<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number 0-28760
Pacific Coast Apparel Company, Inc.
-----------------------------------
(Exact name of registrant as specified in its charter)
California 95-4536683
---------- ----------
(State or other Jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1620 S. Los Angeles Street
Los Angeles, CA 90015
--------------- -----
(Address of principal office) (Zip Code)
Registrant's telephone number,
including area code (213) 748-9724
--------------
Inapplicable
------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Number of shares of common stock
outstanding as of December 31, 1998 3,064,000
Transactional Small Business Disclosure Format Yes / / No /X/
<PAGE>
PACIFIC COAST APPAREL CO., INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1998
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $3,985
Accounts receivable $78,040 $22,818
Inventories $487,014 $564,006
Prepaid expenses and other current assets $34,147 $82,068
Total current assets $603,186 $668,892
PROPERTY AND EQUIPMENT - at cost, net of $89,077 $92,206
accumulated depreciation
OTHER ASSETS $35,666 $36,730
$727,929 $797,828
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Outstanding checks payable $17,324
Accounts payable $208,719 $171,474
Accrued expenses $265,685 $279,049
Due to factor $72,399 $96,018
Current maturities of long-term debt $108,000 $108,000
Total current liabilities $654,803 $671,865
LONG TERM DEBT, LESS CURRENT $83,250 $110,713
MATURITY
NEGATIVE GOODWILL $158,178 $161,062
STOCKHOLDERS' EQUITY
Preferred stock
Authorized, 600,000 shares
No shares outstanding
Common stock - no par value $5,453,798 $5,453,798
Authorized, 1,000,000 shares
Issued and outstanding 3,064,000 shares
Additional paid-in capital $479,860 $479,860
Deficit ($6,101,960) ($6,079,470)
Total stockholders' equity ($168,302) ($145,812)
$727,929 $797,828
</TABLE>
See notes to condensed financial statements
<PAGE>
PACIFIC COAST APPAREL CO., INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended December 31
----------------------------------
1998 1997
---- ----
<S> <C> <C>
NET SALES $1,229,287 $1,134,521
COST OF GOOD SOLD 673,602 553,793
GROSS (LOSS) PROFIT 555,685 580,728
OPERATING EXPENSES
Design and production 118,638 127,375
Selling 125,798 195,618
Shipping 70,445 55,926
General and administrative 242,301 392,652
Interest (income) expense 20,193 19,737
Total Operating Expenses 577,375 791,308
LOSS BEFORE INCOME TAXES (21,690) (210,580)
PROVISION FOR INCOME TAXES (800) (800)
NET LOSS ($22,490) ($211,380)
NET LOSS PER SHARE (0.01) (0.07)
WEIGHTED AVERAGE NUMBER OF 3,064,000 2,958,000
COMMON SHARES OUTSTANDING
</TABLE>
See notes to condensed financial statements
<PAGE>
Page 1 0f 2
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Three Months Ended December 31
--------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($22,490) ($211,380)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation $9,000 $9,247
Amortization of negative goodwill ($2,884) ($2,884)
Changes in assets and liabilities, net
of effect of assets and liabilities
acquired:
Increase in due from factors ($23,619) ($53,371)
Decrease in accounts receivable ($55,222) $17,743
Increase in inventories $76,992 ($45,175)
Increase in prepaid expenses and $47,921 ($23,508)
other current assets
Increase in other assets $1,064 ($1,803)
Increase (decrease) in accounts payable $37,245 $84,179
Increase (decrease) in accrued expenses ($13,364) $19,566
Total Adjustments $77,133 $3,994
Net Cash Used By Operating Activities $54,643 ($207,386)
</TABLE>
See notes to condensed financial statements
<PAGE>
Page 2 0f 2
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Three Months Ended December 31
--------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ($5,871) ($1,638)
Decrease in short term investments
Net Cash (used) Provided by ($5,871) ($1,638)
Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long term debt ($27,463) ($27,551)
Reacquistion of common stock
Net Cash Used by
Financing Activities ($27,463) ($27,551)
NET DECREASE IN CASH AND
CASH EQUIVALENTS $21,309 ($236,575)
CASH AND CASH EQUIVALENTS, beginning
as previously stated ($17,324) $460,606
PRIOR PERIOD ADJUSTMENT $81,085
CASH AND CASH EQUIVALENTS,
beginning, as restated ($17,324) $487,693
CASH AND CASH EQUIVALENTS, ending $3,985 $251,118
</TABLE>
See notes to condensed financial statements
<PAGE>
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS -
SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
Three Months Ended December 31
------------------------------
1998 1997
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during period for:
Interest $19,234 $20,178
Income Taxes
</TABLE>
See notes to condensed financial statements
<PAGE>
PACIFIC COAST APPAREL CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1 - ACCOUNTING POLICIES
Although the interim condensed financial statements of the Company are
unaudited, it is the opinion of the Company's management that all normal
recurring adjustments necessary for a fair statement of the results have
been reflected therein. Operating revenues and net earnings for any interim
period are not necessarily indicative of results that may be expected for
the entire year.
These statements should be read in conjunction wth the financial statements
and reflected notes which are incorporated by reference in the Company's
Annual Report on Form 10-KSB for the year ended September 30, 1998
See notes to condensed financial statements
<PAGE>
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED SEPTEMBER 30, 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common stock Additional Total
---------------------- Paid-in Stockholders'
Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1996 3,070,000 5,920,118 $162,500 ($2,136,808) $3,945,810
Issuance of stock for services 9,000 $4,500 $4,500
Reacquistion of stock during the
year ended September 30, 1997 (116,000) ($452,400) $306,610 ($145,790)
Other (5,000) ($19,500) $10,750 ($8,750)
Net loss for the year ended
. September 30, 1997 ($2,954,339) ($2,954,339)
--------- ---------- -------- ------------ ----------
Balance, September 30, 1997 2,958,000 5,452,718 $479,860 ($5,091,147) $841,431
Issuance of stock 108,000 $1,080 $1,080
Cancellation of stock (2,000)
Net loss for the year ended
. September 30, 1998 ($988,323) ($988,323)
--------- ---------- -------- ------------ ----------
Balance, September 30, 1998 3,064,000 5,453,798 $479,860 ($6,079,470) ($145,812)
Net loss for the three months ended
. December 31, 1998 ($22,490) ($22,490)
--------- ---------- -------- ------------ ----------
Balance, December 31, 1998 3,064,000 5,453,798 479,860 (6,101,960) (168,302)
</TABLE>
See notes to condensed financial statements
<PAGE>
FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
Forward-looking statements, such as those pertaining to the Company's future
sales and revenues, return on investment, profitability, cash requirements
and possible merger transaction. Forward-looking statements involve numerous
risks and uncertainties. The following factors, among others discussed
herein, could cause actual results and future events to differ materially
from those set forth or contemplated in the forward-looking statement:
economic conditions, competitive products, and pricing, new product
development, need for additional capital, development of the Cotton Stuff
business, changes in fashion trends, dependence on key customers and
personnel, consumer response to the Company's products and advertising and
the uncertainties associated with the Company's ability to consummate the
possible merger transaction discussed herein. Readers are cautioned not to
place undue reliance on forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company assumes no
obligation to update forward-looking statements. See also the Company's other
reports to be filed from time to time with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
INTRODUCTION
Pacific Coast Apparel Company, Inc. ("the Company") was incorporated
in California in April 1995 to design, source and market, under license, in
the United States a collection of men's active sportswear under the brand
name "Aca Joe" Registered Trademark through traditional department stores and
men's specialty stores. In August 1997, the Company acquired the assets and
business of Cotton Stuff, Inc. Because of the Company's inability to generate
sufficient revenues it decided not to renew its exclusive Aca Joe license
and ceased doing business thereunder in June 1998.
Cotton Stuff apparel is a collection of both men's and women's
better sportswear which is sold across the United States through better
catalogs including Saks Folio, Coldwater Creek, Neiman Marcus and Nordstrom,
better specialty stores such as Fred Siegel, Bloomingdales and My Friends
Place and selected department stores including Macy's.
Over the past three years, the women's line represented the
significant portion of the Cotton Stuff business. In January 1998, the
Company began to execute a plan to further develop the men's business.
1
<PAGE>
The Company hired Dorian Bolick a men's designer and merchandiser to
head the product development of the men's line. Additionally, the Company
recruited a sales force comprised of seven independent regional salesmen and
began opening specialty store accounts across the country.
In November 1998, the Company announced the signing of definitive
merger agreement which called for the merger of Jodi Kristopher, Inc. into
the Company which would be the surviving corporation.
Jodi Kristopher, Inc. ("JKI") is a well-established Los Angeles
maker of junior dresses with annual revenues of approximately $45M. The
company is owned and operated by Ira Rosenberg, a successful industry veteran.
JKI distributes its line through major department stores including
the Federated Group, Robinson's-May, Dayton Hudson, Kohl's, Sears Roebuck &
Company and J C Penney among others.
The terms of the agreement called for the Company to pay to the
existing shareholders of JKI at closing, $1,456,532 in cash, and to issue
2,506,900 shares of its common stock and 9,646 shares of Series A Preferred
Stock with a valuation of $100 per share in exchange for all of the
outstanding Class A and B common stock of JKI. Reference is made to the
Reorganization Agreement and exhibits thereto governing the merger, which are
included in this quarterly report as exhibits, for a more complete
description of such transaction.
Upon completion of the merger, Mr. Ira Rosenberg will become the
president and chief executive officer of the Company and Mr. McGovern will
remain chairman of the board of the Company.
If all conditions of the reorganization Agreement are met, the
merger is anticipated to close in the Company's second or third fiscal
quarter 1999. The Company plans to consolidate the operations of the two
companies following the merger.
The Company's ability to consummate the described transaction or any
future acquisition or merger is subject to numerous uncertainties and
conditions, including the ability to obtain financing on terms satisfactory
to the company and JKI receipt of third-party consents, adverse changes to
the business of the Company or its target markets, and the uncertainties with
the Company's operations.
2
<PAGE>
In anticipation of the pending merger with JKI, the Company decided
to re-focus all of it's energies and resources on the development of the
Cotton Stuff women's line and has licensed the men's Cotton Stuff sportswear
category to 34 Degrees West Apparel Company, Inc., a California Corporation
formed by Dorian Bolick. The initial term of the license agreement is
thirteen months. The licensee has the option to renew the agreement for one
additional four-year term.
THREE MONTHS ENDED DECEMBER 31, 1998
Revenues for the quarter ended December 31, 1998 were $1,229,287
compared to $1,134,621 for the comparable prior year's quarter. Gross profit
for the quarter was $555,375 compared to $580,726 in the quarter ended
December 31, 1997. The lower gross profit reflects the markdown of certain
Cotton Stuff men's inventory. Total expenses for the quarter ended December
31, 1998 were $577,375 compared to $791,308. The significant drop in
operating expenses reflects the effects of the cost cutting program put in
place during the first fiscal quarter 1998. In addition to the reduction in
operating expenses for the period ended December 31, 1998, it should be noted
that expenses of approximately $43,289 were incurred in conjunction with the
merger involving Jodi Kristopher, Inc. The expenses were primarily
professional fees and related expenses. Additionally, the Company continued
to incured expenses from the design and development of the Cotton Stuff men's
line during the period. Since the Company licensed its Cottons Stuff men's
line in December 1998, it does not believe it will incur material expenses
relative to the Cotton Stuff men's line in future periods. Net losses for the
period ended December 31, 1998 were narrowed to ($22,490) compared to
($211,380) for the comperable period ended December 31, 1997. The results of
the quarter ended December 31, 1997 reflects the continued development of the
Aca Joe lines and the further development of the Cotton Stuff men's line. As
previously stated, neither the Aca Joe lines or the Cotton Stuff men's lines
are currently being developed by the Company.
LIQUIDITY AND CAPITAL RESOURCES
In September 1996, the Company realized net proceeds of
approximately $5,267,000 from the initial public offering of common stock and
warrants to purchase common stock. A portion of these proceeds were used to
repay approximately $550,000 of indebtedness then outstanding. The Company
has experienced cumulative losses from operations of ($6,101,980) for the
period from April 28, 1995 (inception) through December 31, 1998.
The company continues to experience loss from operations but
expects the losses to continue to decline during the first half of fiscal
1999 due to the discontinuation of the Aca Joe lines and the licensing of the
Cotton Stuff men's line.
3
<PAGE>
The revenues of the Cotton Stuff women's line are not sufficient to
sustain the Company. At December 31, 1998, the Company's cash and cash
equivalent balance was zero.
In January 1999, a non-affiliate loaned the Company $50,000 which
the Company used to purchase inventory and for working capital purposes. The
loan calls for repayment on or before February 28, 1999 and bears interest at
the rate of 1% per month. If the Company fails to repay the total amount due
as agreed, the lender has the right to exercise a warrant, which was issued
as collateral by the Company, to purchase 100,000 shares of the Company's
common stock for the aggregate sum of $1. The Company believes it will have
the cash to repay the loan in full on time.
At its current projected level of operations, the Company will
require additional capital during the quarter ending March 31, 1999. In order
to sustain operations until such time as positive cash flow can be achieved,
the Company is considering available alternatives, including additional cost
cutting. In addition, the Company may seek to fund its operations through
private offerings of securities, with collaborative or other arrangements
with corporate partners or from other sources. Additional financing may not
be available when needed or on terms acceptable to the Company. The Company
may be required to delay, scale back or eliminate certain of its development
programs, to relinquish rights to certain products or to license to third
parties the right to commercialize products the Company would otherwise seek
to develop itself.
FEDERAL TAXES
Since its inception, the Company has been taxed as a "C"
corporation. Accordingly the Company has available as of December 31, 1998
approximately $4,000,000 in net operating loss carryforwards to offset future
federal taxable income until expiring through the year ending September 30,
2018.
LEGAL PROCEEDINGS
The Company is currently involved in a law suit, which was filed by
Ms. Jill Grossman, the Company's former sales manager. Ms. Grossman
terminated her employment with the Company on September 22, 1997. Ms.
Grossman claims she is owed approximately $440,000 of compensation due under
and employment agreement. The Company filed a cross complaint against Ms.
Grossman based on the belief that, among other things, Ms. Grossman breached
the employment agreement.
Although the outcome of the litigation cannot be predicted with
certainty, management believes that the Company has meritorious defenses to
the claims alleged, and intends to defend this action with vigor.
4
<PAGE>
YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date
code fields will need to accept four digit entries to distinguish 21st
century dates. This inability to recognize or properly treat the Year 2000
may cause the Company's systems and applications to process critical
financial and operational information incorrectly. The Company continues to
assess the impact of the Year 2000 issue on its reporting systems and
operations.
The Company is currently in the process of investigating whether its
internal accounting systems and other operations systems are Year 2000
compliant. The Company has been informed by the vendors of its internal
accounting software that upgrades are currently available and will provide
them to the Company under its existing software maintenance agreement. The
Company expects to effect the conversion of its internal accounting system to
such upgraded software by June 1999. The Company believes that necessary
conversions of other operational systems can also be accomplished through
vendor upgrades and enhancements as provided under its system maintenance
agreements currently in effect. The Company does not anticipate significant
costs associated with any necessary conversions. However, there can be no
assurances that certain of the Company's internal computer systems or
networks or those of its key vendors and distributors will not be adversely
effected by such Year 2000 issues, which could have a material adverse effect
on the Company's business, operating results or financial condition.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific Coast Apparel Company, Inc.
By /s/ Terrence L. McGovern
-------------------------------
Terrence L. McGovern
Chief Executive Officer and
Chief Financial Officer
February 15, 1999
<PAGE>
REORGANIZATION AGREEMENT
By and Among
Pacific Coast Apparel Company, Inc.,
Jodi Kristopher, Inc.
Ira Rosenberg,
and
Alice Rosenberg
Dated as of November 16, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. THE MERGER; CONVERSION OF SHARES; CLOSING . . . . . . . . . . . . . . 1
2.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . 1
(a) Surviving Corporation. . . . . . . . . . . . . . . . . . 1
(b) Articles of Incorporation. . . . . . . . . . . . . . . . 2
(c) Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . 2
(d) Directors. . . . . . . . . . . . . . . . . . . . . . . . 2
(e) Officers . . . . . . . . . . . . . . . . . . . . . . . . 2
(f) Effective Time . . . . . . . . . . . . . . . . . . . . . 2
2.2 Conversion of Shares . . . . . . . . . . . . . . . . . . . . . 2
(a) Automatic Conversion . . . . . . . . . . . . . . . . . . 2
(b) Stock Transfer Books . . . . . . . . . . . . . . . . . . 3
(c) Surrender of Stock Certificates and Payment for Shares . 3
2.3 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.4 Adjustment Amount. . . . . . . . . . . . . . . . . . . . . . . 5
2.5 Adjustment Procedure . . . . . . . . . . . . . . . . . . . . . 5
2.6 Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . 6
3. REPRESENTATIONS AND WARRANTIES OF MAJORITY SHAREHOLDERS . . . . . . . 6
3.1 Organization and Good Standing.. . . . . . . . . . . . . . . . 6
3.2 Authority; No Conflict . . . . . . . . . . . . . . . . . . . . 7
3.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . 8
3.4 Financial Statements . . . . . . . . . . . . . . . . . . . . . 8
3.5 Books and Records. . . . . . . . . . . . . . . . . . . . . . . 9
3.6 Title to Properties; Encumbrances. . . . . . . . . . . . . . . 9
3.7 Condition and Sufficiency of Assets. . . . . . . . . . . . . . 10
3.8 Environmental Compliance . . . . . . . . . . . . . . . . . . . 10
3.9 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . 11
3.10 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.11 No Undisclosed Liabilities . . . . . . . . . . . . . . . . . . 12
3.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.13 No Material Adverse Change . . . . . . . . . . . . . . . . . . 12
<PAGE>
3.14 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . 12
3.15 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 13
3.16 Absence of Certain Changes and Events. . . . . . . . . . . . . 13
3.17 Contracts; No Defaults.. . . . . . . . . . . . . . . . . . . . 14
3.18 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.19 Labor and Employment Matters . . . . . . . . . . . . . . . . . 17
3.20 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.21 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . 18
3.22 Intellectual Property. . . . . . . . . . . . . . . . . . . . . 19
3.23 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.24 Relationships with Related Persons . . . . . . . . . . . . . . 20
3.25 Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . 20
3.26 Investment Matters . . . . . . . . . . . . . . . . . . . . . . 20
3.27 Certain Tax Matters. . . . . . . . . . . . . . . . . . . . . . 21
4. INTENTIONALLY OMITTED.. . . . . . . . . . . . . . . . . . . . . . . . 21
5. REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . . . . . 21
5.1 Organization and Good Standing.. . . . . . . . . . . . . . . . 21
5.2 Authority; No Conflict . . . . . . . . . . . . . . . . . . . . 22
5.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . 23
5.4 Financial Statements . . . . . . . . . . . . . . . . . . . . . 23
5.5 Books and Records. . . . . . . . . . . . . . . . . . . . . . . 24
5.6 Title to Properties; Encumbrances. . . . . . . . . . . . . . . 24
5.7 Condition and Sufficiency of Assets. . . . . . . . . . . . . . 25
5.8 Environmental Compliance . . . . . . . . . . . . . . . . . . . 25
5.9 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . 26
5.10 Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.11 No Undisclosed Liabilities . . . . . . . . . . . . . . . . . . 26
5.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.13 No Material Adverse Change . . . . . . . . . . . . . . . . . . 27
5.14 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . 27
5.15 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 27
5.16 Absence of Certain Changes and Events. . . . . . . . . . . . . 27
5.17 Contracts; No Defaults.. . . . . . . . . . . . . . . . . . . . 29
5.18 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.19 Labor and Employment Matters . . . . . . . . . . . . . . . . . 32
5.20 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.21 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . 32
5.22 Intellectual Property. . . . . . . . . . . . . . . . . . . . . 33
<PAGE>
5.23 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.24 Relationships with Related Persons . . . . . . . . . . . . . . 34
5.25 Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . 34
5.26 Investment Intent. . . . . . . . . . . . . . . . . . . . . . . 34
5.27 Investment Company . . . . . . . . . . . . . . . . . . . . . . 34
6. COVENANTS OF THE MAJORITY SHAREHOLDERS PRIOR TO CLOSING DATE. . . . . 35
6.1 Access and Investigation . . . . . . . . . . . . . . . . . . . 35
6.2 Operation of the Businesses of the Acquired Companies . . . . 35
6.3 Negative Covenant. . . . . . . . . . . . . . . . . . . . . . . 36
6.4 Required Approvals . . . . . . . . . . . . . . . . . . . . . . 36
6.5 Notification . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.6 Payment of Shareholder Loan and Distributions. . . . . . . . . 36
6.7 No Negotiation.. . . . . . . . . . . . . . . . . . . . . . . . 37
6.8 Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . . 37
7. COVENANTS OF BUYER PRIOR TO CLOSING DATE. . . . . . . . . . . . . . . 37
7.1 Access and Investigation . . . . . . . . . . . . . . . . . . . 37
7.2 Operation of the Businesses of the Acquired Companies . . . . 37
7.3 Negative Covenant. . . . . . . . . . . . . . . . . . . . . . . 38
7.4 Required Approvals . . . . . . . . . . . . . . . . . . . . . . 38
7.5 Notification . . . . . . . . . . . . . . . . . . . . . . . . . 38
7.6 No Negotiation . . . . . . . . . . . . . . . . . . . . . . . . 39
7.7 Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . . 39
8. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE . . . . . . . . . 39
8.1 Accuracy of Representations. . . . . . . . . . . . . . . . . . 39
8.2 Majority Shareholders' Performance . . . . . . . . . . . . . . 40
8.3 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.4 Additional Documents . . . . . . . . . . . . . . . . . . . . . 40
8.5 No Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 40
8.6 Shareholders' Approval. . . . . . . . . . . . . . . . . . . . 41
8.7 Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . 41
8.8 Personal Guarantees. . . . . . . . . . . . . . . . . . . . . . 41
8.9 Approval by Shareholders . . . . . . . . . . . . . . . . . . . 41
8.10 Dissenting Shares. . . . . . . . . . . . . . . . . . . . . . . 41
<PAGE>
8.12 Shareholder's Release. . . . . . . . . . . . . . . . . . . . . 41
8.13 Jan Smith Representations and Warranties . . . . . . . . . . . 41
9. CONDITIONS PRECEDENT TO THE MAJORITY SHAREHOLDERS'
OBLIGATION TO CLOSE. . . . . . . . . . . . . . . . . . . . . . . . . 41
9.1 Accuracy of Representations. . . . . . . . . . . . . . . . . . 41
9.2 Buyer's Performance. . . . . . . . . . . . . . . . . . . . . . 42
9.3 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
9.4 Additional Documents . . . . . . . . . . . . . . . . . . . . . 42
9.5 No Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 42
9.6 Directors and Officer. . . . . . . . . . . . . . . . . . . . 42
9.7 Financing. . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.8 Personal Guarantees. . . . . . . . . . . . . . . . . . . . . . 43
9.9 Dissenting Shares. . . . . . . . . . . . . . . . . . . . . . . 43
10. TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
10.1 Termination Events . . . . . . . . . . . . . . . . . . . . . . 43
10.2 Effect of Termination. . . . . . . . . . . . . . . . . . . . 44
10.3 Break-up Fee. . . . . . . . . . . . . . . . . . . . . . . . . 44
11. INDEMNIFICATION; REMEDIES. . . . . . . . . . . . . . . . . . . . . . 45
11.1 Survival; Right to Indemnification Not Affected by Knowledge.. 45
11.2 Indemnification and Payment of Damages by the Majority
Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 45
11.3 Indemnification and Payment of Damages by Buyer. . . . . . . . 46
11.4 INTENTIONALLY OMITTED. . . . . . . . . . . . . . . . . . . . . 46
11.5 Time Limitations . . . . . . . . . . . . . . . . . . . . . . . 46
11.6 Limitations on Amount--The Majority Shareholders . . . . . . . 47
11.7 Limitations on Amount--Buyer . . . . . . . . . . . . . . . . . 47
11.8 Procedure for Indemnification--Third Party Claims. . . . . . . 47
11.9 Procedure for Indemnification--Other Claims. . . . . . . . . . 49
12. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . 49
12.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
12.2 Public Announcements . . . . . . . . . . . . . . . . . . . . . 49
12.3 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . 49
12.4 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
12.5 Arbitration of Disputes. . . . . . . . . . . . . . . . . . . 51
<PAGE>
12.6 Further Assurances . . . . . . . . . . . . . . . . . . . . . . 53
12.7 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
12.8 Entire Agreement and Modification. . . . . . . . . . . . . . . 53
12.9 Assignments, Successors, and No Third-party Rights. . . . . 53
12.10 Severability . . . . . . . . . . . . . . . . . . . . . . . . . 54
12.11 Section Headings, Construction . . . . . . . . . . . . . . . . 54
12.12 Time of Essence. . . . . . . . . . . . . . . . . . . . . . . . 54
12.13 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . 54
12.14 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 54
12.15 Registration Rights. . . . . . . . . . . . . . . . . . . . . . 54
EXHIBITS AND SCHEDULES
----------------------
Schedule 1 Definitions
Exhibit 2.1(f) Agreement of Merger
Exhibit 2.3(b)(i)(B) Shareholders' Release
Exhibit 2.3(b)(i)(C)(I) I. Rosenberg Employment Agreement
Exhibit 2.3(b)(i)(C)(II) A. Rosenberg Employment Agreement
Exhibit 2.3.(b)(i)(D)(I) I. Rosenberg Noncompetition Agreement
Exhibit 2.3(b)(i)(D)(II) A. Rosenberg Noncompetition Agreement
Exhibit 5.3 Certificate of Determination
Exhibit 8.12 Jan Smith Shareholder Release
Exhibit 8.13 Jan Smith Certificate re: Representations and
Warranties
Exhibit 9.10 McGovern Employment Agreement
Exhibit 12.15 Registration Rights
Shareholder Disclosure Letter
Buyer Disclosure Letter
</TABLE>
<PAGE>
REORGANIZATION AGREEMENT
This Reorganization Agreement (the "Agreement") is made as of
November ___, 1998, by and among Pacific Coast Apparel Company, Inc., a
California corporation ("Buyer"), Jodi Kristopher, Inc., a California
corporation, dba City Triangles (the "Company"), Ira Rosenberg, an individual
resident in California ("I. Rosenberg"), and Alice Rosenberg, an individual
resident in California ("A. Rosenberg" and, together with I. Rosenberg, the
"Majority Shareholders").
RECITALS
A. The Majority Shareholders own 90% of the Company.
B. Buyer desires to effect a combination with the Company pursuant to a
merger of the Company with and into Buyer (the "Merger").
C. The Merger is intended to be treated as a tax-free reorganization
pursuant to the provisions of Section 368 of the Internal Revenue Code of 1986,
as amended (the "Code").
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS. For purposes of this Agreement, defined terms not
otherwise defined herein shall have the meanings set forth in Schedule 1 hereto.
2. THE MERGER; CONVERSION OF SHARES; CLOSING.
2.1 THE MERGER.
(a) SURVIVING CORPORATION. Subject to the provisions of this
Agreement and the California General Corporation Law (the "CGCL"), at the
Effective Time (as defined below), the Company shall be merged with and into
Buyer, and the separate corporate existence of the Company shall cease. Buyer
shall be the surviving corporation in the Merger (hereinafter sometimes called
the "Surviving Corporation"), and shall continue its corporate existence under
the laws of the State of California.
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(b) ARTICLES OF INCORPORATION. The Articles of Incorporation of
Buyer as in effect immediately prior to the Effective Time shall be the Articles
of Incorporation of the Surviving Corporation until thereafter amended as
provided by law.
(c) BYLAWS. The Bylaws of Buyer as in effect immediately prior
to the Effective Time shall be the Bylaws of the Surviving Corporation until
thereafter amended as provided by law.
(d) DIRECTORS. The directors of Buyer immediately after the
Effective Time shall be I. Rosenberg, A. Rosenberg, Terrence McGovern, Alan
Annex and a designee of the Majority Shareholders. Such individuals will hold
office from the Effective Time until their respective successors are duly
elected and qualified or until their earlier death, resignation or removal.
(e) OFFICERS. The officers of Buyer immediately after to the
Effective Time shall be I. Rosenberg (Chief Executive Officer and President),
Terrence McGovern (Chairman and Chief Financial Officer), and A. Rosenberg
(Secretary and Vice President). Such individuals will hold office from the
Effective Time until their successors are duly appointed and qualified.
(f) EFFECTIVE TIME. If all the conditions of the Merger set
forth in Articles 8 and 9 shall have been fulfilled or waived in accordance
herewith and this Agreement shall not have been terminated in accordance with
Article 10, the parties hereto shall cause an Agreement of Merger substantially
in the form of Exhibit 2.1(f) hereto (the "Agreement of Merger"), to be properly
executed and filed on the Closing Date (as defined below) with the Secretary of
State of California. The Mergers shall become effective as of time of the
filing of the Agreement of Merger with the Secretary of State of California.
The date and time when the Merger becomes effective is herein referred to as the
"Effective Time."
2,2 CONVERSION OF SHARES.
(a) AUTOMATIC CONVERSION. At the Effective Time:
(i) Each share of Company Class A Common Stock, without par
value ("Class A Stock"), shall, by virtue of the Merger and without any action
on the part of the holder thereof, no longer be outstanding and shall be
canceled and cease to be outstanding and shall be converted into the right to
receive 25,060.90 shares of Common Stock, without par value, of Buyer ("PCAC
Common Stock"), 96.46 shares of Series A Preferred Stock, without par value, of
Buyer ("PCAC Preferred Stock"), and
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$14,505.32 of cash (together with the aforementioned shares of PCAC Common Stock
and PCAC Preferred Stock, the "Class A Consideration"). Each share of Company
Class B Common Stock, without par value ("Class B Stock" and, together with the
Class A Stock, the "Merger Shares") shall, by virtue of the Merger and without
any action of the part of the holder thereof, no longer be outstanding and shall
be canceled and cease to be outstanding and shall be converted into the right to
receive 25,060.90 shares of PCAC Common Stock, 96.46 shares of PCAC Preferred
Stock and $14,505.32 in cash (together with the aforementioned shares of PCAC
Common Stock and PCAC Preferred Stock, the "Class B Consideration"and together
with the Class A Consideration, the "Merger Consideration"). The Merger
Consideration payable with respect to each Merger Share shall be adjusted to
appropriately reflect the effect of a stock split, reverse stock split, stock
dividend (including any dividend or distribution of securities convertible into
Merger Shares or PCAC shares (as defined below)), reorganization,
recapitalization, reclassification or other like change with respect to the
Merger Shares or the PCAC Shares occurring or having a record date on or after
the date hereof and prior to the Effective Time. No fraction of PCAC Shares
shall be issued by virtue of the Merger. Any fractional PCAC Share otherwise
issuable to a shareholder of the Company (individually, a "Shareholder" and
collectively, the "Shareholders") will be rounded up to the nearest whole
number. The cash to be paid pursuant to the Merger is herein referred to as the
"Cash Portion" and the shares of PCAC Common Stock and PCAC Preferred Stock to
be issued pursuant to the Merger are herein collectively referred to as the
"PCAC Shares."
(ii) Subject to the exercise of the dissenters' rights by
the holders thereof, each issued and outstanding share of capital stock of Buyer
at and as of the Effective Time will remain issued and outstanding and shall be
unaffected by the Merger.
(b) STOCK TRANSFER BOOKS. At the Effective Time, the stock
transfer books of the Company shall be closed and there shall be no further
registration or transfer of shares of the Company's capital stock on the records
of the Company.
(c) SURRENDER OF STOCK CERTIFICATES AND PAYMENT FOR SHARES. At
the Effective Time, the Shareholders shall cease to have any rights as
shareholders of the Company, except for such rights as they may have pursuant to
this Agreement and applicable law. At and after the Effective Time, each
Shareholder shall be entitled upon surrender of his or her certificates
representing the Merger Shares to the Surviving Corporation, to receive, in
exchange, his or her pro rata share of the Class A Consideration or Class B
Consideration, as applicable. From the Effective Time to the date of surrender,
each Merger Share certificate shall represent for all purposes only the right to
receive the consideration specified herein. Certificates of PCAC Shares
delivered to the Shareholders pursuant to this Section shall contain such legend
or legends required by law in the opinion of Buyer's counsel.
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2.3 CLOSING.
(a) Subject to Section 10.1, the consummation of the
Contemplated Transactions (the "Closing") will take place at the offices of
Sheppard, Mullin, Richter & Hampton LLP, 333 South Hope Street, 41st Floor, Los
Angeles, CA, at 10:00 a.m. on the date within 5 business days after all of the
conditions to Closing set forth in Sections 8 and 9 have been satisfied or
waived, or at such other time and place as the parties may agree. Subject to
the provisions of Section 10, failure to consummate the Contemplated
Transactions on the date and time and at the place determined pursuant to this
Section 2.3 will not result in the termination of this Agreement and will not
relieve any party of any obligation under this Agreement.
(b) CLOSING OBLIGATIONS. At the Closing:
(i) The Majority Shareholders will deliver to Buyer:
(A) certificates representing the Shares, duly
endorsed (or accompanied by duly executed stock powers);
(B) the release executed by each Shareholder in the
form of Exhibit 2.3(b)(i)(B) executed by each Seller ("Shareholders' Release");
(C) employment agreements in the form of
Exhibits 2.3(b)(i)(C)(I) and (II), executed by I. Rosenberg and A. Rosenberg,
respectively, (together, the "Employment Agreements");
(D) noncompetition agreements executed by each
Majority Shareholder in the form of Exhibits 2.3(b)(i)(D)(I) and (II), executed
by each Majority Shareholder, as applicable (collectively, the "Noncompetition
Agreement");
(E) a certificate executed by each Majority
Shareholder representing and warranting to Buyer that each of such Majority
Shareholder's representations and warranties in this Agreement was accurate in
all respects as of the date of this Agreement and is accurate in all respects as
of the Closing Date as if made on the Closing Date (giving full effect to any
supplements to the Shareholders Disclosure Letter that were delivered by the
Majority Shareholders to Buyer prior to the Closing Date in accordance with
Section 6.5); and
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(ii) Buyer will deliver to Shareholders:
(A) the Cash Portion pursuant to a cashier's or
certified check or wire transfer;
(B) certificates representing the PCAC Shares;
(C) a certificate executed by Buyer to the effect
that, except as otherwise stated in such certificate, each of Buyer's
representations and warranties in this Agreement was accurate in all respects as
of the date of this Agreement and is accurate in all respects as of the Closing
Date as if made on the Closing Date (giving full effect to any supplements to
the Buyer Disclosure Letter that were delivered by Buyer to the Majority
Shareholders prior to the Closing Date in accordance with Section 7.5); and
(D) the Employment Agreements, executed by the
Company.
(iii) Each party shall deliver all other documents,
instruments and agreements required to be delivered by such party at Closing
pursuant to this Agreement.
2.4 ADJUSTMENT AMOUNT. The Adjustment Amount (which may be a
positive or negative number) will be equal to the amount by which the
shareholders' equity of the Company ("Shareholders' Equity") as of the Closing
Date determined in accordance with GAAP is less than negative $75,000 or is more
than positive $75,000. The Adjustment Amount shall be paid by (if negative) or
paid to (if positive) the Shareholders in the following proportions: the
holders of Class A Stock, 90%, the holders of Class B Stock, 10%.
2.5 ADJUSTMENT PROCEDURE.
(a) The Majority Shareholders will prepare and will cause
Fineman West & Co. LLP, the Company's certified public accountants, to review
the balance sheet ("Closing Balance Sheet") of the Company as of the Closing
Date. The Majority Shareholders will deliver the Closing Balance Sheet to Buyer
within sixty days after the Closing Date. If within thirty days following
delivery of the Closing Balance Sheet, Buyer has not given the Majority
Shareholders notice of its objection to the Closing Balance Sheet (such notice
must contain a statement of the basis of Buyer's objection), then the
Shareholders' Equity reflected in the Closing Balance Sheet will be used in
computing the Adjustment Amount, if any. If Buyer gives such notice of
objection, then
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the issues in dispute will be submitted to KPMG Peat Marwick LLP, certified
public accountants (the "Accountants"), for resolution. If issues in dispute
are submitted to the Accountants for resolution, (i) each party will furnish to
the Accountants such workpapers and other documents and information relating to
the disputed issues as the Accountants may request and are available to that
party (or its independent public accountants), and will be afforded the
opportunity to present to the Accountants any material relating to the
determination and to discuss the determination with the Accountants; (ii) the
determination by the Accountants, as set forth in a notice delivered to both
parties by the Accountants, will be binding and conclusive on the parties; (iii)
Buyer and the Majority Shareholders will each bear 50% of the fees of the
Accountants if their determination results in no Adjustment Amount; and
(iv) Buyer or the Majority Shareholders, as applicable, will pay 100% of such
fees if such determination results in a positive Adjustment Amount or a negative
Adjustment Amount, respectively.
(b) On the tenth business day following the final determination
of the Adjustment Amount, if the Adjustment Amount is negative, the Majority
Shareholders shall pay the Adjustment Amount to PCAC in the proportion set forth
in Section 2.4 above, and if the Adjustment Amount is positive, PCAC shall pay
the Adjustment Amount to the Shareholders in the proportion set forth in
Section 2.4 above. Payments will be made by means of transfer of shares of PCAC
Preferred Stock valued at $100.00 per share.
2.6 TAX CONSEQUENCES. It is intended by the parties hereto that the
Merger constitute a reorganization within the meaning of Section 368 of the
Code.
3. REPRESENTATIONS AND WARRANTIES OF MAJORITY SHAREHOLDERS. The Majority
Shareholders jointly and severally represent and warrant to Buyer as follows:
3.1 ORGANIZATION AND GOOD STANDING.
(a) The Company is a corporation duly organized, validly
existing, and in good standing under the laws of the State of California, with
full corporate power and authority to conduct its business as it is now being
conducted, to own or use the properties and assets that it purports to own or
use. The Company is duly qualified to do business as a foreign corporation and
is in good standing under the laws of each state or other jurisdiction in which
either the ownership or use of the properties owned or used by it, or the nature
of the activities conducted by it, requires such qualification, except when the
failure to so qualify would not have a material adverse effect on the assets,
business, prospects or condition (financial or otherwise) (a "Material Adverse
Effect") of the Company.
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(b) The Majority Shareholders have delivered to Buyer copies of
the Organizational Documents of the Company, as currently in effect.
3.2 AUTHORITY; NO CONFLICT.
(a) Except as set forth in Part 3.2 of the Shareholders
Disclosure Letter, this Agreement constitutes the legal, valid, and binding
obligation of the Majority Shareholders, enforceable against the Majority
Shareholders in accordance with its terms. Upon the execution and delivery by
the Majority Shareholders of the Employment Agreements, the Shareholders'
Release and the Noncompetition Agreements (collectively, the "Majority
Shareholders' Closing Documents"), the Majority Shareholders' Closing Documents
will constitute the legal, valid, and binding obligations of the Majority
Shareholders, enforceable against the Majority Shareholders in accordance with
their respective terms. The Majority Shareholders have the absolute and
unrestricted right, power, authority, and capacity to execute and deliver this
Agreement and the Majority Shareholders' Closing Documents and to perform their
obligations under this Agreement and the Majority Shareholders' Closing
Documents.
(b) Except as set forth in Part 3.2 of the Shareholders
Disclosure Letter, neither the execution and delivery of this Agreement nor the
consummation or performance of any of the Contemplated Transactions will,
directly or indirectly (with or without notice or lapse of time):
(i) contravene, conflict with, or result in a violation of
(A) any provision of the Organizational Documents of the Company, or (B) any
resolution adopted by the board of directors or the shareholders of the Company;
(ii) to the Knowledge of the Company or either Majority
Shareholder, contravene, conflict with, or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the Contemplated
Transactions or to exercise any remedy or obtain any relief under, any Legal
Requirement or any Order to which the Company or either Majority Shareholder, or
any of the assets owned or used by the Company, may be subject;
(iii) to the Knowledge of the Company or either Majority
Shareholder, contravene, conflict with, or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate or modify, any Governmental Authorization
that is held by the Company or that otherwise relates to the business of, or any
of the assets owned or used by, the Company;
7
<PAGE>
(iv) cause the Company to become subject to, or to become
liable for the payment of, any Tax;
(v) cause any of the assets owned by the Company to be
reassessed or revalued by any taxing authority or other Governmental Body;
(vi) contravene, conflict with, or result in a violation or
breach of any provision of, or give any Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of, or
to cancel, terminate or modify, any Applicable Contract; or
(vii) result in the imposition or creation of any Encumbrance
upon or with respect to any of the assets owned or used by the Company.
Except as set forth in Part 3.2 of the Shareholders Disclosure Letter, none
of the Majority Shareholders or the Company is giving, or will be required to
give, any notice to or obtain any Consent from any Person in connection with
the execution and delivery of this Agreement or the consummation or
performance of any of the Contemplated Transactions.
3.3 CAPITALIZATION. The authorized equity securities of the Company
consist of 2,000,000 shares of Class A Common Stock, without par value, and
200,000 shares of Class B Common Stock, without par value, of which 90 shares
and 10 shares, respectively, are issued and outstanding and constitute the
Shares. The Majority Shareholders are and will be on the Closing Date the
record and beneficial owners and holders of all of the outstanding shares of
Class A Common Stock, free and clear of all Encumbrances. All of the
outstanding equity securities of the Company have been duly authorized and
validly issued and are fully paid and nonassessable. There are no Contracts
relating to the issuance, sale or transfer of any equity securities or other
securities of the Company, including, without limitation, options, warrants and
other rights to acquire such securities. None of the outstanding equity
securities or other securities of the Company was issued in violation of the
Securities Act or any other Legal Requirement. The Company does not own, or
have any Contract to acquire, any equity securities or other securities of any
Person or any direct or indirect equity or ownership interest in any other
business. The Majority Shareholders and Jan Smith own all issued and
outstanding securities of the Company free of any Encumbrances.
3.4 FINANCIAL STATEMENTS. The Majority Shareholders have delivered
to Buyer: (a) audited financial statements of the Company for the fiscal year
ended December 31, 1997 together with the report thereon of Fineman West & Co.
LLP, independent certified public accountants (the "Financial Statements"), and
(b) unaudited
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financial statements of the Company through June 30, 1998 (the "Interim
Financial Statements"), including unaudited balance sheets, statements of
income, changes in shareholders' equity, and cash flow for the six months then
ended, including in each case the notes thereto. The Financial Statements and
notes fairly present the financial condition and the results of operations,
changes in shareholders' equity, and cash flow of the Company as at the
respective dates of and for the periods referred to in such financial
statements, all in accordance with GAAP. In the case of Interim Financial
Statements, they are subject to normal recurring year-end adjustments (the
effect of which will not, individually or in the aggregate, be materially
adverse) and the absence of notes (that, if presented, would not differ
materially from those included in the Financial Statements). The Financial
Statements referred to in this Section 3.4 reflect the consistent application of
such accounting principles throughout the periods involved, except as disclosed
in the notes to such financial statements. No financial statements of any
Person other than the Company are required by GAAP to be included in the
consolidated financial statements of the Company.
3.5 BOOKS AND RECORDS. The books of account, minute books, stock
record books and other financial records of the Company, all of which have been
made available to Buyer, are complete and correct. The minute books of the
Company contain accurate and complete records of all meetings held of, and
corporate action taken by, the shareholders, the Boards of Directors, and
committees of the Boards of Directors of the Company, and no meeting of any such
shareholders, Board of Directors or committee has been held for which minutes
have not been prepared and are not contained in such minute books. At the
Closing, all of those books and records will be in the possession of the
Company.
3.6 TITLE TO PROPERTIES; ENCUMBRANCES. Part 3.6 of the Shareholders
Disclosure Letter contains a complete and accurate list of all real property,
leaseholds or other interests therein owned by the Company. The Majority
Shareholders have delivered or made available to Buyer copies of the deeds and
other instruments (as recorded) by which the Company acquired such real property
and interests, and copies of all title insurance policies, opinions, abstracts,
and surveys in the possession of the Majority Shareholders or the Company and
relating to such property or interests. The Company owns all the properties and
assets (whether real, personal or mixed and whether tangible or intangible) that
it purports to own located in the facilities owned or operated by the Company or
reflected as owned in the books and records of the Company, including all of the
properties and assets reflected in the Balance Sheet and the Interim Balance
Sheet (except for assets held under capitalized leases disclosed or not required
to be disclosed in Part 3.6 of the Shareholders Disclosure Letter and personal
property sold since the date of the Balance Sheet and the Interim Balance Sheet,
as the case may be, in the Ordinary Course of Business), and all of the
properties and assets purchased or otherwise acquired
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by the Company since the date of the Balance Sheet (except for personal property
acquired and sold since the date of the Balance Sheet in the Ordinary Course of
Business and consistent with past practice), which subsequently purchased or
acquired properties and assets (other than inventory and short-term investments)
are listed in Part 3.6 of the Shareholders Disclosure Letter. All material
properties and assets reflected in the Balance Sheet and the Interim Balance
Sheet are free and clear of all Encumbrances except, with respect to all such
properties and assets, (a) security interests shown on the Balance Sheet or the
Interim Balance Sheet or Schedule 3.6 hereto as securing specified liabilities
or obligations, with respect to which no default (or event that, with notice or
lapse of time or both, would constitute a default) exists, (b) security
interests incurred in connection with the purchase of property or assets after
the date of the Interim Balance Sheet (such mortgages and security interests
being limited to the property or assets so acquired), with respect to which no
default (or event that, with notice or lapse of time or both, would constitute a
default) exists, and (c) liens for current taxes not yet due.
3.7 CONDITION AND SUFFICIENCY OF ASSETS. To the Knowledge of the
Company or either Majority Shareholder, the buildings, plants, structures and
equipment of the Company are structurally sound, and are adequate for the uses
to which they are being put. The building, plants, structures and equipment of
the Company are sufficient for the continued conduct of the Company's businesses
after the Closing in substantially the same manner and at the same level as
conducted prior to the Closing.
3.8 ENVIRONMENTAL COMPLIANCE. To the Knowledge of the Company or
either Majority Shareholder, the Company has conducted its business in
accordance with all applicable statutes, regulations, rules, ordinances, codes,
licenses, permits, orders, approvals, plans, authorizations, concessions,
franchises and similar items (collectively, "Regulations") of all governmental
agencies, departments, commissions, boards, bureaus and instrumentalities of the
United States, the State of California and political subdivisions thereof and
all applicable judicial, administrative and regulatory decrees, judgments and
orders relating to the protection of human health or the environment, including,
without limitation, all requirements pertaining to reporting, licensing,
permitting, investigation or remediation of emission, discharge, release or
threatened release of Hazardous Material into the air, surface water,
groundwater or land and all requirements pertaining to the protection of the
health and safety of employees or the public. "Hazardous Material" shall
include any substance (i) the presence of which requires investigation or
remediation under any federal, state or local Regulation, or (ii) which is
defined as a "hazardous waste," "hazardous substance," "pollutant" or
"contaminant" under any federal, state or local Regulation, or (iii) which is
toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic,
mutagenic or otherwise hazardous and is regulated by any governmental authority,
agency, department, commission, board, agency or instrumentality of the United
States, the State of California or any political subdivision,
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or (iv) the presence of which causes or threatens to cause a nuisance or poses
or threatens to pose a hazard to the health or safety of any person, or
(v) without limitation, which contains gasoline, diesel fuel or other petroleum
hydrocarbons. No chemicals used or produced by the Company are discharged into
waters or land where such materials could migrate to drinking waters, and no
person is or has been exposed by any chemicals used by the Company which are
known to the State of California to cause cancer or reproductive toxicity in
violation of the California Safe Drinking Water and Toxic Enforcement Act of
1986 (or which appear on the list of chemicals published by the State). Part
3.8 of the Shareholders Disclosure Letter lists all chemical substances which
are being, or within the last four years have been, used in connection with the
Company's business by the Company or on the land where the products of the
Company are manufactured, produced, stored or packaged by the Company.
3.9 ACCOUNTS RECEIVABLE. All accounts receivable of the Company that
are reflected on the Balance Sheet or the Interim Balance Sheet or on the
accounting records of the Company as of the Closing Date (collectively, the
"Accounts Receivable") represent or will represent valid obligations arising
from sales actually made or services actually performed in the Ordinary Course
of Business. Unless paid prior to the Closing Date, the Accounts Receivable are
or will be as of the Closing Date current and collectible net of the respective
reserves shown on the Balance Sheet or the Interim Balance Sheet or on the
accounting records of the Company as of the Closing Date (which reserves are
adequate and calculated consistent with past practice and, in the case of the
reserve as of the Closing Date, will not represent a greater percentage of the
Accounts Receivable as of the Closing Date than the reserve reflected in the
Interim Balance Sheet represented of the Accounts Receivable reflected therein
and will not represent a material adverse change in the composition of such
Accounts Receivable in terms of aging). There is no contest, claim, or right of
set-off, other than returns in the Ordinary Course of Business, under any
Contract with any obligor of an Accounts Receivable relating to the amount or
validity of such Accounts Receivable. Part 3.9 of the Shareholders Disclosure
Letter contains a complete and accurate list of all Accounts Receivable as of
the date of the Interim Balance Sheet, which list sets forth the aging of such
Accounts receivable.
3.10 INVENTORY. All inventory of the Company, whether or not
reflected in the Balance Sheet or the Interim Balance Sheet, consists of a
quality and quantity usable and salable in the Ordinary Course of Business,
except for obsolete items and items of below-standard quality, all of which have
been written off or written down to net realizable value in the Balance Sheet or
the Interim Balance Sheet or on the accounting records of the Company as of the
Closing Date, as the case may be. All inventories not written off have been
priced at the lower of cost or market on a first in, first out basis. To the
Knowledge of the Company or either Majority Shareholder, the quantities of each
item
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of inventory (whether raw materials, work-in-process, or finished goods) are not
excessive, but are reasonable in the present circumstances of the Company.
3.11 NO UNDISCLOSED LIABILITIES. Except as set forth in Part 3.11 of
the Shareholders Disclosure Letter, the Company has no material liabilities or
obligations of any nature (whether known or unknown and whether absolute,
accrued, contingent, or otherwise) except for liabilities or obligations
reflected or reserved against in the Balance Sheet or the Interim Balance Sheet
and current liabilities incurred in the Ordinary Course of Business since the
respective dates thereof.
3.12 TAXES.
(a) The Company has filed or caused to be filed (on a timely
basis since January 1, 1996) all Tax Returns that are or were required to be
filed pursuant to applicable Legal Requirements. The Company has paid, or made
provision for the payment of, all Taxes that have or may have become due
pursuant to those Tax Returns or otherwise, or pursuant to any assessment
received by the Shareholders or the Company, except such Taxes, if any, as are
listed in Part 3.12 of the Shareholders Disclosure Letter and are being
contested in good faith and as to which adequate reserves (determined in
accordance with GAAP) have been provided in the Balance Sheet and the Interim
Balance Sheet.
(b) All Tax Returns filed by the Company are true, correct and
complete.
3.13 NO MATERIAL ADVERSE CHANGE. Except as set forth on Part 3.13 of
the Shareholders Disclosure Letter, since the date of the Balance Sheet, there
has not been any material adverse change in the business, operations,
properties, assets or condition (financial or otherwise) of the Company.
3.14 COMPLIANCE WITH LAWS. Except as set forth on Schedule 3.14, to
the Knowledge of the Company or either Majority Shareholder, the Company has not
violated and is in compliance with all laws, statutes, ordinances, regulations,
rules and orders of any federal or state government and any governmental
department or agency thereof, and any judgment, decision, decree or order of any
court or governmental agency, department or authority, except for such
violations and failures to comply which would not have a material adverse effect
on the business and prospects of the Company.
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3.15 LEGAL PROCEEDINGS. Except as shown in Part 3.15 of the
Shareholders Disclosure Letter, there is no material Proceeding presently
pending against the Company or affecting its assets, property or business, nor
does the Company have any Knowledge of any material Proceedings threatened
against it or affecting its properties or restricting or prohibiting the
consummation of the transactions contemplated by this Agreement before any court
or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign. Part 3.15 of the Shareholders Disclosure
Letter sets forth a description of the damages or other relief sought in all
Proceedings described therein.
3.16 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth in
Part 3.16 of the Shareholders Disclosure Letter, since the date of the Balance
Sheet, the Company has conducted its business only in the Ordinary Course of
Business and there has not been any:
(a) change in the Company's authorized or issued capital stock;
grant of any stock option or right to purchase shares of capital stock of the
Company; issuance of any security convertible into such capital stock; grant of
any registration rights; purchase, redemption, retirement, or other acquisition
by the Company of any shares of any such capital stock; or declaration or
payment of any dividend or other distribution or payment in respect of shares of
capital stock;
(b) amendment to the Organizational Documents of the Company;
(c) payment or increase by the Company of any bonuses, salaries,
or other compensation to any stockholder, director, officer or (except in the
Ordinary Course of Business) employee or entry into any employment, severance or
similar Contract with any director, officer or employee;
(d) adoption of, or increase in the payments to or benefits
under, any profit sharing, bonus, deferred compensation, savings, insurance,
pension, retirement or other employee benefit plan for or with any employees of
the Company;
(e) damage to or destruction or loss of any asset or property of
the Company, whether or not covered by insurance, materially and adversely
affecting the properties, assets, business, financial condition or prospects of
the Company, taken as a whole;
(f) entry into, termination of, or receipt of notice of
termination of (i) any license, distributorship, dealer, sales representative,
joint venture, credit or
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similar agreement, or (ii) any Contract or transaction involving a total
remaining commitment by or to the Company of at least $75,000;
(g) sale (other than sales of inventory in the Ordinary Course
of Business), lease or other disposition of any asset or property of the Company
or mortgage, pledge or imposition of any lien or other encumbrance on any
material asset or property of the Company, including the sale, lease or other
disposition of any of the Intellectual Property Assets;
(h) cancellation or waiver of any claims or rights with a value
to the Company in excess of $75,000;
(i) material change in the accounting methods used by the
Company; or
(ii) agreement, whether oral or written, by the Company to
do any of the foregoing.
3.17 CONTRACTS; NO DEFAULTS.
(a) Part 3.17(a) of the Shareholders Disclosure Letter contains
a complete and accurate list, and the Majority Shareholders have delivered to
Buyer true and complete copies, of:
(i) each Applicable Contract that involves performance of
services or delivery of goods or materials by the Company of an amount or value
in excess of $75,000;
(ii) each Applicable Contract that involves performance of
services or delivery of goods or materials to the Company of an amount or value
in excess of $75,000;
(iii) each Applicable Contract that was not entered into in
the Ordinary Course of Business and that involves expenditures or receipts of
the Company in excess of $75,000;
(iv) each lease, rental or occupancy agreement, license,
installment and conditional sale agreement and other Applicable Contract
affecting the ownership of, leasing of, title to, use of, or any leasehold or
other interest in, any real or personal property (except personal property
leases and installment and conditional sales
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agreements having a value per item or aggregate payments of less than $75,000
and with terms of less than one year);
(v) each licensing agreement or other Applicable Contract
with respect to patents, trademarks, copyrights or other intellectual property,
including agreements with current or former employees, consultants or
contractors regarding the appropriation or the non-disclosure of any of the
Intellectual Property Assets;
(vi) each collective bargaining agreement and other
Applicable Contract to or with any labor union or other employee representative
of a group of employees;
(vii) each joint venture, partnership and other Applicable
Contract (however named) involving a sharing of profits, losses, costs or
liabilities by the Company with any other Person;
(viii) each Applicable Contract containing covenants that in
any way purport to restrict the business activity of the Company or any
Affiliate of the Company or limit the freedom of the Company or any Affiliate of
the Company to engage in any line of business or to compete with any Person;
(ix) each Applicable Contract providing for payments to or
by any Person based on sales, purchases or profits, other than direct payments
for goods;
(x) each power of attorney that is currently effective and
outstanding;
(xi) each Applicable Contract entered into other than in the
Ordinary Course of Business that contains or provides for an express undertaking
by the Company to be responsible for consequential damages;
(xii) each Applicable Contract for capital expenditures in
excess of $75,000;
(xiii) each written warranty, guaranty and or other similar
undertaking with respect to contractual performance extended by the Company
other than in the Ordinary Course of Business; and
(xiv) each amendment, supplement and modification (whether
oral or written) in respect of any of the foregoing.
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Part 3.17(a) of the Shareholders Disclosure Letter sets forth reasonably
complete details concerning such Contracts, including the parties to the
Contracts, the amount of the remaining commitment of the Company under the
Contracts, and where details relating to the Contracts are located.
(b) Except as set forth in Part 3.17(b) of the Shareholders
Disclosure Letter:
(i) no Seller (and no Related Person of any Seller) has or
may acquire any rights under, and no Seller has or may become subject to any
obligation or liability under, any Contract that relates to the business of, or
any of the assets owned or used by, the Company; and
(ii) to the Knowledge of the Company or either Majority
Shareholder and the Company, no officer, director, agent, employee, consultant,
or contractor of the Company is bound by any Contract that purports to limit the
ability of such officer, director, agent, employee, consultant or contractor to
(A) engage in or continue any conduct, activity or practice relating to the
business of the Company, or (B) assign to the Company or to any other Person any
rights to any invention, improvement or discovery.
(c) Except as set forth in Part 3.17(c) of the Shareholders
Disclosure Letter, each Contract identified or required to be identified in
Part 3.17(a) of the Shareholders Disclosure Letter is in full force and effect
and is valid and enforceable in accordance with its terms.
(d) Except as set forth in Part 3.17(d) of the Shareholders
Disclosure Letter:
(i) the Company is, and at all times since July 1, 1996,
has been, in full compliance with all applicable terms and requirements of each
material Contract under which the Company has or had any obligation or liability
or by which the Company or any of the assets owned or used by the Company is or
was bound;
(ii) to the Knowledge of the Company or either Majority
Shareholder, each other Person that has or had any obligation or liability under
any Contract under which the Company has or had any rights is, and at all times
since July 1, 1996, has been, in full compliance with all applicable terms and
requirements of such Contract;
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(iii) no event has occurred or circumstance exists that (with
or without notice or lapse of time) may contravene, conflict with, or result in
a violation or breach of, or give the Company or other Person the right to
declare a default or exercise any remedy under, or to accelerate the maturity or
performance of, or to cancel, terminate, or modify, any Applicable Contract;
and
(iv) the Company has not given to or received from any other
Person, at any time since July 1, 1996, any notice or other communication
(whether oral or written) regarding any actual, alleged, possible or potential
violation or breach of, or default under, any Contract.
(e) There are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate any material amounts paid or payable to the
Company under current or completed Contracts with any Person and no such Person
has made written demand for such renegotiation.
(f) The Contracts relating to the sale, design, manufacture or
provision of products or services by the Company have been entered into in the
Ordinary Course of Business and have been entered into without the commission of
any act alone or in concert with any other Person, or any consideration having
been paid or promised, that is or would be in violation of any Legal
Requirement.
3.18 INSURANCE. Part 3.18 of the Shareholders Disclosure Letter sets
forth a list and brief description of all policies or binders of fire,
liability, product liability, worker's compensation, vehicular and other
insurance held by or on behalf of the Company. Such policies and binders are
valid and enforceable in accordance with their terms are in full force and
effect. All premiums on all such policies have been paid to date and the
Company has complied with all conditions of such policies and has received no
notice of any failure to comply with the terms of such policies. In addition,
Part 3.18 of the Shareholders Disclosure Letter sets forth in respect of such
policies and binders (i) the type and amount of coverage provided thereby, (ii)
their respective effective dates, and (iii) claims made or occurrences reported
during the past two years with respect to products liability and workers
compensation.
3.19 LABOR AND EMPLOYMENT MATTERS.
(a) To the Knowledge of the Company or either Majority
Shareholder, except as set forth in Part 3.19 of the Shareholders Disclosure
Letter, the Company (i) has withheld and paid to the appropriate Governmental
Authorities, or is withholding for payment not yet due to such authorities, all
amounts required to be withheld from its employees; (ii) is not liable for any
arrears of wages, Taxes, penalties
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or other sums for failure to comply with any of the foregoing; and (iii) has
complied in all material respects with all Applicable Laws, rules and
regulations relating to the employment of labor, including Title VII of the
Federal Civil Rights Act of 1964, as amended, OSHA, and those relating to hours,
wages, collective bargaining and the payment and withholding of taxes and other
sums as required by appropriate authorities.
(b) Except as set forth in Part 3.19 of the Shareholders
Disclosure Letter, the Company is not a party to any collective bargaining
agreement or other labor contract applicable to the employees of the Company;
there has been no breach or other failure to comply with any material provision
of such agreement or contract; and the Company is not subject to any (i) unfair
labor practice complaint pending before the National Labor Relations Board or
any other federal, state, local or foreign agency, (ii) pending, or to the
Knowledge of the Company or either Majority Shareholder, threatened labor
strike, slowdown, work stoppage, lockout, or other organized labor disturbance,
or threat thereof, (iii) pending grievance proceeding, (iv) pending
representation question respecting the employees of the Company, (v) pending
arbitration proceeding arising out of or under any collective bargaining
agreement or (vi) attempt by any union to represent employees of the Company as
a collective bargaining agent.
3.20 EMPLOYEES. Part 3.20 of the Shareholders Disclosure Letter sets
forth a list of the names of all employees of the Company currently employed in
connection with the Company with annual compensation of at least $50,000 (the
"Employees") and indicates the current salary or wage rate of each such
Employee. All of such salaries, wages and benefits will be paid by the Company
when due for all periods through the Closing Date. Part 3.20 of the
Shareholders Disclosure Letter sets forth a list of all Employees terminated by
the Company since January 1, 1998.
3.21 EMPLOYEE BENEFIT PLANS. Set forth in Part 3.21 of the
Shareholders Disclosure Letter is each bonus, deferred compensation, pension,
profit-sharing, retirement, stock purchase or stock option, hospitalization or
other medical, life or other insurance, supplemental unemployment plan, whether
formal or informal, including any policy, plan, program or agreement which
provides for the payment of severance, salary continuation, salary in lieu of
notice or similar benefits, under which the Company has any present or future
obligations or liability on behalf of its employees or former employees or their
dependents or beneficiaries. The Company has provided Buyer with complete and
accurate copies of all such written plans and written summaries of all such oral
plans. Each of the plans that are subject to ERISA, the Code or any other
applicable law, are in compliance in all material respects with the presently
applicable provisions of ERISA, the Code or such law, as applicable. The
Company does not maintain any Welfare Plan (as defined in ERISA) under which
coverage is extended beyond the termination of employment.
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3.22 INTELLECTUAL PROPERTY. Set forth in Part 3.22 of the Shareholders
Disclosure Letter is a list of all material United States and foreign patents,
patent applications pending, patent applications in process, written employee
invention disclosures, trademarks, trademark registration applications,
copyrights, copyright registrations, copyright registration applications,
service marks, service mark registrations, service mark registration
applications, know-how agreements, licenses, logos, trade names and slogans
owned, licensed and used by the Company (collectively, the "Company Intellectual
Property Assets"). The Company is the owner of all right, title and interest in
and to each of the Company Intellectual Property Assets, free and clear of any
and all liens, security interests, charges, encumbrances, equities and other
adverse claims. All Company Intellectual Property Assets that have been
registered with the United States Patent and Trademark Office are currently in
compliance with all formal legal requirements (including the timely
post-registration filing of affidavits of use and incontestability and renewal
applications), are valid and enforceable, and are not subject to any maintenance
fees or taxes or actions falling due within ninety days after the Closing. To
the Knowledge of the Company or either Majority Shareholder, where applicable,
all Company Intellectual Property Assets bear the proper federal registration or
copyright notice. Neither any Shareholder nor the Company is a party to, and,
to the Knowledge of the Company or either Majority Shareholder, no threatened
claims are based on the use by, or challenge of the ownership of, the Company of
any of the Company Intellectual Property Assets. The Company or either Majority
Shareholder has no Knowledge of any infringing or interfering use of any Company
Intellectual Property Asset by any other Person and, to the Knowledge of the
Company or either Majority Shareholder, neither the Company nor the Majority
Shareholders have infringed or are infringing upon any intellectual property
rights of any other Person.
3.23 DISCLOSURE. (a) No representation or warranty of the Majority
Shareholders in this Agreement and no statement in the Shareholders Disclosure
Letter omits to state a material fact necessary to make the statements herein or
therein, in light of the circumstances in which they were made, not misleading.
(b) No notice given pursuant to Section 6.5 will contain any
untrue statement or omit to state a material fact necessary to make the
statements therein or in this Agreement, in light of the circumstances in which
they were made, not misleading.
(c) There is no fact known to either Majority Shareholder that
has specific application to either Majority Shareholder or the Company (other
than general economic or industry conditions) and that materially adversely
affects or, as far as either Majority Shareholder can reasonably foresee,
materially threatens, the assets, business,
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prospects, financial condition, or results of operations of the Company that has
not been set forth in this Agreement or the Shareholders Disclosure Letter.
3.24 RELATIONSHIPS WITH RELATED PERSONS. No Majority Shareholder or
any Related Person of a Majority Shareholder or of the Company has, or since
January 1, 1996, has had, any interest in any property (whether real, personal,
or mixed and whether tangible or intangible), used in or pertaining to the
Company's businesses. No Majority Shareholder or any Related Person of either
Majority Shareholder or of the Company is, or since January 1, 1996, has owned
(of record or as a beneficial owner) an equity interest or any other financial
or profit interest in, a Person that has (i) had business dealings or a material
financial interest in any transaction with the Company other than business
dealings or transactions conducted in the Ordinary Course of Business with the
Company at substantially prevailing market prices and on substantially
prevailing market terms, or (ii) engaged in competition with the Company with
respect to any line of the products or services of the Company (a "Competing
Business") in any market presently served by the Company except for less than
one percent of the outstanding capital stock of any Competing Business that is
publicly traded on any recognized exchange or in the over-the-counter market.
Except as set forth in Part 3.25 of the Shareholders Disclosure Letter, neither
Majority Shareholder or any Related Person of either Majority Shareholder or of
the Company is a party to any Contract with, or has any claim or right against,
the Company.
3.25 BROKERS OR FINDERS. The Majority Shareholders or the Company and
their agents have not incurred any obligation or liability, contingent or
otherwise, for brokerage or finders' fees or agents' commissions or other
similar payment in connection with this Agreement.
3.26 INVESTMENT MATTERS. The PCAC Shares to be issued to the Majority
Shareholders hereunder are being acquired for their own accounts and not on
behalf of any other Person, and all such PCAC Shares are being acquired by the
Majority Shareholders for investment purposes only and not with a view to, or
for sale in connection with, any resale or distribution of such PCAC Shares.
The Majority Shareholders have received and examined Buyer's most recent Proxy
Statement, Buyer's Annual Report on Form 10-KSB for the year ended September 30,
1997, Buyer's 1997 Annual Report to Stockholders and Buyer's Quarterly Report on
Form 10-QSB for the quarters ended December 31, 1997, March 30, 1998 and
June 30, 1998. The Majority Shareholders had the opportunity to ask questions
and receive answers from Buyer concerning Buyer, and have been furnished with
all other information about Buyer which they have requested. Each Majority
Shareholder believes that he or she is an "accredited investor" as defined in
Rule 501(a) of the Securities Act of 1933 (the "Securities Act"), as amended,
that he or she has been fully apprised of all facts and circumstances necessary
to permit him or her to make an
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informed decision about acquiring the PCAC Shares, that he or she has sufficient
knowledge and experience in business and financial matters, that he or she is
capable of evaluating the merits and risks of an investment in the PCAC Shares
and that he or she has the capacity to protect his or her own interests in
connection with the transactions contemplated by this Agreement. The Majority
Shareholders have been advised by Buyer and each understands that (a) the PCAC
Shares to be issued hereunder will not be registered under any securities laws,
including without limitation, the securities laws of the United States or any
other jurisdiction, (b) such PCAC Shares must be held indefinitely unless and
until they are subsequently registered or an exemption from registration becomes
available, (c) Buyer is under no obligation to register the PCAC Shares except
as required by Section 12.15 below, (d) the PCAC Shares shall bear appropriate
restrictive legends, (e) Buyer shall have the right to place a stop order
against such shares, and (f) the PCAC Shares shall be "restricted securities"
under Rule 144 of the Securities Act.
3.27 CERTAIN TAX MATTERS.
(a) The liabilities of the Company assumed by Buyer pursuant to
the Merger and the liabilities to which the transferred assets of the Company
are subject were incurred by the Company in the ordinary course of its business.
(b) The Company is not an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
(c) The Company is not under the jurisdiction of a court in a
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
4. INTENTIONALLY OMITTED.
5. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and
warrants to Shareholders as follows:
5.1 ORGANIZATION AND GOOD STANDING.
(a) Buyer is a corporation duly organized, validly existing, and
in good standing under the laws of the State of California, with full corporate
power and authority to conduct its business as it is now being conducted, to own
or use the properties and assets that it purports to own or use. Except as set
forth in Part 5.1 of the Buyer Disclosure Letter, Buyer is duly qualified to do
business as a foreign corporation and is in good standing under the laws of each
state or other jurisdiction in which either the ownership or use of the
properties owned or used by it, or the nature of the activities
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conducted by it, requires such qualification, except when the failure to so
qualify would not have a Material Adverse Effect.
(b) Buyer has delivered to Shareholders copies of the
Organizational Documents of Buyer, as currently in effect.
(c) Buyer has no Subsidiaries that have any material operations.
5.2 AUTHORITY; NO CONFLICT.
(a) This Agreement constitutes the legal, valid, and binding
obligation of Buyer, enforceable against Buyer in accordance with its terms.
Buyer has the absolute and unrestricted right, power, authority, and capacity to
execute and deliver this Agreement and to perform its obligations under this
Agreement.
(b) Except as set forth in Part 5.2 of the Buyer Disclosure
Letter, neither the execution and delivery of this Agreement nor the
consummation or performance of any of the Contemplated Transactions will,
directly or indirectly (with or without notice or lapse of time):
(i) contravene, conflict with, or result in a violation of
(A) any provision of the Organizational Documents of Buyer, or (B) any
resolution adopted by the board of directors or the shareholders of Buyer;
(ii) to the Knowledge of Buyer, contravene, conflict with,
or result in a violation of, or give any Governmental Body or other Person the
right to challenge any of the Contemplated Transactions or to exercise any
remedy or obtain any relief under, any Legal Requirement or any Order to which
Buyer, or any of the assets owned or used by Buyer, may be subject;
(iii) to the Knowledge of Buyer, contravene, conflict with,
or result in a violation of any of the terms or requirements of, or give any
Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or
modify, any Governmental Authorization that is held by Buyer or that otherwise
relates to the business of, or any of the assets owned or used by, Buyer;
(iv) cause Buyer to become subject to, or to become liable
for the payment of, any Tax;
(v) cause any of the assets owned by Buyer to be reassessed
or revalued by any taxing authority or other Governmental Body;
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(vi) contravene, conflict with, or result in a violation or
breach of any provision of, or give any Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of, or
to cancel, terminate or modify, any Applicable Contract; or
(vii) result in the imposition or creation of any Encumbrance
upon or with respect to any of the assets owned or used by any Acquired Company.
Except as set forth in Part 5.2 of the Buyer Disclosure Letter, Buyer is or will
not be required to give any notice to or obtain any Consent from any Person in
connection with the execution and delivery of this Agreement or the consummation
or performance of any of the Contemplated Transactions.
5.3 CAPITALIZATION. The authorized equity securities of Buyer
consist of 10,000,000 shares of Common Stock, without par value, of which
3,063,000 shares are issued and outstanding, and 600,000 shares of preferred
stock, none of which are outstanding. Except as provided on Schedule 5.14, all
of the outstanding equity securities of Buyer have been duly authorized and
validly issued and are fully paid and nonassessable. Except as set forth in
Part 5.3 of the Buyer Disclosure Letter, there are no Contracts relating to the
issuance, sale or transfer of any equity securities or other securities of
Buyer, including, without limitation, options, warrants and other rights to
acquire such securities. None of the outstanding equity securities or other
securities of Buyer was issued in violation of the Securities Act or any other
Legal Requirement. Buyer does not own, or have any Contract to acquire, any
equity securities or other securities of any Person or any direct or indirect
equity or ownership interest in any other business. The PCAC Preferred Stock
shall have the rights, preferences and privileges set forth on a Certificate of
Determination substantially in the form of Exhibit 5.3 hereto (the "Certificate
of Determination").
5.4 FINANCIAL STATEMENTS. Buyer has delivered to Shareholders:
(a) audited financial statements of Buyer for the fiscal year ended
September 30, 1997, together with the report thereon of Fineman West & Co. LLP,
independent certified public accountants (the "Financial Statements"), and
(b) unaudited financial statements of Buyer through June 30, 1998 (the "Interim
Financial Statements"), including unaudited balance sheets, statements of
income, changes in shareholders' equity, and cash flow for the nine months then
ended, including in each case the notes thereto. Except as set forth in
Part 5.4 of Buyer Disbursement Letter, such financial statements and notes
fairly present the financial condition and the results of operations, changes in
shareholders' equity, and cash flow of Buyer as at the respective dates of and
for the periods referred to in such financial statements, all in accordance with
GAAP, subject, in the case of Interim Financial
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Statements, to normal recurring year-end adjustments (the effect of which will
not, individually or in the aggregate, be materially adverse) and the absence of
notes (that, if presented, would not differ materially from those included in
the Financial Statements), the financial statements referred to in this
Section 5.4 reflect the consistent application of such accounting principles
throughout the periods involved, except as disclosed in the notes to such
financial statements. No financial statements of any Person other than Buyer
are required by GAAP to be included in the consolidated financial statements of
Buyer.
5.5 BOOKS AND RECORDS. The books of account, minute books, stock
record books and other financial records of Buyer, all of which have been made
available to Shareholders, are complete and correct. The minute books of Buyer
contain accurate and complete records of all meetings held of, and corporate
action taken by, the shareholders, the Boards of Directors, and committees of
the Boards of Directors of Buyer, and no meeting of any such shareholders, Board
of Directors or committee has been held for which minutes have not been prepared
and are not contained in such minute books. At the Closing, all of those books
and records will be in the possession of Buyer.
5.6 TITLE TO PROPERTIES; ENCUMBRANCES. Part 5.6 of the Buyer
Disclosure Letter contains a complete and accurate list of all real property,
leaseholds or other interests therein owned by Buyer. Buyer has delivered or
made available to Shareholders copies of the deeds and other instruments (as
recorded) by which Buyer acquired such real property and interests, and copies
of all title insurance policies, opinions, abstracts, and surveys in the
possession of Buyer relating to such property or interests. Buyer owns all the
properties and assets (whether real, personal or mixed and whether tangible or
intangible) that it purports to own located in the facilities owned or operated
by Buyer or reflected as owned in the books and records of Buyer, including all
of the properties and assets reflected in the Balance Sheet and the Interim
Balance Sheet (except for assets held under capitalized leases disclosed or not
required to be disclosed in Part 5.6 of the Buyer Disclosure Letter and personal
property sold since the date of the Balance Sheet and the Interim Balance Sheet,
as the case may be, in the Ordinary Course of Business), and all of the
properties and assets purchased or otherwise acquired by Buyer since the date of
the Balance Sheet (except for personal property acquired and sold since the date
of the Balance Sheet in the Ordinary Course of Business and consistent with past
practice), which subsequently purchased or acquired properties and assets (other
than inventory and short-term investments) are listed in Part 5.6 of the Buyer
Disclosure Letter. All material properties and assets reflected in the Balance
Sheet and the Interim Balance Sheet are free and clear of all Encumbrances
except, with respect to all such properties and assets, (a) security interests
shown on the Balance Sheet or the Interim Balance Sheet as securing specified
liabilities or obligations, with respect to which no default (or event that,
with notice or lapse of time or both, would constitute a default) exists,
(b) security interests incurred in connection with the purchase of property or
assets after the date of the Interim
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Balance Sheet (such mortgages and security interests being limited to the
property or assets so acquired), with respect to which no default (or event
that, with notice or lapse of time or both, would constitute a default) exists,
and (c) liens for current taxes not yet due.
5.7 CONDITION AND SUFFICIENCY OF ASSETS. To the Knowledge of Buyer,
the buildings, plants, structures and equipment of Buyer are structurally sound
and are adequate for the uses to which they are being put. The building,
plants, structures and equipment of Buyer are sufficient for the continued
conduct of Buyer's businesses after the Closing in substantially the same manner
and at the same level as conducted prior to the Closing.
5.8 ENVIRONMENTAL COMPLIANCE. To the Knowledge of Buyer, Buyer has
conducted its business in accordance with all applicable statutes, regulations,
rules, ordinances, codes, licenses, permits, orders, approvals, plans,
authorizations, concessions, franchises and similar items (collectively,
"Regulations") of all governmental agencies, departments, commissions, boards,
bureaus and instrumentalities of the United States, the State of California and
political subdivisions thereof and all applicable judicial, administrative and
regulatory decrees, judgments and orders relating to the protection of human
health or the environment, including, without limitation, all requirements
pertaining to reporting, licensing, permitting, investigation or remediation of
emission, discharge, release or threatened release of Hazardous Material into
the air, surface water, groundwater or land and all requirements pertaining to
the protection of the health and safety of employees or the public. "Hazardous
Material" shall include any substance (i) the presence of which requires
investigation or remediation under any federal, state or local Regulation, or
(ii) which is or becomes defined as a "hazardous waste," "hazardous substance,"
"pollutant" or "contaminant" under any federal, state or local Regulation, or
(iii) which is toxic, explosive, corrosive, flammable, infectious, radioactive,
carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by
any governmental authority, agency, department, commission, board, agency or
instrumentality of the United States, the State of California or any political
subdivision, or (iv) the presence of which causes or threatens to cause a
nuisance or poses or threatens to pose a hazard to the health or safety of any
person, or (v) without limitation, which contains gasoline, diesel fuel or other
petroleum hydrocarbons. No chemicals used or produced by Buyer are discharged
into waters or land where such materials could migrate to drinking waters, and
no person is or has been exposed by any chemicals used by Buyer which are known
to the State of California to cause cancer or reproductive toxicity in violation
of the California Safe Drinking Water and Toxic Enforcement Act of 1986 (or
which appear on the list of chemicals published by the State). Part 5.8 of the
Buyer Disclosure Letter lists all chemical substances which are being, or within
the last four years have been, used in
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connection with Buyer's business by Buyer or on the land where the products of
Buyer are manufactured, produced, stored or packaged by Buyer.
5.9 ACCOUNTS RECEIVABLE. All accounts receivable of Buyer that are
reflected on the Balance Sheet or the Interim Balance Sheet or on the accounting
records of Buyer as of the Closing Date (collectively, the "Accounts
Receivable") represent or will represent valid obligations arising from sales
actually made or services actually performed in the Ordinary Course of Business.
Unless paid prior to the Closing Date, the Accounts Receivable are or will be as
of the Closing Date current and collectible net of the respective reserves shown
on the Balance Sheet or the Interim Balance Sheet or on the accounting records
of Buyer as of the Closing Date (which reserves are adequate and calculated
consistent with past practice and, in the case of the reserve as of the Closing
Date, will not represent a greater percentage of the Accounts Receivable as of
the Closing Date than the reserve reflected in the Interim Balance Sheet
represented of the Accounts Receivable reflected therein and will not represent
a material adverse change in the composition of such Accounts Receivable in
terms of aging). There is no contest, claim, or right of set-off, other than
returns in the Ordinary Course of Business, under any Contract with any obligor
of an Accounts Receivable relating to the amount or validity of such Accounts
Receivable. Part 5.9 of the Buyer Disclosure Letter contains a complete and
accurate list of all Accounts Receivable as of the date of the Interim Balance
Sheet, which list sets forth the aging of such Accounts receivable.
5.10 INVENTORY. All inventory of Buyer, whether or not reflected in
the Balance Sheet or the Interim Balance Sheet, consists of a quality and
quantity usable and salable in the Ordinary Course of Business, except for
obsolete items and items of below-standard quality, all of which have been
written off or written down to net realizable value in the Balance Sheet or the
Interim Balance Sheet or on the accounting records of Buyer as of the Closing
Date, as the case may be. All inventories not written off have been priced at
the lower of cost or market on a first in, first out basis. To the Knowledge of
Buyer, the quantities of each item of inventory (whether raw materials,
work-in-process, or finished goods) are not excessive, but are reasonable in the
present circumstances of Buyer.
5.11 NO UNDISCLOSED LIABILITIES. Except as set forth in Part 5.11 of
the Disclosure Letter, Buyer has no material liabilities or obligations of any
nature (whether known or unknown and whether absolute, accrued, contingent, or
otherwise) except for liabilities or obligations reflected or reserved against
in the Balance Sheet or the Interim Balance Sheet and current liabilities
incurred in the Ordinary Course of Business since the respective dates thereof.
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5.12 TAXES.
(a) Buyer has filed or caused to be filed (on a timely basis
since January 1, 1996) all Tax Returns that are or were required to be filed
pursuant to applicable Legal Requirements. Buyer has paid, or made provision
for the payment of, all Taxes that have or may have become due pursuant to those
Tax Returns or otherwise, or pursuant to any assessment received by the
Shareholders or Buyer, except such Taxes, if any, as are listed in Part 5.12 of
the Buyer Disclosure Letter and are being contested in good faith and as to
which adequate reserves (determined in accordance with GAAP) have been provided
in the Balance Sheet and the Interim Balance Sheet.
(b) All Tax Returns filed by Buyer are true, correct and
complete.
5.13 NO MATERIAL ADVERSE CHANGE. Except as set forth in Part 5.13 of
the Buyer Disclosure Letter, since the date of the Balance Sheet, there has not
been any material adverse change in the business, operations, properties,
prospects, assets or condition (financial or otherwise) of Buyer.
5.14 COMPLIANCE WITH LAWS. Except as provided in Part 5.14 of the
Buyer Disclosure Letter, to the Knowledge of Buyer, Buyer has not violated and
is in compliance with all laws, statutes, ordinances, regulations, rules and
orders of any federal or state government and any governmental department or
agency thereof, and any judgment, decision, decree or order of any court or
governmental agency, department or authority, except for such violations and
failures to comply which would not have a material adverse effect on the
business and prospects of Buyer.
5.15 LEGAL PROCEEDINGS. Except as shown in Part 5.15 of the Buyer
Disclosure Letter, there is no material Proceeding presently pending against
Buyer or affecting its assets, property or business, nor does Buyer have any
Knowledge of any material Proceedings threatened against it or affecting its
properties or restricting or prohibiting the consummation of the transactions
contemplated by this Agreement before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign.
Part 5.15 of the Buyer Disclosure Letter sets forth a description of the damages
or other relief sought in all Proceedings described therein.
5.16 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth in
Part 5.16 of the Buyer Disclosure Letter, since the date of the Balance Sheet,
Buyer has conducted its business only in the Ordinary Course of Business and
there has not been any:
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(a) change in Buyer's authorized or issued capital stock; grant
of any stock option or right to purchase shares of capital stock of Buyer;
issuance of any security convertible into such capital stock; grant of any
registration rights; purchase, redemption, retirement, or other acquisition by
Buyer of any shares of any such capital stock; or declaration or payment of any
dividend or other distribution or payment in respect of shares of capital stock;
(b) amendment to the Organizational Documents of Buyer;
(c) payment or increase by Buyer of any bonuses, salaries, or
other compensation to any stockholder, director, officer or (except in the
Ordinary Course of Business) employee or entry into any employment, severance or
similar Contract with any director, officer or employee;
(d) adoption of, or increase in the payments to or benefits
under, any profit sharing, bonus, deferred compensation, savings, insurance,
pension, retirement or other employee benefit plan for or with any employees of
Buyer;
(e) damage to or destruction or loss of any asset or property of
Buyer, whether or not covered by insurance, materially and adversely affecting
the properties, assets, business, financial condition or prospects of Buyer,
taken as a whole;
(f) entry into, termination of, or receipt of notice of
termination of (i) any license, distributorship, dealer, sales representative,
joint venture, credit or similar agreement, or (ii) any Contract or transaction
involving a total remaining commitment by or to Buyer of at least $75,000;
(g) sale (other than sales of inventory in the Ordinary Course
of Business), lease or other disposition of any asset or property of Buyer or
mortgage, pledge or imposition of any lien or other encumbrance on any material
asset or property of Buyer, including the sale, lease or other disposition of
any of the Intellectual Property Assets;
(h) cancellation or waiver of any claims or rights with a value
to Buyer in excess of $75,000;
(i) material change in the accounting methods used by
Buyer; or
(ii) agreement, whether oral or written, by Buyer to do any
of the foregoing; provided, that nothing in this Agreement shall be construed to
limit
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Buyer's right and obligation to comply with Chapter 13 of the California
Corporations Code, to the extent applicable to the transactions contemplated
hereby.
5.17 CONTRACTS; NO DEFAULTS.
(a) Part 5.17(a) of the Buyer Disclosure Letter contains a
complete and accurate list, and Buyer has delivered to Shareholders true and
complete copies, of:
(i) each Applicable Contract that involves performance of
services or delivery of goods or materials by Buyer of an amount or value in
excess of $75,000;
(ii) each Applicable Contract that involves performance of
services or delivery of goods or materials to Buyer of an amount or value in
excess of $75,000;
(iii) each Applicable Contract that was not entered into in
the Ordinary Course of Business and that involves expenditures or receipts of
Buyer in excess of $75,000;
(iv) each lease, rental or occupancy agreement, license,
installment and conditional sale agreement and other Applicable Contract
affecting the ownership of, leasing of, title to, use of, or any leasehold or
other interest in, any real or personal property (except personal property
leases and installment and conditional sales agreements having a value per item
or aggregate payments of less than $75,000 and with terms of less than one
year);
(v) each licensing agreement or other Applicable Contract
with respect to patents, trademarks, copyrights or other intellectual property,
including agreements with current or former employees, consultants or
contractors regarding the appropriation or the non-disclosure of any of the
Intellectual Property Assets;
(vi) each collective bargaining agreement and other
Applicable Contract to or with any labor union or other employee representative
of a group of employees;
(vii) each joint venture, partnership and other Applicable
Contract (however named) involving a sharing of profits, losses, costs or
liabilities by Buyer with any other Person;
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(viii) each Applicable Contract containing covenants that in
any way purport to restrict the business activity of Buyer or any Affiliate of
Buyer or limit the freedom of Buyer or any Affiliate of Buyer to engage in any
line of business or to compete with any Person;
(ix) each Applicable Contract providing for payments to or
by any Person based on sales, purchases or profits, other than direct payments
for goods;
(x) each power of attorney that is currently effective and
outstanding;
(xi) each Applicable Contract entered into other than in the
Ordinary Course of Business that contains or provides for an express undertaking
by Buyer to be responsible for consequential damages;
(xii) each Applicable Contract for capital expenditures in
excess of $75,000;
(xiii) each written warranty, guaranty and or other similar
undertaking with respect to contractual performance extended by Buyer other than
in the Ordinary Course of Business; and
(xiv) each amendment, supplement and modification (whether
oral or written) in respect of any of the foregoing.
Part 5.17(a) of the Buyer Disclosure Letter sets forth reasonably complete
details concerning such Contracts, including the parties to the Contracts, the
amount of the remaining commitment of Buyer under the Contracts, and where
details relating to the Contracts are located.
(b) Except as set forth in Part 5.17(b) of the Buyer Disclosure
Letter, to the Knowledge of Buyer, no officer, director, agent, employee,
consultant, or contractor of Buyer is bound by any Contract that purports to
limit the ability of such officer, director, agent, employee, consultant or
contractor to (i) engage in or continue any conduct, activity or practice
relating to the business of Buyer, or (ii) assign to Buyer or to any other
Person any rights to any invention, improvement or discovery.
(c) Except as set forth in Part 5.17(c) of the Buyer Disclosure
Letter, each Contract identified or required to be identified in Part 5.17(a) of
the Buyer Disclosure Letter is in full force and effect and is valid and
enforceable in accordance with its terms.
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(d) Except as set forth in Part 5.17(d) of the Buyer Disclosure
Letter:
(i) Buyer is, and at all times since July 1, 1996, has
been, in full compliance with all applicable terms and requirements of each
material Contract under which Buyer has or had any obligation or liability or by
which Buyer or any of the assets owned or used by Buyer is or was bound;
(ii) to the Knowledge of Buyer, each other Person that has
or had any obligation or liability under any Contract under which Buyer has or
had any rights is, and at all times since July 1, 1996, has been, in full
compliance with all applicable terms and requirements of such Contract;
(iii) no event has occurred or circumstance exists that (with
or without notice or lapse of time) may contravene, conflict with, or result in
a violation or breach of, or give Buyer or other Person the right to declare a
default or exercise any remedy under, or to accelerate the maturity or
performance of, or to cancel, terminate, or modify, any Applicable Contract;
and
(iv) Buyer has not given to or received from any other
Person, at any time since July 1, 1996, any notice or other communication
(whether oral or written) regarding any actual, alleged, possible or potential
violation or breach of, or default under, any Contract.
(e) There are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate any material amounts paid or payable to Buyer
under current or completed Contracts with any Person and no such Person has made
written demand for such renegotiation.
(f) The Contracts relating to the sale, design, manufacture or
provision of products or services by Buyer have been entered into in the
Ordinary Course of Business and have been entered into without the commission of
any act alone or in concert with any other Person, or any consideration having
been paid or promised, that is or would be in violation of any Legal
Requirement.
5.18 INSURANCE. Part 5.18 of the Buyer Disclosure Letter sets forth
a list and brief description of all policies or binders of fire, liability,
product liability, worker's compensation, vehicular and other insurance held
by or on behalf of Buyer. Such policies and binders are valid and
enforceable in accordance with their terms, are in full force and effect.
All premiums on all such policies have been paid to date and Buyer has
complied
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with all conditions of such policies and has received no notice of any failure
to comply with the terms of such policies. In addition, Part 5.18 of the Buyer
Disclosure Letter sets forth in respect of such policies and binders (i) the
type and amount of coverage provided thereby, (ii) their respective effective
dates, and (iii) claims made or occurrences reported during the past two years
with respect to products liability and workers compensation.
5.19 LABOR AND EMPLOYMENT MATTERS.
(a) To the Knowledge of Buyer, except as set forth in Part 5.19
of the Buyer Disclosure Letter, Buyer (i) has withheld and paid to the
appropriate Governmental Authorities, or is withholding for payment not yet due
to such authorities, all amounts required to be withheld from its employees;
(ii) is not liable for any arrears of wages, Taxes, penalties or other sums for
failure to comply with any of the foregoing; and (iii) has complied in all
material respects with all Applicable Laws, rules and regulations relating to
the employment of labor, including Title VII of the Federal Civil Rights Act of
1964, as amended, OSHA, and those relating to hours, wages, collective
bargaining and the payment and withholding of taxes and other sums as required
by appropriate authorities.
(b) Except as set forth in Part 5.19 of the Buyer Disclosure
Letter, Buyer is not a party to any collective bargaining agreement or other
labor contract applicable to the employees of Buyer; there has been no breach or
other failure to comply with any material provision of such agreement or
contract; and Buyer is not subject to any (i) unfair labor practice complaint
pending before the National Labor Relations Board or any other federal, state,
local or foreign agency, (ii) pending or, to the knowledge of the Buyer,
threatened labor strike, slowdown, work stoppage, lockout, or other organized
labor disturbance, or threat thereof, (iii) pending grievance proceeding,
(iv) pending representation question respecting the employees of Buyer,
(v) pending arbitration proceeding arising out of or under any collective
bargaining agreement or (vi) attempt by any union to represent employees of
Buyer as a collective bargaining agent.
5.20 EMPLOYEES. Part 5.20 of the Buyer Disclosure Letter sets forth a
list of the names of all employees of Buyer currently employed in connection
with Buyer with annual compensation of at least $50,000 (the "Employees") and
indicates the current salary or wage rate of each such Employee. All of such
salaries, wages and benefits will be paid by Buyer when due for all periods
through the Closing Date. Part 5.20 of the Buyer Disclosure Letter sets forth a
list of all Employees terminated by Buyer since January 1, 1998.
5.21 EMPLOYEE BENEFIT PLANS. Set forth in Part 5.21 of the Buyer
Disclosure Letter is each bonus, deferred compensation, pension, profit-sharing,
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retirement, stock purchase or stock option, hospitalization or other medical,
life or other insurance, supplemental unemployment plan, whether formal or
informal, including any policy, plan, program or agreement which provides for
the payment of severance, salary continuation, salary in lieu of notice or
similar benefits, under which Buyer has any present or future obligations or
liability on behalf of its employees or former employees or their dependents or
beneficiaries. Buyer has provided the Company with complete and accurate copies
of all such written plans and written summaries of all such oral plans. Each of
the plans that are subject to ERISA, the Code or any other applicable law, are
in compliance in all material respects with the presently applicable provisions
of ERISA, the Code or such law, as applicable. Buyer does not maintain any
Welfare Plan (as defined in ERISA) under which coverage is extended beyond the
termination of employment.
5.22 INTELLECTUAL PROPERTY. Set forth in Part 5.22 of the Buyer
Disclosure Letter is a list of all material United States and foreign patents,
patent applications pending, patent applications in process, written employee
invention disclosures, trademarks, trademark registration applications,
copyrights, copyright registrations, copyright registration applications,
service marks, service mark registrations, service mark registration
applications, know-how agreements, licenses, logos, trade names and slogans
owned, licensed and used by Buyer (collectively, the "Buyer Intellectual
Property Assets"). Buyer is the owner of all right, title and interest in and
to each of the Buyer Intellectual Property Assets, free and clear of any and all
liens, security interests, charges, encumbrances, equities and other adverse
claims. All Buyer Intellectual Property Assets that have been registered with
the United States Patent and Trademark Office are currently in compliance with
all formal legal requirements (including the timely post-registration filing of
affidavits of use and incontestability and renewal applications), are valid and
enforceable, and are not subject to any maintenance fees or taxes or actions
falling due within ninety days after the Closing. To the Knowledge of Buyer,
where applicable, all Buyer Intellectual Property Assets bear the proper federal
registration or copyright notice. Buyer is not a party to, and, to the
Knowledge of Buyer, no threatened claims are based on the use by, or challenge
of the ownership of, Buyer of any of the Buyer Intellectual Property Assets.
Buyer has no Knowledge of any infringing or interfering use of any Buyer
Intellectual Property Asset by any other Person and, to the Knowledge of Buyer,
Buyer has not infringed and is not infringing upon any intellectual property
rights of any other Person.
5.23 DISCLOSURE. (a) No representation or warranty of Buyer in this
Agreement and no statement in the Buyer Disclosure Letter omits to state a
material fact necessary to make the statements herein or therein, in light of
the circumstances in which they were made, not misleading.
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(b) No notice given pursuant to Section 7.5 will contain any
untrue statement or omit to state a material fact necessary to make the
statements therein or in this Agreement, in light of the circumstances in which
they were made, not misleading.
(c) There is no fact known to Buyer that has specific
application to Buyer (other than general economic or industry conditions) and
that materially adversely affects or, as far as Buyer can reasonably foresee,
materially threatens, the assets, business, prospects, financial condition, or
results of operations of Buyer that has not been set forth in this Agreement or
the Buyer Disclosure Letter.
5.24 RELATIONSHIPS WITH RELATED PERSONS. Except as set forth in
Part 5.24 of the Buyer Disclosure Letter, no Buyer or any Related Person of
Buyer has, or since January 1, 1996, has had, any interest in any property
(whether real, personal, or mixed and whether tangible or intangible), used in
or pertaining to Buyer's businesses. No Buyer or any Related Person of Buyer
is, or since January 1, 1996, has owned (of record or as a beneficial owner) an
equity interest or any other financial or profit interest in, a Person that has
(i) had business dealings or a material financial interest in any transaction
with Buyer other than business dealings or transactions conducted in the
Ordinary Course of Business with Buyer at substantially prevailing market prices
and on substantially prevailing market terms, or (ii) engaged in competition
with Buyer with respect to any line of the products or services of Buyer (a
"Competing Business") in any market presently served by Buyer except for less
than one percent of the outstanding capital stock of any Competing Business that
is publicly traded on any recognized exchange or in the over-the-counter market.
Except as set forth in Part 5.24 of the Buyer Disclosure Letter, neither Buyer
or any Related Person of Buyer is a party to any Contract with, or has any claim
or right against, Buyer.
5.25 BROKERS OR FINDERS. Buyer and its agents have not incurred any
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other similar payment in connection with this
Agreement.
5.26 INVESTMENT INTENT. Buyer is acquiring the Shares for its own
account and not with a view to their distribution within the meaning of
Section 2(11) of the Securities Act.
5.27 INVESTMENT COMPANY. Buyer is not an investment company as
defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
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6. COVENANTS OF THE MAJORITY SHAREHOLDERS PRIOR TO CLOSING DATE.
6.1 ACCESS AND INVESTIGATION. Between the date of this Agreement and
the Closing Date, the Majority Shareholders will, and will cause the Company and
its Representatives to, at Buyer's expense, (a) afford Buyer and its
Representatives and prospective lenders and their Representatives (collectively,
"Buyer's Advisors") full and free access to the Company's personnel, properties
(including subsurface testing), contracts, books and records, and other
documents and data during regular business hours, (b) furnish Buyer and Buyer's
Advisors with copies of all such contracts, books and records, and other
existing documents and data as Buyer may reasonably request, and (c) furnish
Buyer and Buyer's Advisors with such additional financial, operating and other
data and information as Buyer may reasonably request. The Company shall deliver
to Buyer as soon as available all interim financial statements of the Company
prepared prior to the Closing. All such financial statements shall be prepared
from, and shall be consistent with, the books and records of the Company, and
represent fairly its financial position, results of operations and changes of
financial position as of the date and for the periods indicated, in each case in
conformity with preparation of the Interim Financial Statements of the Company.
6.2 OPERATION OF THE BUSINESSES OF THE ACQUIRED COMPANIES. Between
the date of this Agreement and the Closing Date, the Majority Shareholders will,
and will cause the Company to:
(a) conduct the business of the Company only in the Ordinary
Course of Business, except where the Company's Board of Directors determines in
good faith that it is in the best interest of the Company to take any particular
action outside of the Ordinary Course of Business;
(b) use their Best Efforts to preserve intact the current
business organization of the Company, keep available the services of the current
officers, employees, and agents of the Company, and maintain the relations and
good will with suppliers, customers, landlords, creditors, employees, agents and
others having business relationships with the Company, except where the
Company's Board of Directors determines in good faith that it is in the best
interest of the Company to take any actions contrary to the foregoing;
(c) confer with Buyer concerning operational matters of a
material nature; and
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(d) otherwise report periodically to Buyer concerning the status
of the business, operations and finances of the Company.
6.3 NEGATIVE COVENANT. Except as otherwise expressly permitted by
this Agreement, between the date of this Agreement and the Closing Date, the
Majority Shareholders will not, and will cause the Company not to, without the
prior consent of Buyer, take any affirmative action, or fail to take any
reasonable action within their or its control, as a result of which any of the
changes or events listed in Section 3.16 is likely to occur, except where the
Company's Board of Directors determines in good faith that it is in the best
interest of the Company to take any action contrary to the foregoing.
6.4 REQUIRED APPROVALS. As promptly as practicable after the date of
this Agreement, the Majority Shareholders will, and will cause the Company to,
make all filings required by Legal Requirements to be made by them in order to
consummate the Contemplated Transactions. Between the date of this Agreement
and the Closing Date, the Majority Shareholders will, and will cause the Company
to, (a) cooperate with Buyer with respect to all filings that Buyer elects to
make or is required by Legal Requirements to make in connection with the
Contemplated Transactions, and (b) cooperate with Buyer in obtaining all
consents identified in Part 5.2 of the Buyer Disclosure Letter.
6.5 NOTIFICATION. Between the date of this Agreement and the Closing
Date, each Seller will promptly notify Buyer in writing if such Seller or the
Company becomes aware of any fact or condition that causes or constitutes a
Breach of any of the Majority Shareholders' representations and warranties as of
the date of this Agreement, or if such Seller or the Company becomes aware of
the occurrence after the date of this Agreement of any fact or condition that
would (except as expressly contemplated by this Agreement) cause or constitute a
Breach of any such representation or warranty had such representation or
warranty been made as of the time of occurrence or discovery of such fact or
condition. Should any such fact or condition require any change in Shareholders
Disclosure Letter if Shareholders Disclosure Letter were dated the date of the
occurrence or discovery of any such fact or condition, the Majority Shareholders
will promptly deliver to Buyer a supplement to the Shareholders Disclosure
Letter specifying such change. During the same period, each Seller will
promptly notify Buyer of the occurrence of any Breach of any covenant of the
Majority Shareholders in this Section 6 or of the occurrence of any event that
may make the satisfaction of the conditions in Section 8 impossible or unlikely.
6.6 PAYMENT OF SHAREHOLDER LOAN AND DISTRIBUTIONS. On or prior to
the Closing Date, the Majority Shareholders shall cause the Company to repay the
loan made by the Majority Shareholders to the Company (such loan having an
outstanding principal balance as of the date of the Company's Interim Financial
Statements in the amount of
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$965,800) and shall cause the Company to make distributions to the Shareholders
in order that, as of such date, the Shareholders' Equity shall be zero dollars.
6.7 NO NEGOTIATION. Until such time, if any, as this Agreement is
terminated pursuant to Section 10, the Majority Shareholders will not, and will
cause the Company and each of their Representatives not to, directly or
indirectly solicit, initiate or encourage any inquiries or proposals from,
discuss or negotiate with, provide any non-public information to, or consider
the merits of any unsolicited inquiries or proposals from, any Person (other
than Buyer) relating to any transaction involving the sale of the business or
assets (other than in the Ordinary Course of Business) of the Company, or any of
the capital stock of the Company, or any merger, consolidation, business
combination or similar transaction involving the Company.
6.8 BEST EFFORTS. Between the date of this Agreement and the Closing
Date, the Majority Shareholders will use their Best Efforts to cause the
conditions in Sections 8 and 9 to be satisfied. Without limiting the foregoing,
the Company and the Seller shall cooperate fully, including with respect to
providing information and access to the records and properties of the Company,
with Buyer and any potential source of the Financing (as defined below) in
connection with the negotiation and consummation thereof.
7. COVENANTS OF BUYER PRIOR TO CLOSING DATE.
7.1 ACCESS AND INVESTIGATION. Between the date of this Agreement and
the Closing Date, Buyer will, and will cause its Representatives to, at the
Company's expense, (a) afford the Company and its Representatives (collectively,
the "Company's Advisors") full and free access to Buyers's personnel, properties
(including subsurface testing), contracts, books and records, and other
documents and data during regular business hours; (b) furnish the Company and
the Company's Advisors with copies of all such contracts, books and records, and
other existing documents and data as the Company may reasonably request, and
(c) furnish the Company and the Company's Advisors with such additional
financial, operating and other data and information as the Company may
reasonably request. Buyer shall deliver to the Company as soon as available all
interim financial statements of Buyer prepared prior to the Closing. All such
financial statements shall be prepared from, and shall be consistent with, the
books and records of Buyer, and represent fairly its financial position, results
of operations and changes of financial position as of the date and for the
periods indicated, in each case in conformity with preparation of the Interim
Financial Statements of Buyer.
7.2 OPERATION OF THE BUSINESSES OF THE ACQUIRED COMPANIES. Between
the date of this Agreement and the Closing Date, Buyer will:
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(a) conduct the business of Buyer only in the Ordinary Course of
Business, except where the Buyer's Board of Directors determines in good faith
that it is in the best interest of the Buyer to take any particular action
outside of the Ordinary Course of Business;
(b) use its Best Efforts to preserve intact the current business
organization of Buyer, keep available the services of the current officers,
employees, and agents of Buyer, and maintain the relations and good will with
suppliers, customers, landlords, creditors, employees, agents and others having
business relationships with Buyer, except where the Buyer's Board of Directors
determines in good faith that it is in the best interest of the Buyer to take
any actions contrary to the foregoing;
(c) confer with the Majority Shareholders concerning operational
matters of a material nature; and
(d) otherwise report periodically to the Majority Shareholders
concerning the status of the business, operations and finances of Buyer.
7.3 NEGATIVE COVENANT. Except as otherwise expressly permitted by
this Agreement, between the date of this Agreement and the Closing Date, Buyer
will not, without the prior consent of the Majority Shareholders, take any
affirmative action, or fail to take any reasonable action within its control, as
a result of which any of the changes or events listed in Section 5.16 is likely
to occur, except where the Buyer's Board of Directors determines in good faith
that it is in the best interest of the Buyer to take any actions contrary to the
foregoing.
7.4 REQUIRED APPROVALS. As promptly as practicable after the date of
this Agreement, Buyer will make all filings required by Legal Requirements to be
made by it in order to consummate the Contemplated Transactions. Between the
date of this Agreement and the Closing Date, Buyer will (a) cooperate with the
Majority Shareholders with respect to all filings that the Majority Shareholders
or the Company elect to make or are required by Legal Requirements to make in
connection with the Contemplated Transactions, and (b) cooperate with the
Majority Shareholders in obtaining all consents identified in Part 3.2 of the
Disclosure Letter.
7.5 NOTIFICATION. Between the date of this Agreement and the Closing
Date, Buyer will promptly notify the Majority Shareholders in writing if such
Buyer becomes aware of any fact or condition that causes or constitutes a Breach
of any of Buyer's representations and warranties as of the date of this
Agreement, or if Buyer becomes aware of the occurrence after the date of this
Agreement of any fact or condition
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that would (except as expressly contemplated by this Agreement) cause or
constitute a Breach of any such representation or warranty had such
representation or warranty been made as of the time of occurrence or discovery
of such fact or condition. Should any such fact or condition require any change
in the Buyer Disclosure Letter if the Buyer Disclosure Letter were dated the
date of the occurrence or discovery of any such fact or condition, Buyer will
promptly deliver to the Majority Shareholders a supplement to the Buyer
Disclosure Letter specifying such change. During the same period, Buyer will
promptly notify the Majority Shareholders of the occurrence of any Breach of any
covenant of Buyers in this Section 7 or of the occurrence of any event that may
make the satisfaction of the conditions in Section 9 impossible or unlikely.
7.6 NO NEGOTIATION. Until such time, if any, as this Agreement is
terminated pursuant to Section 10, Buyer will not, except to the extent it has
received an opinion of counsel that concludes it is required to do so under
applicable law, directly or indirectly, solicit, initiate or encourage any
inquiries or proposals from, discuss or negotiate with, provide any non-public
information to, or consider the merits of any unsolicited inquiries or proposals
from, any Person (other than Buyer) relating to any transaction involving the
sale of the business or assets (other than in the Ordinary Course of Business)
of Buyer, or any of the capital stock of Buyer, or any merger, consolidation,
business combination or similar transaction involving Buyer.
7.7 BEST EFFORTS. Between the date of this Agreement and the Closing
Date, Buyer will use its Best Efforts to cause the conditions in Sections 8
and 9 to be satisfied.
8. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE. Buyer's
obligation to consummate the Merger and to take the other actions required to be
taken by Buyer at the Closing is subject to the satisfaction, at or prior to the
Closing, of each of the following conditions (any of which may be waived by
Buyer, in whole or in part):
8.1 ACCURACY OF REPRESENTATIONS. All of the Majority Shareholders'
representations and warranties in this Agreement (considered collectively), and
each of these representations and warranties (considered individually), must
have been accurate in all material respects as of the date of this Agreement,
and must be accurate in all material respects as of the Closing Date as if made
on the Closing Date, without giving effect to any supplement to Shareholders
Disclosure Letter, except for supplements related solely to changes in the
Ordinary Course of Business.
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8.2 MAJORITY SHAREHOLDERS' PERFORMANCE.
(a) All of the covenants and obligations that the Majority
Shareholders are required to perform or to comply with pursuant to this
Agreement at or prior to the Closing (considered collectively), and each of
these covenants and obligations (considered individually), must have been duly
performed and complied with in all material respects.
(b) Each document required to be delivered pursuant to Section
2.4 must have been delivered, and each of the other covenants and obligations in
Sections 6.4 and 6.8 must have been performed and complied with in all respects.
8.3 CONSENTS Each of the Consents identified in Part 3.2 of the
Shareholders Disclosure Letter, including, without limitation, the consent of
Gary Lite as required pursuant to the Gary Lite Transaction (as defined in Part
3.2 of the Shareholders Disclosure Letter), and each Consent identified in
Section 5.2 of the Buyer Disclosure Letter, must have been obtained and must be
in full force and effect.
8.4 ADDITIONAL DOCUMENTS. Each of the following documents must have
been delivered to Buyer:
(a) estoppel certificate executed on behalf of the landlord of
the Company's headquarters, dated within 30 days of the Closing Date, in the
form of Exhibit 8.4(a); and
(b) such other documents as Buyer may reasonably request for the
purpose of (i) evidencing the accuracy of any of the Majority Shareholders'
representations and warranties, (ii) evidencing the performance by any Seller
of, or the compliance by any Seller with, any covenant or obligation required to
be performed or complied with by such Seller, (iii) evidencing the satisfaction
of any condition referred to in this Section 8, or (iv) otherwise facilitating
the consummation or performance of any of the Contemplated Transactions.
8.5 NO PROCEEDINGS. Since the date of this Agreement, there must not
have been commenced or Threatened against Buyer, or against any Person
affiliated with Buyer, any Proceeding (a) involving any challenge to, or seeking
damages or other relief in connection with, any of the Contemplated
Transactions, or (b) that may have the effect of preventing, delaying, making
illegal, or otherwise interfering with any of the Contemplated Transactions.
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8.6 SHAREHOLDERS' APPROVAL. Buyer's shareholders shall have approved
the consummation of the Contemplated Transactions.
8.7 FINANCING. The Buyer shall have obtained financing, on terms and
conditions acceptable to Buyer in its sole discretion, sufficient to enable
Buyer to pay the Cash Portion at, and to provide PCAC and the Company with
reasonably sufficient operating capital based on past needs following, the
Closing (the "Financing").
8.8 PERSONAL GUARANTEES. Terry McGovern and Peter Rettman shall have
been released from their personal guarantees by Buyer's factor.
8.9 APPROVAL BY SHAREHOLDERS. Each of the Shareholders shall have
voted for the Merger and, therefore, shall not have any dissenters' rights in
connection therewith.
8.10 DISSENTING SHARES. Buyer shall not have received demands for the
purchase of shares in connection with the exercise of dissenters' rights within
the time periods mandated by applicable California law from holders of shares
representing more than 5% of the issued outstanding shares of capital stock of
Buyer.
8.11 SHAREHOLDER DISCLOSURE LETTER. Not more than two weeks following
the execution and delivery of this Agreement, Buyer shall have received a
complete Shareholder Disclosure Letter in form and substance acceptable to Buyer
in its sole discretion.
8.12 SHAREHOLDER'S RELEASE. Mr. Jan Smith shall have executed a
Shareholder's Release substantially in the form of Exhibit 2.3(b)(i)(B).
8.13 JAN SMITH REPRESENTATIONS AND WARRANTIES. Buyer shall have
received a Certificate of Representations and Warranties substantially in the
form of Exhibit 8.13, executed by Mr. Jan Smith.
9. CONDITIONS PRECEDENT TO THE MAJORITY SHAREHOLDERS' OBLIGATION TO
CLOSE. The Majority Shareholders' obligation to take the actions required to be
taken by the Majority Shareholders at the Closing, and the Company's obligation
to consummate the Merger, are subject to the satisfaction, at or prior to the
Closing, of each of the following conditions (any of which may be waived by the
Majority Shareholders, in whole or in part):
9.1 ACCURACY OF REPRESENTATIONS. All of Buyer's representations and
warranties in this Agreement (considered collectively), and each of these
representations and warranties (considered individually), must have been
accurate in all material respects
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as of the date of this Agreement and must be accurate in all material respects
as of the Closing Date as if made on the Closing Date, without giving effect to
any supplement to the Buyer Disclosure Schedule, except for supplements related
to changes in the Ordinary Course of Business.
9.2 BUYER'S PERFORMANCE.
(a) All of the covenants and obligations that Buyer is required
to perform or to comply with pursuant to this Agreement at or prior to the
Closing (considered collectively), and each of these covenants and obligations
(considered individually), must have been performed and complied with in all
material respects.
(b) Buyer must have delivered each of the documents required to
be delivered by Buyer pursuant to Section 2.3 and must have made the payments
required to be made by Buyer pursuant to Sections 2.3(b)(i), 2.3(b)(ii) and
2.3(b)(iii).
9.3 CONSENTS. Each of the Consents identified in Part 3.2 of
Shareholders Disclosure Letter and Part 5.2 of the Buyer Disclosure Letter must
have been obtained and must be in full force and effect.
9.4 ADDITIONAL DOCUMENTS. Buyer must have caused such other
documents to be delivered to the Majority Shareholders as the Majority
Shareholders may reasonably request for the purpose of (i) evidencing the
accuracy of any representation or warranty of Buyer, (ii) evidencing the
performance by Buyer of, or the compliance by Buyer with, any covenant or
obligation required to be performed or complied with by Buyer, (iii) evidencing
the satisfaction of any condition referred to in this Section 9, or
(iv) otherwise facilitating the consummation of any of the Contemplated
Transactions.
9.5 NO PROCEEDINGS. Since the date of this Agreement, there must not
have been commenced or Threatened against the Majority Shareholders or the
Company or against any Person affiliated with the Majority Shareholders or the
Company, any Proceeding (a) involving any challenge to, or seeking damages or
other relief in connection with, any of the Contemplated Transactions, or
(b) that may have the effect of preventing, delaying, making illegal or
otherwise interfering with any of the Contemplated Transactions.
9.6 DIRECTORS AND OFFICER. I. Rosenberg shall have been appointed as
Chief Executive Officer and President of PCAC, A. Rosenberg shall have been
appointed as the Secretary and Vice President of PCAC and each of the Majority
Shareholders plus one designee of the Majority Shareholders shall have been
appointed or elected to PCAC's
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Board of Directors. Buyer shall have obtained any necessary resignations of its
directors and officers as required hereby.
9.7 FINANCING. The Majority Shareholders shall have approved, in
their sole discretion, the terms and conditions of the Financing.
9.8 PERSONAL GUARANTEES. The Majority Shareholders shall have been
released from their personal guarantees by the Company's factor.
9.9 DISSENTING SHARES. Buyer shall not have received demands for the
purchase of shares in connection with the exercise of dissenters' rights within
the time periods mandated by applicable California law from holders of shares
representing more than 5% of the issued outstanding shares of capital stock of
Buyer.
9.10 MCGOVERN EMPLOYMENT AGREEMENT. Buyer and the Terrence L.
McGovern shall have executed an employment agreement substantially in the form
of Exhibit 9.10.
9.11 BUYER DISCLOSURE LETTER. Not more than two weeks following the
execution and delivery of this Agreement, the Majority Shareholders shall have
received a complete Buyer Disclosure Letter in form and substance acceptable to
the Majority Shareholders in their sole discretion.
9.12 LOCK-UP AGREEMENTS. Not more than two weeks following the
execution and delivery of this Agreement, the parties hereto shall have agreed
upon which 5% or greater shareholders of Buyer are to execute lock-up agreements
reasonably drafted to preserve Buyer's net operating losses. Receipt of such
lock-up agreements by the Buyer shall be a condition to closing for the
Shareholders.
10. TERMINATION.
10.1 TERMINATION EVENTS. This Agreement may, by notice given prior to
or at the Closing, be terminated:
(a) by either Buyer or the Majority Shareholders if a material
Breach of any provision of this Agreement has been committed by the other party
and such Breach has not been waived or, if capable of cure, cured within 30 days
of notice thereof given to the breaching party;
(b) (i) by Buyer if any of the conditions in Section 8 has not
been satisfied as of the Closing Date or if satisfaction of such a condition is
or becomes
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impossible (other than through the failure of Buyer to comply with its
obligations under this Agreement) and Buyer has not waived such condition on or
before the Closing Date; or (ii) by the Majority Shareholders, if any of the
conditions in Section 9 has not been satisfied of the Closing Date or if
satisfaction of such a condition is or becomes impossible (other than through
the failure of the Majority Shareholders to comply with their obligations under
this Agreement) and the Majority Shareholders have not waived such condition on
or before the Closing Date;
(c) by mutual consent of Buyer and the Majority Shareholders; or
(d) by either Buyer or the Majority Shareholders if the Closing
has not occurred (other than through the failure of any party seeking to
terminate this Agreement to comply fully with its obligations under this
Agreement) on or before April 30, 1999, or such later date as the parties may
agree upon.
10.2 EFFECT OF TERMINATION. Each party's right of termination under
Section 10.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of a right of termination will not be an election
of remedies. If this Agreement is terminated pursuant to Section 10.1, all
further obligations of the parties under this Agreement will terminate, except
that the obligations in Sections 12.1 and 12.3 will survive; provided, that,
except as otherwise provided in Section 10.3 below, if this Agreement is
terminated by a party because of the Breach of the Agreement by the other party
or because one or more of the conditions to the terminating party's obligations
under this Agreement is not satisfied as a result of the other party's failure
to comply with its obligations under this Agreement, the terminating party's
right to pursue all legal remedies will survive such termination unimpaired.
10.3 BREAK-UP FEE. In the event that the Closing does not occur on or
before April 30, 1999, solely due to Buyer's failure to secure the Financing on
commercially reasonable terms, and Seller elects to terminate this Agreement
pursuant to Section 10.1(d) above, then Buyer shall pay the Company a breakup
fee of $50,000, which shall be Seller's sole remedy with respect to Buyer's
failure to obtain Financing on such basis.
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11. INDEMNIFICATION; REMEDIES.
11.1 SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY KNOWLEDGE.
All representations, warranties, covenants and obligations in this Agreement,
the Sellers' and Buyer's Disclosure Letters, the supplements to such Disclosure
Letters, the certificate delivered pursuant to Sections 2.3(b)(i)(E) and
2.3(b)(ii)(C), and any other certificate or document delivered pursuant to this
Agreement will survive the Closing. The right to indemnification, payment of
Damages or other remedy based on such representations, warranties, covenants and
obligations will not be affected by any investigation conducted with respect to,
or any Knowledge acquired (or capable of being acquired) at any time, whether
before or after the execution and delivery of this Agreement or the Closing
Date, with respect to the accuracy or inaccuracy of or compliance with, any such
representation, warranty, covenant or obligation.
11.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY THE MAJORITY
SHAREHOLDERS. The Majority Shareholders, jointly and severally, will indemnify
and hold harmless Buyer, the Company and their respective Representatives,
(collectively, the "Buyer Indemnified Persons") for, and will pay to the Buyer
Indemnified Persons the amount of, any loss, liability, claim, damage, expense
(including costs of investigation and defense and reasonable attorneys' fees) or
diminution of value, whether or not involving a third-party claim (collectively,
"Damages"), arising, directly or indirectly, from or in connection with:
(a) any Breach of any representation or warranty made by the
Majority Shareholders or the Company in this Agreement, Shareholders Disclosure
Letter, as supplemented, the Majority Shareholders Closing Documents or any
other certificate or document delivered by the Majority Shareholders pursuant to
this Agreement;
(b) any Breach by either Majority Shareholder of any covenant or
obligation of either Majority Shareholder or the Company in this Agreement or
the Majority Shareholders Closing Documents;
(c) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with either Majority Shareholder
any Seller or the Company (or any Person acting on their behalf) in connection
with any of the Contemplated Transactions.
The remedies provided in this Section 11.2 will not be exclusive of or
limit any other remedies that may be available to Buyer or the other Buyer
Indemnified Persons.
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11.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY BUYER. Buyer will
indemnify and hold harmless the Majority Shareholders and their respective
Representatives, (collectively, the "Shareholders Indemnified Persons") for, and
will pay to the Shareholders Indemnified Persons the amount of, any Damages,
arising, directly or indirectly, from or in connection with:
(a) any Breach of any representation or warranty made by Buyer
in this Agreement, the Buyer Disclosure Letter, as supplemented, or any other
certificate or document delivered by Buyers pursuant to this Agreement;
(b) any Breach by Buyer of any covenant or obligation of such
Buyer in this Agreement;
(c) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with Buyer or the Company (or any
Person acting on their behalf) in connection with any of the Contemplated
Transactions.
The remedies provided in this Section 11.3 will not be exclusive of or
limit any other remedies that may be available to the Majority Shareholders or
the other Shareholders Indemnified Persons.
11.4 INTENTIONALLY OMITTED.
11.5 TIME LIMITATIONS.
(a) If the Closing occurs, the Majority Shareholders will have
no liability (for indemnification or otherwise) with respect to any
representation or warranty, or covenant or obligation to be performed and
complied with prior to the Closing Date, other than those in Sections 3.3, 3.12,
3.23, 3.25 and 3.27, unless on or before the first anniversary of the Closing
Date, Buyer notifies the Majority Shareholders of a claim specifying the factual
basis of that claim in reasonable detail to the extent then known by Buyer; a
claim with respect to Sections 3.3, 3.12, 3.23, 3.25, or 3.27, or a claim for
indemnification or reimbursement not based upon any representation or warranty
or any covenant or obligation to be performed and complied with prior to the
Closing Date, may be made at any time.
(b) If the Closing occurs, Buyer will have no liability (for
indemnification or otherwise) with respect to any representation or warranty, or
covenant or obligation to be performed and complied with prior to the Closing
Date, other than those in Sections 5.3, 5.12, 5.23, 5.25 or 5.27, unless on or
before the first anniversary of
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the Closing Date, the Majority Shareholders notify Buyer of a claim specifying
the factual basis of that claim in reasonable detail to the extent then known by
the Majority Shareholders; a claim with respect to Sections 5.3, 5.12, 5.23,
5.25 or 5.27, or a claim for indemnification or reimbursement not based upon any
representation or warranty or any covenant or obligation to be performed and
complied with prior to the Closing Date, may be made at any time.
11.6 LIMITATIONS ON AMOUNT--THE MAJORITY SHAREHOLDERS. The Majority
Shareholders will have no liability (for indemnification or otherwise) with
respect to the matters described in clause (a), clause (b) or, to the extent
relating to any failure to perform or comply prior to the Closing Date, clause
(c) of Section 11.2 until the total of all Damages with respect to such matters
exceeds $100,000, and then only for the amount by which such Damages exceed
$100,000. The Majority Shareholders' total liability for breaches of
representations and warranties of this Agreement shall be limited to $2,500,000.
However, this Section 11.6 will not apply to any Breach of any of the Majority
Shareholders' representations and warranties of which either Majority
Shareholder had Knowledge at any time prior to the date on which such
representation and warranty is made or any intentional Breach by either Majority
Shareholder of any covenant or obligation of the Majority Shareholders
hereunder, and the Majority Shareholders will be jointly and severally liable
for all Damages with respect to such Breaches.
11.7 LIMITATIONS ON AMOUNT--BUYER. Buyer will have no liability (for
indemnification or otherwise) with respect to the matters described in clause
(a), clause (b) or, to the extent relating to any failure to perform or comply
prior to the Closing Date, clause (c) of Section 11.3 until the total of all
Damages with respect to such matters exceeds $100,000, and then only for the
amount by which such Damages exceed $100,000. Buyer's total liability for
breaches of representations and warranties of this Agreement shall be limited to
$2,500,000. However, this Section 11.7 will not apply to any Breach of any of
Buyer's representations and warranties of which Buyer had Knowledge at any time
prior to the date on which such representation and warranty is made or any
intentional Breach by any Buyer of any covenant or obligation, and Buyer will be
liable for all Damages with respect to such Breaches.
11.8 PROCEDURE FOR INDEMNIFICATION--THIRD PARTY CLAIMS.
(a) Promptly after receipt by an indemnified party under
Sections 11.2, 11.3 or 11.4 of notice of the commencement of any Proceeding
against it, such indemnified party will, if a claim is to be made against an
indemnifying party under such Section, give notice to the indemnifying party of
the commencement of such claim, but the failure to notify the indemnifying party
will not relieve the indemnifying party of
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any liability that it may have to any indemnified party, except to the extent
that the indemnifying party demonstrates that the defense of such action is
prejudiced by the indemnifying party's failure to give such notice.
(b) If any Proceeding referred to in Section 11.8(a) is brought
against an indemnified party and it gives notice to the indemnifying party of
the commencement of such Proceeding, the indemnifying party will, unless the
claim involves Taxes, be entitled to participate in such Proceeding and, to the
extent that it wishes (unless (i) the indemnifying party is also a party to such
Proceeding and the indemnified party determines in good faith that joint
representation would be inappropriate, or (ii) the indemnifying party fails to
provide reasonable assurance to the indemnified party of its financial capacity
to defend such Proceeding and provide indemnification with respect to such
Proceeding), to assume the defense of such Proceeding with counsel satisfactory
to the indemnified party and, after notice from the indemnifying party to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will not, as long as it diligently conducts such defense, be
liable to the indemnified party under this Section 10 for any fees of other
counsel or any other expenses with respect to the defense of such Proceeding, in
each case subsequently incurred by the indemnified party in connection with the
defense of such Proceeding, other than reasonable costs of investigation. If
the indemnifying party assumes the defense of a Proceeding, (i) it will be
conclusively established for purposes of this Agreement that the claims made in
that Proceeding are within the scope of and subject to indemnification; (ii) no
compromise or settlement of such claims may be effected by the indemnifying
party without the indemnified party's consent unless (A) there is no finding or
admission of any violation of Legal Requirements or any violation of the rights
of any Person and no effect on any other claims that may be made against the
indemnified party, and (B) the sole relief provided is monetary damages that are
paid in full by the indemnifying party; and (iii) the indemnified party will
have no liability with respect to any compromise or settlement of such claims
effected without its consent. If notice is given to an indemnifying party of
the commencement of any Proceeding and the indemnifying party does not, within
ten days after the indemnified party's notice is given, give notice to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will be bound by any determination made in such Proceeding or
any compromise or settlement effected by the indemnified party.
(c) Notwithstanding the foregoing, if an indemnified party
determines in good faith that there is a reasonable probability that a
Proceeding may adversely affect it or its affiliates other than as a result of
monetary damages for which it would be entitled to indemnification under this
Agreement, the indemnified party may, by notice to the indemnifying party,
assume the exclusive right to defend, compromise, or settle such Proceeding, but
the indemnifying party will not be bound by any
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determination of a Proceeding so defended or any compromise or settlement
effected without its consent (which may not be unreasonably withheld).
(d) The Majority Shareholders hereby consent to the
non-exclusive jurisdiction of any court in which a Proceeding is brought against
any Indemnified Person for purposes of any claim that an Indemnified Person may
have under this Agreement with respect to such Proceeding or the matters alleged
therein, and agree that process may be served on the Majority Shareholders with
respect to such a claim anywhere in the world.
11.9 PROCEDURE FOR INDEMNIFICATION--OTHER CLAIMS. A claim for
indemnification for any matter not involving a third-party claim may be asserted
by notice to the party from whom indemnification is sought.
12. GENERAL PROVISIONS.
12.1 EXPENSES. Except as otherwise expressly provided in this
Agreement, each party to this Agreement will bear its respective expenses
incurred in connection with the preparation, execution, and performance of this
Agreement and the Contemplated Transactions, including all fees and expenses of
agents, representatives, counsel, and accountants. In the event the Merger is
consummated, the surviving corporation shall pay the reasonable fees and
expenses of counsel for the Company and the Majority Shareholders. In the event
of termination of this Agreement, the obligation of each party to pay its own
expenses will be subject to any rights of such party arising from a breach of
this Agreement by another party.
12.2 PUBLIC ANNOUNCEMENTS. Any public announcement or similar
publicity with respect to this Agreement or the Contemplated Transactions will
be issued, if at all, at such time and in such manner as Buyer determines.
Unless consented to by Buyer in advance or required by Legal Requirements, prior
to the Closing, the Majority Shareholders shall, and shall cause the Company to,
keep this Agreement strictly confidential and may not make any disclosure of
this Agreement to any Person. The Majority Shareholders and Buyer will consult
with each other concerning the means by which the Company's employees,
customers, and suppliers and others having dealings with the Company will be
informed of the Contemplated Transactions, and Buyer and the Company will have
the right to be present for any such communication.
12.3 CONFIDENTIALITY. Between the date of this Agreement and the
Closing Date, Buyer and the Majority Shareholders will maintain in confidence,
and will cause the directors, officers, employees, agents, and advisors of Buyer
and the Company to maintain in confidence, and not use to the detriment of
another party or the Company any written
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information stamped "confidential" when originally furnished by another party or
the Company in connection with this Agreement or the Contemplated Transactions,
unless (a) such information is already known to such party or to others not
bound by a duty of confidentiality or such information becomes publicly
available through no fault of such party, (b) the use of such information is
necessary or appropriate in making any filing or obtaining any consent or
approval required for the consummation of the Contemplated Transactions, or (c)
the furnishing or use of such information is required by legal proceedings.
If the Contemplated Transactions are not consummated, each party will
return or destroy as much of such written information as the other party may
reasonably request. Whether or not the Closing takes place, the Majority
Shareholders waive, and will upon Buyer's request cause the Company to waive,
any cause of action, right, or claim arising out of the access of Buyer or its
representatives to any trade secrets or other confidential information of the
Company except for the intentional competitive misuse by Buyer of such trade
secrets or confidential information.
12.4 NOTICES. All notices, consents, waivers, and other
communications under this Agreement must be in writing and will be deemed to
have been duly given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by telecopier (with written confirmation of receipt),
provided that a copy is mailed by registered mail, return receipt requested, or
(c) when received by the addressee, if sent by a nationally recognized overnight
delivery service (receipt requested), in each case to the appropriate addresses
and telecopier numbers set forth below (or to such other addresses and
telecopier numbers as a party may designate by notice to the other parties):
Majority Shareholders:
Mr. Ira Rosenberg and Mrs. Alice Rosenberg
c/o Jodi Kristopher, Inc.
6015 Bandini Boulevard
Commerce, California 90040
Telephone: (213) 890-8000
Fax: (213) 887-9505
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With a copy to:
Katz, Hoyt, Seigel & Kapor
11111 Santa Monica Boulevard, 8th Floor
Los Angeles, California 90025-3369
Attention: Jeffrey H. Kapor, Esq.
Telephone: (310) 473-1300
Facsimile: (310) 473-7138
and
Klein & Martin
2029 Century Park East, Suite 2550
Los Angeles, CA 90067
Attention: Eric Klein, Esq.
Telephone: (310) 201-2581
Facsimile: (310) 201-0108
Buyer:
Pacific Coast Apparel Company, Inc.
50 Ridgecrest Road
Kentfield, California 94904
Attn: Mr. Terrence L. McGovern
Phone: (415) 925-0386
Fax: (415) 461-2726
With a copy to:
Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street, 48th Floor
Los Angeles, California 90071
Attn: Jon W. Newby, Esq.
Phone: (213) 620-1780
Fax: (213) 620-1398
12.5 ARBITRATION OF DISPUTES.
(a) All disputes arising under this Agreement shall be settled
by binding arbitration in the County of Los Angeles and judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof. Except as specifically provided herein, the arbitration shall proceed
in accordance with the laws of
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the State of California. Either party requesting arbitration shall serve a
written demand for arbitration on the other party by registered or certified
mail. The demand shall set forth a statement of the nature of the dispute, the
amount involved and the remedies sought. No later than 20 calendar days after a
demand for arbitration is served, the parties shall jointly select and appoint a
disinterested person to act as the arbitrator. In the event that the parties do
not agree on the selection of an arbitrator, the arbitrator shall be designated
by the presiding judge of the Los Angeles Superior Court. No later than
10 calendar days after appointment of an arbitrator, the parties shall jointly
prepare and submit to the arbitrator a set of rules for the arbitration. In the
event that the parties cannot agree on the rules for the arbitration, the
arbitrator shall apply the provisions of Sections 1282, 1283 and 1284 of the
California Code of Civil Procedure. No later than 10 calendar days after the
arbitrator is appointed, the arbitrator shall schedule the arbitration for a
hearing to commence on a mutually convenient date. The hearing shall commence
no later than 120 calendar days after the arbitrator is appointed and shall
continue from day to day until completed. The arbitrator shall issue his award
in writing no later than 20 calendar days after the conclusion of the hearing.
Any party may petition any court having jurisdiction to confirm an award of the
arbitrator in accordance with Section 1285 of the California Code of Civil
Procedure and any party aggrieved from any such order may appeal that order
pursuant to Section 1294 of the California Code of Civil Procedure. All
discovery shall be completed no later than the commencement of the arbitration
hearing or 120 calendar days after the date that a proper demand for arbitration
is served, whichever occurs earlier, unless upon a showing of good cause the
arbitrator extends or shortens that period. The fees and expenses of such
arbitration (including reasonable attorneys' fees) or any action to enforce an
arbitration award shall be paid by the party that does not prevail in such
arbitration. The arbitrator's decision shall be final and non-appealable except
for gross errors of law. The arbitrator shall not have the power to amend this
Agreement in any respect.
(b) The parties agree that all facts and information relating to
any arbitration arising under this Agreement shall be kept confidential to the
extent possible. The parties agree that all documents filed with any court in
connection with the resolution of any dispute hereunder shall be filed under
seal. The parties further agree and acknowledge that a claim for damages for
breach of the agreement to maintain confidentiality shall not provide an
adequate remedy and acknowledge that a claim for specific performance or
injunctive relief is appropriate.
(c) The fact that the dispute resolution procedure specified in
this Section 12.5 shall have been or may be invoked shall not excuse any party
from performing its obligations under this Agreement. During the pendency of
any such procedure, all parties shall continue to perform their respective
obligations in good faith,
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subject to any rights to terminate this Agreement that may be available to any
party. All applicable statutes of limitations shall be tolled when a procedure
specified in this Section 12.5 is pending. The parties will take such action,
if any, required to effectuate such tolling.
12.6 FURTHER ASSURANCES. The parties agree (a) to furnish upon
request to each other such further information, (b) to execute and deliver to
each other such other documents, and (c) to do such other acts and things, all
as the other party may reasonably request for the purpose of carrying out the
intent of this Agreement and the documents referred to in this Agreement.
12.7 WAIVER. The rights and remedies of the parties to this Agreement
are cumulative and not alternative. Neither the failure nor any delay by any
party in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power,
or privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law, (a) no claim or right arising out of
this Agreement or the documents referred to in this Agreement can be discharged
by one party, in whole or in part, by a waiver or renunciation of the claim or
right unless in writing signed by the other party; (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given; and (c) no notice to or demand on one party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement or the documents referred to in this Agreement.
12.8 ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all
prior agreements between the parties with respect to its subject matter and
constitutes (along with the documents referred to in this Agreement) a complete
and exclusive statement of the terms of the agreement between the parties with
respect to its subject matter. This Agreement may not be amended except by a
written agreement executed by the party to be charged with the amendment.
12.9 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS. Neither
party may assign any of its rights under this Agreement without the prior
consent of the other parties, which will not be unreasonably withheld, except
that Buyer may assign any of its rights under this Agreement to any Subsidiary
of Buyer. Subject to the preceding sentence, this Agreement will apply to, be
binding in all respects upon, and inure to the benefit of the successors and
permitted assigns of the parties. Nothing expressed or referred to in this
Agreement will be construed to give any Person other than the parties to this
Agreement
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any legal or equitable right, remedy, or claim under or with respect to this
Agreement or any provision of this Agreement. This Agreement and all of its
provisions and conditions are for the sole and exclusive benefit of the parties
to this Agreement and their successors and assigns.
12.10 SEVERABILITY. If any provision of this Agreement is held
invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect. Any provision
of this Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or unenforceable.
12.11 SECTION HEADINGS, CONSTRUCTION. The headings of Sections in
this Agreement are provided for convenience only and will not affect its
construction or interpretation. All references to "Section" or "Sections" refer
to the corresponding Section or Sections of this Agreement. All words used in
this Agreement will be construed to be of such gender or number as the
circumstances require. Unless otherwise expressly provided, the word "including"
does not limit the preceding words or terms.
12.12 TIME OF ESSENCE. With regard to all dates and time periods set
forth or referred to in this Agreement, time is of the essence.
12.13 GOVERNING LAW. This Agreement will be governed by the internal
laws of the State of California without regard to the conflicts of laws
principles of such state.
12.14 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
12.15 REGISTRATION RIGHTS. The Majority Shareholders shall have,
with respect to the PCAC Shares, the registration rights set forth in
Exhibit 12.15 hereto.
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
"BUYER"
Pacific Coast Apparel Company, Inc.
----------------------------------------
Terrence L. McGovern,
Chairman, Chief Executive Officer and
Secretary
"COMPANY"
Jodi Kristopher, Inc.
--------------------------------------------
Ira Rosenberg, President
--------------------------------------------
Alice Rosenberg, Vice President and Secretary
"Majority Shareholders"
--------------------------------------------
Ira Rosenberg
--------------------------------------------
Alice Rosenberg
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Schedule 1
DEFINED TERMS
"APPLICABLE CONTRACT" -- any Contract (a) under which the Company has
or may acquire any rights, (b) under which the Company has or may become subject
to any obligation or liability, or (c) by which the Company or any of the assets
owned or used by it is or may become bound.
"BEST EFFORTS" -- the efforts that a prudent Person desirous of
achieving a result would use in similar circumstances to ensure that such result
is achieved as expeditiously as possible; PROVIDED, HOWEVER, that an obligation
to use Best Efforts under this Agreement does not require the Person subject to
that obligation to take actions that would result in a materially adverse change
in the benefits to such Person of this Agreement and the Contemplated
Transactions.
"BREACH" -- a "Breach" of a representation, warranty, covenant,
obligation, or other provision of this Agreement or any instrument delivered
pursuant to this Agreement will be deemed to have occurred if there is or has
been (a) any inaccuracy in or breach of, or any failure to perform or comply
with, such representation, warranty, covenant, obligation, or other provision,
or (b) any claim (by any Person) or other occurrence or circumstance that is or
was inconsistent with such representation, warranty, covenant, obligation, or
other provision, and the term "Breach" means any such inaccuracy, breach,
failure, claim, occurrence, or circumstance.
"BUYER" -- as defined in the first paragraph of this Agreement.
"BUYER DISCLOSURE LETTER" -- the disclosure letter delivered by Buyer
to Seller concurrently with the execution and delivery of this Agreement.
"CLOSING DATE" -- the date and time as of which the Closing actually
takes place.
"COMPANY" -- as defined in the Recitals of this Agreement.
"CONSENT" -- any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
"CONTEMPLATED TRANSACTIONS" -- all of the transactions contemplated by
this Agreement.
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"CONTRACT" -- any agreement, contract, obligation, promise, or
undertaking (whether written or oral and whether express or implied) that is
legally binding.
"EMPLOYMENT AGREEMENTS" -- as defined in Section 2.3(b)(C).
"ENCUMBRANCE" -- any charge, claim, condition, equitable interest,
lien, option, pledge, security interest, right of first refusal, or restriction
of any kind, including any restriction on use, voting, transfer, receipt of
income, or exercise of any other attribute of ownership.
"ERISA" -- the Employee Retirement Income Security Act of 1974 or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"FACILITIES" -- any real property, leaseholds, or other interests
currently owned or operated by the Company and any buildings, plants,
structures, or equipment (including motor vehicles, tank cars, and rolling
stock) currently owned or operated by the Company.
"GAAP" -- generally accepted United States accounting principles,
applied on a basis consistent with the basis on which the Balance Sheet and the
other financial statements referred to in Section 3.4(b) were prepared.
"GOVERNMENTAL AUTHORIZATION" -- any approval, consent, license,
permit, waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
"GOVERNMENTAL BODY" -- any:
(a) nation or state;
(b) federal or state government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity and
any court or other tribunal);
(d) multi-national organization or body; or
(e) body exercising, or entitled to exercise, any
administrative, executive, judicial, legislative, police, regulatory, or taxing
authority or power of any nature.
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"IRC" -- the Internal Revenue Code of 1986 or any successor law, and
regulations issued by the IRS pursuant to the Internal Revenue Code or any
successor law.
"IRS" -- the United States Internal Revenue Service or any successor
agency, and, to the extent relevant, the United States Department of the
Treasury.
"KNOWLEDGE" -- an individual will be deemed to have "Knowledge" of a
particular fact or other matter if such individual is actually aware of such
fact or other matter. A Person (other than an individual) will be deemed to
have "Knowledge" of a particular fact or other matter if any individual who is
serving, or who has at any time served, as a director, officer, partner,
executor or trustee of such Person (or in any similar capacity) has, or at any
time had, Knowledge of such fact or other matter.
"LEGAL REQUIREMENT" -- any federal or state administrative order,
constitution, law, ordinance, principle of common law, regulation, statute or
treaty.
"OCCUPATIONAL SAFETY AND HEALTH LAW" -- any Legal Requirement designed
to provide safe and healthful working conditions and to reduce occupational
safety and health hazards, and any program, whether governmental or private
(including those promulgated or sponsored by industry associations and insurance
companies), designed to provide safe and healthful working conditions.
"ORDER" -- any award, decision, injunction, judgment, order, ruling,
subpoena, or verdict entered, issued, made or rendered by any court,
administrative agency or other Governmental Body or by any arbitrator.
"ORDINARY COURSE OF BUSINESS" -- an action taken by a Person will be
deemed to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent as to nature and magnitude with
the past practices of such Person and is taken in the ordinary course of the
normal day-to-day operations of such Person; and
(b) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority) and is not required to be specifically authorized by the
parent company (if any) of such Person.
"ORGANIZATIONAL DOCUMENTS" -- (a) the articles or certificate of
incorporation and the bylaws of a corporation; (b) the partnership agreement and
any statement of
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partnership of a general partnership; (c) the limited partnership agreement and
the certificate of limited partnership of a limited partnership; (d) any charter
or similar document adopted or filed in connection with the creation, formation,
or organization of a Person; and (e) any amendment to any of the foregoing.
"PERSON" -- any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union or other entity
or Governmental Body.
"PROCEEDING" -- any action, arbitration, audit, hearing,
investigation, litigation or suit (whether civil, criminal, administrative,
investigative, or informal) commenced, brought, conducted, or heard by or
before, or otherwise involving, any Governmental Body or arbitrator.
"RELATED PERSON" -- with respect to a particular individual:
(a) each other member of such individual's Family;
(b) any Person that is directly or indirectly controlled by such
individual or one or more members of such individual's Family;
(c) any Person in which such individual or members of such
individual's Family hold (individually or in the aggregate) a Material Interest;
and
(d) any Person with respect to which such individual or one or
more members of such individual's Family serves as a director, officer, partner,
executor or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is directly
or indirectly controlled by, or is directly or indirectly under common control
with such specified Person;
(b) any Person that holds a Material Interest in such specified
Person;
(c) each Person that serves as a director, officer, partner,
executor or trustee of such specified Person (or in a similar capacity);
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(d) any Person in which such specified Person holds a Material
Interest;
(e) any Person with respect to which such specified Person
serves as a general partner or a trustee (or in a similar capacity); and
(f) any Related Person of any individual described in clause (b)
or (c).
For purposes of this definition, (a) the "Family" of an individual includes
(i) the individual, (ii) the individual's spouse and former spouses, (iii) any
other natural person who is related to the individual or the individual's spouse
within the second degree, and (iv) any other natural person who resides with
such individual, and (b) "Material Interest" means direct or indirect beneficial
ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934)
of voting securities or other voting interests representing at least 5% of the
outstanding voting power of a Person or equity securities or other equity
interests representing at least 5% of the outstanding equity securities or
equity interests in a Person.
"REPRESENTATIVE" -- with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor or other representative of such
Person, including legal counsel, accountants and financial advisors.
"SECURITIES ACT" -- the Securities Act of 1933 or any successor law,
and regulations and rules issued pursuant to that Act or any successor law.
"SHAREHOLDERS DISCLOSURE STATEMENT" -- the disclosure letter delivered
by the Majority Shareholders to Buyer concurrently with the execution and
delivery of this Agreement.
"SUBSIDIARY" -- with respect to any Person (the "Owner"), any
corporation or other Person of which securities or other interests having the
power to elect a majority of that corporation's or other Person's board of
directors or similar governing body, or otherwise having the power to direct the
business and policies of that corporation or other Person (other than securities
or other interests having such power only upon the happening of a contingency
that has not occurred) are held by the Owner or one or more of its Subsidiaries;
when used without reference to a particular Person, "Subsidiary" means a
Subsidiary of the Company.
"TAX" -- Any tax (including any income tax, capital gains tax,
value-added tax, sales tax, property tax, gift tax, or estate tax), levy,
assessment, tariff, duty (including
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any customs duty), deficiency, or other fee, and any related charge or amount
(including any fine, penalty, interest, or addition to tax), imposed, assessed,
or collected by or under the authority of any Governmental Body or payable
pursuant to any tax-sharing agreement or any other Contract relating to the
sharing or payment of any such tax, levy, assessment, tariff, duty, deficiency,
or fee.
"TAX RETURN" -- any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any Governmental
Body in connection with the determination, assessment, collection or payment of
any Tax or in connection with the administration, implementation or enforcement
of or compliance with any Legal Requirement relating to any Tax.
"THREATENED" -- a claim, Proceeding, dispute, action, or other matter
will be deemed to have been "Threatened" if any demand or statement has been
made (orally or in writing) or any notice has been given (orally or in writing),
or if any other event has occurred or any other circumstances exist, that would
lead a prudent Person to conclude that such a claim, Proceeding, dispute,
action, or other matter is likely to be asserted, commenced, taken, or otherwise
pursued in the future.
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AGREEMENT OF MERGER
OF
JODI KRISTOPHER, INC.
WITH AND INTO
PACIFIC COAST APPAREL COMPANY, INC.
THIS AGREEMENT OF MERGER ("Agreement") is entered into as of
____________, 1999 between Pacific Coast Apparel Company, Inc., a California
corporation ("PCAC"), and Jodi Kristopher, Inc., a California corporation
("JKI"), with reference to the following facts:
A. PCAC is a California corporation authorized to issue 10,000,000
shares of common stock, without par value, of which there are 3,063,000 shares
outstanding on the date of this Agreement (the "PCAC Common Stock") and 600,000
shares of preferred stock, without par value, of which no shares are outstanding
on the date of this Agreement.
B. JKI is a California corporation authorized to issue 2,000,000
shares of Class A Common Stock without par value, of which there are outstanding
on the date of this Agreement [90] shares (the "JKI Class A Common Stock") and
200,000 shares of Class B Common Stock, without par value, of which there are
outstanding on the date of this Agreement 10 shares (the "JKI Class B Common
Stock"). PCAC and JKI desire to effect a merger whereby JKI shall merge with
and into PCAC (the "Merger") and PCAC shall be the surviving corporation on the
terms and conditions set forth herein.
NOW, THEREFORE, IN CONSIDERATION OF the foregoing premises and of the
mutual agreements set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. MERGER; SURVIVING CORPORATION. Subject to the provisions of this
Agreement and the California General Corporation Law, at the Effective Time (as
defined below), JKI shall be merged with and into PCAC, and the separate
corporate existence of JKI shall cease. PCAC shall be the surviving corporation
in the Merger (hereinafter
<PAGE>
sometimes called the "Surviving Corporation") and shall continue its corporate
existence under the laws of the State of California.
2. ARTICLES OF INCORPORATION. The Articles of Incorporation of PCAC
as in effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended as provided
therein or by law.
3. BYLAWS. The Bylaws of PCAC as in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation until thereafter
amended as provided therein or by law.
4. DIRECTORS. The directors of PCAC immediately after the Effective
Time shall be Ira Rosenberg, Alice Rosenberg, ___________, Terrence McGovern and
Alan Annex. Such individuals will hold office from the Effective Time until
their respective successors are duly elected and qualified or until their
earlier death, resignation or removal.
5. OFFICERS. The officers of PCAC immediately after the Effective
Time shall be Ira Rosenberg (Chief Executive Officer and President),
Terrence McGovern (Chairman and Chief Financial Officer) and Alice Rosenberg
(Vice President and Secretary). Such individuals will hold office from the
Effective Time until their successors are duly appointed and qualified or until
their earlier death, resignation or removal.
6. EFFECTIVE TIME. The parties hereto shall cause this Agreement
and officers' certificates to be properly executed and filed on or about the
date hereof with the Secretary of State of California. The Merger shall be
effective upon such filing. The date and time when the Merger shall have become
effective is herein referred to as the "Effective Time."
7. CONVERSION OF SHARES. At the Effective Time:
(a) Each share of JKI Class A Common Stock shall, by virtue of
the Merger and without any action on the part of the holder thereof, no longer
be outstanding and shall be canceled and cease to be outstanding and shall be
converted into the right to receive 25,060.90 shares of PCAC Common Stock, 96.46
shares of Series A Preferred Stock, without par value, of PCAC ("PCAC Preferred
Stock"), and $14,505.32 of cash (together with the aforementioned shares of PCAC
Common Stock and PCAC Preferred Stock, the "Class A Consideration"). Each share
of JKI Class B Common Stock (together with the Class A Common Stock, the "Merger
Shares") shall, by virtue of the Merger and without any action of the part of
the holder thereof, no longer be outstanding and shall be canceled and cease to
be outstanding and shall be converted into the right to
<PAGE>
receive 25,060.90 shares of PCAC Common Stock, 96.46 shares of PCAC Preferred
Stock and $14,505.32 in cash (together with the aforementioned shares of PCAC
Common Stock and PCAC Preferred Stock, the "Class B Consideration"and, together
with the Class A Consideration, the "Merger Consideration"). The Merger
Consideration payable with respect to each Merger Share shall be adjusted to
appropriately reflect the effect of a stock split, reverse stock split, stock
dividend (including any dividend or distribution of securities convertible into
Merger Shares or shares of PCAC Common Stock), reorganization, recapitalization,
reclassification or other like change with respect to the Merger Shares or the
PCAC Shares occurring or having a record date on or after the date hereof and
prior to the Effective Time. No fraction of a PCAC Share shall be issued by
virtue of the Merger. Any fractional PCAC Share otherwise issuable to a
Shareholder will be rounded up to the nearest whole number.
(b) Subject to the exercise of dissenters' rights by the holders
thereof, each issued and outstanding share of capital stock of PCAC at and as of
the Effective Time will remain issued and outstanding and shall be unaffected by
the Mergers.
8. STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer
books of JKI shall be closed and there shall be no further registration or
transfer of shares of JKI's capital stock on the records of such JKI.
9. SURRENDER OF STOCK CERTIFICATES AND PAYMENT FOR SHARES. At the
Effective Time, the JKI shareholders (a "Shareholder") shall cease to have any
rights as shareholders of JKI, except for such rights as they may have pursuant
to this Agreement and applicable law. At and after the Effective Time, each
Shareholder shall be entitled upon surrender of his or her certificates
representing the Merger Shares to the Surviving Corporation to receive, in
exchange, the Class A Consideration or Class B Consideration therefor as
applicable. From the Effective Time to the date of surrender, each Merger Share
certificate shall represent for all purposes only the right to receive the
consideration specified herein.
10. TERMINATION. This Agreement may be terminated at any time prior
to the Effective Time: (a) by mutual consent of the Boards of Directors of PCAC
and JKI; or (b) in accordance with the terms of the Reorganization Agreement (as
defined below).
11. EFFECT OF TERMINATION. In the event of the termination of this
Agreement by either PCAC or JKI as provided in Section 10 above, and without
limiting the provisions of Section 10 of the Reorganization Agreement, this
Agreement shall forthwith become null and void and there shall be no liability
on the part of any of the parties hereto or their respective officers,
directors, employees, agents or shareholders.
<PAGE>
12. REORGANIZATION AGREEMENT. The parties to this Agreement, along
with the shareholders of JKI, are also parties to a Reorganization Agreement
dated as of _____________, 1998 (the "Reorganization Agreement"). The
Reorganization Agreement and this Agreement are intended to be construed
together in order to effectuate their purposes.
13. GOVERNING LAW. This Agreement will be governed by the internal
laws of the State of California without regard to the conflicts of laws
principles of such state.
14. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the date first above written.
"PCAC"
PACIFIC COAST APPAREL COMPANY, INC.
By:
--------------------------------
Terrence McGovern, President and
Secretary
"JKI"
JODI KRISTOPHER, INC.
By:
--------------------------------
Ira Rosenberg, President
By:
--------------------------------
Alice Rosenberg, Secretary
<PAGE>
OFFICER'S CERTIFICATE
REGARDING APPROVAL OF
AGREEMENT OF MERGER
Terrence McGovern hereby certifies that:
1. I am the President and Secretary of Pacific Coast Apparel
Company, Inc., a California corporation (the "Corporation").
2. The principal terms of the Agreement of Merger, in the form
attached hereto, were duly approved by the Board of Directors of the
Corporation.
3. The principal terms of the Agreement of Merger, in the form
attached hereto, were duly approved by the holders of ____% of the outstanding
shares of the Corporation's common stock, without par value.
4. The Corporation is authorized to issue 10,000,000 shares of
common stock, without par value, of which 3,063,000 shares are outstanding, and
600,000 shares of preferred stock, without par value, of which no shares are
outstanding.
I further declare under penalty of perjury under the law of the State
of California that the matters set forth in this certificate are true and
correct of my own knowledge.
DATE: __________________, 1999
--------------------------------
Terrence McGovern,
President and Secretary
<PAGE>
OFFICERS' CERTIFICATE
REGARDING APPROVAL OF
AGREEMENT OF MERGER
Ira Rosenberg and Alice Rosenberg hereby certify that:
1. We are the President and Secretary, respectively of
Jodi Kristopher, Inc., a California corporation (the "Corporation").
2. The principal terms of the Agreement of Merger, in the form
attached hereto, were duly approved by the Board of Directors and shareholders
of the Corporation.
3. The principal terms of the Agreement of Merger, in the form
attached hereto, were duly approved by the holders of 100% of the outstanding
shares of the Corporation entitled to vote thereon.
4. The Corporation is authorized to issue 2,000,000 shares of
Class A Common Stock, without par value, of which [90] shares are outstanding
and 200,000 shares of Class B Common Stock, without par value, of which 10
shares are outstanding.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
DATE: __________________, 1999
--------------------------------
Ira Rosenberg, President
--------------------------------
Alice Rosenberg, Secretary
<PAGE>
RELEASE
This Release is being executed and delivered in accordance with
Section 2.3(b)(i)(B) of that certain Reorganization Agreement dated
, 1998 (the "Agreement"), by and among Pacific Coast Apparel Company,
Inc., a California corporation ("Buyer"), Jodi Kristopher, Inc., a California
corporation, dba City Triangles (the "Company"), Ira Rosenberg, Alice
Rosenberg and Jan Smith (together, "Sellers" and each, a "Seller").
Capitalized terms used in this Release without definition have the respective
meanings given to them in the Agreement.
Each Seller acknowledges that execution and delivery of this Release
is a condition to Buyer's obligation to consummate the merger with and into
Buyer under the Agreement (the "Merger") and that Buyer is relying on this
Release in consummating such Merger.
Each Seller, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound,
in order to induce Buyer to consummate the Merger with and into the Company
pursuant to the Agreement, hereby agrees as follows:
Each Seller, on behalf of himself or herself and each of his or her
Related Persons, hereby releases and forever discharges the Buyer, the
Company, and each of their respective individual, joint or mutual, past,
present and future Representatives, affiliates, stockholders, controlling
persons, Subsidiaries, successors and assigns (individually, a "Releasee" and
collectively, "Releasees") from any and all claims, demands, Proceedings,
causes of action, Orders, obligations, contracts, agreements, debts and
liabilities whatsoever, whether known or unknown, suspected or unsuspected,
both at law and in equity, which each of the Sellers or any of their
respective Related Persons now has, have ever had or may hereafter have
against the respective Releasees arising contemporaneously with or prior to
the Closing Date or on account of or arising out of any matter, cause or
event occurring contemporaneously with or prior to the Closing Date,
including, but not limited to, any rights to indemnification or reimbursement
from the Company, whether pursuant to its Organizational Documents, contracts
or otherwise and whether or not relating to claims pending on, or asserted
after, the Closing Date; PROVIDED, HOWEVER, that nothing contained herein
shall operate to release any obligations of Buyer arising under the Agreement
or any obligation of the Company which obligation has been disclosed in
<PAGE>
the Agreement (e.g., identified transactions with Related Persons of Sellers or
the Company which are to remain in effect after the Closing).
This Release shall be effective as a full and final accord and
satisfaction of the claims set forth in the preceding paragraph. In furtherance
of this intention, each Seller specifically waives the benefit of the provisions
of Section 1542 of the Civil Code of the State of California, which provides as
follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR."
Each Seller acknowledges that Section 1542, and any equivalent provisions in
any other jurisdiction, if they exist, are designed to protect a party from
waiving claims which he or she does not know exist or may exist.
Nonetheless, Sellers each agree that the waiver of Section 1542 and its
equivalents is a material portion of the releases intended by this Release,
and such Seller, therefore, intends to waive all protection provided by
Section 1542 and its equivalents. Each Seller is aware that he or she may
hereafter discover claims or facts that were unknown or unanticipated at the
time this Release was executed in addition to or different from those he or
she now knows or believes to be true with respect to the matters related
herein, which might have materially affected his or her decision to execute
this Release. Notwithstanding the discovery or existence of any additional
or different claims or facts, it is the intention of each Seller to fully,
finally and forever settle and release all such matters, and all claims
relative thereto, that do now exist, may exist, or have existed. EACH SELLER
EXPRESSLY ASSUMES THE RISK OF SUCH UNKNOWN AND UNANTICIPATED CLAIMS AND
AGREES THAT THIS RELEASE APPLIES TO ALL SUCH UNKNOWN AND UNANTICIPATED CLAIMS.
Each Seller hereby irrevocably covenants to refrain from, directly or
indirectly, asserting any claim or demand, or commencing, instituting or causing
to be commenced, any proceeding of any kind against any Releasee, based upon any
matter purported to be released hereby.
Without in any way limiting any of the rights and remedies otherwise
available to any Releasee, each Seller, jointly and severally, shall indemnify
and hold harmless each Releasee from and against all loss, liability, claim,
damage (including
<PAGE>
incidental and consequential damages) or expense (including costs of
investigation and defense and reasonable attorney's fees) whether or not
involving third party claims, arising directly or indirectly from or in
connection with (i) the assertion by or on behalf of the Sellers or any of their
Related Persons of any claim or other matter purported to be released pursuant
to this Release and (ii) the assertion by any third party of any claim or demand
against any Releasee which claim or demand arises directly or indirectly from,
or in connection with, any assertion by or on behalf of the Sellers or any of
their Related Persons against such third party of any claims or other matters
purported to be released pursuant to this Release.
If any provision of this Release is held invalid or unenforceable by
any court of competent Jurisdiction, the other provisions of this Release will
remain in full force and effect. Any provision of this Release held invalid or
unenforceable only in part or degree will remain in full force and effect to the
extent not held invalid or unenforceable.
This Release may not be changed except in a writing signed by the
person(s) against whose interest such change shall operate. This Release shall
be governed by and construed under the internal laws of the State of California
without regard to principles of conflicts of law of such state.
All words used in this Release will be construed to be of such gender
or number as the circumstances require.
IN WITNESS WHEREOF, each of the undersigned have executed and
delivered this Release as of this ____ day of ____________________, 199__.
------------------------------------
Ira Rosenberg
------------------------------------
Alice Rosenberg
------------------------------------
Jan Smith
<PAGE>
______________, 1998
Ira Rosenberg
Re: Employment Agreement
--------------------
Dear Ira:
When executed by you ("Executive") and by a duly authorized representative
of Pacific Coast Apparel Company, Inc., a California Corporation ("Company"),
this Employment Agreement (the "Agreement") will set forth the terms and
conditions of Executive's employment.
1. SERVICES
1.1 EMPLOYMENT. Company employs Executive during the Term (as hereinafter
defined) to serve as the President and Chief Executive Officer of Company
("Services"). Executive shall comply with all of the reasonable and customary
employment policies of the Company. The Services shall be generally performed
at the principal offices of Company in Los Angeles, California. In addition,
the Services may be performed by Executive from time to time on a temporary
travel basis at such other locations as Company shall reasonably request
consistent with his past practices and the reasonable business needs of the
Company. Executive agrees to perform such Services in a competent and
professional manner, consistent with the skills to be possessed by a senior
executive officer in Company's business.
1.2 REPORTING REQUIREMENTS. Executive shall report to the Board of
Directors of Company.
1.3 DUTIES. Executive shall be employed as President and Chief Executive
Officer of Company. It is understood and agreed that Executive's power and
authority in his capacity as President and Chief Executive Officer of Company
shall be superior to that of any other officer, executive or employee of
Company. Executive's duties and responsibilities shall be determined by the
Board of Directors, and shall be consistent with his past practices; such duties
and responsibilities may include oversight management of the following:
- Finance
1
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Ira Rosenberg
_____________, 1998
Page 2
- Operations
- Administration
- Merchandising
1.4 TERM/EXCLUSIVITY
1.4.1 The Term of this Agreement shall commence on the date hereof
and shall end on a date which is five (5) years from the date hereof, unless
sooner terminated in accordance with the provisions of this Agreement (the
"Initial Term"). The Initial Term shall be extended automatically for one (1)
year periods ("Contract Year"), unless this Agreement shall have been terminated
by the written notice of either Company or Executive at least ninety (90) days
before the end of the Initial Term or the current Contract Year after the
Initial term as applicable. As used herein, "Term" shall refer to the Initial
Term and each Contract Year thereafter.
1.4.2 The Services shall be rendered on a full time basis.
1.4.3 Executive may own (without violating the terms hereof):
A. securities of any corporation which are registered under
Sections 12(b) or 12(g) of the Securities Exchange Act of 1934 and which are
publicly traded as long as Executive is not part of any control group of such a
corporation which is directly or indirectly in competition with Company; and
B. any securities of a partnership, trust, corporation or
other person so long as Executive remains a passive investor in that entity and
does not become part of any control group thereof (except in a passive capacity)
and so long as such entity is not, directly or indirectly, in competition with
Company.
1.5 CONFIDENTIALITY. Executive acknowledges that his services will,
throughout the Term, bring Executive into close contact with many confidential
affairs of Company, including, without limitation, information about costs,
profits, markets, sales, products, key personnel, pricing policies, operational
methods, technical processes and other business affairs and methods and other
information not readily available to the public, and plans for future
development ("Company Information"). In recognition of the foregoing, Executive
covenants and agrees:
2
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Ira Rosenberg
_____________, 1998
Page 3
1.5.1 that Executive will keep secret all confidential matters of
Company and will not disclose Company Information to anyone outside of Company,
or use any such Confidential Information, either during or after the Term,
except with Company's written consent and except for such disclosure or use as
is necessary in the performance of Executive's duties during the Term or as may
otherwise be required by law; and
1.5.2 that Executive will deliver promptly to Company on termination
of the Term or at any other time Company may so request, at Company's expense,
all memoranda, notes, records, reports, other documents and physical
representations(and all copies thereof) relating to Company Information, which
Executive obtained while employed by, or otherwise serving or acting on behalf
of, Company or which Executive may then possess or have under his control.
1.6 INDEMNIFICATION. Executive shall be entitled to be indemnified for
things that occurred during the Term even if the claim is made following
termination or expiration, to the benefit of the indemnification provisions
contained on the date hereof in the Bylaws of Company or to the fullest extent
permitted by law, whichever is greater, notwithstanding any future changes
therein, to the extent permitted by applicable law at the time of the assertion
of any liability against Executive, and to the most favorable indemnification
provisions or agreements available to any other senior executive of the Company.
2. COMPENSATION
As compensation and consideration for all Services provided by Executive
during the Term pursuant to this Agreement, Company agrees to pay to Executive
the compensation set forth below.
2.1 FIXED ANNUAL COMPENSATION. Executive shall receive a fixed annual
compensation ("Fixed Annual Compensation") in the amount of Three Hundred Fifty
Thousand Dollars ($350,000.00) per annum. Executive's Fixed Annual Compensation
shall be payable in equal installments on Company's regular pay dates commencing
after the date hereof, subject to any withholding which Company may make for
income tax or other purposes as may be required by law or as requested by
Executive. The Fixed Annual Compensation will be reviewed by the Board of
Directors not less frequently then annually, and may be adjusted in the sole
discretion of the Board of Directors, but in no event will the Fixed Annual
Compensation be less than Three Hundred Fifty Thousand Dollars ($350,000.00) per
year, nor will the Supplemental Compensation (as described in Section 2.2
hereof) be less than Fifty Thousand Dollars ($50,000.00) per year.
3
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Ira Rosenberg
_____________, 1998
Page 4
2.2 SUPPLEMENTAL AND INCENTIVE COMPENSATION. In addition to Fixed Annual
Compensation, Executive shall receive supplemental and incentive compensation as
follows:
2.2.1 For each contract year of this Agreement, Executive shall
receive an supplemental compensation in the amount of Fifty Thousand Dollars
($50,000.00) ("Supplemental Compensation"), payable in twelve (12) equal monthly
payments on the last day of each month commencing as of the last day of the
month following execution of this Agreement.
2.2.2 Executive shall, in addition to Fixed Annual Compensation and
Supplemental Compensation, receive a bonus of four percent (4%) of the Pre-Tax
Financial Income (as hereinafter defined) of the Company (the "Incentive
Compensation"), to be calculated on a fiscal year basis by the Company's regular
independent certified public accountant; provided, however, that the amount of
Incentive Compensation payable to Executive shall be no more than One Hundred
Seventy-Five Thousand Dollars ($175,000.00). The Incentive Compensation shall
be earned by Executive on the last day of the applicable fiscal year and shall
be paid to Executive no later than thirty (30) days after completion of
Company's audited financial statements for such fiscal year.
2.2.3 For the purposes of this Agreement, Pre-Tax Financial Income
shall be defined as income prior to payments by Company for income taxes and
before an allocation to Company, if any, of expenses relating to the merger
between Company and Jodi Kristopher, Inc. or any subsequent merger or
acquisition. Such "merger" or "acquisition" expenses may include, but are not
limited to, amortization of intangible assets, interest on merger debt incurred,
expenses related to any SEC filings and any Board of Directors fees.
2.3 ADDITIONAL BENEFITS. In addition to and without limiting any other
provision hereof, Executive shall be entitled to participate in any
profit-sharing, pension, health, including dependent coverage, vacation,
insurance or other plans, benefits or policies available from time to time to
the senior executive employees of Company and not duplicative (or specifically
excluded or waived herein) of those provided herein on the terms generally
applicable to such employees. Executive will be entitled to reimbursement of
his reasonable and customary and documented business expenses incurred on behalf
of Company or company's Affiliates, including business class air travel, in
accordance with the Company's reimbursement policies as in effect from time to
time. Company shall provide Executive with an automobile and mobile telephone,
mutually acceptable to Executive and Company, for business purposes. Company
shall be responsible for all costs associated with such automobile, including
but not limited to, the maintenance, repair and insurance thereof (collectively
"Additional Benefits").
4
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Ira Rosenberg
_____________, 1998
Page 5
2.4 VACATION. During each year of the Term, Executive shall be entitled
to four (4) weeks of paid vacation in accordance with the Company's vacation
policy as in effect from time to time.
3. TERMINATION
3.1 TERMINATION BY COMPANY.
3.1.1 EXECUTIVE'S MATERIAL BREACH. Company shall have the right, at
its election, to terminate Executive's employment by the Company for cause, by
written notice to Executive. "Cause" is defined for this purpose to mean (i)
material and repeated instances of misconduct or habitual violation of Company's
published policies or procedures; (ii) a single willful act so grievous as to
constitute the equivalent of such repeated instances, including, without
limitation, the commission of a felony, theft, misappropriation of Company's
assets or sexual harassment; (iii) willful unauthorized disclosure of
confidential information related to customers, employees or general business
practices or strategies; (iv) a material breach of any material covenant,
condition, agreement or term of this Agreement, or that certain Noncompetition
Agreement of even date herewith between Company and Executive; (v) Executive's
breach of any of his fiduciary duties of loyalty to Company; or (vi) willful and
material failure to obey any specific lawful written direction from the Board of
Directors ("Executive's Material Breach"); "Cause" and "Executive's Material
Breach" shall be deemed to exist as a result of the circumstances described in
any of the clauses (i), (iv) and (vi) above only if Company shall have given
written notice to Executive specifying the claimed cause or breach, and,
provided such cause or breach is curable, Executive fails to correct to the
reasonable satisfaction of Company's Board of Directors the claimed breach or
fails to alter the objectionable pattern of conduct specified in the applicable
written notice as soon as practical thereafter but no later than thirty (30)
days after receipt of the applicable written notice or such longer time as may
be reasonably required by the nature of the claimed cause or breach, but in no
event more than sixty (60) days.
3.1.2 EARLY TERMINATION. Company shall also have the right, at its
election, to terminate Executive's employment prior to expiration of the Term
without Cause, by thirty (30) days prior written notice to Executive.
3.1.3 EFFECT OF TERMINATION BY COMPANY.
A. Should the Term be terminated by Company for Cause,
Executive shall have no right to any further Fixed Annual Compensation from and
after termination, or to
5
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Ira Rosenberg
_____________, 1998
Page 6
any Incentive Compensation, Additional Benefits or Supplemental Compensation
except those earned by Executive prior to the date of termination.
B. Should Executive's employment be terminated by Company
without Cause in accordance with Paragraph 3.1.2, Company shall pay to Executive
his Fixed Annual Compensation plus Incentive Compensation for the lesser of (i)
twelve (12) months, or (ii) what would have been the balance of the Term had
Executive's employment not been terminated by Company, subject to any
withholding which Company may make for income tax or other purposes as required
by law or requested by Executive. Except as set forth in this paragraph 3.1.3
Executive shall have no right to any further Fixed Annual Compensation from and
after termination, or to any Incentive Compensation, Special Benefits or
Additional Benefits accruing from the date of termination or thereafter.
Incentive Compensation for the fiscal year in which Executive's employment is
terminated shall be pro rated based upon the number of calendar days Executive
was employed by Company in said fiscal year divided by 365 days, multiplied by
the Pre-Tax Financial Income for such year and shall be paid to Executive within
thirty (30) days after the completion of the Company's audited financial
statements for the applicable fiscal year.
C. If Executive's employment with the Company is terminated
either by the Company without Cause or by the Employee pursuant to paragraphs
3.2.1 or 3.2.2 hereof within three (3) months prior to or twelve (12) months
after a Change of Control after the date hereof, as defined below, the Company
shall pay Executive in satisfaction of this Agreement a lump sum cash payment
equal to the amount of his Fixed Annual Compensation, Incentive Compensation and
the cash value of any and all benefits including, but not limited to, health,
life, disability and other insurance benefits which Executive would have earned
had he remained employed with the Company for the remainder of the Term. If the
foregoing is characterized under Section 280G of the Internal Revenue Code (the
"Code") as "excess parachute payment" (as defined therein), the maximum amount
payable to Employee shall be limited to 2.99 times the base amount (as defined
therein) (e.g. such amount which is the highest allowable payment without
invoking the excise tax imposed by Section 280G of the Code).
The term "Change of Control" shall be defined as the (i) sale or transfer of
more than fifty percent (50%) of the total voting power of all of the then
outstanding voting securities of the Company in one or a series of transactions
to a single buyer or group of persons acting in concert (but shall not include
any sale or transfer to the extent that such is made to a shareholder or
shareholders of the Company who owned shares of the Company's common stock as of
the date of this Agreement), (ii) sale of all or substantially all of the assets
of the Company, or (iii) the persons constituting the Company's Board of
Directors at the date hereof, together with each new director whose election, or
nomination for election by the Company's shareholders, was
6
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Ira Rosenberg
_____________, 1998
Page 7
previously approved, or is approved within thirty (30) days after his election
or nomination, by a vote of at least two-thirds (2/3) of the directors in office
prior to this election as a director (the "Existing Directors") cease for any
reason whatsoever at any time to constitute at least a majority of the Company's
Board of Directors. Notwithstanding the foregoing, the term "Change of Control"
shall not include any initial or secondary public offering of the common stock
of the Company or any transaction with a subsidiary or affiliates of the
Company. Upon payment to Executive of the lump sum payment hereunder, this
Agreement shall terminate (except as to such provisions hereof which expressly
survive termination) and Executive shall have no further obligations or
liabilities of any kind to the Company.
3.2 TERMINATION BY EXECUTIVE.
3.2.1. COMPANY'S MATERIAL BREACH. Executive shall have the right, at
his election, to terminate employment by written notice to Company to that
effect if Company shall have failed to substantially perform a material
condition or covenant of this Agreement ("Company's Material Breach"); provided,
and, if such breach is curable, termination for Company's Material Breach will
not be effective until Executive shall have given written notice specifying the
claimed breach and Company fails to correct to the reasonable satisfaction of
Executive the claimed breach within thirty (30) days after the receipt of the
applicable notice or such longer time as may be reasonably required by the
nature of the claimed breach (but within ten (10) days, if the failure to
perform is a failure to pay monies when due under the terms of this Agreement).
3.2.2 TERMINATION BY EXECUTIVE FOR GOOD REASON. Executive may also
terminate this Agreement for "Good Reason" upon thirty (30) days prior written
notice to the Company. For the purposes of this Agreement, "Good Reason" shall
mean (i) a substantial reduction in Executive's position or authority at the
Company without his written consent, (ii) a reduction in Executive's Fixed
Annual Compensation, or (iii) the request that the Executive render services
outside of Los Angeles County, California or the relocation of the Company's
headquarters outside of Los Angeles County, California; provided, however, that
the foregoing shall not apply as to reasonable business travel commensurate with
Executive's position.
3.2.3 EARLY TERMINATION. Executive shall also have the right, at
his election, to terminate his employment prior to expiration of the Term, by
thirty (30) days prior written notice to the Company. Upon said termination,
Executive shall only be entitled to his Fixed Annual Compensation and other
compensation, but not Incentive Compensation, earned as of the date of said
termination.
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Ira Rosenberg
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Page 8
3.2.4 EFFECT OF TERMINATION BY EXECUTIVE. Should the Term be
terminated by Executive by reason of Company's Material Breach or for Good
Reason, Company shall immediately pay to Executive all of Executive's Fixed
Annual Compensation and Supplemental Compensation subject to any withholding
which Company may make for income tax or other purposes as required by law or
requested by Executive. Except as set forth in this paragraph 3.2.4, Executive
shall have no right to any further Fixed Annual Compensation from and after
termination, or to any Incentive Compensation, Supplemental Compensation or
Additional Benefits earned after the date of termination or thereafter.
Incentive Compensation for the fiscal year in which the Term is terminated shall
be pro rated based upon the number of calendar days employed by Company divided
by 365 days, multiplied by the Pre-Tax Financial Income for such year and shall
be paid to Executive no later than thirty (30) days after completion of
Company's audited financial statements for such fiscal year.
3.3 EXECUTIVE'S DEATH OR DISABILITY.
3.3.1 DEATH. The Term shall immediately terminate upon Executive's
death.
3.3.2 DISABILITY. As used herein, the term "Disability" shall mean
Executive becoming materially unable to perform the Services as a result of his
permanent or temporary, total or partial, physical or mental disability
continuing for any six consecutive months during any twelve consecutive months
of the Term ("Disability Period") as may be determined solely by a physician
selected by Company and Executive whose decision shall be conclusive and binding
upon both the Company and the Executive. The Term shall terminate at the end of
the Disability Period.
3.3.3 EFFECT OF DEATH OR DISABILITY.
A. FIXED ANNUAL COMPENSATION AND ADDITIONAL BENEFITS. Should
the Term be terminated in accordance with the provisions of Paragraphs 3.3.1 or
3.3.2 by reason of Executive's death or Disability, Executive or his estate (as
the case may be) shall be entitled to receive Fixed Annual Compensation,
Supplemental Compensation and Incentive Compensation accrued through the date of
his death or termination of Executive's employment as a result of disability,
Incentive Compensation shall be calculated on a pro rata basis during the fiscal
year of such Death or Disability as provided in Section 3.1.3B, Executive or his
estate (as the case may be) shall not accrue any Additional Benefits accruing to
Executive after the date of termination.
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Ira Rosenberg
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Page 9
B. Company shall not have the right (notwithstanding any other
provision of this Agreement to the contrary) to terminate the Term due to
Disability prior to the expiration of the Disability Period.
4. STOCK OPTIONS. Executive shall be eligible to receive, at the discretion
of the Board of Directors of the Company, grants of stock options or awards or
similar benefits as may be adopted by the Company from time to time ("Stock
Options").
5. EXECUTIVE'S REPRESENTATIONS AND WARRANTIES. Executive represents and
warrants to the Company that Executive has the capacity to execute, deliver and
perform this Agreement, and that the execution, delivery and performance of this
Agreement will not result in a breach of any contract or agreement to which
Executive is a party. Executive agrees to indemnify the Company for any and all
claims, demands, damages, liabilities, losses, and causes of actions arising out
of a breach by Executive of the foregoing representations and warranties.
6. GENERAL
6.1 APPLICABLE LAW CONTROLS. Nothing contained in this Agreement shall be
construed to require the commission of any act contrary to law and wherever
there is any conflict between any provisions of this Agreement and any material
statute, law, ordinance or regulation, then the latter shall prevail; provided,
however, that in any such event the provisions of this Agreement so affected
shall be curtailed and limited only to the extent necessary to bring them within
applicable legal requirements, and provided further that if any obligation to
pay the Fixed Annual compensation or any other amount due Executive hereunder is
so curtailed, then such compensation or amount shall be paid as soon thereafter,
either during or subsequent to the Term, as permissible.
6.2 WAIVER/ESTOPPEL. Any party hereto may waive the benefit of any term,
condition or covenant in this Agreement or any right or remedy at law or in
equity to which any party may be entitled but only by an instrument in writing
signed by the parties to be charged. No estoppel may be raised against any
party except to the extent the other party relies on an instrument in writing,
signed by the party to be charged, specifically reciting that the other party
may rely thereon. The parties' rights and remedies under and pursuant to this
Agreement or at law or in equity shall be cumulative and the exercise of any
rights or remedies under one provision hereof or rights or remedies at law or in
equity shall not be deemed an election of remedies; and any waiver or
forbearance of any breach of this Agreement or remedy granted hereunder or at
law or in equity shall not be deemed a waiver of any preceding or succeeding
breach of the same or any other provision hereof or of the opportunity to
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exercise such right or remedy or any other right or remedy, whether or not
similar, at any preceding or subsequent time.
6.3 NOTICES. Any notice which Company is required or may desire to give
to Executive hereunder shall be in writing and may be served by delivering it to
Executive personally, or by sending it to Executive by certified mail, telex,
telecopy or telegraph, at the address set forth on page 1 hereof, or such
substitute address as Executive may from time to time designate by notice to
Company. Any notice which Executive is required or may desire to serve upon
Company hereunder shall be served in writing and may be served by delivering it
personally or by sending it by mail, telex or telegraph to the address set forth
on page 1 hereof, attention of the President, or such other substitute addresses
as Company may from time to time designate by notice to Executive, with copies
to Jeffrey Kapor, Esq., Katz, Hoyt, Seigel & Kapor, 11111 Santa Monica
Boulevard, Suite 820, Los Angeles, California 90025-3342. Any notices or
communications sent by telex or telecopy shall be also sent by mail.
6.4 GOVERNING LAW. This Agreement shall be governed by, construed and
enforced and the legality and validity of each term and condition shall be
determined in accordance with the internal, substantive laws of the State of
California applicable to agreements fully executed and performed entirely in
California.
6.5 MODIFICATION/ENTIRE AGREEMENT. This Agreement may not be altered,
modified or amended except by an instrument in writing signed by all of the
parties hereto. No person, whether or not an officer, agent, employee or
representative of any party, has made or has any authority to make for or on
behalf of that party any agreement, representation, warranty, statement,
promise, arrangement or understanding not expressly set forth in this Agreement
or in any other document executed by the parties concurrently herewith ("Parol
Agreements"). This Agreement and all other documents executed by the parties
concurrently herewith constitute the entire agreement between the parties and
supersede all express or implied, prior or concurrent, and prior written
agreements with respect to the subject matter hereof.
6.6 ARBITRATION. Notwithstanding anything to the contrary contained
herein, any claim, dispute or controversy arising out of, or relating to any
section of this Agreement (other than Section 1.6) or the making, performance,
or interpretation of the rights and obligations explicitly set forth in this
Agreement (other than Section 1.6), including, without limitation, the
determination of "good cause", shall, by written notice of either Executive or
Company, be settled on an expedited basis by binding arbitration in California
before a single arbitrator mutually agreeable to the parties hereto, and if no
agreement is reached, before three
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arbitrators selected in accordance with the Rules of the American Arbitration
Association then in effect, which arbitration shall be conducted in accordance
with such Rules, and judgment on the arbitration award may be entered in any
court having jurisdiction over the subject matter of controversy. The
arbitrator's decision shall be non-reviewable except for gross errors of law.
The arbitrator shall not have the power to amend this Agreement in any respect
or to award punitive or exemplary damages. Any payments to be made as a result
of such arbitration shall include interest.
6.7 ATTORNEYS' FEES. Should any action be brought to enforce any of the
terms or conditions of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees and costs.
Please confirm your agreement to the foregoing by signing below where
indicated.
Very truly yours,
Pacific Coast Apparel Company, Inc.,
a California corporation
By
----------------------------------
AGREED AND ACCEPTED
this ____ day of _____________, 1998:
- -------------------------------
IRA ROSENBERG
11
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______________, 1998
Alice Rosenberg
Re: Employment Agreement
--------------------
Dear Alice:
When executed by you ("Executive") and by a duly authorized representative
of Pacific Coast Apparel Company, Inc., a California Corporation ("Company"),
this Employment Agreement (the "Agreement") will set forth the terms and
conditions of Executive's employment.
1. SERVICES
1.1 EMPLOYMENT. Company employs Executive during the Term (as hereinafter
defined) to serve as the Vice President and Secretary of Company ("Services").
Executive shall comply with all of the reasonable and customary employment
policies of the Company. The Services shall be generally performed at the
principal offices of Company in Los Angeles, California. In addition, the
Services may be performed by Executive from time to time on a temporary travel
basis at such other locations as Company shall reasonably request consistent
with her past practices and the reasonable business needs of the Company.
Executive agrees to perform such Services in a competent and professional
manner, consistent with the skills to be possessed by a senior executive officer
in Company's business.
1.2 REPORTING REQUIREMENTS. Executive shall report to the Board of
Directors of Company.
1.3 DUTIES. Executive's duties and responsibilities as Vice President and
Secretary of the Company shall be determined by the Board of Directors, and
shall be consistent with her past practices. Executive's duties and
responsibilities may include, but shall not be limited to, oversight management
of production and the purchase of piece goods.
1.4 TERM/EXCLUSIVITY
1.4.1 The Term of this Agreement shall commence on the date hereof
and shall end on a date which is five (5) years from the date hereof, unless
sooner terminated in
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accordance with the provisions of this Agreement (the "Initial Term"). The
Initial Term shall be extended automatically for one (1) year periods ("Contract
Year"), unless this Agreement shall have been terminated by the written notice
of either Company or Executive at least ninety (90) days before the end of the
Initial Term or the current Contract Year after the Initial term as applicable.
As used herein, "Term" shall refer to the Initial Term and each Contract Year
thereafter.
1.4.2 The Services shall be rendered on a full time basis.
1.4.3 Executive may own (without violating the terms hereof):
A. securities of any corporation which are registered under
Sections 12(b) or 12(g) of the Securities Exchange Act of 1934 and which are
publicly traded as long as Executive is not part of any control group of such a
corporation which is directly or indirectly in competition with Company; and
B. any securities of a partnership, trust, corporation or
other person so long as Executive remains a passive investor in that entity and
does not become part of any control group thereof (except in a passive capacity)
and so long as such entity is not, directly or indirectly, in competition with
Company.
1.5 CONFIDENTIALITY. Executive acknowledges that her services will,
throughout the Term, bring Executive into close contact with many confidential
affairs of Company, including, without limitation, information about costs,
profits, markets, sales, products, key personnel, pricing policies, operational
methods, technical processes and other business affairs and methods and other
information not readily available to the public, and plans for future
development ("Company Information"). In recognition of the foregoing, Executive
covenants and agrees:
1.5.1 that Executive will keep secret all confidential matters of
Company and will not disclose Company Information to anyone outside of Company,
or use any such Confidential Information, either during or after the Term,
except with Company's written consent and except for such disclosure or use as
is necessary in the performance of Executive's duties during the Term or as may
otherwise be required by law; and
1.5.2 that Executive will deliver promptly to Company on termination
of the Term or at any other time Company may so request, at Company's expense,
all memoranda, notes, records, reports, other documents and physical
representations (and all copies thereof) relating to Company Information, which
Executive obtained while employed by, or otherwise
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serving or acting on behalf of, Company or which Executive may then possess or
have under her control.
1.6 INDEMNIFICATION. Executive shall be entitled to be indemnified for
things that occurred during the Term even if the claim is made following
termination or expiration, to the benefit of the indemnification provisions
contained on the date hereof in the Bylaws of Company or to the fullest extent
permitted by law, whichever is greater, notwithstanding any future changes
therein, to the extent permitted by applicable law at the time of the assertion
of any liability against Executive, and to the most favorable indemnification
provisions or agreements available to any other senior executive of the
Company.
2. COMPENSATION
As compensation and consideration for all Services provided by Executive
during the Term pursuant to this Agreement, Company agrees to pay to Executive
the compensation set forth below.
2.1 FIXED ANNUAL COMPENSATION. Executive shall receive a fixed annual
compensation ("Fixed Annual Compensation") in the amount of Three Hundred Fifty
Thousand Dollars ($350,000.00) per annum. Executive's Fixed Annual Compensation
shall be payable in equal installments on Company's regular pay dates commencing
after the date hereof, subject to any withholding which Company may make for
income tax or other purposes as may be required by law or as requested by
Executive. The Fixed Annual Compensation will be reviewed by the Board of
Directors not less frequently then annually, and may be adjusted in the sole
discretion of the Board of Directors, but in no event will the Fixed Annual
Compensation be less than Three Hundred Fifty Thousand Dollars ($350,000.00) per
year, nor will the Supplemental Compensation (as described in Section 2.2
hereof) be less than Fifty Thousand Dollars ($50,000.00) per year.
2.2 SUPPLEMENTAL AND INCENTIVE COMPENSATION. In addition to Fixed Annual
Compensation, Executive shall receive supplemental and incentive compensation as
follows:
2.2.1 For each contract year of this Agreement, Executive shall
receive supplemental compensation in the amount of Fifty Thousand Dollars
($50,000.00) ("Supplemental Compensation"), payable in twelve (12) equal monthly
payments on the last day of each month commencing as of the last day of the
month following execution of this Agreement.
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2.2.2 Executive shall, in addition to Fixed Annual Compensation and
Supplemental Compensation, receive a bonus of four percent (4%) of the Pre-Tax
Financial Income (as hereinafter defined) of the Company ("Incentive
Compensation"), to be calculated on a fiscal year basis by the Company's regular
independent certified public accountant; provided, however, that the amount of
Incentive Compensation payable to Executive shall be no more than One Hundred
Seventy-Five Thousand Dollars ($175,000.00). The Incentive Compensation shall
be earned by Executive on the last day of the applicable fiscal year and shall
be paid to Executive no later than thirty (30) days after completion of
Company's audited financial statements for such year.
2.2.3 For the purposes of this Agreement, Pre-Tax Financial Income
shall be defined as income prior to payments by Company for income taxes and
before an allocation to Company, if any, of expenses relating to the merger
between Company and Jodi Kristopher, Inc. or any subsequent merger or
acquisition. Such "merger" or "acquisition" expenses may include, but are not
limited to, amortization of intangible assets, interest on merger debt incurred,
expenses related to any SEC filings and any Board of Directors fees.
2.3 ADDITIONAL BENEFITS. In addition to and without limiting any other
provision hereof, Executive shall be entitled to participate in any
profit-sharing, pension, health, including dependent coverage, vacation,
insurance or other plans, benefits or policies available from time to time to
the senior executive employees of Company and not duplicative (or specifically
excluded or waived herein) of those provided herein on the terms generally
applicable to such employees. Executive will be entitled to reimbursement of
her reasonable and customary and documented business expenses incurred on behalf
of Company or company's Affiliates, including business class air travel, in
accordance with the Company's reimbursement policies as in effect from time to
time. Company shall provide Executive with an automobile and mobile telephone,
mutually acceptable to Executive and Company, for business purposes. Company
shall be responsible for all costs associated with such automobile, including
but not limited to, the maintenance, repair and insurance thereof (collectively
"Additional Benefits").
2.4 VACATION. During each year of the Term, Executive shall be entitled
to four (4) weeks of paid vacation in accordance with the Company's vacation
policy as in effect from time to time.
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3. TERMINATION
3.1 TERMINATION BY COMPANY.
3.1.1 EXECUTIVE'S MATERIAL BREACH. Company shall have the right, at
its election, to terminate Executive's employment by the Company for cause, by
written notice to Executive. "Cause" is defined for this purpose to mean (i)
material and repeated instances of misconduct or habitual violation of Company's
published policies or procedures; (ii) a single willful act so grievous as to
constitute the equivalent of such repeated instances, including, without
limitation, the commission of a felony, theft, misappropriation of Company's
assets or sexual harassment; (iii) willful unauthorized disclosure of
confidential information related to customers, employees or general business
practices or strategies; (iv) a material breach of any material covenant,
condition, agreement or term of this Agreement, or that certain Noncompetition
Agreement of even date herewith between Company and Executive; (v) Executive's
breach of any of her fiduciary duties of loyalty to Company; or (vi) willful and
material failure to obey any specific lawful written direction from the Board of
Directors ("Executive's Material Breach"); "Cause" and "Executive's Material
Breach" shall be deemed to exist as a result of the circumstances described in
any of the clauses (i), (iv) and (vi) above only if Company shall have given
written notice to Executive specifying the claimed cause or breach, and,
provided such cause or breach is curable, Executive fails to correct to the
reasonable satisfaction of Company's Board of Directors the claimed breach or
fails to alter the objectionable pattern of conduct specified in the applicable
written notice as soon as practical thereafter but no later than thirty (30)
days after receipt of the applicable written notice or such longer time as may
be reasonably required by the nature of the claimed cause or breach, but in no
event more than sixty (60) days.
3.1.2 EARLY TERMINATION. Company shall also have the right, at its
election, to terminate Executive's employment prior to expiration of the Term
without Cause, by thirty (30) days prior written notice to Executive.
3.1.3 EFFECT OF TERMINATION BY COMPANY.
A. Should the Term be terminated by Company for Cause,
Executive shall have no right to any further Fixed Annual Compensation from and
after termination, or to any Incentive Compensation, Additional Benefits or
Supplemental Compensation except those earned by Executive prior to the date of
termination.
B. Should Executive's employment be terminated by Company
without Cause in accordance with Paragraph 3.1.2, Company shall pay to Executive
her Fixed Annual
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Alice Rosenberg
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Compensation plus Incentive Compensation for the lesser of (i) twelve (12)
months, or (ii) what would have been the balance of the Term had Executive's
employment not been terminated by Company, subject to any withholding which
Company may make for income tax or other purposes as required by law or
requested by Executive. Except as set forth in this paragraph 3.1.3 Executive
shall have no right to any further Fixed Annual Compensation from and after
termination, or to any Incentive Compensation, Special Benefits or Additional
Benefits accruing from the date of termination or thereafter. Incentive
Compensation for the fiscal year in which Executive's employment is terminated
shall be pro rated based upon the number of calendar days Executive was employed
by Company in said fiscal year divided by 365 days, multiplied by the Pre-Tax
Financial Income for such year and shall be paid to Executive within thirty (30)
days after the completion of the Company's audited financial statements for the
applicable fiscal year.
C. If Executive's employment with the Company is terminated
either by the Company without Cause or by the Employee pursuant to paragraphs
3.2.1 or 3.2.2 hereof within three (3) months prior to or twelve (12) months
after a Change of Control after the date hereof, as defined below, the Company
shall pay Executive in satisfaction of this Agreement a lump sum cash payment
equal to the amount of her Fixed Annual Compensation, Incentive Compensation and
the cash value of any and all benefits including, but not limited to, health,
life, disability and other insurance benefits which Executive would have
earned had he remained employed with the Company for the remainder of the Term.
If the foregoing is characterized under Section 280G of the Internal Revenue
Code (the "Code") as "excess parachute payment" (as defined therein), the
maximum amount payable to Employee shall be limited to 2.99 times the base
amount (as defined therein) (e.g. such amount which is the highest allowable
payment without invoking the excise tax imposed by Section 280G of the Code).
The term "Change of Control" shall be defined as the (i) sale or transfer of
more than fifty percent (50%) of the total voting power of all of the then
outstanding voting securities of the Company in one or a series of transactions
to a single buyer or group of persons acting in concert (but shall not include
any sale or transfer to the extent that such is made to a shareholder or
shareholders of the Company who owned shares of the Company's common stock as of
the date of this Agreement), (ii) sale of all or substantially all of the assets
of the Company, or (iii) the persons constituting the Company's Board of
Directors at the date hereof, together with each new director whose election, or
nomination for election by the Company's shareholders, was previously approved,
or is approved within thirty (30) days after her election or nomination, by a
vote of at least two-thirds (2/3) of the directors in office prior to this
election as a director (the "Existing Directors") cease for any reason
whatsoever at any time to constitute at least a majority of the Company's Board
of Directors. Notwithstanding
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Alice Rosenberg
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the foregoing, the term "Change of Control" shall not include any initial or
secondary public offering of the common stock of the Company or any transaction
with a subsidiary or affiliates of the Company. Upon payment to Executive of
the lump sum payment hereunder, this Agreement shall terminate (except as to
such provisions hereof which expressly survive termination) and Executive shall
have no further obligations or liabilities of any kind to the Company.
3.2 TERMINATION BY EXECUTIVE.
3.2.1. COMPANY'S MATERIAL BREACH. Executive shall have the right, at
her election, to terminate employment by written notice to Company to that
effect if Company shall have failed to substantially perform a material
condition or covenant of this Agreement ("Company's Material Breach"); provided,
and, if such breach is curable, termination for Company's Material Breach will
not be effective until Executive shall have given written notice specifying the
claimed breach and Company fails to correct to the reasonable satisfaction of
Executive the claimed breach within thirty (30) days after the receipt of the
applicable notice or such longer time as may be reasonably required by the
nature of the claimed breach (but within ten (10) days, if the failure to
perform is a failure to pay monies when due under the terms of this Agreement).
3.2.2 TERMINATION BY EXECUTIVE FOR GOOD REASON. Executive may also
terminate this Agreement for "Good Reason" upon thirty (30) days prior written
notice to the Company. For the purposes of this Agreement, "Good Reason" shall
mean (i) a substantial reduction in Executive's position or authority at the
Company without his written consent, (ii) a reduction in Executive's Fixed
Annual Compensation, or (iii) the request that the Executive render services
outside of Los Angeles County, California or the relocation of the Company's
headquarters outside of Los Angeles County, California; provided, however, that
the foregoing shall not apply as to reasonable business travel commensurate with
Executive's position.
3.2.3 EARLY TERMINATION. Executive shall also have the right, at
her election, to terminate her employment prior to expiration of the Term, by
thirty (30) days prior written notice to the Company. Upon said termination,
Executive shall only be entitled to her Fixed Annual Compensation and other
compensation, but not Incentive Compensation, earned as of the date of said
termination.
3.2.4 EFFECT OF TERMINATION BY EXECUTIVE. Should the Term be
terminated by Executive by reason of Company's Material Breach or for Good
Reason, Company shall immediately pay to Executive all of Executive's Fixed
Annual Compensation and Supplemental Compensation subject to any withholding
which Company may make for income tax or other
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Alice Rosenberg
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Page 8
purposes as required by law or requested by Executive. Except as set forth in
this paragraph 3.2.4, Executive shall have no right to any further Fixed Annual
Compensation from and after termination, or to any Incentive Compensation,
Supplemental Compensation or Additional Benefits earned after the date of
termination or thereafter. Incentive Compensation for the fiscal year in which
the Term is terminated shall be pro rated based upon the number of calendar days
employed by Company divided by 365 days, multiplied by the Pre-Tax Financial
Income for such year and shall be paid to Executive no later than thirty (30)
days after completion of Company's audited financial statements for such fiscal
year.
3.3 EXECUTIVE'S DEATH OR DISABILITY.
3.3.1 DEATH. The Term shall immediately terminate upon Executive's
death.
3.3.2 DISABILITY. As used herein, the term "Disability" shall mean
Executive becoming materially unable to perform the Services as a result of her
permanent or temporary, total or partial, physical or mental disability
continuing for any six consecutive months during any twelve consecutive months
of the Term ("Disability Period") as may be determined solely by a physician
selected by Company and Executive whose decision shall be conclusive and binding
upon both the Company and the Executive. The Term shall terminate at the end of
the Disability Period.
3.3.3 EFFECT OF DEATH OR DISABILITY.
A. FIXED ANNUAL COMPENSATION AND ADDITIONAL BENEFITS. Should
the Term be terminated in accordance with the provisions of Paragraphs 3.3.1 or
3.3.2 by reason of Executive's death or Disability, Executive or her estate (as
the case may be) shall be entitled to receive Fixed Annual Compensation,
Supplemental Compensation and Incentive Compensation accrued through the date of
her death or termination of Executive's employment as a result of disability,
Incentive Compensation shall be calculated on a pro rata basis during the fiscal
year of such Death or Disability as provided in Section 3.1.3B, Executive or her
estate (as the case may be) shall not accrue any Additional Benefits accruing to
Executive after the date of termination.
B. Company shall not have the right (notwithstanding any
other provision of this Agreement to the contrary) to terminate the Term due to
Disability prior to the expiration of the Disability Period.
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4. STOCK OPTIONS. Executive shall be eligible to receive, at the discretion
of the Board of Directors of the Company, grants of stock options or awards or
similar benefits as may be adopted by the Company from time to time ("Stock
Options").
5. EXECUTIVE'S REPRESENTATIONS AND WARRANTIES. Executive represents and
warrants to the Company that Executive has the capacity to execute, deliver and
perform this Agreement, and that the execution, delivery and performance of this
Agreement will not result in a breach of any contract or agreement to which
Executive is a party. Executive agrees to indemnify the Company for any and all
claims, demands, damages, liabilities, losses, and causes of actions arising out
of a breach by Executive of the foregoing representations and warranties.
6. GENERAL
6.1 APPLICABLE LAW CONTROLS. Nothing contained in this Agreement shall be
construed to require the commission of any act contrary to law and wherever
there is any conflict between any provisions of this Agreement and any material
statute, law, ordinance or regulation, then the latter shall prevail; provided,
however, that in any such event the provisions of this Agreement so affected
shall be curtailed and limited only to the extent necessary to bring them within
applicable legal requirements, and provided further that if any obligation to
pay the Fixed Annual compensation or any other amount due Executive hereunder
is so curtailed, then such compensation or amount shall be paid as soon
thereafter, either during or subsequent to the Term, as permissible.
6.2 WAIVER/ESTOPPEL. Any party hereto may waive the benefit of any term,
condition or covenant in this Agreement or any right or remedy at law or in
equity to which any party may be entitled but only by an instrument in writing
signed by the parties to be charged. No estoppel may be raised against any
party except to the extent the other party relies on an instrument in writing,
signed by the party to be charged, specifically reciting that the other party
may rely thereon. The parties' rights and remedies under and pursuant to this
Agreement or at law or in equity shall be cumulative and the exercise of any
rights or remedies under one provision hereof or rights or remedies at law or in
equity shall not be deemed an election of remedies; and any waiver or
forbearance of any breach of this Agreement or remedy granted hereunder or at
law or in equity shall not be deemed a waiver of any preceding or succeeding
breach of the same or any other provision hereof or of the opportunity to
exercise such right or remedy or any other right or remedy, whether or not
similar, at any preceding or subsequent time.
6.3 NOTICES. Any notice which Company is required or may desire to give
to Executive hereunder shall be in writing and may be served by delivering it to
Executive
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Page 10
personally, or by sending it to Executive by certified mail, telex, telecopy or
telegraph, at the address set forth on page 1 hereof, or such substitute address
as Executive may from time to time designate by notice to Company. Any notice
which Executive is required or may desire to serve upon Company hereunder shall
be served in writing and may be served by delivering it personally or by sending
it by mail, telex or telegraph to the address set forth on page 1 hereof,
attention of the President, or such other substitute addresses as Company may
from time to time designate by notice to Executive, with copies to Jeffrey
Kapor, Esq., Katz, Hoyt, Seigel & Kapor, 11111 Santa Monica Boulevard, Suite
820, Los Angeles, California 90025-3342. Any notices or communications sent by
telex or telecopy shall be also sent by mail.
6.4 GOVERNING LAW. This Agreement shall be governed by, construed and
enforced and the legality and validity of each term and condition shall be
determined in accordance with the internal, substantive laws of the State of
California applicable to agreements fully executed and performed entirely in
California.
6.5 MODIFICATION/ENTIRE AGREEMENT. This Agreement may not be altered,
modified or amended except by an instrument in writing signed by all of the
parties hereto. No person, whether or not an officer, agent, employee or
representative of any party, has made or has any authority to make for or on
behalf of that party any agreement, representation, warranty, statement,
promise, arrangement or understanding not expressly set forth in this Agreement
or in any other document executed by the parties concurrently herewith ("Parol
Agreements"). This Agreement and all other documents executed by the parties
concurrently herewith constitute the entire agreement between the parties and
supersede all express or implied, prior or concurrent, and prior written
agreements with respect to the subject matter hereof.
6.6 ARBITRATION. Notwithstanding anything to the contrary contained
herein, any claim, dispute or controversy arising out of, or relating to any
section of this Agreement (other than Section 1.6) or the making, performance,
or interpretation of the rights and obligations explicitly set forth in this
Agreement (other than Section 1.6), including, without limitation, the
determination of "good cause", shall, by written notice of either Executive or
Company, be settled on an expedited basis by binding arbitration in California
before a single arbitrator mutually agreeable to the parties hereto, and if no
agreement is reached, before three arbitrators selected in accordance with the
Rules of the American Arbitration Association then in effect, which arbitration
shall be conducted in accordance with such Rules, and judgment on the
arbitration award may be entered in any court having jurisdiction over the
subject matter of controversy. The arbitrator's decision shall be
non-reviewable except for gross errors of law. The arbitrator shall not have
the power to amend this Agreement in any respect or to award
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Alice Rosenberg
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Page 11
punitive or exemplary damages. Any payments to be made as a result of such
arbitration shall include interest.
6.7 ATTORNEYS' FEES. Should any action be brought to enforce any of the
terms or conditions of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees and costs.
Please confirm your agreement to the foregoing by signing below where
indicated.
Very truly yours,
Pacific Coast Apparel Company, Inc.,
a California corporation
By
-------------------------------------
AGREED AND ACCEPTED
this day of _____________, 1998:
- ---------------------------------
ALICE ROSENBERG
11
<PAGE>
NONCOMPETITION AGREEMENT
This Noncompetition Agreement (the "Agreement") is made as of
, 1998, by and among Pacific Coast Apparel Company, Inc., a California
corporation ("Buyer"), Jodi Kristopher, Inc., a California corporation, dba City
Triangles ("the Company"), and Ira Rosenberg, as holder of 90%, as community
property, of all of the outstanding Class A Common Stock of the Company
("Seller"). Capitalized terms used herein but not otherwise defined herein shall
have the meanings set forth in that certain Reorganization Agreement, dated as
of ___________ __, 1998, by and among Buyer, the Company, Seller and Alice
Rosenberg (the "Reorganization Agreement").
RECITALS
A. Seller owns 90%, as community property, all of the
outstanding Class A Common Stock of the Company (the "Shares").
B. Buyer and Seller have entered into the Reorganization
Agreement, pursuant to which, the Company shall be merged with and into Buyer
(the "Merger").
C. In connection with the Merger, Buyer and the Company desire
to obtain certain covenants not to compete from Seller. The execution and
delivery of this Agreement by Seller is a condition precedent to the obligations
of Buyer to consummate the Merger under the Reorganization Agreement. Seller
enters into this Agreement in consideration of the execution by Buyer of the
Reorganization Agreement and the consummation by Buyer of the transactions
contemplated thereby.
AGREEMENT
NOW, THEREFORE, in consideration of the promises and the
mutual covenants and agreements hereinafter set forth, the parties hereby agree
as follows:
1. BUSINESS DEFINED. As used herein, the term "Business" means
the business carried on by the Company as of the date hereof, or any similar
business, including, without limitation, the business of designing and selling
women's apparel.
<PAGE>
2. NONCOMPETITION.
(a) During the period commencing on the date hereof
and terminating upon the first to occur of (i) the fifth anniversary of the date
hereof and (ii) the termination of Seller's employment with the Buyer by the
Buyer without cause pursuant to Section 3.1.2, or by Seller due to Buyer's
Material Breach or for Good Reason pursuant to Sections 3.2.1 or 3.2.2, of that
certain Employment Agreement of even date herewith between the Buyer and Seller
(the "Noncompetition Period"), Seller shall not, and Seller shall cause his
Affiliates to not, directly or indirectly, carry on a business similar to the
Business or to own, enter into, engage in, operate, manage, control, participate
in, advise, assist, contribute or give or lend funds to or otherwise finance, be
employed by or render services to or consult with, or have a financial or other
interest in, any business (including without limitation any division, group or
franchise of a larger organization) which competes with the Business (or any
part thereof) within (i) each county of the State of California or any part
thereof, or (ii) any city, county, state or other political subdivision or
geographical area in the United States where customers of the Company are
located or the Company otherwise now conducts the Business (collectively, the
"Territory"), whether for or by himself or as an employee, independent
contractor, agent, shareholder, partner or joint venturer or in any capacity for
any other person, individual, corporation, partnership, joint venture or other
entity or business organization (a "Person").
(b) Seller warrants and represents that neither him
nor any of his Affiliates has any financial or other interest in any Person that
carries on any activity from which Seller is prohibited under Section 2(a). If,
after the date hereof, any Person in which Seller or any of his Affiliates have
any financial or other interest engages directly or indirectly in a line of
business that competes with the Business within the Territory or otherwise
carries on any activity in which Seller is prohibited to engage under Section
2(a), then Seller and his Affiliates shall divest all of their interest in such
Person within 30 days after such Person enters such line of business. The
requirement to divest as set forth above shall apply only during the
Noncompetition Period and not thereafter.
3. NONDISPARAGEMENT; REFERRALS. During the Noncompetition
Period, Seller agrees that he shall not, and shall cause his Affiliates to not,
either directly or indirectly, solicit, induce, attempt to influence, or take
any action that may have the effect of discouraging any past or present lessor,
licensor, customer, supplier, licensee, business prospect or other business
associate of the Company from entering into or maintaining, or causing it to
terminate or cease, the same relationships with the Company with respect to the
Business after the Closing Date as it maintained with the Company with respect
to the Business prior to the Closing Date, and during the Noncompetition Period
shall refer,
<PAGE>
and shall cause their Affiliates to refer, all customer inquiries relating to
the Business to the Company as soon as possible after receiving such inquiries.
4. ENTIRE AGREEMENT. This Agreement, together with the
provisions of the Reorganization Agreement relating hereto, contains the entire
agreement of the parties with respect to Seller's covenants not to compete with
the Company, and supersedes all prior agreements, written or oral, with respect
thereto.
5. REMEDIES. Seller acknowledges that, in the event of any
breach or anticipatory or threatened breach by him of any of the provisions of
this Agreement, the remedies available to Buyer and the Company at law may be
inadequate, and hereby agrees that, in addition to any other remedies that may
be available to Buyer and the Company, Buyer and the Company shall be entitled
to obtain temporary or permanent injunctive relief without the necessity of
proving damages. Such remedies shall be cumulative and nonexclusive and shall be
in addition to any other remedy to which the parties may be entitled (and shall
be in addition to divestiture by Seller pursuant to Section 2(b) hereof).
6. WAIVER. The failure of any party to insist, in any one or
more instances, upon performance of the terms or conditions of this Agreement
shall not be construed as a waiver or relinquishment of any right granted
hereunder or of the future performance of any such term, covenant or condition.
No waiver on the part of any party of any right, power or privilege, nor any
single or partial exercise of any such right, power or privilege, shall preclude
any further exercise thereof or the exercise of any other such right, power or
privilege.
7. NOTICES. Any notice to be given hereunder to any party
hereto or Person subject hereto shall be given in the manner provided in the
Reorganization Agreement (and shall be deemed to have been given as provided
therein), and otherwise as the Persons subject to this Agreement may designate
in writing delivered to the parties hereto.
8. REFORMATION. In the event a court of competent jurisdiction
determines that any of the covenants contained in Sections 2 or 3 or any other
provision hereof is unenforceable as written, the parties agree that such court
shall, for purposes of enforcing such covenant in such jurisdiction, reform the
scope of such covenant to the extent necessary to render such covenant
reasonable in scope under the circumstances then obtaining, and that such
covenant, as reformed, shall be enforceable in such jurisdiction.
<PAGE>
9. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Agreement.
10. AMENDMENT. This Agreement may be amended, superseded,
canceled, renewed or extended, and the terms hereof may be waived, only by a
written instrument signed by each of the parties or, in the case of a waiver, by
the party waiving compliance.
11. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the substantive and procedural laws of the state or
other jurisdiction where enforcement is sought.
12. BINDING NATURE; ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns and legal representatives. Neither this Agreement, nor
any right hereunder, may be assigned by Seller without the written consent of
Buyer. Any non-permitted assignment or attempted assignment shall be void.
13. HEADINGS. The headings in this Agreement are for reference
only, and shall not affect the interpretation of this Agreement.
14. ATTORNEYS' FEES. If any legal action or other proceeding
is brought for the enforcement of this Agreement, or because of an alleged
dispute, breach, default or misrepresentation in connection with any of the
provisions of this Agreement, the successful or prevailing party shall be
entitled to recover reasonable attorneys' fees and other costs incurred in that
action or proceeding, in addition to any other relief to which it may be
entitled.
<PAGE>
15. INTERPRETATION. Each party has negotiated this Agreement
at arm's length and agrees that its terms shall not be construed or interpreted
in favor of or against any party.
IN WITNESS WHEREOF, Buyer, the Company and Seller have duly
executed and delivered this Agreement as of the date first above written.
"Buyer"
Pacific Coast Apparel Company, Inc.,
a California corporation
By
---------------------------------
Terrence L. McGovern,
Chairman and Chief Executive Officer
"Company"
Jodi Kristopher, Inc.,
a California corporation
By
----------------------------------
-------------------------------------
[Printed Name and Title]
"Seller"
-------------------------------------
Ira Rosenberg
<PAGE>
NONCOMPETITION AGREEMENT
This Noncompetition Agreement (the "Agreement") is made as of
____________ ____, 1998, by and among Pacific Coast Apparel Company, Inc., a
California corporation ("Buyer"), Jodi Kristopher, Inc., a California
corporation, dba City Triangles ("the Company"), and Alice Rosenberg, as
holder of 90%, as community property, of all of the outstanding Class A
Common Stock of the Company ("Seller"). Capitalized terms used herein but not
otherwise defined herein shall have the meanings set forth in that certain
Reorganization Agreement, dated as of _______________, 1998, by and among
Buyer, the Company, Seller and Ira Rosenberg (the "Reorganization Agreement").
RECITALS
A. Seller owns 90%, as community property, all of the outstanding
Class A Common Stock of the Company (the "Shares").
B. Buyer and Seller have entered into the Reorganization
Agreement, pursuant to which, the Company shall be merged with and into Buyer
(the "Merger").
C. In connection with the Merger, Buyer and the Company desire to
obtain certain covenants not to compete from Seller. The execution and
delivery of this Agreement by Seller is a condition precedent to the
obligations of Buyer to consummate the Merger under the Reorganization
Agreement. Seller enters into this Agreement in consideration of the
execution by Buyer of the Reorganization Agreement and the consummation by
Buyer of the transactions contemplated thereby.
AGREEMENT
NOW, THEREFORE, in consideration of the promises and the mutual
covenants and agreements hereinafter set forth, the parties hereby agree as
follows:
1. BUSINESS DEFINED. As used herein, the term "Business" means
the business carried on by the Company as of the date hereof, or any similar
business, including, without limitation, the business of designing and
selling women's apparel.
<PAGE>
2. NONCOMPETITION.
(a) During the period commencing on the date hereof and
terminating upon the first to occur of (i) the fifth anniversary of the date
hereof and (ii) the termination of Seller's employment with the Buyer by the
Buyer without cause pursuant to Section 3.1.2, or by Seller due to Buyer's
Material Breach or for Good Reason pursuant to Sections 3.2.1 or 3.2.2, of
that certain Employment Agreement of even date herewith between the Buyer and
Seller (the "Noncompetition Period"), Seller shall not, and Seller shall
cause her Affiliates to not, directly or indirectly, carry on a business
similar to the Business or to own, enter into, engage in, operate, manage,
control, participate in, advise, assist, contribute or give or lend funds to
or otherwise finance, be employed by or render services to or consult with,
or have a financial or other interest in, any business (including without
limitation any division, group or franchise of a larger organization) which
competes with the Business (or any part thereof) within (i) each county of
the State of California or any part thereof, or (ii) any city, county, state
or other political subdivision or geographical area in the United States
where customers of the Company are located or the Company otherwise now
conducts the Business (collectively, the "Territory"), whether for or by
herself or as an employee, independent contractor, agent, shareholder,
partner or joint venturer or in any capacity for any other person,
individual, corporation, partnership, joint venture or other entity or
business organization (a "Person").
(b) Seller warrants and represents that neither her nor any
of her Affiliates has any financial or other interest in any Person that
carries on any activity from which Seller is prohibited under Section 2(a).
If, after the date hereof, any Person in which Seller or any of her
Affiliates have any financial or other interest engages directly or
indirectly in a line of business that competes with the Business within the
Territory or otherwise carries on any activity in which Seller is prohibited
to engage under Section 2(a), then Seller and her Affiliates shall divest all
of their interest in such Person within 30 days after such Person enters such
line of business. The requirement to divest as set forth above shall apply
only during the Noncompetition Period and not thereafter.
3. NONDISPARAGEMENT; REFERRALS. During the Noncompetition Period,
Seller agrees that she shall not, and shall cause her Affiliates to not,
either directly or indirectly, solicit, induce, attempt to influence, or take
any action that may have the effect of discouraging any past or present
lessor, licensor, customer, supplier, licensee, business prospect or other
business associate of the Company from entering into or maintaining, or
causing it to terminate or cease, the same relationships with the Company
with respect to the Business after the Closing Date as it maintained with the
Company with respect to the Business prior to the Closing Date, and during
the Noncompetition Period shall refer,
<PAGE>
and shall cause their Affiliates to refer, all customer inquiries relating to
the Business to the Company as soon as possible after receiving such
inquiries.
4. ENTIRE AGREEMENT. This Agreement, together with the provisions
of the Reorganization Agreement relating hereto, contains the entire
agreement of the parties with respect to Seller's covenants not to compete
with the Company, and supersedes all prior agreements, written or oral, with
respect thereto.
5. REMEDIES. Seller acknowledges that, in the event of any breach
or anticipatory or threatened breach by her of any of the provisions of this
Agreement, the remedies available to Buyer and the Company at law may be
inadequate, and hereby agrees that, in addition to any other remedies that
may be available to Buyer and the Company, Buyer and the Company shall be
entitled to obtain temporary or permanent injunctive relief without the
necessity of proving damages. Such remedies shall be cumulative and
nonexclusive and shall be in addition to any other remedy to which the
parties may be entitled (and shall be in addition to divestiture by Seller
pursuant to Section 2(b) hereof).
6. WAIVER. The failure of any party to insist, in any one or more
instances, upon performance of the terms or conditions of this Agreement
shall not be construed as a waiver or relinquishment of any right granted
hereunder or of the future performance of any such term, covenant or
condition. No waiver on the part of any party of any right, power or
privilege, nor any single or partial exercise of any such right, power or
privilege, shall preclude any further exercise thereof or the exercise of any
other such right, power or privilege.
7. NOTICES. Any notice to be given hereunder to any party hereto
or Person subject hereto shall be given in the manner provided in the
Reorganization Agreement (and shall be deemed to have been given as provided
therein), and otherwise as the Persons subject to this Agreement may
designate in writing delivered to the parties hereto.
8. REFORMATION. In the event a court of competent jurisdiction
determines that any of the covenants contained in Sections 2 or 3 or any
other provision hereof is unenforceable as written, the parties agree that
such court shall, for purposes of enforcing such covenant in such
jurisdiction, reform the scope of such covenant to the extent necessary to
render such covenant reasonable in scope under the circumstances then
obtaining, and that such covenant, as reformed, shall be enforceable in such
jurisdiction.
<PAGE>
9. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.
10. AMENDMENT. This Agreement may be amended, superseded,
canceled, renewed or extended, and the terms hereof may be waived, only by a
written instrument signed by each of the parties or, in the case of a waiver,
by the party waiving compliance.
11. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the substantive and procedural laws of the state
or other jurisdiction where enforcement is sought.
12. BINDING NATURE; ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors
and assigns and legal representatives. Neither this Agreement, nor any right
hereunder, may be assigned by Seller without the written consent of Buyer.
Any non-permitted assignment or attempted assignment shall be void.
13. HEADINGS. The headings in this Agreement are for reference
only, and shall not affect the interpretation of this Agreement.
14. ATTORNEYS' FEES. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged
dispute, breach, default or misrepresentation in connection with any of the
provisions of this Agreement, the successful or prevailing party shall be
entitled to recover reasonable attorneys' fees and other costs incurred in
that action or proceeding, in addition to any other relief to which it may be
entitled.
<PAGE>
15. INTERPRETATION. Each party has negotiated this Agreement at
arm's length and agrees that its terms shall not be construed or interpreted
in favor of or against any party.
IN WITNESS WHEREOF, Buyer, the Company and Seller have duly
executed and delivered this Agreement as of the date first above written.
"Buyer"
Pacific Coast Apparel Company, Inc.,
a California corporation
By
-------------------------------
Terrence L. McGovern,
Chairman and Chief Executive Officer
"Company"
Jodi Kristopher, Inc.,
a California corporation
By
-------------------------------
-------------------------------
[Printed Name and Title]
"Seller"
----------------------------
Alice Rosenberg
<PAGE>
CERTIFICATE OF DETERMINATION
of the
SERIES A PREFERRED STOCK
(WITHOUT PAR VALUE)
of
PACIFIC COAST APPAREL COMPANY, INC.
(Pursuant to Section 401 of the
General Corporation Law of the State of California)
----------------------------------------------
The undersigned, Terrence L. McGovern, does hereby certify that:
1. He is the duly elected and acting President and Chief Financial
Officer of Pacific Coast Apparel Company, Inc., a corporation
organized and existing under the General Corporation Law of the State
of California (the "Company").
2. The resolution attached hereto as Exhibit A was adopted by the Board
of Directors of the Company as required by Section 401 of the General
Corporation Law at a meeting duly called and held on ___________,
199_.
3. The number of shares of Series A Preferred Stock of the Company is
15,000, of which none have been issued.
<PAGE>
The undersigned further declares under penalty of perjury under the laws of
the State of California that the matters set forth in the Certificate of
Determination are true and correct of his own knowledge.
Executed at ____________, California
on __________, 199_
--------------------------------
Terrence L. McGovern,
President and Chief Financial Officer
<PAGE>
EXHIBIT A
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of this Company in accordance with the
provisions of the Company's Articles of Incorporation, as amended (the "Articles
of Incorporation"), this Board of Directors hereby authorizes the issuance of a
series of the serial Preferred Stock of the Company (the "Preferred Stock")
which shall consist of 15,000 shares of the Company's Preferred Stock, and
hereby fixes the powers, designations, preferences, and relative participating,
optional, or other special rights, and the qualifications, limitations, or
restrictions thereof, of the shares of such series (in addition to the powers,
designations, preferences, and relative participating, optional or other special
rights, and the qualifications, limitations, or restrictions thereof, set forth
in the Articles of Incorporation of the Company which are applicable to the
Preferred Stock) as follows:
Series A Preferred Stock:
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall
be designated as "Series A Preferred Stock" (the "Series A Preferred Stock")
and the number of shares constituting the Series A Preferred Stock shall be
15,000. Prior to the issuance of any such shares, such number of shares may
be increased or decreased by resolution of the Board of Directors.
Section 2. RANK. Series A Preferred Stock shall, with respect to
dividend rights and rights of liquidation, dissolution and winding up, rank
prior to all classes or series of common stock of the Company, including the
Company's Common Stock, without par value ("Common Stock"), and each other
class of capital stock of the Company, the terms of which provide that such
class shall rank junior to the Series A Preferred Stock (the "Junior
Preferred Stock"). All equity securities of the company to which the Series
A Preferred Stock ranks prior (whether with respect to dividends or upon
liquidation, dissolution, winding up or otherwise), including the Common
Stock and Junior Preferred Stock, are collectively referred to herein as the
"Junior Securities." All equity securities of the Company with which the
Series A Preferred Stock ranks on a parity (whether with respect to dividends
or upon liquidation, dissolution, winding up or otherwise) are collectively
referred to herein as the "Parity Securities." All equity securities of the
Company to which the Series A Preferred Stock ranks junior (whether with
respect to dividends or upon liquidation, dissolution, winding-up or
otherwise) are collectively referred to herein as the "Senior Securities."
The respective definitions of Junior Securities, Parity Securities and Senior
Securities shall also include any rights or options exercisable for, or
securities convertible into or exchangeable for, any of the Junior
Securities, Parity Securities and Senior Securities, as the case may be. The
Series A
<PAGE>
Preferred Stock shall be subject to the creation of Junior Securities, Parity
Securities, Senior Securities and, as provided in Section 3(b) hereof, any
Additional Shares of Series A Preferred Stock.
Section 3. DIVIDENDS.
(a) (i) The holders of shares of Series A Preferred Stock
shall be entitled to receive, when and as declared by the Board of Directors,
out of funds legally available for the payment of dividends, dividends in cash
at the rate of 8% per annum (computed on the basis of a 360 day year of twelve
30-day months) (the "Dividend Rate") on the Liquidation Value (as defined below)
of each share of Series A Preferred Stock on and as of the most recent Dividend
Payment Date (as defined below). Such dividends shall be payable quarterly on
March 15, June 15, September 15 and December 15 of each year (unless such day is
not a Business Day (as defined below)), in which event on the next succeeding
Business Day) (each of such dates being a "Dividend Payment Date" and each such
quarterly period being a "Dividend Period"). "Business Day" means any day except
a Saturday, Sunday or other day on which the New York Stock Exchange is closed.
The right to such dividends on the Series A Preferred Stock shall be cumulative,
and the right to receive such dividends shall accrue to the holders of Series A
Preferred Stock.
(ii) Each such dividend shall be payable in cash on the
Liquidation Value per share of the Series A Preferred Stock, in equal quarterly
amounts, to the holders of record of shares of the Series A Preferred Stock, as
they appear on the stock records of the Company at the close of business on such
record dates, not more than 60 days or less than 10 days preceding the payment
dates thereof, as shall be fixed by the Board of Directors.
(iii) Notwithstanding the foregoing, no dividend shall be
paid on the Series A Preferred Stock to the extent such dividend is prohibited
by law or by the terms of any agreements governing any loans or other credit
facilities received or entered into by the Company as in effect from time to
time.
(b) Holders of shares of Series A Preferred Stock shall not be
entitled to any dividends, whether payable in cash, property or stock, in excess
of the cumulative dividends, as herein provided, on the Series A Preferred
Stock. Except as provided in this Section 3, no interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment or
payments on the Series A Preferred Stock that may be in arrears.
(c) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends, except as described in the next succeeding sentence,
shall be declared or
<PAGE>
paid or set apart for payment or other distribution declared or made upon Parity
Securities for any period unless full cumulative dividends have been or
contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof set apart for such payment, on the Series A Preferred Stock
for all dividend periods terminating on or prior to the date of payment of the
dividend on such class or series of Parity Securities. When dividends are not
paid in full, or a sum sufficient for such payment is not set apart, as
aforesaid, all dividends declared upon shares of the Series A Preferred Stock
and all dividends declared upon any other class or series of Parity Securities
shall be declared ratably in proportion to the respective amounts of dividends
accumulated and unpaid on the Series A Preferred Stock and accumulated and
unpaid on such Parity Securities. In no event will cash dividends be paid on
Parity Securities when dividends are not payable in cash on the Series A
Preferred Stock. In addition, so long as any shares of the Series A Preferred
Stock are outstanding, no Parity Securities shall be redeemed, purchased or
otherwise acquired for any consideration (and no moneys shall be paid to or made
available for a sinking fund for the purchase or redemption of any shares of any
such stock) by the Company, directly or indirectly, except as described in the
next succeeding sentence or repurchases from employees, directors or consultants
pursuant to a plan or agreement approved by the Company's Board of Directors,
unless the Series A Preferred Stock has been redeemed, purchased or otherwise
acquired (or money paid to or made available for a sinking fund for such
redemption, purchase or acquisition) contemporaneously or a sum sufficient for
the redemption, purchase or acquisition thereof set apart for such redemption,
purchase or acquisition of the Series A Preferred Stock. When the shares of
Series A Preferred Stock are not redeemed, purchased, or otherwise acquired in
full or a sum sufficient for such redemption, purchase or acquisition is not set
apart, as aforesaid, all redemptions, purchases or acquisitions of shares of the
Series A Preferred Stock and all redemptions, purchases or acquisitions of any
other class or series of Parity Securities shall be effected, ratably in
accordance with the respective amounts that would be payable on such shares of
Series A Preferred Stock and any such Parity Securities if all amounts payable
thereon were paid in full.
(d) So long as any shares of the Series A Preferred Stock are
outstanding, no dividends (other than dividends or distributions paid in shares
of, or options, warrants or rights to subscribe for or purchase shares of,
Junior Securities) shall be declared or paid or set apart for payment or other
distribution declared or made upon Junior Securities, nor shall any Junior
Securities be redeemed, purchased or otherwise acquired, except for repurchases
from employees, directors or consultants pursuant to a plan or agreement
approved by the Company's Board of Directors.
<PAGE>
(e) Notwithstanding any other provision set forth herein, the
payment of dividends on the Series A Preferred Stock shall be subject to the
terms of the Senior Securities, if any.
Section 4. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation dissolution or winding up of
the Company, whether voluntary or involuntary, before any payment or
distribution of the assets of the Company (whether capital or surplus) shall be
made to or set apart for the holders of Junior Securities, the holders of the
shares of Series A Preferred Stock shall be entitled to receive an amount equal
to the Liquidation Value of such share plus any accrued and unpaid cash
dividends to the date of distribution. "Liquidation Value" on any date means,
with respect to any share of Series A Preferred Stock, $100.00. Except as
provided in the preceding sentences, holders of shares of Series A Preferred
Stock shall not be entitled to any distribution in the event of liquidation,
dissolution or winding up of the affairs of the Company. If, upon any
liquidation, dissolution or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable among the holders of the shares of
Series A Preferred Stock shall be insufficient to pay in full the preferential
amount aforesaid and liquidating payments on any Parity Securities, then such
assets, or the proceeds thereof, shall be distributed among the holders of
shares of Series A Preferred Stock and any such other Parity Securities ratably
in accordance with the respective amounts that would be payable on such shares
of Series A Preferred Stock and any such Parity Securities if all amounts
payable thereon were paid in full. For the purposes of this Section 4, (i) a
consolidation or merger of the Company with one or more corporations, or (ii) a
sale or transfer of all or substantially all of the Company's assets, shall not
be deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary, of the Company.
(b) Subject to the rights of the holders of any Parity
Securities, after payment shall have been made in full to the holders of the
Series A Preferred Stock, as provided in this Section 4, any other series or
class or classes or Junior Securities shall, subject to the respective terms and
provisions (if any) applying thereto, be entitled to receive any and all assets
remaining to be paid or distributed, and the holders of the Series A Preferred
Stock shall not be entitled to share therein.
(c) In the event the outstanding shares of Series A Preferred
Stock shall be combined or consolidated, by reclassification or otherwise, into
a lesser number of shares of Series A Preferred Stock, the Liquidation Value in
effect immediately prior to such combination or consolidation shall,
concurrently with the effectiveness of such combination or consolidation, be
proportionately increased.
<PAGE>
(d) In the event the Corporation effects a stock split or
subdivision with respect to the Series A Preferred Stock, the Liquidation Value
in effect immediately prior to such stock split or subdivision shall,
concurrently with the effectiveness of such stock split or subdivision, be
proportionately decreased.
(e) Notwithstanding any other provision set forth herein, the
rights of the Parity Securities and Junior Securities upon the liquidation,
dissolution or winding up of the Company shall be subject to the terms of the
Senior Securities, if any.
Section 5. REDEMPTION.
(a) REDEMPTION AT THE OPTION OF THE COMPANY. To the extent the
Company shall have funds legally available for such payment, the Company may, at
its option, redeem shares of Series A Preferred Stock, at any time in whole, or
from time to time in part, at redemption prices per share in cash equal to the
Liquidation Value, together with accrued and unpaid cash dividends thereon to
the date fixed for redemption, without interest.
(b) MANDATORY REDEMPTION. On or after _______, 2004, to the
extent the Company shall have funds legally available for such payment, upon the
affirmative vote of the holders of a majority of the outstanding shares of
Series A Preferred Stock, the Company shall redeem all outstanding shares of the
Series A Preferred Stock, at a redemption price equal to the aggregate
Liquidation Value, in cash, together with any accrued and unpaid cash dividends
thereon to the date fixed for redemption, without interest (the "Redemption
Price").
(c) STATUS OF REDEEMED SHARES. Shares of Series A Preferred
Stock which have been issued and reacquired in any manner, including shares
purchased or redeemed, shall (upon compliance with any applicable provisions of
the laws of the State of California) have the status of authorized and unissued
shares of the class of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of the Preferred Stock;
provided, that no such issued and reacquired shares of Series A Preferred Stock
shall be reissued or sold as Series A Preferred Stock, except as provided in
Section 3(b).
(d) FAILURE TO REDEEM. If the Company is unable or shall fail
to discharge its obligation to redeem all offered shares of Senior Preferred
Stock pursuant to paragraph 5(b) (a "Mandatory Redemption Obligation"), such
Mandatory Redemption
<PAGE>
Obligation shall be discharged as soon as the Company is able to discharge such
Mandatory Redemption Obligation. If and so long as any Mandatory Redemption
Obligation with respect to the Series A Preferred Stock shall not be fully
discharged, the Company shall not directly or indirectly, redeem, purchase, or
otherwise acquire any Junior Securities or Parity Security or discharge any
mandatory or optional redemption, sinking fund or other similar obligation in
respect of any Parity Securities (except in connection with a redemption,
sinking fund or other similar obligation to be satisfied pro rata with the
Series A Preferred Stock or as required pursuant to the terms of the Senior
Securities, if any).
(e) FAILURE TO PAY DIVIDENDS. Notwithstanding the foregoing
provisions of this Section 5, unless full cumulative accrued cash dividends
payable (whether or not declared) on all outstanding shares of Series A
Preferred Stock shall have been paid or contemporaneously are declared and paid
or set apart for payment for all Dividend Periods ending on or prior to the
applicable redemption date, none of the shares of Series A Preferred Stock shall
be redeemed, purchased or otherwise acquired and no sum shall be set aside for
such redemption, purchase or other acquisition.
Section 6. PROCEDURE FOR REDEMPTION.
(a) In the event that fewer than all the outstanding shares of
Series A Preferred Stock are to be redeemed pursuant to Sections 5(a) hereof,
the number of shares to be redeemed shall be determined by the Board of
Directors and the shares to be redeemed shall be redeemed PRO RATA (with any
fractional shares being rounded to the nearest whole share) according to the
number of whole shares held by each holder of the Series A Preferred Stock.
(b) In the event the Company shall redeem shares of Series A
Preferred Stock pursuant to Sections 5(a) or (b), notice of such redemption
shall be given by first class mail, postage prepaid, mailed not less than 10
days nor more than 60 days prior to the redemption date, to each holder of
record of the shares to be redeemed at such holder's address as the same appears
on the stock register of the Company; provided, that neither the failure to give
such notice nor any defect therein shall affect the validity of the giving of
notice for the redemption of any share of Series A Preferred Stock to be
redeemed, except as to the holder to whom the Company has failed to give said
notice or whose notice was defective. Each such notice shall state: (i) the
redemption date; (ii) the number of shares of Series A Preferred Stock to be
redeemed and, if fewer than all the shares held by such holder are to be
redeemed, the number of shares to be redeemed from such holder; (iii) the
redemption price; (iv) the place or places where certificates for such shares
are to
<PAGE>
be surrendered for payment of the redemption price; and (v) that dividends on
the shares to be redeemed will cease to accrue on such redemption date.
(c) In the case of any redemption pursuant to Sections 5(a) or
(b) hereof, notice having been mailed as provided in Section 6(b) hereof, from
and after the redemption date (unless default shall be made by the Company in
providing money for the payment of the redemption price of the shares called for
redemption), dividends on the shares of Series A Preferred Stock so called for
redemption shall cease to accrue and all rights of the holders thereof as
shareholders of the Company (except the right to receive from the Company the
Redemption Price) shall cease. Upon surrender, in accordance with said notice,
of the certificates for any shares so redeemed (properly endorsed or assigned
for transfer, if the Board of Directors of the Company shall so require and the
notice shall so state), such shares shall be redeemed by the Company at the
Redemption Price. In case fewer than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof.
Section 7. AMENDMENT. This Certificate of Determination shall not be
amended in any manner which would materially alter or change the powers,
preferences or special rights of the Series A Preferred Stock so as to affect
them adversely without the affirmative vote of the holders of at least a
majority of the outstanding shares of Series A Preferred Stock.
<PAGE>
CERTIFICATE OF
SHAREHOLDER
OF
JODI KRISTOPHER, INC.
Jan Smith ("Smith"), as a shareholder of Jodi Kristopher, Inc. (the
"Company"), does hereby, pursuant to Section 8.13 of that certain Reorganization
Agreement dated as of November 17, 1998 (the "Agreement"), by and among Pacific
Coast Apparel Company, Inc., a California corporation ("Buyer"), the Company,
Ira Rosenberg and Alice Rosenberg, represent, warrant, certify and agree, for
the benefit of Buyer, that:
1. Smith has read and is familiar with the terms of the Agreement, and
acknowledges that he will materially benefit from the consummation of
the transactions contemplated thereby and that Buyer's obligation to
consummate the same is conditioned upon, among other things, Smith's
execution and delivery to Buyer of this Certificate. Defined terms
not defined herein shall have the meaning set forth in the Agreement.
2. Upon the execution and delivery by Smith of (i) a Shareholders'
Release (as defined in Section 8.12 of the Agreement), (ii) an
Employment Agreement with the Company in the form attached hereto, and
(iii) this Certificate (collectively, "Smith's Documents"), Smith's
Documents will constitute the legal, valid and binding obligations of
Smith, enforceable against Smith in accordance with their respective
terms. Smith has the absolute and unrestricted right, power,
authority and capacity to execute and deliver Smith's Documents and to
perform his obligations under Smith's Documents.
3. Smith's execution, delivery and performance of Smith's Documents and
the consummation by Smith of the transactions contemplated therein,
(i) do not constitute a default or breach (immediately or after the
giving of notice and passage of time, or both) under any agreement to
which Smith is a party or to which he or by which he is bound, (ii) do
not constitute a violation of any applicable law, rule, statute,
judgment or order that is applicable to him, (iii) do not result in
the creation of a lien or other encumbrance upon, or give to any third
party any interest in any of his shares of the capital stock of the
Company, except for restrictions generally imposed on transfer by
federal and state securities laws, and (iv) do not require the consent
of any governmental entity or third party.
<PAGE>
4. Smith (i) is the sole record and beneficial owner (subject to
community property laws) of all of his shares of capital stock of the
Company, (ii) has good and marketable title to such shares free and
clear of any lien or other encumbrance, and (iii) has the full and
legal right to transfer good and marketable title to such shares free
and clear of any encumbrance and, upon the acquisition of such shares
by Buyer under the terms of the Agreement, Buyer shall have good and
marketable title to all of the shares of the Company's capital stock
owned by Smith immediately prior to such sale.
5. No representation or warranty of Smith in this Certificate omits to
state a material fact necessary to make the statements herein, in
light of the circumstances in which they were made, not misleading.
6. Smith and his agents have not incurred any obligation or liability,
contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with the
transactions contemplated by the Agreement.
7. The PCAC Shares to be issued to Smith under the Agreement are being
acquired for his own account and not on behalf of any other person,
and all such PCAC Shares are being acquired by Smith for investment
purposes only and not with a view to, or for sale in connection with,
any resale or distribution of such PCAC Shares. Smith has received
and examined Buyer's most recent Proxy Statement, Buyer's Annual
Report on Form 10-KSB for the year ended September 30, 1997, Buyer's
1997 Annual Report to Stockholders and Buyer's Quarterly Report on
Form 10-QSB for the quarters ended December 31, 1997, March 30, 1998
and June 30, 1998. Smith has had the opportunity to ask questions and
receive answers from Buyer concerning Buyer, and has been furnished
with all other information about Buyer which he has requested. Smith
is an "accredited investor" as defined in Rule 501(a) of the
Securities Act, as amended, has been fully apprised of all facts and
circumstances necessary to permit him to make an informed decision
about acquiring the PCAC Shares, has sufficient knowledge and
experience in business and financial matters so that he is capable of
evaluating the merits and risks of an investment in the PCAC Shares
and has the capacity to protect his own interests in connection with
the transactions contemplated by this Agreement. Smith has been
advised by Buyer and understands that (a) the PCAC Shares to be issued
under the Agreement will not be registered under any securities laws,
including without limitation, the securities laws of the United States
or any other jurisdiction, (b) such PCAC Shares must be held
indefinitely unless and until they are subsequently registered or an
exemption from registration becomes available, (c) Buyer is under no
obligation to register the PCAC
<PAGE>
Shares except as required by Section 12.15 of the Agreement, (d) the
PCAC Shares shall bear appropriate restrictive legends, (e) Buyer
shall have the right to place a stop order against such shares, and
(f) the PCAC Shares shall be "restricted securities" under Rule 144
of the Securities Act.
8. Smith will indemnify and hold harmless Buyer and the other Buyer
Indemnified Persons for, and will pay to the Buyer Indemnified Persons
the amount of, any Damages, arising, directly or indirectly, from or
in connection with any breach by Smith of any representation or
warranty made by Smith in this Certificate or in any of the Smith's
Documents or any Breach by Smith of any covenant or obligation of
Smith in this Certificate or any of Smith's Documents. The remedies
provided in this Certificate will not be exclusive of or limit any of
the remedies that may be available to Buyer.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as
of ___________, 1999.
-------------------------------
Jan Smith
<PAGE>
______________, 1998
Mr. Terry McGovern
______________________
______________________
Re: Employment Agreement
--------------------
Dear Terry:
When executed by you ("Executive") and by a duly authorized representative
of Pacific Coast Apparel Company, Inc., a California Corporation ("Company"),
this Employment Agreement (the "Agreement") will set forth the terms and
conditions of Executive's employment.
1.1 SERVICES
1.1 EMPLOYMENT. Company employs Executive during the Term (as hereinafter
defined) to serve as Vice President and Chairman of the Board of Directors
("Services"). Executive shall comply with all of the reasonable and customary
employment policies of the Company. The Services shall be performed a minimum
of four (4) days per week at the principal offices of Company in Los Angeles,
California, and a maximum of one (1) day per week at Executive's office in
Kentfield, California. In addition, the Services may be performed by Executive
from time to time on a temporary travel basis at such other locations as Company
shall reasonably request consistent with the reasonable business needs of the
Company. Executive agrees to perform such Services in a competent and
professional manner, consistent with the skills to be possessed by a senior
executive officer in Company's business.
1.2 REPORTING REQUIREMENTS. Executive shall report to the President and
Chief Executive Officer of Company.
1.3 DUTIES. Executive shall be employed as the Chairman of the Board of
Directors of Company. Executive's duties and responsibilities shall be
determined by the President and Chief Executive Officer. As part of his duties
hereunder, Executive shall be responsible for researching acquisitions,
soliciting potential investors and arranging debt and/or equity financing for
Company.
1.4 TERM/EXCLUSIVITY
1.4.1 The Term of this Agreement shall commence on the date hereof
and shall continue for a period of one (1) year, unless sooner terminated in
accordance with the provisions of this Agreement (the "Initial Term"). If,
during the course of the Initial Term, there is a successful acquisition by
Company, this Agreement shall be automatically renewed for an
<PAGE>
additional period of one (1) year. Thereafter, this Agreement shall
automatically renew for additional successive one (1) year periods if, during
the preceding contract year, Company has made a successful acquisition. As used
herein, "Term" shall refer to the Initial Term, and any extensions thereof, if
any.
1.4.2 The Services shall be rendered on a full time basis.
1.4.3 Notwithstanding anything to the contrary herein, Executive may
own (without violating the terms hereof):
A. securities of any corporation which are registered under
Sections 12(b) or 12(g) of the Securities Exchange Act of 1934 and which are
publicly traded as long as Executive is not part of any control group of such a
corporation which is directly or indirectly in competition with Company; and
B. any securities of a partnership, trust, corporation or other
person so long as Executive remains a passive investor in that entity and does
not become part of any control group thereof (except in a passive capacity) and
so long as such entity is not, directly or indirectly, in competition with
Company.
1.5 CONFIDENTIALITY. Executive acknowledges that his services will,
throughout the Term, bring Executive into close contact with many confidential
affairs of Company, including, without limitation, information about customers,
employees, general business practices or strategies, costs, profits, markets,
sales, products, key personnel, pricing policies, operational methods, technical
processes and other business affairs and methods and other information not
readily available to the public, and plans for future development ("Company
Information"). In recognition of the foregoing, Executive covenants and agrees:
1.5.1 that Executive will keep secret all Company Information and
confidential matters of Company and will not disclose Company Information to
anyone outside of Company, or use any such Confidential Information, either
during or after the Term, except with Company's written consent and except for
such disclosure or use as is necessary in the performance of Executive's duties
during the Term or as may otherwise be required by law; and
1.5.2 that Executive will deliver promptly to Company on termination
of the Term or at any other time Company may so request, at Company's expense,
all memoranda, notes, records, reports, other documents and physical
representations(and all copies thereof) relating to Company Information, which
Executive obtained while employed by, or otherwise serving or acting on behalf
of, Company or which Executive may then possess or have under his control.
1.6 INDEMNIFICATION. With respect to matters which occur during the Term,
Executive shall be entitled to indemnification consistent with Company policy,
as contained on the date hereof in the Bylaws of Company or to the fullest
extent permitted by law, whichever is greater, notwithstanding any future
changes therein, to the extent permitted by applicable law at the time of the
assertion of any liability against Executive.
<PAGE>
2. COMPENSATION
As compensation and consideration for all Services provided by Executive
during the Term pursuant to this Agreement, Company agrees to pay to Executive
the compensation set forth below.
2.1 FIXED ANNUAL COMPENSATION. Executive shall receive a fixed annual
compensation ("Fixed Annual Compensation") in the amount of One Hundred Ninety
Two Thousand Dollars ($192,000.00) per annum. Executive's Fixed Annual
Compensation shall be payable in equal installments on Company's regular pay
dates commencing after the date hereof, subject to any withholding which Company
may make for income tax or other purposes as may be required by law or as
requested by Executive. The Fixed Annual Compensation will be reviewed by the
President and Chief Executive Officer not less frequently then annually, and may
be adjusted in the sole and absolute discretion of the President and Chief
Executive Officer.
2.2 INCENTIVE COMPENSATION. In addition to Fixed Annual Compensation,
Executive may receive a discretionary incentive bonus ("Incentive Compensation")
at the sole and absolute discretion of the President and Chief Executive Officer
of Company. There is no guaranty of any Incentive Compensation.
2.3 ADDITIONAL BENEFITS. In addition to and without limiting any other
provision hereof, Executive shall be entitled to participate in any
profit-sharing, pension, health, including dependent coverage, vacation,
insurance or other plans, benefits or policies available from time to time to
the senior executive employees of Company and not duplicative (or specifically
excluded or waived herein) of those provided herein on the terms generally
applicable to such employees. Executive will be entitled to reimbursement of
his reasonable and customary and documented business expenses incurred on behalf
of Company or company's Affiliates, including business class air travel, in
accordance with the Company's reimbursement policies as in effect from time to
time. Company shall provide Executive with an automobile and mobile telephone,
mutually acceptable to Executive and Company, for business purposes. Company
shall be responsible for all costs associated with such automobile, including
but not limited to, the maintenance, repair and insurance thereof (collectively
"Additional Benefits").
2.4 VACATION. During each year of the Term, Executive shall be
entitled to three (3) weeks of paid vacation in accordance with the Company's
vacation policy as in effect from time to time.
3. TERMINATION
3.1 TERMINATION BY COMPANY.
3.1.1 EXECUTIVE'S MATERIAL BREACH. Company shall have the right,
at its election, to terminate Executive's employment by the Company for cause,
by written notice to Executive. "Cause" is defined for this purpose to mean
(i) material and repeated instances of misconduct or habitual violation of
Company's published policies or procedures; (ii) a single willful act so
<PAGE>
grievous as to constitute the equivalent of such repeated instances, including,
without limitation, the commission of a felony, theft, misappropriation of
Company's assets or sexual harassment; (iii) willful unauthorized disclosure of
Company Information; (iv) a material breach of any material covenant, condition,
agreement or term of this Agreement; (v) Executive's breach of any of his
fiduciary duties of loyalty to Company; or (vi) willful and material failure to
obey any specific lawful direction from the President and Chief Executive
Officer ("Executive's Material Breach"); "Cause" and "Executive's Material
Breach" shall be deemed to exist as a result of the circumstances described in
any of the clauses (i), (iv) and (vi) above only if Company shall have given
written notice to Executive specifying the claimed cause or breach, and,
provided such cause or breach is curable, Executive fails to correct the claimed
breach or fails to alter the objectionable pattern of conduct specified in the
applicable written notice as soon as practical thereafter, to the satisfaction
of the Board of Directors, but no later than thirty (30) days after receipt of
the applicable written notice or such longer time as may be reasonably required
by the nature of the claimed cause or breach, but in no event more than sixty
(60) days.
3.1.2 EARLY TERMINATION. Company shall also have the right, at its
election, to terminate Executive's employment prior to expiration of the Term
without Cause, by thirty (30) days prior written notice to Executive.
3.1.3 EFFECT OF TERMINATION BY COMPANY. Should the Term be
terminated by Company pursuant to paragraphs 3.1.1 or 3.1.2, Company shall pay
to Executive the remaining Fixed Annual Compensation for the balance of the
applicable period (i.e., the Initial Term, the First Extension Period or the
Second Extension Period) of the Term had Executive's employment not been
terminated by Company, subject to any withholding which Company may make for
income tax or other purposes as required by law or requested by Executive.
Except as set forth in this paragraph 3.1.3, Executive shall have no right to
any further Fixed Annual Compensation from and after termination, or to any
Incentive Compensation, or Additional Benefits accruing from the date of
termination or thereafter.
3.2 TERMINATION BY EXECUTIVE.
3.2.1. COMPANY'S MATERIAL BREACH. Executive shall have the right,
at his election, to terminate employment by written notice to Company to that
effect if Company shall have failed to substantially perform a material
condition or covenant of this Agreement ("Company's Material Breach"); provided,
and, if such breach is curable, termination for Company's Material Breach will
not be effective until Executive shall have given written notice specifying the
claimed breach and Company fails to correct the claimed breach within thirty
(30) days after the receipt of the applicable notice or such longer time as may
be reasonably required by the nature of the claimed breach.
3.2.2 EFFECT OF TERMINATION BY EXECUTIVE. Should the Term be
terminated by Executive by reason of Company's Material Breach, Company shall
immediately pay to Executive all of Executive's Fixed Annual Compensation
subject to any withholding which Company may make for income tax or other
purposes as required by law or requested by Executive. Except as set forth in
this paragraph 3.2.4, Executive shall have no right to any further Fixed Annual
<PAGE>
Compensation from and after termination, or to any Additional Benefits accruing
from the date of termination or thereafter.
3.3 EXECUTIVE'S DEATH OR DISABILITY.
3.3.1 DEATH. The Term shall immediately terminate upon Executive's
death.
3.3.2 DISABILITY. As used herein, the term "Disability" shall mean
Executive becoming materially unable to perform the Services as a result of his
permanent or temporary, total or partial, physical or mental disability
continuing for any six (6) consecutive months ("Disability Period") as may be
determined solely by a physician selected by Company and Executive whose
decision shall be conclusive and binding upon both the Company and the
Executive. The Term shall terminate at the end of the Disability Period.
3.3.3 EFFECT OF DEATH OR DISABILITY.
A. FIXED ANNUAL COMPENSATION AND ADDITIONAL BENEFITS. Should
the Term be terminated in accordance with the provisions of Paragraphs 3.3.1 or
3.3.2 by reason of Executive's death or Disability, Executive or his estate (as
the case may be) shall be entitled to receive Fixed Annual Compensation that
would have accrued prior to termination of Executive's employment as a result of
his death or disability, and Executive or his estate (as the case may be) shall
not accrue any Additional Benefits accruing to Executive after the date of
termination.
B. Company shall not have the right to terminate the Term due
to Disability prior to the expiration of the Disability Period.
4. STOCK OPTIONS. Executive shall be eligible to receive, at the discretion
of the Board of Directors of the Company, grants of stock options or awards or
similar benefits as may be adopted by the Company from time to time ("Stock
Options").
5. EXECUTIVE'S REPRESENTATIONS AND WARRANTIES. Executive represents and
warrants to the Company that Executive has the capacity to execute, deliver and
perform this Agreement, and that the execution, delivery and performance of this
Agreement will not result in a breach of any contract or agreement to which
Executive is a party or is bound. Executive agrees to indemnify the Company for
any and all claims, demands, damages, liabilities, losses, and causes of actions
arising out of a breach by Executive of the foregoing representations and
warranties.
6. GENERAL
6.1 APPLICABLE LAW CONTROLS. Nothing contained in this Agreement shall be
construed to require the commission of any act contrary to law and wherever
there is any conflict between any provisions of this Agreement and any material
statute, law, ordinance or regulation, then the latter shall prevail; provided,
however, that in any such event the provisions of this Agreement so affected
shall be curtailed and limited only to the extent necessary to bring them within
applicable legal requirements, and provided further that if any obligation to
pay the Fixed Annual
<PAGE>
compensation or any other amount due Executive hereunder is so curtailed, then
such compensation or amount shall be paid as soon thereafter, either during or
subsequent to the Term, as permissible.
6.2 WAIVER/ESTOPPEL. Any party hereto may waive the benefit of any term,
condition or covenant in this Agreement or any right or remedy at law or in
equity to which any party may be entitled but only by an instrument in writing
signed by the parties to be charged. No estoppel may be raised against any
party except to the extent the other party relies on an instrument in writing,
signed by the party to be charged, specifically reciting that the other party
may rely thereon. The parties' rights and remedies under and pursuant to this
Agreement or at law or in equity shall be cumulative and the exercise of any
rights or remedies under one provision hereof or rights or remedies at law or in
equity shall not be deemed an election of remedies; and any waiver or
forbearance of any breach of this Agreement or remedy granted hereunder or at
law or in equity shall not be deemed a waiver of any preceding or succeeding
breach of the same or any other provision hereof or of the opportunity to
exercise such right or remedy or any other right or remedy, whether or not
similar, at any preceding or subsequent time.
6.3 NOTICES. Any notice which Company is required or may desire to give
to Executive hereunder shall be in writing and may be served by delivering it to
Executive personally, or by sending it to Executive by certified mail, telex,
telecopy or telegraph, at the address set forth on page 1 hereof, or such
substitute address as Executive may from time to time designate by notice to
Company. Any notice which Executive is required or may desire to serve upon
Company hereunder shall be served in writing and may be served by delivering it
personally or by sending it by mail, telex or telegraph to the address set forth
on page 1 hereof, attention of the President, or such other substitute addresses
as Company may from time to time designate by notice to Executive, with copies
to Jeffrey Kapor, Esq., Katz, Hoyt, Seigel & Kapor, 11111 Santa Monica
Boulevard, Suite 820, Los Angeles, California 90025-3342. Any notices or
communications sent by telex or telecopy shall be also sent by mail.
6.4 GOVERNING LAW. This Agreement shall be governed by, construed and
enforced and the legality and validity of each term and condition shall be
determined in accordance with the internal, substantive laws of the State of
California applicable to agreements fully executed and performed entirely in
California.
6.5 MODIFICATION/ENTIRE AGREEMENT. This Agreement may not be altered,
modified or amended except by an instrument in writing signed by all of the
parties hereto. No person, whether or not an officer, agent, employee or
representative of any party, has made or has any authority to make for or on
behalf of that party any agreement, representation, warranty, statement,
promise, arrangement or understanding not expressly set forth in this Agreement
or in any other document executed by the parties concurrently herewith ("Parol
Agreements"). This Agreement and all other documents executed by the parties
concurrently herewith constitute the entire agreement between the parties and
supersede all express or implied, prior or concurrent, and prior written
agreements with respect to the subject matter hereof.
<PAGE>
6.6 ARBITRATION. Notwithstanding anything to the contrary contained
herein, any claim, dispute or controversy arising out of, or relating to any
section of this Agreement (other than Section 1.6) or the making, performance,
or interpretation of the rights and obligations explicitly set forth in this
Agreement (other than Section 1.6), including, without limitation, the
determination of "good cause", shall, by written notice of either Executive or
Company, be settled on an expedited basis by binding arbitration in California
before a single arbitrator mutually agreeable to the parties hereto, and if no
agreement is reached, before three arbitrators selected in accordance with the
Rules of the American Arbitration Association then in effect, which arbitration
shall be conducted in accordance with such Rules, and judgment on the
arbitration award may be entered in any court having jurisdiction over the
subject matter of controversy. The arbitrator's decision shall be
non-reviewable except for gross errors of law. The arbitrator shall not have
the power to amend this Agreement in any respect or to award punitive or
exemplary damages. Any payments to be made as a result of such arbitration
shall include interest.
Please confirm your agreement to the foregoing by signing below where
indicated.
Very truly yours,
Pacific Coast Apparel Company, Inc.,
a California corporation
By
------------------------------------
AGREED AND ACCEPTED
this ____ day of _____________, 1998:
- --------------------------------------------
TERRY McGOVERN
<PAGE>
REGISTRATION RIGHTS
1. CERTAIN DEFINITIONS. The following terms have the following
respective meaning when used in this Schedule 1:
1.1 "HOLDERS" means Ira Rosenberg, Alice Rosenberg, Jan Smith and any
permitted transferee hereof in accordance with Section 8 hereof.
1.2 "PERSON" means an individual, partnership, corporation (including
a business trust), joint stock company, limited liability company, trust,
unincorporated association, joint venture or other entity.
1.3 "REGISTRABLE SECURITIES" means (a) those certain shares of the
common stock of Pacific Coast Apparel Company, Inc., a California corporation
("PCAC"), issued to Holders in accordance with the terms of that certain
Reorganization Agreement, dated as of November __, 1998 (the "Reorganization
Agreement"), by and between Holders and PCAC; (b) any Common Stock of the
Company issued as a dividend or other distribution with respect to, or in
exchange for or in replacement of the shares referenced in (a) or (c) any other
securities issued with respect to the shares referenced in (a) above pursuant to
any stock split, stock dividend, recapitalization, merger, consolidation or
similar event; provided, that the Shares shall cease to be Registrable
Securities when (i) a registration statement covering such Registrable
Securities has been declared effective under the Securities Act by the SEC and
such Registrable Securities have been disposed of pursuant to such effective
registration statement or (ii) the entire amount of Registrable Securities
proposed to be sold in a single sale are, or in the opinion of counsel
satisfactory to Company and Holders, each in their respective reasonable
judgment, may be distributed to the public without restriction pursuant to Rule
144 (or any successor provisions that are in effect) under the Securities Act.
1.4 "REGISTRATION EXPENSES" means all expenses incident to PCAC's
performance of or compliance with Section 2, including, without limitation, all
registration, qualification, listing and filing fees applicable to any sale of
Registrable Securities (including without limitation fees relating to
registration or qualification under the "blue sky" or securities laws of any
jurisdiction designated by Holders), duplicating and printing expenses,
messenger and delivery expenses and expenses associated with any
<PAGE>
communications with Holders required or permitted hereunder, including without
limitation the cost of mailing such communications to Holders. "Registration
Expenses" will also include the fees and disbursements of counsel and
independent accountants of PCAC and of one, but not more than one, separate
counsel for any selling Holders as a group, and any internal costs of PCAC not
specifically referred to above.
2. REGISTRATION.
2.1 DEMAND REGISTRATION. If at any time after __________, 2004 the
Company receives a written request from the Holders representing at least
66 2/3% of the Registrable Securities, to effect a registration with respect to
any or all of the Registrable Securities, the Company will do the following:
(a) Within ten days of receipt of the request from the Holders
initiating the request for registration, give written notice of the
proposed registration to the Holders who did not initiate the request for
registration.
(b) As soon as practicable, but in no event more than 180 days,
effect the requested registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the
Securities Act) to permit or facilitate the sale and distribution of
(i) all Registrable Securities specified in such request, (ii) all
Registrable Securities of non-initiating holder(s) joining in such request
that have been identified in a written request by the non-initiating
holders (subject to limitation in accordance with Section 5 below) within
30 days after receipt of such written notice from the Company and (iii)
securities proposed to be sold by the Company for its own account.
(c) The Holders shall be entitled to one registration under this
Section 2.1. In the event that the Holders participating in such
registration determine for any reason (other than at the request or
recommendation of the Company or the managing underwriters) not to proceed
with a registration of Registrable Securities requested pursuant to this
Section 2.1 at any time before the registration statement has been declared
effective by the Commission, and such registration statement, if
theretofore filed with the Commission, is withdrawn with respect to the
Registrable Securities covered thereby, and such Holders participating in
such registration agree to reimburse the Company for the fees, costs and
expenses incurred by it in connection therewith, then the Holders
participating in such registration shall not be deemed to have exercised
their right
<PAGE>
to require the Company to register Common Stock pursuant to this
Section 2.1. If the Holders participating in such registration determine
not to proceed with such a registration upon the request or recommendation
of the Company or the managing underwriters, such Holders shall not be
required to reimburse the Company for its fees, costs and expenses and the
Holders shall not be deemed to have exercised their right to require the
Company to register Registrable Securities pursuant to this Section 2.1.
The Company shall not, without the prior written consent of the Holders
holding more than 50% of the Registrable Securities then held by all
Holders, effect any registration of its securities (other than on Form S-4
or Form S-8) from the date the Company receives a request pursuant to this
Section 2 until the earlier of (i) 90 days after the date on which all
securities covered by such request have been sold or (ii) 180 days after
the effective date of the registration statement covering such securities.
2.2 PIGGY BACK REGISTRATION. If PCAC proposes to file a registration
statement under the Securities Act with respect to an offering by PCAC for
(a) its own account of any class of its securities (other than a registration
statement on Form S-4 or S-8 or any successor or other forms not available to
register capital stock to sell to the public), or (b) or on the account of
security holders exercising demand registration rights, PCAC shall give written
notice of such proposed filing to Holders at least 30 days before the
anticipated filing date, and such notice shall describe in detail the proposed
registration and distribution (including those jurisdictions under which
registration under the securities or blue sky laws is intended) and offer
Holders the opportunity to register such number of Registrable Securities as
Holders may request, and shall use its best efforts (within ten days of the
notice provided for in the preceding sentence) to cause the managing underwriter
or underwriters of a proposed underwritten offering (the "Company Underwriter")
to permit Holders to participate in the registration and to include such
Registrable Securities in such offering on the same terms and conditions as the
securities of PCAC included therein. Notwithstanding the foregoing, if the
Company Underwriter delivers a written opinion to Holders that the total amount
or kind of securities which Holders, PCAC and any other persons or entities are
intending to register in such offering (the "Total Securities") is sufficiently
large so as to have a material adverse effect on the distribution of the Total
Securities, the amount or kind of securities to be offered for the account of
Holders and such other persons or entities (but not PCAC) shall be reduced pro
rata first among the participating shareholders other than the Holders, and
second among the Holders, to the extent necessary to reduce the Total Securities
to the number recommended by the Company Underwriter. Holders shall sell
Registrable Securities in such registered offering solely in compliance with the
terms and conditions agreed to between the Company and the Company Underwriter.
Holders agree that it shall enter into any holdback or lock up agreements
required by the Company Underwriter, not to
<PAGE>
exceed 180 days following the filing of the applicable registration of
statement, with respect to the sale by such Holders of Shares and Option Shares
to the extent that the directors, executive officers and 10% or greater
shareholders of PCAC are similarly required to enter into such lock up or
holdback agreement. There shall be no limitation on the number of registrations
which may be obtained with respect to piggyback registration pursuant to this
Section 2.2.
3. REGISTRATION PROCEDURES.
(a) PCAC will use all reasonable efforts to effect the
registration and qualification of the Registrable Securities as provided in
Section 2 and in connection therewith, PCAC shall:
(i) prepare and file and use all reasonable efforts to
cause to become effective a registration statement under the
Securities Act regarding the Registrable Securities to be offered;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the
Securities Act with respect to the disposition of all Registrable
Securities until such time as PCAC has effected its distribution of
securities thereunder;
(iii) furnish to Holders and to any underwriter of such
Registrable Securities such number of conformed copies of such
registration statement and of each such amendment and supplement
thereto, such number of copies of the prospectus included in such
registration statement (including each preliminary prospectus and any
summary prospectus) or filed under Rule 424(b) under the Securities
Act in accordance with Rule 430A thereunder, in conformity with the
requirement of the Securities Act, such documents incorporated by
reference in such registration statement or prospectus, and such other
documents, as Holders or any such underwriter may reasonably request;
(iv) use all reasonable efforts to register or qualify all
Registrable Securities covered by such registration statement under
such "blue sky" or other securities law of such jurisdictions as
Holders or any underwriter of such Registrable Securities will
reasonably request, and to any and all other acts and things which may
be necessary to enable Holders
<PAGE>
or any underwriter to consummate the disposition in such jurisdictions
of the Registrable Securities covered by such registration statement,
except that PCAC shall not for any such purpose be required to qualify
generally to do business as a foreign corporation in any jurisdiction
wherein it is not so qualified, or to subject itself to taxation in
any such jurisdiction or to consent to general service of process in
any such jurisdiction;
(v) if the Company's Common Stock is then listed on a
securities exchange or quoted on an automated quotation system, use
all reasonable efforts to include the Registrable Securities in such
listing or quotation;
(vi) promptly notify Holders at any time when a prospectus
relating to a registration pursuant to Section 2 is required to be
delivered under the Securities Act, of the occurrence of any event as
a result of which the prospectus included in such registration
statement as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing, and at the
request of Holders prepare and furnish to Holders a reasonable number
of copies of a supplement to or an amendment of such prospectus as may
be necessary so that, as thereafter delivered to the purchasers of
such Registrable Securities, such prospectus will not include an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statement
therein not misleading in the light of the circumstances then
existing; and
(vii) furnish to Holders a signed counterpart, addressed to
the selling Holder, of "comfort" letters signed by PCAC's independent
public accountants who have examined and reported on PCAC's financial
statements included in the registration statement, to the extent
permitted by the standards of the AICPA or other relevant authorities,
covering substantially the same matters with respect to the
registration statement (and the prospectus included therein) and (in
the case of the accountants' "comfort" letters) with respect to events
subsequent to the date of the financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' "comfort"
letters delivered to the underwriters in underwritten public offerings
of securities.
<PAGE>
PCAC may require Holders to furnish to PCAC such information regarding
Holders and the distribution of such securities as PCAC may from time to time
reasonably request in writing and as will be required by law or by the SEC in
connection with any registration.
(b) Holders will, upon receipt of any notice from PCAC of the
occurrence of any event of the kind described in Section 3(a)(v) hereof,
discontinue disposition of Registrable Securities pursuant to the
registration statement covering such Registrable Securities until Holders'
receipt of the copies of the supplemented or amended prospectus
contemplated by Section 3(a)(v) hereto. The period of time during which
PCAC will be obligated to maintain the effectiveness of a registration
statement under Section 3(a)(ii) above shall be extended by the number of
days of any such discontinuance.
4. INDEMNIFICATION AND CONTRIBUTION.
(a) In the event of any registration of any Registrable
Securities hereunder, PCAC will enter into customary indemnification
arrangements to indemnify and hold harmless Holders or any person who
participates as an underwriter in the offering or sale of such securities,
each officer and director of each underwriter, and each other person, if
any, who "controls" Holders or any such underwriter within the meaning of
the Securities Act against any losses, claims, damages, liabilities and
expenses, joint or several, to which such person may be subject under the
Securities Act or otherwise insofar as such losses, claims, damages,
liabilities (or actions, proceedings or settlements in respect thereof) or
expenses arise out of or are based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in any registration
statement under which such securities were registered under the Securities
Act, any preliminary prospectus or final prospectus included therein or
filed under Rule 424(b) in accordance with Rule 430A under the Securities
Act, or any amendment or supplement thereto, or any document incorporated
by reference therein, or any other document incident to such registration,
qualification and compliance, or (ii) any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and amounts paid in settlement
approved by PCAC, provided, however, that PCAC will not be liable in any
such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arising out of or is
based upon any untrue statement or alleged untrue statement, any such
preliminary prospectus or final prospectus, amendment or supplement in
reliance upon and in conformity with written information furnished to PCAC
by Holders or such
<PAGE>
underwriter for use in the preparation thereof. Such indemnity will remain
in full force and effect regardless of any investigation made by or on
behalf of Holders or any such underwriter and will survive the transfer of
such securities by Holders. PCAC also will agree to provide for
contribution as will be reasonably requested by Holders or any underwriters
in circumstances where such indemnity is held unenforceable.
(b) Holders, by virtue of exercising their registration rights
hereunder, will enter into customary indemnification arrangements to
indemnify and hold harmless (in the same manner and to the same extent as
set forth in paragraph (a) of this Section 4) PCAC, each director and each
officer of PCAC who will sign such registration statement, against any
losses, claims, damages, liabilities and expenses, joint or several, to
which such person may be subject under the Securities Act or otherwise
insofar as such losses, claims, damages, liabilities (or actions or
proceedings in respect thereof) or expenses arise out of or are based upon
(i) any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such securities were
registered under the Securities Act, any preliminary prospectus or final
prospectus included therein or filed under Rule 424(b) in accordance with
Rule 430A under the Securities Act, or any amendment or supplement thereto,
or any document incorporated by reference therein, or (ii) any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
only to the extent that any such loss, claim, damage, liability (or action
or proceeding in respect thereof) or expense arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, any such preliminary
prospectus or final prospectus, amendment or supplement, in reliance upon
and in conformity with written information specifically furnished to PCAC
by Holders for use in the preparation thereof; provided, however, that
(i) the obligations of Holders will be limited to the amount of net
proceeds (after Registration Expenses) to each such Holder and (ii) Holder
shall not be liable for amounts paid in settlement of such loss if
settlement is effected without consent of Holder. Such indemnity will
remain in full force and effect regardless of any investigation made by or
on behalf of PCAC and will survive the transfer of such securities by
Holders. Holder also will agree to provide for contribution as will be
reasonably requested by PCAC in circumstances where such indemnity is
unenforceable.
(c) Each party entitled to indemnification under this Section 4
(the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party
<PAGE>
has actual knowledge of any claim as to which indemnity may be sought, and
shall permit the Indemnifying Party to assume the defense of any such claim
or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not unreasonably be withheld). The Indemnified Party
may participate in such defense at such party's expense. The failure of
any Indemnified Party to give notice as provided herein shall, to the
extent such failure was prejudicial to the Indemnifying Party's ability to
defend such action, relieve the Indemnifying Party of its obligations under
this Section 4. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect to such claim or litigation. Each Indemnified Party shall furnish
such information regarding itself or the claim in question as an
Indemnifying Party may reasonably request in writing and as shall be
reasonably required in connection with defense of such claim and litigation
resulting therefrom.
(d) If the Indemnification provided for in this Section 4 is
unavailable to an Indemnified Party in respect of any losses, claims,
damages or liabilities referred to therein or is insufficient to hold it
harmless as contemplated in this Section 4, then each Indemnifying Party,
in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the
one hand and all shareholders offering securities in the offering (the
"Selling Shareholders") on the other, or (ii) if the allocation provided by
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
(i) above but also the relative fault of the Company on the one hand and
the Selling Shareholders on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Selling Shareholders on the
other shall be the net proceeds from the offering (before deducting
expenses) received by the Company on the one hand and the Selling
Shareholders on the other. The relative fault of the Company on the one
hand and the Selling Shareholders on the other shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of material fact or the omission or alleged omission to state a
material fact relates to information supplied
<PAGE>
by the company or by the Selling Shareholders and the parties' relevant
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Selling
Shareholders agree that it would not be just and equitable if contribution
pursuant to this Section 4(d) were based solely upon the number of entities
from whom contribution was requested or by any other method of allocation
which does not take account of the equitable considerations referred to
above in this Section 4(d). The amount paid or payable by an Indemnified
Party as a result of the losses, claims, damages and liabilities referred
to above in this Section 4(d) shall be deemed to include any legal or other
expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending any such action or claim, subject to the
provisions of Section 4(d) hereof. Notwithstanding the provisions of this
Section 4(d), no Selling Shareholder shall be required to contribute any
amount or make any other payments under this Agreement which in the
aggregate exceed the net proceeds (after Registration Expenses) received by
such Selling Shareholder. No person guilty of fraudulent misrepresentation
(within the meaning of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
5. LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the
date of this Agreement, the PCAC shall not, without the prior written consent of
the Holders of a majority of the Registrable Securities then outstanding, enter
into an agreement with any holder or prospective holder of any securities of the
Company which would allow such holder or prospective holder to include such
securities in any registration filed under Section 2 hereof on a priority basis
to those to be included by participating Holders.
6. RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission which may permit the sale of the
Registrable Securities to the public without registration, the Company agrees
to:
(a) Use its best efforts to make and keep public information
available as those terms are understood and defined in Rule 144 under the
Securities Act at all times from and after 90 days following the effective
date of the first registration un der the Securities Act filed by the
Company for an offering of its securities to the general public;
(b) Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act at any time after it has become subject
to such reporting requirements; and
<PAGE>
(c) So long as the Holders own any Registrable Securities,
furnish to the Holders forthwith upon request (i) a written statement by
the Company that it has complied with the reporting requirements of
Rule 144 (at any time from and after 90 days following the effective date
of the first registration statement filed by the Company for an offering of
its securities to the general public) of the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements) or that it qualifies as a registrant whose securities may be
resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a
copy of the most recent annual or quarterly report of the Company and
(iii) such other reports and documents so filed as the Holders may
reasonably request in availing itself of any rule or regulation of the
Commission allowing the Holder to sell any such securities without
registration.
7. SPECIFIC PERFORMANCE. The parties hereto declare that it is
impossible to measure in money the damages which will accrue to a party hereto
by reason of a failure to perform any of the obligations under this Exhibit.
Therefore, all parties hereto shall have the right to specific performance of
the obligations of the other parties under this Exhibit, and if any party hereto
shall institute an action or proceeding to enforce the provisions hereof, any
person (including the Company) against whom such action or proceeding is brought
hereby waives the claim or defense therein that such party has an adequate
remedy at law, and such person shall not urge in any such action or proceeding
the claim or defense that such remedy at law exists. Notwithstanding the
foregoing, no Holder shall have the right to obtain or seek an injunction
restraining or otherwise delaying any such registration as a result of any
controversy that might arise with respect to the interpretation or
implementation of this Exhibit.
8. TRANSFEREES. The rights contained herein shall inure to the benefit
of any transferee of a Holder receiving a number of shares of such Holder's
Registrable Securities equal to or greater than ten percent of the Company's
then outstanding shares of common stock.
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<PAGE>
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