-----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, Gc1ghvNcl0gVWU9dWWE+rhEeNhft7X4gSHGKkBdGrIDPy9KcRRHaQjbH5LQV+9sk B86z5gs9wPUzdzEWfbJnXg== 0001047469-99-022554.txt : 19990624 0001047469-99-022554.hdr.sgml : 19990624 ACCESSION NUMBER: 0001047469-99-022554 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990227 FILED AS OF DATE: 19990528 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRAUNS FASHIONS CORP CENTRAL INDEX KEY: 0000883943 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 061195422 STATE OF INCORPORATION: DE FISCAL YEAR END: 0302 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19972 FILM NUMBER: 99637138 BUSINESS ADDRESS: STREET 1: 2400 XENIUM LANE NORTH CITY: PLYMOUTH STATE: MN ZIP: 55441-3626 BUSINESS PHONE: 6125515000 MAIL ADDRESS: STREET 1: 2400 XENIUM LN NORTH CITY: PLYMOUTH STATE: MN ZIP: 55441-3626 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) -------------------------- FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 27, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________. COMMISSION FILE NO. 0-19972 BRAUN'S FASHIONS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 06 - 1195422 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 2400 XENIUM LANE NORTH, PLYMOUTH, MINNESOTA 55441 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (612) 551-5000 ------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share 12% Senior Notes due 2005 ------------------------- 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/ Indicate by check mark whether the registrant (1) has filed all reports required 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 whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES /X/ NO -------- -------- As of May 14, 1999, 4,353,894 shares of common stock were outstanding and the aggregate value of the common stock held by non-affiliates of the Registrant on that date was approximately $45,701,790 based upon the last reported sale price of the common stock at that date by The Nasdaq Stock Market. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held July 28, 1999 (the "Proxy Statement") are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BRAUN'S FASHIONS CORPORATION 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business..................................................................................1 Item 2. Properties................................................................................4 Item 3. Legal Proceedings.........................................................................5 Item 4. Submission of Matters to a Vote of Security Holders.......................................5 Item 4a. Executive Officers of the Registrant......................................................6 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................7 Item 6. Selected Consolidated Financial Data......................................................8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................................................9 Item 7a. Quantitative and Qualitative Disclosures About Market Risk...............................14 Item 8. Consolidated Financial Statements........................................................15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....33 PART III Item 10. Directors and Executive Officers of the Registrant.......................................33 Item 11. Executive Compensation...................................................................33 Item 12. Security Ownership of Certain Beneficial Owners and Management...........................33 Item 13. Certain Relationships and Related Transactions...........................................34 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................34 Signatures...............................................................................36
PART I ITEM 1. BUSINESS GENERAL Braun's Fashions Corporation ("BFC"), is a Minneapolis-based regional retailer of women's specialty apparel which operates through its wholly owned subsidiary, Braun's Fashions, Inc. ("BFI") (collectively referred to as "Braun's" or the "Company"). As of May 14, 1999, the Company operated a chain of 199 stores in 22 states, primarily in the Midwest. Most stores are mall based and average approximately 3,400 square feet. BUSINESS STRATEGY The Company's business strategy is to provide its target customer with high quality, moderately-priced, coordinated ensembles that are interchangeable between work and leisure activities; to differentiate itself from its competitors through its focused merchandising approach, including an emphasis on private label merchandise manufactured exclusively for the Company under its proprietary brand name, Christopher & Banks; to utilize management information systems to effectively manage its merchandise inventories; and to expand its store network and maintain updated, attractive store facilities. The key elements of the Company's strategy are as follows: - Focus on a target customer and meet her needs - Deliver a well defined merchandising approach - Use information systems to drive decision making and maintain disciplined inventory management - Expand store base in existing and new markets FOCUS ON A TARGET CUSTOMER AND MEET HER NEEDS. Braun's target customer is a 35 to 55 year old working woman with an annual family income of $35,000 to $75,000. Management believes this target customer leads a busy life, shops in regional malls and purchases mainstream popular fashion which is suitable for both work and leisure activities. The Company utilizes point-of-sale inventory tracking to analyze the buying patterns of its customers. Braun's also uses a product testing program to identify consumer demand for clothing styles, patterns and colors. This test and reorder philosophy gives the Company the ability to offer proven best sellers throughout a selling season. The Company's objective is to be recognized by its target customer as offering quality fashion at moderate prices. Braun's differentiates itself from other fashion retailers through offering clothing that is characterized by a novelty flair with distinctive patterns, textures and colors. DELIVER A WELL DEFINED MERCHANDISING APPROACH. In fiscal 1999, Braun's lines of merchandise included four principal categories: sportswear, sweaters, dresses and accessories. The following table sets forth the approximate percentage of net sales attributable to each merchandise group for the past three fiscal years:
PERCENTAGE OF NET SALES ---------------------------- MERCHANDISE GROUP 1999 1998 1997 ----------------- ------ ------ ------ Sportswear 53.6% 57.7% 59.5% Sweaters 29.3 26.5 21.5 Dresses 12.1 10.1 10.9 Accessories 5.0 5.7 5.3 Coats and jackets -- -- 2.8 ------ ------ ------ Total 100.0% 100.0% 100.0% ------ ------ ------ ------ ------ ------
The Company has developed a variety of strategies and programs to distinguish itself from its competitors and build customer loyalty. Major elements of its merchandising strategy include: 1 STRONG VISUAL MERCHANDISE PRESENTATION. The Company's stores rely heavily on attracting mall traffic through stimulating visual presentation. Braun's uses carefully designed front-of-store displays to draw customers into the store. The visual program emphasizes attractive windows and an open store-entrance area with bright lighting. To keep its fashions fresh, Braun's introduces a new "color story" every 10 to 12 weeks. Each month a new floorset is completed and new fashion is displayed in the front of the stores, with older or less-actively selling merchandise moved back for promotion and liquidation in the current season. DIRECT IMPORT PROGRAM. During fiscal 1999, the Company directly imported approximately 53% of its total merchandise purchases. The Company anticipates that direct imports, as a percent of total purchases, will be approximately the same in fiscal 2000. Management believes that direct imports allow the Company to obtain high quality merchandise at a lower cost. This in turn provides the Company with the ability to sell garments, comparable in quality and design to those sold in department stores, at a lower price. PRIVATE LABEL CLOTHING -- CHRISTOPHER & BANKS. The use of private label clothing produced exclusively for Braun's creates a unique store identity and establishes a competitive "point of difference". The Company's design staff, guided by its merchants, continually develops new designs for the Company's private label merchandise. For its private label clothing, the Company uses its proprietary brand name, Christopher & Banks. The Company estimates that sales of Braun's private label clothing comprised approximately 87% of its sales in fiscal 1999 compared to 80% in fiscal 1998. The Company anticipates that private label clothing will account for approximately 90% percent of its sales in fiscal 2000. In February 1999, the Company announced that all of its new stores will adopt the name Christopher & Banks, thereby identifying the store name with the Company's brand name merchandise. Based on the operating results at the new stores the Company will also consider changing the name of other existing Braun's stores to Christopher & Banks. KEY VENDOR RELATIONSHIPS. The Company's ongoing relationships with key vendors has enabled it to expand its private label offerings in order to project a merchandising point of difference and to execute a timely product testing and reorder program designed to gauge consumer demand and maximize sales. QUALITY ASSURANCE. The Company uses a variety of quality control measures including color, fabric and construction analysis and sizing verification, to ensure that all merchandise meets the Company's quality standards. LOYALTY BUILDING PROGRAMS. Braun's has frequent shopper and preferred customer programs, which the Company believes encourage repeat sales and customer loyalty. Under the frequent shopper program, customers, after reaching certain cumulative purchase levels, are awarded a coupon redeemable toward future purchases. The customer automatically becomes a preferred customer after receiving the first frequent shopper award coupon. The preferred customer program offers additional customer benefits including invitations to private sales, informational phone calls and notices on upcoming sales. As of February 27, 1999, there were approximately 225,000 active frequent customers and 55,000 active preferred customers. PRIVATE LABEL CREDIT CARD. The Company offers its customers a private label credit card. In fiscal 1999, sales on the Company's card accounted for approximately 8% of the Company's total sales. The Company's card is offered through a third party finance company with no recourse or credit risk to the Company. USE INFORMATION SYSTEMS TO DRIVE DECISION MAKING AND MAINTAIN DISCIPLINED INVENTORY MANAGEMENT. In February 1999, the Company completed the implementation of its new merchandise and financial management information systems. These systems are updated with daily information from the Company's point-of-sale registers. Management believes these new systems will provide it with the ability to enhance its merchandise planning, sales tracking and trend analysis. Management anticipates the Company's new merchandise information systems will also provide improved distribution center processing and enhanced planning and allocation features allowing the Company to more efficiently manage its merchandise assortments at its stores. The Company also utilizes a cost-effective program to efficiently deliver merchandise on a daily basis from the Company's distribution center to all stores. As a result of these programs, inventories can be maintained at an efficient level throughout the year, which ensures a consistent flow of fresh merchandise to the stores. Inventory turnover increased from 3.7 turns in fiscal 1998 to 3.9 turns in fiscal 1999. 2 EXPAND STORE BASE IN EXISTING AND NEW MARKETS. The Company plans to pursue a strategy of controlled expansion with approximately 15% annual growth in net store count. The Company plans to expand its store base by 30 stores in fiscal 2000. All new stores will be opened under the name Christopher & Banks, thereby identifying the store name with the Company's proprietary brand name. New stores will be opened in regional malls in states that already have a market presence or in adjoining states. Additionally, based on the operating results of the new stores, the Company may change the name of other existing Braun's stores to Christopher & Banks. PROPERTIES The Company has developed an updated store design which has been used for new stores and remodeled stores since the beginning of fiscal 1998. The Company plans to continue to use this design for its new stores and remodels as leases expire. This store prototype highlights visual merchandise presentation and improves the customer's shopping experience through enhanced decor, bright lighting and an open store layout. The Company typically effects a major or a minor remodeling of a store following renewal of the store's lease. However, during the interim, improvements such as carpet replacement, painting and other improvements are made as needed. The Company completed five major store remodelings in each of fiscal 1999, 1998 and 1997. The Company plans to complete nine major store remodelings in fiscal 2000. STORE OPERATIONS The Company operates its stores in a manner that encourages operational management participation in planning, execution and evaluation of the Company's business and operational policies at all functional levels. Each store has a manager who is responsible for day-to-day operations of the store. Store managers complete a management training program and are eligible for Company incentive awards based upon store sales volume. PURCHASING/SOURCES OF SUPPLY Direct imports accounted for approximately 53% of total purchases in fiscal 1999. The Company purchased its merchandise from approximately 200 vendors in fiscal 1999. In fiscal 1999, the Company's ten largest vendors represented approximately 45% of the Company's purchases. Further, purchases from the Company's largest overseas supplier accounted for 20% of total purchases in fiscal 1999, compared to 18% in fiscal 1998. The Company's main suppliers are established, quality apparel manufacturers who have worked with the Company over many years and are familiar with the Company's merchandising approach. The Company believes it has good working relationships with its vendors. A disruption in supply from vendors could have a negative impact on the Company's business. The Company intends to directly import approximately the same percentage of purchases in fiscal 2000 as in fiscal 1999. ADVERTISING AND PROMOTION The Company believes that most of its locations depend on mall traffic. To attract customers into its stores, the Company emphasizes attractive front-of-store displays and an open, clean in-store visual presentation. The merchandise presentation is further enhanced by the use of photographic visual merchandise signage. Additionally, the Company uses direct mail in connection with the frequent shopper and preferred customer programs and maintains an internet website at www.braunsfashions.com and www.christopherandbanks.com. SEASONALITY The Company's sales show seasonal variation as sales in the third and fourth quarters, which include the fall and holiday seasons, generally have been higher than sales in the first and second quarters. Sales generated during the fall and holiday seasons have a significant impact on the Company's annual results of operations. COMPETITION The women's retail apparel business is highly competitive. The Company believes that the principal bases upon which it competes are merchandise selection, fashion, quality, store location, store environment and service. The Company competes with a broad range of national and regional retail chains that sell similar merchandise, including department stores and specialty stores. Many of these competitors are larger and have greater financial resources than the Company. The Company believes that its focused merchandise selection, strong visual presentation, product quality, loyalty building programs and customer service enable the Company to compete effectively. 3 EMPLOYEES At May 14, 1999, the Company had approximately 450 full-time and 1,300 part-time employees. The number of part-time employees increases during peak selling periods. None of the Company's employees are represented by a labor union or is subject to a collective bargaining agreement. The Company has never experienced a work stoppage and considers its relationship with its employees to be satisfactory. TRADEMARKS AND SERVICE MARKS The Company is the owner of the federally registered trademark and service mark "BRAUNS" with respect to articles of apparel and "CHRISTOPHER & BANKS", which is its predominant private label. The Company also has common law rights in other trademarks and service marks which it considers to be of lesser importance. The Company believes its primary marks are important to its business and are recognized in the women's retail apparel industry. Accordingly, the Company intends to maintain its marks and the related registrations. The Company is not aware of any pending claims of infringement or other challenges to the Company's right to use its marks in the United States. ITEM 2. PROPERTIES STORE LOCATIONS The Company's stores are located primarily in regional shopping malls in mid-sized cities and suburban areas, which offer high-traffic by potential walk-in customers. The typical store is in a visible and accessible location in an enclosed regional mall that has numerous specialty stores and two or more general merchandise chains or department stores as anchor tenants. Fewer than 10% of the Company's stores are located in strip shopping centers. The Company attempts to locate its stores strategically within the mall or shopping center to attract walk-in customers through stimulating visual displays. The average store size is approximately 3,400 square feet, of which the Company estimates an average of approximately 85% is selling space. At May 14, 1999, the Company operated 199 stores in the following states:
Number Number State of Stores State of Stores ----- --------- ----- --------- Minnesota..................... 39 Montana........................ 6 Iowa.......................... 24 South Dakota................... 6 Wisconsin..................... 23 Colorado....................... 5 Michigan...................... 17 Idaho.......................... 5 Illinois...................... 10 Indiana........................ 4 Kansas........................ 8 New York....................... 4 Nebraska...................... 7 Pennsylvania................... 4 North Dakota.................. 7 Arkansas....................... 3 Ohio.......................... 7 Oklahoma....................... 3 Utah.......................... 7 Washington..................... 2 Missouri...................... 6 Wyoming........................ 2
STORE LEASES All of the Company's stores are leased. Management believes that the current commercial real estate market, combined with the Company's relationship with nationally-recognized developers and established operating history makes the Company an attractive tenant when negotiating terms with shopping center developers or owners. 4 Lease terms typically are for 10 years and may contain a renewal option. Leases generally provide for a fixed minimum rental and a percentage rent if sales are above a specified level. This percentage override is typically 5%. The following table, which covers all of the stores operated by the Company at May 14, 1999, indicates the number of leases expiring during the fiscal year indicated and the number of such leases with renewal options.
Number of Number with Fiscal Year Leases Expiring Renewal Options ----------- --------------- --------------- 2000....................................... 26 3 2001....................................... 12 2 2002....................................... 18 4 2003....................................... 24 2 2004....................................... 31 5 2005 - 2009................................ 80 4 2010 - 2014................................ 8 --
The Company currently plans to negotiate new leases in most of the locations which do not have renewal options. HEADQUARTERS FACILITY The Company occupies a 210,000 square foot headquarters and merchandise distribution center facility located in Plymouth, Minnesota. Of this facility, the Company uses approximately 95,000 square feet for its own office and distribution facility and subleases the balance to third parties. The Company leases this facility under an agreement which expires on June 14, 2005. Under the agreement, the Company is required to pay minimum rent of approximately $688,000 per year through June 14, 1999, and $746,000 per year from June 15, 1999, until the end of the lease term. The Company is also required to reimburse the landlord for property taxes and pay for utilities and other operating costs of the facility. The Company subleases 80,000 square feet of warehouse space in its distribution center to a third party under an agreement which commenced October 1, 1997. Under the agreement, the Company received minimum rent of $14,667 per month from October 1, 1997 through August 31, 1998; and will receive $21,667 per month from September 1, 1998 through August 31, 1999 and $24,667 per month from September 1, 1999 through August 31, 2000. The subtenant may extend the lease for two option periods. Rent for the first three year option period would be $26,480 per month. Rent for the second option period of one year and nine months would be $29,790 per month. The subtenant is also required to reimburse the Company for property taxes, utilities and other operating costs of the subleased portion of the facility. Under a second sublease, effective September 1, 1997 and expiring on May 31, 2005, the Company subleased 33,000 square feet of warehouse and office space to a third party. Under the agreement the Company will receive annual minimum rent of $132,000. The subtenant is also required to reimburse the Company for property taxes, utilities and other operating costs of the subleased portion of the facility. The Company believes its headquarters and merchandise distribution center facility to be adequate to accomodate the expansion plans of the Company for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings pending against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1999. 5 ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the executive officers of the Company as of May 14, 1999.
NAME AGE POSITIONS AND OFFICES - -------------------- ------- ---------------------------------------------------------- William J. Prange 45 President and Chief Executive Officer Joseph E. Pennington 53 Executive Vice President and Chief Operating Officer Ralph C. Neal 52 Executive Vice President/Store Operations Kathryn R. Gangstee 49 Senior Vice President and General Merchandising Manager Andrew K. Moller 40 Senior Vice President and Chief Financial Officer Nancy C. Scott 50 Vice President of Real Estate and Construction Kim M. Westerham 41 Vice President of Merchandise Planning and Distribution Lanette S. Menear 47 Vice President and Divisional Merchandising Manager
WILLIAM J. PRANGE has served as President and Chief Executive Officer since March 1998. From July 1997 through February 1998, Mr. Prange was President and Chief Merchandising Officer. From April 1995 through June 1997, he was Senior Vice President and General Merchandising Manager. From April 1994 through March 1995, Mr. Prange was Vice President and General Merchandising Manager. From 1989 to 1994, he was President and General Merchandise Manager of id Stores. From 1987 to 1989, he was Vice President and General Merchandise Manager of id stores. From 1985 to 1987, Mr. Prange was Vice President and General Merchandise Manager of Prange Department Stores. JOSEPH E. PENNINGTON has served as Executive Vice President and Chief Operating Officer since March 1998. Mr. Pennington was Senior Vice President of Merchandise Planning and Distribution from July 1997 through February 1998. From February 1997 through June 1997, Mr. Pennington was Vice President of Merchandise Planning and Distribution and Management Information Systems. From April 1996 through January 1997, Mr. Pennington was self-employed, providing consulting services to retail companies including Braun's. Mr. Pennington was President and Chief Executive Officer of American Specialty Stores (dba the id) from June 1994 through March 1996. From October 1993 through May 1994, Mr. Pennington was Senior Vice President of Merchandise and Operations for the id, and from January 1990 through October 1993, Mr. Pennington was Vice President of Operations. From 1976 through 1989, Mr. Pennington held various positions with Foxmoor Stores, including Vice President of Planning from 1984 through 1989. RALPH C. NEAL has served as Executive Vice President/Store Operations since March 1998. Mr. Neal was Senior Vice President of Store Operations from July 1997 through February 1998. From September 1996 through June 1997, Mr. Neal was Vice President of Store Operations. From 1989 to 1996, Mr. Neal was Vice President of Store Operations for the id stores. From 1986 to 1989, Mr. Neal was a Senior Vice President of Brooks Fashions. From 1982 to 1986, Mr. Neal was Vice President of Operations for the id stores. Prior to 1982 Mr. Neal served in various managerial capacities for other women's apparel retailers. KATHRYN R. GANGSTEE has served as Senior Vice President and General Merchandise Manager since March 1998. From September 1997 through February 1998, Ms. Gangstee was Vice President and Divisional Merchandise Manager. Ms. Gangstee was a Divisional Merchandise Manager from March 1986 through August 1997. From January 1984 through February 1986, Ms. Gangstee held other positions with the Company. ANDREW K. MOLLER has served as Senior Vice President and Chief Financial Officer since March 1999. From March 1998 through February 1999, Mr. Moller was Vice President Finance and Chief Financial Officer. Mr. Moller was Controller from January 1995 through February 1998. From September 1992 through December 1994, Mr. Moller was Assistant Controller. Prior to joining the Company, Mr. Moller held managerial accounting positions with Ladbroke Racing Canterbury, Inc., a subsidiary of Ladbroke Group and with B Dalton Bookstores. Mr. Moller also has previous experience with Arthur Andersen LLP and is a Certified Public Accountant. 6 NANCY C. SCOTT has served as Vice President of Real Estate and Construction since March 1998. From May 1997 through February 1998, Ms. Scott was a Regional Director of Leasing for Pacific Sunwear of California. Ms. Scott was employed by Frederick's of Hollywood Stores, Inc. from March 1987 through April 1997. She held the position of Vice President Real Estate/Leasing from February 1989 to April 1997. From 1979 through 1986, Ms. Scott held leasing positions with other companies. KIM M. WESTERHAM has served as Vice President of Merchandise Planning and Distribution since March 1999. Ms. Westerham was Director of Merchandise Planning and Distribution from September 1993 through February 1999. From March 1984 through August 1993 Ms. Westerham was a Buyer with the Company. LANNETTE S. MENEAR has served as Vice President and Divisional Merchandising Manager since March 1999. Ms. Menear was a Divisional Merchandising Manager from April 1998 to February 1999 and a Buyer and Product Development Manager with the Company from August 1991 to March 1998. Prior to joining the Company Ms. Menear held various management positions with A.J. Brandon, a women's apparel manufacturer, Donaldson's Department Stores and Dayton-Hudson Department Stores. Messrs. Prange, Pennington and Neal were all previously affiliated with American Specialty Stores (dba the id) which filed a voluntary petition for Chapter 11 Bankruptcy Court protection in September 1994. American Specialty Stores plan of reorganization was confirmed by the Bankruptcy Court in September 1995. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock has traded on The Nasdaq Stock Market under the symbol "BFCI" since March 31, 1992. Prior to that date there was no public market for the Company's common stock. The quarterly high and low stock sales price information for the Company's common stock for fiscal 1999 and fiscal 1998 are presented in Note 10 of the Consolidated Financial Statements and are included herein. The number of holders of record of the Company's common stock as of May 14, 1999 was 77. Based upon information received from the record holders, the Company believes there are more than 1,200 beneficial owners. The last reported sales price of the Company's common stock on May 14, 1999 was $11.75. The Company has never paid dividends on its common stock. The Company presently intends to retain all future earnings, if any, for the operation of its business and does not expect to pay cash dividends on its common stock in the foreseeable future. Currently, dividends are restricted by the terms of the Company's revolving credit facility. (See Item 7 of this Form 10-K.) Any future determination as to the payment of dividends on common stock will depend upon future earnings, results of operations, capital requirements, compliance with financial covenants, the financial condition of the Company and any other factors the Board of Directors may consider. In fiscal 1999 and fiscal 1998, the Company did not sell any equity securities in a transaction that was exempt from the registration provisions of the Securities Act of 1933, as amended. During fiscal 1997, in connection with the Company's Chapter 11 proceedings and in accordance with its Second Amended Plan of Reorganization (the "Plan"), the Company issued an aggregate of 617,516 shares of common stock in the Company and $10,300,200 principal face amount of Senior Notes to holders of certain claims. By issuing these securities the Company discharged $13,201,075 of claims pursuant to the Plan. In connection with the distribution of securities, the Company relied upon the exemption provided under Section 3(a) (7) of the Securities Act of 1933 as amended. During fiscal 1999, the Company purchased 368,000 shares of the Company's common stock at a total cost, including commissions, of $3,000,000. The common stock purchased will be held in treasury and reduced the number of shares of the Company's outstanding common stock by approximately 8%. 7 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial data has been derived from the audited consolidated financial statements of the Company and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes appearing elsewhere herein.
FISCAL YEAR ENDED ---------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SELECTED OPERATING DATA) FEB. 27, FEB. 28, MARCH 1, MARCH 2, FEB. 25, 1999 1998 1997(1) 1996 1995 --------- --------- --------- --------- --------- INCOME STATEMENT DATA: Net sales................................. $110,142 $ 99,536 $ 95,946 $ 97,296 $ 93,961 Cost of sales(2).......................... 71,488 65,111 65,445 70,386 68,108 --------- --------- --------- --------- --------- Gross profit.............................. 38,654 34,425 30,501 26,910 25,853 Selling, general and administrative expenses................ 25,621 23,390 22,854 24,897 22,565 Depreciation and amortization............. 2,679 2,534 2,649 3,154 2,690 Reorganization expense(3)................. -- -- 7,830 -- -- Nonrecurring expense(4)................... -- 775 -- -- -- --------- --------- --------- --------- --------- Operating income (loss)................... 10,354 7,726 (2,832) (1,141) 598 Interest, net............................. 282 691 684 1,388 993 --------- --------- --------- --------- --------- Income (loss) before income taxes......... 10,072 7,035 (3,516) (2,529) (395) Income tax provision (benefit)(5)......... 3,880 2,750 (2,895) 929 (150) --------- --------- --------- --------- --------- Income (loss) before extraordinary gain... 6,192 4,285 (621) (3,458) (245) Extraordinary gain(6)..................... 35 116 -- -- -- --------- --------- --------- --------- --------- Net income (loss)......................... $ 6,227 $ 4,401 $ (621) $ (3,458) $ (245) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Basic earnings per common share: Income (loss) before extraordinary gain.................... $ 1.36 $ 0.96 $ (0.15) $ (0.91) $ (0.06) Extraordinary gain(6)..................... 0.01 0.02 -- -- -- --------- --------- --------- --------- --------- Net income (loss)......................... $ 1.37 $ 0.98 $ (0.15) $ (0.91) $ (0.06) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average number of shares outstanding .......................... 4,541 4,482 4,029 3,792 3,785 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted earnings per common share: Income (loss) before extraordinary gain.................... $ 1.30 $ 0.89 $ (0.15) $ (0.91) $ (0.06) Extraordinary gain(6)..................... 0.01 0.02 -- -- -- --------- --------- --------- --------- --------- Net income (loss)......................... $ 1.31 $ 0.91 $ (0.15) $ (0.91) $ (0.06) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common and common equivalent shares outstanding......... 4,774 4,812 4,029 3,792 3,785 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(1) From July 2, 1996 until December 3, 1996, the Company operated its business as a debtor-in-possession under Chapter 11 of the United States Bankruptcy Code. The Company emerged from bankruptcy upon the confirmation of its Second Amended Plan of Reorganization. (2) Cost of sales includes cost of merchandise and buying expenses and store and distribution center occupancy costs, but excludes all depreciation and amortization. (3) In fiscal 1997, the Company recorded $7,830,000 of reorganization expense as a result of the Company's July 2, 1996 Chapter 11 bankruptcy filing. (4) In fiscal 1998, the Company recorded a one time pre-tax charge of $775,000, or $0.13 per diluted share, related to the implementation of its management succession plan. The majority of this expense was non-cash, related to accelerated vesting of previously issued options. (5) In fiscal 1996, the Company recorded a valuation allowance of $1.8 million, or $0.47 per share, equal to the full amount of its deferred tax assets, due to the uncertainty of realizing the value of these assets in future years. In fiscal 1997, the Company reversed the valuation allowance as improved operating performance made the future realization of these assets more likely than not. (6) In fiscal 1999 and 1998, the Company recorded extraordinary gains of $35,000 and $116,000 on the purchase at a discount from par of $4,676,000 and $1,033,000 principal face amount of its 12% Senior Notes due 2005, respectively. 8
FISCAL YEAR ENDED --------------------------------------------------------------------- FEB. 27, FEB. 28, MARCH 1, MARCH 2, FEB. 25, 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- SELECTED OPERATING DATA Same store sales increase (decrease)(1)... 3% 10% 10% (3)% (9)% Stores at end of period................... 195 179 170 221 224 Net sales per gross square foot(1)........ $ 172 $ 166 $ 148 $ 129 $ 128 BALANCE SHEET DATA (AT END OF PERIOD IN THOUSANDS) Working capital(2)....................... $ 16,424 $ 19,172 $ 14,746 $ 248 $ 10,900 Total assets.............................. 40,060 40,590 34,637 32,304 36,179 Long-term debt(2)......................... 5,074 9,616 10,374 952 11,170 Stockholders' equity...................... 24,730 20,959 15,573 13,662 17,118
(1) Fiscal 1997 excludes stores closed as part of the Company's Chapter 11 reorganization. (2) In fiscal 1996, $10.4 million of long-term debt potentially subject to acceleration was reclassified to current liabilities. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company was incorporated in Delaware in 1986 to acquire BFI, which had operated as a family-owned business since 1956. As of May 14, 1999, the Company operated a chain of 199 stores in 22 states, primarily in the Midwest. In fiscal 1999, the Company opened 24 new stores and closed eight stores when their leases expired. In fiscal 2000, the Company intends to expand its store base by 30 stores. REORGANIZATION As a result of an extremely competitive retail environment and in response to the deteriorating liquidity position brought on by losses at approximately 50 of its store locations and to facilitate restructuring of its obligations, the Company filed for protection from its creditors under Chapter 11 of the United States Bankruptcy Code on July 2, 1996. Under the protection of Chapter 11, the Company managed its affairs and operated its business as a debtor-in-possession while developing a plan of reorganization. The Company filed its Second Amended Plan of Reorganization on October 22, 1996 (the "Plan"), along with its Disclosure Statement. The Plan was approved by 99.6% of the voting shareholders and by a majority of each class of the creditors that voted. On November 22, 1996, the Bankruptcy Court confirmed the Plan, which became effective on December 3, 1996. During the reorganization the Company rejected 50 unprofitable store leases, which in fiscal 1996 generated operating losses of $2.3 million and re-negotiated more favorable lease terms for an additional 46 stores. The Company disposed of its old inventory during liquidation sales and strengthened its inventory control thereby increasing inventory turnover from 3.2 turns in fiscal 1997 to 3.7 turns in fiscal 1998 and to 3.9 turns in fiscal 1999. Also, the Company reconfigured its distribution center and subsequently subleased an additional 33,000 square feet of space to a subtenant. Following the Chapter 11 filing, the Company significantly strengthened its management team through hiring highly qualified individuals in the key areas of store operations, merchandise planning and distribution and real estate. MANAGEMENT SUCCESSION In February 1998, the Company completed the implementation of its management succession plan. As a result of the plan, William J. Prange who has led the Company's merchandising operations since 1994, became President and Chief Executive Officer. He replaced Nicholas H. Cook, who will continue as Chairman of the Company's Board of Directors through August 31, 1999. The new management team also included the promotions of Joseph E. Pennington to Executive Vice President and Chief Operating Officer, Ralph C. Neal to Executive Vice President/Store Operations, Kathryn R. Gangstee to Senior Vice President and General Merchandising Manager and Andrew K. Moller to Vice President Finance and Chief Financial Officer. 9 The Company also hired Nancy C. Scott as Vice President Real Estate and Construction. Herbert D. Froemming, the Company's former Vice Chairman, elected to take early retirement. In connection with its management succession plan, in fiscal 1998 the Company recorded a one-time pre-tax charge of $775,000 or $0.13 per diluted share. The majority of this expense was non-cash, related to the accelerated vesting of previously issued options. RESULTS OF OPERATIONS The following table sets forth operating statement data expressed as a percentage of net sales for the last three fiscal years and should be read in conjunction with "Selected Consolidated Financial Data."
FISCAL YEAR ENDED -------------------------------------------- FEBRUARY 27, FEBRUARY 28, MARCH 1, 1999 1998 1997 ------------ ------------ ------------ Net sales........................................... 100.0% 100.0% 100.0% Cost of sales....................................... 64.9 65.4 68.2 ------------ ------------ ------------ Gross profit........................................ 35.1 34.6 31.8 Selling, general and administrative expenses........ 23.3 23.5 23.8 Depreciation and amortization....................... 2.4 2.6 2.8 Reorganization expense(1)........................... -- -- 8.2 Nonrecurring expense(2)............................. -- 0.8 -- ------------ ------------ ------------ Operating income (loss)............................. 9.4 7.7 (3.0) Interest, net....................................... 0.3 0.7 0.7 ------------ ------------ ------------ Income (loss) before income taxes................... 9.1 7.0 (3.7) Income tax provision (benefit)(3)................... 3.5 2.7 (3.1) ------------ ------------ ------------ Net income (loss) before extraordinary gain......... 5.6 4.3 (0.6) Extraordinary gain(4)............................... 0.1 0.1 -- ------------ ------------ ------------ Net income (loss)................................... 5.7% 4.4% (0.6)% ------------ ------------ ------------ ------------ ------------ ------------
(1) In fiscal 1997, the Company recorded $7,830,000 of reorganization expense as a result of the Company's July 2, 1996 Chapter 11 bankruptcy filing. (2) In fiscal 1998, the Company recorded a one time pre-tax charge of $775,000, or $0.13 per diluted share, related to the implementation of its management succession plan. The majority of this expense was non-cash, related to accelerated vesting of previously issued options. (3) In fiscal 1997, the Company reversed a $1.8 million valuation allowance against its deferred tax assets and recorded an additional $255,000 of deferred tax assets as improved operating performance made the future realization of these assets more likely than not. (4) In fiscal 1999 and 1998, the Company recorded extraordinary gains of $35,000 and $116,000 on the purchase at a discount from par of $4,676,000 and $1,033,000 principal face amount of its 12% Senior Notes due 2005, respectively. FISCAL 1999 COMPARED TO FISCAL 1998 NET SALES. Net sales for the fiscal year ended February 27, 1999, were $110.1 million, an increase of 11% from sales of $99.5 million in fiscal 1998. The increase in net sales was attributable to a 3% increase in same-store sales combined with an increase in the number of stores operated by the Company. The Company operated 195 stores at February 27, 1999 compared to 179 at February 28, 1998. GROSS PROFIT. Gross profit (which is net sales less cost of merchandise and buying and occupancy expenses) was $38.7 million or 35.1% of net sales in fiscal 1999, compared to $34.4 million or 34.6% of net sales in fiscal 1998. The percentage increase in gross profit was primarily due to more favorable merchandise pricing obtained from overseas vendors offset by a slight increase in occupancy costs as a percent of net sales. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $25.6 million or 23.3% of net sales in fiscal 1999 compared to $23.4 million or 23.5% of net sales in fiscal 1998. Selling, general and administrative expenses as a percent of net sales decreased modestly due to leveraging associated with increased sales. NONRECURRING EXPENSE. No nonrecurring expense was recorded in fiscal 1999. In fiscal 1998, the Company incurred a one-time pre-tax expense of $775,451, or $0.13 per diluted share, related to the implementation of its management succession plan. This expense was primarily non-cash, reflecting the accelerated vesting of previously issued stock options. OPERATING INCOME. As a result of the foregoing, operating income was $10.4 million or 9.4% of net sales in fiscal 1999, compared to operating income of $7.7 million or 7.7% of net sales in fiscal 1998. 10 INTEREST, NET. Net interest expense decreased to $282,508 in fiscal 1999 from $690,589 in fiscal 1998. This decrease was primarily due to a higher cash balance maintained during the year and a reduction in the Company's long-term debt. In fiscal 1999 the Company repurchased and retired approximately $4.7 million original principal face amount of its 12% Senior Notes due 2005. INCOME TAXES. Income tax expense in fiscal 1999 was $3.9 million with an effective tax rate of 38.5% compared to $2.7 million with an effective tax rate of 39.1% in fiscal 1998. EXTRAORDINARY GAIN. In fiscal 1999, the Company purchased approximately $4.7 million principal face amount of its 12% Senior Notes due 2005 at a discount from par. These purchases resulted in an extraordinary gain of $35,396 net of tax. In fiscal 1998, the Company purchased a total of approximately $1.0 million principal face amount of its 12% Senior Notes due 2005 at a discount from par. These purchases resulted in a gain of $115,872 net of tax. NET INCOME. Net income for fiscal 1999 was $6.2 million or 5.7% of net sales compared to net income of $4.4 million or 4.4% of net sales in fiscal 1998. FISCAL 1998 COMPARED TO FISCAL 1997 NET SALES. Net sales for the fiscal year ended February 28, 1998, were $99.5 million, an increase of 4% from sales of $95.9 million in fiscal 1997, which included sales from 50 stores closed during the reorganization. Same store sales increased 10%. GROSS PROFIT. Gross profit (which is net sales less cost of merchandise and buying and occupancy expenses) was $34.4 million or 34.6% of net sales in fiscal 1998, compared to $30.5 million or 31.8% of net sales in fiscal 1997. The percentage increase in gross profit was primarily due to closing 50 unprofitable stores whose gross margins were unusually low, particularly during the second quarter fiscal 1997 liquidation sales, and lower occupancy costs as a percent of net sales in the continuing stores. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $23.4 million or 23.5% of net sales in fiscal 1998 compared to $22.9 million or 23.8% of net sales in fiscal 1997. Selling, general and administrative expenses as a percent of net sales decreased due to leveraging associated with increased sales. REORGANIZATION EXPENSE. No reorganization expense was incurred in fiscal 1998. In fiscal 1997, the Company recorded approximately $7.8 million of reorganization expense. This reorganization expense included $2.6 million of professional fees and services; a $2.5 million loss on disposal of fixed assets; $1.0 million of lease rejection claims and $1.7 million in other bankruptcy related expenses. NONRECURRING EXPENSE. In fiscal 1998, the Company incurred a one-time pre-tax expense of $775,451 or $0.13 per diluted share related to the implementation of its management succession plan. This expense was primarily non-cash, reflecting the accelerated vesting of previously issued stock options. OPERATING INCOME. As a result of the foregoing, operating income was $7.7 million or 7.7% of net sales in fiscal 1998 compared to an operating loss of $2.8 million or 3.0% of net sales in fiscal 1997. INTEREST, NET. Net interest expense in fiscal 1998 increased to $690,589 from $684,330 in fiscal 1997. In fiscal 1997, the Company was not required to accrue interest on its prepetition debt after the July 2, 1996 bankruptcy filing. If the Company had been required to pay interest on its prepetition debt, contractual interest in fiscal 1997 would have totaled $1.2 million. The decrease in net interest expense is due to the Company's improved cash flow in fiscal 1998 which resulted in no advances on the line of credit and increased income from short-term investments. INCOME TAXES. Provision for income taxes was $2.7 million in fiscal 1998 with an effective tax rate of 39.1%. The Company had an income tax benefit of $2.9 million in fiscal 1997. In fiscal 1997, the Company reversed a $1.8 million valuation allowance against its deferred tax assets and recorded an additional $255,000 of deferred tax assets as improved operating performance made the future realization of these assets more likely then not. The remainder of the tax benefit resulted from recording an income tax refund receivable of $851,000 related to the Company's net operating loss carryback. EXTRAORDINARY GAIN. In fiscal 1998, the Company purchased a total of $1,033,000 principal face amount of its 12% Senior Notes due 2005 at a discount from par. These purchases resulted in a gain of $115,872 net of tax. NET INCOME (LOSS). Net income for fiscal 1998 was $4.4 million or 4.4% of net sales as compared to a net loss of $621,000 or 0.6% of net sales in fiscal 1997. 11 LIQUIDITY AND CAPITAL RESOURCES The Company's principal on-going cash requirements are to finance the construction of new stores and the remodeling of certain existing stores, to purchase merchandise inventories and to fund other working capital requirements. Merchandise purchases vary on a seasonal basis, peaking in the fall. As a result, the Company's cash requirements historically reach their peak in October and November. Conversely, cash balances reach their peak in January, after the holiday season is completed. Net cash generated by operating activities totaled $8.8 million in fiscal 1999. Cash was used to finance $4.8 million of capital expenditures to open 24 new stores, to substantially complete five major store remodelings and to install new computer software packages. The Company used cash to repurchase approximately $4.7 million principal face amount of its 12% Senior Notes. In addition, cash was also used to repurchase 368,000 shares of the Company's common stock at a total cost including commissions of $3.0 million. Primarily, as a result of the foregoing, cash decreased by $3.3 million in fiscal 1999. In fiscal 2000, the Company expects to spend approximately $8 million on capital expenditures to expand its store base by 30 stores, to complete nine major remodels and for other miscellaneous purchases for its headquarters facility. Management expects its cash on hand combined with cash flow from operations to be sufficient to meet its capital expenditure and working capital requirements and its other needs for liquidity during the upcoming year. In March 1999, the Company entered into an Amended and Restated Revolving Credit and Security agreement with Norwest Bank Minnesota, National Association (the "Norwest Revolver"). The Norwest Revolver will expire on June 30, 2002 and replaced the Company's previous credit agreement with Norwest Bank. The Norwest Revolver provides the Company with revolving credit loans and letters of credit up to $12 million, subject to a borrowing base formula tied to inventory levels. Loans under the Norwest Revolver bear interest at Norwest's base rate plus 1/4%. Interest is payable monthly in arrears. The Norwest Revolver carries a facility fee of 1/4% on the unused portion of the Norwest Revolver as defined in the Norwest Revolver. This facility is secured by substantially all of the Company's assets. The borrowing base at May 14, 1999, was $7.1 million. As of May 14, 1999, the Company had no borrowings and outstanding letters of credit in the amount of $5.1 million under the Norwest Revolver. Accordingly, the availability of revolving credit loans under the Norwest Revolver was $2.0 million at that date. The Norwest Revolver contains certain restrictive covenants including restrictions on incurring additional indebtedness, limitations on certain types of investments and prohibitions on paying dividends, as well as requiring the maintenance of certain financial ratios. As of February 27, 1999, the most recent measurement date, the Company was in compliance with all covenants of the Norwest Revolver. In January 1997, the Company issued $10,300,200 of debt in the form of 12% Senior Notes (the "Senior Notes") due January 2005. The Senior Notes were issued, pursuant to an Indenture dated as of December 2, 1996, to (i) the holders of the 9% Senior Notes due January 2001 where each holder received, for each $1,000 principal face amount, (a) 48 shares of common stock in the Company and (b) Senior Notes in original principal face amount of $800 and (ii) the Company's prepetition banks who received a total of (a) 138,284 shares of common stock in the Company and (b) $2,313,000 in original principal face amount of the Senior Notes. The principal amount of the Senior Notes bears interest at the rate of 12% per annum. Interest at the rate of 9% per annum on the outstanding principal amount is due monthly. Interest at the rate of 3% per annum on the outstanding principal amount accrues monthly and upon accrual is treated as principal for all purposes, including without limitation, the calculation of all interest payments due thereafter, and is payable in full on January 1, 2005. The Senior Notes are general unsecured senior obligations of the Company. The Indenture for the Senior Notes ("the Indenture") contains certain covenants which, among other things, limit the ability of the Company to incur liens and additional indebtedness. As of February 27, 1999, the most recent measurement date, the Company was in compliance with all covenants of the Indenture. In November 1998, the Company received consent from the holders of a majority, by principal face amount, of its Senior Notes. This consent eliminated a restrictive covenant under the Indenture which, among other things, prohibited the Company from repurchasing its equity securities and paying dividends. In fiscal 1999 and fiscal 1998, the Company repurchased $4,676,000 and $1,033,000, respectively, of principal face amount of its Senior Notes at a discount from par. These purchases satisfied all of the annual mandatory redemption requirements through January 1, 2004 leaving no additional mandatory payments due until maturity on January 1, 2005. The Company recorded an extraordinary gain, net of tax, of $35,396 in fiscal 1999 and $115,872 in fiscal 1998 as a result of these purchases. The Company is unaware of any environmental liability that would have a material adverse effect on the financial position or the results of operations of the Company. 12 NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), effective in fiscal 1999, establishes standards of disclosure and financial statement display for reporting total comprehensive income and the individual components thereof. The adoption of SFAS No. 130 had no impact on the Company's financial position or results of operations for the year ended February 27, 1999. Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"), effective in fiscal 1999, established new standards for determining reportable segments and for disclosing information regarding each such segment. Management does not believe that the Company has reportable segments and as such will not be required to disclose segment information. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), effective for fiscal years beginning after June 15, 1999, establishes standards for the recognition and measurement of derivatives and hedging activities. The Company does not currently engage in these types of risk management or investment activities. Therefore, SFAS No. 133 is not anticipated to have any impact on the Company's financial position or results of operations. QUARTERLY RESULTS AND SEASONALITY The Company's sales show seasonal variation as sales in the third and fourth quarters, which include the fall and holiday seasons, generally have been higher than sales in the first and second quarters. Sales generated during the fall and holiday seasons have a significant impact on the Company's annual results of operations. Quarterly results may fluctuate significantly depending on a number of factors including store openings, adverse weather conditions, shifts in the timing of certain holidays and promotional events and customer response to the Company's seasonal merchandise mix. The Company's unaudited quarterly operating results for each quarter of fiscal 1999 and 1998 are presented in Note 10 of the Consolidated Financial Statements. INFLATION The Company does not believe that inflation has had a material effect on the results of operations during the past three fiscal years. YEAR 2000 MATTERS The year 2000 issue results from computer programs being written using two digits rather than four to define the applicable year. Certain of the Company's computer information systems and their associated software ("IT Systems") and other equipment using microchips or embedded technology ("Non-IT Systems") may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations including, but not limited to, a temporary inability to process transactions or to engage in similar business activities. READINESS FOR YEAR 2000. The Company has been in the process of addressing the year 2000 issue with regard to its IT and Non-IT Systems since the beginning of calendar 1998. In connection with a general upgrade of its IT Systems, the Company completed the installation of new merchandise and financial system software packages in February 1999. The Company began using these systems in March 1999. In addition to being year 2000 compliant, management believes the new merchandise systems allow for improved merchandise planning, sales tracking and trend analysis. Further, the Company also expects these systems will allow for improved distribution center processing and more flexible allocation of merchandise to the Company's stores. During fiscal 1999, the Company employed a consultant to upgrade the Company's point-of-sale systems to be year 2000 compliant. The final stages of this project, including testing, are estimated to be complete by August 1999. The Company has also evaluated its Non-IT Systems and determined that all Non-IT Systems that are critical to the Company's operations have been addressed regarding year 2000 compliance. COSTS TO ADDRESS YEAR 2000 ISSUES. Management estimates that new year 2000 compliant software packages and related hardware improvements, which the Company previously planned to install irrespective of any year 2000 considerations, cost approximately $1.0 million, of which approximately $50,000 was expensed and the remainder was capitalized. In addition, the Company intends to spend approximately $300,000 in future hardware costs related to the new software packages. Other internal costs associated with the year 2000 issue, which are not separately tracked by the Company, consist primarily of payroll and related expenses for the Company's Management Information Systems department. All costs related to year 2000 compliance issues have been, or will be funded through cash flows from operations. 13 RISKS OF YEAR 2000 ISSUES. The Company expects to implement all changes necessary to address the year 2000 issue by December 1999. The Company presently believes that, with the conversions to new software and modifications to existing IT and Non-IT Systems, the year 2000 issue will not pose significant operational problems for the Company's IT and Non-IT Systems and thus will not have a materially adverse effect on the Company's operations. However, the year 2000 issue is pervasive and complex and can potentially affect any computer process. Accordingly, no assurance can be given that the year 2000 compliance can be achieved without additional unanticipated expenditures and uncertainties that might affect future financial results. Additionally, in its normal course of operations the Company relies upon vendors, government agencies, utility companies, telecommunications companies, shipping companies, suppliers and other third party service providers over which it can assert little control. The Company's ability to conduct its business is dependent upon the ability of these third parties to avoid year 2000 related disruptions. The Company has contacted and will continue to contact its key suppliers and other third party service providers to inquire as to their year 2000 readiness. If these parties do not adequately address their year 2000 issues the Company's business may be affected, which could result in a materially adverse effect on the results of operations and financial condition of the Company. CONTINGENCY PLANS. In addition to the above plans, the Company's contingency plans involve addressing operational issues that may arise due to the failure of the Company's or third parties' IT and Non-IT Systems. The Company is currently assessing such issues and estimates these plans will be completed by December 1999. FORWARD LOOKING INFORMATION Information contained in this Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology such as "may", "will", "expect", "intend", "plan", "anticipate", "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. There are certain important factors that could cause results to differ materially from those anticipated by some of these forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. The factors, among others, that could cause actual results to differ materially include: consumers' spending and debt levels; the Company's ability to execute its business plan; the Company's ability to open new stores on favorable terms and the timing of such store openings; the acceptance of the Company's merchandising strategies by its target customers; the ability of the Company to anticipate marketing trends and consumer needs; continuity of a relationship with or purchases from major vendors, particularly those from whom the Company imports merchandise; competitive pressures on sales and pricing; increases in other costs which cannot be recovered through improved pricing of merchandise; and the adverse effect of weather conditions from time to time on consumers' ability or desire to purchase new clothing. The Company currently purchases most of its import merchandise using letters of credit denominated in U.S. dollars, primarily from suppliers in countries, whose currency is pegged to the U.S. dollar. Therefore, the Company does not expect foreign currency fluctuations to materially affect its business. However, to the extent the Company begins purchasing larger amounts of merchandise from other countries, currency fluctuations could affect the Company's business. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. 14 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ------ Index to Financial Statements...................................................................... 15 Financial Statements: Report of Independent Accountants................................................................ 16 Consolidated Balance Sheet at February 27, 1999 and February 28, 1998............................ 17 Consolidated Statement of Operations for the three years ended February 27, 1999................. 18 Consolidated Statement of Stockholders' Equity for the three years ended February 27, 1999....... 19 Consolidated Statement of Cash Flows for the three years ended February 27, 1999................. 20 Notes to Consolidated Financial Statements....................................................... 21
15 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Braun's Fashions Corporation In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Braun's Fashions Corporation and its subsidiary at February 27, 1999 and February 28, 1998, and the results of their operations and their cash flows for each of the three years in the period ended February 27, 1999 in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Minneapolis, Minnesota April 2, 1999 16 BRAUN'S FASHIONS CORPORATION CONSOLIDATED BALANCE SHEET
ASSETS FEBRUARY 27, FEBRUARY 28, 1999 1998 ------------ ------------ Current assets: Cash and cash equivalents............................................. $ 12,587,719 $ 15,848,439 Accounts receivable................................................... 1,397,502 847,746 Merchandise inventory................................................. 10,799,046 10,735,681 Prepaid expenses...................................................... 547,947 414,341 Current deferred tax asset............................................ 275,493 322,570 ------------ ------------ Total current assets................................................ 25,607,707 28,168,777 Equipment and improvements: Leasehold improvements................................................ 11,600,657 11,817,695 Furniture and fixtures................................................ 9,312,599 8,296,459 Other equipment....................................................... 4,445,331 3,337,479 Construction in progress.............................................. 864,714 312,585 ------------ ------------ 26,223,301 23,764,218 Less accumulated depreciation and amortization........................ 13,268,337 12,821,164 ------------ ------------ Net equipment and improvements...................................... 12,954,964 10,943,054 Other assets: Long-term deferred tax asset.......................................... 1,468,101 1,414,789 Other................................................................. 28,844 63,424 ------------ ------------ Total other assets.................................................. 1,496,945 1,478,213 ------------ ------------ Total assets........................................................ $ 40,059,616 $ 40,590,044 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................................... $ 2,893,317 $ 3,666,921 Accrued salaries, wages and related expenses.......................... 2,236,876 2,014,996 Other accrued liabilities............................................. 3,234,935 2,446,536 Current maturities of long-term debt.................................. 271,592 681,424 Income taxes payable.................................................. 546,936 186,982 ------------ ------------ Total current liabilities........................................... 9,183,656 8,996,859 Long-term obligations: Long-term debt........................................................ 5,073,604 9,616,311 Accrued rent obligation............................................... 1,072,590 1,017,556 ------------ ------------ Total long-term obligations......................................... 6,146,194 10,633,867 Stockholders' equity: Preferred stock - $0.01 par value, 1,000,000 shares authorized, none outstanding.................................................... -- -- Common stock - $0.01 par value, 9,000,000 shares authorized, 4,349,761 and 4,523,393 shares issued and outstanding in 1999 and 1998, respectively.............................................. 47,178 45,234 Additional paid-in capital............................................ 29,304,648 28,588,350 Accumulated deficit................................................... (1,447,099) (7,674,266) ------------ ------------ 27,904,727 20,959,318 Common stock held in treasury, at cost (368,000 shares)............... (2,999,961) -- Common stock subscriptions receivable................................. (175,000) -- ------------ ------------ Total stockholders' equity.......................................... 24,729,766 20,959,318 ------------ ------------ Total liabilities and stockholders' equity.......................... $ 40,059,616 $ 40,590,044 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 17 BRAUN'S FASHIONS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED ---------------------------------------------------- FEBRUARY 27, FEBRUARY 28, MARCH 1, 1999 1998 1997 ------------ ------------ ------------ Net sales..................................................... $110,142,393 $ 99,535,773 $ 95,946,046 Cost of sales: Merchandise, buying and occupancy (exclusive of depreciation and amortization shown below).. 71,488,228 65,110,994 65,445,103 ----------- ------------ ------------ Gross profit.............................................. 38,654,165 34,424,779 30,500,943 Selling, general and administrative........................... 25,621,024 23,390,027 22,854,266 Depreciation and amortization................................. 2,678,987 2,533,282 2,648,563 Reorganization expense........................................ -- -- 7,829,924 Nonrecurring expense.......................................... -- 775,451 -- ----------- ------------ ------------ Operating income (loss)................................... 10,354,154 7,726,019 (2,831,810) Interest, net................................................. 282,508 690,589 684,330 ----------- ------------ ------------ Income (loss) before income taxes............................. 10,071,646 7,035,430 (3,516,140) Income tax provision (benefit)................................ 3,879,875 2,749,971 (2,895,146) ----------- ------------ ------------ Net income (loss) before extraordinary gain............... 6,191,771 4,285,459 (620,994) Extraordinary gain............................................ 35,396 115,872 -- ----------- ------------ ------------ Net income (loss)............................................. $ 6,227,167 $ 4,401,331 $ (620,994) ----------- ------------ ------------ ----------- ------------ ------------ Basic earnings per common share: Net income (loss) before extraordinary gain............... $ 1.36 $ 0.96 $ (0.15) Extraordinary gain........................................ 0.01 0.02 -- ----------- ------------ ------------ Net income (loss)......................................... $ 1.37 $ 0.98 $ (0.15) ----------- ------------ ------------ ----------- ------------ ------------ Weighted average common shares outstanding................ 4,541,480 4,482,119 4,029,041 ----------- ------------ ------------ ----------- ------------ ------------ Diluted earnings per common share: Net income (loss) before extraordinary gain............... $ 1.30 $ 0.89 $ (0.15) Extraordinary gain........................................ 0.01 0.02 -- ----------- ------------ ------------ Net income (loss)......................................... $ 1.31 $ 0.91 $ (0.15) ----------- ------------ ------------ ----------- ------------ ------------ Weighted average common and common equivalent shares outstanding........................ 4,773,836 4,812,482 4,029,041 ----------- ------------ ------------ ----------- ------------ ------------
See accompanying notes to consolidated financial statements. 18 BRAUN'S FASHIONS CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON COMMON COMMON STOCK ADDITIONAL STOCK STOCK ------------------------- PAID-IN ACCUMULATED HELD IN SUBSCRIPTIONS SHARES AMOUNT CAPITAL DEFICIT TREASURY RECEIVABLE TOTAL ----------- ---------- ----------- ----------- ----------- ------------ ----------- March 2, 1996 3,793,312 $ 37,933 $25,079,052 $(11,454,603) $ -- $ -- $13,662,382 Stock issued pursuant to plan of reorganization 617,516 6,175 2,475,006 -- -- -- 2,481,181 Stock issued on exercise of options 21,760 218 49,985 -- -- -- 50,203 Net loss -- -- -- (620,994) -- -- (620,994) ----------- ---------- ----------- ----------- ----------- ------------ ----------- March 1, 1997 4,432,588 44,326 27,604,043 (12,075,597) -- -- 15,572,772 Stock issued on exercise of options 90,805 908 300,507 -- -- -- 301,415 Tax benefit on exercise of stock options -- -- 165,349 -- -- -- 165,349 Accelerated vesting of stock options -- -- 518,451 -- -- -- 518,451 Net income -- -- -- 4,401,331 -- -- 4,401,331 ----------- ---------- ----------- ----------- ----------- ------------ ----------- February 28, 1998 4,523,393 45,234 28,588,350 (7,674,266) -- -- 20,959,318 Stock issued on exercise of options 194,368 1,944 611,260 -- -- -- 613,204 Tax benefit on exercise of stock options -- -- 105,038 -- -- -- 105,038 Common stock subscriptions receivable -- -- -- -- -- (175,000) (175,000) Acquisiton of common stock held in treasury, at cost (368,000) -- -- -- (2,999,961) -- (2,999,961) Net income -- -- -- 6,227,167 -- -- 6,227,167 ----------- ---------- ----------- ----------- ----------- ------------ ----------- February 27, 1999 4,349,761 $ 47,178 $29,304,648 $(1,447,099) $(2,999,961) $ (175,000) $24,729,766 ----------- ---------- ----------- ----------- ----------- ------------ ----------- ----------- ---------- ----------- ----------- ----------- ------------ -----------
See accompanying notes to consolidated financial statements. 19 BRAUN'S FASHIONS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED --------------------------------------------------- FEBRUARY 27, FEBRUARY 28, MARCH 1, 1999 1998 1997 ------------- ------------- ------------ Cash flows from operating activities: Net income (loss) .......................................... $ 6,227,167 $ 4,401,331 $ (620,994) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 2,678,987 2,533,282 2,678,963 Accelerated vesting of stock options.................... -- 518,451 -- Extraordinary gain from early extinguishment of debt.... (57,090) (186,890) -- (Increase) decrease in deferred tax assets.............. (6,235) 260,744 (1,998,103) (Gain) loss on disposal of property and equipment....... 57,134 (5,810) 2,469,940 Increase (decrease) in accrued rent obligation.......... 55,034 121,303 (185,448) Changes in operating assets and liabilities: (Increase) decrease in merchandise inventory, prepaid expenses, receivables and other............ (712,147) (1,991,667) 4,456,747 Increase in accounts payable and accrued liabilities................................ 236,675 1,242,958 2,214,825 Increase in income taxes payable/receivable........... 359,954 1,057,480 -- ------------- ------------- ------------ Net cash provided by operating activities.............. 8,839,479 7,951,182 9,015,930 Cash flows from investing activities: Purchase of equipment and improvements................. (4,811,730) (2,720,178) (1,042,622) Proceeds from sale of furniture and fixtures........... 63,699 34,949 53,270 ------------- ------------- ------------ Net cash used in investing activities.............. (4,748,031) (2,685,229) (989,352) Cash flows from financing activities: Principal payments on debt agreements.................. (5,120,428) (1,090,754) (250,060) Borrowings under debt agreements....................... -- -- 2,878,952 Interest on 12% Senior Notes added to principal........ 224,979 292,760 -- Exercise of stock options and related income tax benefit 718,242 466,764 50,203 Common stock subscriptions receivable.................. (175,000) -- -- Acquisition of common stock held in treasury, at cost........................... (2,999,961) -- -- Checks issued, not yet presented for payment........... -- -- (1,335,088) ------------- ------------- ------------ Net cash provided by (used in) financing activities.... (7,352,168) (331,230) 1,344,007 Net increase (decrease) in cash and cash equivalents.......... (3,260,720) 4,934,723 9,370,585 Cash and cash equivalents at beginning of year................ 15,848,439 10,913,716 1,543,131 ------------- ------------- ------------ Cash and cash equivalents at end of year...................... $ 12,587,719 $ 15,848,439 $ 10,913,716 ------------- ------------- ------------ ------------- ------------- ------------ Supplemental cash flow information: Interest paid during the year......................... $ 821,831 $ 958,627 $ 644,198 Income taxes paid (refunded) during the year.......... $ 3,442,812 $ 1,276,893 $ (903,958) Debt for equity exchange.............................. $ -- $ -- $ 2,900,000 Write-off of deferred financing costs................. $ -- $ -- $ 418,818
See accompanying notes to consolidated financial statements. 20 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Braun's Fashions Corporation ("BFC"), through its wholly-owned subsidiary, Braun's Fashions, Inc. ("BFI") (collectively referred to as the "Company"), operates retail specialty stores selling women's clothing and related accessories, primarily in the Midwest. The Company operated 195, 179 and 170 stores at the end of fiscal 1999, 1998 and 1997, respectively. FISCAL YEAR AND BASIS OF PRESENTATION The Company's fiscal year ends on the Saturday nearest February 28. The fiscal years ending February 27, 1999, February 28, 1998 and March 1, 1997 consisted of 52 weeks each. The consolidated financial statements include the accounts of BFC and its wholly-owned subsidiary, BFI. All significant intercompany accounts have been eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on hand and on deposit, and investments purchased with an original maturity of three months or less. MERCHANDISE INVENTORIES Merchandise inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out retail inventory method. INVENTORY MARKDOWNS Permanent markdowns are recorded to reflect expected adjustments to retail prices in accordance with the retail inventory method. Markdowns are recorded monthly on the basis of an evaluation of inventory by merchandising management. In the Company's judgement, all markdowns necessary to record inventory at the lower of cost or market under the retail inventory method have been provided for all periods presented. EQUIPMENT AND IMPROVEMENTS Equipment and improvements are stated at cost. Equipment is depreciated over its estimated useful life and improvements are amortized over the term of the related leases. Repairs and maintenance which do not extend an asset's useful life are expensed as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is reflected in income for that period. The Company evaluates its long-lived assets in accordance with the provisions of SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of February 27, 1999, the Company has determined that no adjustment to the financial statements is necessary under SFAS No. 121. RENT EXPENSE Many of the Company's lease agreements for retail space include escalation clauses in minimum base rent. The Company recognizes minimum base rent expense for the lease term in equal annual amounts over the lease term. ADVERTISING The Company expenses advertising costs as incurred. Advertising costs for the fiscal years ended 1999, 1998 and 1997 were $645,000, $671,000 and $793,000, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, receivables and payables for which current carrying amounts approximate fair market value. Additionally, interest rates on outstanding debt are at rates which approximate market rates for debt with similar terms and maturities. 21 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK BASED EMPLOYEE COMPENSATION The Company has elected to recognize compensation cost for its stock based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Generally, no compensation expense is recognized for stock options with exercise prices equal to the market value of the underlying shares of stock at the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation". INCOME TAXES Income taxes are provided following the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS No. 109")"Accounting for Income Taxes. "Under the provisions of SFAS No. 109, deferred tax assets and liabilities result from the expected future tax consequences of differences between the carrying value and the tax basis of assets and liabilities. NET INCOME (LOSS) PER COMMON SHARE In fiscal 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). Under SFAS No. 128, basic earnings per share ("EPS") is computed based on the weighted average number of shares of common stock outstanding during the applicable periods while diluted EPS is computed based on the weighted average number of shares of common and common equivalent shares (dilutive stock options) outstanding. EPS for all periods presented have been restated to reflect the adoption of SFAS No. 128. The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations:
EFFECT OF BASIC DILUTIVE STOCK DILUTED EPS OPTIONS EPS --------- -------------- --------- Fiscal 1999 Shares......................................... 4,541,480 232,356 4,773,836 Per share amount before extraordinary gain..... $1.36 $(0.06) $1.30 Per share amount including extraordinary gain.. $1.37 $(0.06) $1.31 Fiscal 1998 Shares......................................... 4,482,119 330,363 4,812,482 Per share amount before extraordinary gain..... $0.96 $(0.07) $0.89 Per share amount including extraordinary gain.. $0.98 $(0.07) $0.91 Fiscal 1997 Shares......................................... 4,029,041 -- 4,029,041 Per share amount............................... $(0.15) -- $(0.15)
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during a reporting period. As a result, actual results could differ because of the use of these estimates and assumptions. 22 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- CHAPTER 11 REORGANIZATION On July 2, 1996, the Company filed in the United States Bankruptcy Court in the District of Delaware a petition for reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code, case number 96-1030(HSB). Under the protection of Chapter 11, the Company managed its affairs and operated its business as a debtor-in-possession while developing a plan of reorganization. The Company filed its Second Amended Plan of Reorganization on October 22, 1996 (the "Plan"), along with its Disclosure Statement. The Plan was approved by 99.6% of the voting shareholders and by a majority of each class of creditors that voted. On November 22, 1996, the Bankruptcy Court confirmed the Plan, which became effective on December 3, 1996. As of the effective date, December 3, 1996, the Company had 3,796,512 shares of common stock issued and outstanding. Under the terms of the Plan, the Company issued 617,516 shares of common stock on January 2, 1997 to certain creditors in respect to their filed and allowed claims and interests. The Company also issued approximately $10.3 million in aggregate principal amount of 12% Senior Notes (the "Senior Notes") to these classes of creditors pursuant to the Plan. The common stock and Senior Notes were issued to these creditors in exchange for outstanding debt of $13,201,075 previously held by these creditors. The fair value of the common stock and Senior Notes approximated the carrying value of the outstanding obligations, and accordingly, no gain or loss was recorded on the exchange. The Company incurred the following expenses during fiscal 1997 in connection with its Chapter 11 reorganization proceedings: Professional fees and services $2,610,000 Loss on disposal of property, fixtures and equipment 2,453,000 Lease rejection claims 1,042,000 Other 1,725,000 ---------- Total $7,830,000 ---------- ----------
NOTE 3 -- LONG-TERM DEBT As part of the Plan, the Company issued $10,300,200 of debt in the form of 12% Senior Notes (the "Senior Notes") due January 2005. The Senior Notes were issued, pursuant to an Indenture dated December 2, 1996, to (i) the holders of the 9% Senior Notes due January 2001 where each holder received, for each $1,000 principal face amount, (a) 48 shares of common stock in the Company and (b) Senior Notes in original principal amount of $800 and (ii) the Company's prepetition banks who received a total of (a) 138,284 shares of common stock in the Company and (b) $2,313,000 in original principal face amount of the Senior Notes. The principal amount of the Senior Notes bears interest at the rate of 12% per annum from and after December 17, 1996. Interest at the rate of 9% per annum on the outstanding principal amount is paid monthly. Interest at the rate of 3% per annum on the outstanding principal amount is accrued monthly and upon accrual is treated as principal for all purposes, including without limitation, the calculation of all interest payments due thereafter, and is payable in full on January 1, 2005. The Senior Notes are general unsecured senior obligations of the Company. The Indenture for the Senior Notes ("the Indenture") contains certain covenants which, among other things, limit the ability of the Company to incur liens and additional indebtedness. As of February 27, 1999, the most recent measurement date, the Company was in compliance with all covenants of the Indenture. In November 1998, the Company received consent from the holders of a majority, by principal face amount, of its Senior Notes. This consent eliminated a restrictive covenant under the Indenture which, among other things, prohibited the Company from repurchasing its equity securities and paying dividends. During fiscal 1999 and 1998, the Company purchased $4,676,000 and $1,033,000 principal face amount of its Senior Notes, respectively, at a discount from par. The purchases resulted in extraordinary gains of $35,396 and $115,872, net of tax, in 1999 and 1998, respectively. All of the January 1, 1999 to January 1, 2004 annual mandatory redemption requirements were satisfied by the purchases, leaving no additional mandatory payments due until maturity on January 1, 2005. 23 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- LONG TERM DEBT(CONTINUED) In March 1999, the Company entered into an Amended and Restated Revolving Credit and Security Agreement with Norwest Bank Minnesota, National Association (the "Norwest Revolver"). The Norwest Revolver will expire on June 30, 2002 and replaced the Company's previous credit agreement with Norwest Bank. The Norwest Revolver provides the Company with revolving credit loans and letters of credit up to $12 million, subject to a borrowing base formula tied to inventory levels. Loans under the Norwest Revolver bear interest at Norwest's base rate plus 1/4%. Interest is payable monthly in arrears. The Norwest Revolver carries a facility fee of 1/4% based on the unused portion of the Norwest Revolver as defined in the agreement. This facility is secured by substantially all of the Company's assets. The borrowing base at February 27, 1999, was $6.0 million. As of February 27, 1999, the Company had no borrowings and outstanding letters of credit in the amount of $3.3 million under the Norwest Revolver. Accordingly, the availability of revolving credit loans under the Norwest Revolver was $2.7 million at that date. The Norwest Revolver contains certain restrictive covenants, including restrictions on incurring additional indebtedness, limitations on certain types of investments and prohibitions on paying dividends. The Norwest Revolver also requires the Company to maintain certain financial ratios. As of February 27, 1999, the most recent measurement date, the Company was in compliance with all covenants of the Norwest Revolver. Outstanding debt consists of the following:
FEBRUARY 27, FEBRUARY 28, 1999 1998 ------------- ------------ 12% Senior Notes due 2005........................................... $ 4,904,194 $ 9,607,247 Obligation under capital lease...................................... 441,002 690,488 ------------- ------------ 5,345,196 10,297,735 Less: Current maturities of 12% Senior Notes......................... -- 431,938 Current maturities of capital lease obligation................. 271,592 249,486 ------------- ------------ Long-term debt...................................................... $ 5,073,604 $ 9,616,311 ------------- ------------ ------------- ------------
The Company was not required to pay interest on its prepetition debt during its Chapter 11 Bankruptcy proceedings. If the Company had been required to pay interest on its prepetition debt, contractual interest expense net of interest income for the year ended March 1, 1997, would have totaled approximately $1.2 million. 24 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- STOCK OPTION PLANS In 1987, the Company adopted the 1987 Stock Incentive Plan which, as amended, provided for the granting of options to purchase up to 710,000 shares of common stock. Option grants include qualified and non-qualified grants vesting over zero to four years. Options are exercisable up to ten years from the date of grant and are granted at a price not less than 100% of the fair market value of the shares on the date of grant. In June 1996, the Company repriced previously granted employee options to purchase up to 358,200 shares of the Company's common stock. The initial exercise price of these options was $7.00 per share and was reset to $2.00, $3.00, or $4.00 per share. The closing price of the Company's common stock at the date of the repricing was $1.56 per share. The 1987 Stock Incentive Plan terminated on September 11, 1997 and no new options may be granted under that plan after that date. In July 1997, the Company's shareholders approved the Company's 1997 Stock Incentive Plan to replace the 1987 incentive plan. The 1997 Stock Incentive Plan was amended in fiscal 1999, increasing the number of shares of common stock authorized for issuance from 300,000 to 450,000 shares. As of February 27, 1999, 149,000 options remain available for grant. The 1997 Incentive Plan permits the granting of qualified incentive stock options meeting the requirements of Section 422 of the Internal Revenue Code and non-qualified stock options. Options are granted at a price not less than 100% of the fair market value of the Company's common stock on the option grant date, vest over three to five years and are exercisable up to 10 years from the date of grant. The Company established the 1992 Director Stock Option Plan, effective March 1992. This plan provides for options to purchase 40,000 shares of common stock, all of which shares have been granted. In June 1996, the Company repriced previously granted director options to purchase up to 40,000 shares of the Company's common stock. The initial exercise price of these options was $6.00 or $7.00 per share and was reset to $3.00. The closing price of the Company's common stock at the date of the repricing was $1.56 per share. The options vested one-third upon issuance and one-third over the next two years in annual installments of one-third per year. Vested options are exercisable for ten years from the date of grant. In fiscal 1998, the Company granted to non-employee members of its Board of Directors options to purchase an aggregate of 60,000 shares of the Company's common stock. The exercise price of these options is $8.75, equal to the fair market value of the common stock on the date of the grant. Accordingly, no compensation expense was recognized on the issuance of these options. The options vest over three years and are exercisable for ten years from the grant date. In July 1998, the Company's shareholders approved the Company's 1998 Director Stock Option Plan. The 1998 Director Plan provides for granting of non-qualified stock options to purchase an aggregate of 100,000 shares of common stock to non-employee directors. As of February 27, 1999, no options had been granted under the 1998 Director Plan. Options are to be granted at a price not less than 100% of the fair market value of the Company's common stock on the option grant date and are exercisable for up to five years from the date of grant. During fiscal 1998, compensation expense of $518,000 was recognized relating to the accelerated vesting of 166,000 options in connection with the implementation of the Company's management succession plan. The compensation expense was calculated as the difference between the exercise price and the fair market value of the Company's common stock on the date on which the vesting of options were accelerated. The Company has elected to recognize compensation cost for its stock based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Generally, no compensation expense is recognized for stock options with exercise prices equal to the market value of the underlying shares of stock at the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation." If compensation cost for these plans had been determined based on the fair value methodology prescribed by SFAS No. 123, the Company's net earnings and earnings per share in fiscal 1999, 1998 and 1997 would have been reduced to the pro forma amounts indicated below. 25 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- STOCK OPTION PLANS (CONTINUED)
1999 1998 1997 ---------- ---------- ----------- Net income (loss) - as reported $6,227,167 $4,401,331 $ (620,994) Net income (loss) - pro forma $5,814,836 $4,239,092 $ (686,827) Net income (loss) per diluted share - as reported $ 1.31 $ 0.91 $ (0.15) Net income (loss) per diluted share - pro forma $ 1.22 $ 0.88 $ (0.17)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The model was developed for use in estimating the fair value of traded options which have no vesting registration and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The following weighted-average assumptions were used for grants in fiscal 1999, 1998 and 1997:
1999 1998 1997 ---------- ------------ ------------ Dividend yield 0.00% 0.00% 0.00% Expected volatility 53.76% 56.56% 57.32% Risk-free interest rate 5.47% 5.99% - 6.11% 5.99% - 6.50% Expected lives 4.31 Years 4.31 Years 3 Years
26 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- STOCKOPTION PLANS (CONTINUED) The following summarizes stock option transactions:
FISCAL YEAR ENDED ------------------------------------------------------------------------------ FEBRUARY 27, 1999 FEBRUARY 28, 1998 MARCH 1, 1997 ------------------------ ----------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE -------- ---------------- -------- ---------------- -------- ---------------- Outstanding, beginning of period 559,528 $4.92 519,400 $3.26 408,320 $6.52 Granted 305,000 10.69 175,000 8.75 176,000 3.83 Reissued -- -- -- -- 358,200 3.00 Exercised (194,368) 3.15 (84,139) 3.15 (21,760) 0.91 Cancelled (6,300) 7.88 (50,733) 4.13 (401,360) 6.85 -------- ------------- ------- ------------ ------- ------------ Outstanding, end of period 663,860 $8.03 559,528 $4.92 519,400 $3.26 -------- ------------- ------- ------------ ------- ------------ -------- ------------- ------- ------------ ------- ------------ Exercisable, end of period 157,067 $5.18 204,501 $3.21 23,914 $2.60 -------- ------------- ------- ------------ ------- ------------ -------- ------------- ------- ------------ ------- ------------ Available for grant, end of period 249,000 300,000 184,320 -------- ------- ------- -------- ------- ------- Weighted average fair value of options granted $10.69 $8.75 $2.80 ------------- ------------ ------------ ------------- ------------ ------------
The following summarizes stock options outstanding and options exercisable at February 27, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- ----------------------------- WEIGHTED WEIGHTED WEIGHTED RANGE OF NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE ----------------- ----------- ----------------- -------------- ----------- -------------- $2.00 - $6.00 186,194 7.35 $3.14 101,400 $3.33 $6.01 - $8.75 176,666 8.33 8.66 55,667 8.56 $8.76 - $10.69 301,000 9.08 10.69 -- -- ----------- ----------------- -------------- ----------- -------------- 663,860 8.40 $8.03 157,067 $5.18 ----------- ----------------- -------------- ----------- -------------- ----------- ----------------- -------------- ----------- --------------
NOTE 5 -- INCOME TAXES The provision (benefit) for income taxes for the fiscal years ended February 27, 1999, February 28, 1998 and March 1, 1997 consisted of:
1999 1998 1997 ---------- ------------ ----------- Current Federal............................................. $3,186,110 $ 2,389,227 $ (917,043) State............................................... 700,000 100,000 20,000 ---------- ------------ ----------- Current tax expense (benefit)............................ 3,886,110 2,489,227 (897,043) Deferred................................................. (6,235) 260,744 (1,998,103) ---------- ------------ ----------- Provision (benefit) for income tax ...................... $3,879,875 $ 2,749,971 $(2,895,146) ---------- ------------ ----------- ---------- ------------ -----------
27 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- INCOME TAXES (CONTINUED) The Company's effective income tax rate for fiscal years ended February 27, 1999, February 28, 1998 and March 1, 1997, differs from the federal income tax rate as follows:
1999 1998 1997 ------ ------ ------- Federal income tax at statutory rate.................... 34.0% 34.0% (34.0)% State income tax (net of federal benefit)............... 4.6 0.9 0.4 Valuation allowance..................................... -- -- (50.9) Accelerated vesting of stock options.................... -- 2.0 -- Other................................................... (0.1) 2.2 2.2 ------ ------ ------- 38.5% 39.1% (82.3)% ------ ------ ------- ------ ------ -------
The net deferred tax assets included in the consolidated balance sheet as of February 27, 1999 and February 28, 1998 are as follows:
FEBRUARY 27, FEBRUARY 28, 1999 1998 ----------- ----------- Vacation accrual................................... $198,878 $180,200 Inventory and other................................ 76,615 142,370 ----------- ----------- Current deferred tax assets .................... 275,493 322,570 Depreciation and amortization...................... 818,182 749,802 Accrued rent obligation............................ 364,680 345,969 Interest on Senior Notes added to principal........ 106,495 120,873 Other.............................................. 178,744 198,145 ----------- ----------- Long-term deferred tax assets................... 1,468,101 1,414,789 ----------- ----------- Total deferred tax assets....................... $1,743,594 $1,737,359 ----------- ----------- ----------- -----------
Deferred income tax assets represent potential future income tax benefits. Realization of these assets is ultimately dependent upon future taxable income. NOTE 6 -- EMPLOYEE BENEFIT PLANS Effective March 3, 1991, the Company established a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code for the benefit of all employees who meet certain eligibility requirements, primarily age and length of service. The plan allows eligible employees to invest from 1% to 16% of their compensation. For fiscal years ended February 27, 1999, February 28, 1998 and March 1, 1997, the Company approved a discretionary matching contribution of 25% of the first 6% of the participants' pre-tax contributions. Such contributions were based principally on Company performance. Company contributions made for the fiscal years ended February 27, 1999, February 28, 1998 and March 1, 1997 were $67,362, $55,954, and $56,993, respectively. Effective March 1, 1999, the Company amended the plan to allow for fixed quarterly Company matching contributions of 50% of the first 3% of the participants pre-tax contributions and 25% of the next 3% of the participants pre-tax contributions. The Company does not offer any other post-retirement, post-employment or pension benefits to directors or employees. 28 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- LEASE COMMITMENTS The Company leases its computer equipment, office and warehouse facility, vehicles and each of its store locations, all of which are accounted for as operating leases. The store lease terms, including rental period, renewal options, escalation clauses and rent as a percentage of sales, vary among the leases. Most store leases require the Company to pay real estate taxes and common area maintenance charges.
Total rental expense for all leases was as follows: FISCAL YEAR ENDED --------------------------------------------------- FEBRUARY 27, FEBRUARY 28, MARCH 1, 1999 1998 1997 ------------- ------------- ------------- Minimum rent.................................... $ 5,655,384 $ 4,726,654 $ 6,219,379 Contingent rent -- based on a percentage of sales 1,824,926 2,109,262 1,443,340 Maintenance, taxes and other.................... 3,267,663 2,667,097 3,367,817 ------------- ------------- ------------- $ 10,747,973 $ 9,503,013 $ 11,030,536 ------------- ------------- ------------- ------------- ------------- -------------
In addition, the Company leases its point-of-sale (POS) registers. This lease agreement has been capitalized at the present value of the future minimum lease payments. The Company leases its office and warehouse facility under an agreement which commenced on June 15, 1994, and expires on June 14, 2005. The Company is required to pay property taxes, insurance, utilities and other operating costs of the facility. The Company subleases 80,000 square feet of warehouse space in its distribution center to a third party under an agreement which commenced October 1, 1997. Under the agreement, the Company received minimum rent of 14,667 per month from October 1, 1997 through August 31, 1998; and will receive $21,667 per month from September 1, 1998 to August 31, 1999 and $24,667 per month from September 1, 1999 to August 31, 2000. The subtenant may extend the lease for two options periods. Rent for the first three year option period would be $26,480 per month. Rent for the second option period of one year and nine months would be $29,790 per month. The subtenant is also required to reimburse the Company for property taxes, utilities and other operating costs of the subleased portion of the facility. Under a second sublease effective September 1, 1997 and expiring on May 31, 2005, the Company subleases 33,000 square feet of warehouse and office space to a third party. Under the agreement the Company will receive annual minimum rent of $132,000. The subtenant is also required to reimburse the Company for property taxes, utilities and other operating costs of the subleased portion of the facility. Future minimum rental commitments for all leases are as follows:
CAPITAL LEASE OPERATING LEASES ----------- --------------------------------------------------------- POS RETAIL OFFICE/ REGISTER STORE WAREHOUSE VEHICLES/ FISCAL YEAR EQUIPMENT FACILITIES FACILITIES OTHER TOTAL ----------- ------------ ------------ --------- ----------- 2000................................ $ 298,723 $ 5,806,451 $ 198,029 $104,149 $ 6,108,629 2001................................ 174,255 5,614,917 345,854 17,824 5,978,595 2002................................ -- 5,477,793 493,854 -- 5,971,647 2003................................ -- 4,831,430 520,971 -- 5,352,401 2004................................ -- 4,046,038 548,088 -- 4,594,126 Thereafter.......................... -- 10,710,707 726,767 -- 11,437,474 ----------- ------------ ------------ --------- ----------- Total minimum lease payments.. 472,978 $36,487,336 $2,833,563 $121,973 $39,442,872 ------------ ------------ --------- ----------- ------------ ------------ --------- ----------- Less: Amount representing interest.. 31,976 ----------- Present value of minimum capital lease payments................... 441,002 Less: Current maturities............ 271,592 ----------- Obligation under capital lease, less current maturities.......... $ 169,410 ----------- -----------
29 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- NONRECURRING EXPENSE In February 1998, the Company completed the implementation of its management succession plan. As a result of the plan, Nicholas H. Cook, the Company's Chairman and Chief Executive Officer ("CEO") since 1990, relinquished his CEO responsibilities but will continue to serve as Chairman of the Company's Board of Directors, until August 31, 1999. Herbert D. Froemming, the Company's former Vice Chairman, elected to take early retirement. As part of the management succession plan, the Company incurred a one-time, pre-tax expense of $775,000, or $0.13 per diluted share. This charge was primarily non-cash, reflecting the accelerated vesting of previously issued stock options. NOTE 9 -- RELATED PARTY TRANSACTIONS The Company's previous corporate office and warehouse facility was leased under a 28-year lease commencing June 1, 1981 from a partnership whose partners are current stockholders and former officers of the Company. On September 30, 1996, the Company rejected this lease and a related sublease in the United States Bankruptcy Court. In May 1997, the Company settled the related lease rejection claim for $89,768. Total expenses related to transactions with related parties are as follows:
FISCAL YEAR ENDED ------------------------------------------------- FEBRUARY 27, FEBRUARY 28, MARCH 1, 1999 1998 1997 ----------- ----------- ----------- Cost of sales: Rental expense................................. $ -- $ -- $ 143,111 Selling and administrative: Rental expense................................. -- -- 71,556 ----------- ----------- ----------- $ -- $ -- $ 214,667 ----------- ----------- ----------- ----------- ----------- -----------
30 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- QUARTERLY FINANCIAL DATA (UNAUDITED): (IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 1999 QUARTERS ------------------------------------------------------- 1ST 2ND 3RD 4TH ---------- ---------- ---------- ---------- Net sales(1). . . . . . . . . . . . . . . . . . . . . . $ 25,003 $ 22,942 $ 30,826 $ 31,371 Gross profit. . . . . . . . . . . . . . . . . . . . . . 8,673 7,554 11,453 10,974 Operating income . . . . . . . . . . . . . . . . . . . 1,855 917 4,342 3,240 Net income before extraordinary gain. . . . . . . . . . 1,078 504 2,641 1,969 Extraordinary gain(2) . . . . . . . . . . . . . . . . . -- -- 35 -- ---------- ---------- ---------- ---------- Net income . . . . . . . . . . . . . . . . . . . . . . $ 1,078 $ 504 $ 2,676 $ 1,969 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic per share data: Net earnings before extraordinary gain. . . . . . . . . $ 0.24 $ 0.11 $ 0.56 $ 0.45 Extraordinary gain. . . . . . . . . . . . . . . . . . . -- -- 0.01 -- ---------- ---------- ---------- ---------- Net earnings. . . . . . . . . . . . . . . . . . . . . . $ 0.24 $ 0.11 $ 0.57 $ 0.45 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Diluted per share data: Net earnings before extraordinary gain. . . . . . . . . $ 0.22 $ 0.10 $ 0.55 $ 0.43 Extraordinary gain. . . . . . . . . . . . . . . . . . . -- -- 0.01 -- ---------- ---------- ---------- ---------- Net earnings . . . . . . . . . . . . . . . . . . . . . $ 0.22 $ 0.10 $ 0.56 $ 0.43 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Market price -- high(3) . . . . . . . . . . . . . . . . $ 13.625 $ 14.375 $ 9.750 $ 9.500 -- low(3). . . . . . . . . . . . . . . . . $ 10.375 $ 8.625 $ 6.375 $ 7.250
FISCAL 1998 QUARTERS ------------------------------------------------------- 1ST 2ND 3RD 4TH ---------- ---------- ---------- ---------- Net sales(1). . . . . . . . . . . . . . . . . . . . . . $ 21,842 $ 20,939 $ 29,466 $ 27,289 Gross profit. . . . . . . . . . . . . . . . . . . . . . 7,659 6,761 11,028 8,977 Nonrecurring expense(4) . . . . . . . . . . . . . . . . -- -- -- 775 Operating income. . . . . . . . . . . . . . . . . . . . 1,580 684 4,120 1,342 Net income before extraordinary gain. . . . . . . . . . 855 300 2,420 710 Extraordinary gain(5) . . . . . . . . . . . . . . . . . 105 8 -- 3 ---------- ---------- ---------- ---------- Net income . . . . . . . . . . . . . . . . . . . . . . $ 960 $ 308 $ 2,420 $ 713 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic per share data: Net earnings before extraordinary gain. . . . . . . . . $ 0.20 $ 0.07 $ 0.54 $ 0.15 Extraordinary gain. . . . . . . . . . . . . . . . . . . 0.02 0.00 -- 0.00 ---------- ---------- ---------- ---------- Net earnings. . . . . . . . . . . . . . . . . . . . . . $ 0.22 $ 0.07 $ 0.54 $ 0.15 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Diluted per share data: Net earnings before extraordinary gain. . . . . . . . . $ 0.18 $ 0.06 $ 0.50 $ 0.15 Extraordinary gain. . . . . . . . . . . . . . . . . . . 0.02 0.00 -- 0.00 ---------- ---------- ---------- ---------- Net earnings . . . . . . . . . . . . . . . . . . . . . $ 0.20 $ 0.06 $ 0.50 $ 0.15 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Market price -- high(3) . . . . . . . . . . . . . . . . $ 10.000 $ 13.250 $ 16.125 $ 11.750 -- low(3). . . . . . . . . . . . . . . . . $ 6.375 $ 7.375 $ 7.250 $ 7.875
(1) The Company's quarterly net sales show seasonal variation, as sales in the third and fourth quarters, which include the fall and holiday seasons, generally have been higher than sales in the first and second quarters. (2) In fiscal 1999, the Company recorded an extraordinary gain of $35,000 on the purchase at a discount from par of $4,676,000 principal face amount of 12% Senior Notes due 2005. (3) The market prices presented above represent the quarterly high and low sales prices of the Company's common stock. (4) In fiscal 1998, the Company recorded a one-time, pre-tax charge of $775,000, or $0.13 per diluted share, related to the implementation of its management succession plan. The majority of this expense was non-cash, related to acceleration of previously issued options. (5) In fiscal 1998, the Company recorded an extraordinary gain of $116,000 on the purchase at a discount from par of $1,033,000 principal face amount of 12% Senior Notes due 2005. 31 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), effective in fiscal 1999, establishes standards of disclosure and financial statement display for reporting total comprehensive income and the individual components thereof. The adoption of SFAS No. 130 had no impact on the Company's financial position or results of operations for the year ended February 27, 1999. Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"), effective in fiscal 1999, establishes new standards for determining reportable segments and for disclosing information regarding each such segment. Management does not believe that the Company has reportable segments and as such will not be required to disclose segment information. Statement of Financial Accounting Standards No 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), effective for fiscal years beginning after June 15, 1999, establishes standards for the recognition and measurement of derivatives and hedging activities. The Company does not currently engage in these types of risk management or investment activities. Therefore, SFAS No. 133 is not anticipated to have any impact on the Company's financial position or results of operations. 32 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no matters which are required to be reported under Item 9. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding the Company's directors required by Item 10 is incorporated herein by reference to the section entitled, "Item 1 - Election of Directors," in the Company's proxy statement for its 1999 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the Company's fiscal year ended February 27, 1999. Information regarding the Company's executive officers required by Item 10 is included in Part I of this Annual Report on Form 10-K as permitted by General Instruction G(3) to Form 10-K. Information required by this Item concerning compliance with Section 16(a) of the Securities Act of 1934 is included in the proxy statement under the section entitled "Security Ownership of Certain Beneficial Owners and Management," and such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the section entitled "Compensation of Executive Officers and Directors" in the Company's proxy statement for its 1999 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the Company's fiscal year ended February 27, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Company's proxy statement for its 1999 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulations 14A within 120 days of the Company's fiscal year ended February 27, 1999. 33 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the section entitled "Certain Relationships and Related Transactions" in the Company's proxy statement for its 1999 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the Company's fiscal year ended February 27, 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS: PAGE ------ Report of Independent Accountants. . . . . . . . . . . . . . . . 16 Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . 17 Consolidated Statement of Operations . . . . . . . . . . . . . . 18 Consolidated Statement of Stockholders' Equity . . . . . . . . . 19 Consolidated Statement of Cash Flows . . . . . . . . . . . . . . 20 Notes to Consolidated Financial Statements . . . . . . . . . . . 21
(2) FINANCIAL STATEMENT SCHEDULES: All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) EXHIBITS
SEQUENTIAL EXHIBITS PAGE NO. - -------- ---------- +3.1 Restated Certificate of Incorporation of the Company . . . . . . . . +3.2 By-Laws of the Company, as amended . . . . . . . . . . . . . . . . . +3.3 Articles of Incorporation of BFI . . . . . . . . . . . . . . . . . . +3.4 By-laws of BFI . . . . . . . . . . . . . . . . . . . . . . . . . . . +10.1 1987 Stock Incentive Plan. . . . . . . . . . . . . . . . . . . . . . +10.2 Amendment No. 1 to 1987 Stock Incentive Plan . . . . . . . . . . . . +10.3 Amendment No. 2 to 1987 Stock Incentive Plan . . . . . . . . . . . . +10.4 1992 Director Stock Option Plan. . . . . . . . . . . . . . . . . . . +10.5 Braun's Fashions, Inc. Retirement Savings Plan . . . . . . . . . . . +10.9 Sublease Agreement by and between Westburne Supply, Inc., United Westburne, Inc. and Braun's Fashions, Inc., dated February 16, 1994. +10.10 Side Agreement between Braun's Fashions, Inc., Westburne Supply, Inc. and United Westburne, Inc. regarding moving expenses dated February 16, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34
SEQUENTIAL EXHIBITS PAGE NO. - -------- ---------- +10.11 Tax Sharing Agreement between Braun's Fashions Corporation and Braun's Fashions, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . +10.12 Registrant's press release dated July 2, 1996 relating to the filing of the Registrant's plan of reorganization . . . . . . . . . . . . . +10.13 Second Amended Plan of Reorganization dated October 22, 1996 (the "Plan of Reorganization"). . . . . . . . . . . . . . . . . . . . . . +10.14 Motion to Approve Technical Amendment to the Plan of Reorganization dated November 19, 1996. . . . . . . . . . . . . . . . . . . . . . . *10.15 Amended and Restated Revolving Credit and Security Agreement dated as of March 15, 1999 between Norwest Bank Minnesota, National Association and Braun's Fashions , Inc. and Braun's Fashions Corporation . . . . +10.16 Indenture dated as of December 2, 1996 by and among Braun's Fashions Corporation, Braun's Fashions, Inc. and Schroder Bank & Trust Company. +10.17 1997 Stock Incentive Plan. . . . . . . . . . . . . . . . . . . . . . +10.18 Management Succession and Separation Agreement by and between Braun's Fashions Corporation and Nicholas H. Cook dated as of February 26, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +10.19 Management Succession and Separation Agreement by and between Braun's Fashions Corporation and Herbert D. Froemming dated as of February 26, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +10.20 Executive Employment Agreement, dated March 1, 1998, between Braun's Fashions Corporation and William J. Prange . . . . . . . . . . . . . +10.21 Executive Employment Agreement, dated March 1, 1998, between Braun's Fashions Corporation and Joseph E. Pennington. . . . . . . . . . . . +10.22 Executive Employment Agreement, dated March 1, 1998, between Braun's Fashions Corporation and Ralph C. Neal . . . . . . . . . . . . . . . +10.23 First Supplemental Indenture dated as of November 9, 1998. . . . . . *10.24 Amendment No. 1 to 1997 Stock Incentive Plan . . . . . . . . . . . . *10.25 1998 Director Stock Option Plan. . . . . . . . . . . . . . . . . . . +22.1 Subsidiaries of Company. . . . . . . . . . . . . . . . . . . . . . . *27 Financial Data Schedule (submitted for SEC use only) . . . . . . . .
- ------------------------------------- + Previously filed * Filed with this report (b) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the fourth quarter of the fiscal year ended February 27, 1999. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on May 21, 1999. BRAUN'S FASHIONS CORPORATION By: /S/ WILLIAM J. PRANGE ------------------------------------ William J. Prange 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/ NICHOLAS H. COOK Chairman of the Board and Director May 21, 1999 - ------------------------- Nicholas H. Cook /S/ WILLIAM J. PRANGE President and Chief Executive Officer and May 21, 1999 - ------------------------- Director (Principal Executive Officer) William J. Prange /S/ ANDREW K. MOLLER Senior Vice President and May 21, 1999 - ------------------------- Chief Financial Officer (Principal Andrew K. Moller Financial and Accounting Officer) /S/ MARC C. OSTROW Director May 21, 1999 - ------------------------- Marc C. Ostrow /S/ JAMES J. FULD, JR. Director May 21, 1999 - ------------------------- James J. Fuld, Jr. /S/ DONALD D. BEELER Director May 21, 1999 - ------------------------- Donald D. Beeler /S/ LARRY C. BARENBAUM Director May 21, 1999 - ------------------------- Larry C. Barenbaum
36 EX-10.15 2 EXHIBIT 10.15 ---------------------------------------------- ---------------------------------------------- AMENDED AND RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT BY AND BETWEEN BRAUN'S FASHIONS, INC. AND BRAUN'S FASHIONS CORPORATION AND NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION Dated as of: March 15, 1999 [LOGO] ---------------------------------------------- ---------------------------------------------- AMENDED AND RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT Dated as of March 15, 1999 BRAUN'S FASHIONS, INC., a Minnesota corporation ("Borrower"), BRAUN'S FASHIONS CORPORATION, a Delaware corporation ("Guarantor") and NORWEST BANK MINNESOTA, a national banking association ("Lender"), hereby agree as follows: RECITALS FIRST: the Borrower, the Guarantor and the Lender are parties to that certain Revolving Credit and Security Agreement dated as of December 2, 1996, as amended by that certain First Amendment to Revolving Credit and Security Agreement dated April 8, 1998, effective as of February 25, 1998 (together, the "Existing Credit Agreement"), whereby the Lender provides to the Borrower a revolving credit facility in the maximum principal amount of Ten Million Dollars ($10,000,000). SECOND: the parties hereto wish to extend the term of the Existing Credit Agreement, increase the amount of the revolving credit commitment thereunder and make certain other changes to the terms and conditions under which the Lender provides to the Borrower the revolving credit commitment. THIRD: the parties have agreed to execute and deliver this Amended and Restated Revolving Credit and Security Agreement in order to accomplish the foregoing objectives. NOW, THEREFORE, for good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the Borrower, Guarantor and Lender agree as follows: 1. DEFINITIONS 1.1. DEFINITIONS. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; and (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP. "Accounts" means all of the Borrower's accounts, as such term is defined in the UCC, including without limitation the aggregate unpaid obligations of customers and other account debtors to the Borrower arising out of the sale or lease of goods or rendition of services by the Borrower on an open account or deferred payment basis. "Advance" means a Revolving Advance. "Affiliate" or "Affiliates" means any Person controlled by, controlling or under common control with the Borrower, including (without limitation) any Subsidiary of the Borrower. For purposes of this definition, "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. "Aggregate Outstanding" means the sum of the outstanding principal balance of the Revolving Note and the L/C Amount. "Agreement" means this Amended and Restated Revolving Credit and Security Agreement, as amended, supplemented or restated from time to time. "Banking Day" means a day other than a Saturday, Sunday or other day on which banks are generally not open for business in Minneapolis, Minnesota. "Base Rate" means the rate of interest publicly announced from time to time by Lender as its "base rate" or, if such bank ceases to announce a rate so designated, any similar successor rate designated by the Lender. "Borrowing Base" means, at any time the lesser of: (a) the Maximum Line; or (b) subject to change from time to time in the Lender's sole discretion with prior written or telefacsimile notice to the Borrower, the sum of: (i) either (A) between June 1 and August 31 in any year, and so long as there are no outstanding Advances, 80% of Eligible Apparel Inventory, or (B) at all other times, 70% of Eligible Apparel Inventory; and (ii) 30% of Eligible Accessories Inventory "Capital Expenditures" for a period means any expenditure of money for the purchase or construction of assets, or for improvements or additions thereto, which are capitalized on the Borrower's balance sheet. "Cash Flow" means, for any period of determination, Net Income, plus depreciation and amortization, plus any Interest Expense which is accrued but not paid currently, plus repayments of Stock Purchase Loans, minus Capital Expenditures to the extent such Capital Expenditures are paid in cash, minus all scheduled repayment of principal on Debt (whether or not actually paid), minus all funds expended after the date of this Agreement for the repurchase, redemption or retirement of the Guarantor's 12% Senior Subordinated Notes, minus all funds expended after the date of this Agreement for the repurchase, redemption or retirement of the Guarantor's issued and outstanding capital stock 2 to the extent permitted hereunder, minus any Stock Purchase Loans made by the Borrower or the Guarantor to the extent such loans are made in cash, all as determined in accordance with GAAP on a consolidated basis. "Collateral" means all of the Borrower's Equipment, General Intangibles, Inventory, Receivables, Investment Property, and all sums on deposit in any Collateral Account; together with (i) all substitutions and replacements for and products of any of the foregoing; (ii) proceeds of any and all of the foregoing; (iii) in the case of all tangible goods, all accessions; (iv) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any tangible goods; (v) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods; and (vi) all sums on deposit in the Special Account. "Collateral Account" has the meaning given in SECTION 3.3. "Commitment" means the Lender's commitment to make Advances and to cause the Issuer to issue Letters of Credit to or for the Borrower's account pursuant to ARTICLE 2. "Credit Facility" means the credit facility being made available to the Borrower by the Lender pursuant to ARTICLE 2. "Debt" of any Person means all items of indebtedness or liability which in accordance with GAAP would be included in determining total liabilities as shown on the liabilities side of a balance sheet of that Person as at the date as of which Debt is to be determined. For purposes of determining a Person's aggregate Debt at any time, "Debt" shall also include the aggregate payments required to be made by such Person at any time under any lease that is considered a capitalized lease under GAAP. "Default" means an event that, with giving of notice or passage of time or both, would constitute an Event of Default. "Default Period" means any period of time beginning on the day a Default or Event of Default occurs and ending on the date such Default or Event of Default is cured to the Lender's satisfaction or waived in writing. "Default Rate" means an annual rate equal to two percent (2%) over the Floating Rate, which rate shall change when and as the Floating Rate changes. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Eligible Accessories Inventory" means Eligible Inventory consisting of accessories and jewelry. "Eligible Apparel Inventory" means Eligible Inventory consisting of apparel. 3 "Eligible Inventory" means all Inventory of the Borrower, at the lower of cost or market value as determined in accordance with GAAP; provided, however, that the following shall not in any event be deemed Eligible Inventory: (i) Inventory that is: in-transit; located at any warehouse, job site or other premises not approved by the Lender in writing; located outside of the states, or localities, as applicable, in which the Lender has filed financing statements to perfect a first priority security interest in such Inventory; covered by any negotiable or non-negotiable warehouse receipt, bill of lading or other document of title; on consignment from any Person; on consignment to any Person or subject to any bailment unless such consignee or bailee has executed an agreement with the Lender; (ii) Supplies, packaging, parts or sample Inventory; (iii) Work-in-process Inventory; (iv) Inventory that is damaged, obsolete, slow moving (that is, over four months old) or not currently saleable in the normal course of the Borrower's operations; (v) Inventory that the Borrower has returned, has attempted to return, is in the process of returning or intends to return to the vendor thereof; (vi) Inventory that is perishable or live; (vii) Inventory manufactured by the Borrower pursuant to a license unless the applicable licensor has agreed in writing to permit the Lender to exercise its rights and remedies against such Inventory; (viii) Inventory that is subject to a security interest in favor of any Person other than the Lender; and (ix) Inventory otherwise deemed ineligible by the Lender in its sole discretion. "Environmental Laws" has the meaning specified in SECTION 5.12. "Equipment" means all of the Borrower's equipment, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies, and including specifically (without limitation) the goods described in any equipment schedule or list herewith or hereafter furnished to the Lender by the Borrower. "Event of Default" has the meaning specified in SECTION 8.1. "Floating Rate" means an annual rate equal to the sum of the Base Rate plus one quarter of one percent (0.25%), which annual rate shall change when and as the Base Rate changes. 4 "Existing Credit Agreement" is defined in the Recitals to this Agreement. "Funding Date" has the meaning given in SECTION 2.1. "GAAP" means generally accepted accounting principles, applied on a basis consistent with the accounting practices applied in the financial statements previously delivered by the Borrower to the Lender. "General Intangibles" means all of the Borrower's general intangibles, as such term is defined in the UCC, whether now owned or hereafter acquired, including (without limitation) all present and future patents, patent applications, copyrights, trademarks, trade names, trade secrets, customer or supplier lists and contracts, manuals, operating instructions, permits, franchises, the right to use the Borrower's name, and the goodwill of the Borrower's business. "Guarantor" means Braun's Fashions Corporation, a Delaware corporation. "Hazardous Substance" has the meaning given in SECTION 5.12. "Interest Expense" means, for a fiscal year-to-date period, the Borrower's total gross interest expense during such period (excluding interest income), and shall in any event include, without limitation, (i) interest expensed (whether or not paid) on all Debt, (ii) the amortization of debt discounts, (iii) the amortization of all fees payable in connection with the incurrence of Debt to the extent included in interest expense, and (iv) the portion of any capitalized lease obligation allocable to interest expense. "Inventory" means all of the Borrower's inventory, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located. "Inventory Turns Ratio" means, for any period, the product obtained by dividing the total net sales for the prior 12-month period by the average month-end retail value of all Inventory for the same 12-month period, all as determined in accordance with GAAP. "Investment Property" means all of the Borrower's investment property, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all securities, security entitlements, securities accounts, commodity contracts, commodity accounts, stocks, bonds, mutual fund shares, money market shares and U.S. Government securities. "Issuer" means the issuer of any Letter of Credit. "L/C Amount" means the sum of (i) the aggregate face amount of any issued and outstanding Letters of Credit and (ii) the unpaid amount of the Obligation of Reimbursement. 5 "L/C Application" means an application and agreement for letters of credit in a form acceptable to the Issuer and the Lender. "Letter of Credit" has the meaning specified in SECTION 2.2. "Loan Documents" means this Agreement, the Note, the Security Documents, the Guaranty and the Security Agreement. "Maturity Date" means June 30, 2002. "Maximum Line" means $12,000,000, unless said amount is reduced pursuant to SECTION 2.10, in which event it means the amount to which said amount is reduced. "Net Income" means fiscal year-to-date after-tax net income. "Note" means the Revolving Note. "Obligations" means the Note and each and every other debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Lender, whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it arises in a transaction involving the Lender alone or in a transaction involving other creditors of the Borrower, and whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including specifically, but not limited to, the Obligation of Reimbursement and all indebtedness of the Borrower arising under this Agreement, the Note, any L/C Application completed by the Borrower, or any other loan or credit agreement or guaranty between the Borrower and the Lender, whether now in effect or hereafter entered into. "Obligation of Reimbursement" has the meaning given in SECTION 2.3(a). "Permitted Lien" has the meaning given in SECTION 7.1. "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plan" means an employee benefit plan or other plan maintained for the Borrower's employees and covered by Title IV of ERISA. "Premises" means all premises where the Borrower conducts its business and has any rights of possession, including (without limitation) the premises legally described in EXHIBIT C attached hereto. "Receivables" means each and every right of the Borrower to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or otherwise arises under any contract or agreement, whether such right to payment is created, generated or earned by the Borrower or by some other person who subsequently transfers such person's 6 interest to the Borrower, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens and security interests) which the Borrower may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any property of such account debtor or other obligor; all including but not limited to all present and future accounts, contract rights, loans and obligations receivable, chattel papers, bonds, notes and other debt instruments, tax refunds and rights to payment in the nature of general intangibles. "Reportable Event" shall have the meaning assigned to that term in Title IV of ERISA. "Revolving Advance" has the meaning given in SECTION 2.1. "Revolving Note" means the Borrower's revolving promissory note, payable to the order of the Lender in substantially the form of EXHIBIT A hereto and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time. "Security Agreement" means the Security Agreement dated December 2, 1996 by the Guarantor in favor of the Lender. "Security Documents" means this Agreement, the Security Agreement and any other document delivered to the Lender from time to time to secure the Obligations, as the same may hereafter be amended, supplemented or restated from time to time. "Security Interest" has the meaning given in SECTION 3.1. "Special Account" means a specified cash collateral account maintained by a financial institution acceptable to the Lender in connection with Letters of Credit, as contemplated by SECTION 2.4. "Stock Purchase Loans" means loans made by the Borrower or the Guarantor to enable officers and directors of the Borrower or the Guarantor to purchase shares of common stock of the Guarantor. "Subsidiary" means any corporation of which more than 50% of the outstanding shares of capital stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such corporation, irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency, is at the time directly or indirectly owned by the Borrower, by the Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries. 7 "Termination Date" means the earliest of (i) the Maturity Date, (ii) the date the Borrower terminates the Credit Facility, or (iii) the date the Lender demands payment of the Obligations after an Event of Default pursuant to SECTION 8.2. "UCC" means the Uniform Commercial Code as in effect from time to time in the state designated in Section 9.14 as the state whose laws shall govern this Agreement, or in any other state whose laws are held to govern this Agreement or any portion hereof. 1.2. CROSS REFERENCES. All references in this Agreement to Articles, Sections and subsections, shall be to Articles, Sections and subsections of this Agreement unless otherwise explicitly specified. 2. AMOUNT AND TERMS OF THE CREDIT FACILITY 2.1. REVOLVING ADVANCES. The Lender agrees, on the terms and subject to the conditions herein set forth, to make advances to the Borrower from time to time from the date all of the conditions set forth in SECTION 4.1 are satisfied (the "Funding Date") to the Termination Date, on the terms and subject to the conditions herein set forth (the "Revolving Advances"). The Lender shall have no obligation to make a Revolving Advance if, after giving effect to such requested Revolving Advance, the sum of the outstanding and unpaid Revolving Advances under this SECTION 2.1 or otherwise would exceed the Borrowing Base less the L/C Amount. The Borrower's obligation to pay the Revolving Advances shall be evidenced by the Revolving Note and shall be secured by the Collateral as provided in ARTICLE 3. Within the limits set forth in this SECTION 2.1, the Borrower may borrow, prepay pursuant to SECTION 2.10 and reborrow. The Borrower agrees to comply with the following procedures in requesting Revolving Advances under this SECTION 2.1: (a) The Borrower shall make each request for a Revolving Advance to the Lender before 12:00 noon (Minneapolis time) of the day of the requested Revolving Advance. Requests may be made in writing or by telephone, specifying the date of the requested Revolving Advance and the amount thereof. Each request shall be by (i) any officer of the Borrower; or (ii) any person designated as the Borrower's agent by any officer of the Borrower in a writing delivered to the Lender; or (iii) any person whom the Lender reasonably believes to be an officer of the Borrower or such a designated agent. (b) Upon fulfillment of the applicable conditions set forth in ARTICLE 4, the Lender shall disburse the proceeds of the requested Revolving Advance by crediting the same to the Borrower's demand deposit account maintained with the Lender unless the Lender and the Borrower shall agree in writing to another manner of disbursement. Upon the Lender's request, the Borrower shall promptly confirm each telephonic request for an Advance by executing and delivering an appropriate confirmation certificate to the Lender. The Borrower shall repay all Advances even if the Lender does not receive such confirmation and even if the person requesting an Advance was not in fact authorized to do so. Any request for an Advance, whether written or telephonic, shall be deemed to be a representation by the Borrower that the conditions set forth in SECTION 4.2 have been satisfied as of the time of the request. 8 2.2. LETTERS OF CREDIT. (a) The Lender agrees, on the terms and subject to the conditions herein set forth, to cause an Issuer to issue, from the Funding Date to the Termination Date, one or more irrevocable standby or documentary letters of credit (each, a "Letter of Credit") for the Borrower's account and to guaranty the Borrower's obligations with respect thereto. The Lender shall have no obligation to cause an Issuer to issue, or to guaranty, any Letter of Credit if the face amount of the Letter of Credit to be issued or guarantied, would exceed the Borrowing Base less the sum of (A) all outstanding and unpaid Revolving Advances and (B) the L/C Amount. Each Letter of Credit, if any, shall be issued pursuant to a separate L/C Application entered into by the Borrower and the Lender for the benefit of the Issuer, completed in a manner satisfactory to the Lender and the Issuer. The terms and conditions set forth in each such L/C Application shall supplement the terms and conditions hereof, but if the terms of any such L/C Application and the terms of this Agreement are inconsistent, the terms hereof shall control. (b) No Letter of Credit shall be issued with an expiry date later than the Termination Date in effect as of the date of issuance. (c) Any request for the Lender to guaranty a Letter of Credit or to cause an Issuer to issue a Letter of Credit under this SECTION 2.2 shall be deemed to be a representation by the Borrower that the conditions set forth in SECTION 4.2 have been satisfied as of the date of the request. 2.3. PAYMENT OF AMOUNTS DRAWN UNDER LETTERS OF CREDIT; OBLIGATION OF REIMBURSEMENT. The Borrower acknowledges that the Lender, as co-applicant guarantor on the Letters of Credit, will be liable to the Issuer for reimbursement of any and all draws under Letters of Credit and for all other amounts required to be paid under the applicable L/C Application. Accordingly, the Borrower agrees to pay to the Lender any and all amounts required to be paid under the applicable L/C Application, when and as required to be paid thereby, and the amounts designated below, when and as designated: (a) The Borrower hereby agrees to pay the Lender on the day a draft is honored under any Letter of Credit a sum equal to all amounts drawn under such Letter of Credit plus any and all reasonable charges and expenses that the Issuer or the Lender may pay or incur relative to such draw and the applicable L/C Application, plus interest on all such amounts, charges and expenses as set forth below (the Borrower's obligation to pay all such amounts is herein referred to as the "Obligation of Reimbursement"). (b) Whenever a draft is submitted under a Letter of Credit, the Lender shall make a Revolving Advance in the amount of the Obligation of Reimbursement and shall apply the 9 proceeds of such Revolving Advance thereto. Such Revolving Advance shall be repayable in accordance with and be treated in all other respects as a Revolving Advance hereunder. (c) If a draft is submitted under a Letter of Credit when the Borrower is unable, because a Default Period then exists or for any other reason, to obtain a Revolving Advance to pay the Obligation of Reimbursement, the Borrower shall pay to the Lender on demand and in immediately available funds, the amount of the Obligation of Reimbursement together with interest, accrued from the date of the draft until payment in full at the Default Rate. Notwithstanding the Borrower's inability to obtain a Revolving Advance for any reason, the Lender is irrevocably authorized, in its sole discretion, to make a Revolving Advance in an amount sufficient to discharge the Obligation of Reimbursement and all accrued but unpaid interest thereon. (d) The Borrower's obligation to pay any Revolving Advance made under this SECTION 2.3 shall be evidenced by Revolving Note and shall bear interest as provided in SECTION 2.6. 2.4. SPECIAL ACCOUNT. If the Credit Facility is terminated for any reason whatsoever while any Letter of Credit is outstanding, the Borrower shall thereupon pay the Lender in immediately available funds for deposit in the Special Account an amount equal to the L/C Amount. The Special Account shall be an interest bearing account maintained for the Lender by any financial institution acceptable to the Lender. Any interest earned on amounts deposited in the Special Account shall be credited to the Special Account. Amounts on deposit in the Special Account may be applied by the Lender at any time or from time to time to the Obligations in the Lender's sole discretion, and shall not be subject to withdrawal by the Borrower so long as the Lender maintains a security interest therein. The Lender agrees to transfer any balance in the Special Account to the Borrower at such time as the Lender is required to release its security interest in the Special Account under applicable law. 2.5. OBLIGATIONS ABSOLUTE. The Borrower's obligations arising under SECTION 2.3 shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of SECTION 2.3, under all circumstances whatsoever, including (without limitation) the following circumstances: (a) any lack of validity or enforceability of any Letter of Credit or any other agreement or instrument relating to any Letter of Credit (collectively the "Related Documents"); (b) any amendment or waiver of or any consent to departure from all or any of the Related Documents; (c) the existence of any claim, setoff, defense or other right which the Borrower may have at any time, against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), or other person or entity, whether in connection with this Agreement, the transactions contemplated herein or in the Related Documents or any unrelated transactions; 10 (d) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (e) payment by or on behalf of the Issuer or the Lender under any Letter of Credit against presentation of a draft or certificate which does not strictly comply with the terms of such Letter of Credit; or (f) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. 2.6. INTEREST; DEFAULT INTEREST; PARTICIPATIONS; USURY. Interest accruing on the Note shall be due and payable in arrears on the first day of each month. (a) REVOLVING NOTE. Except as set forth in SECTIONS 2.6(b) and 2.6(d), the outstanding principal balance of the Revolving Note shall bear interest at the Floating Rate. (b) DEFAULT INTEREST RATE. At any time during any Default Period, in the Lender's sole discretion and without waiving any of its other rights and remedies, the principal of the Advances outstanding from time to time shall bear interest at the Default Rate, effective for any periods designated by the Lender from time to time during that Default Period. (c) PARTICIPATIONS. If any Person shall acquire a participation in the Advances under this Agreement, the Borrower shall be obligated to the Lender to pay the full amount of all interest calculated under this Agreement, along with all other fees, charges and other amounts due under this Agreement, regardless if such Person elects to accept interest with respect to its participation at a lower rate than the Floating Rate, or otherwise elects to accept less than its prorata share of such fees, charges and other amounts due under this Agreement. (d) USURY. In any event no rate change shall be put into effect which would result in a rate greater than the highest rate permitted by law. 2.7. FEES. (a) COMMITMENT RENEWAL FEE. The Borrower hereby agrees to pay the Lender a fully earned and non-refundable commitment renewal fee of $10,000, due and payable upon the execution of this Agreement. (b) FACILITY FEES. Borrower shall pay to Lender a fee (the "Facility Fees") in an amount equal to one-quarter of one percent (0.25%) per annum of an amount equal to the average daily difference between the Aggregate Outstanding and Five Million Dollars ($5,000,000). To the extent the Aggregate Outstanding exceeds Five Million Dollars ($5,000,000) but is less than Seven Million Five Hundred Thousand Dollars ($7,500,000), the Facility Fees shall be determined on the average daily difference between such Aggregate 11 Outstanding and Seven Million Five Hundred Thousand Dollars ($7,500,000). To the extent the Aggregate Outstanding exceeds Seven Million Five Hundred Thousand Dollars ($7,500,000) but is less than Ten Million Dollars ($10,000,000), the Facility Fees shall be determined on the average daily difference between such Aggregate Outstanding and Ten Million dollars ($10,000,000). To the extent the Aggregate Outstanding exceeds Ten Million Dollars ($10,000,000), the Facility Fees shall be determined on the average daily difference between such Aggregate Outstanding and the Maximum Line. Such fee shall be calculated monthly and paid in arrears commencing on the first Banking Day of the month immediately following execution of this Agreement and continuing on the first Banking Day of each month thereafter until Lender's commitment to extend the Credit has been terminated pursuant to SECTION 2.10 or SECTION 8.2(a). Borrower hereby authorizes Lender, to make an Advance, subject to Availability in an amount equal to the Facility Fees then due and payable and apply the same to the Facility Fees due. (c) STANDBY LETTER OF CREDIT FEES. The Borrower agrees to pay the Lender a fee with respect to each standby Letter of Credit, if any, accruing on a daily basis and computed at the annual rate of two and one half percent (2.5%) of the aggregate amount that may then be drawn on all issued and outstanding standby Letters of Credit assuming compliance with all conditions for drawing thereunder (the "Aggregate Face Amount"), from and including the date of issuance of such standby Letter of Credit until such date as such standby Letter of Credit shall terminate by its terms or be returned to the Lender, due and payable monthly in arrears on the first day of each month and on the Termination Date; PROVIDED, HOWEVER that during any Default Period, in the Lender's sole discretion and without waiving any of its other rights and remedies, such fee shall increase to four and one-half percent (4.5%) of the Aggregate Face Amount. The foregoing fee shall be in addition to any and all fees, commissions and charges of any Issuer of a Letter of Credit with respect to or in connection with such Letter of Credit. (d) DOCUMENTARY LETTER OF CREDIT FEES. The Borrower agrees to pay the Lender fees with respect to each documentary Letter of Credit in accordance with the Lender's usual and customary fees with respect to documentary Letters of Credit. (e) LETTER OF CREDIT ADMINISTRATIVE FEES. The Borrower agrees to pay the Lender, on written demand, the administrative fees charged by the Issuer in connection with the honoring of drafts under any Letter of Credit, amendments thereto, transfers thereof and all other activity with respect to the Letters of Credit at the then-current rates published by the Issuer for such services rendered on behalf of customers of the Issuer generally. (f) COLLATERAL MONITORING FEES. So long as no Event of Default has occurred and is continuing, Borrower shall pay to Lender a monthly collateral monitoring fee of Two Hundred Fifty Dollars ($250) (the "Collateral Monitoring Fees"). The monthly collateral Monitoring Fee shall be paid in arrears commencing on the first Banking Day of the month immediately following execution of this Agreement and continuing on the first Banking Day of each month thereafter until all of the Obligations have been paid in full in money and the Commitment has been terminated pursuant to SECTIONS 2.10, 2.12 or 8.1. Borrower hereby authorizes Lender to make an Advance, subject to Availability, in an amount equal to the Collateral Monitoring Fees then due and payable and apply the same to the Collateral Monitoring Fees due. 12 2.8. COMPUTATION OF INTEREST AND FEES; WHEN INTEREST DUE AND PAYABLE. Interest accruing on the outstanding principal balance of the Advances and fees hereunder outstanding from time to time shall be computed on the basis of actual number of days elapsed in a year of 360 days. Interest shall be payable in arrears on the first day of each month and on the Termination Date. 2.9. CAPITAL ADEQUACY; INCREASED COSTS AND REDUCED RETURN. If any Related Lender determines at any time that its Return has been reduced as a result of any Rule Change, such Related Lender may require the Borrower to pay it the amount necessary to restore its Return to what it would have been had there been no Rule Change. For purposes of this SECTION 2.9: (a) "Capital Adequacy Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding capital adequacy, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules requiring financial institutions to maintain total capital in amounts based upon percentages of outstanding loans, binding loan commitments and letters of credit. (b) "L/C Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding letters of credit, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules imposing taxes, duties or other similar charges, or mandating reserves, special deposits or similar requirements against assets of, deposits with or for the account of, or credit extended by any Related Lender, on letters of credit. (c) "Return," for any period, means the return as determined by such Related Lender on the Advances and Letters of Credit based upon its total capital requirements and a reasonable attribution formula that takes account of the Capital Adequacy Rules then in effect and costs of issuing or maintaining any Letter of Credit. Return may be calculated for each calendar quarter and for the shorter period between the end of a calendar quarter and the date of termination in whole of this Agreement. (d) "Rule Change" means any change in any Capital Adequacy Rule or L/C Rule occurring after the date of this Agreement, but the term does not include any changes in applicable requirements that at the Closing Date are scheduled to take place under the existing Capital Adequacy Rules or L/C Rules or any increases in the capital that any Related Lender is required to maintain to the extent that the increases are required due to a regulatory authority's assessment of the financial condition of such Related Lender. 13 (e) "Related Lender" includes (but is not limited to) the Lender, the Issuer, any parent corporation of the Lender or the Issuer and any assignee of any interest of the Lender hereunder and any participant in the loans made hereunder. Certificates of any Related Lender sent to the Borrower from time to time claiming compensation under this SECTION 2.9, stating the reason therefor and setting forth in reasonable detail the calculation of the additional amount or amounts to be paid to the Related Lender hereunder to restore its Return shall be conclusive absent manifest error. In determining such amounts, the Related Lender may use any reasonable averaging and attribution methods so long as it accurately reflects the reduction. Lender agrees to provide to the Borrower such additional information with respect thereto upon written request by Borrower. 2.10. VOLUNTARY PREPAYMENT; TERMINATION OF THE CREDIT FACILITY BY THE BORROWER; CLEANDOWN PERIOD. (a) VOLUNTARY PREPAYMENT; TERMINATION. Except as otherwise provided herein, the Borrower may prepay the Advances and Obligation of Reimbursement in whole at any time or from time to time in part. The Borrower may terminate the Credit Facility at any time if it gives the Lender at least 30 days' prior written notice and pays any termination fee required under SECTION 2.11. Upon termination of the Credit Facility and payment and performance of all Obligations, the Lender shall release or terminate the Security Interest and the Security Documents to which the Borrower is entitled by law. (b) CLEANDOWN PERIOD. Aggregate Outstandings (excluding Letters of Credit) shall not exceed One Million Five Hundred Thousand Dollars ($1,500,000) for a thirty (30) consecutive-day period in each fiscal year that this Agreement is in effect, which period shall commence and end within such fiscal year. 2.11. TERMINATION FEE; WAIVER OF TERMINATION FEE. (a) TERMINATION FEE. If the Credit Facility is terminated for any reason prior to January 1, 2000, the Borrower shall pay to the Lender a fee in an amount equal to one-half of one percent (0.5%) of the Maximum Line. (b) WAIVER OF TERMINATION FEE. The Borrower will not be required to pay the termination fee otherwise due under this SECTION 2.11 if such termination is made because of refinancing by an affiliate of the Lender. 2.12. MANDATORY PREPAYMENT. Without notice or demand, if the sum of the outstanding principal balance of the Revolving Advances plus the L/C Amount shall at any time exceed the Borrowing Base, the Borrower shall (i) first, immediately prepay the Revolving Advances to the extent necessary to eliminate such excess; and (ii) if prepayment in full of the Revolving Advances is insufficient to eliminate such excess, pay to the Lender in immediately available funds for deposit in the Special Account an amount equal to the remaining excess. Any payment received by the Lender under this SECTION 2.12 or under SECTION 2.10 may be applied to the Obligations, in such order and in such amounts as the Lender, in its discretion, may from time to time determine. 14 2.13. PAYMENT. All payments to the Lender shall be made in immediately available funds and shall be applied to the Obligations one (1) Banking Day after receipt by the Lender. The Lender may hold all payments not constituting immediately available funds for three (3) additional days before applying them to the Obligations. Notwithstanding anything in SECTION 2.1, the Borrower hereby authorizes the Lender, in its discretion at any time or from time to time without the Borrower's request and even if the conditions set forth in SECTION 4.2 would not be satisfied, to make a Revolving Advance in an amount equal to the portion of the Obligations from time to time due and payable. 2.14. PAYMENT ON NON-BANKING DAYS. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment may be made on the next succeeding Banking Day, and such extension of time shall in such case be included in the computation of interest on the Advances or the fees hereunder, as the case may be. 2.15. USE OF PROCEEDS. The Borrower shall use the proceeds of Advances, and each Letter of Credit, if any, for ordinary working capital purposes and for general, lawful corporate purposes. 2.16. LIABILITY RECORDS. The Lender may maintain from time to time, at its discretion, liability records as to the Obligations. All entries made on any such record shall be presumed correct until the Borrower establishes the contrary. Upon the Lender's demand, the Borrower will admit and certify in writing the exact principal balance of the Obligations that the Borrower then asserts to be outstanding. Any billing statement or accounting rendered by the Lender shall be conclusive and fully binding on the Borrower unless the Borrower gives the Lender specific written notice of exception within 45 days after receipt. 3. SECURITY INTEREST; COLLATERAL ACCOUNT; OCCUPANCY; SETOFF 3.1. GRANT OF SECURITY INTEREST. The Borrower hereby reaffirms and restates its pledge, assignment and grant to the Lender of a security interest (collectively referred to as the "Security Interest") in the Collateral, as security for the payment and performance of the Obligations. 3.2. NOTIFICATION OF ACCOUNT DEBTORS AND OTHER OBLIGORS. The Lender may at any time during a Default Period notify any account debtor or other person obligated to pay the amount due that such right to payment has been assigned or transferred to the Lender for security and shall be paid directly to the Lender. The Borrower will 15 join in giving such notice if the Lender so requests. At any time after the Borrower or the Lender gives such notice to an account debtor or other obligor, after ten (10) days' written notice to the Borrower, the Lender may, but need not, in the Lender's name or in the Borrower's name demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such right to payment, or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligations (including collateral obligations) of any such account debtor or other obligor. 3.3. COLLATERAL ACCOUNT. Unless otherwise consented to by the Lender, Borrower will, forthwith upon receipt by Borrower of all checks, drafts, cash and other remittances in payment or as proceeds of, or on account of, any of the Accounts, the Receivables or other Collateral (except Advances made by the Lender and excess amounts referenced in the last sentence of this SECTION 3.3) paid over to Borrower by the Lender), deposit the same in a special Lender account (the "Collateral Account") with the Lender or such other bank or financial institution as the Lender shall consent, over which the Lender alone has power of withdrawal, and will, to the extent required by the Lender, designate with each such deposit the particular Accounts or other item of Collateral upon which the remittance was made. Borrower acknowledges that the maintenance of the Collateral Account is solely for the convenience of the Lender in facilitating its own operations, and Borrower does not and shall not have any right, title or interest in the Collateral Account or in the amounts at any time appearing to the credit thereof. Amounts deposited in the Collateral Account shall not bear interest. All deposits into the Collateral Account shall be applied to the outstanding principal balance, if any, of the Revolving Loan after being held one (1) Banking Day, or at such later time as such amounts are actually and finally collected as determined by the Lender. Said proceeds shall be deposited in precisely the form received except for Borrower's endorsement where necessary to permit collection of items, which endorsement Borrower agrees to make. Pending such deposit, Borrower agrees not to commingle any such checks, drafts, cash and other remittances with any of its funds or property, but will hold them separate and apart therefrom and upon an express trust for the Lender until deposit thereof is made in the Collateral Account. Upon payment in full in cash of all outstanding Obligations, the Lender will pay over to Borrower, daily, any excess amounts received by the Lender as payment or proceeds of Collateral, whether received by the Lender as a deposit in the Collateral Account or received by the Lender as a direct payment on any of the sums due hereunder. 3.4. ASSIGNMENT OF INSURANCE. As additional security for the payment and performance of the Obligations, the Borrower hereby assigns to the Lender any and all monies (including, without limitation, proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of the Borrower with respect to, any and all policies of insurance now or at any time hereafter covering the Collateral or any evidence thereof or any business records or valuable papers pertaining thereto, and the Borrower hereby directs the issuer of any such policy to pay all such monies directly to the Lender. At any time, whether or not a Default Period then exists, the Lender may (but need not), in the Lender's name or in the Borrower's name, execute and deliver proof of claim, receive all such monies, endorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy. 3.5. OCCUPANCY. 16 (a) The Borrower hereby irrevocably grants to the Lender the right to take possession of the Premises at any time during a Default Period after prior written notice to the Borrower. (b) The Lender may use the Premises only to hold, process, manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of goods that are Collateral and for other purposes that the Lender may in good faith deem to be related or incidental purposes. (c) The Lender's right to hold the Premises shall cease and terminate upon the earliest of (i) the cure to the satisfaction of the Lender of all Events of Default, (ii) payment in full and discharge of all Obligations and termination of the Commitment or (iii) final sale or disposition of all goods constituting Collateral and delivery of all such goods to purchasers. (d) The Lender shall not be obligated to pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises; provided, however, that if the Lender does pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises, the Borrower shall reimburse the Lender promptly for the full amount thereof. In addition, the Borrower will pay, or reimburse the Lender for, all taxes, fees, duties, imposts, charges and expenses at any time incurred by or imposed upon the Lender by reason of the execution, delivery, existence, recordation, performance or enforcement of this Agreement or the provisions of this SECTION 3.5. 3.6. LICENSE. The Borrower hereby grants to the Lender a non-exclusive, worldwide and royalty-free license to use or otherwise exploit all trademarks, franchises, trade names, copyrights and patents of the Borrower for the purpose of selling, leasing or otherwise disposing of any or all Collateral during any Default Period. 3.7. FINANCING STATEMENT. A carbon, photographic or other reproduction of this Agreement or of any financing statements signed by the Borrower is sufficient as a financing statement and may be filed as a financing statement in any state to perfect the security interests granted hereby. For this purpose, the following information is set forth: 17 Name and address of Debtor: Braun's Fashions, Inc. 2400 Xenium Lane North Plymouth, Minnesota 55441 Federal Tax Identification No. 41-0851237 Name and address of Secured Party: Norwest Bank Minnesota, National Association Norwest Center Sixth Street and Marquette Avenue Minneapolis, Minnesota 55479-0152 Federal Tax Identification No. 41-1592157 3.8. SETOFF. The Borrower agrees that the Lender may at any time or from time to time, at its sole discretion and without demand and without prior notice to anyone, setoff any liability owed to the Borrower by the Lender, whether or not due, against any Obligation, whether or not due. In addition, each other Person holding a participating interest in any Obligations shall have the right to appropriate or setoff any deposit or other liability then owed by such Person to the Borrower, whether or not due, and apply the same to the payment of said participating interest, as fully as if such Person had lent directly to the Borrower the amount of such participating interest. Lender agrees to give prompt notice to Borrower after exercising its rights under this SECTION 3.8. 4. CONDITIONS OF LENDING 4.1. CONDITIONS PRECEDENT TO THE INITIAL REVOLVING ADVANCE AND THE INITIAL LETTER OF CREDIT. The Lender's obligation to continue to make Revolving Advances or to cause to be issued any additional Letters of Credit hereunder shall be subject to the condition precedent that the Lender shall have received all of the following, each in form and substance satisfactory to the Lender: (a) This Agreement, properly executed by the Borrower. (b) The Note, properly executed by the Borrower. (c) A complete and accurate list of all stores operated by the Borrower, with the following information for each such location: store number, address, and telephone number, name of landlord and, if applicable, property manager, together with each such landlord's and property manager's address. 18 (d) True and correct copies of any and all agreements pursuant to which the Borrower's property is in the possession of any Person other than the Borrower, together with, in the case of any goods held by such Person for resale, (i) a consignee's acknowledgment and waiver of liens, (ii) UCC financing statements sufficient to protect the Borrower's and the Lender's interests in such goods, and (iii) UCC searches showing that no other secured party has filed a financing statement against such Person and covering property similar to the Borrower's other than the Borrower, or if there exists any such secured party, evidence that each such secured party has received notice from the Borrower and the Lender sufficient to protect the Borrower's and the Lender's interests in the Borrower's goods from any claim by such secured party. (e) True and correct copies of any and all agreements pursuant to which the Borrower's property is in the possession of any Person other than the Borrower, together with, (i) an acknowledgment and waiver of liens from each subcontractor who has possession of the Borrower's goods from time to time, (ii) UCC financing statements sufficient to protect the Borrower's and the Lender's interests in such goods, and (iii) UCC searches showing that no other secured party has filed a financing statement covering such Person's property other than the Borrower, or if there exists any such secured party, evidence that each such secured party has received notice from the Borrower and the Lender sufficient to protect the Borrower's and the Lender's interests in the Borrower's goods from any claim by such secured party. (f) Current searches of appropriate filing offices showing that (i) no state or federal tax liens have been filed and remain in effect against the Borrower, (ii) no financing statements or assignments of patents, trademarks or copyrights have been filed and remain in effect against the Borrower except those financing statements and assignments of patents, trademarks or copyrights relating to Permitted Liens or to liens held by Persons who have agreed in writing that upon receipt of proceeds of the Advances, they will deliver UCC releases and/or terminations and releases of such assignments of patents, trademarks or copyrights satisfactory to the Lender, and (iii) the Lender has duly filed all financing statements necessary to perfect the Security Interest, to the extent the Security Interest is capable of being perfected by filing. (g) A certificate of the Borrower's and Guarantor's Secretary or Assistant Secretary certifying as to (i) the resolutions of the Borrower's and Guarantor's directors and, if required, shareholders, authorizing the execution, delivery and performance of the Loan Documents, (ii) the Borrower's and Guarantor's articles or certificate of incorporation and bylaws, and (iii) the signatures of the Borrower's and Guarantor's officers or agents authorized to execute and deliver the Loan Documents and other instruments, agreements and certificates, including Advance requests, on the Borrower's and Guarantor's behalf. (h) A current certificate issued by the Secretary of State of Minnesota, certifying that the Borrower is in compliance with all applicable organizational requirements of the State of Minnesota. 19 (i) A current certificate issued by the Secretary of State of Delaware, certifying that the Guarantor is in compliance with all applicable organizational requirements of the State of Delaware. (j) Evidence that the Borrower is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. (k) A certificate of an officer of the Borrower confirming the representations and warranties set forth in ARTICLE 5. (l) An opinion of counsel to the Borrower and Guarantor, addressed to the Lender. (m) Certificates of the insurance required hereunder, with all hazard insurance containing a lender's loss payable endorsement in the Lender's favor and with all liability insurance naming the Lender as an additional insured. (n) A reaffirmation of Guaranty, properly executed by the Guarantor, pursuant to which the Guarantor unconditionally reaffirms its obligations under the Guaranty. (o) Payment of the fees and commissions due through the date of execution of this Agreement under SECTION 2.7 and expenses incurred by the Lender through such date and required to be paid by the Borrower under SECTION 9.7, including all legal expenses incurred through the date of this Agreement. (p) Such other documents as the Lender in its sole discretion may require. 4.2. CONDITIONS PRECEDENT TO ALL ADVANCES AND LETTERS OF CREDIT. The Lender's obligation to make each Advance or to cause the Issuer to issue any Letter of Credit shall be subject to the further conditions precedent that on such date: (a) the representations and warranties contained in ARTICLE 5 are correct on and as of the date of such Advance or issuance of Letter of Credit as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and (b) no event has occurred and is continuing, or would result from such Advance or the issuance of such Letter of Credit, as the case may be, which constitutes a Default or an Event of Default. 5. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lender as follows: 5.1. CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER. 20 The Borrower is a corporation, duly organized, validly existing and in good standing under the laws of the State of Minnesota and is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. The Borrower has all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, the Loan Documents. The Borrower conducts business solely under the names set forth in SCHEDULE 5.1 hereto. The Borrower's chief executive office and principal place of business is located at the address set forth in SCHEDULE 5.1 hereto, and all of the Borrower's records relating to its business or the Collateral are kept at that location. All Inventory and Equipment is located at that location or at one of the other locations set forth in SCHEDULE 5.1 hereto. The Borrower's tax identification number is correctly set forth in SECTION 3.7 hereto. 5.2. AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR AGREEMENTS. The execution, delivery and performance by the Borrower of the Loan Documents and the borrowings from time to time hereunder have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the Borrower's stockholders; (ii) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any third party, except such authorization, consent, approval, registration, declaration, filing or notice as has been obtained, accomplished or given prior to the date hereof; (iii) violate any provision of any law, rule or regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to the Borrower or of the Borrower's articles of incorporation or bylaws; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected; or (v) result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature (other than the Security Interest) upon or with respect to any of the properties now owned or hereafter acquired by the Borrower. 5.3. LEGAL AGREEMENTS. This Agreement constitutes and, upon due execution by the Borrower, the other Loan Documents will constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, except to the extent such enforcement may be limited by applicable bankruptcy, insolvency and other laws affecting the rights of creditors generally. 5.4. SUBSIDIARIES. The Borrower has no Subsidiaries. 5.5. FINANCIAL CONDITION; NO ADVERSE CHANGE. 21 The Borrower has heretofore furnished to the Lender its audited financial statements for its fiscal year ended February 28, 1998 and unaudited financial statements for the fiscal year-to-date period ended January 30, 1999 and those statements fairly present the Borrower's financial condition on the dates thereof and the results of its operations and cash flows for the periods then ended and were prepared in accordance with generally accepted accounting principles. Since the date of the most recent financial statements, there has been no material adverse change in the Borrower's business, properties or condition (financial or otherwise). 5.6. LITIGATION. There are no actions, suits or proceedings pending or, to the Borrower's knowledge, threatened against or affecting the Borrower or any of its Affiliates or the properties of the Borrower or any of its Affiliates before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Borrower or any of its Affiliates, would have a material adverse effect on the financial condition, properties or operations of the Borrower or any of its Affiliates. 5.7. REGULATION U. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. 5.8. TAXES. The Borrower and its Affiliates have paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by each of them. The Borrower and its Affiliates have filed all federal, state and local tax returns which to the knowledge of the officers of the Borrower or any Affiliate, as the case may be, are required to be filed, and the Borrower and its Affiliates have paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by any of them to the extent such taxes have become due. 5.9. TITLES AND LIENS. The Borrower has good and marketable title to all Collateral described in the collateral reports provided to the Lender and all other Collateral, properties and assets reflected in the latest financial statements referred to in SECTION 5.5 and all proceeds thereof, free and clear of all mortgages, security interests, liens and encumbrances, except for Permitted Liens. No financing statement naming the Borrower as debtor is on file in any office except to perfect only Permitted Liens. 5.10. PLANS. Except as set forth in SCHEDULE 5.10, neither the Borrower nor any of its Affiliates maintains or has maintained any Plan. Neither the Borrower nor any Affiliate has received any notice or has any knowledge to the effect that it is not in full compliance with any of the 22 requirements of ERISA. No Reportable Event or other fact or circumstance which may have an adverse effect on the Plan's tax qualified status exists in connection with any Plan. Neither the Borrower nor any of its Affiliates has: (a) Any accumulated funding deficiency within the meaning of ERISA; or (b) Any liability or knows of any fact or circumstances which could result in any liability to the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the Department of Labor or any participant in connection with any Plan (other than accrued benefits which or which may become payable to participants or beneficiaries of any such Plan). 5.11. DEFAULT. The Borrower is in compliance with all provisions of all agreements, instruments, decrees and orders to which it is a party or by which it or its property is bound or affected, the breach or default of which could have a material adverse effect on the Borrower's financial condition, properties or operations. 5.12. ENVIRONMENTAL MATTERS. (a) DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: (i) "Environmental Law" means any federal, state, local or other governmental statute, regulation, law or ordinance dealing with the protection of human health and the environment. (ii) "Hazardous Substances" means pollutants, contaminants, hazardous substances, hazardous wastes, petroleum and fractions thereof, and all other chemicals, wastes, substances and materials listed in, regulated by or identified in any Environmental Law. (b) To the Borrower's best knowledge, there are not present in, on or under the Premises any Hazardous Substances in such form or quantity as to create any liability or obligation for either the Borrower or the Lender under common law of any jurisdiction or under any Environmental Law, and to the Borrower's best knowledge, no Hazardous Substances have ever been stored, buried, spilled, leaked, discharged, emitted or released in, on or under the Premises in such a way as to create any such liability. (c) To the Borrower's best knowledge, the Borrower has not disposed of Hazardous Substances in such a manner as to create any liability under any Environmental Law. (d) There are no pending requests, claims, notices, investigations, demands, administrative proceedings, hearings or litigation, relating in any way to the Premises or the 23 Borrower, alleging liability under, violation of, or noncompliance with any Environmental Law or any license, permit or other authorization issued pursuant thereto. To the Borrower's best knowledge, no such matter is threatened or impending. (e) To the Borrower's best knowledge, the Borrower's businesses are conducted in accordance with all Environmental Laws and all licenses, permits and other authorizations required pursuant to any Environmental Law and necessary for the lawful and efficient operation of such businesses are in the Borrower's possession and are in full force and effect. No permit required under any Environmental Law is scheduled to expire within twelve (12) months and there is no threat that any such permit will be withdrawn, terminated, limited or materially changed. (f) To the Borrower's best knowledge, the Premises are not and never have been listed on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Information System or any similar federal, state or local list, schedule, log, inventory or database. (g) The Borrower has delivered to Lender all environmental assessments, audits, reports, permits, licenses and other documents describing or relating in any way to the Premises or Borrower's businesses. 5.13. SUBMISSIONS TO LENDER. All financial and other information provided to the Lender by or on behalf of the Borrower in connection with the Borrower's request for the credit facilities contemplated hereby is reasonably accurate in all material respects and, as to projections, valuations or proforma financial statements, present a good faith opinion as to such projections, valuations and proforma condition and results. 5.14. FINANCING STATEMENTS. The Borrower previously provided to the Lender signed financing statements sufficient when filed to perfect the Security Interest and the other security interests created by the Security Documents. The Lender has a valid and perfected security interest in all Collateral and all other collateral described in the Security Documents which is capable of being perfected by filing financing statements. None of the Collateral or other collateral covered by the Security Documents is or will become a fixture on real estate, unless a sufficient fixture filing is in effect with respect thereto. 5.15. RIGHTS TO PAYMENT. Each right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral or other collateral covered by the Security Documents is (or, in the case of all future Collateral or such other collateral, will be when arising or issued) the valid, genuine and legally enforceable obligation of the account debtor or other obligor named therein or in the Borrower's records pertaining thereto as being obligated to pay such obligation. 6. BORROWER'S AFFIRMATIVE COVENANTS 24 So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, the Borrower will comply with the following requirements, unless the Lender shall otherwise consent in writing: 6.1. REPORTING REQUIREMENTS. The Borrower will deliver, or cause to be delivered, to the Lender each of the following, which shall be in form and detail acceptable to the Lender: (a) as soon as available, and in any event within 120 days after the end of each fiscal year of the Borrower, the Borrower's audited financial statements with the unqualified opinion of independent certified public accountants selected by the Borrower and acceptable to the Lender, which annual financial statements shall include the Borrower's balance sheet as at the end of such fiscal year and the related statements of the Borrower's income, retained earnings and cash flows for the fiscal year then ended, prepared, if the Lender so requests, on a consolidating and consolidated basis to include Guarantor and any Affiliates, all in reasonable detail and prepared in accordance with GAAP, together with (i) copies of all management letters prepared by such accountants; and (ii) a certificate of the Borrower's chief financial officer stating that such financial statements have been prepared in accordance with GAAP and whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder and, if so, stating in reasonable detail the facts with respect thereto; (b) as soon as available and in any event within 20 days after the end of each month, an unaudited/internal balance sheet and statements of income and cash flow of the Borrower as at the end of and for such month and for the year to date period then ended, prepared, if the Lender so requests, on a consolidating and consolidated basis to include Guarantor and any Affiliates, in reasonable detail and stating in comparative form the figures for the corresponding date and periods in the previous year, all prepared in accordance with GAAP, subject to year-end audit adjustments; and accompanied by a certificate of the Borrower's chief financial officer, substantially in the form of EXHIBIT B hereto stating (i) that such financial statements have been prepared in accordance with GAAP, subject to year-end audit adjustments, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto, and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in SECTIONS 6.11 and 6.12; (c) within 20 days after the end of each month or more frequently if the Lender so requires, agings of the Borrower's accounts receivable and its accounts payable, and within 15 days after the end of each month an inventory certification report, and a calculation of the Borrower's Accounts, Eligible Accounts, Inventory and Eligible Inventory as at the end of such month or shorter time period; 25 (d) within 45 days after the beginning of each fiscal year of the Borrower, the projected income statements for each month of such year, and if requested, the projected balance sheets for each month, each in reasonable detail, representing the Borrower's good faith projections and certified by the Borrower's chief financial officer as being the most accurate projections available and identical to the projections used by the Borrower for internal planning purposes, together with such supporting schedules and information as the Lender may in its reasonable discretion require; (e) immediately after the commencement thereof, notice in writing of all litigation and of all proceedings before any governmental or regulatory agency affecting the Borrower of the type described in SECTION 5.12 or which seek a monetary recovery against the Borrower in excess of $250,000; (f) as promptly as practicable (but in any event not later than five business days) after an officer of the Borrower obtains knowledge of the occurrence of any breach, default or event of default under any Security Document or any event which constitutes a Default or Event of Default hereunder, notice of such occurrence, together with a detailed statement by a responsible officer of the Borrower of the steps being taken by the Borrower to cure the effect of such breach, default or event; (g) as soon as possible and in any event within 30 days after the Borrower knows or has reason to know that any Reportable Event with respect to any Plan has occurred, the statement of the Borrower's chief financial officer setting forth details as to such Reportable Event and the action which the Borrower proposes to take with respect thereto, together with a copy of the notice of such Reportable Event to the Pension Benefit Guaranty Corporation; (h) as soon as possible, and in any event within 10 days after the Borrower fails to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, the statement of the Borrower's chief financial officer setting forth details as to such failure and the action which the Borrower proposes to take with respect thereto, together with a copy of any notice of such failure required to be provided to the Pension Benefit Guaranty Corporation; (i) promptly upon request of the Lender, a list of all of Borrower's locations and the fax number for each location, along with the telephone and fax number for the landlord of each location; (j) promptly upon knowledge thereof, notice of any change in the persons constituting the Borrower's executive officers; (k) promptly upon knowledge thereof, notice of any loss of or material damage to any Collateral or other collateral covered by the Security Documents or of any substantial adverse change in any Collateral or such other collateral or the prospect of payment thereof; (l) promptly after the sending or filing thereof, copies of all regular and periodic reports which the Borrower shall file with the Securities and Exchange Commission or any national securities exchange; 26 (m) promptly upon knowledge thereof, notice of the Borrower's violation of any law, rule or regulation, the non-compliance with which could materially and adversely affect the Borrower's business or its financial condition; (n) from time to time, with reasonable promptness, any and all receivables schedules, collection reports, deposit records, equipment schedules, copies of invoices to account debtors, shipment documents and delivery receipts for goods sold, and such other material, reports, records or information as the Lender may reasonably request; and (o) promptly upon request by Lender, and in any event within ten (10) days of such a request by Lender, copies of any and all leases pursuant to which Borrower occupies any Premises. 6.2. BOOKS AND RECORDS; INSPECTION AND EXAMINATION. The Borrower will keep accurate books of record and account for itself pertaining to the Collateral and pertaining to the Borrower's business and financial condition in which true and complete entries will be made in accordance with GAAP and, upon the Lender's request, will permit any officer, employee, attorney or accountant for the Lender to audit, review, make extracts from or copy any and all corporate and financial books and records of the Borrower at all times during ordinary business hours, to send and discuss with account debtors and other obligors requests for verification of amounts owed to the Borrower, and to discuss the Borrower's affairs with any of its senior officers and its independent accountants. Upon two Banking Days' notice to Borrower, the Borrower will permit the Lender, or its employees, accountants, attorneys or agents, to examine and inspect any Collateral, other collateral covered by the Security Documents or any other property of the Borrower at any time during ordinary business hours; provided, however that if the Lender reasonably believes that a Default or an Event of Default may have occurred, Lender shall not be required to give prior notice of such inspections. For purposes of this SECTION 6.2, visits by employees or agents of Lender to stores operated by Borrower shall not be deemed to be inspections requiring prior notice as long as such visits are conducted during normal business hours. 6.3. ACCOUNT VERIFICATION. During any Default Period, the Lender may send or require the Borrower to send requests for verification of accounts or notices of assignment to account debtors and other obligors. At any time during any Default Period, the Lender may also telephone account debtors and other obligors to verify accounts. 6.4. COMPLIANCE WITH LAWS. (a) The Borrower will (i) comply with the requirements of applicable laws and regulations, the non-compliance with which would materially and adversely affect its business or its financial condition and (ii) use and keep the Collateral, and require that others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance. 27 (b) Without limiting the foregoing undertakings, the Borrower specifically agrees that it will comply with all applicable Environmental Laws and obtain and comply with all permits, licenses and similar approvals required by any Environmental Laws, and will not generate, use, transport, treat, store or dispose of any Hazardous Substances in such a manner as to create any liability or obligation under the common law of any jurisdiction or any Environmental Law. 6.5. PAYMENT OF TAXES AND OTHER CLAIMS. The Borrower will pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it (including, without limitation, the Collateral) or upon or against the creation, perfection or continuance of the Security Interest, prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon any properties of the Borrower; provided, that the Borrower shall not be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which proper reserves have been made. 6.6. MAINTENANCE OF PROPERTIES. (a) The Borrower will keep and maintain the Collateral, the other collateral covered by the Security Documents and all of its other properties necessary or useful in its business in good condition, repair and working order (normal wear and tear excepted) and will from time to time replace or repair any worn, defective or broken parts; provided, however, that nothing in this SECTION 6.6 shall prevent the Borrower from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the Lender's judgment, desirable in the conduct of the Borrower's business and not disadvantageous in any material respect to the Lender. (b) The Borrower will defend the Collateral against all claims or demands of all persons (other than the Lender) claiming the Collateral or any interest therein. (c) The Borrower will keep all Collateral and other collateral covered by the Security Documents free and clear of all security interests, liens and encumbrances except Permitted Liens. 6.7. INSURANCE. The Borrower will obtain and at all times maintain insurance with insurers believed by the Borrower to be responsible and reputable, in such amounts and against such risks as may from time to time be required by the Lender, but in all events in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which the Borrower operates. Without limiting the generality of the foregoing, the Borrower will at all times maintain business interruption insurance including coverage for force majeure and keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft, collision (for Collateral consisting of motor vehicles) and such other risks and in such amounts as the Lender may reasonably request, with any loss payable to the Lender to the extent of its interest, and all policies of such insurance shall contain a lender's loss payable 28 endorsement for the Lender's benefit acceptable to the Lender. All policies of liability insurance required hereunder shall name the Lender as an additional insured. 6.8. PRESERVATION OF EXISTENCE. The Borrower will preserve and maintain its existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business and shall conduct its business in an orderly, efficient and regular manner. 6.9. DELIVERY OF INSTRUMENTS. Upon request by the Lender, the Borrower will promptly deliver to the Lender in pledge all instruments, documents and chattel papers constituting Collateral, duly endorsed or assigned by the Borrower. 6.10. PERFORMANCE BY THE LENDER. If the Borrower at any time fails to perform or observe any of the foregoing covenants contained in this ARTICLE 6 or elsewhere herein, and if such failure shall continue for a period of ten calendar days after the Lender gives the Borrower written notice thereof (or in the case of the agreements contained in SECTIONS 3.3, 6.5 and 6.7, immediately upon the occurrence of such failure, without notice or lapse of time), the Lender may, but need not, perform or observe such covenant on behalf and in the name, place and stead of the Borrower (or, at the Lender's option, in the Lender's name) and may, but need not, take any and all other actions which the Lender may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens or encumbrances, the performance of obligations owed to account debtors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments); and the Borrower shall thereupon pay to the Lender on demand the amount of all monies expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Lender in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Lender, together with interest thereon from the date expended or incurred at the Floating Rate. To facilitate the Lender's performance or observance of such covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender, or the Lender's delegate, acting alone, as the Borrower's attorney in fact (which appointment is coupled with an interest) with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of the Borrower any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by the Borrower under this SECTION 6.10. 6.11. MINIMUM CASH FLOW; MINIMUM CASH ON HAND. The Borrower will maintain on a rolling twelve-month basis, determined as at the end of each fiscal quarter, Cash Flow at or above ($2,000,000). Notwithstanding the foregoing, in the 29 event the Borrower fails to maintain the required level of Cash Flow set forth in the foregoing sentence, such failure will not constitute an Event of Default hereunder in the event the sum of Borrower's cash and cash equivalents (as determined in accordance with GAAP) as of the end of such measurement period equals or exceeds the following amounts during the periods set forth opposite such amounts:
MINIMUM CASH AND CASH PERIOD EQUIVALENTS Funding Date through February 26, 2000 $4,000,000 February 27, 2000 through March 3, 2001 $3,000,000 March 4, 2001 through June 30, 2002 $2,000,000
6.12. MINIMUM INVENTORY TURNS RATIO. The Borrower will maintain, on a rolling twelve-month basis, determined as at the end of each fiscal quarter, an Inventory Turns Ratio at not less than 3.00 to 1.00. 7. NEGATIVE COVENANTS So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, the Borrower agrees that, without the Lender's prior written consent: 7.1. LIENS. The Borrower will not create, incur or suffer to exist any mortgage, deed of trust, pledge, lien, security interest upon or, assignment or transfer of any of its assets, now owned or hereafter acquired, to secure any indebtedness; EXCLUDING, HOWEVER, from the operation of the foregoing, the following (collectively, "Permitted Liens"): (a) in the case of any of the Borrower's property which is not Collateral or other collateral described in the Security Documents, covenants, restrictions, rights, easements and minor irregularities in title which do not materially interfere with the Borrower's business or operations as presently conducted; (b) mortgages, deeds of trust, pledges, liens, security interests and assignments in existence on the date hereof and listed in SCHEDULE 7.1 hereto, securing indebtedness for borrowed money permitted under SECTION 7.2; (c) the Security Interest and liens and security interests created by the Security Documents; (d) purchase money security interests relating to the acquisition of machinery and equipment of the Borrower not exceeding the lesser of cost or fair market value thereof, not exceeding $50,000 in the aggregate during any fiscal year and so long as no Default Period is then in existence and none would exist immediately after such acquisition; (e) liens encumbering leasehold improvements and fixtures granted in favor of Borrower's landlords pursuant to leases; 30 (f) liens securing capitalized lease obligations, to the extent such capitalized lease obligations are permitted hereunder; and (g) liens for taxes, payment of which is not yet due, or which are being contested in good faith by Borrower through appropriate proceedings properly instituted and diligently conducted, and for which adequate reserves have been established on its books by the Borrower. 7.2. INDEBTEDNESS. The Borrower will not incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money or letters of credit issued on the Borrower's behalf, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except: (a) indebtedness arising hereunder; (b) indebtedness of the Borrower in existence on the date hereof and listed in SCHEDULE 7.2 hereto; (c) indebtedness relating to liens permitted in accordance with SECTION 7.1; (d) capitalized lease obligations incurred from and after the date of this Agreement through the Original Maturity Date not to exceed $4,000,000 in the aggregate; (e) trade debt owed to vendors incurred in the ordinary course of business. 7.3. GUARANTIES. The Borrower will not assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) the endorsement of negotiable instruments by the Borrower for deposit or collection or similar transactions in the ordinary course of business; and (b) guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons, in existence on the date hereof and listed in SCHEDULE 7.2 hereto. 7.4. INVESTMENTS AND SUBSIDIARIES. (a) Without the prior written consent of Lender, which consent will not be unreasonably withheld, the Borrower will not purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including specifically but without limitation any partnership or joint venture, except: 31 (i) investments in direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having a maturity of one year or less, commercial paper issued by U.S. corporations rated "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by Moody's Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $100,000,000 (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation); (ii) travel advances or loans (other than Stock Purchase Loans) to the Borrower's officers and employees not exceeding at any one time an aggregate of $50,000; (iii) Stock Purchase Loans in an amount not to exceed the sum of $200,000 to any one Person and $2,200,000 in the aggregate at any one time; and (iv) advances in the form of progress payments, prepaid rent not exceeding two months or security deposits. (b) Without the prior written consent of the Lender, which consent will be unreasonably withheld, the Borrower will not create or permit to exist any Subsidiary. 7.5. DIVIDENDS. Except as set forth below, the Borrower will not declare or pay any dividends (other than dividends payable solely in stock of the Borrower) on any class of its stock or make any distribution in respect thereof, either directly or indirectly. 7.6. SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS OPERATIONS. The Borrower will not sell, lease, assign, transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of its assets, or (iii) any Collateral or any interest therein (whether in one transaction or in a series of transactions) to any other Person other than the sale of Inventory in the ordinary course of business and will not liquidate, dissolve or suspend business operations. The Borrower will not in any manner transfer any property without prior or present receipt of full and adequate consideration. 7.7. CONSOLIDATION AND MERGER; ASSET ACQUISITIONS. The Borrower will not consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all the assets of any other Person, unless: (a) the corporation formed by such consolidation or into which the Borrower or the Guarantor, as the case may be, is merged (if the Borrower or the Guarantor is not the surviving entity) or the Person which acquires by conveyance or transfer all or substantially all of the properties and assets of the Borrower or the Guarantor, as the case may be, (i) shall be a corporation organized and existing under the laws of the United States of America or 32 any State or the District of Columbia, (ii) shall expressly assume by an amendment to or restatement of this Agreement, executed and delivered to the Lender, in form satisfactory to the Lender, the performance of every covenant of this Agreement on the part of the Borrower and the Guarantor to be performed or observed and (iii) if such corporation or Person is a holding company with a significant portion of its operations conducted and assets held by one or more subsidiaries, shall provide for guaranties from such subsidiaries on substantially the same terms and conditions as are set forth in the Guaranty; (b) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time, or both, would become an Event of Default, shall have occurred and be continuing; (c) immediately after giving effect to such transaction, the corporation formed by such consolidation or into which the Borrower or the Guarantor, as the case may be, is merged or the Person which acquired by conveyance or transfer all or substantially all of the properties and assets of the Borrower or the Guarantor, as the case may be, shall have a tangible net worth of not less than the consolidated tangible net worth of the Borrower and Guarantor immediately preceding such transaction; (d) the Borrower and the Guarantor have delivered to the Lender an officer's certificate and an opinion of counsel (which opinion may rely, as to factual matters, upon a certificate of an executive officer of the Borrower or the Guarantor) stating that such consolidation, merger, conveyance or transfer and such amendment or restatement complies with this Section 7.7setAc and that all conditions precedent herein relating to such transaction have been complied with; and (e) such merger, consolidation or sale has been approved prior to the transaction in writing by the Lender. Upon any consolidation or merger of the Borrower or the Guarantor into another entity, or any conveyance or transfer of all or substantially all of the properties and assets of the Borrower or the Guarantor in accordance herewith, the successor entity formed by such consolidation or into which the Borrower or the Guarantor, as the case may be, is merged or to which such conveyance or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of the Borrower under this Agreement with the same effect as if such successor entity had been named as the Borrower herein. 7.8. SALE AND LEASEBACK. The Borrower will not enter into any arrangement, directly or indirectly, with any other Person whereby the Borrower shall sell or transfer any real or personal property, whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such property or any part thereof or any other property which the Borrower intends to use for substantially the same purpose or purposes as the property being sold or transferred. 33 7.9. RESTRICTIONS ON NATURE OF BUSINESS. Without the advance written consent of the Lender, which consent shall not be unreasonably withheld, the Borrower will not engage in any line of business materially different from that presently engaged in by the Borrower and will not purchase, lease or otherwise acquire assets not related to its business. 7.10. ACCOUNTING. The Borrower will not adopt any material change in accounting principles other than as required or permitted by GAAP. The Borrower will not adopt, permit or consent to any change in its fiscal year unless such change is made in accordance with GAAP and all applicable tax laws and regulations. 7.11. DEFINED BENEFIT PENSION PLANS. The Borrower will not adopt, create, assume or become a party to any defined benefit pension plan, unless disclosed to the Lender pursuant to SECTION 5.10. 7.12. OTHER DEFAULTS. The Borrower will not permit any breach, default or event of default to occur under any note, loan agreement, indenture, lease, mortgage, contract for deed, security agreement or other contractual obligation binding upon the Borrower. 7.13. PLACE OF BUSINESS; NAME. The Borrower will not transfer its chief executive office or principal place of business, or, except in the ordinary course of its business, move, relocate, close or sell any business location. The Borrower will not permit any tangible Collateral or any records pertaining to the Collateral to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interest. The Borrower will not change its name without the prior written consent of the Lender. 7.14. ORGANIZATIONAL DOCUMENTS. The Borrower will not amend its certificate of incorporation, articles of incorporation or bylaws except as may otherwise be permitted under this Agreement or in a manner adverse to the interests of the Lender or which would impair the ability of the Lender to realize all of its benefits hereunder. 8. EVENTS OF DEFAULT, RIGHTS AND REMEDIES 8.1. EVENTS OF DEFAULT. "Event of Default", wherever used herein, means any one of the following events: (a) Default in the payment of the Obligations when they become due and payable; 34 (b) Failure to pay when due any amount specified in SECTION 2.3 relating to the Borrower's Obligation of Reimbursement, or failure to pay immediately when due or upon termination of the Credit Facility any amounts required to be paid for deposit in the Special Account under SECTION 2.4 or; (c) Default in the payment of any fees, commissions, costs or expenses required to be paid by the Borrower under this Agreement; (d) The Borrower or any Guarantor shall be or become insolvent, or admit in writing its or his inability to pay its or his debts as they mature, or make an assignment for the benefit of creditors; or the Borrower or any Guarantor shall apply for or consent to the appointment of any receiver, trustee, or similar officer for it or him or for all or any substantial part of its or his property; or such receiver, trustee or similar officer shall be appointed without the application or consent of the Borrower or such Guarantor, as the case may be; or the Borrower or any Guarantor shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it or him under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against the Borrower or any such Guarantor; or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of the Borrower or any Guarantor; (e) A petition shall be filed by or against the Borrower or any Guarantor under the United States Bankruptcy Code naming the Borrower or such Guarantor as debtor; (f) Any representation or warranty made by the Borrower in this Agreement, by any Guarantor in any guaranty delivered to the Lender, or by the Borrower (or any of its officers) or any Guarantor in any agreement, certificate, instrument or financial statement or other statement contemplated by or made or delivered pursuant to or in connection with this Agreement or any such guaranty shall prove to have been incorrect in any material respect when deemed to be effective; (g) The rendering against the Borrower of a final judgment, decree or order for the payment of money in excess of $250,000 and the continuance of such judgment, decree or order unsatisfied and in effect for any period of 30 consecutive days without a stay of execution; (h) A default under any bond, debenture, note or other evidence of indebtedness of the Borrower owed to any Person other than the Lender, or under any indenture or other instrument under which any such evidence of indebtedness has been issued or by which it is governed, or under any lease of any of the Premises, and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture, other instrument or lease; 35 (i) Any Reportable Event, which the Lender determines in good faith might constitute grounds for the termination of any Plan or for the appointment by the appropriate United States District Court of a trustee to administer any Plan, shall have occurred and be continuing 30 days after written notice to such effect shall have been given to the Borrower by the Lender; or a trustee shall have been appointed by an appropriate United States District Court to administer any Plan; or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Plan or to appoint a trustee to administer any Plan; or the Borrower shall have filed for a distress termination of any Plan under Title IV of ERISA; or the Borrower shall have failed to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, which the Lender determines in good faith may by itself, or in combination with any such failures that the Lender may determine are likely to occur in the future, result in the imposition of a lien on the Borrower's assets in favor of the Plan; (j) An event of default shall occur under any Security Document or under any other security agreement, mortgage, deed of trust, assignment or other instrument or agreement securing any obligations of the Borrower hereunder or under any note; (k) The Borrower shall liquidate, dissolve, terminate or suspend its business operations or otherwise fail to operate its business in the ordinary course, or sell all or substantially all of its assets, without the Lender's prior written consent; (l) The Borrower shall fail to pay, withhold, collect or remit any tax or tax deficiency when assessed or due (other than any tax deficiency which is being contested in good faith and by proper proceedings and for which it shall have set aside on its books adequate reserves therefor) or notice of any state or federal tax liens shall be filed or issued; (m) Default in the payment of any amount owed by the Borrower to the Lender other than any indebtedness arising hereunder; (n) Any Guarantor shall repudiate, purport to revoke or fail to perform any such Guarantor's obligations under such Guarantor's guaranty in favor of the Lender, or any Guarantor shall cease to exist; (o) Any event or circumstance with respect to the Borrower shall occur such that the Lender shall believe in good faith that the prospect of payment of all or any part of the Obligations or the performance by the Borrower under the Loan Documents is impaired or any material adverse change in the business or financial condition of the Borrower shall occur; (p) Any breach, default or event of default by or attributable to any Affiliate under any agreement between such Affiliate and the Lender; or (q) Default in the performance, or breach, of any covenant or agreement of the Borrower contained in this Agreement, other than those identified in Sections 8.1(a) through (p) above and other than a breach of the requirements of Section 6.11, the breach of which covenant is not cured to the Lender's satisfaction within 10 Banking Days, provided that Lender shall have no obligation to make any Advance during any such cure period. 36 8.2. RIGHTS AND REMEDIES. During any Default Period, the Lender may exercise any or all of the following rights and remedies: (a) the Lender may, by notice to the Borrower, declare the Commitment to be terminated, whereupon the same shall forthwith terminate; (b) the Lender may, by notice to the Borrower, declare the Obligations to be forthwith due and payable, whereupon all Obligations shall become and be forthwith due and payable, without presentment, notice of dishonor, protest or further notice of any kind, all of which the Borrower hereby expressly waives; (c) the Lender may, without notice to the Borrower and without further action, apply any and all money owing by the Lender to the Borrower to the payment of the Obligations; (d) the Lender may make demand upon the Borrower and, forthwith upon such demand, the Borrower will pay to the Lender in immediately available funds for deposit in the Special Account pursuant to SECTION 2.12 an amount equal to the aggregate maximum amount available to be drawn under all Letters of Credit then outstanding, assuming compliance with all conditions for drawing thereunder; (e) the Lender may exercise and enforce any and all rights and remedies available upon default to a secured party under the UCC, including, without limitation, the right to take possession of Collateral, or any evidence thereof, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which the Borrower hereby expressly waives) and the right to sell, lease or otherwise dispose of any or all of the Collateral, and, in connection therewith, the Borrower will on demand assemble the Collateral and make it available to the Lender at a place to be designated by the Lender which is reasonably convenient to both parties; (f) the Lender may exercise and enforce its rights and remedies under the Loan Documents; and (g) the Lender may exercise any other rights and remedies available to it by law or agreement. Notwithstanding the foregoing, upon the occurrence of an Event of Default described in subsections (d) or (e) of SECTION 8.1, the Obligations shall be immediately due and payable automatically without presentment, demand, protest or notice of any kind. 8.3. CERTAIN NOTICES. If notice to the Borrower of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially 37 reasonable if given (in the manner specified in SECTION 9.4) at least ten calendar days before the date of intended disposition or other action. 9. MISCELLANEOUS 9.1. NO WAIVER; CUMULATIVE REMEDIES. No failure or delay by the Lender in exercising any right, power or remedy under the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under the Loan Documents. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. 9.2. EXISTING CREDIT AGREEMENT. The security interests granted by the Borrower to the Lender under this Agreement are in addition to, and shall be consolidated with, the liens and security interests granted by the Borrower to the Lender under the Existing Credit Agreement and any other prior security agreement, mortgage or other document, without affecting the lien, priority or effectiveness of those prior liens, security interests and agreements. 9.3. AMENDMENTS. No amendment, modification, termination or waiver of any provision of any Loan Document or consent to any departure by the Borrower therefrom or any release of a Security Interest shall be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. 9.4. ADDRESSES FOR NOTICES. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for under the Loan Documents shall be in writing and shall be (a) personally delivered, (b) sent by first class United States mail, (c) sent by overnight courier of national reputation, or (d) transmitted by telecopy, in each case addressed or telecopied to the party to whom notice is being given at its address or telecopier number as set forth below: If to the Borrower: Braun's Fashions, Inc. 2400 Xenium Lane Plymouth, Minnesota 55441 Fax: (612) 551-5198 Attention: Mr. Andrew Moller 38 If to the Lender: Norwest Bank Minnesota, National Association Norwest Center Sixth Street and Marquette Avenue Minneapolis, Minnesota 55479-0152 Fax: (612) 341-2472 Attention: Mr. Leslie Tatarek or, as to each party, at such other address or telecopier number as may hereafter be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed to have been given on (a) the date received if personally delivered, (b) when deposited in the mail if delivered by mail, (c) the date sent if sent by overnight courier, or (d) the date of transmission if delivered by telecopy, except that notices or requests to the Lender pursuant to any of the provisions of ARTICLE 2 shall not be effective until received by the Lender. 9.5. FURTHER DOCUMENTS. The Borrower will from time to time execute and deliver or endorse any and all instruments, documents, conveyances, assignments, security agreements, financing statements and other agreements and writings that the Lender may reasonably request in order to secure, protect, perfect or enforce the Security Interest or the Lender's rights under the Loan Documents (but any failure to request or assure that the Borrower executes, delivers or endorses any such item shall not affect or impair the validity, sufficiency or enforceability of the Loan Documents and the Security Interest, regardless of whether any such item was or was not executed, delivered or endorsed in a similar context or on a prior occasion). 9.6. COLLATERAL. This Agreement does not contemplate a sale of accounts, contract rights or chattel paper, and, as provided by law, the Borrower is entitled to any surplus and shall remain liable for any deficiency. The Lender's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if it exercises reasonable care in physically keeping such Collateral, or in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and the Lender need not otherwise preserve, protect, insure or care for any Collateral. The Lender shall not be obligated to preserve any rights the Borrower may have against prior parties, to realize on the Collateral at all or in any particular manner or order or to apply any cash proceeds of the Collateral in any particular order of application. 9.7. COSTS AND EXPENSES. The Borrower agrees to pay on demand all costs and expenses, including (without limitation) reasonable attorneys' fees, incurred by the Lender in connection with the Obligations, 39 this Agreement, the Loan Documents, any Letters of Credit, and any other document or agreement related hereto or thereto, and the transactions contemplated hereby, including without limitation all such costs, expenses and fees incurred in connection with the negotiation, preparation, execution, amendment, administration, performance, collection and enforcement of the Obligations and all such documents and agreements and the creation, perfection, protection, satisfaction, foreclosure or enforcement of the Security Interest. 9.8. INDEMNITY. In addition to the payment of expenses pursuant to SECTION 9.7, the Borrower agrees to indemnify, defend and hold harmless the Lender, and any of its participants, parent corporations, subsidiary corporations, affiliated corporations, successor corporations, and all present and future officers, directors, employees, attorneys and agents of the foregoing (the "Indemnitees") from and against any of the following (collectively, "Indemnified Liabilities"): (i) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of the Loan Documents or the making of the Advances; (ii) any claims, loss or damage to which any Indemnitee may be subjected if any representation or warranty contained in SECTION 5.12 proves to be incorrect in any respect or as a result of any violation of the covenant contained in SECTION 6.5(b); and (iii) any and all other liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel) in connection with the foregoing and any other investigative, administrative or judicial proceedings, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against any such Indemnitee, in any manner related to or arising out of or in connection with the making of the Advances and the Loan Documents or the use or intended use of the proceeds of the Advances. If any investigative, judicial or administrative proceeding arising from any of the foregoing is brought against any Indemnitee, upon such Indemnitee's request, the Borrower, or counsel designated by the Borrower and satisfactory to the Indemnitee, will resist and defend such action, suit or proceeding to the extent and in the manner directed by the Indemnitee, at the Borrower's sole costs and expense. Each Indemnitee will use its best efforts to cooperate in the defense of any such action, suit or proceeding. If the foregoing undertaking to indemnify, defend and hold harmless may be held to be unenforceable because it violates any law or public policy, the Borrower shall nevertheless make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The Borrower's obligation under this SECTION 9.8 shall survive the termination of this Agreement and the discharge of the Borrower's other obligations hereunder. 9.9. PARTICIPANTS. 40 The Lender and its participants, if any, are not partners or joint venturers, and the Lender shall not have any liability or responsibility for any obligation, act or omission of any of its participants. All rights and powers specifically conferred upon the Lender may be transferred or delegated to any of the Lender's participants, successors or assigns. 9.10. EXECUTION IN COUNTERPARTS. This Agreement and other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. 9.11. BINDING EFFECT; ASSIGNMENT; COMPLETE AGREEMENT; EXCHANGING INFORMATION. The Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights thereunder or any interest therein without the Lender's prior written consent. This Agreement, together with the Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. Without limiting the Lender's right to share information regarding the Borrower and its Affiliates with the Lender's participants, accountants, lawyers and other advisors, the Lender, Norwest Corporation, and all direct and indirect subsidiaries of Norwest Corporation, may exchange any and all information they may have in their possession regarding the Borrower and its Affiliates, and the Borrower waives any right of confidentiality it may have with respect to such exchange of such information; provided, however, that Lender acknowledges that Borrower is the operating subsidiary of a publicly-held corporation and certain information provided to Lender may consist of material, non-public documents and Lender will maintain such non-public information identified as such by Borrower in accordance with applicable securities laws. 9.12. SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. 9.13. HEADINGS. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 9.14. GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF JURY TRIAL. The Loan Documents shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Minnesota. This Agreement shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Minnesota. The parties hereto hereby (i) consent to the personal jurisdiction of the state and 41 federal courts located in the State of Minnesota in connection with any controversy related to this Agreement; (ii) waive any argument that venue in any such forum is not convenient, (iii) agree that any litigation initiated by the Lender or the Borrower in connection with this Agreement or the other Loan Documents shall be venued in either the District Court of Hennepin County, Minnesota, or the United States District Court, District of Minnesota, Fourth Division; and (iv) agree that a final judgment in any such suit, action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. NORWEST BANK MINNESOTA, BRAUN'S FASHIONS, INC. NATIONAL ASSOCIATION By: By: ---------------------------- ----------------------------- Name: Leslie Tatarek Name: Andrew K. Moller Title: Vice President Title: Vice President Finance and Chief Financial Officer 42 ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR The undersigned, a guarantor of the indebtedness of BRAUN'S FASHIONS, INC. (the "Borrower") to Norwest Bank Minnesota, National Association (the "Lender") pursuant to a Guaranty dated as of December 2, 1996 (the "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amended and Restated Revolving Credit and Security Agreement ("Agreement"); (ii) consents to the terms and execution of the Agreement by the Borrower; (iii) reaffirms its obligations to the Lender pursuant to the terms of its Guaranty; (iv) reaffirms the security interest of the Lender in its assets granted to the Lender pursuant to that certain Security Agreement dated as of December 2, 1996 ("Security Agreement"); and (v) acknowledges that the Lender may amend, restate, extend, renew or otherwise modify the Agreement and any indebtedness or agreement of the Borrower, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under the Guaranty and the Security Agreement for all of the Borrower's present and future indebtedness to the Lender. BRAUN'S FASHIONS CORPORATION By: ------------------------------------ Name: Andrew K. Moller Title: Vice President Finance and Chief Financial Officer 43 TABLE OF EXHIBITS AND SCHEDULES Exhibit A Form of Revolving Note Exhibit B Compliance Certificate Exhibit C Premises ___________________ Schedule 5.1 Trade Names, Chief Executive Office, Principal Place of Business, and Locations of Collateral Schedule 7.1 Permitted Liens Schedule 7.2 Permitted Indebtedness and Guaranties Exhibit A to Amended and Restated Revolving Credit and Security Agreement AMENDED AND RESTATED REVOLVING NOTE $12,000,000 Minneapolis, Minnesota March 15, 1999 For value received, the undersigned, BRAUN'S FASHIONS, INC., a Minnesota corporation (the "Borrower"), hereby promises to pay on the Termination Date under the Credit Agreement (defined below), to the order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association (the "Lender"), at its main office in Minneapolis, Minnesota, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Twelve Million Dollars ($12,000,000) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender to the Borrower under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Amended and Restated Revolving Credit and Security Agreement of even date herewith (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") by and between the Lender and the Borrower. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Revolving Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. BRAUN'S FASHIONS, INC. By: ----------------------------- Name: Andrew K. Moller Title: Vice President Finance and Chief Financial Officer A-1 Exhibit B to Amended and Restated Revolving Credit and Security Agreement COMPLIANCE CERTIFICATE To: _________________________________ Norwest Bank Minnesota, National Association Date: __________________, 199___ Subject: ___________________ Financial Statements In accordance with our Amended and Restated Revolving Credit and Security Agreement dated as of March 15, 1999 (the "Credit Agreement"), attached are the financial statements of Braun's Fashions, Inc. (the "Borrower") as of and for ________________, _____ (the "Reporting Date") and the year-to-date period then ended (the "Current Financials"). All terms used in this certificate have the meanings given in the Credit Agreement. I certify that the Current Financials have been prepared in accordance with GAAP, subject to year-end audit adjustments, and fairly present the Borrower's financial condition and the results of its operations as of the date thereof. EVENTS OF DEFAULT. (Check one): / / The undersigned does not have knowledge of the occurrence of a Default or Event of Default under the Credit Agreement. / / The undersigned has knowledge of the occurrence of a Default or Event of Default under the Credit Agreement and attached hereto is a statement of the facts with respect to thereto. [I HEREBY CERTIFY TO THE LENDER AS FOLLOWS: / / THE REPORTING DATE MARKS THE END OF ONE OF THE BORROWER'S FISCAL QUARTERS, HENCE I AM COMPLETING ALL PARAGRAPHS BELOW EXCEPT PARAGRAPH __. / / THE REPORTING DATE MARKS THE END OF THE BORROWER'S FISCAL YEAR, HENCE I AM COMPLETING ALL PARAGRAPHS BELOW.] FINANCIAL COVENANTS. I further hereby certify as follows: 1. MINIMUM CASH FLOW; MINIMUM CASH ON HAND. Pursuant to SECTION 6.11 of the Credit Agreement, as of the Reporting Date, the Borrower's Cash Flow was $_______ which / / satisfies / / does not satisfy the requirement that such amount be not less than B-1 ($2,000,000) on the Reporting Date or, such Cash Flow was less than ($2,000,000) but the Borrower's cash and cash equivalents as of such date equaled / / satisfies / / does not satisfy the requirement that such amount be not less than the amount set forth in the table below:
MINIMUM CASH AND CASH PERIOD EQUIVALENTS Funding Date through February 26, 2000 $4,000,000 February 27, 2000 through March 3, 2001 $3,000,000 March 4, 2001 through June 30, 2002 $2,000,000
2. MINIMUM INVENTORY TURNS RATIO. Pursuant to SECTION 6.12 of the Credit Agreement, as of the Reporting Date, the Borrower's Inventory Turns Ratio was _____ to 1.00 which / / satisfies / / does not satisfy the requirement that such ratio be no less than 3.00 to 1.00 on the Reporting Date: Attached hereto are all relevant facts in reasonable detail to evidence, and the computations of the financial covenants referred to above. These computations were made in accordance with GAAP. BRAUN'S FASHIONS, INC. By: --------------------------------- Name: Title: Chief Financial Officer B-2 Exhibit C to Amended and Restated Revolving Credit and Security Agreement PREMISES The Premises referred to in the Amended and Restated Revolving Credit and Security Agreement are legally described as follows: See Schedule 5.1 1 Schedule 5.1 to Amended and Restated Revolving Credit and Security Agreement TRADE NAMES, CHIEF EXECUTIVE OFFICE, PRINCIPAL PLACE OF BUSINESS, AND LOCATIONS OF COLLATERAL TRADE NAMES Braun's Christopher & Banks CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS 2400 Xenium Lane North Plymouth, MN 55441 OTHER INVENTORY AND EQUIPMENT LOCATIONS See attached list of store locations. 1 Schedule 5.10 to Amended and Restated Revolving Credit and Security Agreement PLANS Plan Name Plan Type - --------- --------- Braun's Fashions, Inc. Retirement Savings Plan 401(k) Schedule 7.1 to Amended and Restated Revolving Credit and Security Agreement PERMITTED LIENS
Creditor Collateral Jurisdiction Filing Date Filing No. -------- ---------- ------------ ----------- ---------- 230 NCR Model 7450 See list of store NCR Credit cash registers locations Corp. as owned by Lessor and Lessor; leased to Lessee under capital lease
Schedule 7.2 to Amended and Restated Revolving Credit and Security Agreement PERMITTED INDEBTEDNESS AND GUARANTIES INDEBTEDNESS
Principal Maturity Monthly Creditor Amount Date Payment Collateral -------- ------ ---- ------- ---------- Publicly held notes $4,676,228 1/1/2005 See attached None (Borrower and Guarantor co-obligors) NCR Credit Corp. as $441,002.12 9/30/2000 $26,250.47 230 NCR Model 7450 cash Lessor; registers owned by Borrower and Lessor and leased to Guarantor as Lessee under capital co-lessees lease
GUARANTIES None. i TABLE OF CONTENTS 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2. CROSS REFERENCES.. . . . . . . . . . . . . . . . . . . . . . . . . 8 2. AMOUNT AND TERMS OF THE CREDIT FACILITY . . . . . . . . . . . . . . . . . 8 2.1. REVOLVING ADVANCES.. . . . . . . . . . . . . . . . . . . . . . . . 8 2.2. LETTERS OF CREDIT. . . . . . . . . . . . . . . . . . . . . . . . . 9 2.3. PAYMENT OF AMOUNTS DRAWN UNDER LETTERS OF CREDIT; OBLIGATION OF REIMBURSEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.4. SPECIAL ACCOUNT. . . . . . . . . . . . . . . . . . . . . . . . . .10 2.5. OBLIGATIONS ABSOLUTE.. . . . . . . . . . . . . . . . . . . . . . .11 2.6. INTEREST; DEFAULT INTEREST; PARTICIPATIONS; USURY. . . . . . . . .11 2.7. FEES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 2.8. COMPUTATION OF INTEREST AND FEES; WHEN INTEREST DUE AND PAYABLE. .13 2.9. CAPITAL ADEQUACY; INCREASED COSTS AND REDUCED RETURN.. . . . . . .13 2.10. VOLUNTARY PREPAYMENT; TERMINATION OF THE CREDIT FACILITY BY THE BORROWER; CLEANDOWN PERIOD. . . . . . . . . . . . . . . . . . . .14 2.11. TERMINATION FEE; WAIVER OF TERMINATION FEE. . . . . . . . . . . .15 2.12. MANDATORY PREPAYMENT. . . . . . . . . . . . . . . . . . . . . . .15 2.13. PAYMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 2.14. PAYMENT ON NON-BANKING DAYS.. . . . . . . . . . . . . . . . . . .15 2.15. USE OF PROCEEDS.. . . . . . . . . . . . . . . . . . . . . . . . .16 2.16. LIABILITY RECORDS.. . . . . . . . . . . . . . . . . . . . . . . .16 3. SECURITY INTEREST; COLLATERAL ACCOUNT; OCCUPANCY; SETOFF. . . . . . . . .16 3.1. GRANT OF SECURITY INTEREST.. . . . . . . . . . . . . . . . . . . .16 3.2. NOTIFICATION OF ACCOUNT DEBTORS AND OTHER OBLIGORS.. . . . . . . .16 3.3. COLLATERAL ACCOUNT.. . . . . . . . . . . . . . . . . . . . . . . .16 3.4. ASSIGNMENT OF INSURANCE. . . . . . . . . . . . . . . . . . . . . .17 3.5. OCCUPANCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 3.6. LICENSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 3.7. FINANCING STATEMENT. . . . . . . . . . . . . . . . . . . . . . . .18 3.8. SETOFF.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 4. CONDITIONS OF LENDING . . . . . . . . . . . . . . . . . . . . . . . . . .19 4.1. CONDITIONS PRECEDENT TO THE INITIAL REVOLVING ADVANCE AND THE INITIAL LETTER OF CREDIT.. . . . . . . . . . . . . . . . . . . . .19 4.2. CONDITIONS PRECEDENT TO ALL ADVANCES AND LETTERS OF CREDIT.. . . .21 i 5. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . .21 5.1. CORPORATE EXISTENCE AND POWER; NAME; CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT LOCATIONS; TAX IDENTIFICATION NUMBER.. . .21 5.2. AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR AGREEMENTS. .22 5.3. LEGAL AGREEMENTS.. . . . . . . . . . . . . . . . . . . . . . . . .22 5.4. SUBSIDIARIES.. . . . . . . . . . . . . . . . . . . . . . . . . . .22 5.5. FINANCIAL CONDITION; NO ADVERSE CHANGE.. . . . . . . . . . . . . .22 5.6. LITIGATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . .23 5.7. REGULATION U.. . . . . . . . . . . . . . . . . . . . . . . . . . .23 5.8. TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 5.9. TITLES AND LIENS.. . . . . . . . . . . . . . . . . . . . . . . . .23 5.10. PLANS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 5.11. DEFAULT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 5.12. ENVIRONMENTAL MATTERS.. . . . . . . . . . . . . . . . . . . . . .24 5.13. SUBMISSIONS TO LENDER.. . . . . . . . . . . . . . . . . . . . . .25 5.14. FINANCING STATEMENTS. . . . . . . . . . . . . . . . . . . . . . .25 5.15. RIGHTS TO PAYMENT.. . . . . . . . . . . . . . . . . . . . . . . .25 6. BORROWER'S AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . .26 6.1. REPORTING REQUIREMENTS.. . . . . . . . . . . . . . . . . . . . . .26 6.2. BOOKS AND RECORDS; INSPECTION AND EXAMINATION. . . . . . . . . . .28 6.3. ACCOUNT VERIFICATION.. . . . . . . . . . . . . . . . . . . . . . .28 6.4. COMPLIANCE WITH LAWS.. . . . . . . . . . . . . . . . . . . . . . .29 6.5. PAYMENT OF TAXES AND OTHER CLAIMS. . . . . . . . . . . . . . . . .29 6.6. MAINTENANCE OF PROPERTIES. . . . . . . . . . . . . . . . . . . . .29 6.7. INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 6.8. PRESERVATION OF EXISTENCE. . . . . . . . . . . . . . . . . . . . .30 6.9. DELIVERY OF INSTRUMENTS. . . . . . . . . . . . . . . . . . . . . .30 6.10. PERFORMANCE BY THE LENDER.. . . . . . . . . . . . . . . . . . . .30 6.11. MINIMUM CASH FLOW; MINIMUM CASH ON HAND.. . . . . . . . . . . . .31 6.12. MINIMUM INVENTORY TURNS RATIO.. . . . . . . . . . . . . . . . . .31 7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .31 7.1. LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 7.2. INDEBTEDNESS.. . . . . . . . . . . . . . . . . . . . . . . . . . .32 7.3. GUARANTIES.. . . . . . . . . . . . . . . . . . . . . . . . . . . .33 7.4. INVESTMENTS AND SUBSIDIARIES.. . . . . . . . . . . . . . . . . . .33 7.5. DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 7.6. SALE OR TRANSFER OF ASSETS; SUSPENSION OF BUSINESS OPERATIONS. . .34 7.7. CONSOLIDATION AND MERGER; ASSET ACQUISITIONS.. . . . . . . . . . .34 7.8. SALE AND LEASEBACK.. . . . . . . . . . . . . . . . . . . . . . . .35 7.9. RESTRICTIONS ON NATURE OF BUSINESS.. . . . . . . . . . . . . . . .35 7.10. ACCOUNTING. . . . . . . . . . . . . . . . . . . . . . . . . . . .35 7.11. DEFINED BENEFIT PENSION PLANS.. . . . . . . . . . . . . . . . . .35 7.12. OTHER DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . . . .36 7.13. PLACE OF BUSINESS; NAME.. . . . . . . . . . . . . . . . . . . . .36 7.14. ORGANIZATIONAL DOCUMENTS. . . . . . . . . . . . . . . . . . . . .36 ii 8. EVENTS OF DEFAULT, RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . .36 8.1. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . .36 8.2. RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . . . . .38 8.3. CERTAIN NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . .39 9. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 9.1. NO WAIVER; CUMULATIVE REMEDIES.. . . . . . . . . . . . . . . . . .40 9.2. EXISTING CREDIT AGREEMENT. . . . . . . . . . . . . . . . . . . . .40 9.3. AMENDMENTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . .40 9.4. ADDRESSES FOR NOTICES. . . . . . . . . . . . . . . . . . . . . . .40 9.5. FURTHER DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . .41 9.6. COLLATERAL.. . . . . . . . . . . . . . . . . . . . . . . . . . . .41 9.7. COSTS AND EXPENSES.. . . . . . . . . . . . . . . . . . . . . . . .41 9.8. INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 9.9. PARTICIPANTS.. . . . . . . . . . . . . . . . . . . . . . . . . . .43 9.10. EXECUTION IN COUNTERPARTS.. . . . . . . . . . . . . . . . . . . .43 9.11. BINDING EFFECT; ASSIGNMENT; COMPLETE AGREEMENT; EXCHANGING INFORMATION.. . . . . . . . . . . . . . . . . . . . . . . . . . .43 9.12. SEVERABILITY OF PROVISIONS. . . . . . . . . . . . . . . . . . . .43 9.13. HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 9.14. GOVERNING LAW; JURISDICTION, VENUE; WAIVER OF JURY TRIAL. . . . .44
iii EX-10.23 3 EXHIBIT 10.23 FIRST AMENDMENT TO THE BRAUN'S FASHIONS CORPORATION 1997 STOCK INCENTIVE PLAN July 22, 1998 RECITALS: A. The Braun's Fashions Corporation 1997 Stock Incentive Plan (the "Plan") was adopted by the Board of Directors of Braun's Fashions Corporation (the "Company") and was approved by the shareholders of the Company on July 17, 1997. The Plan is now in full force and effect. B. The Company desires to amend the Plan to increase the number of shares of common stock available for issuance under the Plan. AMENDMENT: THEREFORE, the Plan is hereby amended as follows: 1. The first sentence of paragraph 4 of the Plan is hereby amended to read as follows: "4. STOCK SUBJECT TO THE PLAN. The aggregate number of shares subject to the Plan shall be four hundred fifty thousand (450,000) shares of the Common Stock of the Company, $.01 par value per share. 2. The foregoing amendment shall be effective as of July 22, 1998, the date the shareholders of approved this amendment at the Company's Annual Meeting of Shareholders. 3. Except as modified hereby, the Plan shall continue in full force and effect. IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by its duly authorized officer as of July 22, 1998. BRAUN'S FASHIONS CORPORATION By: ------------------------- William J. Prange President EX-10.24 4 EXHIBIT 10.24 BRAUNS FASHIONS CORPORATION 1998 DIRECTOR STOCK OPTION PLAN The purpose of the Brauns Fashions Corporation 1998 Director Stock Option Plan (the "Option Plan") is to attract and retain persons of outstanding competence to serve on the Board of Directors of Brauns Fashions Corporation (the "Company"). 1. ADMINISTRATION. The Option Plan will be administered by the Board of Directors of the Company. Grants of stock options under the Option Plan ("Options") and the amount and nature of the Options so granted will be automatic, as described below. 2. STOCK SUBJECT TO THE OPTION PLAN. An aggregate of 100,000 shares of Common Stock, par value $.0l per share ("Common Stock"), of the Company are reserved for issuance under the Option Plan. The number of shares authorized for issuance under the Option Plan may be increased from time to time by approval of the Board of Directors and, if required pursuant to Rule 16b-3 under the Securities Exchange Act of 1934 or the applicable rules of any securities exchange or the NASD, the shareholders of the Company. In the event of any reorganization, merger, recapitalization, stock dividend, stock split, or similar change in the corporate structure or shares of the Company, appropriate adjustments will be made to the number and kind of shares reserved for issuance under the Option Plan and pursuant to outstanding Options and to the exercise price of outstanding Options. 3. AUTOMATIC OPTION GRANTS. Under the Option Plan, each non-employee director will automatically be granted Options to purchase shares of Common Stock as follows: i. On the date of the 1999 annual meeting of shareholders, each non-employee director will automatically be granted an Option to purchase 5,000 shares of Common Stock. ii. Thereafter, on the date of each subsequent annual meeting of shareholders at which the non-employee director is reelected, or otherwise continues to serve as a director pursuant to the current three year terms, to the Board of Directors, the non-employee director shall automatically be granted an additional Option to purchase 5,000 shares of Common Stock. 4. VESTING, EXERCISABILITY AND EXPIRATION. All Options granted under the Option Plan shall be fully vested when granted, but may not be exercised until six months following the date of grant. All Options granted under the Option Plan shall expire five years after the date of grant. 5. TRANSFERABILITY. No Option granted under the Option Plan is assignable or transferable during the lifetime of the director, either voluntarily or involuntarily. Options shall be exercisable during a director's lifetime only by such director. In the event of the death of a non-employee director, Options granted under the Option Plan may be transferred by will or the laws of descent and distribution and may only be exercised by the executors or administrators of such director's estate or by the person or persons to whom such director's rights under the Option shall. pass by the director's will or the laws of descent and distribution. 6. EXERCISE PRICE. The exercise price of Options granted under the Option Plan shall be equal to the fair market value of one share of Common Stock on the date of grant. For purposes of the Option Plan, "fair market value" is the average of the high and low sales price of the Common Stock, as reported by the NASDAQ National Market System on the date of grant. Payment for the exercise of Options may be made in cash, by personal check payable to the Company, by delivery of shares of Common Stock having an aggregate fair market value on the date of exercise which is not less than the option price, or by a combination thereof. 7. PLAN AMENDMENT AND TERMINATION. The Board of Directors may suspend or terminate the Option Plan or any portion thereof at any time, and may amend the Option Plan from time to time in any respect, provided that no such amendment will be effective without approval of the shareholders, if shareholder approval is required pursuant to Rule 16b-3 under the Securities Exchange Act of 1934 or the applicable rules of any securities exchange or the NASD. To the extent prohibited under Rule 16b-3 under the Securities Exchange Act of 1934, the Option Plan may not be amended more than once every six months. No termination, suspension or amendment of the Option Plan will alter an outstanding Option without the consent of the holder of such Option. Unless earlier terminated by action of the Board, the Option Plan will terminate on July 17, 2008, and no Option shall be granted after any such termination. Options granted and outstanding upon termination of the Option Plan may continue to be exercised in accordance with their terms. 8. COMPLIANCE WITH SEC REGULATIONS. It is the Company's intent that the Option Plan comply in all respects with Rule 16b-3 of the Act and any regulations promulgated thereunder. If any provision of this plan is later found not to be in compliance with the Rule, the provision shall be deemed null and void. All grants and exercises of Options under the Option Plan shall be executed in accordance with the requirements of Section 16 of the Act, as amended, and any regulations promulgated thereunder. 9. SHAREHOLDER APPROVAL. The Option Plan shall be subject to approval by the shareholders holding at least a majority of the voting stock of the Company represented in person or by proxy at a duty held shareholders' meeting, and any Option granted under the Option Plan prior to the date of such approval shall be contingent upon such approval. 10. EFFECTIVE DATE. This Option Plan shall be effective as of July 17, 1998, subject to shareholder approval of the Option Plan as described above on or before July 17, 1999. 11. MISCELLANEOUS. Except as otherwise provided herein, no non-employee director shall have any claim or right to be granted an Option under the Option Plan. Neither the Option Plan nor any action hereunder shall be construed as giving any director any right to be retained in the service of the Company. -2- EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 27, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR FEB-27-1999 MAR-01-1998 FEB-27-1999 12,587,719 0 1,397,502 0 10,799,046 25,607,707 26,223,301 13,268,337 40,059,616 9,183,656 5,073,604 0 0 47,178 24,682,588 40,059,616 110,142,393 110,142,393 71,488,228 71,488,228 28,300,011 0 282,508 10,071,646 3,879,875 6,191,771 0 35,396 0 6,227,167 1.37 1.31 Results include an extraordinary gain of $35,396, or $0.01 per share, related to the purchase at a discount from par of $4,676,000 principal face amount of the Company's 12% Senior Notes due 2005.
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