SIGNAL APPAREL COMPANY, INC.
200-A Manufacturers Road
Chattanooga, Tennessee 37405
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
JANUARY 20, 1999
Notice is hereby given that the Annual Meeting of Shareholders of Signal
Apparel Company, Inc. (the "Company") will be held at 200-A Manufacturers Road,
Chattanooga, Tennessee, on Wednesday, January 20, 1999, at 10:00 a.m. for the
following purposes, each as described in more detail in the accompanying proxy
statement:
1. To elect eight directors;
2. To approve the issuance of up to 10,070,000 shares of the Company's
Common Stock in connection with the Company's acquisition of
substantially all of the assets of Tahiti Apparel, Inc.;
3. To approve the issuance of additional shares of the Company's Common
Stock upon the conversion of (or, at the election of the Company, in
payment of accrued dividends with respect to) shares of the Company's
5% Series G1 Convertible Preferred Stock and 5% Series G2 Convertible
Preferred Stock;
4. To approve the Company's 1998 Stock Incentive Plan and the issuance of
up to 5,000,000 shares of the Company's Common Stock in connection
with awards under such plan;
5. To approve the issuance of warrants to purchase up to 5,000,000 shares
of the Company's Common Stock to WGI, LLC in connection with certain
additional funding and waivers under the Credit Agreement between the
Company and WGI, LLC;
6. To approve the issuance of warrants to purchase up to 3,804,546 shares
of the Company's Common Stock to each of the Company's Chief Executive
Officer and the Company's President under the terms of certain
agreements between the Company and such officers; and
7. To transact such other business as may properly come before the
meeting or any adjournments thereof.
The Board of Directors has fixed November 20, 1998, as the record date for
the determination of shareholders entitled to vote at the Annual Meeting and to
receive notice thereof.
Shareholders are cordially invited to attend the meeting in person. IF YOU
CANNOT ATTEND, PLEASE RECORD YOUR VOTE AND SIGN AND DATE THE ACCOMPANYING PROXY
WHICH IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND RETURN IT IN THE
ENCLOSED ENVELOPE. NO POSTAGE IS NECESSARY IF MAILED IN THE UNITED STATES.
BY ORDER OF THE BOARD OF DIRECTORS
Robert J. Powell
Secretary
Chattanooga, Tennessee
December 15, 1998
<PAGE>
SIGNAL APPAREL COMPANY, INC.
200-A Manufacturers Road
Chattanooga, Tennessee 37405
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
JANUARY 20, 1999
This Proxy Statement, which is to be mailed on or about December 15, 1998,
is furnished to shareholders on behalf of the Board of Directors for
solicitation of proxies for use at the Annual Meeting of Shareholders of Signal
Apparel Company, Inc. (the "Company") to be held on Wednesday, January 20, 1999,
at 10:00 a.m., and at all adjournments thereof, for the purposes set forth in
the accompanying Notice of Annual Meeting of Shareholders. Any proxy given
pursuant to this solicitation may be revoked by the person giving it at any time
before it is exercised by giving written notice to the Secretary of the Company.
The cost of this solicitation will be paid by the Company. In addition to
solicitation by mail, certain officers, directors and other employees of the
Company, who will receive no additional compensation for their services, may
solicit proxies by telephone, facsimile or personal call. The Company has
engaged Corporate Communications, Inc. to distribute soliciting material to
shareholders of record and to solicit brokers and other persons holding shares
beneficially owned by others to procure from such beneficial owners consents to
the execution of proxies. In addition to a fee of approximately $5,000 to be
paid to Corporate Communications, Inc., the Company will reimburse brokers and
others for their expense in sending proxy material to beneficial owners.
On December 7, 1998, the outstanding securities of the Company consisted of
32,636,547 shares of Common Stock, par value $.01 per share, 5,000 shares of 5%
Series G1 Convertible Preferred Stock, stated value $1,000 per share, and
454.444 shares of Series H Preferred Stock, stated value $100,000 per share.
Each outstanding share of the Common Stock is entitled to one vote per share on
each matter to be brought before the Annual Meeting. The 5% Series G1
Convertible Preferred Stock and the Series H Preferred Stock are not entitled to
vote on any matter scheduled to be brought before the Annual Meeting.
Shares represented at the Annual Meeting by properly executed proxies will
be voted in accordance with the instructions indicated in the proxies unless
such proxies have previously been revoked. If no instructions are indicated,
such shares will be voted FOR each of the six agenda items specified in the
Notice of Annual Meeting accompanying this Proxy Statement.
Any proxy given pursuant to this solicitation may be revoked at any time by
the shareholder giving it, insofar as it has not been exercised, by delivering
to the Secretary of the Company a written notice of revocation bearing a later
date than the proxy or by submission of a later-dated, properly executed proxy.
Attendance at the Annual Meeting will not, in and of itself, constitute a
<PAGE>
revocation of a proxy. Any written notice revoking a proxy should be sent to
Signal Apparel Company, Inc., 200-A Manufacturers Road, Chattanooga, Tennessee
37405, Attention: Robert J. Powell, Secretary.
The Board of Directors expects all nominees named below to be available for
election. In case any nominee is not available, the proxy holders may vote for a
substitute. The Company knows of no specific matter to be brought before the
meeting that is not referred to in the Notice of Meeting or this proxy
statement. Regulations of the Securities and Exchange Commission permit the
proxies solicited pursuant to this Proxy Statement to confer discretionary
authority with respect to matters of which the Company did not know a reasonable
time before the meeting. Accordingly, the proxy holders may use their
discretionary authority to vote with respect to any such matter pursuant to the
proxy solicited hereby.
The persons designated by the Board of Directors as proxy holders in the
accompanying form of proxy are John W. Prutch and Robert J. Powell, officers of
the Company. The cost of solicitation of proxies will be borne by the Company.
The presence, in person or by proxy, of the holders of a majority of the
votes eligible to be cast by the holders of the outstanding shares of Common
Stock entitled to vote is necessary to constitute a quorum at the Annual
Meeting. Directors are elected by a plurality of the votes cast by the shares
entitled to vote in the election at which a quorum is present. Approval of all
other Proposals requires the affirmative vote of the majority of the votes cast
by the shares entitled to vote in the election at which a quorum is present.
Abstentions and broker non-votes are counted as present for determination of a
quorum, but are not counted as affirmative or negative votes on any item to be
voted upon and are not counted in determining the number of shares voted on any
item.
2
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's equity securities as of December 7, 1998, by each
shareholder that the Company knows to own beneficially more than 5% of the
issued and outstanding shares of the Company's Common Stock, director of the
Company, nominee for director, Named Executive (as defined herein) and by the
directors and Named Executives of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Owner Title of Class Beneficial Ownership(1) Percent of Class
------------------------------------ -------------- ----------------------- ----------------
<S> <C> <C> <C>
FS Signal Associates, L.P.; FS Signal Common Stock 11,940,002 36.3%
Associates II, L.P.; FS Signal, Inc.; and $.01 par value
Kevin S. Penn, as a group
65 E. 55th St., 32nd Floor
New York, New York 10022 (2)
Kevin S. Penn Common Stock 11,940,002 36.3%
65 E. 55th St., 32nd Floor $.01 par value
New York, New York 10022 (2)
FS Signal, Inc. Common Stock $.01 11,640,002 35.7%
65 E. 55th St., 32nd Floor par value
New York, New York 10022(2)(3)
FS Signal Associates, L.P. Common Stock 4,645,013 14.2%
c/o Kenneth Musen $.01 par value
157 Church Street, Box 426
New Haven, Connecticut 06502 (2)(4)
FS Signal Associates II, L.P. Common Stock 6,994,989 21.4%
c/o Kenneth Musen $.01 par value
157 Church Street, Box 426
New Haven, Connecticut 06502 (2)(5)
Walsh Greenwood & Co.; Stephen Walsh; Paul R. Common Stock 21,124,749 56.9%
Greenwood; and WGI, LLC, as a group $.01 par value
One East Putnam Avenue
Greenwich, Connecticut 06830 (6) Series H 454.444 100%
Preferred Stock
$100,000 stated
value
Walsh Greenwood & Co. Common Stock 788,800 2.4%
One East Putnam Avenue $.01 par value
Greenwich, Connecticut 06830 (6)(7)
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Owner Title of Class Beneficial Ownership(1) Percent of Class
- ------------------------------------ -------------- ----------------------- ----------------
<S> <C> <C> <C>
WGI, LLC Common Stock 20,318,549 54.7%
One East Putnam Avenue $.01 par value
Greenwich, Connecticut 06830 (6)(7)
Series H 454.444 100%
Preferred Stock
$100,000 stated
value
Henry L. Aaron (8) Common Stock 75,000 *
$.01 par value
Barry F. Cohen Common Stock -- --
$.01 par value
Jacob I. Feigenbaum (9) Common Stock 10,000 *
$.01 par value
Paul R. Greenwood (6)(7) Common Stock 21,119,749 56.9%
$.01 par value
Series H 454.444 100%
Preferred Stock
$100,000 stated
value
Thomas A. McFall (10) Common Stock $.01 134,435 *
par value
John W. Prutch (11) Common Stock 134,435 *
$.01 par value
Stephen Walsh (6)(7) Common Stock 21,112,349 56.9%
$.01 par value
Series H 454.444 100%
Preferred Stock
$100,000 stated
value
Howard N. Weinberg Common Stock -- --
$.01 par value
Robert J. Powell (12) Common Stock -- --
$.01 par value
Leslie W. Levy (13) Common Stock 40,278 *
$.01 par value
Barton J. Bresky (12) Common Stock 265,000 *
$.01 par value
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Owner Title of Class Beneficial Ownership(1) Percent of Class
- ------------------------------------ -------------- ----------------------- ----------------
<S> <C> <C> <C>
David E. Houseman Common Stock 5,000 *
$.01 par value
All directors and executive Common Stock 21,518,897 57.4%
officers as a group [10 individuals] (14) $.01 par value
Series H 454.444 100%
Preferred Stock
$100,000 stated
value
</TABLE>
- ---------------
* Less than 1%
NOTES TO TABLE OF BENEFICIAL OWNERSHIP
(1) As of December 7, 1998, the Company had issued and outstanding 32,636,547
shares of Common Stock, 5,000 shares of 5% Series G1 Convertible Preferred
Stock and 454.444 shares of Series H Preferred Stock. In general, a person
is deemed to be a "beneficial owner" of a security if that person has or
shares "voting power," which includes the power to vote or direct the
voting of such security, or "investment power," which includes the power to
dispose of or to direct the disposition of such security, or if a person
has the right to acquire either voting power or investment power over such
security through the exercise of an option or the conversion of another
security within 60 days. More than one person may be a beneficial owner of
the same security, and a person may be deemed to be a beneficial owner of
securities as to which he has no personal economic interest or which he may
not vote. In the case of persons who hold options or warrants to purchase
shares of Common Stock that are exercisable either immediately or within 60
days of December 7, 1998, the shares of Common Stock represented thereby
have been treated as outstanding for purposes of calculating the ownership
totals and percentages (and the percentage of voting power) for only the
persons holding such options and warrants, and have not otherwise been
treated as outstanding shares.
(2) FS Signal Associates, L.P. ("FS Signal"); FS Signal Associates II, L.P.
("FS Signal II"); FS Signal, Inc. ("FSSI"); and Kevin S. Penn ("Penn") have
filed a report, as a group, on Schedule 13D disclosing their various
relationships. Such persons may be deemed to be a group for purposes of the
beneficial ownership of the securities disclosed in the table, although
they disclaim membership in a group. The 11,940,002 shares of Common Stock
include (i) 4,645,013 shares of Common Stock held directly by FS Signal;
(ii) 6,994,989 shares of Common Stock held directly by FS Signal II; and
(iii) warrants held directly by Penn to acquire 300,000 shares of Common
Stock. The reporting persons may be deemed to be members of a group and,
accordingly, could each be deemed to have beneficial ownership (by virtue
of Rule 13(d)-5) of all shares of Common Stock held directly by the various
members of the group. Except as disclosed herein, no other entity or person
that may be deemed to be a member of the group holds direct beneficial
ownership of such Common Stock. Penn is the President of FSSI, which is the
general partner of both FS Signal and FS Signal II. Both FS Signal and FS
Signal II are limited partnerships. Pursuant to both the bylaws of FSSI and
an understanding among the limited partners of FS Signal and FS Signal II,
Penn, as President of FSSI, has the sole voting and investment power over
the securities held by both limited partnerships.
(3) As the general partner of both FS Signal and FS Signal II, FSSI may be
deemed to be the beneficial owner of (i) 4,645,013 shares of Common Stock
held directly by FS Signal and (ii) 6,994,989 shares of Common Stock held
directly by FS Signal II. Kevin S. Penn is the President of FSSI. Pursuant
to both the bylaws of FSSI and
5
<PAGE>
an understanding among the limited partners of FS Signal and FS Signal II,
Penn, as President of FSSI, has the sole voting and investment power over
the securities held by both limited partnerships.
(4) FS Signal, a Connecticut limited partnership, owns directly 4,645,013
shares of Common Stock. Kevin S. Penn, in his capacity as President of FS
Signal, Inc., the general partner of FS Signal, may be deemed to own
beneficially all shares of Common Stock held by FS Signal.
(5) FS Signal II, a Connecticut limited partnership, owns directly 6,994,989
shares of Common Stock. Kevin S. Penn, in his capacity as the President of
FS Signal, Inc., the general partner of FS Signal II, may be deemed to own
beneficially all shares of Common Stock held by FS Signal II.
(6) Walsh Greenwood & Co., a New York limited partnership ("Walsh Greenwood");
Walsh Greenwood's sole general partners, Stephen Walsh and Paul R.
Greenwood; and WGI,LLC, a Connecticut limited liability company whose
Managers are Stephen Walsh and Paul R. Greenwood ("WGI") have filed a
report, as a group, on Schedule 13D disclosing their various relationships.
Such persons may be deemed to be a group for purposes of the beneficial
ownership of the securities disclosed in the table, although they disclaim
membership in a group. The 21,124,749 shares of Common Stock include (i)
788,800 shares of Common Stock held directly by Walsh Greenwood on behalf
of certain managed accounts (as to which Walsh Greenwood has voting power
and investment power but does not have any pecuniary interest therein);
(ii) 15,818,549 shares of Common Stock owned directly by WGI; (iii) 11,400
shares of Common Stock owned by two trusts for the benefit of the minor
children of Stephen Walsh, as to which Paul R. Greenwood serves as trustee;
(iv) 1,000 shares of Common Stock owned by Mr. Greenwood's spouse; (v)
5,000 shares of Common Stock owned by Mr. Walsh's spouse; and (vi)
presently exercisable warrants to acquire a total of 4,500,000 shares of
Common Stock held by WGI. All 454.444 shares of Series H Preferred Stock
are held directly by WGI.
(7) Walsh Greenwood has the sole power to vote and dispose of 788,800 shares of
Common Stock (all of which shares are held by Walsh Greenwood on behalf of
certain managed accounts and as to which Walsh Greenwood has voting power
and investment power but does not have any pecuniary interest therein). WGI
has (i) the sole power to vote and dispose of the 15,818,549 shares of
Common Stock it owns directly; (ii) the sole power to dispose of the
warrants to acquire a total of 4,500,000 shares of Common Stock, which
warrants are exercisable by WGI's Managers, Stephen Walsh and Paul R.
Greenwood; and (iii) the sole power to vote and dispose of the 454.444
shares of Series H Preferred Stock that it owns directly. Both Messrs.
Walsh and Greenwood, in their individual capacities as general partners of
Walsh Greenwood and as Managers of WGI, may be deemed to share the power to
vote and direct the disposition of the shares of Common Stock and Series H
Preferred Stock beneficially owned by Walsh Greenwood and WGI. Paul R.
Greenwood, in his capacity as trustee, has sole power to vote and to direct
the disposition of the 11,400 shares of Common Stock held in two trusts for
the benefit of Mr. Walsh's minor children (but Mr. Greenwood has no
financial interest in such shares). Under S.E.C. rules, Mr. Greenwood may
be deemed to share voting and investment with respect to the 1,000 shares
of Common Stock held by his wife, and Mr. Walsh may be deemed to share
voting and investment with respect to the 5,000 shares of Common Stock held
by his wife; however, Messrs. Greenwood and Walsh disclaim any beneficial
ownership with respect to such shares.
(8) Beneficial ownership reported for Mr. Aaron consists of warrants to
purchase 75,000 shares of Common Stock which were granted in connection
with a licensing transaction between the Company and Mr. Aaron prior to Mr.
Aaron becoming a director. These Warrants become exercisable on December
31, 1998. Mr. Aaron also holds warrants to purchase an additional 75,000
shares (granted in connection with the same license) which become
exercisable on December 31, 1999.
(9) Beneficial ownership reported for Mr. Feigenbaum consists of presently
exercisable warrants to purchase 10,000 shares of Common Stock.
(10) Beneficial ownership reported for Mr. McFall consists of presently
exercisable warrants to purchase 134,435 shares of Common Stock.
(11) Beneficial ownership reported for Mr. Prutch consists of presently
exercisable warrants to purchase 134,435 shares of Common Stock.
6
<PAGE>
(12) Beneficial ownership reported for Mr. Bresky consists of options that are
immediately exercisable to acquire shares of Common Stock, which were
issued pursuant to the Company's 1985 Stock Option Plan.
(13) This figure includes options that are immediately exercisable to acquire
30,000 shares of Common Stock which were issued pursuant to the Company's
1985 Stock Option Plan.
(14) This figure includes shares held by certain entities for which indirect
beneficial ownership may be attributed to Messrs. Walsh and Greenwood,
directors of the Company, as discussed in Notes (6) and (7) above. The
figure includes warrants to acquire 4,853,870 shares of Common Stock and
options to acquire 30,000 shares of Common Stock. All such warrants and
options are exercisable either immediately or within 60 days of December 7,
1998 and, consequently, have been treated as outstanding shares of Common
Stock for calculations of share ownership and voting power for the group of
directors and executive officers. See Note (1) above.
[This space intentionally left blank]
7
<PAGE>
PROPOSAL NUMBER 1
ELECTION OF DIRECTORS
The Company's Restated Articles of Incorporation provide for a board of
directors consisting of not less than five nor more than ten persons, with the
exact number to be set by the Board of Directors. The Board of Directors has set
the number of directors at eight. All directors are elected to serve a one year
term, or until their respective successor is elected and qualified. The persons
named in the enclosed form of proxy will vote for the election of the eight
nominees named below, unless such authority is withheld on the enclosed form of
proxy. In the event any of the nominees should become unavailable to serve as a
director, the proxy will be voted by the persons named therein in accordance
with their best judgment.
The following is a list of the names, ages, positions held with the Company
and business experience during the past five years of all nominees for director:
<TABLE>
<CAPTION>
Year First
Became A
Name and Address Age Business Experience and Directorships Director
- ---------------- --- ------------------------------------- --------
<S> <C> <C> <C>
Henry L. Aaron 64 Senior Vice President of Atlanta National League 1998
c/o Cohen Pollock Merlin Baseball Club, Inc., since October 1998. Vice
Axelrod & Tanenbaum President of Atlanta National League Baseball Club, 2100
Riveredge Parkway Inc., from 1976 through October 1998.
Suite 300
Atlanta, GA 30328
Barry F. Cohen 53 Executive Vice President of Parametrics Technology 1998
Parametrics Technology Corporation, a computer software company, since January
Corp. 1998; Senior Vice President of Computer Vision, Inc.,
128 Technology Drive 1993 to January 1998.
Waltham, MA 02154
Jacob I. Feigenbaum 50 President of Miracle Suit by Swim Shaper since February 1994
c/o Miracle Suit 1996; President and owner of Sea Q. America, August
1411 Broadway, 30th Floor 1994 to 1996; President of Robby Len Swimwear division
New York, NY 10018 of Apparel America, 1980 to 1994.
Paul R. Greenwood 51 Managing General Partner of Walsh, Greenwood & Co., a 1990
One East Putnam Avenue broker-dealer engaged in effecting transactions in
Greenwich, CT 06830 securities for others and for its own account.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Year First
Became A
Name and Address Age Business Experience and Directorships Director
- ---------------- --- ------------------------------------- --------
<S> <C> <C> <C>
Thomas A. McFall 44 Chief Executive Officer since June 1998. Chairman, 1997
200A Manufacturers Road Weatherly Financial Companies, since 1984 (currently
Chattanooga, TN 37405 inactive).
John W. Prutch 46 President of the Company since October 1997; President, 1997
1088 National Parkway GIDI Holdings, Inc., imprinted activewear manufacturer,
Schaumburg, IL 60173 from July 1994 to October 1997; President, Merchant
Capital Group, Ltd., 1984 to January 1993.
Stephen Walsh 53 Chairman of the Board of Directors since September 1990
3333 New Hyde Park Road 1997; Chief Executive Officer since June 1998.
North Hills, NY 11040 General Partner of Walsh, Greenwood & Co.,
broker-dealer engaged in effecting transactions in
securities for others and for its own account.
Howard N. Weinberg 38 Executive Vice President and Chief Financial Officer of 1998
200A Manufacturers Road the Company since September 1998. Associate Attorney,
Chattanooga, TN 37405 Skadden, Arps, Slate, Meagher & Flom LLP, 1997 through
September 1998. Co-Owner of Louise's Trattoria, Inc., a
privately held restaurant company, 1989 through 1997.
</TABLE>
The information set forth above with respect to the principal occupation or
employment of each nominee during the past five years has been furnished to the
Company by the respective nominee.
Pursuant to an agreement among the Company and certain shareholders (a
predecessor to WGI, LLC, FS Signal Associates, L.P. and FS Signal Associates II,
L.P.), FS Signal Associates, L.P. and FS Signal Associates II, L.P., together,
have the right until 2001 to nominate two directors to be included in the slate
of nominees. As of the date of this Proxy Statement, neither FS Signal
Associates, L.P. nor FS Signal Associates II, L.P. has exercised this right by
nominating any individuals for election to the Board of Directors.
The Board of Directors held three meetings in 1997.
9
<PAGE>
COMMITTEES OF THE BOARD
Audit Committee. This committee recommends, for appointment by the Board of
Directors, a firm of independent certified public accountants to serve as
auditors for the Company; makes recommendations to the Board of Directors with
respect to the scope of the annual audit; approves the services which the
auditors may render to the Company without impairing the auditors' independence;
approves the auditors' fees; and may undertake investigations of any financial
matter and make recommendations to the Board of Directors with respect thereto.
This committee meets on an as needed basis with the auditors to review the
results of the audit and to review all recommendations made by the auditors with
respect to the accounting methods used and the system of internal control
followed by the Company and advises the Board of Directors with respect thereto.
The independent auditors have direct access to the members of this committee on
any matter at any time. This committee did not meet in 1997, but reviewed
appropriate matters with the Company's Chief Financial Officer on an informal
basis throughout 1997. At present, Mr. Feigenbaum is the sole member of this
committee. The Board of Directors plans to add additional members to this
committee.
Compensation Committee. This committee recommends to the Board of Directors the
amount of compensation and the terms and conditions of employment of each
officer of the Company, and also approves employment contracts and agreements
for executive officers. This committee administers the 1985 Stock Option Plan
and makes recommendations to the Board of Directors with respect to employee
benefit plans. The Committee did not formally meet during 1997, but met on an
informal basis at various times throughout the year. Current members of this
committee are Messrs. Feigenbaum, Greenwood and Walsh.
Executive Committee. This committee has and may exercise, except as otherwise
provided by statute or by the Restated Articles of Incorporation, all the powers
and authority of the Board of Directors. The Committee did not meet formally in
1997, but met on an informal basis at various times throughout the year. Current
members of this committee are Messrs. Greenwood, McFall (Chairman), Prutch,
Walsh and Weinberg.
The Board has no standing nominating committee. Individual directors and
management recommend to the full Board qualified candidates for election as
directors and officers of the Company. The Board will consider nominees for
director recommended by shareholders. Such recommendations may be submitted in
writing to the Secretary of the Company.
10
<PAGE>
EXECUTIVE OFFICERS
The following is a list of the names, ages, positions with the Company and
business experience during the past five years of the executive officers of the
Company:
Name Age Office and Business Experience
- ---- --- ------------------------------
Leslie W. Levy 60 Vice President of the Company and President of
the Heritage Sportswear business unit of the
Company since 1977.
Thomas A. McFall 44 Chief Executive Officer since June 1998.
Chairman, Weatherly Financial Companies, since
1984 (currently inactive).
Robert J. Powell 49 Vice President of Licensing and General Counsel
since September 1992; Secretary since January
1993.
John W. Prutch 46 President of the Company since October 1997.
President, GIDI Holdings, Inc., imprinted
activewear manufacturer, from July 1994 to
October 1997; President, Merchant Capital Group,
Ltd., 1984 to January 1993.
Stephen Walsh 53 Chairman of the Board of Directors since
September 1997; Chief Executive Officer since
June 1998. General Partner of Walsh, Greenwood &
Co., broker-dealer engaged in effecting
transactions in securities for others and for
its own account.
Howard N. Weinberg 38 Executive Vice President and Chief Financial
Officer of the Company since September 1998.
Associate Attorney, Skadden, Arps, Slate,
Meagher & Flom LLP, 1997 through September 1998.
Co-Owner of Louise's Trattoria, Inc., a
privately held restaurant company, 1989 through
1997.
Officers are elected annually and serve at the pleasure of the Board of
Directors. There is no family relationship between any of the above executive
officers, directors and nominees for director.
11
<PAGE>
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 and regulations of the
Securities and Exchange Commission thereunder require the Company's executive
officers and directors and persons who own more than ten percent of the
Company's Common Stock, as well as certain affiliates of such persons, to file
initial reports of ownership and monthly transaction reports covering any
changes in ownership with the Securities and Exchange Commission and the New
York Stock Exchange. Executive officers, directors and persons owning more than
ten percent of the Company's Common Stock are required by Securities and
Exchange Commission regulations to furnish the Company with copies of all such
reports they file. Based solely on its review of the copies of such reports
received by it and written representations that no other reports were required
for those persons, the Company believes that during 1997 all filing requirements
applicable to its executive officers, directors and owners of more then ten
percent of the Company's Common Stock were complied with except for one late
filing reporting initial holdings by each of Messrs. Thomas A. McFall, a
director and Chief Executive Officer, and John W. Prutch, a director and
President; one late filing (reporting one transaction) by each of Messrs. Jacob
I. Feigenbaum and Leon Ruchlamer, both directors; and one late filing (reporting
one transaction) by each of FS Signal, Inc., FS Signal Associates, L.P. and FS
Signal Associates II, L.P., each beneficial owners of more than ten percent the
Company's Common Stock. Additionally, one affiliate of WGI, LLC which was a
former ten percent beneficial owner filed one late report covering one
transaction. Another affiliate of WGI, LLC, which also was a former ten percent
beneficial owner, filed one late report covering 22 transactions. A third
affiliate of WGI, LLC, which also was a former ten percent beneficial owner,
filed one late report covering its initial holdings and six additional
transactions. WGI, LLC, a current ten percent beneficial owner, filed one late
report covering its initial holdings and six additional transactions. Messrs.
Paul R. Greenwood, a director and ten percent beneficial owner, and Stephen
Walsh, a director, Chief Executive Officer and ten percent beneficial owner,
each filed one late report covering 28 transactions which were reported in their
capacities as general partners and/or as Managers of WGI, LLC and its affiliates
as described above.
REPORT OF COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Board of Directors of the Company has a Compensation Committee
consisting of three voting members. Three non-employee directors are chosen to
serve one-year terms at the first Board meeting following the Annual Meeting,
and the fourth member is, pursuant to the Company's Bylaws, the President of the
Company. The Committee meets on an as needed basis during the year. The
Committee's responsibilities include recommending to the Board of Directors the
amount of compensation and terms of employment of each executive officer of the
Company. The Committee approves employment contracts and agreements for each
executive officer of the Company. Additionally, the Committee administers the
Company's 1985 Stock Option Plan and makes recommendations to the Board of
Directors with respect to the Company's other benefits and employee benefit
plans applicable to the Company's executive officers. The following is the
report of the Committee:
12
<PAGE>
Compensation Policy
The Company makes an effort to offer competitive compensation packages that
allow the Company to attract and retain highly qualified individuals. The
Committee believes the long-term strategic goals of the Company can be
accomplished only if the Company employs management with experience and skills
relevant to the changing nature of the Company's products, sales and marketing
efforts. A substantial portion of each executive officer's total compensation is
incentive-based in order to motivate the Company's executive officers in the
performance of their duties and to encourage a continued focus on Company
profitability. For those executive officers responsible for particular business
units, the financial and non-financial results of their business units are also
considered. The Committee believes that by emphasizing performance based
compensation, it will encourage the Company's management to act in concert with
the interests of the Company's shareholders.
Compensation packages offered to the Company's senior management are
thought to be competitive within the domestic apparel industry and have not been
tied directly to short-term results of operations. The Committee believes the
compensation packages for its senior management are competitive with
compensation packages for executives of other public domestic apparel companies.
The Committee meets with the President to evaluate the performance of the other
executive officers and meets in the absence of the President to evaluate his
performance. The Committee reports its executive evaluations to the other
outside members of the Board.
The overall compensation of each of the Company's executive officers
consists of three principal elements:
o Base Salary
Executive officers' base salaries are reviewed periodically by the
Compensation Committee. In the case of all executive officers, their base salary
is their principal element of compensation. In an effort to ensure that the
Company can obtain the talent it needs to effectuate its long-term strategies,
the base salary of all executive officers has been set at a level that is
thought to be competitive within the group of public businesses identified as
similar to the Company. Among the businesses with which the Company compares
itself are those included within the companies that comprise the Value Line
Apparel Industry Group. Based on information available to the Company, the
Committee believes that the overall compensation of its executive officers,
taken in the aggregate, places them in the median range of the compensation
scale of similarly situated executive officers in the industry. Factors
considered in establishing base salaries include the requisite skill and
experience required in a particular position, the range of duties and
responsibilities attributable to that position, the individual's prior
experience and compensation, the compensation of similarly situated individuals
in the apparel industry and the overall past and expected future contributions
of the individual. Generally, in establishing such salaries, the greatest weight
is given to ensuring that a competitive salary level is established. Overall,
the process is subjective, with no precise, mathematical weight given to the
enumerated factors.
13
<PAGE>
o Annual Bonus
The Company operates an annual discretionary bonus plan, the terms of which
vary in accordance with the participant's position with the Company. The amount
of the annual bonus is determined, if earned, at the conclusion of the Company's
fiscal year following a review of Company, business unit and individual
performance, and is generally based on certain performance objectives, cash
flows and pre-tax earnings.
The Committee's discretion includes both whether and the extent to which
any bonus is awarded. The bonus element of each executive officer's compensation
is set at a level that the Committee believes is necessary to compensate
executive officers for the achievement of short-term goals forming part of the
Company's overall strategic objectives. Short-term sales, profit and performance
goals for each business unit and for the Company as a whole are developed
annually and in advance by the Company's management and then reviewed by the
Company's Board of Directors. Performance is monitored against established goals
throughout the year.
No bonuses were awarded to executive officers for 1997.
o Stock Options
To establish a link between compensation and management's performance in
creating value for shareholders, evidenced by increases in the Company's stock
price, the Company has implemented a stock option plan (the "1985 Stock Option
Plan"). The Committee is responsible for administering the 1985 Stock Option
Plan, which provides for options to purchase the Company's Common Stock
generally issued at or above market value on the date of grant. Accordingly, the
value of such options to the Company's participating executive officers will
depend directly on increases in the price of the Company's securities. Because
the Committee believes such compensation should result from long-term increases
in value, such options do not vest at a minimum until one year from the date of
grant; and, to serve as an incentive for such executives to continue in the
Company's service through the implementation of its plans, such options are
typically divested upon termination of employment or within a minimal period
thereafter.
The Compensation Committee has exclusive discretion to (i) select the
persons to whom options will be granted and to determine the type, amount and
terms of each option; (ii) modify, within certain limits, the terms of any
option which has been granted, including replacement or exchange of options
without the consent of the option holder under certain circumstances; (iii)
determine the time when options will be granted; and (iv) make all other
determinations that it deems necessary or desirable in the interpretation and
administration of the 1985 Stock Option Plan. The Compensation Committee has the
authority to administer, construe and interpret the 1985 Stock Option Plan, and
its decisions are final, binding and conclusive.
In determining the size and vesting of option awards, the Committee
considers the amount of options currently held by an officer, the results
achieved by each officer relative to that officer's assigned responsibilities
and the overall performance of the Company.
14
<PAGE>
Stock Options awarded to executive officers in 1997 are set forth under the
heading "Options/Awards in Last Fiscal Year."
o Chief Executive Officer.
The compensation of the Chief Executive Officer during 1997 consisted of
the same components as for other executive officers, namely base salary, annual
bonus and stock options. In an effort to ensure that the Company can obtain the
talent it needs to effectuate its long-term strategies, the base salary of all
executive officers has been set at a level that is thought to be competitive
within the group of public businesses identified as similar to the Company. As
with other executive officers, the factors considered by the Committee in
establishing the base salary of the chief executive officer include the
requisite skill and experience required in a particular position, the range of
duties and responsibilities attributable to that position, the individual's
prior experience and compensation, the compensation of similarly situated
individuals in the apparel industry and the overall past and expected future
contributions of the individual. The process is likewise subjective, with no
precise, mathematical weight given to the enumerated factors.
Jacob I. Feigenbaum
Paul R. Greenwood
Stephen Walsh
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Jacob I. Feigenbaum, Paul R. Greenwood and Stephen Walsh are the current
members of the Board's Compensation Committee. As previously stated, Paul R.
Greenwood and Stephen Walsh are Managers of WGI, LLC, the Company's principal
shareholder.
At the 1997 Annual Meeting, the Company's Shareholders approved a plan for
restructuring the Company's then-outstanding preferred stock and the majority of
its subordinated debt (the "Restructuring Plan"). In connection with the
implementation of the Restructuring Plan (which was effective December 30,
1997), the Company issued: (i) 8,000,000 shares of Common Stock; (ii) warrants
to acquire an additional 4,500,000 shares of Common Stock with an exercise price
of $1.75 per share; and (iii) 454.444 shares of a new Series F Preferred Stock,
stated value $100,000 per share, to WGI, LLC. The new Series F Preferred Stock
(which since has been exchanged for Series H Preferred stock as discussed under
Proposal 3 below) accrues cumulative undeclared dividends at the rate of 9% per
annum. These dividends are payable in cash when declared. The Series F/Series H
Preferred Stock is not convertible into Common Stock or into any other security
issued by the Company, and does not have any mandatory redemption or call
features.
The Company also agreed with WGI, LLC, that all funds advanced to the
Company by WGI, LLC after August 21, 1997 (which indebtedness was not part of
the Restructuring Plan) would be documented in the form of a new Credit
Agreement with interest payable quarterly at a rate of 10% per annum and with
other terms to be agreed upon between the Company and WGI.
15
<PAGE>
As of August 10, 1998, the Company was indebted to WGI in an aggregate principal
amount of $19,360,000 pursuant to such advances.
On August 10, 1998, the Company's Board of Directors approved a new Credit
Agreement between the Company and WGI, to be effective as of May 8, 1998 (the
"WGI Credit Agreement"), pursuant to which WGI will lend the Company up to
$25,000,000 on a revolving basis for a three-year term ending May 8, 2001.
Additional material terms of the WGI Credit Agreement are as follows:
o Maximum funding of $25,000,000, available in increments of $5,000 in
excess of the minimum funding of $100,000.
o WGI will receive (subject to shareholder approval as described in
Proposal 5) warrants to purchase up to 5,000,000 shares of the
Company's Common Stock at $1.75 per share, with additional terms
described in more detail in the discussion of Proposal 5 herein.
o Secured by a security interest in all of the Company's assets (except
for the assets of its Heritage division and certain former plant
locations which are currently held for sale), subordinate to the
security interests of the Company's senior lender.
o Funds borrowed may be used for any purpose approved by the Company's
directors and executive officers, including repayment of any other
existing indebtedness of the Company.
o During the term of the WGI Credit Agreement, WGI, LLC is entitled to
have two designees nominated by the Company for election to its Board
of Directors at the Company's Annual Meeting of Shareholders; Messrs.
Walsh and Greenwood are the Board nominees designated by WGI, LLC
pursuant to this provision.
16
<PAGE>
EXECUTIVE COMPENSATION INFORMATION
Set forth below is a summary of the annual and long-term compensation paid
by the Company for each of the last three fiscal years to: (i) Barton J. Bresky,
the Company's Chief Executive Officer from December 6, 1996 until August 20,
1997; (ii) David E. Houseman, Chief Executive Officer from September 1997 until
June 1998; and (iii) the Company's other four most highly compensated executive
officers serving as of December 31, 1997 (the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------
Long-Term
Compensation
Awards
------------
Other Securities All
Annual Underlying Other
Name and Principal Salary Bonus Compensation Options/SARs Compensation
Position Year ($) ($) ($) (#)(2) (3)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Barton J. Bresky, 1997 223,383 -- -- 265,000 7,378
President and Chief 1996 108,608 -- 40,092 -- 7,273
Executive Officer 1995 -- -- -- -- --
(until August 1997)
David E. Houseman, 1997 90,805 -- 104,226(1) 300,000 562
Chief Executive 1996 -- -- -- -- --
Officer and Chief Operating 1995 -- -- -- -- --
Officer (until May 1998)
and Chief Financial Officer
(until September, 1998)
Robert J. Powell, 1997 180,418 -- -- 150,000 4,868
Vice President 1996 185,000 -- -- -- 5,645
and Secretary 1995 191,125 -- -- 50,000 5,595
John W. Prutch, 1997 31,705 -- -- 150,000 87
President (since 1996 -- -- -- -- --
October 1997) 1995 -- -- -- -- --
Leslie W. Levy, 1997 145,192 -- -- -- 12,514
Vice President 1996 145,000 -- -- -- 9,062
and President, 1995 145,000 -- -- -- 8,872
Heritage Sportswear
Division
</TABLE>
17
<PAGE>
NOTES TO SUMMARY COMPENSATION TABLE
(1) $100,475 of this amount consisted of moving and temporary living expenses
and related reimbursements.
(2) Reflects the number of shares of the Company's Common Stock subject to
options granted to the Named Executive Officers for the periods presented.
(3) These amounts include the portion of life insurance premiums paid by the
Company that represents term life insurance on each of the Named
Executives. In 1997, these amounts were as follows: Mr. Bresky, $4,242; Mr.
Houseman, $562; Mr. Powell, $1,117;Mr. Prutch, $87; and Mr. Levy, $9,547.
All other amounts represent Company matching contributions to a 401(k) plan
maintained by the Company for the accounts of the Named Executives. In
1997, these amounts were as follows: Mr. Bresky, $3,136; Mr. Houseman,
none; Mr. Powell, $3,751; Mr. Prutch, none; and Mr. Levy, $2,967.
The table below sets forth certain information concerning grants of options
during the year ended December 31, 1997, to the Company's Named Executives. The
plan does not provide for the granting of stock appreciation rights.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-------------------------------
Potential Realizable
Value at Assumed
Annual Rates of Stock
% of Total Price Appreciation for
Options Granted Exercise or Option Term*
Options to Employees In Base Price Expiration ------------------------
Name granted (#) Fiscal Year ($/Share) Date 5%($) 10%($)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Barton J. Bresky(1) 250,000 10.01% $2.375 3/03/02 $164,042 $362,490
15,000 0.6% 2.375 8/21/02 Nil Nil
David E. Houseman(2) 300,000 14.02% 2.50 6/02/02 Nil Nil
Robert J. Powell(3) 150,000 6.01% 2.375 3/03/02 98,425 217,494
John W. Prutch(4) 150,000 6.01% 2.375 10/02/02 Nil 66,509
Leslie W. Levy -- -- -- -- -- --
</TABLE>
* The dollar gains under these columns result from calculations assuming 5% and
10% growth rates as required by the Securities and Exchange Commission and are
not intended to forecast future price appreciation of Company Common Stock. The
gains reflect a future value based upon growth at these prescribed rates.
(1) Options with respect to 250,000 shares were issued under the Company's 1985
Stock Option Plan as a component of Mr. Bresky's compensation, with an
exercise price equal to the market price on the date of grant. Under the
original terms of this grant, options with respect to 166,667 such shares
vested two years after the date of grant and the remaining 83,333 options
vested three years after the date of grant. Options with respect to 15,000
additional shares were issued pursuant to the Amendment to Employment
Agreement dated August 21, 1997, exercisable one year after the date of
grant with an exercise price that
18
<PAGE>
was $1.4375 above the market price on the date of grant. Pursuant to the
August 1997 Amendment to Mr. Bresky's Employment Agreement, vesting of the
original options for 250,000 shares was accelerated to March 2, 1998.
(2) Options were issued to induce Mr. Houseman to accept employment with the
Company, with 200,000 options vesting two years after the date of the grant
and the remaining 100,000 options vesting three years after the date of
grant. The options were issued with an exercise price that was $1.125 above
the market price on the date of grant.
(3) Options were issued under the Company's 1985 Stock Option Plan as a
component of Mr. Powell's compensation. Options with respect to 100,000
shares vest two years after the date of grant and the remaining 50,000
options vest three years after the date of grant. The options were issued
with an exercise price that was equal to the market price on the date of
grant.
(4) Options were issued to induce Mr. Prutch to accept employment with the
Company, 2/3 of the options vest two years after the date of grant and the
remaining 1/3 of the options vest three years after the date of grant. The
options were issued with an exercise price that is subject to adjustment
and was $.625 above the market price on the date of grant.
The following table provides information about options held by the Named
Executives. The 1985 Stock Option Plan does not provide for the granting of
stock appreciation rights.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End($)(1)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- ---------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Barton J. Bresky -- -- 250,000 exer./ --
15,000 unexer. --
David E. Houseman -- -- 0 exer./ --
300,000 unexer. --
Robert J. Powell -- -- 125,000 exer./ --
150,000 unexer. --
John W. Prutch -- -- 0 exer./ --
150,000 unexer. --
Leslie W. Levy -- -- 30,000 exer./ --
0 unexer. --
</TABLE>
(1) Value of unexercised in-the-money options based on a fair market value of a
share of the Company's Common Stock of $1.25 as of December 31, 1997. Based
on such value, none of the options held by any of the Named Executives were
"in-the-money" at December 31, 1997.
19
<PAGE>
Shareholder Return Performance Presentation
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total shareholder return on the Company's Common Stock against
the total return of the S & P composite 500 Stock Index and the Value Line
Apparel Industry Group for the five year period ending December 31, 1997.
Comparison of Five-Year Cumulative Total Return*
Signal Apparel Company, Inc., Standard & Poors 500 and Value Line Apparel Index
(Performance Results Through 12/31/96)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
SIGNAL APPAREL STANDARD & POORS 500 APPAREL
COMPANY, INC. INDEX
1992 $100.00 $100.00 $100.00
1993 $ 50.43 $110.09 $ 92.97
1994 $ 53.85 $111.85 $102.43
1995 $ 49.57 $153.80 $112.34
1996 $ 19.53 $189.56 $153.85
1997 $ 8.14 $252.82 $179.48
Assumes $100 invested at the close of trading 12/92 in Signal Apparel Company,
Inc. common stock, Standard & Poors 500, and Apparel.
*Cumulative total return assumes reinvestment of dividends.
Source: Value Line, Inc.
Factual material is obtained from sources believed to be reliable, but the
publisher is not responsible for any errors or omissions contained herein.
20
<PAGE>
Directors' Compensation
Directors who are not employees of the Company are paid (i) $4,000 for each
Board meeting attended in person up to a maximum of $20,000 per year and (ii)
$500 for each Board committee meeting attended in person or telephonically.
Employment Agreements
David E. Houseman was employed as the Company's Chief Executive Officer and
Chief Operating Officer through May 1998, and as the Company's Chief Financial
Officer through his resignation in September 1998. Pursuant to the terms of a
severance agreement between the Company and Mr. Houseman, Mr. Houseman will
receive severance payments in the aggregate amount of $100,000, with $60,000
having been paid upon execution and the remainder payable in four equal monthly
installments, together with continuation of his health benefits through
September 1999 and payments for unused vacation time and certain expenses
totaling less than $20,000. Mr. Houseman also was permitted to retain an option
to purchase 275,000 shares of the Company's Common Stock at $1.75 per share
which was granted effective May 8, 1998. Under Mr. Houseman's severance
agreement, such option will vest in full on May 8, 1999 and may be exercised by
Mr. Houseman through September 17, 2001.
John W. Prutch is employed as the Company's President. Pursuant to the
terms of his employment agreement, which commenced October 2, 1997, Mr. Prutch's
base salary is $150,000 with the right to receive an annual bonus. As a further
inducement to employment, the Company granted Mr. Prutch options pursuant to the
Company's 1985 Stock Option Plan to purchase 150,000 shares of the Company's
Common Stock at an exercise price of $2.375 per share, subject to adjustment
($.625 above the market price on the date of grant), with such options vesting
at the rate of 100,000 shares two years after the date of grant and the
remaining 50,000 shares three years after the date of grant. All such options
expire five years from the date of grant. Additionally, Mr. Prutch is entitled
to participate in all other incentive bonus, stock option, savings and
retirement programs and benefit programs maintained for the Company's executive
officers from time to time. In the event that Mr. Prutch's employment is
terminated for cause or, under certain circumstances, Mr. Prutch voluntarily
terminates his employment, the Company shall pay Mr. Prutch (or his legal
representative) only those amounts of compensation attributable to periods prior
to the termination. If the termination is for cause, all outstanding stock
options held by Mr. Prutch shall expire. If Mr. Prutch voluntarily terminates
his employment, all options vested as of the date of termination shall expire
ninety days after the date of termination. In the event that Mr. Prutch's
employment is terminated without cause (as defined in his employment agreement
then he will be entitled to payments equal to one year's base salary.
Furthermore, all unvested options shall become immediately exercisable. Any
vested Incentive Stock Options will expire three months from the date of
termination, and any vested Non-Incentive Stock Options will expire one year
from the date of termination.
Barton J. Bresky was employed as President and Chief Executive Officer of
the Company from December 6, 1996, until his resignation on August 20, 1997.
Pursuant to the terms of his employment agreement, Mr. Bresky was paid an annual
base salary of $250,000. Pursuant to the terms of the Amendment to Employment
Agreement dated August 21, 1997, by and between the Company and Mr. Bresky, Mr.
Bresky will received severance payments equal to one year's
21
<PAGE>
salary, and a continuation of his health benefits through August 19, 1998,
vesting of options previously granted with respect to 250,000 shares of the
Company's Common Stock was accelerated to March 2, 1998 and he received an
option to purchase up to 15,000 shares of the Company's Common Stock at an
exercise price of $2.375 per share, vesting August 21, 1998 and exercisable
until August 21, 2002.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective May 9, 1997, the Company contracted with Weatherly Financial
("Weatherly") for Weatherly to act as financial advisor to the Company on an
exclusive basis with respect to evaluating, pricing, negotiating and closing
mergers and acquisitions and other investments and arranging financing on the
Company's behalf. Weatherly was to be compensated for these services through
prescribed fees and, in addition, Weatherly was granted Warrants, effective May
9, 1997, to purchase 805,000 shares of the Company's Common Stock at $2.50 per
share. These warrants were to vest upon the achievement of certain objectives
with respect to the Company's business performance and were part of a complex
overall arrangement that also included additional warrant opportunities.
All of the parties to the Weatherly Agreement anticipated that Thomas A.
McFall and John W. Prutch, in their capacities as associates of Weatherly, would
play a significant role in performing the services under the agreement and would
receive a significant portion of the compensation payable under the Weatherly
Agreement. When it later employed Mr. McFall as its CEO and Mr. Prutch as its
President, the Company replaced the former arrangement with Weatherly with an
agreement, approved by the Board of Directors on August 10, 1998 to be effective
as of May 8, 1998, directly with Messrs. McFall and Prutch. Under the terms of
the new agreement, the warrants previously issued to Weatherly have been
assigned 50% to Mr. McFall and 50% to Mr. Prutch, the exercise price of these
warrants has been reset to $1.75 per share (the closing market price for the
Common Stock on May 8, 1998).
Each of Messrs. McFall and Prutch also have been issued additional
warrants, with a term of 10 years, for the purchase of up to 1,902,273 shares of
Common Stock at an exercise price of $1.75 per share. All of the warrants held
by Messrs. McFall and Prutch (including those originally issued to Weatherly)
now will be subject to a new vesting schedule which provides that 33.4% of the
Warrants will be immediately exercisable and the remainder will vest on the
basis of the achievement of prescribed increases in the Company's annual pre-tax
earnings and/or the average public trading price of its Common Stock. The
Warrants contain customary antidilution provisions and piggyback registration
rights and, subject to certain exceptions, Messrs. McFall and Prutch may not
dispose of the Common Stock issuable under the Warrants without the prior
consent of WGI, LLC. The new 3,804,546 warrants issued to Messrs. McFall and
Prutch after they became directors of the Company are subject to shareholder
approval as described under Proposal 6 below, together with a more detailed
description of the terms of such warrants.
The new agreement also provides that Messrs. McFall and Prutch,
collectively, will receive a success fee equal to three percent (3%) of the
proceeds of any financing transactions which they participate in developing,
negotiating and closing with third parties for the benefit of
22
<PAGE>
the Company, a portion of which may be paid in additional equity under certain
circumstances. Under this provision, Messrs. McFall and Prutch each received a
cash payment of $50,000 in connection with the Company's recent private
placement of $5,000,000 of its 5% Series G1 Convertible Preferred Stock. They
also (collectively) will receive a success fee in connection with identifying,
negotiating and closing any Acquisition Transactions (as defined in the
agreement) equal to three percent (3%) of the Aggregate Consideration paid by
the Company (as defined in the agreement). See "Interests of Certain Persons in
the Acquisition" under Proposal 2 herein for a description of amounts which will
become payable to Messrs. McFall and Prutch upon the Company's completion of its
pending acquisition of substantially all of the assets of Tahiti Apparel, Inc.
All cash payments to Messrs. McFall and Prutch called for under the terms of
this agreement will be subject to offset against annual compensation of $150,000
which they each receive in their separate capacities as officers of the Company.
Henry Aaron, a director of the Company, is a principal of Henry-Aaron,
Inc., a corporation that holds various licenses from Major League Baseball
Properties. Pursuant to an agreement between the Company and Henry-Aaron, Inc.,
the Company is authorized to manufacture, market and sell various products
bearing the logos and trademarks of Major League Baseball pursuant to the
license held directly by Henry-Aaron, Inc. In connection with the execution of
this agreement, the Company granted Henry Aaron and another principal of
Henry-Aaron, Inc. warrants to purchase a total of 200,000 shares of Common Stock
at $1.75 per share, effective May 8, 1998, and vesting as to 100,000 shares on
December 31, 1998 and as to the remaining 100,000 shares on December 31, 1999.
Mr. Aaron holds 150,000 of such warrants. In addition to paying royalties due to
Major League Baseball Properties under the arrangement with Henry-Aaron, Inc.,
the Company also pays an override to Henry-Aaron, Inc. on its sales of Major
League Baseball products. These payments to Henry-Aaron, Inc. totaled $270,000
in 1997 and $157,718 through the first nine months of 1998.
PROPOSAL 2
APPROVAL OF THE ISSUANCE OF UP TO
10,070,000 ADDITIONAL SHARES
OF COMMON STOCK
IN CONNECTION WITH
THE COMPANY'S ACQUISITION OF
TAHITI APPAREL, INC.
The Board of Directors has approved, and recommends to the Shareholders for
their approval, the issuance of up to 10,070,000 additional shares of the
Company's Common Stock in connection with the Company's pending acquisition of
substantially all of the assets of Tahiti Apparel, Inc. ("Tahiti"), a New Jersey
Corporation engaged in the design and marketing of swimwear, body wear and
active wear for ladies and girls. The acquisition will take place pursuant to
the terms of an Asset Purchase Agreement dated December ___, 1998 between the
Company, Tahiti and the majority stockholders of Tahiti (the "Acquisition
Agreement"). Any capitalized terms used but not defined in the following
discussion are used as defined in the Acquisition Agreement, a copy of which is
attached as ANNEX I to this Proxy Statement.
23
<PAGE>
Background of the Acquisition.
In October 1997, senior executives of the Company met with the senior
executives and principal shareholders of Tahiti for the first time concerning a
possible acquisition of Tahiti by the Company. Negotiations between the parties
continued on an intermittent basis until February 1998 when they were
temporarily suspended. Negotiations resumed in March 1998 and resulted in the
executive of a letter of intent on April 15, 1998.
Following the execution of the letter of intent, the Company commenced its
due diligence review of Tahiti. During the course of the due diligence, review,
the parties negotiated and executed an amendment dated June 25, 1998, to the
letter of intent. During the course of continued negotiations, and in order to
enable Tahiti to obtain working capital financing needed to support its ongoing
operations, the Company guaranteed repayment by Tahiti of certain amounts Tahiti
owes under one of its loans from Bank of New York Financial Corporation
("BNYFC"), which also is the Company's senior lender. This loan had an unpaid
principal balance, as of December 11, 1998, of $2,072,552. In consideration of
the Company's guarantee of this loan, BNYFC has subordinated to the Company
BNYFC's security interest in certain assets of Tahiti such that, as of December
11, 1998, the Company has a first lien security interest in approximately $1.9
million of Tahiti's accounts receivable and $1.6 million of Tahiti's inventory.
The parties continued to negotiate the terms of the acquisition throughout
the due diligence review period and reached final agreement on the terms of the
transaction on December ___ 1998.
Effective Time.
If the Company's shareholders vote to approve the issuance of up to
10,070,000 additional shares of Common Stock in connection with the Company's
acquisition of substantially all of Tahiti's assets and business and the other
conditions to closing under the Acquisition Agreement are satisfied or waived
(where permitted by the Acquisition Agreement), the acquisition will become
effective upon the completion of the Closing in accordance with the terms of the
Acquisition Agreement. The Company anticipates that Closing will occur not later
than three (3) business days following satisfaction of all conditions to Closing
under the Acquisition Agreement.
Purchase Price Under the Acquisition Agreement.
The purchase price for the assets and business of Tahiti under the
Acquisition Agreement will be $15,872,500, payable in shares of the Company's
Common Stock having an agreed value (for purposes of such payment only) of $1.75
per share. Additionally, the Company has agreed to assume, generally, the
liabilities of the business set forth on Tahiti's audited balance sheet as of
June 30, 1998 and all liabilities incurred in the ordinary course of business
during the period commencing July 1, 1998 and ending on the Closing Date
(including Tahiti's liabilities under a separate agreement (as described below)
between Tahiti and Ming-Yiu Chan, Tahiti's minority shareholder). The
acquisition will result in the issuance of 9,070,000 shares of the Company's
Common Stock to Tahiti in payment of the purchase price under the Acquisition
Agreement. The
24
<PAGE>
Acquisition Agreement also provides that 1,000,000 of such shares will be placed
in escrow with Tahiti's counsel, Wachtel & Masyr, LLP (acting as escrow agent
under the terms of a separate escrow agreement) for a period commencing on the
Closing Date and ending on the earlier of the second anniversary of the Closing
Date or the completion of Signal's annual audit for its 1999 fiscal year. This
escrow will be used exclusively to satisfy the obligations of Tahiti and its
majority stockholders to indemnify the Company against certain losses as
specified in the Acquisition Agreement. Any shares not used to satisfy such
indemnification obligations will be released to Tahiti at the conclusion of the
escrow period. See "THE ACQUISITION AGREEMENT--Additional
Agreements--Indemnification." As discussed below, the Company also may issue up
to 1,000,000 additional shares of Common Stock under the terms of the Chan
Agreement.
The Chan Agreement.
Ming-Yiu Chan is a 33% shareholder of Tahiti and Tahiti may be indebted to
Chan in the amount of approximately $6,770,000. It is a condition to the
Company's obligations to close the acquisition that the Company, Tahiti, and
Tahit's majority stockholders be able to reach an agreement with Chan, on terms
reasonably satisfactory to the Company, Tahiti and its majority stockholders,
with respect to the payment of the Company's debt to Chan and Chan's equity
interest in the Company resulting from the acquisition. It is anticipated that
the terms of this agreement (the "Chan Agreement") will provide for the
formalization of Tahiti's indebtedness to Chan, together with the release by
Tahiti of all claims against Chan and the release by Chan of all claims against
Tahiti and its officers, directors, stockholders, successors and assigns. Under
this arrangement, Tahiti will execute a promissory note to Chan in the principal
amount of $6,770,000 (the "Chan Note"), bearing interest at the rate of 8% per
annum, and payable as follows:
(a) $1,000,000 payable in cash (with accrued interest thereon) in the
following installments: (1) $250,000 payable 90 days following the
closing of the transactions contemplated by the Acquisition Agreement,
(2) $200,000 payable 180 days following closing, (3) $250,000 payable
270 days following closing and (4) $250,000 payable 360 days following
closing; and
(b) Balance of $5,770,000 plus accrued interest payable, at the option of
Tahiti, through either:
1. Delivery of (X) 1,000,000 shares of Common Stock of the Company
in satisfaction of $3,270,000 of such debt plus (Y) payment of
the balance of $2,500,000 (plus accrued interest) in cash in
eight equal quaterly installments commencing April 1, 2000; or
2. Payment of the entire balance (including accrued interest) in
cash in eight quarterly installments, beginning on the first
anniversary of the closing of the transactions contemplated by
the Asset Purchase Agreement.
Under the terms of the Acquisition Agreement, the Company will assume the
Chan Note following Closing.
25
<PAGE>
Potential Repurchase of Tahiti Assets by Current Majority Stockholders.
The Acquisition Agreement gives Tahiti's majority stockholders, Zvi
Ben-Haim and Michael Harary, the right (jointly) to repurchase Taiti's assets
from the Company if, at any time prior to the fifth anniversary of the closing,
the Company is unable to provide sufficient financing to its subsidiary or
division operating the business purchased from Tahiti to support a level of
sales at least equal to the sales of such business for the preceding season plus
a reasonable rate of growth (a "Financing Default"). This repurchase option
would have to be exercised by giving notice to the Company within 90 days of the
occurrence of any such Financing Default, with closing of the repurchase to take
place within 30 days thereafter. If Messrs. Ben-Haim and Harary should exercise
this right, the repurchase price would consist of repayment to the Company of
the original $15,872,500 purchase price (payable in shares of Common Stock which
would then be valued at the greater of $1.75 per share or the average market
price over the 20 preceding trading days), plus assumption of liabilities
incurred in the ordinary course of business.
Restrictions on Resale of Company Common Stock; Registration Rights.
The shares of Company Common Stock issued pursuant to the acquisition will
not be registered under the Securities Act of 1933, as amended, and,
accordingly, may not be sold, transferred or otherwise disposed of by the
recipients except: (1) pursuant to an effective registration statement; (2) in
compliance with Securities Act Rule 144; or (3) if, in the opinion of counsel
reasonably acceptable to the Company or pursuant to a "no action" letter
obtained by the selling shareholder from the staff of the Commission, such sale,
transferor other disposition is otherwise exempt from registration under the
Securities Act.
Under the terms of a separate Registration Rights Agreement executed in
conjunction with the Acquisition Agreement, Tahiti and/or its majority
shareholders (and certain permitted assignees) will have the right for a period
of ten years following the Closing Date, under certain circumstances, to have
shares of the Company's Common Stock issued to Tahiti pursuant to the
Acquisition Agreement registered for resale if the Company otherwise registers
shares of its Common Stock for sale. Such "piggy back" registration rights will
not apply, however, in the case of any registration by the Company of (A)
securities issued or issuable to the holders of the Company's 5% Series G1
Convertible Preferred Stock or (when issued) the Company's 5% Series G2
Convertible Preferred Stock, (B) securities to be issued pursuant to a stock
option or other employee benefit or similar plan or (C) in connection with any
transaction (such as another acquisition) contemplated by Rule 145 under the
Securities Act. The Company also has agreed that Tahiti's majority shareholders
(and certain permitted assignees) will be entitled to one "demand" registration
during each of the first five (5) years following the Closing Date, and to one
additional demand registration between the fifth and tenth anniversaries of the
Closing Date, provided that they are still serving in their respective
capacities as employees of Signal at such time. The Company generally will be
responsible for the expenses of any resale registration of the shares issued
under the Acquisition Agreement while Tahiti's former majority shareholders
continue to serve as employees of the Company, except that the selling
shareholders will be required to pay any underwriter's and/or brokers
commissions that the Company would not have incurred if their shares had not
been included in the registration. In the case, however, of any demand
registration effected during the first five years following the Closing Date but
while the
26
<PAGE>
registering shareholder is no longer an employee of Signal, the registering
shareholder shall be responsible for all such expenses.
The parties also have entered into a Stock Resale Agreement, whereby
Tahiti's majority stockholders have agreed (subject to certain limited
exceptions) to limit their transfers of Company Common Stock during each of the
first five (5) years following the Closing Date to no more than five percent
(5%) of the number of shares held by each of them during each such year. This
agreed limitation will expire as to either shareholder if his employment with
the Company should be terminated prior to the end of such five year period
either (A) by the Company, without cause, or (B) by the employee under
circumstances amounting to a constructive termination as set forth in each
shareholder's employment agreement. See "Interests of Certain Persons in the
Acquisition."
NYSE Listing.
In accordance with the rules of the New York Stock Exchange, on which the
Company's Common Stock is listed for trading, the Company will file a Listing
Application for the additional shares of Common Stock issuable pursuant to the
Acquisition Agreement.
Expenses.
The Acquisition Agreement provides that all fees and expenses incurred in
connection with the Acquisition Agreement and the transactions contemplated by
the Acquisition Agreement will be paid by the party incurring such fees or
expenses, whether or not the acquisition is consummated.
Certain Federal Income Tax Considerations.
The proposed acquisition is intended to qualify as a tax-free asset
acquisition under Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as
amended (the "Code"). In this type of tax-free acquisition, the acquiror (in
this case, the Company) acquires substantially all of the assets of the company
being purchased (Tahiti) solely in exchange for the acquiror's voting stock. The
Company is permitted to assume some or all of Tahiti's liabilities; subject,
however, to the limitation that if cash or other non-stock consideration is paid
to Tahiti, the value of all such non-stock consideration plus the assumed
liabilities may not exceed 20% of Tahiti's fair market value. A purchaser (such
as the Company) may assume unlimited liabilities if no other non-stock
consideration is involved in the exchange.
In this type of tax-free acquisition, Tahiti will be required to distribute
the Common Stock of the Company which it receives to its stockholders in a
liquidating distribution. To the extent that Tahiti shareholders receive Company
Common Stock in pursuance of a plan of reorganization, they will not be required
to recognize any gain or loss on the exchange unless non-stock consideration
("boot") is received. Under Section 356 of the Code, if the transaction would
qualify as a tax-free exchange but for the fact that boot is received, then
Tahiti's stockholders may be required to recognize gain in an amount not in
excess of the fair market value of the boot received. Upon the liquidation of
Tahiti, its stockholders will have a basis in the shares of the Company's Common
Stock which they receive equal to their basis in their Tahiti stock, decreased
by the fair market value of any boot received and increased by any gain
27
<PAGE>
recognized on the exchange. The Company has not made any determination as to
whether the transactions contemplated by the Acquisition Agreement will
successfully qualify as a tax-free exchange under Code Section 368(a)(1)(C), and
Tahiti and its stockholders are responsible for obtaining their own independent
tax advice with regard to these issues.
In general, the Company also will not be required to recognize gain or loss
on the receipt of the assets of Tahiti in a tax-free exchange under Code Section
368(a)(1)(C). However, if the Company were to issue to Tahiti property other
than its own stock, then the Company would be required to recognize gain for
federal tax purposes equal to the excess (if any) of the fair market value of
such additional property over the Company's tax basis is such property. As
described above, the Acquisition Agreement does not provide for the issuance to
Tahiti of any property other than shares of the Company's Common Stock. The
Company's federal income tax basis in the assets acquired from Tahiti will be
equal to Tahiti's tax basis in such assets at the time of the acquisition.
The Company currently has net operating loss (NOL) and certain tax credit
carryforwards for federal income tax purposes. The issuance of shares of the
Company's Common Stock under the terms of the Acquisition Agreement is expected
to result in a technical "change in control" of the Company (as defined in
Section 382(g) of the Code). (It is anticipated, however, that WGI, LLC and its
affiliates will retain practical "control" of the Company by virtue of their
combined interests in the Company's voting securities. See the section of this
Proxy Statement entitled "Security Ownership of Certain Beneficial Owners and
Management" above for a more detailed description of these ownership interests.)
Upon the occurrence of this technical "change in control," certain carryovers
(including the Company's NOLs, general business credits under Code Section 39
and minimum tax credits under Code Section 53) may be limited for federal tax
purposes.
The Company's annual usage of its NOLs in the future will be limited to an
amount based on the fair market value of the Company immediately before the
"change in control" occurred, multiplied by the adjusted "federal long-term
rate" of interest as determined under Code Section 1274(d). To the extent that
the Company cannot fully utilize its NOLs in a given year because of this
limitation, the unused portion may be carried forward for use in a future year
(until the NOLs expire). NOLs generated in tax years beginning before December
31, 1997 will expire in 15 years, and NOLs generated in tax years beginning
after December 31, 1997 will expire in 20 years. The Company's use of its
general business credits and minimum tax credits will be limited in a similar
manner pursuant to Code Section 383.
Accounting Treatment.
The acquisition will be treated as a "purchase" for financial reporting and
accounting purposes, in accordance with generally accepted accounting
principles. After the acquisition, the results of operations of Tahiti's
business will be included in the consolidated financial statements of the
Company. The purchase price for the assets and business of Tahiti under the
Acquisition Agreement will be allocated based on the fair values of the assets
acquired and the liabilities assumed by the Company. Any excess of cost over
fair value of the net tangible assets of Tahiti acquired by the Company will be
recorded as goodwill and other intangible assets. See "SUMMARY UNAUDITED PRO
FORMA FINANCIAL INFORMATION."
28
<PAGE>
Regulatory Approvals Required.
The Company does not believe that any material governmental approvals or
actions will be required for consummation of its acquisition of Tahiti's assets
and business under the Acquisition Agreement.
Summary of Selected Financial Data
The following summary of selected financial data is being provided to assist in
analyzing the financial aspects of the acquisition. The summary of selected
financial data for Signal as of December 31, 1993, 1994, 1995, 1996, and 1997
and for the years then ended have been derived from Signal's audited
consolidated financial statements. The summary of selected financial data for
Tahiti has been derived from Tahiti's audited financial statements as of June
30, 1996, 1997, and 1998 and for the years then ended. The summary of selected
financial data for Tahiti as of June 30, 1994 and 1995 and for the years then
ended are unaudited. The information is only a summary. The information should
be read in connection with the historical financial statements and accompanying
notes contained in the annual, quarterly and other reports filed by Signal with
the SEC and those included elsewhere in this Proxy Statement
SIGNAL APPAREL COMPANY, INC.
SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1997(b) 1996 1995 1994(a) 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 44,616 $ 58,808 $ 89,883 $ 95,818 $ 131,000
--------- --------- --------- --------- ---------
Net loss (30,345) (33,696) (39,959) (53,304) (34,878)
--------- --------- --------- --------- ---------
Basic/diluted net loss per common share (2.39) (2.91) (3.80) (6.88) (4.17)
--------- --------- --------- --------- ---------
Total assets 29,660 26,167 43,229 69,448 87,914
--------- --------- --------- --------- ---------
Long-term obligations 60,147 66,423 57,243 49,258 26,748
--------- --------- --------- --------- ---------
</TABLE>
(a) The data includes amounts applicable to American Marketing Works from date
of acquisition, November 22, 1994.
(b) The data includes amounts applicable to Grand Illusion and Big Ball Sports
from the dates of acquisition, (October 1, 1997 and November 5, 1997)
respectively.
29
<PAGE>
TAHITI APPAREL, INC.
SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales $ 64,574 $ 46,782 $ 34,431 $ 27,505 $ 12,997
-------- -------- -------- -------- --------
Net income/(loss) (2,392) 1,199 (611) 32 62
-------- -------- -------- -------- --------
Basic/diluted net income/(loss) per common share (15.95) 7.99 (4.07) 0.21 0.41
-------- -------- -------- -------- --------
Total assets 16,507 7,628 6,964 7,266 4,054
-------- -------- -------- -------- --------
Long-term obligations 0 46 100 150 210
-------- -------- -------- -------- --------
</TABLE>
30
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited summary pro forma Income Statement and Other Financial
Data give effect to the acquisition as if it had been consummated on January 1,
1997. The Pro Forma Balance Sheet Data gives effect to the acquisition as if it
had consummated on October 3, 1998. The Pro Forma Financial Information does not
purport to represent what Signal's results of operations or financial position
actually would have been had the acquisition described herein in fact been
consummated on the dates indicated or to project the results of operations or
financial positions for any future period or date. The Pro Forma Financial
Information is based upon assumptions that Signal's management believes are
reasonable and should be read in conjunction with the section of this Proxy
Statement entitled "Unaudited Pro Forma Financial Information Concerning the
Acquisition" and financial statements and the notes thereto included elsewhere
in this document or incorporated herein by reference.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Year Ended Nine Months Ended
December 31, 1997 October 3, 1998
<S> <C> <C>
Income Statement Data:
Net sales $ 105,136 $ 97,180
Net loss $ (31,032) $ (20,157)
Other Financial Data:
Basic/diluted net loss per common share $ (1.43) $ (0.48)
Weighted average number of shares outstanding 21,763 41,711
Balance Sheet Data:
Total assets $ 71,872
Long-term debt, net of current maturities $ 21,054
Shareholders' deficit $ (32,650)
</TABLE>
31
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
CONCERNING THE ACQUISITION
The following unaudited pro forma condensed balance sheet and statements of
operations have been prepared to reflect the Company's purchase from Tahiti of
substantially all of Tahiti's assets and the assumption of selected liabilities
of Tahiti under the terms of the Acquisition Agreement. The Company intends to
close the acquisition promptly after receiving approval from its shareholders
for the issuance of Common Stock in connection with the acquisition at its 1998
Annual Meeting. The purchase price for the assets is approximately $15,873,000,
subject to adjustment, to be paid in the Company's common stock valued at $1.75
per share or 9,070,000 common shares.
The unaudited pro forma condensed statements for operations of the year
ended December 31, 1997 and the nine months ended October 3, 1998, and the
unaudited pro forma condensed balance sheet as of October 3, 1998, set forth
below, have been prepared by combining the Company's audited consolidated
statement of operations for the year ended December 31, 1997 with Tahiti's
unaudited statement of operations for the twelve months ended December 31, 1997;
combining the Company's unaudited condensed consolidated statement of operations
for the nine months ended October 3, 1998 with Tahiti's unaudited condensed
statement of operations for the nine months ended September 30, 1998; and
combining the Company's unaudited condensed consolidated balance sheet as of
October 3, 1998 with Tahiti's unaudited condensed balance sheet as of September
30, 1998.
The unaudited pro forma condensed statements of operations for the year
ended December 31, 1997 and the nine months ended October 3, 1998 were prepared
as if the acquisition had occurred on January 1, 1997 and 1998, respectively.
The unaudited pro forma condensed balance sheet October 3, 1998 was prepared
giving effect to the acquisition on such date.
For purpose of presenting pro forma results, no changes in revenues and
expenses have been made to reflect the result of any modification to operations
that might have been made had the acquisition been consummated on the assumed
effective date for each statement as described above. The pro forma expenses
include the recurring costs which are directly attributable to the acquisition,
such as interest expense and amortization of goodwill, change in certain
expenses, and the related tax effects. The pro forma adjustments made to the pro
forma condensed balance sheets include (i) adjustments to remove selected Tahiti
assets not acquired and liabilities not assumed in the acquisition, (ii) the
issuance to the former stockholders of Tahiti of 9,070,000 shares of the
Company's common stock, and (iii) the recognition of goodwill resulting from the
acquisition. The pro forma financial information does not purport to be
indicative of the results which would have been attained had the acquisition
been completed as of the date and for the periods presented or which may be
attained in the future.
The unaudited pro forma condensed balance sheet reflects the preliminary
allocation of purchase price to the assets acquired and liabilities assumed in
the acquisition to the Company's tangible and intangible assets and liabilities.
The final allocation of such purchase price , and the resulting depreciation and
amortization expense in the accompanying unaudited pro forma statements of
operations, will differ from the preliminary estimates due to the final
allocation being based on actual closing date amounts of assets and liabilities,
and a final determination of the fair market values of property and other assets
as of the closing date.
32
<PAGE>
Signal Apparel Company, Inc.
Pro Forma Condensed Balance Sheet
October 3, 1998
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
ProForma Adjustments
Signal Tahiti -----------------------------
October 3, 1998 September 30, 1998 Debit Credit Combined
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Restricted cash $ -- $ 100 $ $ 50(a) $ 50
Cash and cash equivalents 18 -- 18
Receivables 5,502 538 6,040
Note receivable 324 -- 324
Inventories 12,603 9,173 21,776
Due from Related Party -- 2,918 2,189(a) 729
Prepaid expenses and other 510 1,028 1,538
-------------------------------------------------------------------------------------
Total current assets 18,957 13,757 -- 2,239 30,475
-------------------------------------------------------------------------------------
Net PP&E 4,919 1,671 6,590
Goodwill 4,550 22,150(b) 26,700
Debt issuance costs 7,206 7,206
Restricted cash -- 654 654
Other Assets 59 188 247
-------------------------------------------------------------------------------------
Total Assets $ 35,691 $ 16,270 $ 22,150 $ 2,239 $ 71,872
=====================================================================================
Liabilities and Shareholders' Deficit
Current Liabilities:
Accounts payable $ 4,853 $ 2,984 50(a) $ 7,787
Bank overdraft 667 49 716
Accrued liabilities 6,255 495 6,750
Accrued interest 3,209 -- 3,209
Royalty payable 979 979
Due to Shareholder 181 181
Due to Related Party 6,780 6,780
Current portion of long-term 5,828 50 5,878
debt
Revolving advance account 42,348 8,840 51,188
-------------------------------------------------------------------------------------
63,160 20,358 50 -- 83,468
-------------------------------------------------------------------------------------
Long-term debt 21,054 21,054
Other noncurrent liabilities -- --
Preferred stock 48,746 48,746
Common stock 325 105 105(b) 91(b) 416
Additional paid in capital 165,079 15,782(b) 180,861
Accumulated deficit (261,556) (4,193) 4,193(b) (261,556)
-------------------------------------------------------------------------------------
Subtotal (47,406) (4,088) 105 20,066 (31,533)
Less treasury shares (1,117) (1,117)
-------------------------------------------------------------------------------------
(48,523) (4,088) 105 20,066 (32,650)
-------------------------------------------------------------------------------------
Total liabilities and shareholders'
deficit $ 35,691 $ 16,270 $ 155 $ 20,066 $ 71,872
=====================================================================================
</TABLE>
33
<PAGE>
Signal Apparel Company, Inc.
Pro Forma Condensed Statement of Operations
For the Year Ended December 31, 1997
(Unaudited)
(In Thousands, Except per Share Data)
<TABLE>
<CAPTION>
ProForma ProForma
Signal Tahiti Adjustments Total
--------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 44,616 $ 60,520 $ 105,136
Cost of Sales 39,287 42,206 $ 81,493
--------------------------------------------------------------------
Gross Profit 5,329 18,314 -- 23,643
Royalty expense 5,467 -- 5,467
SG&A expenses 13,916 14,639 1,477 (c) 30,550
518 (f)
Interest expense 14,726 2,367 -- 17,093
Other expense, net 1,565 -- 1,565
--------------------------------------------------------------------
Income (loss) before income taxes (30,345) 1,308 (1,995) $ (31,032)
Income Taxes -- (523) 523 (d) --
--------------------------------------------------------------------
Net income (loss) $ (30,345) $ 785 $ (1,472) $ (31,032)
====================================================================
Weighted average shares outstanding 12,693 0.15 N/A 21,763
Basic/diluted net income (loss) $ (2.39) $ 5.23 N/A $ (1.43)
per common share
</TABLE>
34
<PAGE>
Signal Apparel Company, Inc.
Pro Forma Condensed Statement of Operations
For the Nine Months ended October 3, 1998
(Unaudited)
(In Thousands, Except per Share Data)
<TABLE>
<CAPTION>
Signal Tahiti ProForma ProForma
October 3, 1998 September 30, 1998 Adjustments Total
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 39,341 $ 57,839 $ $ 97,180
Cost of Sales 32,163 43,785 75,948
---------------------------------------------------------------------------------
Gross Profit 7,178 14,054 -- 21,232
Royalty expense 3,290 -- 3,290
SG&A expenses 13,831 13,916 372 (f) 28,976
(250)(g)
1,107 (c)
Interest expense 6,961 2,717 -- 9,678
Other (income)/expense, net (555) -- (555)
---------------------------------------------------------------------------------
Loss before income taxes (16,349) (2,579) (1,229) (20,157)
Income Taxes -- (58) 58 (d) --
---------------------------------------------------------------------------------
Net loss $(16,349) $ (2,637) $(1,171) $(20,157)
=================================================================================
Weighted average shares outstanding 32,641 0.15 N/A 41,711
Basic/diluted net loss per common share $ (0.50) $ (17.58) N/A $ (0.48)
</TABLE>
35
<PAGE>
EXPLANATION OF ADJUSTMENTS REFLECTED ON
PRO FORMA BALANCE SHEET AND STATEMENTS OF OPERATIONS
(a) To remove selected Tahiti assets not acquired and the liabilities not
assumed in the acquisition.
(b) To recognize the issuance of 9,070,000 shares of the Company's common stock
and the excess of the cost of the assets acquired over their fair value at
the date of acquisition as goodwill and to eliminate the historical equity
balances of Tahiti.
(c) To reflect amortization of goodwill recorded in connection with (b) above.
The Company will amortize goodwill on a straight-line basis over a period
of 15 years.
(d) To consider the federal and state tax effects of the pro forma adjustments
and the impact of the Tahiti results on the consolidated income taxes.
(e) Net earning per common share are computed assuming that the 9,070,000
shares of the Company's common stock issued in connection with the
acquisition are outstanding for the entire periods presented.
(f) To reflect increased compensation to be paid to the former stockholders of
Tahiti, offset in part by the reduction of charitable contributions made by
Tahiti.
(g) To reflect nonrecurring costs associated with the merger.
36
<PAGE>
ADDITIONAL INFORMATION CONCERNING THE COMPANY
The Company files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any document which the
Company files at the SEC's public reference rooms in Washington, D.C., New York,
New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. The Company also files such
reports and other information with the NYSE, on which the Common Stock is
traded. Copies of such material can be inspected at the offices of the NYSE, 20
Broad Street, New York, New York 10005. Our SEC filings also are available to
the public from the SEC's worldwide web site at "http://www.sec.gov."
The SEC allows the Company to "incorporate by reference" the information
that the Company files with them, which means that the Company can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this Proxy
Statement, and information that the Company files later with the SEC will
automatically update and supersede this information. The "file number" used by
the SEC to identify documents filed by the Company is 1-2782. The Company hereby
incorporates by reference the documents listed below and any future filings that
the Company will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934:
(1) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
(2) the Company's Quarterly Reports on Form 10-Q for the quarterly periods
ended April 4, 1998, July 4, 1998 and October 3, 1998; and
(3) the Company's Current Report on Form 8-K dated September 17, 1998.
Copies of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 and its Current Report on Form 8-K dated September 17,
1998 will be delivered to you with this Proxy Statement. You may request a copy
of any of the other filings listed above, at no cost, by writing or telephoning
the Company's Secretary at the following address:
Robert J. Powell, Secretary
Signal Apparel Company, Inc.
200 Manufacturers Road
Chattanooga, TN 37405
Telephone: (423) 266-2175
You also may obtain copies of any of the Company's other SEC filings,
either from the SEC or from the Secretary of the Company as described above.
37
<PAGE>
Interests of Certain Persons in the Acquisition.
In considering the recommendation of the Company's Board of Directors with
respect to the approval of the issuance of Common Stock pursuant to the
Acquisition Agreement and the transactions contemplated thereby, stockholders of
the Company should be aware that certain members of the management of the
Company who are also directors, as well as certain Tahiti officers and
shareholders who will become officers and/or directors of the Company following
the acquisition, may have certain interests in the acquisition that are
different from the interests of the Company's shareholders generally.
Certain Success Fees. Under the terms of the Company's employment
arrangements with Thomas A. McFall (a director and Chief Executive Officer) and
John W. Prutch (a director and President), each of Messrs. McFall and Prutch
will receive a success fee in connection with the acquisition equal to one and
one-half percent (1.5%) of the Aggregate Consideration paid by the Company (as
defined in the agreement). Under the terms of these agreements, the closing of
the transactions set forth in the Acquisition Agreement and the Chan Agreement
will result in each of Messrs. McFall and Prutch becoming entitled to receive a
cash payment from the Company equal to 1.5% of the aggregate value of the
consideration payable in connection with such transactions. As described above
under the heading "Certain Relationships and Related Transactions," the net
amount of this payment will be subject to reduction by the amount of any
compensation which Messrs. McFall and Prutch receive in their separate
capacities as officers of the Company.
Tahiti Employment Agreements. Messrs. Zvi Ben-Haim and Michael Harary, the
current majority stockholders of Tahiti, both will be employed by the Company to
continue to manage Tahiti's business under 5-year employment agreements
following consummation of the acquisition. Each of these agreements provides for
a base salary of $500,000 per year, with annual bonuses based on a sliding scale
tied to the annual amount of earnings before interest, taxes, depreciation and
other allocations ("EBITDA") generated by Tahiti's business following its
acquisition by the Company. No bonus will be payable unless such EBITDA reaches
an annual level of at least $4.5 million. The employment agreements further
provide that Messrs. Ben-Haim and Harary both will be appointed to the Company's
Executive Committee, and that (subject to the fiduciary duties of its Board of
Directors) the Company will use its reasonable best efforts to cause Ben-Haim to
be nominated for election as a director of the Company.
The employment agreements also provide that Messrs. Ben-Haim and Harary
each will be provided with an expense allowance, automobile allowances and
additional fringe benefits generally commensurate with those of the Company's
other senior executives during the term of their employment, and will
participate in all insurance, retirement and other benefit programs available to
the Company's employees generally. In the event of any Change in Control of the
Company (as defined in the employment agreements), each of Messrs. Ben-Haim and
Harary would have the right to volutarily terminate his employment and receive
(A) a lump sum payment equal to his annual base salary and (B) the immediate
vesting of any incentive compensation benefits or compensatory option grants.
The employment agreements also provide for excise tax gross up payments to each
of Messrs. Ben-Haim and Harary if it is determined that, as a result of any
payment made by the Company to either executive (including any payments under
the change
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in control provision), such executive would be liable for the excise tax imposed
on "excess parachute payments" by Section 4999 of the Code.
The agreements each contain a covenant not to compete with the Company: (1)
if the employee voluntarily terminates, generally, or is terminated by the
Company for cause, for a period extending through the lesser of two years or
December 31, 2004, (2) if the employee voluntarily terminates (under certain
circumstances) or is terminated without cause, during the Post Termination
Period (as defined below) and (3) for a period of one year at the end of the
5-year term (provided that the average closing price for the Company's Common
Stock over a period of 60 days at the end of such 5-year period is at least
$5.00 per share and the average daily trading volume is at least 150,000 shares
per day). This covenant not to compete would not be effective in the event of
any termination of employment pursuant to the change in control provision of the
employment agreements.
Upon any termination of employment due to death or disability, either of
Messrs. Ben-Haim or Harary (or his beneficiary) would receive any then-earned
bonus plus six months base salary and any reimbursable expenses. Upon
termination without cause, each of the employment agreements provides for (A)
the immediate vesting of any incentive compensation benefits or compensatory
option grants, (B) the continuation of base salary for a period equal to the
shorter of two years or the remaining term of the agreement (the "Post
Termination Period"), (C) a continuation of all benefits through the Post
Termination Period, and (D) payment of any bonus which otherwise would have been
applicable as if the executive were employed through December 31 of the year in
which such termination occurs. No additional compensation would be payable for
any period following a voluntary termination or a termination for cause.
Unique Character Bonus Payments. In addition to the arrangements described
above, the Acquisition Agreement also provides that, during the five year period
commencing on the closing date of the acquisition, the Company will pay to Zvi
Ben-Haim and Michael Harary (collectively) an amount equal to ten percent (10%)
of the Company's annual net operating income derived from sales of merchandise
related to a particular unique character developed by Tahiti, which constitutes
a portion of the assets to be purchased from Tahiti (with such net operating
income to be calculated net of any additional capital invested by the Company in
such business). After the initial five year period, the Company will pay Messrs.
Ben-Haim and Harary an amount equal to twenty-five percent (25%) of its net
operating income from such business.
THE ACQUISITION AGREEMENT
The following is a brief summary of the terms of the Acquisition Agreement,
which is attached as ANNEX I to this Proxy Statement and is incorporated herein
by reference. This summary is qualified in its entirety by reference to the
Acquisition Agreement.
The Asset Purchase.
Under the terms of the Acquisition Agreement, assuming approval by the
Company's shareholders of this Proposal Number 2 concerning the issuance of
Common Stock and the satisfaction (or waiver, if applicable) of the other
conditions to closing prescribed in the Acquisition
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Agreement, Tahiti will sell to the Company substantially all of its assets,
including without limitation all intellectual property of Tahiti and all of its
rights to the use of the name "Tahiti Apparel, Inc." in the conduct of its
business (subject only to the exclusion of certain assets with an aggregate
value not exceeding $50,000). The Company will pay the purchase price for the
assets and business of Tahiti through delivery of 9,070,000 shares of the
Company's Common Stock. Additionally, the Company will assume scheduled
liabilities of Tahiti, including license transfer fees, liabilities set forth on
Tahiti's audited balance sheet as of June 30, 1998 and all liabilities incurred
in the ordinary course of business during the period commencing July 1, 1998 and
ending on the Closing Date (including all liabilities of Tahiti under any
agreement reached with Ming-Yiu Chan, Tahiti's minority shareholder, as
described above under the heading "The Chan Agreement").
Representations and Warranties.
The Acquisition Agreement includes various customary representations and
warranties of both Tahiti and the Company. In particular, the Acquisition
Agreement includes reciprocal representations and warranties of the Company and
Tahiti as to the following:
o valid corporate organization, good standing and capital structure;
o the due authorization, execution, delivery, performance and
enforceability of the Acquisition Agreement;
o full disclosure, compliance with applicable laws and the absence of
any material litigation or undisclosed liabilities;
o the status of each party's environmental compliance, labor relations
and insurance coverage; and
o the absence of any broker or finder's fee payable with respect to the
acquisition (other than payments which the Company has agreed to make
to Messrs. McFall and Prutch as described above).
The Acquisition Agreement includes additional customary representations and
warranties by Thaiti, including those with respect to:
o Tahiti's subsidiaries, corporate records, financial statements and tax
status;
o Tahiti's accounts payable and bank accounts, notes and accounts
receivable;
o Tahiti's employee benefit plans and any other material contracts;
o Tahiti's intellectual and intangible property, as well as all names
used by Tahiti in its business in addition to its corporate name;
o the condition of, and the status of Tahiti's ownership or leasehold
interests in, all real and personal property utilized by Tahiti in its
business;
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o the quantity and quality of Tahiti's inventory, as well as Tahiti's
relationships with its major suppliers and customers;
o valid ownership or license interests in, and "Year 2000 Compliant"
status of, all information technology and software used in Tahiti's
business;
o the absence of any undisclosed liens, transactions with affiliates, or
certain other improper practices or regulatory problems;
o Tahiti's financial and business experience, and its investment intent,
with respect to the unregistered and restricted shares of the
Company's Common Stock which it will receive at Closing; and
o the conduct of Tahiti's business in the ordinary course and the
absence of certain material changes or events since June 30, 1998;
The Acquisition Agreement also includes additional customary
representations and warranties by the Company with respect to environmental
matters, the absence of certain material changes in the Company's business since
the date of the letter of intent and the status of the Common Stock to be issued
to Tahiti pursuant to the Acquisition Agreement.
Additional Agreements.
The Acquisition Agreement also provides for the following additional agreements:
Access to Information. Each party has agreed to afford the other party and its
authorized employees, agents, and other representatives full and unrestricted
access during normal business hours, throughout the period prior to the Closing,
to its offices, properties and records and, during such period, to make its
officers, employees and other representatives available to the other party for
consultation and discussion regarding its business, properties and financial
condition. Each party also has agreed to return or destroy (as necessary) copies
of documents, and to take all other actions necessary, to protect the
confidentiality of such information in the event that the Closing does not
occur. Following Closing, each party will provide the other with reasonable
access to such information and personnel as may be necessary in connection with
any audit, inquiry or other examination by any governmental entity relating to
Tahiti's assets or business (subject to reimbursement of such party's expenses
by the requesting party).
Conduct of Tahiti's Business Prior to Closing. Tahiti and its majority
stockholders have agreed that, after the date of the Acquisition Agreement and
prior to the Closing, unless the Company agrees otherwise in writing, they will
use their best efforts to see that Tahiti (A) conducts its business and
maintains its records in the ordinary and regular course, consistent with past
practice and in accordance with the budget attached to the Acquisition
Agreement, (B) maintains all of its licenses and (C) preserves all existing
relationships with its customers, suppliers and employees.
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No Solicitation. Tahiti and its majority stockholders have agreed that, prior to
the Closing, neither they nor any of their respective officers, employees,
representatives or agents will, directly or indirectly, solicit, initiate,
participate in or encourage any attempt by any person (other than the Company
and its agents) to facilitate any transaction involving any merger, sale of
substantial assets, sale of shares of capital stock or any similar transaction
involving Tahiti and its business. Tahiti and its majority stockholders also
have agreed to inform the Company if any of them are approached by any other
party with a proposal or indication of interest regarding any such transaction.
Change of Corporate Name. Tahiti has agreed that, concurrently with the Closing,
it will change its corporate name to a new name bearing no resemblance to its
existing name. It will thereafter cease to make any use of the name "Tahiti
Apparel, Inc." in the conduct of any business, and will execute any consents or
other documents which the Company may require to enable the Company to use such
name in connection with the purchased assets and business from and after the
Closing.
Disclosure Updates. Each party has agreed to promptly notify the other of any
breach by it of any representation, warranty or covenant contained in the
Acquisition Agreement (or any event that would result in such a breach), and of
any suit, claim, proceeding or investigation commenced prior to Closing against
it or any of its officers, directors, employees, agents, consultants,
stockholders or other representatives concerning such party or its securities,
assets or business. Each party also has agreed to supplement the disclosure
Schedules to the Acquisition Agreement as needed to reflect any new developments
prior to Closing.
Survival of Representations and Warranties. The parties have agreed that all
representations, warranties, covenants and agreements of each party contained in
the Acquisition Agreement and related documents shall survive for a period of
one year following the Closing (or until the conclusion of any legal action
commenced within such one year period based on or involving any such
representation, warranty, covenant or agreement).
Indemnification. The Acquisition Agreement contains customary provisions
whereby:
o Tahiti and its majority stockholders have agreed to indemnify and hold
harmless the Company and its directors, officers, employees, agents
and affiliates (as well as successors and assigns of any of them) with
respect to any liabilities arising out of (A) any breach of any
representation, warranty, covenant or agreement of Tahiti or such
stockholders contained in the Acquisition Agreement or in any related
document or (B) any of the approximately $50,000 of Excluded
Liabilities (as defined in the Acquisition Agreement).
o The Company has agreed to indemnify and hold harmless Tahiti and its
majority stockholders, directors, officers, employees, agents and
affiliates (as well as successors and assigns of any of them) with
respect to any liabilities arising out of (A) any breach of any
representation, warranty, covenant or agreement of the Company
contained in the Acquisition Agreement or in any related document, (B)
the conduct by the Company of Tahiti's business after the Closing or
(C) any of the approximately $50,000 of Assumed Liabilities (as
defined in the Acquisition Agreement).
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The Acquisition Agreement also provides, however, that neither party's
indemnification obligations as described above shall be effective until the
aggregate combined total of all such losses incurred by any indemnitee exceeds
$100,000, and that any such indemnification payments by Tahiti or its majority
stockholders shall be made first out of the 1,000,000 shares of Company Common
Stock held in escrow by Tahiti's counsel for such purpose (which shares shall
then be valued at the greater of $1.75 per share or the average market price
over the 20 preceding trading days).
Company Shareholder Vote. The Company agreed to submit to its shareholders for
approval (pursuant to this Proxy Statement) the issuance in connection with the
acquisition of Common Stock having voting power in excess of 20% of the
Company's currently outstanding Common Stock, and to consult with Tahiti
regarding the information concerning the acquisition to be included in this
Proxy Statement. The Company also agreed that, subject to the fiduciary duties
of its directors, the Company's Board of Directors would recommend unanimously
that the Company's shareholders approve such issuance of Common Stock in
connection with the acquisition. The Acquisition Agreement provides that, as a
condition to the obligations of Tahiti and its majority shareholders to close
the acquisition, Tahiti must receive a proxy from WGI, LLC, the Company's
principal shareholder, to vote all shares of the Company's Common Stock held by
WGI, LLC in favor of the issuance of Company Common Stock pursuant to the
Acquisition Agreement. WGI, LLC currently holds 15,818,549 shares of Common
Stock, representing approximately 48.5% of the total outstanding voting power of
the Company's Common Stock.
Employees and Employee Benefits. Tahiti has agreed to use its best efforts to
make the services of all of its employees available to the Company as of the
Closing, and the Company has expressed its intention to offer employment to such
individuals on terms no less favorable that their existing employment
relationship with Tahiti (but without any binding obligation on the part of the
Company except for the Employment Agreements to be executed with Messrs.
Ben-Haim and Harary). Following the Closing, the Company will be solely
responsible for all claims for any type of employment benefits brought by any
employee of Tahiti, regardless of whether any such claim is based on occurrences
that took place (or notices of claims filed) before or after the Closing.
Tax Returns and Tax Audits. Tahiti will be responsible for the preparation and
filing of all tax returns required to be filed with respect to the operations of
its business for periods ending on or prior to the Closing Date (regardless of
when such returns are filed) and for the payment of all taxes due with respect
to such returns. The Company will be responsible for all other tax returns, and
payment of all other taxes, arising out of the sale of Tahiti's assets under the
Acquisition Agreement. Each party shall have the right (at its own expense) to
control any audit, determination, refund claim or amended return with respect to
any tax return or payment of tax for which it had the original responsibility as
described herein. However, neither party can agree to any assessment,
deficiency, settlement or other adjustment that would prejudice the other party
without the other party's consent (which shall not be unreasonably withheld or
delayed). Each party shall notify the other of any audit or other proceeding
that could give rise to any tax liability of the party receiving such
notification.
Publicity. The parties have agreed that they each will have the right to receive
advance notice of, and to comment on, any public statements to be released by
the other party concerning the Acquisition Agreement and related transactions.
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Cooperation and Further Assurances. Each party has agreed to fully cooperate in
making all filings and notifications required, and to take all other actions
needed, to obtain all necessary governmental or third party consents, permits,
authorizations, approvals, orders, qualifications or waivers in order to
consummate the transactions under the Acquisition Agreement, and to use its best
efforts to take, or cause to be taken, any other necessary actions to complete
such transactions (including joint notification to third parties such as
licensors, licensees and sub-licensees of Tahiti of the occurrence of the
Closing and of the Company's rights in all of Tahiti's assets and business
following the Closing).
Governing Law and Venue. The parties have agreed that the Acquisition Agreement
will be governed by New York law, and that any action, suit or proceeding
relating to the Acquisition Agreement must be brought in a Federal or state
court sitting in the City of New York, New York.
Conditions to the Closing of the Acquisition.
The Company's obligations to close the transactions under the Acquisition
Agreement are subject to satisfaction of the following conditions, each of which
may be waived in writing by the Company in its sole discretion:
o Tahiti and its majority stockholders must have performed materially
all of their agreements contained in the Acquisition Agreement, and
their representations and warranties must be true and correct in all
material respects;
o the Company must have received an opinion from Tahiti's legal counsel
as prescribed in the Acquisition Agreement;
o since June 30, 1998, Tahiti must not have suffered (A) any material
casualty loss, (B) any material business interruption, (C) any
material labor difficulty or customer boycott or (D) any other change
that could have a Material Adverse Effect;
o Tahiti must have terminated any related party agreements between it
and either of its majority stockholders (or any affiliate or associate
of either such stockholder);
o Tahiti must deliver certain required affidavits, and any governmental
authorizations or consents required for the Closing of the acquisition
must have been obtained, and there must be no court order or other
governmental decree that would prohibit or materially interfere with
the acquisition;
o the Company must have receive all good standing certificates and other
confirmations of Tahiti's good standing in its jurisdiction of
incorporation, and its qualification in all necessary foreign
jurisdictions, as contemplated by the Acquisition Agreement;
o the Company must have received certified copies of Tahiti's current
Articles of Incorporation and Bylaws, as well as Tahiti's audited
financial statements for the years ended June 30, 1997 and June 30,
1998, together with the audit report of Arthur Andersen LLP concerning
such statements;
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o Tahiti's Board of Directors must have approved the Acquisition
Agreement and all related agreements and transactions;
o the Employment Agreements between the Company and Messrs. Zvi Ben-Haim
and Michael Harary, as contemplated by the Acquisition Agreement, must
be fully executed;
o the Chan Agreement must be fully executed, on terms reasonably
satisfactory to the Company, Tahiti and its majority stockholders,
with respect to the payment of the Company's debt to Chan and Chan's
equity interest in the Company resulting from the acquisition;
o the issuance of Company Common Stock pursuant to the Acquisition
Agreement must have received the approval of the Company's
shareholders required by applicable New York Stock Exchange rules;
o the Company must have secured a new asset based revolving line of
credit (on terms reasonably acceptable to the Company) to finance both
the Company's and Tahiti's businesses on a combined basis, with a
minimum credit limit of $75,000,000 and which shall be secured by side
collateral of not more than $32,000,000 of Treasury Bills and other
U.S. government securities; and
o all documents and other legal matters related to the Closing must be
reasonably satisfactory to the Company's legal counsel.
Tahiti's obligations to close the transactions under the Acquisition
Agreement are subject to satisfaction of the following conditions, each of which
may be waived in writing by Tahiti in its sole discretion:
o the Company must have performed materially all of its agreements
contained in the Acquisition Agreement, and its representations and
warranties must be true and correct in all material respects;
o Tahiti must have received an opinion from the Company's legal counsel
as prescribed in the Acquisition Agreement;
o since June 30, 1998, the Company must not have suffered (A) any
material casualty loss, (B) any material business interruption, (C)
any material labor difficulty or customer boycott or (D) any other
change that could have a Material Adverse Effect;
o any governmental authorizations or consents required for the Closing
of the acquisition must have been obtained, and there must be no court
order or other governmental decree that would prohibit or materially
interfere with the acquisition;
o the Company's Board of Directors must have approved the Acquisition
Agreement and all related agreements and transactions;
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o Tahiti and/or its majority stockholders, as applicable, must have
received (A) the Employment Agreements between the Company and Messrs.
Zvi Ben-Haim and Michael Harary, as contemplated by the Acquisition
Agreement, (B) the Chan Agreement, and (C) the registration rights
agreement concerning the shares of Company Common Stock to be issued
in the acquisition, all duly executed by the Company;
o all personal guaranties given by either of Messrs. Ben-Haim or Harary,
or by any third parties, for any liabilities of Tahiti (and any
collateral securing any such guaranties) must have been released;
o Tahiti must have received a proxy from WGI, LLC, the Company's
principal shareholder, to vote all shares of the Company's Common
Stock held by WGI, LLC in favor of the issuance of Company Common
Stock pursuant to the Acquisition Agreement;
o the Chan Agreement must be fully executed, on terms reasonably
satisfactory to the Company, Tahiti and its majority stockholders,
with respect to the payment of the Company's debt to Chan and Chan's
equity interest in the Company resulting from the acquisition;
o the Company must have secured a new asset based revolving line of
credit (on terms reasonably acceptable to Tahiti's majority
stockholders) to finance both the Company's and Tahiti's businesses on
a combined basis, with a minimum credit limit of $75,000,000 and which
shall be secured by side collateral of not more than $32,000,000 of
Treasury Bills and other U.S. government securities;
o consummation of the acquisition shall constitute, in the opinion of
counsel to Tahiti, a tax-free reorganization under Section
368(a)(1)(c) of the Code; and
o all documents and other legal matters related to the Closing must be
reasonably satisfactory to Tahiti's legal counsel.
Termination, Amendment and Waiver.
The Acquisition Agreement may be terminated and the acquisition may be
abandoned at any time prior to the Closing Date, either before or after the vote
on issuance of 10,070,000 additional shares of Common Stock at the Company's
1998 Annual Meeting of Shareholders, by mutual written consent of the Company
and the majority stockholders of Tahiti (Messrs. Ben-Haim and Harary). The
acquisition also may be terminated by either the Company or Tahiti if (A) the
Closing does not occur on or before February 28, 1999 or (B) any court has
issued an order, decree or ruling permanently restraining, enjoining or
otherwise prohibiting the acquisition, and such order, decree or ruling has
become final and non-appealable.
Either the Company or Tahiti may act unilaterally to terminate the
acquisition if: (A) the other party breaches its representations or warranties
made in the Acquisition Agreement in any
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material respect; (B) the other party fails to comply in any material respect
with any of its covenants or agreements made in the Acquisition Agreement (and
such failure is not cured within 20 days of written notice from the other
party); or (C) either party fails to satisfy one of the conditions to the other
party's obligations to close the acquisition, and such failure is not waived by
the party entitled to the benefit of the condition.
In the event of any termination of the Acquisition Agreement as described
above, all obligations of the parties thereunder shall terminate, except for
each party's obligation to protect the confidentiality of information supplied
by the other and any liability of either party for breach of any term of the
Acquisition Agreement. Additionally, the Acquisition Agreement gives either
party the right to obtain the remedy of specific performance by the other party
of its obligations thereunder if (A) the other party wrongfully refuses to close
the acquisition or (B) there is a failure (or threatened failure) by the other
party to comply with all of its covenants and agreements contained in the
Acquisition Agreement.
The Acquisition Agreement may not be amended or modified except by means of
a written agreement executed by all parties to the original Acquisition
Agreement. At any time prior to Closing, however, either party may (A) extend
the time for performance of any act or obligation of the other; (B) waive any
inaccuracies in the other's representations or warranties in the Acquisition
Agreement or in any related document; or (C) waive compliance by the other with
any agreement or condition contained in the Acquisition Agreement. Any such
waiver or extension must be contained in a written instrument signed by the
party making it, and will not operate as a waiver of any future failure.
Shareholder Vote Requirement.
The New York Stock Exchange rules (pursuant to Paragraph 312.03(c) of the
Listed Company Manual) require shareholder approval when a listed company plans
to issue additional shares of Common Stock, if the Common Stock to be issued has
(or will have upon issuance) voting power greater than or equal to 20% of the
total voting power of the shares of the Company's Common Stock outstanding
before the issuance of such stock or other securities. As of December 7, 1998,
there were 32,636,547 shares of Common Stock outstanding. The amount of Common
Stock issuable pursuant to the Company's acquisition of Tahiti Apparel, Inc. on
the terms described above would total 10,070,000 shares, and would represent in
excess of 20% of the Company's outstanding voting power. Accordingly, the
issuance of such Common Stock is being submitted, pursuant to this Proxy
Statement for approval by the Company's shareholders at the 1998 Annual Meeting.
The Board of Directors believes that the consummation of the Tahiti acquisition,
including the issuance of up to 10,070,000 shares of the Company's Common Stock
under the Acquisition Agreement is fair to, and in the best interests of, the
Company and its shareholders. Accordingly, the Board of Directors recommends
that shareholders vote for approval of this Proposal 2.
The Acquisition Agreement provides that, as a condition to the obligations
of Tahiti and its majority shareholders to close the acquisition, Tahiti must
receive a proxy from WGI, LLC, the Company's principal shareholder, to vote all
shares of the Company's Common Stock held by WGI, LLC in favor of the issuance
of Company Common Stock pursuant to the Acquisition Agreement. WGI, LLC
currently holds 15,818,549 shares of Common Stock, representing
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approximately 48.5% of the total outstanding voting power of the Company's
Common Stock. Accordingly, if holders of other shares of Common Stock
representing more than 1.5% of the Company's total outstanding voting power vote
in favor of this Proposal 2, it is anticipated that the issuance of up to
10,070,000 shares of the Company's Common Stock under the Acquisition Agreement
will be approved.
PROPOSAL 3
APPROVAL OF THE ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK
UPON CONVERSION OF (OR PAYMENT OF DIVIDENDS WITH RESPECT TO)
CERTAIN CONVERTIBLE PREFERRED STOCK
The Board of Directors has approved, and recommends to the Shareholders for
their approval, the issuance of shares of the Company's Common Stock having
(potentially) voting power in excess of 20% of the Company's currently
outstanding shares, upon the conversion of (or, at the election of the Company,
in payment of accrued dividends with respect to) shares of the Company's 5%
Series G1 Convertible Preferred Stock and (when issued) 5% Series G2 Convertible
Preferred Stock.
The Company reached an agreement, effective September 17, 1998, with four
institutional investors concerning the private placement of up to $10 million in
5% senior convertible preferred stock. Under the terms of the agreement, the
Company has placed an initial installment of $5 million of 5% Convertible
Preferred Stock, Series G1, as of the Closing Date. The placement of an
additional $5 million of 5% Convertible Preferred Stock, Series G2, also will be
available to the Company, subject to the satisfaction of conditions concerning
the absence of certain adverse changes or events and the registration for resale
of the shares of Common Stock issuable upon conversion of (or as payment of
dividends with respect to) the Series G1 and Series G2 preferred stock. The
Company has filed a registration statement on Form S-3 with the Securities and
Exchange Commission in satisfaction of this condition. This registration
statement became effective as of November 2, 1998.
Since the Company's agreement with these institutional investors required
that the 5% Series G1 (and, when issued) 5% Series G2 Convertible Preferred
Stock be senior to all other classes of the Company's equity securities in
priority as to dividends and distributions, WGI, LLC, in order to facilitate the
completion of this private placement by the Company, agreed to exchange all of
the shares of Series F Preferred Stock which it received in the Company's 1997
restructuring for a like number of shares of a new Series H Preferred Stock.
Series H Preferred Stock (as described in more detail below) is identical to the
Series F Preferred Stock in every respect except that Series H Preferred Stock
will be junior in priority to the Company's 5% Series G1 and 5% Series G2
Convertible Preferred Stock.
The following description of the Company's authorized capital stock
provides a summary of the key terms of both the Series H Preferred Stock and the
5% Series G1 Convertible Preferred Stock, as well as the Company's Common Stock.
Note: Except for the series designation and maximum conversion price (which will
be based on the market price for the Company's Common
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Stock when the Series G2 is issued), it is anticipated that the 5% Series G2
Convertible Preferred Stock will be substantially identical to the 5% Series G1
Convertible Preferred Stock.
Description of the Company's Capital Stock:
- -------------------------------------------
The Company's Restated Articles of Incorporation, as amended to date,
authorize the issuance of up to 80,000,000 shares of Common Stock, $.01 par
value per share, and 1,600,000 shares of preferred stock, no par value per
share.
Common Stock.
As of December 7, 1998 there were 32,636,547 shares of Common Stock
outstanding. As a holder of Common Stock, you are entitled to one vote for each
share on all matters submitted to a vote of the stockholders. Generally, when a
quorum is present at any meeting, the vote of the holders of a majority the
shares of Common Stock present in person or by proxy decides all questions
properly brought before such meeting. Subject to the preferential rights of any
outstanding Preferred Stock, you will be entitled as a holder of Common Stock to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of the Company,
you would be entitled to share ratably in all assets remaining after payments of
liabilities and satisfaction of all distribution rights of preferred
stockholders. You will not have any right as a holders of Common Stock to
convert your Common Stock into any other securities of the Company. All shares
of Common Stock have equal, non-cumulative voting rights, and have no
preference, conversion, exchange, preemptive or redemption rights. All of the
outstanding shares of the Company's Common Stock are fully paid and
nonassessable.
Preferred Stock.
The Company's Board of Directors is authorized to issue the Preferred Stock
in one or more series. The Restated Articles provide that the Board of Directors
shall fix the designations rights, preferences, privileges and restrictions,
including the dividend rights, conversion rights, voting rights, rights and
terms of redemption, redemption price or prices, liquidation preferences, as
well as the number of shares constituting any series of preferred stock, without
any further vote or action by the stockholders.
The Board has authorized Series A, Series B, Series C, Series D, Series E,
Series F, and Series H Preferred Stock, as well as the 5% Series G1 Convertible
Preferred Stock. Subject to the satisfaction of the conditions that must be met
prior to its sale and issuance, the Board also has authorized the creation of 5%
Series G2 Convertible Preferred Stock with terms (other than the designation)
substantially identical to those of the 5% Series G1 Convertible Preferred
Stock.
As of December 7, 1998, there were no outstanding shares of Series A,
Series B, Series C, Series D, Series E or Series F Preferred Stock, and the
Company presently has no plans to issue any shares of any of these series of
preferred stock in the future. As of such date, there were issued and
outstanding 5,000 shares of 5% Series G1 Convertible Preferred Stock and
49
<PAGE>
454.444 shares of Series H Preferred Stock. Each share of 5% Series G1
Convertible Preferred Stock has a stated value of $1,000 and each share of
Series H Preferred Stock has a stated value of $100,000.
5% Series G1 Convertible Preferred Stock
----------------------------------------
Additional key terms of the 5% Series G1 Convertible Preferred Stock are as
follows:
o Equal to the 5% Series G2 Convertible Preferred Stock (when issued)
and senior to all other classes of the Company's equity securities
(both Common Stock and preferred stock) with respect to dividend
priorities and liquidation rights.
o Convertible at the option of the purchasers (subject to certain
limitations) into shares of Common Stock at a maximum conversion price
of $2.50 per share of Common Stock. The maximum conversion price may
be reduced if the market price for the Company's Common Stock declines
below the level at which it generally stood on September 17, 1998. The
conversion price also may be reduced, under some circumstances, if the
Company issues shares of its Common Stock (or rights to acquire such
shares) at a price below the then-prevailing market price for the
Common Stock.
o After September 17, 2001, any shares of Series G1 Convertible
Preferred Stock that are still outstanding and unconverted shall be
(at the option of the holder) converted to Common Stock or redeemed by
the Company in cash.
o Accrues dividends, payable semi-annually on January 1 and July 1, at
an annual rate of 5%. The Company may pay these dividends either in
cash or in shares of its Common Stock. The dividend on the preferred
stock will be eliminated if the closing bid price of the Common Stock
on the NYSE exceeds $3.41 per share for any five trading day period.
o No dividends may be declared or paid on the Company's Common Stock
while any shares of 5% Series G1 Convertible Preferred Stock are
issued and outstanding.
o No voting rights except that, without approval by all of the holders
of 5% Series G1 Convertible Preferred Stock, the Company may not: (1)
make any adverse change in the powers, preferences or rights of such
stock, or increase the authorized amount of such stock; (2) authorize
or create any class of stock ranking senior to such stock for
dividends or distributions; (3) amend its Restated Articles of
Incorporation or Bylaws or take any other action that would have a
similar adverse effect on the rights of holders of such stock, or (4)
sell all or substantially all of its assets.
Series H Preferred Stock
------------------------
Additional key terms of the Series H Preferred Stock are as follows:
o Junior to the 5% Series G1 and 5% Series G2 Convertible Preferred
Stock, equal to former Series A and former Series F Preferred Stock,
and senior to all other classes of
50
<PAGE>
the Company's equity securities (both Common Stock and preferred
stock) with respect to dividend priorities and liquidation rights.
o No dividends may be declared or paid on the Company's Common Stock
while any shares of Series G1 Convertible Preferred Stock are issued
and outstanding.
o Accrues dividends at an annual rate of 9%, payable annually in cash.
o No conversion, exchange, preemptive or redemption rights.
o No voting rights, except that holders of Series H Preferred Stock have
the right to vote on any merger or consolidation of the Company, or on
any proposed dissolution of the Company. Also, without approval by the
holders of 2/3 of the outstanding shares of Series H Preferred Stock,
the Company may not: (1) amend, repeal or add to any provision of its
Restated Articles of Incorporation or Bylaws if such action would
alter or change the preferences, rights, privileges or powers of, or
the restrictions provided for the benefit of, the Series H Preferred
Stock; (2) reclassify any Common Stock into shares having a preference
or priority equal or superior to the Series H Preferred Stock; (3)
apply any of its assets (in excess of one percent (1%) of its net
worth on an annual basis) to the redemption, retirement, purchase or
other acquisition of shares of Common Stock, except for purchases of
the Company's Common Stock on the open market or purchases from
employees of the Company upon termination of employment or pursuant to
any rights of first refusal held by the Company; or (4) create,
authorize or issue any equity security having any preference or
priority superior to the Series H Preferred Stock.
At the maximum conversion price of $2.50 per share, the $5 million of 5%
Series G1 Convertible Preferred Stock issued by the Company September 17 will
convert into a minimum of 2,000,000 additional shares of Common Stock (or
approximately 6.1% of the number of shares of Common Stock outstanding
immediately before the issuance of such convertible preferred stock).
The New York Stock Exchange rules (pursuant to Paragraph 312.03(c) of the
Listed Company Manual) require shareholder approval when a listed company plans
to issue additional shares of Common Stock, or securities convertible into or
exercisable for Common Stock (e.g., convertible preferred stock), if the Common
Stock to be issued has (or will have upon issuance) voting power greater than or
equal to 20% of the total voting power of the shares of the Company's Common
Stock outstanding before the issuance of such stock or other securities. Under
certain circumstances, the number of shares of Common Stock issued upon the
conversion of (or payment of accrued dividends with respect to) shares of the
Company's 5% Series G1 or 5% Series G2 Convertible Preferred Stock could exceed
20% of the 32,636,547 shares of Common Stock outstanding as of December 7, 1998.
51
<PAGE>
Whether or not the number of shares of Common Stock so issued ever actually
exceeds this 20% threshold will depending upon an number of factors, including
any future fluctuations in the conversion price for the convertible preferred
shares as well as the extent to which the Company may choose to pay dividends on
the convertible preferred in shares of Common Stock rather than in cash.
Accordingly, in order to ensure compliance with the applicable New York Stock
Exchange rules, this potential issuance of Common Stock with voting power in
excess of 20% of the Company's currently outstanding shares is being submitted,
pursuant to this Proxy Statement, for approval by the Company's shareholders at
the 1998 Annual Meeting. The Board of Directors believes that the issuance of
Common Stock in connection with the additional equity funding provided by the 5%
Series G1 Convertible Preferred Stock and (when issued) the 5% Series G2
Convertible Preferred Stock is fair to, and in the best interests of, the
Company and its shareholders. Accordingly, the Board of Directors recommends
that shareholders vote for approval of this Proposal 3.
PROPOSAL 4
APPROVAL OF 1999 STOCK INCENTIVE PLAN
The Board of Directors has, subject to stockholder approval, adopted the
1999 Stock Incentive Plan (the "1999 Incentive Plan") attached hereto as Annex
B.
The Board of Directors believes that there is a continuing need for a
long-term incentive plan tied directly to stockholder value and applicable to a
broad class of employees. The Company is no longer able to grant Incentive Stock
Options under the Company's 1985 Stock Option Plan. Furthermore, the Board of
Directors believes that the Company needs the extra flexibility of a plan that
provides for a variety of different types of stock compensation awards (in
addition to options) in order to structure executive compensation packages that
are best suited to the Company's needs. For these reasons, the Board of
Directors believes that the 1999 Incentive Plan is necessary and is in the best
interests of the Company and its shareholders, and hereby recommends that
shareholders vote in favor of the approval and adoption of the 1999 Incentive
Plan.
1999 STOCK INCENTIVE PLAN
The 1999 Incentive Plan has been approved by the Company's Board of
Directors effective as of January 1, 1999, but all grants (if any) under the
1999 Incentive Plan shall be conditional upon the approval of the 1999 Incentive
Plan by the holders of the Common Stock. The following description of the terms
of the 1999 Incentive Plan is qualified in its entirety by reference to the full
text of the 1999 Incentive Plan attached as ANNEX A to this Proxy Statement.
Capitalized terms used but not defined in the following description are used as
defined in the 1999 Incentive Plan.
The 1999 Incentive Plan provides for the grant of Stock Options (which may
be either Incentive Stock Options or Nonstatutory Stock Options), Stock
Appreciation Rights ("SARs"), Performance Shares and Restricted or Unrestricted
Stock to employees, officers and members of the Board of Directors of, as well
as consultants or advisors to, the Company. A total of
52
<PAGE>
5,000,000 shares of Common Stock may be awarded under the 1999 Incentive Plan.
The 1999 Incentive Plan is administered by the Compensation Committee which may
adopt, amend or repeal the administrative rules, guidelines and practices
relating to the plan.
INCENTIVE STOCK OPTIONS; NONSTATUTORY STOCK OPTIONS
The Compensation Committee may award Incentive Stock Options and
Nonstatutory Stock Options, and determine the number of shares to be covered by
each option, the conditions and limitations applicable to the exercise of the
option and the option price therefor, which, in the case of Incentive Stock
Options, must be at least 100% (110% in the case of Incentive Stock Options
granted to a stockholder owning in excess of 10% of the Common Stock) of the
fair market value of the Common Stock as of the date of grant. Incentive Stock
Options shall be subject to and comply with Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"). Payment of the option exercise price may
be made in cash, shares of Common Stock or by any other method (including
delivery of a promissory note payable on terms specified by the Board) approved
by the Compensation Committee. The option exercise period for Incentive Stock
Options shall not exceed ten years from the date of grant, or five years if
granted to a stockholder owning in excess of 10% of the Common Stock.
STOCK APPRECIATION RIGHTS
The Compensation Committee may award SARs entitling recipients on exercise
of the SAR to receive an amount, in cash or stock or a combination thereof,
determined in whole or in part by reference to appreciation in the fair market
value of the Common Stock between the date of the award and the exercise of the
award. SARs may be granted in tandem with, or independently of, options granted
under the 1999 Incentive Plan.
PERFORMANCE SHARE AWARDS
The Compensation Committee may make Performance Share Awards entitling
recipients to acquire shares of Common Stock upon the attainment of specified
performance goals, as determined by the Compensation Committee, which may
include earnings per share or revenue targets, completed acquisitions and other
corporate or individual executive objectives. The Compensation Committee may
make Performance Share Awards independent of or in connection with any other
award under the Incentive Plan. Performance Share Awards and all rights with
respect to such awards may not be sold, assigned, transferred, pledged or
otherwise encumbered.
RESTRICTED AND UNRESTRICTED STOCK AWARDS
The Board may grant Restricted Stock Awards entitling recipients to acquire
shares of Common Stock subject to the right of the Company to repurchase all or
part of such shares at their purchase price from the recipient (or to have such
shares revert to the Company, if granted with no payment by the recipient) in
the event that conditions specified by the Compensation Committee are not
satisfied prior to the end of the applicable Restricted Period established by
the Compensation Committee for such award. Shares of Restricted Stock may not be
sold, assigned, transferred, pledged or otherwise encumbered during the
applicable Restricted Period. The
53
<PAGE>
Board may, in its sole discretion, grant or sell to participants shares of
Common Stock free of any restrictions under the 1999 Incentive Plan at a price
per share equal to at least 85% of the fair market value of the Common Stock.
In the event of the sale of all or substantially all of the asset of the
Company or a consolidation or merger involving the Company in which the
outstanding shares of Common Stock are exchanged for security, cash or other
property of any other corporation or business entity, then all of the
outstanding stock options granted under the 1999 Incentive Plan shall become
exercisable immediately prior to such event. The 1999 Incentive Plan shall
terminate upon the earlier of (i) the close of business on the day next
preceding the tenth anniversary of the date of its adoption or (ii) the date on
which all shares available for issuance under the 1999 Incentive Plan shall have
been awarded.
The 1999 Incentive Plan has been approved by the Company's Board of
Directors effective as of January 1, 1999, but all grants (if any) under the
1999 Incentive Plan shall be conditional upon the approval of the 1999 Incentive
Plan by the holders of the Common Stock.
FEDERAL INCOME TAX CONSEQUENCES
The following brief description of the tax consequences of awards under the
1999 Incentive Plan is based on Federal tax laws currently in effect and does
not purport to be a complete description of such Federal tax consequences.
Options.
There are no Federal tax consequences either to the optionee or to the
Company upon the grant of an Incentive Stock Option or Nonstatutory Stock
Option. On the exercise of an Incentive Stock Option, the optionee will not
recognize any income and the Company will not be entitled to a deduction,
although such exercise may give rise to alternative minimum tax liability for
the optionee. Generally, if the optionee disposes of shares acquired upon
exercise of an Incentive Stock Option within two years of the date of grant or
one year of the date of exercise, the optionee will recognize ordinary income
and generally the Company will be entitled to a compensation expense deduction,
equal to the excess of the fair market value of the shares of the date of
exercise over the option price (limited generally to the gain on the sale). The
balance of any gain, and any loss, will be treated as a capital gain or loss to
the optionee. If the shares are disposed of after the foregoing holding
requirements are met, the Company will not be entitled to any deduction, and the
entire gain or loss for the optionee will be treated as a capital gain or loss.
On exercise of a Nonstatutory Stock Option, the excess of the
date-of-exercise fair market value of the shares acquired over the option price
will generally be taxable to the optionee as ordinary income and generally
deductible by the Company as compensation expense. The disposition of shares
acquired upon exercise of a Nonstatutory Stock Option will generally result in a
capital gain or loss for the optionee, but will have no tax consequences for the
Company.
54
<PAGE>
Stock Appreciation Rights.
The amount of any cash (or the fair market value of any Common Stock)
received by the holder of an SAR upon the exercise of the SAR under the 1999
Incentive Plan will be subject to ordinary income tax in the year of receipt and
generally, the Company will be entitled to a deduction for such amount.
Performance Share Awards.
An employee who has been awarded Performance Share Awards will not
recognize taxable income, and the Company will not be entitled to a deduction,
at the time of the award. When the employee becomes entitled to receive the
shares of Common Stock, cash or other consideration payable at the maturity of
the award, the employee will recognize ordinary income equal to the sum of the
cash and the fair market value of the shares of Common Stock or other property
at such time, and generally, the Company will be entitled to a corresponding
compensation expense deduction.
Restricted Stock Awards.
An employee (the "Recipient") who has been awarded Restricted Stock will
not recognize taxable income at the time of the award unless he elects
otherwise. At the time any restrictions applicable to the Restricted Stock award
lapse, the Recipient will recognize ordinary income and generally the Company
will be entitled to a corresponding deduction equal to the excess of the fair
market value of such stock at such time over the amount paid therefor. Dividends
paid to the Recipient on the Restricted Stock during the Restricted Period will
be ordinary compensation income to the Recipient and deductible as such by the
Company.
Unrestricted Stock Awards.
An employee who has been granted Unrestricted Stock will recognize ordinary
income as of the date of receipt of the shares in an amount equal to the excess
of the fair market value of the shares at that time over the amount (if any)
paid by the employee for such shares. The employee's tax basis in the shares
will be equal to the sum of the amount paid for such shares plus the amount of
ordinary income so recognized. Generally, the Company is entitled to a
compensation expense deduction equal to the amount of income recognized by the
employee.
PROPOSAL 5
APPROVAL OF THE ISSUANCE OF
WARRANTS TO PURCHASE
5,000,000 ADDITIONAL SHARES OF
COMMON STOCK TO WGI, LLC
The Board of Directors has approved, and recommends to the Shareholders for
their approval, the issuance of warrants to purchase up to an additional
5,000,000 shares of the Company's Common Stock (subject to adjustment for
certain antidilution provisions described below) to WGI,LLC in connection with
the new credit facility which the Company has entered
55
<PAGE>
into with WGI, LLC as described above under the heading "Compensation Committee
Interlocks and Insider Participation." Key terms of the Warrants are as follows:
o Exercise price of $1.75 per share of Common Stock.
o Warrants vest at the rate of 200,000 warrants for each $1,000,000
increase in the largest balance owed at any one time over the life of
the credit agreement (as of December 7, 1998, the largest outstanding
balance to date has been $19,985,000, which means that warrants to
acquire 3,997,000 shares of Common Stock would have been vested as of
such date).
o The warrants have registration rights no more favorable than the
equivalent provisions in the currently outstanding warrants issued to
principal shareholders of the Company, except that such rights include
three demand registrations.
o The warrants contain antidilution provisions which require that the
number of shares subject to such warrants shall be adjusted in
connection with any future issuance of the Company's Common Stock (or
of other securities exercisable for or convertible into Common Stock)
such the aggregate number of shares issued or issuable subject to
these Warrants (assuming eventual vesting as to the full 5,000,000
shares) will always represent ten percent (10%) of the total number of
shares of the Company's Common Stock on a fully diluted basis.
The New York Stock Exchange rules (pursuant to Paragraph 312.03(c) of the
Listed Company Manual) require shareholder approval when a listed company plans
to issue additional shares of Common Stock, or securities convertible into or
exercisable for Common Stock (e.g., warrants), if the Common Stock to be issued
has (or will have upon issuance) voting power greater than or equal to 20% of
the total voting power of the shares of the Company's Common Stock outstanding
before the issuance of such stock or other securities. As of December 7, 1998,
there were 32,636,547 shares of Common Stock outstanding. The number of shares
issuable pursuant to these warrants does not, at present, exceed 20% of the
Company's outstanding voting power. It is possible, however, that the
antidilution provisions described above could, at some point in the future,
result in the warrants being adjusted to cover more than 20% of the number of
shares outstanding on the effective date of the warrants. Accordingly, the Board
of Directors has made the issuance of these warrants subject to approval by the
Company's shareholders at the 1998 Annual Meeting.
Messrs. Walsh and Greenwood, both directors of the Company, are the
managers of WGI, LLC. Both Messrs. Walsh and Greenwood abstained when the Board
voted upon this matter. The Board of Directors believes that the proposed
issuance of such warrants to WGI, LLC is fair and reasonable as additional
compensation for the extension of additional credit provided to the Company by
WGI, LLC as described above. Accordingly, the Board of Directors believes that
the issuance of warrants is fair to, and in the best interest of, the Company
and its shareholders.
56
<PAGE>
PROPOSAL 6
APPROVAL OF THE ISSUANCE OF
WARRANTS TO PURCHASE UP TO
3,804,546 ADDITIONAL SHARES OF
COMMON STOCK TO
MESSRS. McFALL AND PRUTCH
The Board of Directors has approved, and recommends to the Shareholders for
their approval, the issuance of warrants to purchase up to an additional
1,902,273 shares of the Company's Common Stock to each of Thomas A. McFall (a
director and Chief Executive Officer of the Company) and John W. Prutch (a
director and President of the Company), in connection with the agreements with
such officers described above in the section of this Proxy Statement entitled
"Certain Relationships and Related Transactions." Key terms of the Warrants are
as follows:
o Exercise price of $1.75 per share of Common Stock.
o All warrants expire 10 years from the date of grant and are not
transferable by the holder.
o Warrants to purchase 33.4% of the total number of shares of Common
Stock (635,359 shares for each of Messrs. McFall and Prutch) will be
vested immediately upon obtaining shareholder approval.
o Warrants to purchase the remaining shares will vest in incremental
installments of 22.2% each, based on achievement by the Company
(including its subsidiaries) of each of the following goals:
Goal 1:
-------
$4.0 million in annual pre-tax earnings or an average daily
closing price of at least $2.75 per share for the Company's
Common Stock over any period of 120 consecutive calendar days
(Approx. 422,305 additional shares vest for each of Messrs.
McFall and Prutch)
Goal 2:
-------
$5.0 million in annual pre-tax earnings or an average daily
closing price of at least $4.00 per share for the Company's
Common Stock over any period of 120 consecutive calendar days
(Approx. 422,305 additional shares vest for each of Messrs.
McFall and Prutch)
Goal 3:
-------
$6.0 million in annual pre-tax earnings or an average daily
closing price of at least $5.00 per share for the Company's
Common Stock over any period of 120 consecutive calendar days
(Approx. 422,305 additional shares vest for each of Messrs.
McFall and Prutch)
57
<PAGE>
o More than one of the preceding goals may be met simultaneously,
provided that the threshold of the higher goal is met.
The New York Stock Exchange rules (pursuant to Paragraph 312.03(a) of the
Listed Company Manual) require shareholder approval (subject to certain
exceptions) whenever a listed company plans to establish a plan or other
arrangement pursuant to which stock may be acquired by its officers or
directors. In order to satisfy this requirement, the issuance of the warrants
described above, pursuant to which additional shares of Common Stock may be
acquired by Messrs. McFall and Prutch, is being submitted for approval by the
Company's shareholders at the 1998 Annual Meeting.
Both Messrs. McFall and Prutch abstained when the Board voted upon this
matter. The Board of Directors believes that the proposed issuance of such
warrants to Messrs. McFall and Prutch is fair and reasonable as additional
compensation for the benefits to be provided to the Company by Messrs. McFall
and Prutch under the arrangement described above under the heading "Certain
Relationships and Related Transactions." Accordingly, the Board of Directors
believes that the issuance of warrants is fair to, and in the best interest of,
the Company and its shareholders.
OTHER MATTERS
The Company does not intend to bring before the meeting any matters other
than those hereinbefore set forth, and has no present knowledge that any other
matters will be or may be brought before the meeting by others. However, if any
other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of proxy to vote the proxy in accordance with
their judgment.
Representatives of the firm of Arthur Andersen LLP are expected to be
present at the 1998 Annual Meeting. The representatives will have the
opportunity to make a statement at the meeting if they desire to do so and are
expected to be available to respond to appropriate questions from shareholders.
1999 SHAREHOLDERS' PROPOSALS
In order for shareholder proposals for the 1999 Annual Meeting of
Shareholders to be eligible for inclusion in the Company's Proxy Statement,
proposals must be received by the Company at its principal office in
Chattanooga, Tennessee, prior to January 8, 1999.
BY ORDER OF THE BOARD OF DIRECTORS
ROBERT J. POWELL
Secretary
58
<PAGE>
FINANCIAL STATEMENTS SUPPLEMENT
INDEX TO FINANCIAL STATEMENTS
TAHITI APPAREL, INC.
<TABLE>
<CAPTION>
PAGE
----
AS OF JUNE 30, 1998 AND 1997
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
Balance Sheets as of June 30, 1998 and 1997 F-3
Statements of Operations For The Years Ended June 30, 1998, 1997 and 1996 F-4
Statements of Stockholders' Equity (Deficit) For The Years Ended
June 30, 1998, 1997 and 1996 F-5
Statements of Cash Flows For The Years Ended June 30, 1998, 1997 and 1996 F-6
NOTES TO FINANCIAL STATEMENTS F-7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF F-15
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL QUARTER ENDED AS OF
SEPTEMBER 30, 1998 AND 1997(unaudited)
Balance Sheets as of September 30, 1998 and June 30, 1998 F-18
Statements of Operations For The Three Months Ended September 30, 1998 and 1997 F-19
Statements of Cash Flows For The Three Months Ended September 30, 1998 and 1997 F-20
NOTES TO FINANCIAL STATEMENTS F-21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF F-21
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Tahiti Apparel, Inc.:
We have audited the accompanying balance sheets of Tahiti Apparel, Inc. as of
June 30, 1998 and 1997, and the related statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tahiti Apparel, Inc. as of June
30, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
August 31, 1998
F-2
<PAGE>
TAHITI APPAREL, INC.
BALANCE SHEETS AS OF JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ----------- -----------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents (Note 2) $ 0 $ 27,188
Restricted cash - current (Note 2) 100,000 126,557
Accounts receivable - nonfactored, net of allowance for doubtful
accounts (Note 2) 318,677 220,951
Inventories (Notes 2 and 4) 10,376,422 4,850,355
Prepaid expenses and other current assets 982,061 172,383
Deferred income taxes (Notes 2 and 5) 0 363,217
Due from affiliate (Note 7) 924,375 0
Due from officers (Note 7) 1,464,131 491,515
----------- -----------
Total current assets 14,165,666 6,252,166
----------- -----------
FURNITURE, FIXTURES AND EQUIPMENT (NOTE 2):
Furniture and fixtures 342,368 214,020
Machinery and equipment 44,924 44,326
Computer equipment 402,998 282,922
Leasehold improvements 990,474 185,229
----------- -----------
Total furniture, fixtures and equipment 1,780,764 726,497
Less- Accumulated depreciation and amortization 271,184 107,376
----------- -----------
Furniture, fixtures and equipment, net 1,509,580 619,121
----------- -----------
RESTRICTED CASH (Note 2) 644,242 461,540
DEFERRED INCOME TAXES (Notes 2 and 5) 0 124,000
----------- -----------
OTHER ASSETS 187,849 171,205
----------- -----------
Total assets $16,507,337 $ 7,628,032
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1998 1997
---------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Cash overdraft $ 89,766 $ 0
Current portion of note payable (Note 6) 49,000 30,000
Due to factor (Note 3) 6,166,405 92,986
Accounts payable 2,685,937 1,760,949
Due to related party (Note 7) 6,772,207 1,644,394
Royalties payable (Note 8) 1,361,562 775,033
Accrued expenses and other current liabilities (Notes 7 and 8) 874,225 2,387,094
Due to stockholder (Note 7) 178,412 169,407
------------ ------------
Total current liabilities 18,177,514 6,859,863
------------ ------------
NOTE PAYABLE (Note 6) 0 46,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value; authorized 300 shares; issued
and outstanding 150 shares 104,990 104,990
Retained earnings (deficit) (1,775,167) 617,179
------------ ------------
Total stockholders' equity (deficit) (1,670,177) 722,169
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 16,507,337 $ 7,628,032
============ ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these balance sheets.
F-3
<PAGE>
TAHITI APPAREL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES (Note 2) $ 64,574,007 $ 46,781,696 $ 34,431,340
COST OF SALES (Note 7) 47,672,730 32,189,436 25,796,690
------------ ------------ ------------
Gross profit 16,901,277 14,592,260 8,634,650
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Notes 2, 7 and 8) 16,900,310 10,990,237 7,906,219
------------ ------------ ------------
Income from operations 967 3,602,023 728,431
INTEREST EXPENSE 3,150,686 1,576,980 1,145,224
------------ ------------ ------------
(Loss) income before provision for
income taxes (3,149,719) 2,025,043 (416,793)
(BENEFIT) PROVISION FOR INCOME TAXES
(Note 5) (757,373) 825,816 193,967
------------ ------------ ------------
Net income (loss) ($ 2,392,346) $ 1,199,227 ($ 610,760)
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
F-4
<PAGE>
TAHITI APPAREL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Common Stock
------------------------
Shares Retained
Issued Amount Earings Total
---------- ---------- ---------- ---------
BALANCE, June 30, 1995 150 $ 104,990 $ 28,712 $ 133,702
Net loss 0 0 (610,760) (610,760)
---------- ---------- ---------- ---------
BALANCE, June 30, 1996 150 104,990 (582,048) (477,058)
Net income 0 0 1,199,227 1,199,227
---------- ---------- ---------- ---------
BALANCE, June 30, 1997 150 104,990 617,179 722,169
Net loss 0 0 (2,392,346) (2,392,346)
---------- ---------- ---------- ---------
BALANCE, June 30, 1998 150 $ 104,990 ($1,775,167) ($1,670,177)
========== ========== ========== ==========
The accompanying notes to financial statements are an
integral part of these statements
F-5
<PAGE>
TAHITI APPAREL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($2,392,346) $1,199,227 ($610,760)
Adjustments to reconcile net income to net cash
provided by operating activities-
Provision for doubtful accounts 144,000 190,000 267,447
Depreciation and amortization 246,543 105,983 21,983
Deferred tax provision (benefit) 487,217 (357,217) (23,000)
Changes in assets and liabilities-
Due from factor, net 0 2,376,464 228,215
Accounts receivable - nonfactured (241,726) 127,963 134,999
Inventories (5,526,067) (2,700,525) 426,985
Prepaid expenses and other current assets (809,678) (69,915) 80,848
Due from affiliate (924,375) 0 0
Due from officers (972,616) (291,344) (218,450)
Other assets (16,644) 32,626 215,824
Accounts payable 924,988 (2,003,829) (1,050,365)
Due to related party 5,127,813 0 0
Royalties payable 586,529 395,074 (75,627)
Accrued expenses and other current liabilities (1,512,869) 1,596,110 577,255
Due from stockholder 9,005 0 159,235
----------- ----------- -----------
Net cash (used in) provided by operating
activities (4,870,226) 600,617 134,589
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash, net (156,145) (271,550) (316,547)
Purchases of furniture, fixtures and equipment (1,137,002) (635,981) (51,508)
----------- ----------- -----------
Net cash (used in) provided by investing
activities (1,293,147) (907,531) (368,055)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on note payable (27,000) (55,210) (40,038)
Due to factor, net 6,073,419 0 0
Cash overdraft 89,766 0 0
----------- ----------- -----------
Net cash provided by (used in) financing
activities 6,136,185 (55,210) (40,038)
----------- ----------- -----------
Net decrease in cash and cash equivalents (27,188) (362,124) (273,504)
CASH AND CASH EQUIVALENTS, beginning of year 27,188 389,312 $662,816
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $0 $27,188 $389,312
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for-
Interest $3,150,686 $1,576,980 $1,145,224
=========== =========== ===========
Income taxes $17,903 $69,200 $76,571
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements
F-6
<PAGE>
TAHITI APPAREL, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND
BACKGROUND:
Tahiti Apparel, Inc. (the Company) is an importer and distributor of
women's clothing, specifically swimwear, swimwear cover-ups and
bodywear. The products are imported primarily from the Far East and
sold to specialty stores, department stores and mass merchant chains.
On June 30, 1996, the stockholders executed an agreement to merge
Tahiti Apparel, Inc., a previously inactive corporation, into Key Item
Speed Sourcing, Inc. and to change the name of the Company to Tahiti
Apparel, Inc. As a result, this transaction was accounted for as a
reorganization of companies under common control which is similar to a
pooling of interests. The accompanying financial statements include
the financial results of both Key Item Speed Sourcing, Inc. and Tahiti
Apparel, Inc. The merger and name change was filed with the state of
New Jersey on August 6, 1996.
(2) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Use of Estimates-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates.
Cash and Cash Equivalents-
Cash and cash equivalents represent all highly liquid investments with
maturities of one year or less when acquired.
Restricted Cash-
Restricted cash represents certificates of deposit of $744,242 and
$588,097 at June 30, 1998 and 1997, respectively, which have been
assigned to a bank as security for letters of credit (see Note 7)
issued by banks on behalf of the Company.
Allowance for Doubtful Accounts-
The Company provides an allowance for doubtful accounts arising from
operations of the business, which allowance is based upon a specific
review of certain outstanding and historical collection performance.
In determining the amount of the allowance, the Company is required to
make certain estimates and assumptions and actual results may differ
from these estimates and
F-7
<PAGE>
assumptions. The allowance for doubtful nonfactored accounts
receivable was $205,254 and $52,680 as of June 30, 1998 and 1997,
respectively.
Inventories-
Inventories are stated at the lower of cost (using the first-in,
first-out method) or market. Inventories, which consist primarily of
finished goods, have been pledged in accordance with the terms of the
Company's factoring agreement (see Note 4).
Furniture, Fixtures and Equipment-
Furniture, fixtures and equipment are stated at cost. Depreciation is
provided using the straight-line method based on the estimated useful
lives of the assets.
Furniture and fixtures 4 -10 years
Machinery and Equipment 10 years
Computer equipment 7 years
Leasehold improvements Lease term
Long-Lived Assets-
The provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets" ("SFAS 121")
requires, among other things that an entity review its long-lived
assets and certain related intangibles for impairment whenever changes
in circumstances indicate that the carrying amount of an asset may not
be fully recoverable. The Company does not believe that any such
changes have occurred.
Income Taxes-
The Company accounts for taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
This statement requires the Company to recognize deferred tax assets
and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial statements
carrying amounts and the tax basis of assets and liabilities.
Revenue Recognition-
Revenue is recognized when the Company's products are shipped to its
customers.
Concentrations of Credit Risk-
In 1998, 1997 and 1996, Wal-Mart accounted for 55%, 50% and 50% of
sales, respectively. In 1998, 1997 and 1996, Kmart accounted for 26%,
26% and 23% of sales, respectively.
Advertising Costs-
The Company expenses nonreimbursable advertising costs as costs are
incurred. The amounts charged to advertising expense during the years
ended June 30, 1998, 1997 and 1996 were approximately $264,000,
$41,000 and $182,000, respectively.
F-8
<PAGE>
Financial Instruments-
The Company's financial instruments consist mainly of cash, accounts
receivable, accounts payable and amounts due to factor. The carrying
amounts of these financial instruments approximate fair value due to
their short-term nature.
Reclassifications-
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
(3) DUE TO FACTOR:
Due to factor consists of the following-
June 30
--------------------------
1998 1997
----------- -----------
Factor receivables $15,233,891 $14,858,900
Due to factor (21,056,296) (14,456,555)
Allowance for returns and discounts (344,000) (495,331)
----------- -----------
Net due to factor ($6,166,405) ($92,986)
=========== ===========
The Company has an accounts receivable financing arrangement (the
"Factor Agreement") with a financial institution (the "Factor")
covering substantially all of its accounts receivable. The Factor
Agreement provides for the payment of a commission ranging from .70%
to .80% of the face amount for all accounts sold to the Factor. In
addition, the Factor Agreement also provides for advances to be made
against eligible accounts receivable, factored without recourse, and
eligible inventory as determined by the Factor. The outstanding
advances bear interest at the prime rate (8.50% at June 30, 1998) plus
1.5%. Under the Factor Agreement, the Company can obtain letter of
credit financing to fund the Company's foreign orders up to a defined
borrowing base at a monthly rate of .25%. All transactions under the
Factor Agreement are personally guaranteed by two stockholders of the
Company and secured by the factored receivables and inventory of the
Company. Additionally, during 1997, stockholders of the Company
provided the Factor side collateral of approximately $200,000 which
was returned to the stockholders prior to June 30, 1997.
Either party to the Factor Agreement may terminate with 60 days
notice. The Factor Agreement provides that a minimum amount of
receivables ($30,000,000) must be sold to the factor per each Factor
Agreement year.
(4) INVENTORIES:
Inventories are summarized as follows:
1998 1997
----------- ----------
Raw materials $326,680 $37,014
Work-in-process 376,751 0
Finished goods 9,672,991 4,813,341
----------- ----------
$10,376,422 $4,850,355
=========== ==========
F-9
<PAGE>
(5) INCOME TAXES:
The provision for income taxes consists of the following for the years
ended June 30, 1998, 1997 and 1996-
1998 1997 1996
----------- ----------- -----------
Federal-
Current ($1,001,640) $922,179 $182,279
Deferred 390,000 (282,451) (18,000)
----------- ----------- -----------
(611,640) 639,728 164,279
----------- ----------- -----------
State-
Current (242,950) 260,854 34,688
Deferred 97,217 (74,766) (5,000)
----------- ----------- -----------
(145,733) 186,088 29,688
----------- ----------- -----------
Total ($757,373) $825,816 $193,967
=========== =========== ===========
A reconciliation of the differences between the effective tax rate and
the statutory U. S. income tax rate (34%) is as follows for the years
ended June 30, 1998, 1997 and 1996-
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Federal income tax provision at statutory rate ($1,047,614) $688,515 $164,279
State income tax provision, net of Federal benefit (184,873) 137,301 29,688
Valuation allowance 1,719,704 0 0
Reversal of previously recorded tax liability (1,244,590) 0 0
----------- ----------- -----------
Total ($757,373) 825,816 193,967
----------- ----------- -----------
Effective tax rate (21.3%) 40.8% 46.5%
=========== =========== ===========
</TABLE>
The deferred income tax benefit for the year ended June 30, 1997
amounted to $357,217. Significant components of deferred tax assets as
of June 30, 1998 and 1997 are as follows-
1998 1997
--------- ---------
Allowance for doubtful accounts $111,000 $197,000
Inventory 270,000 166,217
Contributions 403,000 124,000
Depreciation 25,000 0
Valuation allowance (809,000) 0
--------- ---------
Total $0 $487,217
========= =========
The Company incurred a net operating loss of approximately $100,000
for Federal income tax purposes during 1998. The deferred tax benefit
for the loss was not recorded in the accompanying financial statements
as management was unable to determine that the realization of such
asset was more likely than not, and thus provided a valuation
allowance for the deferred tax asset generated. In addition, due to
the loss recorded during 1998, management was unable to conclude that
the realization of deferred tax assets totaling $809,000 at June 30,
1998 were more likely than not.
F-10
<PAGE>
Accordingly, during 1998 a $809,000 valuation allowance was recorded
against the net deferred tax assets.
(6) NOTE PAYABLE:
On October 25, 1993, the Company entered into a stock buy-out
agreement (the "Stock Agreement") with a stockholder. The Stock
Agreement called for the Company to repurchase the 50 shares of the
Company's stock owned by the stockholder for total consideration of
$400,000. In accordance with the terms of the Stock Agreement the
Company paid $150,000 to the stockholder in 1993. In addition, the
Stock Agreement required five annual installments of $50,000
(inclusive of interest at a rate of 7.00%) to be paid to the
stockholder commencing on October 15, 1994. The final installment of
$49,000 is due and payable on October 15, 1998.
(7) RELATED PARTY TRANSACTIONS:
The Company has outstanding advances of $1,464,131 and $491,515 at
June 30, 1998 and 1997, respectively, to certain officers including
two stockholders. Accrued interest, included within due from officers
in the accompanying balance sheet, totaled approximately $108,000 and
$31,000 as of June 30, 1998 and 1997, respectively. The advances which
bear interest at the prime rate (8.50% at June 30, 1998) are payable
on demand.
On November 1, 1997, the Company and the Affiliate entered into a
Products Warehousing Agreement (the "Warehousing Agreement"). Under
the Warehousing agreement the Company has contracted the Affiliate to
warehouse and service orders of the Company's products under policies
and procedures provided by the Company within the Warehousing
Agreement for a period of five years. Following expiration, the
Warehousing Agreement shall be automatically renewed as written in one
year increments unless either party provides at least sixty days
notice prior to expiration. The Warehousing Agreement provides payment
terms for the Affiliate for performing services. The fee structure is
delineated in an exhibit to the Warehousing Agreement where prices are
set based upon per piece and per dozen of pieces handled.
As of June 30, 1998 and 1997, the Company has outstanding
advances/payables of approximately $924,000 and ($2,000), respectively
due from/(to) an affiliated company (the "Affiliate"). The Affiliate,
incorporated in December 1996, has four stockholders, two of which are
33 1/3% stockholders of the Company and two who are officers of the
Company. The Affiliate acts as a contractor for the Company for the
receipt, warehousing, and shipment of the Company's inventory. The
Company made payments to the Affiliate in the amount of $3,041,000 and
$440,000 in fiscal 1998 and 1997, respectively. It is the Company's
intent to deduct the $924,375 in outstanding advances against future
invoices for services rendered by the Affiliate.
A stockholder loaned $150,000 to the Company to fund a certificate of
deposit which provides security to a bank for letters of credit issued
by that bank on behalf of the Company in relation to certain licensing
agreements. As of June 30, 1998 and 1997, the certificate of deposit
had earned interest of $28,412 and $19,407, respectively, which is
reflected as an additional stockholder loan payable in the
accompanying balance sheet.
A related party owned by a stockholder providing financing for the
Company by opening bank letters of credit to suppliers and provides
acceptance financing for merchandise shipped under those letters of
credit. The related party provided continuous financing which reached
a maximum of approximately $8 million in open letters of credit and
acceptances, combined. The related party is compensated for the
letters of credit at 3% of their face amount, and interest on
acceptances is accrued at an annual rate of 11%. The Company made
payments to the related party in the
F-11
<PAGE>
approximate amount of $10,450,000, $10,085,000, and $14,061,000 in
fiscal 1998, 1997 and 1996, respectively, related to the inventory
purchases and the letter of credit fees discussed above. Included
within current liabilities in the accompanying balance sheet are
amounts due to the related party of approximately $6,772,000 and
$1,644,000 as of June 30, 1998 and 1997, respectively. During fiscal
1998, the Company extended its payment terms with the related party.
As a result, beginning in March 1998, interest was accrued on past due
invoices at an annual rate of 12.75%. As of June 30, 1998,
approximately $76,500 of accrued interest is included within accrued
expenses and other current liabilities related to the past due
accounts payable outstanding.
(8) COMMITMENTS AND CONTINGENCIES:
Leases-
The future minimum lease payments for all noncancellable leases at
June 30, 1998, are as follows-
1999 $609,000
2000 486,000
2001 432,000
2002 424,000
2003 433,000
Thereafter 1,280,000
----------
$3,664,000
==========
Rent expense under the Company's various lease agreements totaled
approximately $479,000, $104,000, and $116,000 in 1998, 1997 and 1996,
respectively.
Employment and Consulting Contracts-
During 1997, the Company entered into a two year employment contract
with an officer which provides for guaranteed annual base and bonus
compensation of $240,000, plus an additional incentive bonus based on
the sales performance of specific product lines. Either party may
terminate the contract with thirty days written notice.
In April 1998, the Company entered into a three year consulting
agreement with an officer providing for an annual fee of $600,000 (the
"Fee") during the term. The Fee is payable in monthly installments of
$50,000, which commenced in April 1998. The consulting agreement also
provides for additional fees ("Additional Fees"), as defined,
calculated as a percentage of net sales of certain products sold by
the officer and payable on a quarterly basis. The Fee is considered an
advance and is not earned by the officer until the calculation of the
Additional Fee based upon net sales equals or exceeds $600,000 (the
"Sales Threshold"). In the event the Sales Threshold is not met in any
given year, the difference between the Sales Threshold and the portion
of the Fee and Additional Fee advanced to the officer (the
"Shortfall") shall be added to the Sales Threshold in any subsequent
year of the consulting agreement. Included in prepaid expenses and
other current assets in the accompanying June 30, 1998 balance sheet
is $150,000 of the Fee advanced to the officer. The consulting
agreement also provides for early termination under certain
conditions, including not achieving a minimum sales level, as defined.
F-12
<PAGE>
Litigation-
The Company is involved in legal proceedings incurred in the normal
course of business. In the opinion of management and its counsel, if
adversely decided, none of these proceedings would have a material
effect on the financial position or results from operations of the
Company.
License Agreements-
The Company has licenses for the right to use certain trademarks in
connection with the sale of its products. The license agreements
require the Company to pay a percentage of sales of the licensed
products, as defined. In addition, minimum royalty payments and
advertising expenditures is also generally required, as well as
providing for maintenance of quality control. Royalty expense under
these agreements was approximately $4,547,000, $2,804,000 and
$1,842,000 for the years ended June 30, 1998, 1997, and 1996,
respectively. As of June 30, 1998, future minimum guaranteed royalty
payments under existing license agreements aggregate to approximately
$5,645,000 through the year 2002.
Letters of Credit-
At June 30, 1998, and 1997, the Company was contingently liable for
irrevocable standby letters of credit totaling $3,158,000 and
$1,113,000, respectively.
Litigation Settlement-
In June 1998, the Company settled a copyright infringement lawsuit.
Under the terms of the Settlement Agreement, the Company is required
to pay $40,000 to the plaintiff in two $20,000 installments in
addition to certain legal fees incurred. The first installment was due
on or before July 6, 1998 and the second installment was due on or
before August 1, 1998. The Company has accrued $44,000 for the
settlement and related legal expenses which is included within accrued
expenses and other liabilities in the accompanying June 30, 1998
balance sheet.
Under the terms of the Settlement Agreement, the Company committed to
purchase from the plaintiff a minimum of $2,000,000 of fabric from the
date of the settlement through March 1, 2000, (the "Settlement
Period"). If the Company fails to meet the fabric purchase
requirements an additional payment will be required on April 1, 2000.
If the Company purchases more than $1,000,000 of fabric but less than
$2,000,000 of fabric during the Settlement Period, $50,000 will be
due. If the purchased fabric amount is less than $1,000,000 during the
Settlement Period, $75,000 will be due.
Any late payments under the Settlement Agreement are subject to
interest changes at an annual rate of 18%. If the Company sells its
assets during the Settlement Period, the buyer of the assets will
assume the contingent minimum fabric purchase liability or the Company
will make the additional $50,000 or $75,000 payment, based on fabric
purchases through the asset sale date.
Buying Agency Agreement-
In February 1998, the Company entered into a Buying Agency Agreement
with an agent based in Taiwan (the "Agent"). Under the terms of the
Buying Agency Agreement, the Agent will act as a nonexclusive buying
agent for the company in connection with the Company's purchases of
wearing apparel in Taiwan, Hong Kong, Philippines, Indonesia, Korea,
and the United States.
F-13
<PAGE>
The Agent will charge a commission of 6% of the invoice price for
purchases in the United States and Taiwan and a commission of 7% for
purchases in the other countries. The Company will also reimburse the
Agent for freight and insurance expenses incurred on the shipment of
goods. Letter of credit financing is required under the Buying Agency
Agreement upon which the Agent may draw from on the Company's behalf.
There is no term or purchase requirement in the Buying Agency
Agreement. The Company can terminate the Buying Agency Agreement if
the Agent fails to perform with any terms of the agreement or if the
Agent discontinues performance for any thirty day period, changes
ownership or enters bankruptcy proceedings.
Collateral Agreement-
In July 1998, the Company, Signal Apparel Company, Inc. ("Signal"),
and the Factor (see Note 3) entered into an agreement (the
"Agreement") whereby Signal would provide letter of credit financing
for the Company. Under the Company's Factor Agreement (see Note 3)
letter of credit financing is available, however, the Company had
reached its borrowing base limit. The Factor Agreement also provided
the Factor with first lien on the Company's inventory and receivables
from factored sales. Under the Agreement, Signal is provided with the
first lien on the Company's inventory purchased under letters of
credit opened by Signal on behalf of the Company. Signal will also
guarantee to the Factor payment of all invoices attributable to the
letters of credit opened by Signal. The Company will pay Signal a fee
of 2% of the total invoice cost of the goods plus the costs to import
the goods and the costs to prepare the goods for shipment.
(8) SUBSEQUENT EVENT:
The Company is currently negotiating the sale of its assets to Signal
Apparel Company, Inc. ("Signal") in exchange for stock in Signal.
MANAGEMENT'S DISSCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Year Ended June 30, 1998 Compared With The Prior Fiscal Year
Net sales totaled $64.6 million and $46.8 million for the fiscal years ended
June 30, 1998 and 1997 respectively, or an increase of $17.8 million (38%). The
increase in net sales in fiscal 1998 compared with fiscal 1997, was principally
due to an increase in bodywear and activewear sales in the first six months of
fiscal 1998. Those non-seasonal sales totaled $16.6 million in the first six
months of the fiscal year ended June 30, 1998 compared with $2.9 million for the
first six months of fiscal 1997, or an increase of $13.7 million (29%). Prior to
fiscal 1998, the company was very seasonal with virtually all sales occurring in
the January to June period which is the swimwear sales season. The balance of
the increase was due to growth in seasonal sales to the existing customer base
($2.7 million or approximately 6%) and the entry into a new channel of
distribution ($1.2 million or approximately 2%). Sales in the new channel of
distribution were made to specialty retailers and the higher-priced, better
stores with swimwear and related garments made under the Jones of New York label
under a licensing agreement.
Cost of sales totaled $47.6 million and $32.2 million representing percentages
of net sales of 74% and 69% in the fiscal years ended June 30, 1998 and 1997,
respectively. The increase in the cost of sales is
F-14
<PAGE>
principally the result of higher sales volume. The increase in cost of sales as
a percentage of net sales in fiscal 1998 as compared with fiscal 1997 is due to
the inclusion of higher product costs in connection with the entry into the new
channel of distribution described above and the product costs in connection with
a new product which was launched in fiscal 1998 and subsequently abandoned.
Additionally, cost of sales includes higher manufacturing costs and a premium to
expedite imported merchandise which was delayed due to the company's inability
to open letters of credit in favor of the manufacturers in a timely manner due
to a shortage of working capital (see LIQUIDITY AND CAPITAL RESOURCES below).
Gross profit of $17 million and $14.6 million for the fiscal years ended June
30, 1998 and 1997 represented 26% and 31%, respectively, of net sales of those
years. The increases in gross profit are the result of the sales increase in
each of the years and the changes as a percentage of net sales result from the
changes in cost of sales as described above.
Selling, general and administrative expenses increased $5.9 million to $16.9
million (26% of net sales) in the fiscal year ended June 30, 1998 compared with
$11 million (24% of net sales) in fiscal 1997. Much of the increase is
attributable to the increase in sales volume including higher royalties for
licensed products of $1.8 million, increased payroll and related taxes for
increased staff of $.9 million, higher legal and professional fees of $.5
million, increased rent $.4 million for additional showroom and office space,
increased office administrative expenses of $.4 million, increased advertising
of $.2 million and depreciation of $.2 million related to capital expenditures
for additional space and computer systems. The 2% of net sales, or approximately
$1.3 million increase in selling, general and administrative expenses in fiscal
1998 as compared with fiscal 1997 that is not directly related to the volume
increase is the result of costs in connection with sales in the new channel of
distribution and the new product launch described above.
Interest expense increased $1.6 million to $3.2 million (5% of net sales) in the
fiscal year ended June 30, 1998 from $1.6 million (3% of net sales) in fiscal
1997. The increase resulted from higher loan balances outstanding due to
increased volume and a shortage of working capital (see discussion of LIQUIDITY
AND CAPITAL RESOURCES below).
Year Ended June 30, 1997 Compared With The Prior Fiscal Year
Net sales increased $12.4 million or 36% from $34.4 million in the year ended
June 30, 1996 to $46.8 million in the year ended June 30, 1997. The increase
resulted from higher seasonal sales to existing customers. Non-seasonal bodywear
and activewear sales decreased $1.1 million from $4.0 million in the first six
months of the fiscal year ended June 30, 1996 to $2.9 million in the first six
months of the fiscal year ended June 30, 1997.
Cost of sales totaled $32.2 million, or 69% of net sales for the year ended June
30, 1997. This represents an increase of $6.4 million from $25.8 million, or 75%
of net sales for the previous fiscal year. The increase in cost of sales is the
direct result of the increased sales, however, the decrease expressed as a
percentage of net sales from 75% to 69% was the effect of a selling price
increase made at the end of fiscal 1996 and in effect for the full fiscal year
ended June 30, 1997.
Gross profit increased from $8.6 million, or 25% of net sales for the fiscal
year ended June 30, 1996 to $14.6 million, or 31% of net sales for the fiscal
year ended June 30, 1997. The improvement in gross profit expressed as a
percentage of net sales resulted from the selling price increase described
above.
The total of selling, general and administrative expenses increased $3.9 million
in the fiscal year ended June 30, 1997 to $11 million, or 23% of net sales, from
$7.9 million, or 23% of net sales, in fiscal 1996. Included in volume-related
increases are higher royalties for licensed products of $1 million, increased
payroll and related taxes for increased staff of $1.4 million, increased
warehousing and shipping costs of $.5 million and increased sales-related travel
and selling expenses of $.7 million
F-15
<PAGE>
Interest expense increased from $1.2 million, or 4% of net sales for the fiscal
year ended June 30, 1996 to $1.6 million, or 3% of net sales for the fiscal year
ended June 30, 1997. The increase resulted from greater borrowings in fiscal
1997 to support the increased sales recorded in that year.
LIQUIDITY AND CAPITAL RESOURCES
The working capital deficit was $.6 million at June 30, 1997 and worsened to
$3.9 at June 30, 1998. The trend throughout fiscal 1998 was the consumption of
working capital with the result of a severe shortage at June 30, 1998. At June
30, 1998, the company had ceased payment to a shareholder who provided letter of
credit and acceptance financing to the company and was in arrears in payment of
trade accounts payable, royalties payable to licensors and other liabilities.
The severe shortage in working capital was caused by the net loss recorded for
fiscal 1998 ($2.3 million), an increase in inventory ($5.5 million), an increase
in prepaid expenses ($.8 million) and increases in due from officers ($1
million) and due from related parties ($.9 million).
In the fiscal year ended June 30, 1998, the working capital demands caused by
the net cash used by operating activities of $4.9 million and capital spending
of $1.1 million were met by borrowings under an accounts receivable factoring
and inventory loan agreement. Borrowings under that agreement are near the
maximum available. Sale of the company's inventory to provide liquidity is
possible, however, sale of seasonal inventory in the off season will result in
deep discounts from normal selling prices. The company intends to complete the
intended acquisition by Signal Apparel Company, Inc. and benefit from the
greater financial resources of that company. While both parties to the
acquisition believe it will be accomplished, no assurances can be given that it
will close. Should the acquisition not close, the company will pursue a
financing alternative that had been discussed with a new source. The financing
package is intended to be a combination of purchase order financing to provide
letters of credit for imported products and asset-based financing to meet the
company's working capital needs. In addition, the company explored an
equity/debt placement which will be re-evaluated in the event that the intended
acquisition does not occur.
At June 30, 1998, the company had capital expenditure commitments totaling
approximately $1 million, the bulk of which is related to completion of
leasehold improvements in leased space for offices and showrooms.
YEAR 2000 COMPLIANCE PLAN
The company purchased hardware and software and installed the new systems during
fiscal 1997 to support operational and customer demands resulting from the
increased sales levels. The company's year 2000 initiative involves internal and
external professionals and is ongoing. Preliminary findings indicate that the
systems require slight modification to be year 2000 compliant with a total
estimated cost of less than $100 thousand.
F-16
<PAGE>
TAHITI APPAREL, INC.
FINANCIAL STATEMENTS
FISCAL QUARTER ENDED AS OF
JUNE 30, 1998 AND 1997(unaudited)
F-17
<PAGE>
TAHITI APPAREL, INC.
BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, June 30,
Assets 1998 1998
------ -------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ -- $ --
Restricted Cash-Current 100 100
Accounts Receivable-Net of Allowance
for Doubtful Accounts 538 319
Inventories 9,173 10,376
Prepaid Expenses and Other Current Assets 982
1,602
Due From Affiliate 1,033 924
Due From Officers 1,312 1,464
-------- --------
Total Current Assets 13,758 14,166
FURNITURE, FIXTURES AND EQUIPMENT-NET 1,671 1,510
RESTRICTED CASH 654 644
OTHER ASSETS 187 188
-------- --------
Total Assets $ 16,270 $ 16,507
======== ========
Liabilities and Stockholders' Deficit
CURRENT LIABILITIES:
Cash Overdraft $ 49 $ 90
Current Portion of Note Payable 50 49
Due to Factor 8,840 6,166
Accounts Payable 2,984 2,617
Due to Related Party 6,780 6,772
Royalties Payable 979 1,362
Accrued Expenses and Other Current Liabilities 495 874
Due to Stockholder 181 178
-------- --------
Total Current Liabilities 20,358 18,109
STOCKHOLDER'S DEFICIT:
Common Stock, No Par Value; Authorized 300
Shares; Issued and Outstanding 150 Shares 105 105
Accumulated Deficit (4,193) (1,775)
-------- --------
Total Stockholder's Deficit
(4,088) (1,670)
Total Liabilities and Stockholder's
Deficit $ 16,270 $ 16,507
======== ========
</TABLE>
See accompanying notes to financial statements
F-18
<PAGE>
TAHITI APPAREL, INC.
STATEMENTS OF OPERATIONS
For the Three Months Ended
September 30, 1998 and September 30, 1997
(In Thousands)
(Unaudited)
1998 1997
------- -------
Net Sales $ 9,913 $ 7,419
Cost of Sales 8,246 6,139
------- -------
Gross Profit 1,667 1,280
Selling, General and Administrative
Expenses 3,389 3,021
------- -------
Loss From Operations (1,722) (1,741)
Interest Expense 696 458
------- -------
Loss Before Benefit for Income Taxes (2,418) (2,199)
Income Taxes -- --
------- -------
Net Loss $(2,418) $(2,199)
======= =======
See Accompanying Notes to Financial Statements
F-19
<PAGE>
TAHITI APPAREL, INC
STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(2,418) $(2,199)
Adjustments to Reconcile Net Loss
to Net Cash Used by Operating
Activities-
Depreciation 59 33
Changes in Assets and Liabilities-
Accounts Receivable (219) (105)
Inventories 1,203 (1,640)
Prepaid Expenses (620) (230)
Due From Related Party (109) --
Due From Officers 152 (39)
Other Assets 1 128
Accounts Payable 300 357
Due to Related Party 8 272
Royalties Payable (383) 152
Accrued Expenses (380) 515
Due to Stockholder 3 --
------- -------
Net Cash Used by
Operating Activities (2,403) (2,756)
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted Cash (10) 164
Purchases of Furniture, Fixtures and Equipment (221) (58)
------- -------
Net Cash Provided (Used) by
Investing Activities (231) 106
CASH FLOWS FROM FINANCING ACTIVITIES:
Note Payable 1 --
Due to Factor 2,674 2,526
Cash Overdraft (41) 97
------- -------
Net Cash Provided by
Financing Activities 2,634 2,623
Net Decrease in Cash and
Cash Equivalents -- (27)
CASH AND CASH EQUIVALENTS-beginning of period -- 27
------- -------
CASH AND CASH EQUIVALENTS-end of period $ -- $ --
======= =======
</TABLE>
See Accompanying Notes to Financial Statements
F-20
<PAGE>
TAHITI APPAREL, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying financial statements have been prepared on a basis
consistent with the financial statements for the year ended June 30, 1998.
The accompanying financial statements include all adjustments which are, in
the opinion of the company, necessary to present fairly the financial
position of the company as of September 30, 1998 and its results of
operations and cash flows for the three months ended September 30, 1998.
These financial statements should be read in conjunction with the company's
audited financial statements and notes thereto as of June 30, 1998 and
1997.
2. The results of operations for the three months ended September 30, 1998 are
not necessarily indicative of the results to be expected for the full year.
3. Inventories consisted of the following:
(In Thousands)
September 30, June 30,
1998 1998
------- -------
Raw Materials $ 176 $ 326
Work in Process 998 377
Finished Goods 7,999 9,673
------- -------
$ 9,173 $10,376
======= =======
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Net sales of $9.9 million for the three months ended September, 30, 1998
increased $2.5 million or 34% from $7.4 million for the three months ended
September 30, 1997. The increase results from higher non-seasonal activewear and
bodywear sales to two major customers which totaled $6.4 million, offset by a
decrease to a third large customer of $3.8 million. There is clearly a trend
that the company has been and continues to be successful in increasing the
non-seasonal activewear and bodywear sales, however, as evidenced by the one
large customer described, any one or more of the customers may decide against an
increase in quantity or opt not to carry the garments in their stores.
Cost of sales increased from $6.1 million ( 83% of net sales ) for the three
months ended September 30, 1997 to $8.2 million ( 83% of net sales )for the same
period of the current year. The increase is the result of increased sales
volume.
F-21
<PAGE>
Gross profit increased to $1.7 million ( 17% of net sales )for the three months
ended September 30, 1998 from $1.3 million ( 17% of net sales )for the three
months ended September 30, 1997 resulting from increased sales volume.
Selling, general and administrative expenses increased $.4 million from $3.0
million for the three months ended September 30, 1997 to $3.4 million for the
same period of the current year. These expenses decreased as a percentage of net
sales from 40% for the three months ended September 30, 1997 to 34% for the same
three month period of the current year. The $.4 million is the result of; higher
selling expenses of $.2 million including trade shows, travel and other selling
expenses related to increased volume, increased general and administrative
expenses of $.2 million including royalties on higher volume, and payroll costs
related to staff increases.
Interest expense increased $.2 million from $.5 million for the three months
ended September 30, 1997 to $.7 million for the same three month period of the
current year. The increase resulted from higher outstanding amounts borrowed
from the factor and from the related party who provides letters of credit and
acceptance financing to the company due to increased volume and a shortage of
working capital (see discussion of LIQUIDITY AND CAPITAL RESOURCES below).
LIQUIDITY AN CAPITAL RESOURCES
The working capital deficit was $3.9 million at June 30, 1998 and worsened to
$6.6 million at September 30, 1998. The worsening deficit in the quarter was
principally the result of the net loss of $2.4 million and was funded primarily
by additional borrowing under the accounts receivable factoring and inventory
loan agreements. Borrowings under those agreements are near the maximum
available. Sale of the company's inventory to provide liquidity is possible,
however, sale of seasonal inventory in the off season will result in deep
discounts from normal selling prices. The company intends to complete the
acquisition of the company by Signal Apparel Company, Inc. and benefit from the
greater financial resources of that company. While both parties to the
acquisition believe it will be accomplished, no assurances can be given that it
will close. Should the acquisition not close, the company will pursue a
financing alternative that had been discussed with a new source. The financing
package is intended to be a combination of purchase order financing to provide
letters of credit for imported products and asset-based financing to meet the
company's working capital needs. In addition, the company explored an
equity/debt placement which will be re-evaluated in the event the intended
acquisition does not occur.
At September 30, 1998 the company had capital expenditure commitments totaling
approximately $.8 million, the bulk of which is related to completion of
leasehold improvements in space leased for showrooms and offices.
YEAR 2000 COMPLIANCE PLAN
The company purchased hardware and software and installed the new systems during
fiscal 1997 to support operational and customer demands resulting from the
increased sales levels. The company's year 2000 initiative involves internal and
external professionals and is ongoing. Preliminary findings indicate that the
systems require slight modification to be year 2000 compliant with a total
estimated cost of less than $100 thousand.
F-22
<PAGE>
ANNEX II
SIGNAL APPAREL COMPANY, INC.
1999 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE
- ------------------
The purpose of this 1999 Stock Incentive Plan (the "Plan") is to advance
the interests of Signal Apparel Company, Inc. by enhancing its ability to
attract and retain key employees, directors, consultants and others who are in a
position to contribute to the Company's future growth and success.
SECTION 2. DEFINITIONS
- -----------------------
Award Any Option, Stock Appreciation Right,
Performance Share, Restricted Stock or
Unrestricted Stock awarded under the Plan.
Board The Board of Directors of the Company.
Code The Internal Revenue Code of 1986, as amended
from time to time.
Committee A committee of not less than two members of
the Board appointed by the Board to
administer the Plan, provided that if and
when the Common Stock is registered under
Section 12 of the Securities Exchange Act of
1934, each member of the Committee shall be a
"non-employee director" within the meaning of
Rule 16b-3 under the Securities Exchange Act
of 1934 ("Rule 16b-3").
Common Stock or Stock The Common Stock, $.01 par value per share,
of Signal Apparel Company, Inc.
Company Signal Apparel Company, Inc. and, except
where the context otherwise requires, all
present and future subsidiaries of the
Company as defined in Sections 424(f) of the
Code.
Designated Beneficiary The beneficiary designated by a Participant,
in a manner determined by the Committee, to
receive amounts due or exercise rights of the
Participant in the event of the Participant's
death. In the absence of an effective
designation by a Participant, Designated
Beneficiary shall mean the Participant's
estate.
II-1
<PAGE>
Fair Market Value With respect to Common Stock or any other
property, the fair market value of such
property as determined by the Board in good
faith or in the manner established by the
Board from time to time.
Incentive Stock Option An option to purchase shares of Common Stock
awarded to a Participant under Section 6
which is intended to meet the requirements of
Section 422 of the Code or any successor
provision.
Nonstatutory Stock Option An option to purchase shares of Common Stock
awarded to a Participant under Section 6
which is not intended to be an Incentive
Stock Option.
Option An Incentive Stock Option or a Nonstatutory
Stock Option.
Participant A person selected by the Committee to receive
an Award under the Plan.
Performance Shares Shares of Common Stock which may be earned by
the achievement of performance goals awarded
to a Participant under Section 8.
Reporting Person A person subject to Section 16 of the
Securities Exchange Act of 1934 or any
successor provision.
Restricted Period The period of time selected by the Committee
during which shares subject to a Restricted
Stock Award may be repurchased by or
forfeited to the Company.
Restricted Stock Shares of Common Stock awarded to a
Participant under Section 9.
Stock Appreciation Right or "SAR" A right to receive any excess in Fair Market
Value of shares of Common Stock over the
exercise price awarded to a Participant under
Section 7.
Unrestricted Stock Shares of Common Stock awarded to a
Participant under Section 9(c).
SECTION 3. ADMINISTRATION
- --------------------------
The Plan will be administered by the Committee. The Committee shall have
authority to make Awards and (subject to any restrictions contained herein or in
the terms of an individual Award) to amend any outstanding Award, and to adopt,
amend and repeal such administrative rules, guidelines and practices relating to
the Plan as it shall deem advisable from time to time, and to interpret the
provisions of the Plan. The Committee's decisions shall be final and binding.
II-2
<PAGE>
No member of the Committee shall be liable for any action or determination
relating to the Plan made in good faith. All decisions by the Committee pursuant
to the Plan shall be final and binding on all persons having or claiming any
interest in the Plan or in any Award.
SECTION 4. ELIGIBILITY
- -----------------------
All of the Company's employees, officers, directors, consultants and
advisors who are expected to contribute to the Company's future growth and
success, other than persons who have irrevocably elected not to be eligible, are
eligible to be Participants in the Plan. For this purpose, the grant of new
Awards in substitution for outstanding Awards shall be deemed to constitute a
new grant of additional Awards separate from the original grant of Awards that
are to be canceled. Incentive Stock Options may be awarded only to persons
eligible to receive Incentive Stock Options under the Code.
SECTION 5. STOCK AVAILABLE FOR AWARDS
- --------------------------------------
(a) Subject to adjustment under subsection (b) below, Awards may be made
under the Plan for up to 5,000,000 shares of Common Stock. If any Award in
respect of shares of Common Stock expires or is terminated unexercised or is
forfeited for any reason or settled in a manner that results in fewer shares
outstanding than were initially awarded, the shares subject to such Award or so
surrendered, as the case may be, to the extent of such expiration, termination,
forfeiture or decrease, shall again be available for award under the Plan;
subject, however, in the case of Incentive Stock Options, to any limitation
required under the Code. Shares issued under the Plan may consist in whole or in
part of authorized but unissued shares or treasury shares.
(b) In the event that the Committee, in its sole discretion, determines
that any stock dividend, extraordinary cash dividend, recapitalization,
reorganization, merger, consolidation, split-up, spin-off, combination or other
similar transaction affects the Common Stock such that an adjustment is required
in order to preserve the benefits or potential benefits intended to be made
available under the Plan, then the Committee, subject, in the case of Incentive
Stock Options, to any limitation required under the Code, shall equitably adjust
any or all of (i) the number and kind of shares in respect of which Awards may
be made under the Plan, (ii) the number and kind of shares subject to
outstanding Awards, and (iii) the award, exercise or conversion price with
respect to any of the foregoing, and if considered appropriate, the Committee
may make provision for a cash payment with respect to an outstanding Award,
provided that the number of shares subject to any Award shall always be a whole
number.
(c) The Committee may grant Awards under the Plan in substitution for stock
and stock based awards held by employees of another corporation who concurrently
become employees of the Company as a result of a merger or consolidation of the
employing corporation with the Company or a Subsidiary or the acquisition by the
Company or a subsidiary of property or stock of the employing corporation. The
substitute Awards shall be granted on such terms and conditions as the Committee
considers appropriate in the circumstances.
II-3
<PAGE>
SECTION 6. STOCK OPTIONS
- -------------------------
(a) General.
(i) Subject to the provisions of the Plan, the Committee may award
Incentive Stock Options and Nonstatutory Stock Options, and determine the number
of shares to be covered by each option, the option price therefor and the
conditions and limitations applicable to the exercise of the Option. The terms
and conditions of Incentive Stock Options shall be subject to and comply with
Section 422 of the Code, or any successor provision, and any regulations
thereunder.
(ii) The Committee shall establish the exercise price of each Option at the
time such Option is awarded. In the case of Incentive Stock Options, such price
shall not be less than 100% of the Fair Market Value of the Common Stock on the
date of award. (iii) Each Option shall be exercisable at such times and subject
to such terms and conditions as the Committee may specify in the applicable
Award or thereafter. The Committee may impose such conditions with respect to
the exercise of Options, including conditions relating to applicable federal or
state securities laws, as it considers necessary or advisable.
(iv) Options granted under the Plan may provide for the payment of the
exercise price by delivery of cash or check in an amount equal to the exercise
price of such Options or, to the extent permitted by the Committee at or after
the award of the Option, by (A) delivery of shares of Common Stock owned by the
optionee, valued at their Fair Market Value on the date of such option exercise,
(B) delivery of a promissory note of the optionee to the Company on terms
determined by the Committee, (C) delivery of an irrevocable undertaking by a
broker to deliver promptly to the Company sufficient funds to pay the exercise
price or delivery of irrevocable instructions to a broker to deliver promptly to
the Company cash or a check sufficient to pay the exercise price, (D) payment of
such other lawful consideration as the Committee may determine, or (E) any
combination of the foregoing.
(v) In the event an optionee pays some or all of the exercise price of an
Option by delivery of shares of Common Stock pursuant to clause 6(a)(iv)(A)
above, the Committee may provide for the automatic award of an option for up to
the number of shares so delivered.
(vi) Each Option granted under the Plan by its terms shall not be
transferable by the optionee otherwise than by will, or by the laws of descent
and distribution, and shall be exercised during the lifetime of the optionee
only by him. No Option or interest therein may be transferred, assigned, pledged
or hypothecated by the optionee during his lifetime, whether by operation of law
or otherwise, or be made subject to execution, attachment or similar process.
(vii) The Committee may at any time accelerate the time at which all or any
part of an Option may be exercised.
II-4
<PAGE>
(b) Incentive Stock Options.
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(i) All Incentive Stock Options granted under the Plan shall, at the time
of grant, be specifically designated as such in the option agreement covering
such Incentive Stock Options. The Option exercise period shall not exceed ten
years from the date of grant.
(ii) If any employee to whom an Incentive Stock Option is to be granted
under the Plan is, at the time of the grant of such option, the owner of stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company (after taking into account the attribution of stock
ownership rule of Section 424(d) of the Code), then the following special
provisions shall be applicable to the Incentive Stock Option granted to such
individual:
(x) The purchase price per share of the Common Stock subject to such
Incentive Stock Option shall not be less than 110% of the Fair
Market Value of one share of Common Stock at the time of grant;
and
(y) The Option exercise period shall not exceed five years from the
date of grant.
(iii) For so long as the Code shall so provide, options granted to any
employee under the Plan (and any other incentive stock option plans of the
Company) which are intended to constitute Incentive Stock Options shall not
constitute Incentive Stock Options to the extent that such options, in the
aggregate, become exercisable for the first time in any one calendar year for
shares of Common Stock with an aggregate Fair Market Value (determined as of the
respective date or dates of grant) of more than $100,000.
(iv) No Incentive Stock Option may be exercised unless, at the time of such
exercise, the Participant is, and has been continuously since the date of grant
of his or her Option, employed by the Company, except that:
(x) an Incentive Stock Option may be exercised (to the extent
exercisable on the date the Participant ceased to be an employee of
the Company) within the period of three months after the date the
Participant ceases to be an employee of the Company (or within such
lesser period as may be specified in the applicable option agreement),
provided, that the agreement with respect to such Option may designate
a longer exercise period and that any exercise after such three-month
period shall be treated as the exercise of a Nonstatutory Stock Option
under the Plan;
(y) if the Participant dies while in the employ of the Company, or
within three months after the Participant ceases to be such an
employee, the Incentive Stock Option (to the extent otherwise
exercisable on the date of death) may be exercised by the
Participant's Designated Beneficiary within
II-5
<PAGE>
the period of one year after the date of death (or within such lesser
period as may be specified in the applicable Option agreement); and
(z) if the Participant becomes disabled (within the meaning of Section
22(e)(3) of the Code or any successor provision thereto) while in the
employ of the Company, the Incentive Stock Option may be exercised (to
the extent otherwise exercisable on the date of death) within the
period of one year after the date of such disability (or within such
lesser period as may be specified in the Option agreement). In the
event of the Participant's death during this one-year period, the
Incentive Stock Option may be exercised by the Participant's
Designated Beneficiary within the period of one year from the date the
Participant became disabled or within such lesser period as may be
specified in the applicable Option agreement.
For all purposes of the Plan and any Option granted hereunder, (i) "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations) and (ii) any option may
provide that if such Option shall be assumed or a new Option substituted
therefor in a transaction to which Section 424(a) of the Code applies,
employment by such assuming or substituting corporation (hereinafter called the
"Successor Corporation") shall be considered for all purposes of such Option to
be employment by the Company. Notwithstanding the foregoing provisions, no
Incentive Stock Option may be exercised after its expiration date.
SECTION 7. STOCK APPRECIATION RIGHTS
- ------------------------------------
(a) The Committee may grant Stock Appreciation Rights entitling recipients
on exercise of the SAR to receive an amount, in cash or Stock or a combination
thereof (such form to be determined by the Committee), determined in whole or in
part by reference to appreciation in the Fair Market Value of the Stock between
the date of the Award and the exercise of the Award. A Stock Appreciation Right
shall entitle the Participant to receive, with respect to each share of Stock as
to which the SAR is exercised, the excess of the share's Fair Market Value on
the date of exercise over its Fair Market Value on the date the SAR was granted.
The Committee also may grant Stock Appreciation Rights that provide that,
following a change in control of the Company (as defined by the Board or the
Committee at the time of the Award), the holder of such SAR will be entitled to
receive, with respect to each share of Stock subject to the SAR, an amount equal
to the excess of a specified value (which may include an average of values) for
a share of Stock during a period preceding such change in control over the Fair
Market Value of a share of Stock on the date the SAR was granted.
(b) Stock Appreciation Rights may be granted in tandem with, or
independently of, Options granted under the Plan. A Stock Appreciation Right
granted in tandem with an option which is not an Incentive Stock Option may be
granted either at or after the time the Option is granted. A Stock Appreciation
Right granted in tandem with an Incentive Stock Option may be granted only at
the time the Option is granted.
(c) When Stock Appreciation Rights are granted in tandem with Options, the
following provisions will apply:
II-6
<PAGE>
(i) The Stock Appreciation Right will be exercisable only at such time
or times, and to the extent, that the related Option is exercisable
and will be exercisable in accordance with the procedure required for
exercise of the related Option.
(ii) The Stock Appreciation Right will terminate and no longer be
exercisable upon the termination or exercise of the related Option,
except that a Stock Appreciation Right granted with respect to less
than the full number of shares covered by an Option will not be
reduced until the number of shares as to which the related Option has
been exercised or has terminated exceeds the number of shares not
covered by the Stock Appreciation Right.
(iii) The Option will terminate and no longer be exercisable upon the
exercise of the related Stock Appreciation Right.
(iv) A Stock Appreciation Right granted in tandem with an Incentive
Stock Option may be exercised only when the market price of the Stock
subject to the Option exceeds the exercise price of such Option.
(d) A Stock Appreciation Right not granted in tandem with an Option will
become exercisable at such time or times, and on such conditions, as the
Committee may specify.
(e) The Committee may at any time accelerate the time at which all or any
part of the SAR may be exercised.
SECTION 8. PERFORMANCE SHARES
- ------------------------------
(a) The Committee may make Performance Share Awards entitling recipients to
acquire shares of Stock upon the attainment of specified performance goals. The
Committee may make Performance Share Awards independent of or in connection with
the granting of any other Award under the Plan. The Committee in its sole
discretion shall determine the performance goals applicable under each such
Award, the periods during which performance is to be measured, and all other
limitations and conditions applicable to the awarded Performance Shares;
provided, however, that the Committee may rely on the performance goals and
other standards applicable to any other performance plans of the Company in
setting the standards for Performance Share Awards under the Plan.
(b) Performance Share Awards and all rights with respect to such Awards may
not be sold, assigned, transferred, pledged or otherwise encumbered.
(c) A Participant receiving a Performance Share Award shall have the rights
of a stockholder only as to shares actually received by the Participant under
the Plan and not with respect to shares subject to an Award but not actually
received by the Participant. A Participant shall be entitled to receive a stock
certificate evidencing the acquisition of shares of Stock under
II-7
<PAGE>
a Performance Share Award only upon satisfaction of all conditions specified in
the agreement evidencing the Performance Share Award.
(d) The Committee may at any time accelerate or waive any or all of the
goals, restrictions or conditions imposed under any Performance Share Award.
SECTION 9. RESTRICTED AND UNRESTRICTED STOCK
- ---------------------------------------------
(a) The Board may grant Restricted Stock Awards entitling recipients to
acquire shares of Stock, subject to the right of the Company to repurchase all
or part of such shares at their purchase price (or to require forfeiture of such
shares if purchased at no cost) from the recipient in the event that conditions
specified by the Committee in the applicable Award are not satisfied prior to
the end of the applicable Restricted Period or Restricted Periods established by
the Committee for such Award. Conditions for repurchase (or forfeiture) may be
based on continuing employment or service or achievement of pre-established
performance or other goals and objectives.
(b) Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered, except as permitted by the Committee, during
the applicable Restricted Period. Shares of Restricted Stock shall be evidenced
in such manner as the Board may determine. Any certificates issued in respect of
shares of Restricted Stock shall be registered in the name of the Participant
and, unless otherwise determined by the Board, deposited by the Participant,
together with a stock power endorsed in blank, with the Company (or its
designee). At the expiration of the Restricted Period, the Company (or such
designee) shall deliver certificates representing such shares to the Participant
or if the Participant has died, to the Participant's Designated Beneficiary.
(c) The Committee may, in its sole discretion, grant (or sell at a purchase
price determined by the Board, which shall not be lower than 75% of Fair Market
Value on the date of sale) to Participants shares of Stock free of any
restrictions under the Plan ("Unrestricted Stock").
(d) The purchase price for each share of Restricted Stock and Unrestricted
Stock shall be determined by the Committee and may not be less than the par
value of the Common Stock. Such purchase price may be paid in the form of past
services or such other lawful consideration as is determined by the Board.
(e) The Committee may at any time accelerate the expiration of the
Restricted Period applicable to all, or any particular, outstanding shares of
Restricted Stock.
SECTION 10. GENERAL PROVISIONS APPLICABLE TO AWARDS
- ----------------------------------------------------
(a) Applicability of Rule 16b-3.
Those provisions of the Plan which make an express reference to Rule 16b-3
shall apply to the Company only at such time as the Company's Common Stock is
registered under the Securities Exchange Act of 1934, or any successor
provision, and then only to Reporting Persons.
II-8
<PAGE>
(b) Documentation.
Each Award under the Plan shall be evidenced by an instrument delivered to
the Participant specifying the terms and conditions thereof and containing such
other terms and conditions not inconsistent with the provisions of the Plan as
the Committee considers necessary or advisable. Such instruments may be in the
form of agreements to be executed by both the Company and the Participant, or
certificates, letters or similar documents, acceptance of which will evidence
agreement to the terms thereof and of this Plan.
(c) Committee Discretion.
Each type of Award may be made alone, in addition to or in relation to any
other type of Award. The terms of each type of Award need not be identical, and
the Committee need not treat Participants uniformly. Except as otherwise
provided by the Plan or a particular Award, any determination with respect to an
Award may be made by the Committee at the time of award or at any time
thereafter.
(d) Termination of Status.
Subject to the provisions of Section 6(b)(iv), the Committee shall
determine the effect on an Award of the disability, death, retirement,
authorized leave of absence or other termination of employment or other status
of a Participant and the extent to which, and the period during which, the
Participant's legal representative, guardian or Designated Beneficiary may
exercise rights under such Award.
(e) Mergers, Etc.
In the event of a consolidation or merger or sale of all or substantially
all of the assets of the Company in which outstanding shares of Common Stock are
exchanged for securities, cash or other property of any other corporation or
business entity (an "Acquisition"), or in the event of a liquidation of the
Company, the Board or the board of directors of any corporation assuming the
obligations of the Company, may, in its discretion, take any one or more of the
following actions as to outstanding Awards: (i) provide that such Awards shall
be assumed, or substantially equivalent Awards shall be substituted, by the
acquiring or succeeding corporation (or an affiliate thereof) on such terms as
the Board determines to be appropriate, (ii) upon written notice to
Participants, provide that all unexercised options or SARs will terminate
immediately prior to the consummation of such transaction unless exercised by
the Participant within a specified period following the date of such notice,
(iii) in the event of an Acquisition under the terms of which holders of the
Common Stock of the Company will receive upon consummation thereof a cash
payment for each share surrendered in the Acquisition (the "Acquisition Price"),
make or provide for a cash payment to Participants equal to the difference
between (A) the Acquisition Price times the number of shares of Common Stock
subject to outstanding Options or SARs (to the extent then exercisable at prices
not in excess of the Acquisition Price) and (B) the aggregate exercise price of
all such outstanding Options or SARs in exchange for the termination of such
Options and SARS, and (iv) provide that all or any outstanding Awards shall
become exercisable or realizable in full prior to the effective date of
II-9
<PAGE>
such Acquisition. Notwithstanding the foregoing, in the event of an Acquisition,
then all of the outstanding Options granted hereunder shall become exercisable
immediately prior to such Acquisition.
(f) Withholding.
The Participant shall pay to the Company, or make provision satisfactory to
the Committee for payment of, any taxes required by law to be withheld in
respect of Awards under the Plan no later than the date of the event creating
the tax liability. In the Committee's discretion, and subject to such conditions
as the Committee may establish, such tax obligations may be paid in whole or in
part in shares of Common Stock, including shares retained from the Award
creating the tax obligation, valued at their Fair Market Value. The Company may,
to the extent permitted by law, deduct any such tax obligations from any payment
of any kind otherwise due to the Participant.
(g) Foreign Nationals.
Awards may be made to Participants who are foreign nationals or employed
outside the United States on such terms and conditions different from those
specified in the Plan as the Committee considers necessary or advisable to
achieve the purposes of the Plan or comply with applicable laws.
(h) Amendment of Award.
Either the Board or the Committee may amend, modify or terminate any
outstanding Award, including substituting therefor another Award of the same or
a different type, changing the date of exercise or realization and converting an
Incentive Stock Option to a Nonstatutory Stock Option, provided that the
Participant's consent to such action shall be required unless the Board
determines that the action, taking into account any related action, would not
materially and adversely affect the Participant.
(i) Cancellation and New Grant of Options.
Both the Board and the Committee shall have the authority to effect, at any
time and from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new Options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
cancelled Options or (ii) the amendment of the terms of any and all outstanding
Options under the Plan to provide an option exercise price per share which is
higher or lower than the then current exercise price per share of such
outstanding Options.
(j) Conditions on Delivery of Common Stock.
The Company will not be obligated to deliver any shares of Common Stock
pursuant to the Plan or to remove restrictions from shares previously delivered
under the Plan (i) until all conditions of the Award have been satisfied or
removed, (ii) until, in the opinion of
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<PAGE>
the Company's counsel, all applicable federal and state laws and regulations
have been complied with, (iii) if the outstanding Common Stock is at the time
listed on any stock exchange, until the shares to be delivered have been listed
or authorized to be listed on such exchange upon official notice of notice of
issuance, and (iv) until all other legal matters in connection with the issuance
and delivery of such shares have been approved by the Company's counsel. If the
sale of Common Stock has not been registered under the Securities Act of 1933,
as amended, the Company may require, as a condition to exercise of the Award,
such representations or agreements as the Company may consider appropriate to
avoid violation of such Act and may require that the certificates evidencing
such Common Stock bear an appropriate legend restricting transfer.
SECTION 11. MISCELLANEOUS
- --------------------------
(a) No Right To Employment or Other Status.
No person shall have any claim or right to be granted an Award, and the
grant of an Award shall not be construed as giving a Participant the right to
continued employment or service for the Company. The Company expressly reserves
the right at any time to dismiss a Participant free from any liability or claim
under the Plan, except as expressly provided in the applicable Award.
(b) No Rights As Stockholder.
Subject to the provisions of the applicable Award, no Participant or
Designated Beneficiary shall have any rights as a stockholder with respect to
any shares of Common Stock to be distributed under the Plan until he or she
becomes the record holder thereof.
(c) Exclusion from Benefit Computations.
No amounts payable upon exercise of Awards granted under the Plan shall be
considered salary, wages or compensation to Participants for purposes of
determining the amount or nature of benefits that Participants are entitled to
under any insurance, retirement or other benefit plans or programs of the
Company.
(d) Effective Date and Term.
(i) Effective Date. The Plan shall become effective when adopted by
the Board of Directors, but no Incentive Stock Option granted under
the Plan shall become exercisable unless and until the Plan shall have
been approved by the Company's stockholders. If such stockholder
approval is not obtained within twelve months after the date of the
Board's adoption of the Plan, no Options previously granted under the
Plan shall be deemed to be Incentive Stock Options and no Incentive
Stock Options shall be granted thereafter. Amendments to the Plan not
requiring stockholder approval shall become effective when adopted by
the Board of Directors; amendments requiring stockholder approval
shall become effective when adopted by the Board of Directors, but no
Incentive Stock Option granted
II-11
<PAGE>
after the date of such amendment shall become exercisable (to the
extent that such amendment to the Plan was required to enable the
Company to grant such Incentive Stock Option to a particular optionee)
unless and until such amendment shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained
within twelve months of the Board's adoption of such amendment, any
Incentive Stock Options granted on or after the date of such amendment
shall terminate to the extent that such amendment to the Plan was
required to enable the Company to grant such Option to a particular
optionee. Subject to the limitations set forth in this Section 11(d),
Awards may be made under the Plan at any time after the effective date
and before the date fixed for termination of the Plan.
(ii) Termination. The Plan shall terminate upon the earlier of (i) the
close of business on the day next preceding the tenth anniversary of the
date of its adoption by the Board of Directors, or (ii) the date on which
all shares available for issuance under the Plan shall have been issued
pursuant to Awards under the Plan. Awards outstanding on such date shall
continue to have force and effect in accordance with the provisions of the
instruments evidencing such Awards.
(e) Amendment of Plan.
The Board may amend, suspend or terminate the Plan or any portion thereof
at any time, provided that no amendment shall be made without stockholder
approval if such approval is necessary to comply with any applicable tax, stock
exchange or other regulatory requirement. Prior to any such approval, Awards may
be made under the Plan expressly subject to such approval.
(f) Governing Law.
The provisions of the Plan shall be governed by and interpreted in
accordance with the laws of the State of Indiana.
Adopted by the Board of Directors
of Signal Apparel Company, Inc.
effective January 1, 1999
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<PAGE>
PROXY
SIGNAL APPAREL COMPANY, INC.
200-A Manufacturers Road
P. O. Box 4296
Chattanooga, Tennessee 37405
This Proxy is Solicited on Behalf of the Board of Directors
Annual Meeting of Shareholders, January 20, 1999
The undersigned hereby appoints John W. Prutch and Robert J. Powell, and
each of them, proxies, with full power of substitution, to act and to vote the
shares of common stock which the undersigned is entitled to vote at the Annual
Meeting of Shareholders to be held at 200-A Manufacturers Road, Chattanooga,
Tennessee 37405, at 10 A.M., E.D.T., on January 20, 1999, and any adjournment or
adjournments thereof, as follows:
1. Election of Directors: |_| FOR all nominees |_| WITHHOLD ALL AUTHORITY
(Except as indicated to vote for all
to the contrary below) nominees listed below
Henry L. Aaron; Barry F. Cohen; Jacob I. Feigenbaum; Paul R. Greenwood;
Thomas A. McFall; John W. Prutch; Stephen Walsh; Howard N. Weinberg.
(Instruction: To withhold authority to vote for any individual,
write that nominee's name in the space provided below.)
-----------------------------------------------------------------------
2. To approve the issuance of up to 10,070,000 additional shares of the
Company's Common Stock in connection with the Company's acquisition of
substantially all of the assets of Tahiti Apparel, Inc.;
|_| FOR |_| AGAINST |_| ABSTAIN
3. To approve the issuance of additional shares of the Company's Common Stock
upon the conversion of (or, at the election of the Company, in payment of
accrued dividends with respect to) shares of the Company's 5% Series G1
Convertible Preferred Stock and 5% Series G2 Convertible Preferred Stock;
|_| FOR |_| AGAINST |_| ABSTAIN
(Continued on reverse side)
<PAGE>
4. To approve the Company's 1998 Stock Incentive Plan and the issuance of up
to 5,000,000 shares of the Company's Common Stock in connection with awards
under such plan;
|_| FOR |_| AGAINST |_| ABSTAIN
5. To approve the issuance of warrants to purchase up to 5,000,000 shares of
the Company's Common Stock to WGI, LLC in connection with certain
additional funding and waivers under the Credit Agreement between the
Company and WGI, LLC;
|_| FOR |_| AGAINST |_| ABSTAIN
6. To approve the issuance of warrants to purchase up to 3,804,546 shares of
the Company's Common Stock to each of the Company's Chief Executive Officer
and the Company's President under the terms of certain agreements between
the Company and such officers;
|_| FOR |_| AGAINST |_| ABSTAIN
7. To transact such other business as may properly come before the meeting or
any adjournments thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED IN FAVOR OF
PROPOSALS 1 THROUGH 6. THE BOARD IS NOT AWARE OF ANY OTHER MATTER TO BE BROUGHT
BEFORE THE ANNUAL MEETING FOR A VOTE OF SHAREHOLDERS. IF, HOWEVER, OTHER MATTERS
ARE PROPERLY PRESENTED, THE PROXIES WILL VOTE IN ACCORDANCE WITH THEIR BEST
JUDGMENT.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
of Shareholders, dated December 15, 1998, and the Proxy Statement furnished
therewith.
Dated this ____ day of ________, 1998.
_______________________________ (Seal)
Note: Signature should agree with name
on stock certificate as printed
thereon. Executors, administrators,
trustees and other fiduciaries and
persons signing on behalf of
corporations or partnerships, should so
indicate when signing.
Please sign, date and return this Proxy in the accompanying prepaid
self-addressed envelope. Thank you.
Chattanooga, Tennessee
December 15, 1998
