SIGNAL APPAREL COMPANY, INC.
200-A Manufacturers Road
Chattanooga, Tennessee 37405
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
JANUARY 27, 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 27, 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
January 5, 1999
<PAGE>
SIGNAL APPAREL COMPANY, INC.
200-A Manufacturers Road
Chattanooga, Tennessee 37405
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
JANUARY 27, 1999
This Proxy Statement, which is to be mailed on or about January 5, 1999, 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 27, 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 31, 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 31, 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 11,640,002 35.7%
65 E. 55th St., 32nd Floor $.01 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 Common Stock 21,124,749 56.9%
R. 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 134,435 *
$.01 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 31, 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 31, 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.
6
<PAGE>
(11) Beneficial ownership reported for Mr. Prutch consists of presently
exercisable warrants to purchase 134,435 shares of Common Stock.
(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
31, 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 1998
c/o Cohen Pollock Merlin League Baseball Club, Inc., since October
Axelrod & Tanenbaum 1998. Vice President of Atlanta National
2100 Riveredge Parkway League Baseball Club, Inc., from 1976 through
Suite 300 October 1998.
Atlanta, GA 30328
Barry F. Cohen 53 Executive Vice President of Parametrics 1998
Parametrics Technology Technology Corporation, a computer software
Corp. company, since January 1998; Senior Vice
128 Technology Drive President of Computer Vision, Inc., 1993 to
Waltham, MA 02154 January 1998.
Jacob I. Feigenbaum 50 President of Miracle Suit by Swim Shaper since 1994
c/o Miracle Suit February 1996; President and owner of Sea Q.
1411 Broadway, 30th Floor America, August 1994 to 1996; President of
New York, NY 10018 Robby Len Swimwear division of Apparel America,
1980 to 1994.
Paul R. Greenwood 51 Managing General Partner of Walsh, Greenwood & 1990
One East Putnam Avenue Co., a broker-dealer engaged in effecting
Greenwich, CT 06830 transactions in 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. 1997
200A Manufacturers Road Chairman, Weatherly Financial Companies, since
Chattanooga, TN 37405 1984 (currently inactive).
John W. Prutch 46 President of the Company since October 1997; 1997
1088 National Parkway President, GIDI Holdings, Inc., imprinted
Schaumburg, IL 60173 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 1990
3333 New Hyde Park Road September 1997; Chief Executive Officer since
North Hills, NY 11040 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 1998
200A Manufacturers Road Officer of the Company since September 1998.
Chattanooga, TN 37405 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.
</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:
<TABLE>
<CAPTION>
Name Age Office and Business Experience
- ---- --- ------------------------------
<S> <C> <C>
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.
</TABLE>
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 $1.75 per share, with additional terms
described in more detail in the discussion of Proposal 5 herein.
o Secured by a security interest in all of the Company's assets (except
for the assets of its Heritage division and certain former plant
locations which are currently held for sale), subordinate to the
security interests of the Company's senior lender.
o Funds borrowed may be used for any purpose approved by the Company's
directors and executive officers, including repayment of any other
existing indebtedness of the Company.
o During the term of the WGI Credit Agreement, WGI, LLC is entitled to
have two designees nominated by the Company for election to its Board
of Directors at the Company's Annual Meeting of Shareholders; Messrs.
Walsh and Greenwood are the Board nominees designated by WGI, LLC
pursuant to this provision.
16
<PAGE>
EXECUTIVE COMPENSATION INFORMATION
Set forth below is a summary of the annual and long-term compensation paid
by the Company for each of the last three fiscal years to: (i) Barton J. Bresky,
the Company's Chief Executive Officer from December 6, 1996 until August 20,
1997; (ii) David E. Houseman, Chief Executive Officer from September 1997 until
June 1998; and (iii) the Company's other four most highly compensated executive
officers serving as of December 31, 1997 (the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------
Long-Term
Compensation
Awards
------------
Other Securities All
Annual Underlying Other
Salary Bonus Compensation Options/SARs Compensation
Name and Principal Position Year ($) ($) ($) (#)(2) (3)
====================================================================================================================================
<S> <C> <C> <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, $2,967.
The table below sets forth certain information concerning grants of options
during the year ended December 31, 1997, to the Company's Named Executives. The
plan does not provide for the granting of stock appreciation rights.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
--------------------------------
Potential Realizable Value
at Assumed Annual Rates of
% of Total Stock Price Appreciation
Options for Option Term*
Granted to Exercise or ----------------------------
Options Employees In Base Price Expiration
Name granted (#) Fiscal Year ($/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 12/31/97)
[EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC]
SIGNAL APPAREL
COMPANY, INC. STANDARD & POORS 500 APPAREL
-------------- -------------------- -------
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 18, 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 II 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 which
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 18, 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 the conditions to Closing
under the Acquisition Agreement will be satisfied, and Closing will occur, as
soon as practicable following approval of the stock issuance by the Company's
shareholders at the Annual Meeting.
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 potential claims
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 Tahiti and Tahiti'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. Subject to finalizing
negotiations with Chan, it is anticipated that the terms of this agreement (the
"Chan Agreement") will provide for: (i) 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, and (ii) the execution by
Tahiti of 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 quarterly 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 to be executed
in connection 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, in the case of a
"piggy back" registration, 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
26
<PAGE>
years following the Closing Date but while the registering shareholder is no
longer an employee of Signal, the registering shareholder shall be responsible
for all such expenses.
Subject to finalizing negotiations with Chan, it is anticipated that the
parties also will entered into a Stock Resale Agreement, whereby Tahiti's
majority stockholders and Chan will agree (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 of Tahiti's majority
stockholders 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 related transactions 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>
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> <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> <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)
</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> <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 net operating income ("NOI") generated by Tahiti's
business following its acquisition by the Company. No bonus will be payable
unless such NOI 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
salary and 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 payment, in a lump sum, of all base salary that would
have continued 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 Mr.
Ben-Haim 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 $270,000 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 other liabilities assumed by the Company under 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
0aggregate 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 signed agreement from WGI, LLC and its
affiliates, the Company's principal shareholders, to vote all shares of the
Company's Common Stock held by them in favor of the issuance of Company Common
Stock pursuant to the Acquisition Agreement. WGI, LLC and its affiliates
currently hold 16,618,749 shares of Common Stock, representing approximately
50.9% 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 January 31, 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 material respect; (B) the other party
fails to comply in any material respect with any of its
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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 31, 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 approximately
48.5% of the total outstanding voting power of the Company's Common Stock.
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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 31, 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 31, 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 31,
1998.
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
51
<PAGE>
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
II.
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 II 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. These awards may be made in
connection with, or independent of, any deferrals of other compensation payable
to plan participants. A total of 5,000,000 shares of Common Stock may be awarded
under the 1999 Incentive Plan. The 1999 Incentive Plan will be administered by
the Company's Board of Directors (or, if the Board should choose to delegate
such functions, by the Compensation
52
<PAGE>
Committee), which may adopt, amend or repeal the administrative rules,
guidelines and practices relating to the plan. The remainder of this discussion
will refer to the Board or the Compensation Committee, as applicable, in the
exercise of this role as the "Plan Administrators."
INCENTIVE STOCK OPTIONS; NONSTATUTORY STOCK OPTIONS
The Plan Administrators 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 Plan Administrators.
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 Plan Administrators 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 Plan Administrators may make Performance Share Awards entitling
recipients to acquire shares of Common Stock upon the attainment of specified
performance goals, as determined by the Plan Administrators, which may include
earnings per share or revenue targets, completed acquisitions and other
corporate or individual executive objectives. The Plan Administrators 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 Plan Administrators are not satisfied
prior to the end of the applicable Restricted Period established by the Plan
Administrators for such award. Shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered during the applicable
Restricted Period. The Board may, in its sole discretion, grant or sell to
participants shares of Common Stock free of
53
<PAGE>
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.
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
54
<PAGE>
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 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.
55
<PAGE>
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 31, 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 31, 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.
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
56
<PAGE>
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)
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
57
<PAGE>
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
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
TAHITI APPAREL, INC.
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
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
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
=========== ===========
<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 Earnings 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
SEPTEMBER 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 1,602 982
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 September 30,1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(2,418.00) $(2,199.00)
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 I
ASSET PURCHASE AGREEMENT
BY AND AMONG
SIGNAL APPAREL COMPANY, INC.,
TAHITI APPAREL, INC.
AND
THE STOCKHOLDERS OF TAHITI APPAREL, INC.
DATED AS OF DECEMBER 17, 1998
<PAGE>
TABLE OF CONTENTS
ARTICLE I. DEFINITIONS 1
Section 1.01 Definitions 1
Section 1.02 Rules of Construction 8
ARTICLE II. PURCHASE AND SALE OF THE ASSETS 9
Section 2.01 Sale and Purchase of the Assets 9
Section 2.02 Excluded Assets 10
Section 2.03 Liabilities Assumed 10
Section 2.04 Purchase Price 11
Section 2.05 Escrow of Purchase Price 11
Section 2.06 Payment of Transfer Taxes and Other Charges 11
ARTICLE III. THE CLOSING 12
Section 3.01 Closing Date 12
Section 3.02 Deliveries at Closing 13
Section 3.03 Risk of Loss 16
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF
THE COMPANY AND THE STOCKHOLDERS 16
Section 4.01 Organization and Qualification 16
Section 4.02 Authority 17
Section 4.03 Consents and Approvals; No Violations 17
Section 4.04 Capitalization; Stock Ownership 17
Section 4.05 Subsidiaries 18
Section 4.06 Company's Articles of Incorporation and By-laws 18
Section 4.07 Compliance With Laws; Licenses 18
Section 4.08 Litigation; Investigations 19
Section 4.09 Taxes 19
Section 4.10 Employee Benefit Plans; ERISA 21
Section 4.11 Labor Relations 23
Section 4.12 Insurance Policies 24
Section 4.13 Environmental Laws 24
Section 4.14 Financial Statements and Books and Records 26
Section 4.15 No Material Adverse Change 26
Section 4.16 Absence of Liabilities 26
Section 4.17 Absence of Specified Changes 26
Section 4.18 Corporate Names 28
Section 4.19 Real Property; Leases 28
Section 4.20 Equipment and Personal Property 29
Section 4.21 Intellectual Property 30
Section 4.22 Software 30
Section 4.23 Contracts 30
Section 4.24 Inventory 31
i
<PAGE>
Section 4.25 Major Customers and Suppliers 31
Section 4.26 Title to Properties; Liens 31
Section 4.27 Condition of Assets 31
Section 4.28 Transactions with Affiliates 32
Section 4.29 Absence of Certain Practices 32
Section 4.30 Accounts Payable 32
Section 4.31 Accounts Receivable 32
Section 4.32 WARN Act 33
Section 4.33 Compliance with United States Customs Regulations 33
Section 4.34 Bank Accounts 33
Section 4.35 Valid Transfer 33
Section 4.36 Full Disclosure 33
Section 4.37 Investment Intent 34
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF THE BUYER 35
Section 5.01 Organization and Qualification 35
Section 5.02 Authority 35
Section 5.03 Consents and Approvals; No Violations 35
Section 5.04 Buyer Securities 35
Section 5.05 NYSE Compliance
Section 5.06 Capitalization; Stock Ownership
Section 5.07 Compliance With Laws; Licenses
Section 5.08 Litigation Investigations
Section 5.09 Environmental Laws
Section 5.10 Absence of Liabilities
Section 5.11 Absence of Specified Changes
Section 5.12 Full Disclosure
ARTICLE VI. CONDUCT AND TRANSACTIONS PRIOR TO CLOSING 36
Section 6.01 Access to Information 36
Section 6.02 Conduct of Business in Normal Course 36
Section 6.03 Consents; Satisfaction of Conditions 37
Section 6.04 Further Assurances 37
Section 6.05 No Solicitation 37
Section 6.06 Notification of Certain Matters 38
Section 6.07 Supplements to Schedules 38
Section 6.08 Special Meeting of Stockholders 38
ARTICLE VII. CONDITIONS PRECEDENT TO THE
BUYER'S OBLIGATIONS 39
Section 7.01 Accuracy of Representations and Warranties 39
Section 7.02 Performance by the Company and Stockholders 39
Section 7.03 Opinion of Counsel 39
Section 7.04 Casualty Losses; Material Adverse Effect 39
Section 7.05 Termination of Related Party Agreements 40
Section 7.06 Governmental Authorizations; Consents 40
ii
<PAGE>
Section 7.07 FIRPA Affidavit 40
Section 7.08 Absence of Litigation 40
Section 7.9 No Injunction 40
Section 7.10 Good Standing Certificates 40
Section 7.11 Certified Charter Documents 41
Section 7.12 Certified By-laws 41
Section 7.13 Approval of the Buyer's Board 41
Section 7.14 Duly Executed Agreements
Section 7.15 Financial Statements
Section 7.16 Conversion Agreement
Section 7.17 Matters Satisfactory to the Buyer's Counsel 41
Section 7.18 Approval of Buyer's Stockholders 42
Section 7.19 Clearance Certificates 42
Section 7.20 Financing
ARTICLE VIII. CONDITIONS PRECEDENT TO THE COMPANY'S
OBLIGATIONS 42
Section 8.01 Accuracy of Representations and Warranties 42
Section 8.02 Performance by the Buyer 42
Section 8.03 Opinion of Counsel 42
Section 8.04 Casualty Losses; Material Adverse Effect 42
Section 8.05 Governmental Authorizations; Consents 43
Section 8.06 Absence of Litigation 43
Section 8.07 No Injunction 43
Section 8.08 Approval of the Buyer's Board 43
Section 8.09 Duly Executed Agreements 43
Section 8.10 Matters Satisfactory to the Company's Counsel 43
Section 8.11 Proxy
Section 8.12 Guarantee
Section 8.13 Conversion Agreement
Section 8.14 Tax Treatment
ARTICLE IX. SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS 43
ARTICLE X. INDEMNIFICATION 44
Section 10.01 Indemnity 44
Section 10.02 Indemnification Procedure 45
ARTICLE XI. TERMINATION 46
Section 11.01 Right to Terminate 46
Section 11.02 Obligations to Cease 47
Section 11.03 Additional Buyer Remedies
Section 11.04 Additional Company Remedies
ARTICLE XII. OBLIGATIONS AFTER THE CLOSING 47
iii
<PAGE>
Section 12.01 Access to Information 47
Section 12.02 Employees and Employee Benefits 47
Section 12.03 Tax Returns; Tax Audits 48
Section 12.04 Further Assurances 48
Section 12.05 Change of Name 49
Section 12.06 Consent of Company's Accountants 50
Section 12.07 Qualification as Reorganization 50
ARTICLE XIII. MISCELLANEOUS 50
Section 13.01 Publicity 50
Section 13.02 Costs 51
Section 13.03 Headings 51
Section 13.04 Notices 51
Section 13.05 Assignment and Successors 52
Section 13.06 Binding Effect 52
Section 13.07 Governing Law; Forum; Process 53
Section 13.08 Entire Agreement 53
Section 13.09 Counterparts 53
Section 13.10 Severability 53
Section 13.11 No Prejudice 53
Section 13.12 Parties in Interest 53
Section 13.13 Amendment and Modification 53
Section 13.14 Waiver 54
Section 13.15 Further Assurances 54
Exhibits
Exhibit A -- Form of Resale Agreement
Exhibit B -- Form of Ben-Haim Employment Agreement
Exhibit C -- Form of Harary Employment Agreement
Exhibit D -- Registration Rights Agreement
Exhibit E -- Form of Budget
Exhibit F -- Form of FIRPTA Affidavit
Schedules
Schedule 2.01(a) -- Assets - Accounts Receivable
Schedule 2.01(b) -- Assets - Contracts
Schedule 2.01(c) -- Assets - Personal Property
Schedule 2.01(d) -- Assets - Licenses
Schedule 2.01(e) -- Assets - Computer Software
Schedule 2.01(f) -- Assets - Patents
Schedule 2.01(g) -- Assets - Real Property Leases
Schedule 2.01(h) -- Assets - Tangible Assets
Schedule 2.01(i) -- Assets - Corporate Names
Schedule 2.02 -- Excluded Assets
iv
<PAGE>
Schedule 2.03-A -- Assumed Contracts
Schedule 2.03-B -- Assumed Liabilities
Schedule 2.03-C -- Excluded Liabilities
Schedule 4.01 -- Company Qualifications
Schedule 4.03 -- Company Consents
Schedule 4.04 -- Company Capitalization
Schedule 4.07 -- Company Licenses
Schedule 4.08 -- Company Litigation
Schedule 4.09 -- Company Taxes
Schedule 4.10 -- ERISA
Schedule 4.11 -- Company Labor Relations
Schedule 4.12 -- Company Insurance
Schedule 4.13 -- Company Environmental Assessments
Schedule 4.14 -- Company Financial Statements
Schedule 4.15 -- Material Adverse Change
Schedule 4.16 -- Company Absence of Liabilities
Schedule 4.17 -- Company Absence of Specified Changes
Schedule 4.18 -- Corporate Names
Schedule 4.19 -- Real Property
Schedule 4.20 -- Equipment
Schedule 4.21 -- Intellectual Property
Schedule 4.23 -- Contracts
Schedule 4.26 -- Liens
Schedule 4.28 -- Transactions with Affiliates
Schedule 4.31 -- Accounts Receivable
Schedule 4.33 -- U.S. Customs
Schedule 4.34 -- Bank Accounts
Schedule 4.37 -- Residence Addresses
Schedule 5.02 -- Buyer Authority
Schedule 5.03 -- Buyer Consents
Schedule 5.06 -- Buyer Capitalization
Schedule 5.08 -- Buyer Litigation
Schedule 6.03 -- Company Consents
Schedule 10.01(a) -- Company Indemnification
Schedule 10.01(b) -- Buyer Indemnification
Schedule 13.02 -- Finders
v
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of December 18,
1998, by and among Signal Apparel Company, Inc., an Indiana corporation (the
"Buyer"), Tahiti Apparel, Inc., a New Jersey corporation (the "Company"), and
Zvi Ben-Haim ("Ben-Haim") and Michael Harary ("Harary") (each of Ben-Haim and
Harary being referred to herein as a "Stockholder" and collectively as the
"Stockholders").
WHEREAS, the Company is engaged in the design and marketing of swimwear,
bodywear and activewear for ladies and girls (the "Business");
WHEREAS, upon the terms and subject to the conditions set forth in this
Agreement, the Buyer desires to purchase from the Company, and the Company
desires to sell to the Buyer, all of the assets of the Company in consideration
for the issuance of certain securities of the Buyer and the Buyer's assumption
of certain liabilities of the Company, in each case as more particularly
described herein; and
WHEREAS, for federal income tax purposes, it is intended that this
acquisition shall qualify as a reorganization within the meaning of Section
368(a)(1)(C) of the Code and that this Agreement constitutes a "plan of
reorganization" within the meaning of Treasury Regulation Section 1.368-2(g).
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements contained herein, intending to be legally
bound hereby, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.01 Definitions. As used throughout this Agreement, the following
terms have the following meanings:
"Ancillary Documents" shall have the meaning set forth in Article IX.
"Assets" shall have the meaning set forth in Section 2.01.
"Assumed Liabilities" shall have the meaning set forth in Section 2.03.
"Ben-Haim" shall mean Zvi Ben-Haim.
"Ben-Haim Employment Agreement" shall have the meaning set forth in Section
3.02.
"Bill of Sale" shall have the meaning set forth in Section 3.02.
"Business" shall have the meaning set forth in the preamble to this
Agreement.
<PAGE>
"Buyer" shall mean Signal Apparel Company, Inc., an Indiana corporation.
"Buyer Common Stock" shall mean the common stock, par value $0.01 per
share, of the Buyer.
"Buyer Material Adverse Effect" shall have the meaning set forth in Section
5.07(a).
"CERCLA" shall mean the Comprehensive Environmental Response Compensation
and Liability Act, as amended.
"CERCLIS" shall mean the Comprehensive Environmental Response Compensation
and Liability Information System.
"Chan" shall mean Ming-Yiu Chan.
"Closing" shall have the meaning set forth in Section 3.01.
"Closing Date" shall have the meaning set forth in Section 3.01.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Stock Consideration" shall mean the shares of Buyer Common Stock
issuable as the Purchase Price.
"Company" shall mean Tahiti Apparel, Inc., a New Jersey corporation.
"Company Accountants" shall mean Arthur Andersen LLP.
"Consents" shall have the meaning set forth in Section 6.03.
"Contracts" shall mean all contracts, agreements, indentures, notes, bonds,
loans, guarantees, instruments, leases, sub-leases, deeds of trust, conditional
sales contracts, mortgages, franchises, licenses, commitments or other binding
arrangements, express or implied, written or oral, currently in effect to which
the Company is a party, by which it, the Business or any of its Assets, is bound
or pursuant to which the Company is an obligor or a beneficiary.
"Employee" shall have the meaning set forth in Section 12.02.
"Environmental Assessments" shall have the meaning set forth in Section
4.13.
"Environmental Laws" shall mean all applicable federal, state, local and
foreign laws, rules, regulations, codes, ordinances, orders, decrees,
directives, treaties, protocols, permits, licenses and judgments relating to
pollution, contamination or protection of the environment (including, without
limitation, relating to Hazardous Materials).
"EPA" shall have the meaning set forth in Section 4.13.
2
<PAGE>
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" shall have the meaning set forth in Section 2.05.
"Escrow Agent" shall mean Wachtel & Masyr, LLP.
"Escrow Agreement" shall have the meaning set forth in Section 2.05.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Excluded Assets" shall have the meaning set forth in Section 2.02.
"Excluded Liabilities" shall have the meaning set forth in Section 2.03.
"Financial Statements" shall have the meaning set forth in Section 4.14.
"GAAP" shall mean generally accepted accounting principles in the United
States, consistently applied.
"Governmental Entity" shall mean any governmental authority, including,
without limitation, any federal, state, local, regional, municipal, regulatory
or foreign department, commission, agency, board, instrumentality, court, body,
authority or other instrumentality or political unit or subdivision or official
thereof, whether domestic or foreign (including, without limitation, the U.S.
government) or arbitral tribunal having jurisdiction over the Business, the
Company, the Buyer or any Stockholder or any of their respective assets or
properties.
"Harary" shall mean Michael Harary.
"Harary Employment Agreement" shall have the meaning set forth in Section
3.02.
"Hazardous Materials" shall mean any dangerous, toxic or hazardous
pollutant, contaminant, chemical, waste, material or substance as defined in or
governed by any federal, state, local or foreign law, statute, code, ordinance,
regulation, rule or other requirement relating to such substance or otherwise
relating to the environment or human health or safety, including, without
limitation, any pollutant, contaminant, chemical, waste, material or substance
that might cause any injury to human health or safety or to the environment or
might subject the Company to any environmental costs or liability under any
Environmental Law.
"Indemnitee" shall have the meaning set forth in Section 10.01.
"Indemnitor" shall have the meaning set forth in Section 10.01.
"Independent Auditor" shall have the meaning set forth in Section 13.01.
3
<PAGE>
"Information Technology" shall mean computer software, computer firmware,
computer hardware (whether general or specific purpose), and other similar or
related items of automated, computerized and/or software systems.
"Intangible Property" shall mean all trade names, trademarks, service
marks, patents and copyrights (including any registrations or pending
applications for registration of any of the foregoing), trade secrets,
inventions, processes, formulae, technology, technical data, information and
know-how, and all licenses or other rights relating to any of the foregoing that
are attributable to the conduct of, used in, or related to, the operations of
the Company.
"Inventory" shall mean all products (finished or in the process of
manufacture) and all raw materials held for the manufacture of products of the
Company, whether or not located on the premises of the Company, on consignment
to a third party, or in transit or storage, packaging materials, supplies,
ingredients, and any warehouse receipts and any other similar documents relating
thereto.
"IP Assignment" shall have the meaning set forth in Section 3.02.
"IRS" shall mean the Internal Revenue Service.
"Lease Assignment and Assumption" shall have the meaning set forth in
Section 3.02.
"License Assignment" shall have the meaning set forth in Section 3.02.
"Licenses" shall mean all consents, franchises, licenses, permits
(including all air permits and any other applicable environmental or pollution
control permits and all export licenses and occupancy, fire, business and other
permits from local officials), certificates, authorizations, rights,
qualifications, registrations, orders and other approvals of, with or from
Governmental Entities necessary to conduct the Business as currently conducted
by the Company.
"Liens" shall mean all liens, mortgages, charges, security interests,
pledges, deeds of trust, options, rights of first or last refusal or offer,
hypothecation's, assignments, deposit arrangements, charges, conditional sales,
adverse claims or other charges, encumbrances or security interests or
agreements or preferential arrangements of any kind whatsoever (including,
without limitation, any conditional sale or other title retention agreement or
lease in the nature thereof as to which the Company is the buyer or lessee, any
sale of receivables with recourse against the Company or any other Person except
the account debtor, any filings or agreements to file a financing statement as a
debtor under the Uniform Commercial Code or any similar statute of any
jurisdiction to reflect ownership by a third party of property leased to the
Company under a lease that is not in the nature of a conditional sale or title
retention agreement, or any subordination arrangement in favor of any Person).
"Loss" (including, with correlative meaning, the term "Losses") shall mean
any and all liabilities (whether accrued, contingent or otherwise), damages,
deficiencies, costs, claims, judgments, amounts paid in settlement, interest,
penalties, assessments and out-of-pocket expenses (including reasonable
attorneys' and auditors' fees and disbursements).
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"Material Adverse Effect" shall have the meaning set forth in Section 4.15.
"Notice" shall have the meaning set forth in Section 10.02.
"Orders" shall mean all federal, state, local, regional, municipal or
foreign laws, rules, statutes, regulations, ordinances, codes, decrees,
judgments, injunctions, orders or other legal requirements.
"Person" shall mean any corporation, partnership, firm, limited liability
company, joint venture, individual, association, trust, unincorporated
organization or other entity.
"Plans" shall have the meaning set forth in Section 4.10.
"Purchase Price" shall have the meaning set forth in Section 2.04.
"Real Property" shall mean all real property owned by the Company and all
buildings and other structures located thereon and all real property leased by
the Company.
"Registration Rights Agreement" shall have the meaning set forth in Section
3.02.
"Regulatory Actions" shall mean any claim, demand, action or proceeding
with respect to the Company brought or instigated by any Governmental Entity in
connection with any Environmental Law, including, without limitation, civil,
criminal and/or administrative proceedings, and whether or not seeking
environmental costs.
"Related Agreements" shall have the meaning set forth in Section 4.02.
"Release" shall mean the spilling, leaking, disposing, discharging,
emitting, depositing, ejecting, leaching, escaping or any other release or
threatened release, however defined, whether intentional or unintentional, of
any Hazardous Material.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"SEC" shall mean the Securities Exchange Commission.
"Stockholders Agreement" shall have the meaning set forth in Section 3.02.
"Similar Transaction" shall have the meaning set forth in Section 6.05.
"Stockholders" shall have the meaning set forth in the preamble to this
Agreement.
"Tax" (including, with correlative meaning, the terms "Taxes" and
"Taxable") shall mean any federal, state, county, local, foreign or other tax or
governmental charge, fee, levy or other assessment of any nature whatsoever and
however denominated, including, without limitation, any income tax, excise tax,
sales tax, severance tax, occupation tax, windfall profits tax, environmental
tax, alternative tax, alternative minimum tax, registration tax, value added
tax, use
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tax, gross receipts tax, franchise tax, employment and payroll tax, withholding
tax, property tax and import duties, together with any interest and any penalty,
addition to Tax or additional amount imposed by any Taxing Authority due from,
or allocable under any applicable law or agreement to, the Company.
"Taxing Authority" shall mean any Governmental Entity responsible for the
imposition of any Tax.
"Tax Return" shall mean any report, return, form, declaration, statement
extension, or other document or information, including any schedule or
attachment thereto or any amendment thereof, required to be supplied to any
Governmental Entity in connection with Taxes.
"Third-Party Environmental Claims" shall mean any third-party claim,
action, demand or proceeding (other than a Regulatory Action) based on
negligence, trespass, strict liability, nuisance, toxic tort, or any other cause
of action or theory under common law or Environmental Law.
"Transfer Taxes" shall mean all sales and use taxes, stamp taxes, value
added taxes, recording taxes and fees and related expenses, transfer taxes, and
other similar taxes and fees (but excluding any income, franchise or other
similar taxes based on gross or net income), including all interest and
penalties, if any, arising from, or otherwise associated with, the transactions
contemplated by this Agreement.
"Year 2000 Compliant" shall mean, with respect to the Company's Information
Technology, (a) that such technology is designed to be used prior to, during and
after the calendar year 2000 A.D., and (b) that such technology used during each
such time period (i) will accurately receive, provide and process date/time data
(including, but not limited to, calculating, comparing and sequencing) from,
into and between the twentieth and twenty-first centuries, including the years
1999 and 2000, and leap year calculations and (ii) will not malfunction, cease
to function, or provide invalid or incorrect results as a result of date/time
data, to the extent that other Information Technology, used in combination with
the Company's Information Technology, properly exchanges date/time data with it.
Section 1.02 Rules of Construction. Unless the context otherwise requires:
(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(c) "or" is not exclusive;
(d) words in the singular include the plural, and words in the plural
include the singular;
(e) provisions apply to successive events and transactions;
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(f) the words "include" and "including" shall be deemed to mean
"include, without limitation," and "including, without limitation";
(g) "herein," "hereof", "hereto", "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
article, section, paragraph or clause where such terms may appear;
(h) references to sections or articles mean references to such section
or article in this Agreement, unless stated otherwise; and
(i) the use of any gender shall be applicable to all genders.
ARTICLE II
PURCHASE AND SALE OF THE ASSETS
Section 2.01 Sale and Purchase of the Assets. Except as set forth in
Section 2.02 hereof, upon the terms and subject to the conditions set forth
herein, at the Closing, the Company shall sell, convey, transfer, assign and
deliver to the Buyer, and the Buyer shall purchase, acquire and accept from the
Company, free and clear of all Liens (subject only to Liens set forth on
Schedule 4.26), all of the Company's right, title and interest in and to all
properties, assets, privileges, contracts, rights and chooses in action of every
kind, character and description, whether tangible or intangible, whether real,
personal or mixed, whether accrued, contingent or otherwise, and wherever
located, that are related to or existing, used or held for use in connection
with the Business, as the same may exist on the Closing Date (collectively, the
"Assets"), including, without limitation, the following:
(a) All cash, cash equivalents, accounts receivable and other
receivables, credits, allowances, security deposits, prepaid expenses and
unused advances of any kind of the Company, including, but not limited to,
those which are specified on Schedule 2.01(a);
(b) all contracts, licenses, purchase orders, agreements,
arrangements, instruments and documents of any nature or description of the
Company, including, but not limited to, those which are specified on
Schedule 2.01(b);
(c) all machinery, equipment, furniture, fixtures, office and computer
equipment, leasehold improvements, vehicles and other tangible personal
property of the Company, including, but not limited to, those which are
specified on Schedule 2.01(c);
(d) all regulatory licenses, qualifications, authorizations,
franchises, approvals, permits and applications held by the Company that
pertain to the Business, including, but not limited to, those which are
specified on Schedule 2.01(d), to the extent same are assignable;
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(e) all computer software, computer databases, computer programs,
application software, source codes, and object codes of the Company,
including, but not limited to, those which are specified on Schedule
2.01(e);
(f) all patents, trade secrets, inventions, processes, procedures,
research records, market surveys, copyrights, servicemarks, trade names and
know-how and other intellectual property, wherever located, of the Company
and all registrations and applications for registration of any of the
foregoing, including, but not limited to, those which are specified on
Schedule 2.01(f);
(g) the real property and/or interests of the Company in real property
leases listed on Schedule 2.01(g);
(h) all inventories, supplies and similar tangible assets of the
Company, including, but not limited to, those which are specified on
Schedule 2.01(h);
(i) the corporate name of the Company and all names under which the
Company is doing business or has conducted business, including, but not
limited to, those which are specified on Schedule 2.01(i);
(j) all goodwill of the Company;
(k) all books, records, correspondence, production records, employment
records, customer relation information of the Company and any other
confidential or proprietary information pertaining to the Business;
(l) all sales, advertising and promotional material and literature,
catalogs and manuals of the Company;
(m) all actions, suits, claims, demands, charges or complaints in
which the Company is the plaintiff or cross-complainant relating to
(including, but not limited to, all rights under express or implied
warranties from suppliers of the Company with respect to) the Assets and
the operation of the Business, and all proceeds with respect to any of the
foregoing; and
(n) all other assets and properties of any nature whatsoever held by
the Company, either directly or indirectly, and used in, allocated to, or
required for the conduct of, the Business, including all data, files,
indices, analyses and similar information, all stationery, invoices and
other forms and all other records of any kind.
Section 2.02 Excluded Assets. Notwithstanding anything to the contrary in
this Agreement, the Company shall retain and shall not sell, transfer, convey or
assign to the Buyer, and the Buyer shall not purchase or acquire, the items
specified on Schedule 2.02, including, all security deposits of the Company
(collectively, the "Excluded Assets").
Section 2.03 Liabilities Assumed. Notwithstanding anything to the contrary
in this Agreement, the Buyer shall not assume any liabilities of the Company
whether accrued, absolute,
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or contingent, recorded or unrecorded or otherwise, other than (a) the
performance of all obligations of the Company after the Closing Date with
respect to the agreements specified on Schedule 2.03-A, including, without
limitation, the Conversion Agreement; (b) those liabilities specified on
Schedule 2.03-B; (c) those liabilities set forth on the Company's audited
balance sheet as of June 30, 1998; and (d) all liabilities of the Company
incurred in the ordinary course of business during the period commencing July 1,
1998 and ending on the Closing Date; (the "Assumed Liabilities"). The Company
shall be solely responsible for all obligations and liabilities of the Company,
other than the Assumed Liabilities, including, but not limited to, those
specified on Schedule 2.03-C (the "Excluded Liabilities").
Section 2.04 Purchase Price. The purchase price for the Assets (the
"Purchase Price") shall be an amount equal to Fifteen Million Eight Hundred
Seventy Two Thousand Five Hundred ($15,872,500) Dollars. The Purchase Price
shall be payable in shares of Buyer Common Stock. For purposes of determining
the number of shares of Buyer Common Stock issuable to the Company hereunder, it
is agreed that each share of Buyer Common Stock has a value of $1.75 and the
number of shares of Buyer Common Stock issuable shall be determined by dividing
the Purchase Price by $1.75.
Section 2.05 Escrow of Purchase Price. One Million (1,000,000) shares of
the Common Stock Consideration shall be placed in an escrow account (the "Escrow
Account") maintained by Wachtel & Masyr, LLP as escrow agent pursuant to the
terms of an escrow agreement on terms and conditions mutually satisfactory to
the Buyer and the Company (the "Escrow Agreement") to be held in escrow during
the period commencing on the Closing Date and ending on the earlier of six (6)
months after the completion of the Buyer's audit for the year 1999 and two (2)
years after the Closing Date to be used only to satisfy the payment of any
indemnified Losses under Section 10.01 hereof and shall be released from the
Escrow Account in accordance with the terms set forth in the Escrow Agreement.
The certificates for the escrowed shares shall be duly endorsed in blank or
accompanied by stock powers duly endorsed in blank.
Section 2.06 Payment of Transfer Taxes and Other Charges. The Buyer shall
pay all Transfer Taxes. The Buyer shall, at its own expense, file all necessary
Tax Returns and other documentation with respect to all such Transfer Taxes, and
if required by applicable law, the Buyer, as appropriate, will join in the
execution of any such Tax Return or other documentation.
ARTICLE III.
THE CLOSING
Section 3.01 Closing Date. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Wachtel &
Masyr, LLP, 110 East 59th Street, New York, New York 10022 within three (3)
business days following satisfaction of the conditions set forth in Articles VII
and VIII, or at such other location, date and time as to which the parties may
mutually agree (the date and time of the Closing is referred to herein as the
"Closing Date").
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Section 3.02 Deliveries at Closing.
(a) At the Closing, the Buyer shall deliver to the Company:
(i) certificates to the Company, containing appropriate
restrictive legends, evidencing the Common Stock Consideration;
(ii) duly executed Resale Agreement in the form attached hereto
as Exhibit A;
(iii) duly executed assumption agreement(s) in a form mutually
satisfactory to the Buyer and the Company relating to the assumption
by the Buyer of the Assumed Liabilities;
(iv) duly executed assignment and assumption(s) in a form
mutually satisfactory to the Buyer and the Company relating to the
transfer to the Buyer of all interests of the Company in the lease
agreements to be transferred to the Buyer hereunder and providing for
the assumption by the Buyer of the liabilities it is assuming pursuant
to Section 2.03 above (the "Lease Assignment and Assumption");
(v) a certificate of an executive officer of the Buyer certifying
to the fulfillment of the conditions set forth in Sections 8.01 and
8.02;
(vi) an opinion of counsel to the Buyer in a form acceptable to
the Company; (vii) copies of the Consents referred to on Schedule 6.03
under the heading "Buyer Consents";
(viii) a copy of the resolutions of the Buyer's Board of
Directors certified by the Buyer's corporate secretary authorizing the
execution and delivery of this Agreement by the Buyer and the
performance of the Buyer's obligations hereunder;
(ix) a copy of the report of Inspectors of Election for the
meeting of the Buyer's Stockholders at which the issuance of the
Common Stock Consideration is approved by the Buyer's Stockholders;
(x) the employment agreement (the "Ben-Haim Employment
Agreement"), duly executed by the Buyer, in the form attached hereto
as Exhibit B , between the Buyer and Ben-Haim;
(xi) the employment agreement (the "Harary Employment
Agreement"), duly executed by the Buyer, in the form attached hereto
as Exhibit C, between the Buyer and Harary;
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(xii) the Escrow Agreement, duly executed by the Buyer, among the
Buyer, the Company and Wachtel & Masyr, LLP as escrow agent (the
"Escrow Agent"), together with any deposits to be made to the escrow
account pursuant to Section 2.06;
(xiii) the registration rights agreement (the "Registration
Rights Agreement"), duly executed by the Buyer, in the form attached
hereto as Exhibit D, among the Buyer, the Company, Ben-Haim and
Harary;
(xiv) the tag-along/drag-along rights agreement (the
"Stockholders Agreement"), duly executed by the Buyer on terms and
conditions mutually satisfactory to the Buyer, the Company, ,
Ben-Haim, Harary, Walsh, Greenwood & Co. ("WGC") and WGI;
(xv) the releases of the guarantees of the Stockholders and any
third party of the liabilities of the Company set forth in Schedule
3.02(a)(xv) and any collateral securing such guarantees; and
(xvi) such other instruments and certificates as may be
reasonably requested by the Company.
(b) At the Closing, the Company and the Stockholders shall deliver to
the Buyer:
(i) duly executed bill(s) of sale (the "Bill of Sale") in a form
mutually satisfactory to the Buyer and the Company, relating to the
transfer to the Buyer of the Assets which are in the nature of
personal property;
(ii) duly executed assignment(s) in a form mutually satisfactory
to the Buyer and the Company, relating to the transfer to the Buyer of
all interests of the Company in the agreements and licenses to be
transferred to the Buyer hereunder (the "License Assignment");
(iii) duly executed assignment(s) in a form mutually satisfactory
to the Buyer and the Company relating to the transfer to the Buyer of
all interests of the Company in the intellectual property to be
transferred to the Buyer hereunder (the "IP Assignment");
(iv) duly executed Lease Assignment and Assumption and related
estoppel certificates, and consents of landlord;
(v) such other bills of sale, instruments of assignment and other
documents as may be reasonably requested by the Buyer in order to
effect or evidence the transactions contemplated hereunder;
(vi) a certificate(s) of a duly authorized officer of the Company
and the Stockholders certifying to the fulfillment of the conditions
set forth in Sections 7.01 and 7.02;
(vii) an opinion of counsel to the Company in a form acceptable
to the Buyer;
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(viii) copies of the Consents referred to on Schedule 6.03 under
the heading "Company Consents";
(ix) the good standing and other certificates and telegrams
required to be delivered pursuant to Section 7.10;
(x) the certified copy of the Articles of Incorporation and
By-laws of the Company required to be delivered pursuant to Sections
7.11 and 7.12, respectively;
(xi) the Ben-Haim Employment Agreement duly executed by Ben-Haim;
(xii) the Harary Employment Agreement duly executed by Harary;
(xiii) the Escrow Agreement duly executed by the Company
(including any required stock powers duly endorsed in blank);
(xiv) the Registration Rights Agreement duly executed by the
Company, Ben-Haim and Harary;
(xv) the Stockholders Agreement, duly executed by the Company,
Ben-Haim, Harary, WGC and WGI;
(xvi) a copy of the resolutions of the Company's Board of
Directors and stockholders, certified by the Company's corporate
secretary, authorizing the execution and delivery of this Agreement by
the Company and the performance of the Company's obligations
hereunder;
(xvii) a certificate of amendment to the Company's Articles of
Incorporation for subsequent filing by the Buyer changing the
corporate name of the Company to another name acceptable to the Buyer;
(xviii) the FIRPTA Affidavit required to be delivered pursuant to
Section 7.07;
(xix) UCC-3 Termination Statements with respect to the liens set
forth on Schedule 3.02(b)(xix); and
(xx) such other instruments and certificates as may be reasonably
requested by the Buyer.
Section 3.03 Risk of Loss.
(a) The Company shall bear the risk of loss for the Assets until the
Assets are transferred to the Buyer on the Closing Date.
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(b) Should the Assets be damaged or destroyed during the period
commencing on the date hereof and ending on the Closing Date, and in the
event that the Buyer does not terminate this Agreement under Article XI
hereof, the Buyer shall be entitled to collect any available insurance
proceeds relating to such loss on the later of the date such proceeds are
paid to the Company or on the Closing Date. The Company and the
Stockholders shall take such actions as may reasonably be necessary to
assist the Buyer in any effort to collect such insurance proceeds.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE STOCKHOLDERS
The Company and the Stockholders, jointly and severally, represent and
warrant to the Buyer as follows:
Section 4.01 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of New Jersey. The Company has all corporate power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. The Company is duly qualified or licensed to do business and in good
standing in each jurisdiction in which the property owned, leased or operated by
it or the nature of the business conducted by it makes such qualification or
licensing necessary other than in such jurisdictions where the failure to be so
qualified or licensed, or in good standing, would not have a Material Adverse
Effect. A true, correct and complete list of the jurisdictions in which the
Company is so duly qualified or licensed is set forth on Schedule 4.01.
Section 4.02 Authority. The Company has the requisite corporate power and
authority to execute and deliver this Agreement and each of the other agreements
contemplated hereby, including, without limitation, the Conversion Agreement
(together with the agreements contemplated hereby being executed by the
Stockholders, the "Related Agreements"), and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance of this
Agreement and the Related Agreements by the Company and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of the Company and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
and the Related Agreements or to consummate the transactions so contemplated.
This Agreement and the Related Agreements have been duly executed and delivered
by the Company and the Stockholders and, assuming this Agreement and the Related
Agreements constitute valid and binding obligations of the Buyer, this Agreement
and the Related Agreements constitute valid and binding obligations of the
Company and the Stockholders, enforceable against the Company and the
Stockholders in accordance with their respective terms, except as may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws of
general application relating to or affecting the enforcement of creditor's
rights and general principles of equity as from time to time in effect.
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Section 4.03 Consents and Approvals; No Violations. Neither the execution,
delivery or performance of this Agreement or the Related Agreements by the
Company or the Stockholders, nor the consummation by any of them of the
transactions contemplated hereby or thereby nor the compliance by any of them
with any of the provisions hereof or thereof will (a) conflict with or result in
any breach of any provision of the charter or by-laws of the Company, (b) except
as listed on Schedule 4.03, require (on its behalf) any filing with, or permit,
authorization, consent or approval of, any Governmental Entity or other third
party, (c) except for consents required and set forth on Schedule 4.03, result
in a violation or breach of, or constitute (with or without notice or lapse of
time or both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration) under, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, lease, license, contract, agreement or
other instrument or obligation to which the Company or any Stockholder is a
party or by which any of its properties or assets may be bound or (d) violate
any order, writ, injunction, award, decree, statute, law, rule or regulation
applicable to the Company or any of the Assets or otherwise violate any License.
Section 4.04 Capitalization; Stock Ownership. The authorized and
outstanding capital stock of the Company as of the date hereof is as set forth
on Schedule 4.04 hereto. Except as set forth on Schedule 4.04 hereto, all of the
outstanding shares of the capital stock of the Company are validly issued, fully
paid and non-assessable with no personal liability attaching to the ownership
thereof, have not been issued in violation of any preemptive rights of
stockholders, rights of first refusal or federal or state securities laws, and
are owned beneficially and of record by the Stockholders. Except as set forth on
Schedule 4.04 hereto, there are no Liens on or with respect to any outstanding
shares of capital stock of the Company. Except as set forth on Schedule 4.04
hereto, there are no outstanding (a) securities convertible into, or exercisable
or exchangeable for, capital stock of the Company; (b) options, warrants or
other rights to purchase or subscribe for capital stock of the Company or
securities convertible into, or exercisable or exchangeable for, capital stock
of the Company; or (c) contracts, commitments, agreements, understandings or
arrangements of any kind relating to the issuance, sale, purchase, redemption or
voting of any capital stock of the Company, any such convertible or exchangeable
securities or any such options, warrants or rights. Except as set forth on
Schedule 4.04 hereto, there is no outstanding right, option or other agreement
of any kind to purchase or otherwise to receive from the Company, or any
stockholder of the Company, any ownership interest in the Company's capital
stock, Assets or in the Business, and there is no outstanding right or security
of any kind convertible into such ownership interest.
Section 4.05 Subsidiaries. Except as set forth on Schedule 4.05, the
Company does not own, of record or beneficially, or control, nor is the Company
obligated to acquire, directly or indirectly, any capital stock, securities
convertible into, or exercisable or exchangeable for, capital stock or any other
equity interest in any corporation, association or business entity nor is the
Company, directly or indirectly, a participant in any joint venture,
partnership, limited liability company or other non-corporate entity.
Section 4.06 Company's Articles of Incorporation and By-laws. The Company
has heretofore delivered to the Buyer true and complete copies of the (a)
Articles of Incorporation of
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the Company, as in effect on the date hereof, (b) By-laws of the Company, as in
effect on the date hereof and (c) minute books of the Company (containing
records of all meetings and consents in lieu of meetings of the Company's
stockholders and Board of Directors (and any committees thereof) since the time
of its incorporation and accurately reflecting all transactions referred to in
such minutes and consents in lieu of meetings). The Company is not in violation
of any provision of its Articles of Incorporation or By-Laws, as in effect on
the date hereof.
Section 4.07 Compliance With Laws; Licenses.
(a) The conduct of the Business by the Company has not violated, and
as presently conducted does not violate any Orders which would have a
Material Adverse Effect. No investigations by any Governmental Entity
asserting or alleging any violation of, or noncompliance with, any such
Orders with respect to the Company are pending or, to the knowledge of the
Company or any Stockholder, threatened.
(b) Except as set forth on Schedule 4.07, the Company possesses all
Licenses and is in full compliance with the terms thereof except for any
non-compliance which would not have a Material Adverse Effect. Schedule
4.07 sets forth a complete and accurate list of all such Licenses, which
Licenses are in full force and effect. Except as set forth on Schedule
4.07, none of such Licenses shall terminate or lapse or be limited or
otherwise affected in any material respect as a result of the consummation
of the transactions contemplated hereby or by the Related Agreements. No
proceeding has been instituted or is pending or, to the knowledge of the
Company or any Stockholder, is threatened to revoke or limit any such
License. To the knowledge of the Company or any Stockholder, no violation
has been or is recorded in respect of any License.
Section 4.08 Litigation; Investigations. Schedule 4.08 sets forth a
complete and accurate list of all suits, claims, proceedings, investigations,
audits or reviews (including, without limitation, with respect to Taxes) which
are pending or, to the knowledge of the Company or any Stockholder, threatened
against the Company any of its directors, stockholders, officers, employees or
consultants (in his or her capacity as such) or any of the Assets or its
securities. Except as disclosed in Schedule 4.08, (a) no investigation or review
by any Governmental Entity with respect to the Company is pending or, to the
knowledge of the Company or any Stockholder, threatened, nor has any
Governmental Entity indicated to the Company an intention to conduct the same,
and (b) there is no action, suit or proceeding pending or, to the knowledge of
the Company or any Stockholder, threatened against or affecting the Company at
law or in equity, by or before any Governmental Entity.
Section 4.09 Taxes.
(a) All Tax Returns for all periods which end prior to or which
include the Closing Date that are or were required to be filed prior to the
Closing Date by or with respect to the Company have been or shall be filed
on a timely basis in accordance with the applicable laws, rules and
regulations of each Governmental Entity. The Company shall timely file all
Tax Returns relating to the transactions contemplated by this Agreement
that shall be required to be filed after the Closing Date. All such Tax
Returns that have been filed were, when filed, and
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continue to be, true, correct and complete. All such Tax Returns that will
be filed will be true, correct and complete.
(b) Schedule 4.09 annexed hereto lists all United States federal,
state, local and foreign income Tax Returns that have been filed since
January 1, 1991 by or with respect to the Company that have been audited by
any Governmental Entity. There are no outstanding waivers or extensions of
any statute of limitations relating to the payment of Taxes by or with
respect to the Company to which the Company may be liable, and no
Governmental Entity has either formally or informally requested such a
waiver or extension. No power of attorney granted by the Company with
respect to any Tax matter is currently in force.
(c) The Company has timely paid all of its Taxes that have or may
become due for all periods which end prior to or which include the Closing
Date, including all Taxes reflected on the Tax Returns referred to in this
Section 4.09, or in any assessment, proposed assessment or notice, either
formal or informal, received by the Company, except such Taxes, if any, (i)
as are set forth on Schedule 4.09 annexed hereto that are being contested
in good faith and as to which adequate reserves (determined in accordance
with GAAP) have been provided or (ii) with respect to post-Closing periods
(determined by treating the books of the Company as being closed as of the
Closing Date) that are adequately reserved (in accordance with GAAP applied
on a basis consistent with that of prior years). All Taxes that the Company
is or was required by law to withhold or collect have been duly withheld or
collected and, to the extent required, have been timely paid to the
appropriate Governmental Entities. There are no Liens with respect to Taxes
on the Company's capital stock or Assets other than Liens set forth on
Schedule 4.09. The Company will not have any liability, whether direct,
indirect, fixed or contingent (including, without limiting the generality
of the foregoing, retaliatory Taxes), for any Taxes in excess of the
reserves for Tax liability (as opposed to any reserve for deferred Taxes
established to reflect timing differences between book and Tax income)
established on the books of the Company as of the date hereof or, as to
liabilities accruing thereafter, as of the Closing Date. All Taxes
applicable to the Company that may later become due and payable with
respect to any taxable period which ends prior to or which includes the
Closing Date shall be paid by the Company without any reimbursement or
contribution by the Buyer.
(d) None of the Assets are assets that the Buyer is or shall be
required to treat as being owned by another Person pursuant to the
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as
amended and in effect immediately before the enactment of the Tax Reform
Act of 1986, or is "tax-exempt use property" within the meaning of Section
168(h)(1) of the Code.
(e) The Company is not a foreign person within the meaning of Section
1445 of the Code, and the Company has not been a United States real
property holding corporation within the meaning of Section 897(c)(2) of the
Code during the applicable period specified in Section 897(c)(1)(A)(ii) of
the Code.
(f) The Company is not a party to any agreement, contract, arrangement
or plan that has resulted or would result, separately or in the aggregate,
in the payment of any "excess parachute payments" within the meaning of
Section 280G of the Code.
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(g) The Company is not a party to any agreement, whether written or
unwritten, providing for the payment of Tax liabilities, payment for Tax
losses, entitlements to refunds or similar Tax matters.
(h) No ruling with respect to Taxes relating to the Company or the
Assets has been requested by or on behalf of the Company.
(i) There is no dispute or claim concerning any Tax Liability of the
Company either (A) claimed or raised by any Governmental Entity in writing
or (B) as to which the Company or the directors and officers (and employees
responsible for Tax matters) of the Company has or have knowledge. There is
no proceedings with respect to Taxes pending.
(j) No claim has been made by a Governmental Entity in a jurisdiction
where the Company does not currently file Tax Returns that relate to any
Taxes in respect of the Company or the Assets that it is or may be subject
to taxation by that jurisdiction, nor is the Company aware that any such
assertion of jurisdiction is threatened.
(k) In the case of any Tax Returns of the Company which have been
examined by the IRS or any other Governmental Entity having the
responsibility for auditing Tax Returns, all deficiencies asserted as a
result of such examinations have been paid or finally settled and no issue
has been raised by the IRS or other Governmental Entity in any such
examination which, by application of the same or similar principles,
reasonably could be expected to result in a proposed deficiency for any
other period not so examined. The Company has provided the Buyer with true
and complete copies of all federal, state and local income tax returns
constituting part of the Tax Returns which relate to the conduct of the
Business, as well as any correspondence and agreements with the IRS or
other Governmental Entity for the jurisdictions in which such Tax Returns
are filed for all periods ended after December 31, 1991 or for which
assessments are not barred by operation of the relevant statute of
limitations.
(l) No ruling with respect to Taxes relating to the Company has been
requested by or on behalf of the Company.
(m) The Company (i) has no indebtedness which consists of "corporate
acquisition indebtedness" within the meaning of Section 279 of the Code;
(ii) has not sustained for any taxable year an "overall foreign loss"
within the meaning of Section 904(f)(2) of the Code; (iii) is not a "loss
corporation" within the meaning of Section 382(k)(1) of the Code; (iv) has
disclosed on its federal income Tax Returns all positions taken therein
which, if not otherwise disclosed, could give rise to a penalty under
Section 6662 of the Code; (v) has no liability for the Taxes of any other
person under Section 6901 of the Code or Section 1.1502-6 of the Treasury
Regulations, any similar provision(s) of state, local or foreign law, as a
transferee or successor, by contract or otherwise; and (vi) has never been
a member of an affiliated group (within the meaning of Section 1504(a) of
the Code) which filed a consolidated federal income Tax Return or was ever
included or includible on any consolidated, combined or unitary Tax Return
for any state, local, foreign or other taxing jurisdiction.
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(n) The Company has not agreed to make, nor is it required to make,
any adjustments under Section 481(a) of the Code by reason of a change in
accounting method or otherwise.
For purposes of this Section 4.09, references to the Company shall also
refer to any predecessor companies.
Section 4.10 Employee Benefit Plans; ERISA.
(a) Attached hereto as Schedule 4.10 are complete and accurate copies
of all plans, contracts, agreements, practices, policies or arrangements,
oral or written, providing for any deferred compensation, excess benefits,
bonuses, pensions, retirement benefits, profit sharing, savings, holiday,
vacation, severance, sick pay, leave, disability or any other employee or
executive benefits, including, without limitation, any such plan, contract,
agreement, practice, policy or arrangement which is an employee benefit
plan (as defined in Section 3(3) of ERISA) maintained by the Company, to
which the Company contributes or contributed in the last five (5) years or
with respect to which the Company has a liability, whether direct or
indirect, actual or contingent (including, but not limited to, liabilities
arising from affiliation under Section 414(b), (c), (m) or (o) of the Code
or Section 4001 of ERISA) (the "Plans"). Schedule 4.10 sets forth a list of
all of the Plans that have been terminated within the past five (5) years.
(b) With respect to each Plan, the Company has delivered to the Buyer
true and complete copies of: (i) any and all plan texts and agreements,
(ii) any and all material employee communications (including all summary
plan descriptions and material modifications thereto), (iii) the most
recent annual report, if applicable, (iv) the two most recent annual and
periodic accountings of plan assets, if applicable, (v) the most recent
determination letter received from the IRS, if applicable, and (vi) the
most recent actuarial valuation, if applicable.
(c) With respect to each Plan: (i) if intended to qualify under
Section 401(a) or 403(a) of the Code, such Plan so qualifies, and its
trust, if applicable, is exempt from taxation under Section 501(a) of the
Code; (ii) such Plan has been administered and operated in accordance with
its terms and all applicable laws; (iii) no breach of fiduciary duty has
occurred with respect to which any of the Company, any Plan or any Person
which the Company has agreed to indemnify and hold harmless, in whole or in
part, may be liable or otherwise damaged; (iv) no disputes are pending or,
to the knowledge of the Company or any Stockholder, threatened; (v) no
prohibited transaction has occurred with respect to which the Company or
any Plan may be liable or otherwise damaged; (vi) no "reportable event"
(within the meaning of Section 4043(b) of ERISA) has occurred with respect
to which the Company or any Plan may be liable or otherwise damaged; (vii)
all contributions, premiums, and other payment obligations have been
accrued on the financial statements of the Company in accordance with GAAP,
and, to the extent due, have been made on a timely basis; (viii) all
contributions made or required to be made under the Plans meet the
requirements for deductibility under the Code; (ix) the Company has
expressly reserved in itself the right to amend, modify or terminate each
Plan, or any portion of it, without liability to itself; (x) no Plan
requires the Company to continue to employ any employee, director or
consultant; (xi) with respect to each such Plan subject to either Section
412 of the Code or Section 302 of ERISA, (1) each Plan uses a funding
method
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permissible under ERISA and the actuarial assumptions used in connection
therewith are reasonable, both individually and in the aggregate, (2) no
Plan has incurred an accumulated funding deficiency, whether or not waived,
and (3) based on the Plan's actuarial assumptions, such Plan's assets have
and will have a fair market value at least equal to the greater of (A) the
Plan's "benefit liabilities," as defined in Section 4001(a)(16) of ERISA or
(B) the Plan's "projected benefit obligation," as defined in Statement of
Financial Accounting Standards No. 87; and (xii) no Plan has invested in
(1) insurance or annuity contracts issued by an insurance company with an
A.M. Best Company, Inc. rating of claims-paying ability below A++ or (2)
employer securities or employer real property.
(d) No Plan is a "multiemployer plan" (within the meaning of Section
3(37) or Section 4001(a)(3) of ERISA) or a "multiple employer plan" (within
the meaning of Section 4064 of ERISA or Section 413(c) of the Code). The
Company has no current or potential liability or obligation (including, but
not limited to, liabilities arising under Section 4063, 4064 or 4021 of
ERISA), whether direct or indirect (including, but not limited to,
liabilities arising from affiliation under Section 414(b), (c), (m) or (o)
of the Code or Section 4001 of ERISA), with respect to any multiemployer
plan or multiple employer plan.
(e) With respect to each Plan which provides welfare benefits of the
type described in Section 3(1) of ERISA: (i) no such Plan provides medical
or death benefits with respect to current or former employees, directors or
consultants of the Company beyond their termination of employment, other
than coverage mandated by Sections 601-608 of ERISA and Section 4980B(f) of
the Code; (ii) each such Plan has been administered in compliance with
Sections 601-608 of ERISA and Section 4980B(f) of the Code; and (iii) no
such Plan has reserves, assets, surpluses or prepaid premiums, except as
disclosed in the Financial Statements.
If requested by the Buyer, the Company will terminate any Plan identified
on Schedule 4.10 as a "Pension or Profit Sharing Plan to be Terminated"
substantially contemporaneously with the Closing.
Section 4.11 Labor Relations.
(a) Except as set forth on Schedule 4.11 annexed hereto: (i) the
Company has paid and performed all material obligations with respect to its
employees, independent sales representatives, consultants, agents, officers
and directors, including, without limitation, all wages, salaries,
commissions, bonuses, severance pay, vacation pay, benefits and other
direct compensation for all services performed by such persons to the
extent then due and payable as of the date hereof and all amounts required
to be reimbursed to such persons; (ii) the Company is in compliance in all
material respects with all federal, state, local and foreign laws and
regulations respecting employment and employment practices, terms and
conditions of employment and wages and hours; (iii) there is no pending or,
to the knowledge of the Company or any Stockholder, threatened charge,
complaint, allegation, application or other process against the Company
before the National Labor Relations Board or any comparable state, local or
foreign agency, governmental or administrative; (iv) there is no labor
strike, dispute, slowdown or work stoppage or other job action pending or,
to the knowledge of the Company or any Stockholder, threatened against or
otherwise affecting or involving the Company or its employees and there
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never has been; (v) no employees of the Company are covered by any
collective bargaining agreements and, to the knowledge of the Company or
any Stockholder, no effort is being made by any union to organize any of
the Company's employees; (vi) there is no workman compensation claim
pending against the Company that is not adequately provided for by
insurance; (vi) there is no charge, complaint or suit pending or, to the
knowledge of the Company or any Stockholder, threatened against the Company
respecting employment, hiring for employment, terminating from employment,
employment practices, employment discrimination, terms and conditions of
employment, safety, wrongful termination, or wages and hours.
(b) Schedule 4.11 annexed hereto and made a part hereof is a complete
and correct list of the names and current annual salary, bonus, commission
and perquisite arrangements, written or unwritten, for each director,
officer and employee of the Company whose compensation for the fiscal year
ending June 30, 1999 will exceed $50,000. Except as set forth on Schedule
4.11, no current or former director, officer or employee of the Company or
any relative, associate or agent of such director, officer or employee has
any interest in any property of the Company, or is a party, directly or
indirectly, to any contract for employment or otherwise or any lease or has
entered into any transaction with the Company, including, without
limitation, any contract for the furnishing of services by, or rental of
real or personal property from or to, or requiring payments to, any such
director, officer, employee, relative, associate or agent. Complete and
correct copies of any such contracts have been delivered to the Buyer. Also
set forth on Schedule 4.11 is a complete and correct list of all vehicles,
apartments and other facilities owned or operated by the Company and not
listed on any other Schedule hereto, and all country club and other
memberships owned or paid for, or the dues for which are borne, by the
Company. Except as set forth in Schedule 4.11, to the knowledge of the
Company and/or any Stockholder no employee listed thereon intends to
terminate his employment relationship with the Company, and the Company
does not have any contract for the future employment of any officer or
employee not listed on Schedule 4.11.
Section 4.12 Insurance Policies. Each insurance policy of the Company is
listed on Schedule 4.12 and is valid, binding and enforceable in accordance with
its terms and is in full force and effect. All premiums are currently paid in
respect of such policies; the Company is not otherwise in default with respect
to any provision contained in any such policy or has failed to give any notice
or present any claim under any such policy in due and timely fashion; and the
Company has not received any notice of cancellation or non-renewal or
termination with respect to any such policy. Such policies have been sufficient
for compliance with all material requirements of law. Except as set forth on
Schedule 4.12, there are no material claims, actions, suits or proceedings
arising out of or based upon any of such policies of insurance, and, to the
knowledge of the Company or any Stockholder, no basis for any such material
claim, action, suit or proceeding exists. The Company has not been refused any
insurance with respect to the Assets and its operations, nor has its coverage
been limited by any insurance carrier to which it has applied for any such
insurance or with which it has carried insurance during the last five years.
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Section 4.13 Environmental Laws.
(a) Attached hereto as Schedule 4.13 are all environmental site
assessments, reports, documentation, information and other studies relating
to the presence or possible presence of Hazardous Materials on, at, in,
under, about or from the leased Real Property or from the activities of the
Company on, at, in, under, about or from the leased Real Property
(collectively, the "Environmental Assessments"). All Environmental
Assessments required by the National Environmental Policy Act have been
completed, and any required findings thereunder of no sufficient impact
have been issued.
(b) The Company at all times has been in compliance with all
applicable Environmental Laws. The Company has not received any notice of
any violation of Environmental Law relating to the operations of the
Company. No Third-Party Environmental Claims and/or Regulatory Actions have
been asserted or assessed against the Company relating to the operations of
the Company and, to the knowledge of the Company or any Stockholder, no
Third-Party Environmental Claims and/or Regulatory Actions are pending or
threatened against the Company relating to the operations of the Company.
(c) The Company has obtained all permits, licenses, certificates of
compliance, approvals and other authorizations relating to any
Environmental Law (collectively referred to in this Section 4.13 as
"authorizations") necessary for operation of the Company. The Company has
filed all reports and notifications required to be filed under and pursuant
to all applicable Environmental Laws.
(d) To the knowledge of the Company and Stockholders, the Real
Property is not listed in the United States Environmental Protection
Agency's (the "EPA") National Priorities List of Hazardous Waste Sites
under CERCLA or any similar state list, schedule, log, inventory or record
(however defined) of sites from which there has been a Release of Hazardous
Materials. No part of the owned Real Property or, to the knowledge of the
Company or any Stockholder, the leased Real Property was ever used, nor is
it now being used, as a landfill, dump or other disposal, storage,
transfer, handling, or treatment area for Hazardous Materials, or as a
gasoline service station or a facility for selling, dispensing, storing,
transferring, disposing or handling petroleum and/or petroleum products.
(e) All transfer, transportation or disposal of Hazardous Materials by
the Company to properties not owned, leased or operated by the Company has
been in compliance with applicable Environmental Laws. The Company has not
transported or arranged for the transportation of any Hazardous Materials
to any location which is (i) listed on the EPA's National Priorities List
of Hazardous Waste Sites under CERCLA or any similar state list, schedule,
log, inventory or record (however defined) of sites from which there has
been a Release of Hazardous Materials; (ii) listed for possible inclusion
on the National Priorities List by the EPA in CERCLIS or any similar state
or local list; or (iii) the subject of any Regulatory Action or Third-Party
Environmental Claim.
(f) There has not been, and is not now occurring, any Release of any
Hazardous Material on, in, under, about, or from the leased Real Property,
including, to the
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knowledge of the Company or any Stockholder, a Release that has come to be
located on or under the leased Real Property from another location.
Section 4.14 Financial Statements and Books and Records. The Company has
previously delivered to the Buyer a copy of the following financial statements:
the balance sheet of the Company as of June 30, 1996, June 30, 1997 and June 30,
1998 and the related results of operations and statements of income and retained
earnings, and cash flow for the periods then ended, accompanied by the audit
report of Arthur Andersen LLP with respect to the June 30, 1997 and June 30,
1998 financial statements (the "Financial Statements"). Copies of the Financial
Statements are annexed as Schedule 4.14 hereto. The Financial Statements are
true and accurate, are in accordance with the books and records of the Company
and present fairly in all material respects the financial position and related
results of operations of the Company as of the times and for the periods
referred to herein, in each case in accordance with GAAP (subject, in the case
of unaudited statements, to normal, recurring audit adjustments and the absence
of footnotes). All of the financial books and records of the Company have been
made available to the Buyer, and such books and records completely and fairly
record in all material respects the Company's financial affairs which would
normally be recorded in financial books and records.
Section 4.15 No Material Adverse Change. Since June 30, 1998, except as set
forth on Schedule 4.15, there has been no Material Adverse Effect and the
Company does not know of any change that is threatened or pending, nor has there
been any damage, destruction or loss, whether or not covered by insurance, which
could have a Material Adverse Effect. For purposes of this Agreement, a
"Material Adverse Effect" means any event, circumstance or condition that,
individually or when aggregated with all other events, circumstances or
conditions, could reasonably be expected to have, or has had, a material adverse
effect on: (a) the business, property, operations, condition (financial or
otherwise), results of operations or prospects of the Company; (b) the Assets or
the Business; (c) the ability of the Company or any Stockholder to consummate
the transactions contemplated hereunder and under the Related Agreements; or (d)
the ability of the Buyer to perform and conduct the Business after the
consummation of the transactions contemplated by this Agreement and the Related
Agreements in substantially the same manner conducted by the Company prior to
the consummation of such transactions.
Section 4.16 Absence of Liabilities. The Company has no debt, liabilities
or obligations of any nature, whether accrued, absolute, contingent or
otherwise, whether due or to become due and whether or not the amount thereof is
readily ascertainable, that are not reflected as a liability in the Financial
Statements except as described on Schedule 4.16 or except for liabilities
incurred by the Company in the ordinary course of business since June 30, 1998
consistent with past practices which are not otherwise prohibited by, or in
violation of or which will not result in a breach of the representations,
warranties and covenants of the Company or any Stockholder contained in this
Agreement and liabilities under contracts that the Company is a party to and
which are set forth on a Schedule to this Agreement. Any reserves reflected in
the Financial Statements are adequate, appropriate and reasonable.
Section 4.17 Absence of Specified Changes. Except as disclosed on Schedule
4.17 or in the Financial Statements, since June 30, 1998, (a) the Company has
not suffered any change which has or could have a Material Adverse Effect, (b)
the Company has conducted its business
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only in the ordinary course of business and consistent with past practices and
(c) the Company has not:
(i) suffered any damage, destruction, loss or other casualty, whether
or not covered by insurance, materially adversely affecting the business,
assets, operations, prospects, properties or condition (financial or
otherwise) of the Company;
(ii) incurred any liabilities or obligations (absolute, accrued,
contingent or otherwise) individually in excess of $20,000 and in excess of
$200,000 in the aggregate except non-material items incurred in the
ordinary course of business and consistent with past practices;
(iii) paid, discharged or satisfied any debts, claims, liabilities or
obligations (absolute, accrued, contingent or otherwise) individually in
excess of $10,000 and in excess of $50,000 in the aggregate other than in
the ordinary course of business and consistent with past practices;
(iv) permitted or allowed any of the Assets (real, personal or mixed,
tangible or intangible) to be subjected to any Lien, except for Liens set
forth on Schedule 4.26;
(v) written off as uncollectible any notes or accounts receivable
individually in excess of $10,000 and in excess of $50,000 in the
aggregate, except for immaterial write-downs and write-offs in the ordinary
course of business and consistent with past practices;
(vi) cancelled, compromised or waived any debts, claims or rights
having an aggregate value of $10,000 or more;
(vii) sold, transferred, or otherwise disposed of any of the Assets
(real, personal or mixed, tangible or intangible), except in the ordinary
course of business and consistent with past practice;
(viii) increased the compensation of any director, officer, employee
or consultant of the Company (including any such increase pursuant to any
bonus, pension, profit-sharing or other plan or commitment) and no such
increase is customary on a periodic basis or required by an agreement or
understanding;
(ix) made any single capital expenditure or commitment in excess of
$5,000 or aggregate capital expenditures or commitments in excess of
$20,000;
(x) loaned or advanced any amount to, or sold, transferred or leased
any Assets (real, personal or mixed, tangible or intangible) to, or entered
into any agreement or arrangement of any kind with, any of its employees,
consultants, officers, directors, stockholders or any affiliate or
associate of any of the foregoing;
(xi) amended or modified any existing, or entered into or instituted
any new, employment contract, bonus, profit-sharing, pension, retirement,
incentive or similar
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arrangement, plan or program or made any severance payments or granted any
termination benefits;
(xii) acquired, directly or indirectly, by redemption or otherwise, or
issued or sold, or authorized or proposed the issuance or sale of, directly
or indirectly, any shares of capital stock of the Company;
(xiii) declared, paid or set aside for payment any dividend or
distribution in respect of capital stock of the Company in cash, securities
or other property or made any other distribution of the Assets whether or
not with respect to securities of the Company;
(xiv) entered into, or agreed to enter into, any transaction other
than in the ordinary course of business and consistent with past practice
pursuant to which the Company paid or is obligated to pay in excess of
$25,000;
(xv) changed its accounting methods or practices or made any change in
depreciation or amortization policies or rates adopted by it;
(xvi) taken any action or omitted to take any action which: resulted
in a breach of any provisions of, or constituted a default (or with or
without notice or lapse of time or both, would constitute a default) under,
or resulted in the termination of, or accelerated the performance required
by, or resulted in the creation of any Lien upon any of the Assets of the
Company under any of the terms, conditions or provisions of, any Contract;
or
(xvii) entered into, or agreed to enter into, any contract, agreement
or understanding with respect to any of the foregoing.
Section 4.18 Corporate Names. Schedule 4.18 sets forth a complete and
accurate list of all names used by the Company in addition to its corporate
name.
Section 4.19 Real Property; Leases.
(a) Schedule 4.19 sets forth a correct and complete list of all Real
Property. The Company is the sole and exclusive legal and equitable owner
of all right, title and interest in, and has good, marketable and insurable
title to, all of the Real Property set forth on Schedule 4.19 as being
owned by the Company, free and clear of all Liens, except for such
imperfections of title and encumbrances, if any, as are not substantial in
character, amount or extent, and do not and will not materially detract
from the value or marketability or materially interfere with the present
use by the Company, or proposed use by the Buyer after the Closing, of the
properties subject to or affected thereby, or otherwise materially impair
its operations; and except for Liens set forth on Schedule 4.26. All Real
Property is in condition and repair adequate for its current use and its
proposed use by the Buyer after the Closing, is suitable for the purposes
for which it is presently being used, and proposed to be used by the Buyer
after the Closing, and in the aggregate is adequate to meet all present and
proposed requirements of the Business.
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(b) Schedule 4.19 sets forth a complete and accurate list of each
lease, sublease or other arrangement pursuant to which the Company leases
or subleases Real Property, and the Company has heretofore delivered to the
Buyer a complete and accurate copy of each such lease, sublease or
arrangement. Unless otherwise noted on Schedule 4.19, the Company is the
sole lessee or sublessee under each of the leases and subleases listed on
Schedule 4.19, and each such lease and sublease is valid and in full force
and effect and enforceable in accordance with its terms and has not been
further supplemented, amended or modified. Unless otherwise noted on
Schedule 4.19, there exists no event of default or event, occurrence,
condition or act, including, without limitation, the execution and delivery
of this Agreement and the consummation of the transactions contemplated
hereby, which constitutes or would constitute (with or without notice or
lapse of time or both) a default in any respect under any of the leases or
subleases listed on Schedule 4.19. The Company has not received any notice
of any event of default and no event, occurrence, condition or act,
including, without limitation, the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby, has
transpired which constitutes or would constitute (with or without notice or
lapse of time or both) a default in any respect under any of the leases or
subleases listed on Schedule 4.19. To the knowledge of the Company and
Stockholders, the leased premises are structurally sound with no defects
and are in good operating condition and repair and are adequate for the
uses to which they are being put; and none of such leased premises are in
need of maintenance or repairs except for ordinary, routine maintenance and
repairs which are not material in nature or cost.
Section 4.20 Equipment and Personal Property. Except as described on
Schedule 4.20, all equipment and tangible personal property used by the Company
are either owned, free and clear of all Liens other than Liens set forth on
Schedule 4.26, or are (a) used under capital leases reflected on the Financial
Statements, or (b) used under operating leases. The Company has previously
delivered to the Buyer true, correct and complete copies of all such leases. All
such leases are valid and in full force and effect and enforceable in accordance
with their terms and have not been further supplemented, amended or modified.
The Company has not received any notice of, and to the knowledge of the Company
and Stockholders there exists no event of default, or event, occurrence,
condition or act, including, without limitation, the execution and delivery of
this Agreement and the consummation of the transactions contemplated herein,
which constitutes or would constitute (with or without notice or lapse of time
or both) a default in any respect under any such lease. All of the equipment and
tangible personal property owned or leased by the Company is in good operating
condition and repair, subject to normal wear and tear, has been operated,
serviced and maintained diligently and properly within the recommendations and
requirements of the manufacturers thereof, is not in need of maintenance or
repairs except for ordinary, routine maintenance and is suitable and appropriate
for the use thereof made by the Company.
Section 4.21 Intellectual Property. The Company owns or possesses, or has
adequate and enforceable licenses or other rights to use and license for all
purposes, all proprietary rights necessary for the Business (as now conducted or
as proposed to be conducted by the Buyer after the Closing) without any conflict
with or infringement of the rights of others. Except as set forth on Schedule
4.21, (a) the Company has sole and exclusive good, valid and transferable title
with respect to the Intangible Property, (b) no royalties or other consideration
is required in connection with the Company's use and enjoyment of the Intangible
Property and (c) no claim
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has been asserted by any Person against the Company with respect to the
ownership or use of any Intangible Property by the Company, and the Company does
not have any knowledge of any such potential claim nor has the Company asserted
any similar claim against any Person, and, to the knowledge of the Company or
any Stockholder, there exists no valid basis for any such claim except as set
forth on Schedule 4.21, the use of the Intangible Property does not violate or
infringe, and has not violated or infringed, the rights of any Person. Except as
set forth on Schedule 4.21, the Company is not a licensor with respect to any
Intangible Property. All of the Company's trade names, trademarks, service
marks, patents and copyrights (including any registrations or pending
applications for registrations of any of the foregoing) are listed on Schedule
4.21.
Section 4.22 Software. Except as set forth on Schedule 4.22, all of the
Information Technology used or relied on by the Company in the conduct of the
Business is owned by, or are licensed to, the Company, without any restrictions
thereon and is Year 2000 Compliant.
Section 4.23 Contracts. Schedule 4.23 sets forth an accurate, correct and
complete list of all Contracts. Accurate, correct and complete copies of each
such written Contract and written summaries of all oral contracts which require
the payment by the Company after the date hereof of amounts in excess of Ten
Thousand ($10,000) Dollars per annum have been delivered to the Buyer. All of
such Contracts are valid, subsisting, in full force and effect and binding and
enforceable upon the parties thereto in accordance with their terms. The Company
and, except as set forth on Schedule 4.23, to the knowledge of the Company and
Stockholders, each other party to the Contracts have satisfied in full or
provided for all of their respective liabilities and obligations thereunder
requiring performance prior to the date hereof, are not in default under any of
such Contracts, nor does any condition exist that, with or without notice or
lapse of time or both, would constitute a default thereunder. To the knowledge
of the Company or any Stockholder, there is no fact, event or circumstance which
may give rise to any event of default on the part of the Company or any other
party under any Contract. Except as set forth on Schedule 4.23, no party to any
such Contract has given notice of its intention to cancel, terminate, modify or
fail to renew any such Contract. Except as set forth on Schedule 4.23, no
approval or consent of any Person is needed in connection with the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby and by the Related Agreements, and after the
Closing each of such Contracts will be enforceable by the Buyer in accordance
with their terms. The Company is not a party to, or bound by, any warranty
agreement with respect to products sold or services rendered or any other
Contract or restriction which obligates the Company to sell or produce products
or perform services unprofitably. Except as set forth on Schedule 4.23, no
payment, other than payments contemplated by this Agreement, is required to be
made to any employee, officer, director or consultant of the Company or to any
other Person as a result of the consummation of the transactions contemplated
hereby.
Section 4.24 Inventory. All Inventory, whether reflected in the Financial
Statements or otherwise and whether existing now or existing at the Closing
Date, consists or will consist of a quality and quantity usable in the ordinary
and usual course of business and there are no items of obsolete materials and
materials of below standard quality. The Inventory reflected in the Financial
Statements were on the date thereof properly recorded thereon and reflected at
such
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date proper reserves as determined in accordance with GAAP and stated, on an
aggregate basis, at the lower of cost (based on the last-in, first-out method)
or market value. The current Inventory is not, except in amounts which in the
aggregate are not material, in excess of reasonably anticipated requirements.
The current Inventory conforms to customary trade standards for marketable
goods.
Section 4.25 Major Customers and Suppliers. None of the Company's fifteen
largest suppliers in terms of purchases nor fifteen largest customers in terms
of sales, in each case with respect to each of the years ended June 30, 1997 and
June 30, 1998, has ceased doing business with the Company or materially and
adversely changed its relationship with the Company, and, to the knowledge of
the Company or any Stockholder, none of such suppliers or customers intends to
cease doing business with the Company or to materially and adversely change its
relationship with the Company. At all times since June 30, 1998, the Company has
had available to it adequate sources of supply consistent with the past, present
and planned requirements of the Business. The Company has no knowledge of any
threat to, or disruption of, the Company's regular sources of supply.
Section 4.26 Title to Properties; Liens. The Company has good, valid and
marketable title to all of the Assets, free and clear of any Lien except for
such Liens specifically set forth on Schedule 4.26.
Section 4.27 Condition of Assets. The Assets are in good working order and
condition, subject to normal wear and tear, and have no defects which would
materially interfere with, the Business as presently conducted. Except for cash
and cash equivalents, the Assets are reasonably sufficient to conduct the
Business as presently conducted.
Section 4.28 Transactions with Affiliates. Except as set forth on Schedule
4.28, no officer, director or stockholder of the Company or family member or
affiliate thereof (a) has borrowed money from, or loaned money to, the Company,
(b) is a party to any contract with the Company or any of its suppliers, (c) has
asserted or threatened to assert any claim against the Company, (d) is engaged
in any transaction with the Company other than as a salaried employee or (e) has
any direct or indirect material interest in any competitor, supplier, or
customer of the Company or in any Person from whom or to whom the Company leases
any real or personal property or in any other Person with whom the Company is
doing business.
Section 4.29 Absence of Certain Practices. To the knowledge of the Company
or any Stockholder, neither the Company, nor any director, officer, agent,
employee or other Person acting on its behalf, has given or agreed to give any
gift or similar benefit of more than nominal value to any customer, supplier, or
governmental employee or official or any other Person who is or may be in a
position to help or hinder the Company or assist the Company in connection with
any proposed transaction involving the Company, which gift or similar benefit,
if not given in the past, would have materially and adversely affected the
Business or prospects of the Company. To the knowledge of the Company or any
Stockholder, neither the Company, nor any director, officer, agent, employee, or
other Person acting on its behalf has (a) used any corporate or other funds for
unlawful contributions, payments, gifts, or entertainment, or made any
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unlawful expenditures relating to political activity to, or on behalf of,
government officials or others or (b) accepted or received any unlawful
contributions, payments, gifts or expenditures.
Section 4.30 Accounts Payable. All accounts payable and accrued expenses
reflected on the Company's balance sheet as at June 30, 1998 arose, and each
accounts payable and accrued expense that will exist on the Closing Date will
have arisen, from bona fide transactions in the ordinary course of the Company's
business.
Section 4.31 Accounts Receivable. Except as set forth on Schedule 4.31,
each account receivable previously sold to Bank of New York which is unpaid as
of the date hereof and each account receivable reflected on the Company's
balance sheet as at June 30, 1998 constitutes, and each account receivable on
the Closing Date will constitute, a bona fide receivable resulting from a bona
fide sale or other transaction with a customer in the ordinary course of
business, the amount of which was actually due on the date of such balance sheet
or on the Closing Date and has been or should be collectable in the ordinary
course of business. The books and records of the Company state correctly the
facts with respect to each account receivable of the Company and the balance due
thereon. Each payment reflected on such books and records as having been made on
each such account receivable was made by the respective account debtor and not
directly or indirectly by any director, officer, employee or agent of the
Company unless such person is shown on said books and records as such account
debtor. Each document and instrument evidencing, securing or relating to each
account receivable, including, without limitation, each insurance policy,
certificate, bill or statement, is correct and complete in all respects, is
genuine and valid and is enforceable in accordance with its terms. Except as set
forth below, to the knowledge of the Company and Stockholders, there are no
defenses, claims of disability, counterclaims, offsets, refusals to pay or other
rights of set-off against any accounts receivable and there is no threatened,
intended or proposed defense, claim of disability, counterclaim, offset, refusal
to pay or other right of set-off with respect thereto other than allowances,
chargebacks and returns taken in the ordinary course of business. To the
knowledge of the Company and Stockholders, set forth on Schedule 4.31 is an
estimate of all individual allowances, chargebacks and returns to be taken
against the accounts receivable in excess of $2,500. To the knowledge of the
Company and Stockholders, each account receivable, each document and instrument
and each transaction underlying or relating thereto conforms in all material
respects, including, without limitation, in respect of interest rates charges,
notices given and disclosures made, to the requirements and provisions of each
applicable law, rule, regulation or order relating to credit, consumer credit,
credit practices, credit advertising, credit reporting, retail installment
sales, credit cards, collections, usury, interest rates and truth-in-lending,
including, without limitation, the Federal Truth in Lending Act, as amended, and
Regulation Z issued by the Board of Governors of the Federal Reserve System
thereunder.
Section 4.32 WARN Act. The Company has not violated the Worker Adjustment
and Retraining Notification Act of 1988.
Section 4.33 Compliance with United States Customs Regulations. Except as
set forth on Schedule 4.33, the Company has not received any correspondence from
the United States Customs Service regarding any Pre-Penalty Notice, Notice of
Penalty, Notice of Redelivery, Marking Notice, Customs Inquiry, Notice of
Proposed Rate or Value Advance, Notice of Audit
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or Investigation by a Special Agent, Import Specialist or other United States
Customs Service Official. Except as set forth on Schedule 4.33, the Company has
not paid and does not currently pay any buying commissions, quota charges, fees
or royalties for design services, royalties or license fees or management fees.
Except as set forth on Schedule 4.33 the Company has not participated and does
not currently participate in any of the following duty programs: (a) American
Goods Returned (807.00 or 9802.00), (b) Generalized System of Preferences, (c)
North American Free Trade Agreement, (d) Canadian Basin Initiative, (e) Israel
Free Trade Agreement, (f) Drawback, (g) Temporary Importation's under Bond or
(h) other special duty provisions of the tariff.
Section 4.34 Bank Accounts. Schedule 4.34 sets forth the names and
locations of all banks, trust companies, savings and loan associations and other
financial institutions at which the Company maintains safe deposit boxes or
accounts of any nature and the names of all persons authorized to draw thereon,
make withdrawals therefrom or have access thereto.
Section 4.35 Valid Transfer. At the Closing, the Company will convey to the
Buyer good title to the Assets, free and clear of any Liens of any nature
whatsoever, other than Liens set forth on Schedule 4.26. The Assets constitute
all the rights, interests and other assets necessary for the Buyer to conduct
the Business as conducted by the Company on the Closing Date.
Section 4.36 Full Disclosure. All documents and other papers delivered by
or on behalf of the Company or any Stockholder in connection with this Agreement
and the Related Agreements and the transactions contemplated hereby and thereby
are true, complete and accurate in all material respects. To the knowledge of
the Company and Stockholders, no representation or warranty by the Company or
any Stockholder contained in this Agreement or any Exhibit or Schedule attached
hereto or to be delivered in connection herewith, and no statement contained in
any document, certificate or other writing furnished or to be furnished by or on
behalf of the Company or any Stockholder in connection with this Agreement and
the Related Agreements and the transactions contemplated hereby and thereby,
contains or will contain any untrue statement of a material fact, or omits or
will omit to state a material fact required to be stated therein or necessary to
make the statements therein not false or misleading in light of the
circumstances in which they were made.
Section 4.37 Investment Intent. The Company represents that (i) by reason
of its business and financial experience, and/or the business and financial
experience of those Persons, if any, retained by it to advise it with respect to
its acquisition of the Buyer Securities pursuant hereto, the Company, together
with such advisers, have such knowledge, sophistication and experience in
business and financial matters as to be capable of evaluating the merits and
risks of the prospective acquisition, and that it is purchasing such Buyer
Securities for its own account and not with a view to the distribution thereof
or with any present intention of distributing or selling any of such Buyer
Securities except in compliance with the Securities Act, (ii) it understands and
agrees that the Buyer's offer and sale of the Buyer Securities have not been
registered under the Securities Act and the Buyer Securities may be resold only
if registered pursuant to the provisions thereunder or if an exemption from
registration is available, (iii) it has received all the information it has
requested from the Buyer and has had the opportunity to ask
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questions of the Buyer and, relying on the completeness and accuracy of such
information, the Company believes such information is sufficient to make an
informed decision with respect to its acquisition of the Buyer Securities and
(iv) it is an "accredited investor" as that term is defined in Rule 501(a) of
Regulation D promulgated under the Securities Act. The residence address of the
Stockholders is set forth on Schedule 4.37. The Company understands and agrees
that the Buyer may require investment representations and warranties similar to
those contained in this Section 4.37 from any permitted transferee of Buyer
Securities, including, without limitation, any Stockholder, prior to effecting
such transfer.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer represents and warrants to the Company and the Stockholders as
follows:
Section 5.01 Organization and Qualification. The Buyer is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Indiana. The Buyer has all corporate power and authority to own, lease
and operate its properties and to carry on its business as now being conducted.
Section 5.02 Authority. Except as set forth on Schedule 5.02, (a) the Buyer
has the requisite corporate power and authority to execute and deliver this
Agreement and the Related Agreements and to consummate the transactions
contemplated hereby and thereby; (b) the execution, delivery and performance of
this Agreement and the Related Agreements by the Buyer and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of the Buyer and no other corporate
proceedings on the part of the Buyer are necessary to authorize this Agreement
and the Related Agreements or to consummate the transactions so contemplated;
and (c) this Agreement has been duly executed and delivered by the Buyer and,
assuming this Agreement constitutes a valid and binding obligation of the
Company and the Stockholders, constitutes a valid and binding obligation of the
Buyer, enforceable against the Buyer in accordance with its terms, except as may
be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws of general application relating to or affecting the enforcement of
creditor's rights and general principles of equity as from time to time in
effect.
Section 5.03 Consents and Approvals; No Violations. Except as set forth on
Schedule 5.03, neither the execution, delivery or performance of this Agreement
and the Related Agreements by the Buyer nor the consummation by it of the
transactions contemplated hereby or thereby nor compliance by it with any of the
provisions hereof or thereof will (a) conflict with or result in any breach of
any provision of the charter or by-laws of the Buyer, (b) require (on behalf of
the Buyer) any filing with, or permit, authorization, consent or approval of,
any Governmental Entity (except where the failure to make such filings or to
obtain such permits, authorizations, consents or approvals would not have a
material adverse effect on the Buyer), (c) result in a violation or breach of,
or constitute (with or without due notice or lapse of time or both) a default
(or give rise to any right of termination, amendment, cancellation or
acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, lease,
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license, contract, agreement or other instrument or obligation to which the
Buyer is a party or by which any of its properties or assets may be bound or (d)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the Buyer or any of its properties or assets.
Section 5.04 Buyer Securities. When paid for by, and issued to, the Company
in accordance with the terms hereof, the Common Stock Consideration will be duly
authorized, validly issued, fully paid and non-assessable and will not have been
issued in violation of any preemptive right of stockholders or rights of first
refusal; and the Company will have good title to such stock, free and clear of
all Liens (other than any created by the Company or either of the Stockholders).
Section 5.05 NYSE Compliance. The Buyer has received a notice from the New
York Stock Exchange, Inc. (the "NYSE") that the Buyer is not currently in
compliance with the NYSE criteria for continued listing of the Buyer Common
Stock on the NYSE. The Buyer has submitted to the NYSE certain information
regarding the Buyer's possible future performance which may result in Buyer
achieving compliance with the original listing standards of the NYSE. The NYSE
has not initiated delisting procedures pursuant to the Exchange Act. The Buyer
has been advised that Buyer's Common Stock is subject to delisting procedures
unless the NYSE approves the Buyer's revised business plan prior to December 31,
1998. The Buyer has furnished to counsel for the Company and the Stockholders
copies of all correspondence between the NYSE and the Buyer relating to this
compliance matter. The Buyer covenants and agrees that it shall use its best
efforts to maintain the listing of the Buyer Common Stock on the NYSE.
Section 5.06 Capitalization; Stock Ownership. The authorized and
outstanding capital stock of the Buyer as of the date hereof is as set forth on
Schedule 5.06 hereto. Except as set forth on Schedule 5.06 hereto, all of the
outstanding shares of the capital stock of the Buyer are validly issued, fully
paid and non-assessable with no personal liability attaching to the ownership
thereof, have not been issued in violation of any preemptive rights of
stockholders, rights of first refusal or federal or state securities laws.
Except as set forth on Schedule 5.06 hereto, there are no outstanding (to the
extent issued by the Buyer) (a) securities convertible into, or exercisable or
exchangeable for, capital stock of the Buyer; (b) options, warrants or other
rights to purchase or subscribe for capital stock of the Buyer or securities
convertible into, or exercisable or exchangeable for, capital stock of the
Buyer; or (c) contracts, commitments, agreements, understandings or arrangements
of any kind relating to the issuance, sale, purchase, redemption or voting of
any capital stock of the Buyer, any such convertible or exchangeable securities
or any such options, warrants or rights. Except as set forth on Schedule 5.06
hereto, there is no outstanding right, option or other agreement of any kind to
purchase or otherwise to receive from the Buyer, any ownership interest in the
Buyer's capital stock, assets or business, and there is no outstanding right or
security of any kind convertible into such ownership interest. To the knowledge
of Buyer, the stockholders of the Buyer beneficially owning ten (10%) percent or
more of the Buyer Common Stock are set forth on Schedule 5.06.
Section 5.07 Compliance With Laws; Licenses.
(a) The conduct of the Buyer's business by the Buyer has not violated,
and as presently conducted does not violate, any Orders which would have a
Buyer Material Adverse
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Effect. No investigations by any Governmental Entity asserting or alleging
any violation of, or noncompliance with, any such Orders with respect to
the Buyer are pending or, to the knowledge of the Buyer, threatened. For
purposes of this Agreement, a "Buyer Material Adverse Effect" means any
event, circumstances or condition that, individually or when aggregated
with all other events, circumstances or conditions, could reasonably be
expected to have, or has had, a material adverse effect on: (a) the
business, property, operations, condition (financial or otherwise), results
of operations or prospects of the Buyer; (b) the ability of the Buyer to
consummate the transactions contemplated hereunder and under the Related
Agreements; or (c) the ability of the Buyer to perform and conduct the
Business after the consummation of the transactions contemplated by this
Agreement and the Related Agreements in substantially the same manner
conducted by the Company prior to the consummation of such transactions.
Section 5.08 Litigation; Investigations. Schedule 5.08 sets forth a
complete and accurate list of all suits, claims, proceedings, investigations,
audits or reviews (including, without limitation, with respect to Taxes) which
are pending or, to the knowledge of the Buyer, threatened against Buyer, any of
its directors, officers, employees or consultants (in his or her capacity as
such) or any of the Buyer's assets or its securities which would have a Buyer
Material Adverse Effect.
Section 5.09 Environmental Laws.
To the knowledge of the Buyer, the Buyer is in compliance with all material
applicable Environmental Laws. The Buyer is not in receipt of any notice of any
violation of any material Environmental Law relating to the operations of the
Buyer. No Third-Party Environmental Claims and/or Regulatory Actions are
outstanding against the Buyer or relating to the operations of the Buyer and, to
the knowledge of the Buyer, no Third-Party Environmental Claims and/or
Regulatory Actions are pending or threatened against the Buyer or relating to
the operations of the Buyer.
Section 5.10 Absence of Liabilities. The Buyer has no debt, liabilities or
obligations of any nature, whether accrued, absolute, contingent or otherwise,
whether due or to become due and whether or not the amount thereof is readily
ascertainable, that are not reflected as a liability in the financial statements
of the Buyer set forth in its Quarterly Report on Form 10Q for the quarter ended
October 3 1998 (the "Buyers Financial Statements") except as described on
Schedule 5.10 or except for liabilities incurred by the Buyer in the ordinary
course of business since October 3, 1998 consistent with past practices.
Section 5.11 Absence of Specified Changes. Except as disclosed on Schedule
5.11 or in the Buyer Financial Statements, since October 3, 1998, (a) the Buyer
has not suffered any change which has or could have a Buyer Material Adverse
Effect, and (b) the Buyer has conducted its business only in the ordinary course
of business and consistent with past practices.
Section 5.12 Full Disclosure. All documents and other papers delivered by
or on behalf of the Buyer in connection with this Agreement and the Related
Agreements and the transactions contemplated hereby and thereby are true,
complete and accurate in all material respects. To the knowledge of the Buyer,
no representation or warranty by the Buyer contained in this Agreement
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or any Exhibit or Schedule attached hereto or to be delivered in connection
herewith, and no statement contained in any document, certificate or other
writing furnished or to be furnished by or on behalf of the Buyer in connection
with this Agreement and the Related Agreements and the transactions contemplated
hereby and thereby, contains or will contain any untrue statement of a material
fact, or omits or will omit to state a material fact required to be stated
therein or necessary to make the statements therein not false or misleading in
light of the circumstances in which they were made.
ARTICLE VI.
CONDUCT AND TRANSACTIONS PRIOR TO CLOSING
Section 6.01 Access to Information.
(a) From and after the date hereof to and including the Closing Date,
the Buyer and its authorized employees, agents, officers and financial,
legal and other representatives and actual and potential financing sources
and their representatives shall be granted full and unrestricted access,
during normal business hours, to the offices, properties, books, documents
and records of the Company to conduct such examinations and investigations
thereof as they may desire. The Company and the Stockholders shall also
cause the officers, employees and financial, legal and other
representatives of the Company to be available for consultation and
discussion with the Buyer and its authorized employees, agents, officers
and financial, legal and other representatives and actual and potential
financing sources and their representatives during normal business hours
and to furnish such persons with any information as they may, from time to
time, request, and the Company and the Stockholders shall otherwise
cooperate fully in permitting the Buyer and such persons to investigate the
business, properties and financial condition of the Company.
(b) From and after the date hereof to and including the Closing Date,
the Company and its authorized employees, agents, officers and financial,
legal and other representatives shall be granted full and unrestricted
access, during normal business hours, to the offices, properties, books,
documents and records of the Buyer to conduct such examinations and
investigations thereof as they may desire. The Buyer shall also cause the
officers, employees and financial, legal and other representatives of the
Buyer to be available for consultation and discussion with the Company and
its authorized employees, agents, officers and financial, legal and other
representatives during normal business hours and to furnish such persons
with any information as they may, from time to time, request, and the Buyer
shall otherwise cooperate fully in permitting the Company and such persons
to investigate the business, properties and financial condition of the
Buyer.
(c) If the transactions provided for herein are not consummated, Buyer
and its respective officers, agents, and representatives will hold in
strict confidence all information obtained from the Company and its
officers, agents, or representatives, and will, promptly return to the
Company, or destroy at the request of the Company, all documents obtained
from the Company and its officers, agents or representatives, and all
copies of such documents made by Buyer and its officers, agents, and
representatives, excepting however, any such information or
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documents which: (i) was, is, or becomes in the public domain; (ii) was in
fact lawfully known or lawfully furnished to Buyer prior to disclosure to
Buyer by the Company or its officers, agents, or representatives; or (iii)
is lawfully disclosed or lawfully furnished to Buyer by a third party
(other than officers, directors, employees, and agents of the Company)
after disclosure to Buyer by the Company.
(d) The Company and its respective officers, agents, and
representatives will hold in strict confidence all information obtained
from the Buyer and its officers, agents, or representatives, and will,
promptly return to the Buyer, or destroy at the request of the Buyer, all
documents obtained from the Buyer and its officers, agents or
representatives, and all copies of such documents made by the Company and
its officers, agents, and representatives, excepting however, any such
information or documents which: (i) was, is, or becomes in the public
domain; (ii) was in fact lawfully known or lawfully furnished to the
Company prior to disclosure to the Company by the Buyer or its officers,
agents, or representatives; or (iii) is lawfully disclosed or lawfully
furnished to the Company by a third party (other than officers, directors,
employees, and agents of the Buyer) after disclosure to the Company by the
Buyer.
Section 6.02 Conduct of Business in Normal Course. Except as otherwise
expressly contemplated by this Agreement or as specifically consented to in
writing by the Buyer, from and after the date of this Agreement and until the
Closing Date, the Company covenants and agrees, and the Stockholders, jointly
and severally, covenant and agree (i) that the Company shall operate its
business until the Closing Date strictly in accordance with the budget attached
hereto as Exhibit E attached hereto and shall not materially deviate from the
budget without the prior written consent of the Buyer and (ii) to use their best
efforts to cause the Company, in each case consistent with good business
judgment, to preserve the Company's present business organization intact, keep
available the services of its present employees and consultants, preserve its
present relationships with Persons having business dealings with it and
generally operate its business in the ordinary and regular course consistent
with its prior practices, maintain its books and records in accordance with good
business practice, on a basis consistent with prior practice and in accordance
with GAAP, and maintain all Licenses. Except as otherwise expressly contemplated
by this Agreement or as specifically consented to in writing by the Buyer, from
and after the date of this Agreement and until the Closing Date, the Company
shall not, and the Stockholders, jointly and severally, shall use their best
efforts to cause the Company not to, undertake or permit any of the actions set
forth in Section 4.17 to occur or agree to take any of such actions.
Section 6.03 Consents; Satisfaction of Conditions. Each of the parties
hereto shall use its best efforts and shall fully cooperate with each other
party to make promptly all registrations, filings and applications, give all
notices and obtain all governmental and third party consents, permits,
authorizations, approvals, orders, qualifications, and waivers necessary for the
consummation of the transactions contemplated hereby, including the transfer of
the Assets, or that thereafter may be necessary to effectuate the transfer or
renewal of any License (collectively, the "Consents"). All Consents necessary to
consummate the Closing are listed on Schedule 6.03. Each of the parties hereto
shall use its best efforts to comply with and satisfy, or cause to be complied
with and satisfied, each of the covenants set forth in this Article VI and each
of the conditions set forth in Articles VII and VIII.
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Section 6.04 Further Assurances. Subject to the terms and conditions of
this Agreement, each of the parties hereto will use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable under applicable law and regulations to
consummate and make effective the transactions contemplated pursuant to this
Agreement (and the Related Agreements), and each of the Company and Stockholder
will use its or his respective best efforts to assure that the Buyer has the
benefits of all of the covenants and agreements contained in this Agreement and
the Related Agreements. From and after the date hereof, the Company and each of
the Stockholders shall, at the request of the Buyer, execute and deliver to the
Buyer, without further consideration, all such further assignments,
endorsements, instruments of conveyance and transfer, and other documents as the
Buyer may reasonably request in order to fully effectuate the transactions
contemplated by this Agreement and the Related Agreements.
Section 6.05 No Solicitation. From the date hereof to the Closing Date,
neither the Company nor any Stockholder, nor any other entity controlling,
controlled by or under common control with the Company, nor any of their
respective officers, employees, representatives or agents, will, directly or
indirectly, solicit or initiate any discussions or negotiations with,
participate in any negotiations with or provide any information to or otherwise
cooperate in any other way with, or facilitate or encourage any effort or
attempt by, any Person, other than the Buyer and its directors, officers,
employees, representatives and agents, regarding any merger, sale of substantial
assets, sale of shares of capital stock or similar transaction (a "Similar
Transaction") involving the Business. The Company and the Stockholders shall
inform the Buyer promptly if the Company or any of them are approached by, or
obtains a proposal or indication of interest from, any other party regarding a
Similar Transaction, and shall disclose to the Buyer the identity of such other
party and the terms and conditions of its proposal.
Section 6.06 Notification of Certain Matters.
(a) Each of the parties hereto agrees to give prompt notice to the
other of (i) the occurrence, or failure to occur, of any event which
occurrence or failure to occur would be likely to cause any representation
or warranty contained in this Agreement to be untrue or inaccurate in any
material respect at any time from the date hereof to the Closing Date, and
(ii) any material failure on its part to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of or the failure to
deliver any notice pursuant to this Section 6.06 shall not limit or
otherwise affect the remedies available hereunder to the party receiving
such notice.
(b) From the date hereof through the Closing Date, the Company and the
Stockholders shall promptly notify the Buyer of any suits, claims,
proceedings, investigations or reviews, which, after the date hereof, are
threatened or commenced against the Company or against any officer,
director, employee, consultant, agent, stockholder or other representative
of the Company with respect to the Company, its securities, any of the
Assets or the Business.
Section 6.07 Supplements to Schedules. On or before December 23, 1998, the
Company may furnish any schedules omitted from this Agreement or amend or
supplement any schedules hereto. On or before December 29, 1998, Buyer may
terminate this Agreement,
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without liability to any party hereto, if Buyer is not satisfied with any new
supplemented or amended schedule. If Buyer does not terminate the Agreement,
Buyer shall be deemed to have accepted the schedules. After December 29, 1998
and prior to the Closing, each party will supplement or amend the Schedules
hereto provided by such party with respect to any matter hereafter arising
which, if existing or occurring at the date of this Agreement, would have been
required to be set forth or described in such Schedules. No supplement to or
amendment of the Schedules made pursuant to this Section 6.07 shall be deemed to
cure any breach of any representation or warranty made in this Agreement unless
the other parties hereto specifically agrees thereto in writing.
Section 6.08 Special Meeting of Stockholders
(a) Buyer shall promptly take all steps necessary to cause a special
meeting of its stockholders (the "Special Meeting") to be duly called,
noticed, convened and held as soon as practicable after the execution of
this Agreement for the purposes of voting to approve the issuance to the
Company of the Common Stock Consideration.
(b) In connection with the Special Meeting, Buyer has prepared and
submitted to the SEC for comment preliminary proxy material with respect
thereto. Upon notification from the SEC Staff that there are no further
comments with respect to the preliminary proxy material, Buyer shall cause
to be mailed to its stockholders a notice of the Special Meeting, a
definitive proxy statement (the "Proxy Statement") and proxy as soon as
practicable thereafter and, in any event, shall cause such notice, the
Proxy Statement and the proxy to be mailed no later than the time required
by Law and Buyer's Articles of Incorporation and Bylaws and in any event no
later than January 10, 1999. Upon receipt of comments, if any, from the SEC
staff, the Buyer will promptly respond thereto. In connection with the
foregoing, the Company and the Stockholders will supply to the Buyer (and
be responsible for) such information related to the Company and the
Stockholders as is required to be included in the Proxy Statement for such
meeting. If, at any time prior to such meeting, any event with respect to
the Company or any Stockholder or with respect to the other information
supplied by the Company or a Stockholder for inclusion in such proxy
statement shall occur which is required to be described in an amendment of,
or a supplement to, such Proxy Statement, the Company and the Stockholders
will provide written notice thereof to the Buyer and such event will be so
described, and such amendment or supplement will be promptly filed with the
SEC and as required by applicable law disseminated to the Buyer's
stockholders. The Company and the Stockholders further represent and
warrant that all information provided by them for inclusion in such proxy
statement will be true, complete and correct and shall not contain any
untrue statement of material fact or omit to state a material fact required
to be state therein or necessary in order to make the statements therein
not false or misleading in light of the circumstances under which they were
made. Buyer shall consult with the Company with respect to the Proxy
Statement and shall afford the Company reasonable opportunity to comment
thereon. If, at any time prior to the Special Meeting, any event should
occur relating to the Company which should be set forth in an amendment of,
or a supplement to, the Proxy Statement, the Company will promptly inform
Buyer in writing. In each such case, Buyer, with the cooperation of the
Company, will promptly prepare and mail such amendment or supplement and
the Buyer shall consult with the Company with respect to such supplement or
amendment and shall afford the Company reasonable opportunity to
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comment thereon prior to such mailing. The Buyer will notify the Company at
least 48 hours prior to the mailing of the Proxy Statement, or any
amendment or supplement thereto, to its stockholders.
ARTICLE VII.
CONDITIONS PRECEDENT TO THE BUYER'S OBLIGATIONS
The obligation of the Buyer to purchase the Assets is subject to the
satisfaction, at or before the Closing, of the conditions set out below. The
benefit of these conditions is for the Buyer only and may be waived in writing
by the Buyer at any time in its sole discretion.
Section 7.01 Accuracy of Representations and Warranties. The
representations and warranties of the Company and the Stockholders contained in
this Agreement and the Related Agreements and in any certificate delivered to
the Buyer pursuant hereto and thereto shall be true and correct in all material
respects as of the date when made and as of Closing Date as though made at that
time, and the Buyer shall have received certificates duly signed by a duly
authorized officer of the Company and by the Stockholders attesting thereto.
Section 7.02 Performance by the Company and Stockholders. The Company and
the Stockholders shall have performed, satisfied and complied in all material
respects with all covenants, agreements and conditions required by this
Agreement and the Related Agreements to be performed, satisfied or complied with
by it or them, and the Buyer shall have received certificates duly signed by a
duly authorized officer of the Company and by the Stockholders attesting
thereto.
Section 7.03 Opinion of Counsel. The Buyer shall have received from counsel
to the Company, an opinion of counsel, dated as of the Closing Date and
addressed to the Buyer in a form acceptable to the Buyer.
Section 7.04 Casualty Losses; Material Adverse Effect. Since June 30, 1998,
the Company shall not have suffered (a) any material casualty loss, (b) any
material business interruption, (c) any material labor difficulty or customer
boycott or (d) any change which could have a Material Adverse Effect.
Section 7.05 Termination of Related Party Agreements. All existing
agreements between the Company and any Stockholder or any associate or affiliate
of any Stockholder shall have been canceled.
Section 7.06 Governmental Authorizations; Consents. The Company and the
Buyer shall have obtained all Consents which are required for the consummation
of the transactions contemplated under this Agreement and the Related Agreements
and for the Buyer to be able to continue to operate the Business immediately
after consummation of this Agreement, in accordance with all applicable laws,
rules and regulations.
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Section 7.07 FIRPTA Affidavit. The Company shall have delivered an
affidavit dated the Closing Date pursuant to Sections 897 and 1445 of the Code
(Foreign Investment in Real Property Tax Act of 1990 affidavit) substantially in
the form set forth in Exhibit F hereto and shall have compiled with the notice
requirements of Treasury Regulation Section 1.897 2(h)(z).
Section 7.08 Absence of Litigation. There shall not have been issued and be
in effect any order of any court or tribunal of competent jurisdiction which (a)
prohibits or makes illegal the purchase by the Buyer of the Assets, (b) would
require the divestiture by the Buyer of all or a material portion of the Assets,
the Business or the assets of the Buyer as a result of the transactions
contemplated hereby, or (c) would impose limitations on the ability of the Buyer
to effectively exercise full rights of ownership of the Assets or of a material
portion of the Business as a result of the transactions contemplated hereby.
Section 7.09 No Injunction. On the Closing Date there shall be no effective
injunction, writ, preliminary restraining order or any order of any nature
issued by a court of competent jurisdiction directing that the transactions
provided for herein or any of them not be consummated as so provided or imposing
any conditions on the consummation of the transactions contemplated hereby which
the Buyer deems unacceptable in its sole discretion.
Section 7.10 Good Standing Certificates. The Buyer shall have received
certificates issued by appropriate Governmental Entities evidencing, as of a
recent date, the good standing and tax status of (a) the Company in the State of
New Jersey and (b) the Company in the jurisdictions in which it is qualified to
do business; and as of a date not more than ten (10) days prior to the Closing
Date, telegrams, if available, issued by the appropriate Governmental Entities
with respect to the good standing and tax status of such corporations in such
jurisdictions.
Section 7.11 Certified Charter Documents. The Buyer shall have received a
copy of the Articles of Incorporation or other applicable charter instrument and
all amendments thereto of the Company, certified by the Secretary of State of
New Jersey.
Section 7.12 Certified By-laws. The Buyer shall have received a copy of the
By-laws of the Company, as amended through the Closing Date, certified by the
Company's corporate secretary.
Section 7.13 Approval of the Buyer's Board. The Board of Directors of the
Buyer shall have approved this Agreement and the Related Agreements and the
transactions contemplated hereby and thereby.
Section 7.14 Duly Executed Agreements. The Buyer shall have received the
Ben-Haim Employment Agreement, the Harary Employment Agreement, the Escrow
Agreement, the Registration Rights Agreement, the Stockholders Agreement and the
Management Agreement, in each case duly executed by the other party or parties
thereto.
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Section 7.15 Financial Statements. The Buyer shall have received audited
financial statements of the Company for the fiscal years ended June 30, 1996 and
June 30, 1998, accompanied by the audit report of Arthur Andersen LLP with
respect thereto.
Section 7.16 Conversion Agreement. Chan and the Company shall have entered
into the Conversion Agreement, and the transactions contemplated thereby shall
be consummated contemporaneously with the Closing without any waiver of any term
or provision thereof.
Section 7.17 Matters Satisfactory to the Buyer's Counsel. All actions,
proceedings, opinions and Ancillary Documents required or incidental to the
consummation of the transactions contemplated by this Agreement and the Related
Agreements, and all legal matters related thereto, shall be reasonably
satisfactory to counsel for the Buyer.
Section 7.18 Approval of Buyers Stockholders. The Stockholders of the Buyer
shall have approved the issuance to the Company of the Common Stock
Consideration.
Section 7.19 Clearance Certificates. To the extent required by law to
relieve the Purchaser of any secondary liability for unpaid sales or similar
Taxes of the Company attributable to periods ending on or prior to the Closing
Date, the Company shall, prior to the Closing Date, take all necessary action in
order to obtain clearance certificates or similar documents from any applicable
state Tax authority, which shall be delivered to the Purchaser on the Closing
(the "Clearance Certificates").
Section 7.20 Financing. The Buyer shall have obtained an asset based
revolving line of credit (on terms reasonably satisfactory to the Buyer) to
finance the businesses of the Buyer and the Company with a minimum credit limit
of $75,000,000.
Section 7.21 Conversion Agreement. The execution and delivery of an
agreement between the Company, Buyer, Stockholders and Chan, on terms reasonably
satisfactory to the Buyer, Company and the Stockholders with respect to (i) the
payment of the Company's alleged debt to Chan, if any, and (ii) the total amount
of Buyer's Common Stock that Chan will receive from the Company.
ARTICLE VIII.
CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS.
The obligation of the Company to sell the Assets is subject to the
satisfaction, at or before the Closing, of the conditions set out below. The
benefit of these conditions is for the Company only and may be waived by the
Company in writing at any time in its sole discretion.
Section 8.01 Accuracy of Representations and Warranties. The
representations and warranties of the Buyer contained in this Agreement and the
Related Agreements and in any certificate delivered to the Company or any
Stockholder pursuant hereto and thereto shall be true and correct in all
material respects as of the date when made and as of the Closing Date as
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though made at that time, and the Company shall have received a certificate
attesting thereto signed by a duly authorized officer of the Buyer.
Section 8.02 Performance by the Buyer. The Buyer shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement and the Related Agreements to be
performed, satisfied or complied with by it, and the Company shall have received
a certificate of a duly authorized officer of the Buyer to such effect.
Section 8.03 Opinion of Counsel. The Company shall have received from
counsel to the Buyer, an opinion of counsel, dated as of the Closing Date and
addressed to the Company in a form acceptable to the Company.
Section 8.04 Casualty Losses; Material Adverse Effect. Since June 30, 1998,
the Buyer shall not have suffered (a) any material casualty loss, (b) any
material business interruption, (c) any material labor difficulty or customer
boycott or (d) any change which could have a material adverse effect on the
business or operations of the Buyer.
Section 8.05 Governmental Authorizations; Consents. The Company and the
Buyer shall have obtained all Consents which are required for the consummation
of the transactions contemplated under this Agreement and the Related Agreements
and for the Buyer to be able to continue to operate the Business immediately
after consummation of this Agreement, in accordance with all applicable
regulations.
Section 8.06 Absence of Litigation. There shall not have been issued and be
in effect any order of any court or tribunal of competent jurisdiction which (a)
prohibits or makes illegal the purchase by the Buyer of the Assets, (b) would
require the divestiture by the Buyer of all or a material portion of the Assets,
the Business or the assets of the Buyer as a result of the transactions
contemplated hereby, or (c) would impose limitations on the ability of the Buyer
to effectively exercise full rights of ownership of the Assets or of a material
portion of the Business as a result of the transactions contemplated hereby.
Section 8.07 No Injunction. On the Closing Date there shall be no effective
injunction, writ, preliminary restraining order or any order of any nature
issued by a court of competent jurisdiction directing that the transactions
provided for herein or any of them not be consummated as so provided or imposing
any conditions on the consummation of the transactions contemplated hereby which
the Company deems unacceptable in its sole discretion.
Section 8.08 Approval of the Buyer's Board. The Board of Directors of the
Buyer shall have approved this Agreement and the Related Agreements and the
transactions contemplated hereby and thereby.
Section 8.09 Duly Executed Agreements. The Company and/or the Stockholders,
as applicable, shall have received the Ben-Haim Employment Agreement, the Harary
Employment Agreement, the Escrow Agreement, the Registration Rights Agreement
and the Stockholders
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Agreement and an Anti-Dilution Agreement on terms and conditions mutually
satisfactory to the Buyer and the Company, in each case duly executed by the
Buyer.
Section 8.10 Matters Satisfactory to the Company's Counsel. All actions,
proceedings, opinions and Ancillary Documents required or incidental to the
consummation of the transactions contemplated by this Agreement and the Related
Agreements, and all legal matters related thereto, shall be reasonably
satisfactory to counsel for the Company.
Section 8.11 Proxy. The delivery by WGI, LLC and WGC. to the Company of a
proxy to vote WGI's and WGC's Buyer Common Stock in favor of such matters set
forth in the Proxy Statement and described in Section 6.08 hereof.
Section 8.12 Guarantee. The release of all personal guarantees given by any
of the Stockholders or third parties for liabilities of the Company and any
collateral securing said guarantees.
Section 8.13 Conversion Agreement. The execution and delivery of an
agreement between the Company, Buyer, Stockholders and Chan, on terms reasonably
satisfactory to the Buyer, Company and the Stockholders with respect to (i) the
payment of the Company's alleged debt to Chan, if any, and (ii) the total amount
of Buyer's Common Stock that Chan will receive from the Company.
Section 8.14 Tax Treatment. The consummation of the transactions
contemplated by this Agreement shall be in the opinion of counsel to the Company
a tax-free reorganization under Section 368(a)(1)(c) of the Code.
Section 8.15 Financing. The Buyer shall have obtained an asset based
revolving line of credit (on terms reasonably satisfactory to the Buyer) to
finance the businesses of the Buyer and the Company with a maximum credit limit
of $75,000,000.
Section 8.16 Delisting. The Buyer's Common Stock shall not be delisted by
the NYSE.
ARTICLE IX.
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS.
Except as otherwise specifically provided for herein, the representations,
warranties, covenants and agreements of the Buyer, the Company and the
Stockholders included or provided for herein, or in other instruments or
agreements delivered or to be delivered at or prior to Closing in connection
herewith, including the representations and warranties of all Persons made in
the certificates to be delivered pursuant hereto (each, an "Ancillary Document")
shall survive for a period commencing on the date hereof and ending on the
earlier of six (6) months after the completion of the Buyer's audit for 1999 and
two (2) years following the Closing Date (or such longer period as set forth in
the succeeding sentences). Notwithstanding the foregoing, (a) there
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shall be no limit on the survival of the indemnification obligations of the
Company and the Stockholders for breaches of the representations or warranties
made by them as to the transfer of legal and valid title to the Assets and as to
environmental matters and (b) the indemnification obligations of the Company and
the Stockholders for breaches of the representations or warranties made by them
with respect to Taxes or Tax matters or ERISA matters shall survive until the
expiration of the applicable statute of limitations. Notwithstanding anything
herein to the contrary, if, prior to the expiration of any indemnification
period, either the Buyer, on the one hand, or the Company and the Stockholders,
on the other hand, shall have been notified of a claim for indemnity hereunder
and such claim shall not have been finally resolved before the expiration of
such period, any representation, warranty, covenant or agreement that is the
basis for such claim shall continue to survive and shall remain a basis for
indemnity as to such claim until such claim is finally resolved. The respective
representations and warranties of the Company, the Stockholders and the Buyer
contained herein or in any other documents covered in the preceding sentence
shall not be deemed waived or otherwise affected by any investigation made by
any party hereto or any amendment or supplement to the Schedules or Exhibits
hereto occurring after the signing of this Agreement.
ARTICLE X.
INDEMNIFICATION.
Section 10.01 Indemnity.
(a) Subject to the limitations and other provisions of Article IX and
this Article X, on or after to the Closing Date, the Company and the
Stockholders, jointly and severally, agree to indemnify and hold harmless
the Buyer and its directors, officers, employees, agents, affiliates, and
the successors and assigns of each of them, from, against and in respect of
any and all Losses resulting from, incurred in connection with or arising
out of (i) any inaccuracy in or breach of any representation, warranty,
covenant or agreement of the Company and the Stockholders contained herein
or in the Related Agreements or in any certificate delivered by or on
behalf of the Company to the Buyer pursuant hereto or thereto (including in
respect of any actual or threatened action or proceeding in connection with
any such breach), (ii) the conduct of the Business on or prior to the
Closing Date, (iii) any Excluded Liability, (iv) any matter set forth on
Schedule 10.01, (v) the failure to comply with any agreement or covenant
set forth herein, and (vi) the failure to comply with bulk sales or
transfer laws in respect of the sale of the Assets.
(b) Subject to the limitations and other provisions of Article IX and
this Article X, on or after to the Closing Date, the Buyer agrees to
indemnify and hold harmless the Company and its directors, stockholders,
officers, employees, agents, affiliates, and the successors and assigns of
each of them, from, against and in respect of any and all Losses resulting
from, incurred in connection with or arising out of (i) any inaccuracy in
or breach of any representation, warranty, covenant or agreement of the
Buyer contained herein or in the Related Agreements or in any certificate
delivered by or on behalf of the Buyer to the Company or the Stockholders
pursuant hereto or thereto (including in respect of any actual or
threatened action or proceeding in connection with any such breach), (ii)
the conduct of the Business on or
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after the Closing date; (iii) any Assumed Liability, (iv) any matter set
forth on Schedule 10.01(b).
(c) The party or parties being indemnified are referred to herein as
the "Indemnitee" and the indemnifying party is referred to herein as the
"Indemnitor." No Indemnitor shall have any obligation under Article IX or
this Article X to indemnify the Indemnitee with respect to (i) Losses until
the aggregate combined total of all such Losses incurred by the Indemnitee
exceeds $100,000, whereupon the Indemnitee shall be entitled to
indemnification with respect to the amount of Losses in excess of $100,000,
and (ii) aggregate Losses in excess of the amount of the Purchase Price.
The above limitations shall also apply to claims of fraud.
(d) Losses are limited to quantifiable out of pocket amounts and
exclude special, indirect or consequential damages and damage for lost
profits.
(e) The Company and the Stockholders shall only be obligated to pay
any claim under Section 10.1(a) with shares of the Buyer Common Stock
received in payment of the Purchase Price valued at the greater of $1.75
per share and the average of the Closing Prices during the 20 consecutive
trading days immediately preceding the date that any amount is due and
payable to the Buyer under Section 10.1(a) (or such date as otherwise
agreed by the parties). Shares of Buyer Common Stock held in the Escrow
Account shall first be used to pay any such amount and thereafter any other
shares of Buyer Common Stock received in payment of the Purchase Price
shall be used to pay any such amount. "Closing Price" on any day when used
with respect to the Buyer Common Stock means the reported last sale price
regular way on composite tape, or, if the shares of Buyer Common Stock are
not quoted on the composite tape, the reported last sale price on the New
York or the American Stock Exchange or, if the shares of Buyer Common Stock
are not listed or admitted to trading on either such Exchange, as reported
on the National Association of Securities Dealers Automated Quotation
System, or if the shares of Buyer Common Stock are not quoted on such
system, the average of the closing bid and asked prices as furnished by any
member of the National Association of Securities Dealers, Inc. selected by
the Company for that purpose.
(f) Neither the Company nor the Stockholders shall be liable for any
payment under Section 10.1(a) with respect to any breach of any
representation or warranty which Buyer had actual knowledge was untrue or
misleading.
Section 10.02 Indemnification Procedure.
(a) Any party who receives notice of a potential claim that may, in
the judgment of such party, result in a Loss shall use all reasonable
efforts to provide the parties hereto notice thereof, provided that failure
or delay or alleged delay in providing such notice shall not adversely
affect such party's right to indemnification hereunder. In the event that
any party shall incur or suffer any Losses in respect of which
indemnification may be sought by such party hereunder, the Indemnitee shall
assert a claim for indemnification by written notice (a "Notice") to the
Indemnitor stating the nature and basis of such claim and the amount of
such claim. In the case of Losses arising by reason of any third party
claim, the Notice shall be given
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within thirty (30) days of the filing or other written assertion of any
such claim against the Indemnitee, but the failure of the Indemnitee to
give the Notice within such time period shall not relieve the Indemnitor of
any liability that the Indemnitor may have to the Indemnitee except if the
failure to give a Notice with such thirty (30) day period materially
prejudices the Indemnitor in defending such claim.
(b) In the case of third party claims for which indemnification is
sought, the Indemnitor shall have the option (i) to conduct any proceedings
or negotiations in connection therewith, (ii) to take all other steps to
settle or defend any such claim (provided that the Indemnitor shall not
settle any such claim without the prior written consent of the Indemnitee,
which consent shall not be unreasonably withheld except that the Indemnitor
may settle any such claim without the prior written consent of the
Indemnitee if the settlement includes an unconditional general release of
the Indemnitee, no admission of any wrongdoing by "Indemnitee and no
injunctive relief or future obligation binding on the Indemnitee.) and
(iii) to employ counsel to contest any such claim or liability in the name
of the Indemnitee or otherwise. In any event, the Indemnitee shall be
entitled to participate at its own expense and by its own counsel in any
proceedings relating to any third party claim. The Indemnitor shall, within
twenty (20) days of receipt of the Notice, notify the Indemnitee of its
intention to assume the defense of such claim. If (x) the Indemnitor shall
decline to assume the defense of any such claim, (y) the Indemnitor shall
fail to notify the Indemnitee within twenty (20) days after receipt of the
Notice of the Indemnitor's election to defend such claim or (z) the
Indemnitee shall have reasonably concluded that there may be a conflict of
interest available to it which are different from or in addition to those
available to the Indemnitor (in which case the Indemnitor shall not have
the right to direct the defense of such action on behalf of the
Indemnitee), the Indemnitee may defend against such claim at the expense of
the Indemnitor, the Indemnitee may settle such claim without the consent of
the Indemnitor, and the Indemnitor may not challenge the reasonableness of
any such settlement. The expenses of all proceedings, contests or lawsuits
in respect of such claims shall be borne and paid by the Indemnitor, and
the Indemnitor shall pay the Indemnitee, in immediately available funds,
the amount of any Losses, as such Losses are incurred. Regardless of which
party shall assume the defense of the claim, the parties agree to cooperate
fully with one another in connection therewith. In the event that any
Losses incurred by the Indemnitee do not involve payment by the Indemnitee
of a third party claim, then the Indemnitor shall, within ten (10) days
after agreement on the amount of Losses or the occurrence of a final
non-appealable determination of such amount, pay to the Indemnitee, in
immediately available funds, the amount of such Losses. Anything in this
Article X to the contrary notwithstanding, the Indemnitor shall not,
without the Indemnitee's prior written consent, settle or compromise any
claim or consent to entry of any judgment in respect thereof which imposes
any future obligation on the Indemnitee or which does not include, as an
unconditional term thereof, the giving by the claimant or plaintiff to the
Indemnitee a release from all liability in respect of such claim.
(c) The remedies provided for in this Agreement shall be exclusive of
any other rights or remedies available to one party against the other for
breach of any representation, warranty, covenant, agreement or obligation
contained in this Agreement other than for fraud or equitable relief.
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ARTICLE XI.
TERMINATION.
Section 11.01 Right to Terminate. Notwithstanding anything to the contrary
set forth in this Agreement, this Agreement may be terminated and the
transactions contemplated herein abandoned at any time prior to the Closing:
(a) by written consent of the Buyer and the Stockholders;
(b) by the Buyer or the Company if the Closing shall not have occurred
on or before January 31, 1999 or such other date as the parties have agreed
to in writing, provided, however, that the right to terminate this
Agreement under this Section 11.01(b) shall not be available to any party
whose failure to fulfill any obligation under this Agreement has been the
cause of, or resulted in, the failure of the Closing Date to occur on or
before such date;
(c) by the Buyer or the Company if a court of competent jurisdiction
shall have issued an order, decree or ruling permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by this
Agreement, and such order, decree, ruling or other action shall have become
final and non-appealable;
(d) by the Company if the Buyer (i) breaches its representations and
warranties in any material respect, (ii) fails to comply in any material
respect with any of its covenants or agreements contained herein which
failure is not cured within twenty (20) days of written notice thereof; or
(iii) fails to meet at Closing any conditions set forth in Article VIII
hereof and such failure has not been waived in writing by the Company;
(e) by the Buyer if the Company or the Stockholders (i) breach its or
their representations and warranties in any material respect, (ii) fail to
comply in any material respect with any of its or their covenants or
agreements contained herein which failure is not caused within twenty (20)
days or written notice thereof; or (iii) fail to meet at Closing any
condition set forth in Article VII hereof and such failure has not been
waived in writing by the Buyer; or
Section 11.02 Obligations to Cease. In the event that this Agreement shall
be terminated pursuant to Section 11.01 hereof, all obligations of the parties
hereto under this Agreement shall terminate except for the Buyer's and the
Company's obligations contained in Section 6.01(c) and (e) and there shall be no
liability of any party hereto to any other party except (a) as set forth in
Section 13.02 hereof, and (b) that nothing herein will relieve any party from
liability for any breach of this Agreement. Prior to the Closing the specific
remedies to which any party may resort under the terms of this Article 11 are
exclusive of any other remedies or means of redress to which such party may
lawfully be entitled in case of any breach, threatened breach or failure of
observance or performance of any representation, warranty, covenant, agreement
or commitment made hereunder or relating hereto or by reason of any such
representation, warranty, covenant, agreement or commitment being materially
untrue or incorrect.
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Section 11.03 Additional Buyer Remedies. If the Buyer shall be entitled to
close the transactions contemplated by this Agreement and the Company wrongfully
refuses to do so, or if the Company fails, or if a failure by the Company is
threatened, to comply with any of its covenants and agreements contained in this
Agreement, then, in addition to all other remedies which may be available to it,
the Buyer shall be entitled to injunctive and other equitable relief, including,
without limitation, specific performance and shall be entitled to recover from
the Company its loss, costs and expenses, including reasonable attorneys' fees,
incurred by the Buyer in securing such injunctive or equitable relief.
Section 11.04 Additional Company Remedies. If the Company shall be entitled
to close the transactions contemplated by this Agreement and the Buyer
wrongfully refuses to do so, or if the Buyer fails, or if a failure by the Buyer
is threatened, to comply with any of its covenants and agreements contained in
this Agreement, then, in addition to all other remedies which may be available
to it, the Company shall be entitled to injunctive and other equitable relief,
including, without limitation, specific performance and shall be entitled to
recover from the Buyer its loss, costs and expenses, including reasonable
attorneys' fees, incurred by the Company in securing such injunctive or
equitable relief.
ARTICLE XII.
OBLIGATIONS AFTER THE CLOSING.
Section 12.01 Access to Information. Each of the Buyer and the Company
shall provide the other with the right, at reasonable times and upon reasonable
notice, to have access to, and to copy and use, any records or information and
personnel which may be relevant in connection with any audit, inquiry or other
examination by any Governmental Entity relating to the Assets or the Business.
The party requesting assistance hereunder shall reimburse the other party for
reasonable expenses incurred in providing such assistance. Any information
obtained pursuant to this Section 12.01 shall be held in strict confidence and
shall be used solely in connection with the reason for which it was requested.
Section 12.02 Employees and Employee Benefits.
(a) The Company shall use its best efforts to make available to Buyer
all employees of the Company on the Closing Date. It is the intention of
the Buyer to offer employment to all employees of the Company ("Employees")
on terms that are no less advantageous to each individual Employee than
those which such Employee enjoyed with the Company as of the Closing Date.
Notwithstanding the foregoing and except as contemplated by the Ben-Haim
Employment Agreement and Harary Employment Agreement, the Buyer is not
obligated in any manner to offer employment to any Employee. Nothing in
this Section 12.02, express or implied, is intended to confer upon any
person other than parties to this Agreement, or their successors and
assigns, any rights or remedies under or by reason of this Section 12.02.
(b) The Company shall be solely responsible for the satisfaction of
all claims for benefits brought by or in respect of any person who was an
employee of the Company prior to the Closing under any Plan or any
government mandated benefits (worker's compensation and unemployment
compensation) or otherwise, which claims are based on occurrences prior to
the
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Closing, or as a result of the transactions contemplated herein, regardless
of when notices of such claims were filed.
Section 12.03 Tax Returns; Tax Audits.
(a) The Company shall prepare, or cause to be prepared, and file, or
cause to be filed, (at its expense) its Tax Returns with respect to the
Business and Assets for all periods ending on or prior to the Closing Date
which are to be filed after the Closing Date. Such Tax Returns shall be
prepared in a manner consistent with the Tax Returns (including amended Tax
Returns) of the Company for prior fiscal periods. The Company shall timely
pay, or cause to be paid, all Taxes shown as due (or required to be shown
as due) on such Tax Returns. The Buyer shall pay or otherwise discharge all
sales tax arising out of the sale of the Assets and shall furnish to the
Company evidence of such payment and all correspondence with all applicable
taxing authorities in connection therewith.
(b) Each party shall have the right, at its own expense, to control
any audit or determination by any Governmental Entity, initiate any claim
for refund or amended return, and contest, resolve and defend against any
assessment, notice of deficiency, or other adjustment or proposed
adjustment of Taxes for any taxable period for which that party is charged
with responsibility for filing a Tax Return under this Agreement; provided,
however, that no party shall have the right to agree to any assessment,
deficiency, settlement, or other adjustment or proposed adjustment of Taxes
that would adversely affect the interests of the other without such other
party's written consent, which consent shall not be unreasonably withheld
or delayed. The Company shall notify the Buyer, and the Buyer shall notify
the Company, as the case may be, if any taxing authority shall, upon audit
or otherwise, propose in writing an adjustment to tax items which could
give rise to a claim against or by the Buyer.
Section 12.04 Further Assurances.
(a) Subject to the terms and conditions hereof, the Company and the
Stockholders agree that after the Closing Date they will execute and
deliver such documents to the Buyer as the Buyer may reasonably request in
order to more effectively vest in the Buyer good title to the Assets and to
consummate the transactions contemplated hereby. On the Closing Date, the
Company shall execute and deliver to the Buyer for use by the Buyer with
respect to third parties, such as licensors, licensees, sub-licensees and
any other third party that currently has any rights whatsoever in or to the
Assets, anywhere throughout the world, letters prepared jointly by, and
mutually acceptable to, the Buyer and the Company advising that (i)
effective as at the Closing Date, the Buyer owns the Company's interests in
and to the Assets; (ii) the Buyer is entitled to receive all moneys,
payments, receipts, revenues or income derived therefrom in accordance with
this Agreement; and requesting that thereafter they render all required
statements and activity reports and make payments of one hundred percent
(100%) of all sums thereafter otherwise due in respect of any period,
whether before or after Closing, to Buyer in accordance with this
Agreement, and provide copies of all notices, claims or other
correspondence, directly to the Buyer.
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(b) On and after the Closing Date, the Buyer shall have the sole right
and authority to collect, for its own account and sole benefit, all monies
payable in respect of the Assets, no matter how or when earned. If the
Company or the Stockholders shall receive any such monies, it shall hold
all such monies in trust for the sole benefit of the Buyer. Within five (5)
business days after receipt thereof, the Company or the Stockholders, as
the case may be, shall cause the transfer and delivery to the Buyer of any
monies or other property which the Company or the Stockholders may receive
after the Closing Date in payment of monies payable in respect of the
Assets or the Business. The Company authorizes the Buyer to endorse in the
Company's name all notes, checks, drafts, money orders or other instruments
of payment in respect of the foregoing which may come into the possession
of the Buyer, and the Company hereby ratifies all that the Buyer shall
lawfully do or cause to be done by virtue hereof. This right shall become
irrevocable upon Closing. The Company and the Stockholders each agree to
use its best efforts, if requested by the Buyer, to assist the Buyer in the
collection of accounts receivable of the Business at the Closing Date.
Section 12.05 Change of Name. Concurrently with the Closing, the Company
shall change its corporate name to a new name bearing no resemblance to its
existing corporate name and which will not interfere in any jurisdiction with
the use by the Buyer (either alone or in connection with other words) of all or
any part of such name. From and after the Closing Date, the Company will cease
and desist from using its present corporate name (or words resembling or likely
to be confused with its present name) in the conduct of any business, or
otherwise. The Company will execute or obtain such consents and documents as the
Buyer shall require in order to enable the Buyer to use as it may desire the
aforesaid corporate name on all correspondence and other documents, and the
Company will cooperate with the Buyer to that end.
Section 12.06 Consent of Company's Accountants. After the Closing, the
Company and the Stockholders agree to use their best efforts to obtain the
consent of Arthur Andersen LLP with respect to the inclusion of the Company's
audited financial statements for June 30, 1997 and 1998, and the related audit
report, within any periodic report, registration statement, proxy or information
statement or other similar report or statement filed by the Buyer with any
Governmental Entity, including, without limitation, the Securities and Exchange
Commission.
Section 12.07 Qualification as Reorganization. For federal income tax
purposes, it is intended that transfer of the Assets and subsequent liquidation
of the Company qualify as a reorganization within the meaning of Section
368(a)(1)(C) of the Code. The Company and the Stockholders agree to take all
action necessary in order to so qualify, including, without limitation, to cause
the dissolution and liquidation of the Company as soon as practicable after the
Closing (but in any event within twelve (12) months) and the subsequent
distribution of the assets of the Company to the Stockholders, and the filing of
any documents with, and the timely payment of any amounts to, any Governmental
Entity or other Person in connection with such dissolution and liquidation
(including any final Tax Returns and related Taxes). It is understood and agreed
that the Buyer makes, and has made, no representation as to qualification of the
transfer of the Assets and subsequent liquidation of the Company as a
reorganization under the Section 368(a)(1)(c) of the Code or otherwise.
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ARTICLE XIII.
Section 13.01 Publicity. Unless required by law (in which event notice and
an opportunity to comment shall be given to the other party), neither party
shall issue any press release or other public statement regarding the
transactions contemplated hereby without the prior written consent of the other
party. The parties acknowledge that the Buyer will be required to publicly
disclose this Agreement and the transactions contemplated hereby.
Section 13.02 Costs. The Buyer, on the one hand, and the Company and the
Stockholders, on the other, each represent to the other that it has not used a
broker or finder in connection with the transactions contemplated by this
Agreement, except as set forth on Schedule 13.02. The Buyer, on the one hand,
and the Company and the Stockholders, on the other, shall each pay its own costs
and expenses incurred by it with respect to brokers or finders and in
negotiating and preparing this Agreement and in closing and carrying out the
transactions contemplated by this Agreement.
Section 13.03 Headings. Subject headings are included for convenience only
and shall not affect the interpretation of any provision of this Agreement.
Section 13.04 Notices. Any notice, demand, request, waiver, or other
communication under this Agreement shall be in writing and shall be deemed to
have been duly given on the date of service if personally served or sent by
telecopy, on the business day after notice is delivered to a courier or mailed
by express mail if sent by courier delivery service or express mail for next day
delivery, and on the third day after mailing if mailed to the party to whom
notice is to be given, by first class mail, registered, return receipt
requested, postage prepaid and addressed as follows:
If to the Company and the Stockholders, to:
Tahiti Apparel, Inc.
500 Seventh Avenue
New York, NY 10018
Attention: President
Telecopy: (212) 354-5314
Telephone: (212) 944-7117
with a copy to:
Wachtel & Masyr, LLP
110 East 59th Street
New York, NY 10022
Attention: Morris Missry, Esq.
Telecopy: (212) 909-9500
Telephone: (212) 909-9490
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If to the Buyer, to:
Signal Apparel Company, Inc.
200-A Manufacturers Road
Chattanooga, TN 37405
Attention: Robert J. Powell, Esq.
Telecopy: (423) 752-2040
Telephone: (423) 752-2048
with a copy to:
Michael Chotos, Esq.
56 Malaga Cove Plaza
Palos Verdes, CA 90274
Telecopy: (310) 791-1928
Telephone: (310) 791-1958
Section 13.05 Assignment and Successors. Prior to Closing, none of the
parties hereto shall assign any rights or delegate any duties hereunder without
the prior written consent of the other, except that the Buyer may designate an
affiliate or subsidiary to fulfill its obligations hereunder or assert or enjoy
any of its rights or benefits hereunder. Any such assignment shall not
constitute a novation.
Section 13.06 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the permitted successors and assigns of the parties.
Section 13.07 Governing Law; Forum; Process. This Agreement shall be
construed in accordance with, and governed by, the laws of the State of New York
as applied to contracts made and to be performed entirely in the State of New
York without regard to principles of conflicts of law. Each of the parties
hereto hereby irrevocably and unconditionally submits to the exclusive
jurisdiction of any court of the City and State of New York or any federal court
sitting in the City and State of New York for purposes of any suit, action or
other proceeding arising out of this Agreement (and agrees not to commence any
action, suit or proceedings relating hereto except in such courts). Each of the
parties hereto agrees that service of any process, summons, notice or document
by U.S. registered mail at its address set forth herein shall be effective
service of process for any action, suit or proceeding brought against it in any
such court. Each of the parties hereto hereby irrevocably and unconditionally
waives any objection to the laying of venue of any action, suit or proceeding
arising out of this Agreement, which is brought by or against it, in the courts
of the City and State of New York or any federal court sitting in the City and
State of New York and hereby further irrevocably and unconditionally waives and
agrees not to plead or claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient forum.
Section 13.08 Entire Agreement. This Agreement, including the Exhibits and
Schedules hereto, sets forth the entire understanding and agreement and
supersedes any and all other understandings, negotiations or agreements among
any Stockholder, the Company and the Buyer
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relating to the sale and purchase of the Assets. Notwithstanding the foregoing,
the terms of the Confidentiality Agreement dated October 29, 1997 shall remain
in full force and effect and to the extent necessary shall be incorporated
herein by reference.
Section 13.9 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, and all of which together shall
constitute a single agreement.
Section 13.10 Severability. In the event that any one or more of the
provisions contained in this Agreement shall for any reason be held to be
invalid, illegal or unenforceable, the same shall not affect any other provision
of this Agreement, but this Agreement shall be construed in a manner which, as
nearly as possible, reflects the original intent of the parties.
Section 13.11 No Prejudice. This Agreement has been jointly prepared by the
parties hereto and the terms hereof shall not be construed in favor of or
against any party on account of its participation in such preparation.
Section 13.12 Parties in Interest. Nothing expressed or implied in this
Agreement is intended or shall be construed to confer upon or give to any Person
other than the parties hereto any rights or remedies under or by reason of this
Agreement or any transaction contemplated hereby.
Section 13.13 Amendment and Modification. This Agreement may be amended or
modified only by written agreement executed by all parties hereto.
Section 13.14 Waiver. At any time prior to the Closing, the Buyer on the
one hand, or the Company or the Stockholders, on the other hand, may (a) extend
the time for the performance of any of the obligations or other acts of the
other, (b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, and (c) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed by the party granting
such waiver but such waiver or failure to insist upon strict compliance with
such obligation, covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or future failure.
Section 13.15 Further Assurances. Subject to the terms and conditions
hereof, the Stockholders agree that after the Closing Date they will execute and
deliver such documents to the Buyer as the Buyer may reasonably request in order
to more effectively vest in the Buyer good title to the Assets and to consummate
the transactions contemplated hereby.
Section 13.16 Repurchase of Assets. The term "Financing Default" shall mean
the inability at any time during the thirty (30) month period commencing on the
Closing Date of the Buyer to provide sufficient financing to finance the sales
of the Buyer's subsidiary or division which is operating the business of the
Company in an amount equal to the amount of sales of such subsidiary or division
in the immediately preceding season plus ten (10%) percent growth in sales. Upon
the occurrence of a Financing Default the Stockholders shall have the option
(the "Option") to jointly repurchase the assets of the Business as they then
exist for an amount equal
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to the Purchase Price payable in shares of the Buyer Common Stock valued as set
forth in Section 10.01(e) hereof, plus the assumption of the liabilities of the
business incurred in the ordinary course of business. The Option may be
exercised within ninety (90) days of the occurrence of the Financing Default.
The closing of the repurchase of the assets shall occur within thirty (30) days
of the exercise of the Option (the "Repurchase Date"). At the Closing the Seller
shall transfer the assets to the Stockholders or their designee free and clear
of all liens, claims and encumbrances except for the assumed liabilities.
Section 13.17 Bobby Blu. During the five year period commencing on the
Closing Date the Company shall pay to Zvi Ben-Haim ("Ben-Haim") an amount per
annum equal to ten (10%) percent of the net operating income ("NOI") of the
Company's Bobby Blue subsidiary or division. After said five year period, the
Company shall pay to Ben-Haim an amount per annum equal to twenty-five (25%)
percent of the NOI of the Company's Bobby Blue subsidiary or division.
NOI shall be calculated in accordance with generally accepted accounting
principles, and shall be calculated after a return of all invested capital in
the Bobby Blue subsidiary or division, and a return on such invested capital in
accordance with the terms of the invested capital; provided that the return on
any invested capital by the Buyer and its affiliates will be on commercially
reasonable terms, as all such amounts are set forth in the internal unaudited
financial statements of the Company. The annual payment shall be paid within ten
days of the completion of the Company's annual Financial Statements, but in no
event later than April 30, of the year succeeding the calendar year for which
the annual payment is earned (the "Payment Date"). Together with the payment, or
if no payment is due, on the Payment Date, the Company shall deliver to Ben-Haim
a detailed statement calculating the NOI for the prior calendar year and the
calculation of the payment, if any. Within thirty (30) days after the delivery
of the statement of NOI and Bonus calculation, Ben-Haim may notify the Company
of any objections or changes thereto, specifying in reasonable detail any such
objections or changes. If Ben-Haim does not notify the Company of any objections
or changes thereto or if within twenty (20) days of the delivery of an objection
notice Ben-Haim and the Company agree on the resolution of all objections or
changes, then such statements delivered by the Company, with such changes as are
agreed upon, shall be final and binding. If the parties shall fail to reach an
agreement with respect to all objections or changes within such twenty (20) day
period, then all disputed objections or changes shall, not later than ten (10)
days after the expiration of such twenty (20) day period, be submitted for
resolution to an impartial certified public accounting firm of national standing
which is reasonably acceptable to the parties (the "Independent Auditor"). All
of the parties shall use reasonable efforts to cause such Independent Auditor,
within twenty (20) days of its appointment, to use its best judgment in
resolving the disputes submitted to it. The statements delivered by the Company,
as adjusted by the parties or the Independent Auditor, shall be final and
binding. The fees and costs of such Independent Auditor shall be paid by
Ben-Haim if the adjustment to the amount of the payment by the Independent
Auditor is less than two (2%) percent and by the Company if the adjustment to
the amount of the payment by the Independent Auditor is greater than two (2%)
percent. The Company agrees to permit Ben-Haim and his legal counsel and
accounting firm and the Independent Auditor, if any, to have reasonable access
upon prior notice during normal business hours to its books and records
(including, without limitation, the work papers of its accountants) of the Bobby
Blu division or
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subsidiary and its representatives and accountants, in each case in connection
with Ben-Haim's review of the statement calculating the payment and NOI.
Section 13.18 Right to Counsel.The Buyer acknowledges that it had the
opportunity to seek independent legal counsel regarding this transaction, and
has been afforded the time and opportunity necessary to seek independent legal
counsel.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
SIGNAL APPAREL COMPANY, INC.
By: /s/ Thomas A. McFall
-------------------------------
Name: Thomas A. McFall
Title: Chief Executive Officer
TAHITI APPAREL, INC.
By: /s/ Zvi Ben-Haim
-------------------------------
Name: Zvi Ben-Haim
Title: CEO
/s/ Zvi Ben-Haim
----------------------------------------
Zvi Ben-Haim
/s/ Michael Harary
----------------------------------------
Michael Harary
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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.
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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.
Plan Administrator The Board or, to the extent that the
Board elects to delegate such
administrative functions to the
Committee, the Committee.
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).
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SECTION 3. ADMINISTRATION
The Plan will be administered by the Plan Administrator. The Plan
Administrator 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 Plan
Administrator's decisions shall be final and binding. No member of the Board or
the Committee shall be liable for any action or determination relating to the
Plan made in good faith in the capacity of such body as Plan Administrator. All
decisions of the Plan Administrator 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 Plan Administrator, 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 Plan Administrator,
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 Plan Administrator 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 Plan Administrator may grant Awards under the Plan in substitution
for stock and stock based awards held by employees of another corporation who
concurrently become
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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 Plan
Administrator considers appropriate in the circumstances.
SECTION 6. STOCK OPTIONS
(a) General.
(i) Subject to the provisions of the Plan, the Plan Administrator 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 Plan Administrator 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 Plan Administrator may specify in the applicable
Award or thereafter. The Plan Administrator 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 Plan Administrator 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 Plan Administrator, (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 Plan Administrator 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 Plan Administrator 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.
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(vii) The Plan Administrator may at any time accelerate the time at which
all or any part of an Option may be exercised.
(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;
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(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
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 Plan Administrator 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 Plan Administrator),
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 Plan Administrator also may grant Stock
Appreciation Rights that provide that, following a change in control of the
Company (as defined by the Board or the Plan Administrator 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
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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:
(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 Plan
Administrator may specify.
(e) The Plan Administrator 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 Plan Administrator may make Performance Share Awards entitling
recipients to acquire shares of Stock upon the attainment of specified
performance goals. The Plan Administrator may make Performance Share Awards
independent of or in connection with the granting of any other Award under the
Plan. The Plan Administrator 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 Plan
Administrator 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.
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<PAGE>
(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 a Performance
Share Award only upon satisfaction of all conditions specified in the agreement
evidencing the Performance Share Award.
(d) The Plan Administrator 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 Plan Administrator in the applicable Award are not satisfied
prior to the end of the applicable Restricted Period or Restricted Periods
established by the Plan Administrator 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 Plan Administrator,
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 Plan Administrator 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 Plan Administrator 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 Plan Administrator may at any time accelerate the expiration of the
Restricted Period applicable to all, or any particular, outstanding shares of
Restricted Stock.
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<PAGE>
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.
(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 Plan Administrator 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) Plan Administrator's 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 Plan Administrator 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 Plan Administrator at the time of award
or at any time thereafter.
(d) Termination of Status.
Subject to the provisions of Section 6(b)(iv), the Plan Administrator 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
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<PAGE>
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 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 Plan Administrator 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 Plan Administrator's discretion, and subject to such
conditions as the Plan Administrator 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) Deferral of Compensation.
The Plan Administrator shall determine whether an Award shall be made in
conjunction with deferral of the Participant's salary, bonus or other
compensation, or any combination thereof, and whether such deferred amounts may
be:
(i) forfeited to the Company or to other Participants, or any
combination thereof, under certain circumstances (which may
include, but need not be limited to, certain types of termination
of employment or performance of services for the Company and its
Affiliates);
(ii) subject to increase or decrease in value based upon the
attainment of or failure to attain, respectively, certain
performance measures; and/or
(iii) credited with income equivalents (which may include, but need
not be limited to, interest, dividends or other rates of return)
until the date or dates of payment of the Award, if any.
(h) 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 Plan Administrator considers necessary or advisable
to achieve the purposes of the Plan or comply with applicable laws.
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<PAGE>
(i) Amendment of Award.
Either the Board or the Plan Administrator 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.
(j) Cancellation and New Grant of Options.
Both the Board and the Plan Administrator 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.
(k) 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 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.
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<PAGE>
(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 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.
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<PAGE>
(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 27, 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 27, 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 nominees listed below
to the contrary 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 January 5, 1999, and the Proxy Statement furnished
therewith.
Dated this ____ day of ________, 1999.
___________________________ (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
January 5, 1999
