-----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, Mw55UP+Bcos1B3DJP3WR55L5w54B4GTM/zQ4PHDRQBScyfBPNu7mD+g7PXsPBLtR ydCmyZaMJesIaLKfOHw9qw== 0000950130-96-000486.txt : 19960216 0000950130-96-000486.hdr.sgml : 19960216 ACCESSION NUMBER: 0000950130-96-000486 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951029 FILED AS OF DATE: 19960213 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORSTMANN & CO INC CENTRAL INDEX KEY: 0000798246 STANDARD INDUSTRIAL CLASSIFICATION: TEXTILE MILL PRODUCTS [2200] IRS NUMBER: 581651326 STATE OF INCORPORATION: GA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09474 FILM NUMBER: 96517684 BUSINESS ADDRESS: STREET 1: 1185 AVE OF AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2126426900 MAIL ADDRESS: STREET 1: 1185 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 10-K405 1 AMEND. DEBTOR-IN-POSSESSION LOAN AGREEMENT UNITED STATES 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 [FEE REQUIRED] For the fiscal year ended October 29, 1995 ---------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-9474 ------ FORSTMANN & COMPANY, INC. Debtor-in-Possession ---------------------------------------------------------- (Exact name of registrant as specified in its charter) GEORGIA 58-1651326 ------------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1155 Avenue of the Americas, New York, N.Y. 10036 ------------------------------------------- ------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 642-6900 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value ----------------------------- (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. [ X ] State the aggregate market value of the voting stock held by non- affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. As a result of the Company's closing price per share being less than $1.00 per share for more than thirty (30) consecutive days, the NASDAQ National Market System delisted Forstmann & Company, Inc. on October 16, 1995. Accordingly, the aggregate market value of the voting stock held by non- affiliates of the registrant is not determinable. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of February 12, 1996 - 5,618,799 shares of Common Stock Total Number of Pages: 229 Exhibit Index starts on sequentially numbered page 71. Item 1. BUSINESS -------- GENERAL Forstmann & Company, Inc., a Georgia corporation (the "Company" or "Forstmann"), is a leading designer, marketer and manufacturer of innovative, high quality woolen, worsted and other fabrics which are used primarily in the production of brand-name and private label apparel for men and women as well as specialty fabrics for use in billiard and gaming tables, sports caps and career uniforms. The Company manufactures fabrics produced from 100% wool and wool blends and, recently, of blends of other natural and man-made fibers. The Company believes that it is the largest manufacturer of domestically produced woolen fabrics and the second largest manufacturer of domestically produced worsted fabrics. During the Company's 1995 fiscal year (the fifty-two week period from October 31, 1994 through October 29, 1995) ("Fiscal Year 1995"), womenswear and outerwear fabrics accounted for approximately 67.0% of revenues and menswear fabrics accounted for approximately 25.8% of revenues. Specialty fabrics, including government and other, accounted for remaining revenues. Although Forstmann was incorporated in December 1985, its predecessors have been in business for over 100 years. The Company is the successor to the business of the Woolen and Worsted Fabrics Division of J.P. Stevens & Co., Inc., the assets of which the Company acquired in February 1986. The principal executive offices of the Company are located at 1155 Avenue of the Americas, New York, New York 10036, and its telephone number is (212) 642-6900. SIGNIFICANT EVENTS BANKRUPTCY FILING. As a result of the continued decline in the Company's results of operations throughout Fiscal Year 1995, the Company, since July 30, 1995 was in default under substantially all of its long-term financing arrangements. The decline in the Company's results of operations is principally due to the Company's high debt leverage, rising wool costs and sluggishness of retail apparel sales. The Company's liquidity and financial position were severely strained during Fiscal Year 1995. Such underlying market conditions are likely to continue into fiscal year 1996. On September 22, 1995, the Company filed a petition for protection under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") with the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy Filing"). These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company received approval from the U.S. Bankruptcy Court to pay or otherwise honor certain of its pre-petition obligations, including employee salaries, wages and benefits. The Company has continued to accrue interest on its secured debt obligations as the Company currently estimates that the collateral securing the secured debt obligations is sufficient to cover the debt and interest portion of scheduled payments. Refer to Note 7 to the Financial Statements included in Item 8. of this Annual Report on Form 10-K and "Financing Agreements -- DIP Facility" for a discussion of the credit arrangements entered into subsequent to the Bankruptcy Filing. Since the Bankruptcy Filing, the Company has been reassessing its business strategy and capital expenditures plans. This process, which began in the Company's 1995 fourth quarter, will be on-going until the Company successfully develops and implements a plan of reorganization and emerges from bankruptcy. In the course of this process, the Company is significantly reducing its product offerings, manufacturing production levels and capital spending plans (including those for computer information systems). As a result of such events, certain assets of the Company have been rendered surplus or obsolete. Accordingly, the Company has increased its inventory market reserves (see Note 3 to the Financial Statements included in Item 8. of this Annual Report on Form 10-K ) and written down certain of its 2 machinery and equipment (see Note 4 to the Financial Statements included in Item 8. of this Annual Report on Form 10-K). Also, the Company has evaluated its computer information systems that were being internally developed, decided to significantly curtail future development of the systems, abandon development projects in process and concluded that the majority of previously capitalized costs will not be recoverable through the Company's future operations (see Note 5 to the Financial Statements included in Item 8. of this Annual Report on Form 10-K). As a plan of reorganization is developed, the Company may further conclude that additional market reserves, write downs of machinery and equipment and write downs of other assets are necessary. Accordingly, the Company may recognize significant expenses associated with the development and implementation of a plan of reorganization that are not reflected in the Financial Statements included in Item 8. of this Annual Report filed on Form 10-K. Any additional asset impairment or restructuring costs directly related to reorganization proceedings will be reflected as restructuring charges in the Company's financial statements in the period the Company becomes committed to plans which impair the valuation of the Company's assets. OTHER FINANCING EVENTS. The Company, as of October 30, 1992, entered into a five-year, $100 million senior secured credit facility with General Electric Capital Corporation ("GE Capital"), as agent and lender (the "GE Capital Facility"). The GE Capital Facility consisted of a $15 million term loan (the "Original Term Loan") and an $85 million revolving line of credit (the "Revolving Line of Credit"). In April 1993, the Original Term Loan was prepaid in full. The initial borrowing under the GE Capital Facility, on November 13, 1992, repaid the Company's then existing $85 million senior secured credit facility, which was scheduled to expire in November 1994, and secured then outstanding letters of credit. In January 1995, the GE Capital Facility was amended, subject to loan availability (as defined), to provide a $7.5 million term loan (the "Term Loan"). On January 23, 1995, the Company borrowed $7.5 million under the Term Loan, the proceeds of which were used to repay a portion of outstanding borrowings under the Revolving Line of Credit. As a result of the Company's deteriorating liquidity and financial position during Fiscal Year 1995, the Company was, at various times, not in compliance with certain of its financial covenant requirements under the GE Capital Facility. On June 19, 1995, the GE Capital Facility was amended to, among other things, retroactively lower the financial covenant and provide lower financial covenant requirements under the remaining term of the GE Capital Facility. Such amended financial covenants were based on the Company's estimate of its future operating results and cash flows. Although the financial covenant tests were lowered, such covenant requirements were generally more restrictive than prior covenant requirements, instituted on a monthly basis and imposed revised caps, for borrowing availability purposes, for certain categories of inventory and accounts receivable. In connection with such amendment, the Company agreed to repay borrowings outstanding under the Term Loan. On July 1, 1995 the Company repaid $2.5 million of the Term Loan, and on September 1, 1995 the Company repaid the remaining borrowings outstanding under the Term Loan. Borrowings under the Revolving Line of Credit were used to repay the Term Loan. See "Financing Arrangements -- GE Capital Facility". In connection with the Bankruptcy Filing, the Company obtained debtor- in-possession financing (the "DIP Facility"), which expires on October 31, 1996 and provides up to $85 million (which includes a $10.0 million letter of credit facility) under a borrowing base formula, less pre-petition advances and letters of credit outstanding under the existing GE Capital Facility. Proceeds from the Company's ordinary operations are first applied to reduce the principal amount of borrowings outstanding under the GE Capital Facility until repaid in full and thereafter are applied to reduce the principal amount of borrowings outstanding under the DIP Facility. Unused portions of the DIP Facility may be borrowed and reborrowed subject to availability in accordance with the then applicable commitment and borrowing base limitations. On April 5, 1993, the Company issued an aggregate of $20 million Senior Secured Notes (the "Original Senior Secured Notes") and on March 30, 1994, the Company issued an aggregate of $10 million Senior Secured Notes (the "Additional Senior Secured Notes"), all of which are due October 30, 1997 (collectively the "Senior Secured Notes"). The net proceeds from the Original Senior Secured Notes were used to repay the Original Term Loan and to repay a portion of borrowings outstanding under the Revolving Line of Credit. The net proceeds from the Additional Senior Secured Notes were used to repay a 3 portion of the borrowings outstanding under the Revolving Line of Credit. The Senior Secured Notes were issued pursuant to an indenture, dated April 5, 1993, which was amended and restated as of March 30, 1994, between the Company and Shawmut Bank Connecticut, National Association, as trustee (the "Senior Secured Notes Indenture"). See "Financing Arrangements -- Senior Secured Notes". Since December 1991, the Company has been a party to a loan and security agreement and as subsequently amended (the "CIT Equipment Facility") with the CIT Group/Equipment Financing, Inc. ("CIT") which provided financing for the acquisition of and refinancing of borrowings incurred to acquire, various textile machinery and equipment. On December 22, 1994, the CIT Equipment Facility was further amended to permit up to two additional loans not to exceed an aggregate of $5.0 million with the commitment period ending on July 31, 1995. On December 22, 1994, the Company borrowed $2.5 million at an interest rate of 10.58%. As a result of the Company's deteriorating liquidity and financial position during Fiscal Year 1995, the Company, at various times, was not in compliance with certain of its financial covenant requirements under the CIT Equipment Facility. On June 14, 1995, the CIT Equipment Facility was amended to, among other things, retroactively lower the financial covenant requirements remaining under the CIT Equipment Facility. Effective as of April 30, 1995, the commitment to provide additional borrowing under the CIT Equipment Facility was terminated. At October 29, 1995, an aggregate of $7.5 million was outstanding under the CIT Equipment Facility. The Company is in default of the terms of the CIT Equipment Facility as a result of the Bankruptcy Filing and the Company's results of operations and financial position. As a result of the Bankruptcy Filing, the Company has not remitted principal and interest payments which are due under the CIT Equipment Facility. At the Bankruptcy Filing date the Company owed CIT $7.7 million in principal and accrued interest payments and had issued a $1.5 million letter of credit payable to the CIT Group/Equipment Financing, Inc. Through January 2, 1996 CIT has drawn $0.9 million to satisfy principal and interest due under the CIT Equipment Facility. DESCRIPTION OF BUSINESS MARKETS AND PRODUCTS. Forstmann fulfills many of the diverse fabric needs of leading men's, women's and outerwear apparel makers by offering a collection of wool, wool-blend, synthetic and synthetic-blend fabrics, as well as fabrics blended with natural fibers such as linen, cotton and silk. These fabrics are offered in a wide variety of styles, colors, weaves and weights which can be used in tailored clothing, sportswear, coats for men and women, as well as for specialty applications. The Company introduces new collections throughout the year to ensure that its customers are frequently exposed to the latest fabric offerings and to accommodate seasonal retail cycles. This has resulted in stronger, year-round customer relationships. As a result of the Bankruptcy Filing, during the Company's 1995 fourth quarter, the Company began reducing its product offerings. This process will be on-going as the Company develops and implements a more simplified and focused product offering. Womenswear and Outerwear. The Company designs, markets and manufactures woolen and worsted fabrics for women's apparel in the moderate, better and bridge price range for sportswear, suits and dresses, as well as for women's outerwear. The fabric selection for women's apparel includes traditional fabrics, such as 100% wool gabardines, crepes and 100% wool flannels, meltons and velours, as well as additional fabrics made from 100% viscose and blends of wool/nylon, wool/viscose, and viscose/linen. These additional fabrics enable the Company to serve its womenswear customers year-round. The Company is a significant supplier of outerwear fabrics for women's woolen coats. In Fiscal Year 1995, womenswear and outerwear accounted for 67.0% of total revenue. Menswear. The Company designs, markets and manufactures fabrics in the moderate and better price range for men's apparel such as suits, sportcoats, blazers, trousers and formal wear. The fabric selection includes traditional fabrics, such as tropicals, gabardines and flannels in wool and wool blends, as well as fabrics made from man-made fibers such as viscose and polyester and natural fibers such as silk, linen and cotton. These fabrics have allowed the Company to expand from its traditional base of tailored clothing manufacturers to new areas such as suit separates, casual sportswear and weekend wear. In Fiscal Year 1995, menswear accounted for 25.8% of total revenue. 4 Specialty Fabrics. The Company produces specialty fabrics for a wide variety of end uses, including billiard and gaming tables, sports caps and school uniforms. The Company is a leading billiard table fabric manufacturer in the United States, selling directly to manufacturers and distributors. In addition, during fiscal year 1992, the Company began distributing billiard table fabric in Europe. The Company also is the sole supplier of wool fabric used in the production of official major league baseball caps for on-field play. The Company also markets career uniform apparel designed to meet stringent requirements for comfort and durability and, in some cases, washability. Forstmann International. In July 1992, the Company formed its Forstmann International division and entered into a licensing, technical information and consulting arrangement with Compagnia Tessile, S.p.A., an Italian corporation, and its affiliate (collectively "Carpini"). Under the arrangement, the Company had the exclusive right to sell "Carpini/(R)/ USA" fabrics for men's and women's apparel in the United States and Canada and nonexclusive rights in Mexico for an initial period of five years. These high quality fabrics, styled in Italy and manufactured in Georgia, were marketed through a specialized sales force to the designer and bridge apparel markets in North America. Additionally, the Company imported certain fabrics from Carpini and its affiliate which the Company marketed in the United States and Canada. In connection with the arrangement with Carpini, the Company established letters of credit payable to Carpini and an affiliate in an aggregate of $1.0 million. On December 22, 1995, through the Bankruptcy Court, the Company rejected all agreements under the Carpini arrangement except for a letter agreement which permits the Company to purchase certain fabrics manufactured by Carpini which can be resold by the Company in the United States and Canada. Since the Bankruptcy Filing, Carpini has not shipped any fabrics manufactured by Carpini as provided for in the letter agreement. Under the terms of the arrangement and letters of credit, Carpini subsequently drew all amounts outstanding under the letters of credit as reimbursement for defaulted royalty and guaranteed minimum fee and liquidated damages. The $0.7 million in excess of accrued royalty and guaranteed minimum fee due as of December 31, 1995 will be recognized as a reorganization item in the Company's first quarter of fiscal year 1996. MERCHANDISING AND MARKETING. The Company's merchandising and marketing functions are integrated and include both the conceptualization (merchandising) and the sale (marketing) of the product line. The Company's merchandising and marketing functions are directed from its New York office and are organized around the Company's three customer end-use divisions. MANUFACTURING. The Company's vertically integrated facilities (which perform operations beginning with opening, blending and spinning raw stock into yarn through weaving, to dyeing and finishing fabric) enable the Company to produce, in addition to woolens and worsteds, a wide variety of other natural and synthetic-blend fabrics. The Company is the only major United States mill which produces fabrics on both the woolen and worsted systems. Woolen fabrics, such as flannels, are woven from yarns containing short, unstraightened wool fibers which remain in a haphazard arrangement, creating a "fuzzy" appearance. Worsted fabrics, such as gabardine and serge, are woven from yarns composed of longer wool fibers that have been combed to align the fibers in parallel and to remove shorter fibers. For the production of woolen yarns, the Company purchases scoured (cleansed and degreased) wool, which is then blended and carded to remove impurities, disentangle locks and straighten individual fibers. The carded wool is then spun into woolen yarn. To produce worsted yarns, the Company purchases combed wool top, which is pin-drafted and straightened to produce long staple wool fibers spun into worsted yarn. Polyester or other synthetic fibers are, sometimes, combined with wool in the spinning process to produce a variety of woolen and worsted blends. _______________________________________ Carpini is a trademark of Carpini S.r.l. 5 Woolen, worsted or wool-blend yarns are woven to produce either greige or patterned fabrics. Other yarns, such as viscose, linen, silk, polyester or cotton (all of which the Company purchases from outside suppliers), are sometimes woven directly into non-wool fabrics or combined with woolen or worsted yarn. After weaving, most fabric is piece-dyed and finished to impart the desired color and feel (or "hand") to the fabric. Fabrics woven, dyed and finished in this manner are referred to as "plain" fabrics. Multicolored patterned fabrics, known as "fancy" fabrics, are woven from colored yarns which are dyed by the Company either as scoured wool prior to spinning or in packages of spun yarn. As with piece-dyed fabrics, fancy fabrics go through various finishing processes to achieve the appropriate "hand" or feel. The Company maintains a physical testing laboratory to ensure product quality from blending through finishing. In addition, all fabrics go through multiple cleaning stages and a final quality inspection prior to packaging and shipping. CAPITAL INVESTMENT PROGRAM. During fiscal year 1992, the Company established a six-year, $100 million capital investment program. This program was designed to (i) reduce manufacturing costs, (ii) enhance product quality, (iii) provide greater manufacturing flexibility while maintaining operating efficiencies, (iv) improve the Company's technical capabilities to provide new blends, styles and colors of fabrics to be offered. Since Fiscal Year 1992, the Company has made capital expenditures (including capital leased assets and computer information systems) of $64.1 million and has also entered into certain operating leases associated with machinery and equipment. As a result of the Bankruptcy Filing, the Company's capital investment program was halted. Capital expenditures during fiscal year 1996 will be limited to maintaining the Company's facilities and emergency replacements. The Company expects to spend less than $3.0 million in capital related expenditures during fiscal year 1996. During the fourth quarter of Fiscal Year 1995, in conjunction with the Company's assessment and evaluation of its business strategy, as more throughly discussed in Note 1 to the Financial Statements included in Item 8. of this Annual Report on Form 10-K, certain of the Company's machinery and equipment and computer information systems were written down by approximately $6.9 million as a result of the elimination of certain product offerings and the reassessment of the Company's future capital investment program which has rendered certain machinery and equipment and computer information systems as either surplus or obsolete. RAW MATERIALS. The Company's raw material costs constituted approximately 42% of its cost of goods sold during Fiscal Year 1995. The primary raw material used by the Company is wool. As a result, the Company's costs are dependent on its ability to manage its wool inventory and control its wool costs. Approximately three-quarters of the Company's wool is imported from Australia and substantially all of the balance is purchased in the United States. The Company purchases its wool from brokers and is not dependent on a single supply source. The Company's foreign wool purchases are denominated in U.S. dollars and the Company generally does not incur any currency exchange risk. However, future changes in the relative exchange rates between United States and Australian dollars can materially affect the Company's results of operations for financial reporting purposes. Prior to the Bankruptcy Filing, much of the Company's wool was purchased on extended payment terms. Subsequent to the Bankruptcy Filing, the majority of the Company's wool purchases have required payment to the wool providers upon arrival in the United States or upon the Company's receipt of the wool. During Fiscal Year 1995, the cost of certain raw wool categories sourced from Australia rose significantly, due in part to a drought in Australia which resulted in a reduction in sheep herds. Recent world-wide declines in wool demand have resulted in a moderate decline in wool costs. Fiscal Year 1995 wool costs were 26% higher than Fiscal Year 1994. Based on the Company's forward purchase commitments and wool market trends, the Company expects its wool costs to be a weighted average of 10% higher during fiscal year 1996 as compared to Fiscal Year 1995. 6 The Company purchases the majority of its raw wool needs from Australia. The Company does not have adequate alternative sources of raw wool if the existing wool suppliers are unwilling to supply raw wool to the Company. CUSTOMERS. The Company has more than 720 active customers. During Fiscal Year 1995, one of the Company's customers accounted for approximately 14.0% of the Company's revenues. No other customer of the Company accounted for 10% or more of the Company's revenues in Fiscal Year 1995. Substantially all of the Company's customers are located within the United States. During each of Fiscal Year 1993, Fiscal Year 1994 and Fiscal Year 1995, less than two percent of the Company's revenues arose from non- United States sales. BACKLOG. The Company's sales order backlog at January 28, 1996 was $61.3 million, a decrease of $3.4 million from the comparable period one year ago. Excluding government orders, which yield slightly lower gross profit margins, the backlog at January 28, 1996 was $12.7 million less than the comparable period one year ago. The decline in the backlog, excluding government orders, is attributable to an overall decline in demand for apparel fabrics which the Company believes is due to the continuing sluggishness of retail apparel sales. Accordingly, due to anticipated retail apparel 1996 market conditions and the Company's planned reduction in product offerings, the Company expects sales in fiscal year 1996 to be less than Fiscal Year 1995. SEASONALITY. The wool fabric business is seasonal, with the vast majority of orders placed from December through April for manufacture and shipment from February through July to enable apparel manufacturers to produce apparel for retail sale during the fall and winter seasons. As a result of normal payment terms for sale of such fabrics, the Company receives the major portion of its payments thereon during May through October. The Company's worsted fabrics sales tend to be less seasonal because the lighter weight of such fabrics makes them suitable for retail sale in the spring and summer seasons as well as in the fall and winter seasons. COMPETITION. The textile business in the United States is highly competitive and the Company competes with many other textile companies, some of which are larger and have greater resources than the Company. The Company believes that it is the largest domestic manufacturer of woolen fabrics and the second largest domestic manufacturer of worsted fabrics. The Company's principal competitors in the sale of woolen fabrics are Warshaw Woolen Associates, Inc. and Carleton Woolen Mills, Inc., and its principal competitors in the sale of worsted fabrics are Burlington Industries Equity Inc. and The Worcester Company, Inc. The Company believes that the principal competitive factors are fashion, quality, price and service, with the significance of each factor depending upon the product involved. The competitive position of the Company varies among the different fabrics it manufactures. Given the current retail apparel environment, the Company believes that price is the primary factor influencing our customers to make a purchasing decision. The Company believes that its competitive advantages include its ability to respond effectively to changing customer demands and its ability to deliver products in a timely manner. Currently, imports of foreign-manufactured woolen and worsted fabrics face strict quotas and high import duties upon entering the United States. During the year ended September 1995, imports of wool-rich fabrics into the United States decreased approximately 3.2% from the year ended September 1994. However, during that period of time most categories of imported wool apparel saw increases in various levels. While a substantial portion of these imports came from NAFTA (as defined below) countries, the Company believes imports of wool coats from Eastern Europe and Ukraine caused some domestic market disruption. The North American Free Trade Agreement ("NAFTA"), which became effective on January 1, 1994, is expected to have a long-term positive effect on the Company's growth. An increasing percentage of foreign-produced garments for sale in the United States, Canada and Mexico are being manufactured in Canada or Mexico, taking market share from the Far East. In order for such garments to qualify for duty- 7 free treatment into the United States and Canada, the fabric has to be sourced from the United States, Canada or Mexico. With limited wool fabric production capacity currently in Mexico and Canada, this requirement represents a major opportunity for woolen mills in the United States. The General Agreement on Trade and Tariffs ("GATT"), reduces tariffs on wool fabric from about one third, to 25%, over a ten-year period. In exchange for the tariff reduction, market access for products manufactured in the United States to countries that are parties to GATT is improved. The Company believes that, overall, GATT will enable the Company to compete more effectively in the world market, thereby offsetting the effect of the tariff reductions. TRADEMARKS. The Company owns the Forstmann (R) name, which it uses as a trade name, as a trademark in connection with various merchandise, and as a service mark in the United States. The Forstmann name is also registered in various countries, including Austria, Australia, the Benelux countries, Canada, Denmark, France, Germany, Hong Kong, Indonesia, Ireland, Italy, Japan, Norway, Portugal, Spain, Switzerland and the United Kingdom, under International Class 24. In addition, the Company has applied to register the Forstmann name in various countries, including China and Sweden. The Company believes that no individual trademark or trade name, other than Forstmann(R), is material to the Company's business. EMPLOYEES. As of December 31, 1995, the Company employed approximately 2,173 hourly-paid, full-time skilled personnel at its plants and approximately 389 additional salaried, supervisory, management and administrative employees. None of the Company's employees is represented by a union or a labor organization. The Company has never experienced a strike and believes that its relations with its employees are good. ENVIRONMENTAL MATTERS. By the nature of its operations, the Company's manufacturing facilities are subject to various federal, state and local environmental laws and regulations, including the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act. Although the Company occasionally has been subject to proceedings and orders pertaining to emissions into the environment, the Company believes that it is in substantial compliance with existing environmental laws and regulations. Pursuant to Georgia's Hazardous Site Response Act (the "Response Act"), property owners in Georgia were required to notify the Environmental Protection Division of the Georgia Department of Natural Resources (the "EPD") of known releases of regulated substances on their properties above certain levels by March 22, 1994. Pursuant to the Response Act, the Company notified the EPD of two historical releases at the Company's Dublin, Georgia facility, one relating to the presence of trichloroethylene at the site (the "TCE Site") and one relating to another constituent near the southern property boundary. Based upon the Company's March 1994 notification, the EPD has determined that a release exceeding a reportable quantity has occurred at those two sites. As a result, the two sites have been listed on the Georgia Hazardous Site Inventory ("HSI"), which currently consists of over 300 other sites. In January 1995, the EPD notified the Company that it is a responsible party, and has informed the Company that, pursuant to the Response Act, the Company is required to submit a compliance status report and compliance status certification with respect to the two sites. The EPD also informed the Company of its obligation to identify all other potentially responsible parties, and, in compliance therewith, on February 24, 1995, the Company identified the prior owner and operator (J.P. Stevens & Co., Inc.) of the Company's Dublin facility. Also, in 1995, the EPD designated these sites as "Class I" (i.e., needing corrective action) sites. On June 29, 1995, the Company notified the EPD of a possible release of a hazardous substance at the Company-owned site (previously owned by J.P. Stevens & Co., Inc., ("J.P. Stevens") where various waste materials were reportedly disposed and burned (the "Burn Area"). The Company purchased the facility in 1986 and has not disposed of or burned such waste materials at the Burn Area. 8 By letter of July 14, 1995, the EPD notified the Company that the two sites that the EPD has previously placed on the HSI had been designated as "Class I" sites needing corrective action. The letter required the Company to file a deed notice that the sites were on the HSI and needed corrective action. Included with this letter was a proposed consent order. The Company and the EPD tried to negotiate a mutually agreeable consent order regarding the two sites, but those negotiations were not successful. On December 29, 1995, the EPD issued separate administrative orders to the Company and J.P. Stevens, which related to the two sites at the Company's Dublin Facility. The orders require the Company and J.P. Stevens to submit a compliance status report and compliance status certification within 120 days from December 29 (i.e., by April 27, 1996) to the EPD that includes, among other things, a description of the release, including its nature and extent, and suspected or known source, quantity and date of the release. Based on the Company's evaluation of the administrative order and consultation with outside environmental consultants, the Company believes that the $0.4 million accrued environmental costs at October 29, 1995 covers the Company's known and probable responsibilities and costs expected to be incurred relative to the two sites. However, subsequent action by the EPD may result in the Company having to re-evaluate its accrual for environmental costs associated with the two sites which may result in the environmental accrual being increased. The EPD's letters of December 29, 1995 also informed the Company and J.P. Stevens that a release exceeding a reportable quantity had occurred in the Burn Area and that the Burn Area was being listed on the HSI. Both Forstmann and J.P. Stevens were requested to submit a compliance status report ("CSR") and compliance status certification for the Burn Area by April 11, 1996. The extent and scope of such remediation investigation has not been determined and the cost can not currently be estimated. Preparation of a CSR would first require completion of a remediation investigation of the Burn Area, which will be performed in 1996. The two companies responded separately to the EPD indicating their belief that the April 11, 1996 due date is unrealistic. The Company requested 330 days for submittal of the CSR. To date, the EPD has not responded to the Company's request. After completion of the remediation investigation, the Company will be able to estimate the expected future costs associated with the Burn Area. Based on previous experience with environmental issues at the Company's facilities, management believes that environmental costs associated with the Burn Area may be material and may have a material adverse effect on the Company's liquidity and financial position. The Company has been informed that EPD may require demonstration of financial assurance upon the conclusion of the Company's Bankruptcy Filing. FINANCING AGREEMENTS The Company's debt as of October 29, 1995, consists of indebtedness outstanding under the DIP Facility, the GE Capital Facility, the Senior Secured Notes, the CIT Equipment Facility, the capital lease obligations and the Subordinated Notes. As a result of the Company's results of operations, liquidity and financial position and the Bankruptcy Filing, the Company is in default under substantially all of its debt agreements. (See Note 7 to the Financial Statements included in Item 8. of this Annual Report on Form 10-K.) DIP FACILITY. The Company has obtained DIP financing from GE Capital which was approved by the Bankruptcy Court. The DIP Facility, which expires on October 31, 1996, provides up to $85 million (which includes a $10.0 million letter of credit facility) under a borrowing base formula, less pre-petition advances and letters of credit outstanding under the GE Capital Facility. The Company's obligations under the DIP Facility are secured by liens on substantially all of the Company's assets. Outstanding borrowings (including outstanding letters of credit) under the DIP Facility cannot exceed the sum of (1) 85% of eligible accounts receivable (other than bill and hold receivables); (2) the lesser of (a) $10 million or (b) a percentage (based on aging) of eligible bill and hold accounts 9 receivable; (3) the lesser of (a) 65% of eligible inventory (other than seconds and samples) or (b) 60% of eligible inventory (other than seconds and samples) plus $3.5 million; and (4) the lesser of (a) $3 million or (b) 60% of samples and seconds. The Company's borrowing base is subject to reserves determined by GE Capital in its sole discretion. At October 29, 1995, the Company's loan availability as defined in the DIP Facility, in excess of pre- petition and post-petition advances and outstanding letters of credit, was approximately $15.0 million. Borrowings under the DIP Facility bear interest, at the Company's option, at a floating rate (which is based on a defined index rate) or a fixed rate (which is based on LIBOR) payable monthly. The floating rate is 1.5% per annum above the index rate, and the fixed rate is 3.0% per annum above LIBOR. At October 29, 1995, the DIP Facility bore interest at the fixed rate of 8.9% per annum through November 30, 1995 and was offset at the same rate from December 1, 1995 through February 29, 1996. Proceeds from the Company's ordinary operations are first applied to reduce the principal amount of borrowings outstanding under the GE Capital Facility until repaid in full and thereafter are applied to reduce the principal amount of borrowings outstanding under the DIP Facility. Unused portions of the DIP Facility may be borrowed and reborrowed, subject to availability in accordance with the then applicable commitment and borrowing base limitations. Subject to certain exceptions, the DIP Facility restricts, among other things, the incurrence of indebtedness, the sale of assets, the incurrence of liens, the making of certain restricted payments, the making of specified investments, the payment of cash dividends and the making of certain fundamental corporate changes and amendments to the Company's corporate organizational and governance instruments. In addition, the Company is required to satisfy, among other things, certain financial performance criteria, including minimum EBITDA levels and maximum capital expenditure levels. The Company pays GE Capital, for the account of each of the lenders party to the DIP Facility, a fee of 0.5% per annum on the average daily unused portion of the DIP Facility. In addition, the Company paid GE Capital, for its own account, an agency fee of $150,000 per annum and pays certain fees in connection with extending and making available letters of credit. In connection with entering into the DIP Facility, the Company paid GE Capital $100,000 and agreed to pay $325,000 on February 15, 1996 and $125,000 on October 31, 1996. GE CAPITAL FACILITY. The Company entered into the GE Capital Facility as of October 30, 1992, for borrowings of up to $100 million. Subject to certain borrowing base limitations, the GE Capital Facility provided for a maximum available non-amortizing Revolving Line of Credit (which includes a $7.5 million letter of credit facility) of $85 million and had a term loan of $15 million (the "Original Term Loan"). On April 5, 1993, the Company issued the Senior Secured Notes in the aggregate principal amount of $20 million and prepaid in full the Original Term Loan. In January 1995, the GE Capital Facility was amended, subject to loan availability to provide the $7.5 million Term Loan. In January 1995, the Company borrowed $7.5 million under the Term Loan, the proceeds of which were used to repay a portion of outstanding borrowings under the Revolving Line of Credit. As a result of the Company's deteriorating liquidity and financial position during Fiscal Year 1995 the Company was, at various times, not in compliance with certain of its financial covenant requirements, under the GE Capital Facility. On June 19, 1995, the GE Capital Facility was amended to, among other things, retroactively lower the financial covenant and provide lower financial covenant requirements under the remaining term of the GE Capital Facility. Such amended financial covenants were based on the Company's estimate of its future operating results and cash flows. In connection with such amendments, the Company agreed to repay borrowings outstanding under the Term Loan. On July 1, 1995 the Company repaid $2.5 million of the Term Loan, and on September 1, 1995 the Company repaid the remaining borrowings outstanding under the Term Loan. Borrowings under the Revolving Line of Credit were used to repay the Term Loan. The Company's obligations under the GE Capital Facility are secured by liens on substantially all of the Company's assets. 10 SENIOR SECURED NOTES. On April 5, 1993, the Company issued an aggregate of $20 million Senior Secured Notes. On March 30, 1994, the Company issued the Additional Senior Secured Notes in the aggregate principal amount of $10 million. The proceeds from the sale of the Senior Secured Notes were used to repay the Original Term Loan and to reduce outstanding borrowings under the Revolving Line of Credit. As a result of the Bankruptcy Filing, the Company did not remit the required principal payment of $4.0 million that was due on October 31, 1995. Further, the quarterly interest payment of $633,937 due on October 31, 1995 was not paid. In addition, under the indenture relating to the Senior Secured Notes (the "Senior Secured Notes Indenture"), as modified by a Bankruptcy Court order, the net proceeds from the sale or other disposition by the Company of assets (excluding, among other things, the sales of inventory in the ordinary course of business) are required to be deposited with the Senior Secured Notes Indenture trustee. As of October 29, 1995, under the terms of the Senior Secured Notes Indenture, the Company had not deposited any net proceeds with the trustee. The Company's obligations under the Senior Secured Notes are secured by liens on substantially all of the Company's assets. CIT EQUIPMENT FACILITY. On December 27, 1991, the Company entered into the CIT Equipment Facility with CIT to finance the acquisition of, and to refinance borrowings incurred to acquire, various textile machinery and equipment. CIT has made purchase money loans to the Company pursuant to the CIT Equipment Facility in the principal amount of $0.7 million at an interest rate of 8.61% per annum on December 27, 1991, of $1.3 million at an interest rate of 7.86% per annum on September 15, 1992, of $2.6 million at an interest rate of 8.55% per annum on December 31, 1992, of $1.2 million at an interest rate of 7.75% per annum on August 2, 1993, of $2.0 million at an interest rate of 7.45% per annum on August 24, 1993, of $1.7 million at an interest rate of 7.36% per annum on October 22, 1993, of $1.1 million at an interest rate of 7.74% per annum on December 29, 1993 and of $2.5 million at an interest rate of 10.58%. The Company is obligated to provide CIT with irrevocable letters of credit in an amount equal to 25% of the original principal amount of each loan incurred after August 1, 1993 through December 31, 1993. In December 1994, the CIT Equipment Facility was amended to provide for up to two additional loans not to exceed an aggregate of $5.0 million of additional equipment financing equal to 85% of the acquisition cost of machinery and equipment, net of all taxes, freight, installation and certain other fees, costs and expenses. The commitment period would have ended on July 31, 1995. On December 22, 1994, the Company borrowed $2.5 million at an interest rate of 10.58%. Each loan under the CIT Equipment Facility is payable in 60 monthly installments. As a result of the Company's deteriorating liquidity and financial position during Fiscal Year 1995, the Company, at various times, was not in compliance with certain of its financial covenant requirements under the CIT Equipment Facility. On June 14, 1995, the CIT Equipment Facility was amended to, among other things, retroactively lower the financial covenant requirements remaining under the CIT Equipment Facility. Effective as of April 30, 1995, the commitment to provide an additional borrowing under the CIT Equipment Facility was terminated. At October 29, 1995, an aggregate of $7.5 million was outstanding under the CIT Equipment Facility. The Company was required to provide CIT with an irrevocable letter of credit in an amount equal to 25% of the original principal amount of each additional loan made under the August 2, 1995 amendment. At the Bankruptcy Filing date the Company owed CIT $7.7 million in principal and accrued interest and had issued a $1.5 million letter of credit payable to CIT. Since October 29, 1995 and through January 2, 1996 CIT has drawn $0.9 million to satisfy principal and interest due under the CIT Equipment Facility. SUBORDINATED INDEBTEDNESS. In April 1989, through an underwritten public offering, the Company sold $100 million of the Subordinated Notes which currently have an interest rate until maturity of 14-3/4%. As of January 1, 1995, an aggregate of $100 million face amount of the Subordinated Notes were outstanding -an aggregate of $43.4 million of which are owned by the Company. The Subordinated Notes are 11 subordinated to all existing senior indebtedness of the Company (which currently consist of the loans under the GECC Facility, the Senior Secured Notes and the CIT Equipment Facility) and any extensions, modifications or refinancings thereof. In connection with an exchange offer, the Company acquired, and did not retire or cancel, $46.2 million aggregate face amount of the Subordinate Notes. The Company used $2.9 million of such Subordinated Notes to satisfy the January 31, 1993 mandatory redemption required in the Subordinated Notes Indenture. The Company is required to redeem on April 15, 1998, $50.0 million of the aggregate face amount of the Subordinated Notes at a redemption price equal to par, plus accrued interest to the redemption date. The remaining Subordinated Notes are due on April 15, 1999. The Company may use the remaining $43.4 million of the Subordinated Notes acquired in the exchange offer to satisfy partially the April 15, 1998 mandatory redemption required in the Subordinated Notes Indenture. As a result of the Bankruptcy Filing, the Company wrote off $3.5 million of the unamortized debt premium related to the Subordinated Notes. The Company did not remit the semi-annual interest payment of $4.2 million due on October 15, 1995 to holders of the Subordinated Notes. Through the date of the Bankruptcy Filing, the Company had accrued $3.7 million in interest associated with the Subordinated Notes. Such amount is included in "Liabilities Subject to Compromise" at October 29, 1995. See the Financial Statements included in Item 8. of this Annual Report on Form 10-K and Notes 1 and 11 thereto. Further, the Company is no longer accruing interest on the Subordinated Notes as such Subordinated Notes are not secured. Item 2. PROPERTIES ---------- Information regarding the Company's manufacturing facilities, all of which are owned, is as follows:
Approximate Square Feet of Building Acreage -------------- ------- Dublin Plant 363,000 295 Dublin, Georgia Nathaniel Plant 313,000 * Dublin, Georgia Milledgeville Plant 580,000 141 Milledgeville, Georgia Louisville Plant 153,000 393 Louisville, Georgia Tifton Plant 244,000 99 Tifton, Georgia
* The Nathaniel plant adjoins the Dublin plant and is located on the same property. The Company owns a 24,000 square foot office building adjoining its Dublin plant, which is used for administrative offices. The Company leases approximately 35,000 square feet of office space at 1155 Avenue of the Americas, New York City (the "1155 Lease"), for its principal executives offices, its styling, sales and marketing operations and its Forstmann International division. Such lease expires on December 31, 2015. The Company also leases storage facilities in Georgia and a regional sales office in Dallas, Texas, primarily on a short-term basis. 12 The Company believes that its facilities are adequate to serve its present needs. Substantially all of the Company's properties, plants and equipment are encumbered by security interests under the DIP Facility, the GE Capital Facility, and the Senior Secured Notes Indenture. See "Business - - Financing Arrangements" in Item 1. of this Annual Report on Form 10-K. Item 3. LEGAL PROCEEDINGS ----------------- The Company is a party to legal actions arising out of the ordinary course of business. The Company has no material pending legal proceedings. DISSENTERS' PROCEEDING As required under Georgia Statute O.C.G.A. (S)14-2-1330, the Company commenced, on July 10, 1992, a civil action against: Resolution Trust Corporation as receiver for Columbia Savings & Loan Association, F.A. (the "RTC"); James E. Kjorlien; Gary M. Smith; Grace Brothers, Ltd.; The Henley Group; Randall D. Smith, Jeffrey A. Smith and Russell B. Smith, as Trustees for Lake Trust dtd 9/4/91; (the Non-RTC defendants) and the record owners of the shares of the Non-RTC defendants (the "Dissenters' Proceeding"). The RTC and Non-RTC defendants were record owners or beneficial holders of an aggregate of 1,473,562 shares of the Company's then existing voting and non- voting common stock (the "Pre-Merger Stock") who dissented from the Merger. Under Georgia law, holders of the outstanding shares of Pre-Merger Stock who were deemed to have dissented from the Merger became entitled to payment of the "fair value" of their Pre-Merger Stock, determined as of a time immediately before consummation of the Merger plus interest on that amount from the date of the Merger. In September 1994, the Company settled the claims of the RTC in exchange for payment by the Company of $475,000 and the issuance of 30,000 shares of the Company's common stock. In December 1994, in settlement of the remaining claims, the Company paid the Non-RTC defendants $365,000. The action has been dismissed and no claims remain pending in the Dissenters' Proceeding. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ----------------------------------------------------- During the fourth quarter of Fiscal Year 1995, no matters were submitted by the Company to a vote of its shareholders. 13 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED ------------------------------------------------- STOCKHOLDER MATTERS -------------------- The Company's Common Stock was traded on the NASDAQ National Market System ("NASDAQ-NMS"), the automated quotation system of The National Association of Securities Dealers, Inc. (the "NASD") under the symbol "FSTM". As a result of the Company's closing price per share being less than $1.00 per share for more than thirty (30) consecutive days the NASDAQ National Market System delisted Forstmann & Company, Inc. on October 16, 1995. The following table sets forth the high and low sales prices for each quarterly fiscal period of the Common Stock on the NASDAQ-NMS, as reported by the NASD. These quotations represent prices between dealers, do not include retail markup, markdown or commission and may not necessarily represent actual transactions.
High Sales Price Low Sales Price ---------------- --------------- Fiscal Year 1994 - ---------------- 1st Fiscal Quarter (November 1, 1993 through January 30, 1994) 12 10-1/2 2nd Fiscal Quarter (January 31 through May 1) 12 9 3rd Fiscal Quarter (May 2 through July 31) 11-3/4 10-3/4 4th Fiscal Quarter (August 1 through October 30) 11-1/2 6-1/4 Fiscal Year 1995 ---------------- 1st Fiscal Quarter (October 31, 1994 through January 29, 1995) 7 5 2nd Fiscal Quarter (January 30 through April 30) 6 3-3/4 3rd Fiscal Quarter (May 1 through July 30) 5 1 4th Fiscal Quarter (July 31 through October 16) 2-1/4 3/8
14 At December 31, 1995, the Company had 72 record holders of its Common Stock, including CEDE & Company, the nominee of Depositary Trust Company, that held 2,642,800 shares of Common Stock as nominee for an unknown number of beneficial holders. The Company has not paid, and has no present intention to pay in the foreseeable future, any cash dividends in respect of its Common Stock. The DIP Facility prohibits and the Senior Secured Notes Indenture and the Subordinated Notes Indenture restrict the payment of cash dividends. The payment of future cash dividends, if any, would be made only from assets legally available therefore, and would generally depend on the Company's financial condition, results of operations, current and anticipated capital requirements, plans for expansion, if any, restrictions under its then existing credit and other debt instruments and arrangements, and other factors deemed relevant by the Company's Board of Directors, in its sole discretion. As a debtor-in-possession, the Company is prohibited under the Bankruptcy Code from paying cash dividends. 15 Item 6. SELECTED FINANCIAL DATA ----------------------- Presented below are selected operating statement data for the Company for the fiscal years ended October 29, 1995, October 30, 1994, October 31, 1993, November 1, 1992 and October 27, 1991. Also presented are selected balance sheet data for the Company as of October 29, 1995, October 30, 1994, October 31, 1993, November 1, 1992 and October 27, 1991. The selected financial data have been derived from the audited financial statements of the Company, are not covered by the report of the Company's independent public accountants and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7. of this Annual Report on Form 10-K and the Company's financial statements (and the related notes and schedules thereto) in Item 8. of this Annual Report on Form 10-K.
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED ENDED ENDED OCTOBER 29, OCTOBER 30, OCTOBER 31, NOVEMBER 1, OCTOBER 27, 1995 1994 1993 1992 1991 --------------- --------------- --------------- --------------- -------------- OPERATING STATEMENT DATA(1):................... (amounts in thousands, except per share and share information) Net Sales...................................... $ 222,217 $ 237,085 $ 233,365 $ 208,908 $ 194,622 Gross profit................................... 26,323 47,852 51,018 39,833 31,863 Operating income (loss)........................ (248)(3) 23,417 26,618(3) 21,847 5,570(3) Income (loss) before income taxes, extraordinary loss and reorganization items................. (19,817) 5,900 10,869 3,864 (15,584) Reorganization items(2)........................ 10,904 - - - - Income tax (provision) benefit................. 4,250 (2,331) (4,245) (5,690)(4) 6,047 Income (loss) before extraordinary loss........ (26,471) 3,569 6,624 (1,826) (9,537) Net income (loss).............................. (26,471) 3,569 6,624 (3,005)(5) (9,537) Income (loss) applicable to common shareholders (26,701) 3,339 6,415 (3,245) (9,752) Per share and share information (pro forma as to 1992 and 1991)(6): Income (loss) before extraordinary loss applicable to common shareholders........... (4.75) .60 1.15 .61 (1.08) Income (loss) applicable to common shareholders................................ (4.75) .60 1.15 .40 (1.08) Weighted average common shares outstanding... 5,618,799shs. 5,592,022shs. 5,585,014shs. 5,585,014shs. 5,585,014shs. OTHER OPERATING DATA: Income before interest, income taxes, depreciation, amortization, reorganization items and loss from abandoned property and other assets........... 13,581 37,074 37,946 32,583 26,271 Capital expenditures........................... 13,729 14,979 14,955 12,354 6,986 AS OF AS OF AS OF AS OF AS OF OCTOBER 29, OCTOBER 30, OCTOBER 31, NOVEMBER 1, OCTOBER 27, 1995(2) 1994 1993(7) 1992 1991 ------------ ----------- ------------ ----------- ------------ BALANCE SHEET DATA(7):......................... (amounts in thousands) Current Assets................................. $ 116,475 $ 140,801 $ 130,172 $ 123,626 $ 112,519 Property, plant and equipment, net of accumulated depreciation and amortization................. 78,784 79,479 76,521 92,231 89,974 Total assets................................... 198,203 229,256 215,567 223,424 209,027 Long-term debt, including DIP Facility and current maturities of long-term debt and long-term debt included in liabilities subject to compromise. 142,935 158,311 138,859 116,925 157,414 Senior Preferred Stock, redeemable............. 2,655 2,425 2,195 4,930 4,690 Shareholders' equity........................... 7,667 35,836 33,890 51,083 8,337 - ----------------------------------
Notes to Operating Statement Data and Balance Sheet Data next page. 16 (1) The year ended November 1, 1992 ("Fiscal Year 1992") consists of a 53 week period. The years ended October 29, 1995 ("Fiscal Year 1995"), October 30, 1994 ("Fiscal Year 1994"), October 31, 1993 ("Fiscal Year 1993"), and October 27, 1991 ("Fiscal Year 1991") consist of 52 week periods. No cash dividends on the Common Stock were paid during any of the foregoing periods. (2) On September 22, 1995, the Bankruptcy Filing occurred. The Company's Fiscal Year 1995 financial statements have been prepared in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting of Entities in Reorganization Under the Bankruptcy Code". In accordance with SOP 90-7, professional fees and restructuring charges directly related to the Bankruptcy Filing have been segregated from normal operations during Fiscal Year 1995. Reference is made to Note 15 to the Financial Statements included in Item 8. of this Annual Report on Form 10-K for a description of reorganization items. (3) After taking into account a $9.2 million provision in Fiscal Year 1991 and a $1.0 million and $0.4 million provision in Fiscal Year 1993 and 1995, respectively for a non-cash loss from abandonment, disposal and impairment of machinery and equipment and other assets to reflect their remaining economic value. (4) The Company recorded a net deferred income tax expense of $4.2 million primarily to reflect previously recognized income tax benefits. (5) After taking into account an extraordinary loss of $1.2 million, net of income tax benefit, resulting from a debt refinancing. (6) The per share and share information for Fiscal Year 1992 and Fiscal Year 1991 is presented on a pro forma basis to give effect to an exchange offer and merger of the Company with an affiliate, as if such transactions occurred at the beginning of Fiscal Year 1991 and as if such transactions were effected as a recapitalization of the Company. The per share information for Fiscal Year 1995, 1994 and 1993 is actual. (7) The Company revalued its assets and liabilities to fair value as of the beginning of Fiscal Year 1993 pursuant to the principles of quasi- reorganization accounting as more fully described in Note 14 to the Financial Statements included in Item 8. of this Annual Report on Form 10-K. 17 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Recent Events - ------------- As a result of the continued decline in the Company's results of operations throughout Fiscal Year 1995, on September 22, 1995, the Company filed for protection under Chapter 11 of the United States Bankruptcy Code with the Bankruptcy Court for the Southern District of New York (the "Bankruptcy Filing"). The decline in the Company's results of operations is principally due to the Company's high debt leverage, rising wool costs and sluggishness of retail apparel sales. These factors raise substantial doubt about the Company's ability to continue as a going concern. Under Chapter 11, absent authorization of the Bankruptcy Court, efforts to collect on claims against the Company in existence prior to the Bankruptcy Filing are stayed while the Company continues business operations as debtor-in- possession. Unsecured claims against the Company in existence prior to the Bankruptcy Filing are reflected in the Financial Statements included in Item 8. of this Annual Report on Form 10-K as "Liabilities Subject to Compromise". See the Financial Statements included in Item 8. of this Annual Report on Form 10-K and Notes 1 and 11 thereto. As of October 29, 1995 the amount of such claims approximated $90.8 million which primarily includes unsecured trade accounts payable and Subordinated Notes, including interest thereon through the date of the Bankruptcy Filing. Additional claims (Liabilities Subject to Compromise) may arise or become fixed subsequent to the filing date resulting from the rejection of executory contracts, including leases, from the determination by the court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed and unliquidated amounts and from the determination of unsecured deficiency claims in respect of claims secured by the Company's assets ("Secured Claims"). A successful plan of reorganization may require certain compromises of liabilities (including Secured Claims) that, as of October 29, 1995, are not classified as "Liabilities Subject to Compromise". The Company's ability to compromise Secured Claims without the consent of the holder is subject to greater restrictions than in the case of unsecured claims. Parties holding Secured Claims have the right to move the court for relief from the stay imposed by the Bankruptcy Court to permit foreclosure on collateral, which relief may be granted in certain circumstances. Secured Claims are collateralized by substantially all of the assets of the Company, including accounts receivables, inventory and property, plant and equipment. The Company has received approval from the Bankruptcy Court to pay or honor certain of its prepetition liabilities, including employee salaries, wages and benefits. Since the Bankruptcy Filing, the Company has been reassessing its business strategy and capital expenditures plans. This process, which began in the Company's 1995 fourth quarter, will be on-going until the Company successfully develops and implements a plan of reorganization and emerges from bankruptcy. In the course of this process, the Company is significantly reducing its product offerings, manufacturing production levels and capital spending plans (including those for computer information systems). As a result of such events, certain assets of the Company have been rendered surplus or obsolete. Accordingly, the Company has increased its inventory market reserves (see Note 3 to the Financial Statements included in Item 8. of this Annual Report on Form 10-K) and written down certain of its machinery and equipment (see Note 4 to the Financial Statements included in Item 8. of this Annual Report on Form 10-K). Also, the Company has evaluated its computer information systems that were being internally developed, decided to significantly curtail future development of the systems, abandon certain development projects in process, and concluded that the majority of previously capitalized costs will not be recoverable through the Company's future operations (see Note 5 to the Financial Statements included in Item 8. of this Annual Report on Form 10-K). As a plan of reorganization is developed, the Company may further conclude that additional market reserves, write downs of machinery and equipment and write downs of other assets are necessary. Accordingly, the Company may recognize significant expenses associated with the development and implementation of a plan of reorganization that are not reflected in the Financial Statements included in Item 8. of this Annual Report on Form 10-K. Any such additional asset impairment or restructuring costs directly related to reorganization proceedings will be reflected as reorganization items in the Company's financial statements in the period the Company becomes committed to plans which impair the valuation of the Company's assets or incurs a restructuring liability. 18 The Company purchases the majority of its raw wool needs from Australia. The Company does not have access to adequate alternative sources of raw wool if the existing wool suppliers are unwilling to supply raw wool to the Company. Results of Operations - --------------------- The Fifty-Two Week Period Ended October 29, 1995 ("Fiscal Year 1995") compared to the Fifty-Two Week Period Ended October 30, 1994 ("Fiscal Year 1994"). The Company's expectations or beliefs expressed below regarding results of operations for fiscal year 1996 constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Net sales in Fiscal Year 1995 were $222.2 million, a decrease of $14.9 million or 6.3% from Fiscal Year 1994. Total yards of fabric sold decreased 3.7% during Fiscal Year 1995. The decline in sales is attributable to a decline in sales of women's outerwear (coating), menswear and specialty fabrics which were somewhat offset by increases in womenswear, converting and Carpini fabrics. Due to this shift in product mix, the average per yard selling price declined from $7.63 in Fiscal Year 1994 to $7.42 in Fiscal Year 1995. Sales of women's outerwear fabrics declined 43% in Fiscal Year 1995 due to the unseasonably warm fall and winter weather experienced in much of the U.S. last year and the increase in women's coats imported from Eastern Europe last year. As a result, during 1995, higher levels of women's coats remained in retail inventories resulting in lower demand for the Company's women's outerwear fabrics for the fall and winter season. Compounding the effect of the decline in women's outerwear fabrics was a decline in sales of menswear worsted and specialty fabrics. The decline in menswear sales reflects the continuing decline in the sale of tailored menswear and the shift to "Friday wear". The decline in specialty fabrics is primarily due to the effects of the prolonged major league baseball strike which resulted in lower demand for baseball caps. Excluding government sales ($3.7 million in Fiscal Year 1995 and $2.9 million in Fiscal Year 1994), which traditionally yield lower gross profit margins, net sales for Fiscal Year 1995 declined $15.7 million from Fiscal Year 1994. Cost of goods sold increased $6.7 million to $195.9 million in Fiscal Year 1995. Gross profit declined $21.5 million or 45.0% to $26.3 million in Fiscal Year 1995 and the gross profit margin declined to 11.8% in Fiscal Year 1995 from 20.2% in Fiscal Year 1994. The decline in gross profit is primarily due to the significant increase in wool costs that was not recovered through higher selling prices. Fiscal Year 1995 wool costs were 26% higher than Fiscal Year 1994. Due to the continuing weakness in sales, the Company reduced its manufacturing operations, particularly woolen, during the fourth quarter of Fiscal Year 1995. Due to the on-going weakness in sales resulting from the depressed retail apparel market, the need to maximize cash flows by reducing the Company's investment in inventory and higher wool costs, the Company expects the gross profit margin for fiscal year 1996 to be lower than that for Fiscal Year 1995. Selling, general and administrative expenses, excluding the provision for uncollectible accounts, increased 4.2% in Fiscal Year 1995 to $23.3 million as compared to $22.4 million in Fiscal Year 1994. The majority of this increase is attributable to severances, relocation of the Company's corporate and marketing headquarters and professional services, all of which were somewhat offset by a decline in employee benefit related expenses, primarily pension and retirement and travel and entertainment, lower advertising and promotional related expenses and incentive compensation. Severance in Fiscal Year 1995 is primarily due to the Company and an Executive Officer entering into a severance agreement and the Executive Officer resigning from the Company as more fully described in Note 11 to the Financial Statements included in Item 8. of this Annual Report on Form 10-K. In connection with the Company relocating and entering into a twenty (20) year lease for its corporate and marketing headquarters, the new landlord and the Company entered into a takeover agreement, effective August 1, 1995, whereby the landlord agreed to take over the Company's remaining obligation under a previous lease which expires in October 1996. Pursuant to the accounting rules for leases, the Company recognized a loss of $0.6 million during Fiscal Year 1995 for the estimated economic loss in the previous lease assumed by the new landlord. Additionally, during Fiscal Year 1995, the Company incurred accelerated amortization on leasehold improvements associated with the previous lease. 19 The provision for uncollectible accounts increased from $2.2 million in Fiscal Year 1994 to $2.9 million. Such increase is primarily attributable to an increase in the Company's allowance for uncollectible accounts in Fiscal Year 1995 resulting from the filing by two of the Company's menswear customers for protection under the United States Bankruptcy Code. Further, the Company increased its general allowance based on continuing economic downturn in the apparel industries, in which most of the Company's customers operate. During Fiscal Year 1994, the allowance for doubtful accounts included an increased provision as a result of one of the Company's outerwear customers filing for protection under the United States Bankruptcy Code in February 1994. Interest expense in Fiscal Year 1995 was $19.6 million compared to $17.5 million in Fiscal Year 1994. This increase is primarily due to the increase in the Federal Reserve discount rates which began during calendar year 1994. Increases in the Federal Reserve discount rates since the beginning of fiscal year 1994 have resulted in the Company's interest rates applicable to borrowings under the Revolving Line of Credit and Senior Secured Notes increasing by approximately 2% per annum in Fiscal Year 1995 as compared to Fiscal Year 1994. Since the Bankruptcy Filing, the Company has been reassessing its business strategy and capital expenditures plans. This process, which began in the Company's 1995 fourth quarter will be on-going until the Company successfully develops and implements a plan of reorganization and emerges from bankruptcy. In the course of this process, the Company is significantly reducing its product offerings, manufacturing production levels and capital spending plans (including those for computer information systems). As a result of such events, certain assets of the Company have been rendered surplus or obsolete. Accordingly, during the fourth quarter of Fiscal Year 1995, the Company increased its inventory market reserves $4.3 million and wrote down certain of its machinery and equipment $2.3 million and barter credits $0.9 million. Also, during the fourth quarter of Fiscal Year 1995, the Company evaluated its computer information systems that were being internally developed, decided to significantly curtail internal development of the systems, abandon certain development projects in process, and concluded that $4.6 million of previously capitalized costs will not be recovered through the Company's future operations. As a result of the Bankruptcy Filing, during the fourth quarter of Fiscal Year 1995, the Company incurred $1.2 million in professional fees, wrote off $1.0 million in deferred financing costs, incurred $0.3 million gain in financing related fees, wrote off $3.5 million of debt premium associated with the Subordinated Notes and incurred $0.3 million in other reorganization items. All of these costs and write offs have been accounted for as reorganization items in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7 "Financial Reporting of Entities in Reorganization Under the Bankruptcy Code." As a plan of reorganization is developed the Company may further conclude that additional market reserves, write downs of machinery and equipment and write downs of other assets are necessary. Accordingly, the Company may recognize significant expenses associated with the development and implementation of a plan of reorganization that are not reflected in Financial Statements included in Item 8. of this Annual Report on Form 10-K. Any additional asset impairment or restructuring costs directly related to reorganization proceedings will be reflected as reorganization items in the Company's financial statements in the period the Company becomes committed to plans which impair the valuation of the Company's assets or incurs a restructuring liability. The Company's effective tax rate was 13.8% for Fiscal Year 1995, while the effective tax rate for Fiscal Year 1994 was 39.5%. Recognition of the income tax benefit in Fiscal Year 1995 was limited to the amount of its net operating loss the Company can carry back. To the extent the Company had net deferred tax assets at October 29, 1995, the Company, during Fiscal Year 1995, established a valuation allowance to reduce such net deferred tax assets to zero. The corresponding charge to increase the valuation allowance reduced the Company's 1995 income tax benefit. As a result of the foregoing, the Company realized a net loss of $26.5 million in Fiscal Year 1995 compared to net income of $3.6 million in Fiscal Year 1994. Preferred stock in-kind dividends and accretion to redemption value was $230,000 in both Fiscal Years 1995 and 1994. As a result of the Bankruptcy Filing, the Company is no longer accruing the dividend under the redeemable preferred stock and accretion of the recorded balance of redemption value. As a result of the foregoing, the Company's loss applicable to common shareholders was $26.7 million, compared to income applicable to common shareholders of $3.3 million in Fiscal Year 1994. 20 In light of the Bankruptcy Filing, which is expected to result in the Company reducing its working capital needs, and the effect of no longer accruing interest expense due on unsecured indebtedness, the Company expects interest expense in fiscal year 1996 to be significantly less than in Fiscal Year 1995. Interest, at the contractural rate of $8.4 million per annum, on the Company's 14-3/4% Senior Subordinated Notes with a face value of approximately $56.6 million, is no longer being accured as result of the Bankruptcy Filing. The Company expects overall wool costs in fiscal year 1996 to be 10% higher than Fiscal Year 1995 due to the timing of changes in wool market conditions, consumption needs and the actual wool purchase commitment position of the Company. The Company's sales order backlog at January 28, 1996 was $61.3 million, a decrease of $3.4 million from the comparable period one year ago. Excluding government orders, which yield slightly lower gross profit margins, the backlog at January 28, 1996 was $12.7 million less than the comparable period one year ago. The decline in backlog excluding government orders, is attributable to an overall decline in demand for apparel fabrics which the Company believes is due to the continuing sluggishness of retail apparel sales and increased apparel imports. Due to this environment, coupled with the overall excess apparel textile fabric manufacturing capacity, management expects to encounter pricing pressures which will depress gross margins during fiscal year 1996. The Fifty-Two Week Period Ended October 30, 1994 ("Fiscal Year 1994") compared to the Fifty-Two Week Period ended October 31, 1993 ("Fiscal Year 1993"). Net sales for Fiscal Year 1994 were $237.1 million, an increase of less than 2% from Fiscal Year 1993. Total yards of fabric sold decreased 1% during Fiscal Year 1994. The increase in sales is attributable primarily to an increase in the sale of menswear fabrics which the Company believes is the result of focusing the menswear product line on specific market niches over the last two years. A decline in the sale of womenswear fabrics somewhat offset the increase in the sale of menswear fabrics. Womenswear fabric sales declined due to an over-ordering of certain wool fabrics by the Company's customers in Fiscal Year 1993 which was somewhat offset by a shift from woolen to worsted fabrics due to changing fashion trends in Fiscal Year 1994. Excluding government sales ($2.9 million in Fiscal Year 1994 and $0.1 million in Fiscal Year 1993) which traditionally yield lower gross profit margins, net sales for Fiscal Year 1994 increased less than 0.5% from Fiscal Year 1993. Cost of goods sold increased to $189.2 million from $182.3 million in Fiscal Year 1993. Gross profit decreased 6.2% in Fiscal Year 1994 to $47.9 million, and gross profit margin for Fiscal Year 1994 was 20.2% compared to 21.9% for Fiscal Year 1993. Production of certain fabrics and related yarns, particularly during the fourth quarter of Fiscal Year 1994, was slowed in response to the decline in womenswear fabrics. The lowering of production, its resultant lower absorption of manufacturing costs, as well as an unusually high increase in healthcare claims and workers' compensation expenses, adversely effected gross profit for the year. Fiscal Year 1994 and Fiscal Year 1993 include the effects of the Company's quasi reorganization which was effected as of the beginning of Fiscal Year 1993. Selling, general and administrative expenses, excluding the provision for uncollectible accounts, increased 7.6% to $22.4 million in Fiscal Year 1994, compared to $20.7 million in Fiscal Year 1993. Human resources related expenses increased $0.3 million during Fiscal Year 1994 due to the hiring of personnel for marketing and in-house legal counsel and the lowering of the assumed discount rate used to measure the accumulated benefit obligation for the Company's hourly and salaried pension plans under SFAS No. 87, "Employers' Accounting for Pensions," as of the end of Fiscal Year 1993. The increase in human resources related expenses was partially offset by a $1.0 million decline in incentive compensation expense in Fiscal Year 1994. Due to the modernization and computerization of the Company's styling, sales and marketing operations in New York, coupled with other computer equipment upgrades, facility, depreciation and amortization expenses were higher in Fiscal Year 1994 than in the Fiscal Year 1993. During the fourth quarter of Fiscal Year 1994, approximately $0.3 million in costs associated with potential acquisitions were expensed as such potential acquisitions did not materialize. The provision for uncollectible accounts declined from $2.7 million in Fiscal Year 1993 to $2.2 million in Fiscal Year 1994. The provision for uncollectible accounts in Fiscal Year 1993 includes the effect of several of the Company's customers filing for protection under the Bankruptcy Code, which customers, at the time of such filings, owed the Company an aggregate of $2.5 million. 21 Interest expense for Fiscal Year 1994 was $17.5 million compared to $15.7 million in Fiscal Year 1993. The $1.8 million increase in interest expense in Fiscal Year 1994 primarily was due to higher interest rates and additional borrowings under the Company's various financing facilities. Increases in the Federal Reserve discount rates during Fiscal Year 1994 have resulted in the Company's interest rates applicable to borrowings under the Revolving Line of Credit and Senior Secured Notes increasing by approximately 1.5% per annum since the beginning of Fiscal Year 1994. In Fiscal Year 1994, the Company recorded an income tax provision of $2.3 million. The Company's effective tax rate was 39.5% on income before taxes for Fiscal Year 1994, while the effective tax rate for Fiscal Year 1993 was 38.5%. As a result of the foregoing, the Company's net income was $3.6 million in Fiscal Year 1994 compared to net income of $6.6 million in Fiscal Year 1993. Preferred stock in-kind dividends and accretion to redemption value was $230,000 in Fiscal Year 1994 compared to $209,000 in Fiscal Year 1993. As a result of the foregoing, the Company's income applicable to common shareholders was $3.3 million in Fiscal Year 1994, compared to income applicable to common shareholders of $6.4 million in Fiscal Year 1993. Liquidity and Capital Resources - ------------------------------- The Company's expectations or beliefs expressed below regarding liquidity and capital resources for fiscal year 1996 constitute "forward-looking statements" within the meaning of Section 21E of the Exchange Act. The Company historically has financed its operations and investing activities through a combination of borrowings, equipment leasing, and internally generated funds. The Company's financing needs have arisen principally in connection with modernization and expansion of the Company's production capacity and with increased working capital needs that had accompanied sales growth. Additional borrowings were needed to finance higher inventories throughout Fiscal Year 1995. Gross inventories, excluding market reserves, at October 29, 1995 were approximately equal to inventories at October 30, 1994. However, during Fiscal Year 1995, gross inventories were approximately $4.4 million higher on average than in Fiscal Year 1994 as a result of an increase in wool prices and an increase in work-in-process inventories due to the overall decline in sales. The Company has obtained debtor-in-possession (DIP) financing from GE Capital under a DIP Facility. The DIP Facility provides up to $85 million (which includes a $10.0 million letter of credit facility) under a borrowing base formula, less pre-petition advances and outstanding letters of credit under the Company's then existing GE Capital Facility (hereinafter defined). The DIP Facility is subject to certain borrowing base limitations and expires on October 31, 1996. The Company entered into a five-year loan agreement as of October 30, 1992 with GE Capital, as agent and lender, which as subsequently amended, provided revolving loans up to a maximum of $85 million (the "Revolving Line of Credit") (which included a $7.5 million letter of credit facility) (the "GE Capital Facility"). In January 1995, the GE Capital Facility was amended, subject to loan availability (as defined), to provide a $7.5 million term loan (the "Term Loan"). On January 23, 1995, the Company borrowed $7.5 million under the Term Loan, the proceeds of which were used to repay a portion of outstanding borrowings under the Revolving Line of Credit. On June 19, 1995, the GE Capital Facility was amended to, among other things, retroactively lower certain financial covenants and provide lower financial covenant requirements under the remaining term of the GE Capital Facility. Such amended financial covenants were based on the Company's estimate of its future operating results and cash flows. In connection with such amendment, the Company agreed to repay borrowings outstanding under the Term Loan. On July 1, 1995 the Company repaid $2.5 million of the Term Loan and on September 1, 1995 the Company repaid the remaining borrowings outstanding under the Term Loan. Borrowings under the Revolving Line of Credit were used to repay the Term Loan. The Company's cash requirements, including working capital and capital expenditures during Fiscal Year 1995, were funded from the proceeds from borrowings under the DIP Facility and GE Capital Facility. At October 29, 1995 the aggregate amount of revolving loans and letters of credit outstanding under the DIP Facility and GE 22 Capital Facility was approximately $48.1 million and loan availability (under the DIP Facility), in excess of the Company's outstanding borrowings and letters of credit, was approximately $15.0 million. The Company is in default of substantially all of its debt agreements (other than the DIP Facility). During Fiscal Year 1995, the Company was, at various times, not in compliance with certain of its financial covenant requirements under the GE Capital Facility, the indenture to the Senior Secured Notes and the CIT Equipment Facility. Effective as of April 30, 1995, certain financial covenants under the GE Capital Facility, the indenture to the Senior Secured Notes and the CIT Equipment Facility were amended. Had these amendments not been effective as of such date, the Company would not have been in compliance as of such date with among other things, the minimum adjusted tangible worth, EBITDA, and certain EBITDA related ratio requirements in certain of those agreements. Capital additions for plant and equipment were $13.7 million in Fiscal Year 1995. The Company expects spending for capital expenditures, primarily machinery and equipment, in fiscal year 1996 to be significantly less than Fiscal Year 1995 due to the curtailment of the Company's $100 million capital investment program as a result of the Bankruptcy Filing. Under the terms of the DIP Facility, capital expenditures can not exceed $3.0 million and the Company is prohibited from entering into any additional capital lease obligations. Further, the DIP Facility prohibits the Company from entering into any operating lease obligations other than for replacement of existing operating lease obligations where the minimum annual rental payments under the new operating lease does not exceed the old operating lease by $50,000 or more. Capital additions, including capital lease obligations, for plant and equipment were $15.0 million in each of Fiscal Years 1994 and 1993 and $12.4 million in fiscal year 1992. The Company believes that cash generated from operations and borrowings under the DIP Facility will be sufficient to fund its fiscal year 1996 working capital and capital expenditures requirements. However, expected cash flow from operations is dependent upon achieving sales expectations during fiscal year 1996 which are influenced by market conditions, including apparel sales at retail, that are beyond the control of the Company. Due to the seasonal nature of the Company's core woolen and worsted business, the Company's borrowings under its DIP Facility will tend to increase throughout the fiscal year until the fourth quarter, when, at year-end, borrowings will tend to be the lowest. However, the Company's ability to reduce its working capital needs, as well as, deviations from the Company's fiscal year 1996 operating plan, could result in borrowings at the end of fiscal year 1996 being higher than at the beginning of fiscal year 1996 or being higher during various times within fiscal year 1996 than comparable periods within Fiscal Year 1995. Net cash provided by operating activities during Fiscal Year 1995 was $26.9 million, an increase of $29.4 million from Fiscal Year 1994. As a result of the Bankruptcy Filing, approximately $32.9 million of accrued liabilities and accounts payable were classified as "Liabilities Subject to Compromise." See the Financial Statements included in Item 8. of this Annual Report on Form 10-K and Notes 1 and 11 thereto. Assuming payment of these liabilities, operations used approximately $6.0 million, an increase of $3.5 million. Historically, during the first half of its fiscal year, the Company utilizes cash to fund operations, whereas operations provide cash during the second half of the Company's fiscal year. Net cash used in investing activities during Fiscal Year 1995, primarily for capital expenditures, was $15.0 million, an increase of $1.8 million from Fiscal Year 1994. Such increase was primarily due to capital expenditures in Fiscal Year 1995 being totally funded through borrowings under the DIP Facility and GE Capital Facility whereas the Company acquired approximately $3.6 million of its capital investments under capital leases in Fiscal Year 1994. Net cash provided by operations plus borrowings under the DIP Facility ($9.4 million ) and CIT Equipment Facilities ($2.5 million) were used to repay $20.1 million in borrowings under the GE Capital Facility and $2.9 million of other financing facilities and $0.9 million of costs incurred in connection with the Dissenters' Proceeding. Working capital at October 29, 1995 was $45.0 million, a decrease of $67.7 million from October 30, 1994. This decrease resulted, in part, from a $24.3 million decrease in current assets, primarily attributable to a decrease in accounts receivable of $13.2 million and a decrease in inventories of $7.4 million. The decrease in accounts receivable is primarily attributable to the $13.4 million decline in sales during the fourth quarter of Fiscal Year 1995. The decrease in inventories is primarily attributable to a $6.4 million increase in inventory market reserves mainly due to the Company's assessment and evaluation of its business strategy as more thoroughly discussed in Note 1 to the Financial Statements included in Item 8. of this Annual Report on Form 10-K. Further as a result of the Bankruptcy Filing and the Company entering into the DIP Facility which expires on October 31, 1996, current liabilities increased approximately $43.3 million in Fiscal Year 1995. 23 Historically, the Company experiences an increase in accounts receivable during the second and third quarters of its fiscal year, due to the seasonal increase in sales which typically occurs in February through July of each year. This seasonal pattern is further influenced by the industry practice of providing coating fabric customers with favorable billing terms (referred to as "dating"), which permit payment 60 days beyond July 1 for invoices billed in January through June. Accounts receivable at October 30, 1994 included $8.2 million of receivables with dating, whereas at October 29, 1995 accounts receivable included $1.7 million of receivables with dating. The Company expects sales with dating terms to be lower in fiscal year 1996 due to the Company limiting such sales (primarily to coating fabric customers) in light of the Company's limited working capital availability. The Company purchases a significant amount of its raw wool inventory from Australia. Since all of the Company's forward purchase commitments for raw wool are denominated in U.S. dollars, there is no actual currency exposure on outstanding contracts. However, future changes in the relative exchange rates between United States and Australian dollars can materially affect the Company's results of operations for financial reporting purposes. Based on the Company's forward purchase commitments and wool market trends, the Company expects wool costs to increase approximately 10% in fiscal year 1996 as compared to Fiscal Year 1995. The Company's assumed discount rate (the "discount rate") used to measure the accumulated benefit obligation for its hourly and salaried pension plans under SFAS No. 87, "Employers' Accounting for Pensions," as of the end of Fiscal Year 1995 was decreased from 8.75% to 7.25% based on the composition of the accumulated benefit obligation and current economic conditions. The Company's hourly pension plan's accumulated benefit obligation exceeds the plan assets at fair value by $1.5 million. As of the end of Fiscal Year 1994, the discount rate was increased from 7.00% to 8.75% based on then prevailing economic conditions. The raising of the discount rate at the end of Fiscal Year 1994 caused the Company's hourly pension plan's accumulated benefit obligation to exceed plan assets at fair value by $0.6 million. During Fiscal Year 1995, the Company increased its accrued additional pension liability in excess of accumulated benefit obligation from $0.9 million to $2.0 million and increased the $0.5 million excess of additional pension liability over unrecognized prior service cost, net of $0.3 million deferred tax benefit charged to shareholders' equity at the end of Fiscal Year 1994, to $2.0 million. Based primarily on the lowering of the discount rate, the Company estimates that net periodic pension cost for both the hourly and salaried pension plans during fiscal year 1996 will be approximately $0.3 million higher than in Fiscal Year 1995. However, changes in the Company's employment base or future changes in the hourly and salaried pension plans could result in actual results for fiscal year 1996 differing from expectations. The Company does not believe that inflation, other than the increase in wool costs, has had a material impact on its business. 24 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report.............................. 26 Balance Sheets as of October 29, 1995 and October 30, 1994...................................... 27 Statements of Operations for the Fifty-Two Weeks Ended October 29, 1995, October 30, 1994 and October 31, 1993...................................... 28 Statements of Cash Flows for the Fifty-Two Weeks Ended October 29, 1995, October 30, 1994 and October 31, 1993...................................... 29 Statements of Shareholders' Equity for the Fifty-Two Weeks Ended October 31, 1993, October 30, 1994 and October 29, 1995..................... 31 Notes to Financial Statements for the Fifty-Two Weeks Ended October 29, 1995, October 30, 1994 and October 31, 1993...................................... 32
25 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Forstmann & Company, Inc. (Debtor-in-Possession): We have audited the accompanying balance sheets of Forstmann & Company, Inc. (Debtor-in-Possession) as of October 29, 1995, and October 30, 1994 and the related statements of operations, shareholders' equity and cash flows for the fifty-two weeks ended October 29, 1995, October 30, 1994 and October 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Forstmann & Company, Inc. at October 29, 1995 and October 30, 1994 and the results of its operations and its cash flows for the fifty-two weeks ended October 29, 1995, October 30, 1994 and October 31, 1993, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 7 to the financial statements, the Company was in violation of substantially all of its debt agreements at October 29, 1995 and has experienced a significant decline in operating results. The Company filed a petition seeking protection under Chapter 11 of the United States Bankruptcy Code on September 22, 1995. Such conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plan concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Atlanta, Georgia January 26, 1996 26
FORSTMANN & COMPANY, INC. (DEBTOR-IN-POSSESSION) - ------------------------------------------------------------------------------------------------ BALANCE SHEETS OCTOBER 29, 1995 AND OCTOBER 30, 1994 NOTES 1995 1994 -------- ------------ ------------ ASSETS CURRENT ASSETS: Cash.................................................... $ 52,000 $ 49,000 Accounts receivable, net of allowance of $2,991,000 and $2,100,000........................ 43,872,000 57,089,000 Current income taxes receivable......................... 9 2,417,000 1,500,000 Inventories............................................. 3 69,470,000 76,881,000 Current deferred tax assets............................. 9 - 4,339,000 Other current assets.................................... 664,000 943,000 ----------- ----------- Total current assets.................................. 116,475,000 140,801,000 Property, plant and equipment, net........................ 4 78,784,000 79,479,000 Other assets.............................................. 5 2,944,000 8,976,000 ------------ ------------ Total................................................. $198,203,000 $229,256,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES NOT SUBJECT TO COMPROMISE: Current maturities of long-term debt.................... 7 $ 61,001,000 $ 2,714,000 Accounts payable........................................ 1,771,000 13,153,000 Accrued liabilities..................................... 6,12 9,048,000 12,272,000 ------------ ------------ Total current liabilities............................. 71,820,000 28,139,000 Long-term debt............................................ 7 25,302,000 155,597,000 Deferred tax liability.................................... 9 - 6,316,000 Accrued additional pension liability in excess of accumulated benefit obligation.............. - 943,000 ------------ ----------- Total liabilities not subject to compromise........... 97,122,000 190,995,000 Liabilities subject to compromise......................... 11 90,759,000 - Commitments and contingencies............................. 12 Redeemable preferred stock subject to compromise, $1.00 par value, 100,000 shares authorized, 56,867.50 and 54,110.8 shares issued and outstanding (aggregate redemption and liquidation value of $100 per share or $5,686,750 and $5,411,080, respectively)............................. 8 2,655,000 2,425,000 SHAREHOLDERS' EQUITY: 2,10,12 Common stock, $.001 par value, 20,000,000 shares authorized, 5,618,799 shares issued and outstanding.............................. 5,619 5,619 Non-voting common stock, $.001 par value, 120,000 shares authorized, nil shares issued and outstanding.............................. - - Additional paid-in capital.............................. 26,564,381 26,602,381 Excess of additional pension liability over unrecognized prior service cost, net of deferred income tax benefit of zero and $343,000................................... (1,956,000) (526,000) Retained earnings (deficit) since November 2, 1992.................................... (16,947,000) 9,754,000 ------------ ------------ Total shareholders' equity.......................... 7,667,000 35,836,000 ------------ ------------ Total............................................... $198,203,000 $229,256,000 ============ ============
See notes to financial statements. 27
FORSTMANN & COMPANY, INC. (DEBTOR-IN-POSSESSION) - -------------------------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS FOR THE FIFTY-TWO WEEKS ENDED OCTOBER 29, 1995, OCTOBER 30, 1994 AND OCTOBER 31, 1993 NOTES 1995 1994 1993 ------------- ------------- ------------- ----------- Net sales.................................. $222,217,000 $237,085,000 $233,365,000 Cost of goods sold......................... 195,894,000 189,233,000 182,347,000 ------------ ------------ ------------ Gross profit............................... 26,323,000 47,852,000 51,018,000 Selling, general and administrative expenses................................. 23,310,000 22,377,000 20,723,000 Provision for uncollectible accounts and notes receivable..................... 2,879,000 2,167,000 2,714,000 Loss (gain) from abandonment, disposal and impairment of machinery and equipment and other assets............... 4 382,000 (109,000) 963,000 ------------ ------------ ---------- Operating income(loss)..................... (248,000) 23,417,000 26,618,000 Interest expense (contractual interest of $20,422,000 for 1995)..................... 7 19,569,000 17,517,000 15,749,000 ------------ ------------ ---------- Income (loss) before reorganization items and income taxes................... (19,817,000) 5,900,000 10,869,000 Reorganization items....................... 15 10,904,000 - - ------------ ------------ ---------- Income (loss) before income taxes.......... (30,721,000) 5,900,000 10,869,000 Income tax provision (benefit)............. 9 (4,250,000) 2,331,000 4,245,000 ------------ ------------- --------- Net income (loss).......................... (26,471,000) 3,569,000 6,624,000 Preferred stock in-kind dividends and accretion to redemption value.................................... 8 (230,000) (230,000) (209,000) ------------ ------------- --------- Income (loss) applicable to common shareholders............................. $(26,701,000) $ 3,339,000 $ 6,415,000 ============ ============ ============ Per share and share information: Income (loss) applicable to common shareholders......................... $ (4.75) $.60 $1.15 ============ ============ ============ Weighted average common shares outstanding.......................... 5,618,799 5,592,022 5,585,014 ============ ============ ============
See notes to financial statements. 28
FORSTMANN & COMPANY, INC. (DEBTOR-IN-POSSESSION) - --------------------------------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS FOR THE FIFTY-TWO WEEKS ENDED OCTOBER 29, 1995, OCTOBER 30, 1994 AND OCTOBER 31, 1993 1995 1994 1993 ------------ ------------ ------------ Net income (loss)................................ $(26,471,000) $ 3,569,000 $ 6,624,000 ------------ ------------ ------------ Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization................ 13,982,000 13,942,000 10,347,000 Write-off of debt premium.................... (3,531,000) - - Write-off of deferred financing costs........ 1,005,000 - - Income tax provision (benefit)............... (4,250,000) 2,331,000 4,245,000 Income tax refunds (payments), net........... 1,014,000 (3,429,000) (1,075,000) Provision for uncollectible accounts and notes receivable....................... 2,879,000 2,167,000 2,714,000 Loss (gain) from abandonment, disposal and impairment of machinery and equipment and other assets................. 8,199,000 (109,000) 963,000 Foreign currency transaction gain............ (2,000) (10,000) (80,000) Changes in current assets and current liabilities, exclusive of quasi- reorganization adjustments: Accounts receivable...................... 10,338,000 (10,071,000) (6,535,000) Inventories.............................. 5,707,000 55,000 (13,776,000) Other current assets..................... 279,000 102,000 (101,000) Accounts payable......................... (11,382,000) (11,427,000) 4,116,000 Accrued liabilities...................... (3,224,000) 1,019,000 (4,044,000) Investment in notes receivable, net.......... (10,000) 161,000 (131,000) Deferred financing costs..................... (572,000) (821,000) (2,898,000) Operating liabilities subject to compromise................................. 32,940,000 - - ------------ ------------ ------------ Total adjustments................................ 53,372,000 (6,090,000) (6,255,000) ------------ ------------ ------------ Net cash provided (used) by operating activities..................... 26,901,000 (2,521,000) 369,000 ------------ ------------ ------------ Cash flows used in investing activities: Investment in property, plant and equipment.................................... (13,729,000) (11,338,000) (14,955,000) Investment in other assets, principally computer information systems................. (1,361,000) (2,054,000) (2,217,000) Proceeds from disposal of machinery and equipment................................ 110,000 185,000 277,000 ------------ ------------ ------------ Net cash used by investing activities ..... (14,980,000) (13,207,000) (16,895,000) ------------ ------------ ------------ Cash flows from financing activities: Net borrowings under DIP Facility.............. 9,434,000 - - Net (repayments) borrowings under GE Capital Facility..................................... (20,070,000) 11,478,000 (9,268,000) Proceeds from the Original Term Loan........... - - 15,000,000 Repayment of the Original Term Loan............ - - (15,000,000) Proceeds from the Term Loan.................... 7,500,000 - - Repayment of the Term Loan..................... (7,500,000) - - Proceeds from sales of Senior Secured Notes.... - 10,000,000 20,000,000 Repayment of Senior Secured Notes.............. - (3,000,000) - Borrowings under the CIT Equipment Facility.... 2,487,000 1,113,000 7,436,000 Repayment of other financing arrangements...... (2,900,000) (3,090,000) (1,641,000) Incentive stock options exercised.............. - 26,000 - Cash paid in connection with Dissenters' Proceeding................................... (869,000) (803,000) - ------------ ------------ ------------ Net cash provided (used) by financing activities................... (11,918,000) 15,724,000 16,527,000 ------------ ------------ ------------
29
FORSTMANN & COMPANY, INC. (DEBTOR-IN-POSSESSION) - --------------------------------------------------------------------------- STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE FIFTY-TWO WEEKS ENDED OCTOBER 29, 1995, OCTOBER 30, 1994 AND OCTOBER 31, 1993 1995 1994 1993 ------------- ------------- ------------- Net increase (decrease) in cash............. 3,000 (4,000) 1,000 Cash at beginning of period................. 49,000 53,000 $ 52,000 ----------- ------------ ------------ Cash at end of period....................... $ 52,000 $ 49,000 $ 53,000 =========== ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for interest.............................. $15,336,000 $ 17,316,000 $ 16,046,000 =========== ============ ============ Cash (received) paid during the period for income taxes, net................. $(1,014,000) $ 3,429,000 $ 1,075,000 =========== ============ ============ Cash paid during the period for professional fees relating to services rendered in connection with the Chapter 11 proceeding........ $ 847,000 $ - $ - =========== ============ ============ Supplemental schedule for non-cash investing and financing activities: Capital lease obligations incurred...... $ - $ 3,641,000 $ - =========== ============ ============ Preferred stock in-kind dividends and accretion to redemption value......... $ 230,000 $ 230,000 $ 209,000 =========== ============ ============ Supplemental schedule of changes in current assets and current liabilities: Accounts receivable trade, net: Decrease (increase) from operations... $10,338,000 $(10,071,000) $ (6,535,000) Provision for uncollectible accounts............................ 2,879,000 1,798,000 2,104,000 ----------- ------------ ------------ Net decrease (increase)............. $13,217,000 $ (8,273,000) $ (4,431,000) =========== ============ ============ Inventories: Decrease (increase) from operations... $ (711,000) $ (235,000) $(13,441,000) Decrease from non-cash barter transaction......................... 1,704,000 - - Increase (decrease) in market reserves............................ 6,418,000 290,000 (335,000) Quasi-reorganization adjustment....... - - 14,781,000 ----------- ------------ ------------ Net decrease........................ $ 7,411,000 $ 55,000 $ 1,005,000 =========== ============ ============ Accrued liabilities: Increase (decrease) from operations... $(3,224,000) $ 1,019,000 $ (4,044,000) Quasi-reorganization adjustments...... - 1,172,000 4,048,000 ----------- ------------ ------------ Net (decrease) increase............. $(3,224,000) $ 2,191,000 $ 4,000 =========== ============ ============
See notes to financial statements. 30
FORSTMANN & COMPANY, INC. (DEBTOR-IN-POSSESSION) - -------------------------------------------------------------------------------------------- STATEMENT OF SHAREHOLDERS' EQUITY FOR THE FIFTY-TWO WEEKS ENDED OCTOBER 31, 1993 AND OCTOBER 30, 1994 AND OCTOBER 29, 1995 Pension Liability Additional Over Prior Retained Total Common Paid-In Service (Deficit) Shareholders' Stock Capital Cost Earnings Equity ---------- ------------- ------------ ------------- -------------- Balance, November 1, 1992.................. $5,585 $ 88,169,415 $ - $(37,092,000) $ 51,083,000 Quasi Reorganization.... - (59,599,000) - 37,092,000 (22,507,000) Excess of additional pension liability over unrecognized prior service cost, net of tax benefit.... - - (1,101,000) - (1,101,000) Income applicable to common shareholders... - - - 6,415,000 6,415,000 ---------- ------------ ----------- ------------ ------------ Balance, October 31, 1993.................. 5,585 28,570,415 (1,101,000) 6,415,000 33,890,000 Adjustments to Quasi Reorganization........ 30 (1,993,660) - - (1,993,630) Adjustments to pension liability over prior service cost.......... - - 575,000 - 575,000 Incentive stock options exercised..... 4 25,626 - - 25,630 Income applicable to common shareholders... - - - 3,339,000 3,339,000 ---------- ------------ ----------- ------------ ------------ Balance, October 30, 1994.................. 5,619 26,602,381 (526,000) 9,754,000 35,836,000 Adjustments to Quasi Reorganization........ - (38,000) - - (38,000) Adjustments to pension liability over prior service cost.......... - - (1,430,000) - (1,430,000) Loss applicable to common shareholders... - - - (26,701,000) (26,701,000) ---------- ------------ ----------- ------------ ------------ Balance, October 29, 1995.................. $5,619 $ 26,564,381 $(1,956,000) $(16,947,000) $ 7,667,000 ========== ============ =========== ============ ============
See notes to financial statements. 31 FORSTMANN & COMPANY, INC. (DEBTOR-IN-POSSESSION) - ------------------------------------------------------------------------ NOTES TO FINANCIAL STATEMENTS FOR THE FIFTY-TWO WEEKS ENDED OCTOBER 29, 1995, OCTOBER 30, 1994 AND OCTOBER 31, 1993 1. NATURE OF BUSINESS AND BANKRUPTCY FILING Forstmann & Company, Inc. (the "Company") is a leading designer, marketer and manufacturer of innovative, high quality woolen, worsted and other fabrics which are used primarily in the production of brand-name and private label apparel for men and women, as well as specialty fabrics for use in billiard and gaming tables, sports caps and career uniforms. A majority (50.4%) of the Company's common stock is owned by Odyssey Partners, L.P. As a result of the continued decline in the Company's results of operations throughout Fiscal Year 1995, on September 22, 1995, the Company filed a petition for protection under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") with the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy Filing"). The decline in the Company's results of operations is principally due to rising wool costs and sluggishness of retail apparel sales and a significant decline in women's outerwear sales, which were partially offset by the sale of fabrics yielding lower profit margins. This resulted in the Company being unable to meet all of its interest payments when such became due. The Company's liquidity and financial position were severely strained during Fiscal Year 1995. Such underlying market conditions are likely to continue into fiscal year 1996. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements, as of October 29, 1995, do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Under Chapter 11, absent authorization of the Bankruptcy Court, efforts to collect on claims against the Company in existence prior to the filing of the petition for protection under the Bankruptcy Code are stayed while the Company continues business operations as debtor-in-possession. Unsecured claims against the Company in existence prior to the Bankruptcy Filing are reflected as "Liabilities Subject to Compromise." See Note 11 to the financial statements. Additional claims (Liabilities Subject to Compromise) may arise or become fixed subsequent to the filing date resulting from rejection of executory contracts, including leases, from the determination by the Court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed and unliquidated amounts and from the determination of unsecured deficiency claims in respect of claims secured by the Company's assets ("Secured Claims"). A successful plan of reorganization may require certain compromises of liabilities (including Secured Claims) that, as of October 29, 1995, are not classified as "Liabilities Subject to Compromise." The Company's ability to compromise Secured Claims without the consent of the holder is subject to greater restrictions than in the case of unsecured claims. As of October 29, 1995, the Company estimates that the amount of Liabilities Subject to Compromise approximates $90.8 million (see Note 11 to financial statements). Parties holding Secured Claims have the right to move the court for relief from the stay, which relief may be granted upon satisfaction of certain statutory requirements. Secured Claims are collateralized by substantially all of the assets of the Company, including, accounts receivable, inventories and property, plant and equipment. The Company received approval from the U.S. Bankruptcy Court to pay or otherwise honor certain of its pre-petition obligations, including employee salaries, wages and benefits. The Company has continued to accrue interest on its secured debt obligations as the Company currently estimates that in most cases the collateral is sufficient to cover the debt and interest portion of scheduled payments. Refer to Note 7 to financial statements for a discussion of the credit arrangements entered into subsequent to the Bankruptcy Filing. One possible resolution to the Company's liquidity and debt leverage problems will involve a conversion of certain existing indebtedness to equity. This resolution might result in an ownership change as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). An ownership change would limit the Company's ability to utilize its net operating loss and certain other carry forward tax credits. Refer to Note 9 to financial statements for a further discussion of income tax matters. Since the Bankruptcy Filing, the Company has been reassessing its business strategy and capital expenditures plans. This process, which began in the Company's Fiscal Year 1995 fourth quarter, will be on-going until the Company successfully develops and implements a plan of reorganization and emerges from bankruptcy. In the course of this process, the Company is significantly reducing its product offerings, manufacturing production levels and capital spending plans (including those for computer information systems). As a result of such events, certain assets of the Company have been rendered surplus or obsolete. Accordingly, the Company has increased its inventory market reserves (see Note 3 to 32 financial statements) and written down certain of its machinery and equipment (see Note 4 to financial statements). Also, the Company has evaluated its computer information systems that were being internally developed, decided to significantly curtail future development of the systems, abandon certain development projects in process, and concluded that the majority of previously capitalized costs will not be recoverable through the Company's future operations (see Note 5 to financial statements). As a plan of reorganization is developed the Company may further conclude that additional market reserves, write downs of machinery and equipment and write downs of other assets are necessary. Accordingly, the Company may recognize significant expenses associated with the development and implementation of a plan of reorganization that are not reflected in these financial statements. Any additional asset impairments or restructuring costs directly related to reorganization proceedings will be reflected as reorganization items in the Company's financial statements in the period the Company becomes committed to plans which impair the valuation of the Company's assets or incurs a restructuring liability. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Debtor-in-Possession - The Company's financial statements have been prepared in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting of Entities in Reorganization Under the Bankruptcy Code". The accompanying financial statements have been prepared on a going concern basis which assumes continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. As a result of the reorganization proceeding, the Company may have to sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in these financial statements. Further, a plan of reorganization could materially change the amounts currently recorded in the financial statements. The financial statements do not give effect to all adjustments to the carrying value of the assets, or amounts and reclassification of liabilities that might be necessary as a result of the bankruptcy proceeding. The appropriateness of using the going concern basis is dependent upon, among other things, confirmation of a plan of reorganization, success of future operations and the ability to generate sufficient cash from operations and financing sources to meet obligations. Fiscal Year - The Company has adopted a fiscal year ending on the Sunday nearest to October 31. The fiscal years ended October 29, 1995, October 30, 1994 and October 31, 1993 comprise fifty-two weeks ("Fiscal Year 1995", "Fiscal Year 1994" and "Fiscal Year 1993", respectively). Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition - Generally, sales are recognized when goods are sold and then shipped to the Company's customers. A portion of such sales is made on extended terms of up to 240 days. At October 29, 1995, $1.7 million of sales made on extended terms were included in accounts receivable under terms of specific sales. When customers, under the terms of specific orders, request that the Company manufacture, invoice and ship goods on a bill and hold basis, the Company recognizes revenue based on the completion date required in the order and actual completion of the manufacturing process. At that time title and risk of ownership passes to the customer. Accounts receivable included bill and hold receivables of $14.5 million at October 29, 1995 and $19.4 million at October 30, 1994. During Fiscal Year 1995, one of the Company's customers accounted for approximately 14.0% of the Company's revenues. No other customer of the Company accounted for 10% or more of the Company's revenues in Fiscal Year 1995. Allowance for Uncollectible Accounts - Based on a review and assessment of the collectibility of aged balances included in accounts receivable, the Company establishes a specific allowance for uncollectible accounts. Additionally, the Company establishes a general allowance for uncollectible accounts based, in part, on historical trends and the state of the economy and its effect on the Company's customers. The Company also establishes allowances for estimated sales returns. The Company grants credit to certain customers, most of which are companies in apparel industries, which industries generally have experienced an economic downturn. The ability of such customers to honor their debts is somewhat dependent upon the apparel business sector. One individual customer's accounts receivable balance represents approximately 19.8% of gross accounts receivable and no other individual customer's accounts receivable balance exceeded 4% of gross accounts receivable at October 29, 1995. 33 Inventories - Inventories are stated at the lower of cost, determined principally by the last-in, first-out ("LIFO") method, or market. Property, Plant and Equipment - Property, plant and equipment is recorded at cost, net of accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets or the lease terms of certain capital lease assets. For income tax purposes, accelerated methods of depreciation are used. Maintenance and repairs are charged to income, and renewals or betterments are capitalized. Deferred Financing Costs - Costs incurred to obtain financing are included as other assets and amortized using the straight-line method over the expected maturities of the related debt. Computer Information Systems - Costs directly associated with the initial purchase, development and implementation of computer information systems are deferred and included as other assets. Such costs are amortized on a straight-line basis over the expected useful life of the systems, principally five years. Ongoing maintenance costs of computer information systems are expensed. Environmental Remediation Liabilities - The Company recognizes environmental remediation liabilities when a loss is probable and can be reasonably estimated. Estimates are developed in consultation with environmental consultants and legal counsel and are periodically revised based on expenditures against established reserves and the availability of additional information. Such liabilities are included on the balance sheet as accrued liabilities and include estimates for legal and other consultation costs. Earnings Per Share - Earnings (loss) per share information is computed using the weighted average common shares outstanding during each year and income applicable to common shareholders. Shares issuable upon the exercise of employee stock options do not have a material dilutive effect on earnings per share for the periods presented. 3. INVENTORIES Inventories consist of the following at October 29, 1995 and October 30, 1994 (in thousands): 1995 1994 -------- -------- Raw materials and supplies........ $10,583 $ 9,873 Work-in-process................... 50,624 53,730 Finished products................. 16,874 15,471 Less market reserves.............. (8,611) (2,193) ------- ------- Total........................... 69,470 76,881 Difference between LIFO carrying value and current replacement cost............................. 7,346 2,558 ------- ------- Current replacement cost.......... $76,816 $79,439 ======= ======= Market reserves are estimated by the Company based, in part, on inventory age as well as estimated usage. During the fourth quarter of Fiscal Year 1995, in conjunction with the Company's assessment and evaluation of its business strategy as more thoroughly discussed in Note 1 to the financial statements, the Company began significantly reducing its product offerings which had the effect of rendering many inventory units as either surplus or obsolete. The Company increased inventory market reserves related to such inventories by $4.3 million. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following at October 29, 1995 and October 30, 1994 (in thousands): 1995 1994 --------- --------- Land............................... $ 1,100 $ 1,100 Buildings.......................... 19,235 16,382 Machinery and equipment............ 86,816 78,657 Construction in progress........... 4,304 3,906 -------- -------- Total............................ 111,455 100,045 Less accumulated depreciation and amortization...................... (32,671) (20,566) -------- -------- Net............................. $ 78,784 $ 79,479 ======== ======== 34 Capital lease assets (principally machinery and equipment) at October 29, 1995 and October 30, 1994 were $5,441,000 and $6,718,000, respectively. Accumulated amortization related to such capital lease assets at October 29, 1995 and October 30, 1994 was $795,000 and $1,297,000, respectively. Depreciation expense and amortization of capital lease assets was $11,870,000 for Fiscal Year 1995, $11,945,000 for Fiscal Year 1994 and $9,685,000 for Fiscal Year 1993. During the fourth quarter of Fiscal Year 1995, in conjunction with the Company's assessment and evaluation of its business strategy, as more thoroughly discussed in Note 1 to the financial statements, certain of the Company's machinery and equipment were identified for abandonment or disposal. Abandoned assets were written off. Assets to be disposed through future sale were written down to estimated fair value less estimated cost to sell. Other assets previously identified for disposal and held for sale were further written down to revised estimates of fair value. Provisions for impairment of assets related to such matters approximated $2.3 million. The Company recognized a $963,000 loss from disposal and impairment of machinery and equipment during Fiscal Year 1993 related to the disposal and writedown of idle equipment to reflect its remaining future economic value. 5. OTHER ASSETS Other assets consist of the following at October 29, 1995 and October 30, 1994 (in thousands): 1995 1994 ------ ------ Computer information systems, net of accumulated amortization of $3,861,000 and $2,640,000........... $ 832 $5,896 Deferred financing costs, net of accumulated amortization of $1,293,000 and $1,512,000........... 1,196 2,961 Other................................ 916 119 ------ ------ Total................................ $2,944 $8,976 ====== ====== During the fourth quarter of Fiscal Year 1995, the Company evaluated its computer information systems that were being internally developed, decided to significantly curtail future development of the system, abandon certain development projects in process, and concluded that the majority of such previously capitalized costs will not be recovered through future operations and, accordingly, wrote off approximately $4.6 million of such deferred software development costs. During the fifty-two week period ended October 29, 1995, the Company exchanged inventories with a net book value of $1.7 million for barter credits that may be used as partial consideration for future goods and services purchased through a barter syndicate. This transaction was recorded based upon the net book value of the inventories and did not give rise to any profit. The Company planned to utilize a significant portion of the barter credits in connection with the Company's capital expenditure plan. The Company has curtailed its capital expenditure plan which resulted in the Company writing down the barter credits by $0.9 million during the fourth quarter of Fiscal Year 1995. Based upon analysis of planned barter credit use, management believes the recorded value of barter credits, after adjustment, is fairly stated. Changes in the Company's business in the future may further impair the economic value of the barter credits to the Company. 35 6. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following at October 29, 1995 and October 30, 1994 (in thousands): 1995 1994 ---- ---- Salaries and wages (including related payroll taxes)......................... $1,484 $ 1,314 Incentive compensation and ERAs.. 171 1,027 Vacation......................... 1,988 2,022 Employee benefit plans........... 1,037 834 Interest on long-term debt....... 1,015 773 Medical insurance premiums....... 1,092 1,540 Environmental remediation........ 357 589 Dissenters' settlement........... - 831 Other............................ 1,904 3,342 ------ ------- Total......................... $9,048 $12,272 ====== ======= See Note 11 to the Financial Statements for accrued liabilities included in liabilities subject to compromise at October 29, 1995. 7. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS Long-term debt consists of the following at October 29, 1995 and October 30, 1994 (in thousands): 1995 1994 --------- --------- GE Capital DIP Facility............. $ 9,434 $ - GE Capital Facility................. 38,626 58,696 Senior Secured Notes................ 27,000 27,000 Subordinated Notes.................. 56,632 56,632 Equipment Facilities................ 7,451 7,082 Capital lease obligations (see Note 12)...................... 3,610 4,572 Other............................... 182 - -------- -------- Total............................. 142,935 153,982 Debt premium - Subordinated Notes... - 4,329 Current portion of long-term debt... (61,001) (2,714) Subordinated Notes included in liabilities subject to compromise.. (56,632) - -------- -------- Long-term debt................... $ 25,302 $155,597 ======== ======== The Company is in default of substantially all of its debt agreements (other than the DIP Facility). All outstanding unsecured debt of the Company has been presented in these financial statements as "Liabilities Subject to Compromise." The Company has obtained debtor-in-possession (DIP) financing from General Electric Capital Corporation ("GE Capital") under a revolving facility which was approved by the Bankruptcy Court (the "DIP Facility"). The DIP Facility provides up to $85 million (which includes a $10.0 million letter of credit facility) under a borrowing base formula, less pre-petition advances and outstanding letters of credit under the Company's then existing GE Capital Facility (hereinafter defined). The DIP Facility expires on October 31, 1996. Secured Claims are collateralized by substantially all of the assets of the Company including accounts receivable, inventories and property, plant and equipment. The Company has continued to accrue interest on its secured debt obligations as management believes that in most cases the collateral securing the secured debt obligations is sufficient to 36 cover the principal and interest portions of scheduled payments on the Company's pre-petition secured debt obligations. To the extent any claim secured by assets of the Company is determined to exceed the value of the asset securing it, such claims will be treated as an unsecured claim and not entitled to interest accruing after the Bankruptcy Filing. Outstanding borrowings (including outstanding letters of credit) under the DIP Facility cannot exceed the sum of (1) 85% of eligible accounts receivable (other than bill and hold receivables), (2) the lesser of (a)$10 million or (b) a percentage (based on aging) of eligible bill and hold accounts receivable, (3) the lesser of (a) 65% of eligible inventory (other than seconds and samples) or (b) 60% of eligible inventory (other than seconds and samples) plus $3.5 million, and (4) the lesser of (a) $3 million or (b) 60% of samples and seconds. The Company's borrowing base is subject to reserves determined by GE Capital in its sole discretion. At October 29, 1995, the Company's loan availability as defined in the DIP Facility, in excess of pre-petition and post-petition advances, and outstanding letters of credit, was approximately $15.0 million. Borrowings under the DIP Facility bear interest, at the Company's option, at a floating rate (which is based on a defined index rate) or a fixed rate (which is based on LIBOR) payable monthly. The floating rate is 1.5% per annum above the index rate, and the fixed rate is 3.0% per annum above LIBOR. At October 29, 1995, the DIP Facility bore interest at the fixed rate of 8.9% per annum through November 30, 1995 and was reset at 8.9% per annum on December 1, 1995 through February 29, 1996. Proceeds from the Company's ordinary operations are first applied to reduce the principal amount of borrowings outstanding under the GE Capital Facility until repaid in full and thereafter are applied to reduce the principal amount of borrowings outstanding under the DIP Facility. Unused portions of the DIP Facility may be borrowed and reborrowed, subject to availability in accordance with the then applicable commitment and borrowing base limitations. Subject to certain exceptions, the DIP Facility restricts, among other things, the incurrence of indebtedness, the sale of assets, the incurrence of liens, the making of certain restricted payments, the making of specified investments, the payment of cash dividends and the making of certain fundamental corporate changes and amendments to the Company's corporate organizational and governance instruments. In addition, the Company is required to satisfy, among other things, certain financial performance criteria, including minimum EBITDA levels and maximum capital expenditure levels. The Company pays GE Capital, for the account of each of the lenders party to the DIP Facility, a fee of 0.5% per annum on the average daily unused portion of the DIP Facility. In addition, the Company paid GE Capital, for its own account, an agency fee of $150,000 per annum and pays certain fees in connection with extending and making available letters of credit. In connection with entering into the DIP Facility, the Company paid GE Capital $100,000 and agreed to pay $325,000 on February 15, 1996 and $125,000 on October 31, 1996. GE Capital Facility - The Company entered into a five-year loan agreement as of October 30, 1992 with GE Capital, as agent and lender, for borrowings up to $100 million (the "GE Capital Facility"). The GE Capital Facility provided revolving loans up to a maximum of $85 million (the "Revolving Line of Credit") (which included a $7.5 million letter of credit facility) and provided a $15 million term loan (the "Original Term Loan"). In January 1995, the GE Capital Facility was amended, subject to loan availability (as defined), to provide a $7.5 million term loan (the "Term Loan"). On January 23, 1995, the Company borrowed $7.5 million under the Term Loan, the proceeds of which were used to repay a portion of outstanding borrowings under the Revolving Line of Credit. As a result of the Company's deteriorating liquidity and financial position during Fiscal Year 1995 the Company was, at various times, not in compliance with certain of its financial covenant requirements under the GE Capital Facility. On June 19, 1995, the GE Capital Facility was amended to, among other things, retroactively lower the financial covenant and provide lower financial covenant requirements under the remaining term of the GE Capital Facility. Such amended financial covenants were based on the Company's estimate of its future operating results and cash flows. In connection with such amendment the Company agreed to repay borrowings outstanding under the Term Loan. On July 1, 1995 the Company repaid $2.5 million of the Term Loan and on September 1, 1995 the Company repaid the remaining borrowings outstanding under the Term Loan. Borrowings under the Revolving Line of Credit were used to repay the Term Loan. The Company's obligations under the GE Capital Facility are secured by liens on substantially all of the Company's assets. 37 Senior Secured Notes - On April 5, 1993, the Company issued an aggregate of $20 million Senior Secured Floating Rate Notes and on March 30, 1994, the Company issued an aggregate of $10 million Senior Secured Floating Rate Notes, all of which are due October 30, 1997 (collectively the "Senior Secured Notes"). The proceeds from the sale of the Senior Secured Notes were used to repay the Original Term Loan and to reduce outstanding borrowings under the Revolving Line of Credit. Borrowings under the Senior Secured Notes bear interest, at the Company's option, at a floating rate (which is based on the prime lending rate, as defined) or a fixed rate (which is based on LIBOR), payable quarterly. The floating rate is 1.75% per annum above the prime lending rate, as defined, and the fixed rate is 3.25% per annum above LIBOR. Since the Bankruptcy Filing, the Company has accrued interest on the Senior Secured Notes at a fixed rate of 9.1875%. The Senior Secured Notes require principal payments of $4.0 million on October 31, 1995, $5.0 million on October 31, 1996 and a final payment of the unpaid principal balance on October 30, 1997. As a result of the Bankruptcy Filing, the Company did not remit the required principal payment of $4.0 million that was due on October 31, 1995. Further, the quarterly interest payment of $633,937 due on October 31, 1995 was not paid. In addition, under the Indenture to the Senior Secured Notes (the "Senior Secured Notes Indenture"), as modified by a Bankruptcy Court order, the net proceeds from the sale or other disposition by the Company of assets (excluding, among other things, the sales of inventory in the ordinary course of business) are required to be deposited with the Senior Secured Notes Indenture trustee. As of October 29, 1995, under the terms of the Senior Secured Notes Indenture, the Company had not deposited any net proceeds with the trustee. The Company's obligations under the Senior Secured Notes are secured by liens on substantially all of the Company's assets. Further, the Senior Secured Notes Indenture requires the Company to satisfy, among other things, certain financial performance criteria, including minimum adjusted tangible net worth levels, fixed charge and interest coverage ratios and minimum EBITDA levels. Since July 31, 1995, the Company has not been in compliance with such financial performance criteria. Subordinated Notes - On April 20, 1989, through an underwritten public offering, the Company sold $100 million of 14-3/4% Senior Subordinated Notes due April 15, 1999 (the "14-3/4% Notes") (effective rate 15%). The Subordinated Notes are subordinated to all existing and future senior indebtedness (as defined) of the Company. The Subordinated Notes Indenture limits, subject to certain financial tests, the incurrence of additional senior indebtedness and prohibits the incurrence of any indebtedness senior to the Subordinated Notes that is subordinated to the Company's then existing senior indebtedness. The Subordinated Notes Indenture contains restrictions relating to payment of dividends, the repurchase of capital stock and the making of certain other restricted payments, certain transactions with affiliates and subsidiaries, and certain mergers, consolidations and sales of assets. In addition, the Subordinated Notes Indenture requires the Company to make an offer to purchase (1) a portion of the Subordinated Notes if (a) the Company's adjusted tangible net worth (as defined) falls below $15 million at the end of any two consecutive fiscal quarters or (b) the Company consummates an asset sale (as defined) at certain times or (2) all of the Subordinated Notes if a change of control (as defined) occurs. In fiscal year 1992, the Company acquired, and did not retire or cancel, $46,240,100 aggregate face amount of the Subordinated Notes. The Company used $2,875,000 of such Subordinated Notes to satisfy a January 31, 1993 mandatory redemption required in the Subordinated Notes Indenture. The Company is required to redeem on April 15, 1998, $50.0 million of the aggregate face amount of the Subordinated Notes at a redemption price equal to par, plus accrued interest to the redemption date. The remaining Subordinated Notes are due on April 15, 1999. The Company may use the remaining $43,365,100 of the 14-3/4% Notes acquired in 1992 to satisfy partially the April 15, 1998 mandatory redemption required in the Subordinated Notes Indenture. As a result of the Quasi Reorganization (hereinafter defined, see Note 14), the Subordinated Notes were fair valued, which, for financial reporting purposes, resulted in the elimination of the previously existing deferred interest payable and debt discount, the creation of a debt premium of $5,663,000 and an adjustment in the effective interest rate on the outstanding Subordinated Notes to 12.43% per annum. As a result of the Bankruptcy Filing, the Company wrote off $3.5 million of the unamortized debt premium related to the Subordinated Notes. The Company did not remit the semi-annual interest payment of $4,177,000 due on October 15, 1995 to holders of the Subordinated Notes. Through the date of the 38 Bankruptcy Filing, the Company had accrued $3.7 million in interest associated with the Subordinated Notes. Such amount is included in Liabilities Subject to Compromise at October 29, 1995. Further, the Company is no longer accruing interest on the Subordinated Notes as such Subordinated Notes are not collateralized. Equipment Facilities - The Company is a party to a loan and security agreement (the "CIT Equipment Facility") with the CIT Group/Equipment Financing, Inc. ("CIT") which provides financing for the acquisition of, and to refinance borrowings incurred to acquire various textile machinery and equipment. Pursuant to the CIT Equipment Facility, commencing on December 27, 1991 and through December 31, 1992, the Company borrowed an aggregate of $4.5 million at interest rates ranging from 7.86% to 8.61% per annum. On August 2, 1993, the CIT Equipment Facility was amended to permit up to four additional loans not to exceed an aggregate of $6.0 million with the commitment period ending on January 31, 1994. Through October 30, 1994, the Company borrowed an additional $6.0 million at interest rates ranging from 7.36% to 7.75% per annum. On December 22, 1994, the CIT Equipment Facility was further amended to permit up to two additional loans not to exceed an aggregate of $5.0 million with the commitment period ending on July 31, 1995. On December 22, 1994, the Company borrowed $2.5 million at an interest rate of 10.58%. As a result of the Company's deteriorating liquidity and financial position during Fiscal Year 1995, the Company, at various times, was not in compliance with certain of its financial covenant requirements under the CIT Equipment Facility. On June 14, 1995, the CIT Equipment Facility was amended to, among other things, retroactively lower the financial covenant requirements remaining under the CIT Equipment Facility. Effective as of April 30, 1995, the commitment to provide the additional borrowing under the CIT Equipment Facility was terminated. At October 29, 1995, an aggregate of $7.5 million was outstanding under the CIT Equipment Facility. Each loan under the CIT Equipment Facility is a five-year purchase money loan, secured by a first (and only) perfected security interest in the equipment, and is payable in 60 consecutive installments of principal plus interest, payable monthly in arrears. The Company was required to provide CIT with an irrevocable letter of credit in an amount equal to 25% of the original principal amount of each additional loan made under the August 2, 1993 amendment. At the Bankruptcy Filing date the Company owed CIT $7.7 million in principal and accrued interest and had issued a $1.5 million letter of credit payable to CIT. Since October 29, 1995 and through January 2, 1996 CIT has drawn $0.9 million to satisfy principal and interest due under the CIT Equipment Facility. Aggregate Maturities - Absent the Bankruptcy Filing and covenant defaults under the Company's various financing agreements, at October 29, 1995, aggregate long- term debt maturities excluding capital lease obligations (see Note 11), are as follows (in thousands): Fiscal Year Amount ------------- -------- 1996................................. $11,724 1997................................. 20,460 1998................................. 8,238 1999................................. 50,578 2000................................. 83 ------- Total................................ $91,083 ======= 8. REDEEMABLE PREFERRED STOCK The Company's senior preferred stock, with a dividend rate of 5% per annum, is non-voting, except in limited circumstances, and ranks senior to any subsequently issued class or series of preferred stock. The Company is prohibited from paying cash dividends on the senior preferred stock under its existing financial arrangements (see Note 7 to financial statements), except that the Company may, at its option, pay such dividends through the issuance of additional shares of 39 senior preferred stock with an aggregate liquidation preference equal to the dollar value of the required dividend. The senior preferred stock, plus accumulated unpaid dividends, is mandatorily redeemable on December 15, 2010 (and earlier under certain circumstances upon a change in control (as defined)) at a price equal to the liquidation preference thereof. In connection with the Company's Quasi Reorganization, the senior preferred stock was fair valued. The fair valuation resulted in an effective dividend rate of 10.11% per annum. As a result of the Bankruptcy Filing, the Company is no longer accruing the dividend due under the redeemable preferred stock and accretion of the recorded balance to redemption value. The redeemable preferred stock is subject to compromise in the Bankruptcy Filing. 9. INCOME TAXES The provision (benefit) for income taxes is as follows (in thousands): 1995 1994 1993 -------- ------ ------ Current............................ $(1,930) $1,759 $ 624 Deferred........................... (2,320) 572 3,621 ------- ------ ------ Total............................. $(4,250) $2,331 $4,245 ======= ====== ====== A reconciliation between federal income taxes at the statutory rate and the Company's income tax provision is as follows: 1995 1994 1993 -------- ------ ------ Federal statutory tax rate.......... (35.00)% 35.00% 34.00% State income taxes, net of federal benefit.......................... (4.50) 4.50 4.50 Valuation allowance................. 25.14 Other............................... .53 .01 .56 ------- ----- ----- Income tax provision................ (13.83)% 39.51% 39.06% ======= ====== ===== Recognition of the income tax benefit in Fiscal Year 1995 was limited to the amount of its net operating loss the Company can carry back. To the extent the Company had net deferred tax assets at October 29, 1995 the Company during Fiscal Year 1995 established a valuation allowance to reduce such net deferred tax assets to zero. The corresponding change to increase the Valuation allowance reduced the Company's 1995 income tax benefit. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax liability at October 29, 1995 and October 30, 1994 are as follows (in thousands): 1995 1994 --------- --------- Deferred tax liabilities: Differences between book and tax basis of property, plant and equipment .............................. $ 9,971 $ 9,922 Deferred interest payable............ 1,417 1,742 Other................................ 27 379 -------- -------- Total................................... 11,415 12,043 -------- -------- Deferred tax assets: Operating loss carryforwards ........... (10,187) (6,126) Alternative minimum tax carryforwards... (846) (516) Difference between book and tax basis of computer information systems....... (1,308) (379) Accrued Vacation........................ (785) (799) Allowance for uncollectible accounts.... (1,181) (830) Inventories.............................. (5,671) (800) Long-term debt.......................... - (1,710) Other................................... (3,499) (2,472) -------- -------- Total................................... (23,477) (13,632) Valuation allowance..................... 12,062 3,566 -------- -------- Net deferred tax liability.............. $ - $ 1,977 ======== ======== 40 At October 29, 1995, the Company had cumulative net operating loss carryforwards for federal income tax purposes of approximately $26 million, of which approximately $18 million is available to offset future taxable income as discussed below. For federal income tax purposes, net operating loss carryforwards begin to expire in the year 2002. As a result of a recapitalization in fiscal year 1992, the Company underwent an ownership change as defined in the Internal Revenue Code. This ownership change limits the Company's ability to utilize its net operating loss carryforwards. One possible resolution to the Company's current liquidity and debt leverage problems would involve a conversion of certain existing indebtedness to equity. This resolution might result in an ownership change as defined in Section 382 of the Internal Revenue Code, as amended. An ownership change would further limit the Company's ability to utilize its net operating loss and certain other carry-forward tax credits. At October 29, 1995, the Company established a valuation allowance to reduce its net deferred tax assets to zero based on a more likely than not assessment of recoverability. 10. EMPLOYEE BENEFIT PLANS The Company has established and presently maintains qualified pension plans and qualified and non-qualified profit sharing and savings plans covering eligible hourly and salaried employees. The qualified noncontributory defined benefit pension plans cover substantially all salaried and hourly employees. Pension plan assets consist primarily of common stocks, bonds and United States government securities. The plans provide pension benefits that are determined by years of service and for salaried plan participants are based on the plan participants' average compensation for the last five years of service and for hourly plan participants are based on the plan's applicable hourly rate for each specific participant's year of service. The Company's funding policy is to make the annual contribution required by applicable regulations and recommended by its actuary. Net periodic pension cost for the periods indicated include the following components at October 29, 1995, October 30, 1994 and October 31, 1993, (in thousands, except assumption percentages):
1995 1994 1993 ------------------- ------------------- ------------------ Hourly Salaried Hourly Salaried Hourly Salaried Pension Pension Pension Pension Pension Pension Plan Plan Plan Plan Plan Plan -------- --------- -------- --------- -------- --------- Service cost............. $ 489 $ 683 $ 568 $ 878 $ 413 $ 563 Interest cost............ 591 539 532 476 463 379 Return on plan assets.... (489) (434) (390) (356) (393) (339) ----- ----- ----- ----- ----- ----- Net periodic pension cost................... $ 591 $ 788 $ 710 $ 998 $ 483 $ 603 ===== ===== ===== ===== ===== ===== Assumptions used in the accounting are: Discount rates........... 7.25% 7.25% 8.75% 8.75% 7.00% 7.00% Rate of increase in compensation levels.... - 5.50% - 5.50% - 5.50% Expected long-term rate of return on assets.... 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
41 The following schedule sets forth the funded status of the hourly and salaried pension plans and the plan assets (accrued pension costs) included in the Company's balance sheets at October 29, 1995 and October 30, 1994, respectively (in thousands):
1995 1994 ---------------- ------------------ Hourly Salaried Hourly Salaried Pension Pension Pension Pension Plan Plan Plan Plan -------- --------- -------- --------- Actuarial present value of pension obligation: Vested....................... $(8,674) $(6,146) $(6,184) $(4,945) Nonvested.................... (607) (528) (617) (327) ------- ------- ------- ------- Accumulated benefit obligation.. (9,281) (6,674) (6,801) (5,272) Effects of projected future compensation levels........... - (1,849) - (907) ------- ------- ------- ------- Projected benefit obligation.... (9,281) (8,523) (6,801) (6,179) Plan assets at fair value....... 7,800 6,438 6,224 5,325 Unrecognized net loss (gain).... 2,011 522 943 (242) ------- ------- ------- ------- Plan assets (accrued pension costs) included in balance sheet......................... $ 530 $(1,563) $ 366 $(1,096) ======= ======= ======= =======
The Company's assumed discount rate ("discount rate") used to measure the accumulated benefit obligation for its hourly and salaried pension plans as of the end of Fiscal Year 1995 was decreased from 8.75% to 7.25% based on the composition of the accumulated benefit obligation and current economic conditions. The Company's hourly pension plan benefit obligation exceeds the plan assets at fair value at the end of Fiscal Year 1995 by $1,481,000. During Fiscal Year 1995, the Company increased its accrued additional pension liability in excess of accumulated benefit obligation from $943,000 to $2,025,000 and increased the $526,000 excess of additional pension liability over unrecognized prior service cost, net of $343,000 deferred tax benefit charged to shareholders' equity at the end of Fiscal Year 1994 to $1,956,000 at the end of Fiscal Year 1995. The Company has a qualified salaried employees' savings, investment and profit sharing plan under Section 401(k) of the Internal Revenue Code (the "Qualified Plan"). The Company has adopted a non-qualified salaried employees' savings, investment and profit sharing plan covering certain employees not covered under the Qualified Plan. On September 18, 1992, the Company adopted the Forstmann & Company, Inc. Common Stock Incentive Plan, as subsequently amended (the "Option Plan"), for key employees of the Company. Through October 29, 1995 the Company's shareholders had reserved 950,000 shares for issuance by the Company under the Option Plan. Options granted under the Option Plan may be either incentive stock options ("ISOs"), which are intended to meet the requirements of Section 422 of the Internal Revenue Code, or non-qualified stock options ("NSOs"). The Compensation Committee of the Company's Board of Directors may grant under the Option Plan (1) ISOs at an exercise price per share which is not less than the fair market value (as defined) of the common stock at the date of grant and (2) NSOs at an exercise price not less than $.001 per share. The Option Plan further provides that the maximum period in which options may be exercised will be determined by the Compensation Committee, except that ISOs may not be exercised after the expiration of ten years from the date of grant (five years in the case of an optionee who is a 10% shareholder). The Option Plan requires that ISOs terminate on the date the optionee's employment with the Company terminates, except in the case of death, disability, termination of employment without cause or a change of control (as defined) of the Company, as determined by the Compensation Committee. Options are non-transferable, except by will or by the laws of descent and distribution, and may be exercised upon the payment of the option price in cash or any other form of consideration acceptable to the Compensation Committee. 42 The following summarizes stock option activity: 1995 1994 ---- ---- Shares under option at beginning of fiscal year.................. 241,268 247,300 Granted........................... 225,000 - Exercised......................... - (3,797) Terminated........................ (44,967) (2,235) ------- -------- Shares under option at end of fiscal year..................... 421,301 241,268 ======= ======= Options exercisable at end of fiscal year..................... 172,274 158,928 ======= ======= Options available for future grant........................... 524,902 454,935 ======= ======= Option prices per share: Granted........................... $ 8.50 $ - Exercised......................... $ - $ 6.75 Outstanding at end of fiscal year..................... $6.75-$9.00 $6.75-$9.00 Five senior officers of the Company were granted equity referenced deferred incentive awards ("ERAs") on March 4, 1992, which generally vest three years after grant and are exercisable only if, after vesting, the Company's common stock maintains a market price of at least $9.00 per share for a continuous period of 30 days provided that such event occurs before March 4, 1998. Upon exercise, the ERAs have a value of $9.00, multiplied by the number of shares covered by the senior officer's ISOs, thus permitting the officers to be reimbursed, on a pre-tax basis, for the exercise price of their ISOs. The senior officers will be entitled to exercise their ERAs even if they determine not to exercise their ISOs. As described more fully in Note 11 to the financial statements, on August 16, 1995, the Company's former Chairman of the Board, President and Chief Executive Officer (the "Executive Officer") entered into a severance agreement and resigned from the Company. Under the terms of the agreement, the Company agreed to pay certain vested but unearned ERAs which he would have been entitled to under his employment agreement with the Company if he had been dismissed without "cause" as defined therein. The value of his ERAs was fully accrued by the Company as of March 4, 1995 and, as a result of the Bankruptcy Filing has been included in "Liabilities Subject to Compromise". Based on management's assessment of possible resolutions to the Company's liquidity and debt leverage problems, the remaining accrued value of the ERAs applicable to other participants ($450,000) was reversed during the fourth quarter of Fiscal Year 1995 and the resulting gain is included in reorganization items (see Note 15 to financial statements). On December 8, 1992, the Compensation Committee approved a supplemental retirement benefit plan (the "SERP") to provide additional retirement benefits to senior officers of the Company. The SERP provides supplemental retirement income benefits, supplemental welfare benefit coverage and death benefits to senior officers who have been selected by the Compensation Committee. The level of benefits a participant may receive depends upon the participant's accrued or projected benefits under the Company's tax-qualified pension plan, the participant's length of service with the Company and the circumstances under which the participant retires. If a participant is terminated from employment without cause or after a change in control (as defined), the participant will receive the same benefits which would have been provided by the SERP if the participant continued in the Company's employ until age 62. As of October 29, 1995, $149,000 of contributions have been made to the SERP. During Fiscal Year 1995, as a result of the resignation of certain participants in the SERP, a $37,000 gain was recognized in connection with the SERP and during Fiscal Year 1994 and 1993, $128,000 and $64,000, respectively, was expensed. Effective January 31, 1996, the Company's Board of Directors ceased future benefit accruals and terminated the SERP. As a result of the Bankruptcy Filing, the accrued amount due the SERP participants has been included in Liabilities Subject to Compromise. Contributions to the SERP were made to a grantor or trust as defined by the Sections 671-677 of the Internal Revenue Code, commonly known as a "rabbi trust." Under bankruptcy law, the assets of a rabbi trust are treated as general assets of the Company and can be used to satisfy the Company's on-going obligations. 43 11. LIABILITIES SUBJECT TO COMPROMISE Liabilities subject to compromise consist of: 1995 ---- Subordinated Notes, including accrued pre-petition interest.................................... $60,330 Trade accounts payable..................................... 22,808 Priority tax claim......................................... 1,008 Accrued severance.......................................... 1,498 Deferred rental and other lease obligations.............................................. 2,781 Accrued additional pension liability in excess of accumulated benefit obligation.... 2,025 Other...................................................... 309 ------- Total.................................................... $90,759 ======= On August 16, 1995, the Company's former Chairman of the Board, President and Chief Executive Officer (the "Executive Officer") entered into a severance agreement and resigned from the Company. The agreement entitled the Executive Officer to a continuation of existing salary and certain other benefits for a period of two years from the date of separation from the Company and grants the Executive Officer title to certain of the Company's assets in the Executive Officer's possession. In addition, under the agreement, the Company agreed to pay certain vested but unearned ERAs which he would have been entitled to under his employment agreement with the Company if he had been dismissed without "cause" as defined therein. The value of the ERAs was fully accrued by the Company as of March 4, 1995. In connection with the severance agreement, the Company recognized $0.7 million of expense during the fourth quarter of Fiscal Year 1995. Unsecured claims against the Company in existence prior to the Bankruptcy Filing are included in "Liabilities Subject to Compromise." Additional claims (Liabilities Subject to Compromise) may arise or become fixed subsequent to the filing date resulting from rejection of executory contracts, including leases, from the determination by the Court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed and unliquidated amounts and from the determination of unsecured deficiency claims in respect of claims secured by the Company's assets. Consequently, the amount included in the balance sheet as Liabilities Subject to Compromise may be subject to further adjustments. A plan of reorganization may require certain compromise of liabilities that, as of October 29, 1995, are not classified as Liabilities Subject to Compromise. 12. COMMITMENTS AND CONTINGENCIES Lease Commitments - Aggregate future minimum lease commitments under operating leases and capital leases with an initial or remaining non-cancelable term in excess of one year, together with the present value of the minimum capital lease payments at October 29, 1995, are as follows (in thousands): Operating Capital Fiscal Year Leases Leases - ----------- --------- ------- 1996................................ $ 2,639 $1,384 1997................................ 2,743 1,061 1998................................ 2,591 942 1999................................ 2,530 889 2000................................ 2,347 119 Thereafter.......................... 20,254 - ------- ------ Total minimum lease payments........ $33,104 $4,395 ======= Less amount representing interest.. 785 ------ Present value of minimum lease payments.......................... 3,610 Less current portion of capital lease obligations................. 1,036 ------ Long-term portion of capital lease obligations................. $ 2,574 ======= 44 Rental expense under operating leases was $3.1 million for Fiscal Year 1995 and $2.2 million for Fiscal Year 1994 and Fiscal Year 1993. The Company was unable to negotiate a favorable extension or renewal of its corporate and marketing lease which expires in October 1996 (the "Previous Lease") and on January 31, 1995, the Company entered into a twenty (20) year lease for office space with a new landlord (the "New Lease"). Concurrent with the consummation of the New Lease, the landlord and the Company entered into a takeover agreement, effective August 1, 1995, whereby the landlord agreed to take over the Company's remaining obligations under the Previous Lease. Pursuant to the accounting rules for leases, the Company recognized a loss of $0.6 million during Fiscal Year 1995 for the estimated economic loss in the Previous Lease assumed by the new landlord.. Additionally, during Fiscal Year 1995, the Company incurred accelerated amortization on leasehold improvements associated with the Previous Lease. Under the terms of the New Lease, the Company's rental payments will commence January 1, 1996 and future minimum rental payments, on a calendar year basis, will be $1.6 million per year through 2015. Such minimum rental payments will be adjusted periodically, subject to certain maximum limitations, based on changes in the Consumer Price Index (as defined). The Company has incurred approximately $3.9 million in leasehold improvements and related fees and expenses, of which the landlord has contributed approximately $1.4 million. Under the terms of the New Lease, $0.5 million in landlord contributions is due the Company when the Company remits outstanding payments due to its construction related vendors. As a result of the Bankruptcy Filing, $0.7 million has not been paid to construction related vendors and is included in "Liabilities Subject to Compromise". On December 27, 1995, the New Lease was amended to, among other things, permanently reduce the square footage under the lease thereby reducing future rental payments by approximately $0.5 million per year. In connection with entering into the amendment, $255,000 of capitalized leasehold improvements and related fees and expenses will be written off during the first quarter of fiscal year 1996. License & Royalty Agreements - In July 1992, the Company formed its Forstmann International division and entered into a licensing, technical information and consulting arrangement with Compagnia Tessile, S.p.A., an Italian corporation, and its affiliate (collectively "Carpini"). Under the arrangement, the Company had the exclusive right to manufacture "Carpini/(R)/ USA for Forstmann International" fabrics for women's and men's apparel for distribution and sale in the United States, Canada and Mexico for an initial period through December 31, 1997. The Company also had the right to acquire certain technical information. In consideration of the licensing and consulting arrangement, the Company had agreed to pay Carpini an annual royalty and guaranteed minimum fee. Additionally, the Company was required to pay Carpini a sales fee equal to five percent (5%) of annual net sales of "Carpini USA" fabrics, after deducting the annual guaranteed minimum fee. Further, the arrangement permitted the Company to purchase certain fabrics manufactured by Carpini which could be resold by the Company in the United States and Canada. In connection with entering into the arrangement, the Company established letters of credit payable to Carpini in an aggregate of $1.0 million. On December 22, 1995, through the Bankruptcy Court, the Company rejected all agreements under the Carpini arrangement except for a letter agreement which permits the Company to purchase certain fabrics manufactured by Carpini which can be resold by the Company in the United States and Canada. Since the Bankruptcy Filing, Carpini has not shipped any fabrics manufactured by Carpini as provided for in the letter of agreement. Under the terms of the arrangement and letters of credit, Carpini subsequently drew all amounts outstanding under the letters of credit as reimbursement for defaulted royalty and guaranteed minimum fee and liquidated damages. The $0.7 million in excess of the royalty and guaranteed minimum fee due as of December 31, 1995 will be expensed as a reorganization item in the Company's first quarter of fiscal year 1996. Purchase Commitments - In the ordinary course of business, the Company has significant purchase orders for raw wool outstanding, which generally require the placement of an order six to nine months prior to delivery. Additionally, at October 29, 1995 the Company had outstanding commitments to purchase machinery and equipment with an approximate value of $2.9 million. As a result of the Bankruptcy Filing, the Company's capital expenditure program has been curtailed and most open purchase orders are not being honored by the Company. At the date of the Bankruptcy Filing, the Company owed approximately $0.9 million for machinery and equipment purchased but not yet paid. Such amount is included in liabilities subject to compromise. Letters of Credit - At October 29, 1995, the Company had outstanding letters of credit aggregating $5.4 million. 45 Litigation - The Company is a party to legal actions arising out of the ordinary course of business. In the opinion of management, after consultation with counsel, other than environmental matters, the resolution of these claims will not have a material adverse effect on the financial position or results of operations of the Company. Environmental - By the nature of its operations, the Company is subject to various governmental environmental regulations and occasionally has been subject to proceedings and orders pertaining to emissions into the environment. During fiscal year 1988, the Company became aware of accidental releases of certain chemicals into the environment. At that time, the Company accrued environmental remediation liabilities for its estimate of the necessary remediation costs to be incurred relating to the releases. Pursuant to the Georgia Hazardous Site Response Act (the "Response Act"), property owners in Georgia were required to notify the Environmental Protection Division of the Georgia Department of Natural Resources (the "EPD") of known releases of regulated substances on their properties above certain levels by March 22, 1994. Pursuant to the Response Act, the Company notified the EPD of two historical releases at the Company's Dublin, Georgia facility, one relating to the presence of trichloroethylene at the site (the "TCE Site") and one relating to another constituent near the southern property boundary. Based upon the Company's March 1994 notification, the EPD determined that a release exceeding a reportable quantity had occurred at those two sites. As a result, the two sites have been listed on the Georgia Hazardous Site Inventory ("HSI"), which currently consists of over 300 other sites. In January 1995, the EPD notified the Company that it is a responsible party, and has informed the Company that, pursuant to the Response Act, the Company is required to submit a compliance status report and compliance status certification with respect to the two sites. The EPD also informed the Company of its obligation to identify all other potentially responsible parties, and, in compliance therewith, on February 24, 1995, the Company identified the prior owner and operator (J.P. Stevens) of the Company's Dublin facility. On June 29, 1995, the Company notified the EPD of a possible release of a hazardous substance at the Company-owned site (previously owned by J.P. Stevens & Co., Inc., ("J.P. Stevens") where various waste materials were reportedly disposed and burned (the "Burn Area"). The Company purchased the facility in 1986 and has not disposed of or burned such waste materials at the Burn Area. By letter of July 14, 1995, the EPD notified the Company that the two sites that the EPD has previously placed on the HSI had been designated as "Class I" sites needing corrective action. The letter required the Company to file a deed notice that the sites were on the HSI and needed corrective action. Included with this letter was a proposed consent order. The Company and the EPD tried to negotiate a mutually agreeable consent order regarding the two sites, but those negotiations were not successful. On December 29, 1995, the EPD issued separate administrative orders to the Company and J.P. Stevens & Co, Inc., which related to the two sites at the Company's Dublin Facility. The orders require the Company and J.P. Stevens to submit a compliance status report and compliance status certification within 120 days from December 29 (i.e., by April 27, 1996) to the EPD that includes, among other things, a description of the release, including its nature and extent, and suspected or known source, quantity and date of the release. Based on the Company's evaluation of the administrative order and consultation with outside environmental consultants, the Company believes that the $0.4 million accrued environmental costs at October 29, 1995 covers the Company's known and probable responsibilities and costs expected to be incurred relative to the two sites. However, subsequent action by the EPD or changes in laws may result in the Company having to re-evaluate its accrual for environmental costs associated with the two sites which may result in the environmental accrual being increased. The EPD's letters of December 29, 1995, also informed the Company and J.P. Stevens that a release exceeding a reportable quantity had occurred in the Burn Area and that the Burn Area was being listed on the HSI. Both Forstmann and J.P. Stevens were requested to submit a compliance status report ("CSR") and compliance status certification for the Burn Area by April 11, 1996. Preparation of a CSR would first require completion of a remediation investigation of the Burn Area, which will be performed in 1996. The extent and scope of such remediation investigation has not been determined and the cost can not currently be estimated. The two companies responded separately to the EPD indicating their belief that the April 11, 1996 due date is unrealistic. The Company requested 330 days for submittal of the CSR. To date, the EPD has not responded to the Company's request. 46 After completion of the remediation investigation, the Company will be able to estimate the expected future costs associated with the Burn Area. Based on previous experience with environmental issues at the Company's facilities, management believes that environmental costs associated with the Burn Area may be material and may have a material adverse effect on the Companies liquidity and financial position. The Company has been informed that EPD may require demonstration of financial assurance upon the conclusion of the Company's Bankruptcy Filing. Dissenters' Proceeding - As required under Georgia Statute O.C.G.A. (S) 14-2-1330, the Company commenced, on July 10, 1992, a civil action against: Resolution Trust Corporation as receiver for Columbia Savings & Loan Association, F.A. (the "RTC"); James E. Kjorlien; Gary M. Smith; Grace Brothers, Ltd.; The Henley Group; Randall D. Smith, Jeffrey A. Smith and Russell B. Smith, as Trustees for Lake Trust dtd 9/4/91; (the "Non-RTC defendants") and the record owners of the shares of the Non-RTC defendants (the "Dissenters' Proceeding"). The RTC and Non-RTC defendants were record owners or beneficial holders of an aggregate of 1,473,562 shares of the Company's then existing voting and non- voting common stock who dissented (the "Pre-Merger Stock") from a merger between the Company and an affiliated Company. Under Georgia law, holders of the outstanding shares of Pre-Merger Stock who were deemed to have dissented from the merger became entitled to payment of the "fair value" of their Pre-Merger Stock, determined as of a time immediately before consummation of the merger plus interest on that amount from the date of the merger. In September 1994, the Company settled the claims of the RTC in exchange for payment by the Company of $475,000 and the issuance of 30,000 shares of the Company's common stock. In December 1994, in settlement of the remaining claims, the Company paid the Non-RTC defendants $365,000. The action has been dismissed and no claims remain pending in the Dissenters' Proceeding. Total costs of $1,788,000, including legal fees to settle the Dissenters' Proceeding, were charged to additional paid-in capital during Fiscal Year 1994 in accordance with the principles of quasi-reorganization accounting (see Note 14 to financial statements). 13. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards ("SFAS") No. 107, "Fair Value of Financial Instruments", requires that the fair value of all financial instruments be estimated and compared to the carrying amount of such financial instruments as of the balance sheet date. As a result of the Company's Bankruptcy Filing, the fair value of most of the Company's financial instruments, other than cash, accounts receivable, accounts payable, Senior Secured Notes and the DIP Facility, have been compromised or impaired. Possible resolutions to the Company's liquidity and debt leverage problems and emergence from bankruptcy may involve the conversion of certain of the Company's existing indebtedness to equity. In managements' opinion, until a plan of reorganization is developed, accepted by the Company's creditors and the Company emerges from bankruptcy, the fair value of the Company's financial instruments, other than cash, accounts receivable, accounts payable and the DIP Facility is not reasonably estimatable. Accordingly, the Company has not attempted to fair value such financial instruments whose value might have been compromised or impaired by the Bankruptcy Filing. The Company believes that the carrying amount of cash, accounts receivable, accounts payable, Senior Securied Notes and DIP Facility is a reasonable estimate of their fair value. 14. QUASI REORGANIZATION The Company, with approval from its Board of Directors, revalued its assets and liabilities to fair value as of the beginning of Fiscal Year 1993 pursuant to the principles of quasi-reorganization accounting (the "Quasi Reorganization"). The Quasi Reorganization fair value adjustments recorded during Fiscal Year 1993 resulted in a write-down of the Company's net assets of $22,507,000 that was charged to the Company's retained deficit account. Subsequent to the fair value adjustments, the balance in the Company's retained deficit account of $59,599,000 was eliminated against the Company's additional paid-in capital account. At the effective date of the Quasi Reorganization, the Company had certain unresolved contingencies related to specific environmental matters and the Dissenters' Proceeding (see Note 12). In accordance with the principles of quasi-reorganization accounting, the difference between the actual costs subsequently incurred to resolve these matters and the liabilities recorded at the time of the Quasi Reorganization will be charged or credited to additional paid-in capital, as appropriate. During Fiscal Year 1995, $38,000 related to the Dissenters' Proceeding and during Fiscal Year 1994, $206,000 (net of income taxes) and $1,788,000 related to the environmental matters and Dissenters' Proceeding, respectively were charged to additional paid-in capital as adjustments to the amounts initially recorded in the Quasi Reorganization. 47 15. REORGANIZATION ITEMS In accordance with SOP 90-7, professional fees, asset impairments and restructuring charges directly related to the Bankruptcy Filing and related reorganization proceedings have been segregated from normal operations during Fiscal Year 1995 and consists of (in thousands): 1995 --------- Professional fees............................ $ 1,234 Write off of deferred financing cost and expense and other financing fees incurred.............................. 1,305 Write off of debt premium associated with Subordinated Notes..................... (3,531) Impairment of assets (See Notes 3, 4 and 5).. 12,156 Other........................................ (260) ------- Total....................................... $10,904 ======= 16. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for Fiscal Year 1995 and Fiscal Year 1994 are summarized as follows (in thousands, except per share information): Fiscal Quarter --------------------------------------- First Second Third Fourth -------- ------- -------- --------- Fiscal Year 1995 - ---------------- Net sales.................... $43,527 $69,399 $68,608 $ 40,683 Gross profit (loss).......... 6,903 11,574 9,083 (1,237) Reorganization items......... - - - 10,904 Income (loss) applicable to common shareholders......... (1,950) 449 (2,730) (22,470) Income (loss) per share applicable to common shareholders................ (.35) .08 (.49) (4.00) Fiscal Quarter --------------------------------------- First Second Third Fourth ----- ------ ----- ------ Fiscal Year 1994 - ---------------- Net sales.................... $37,451 $76,508 $69,092 $ 54,034 Gross profit................. 8,768 18,566 14,173 6,345 Income (loss) applicable to common shareholders......... (1,197) 5,229 2,391 (3,084) Income (loss) per share applicable to common shareholders................ (.21) .94 .43 (.55) During the fourth quarter of Fiscal Year 1995, the Company increased its allowance for uncollectible accounts by $1,181,000, increased its inventory market reserves by $4,338,000 (see Note 3 to financial statements), wrote off $2,417,000 of machinery and equipment (see Note 4 to financial statements), wrote off $4,644,000 of deferred software development costs (see Note 5 to financial statements), accrued $859,000 in severance costs associated with a severance agreement with the Company's former Chairman of the Board, President and Chief Executive Officer (see Note 11 to the financial statements), wrote off $1,005,000 of deferred financing costs relating to the GECC Facility, increased its barter credit reserve by $905,000 and wrote off $3,531,000 of debt premium associated with the Subordinated Notes (see Note 7 to financial statements). Also, during the fourth quarter of Fiscal Year 1995, the Company incurred significant unfavorable manufacturing variances resulting from a slowdown of production at its manufacturing facilities. 48 During the fourth quarter of Fiscal Year 1994, the Company accrued an additional amount for workers' compensation expense of approximately $550,000 and increased its inventory valuation by $1,165,000 for the effects of LIFO accounting. Also, during the fourth quarter of Fiscal Year 1994, the Company incurred significant unfavorable manufacturing variances resulting from a slowdown of production and a shift in product mix at its manufacturing facilities. 49 Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ---------------------------------------------------- Deloitte & Touche LLP, independent public accountants, currently is, and for more than the Company's last two fiscal years has been, the Company's independent accounting firm. Since the beginning of such two fiscal year period, (i) Deloitte & Touche LLP has not expressed reliance, in its audit report, on the audit services of any other accounting firm, and (ii) there have been no reported disagreements between the Company and Deloitte & Touche LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- The following table sets forth the name, age and position with the Company of each person who is a director or executive officer of the Company: Position with the Name Age Company ---- --- ---------------- Stephen Berger 56 Director Cameron Clark, Jr. 73 Director, Audit Committee Chairman and Member of Compensation Committee Steven M. Friedman 41 Director and Member of Compensation Committee F. Peter Libassi 65 Chairman of the Board, Chairman of Compensation Committee and Member of Audit Committee Alain Oberrotman 44 Director and Member of Audit Committee Robert E. Dangremond 52 Director, President and Chief Executive Officer Fred D. Matheson 49 Executive Vice President-- Manufacturing Richard Pactor 58 Executive Vice President-- Product Development and President of the Forstmann International division Peter Roaman 45 Executive Vice President-- Marketing and Styling Gary E. Schafer 44 Vice President and Corporate Controller 50 The business experience of each of the directors and executive officers during the past five years is as follows: Robert N. Dangremond - Director of the Company since August 1995. Since August 1995, Mr. Dangremond has also served as interim Chief Executive Officer and President of the Company. Under a Letter Agreement dated July 31, 1995, between Jay Alix & Associates ("Alix") and the Company, Mr. Dangremond is currently providing consulting services to the Company. Since September 1989 Mr. Dangremond has been a Principal with Alix, a consulting firm specializing in the restructuring of major corporations. From 1982 to 1989 he was the CFO and Treasurer of Leach & Garner Company, a diversified manufacturing and trading company. Prior thereto, he served as a Vice President and Manager for Chase Manhattan Bank and a Sales and Marketing Manager for Scott Paper Company. Mr. Dangremond is also a director of AM International (a manufacturing and distribution company), Standard Brands Paint Company (a manufacturing and retail company), Barry's Jewelers (a manufacturing company) and Envirody Industries, Inc. (a manufacturing company). Fred D. Matheson joined the Company in October 1990 as Executive Vice President--Manufacturing. Prior thereto, Mr. Matheson served with Fieldcrest Cannon Inc. (a manufacturer of consumer textiles and consumer products), as Executive Vice President. Richard Pactor joined the Company in December 1988 as Executive Vice President--Product Development, and was named President of the Forstmann International division in July 1992. Peter Roaman joined the Company in June 1989 as Vice President-- Womenswear and was elected Senior Vice President--Marketing in December 1990 and Executive Vice President--Marketing and Styling in July 1991. Gary E. Schafer was elected Vice President and Corporate Controller of the Company in March 1992. In 1990, when Mr. Schafer joined the Company, he served as Director of Cost Accounting. Prior thereto, Mr. Schafer was Chief Financial Officer of Racal-Milgo Skynetworks (a telecommunications company). Stephen Berger has been a general partner of Odyssey Partners since July 1, 1993 and has been a director of the Company since March 1994. From July 1990 to July 1993, Mr. Berger was employed by General Electric Capital Corporation, most recently as Executive Vice President and Chairman and Chief Executive Officer of its subsidiary, Financial Guaranty Insurance Corporation. Immediately prior thereto, Mr. Berger served as the Executive Director of the New York and New Jersey Port Authority. Mr. Berger is a director of the following reporting companies: Canrise Resources Ltd. (a natural oil and gas company), Hugoton Energy Corporation (a natural gas exploration and production company), Scotsman Holdings, Inc. (a holding company) and The Scotsman Group, Inc. (a lessor of mobile office units). Cameron Clark, Jr. has been President and Chief Executive Officer of Production Sharing International, Ltd., the principal business of which is third world industrial development, since January 1979 and has been a director of the Company since December 1991. Steven M. Friedman has been a General Partner of Eos Partners, L.P. (a private investment firm) since January 1, 1994 and has been a director of the Company since December 1988. For more than five years prior thereto, he was a General Partner of Odyssey Partners. Mr. Friedman was Chairman of the Board of the Company from October 1990 to March 1992 and a Vice President of the Company from December 1988 to March 1992. Mr. Friedman is a director of the following reporting companies: The Leslie Fay Companies, Inc. (a womenswear designer and manufacturer), which is a customer of the Company, The Caldor Corporation (a chain of discount retail stores), Eagle Food Centers, Inc. (a chain of grocery stores), JPS Textile Group, Inc. (a textile manufacturer) and MICOM Communications Corp. (a data communications company), Rickel Home Centers, Inc. (a home center retailer). F. Peter Libassi has been Dean of the Barney School of Business and Public Administration of the University of Hartford since February 1993 and has been a director of the Company since February 1994. From 1982 to February 1993, he was Senior Vice President for Corporate Communications of Travelers Corporation (an insurance company). Since January 1993, Mr. Libassi also has been Of Counsel to the Washington, D.C. law firm of Verner, Liipfert, Bernhard, McPherson and Hand. 51 Alain Oberrotman has been a Principal of Odyssey Partners since October 1992 and has been a director of the Company since December 1994. From September 1990 until joining Odyssey Partners, he was a Principal of Hambro International Equity Partners, a venture capital firm. From September 1982 to September 1990, he was President of TVI Group, Inc. a business development, consulting and finance firm. Mr. Oberrotman is a director of the JPS Textile Group, Inc. and Eagle Food Centers, Inc. Item 11. EXECUTIVE COMPENSATION ---------------------- SUMMARY OF COMPENSATION IN FISCAL YEARS 1995, FISCAL YEAR 1994 AND FISCAL YEAR 1993 The following summary compensation table sets forth information concerning compensation for services in all capacities awarded to, earned by or paid to the Chief Executive Officer and the four other most highly compensated executive officers of the Company during Fiscal Year 1995, Fiscal Year 1994 and Fiscal Year 1993.
Long-Term Compensation Annual Compensation Awards ---------------------------------------------- ------------ Other Annual Securities All Other Name and Fiscal Bonus Compensation Underlying Compensation Principal Position Year Salary($) ($)(1) ($)(2) Options (#)(3) ($)(4)(5) - ------------------ ------ --------- ------ -------------- --------------- -------------- Robert N. Dangremond(5) 1995 n/a n/a n/a n/a 153,750 President and Chief 1994 n/a n/a n/a n/a n/a Executive Officer 1993 n/a n/a n/a n/a n/a Fred D. Matheson 1995 243,475 0 15,644 25,000 663 Executive Vice 1994 234,025 0 32,366 0 572 President - 1993 220,000 69,592 73,132 10,000 1,376 Manufacturing Richard Pactor 1995 254,208 0 9,501 25,000 3,935 Executive Vice 1994 243,750 0 10,623 0 3,693 President-Product 1993 232,292 73,480 6,398 10,000 6,351 Development Peter Roaman 1995 242,000 0 10,390 25,000 0 Executive Vice 1994 232,000 0 12,074 0 0 President- 1993 216,667 68,537 7,190 10,000 0 Marketing and Styling Gary E. Schafer 1995 109,075 0 4,357 12,500 0 Vice President and 1994 104,875 0 4,210 0 0 Corporate Controller 1993 100,312 31,952 3,591 4,000 0
(1) The amount of any bonus earned for a fiscal year, although included in the fiscal year earned, is actually determined and paid after the end of the fiscal year. (2) Represents tax liability reimbursed by the Company arising from (a) contributions made by the executive officer and for investment earnings thereon under a Company employee savings plan and (b) personal use of Company owned vehicles by the executive officer. The amounts for Mr. Matheson include reimbursement of relocation expenses of $17,115 and $65,161 in Fiscal 1994 and Fiscal 1993, respectively. (3) Represents incentive stock options ("ISOs") granted under the Company's Common Stock Incentive Plan (a) on December 8, 1992 to purchase the stated number of shares of Common Stock at an exercise price of $6.75 per share, exercisable for one-third of such shares commencing on each of December 8, 1993, December 8, 1994 and December 8, 1995, and (b) on January 6, 1995 to purchase the stated number of 52 shares of common stock at an exercise price of $8.50 per share, exercisable for one-third of such shares commencing on each of January 6, 1996, January 6, 1997 and January 9, 1998. The options granted on December 8, 1992 were granted at fair market value and the options granted on January 6, 1995 were granted at an amount greater than fair market value. (4) Represents amounts paid as premiums for group life insurance. In addition, Mr. Matheson, Mr. Pactor and Mr. Roaman were granted an Equity Referenced Award ("ERA") during Fiscal 1992, which cannot be exercised unless the Common Stock maintains a market price of at least $9.00 per share for a period of 30 consecutive days after vesting. Upon exercise of their respective ERAs, Mr. Matheson, Mr. Pactor and Mr. Roaman would each receive $112,500. (5) Mr. Dangremond is an employee and principal of Alix. The amount shown is that which has been paid to Alix with respect to services provided by Mr. Dangremond from August 1995 through October 29, 1995. STOCK OPTIONS GRANTED IN FISCAL YEAR 1995 The following table sets forth information concerning individual grants of stock options made during Fiscal Year 1995 to each executive officer named below. The Company did not grant any stock appreciation rights during Fiscal Year 1995.
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term (3) ------------------- -------------------------- % of Total Options Options Granted to Granted Employees in Expiration Name (Shares) (1) Fiscal Year Date (2) 5% 10% ------ ------------ ----------- ------- --- ------- Fred D. Matheson 25,000 11.11% 1/5/05 -0- $37,500 Richard Pactor 25,000 11.11% 1/5/05 -0- 37,500 Peter Roaman 25,000 11.11% 1/5/05 -0- 37,500 Gary E. Schafer 12,500 5.56% 1/5/05 -0- 18,750 - ------------------
(1) The options were granted by the Compensation Committee pursuant to the Company's Common Stock Incentive Plan on January 6, 1996, when the fair market value of the Common Stock was $5.00 per share. (2) The options become exercisable for one third of the share commencing on each of January 6, 1996, January 6, 1997 and January 6, 1998 and are canceled upon a termination of employment for cause, unless such termination follows a change in control of the Company. (3) Based upon the $5.00 per share market price on the date of the grant and an annual appreciation at the rate stated of such market price through January 5, 2005, the expiration date of such options. Gains, if any, are dependent upon the actual performance of the Common Stock, as well as the continued employment of the executive officers through the vesting period. The potential realizable values indicated have not taken into account amounts required to be paid as income tax under the Code and any applicable state laws. No value is set forth for a 5% rate of appreciation since the options will have no potential realizable value at such rate. 53 STOCK OPTIONS HELD AT THE END OF FISCAL YEAR 1995 The following table indicates the total number of exercisable and unexercisable stock options granted under the Company's Common Stock Incentive Plan held by each executive officer named below on October 16, 1995, the day that the Company was delisted on NASDAQ National Market System. No options to purchase Common Stock were exercised during Fiscal Year 1995 and no stock appreciation rights were outstanding during Fiscal Year 1995. On October 13, 1995, the last trading day in Fiscal Year 1995, prior to being delisted, the last sales price of the Common Stock on the NASDAQ National Market System was $0.50 per share.
Number of Securities Underlying Value of Unexercised Unexercised Options In-the-Money Options at at Fiscal Year End (#) Fiscal Year End ($) ------------------------- --------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Fred D. Matheson 15,833 shares 31,667 shares 0 0 Richard Pactor 15,833 shares 31,667 shares 0 0 Peter Roaman 15,833 shares 31,667 shares 0 0 Gary E. Schafer 2,666 shares 13,834 shares 0 0
RETIREMENT PENSION PLAN The Company maintains a Retirement Pension Plan (the "Pension Plan") for its salaried employees. The Pension Plan is a defined benefit pension plan providing a formula benefit, upon vesting, for employees 21 years of age or older who have completed one year of service with the Company. The Pension Plan generally takes into account credited service and annual compensation earned under the pension plan of a predecessor of the Company (the "Predecessor Plan"), but the benefit payable from the Pension Plan, depending on the circumstances, may be reduced by any benefit payable under the Predecessor Plan. The following table shows the estimated annual benefits upon retirement to participants in the Pension Plan in specified annual compensation and years of credited service classifications. The amounts shown are subject to the maximum benefit limitations set forth in Section 415 of the Internal Revenue Code of 1986 (the "Code") and are subject to reduction for amounts payable under the Predecessor Plan. The pension benefits shown are based upon retirement at age 65 and the payment of a single-life annuity to the participants. The pension benefits in the table do not reflect the limitation under Section 401(a)(17) of the Code on the maximum amount of annual compensation ($150,000 effective February 1, 1994 (the "Code Limitation"), that can be utilized for determining benefits. 54
Years of Credited Service at Retirement --------------------------------------------------------------------- Highest Five Year Average Annual Compensation (1) 5 10 15 20 25 30 35 - ---------------------------- ------- ------- -------- -------- -------- -------- -------- $100,000 $ 6,852 $13,704 $ 20,556 $ 27,408 $ 34,260 $ 41,112 $ 47,964 150,000 10,602 21,204 31,806 42,408 53,010 63,612 74,214 200,000 14,352 28,704 43,056 57,408 71,760 86,112 100,464 250,000 18,102 36,204 54,306 72,408 90,510 108,612 126,714 300,000 21,852 43,704 65,556 87,408 109,260 131,112 152,964 350,000 25,602 51,204 76,806 102,408 128,010 153,612 179,214 400,000 29,352 58,704 88,056 117,408 146,760 176,112 205,464 450,000 33,102 66,204 99,306 132,408 165,510 198,612 231,714 500,000 36,852 73,704 110,556 147,408 184,260 221,112 257,964 550,000 40,602 81,204 121,806 162,408 203,010 243,612 284,214 600,000 44,352 88,704 133,056 177,408 221,760 266,112 310,464 650,000 48,102 96,204 144,306 192,408 240,510 288,612 336,714 - ----------------------------
(1) Annual compensation is the amount reportable on a participant's Form W-2 for federal income tax purposes, and consists of the amounts reported in the table included under "Summary of Compensation in Fiscal Year 1995, Fiscal Year 1994 and Fiscal Year 1993 as salary, bonus, other annual compensation and all other compensation. Credited years of service for benefit accrual under the Pension Plan, as of December 31, 1995, for the following executive officers are: Fred D. Matheson . . . . . . . . . . . . . . . . . . . . . . 5 years Richard Pactor . . . . . . . . . . . . . . . . . . . . . . 7 years Peter Roaman . . . . . . . . . . . . . . . . . . . . . . 7 years Gary E. Schafer . . . . . . . . . . . . . . . . . . . . . . 6 years A participant's annual pension payable as of his or her normal retirement date at age 65 will be equal to 1% of that portion of the participant's "final average compensation" (as defined in the Pension Plan) which is equal to the "social security integration level" (as defined in the Pension Plan) in effect for the year in which the participant retires, plus 1-1/2% of that portion of the participant's final average compensation in excess of the social security integration level, multiplied by the number of years of credited service not to exceed 35 years. A reduced pension benefit is payable upon (i) early retirement at or after age 55, (ii) death, under certain circumstances, and (iii) disability if the participant has completed at least five years of vesting service. A reduced pension benefit is also payable, at the election of a participant who terminates employment after completing at least five years of vesting service, at any time at or after age 55. Generally, the payment of benefits will be in the form of a straight life annuity for participants who are not married and a joint and survivor annuity for those who are married. 55 SUPPLEMENTAL RETIREMENT PLANS In response to the Code Limitation, which substantially reduces the amount of annual compensation that can be considered under the Pension Plan, the Company, in Fiscal Year 1994, approved an auxiliary nonqualified retirement plan (the "Auxiliary Plan") applicable to all employees whose annual compensation exceeds the Code Limitation. The Auxiliary Plan became effective during Fiscal Year 1994 and will provide a retirement benefit, payable only if and when the participant or the participant's beneficiary commences receiving a benefit under the Pension Plan, equal to the difference between the benefit the participant or the participant's beneficiary would have received had the Code Limitation not existed and the amount of the benefit being received under the Pension Plan. On January 29, 1996, the Auxiliary Plan was terminated and no aditional liability will accrue to participants after January 29, 1996. The Company has not remitted any of the contributions due the Auxiliary Plan since the Auxiliary Plan became effective. Executive officers of the Company having a position of Executive Vice President or higher, upon attaining age 50, are eligible to participate in the Company's Supplemental Retirement Benefit Plan (the "SERP"). Mr. Pactor is currently the only participants in the SERP. The Company's contributions to the SERP are paid to a trust for the benefit of participants. A participant who retires at or after age 62 who does not elect an optional form of payment will receive until death (i) monthly amounts equal to the greater of (a) the annuity benefit that would be payable to him for such month under the Pension Plan after application of the Code Limitation, or (b) the annuity benefit that, as of the date he became a participant, was expected to be payable to him, as aforesaid, for such month under the Pension Plan, and (ii) continued welfare benefits (such as medical insurance) for himself, his spouse and his eligible dependents. Based on such provisions, the annual benefit payable under the SERP at age 62 for Mr. Pactor would be $37,792. Alternatively, a participant may elect to have his supplemental income benefit paid in a lump sum, in five equal annual installments, or as a joint and survivor annuity. A participant who voluntarily resigns before age 62 will receive, on his 62nd birthday, the following: (i) if he was employed by the Company for at least two-thirds of his anticipated service period (the period commencing on the date he became a participant and ending on his 62nd birthday), a lump sum payment that is the actuarial equivalent of two-thirds of the normal form of payment he would have received had he continued in the Company's employ until age 62 and (ii) if he was employed by the Company for at least one-third (but less than two-thirds) of his anticipated service period, a lump sum payment that is the actuarial equivalent of one-third of the normal form of payment he would have received had he continued in the Company's employ until age 62. If a participant dies while employed, his beneficiary will receive a lump sum payment that is the actuarial equivalent of the normal form of payment the participant would have received had he continued in the Company's employ until age 62. If a participant is terminated from employment without cause or after a change in control, he will receive the same supplemental income benefit (actuarially reduced for payment prior to age 62) and the same welfare benefits he would have received had he continued in the Company's employ until age 62. No payment may be made under the SERP to a participant whose employment is terminated for cause. On January 29, 1996, the SERP was terminated and no additional benefits will accrue to Mr. Pactor after December 31, 1995. The Company did not remit to the trustee the contribution due the SERP on December 31, 1995. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS In December 1992, the Company entered into a change in control agreement (the "CIC Agreement") with each of the Company's Executive Vice Presidents which provides that upon a change in control of the Company, followed by a termination of employment of the executive without appropriate cause (or an event which is deemed to be tantamount to a termination) within 18 months of such change in control, the executive will be entitled to a severance payment equal to the aggregate of two years' base compensation plus an amount equal to his previous year's bonus, if any. The severance payment is subject to reduction if it results in the imposition of an excise tax under the Code. A "change in control," as defined in the CIC Agreement, will be deemed to have occurred if, among other things, the Company's Board of Directors becomes controlled by a shareholder or group of affiliated shareholders, other than Odyssey Partners, beneficially owning more than 20% of the Common Stock, or if any person or entity, including Odyssey Partners, causes a majority of the Board of Directors to consist of individuals 56 affiliated with, or nominated by, such person or entity. No severance is payable under a CIC Agreement if the executive officer is terminated prior to a change of control, regardless of the reason for such termination. A CIC Agreement may be terminated by the Company for any reason upon four years' prior notice. The Company is party to an employment agreement with each of the Company's Executive Vice Presidents. Each of these agreements is for a two-year term and is automatically extended so that the unexpired term thereof remains two years, until either the Company or the executive gives two years' advance notice of non-renewal. During the term of their respective agreements, each executive is to receive an annual base salary of not less than the executive's base salary at the time his employment agreement was executed, as follows: Mr. Pactor - $237,500; Mr. Matheson - $220,000; and Mr. Roaman - $220,000. Each agreement provides that, upon the executive's termination for any reason other than for cause (as defined), disability, death or voluntary resignation and other than under the circumstances covered by his CIC Agreement, the executive will (i) receive a lump sum payment equal to (a) two times the executive's then-current base salary, plus (b) the executive's most recent bonus reduced proportionately to the extent that the current year's adjusted pre-tax earnings are less than such amount in the immediately preceding year, (ii) continue to receive life and health insurance benefits for a two-year period on the same contributory basis that would have been in effect had the executive remained employed by the Company, unless substantially similar coverage is obtained prior thereto at no greater expense to the executive, (iii) become vested in all unvested stock options and ERAs previously granted to the executive, and (iv) be entitled to outplacement consultant services. The SERP provides that if a participant thereunder is terminated from employment without cause or after a change in control, the participant will receive the same supplemental income benefit (actuarially reduced for payment prior to age 62) and the same welfare benefit he would have received if he continued in the Company's employ until age 62. Mr. Pactor is the only participant in the SERP at the present time, due to the age eligibility requirement for the SERP. The ISOs granted in September 1992 to each of the Company's Executive Vice Presidents provide that if their respective employment is terminated after a change in control of the Company, the options vest immediately and may be exercised at any time until expiration on October 31, 1999. ISOs which are not exercised within three months after termination of employment will be treated as non-qualified stock options under the Code. The Company is party to an indemnity agreement (the "Indemnity Agreement") with each of its directors and certain of its executive officers which provides that the indemnitee will be entitled to receive indemnification, which may include advancement of expenses, to the full extent permitted by law for all expenses, judgements, fines, penalties and settlement payments incurred by the indemnitee in actions brought against the indemnitee in connection with any act taken in the indemnitee's capacity, and within the indemnitee's scope of authority, as a director or executive officer of the Company. The Indemnity Agreement provides for the appointment of independent legal counsel to determine whether a director or executive officer is entitled to indemnity after a change in control. It also requires the Company to maintain its current level of directors' and officers' liability insurance for so long as the indemnitee may be subject to any possible, threatened or pending action, unless the cost of such insurance is more than 150% of the annualized cost thereof in Fiscal Year 1994. THE BOARD OF DIRECTORS AND COMMITTEES THEREOF Directors of the Company are elected annually to serve until the next annual meeting of shareholders and until their successors have been duly elected and qualified. During Fiscal Year 1995, there were nineteen meetings of the Board of Directors, and each director other than Mr. Oberrotman, who did not attend the first board meeting held after he was elected a director, attended all of the meetings of the Board of Directors and of the Committees thereof, if any, on which he served. 57 The Company's Board of Directors has an Audit Committee and a Compensation Committee. The members of each committee are appointed by the Board of Directors for a term beginning after the first regular meeting of the Board of Directors following the Annual Meeting of Shareholders and until their respective successors are elected and qualified. AUDIT COMMITTEE. The Audit Committee recommends to the Board of Directors the auditing firm to be selected each year as independent auditors of the Company's financial statements. The Audit Committee also has responsibility for (i) reviewing the proposed scope and results of the audit, (ii) reviewing the Company's financial condition and results of operations, (iii) considering the adequacy of the Company's internal accounting and control procedures, and (iv) reviewing any non-audit services and special engagements to be performed by the independent auditors, and ensuring that the performance of such tasks will not impair the auditors' independence. The Audit Committee also reviews, at least annually, the terms of all material transactions and arrangements between the Company and its affiliates. Members of the Audit Committee may not be employees of the Company, and not more than one member may be affiliated with or represent the interest of a shareholder of the Company beneficially owning 20% or more of the outstanding Common Stock. The current members of the Audit Committee are Messrs. Clark, Libassi, and Oberrotman, with Mr. Clark serving as Chairman. During Fiscal Year 1995, the Audit Committee held seven meetings. COMPENSATION COMMITTEE. The Compensation Committee determines, subject to the approval of the Board of Directors, the compensation paid to the Company's executive officers, the award of stock options under the Company's Common Stock Incentive Plan and the implementation of the management incentive compensation plans. The current members of the Compensation Committee are Messrs. Clark, Friedman and Libassi, with Mr. Libassi serving as Chairman. During Fiscal Year 1995, the Compensation Committee held four meetings. COMPARATIVE PERFORMANCE BY THE COMPANY The Securities and Exchange Commission requires the Company to present a chart comparing the cumulative total shareholders return on its Common Stock with the cumulative total shareholder return of (i) a broad equity market index, and (ii) a published industry index or peer group. Such a chart would normally be for a five-year period. However, the Company's common stock has publicly traded only since March 4, 1992, and on October 16, 1995, as a result of the Company's closing price per share being less than $1.00 per share for more than thirty (30) consecutive days, the NASDAQ National Market System delisted the Company. Accordingly, the Company does not believe that the required chart comparing the cumulative total shareholder return on its Common Stock would be meaningful. For the four year period consisting of Fiscal Year 1995, 1994, 1993 and 1992, the Company has realized a cumulative loss applicable to common shareholders of $20.2 million. Shareholders' equity since the beginning of fiscal year 1992 to October 29, 1995 has declined $0.7 million. 58 Item 12. Security Ownership of Certain Beneficial Owners and Management ------------------------------------------------------------- The following table sets forth the aggregate number of shares of Common Stock of the only persons or groups known to the Company as of October 25, 1995 to own beneficially 5% or more of the outstanding shares of Common Stock.
Name and Address of Amount and Nature of Percent Beneficial Owner Beneficial Ownership of Class - ------------------------------------ -------------------- --------- Odyssey Partners, L.P.(1) 2,832,713 shares 50.41% 31 West 52nd Street New York, New York 10019 Harris Associates L.P. 363,000 shares 6.46% Harris Associates, Inc.(2) 2 North LaSalle Street, Suite 500 Chicago, Illinois 60602 David L. Babson & Company, Inc.(3) 637,700 shares 11.35% One Memorial Drive Cambridge, Massachusetts 02142-1300 - -----------------------------
(1) Leon Levy, Jack Nash, Stephen Berger, Joshua Nash and Jeffrey Gendell, by virtue of being general partners of Odyssey Partners, share voting and dispositive power with respect to the Common Stock owned by Odyssey Partners and, accordingly, may each be deemed to own beneficially the Common Stock owned by Odyssey Partners. Each of the aforesaid persons has expressly disclaimed any such beneficial ownership (within the meaning of Rule 13d-3(d)(1) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) which exceeds the proportionate interest in the Common Stock which he may be deemed to own as a general partner of Odyssey Partners. The Company has been advised that no other person exercises (or may be deemed to exercise) any voting or investment control over the Common Stock owned by Odyssey Partners. Odyssey Partners is a private investment firm with substantial equity capital invested in marketable securities and closely-held businesses. Steven M. Friedman, a director of the Company, was, until December 31, 1993, a general partner of Odyssey Partners. (2) Based on Schedule 13G dated February 6, 1996, filed with the Securities and Exchange Commission. Such shares are beneficially owned by The Oakmark Fund, a series of the Harris Associates Investment Trust, with which Harris Associates L.P. , an Investment Adviser registered under the Investment Advisers Act of 1940 (of which Harris Associates, Inc. is the general partner), shares voting and dispositive power. (3) Based on information received by the Company on October 25, 1995. David L. Babson & Company, Inc., a registered investment adviser under the Investment Advisers Act of 1940, is the beneficial owner of 637,700 shares of Common Stock with sole dispositive power over such shares. It has sole voting power with respect to 452,900 of such shares and shared voting power with respect to the remaining 184,800 of such shares. 59 Set forth below is information, as of January 26, 1996, with respect to the beneficial ownership of the Common Stock by (a) the six nominees of the Board of Directors for election as directors of the Company (which consists of all current directors), (b) the Company's Chief Executive Officer and the four other most highly compensated executive officers of the Company during Fiscal 1995, and (c) all current directors and executive officers of the Company, as a group (11 persons).
Amount and Nature of Percent Name Beneficial Ownership (1) of Class - ---- ----------------------- -------- Stephen Berger................................... 2,832,713 (2) 50.41% Cameron Clark, Jr................................ 1,500 * F. Peter Libassi................................. 1,000 (3) * Steven M. Friedman............................... 0 (4) --- Alain Oberrotman................................. 0 --- Robert N. Dangremond............................. 0 --- Fred D. Matheson................................. 40,833 (5) * Richard Pactor................................... 30,833 (6) * Peter Roaman..................................... 31,533 (7) * Gary Schafer..................................... 2,666 (6) * All directors and executive officers as a group.. 2,946,578 (8) 52.44%
- ----------------------- * Less than 1%. (1) Each individual listed below has sole investment and voting power except as otherwise indicated. (2) Consists of the shares owned by Odyssey Partners. As reflected in footnote (1) to the preceding table, Mr. Berger is a general partner of Odyssey Partners and may be deemed to own beneficially the shares owned by Odyssey Partners. Mr. Berger has disclaimed beneficial ownership in such shares to the extent that such beneficial ownership exceeds the proportionate interest in such shares that he may be deemed to own as a general partner of Odyssey Partners. (3) Mr. Libassi shares investment and voting power with his wife. (4) Mr. Friedman has an indirect financial interest in a portion of the shares owned by Odyssey Partners which are listed above for Mr. Berger; however, Mr. Friedman does not have any voting or dispositive power over any shares owned by Odyssey Partners. (5) Consists of (a) 30,833 shares issuable upon exercise of currently exercisable options under the Company's Common Stock Incentive Plan, (b) 5,000 shares held in an individual retirement account, and (c) 5,000 shares held in wife's retirement account. (6) Represents shares issuable upon exercise of currently exercisable options under the Company's Common Stock Incentive Plan. (7) Includes 30,833 shares issuable upon exercise of currently exercisable options under the Company's Common Stock Incentive Plan. (8) Includes shares issuable upon exercise of currently exercisable options under the Company's Common Stock Incentive Plan. 60 SECTION 16 REPORTS Based upon a review of information received by the Company, none of the persons referred to above other than Fred D. Matheson failed to file timely with the Securities and Exchange Commission the reports required to be filed during Fiscal 1995 pursuant to Section 16(a) of the Exchange Act. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- COMPENSATION OF DIRECTORS Directors who are employees of the Company or an affiliate of the Company receive no compensation for their services as directors. Other directors receive $2,500 for attendance at each meeting of the Board of Directors or committee thereof. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board of Directors consists of Cameron Clark, Jr., Steven M. Friedman and F. Peter Libassi. Mr. Friedman served as a Vice President of the Company and Chairman of the Board of Directors from December 1988 to March 1992. Until December 31, 1993, Mr. Friedman was a general partner of Odyssey Partners, which, directly or indirectly, has been the principal shareholder of the Company since December 1988. See "Ownership of Equity Securities." In connection with the Company's March 1992 initial public offering, Odyssey Partners purchased from the Company an aggregate of 1,215,000 unregistered shares of Common Stock for $9.00 per share and the Company agreed to grant registration rights to Odyssey Partners with respect thereto. These registration rights have not yet been exercised. SEVERANCE AGREEMENT WITH FORMER EXECUTIVE OFFICER On August 16, 1995, the Company's former Chairman of the Board, President and Chief Executive Officer (the "Executive Officer") entered into a severance agreement and resigned from the Company. The agreement entitled the Executive Officer to a continuation of existing salary and certain other benefits for a period of two years from the date of separation from the Company and grants the Executive Officer title to certain of the Company's assets in the Executive Officer's possession. In addition, under the agreement, the Company agreed to pay certain vested but unearned ERAs which he would have been entitled to under his employment agreement with the Company if he had been dismissed without "cause" as defined therein. The value of the ERAs were fully accrued by the Company as of March 4, 1995. In connection with the severance agreement, the Company recognized $0.8 million of expense during the fourth quarter of Fiscal Year 1995. 61 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ---------------------------------- (a) Documents filed as part of this Annual Report on Form 10-K: 1. Financial Statements. All financial statements required to be filed as part of this Annual Report on Form 10-K are filed under Item 8. A listing of such financial statements is set forth in Item 8., which listing is incorporated herein by reference. 2. Schedules. Schedules for the Fifty-Two Weeks Ended October 31, 1993, October 30, 1994 and October 29, 1995. SCHEDULE NUMBER -------- II. Valuation and Qualifying Accounts Schedules other than those listed above are omitted because (a) they are not required or are not applicable or (b) the required information is shown in the financial statements or notes related thereto. (b) No Current Report on Form 8-K was filed by the Company during the fourth quarter of its fiscal year ended October 29, 1995. (c) Exhibits 3.1(a) Articles of Restatement setting forth the Amended and Restated Articles of Incorporation of the Company, as filed with the Secretary of State of Georgia on November 19, 1990 (Exhibit 3(i)1. to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1994). 3.1(b) Articles of Correction, as filed with the Secretary of State of Georgia on December 18, 1990 (Exhibit 3(i)2. to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1994). 3.1(c) Articles of Merger of Forstmann Georgia Corp. and the Company, as filed with the Secretary of State of Georgia on March 3, 1992 (Exhibit 3(i)3. to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1994). 3.1(d) Articles of Amendment to the Articles of Incorporation of the Company, as filed with the Secretary of State of Georgia on April 5, 1994 (Exhibit 3.1(d) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 3.2(a) By-Laws of the Company (Exhibit 4.4 to the Company's Registration Statement (No. 33-55770) on Form S-8). 3.2(b) Amended and Restated By-Laws of the Company on March 30, 1994 (Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1994). 4.1(a) Amended and Restated Indenture, dated as of November 19, 1990, relating to Senior Subordinated Notes due April 15, 1999 (Exhibit 2 to the Company's Current Report on Form 8-K dated November 19, 1990). 4.1(b) First Supplemental Indenture, dated as of November 29, 1990, relating to Senior Subordinated Notes due April 15, 1999 (Exhibit 3 to the Company's Current Report on Form 8-K dated November 19, 1990). 4.1(c) Second Supplemental Indenture, dated as of March 4, 1992, relating to Senior Subordinated Notes due April 15, 1999 (Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 2, 1992). 62 4.2 Form of 14-3/4% Senior Subordinated Note due April 15, 1999 (Exhibit A to Exhibit 4.1(a) hereof, as amended by Exhibits 4.1(b) and 4.1(c) hereof). 4.3 Form of Amended Senior Subordinated Note due April 15, 1999 (Exhibit B to Exhibit 4.1(a) hereof, as amended by Exhibits 4.1(b) and 4.1(c) hereof). 4.4(a) Loan Agreement, dated as of October 30, 1992, between the Company and General Electric Capital Corporation ("GECC"), as lender and agent for the lenders named therein ("Loan Agreement") (Exhibit 4.4(a) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). 4.4(b) Security Agreement, dated as of November 13, 1992, by the Company, in favor of GECC, as lender and agent for the lenders named therein (Exhibit 4.4(b) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). 4.4(c) Form of Trademark Security Agreement, dated as of November 13, 1992, by the Company, in favor of GECC, as lender and agent for the lenders named therein (Exhibit 4.4(c) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). 4.4(d) Form of Deed to Secure Debt, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of November 13, 1992, between the Company and GECC, as agent (Exhibit 4.4(d) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). 4.4(e) First Amendment, dated as of November 13, 1992, to the Loan Agreement (Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1993). 4.4(f) Form of Promissory Note for the Loan Agreement (Exhibit 19.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1993). 4.4(g) Second Amendment, dated as of December 30, 1992, to the Loan Agreement (Exhibit 19.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1993). 4.4(h) Third Amendment, dated as of April 5, 1993, to the Loan Agreement (Exhibit 19.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1993). 4.4(i) Consent and Waiver Letter, dated as of June 10, 1994, to the Company from GECC (Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1994). 4.4(j) Fourth Amendment, dated as of June 11, 1993, to the Loan Agreement (Exhibit 19.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1993). 4.4(k) Fifth Amendment, dated as of August 2, 1992, to the Loan Agreement (Exhibit 4.4(j) to the Company's Annual Report on Form 10-K for the year ended October 31, 1993). 4.4(l) Sixth Amendment, dated as of October 29, 1993, to the Loan Agreement (Exhibit 4.4(k) to the Company's Annual Report on Form 10-K for the year ended October 31, 1993). 4.4(m) Seventh Amendment, dated as of March 30, 1994, to the Loan Agreement (Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994). 4.4(n) Eighth Amendment, dated as of August 29, 1994, to the Loan Agreement (Exhibit 4.4(n) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 4.4(o) Consent and Waiver Letter, dated as of September 12, 1994, to the Company from GECC (Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1994). 4.4(p) Ninth Amendment, dated as of November 4, 1994, to the Loan Agreement (Exhibit 4.4(p) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 4.4(q) Tenth Amendment, dated January 4, 1995, to the Loan Agreement (Exhibit 4.4(q) to the Company's Annual Report on Form 10-K for the year ended Octdober 30, 1994). 4.4(r) Eleventh Amendment, dated as of January 23, 1995, to the Loan Agreement (Exhibit 4.4(r) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 63 4.4(s) Twelfth Amendment, dated June 16, 1995, to the Loan Agreement (Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1995). 4.4(t) Amended and Restated Debtor-in-Possession Loan Agreement, dated September 27, 1995 (as approved by the United States Bankruptcy Court Southern District of New York on October 31, 1995). 4.5(a) Loan and Security Agreement ("Loan and Security Agreement"), dated December 27, 1991, between the Company and The CIT Group/Equipment Financing, Inc. ("CIT") (Exhibit 28.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 2, 1992). 4.5(b) Amendment, dated September 2, 1992, to the Loan and Security Agreement (Exhibit 4.5(b) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). 4.5(c) Amendment, dated October 30, 1992, to the Loan and Security Agreement (Exhibit 4.5(c) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). 4.5(d) Amendment, dated December 31, 1992, to the Loan and Security Agreement (Exhibit 4.5(d) to Post-Effective Amendment No. 4 to the Company's Registration Statement (No. 33-38520) on Form S-1). 4.5(e) Amendment, dated as of July 30, 1993, to the Loan and Security Agreement (Exhibit 4.5(e) to Post-Effective Amendment No. 4 to the Company's Registration Statement (No. 33-38520) on Form S-1). 4.5(f) Third Amendment to the Loan and Security Agreement, dated as of June 13, 1994 (Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1994). 4.5(g) Fourth Amendment to the Loan and Security Agreement, dated as of September 12, 1994 (Exhibit 4.5 to the Company's Quarterly Report on Form 10-K for the quarter ended July 31, 1994). 4.5(h) Fifth Amendment to the Loan and Security Agreement, dated as of December 22, 1994 (Exhibit 4.5(h) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 4.5(i) Sixth Amendment to the Loan and Security Agreement, dated as of June 15, 1995 (Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1995). 4.6(a) Indenture, dated as of April 5, 1993, between the Company and Shawmut Bank Connecticut, National Association ("Shawmut"), as trustee, relating to the Senior Secured Floating Rate Notes ("Senior Secured Notes") (Exhibit 4.6(a) to Post-Effective Amend- ment No. 4 to the Company's Registration Statement (No. 33-38520) on Form S-1). 4.6(b) Form of Senior Secured Note due October 30, 1997 (Exhibit 4.6(b) to Post-Effective Amendment No. 4 to the Company's Registration Statement (No. 33-38520) on Form S-1). 4.6(c) Form of Deed to Secure Debt, Assignments of Leases and Rents, Security Agreements and Fixture Filings, dated as of April 5, 1993, between the Company and Shawmut, as trustee (Exhibit 4.6(c) to Post-Effective Amendment No. 4 to the Company's Registration Statement (No. 33-38520) on Form S-1). 4.6(d) Security Agreement, dated as of April 5, 1993, between the Company and Shawmut, as trustee (Exhibit 4.6(d) to Post-Effective Amendment No. 4 to the Company's Registration Statement (No. 33- 38520) on Form S-1). 4.6(e) Form of Trademark Security Agreement, dated as of April 5, 1993, between the Company and Shawmut, as trustee (Exhibit 4.6(e) to Post-Effective Amendment No. 4 to the Company's Registration Statement (No. 33-38520) on Form S-1). 4.6(f) Form of Patent Security Agreement, dated as of April 5, 1993, between the Company and Shawmut, as trustee (Exhibit 19.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1993). 4.6(g) Amended and Restated Indenture, dated as of March 30, 1994, between the Company and Shawmut Bank of Connecticut, National Association, as trustee, relating to the Senior Secured Notes (Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994). 64 4.6(h) Form of Original Senior Secured Note (incorporated herein by reference to Exhibit 4.6(g)). 4.6(i) Form of Additional Senior Secured Note (incorporated herein by reference to Exhibit 4.6(g)). 4.6(j) Form of First Amendment to Deed to Secure Debt, Assignments of Leases and Rents, Security Agreements and Fixture Filings, dated as of March 30, 1994, between the Company and Shawmut Bank Connecticut, National Association, as trustee (Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994). 4.6(k) First Amendment to Pledge and Security Agreement, dated as of March 30, 1994 between the Company and Shawmut Bank Connecticut, National Association, as trustee (Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994). 4.6(l) First Amendment to Trademark Security Agreement (foreign), dated as of March 30, 1994, between the Company and Shawmut Bank Connecticut, National Association, as trustee (Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994). 4.6(m) First Amendment to Trademark Security Agreement (U.S.), dated as of March 30, 1994, between the Company and Shawmut Bank Connecticut, National Association, as trustee (Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994). 4.6(n) First Amendment to Patent Security Agreement, dated as of March 30, 1994, between the Company and Shawmut Bank Connecticut, National Association, as trustee (Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994). 4.6(o) Supplemental Indenture, dated as of January 23, 1995, between the Company and Shawmut Bank Connecticut, National Association, as trustee, relating to the Senior Secured Notes (Exhibit 4.6(o) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 4.6(p) Supplemental Indenture, dated as of June 15, 1995, between the Company and Shawmut Bank Connecticut, National Association, as trustee, relating to the Senior Secured Notes (Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1995). 10.1(a) J. P. Stevens & Co., Inc. Trademark Assignments to the Company, effective December 28, 1985, dated January 29, 1986 (Exhibit 10(h) to the Company's Registration Statement (No. 33-27296) on Form S-1). 10.1(b) Lease, dated July 21, 1986, between the Company and 1185 Avenue of the Americas Associates ("1185 Associates") (Exhibit 10(t) to the Company's Registration Statement (No. 33-27296) on Form S- 1). 10.1(c) Lease Modification Agreement, dated December 5, 1991, between the Company and 1185 Associates (Exhibit 10.7 to the Company's Registration Statement (No. 33-44417) on Form S-1). 10.1(d) Consent to Lease Modification Agreement, dated May 11, 1992, between the Company and 1185 Associates (Exhibit 10.2(c) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). 10.1(e) Lease Modification Agreement, dated May 11, 1992, between the Company and 1185 Associates (Exhibit 10.1(d) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). 10.1(f) Lease dated January 31, 1995 between 1155 Avamer Realty Corp., and the Company (Exhibit 10.1(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended January 29, 1995). 10.1(g) Lease Takeover Amendment dated January 31, 1995 between the Company and 1155 Avamer Realty Corp. and the Company (Exhibit 10.1(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended January 29, 1995). 10.1(h)* First Amendment to Lease dated as of December 27, 1995 between 1155 Avamer Realty Corp., and the Company. 10.2(a) Amended Note Registration Rights Agreement, dated as of November 19, 1990, among the Company and the parties thereto (Exhibit 10.4 to the Company's Registration Statement (No. 33-38520) on Form S-1). 65 10.2(b) Common Stock Registration Rights Agreement, dated as of November 19, 1990, among the Company, Columbia Savings & Loan Association, CSL Investments, Executive Life Insurance Company and the parties thereto (Exhibit 10.5 to the Company's Registration Statement (No. 33-38520) on Form S-1). 10.2(c) Preferred Stock Registration Rights Agreement, dated as of November 19, 1990, between the Company and Executive Life Insurance Company (Exhibit 10.6 to the Company's Registration Statement (No. 33-38520) on Form S-1). 10.2(d) Common Stock Registration Rights Agreement, dated as of September 9, 1994, between the Company and Resolution Trust Corporation as receiver for Columbia Savings & Loan Association, F.A (Exhibit 10.2(d) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 10.2(e)* Common Stock Registration Rights Agreement, dated as of April 4, 1995, among the Company and Odyssey Partners, L.P. 10.3(a) Common Stock Incentive Plan as amended as of March 30, 1994 (Exhibit 10.3(a) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 10.3(b) Form of Incentive Stock Option Agreement (Exhibit 4.2(a) to the Company's Registration Statement (No. 33-55770) on Form S-8). 10.3(c) Alternative Form of Incentive Stock Option Agreement (Exhibit 4.2(b) to the Company's Registration Statement (No. 33-55770) on Form S-8). 10.4(a) Form of Equity Referenced Deferred Incentive Award Agreement ("ERA") (Exhibit 10.13 to the Company's Registration Statement (No. 33-44417) on Form S-1). 10.4(b) Amendment, dated February 10, 1994, to the ERA Agreement, dated February 26, 1992 Exhibit 10-4(b) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 10.5(a) Form of Change in Control Agreement (Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). 10.5(b) Employment Agreement dated December 16, 1993 between the Company and Christopher L. Schaller. (Exhibit 10.5(b) to the Company's Annual Report on Form 10-K for the year ended October 31, 1993). 10.5(c) Form of Employment Agreement for Executive Vice Presidents. (Exhibit 10.5(c) to the Company's Annual Report on Form 10-K for the year ended October 31, 1993). 10.6(a) Supplemental Retirement Benefit Plan (Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). 10.6(b) Trust Agreement, dated December 30, 1993, of the Supplemental Retirement Benefit Plan Trust. (Exhibit 10.6(b) to the Company's Annual Report on Form 10-K for the year ended October 31, 1993). 10.7 Management Incentive Plan - Fiscal Year 1995 (Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 10.8 Non-Qualified Salaried Employees' Savings, Investment and Profit Sharing Plan (Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). 10.9(a) Form of Indemnity Agreement, effective as of February 7, 1994, between the Company and its corporate officers (Exhibit 10.9(a) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 10.9(b) Form of Indemnity Agreement, effective as of February 7, 1994, between the Company and its directors (Exhibit 10.9(b) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 10.10(a) License Agreement, dated July 1, 1992, between Campagnia Tessile S.p.A. ("licensor") and the Company (Exhibit 10.10(a) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 10.10(b) Guarantee Agreement, dated July 1, 1992, between the Licensor and the Company (Exhibit 10.10(b) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 66 10.10(c) Italian Fabrics Purchase Agreement, dated July 1, 1992, between the Licensor and the Company (Exhibit 10.10(c) to the Company's Annual Report on Form 10-K for the year ended October 10, 1994). 10.10(d) Liquidated Damages Agreement, dated July 1, 1992, between the Licensor and the Company (Exhibit 10.10(d) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 10.10(e) Use of the mark "Carpini" Agreement, dated July 1, 1992, between the Licensor and the Company (Exhibit 10.10(e) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 10.10(f) Consultancy/Sales Fee Agreement, dated July 1, 1992, between Woolverton Limited ("Consultant") and the Company (Exhibit 10.10(f) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 10.10(g) Guarantee Agreement, dated July 1, 1992, between the Consultant and the Company (Exhibit 10.10(g) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 10.10(h) Consultation for Purchase of Italian Fabrics Agreement, dated July 1, 1992, between the Consultant and the Company (Exhibit 10.10(h) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 10.10(i) Liquidated Damages Agreement, dated July 1, 1992, between the Consultant and the Company (Exhibit 10.10(i) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 10.10(j) Renegotiation of Sales Fee Arrangements for Non- Registration of Marks, dated July 1, 1992, between the Consultant and the Company (Exhibit 10.10(j) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). 10.10(k)* Agreement for Financial Consulting Services between Jay Alix & Associates and the Company, dated July 31, 1995. 10.10(l)* Letter of Acknowledgement and Agreement dated August 18, 1995, between Jay Alix & Associates and the Company, outlining changes to "Agreement for Financial Consulting Services" dated July 31, 1995. 11.1* Computation of per share earnings. 23.1* Consent of Deloitte & Touche LLP. * Filed herewith. 67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 12, 1996 By:/s/ Robert N. Dangremond ------------------------ Robert N. Dangremond President and Chief Executive Officer 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/ Robert N. Dangremond President and Chief February 12, 1996 - ------------------------ Executive Officer Robert N. Dangremond and Director (Principal Executive and Financial Officer) /s/ Gary E. Schafer Vice President February 12, 1996 - ------------------------ and Corporate Gary E. Schafer Controller (Principal Financial Accounting Officer) /s/ Stephen Berger Director February 12, 1996 - ------------------------ Stephen Berger /s/ Cameron Clark, Jr. Director February 12, 1996 - ------------------------ Cameron Clark, Jr. /s/ Steven M. Friedman Director February 12, 1996 - ------------------------ Steven M. Friedman /s/ F. Peter Libassi Director February 12, 1996 - ------------------------ F. Peter Libassi /s/ Alain Oberrotman Director February 12, 1996 - ------------------------ Alain Oberrotman 68 INDEPENDENT AUDITORS' REPORT To The Board of Directors and Shareholders of Forstmann & Company, Inc. (Debtor-in-Possession): We have audited the financial statements of Forstmann & Company, Inc. (Debtor- in-Possession) as of October 29, 1995, October 30, 1994 and the related statements of operations, shareholders' equity, and cash flows for the fifty-two weeks ended October 29, 1995, October 30, 1994 and October 31, 1993 and have issued our report thereon dated January 26, 1996 (which expresses an unqualified opinion and includes an explanatory paragraph relating to uncertainties as to the Company's ability to continue as a going concern)(included elsewhere in the Annual Report on Form 10-K). Our audits also included the financial statement schedule listed in Item 14(a)2. of this Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP - ------------------------- Deloitte & Touche LLP Atlanta, Georgia January 26, 1995 69 SCHEDULE II FORSTMANN & COMPANY, INC. VALUATION AND QUALIFYING ACCOUNTS THE FIFTY-TWO WEEKS ENDED OCTOBER 31, 1993, OCTOBER 30, 1994 OCTOBER 29, 1995
Additions Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions of Period - ---------------------------------- ---------- ---------- ---------------- ---------- Allowance for Doubtful Accounts: - ---------------------------------- Fifty-Two Weeks Ended October 31, 1993 $7,853,000 $2,714,000 $(8,372,000) (1) $2,195,000 Fifty-Two Weeks Ended October 30, 1994 $2,195,000 $2,167,000 $(2,262,000) (1) $2,100,000 Fifty-Two Weeks Ended October 29, 1995 $2,100,000 $2,879,000 $(1,988,000) (1) $2,991,000 Inventory Market Reserves: - -------------------------- Fifty-Two Weeks Ended October 31, 1993 $2,238,000 - $ (335,000) (2) $1,903,000 Fifty-Two Weeks Ended October 30, 1994 $1,903,000 $ 290,000 - $2,193,000 Fifty-Two Weeks Ended October 29, 1995 $2,193,000 $6,418,000 - $8,611,000
(1) Accounts written off net of recoveries of accounts previously written off. (2) Net reduction due to disposal of identified excess cloth and yarn inventories. 70 EXHIBIT INDEX ------------- Sequential Exhibit No. Description Page No. - ----------- ----------- ---------- 3.1(a) Articles of Restatement setting forth the Amended and Restated Articles of Incorporation of the Company, as filed with the Secretary of State of Georgia on November 19, 1990 (Exhibit 3(i)1. to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1994). * 3.1(b) Articles of Correction, as filed with the Secretary of State of Georgia on December 18, 1990 (Exhibit 3(i)2. to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1994). * 3.1(c) Articles of Merger of Forstmann Georgia Corp. and the Company, as filed with the Secretary of State of Georgia on March 3, 1992 (Exhibit 3(i)3. to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1994). * 3.1(d) Articles of Amendment to the Articles of Incorporation of the Company, as filed with the Secretary of State of Georgia on April 5, 1994 (Exhibit 3.1(d) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 3.2(a) By-Laws of the Company (Exhibit 4.4 to the Company's Registration Statement (No. 33-55770) on Form S-8). * 3.2(b) Amended and Restated By-Laws of the Company on March 30, 1994 (Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1994). * 4.1(a) Amended and Restated Indenture, dated as of November 19, 1990, relating to Senior Subordinated Notes due April 15, 1999 (Exhibit 2 to the Company's Current Report on Form 8-K dated November 19, 1990). * 4.1(b) First Supplemental Indenture, dated as of November 29, 1990, relating to Senior Subordinated Notes due April 15, 1999 (Exhibit 3 to the Company's Current Report on Form 8-K dated November 19, 1990). * 4.1(c) Second Supplemental Indenture, dated as of March 4, 1992, relating to Senior Subordinated Notes due April 15, 1999 (Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 2, 1992). * _______________ *Incorporated herein by reference as indicated. (i) EXHIBIT INDEX ------------- Sequential Exhibit No. Description Page No. - ---------- ----------- ---------- 4.2 Form of 14-3/4% Senior Subordinated Note due April 15, 1999 (Exhibit A to Exhibit 4.1(a) hereof, as amended by Exhibits 4.1(b) and 4.1(c) hereof). * 4.3 Form of Amended Senior Subordinated Note due April 15, 1999 (Exhibit B to Exhibit 4.1(a) hereof, as amended by Exhibits 4.1(b) and 4.1(c) hereof). * 4.4(a) Loan Agreement, dated as of October 30, 1992, between the Company and General Electric Capital Corporation ("GECC"), as lender and agent for the lenders named therein ("Loan Agreement") (Exhibit 4.4(a) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). * 4.4(b) Security Agreement, dated as of November 13, 1992, by the Company, in favor of GECC, as lender and agent for the lenders named therein (Exhibit 4.4(b) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). * 4.4(c) Form of Trademark Security Agreement, dated as of November 13, 1992, by the Company, in favor of GECC, as lender and agent for the lenders named therein (Exhibit 4.4(c) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). * 4.4(d) Form of Deed to Secure Debt, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of November 13, 1992, between the Company and GECC, as agent (Exhibit 4.4(d) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). * 4.4(e) First Amendment, dated as of November 13, 1992, to the Loan Agreement (Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1993). * 4.4(f) Form of Promissory Note for the Loan Agreement (Exhibit 19.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1993). * _______________ *Incorporated herein by reference as indicated. (ii) EXHIBIT INDEX ------------- Sequential Exhibit No. Description Page No. - ---------- ----------- ---------- 4.4(g) Second Amendment, dated as of December 30, 1992, to the Loan Agreement (Exhibit 19.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1993). * 4.4(h) Third Amendment, dated as of April 5, 1993, to the Loan Agreement (Exhibit 19.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1993). * 4.4(i) Consent and Waiver Letter, dated as of June 10, 1994, to the Company from GECC (Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1994). * 4.4(j) Fourth Amendment, dated as of June 11, 1993, to the Loan Agreement (Exhibit 19.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1993). * 4.4(k) Fifth Amendment, dated as of August 2, 1992, to the Loan Agreement (Exhibit 4.4(j) to the Company's Annual Report on Form 10-K for the year ended October 31, 1993). * 4.4(l) Sixth Amendment, dated as of October 29, 1993, to the Loan Agreement (Exhibit 4.4(k) to the Company's Annual Report on Form 10-K for the year ended October 31, 1993). * 4.4(m) Seventh Amendment, dated as of March 30, 1994, to the Loan Agreement (Exhibit 4.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994). * 4.4(n) Eighth Amendment, dated as of August 29, 1994, to the Loan Agreement (Exhibit 4.4(n) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 4.4(o) Consent and Waiver Letter, dated as of September 12, 1994, to the Company from GECC (Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1994). * 4.4(p) Ninth Amendment, dated as of November 4, 1994, to the Loan Agreement (Exhibit 4.4(p) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * _______________ *Incorporated herein by reference as indicated. (iii) EXHIBIT INDEX ------------- Sequential Exhibit No. Description Page No. - ---------- ----------- -------- 4.4(q) Tenth Amendment, dated January 4, 1995, to the Loan Agreement (Exhibit 4.4(a) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 4.4(r) Eleventh Amendment, dated as of January 23, 1995, to the Loan Agreement (Exhibit 4.4(r) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 4.4(s) Twelfth Amendment, dated June 16, 1995, to the Loan Agreement (Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1995). * 4.4(t) Amended and Restated Debtor-in-Possession Loan Agreement, dated September 27, 1995 (as approved by the the United States Bankruptcy Court Southern District of New York on October 31, 1995). 82 4.5(a) Loan and Security Agreement ("Loan and Security Agreement"), dated December 27, 1991, between the Company and The CIT Group/Equipment Financing, Inc. ("CIT") (Exhibit 28.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 2, 1992). * 4.5(b) Amendment, dated September 2, 1992, to the Loan and Security Agreement (Exhibit 4.5(b) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). * 4.5(c) Amendment, dated October 30, 1992, to the Loan and Security Agreement (Exhibit 4.5(c) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). * 4.5(d) Amendment, dated December 31, 1992, to the Loan and Security Agreement (Exhibit 4.5(d) to Post-Effective Amendment No. 4 to the Company's Registration Statement (No. 33-38520) on Form S-1). * 4.5(e) Amendment, dated as of July 30, 1993, to the Loan and Security Agreement (Exhibit 4.5(e) to Post-Effective Amendment No. 4 to the Company's Registration Statement (No. 33-38520) on Form S-1). * ______________ *Incorporated herein by reference as indicated. (iv) EXHIBIT INDEX ------------- Sequential Exhibit No. Description Page No. - ---------- ----------- -------- 4.5(f) Third Amendment to the Loan and Security Agreement, dated as of June 13, 1994 (Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1994). * 4.5(g) Fourth Amendment to the Loan and Security Agreement, dated as of September 12, 1994 (Exhibit 4.5 to the Company's Quarterly Report on Form 10-K for the quarter ended July 31, 1994). * 4.5(h) Fifth Amendment to the Loan and Security Agreement, dated as of December 22, 1994 (Exhibit 4.5(h) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 4.5(i) Sixth Amendment to the Loan and Security Agreement, dated as of June 15, 1995 (Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1995). * 4.6(a) Indenture, dated as of April 5, 1993, between the Company and Shawmut Bank Connecticut, National Association ("Shawmut"), as trustee, relating to the Senior Secured Floating Rate Notes ("Senior Secured Notes") (Exhibit 4.6(a) to Post-Effective Amendment No. 4 to the Company's Registration Statement (No. 33-38520) on Form S-1). * 4.6(b) Form of Senior Secured Note due October 30, 1997 (Exhibit 4.6(b) to Post-Effective Amendment No. 4 to the Company's Registration Statement (No. 33-38520) on Form S-1). * 4.6(c) Form of Deed to Secure Debt, Assignments of Leases and Rents, Security Agreements and Fixture Filings, dated as of April 5, 1993, between the Company and Shawmut, as trustee (Exhibit 4.6(c) to Post-Effective Amendment No. 4 to the Company's Registration Statement (No. 33-38520) on Form S-1). * 4.6(d) Security Agreement, dated as of April 5, 1993, between the Company and Shawmut, as trustee (Exhibit 4.6(d) to Post-Effective Amendment No. 4 to the Company's Registration Statement No. 33-38520) on Form S-1). * 4.6(e) Form of Trademark Security Agreement, dated as of April 5, 1993, between the Company and Shawmut, as trustee (Exhibit 4.6(e) to Post-Effective Amendment No. 4 to the Company's Registration Statement (No. 33-38520) on Form S-1). * ______________ *Incorporated herein by reference as indicated. (v) EXHIBIT INDEX ------------- Sequential Exhibit No. Description Page No. - ---------- ----------- -------- 4.6(f) Form of Patent Security Agreement, dated as of April 5, 1993, between the Company and Shawmut, as trustee (Exhibit 19.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 1, 1993). * 4.6(g) Amended and Restated Indenture, dated as of March 30, 1994, between the Company and Shawmut Bank of Connecticut, National Association, as trustee, relating to the Senior Secured Notes (Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994). * 4.6(h) Form of Original Senior Secured Note (incorporated herein by reference to Exhibit 4.6(g)). * 4.6(i) Form of Additional Senior Secured Note (incorporated herein by reference to Exhibit 4.6(g). * 4.6(j) Form of First Amendment to Deed to Secure Debt, Assignments of Leases and Rents, Security Agreements and Fixture Filings, dated as of March 30, 1994, between the Company and Shawmut Bank Connecticut, National Association, as trustee (Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994). * 4.6(k) First Amendment to Pledge and Security Agreement, dated as of March 30, 1994 between the Company and Shawmut Bank Connecticut, National Association, as trustee (Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994). * 4.6(l) First Amendment to Trademark Security Agreement (foreign), dated as of March 30, 1994, between the Company and Shawmut Bank Connecticut, National Association, as trustee (Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994). * 4.6(m) First Amendment to Trademark Security Agreement (U.S.), dated as of March 30, 1994, between the Company and Shawmut Bank Connecticut, National Association, as trustee (Exhibit 4.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994). * ______________ *Incorporated herein by reference as indicated. (vi) EXHIBIT INDEX ------------- Sequential Exhibit No. Description Page No. - ---------- ----------- -------- 4.6(n) First Amendment to Patent Security Agreement, dated as of March 30, 1994, between the Company and Shawmut Bank Connecticut, National Association, as trustee (Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 1, 1994). * 4.6(o) Supplemental Indenture, dated as of January 23, 1995, between the Company and Shawmut Bank Connecticut, National Association, as trustee, relating to the Senior Secured Notes (Exhibit 4.6(o) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 4.6(p) Supplemental Indenture, dated as of June 15, 1995, between the Company and Shawmut Bank Connecticut, National Association, as trustee, relating to the Senior Secured Notes (Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1995). * 10.1(a) J. P. Stevens & Co., Inc. Trademark Assignments to the Company, effective December 28, 1985, dated January 29, 1986 (Exhibit 10(h) to the Company's Registration Statement (No. 33-27296) on Form S-1). * 10.1(b) Lease, dated July 21, 1986, between the Company and 1185 Avenue of the Americas Associates ("1185 Associates") (Exhibit 10(t) to the Company's Registration Statement (No. 33-27296) on Form S-1). * 10.1(c) Lease Modification Agreement, dated December 5, 1991, between the Company and 1185 Associates (Exhibit 10.7 to the Company's Registration Statement (No. 33-44417) on Form S-1). * 10.1(d) Consent to Lease Modification Agreement, dated May 11, 1992, between the Company and 1185 Associates (Exhibit 10.2(c) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). * 10.1(e) Lease Modification Agreement, dated May 11, 1992, between the Company and 1185 Associates (Exhibit 10.1(d) to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). * 10.1(f) Lease dated January 31, 1995 between 1155 Avamer Realty Corp., and the Company (Exhibit 10.1(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended January 29, 1995). * ______________ *Incorporated herein by reference as indicated. (vii) EXHIBIT INDEX ------------- Sequential Exhibit No. Description Page No. - ---------- ----------- -------- 10.1(g) Lease Takeover Agreement dated January 31, 1995 between the Company and 1155 Avamer Realty Corp. (Exhibit 10.1(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended January 29, 1995). * 10.1(h) First Amendment to Lease dated as of December 27, 1995 between 1155 Avamer Realty Corp., and the Company. 197 10.2(a) Amended Note Registration Rights Agreement, dated as of November 19, 1990, among the Company and the parties thereto (Exhibit 10.4 to the Company's Registration Statement (No. 33-38520) on Form S-1). * 10.2(b) Common Stock Registration Rights Agreement, dated as of November 19, 1990, among the Company, Columbia Savings & Loan Association, CSL Investments, Executive Life Insurance Company and the parties thereto (Exhibit 10.5 to the Company's Registration Statement (No. 33-38520) on Form S-1). * 10.2(c) Preferred Stock Registration Rights Agreement, dated as of November 19, 1990, between the Company and Executive Life Insurance Company (Exhibit 10.6 to the Company's Registration Statement (No. 33-38520) on Form S-1). * 10.2(d) Common Stock Registration Rights Agreement, dated as of September 9, 1994, between the Company and Resolution Trust Corporation as receiver for Columbia Savings & Loan Association, F.A (Exhibit 10.2(d) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 10.2(e) Common Stock Registration Rights Agreement, dated as of April 4, 1995, among the Company and Odyssey Partners, L.P. 201 10.3(a) Common Stock Incentive Plan as amended as of March 30, 1994 (Exhibit 10.3(a) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 10.3(b) Form of Incentive Stock Option Agreement (Exhibit 4.2(a) to the Company's Registration Statement (No. 33-55770) on Form S-8). * 10.3(c) Alternative Form of Incentive Stock Option Agreement (Exhibit 4.2(b) to the Company's Registration Statement (No. 33-55770) on Form S-8). * ______________ *Incorporated herein by reference as indicated. (viii) EXHIBIT INDEX ------------- Sequential Exhibit No. Description Page No. - ---------- ----------- -------- 10.4(a) Form of Equity Referenced Deferred Incentive Award Agreement ("ERA") (Exhibit 10.13 to the Company's Registration Statement (No. 33-44417) on Form S-1). * 10.4(b) Amendment, dated February 10, 1994, to the ERA Agreement, dated February 26, 1992 (Exhibit 10.4(b) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 10.5(a) Form of Change in Control Agreement (Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). * 10.5(b) Employment Agreement dated December 16, 1993 between the Company and Christopher L. Schaller. (Exhibit 10.5(b) to the Company's Annual Report on Form 10-K for the year ended October 31, 1993). * 10.5(c) Form of Employment Agreement for Executive Vice Presidents. (Exhibit 10.5(c) to the Company's Annual Report on Form 10-K for the year ended October 31, 1993). * 10.6(a) Supplemental Retirement Benefit Plan (Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). * 10.6(b) Trust Agreement, dated December 30, 1993, of the Supplemental Retirement Benefit Plan Trust. (Exhibit 10.6(b) to the Company's Annual Report on Form 10-K for the year ended October 31, 1993). * 10.7 Management Incentive Plan - Fiscal Year 1995 (Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 10.8 Non-Qualified Salaried Employees' Savings, Investment and Profit Sharing Plan (Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended November 1, 1992). * 10.9(a) Form of Indemnity Agreement, effective as of February 7, 1994, between the Company and its corporate officers (Exhibit 10.9(a) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 10.9(b) Form of Indemnity Agreement, effective as of February 7, 1994, between the Company and its directors (Exhibit 10.9(b) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * ____________ *Incorporated herein by reference as indicated. (ix) EXHIBIT INDEX ------------- Sequential Exhibit No. Description Page No. - ---------- ----------- -------- 10.10(a) License Agreement, dated July 1, 1992, between Campangia Tessile S.p.A. ("licensor") and the Company (Exhibit 10.10(a) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 10.10(b) Guarantee Agreement, dated July 1, 1992, between the Licensor and the Company (Exhibit 10.10(b) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 10.10(c) Italian Fabrics Purchase Agreement, dated July 1, 1992, between the Licensor and the Company (Exhibit 10.10(c) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 10.10(d) Liquidated Damages Agreement, dated July 1, 1992, between the Licensor and the Company (Exhibit 10.10(d) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 10.10(e) Use of the mark "Carpini" Agreement, dated July 1, 1992, between the Licensor and the Company (Exhibit 10.10(e) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 10.10(f) Consultancy/Sales Fee Agreement, dated July 1, 1992, between Woolverton Limited ("Consultant") and the Company (Exhibit 10.10(f) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 10.10(g) Guarantee Agreement, dated July 1, 1992, between the Consultant and the Company (Exhibit 10.10(g) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 10.10(h) Consultation for Purchase of Italian Fabrics Agreement, dated July 1, 1992, between the Consultant and the Company (Exhibit 10.10(h) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 10.10(i) Liquidated Damages Agreement, dated July 1, 1992, between the Consultant and the Company (Exhibit 10.10(i) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * 10.10(j) Renegotiation of Sales Fee Arrangements for Non-Registration of Marks, dated July 1, 1992, between the Consultant and the Company (Exhibit 10.10(j) to the Company's Annual Report on Form 10-K for the year ended October 30, 1994). * ____________ *Incorporated herein by reference as indicated. (x) EXHIBIT INDEX ------------- Sequential Exhibit No. Description Page No. - ---------- ----------- -------- 10.10(k) Agreement for Financial Consulting Services between Jay Alix & Associates and the Company, dated July 31, 1995. 218 10.10(l) Letter of Acknowledgement and Agreement dated August 18, 1995, between Jay Alix & Associates and the Company, outlining changes to "Agreement for Financial Consulting Services" dated July 31, 1995. 225 11.1 Computation of per share earnings. 227 23.1 Consent of Deloitte & Touche LLP. 228 27 Financial Data Schedule (for EDGAR only) 229 (xi) EX-4.4(T) 2 AMEND. DEBTOR-IN-POSSESSION LOAN AGREEMENT Exhibit 4.4(t) AMENDED AND RESTATED DEBTOR-IN-POSSESSION LOAN AGREEMENT Dated as of September 27, 1995 among FORSTMANN & COMPANY, INC., The Lenders Named Herein, and GENERAL ELECTRIC CAPITAL CORPORATION as Agent for the Lenders TABLE OF CONTENTS ----------------- ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS 2 1.1 Defined Terms 2 1.2 Use of Defined Terms 31 1.3 Accounting Terms 31 1.4 Rounding 31 1.5 Exhibits and Schedules 31 1.6 Miscellaneous Terms 31 ARTICLE 2 AMOUNT AND TERMS OF CREDIT 32 2.1 Advances 32 2.2 Letters of Credit 33 2.3 Special Advances by Lenders 36 2.4 Agent's Right to Assume Funds Available 36 2.5 Accounting 37 2.6 Single Loan 37 2.7 Priority Nature of Obligations 37 2.8 Carve Out 37 ARTICLE 3 PRINCIPAL PAYMENTS; INTEREST; FEES 38 3.1 Principal Payments 38 3.2 Termination of Commitment 38 3.3 Mandatory Prepayments 39 3.4 Interest 39 3.5 Fixed Rate Elections 40 3.6 Facility Fees 41 3.7 Commitment Fees 41 3.8 Letter of Credit Fees 41 3.9 Agent's Fees 42 3.10 Increased Commitment or Funding Costs 42 3.11 LIBOR Costs 42 3.12 Special LIBOR Circumstances 43 3.13 Funding Losses 44 3.14 Default Rate 45 3.15 Payment and Computation of Interest 45 3.16 Non-Business Days 45 3.17 Payment Free of Taxes 45 3.18 Funding Sources 46 3.19 Failure to Charge Not Subsequent Waiver 46 3.20 Savings Clause 47 3.21 Pro Rata Treatment 47 3.22 Manner and Treatment of Payments 48 3.23 Agent's Right to Assume Payments Will Be Made 48 3.24 Survivability 48 ARTICLE 4 REPRESENTATIONS AND WARRANTIES 48 4.1 Existence and Qualification; Power; Compliance With Laws 48 4.2 Authority; Compliance With Other Agreements and Instruments 49 4.3 Requirements of Law; Performance of Contractual Obligations 50 4.4 No Governmental Approvals Required 50 4.5 Subsidiaries 50 4.6 Financial Statements 50 4.7 Title to and Location of Property 51 4.8 Intangible Assets 51 4.9 Governmental Regulation 51 4.10 Litigation; Judgments 51 4.11 Binding Obligations 52 4.12 No Default 52 4.13 ERISA 52 4.14 Regulations G and U 53 4.15 Disclosure 53 4.16 Tax Liability 54 4.17 Security Interests 54 4.18 Employee Matters 54 4.19 Subordination of Subordinated Indebtedness 54 4.20 Real Property 55 4.21 Environmental Matters 55 4.22 Ownership of Capital Stock 56 ARTICLE 5 AFFIRMATIVE COVENANTS (OTHER THAN INFORMATION AND REPORTING REQUIREMENTS) 57 5.1 Use of Proceeds 57 5.2 Payment of Taxes and Other Potential Liens 57 5.3 Preservation of Existence 57 5.4 Maintenance of Properties 58 5.5 Maintenance of Insurance 58 5.6 Compliance with Laws 58 5.7 Inspection Rights 58 5.8 Audit Rights 59 5.9 Keeping of Records and Books of Account 59 5.10 Compliance With Agreements 59 5.11 Environmental Laws 59 5.12 Additional Real Property Collateral 61 5.13 Collections 61 ARTICLE 6 NEGATIVE COVENANTS 62 6.1 Disposition of Property; Application of Proceeds 62 6.2 Restrictions on Fundamental Changes 63 2 6.3 Restricted Payments 63 6.4 Subordinated Indebtedness; CIT Facility 63 6.5 ERISA 63 6.6 Change in Nature or Conduct of Business 64 6.7 Liens 64 6.8 Indebtedness 65 6.9 Transactions with Affiliates 66 6.10 Sales and Leasebacks 66 6.11 Margin Regulations 66 6.12 Investments 66 6.13 Amendment of Charter or By-Laws 67 6.14 Capital Stock 67 6.15 Fiscal Year 67 6.16 Cash Management System 67 6.17 Cancellation of Indebtedness 68 6.18 Commingling 68 6.19 Capital Expenditures 68 6.20 Operating Leases 68 6.21 EBITDA 68 6.22 Restated Indenture 68 6.23 Payment of Prepetition Indebtedness; Adequate Protection 69 6.24 Return of Goods 69 ARTICLE 7 INFORMATION AND REPORTING REQUIREMENTS 70 7.1 Financial Information and Reports 70 7.2 Collateral Information and Reports 72 7.3 Operating Leases; Capital Leases, Etc 73 7.4 Other Specific Information and Reports 74 7.5 Other Information and Reports (Generally) 77 ARTICLE 8 CONDITIONS PRECEDENT TO EFFECTIVE DATE; EFFECT OF RESTATEMENT; EXTENSIONS OF CREDIT ON AND AFTER EFFECTIVE DATE 77 8.1 Conditions Precedent to Effective Date 77 8.2 Confirmation of Effectiveness 79 8.3 Effect of Restatement 79 8.4 Conditions Precedent to Extensions of Credit on and After Effective Date 80 ARTICLE 9 EVENTS OF DEFAULT AND REMEDIES UPON EVENTS OF DEFAULT 81 9.1 Events of Default 81 9.2 Remedies Upon Event of Default 84 3 ARTICLE 10 THE AGENT 85 10.1 Appointment and Authorization; No Fiduciary Responsibility 85 10.2 Agent and Affiliates 86 10.3 Lenders' Credit Decisions 86 10.4 Action by Agent 86 10.5 Liability of Agent 87 10.6 Indemnification 88 10.7 Successor Agent 89 10.8 Proportionate Interest of the Lenders in any Collateral 89 ARTICLE 11 MISCELLANEOUS 90 11.1 Cumulative Remedies; No Waiver 90 11.2 Amendments; Consents 90 11.3 Costs, Expenses and Taxes 91 11.4 Nature of Lender's Obligations 92 11.5 Survival of Representations and Warranties 92 11.6 Notices 92 11.7 Execution in Counterparts 94 11.8 Binding Effect; Assignment 94 11.9 Trustees; Bankruptcy Court Proceedings 96 11.10 Sharing of Setoffs 97 11.11 Indemnity by Borrower 98 11.12 Nonliability of Lenders 99 11.13 Confidential Information 100 11.14 No Third Parties Benefited 100 11.15 Right of Setoff - Deposit Accounts 101 11.16 Further Assurances 101 11.17 Integration 101 11.18 Governing Law 102 11.19 Severability of Provisions 102 11.20 Headings 102 11.21 Conflict in Loan Documents 102 11.22 Choice of Forum 102 11.23 Consequential Damages; Waiver of Trial by Jury 104 11.24 Purported Oral Amendments 104 11.25 Intercreditor Agreement 104 11.26 Estoppel 105 4 Exhibits -------- A - First Amendment to Blocked Account Agreement B - Borrowing Base Certificate C - Compliance Certificate D - Loan Assignment E - Opinion of Debevoise & Plimpton F - Request for Advance G - Request for Fixed Rate Election H - Request for Letter of Credit I - Revolving Credit Note Schedules --------- 1.1 - CIT Collateral 4.7 - Locations of Property 4.8 - Patents and Trademarks 4.10 - Litigation 4.13 - Pension Plans 4.20 - Real Property 4.21 - Environmental Matters 4.22 - Ownership of Capital Stock 5.5 - Minimum Insurance Requirements 6.7 - Existing Liens 6.8 - Existing Capital Leases, etc. 6.12 - Investments 6.16 - Bank Accounts 5 AMENDED AND RESTATED DEBTOR-IN-POSSESSION LOAN AGREEMENT ----------------------------------- Dated as of September 27, 1995 THIS AMENDED AND RESTATED DEBTOR-IN-POSSESSION LOAN AGREEMENT ("Agreement") --------- is entered into as of the date set forth above, but effective only as of the Effective Date (as hereinafter defined), by and among FORSTMANN & COMPANY, INC., a Georgia corporation having its principal place of business and chief executive office at 1155 Avenue of the Americas, New York, New York 10036, as Debtor-in-Possession under Chapter 11 of the United States Bankruptcy Code ("Borrower"), the lenders named herein (individually, a "Lender" and - ---------- ------ collectively the "Lenders") and GENERAL ELECTRIC CAPITAL CORPORATION, a New York ------- corporation having an office at 201 High Ridge Road, Stamford, Connecticut 06927-5100 ("GE Capital"), as agent for itself and the other Lenders hereunder ---------- (GE Capital, in such capacity, the "Agent"). ----- RECITALS -------- A. The Lenders, the Agent and Borrower are party to a Loan Agreement, dated as of October 30, 1992, as amended (the "Original Loan Agreement"), ----------------------- pursuant to which the Lenders agreed to extend credit and other financial accommodations to Borrower subject to the terms and conditions therein contained. B. On September 22, 1995 (the "Petition Date"), Borrower commenced ------------- Chapter 11 Case No.95 B 44190 (JLG) (the "Chapter 11 Case") by filing a --------------- voluntary petition for relief pursuant to the provisions of Chapter 11 of the United States Bankruptcy Code, Title 11 U.S.C. (S) 101 et seq. (as the same may ------ be amended from time to time, the "Bankruptcy Code") with the United States --------------- Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). ---------------- C. Pursuant to Sections 1107 and 1108 of the Bankruptcy Code, Borrower has retained possession of its assets and is autho rized as a debtor-in- possession to continue the operation and man agement of its business. D. Borrower has requested that the Lenders continue to extend credit and other financial accommodations to Borrower for a limited period of time during the pendency of the Chapter 11 Case on substantially the same terms and conditions as set forth in the Original Loan Agreement, with such modifications as are set forth herein, in order to provide an uninterrupted flow of funds to permit Borrower to purchase inventory, to meet ordinary and necessary expenses of operation, to preserve the value of Borrower and to permit Borrower time within which to seek replacement debtor-in- possession financing, all so as to enhance Borrower's prospects for an effective reorganization. E. The Lenders have indicated their willingness to extend such credit and other financial accommodations to Borrower for such purposes and on such basis, subject, however, to all those terms and conditions set forth herein amending and restating the existing terms and conditions of the Original Loan Agreement and subject to the fulfillment of all of the conditions precedent set forth herein to the Lenders' obligation to make the initial and each subsequent extension of credit and financial accommodation pursuant to this Agreement. F. Borrower, the Lenders and the Agent have executed this Agreement in order to evidence and memorialize the foregoing, and Borrower has applied to the Bankruptcy Court, pursuant to Sections 364(c)(1), (c)(2), (c)(3) and (d)(1) of the Bankruptcy Code, to obtain credit and incur debt, under and as provided in this Agreement. G. The parties desire to amend and restate the Original Loan Agreement in its entirety in order to set forth in a single agreement all of the provisions of the Original Loan Agreement, as heretofore amended and as further amended by the amendments to the Original Loan Agreement contained herein, and for convenience of reference. AGREEMENT --------- In consideration of the mutual covenants and agreements herein contained, the parties hereto amend and restate the Original Loan Agreement and covenant and agree as follows, effective as of the Effective Date: ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS -------------------------------- 1.1 Defined Terms. As used in this Agreement, the following terms shall ------------- have the meanings set forth respectively after each: "Account Debtor" means any Person who is or who may become obligated to -------------- Borrower under, with respect to, or on account of, an Account. "Accounts" means all rights to payment for Inventory sold or for services -------- rendered arising in the ordinary course of Borrower's business. "Advance" means an advance made to Borrower by Lenders before the Petition ------- Date or an advance to be made to Borrower by the Lenders on or after the Effective Date, as the context may 2 require, each according to that Lender's Pro Rata Share of the Commitment, pursuant to Section 2.1. ----------- "Affiliate" means, with respect to any Person, (a) each Person that, --------- directly or indirectly, owns or controls, whether beneficially, or as a trustee, guardian or other fiduciary, ten percent (10%) or more of the Capital Stock having ordinary voting power in the election of directors of such Person, (b) each Person that controls, is controlled by or is under common control with such Person or any Affiliate of such Person and (c) each of such Person's officers, directors, joint venturers and partners. For purposes of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise. "Agent" means GE Capital, in its capacity as agent for itself and any other ----- Lenders hereunder, and any successor agent appointed pursuant to Section 10.7. ------------ "Agent's Deposit Account" means the Agent's deposit account number 50-232- ----------------------- 854 maintained at Bankers Trust Company, New York, New York, ABA #0210-0103-3, or such other deposit account maintained at such bank or at such other bank as shall be designated by the Agent from time to time. "Agreement" means this Amended and Restated Debtor-in-Possession Loan --------- Agreement, either as originally executed or as it may from time to time be supplemented, modified, amended, renewed, extended or supplanted. "Asset Sale Provision" means Section 4.13 of the Restated Indenture (as in -------------------- effect on March 30, 1994) or any successor provision which is the same in substance as such Section 4.13. "Bankruptcy Code" has the meaning set forth in the preamble to this --------------- Agreement. "Bankruptcy Court" has the meaning set forth in the preamble to this ---------------- Agreement. "Bankruptcy Rules" means the Federal Rules of Bankruptcy Procedure ---------------- promulgated by the Supreme Court of the United States pursuant to Section 2075 of Title 28, United States Code, as the same may be amended from time to time. "Bill and Hold Accounts" means Accounts of Borrower for Inventory that has ---------------------- been sold and invoiced to an Account Debtor, as to which the Account Debtor has accepted the subject Inventory and title to such Inventory has passed to such Account Debtor, but such Account Debtor has not yet paid the invoice and has directed Borrower to hold shipment of such Inventory pending delivery in- 3 structions from such Account Debtor. "Blocked Account Agreement" means the Lockbox and Lockbox Account Agreement ------------------------- dated November 13, 1992 among Borrower, the Agent and Citibank, N.A., as amended by an amendment in substantially the form of Exhibit A hereto. --------- "Borrower" means Forstmann & Company, Inc., a Georgia corporation, having -------- its principal place of business and chief execu tive office at the address set forth in the introductory paragraph to this Agreement, as debtor and debtor-in- possession in the Chapter 11 Case. "Borrower's Deposit Account" means a deposit account to be maintained by -------------------------- Borrower with a bank selected by Borrower and rea sonably acceptable to the Agent and any substitution therefor identified to the Agent by a Senior Officer of Borrower. "Borrowing Base" means, as of any date of determination, an amount -------------- determined by the Agent to be equal to the sum of (a) up to 85% of Eligible Accounts (other than Eligible Bill and Hold Accounts), plus (b) the lesser of ---- ------ $10,000,000 or the sum of (i) up to 85% of Eligible Bill and Hold Accounts which are not more than thirty (30) days past invoice date, (ii) up to 75% of Eligible Bill and Hold Accounts which are more than thirty (30) days, but not more than sixty (60) days, past invoice date, (iii) up to 60% of Eligible Bill and Hold Accounts which are more than sixty (60) days, but not more than ninety (90) days, past invoice date and (iv) up to 45% of Eligible Bill and Hold Accounts which are more than ninety (90) days, but not more than one hundred eighty (180) days, past invoice date, plus (c) up to 60% of Eligible Inventory, plus (d) the ---- ---- lesser of $3,500,000 or the difference between 65% and 60% of Eligible - ------ Inventory. Borrower acknowledges that (i) the advance rates provided for in the preceding paragraph have been agreed to by Lenders and the Agent to reflect the Agent's determination of the loan value of Borrower's Eligible Accounts and Eligible Inventory as of the date of this Agreement, based upon such considerations as were known to the Agent as of such date, (ii) the Agent may, at any time or times hereafter, in the exercise of its sole credit judgment, decrease the advance rates against Eligible Accounts and Eligible Inventory, or provide for sublimits or varying advance rates as among the various categories of Eligible Accounts and Eligible Inventory, (iii) each such decrease, sublimit or variation shall become effective immediately upon the Agent's giving of notice thereof to Borrower, and (iv) immediately upon the Agent's giving of any notice as provided in the preceding subclause (iii), the provisions of the preceding paragraph shall be deemed to be amended in accordance therewith. The Borrowing Base shall be determined by the Agent with ref- 4 erence to the most recent Borrowing Base Certificate, adjusted on a daily basis since the most recent Borrowing Base Certificate to reflect Collections remitted to the Agent pursuant to Section 3.1 and applied to the outstanding principal ----------- amount of the Revolving Credit Loan and the daily reports furnished to the Agent pursuant to Section 7.2(a); provided that if on any date of determination, a -------------- -------- Borrowing Base Certificate has not been delivered as of the most recent due date therefor, the Borrowing Base shall mean such amount as may be determined by the Agent in the exercise of its reasonable judgment. The Agent shall have the right to establish reserves against the Borrowing Base as to such matters, events, conditions or contingencies as to which the Agent, in its sole credit judgment, determines reserves should be established hereunder, including, without limitation, reserves with respect to (a) taxes, charges and assessments of any Governmental Agency and Liens, (b) sums as to which the Agent is permitted to make Advances on Borrower's behalf under Section ------- 2.4, (c) anticipated costs of repair, replacement or restoration of damaged or - --- destroyed Property in accordance with the provisions of Section 6 of the Security Agreement and Section 7 of the Mortgage, (d) expenses incurred by Borrower in connection with the transactions contemplated to occur on the Effective Date which have not been paid by Borrower on or before such date, (e) potential liabilities for responding to Environmental Claims, potential costs of Remedial Actions and potential decreases in the value of the Collateral, in each case occurring as a result of Release of Contaminants or violations of Environmental Laws at or with respect to Borrower's Real Property, (f) anticipated costs of liquidation of Collateral upon the exercise of the Agent's rights and remedies under the Security Agreement and the Mortgage, (g) the Carve Out Amount as of the date of determination, and (h) such other matters, events, conditions or contingencies as to which the Agent determines that reserves should be established hereunder. "Borrowing Base Certificate" means a Borrowing Base Certificate in the -------------------------- form of Exhibit B, properly completed and executed by a Responsible Official of --------- Borrower. "Business Day" means any day that is not a Saturday, a Sunday, a day on ------------ which banks are required or authorized to be closed in the State of New York or a day on which the Agent is closed for business. "Capital Expenditures" means, with respect to any period, any expenditure -------------------- for fixed or capital assets, including MIS Expenditures and expenditures for maintenance and repairs during such period, which are required to be capitalized on the balance sheet of Borrower in accordance with GAAP, but excluding payments made by Borrower during such period under Capital Leases or Operating Leases. 5 "Capital Lease" means, at the time any determination thereof is to be made, ------------- any lease of property, real or personal, in respect of which the present value of the minimum rental commitment would be capitalized on a balance sheet of the lessee in accordance with GAAP. "Capital Lease Obligation" means, at the time any determination thereof is ------------------------ to be made, the amount of the liability in respect of a Capital Lease which would at such time be so required to be capitalized on a balance sheet of the lessee in accordance with GAAP. "Capital Stock" means any and all shares, interests, participations or ------------- other equivalents (however designated) of corporate stock or partnership interests. "Carve Out" has the meaning set forth in Section 2.8. --------- ----------- "Carve Out Amount" has the meaning set forth in Section 2.8. ---------------- ----------- "Cash" means all monetary items (including currency, coin and bank demand ---- deposits) that are treated as cash under GAAP. "Cash Collateral Account" has the meaning set forth in Section 2.2(i). ----------------------- -------------- "Cash Equivalents" means (a) marketable direct obligations issued or ---------------- unconditionally guaranteed by the United States Government or issued by an agency thereof and backed by the full faith and credit of the United States, in each case maturing within one (1) year after the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any pub lic instrumentality thereof maturing within ninety (90) days after the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc. (or, if at any time neither Standard & Poor's Corporation nor Moody's Investors Service, Inc. shall be rating such obligations, then from such other nationally recognized rating services acceptable to Agent) and not listed in Credit Watch published by Standard & Poor's Corporation, (c) commercial paper, other than commercial paper issued by Borrower or any of its Affiliates, maturing no more than ninety (90) days after the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 or P-1 from either Standard & Poor's Corporation or Moody's Investors Service, Inc. (or, if at any time neither Standard & Poor's Corporation nor Moody's Investors Service, Inc. shall be rating such obligations, then the highest rating from such other nationally recognized rating services acceptable to Agent), and (d) domestic and Eurodollar certificates of deposit or time deposits or bankers' acceptances maturing within ninety (90) days 6 after the date of acquisition thereof issued by any commercial bank organized under the Laws of the United States of America or any state thereof or the District of Columbia or Canada having combined capital and surplus of not less than $250,000,000. "Change of Control" means (a) the sale, in one or a series of related ----------------- transactions, of all or substantially all of Borrower's assets as an entirety to any Person or related group of Persons; (b) the merger or consolidation of Borrower with or into another corporation or entity or the consolidation or merger of any other corporation or entity with or into Borrower, (c) the sale or other disposition of any of the Capital Stock of Borrower owned by Odyssey except sales or other dispositions which do not, in the aggregate, result in Odyssey owning less than twenty-five percent (25%) of the total voting power of Borrower's Capital Stock entitled to vote in the election of directors of Borrower, (d) any other occurrence (other than the issuance by Borrower of its Capital Stock in a public offering) which results in Odyssey owning less than twenty-five percent (25%) of the total voting power of Borrower's Capital Stock entitled to vote in the election of directors, managers or trustees of Borrower, or (e) any sale, other disposition or acquisition of any Capital Stock of Borrower or any other occurrence which results in any Person (other than Odyssey) owning more than thirty percent (30%) of the total voting power of Borrower's Capital Stock entitled to vote in the election of directors of Borrower. "Chapter 11 Case" has the meaning set forth in the preamble to this --------------- Agreement. "CIT" means The CIT Group/Equipment Financing, Inc. --- "CIT Collateral" means the capital assets described on Schedule 1.1 -------------- ------------ (together with all warranties, service contracts and like arrangements relating thereto, all documents relating to the operation thereof, any chattel paper evidencing any lease of, and any and all rents or profits or other amounts from time to time paid or payable in connection with, any such capital assets (but solely to the extent relating thereto) and all proceeds therefrom, all as more particularly described on Schedule 1.1) and other capital assets acquired by ------------- Borrower and financed or refinanced with the proceeds of the CIT Facility, in which Borrower has granted CIT a security interest to secure the payment of the obligations under the CIT Facility. "CIT Facility" means the facility provided by CIT in an amount of up to ------------ approximately $10,755,648 pursuant to the CIT Loan Agreement to finance and refinance Capital Expenditures. "CIT Loan Agreement" means the Loan and Security Agreement, dated as of ------------------ December 27, 1991, between Borrower and CIT, as the same may have been amended or modified prior to the date of this 7 Agreement and as the same may be amended subsequent to the date of this Agreement as permitted pursuant to Section 6.4. ----------- "Closing Date" means November 13, 1992, the day on which the transactions ------------ contemplated by the Original Loan Agreement were consummated. "Code" means the Internal Revenue Code of 1986, as amended or replaced and ---- as in effect from time to time, and any regulations promulgated pursuant thereto and rulings issued thereunder. "Collateral" means, collectively, all of the present and future right, ---------- title and interest of Borrower in and to its Property subjected to the Liens, or intended to be subjected to the Liens, created by the Collateral Documents, which Collateral shall include, but is not limited to, Borrower's accounts, inventory, equipment, instruments, patents, patent licenses, trademarks, trademark licenses, other intellectual property, contract rights, documents, general intangibles, Real Property and other Property, and proceeds of any of the foregoing, except to the extent that specific items or portions of any of the foregoing are expressly excluded under any of the Collateral Documents. "Collateral Documents" means, collectively, the Security Agreement, the -------------------- Mortgage, the Trademark Security Agreement, the Patent Security Agreement, the Blocked Account Agreement and any other pledge agreement, security agreement, assignment, deed of trust, mortgage, deed to secure debt or similar instrument executed by Borrower in favor of the Agent for the benefit of the Lenders to secure the Obligations. "Collection Account" means a deposit account maintained in the Agent's name ------------------ at Citibank, N.A. or such other bank or banks as the Agent shall select for the collection of proceeds of Accounts and Inventory of Borrower and of other Lenders' Primary Collateral. "Collections" means the collected balance from time to time of all proceeds ----------- of Accounts and Inventory deposited to the Collection Account pursuant to the terms and conditions of the Blocked Account Agreement. "Commitment" means Eighty-Five Million Dollars ($85,000,000), unless and ---------- until reduced to zero pursuant to Section 3.2. ----------- "Commitment Letter" means the commitment letter dated as of September 15, ----------------- 1995 between Forstmann & Company, Inc. and GE Capital. "Commitment Termination Date" means the earliest of (a) the Maturity Date, --------------------------- (b) the date of termination of the Lenders' Commitment by Borrower pursuant to Section 3.2, (c) the date of termination of the Lenders' Commitment by the - ----------- Agent pursuant to Section ------- 8 9.2, (d) the effective date of a plan of reorganization of Borrower confirms - ---- in the Chapter 11 Case pursuant to Section 1129 of the Bankruptcy Code, and (e) the occurrence of a Change of Control. "Compliance Certificate" means a compliance certificate in the form of ---------------------- Exhibit C, properly completed and executed by a Senior Officer of Borrower. - --------- "Contaminant" means those substances, materials, and items, in any form, ----------- whether solid, liquid, gaseous, semisolid or any combination thereof, whether waste materials, raw materials, chemicals, finished products, by products or any other material or ar ticle, which are regulated by or form the basis of liability under federal, state or local environmental, health and safety statutes or regulations including, without limitation, hazardous wastes, hazardous substances, pollutants, contaminants, asbestos, polychlorinated biphenyls ("PCBs"), petroleum (including, but not limited to, crude oil, ---- petroleum-derived substances, waste or breakdown or decomposition products thereof or any fraction thereof) and radioactive substances. "Contractual Obligation" means, as to any Person, any obligation under any ---------------------- outstanding Securities issued by that Person or any agreement, indenture, loan agreement, credit agreement, instrument or undertaking to which that Person is a party or by which it or any of its Property is bound. "Debtor Relief Laws" means the Bankruptcy Code and all other applicable ------------------ dissolution, liquidation, conservatorship, bankruptcy, moratorium, readjustment of debt, compromise, rearrangement, receivership, insolvency, reorganization or similar debtor relief laws from time to time in effect affecting the rights of creditors generally. "Default" means any event that, with the giving of notice or passage of ------- time, or both, would be an Event of Default. "Default Rate" means, at any time, two percent (2%) per annum over the ------------ applicable interest rates otherwise in effect hereunder with respect to the Loans. "Dollars" or "$" means United States of America dollars. ------- - "EBITDA" means, with respect to any period, Borrower's Net Income for such ------ period, plus (x) and minus (y) (without duplication), where (x) equals the sum ---- ----- of (i) Borrower's depreciation and amortization for such period, (ii) Interest Expense for such period, (iii) any provision for taxes based on income or profits that was deducted in computing Net Income for such period, (iv) losses from sales of Property during such period, (v) negative LIFO adjustments with respect to such period, (vi) extraordinary losses during such period, (vii) non- cash losses recognized in connection 9 with the establishment of inventory market reserves which arise from the identification of obsolete inventories when Borrower implements its fiscal year 1996 business plan, as well as subsequent changes in inventory market reserves which result in additional losses being recognized in the determination of Borrower's Net Income, (viii) non-cash losses recognized in connection with the writeoff of property plant, machinery and equipment rendered obsolete when Borrower implements its fiscal year 1996 business plan, (ix) non-cash losses recognized in connection with the writeoff of deferred software development costs and (x) administrative claims under the Bankruptcy Code that are included in the determination of Borrower's Net Income, and (y) equals the sum of (i) positive LIFO adjustments with respect to such period, (ii) gains from sales of Property during such period, (iii) extraordinary gains during such period, and (iv) changes in inventory market reserves which result in gains being recognized in Borrower's Net Income, all as determined in accordance with GAAP. "Effective Date" means the Business Day on which all of the conditions set -------------- forth in Section 8.1 shall have been satisfied and this Agreement shall become ----------- effective. "Eligible Accounts" means the aggregate book value of Accounts, including, ----------------- without limitation, Bill and Hold Accounts, which the Agent, in the reasonable exercise of its credit judgment, shall deem eligible, provided that no Account shall be deemed eligible if: (a) the Account is an Account in which the Agent does not have a perfected first priority Lien for the benefit of Lenders, or as to which Borrower does not have clear title, free and clear of all adverse claims of any kind; (b) the Account is billed on dating terms, other than Accounts billed on dating terms during the period from January 1 to June 30 in each calendar year which are due and payable on Septem ber 1 of such year, or otherwise on other than standard terms of payment (i.e., net sixty (60) days); ---- (c) (i) with respect to any Account billed on standard terms of payment, such Account has remained unpaid for a period exceeding one hundred twenty (120) days after the date of the invoice issued with respect to such Account (i.e., more than sixty (60) days past the due date thereof), (ii) with ---- respect to any Account billed on dating terms of payment (other than any Bill and Hold Account), such Account has remained unpaid more than two hundred forty- five (245) days after the date of the invoice issued with respect to such Account or more than thirty (30) days after the due date thereof, whichever is earlier or (iii) with respect to any Bill and Hold Account billed on dating terms of payment such Account has remained unpaid more than one hundred eighty (180) days after the date of the invoice issued with respect to such Account or more 10 than thirty (30) days after the due date thereof, whichever is earlier; (d) fifty percent (50%) or more of the outstanding Accounts from the Account Debtor which constituted Eligible Accounts at the time they arose are not deemed Eligible Accounts hereunder; (e) the Account Debtor is a supplier or creditor of Borrower, in which event such Account will be deemed ineligible to the extent of any sums owed by Borrower to the Account Debtor, or the Account is otherwise subject to any right of set-off by the Account Debtor, in which event such Account will be deemed ineligible to the extent of such right of set-off; (f) the Account is an account of the United States government, the government of any state of the United States or any political subdivision thereof, or any agency or instrumentality of any of the foregoing; provided, -------- however, that an account of the United States government or any agency or - ------- instrumentality thereof which is otherwise an Eligible Account will not be deemed ineli gible pursuant to this clause (f) if Borrower has complied with all requirements of the Federal Assignment of Claims Act (31 U.S.C. (S) 3727) relative to the assignment of such Account to the Agent; (g) the Account Debtor is the subject of a proceeding under any Debtor Relief Law; (h) the Account is subject to any claim or dispute by the Account Debtor (in which event such Account shall be deemed ineligible to the extent of the amount of the claim or dispute) or any material part of the subject goods has been returned, rejected, lost or damaged; (i) the Account is not evidenced by an invoice or other writing in form acceptable to the Agent in the reasonable exercise of its credit judgment; (j) the Account or Accounts, individually or when aggregated with all other then outstanding Accounts of the same Account Debtor, exceed fifteen percent (15%) in face value of all Accounts of Borrower then outstanding, in which event such Account or Accounts will be deemed ineligible to the extent of such excess; (k) the Account is denominated in other than United States dollars or is payable outside the United States, or the sale rep resented by such Account is to an Account Debtor outside the United States unless the sale is on letter of credit or acceptance terms reasonably acceptable to the Agent and the Agent has received an assignment of Borrower's rights under such letter of credit or acceptance or has been irrevocably designated the payee of such letter of credit or acceptance or the sale is insured by the Foreign Credit Insurance Association in form and amount reasonably 11 satisfactory to the Agent and the proceeds of such insurance have been assigned to the Agent pursuant to an assignment in form and substance satisfactory to the Agent; (1) with respect to such Account, any warranty or representation contained in this Agreement or any of the other Loan Documents or applicable either to Accounts in general or to any such specific Account has been breached; (m) the Account Debtor is an Affiliate or employee of Borrower; (n) except for sales represented by Bill and Hold Accounts, the sale represented by such Account is on a bill and hold, undelivered sale, guaranteed sale, sale or return, consignment, or sale on approval basis; (o) the Agent believes, in the reasonable exercise of its credit judgment, that the collection of such Account is insecure or that such Account may not be paid; (p) the Account is subject to any Lien whatsoever, other than Liens in favor of the Agent and Liens in favor of the Trustee that are subject to the Intercreditor Agreement; (q) the Account is evidenced by chattel paper or other instrument; (r) the Account or Accounts exceed any credit limit established by the Agent for the Account Debtor based on the Agent's customary credit considerations, in which case such Account or Accounts will be deemed ineligible to the extent of such excess; (s) the Inventory giving rise to such Account has not been shipped and delivered to the Account Debtor (except in the case of Inventory sold pursuant to Bill and Hold Accounts) and accepted by the Account Debtor or the services giving rise to such Account have not been performed by Borrower and accepted by the Account Debtor; or (t) Borrower, in order to be entitled to collect the Account, is required to perform any additional service for, or perform or incur any additional obligation to, the Account Debtor (other than delivery in the case of Bill and Hold Accounts); or (u) the Account Debtor is located in any state imposing the condition on the right of a creditor to collect accounts receivable that such creditor has either qualified to do business in such state or filed a Business Activities Report or other appropriate report with the taxing or other designated authorities of such state for the then current year, unless Borrower has complied with such conditions on or prior to the date when such compliance is 12 required under applicable state law. The Agent shall have the right, based on the Agent's customary credit considerations, to establish reserves with respect to specific categories of ineligibility, in lieu of determining specific Accounts to be ineligible in accordance with the foregoing categories, and to establish reserves against eligibility to reflect reserves carried on Borrower's books and to reconcile accounting entries. In addition, the total amount of Borrower's Accounts which are ineligible pursuant to clause (c) above will be adjusted by adding thereto credit balances which are over sixty (60) days old. "Eligible Bill and Hold Accounts" means Eligible Accounts consisting of ------------------------------- Bill and Hold Accounts. "Eligible Inventory" means the lower of FIFO cost or market value of ------------------ Inventory which the Agent, in the reasonable exercise of its credit judgment, shall deem eligible, provided that no Inventory shall be deemed eligible if: (a) the Inventory consists of Inventory in which the Agent does not have a perfected first priority Lien, for the benefit of Lenders, or as to which Borrower does not have clear title, free and clear of all adverse claims of any kind, other than Liens in favor of the Trustee that are subject to the Intercreditor Agreement; (b) the Inventory is not (i) located at one of the places of business of Borrower listed on Schedule 4.7 which is either owned or leased by Borrower and ------------ which is located in a jurisdiction where all necessary UCC filings have been made to perfect the security interest of the Agent under the Security Agreement; (ii) located at such other place or places of business which is reported to the Agent on a schedule of inventory locations furnished to the Agent pursuant to Section 7.2(d)(viii) of this Agreement, which the Agent determines, in the - -------------------- reasonable exercise of its credit judgment, is an acceptable location for Eligible Inventory (and so notifies Borrower in writing) and which is located in a jurisdiction where all necessary UCC filings have been made to perfect the security interests of the Agent under the Security Agreement; or (iii) in transit from one such place of business to another; (c) the Inventory does not consist of raw materials, finished goods inventory or work in process Inventory consisting solely of griege goods and yarn in storage (but no other work in process Inventory shall be deemed eligible); (d) the Inventory consists of auxiliary manufacturing material, supplies, packaging, advertising or promotional materials or tolling Inventory (i.e., ---- Inventory to be processed or finished at third-party processing or finishing locations); 13 (e) the Inventory is located at any third-party finishing or processing location or public warehouse or is otherwise in the possession of a bailee; (f) the Inventory is located at any leased location of Borrower as to which the Agent has not received a landlord's lien waiver, and to the extent that the Agent shall reasonably so re quire, a consent to the collateral assignment to the Agent of the subject lease, in each case in form and substance satisfactory to the Agent; (g) the Inventory is slow moving or obsolete or is otherwise not currently saleable in the ordinary course of the business of Borrower; (h) the Inventory is under consignment to or from any Person or under any bill and hold or like arrangement; (i) the Inventory is not of good and merchantable quality, free from defects which would affect the market value thereof; (j) the Inventory does not meet all standards imposed by any Governmental Agency, or department or division thereof, having regulatory authority over such Inventory; or (k) with respect to such Inventory, any warranty or representation contained in this Agreement or any of the other Loan Documents applicable either to Inventory in general or to such specific Inventory has been breached; provided, however, that (i) the gross amount of Inventory consisting of raw - -------- ------- materials that will be considered for inclusion as Eligible Inventory shall not exceed $12,500,000 at any time from November 1, 1995 through October 31, 1996, (ii) the gross amount of Inventory consisting of work in process that will be considered for inclusion as Eligible Inventory shall not exceed $49,600,000 at any time during November 1995, $49,500,000 at any time during December 1995, $54,800,000 at any time during January 1996, $54,800,000 at any time during February 1996, $57,500,000 at any time during March 1996, $56,700,000 at any time during April 1996, $54,300,000 at any time during May 1996, $47,200,000 at any time during June 1996, $41,400,000 at any time during July 1996, $39,800,000 at any time during August 1996, $36,700,000 at any time during September 1996, or $39,000,000 at any time during October 1996, (iii) the gross amount of Inventory consisting of finished goods (exclusive of seconds and samples) that will be considered for inclusion as Eligible Inventory shall not exceed $20,100,000 at any time during November 1995, $22,000,000 at any time during December 1995, $19,800,000 at any time during January 1996, $21,700,000 at any time during February 1996, $15,200,000 at any time during March 1996, $15,300,000 at any time during April 1996, $12,400,000 at any time during May 1996, 14 $11,800,000 at any time during June 1996, $13,700,000 at any time during July 1996, $12,900,000 at any time during August 1996, $14,900,000 at any time during September 1996, or $13,400,000 at any time during October 1996, and (iv) the gross amount of Inventory consisting of seconds and samples that will be considered for inclusion as Eligible Inventory shall not exceed $3,000,000 at any time from the Effective Date through the Commitment Termination Date. The Agent shall have the right, based on the Agent's customary credit considerations, to establish reserves with respect to specific categories of ineligibility, in lieu of determining specific items of Inventory to be ineligible in accordance with the foregoing categories, and to establish reserves against eligibility to reflect reserves carried on Borrower's books (including, without limitation, reserves for "beginning profit in inventory") and to reconcile accounting entries. "Environmental Claim" shall mean any notice of violation (including, ------------------- without limitation, any notice of expenditures necessary to come into compliance with or maintain compliance with, any Environmental Law or Environmental Permit), claim (whether based on strict liability or otherwise), demand, abatement or other order or direction (conditional or otherwise) by any governmental authority or any Person for personal injury (including sickness, disease or death), toxic tort, tangible or intangible property damage, damage to the environment, trespass, damage to natural resources, nuisance, pollution, contamination or other adverse effects on the environment, or for fines, penalties or restrictions, resulting from or based upon (a) the existence, or the continuation of the existence, of a Release or a threatened Release (including, without limitation, sudden or non-sudden, accidental or non- accidental Releases), of, or exposure to, any Contaminant, odor or audible noise or other release or emission in, into or onto the environment (including, without limitation, the air, soil, subsurface strata, drinking water supply, groundwater or any surface water or any sediments associated with any water body), and in, by, from, or related to any of the Real Property, (b) the environmental aspects of the transportation, storage, treatment, disposal, generation, recycling, reclamation, use or other handling of any Contaminants or other materials in connection with the operation of the any of the Real Property or the conduct of Borrower's business or (c) the violation, or alleged violation, of any applicable statutes, common law, ordinances, decrees, agreements, orders, rules, regulations, Environmental Permits, licenses, registrations or approvals of or from any governmental authority, agency or court relating to environmental matters connected with the any of the Real Property. "Environmental Laws" shall mean all applicable federal, state, local or ------------------ foreign laws relating to the environment, natural resources, safety, health or the regulation of Contaminants, including, without limitation, the Comprehensive Environmental Re- 15 sponse, Compensation, and Liability Act (42 U.S.C. (S) 9601 et seq.) ("CERCLA"), -- --- ------ the Hazardous Material Transportation Act (49 U.S.C. (S) 1801 et seq.), the -- --- Resource Conservation and Recovery Act (42 U.S.C. (S) 6901 et seq.) ("RCRA"), -- --- ---- the Clean Water Act (33 U.S.C. (S) 1251 et seq.), the Clean Air Act (42 U.S.C. -- --- (S) 7401 et seq.), the Toxic Substances Control Act, as amended (15 U.S.C. (S) -- --- 2601 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. -- --- (S) 136 et seq.), the Emergency Planning and Community Right-to-Know Act (42 -- --- U.S.C. (S) 11001 et seq.), the Safe Drinking Water Act (42 U.S.C. (S) 201 and -- --- (S) 300 et seq.), The Rivers and Harbors Act (33 U.S.C. (S) 401 et seq.), The -- --- -- --- Oil Pollution Act (33 U.S.C. (S) 2701 et seq.) and the Occupational Safety and -- --- Health Act (29 U.S.C. (S) 651 et seq.), as such laws have been and may be -- --- amended or supplemented from time to time, and any analogous future federal, state, local or foreign laws and all rules and regulations promulgated pursuant to any of such federal, state, local or foreign laws. "Environmental Lien" means a Lien in favor of any Governmental Agency for ------------------ (a) liability under Environmental Laws or (b) damages arising from, or costs incurred by such Governmental Agency in response to, a Release or threatened Release of a Contaminant. "Environmental Permit" means any permit, approval, authorization, -------------------- registration, license, variance or permission required from a Governmental Agency having jurisdiction under an applicable Environmental Law. "Equipment" means all of Borrower's present and future machinery, --------- equipment and fixtures. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time, and any applicable regulations promulgated pursuant thereto. "ERISA Affiliate" means, with respect to any Person, any other Person (or --------------- any trade or business, whether or not incorporated) that is under common control with that Person within the meaning of Section 414(b) and (c) of the Code. "Event of Default" has the meaning set forth in Section 9.1. ---------------- ----------- "Facility Usage" means, as of any date of determination, the sum of (a) the -------------- principal amount of the Revolving Credit Loan then outstanding (including Advances constituting Prepetition Obligations and Advances constituting Postpetition Obligations), plus (b) the aggregate amount of all Letter of Credit ---- Obligations then outstanding (including Prepetition Letter of Credit Obligations and Postpetition Letter of Credit Obligations). "Final Borrowing Order" means the order of the Bankruptcy Court entered in --------------------- the Chapter 11 Case after a final hearing under 16 Bankruptcy Rule 4001(c)(2), satisfactory in form and substance to the Lenders, and from which no appeal has been timely filed, or if timely filed, no stay of such order pending appeal shall have been granted, together with all extensions, modifications and amendments thereto consented to in writing by the Lenders, (a) authorizing Borrower to obtain credit and incur indebtedness under this Agreement and the other Loan Documents, (b) granting and establishing the priority and perfection of Liens under this Agreement and the other Loan Documents, (c) approving the form of, and the rights, remedies and obligations contained in, this Agreement and the other Loan Documents, (d) providing for the administrative expense priority of the Lenders' claims hereunder constituting Postpetition Obligations, (e) finding that notice of and opportunity for a hearing on the proceedings relating to the entry of the Final Borrowing Order were adequate and appropriate under the circumstances, (f) finding that extensions of credit pursuant to this Agreement made by the Lenders shall constitute extensions of credit made in good faith under Section 364(e) of the Bankruptcy Code, and (g) providing that the stay under Section 362 of the Bankruptcy Code shall be automatically lifted, modified or otherwise vacated (i) immediately for perfection and implementation of all Liens under this Agreement and the other Loan Documents and (ii) upon not less than five Business Days' notice to Borrower, the Office of the United States Trustee and counsel to the Official Committee (or, in the absence of any such Official Committee, to Borrower's 20 largest unsecured creditors as set forth in the list filed pursuant to Bankruptcy Rule 1007(d)), for enforcement of all Liens granted under this Agreement and the other Loan Documents, all without need for further order or authorization of the Court, all as set forth in such Order. "Financial Covenants" means the covenants contained in Sections 6.19 ------------------- ------------- through 6.21 of this Agreement. ---- "Fiscal Quarter" means each of the four fiscal quarters of Borrower ending -------------- on the Sunday closest to January 31, April 30, July 31 and October 31, respectively, of each Fiscal Year. "Fiscal Year" means the annual accounting period of Borrower ending on the ----------- Sunday closest to October 31 in each calendar year. "Fixed Rate Election" has the meaning set forth in Section 3.5. ------------------- ------------ "Fixed Rate Loan" means the Revolving Credit Loan at any time during which --------------- the Revolving Credit Loan is to bear interest at the Fixed Rate pursuant to Section 3.5. - ----------- "Fixed Rate" means, the LIBOR Rate plus three percent (3%) per annum. ---------- ---- "Floating Rate Loan" means the Revolving Credit Loan at any ------------------ 17 time during which the Revolving Credit Loan is to bear interest at the Floating Rate pursuant to Section 3.4. ----------- "Floating Rate" means the Index Rate plus one and one-half percent (1.5%) ------------- ---- per annum. "GAAP" means, as of any date of determination, accounting principles ---- referenced as "generally accepted" in then currently effective Statements of the Auditing Standards Board of the American Institute of Certified Public Accountants, or if such Statements are not then in effect, accounting principles that are then approved by a significant segment of the accounting profession in the United States of America, applied on a basis consistent in all material respects with those accounting principles applied at prior dates or for prior periods. "GE Capital" has the meaning set forth in the introductory paragraph of ---------- this Agreement. "Governmental Agency" means (a) any international, foreign, federal, state, ------------------- county or municipal government, or political subdivision thereof, (b) any governmental agency, authority, board, bureau, commission, department or instrumentality, (c) any court or administrative tribunal, (d) any non- governmental agency or entity that is vested by a governmental agency with applicable jurisdiction over a Person, or (e) any arbitration tribunal or other non-governmental authority to whose jurisdiction a Person has given its general consent. "Guaranty" means any Contractual Obligation, contingent or otherwise, of -------- any Person with respect to any Indebtedness, obligation or liability of another, if the primary purpose or intent thereof by the Person incurring the Contractual Obligation is to provide assurance to the obligee of such Indebtedness, obligation or liability of another Person that such Indebtedness, obligation or liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders thereof will be protected (in whole or in part) against loss in respect thereof including, without limitation, direct and indirect guarantees, endorsements (except for collection or deposit in the ordinary course of business), notes co-made or discounted, recourse agreements, take-or-pay agreements, keep-well agreements, agreements to purchase or repurchase such Indebtedness, obligation or liability or any security therefor or to provide funds for the payment or discharge thereof, agreements to maintain solvency, assets, level of income, or other financial condition, and agreements to make payment other than for value received. "Hedging Obligations" means the obligations of Borrower under any interest ------------------- rate protection agreement, interest rate future, interest rate option, interest rate swap, interest rate cap or other interest rate hedge arrangement, to or under which Borrower is or 18 becomes a party or beneficiary. "Indebtedness" means, as applied to any Person at any time, (a) all ------------ indebtedness, obligations or other liabilities of such Person (i) for borrowed money or evidenced by debt securities, debentures, acceptances, notes or other similar instruments, and any accrued interest, fees and charges relating thereto, (ii) under profit payment agreements or in respect of obligations to redeem, repurchase or exchange any Securities of such Person or to pay dividends in respect of any Capital Stock, (iii) with respect to letters of credit issued for such Person's account, (iv) to pay the deferred purchase price of property or services, except accounts payable and accrued expenses arising in the ordinary course of business, (v) in respect of Capital Leases or (vi) which are Guaranties; (b) all indebtedness, obligations or other liabilities of such Person or others secured by a Lien (other than a Permitted Encumbrance described in clause (c), (d), (e) or (f) of Section 6.7) on any property of such Person, ----------- whether or not such in debtedness, obligations or liabilities are assumed by such Person, all as of such time; (c) all indebtedness, obligations or other liabilities of such Person in respect of foreign exchange contracts, net of liabilities owed to such Person by the counterparties thereon; (d) all preferred stock subject (upon the occurrence of any contingency or otherwise) to mandatory redemption; and (e) all contingent Contractual Obligations with respect to any of the foregoing. "Index Rate" means the greater of (a) the average of the prime, base or ---------- equivalent rate of interest announced or published from time to time hereafter by Morgan Guaranty Trust Company of New York, Citibank, N.A., Chemical Bank and The Chase Manhattan Bank (National Association), or the successor by merger or consolidation to any of such banks (with the understanding that such rates may merely serve as a basis upon which effective rates of interest are calculated for loans making reference thereto and that such rates are not necessarily the lowest or best rates at which such banks calculate interest or extend credit), and (b) the most recent published annual yield on ninety-day commercial paper (or the average of such yields if more than one is published) sold through dealers by major corporations in multiples of $1,000, as quoted either in the Federal Reserve Rate Report which customarily appears in The Wall Street Journal ----------------------- (Eastern Edition) under "Money Rates" or, in the event such report shall not so appear, in such other nationally recognized publication as the Agent may, from time to time, specify to Borrower. The Index Rate shall be determined by the Agent as of the last Business Day of each month, and the Index Rate on that date shall be the Index Rate used in calculating the Floating Rate which is payable for the next succeeding calendar month. "Intercreditor Agreement" means the Amended and Restated Intercreditor ----------------------- Agreement, dated as of March 30, 1994, between the 19 Agent and the Trustee, amending and restating the Intercreditor Agreement, dated as of April 5, 1993, between the Agent and the Trustee, as such Amended and Restated Intercreditor Agreement may be amended, modified or supplemented hereafter. "Interest Expense" means, with respect to any period, the amount which, in ---------------- conformity with GAAP, would be set forth opposite the caption "interest expense" (or any like caption) on Borrower's income statement for such period, including all fees owed in respect of letters of credit and net costs under Hedging Obligations, but excluding amortization of deferred financing costs and debt discounts, all as determined in accordance with GAAP. "Interest Period" means a period of 1, 2 or 3 whole calendar months, as --------------- designated by Borrower in a Request for Fixed Rate Election; provided that no -------- Interest Period shall extend beyond the earlier of the Maturity Date or any date fixed for termination of the Lenders' Commitment pursuant to Section 3.2. ----------- "Interim Borrowing Order" means an order of the Bankruptcy Court entered in ----------------------- the Chapter 11 Case after an interim hearing under Bankruptcy Rule 4001(c)(2), satisfactory in form and substance to the Lenders, and from which no appeal has been timely filed, or if an appeal has been filed, no stay of such order pending appeal shall have been granted, together with all extensions, modifications and amendments thereto consented to in writing by the Lend ers, (a) authorizing, on an interim basis, Borrower to execute and to perform under the terms of this Agreement and the other Loan Documents, (b) granting and establishing the priority and perfection of Liens under this Agreement and the other Loan Documents, (c) approving the form of, and the rights, remedies and obligations contained in, this Agreement and the other Loan Documents, (d) providing for the administrative expense priority of the Lenders' claims hereunder constituting Postpetition Obligations, (e) finding that notice of and opportunity for a hearing on the proceedings relating to entry of the Interim Borrowing Order were adequate and appropriate under the circumstances, (f) finding that extensions of credit made by the Lenders pursuant to this Agreement shall constitute extensions of credit made in good faith under Section 364(e) of the Bankruptcy Code, and (g) providing that the stay under Section 362 of the Bankruptcy Code shall be automatically lifted, modified or otherwise vacated (i) immediately for perfection and implementation of all Liens under this Agreement and the other Loan Documents and (ii) upon not less than three Business Days' notice to Borrower, the Office of the United States Trustee and counsel to the Official Committee (or, in the absence of any such Official Committee, to Borrower's 20 largest unsecured creditors as set forth in the list filed pursuant to Bankruptcy Rule 1007(d)), for enforcement of all Liens granted under this Agreement and the other Loan Documents, all without need for further order or authorization of the Court, all as set forth in such Order. 20 "Inventory" means goods held by Borrower for sale or raw materials, work --------- in process or materials used or consumed in Borrower's business. "Investment" means, when used in connection with any Person, any investment ---------- by that Person, whether by means of a purchase or other acquisition of Capital Stock or other Securities of any other Person or by means of a loan, advance, capital contribution, Guaranty, or other debt or equity participation or interest in any other Person, including any partnership or joint venture interest in any other Person. The amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the market value or book value of such Investment. "Laws" means, when used in connection with any Person, collectively, all ---- international, foreign, federal, state and local statutes, treaties, rules, regulations, standards, guidelines, ordinances, codes, orders and judgments (or any official interpre tation of any of the foregoing) issued by any Governmental Agency applicable to that Person and, in the case of Borrower, shall include, without limitation, Environmental Laws, labor laws, ERISA and tax laws. "Leasehold Real Property" means all leasehold interests in real property ----------------------- held by Borrower, as lessee, wherever located, together with all rights of the lessee under the related lease, a listing of which as of the date of this Agreement is set forth in Schedule 4.21. ------------- "Lender" means any of the lenders signatory to this Agreement, their ------ successors and, upon the effective date after recordation with the Agent pursuant to Section 11.8 of a Loan Assignment executed by a Lender Assignee, ------------ such Lender Assignee. "Lender Assignee" means any institutional investor, bank, financial --------------- institution or commercial lender that has executed and recorded with the Agent a Loan Assignment pursuant to Section 11.8(d). --------------- "Lenders' Primary Collateral" has the meaning assigned to it in the --------------------------- Intercreditor Agreement, as in effect on March 30, 1994. "Lenders' Commitment" means the collective commitment of the Lenders, prior ------------------- to the Commitment Termination Date, to make Advances and incur Letter of Credit Obligations pursuant to Article 2 hereof, not to exceed as to all of the Lenders --------- the amount of the Commitment or as to any Lender its Pro Rata Share of the amount of the Commitment. "Letter of Credit" means any documentary or standby letter of credit issued ---------------- at the request and for the account of Borrower for 21 which the Lenders have incurred Letter of Credit Obligations pursuant to Section 2.2. - ----------- "Letter of Credit Agreement" means such form of reimbursement agreement as -------------------------- shall be mutually satisfactory to the Letter of Credit Issuer and the Agent. "Letter of Credit Guaranty" means a guaranty issued by GE Capital on behalf ------------------------- of the Lenders guaranteeing the reimbursement obligations of Borrower to the Letter of Credit Issuer under any Letters of Credit arranged for by the Agent under the Original Loan Agreement or this Agreement. "Letter of Credit Issuer" means, as of the Effective Date, ABN AMRO Bank, ----------------------- N.V. and, from time to time thereafter, such other bank or other legally authorized Person as shall be selected by the Agent in its sole discretion to issue Letters of Credit. "Letter of Credit Obligations" means all outstanding obligations incurred ---------------------------- by Lenders at the request of Borrower, whether direct or indirect, contingent or otherwise, due or not due, in connection with the issuance or guarantee, by any Lender or any other Person, of Letters of Credit, including, without limitation, the obligations of GE Capital under the Letter of Credit Guaranty and the obligations of the Lenders pursuant to Section 2.2(c). The amount of -------------- such Letter of Credit Obligations shall equal the maximum amount which may be payable by Lenders thereupon or pursuant thereto. "LIBOR Base Rate" means, for any Interest Period, the rate per annum equal --------------- to the offered rate for deposits in Dollars for the applicable Interest Period which appears on Telerate Page 3750 as of 11:00 a.m. (London, England time) two (2) LIBOR Business Days prior to the beginning of such Interest Period. "LIBOR Business Day" means a Business Day on which banks may accept ------------------ deposits of Dollars in the London interbank market. "LIBOR Rate" means, for any Interest Period, that rate per annum determined ---------- solely by the Agent pursuant to the following formula (with each component expressed as a decimal and rounded upward to the nearest 1/100 of 1%): LIBOR Base Rate ----------------------------- 1.00-LIBOR Reserve Percentage "LIBOR Reserve Percentage" means, with respect to any Interest Period, the ------------------------ maximum percentage then applicable under Regulation D or other applicable Laws to determine reserve requirements of member banks in the Federal Reserve System with respect to "eurocurrency liabilities," irrespective of whether any Lender is at the time a member bank of the Federal Reserve System or 22 otherwise subject to such requirements. The determination by the Agent of the LIBOR Reserve Percentage shall be conclusive in the absence of manifest error. "Lien" means any mortgage, deed of trust, deed to secure debt, pledge, ---- hypothecation, assignment for security, security interest, encumbrance, lien or charge of any kind, whether voluntarily incurred or arising by operation of Law, by statute, by contract, or otherwise, affecting any Property, including any agreement to grant any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature of a security interest, and/or the filing of or agreement to give any financing statement (other than a precautionary financing statement with respect to a lease that is not in the nature of a security interest) under the UCC or comparable Law of any jurisdiction with respect to any Property. "Loan Assignment" means a Loan Assignment executed by a Lender and an --------------- assignee of such Lender substantially in the form of Exhibit D and recorded with --------- the Agent pursuant to Section 11.8. ------------ "Loan Documents" means, collectively, this Agreement, the Revolving Credit -------------- Notes, the Collateral Documents and any other agreements of any type or nature heretofore or hereafter executed and delivered by Borrower or any of its Affiliates in favor of the Agent or Lenders in any way relating to or in furtherance of this Agreement, in each case either as originally executed or as the same may from time to time be supplemented, modified, amended, restated, extended or supplanted. "Majority Lenders" means, as of any date of determination, Lenders holding ---------------- Revolving Credit Notes evidencing at least 67% of the aggregate Indebtedness evidenced by the Revolving Credit Notes, or, if no such Indebtedness is outstanding, at least 67% of the Commitment. "Material Adverse Effect" means any set of circumstances or events which, ----------------------- alone or in conjunction with other circumstances or events occurring concurrently therewith (a) has or is reasonably expected to have any material adverse effect whatsoever upon the validity or enforceability of any Loan Document, (b) is or is reasonably expected to be material and adverse to the condition (financial or otherwise), business operations, results of operations or prospects of Borrower or the industry in which Borrower operates, (c) materially impairs or is reasonably expected to materially impair the ability of Borrower to perform the Obligations, (d) materially impairs or is reasonably expected to materially impair the ability of the Lenders to enforce their legal remedies pursuant to the Loan Documents or (e) has or is reasonably expected to have any material adverse effect whatsoever on the Collateral, the Liens of the Agent on the Collateral or the priority of such Liens. 23 "Maturity Date" means October 31, 1996. ------------- "MIS Expenditures" means all deferred and Cash expenditures made by ---------------- Borrower in connection with the acquisition and development of computer software for Borrower's management information systems which are capitalized as intangible assets on Borrower's balance sheet. "Monthly Payment Date" means the last day of each calendar month after the -------------------- Effective Date, through and including the Commitment Termination Date. "Monthly Report" has the meaning assigned to it in Section 7.2(d). -------------- -------------- "Mortgage" means, collectively, the deeds to secure debt covering the -------- Owned Real Property executed by Borrower on the Closing Date, either as originally executed or as the same from time to time may be supplemented, modified, amended, renewed, extended or supplanted. "Multiemployer Plan" means any employee benefit plan of the type described ------------------ in Section 4001(a)(3) of ERISA. "Net Income" means, with respect to any period, the net income (or loss) ---------- after taxes of Borrower, as determined in accordance with GAAP. "Net Worth" means, as of the last day of any Fiscal Quarter, Borrower's --------- shareholders' equity (deficiency), as determined in accordance with GAAP. "1993 Securities" means Borrower's Senior Secured Floating Rate Notes due --------------- October 30, 1997, in the aggregate original principal amount of Twenty Million Dollars ($20,000,000), issued pursuant to the Securities Indenture (as amended and restated pursuant to the Restated Indenture), as such notes may be amended, modified, supplemented, extended, renewed, refinanced, refunded or replaced. "1994 Securities" means Borrower's Senior Secured Floating Rate Notes due --------------- October 30, 1997, in the aggregate original principal amount of Ten Million Dollars ($10,000,000), issued pursuant to the Restated Indenture, as such notes may be amended, modified, supplemented, extended, renewed, refinanced, refunded or replaced. "Noteholders' Primary Collateral" has the meaning assigned to it in the ------------------------------- Intercreditor Agreement, as in effect on March 30, 1994. "Notes Security Documents" means the "Security Documents", as that term is ------------------------ defined in the Restated Indenture, exclusive, however, of the Intercreditor Agreement. 24 "Obligations" means all present and future obligations of every kind or ----------- nature of Borrower at any time and from time to time owed to the Agent or the Lenders or any one or more of them under any one or more of the Loan Documents, whether due or to become due, matured or unmatured, liquidated or unliquidated, or contingent or non-contingent, including obligations of performance as well as obligations of payment, including Prepetition Obligations and Postpetition Obligations and including, to the extent permitted by applicable Debtor Relief Laws, interest that accrues after the commencement of any proceeding under any Debtor Relief Law by or against Borrower. "Odyssey" means Odyssey Partners, L.P., a Delaware limited partnership. ------- "Officer's Certificate" means, when used with reference to any Person, a --------------------- certificate signed by a Senior Officer of such Person. "Official Committee" means the official committee of unsecured creditors in ------------------ the Chapter 11 Case. "Opinion of Counsel" means the favorable written legal opinion of Debevoise ------------------ & Plimpton, special counsel to Borrower, substantially in the form of Exhibit E, --------- together with copies of all factual certificates and legal opinions upon which such counsel has relied. "Original Loan Agreement" has the meaning set forth in the recitals to this ----------------------- Agreement. "Owned Real Property" means all real property owned by Borrower wherever ------------------- located, together with all improvements thereon and appurtenances thereto, a listing of which as of the date of this Agreement is set forth in Schedule 4.21. ------------- "Patent Security Agreement" means the collateral assignment or assignments ------------------------- covering all patents owned by Borrower or in which Borrower has rights as a licensee, executed by Borrower on the Closing Date, either as originally executed or as the same from time to time may be supplemented, modified, amended or extended. "PBGC" means the Pension Benefit Guaranty Corporation or any successor ---- thereto established under ERISA. "Pension Plan" means any "employee pension benefit plan" that is subject to ------------ Title IV of ERISA and which is maintained for employees of Borrower or any of its ERISA Affiliates. "Permitted Encumbrances" has the meaning assigned to it in Section 6.7. ---------------------- ----------- "Person" means any entity, whether an individual, trustee, corporation, ------ general partnership, limited partnership, joint stock 25 company, trust, estate, unincorporated organization, business association, tribe, firm, joint venture, Governmental Agency, or otherwise. "Petition Date" has the meaning set forth in the preamble to this ------------- Agreement. "Postpetition Letter of Credit" means any Letter of Credit issued after the ----------------------------- Petition Date. "Postpetition Letter of Credit Obligations" means and includes all Letter ----------------------------------------- of Credit Obligations in respect of Postpetition Letters of Credit. "Postpetition Obligations" means and includes all liabilities and ------------------------ obligations of Borrower as a result of Advances made under the Lenders' Commitment after the Petition Date, including, without limitation, principal and accrued and unpaid interest. "Prepetition Letter of Credit Obligations" means and includes all Letter of ---------------------------------------- Credit Obligations in respect of Letters of Credit issued on or prior to the Petition Date. "Prepetition Obligations" means and includes all liabilities and ----------------------- obligations of Borrower as a result of Advances made on or prior to the Petition Date under the Lenders' Commitment established under the Original Loan Agreement, including, without limitation, principal and accrued and unpaid interest thereon (regardless of whether such interest accrued prior to, on, or after the Petition Date). "Professionals' Carve Out Amount" has the meaning set forth in Section 2.8. ------------------------------- ----------- "Property" means any interest in any kind of property or asset, whether -------- real, personal or mixed, tangible or intangible. "Pro Rata Share" means, with respect to each Lender, the percentage set -------------- forth opposite the name of that Lender on the signature pages hereof. "Quarterly Report" has the meaning assigned to it in Section 7.2(e). ---------------- -------------- "Real Property" means, collectively, the Owned Real Property and the ------------- Leasehold Real Property, in each case whether now or hereafter owned or leased by Borrower. "Regulation D," "Regulation G" and "Regulation U" mean, respectively, ------------ ------------ ------------ Regulations D, G and U of the Board of Governors of the Federal Reserve System as from time to time in effect and all official rulings and interpretations thereunder or thereof. 26 "Release" shall mean any release, spill, emission, leaking, pumping, ------- emptying, dumping, injection, abandonment, deposit, disposal, discharge, dispersal, leaching or migration of Contaminants (including, but not limited to, the abandonment or discarding of Contaminants in barrels, drums or other containers) into the indoor or outdoor environment or into or out of any Real Property, including the movement of Contaminants, into, under, on, through or in the air, soil, subsurface strata, surface water, groundwater, drinking water supply, any sediments associated with any water bodies or any other environmental medium. "Remedial Action" shall mean all actions required to (a) clean up, remove, --------------- treat, dispose of or in any other way address Contaminants in the indoor or outdoor environment; (b) prevent the Release or threat of Release or minimize the further Release of Contaminants so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; (c) respond to or otherwise mitigate Releases, or (d) perform pre- remedial studies and investigations and post-remedial monitoring and care in respect of actions contemplated in the preceding clauses (a), (b) and (c). "Request for Advance" means a request for an Advance substantially in the ------------------- form of Exhibit F, signed by a Responsible Official of Borrower and properly --------- completed to provide all information required to be included therein. "Request for Fixed Rate Election" means a request for conversion of the ------------------------------- Revolving Credit Loan from a Floating Rate Loan to a Fixed Rate Loan, or for a renewal of the Revolving Credit Loan as a Fixed Rate Loan for a subsequent Interest Period, or that an Advance described in Section 3.5(b)(i)(C) constitute -------------------- a Fixed Rate Loan, substantially in the form of Exhibit G, signed by a Respon- --------- sible Official of Borrower and properly completed to provide all information required to be included therein. "Request for Letter of Credit" means a request for a Letter of Credit ---------------------------- substantially in the form of Exhibit H, signed by a Responsible Official of --------- Borrower and properly completed to provide all information required to be included therein. "Requirement of Law" means, with respect to an Person, (a) the articles or ------------------ certificate of incorporation and bylaws or other organizational or governing documents of such Person, (b) any Law applicable to such Person including, without limitation, any Environmental Law, and (c) any judgment, award, decree, writ or determination of a Governmental Agency, applicable to or binding upon such Person or any of its Property or to which such Person or any of its Property is subject. "Responsible Official" means any corporate officer of Borrower or any other -------------------- responsible official of Borrower duly acting on behalf 27 of Borrower. Any document or certificate hereunder that is signed or executed by a Responsible Official of Borrower shall be conclusively presumed to have been authorized by all necessary corporate and/or other action on the part of Borrower, and the Agent and Lenders shall be entitled to rely in good faith on the authorization to act of any such Person reasonably believed by the Agent or any Lender to be a Responsible Official of Borrower. "Restated Indenture" means the Amended and Restated Indenture, dated as of ------------------ March 30, 1994, executed between Borrower and the Trustee in amendment and restatement of the Indenture, as such Amended and Restated Indenture may be amended, modified, supple mented, extended, renewed, refunded or refinanced (and any renewals, refunding and replacements of any thereof). "Restated Indenture Notes" means, collectively, the 1993 Securities and ------------------------ the 1994 Securities. "Restricted Payment" means (a) any dividend or other distribution, direct ------------------ or indirect, on account of any shares of any class of Capital Stock of Borrower now or hereafter outstanding, except a dividend payable solely in shares of that class of stock or in any junior class of stock to the holders of that class, (b) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of Capital Stock of Borrower now or hereafter outstanding, (c) any payment or prepayment of principal of, premium, if any, or interest, fees or other charges on or with respect to, and any redemption, purchase, retirement, defeasance, sinking fund or similar payment and any claim for rescission with respect to, the Subordinated Indebtedness, (d) any payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding warrants, options or other Securities of Borrower now or hereafter outstanding, (e) any Investment by Borrower in the holder of five percent (5%) or more of any Capital Stock or other Securities of Borrower if a purpose of such Investment is to avoid characterization of the transaction as a Restricted Payment, and (f) any other payment by Borrower in respect of its Capital Stock or other Securities which would be characterized as a distribution under applicable Laws with respect to such Security. "Revolving Credit Loan" means the outstanding principal amount of the --------------------- Advances from time to time (including Advances constituting Prepetition Obligations and Advances constituting Postpetition Obligations). "Revolving Credit Note" means the promissory note in the amount of the --------------------- Commitment issued by Borrower to GE Capital on the Closing Date and any other promissory notes, substantially in the form of Exhibit I, from time to time --------- issued by Borrower in favor of a Lender evidencing such Lender's Pro Rata Share of all Advances made to Borrower, pursuant to such Lender's Pro Rata Share of the 28 Commitment. "Right of Others" means, as to any Property in which a Person has an --------------- interest, (a) any legal or equitable right, title or other interest (other than a Lien) held by any other Person in or with respect to that Property, and (b) any option or right held by any other Person to acquire any right, title or other interest in or with respect to that Property, including any option or right to acquire a Lien. "SEC" means the Securities and Exchange Commission and any successor --- Governmental Agency. "Securities" means any Capital Stock, shares, voting trust certificates, ---------- bonds, debentures, notes or other evidences of Indebtedness, limited partnership interests, or any warrant, option or other right to purchase or acquire any of the foregoing. "Securities Act" means the Securities Act of 1933, as amended, and the -------------- rules and regulations of the SEC thereunder. "Securities Exchange Act" means the Securities Exchange Act of 1934, as ----------------------- amended, and the rules and regulations of the SEC thereunder. "Securities Indenture" means the Indenture, dated as of April 5, 1993, -------------------- between Borrower and the Trustee, as the same may be amended, modified, supplemented, extended, renewed, refunded or refinanced (and any renewals, refundings and replacements of any thereof). "Security Agreement" means the security agreement covering the Property of ------------------ Borrower specified therein, executed by Borrower on the Closing Date, either as originally executed or as the same from time to time may be supplemented, modified, amended, renewed, extended or supplanted. "Senior Officer" means the (a) chief executive officer, (b) chief operating -------------- officer, (c) chief financial officer or (d) chief administrative officer, in each case whatever the title nomenclature may be, of the Person designated. "Senior Preferred Stock" means Borrower's 5% senior (Pay-in-Kind) Preferred ---------------------- Stock, par value $1.00. "Senior Subordinated Note Indenture" means the Amended and Restated ---------------------------------- Indenture dated as of November 19, 1990, as amended by the First Supplemental Indenture thereto dated as of November 29, 1990 and the Second Supplemental Indenture thereto dated as of March 4, 1992, amending and restating that certain Indenture dated as of April 27, 1989 between Borrower and First Trust National Association, as trustee, pursuant to which the Senior Subordinated 29 Notes were issued and are governed. "Senior Subordinated Notes" means, collectively, the 14-3/4% Senior ------------------------- Subordinated Notes due April 15, 1999 and the Split Coupon Redeemable Amended Senior Subordinated Notes due April 15, 1999 of Borrower issued pursuant to the Senior Subordinated Note Indenture. "Special Inventory L/C Credit" means an amount equal to fifty percent (50%) ---------------------------- of the aggregate Letter of Credit Obligations in respect of Letters of Credit that (i) are documentary letters of credit, (ii) are issued to support Borrower's payment obligations to a supplier of raw materials Inventory, (iii) are issued in respect of Inventory which has not yet been received by Borrower but which has been or will be consigned for shipment to Borrower and is or will be in transit directly to Borrower, and not to any finisher or other bailee of Borrower, and will otherwise be Eligible Inventory immediately upon receipt by Borrower, (iv) may only be drawn against by the presentation of customary certificates of insurance, shipping documents showing that such Inventory is in transit to Borrower (if not already delivered to Borrower) and documents of title with respect to such Inventory, and (v) is otherwise acceptable to the Agent. "Subordinated Indebtedness" means the Indebtedness evidenced by or in ------------------------- respect of (a) the Senior Subordinated Notes, (b) any refinancing of the Senior Subordinated Notes with the prior written consent of the Majority Lenders on terms and conditions reasonably satisfactory to the Majority Lenders (but in no event less favorable to Borrower than the terms and conditions of the Senior Subordinated Notes unless the Majority Lenders shall otherwise consent in writing), which Indebtedness shall not exceed the principal amount then outstanding under the Senior Subordinated Notes and shall be subordinated in right of payment to the Obligations in a manner reasonably satisfactory to the Majority Lenders, and (c) any additional Indebtedness incurred by Borrower with the prior written consent of the Majority Lenders on terms and conditions reasonably satisfactory to the Majority Lenders (but in no event less favorable to Borrower than the terms and conditions of the Senior Subordinated Notes unless the Majority Lenders shall otherwise consent in writing) and subordinated in right of payment to the Obligations in a manner satisfactory to the Majority Lenders. "Subsidiary" means any Person of which at least a majority of Capital Stock ---------- having ordinary voting power for the election of directors or other governing body of said Person is owned by Borrower directly or through one or more Subsidiaries. "Termination Event" means (a) a "reportable event" as defined in Section ----------------- 4043 of ERISA (other than a "reportable event" that is not subject to the provision for 30 day notice to the PBGC), (b) the withdrawal of Borrower or any of its ERISA Affiliates from 30 a Pension Plan during any plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, if such with drawal results in liability pursuant to Section 4063 of the Code, (c) the filing of a notice of intent to terminate a Pension Plan or the treatment of an amendment to a Pension Plan as a termination thereof pursuant to Section 4041 of ERISA, (d) the institution of proceedings to terminate a Pension Plan by the PBGC or (e) any other event or condition which might reasonably be expected to constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan (other than a Multiemployer Plan). "Trademark Security Agreement" means the collateral assignment or ---------------------------- assignments covering all trademarks and trade names owned by Borrower or in which Borrower has rights as a licensee, executed by Borrower on the Closing Date, either as originally executed or as the same from time to time may be supplemented, modified, amended, extended or supplanted. "Trustee" means Shawmut Bank Connecticut, National Association, as Trustee ------- under the Restated Indenture, and any successor Trustee under the Restated Indenture. "UCC" means the Uniform Commercial Code of the jurisdiction with respect to --- which such term is used, as in effect from time to time. 1.2 Use of Defined Terms. Any defined term used in the plural shall --------------------- refer to all members of the relevant class, and any de fined term used in the singular shall refer to any one or more of the members of the relevant class. 1.3 Accounting Terms. All accounting terms not specifically defined in ----------------- this Agreement shall be construed in conformity with, and all financial data required to be submitted by this Agreement shall be prepared in conformity with, GAAP except as otherwise specifically prescribed herein. In the event that GAAP changes during the term of this Agreement such that the defined terms set forth in Section 1.1 or that the Financial Covenants would then be calculated in a ----------- different manner or with different components or would render the same not meaningful criteria for evaluating Borrower's financial condition, (a) Borrower and the Lenders agree to amend this Agreement in such respects as are necessary to con form the defined terms set forth in Section 1.1 (as used in Article 6 of ----------- ---------- this Agreement) and the Financial Covenants so that the criteria for evaluating the matters contemplated by Article 6 (including the Financial Covenants) are --------- substantially the same criteria as were effective prior to such change in GAAP, and (b) Borrower shall be deemed to be in compliance with the Financial Covenants during the 60 day period following any such change in GAAP if and to the extent that Borrower would have been in compliance therewith under GAAP as in effect immediately prior to such 31 change. 1.4 Rounding. All ratios required to be maintained by Borrower --------- pursuant to the Financial Covenants shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed in the Financial Covenants and rounding the result up or down to the nearest number (with a round-up if there is no nearest number) to the number of places by which such ratio is expressed in the Financial Covenants. 1.5 Exhibits and Schedules. All Exhibits and Schedules to this ----------------------- Agreement, either as originally existing or as the same may from time to time be supplemented, modified, or amended, are incorporated herein by reference. A matter disclosed on any Schedule shall be deemed disclosed on all Schedules to the extent that it is specifically cross-referenced in any other applicable Schedule, but not otherwise. 1.6 Miscellaneous Terms. The term "or" is disjunctive; the term "and" -------------------- is conjunctive. The term "shall" is mandatory; the term "may" is permissive. Masculine terms also apply to females; feminine terms also apply to males. The term "including" is by way of example and not limitation. ARTICLE 2 AMOUNT AND TERMS OF CREDIT -------------------------- 2.1 Advances. --------- (a) Subject to the terms and conditions set forth in this Agreement, at any time and from time to time from the Effective Date to (but not including) the Commitment Termination Date, each Lender agrees, severally and for itself alone, that it shall, pro rata according to that Lender's Pro Rata Share of the --- ---- Commitment, make Advances to Borrower in such amounts as Borrower may request; provided that, after giving effect to each such Advance, (i) the Facility Usage - -------- does not exceed the Commitment, and (ii) the Facility Usage minus the Special ----- Inventory L/C Credit does not exceed the Borrowing Base. Subject to the limitations set forth herein, Borrower may borrow, repay and reborrow under this Section 2.1(a) without premium or penalty. - -------------- (b) Subject to the next succeeding sentence, each Advance shall be made pursuant to a Request for Advance which shall specify the requested (i) date of such Advance and (ii) amount of such Advance, and shall be given by Borrower to the Agent no later than 11:30 a.m., Atlanta time, on the Business Day of the proposed Advance for so long as GE Capital is the only Lender hereunder, and no later than 2:00 p.m., Atlanta time, on the Business Day preceding the proposed Advance in the event that any other Lender 32 has been made a party to this Agreement pursuant to Section 11.8. Unless the ------------ Agent has, in its sole and absolute discretion, notified Borrower to the contrary, an Advance may also be made pursuant to a request therefor by telephone by a Responsible Official of Borrower, received by the Agent by the time required for a Request for Advance, in which case Borrower shall confirm such request by promptly mailing to the Agent a Request for Advance conforming to the preceding sentence and concurrently telecopying to the Agent a copy of such Request for Advance. (c) Promptly following receipt of a Request for Advance, the Agent shall notify each Lender by telephone or telecopier of the date of the Advance and such Lender's Pro Rata Share of the Advance. Not later than 11:00 a.m., Atlanta time, on the date specified for any Advance, each Lender shall make its Pro Rata Share of the Advance available to the Agent by wire transfer of immediately available funds to the Agent's Deposit Account. Upon fulfillment of the applicable conditions set forth in Article 8, each Advance shall be made by --------- the Agent by wire transfer of immediately available funds to Borrower's Deposit Account, to the extent actually received from the Lenders. No Lender shall be responsible for the failure of any other Lender to make the Pro Rata Share of any Advance to be made by such other Lender. (d) Each Lender's Pro Rata Share of the Advances made to Borrower pursuant to Section 2.1(a) shall be evidenced by that Lender's Revolving Credit Note, -------------- subject to the provisions of Section 2.6. ------------ (e) A Request for Advance shall be irrevocable upon the Agent's first notification thereof. 2.2 Letters of Credit. ------------------ (a) Subject to the terms and conditions hereof, at any time and from time to time from the Effective Date to (but not including) the Commitment Termination Date, the Agent shall arrange for the issuance by the Letter of Credit Issuer of such Letters of Credit as Borrower may request by a Request for Letter of Credit; provided that, after giving effect to the Letter of Credit -------- Obligations incurred by the Lenders as a result thereof, (i) the aggregate amount of all Postpetition Letter of Credit Obligations then outstanding (other than Postpetition Letter of Credit Obligations in respect of Postpetition Letters of Credit that are issued to replace Prepetition Letters of Credit in face amounts not to exceed the respective face amounts of the Prepetition Letters of Credit so replaced) does not exceed $10,000,000, (ii) the Facility Usage does not exceed the Commitment, and (iii) the Facility Usage minus the ----- Special Inventory L/C Credit does not exceed the Borrowing Base. No Letter of Credit shall be arranged for by the Agent hereunder except to the extent reasonably necessary in connection with transactions in the ordinary course of business of 33 Borrower. The expiration date of any Letter of Credit shall not extend beyond the earlier of (i) one year from the date of issuance thereof, and (ii) any date fixed for termination of the Commitment pursuant to Section 3.2. ----------- (b) Each Request for Letter of Credit shall be submitted to the Agent at least three (3) Business Days prior to the date when required, accompanied by a Letter of Credit Agreement executed by a Responsible Official or, if the Letter of Credit Agreement is a master agreement covering multiple letter of credit applications, by an appropriate letter of credit application executed by a Re- sponsible Official. Upon issuance of a Letter of Credit by the Letter of Credit Issuer, the Agent shall notify the Lenders of the amount and terms thereof within a reasonable time thereafter. (c) Upon the incurrence of any Letter of Credit Obligation by GE Capital under the Letter of Credit Guaranty, each other Lender shall be deemed to have purchased from GE Capital a participation therein and in any rights of GE Capital under the related Letter of Credit Agreement, in an amount equal to that Lender's Pro Rata Share of the amount of the Letter of Credit Obligations so incurred. Without limiting the scope and nature of each Lender's participation in any Letter of Credit Obligations, to the extent that GE Capital has not been reimbursed by Borrower for any payment required to be made by GE Capital in respect of any Letter of Credit Obligations, each Lender shall, according to its Pro Rata Share, reimburse GE Capital promptly upon demand for the amount of such payment. The obligation of each Lender so to reimburse GE Capital shall be absolute and unconditional and shall not be affected by the occurrence of a Default, an Event of Default, the Commitment Termination Date or any other occurrence or event, nor be modified or diminished for any reason or in any manner whatsoever, including, without limitation, by virtue of any claim, action or defense that Borrower may have or assert against the Letter of Credit Issuer in respect of the payment of any draft or demand under any Letter of Credit or against GE Capital in respect of its reimbursement obligations hereunder. Any such reimbursement shall not relieve or otherwise impair the obligation of Borrower to reimburse GE Capital for the amount of any payment made by GE Capital in respect of any Letter of Credit Obligations together with interest as hereinafter provided. (d) Borrower agrees to pay to GE Capital, within one (1) Business Day after demand therefor, a principal amount equal to any payment made by GE Capital in respect of any Letter of Credit Obligations, together with interest on such amount from the date of any payment made by GE Capital through the date of payment by Borrower at the Floating Rate or, if then in effect, at the Default Rate. The principal amount of any such payment made by Borrower to GE Capital shall be used to reimburse GE Capital for the payment made by it in respect of such Letter of Credit Obligation. Each Lender that has reimbursed GE Capital pursuant to Section 2.2(c) -------------- 34 for its Pro-Rata Share of any payment made by GE Capital in respect of any Letter of Credit Obligation shall thereupon acquire a participation, to the extent of such reimbursement, in the claim of GE Capital against Borrower under this Section 2.2(d). -------------- (e) If Borrower fails to make any payment required by Section 2.2(d), the -------------- Agent may, without notice to or the consent of Borrower, notify each Lender that an Advance is to be made by Lenders under Section 2.1 in an aggregate amount ----------- equal to the amount paid by GE Capital in respect of its Letter of Credit Obli- gations in accordance with the procedures provided in Section 2.1(c) (or may -------------- deem any reimbursement made by Lenders pursuant to Section 2.2(c) to constitute -------------- the funding of such Advance) and, for this purpose, the conditions precedent set forth in Section 8.4 shall not apply. The proceeds of each such Advance shall ----------- be paid to GE Capital to reimburse it for the payment made by it in respect of such Letter of Credit Obligations, and each such Advance shall constitute Postpetition Obligations irrespective of whether the Letter of Credit Obligations so discharged are Postpetition Letter of Credit Obligations or Prepetition Letter of Credit Obligations. (f) The issuance of any supplement, modification, amendment, renewal or extension to or of any Letter of Credit shall be treated in all respects the same as the issuance of a new Letter of Credit, and each such Letter of Credit, and all Letter of Credit Obligations in respect thereof, shall in each case remain subject to this Section 2.2. ------------ (g) The obligation of Borrower to pay to GE Capital the amount of any payment made by GE Capital in respect of any Letter of Credit Obligation shall be absolute, unconditional and irrevocable, and Borrower's unconditional obligations to GE Capital hereunder shall not be modified or diminished for any reason or in any manner whatsoever, including, without limitation, by virtue of any claim, action or defense that Borrower may have or assert against the Letter of Credit Issuer in respect of the payment of any draft or demand under any Letter of Credit. Borrower hereby agrees that any action taken by GE Capital, if taken in good faith, under or in connection with a Letter of Credit or in respect of GE Capital's Letter of Credit Obligations, or the drafts or acceptances thereunder, shall be binding on Borrower and shall not impose any resulting liability on GE Capital, other than as a result of the gross negligence or wilful misconduct of GE Capital. (h) As between Borrower and the Letter of Credit Issuer, each Letter of Credit shall be issued pursuant to and shall be subject to the provisions of the respective Letter of Credit Agreement. As between Borrower and GE Capital, the provisions of this Agreement, to the extent in conflict with any provision of any Letter of Credit Agreement, shall control. Notwithstanding the foregoing, GE Capital shall be fully subrogated to all rights of the Letter of Credit Issuer under each Letter of Credit Agreement, upon 35 discharging its Letter of Credit Obligations in respect of the Letter of Credit issued thereunder. (i) In the event that any Letter of Credit Obligation, whether or not then due and payable, shall for any reason be outstanding on the Commitment Termination Date, then: (i) Borrower will pay to the Agent (A) Cash or Cash Equivalents in an amount equal to one hundred five percent (105%) of the then outstanding Letter of Credit Obligations or (B) provide a back-up letter of credit or guaranty from a financial institution satisfactory to the Agent in such amount, in form and substance satisfactory to the Agent. Such Cash or Cash Equivalents, in the case of clause (A) above, shall be held by the Agent in a cash collateral account (the "Cash Collateral Account"). The Cash ----------------------- Collateral Account shall be held in the name of the Agent (as a cash collateral account), for its benefit and the ratable benefit of the Lenders, and shall be under the sole dominion and control of the Agent and subject to the terms of this Section 2.2(i). Borrower hereby pledges, and -------------- grants to the Agent a security interest in, all Cash or Cash Equivalents held in the Cash Collateral Account from time to time and all proceeds thereof, as security for the payment of all amounts due in respect of the Letter of Credit Obligations, whether or not then due. (ii) From time to time after Cash or Cash Equivalents are deposited in the Cash Collateral Account, the Agent may apply such Cash or Cash Equivalents then held in the Cash Collateral Account to the payment of any amounts, in such order as the Agent may elect, as shall be or shall become due and payable by Borrower to the Agent, GE Capital or any other Lender in respect of such Letter of Credit Obligations. (iii) The Agent shall invest the Cash in the Cash Collateral Account or deposit such Cash in an interest-bearing account, as the Agent deems appropriate in its sole discre tion. Interest and earnings on the Cash or Cash Equivalents in the Cash Collateral Account shall become a part of the Cash Collateral Account and shall be held and disbursed by the Agent in accordance with this Section 2.2(i). -------------- (iv) Neither Borrower nor any Person claiming on behalf of or through Borrower shall have any right to withdraw any of the Cash or Cash Equivalents held in the Cash Collateral Account, except that upon the termination of any Letter of Credit Obligations in accordance with their terms and the payment of all amounts payable by Borrower to the Agent, GE Capital and the other Lenders in respect thereof, any Cash or Cash Equivalents remaining in the Cash Collateral Account in excess of the then remaining Letter of Credit Obligations shall be returned to Borrower. 36 (j) The Letter of Credit Issuer shall be entitled to the benefits accorded by Article 10 to the Agent, mutatis mutandis. ---------- ---------------- 2.3 Special Advances by Lenders. If Borrower fails to make any payment ---------------------------- of interest, fees, expenses, costs or other sums required to be paid to the Agent or any Lender or Lenders under the terms of this Agreement or any other Loan Document, the Agent may, without the consent of Borrower, but, except in the event of the failure of Borrower to pay interest when due under this Agreement, after giving Borrower at least three days' advance notice (which may be by telephone to a Responsible Official), notify each Lender that an Advance is to be made by the Lenders under Section 2.1 in an amount equal to the sum due ----------- from Borrower to the Agent or such Lender or Lender, and, for this purpose, the conditions precedent set forth in Section 8.4 shall not apply. The proceeds of ----------- such Advance shall be paid to the Agent or such Lender or Lenders for application to the payment of the sum due from Borrower to the Agent, such Lender or Lenders. The Agent shall promptly confirm the date and the amount of any such Advance to Borrower. 2.4 Agent's Right to Assume Funds Available. Unless the Agent shall have ---------------------------------------- been notified by any Lender at least one Business Day prior to the date on which any Advance is to be made to Borrower that such Lender does not intend to make available to the Agent such Lender's Pro Rata Share of such Advance, the Agent may assume that such Lender has made such amount available to the Agent on the date of the Advance and the Agent may, in reliance upon such assumption, make available to Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Agent by such Lender, the Agent shall be entitled to recover such corresponding amount on demand from such Lender, which demand shall be made in a reasonably prompt manner. If such Lender does not pay such corresponding amount forthwith upon the Agent's demand therefor, the Agent promptly shall notify Borrower and Borrower shall pay such corresponding amount to the Agent. The Agent shall also be entitled to recover from such Lender interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Agent to Borrower to the date such corresponding amount is recovered by the Agent, at a rate per annum equal to the rate per annum then in effect with respect to the Revolving Credit Loan. Nothing herein shall be deemed to relieve any Lender from its obligation to fulfill its Pro Rata Share of the Lenders' Commitment hereunder or to prejudice any rights which the Agent or Borrower may have against any Lender as a result of any default by such Lender hereunder. 2.5 Accounting. The Agent will provide to Borrower a monthly accounting ----------- of transactions under Articles 2 and 3 of this Agreement. Each and every such ---------- - accounting shall (absent manifest error) be deemed final, binding and conclusive upon Borrower in all respects as to all matters reflected therein, unless Borrower, within thirty (30) days after the date any such accounting is re- 37 ceived by Borrower, shall notify the Agent in writing of any objection which Borrower may have to any such accounting, describing the basis for such objection with specificity. In that event, only those items expressly objected to in such notice shall be deemed to be disputed by Borrower. The Agent's good faith determination, based upon the facts available, of any item objected to by Borrower in such notice shall (absent manifest error) be final, binding and conclusive on Borrower, unless Borrower shall commence a judicial proceeding to resolve such objection within sixty (60) days following the Agent's notifying Borrower of such determination. 2.6 Single Loan. The Advances, the Letter of Credit Obligations and all ------------ other Obligations of Borrower arising under this Agreement shall constitute one general obligation of Borrower secured by a first priority security interest in the Collateral (subject only to Permitted Encumbrances and the Carve Out). 2.7 Priority Nature of Obligations. Notwithstanding the Liens granted to ------------------------------ the Lenders under the Interim Borrowing Order and the Final Borrowing Order, all Postpetition Obligations of Borrower under this Agreement and the other Loan Documents shall also constitute administrative expenses of Borrower in the Chapter 11 Case with priority at all times under Section 364(c)(1) of the Bankruptcy Code over all other costs and expenses of the kind specified in or ordered pursuant to, Sections 105, 326, 330, 331, 364(a), (b) or (c)(1), 503(b), 507(a), 507(b) or 726 of the Bankruptcy Code, subject only to the Carve Out and the compensation payable to, and costs and expenses incurred by, a trustee in a case commenced under Chapter 7 of the Bankruptcy Code. 2.8 Carve Out. Following the occurrence and during the continuation of a --------- Default or Event of Default, the Lenders' Liens on the Collateral and the Lenders' administrative expense claim under Section 364(c)(1) of the Bankruptcy Code shall be subject to a prior claim (the "Carve Out") for (a) the unpaid --------- professional fees and expenses allowed in the Chapter 11 Case under Sections 330 or 331 of the Bankruptcy Code in an amount (determined without regard to fees and expenses paid on an interim basis) equal to the sum (the "Professionals' -------------- Carve Out Amount") of (i) $250,000, plus (ii)(A) $500,000, multiplied by (B) the - ---------------- ---- ---------- -- number of months elapsed since the later of the commencement of the Chapter 11 Case and the end of the most recent period in respect of which Borrower shall have paid any allowed professional fees and expenses pursuant to approved fee application(s), and (b) fees payable to the Office of the United States Trustee pursuant to 28 U.S.C. (S) 1930(a)(6) (the sum of the amounts set forth in Sections 2.8(a) and (b) hereof being referred to as the "Carve Out Amount"); - -------- ------ --- ---------------- provided, however, that the Carve Out Amount shall not be paid from amounts on - -------- ------- deposit in the Cash Collateral Account. So long as no Default or Event of Default has occurred and is continuing, Borrower shall be permitted to pay the professional fees and expenses allowed in the Chapter 11 Case under Sections 330 or 331 of the Bankruptcy Code, as the same 38 may be due and payable, and the same shall not reduce the Carve Out Amount and shall not be subject to disgorgement; provided, however, that nothing contained -------- ------- in this Section 2.8 shall require the Lenders to make Advances to Borrower ----------- subsequent to the occurrence of an Event of Default or to the extent that Lenders would not otherwise be obligated to make such Advance under Section 2.1 ----------- hereof. Notwithstanding any other provision of this Agreement, the Professionals' Carve Out Amount shall not exceed $2,500,000. ARTICLE 3 PRINCIPAL PAYMENTS; INTEREST; FEES ---------------------------------- 3.1 Principal Payments. All Collections remitted to the Agent's Deposit ------------------- Account from the Collection Account pursuant to the Blocked Account Agreement shall be applied on a daily basis first against the Prepetition Obligations in such order as the Agent shall elect until such Prepetition Obligations are paid in full and, thereafter, against the Postpetition Obligations from time to time outstanding in such order as the Agent shall elect. All such applications of Collections to Postpetition Obligations shall be applied to the prepayment of the Revolving Credit Loan and, from and after the Commitment Termination Date, to the repayment of any and all other Obligations of Borrower. All Collections shall be applied to Advances in the order that such Advances are or were made (i.e., to the oldest outstanding Advances hereunder). In no event shall any - ----- Advance remain outstanding for a period in excess of twenty-four months following the date such Advance is made, and the entire unpaid balance of the Revolving Credit Loan shall be due and payable in full in Cash on the Commitment Termination Date. 3.2 Termination of Commitment. Borrower may voluntarily terminate the ------------------------- Lenders' Commitment at any time by giving not less than five days' prior written notice to the Agent of its intent to terminate the Lenders' Commitment and the effective date of such termination. On such effective date, upon compliance by Borrower with the provisions of Sections 2.2(i), the Commitment shall reduce to --------------- zero and, in accordance with Section 3.3(a), Borrower shall immediately pay any -------------- outstanding principal amounts of the Revolving Credit Loan, together with any accrued and unpaid interest and accrued and unpaid fees pursuant to Sections -------- 3.6, 3.7 and 3.8 in Cash. - --- --- --- 3.3 Mandatory Prepayments. ---------------------- (a) The outstanding principal amount of the Revolving Credit Loan shall be immediately payable in Cash in an amount equal to any amount by which the Facility Usage at any time exceeds the lesser of (i) the Commitment or (ii) the Borrowing Base. Any payment made hereunder shall be applied to the Advances in the order in which such Advances are or were made. 39 (b) The Commitment shall terminate and the Revolving Credit Loan shall be prepaid in full, together with accrued and unpaid interest thereon, any unpaid facility fees pursuant to Section 3.6, any accrued and unpaid commitment fees ----------- pursuant to Section 3.7 and any accrued and unpaid letter of credit fees ----------- pursuant to Section 3.8 immediately upon the Commitment Termination Date. ----------- (c) Except as otherwise provided in Section 6.1 or in the Intercreditor ----------- Agreement with regard to the Noteholders' Primary Collateral, the outstanding principal amount of the Revolving Credit Loan shall be payable in amounts equal to one hundred percent (100%) of the proceeds of any sale of Borrower's Property (net of reasonable expenses of sale except in the case of sales of Accounts or Inventory), and of any insurance proceeds or payments of compensation for any Property taken by condemnation or eminent domain which the Agent retains as provided in Section 6 of the Security Agreement or in Section 7 or 8 of the Mortgage, as applicable. All such payments shall be applied first in payment of Advances outstanding under the Revolving Credit Loan, except that if a Default or Event of Default has occurred and is continuing such payments may be applied by the Majority Lenders in payment of the Obligations in such order as the Majority Lenders elect. 3.4 Interest. --------- (a) Interest shall be payable on the outstanding daily unpaid principal amount of each Advance from the date thereof until payment in full of such Advance and shall accrue and be payable at the applicable rates set forth herein, before and after default, before and after maturity, before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Law, with interest on overdue interest to bear interest at the Default Rate to the extent permitted by applicable Laws. Each Advance shall initially bear interest at the rate in effect for the Revolving Credit Loan on the date each such Advance is made, changing thereafter on the date of each change in the rate of interest in effect for the Revolving Credit Loan on the basis hereinafter set forth. (b) Except as otherwise provided in Sections 3.5, 3.14 and 3.20, the ------------ ---- ---- Revolving Credit Loan shall bear interest at the Floating Rate. 3.5 Fixed Rate Elections. --------------------- (a) Provided that no Default or Event of Default has occurred and is continuing, Borrower may elect that the entire outstanding principal amount of the Revolving Credit Loan bear interest at the Fixed Rate, for such Interest Period as Borrower shall select; provided that (i) Borrower may not have more -------- than one Interest Period in effect at any time with respect to the Revolving Credit Loan, and (ii) Borrower may not make such an election unless 40 (A) the outstanding principal amount of the Revolving Credit Loan equals or exceeds $5,000,000 (or, giving effect to an Advance to be made on the first day of the Interest Period selected by Borrower, would equal or exceed $5,000,000), and (B) Borrower reasonably anticipates that the outstanding principal amount of the Revolving Credit Loan will continue to equal or exceed $5,000,000 for the duration of the Interest Period selected by Borrower. Any election made pursuant to this clause (a) is called herein a "Fixed Rate Election." ------------------- (b) Subject to the requirements of clause (a) above and the next succeeding sentence, Borrower may make a Fixed Rate Election pursuant to a Request for Fixed Rate Election which shall (i) request (A) that the Revolving Credit Loan be converted from a Floating Rate Loan to a Fixed Rate Loan, (B) that the Revolving Credit Loan be renewed as a Fixed Rate Loan for an additional In- terest Period following the expiration of the then current Interest Period or (C) if no Revolving Credit Loan is outstanding, that an Advance requested by Borrower in a principal amount of not less than $5,000,000 on the first day of an Interest Period constitute a Fixed Rate Loan, (ii) specify (A) the requested date of such Fixed Rate Election, which shall be the first day of a calendar month, and (B) the Interest Period selected by Borrower, and (iii) be given by Borrower to the Agent no later than 11:00 a.m., Atlanta time, one LIBOR Business Day prior to the proposed Fixed Rate Election for so long as GE Capital is the only Lender hereunder, and no later than 11:00 a.m., Atlanta time, three LIBOR Busi ness Days prior to the proposed Fixed Rate Election in the event that any other Lender has been made a party to this Agreement pursuant to Section 11.8 ------------ hereof. Unless the Agent has, in its sole and absolute discretion, notified Borrower to the contrary, a Fixed Rate Election may also be made pursuant to a request therefor by telephone by a Responsible Official of Borrower received by the Agent by the time required for a Request for Fixed Rate Election, in which case Borrower shall confirm such request by promptly mailing to the Agent a Request for Fixed Rate Election conforming to the preceding sentence and concurrently telecopying to the Agent a copy of such Request for Fixed Rate Election. (c) Except as otherwise provided in Sections 3.5(d), 3.5(e), 3.12, 3.14 and --------------- ------ ---- ---- 3.20, at all times during an Interest Period selected by Borrower in a Request - ---- for Fixed Rate Election, the Revolving Credit Loan shall bear interest at the Fixed Rate. (d) Notwithstanding any Fixed Rate Election made by Borrower pursuant to Section 3.5(a), upon the occurrence of an Event of Default, Borrower's Fixed - -------------- Rate Election shall terminate, any Fixed Rate Loan shall automatically and without further action on the part of the Agent convert to a Floating Rate Loan, and such conversion shall be deemed a repayment of such Fixed Rate Loan for the purposes of Section 3.13. ------------ 41 (e) Notwithstanding any Fixed Rate Election made by Borrower, in the event that the outstanding principal amount of the Revolving Credit Loan should fail to equal or exceed $5,000,000 during any Interest Period, Borrower's Fixed Rate Election shall terminate, the Revolving Credit Loan shall automatically and without further action on the part of the Agent convert from a Fixed Rate Loan to a Floating Rate Loan, and such conversion shall be deemed a repayment of such Fixed Rate Loan for the purposes of Section 3.13. ------------ (f) Notwithstanding any termination of a Fixed Rate Loan pursuant to the preceding clauses (d) or (e), Borrower shall at any time thereafter be entitled to make a new Fixed Rate Election pursuant to Section 3.5(a). -------------- 3.6 Facility Fees. Borrower shall pay to the Agent, for the account of ------------- GE Capital, a facility fee equal to $550,000, $300,000 of which was fully earned on the date of acceptance of the Commitment Letter by Borrower and $250,000 of which will be fully earned upon the entry by the Bankruptcy Court of the Final Borrowing Order. The facility fee shall be nonrefundable, in whole or in part, when paid. $100,000 of the facility fee was paid on the date of acceptance of the Commitment Letter by Borrower, $325,000 of the facility fee shall be due and payable on February 15, 1996, and the remaining balance thereof shall be due and payable on the Commitment Termination Date. 3.7 Commitment Fees. Borrower shall pay to the Agent, for the account of ---------------- each Lender according to that Lender's Pro Rata Share of the Commitment, a commitment fee in an amount equal to the quotient of (a) an amount equal to (i) the average daily amount by which the Commitment exceeds the Facility Usage during the preceding month, multiplied by (ii) one-half of one percent (1/2 of ---------- -- 1%), multiplied by (iii) the number of days in such month, divided by (b) 360. ------------- ------- -- The commitment fee shall accrue daily commencing on the Effective Date and be payable monthly in arrears on each Monthly Payment Date and on the Commitment Termination Date. 3.8 Letter of Credit Fees. In the event that Lenders shall incur any ---------------------- Letter of Credit Obligations, Borrower shall pay to the Agent (a) for the account of the Agent, the fees and charges paid by the Agent to the Letter of Credit Issuer in connection with the Letters of Credit in respect of which such Letter of Credit Obligations were incurred, provided that the amount of Borrower's Obligations under this clause (a) in respect of each Letter of Credit shall be limited to one percent (1%) of the amount of the Letter of Credit Obligations incurred by Lenders with respect to such Letter of Credit, and (b) for the account of each Lender according to that Lender's Pro Rata Share of the Commitment, a letter of credit fee in an amount equal to the quotient of (i) an amount equal to (A) the sum of the daily outstanding amount of such Letter of Credit Obligations on each day during the previous month, multiplied ---------- by - -- 42 (B) two percent (2%), divided by (ii) 360. Letter of credit fees shall ------- -- accrue daily during each month during which Letter of Credit Obligations are outstanding hereunder and be payable monthly in arrears on the Monthly Payment Date and on the Commitment Termination Date. 3.9 Agent's Fees. Borrower shall pay to the Agent, for its account, an ------------- agency fee in the amount of $150,000, payable in advance in monthly installments of $15,000 each on the Effective Date and on each Monthly Payment Date thereafter, commencing October 31, 1995, and the entire balance thereof shall be due and payable in full on the Commitment Termination Date. 3.10 Increased Commitment or Funding Costs. If any Lender reasonably -------------------------------------- determines that either (a) the introduction of or any change in any Law or in the interpretation or administration of any Law by any Governmental Agency charged with the interpretation or administration thereof after the date of this Agreement relating to the regulation of banks or commercial lenders or (b) compliance with any guideline or request issued or made after the date hereof from any such Governmental Agency relating to the regulation of banks or commercial lenders (whether or not having the force of law) has or would have the effect of reducing the rate of return on the capital of that Lender or any corporation controlling that Lender as a consequence of or with reference to that Lender's funding, incurring or maintaining its allocable portion of any Commitment, Advance, Letter of Credit Obligation or other extension of credit or transaction hereunder below the rate which that Lender or such other corporation could have achieved but for such introduction, change or compliance (taking into account the policies of that Lender or corporation with regard to capital), then Borrower shall from time to time, upon demand by that Lender, pay to that Lender additional amounts sufficient to compensate that Lender or other corporation for such reduction. Each Lender agrees promptly to notify Borrower of any circumstances that would cause Borrower to pay any additional amount pursuant to this Section 3.10, provided that the failure to give notice shall not affect ------------ -------- Borrower's obligations to pay such additional amounts hereunder. 3.11 LIBOR Costs. Upon notice from any Lender, Borrower shall promptly ------------ reimburse that Lender for any increase after the date of this Agreement in its costs, including taxes (other than any tax, or changes in the rate of any tax, based upon the income, profits, receipts or business of that Lender, or upon any personal property or franchise of that Lender, or any similar tax which may be levied upon that Lender, or any change in the rate of any such similar tax by the United States, or any other government having jurisdiction, or any political subdivision or taxing authority of any thereof, and other than withholding tax covered by Section 3.17), fees, charges, and/or reserve requirements directly or ------------ indirectly resulting from or relating to funding, incurring or maintaining such Lender's Pro Rata Share of the Revolving Credit Loan as a 43 Fixed Rate Loan due to any change after the date of this Agreement in any Law, guideline or interpretation or application thereof by any Governmental Agency. As used in the preceding sentence, "reserve requirements" shall be calculated after taking into account any compensation received by that Lender through the computation of the LIBOR Reserve Percentage. Amounts payable to any Lender under this Section 3.11 shall be determined solely by that Lender on the assumption ------------ that such Lender funded and maintained 100% of its Pro Rata Share of the Revolving Credit Loan in the London interbank market for a corresponding amount of Dollars and term, regardless of whether that Lender did so in fact. In attributing any Lender's general costs relating to its eurocurrency operations to any transaction under this Agreement, or averaging any cost over a period of time, that Lender may use any reasonable attribution and/or averaging method it deems appropriate and practical. Any notice under this Section 3.11 shall be ------------ given to Borrower as promptly as practicable after it obtains knowledge of such change, with a copy to the Agent, and shall be accompanied by a certificate from that Lender setting forth in reasonable detail the nature and calculation of the relevant amounts. 3.12 Special LIBOR Circumstances. ---------------------------- (a) If any change in any Law, guideline or interpretation or application thereof by any Governmental Agency or any other circumstance relating to the London interbank market shall at any time in the reasonable opinion of any Lender make it unlawful or impractical for that Lender to fund or maintain its Pro Rata Share of the Revolving Credit Loan as a Fixed Rate Loan in the London interbank market for a corresponding amount of Dollars or term, or to continue that funding or maintaining, or to determine or charge interest rates based upon the LIBOR Rate, that Lender shall promptly notify the Agent, who shall notify Borrower and the other Lenders. Upon the giving of such notice, the obligation of that Lender to fund or maintain its Pro Rata Share of the Revolving Credit Loan as a Fixed Rate Loan shall terminate, and such Lender's Pro Rata Share of the Revolving Credit Loan then being maintained as a Fixed Rate Loan shall bear interest at the applicable Floating Rate commencing on the day following the last day of the applicable Interest Period or on such earlier date as shall be required by Law. (b) In the event that, prior to the first day of any Interest Period in respect of any Fixed Rate Loan, by reason of circum stances affecting the London interbank market, either (i) the Agent shall have determined in good faith (which determination shall be conclusive and binding upon all parties hereto), that (A) Dollar deposits of the relevant amount and for the relevant Interest Period for such Fixed Rate Loan are not available to those Lenders authorized to accept such deposits in the London interbank market, or (B) the LIBOR Base Rate applicable to such Interest Period cannot be ascertained, or (ii) the Majority Lenders shall have 44 determined in good faith and so notified the Agent that the LIBOR Rate will not adequately reflect the cost to such Majority Lenders of funding or maintaining the Revolving Credit Loan as a Fixed Rate Loan, the Agent shall promptly give to Borrower and the Lenders notice of such determination, whereupon Borrower's right to make a Fixed Rate Election by submitting a Request for Fixed Rate Election pursuant to Section 3.5(a) shall be suspended for so long as such -------------- circumstances shall exist. At all times during the period of such suspension, the Revolving Credit Loan shall be a Floating Rate Loan. 3.13 Funding Losses. In order to induce each Lender to fund and maintain --------------- its Pro Rata Share of the Revolving Credit Loan as a Fixed Rate Loan, on the terms provided herein and in consideration of the entering into by Lenders of funding arrangements from time to time in contemplation thereof, whether or not funded in the London interbank market, if any Fixed Rate Loan is repaid in whole or in part on any day other than the last day of the Interest Period therefor (whether any such repayment is made pursuant to any provision of this Agreement or any other Loan Document or is the result of acceleration, by operation of law or otherwise), Borrower shall indemnify and hold harmless each Lender from and against and in respect of any and all losses, costs and expenses resulting from, or arising out of or imposed upon or incurred by such Lender by reason of the liquidation or reemployment of funds acquired or committed to be acquired by such Lender to fund or maintain its Pro Rata Share of the Revolving Credit Loan as a Fixed Rate Loan, pursuant to such Lender's customary funding arrangements. The amount of any losses, costs or expenses resulting in an obligation of Borrower to make a payment pursuant to the foregoing sentence shall not include any losses attributable to any Lender's lost profit, but shall represent the excess, if any, of (a) such Lender's cost or deemed cost of obtaining funding for the amount necessary to fund or maintain its Pro Rata Share of the Revolving Credit Loan as a Fixed Rate Loan pursuant to such Lender's customary funding arrangements, whether or not funded in the London interbank market, as reasonably determined by each Lender (which may be computed by any Lender on the basis of such funds having been borrowed at a rate equal to one percent (1%) over the interest rate on United States Treasury bills or notes with a maturity that most closely approximated the end of the relevant Interest Period as quoted by Telerate News Service (page 5) at the close of business on the date when the Revolving Credit Loan was made as, converted to or renewed as a Fixed Rate Loan), over (b) the return such Lender would receive on its reemployment of such funds, as reasonably determined by each Lender (which, if such Lender's cost of obtaining funding is computed pursuant to the parenthetical to clause (a) above, may be computed by any Lender on the basis of its reinvestment of such funds in United States Treasury bills or notes with a maturity that most closely approximates the end of the relevant Interest Period as quoted by Telerate News Service (page 5) at the close of business on the date of repayment of such Fixed 45 Rate Loan); provided, that if any Lender terminates any funding arrangements in -------- respect of its Pro Rata Share of the Revolving Credit Loan when maintained as a Fixed Rate Loan, the amount of such losses, costs and expenses shall also include the cost to such Lender of such termination. The determination of such amount by any Lender, when evidenced by a certificate from that Lender giving a reasonably detailed calculation of the amount of said cost, expense, claim, penalty, liability, loss, fee, damage or other charge, shall be presumed correct in the absence of manifest error. 3.14 Default Rate. So long as a Default or Event of Default shall have ------------- occurred and be continuing, the Obligations (including accrued and unpaid interest to the extent permitted by applicable Laws), shall, at the option of the Agent evidenced by its written notice to Borrower making specific reference to this Section 3.14, bear interest at the Default Rate. The provisions of this ------------ Section 3.14 are intended to compensate Lenders for additional credit risk and - ------------ not as a penalty. 3.15 Payment and Computation of Interest. Interest on the Revolving ------------------------------------ Credit Loan shall be payable at the rate or rates herein specified on each Monthly Payment Date and on the Commitment Termination Date, and on demand, after the occurrence of an Event of Default. All computations of interest hereunder shall be calcu lated on the basis of a year of 360 days and the actual number of days elapsed. Any Advance or portion thereof that is repaid on the same day on which it is made shall bear interest for one day. 3.16 Non-Business Days. If any payment to be made by Borrower shall come ------------------ due on a day other than a Business Day, payment shall be made on the next preceding Business Day, and shall be computed through the last day of any period for which such payment is to accrue. 3.17 Payment Free of Taxes. Any payments made by Borrower under this ---------------------- Agreement or the Revolving Credit Notes shall be made free and clear of, and without reduction by reason of, any tax, assessment or other charge imposed by any Governmental Agency, central bank or comparable authority (other than taxes on income or gross receipts generally applicable to banks or other corpora- tions). To the extent that Borrower is obligated by applicable Laws to make any deduction or withholding on account of taxes, assessments or other charges imposed by any Governmental Agency from any amount payable to any Lender under this Agreement or the Revolving Credit Notes, Borrower shall (a) make such deduction or withholding and pay the same to the relevant Governmental Agency and (b) pay such additional amount to that Lender as is necessary to result in that Lender's receiving a net after-tax (or after-assessment or after-charge) amount equal to the amount to which that Lender would have been entitled under this Agreement or its Revolving Credit Note absent such deduction or withholding. Each Lender that is incorporated under the Laws of a jurisdiction other 46 than the United States of America or any state thereof shall deliver to Borrower, with a copy to the Agent, on or before the date when such Lender becomes a Lender hereunder, a certificate signed by an authorized signatory of that Lender to the effect that such Lender is entitled to receive payments of interest and other amounts payable under this Agreement or the Revolving Credit Notes without deduction or withholding on account of United States of America federal income taxes, which certificate shall be accompanied by two copies of Internal Revenue Service Form 1001 or Form 4224, or any successor or substitute form or forms, as applicable, also executed by an authorized signatory of that Lender. Each such Lender agrees (i) promptly to notify Borrower if any fact set forth in such certificate ceases to be true and correct and (ii) to take such steps as may be reasonably necessary to avoid any requirement of applicable Laws that Borrower make any deduction or withholding for taxes from amounts payable to that Lender under this Agreement or the Revolving Credit Notes, or to provide for a reduced rate of taxation or withholding under any applicable tax treaty. Within 30 days after the payment of any such taxes by Borrower in respect of payments made on any Lender's Pro Rata Share of the Revolving Credit Loan, Borrower shall furnish to such Lender the original or a certified copy of any receipt received by Borrower evidencing such payment. 3.18 Funding Sources. Nothing in this Agreement shall be deemed to ---------------- obligate any Lender to obtain the funds for its Pro Rata Share of any Revolving Credit Loan in the London interbank market or in any other particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for its Pro Rata Share of the Revolving Credit Loan in the London interbank market or in any other particular place or manner, but any Lender shall, for purposes hereof, be entitled to compute the amounts due to it under Sections 3.11, 3.12 and 3.13 as if such funds had been obtained in the ------------- ---- ---- London interbank market, without any requirement of tracing or matching such funds. 3.19 Failure to Charge Not Subsequent Waiver. Any failure by the Agent or ---------------------------------------- any Lender to require payment of any interest (including interest at the Default Rate), fee, cost or other amount payable under any Loan Document, or to calculate any amount payable by a particular method, on any occasion shall in no way limit or be deemed a waiver of the Agent's or any Lender's right to require full payment of any such interest, fee, cost or other amount payable under any Loan Document, or to calculate any amount payable by another method, on any other or subsequent occasion. 3.20 Savings Clause. Notwithstanding anything to the contrary set forth --------------- in this Article 3, if at any time until payment in full of all of the --------- Obligations, any of the Floating Rate, the Fixed Rate or the Default Rate, as the case may be, exceeds the highest rate of interest permissible under any Laws which a court of competent jurisdiction shall, in a final determination, deem 47 applicable to any Lender with respect to its Pro Rata Share of the Revolving Credit Loan (each a "Maximum Lawful Rate"), then in such event and so long as ------------------- the Maximum Lawful Rate would be so exceeded, such rate of interest shall be reduced to the Maximum Lawful Rate; provided that if at any time thereafter any -------- of the Floating Rate, the Fixed Rate or the Default Rate, as applicable, is less than the Maximum Lawful Rate, Borrower shall continue to pay interest to such Lender hereunder at the Maximum Lawful Rate until such time as the total interest received by such Lender from the making of its Pro Rata Share of the Revolving Credit Loan is equal to the total interest which such Lender would have received had the Floating Rate, the Fixed Rate or the Default Rate, as applicable, been (but for the operation of this Section 3.20) the interest rate ------------ payable to such Lender since such Lender became a Lender hereunder. Thereafter, the interest rate payable to such Lender with respect to its Pro Rata Share of the Revolving Credit Loan shall be the applicable Floating Rate, Fixed Rate or Default Rate, unless and until the Floating Rate, Fixed Rate or Default Rate, as applicable, again exceeds the Maximum Lawful Rate, in which event this Section ------- 3.20 shall again apply. In no event shall the total interest received by any - ---- Lender pursuant to the terms hereof exceed the amount which such Lender could lawfully have received had the interest due hereunder been calculated for the full term hereof at the Maximum Lawful Rate. In the event that the Maximum Lawful Rate is calculated pursuant to this Section 3.20, if required by ------------ applicable law such interest shall be calculated at a daily rate equal to the Maximum Lawful Rate divided by the number of days in the year in which such calculation is made. In the event that a court of competent jurisdiction, notwithstanding the provisions of this Section 3.20, shall make a final ------------ determination that any Lender has received interest hereunder or under any of the Loan Documents in excess of the Maximum Lawful Rate with respect to its Pro Rata Share of the Revolving Credit Loan, such Lender shall, to the extent permitted by applicable Law, promptly apply such excess, first to any interest due and not yet paid under its Revolving Credit Note, second to any due and payable principal of its Revolving Credit Note, third to the remaining principal amount of its Revolving Credit Note and fourth to other unpaid Obligations, and thereafter shall refund any excess to Borrower or as a court of competent jurisdiction may otherwise order. 3.21 Pro Rata Treatment. Each payment and prepayment of principal on, and ------------------- each payment of interest on, the Revolving Credit Loan shall be applied pro --- rata, as among Lenders, according to the respective Pro Rata Share of each - ---- Lender. 3.22 Manner and Treatment of Payments. Each payment hereunder or on the --------------------------------- Revolving Credit Notes or under any other Loan Document shall be made to the Agent, without setoff, deduction or counterclaim, by wire transfer of immediately available funds to the Agent's Deposit Account, for the attention of Cash Supervisor, Northeast Region Office re: Forstmann & Company, Inc., for the 48 account of each of the Lenders or the Agent, as the case may be, not later than 12:00 noon, Atlanta time, on the day of payment (which must be a Business Day). All payments received after 12:00 noon, Atlanta time, on any particular Business Day, shall be deemed received on the next succeeding Business Day. All payments shall be made in lawful money of the United States of America. The amount of all payments received by the Agent for the account of a Lender shall be promptly paid by the Agent to that Lender in immediately available funds. All payments made by Borrower pursuant to this Section 3.22 shall be credited by each Lender ------------ for purposes of computing interest hereunder on the day payment has been received or deemed received by the Agent in accordance with this Section 3.22. ------------ 3.23 Agent's Right to Assume Payments Will be Made. Unless the Agent ---------------------------------------------- shall have been notified by Borrower at least one Business Day prior to the date on which any payment to be made by Borrower hereunder is due that Borrower does not intend to remit such payment, the Agent may, in its discretion, assume that Borrower has remitted such payment when so due and the Agent may, in its discretion and in reliance upon such assumption, make available to each Lender on such payment date an amount equal to such Lender's share of such assumed payment. If Borrower has not in fact remitted such payment to the Agent, each Lender shall forthwith on demand repay to the Agent the amount of such assumed payment made available to such Lender, together with interest thereon in respect of each day from and including the date such amount was made available by the Agent to such Lender to the date such amount is repaid to the Agent at a rate per annum equal to the rate or rates per annum then in effect with respect to the Loans in respect of which such payment is due. 3.24 Survivability. All of Borrowers' obligations under Sections 3.10, -------------- ------------- 3.11, 3.13 and 3.17 shall survive the payment in full of all Obligations - ---- ---- ---- hereunder. ARTICLE 4 REPRESENTATIONS AND WARRANTIES ------------------------------ Borrower represents and warrants to the Agent and Lenders that: 4.1 Existence and Qualification; Power; Compliance With Laws. Borrower is --------------------------------------------------------- a corporation duly organized and validly existing and in good standing under the Laws of the State of Georgia. Borrower is duly qualified as a foreign corporation, and is in good standing, in the States of New York and Texas and each other jurisdiction in which the conduct of its business or the ownership or leasing of its Property makes such qualification necessary, except where the failure so to qualify and to be in good standing would not constitute a Material Adverse Effect. The chief execu- 49 tive office and principal place of business of Borrower is located at 1155 Avenue of the Americas, New York, New York 10036. Borrower has the requisite corporate power and authority to conduct its business as now being conducted and to own its Property, and to execute and deliver each Loan Document and to perform the Obligations. Borrower is in compliance in all respects with all Laws applicable to Borrower or to its business except where failure to comply would not constitute a Material Adverse Effect, has obtained all authorizations, consents, approvals, orders, licenses and permits (including, without limitation, Environmental Permits) from, and has accomplished all filings, registrations and qualifications with, or obtained exemptions from any of the foregoing from, any Governmental Agency that are necessary for the transaction of its business except where the failure to obtain such authorizations, consents, approvals, orders, licenses and permits or to accomplish such filings, registrations and qualifications would not constitute a Material Adverse Effect. 4.2 Authority; Compliance With Other Agreements and Instruments. The ------------------------------------------------------------ execution, delivery and performance by Borrower of the Loan Documents have been duly authorized by all necessary corporate actions, and do not and will not: (a) Require any consent or approval of any partner, stockholder, security holder or creditor of Borrower (including, without limitation, the holders of the Senior Subordinated Notes and CIT) not heretofore obtained or obtained prior to the Effective Date; (b) Violate or conflict with any provision of Borrower's articles of incorporation or bylaws; (c) Result in or require the creation or imposition of any Lien or Right of Others upon or with respect to any Property now owned or leased by Borrower, other than in favor of the Lenders; (d) Violate any Requirement of Law applicable to Borrower; or (e) Conflict with, result in a breach of or default under, or with the giving of notice or the lapse of time or both, constitute a breach of or default under, or cause or permit the acceleration of any obligation owed under or require the termination of (i) the Senior Subordinated Note Indenture, the Senior Subordinated Notes, the Restated Indenture, the Restated Indenture Notes or the CIT Loan Agreement or (ii) to the best knowledge of Borrower, any other Contractual Obligation of Borrower, the consequences of which conflict, breach, default, violation or termination, singly or in the aggregate, would constitute a Material Adverse Effect. 4.3 Requirements of Law; Performance of Contractual Obligations. ------------------------------------------------------------ 50 (a) Borrower is not in violation of, or default under, any Requirement of Law applicable to Borrower, its property or business, including, without limitation any Environmental Law or any other Law, in any respect that would constitute a Material Adverse Effect. (b) Except as a result of the commencement of the Chapter 11 Case or such defaults or conditions as existed on the Petition Date, Borrower has neither received any notice nor has actual knowledge that (i) it is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Contractual Obligation applicable to it or (ii) any condition exists which, with the giving of notice or lapse of time or both, would constitute a default with respect to such Contractual Obligation, except where such default or defaults, singly or in the aggregate, would not constitute a Material Adverse Effect. 4.4 No Governmental Approvals Required. No authorization, consent, ----------------------------------- approval, order, license or permit from, or filing, registration or qualification with, any Governmental Agency is required to authorize or permit under applicable Laws the execution, delivery and performance by Borrower of the Loan Documents or the consummation by Borrower of the transactions contemplated hereby, except for the Interim Borrowing Order and the Final Borrowing Order. 4.5 Subsidiaries. Borrower has no Subsidiaries and no interests in any ------------- joint venture or partnership with any other Person. 4.6 Financial Statements. Borrower has furnished to the Lenders (a) --------------------- Borrower's Annual Report on Form 10-K and Annual Report to Shareholders for Fiscal Year 1994 (including the audited balance sheets of Borrower as of October 30, 1994 and October 31, 1993 and the related statements of operations, shareholders' equity (deficiency) and cash flows for the fifty-two weeks ended October 30, 1994 and the fifty-three weeks ended October 31, 1993, accompanied by the audit opinion of Deloitte & Touche LLP), (b) Borrower's unaudited balance sheet as of July 30, 1995 and the related standard statement of operations for the thirty-nine weeks ended July 30, 1995 and the condensed statements of cash flows for the thirty-nine weeks ended July 30, 1995 and the thirty-nine weeks ended July 31, 1994, and (c) Borrower's operating and financial plan for the balance of Borrower's Fiscal Year ending October 29, 1995 and for Borrower's Fiscal Year ending November 2, 1996, including projected balance sheets, statements of operations, and statements of cash flow. The financial statements described in clauses (a) and (b) above (as updated, in the case of the financial statements described in clause (b) above, in the September 20, 1995 management case projections furnished by Borrower to the Agent) fairly present the financial position and results of operations of Borrower as at the dates and for the periods indicated in 51 accordance with GAAP consistently applied. The projections referred to in clause (c) above have been prepared on the basis of the assumptions set forth therein, which are believed by Borrower to be reasonable and fair in the light of current conditions and to reflect a reasonable estimate of the projected balance sheets, results of operations, cash flows and other information presented therein. 4.7 Title to and Location of Property. Borrower has good and marketable ---------------------------------- title to the owned Property reflected in the financial statements described in Section 4.6 and valid leasehold title to the leased Property reflected in such - ----------- financial statements, in each case, other than Property subsequently sold or disposed of in the ordinary course of business, free and clear of all Liens and Rights of Others, other than Permitted Encumbrances. Borrower does not own any Property in any jurisdiction other than the jurisdictions set forth in Schedule -------- 4.7. Substantially all of the Property owned by, leased to or used by Borrower - ---- is in good operating condition and repair, ordinary wear and tear excepted, is free and clear of any known defects except such defects as do not substantially interfere with the continued use thereof in the conduct of normal operations, and is able to serve the function for which it is currently being used, except in each case where the failure of such Property to meet such requirements would not constitute a Material Adverse Effect. Borrower has the right to peaceful and undisturbed possession under all leases of Property necessary for the operation of its business and assets, none of which contains any unusual or burdensome provisions which would constitute a Material Adverse Effect, and all such leases are valid and subsisting and in full force and effect. 4.8 Intangible Assets. Borrower owns or possesses the right to use all ------------------ trademarks, trade names, copyrights, patents, patent rights, computer software, licenses and other intangible assets that are used or are necessary in the conduct of its businesses as now operated. To the best of Borrower's knowledge, no such intangible asset (a) conflicts with the valid trademark, trade name, copyright, patent, patent right or intangible asset of any other Person or (b) has been infringed upon, to the extent that such conflict or infringement would constitute a Material Adverse Effect. Schedule 4.8 sets forth all patents, ------------ patent applications, trademarks and trade names used by Borrower as of the date of this Agreement. 4.9 Governmental Regulation. Borrower is not subject to regulation under ------------------------ the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, the Investment Company Act of 1940 or any other Law limiting or regulating its ability to incur Indebtedness for money borrowed. 4.10 Litigation; Judgments. Except for proceedings in the Chapter 11 Case ---------------------- and the matters set forth in Schedules 4.10 and -------------- 52 4.21, there are no actions, suits, proceedings or investigations pending or, to - ---- Borrower's knowledge, threatened against or affecting Borrower or any Property of Borrower before any Governmental Agency relating to this Agreement, the other Loan Documents or the transactions contemplated hereby or which, if determined adversely to Borrower, would constitute a Material Adverse Effect. There is, to the best knowledge of Borrower, no reasonable basis for any action, suit, proceeding or investigation against Borrower or any Property of Borrower before any Governmental Agency which, if determined adversely to Borrower, would constitute a Material Adverse Effect. Except for proceedings in the Chapter 11 Case, Borrower is not subject to, or in default with respect to, any final judgment, writ, injunction, restraining order or other order of any nature, decree, rule or regulation of any Governmental Agency which will constitute a Material Adverse Effect. 4.11 Binding Obligations. Each of the Loan Documents constitutes the -------------------- legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, except as such terms are modified by Section 11.25 ------------- hereof and except as enforcement may be limited by Debtor Relief Laws. Without limiting the generality of the foregoing, and in addition to the Liens granted to the Lenders under the Interim Borrowing Order and the Final Borrowing Order, each of the Collateral Documents shall continue to secure the payment and performance of all Obligations of Borrower under this Agreement, including, without limitation, all Prepetition Obligations and Prepetition Letter of Credit Obliga tions, as well as all Postpetition Obligations and Postpetition Letter of Credit Obligations. 4.12 No Default. No event has occurred and is continuing that ----------- constitutes a Default or an Event of Default. 4.13 ERISA. ------ (a) Each "employee benefit plan" (as defined in Section 3(3) of ERISA) (other than a Multiemployer Plan) which is maintained or contributed to by Borrower and which is intended to be a qualified plan has been determined by the Internal Revenue Service to be qualified under Section 401(a) of the Code, and each trust related to any such plan has been determined to be exempt from such federal income tax under Section 501(a) of the Code, and each employee benefit plan and any related trust comply in all material respects with all applicable Laws. (b) Except as disclosed in Schedule 4.13, neither Borrower nor any ERISA -------------- Affiliate maintains, contributes to or is required to contribute to any Pension Plan. (c) With respect to each Pension Plan disclosed in Schedule 4.13: -------------- 53 (i) such Pension Plan complies in all material respects with ERISA and any other applicable Laws; (ii) such Pension Plan has not incurred any unsatisfied material "accumulated funding deficiency," as that term is defined in Section 302 of ERISA; (iii) neither Borrower nor any ERISA Affiliate has failed to make any required installment under Section 412(m) of the Code or any other payment required under Section 412 of the Code on or before the due date for such installment or other payment which failure would constitute a Material Adverse Effect; (iv) neither Borrower nor any ERISA Affiliate thereof has engaged in any non-exempt "prohibited transaction" (as defined in Section 406 of ERISA or in Section 4975 of the Code) that would subject Borrower to any penalty that would constitute a Material Adverse Effect; and (v) except for the filing of the petition initiating the Chapter 11 Case, no Termination Event has occurred or may reasonably be expected to occur which constitutes a Material Adverse Effect. (d) As of the date of this Agreement, Borrower is not contributing to and has not ever contributed to or been obligated to contribute to any Multiemployer Plan, and no employees or former employees of Borrower have been covered by any Multiemployer Plan with respect to their employment by Borrower. No ERISA Affiliate has or is likely to incur any withdrawal liability with respect to any Multiemployer Plan which would have a Material Adverse Effect. (e) Borrower does not maintain or contribute to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) which provides retiree medical benefits to former employees or their dependents other than as required by the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. 4.14 Regulations G and U. No part of the proceeds of any Advance -------------------- hereunder will be used to purchase or carry, or to extend credit to others for the purpose of purchasing or carrying, any "margin stock" (as such term is defined in Regulations G and U) in violation of Regulations G or U. Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any such "margin stock." 4.15 Disclosure. Neither this Agreement, any other Loan Document or any ----------- written statement made by Borrower to the Agent or the Lenders in connection with this Agreement or any other Loan Document in connection with the making of any Advance, the issuance 54 of any Letter of Credit or the incurrence of any Letter of Credit Obligation contains any untrue statement of a material fact or omits a material fact necessary in order to make the statement made not misleading in light of all the circumstances existing at the date the statement was made. There is no fact known to Borrower which would constitute a Material Adverse Effect that has not been disclosed in writing to Lenders. Borrower acknowledges that Lenders are relying on the truth and accuracy of all disclosures made by Borrower in making the extensions of credit contemplated by this Agreement, and specifically authorizes such reliance. 4.16 Tax Liability. Borrower has filed all tax returns which are required -------------- to be filed, and has paid, or made provision for the payment of, all taxes with respect to the periods, Property or transactions covered by said returns, or pursuant to any assessment received by Borrower, except (a) such taxes, if any, as are being contested in good faith by appropriate proceedings and as to which adequate reserves have been established and maintained, (b) taxes or assessments not yet past due, and (c) any filings or taxes, the non-filing or non-payment, respectively, of which would not constitute a Material Adverse Effect. Borrower has no knowledge of any proposed tax assessment against Borrower that would constitute a Material Adverse Effect, which has not been reserved against and is not being actively contested in good faith by Borrower. As of the date of this Agreement and the Effective Date, Borrower has not executed or filed with any Governmental Agency any agreement or other document extending, or having the effect of extending, the period for the assessment or collection of any tax. All deficiencies which have been asserted against Borrower as a result of any federal, state, local or foreign tax examination for each taxable year in respect of which an examination has been conducted by the Internal Revenue Service have been fully paid or finally settled or are being contested in good faith, and no issue has been raised in any such examination which, by application of similar principles, reasonably can be expected to result in assertion of a material deficiency for any other year not so examined which has not been reserved for in Borrower's financial statements to the extent, if any, required by GAAP. 4.17 Security Interests. The Collateral Documents create valid perfected ------------------- first priority Liens (subject only to Permitted Encumbrances and the Carve Out) in the Collateral described therein in favor of the Agent, for the benefit of the Lenders, as security for the Obligations. 4.18 Employee Matters. There is no strike, work stoppage or labor dispute ----------------- with any union or group of employees pending or, to the best knowledge of Borrower, threatened involving Borrower that would constitute a Material Adverse Effect. 4.19 Subordination of Subordinated Indebtedness. ------------------------------------------- 55 (a) This Agreement, and all amendments, modifications, extensions, renewals, refinancings and refundings hereof (to the extent permissible pursuant to Section 4.09 of the Senior Subordinated Note Indenture), constitute the "Credit Agreement" within the meaning of the Senior Subordinated Note Indenture, and the Revolving Credit Loan, the Letter of Credit Obligations and all other Obligations of Borrower to the Agent and the Lenders under this Agreement, the Revolving Credit Notes and any of the other Loan Documents, and all amendments, modifications, extensions, renewals, refundings or refinancings of any of the foregoing (to the extent permissible pursuant to Section 4.09 of the Senior Sub- ordinated Note Indenture), constitute "Senior Indebtedness" of Borrower within the meaning of the Senior Subordinated Note Indenture, and the holders thereof from time to time shall be entitled to all of the rights of a holder of "Senior Indebtedness" pursuant to Article 10 of the Senior Subordinated Note Indenture. (b) The commitments for revolving loans under the Credit Agreement, dated as of April 27, 1989, among Citibank, N.A., as agent, Citibank, N.A. and the other lenders named therein, as lenders, and Borrower, as borrower (the "1989 ---- Credit Agreement"), as reduced by all permanent reductions of such commitments, - ---------------- pursuant to the terms of the 1989 Credit Agreement, as amended, modified, extended, renewed or refinanced, including, without limitation, pursuant to the Credit Agreement dated as of February 28, 1992 among Borrower, Citibank, N.A. as agent and Citibank, N.A. and the other lenders party thereto and pursuant to the Original Loan Agreement, and by all mandatory revolving loan prepayments made pursuant to Section 4.11 of the Senior Subordinated Note Indenture, are currently, and at all times has been, equal to or greater than $85,000,000. 4.20 Real Property. Schedule 4.20 correctly sets forth a summary -------------- ------------- description of all Owned Real Property and all Leasehold Real Property. 4.21 Environmental Matters. Except as described on Schedule 4.21, (a) the ---------------------- ------------- operations of Borrower comply in all material respects with all applicable Environmental Laws; (b) Borrower has obtained all material Environmental Permits necessary for the operation of its business, and all such Environmental Permits are valid and in good standing and, to the best of Borrower's knowledge, are not the subject of any modification or revocation proceeding, and Borrower is in compliance in all material respects with all terms and conditions of such Environmental Permits; (c) Borrower is not the subject of any outstanding written order or agreement with any Governmental Agency or private party respecting (i) any Environmental Laws, (ii) any Remedial Actions, or (iii) any Environmental Claims arising from the Release or threat of Release (within the meaning of CERCLA) of a Contaminant; (d) Borrower is not a party defendant or respondent in any judicial or administrative proceeding alleging a violation of any Environmental 56 Law, asserting any Environmental Claim arising from the Release or threat of Release (within the meaning of CERCLA) of a Contaminant or relating to any Remedial Action; (e) to the best of Borrower's knowledge, none of the operations of Borrower or any of its past facilities or operations is the subject of any federal or state investigation (other than periodic and ordinary inspections) evaluating any matter regulated by any Environmental Law, including, without limitation, a determination of whether any Remedial Action is needed to respond to a Release of any Contaminant into the environment under any Environmental Law; (f) neither Borrower (as to any of its present or past facilities or operations) or, to the best knowledge of Borrower, any predecessor of Borrower, has filed any written notice under any Environmental Law indicating past or present treatment, storage, or disposal of a hazardous waste or solid waste or reporting a spill or Release of a Contaminant into the environment under any Environmental Law; (g) to the best of Borrower's knowledge, Borrower has no contingent liability in connection with any Release or threat of Release (within the meaning of CERCLA) of any Contaminant into the environment; (h) Borrower has not received any written notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threat of Release (within the meaning of CERCLA) of a Contaminant into the Environment if such liability would constitute a Material Adverse Effect; (i) as of the Effective Date, none of Borrower's operations involve the generation, storage, transportation, treatment, recycling, reclamation, handling or disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-270 or any state equivalent; (j) except to the extent that such disposition would not constitute a Material Adverse Effect, Borrower has not disposed of any Contaminant by placing it in, on or under the ground, subsurface strata, surface waters or groundwaters of any Real Property owned, leased or used by Borrower and, to the best of Borrower's knowledge, neither has any lessee, other prior owner or other Person; (k) to the best of Borrower's knowledge, none of Borrower's Real Property contains or ever contained, any underground storage tanks, surface impoundments, asbestos- containing materials or polychlorinated biphenyls; and (1) no Environmental Lien in favor of any Governmental Agency has been filed or attached to any of Borrower's Real Property and, to the best of Borrower's knowledge, there are no conditions or facts in existence that with the passage of time could give rise to the filing or attachment of such an Environmental Lien. 4.22 Ownership of Capital Stock. Schedule 4.22 sets forth, as of the date --------------------------- ------------- of this Agreement and the Effective Date, the number of issued and authorized shares of each class of Capital Stock of Borrower, and the ownership of such shares. The outstanding Capital Stock of Borrower is duly authorized, validly issued, fully paid and nonassessable. Except as set forth in Schedule 4.22, no ------------- Capital Stock (or any securities, instruments, warrants, option or purchase rights, conversion or exchange rights, calls, commitments or claims of a character convertible into or exercisable for 57 Capital Stock) of Borrower is subject to issuance under any security, instrument, warrant, option or purchase rights, conversion or exchange rights, call, commitment or claim of any character. ARTICLE 5 AFFIRMATIVE COVENANTS --------------------- (OTHER THAN INFORMATION AND REPORTING REQUIREMENTS) --------------------------------------------------- So long as any Advance remains unpaid, any Letter of Credit Obligation remains outstanding, any other Obligation remains unpaid or any portion of the Lenders' Commitment remains outstanding, unless the Majority Lenders otherwise consent in writing: 5.1 Use of Proceeds. Borrower shall use the proceeds of Advances made ---------------- hereunder only for Capital Expenditures permitted hereunder and for working capital and for other general corporate purposes of Borrower; and use Letters of Credit arranged for hereunder only to secure Borrower's obligations with respect to workers' compensation, capital lease obligations, purchase money fi- nancings of Equipment, patent, trademark and technology licensing arrangements, Equipment purchases from foreign vendors and for other general corporate purposes of Borrower, in each case to the extent that such purpose is not otherwise prohibited by this Agreement. 5.2 Payment of Taxes and Other Potential Liens. Except as otherwise ------------------------------------------- permitted by the Bankruptcy Code and except as otherwise prohibited by Section ------- 6.23 hereof, Borrower shall pay (a) all taxes, assessments and other - ---- governmental charges imposed upon it or on any of its Property or in respect of any of its franchises, businesses, income or Property before any penalty or interest accrues thereon, other than any inadvertent nonpayment which would not constitute a Material Adverse Effect and (b) all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by Law have or may become a Lien upon any of Borrower's Properties other than inadvertent nonpayment of sums which are not material individually or in the aggregate; provided that no such taxes, -------- assessments, and governmental charges referred to in clause (a) above or claims referred to in clause (b) above need to be paid if being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if adequate reserves shall have been set aside therefor in accordance with GAAP. 5.3 Preservation of Existence. Borrower shall (a) preserve and maintain -------------------------- its corporate existence in the State of Georgia and all authorizations, rights, franchises, privileges, consents, approvals, orders, licenses, permits or registrations from any Governmental Agency that are necessary for the transaction of its 58 business, except where the failure so to preserve and maintain would not constitute a Material Adverse Effect; and notify the Agent in writing, promptly after learning thereof, of the suspension, cancellation, revocation or discontinuance of or of any pending or threatened action or proceeding seeking to suspend, cancel, revoke or discontinue any such authorization, right, fran- chise, privilege, consent, approval, order, license or permit, and (b) qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary in view of its business or the ownership of its Properties except if failure to qualify or remain qualified would not constitute a Material Adverse Effect. 5.4 Maintenance of Properties. Borrower shall maintain all of its -------------------------- Property in good condition and repair, and not permit, commit or suffer any waste or abandonment of any such Property and from time to time shall make or cause to be made all material repairs, renewals and replacements thereof, except in each of the foregoing instances, to the extent that the failure to do any of the foregoing would not constitute a Material Adverse Effect; provided --------- that nothing contained herein shall prevent Borrower from altering or renovating its Property in the ordinary course of business. 5.5 Maintenance of Insurance. Borrower shall maintain liability, ------------------------- casualty and other insurance (subject to customary deductibles and retentions) with responsible insurance companies in such amounts and against such risks as is carried by responsible companies engaged in similar businesses and owning similar assets in the general areas in which Borrower operates and, in any event, the minimum insurance coverages and risks assured against described in Schedule 5.5; and provide to the Agent a certified copy of each policy providing - ------------ for such insurance, together with an endorsement thereto providing that the insurance companies issuing such policies will give the Agent at least thirty (30) days prior written notice of cancellation, nonrenewal or any other material change; maintain the Agent for the benefit of the Lenders as loss payee, as its interest appears, with respect to insurance covering the Collateral and maintain each Lender as an additional insured on its liability insurance policies. 5.6 Compliance With Laws. Borrower shall comply with all Requirements of --------------------- Law, including, without limitation, all Environmental Laws, except where such noncompliance with Requirements of Law, other than Environmental Laws, would not constitute a Material Adverse Effect. 5.7 Inspection Rights. Borrower shall, upon reasonable notice, at any ------------------ time during customary business hours and as often as reasonably requested, or if an Event of Default has occurred and is continuing, at any time with or without notice, permit the Agent or any Lender, or any authorized employee, agent or representative 59 thereof, to examine, audit and make copies and abstracts from the records and books of account of, and to visit and inspect the Property of, Borrower and to discuss the affairs, finances and accounts of Borrower with any of its officers, key employees or accountants. Borrower hereby authorizes the Agent, each Lender and their respective representatives to communicate directly with Borrower's accountants and authorizes Borrower's accountants to disclose to the Agent, each Lender and their respective representatives any and all financial statements and other information of any kind, including copies of any management letter or the substance of any oral information, that such accountants may have with respect to the Collateral or Borrower's condition (financial or otherwise), operations, properties, performance and prospects. The Agent and Lenders shall treat any non-public information so obtained as confidential in accordance with the provisions of Section 11.13. -------------- 5.8 Audit Rights. Borrower shall permit the Agent, or any authorized ------------- employee, agent or representative thereof, at Borrower's expense, to audit the Collateral from time to time as often as the Agent may reasonably request. 5.9 Keeping of Records and Books of Account. Borrower shall make and ---------------------------------------- keep books, records and accounts which reflect in reasonable detail all transactions as necessary to permit preparation of financial statements in conformity with GAAP. If an Event of Default has occurred and is continuing, Borrower, upon the Agent's request, shall turn over any such records to the Agent or its representative, and the Agent shall permit Borrower reasonable access to such records. 5.10 Compliance With Agreements. Except as otherwise permitted by the --------------------------- Bankruptcy Code and except as otherwise prohibited by Section 6.23 hereof, ------------ Borrower shall promptly and fully comply with all Contractual Obligations under all agreements, indentures, leases and/or instruments to which Borrower is a party, whether such agreements, indentures, leases or instruments are with the Lenders or another Person, where the failure so to comply would constitute a Material Adverse Effect. 5.11 Environmental Laws. (a) Borrower shall (i) comply in all material ------------------- respects with the Environmental Laws and Environmental Permits applicable to it; (ii) except to the extent that factual information has been set forth in Schedule 4.23 and a report after the Effective Date would only duplicate such - ------------- previously reported factual information, notify the Agent promptly in writing after knowledge in the event of any: (A) Release or threat of Release (within the meaning of CERCLA) which is or must be reported to any Governmental Agency, (B) Environmental Claims in connection with any of Borrower's Real Property, (C) government investigation (other than periodic and ordinary inspections) of matters regulated pursuant to any Environmental Law, (D) actual or threatened 60 Environmental Lien, (E) proposed real estate, stock or other commercial transaction that reasonably could be expected to constitute a Material Adverse Effect as a result of any Environmental Claim or potential liability under any Environmental Law, or (F) any other matter related to Borrower's Real Property that is related to Environmental Laws and which would constitute a Material Adverse Effect, including, without limitation, any actual change to any applicable Environmental Law or Environmental Permit which would constitute a Material Adverse Effect; (iii) promptly forward to the Agent a copy of any notice or report submitted by Borrower to any Governmental Agency in connection with (A) any Release, (B) any threat of Release (within the meaning of CERCLA), (C) any Environmental Claim, (D) any written allegation which may give rise to an Environmental Claim or (E) any other matter relating to the Environmental Laws which would constitute a Material Adverse Effect; (iv) promptly forward to the Agent a copy of any order, notice, Environmental Permit or other written communication received by Borrower from any Governmental Agency or other Person in connection with (A) any Release, (B) any threat of Release (within the meaning of CERCLA), (C) any Environmental Claim, (D) any written allegation which may give rise to an Environmental Claim, or (E) any other matter relating to the Environmental Laws which would constitute a Material Adverse Effect; and (v) promptly notify the Agent of any application for an Environmental Permit submitted by Borrower to any Governmental Agency. (b) Borrower shall refrain from intentionally disposing of any "hazardous waste" (as that term is defined under RCRA) or "hazardous substance" (as that term is defined under CERCLA) at, on, in or under any of the Real Property. (c) On a semi-annual basis, on or prior to January 15 and June 15 of each calendar year, Borrower shall provide to the Agent a written status report, in such detail as the Agent shall reasonably request, as to the monitoring, remediation and clean-up of the 1987 accidental spill at Borrower's Owned Real Property in Dublin, Georgia of trichloroethylene and the affected groundwater and other environmental media and as to any other matter as to which Borrower is required to notify the Agent, or to deliver a copy of any communication with respect thereto, pursuant to the preceding clause (a). (d) At the Agent's reasonable request, from time to time, in the reasonable exercise of its discretion, Borrower shall, at its expense, retain an independent environmental contractor of recognized standing, subject to the Agent's approval, to perform an environmental compliance audit ("Environmental ------------- Audit") of the Real Property of Borrower, or such parcels thereof as the Agent - ----- shall request, in order to demonstrate that Borrower is in compliance with clauses (a) and (b) of this Section 5.11 and will provide the Agent with a ------------ report ("Auditor's Report") of the results of the Environmental Audit. The work ---------------- performed by the contractor in 61 conducting the Environmental Audit shall be of sufficient scope and quality, and the Auditor's Report presented in such a format, as to permit the Agent readily to ascertain such compliance on the part of Borrower. In the event that the Auditor's Report discloses any noncompliance with any Environmental Laws, Borrower shall promptly take such action as Borrower shall deem necessary or appropriate, in consultation with the environmental contractor retained by it, to remedy such noncompliance. (e) The semi-annual status reports described in the preceding clause (c) and the Auditor's Reports shall be furnished to the Agent solely for the purposes of evidencing Borrower's compliance with the provisions of clauses (a) and (b) of this Section 5.11, and shall not create, nor be intended to imply, ------------ any right, duty or obligation on behalf of the Agent or any of the Lenders in any respect whatsoever, including, without limitation, any right, duty or obligation on the part of the Agent or any of the Lenders in any manner to participate in the management or operations of Borrower, nor be construed to imply that the Agent or any of the Lenders has any power whatsoever to affect the decisions and activities of Borrower with respect to compliance with applicable Environmental Laws. 5.12 Additional Real Property Collateral. Borrower shall notify the Agent ------------------------------------ in writing promptly upon its acquisition or leasing of any Real Property, and, at the Agent's request, shall promptly thereafter execute and deliver to the Agent, for the benefit of Lenders, a mortgage, deed of trust, deed to secure debt, assignment or other appropriate instrument evidencing a Lien upon any such Real Property, together with such title insurance policies (mortgagee's form), certified surveys, appraisals and local counsel opinions with respect thereto and such other agreements, documents and instruments which the Agent deems necessary or desirable, the same to be in form and substance substantially the same as the Mortgage (with appropriate state law variations) and to be subject only to (a) Permitted Encumbrances, (b) the Carve Out and (c) such other Liens as the Agent may reasonably approve, it being understood that the granting of such additional security for the Obligations is a material inducement to the execution and delivery of this Agreement by each Lender. 5.13 Collections. (a) Except as otherwise provided in Section 6.1 hereof ------------ ------------ or in the Intercreditor Agreement with respect to the Noteholders' Primary Collateral, and except as otherwise provided in paragraph (b) below, Borrower shall deposit into the Collection Account on a daily basis any monies, checks, notes, drafts or other items of payment received by Borrower relating to or which constitute proceeds of Accounts, Inventory or other Collateral (including, without limitation, on the Effective Date, all such proceeds received by Borrower from and after the Petition Date, through and including the Effective Date, and held by Borrower in a segregated account pursuant to (S) 363(c)(4) of the Bankruptcy 62 Code) and will direct all of its Account Debtors to remit all payments on Accounts directly to the appropriate lockbox or lockboxes provided for in the Blocked Account Agreement. Prior to Borrower's deposit of proceeds of Accounts or Inventory into the Collection Account, Borrower shall hold all such amounts in trust for the benefit of Lenders. Borrower shall take all actions necessary at all times hereafter to maintain the Collection Account, including the payment of all fees charged by the banks at which such accounts are maintained. Borrower acknowledges and agrees that only the Agent shall have any power of withdrawal with respect to the Collection Account and that Borrower shall not have any right, title or interest in such accounts or the sums deposited therein. (b) Borrower acknowledges and agrees that the Agent may at all times during the term of this Agreement have one or more employees of the Agent on Borrower's premises for the purposes set forth in Sections 5.7 and 5.8 of this ------------ --- Agreement and to take possession of all monies, checks, notes, drafts or other items of payment received by Borrower in the manner contemplated by paragraph (a) above and relating to or constituting proceeds of Accounts and Inventory, for application to the Obligations, by deposit in the Collection Account or otherwise, and Borrower agrees (i) to cooperate in all respects with such employee or employees of the Agent, and (ii) that all cost and expense incurred by the Agent in connection with the matters contemplated by this paragraph (b) shall be reimbursed by Borrower to the Agent in accordance with the provisions of Section 11.3 of this Agreement. ------------ ARTICLE 6 NEGATIVE COVENANTS ------------------ So long as any Advance remains unpaid, or any Letter of Credit Obligation remains outstanding or any other Obligation remains unpaid, or any portion of the Lenders' Commitment remains outstanding (unless the Majority Lenders otherwise consent in writing): 6.1 Disposition of Property; Application of Proceeds. ------------------------------------------------- (a) Borrower shall not sell, assign, transfer, lease, convey or otherwise dispose of any of its Property, whether now owned or hereafter acquired, or any income or profits therefrom, or enter into any agreement to do so, except: (i) sales of Inventory in the ordinary course of business; and (ii) dispositions of Equipment that is obsolete or no longer useful in the ordinary course of Borrower's business having an aggregate market value not in excess of $10,000, 63 individually, and $50,000 in the aggregate during any consecutive twelve- month (12) period. (b) In the event of any sale or other disposition by Borrower of its Property pursuant to the preceding clause (a) or otherwise with the Majority Lenders' prior written consent, Borrower will cause the proceeds of such sale (net of reasonable expenses of sale and proceeds used to discharge prior Liens, if any, in the case of sales of Property other than Inventory) to be deposited in the Collection Account, except that for so long as any of the Restated Indenture Notes remains outstanding, proceeds of dispositions of Borrower's Property constituting Noteholders' Primary Collateral shall be applied or otherwise disposed of in accordance with the order of the Bankruptcy Court approving such sale or other disposition of Noteholders' Primary Collateral. (c) In the event Borrower receives any proceeds of business interruption insurance, Borrower shall seek a determination from the Bankruptcy Court regarding whether such proceeds constitute Lenders' Primary Collateral or Noteholders' Primary Collateral. In the event such proceeds are determined to constitute Lenders' Primary Collateral, such proceeds shall be deposited into the Collection Account, and if such proceeds are determined to constitute Noteholders' Primary Collateral, such proceeds shall be applied or otherwise disposed of in accordance with the order of the Bankruptcy Court determining the status of such proceeds. 6.2 Restrictions on Fundamental Changes. Borrower shall not: (a) enter ------------------------------------ into any merger or consolidation, or liquidate, wind-up or dissolve (or suffer any liquidation or dissolution), or convey, lease, sell, transfer or otherwise dispose of, in one transaction or a series of transactions, all or substantially all of Borrower's business or Property, whether now owned or hereafter acquired, (b) acquire, by purchase or otherwise, all or any material portion of the assets or Capital Stock of, or any division or business of, any Person, or create any Subsidiary or transfer any of its assets to any Subsidiary created (with the Majority Lenders' prior written consent) hereafter, or (c) change its corporate, capital, legal or divisional structure. 6.3 Restricted Payments. Borrower shall not make any Restricted Payment. -------------------- 6.4 Subordinated Indebtedness; CIT Facility. Borrower shall not amend or ---------------------------------------- modify the Senior Subordinated Note Indenture or the CIT Loan Agreement, or otherwise amend, supplement or change the terms of, or applicable to, any of the Subordinated Indebtedness, the Senior Preferred Stock or the CIT Facility. 6.5 ERISA. Borrower shall not: ------ (a) At any time, maintain, or be or become obligated to con- 64 tribute on behalf of its employees to, any Pension Plan, other than (i) Pension Plans disclosed in Schedule 4.13, (ii) Pension Plans created to replace those -------------- Pension Plans disclosed in Schedule 4.13, as notified by Borrower to the Agent, ------------- and (iii) Pension Plans to which Borrower or any ERISA Affiliate becomes obligated to contribute pursuant to the terms of a collective bargaining agreement. (b) At any time, permit any Pension Plan maintained by it or, in the case of clauses (ii), (iii) and (iv) below, by any ERISA Affiliate, to: (i) engage in any non-exempt "prohibited transaction," as such term is defined in Section 406 of ERISA or Section 4975 of the Code; (ii) incur any material "accumulated funding deficiency," as that term is defined in Section 302 of ERISA; (iii) fail, or permit any ERISA Affiliate to fail, to timely pay any required installment under Section 412(m) or any other payment required under Section 412 of the Code, if such failure could result in the imposition of a Lien or otherwise would constitute a Materials Adverse Effect; or (iv) other than the filing of the petition initiating the Chapter 11 Case, suffer a Termination Event to occur which may reasonably be expected to result in liability of Borrower or any ERISA Affiliate thereof to the Pension Plan or to the PBGC or the imposition of a Lien on the Property of Borrower or any ERISA Affiliate thereof pursuant to Section 4068 of ERISA if such liability may reasonably be expected to constitute a Material Adverse Effect. (c) Fail promptly to notify the Agent of the occurrence of any "reportable event" (as defined in Section 4043 of ERISA), other than a reportable event for which the thirty-day notice requirement has been waived by the PBGC, or of any non-exempt "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) with respect to any Pension Plan described in Schedule -------- 4.13 or any trust created thereunder. - ---- (d) At any time, permit any Pension Plan described in Schedule 4.13 to -------------- fail to comply with ERISA or other applicable Laws in any respect that constitutes a Material Adverse Effect. 6.6 Change in Nature or Conduct of Business. Borrower shall not make any ---------------------------------------- material change in the nature of the business of Borrower as conducted on the date of this Agreement and the Effective Date or engage in any line of business not engaged in by Borrower on the date of this Agreement and the Effective Date; provided that the introduction of additional products or services within or - -------- 65 related to such lines of business or the expansion of marketing areas shall not be construed to be a new line of business. 6.7 Liens. Borrower shall not, directly or indirectly, create, incur, ------ assume or permit to exist any Lien on or with respect to any of its Property, except the following (collectively, "Permitted Encumbrances"): ----------------------- (a) Liens created by the Loan Documents; (b) Liens existing on the date of this Agreement and described on Schedule -------- 6.7; - ---- (c) Those matters shown as exceptions on "Schedule B" to mortgagee's title insurance policy no. 112-01-088616 issued on November 19, 1992 by Lawyers Title Insurance Company in favor of the Agent; (d) Liens (other than Environmental Liens and Liens in favor of the PBGC) with respect to taxes, assessments or governmental charges or claims, the nonpayment of which is permitted under Section 5.2; ----------- (e) Statutory Liens of landlords and Liens of suppliers, mechanics, carriers, materialmen, warehousemen or workmen and other Liens imposed by law and created in the ordinary course of business, arising in respect of claims, the nonpayment of which is permitted under Section 5.2; ----------- (f) Liens incurred or deposits made in the ordinary course of business in connection with worker's compensation, unemployment insurance or other types of social security benefits or to secure other similar obligations or arising as a result of progress payments under government contracts; (g) Liens arising under Section 302(f) of ERISA or Section 412(n) of the Code where the delinquent contribution which gave rise to the Lien is paid within thirty (30) days of its original due date; (h) Liens granted on the CIT Collateral in favor of CIT securing Indebtedness under the CIT Loan Agreement which Borrower is permitted to incur under subclause (b)(iii) or (b)(vii) of Section 6.8 but not to exceed in any ----------- event the aggregate principal sum of $10,755,648; (i) Any interest or title of a lessor, or secured by a lessor's interest, under any lease permitted by this Agreement; (j) Subject to the terms of the Intercreditor Agreement, Liens granted to the Trustee as security for Borrower's obligations under the Restated Indenture Notes, the Notes Security Documents 66 and the Restated Indenture securing Indebtedness under the Restated Indenture Notes which Borrower is entitled to incur under Section 6.8 but not to exceed in ----------- any event the aggregate principal sum of $27,000,000; (k) To the extent Indebtedness secured thereby is permitted to be extended, renewed, replaced or refinanced pursuant to Section 6.8, a future Lien upon any ----------- Property which is subject to a Lien described in clauses (h) and (j) above, if such future Lien attaches only to the same Property, secures only such permitted extensions, renewals, replacements or refinancings and is of like quality, character and extent; and (l) Liens granted by the Bankruptcy Court in favor of reclamation claimants pursuant to Section 546(c)(2)(B) of the Bankruptcy Code, but only to the extent such Liens are junior in priority to the Liens of the Lenders granted under or pursuant to this Agreement, the other Loan Documents and the Final Borrowing Order. 6.8 Indebtedness. Except as expressly permitted in this Section 6.8, ------------- ----------- Borrower shall not (a) enter into any Guaranty or (b) create, incur, assume or permit to exist any other Indebtedness, whether recourse or nonrecourse, and whether superior or junior, resulting from borrowings, loans, advances or the granting of credit, whether secured or unsecured, except (i) the Obligations, (ii) obligations of Borrower in respect of allowed fees and expenses of the type contemplated by Section 2.8 hereof, (iii) Indebtedness in an amount not ----------- in excess of $10,755,648 in the aggregate incurred under the CIT Facility, (iv) Subordinated Indebtedness, (v) Indebtedness in respect of Hedging Obligations and under Capital Leases and other financing agreements outstanding on the date of this Agreement and described in Schedule 6.8, (vi) Indebtedness under the ------------ 1993 Securities and the 1994 Securities, in aggregate principal amounts not in excess of Twenty Million Dollars ($20,000,000) and Ten Million Dollars ($10,000,000), respectively, as each such principal amount is reduced from time to time by any optional or mandatory redemption, repayment, prepayment or sinking fund payment made pursuant to the terms of the Restated Indenture other than a reduction effected by a refunding, refinancing or replacement in whole or in part of the obligations under the Restated Indenture by obligations under any subsequent indenture or indentures complying with all applicable provisions of this Agreement and the Intercreditor Agreement (as in effect on the date hereof); and (vii) extensions, renewals, replacements or refinancings of the Indebtedness described in the preceding clauses (i), (iii), (iv), (v) and (vi) on terms and conditions satisfactory to the Majority Lenders. 6.9 Transactions with Affiliates. Borrower shall not, directly or ----------------------------- indirectly, enter into or permit to exist any transaction 67 with any Affiliate of Borrower on terms that are less favorable to Borrower than those that might be obtained in an arm's length transaction at the time from Persons who are not an Affiliate; provided that Borrower shall not, in any event, be permitted to pay any management fee to Odyssey or any Affiliate of --------- Odyssey, to transfer any assets to Odyssey or to any Affiliate of Odyssey, or to repurchase Senior Subordinated Notes from Odyssey or any Affiliate of Odyssey. Nothing in this Section 6.9 shall prohibit the payment of customary directors' ----------- fees and indemnities, to Borrower's directors generally, including any director who is also an Affiliate of Odyssey. 6.10 Sales and Leasebacks. Borrower shall not become liable, by --------------------- assumption or by Guaranty, with respect to any lease, whether an Operating Lease or a Capital Lease, of any Property (whether real, personal or mixed) (a) which it sold or transferred or is to sell or transfer to any other Person or (b) which it intends to use for substantially the same purposes as any other Property which has been or is to be sold or transferred by it to any other Person in connection with such lease. 6.11 Margin Regulations. Borrower shall not use all or any portion of the ------------------- proceeds of any Advance made under this Agreement to purchase or carry "margin stock" (as such term is defined in Regulations G and U). 6.12 Investments. Borrower shall not make or suffer to exist any ------------ Investment except (a) Investments existing on the Effective Date and disclosed in Schedule 6.12, (b) Investments consisting of Cash Equivalents at any time -------------- when no Advances are outstanding hereunder, (c) Investments consisting of advances to employees of Borrower for travel expenses, relocation and similar purposes in the ordinary course of business in amounts not to exceed $120,000 to any individual employee at any time outstanding or $750,000 to all employees in the aggregate at any time outstanding, and (d) Investments arising from the conversion of Accounts which are over ninety (90) days past due and in any event are not Eligible Accounts into (i) Securities consisting of promissory notes if the aggregate face value of such Accounts with respect to any one Account Debtor at any time held as such Securities does not exceed $1,000,000 and the aggregate face value of all such Accounts at any time held as such Securities does not exceed $5,000,000 and (ii) Securities consisting of a combination of promissory notes and Capital Stock of the Account Debtors if the aggregate face value of such Accounts with respect to any one Account Debtor at any time held as such Securities does not exceed $500,000 and the aggregate face value of all such Accounts at any time held as such Securities does not exceed $2,000,000; provided that in each case the Securities into which such Accounts are converted - -------- shall be pledged and delivered to the Agent, for the benefit of Lenders, in a manner satisfactory to the Agent. 68 6.13 Amendment of Charter or By-Laws. Borrower shall not amend its -------------------------------- charter documents or By-Laws except upon at least ten (10) days' prior written notice to the Agent and then, only if such amendment would not constitute a Material Adverse Effect. 6.14 Capital Stock. Borrower shall not issue or sell any of its Capital -------------- Stock or any Securities convertible into or exchangeable for any shares of its Capital Stock, grant any rights (either preemptive or other) to subscribe for or to purchase, or any options for the purchase of, enter into any agreement providing for the issuance (contingent or otherwise) of, or create calls, com- mitments or claims of any character relating to, any of its Capital Stock or any stock or Securities convertible into or exchangeable for any of its Capital Stock, except for (a) the issuance of Senior Preferred Stock as payment in kind dividends pursuant to the terms of the Senior Preferred Stock, (b) the issuance of stock options to members of Borrower's management and key employees in connection with Borrower's management incentive programs, and (c) the issuance by Borrower of Capital Stock in a public offering if the issuance of such Capital Stock would not result in the occurrence of a Change of Control. 6.15 Fiscal Year. Borrower shall not change its Fiscal Year for ------------ accounting or tax purposes from a period consisting of the annual period ending on the Sunday closest to October 31 of each calendar year. 6.16 Cash Management System. Borrower shall not maintain any bank account ----------------------- other than those accounts set forth in Schedule 6.16 and, to the extent provided ------------- in the Blocked Account Agreement, the "Lockbox Account" provided for therein, or authorize or direct any Person to take any action with respect to amounts deposited in the Collection Account in contravention of the provisions of this Agreement, the Security Agreement, the Blocked Account Agreement, or any other Loan Document. 6.17 Cancellation of Indebtedness. Borrower shall not cancel any material ----------------------------- claim or debt owing to it, except for reasonable consideration or (as to Collateral not constituting Eligible Accounts) in the ordinary course of business. 6.18 Commingling. Borrower shall not maintain corporate deposit accounts ----------- jointly with any Affiliate or other Person or commingle any funds with funds of any Affiliate or other Person. 6.19 Capital Expenditures. Borrower shall not make, or incur any -------------------- Contractual Obligation to make, any Capital Expenditure if to do so would cause Borrower's aggregate Capital Expenditures to exceed $3,000,000 during the period from November 1, 1995 through and including October 31, 1996. 6.20 Operating Leases. Borrower shall not become liable in ----------------- 69 any way, whether directly or by assignment or Guaranty, for the obligations of the lessee under any Operating Lease, other than (i) Operating Leases to which Borrower is a party as of the date of this Agreement, and (ii) Operating Leases replacing Operating Leases to which Borrower is a party as of the date of this Agreement, provided that such Operating Leases do not in the aggregate have minimum annual rental payments exceeding by $50,000 or more the minimum annual rental payments for the Operating Leases so replaced. 6.21 EBITDA. Borrower shall not permit its EBITDA for the fiscal month of ------ November 1995 to be less than ($3,900,000) and shall not permit its EBITDA for any two-month fiscal period set forth below to be less than the Amount set forth opposite such two-month fiscal period (with negative numbers indicated by parentheses): TWO-MONTH FISCAL PERIOD AMOUNT ------------- ------ November/December 1995 $(5,800,000) December 1995/January 1996 (1,000,000) January/February 1996 3,000,000 February/March 1996 5,800,000 March/April 1996 7,800,000 April/May 1996 7,500,000 May/June 1996 6,600,000 June/July 1996 5,300,000 July/August 1996 2,500,000 August/September 1996 125,000 September/October 1996 350,000 6.22 Restated Indenture. Borrower shall not amend the Restated Indenture ------------------ or the Restated Indenture Notes or consent to any amendment to the Restated Indenture or the Restated Indenture Notes that would provide for mandatory redemptions in any event of the 1994 Securities or mandatory redemptions of the 1993 Securities in amounts greater than, or at intervals more frequent than, those provided for in Section 6 of the form of Securities attached as Exhibit A to the Restated Indenture, as in effect on the date hereof, or acquiesce in any thereof, or effect any refunding, refinancing or replacement which would have such effect, except, in each case, as provided in the Asset Sale Provision and 70 in Section 3.09 of the Restated Indenture, as in effect on the date hereof or any successor provision which is the same in substance as such Section 3.09, or as provided in a plan of reorganization confirmed in the Chapter 11 Case pursuant to Section 1129 of the Bankruptcy Code. 6.23 Payment of Prepetition Indebtedness; Adequate Protection. Borrower --------------------------------------------------------- shall not: (a) Make any payment of cash or transfer any interest in property to or for the benefit of a creditor for or on account of prepetition indebtedness without the prior approval of the Bankruptcy Court after notice and opportunity for a hearing; provided, however, that, notwithstanding the foregoing, Borrower shall -------- ------- not, other than as permitted by Section 6.23(b), make any such payments or --------------- transfers except (i) payments of prepetition wages, salaries and commissions, related employee benefits and payroll taxes in an amount that does not exceed $1,750,000 in the aggregate, (ii) payments of health and dental benefit claims incurred but not yet reported as of the Petition Date, (iii) payments of prepetition indebtedness owed to essential suppliers of services to Borrower (including, without limitation, freight handlers) in an amount that does not exceed $500,000 in the aggregate, (iv) payments of customs duty owed to the United States Customs Service in an amount that does not exceed $150,000 in the aggregate, and (v) for other purposes material to Borrower's ability to obtain deliveries of raw materials in an amount that does not exceed $300,000 in the aggregate; or (b) Absent an order of the Bankruptcy Court after notice and opportunity for a hearing, make any cash payment or periodic cash payments, grant any Lien or any additional or replacement Lien, grant any administrative expense priority, or grant any other form of adequate protection provided under Section 361 of the Bankruptcy Code to a secured creditor or lessor of property (except as required by Section 365(d)(3) or (10) of the Bankruptcy Code); provided, -------- however, that, notwithstanding any such notice and hearing and Court order, - ------- Borrower shall not (i) make any such cash payment or periodic cash payments in an aggregate amount in excess of $100,000 (or such other dollar amount as the Bankruptcy Court, after notice and hearing, may order) in any fiscal month or $1,200,000 (or such other dollar amount as the Bankruptcy Court, after notice and hearing, may order) during the term of this Agreement (subject to increase, as required, in the event of a subsequent increase in the applicable rates of interest owed under instruments and agreements held by the recipients of such adequate protection payments), (ii) grant any Lien or additional or replacement Lien which is senior or equal in priority to the Liens of the Lenders granted under or pursuant to this Agreement and the other Loan Documents, or (iii) grant any administrative expense priority to any secured creditor or lessor of property that is senior or equal in priority to the 71 administrative expense priority of the Obligations of Borrower hereunder. 6.24 Return of Goods. Borrower shall not return any goods to any of its --------------- creditors for application against prepetition indebtedness under Section 546(g) of the Bankruptcy Code or otherwise or allow any creditor to take any setoff against any of its prepetition indebtedness based upon any such return; provided, however, that the provisions of this Section 6.24 shall not apply to - -------- ------- ------------ returns of defective or non-conforming goods in the ordinary course of business. Borrower shall use its best efforts to oppose the treatment of reclamation claims to the extent such treatment involves the return of goods to the reclamation claimant or the immediate cash payment of such reclamation claim as an administrative expense (it being understood that Borrower is not required to oppose the granting to a reclamation claimant of an administrative expense claim or a Lien securing such reclamation claim, which Lien is junior in priority to the Liens granted to the Agent (for the ratable benefit of the Lenders) pursuant to this Agreement, the other Loan Documents and the Final Borrowing Order). ARTICLE 7 INFORMATION AND REPORTING REQUIREMENTS -------------------------------------- So long as any Advance remains unpaid, any Letter of Credit Obligation remains outstanding, any other Obligation remains unpaid or any portion of the Commitment remains outstanding, unless the Agent (with the approval of the Majority Lenders) otherwise consents in writing: 7.1 Financial Information and Reports. Borrower shall deliver to each ---------------------------------- of the Lenders at Borrower's sole expense: (a) Monthly Financial Statements. As soon as practicable, and in any event ----------------------------- within thirty (30) days after the end of each fiscal month of each Fiscal Year, (i) the balance sheet of Borrower as at the end of such fiscal month and (ii) statements of income and cash flows, in each case for such fiscal month and for the portion of the Fiscal Year ended with such fiscal month, all in sufficient detail to calculate compliance with the Financial Covenants, presented in a manner comparing such financial statements to Borrower's budget for the Fiscal Year and setting forth any variances therefrom and to the corresponding period of the prior Fiscal Year. (b) Quarterly Financial Statements. As soon as practicable, and in any ------------------------------- event within forty-five (45) days after the end of each Fiscal Quarter (other than the fourth Fiscal Quarter in any Fiscal Year), (i) the balance sheet of Borrower as at the end of such Fiscal Quarter and (ii) statements of income and cash flows, in 72 each case for such Fiscal Quarter and for the portion of the Fiscal Year ended with such Fiscal Quarter, all in detail sufficient to calculate compliance with the Financial Covenants, presented in a manner comparing such financial statements to Borrower's budget for the Fiscal Year and setting forth any variances therefrom and to the corresponding period of the prior Fiscal Year. (c) Annual Financial Statements. As soon as practicable, and in any event ---------------------------- within ninety (90) days after the end of each Fiscal Year, (i) the balance sheet of Borrower as at the end of such Fiscal Year, and (ii) the related statements of income, stockholders' equity and cash flows. Such financial statements shall be prepared in accordance with GAAP, consistently applied (except for those changes with which the independent public accountants of Borrower have concurred and shall have disclosed in the notes to such financial statements) and shall be accompanied by a report and opinion of Deloitte & Touche LLP or other independent public accountants of recognized national standing selected by Borrower and approved by the Majority Lenders which report and opinion shall be prepared in accordance with generally accepted auditing standards as at such date, shall not be subject to any qualifications or exceptions, and shall be accompanied by a certificate stating that (x) Borrower is in compliance with the Financial Covenants, and (y) in performing the audit necessary for the certification of such financial statements and such report, such accountants have obtained no actual knowledge of a Default or Event of Default (or, if such accountants have obtained actual knowledge of a Default or Event of Default, stating the nature and status of such Default or Event of Default). (d) Comparison of Annual Statements and Budget. Concurrently with the ------------------------------------------- financial statements described in clause (c) above, unaudited statements setting forth the balance sheet, income statement, statement of stockholders' equity and statement of cash flows of Borrower presented in a manner comparing such financial statements to Borrower's budget for the Fiscal Year and setting forth any variances therefrom and to the prior Fiscal Year. (e) Management's Discussion and Analysis. Concurrently with the financial ------------------------------------- statements described in clauses (a), (b) and (c) above, a report detailing the operations of Borrower which report shall include a management discussion and analysis of Borrower's performance during such month, Fiscal Quarter or Fiscal Year and an explanation of any material variance from Borrower's business plan or budget for such period that is reflected in such financial statements. (f) Compliance Certificate. Concurrently with each of the financial ----------------------- statements to be delivered pursuant to clauses (a), (b) and (c), Borrower shall deliver a Compliance Certificate dated as of the last day of the fiscal period covered by such financial statements. 73 (g) Budgets; Business Plans; Financial Projections. As soon as practicable ----------------------------------------------- and in any event not later than forty-five (45) days before the commencement of each Fiscal Year of Borrower for each of Borrower's Fiscal Years (i) a monthly budget for such Fiscal Year, (ii) an annual business plan for such Fiscal Year, substantially in the form of the business plan heretofore delivered to the Agent and the Lenders, accompanied by a report reconciling all changes and departures from the business plan delivered to the Agent and the Lenders on or prior to the Effective Date as described in Section 4.6 and (if applicable) with respect to ----------- the preceding Fiscal Year, pursuant to this Section 7.1(g), and (iii) a plan and -------------- financial forecast, prepared in accordance with Borrower's normal accounting procedures applied on a consistent basis, for each succeeding Fiscal Year of Borrower until the Commitment Termination Date, including, without limitation (A) a forecasted balance sheet and a statement of cash flows of Borrower for each such Fiscal Year, (B) forecasted balance sheets, statements of earnings and retained earnings, and changes in cash flows of Borrower for and as of the end of each fiscal month and of each such Fiscal Year, (C) the amount of forecasted Capital Expenditures for each such Fiscal Year and (D) forecasted compliance with the Financial Covenants for each such Fiscal Year. 7.2 Collateral Information and Reports. Borrower shall deliver to the ---------------------------------- Agent and each of the Lenders at Borrower's sole expense: (a) Daily Reports. On a daily basis, a daily report in form reasonably ------------- satisfactory to the Agent, as to Borrower's Accounts, daily collections, returns and credits and such other matters as the Agent shall reasonably request, certified by a Responsible Official of Borrower. (b) Borrowing Base Certificate. On a weekly basis, on Monday of each -------------------------- week, a Borrowing Base Certificate as of the last Business Day of the immediately preceding week. Each Borrowing Base Certificate shall set forth Borrowing Base calculations since the date of the last prior Borrowing Base Certificate and shall include a weekly cash journal, the information required to be delivered pursuant to clause (c) below and such other information as the Agent may request from time to time. (c) Weekly Accounts Reports. On a weekly basis, on Wednesday of each ----------------------- week, with respect to the period from August 1 of each calendar year to January 31 of the next calendar year and at any time when a Default or Event of Default has occurred and is continuing a summary aging of Accounts and Eligible Accounts specifying the Accounts and Eligible Accounts created or acquired during the prior week certified by a Responsible Official of Borrower. (d) Monthly Collateral Reports. At least once each fiscal month, a report -------------------------- (a "Monthly Report"), dated the last day of such -------------- 74 fiscal month, and certified by a Responsible Official of Borrower, which Monthly Report shall include the following information for Borrower and shall cover the period since the last prior Monthly Report delivered to the Agent (provided that Borrower shall provide such information to the Agent more often than monthly if the Agent reasonably so requests): (i) A summary aging of Accounts and Eligible Accounts specifying the Accounts and Eligible Accounts created or acquired during the prior month, (ii) A schedule of Inventory based upon Borrower's most recent physical inventory and its perpetual inventory records showing Borrower's cost of all such Inventory with a monthly reconciliation to the general ledger inventory account of Borrower and scheduling all such Inventory by type and location, (iii) A list of all Accounts, Inventory, Equipment and Real Property which do not satisfy any warranty, representation or covenant contained in this Agreement or any other Loan Document and an explanation thereof, (iv) A monthly summary of standard cost variances, on a consolidating and consolidated basis by plants/profit center, and (v) A list of all new locations, offices, or places of business opened by Borrower or at which Borrower has located any of the Collateral, its operations, assets, property or books and records, or to which it has relocated its headquarters, and a description of the Collateral or other property located therein, and a list of any locations, offices or places of business closed or abandoned by Borrower. Each fiscal month's Monthly Report shall be delivered to the Agent within fifteen (15) days after the end of such month; provided that if such date shall not be a Business Day, delivery shall be made on the next Business Day after such date. (e) Quarterly Collateral Reports. At least once each Fiscal Quarter, a ---------------------------- report (a "Quarterly Report"), dated the last day of such Fiscal Quarter, and ---------------- certified by a Responsible Official of Borrower, which Quarterly Report shall include the following in formation for Borrower, and shall cover the period since the last prior Quarterly Report delivered to the Agent (provided that Bor- -------- rower shall provide such information to the Agent more often if the Agent reasonably so requests): (i) A detailed summary of Inventory aging for greige and finished cloth, 75 (ii) A schedule of any acquisition or disposition of Equipment with a value in excess of $25,000, (iii) A list of all Real Property purchased or sold, together with legal descriptions for all Real Property so purchased, and (iv) A list of all other contracts for the sale of Inventory or the performance of services by Borrower for a total contract price in excess of One Million Dollars ($1,000,000). Each Fiscal Quarter's Quarterly Report shall be delivered to the Agent together with the Monthly Report for the last fiscal month of such Fiscal Quarter within fifteen (15) days after the end of such fiscal month; provided that if such date -------- shall not be a Business Day, delivery shall be made on the next Business Day after such date. (f) Customer Lists. At any time at Agent's request, a list of Borrower's -------------- customers, including addresses. 7.3 Operating Leases; Capital Leases, Etc. On a monthly basis, together -------------------------------------- with each Monthly Report, Borrower shall deliver to the Agent and each of the Lenders at Borrower's sole expense: (a) A list showing each of the then existing Capital Leases and Operating Leases and the amount of all payments due in respect thereof during the prior Fiscal Quarter and indicating whether such payments were made when due; and (b) A schedule setting forth the aggregate amount of all Capital Expenditures from the Petition Date to date (including all principal payments made with respect to MIS Expenditures). 7.4 Other Specific Information and Reports. Borrower shall deliver to the --------------------------------------- Agent and each of the Lenders at Borrower's sole expense: (a) Taxes, Assessments, etc. Promptly after Borrower determines to ------------------------ contest any tax, assessment or other governmental charge or any claim as permitted pursuant to Section 5.2, written notice of such contest which notice ----------- shall include a brief description of the nature of the tax, assessment, charge or claim being contested and the action Borrower is taking with respect thereto and shall specify (i) the amount of such tax assessment, charge or claim being contested, and (ii) the amount of the reserve Borrower has set aside therefor. (b) Audit Reports. Promptly after receipt thereof, copies of any detailed -------------- audit reports or recommendations submitted to Borrower by independent accountants in connection with the accounts or books of Borrower, or any audit of any of them. 76 (c) Management Reports. Promptly after receipt thereof, copies of any ------------------- management reports delivered to Borrower or to any officer or employee thereof by Borrower's accountants in connection with the financial statements delivered pursuant to Section 7.1. ----------- (d) Reports to Shareholders; SEC Filings. Promptly after the same are ------------------------------------- available, copies of each annual report, proxy or financial statement or other report or communication sent to the shareholders of Borrower or to the trustee under any indenture and copies of all annual, regular, periodic and special reports and registration statements which Borrower may file or be required to file with the SEC under the Securities Act or the Securities Exchange Act. (e) Press Releases. Promptly after the same are made available to the --------------- public, copies of all press releases made available generally by Borrower to the public concerning material developments in Borrower's business. (f) ERISA Matters. Promptly upon Borrower's becoming aware, and in any -------------- event within five (5) Business Days after becoming aware, of the occurrence of any (i) "reportable event" (as such term is defined in Section 4043 of ERISA), other than a reportable event for which the thirty-day notice requirement has been waived by the PBGC and the reportable event resulting from the filing of the petition initiating the Chapter 11 Case, or (ii) "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) in connection with any Pension Plan, other than a Multiemployer Plan, or any trust created thereunder, a written notice specifying the nature thereof, what action Borrower is taking or proposes to take with respect thereto, and, when known, any action taken by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto; (g) Change of Control. Not less than thirty (30) days prior to the ------------------ occurrence of any event or transaction which could reasonably be expected to result in a Change of Control, written notice specifying the nature of such event or transaction. (h) Invoices, Etc. If so requested by the Agent, copies of all customer -------------- invoices (or the equivalent), rebilled invoices, credit memos, remittance advice and reports and deposit tickets, original bills of lading and other shipping or delivery receipts generated or received by Borrower and such other documents as the Agent may reasonably require in connection with the Accounts. (i) Events of Default. Promptly upon, but in no event more than five (5) ------------------ days after, Borrower obtains knowledge (i) of any condition or event which constitutes an Event of Default or Default, or that any Lender or the Agent has given any notice with respect to a claimed Default or Event of Default under this Agree ment, (ii) that any Person has given any notice to Borrower or 77 taken any other action with respect to a claimed default or event or condition of the type referred to in Section 9.1(e) or (iii) of any event or condition -------------- that constitutes or will constitute a Material Adverse Effect or affect the value of, or the Agent's interest in, the Collateral in any material respect, an Officer's Certificate specifying (A) the nature and period of existence of any such claimed Default, Event of Default, default, condition or event, (B) the notice given or action taken by any Person in connection therewith and (C) what action Borrower has taken, is taking and proposes to take with respect thereto. (j) Lawsuits. (i) Promptly upon Borrower obtaining knowledge of the --------- institution of, or written threat of, (A) any action, suit, proceeding or arbitration against or affecting Borrower or any asset of Borrower not previously disclosed pursuant to Section 4.10 or Section 5.11 involving money or ------------ ------------ property valued in excess of Five Hundred Thousand Dollars ($500,000) or any actions, suits, proceedings or arbitration which in the aggregate involve money or property value in excess of One Million Dollars ($1,000,000) or (B) any investigation or proceeding before or by any Governmental Agency, the effect of which is reasonably likely to limit, prohibit or restrict materially the manner in which Borrower currently conducts its business or to declare any substance contained in products manufactured or distributed by it to be likely to result in harm or injury, written notice thereof and such other information as may be reasonably available to enable each Lender and its counsel to evaluate such matters except, in each case, where the same is fully covered by insurance (other than applicable deductible), (ii) as soon as practicable and in any event within forty-five (45) days after the end of each Fiscal Quarter of Borrower, a litigation status report covering the institution of, or written threat of, any action, suit, proceeding, governmental investigation or arbitration reported pursuant to clause (i)(A) and (B) above and such other information at such time as may be reasonably available to enable each Lender and its counsel to evaluate such matters, and (iii) in addition to the requirements set forth in clauses (i) and (ii) of this clause (j), upon request of the Agent or the Majority Lenders, written notice of the status of any action, suit, proceeding, governmental investigation or arbitration covered by a report delivered pursuant to clause (i) or (ii) above and such other information as may be reasonably available to it to enable each Lender and its counsel to evaluate such matters. (k) Insurance. As soon as practicable and in any event by the last day of ---------- April in each Fiscal Year, (i) a report in form and substance reasonably satisfactory to Lenders outlining all insurance policies and programs currently in effect with respect to the Property and business of Borrower, insurance coverage maintained as of the date of such report by Borrower and the loss pay- ment provisions of such coverage and (ii) evidence that all premiums with respect to such coverage have been paid when due. 78 (l) Labor Matters. Promptly, but in any event within two (2) Business Days -------------- after learning thereof, written notice of (i) any material labor dispute to which Borrower may become a party, any strikes, lockouts or other disputes relating to Borrower's plants and other facilities and (ii) any liability incurred with respect to the closing of any plant facility of Borrower. (m) Permitted Subordinated Indebtedness. Upon its receipt thereof, copies ------------------------------------ of (i) any notice or other communication delivered by or on behalf of Borrower to any Person in connection with any agreement or other document relating to Subordinated Indebtedness at the same time and by the same means as such notice or other communication is delivered to such Person and (ii) any material notice or other material communication received by Borrower from any Person in connection with any agreement or other document relating to Subordinated Indebtedness promptly after such notice or other communication is received by Borrower. (n) Documents Related to Chapter 11 Case. Promptly after the filing or ------------------------------------ distribution thereof, copies of all pleadings, motions, applications, judicial information, financial information and other documents filed by Borrower with the Bankruptcy Court or with respect to the Chapter 11 Case or distributed to the Office of the United States Trustee, the Official Committee, any other committee of creditors or equity security holders in the Chapter 11 Case or any other creditor in the Chapter 11 Case. 7.5 Other Information and Reports (Generally). Borrower shall provide to ------------------------------------------ the Agent and each Lender such other information, reports, contracts, schedules, lists, documents, agreements and instruments with respect to (a) the Collateral and (b) Borrower's business condition (financial or otherwise), operations, performance, properties or prospects as the Agent or the Majority Lenders may from time to time reasonably request. SECTION 8 CONDITIONS PRECEDENT TO EFFECTIVE DATE; EFFECT OF RESTATEMENT; EXTENSIONS OF CREDIT ON AND AFTER EFFECTIVE DATE ---------------------------------- 8.1 Conditions Precedent to Effective Date. Notwithstanding any other --------------------------------------- provision of this Agreement, it is understood and agreed that this Agreement shall not become effective (and the Original Loan Agreement shall remain in full force and effect) unless and until the following conditions precedent shall have been satisfied or waived on such terms and conditions as the Agent may agree: (a) Document Deliveries. The Agent shall have received all of the -------------------- following, each dated as of the Effective Date and all in form and substance reasonably satisfactory to the Agent and legal counsel for the Agent: 79 (i) a Borrowing Base Certificate as of a date not more than five (5) days prior to the Effective Date; (ii) such documentation as the Agent may reasonably require to establish the due organization, valid existence and good standing of Borrower, its qualification to engage in business in each jurisdiction in which it is engaged in business or required to be so qualified, its authority to execute, deliver and perform any Loan Documents to which it is a party, and the identity, authority and capacity of each Responsible Official thereof authorized to act on its behalf, including certified copies of articles of incorporation and amendments thereto, bylaws and amendments thereto, certificates of good standing and/or qualification to engage in business, certificates of corporate resolutions, incumbency certificates, certificates of Responsible Officials and the like; (iii) the Opinion of Counsel; (iv) an Officer's Certificate affirming that the conditions set forth in Sections 8.1(g), 8.1(h) and 8.1(i) have been satisfied; --------------- ------ ------ (v) the amendment to the Blocked Account Agreement contemplated by the definition thereof, substantially in the form of Exhibit A hereto, duly --------- executed by Borrower and Citibank, N.A.; and (vi) such other assurances, certificates, documents, consents or opinions as the Agent may reasonably require. (b) Fees. The Agent shall have received, for the account of the Agent, the ----- portion of the agent's fee described in Section 3.9 that is due and payable on ----------- or before the Effective Date. (c) Interim Borrowing Order. The Bankruptcy Court shall have entered the ------------------------ Interim Borrowing Order within five (5) Business Days after the Petition Date, and no order modifying or vacating such Order shall have been entered, and no appeal of such Order shall have been timely filed or, if such an appeal has been taken, no stay of such Order pending appeal shall have been granted. (d) Litigation, Etc. The Agent shall be satisfied that, other than the ---------------- Chapter 11 Case, no litigation, arbitration, injunction, proceeding, government investigation or inquiry which (i) is related to this Agreement, the Revolving Credit Loan, or any of the other transactions contemplated hereby, or (ii) would constitute a Material Adverse Effect has been commenced nor has been threatened, and nor will the Agent have been apprised of the existence of any basis for such litigation, arbitration, injunc tion, proceeding, governmental investigation or proceeding nor 80 shall Borrower be aware of any basis therefor. (e) Availability. The Agent shall be satisfied that the amount available ------------- for borrowing by Borrower under the Revolving Credit Loan pursuant to Section ------- 2.1, after giving effect to any Advances and Letter of Credit Obligations - --- requested by Borrower to be made or incurred on the Effective Date pursuant to a Request for Advance and any Request for Letter of Credit submitted in ac- cordance with Sections 2.1(b) and 2.2(b) hereof, shall equal or exceed --------------- ------ $3,000,000. (f) Legal Fees and Expenses. The fees and expenses of King & Spalding, ------------------------ legal counsel to the Agent, and any other counsel retained by the Agent relating to the Loan Documents shall have been paid by Borrower. (g) Representations and Warranties. The Agent shall be satisfied that the ------------------------------- representations and warranties of Borrower contained in Article 4 shall be true --------- and correct. (h) Compliance; No Default. Borrower shall be in compliance with all the ----------------------- terms and provisions of the Loan Documents, and no Default or Event of Default shall have occurred and be continuing or shall result from the making of such Advance or the application of the proceeds thereof or from the incurrence of such Letter of Credit Obligations. (i) No Material Adverse Effect. Since the Petition Date, there shall not --------------------------- have occurred: (i) any event or circumstance that constitutes a Material Adverse Effect, (ii) any material adverse change in the Collateral, (iii) any material decrease in the as sets, or any material increase in the liabilities, liquidated or contingent, of Borrower; or (iv) any dividends or other distributions made to the stockholders of Borrower. 8.2 Confirmation of Effectiveness. Upon the satisfaction or waiver of ----------------------------- each of the conditions precedent to the effectiveness of this Agreement set forth in Section 8.1, the Agent shall deliver to Borrower a letter confirming ----------- that the foregoing conditions precedent have been satisfied or waived (and, if any such condition precedent has been waived, stating the terms and conditions of such waiver) and stating that this Agreement has become effective. 8.3 Effect of Restatement. Upon the effectiveness of this Agreement on --------------------- the Effective Date pursuant to Section 8.1: (a) except as expressly set forth ----------- herein, all terms and conditions of the Original Loan Agreement and the other Loan Documents shall be and remain in full force and effect and shall constitute the legal, valid, binding and enforceable obligations of Borrower to Lenders and the Agent; (b) the terms and conditions of the Original Loan Agreement shall be amended as set forth herein and, as so amended, shall be restated in their entirety, but only with respect to the 81 rights, duties and obligations among the Agent, the Lenders and Borrower accruing from and after the Effective Date; (c) this Agreement shall not in any way release or impair the rights, duties, Obligations or Liens created pursuant to the Original Loan Agreement or any other Loan Document or affect the relative priorities thereof, in each case to the extent in force and effect thereunder as of the Effective Date and except as modified hereby or by documents, instruments and agreements executed and delivered in connection herewith, and all of such rights, duties, Obligations and Liens are assumed, ratified and affirmed by Borrower; (d) all indemnification obligations of Borrower under the Original Loan Agreement and any other Loan Documents shall survive the execution and delivery of this Agreement and shall continue in full force and effect for the benefit of all lending institutions party to the Original Loan Agreement at any time prior to the Effective Date (including, without limitation, to the extent set forth in Section 11.10 of the Original Loan Agreement as in effect on the Effective Date); (e) the Obligations incurred under the Original Loan Agreement shall, to the extent outstanding on the Effective Date, continue outstanding under this Agreement and shall not be deemed to be paid, released, discharged or otherwise satisfied by the execution of this Agreement, and this Agreement shall not constitute a refinancing, substitution or novation of such Obligations or any of the other rights, duties and obligations of the parties hereunder; (f) the execution, delivery and effectiveness of this Agreement shall not operate as a waiver of any right, power or remedy of the Lenders or the Agent under the Original Loan Agreement, nor constitute a waiver of any covenant, agreement or obligation under the Original Loan Agreement, except to the extent that any such covenant, agreement or obligation is no longer set forth herein or is modified hereby; and (g) any and all references in the Loan Documents to the Original Loan Agreement shall, without further action of the parties, be deemed a reference to the Original Loan Agreement, as amended and restated by this Agreement, and as this Agreement shall be further amended or amended and restated from time to time hereafter. 8.4 Conditions Precedent to Extensions of Credit on and After Effective ------------------------------------------------------------------- Date. The obligations of the Lenders to make any Advance or to incur any Letter - ---- of Credit Obligation on or subsequent to the Effective Date are subject to the satisfaction of the following conditions precedent: (a) Requests. The Agent shall have timely received a Request for Advance --------- in compliance with Section 2.1(b) or the Agent shall have timely received a -------------- Request for Letter of Credit in compliance with Section 2.2(b), as the case may -------------- be. (b) Representations and Warranties. The representations and warranties ------------------------------- contained in Article 4 shall be true and correct in all material respects on and --------- as of the date of the Advance or Letter of Credit Obligation as though made on and as of that date (except to 82 the extent that such representations and warranties relate solely to an earlier date and except as affected by transactions expressly contemplated by this Agreement). (c) Compliance; No Default. Borrower shall be in compliance with all the ----------------------- terms and provisions of the Loan Documents, and no Default or Event of Default shall have occurred and be continuing or shall result from the making of such Advance or the application of the proceeds thereof. (d) Litigation, Etc. Other than the Chapter 11 Case, there shall not be ---------------- then pending or, to the best knowledge of Borrower, threatened, any litigation, arbitration, injunction, proceeding, governmental investigation or inquiry against or affecting Borrower or any Property of Borrower before any Governmental Agency that constitutes or would constitute a Material Adverse Effect. (e) Borrowing Base Certificate. The Agent shall have received the most --------------------------- recent Borrowing Base Certificate required to be delivered in accordance with Section 7.2(b) and the additional items required to be delivered in accordance - --------------- with Section 7.2(a), (c), (d) and (e). -------------- --- --- --- (f) Final Borrowing Order. In the case of any Advance or Letter of Credit --------------------- Obligation requested to be made or incurred on or after the fortieth (40th) day following the Petition Date, the Agent shall have received a copy of the Final Borrowing Order, certified by the Clerk of the Bankruptcy Court, such Final Borrowing Order shall comply in all respects with the terms and conditions set forth in the definition thereof set forth in Section 1.1 hereof, and no order ----------- modifying or vacating such Order shall have been entered. (g) Other Information, Etc. The Agent shall have received such other ----------------------- information relating to any matters which are the sub ject of this Section 8.4 ----------- or the compliance by Borrower with this Agreement as may reasonably be requested by the Agent. ARTICLE 9 EVENTS OF DEFAULT AND REMEDIES ------------------------------ UPON EVENTS OF DEFAULT ---------------------- 9.1 Events of Default. The existence or occurrence of any one or more of ------------------ the following events, whatever the reason therefor and under any circumstance whatsoever, shall constitute an Event of Default: (a) Failure to Make Payments When Due. Borrower fails to pay any of the ---------------------------------- Prepetition Obligations (whether principal, interest, premium, fee or other Obligation) on the date when due, other than as a result of the Chapter 11 Case, or fails to pay any of the 83 Postpetition Obligations (whether principal, interest, premium, fee or other Obligation) on the date when due; or (b) Breach of Representation or Warranty. Any representation or warranty of ------------------------------------ Borrower made in any Loan Document or in any certificate delivered pursuant to any Loan Document proves to have been incorrect when made or reaffirmed in any respect that is materially adverse to the interests of the Lenders; or (c) Breach of Certain Covenants; Event of Default Under Other Loan -------------------------------------------------------------- Documents. Borrower fails duly and punctually to perform or observe any - ---------- agreement, covenant or obligation binding on Borrower pursuant to Section 5.5, ----------- Section 5.11 or Article 6 of this Agreement or any "Event of Default" (as such - ------------ --------- term is or may hereafter be defined in any of the other Loan Documents) shall occur under any other Loan Document; or (d) Other Defaults. Borrower shall fail duly and punctually to perform or --------------- observe any term, covenant or obligation binding on Borrower under this Agreement or under any of the other Loan Documents (other than as described in the preceding clauses (a), (b) and (c)) and such failure shall continue for twenty (20) days after the earlier of (i) the date on which Agent notifies Borrower of such failure, or (ii) the date on which Borrower knew, or in the exercise of due care, should have known of such failure (or such lesser period of time as is mandated by applicable Requirement of Law); or (e) Default as to Other Indebtedness. Any breach, default or event of -------------------------------- default shall occur under, or any other condition shall exist under, any instrument, agreement or indenture pertaining to any Indebtedness in an aggregate principal amount of $2,500,000 or more incurred by Borrower after the Petition Date or which has been assumed by Borrower pursuant to Section 365(a) of the Bankruptcy Code and, in any such case, such breach, default, event of default or condition shall (i) continue beyond the last day of any applicable grace, notice and/or cure period, and (ii) permit or require any such Indebtedness to be repaid, prepaid, redeemed or otherwise repurchased by Borrower prior to the stated maturity thereof without requiring relief from the automatic stay under Section 362 of the Bankruptcy Code; or (f) Judgments and Attachments. (i) Any money judgment (other than a money -------------------------- judgment covered by insurance as to which the insurance company has acknowledged coverage), writ or warrant of attachment or similar process against Borrower or any of its assets involving in any case an amount in excess of One Million Dollars ($1,000,000) is entered and shall remain undischarged, unvacated, unbonded or unstayed for a period of thirty (30) days; or (ii) any judgment or award of any court or administrative agency awarding material damages shall be entered against Borrower in any action under the Securities Act or the Securities Exchange Act, or any 84 other securities laws, seeking rescission of the purchase or sale of, any Subordinated Indebtedness, and such judgment or order shall have become final after exhaustion of all available appellate remedies; or (g) Dissolution. Any order, judgment or decree shall be entered against ------------ Borrower decreeing its involuntary dissolution or split up and such order shall remain undischarged or unstayed for a period in excess of thirty (30) days; or Borrower shall otherwise dissolve or cease to exist; or (h) Loan Documents: Failure of Security. At any time, for any reason (i) ------------------------------------ as modified by Section 11.25 hereof, any Loan Document ceases to be in full ------------- force and effect in any material respect or Borrower seeks to repudiate its Obligations thereunder and the Liens intended to be created thereby are, or Borrower seeks to render such Liens, invalid and unperfected, or (ii) Liens in favor of the Agent and/or Lenders contemplated by the Loan Documents or the subordination provisions of any documents evidencing the Subordinated Indebtedness shall, at any time, for any reason, be invalidated or otherwise cease to be in full force and effect, or such Liens shall be subordinated or shall not have the priority contemplated by this Agreement or the other Loan Documents; or (i) Subordinated Indebtedness. Any determination is made by a court of -------------------------- competent jurisdiction that payment of principal or interest or both is due to any holder of any Subordinated Indebtedness which would not be permitted by Section 6.3 or that the Senior Subordinated Notes are not subordinated to the - ----------- Obligations in accordance with the terms of the Senior Subordinated Note In- denture; or (j) Proceedings Under Chapter 11 Case. Any of the following shall occur in ---------------------------------- respect of the Chapter 11 Case: (i) the filing of a motion or other pleading by Borrower in the Chapter 11 Case (A) to obtain additional financing under Section 364(d) of the Bankruptcy Code, (B) except as permitted by Section 6.23(b), --------------- hereof, to grant any Lien upon or affecting any Collateral, (C) to use cash collateral of the Lenders under Section 363(c) of the Bankruptcy Code without the Lenders' consent, or (D) to recover from any portions of the Collateral any costs or expenses of preserving or disposing of such Collateral under Section 506(c) of the Bankruptcy Code; or (ii) the appointment of an interim or permanent trustee in the Chapter 11 Case or the appointment of an examiner in the Chapter 11 Case with expanded powers to operate or manage the financial affairs, the business or the reorganization of Borrower; or (iii) the dismissal or suspension of the Chapter 11 Case, or the conversion of the Chapter 11 Case from one under Chapter 11 to one under Chapter 7 of the Bankruptcy Code; or (iv) the entry of an Order by the Bankruptcy Court (A) granting, except as permitted by Section 6.23(b) of this Agreement, adequate protection to any secured --------------- creditor or lessor of property under Section 362, 363 or 85 364 of the Bankruptcy Code, (B) granting relief from, or modifying the automatic stay of Section 362 of the Bankruptcy Code in favor of, any holder of a claim in an amount in excess of $100,000 or any holder of any interest in any asset of Borrower with a book value in excess of $100,000 (provided, however, that no -------- ------- holder of the Restated Indenture Notes or the Senior Subordinated Notes shall be entitled to the benefit of the foregoing $100,000 exceptions), or (C) granting administrative expense priority to any creditor or lessor of property that is senior or equal in priority to the administrative expense priority of the Obligations of Borrower hereunder; or (v) the failure of the Bankruptcy Court to enter the Final Borrowing Order on or before the fortieth day following the Petition Date; or (vi) the modification of the Interim Borrowing Order or the Final Borrowing Order (whether by the Bankruptcy Court or on appeal) to which modification the Lenders have not consented in writing, the vacation, staying or reversal of any such Order (whether by the Bankruptcy Court or on appeal) or the expiration by its terms of any such Order; or (vii) [INTENTIONALLY DELETED]; or (viii) the filing of a plan of reorganization or liquidation that does not provide for the payment in full of all amounts due under or with respect to this Agreement within thirty days of the date of confirmation of such plan by the Bankruptcy Court pursuant to Section 1129 of the Bankruptcy Code; or (ix) the assertion by Borrower in any pleading filed with the Bankruptcy Court that any material provision of any Loan Document is not valid and binding on Borrower; or (k) Termination Event. The occurrence of a Termination Event with respect ------------------ to any Pension Plan if the liability of Borrower under ERISA as a result thereof exceeds One Million Dollars ($1,000,000); or the complete or partial withdrawal subsequent to the Effective Date by Borrower or any of its ERISA Affiliates from any Multiemployer Plan if the liability of Borrower as a result thereof exceeds One Million Dollars ($1,000,000); or (l) Change of Control. The occurrence of any Change of Control; or ------------------ (m) Key Officers and Consultants. Robert N. Dangremond shall cease to be ---------------------------- President and Chief Executive Officer of Borrower or Rod J. Peckham shall cease to be a financial consultant to Borrower, in each case devoting his full time and energy to the affairs of Borrower; or (n) Material Adverse Effect. The occurrence of any condition or event ------------------------ since the Effective Date which the Majority Lenders determine constitutes a Material Adverse Effect. 9.2 Remedies Upon Event of Default. Without limiting any other rights or ------------------------------- remedies of the Agent or the Lenders provided for elsewhere in this Agreement or the Loan Documents, or by applicable Law, or in equity, or otherwise: 86 (a) Upon the occurrence, and during the continuation, of any Event of Default and (except as otherwise contemplated by or pro vided for in the Interim Borrowing Order or the Final Borrowing Order) without application or motion to, or any order from, the Bankruptcy Court under Bankruptcy Code Section 362 or any other Section of the Bankruptcy Code or the Bankruptcy Rules: (i) the Lenders' Commitment and all other obligations of the Agent and the Lenders and all rights of Borrower under the Loan Documents shall be suspended without notice to or demand upon Borrower, which is expressly waived by Borrower to the fullest extent permitted by applicable Law, except that the Majority Lenders may waive the Event of Default or, without waiving, determine, upon terms and conditions satisfactory to the Majority Lenders, to reinstate the Lenders' Commitment; (ii) the Majority Lenders may request the Agent to, and the Agent thereupon shall, terminate the Lenders' Commitment, declare all or any part of the unpaid principal of the Revolving Credit Notes, all interest accrued and unpaid thereon and all other Obligations payable under the Loan Documents to be forthwith due and payable, and direct the Letter of Credit Issuer to declare all amounts due under the Letter of Credit Agreements to be forthwith due and payable, whereupon the same shall become and be forthwith due and payable, without protest, presentment for payment, notice of dishonor, demand or further notice of any kind, all of which are expressly waived by Borrower to the fullest extent permitted by applicable Law; (iii) the Majority Lenders may request the Agent to, and the Agent thereupon shall, make immediate demand upon Borrower to fund the Cash Collateral Account contemplated by Section 2.2(i); and -------------- (iv) the Agent, upon not less than five Business Days' notice to Borrower (all other notice or demand being expressly waived by Borrower to the fullest extent permitted by applicable Laws), the Office of the United States Trustee and counsel for the Official Committee (or, in the absence of any such Official Committee, to Borrower's 20 largest unsecured creditors as set forth in the list filed pursuant to Bankruptcy Rule 1007(d)), may proceed to protect, exercise, and enforce the rights and remedies of the Agent and the Lenders under the Loan Documents and such other rights and remedies as are provided by Law or equity. (b) The order and manner in which the rights and remedies of the Lenders under the Loan Documents and otherwise are to be exercised shall be determined by the Majority Lenders. All payments received by the Agent and the Lenders, or any of them, shall be applied first, to the costs and expenses (including ----- reasonable 87 attorneys' fees and disbursements) of the Agent and of the Lenders, second, ------ to the payment to the Lenders, in proportion to each Lender's Pro Rata Share, of the unpaid principal amount owing on all the Obligations, plus accrued and unpaid interest thereon, third, to the payment to the Agent and the Lenders ------ of any other Obligations hereunder, in proportion to the amount of such Obliga- tions owing to the Agent and to the Lenders, and thereafter to Borrower or ---------- whomsoever may be lawfully entitled thereto. Regardless of how each Lender may treat the payments for its own accounting purposes, for the purpose of computing Borrower's Obligations hereunder and under the Revolving Credit Notes, payments shall be applied first, to the costs and expenses of the Agent and the Lenders ----- as set forth above, second, to the payment of accrued and unpaid interest due ------ under any Loan Documents to and including the date of such application (ratably, and without duplication, according to the accrued and unpaid interest due under each of the Loan Documents), and third, to the payment of all other amounts ----- (including principal and fees) then owing to the Lenders under the Loan Documents. No application of the payments will cure any Event of Default or prevent acceleration, or continued acceleration, of amounts payable under the Loan Documents or prevent the exercise, or continued exercise, of rights or remedies of the Lenders hereunder or thereunder or at Law or in equity. ARTICLE 10 THE AGENT --------- 10.1 Appointment and Authorization; No Fiduciary Responsibility. Each ----------------------------------------------------------- Lender hereby irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Agent by the terms thereof or are reasonably incidental, as determined by the Agent, thereto. This appointment and authorization does not constitute appointment of the Agent as a trustee or fiduciary for any Lender and, except as specifically set forth herein to the contrary, the Agent shall take such action and exercise such powers only in an administrative and ministerial capacity. Each of the Lenders agrees that the Agent has no fiduciary relationship with any Lender and that no implied covenants, functions, responsibilities, duties, obligations or liabilities of any kind shall be implied in the course of conduct of the Agent's responsibilities specifically set forth herein or otherwise exist on the part of the Agent for the benefit of the Lenders. 10.2 Agent and Affiliates. GE Capital (and each successor Agent) has the --------------------- same rights and powers under the Loan Documents as any other Lender and may exercise the same as though it were not the Agent; and the term "Lender" or "Lenders" includes GE Capital in its individual capacity. GE Capital (and each successor Agent) and its respective Affiliates may lend money to and generally engage in any kind of business with Borrower and any Affiliate of 88 Borrower, as if it were not the Agent and without any duty to account therefor to the Lenders. GE Capital (and each successor Agent) need not account to any other Lender for any monies received by it for reimbursement of its costs and expenses as Agent hereunder, for any fee received by it in its capacity as Agent hereunder, or for any monies received by it in its capacity as a Lender hereunder, except as otherwise provided herein. 10.3 Lenders' Credit Decisions. Each Lender agrees that it has, -------------------------- independently and without reliance upon the Agent, any other Lender, or the directors, officers, agents, or employees of the Agent or of any other Lender, and instead in reliance upon information supplied to it by or on behalf of Borrower and upon such other information as it has deemed appropriate, made its own independent credit analysis and decision to enter into this Agreement. Each Lender confirms that it has such knowledge and experience in business and financial matters that it is capable of making such credit analysis and evaluating the merits and risks of entering into this Agreement. It is expressly understood that each Lender is able to bear the risk of loss, and assumes all risk of loss in connection with the entering into of this Agreement. Each Lender also agrees that it shall, independently and without reliance upon the Agent, any other Lender, or the directors, officers, agents, or employees of the Agent or of any other Lender, continue to make its own independent credit analyses and decisions in acting or not acting under the Loan Documents. 10.4 Action by Agent. ---------------- (a) The Agent may assume that no Default or Event of Default has occurred and is continuing, unless the Agent has actual knowledge of the Default or Event of Default, has received notice from Borrower stating the nature of the Default or Event of Default, or has received notice from a Lender stating the nature of the Default or Event of Default and that Lender considers the Default or Event of Default to have occurred and to be continuing. (b) The Agent has only those obligations under the Loan Documents that are expressly set forth therein. Without limitation on the foregoing, the Agent shall have no duty to inspect any Property of Borrower, although the Agent may in its discretion periodically inspect any Property from time to time. (c) Except for any obligation expressly set forth in the Loan Documents and as long as the Agent may assume that no Default or Event of Default has occurred and is continuing, the Agent may, but shall not be required to, exercise its discretion to act or not act, except that the Agent shall be required to act or not act upon the instructions of the Majority Lenders (or of all the Lenders, to the extent required by Section 11.2) and those instructions shall be binding ------------ upon the Agent and all the Lenders; provided, that the Agent shall not be -------- required to act or not act if to do so would 89 expose the Agent to personal liability or would be contrary to any Loan Document or to applicable Law. (d) If the Agent has received a notice specified in clause (a), the Agent shall give notice thereof to the Lenders and shall act or not act upon the instructions of the Majority Lenders (or of all the Lenders, to the extent required by Section 11.2); provided that the Agent shall not be required to act ------------ -------- or not act if to do so would be contrary to any Loan Document or to applicable Law or would result, in the reasonable judgment of the Agent, in risk of liability to the Agent, and except that if the Majority Lenders (or all the Lenders, if required under Section 11.2) fail, for three Business Days after the ------------ receipt of notice from the Agent, to instruct the Agent, then the Agent, in its sole discretion, may act or not act as it deems advisable for the protection of the interests of the Lenders. (e) The Agent shall have no liability to any Lender for acting, or not acting, as instructed by the Majority Lenders (or all the Lenders, if required under Section 11.2), notwithstanding any other provision hereof. ------------ (f) Each Lender hereby irrevocably authorizes the Agent to execute releases of Liens relating to any Collateral that is the subject of any disposition of Property permitted by this Agreement. 10.5 Liability of Agent. Neither the Agent nor any of its respective ------------------- directors, officers, agents, or employees shall be liable for any action taken or not taken by them under or in connection with the Loan Documents, except for their own gross negligence or willful misconduct. Without limitation of the foregoing, the Agent and its respective directors, officers, agents, and em- ployees: (a) may treat the payee of any Note as the holder thereof until the Agent receives notice of the assignment or transfer thereof pursuant to a Loan Assignment, signed by the payee and may treat each Lender as the owner of that Lender's interest in the Obligations due to Lenders for all purposes of this Agreement until the Agent receives notice of the assignment or transfer thereof pursuant to a Loan Assignment; (b) may consult with legal counsel, in-house legal counsel, independent public accountants, in-house accountants and other professionals, or other experts selected by it, or with legal counsel, independent public accountants, or other experts for Borrower, and shall not be liable for any action taken or not taken by it or them in good faith in accordance with the advice of such legal counsel, independent public accountants, or experts; (c) will not be responsible to any Lender for any statement, warranty, or representation made in any of the Loan Documents or in 90 any notice, certificate, report, request, or other statement (written or oral) in connection with any of the Loan Documents; (d) except to the extent expressly set forth in the Loan Documents, will have no duty to ascertain or inquire as to the performance or observance by Borrower or any other Person of any of the terms, conditions, or covenants of any of the Loan Documents or to inspect the property, books, or records of Borrower or any of its Affiliates or other Person; (e) will not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, effectiveness, sufficiency, or value of any Loan Document, any other instrument or writing furnished pursuant thereto or in connection therewith; (f) will not incurany liability by acting or not acting in reliance upon any Loan Document, notice, consent, certificate, statement, or other instrument or writing believed by it or them to be genuine and signed or sent by the proper party or parties; and (g) will not incur any liability for any arithmetical error in computing any amount payable to or receivable from any Lender hereunder, including payment of principal and interest on the Revolving Credit Notes and payment of fees and other amounts; provided, that promptly upon discovery of such an error in -------- computation, the Agent, the Lenders, and (to the extent applicable) Borrower shall make such adjustments as are necessary to correct such error and to restore the parties to the position that they would have occupied had the error not occurred. 10.6 Indemnification. Each Lender shall, ratably in accordance with its ---------------- Pro Rata Share of the Commitment, indemnify and hold the Agent and its directors, officers, agents, and employees harmless against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind or nature whatsoever (including, without limitation, attorney's fees and disbursements) that may be imposed on, incurred by, or asserted against it or them in any way relating to or arising out of the Loan Documents (other than losses incurred by reason of the failure by Borrower to pay the Obligations due to Lenders hereunder or under the Revolving Credit Notes) or any action taken or not taken by it as Agent thereunder, except for the Agent's gross negligence or willful misconduct. Without limitation on the foregoing, each Lender shall reimburse the Agent upon demand for that Lender's ratable share of any cost or expense incurred by the Agent in connection with the negotiation, preparation, execution, delivery, administration, amendment, waiver, refinancing, restructuring, reorganization (including all costs and expenses incurred by the Agent in connection with the Chapter 11 Case or any other bankruptcy reorganization), or enforcement of the Loan Documents, to the extent that Borrower is required by 91 Section 11.3 to pay that cost or expense but fails to do so upon demand. Any - ------------ such reimbursement shall not relieve Borrower of its obligations under Section ------- 11.3, and upon any subsequent recovery of such cost or expense by the Agent from - ---- Borrower the Agent shall promptly return to each Lender such Lender's Pro Rata Share of the amounts so paid. 10.7 Successor Agent. The Agent may resign as such at any time by written ---------------- notice to Borrower and the Lenders. The Majority Lenders may, with cause, at any time remove the Agent by written notice to that effect. Such resignation or removal shall become effective upon a successor's acceptance of appointment as Agent. In either event, the Majority Lenders shall appoint a successor Agent or Agents, who must be from among the Lenders; provided that the Agent shall be -------- entitled to appoint a successor Agent from among the Lenders, subject to acceptance of appointment by that successor Agent, if the Majority Lenders have not appointed a successor Agent within 30 days after the date the Agent gave notice of resignation or was removed. Upon a successor's acceptance of appointment as Agent, the successor will thereupon succeed to and become vested with all the rights, powers, privileges, and duties of the Agent under the Loan Documents, the resigning or removed Agent will thereupon be discharged from its duties and obligations thereafter arising under the Loan Documents, and the provisions of this Article 10 shall continue to inure to the benefit of the ---------- retiring or removed Agent as to any actions taken or omitted to be taken by it while it was serving as Agent under this Agreement and the other Loan Documents. 10.8 Proportionate Interest of the Lenders in any Collateral. The Agent, -------------------------------------------------------- on behalf of all the Lenders, shall hold in accordance with the Loan Documents all items of any Collateral or interests therein received or held by the Agent. Subject to the Agent's and the Lenders' rights to reimbursement for their costs and expenses under this Agreement (including attorneys' fees and disbursements and other professional services) and subject to the application of payments in accordance with Section 9.2(b), each Lender shall have an interest in any -------------- Collateral or interests therein in the same proportions that the aggregate Obligations owed such Lender under the Loan Documents bear to the aggregate Obligations owed under the Loan Documents to all the Lenders, without priority or preference among the Lenders. ARTICLE 11 MISCELLANEOUS ------------- 11.1 Cumulative Remedies; No Waiver. The rights, powers, privileges and ------------------------------- remedies of the Agent or any Lender provided herein or in any Revolving Credit Note or other Loan Document are cumulative and not exclusive of any right, power, privilege or remedy provided by Law or equity. No failure or delay on the part of the 92 Agent or any Lender in exercising any right, power, privilege or remedy may be, or may be deemed to be, a waiver thereof; nor may any single or partial exercise of any right, power, or remedy preclude any other or further exercise of any other right, power, privilege or remedy. The terms and conditions of Article 8 --------- hereof are inserted for the sole benefit of the Lenders, and the Agent may (with the approval of the Majority Lenders) waive them in whole or in part with or without terms or conditions in respect of any Advance or Letter of Credit Obligation, without prejudicing the Lenders' rights to assert them in whole or in part in respect of any other Advance or Letter of Credit. 11.2 Amendments; Consents. No amendment, modification, supplement, --------------------- termination or waiver of any provision of this Agreement or any other Loan Document, and no consent to any departure therefrom by Borrower, may in any event be effective unless in writing signed by the Agent with the written approval of the Majority Lenders, and, in the case of an amendment or modification, Borrower, and then only in the specific instance and for the spe- cific purpose given; and without the approval in writing of all the Lenders, no amendment, modification, supplement, termination, waiver or consent may be effective: (a) to amend or modify the principal of, or the rate of interest payable on, any Obligation or decrease the amount of any fee payable to any Lender; or (b) without limitation of the preceding clause (a), to amend or modify the provisions of Section 3.1, 3.3, 3.6, 3.7, 3.8, 3.9, 3.10 or 3.15 in any manner ----------- --- --- --- --- --- ---- ---- which would postpone any date fixed for any payment or prepayment of principal of, or any interest on, any Obligation or any fee; or (c) to extend the Maturity Date; or (d) to amend or modify the provisions of the definition of "Majority Lenders," of Section 9.2(a) with respect to the rights of the Majority Lenders -------------- or of Section 11.2, 11.11 or 11.12. ------------ ----- ----- (e) to amend or modify any provision of this Agreement or the Loan Documents that expressly requires the consent or approval of all the Lenders; or (f) to release all or a material portion of the Collateral, other than as set forth in Section 10.4(f) or as contemplated by the Loan Documents. --------------- Any amendment, modification, supplement, termination, waiver, or consent pursuant to this Section 11.2 shall apply equally to, and shall be binding upon, ------------ all the Lenders and the Agent. 11.3 Costs, Expenses and Taxes. Borrower shall pay on demand -------------------------- 93 the reasonable costs and expenses of GE Capital, individually and in its capacity as Agent, and its Affiliates and agents, in connection with (a) the negotiation, preparation, execution and delivery of the Loan Documents; (b) the ongoing administration (including, without limitation, consultation with attorneys in connection therewith and with respect to the Agent's rights and responsibilities under this Agreement and the other Loan Documents and the Agent's periodic audits of Borrower), amendment, waiver, refinancing, restructuring, reorganization (including the Chapter 11 Case or any other bankruptcy reorganization) and enforcement or attempted enforcement of any Loan Documents; (c) any assignment or sale of a participation by GE Capital permitted by Section 11.8 and (d) any matter related to any of the foregoing, including ------------ filing fees, recording fees, search fees, reasonable travel expenses, and other out-of-pocket expenses and the reasonable fees and out-of-pocket expenses of any legal counsel and of any other professionals retained by GE Capital in any capacity (including, without limitation, King & Spalding, special counsel to the Agent and GE Capital, any other counsel retained by GE Capital in any capacity, auditors, accountants, appraisers, insurance and environmental advisors, records research firms, management consultants, and other consultants and agents), including any reasonable costs, expenses or fees incurred or suffered by GE Capital in any capacity, in connection with or during the course of the Chapter 11 Case or any other bankruptcy or insolvency proceedings of Borrower. Without limitation of the foregoing, Borrower will pay to the Agent a fee of $500 per day per auditor in connection with the Agent's field examinations of Borrower and will reimburse the Agent's expenses incurred in connection with the matters contemplated by Section 5.13(b). Borrower shall pay on demand the reasonable --------------- costs and expenses of each of the Lenders in connection with the refinancing, restructuring, reorganization (including the Chapter 11 Case or any other bankruptcy reorganization) and enforcement or attempted enforcement of any Loan Documents and any matter related thereto, including reasonable travel expenses and other out-of-pocket expenses and the reasonable fees and other out-of-pocket expenses of any legal counsel retained by any of the Lenders, including any reasonable costs, expenses or fees incurred or suffered by any of the Lenders in connection with or during the course of the Chapter 11 Case or any other bankruptcy or insolvency proceedings of Borrower. Borrower shall pay any and all documentary tax, stamp tax, intangibles tax, intangible recording tax, ad valorem tax, value added tax, excise tax and any other similar taxes or levies and all costs, expenses, fees and charges payable or determined to be payable in connection with the filing or recording of any Loan Document or any other instrument or writing to be delivered hereunder or thereunder, or in connection with any transaction pursuant hereto or thereto, and shall reimburse, hold harmless and indemnify the Agent and each Lender from and against any and all loss, liability or legal or other expense with respect to or resulting from any delay in paying or failure to pay any tax, cost, expense, fee or charge that any of them may suffer or incur by 94 reason of the failure of Borrower to perform any of its Obligations. 11.4 Nature of Lender's Obligations. Each Lender's obligation to make ------------------------------- any Advance pursuant hereto is several and not joint or joint and several and is conditioned upon the performance by each other Lender of its obligation to make Advances. A default by any Lender will not increase the Pro Rata Share of the Commitment attributable to any other Lender or create any new obligation or otherwise increase any existing obligation of any other Lender. Any Lender not in default may, if it desires, assume in such proportion as the non-defaulting Lenders agree of the obligations of any Lender in default, but is not obligated to do so. 11.5 Survival of Representations and Warranties. All representations and ------------------------------------------- warranties contained herein or in any other Loan Document or in any certificate or other writing delivered by or on behalf of Borrower, will survive the making of the Revolving Credit Loan hereunder and the execution and delivery of the Revolving Credit Notes, and have been or will be relied upon by the Agent and each Lender, notwithstanding any investigation made by the Agent or any Lender or on their behalf. 11.6 Notices. -------- (a) Except as otherwise expressly provided in any Loan Document, all notices, requests, demands, directions, and other communications provided for hereunder and under any other Loan Document must be in writing and must be mailed, telegraphed, telecopied, delivered, or sent by telex or cable to the appropriate party at the following address for such party: (i) If to the Agent or GE Capital at General Electric Capital Corporation 201 High Ridge Road Stamford, Connecticut 06927-5100 Attention: Rick Luck Vice President, Commercial Finance Telephone Number: (203) 316-7565 Telecopier Number: (203) 316-7893 With copies to General Electric Capital Corporation 260 Long Ridge Road Stamford, Connecticut 06927 Attention: Barbara J. Gould, Esq. Department Counsel Telephone Number: (203) 357-6839 Telecopier Number: (203) 357-3047 95 and King & Spalding 191 Peachtree Street Atlanta, Georgia 30303-1763 Attention: John Hays Mershon, Esq. Telephone Number: (404) 572-4671 Telecopier Number: (404) 572-5100 (ii) If to Borrower, at Forstmann & Company, Inc. 1155 Avenue of the Americas New York, New York 10036 Attention: Mr. Robert N. Dangremond President and Chief Executive Officer Telephone Number: (212) 642-6916 Telecopier Number: (212) 642-6992 With a copy to Debevoise & Plimpton 875 Third Avenue New York, New York 10022 Attention: Richard F. Hahn, Esq. Telephone Number: (212) 909-6235 Telecopier Number: (212) 909-6836 (iii) If to any Lender at its address indicated on the signature pages hereof or in a Loan Assignment. or at such other address as may be substituted by notice given as herein provided. Any notice, request, demand, direction, or other communication given by telegram, telecopier, telex, or cable must be confirmed within 48 hours by letter mailed or delivered to the appropriate party at its respective address. (b) Except as otherwise expressly provided in any Loan Document if any notice, request, demand, direction, or other communication required or permitted by any Loan Document is given by mail it will be effective on the earlier of receipt or the third calendar day after deposit in the United States mail with first class or airmail postage prepaid; if given by telegraph or cable, when delivered to the telegraph company with charges prepaid; if given by telex or telecopier, when received; or if given by per- 96 sonal delivery, when delivered. 11.7 Execution in Counterparts. Unless the Agent otherwise specifies with -------------------------- respect to any Loan Document, this Agreement and any other Loan Document may be executed in any number of counterparts and any party hereto or thereto may execute any counterpart, each of which when executed and delivered will be deemed to be an original and all of which counterparts of this Agreement or any other Loan Document, as the case may be, taken together will be deemed to be but one and the same instrument. Neither this Agreement nor any other Loan Document will be deemed to have been executed and delivered by any party hereto or thereto until counterparts hereof or thereof, as the case may be, have been executed by all the parties hereto or thereto and delivered to the Agent (which delivery may be made by facsimile transmission of the respective signature pages to this Agreement, followed promptly thereafter by delivery of executed original signature pages). 11.8 Binding Effect; Assignment. --------------------------- (a) This Agreement and the other Loan Documents shall be binding upon and inure to the benefit of Borrower, the Agent, each of the Lenders, and its successors and assigns, except that Borrower may not assign its rights hereunder or thereunder or any interest herein or therein without the prior written consent of all the Lenders. Each Lender shall have the right to sell or transfer any participation interest in this Agreement, and the Revolving Credit Notes in accordance with the provisions of this Section 11.8. Each Lender ------------ represents that it is not acquiring its Note with a view to the distribution thereof within the meaning of the Securities Act (subject to any requirement that disposition of such Note must be within the control of such Lender). (b) From time to time each Lender may assign to one or more Lender Assignees all or a portion of its Pro Rata Share of the Commitment; provided -------- that (i) such Eligible Assignee, if not then a Lender or an Affiliate of Lender, shall be reasonably acceptable to the Agent, (ii) such assignment shall be evidenced by a Loan Assignment, a copy of which shall be furnished to the Agent for recordation as hereinbelow provided, and (iii) the effective date of any such assignment shall be as specified in the Loan Assignment, but not earlier than the date which is five Business Days after the date the Agent has recorded the Loan Assignment in the ledger kept for that purpose by the Agent as described below. Upon the effective date of such Loan Assignment, the Lender Assignee named therein shall be a Lender for all purposes of this Agreement, with the Pro Rata Share of the Commitment therein set forth and, to the extent of such Pro Rata Share, the assigning Lender shall be released from its obligations under this Agreement. Borrower agrees that it shall execute and deliver (against delivery by the assigning Lender to Borrower of its Revolving Credit Note) to such Lender Assignee, a Revolving Credit Note evidencing that Lender 97 Assignee's Pro Rata Share of the Commitment and to the assigning Lender, a Revolving Credit Note evidencing the Pro Rata Share of the Commitment retained by the assigning Lender. Borrower also agrees that it shall provide any information to any Lender Assignee reasonably deemed necessary by an assigning Lender in order to effect such assignment, including without limitation all information delivered pursuant to Article 7 hereof, and shall cause its Senior --------- Officers to participate in meetings with any Lender Assignee when reasonably requested by an assigning Lender. (c) By executing and delivering a Loan Assignment, the Lender Assignee thereunder acknowledges and agrees that (i) other than the representation and warranty that it is the legal and beneficial owner of the Pro Rata Share of the Commitment or portion thereof being assigned thereby free and clear of any adverse claim, the assigning Lender has made no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness or sufficiency of this Agreement or any other Loan Document, (ii) the assigning Lender has made no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance by Borrower of the Obligations, (iii) it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to this Agreement and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Loan Assignment, (iv) it will, independently and without reliance upon the Agent or any Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement, (v) it appoints and authorizes the Agent to take such action and to exercise such powers under this Agreement as are delegated to the Agent by Article 10, and (vi) it will perform in accordance with their terms all of the - ---------- obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Agent shall maintain at the Agent's office a copy of each Loan Assignment delivered to it and a ledger for recordation, upon payment to the Agent by the assigning Lender of a recording fee of $2,500, of the names and addresses of the Lenders and their respective Pro Rata Shares of the Commitment. The entries in such ledger shall be conclusive, in the absence of manifest error, and Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the ledger as a Lender hereunder for all purposes of this Agreement. Promptly following any entry in the ledger, the Agent shall provide notice thereof to Borrower and the Lenders. (e) Notwithstanding any provision of this Section 11.8 to the contrary, (i) ------------ any Lender that is a member of the Federal Re- 98 serve system may assign, as collateral or otherwise, any of its rights under this Agreement and the other Loan Documents (including, without limitation, rights to payment of principal and/or interest) to any Federal Reserve Bank of the Federal Reserve System without notice to or consent of Borrower and (ii) any Lender (including GE Capital) may assign its entire interest in this Agreement, the Revolving Credit Notes, the other Loan Documents, the Commitment, the Letter of Credit Obligations and all other Obligations as part of the sale or other disposition by such Lender of a portfolio including one or more other transactions. (f) From time to time each Lender may, without notice to the Agent or Borrower, sell participations in all or any portion of its Pro Rata Share of the Commitment and Revolving Credit Note to any institutional investor, bank, financial institution or other commercial lender; provided that (i) such -------- Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the other parties to this Agreement shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, (iv) any participant shall not be entitled to require such Lender to take or omit to take any action hereunder except action with respect to (x) a reduction in the rates of interest payable with respect to the Revolving Credit Loan (but not a waiver of a Default or Event of Default that would result in the reduction of the interest rate payable with respect to the Revolving Credit Loan from the Default Rate to the Floating Rate or the Fixed Rate) or any fees payable with respect to the Revolving Credit Loan in which such participant shares, (y) an extension of the Maturity Date or the postponement of any date fixed for the payment of any interest on the Revolving Credit Loan or (z) the release of all or any material portion of the Collateral for the Revolving Credit Loan, other than in connection with dispositions of such Collateral permitted by this Agreement, (v) such Lender shall require such participant to agree that it shall not resell all or any portion of such participation, other than to such Lender, and (vi) the participant shall be entitled to the cost protection provisions contained in Sections 3.10, 3.11, and 3.13, but a participant shall not be entitled to - ------------- ---- ---- receive pursuant to such provisions an amount greater than the amount the Lender granting such participation would have been entitled to receive with respect thereto. 11.9 Trustees; Bankruptcy Court Proceedings. This Agreement and the other -------------------------------------- Loan Documents shall also be binding upon any trustee or successor in interest of Borrower in the Chapter 11 Case or any subsequent case commenced under Chapter 7 of the Bankruptcy Code, and shall not be subject to Section 365 of the Bankruptcy Code. The Liens created or referred to in this Agreement and the other Loan Documents, including, without limitation, those granted to the Lenders under the Interim Borrowing Order and the Final Borrowing 99 Order, shall be and remain valid and perfected in the event of the substantive consolidation or conversion of the Chapter 11 Case or any other bankruptcy case of Borrower to a case under Chapter 7 of the Bankruptcy Code or in the event of dismissal or suspension of the Chapter 11 Case or the release or abandonment of any Collateral from the property of Borrower or jurisdiction of the Bankruptcy Court for any reason, without the necessity that the Lenders file financing statements or otherwise perfect their Liens under applicable law. This Agreement and all Liens created hereby or pursuant hereto or by or pursuant to any other Loan Document, including, without limitation, those granted to the Lenders under the Interim Borrowing Order and the Final Borrowing Order, shall at all times be binding upon Borrower, the estate of Borrower and any trustee appointed in the Chapter 11 Case, or any trustee appointed in the event of a conversion of the Chapter 11 Case, or any other successor in interest to Borrower. 11.10 Sharing of Setoffs. Each Lender severally agrees that if it, ------------------- through the exercise of the right of setoff, banker's lien, or counterclaim against Borrower or otherwise, receives payment of the Obligations due it hereunder and under the Revolving Credit Notes that is ratably more than any other Lender, through any means, receives in payment of the Obligations held by that Lender, then (a) the Lender exercising the right of setoff, banker's lien, or counterclaim or otherwise receiving such payment shall purchase, and shall be deemed to have simultaneously purchased, from the other Lender a participation in the Obligations held by the other Lender and shall pay to the other Lender a purchase price in an amount so that the share of the Obligations held by each Lender after the exercise of the right of setoff, banker's lien, or coun- terclaim or receipt of payment shall be in the same proportion that existed prior to the exercise of the right of setoff, banker's lien, or counterclaim or receipt of payment, and (b) such other adjustments and purchases of participations shall be made from time to time as shall be equitable to ensure that all of the Lenders share any payment obtained in respect of the Obligations ratably in accordance with each Lender's share of the Obligations immediately prior to, and without taking into account, the payment; provided that, if all or -------- any portion of a disproportionate payment obtained as a result of the exercise of the right of setoff, banker's lien, counterclaim or otherwise is thereafter recovered from the purchasing Lender by Borrower or any Person claiming through or succeeding to the rights of Borrower, the purchase of a participation shall be rescinded and the purchase price thereof shall be restored to the extent of the recovery, but without interest. Each Lender that purchases a participation in the Obligations pursuant to this Section 11.10 shall from and after the pur- ------------- chase have the right to give all notices, requests, demands, directions and other communications under this Agreement with respect to the portion of the Obligations purchased to the same extent as though the purchasing Lender were the original owner of the Obligations purchased. Borrower expressly consents to the 100 foregoing arrangements and agrees that any Lender holding a participation in an Obligation so purchased may exercise any and all rights of setoff, banker's lien or counterclaim with respect to the participation as fully as if the Lender were the original owner of the Obligation purchased. 11.11 Indemnity by Borrower. ---------------------- (a) Borrower agrees to indemnify and hold the Agent and each Lender, its successors and assigns, its Affiliates, its directors, officers, attorneys, employees, and agents and the directors, officers, attorneys, employees and agents of its successors and assigns and Affiliates, and all Persons controlling any of them or their Affiliates within the meaning of the Securities Act or Securities Exchange Act (collectively, "Indemnified Persons") harmless from and ------------------- against any and all claims, losses, damages, liabilities and expenses of any kind or nature whatsoever which may be incurred by or asserted against or involve any Indemnified Person in any and all actions, suits, proceedings (including any investigations or inquiries) or claims with respect to (i) this Agreement, the other Loan Documents, the Senior Subordinated Note Indenture, or the Existing Credit Agreement, (ii) any of the transactions contemplated hereunder or thereunder (whether or not consummated), and (iii) the preparation, execution, delivery, administration and enforcement of the Loan Documents by the Agent or any Lender, and, upon demand by the Agent or any Lender, will pay or reimburse any such Indemnified Person for any reasonable legal or other expenses incurred in connection with investigating, defending or preparing to defend or participate in any such action, suit, proceeding (including any inquiry or investigation) or claim, whether commenced or threatened (including such expenses incurred on any appeal), it being understood that each Indemnified Person shall have the right to select its own counsel in connection with such matters if such Indemnified Person is a party to any such action, suit, proceeding or claim; provided that Borrower shall not be responsible for such -------- indemnification to such Indemnified Persons to the extent that any such claims, losses, damages, liabilities or expenses result from such Indemnified Person's gross negligence or wilful misconduct. The provisions of this Section 11.11 ------------- shall apply whether or not any such Indemnified Person is a party to any such action, suit, proceeding or claim, and are expressly intended to include, but not be limited to, reimbursement of legal and other expenses, including expenses incurred in depositions or discovery proceedings. The indemnity obligations of Borrower hereunder shall be in addition to, and not in limitation of, any other liability or obligation that Borrower may have to any Indemnified Person, at common law or otherwise, including, but not limited to, any obligation of contribution. (b) The Agent and each Lender agree that in the event that it becomes aware of any claim for indemnification under this Section 11.11, the Agent or such ------------- Lender shall promptly notify Borrower 101 in writing, but any failure to so notify Borrower shall not relieve Borrower of any of its obligations hereunder. (c) Notwithstanding any provision of this Agreement to the contrary, the provisions of this Section 11.11 shall survive the termination of this Agreement ------------- and the repayment of the Revolving Credit Loan and the payment and performance of all other Obligations owed to the Agent and the Lenders for the applicable statute of limitations period. 11.12 Nonliability of Lenders. Borrower acknowledges and agrees that: ------------------------ (a) Any inspections of any Property of Borrower made by or through the Agent or the Lenders are for purposes of administration of the Loan Documents only, and Borrower is not entitled to rely upon the same; (b) By accepting or approving anything required to be observed, performed, fulfilled or given to the Lenders or the Agent pursuant to the Loan Documents, neither the Lenders nor the Agent shall be deemed to have warranted or represented the sufficiency, legality, effectiveness or legal effect of the same or of any term, provision or condition thereof, and such acceptance or approval thereof shall not constitute a warranty or representation to anyone with respect thereto by the Lenders or the Agent; and (c) The relationship between Borrower and the Lenders arising out of or related to this Agreement is, and shall at all times remain, solely that of a borrower and lender; neither the Agent nor any of the Lenders shall under any circumstance be construed to be a partner or a joint venturer of Borrower or any of its Affiliates; neither the Agent nor any of the Lenders shall under any circumstance be deemed to be in a fiduciary relationship with Borrower or its Affiliates in connection with this Agreement, or to owe any fiduciary duty to Borrower or its Affiliates in connection with this Agreement; neither the Agent nor any of the Lenders undertakes or assumes any responsibility or duty to Borrower or its Affiliates to select, review, inspect, supervise, pass judgment upon or inform Borrower or its Affiliates of any matter in connection with their Property or the operations of Borrower or its Affiliates; Borrower and its Affiliates shall rely entirely upon their own judgment with respect to such matters; and any review, inspection, supervision, exercise of judgment or supply of information undertaken or assumed by the Lenders or the Agent in connection with such matters is solely for the protection of the Agent and the Lenders and neither Borrower, nor any other Person is entitled to rely thereon. 11.13 Press Releases; Confidential Information. ----------------------------------------- (a) Borrower shall not use the name of or otherwise identify 102 GE Capital, or any of its Affiliates, in any press release or other public disclosure made in connection with the transactions contemplated by this Agreement without the prior written consent of GE Capital, and shall provide to GE Capital the proposed text of any such press release or other public disclosure using the name of or otherwise identifying GE Capital for review not later than one Business Day prior to the proposed date of release or disclosure thereof. (b) The Agent and each Lender acknowledge that certain information concerning Borrower which is obtained by or furnished to the Agent and such Lenders pursuant to this Agreement, including, without limitation, pursuant to Section 5.11, may be non-public, proprietary or confidential in nature - ------------ ("Confidential Information"). The Agent and each Lender confirm to Borrower, for ------------------------ itself, that it is the policy and practice of the Agent and each such Lender to maintain in confidence all Confidential Information which is received by it in connection with the closing and administration of transactions of the kind contemplated by this Agreement and which is identified to the Agent or such Lender as such, and that the Agent and each Lender will protect the confidentiality of all Confidential Information submitted to it by or with respect to Borrower, commensurate with its efforts to maintain the confidentiality of its own Confidential Information, subject to (a) its need in connection with the closing and administration of the transactions contemplated by this Agreement to disclose any Confidential Information on a confidential basis to any legal counsel, auditors, appraisers, consultants or other Persons retained by it for the purpose of advising the Agent or such Lender in connection therewith, (b) its need to disclose any Confidential Information under color of legal authority, including, without limitation, to any regulatory authority having jurisdiction over its or its operations or to or under the authority of any court deemed by it to be of competent jurisdiction, (c) its right to disclose the Confidential Information to any prospective Lender, assignee or participant which has agreed to maintain the confidentiality thereof on a basis substantially similar to that set forth herein, and (d) the inapplicability of the terms of this Section 11.13 to any information furnished ------------- to the Agent or any Lender which was (i) in the Agent's or such Lender's possession prior to its delivery to the Agent or such Lender by Borrower, or otherwise has been obtained by the Agent or such Lender on a non-confidential basis, or (ii) was or becomes available to the public or otherwise part of the public domain (other than as a result of the Agent's or such Lender's failure to abide hereby), or (iii) was not non-public, proprietary or confidential when Borrower delivered it to the Agent or such Lender. 11.14 No Third Parties Benefited. This Agreement is made for the purpose --------------------------- of defining and setting forth certain obligations, rights and duties of Borrower, the Agent and the Lenders with respect to the Revolving Credit Loan, Letter of Credit Obligations 103 and the other Obligations and is made for the sole benefit of Borrower, the Agent and the Lenders, and the Agent's and the Lenders' successors and assigns. Except as provided in Sections 11.8 and 11.11, no other Person shall have any ------------- ----- rights of any nature hereunder or by reason hereof, including, without limitation, any right to rely on any representation made by Borrower herein (except that counsel to the parties hereto may rely on such representations in connection with the issuance of opinions with respect to the Loan Documents). 11.15 Right of Setoff - Deposit Accounts. Upon the occurrence of an ----------------------------------- Event of Default, Borrower hereby specifically authorizes each Lender, if any, which is a bank in which Borrower maintains deposit accounts (whether a general or special deposit account, other than trust accounts) or a certificate of deposit, without application or motion to, or any order from the Bankruptcy Court under Bankruptcy Code Section 362 or any other Section of the Bankruptcy Code, upon not less than five Business Days' notice to Borrower, the Office of the United States Trustee and counsel for the Official Committee (or, in the absence of any such Official Committee, to Borrower's 20 largest unsecured creditors as set forth in the list filed pursuant to Bankruptcy Rule 1007(d)), to set off any Obligations owed to the Lenders against such deposit account or certificate of deposit whether or not such deposit account or certificate of deposit has then matured. Nothing in this Section 11.15 shall limit or restrict ------------- the exercise by a Lender of any right to setoff or banker's lien under applicable Law. Borrower waives its right to seek relief under Bankruptcy Code Section 105 or any other Section of the Bankruptcy Code or the Bankruptcy Rules to the extent that such relief would in any way restrict or impair the foregoing rights and remedies of the Lenders. 11.16 Further Assurances. Borrower shall, at its expense and without ------------------- expense to the Lenders or the Agent, do, execute and deliver such further acts and documents as any Lender or the Agent from time to time reasonably requires for the assuring and confirming unto the Lenders or the Agent the rights hereby created or intended now or hereafter so to be, or for carrying out the inten- tion or facilitating the performance of the terms of any Loan Document. 11.17 Integration. This Agreement, together with the other Loan ------------ Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and, upon becoming effective pursuant to Section 8.1, ----------- shall supersede all prior agreements, written or oral, on the subject matter hereof including, without limitation, the Commitment Letter. Until this Agreement becomes effective pursuant to Section 8.1, the Original Loan Agreement ----------- and the Commitment Letter shall continue in full force and effect in accordance with their respective terms, and the parties thereto shall continue to be bound thereby. Each Loan Document was drafted 104 with the joint participation of the respective parties thereto and shall be construed neither against nor in favor of any party, but rather in accordance with the fair meaning thereof. 11.18 GOVERNING LAW. THE PRINCIPAL PLACE OF BUSINESS OF BORROWER IS IN -------------- NEW YORK, NEW YORK, AND ALL ADVANCES MADE HEREUNDER SHALL BE FUNDED FROM AND WILL BE REPAID IN NEW YORK, NEW YORK, AND THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OTHERWISE BEAR A SUBSTANTIAL RELATIONSHIP TO THE STATE OF NEW YORK. ACCORDINGLY, THE PARTIES TO THIS AGREEMENT HAVE CHOSEN THAT, EXCEPT TO THE EXTENT OTHERWISE EXPRESSLY PROVIDED THEREIN, EACH LOAN DOCUMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA INCLUDING, WITHOUT LIMITATION, THE BANKRUPTCY CODE AND THE BANKRUPTCY RULES. 11.19 Severability of Provisions. Any provision in any Loan Document that --------------------------- is held to be inoperative, unenforceable, or invalid as to any party or in any jurisdiction shall, as to that party or that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions or the operation, enforceability, or validity of that provision as to any party or in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 11.20 Headings. Article and Section headings in this Agreement and the -------- other Loan Documents are included for convenience of reference only and are not part of this Agreement or the other Loan Documents for any other purpose. 11.21 Conflict in Loan Documents. To the extent there is any actual --------------------------- irreconcilable conflict between the provisions of this Agreement and any other Loan Document, the provisions of this Agreement shall prevail. 11.22 CHOICE OF FORUM. ---------------- (a) EACH PARTY TO THIS AGREEMENT HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE BANKRUPTCY COURT OR OF ANY OTHER NEW YORK STATE OR FEDERAL COURT SITTING IN THE COUNTY OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, AND EACH HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN THE BANKRUPTCY COURT OR IN SUCH OTHER NEW YORK STATE OR FEDERAL COURT. BORROWER AGREES THAT SUCH JURISDICTION SHALL BE EXCLUSIVE WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING BROUGHT BY IT AGAINST THE AGENT OR ANY LENDER. NOTWITHSTANDING THE FOREGOING, THE PARTIES AGREE THAT, WITH RESPECT TO ANY COLLATERAL IN WHICH A SECURITY INTEREST IS GRANTED BY BORROWER TO THE LENDERS AND THE AGENT LOCATED IN OTHER JURISDICTIONS, AND SUBJECT TO THE AUTOMATIC STAY IN THE CHAPTER 11 CASE, THE AGENT 105 SHALL BE ENTITLED TO COMMENCE ACTIONS IN SUCH JURISDICTIONS AGAINST BORROWER OR OTHER PERSONS FOR THE PURPOSE OF SEEKING PROVISIONAL REMEDIES, INCLUDING ACTIONS FOR CLAIM AND DELIVERY OF PROPERTY, OR FOR INJUNCTIVE RELIEF OR APPOINTMENT OF A RECEIVER, OR ACTIONS TO FORECLOSE UPON LIENS GRANTED TO THE LENDERS AND THE AGENT. EACH PARTY TO ANY LOAN DOCUMENT, TO THE EXTENT PERMITTED BY APPLICABLE LAWS, HEREBY EXPRESSLY WAIVES ANY DEFENSE OR OBJECTION TO JURISDICTION OR VENUE BASED ON THE DOCTRINE OF FORUM NON CONVENIENS, AND STIPULATES THAT ANY NEW YORK -------------------- STATE OR FEDERAL COURT SITTING IN THE COUNTY OF NEW YORK SHALL HAVE IN PERSONAM ----------- JURISDICTION AND VENUE OVER SUCH PARTY FOR THE PURPOSE OF LITIGATING ANY DISPUTE OR CONTROVERSY ARISING OUT OF OR RELATED TO THE LOAN DOCUMENTS. IN THE EVENT BORROWER SHOULD COMMENCE OR MAINTAIN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATED TO THE LOAN DOCUMENTS IN A FORUM OTHER THAN ONE OF THE FOREGOING COURTS, THE LENDERS AND THE AGENT SHALL BE ENTITLED TO REQUEST THE DISMISSAL OR STAY OF SUCH ACTION OR PROCEEDING, AND BORROWER STIPULATES FOR ITSELF THAT SUCH ACTION OR PROCEEDING SHALL BE DISMISSED OR STAYED. (b) Borrower hereby irrevocably designates, appoints and empowers CT Corporation System, whose present address is 1633 Broadway, New York, New York 10019, as its authorized agent to receive, for and on its behalf and on behalf of its Property, service of process in the State of New York when and as such legal actions or proceedings may be brought in the New York Courts, and such service of process shall be deemed complete upon the date of delivery thereof to such agent whether or not such agent gives notice thereof to Borrower, or upon the earliest of any other date permitted by applicable Law. It is understood that a copy of said process served on such agent will as soon as practicable be forwarded to Borrower at such address specified in accordance with Section 11.6, ------------ at such address, but its failure to receive such copy shall not affect in any way the service of said process on said agent as the agent of Borrower. Borrower irrevocably consents to the service of process of any of the New York Courts in any such action or proceeding by the mailing of the copies thereof by certified mail, return receipt requested, postage prepaid, to it at its address specified in accordance with Section 11.6, such service to become effective upon the ------------ earlier of (i) the date 10 calendar days after such mailing or (ii) any earlier date permitted by applicable Law. Borrower agrees that it will at all times continuously maintain an agent to receive service of process in the State of New York on behalf of itself and its Property and in the event that, for any reason, the agent named above or its successor shall no longer serve as its agent to receive service of process in the State of New York on its behalf, it shall promptly appoint a successor so to serve and shall advise the Agent and the Lenders thereof (and shall furnish to the Agent the consent of any successor agent so to act). (c) Nothing in this Section 11.22 shall affect the right of the Agent or ------------- any Lender to bring proceedings against Borrower in 106 the courts of any other jurisdiction or to serve process in any other manner permitted by applicable Law. 11.23 CONSEQUENTIAL DAMAGES; WAIVER OF TRIAL BY JURY. NEITHER THE AGENT ---------------------------------------------- NOR ANY LENDER SHALL BE RESPONSIBLE OR LIABLE TO BORROWER OR ANY OTHER PERSON OR ENTITY FOR ANY PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY. BORROWER AND THE AGENT AND EACH OF THE LENDERS HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY LOAN DOCUMENT OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF SUCH PERSONS OR ANY OF THEM WITH RESPECT TO ANY LOAN DOCUMENT, OR THE TRANSACTIONS RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND EACH SUCH PERSON HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY TRIAL COURT WITHOUT A JURY, AND THAT ANY OTHER PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 11.24 PURPORTED ORAL AMENDMENTS. BORROWER EXPRESSLY ACKNOWLEDGES THAT ------------------------- THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS MAY ONLY BE AMENDED OR MODIFIED, OR THE PROVISIONS HEREOF OR THEREOF WAIVED OR SUPPLEMENTED, BY AN INSTRUMENT IN WRITING THAT COMPLIES WITH SECTION 11.2. BORROWER AGREES THAT IT WILL NOT RELY ------------ ON ANY COURSE OF DEALING, COURSE OF PERFORMANCE, OR ORAL OR WRITTEN STATEMENTS BY ANY REPRESENTATIVE OF AGENT OR ANY LENDER THAT DOES NOT COMPLY WITH SECTION ------- 11.2 TO EFFECT AN AMENDMENT, MODIFICATION, WAIVER OR SUPPLEMENT TO THIS OR THE - ---- OTHER LOAN DOCUMENTS. 11.25 Intercreditor Agreement. ----------------------- (a) As between the Agent and the Trustee, each of this Agreement and the other Loan Documents is expressly made subject to the terms of the Intercreditor Agreement. Additionally, as between themselves and Borrower, the Agent and Lenders hereby agree that notwithstanding anything contained herein or in any of the other Loan Documents to the contrary (a) to the extent that pursuant to the terms of this Agreement or any of the other Loan Documents and the Indenture or any of the Notes Security Documents, Borrower is required to deliver over the same property to the Agent or Lenders and to the Trustee or the "Noteholders" (as that term is defined in the Restated Indenture), to make a payment of the same funds to the Agent or Lenders and to the Trustee or the Noteholders, to give any direction or authorization for the benefit of the Agent or Lenders and the Trustee or Noteholders which cannot be complied with in favor of both the Agent or Lenders and the Trustee or Noteholders or to take any other action in favor of both the Agent or Lenders and the Trustee or the Noteholders which cannot be taken in favor 107 of both the Agent or Lenders and the Trustee or Noteholders, then Borrower shall make such delivery or payment, give such direction or authorization or take such action in favor of the Agent or Lenders if such payment, delivery, direction, authorization or action relates to the Lenders' Primary Collateral and in favor of the Trustee or Noteholders if such payment, delivery, direction, authorization or action relates to the Noteholders' Primary Collateral. In addition, Borrower, the Agent and Lenders hereby agree that any representation in any of the Loan Documents that cannot be true as to both the Trustee and/or the Noteholders and the Agent and/or the Lenders in connection with the Noteholders' Primary Collateral and the Lenders' Primary Collateral, respectively, or their respective interests therein, shall be deemed to be true if it is true with respect to (i) in the case of representations to the Agent and/or Lenders, the Lenders' Primary Collateral, and (ii) in the case of representations to the Trustee and/or the Noteholders, the Noteholders' Primary Collateral. The provisions of this Section 11.25(a) shall terminate on such date ---------------- as the Intercreditor Agreement terminates. (b) Each of the Lenders hereby acknowledges that it has received an executed copy of the Intercreditor Agreement, has reviewed the Intercreditor Agreement with counsel of its choice and understands fully all terms and conditions of the Intercreditor Agreement. Each of the Lenders hereby ratifies the execution and delivery by the Agent of the Intercreditor Agreement on behalf of Lenders and agrees to be bound thereby as to each and every provision thereof applicable to such Lender, as fully as if such Lender were a party to the Intercreditor Agreement. Without limiting the generality of the foregoing, each Lender specifically agrees to be bound by Sections 3.5, 3.11(b) and 4.1(b) of the Intercreditor Agreement. Each Lender further represents and warrants to the Agent that the Agent has all requisite authority to bind such Lender by the Agent's execution and delivery of the Intercreditor Agreement, and that no further consent or approval on the part of such Lender is or will be required in connection with the execution, delivery and performance of the Intercreditor Agreement by the Agent. 11.26 Estoppel. Borrower hereby represents and warrants that there are no -------- claims, causes of action, defenses, rights of offset, suits, debts, liens, obligations, liabilities, demands, losses, costs and expenses (including attorneys' fees) of any kind, character or nature whatsoever, known or unknown, fixed or contingent, which Borrower may have or claim to have against GE Capital, individually or as Agent, which might arise out of or be connected with any act of commission or omission of GE Capital existing or occurring on or prior to each of the date of this Agreement and the Effective Date, including, without limitation, any claims, liabilities or obligations arising with respect to the Original Loan Agreement or any Loan Documents. 108 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written, but effective only as of the Effective Date. FORSTMANN & COMPANY, INC., as Debtor and Debtor-in-Possession By: /s/Robert N. Dangremond --------------------------- Robert N. Dangremond President and Chief Executive Officer GENERAL ELECTRIC CAPITAL CORPORATION, as a Lender and as Agent By: /s/ Rick Luck --------------------------- Rick Luck Vice President, GE Capital Commercial Finance, Inc., being duly authorized Pro Rata Share of Commitment: 100% 109 EX-10.1(H) 3 FIRST AMENDMENT TO LEASE (DATED 12/27/95) Exhibit 10.1(h) FIRST AMENDMENT TO LEASE ------------------------ FIRST AMENDMENT TO LEASE (this "Amendment") dated as of December 27, 1995 between 1155 AVAMER REALTY CORP., a New York corporation with offices at 1155 Avenue of the Americas, New York, New York 10036 (the "Landlord") and FORSTMANN & COMPANY, INC., a Georgia corporation having offices at 1155 Avenue of the Americas, New York, New York 10036 (the "Tenant"). WITNESSETH: ----------- WHEREAS, Landlord and Tenant entered into that certain lease dated as of January 31, 1995 (the "Lease") covering the entire third (3rd) and fourth (4th) floors (the "Demised Premises") in the building designated and known as 1155 Avenue of the Americas (the "Building"), in the borough of Manhattan, City, County and State of New York; WHEREAS, Tenant filed a voluntary petition for relief pursuant to Section 301 of Title 11 of the United States Code on September 22, 1995; WHEREAS, (i) Tenant desires to surrender to Landlord and Landlord desires to accept from Tenant a portion of the Demised Premises (Rooms 300-315 on the third (3rd) floor of the Building consisting of approximately 15, 457 rentable square feet of space (the "Surrender Space")) as shown on Exhibit A annexed hereto and made a part hereof and (ii) Tenant and Landlord desire to amend the Lease with respect to the Surrender Space; NOW, THEREFORE, in consideration of the premises, the parties hereto hereby agree that the Lease be and the same hereby is amended as follows: 1. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Lease. 2. Tenant shall surrender to Landlord the Surrender Space broom clean and in good order and condition upon the entry of an order by the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") approving this Amendment. The date of the entry of such order is herein called the "Surrender Date". 3. Effective as of the Surrender Date: a. The Surrender Space shall be deleted from the definition of "Demised Premises" as set forth in the Lease. b. Section 3.01 of the Lease shall be deleted in its entirety and restated as follows to decrease the dollar amount therein: "3.01 During the term of this Lease, Tenant covenants and agrees to pay to Landlord a fixed annual minimum rent (the "Fixed Rent") in lawful money of the United States, in the amount of $1,081,404.00, subject to adjustment pursuant to the provisions of Sections 3.02 and 3.03 hereinbelow." c. Section 3.02.A of the Lease shall be deleted in its entirety and restated as follows to decrease the dollar amounts therein: "3.02. A. The annual Fixed Rent shall be increased as follows: 1. From 1/1/99 to and including 12/31/01 (the "First Adjustment Period"), the annual Fixed Rent (the "First Adjusted Rent") shall be the lesser of (i) $1,151,172 (the "Maximum First Rent") and (ii) $1,081,404 increase by 150% of the percentage change in the Index (as hereinafter defined) in effect on 10/1/98 over the Index in effect on 10/1/94 (the "Base Index"). 2. From 1/1/02 to and including 12/31/04 (the "Second Adjustment Period"), the annual Fixed Rent (the "Second Adjusted Rent") shall be the lesser of (i) $1,220,940 (the "Maximum Second Rent") and (ii) $1,081,404 increased by 150% of the percentage change in the Index (as hereinafter defined) in effect on 10/1/01 over Base Index. 3. From 1/1/05 to and including 12/31/07 (the "Third Adjustment Period"), the annual Fixed Rent (the "Third Adjusted Rent") shall be the lesser of (i) $1,290,708 (the "Maximum Third Rent") and (ii) $1,081,404 increased by 150% of the percentage change in the Index (as hereinafter defined) in effect on 10/1/04 over the Base Index. 4. From 1/1/08 to and including 12/31/10 (the "Fourth Adjustment Period"), the annual Fixed Rent (the "Fourth Adjusted Rent") shall be the lesser of (i) $1,360,476 (the "Maximum Fourth Rent") and (ii) $1,081,404 increased by 150% of the percentage change in the Index (as hereinafter defined) in effect on 10/1/07 over the Base Index. 5. From 1/1/11 to and including 12/31/13 (the "Fifth adjustment Period"), the annual Fixed Rent (the "Fifth Adjusted Rent") shall be the lesser of (i) $1,465,128 (the "Maximum Fifth Rent") and (ii) $1,081,404 increased by 150% of the percentage change in the Index (as hereinafter defined) in effect on 10/1/10 over the Base Index. 6. From 1/1/14 to and including 12/31/15 (the "Sixth Adjustment Period"), the annual Fixed Rent (the "Sixth Adjusted Rent") shall be the lesser of (i) $1,569,780 (the "Maximum Sixth Rent") and (ii) $1,081,404 increased by 150% of the percentage change in the Index (as hereinafter defined) in effect on 10/1/13 over the Base Index." d. Section 3.02.I of the Lease shall be deleted in its entirety and restated as follows to decrease the dollar amounts therein: 2 "I. The following is an example of the rental adjustment set forth in Section 3.02(A) above: If the Index in effect on 10/1/98 exceeds the Base Index by 2%, then the First Adjusted Rent shall initially be $1,113,846.12 (($1,081,404 x [150% x 2%]) + $1,081,404). The First Adjusted Rent will remain in effect from 1/1/99 through 12/31/99. Since the First Rent does not equal the Maximum First Rent, then the computation shall be made again utilizing the Index in effect on 10/1/99. If the Index in effect on 10/1/99 exceeds the Base Index by 8%, then the First Rent commencing 1/1/00 shall be the Maximum First Adjusted Rent since the computation would otherwise exceed $1,151,172." e. Section 4.01.A.6 of the Lease shall be deleted in its entirety and restated as follows to decrease Tenant's Percentage and the rentable square foot figures for the calculation thereof: "6. "Tenant's Percentage" shall mean for purposes of this Lease and all ------------------- calculations in connection therewith five and seventy-two one hundredths percent (5.72%) which has been computed on the basis of a fraction, the numerator of which is the agreed rentable square foot area of the Demised Premises and the denominator of which is the agreed rentable square foot area of the Building, both as set forth below. The parties agree that the rentable square foot area of the Demised Premises shall be deemed to be 34,884 square feet, and that the agreed rentable square foot area of the Building shall be deemed to be 610,191 square feet, and that the usable square footage of the Demised Premises is 28,213 square feet." f. The second paragraph of Section 7.07 of the Lease shall be deleted in its entirety and replaced by the following Section 7.08: "7.08. (a) Because the fans for the Building HVAC system servicing the 4th floor also service the 3rd floor of the Building and are wired into the electric meter serving the 3rd floor of the Building, Landlord shall credit Tenant with an amount equal to (i) $450.83 per month (i.e., 35c per rentable square foot per ---- year) and (ii) $.000241 per hour per rentable square foot for any after business hours use of the fans to service the portion of the 3rd floor not included in this Lease, which sums shall represent Landlord's credits to Tenant for electrical energy for operating the fans servicing said portion of the 3rd floor. Such credit shall be adjusted from time to time by the percentage of any increase or decrease in electric charges to Landlord for operating the fans servicing the 3rd and 4th floors. (b) Fans servicing the HVAC system within the Premises shall be wired into Tenant's electric meter and Tenant shall pay the electrical charges for operating such fans." g. Section 8.01.C.6 of the Lease shall be deleted in its entirety and replaced by the following: "6. Such proposed subletting would result (a) in the fourth (4th) floor of the Demised Premises being divided into more than four (4) rental units in the aggregate or (b) in the third (3rd) floor of the Demised Premises being divided into more than two (2) rental 3 units in the aggregate; or" 4. Except as amended herein, all of the other terms, covenants and conditions of the Lease are and shall remain in full force and effect and are hereby ratified and confirmed. 5. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 6. Tenant shall diligently pursue the approval of the Bankruptcy Court but, if this Agreement has not been approved by the Bankruptcy Court by December 31, 1995 Landlord or Tenant, at its respective option, shall have the right to cancel this Agreement effective upon notice to the others and this Agreement shall thereafter have no further force or effect. 7. Landlord will be responsible for all costs relating to any construction required to separate the Surrender Space from the Demised Premises. 8. Landlord represents that it has received consent to the Amendment from the holder of the mortgage on the Building. IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement as of the date first written above. 1155 AVAMER REALTY CORP. By:/s/ Douglas Durst --------------------- Name: Douglas Durst Title: President FORSTMANN & COMPANY, INC. By:/s/ Robert N. Dangremond -------------------------- Name: Robert N. Dangremond Title:President and Chief Executive Officer 4 EX-10.2(E) 4 COMMON STOCK REG. RIGHTS AGREEMENT (DATED 12/27/95) Exhibit 10.2(e) REGISTRATION RIGHTS AGREEMENT ----------------------------- This Registration Rights Agreement (the "Agreement") is made and entered into as of the 4th day of April, 1995, by and between FORSTMANN & COMPANY, INC., a Georgia corporation (the "Company"), and ODYSSEY PARTNERS, L.P., a Delaware limited partnership ("Odyssey"). WHEREAS, Odyssey is the holder of 2,832,713 shares of the Company's common stock, par value $.001 per share (the "Common Stock"); and WHEREAS, in February 1992 the Board of Directors of the Company authorized the Company to grant to Odyssey registration rights with respect to 1,215,000 shares of Common Stock purchased by Odyssey in connection with the Company's initial public offering (the "IPO Shares"); and WHEREAS, the registration rights with respect to the IPO Shares have never been documented; and WHEREAS, the Company and Odyssey desire to provide for the registration of the IPO Shares and, if the IPO Shares are sold in an underwritten public offering (an "Offering"), to permit Odyssey to include in the Offering additional shares of Common Stock held by it and to grant Odyssey certain registration rights with respect to any remaining shares of Common Stock held by Odyssey after an Offering under certain circumstances as further set forth herein; NOW, THEREFORE, in consideration of the following mutual covenants and agreements, and subject to the terms and conditions set forth herein, the parties hereto agree as follows: ARTICLE I. DEFINITIONS 1.1 Certain Definitions. The following terms shall have the following ------------------- meanings when used in this Agreement: (a) "Commission." The term "Commission" shall mean the Securities and ---------- Exchange Commission or any other federal agency at the time administering the Securities Act. (b) "Common Shares." The term "Common Shares" shall mean (i) with respect ------------- to the Initial Registration Statement, the IPO Shares and such number of additional shares of Common Stock which are held of record by Odyssey on the date hereof as the managing underwriters for the Offering shall have advised the Company does not exceed any Underwriter's Limitation with respect to the Offering, (ii) with respect to any subsequent Registration Statement filed hereunder, if the Company shall have filed the Initial Registration Statement and Odyssey shall have sold at least such number of IPO Shares as the managing underwriters for the Offering shall have advised does not exceed any underwriters' limitation with respect to the Offering, those shares of Common Stock which are held of record by Odyssey on the date hereof and which are not sold by Odyssey pursuant to the Initial Registration Statement. (c) "Common Stock." The term "Common Stock" shall have the meaning set ------------ forth in the preamble. (d) "Company's Notice." The term "Company's Notice" shall have the meaning ---------------- set forth in Section 2.3 hereof. (e) "Initial Registration Statement". The term "Initial Registration ------------------------------ Statement" shall mean a registration statement filed pursuant to Section 2.1 or 2.2 hereof for an Offering pursuant to a firm commitment underwriting agreement with a firm of underwriters selected by the Company including the IPO Shares and any other shares of Common Stock owned by Investors which the managing underwriter for such Offering shall have advised the Company can be sold in such Offering without exceeding the Underwriter's Limitation. (f) "Initiating Investors." The term "Initiating Investors" shall mean any -------------------- Investor or Investors who hold of record an aggregate of no less than 50% of the Registrable Stock then outstanding. (g) "Investors." The term "Investors" shall mean Odyssey and any other --------- holder of Registrable Stock who by amendment is added as a party to this Agreement or who is granted registration rights hereunder and has agreed with the Company in writing to be bound by this Agreement. (h) "Investor's Notice." The term "Investor's Notice" shall have the ----------------- meaning set forth in Section 2.3 hereof. (i) "IPO Shares." The term "IPO Shares" shall have the meaning set forth ---------- in the preamble. (j) "Offering." The term "Offering" shall have the meaning set forth in -------- the preamble. (k) "Prior Agreements." The term "Prior Agreements" shall mean, ---------------- individually and collectively, (i) that certain Common Stock Registration Rights Agreement dated as of November 19, 1990, by and between the Company and certain holders of the Company's - 2 - Common Stock named therein, (ii) that certain Preferred Stock Registration Rights Agreement dated as of November 19, 1990, by and between the Company and Executive Life Insurance Company, and (iii) that certain Registration Rights Agreement dated as of November 19, 1990, by and between the Company and certain holders of the Company's Amended Senior Subordinated Notes named therein. (l) "Prospective Sellers." The term "Prospective Sellers" shall have the ------------------- meaning set forth in Section 2.5(a)(ii) hereof. (m) "Register." The terms "register," "registered" and "registration" -------- refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act. (n) "Registrable Stock." The term "Registrable Stock" shall mean (i) the ----------------- Common Shares and (ii) any securities of the Company issued or issuable with respect to the Common Shares by reason of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. Each share of Registrable Stock shall continue to be Registrable Stock only for the duration of the Registration Period (as herein defined) and only in the hands of (w) Odyssey, (x) any transferee or assignee (including any subsequent transferee or assignee) which is an affiliate or a wholly-owned direct or indirect subsidiary of Odyssey, (y) any transferee or assignee which is a charitable institution that received Common Shares as a charitable donation from Odyssey or a partner of Odyssey, and (z) any single transferee or assignee (including any subsequent single transferee or assignee) to whom Odyssey assigns its rights under this Agreement provided such transferee or assignee delivers to the Company a written agreement to be bound by the terms and conditions of this Agreement; provided that any such share shall no longer be a share of Registrable Stock hereunder (regardless of the identity of any subsequent transferee or assignee) following any transfer thereof to a transferee or assignee who is not a person named in the foregoing clauses (x), (y) or (z). (o) "Registration Period." The term "Registration Period" shall mean, with ------------------- respect to any Investor and the shares of Registrable Stock then held by such Investor, that period beginning on the date hereof and ending on the date on which such Investor no longer holds any Registrable Stock, but not later than ten years after the date hereof. (p) "Registration Statement." The term "Registration Statement" shall mean ---------------------- a registration statement relating to any shares of Registrable Stock, including the Initial Registration Statement, which is prepared and filed with the Commission under the Securities Act and in accordance with the terms and conditions of this Agreement. (q) "Securities Act." The term "Securities Act" shall have the meaning set -------------- forth in the preamble. - 3 - (r) "Underwriter's Limitation". The number of shares of Common Stock or ------------------------ other securities of the Company which the managing underwriter for any proposed Offering shall have advised the Company, in its good faith exercise of reasonable business judgment, is the maximum number that can be sold in such Offering without (a) creating a substantial risk that the proceeds or price per unit that will be derived from such Offering will be reduced; or (b) causing such Offering to be too large to be reasonably sold. ARTICLE II. SECURITIES REGISTRATION 2.1 Initial Registration Statement. At any time during the Registration ------------------------------ Period, upon the written request of one or more Initiating Investors requesting that the Company effect the registration under the Securities Act of Registrable Stock consisting of (or corresponding to) not less than all of the IPO Shares for an Offering, the Company will thereupon promptly (but in any event within 120 days after it receives such written request) prepare and file the Initial Registration Statement with respect to the Registrable Stock which the Company has been so requested to register, for disposition in an Offering with an underwriter selected by the Company and reasonably satisfactory to the Initiating Investors, and the Company will thereafter use all reasonable efforts to cause such Registration Statement to become effective within 180 days after the date on which it receives such written request. 2.2 Registration on Request. At any time during the Registration Period, ----------------------- after the Company shall have filed an Initial Registration Statement, and provided the Investors shall have sold pursuant to the Initial Registration Statement at least such number of the IPO Shares as does not exceed the Underwriter's Limitation with respect to the Initial Registration Statement, upon the written request of one or more Initiating Investors requesting that the Company effect the registration under the Securities Act of Registrable Stock consisting of (or corresponding to) not less than 500,000 common shares (or all of the common shares, if the total number of common shares is less than 500,000) and specifying the intended method or methods of disposition thereof, the Company will thereupon promptly (but in any event within 120 days after it receives such written request) prepare and file a Registration Statement with respect to the Registrable Stock which the Company has been so requested to register, for disposition in accordance with the intended method or methods of disposition stated in such written request, and the Company will thereafter use all reasonable efforts to cause such Registration Statement to become effective within 180 days after the date on which it receives such written request; provided, however, that the Company shall not be required to effect more than - ----------------- one registration pursuant to this Section 2.2. In the event that any offering pursuant to a Registration Statement filed under this Section 2.2 is to be an underwritten offering, the Initiating Investor(s) shall have the right to select the underwriter for such offering, subject to the approval of the Company which shall not be unreasonably withheld. Notwithstanding the foregoing, if, on the date of receipt by the Company of a written request under this Section 2.2, the Company has given a Company's Notice (as defined in Section 2.3) with respect to a registration statement under the Securities Act (other - 4 - than a registration relating either to (i) a dividend reinvestment, employee stock option, stock purchase or similar plan, (ii) a transaction pursuant to Rule 145 under the Securities Act, or (iii) a merger, consolidation or reorganization), the Company may defer the filing of any such Registration Statement requested pursuant to this Section 2.2 to a date not later than 120 days after the effective date of such prior registration statement and will use all reasonable efforts to cause such requested Registration Statement to become effective within 180 days after the effective date of such prior registration statement. The Company shall not register any shares of Common Stock pursuant to any registration statement filed pursuant to this Section 2.2, other than any Registrable Stock covered by any request for registration pursuant to this Section 2.2, without the written consent of the Initiating Investors, provided, --------- however, that the Company shall be entitled to include shares to be sold for its - ------- own account in any such Registration Statement to the extent that such shares, when aggregated with the shares to be sold by the Initiating Investors, do not exceed the Underwriter's Limitation with respect to such Offering. 2.3 Incidental Offering. If, at any time during the Registration Period, ------------------- the Company proposes to register any of its capital stock for sale, whether or not for its own account, pursuant to an Offering (other than a registration relating either to (i) a dividend reinvestment, employee stock option, stock purchase or similar plan, (ii) a transaction pursuant to Rule 145 under the Securities Act, or (iii) a merger, consolidation or reorganization), the Company shall each such time give written notice (the "Company's Notice"), at its expense, to each Investor then holding Registrable Stock of its intention to effect such registration at least 20 days prior to the filing of a registration statement with respect to such registration with the Commission. If any such Investor desires to dispose of all or part of its Registrable Stock in connection therewith, it shall deliver to the Company, within 10 days after the giving of the Company's Notice, written notice of such desire (the "Investor's Notice") stating the number of shares of Registrable Stock to be disposed of by such Investor. The Company shall cause all shares of Registrable Stock specified in such Investors' Notices to be included in the offering so as to permit the sale by such Investor or Investors of all of the shares of Registrable Stock referred to in such Investors' Notices, subject, however, to the limitations set forth in Section 2.4 hereof. The Company shall have the right, in its sole discretion, to select the underwriter for any offering pursuant to a Registration Statement filed under this Section 2.3. Any Registration Statement filed pursuant to this Section 2.3 shall be deemed an Initial Registration Statement if the Investors' Notice shall have requested the Company to include in such Registration Statement not less than all of the IPO Shares and the Investors shall have sold pursuant to the Registration Statement not less than the number of IPO Shares which does not exceed the Underwriter's Limitation with respect to such Offering. 2.4 Limitations on Inclusion in Incidental Offering. ----------------------------------------------- (a) The Company shall have the right to limit the aggregate size of any offering under Section 2.3 or the number of shares to be included therein by stockholders of the Company in accordance with any Underwriter's Limitation with respect to such Offering. (b) Whenever the number of shares which may be offered pursuant to Section 2.3 is limited by the provisions of Section 2.4(a) above, (i) any such reduction shall apply on a - 5 - proportional basis to the Registrable Stock which Investors shall have requested to have included and all other securities that the Company shall have been requested, pursuant to contractual registration rights, to include in the offering other than those to be offered for the Company's own account and (ii) the Company shall have priority as to sales over the Investors and each Investor hereby agrees that it shall withdraw its Registrable Stock from such offering to the extent necessary to allow the Company to include all the shares which the Company desires to sell for its own account to be included within such offering. The Investors given rights by Section 2.3 above who are Prospective Sellers (as herein defined) shall share pro rata in the available portion of the offering in question, such sharing to be based upon the number of shares of Registrable Stock then held by each of such Investors, respectively, with respect to which registration has been requested. (c) The Company may, for any reason and without the consent of any Investor, determine at any time not to proceed with any registration which is the subject of a Company's Notice and abandon the proposed offering, whereupon the Company shall be relieved of any further obligation hereunder to proceed with such registration or offering. (d) The rights of each Investor pursuant to Sections 2.3 and 2.4 above are subject to any superior rights of the holders of any securities of the Company under Section 3(b) of any of the Prior Agreements. The Company agrees that, during the Registration Period, it will not grant any registration rights to any other person that are superior to the Investors' registration rights hereunder, without the prior written consent of Investors then holding a majority of the shares of Registrable Stock. 2.5 Registration Procedures. ----------------------- (a) In connection with the registration by the Company of shares of Registrable Stock pursuant to Sections 2.1 and 2.2 above, or in connection with the inclusion of shares of Registrable Stock in any offering of securities of the Company pursuant to Section 2.3 above, the Company shall: (i) prepare and file with the Commission a Registration Statement with respect to such securities on such form as the Company deems appropriate and use all reasonable efforts to cause such registration statement to become and remain effective as provided herein; provided that, in the case of any registration -------- pursuant to Section 2.3, such preparation and filing may be delayed in the sole discretion of the Company, without prejudice to the rights of any of the Investors pursuant to Section 2.2 hereof; (ii) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectuses used in connection therewith as may be necessary to keep such Registration Statement effective and current and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all shares covered by such Registration Statement, including such amendments and supplements as may be - 6 - necessary to reflect the intended method of disposition from time to time of the Investors who have requested that any of their shares be sold or otherwise disposed of in connection with any registration pursuant to Section 2.3 or whose shares of Registrable Stock are included in any registration pursuant to Section 2.2 (in either such case, the "Prospective Sellers"), until the earliest of (a) such time as all of the securities covered by such Registration Statement have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof, (b) two years after the effective date of such Registration Statement or (c) the end of the Registration Period; (iii) notify the Prospective Sellers and confirm such advice in writing, (a) when such Registration Statement becomes effective, and (b) of the entry of any stop order suspending the effectiveness of such registration statement or the initiation of any proceedings for that purpose, and, if such stop order shall be entered, the Company shall use its reasonable efforts promptly to obtain the lifting thereof; (iv) furnish to the Prospective Sellers at a reasonable time prior to the filing thereof with the Commission a copy of the Registration Statement in the form in which the Company proposes to file the same; not later than one day prior to the filing thereof, a copy of any amendment (including any post- effective amendment) to such Registration Statement; and promptly following the effectiveness thereof, a conformed copy of the Registration Statement as declared effective by the Commission and of each post-effective amendment thereto, including financial statements and all exhibits and reports incorporated therein by reference; (v) furnish to each Prospective Seller such number of copies of each prospectus, including preliminary prospectuses, in conformity with the requirements of the Securities Act, and such other documents, as the Prospective Seller may reasonably request in order to facilitate the public sale or other disposition of the shares owned by it; (vi) use all reasonable efforts to register or qualify the shares covered by such Registration Statement under such other securities or Blue Sky or other applicable laws of such jurisdictions as each Prospective Seller shall reasonably request to enable such seller to consummate the public sale or other disposition of the shares owned by such seller; provided that the Company shall -------- not be required in connection therewith or as an election thereto to qualify to do business or to file a general consent to service of process in any such jurisdiction, or to maintain the effectiveness of any such registration or qualification for any period during which it is not required to maintain the effectiveness of the related Registration Statement under the Securities Act as set forth in Section 2.5(a)(ii); (vii) use all reasonable efforts to cause all such Registrable Stock to be listed on each securities exchange or other securities trading market on which Common Stock issued by the Company is then listed; - 7 - (viii) enter into such customary agreements (including an underwriting agreement with respect to underwritten offerings) in form and substance reasonably acceptable to the Company and take such other customary actions as Prospective Sellers may reasonably request in order to expedite or facilitate the disposition of such Registrable Stock; and (ix) make reasonably available for inspection by any Prospective Seller, any underwriter participating in any disposition of Registrable Stock, and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and use all reasonable efforts to cause the Company's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with the registration contemplated by Sections 2.1, 2.2 or 2.3 above, in each case as and to the extent necessary to permit the Prospective Sellers to conduct a reasonable investigation within the meaning of the Securities Act. To minimize disruption and expense to the Company during the course of the registration process, all Prospective Sellers shall, to the extent practicable, coordinate their investigation and due diligence efforts hereunder and, to the extent practicable, will act through a single law firm and a single accounting firm and will enter into confidentiality agreements with the Company in form and substance reasonably satisfactory to the Company and such Prospective Sellers prior to receiving any confidential or proprietary information of the Company. (b) Each Prospective Seller shall furnish to the Company in writing such information as the Company may reasonably request from such Prospective Seller for use in preparing the registration statement (and the prospectus included therein) and performing its other obligations hereunder. (c) During such time as the Prospective Sellers may be engaged in a distribution of the Registrable Stock, the Prospective Sellers shall comply with Rules 10b-6 and 10b-7 promulgated under the Exchange Act, and pursuant thereto, shall, among other things: (w) not engage in any stabilization activity in connection with the securities of the Company in contravention of such Rules; (x) distribute the Registrable Stock solely in the manner described in the Registration Statement; (y) cause to be furnished to each underwriter, broker or agent through whom the Registrable Stock may be offered, or to the offeree if an offer is not made through a broker, such copies of the Prospectus and any amendment or supplement thereto and documents incorporated by reference therein as may be required by law; and (z) not bid for or purchase any securities of the Company or attempt to induce any person to purchase any securities of the Company other than as permitted under the Exchange Act. 2.6 Expenses of Registration. All expenses incurred in effecting any ------------------------ registration and/or sale of Registrable Stock pursuant to Section 2.2 hereof, including, without limitation, all registration and filing fees, printing expenses, expenses of compliance with Blue Sky laws, fees and disbursements of counsel for the Company, expenses of any audits incidental to or required by any such registration (other than such annual audits as would otherwise be performed regardless - 8 - of such registration), and expenses of all marketing and promotional efforts requested by any underwriter shall be borne by the Prospective Sellers; provided, however, that in the event that the Company or any other shareholder - ----------------- of the Company shall sell any shares of Common Stock in connection with any sale of Registrable Stock pursuant to Section 2.2 hereof, then the Company and any such shareholder shall bear its pro rata share of any such costs and expenses in proportion to the number of shares being sold by the Company or such shareholder in the Offering. All expenses incurred in effecting any registration and/or sale of Registrable Stock pursuant to Section 2.1 or Section 2.3 hereof, including, without limitation, all registration and filing fees with respect to securities registered for sale by the Company, printing expenses, expenses of compliance with Blue Sky laws, fees and disbursements of counsel for the Company, expenses of any audits incidental to or required by any such registration, and expenses of all marketing and promotional efforts requested by any underwriter shall be borne by the Company; provided, however, that each ----------------- Prospective Seller shall bear all registration and filing fees and underwriting discounts or brokerage fees or commissions relating to the sale of its Registrable Stock and all fees and expenses of its own counsel, accountants and other experts with respect to any registration and/or sale of Registrable Stock under Sections 2.1, 2.2 or 2.3 hereof. 2.7 Indemnification. --------------- (a) The Company shall indemnify and hold harmless each Investor, each underwriter (as defined in the Securities Act), each other selling agent who may be deemed to be an underwriter, and each controlling person of any Investor, underwriter or other selling agent, if any (within the meaning of the Securities Act), against any losses, claims, damages or liabilities, joint or several (or actions in respect thereof) ("Losses"), to which such indemnified party may be subject under the Securities Act, under any other statute or at common law, but only to the extent such Losses arise out of or are based upon (i) any untrue statement (or alleged untrue statement) of any material fact contained in (x) any Registration Statement under which Registrable Stock held by such Investor was registered under the Securities Act or offered for sale, (y) any preliminary prospectus (if used prior to the effective date of such Registration Statement), or (z) any final prospectus or any post-effective amendment or supplement thereto (if used during the period the Company is required to keep the Registration Statement effective), in each case, on the effective date of such Registration Statement or post-effective amendment, or the date of such prospectus, including any preliminary prospectus, or supplement (the "Disclosure Documents"), (ii) any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading or (iii) any violation by the Company of the Securities Act or any Blue Sky law, or any rule or regulation promulgated under the Securities Act or any Blue Sky law, or any other law, applicable to the Company in connection with the sale, registration or qualification of any shares of Registrable Stock held by such Investor; and such indemnifying party shall reimburse each such indemnified party for any legal or other expenses reasonably incurred by such party in connection with investigating or defending any such loss, claim, damage, liability or action, whether or not resulting in any liability, or in connection with any investigation or proceeding by any governmental agency or instrumentality relating to any such claims with respect to any offering of securities pursuant to - 9 - this Article II, but excluding any amounts paid in settlement of any action, suit, arbitration, proceeding, litigation, or investigation (collectively "Litigation"), commenced or threatened, if such settlement is effected without the prior written consent of such indemnifying party, which consent shall not be unreasonably withheld; provided, however, that the Company shall not be liable to any Investor, underwriter, other selling agent or controlling person in any such case to the extent that any such Losses arise out of or are based upon (i) an untrue statement or omission or alleged omission (x) made in any such Disclosure Documents in reliance upon and in conformity with written information furnished to the Company by or on behalf of such indemnified party expressly for use in the preparation thereof, or (y) made in any preliminary prospectus if a copy of the final prospectus was not delivered to the person alleging any loss, claim, damage or liability for which Losses arise at or prior to the written confirmation of the sale of such Registrable Stock to such person and the untrue statement or omission concerned had been corrected in such final prospectus and copies thereof had timely been delivered by the Company to such indemnified party, or (z) made in any prospectus used by such indemnified party if a court of competent jurisdiction finally determines that at the time of such use such indemnified party had actual knowledge of such untrue statement or omission; or (ii) the use of any prospectus after such time as the Company has advised such indemnified party that the filing of a post-effective amendment or supplement thereto is required, except the prospectus as so amended or supplemented, or the use of any prospectus after such time as the obligation of the Company to keep the same current and effective has expired; provided further that, in accordance with the policy of the Commission, any obligation of the Company to provide indemnification hereunder to a person who is a director, officer or controlling person of the Company, is subject to the limitation that, in the event of any claim by any such person for indemnification hereunder with respect to a claim against such person under the Securities Act (other than a claim for payment by the Company of expenses incurred by such person in the successful defense of any action, suit or proceeding), the Company will, unless in the opinion of its counsel the matter has been settled by controling precedent, submit to a court of competent jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and the Company and such person shall be governed by the final adjudication of such issue. In determining the actual knowledge of an indemnified party for purposes of clause (i)(z) above, the actual knowledge (without any requirement of due inquiry) of a controlling person of an indemnified party shall be imputed to such indemnified party (and its other controlling persons). (b) In connection with the registration and/or sale of any shares of Registrable Stock pursuant to this Agreement, each Investor having any of its shares of Registrable Stock included in such registration shall, and (except as to clause (iii) below) shall cause any underwriter retained by it who participates in the offering to, indemnify and hold harmless the Company, each of its directors, each of its officers who have signed such Registration Statement and each controlling person of the Company (within the meaning of the Securities Act), against any Losses, joint or several, to which such indemnified party may become subject under the Securities Act, under any other statute or at common law, but only to the extent such Losses arise out of or are based upon (i) any untrue statement (or alleged untrue statement) of any material fact contained in any of the Disclosure Documents or any omission or alleged omission to state therein a material - 10 - fact required to be stated therein or necessary to make the statements therein not misleading, if the statement or omission was made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such indemnifying party expressly for use in the preparation thereof; (ii) the use by such indemnifying party of any prospectus after such time as the Company has advised such indemnifying party that the filing of a post-effective amendment or supplement thereto is required, except the prospectus as so amended or supplemented, or after such time as the obligation of the Company to keep the registration statement effective and current has expired, or (iii) any information given or representation made by such indemnifying party to any purchaser in connection with the sale of Registrable Shares which is not contained in and not in conformity with the prospectus (as amended or supplemented at the time of the giving of such information or making of such representation); and such indemnifying party shall reimburse each such indemnified party for any legal and other expenses reasonably incurred by such party in investigating or defending any such loss, claim, damage, liability or action, whether or not resulting in any liability, or in connection with any investigation or proceeding by any governmental agency or instrumentality relating to any such claims with respect to any offering of securities pursuant to this Article II, but excluding any amounts paid in settlement of any Litigation, commenced or threatened, if such settlement is effected without the prior written consent of such indemnifying party; provided, however, that ----------------- Investors shall not be liable to the Company, any of its directors, any of its officers who have signed such Registration Statement or any controlling person of the Company in any such case to the extent that any such Losses arise out of or are based upon (y) statements made in any preliminary prospectus if a copy of the final prospectus was not delivered to the person alleging any loss, claim, damage or liability for which losses arise at or prior to the written confirmation of the sale of such Registrable Stock to such person and the untrue statement or omission concerned had been corrected in such final prospectus, or (z) statements made in any prospectus used by such Indemnified Party if a court of competent jurisdiction finally determines that at the time of such use such Indemnified Party had actual knowledge of such untrue statement or omission. (c) If the indemnification provided for in Section 2.7(a) or (b) above is unavailable to an indemnified party in respect of any Losses referred to therein, then the intended indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such Losses in such proportion as is appropriate to reflect the relative fault of the intended indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions which resulted in such Losses, as well as any other relevant equitable considerations. The relative fault of the intended indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by (or omitted to be supplied by) the intended indemnifying party or by the indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. - 11 - The Company and the Investors agree that it would not be just and equitable if contribution pursuant to this Section 2.7(c) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities or actions in respect thereof referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 2.7(c), no Investor shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Stock sold by it exceeds the amount of any damages which such Investor has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (d) Promptly after receipt by an indemnified party under Section 2.7(a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made under such Section, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such Section or to the extent that it has not been prejudiced as a proximate result of such failure. In case any such action shall be brought against any indemnified party, and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, to assume the defense thereof, in each case jointly with any other indemnifying parties and with counsel reasonably satisfactory to such indemnified party; provided, however, that, if the defendants in any such ------------------ action include both the indemnified party and the indemnifying party and representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding, the indemnified party or parties shall have the right to select separate counsel to defend such action (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party or parties). Upon the permitted assumption by the indemnifying party of the defense of such action, and approval by the indemnified party of counsel, the indemnifying party shall not be liable to such indemnified party under this Section 2.7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof (other than reasonable costs of investigation) unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence, (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. It is understood, however, that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any action or related actions in the same jurisdiction arising out of the same general allegations or - 12 - circumstances, be liable for the fees and expenses of more than one separate law firm (in addition to any local counsel) for all indemnified parties. 2.8 Assertion and Transfer of Registration Rights. The rights of any --------------------------------------------- Investor under this Agreement may be transferred or assigned only to (i) a transferee or assignee (including any subsequent transferee or assignee) which is an affiliate or a wholly-owned direct or indirect subsidiary of Odyssey, (ii) any transferee or assignee which is a charitable institution which receives the related Registrable Stock as a charitable donation from Odyssey or any partner of Odyssey, or (iii) any single transferee or assignee (including any subsequent single transferee or assignee) to whom Odyssey assigns its rights under this Agreement provided such transferee or assignee delivers to the Company a written agreement to be bound by the terms and conditions of this Agreement. In any event, the rights of any Investor under this Agreement may be transferred or assigned only in connection with a transfer of securities which remain Registrable Stock hereunder after giving effect to such transfer, and not to any other or subsequent transferee of any such securities, and any such permitted transfer or assignment shall be effective only upon the receipt by the Company of written notice of such transfer or assignment and an instrument, the form and substance of which shall be reasonably satisfactory to the Company, pursuant to which such transferee or assignee agrees to be bound by the provisions of this Agreement. 2.9 Holdback Agreements. ------------------- (a) Notwithstanding any provision of this Agreement to the contrary, in the event the Company notifies the Investors that the Company intends to file a registration statement in connection with an underwritten offering of any of its capital stock, each Investor shall refrain from selling or otherwise distributing any Registrable Stock during such period as shall be reasonably requested by the underwriters of such offering (the "Offering Restricted Period") except as part of such offering as set forth herein. If a Registration Statement filed pursuant to Section 2.2 is effective on the first date of the Offering Restricted Period, the Company's obligation under Section 2.5(a)(ii) to keep such Registration Statement current and effective shall be extended for a number of days equal to the Offering Restricted Period, or, if earlier, until the date on which all of the Registrable Stock has been disposed of. (b) Notwithstanding anything set forth herein to the contrary, in the event that the Company notifies the Investors that the Company desires to amend the Registration Statement or to supplement the prospectus in order to disclose material information required to be disclosed in the prospectus included in such Registration Statement, as then in effect, in order to correct an untrue statement of a material fact or to disclose an omitted material fact that is required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, the Investors shall refrain from selling Registrable Stock until the Company notifies the Investors that the required amendment or supplement has been filed with the Commission (the "Disclosure Restricted Period"). If a Registration Statement filed pursuant to Section 2.2 is effective on the first date of the Disclosure Restricted Period, the Company's obligation under Section 2.5(a)(ii) to keep such Registration Statement current and effective shall - 13 - be extended for a number of days equal to the Disclosure Restricted Period, or, if earlier, until the date on which all of the Registrable Stock has been disposed of. The Company shall use its reasonable efforts to file such amendment or supplement as promptly as practicable after the Company decides to amend the Registration Statement or supplement the prospectus. (c) Notwithstanding any provision of this Agreement to the contrary, in the event the Company notifies the Investors that it has received a notice pursuant to Section 4(b)(1) of any of the Prior Agreements (which notice by the Company shall state the date on which it received such notice pursuant to Section 4(b)(1) of such Prior Agreement), each Investor shall thereafter refrain from selling or otherwise distributing any Registrable Stock, as and to the extent set forth in such notice by the Company, for the period ending 20 days after receipt by the Company of such notice pursuant to Section 4(b)(1) of such Prior Agreement (the "Prior Agreement Restricted Period"). If a Registration Statement filed pursuant to Section 2.2 is effective on the first date of the Prior Agreement Restricted Period, the Company's obligation under Section 2.5(a)(ii) to keep such Registration Statement current and effective shall be extended for a number of days equal to the Prior Agreement Restricted Period, or, if earlier, until the date on which all of the Registrable Stock has been disposed of. 2.10 Lender Consents. If the sale by Odyssey of the number of Common --------------- Shares proposed to be sold by Odyssey pursuant to any Registration Statement to be filed pursuant to Sections 2.1, 2.2 or 2.3 of this Agreement would cause a default or violate any covenant in any loan agreement, credit agreement, indenture, promissory note, or other security of the Company, the Company will use reasonable efforts to obtain such consents, waivers or amendments as may be required thereunder; provided, however, that if the Company is unable to obtain ----------------- such consents, waivers or amendments, Odyssey shall limit its sales of Common Shares under such Registration Statement to such number, if any, which would not result in a violation of or default under such agreement, indenture, note or security. The Company represents that the only agreements to which the Company is a party pursuant to which the sale by Odyssey could result in a default or violate a covenant thereof are the Loan Agreement dated October 30, 1992, as amended, with General Electric Capital Corporation (the "GECC Facility") and the Loan and Security Agreement dated December 27, 1991, as amended with The CIT Group/Equipment Financing, Inc. (the "CIT Facility"). The Company covenants and agrees that during the Registration Period it will not enter into any other agreement or issue any security pursuant to which a sale of Common Stock by Odyssey could result in a default or violation of a covenant of the Company without the prior written consent of Odyssey; provided, however, that this ----------------- restriction shall not apply to any amendment to or refinancing of the GECC Facility or the CIT Facility. ARTICLE III. MISCELLANEOUS 3.1 Notices. All notices, demands or other communications hereunder shall ------- be in writing and shall be deemed given when delivered personally, mailed by certified mail, return - 14 - receipt requested, sent by overnight courier service or telecopied, telegraphed or telexed (transmission confirmed), or otherwise actually delivered: If to the Company: Forstmann & Company, Inc. 1185 Avenue of the Americas New York, New York 10036 Attention: Jane S. Pollack, Esq. Telephone: (212) 642-6900 Facsimile: (212) 642-6992 If to Odyssey: Odyssey Partners, L.P. 31 West 52nd Street New York, New York 10019 Attention: Lawrence Levitt Telephone: (212) 708-0600 Facsimile: (212) 708-0750 If to any other Investor: At the address and numbers set forth in the Company's records, marked for attention as therein indicated; or at such other address and numbers as may have been furnished by such person in writing to the other parties, accompanied by a written request that such address and numbers be used for the purpose of giving notices hereunder. 3.2 Severability and Governing Law. Should any Section or any part of a ------------------------------ Section within this Agreement be rendered void, invalid or unenforceable by any court of law for any reason, such invalidity or unenforceability shall not void or render invalid or unenforceable any other Section or part of a Section in this Agreement. This Agreement is made and entered into in the State of New York, and the laws of said state shall govern the validity and interpretation hereof and the performance by the parties hereto of their respective duties and obligations hereunder. 3.3 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 3.4 Captions and Section Headlines. Section titles or captions contained ------------------------------ in this Agreement are inserted as a matter of convenience and for reference purposes only, and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. - 15 - 3.5 Singular and Plural, Etc. Whenever the singular number is used herein ------------------------ and where required by the context, the same shall include the plural, and the neuter gender shall include the masculine and feminine genders. 3.6 Costs and Attorneys' Fees. In the event that any action, suit, or ------------------------- other proceeding is instituted concerning or arising out of this Agreement, the prevailing party shall recover all of such party's costs, and attorneys' fees incurred in each and every such action, suit, or other proceeding, including any and all appeals or petitions therefrom. As used herein, "attorneys' fees" shall mean the full and actual costs of any legal services actually rendered in connection with the matters involved, calculated on the basis of the usual fee charged by the attorneys performing such services. 3.7 Amendments and Waivers. Neither this Agreement nor any term hereof ---------------------- may be changed, waived, discharged or terminated orally or in writing, except that any term of this Agreement may be amended and the observance of any such term may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and Investors holding at least 66-2/3% of the Registrable Stock then outstanding; provided, however, that no such amendment or waiver shall affect the provisions of this Section 3.7 and no such waiver shall extend to or affect any other obligation not expressly waived. No failure to exercise and no delay in exercising, on the part of any party, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. The failure of any party to insist upon a strict performance of any of the terms or provisions of this Agreement, or to exercise any option, right or remedy herein contained, shall not be construed as a waiver or as a relinquishment for the future of such term, provision, option, right or remedy, but the same shall continue and remain in full force and effect. 3.8 Successors and Assigns. All rights, covenants and agreements of the ---------------------- parties contained in this Agreement shall, except as otherwise provided herein, be binding upon and inure to the benefit of their respective successors and assigns. 3.9 Entire Agreement. This Agreement contains the entire understanding of ---------------- the parties and there are no further or other agreements or understandings, written or oral, in effect between the parties relating to the subject matter hereof unless expressly referred to herein. Odyssey acknowledges and agrees that, by entering into this Agreement, the Company has satisfied any obligation it has, arising out of the 1992 initial public offering or otherwise, to provide registration rights with respect to the shares of Common Stock owned by Odyssey and that Odyssey's rights with respect to the registration of such shares are limited to the rights set forth in this Agreement. - 16 - IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. FORSTMANN & COMPANY, INC. By: /s/ Jane S. Pollack ---------------------------- Jane S. Pollack Vice President and Secretary ODYSSEY PARTNERS, L.P. By: /s/ Jack Nash ---------------------------- Jack Nash General Partner - 17 - EX-10.10(K) 5 AGREEMENT FOR FINANCIAL CONSULTING SERVICES Exhibit 10.10(k) July 31, 1995 Mr. Christopher L. Schaller Chairman, President and CEO Forstmann & Company, Inc. 1155 Avenue of the Americas New York, NY 10036-2711 Re: Agreement for Financial Consulting Services Dear Mr. Schaller: This letter outlines the understanding between Jay Alix & Associates, a Michigan corporation ("JA&A") and Forstmann & Company, Inc. (the "Company") of the objectives, tasks, work product and fees for the engagement of JA&A to provide financial consulting services to the Company. OBJECTIVES - ---------- . To assist management in the completion of its financial and operational restructuring. . To work with the Board of Directors and senior management of the Company to: - Develop and implement alternative strategies to pursue a financial and operational restructuring of the Company. - Maximize values for the various constituents. - Provide an independent assessment of restructuring options. TASKS - ----- To accomplish the objectives of this engagement, our efforts will include, but not be limited to, the following activities: . Gather and review financial and other information as necessary to gain an understanding of the Company's operations and financial position. . Meet with senior management and others to gain an understanding of and to become involved in the restructuring process. . Assist management in its restructuring planning and strategy setting. Mr. Christopher L. Schaller July 31, 1995 Page 2 . Meet with attorneys, bankers and other professionals as you or as the Board of Directors may direct. . Assist management in the negotiations with lending institutions and other creditors, as may be necessary, as part of the restructuring process. . Assist the Company and its legal advisors in developing a contingency plan, including planning and analysis related to cash collateral and secured financing. . Perform other tasks and assignments as may be necessary related to the restructuring as you may direct. . Assist in such other matters as may be mutually agreed upon. WORK PRODUCT - ------------ Our work product will be in the form of: . Information to be discussed with you and others, as you may direct. . Written reports and analysis worksheets to support our suggestions as we deem necessary or as you may request. STAFFING - -------- Robert N. Dangremond will be the principal responsible for the overall engagement. Mr. Dangremond will be working full-time on this engagement except for occasional meetings, including Board Meetings. He may be assisted, as appropriate, by JA&A staff at various levels. JA&A also has relationships with and periodically retains independent contractors with specialized skills to assist with client assignments. TIMING, FEES AND EXPENSES - ------------------------- As you requested, we have already commenced this engagement. Therefore, upon reviewing this proposal, if you have no further questions, please sign the enclosed copy and return it and arrange for the wire transfer of the retainer. The effective date of this agreement shall be July 21, 1995. Mr. Christopher L. Schaller July 31, 1995 Page 3 We will require a retainer of $150,000 to be applied against the time charges, excluding expenses, specific to the engagement. We will submit monthly invoices for services rendered and expenses incurred as described below, and we will offset such invoices against the retainer. Payment will be due upon receipt of the invoices to replenish the retainer to the agreed upon amount. Any unearned portion of the retainer will be returned to you at the termination of the engagement. The fee for the services provided by JA&A is a flat rate of $75,000 per month. Any assistance requested by the Company that falls outside the scope of our engagement will be approved by you in advance and will be billed at our hourly rates. In addition to the fees set forth above, JA&A will also be eligible for a success fee of $225,000 upon the approval of a credit line that is acceptable to the Company to finance the Company's 1996 business plan. The Company shall also pay directly or reimburse JA&A upon receipt of periodic billings, for all reasonable out-of-pocket expenses incurred in connection with this assignment such as travel, lodging, postage, telephone and facsimile charges. RELATIONSHIP OF THE PARTIES - --------------------------- The parties intend that an independent contractor relationship will be created by this agreement. JA&A is not to be considered an employee or agent of the Company and the employees of JA&A are not entitled to any of the benefits that the Company provides for the Company's employees. The Company also agrees not to solicit or recruit any employees or agents of JA&A for a period of two years subsequent to the completion and/or termination of this agreement. TIME MAXIMIZATION AND CONSTRAINTS - --------------------------------- We work in and respond to crisis situations as a normal part of our work. We are accustomed to it and expect it. We will make every possible attempt to reschedule staff and we will make numerous personal sacrifices to be available wherever and whenever emergency or crisis develops. However, JA&A and Robert N. Dangremond, personally, may have previous commitments to other clients and will be required to make commitments of time and staff in the future. Mr. Christopher L. Schaller July 31, 1995 Page 4 Accordingly, we will need your understanding and support when we have professional and personal time conflicts which prevent us from spending 100% of our time at the Company. Nevertheless, it is our intent to commit a significant amount of time and resources to this engagement. From time to time, it may be necessary to spend some time on other client matters while working at the Company's offices. Our experience at other companies has led us to conclude that this will generally not be bothersome to your staff while still allowing us to be available and on site for your management and staff who need ready access to us. This will eliminate unproductive "down time" at the Company and minimize your concerns about our availability and time we would otherwise have to spend away from the Company. CONFIDENTIALITY - --------------- JA&A agrees to keep confidential all information obtained from the Company. JA&A agrees that neither it nor its directors, officers, principals, employees, agents or attorneys will disclose to any other person or entity, or use for any purpose other than specified herein, any information pertaining the Company or any affiliate thereof which is either non-public, confidential or proprietary in nature ("Information") which it obtains or is given access to during the performance of the services provided hereunder. JA&A also agrees that only those if its directors, officers, principals, employees, agents and attorneys who have a need-to-know to perform the services contracted herein and are under an obligation to maintain the confidentiality of the Information will be given access to the Information. JA&A may make reasonable disclosures of Information to third parties in connection with their performance of their obligations and assignments hereunder. In addition, JA&A will have the right to disclose to others in the normal course of business its involvement with the Company provided that such disclosure could not reasonably be expected to prejudice the Company in any way. Information includes data, plans, reports, schedules, drawings, accounts, records, calculations, specifications, flow sheets, computer programs, source or object codes, results, models, or any work product relating to the business of the Company, its subsidiaries, distributors, affiliates, vendors, customers, employees, contractors and consultants. The Company acknowledges that all advice (written or oral) given by JA&A to the Company in connection with JA&A's engagement is intended solely for the benefit and use of the Company (limited to its management) in considering the transactions to which Mr. Christopher L. Schaller July 31, 1995 Page 5 it relates. The Company agrees that no such advice shall be used for any other purpose or reproduced, disseminated, quoted or referred to at any time in any manner of for any purpose other than accomplishing the tasks and programs referred to herein or in discussions with the Company's lenders or debt holders, unless mutually agreed and expected as required by law. This agreement will survive the termination of the engagement. FRAMEWORK OF THE ENGAGEMENT - --------------------------- The Company acknowledges that it is hiring JA&A purely to assist and advise the Company in business planning and restructuring. JA&A's engagement shall not constitute an audit, review or compilation, or any other type of financial statement reporting engagement that is subject to the rules of the AICPA or other such state and national professional bodies. INDEMNIFICATION - --------------- In engagements of this nature, it is our practice to receive indemnification. Accordingly, in consideration of our agreement to act on your behalf in connection with this engagement, you agree to indemnify and hold harmless JA&A, its affiliated companies, and each of JA&A's and such affiliated companies' respective directors, officers, agents, employees and controlling persons (each of the foregoing, including JA&A, being hereinafter referred to as an "Indemnified Person") from and against any and all claims, demands, causes of actions, liabilities, damages, losses, expenses (including reasonable expenses and disbursements of counsel) and value of time of JA&A personnel (at such hourly rates as may be in effect when such time commitment is required) incurred in connection with investigating, preparing for or defending claims, actions (including shareholder derivative actions), proceedings or investigations (whether formal or informal) threats thereof (all of the foregoing being hereinafter referred to as a "Liability") arising out of, based upon or relating in any way to the engagement or any Indemnified Person's role therein, provided, however, that the Company shall not be liable under this paragraph for a Liability to the extent that it is finally judicially determined that such Liability resulted primarily from the willful misconduct or bad faith of the Indemnified Person seeking indemnification hereunder. The foregoing rights of the Indemnified Persons shall be in addition to any rights that JA&A or any other Indemnified Person may have at common law or otherwise, including without limitation any right to indemnification under any by-law or otherwise, insurance or contribution, and shall remain in full force and effect following the completion or any termination of the engagement. Mr. Christopher L. Schaller July 31, 1995 Page 6 The Company shall, at its own expense, defend any action or proceeding, and take appropriate similar action with respect to any investigation, in any case whether groundless or not, which may be brought against or involving any Indemnified Person. TERMINATION AND SURVIVAL - ------------------------ The agreement may be terminated at any time by written notice by one party to the other; provided, however, that notwithstanding such termination JA&A will be entitled to any fees and expenses due under the provisions of the agreement. Such payment obligation shall inure to the benefit of any successor or assignee of JA&A. The obligations of the parties under the Indemnification and Confidentiality sections of this agreement shall survive the termination of the agreement as well as the other sections of this agreement which expressly provide that they shall survive termination of this agreement. GOVERNING LAW - ------------- This letter agreement is governed by and construed in accordance with the laws of the State of New York with respect to contracts made and to be performed entirely therein and without regard to choice of law or principles thereof. CONFLICTS - --------- We know of no fact or situation which would represent a conflict of interest for us with regard to the Company. SEVERABILITY - ------------ If any portion of the letter agreement shall be determined to be invalid or unenforceable, we each agree that the remainder shall be valid and enforceable to the maximum extent possible. ENTIRE AGREEMENT - ---------------- All of the above contains the entire understanding of the parties relating to the services to be rendered by JA&A and may not be amended or modified in any respect except in writing signed by the parties. Mr. Christopher L. Schaller July 31, 1995 Page 7 NOTICES - ------- All notices required or permitted to be delivered under this letter agreement shall be sent, if to us, to the address set forth at the head of this letter, to the attention of Mr. Melvin R. Christiansen, and if to you, to the address for you set forth above, to the attention of your General Counsel, or to such other name or address as may be given in writing to other party. All notices under the agreement shall be sufficient if delivered by facsimile or overnight mail. Any notice shall be deemed to be given only upon actual receipt. If the Company becomes involved in any proceeding under the Bankruptcy Code, it agrees to petition the Court to affirm this agreement as part of its first day motions. If these terms meet with your approval, please sign and return the enclosed copy of this proposal and wire transfer the amount to establish the retainer. We look forward to working with you. Sincerely yours, JAY ALIX & ASSOCIATES /s/ Robert N. Dangremond Robert N. Dangremond Principal Acknowledged and Agreed to: FORSTMANN & COMPANY, INC. By: /s/ Christopher L. Schaller --------------------------- Its: President, CEO Dated: 8/1/95 EX-10.10(L) 6 LETTER OF ACKNOWLEDGE. AND AGREE (DATED 8/18/95) Exhibit 10.10(l) August 18, 1995 Mr. Peter Libassi Chairman of the Board Forstmann & Company, Inc. 1155 Avenue of the Americas New York, NY 10036-2711 RE: Agreement for Financial Consulting Services Dear Mr. Libassi: This letter outlines the understanding between Jay Alix & Associates, a Michigan corporation ("JA&A") and Forstmann & Company, Inc. (the "Company") of the objectives, tasks, work product and fees for the engagement of JA&A to provide financial consulting services to the Company. JA&A hereby incorporates by reference the terms and conditions of the engagement letter between JA&A and the Company, dated July 31, 1995, a copy of which is attached, subject to the additions or modifications reflected herein. By your agreement to this letter, you hereby affirm the terms reflected in the July 31, 1995 letter. OBJECTIVES - ---------- In addition to the objectives previously stated, JA&A will: . Assume the position of interim Chief Executive Officer and Board Member of the Company. TIMING, FEES AND EXPENSES - ------------------------- The first paragraph on page 4 is replaced with: The fee for the services provided by Robert N. Dangremond as interim CEO and Board Member will be billed at a flat rate of $75,000 per month. Any assistance requested by the Company that falls outside the scope of our engagement or assistance that is required due to the workload will be approved by you in advance and will be billed at our hourly rates which are: Principals $ 430 Senior Associates $265 - $300 Associates $215 - $250 Accountants and Consultants $170 - $200 Mr. Peter Libassi August 18, 1995 Page 2 DIRECTORS' AND OFFICERS' INSURANCE - ---------------------------------- In addition to the Indemnification provided for, since the Company has named Robert N. Dangremond as an officer and director of the Company, the Company will specifically include and cover Robert N. Dangremond under the Company's policy for Directors' and Officers' Insurance. The face amount of such policy must be at least $5 million. In the event the Company is unable to include Robert N. Dangremond under the Company's policy, JA&A reserves the right to preclude Robert N. Dangremond's service as an officer or director of the Company. If these terms meet with your approval, please sign and return the enclosed copy of this letter. Sincerely yours, JAY ALIX & ASSOCIATES /s/ Robert N. Dangremond Robert N. Dangremond Principal Acknowledged and Agreed to: BOARD OF DIRECTORS FORSTMANN & COMPANY, INC. By: /s/ F. Peter Libassi Its: Chairman of the Board Date: August 29, 1995 Attachment EX-11.1 7 COMPUTATION OF PER SHARE EARNINGS Exhibit 11.1 Forstmann & Company, Inc. Computation of Per Share Earnings Fifty-Two Weeks Ended October 29, 1995 ---------------- Loss applicable to common shareholders $(26,701,000) ============= Average common shares and common share equivalents outstanding: Average common shares outstanding 5,618,799 Add average common share equivalents - - ------------ options to purchase common shares, net Average common shares and common share equivalents outstanding 5,618,799 ============ Loss per common share and common share equivalent $ (4.75) ============ NOTE: The information provided in this exhibit is presented in accordance with Regulation S-K, Item 601(b)(11), while loss per common share on the Company's statements of operations is presented in accordance with Accounting Principles Board ("APB") Opinion No. 15. This information is not required by Footnote 2 to paragraph 14 of APB Opinion No. 15 as there is no dilution. EX-23.1 8 CONSNET OF DELOITTE & TOUCHE LLP Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33- 38520 of Forstmann & Company, Inc. on Form S-8 of our reports dated January 26, 1996 (which express an unqualified opinion and include an explanatory paragraph relating to uncertainties as to the Company's ability to continue as a going concern), appearing in this Annual Report on Form 10-K of Forstmann & Company, Inc. for the year ended October 29, 1995. /S/ Deloitte & Touche LLP - ---------------------------- Atlanta, Georgia February 12, 1996 EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Forstman & Company Inc.'s condensed financial statements for the fifty-two weeks ended October 29, 1995 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS OCT-29-1995 OCT-31-1994 OCT-29-1995 52 0 46,289 2,991 69,470 116,475 78,784 32,671 198,203 71,820 25,302 2,655 0 6 7,661 198,203 222,217 222,217 195,894 195,894 23,310 2,879 19,569 (19,817) (4,250) (15,567) 0 10,904 0 (26,701) 4.75 4.75
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