was $1.5 million, $2.0 million, and $2.1 million during Fiscal 1998, Fiscal 1997, and Fiscal 1996, respectively. Future minimum rental payments under capital and operating leases are summarized as follows:
CAPITAL OPERATING LEASES LEASES -------- --------- (dollars in thousands) For the fiscal years: 1999 $3,004 $6,634 2000 2,896 5,971 2001 2,836 5,637 2002 2,001 4,954 2003 1,498 4,500 Thereafter 10,393 17,786 ------ ------ Total minimum rental payments 22,628 $45,482 ------ ------ Less amounts representing interest (8,757) ------ Present value of obligations $13,871 ------ ------
In addition, the Company guarantees an operating lease of a third party that operates the Company's distribution center in Kent, Washington, which expires in February 2001. Minimum monthly lease payments guaranteed by the Company pursuant to such lease approximate $21,000 per month. NOTE 7 - DEBT REVOLVER AND TERM LOAN The Company entered into the Amended and Restated Debtor-in-Possession and Exit Financing Loan Agreement, dated as of September 26, 1997 (the "Loan Agreement"), between the Company and BankBoston, pursuant to which BankBoston provides Lamonts with (i) a revolving line of credit (the "Revolver") with a maximum borrowing capacity of $32 million, ($35 million for the period October 15, 1998 to December 15, 1998) and (ii) a term loan in the amount of $10 million (the "Term Loan" and, together with the Revolver, the "BankBoston Facility"). The Company was required to maintain a Revolver balance of less than $20.5 million for 30 consecutive days between December 15, 1998 and January 31, 1999. Pursuant to, and on the terms and conditions set forth in, the Loan Agreement, BankBoston is obligated to make loans and advances to Lamonts on a revolving basis, and to issue letters of credit to or for the account of Lamonts (with a sublimit for letters of credit of $3 million) in an aggregate outstanding amount (net of repayments) not to exceed the lesser of $32 million and a borrowing base approximately equal to 65% (subject to adjustment and reserves as specified in the Loan Agreement) of the book value of the Company's first quality finished goods inventory held for sale. The borrowing base increased to 70% effective January 15, 1999, through June 30, 1999, at which time the borrowing base will revert back to 65%. The Term Loan was fully disbursed during the Chapter 11 case and no further amounts may be borrowed thereunder. The Term Loan is guaranteed by Specialty Investment I LLC (the "Surety"). The Revolver will mature two years after the Plan Effective Date subject to earlier maturity (including, as a result of acceleration, mandatory prepayment or otherwise) of the Term Loan. The Term Loan will mature December 26, 1999, subject to earlier maturity (including, as a result of acceleration, mandatory prepayment or otherwise) of the Revolver. Lamonts has the option to extend the maturity date of the Term Loan for two additional one-year periods (subject to earlier maturity of the Revolver), on the terms and conditions set forth in the Loan Agreement and upon payment of a fee equal to approximately 5% of the outstanding amount of the Term Loan on the relevant extension date. There are no extension options for the Revolver. Lamonts is required to make principal payments on the Term Loan of $25,000 per month commencing on October 31, 1998. A substantial portion of the principal amount of the Term Loan is expected to be outstanding on the maturity date of the Term Loan. 32 Lamonts' borrowings under both the Revolver and the Term Loan bear interest at a floating rate of 1.50% above the annual interest rate announced from time to time by BankBoston as its "base rate" (the "Base Rate") or, at Lamonts' option, at 2.75% above the rate (fully adjusted for applicable reserve requirements) based on the rate offered dollar deposits in the interbank eurodollar market (the "Eurodollar Rate"). The rates are subject to adjustment annually on June 1, based upon Lamonts' financial results in accordance with the criteria set forth in the Loan Agreement. The default rate of interest under the Revolver is 3% above the Base Rate. The default rate of interest under the Term Loan prior to maturity is 7% above the non-default rate otherwise applicable, and after maturity is 7% above the non-default rate applicable to loans measured by the Base Rate. For Fiscal 1998 and Fiscal 1997, the weighted average interest rate for Base Rate loans was 9.8% and 10.0%, respectively, and the weighted average interest rate for Eurodollar Rate loans was 8.3% and 8.5%, respectively. A facility fee for the Revolver in the amount of $336,000 was paid on the Plan Effective Date and an additional fee in the amount of $224,000 was paid on December 31, 1998. A letter of credit fee of 1.75% per annum will be charged quarterly in arrears based on the average daily maximum aggregate amount available to be drawn by beneficiaries under all outstanding letters of credit. A commitment fee in the amount of 0.5% per annum will be payable monthly in arrears based on the average daily unused amount of the maximum Revolver facility. Both the letter of credit fee and the commitment fee are subject to adjustment annually on June 1, based upon Lamonts' financial results in accordance with the criteria set forth in the Loan Agreement. In addition to a closing fee in the amount of $500,000 that Lamonts paid at the closing of the Term Loan on September 26, 1997, an additional closing fee for the Term Loan, calculated at the rate of 5% per annum applied to the average daily principal balance of the Term Loan outstanding after September 26, 1998, is payable at the times and in the manner set forth in the Loan Agreement. If the options to extend the maturity date of the Term Loan are exercised, extension fees calculated at the rate of 5% per annum applied to the average daily principal balance of the Term Loan outstanding during the applicable extension period will be payable at the times and in the manner set forth in the Loan Agreement. Advances by BankBoston under the BankBoston Facility are secured by all real and personal property, rights, and assets of Lamonts, including, without limitation, real estate leasehold interests. The BankBoston Facility required that, as of the Plan Effective Date, in partial exchange for the BankBoston administrative claim against the Company's Chapter 11 estate, and in consideration for the guaranty of the Term Loan, the Surety received (i) 228,639 Class C Warrants exercisable for the purchase of an aggregate of 3,429,585 shares of Common Stock, and (ii) 10 shares of Class B Common Stock, representing all of the authorized and outstanding Class B Common Stock. (See Note 12.) The Loan Agreement contains certain covenants, among others provisions, which require the Company to maintain certain inventory levels within a range of minimum and maximum book values and a debt service coverage ratio, in each case measured on a quarterly basis. In addition, to the foregoing, the Company has restrictions on acquisitions, capital expenditures, additional indebtedness or liens, payment of dividends and other restrictions. As of January 30, 1999, the Company is in compliance with all covenants. Any necessary waivers of or amendments to the covenants require, with certain exceptions specified in the BankBoston Facility, the concurrence of both BankBoston and the Surety. The Loan Agreement contains customary Events of Default for credit facilities of its type. The Surety has the right, under specified circumstances after a default, to direct BankBoston to declare Lamonts' obligations under the BankBoston Facility immediately due and payable and to cause the exercise of certain of BankBoston's rights and remedies under the Loan Agreement. As of January 30, 1999, the Company had $25.4 million of borrowings outstanding under the Revolver (with additional borrowing capacity thereunder of $5.0 million) and $9.9 million outstanding under the Term Loan. To hedge the interest rate exposure from variable rate loans under the BankBoston Facility, on March 24, 1998, the Company entered into a forward interest rate swap letter agreement ("Swap Agreement") with BankBoston. Under the Swap Agreement, the Company pays a fixed rate of 5.73% per annum and receives the floating rate which is tied to 3-month LIBOR as fixed quarterly. The Swap Agreement is for a notional amount of $20 million for a period of two years beginning March 25, 1998. Net periodic cash settlements under the Swap Agreement are recognized in the consolidated statements of operations when they accrue. 33 CERTAIN DEFERRED PRIORITY TAX OBLIGATIONS AND DEFERRED CURE PAYMENTS Deferred priority tax obligations consist of $0.5 million (of which approximately $0.25 million is included in current maturities of long-term debt) in tax claims which were entitled to priority under the Bankruptcy Code. The holders of these certain deferred priority tax claims will receive deferred cash payments in principal amounts equal in the aggregate to the amount of their claims, payable in quarterly installments beginning April 30, 1998 through October 31, 2000, together with interest at the prevailing statutory rates. Deferred cure payments accepted by landlords consist of approximately $0.1 million (of which approximately $0.07 million is included in current maturities of long-term debt) of lease arrearages required under the Plan subsequent to the Plan Effective Date. The deferred cash payments, including principal plus simple interest at the rate of 8% per annum, will be paid quarterly, in equal principal amounts beginning January 31, 1998 through October 31, 2000. Maturities of long-term debt obligations are as follows:
For fiscal years ending: (dollars in thousands) 1999 $10,228 2000 265 -------- $10,493 -------- --------
LETTERS OF CREDIT At January 30, 1999, the Company had no outstanding trade or stand-by letters of credit NOTE 8 - STORE CLOSURE COSTS In October 1996, the Company received approval by the Bankruptcy Court to close four underperforming stores. During Fiscal 1996, $3.1 million was charged to reorganization expense in connection with the closure of these stores. Revenues associated with the closed stores totaled $13.9 million Fiscal 1996. Operating income (losses) incurred from these stores, excluding the allocation of corporate expenses, interest and reorganization expenses, were $1.4 million. There were no store closure costs in Fiscal 1998 or Fiscal 1997. NOTE 9 - INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred tax assets and liabilities are recognized on temporary differences between the financial statement and tax bases of assets and liabilities using applicable enacted tax rates. The Company has recorded a valuation allowance against net deferred tax assets as the Company could not conclude that it was more likely than not that the tax benefits from temporary differences and net operating loss carryforwards would be realized. In subsequent periods, the Company may reduce the valuation allowance, provided that the possibility of utilization of the deferred tax assets is more likely than not. 34 Significant components of the Company's deferred income tax assets and liabilities are as follows:
JANUARY 30, JANUARY 31, 1999 1998 ----------- ----------- (dollars in thousands) Deferred income tax assets: Net operating loss carryovers $5,642 $5,190 Accrued payroll and related costs 1,230 1,118 Leasehold interests 1,134 889 Other 680 1,670 Valuation allowance (7,750) (6,418) ------- -------- Total deferred income tax assets 936 2,449 ------- -------- Deferred income tax liabilities: Inventory $(572) $(572) Property and equipment (364) (1,877) ------- -------- Total deferred income tax liabilities (936) (2,449) ------- -------- Net deferred income taxes $0 $0 ------- -------- ------- --------
As of January 30, 1999, the Company had approximately $16 million of regular tax Net Operating Losses ("NOL"), after adjustments for section 382 limitations discussed below, which will expire in years 2009 through 2019. The Company underwent an ownership change in reorganization under Chapter 11 which was approved by the Bankruptcy Court on December 18, 1997. Section 382 of the Internal Revenue Code limits the use of NOLs when an ownership change occurs. The annual limitation under section 382 with respect to such ownership change has significantly limited the Company's ability to use its NOLs to offset future taxable income. The annual section 382 limitation on the pre-ownership change NOLs is approximately $1 million. As a result of the section 382 limitation a maximum of $15.3 million of pre-ownership change NOLs will become available prior to expiration. Post-ownership change NOLs are unaffected by the section 382 limitation. NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", the following assumptions were used by management of the Company in estimating its fair value disclosures for the Company's financial instruments: CASH AND RESTRICTED CASH The carrying amount for cash approximates fair value because of the short maturity of amounts therein. REVOLVER AND TERM LOAN The fair value is estimated based on current rates offered for similar debt. Carrying value approximates the fair value. INTEREST RATE SWAP The fair value of the interest rate swap, under the Swap Agreement, was estimated to be ($0.1 million). 35 NOTE 11 - COMMITMENTS AND CONTINGENCIES The Company is involved in various matters of litigation arising in the ordinary course of business. In the opinion of management, the ultimate outcome of all such matters will not have a material adverse effect on the financial statements of the Company, but, if decided adversely to the Company, could have a material effect on quarterly or annual operating results during the period such matters are resolved. In March 1995, the Company brought an action against one of its landlords, Hickel Investment Company ("Hickel"), to recover overpayments of common area maintenance and other charges made to Hickel. The United States District Court for the District of Alaska has entered a judgment against Hickel for an amount in excess of $1.9 million. Hickel has since appealed the judgment and posted a bond to obtain a stay pending appeal. There can be no assurance that the Company will be successful on such appeal. As a result, no amounts related to this judgment have been recorded in the consolidated financial statements. The Company utilizes an outside service bureau, Affiliated Computer Services, Inc. ("ACS"), for its mainframe computer processing pursuant to a contract that continues through February 2000. Fees payable to ACS under the contract are based on CPU utilization and other miscellaneous charges. The minimum monthly fee payable to ACS under the contract is $50,000. In addition, ACS licenses certain system and application software programs to the Company. The Company is self-insured for health care claims for eligible covered enrollees. Consulting actuaries assist the Company in determining its undiscounted liability for self-insured claims. The Company is liable for claims up to $200,000 per covered enrollee annually. The maximum lifetime benefit per covered enrollee is $1.0 million. Self-insurance claims costs are accrued based upon the aggregate of the liability for reported claims and an estimated liability for claims incurred but not reported. The Company's proprietary charge card, administered and owned by Alliance Data Systems ("ADS"), provides for the option of paying in full within 30 days of the billed date with no finance charge or with revolving credit terms. Terms of the short-term revolving charge accounts require customers to make minimum monthly payments in accordance with prescribed schedules. Through a contractual arrangement, as amended (the "Alliance Agreement"), ADS owns the receivables generated from purchases made by customers using the Lamonts charge card. In October 1998, the Company entered into an agreement with NCR Corporation ("NCR"), in which NCR will furnish certain equipment and related services in connection with the replacement of in-store registers and computer and operating systems ("POS Project"). The equipment has been financed through a leasing company as an operating lease over five years. Lease obligations to the leasing company begin when the equipment is received. NOTE 12 - STOCKHOLDERS' EQUITY As provided under the Plan, the authorized capital stock of the Company is 50,000,000 shares and consists of 39,999,990 shares of Common Stock, 10 shares of Class B Common Stock, and 10,000,000 shares of preferred stock, par value $0.01 per share ("Preferred Stock"). All equity interests existing immediately prior to consummation of the Plan were canceled pursuant to the Plan, and the accumulated deficit relating to the equity interests was eliminated under Fresh-Start Reporting. COMMON STOCK Each share of Common Stock entitles the holder thereof to one vote on all matters on which holders are permitted to vote. No stockholder has any preemptive right or other similar right to purchase or subscribe to any additional securities issued by the Company, and no stockholder has any right to convert Common Stock into other securities. No shares of Common Stock are subject to redemption or to any sinking fund provisions. All of the outstanding shares of Common Stock are fully paid and nonassessable. 36 Subject to the rights of holders of Preferred Stock, if any, the holders of shares of Common Stock are entitled to dividends when, as and if declared by the Board of Directors from funds legally available therefor and, upon liquidation, to a pro rata share in any distribution to stockholders. The Company does not anticipate declaring or paying any dividends on the Common Stock in the foreseeable future. CLASS B COMMON STOCK Except as set forth in the following paragraphs, the holders of Class B Common Stock shall enjoy the same rights, privileges and preferences and be subject to the same restrictions as the holders of the Common Stock. Upon the affirmative vote of not less than three-fourths of the then outstanding shares of the Class B Common Stock, (a) during the continuance of any event described in Section 11(b) of the Loan Agreement (each, an "Event of Default"), including, without limitation, nonpayment of principal and/or interest, covenant defaults, breach of representations and warranties and certain events of bankruptcy, in each case subject to applicable notice and cure periods, and/or (b) upon acceleration of any of the loans under the Loan Agreement and until such acceleration is rescinded or all amounts due under such accelerated loan are paid in full, the Company shall (i) file a voluntary petition under Chapter 11 of the Bankruptcy Code and (ii) oppose any motion to dismiss the resulting bankruptcy case. Such right of the holders of the Class B Common Stock will terminate upon satisfaction in full of all of the Company's obligations under the Term Loan, whereupon each share of Class B Common Stock will automatically convert into one share of Common Stock. Such right of the holders of the Class B Common Stock shall be coextensive with the right of the Board of Directors at any time to cause such a filing to occur, and such right shall not restrict the ability of the Board of Directors to otherwise cause the Company to file a voluntary petition under the Bankruptcy Code or to oppose any motion to dismiss any bankruptcy case. Subject to certain exceptions set forth in the Company's Second Restated Certificate of Incorporation, shares of Class B Common Stock are non-transferable. As required under the BankBoston Facility, in consideration of the Surety's guaranty of the Term Loan, the Company issued 10 shares of the Class B Common Stock, representing all of the authorized and outstanding Class B Common Stock, to the Surety on the Plan Effective Date. STOCKHOLDER RIGHTS PLAN In January 1999, the Company adopted a Stockholder Rights Plan (the "Rights Plan"). Under the Rights Plan, a dividend of one Share Purchase Right (a "Right") was declared for each share of Common Stock and Class B Common Stock of the Company outstanding at the close of business on January 22, 1999. In the event that a person or group acquires beneficial ownership of shares that represent 15% or more of the combined voting power of the outstanding shares of Common Stock and Class B Common Stock of the Company without advance approval by the Board of Directors, each Right will entitle the holder, other than the acquirer and its affiliates, to buy Common Stock of the Company with a market value of twice the Right's then current exercise price (initially $6.00, subject to adjustment). In addition, if the new Rights are triggered by such a non-approved acquisition and the Company is thereafter acquired in a merger or other transaction in which the stockholders of the Company are not treated equally, stockholders with unexercised Rights will be entitled to purchase common stock of the acquirer with a value of twice the exercise price of the Rights. The Board of Directors may redeem the Rights for a nominal amount at any time prior to an event that causes the Rights to become exercisable. The Rights trade automatically with the underlying Common Stock (unless and until a distribution event occurs under the Rights Plan) and expire on January 12, 2009, if not redeemed earlier. The Rights Plan includes grandfathering provisions that exempt Troutman Investment Company ("Troutman Investment") and its affiliates including Dallas C. Troutman (collectively, "Troutman"), which hold approximately 32.5% of the common stock of the Company on a fully-diluted basis, and Specialty Investment I LLC, which holds warrants to acquire approximately 19% of the Common Stock of the Company, at their respective levels of Common Stock ownership at the time the Rights Plan was adopted. However, dispositions of shares owned at the time of the adoption of the Rights Plan will reduce each of Troutman and Specialty Investment's maximum permissible level of ownership share-for-share (i.e., any acquisition by Troutman or Specialty Investment of securities other than the grandfathered securities which, when aggregated with the grandfathered securities, represent 15% or more of the voting power of the Common Stock and Class B Common Stock of the Company, will trigger the Rights Plan). 37 PREFERRED STOCK The Second Restated Certificate of Incorporation of the Company provides for the issuance of 10 million shares of Preferred Stock. The Preferred Stock may be issued in one or more classes or series, and the Board of Directors is authorized to fix for each such class or series such voting powers, full or limited, or no voting powers, and such distinctive designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof. Because the Board of Directors has the power to establish the preferences and rights attributable to the Preferred Stock, it may afford the holders of any Preferred Stock preferences, powers and rights (including voting rights) senior to the rights of the holders of Common Stock. No shares of Preferred Stock are currently outstanding. WARRANTS Pursuant to the Plan, all outstanding warrants to purchase Old Common Stock were rejected as of the Plan Effective Date. CLASS A WARRANTS AND CLASS B WARRANTS Class A Warrants to purchase an aggregate of 2,203,320 shares of Common Stock and Class B Warrants to purchase an aggregate of 800,237 shares of Common Stock were issued by the Company in accordance with the Plan pursuant to a Warrant Agreement (the "Class A/B Warrant Agreement") entered into between the Company and Norwest Bank Minnesota, N.A., as Warrant Agent named therein. The Class A Warrants are exercisable, in whole or in part, on the first date on which the Aggregate Equity Trading Value (as defined below) equals or exceeds $20 million and, if not previously exercised, expire on the tenth anniversary of the Plan Effective Date. The Class B Warrants are exercisable, in whole or in part, on the first date on which the Aggregate Equity Trading Value equals or exceeds $25 million and, if not previously exercised, expire on the tenth anniversary of the Plan Effective Date. The exercise price for the Class A Warrants and the Class B Warrants is $.01 per share. The number and type of securities issuable upon exercise of the Class A Warrants and the Class B Warrants and the exercise price payable upon exercise thereof are subject to customary anti-dilution protection as described in the Class A/B Warrant Agreement. "Aggregate Equity Trading Value" means, as of any date, the product of (a) either (i) if the Common Stock is listed on any national securities exchange or quoted on a national quotation system, the average of the daily closing prices of the Common Stock for the five (5) trading days immediately preceding such date, or (ii) if the Common Stock is not so listed or quoted, the fair market value per share of the Common Stock determined in good faith by the Company's Board of Directors as of a date within 30 days of such date, multiplied by (b) the total number of issued and outstanding shares of Common Stock as of such date (assuming for purposes of determining such number of shares the exercise in full of all in-the-money options outstanding on such date to purchase shares of Common Stock and the exercise of all Class B Warrants which are exercisable as of such date). CLASS C WARRANTS 254,043 Class C Warrants to purchase an aggregate of 3,810,645 shares of Common Stock were issued by the Company in accordance with the Plan pursuant to one or more Warrant Agreements (collectively, the "Class C Warrant Agreements") entered into between the Company and the initial holders of the Class C Warrants, and were distributed as follows: (i) 228,639 Class C Warrants to purchase an aggregate of 3,429,585 shares of Common Stock were distributed to the Surety as required under the BankBoston Facility and in consideration of the Surety's guaranty of the Term Loan and in partial exchange for the Surety's administrative claim against the Company's Chapter 11 estate; and (ii) 25,404 Class C Warrants to purchase an aggregate of 381,060 shares of Common Stock were distributed to the holders of Stock Options. The Class C Warrants are exercisable, in whole or in part, as follows: (a) at any time after the date of issuance thereof and until the fourth anniversary of the Plan Effective Date, the Class C Warrants are exercisable for an aggregate of 3,556,602 shares of Common Stock at an exercise price of $1.25 per share; and (b) at any time after the first date on which the Aggregate Equity Trading Value equals or exceeds $25 million and until the tenth anniversary of the Plan Effective Date, the Class C Warrants are exercisable for an aggregate of 254,043 additional shares of Common Stock at an exercise price of $.01 per share; provided that the portion of each Class C Warrant otherwise exercisable after the first date on which the Aggregate Equity Trading Value equals or exceeds $25 million shall not be exercisable by any holder thereof unless such holder has exercised in full such holder's portion of such Class C Warrant that is immediately exercisable upon the issuance thereof. The number and type of securities issuable upon exercise of the Class C Warrants are subject to customary anti-dilution protection as described in the Class C Warrant Agreements. 38 GORDIAN WARRANTS On June 1, 1998, as compensation to Gordian for investment banking services rendered to the Company during the Company's Chapter 11 case, Gordian was issued warrants exercisable for the purchase 161,937 shares of Common Stock with an exercise price of $1.24 per share. The Gordian Warrants are immediately exercisable and expire five (5) years from their issuance date. STOCK OPTIONS The Stock Options granted pursuant to the Plan are exercisable for the purchase of 1,333,728 shares of Common Stock and consist of: (i) options exercisable for the purchase of 1,000,000 shares of Common Stock with an exercise price of $1.00 per share ("Base Options"); (ii) to prevent dilution resulting from the issuance of the Class A Warrants, options exercisable for the purchase of an additional 244,813 shares of Common Stock with an exercise price of $0.01 per share, exercisable only on or after the date on which the Class A Warrants become exercisable ("Protective A Options"); and (iii) to prevent dilution resulting from the issuance of the Class B Warrants, options exercisable for the purchase of an additional 88,915 shares of Common Stock with an exercise price of $0.01 per share, exercisable only on or after the date on which the Class B Warrants become exercisable ("Protective B Options" and, together with Protection A Options, the "Protective Options"). In addition, to prevent dilution resulting from the issuance of the Class C Warrants to the Surety, holders of Stock Options have been or will be issued, on a pro rata basis and with the same vesting schedule as each holder's respective Stock Options, Class C Warrants exercisable for the purchase of an aggregate of 381,060 shares of Common Stock (355,656 shares with an exercise price of $1.25 per share and 25,404 shares with an exercise price of $.01 per share). The number of Protective Options that may be exercised by any holder shall bear the same proportion (based on the total number of Protective Options granted to such holder) to the number of Base Options that have been exercised by such holder (based on the total number of Base Options granted to such holder). The Stock Options and the Class C Warrants are subject to adjustment to prevent dilution upon the occurrence of certain specified events, excluding exercise of the Stock Options, the Class A Warrants, the Class B Warrants, the Class C Warrants, or the Gordian Warrants. The Stock Options granted on January 31, 1998 have a term of 10 years and vest as follows: 50% on the date of grant; and 25% on each anniversary of the date of grant. The Stock Options are governed by the Lamonts Apparel, Inc. 1998 Stock Option Plan (the "Stock Option Plan"), and the Class C Warrants issued in conjunction therewith are governed by a warrant agreement in substantially the form of the Class C Warrant Agreement between the Company and the Surety. Under the terms of the Stock Option Plan, the Company has available, in addition to the 1,333,728 shares of Common Stock reserved for issuance upon the exercise of the Stock Options granted on the Plan Effective Date (subject to adjustment to prevent dilution upon certain events, excluding any exercise of Class A Warrants, Class B Warrants, Class C Warrants, or Stock Options), an additional 375,000 shares of Common Stock for possible grants of additional stock options from time to time after the Plan Effective Date if, and to the extent, a committee appointed by the Board of Directors ("Compensation Committee"), may determine that additional grants would be in the best interest of the Company. Any shares forfeited, canceled, exchanged or surrendered will again be available under the Stock Option Plan. Stock Options issued as of January 30, 1999 have a per share exercise price of $1.00, a term of 10 years and vest as follows: 25% on the date of grant, and 25% on each annual anniversary of the date of grant. 39 The following summarizes the Stock Options granted under the Stock Option Plan during Fiscal 1997 and 1998:
Weighted Shares Range Average ---------- -------------- ----------- Balance February 1, 1997 0 Granted 1,333,728 $0.01 - $1.00 $0.75 Exercised 0 Expired / Canceled 0 ---------- -------------- ------ Balance, January 31, 1998 1,333,728 $0.01 - $1.00 $0.75 Granted 388,000 $1.00 $1.00 Exercised 0 Expired / Canceled (67,275) $0.01 - $1.00 $0.84 ---------- -------------- ------ Balance, January 30, 1999 1,654,453 $0.01 - $1.00 $0.81 ---------- ----------
The following table summarizes information concerning options outstanding and exercisable at January 30, 1999:
Weighted Average Remaining Weighted Weighted Range of Exercise Number Contractual Life Average Number Average Prices Outstanding (Years) Exercise Price Exercisable Exercise Price -------------------------- --------------- --------------------- ------------------ ---------------- ------------------- $0.01 322,828 9.00 $0.01 119,957 $0.01 $1.00 1,331,625 9.02 $1.00 583,125 $1.00 -------------------------- --------------- --------------------- ------------------ ---------------- ------------------- -------------------------- --------------- --------------------- ------------------ ---------------- ------------------- $0.01 - $1.00 1,654,453 9.01 $0.81 703,082 $0.83 -------------------------- --------------- --------------------- ------------------ ---------------- ------------------- -------------------------- --------------- --------------------- ------------------ ---------------- -------------------
The Company has elected to follow Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") in accounting for its employee stock options. Under APB No. 25, because the exercise price of the Company's employee options is greater than the market price of the underlying stock on the date of grant, no compensation expense is recognized in the consolidated financial statements. Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation ("SFAS No. 123"). This information is required to be determined as if the Company has accounted for its employee stock options granted subsequent to January 31, 1995, under the fair value method of that statement. The fair value of the options was estimated at the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions for Fiscal 1998 and Fiscal 1997: risk free interest rates of 5.2% and 5.7%; a stock price volatility factor of 2.25 estimated based on the Company's actual stock prices during Fiscal 1998 and 0.45 estimated based on stock prices of similar publicly traded companies with similar stock option plans; and an expected option life of 5 and 10 years; and no dividend during the expected terms. For purposes of pro forma disclosures required by SFAS No. 123, the Company's income and earnings per share ("EPS") would have reflected compensation cost determined based on the estimated fair value of the options at the date of grant. There are no pro forma adjustments for Fiscal 1996 and Fiscal 1995 because no options were granted during these periods. The Company's pro forma information is as follows: 40 Pro Forma (Loss) Income and EPS from Operations Before Extraordinary Item:
Fiscal 1998 Fiscal 1997 ------------------------------------ (dollars in thousands except share data) (Loss) income from operations before extraordinary item: As reported $(4,461) $53,546 Pro forma net (loss) income $(4,636) $53,487 Basic and Diluted EPS from operations before extraordinary item: As reported $(0.50) $3.00 Pro forma net (loss) income per share $(0.52) $3.00
NOTE 13 - RELATED PARTY TRANSACTIONS As required by the BankBoston Facility and in partial exchange for its administrative claim, pursuant to the Plan, the Surety received (i) 228,639 Class C Warrants exercisable for the purchase of an aggregate of 3,429,585 shares of Common Stock and (ii) 10 shares of Class B Common Stock representing all of the authorized and outstanding Class B Common Stock. Under the Plan, certain investment companies and accounts indirectly controlled by FMR Corp. (collectively "Fidelity") received 2,925,140 shares of Common Stock, 1,810,380 Class A Warrants and 581,181 Class B Warrants in exchange for 1,042,174 shares of Old Common Stock and $60.6 million of outstanding debt. In connection with the Plan, the Company entered into a Grant of Registration Rights in favor of Fidelity and the Surety, pursuant to which, and subject to certain exceptions, the Company has agreed to file and cause to remain effective a Registration Statement under the Securities Act of 1933, as amended, covering certain of the securities distributed under the Plan until no such securities are outstanding. The Company is required to pay all expenses (other than underwriting discounts and commissions) in connection with all such registrations. In addition, the agreement provides for certain "piggyback" registration rights. On January 4, 1999, Troutman Investment filed with the SEC a report stating that on December 23, 1998, Troutman Investment acquired 2,925,140 shares of Class A Common Stock, 1,810,380 Class A Warrants, and 581,181 Class B Warrants from Fidelity with the stated intent of entering into discussions with the Company regarding a possible merger of the two Companies. Troutman Investment's principal business is the operation of retail stores selling fashion apparel and home and fashion accessories. In January, 1999 the Company commenced preliminary discussions with Troutman with respect to a possible merger between the Company and Troutman Investment. Additionally, the Board of Directors of the Company adopted a Stockholder Rights Plan (See Note 12) and certain amendments to the Company's Bylaws. The Company does not intend to disclose any details of the discussions with Troutman pending their outcome. On March 10, 1999, Troutman Investment transferred all of its securities of Lamonts Apparel, Inc. to Dallas C. Troutman, president and controlling stockholder of Troutman Investment. NOTE 14 - BENEFIT PLANS PENSION PLAN On January 1, 1986, the Company established the Lamonts Apparel, Inc. Employees Retirement Trust (the "Pension Plan"). The Pension Plan is a noncontributory defined benefit pension plan for employees of the Company who are not eligible for pension benefits from another pension plan pursuant to collective bargaining agreements. Participant benefits are based on years of service and compensation during later years of employment. The Company makes contributions to the Pension Plan in amounts which comply with the minimum regulatory funding requirements. 41 On February 26, 1998, the Board approved an amendment to the Pension Plan which provided that, effective April 1, 1998, benefits under the Pension Plan would cease to accrue. In addition, the entry of new participants would be prohibited. Participants not vested as of April 1, 1998, continue to accrue vesting service after April 1, 1998. In accordance with Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" ("SFAS No. 88"), the projected benefit obligation decreased, and a curtailment gain of $1.0 million was recognized in Fiscal 1998. The curtailment gain is included as a reduction of operating and administrative expense in the consolidated statements of operations. The following table sets forth the Company's funded plan status and amounts recognized in the Company's consolidated balance sheets:
JANUARY 30, JANUARY 31, FEBRUARY 1, 1999 1998 1997 ---------- ---------- ---------- (dollars in thousands, except percents) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $8,422 $6,513 $6,547 Service cost 64 336 404 Interest cost 554 527 461 Assumption change 383 899 (522) Actuarial loss (gain) 352 441 (117) Curtailment (1,001) -- -- Benefits paid (376) (294) (260) ------- ------- ------- Benefit obligation at end of year 8,398 8,422 6,513 ------- ------- ------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 6,528 6,045 5,345 Actual return on plan assets 456 777 635 Employer contributions 175 -- 527 Benefits paid (376) (294) (462) ------- ------- ------- Fair value of plan assets at end of year 6,783 6,528 6,045 ------- ------- ------- Funded status (1,615) (1,894) (468) Unrecognized actuarial loss 893 1,432 347 ------- ------- ------- Accrued benefit cost (722) (462) (121) ------- ------- ------- WEIGHT AVERAGE ASSUMPTIONS Discount rate 6.75% 7.0% 7.75% Expected long term rate of return on assets 9.0% 9.0% 9.0% Rate of increase in future compensation levels 3.5% 3.5% 3.5%
FISCAL FISCAL FISCAL 1998 1997 1996 -------- -------- -------- (dollars in thousands) COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $64 $336 $404 Interest cost on projected benefit obligation 554 527 461 Expected return on plan assets (613) (532) (494) Recognized net actuarial loss -- 10 72 ------- ----- ----- Net periodic benefit cost $5 $341 $443 ------- ----- ----- ------- ----- ----- SFAS No. 88 curtailment gain $1,001 -- --
42 LAMONTS 401(k) PLAN The Lamonts Apparel, Inc. Tax Relief Investments Protection Plan, as amended and restated effective January 1, 1994 (the "401(k) Plan") provides participants the opportunity to elect to defer an amount from 1% to 15% of their compensation, in increments of 1%. Under the 401(k) Plan, the Company matches contributions equal to 50% of each participant's deferred pay contributions (such contribution not to exceed one percent of the participant's compensation). Effective April 1, 1998, the Company increased its matching contribution to 50% of the first 4% of each participant's deferred pay contributions. Effective April 1, 1999, the Company increased its matching contribution to 50% of the first 6% of each participant's deferred pay contributions. The Company contributed $0.2 million, $0.12 million, and $0.14 million during Fiscal 1998, Fiscal 1997, and Fiscal 1996, respectively. 43 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On July 9, 1998, the Company dismissed PricewaterhouseCoopers LLP ("PwC") as its independent accountants. The dismissal of PwC was approved by unanimous written consent of the Board of Directors on July 1, 1998. For the fiscal year ended January 31, 1998, PwC's report on the consolidated financial statements contained an unqualified opinion which included the following explanatory paragraph: "On January 31, 1998, the Company emerged from bankruptcy. As discussed in Note 2 to the consolidated financial statements, the Company adopted "Fresh-Start Reporting" principles in accordance with the American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." As a result of the reorganization and the adoption of Fresh-Start Reporting, the Company's January 31, 1998 consolidated balance sheet is not comparable to the Company's February 1, 1997 consolidated balance sheet since it presents the consolidated financial position of the reorganized entity." For the fiscal year ended February 1, 1997, PwC's report on the consolidated financial statements contained an unqualified opinion which included the following explanatory paragraph: "The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations. As discussed in Note 1 of the notes to the consolidated financial statements, on January 6, 1995, the Company filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code. Further, as more fully described in Note 1, claims substantially in excess of amounts reflected as liabilities in the consolidated financial statements have been asserted against the Company as a result of the reorganization proceedings. The validity of these claims, as well as the amount and manner of payment of all valid claims, will ultimately be determined by the Bankruptcy Court. As a result of the reorganization proceedings, the Company may sell or otherwise realize assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, the confirmation of a Plan of Reorganization could materially change the amounts currently recorded in the consolidated financial statements. These matters raise substantial doubt about the Company's ability to continue as a going concern and recover the carrying amounts of its assets. Management's plans in regard to these matters are also discussed in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties." During the quarter ended May 2, 1998 and the fiscal years ended January 31, 1998 and February 1, 1997, there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures that, if not resolved to the satisfaction of PwC, would have caused PwC to make reference to the subject matter of the disagreement in connection with its report. On July 29, 1998,the Company engaged Deloitte & Touche LLP as its principal accountants to audit the Company's consolidated financial statements. 44 PART III ITEM 10 - EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT The information called for by this item is incorporated by reference from the Company's Definitive Proxy Statement relating to the 1999 Annual Meeting of the Stockholders, to be filed with the Commission on or before May 30, 1999. ITEM 11 - EXECUTIVE COMPENSATION The information called for by this item is incorporated by reference from the Company's Definitive Proxy Statement relating to the 1999 Annual Meeting of the Stockholders, to be filed with the Commission on or before May 30, 1999. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this item is incorporated by reference from the Company's Definitive Proxy Statement relating to the 1999 Annual Meeting of the Stockholders, to be filed with the Commission on or before May 30, 1999. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this item is incorporated by reference from the Company's Definitive Proxy Statement relating to the 1999 Annual Meeting of the Stockholders, to be filed with the Commission on or before May 30, 1999. ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as Part of this Report 1. FINANCIAL STATEMENTS OF LAMONTS APPAREL, INC. - Reference is made to the Index to Consolidated Financial Statements on page 16. 2. FINANCIAL STATEMENT SCHEDULES - All schedules have been omitted as they are either not required or not applicable or because the information required to be presented is included in the Consolidated Financial Statements and related notes. Exhibit Number Description of Document -------- ----------------------- (a) Exhibits. 2.1 Modified and Restated Plan of Reorganization Under Chapter 11 of the Bankruptcy Code. (Previously filed as Exhibit 99.1 in Quarterly Report on Form 10-Q of the Registrant as filed with Commission on December 16, 1997) (7) 2.2 Supplemented and Restated Disclosure Statement (As Amended) re Debtor's Plan of Reorganization Under Chapter 11 of the Bankruptcy Code. (Previously filed as Exhibit 99.2 in Quarterly Report on Form 10-Q of the Registrant as filed with Commission on December 16, 1997) (7) 3.1 Second Restated Certificate of Incorporation of the Registrant. (10) 3.2 Amended and Restated By-laws of the Registrant.* 4.1 Specimen Class A Common Stock certificate. (10) 4.2 Specimen Class B Common Stock certificate. (10) 4.3 Warrant Agreement dated January 31, 1998 between the Registrant and Norwest Bank Minnesota, N.A., as Warrant Agent. (8) 45 4.4 Warrant Agreement dated January 31, 1998 between the Registrant and Specialty Investment I LLC. (8) 4.5 Warrant Agreement dated January 31, 1998 between the Registrant and Gordian Group, L.P. (9) 4.6 Form of Warrant Agreement dated January 31, 1998 between Registrant and each of Alan R. Schlesinger, Loren R. Rothschild, Debbie A. Brownfield, E.H. Bulen and Gary Grossblatt. (8) 4.7 Rights Agreement dated January 12, 1999, between the Registrant and Norwest Bank Minnesota, N.A. (12) 4.8 Certificate of Designation, Preferences and Rights of Series RP Preferred Stock, dated January 12, 1999 * 10.1 Standard Service Agreement dated February 13, 1989 between Frederick Atkins, Incorporated and the Registrant, as amended October 3, 1989 and February 5, 1990. (10) 10.2 Credit Card Plan Agreement dated June 20, 1988, as amended September 30, 1992, between the Registrant and Alliance Data Systems (successor in interest to National City Bank, Columbus, f/k/a BancOhio National Bank) (the "Credit Card Plan Agreement"). (2) 10.3 Amendment No. 2 dated March 30, 1994 to the Credit Card Plan Agreement. (3) 10.4 Letter Agreement dated November 2, 1994 to the Credit Card Plan Agreement. (4) 10.5 License Agreement dated May 25, 1995 between the Registrant and Shoe Corporation of America. (5) 10.6 Depository Account Agreement dated June 4, 1996 among the Registrant, BankBoston and Bank of America, N.W. N.A. (d/b/a Seafirst Bank). (10) 10.7 Amendment dated December 9, 1996 to the Credit Card Plan Agreement. (6) 10.8 Computer Services Agreement dated February 4, 1997 between the Registrant and Affiliated Computer Services, Inc. (6) 10.9 Non-Qualified Employee Stock Option Agreement dated January 31, 1998 between the Registrant and each of Alan R. Schlesinger, Loren R. Rothschild, Debbie A. Brownfield, E.H. Bulen and Gary A. Grossblatt. (10) (1) 10.10 Lamonts Apparel, Inc. 1998 Stock Option Plan. (10) (1) 10.11 Amended and Restated Employment Agreement dated April 19, 1999 between the Registrant and Alan R. Schlesinger. (1) * 10.12 Amended and Restated Employment Agreement dated April 19, 1999 between the Registrant and Loren R. Rothschild. (1) * . 10.13 Amended and Restated Debtor in Possession and Exit Financing Loan Agreement dated September 26, 1997 among the Registrant, certain financial institutions and Bank Boston, as agent. (7) 10.14 Grant of Registration Rights dated January 31, 1998 among the Company and the parties listed on the signature pages thereto. (10) 10.15 Form of Indemnification Agreement dated January 31, 1998 between the Registrant 46 and each of Alan R. Schlesinger, Loren R. Rothschild, Debbie A. Brownfield, E.H. Bulen, Gary A. Grossblatt, Paul M. Buxbaum, Stanford Springel and John J. Wiesner. (10) (1) 10.16 First Amendment dated January 8, 1998, to Amended and Restated Debtor in Possession and Exit Financing Loan Agreement dated September 26, 1997 among the Registrant, certain financial institutions and BankBoston, as agent (11) 10.17 Second Amendment dated April 1, 1998, to Amended and Restated Debtor in Possession and Exit Financing Loan Agreement dated September 26, 1997 among the Registrant, certain financial institutions and BankBoston, as agent (11) 10.18 Third Amendment dated September 23, 1998, to Amended and Restated Debtor in Possession and Exit Financing Loan Agreement dated September 26, 1997 among the Registrant, certain financial institutions and BankBoston, as agent (11) 10.19 Fourth Amendment dated April 13, 1999 to Amended and Restated Debtor in Possession and Exit Financing Loan Agreement dated September 26, 1997 among the Registrant, certain financial institutions and BankBoston, as agent * 10.20 Form of Employment Agreement dated April 19, 1999 between the Registrant and Debbie A. Brownfield, E.H. Bulen and Gary A. Grossblatt (1) * 23.1 Auditors' Consent * 23.2 Auditors' Consent * 27.1 Financial Data Schedule * - ----------------- * filed herewith (1) Management contracts and/or compensatory plans required to be identified specifically as responsive to Item 601(b)(10)(iii)(A) of Regulation S-K. (2) Incorporated by reference from Registration Statement No. 33-56038 of the Registrant, initially filed with the Commission on December 22, 1992. (3) Incorporated by reference from Quarterly Report on Form 10-Q of the Registrant as filed with Commission on June 14, 1994. (4) Incorporated by reference from Annual Report on Form 10-K of the Registrant as filed with Commission on January 27, 1995. (5) Incorporated by reference from Quarterly Report on Form 10-Q of the Registrant as filed with Commission on June 12, 1995. (6) Incorporated by reference from Annual Report on Form 10-K of the Registrant as filed with Commission on May 2, 1997. (7) Incorporated by reference from Quarterly Report on Form 10-Q of the Registrant as filed with Commission on December 16, 1997. (8) Incorporated by reference from the Company's Registration Statement on Form 8-A (File No. 000-15542) filed with the Commission on February 2, 1998. (9) Incorporated by reference from the Company's Registration Statement on Form S-8 (File No. 333-45455) filed with the Commission on February 2, 1998. (10) Incorporated by reference from the Company's Registration Statement on Form S-1 47 (File No. 333-44311) initially filed with the Commission on January 15, 1998. (11) Incorporated by reference from Quarterly Report on Form 10-Q of the Registrant as filed with the Commission on December 16, 1998 (12) Incorporated by reference from Current Report on Form 8-K of the Registrant as filed with the Commission on January 13, 1999. (b) Reports filed on Form 8-K 1. Form 8-K dated July 9, 1998. Item 4 - Changes in Registrant's Certifying Accountant, related to announcing that PricewaterhouseCoopers LLP was dismissed as the Company's independent accountants. 2. Form 8-K dated July 29, 1998. Item 4 - Changes in Registrant's Certifying Accountant, related to announcing the engagement of Deloitte & Touche LLP as the principal accountants to audit the Company's consolidated financial statements. 3. Form 8-K dated January 12, 1999. Item 5 - Other Events, related to (i) the commencement of preliminary discussions between the Company and Troutman with respect to a possible business combination between the Company and Troutman, (ii) the adoption by the Board of Directors of the Company of a Stockholder Rights Plan; and (iii) the adoption by the Board of certain amendments to the Company's Bylaws. No financial statements were filed with this Form 8-K. 48 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. LAMONTS APPAREL, INC. By: /S/ DEBBIE A. BROWNFIELD ----------------------------------------- Debbie A. Brownfield Executive Vice President and Chief Financial Officer Date: April 29, 1999 49 Pursuant to the requirements of the Securities 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 TITLE DATE /s/ Alan R. Schlesinger Chairman of the Board, Chief - ---------------------------- Executive Officer, President and Alan R. Schlesinger Director (Principal Executive Officer) April 29, 1999 /s/ Loren R. Rothschild Vice Chairman of the Board, Chief - ---------------------------- Administrative Officer and Director April 29, 1999 Loren R. Rothschild /s/ Debbie A. Brownfield Executive Vice President and Chief - ---------------------------- Financial Officer (Principal Debbie A. Brownfield Financial and Accounting Officer) April 29, 1999 /s/ Stanford Springel - ---------------------------- Stanford Springel Director April 29, 1999 /s/ John J. Wiesner - ---------------------------- John J. Wiesner Director April 29, 1999 /s/ Paul M. Buxbaum - ---------------------------- Paul M. Buxbaum Director April 29, 1999
50
EX-3.2 2 EXHIBIT 3.2 EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF LAMONTS APPAREL, INC. (hereinafter called the "Corporation") (as amended through January 12, 1999) ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. SECTION 2. OTHER OFFICES. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. PLACE OF MEETINGS. Meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors. SECTION 2. ANNUAL MEETINGS. The Annual Meetings of Stockholders for the election of directors shall be held on such date and at such time as shall be designated from time to time by the Board of Directors. Any other proper business may be transacted at the Annual Meeting of Stockholders. SECTION 3. SPECIAL MEETINGS. Unless otherwise required by law or by the certificate of incorporation of the Corporation, as amended and restated from time to time (the "Certificate of Incorporation"), Special Meetings of Stockholders, for any purpose or purposes, may be called by either (i) the Chairman of the Board of Directors, if there be one, or the Vice Chairman of the Board of Directors, if there be one, or (ii) the President, or Vice President, if there be one, the Secretary or any Assistant Secretary, if there be one, at the request in writing of (i) the Board of Directors, (ii) a committee of the Board of Directors that has been duly designated by the Board of Directors and whose powers and authority include the power to call such meetings, or (iii) with respect to Special Meetings of the holders of the Corporation's Class B Common Stock only, during the continuance of any Special Share Event (as defined in the Certificate of Incorporation), holders owning 100% of the issued and outstanding Class B Common Stock. Such request shall state the purpose or purposes of the proposed meeting. At a Special Meeting of Stockholders, only such business shall be conducted as shall be specified in the notice of meeting (or any supplement thereto). Upon request in writing sent by registered mail to the President or Chief Executive Officer by any stockholder or stockholders entitled to call a special meeting of stockholders pursuant to this Section 3, the Board of Directors shall determine a place and time for such meeting, which time shall be not less than ninety (90) nor more than one hundred (100) days after the receipt and determination of the validity of such request, and a record date for the determination of stockholders entitled to vote at such meeting in the manner set forth in Article V, Section 5 hereof. Following such receipt and determination, it shall be the duty of the Secretary to cause notice to be given to the stockholders entitled to vote at such meeting, in the manner set forth in Section 4 of Article II, Section 4 hereof, that a meeting will be held at the place and time so determined. SECTION 4. NOTICE. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by law, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. SECTION 5. ADJOURNMENTS. Any meeting of the stockholders may be adjourned from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 6. QUORUM. Unless otherwise required by law or the Certificate of Incorporation, the holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented 2 by proxy, shall have power to adjourn the meeting from time to time, in the manner provided in Section 5, until a quorum shall be present or represented. SECTION 7. VOTING. Unless otherwise required by law, the Certificate of Incorporation or these By-laws, any question brought before any meeting of stockholders, other than the election of directors, shall be decided by the vote of the holders of a majority of the total number of votes of the capital stock represented and entitled to vote thereat, voting as a single class. Unless otherwise provided in the Certificate of Incorporation, and subject to Section 5 of Article V hereof, each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such stockholder. Such votes may be cast in person or by proxy but no proxy shall be voted on or after three years from its date, unless such proxy provides for a longer period. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in such officer's discretion, may require that any votes cast at such meeting shall be cast by written ballot. SECTION 8. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Unless otherwise provided in the Certificate of Incorporation, any action required or permitted to be taken at any Annual or Special Meeting of Stockholders of any class of the Corporation, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required by this Section 8 to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to its registered office in the state of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to the Corporation as provided above in this section. 3 SECTION 9. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. SECTION 10. STOCK LEDGER. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 9 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. SECTION 11. CONDUCT OF MEETINGS. The Board of Directors of the Corporation may adopt by resolution such rules and regulations for the conduct of the meeting of the stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of the stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) the determination of when the polls shall open and close for any given matter to be voted on at the meeting; (iii) rules and procedures for maintaining order at the meeting and the safety of those present; (iv) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (v) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (vi) limitations on the time allotted to questions or comments by participants. SECTION 12. ADVANCE NOTICE OF STOCKHOLDER NOMINATIONS AND PROPOSALS. Nominations of persons for election to the Board and the proposal of business to be transacted by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice with respect to such meeting, (b) by or at the direction of the Board or (c) by any stockholder of record of the Corporation who was a stockholder of record at the time of the giving of the notice 4 provided for in the following paragraph, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in this section. For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of the foregoing paragraph, (1) the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation, (2) such business must be a proper matter for stockholder action under the General Corporation Law of the State of Delaware, (3) if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, has provided the Corporation with a Solicitation Notice, as that term is defined in subclause (c)(iii) of this paragraph, such stockholder or beneficial owner must, in the case of a proposal, have delivered a proxy statement and form of proxy to holders of at least the percentage of the Corporation's voting shares required under applicable law to carry any such proposal, or, in the case of a nomination or nominations, have delivered a proxy statement and form of proxy to holders of a percentage of the Corporation's voting shares reasonably believed by such stockholder or beneficial holder to be sufficient to elect the nominee or nominees proposed to be nominated by such stockholder, and must, in either case, have included in such materials the Solicitation Notice and (4) if no Solicitation Notice relating thereto has been timely provided pursuant to this section, the stockholder or beneficial owner proposing such business or nomination must not have solicited a number of proxies sufficient to have required the delivery of such a Solicitation Notice under this section. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation (i) in the case of the 1999 annual meeting, not after March 31, 1999 and not before February 28, 1999, or (ii) in the case of any annual meeting for any year after 1999, not less than 45 or more than 75 days prior to the first anniversary (the "Anniversary") of the date on which the Corporation first mailed its proxy materials for the preceding year's annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed by more than 30 days after (i) in the case of the 1999 annual meeting, June 30, 1999, or (ii) in the case of any annual meeting for any year 1999, the anniversary of the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of (i) the 90th day prior to such annual meeting or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person as would be required to be disclosed in solicitations of proxies for the election of such nominees as directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such person's written consent to serve as a director if elected; (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and 5 any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner, (ii) the class and number of shares of the Corporation that are owned beneficially and of record by such stockholder and such beneficial owner, and (iii) whether either such stockholder or beneficial owner intends to deliver a proxy statement and form of proxy to holders of, in the case of a proposal, at least the percentage of the Corporation's voting shares required under applicable law to carry the proposal or, in the case of a nomination or nominations, a sufficient number of holders of the Corporation's voting shares to elect such nominee or nominees (an affirmative statement of such intent, a "Solicitation Notice"). Notwithstanding anything in the second sentence of the second paragraph of this Section 12 to the contrary, in the event that the number of directors to be elected to the Board is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board made by the Corporation at least 55 days prior to the Anniversary, a stockholder's notice required by this Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. Only persons nominated in accordance with the procedures set forth in this Section 12 shall be eligible to serve as directors and only such business shall be conducted at an annual meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this section. The chair of the meeting shall have the power and the duty to determine whether a nomination or any business proposed to be brought before the meeting has been made in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defective proposed business or nomination shall not be presented for stockholder action at the meeting and shall be disregarded. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board or (b) by any stockholder of record of the Corporation who is a stockholder of record at the time of giving of notice provided for in this paragraph, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 12. Nominations by stockholders of persons 6 for election to the Board may be made at such a special meeting of stockholders if the stockholder's notice required by the second paragraph of this Section 12 shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting. For purposes of this section, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. Notwithstanding the foregoing provisions of this Section 12, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to matters set forth in this Section 12. Nothing in this Section 12 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. ARTICLE III DIRECTORS SECTION 1. NUMBER AND ELECTION OF DIRECTORS. The Board of Directors shall consist of not less than one nor more than fifteen members, the exact number of which shall initially be fixed from time to time by the Board of Directors. Except as provided in Section 2 of this Article III, directors shall be elected by a plurality of the votes cast at the Annual Meetings of Stockholders and each director so elected shall hold office until the next Annual Meeting of Stockholders and until such director's successor is duly elected and qualified, or until such director's earlier death, resignation or removal. Any director may resign at any time upon written notice to the Corporation. Directors need not be stockholders. SECTION 2. VACANCIES. Unless otherwise required by law or the Certificate of Incorporation, vacancies arising through death, resignation, removal, an increase in the number of directors or otherwise may be filled only by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and qualified, or until their earlier death, resignation or removal. 7 SECTION 3. DUTIES AND POWERS. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws required to be exercised or done by the stockholders. SECTION 4. MEETINGS. The Board of Directors may hold meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman, if there be one, the President, or by any director. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone or telegram on twenty-four (24) hours' notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. SECTION 5. QUORUM. Except as otherwise required by law or the Certificate of Incorporation, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting of the time and place of the adjourned meeting, until a quorum shall be present. SECTION 6. ACTIONS BY WRITTEN CONSENT. Unless otherwise provided in the Certificate of Incorporation, or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. SECTION 7. MEETINGS BY MEANS OF CONFERENCE TELEPHONE. Unless otherwise provided in the Certificate of Incorporation, members of the Board of Directors of the Corporation, or any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 7 shall constitute presence in person at such meeting. 8 SECTION 8. COMMITTEES. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent permitted by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Each committee shall keep regular minutes and report to the Board of Directors when required. SECTION 9. COMPENSATION. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director, payable in cash or securities. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. SECTION 10. INTERESTED DIRECTORS. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because the director or officer's vote is counted for such purpose if (i) the material facts as to the director or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to the director or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board 9 of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IV OFFICERS SECTION 1. GENERAL. The officers of the Corporation shall be chosen by the Board of Directors and shall be a President, a Secretary and a Treasurer. The Board of Directors, in its discretion, also may choose a Chairman of the Board of Directors and a Vice Chairman of the Board of Directors (each of whom must be a director) and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by the same person, unless otherwise prohibited by law or the Certificate of Incorporation. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors and the Vice Chairman of the Board of Directors, need such officers be directors of the Corporation. SECTION 2. ELECTION. The Board of Directors, at its first meeting held after each Annual Meeting of Stockholders (or action by written consent of stockholders in lieu of the Annual Meeting of Stockholders), shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier death, resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative vote of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. The salaries of all officers of the Corporation shall be fixed by the Board of Directors. SECTION 3. VOTING SECURITIES OWNED BY THE CORPORATION. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President or any Vice President or any other officer authorized to do so by the Board of Directors and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised 10 and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. SECTION 4. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors, if there be one, shall preside at all meetings of the stockholders and of the Board of Directors. The Chairman of the Board of Directors shall be the Chief Executive Officer of the Corporation, unless the Board of Directors designates the President as the Chief Executive Officer, and, except where by law the signature of the President is required, the Chairman of the Board of Directors shall possess the same power as the President to sign all contracts, certificates and other instruments of the Corporation which may be authorized by the Board of Directors. During the absence or disability of the President, the Chairman of the Board of Directors shall exercise all the powers and discharge all the duties of the President. The Chairman of the Board of Directors shall also perform such other duties and may exercise such other powers as may from time to time be assigned by these By-Laws or by the Board of Directors. SECTION 5. VICE CHAIRMAN OF THE BOARD OF DIRECTORS. The Vice Chairman of the Board of Directors, if there be one, shall be an agent of the Corporation and, subject to the direction of the Board of Directors, shall perform such functions and duties as from time to time may be assigned to him or her by the Board of Directors. The Vice Chairman of the Board of Directors, if present, shall preside with the Chairman of the Board of Directors at all meetings of the stockholders and all meetings of the Board of Directors. SECTION 6. PRESIDENT. The President shall, subject to the control of the Board of Directors and, if there be one, the Chairman of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these By-Laws, the Board of Directors or the President. In the absence or disability of the Chairman of the Board of Directors, or if there be none, the President shall preside at all meetings of the stockholders and the Board of Directors. If there be no Chairman of the Board of Directors, or if the Board of Directors shall otherwise designate, the President shall be the Chief Executive Officer of the Corporation. The President shall also perform such other duties and may exercise such other powers as may from time to time be assigned to such officer by these By-Laws or by the Board of Directors. 11 SECTION 7. VICE PRESIDENTS. At the request of the President or in the President's absence or in the event of the President's inability or refusal to act (and if there be no Chairman of the Board of Directors), the Vice President, or the Vice Presidents if there is more than one (in the order designated by the Board of Directors), shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Each Vice President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board of Directors and no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. SECTION 8. SECRETARY. The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for committees of the Board of Directors when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board of Directors or the President, under whose supervision the Secretary shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest to the affixing by such officer's signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be. SECTION 9. TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all transactions as Treasurer and of the financial condition of the Corporation. If required by 12 the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of the office of the Treasurer and for the restoration to the Corporation, in case of the Treasurer's death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the Treasurer's possession or under the Treasurer's control belonging to the Corporation. SECTION 10. ASSISTANT SECRETARIES. Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Secretary, and in the absence of the Secretary or in the event of the Secretary's disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary. SECTION 11. ASSISTANT TREASURERS. Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of the Treasurer's disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of the office of Assistant Treasurer and for the restoration to the Corporation, in case of the Assistant Treasurer's death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the Assistant Treasurer's possession or under the Assistant Treasurer's control belonging to the Corporation. SECTION 12. OTHER OFFICERS. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers. ARTICLE V STOCK SECTION 1. FORM OF CERTIFICATES. Every holder of stock in the Corporation shall be entitled to have a certificate signed, in the name of the Corporation (i) by the Chairman of the Board of Directors, the President or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of 13 the Corporation, certifying the number of shares owned by such stockholder in the Corporation. SECTION 2. SIGNATURES. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. SECTION 3. LOST CERTIFICATES. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or the owner's legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed or the issuance of such new certificate. SECTION 4. TRANSFERS. Stock of the Corporation shall be transferable in the manner prescribed by law and in these By-Laws. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by such person's attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be canceled before a new certificate shall be issued. No transfer of stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred. SECTION 5. RECORD DATE. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which 14 the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; providing, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within 10 days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed is delivered to the Corporation by delivery to its registered office in this State, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolutions taking such prior action. (c) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 6. RECORD OWNERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of 15 any other person, whether or not it shall have express or other notice thereof, except as otherwise required by law. ARTICLE VI NOTICES SECTION 1. NOTICES. Whenever written notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at such person's address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by telegram, telex or cable. SECTION 2. WAIVERS OF NOTICE. Whenever any notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, a waiver thereof in writing, signed, by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting, present in person or represented by proxy, shall constitute a waiver of notice of such meeting, except where the person attends the meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. ARTICLE VII GENERAL PROVISIONS SECTION 1. DIVIDENDS. Dividends upon the capital stock of the Corporation, subject to the requirements of the DGCL and the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting of the Board of Directors (or any action by written consent in lieu thereof in accordance with Section 6 of Article III hereof), and may be paid in cash, in property, or in shares of the Corporation's capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve. 16 SECTION 2. DISBURSEMENTS. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. SECTION 3. FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. SECTION 4. CORPORATE SEAL. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII INDEMNIFICATION SECTION 1. POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS OTHER THAN THOSE BY OR IN THE RIGHT OF THE CORPORATION. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any Eligible Indemnitee who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director or officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person's conduct was unlawful. "Eligible Indemnitee" means any person who is or was a director or officer of the Corporation on or after January 31, 1998. SECTION 2. POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS BY OR IN THE RIGHT OF THE CORPORATION. Subject to 17 Section 3 of this Article the Corporation shall indemnify any Eligible Indemnitee who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 3. AUTHORIZATION OF INDEMNIFICATION. Any indemnification under this Article VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Eligible Indemnitee is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Such determination shall be made (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (ii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion or (iii) by the stockholders. To the extent, however, that an Eligible Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith, without the necessity of authorization in the specific case. SECTION 4. GOOD FAITH DEFINED. For purposes of any determination under Section 3 of this Article VIII, a person shall be deemed to have acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe such person's conduct was unlawful, if such person's action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to such person by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to 18 the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term "another enterprise" as used in this Section 4 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. The provisions of this Section 4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Section 1 or 2 of this Article VIII, as the case may be. SECTION 5. INDEMNIFICATION BY A COURT. Notwithstanding any contrary determination in the specific case under Section 3 of this Article and notwithstanding the absence of any determination thereunder, any Eligible Indemnitee may apply to the Court of Chancery in the State of Delaware for indemnification to the extent otherwise permissible under Sections 1 and 2 of this Article VIII. The basis of such indemnification by a court shall be a determination by such court that indemnification of the Eligible Indemnitee is proper in the circumstances because such person has met the applicable standards of conduct set forth in Section 1 or 2 of this Article VIII, as the case may be. Neither a contrary determination in the specific case under Section 3 of this Article VIII nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director or officer seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Section 5 shall be given to the Corporation promptly upon the filing of such application. If successful, in whole or in part, the director or officer seeking indemnification shall also be entitled to be paid the expense of prosecuting such application. SECTION 6. EXPENSES PAYABLE IN ADVANCE. Expenses incurred by an Eligible Indemnitee in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article VIII. SECTION 7. NONEXCLUSIVITY OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. The indemnification and advancement of expenses provided by or granted pursuant to this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate of Incorporation, any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, it being 19 the policy of the Corporation that indemnification of the persons specified in Sections 1 and 2 of this Article VIII shall be made to the fullest extent permitted by law. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not specified in Section 1 or 2 of this Article VIII but whom the Corporation has the power or obligation to indemnify under the provisions of the General Corporation Law of the State of Delaware, or otherwise. SECTION 8. INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article VIII. SECTION 9. CERTAIN DEFINITIONS. For purposes of this Article VIII, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation, or is or was a director or officer of such constituent corporation serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article VIII, references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article VIII. SECTION 10. SURVIVAL OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or 20 officer and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 11. LIMITATION ON INDEMNIFICATION. Notwithstanding anything contained in this Article VIII to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 5 hereof), the Corporation shall not be obligated to indemnify any director or officer in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors of the Corporation. SECTION 12. INDEMNIFICATION OF EMPLOYEES AND AGENTS. The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article VIII to directors and officers of the Corporation. ARTICLE IX AMENDMENTS SECTION 1. AMENDMENTS. These By-Laws may be altered, amended or repealed, in whole or in part, or new By-Laws may be adopted by the stockholders or by the Board of Directors, provided, however, that notice of such alteration, amendment, repeal or adoption of new By-Laws be contained in the notice of such meeting of stockholders or Board of Directors as the case may be. All such amendments must be approved by either the holders of a majority of the outstanding capital stock entitled to vote thereon or by a majority of the entire Board of Directors then in office. SECTION 2. ENTIRE BOARD OF DIRECTORS. As used in this Article X and in these By-Laws generally, the term "entire Board of Directors" means the total number of directors which the Corporation would have if there were no vacancies. 21 EX-4.8 3 EXHIBIT 4.8 Exhibit 4.8 Certificate of Designation, Preferences and Rights of Series RP Preferred Stock of Lamonts Apparel, Inc. (Pursuant to Section 151 of the Delaware General Corporation Law) I, Debbie A. Brownfield, Secretary of Lamonts Apparel, Inc. (the "CORPORATION"), a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors of the Corporation by the Restated Certificate of Incorporation of the Corporation, the said Board of Directors has adopted the following resolutions creating a series of 40,000 shares of Preferred Stock designated as Series RP Preferred Stock. RESOLVED, that pursuant to the authority granted to and vested in the Board of Directors of the Corporation in accordance with the provisions of the Restated Certificate of Incorporation of the Corporation, the Board of Directors hereby creates a series of Series RP Preferred Stock, with a par value of $.01 per share, of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences and limitations thereof as follows (the following provisions being intended to operate in addition to any other provisions of said Restated Certificate of Incorporation applicable to any series of Preferred Stock): Series RP Preferred Stock Section 1. DESIGNATION, PAR VALUE AND AMOUNT. The shares of such series shall be designated as "Series RP Preferred Stock" (hereinafter referred to as "SERIES RP PREFERRED STOCK"), the shares of such series shall be with par value of $.01 per share, and the number of shares constituting such series shall be 40,000; PROVIDED, HOWEVER, that, if more than a total of 40,000 shares of Series RP Preferred Stock shall be issuable upon the exercise of Rights (the "Rights") issued pursuant to the Rights Agreement, dated as of January 12, 1999, between the Corporation and Norwest Bank Minnesota, N.A., as Rights Agent (as amended from time to time, the "RIGHTS AGREEMENT"), the Board of Directors of the Corporation shall direct by resolution or resolutions that a certificate be properly executed, acknowledged and filed providing for the total number of shares of Series RP Preferred Stock authorized to be issued to be increased (to the extent that the Restated Certificate of Incorporation then permits) to the largest number of whole shares (rounded up to the nearest whole number) issuable upon exercise of the Rights. Section 2. DIVIDENDS AND DISTRIBUTIONS. 2.1 Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series RP Preferred Stock with respect to dividends, the holders of shares of Series RP Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of assets legally available for the purpose, quarterly dividends payable in cash on the first business day of March, June, September and December in each year (each such date being referred to herein as a "QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series RP Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment set forth in Section 6.1, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock, par value $.01 per share, of the Corporation (the "COMMON STOCK") or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series RP Preferred Stock. 2.2 The Corporation shall declare a dividend or distribution on the Series RP Preferred Stock as provided in Section 2.1 above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); PROVIDED THAT, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series RP Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. 2.3 Dividends shall begin to accrue and be cumulative on outstanding shares of Series RP Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series RP Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series RP Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series RP Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series RP Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 30 days prior to the date fixed for the payment thereof. 2 Section 3. VOTING RIGHTS. The holders of shares of Series RP Preferred Stock shall have the following voting rights: 3.1 Except as provided in Section 3.3 and subject to the provision for adjustment hereinafter set forth, each share of Series RP Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. 3.2 Except as otherwise provided herein or by law, the holders of shares of Series RP Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. 3.3 The following additional provisions shall apply with respect to the voting of shares of Series RP Preferred Stock: 3.3.1 If, on the date used to determine stockholders of record for any meeting of stockholders for the election of directors, a default in preference dividends (as defined in Section 3.3.5 below) on the Series RP Preferred Stock shall exist, the holders of the Series RP Preferred Stock shall have the right, voting as a class as described in Section 3.3.2 below, to elect two directors (in addition to the directors elected by holders of Common Stock of the Corporation). Such right may be exercised (a) at any meeting of stockholders for the election of directors or (b) at a meeting of the holders of shares of Voting Preferred Stock (as hereinafter defined), called for the purpose in accordance with the Bylaws of the Corporation, until all such cumulative dividends (referred to above) shall have been paid in full or until non-cumulative dividends have been paid regularly for at least one year. 3.3.2 The right of the holders of Series RP Preferred Stock to elect two directors, as described above, shall be exercised as a class concurrently with the rights of holders of any other series of Preferred Stock upon which voting rights to elect such directors have been conferred and are then exercisable. The Series RP Preferred Stock and any additional series of Preferred Stock that the Corporation may issue and that may provide for the right to vote with the foregoing series of Preferred Stock are collectively referred to herein as "VOTING PREFERRED STOCK." 3.3.3 Each director elected by the holders of shares of Voting Preferred Stock shall be referred to herein as a "PREFERRED DIRECTOR." A Preferred Director shall continue to serve as such for a term of one year, except that upon any termination of the right of all holders of Voting Preferred Stock to vote as a class for Preferred Directors, the term of office of Preferred Directors then serving shall terminate. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of a majority of the outstanding shares of Voting Preferred Stock then entitled to vote for the election of directors, present (in person or by proxy) and voting together as a single class (a) at a meeting of the stockholders, or (b) at a meeting of the holders of shares of such Voting Preferred Stock, called for the purpose in accordance with the Bylaws of the Corporation. 3.3.4 So long as a default in any preference dividends of the Series RP Preferred Stock shall exist or the holders of any other series of Voting Preferred Stock shall be 3 entitled to elect Preferred Directors, (a) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (b)) by an instrument in writing signed by the remaining Preferred Director and filed with the Corporation and (b) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote or written consent of the holders of a majority of the outstanding shares of Voting Preferred Stock then entitled to vote for the election of directors, present (in person or by proxy) and voting together as a single class, at such time as the removal shall be effected. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever (x) no default in preference dividends on the Series RP Preferred Stock shall exist and (y) the holders of other series of Voting Preferred Stock shall no longer be entitled to elect such Preferred Directors, then the number of directors constituting the Board of Directors of the Corporation shall be reduced by two. 3.3.5 For purposes hereof, a "DEFAULT IN PREFERENCE DIVIDENDS" on the Series RP Preferred Stock shall be deemed to have occurred whenever the amount of cumulative and unpaid dividends on the Series RP Preferred Stock shall be equivalent to six full quarterly dividends or more (whether or not consecutive), and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all cumulative dividends on all shares of the Series RP Preferred Stock then outstanding shall have been paid through the last Quarterly Dividend Payment Date or until, but only until, non-cumulative dividends have been paid regularly for at least one year. 3.4 Except as set forth herein (or as otherwise required by applicable law), holders of Series RP Preferred Stock shall have no general or special voting rights and their consent shall not be required for taking any corporate action. Section 4. CERTAIN RESTRICTIONS. 4.1 Whenever quarterly dividends or other dividends or distributions payable on the Series RP Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series RP Preferred Stock outstanding shall have been paid in full, the Corporation shall not: 4.1.1 declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series RP Preferred Stock; 4.1.2 declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series RP Preferred Stock, except dividends paid ratably on the Series RP Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; 4.1.3 redeem or purchase or otherwise acquire for consideration (except as provided in Section 4.1.4 below) shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series RP Preferred Stock, provided that the 4 Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series RP Preferred Stock; 4.1.4 redeem or purchase or otherwise acquire for consideration any shares of Series RP Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series RP Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. 4.2 The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under Section 4.1, purchase or otherwise acquire such shares at such time and in such manner. Section 5. REACQUIRED SHARES. Any shares of Series RP Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, in any other Certificate of Amendment creating a series of Preferred Stock or as otherwise required by law. Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. 6.1 Subject to the prior and superior rights of holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series RP Preferred Stock with respect to rights upon liquidation, dissolution or winding up (voluntary or otherwise), no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series RP Preferred Stock unless, prior thereto, the holders of shares of Series RP Preferred Stock shall have received per share an amount equal to the greater of 1,000 times $6.00 or 1,000 times the payment made per share of Common Stock, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "SERIES RP LIQUIDATION PREFERENCE"). Following the payment of the full amount of the Series RP Liquidation Preference, no additional distributions shall be made to the holders of shares of Series RP Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "CAPITAL ADJUSTMENT") equal to the quotient obtained by dividing (i) the Series RP Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in Section 6.3 to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii) being hereafter referred to as the "ADJUSTMENT NUMBER"). Following the payment of the full amount of the Series RP Liquidation Preference and the Capital 5 Adjustment in respect of all outstanding shares of Series RP Preferred Stock and Common Stock, respectively, holders of Series RP Preferred Stock and holders of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. 6.2 In the event, however, that there are not sufficient assets available to permit payment in full of the Series RP Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series RP Preferred Stock, then such remaining assets shall be distributed ratably to the holders of Series RP Preferred Stock and the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Capital Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. 6.3 In the event the Corporation shall (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series RP Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share equal to the Adjustment Number (as appropriately adjusted as set forth in Section 6.3 to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. Section 8. NO REDEMPTION. The shares of Series RP Preferred Stock shall not be redeemable. Section 9. RANKING. The Series RP Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such other series shall provide otherwise. Section 10. AMENDMENT. The Restated Certificate of Incorporation of the Corporation shall not be further amended in any manner that would materially alter or change the powers, preferences or special rights of the Series RP Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series RP Preferred Stock, voting separately as a class. 6 Section 11. FRACTIONAL SHARES. Series RP Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all other rights of holders of Series RP Preferred Stock. RESOLVED, that the proper officers of the Corporation be, and each of them hereby is, authorized to execute a Certificate of Designation with respect to the Series RP Preferred Stock pursuant to Section 151 of the General Corporation Law of the State of Delaware and to take all appropriate action to cause such Certificate to become effective, including, but not limited to, the filing and recording of such Certificate with and/or by the Secretary of State of the State of Delaware. [REST OF PAGE INTENTIONALLY LEFT BLANK] 7 IN WITNESS WHEREOF, I have executed and subscribed to this Certificate and do affirm the foregoing as true under penalty of perjury this 12th day of January, 1999. /s/ Debbie A. Brownfield ------------------------------ Debbie A. Brownfield Secretary 8 EX-10.19 4 EXHIBIT 10.19 EXHIBIT 10.19 FOURTH AMENDMENT FOURTH AMENDMENT dated as of April 13, 1999 (this "AMENDMENT"), by and among LAMONTS APPAREL, INC., a Delaware corporation (the "BORROWER"), having its principal place of business at 12413 Willows Road N.E., Kirkland, WA 98034, BANKBOSTON, N.A. (f/k/a "The First National Bank of Boston"), a national banking association with its head office at 100 Federal Street, Boston, Massachusetts 02110 (the "BANK"), and BANKBOSTON, N.A. (f/k/a "The First National Bank of Boston"), as Agent (the "AGENT") amending certain provisions of the Amended and Restated Debtor in Possession and Exit Financing Loan Agreement by and among the Borrower, the Bank, and the Agent dated as of September 26, 1997, as previously amended by a First Amendment dated as of January 8, 1998, a Second Amendment dated as of April 1, 1998, and a Third Amendment dated as of September 23, 1998 (as so amended, the "LOAN AGREEMENT"). Terms not otherwise defined herein which are defined in the Loan Agreement shall have the respective meanings herein assigned to such terms in the Loan Agreement. WHEREAS, the Borrower has requested that the Bank agree to amend the terms of the Loan Agreement in certain respects; and WHEREAS, the Bank is willing to amend the terms of the Loan Agreement in such respects, upon the terms and subject to the conditions contained herein; and NOW, THEREFORE, in consideration of the mutual agreements contained in the Loan Agreement, herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. AMENDMENT TO DEFINITIONS. Section 1.1 of the Loan Agreement is hereby amended as follows: DEFINITION OF "OPERATING CASH FLOW." Section 1.1 of the Loan Agreement is amended by inserting the following sentence following subparagraph (C) in the definition of the term "OPERATING CASH FLOW": "The deduction in the foregoing clause (iii) for cash payments shall not include, and there shall be no deduction from Operating Cash Flow for, cash payments made by the Borrower in connection with the acquisition, installation and lease financing of certain point of sale cash registers and associated systems and software (the so called "POS Register Project") as disclosed to the Agent." -2- Section 2. AMENDMENT TO Section 10.3 OF THE LOAN AGREEMENT. Section 10.3 of the Loan Agreement is hereby amended as follows: MINIMUM/MAXIMUM INVENTORY FROM AND AFTER EXIT FACILITY DATE. Section 10.3(d) of the Loan Agreement is amended by deleting the dates and amounts on and following May 1, 1999 in the table in Section 10.3(d), and inserting in place thereof the following dates and amounts:
Date Minimum Amount Maximum Amount ---- -------------- -------------- May 1, 1999 $45,700,000 $53,700,000 July 31, 1999 $47,800,000 $55,800,000 November 6, 1999 $63,800,000 $71,800,000 February 5, 2000 $44,900,000 $52,900,000
Section 3. AMENDMENT TO EXHIBIT J. Exhibit J to the Loan Agreement is hereby amended as follows: EXHIBIT J (FORM OF COMPLIANCE CERTIFICATE AND WORKSHEET). Exhibit J of the Loan Agreement is hereby amended by deleting Exhibit J (Form of Compliance Certificate and Worksheet) thereof in its entirety and substituting in place thereof the Form of Compliance Certificate and Worksheet attached hereto as Exhibit J. Section 4. REPRESENTATIONS, WARRANTIES AND COVENANTS; NO DEFAULT; AUTHORIZATION. The Borrower hereby represents, warrants and covenants to the Agent as follows: (a) Each of the representations and warranties of the Borrower contained in the Loan Agreement or in any other Loan Documents was true and correct as of the date as of which it was made and is true and correct in all material respects as of the date of this Amendment except to the extent such representations and warranties expressly related to a prior date (in which case they shall be true and correct as of such earlier date); and no Default or Event of Default has occurred and is continuing as of the date of this Amendment; (b) This Amendment has been duly authorized, executed and delivered by the Borrower; and (c) This Amendment shall constitute the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. Section 5. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment shall be subject to satisfaction of the following conditions on or prior to April 23, 1999: -3- (a) This Amendment shall have been duly executed and delivered by the Borrower, the Banks and the Agent. (b) The Agent shall have received written confirmation of approval of this Amendment executed by the Surety and written ratification of the Supplemental Guaranty (as defined in the Purchase and Guaranty Agreement) executed by the Guarantor (as defined in the Purchase and Guaranty Agreement), each in form and substance satisfactory to the Agent. (c) The Agent shall have received such other documents or instruments relating hereto as the Agent shall have reasonably requested. Section 6. RATIFICATION, ETC. Except as expressly amended hereby, the Loan Agreement, the other Loan Documents, and all documents, instruments and agreements related thereto are hereby ratified and confirmed in all respects. All references in the Loan Agreement or any related agreement or instrument to the Loan Agreement shall hereafter refer to the Loan Agreement as amended hereby. Section 7. NO OTHER CHANGES; NO IMPLIED WAIVER. Except as expressly provided herein, the Loan Agreement and the other Loan Documents shall be unaffected hereby and shall continue in full force and effect, and nothing contained herein shall constitute a waiver by the Agent or any Bank of any right, remedy, Default, or Event of Default, or impair or otherwise affect any Obligations, any other obligations of the Borrower, or any right of the Agent or any Bank consequent thereon. Section 8. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original but which together shall constitute one and the same instrument. Section 9. GOVERNING LAW. THIS AMENDMENT SHALL FOR ALL PURPOSES BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICTS OF LAW). -4- IN WITNESS WHEREOF, the undersigned have duly executed this Amendment as a sealed instrument as of the date first above written. LAMONTS APPAREL, INC. By: /s/ Loren Rothschild ---------------------------------- Name: Loren Rothschild Title: Vice Chairman BANKBOSTON, N.A., in its respective capacities as a Revolving Credit Bank and Agent By: /s/ William J. Sherald ---------------------------------- Name: William J. Sherald Title: Vice President BANKBOSTON, N.A., as Term Loan Lender By: /s/ William J. Sherald ---------------------------------- Name: William J. Sherald Title: Vice President THE CIT GROUP/BUSINESS CREDIT, INC., as a Revolving Credit Bank By: /s/ Kelly Wu ---------------------------------- Name: Kelly Wu Title: Assistant Vice President -5- CONFIRMATION OF THE SURETY AND OF THE GUARANTOR The Surety hereby confirms approval of the foregoing amendment in all respects and directs the Term Loan Lender to give its consent thereto. The Guarantor (as defined in the Purchase and Guaranty Agreement) hereby ratifies and confirms the Supplemental Guaranty (as defined in the Purchase and Guaranty Agreement) in all respects, and agrees that the Supplemental Guaranty, after giving effect to foregoing amendment, shall continue in full force and effect. SPECIALTY INVESTMENT I LLC By: /s/ Alan R. Goldstein ---------------------------------- Name: Alan R. Goldstein Title: CFO/SVP GORDON BROTHERS PARTNERS, INC. By: /s/ Alan R. Goldstein ---------------------------------- Name: Alan R. Goldstein Title: CFO/SVP
EX-10.11 5 EXHIBIT 10.11 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into as of April 19, 1999, is by and between Lamonts Apparel, Inc., a Delaware corporation (the "Company"), and Alan Schlesinger ("Executive"). WHEREAS, this Agreement amends and restates the Employment Agreement, dated as of April 18, 1995, as amended as of January 31, 1998 (the "Effective Date"), between Executive and the Company (the "Existing Employment Agreement"), which amendment was entered into in connection with the Company's Modified and Restated Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the "Plan of Reorganization" or "Plan"); NOW, THEREFORE, the parties agree to amend and restate the Existing Employment Agreement in its entirety as follows: 1. EMPLOYMENT OF EXECUTIVE; TITLE. (a) EMPLOYMENT. Executive agrees to be employed by the Company, and the Company agrees to employ Executive, on the terms and conditions set forth in this Agreement. Executive agrees during the Term (as defined below) to devote substantially all of his business time, efforts, skills and abilities to the performance of his duties as stated in this Agreement and to the furtherance of the Company's business. (b) TITLE. Executive's job title will be Chief Executive Officer and his duties will be those as are designated by the Board of Directors of the Company ("Board"), consistent with the position of Chief Executive Officer. Executive further agrees to serve, if requested by the Board, without additional compensation, as a director of the Company, and as an officer or director, or both, of any subsidiary, division or affiliate of the Company or any other entity in which the Company holds an equity interest; provided, however, that the Company shall indemnify Executive from liabilities in connection with serving in any such position to the same extent as his indemnification rights pursuant to the Company's Certificate of Incorporation, By-Laws and applicable Delaware law. 2. COMPENSATION. (a) BASE SALARY. Executive's base salary shall be composed of the following: (i) SALARY. During the Term, the Company shall pay to Executive as compensation for his services an annual salary of $450,000 payable semi-monthly ("Salary"). Executive's Salary will be payable in arrears in accordance with the Company's normal payroll procedures and will be reviewed annually and subject to upward adjustment as provided in paragraph 3(a)(iii) below. (ii) GUARANTEED BONUS. In addition to his Salary, the Executive shall be paid a guaranteed annual bonus in the sum of $100,000 per year ("Minimum Bonus"), payable at the end of each calendar year. (iii) INCREASES IN BASE SALARY. The Executive's Salary and Minimum Bonus shall be reviewed by the Board or the Compensation Committee of the Board no less frequently than on each January 31 during the Term. The Salary and Minimum Bonus payable to Executive may be increased on each such date (and at such other times as such Board or the Compensation Committee of the Board (the "Compensation Committee") may deem appropriate during the Term) to such amount determined appropriate by such Board or the Compensation Committee; provided, however, that Executive's Salary and Minimum Bonus shall be increased annually in a minimum amount equal to the cost-of-living increment as reported in the "Consumer Price Index, Seattle, Washington, All Items," published by the U.S. Department of Labor (using January 1, 1995 as the base date for comparison with respect to the increase to be made on January 31, 1998, and using January 1 of the immediately preceding year as the base date for comparison with respect to each annual increase to be made thereafter). Each such new Salary and Minimum Bonus shall become the base for each successive year increase. Any increase in Salary, Minimum Bonus or other compensation shall in no way limit or reduce any other obligations of the Company hereunder and, once established as an increased specified rate, Executive's Salary and Minimum Bonus shall not be reduced unless Executive otherwise agrees in writing. (b) RETENTION OF PRIOR BENEFITS. Executive shall retain all monies and other benefits previously paid to him by reason of the Existing Employment Agreement. (c) EXECUTIVE PERQUISITES. Executive shall be entitled to receive such executive perquisites and fringe benefits as have been customarily provided to senior executives of the Company. (d) MISCELLANEOUS BUSINESS EXPENSES. Executive shall be entitled to receive an allowance of $1,500 per month, payable monthly in advance, for unreimbursed business-related expenses including the use of one personal vehicle. 2 (e) TAX WITHHOLDING. The Company has the right to deduct from any compensation payable to Executive under this Agreement social security (FICA) taxes and all federal, state, municipal or other such taxes or charges as may now be in effect or that may hereafter be enacted or required. (f) BOARD MEMBERSHIP. The Company agrees that during the Term it will use its best efforts to cause Executive to be nominated for election to the Board at each annual meeting of stockholders of the Company and, if elected, the Company will appoint Executive to serve as Chairman of the Board. (g) LIFE INSURANCE. In addition to any other insurance which the Company may choose to maintain on the life of the Executive, the Company shall provide, to the extent it is reasonably able to do so, a term life insurance policy in the face amount of two million dollars ($2,000,000) payable to such beneficiary as the Executive may designate; provided, however, that in no event shall the Company be required to pay premiums on such term life insurance policy in excess of $15,000 per annum. (h) DIRECTOR'S AND OFFICER'S INSURANCE. The Company shall maintain directors' and officers' insurance policies during the Term and for a period of twelve months thereafter on substantially the same terms as the Company's current policies; provided that, if any insurer shall cancel or refuse to renew any such policy and the Company is unable to obtain a replacement policy on substantially the same terms reasonably satisfactory to Executive, the Company shall exercise in a timely manner any and all options thereunder, and pay any and all premiums or other charges necessary, to extend the period during which claims may be made thereunder; provided further that, the Company shall not be required to pay such premiums or other charges necessary to extend such period if they are substantially in excess of the premiums in effect on the date hereof. If the Company fails to maintain directors' and officers' insurance at any time during the term of Executive's employment hereunder, Executive may terminate this Agreement immediately and such termination shall be treated as a termination without Cause hereunder. 3. DURATION OF EMPLOYMENT. (a) TERM. Unless otherwise terminated at an earlier date in accordance with Section 3, 4 or 6 hereof or unless extended in accordance with Section 6 hereof, the term of Executive's employment under this Agreement shall be for a period commencing on January 31, 1998 and ending on January 31, 2002 (the "Term"). (b) EARLY TERMINATION. Notwithstanding the foregoing, this Agreement (other than Sections 5 through 14 hereof) and the relationship created hereunder between the Company and Executive will terminate prior to the expiration of the Term upon the 3 earliest to occur of: (i) 30 days after delivery to Executive by the Company of written notice of the Company's voluntary and unilateral termination of this Agreement, (ii) the date of delivery to the Company by Executive of written notice of Executive's voluntary and unilateral termination of this Agreement, (iii) the date of delivery of written notice from the Company following the disability of Executive that renders him unable to perform his essential duties under this Agreement, even with reasonable accommodation that does not cause undue hardship to the Company, for at least 90 days out of any 120 consecutive day period, (iv) immediately after delivery to Executive by the Company of written notice of termination for "Cause" (as defined in Section 4 below) or (v) the death of Executive, provided, however, that in the event of the death of Executive, the Company shall pay to the estate of Executive six months of Salary commencing with the next regular pay period after the date of his death ("Death Benefit"). Any Death Benefit otherwise payable by the Company shall be offset by proceeds from any life insurance furnished by the Company for payment of the Death Benefit under this Section 3(b). (c) EFFECT OF TERMINATION. Subject to the provisions set forth in Section 6 hereof pertaining to a Change in Control, if this Agreement is terminated (A) by the Company for "Cause" or pursuant to Section 3(b)(iii), (B) voluntarily by Executive or (C) by nonrenewal at the end of the Term, Executive shall be entitled to receive only (i) his Salary payable pursuant to Section 2(a)(i), pro-rated through the effective date of such termination, (ii) a pro-rated portion of his Minimum Bonus payable pursuant to Section 2(a)(ii) and (iii) all reasonable and necessary expenses reasonably incurred by Executive on Company business prior to the effective date of termination shall be reimbursed in accordance with the Company's reimbursement policy then in effect, which shall be paid to Executive within ten business days after the date the Executive submits to the Company reasonable documentation of such expenses. 4. TERMINATION BY THE COMPANY FOR CAUSE; DEFINITION OF CAUSE. Executive's employment under this Agreement (and his right to receive the compensation set forth in Section 2 hereof) may be terminated by the Company at any time for "Cause," or (subject to the rights of Executive pursuant to Section 5 hereof) without "Cause." As used herein, "Cause" shall mean: (a) Any dishonest or fraudulent act or course of conduct by Executive, or other act or course of conduct by Executive constituting a criminal act or that results in improper gain or personal enrichment of Executive at the expense of the Company, or the commission by Executive of an act or a course of conduct involving moral turpitude, or Executive's insubordination to the Board. (b) Executive's material breach of any of the terms or conditions of this Agreement or of policies established by the Board, or Executive's material neglect of his duties or of the Company's business; PROVIDED, HOWEVER, that no such termination 4 pursuant to this clause (b) shall be effective unless the Company shall have given Executive ten days' prior written notice of any such conduct which, if not discontinued or corrected, would lead to his termination for Cause. Executive will have the opportunity to cure such non-complying conduct or performance within such 10-day period. Termination pursuant to this clause (b) shall be effective with respect to matters referred to in this clause (b) ten days after such notice unless such conduct has been cured in the good faith judgment of the Board. 5. SEVERANCE PAYMENT ON TERMINATION WITHOUT CAUSE. (a) TERMINATION WITHOUT CAUSE. Subject to the provisions set forth below and in Section 6 hereof pertaining to Change in Control (it being intended that this Section 5 shall apply cumulatively with Section 6 hereof, except to the extent otherwise provided in Section 6 hereof), if Executive's employment is terminated by the Company without Cause during the Term, (i) the Company shall be obligated to continue to pay Executive his Salary for a period of three years or for the remainder of the Term, whichever period is shorter, (ii) all options to purchase shares of capital stock of the Company shall vest in full upon the date of such termination, and (iii) the Company shall pay Executive an amount equal (x) sum of (A) the Minimum Bonus for the year in which the termination occurs plus (B) the Minimum Bonus for each year (treating a portion of a year as a full year for this purpose) remaining in the Term, excluding the year in which the termination occurs minus (y) the aggregate of all amounts paid as Minimum Bonus under this Agreement prior to such termination. At the Company's sole option, the Company may elect to pay Executive any remaining Salary due under this Section 5(a) in one lump sum, equal to the present value of such remaining Salary payments at an effective annual interest rate of 10 percent. (b) GENERAL RELEASE. Acceptance by Executive of any amounts pursuant to Sections 3, 5 or 6 shall constitute a full and complete release by Executive of any and all claims Executive may have against the Company, any of its past, present or future shareholders or any of their respective officers, directors and affiliates (past, present or future), including, but not limited to, claims he might have relating to Executive's employment and/or cessation of employment with the Company, including without limitation, tort, contract and common law claims and claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, the Washington Law Against Discrimination, or any other similar federal, state or local statute, rule or regulation; provided that, there shall be excluded from the scope of such general release the following: (i) claims that Executive may have against the Company for reimbursement of ordinary and necessary business expenses incurred by him during the course of his employment; 5 (ii) claims that may be made by the Executive for payment of accrued Salary, Minimum Bonus, fringe benefits, stock, or stock options properly due to him as provided in this Agreement; and (iii) claims respecting matters for which the Executive is entitled to be indemnified under the Company's Certificate of Incorporation or Bylaws or indemnification agreements, respecting third party claims asserted or third party litigation pending or threatened against the Executive. A condition to Executive's receipt of any amounts pursuant to Sections 3, 5 or 6 shall be Executive's execution and delivery of a general release as described above with appropriate provisions as necessary to insure the release is valid and enforceable under applicable laws, including the Older Workers Benefit Protection Act. Such payment shall be considered independent consideration made in exchange for such release. In exchange for such release, the Company shall, if Executive's employment is terminated without Cause, provide a release to Executive, but only with respect to claims against Executive that are actually known to the Company as of the time of such termination. 6. EFFECT OF CHANGE IN CONTROL. (a) If a Change in Control (as defined below) shall occur on or prior to the expiration of the Term or the earlier termination of this Agreement pursuant to Sections 3 or 4, then (A) if the remaining portion of the Term is scheduled to end on a date that is on or before the date that is the second anniversary of the occurrence of such Change in Control, then the Term shall be extended by such number of months so that the Term shall end on a date that is the second anniversary of the occurrence of such Change in Control; or (B) if the remaining portion of the Term is scheduled to end on a date that is after the date of the second anniversary of the occurrence of such Change in Control, then the Term shall remain unaffected and shall not be extended. If a Change in Control shall occur on or prior to the expiration of the Term, or the earlier termination of this Agreement pursuant to Sections 3 or 4, then if Executive's options have not fully vested, then upon occurrence of a Change in Control on or after the Effective Date, all such options shall fully vest immediately upon such event. In the event that a Change in Control occurs, this Agreement shall continue to apply to Executive's employment except that (x) termination of Executive's employment by Executive for "Good Reason" (as defined below) shall be treated in the same manner as termination of Executive's employment by the Company without Cause; and (y) if Executive's employment with the Company is terminated without Cause or for Good Reason following (or is otherwise effected in connection with) a Change in Control, the Company shall pay Executive in a lump sum (calculated in accordance with such section) within 10 days of such date of termination, an amount equal to the present value of the Salary that would have been payable under this Agreement for the remainder of the Term. 6 (b) As used herein, a "Change in Control" shall be deemed to have occurred if, subsequent to the date hereof: (i) any "person" (as such term is defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than (i) Apollo Advisors, L.P., Lion Advisors, L.P., FMR Corp., Fidelity Management & Research Company, Fidelity Management Trust Company, any other beneficial owner of more than 10% of the Company's common stock as of January 31, 1998, or (ii) any investment fund managed by, or firm or group affiliated with any of the persons specified in clause (i) above, or any of their respective affiliates, becomes the beneficial owner, directly or indirectly, of either (A) a majority of the Company's outstanding common stock or (B) securities of the Company representing a majority of the combined voting power of the Company's then outstanding voting securities; (ii) a sale is made to any purchaser unaffiliated with the Company or any of the persons specified in clause (i) above of all or substantially all of the assets of the Company; (iii) a merger or consolidation of the Company is made with another corporation or other legal person unaffiliated with the Company or any of the persons specified in clause (i) above if, immediately after such merger or consolidation, less than 70% of the combined voting power of the then- outstanding securities of such corporation or person are held, directly or indirectly, in the aggregate by the holders immediately prior to such transaction of the then-outstanding securities of the Company entitled to vote generally in the election of the Board; or (iv) if during any two consecutive years individuals who the beginning of such period constituted the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the members of the Board; PROVIDED, HOWEVER, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; PROVIDED, FURTHER, HOWEVER, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors(a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest. In no event shall the term "Change in Control" be construed to include any change of control of the Company or any affiliate of the Company solely as a result of any 7 exchange of equity for debt securities of the Company or any such affiliate upon consummation of a plan of reorganization for the Company in the Bankruptcy Case. (c) As used in this Agreement, "Good Reason" shall mean the occurrence (without Executive's express written consent) after or in connection with any Change in Control, of any of the following acts by the Company, or failures to act by the Company to act, unless, in the case of any act or failure to act described in clauses (i), (iv), (v) or (vi) below, such act or failure to act is corrected prior to the effective date of Executive's termination: (i) the assignment to Executive by the Company of any duties inconsistent with Executive's status as the chief executive officer of the Company or a substantial adverse alteration in the nature or status of Executive's responsibilities from those in effect immediately prior to the Change in Control; (ii) a reduction by the Company in Executive's Salary as in effect on the date hereof or as the same may be increased from time to time; (iii) the relocation of Executive's principal place of employment to a location more than 25 miles from Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations prior to the Change in Control; (iv) the failure of the Company to pay to Executive any portion of Executive's current compensation, or to pay to Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (v) the failure by the Company to continue in effect any compensation plan in which Executive participates immediately prior to the Change in Control that is material to Executive's total compensation (e.g., stock option, restricted stock, stock appreciation right, incentive compensation, bonus or other similar plan), unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of Executive's participation relative to other participants, as existed immediately prior to the Change in Control; or (vi) the failure by the Company to continue to provide Executive with benefits substantially similar to those enjoyed by Executive under any of the Company's 8 pension, savings, life insurance, medical, health and accident, or disability plans in which Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company that would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed by Executive at the time of the Change in Control, or the failure by the Company to provide Executive with the number of paid vacation days to which Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control. (d) Executive's right to terminate Executive's employment for Good Reason shall not be affected by Executive's incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (e) For purposes of any determination regarding the existence of Good Reason, any claim by Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (f) LIMITATION ON PAYMENTS. In the event that the termination and other benefits provided for in this Agreement (the "Benefits") or otherwise payable to the Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) but for this Section 6(f) would be subject to the excise tax imposed by Section 4999 of the Code, then the Benefits shall be payable either (A) in full, or (B) as to such lesser amount which would result in no portion of the Benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the excise tax imposed by Section 4999, results in the receipt by the Executive on an after-tax basis, of the greatest amount of Benefits, notwithstanding that all or some portion of such Benefits may be taxable under Section 4999 of the Code. If a reduction of the Benefits is necessary to comply with the provisions of the preceding paragraph, the Executive shall be entitled to select which Benefits will be reduced and the manner and method of any such reduction of such Benefits. Within 30 days after the amount of any required reduction in Benefits is finally determined in accordance with the provisions of this Section 6(f), the Executive shall notify the Company and the Accounting Firm in writing regarding which Benefits are to be reduced. If no notification is given by the Executive, the Company will determine which Benefits to reduce. If, as a result of any reduction required by this Section 6(f), amounts previously paid to the Executive exceed the amount to which the Employee is entitled, the Employee will promptly return the excess amount to the Company. 9 Any determination (the "Determination") with respect to this Section 9(f) shall be made at the Company's expense by an accounting firm selected by the Company (the "Accounting Firm"). The Accounting Firm shall provide its Determination that amounts otherwise payable would be subject to Section 4999, together with detailed supporting calculations and documentation to the Company and Executive within 15 days of the effective date of Executive's termination of employment by the Company if applicable, or such other time as requested by the Company or by Executive. The Accounting Firm shall provide any other Determination requested within 10 days. Within 10 days of the delivery of a Determination to Executive, Executive shall have the right to dispute the Determination and such dispute shall be resolved in accordance with Section 13 of this Agreement. Upon the resolution of a dispute under Section 13, the Company shall promptly pay to Executive or the Executive shall pay to the Company, any amount required by such resolution and such resolution shall be binding, final and conclusive upon the Company and Executive. If there is no dispute, the Determination shall be binding, final and conclusive upon the Company and Executive. Nothing herein shall limit the parties' respective rights in the event that an applicable government taxing authority or a court, in a final, nonappealable order or decision, takes a position which is inconsistent with a non-disputed Determination or a final and conclusive resolution of a disputed Determination. 7. VOLUNTARY TERMINATION BY EXECUTIVE. Executive may terminate this Agreement for any reason by giving the Company written notice of termination, which shall be effective as set forth in Section 3(b) above. Except in the case of a voluntary termination that constitutes Good Reason following a Change in Control, the Company shall have no obligation to provide any severance compensation under Section 5 in the event of Executive's voluntary termination of this Agreement. 8. NONSOLICITATION OF EMPLOYEES. For a period of two years after the termination or cessation of his employment with the Company for any reason whatsoever, Executive shall not, on his own behalf or on behalf of any other person, partnership, association, corporation, or other entity, solicit or in any manner attempt to influence or induce any employee of the Company or its subsidiaries or affiliates (known by the Executive to be such) to leave the employment of the Company or its subsidiaries or affiliates, nor shall he use or disclose to any person, partnership, association, corporation or other entity any information obtained while an employee of the Company concerning the names and addresses of the Company's employees. 9. NONDISCLOSURE OF TRADE SECRETS. During the term of this Agreement, Executive will have access to and become familiar with various trade secrets and proprietary and confidential information of the Company, its subsidiaries and affiliates, including, but not limited to, processes, computer programs, compilations of information, 10 records, sales procedures, customer and supplier requirements, pricing techniques, customer and supplier lists, methods of doing business and other confidential information (collectively referred to as "Trade Secrets") which are owned by the Company, its subsidiaries and/or affiliates and regularly used in the operation of its business, and as to which the Company, its subsidiaries and/or affiliates take precautions to prevent dissemination to persons other than certain directors, officers and employees. Executive acknowledges and agrees that the Trade Secrets (1) are secret and not known in the industry; (2) give the Company or its subsidiaries or affiliates an advantage over competitors who do not know or use the Trade Secrets; (3) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and (4) are valuable, special and unique assets of the Company or its subsidiaries or affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to the Company or its subsidiaries or affiliates. Executive may not use in any way or disclose any of the Trade Secrets, directly or indirectly, either during the term of this Agreement or at any time thereafter, except as required in the course of his employment under this Agreement, if required in connection with a judicial or administrative proceeding, or if the information becomes public knowledge other than as a result of an unauthorized disclosure by the Executive. All files, records, documents, information, data and similar items relating to the business of the Company, whether prepared by Executive or otherwise coming into his possession, will remain the exclusive property of the Company and may not be removed from the premises of the company under any circumstances without the prior written consent of the Board (except in the ordinary course of business during the Executive's period of active employment under this Agreement), and in any event must be promptly delivered to the Company upon termination of Executive's employment with the Company. Executive agrees that upon his receipt of any subpoena, process or other request to produce or divulge, directly or indirectly, any Trade Secrets to any entity, agency, tribunal or person, Executive shall timely notify and promptly hand deliver a copy of the subpoena, process or other request to the Board. For this purpose, Executive appoints the Company (including any attorney retained by the Company), as his true and lawful attorney-in-fact, to act in Executive's name, place and stead to perform any act that Executive might perform to defend and protect against any disclosure of any Trade Secrets. 10. EQUITABLE RELIEF. Executive acknowledges that the restrictions contained in Sections 8 and 9 are, in view of the nature of the business of the Company, reasonable and necessary to protect the legitimate interests of the Company, that the company would not have entered into this Agreement in the absence of such restrictions, and that any violation of any provisions of those sections will result in irreparable injury to the Company. Executive also acknowledges that the remedy at law for any violation of these restrictions will be inadequate and that the Company shall be entitled to temporary and permanent injunctive relief prohibiting any such violation, without the necessity of 11 proving actual damages or the posting of a bond, and that the Company shall be further entitled to an equitable accounting of all earnings, profits and other benefits arising from any such violation, which rights shall be cumulative of and in addition to any other rights or remedies to which the Company may be entitled. In the event of any such violation, the Company shall be entitled to commence an action for temporary and permanent injunctive relief and other equitable relief in any court of competent jurisdiction and Executive further irrevocably submits to the jurisdiction of any federal or state court in the geographical jurisdiction of Seattle, Washington over any suit, action or proceeding arising out of or relating to any asserted violation of Sections 8 and 9. Executive hereby waives, to the fullest extent permitted by law, any objection that he may now or hereafter have to the jurisdiction of any federal or state court in the geographical jurisdiction of Seattle, Washington or to the venue of any such suit, action or proceeding brought in such a court and any claim that such suit, action or proceeding has been brought in an inconvenient forum. Effective service of process may be made upon Executive by mail under the notice provisions contained in Section 14(a). 11. SEVERABILITY. The parties hereto intend all provisions of this Agreement, including Sections 8 and 9 hereof, to be enforced to the fullest extent permitted by law. Accordingly, should a court of competent jurisdiction determine that the scope of any provision of this Agreement, including Section 8 or 9 hereof, is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable. In addition, however, Executive agrees that the nonsolicitation and nondisclosure agreements set forth above each constitute separate agreements independently supported by good and adequate consideration and shall be severable from the other provisions of, and shall survive, this Agreement. The existence of any claim or cause of action of Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants of Executive contained in the nonsolicitation and nondisclosure agreements. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never constituted a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added as part of this Agreement, a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 12 12. LEGAL EXPENSES; EXECUTIVE'S WARRANTY. (a) The Company agrees to reimburse Executive for reasonable attorneys' fees and disbursements incurred and to be incurred by Executive (net of amounts previously advanced) in the making of this agreement. (b) Executive affirms that his employment is not contrary to or in breach of any lawful agreement or other obligation Executive has to The May Department Stores Company, and that based upon information known to him as of the date of this Agreement regarding the business of the Company, he does not know or possess any trade secrets or proprietary information of The May Department Stores Company, or any of its affiliates (including its parent) which would provide the Company with an unfair advantage over such entities in the retail apparel business, and, in any event, will not, and does not have any intent to convey any trade secrets or proprietary information to the Company. 13. ARBITRATION - EXCLUSIVE REMEDY. (a) Except as otherwise provided herein, the parties agree that the exclusive remedy or method of resolving all disputes or questions arising out of or relating to this Agreement shall be arbitration. Arbitration shall be held in Seattle, Washington, presided over by one arbitrator. Any arbitration may be initiated by either party by written notice ("Arbitration Notice") to the other party specifying the subject of the requested arbitration. (b) If the parties are unable to mutually select an arbitrator to hear the matter, then the American Arbitration Association, upon application of the initiating party, shall provide a panel of arbitrators from which the parties shall select one to hear the matter. (c) The arbitration proceeding shall be conducted in accordance with the Rules for Resolution of Employment Disputes of the American Arbitration Association. The administrative costs of arbitration (including the expense of a party in preparing for and presenting the party's case at the arbitration and of the fees and expenses of legal counsel to a party, all of which shall be borne by that party), shall be borne by the Company only if Executive receives substantially the relief sought by him in the arbitration; otherwise, the costs shall be borne equally between the parties. The arbitration determination or award shall be final and conclusive on the parties, and judgment upon such award may be entered and enforced in any court of competent jurisdiction. 14. MISCELLANEOUS. (a) NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other must be in 13 writing and must be either (i) personally delivered, (ii) mailed by registered or certified mail, postage prepaid with return receipt requested, (iii) delivered by overnight express delivery service or same-day local courier service, or (iv) delivered by telex or facsimile transmission, to the address set forth below, or to such other address as may be designated by the parties from time to time in accordance with this Section 14(a): If to the Company: Lamonts Apparel, Inc. 12413 Willows Road N.E. Kirkland, Washington 98034 Attention: Chief Financial Officer Facsimile: (425) 814-9749 With a copy (which shall not constitute notice) to: Heller Ehrman White & McAuliffe 525 University Avenue Palo Alto, California 94301 Facsimile: (650) 324-0638 Attention: Henry Lesser If to Executive: Alan Schlesinger Lamonts Apparel, Inc. 12413 Willows Road N.E. Kirkland, Washington 98034 Facsimile: (425) 814-9749 With a copy (which shall not constitute notice) to: Lawrence A. Jacobson Cohen and Jacobson 577 Airport Boulevard Suite 230 Burlingame, California 94010 Facsimile: (415) 347-2916 14 Notices delivered personally or by overnight express delivery service or by local courier service are deemed given as of actual receipt. Mailed notices are deemed given three business days after mailing. Notices delivered by telex or facsimile transmission are deemed given upon receipt by the sender of the answer back (in the case of a telex) or transmission confirmation (in the case of a facsimile transmission). (b) ENTIRE AGREEMENT. This Agreement supersedes any and all other agreements, either oral or written, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect to the subject matter of this Agreement. (c) MODIFICATION. No change or modification of this Agreement is valid or binding upon the parties, nor will any waiver of any term or condition in the future be so binding, unless the change or modification or waiver is in writing and signed by the parties to this Agreement. (d) GOVERNING LAW. THE PARTIES ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT AND THE OBLIGATIONS AND UNDERTAKINGS OF THE PARTIES UNDER THIS AGREEMENT WILL BE PERFORMED IN SEATTLE, WASHINGTON. THIS AGREEMENT IS GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF WASHINGTON, AND, WHERE APPLICABLE, THE LAWS OF THE UNITED STATES. (e) COUNTERPARTS. This Agreement may be executed in counterparts, each of which constitutes an original, but all of which constitute one document. (f) ESTATE. If Executive dies prior to the expiration of the Term or during a period when monies are owing to him, any monies that may be due him from the Company under this Agreement as of the date of his death shall be paid to his estate when and as otherwise payable. (g) ASSIGNMENT. The Company shall have the right to assign this Agreement to its successors or assigns. The terms "successors" and "assigns" shall include any person, corporation, partnership or other entity that buys all or substantially all of the Company's assets or a control block of stock of the Company, or with which the Company merges or consolidates. The rights, duties and benefits to Executive hereunder are personal to him, and no such right or benefit may be assigned by him. The provisions of this clause (g) are all subject to the provisions of Section 6. (h) BINDING EFFECT. This Agreement is binding upon the parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and permitted assigns. 15 (i) WAIVER OF BREACH. The waiver by the Company or Executive of a breach of any provision of this Agreement by Executive or the Company may not operate or be construed as a waiver of any subsequent breach. (j) NO DUTY TO MITIGATE. Executive shall not be required to mitigate the amount of any payment or benefit provided for in any provision of this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by him as a result of employment by another employer or by retirement benefits after the termination date, or otherwise. 16 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth in the first paragraph. LAMONTS APPAREL, INC. /s/ Loren R. Rothschild - ------------------------------ Loren R. Rothschild, Vice Chairman of the Board EXECUTIVE /s/ Alan Schlesinger - ------------------------------ Alan Schlesinger 17 EX-10.12 6 EXHIBIT 10.12 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into as of April 19, 1999, is by and between Lamonts Apparel, Inc., a Delaware corporation (the "Company"), and Loren R. Rothschild ("Executive"). WHEREAS, this Agreement amends and restates the Employment Agreement, dated as of April 18, 1995, as amended as of January 31, 1998 (the "Effective Date"), between Executive and the Company (the "Existing Employment Agreement"), which amendment was entered into in connection with the Company's Modified and Restated Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the "Plan of Reorganization" or "Plan"). NOW, THEREFORE, the parties agree to amend and restate the Existing Employment Agreement in its entirety as follows: 1. EMPLOYMENT OF EXECUTIVE; TITLE. (a) EMPLOYMENT. The Company hereby agrees to employ Executive, and Executive agrees to enter into the employment of the Company, on the terms and conditions set forth in this Agreement. Executive agrees during the Term (as defined below) to devote such portion of his business and professional time, efforts, skills and abilities to the performance of his duties as stated herein and to the furtherance of the Company's business as the Chairman of the Board of Directors of the Company (the "Board") may reasonably direct. (b) TITLE. Executive's job title will be Vice Chairman of the Board and his duties will be those as are mutually determined by the Chairman and the Vice Chairman of the Board, consistent with the position of Vice Chairman, including advising on legal, financial and administrative functions of the Company. (c) BOARD MEMBERSHIP. The Company agrees that during the Term it will use its best efforts to cause Executive to be nominated for election to the Board at each annual meeting of stockholders of the Company and, if elected, the Company will appoint Executive to serve as Vice Chairman of the Board. 2. TERM. Unless terminated at an earlier date in accordance with Section 8 hereof or extended in accordance with Section 9 hereof, the term of this Agreement (the "Term") shall commence as of the Effective Date and continue until April 1, 2001. 3. COMPENSATION. (a) BASE SALARY. Subject to Section 8 hereof, as compensation for Executive's services hereunder, the Company shall pay to Executive a base salary ("Base Salary") of $174,876 per year, payable in equal monthly installments of $14,573, in arrears at the end of each calendar month during the remainder of the Term. (b) INCREASES IN BASE SALARY. Executive's Base Salary shall be reviewed by the Board or the Compensation Committee of the Board no less frequently than on each January 31 during the Term. The Base Salary payable to Executive may be increased on each such date (and at such other times as such Board or the Compensation Committee of the Board (the "Compensation Committee") may deem appropriate during the Term) to such amount determined appropriate by such Board or the Compensation Committee; provided, however, that Executive's Base Salary shall be increased annually in a minimum amount equal to the cost- of-living increment as reported in the "Consumer Price Index, Los Angeles, California, All Items," published by the U.S. Department of Labor (using January 1, 1995 as the base date for comparison with respect to the increase to be made on January 31, 1998, and using January 1 of the immediately preceding year as the base date for comparison with respect to each annual increase to be made thereafter). Each such new Base Salary shall become the base for each successive year increase. Any increase in Base Salary or other compensation shall in no way limit or reduce any other obligations of the Company hereunder and, once established as an increased specified rate, Executive's Base Salary shall not be reduced unless Executive otherwise agrees in writing. 4. INTENTIONALLY OMITTED. 5. TAX WITHHOLDING; WAIVER OF BENEFITS. The Company has the right to deduct from all compensation and amounts payable to Executive under this Agreement social security (FICA) taxes and all federal, state, municipal or other such taxes, deductions or charges as may now be in effect or that may hereafter be enacted or required. During the Term, Executive hereby waives, to the fullest extent permitted by applicable law, all benefits and executive perquisites provided to employees of the Company, including, without limitation, those provided to its senior executives (but excluding 401(k) benefits and benefits and perquisites provided to directors of the Company, including (without limitation), directors' and officers' liability insurance). 6. EXPENSES. Executive acknowledges that the performance of his duties hereunder will require significant travel, primarily to Kirkland, Washington, and agrees to be present in such other locations at such other times as the Chairman of the Board may reasonably request. Executive shall be reimbursed by the Company, in accordance with its reimbursement policy from time to time in effect, for all reasonable and necessary out- 2 of-pocket expenses incurred by him in performing his duties under this Agreement, including (without limitation) hotel, rental car, airfare and other reasonable travel expenses between Executive's home in Los Angeles, California, and Kirkland, Washington. Executive shall be furnished with a suitable office and secretarial assistance at the Company's headquarters. 7. CONFIDENTIAL INFORMATION. (a) CONFIDENTIALITY. Except as permitted or directed by the Board through written authorization, during the Term and for a period of two years thereafter, Executive shall not, and shall not permit any of his affiliates or representatives (collectively, "Representatives") to, divulge, furnish or make accessible to anyone or use in any way (other than in the ordinary course of the business of the Company) any confidential or secret knowledge or information of the Company which Executive or any of his Representatives has acquired or becomes acquainted with or will acquire or become acquainted with prior to the termination of this Agreement, whether developed by itself or by others, concerning any trade secrets, confidential or secret designs, directly or indirectly useful in any aspect of the business of the Company, any customer or supplier lists of the Company, any confidential or secret development or research work of the Company, or any other confidential information or secret aspects of the business of the Company. The foregoing obligations of confidentiality, however, shall not apply to disclosure of any knowledge or information that is required by any governmental agency or instrumentality to be disclosed or is now published or which subsequently becomes generally publicly known in the form in which it was obtained from the Company, other than as a direct or indirect result of the breach of this Agreement by Executive or any of his Representatives; provided that, in the case of a governmental agency or instrumentality seeking disclosure of such confidential material, Executive agrees to provide the Company with prompt notice, sufficient information and reasonable assistance so that the Company can seek an appropriate order or other appropriate remedy or, if the Company wishes, waive Executive's compliance with this Section 7. (b) CONFIDENTIAL MATERIALS. Upon termination of this Agreement and upon written request of the Company, Executive agrees to deliver promptly to the Company all written confidential or secret knowledge or information of the Company, including, without limitation, all analyses, compilations, studies or other documents or records prepared by Executive, his Representatives or any others, and all copies or other reproductions of any of the aforementioned items. 8. TERMINATION PRIOR TO A CHANGE IN CONTROL. (a) BASES FOR TERMINATION. Notwithstanding any other provision hereof, this Agreement and the relationship created hereunder between the Company and 3 Executive shall terminate prior to the expiration of the Term only upon the occurrence of any one of the following events (unless such termination occurs after the occurrence of a Change in Control in which case Section 9 shall apply and this Section 8 shall thereafter apply cumulatively with Section 9 hereof except to the extent otherwise provided in Section 9 hereof): (i) 30 days after delivery to Executive by the Company of written notice of the Company's voluntary and unilateral termination of this Agreement; (ii) 30 days after delivery to the Company by Executive of written notice of Executive's voluntary and unilateral termination of this Agreement; or (iii) the date of delivery of written notice from the Company to the Executive following the disability of Executive that renders him unable to perform his essential duties under this Agreement, even with reasonable accommodations that do not cause undue hardship to the Company, for at least 90 days out of any 120 consecutive day period; (iv) immediately after delivery to Executive by the Company of written notice of termination for "Cause"; or (v) the death of Executive; PROVIDED, HOWEVER, that in the event of the death of Executive, the Company shall pay the estate of Executive six months of Base Salary commencing with the next regular pay period after the date of his death. For purposes of this Agreement, "Cause" shall mean (A) any dishonest or fraudulent act or course of conduct by Executive, or other act or course of conduct by Executive constituting a criminal act or that results in improper gain or personal enrichment of Executive at the expense of the Company, or the commission by Executive of an act or a course of conduct involving moral turpitude, or Executive's insubordination to the Board; or (B) the engaging by Executive in willful misconduct or gross negligence that is injurious to the Company; or (C) a material breach by Executive of any of the terms or conditions of this Agreement or of policies reasonably established by the Board, or Executive's material neglect of his duties or of the Company's business, PROVIDED THAT, no such termination pursuant to this clause (C) shall be effective unless the Company shall have given Executive 30 days' prior written notice specifying the manner in which Executive's conduct or performance fails to comply with this clause (C) and Executive shall not have cured such non- complying conduct or performance within such 30-day period. Termination pursuant to clause (C) shall be effective 30 days after such notice unless such conduct has been cured in the good faith judgment of the Board. (b) EFFECT OF TERMINATION. If this Agreement is terminated by the Company pursuant to Section 8(a)(i), (A) Executive shall be entitled to receive only the 4 unpaid portion of his Base Salary that would have been payable pursuant to Section 3(a) during the Termination Period (defined below) had this Agreement not been so terminated, which shall be paid to Executive in arrears at the end of each calendar month during such period, plus any unreimbursed expenses payable pursuant to Section 6, which shall be paid to Executive within ten business days after the date that Executive submits to the Company reasonable documentation of such unreimbursed expenses; and (B) all options to purchase shares of capital stock of the Company held by Executive shall vest in full upon the date of such termination. At the Company's sole option, the Company may elect to pay Executive any remaining Base Salary due under this Section 8(b) in one lump sum, equal to the present value of such remaining Base Salary payments at an effective annual interest rate of 10 percent. "Termination Period" shall mean the period beginning on the effective date of termination and ending on the last day of the Term. If this Agreement is terminated by Executive pursuant to Section 8(a)(ii) or by the Company pursuant to Section 8(a)(iii) and 8(a)(iv); Executive shall be entitled to receive only (A) his Base Salary payable pursuant to Section 3(a), pro-rated through the effective date of such termination, which shall be paid to Executive on the effective date of such termination, plus (B) any unreimbursed expenses payable pursuant to Section 6, which shall be paid to Executive within ten business days after the date that Executive submits to the Company reasonable documentation of such unreimbursed expenses. 9. TERMINATION FOLLOWING A CHANGE IN CONTROL. (a) If a Change in Control (as defined below) shall occur on or prior to the expiration of the Term or the earlier termination of this Agreement pursuant to Section 8(a), then the Term shall be extended by such number of months so that the Term shall end on a date that is the second anniversary of the occurrence of such Change in Control. If a Change in Control shall occur on or prior to the expiration of the Term or the earlier termination of this Agreement pursuant to Section 8(a), then if Executive's options have not fully vested, then upon occurrence of a Change in Control, on or after the Effective Date, all the Executive options, shall fully vest immediately upon such event. In the event that a Change in Control occurs, the provisions of this Agreement shall continue to apply except that (x) termination of Executive's employment by Executive for "Good Reason" (as defined below) shall be treated in the same manner as termination of Executive's employment by the Company without Cause; and (y) if Executive's employment with the Company is terminated without Cause or for Good Reason following (or is otherwise effected in connection with) a Change in Control, the Company shall pay Executive in a lump sum within 10 days of such date of termination, an amount equal to the present value (at an effective annual interest rate of 10 percent) of the Salary that would have been payable under this Agreement for the remainder of the Term. 5 (b) As used herein, a "Change in Control" shall be deemed to have occurred if, subsequent to the date hereof: (i) any "person" (as such term is defined in Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than (i) Apollo Advisors, L.P., Lion Advisors, L.P., FMR Corp., Fidelity Management & Research Company, Fidelity Management Trust Company, any other beneficial owner of more than 10% of the Company's common stock as of January 31, 1998, or (ii) any investment fund managed by, or firm or group affiliated with any of the persons specified in clause (i) above, or any of their respective affiliates, becomes the beneficial owner, directly or indirectly, of either (A) a majority of the Company's outstanding common stock or (B) securities of the Company representing a majority of the combined voting power of the Company's then outstanding voting securities; (ii) a sale is made to any purchaser unaffiliated with the Company or any of the persons specified in clause (i) above of all or substantially all of the assets of the Company; (iii) a merger or consolidation of the Company is made with another corporation or other legal person unaffiliated with the Company or any of the persons specified in clause (i) above and if, immediately after such merger or consolidation, less than 70% of the combined voting power of the then- outstanding securities of such corporation or person are held, directly or indirectly, in the aggregate by the holders immediately prior to such transaction of the then-outstanding securities of the Company entitled to vote generally in the election of the Board; or (iv) if during any two consecutive years individuals who the beginning of such period constituted the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the members of the Board; PROVIDED, HOWEVER, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; PROVIDED, FURTHER, HOWEVER, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest. In no event shall the term "Change in Control" be construed to include any change of control of the Company or any affiliate of the Company solely as a result of any 6 exchange of equity for debt securities of the Company or any such affiliate upon consummation of a plan of reorganization for the Company in the Bankruptcy Case. (c) As used in this Agreement, "Good Reason" shall mean the occurrence (without Executive's express written consent) after or in connection with any Change in Control, of any of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in clauses (i), (v) or (vi) below, such act or failure to act is corrected prior to the effective date of Executive's termination: (i) the assignment to Executive by the Company of any duties inconsistent with Executive's status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of Executive's responsibilities from those in effect immediately prior to the Change in Control; (ii) a reduction by the Company in Executive's Base Salary as in effect on the date hereof or as the same may be increased from time to time; (iii) the relocation of Executive's principal place of employment to a location more than 25 miles from Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations prior to the Change in Control; (iv) the failure of the Company to pay to Executive any portion of Executive's current compensation, or to pay to Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within 7 days of the date such compensation is due; (v) the failure by the Company to continue in effect any compensation plan in which Executive participates immediately prior to the Change in Control that is material to Executive's total compensation (e.g., stock option, restricted stock, stock appreciation right, incentive compensation, bonus or other similar plan), unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of Executive's participation relative to other participants, as existed immediately prior to the Change in Control; or (vi) the failure by the Company to continue to provide Executive with benefits substantially similar to those enjoyed by Executive under any of the 7 Company's pension, savings, life insurance, medical, health and accident, or disability plans in which Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company that would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed by Executive at the time of the Change in Control, or the failure by the Company to provide Executive with the number of paid vacation days to which Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control. (d) Executive's right to terminate Executive's employment for Good Reason shall not be affected by Executive's incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (e) For purposes of any determination regarding the existence of Good Reason, any claim by Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (f) LIMITATION ON PAYMENTS. In the event that the termination and other benefits provided for in this Agreement (the "Benefits") or otherwise payable to the Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) but for this Section 9(f) would be subject to the excise tax imposed by Section 4999 of the Code, then the Benefits under this Section 9 shall be payable either (A) in full, or (B) as to such lesser amount which would result in no portion of the Benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the excise tax imposed by Section 4999, results in the receipt by the Executive on an after-tax basis, of the greatest amount of the Benefits, notwithstanding that all or some portion of such Benefits may be taxable under Section 4999 of the Code. If a reduction in the Benefits is necessary to comply with the provisions of the preceding paragraph, the Executive shall be entitled to select which Benefits will be reduced and the manner and method of any such reduction of such Benefits. Within 30 days after the amount of any required reduction in Benefits is finally determined in accordance with the provisions of this Section 9(f), the Executive shall notify the Company and the Accounting Firm in writing regarding which Benefits are to be reduced. If no notification is given by the Executive, the Company will determine which Benefits to reduce. If, as a result of any reduction required by this Section 9(f), amounts previously paid to the Executive exceed the amount to which the Employee is entitled, the Employee will promptly return the excess amount to the Company. 8 Any determination (the "Determination") with respect to this Section 9(f) shall be made at the Company's expense by an accounting firm selected by the Company (the "Accounting Firm"). The Accounting Firm shall provide its Determination that amounts otherwise payable would be subject to Section 4999, together with detailed supporting calculations and documentation to the Company and Executive within 15 days of the effective date of Executive's termination of employment by the Company if applicable, or such other time as requested by the Company or by Executive. The Accounting Firm shall provide any other Determination requested within 10 days. Within 10 days of the delivery of a Determination to Executive, Executive shall have the right to dispute the Determination and such dispute shall be resolved in accordance with Section 17 of this Agreement. Upon the resolution of a dispute under Section 17, the Company shall promptly pay to Executive or the Executive shall pay to the Company, any amount required by such resolution and such resolution shall be binding, final and conclusive upon the Company and Executive. If there is no dispute, the Determination shall be binding, final and conclusive upon the Company and Executive. Nothing herein shall limit the parties' respective rights in the event that an applicable government taxing authority or a court, in a final, nonappealable order or decision, takes a position which is inconsistent with a non-disputed Determination or a final and conclusive resolution of a disputed Determination. 10. GENERAL RELEASE. Acceptance by Executive of any amounts pursuant to Sections 8 or 9 shall constitute a full and complete release by Executive of any and all claims Executive may have against the Company, any of its past, present or future shareholders or any of their respective officers, directors and affiliates (past, present or future), including, but not limited to, claims he might have relating to Executive's employment and/or cessation of employment with the Company, including without limitation, tort, contract and common law claims and claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, the Washington Law Against Discrimination, or any other similar federal, state or local statute, rule or regulation; provided that, there shall be excluded from the scope of such general release the following: (i) claims that Executive may have against the Company for reimbursement of reasonable and necessary business expenses incurred by him during the course of his employment; (ii) claims that may be made by the Executive for payment of accrued Base Salary or stock options properly due to him as provided in this Agreement; and 9 (iii) claims respecting matters for which the Executive is entitled to be indemnified under the Company's Certificate of Incorporation or Bylaws or indemnification agreements, respecting third party claims asserted or third party litigation pending or threatened against the Executive. A condition to Executive's receipt of any amounts pursuant to Sections 8 or 9 shall be Executive's execution and delivery of a general release as described above with appropriate provisions as necessary to insure the release is valid and enforceable under applicable laws, including the Older Workers Benefit Protection Act. Such payment shall be considered independent consideration made in exchange for such release. In exchange for such release, the Company shall, if Executive's employment is terminated without Cause, provide a release to Executive, but only with respect to claims against Executive that are actually known to the Company as of the time of such termination. 11. NONSOLICITATION OF EMPLOYEES. For a period of two years after the termination or cessation of his employment with the Company for any reason whatsoever, Executive shall not, on his own behalf or on behalf of any other person, partnership, association, corporation, or other entity, solicit or in any manner attempt to influence or induce any employee of the Company or its subsidiaries or affiliates (known by the Executive to be such) to leave the employment of the Company or its subsidiaries or affiliates, nor shall he use or disclose to any person, partnership, association, corporation or other entity any information obtained while an employee of the Company concerning the names and addresses of the Company's employees. 12. EQUITABLE RELIEF. Executive acknowledges that the restrictions contained in Sections 7 and 11 are, in view of the nature of the business of the Company, reasonable and necessary to protect the legitimate interests of the Company, that the Company would not have entered into this Agreement in the absence of such restrictions, and that any violation of any provisions of those sections will result in irreparable injury to the Company. Executive also acknowledges that the remedy at law for any violation of these restrictions will be inadequate and that the Company shall be entitled to temporary and permanent injunctive relief prohibiting any such violation, without the necessity of proving actual damages or the posting of a bond, and that the Company shall be further entitled to an equitable accounting of all earnings, profits and other benefits arising from any such violation, which rights shall be cumulative of and in addition to any other rights or remedies to which the Company may be entitled. In the event of any such violation, the Company shall be entitled to commence an action for temporary and permanent injunctive relief and other equitable relief in any court of competent jurisdiction and Executive further irrevocably submits to the jurisdiction of any federal or state court in the geographical jurisdiction of Seattle, Washington over any suit, action or proceeding arising out of or relating to any asserted violation of Section 7 or 11. Executive hereby waives, to the fullest extent permitted by law, any objection that he may now or hereafter 10 have to the jurisdiction of any federal or state court in the geographical jurisdiction of Seattle, Washington or to the venue of any such suit, action or proceeding brought in such a court and any claim that such suit, action or proceeding has been brought in an inconvenient forum. Effective service of process may be made upon Executive by mail under the notice provisions contained in Section 18(h). 13. SEVERABILITY. The parties hereto intend all provisions of this Agreement, including Sections 7 and 11 hereof, to be enforced to the fullest extent permitted by law. Accordingly, should a court of competent jurisdiction determine that the scope of any provision of this Agreement, including Section 7 or 11 hereof, is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable. In addition, however, Executive agrees that the nonsolicitation and nondisclosure agreements set forth above each constitute separate agreements independently supported by good and adequate consideration and shall be severable from the other provisions of, and shall survive, this Agreement. The existence of any claim or cause of action of Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants of Executive contained in the nonsolicitation and nondisclosure agreements. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never constituted a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added as part of this Agreement, a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 14. LIABILITY OF EXECUTIVE. Executive assumes no responsibility under this Agreement, other than to perform the services to be performed hereunder in good faith and to maintain the confidentiality of any confidential or secret information of the Company pursuant to Section 7. Executive shall not be liable to the Company, except by reason of acts constituting bad faith, willful misfeasance, gross negligence or reckless disregard of his duties. 15. DIRECTOR'S AND OFFICER'S INSURANCE. The Company shall maintain directors' and officers' insurance policies during the Term and for a period of twelve months thereafter on substantially the same terms as the Company's current policies; PROVIDED THAT, if any insurer shall cancel or refuse to renew any such policy and the Company is unable to obtain a replacement policy on substantially the same terms reasonably satisfactory to Executive, the Company shall exercise in a timely manner any 11 and all options thereunder, and pay any and all premiums or other charges necessary, to extend the period during which claims may be made thereunder; PROVIDED FURTHER THAT, the Company shall not be required to pay such premiums or other charges necessary to extend such period if they are substantially in excess of the premiums in effect on the date hereof. If the Company fails to maintain directors' and officers' insurance at any time during the Term, Executive may terminate this Agreement immediately and such termination shall be treated (A)as a termination under 8(a)(i) hereof if such failure occurs prior to a Change in Control and (B) as a termination by the Executive for Good Reason if such failure occurs on or after the occurrence of a Change in Control. 16. OTHER BUSINESS ACTIVITIES. The Company acknowledges and agrees that Executive may perform consulting services for other persons; provided that, Executive may not perform consulting or other services for any retail apparel chain that is competitive with the Company or its subsidiaries in any geographical area in which the Company or any of its subsidiaries engages in business. Subject to the foregoing proviso, nothing in this Agreement shall restrict or limit the right of Executive, the Company or their respective affiliates or associates to engage in whatever activities they choose, and none of them shall, as a result of this Agreement, have any obligation to offer any interest in such activities to any party hereto. 17. ARBITRATION - EXCLUSIVE REMEDY. (a) Except as otherwise provided herein, the parties agree that the exclusive remedy or method of resolving all disputes or questions arising out of or relating to this Agreement shall be arbitration. Arbitration shall be held in Seattle, Washington, presided over by one arbitrator. Any arbitration may be initiated by either party by written notice ("Arbitration Notice") to the other party specifying the subject of the requested arbitration. (b) If the parties are unable to mutually select an arbitrator to hear the matter, then the American Arbitration Association, upon application of the initiating party, shall provide a panel of arbitrators from which the parties shall select one to hear the matter. (c) The arbitration proceeding shall be conducted in accordance with the Rules for Resolution of Employment Disputes of the American Arbitration Association. The administrative costs of arbitration (including the expense of a party in preparing for and presenting the party's case at the arbitration and of the fees and expenses of legal counsel to a party, all of which shall be borne by that party), shall be borne by the Company only if Executive receives substantially the relief sought by him in the arbitration; otherwise, the costs shall be borne equally between the parties. The arbitration determination or award shall be final and conclusive on the parties, and 12 judgment upon such award may be entered and enforced in any court of competent jurisdiction. 18. MISCELLANEOUS. (a) ASSIGNMENT. The Company shall have the right to assign this Agreement to its successors or assigns. The terms "successors" and "assigns" shall include any person, corporation, partnership or other entity that buys all or substantially all of the Company's assets or all of its stock, or with which the Company merges or consolidates. The rights, duties and benefits to Executive hereunder are personal to him, and no such right or benefit may be assigned by him. (b) GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF WASHINGTON AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE APPLICABLE TO CON TRACTS MADE AND TO BE PERFORMED WITHIN SAID STATE WITHOUT CONSIDERATION OF ANY CONFLICTS OF LAW PROVISIONS THEREOF. (c) ENTIRE AGREEMENT. This Agreement evidences the entire understanding and agreement of the parties hereto relative to the employment arrangement between Executive and the Company and the other matters discussed herein. This Agreement supersedes any and all other agreements and understandings, whether written or oral, relative to the matters discussed herein. (d) SEVERABILITY. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. If any term, provision covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ a valid, legal, nonvoid and enforceable alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (e) AMENDMENTS/WAIVERS. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or 13 shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. (f) HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. (g) COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. (h) NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other must be in writing and must be either (i) personally delivered, (ii) mailed by registered or certified mail, postage prepaid with return receipt requested, (iii) delivered by overnight express delivery service or same-day local courier service, or (iv) delivered by telex or facsimile transmission, to the address set forth below, or to such other address as may be designated by the parties from time to time in accordance with this Section 18(a): If to the Company: Lamonts Apparel, Inc. 12413 Willows Road N.E. Kirkland, Washington 98034 Attention: Chief Financial Officer Facsimile: (425) 814-9749 With a copy (which shall not constitute notice) to: Heller Ehrman White & McAuliffe 525 University Avenue Palo Alto, California 94301 Facsimile: (650) 324-0638 Attention: Henry Lesser If to Executive: Loren R. Rothschild 1201 Tower Grove Drive Beverly Hills, California 90210 Facsimile: (310) 276-1784 Notices delivered personally or by overnight express delivery service or by local courier service are deemed given as of actual receipt. Mailed notices are deemed given three business days after mailing. Notices delivered by telex or facsimile transmission are 14 deemed given upon receipt by the sender of the answer back (in the case of a telex) or transmission confirmation (in the case of a facsimile transmission). (i) NO DUTY TO MITIGATE. Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by him as a result of employment by another employer or by retirement benefits after the termination date, or otherwise. (j) ESTATE. If Executive dies prior to the expiration of the Term or during a period when monies are owing to him, any monies that may be due him from the Company under this Agreement as of the date of his death shall be paid to his estate when and as otherwise payable. 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth in the first paragraph. LAMONTS APPAREL, INC. /s/ Alan Schlesinger - ------------------------------------- Alan Schlesinger, Chairman of the Board, President and Chief Executive Officer EXECUTIVE /s/ Loren R. Rothschild - ------------------------------------- Loren R. Rothschild 16 EX-10.20 7 EXHIBIT 10.20 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into as of April __, 1999, is by and between Lamonts Apparel, Inc., a Delaware corporation (the "Company"), and ______________ ("Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, the Compensation Committee (the "Compensation Committee") of the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including Executive; and WHEREAS, the Board, upon the recommendation of the Compensation Committee, has determined that it is in the best interests of the Company to institute an employment arrangement for certain of its executives, officers and key employees, including the Executive, to provide for their continued employment with the Company. NOW, THEREFORE, in consideration of the promises and the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. EMPLOYMENT OF EXECUTIVE; TITLE. (a) EMPLOYMENT. Executive agrees to be employed by the Company, and the Company agrees to employ Executive, on the terms and conditions set forth in this Agreement. Executive agrees during the Term (as defined below) to devote substantially all of Executive's business time, efforts, skills and abilities to the performance of Executive's duties as stated in this Agreement and to the furtherance of the Company's business. (b) TITLE. Executive's job title will be _____________ and Executive's duties will be those as are designated by the Board of Directors of the Company ("Board") from time to time, subject to the supervision of the Chief Executive Officer of the Company. 2. COMPENSATION. (a) BASE SALARY. Executive's base salary shall be composed of the following: (i) SALARY. During the Term, the Company shall pay to Executive as compensation for his services an annual salary of as determined by the Compensation Committee from time to time ("Salary"). Executive's Salary will be payable in arrears in accordance with the Company's normal payroll procedures and will be reviewed annually and subject to upward adjustment as provided in paragraph 2(a)(iii) below. If a Change in Control (as defined below) occurs, then the Salary for the Term (as defined below) and, if applicable, any extension thereof in accordance with Section 6(a) hereof shall be the Salary in effect immediately prior to the occurrence of the Change in Control. (ii) BONUS. During the Term, Executive shall be eligible for each fiscal year that ends within the Term to participate in an annual incentive performance bonus program in accordance with performance targets and other criteria established by the Board or the Compensation Committee of the Board from time to time in its sole discretion. (iii) INCREASES IN SALARY. The Executive's Salary shall be reviewed by the Board or the Compensation Committee thereof no less frequently than on each January 31 during the Term. (b) EXECUTIVE PERQUISITES. Executive shall be entitled to receive such executive perquisites and fringe benefits as determined by the Compensation Committee (in its sole and absolute discretion) from time to time for executives of equivalent seniority. (c) TAX WITHHOLDING. The Company has the right to deduct from any compensation payable to Executive under this Agreement social security (FICA) taxes and all federal, state, municipal or other such taxes or charges as may now be in effect or that may hereafter be enacted or required. (d) DIRECTOR'S AND OFFICER'S INSURANCE. During the Term, the Executive shall be entitled to the same benefits under the Company's directors' and officers' insurance policies as those to which the Chief Executive Officer is entitled. 3. DURATION OF EMPLOYMENT. (a) TERM. Unless otherwise terminated at an earlier date in accordance with Section 3, 4 or 6 hereof or unless extended in accordance with Section 6 hereof, the 2 term of Executive's employment under this Agreement shall be for a period commencing on April 1, 1999 (the "Effective Date") and ending on March 31, 2001 (the "Term"). (b) EARLY TERMINATION. Notwithstanding the foregoing, this Agreement (other than Sections 5 through 14 hereof) and the relationship created hereunder between the Company and Executive will terminate prior to the expiration of the Term upon the earliest to occur of: (i) 30 days after delivery to Executive by the Company of written notice of the Company's voluntary and unilateral termination of this Agreement, (ii) the date of delivery to the Company by Executive of written notice of Executive's voluntary and unilateral termination of this Agreement, (iii) the date of delivery of written notice from the Company following the disability of Executive that renders him unable to perform his essential duties under this Agreement, even with reasonable accommodation that does not cause undue hardship to the Company, for at least 90 days out of any 120 consecutive day period, (iv) immediately after delivery to Executive by the Company of written notice of termination for "Cause" (as defined in Section 4 below) or (v) the death of Executive. (c) EFFECT OF TERMINATION. Subject to the provisions set forth in Section 6 hereof pertaining to a Change in Control, if this Agreement is terminated (A) by the Company for "Cause" or pursuant to Section 3(b)(iii), (B) voluntarily by Executive or (C) by nonrenewal at the end of the Term, Executive shall be entitled to receive only (i) Executive's Salary payable pursuant to Section 2(a)(i), pro-rated through the effective date of such termination, and (ii) all reasonable and necessary expenses reasonably incurred by Executive on Company business prior to the effective date of termination shall be reimbursed in accordance with the Company's reimbursement policy then in effect, which shall be paid to Executive within ten business days after the date the Executive submits to the Company reasonable documentation of such expenses. 4. TERMINATION BY THE COMPANY FOR CAUSE; DEFINITION OF CAUSE. Executive's employment under this Agreement (and Executive's right to receive the compensation set forth in Section 2 hereof) may be terminated by the Company at any time for "Cause," or (subject to the rights of Executive pursuant to Section 5 hereof) without "Cause." As used in this Agreement, "Cause" shall mean: (a) Any dishonest or fraudulent act or course of conduct by Executive, or other act or course of conduct by Executive constituting a criminal act or that results in improper gain or personal enrichment of Executive at the expense of the Company, or the commission by Executive of an act or a course of conduct involving moral turpitude, or Executive's insubordination to the Board. (b) Executive's material breach of any of the terms or conditions of this Agreement or of policies established by the Board, or Executive's material neglect of 3 Executive's duties or of the Company's business, provided, however, that no such termination pursuant to this clause (b) shall be effective unless the Company shall have given Executive ten days' prior written notice of any such conduct which, if not discontinued or corrected, would lead to Executive's termination for Cause. Executive will have the opportunity to cure such non-complying conduct or performance within such 10-day period. Termination pursuant to this clause (b) shall be effective with respect to matters referred to in this clause (b) ten days after such notice unless such conduct has been cured in the good faith judgment of the Board. 5. SEVERANCE PAYMENT ON TERMINATION WITHOUT CAUSE. (a) TERMINATION WITHOUT CAUSE; DUTY TO MITIGATE. Subject to the provisions set forth below and in Section 6 hereof pertaining to Change in Control (it being intended that this Section 5 shall apply cumulatively with Section 6 hereof except to the extent otherwise provided in Section 6 hereof), if Executive's employment is terminated by the Company without Cause during the Term, (i) the Company shall be obligated to continue to pay Executive his/her Salary for the remainder of the Term (the "Severance Period"), and (ii) all options to purchase shares of stock of the Company shall vest in full upon the date of such termination. Subject to the provisions relating to a Change in Control, Executive shall use reasonable efforts to mitigate the amount of any payment or benefit provided for in this Section 5(a) by seeking employment commensurate with Executive's skills and experience, or otherwise. The amounts payable by the Company pursuant to Section 5(a)(i) shall be reduced by any compensation earned by Executive during the Severance Period as a result of employment by another employer or otherwise during the Severance Period. (b) GENERAL RELEASE. Acceptance by Executive of any amounts pursuant to Sections 3, 5 or 6 shall constitute a full and complete release by Executive of any and all claims Executive may have against the Company, any of its past, present or future shareholders or any of their respective officers, directors and affiliates (past, present or future), including, but not limited to, claims Executive might have relating to Executive's employment and/or cessation of employment with the Company, including without limitation, tort, contract and common law claims and claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, the Washington Law Against Discrimination, or any other similar federal, state or local statute, rule or regulation; provided that, there shall be excluded from the scope of such general release the following: (i) claims that Executive may have against the Company for reimbursement of ordinary and necessary business expenses incurred by Executive during the course of Executive's employment; 4 (ii) claims that may be made by the Executive for payment of accrued Salary, bonus, fringe benefits, stock, or stock options properly due to him as provided in this Agreement; and (iii) claims respecting matters for which the Executive is entitled to be indemnified under the Company's Certificate of Incorporation or Bylaws or indemnification agreements, respecting third party claims asserted or third party litigation pending or threatened against the Executive. A condition to Executive's receipt of any amounts pursuant to Sections 3, 5 or 6 shall be Executive's execution and delivery of a general release as described above with appropriate provisions as necessary to insure the release is valid and enforceable under applicable laws, including the Older Workers Benefit Protection Act. Such payment shall be considered independent consideration made in exchange for such release. In exchange for such release, the Company shall, if Executive's employment is terminated without Cause, provide a release to Executive, but only with respect to claims against Executive that are actually known to the Company as of the time of such termination. 6. EFFECT OF CHANGE IN CONTROL. (a) If a Change in Control shall occur on or prior to the expiration of the Term, or the earlier termination of this Agreement pursuant to Sections 3, 4 or 5, then (A) if the remaining portion of the Term is scheduled to end on a date that is on or before the last day of the fifteenth month after the occurrence of such Change in Control (the "Fifteenth Month"), the Term shall be automatically extended by such number of months so that the Term shall end on the date that is the last day of the Fifteenth Month; or (B) if the remaining portion of the Term is to end on a date that is after the last day of the Fifteenth Month, then the Term shall remain unaffected and shall not be extended. If a Change in Control shall occur on or prior to the expiration of the Term, or the earlier termination of this Agreement pursuant to Sections 3, 4 or 5, then if Executive's options have not fully vested, then upon occurrence of a Change in Control on or after the Effective Date, all Executive options shall fully vest immediately upon such event. In the event that a Change in Control occurs, this Agreement shall continue to apply to Executive's Employment except that termination of Executive's employment by Executive for "Good Reason" (as defined below) shall be treated in the same manner as termination of Executive's employment by the Company without Cause. (b) As used herein, a "Change in Control" shall be deemed to have occurred if, subsequent to the date hereof: (i) any "person" (as such term is defined in Section 13(d) of the Securities Exchange Act of 1934), other than (i) Apollo Advisors, L.P., Lion 5 Advisors, L.P., FMR Corp., Fidelity Management & Research Company, Fidelity Management Trust Company, any other beneficial owner of more than 10% of the Company's common stock as of January 31, 1998, or (ii) any investment fund managed by, or firm or group affiliated with any of the persons specified in clause (i) above, or any of their respective affiliates, becomes the beneficial owner, directly or indirectly, of either (A) a majority of the Company's outstanding common stock or (B) securities of the Company representing a majority of the combined voting power of the Company's then outstanding voting securities; (ii) a sale is made to any purchaser unaffiliated with the Company or any of the persons specified in clause (i) above of all or substantially all of the assets of the Company; (iii) a merger or consolidation of the Company is made with another corporation or other legal person unaffiliated with the Company or any of the persons specified in clause (i) above if, immediately after such merger or consolidation, less than 70% of the combined voting power of the then-outstanding securities of such corporation or person are held, directly or indirectly, in the aggregate by the holders immediately prior to such transaction of the then-outstanding securities of the Company entitled to vote generally in the election of the Board; or (iv) if during any two consecutive years individuals who the beginning of such period constituted the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the members of the Board; PROVIDED, HOWEVER, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; PROVIDED, FURTHER, HOWEVER, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest. In no event shall the term "Change in Control" be construed to include any change of control of the Company or any affiliate of the Company solely as a result of any exchange of equity for debt securities of the Company or any such affiliate upon consummation of a plan of reorganization for the Company in the Bankruptcy Case. 6 (c) As used in this Agreement, "Good Reason" shall mean the occurrence (without Executive's express written consent) after or in connection with any Change in Control, of any of the following acts by the Company, or failures to act by the Company to act, unless, in the case of any act or failure to act described in clauses (i), (iv), (v) or (vi) below, such act or failure to act is corrected prior to the effective date of Executive's termination: (i) the assignment to Executive by the Company of any duties materially and adversely inconsistent with Executive's status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of Executive's responsibilities from those in effect immediately prior to the Change in Control; (ii) a reduction by the Company in Executive's Salary as in effect on the date hereof or as the same may be increased from time to time; (iii) the relocation of Executive's principal place of employment to a location more than 25 miles from Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations prior to the Change in Control; (iv) the failure of the Company to pay to Executive any portion of Executive's current compensation, or to pay to Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (v) the failure by the Company to continue in effect any compensation plan in which Executive participates immediately prior to the Change in Control that is material to Executive's total compensation (e.g., stock option, restricted stock, stock appreciation right, incentive compensation, bonus or other similar plan), unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of Executive's participation relative to other participants, as existed immediately prior to the Change in Control; or 7 (vi) the failure by the Company to continue to provide Executive with benefits substantially similar to those enjoyed by Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company that would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed by Executive at the time of the Change in Control, or the failure by the Company to provide Executive with the number of paid vacation days to which Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control. (d) Executive's right to terminate Executive's employment for Good Reason shall not be affected by Executive's incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (e) For purposes of any determination regarding the existence of Good Reason, any claim by Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (f) If any payment received or to be received by or for the benefit of Executive following or in connection with a Change in Control (whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any persons whose actions result in a Change in Control, or any person affiliated with the Company or such person) will be subject to excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), and would not be deductible (in whole or in part) by the Company as a result of such payments constituting an "excess parachute payment" (as defined in Section 280G of the Code), payments under this Agreement (or, at the Executive's Election, such other payments and/or benefits, or a combination of such other payments and/or benefits) shall be reduced to the largest amount as will result in no portion of the payments not being fully deductible by the Company as a result of Section 280G of the Code. All determinations of excess parachute payments shall be made by the Company's independent auditors. Any determination required by this paragraph to be made by the Company's independent auditors shall be binding upon the Company and Executive, absent manifest error. (g) If after the occurrence of a Change in Control, Executive's employment is terminated without cause by the Company or for good reason by Executive, Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise. The 8 amounts payable by the Company pursuant to this Section 6 shall be reduced by any compensation (whether as salary, consulting fees or otherwise) earned by Executive during the Severance Period as a result of employment by other employer or otherwise during the Severance Period. 7. VOLUNTARY TERMINATION BY EXECUTIVE. Executive may terminate this Agreement for any reason by giving the Company written notice of termination, which shall be effective as set forth in Section 3(b) above. Except in the case of a voluntary termination that constitutes Good Reason following a Change in Control, the Company shall have no obligation to provide any severance compensation under Section 5 in the event of Executive's voluntary termination of this Agreement. 8. NONSOLICITATION OF EMPLOYEES. For a period of two years after the termination or cessation of his employment with the Company for any reason whatsoever, Executive shall not, on his own behalf or on behalf of any other person, partnership, association, corporation, or other entity, solicit or in any manner attempt to influence or induce any employee of the Company or its subsidiaries or affiliates (known by the Executive to be such) to leave the employment of the Company or its subsidiaries or affiliates, nor shall he use or disclose to any person, partnership, association, corporation or other entity any information obtained while an employee of the Company concerning the names and addresses of the Company's employees. 9. NONDISCLOSURE OF TRADE SECRETS. During the term of this Agreement, Executive will have access to and become familiar with various trade secrets and proprietary and confidential information of the Company, its subsidiaries and affiliates, including, but not limited to, processes, computer programs, compilations of information, records, sales procedures, customer and supplier requirements, pricing techniques, customer and supplier lists, methods of doing business and other confidential information (collectively referred to as "Trade Secrets") which are owned by the Company, its subsidiaries and/or affiliates and regularly used in the operation of its business, and as to which the Company, its subsidiaries and/or affiliates take precautions to prevent dissemination to persons other than certain directors, officers and employees. Executive acknowledges and agrees that the Trade Secrets (1) are secret and not known in the industry; (2) give the Company or its subsidiaries or affiliates an advantage over competitors who do not know or use the Trade Secrets; (3) are of such value and nature as to make it reasonable and necessary to protect and preserve the confidentiality and secrecy of the Trade Secrets; and (4) are valuable, special and unique assets of the Company or its subsidiaries or affiliates, the disclosure of which could cause substantial injury and loss of profits and goodwill to the Company or its subsidiaries or affiliates. Executive may not use in any way or disclose any of the Trade Secrets, directly or indirectly, either during the term of this Agreement or at any time thereafter, except as required in the course of his employment under this Agreement, if required in connection 9 with a judicial or administrative proceeding, or if the information becomes public knowledge other than as a result of an unauthorized disclosure by the Executive. All files, records, documents, information, data and similar items relating to the business of the Company, whether prepared by Executive or otherwise coming into his possession, will remain the exclusive property of the Company and may not be removed from the premises of the company under any circumstances without the prior written consent of the Board (except in the ordinary course of business during the Executive's period of active employment under this Agreement), and in any event must be promptly delivered to the Company upon termination of Executive's employment with the Company. Executive agrees that upon his receipt of any subpoena, process or other request to produce or divulge, directly or indirectly, any Trade Secrets to any entity, agency, tribunal or person, Executive shall timely notify and promptly hand deliver a copy of the subpoena, process or other request to the Board. For this purpose, Executive appoints the Company (including any attorney retained by the Company), as his true and lawful attorney-in-fact, to act in Executive's name, place and stead to perform any act that Executive might perform to defend and protect against any disclosure of any Trade Secrets. 10. EQUITABLE RELIEF. Executive acknowledges that the restrictions contained in Sections 8 and 9 are, in view of the nature of the business of the Company, reasonable and necessary to protect the legitimate interests of the Company, that the company would not have entered into this Agreement in the absence of such restrictions, and that any violation of any provisions of those sections will result in irreparable injury to the Company. Executive also acknowledges that the remedy at law for any violation of these restrictions will be inadequate and that the Company shall be entitled to temporary and permanent injunctive relief prohibiting any such violation, without the necessity of proving actual damages or the posting of a bond, and that the Company shall be further entitled to an equitable accounting of all earnings, profits and other benefits arising from any such violation, which rights shall be cumulative of and in addition to any other rights or remedies to which the Company may be entitled. In the event of any such violation, the Company shall be entitled to commence an action for temporary and permanent injunctive relief and other equitable relief in any court of competent jurisdiction and Executive further irrevocably submits to the jurisdiction of any federal or state court in the geographical jurisdiction of Seattle, Washington over any suit, action or proceeding arising out of or relating to any asserted violation of Sections 8 and/or 9. Executive hereby waives, to the fullest extent permitted by law, any objection that he may now or hereafter have to the jurisdiction of any federal or state court in the geographical jurisdiction of Seattle, Washington or to the venue of any such suit, action or proceeding brought in such a court and any claim that such suit, action or proceeding has been brought in an inconvenient forum. Effective service of process may be made upon Executive by mail under the notice provisions contained in Section 14(a). 10 11. SEVERABILITY. The parties hereto intend all provisions of this Agreement, including Sections 8 and 9 hereof, to be enforced to the fullest extent permitted by law. Accordingly, should a court of competent jurisdiction determine that the scope of any provision of this Agreement, including Section 8 or 9 hereof, is too broad to be enforced as written, the parties intend that the court reform the provision to such narrower scope as it determines to be reasonable and enforceable. In addition, however, Executive agrees that the nonsolicitation and nondisclosure agreements set forth above each constitute separate agreements independently supported by good and adequate consideration and shall be severable from the other provisions of, and shall survive, this Agreement. The existence of any claim or cause of action of Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants of Executive contained in the nonsolicitation and nondisclosure agreements. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never constituted a part of this Agreement; and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added as part of this Agreement, a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 12. EXECUTIVE'S WARRANTY. Executive represents and warrants that Executive's entering into this Agreement does not, and that his performance under this Agreement and consummation of the transactions contemplated hereby will not, violate the provisions of any agreement or instrument to which the Executive is a party, or any decree, judgment or order to which Executive is subject, and that this Agreement constitutes a valid and binding obligation of Executive in accordance with its terms. 13. ARBITRATION - EXCLUSIVE REMEDY. (a) Except as otherwise provided herein, the parties agree that the exclusive remedy or method of resolving all disputes or questions arising out of or relating to this Agreement shall be arbitration. Arbitration shall be held in Seattle, Washington, presided over by one arbitrator. Any arbitration may be initiated by either party by written notice ("Arbitration Notice") to the other party specifying the subject of the requested arbitration. (b) If the parties are unable to mutually select an arbitrator to hear the matter, then the American Arbitration Association, upon application of the initiating 11 party, shall provide a panel of arbitrators from which the parties shall select one to hear the matter. (c) The arbitration proceeding shall be conducted in accordance with the Rules for Resolution of Employment Disputes of the American Arbitration Association. The administrative costs of arbitration (including the expense of a party in preparing for and presenting the party's case at the arbitration and of the fees and expenses of legal counsel to a party, all of which shall be borne by that party), shall be borne by the Company only if Executive receives substantially the relief sought by him in the arbitration; otherwise, the costs shall be borne equally between the parties. The arbitration determination or award shall be final and conclusive on the parties, and judgment upon such award may be entered and enforced in any court of competent jurisdiction. 14. MISCELLANEOUS. (a) NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other must be in writing and must be either (i) personally delivered, (ii) mailed by registered or certified mail, postage prepaid with return receipt requested, (iii) delivered by overnight express delivery service or same-day local courier service, or (iv) delivered by telex or facsimile transmission, to the address set forth below, or to such other address as may be designated by the parties from time to time in accordance with this Section 14(a): If to the Company: Lamonts Apparel, Inc. 12413 Willows Road N.E. Kirkland, Washington 98034 Attention: Chief Financial Officer Facsimile: (425) 814-9749 With a copy Heller Ehrman White & McAuliffe (which shall not 525 University Avenue constitute notice) Palo Alto, California 94301 to: Facsimile: (650) 324-0638 Attention: Henry Lesser If to Executive: ----------------------------------- ----------------------------------- ----------------------------------- ----------------------------------- 12 Notices delivered personally or by overnight express delivery service or by local courier service are deemed given as of actual receipt. Mailed notices are deemed given three business days after mailing. Notices delivered by telex or facsimile transmission are deemed given upon receipt by the sender of the answer back (in the case of a telex) or transmission confirmation (in the case of a facsimile transmission). (b) ENTIRE AGREEMENT. This Agreement supersedes any and all other agreements, either oral or written, between the parties with respect to the subject matter of this Agreement and contains all of the covenants and agreements between the parties with respect to the subject matter of this Agreement. (c) MODIFICATION. No change or modification of this Agreement is valid or binding upon the parties, nor will any waiver of any term or condition in the future be so binding, unless the change or modification or waiver is in writing and signed by the parties to this Agreement. (d) GOVERNING LAW. THE PARTIES ACKNOWLEDGE AND AGREE THAT THIS AGREEMENT AND THE OBLIGATIONS AND UNDERTAKINGS OF THE PARTIES UNDER THIS AGREEMENT WILL BE PERFORMED IN SEATTLE, WASHINGTON. THIS AGREEMENT IS GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF WASHINGTON, AND, WHERE APPLICABLE, THE LAWS OF THE UNITED STATES. (e) COUNTERPARTS. This Agreement may be executed in counterparts, each of which constitutes an original, but all of which constitute one document. (f) ESTATE. If Executive dies prior to the expiration of the term of employment or during a period when monies are owing to Executive, any monies that may be due Executive from the Company under this Agreement as of the date of his death shall be paid to Executive's estate when and as otherwise payable. (g) ASSIGNMENT. The Company shall have the right to assign this Agreement to its successors or assigns. The terms "successors" and "assigns" shall include any person, corporation, partnership or other entity that buys all or substantially all of the Company's assets or a control block of stock of the Company, or with which the Company merges or consolidates. The rights, duties and benefits to Executive hereunder are personal to him, and no such right or benefit may be assigned by him. The provisions of this clause (g) are all subject to the provisions of Section 6. (h) BINDING EFFECT. This Agreement is binding upon the parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and permitted assigns. 13 WAIVER OF BREACH. The waiver by the Company or Executive of a breach of any provision of this Agreement by Executive or the Company may not operate or be construed as a waiver of any subsequent breach. 14 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth in the first paragraph. LAMONTS APPAREL, INC. By: ----------------------------------------- Name: Alan Schlesinger Title: President and Chief Executive Officer - --------------------------------------------- [Executive] 15 EX-23.1 8 EX-23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement No. 333-45455 of Lamonts Apparel, Inc. on Form S-8 of our report, dated April 16, 1999, appearing in this Annual Report on Form 10-K of the Company for the year ended January 30, 1999. /s/ Deloitte & Touche LLP Seattle, Washington April 27, 1999 EX-23.2 9 EX-23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-45455) of our report dated April 10, 1998, except as to the restatement described in the last paragraph of Note 3 which is as of April 16, 1999, relating to the consolidated financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Seattle, Washington April 30, 1999 EX-27.1 10 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE FIFTY-TWO WEEKS ENDED JANUARY 30, 1999. 1,000 12-MOS JAN-30-1999 FEB-01-1998 JAN-30-1999 1,594 0 2,124 0 42,411 47,562 28,896 0 93,895 64,224 0 0 0 16,927 3,029 93,895 209,585 209,585 137,651 71,367 0 0 5,042 (4,461) 0 (4,461) 0 0 0 (4,461) (0.50) (0.50) Amount is net of accumulated depreciation of $6,690. Includes operating expenses and administrative expenses of $63,343 and depreciation and amortization of $8,024.
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