<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
[_]Filing by the Registrant
[_]Filing by a party other than the Registrant
[_]Preliminary Proxy Statement
[X]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HAPPY KIDS INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_]No fee required.
[X]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock (par value $0.01 per share) of HAPPY KIDS INC.
(2) Aggregate number of securities to which transaction applies:
9,614,012 (a) shares of Common Stock of HAPPY KIDS INC.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$12.00/$7.164/$2.00(b)
(4) Proposed maximum aggregate value of transaction:
$80,984,990(b)
(5) Total fee paid:
$16,197(b)
(a) This represents 9,500,345 shares of common stock, par value $0.01
per share, of HAPPY KIDS Inc. (the "HK Common Stock") (other than
875,348 shares to be retained by certain shareholders of Happy Kids
(including certain officers and directors of Happy Kids)), and
options to purchase 113,667 shares of HK Common Stock, all of which
are estimated to be outstanding as of September 17, 1999.
(b) Pursuant to Rule 0-11, the filing fee was computed as set forth in
the following table:
<TABLE>
<CAPTION>
Consideration Aggregate
Number Per Unit Consideration
--------- ------------- -------------
<S> <C> <C> <C>
HK Common Stock (held by public)........ 2,625,693 $12.00 $31,508,316
HK Common Stock (held by Management
Group)................................. 6,874,652 $7.164 $49,250,007
Options to purchase HK Common Stock
entitled to cash consideration......... 113,333 $ 2.00 $ 226,667
</TABLE>
- -------
* Based on the exercise price of such options.
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
[LOGO OF HAPPY KIDS INC.]
November 22, 1999
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Happy Kids Inc. ("Happy Kids" or the "Company") to be held at 10:00 a.m. on
December 13, 1999 at the Holiday Inn, located at 49 West 32nd Street, New
York, New York 10001 (the "Special Meeting").
At this meeting, you will be asked to consider and vote upon a proposal to
approve and adopt the Agreement and Plan of Merger, dated as of September 17,
1999 (as amended, the "Merger Agreement"), by and between Happy Kids and HK
Merger Corp. ("Merger Sub"). Merger Sub is a New York corporation newly-formed
by H.I.G. Capital, LLC ("HIG") and controlled by HIG-HK Investment, Inc.
("HIG-HK"), an affiliate of HIG. Merger Sub was formed solely for the purpose
of consummating the Merger. As of the date hereof, Merger Sub has not owned
any assets and Merger Sub will have no assets as of the Effective Time (as
defined below). Merger Sub's ability to consummate the Merger is dependent
upon, and its obligation to do so is conditioned upon, Merger Sub having
received the proceeds of certain financing arranged by HIG.
Upon the terms and subject to the conditions of the Merger Agreement, at
the effective time of the transactions contemplated thereby (the "Effective
Time"), Merger Sub will be merged into Happy Kids (the "Merger"), with Happy
Kids continuing as the surviving corporation (the "Surviving Corporation"). In
connection therewith, each share of common stock of Happy Kids outstanding
immediately prior to the Effective Time (except for the Rollover Shares
(defined below), the Management Shares (as defined below) and treasury shares
held by Happy Kids) will be converted into the right to receive $12.00 per
share in cash (the "Cash Merger Price"). Certain shareholders of Happy Kids
(namely, Jack M. Benun, Mark J. Benun and Isaac Levy) will retain an aggregate
of 875,348 shares of common stock of Happy Kids (the "Rollover Shares"), which
represent approximately 8.44% of the outstanding shares of common stock of
Happy Kids and which will represent approximately 23.61% of the outstanding
shares of common stock of the Surviving Corporation immediately after the
Effective Time. Other than the Rollover Shares, each share of common stock of
Happy Kids outstanding prior to the Effective Time that is owned by any of
Jack M. Benun, Mark J. Benun and Isaac Levy (collectively, the "Management
Shares" and such persons, the "Management Group") will be converted into the
right to receive $7.164 per share in cash (the "Management Cash Price").
Certain employees and directors of the Company, including members of the
Management Group will receive additional compensation in connection with the
Merger including cash payments as compensation for the cancellation of
employee or director stock options (the "Options") granted under the Company's
1997 Stock Plan (the "Stock Option Plan"), (other than certain non-vested
employee Options) and members of the Management Group will also receive new
employment agreements (the "Employment Agreements"), effective upon
consummation of the Merger. The specific terms of the Employment Agreements
are set forth in the enclosed Proxy Statement under "Summary--Interests of
Certain Persons in the Merger"; "--Certain Related Agreements"; "Special
Factors--Interests of Certain Persons in the Merger" and "Certain Effects of
the Merger--Certain Related Agreements".
Persons purporting to be public shareholders of the Company brought
actions, denominated as class actions on behalf of public shareholders of the
Company, challenging the transaction originally proposed by HIG and described
in the Company's press release of July 12, 1999 pursuant to which public
shareholders of the Company were offered $11.50 per share (as opposed to the
$12.00 now offered) before the transaction was considered by a special
committee of independent directors (the "Special Committee"). The defendants
in these actions, including the Company, HIG, Messrs. Jack and Mark Benun,
Isaac Levy, Andrew Glasgow, another director of the Company, and the Special
Committee, have agreed to the consolidation of these actions and to accept
service of any consolidated amended complaint that the plaintiffs may choose
to file on the basis of the transaction recommended by the Special Committee
and described below. The defendants believe that they would have meritorious
defenses to any such claims and intended to defend against them vigorously.
100 West 33rd Street . Suite 1100 . New York, NY 10001 . Tel: 212-695-1151 .
Fax: 212-736-0397
<PAGE>
The terms of the Merger Agreement are described in the accompanying Proxy
Statement and a conformed copy of the Merger Agreement is included as Annex A
with the Proxy Statement.
Since the Company's common stock is designated as a national market system
security on the Nasdaq National Market, pursuant to Section 910 of the New
York Business Corporation Law, dissenter's rights will not be available to
shareholders of the Company. Accordingly, although a shareholder who objects
to the Merger may vote against its adoption, since the members of the
Management Group have indicated that they will vote in favor of the Merger,
the approval by shareholders is assured and an objecting shareholder's only
available alternative may be limited to selling the shareholder's common stock
before the Merger takes place.
The affirmative vote of two-thirds of the issued and outstanding shares of
common stock of Happy Kids entitled to vote at the special meeting is required
to approve and adopt the Merger Agreement. Jack M. Benun, Mark J. Benun and
Isaac Levy, as shareholders of Happy Kids, have entered into a Support
Agreement, dated as of September 17, 1999 (the "Support Agreement"), with
Merger Sub pursuant to which they appointed certain persons designated by
Merger Sub as proxy to vote each of their respective shares of common stock of
Happy Kids in favor of the Merger Agreement at the Special Meeting. As of
September 17, 1999, the shares of common stock of Happy Kids held by members
of the Management Group represented approximately 74.69% of the outstanding
shares of common stock of Happy Kids. Accordingly the Merger Agreement is
expected to be approved at the special meeting regardless of how the other
shareholders vote.
Consummation of the Merger is subject to certain conditions, including the
completion of financing to provide an aggregate of approximately $100.8
million which will be used to fund the Cash Merger Price, the Management Cash
Price, the payment of the value of the Options, the refinancing of certain
indebtedness of the Company, (the "Refinancing") the repayment of the
Company's 5.7% promissory notes in the aggregate principal amount of $5.57
million, which notes are held by members of the Management Group, the payment
of transaction fees and expenses related to the Merger and the Refinancing and
to provide working capital to the Company and its subsidiaries. The financing
transactions will include (a) bank financing, (b) equity financing and (c) the
possible issuance of senior subordinated notes by the Company.
The Board of Directors of the Company, upon recommendation of the Special
Committee, has unanimously approved the Merger Agreement and has determined
that the Merger is fair to, and in the best interests of, the holders of the
Company's common stock (other than the holders of Management Shares and
Rollover Shares, as to which it expresses no opinion) and recommends that
shareholders vote FOR the approval and adoption of the Merger Agreement.
The approval and determination of the Board was based on a number of
factors, described in the accompanying Proxy Statement, which should be read
carefully. The Special Committee has received a written opinion dated
September 15, 1999 of CIBC World Markets Corp. ("CIBC"), the Special
Committee's financial advisor, as to the fairness, from a financial point of
view and as of the date of the opinion, of the $12.00 per share cash
consideration to be received in the Merger by the holders of Happy Kids's
common stock (other than the holders of Management Shares and Rollover Shares,
as to which CIBC was not requested to express an opinion). CIBC's opinion is
included as Annex B to the Proxy Statement and should be read carefully in its
entirety for a description of the procedures followed, assumptions made,
matters considered and limitations on the review undertaken.
Your vote is important. Regardless of whether you plan to attend the
Special Meeting, please sign and date the enclosed proxy and return it in the
envelope provided in order that your shares may be represented at the Special
Meeting. If you decide to attend the Special Meeting, you may revoke your
proxy and vote your shares in person.
Sincerely,
/s/ Jack M. Benun
Jack M. Benun
Chairman of the Board
<PAGE>
HAPPY KIDS INC.
100 West 33rd Street
Suite 1100
New York, New York 10001
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On December 13, 1999
To the Shareholders of Happy Kids Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Happy Kids
Inc. ("Happy Kids") will be held at 10:00 a.m., local time, on December 13,
1999, at the Holiday Inn, located at 49 West 32nd Street, New York, New York
10001, for the following purposes:
(1) To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of September 17, 1999 (as amended, the
"Merger Agreement"), by and between Happy Kids and HK Merger Corp.
("Merger Sub"), a New York corporation newly formed by H.I.G. Capital,
LLC ("HIG") and controlled by HIG-HK Investment, Inc. ("HIG-HK"), an
affiliate of HIG, and the transactions contemplated thereby. Merger Sub
was formed solely for the purpose of consummating the Merger (as
defined below). As of the date hereof, Merger Sub has not owned any
assets and Merger Sub will have no assets as of the Effective Time (as
defined below). Merger Sub's ability to consummate the Merger is
dependent upon, and its obligation to do so is conditioned upon, Merger
Sub having received the proceeds of certain financing arranged by HIG.
Upon the terms and subject to the conditions of the Merger Agreement at
the effective time of the transaction contemplated (the "Effective
Time"), (a) Merger Sub will be merged into Happy Kids (the "Merger"),
with Happy Kids continuing as the surviving corporation (the "Surviving
Corporation"); (b) the current directors of Happy Kids will be replaced
by the directors of Merger Sub (and a majority of the directors of the
Surviving Corporation will be designees of HIG-HK); (c) the shares of
common stock of Merger Sub held by HIG-HK will be converted into shares
of common stock of the Surviving Corporation, representing
approximately 76.39% of the outstanding shares of common stock of the
Surviving Corporation immediately following the Effective Time; (d)
certain shareholders of Happy Kids (including certain officers and
directors of the Company) will retain existing shares of common stock
in Happy Kids (the "Rollover Shares"), which now represent
approximately 8.44% of the outstanding shares of common stock of Happy
Kids and will represent approximately 23.61% of the outstanding shares
of common stock of the Surviving Corporation immediately after the
Effective Time; (e) each share of common stock of Happy Kids
outstanding immediately prior to the Effective Time (except for the
Rollover Shares, Management Shares (defined below) and treasury shares
held by Happy Kids) will be converted into the right to receive $12.00
per share in cash (the "Cash Merger Price"); (f) each share of common
stock of Happy Kids held by Jack M. Benun, Mark J. Benun and Isaac Levy
(other than the Rollover Shares) (collectively, the "Management Shares"
and such persons, the "Management Group"), will be converted into the
right to receive approximately $7.164 per share in cash (the
"Management Cash Price"); (g) each outstanding employee or director
stock option (the "Options") granted under the Company's 1997 Stock
Plan (the "Stock Option Plan") other than certain non-vested employee
options will be canceled and the former holder thereof shall thereafter
have the right to receive cash in an amount equal to the product of the
number of shares of common stock of Happy Kids previously subject to
such Option and the excess of the Cash Merger Price per share over the
exercise price per share of such Option, less applicable withholding
taxes; and (h) each member of the Management Group has entered into a
new employment agreement (each, an "Employment Agreement") effective
upon consummation of the Merger. Pursuant to their respective
<PAGE>
Employment Agreements, Jack M. Benun, Mark J. Benun and Isaac Levy will
serve as the Company's President and Chief Executive Officer, Executive
Vice President and Secretary, and Senior Vice President, respectively.
Each Employment Agreement (i) is for a term of three years, and (ii)
provides for certain payments to each of them upon his termination
without "cause" (as defined in each Employment Agreement), or his
resignation for "good reason" (as defined in each Employment Agreement).
In addition, the Employment Agreements provide for the payment of
annual bonuses to the members of the Management Group in an aggregate
amount of up to approximately $9.5 million, based upon the Company's
achievement of certain financial targets for fiscal years 1999, 2000 and
2001 and stock option grants in fiscal year 2001 representing, in the
aggregate, up to 3% of the shares of common stock of the Surviving
Corporation, outstanding immediately following the Effective Time,
contingent upon the Company's achievement of certain financial targets
in fiscal year 2001.
(2) To transact such other business as may properly come before the meeting
or any continuation, adjournment or postponement thereof.
In addition to the Management Shares held by each of them, Jack M. Benun,
Mark J. Benun and Isaac Levy own, respectively, 372,023, 372,023 and 131,302
Rollover Shares, which now represent approximately 3.59%, 3.59% and 1.27%,
respectively, of the outstanding shares of common stock of Happy Kids and
which will represent approximately 10.03%, 10.03% and 3.54%, respectively, of
the common stock of the Surviving Corporation immediately following the
Effective Time.
Persons purporting to be public shareholders of the Company brought
actions, denominated as class actions on behalf of public shareholders of the
Company, challenging the transaction originally proposed by HIG and described
in the Company's press release of July 12, 1999 pursuant to which public
shareholders of the Company were offered $11.50 per share (as opposed to the
$12.00 now offered) before the transaction was considered by a special
committee of independent directors (the "Special Committee"). The defendants
in these actions, including the Company, HIG, Messrs. Jack and Mark Benun,
Issac Levy, Andrew Glasgow, another director of the Company, and the Special
Committee, have agreed to the consolidation of these actions and to accept
service of any consolidated amended complaint that the plaintiffs may choose
to file on the basis of the transaction recommended by the Special Committee
and described below. The defendants believe that they would have meritorious
defenses to any such claims and intended to defend against them vigorously.
The Cash Merger Price and the Management Cash Price will be paid and the
Rollover Shares will be issued after the Effective Time, promptly, and in any
case no later than three business days following receipt by an exchange agent
("Exchange Agent") selected by Merger Sub of certificates which, immediately
prior to the Effective Time represented, the shares of Happy Kids common stock
exchangeable therefor.
A copy of the Merger Agreement appears as Annex A to, and is described in,
the accompanying Proxy Statement.
Since the Company's common stock is designated as a national market system
security on the Nasdaq National Market, pursuant to Section 910 of the New
York Business Corporation Law, dissenter's rights will not be available to
shareholders of the Company. Accordingly, although a shareholder who objects
to the Merger may vote against its adoption, since the members of the
Management Group have indicated that they will vote in favor of the Merger,
the approval by shareholders is assured and an objecting shareholder's only
available alternative may be limited to selling the shareholder's common stock
before the Merger takes place.
<PAGE>
All shareholders are cordially invited to attend the meeting, although only
those shareholders of record at the close of business on November 9, 1999, are
entitled to notice of and to vote at the meeting or any adjournment or
postponement thereof.
By Order of the Board of Directors
/s/ Mark J. Benun
Mark J. Benun, Secretary
Dated: November 22, 1999
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING
IN PERSON, PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT
PROMPTLY IN THE ACCOMPANYING ENVELOPE. YOUR PROXY MAY BE REVOKED AT ANY TIME
BEFORE IT IS VOTED AT THE SPECIAL MEETING BY DELIVERING WRITTEN NOTICE OF
REVOCATION TO THE SECRETARY OF THE COMPANY, BY SUBMITTING TO THE SECRETARY OF
THE COMPANY A LATER DATED PROXY OR BY VOTING IN PERSON AT THE SPECIAL MEETING.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS.................................. 1
SUMMARY.................................................................... 4
THE PARTIES TO THE MERGER................................................ 4
Happy Kids............................................................. 4
Merger Sub and HIG-HK.................................................. 4
THE SPECIAL MEETING...................................................... 4
REASONS FOR THE MERGER................................................... 5
TERMS OF THE MERGER...................................................... 5
General................................................................ 5
Cash Merger Price and Management Cash Price............................ 5
Payment of Cash Merger Price and Management Cash Price................. 5
Rollover Shares........................................................ 6
Excluded Shares........................................................ 6
Issuance of Surviving Corporation Common Stock to HIG-HK............... 6
Payment for Options.................................................... 6
EFFECTIVE TIME........................................................... 6
FINANCING ARRANGEMENTS................................................... 6
Revolving Credit Facility.............................................. 7
Senior Secured Term Loan............................................... 7
Senior Subordinated Loan............................................... 7
Equity Investment...................................................... 7
INTERESTS OF CERTAIN PERSONS IN THE MERGER............................... 7
RECOMMENDATION OF THE BOARD.............................................. 8
OPINION OF THE SPECIAL COMMITTEE'S FINANCIAL ADVISOR..................... 8
CONDITIONS TO CONSUMMATION OF THE MERGER................................. 8
CERTAIN RELATED AGREEMENTS............................................... 9
CERTAIN EFFECTS OF THE MERGER............................................ 9
ACCOUNTING TREATMENT OF TRANSACTION...................................... 10
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER.................... 10
TERMINATION; FEES AND EXPENSES........................................... 10
DISSENTER'S RIGHTS....................................................... 10
MARKET PRICES; DIVIDENDS................................................. 11
SELECTED HISTORICAL FINANCIAL INFORMATION................................ 12
THE SPECIAL MEETING........................................................ 18
GENERAL.................................................................. 18
RECORD DATE, SOLICITATION, AND REVOCABILITY OF PROXIES................... 18
QUORUM; REQUIRED VOTE.................................................... 19
SPECIAL FACTORS............................................................ 20
BACKGROUND OF THE TRANSACTION............................................ 20
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS......... 24
PURPOSES AND REASONS OF HIG-HK AND MERGER SUB FOR THE MERGER............. 26
PURPOSES AND REASONS OF THE MANAGEMENT GROUP IN AGREEING TO THE MERGER... 26
POSITION OF HIG-HK AND MERGER SUB AS TO FAIRNESS OF THE MERGER........... 26
POSITION OF THE MANAGEMENT GROUP AS TO FAIRNESS OF THE MERGER............ 27
OPINION OF THE SPECIAL COMMITTEE'S FINANCIAL ADVISOR..................... 28
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
CERTAIN PROJECTIONS...................................................... 32
INTERESTS OF CERTAIN PERSONS IN THE MERGER............................... 33
Officers of the Surviving Corporation.................................. 33
Benefits Under Employment Agreements................................... 33
Retention of Rollover Shares........................................... 33
Options................................................................ 33
Present Interests in Happy Kids Common Stock........................... 34
Indemnification of Officers and Directors.............................. 34
Support Agreement...................................................... 34
LITIGATION................................................................. 36
CERTAIN EFFECTS OF THE MERGER.............................................. 37
ACCOUNTING TREATMENT OF TRANSACTION...................................... 37
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER.................... 37
The Merger............................................................. 38
Backup Withholding..................................................... 38
DISSENTER'S RIGHTS....................................................... 38
CERTAIN RELATED AGREEMENTS............................................... 38
CERTAIN PROVISIONS OF THE MERGER AGREEMENT................................. 41
GENERAL.................................................................. 41
TREATMENT OF SECURITIES IN THE MERGER.................................... 41
Cash Merger Price and Management Cash Price............................ 41
Payment of Cash Merger Price and Management Cash Price................. 41
Rollover Shares........................................................ 42
Excluded Shares........................................................ 42
Issuance of Surviving Corporation Common Stock to HIG-HK............... 42
Payment for Options.................................................... 42
BOARD OF DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION............. 42
CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE SURVIVING CORPORATION.... 42
PAYMENT FOR SHARES....................................................... 42
REPRESENTATIONS AND WARRANTIES........................................... 44
Representations and Warranties of the Company.......................... 44
Representations and Warranties of Merger Sub........................... 44
COVENANTS................................................................ 44
Interim Operations..................................................... 44
Investigation by Merger Sub............................................ 45
Additional Covenants................................................... 45
NO SOLICITATION.......................................................... 46
CONDITIONS TO THE CONSUMMATION OF THE MERGER............................. 47
Conditions to Each Party's Obligations to Effect the Merger............ 47
Conditions to the Obligations of Merger Sub to Effect the Merger....... 47
Conditions to the Obligations of the Company to Effect the Merger...... 48
TERMINATION; EFFECTS OF TERMINATION...................................... 48
Termination by Mutual Written Consent.................................. 48
Termination by the Company............................................. 48
Termination by Merger Sub.............................................. 49
Termination by Either Merger Sub or the Company........................ 49
AMENDMENT................................................................ 49
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SELECTED CONSOLIDATED FINANCIAL DATA..................................... 50
MARKET PRICES AND DIVIDENDS.............................................. 55
FINANCING OF THE MERGER.................................................. 55
SOURCES AND USES OF FUNDS.............................................. 57
EXPENSES OF THE MERGER................................................. 57
THE COMPANY.............................................................. 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 62
MERGER SUB, HIG-HK AND THE MANAGEMENT GROUP.............................. 68
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 69
DIRECTORS AND EXECUTIVE OFFICERS OF THE SURVIVING CORPORATION............ 70
DESCRIPTION OF CAPITAL STOCK............................................. 72
AVAILABLE INFORMATION.................................................... 72
INDEPENDENT AUDITORS..................................................... 73
SHAREHOLDER PROPOSALS.................................................... 73
OTHER MATTERS............................................................ 73
INDEX TO FINANCIAL STATEMENTS............................................ F-1
ANNEX A--Merger Agreement
ANNEX B--Opinion of CIBC World Markets Corp.
ANNEX C--Schedule of Directors and Executive Officers of Merger Sub and
HIG-HK
</TABLE>
iii
<PAGE>
HAPPY KIDS INC.
100 West 33rd Street
New York, New York 10001
------------------
PROXY STATEMENT
------------------
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 13 , 1999
This proxy statement is being furnished to the shareholders of Happy Kids
Inc., a New York corporation ("Happy Kids" or the "Company"), in connection
with the solicitation of proxies by the Board of Directors of the Company for
use at a Special Meeting of Shareholders to be held on December 13, 1999, at
10:00 am local time, at the Holiday Inn, located at 49 West 32nd Street, New
York, New York 10001.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt the Agreement and Plan of Merger, dated as of
September 17, 1999 (as amended, the "Merger Agreement"), by and between Happy
Kids and HK Merger Corp. ("Merger Sub"). Merger Sub is a New York corporation
newly formed by H.I.G. Capital LLC ("HIG") and controlled by HIG-HK
Investment, Inc. ("HIG-HK"), an affiliate of HIG. Merger Sub was formed solely
for the purpose of consummating the Merger (as defined below). As of the date
hereof, Merger Sub has not owned any assets and Merger Sub will have no assets
as of the Effective Time (as defined below). Merger Sub's ability to
consummate the Merger is dependant upon, and its obligation to do so is
conditioned upon, Merger Sub having received the proceeds of certain financing
arranged by HIG. Upon the terms and subject to the conditions of the Merger
Agreement, at the Effective Time (a) Merger Sub will be merged into Happy Kids
(the "Merger"), with Happy Kids continuing as the surviving corporation (the
"Surviving Corporation"); (b) the current directors of Happy Kids will be
replaced by the directors of Merger Sub and a majority of the directors of the
Surviving Corporation will be designees of HIG-HK; (c) the shares of common
stock of Merger Sub held by HIG-HK will be converted into shares of common
stock, par value $0.01 per share, of the Surviving Corporation (the "Surviving
Corporation Common Stock"), representing approximately 76.39% of the
outstanding shares of the Surviving Corporation Common Stock immediately
following the Effective Time; (d) certain shareholders of Happy Kids
(including certain officers and directors of the Company) will retain an
aggregate of 875,348 outstanding shares (the "Rollover Shares") of common
stock, par value $0.01 per share, in Happy Kids (the "Happy Kids Common
Stock"), which now represent approximately 8.44% of the outstanding shares of
Happy Kids Common Stock and will represent approximately 23.61% of the
outstanding shares of the Surviving Corporation Common Stock immediately
following the Effective Time; (e) each share of Happy Kids Common Stock
outstanding immediately prior to the Effective Time (except for the Rollover
Shares, Management Shares (as defined below) and treasury shares held by Happy
Kids) will be converted into the right to receive $12.00 per share in cash
(the "Cash Merger Price"); (f) each share of Happy Kids Common Stock (other
than the Rollover Shares) held by Jack M. Benun, Mark J. Benun and Isaac Levy
(the "Management Group" and such shares the "Management Shares") will be
converted into the right to receive approximately $7.164 per share in cash
(the "Management Cash Price") and (g) each outstanding employee or director
stock option (the "Options") granted under the Company's 1997 Stock Plan (the
"Stock Option Plan") other than certain non-vested employee Options will be
canceled and the former holder thereof shall thereafter have the right to
receive cash in an amount equal to the product of the number of shares of
Happy Kids Common Stock previously subject to such option and the excess of
the Cash Merger Price per share over the exercise price per share of such
Option, reduced by applicable withholding taxes or other taxes required by law
to be withheld. Each member of the Management Group has entered into a new
employment agreement (collectively, the "Employment Agreements") effective
upon consummation of the Merger. Pursuant to their respective Employment
Agreements, Jack M. Benun, Mark J. Benun and Isaac Levy will serve as the
President and Chief Executive Officer, Executive Vice President and Secretary,
and Senior Vice President, respectively, of the Company. Each Employment
Agreement (i) is for a term of three years and (ii) provides for
<PAGE>
certain payments to the executive upon his termination without "cause" (as
defined in each Employment Agreement) or his resignation for "good reason" (as
defined in each Employment Agreement). In addition, the Employment Agreements
provide for the payment of annual bonuses to the members of the Management
Group in an aggregate amount of up to $9.5 million, based upon the Company's
achievement of certain financial targets for fiscal years 1999 and 2000 and
2001 and stock option grants in fiscal 2001 representing, in the aggregate, up
to 3% of the shares of common stock of the Surviving Corporation outstanding
immediately after the Effective Time contingent upon the Company's achievement
of certain financial targets in fiscal year 2001.
Persons purporting to be public shareholders of the Company brought
actions, denominated as class actions on behalf of public shareholders of the
Company, challenging the transaction originally proposed by HIG and described
in the Company's press release of July 12, 1999 pursuant to which public
shareholders of the Company were offered $11.50 per share (as opposed to the
$12.00 now offered) before the transaction was considered by a special
committee of independent directors (the "Special Committee"). The defendants
in these actions, including the Company, HIG, Messrs. Jack and Mark Benun,
Issac Levy, Andrew Glasgow, another director of the Company, and the Special
Committee, have agreed to the consolidation of these actions and to accept
service of any consolidated amended complaint that the plaintiffs may choose
to file on the basis of the transaction recommended by the Special Committee
and described below. The defendants believe that they would have meritorious
defenses to any such claims and intended to defend against them vigorously.
Any shares of Happy Kids Common Stock held in the Company's treasury (the
"Excluded Shares") will be canceled and retired. The effective time of the
Merger (the "Effective Time") will be the date and time of the filing of the
Certificate of Merger with the Secretary of State of New York in accordance
with the New York Business Corporation Law (the "BCL"), which is scheduled to
occur as soon as practicable after the satisfaction of certain closing
conditions. See "Special Factors--Interests of Certain Persons in the Merger"
and "Certain Provisions of the Merger Agreement--Treatment of Securities in
the Merger."
A copy of the Merger Agreement is included as Annex A hereto. The summaries
of the portions of the Merger Agreement set forth in this Proxy Statement do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the text of the Merger Agreement.
Since the Company's common stock is designated as a national market system
security on the Nasdaq National Market, pursuant to Section 910 of the BCL,
dissenter's rights will not be available to shareholders of the Company.
Accordingly, although a shareholder who objects to the Merger may vote against
its adoption, since the members of the Management Group have indicated that
they will vote in favor of the Merger, the approval by shareholders is assured
and an objecting shareholder's only available alternative may be limited to
selling the shareholder's common stock before the Merger takes place.
The affirmative vote of the holders of two-thirds of the issued and
outstanding shares of Happy Kids Common Stock entitled to vote thereon is
required to adopt the Merger Agreement. Only holders of record of shares of
Happy Kids Common Stock at the close of business on November 9, 1999 (the
"Record Date") are entitled to notice of and to vote at the Special Meeting
and any and all adjournments and postponements thereof. The Management Group,
as shareholders of Happy Kids, have entered into a Support Agreement, dated as
of September 17, 1999, with Merger Sub (the "Support Agreement"), pursuant to
which each such shareholder appointed certain persons designated by Merger Sub
as his proxy to, among other things, vote his shares of Happy Kids Common
Stock (including shares issuable upon exercise of Options prior to the
Effective Time) in favor of the Merger Agreement. In addition, pursuant to the
Support Agreement, each member of the Management Group has agreed, jointly and
severally, to pay Merger Sub $1.5 million (the "Management Termination Fee")
in the event that the Merger Agreement is terminated for any reason that
results in the payment of a termination fee by the Company to Merger Sub. If,
within twelve months following any termination for which a Management
Termination Fee has been paid by the Management Group, any member of the
Management Group sells all or any portion of the Happy Kids Common Stock held
by him to any person other than Merger Sub or an affiliate of Merger Sub, then
the Management Group shall be jointly and severally liable
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to Merger Sub for the payment of a fee equal to the product of (i) 90%
multiplied by (ii) the aggregate number of shares of Happy Kids Common Stock
sold by members of the Management Group in such transaction multiplied by
(iii) the excess of (a) the price per share to be received plus any other
consideration to be received by members of the Management Group over (b)
$7.164.
As of September 17, 1999, the shares of Happy Kids Common Stock held by
members of the Management Group represented approximately 74.69% of the
outstanding shares of Happy Kids Common Stock. Accordingly, the Merger
Agreement is expected to be approved at the Special Meeting regardless of how
the other shareholders vote. Jack M. Benun, Mark J. Benun and Isaac Levy own,
respectively, 372,023, 372,023 and 131,302 Rollover Shares, which represent
approximately 3.59%, 3.59% and 1.27% of the outstanding shares of Happy Kids
Common Stock and which will represent approximately 10.03%, 10.03% and 3.54%,
respectively, of the Surviving Corporation Common Stock immediately after the
Effective Time. See "Special Factors--Interests of Certain Persons in the
Merger."
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER. See "Special
Factors-- Interests of Certain Persons in the Merger," regarding potential
conflicts of interest for members of the Board of Directors.
This Proxy Statement is first being mailed to the Company's shareholders on
or about November 22 , 1999.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH
TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE DATE OF THIS PROXY STATEMENT IS NOVEMBER 22 , 1999.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT OR IN THE DOCUMENTS
INCORPORATED HEREIN BY REFERENCE IN CONNECTION WITH THE SOLICITATION MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, MERGER SUB OR HIG. THE
DELIVERY OF THIS PROXY STATEMENT SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR IN ANY DOCUMENT
INCORPORATED HEREIN BY REFERENCE IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF OR THE DATE OF SUCH DOCUMENT, AS THE CASE MAY BE, OR THAT THERE
HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF OR THE DATE OF SUCH DOCUMENT, AS THE CASE
MAY BE. THIS PROXY STATEMENT DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY
FROM ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH PROXY
SOLICITATION.
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SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement. This summary is not intended to be a complete
description of the matters covered in this Proxy Statement and is subject to
and qualified in its entirety by reference to the more detailed information
contained elsewhere or incorporated by reference in this Proxy Statement,
including the Annexes hereto. Shareholders are urged to read and consider
carefully this entire Proxy Statement, including the Annexes.
The Parties to the Merger
Happy Kids. Happy Kids' principal executive offices are located at 100 West
33rd Street, Suite 1100, New York, New York 10001 (Telephone: (212) 695-1151).
For additional information regarding Happy Kids and its business, see
"Selected Historical Consolidated Financial Information" and "Incorporation of
Certain Documents by Reference."
Merger Sub and HIG-HK. Merger Sub was recently incorporated under the laws
of the State of New York by HIG for the purpose of consummating the Merger. As
of the date hereof, Merger Sub has not owned any assets and Merger Sub will
have no assets as of the Effective Time. All of the issued and outstanding
common stock of Merger Sub is owned by HIG-HK, an affiliate of HIG. HIG is a
Delaware limited liability company principally engaged in the business of
investing in companies. The address of the principal executive offices of each
of Merger Sub and HIG is located at 1001 Brickell Bay Drive, 27th Floor,
Miami, Florida 33131. See "Merger Sub and HIG-HK."
The Special Meeting
The Special Meeting will be held at 10:00 a.m., local time, on December 13,
1999 at the Holiday Inn, located at 49 West 32nd Street, New York, New York
10001. At the Special Meeting, shareholders of Happy Kids (a) will be asked to
consider and vote upon a proposal to approve and adopt the Merger Agreement
and the transactions contemplated thereby and (b) will transact such other
business as may properly come before the Special Meeting. The Board of
Directors has fixed the Record Date as the date for the determination of
shareholders entitled to notice of and to vote at the Special Meeting and any
and all adjournments and postponements thereof. As of the Record Date, there
were 10,375,693 shares of Happy Kids Common Stock issued and outstanding and
entitled to vote at the Special Meeting.
Adoption of the Merger Agreement requires the affirmative vote of the
holders of two-thirds of the issued and outstanding shares of Happy Kids
Common Stock entitled to vote at the Special Meeting. As of the Record Date,
the directors and executive officers of Happy Kids were the beneficial owners
of 7,895,026 shares of Happy Kids Common Stock (including shares of Happy Kids
Common Stock issuable upon the exercise of Options prior to the Effective
Time) of which 7,845,693 shares were issued and outstanding, constituting
75.62% of the outstanding shares of Happy Kids Common Stock. The directors and
executive officers of Happy Kids have indicated that they intend to vote such
shares in favor of the approval and adoption of the Merger Agreement. The
collective vote of the shares of Happy Kids Common Stock held by the directors
and executive officers is sufficient to approve and adopt the Merger
Agreement. In addition, Jack M. Benun, Mark J. Benun and Isaac Levy have
entered into the Support Agreement pursuant to which they agreed with Merger
Sub to vote in favor of the Merger Agreement. Members of the Management Group
beneficially own an aggregate of 7,750,000 shares of Happy Kids Common Stock
(including shares of Happy Kids Common Stock issuable upon the exercise of
Options prior to the Effective Time) of which 7,750,000 shares, constituting
approximately 74.69% of the outstanding Happy Kids Common Stock, are
outstanding as of September 17, 1999. The total number of outstanding shares
of Happy Kids Common Stock that either are held by the directors and officers
of Happy Kids or are subject to the Support Agreement is 7,895,026, or
approximately 76.09% of the outstanding shares of Happy Kids Common Stock.
Pursuant to the Support Agreement, each member of the Management Group has
agreed, jointly and severally, to pay Merger Sub $1.5 million (the "Management
Termination Fee") in the event that the Merger Agreement is terminated for any
reason that results in the payment of a termination fee by the Company to
Merger Sub. If, within twelve months following any termination for which a
Management
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Termination Fee has been paid by the Management Group, any member of the
Management Group sells all or any portion of the Happy Kids Common Stock held
by him to any person other than Merger Sub or an affiliate of Merger Sub, then
the Management Group shall be jointly and severally liable to Merger Sub for
the payment of a fee equal to the product of (i) 90% multiplied by (ii) the
aggregate number of shares of Happy Kids Common Stock sold by members of the
Management Group in such transaction multiplied by (iii) the excess of (a) the
price per share to be received plus any other consideration to be received by
members of the Management Group over (b) $7.164. See "Special Factors--
Interests of Certain Persons in the Merger--Support Agreement, for a
discussion of potential conflicts of interest of members of the Board of
Directors."
Reasons for the Merger
The Board of Directors of Happy Kids upon recommendation of the Special
Committee, which was formed to consider and evaluate the proposed Merger, has
unanimously approved the Merger Agreement and has determined, in its opinion,
that the Merger Agreement is fair to and in the best interests of Happy Kids'
shareholders (other than the holders of Management Shares and Rollover Shares
as to which it expresses no opinion). This determination was based on, among
other things, the following material factors: a comparison of the risks and
benefits of the Merger against the risks and benefits of the Company
continuing as an independent entity; the Cash Merger Price of $12.00 per share
of the Happy Kids Common Stock (other than Rollover Shares, Management Shares
and Excluded Shares), which represents a premium over recent historical price
levels; the written opinion dated September 15, 1999 of CIBC to the Special
Committee as to the fairness, from a financial point of view and as of the
date of the opinion, of the Cash Merger Price to the holders of Happy Kids
Common Stock (other than the holders of Management Shares and Rollover Shares,
as to which CIBC was not requested to express an opinion); and the terms and
conditions of the Merger Agreement. See "Special Factors--Reasons for the
Merger; Recommendations of the Board of Directors and --Interest of Certain
Persons in the Merger."
Terms of the Merger
General. At the Effective Time, Merger Sub will be merged with and into the
Company, with the Company continuing as the Surviving Corporation. Also at the
Effective Time, the current directors of the Company will be replaced by the
directors of Merger Sub, and a majority of the directors of the Surviving
Corporation will be designees of HIG-HK. Jack M. Benun, Mark J. Benun, Isaac
Levy and Andrew Glasgow will each upon consummation of the Merger become a
director of the Surviving Corporation. All members of the Company's current
management will continue as such immediately after the Effective Time. See
"Certain Provisions of the Merger Agreement--Board of Directors and Officers
of the Surviving Corporation" and "Directors and Executive Officers of the
Surviving Corporation."
Cash Merger Price and Management Cash Price. At the Effective Time, each
share of Happy Kids Common Stock held by the Company's shareholders (other
than the Management Shares, Rollover Shares and Excluded Shares) will be
converted into the right to receive the Cash Merger Price and each Management
Share will be converted into the right to receive the Management Cash Price.
No interest will be paid or accrued on the Cash Merger Price or the Management
Cash Price.
Payment of Cash Merger Price and Management Cash Price. The Cash Merger
Price and the Management Cash Price will be paid after the Effective Time,
promptly, and in any case no later than three business days following receipt
by an exchange agent selected by Merger Sub (the "Exchange Agent") of
certificates which, immediately prior to the Effective Time represented, the
shares of Happy Kids Common Stock exchangeable therefor. At the Effective
Time, Merger Sub will deposit, or otherwise take all steps necessary to cause
to be deposited, in trust with the Exchange Agent for the benefit of the
holders of shares of Happy Kids Common Stock, the funds necessary to pay the
Cash Merger Price and the Management Cash Price for each share payable
pursuant to the terms of the Merger Agreement. Promptly, but in any event no
later than three business days following the Effective Time, the Surviving
Corporation shall cause the Exchange Agent to mail to each record holder of
Happy Kids Common Stock a letter of transmittal which shall specify that
delivery shall be effected, and risk of loss and title to the certificates
representing Happy Kids Common Stock shall pass, only upon proper delivery of
the certificates to the Exchange Agent and which shall provide instructions
for use in
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surrendering certificates to the Exchange Agent for exchange into the Cash
Merger Price and the Management Cash Price. Shareholders should not forward
stock certificates to the Exchange Agent until they have received transmittal
forms. Certificates should not be returned with the enclosed proxy cards.
Rollover Shares. At the Effective Time, the Rollover Shares will be
converted on a share-for-share basis into shares of Surviving Corporation
Common Stock. The Rollover Shares will represent approximately 23.61% of the
total outstanding shares of Surviving Corporation Common Stock. Jack M. Benun
(Chairman, Chief Executive Officer and President of Happy Kids), Mark J. Benun
(Director, Executive Vice President, Secretary of Happy Kids) and Isaac Levy
(Director and Senior Vice President of Happy Kids) own, respectively, 372,023,
372,023 and 131,302 Rollover Shares, which represent approximately 3.59%,
3.59% and 1.27%, respectively, of the outstanding shares of Happy Kids Common
Stock and which will represent approximately 10.03%, 10.03% and 3.54%,
respectively, of the total outstanding shares of Surviving Corporation Common
Stock immediately after the Effective Time. See "Special Factors--Interests of
Certain Persons in the Merger--Retention of Rollover Shares" and "Certain
Provisions of the Merger Agreement--Treatment of Securities in the Merger."
Excluded Shares. At the Effective Time, the Excluded Shares will be
canceled and retired without payment of any consideration therefor.
Issuance of Surviving Corporation Common Stock to HIG-HK. At the Effective
Time, the issued and outstanding shares of Merger Sub will be converted into
2,832,183 shares of Surviving Corporation Common Stock, representing
approximately 76.39% of the total outstanding shares of Surviving Corporation
Common Stock immediately following the Effective Time.
Payment for Options. Immediately prior to the Effective Time, each holder
of a then-outstanding Option under the Stock Option Plan, other than certain
non-vested employee Options, will be entitled to receive in settlement of such
Option a cash payment (the "Option Consideration") from the Company equal to
the product of (i) the excess of the Cash Merger Price over the exercise price
of each such Option and (ii) the number of shares of Happy Kids Common Stock
previously subject to the Option immediately prior to its cancellation (such
payment to be net of withholding taxes).
Effective Time
The Effective Time of the Merger will be the date and time of the filing of
the Certificate of Merger with the Secretary of State of New York in
accordance with the BCL, which is scheduled to occur as soon as practicable
after the satisfaction of certain closing conditions. Either Merger Sub or the
Company may terminate the Merger Agreement should the Merger not be
consummated by February 15, 2000, provided, that neither party may terminate
the Merger Agreement due to such failure if prior to such date that party had
materially breached the Merger Agreement. See "Certain Provisions of the
Merger Agreement--Conditions to the Consummation of the Merger" and "--
Termination; Effects of Termination."
Financing Arrangements
Financing of the Merger will require approximately $100.8 million to pay
the Cash Merger Price and the Management Cash Price, to pay the value of the
Options, to refinance certain existing indebtedness of Happy Kids and its
subsidiaries (the "Refinancing"), to repay the Company's 5.7% promissory notes
(the "Notes") in the aggregate principal amount of $5.57 million, which Notes
are held by members of the Management Group, and to pay the estimated fees and
expenses in connection with the Merger and such financing. These funds are
expected to be provided through (a) a $10 million senior subordinated loan
(which may, at the option of the lenders, take the form of senior subordinated
notes issued by the Company) (the "Senior Subordinated Loan"), (b) drawings of
up to $10.5 million under the Revolver (as defined below), (c) a senior
secured term loan facility of $60 million (the "Term Loan" and, together with
the Revolver, the "Senior Secured Facility") and (d) equity financing provided
by HIG-HK in the amount of approximately $20.3 million through the purchase of
the
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common stock of Merger Sub. HIG has obtained financing letters (each a
"Commitment Letter") from certain affiliates of Deutsche Bank, namely Bankers
Trust Company ("BT") and Bankers Trust Corporation ("BTC"), with respect to
the terms and conditions of the financing to be provided by each entity.
Merger Sub's obligation to consummate the Merger is conditioned upon Merger
Sub having received the proceeds of the financing described above on the terms
and conditions described in the Commitment Letters. Each Commitment Letter
expires in accordance with its terms if the Merger is not consummated on or
prior to December 15, 1999.
Revolving Credit Facility. Pursuant to a Commitment Letter obtained by HIG
from BT, BT has committed to provide and arrange, subject to the terms and
conditions provided therein, a senior secured revolving credit facility (the
"Revolver") of up to $50 million to be used by Happy Kids to effectuate the
Merger and for its working capital purposes and other corporate purposes.
Senior Secured Term Loan. Pursuant to the BT Commitment Letter, BT has
committed to arrange, subject to the terms and conditions provided therein, a
$60 million Term Loan to be used to finance the Merger and the Refinancing and
to pay the fees and expenses incurred in connection therewith.
Senior Subordinated Loan. Pursuant to the BTC Commitment Letter, BTC (or a
third party to whom BTC transfers or assigns its interest as permitted under
the BTC Commitment Letter) will provide to the Company the Senior Subordinated
Loan (which may at the option of BTC take the form of senior subordinated
notes issued by the Company) concurrently with the consummation of the Merger.
HIG has entered into exclusive negotiations with J.H. Whitney & Co.
("Whitney") to provide the financing contemplated by the BTC Commitment Letter
on terms that may be more favorable to the Surviving Corporation. BTC remains
obligated under the BTC Commitment Letter to provide the Senior Subordinated
Loan on the terms set forth therein in the event that no agreement is reached
with Whitney (or any other third party) to provide such financing. It is
expected that warrants to purchase Surviving Corporation Common Stock will be
issued to BTC or the third party providing the Senior Subordinated Loan.
Equity Investment. Pursuant to a commitment letter executed by HIG-HK in
favor of Merger Sub, and on which the Company is entitled to rely, HIG-HK will
make a cash contribution to Merger Sub at the Effective Time in an aggregate
amount of approximately $20.3 million, which Merger Sub will then contribute
by operation of law to Happy Kids immediately following the Merger.
The total equity investment in the Surviving Corporation after the
Effective Time will be approximately $26.575 million, consisting of (a)
approximately $20.3 million of Surviving Corporation Common Stock, in the form
of approximately $20.3 million contributed by HIG through Merger Sub and (b)
the approximately $6.275 million value of the Rollover Shares.
For a summary of certain terms of the Revolver, the Term Loan and the
Senior Subordinated Loan, and a discussion of the sources of funds for the
financing of the Merger, see "Financing of the Merger."
Interests of Certain Persons in the Merger
In considering the recommendation of the Company's Board of Directors that
shareholders vote in favor of the Merger Agreement, shareholders should be
aware that certain members of Happy Kids's management and Board of Directors
have interests in the Merger that are in addition to, and may be deemed to be
in conflict with, the interests of the shareholders of Happy Kids generally.
These interests include (a) benefits under certain employment agreements to be
executed by the Company, on the one hand, and by each member of the Management
Group on the other hand, (b) the retention by members of the Management Group
of the Rollover Shares; (c) the cash settlement of Options pursuant to the
terms of the Merger Agreement; (d) indemnification of officers and directors
(e) the repayment of the Notes which Notes are held by members of the
Management Group and (f) certain other matters. Each member of the Management
Group has entered into the Support Agreement, dated September 17, 1999, with
Merger Sub pursuant to which they have agreed to vote their shares of Happy
Kids Common Stock in favor of the Merger and have appointed certain persons
designated by Merger Sub as their proxies to vote their respective shares in
favor of the Merger at the Special Meeting. In addition, each member of the
Management Group, pursuant to the Support Agreement will be jointly and
severally liable to Merger Sub for a fee of $1.5 million if the Merger
Agreement is terminated for any reason that results in the payment of a
termination fee by the Company under the Merger Agreement. If within 12 months
of such
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termination, any member of the Management Group sells all or any portion of
the Happy Kids Common Stock held by him to any person other than Merger Sub or
an affiliate of Merger Sub, then the Management Group shall be jointly and
severally liable to Merger Sub for the payment of a fee equal to (i) 90%
multiplied by (ii) the aggregate number of shares of Happy Kids Common Stock
sold by members of the Management Group in such transaction, multiplied by
(iii) the excess of (a) the price per share to be received, plus any other
consideration to be received by members of the Management Group over (b)
$7.164.
Jack M. Benun, President, Chief Executive Officer, and Chairman of the
Company's Board, owns 372,023 Rollover Shares, which represent approximately
3.59% of the outstanding shares of Happy Kids Common Stock and which will
represent approximately 10.03% of the outstanding shares of Surviving
Corporation Common Stock immediately following the Effective Time. Mark J.
Benun, Executive Vice President, Secretary and Director of the Company, owns
372,023 Rollover Shares which represent approximately 3.59% of the outstanding
shares of Happy Kids Common Stock and which will represent approximately
10.03% of the outstanding shares of Surviving Corporation Common Stock
immediately following the Effective Time. Isaac Levy, Vice President and
Director of the Company, owns 131,302 Rollover Shares which represent
approximately 1.27% of the outstanding shares of Happy Kids Common Stock and
which will represent approximately 3.54% of the outstanding shares of
Surviving Corporation Common Stock immediately following the Effective Time.
Stephen I. Kahn and Marvin Azrak, each a non-employee director of the
Company and a member of the Special Committee, have received from the Company
a fee of $25,000 as compensation for their service as committee members. See
"Special Factors--Interests of Certain Persons in the Merger," for a
discussion of potential conflicts of interest of certain members of the Board
of Directors.
Recommendation of the Board
The Board of Directors of the Company unanimously approved the Merger
Agreement and the transactions contemplated thereby, including the Merger. The
Board has determined that the Merger Agreement is fair to, and in the best
interests of, the shareholders of the Company (other than holders of
Management Shares and Rollover Shares, as to which it expresses no opinion)
and recommends that the shareholders vote FOR the approval and adoption of the
Merger Agreement. For a discussion of the factors considered by the Board in
reaching its recommendation and determination, see "Special Factors--Reasons
for the Merger; Recommendation of the Board of Directors."
Persons purporting to be public shareholders of the Company brought
actions, denominated as class actions on behalf of public shareholders of the
Company, challenging the transaction originally proposed by HIG and described
in the Company's press release of July 12, 1999 pursuant to which public
shareholders of the Company were offered $11.50 per share (as opposed to the
$12.00 now offered) before the transaction was considered by the Special
Committee. The defendants in these actions, including the Company, HIG,
Messrs. Jack and Mark Benun, Isaac Levy, Andrew Glasgow, another director of
the Company, and the Special Committee, have agreed to the consolidation of
these actions and to accept service of any consolidated amended complaint that
the plaintiffs may choose to file on the basis of the transaction recommended
by the Special Committee and described below. The defendants believe that they
would have meritorious defenses to any such claims and intended to defend
against them vigorously.
Opinion of the Special Committee's Financial Advisor
In connection with the Merger, the Special Committee received a written
opinion from CIBC as to the fairness, from a financial point of view and as of
the date of the opinion, of the Cash Merger Price to the holders of Happy Kids
Common Stock (other than the holders of Management Shares and Rollover Shares,
as to which CIBC was not requested to express an opinion). CIBC's written
opinion dated September 15, 1999 is attached to this Proxy Statement as Annex
B. We encourage you to read this opinion carefully in its entirety for a
description of the procedures followed, assumptions made, matters considered
and limitations on the review undertaken by
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CIBC in providing its opinion. CIBC's opinion is addressed to the Special
Committee and does not constitute a recommendation to any shareholder with
respect to any matter relating to the proposed Merger. See "Special Factors--
Opinion of the Special Committee's Financial Advisor."
Conditions to Consummation of the Merger
Consummation of the Merger is subject to various conditions, including
among other matters: (a) approval of the Merger Agreement and the transactions
contemplated thereby by the holders of two-thirds of the issued and
outstanding shares of Happy Kids Common Stock entitled to vote thereon; (b)
the absence of any United States federal or state statute, rule or regulation
enacted or promulgated after the date of the Merger Agreement that would
materially impair the ability of Merger Sub to consummate the transaction; (c)
the representations and warranties of the Company and of Merger Sub being true
and correct as of the Closing Date (except where the failure to be true and
correct does not have a material adverse effect on the Company or Merger Sub,
as applicable); (d) performance by the Company and Merger Sub of all their
respective obligations under the Merger Agreement in all material respects;
(e) receipt of all consents and approvals necessary to permit consummation of
the Merger, (f) absence of any order, decree or ruling prohibiting the
consummation of the Merger, prohibiting or limiting the ownership or operation
by the Company or any of its subsidiaries of any material portion of its
assets or business or imposing limitations on the ability of Merger Sub to
acquire or hold, or exercise full rights in respect of, any shares of Happy
Kids Common Stock; (g) receipt of the funding contemplated by the Financing
Letters; (h) the occurrence of any event which has a material adverse effect
on the Company; (i) the cancellation of all Options (other than certain non-
vested employee Options and there shall not be any other plan, program or
arrangement which obligates the Company or the Surviving Corporation to issue
any equity securities or any securities with equity-like features) (j) payment
by the Surviving Corporation of the Notes, which Notes are held by members of
the Management Group; and (k) satisfaction of certain other customary
conditions. See "Certain Provisions of the Merger Agreement--Conditions to the
Consummation of the Merger."
Certain Related Agreements
For a summary of certain terms of agreements entered into in connection
with the Merger, including the Shareholders Agreement (as hereinafter defined)
and the Employment Agreements, see "Special Factors--Certain Related
Agreements" and "Interests of Certain Persons in the Merger" for a discussion
of potential conflicts of interest of certain members of the Board of
Directors.
Certain Effects of the Merger
If the Merger is consummated, the Company's shareholders (other than the
holders of the Management Shares, the Rollover Shares and the Excluded Shares)
will have the right to receive $12.00 in cash, without interest, for each
share of Happy Kids Common Stock held by such shareholders immediately prior
to the Effective Time. The members of the Management Group will have the right
to receive $7.164 in cash, without interest, for each Management Share held
immediately prior to the Effective Time. Such persons will have the right to
receive, on a share-for-share basis, shares of Surviving Corporation Common
Stock in exchange for the Rollover Shares. As a result of the Merger, the
Company's shareholders (other than the members of the Management Group) will
cease to have any ownership interest in Happy Kids and will cease to
participate in future earnings and growth, if any, of Happy Kids. Moreover, if
the Merger is consummated, public trading of the Happy Kids Common Stock will
cease, the Happy Kids Common Stock will cease to be quoted on the Nasdaq
National Market, the registration of the Happy Kids Common Stock under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") will be
terminated, and the Company will cease filing reports with the Securities and
Exchange Commission (the "Commission").
Immediately following the Merger, approximately 76.39% of the outstanding
shares of Surviving Corporation Common Stock will be owned by HIG-HK and the
remaining 23.61% will be owned by members of the Management Group. See
"Special Factors--Interests of Certain Persons in the Merger" and "Certain
Provisions of the Merger Agreement--Treatment of Securities in the Merger."
9
<PAGE>
The Merger Agreement provides that at the Effective Time the current
directors of the Company will be replaced by the directors of Merger Sub. A
majority of the directors of the Surviving Corporation will be designees of
HIG-HK. Jack M. Benun, Mark J. Benun, Isaac Levy and Andrew Glasgow will each,
upon consummation of the Merger, become a director of the Surviving
Corporation. All members of the Company's current management will continue as
such immediately after the Effective Time. See "Directors and Executive
Officers of the Surviving Corporation."
Upon consummation of the Merger, the Surviving Corporation expects to
refinance certain existing indebtedness of Happy Kids. See "Financing of the
Merger."
It is currently anticipated that the Surviving Corporation will be operated
after the Merger in a manner substantially the same as Happy Kids's current
operations.
Accounting Treatment of Transaction
The Company intends that the Merger be accounted for as a recapitalization.
If the Merger is accounted for as a recapitalization, the historical basis of
Happy Kids assets and liabilities will not be impacted by the Merger and the
transactions contemplated thereby. Pursuant to the terms of the Merger
Agreement, the consummation of the Merger is not conditioned upon the
transaction being accounted for as a recapitalization.
Certain Federal Income Tax Consequences of the Merger
The receipt of cash for Happy Kids Common Stock in the Merger will be a
taxable transaction for federal income tax purposes. See "Special Factors--
Certain Federal Income Tax Consequences of the Merger."
Termination; Fees and Expenses
The Merger Agreement may be terminated at any time prior to the Effective
Time upon the occurrence of certain events or if the Merger is not consummated
by February 15, 2000. In the event that the Merger Agreement is terminated due
to the material breach of the agreement by Merger Sub, which breach remains
uncured twenty days after written notice to Merger Sub, or if the Merger
Agreement is terminated due to the failure of the transactions contemplated
thereby to be consummated on or before February 15, 2000 and such termination
is based at least in part upon a material breach of the Merger Agreement by
Merger Sub, then the Company shall be entitled to reimbursement from the
Merger Sub of all reasonable out-of-pocket expenses and fees incurred by the
Company prior to the termination of the Merger Agreement in connection with
the transactions contemplated thereby. In the event that the Merger Agreement
is terminated (i) due to the material breach of the agreement by the Company,
(ii) due to the failure of the transactions contemplated by the Merger
Agreement to be consummated on or before February 15, 2000 based at least in
part upon a material breach of the Merger Agreement by the Company or (iii)
under certain circumstances generally related to the presence of a Formal
Acquisition Proposal (as defined in the Merger Agreement), or withdrawal by
the Board of Directors or modification in a manner adverse to Merger Sub of
its approval or recommendation of the Merger Agreement or the Merger, the
Company may be obligated to pay to Merger Sub a fee of $4.0 million, without
additional reimbursement for fees and expenses. See "Certain Provisions of the
Merger Agreement--Termination; Effects of Termination."
Dissenter's Rights
Since the Happy Kids Common Stock is designated as a national market system
security on the Nasdaq National Market, pursuant to Section 910 of the BCL,
dissenter's rights will not be available to shareholders of the Company.
Accordingly, although a shareholder who objects to the Merger may vote against
its adoption, since the members of the Management Group have indicated that
they will vote in favor of the Merger, the approval by shareholders is assured
and an objecting shareholder's only available alternative may be limited to
selling the shareholder's common stock before the Merger takes place.
10
<PAGE>
Market Prices; Dividends
Happy Kids Common Stock is quoted on the Nasdaq National Market under the
symbol "HKID." On September 17, 1999, the last trading day prior to the public
announcement that Happy Kids and Merger Sub had executed the Merger Agreement,
the high and low sale prices per share of Happy Kids Common Stock as reported
on the Nasdaq National Market were $10.50 and $10.3125, respectively.
The following table sets forth the high and low sale prices per share of
Happy Kids Common Stock on the Nasdaq National Market and the average daily
trading volume for Happy Kids Common Stock with respect to each quarterly
period since the Second Quarter of fiscal year 1998.
<TABLE>
<CAPTION>
Average
Daily
Trading
High Low Volume
------ ------ -----------
(in shares)
<S> <C> <C> <C>
FISCAL 1998
Second Quarter (April 1-June 30).................... $14.75 $10.50 70,072
Third Quarter (July 1-September 30)................. $14.25 $ 7.38 22,356
Fourth Quarter (October 1-December 31).............. $14.00 $ 6.75 30,170
FISCAL 1999
First Quarter (January 1-March 31).................. $14.25 $ 8.82 36,782
Second Quarter (April 1-June 30).................... $14.88 $ 7.00 50,405
Third Quarter (July 1-September 30)................. $11.06 $ 8.75 38,355
Fourth Quarter (October 1-November 18).............. $11.50 $ 9.69 42,665
</TABLE>
Consistent with past practice, the Company has no present intention of
paying cash dividends on its common stock in the foreseeable future. In
addition, the payment of dividends by the Company is subject to certain
restrictions under the Company's existing credit agreements, which will be
refinanced in connection with the Merger. Under the Merger Agreement, the
Company has agreed not to pay any dividends on the Happy Kids Common Stock
prior to the Effective Time. Pursuant to the terms of the agreements
contemplated by the Financing Letters, the Surviving Corporation's ability to
pay certain dividends will be restricted. See "Market Prices and Dividends."
11
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial data of Happy Kids Inc. at
December 31, 1998 and as of and for each of the four years in the period
ending December 31, 1998 is derived from the Happy Kids Inc. audited financial
statements and are incorporated by reference to this proxy statement. The
selected statement of operations and balance sheet as of and for the year
ended December 31, 1994 have been derived from the audited Consolidated
Financial Statements of the Company not incorporated by reference herein. The
selected consolidated financial data of Happy Kids Inc. as of and for the nine
months ended September 30, 1999 and 1998 has been derived from unaudited
consolidated financial statements of Happy Kids Inc. incorporated by reference
in this proxy statement. In the opinion of Happy Kids Inc. management, the
nine month financial data includes all necessary adjustments for a fair
presentation of that data in conformity with generally accepted accounting
standards. See the consolidated financial statements of the Company and notes
appearing elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
Year ended Nine Months Ended
------------------------------------------- ---------------------------
September 30, September 30,
1994 1995 1996 1997 1998 1998 1999
------- ------- -------- -------- -------- ------------- -------------
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data
Net Sales............. $74,520 $79,828 $ 90,723 $106,673 $154,559 $114,721 $148,850
Gross Profit.......... 15,276 14,792 20,837 26,925 40,763 29,419 39,243
Operating Expenses.... 12,320 14,816 15,370 18,457 22,449 16,539 23,176
------- ------- -------- -------- -------- -------- --------
Operating income
(loss)............... 2,956 (24) 5,467 8,468 18,314 12,880 16,067
Interest expense,
net.................. 1,631 2,375 2,980 3,803 2,077 1,790 1,187
------- ------- -------- -------- -------- -------- --------
Income (loss) before
pro forma income
taxes................ 1,325 (2,399) 2,487 4,665 16,237 11,090 14,880
Pro forma net
income(1)............ $ 703 $(1,463) $ 11,497 $ 2,704 $ 9,580 $ 8,276 $ 8,630
======= ======= ======== ======== ======== ======== ========
Pro forma basic net
income per share..... $ 0.09 $ (0.19) $ 0.19 $ 0.35 $ 1.00 $ 0.88 $ 0.83
======= ======= ======== ======== ======== ======== ========
Pro forma diluted net
income per share..... $ 0.09 $ (0.19) $ 0.19 $ 0.35 $ 0.99 $ 0.88 $ 0.83
======= ======= ======== ======== ======== ======== ========
Pro forma weighted
average shares
outstanding--basic... 7,750 7,750 7,750 7,750 9,625 9,406 10,340
======= ======= ======== ======== ======== ======== ========
Pro forma weighted
average shares
outstanding--
diluted.............. 7,750 7,750 7,750 7,750 9,637 9,419 10,365
======= ======= ======== ======== ======== ======== ========
</TABLE>
12
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION--(Continued)
<TABLE>
<CAPTION>
December 31,
---------------------------------------
September 30, September 30,
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital....... $ 5,942 $ 3,260 $ 5,228 $ 6,419 $36,295 $33,054 $39,867
Total Assets.......... 27,570 33,568 33,986 44,952 50,452 49,090 84,202
Due to bank........... 14,435 21,340 19,732 24,863 3,753 8,315 25,723
Due to shareholders... 1,200 1,500 1,560 1,400 5,719 5,405 5,570
Capital Lease
obligations.......... 14 52 123 68 27 -- --
Shareholders' Equity.. 6,135 3,848 5,573 6,644 32,531 29,123 42,161
</TABLE>
- --------
(1) Prior to April 2, 1998, the Company had operated as an S Corporation for
federal and New York state income tax purposes since 1988. Two of the
wholly-owned subsidiaries are C Corporations and, accordingly, have been
taxed at the appropriate corporate federal and state tax rates. The
historical Consolidated Financial Statements do not include a provision
for federal and state income taxes for such periods for those subsidiaries
which had elected to be treated as S Corporations. A provision for state
income taxes has been made for those states not recognizing S Corporation
status. Pro forma net income has been computed as if the Company had been
fully subject to federal and state income taxes based on the tax laws in
effect during the respective periods.
13
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(in thousands; except per share data)
The accompanying unaudited pro forma condensed consolidated income
statement for the year ended December 31, 1998 and for the nine months ended
September 30, 1999 have been prepared to give effect to acquisition of certain
assets of D. Glasgow & Sons, Inc. ("Glasgow"), in each case, as if it had
occurred on January 1, 1998 and January 1, 1999, respectively. The acquisition
of Glasgow was completed on April 13, 1999 and was accounted for under the
purchase method of accounting.
All adjustments necessary to fairly present this pro forma condensed
consolidated financial information have been made based on available
information and assumptions which, in the opinion of management, are
reasonable. All such pro forma adjustments and the assumptions on which they
are based are described in the accompanying notes to the pro forma condensed
consolidated financial statements. The unaudited pro forma condensed
consolidated financial information is based upon and should be read in
conjunction with, the historical consolidated financial statements of the
Company and the notes thereto incorporated by reference to this Proxy
Statement. The pro forma condensed consolidated financial statements do not
purport to represent what the Company's results of operations or financial
condition would actually have been had the acquisition of Glasgow and the
other adjustments described below in fact occurred as of such dates or to
project the Company's results of operations or financial condition for any
future period or as of any date. In addition, there can be no assurance that
the assumptions used in the preparation of the pro forma condensed
consolidated financial statements will prove to be correct.
14
<PAGE>
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------
Pro Forma
Happy Kids Glasgow Happy Kids
Historical Historical Adjustments and Glasgow
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.................. $154,559 $29,756 $184,315
Cost of goods sold......... 113,796 23,991 137,787
-------- ------- --------
Gross profit............... 40,763 5,765 46,528
-------- ------- --------
Operating expenses......... 22,449 5,142 $ 248 (a) 27,839
-------- ------- ------- --------
Operating earnings......... 18,314 623 (248) 18,689
-------- ------- ------- --------
Interest expense, net...... 2,077 1,039 546 (b) 3,662
-------- ------- ------- --------
Income (loss) before income
taxes..................... 16,237 (416) (794) 15,027
-------- ------- ------- --------
Income taxes (benefit)..... 4,603 1,558 (c)(d) 6,161
-------- ------- ------- --------
Net income (loss).......... $ 11,634 $ (416) $(2,352) $ 8,866
======== ======= ======= ========
Basic net income per
share..................... $ 1.21 $ 0.91
======== ========
Weighted average shares
outstanding-basic......... 9,625 96 (e) 9,721
======== ======= ========
Diluted net income per
share..................... $ 1.21 $ 0.91
======== ========
Weighted average shares
outstanding-diluted....... 9,637 96 (e) 9,733
======== ======= ========
</TABLE>
15
<PAGE>
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
----------------------------------------------------------------
Pro Forma
Pro Forma Adjusted
Happy Kids Glasgow Happy Kids Happy Kids
Historical Historical(1) and Glasgow Adjustments and Glasgow
---------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............... $148,850 $7,882 $156,732 $156,732
Cost of goods sold...... 109,607 5,905 115,512 115,512
-------- ------ -------- --------
Gross profit............ 39,243 1,977 41,220 41,220
-------- ------ -------- --------
Operating expenses:
Operating expenses...... 23,176 1,356 24,532 $ 74 (a) 24,606
-------- ------ -------- ----- --------
Operating earnings...... 16,067 621 16,688 (74) 16,615
-------- ------ -------- ----- --------
Interest expense, net... 1,187 252 1,439 155 (b) 1,594
-------- ------ -------- ----- --------
Income before income
taxes.................. $ 14,880 369 $ 15,249 (229) $ 15,020
Provision for income
taxes.................. 6,250 -- 6,250 59 (c)(d) 6,309
-------- ------ -------- ----- --------
Net income.............. $ 8,630 $ 369 $ 8,999 $(288) $ 8,711
======== ====== ======== ===== ========
Basic income per common
share.................. $ 0.83 $ 0.87 $ 0.84
======== ======== ========
Weighted average common
shares outstanding-
basic.................. 10,340 10,340 37 (e) 10,377
======== ======== ===== ========
Diluted income per
common share........... $ 0.83 $ 0.87 $ 0.84
======== ======== ========
Weighted average common
shares outstanding-
diluted................ 10,365 10,365 37 (e) 10,402
======== ======== ===== ========
</TABLE>
- --------
(1) Glasgow historical amounts include the unaudited results of Glasgow for
the period of January 1, 1999 through April 13, 1999.
16
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The adjustments below were prepared based on data currently available and
in some cases are based on estimates of approximations. It is possible that
the actual amounts to be recorded may have an impact on the results of
operations and the balance sheet different from that reflected in the
accompanying pro forma unaudited condensed consolidated financial statements.
Statement of operations for the year ended December 31, 1998 and the nine
months ended September 30, 1999:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended September 30,
December 31, 1998 1999
----------------- -----------------
<S> <C> <C>
(a) To record goodwill amortization based
on a twenty-year life................. $ 248 $ 74
====== ====
(b) To record interest on borrowings to
finance cash payment to Glasgow and
costs incurred in connection with the
acquisition line of credit of $6.8
million at 8%......................... $ 546 $155
====== ====
(c) To record the tax effect of pro forma
adjustments and record income tax
expense as if Glasgow and Happy Kids
had been subject to Federal and
additional state and local income
taxes which they were not subject to
because they were S corporations...... $1,558 $ 59
====== ====
(d) Prior to April 2, 1998, the Company
had operated as an S Corporation for
federal and New York state income tax
purposes since 1988. Two of the
wholly-owned subsidiaries are C
Corporations and, accordingly, have
been taxed at the appropriate
corporate federal and state tax rates.
The historical Consolidated Financial
Statements do not include a provision
for federal and state income taxes for
such periods for those subsidiaries
which had elected to be treated as S
Corporations. A provision for state
income taxes has been made for those
states not recognizing S Corporation
status. Pro forma net income has been
computed as if the Company had been
fully subject to federal and state
income taxes based on the tax laws in
effect during the respective periods.
(e) Common stock
Issuance of 95,693 shares of common
stock in connection with the
acquisition.
</TABLE>
17
<PAGE>
THE SPECIAL MEETING
General
This Proxy Statement is being furnished to the holders of Happy Kids Common
Stock in connection with the solicitation of proxies by the Board of Directors
of Happy Kids from holders of the outstanding shares of Happy Kids Common
Stock for use at the Special Meeting of Shareholders to be held at 10:00 a.m.,
local time, on December 13, 1999 at the Holiday Inn, located at 49 West 32nd
Street in New York, New York 10001, and any adjournments and postponements
thereof. At the Special Meeting, shareholders of Happy Kids (a) will be asked
to consider and vote upon a proposal to approve and adopt the Merger Agreement
and the transactions contemplated thereby and (b) will transact such other
business as may properly come before the Special Meeting.
Record Date, Solicitation, and Revocability of Proxies
The Board of Directors of the Company has fixed the Record Date as the date
for determining the Happy Kids shareholders entitled to receive notice of and
to vote at the Special Meeting and any adjournments or postponements thereof.
Only holders of record of Happy Kids Common Stock as of the Record Date are
entitled to notice of and to vote at the Special Meeting. As of the Record
Date, there were 10,375,693 shares of Happy Kids Common Stock issued,
outstanding, and held by 25 holders of record. Holders of Happy Kids Common
Stock are entitled to one vote on each matter considered and voted on at the
Special Meeting for each share of Happy Kids Common Stock held of record at
the close of business on the Record Date.
Proxies in the form enclosed are being solicited by the Board of Directors
of the Company. Shares of Happy Kids Common Stock represented by properly
executed proxies, if such proxies are received in time and are not revoked,
will be voted in accordance with the instructions indicated on the proxies. If
no instructions are indicated, such proxies will be voted FOR approval and
adoption of the Merger Agreement and the transactions contemplated thereby.
Any holder of Happy Kids Common Stock who returns a signed proxy but fails to
provide instructions as to the manner in which such holder's shares are to be
voted will be deemed to have voted FOR approval and adoption of the Merger
Agreement and the transactions contemplated thereby.
It is not anticipated that any matter other than the proposal to approve
and adopt the Merger Agreement will be brought before the Special Meeting. If
any other matter is properly presented at the Special Meeting for
consideration, including, among other things, a motion to adjourn the Special
Meeting to another time and/or place (including, without limitation, for the
purpose of soliciting additional proxies), the persons named in the enclosed
form of proxy card and acting thereunder will have discretion to vote on such
matter in accordance with their best judgment; provided, however, that no
proxy that directs the shares represented thereby to be voted against the
proposal to approve and adopt the Merger Agreement will be voted in favor of
any adjournment of the Special Meeting for purposes other than the absence of
a quorum.
A shareholder who has given a proxy may revoke it at any time prior to its
exercise at the Special Meeting, by (a) giving written notice of revocation to
the Secretary of the Company, (b) properly submitting to the Company a duly
executed proxy bearing a later date, or (c) voting in person at the Special
Meeting. All written notices of revocation and other communications with
respect to revocation of proxies should be addressed to the Company as
follows: Happy Kids Inc., 100 West 33rd Street, Suite 1100, New York, New York
10001, Attention: Corporate Secretary. A proxy appointment will not be revoked
by death or supervening incapacity of the shareholder executing the proxy
unless, before the shares are voted, notice of such death or incapacity is
filed with the Company's Secretary or other person responsible for tabulating
votes on behalf of the Company.
The expense of soliciting proxies for the Special Meeting will be paid by
the Company. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers, and employees of Happy Kids in person or by
telephone, telegram, or other means of communication. Such directors,
officers, and employees will not be additionally compensated, but may be
reimbursed for reasonable out-of-pocket expenses incurred in connection with
such solicitation. Arrangements will be made with custodians, nominees, and
fiduciaries for
18
<PAGE>
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such custodians, nominees, and fiduciaries, and Happy Kids will
reimburse such custodians, nominees, and fiduciaries for reasonable out-of-
pocket expenses incurred in connection therewith. In addition, Happy Kids has
retained D.F. King & Co., Inc., a proxy solicitation organization, to assist
in the solicitation of proxies for the Special Meeting for a fee of $4,000,
plus reasonable out-of-pocket expenses.
Quorum; Required Vote
Approval of the Merger Agreement and the transactions contemplated thereby
requires the presence of a quorum and the affirmative vote of the holders of
two-thirds of the issued and outstanding shares of Happy Kids Common Stock
entitled to vote thereon at the Special Meeting. The presence, in person or by
properly executed proxy, of the holders of a majority of the issued and
outstanding shares of Happy Kids Common Stock at the Special Meeting is
necessary to constitute a quorum of the holders of Happy Kids Common Stock at
the Special Meeting. Abstentions and broker non-votes will be counted as
shares present for purposes of determining the presence of a quorum. However,
because the proposal to approve and adopt the Merger Agreement requires the
affirmative vote of two-thirds of the issued and outstanding shares of Happy
Kids Common Stock, abstentions and broker non-votes will have the effect of a
vote against the Merger Agreement and the transactions contemplated thereby in
determining whether effective action has been taken. THE EFFECT ON APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT OF FAILING TO PROPERLY EXECUTE AND RETURN
A PROXY CARD OR TO VOTE AT THE SPECIAL MEETING WILL BE THE SAME AS VOTING
AGAINST THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
As of the Record Date, the directors and executive officers of Happy Kids
were the beneficial owners of 7,895,026 shares of Happy Kids Common Stock
(including shares of Happy Kids Common Stock issuable upon the exercise of
Options prior to the Effective Time) of which 7,845,693 shares were issued and
outstanding, constituting 75.62% of the outstanding shares of Happy Kids
Common Stock. The collective vote, of the shares of Happy Kids Common Stock
held by the directors and executive officers is sufficient to approve and
adopt the Merger Agreement. The directors and executive officers of Happy Kids
have indicated that they intend to vote such shares in favor of the approval
and adoption of the Merger Agreement. Jack M. Benun, President, Chief
Executive Officer, and Chairman of the Company's Board, Mark J. Benun and
Isaac Levy, each of whom are officers and directors of the Company, are
principal shareholders of the Company, who beneficially own in the aggregate
7,750,000 shares of Happy Kids Common Stock (including shares of Happy Kids
Common Stock issuable upon the exercise of Options prior to the Effective
Time) of which 7,750,000 shares, constituting approximately 74.69% of the
outstanding Happy Kids Common Stock, are outstanding as of September 16, 1999,
have entered into the Support Agreement, pursuant to which each of them
appointed certain persons designated by Merger Sub as his proxy to, among
other things, vote his shares of Happy Kids Common Stock (including shares
issuable upon exercise of Options prior to the Effective Time) in favor of the
Merger Agreement. Accordingly, the Merger Agreement is expected to be approved
at the Special Meeting regardless of how the other shareholders vote. See
"Special Factors--Interests of Certain Persons in the Merger--Support
Agreement."
19
<PAGE>
SPECIAL FACTORS
Background of the Transaction
Historically, the children's apparel industry has been highly fragmented
and competitive. Recently, the industry has undergone significant
consolidation, with companies with greater financial resources acquiring
smaller companies and companies with less access to capital. Senior management
of Happy Kids believed that the Company needed, among other things, access to
additional resources in order to continue to compete effectively in the
children's apparel industry by (i) taking advantage of future opportunities
for growth through acquisitions of complimentary businesses and/or assets and
(ii) continuing to implement is business strategy, which calls for the
development of a diversified portfolio of popular, established and well-
recognized licensed properties and branded private label arrangements. In
furtherance of this objective, senior management of the Company engaged BDO
Seidman LLP ("BDO") on October 29, 1998. The Company instructed BDO to explore
the possibility that the Company could raise the capital it needed through a
secondary offering of Happy Kids Common Stock. On April 2, 1998, the Company
made the initial public offering (the "IPO") of Happy Kids Common Stock,
issuing 2,230,000 shares at $10.00 per share. However, in the months that
followed the IPO there was a general downturn in the equity markets. This
downturn had an adverse impact on apparel industry stocks, and specifically
stocks with respect to smaller apparel companies, which are historically
volatile and were highly volatile during the months following the IPO. The
wide disparity between high and low sale prices for Happy Kids Common Stock
during the third and fourth quarters of 1998 reflected this volatility. An
added effect of this volatility was a decline in the level of interest in
apparel industry stocks and specifically stocks with respect to smaller
apparel companies, which was reflected in the decline in the average daily
trading volume of Happy Kids Common Stock during the third and fourth quarters
of 1998. Based upon its knowledge that, at such time, there was limited
interest in apparel industry stocks and specifically stocks with respect to
smaller apparel companies, and its belief, upon review of the Company's
financial statements, that the Company would have difficulty raising large
amounts of additional capital in a secondary offering in such a limited
market, BDO recommended to the Company that it explore other strategic
alternatives including, without limitation, the sale or privatization of the
Company. See "Summary--Market Prices and Dividends" and "Market Prices and
Dividends."
After considering BDO's suggestions, senior management of the Company
determined that a private sale of the Company was an attractive alternative
because (i) given the then existing state of the equity markets, particularly
with respect to apparel industry stocks, and specifically stocks with respect
to smaller apparel companies, a secondary offering was not a viable
alternative for the Company, (ii) due to the then existing state of the
capital markets, the lack of enthusiasm for apparel companies in the financial
sector, and the Company's financial condition senior management believed that
obtaining additional capital through the refinancing of the Company's existing
credit facilities would be cost prohibitive and senior management also
believed that the then existing state of the market for debt securities issued
by apparel companies either would not support an issuance by the Company or
would make such an issuance cost prohibitive for the Company and (iii) senior
management believed that a private sale of the Company to a financial buyer or
to a strategic buyer with greater access to capital resources than the Company
would enable the Company to fulfill its business objectives and provide
liquidity to the Company's shareholders for their shares of Happy Kids Common
Stock, which were at such time and remain, highly illiquid and volatile. The
Company requested then that BDO explore the possibility of a private sale of
the Company to a financial or strategic buyer. The Company did not instruct
BDO to limit or restrict its search to potential buyers interested in
retaining the Company's existing senior management following consummation of
the transaction. BDO identified a list of approximately 35 potential buyers,
consisting of potential strategic buyers within the apparel industry and
potential non-industry financial buyers. BDO contacted each of these potential
buyers including HIG and eight of these potential buyers (all of whom were
financial buyers) subsequently executed confidentiality agreements with BDO.
Five of those potential buyers were then furnished with a package containing
information concerning the Company.
On February 5, 1999, BDO was contacted by representatives of Saunders Karp
& Megrue, a potential financial buyer (the "First Potential Acquiror"), who
expressed interest in acquiring the Company in a recapitalization transaction
at a valuation of $12.75 per share to public shareholders and an aggregate of
approximately $65 million to the Management Group following which the Company
would be privately held. The existing senior management of the Company would
be retained following the consummation of the transaction. On or about
February 12, 1999, executives of the Company and the First Potential Acquiror
met and
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negotiated the preliminary terms of the transaction. Soon thereafter, however,
the First Potential Acquiror informed the Company that based upon the First
Potential Acquiror's financial analysis of the Company and current market
conditions for companies in the apparel industry and, specifically, smaller
apparel companies, it had reduced its initial valuation to $12.75 to the
public shareholders and $7.00 to the members of the Management Group.
Subsequently, the First Potential Acquiror indicated its intention to further
reduce its valuation of the Company. Based upon its belief that the new
valuation proposed by the First Potential Acquiror constituted an insufficient
offer, that any subsequent offer made by the First Potential Acquiror would be
insufficient as well and that the likelihood of consummating a transaction was
uncertain, senior management decided to terminate discussions with the First
Potential Acquiror.
Thereafter, on March 3, 1999, representatives of HIG contacted BDO to
express HIG's interest in acquiring the Company in a privatization
transaction. The transaction contemplated by HIG included payment of cash
consideration to equity holders of the Company, the refinancing of certain
existing indebtedness of the Company (excluding the Notes, which Notes are
held by members of the Management Group) and obtaining new financing and
access to additional resources for use by the Company in making acquisitions
and funding certain other capital expenditures.
On April 8, 1999, representatives of a third potential financial buyer (the
"Third Potential Acquiror") contacted BDO to express an interest in a
recapitalization transaction following which the Company would be privately
held. During their conversations with the Company, the representatives
indicated that they would be interested in entering into negotiations to
purchase the Company. However, the Third Potential Acquiror never provided a
valuation at which it was willing to purchase the Company. After preliminary
discussions, the parties mutually agreed to terminate discussions.
Based on their review of the information previously provided by BDO, on May
12, 1999, HIG delivered to the Company a written proposal (the "HIG
Proposal"), pursuant to which HIG offered to purchase the Company in a
recapitalization transaction at a valuation of $12.75 per share to the public
shareholders of the Company and approximately $7.71 per share to the
Management Group, subject to, among other things, the satisfactory completion
of due diligence. The HIG proposal required that senior management of the
Company remain with the Company following consummation of the transaction. In
connection therewith, each member of the Management Group would enter into a
three-year employment agreement with the Company, which would provide for (i)
cash bonus payments to the Management Group of up to an aggregate of
approximately $5 million during the first two years of the contracts and (ii)
stock option grants to the Management Group during the third year of the
contracts representing up to an aggregate of 4% of the issued and outstanding
Happy Kids Common Stock (determined as of the date of issuance of such
options), exercisable at a price equal to the fair market value of the Happy
Kids Common Stock immediately following closing of the transaction. In
addition, the Company would adopt a stock option plan to enable non-
shareholder management to acquire up to 5% of the Happy Kids Common Stock.
Further, the HIG proposal provided that the members of the Management Group
would be required to roll over a portion of their shares of Happy Kids Common
Stock into the surviving corporation, which shares would represent, upon
consummation of the transaction, 24% of the outstanding shares of the
surviving corporation. The members of the Management Group and HIG each
executed the HIG Proposal.
In the weeks that followed the signing of the HIG Proposal, HIG and senior
management of the Company continued discussions regarding the transaction and
HIG began an extensive due diligence review of the Company. After HIG had
completed preliminary due diligence, and based in part upon HIG's belief that
the Company's anticipated revenues for the second quarter of 1999 would likely
be materially below the Company's estimates, on June 30, 1999, HIG revised the
HIG Proposal to take into account HIG's assessment of risk with respect to the
transaction, certain concerns of HIG regarding the Company's ability to
continue to execute its growth strategy and problems related to the
integration of D. Glasgow & Sons, Inc. following Happy Kids' acquisition of
that company in April 1999. In the first and second quarters of 1999, the
Company exhibited slower growth than historically achieved, as well as the
deferral by certain customers of their orders, which the Company attributes to
a overall weakness in the apparel industry during the second quarter of 1999.
The revised HIG Proposal provided for a valuation of the Company at $11.50
per share to the public shareholders and $7.164 per share to the Management
Group. Further, the revised HIG Proposal, in order to
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protect the considerable time and effort that HIG had already invested in the
proposed transaction and the additional time and effort that HIG anticipated
continuing to devote to the transaction, added certain provisions requiring
members of the Management Group to pay a $1.5 million fee to HIG in the event
that the transaction was not consummated due to a breach by a member of the
Management Group and in the event that, within twelve months of executing such
proposal, any member of the Management Group sold his shares of Happy Kids
Common Stock in an alternative transaction. In addition, the revised HIG
proposal provided that, if the revised proposal was submitted to the Company's
Board of Directors by HIG and such proposal was rejected by the Board then, in
such event, the Management Group would be obligated to reimburse HIG for all
reasonable, direct, out-of-pocket expenses incurred by HIG in connection with
the preparation and negotiation of the proposed transaction, and a fee equal
to the product of (i) 90% multiplied by (ii) the aggregate number of shares of
Happy Kids Common Stock sold by members of the Management Group in such
transaction multiplied by (iii) the excess of (a) the price per share to be
received plus any other consideration to be received by members of the
Management Group over (b) $7.164. Under the terms of the revised HIG Proposal,
the Management Group would roll over shares representing 23.61%, rather than
24%, of the Surviving Corporation upon consummation of the transaction. The
members of the Management Group would enter into employment agreements having
the same terms as set forth in the original HIG Proposal and except as
explained above, all other provisions of the original HIG Proposal remained in
place, except (i) that the exclusivity period granted to HIG was extended from
90 days from the original HIG Proposal to 90 days from the date of the revised
HIG Proposal and (ii) the revised HIG Proposal provided that the Notes held by
the Management Group would be refinanced in the transaction. The members of
the Management Group and HIG executed this revised HIG Proposal.
Following the completion of additional due diligence and further
discussions with senior management, HIG further revised the HIG Proposal and
on July 9, 1999, submitted a proposal (the "Final Proposal") providing for a
valuation of the Company at $11.50 per share to public shareholders and $7.164
per share to members of the Management Group, with the Management Group
retaining rollover shares representing 23.61% of the surviving corporation.
The Final Proposal also further extended the exclusivity period to 90 days
from the date of the Final Proposal and provided for the repayment of the
Notes to the holders thereof (all of whom are members of the Management Group)
by the surviving corporation at the time of closing. Each member of the
Management Group, acting in his capacity as a shareholder, and HIG executed
the Final Proposal.
Following the execution of the Final Proposal, the Company formed the
Special Committee (consisting of Stephen I. Kahn and Marvin Azrak, the non-
employee directors of the Company) to consider and evaluate the Final Proposal
and issued a press release dated July 12, 1999, announcing the proposed
transaction. Subsequently, the Special Committee retained Proskauer Rose LLP
("Proskauer Rose"), which had previously provided legal counsel to the Company
on certain matters in May, June and July of 1998, currently acts as legal
counsel to a member of the Special Committee and to a corporation controlled
by such member and also acts as outside legal counsel, from time to time, for
CIBC, as its counsel, to advise the Special Committee with respect to the
proposed transaction. HIG's counsel then delivered to the Company, the Special
Committee and Proskauer Rose initial drafts of the Merger Agreement and
related documents based upon the terms set forth in the Final Proposal. On
July 22, 1999, the Special Committee met at the offices of its counsel to
discuss the terms of the Final Proposal and the transaction documents and to
select a financial advisor. Representatives of various investment banking
firms proposing to act as financial advisor to the Special Committee,
consisting of J.P. Morgan & Co., Incorporated, Chase Securities, Inc., Needham
& Co. and CIBC, interviewed with the Special Committee. The Special Committee
then requested from each prospective advisor a proposal setting forth proposed
terms of engagement. After receiving the requested proposals, the Special
Committee met and discussed the various qualifications of each investment firm
interviewed and evaluated the terms pursuant to which each would be retained.
On July 27, 1999, the Special Committee engaged CIBC to act as financial
advisor to the Special Committee in connection with its consideration and
evaluation of the Final Proposal.
At a meeting held on August 12, 1999, the Special Committee met with CIBC
regarding the Final Proposal and the efforts previously made to seek a buyer
for the Company. Following its initial evaluation of the Final Proposal, the
Special Committee instructed CIBC to seek alternative indications of interest
from both potential industry buyers and potential financial buyers. The
Special Committee did not instruct CIBC to limit or restrict its search to
potential buyers interested in retaining the Company's existing senior
management following
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consummation of the transaction. Beginning on August 16, 1999, as instructed by
the Special Committee, CIBC contacted potential strategic and potential
financial buyers, including the First Potential Acquiror and certain other
potential buyers previously contacted by BDO. No indications of interest at any
price were received from potential strategic buyers, but one potential
financial buyer expressed interest in acquiring the Company and signed a
confidentiality agreement, in substantially the same form as the
confidentiality agreement executed by HIG, and was provided with additional
information regarding the Company. Simultaneously therewith, HIG continued to
perform due diligence on the Company. No potential financial buyer made any bid
for the Company.
After reviewing the draft documents provided by HIG's counsel and consulting
with its advisors, the Special Committee concluded that the $11.50 per share
valuation of the publicly-held shares of Happy Kids Common Stock did not fully
reflect the value of such shares. Discussions between Happy Kids and HIG ensued
and, as a result of these discussions, the per share valuation of the publicly-
held shares of Happy Kids Common Stock was increased to $12.00 per share.
At a meeting of the Special Committee held on September 8, 1999 to evaluate
the Merger, the Special Committee reviewed and discussed with its legal and
financial advisors the proposed terms of the Merger Agreement and the related
documents. The Special Committee, together with its legal and financial
advisors, specifically discussed issues that required further negotiation,
including the possibility of negotiating a more favorable non-solicitation
provision which would enable the Company to continue to solicit buyers
following execution of the Merger Agreement and the payment of a lower
termination fee to HIG in the event the Merger is not consummated. At the
meeting, CIBC reviewed with the Special Committee its financial analyses with
respect to the Cash Merger Price and informed the Special Committee that, based
on its financial analyses and subject to the negotiation and resolution of the
remaining issues, it would be in a position to render an opinion as to the
fairness, from a financial point of view, of the Cash Merger Price to the
holders of Happy Kids Common Stock (other than the holders of Management Shares
and Rollover Shares, as to which CIBC was not requested to express an opinion).
After full discussion, the Special Committee approved the Merger, subject to
the negotiation and resolution of the remaining issues and completion of
definitive agreements with respect to the transaction. A meeting of the full
Board of Directors took place immediately following the Special Committee
meeting. The Special Committee informed the Board of its conditional approval
of the proposed Merger. HIG was contacted and negotiations with respect to the
proposed Merger continued, resulting in (i) the Company having a continued
right to solicit Acquisition Proposals (as defined in the Merger Agreement)
from third parties for a period of four weeks following execution of the Merger
Agreement and (ii) a reduction of the maximum aggregation termination fee
payable by the Company (including fees and expenses) from $6.25 million, plus
reimbursement of out-of-pocket costs, and expenses to $4.0 million, without
additional reimbursement for out-of-pocket costs and expenses.
At a meeting held on September 15, 1999, the Special Committee met
telephonically to discuss the final resolution of outstanding issues with
respect to the proposed Merger. At the meeting, CIBC delivered to the Special
Committee an oral opinion, subsequently confirmed by delivery of a written
opinion dated September 15, 1999, to the effect that, as of the date of the
opinion and based on and subject to the matters described in the opinion,
including the assumption that the material terms of the Merger Agreement would
not vary materially from the draft reviewed by CIBC, the Cash Merger Price was
fair, from a financial point of view, to the holders of Happy Kids Common Stock
(other than the holders of Management Shares and Rollover Shares, as to which
CIBC was not requested to express an opinion). The Special Committee then
approved the proposed Merger and resolved to recommend the transaction to the
Board. Based on the recommendation of the Special Committee and on the other
factors described herein under "Reasons for the Merger; Recommendation of the
Board of Directors," at a meeting held immediately following the meeting of the
Special Committee on September 15, 1999, the Board approved the Merger
Agreement, the Support Agreement, the Employment Agreements and the
Shareholder's Agreement in substantially the forms submitted to the Board, and
authorized senior management to complete negotiation of certain remaining
points and to execute final documents. On September 17, 1999, the Merger
Agreement, the Support Agreement, the Employment Agreements, and the
Shareholder's Agreement were executed by the parties thereto, and Happy Kids
issued a press release announcing the transaction.
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Reasons for the Merger; Recommendation of the Board of Directors
At a meeting held on September 15, 1999, the Board of Directors unanimously
approved the Merger Agreement and determined, among other things, that the
Merger Agreement was fair to and in the best interests of Happy Kids'
unaffiliated shareholders and recommended that Happy Kids's unaffiliated
shareholders approve the Merger Agreement. In reaching these conclusions, the
Board of Directors consulted with the Special Committee's legal and financial
advisors and considered the following material factors:
(a) A comparison of the risks and benefits of the Merger against the
risks and benefits of the other strategic alternatives available to Happy
Kids, including continuing as an independent entity and the initial
proposals of the First and Third Potential Acquirors, as well as a
consideration of the long term interests of the Company. Of the
alternatives available to Happy Kids, the Merger was determined by the
Board of Directors to be the alternative which would yield the best results
to the public shareholders of Happy Kids from a financial point of view.
The Merger was determined to be more favorable to the public shareholders
because the Merger would provide the Company's public shareholders with the
opportunity to receive cash for their Happy Kid Common Stock which is
currently highly illiquid. Further the Board determined that the Merger was
preferable to the Company continuing as an independent entity because Happy
Kids' ability to compete effectively in a consolidating market was
contingent upon the Company's access to capital and other resources for
making acquisitions and otherwise pursuing its business strategy. No
alternatives were available to the Company as an independent entity that
would provide access to sufficient capital to meet the Company's needs. See
"--Background of the Transaction.";
(b) The $12.00 per share of Happy Kids Common Stock to be paid to public
shareholders in the Merger represented a premium of approximately 15.7%
over the closing price of $10.375 per share of Happy Kids Common Stock on
September 14, 1999. The Board of Directors considered that shares of Happy
Kids Common Stock have traded at a range from a low of $6.75 to a high of
$14.875 during the 52 weeks prior to September 15, 1999, meaning that the
Merger offered a substantial premium to public shareholders compared to
recent historical price levels of Happy Kids Common Stock. While the Board
recognized that Happy Kids Common Stock had at times during the 52 weeks
prior to September 15, 1999, traded at a price above the Cash Merger Price,
the Board also considered the cyclical nature of the Company's business
which contributed to the volatile nature of the Happy Kids Common Stock,
the recent downturn in prices for apparel industry stocks and specifically
stocks with respect to smaller apparel companies, the Company's failure to
meet its second quarter projections which initiated concerns regarding the
Company's ability to meet its projections for the fiscal year, and concern
about the Company's ability to execute its growth strategy, as factors in
favor of approving the Merger.
(c) As a positive factor, the written opinion, dated September 15, 1999,
of CIBC (and the financial analyses underlying such opinion) as to the
fairness, from a financial point of view and as of the date of the opinion,
of the Cash Merger Price to the holders of Happy Kids Common Stock (other
than the holders of Management Shares and Rollover Shares, as to which CIBC
was not requested to express an opinion). See "--Opinion of the Special
Committee's Financial Advisor.";
(d) As a positive factor, the recommendation of the Special Committee,
consisting solely of the non-employee directors of the Company. The final
terms and conditions of the Merger Agreement and related matters were the
product of arm's-length negotiations in which the Special Committee was
assisted by its legal and financial advisors. In particular, the Board
considered that under the terms of the Merger Agreement, the Board was not
prohibited from actively soliciting Acquisition Proposals from third
parties for a period of four weeks after the execution of the Merger
Agreement and, thereafter, that the Company was permitted to furnish
information to any person or entity in response to an unsolicited bona fide
written Acquisition Proposal and to negotiate, or participate in
discussions regarding an unsolicited bona fide written Acquisition
Proposal, but only to the extent that the Special Committee or the Board of
Directors determined in good faith, after consulting with independent legal
counsel, that it had a fiduciary obligation to furnish such information or
engage in such negotiations or discussions with such person or entity and
provided, that all such information was furnished pursuant to a
confidentiality agreement substantially similar to the Confidentiality
Agreement previously executed by HIG. Under certain circumstances involving
the presence of an Acquisition Proposal, the Board could terminate the
Merger Agreement,
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withdraw its recommendation of the Merger or endorse another transaction
upon payment of a termination fee of $4.0 million to Merger Sub. See
"Certain Provisions of The Merger Agreement.";
(e) As a negative factor, the fact that although the affirmative vote of
two-thirds of the outstanding shares of Happy Kids Common Stock entitled to
vote at the Special Meeting are required for adoption of the Merger
Agreement and the approval of the transactions contemplated thereby the
terms and conditions of the Support Agreement, pursuant to which, among
other things, members of the Management Group who own, in the aggregate,
approximately 74.69% of the issued and outstanding shares of Happy Kids
Common Stock have agreed to vote and have granted a related proxy to vote
their shares of Happy Kids Common Stock in favor of the Merger Agreement
would likely result in the Merger Agreement being approved regardless of
how unaffiliated shareholders vote. The Management Group's obligation to
vote in favor of the Merger Agreement and the related proxy granted
pursuant to the Support Agreement would terminate if the Board terminated
the Merger Agreement. However, if the Merger Agreement is terminated for
any reason that results in the payment of a termination fee by the Company
to Merger Sub, then the Management Group will be jointly and severally
liable to Merger Sub for an additional $1.5 million termination fee (the
"Management Termination Fee"). If, within twelve months following any
termination for which a Management Termination Fee has been paid by the
Management Group, any member of the Management Group sells all or any
portion of the Happy Kids Common Stock held by him to any person other than
Merger Sub or an affiliate of Merger Sub, then the Management Group shall
be jointly and severally liable to Merger Sub for the payment of a fee
equal to the product of (i) 90% multiplied by (ii) the aggregate number of
shares of Happy Kids Common Stock sold by members of the Management Group
in such transaction multiplied by (iii) the excess of (a) the price per
share to be received plus any other consideration to be received by members
of the Management Group over (b) $7.164. In addition, the members of the
Management Group have executed new employment agreements effective upon
consummation of the Merger. Notwithstanding the foregoing, the Board
believes that the other procedural safeguards in place ensure the
procedural fairness of the Merger. These safeguards include (i) the
establishment of the Special Committee to consider the various alternatives
available to the Company, (ii) the Special Committee was comprised of two
non-employee directors, who will have no continuing interest in the Company
following completion of the Merger, (iii) the Special Committee
independently selected its own legal and financial advisors, (iv) the
Special Committee was actively involved in evaluating the other
alternatives available to the Company, and (v) the Special Committee
negotiated the terms of the Merger with the assistance of its legal and
financial advisors. See "--Interests of Certain Persons in the Merger.";
(f) The Rollover Shares and the Employment Agreements and other benefits
to be received by members of the Management Group upon consummation of the
Merger. The Board determined that such interests were reasonable and
appropriate in light of HIG's requirement that the Management Group
participate in the transaction and that members of the Management Group
execute employment agreements effective upon consummation of the Merger.
The Board of Directors has determined that the interests of certain
officers and directors of the Company in the Merger have not impacted the
fairness of the consideration paid to the Company's unaffiliated
shareholders. See "--Interests of Certain Persons in the Merger."; and
(g) As a negative factor, the fact that Merger Sub's obligation to
consummate the transaction is contingent upon Merger Sub's ability to
obtain the financing contemplated by the Commitment Letters to pay the Cash
Merger Price and the Management Cash Price, to pay the value of the
Options, to refinance certain existing indebtedness of Happy Kids and its
subsidiaries, to repay the Notes and to pay the estimated fees and expenses
in connection with the Merger and such financing. However, the Board also
considered that such a condition to closing is common in transactions
involving financial buyers. If the Merger is consummated, it is
contemplated that the financing will be provided through the (a) Senior
Secured Facility, including up to $10.5 million in drawings under the
Revolver, (b) the Senior Subordinated Loan and (c) equity financing
provided by HIG-HK in the amount of approximately $20.3 million through the
purchase of the common stock of Merger Sub. The Commitment Letters obtained
by HIG from BT and BTC, respectively, expire in accordance with their terms
on December 15, 1999 if the Merger has not been consummated on or prior to
such date. See "Financing of the Merger."
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The Board did not consider the liquidation value or the net book value
of the Company in making its determination to recommend the Merger
Agreement. The value of the Company as a going concern far exceeded both
measures and provided the best opportunity for maximizing shareholder
value. Therefore the Board investigated and considered various alternatives
for allowing the Company to continue to pursue its growth strategy and did
not consider or pursue a liquidation strategy or a sale of the Company's
assets.
The foregoing discussion of the information and factors considered by
the Board of Directors is not intended to be exhaustive, but includes the
material factors considered by the Board of Directors. In reaching its
determination to approve the Merger Agreement, and in view of the variety
of factors considered by the Board of Directors in connection with its
evaluation of the Merger Agreement, the Board of Directors did not assign
any relative or specific weights to the various factors considered by it.
Purposes and Reasons of Merger Sub and HIG-HK for the Merger
The purpose of Merger Sub and HIG-HK for engaging in the transactions is to
gain control of the Company. Merger Sub and HIG-HK believe that the Company's
future business prospects can be improved through HIG-HK'S active
participation in the strategic direction and operations of the Company and its
access to additional capital and other resources if needed. This assessment is
based upon publicly available information regarding the Company, the due
diligence investigation of the Company conducted by Merger Sub and HIG-HK and
the investment experience of HIG. While Merger Sub and HIG-HK believe that
there will be significant opportunities associated with their investment in
the Company, there are also substantial risks that such opportunities may not
be fully realized.
The proposed acquisition of the Company has been structured as it has in
order to provide a prompt and orderly transfer of ownership of the equity
interest in the Company held by shareholders of the Company from such
shareholders to HIG-HK and to provide the shareholders of the Company with
cash for all of their shares (except for the Rollover Shares). Merger Sub and
HIG-HK considered no other alternative with respect to the structure of the
transaction.
Purposes and Reasons of the Management Group In Agreeing to the Merger
The purpose of the Management Group in agreeing to the transactions
contemplated by the Merger Agreement is to continue the pursuit of their
strategic view of the future of the Company to assist the Company in obtaining
access to capital and other resources needed to pursue its business strategy,
to provide liquidity to existing shareholders and to enable existing
stockholders of the Company to realize a substantial premium on the shares of
Happy Kids Common Stock owned by them. See "--Reasons for the Merger;
Recommendation of the Board of Directors" and "--Interests of Certain Persons
in the Merger."
Position of HIG-HK and Merger Sub as to Fairness of the Merger
Each of Merger Sub and HIG-HK regards the acquisition of the Company as an
attractive investment opportunity because it believes that the Company's
future business prospects coupled with the HIG partnership and the Company's
new capital structure are favorable. Although the investment will involve a
substantial risk to holders of Merger Sub's common stock, each of Merger Sub
and HIG-HK believes that the long-term value of the equity investment could
appreciate significantly based upon combined efforts and a revised strategic
plan. Each of Merger Sub and HIG-HK believes that the Cash Merger Price is
fair to the Company's unaffiliated shareholders. In reaching this conclusion,
each of Merger Sub and HIG has taken into consideration the recent and
historical prices of the Happy Kids Common Stock, see "Price Range of Common
Shares; Dividends", and its due diligence review of the Company. Neither of
Merger Sub nor HIG-HK has undertaken any formal evaluation of the fairness of
the Merger to the Company's unaffiliated shareholders. Moreover, neither
Merger Sub nor HIG-HK participated in the deliberations of the Special
Committee or received advice from the Special Committee's financial advisor.
Consequently, neither Merger Sub nor HIG-HK is in a position to specifically
adopt the conclusions of the Special Committee with respect to the fairness of
the Merger to the unaffiliated stockholders. Because of the variety of factors
considered, neither Merger Sub nor HIG-HK found it practicable to make
specific assessments of, quantify or otherwise assign relative weights to the
specific factors considered in
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reaching its determination. The determination of Merger Sub and HIG-HK that
the Merger is fair was made after consideration of all the factors together.
These factors include:
(i) the presence of procedural safeguards such as the appointment of the
Special Committee;
(ii) the fact that the Merger Agreement was the result of arms-length
negotiations in which the Special Committee was assisted by its legal and
financial advisors;
(iii) the conclusions of the Special Committee;
(iv) the fact that the terms of the transactions were negotiated with
the Special Committee at a time when each of Merger Sub and HIG-HK did not
beneficially own any Happy Kids Common Stock;
(v) their belief that BDO adequately shopped the Company prior to the
formation of the Special Committee;
(vi) the inclusion in the Merger Agreement of the Company's right to
solicit acquisition proposals for a period of four weeks following
execution of the Merger Agreement;
(vii) the fact that the Special Committee received an opinion of CIBC as
to the fairness, from a financial point of view and as of the date of the
opinion, of the Cash Merger Price to the holders of Happy Kids Common Stock
(other than the holders of Management Shares and Rollover Shares, as to
which CIBC was not requested to express an opinion);
(viii) the nature of the Company's business;
(ix) the fact that the Cash Merger Consideration represents a premium
for the shares held by unaffiliated shareholders compared to recent
historical price levels of Happy Kids Common Stock;
(x) the historical volatility of Happy Kids Common Stock; and
(xi) concerns regarding the Company's ability to continue to execute its
growth strategy and problems related to the integration of D. Glasgow &
Sons.
Each of HIG-HK and Merger Sub believes these analyses and factors provide a
reasonable basis for them to believe that the Merger is fair to the
unaffiliated holders of Happy Kids Common Stock. This belief should not,
however, be construed as a recommendation to the Company's shareholders by
HIG-HK or Merger Sub to vote to approve the Merger.
Neither HIG-HK nor Merger Sub considered the net book value, the going
concern value or the liquidation value of the Company to be material factors
in determining the fairness of the merger to the Company's unaffiliated
shareholders. Neither believes that these factors have any significant impact
on the market trading prices of Happy Kids Common Stock. Neither HIG-HK nor
Merger Sub relied on any report, opinion or appraisal in determining the
fairness of the Merger to the Company's unaffiliated shareholders, but neither
Merger Sub nor HIG-HK disagrees with the conclusion expressed by CIBC in its
opinion to the Special Committee regarding the fairness, from a financial
point of view and as of the date of its opinion, of the Cash Merger
Consideration to the holders of Happy Kids Common Stock (other than the
holders of Management Shares and Rollover Shares, as to which CIBC was not
requested to express an opinion). Except as otherwise disclosed in this
document, neither HIG-HK nor Merger Sub is aware of any firm offers made in
the last eighteen months by an unaffiliated person to merge or consolidate
with the Company, to acquire all or any substantial part of the assets of the
Company or to acquire control of the Company. For the reasons cited above and
based upon their involvement in the process leading up to the Merger, each of
HIG-HK and Merger Sub believes that the Merger is procedurally fair to the
unaffiliated shareholders. HIG-HK and Merger Sub agree with the position of
the Special Committee and the Board of Directors in not considering it
necessary to require approval of the Merger by a majority of the Company's
shareholders who are not members of the Management Group. See "Special
Factors--Reasons for the Merger; Recommendation of the Board of Directors."
Position of the Management Group as to Fairness of the Merger
In arriving at their belief that the Merger is fair to the unaffiliated
shareholders of the Company, the Management Group has considered the same
factors considered by the Board of Directors and has adopted the analysis of
the Board described in "--Reasons for the Merger; Recommendation of the Board
of Directors." However, the Management Group's belief that the Merger and the
transactions contemplated thereto are fair to the Company's unaffiliated
shareholders should not be construed as a recommendation to the Company's
shareholders by the members of the Management Group (in their respective
capacities as shareholders of the Company and not in their respective
capacities as members of the Board of Directors) to vote to approve the Merger
Agreement and the transactions contemplated thereby.
27
<PAGE>
Opinion of the Special Committee's Financial Advisor
The Special Committee retained CIBC to render an opinion as to the
fairness, from a financial point of view, of the Cash Merger Price to the
holders of Happy Kids Common Stock (other than the holders of Management
Shares and Rollover Shares, as to which CIBC was not requested to express an
opinion). At a meeting of the Special Committee on September 15, 1999 held to
evaluate the proposed Merger, CIBC delivered an oral opinion, confirmed by
delivery of a written opinion dated September 15, 1999, to the effect that, as
of the date of the opinion and based on and subject to the matters described
in the opinion, including the assumption that the final terms of the Merger
Agreement would not vary materially from the terms of the draft of the Merger
Agreement reviewed by CIBC, the Cash Merger Price was fair, from a financial
point of view, to the holders of Happy Kids Common Stock (other than the
holders of Management Shares and Rollover Shares, as to which CIBC was not
requested to express an opinion).
The full text of CIBC's opinion, dated September 15, 1999, which describes
the assumptions made, procedures followed, matters considered and limitations
on the review undertaken, is attached as Annex B and is incorporated into this
Proxy Statement by reference. CIBC's opinion is addressed to the Special
Committee and relates only to the fairness of the Cash Merger Price, from a
financial point of view, to the holders of Happy Kids Common Stock (other than
the holders of Management Shares and Rollover Shares, as to which CIBC was not
requested to express an opinion). The opinion does not address any other
aspect of the proposed Merger or any related transaction and does not
constitute a recommendation to any shareholder with respect to any matter
relating to the Merger. The description of CIBC's opinion included in this
Proxy Statement is qualified in its entirety by reference to Annex B. Holders
of Happy Kids Common Stock are urged to read the opinion carefully in its
entirety.
In arriving at its opinion, CIBC, among other things:
(a) reviewed the terms of a draft dated September 14, 1999 of the Merger
Agreement;
(b) reviewed audited financial statements for Happy Kids for the fiscal
years ended December 31, 1997 and December 31, 1998;
(c) reviewed unaudited financial statements for Happy Kids for the six-
month period ended June 30, 1999;
(d) reviewed financial projections for Happy Kids prepared by the
management of Happy Kids;
(e) held discussions with the senior management of Happy Kids with
respect to the business and prospects for future growth of Happy Kids;
(f) reviewed and analyzed publicly available financial data for
companies CIBC deemed comparable to Happy Kids;
(g) performed a discounted cash flow analysis of Happy Kids using
assumptions of future performance provided to CIBC by the management of
Happy Kids;
(h) reviewed and analyzed publicly available information for
transactions that CIBC deemed comparable to the Merger;
(i) reviewed public information concerning Happy Kids;
(j) at the direction of the Special Committee, approached and held
discussions with third parties to solicit indications of interest in the
acquisition of all or a part of Happy Kids; and
(k) performed such other analyses and reviewed such other information as
CIBC deemed appropriate.
In rendering its opinion, CIBC relied on and assumed, without independent
verification or investigation, the accuracy and completeness of all of the
financial and other information provided to or discussed with CIBC by Happy
Kids and its employees, representatives and affiliates. With respect to
forecasts of the future financial condition and operating results of Happy
Kids, CIBC assumed, at the direction of the management of Happy Kids, without
independent verification or investigation, that the forecasts were reasonably
prepared on bases
28
<PAGE>
reflecting the best available information, estimates and judgments of the
management of Happy Kids. CIBC was advised that it was intended, and therefore
CIBC also assumed, that the Merger would be recorded as a recapitalization for
financial reporting purposes. At the direction of the management of Happy
Kids, CIBC further assumed that the final terms of the Merger Agreement would
not vary materially from the terms described in the draft reviewed by CIBC.
CIBC did not make or obtain any independent evaluations or appraisals of
the assets or liabilities of Happy Kids or its affiliated entities. CIBC
expressed no opinion as to the underlying valuation, future performance or
long-term viability of Happy Kids, or the price at which the Happy Kids Common
Stock would trade or otherwise be transferable after announcement of the
proposed Merger. CIBC was not requested to evaluate, and its opinion does not
address, the consideration to be received in the Merger by holders of
Management Shares and Rollover Shares and, at the direction of Happy Kids,
CIBC evaluated the Cash Merger Price as though all shares of Happy Kids Common
Stock were transferred in the Merger for the Cash Merger Price. CIBC's opinion
was necessarily based on the information available to CIBC and general
economic, financial and stock market conditions and circumstances as they
existed and could be evaluated by CIBC as of the date of the opinion. No other
instructions or limitations were imposed by Happy Kids on CIBC with respect to
the investigations made or procedures followed by CIBC in rendering its
opinion. It should be understood that, although subsequent developments may
affect its opinion, CIBC does not have any obligation to update, revise or
reaffirm its opinion.
A copy of CIBC's written presentation to the Special Committee has been
filed as an exhibit to the Rule 13e-3 Transaction Statement on Schedule 13E-3,
as amended, filed by Happy Kids with the Commission and will be available for
inspection and copying at the principal executive offices of Happy Kids during
regular business hours by any interested stockholder of Happy Kids or any
representative of such stockholder who has been so designated in writing and
may be inspected and copied at the office of, and obtained by mail from, the
Commission.
In its analyses, CIBC considered industry performance, regulatory, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of Happy Kids. No company, transaction or
business used in CIBC's analyses as a comparison is identical to Happy Kids or
the proposed merger, and an evaluation of the results of the analyses is not
entirely mathematical. Rather, the analyses involve complex considerations and
judgments concerning financial and operating characteristics and other factors
that could affect the acquisition, public trading or other values of the
companies, business segments or transactions analyzed.
The estimates contained in CIBC's analyses and the ranges of valuations
resulting from any particular analysis are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by its analyses. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, CIBC's analyses and estimates
are inherently subject to substantial uncertainty.
CIBC's opinion and financial analyses were only one of many factors
considered by the Special Committee in its evaluation of the proposed Merger
and should not be viewed as determinative of the views of the Happy Kids
Special Committee, Board or management with respect to the Merger or the Cash
Merger Price.
The following is a summary of the material analyses underlying CIBC's
opinion presented to the Special Committee on September 8, 1999:
Selected Companies Analysis. CIBC compared financial and operating data for
Happy Kids with corresponding information for 20 companies in the apparel
industry, with particular focus on the following selected companies:
. Aris Industries, Inc.
. Authentic Fitness Corporation
. Bernard Chaus, Inc.
29
<PAGE>
. Gerber Childrenswear, Inc.
. McNaughton Apparel Group Inc.
. OshKosh B'Gosh, Inc.
. Phillips-Van Heusen Corp.
. Tarrant Apparel Group
. V.F. Corporation
. The Warnaco Group, Inc.
CIBC reviewed enterprise values (calculated as equity market value, plus
debt, minority interest, straight preferred stock and out-of-the-money
convertible securities, less investments in unconsolidated affiliates and
cash) as multiples of, among other things, latest 12 months revenues, earnings
before interest, taxes, depreciation and amortization, commonly known as
"EBITDA," and earnings before interest and taxes, commonly known as "EBIT."
CIBC reviewed equity values as a multiple of latest 12 months net income and
stock prices as a multiple of estimated calendar years 1999 and 2000 earnings
per share, commonly referred to as "EPS." All multiples were based on closing
stock prices on September 3, 1999. Estimated financial and operating data for
the selected companies were based on publicly available research analysts'
estimates and estimated financial and operating data for Happy Kids were based
on internal estimates of the management of Happy Kids.
CIBC then applied a range of selected multiples derived for the selected
companies of latest 12 months revenues, EBITDA and EBIT, and latest 12 months
net income and estimated calendar years 1999 and 2000 EPS, to corresponding
financial data of Happy Kids. This analysis indicated an implied equity
reference range for Happy Kids of approximately $5.00 to $17.00 per share, as
compared to the Cash Merger Price of $12.00 per share.
Precedent Transaction Analysis. CIBC analyzed the implied transaction and
purchase price multiples paid in the following selected merger and acquisition
transactions in the apparel industry:
<TABLE>
<CAPTION>
Target Acquiror Date Announced
------ -------- --------------
<S> <C> <C>
.Nine West Group Inc. Jones Apparel Group, Inc. 3/2/99
.Phillips-Van Heusen Pyramid Partners AB
Corp. (Gant Brand) 2/24/99
.St. John Knits, Inc. Vestar/Gray Investors LLC and affiliates 2/3/99
.Perry Ellis
International, Inc. Supreme International Corp. 1/29/99
.Segrets, Inc. Liz Claiborne, Inc. 1/22/99
.Koret, Inc. Kellwood Co. 11/30/98
.Galoob Toys Inc. Hasbro, Inc. 9/28/98
.Sun Apparel, Inc. Jones Apparel Group, Inc. 9/10/98
.Farah Inc. Tropical Sportswear International Corp. 5/4/98
.Jeri-Jo Knitwear Inc. Norton McNaughton, Inc.
and Jamie Scott, Inc. 4/22/98
.Tahiti Apparel, Inc. Signal Apparel Company, Inc. 4/21/98
.Pepe Jeans London Corp. Tommy Hilfiger Corp. 1/31/98
.Designer Holdings Ltd. The Warnaco Group, Inc. 9/17/97
.Fieldcrest Cannon, Inc. Pillowtex Corp. 9/11/97
.Miss Erika, Inc. Norton McNaughton, Inc. 9/5/97
.American Marketing
Industries Inc. Jupiter Partners L.P. 11/13/95
</TABLE>
CIBC compared transaction values in the selected transactions as multiples
of, among other things, latest 12 months revenues, EBITDA and EBIT, and equity
purchase prices as a multiple of latest 12 months net income. All multiples
were based on financial information available at the time the relevant
transaction was announced.
30
<PAGE>
CIBC then applied a range of selected multiples derived for the selected
transactions of latest 12 months revenues, EBITDA, EBIT and net income to
corresponding financial data of Happy Kids. This analysis indicated an implied
equity reference range for Happy Kids of approximately $9.00 to $17.00 per
share, as compared to the Cash Merger Price of $12.00 per share.
Discounted Cash Flow Analysis. CIBC performed a discounted cash flow
analysis to estimate the present value of the stand-alone, unlevered, after-
tax free cash flows that Happy Kids could generate over calendar years 1999
through 2004, based on internal estimates of the management of Happy Kids. The
range of estimated terminal values for Happy Kids was calculated by applying
terminal value multiples of 5.5x to 7.5x to Happy Kids' estimated calendar
year 2004 EBITDA. The cash flows and terminal values were discounted to
present value using discount rates ranging from 13.0% to 15.0%. Ranges of
estimated terminal values were also calculated by applying perpetuity growth
rates of 4.0% to 5.0% to calendar year 2004 free cash flow, also discounted to
present value using discount rates of 13.0% to 15.0%. This analysis indicated
an implied equity reference range for Happy Kids of approximately $10.00 to
$16.00 per share, as compared to the Cash Merger Price of $12.00 per share.
Premiums Paid Analysis. CIBC reviewed the premiums paid in approximately
1,410 domestic transactions having transaction values of between $100 million
and $250 million effected between January 1, 1996 and August 11, 1999 and in
the 16 selected apparel transactions that CIBC examined under its Selected
Transaction Analysis. CIBC then applied the maximum, average and minimum
premiums derived from these transactions based on the per share market prices
of the target company one trading day, one week and four weeks prior to public
announcement of the transaction to the per share market price of Happy Kids
Common Stock one day prior to July 12, 1999, which is the date on which Happy
Kids publicly announced that it had received an offer from HIG to acquire all
outstanding shares of Happy Kids Common Stock held by non-majority
shareholders for $11.50 per share. This analysis indicated an implied equity
reference range for Happy Kids of approximately $10.00 to $18.00 per share, as
compared to the Cash Merger Price of $12.00 per share.
Leveraged Buyout Analysis. CIBC derived an implied equity reference range
for Happy Kids by performing a leveraged buyout analysis based on internal
estimates of the management of Happy Kids and estimated rates of return for a
financial buyer. CIBC assumed management projections for the years 1999
through 2004 and a capitalization structure similar to the one proposed by
HIG. The analysis was performed assuming a range of required rates of return
to a financial buyer of 25% to 35% and a range of EBITDA terminal multiples of
5.5x to 7.5x. This analysis indicated an implied equity reference range for
Happy Kids of approximately $10.00 to $13.00 per share, as compared to the
Cash Merger Price of $12.00 per share.
Other Factors. In rendering its opinion, CIBC also reviewed and considered,
among other things:
. historical and projected financial data for Happy Kids;
. historical market prices and trading volumes for Happy Kids Common Stock
and the relationship between movements in Happy Kids Common Stock,
movements in the common stock of the selected companies and movements in
the S&P 500 Index; and
. selected analysts' reports on Happy Kids.
Miscellaneous. Happy Kids has agreed to pay CIBC upon delivery of its
opinion an aggregate fee of $500,000. Happy Kids also has agreed to reimburse
CIBC for its reasonable out-of-pocket expenses, including reasonable fees and
expenses of legal counsel, and to indemnify CIBC and related parties, to the
full extent lawful, from and against liabilities, including liabilities under
the federal securities laws, incurred in connection with CIBC's engagement.
The Special Committee selected CIBC because of CIBC's reputation,
experience and expertise. As part of CIBC's investment banking business, CIBC
is regularly engaged in valuations of businesses and securities in connection
with acquisitions and mergers (including "going-private transactions"),
underwritings, secondary distributions of securities, private placements and
valuations for other purposes. In the ordinary course of business, CIBC and
its affiliates may actively trade securities of Happy Kids and its affiliates
for their own account and for the accounts of customers and, accordingly, may
at any time hold a long or short position in such securities.
31
<PAGE>
Certain Projections
The Company does not as a matter of policy make public forecasts or
projections as to future performance or earnings. However, in connection with
the sale of the Company, the Company prepared projections of its anticipated
future operating performance of the two fiscal years ended December 31, 1999
and December 31, 2000. The projections provided herein reflect certain
adjustments made to prior projections prepared in connection with the sale of
the Company, which adjustments were meant to take into account shortfalls in
the Company's second-quarter sales, anticipated future shortfalls and recent
adverse trends in the apparel industry.
Such projections were prepared assuming that the sale had not occurred and
upon estimates and assumptions (including with respect to industry
performance, general economic and business conditions, taxes, and other
matters) that inherently are subject to material uncertainties and risk, all
of which are difficult to quantify and many of which are beyond the control of
the Company. The projections were not prepared with a view to public
disclosure or compliance with the published guidelines of the Commission or
the guidelines established by the American Institute of Certified Public
Accountants regarding projections or forecasts and are included herein only
because such information was provided to potential acquirors. The Company's
internal operating projections are, in general, prepared solely for internal
use in connection with capital budgeting and other management decisions and
are subjective in many respects and thus susceptible to various
interpretations. Certain assumptions on which the projections were based
related to the achievement of strategic goals, objectives, and targets over
the applicable periods that are more favorable than historical results. There
can be no assurance that the assumptions made in preparing the projections
will prove accurate, and actual results may be materially greater or less than
those contained in the projections. Neither the Company's independent
auditors, nor any other independent accountants or financial advisors, have
compiled, examined, or performed any procedures with respect to the
projections contained herein, nor have they expressed any opinion or any form
of assurance on such information or its aachievability, and assume no
responsibility for, and disclaim any association with, the projections.
The projections below constitute forward looking statements, involve
numerous risks and uncertainties and reflect numerous assumptions made by the
Company's management. The Company's actual results may differ materially from
the results anticipated from the projections discussed herein as a result of
various factors, including, but not limited to, the effect of changing
economic or business conditions, weather conditions, competitive initiatives
and pricing pressures, shifts in market demand, the performance and needs of
industries served by the Company, actual future costs of operating expenses
such as fuel and related taxes, increases in labor costs, and management
retention. Accordingly, there can be no assurance that the projections will be
realized, and actual results may be materially greater or less than those
contained in the projections.
The inclusions of the projections herein should not be regarded as an
indication that Merger Sub, HIG-HK or the Company or their respective advisors
considered or consider the projections to be a reliable prediction of future
events, and the projections should not be relied upon as such. The Company
does not intend to update or otherwise revise the projections to reflect the
circumstances existing after the date when made or to reflect the occurrence
of future events even in the event that any or all of the assumptions
underlying the projections are shown to be in error.
1999 and Year 2000 Projections
(In thousands)
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Sales........................................................ $192,897 $226,864
Cost of goods sold........................................... 142,644 169,473
Gross profit................................................. 50,253 57,391
SG & A....................................................... 28,965 31,370
EBITDA....................................................... 21,288 26,021
Depreciation and amortization................................ 594 409
Operating income............................................. 20,694 25,612
Interest..................................................... 1,782 932
Pre tax income............................................... 18,912 24,680
Net income................................................... 10,969 14,314
</TABLE>
32
<PAGE>
Interests of Certain Persons in the Merger
In considering the recommendation of the Company's Board of Directors that
shareholders vote in favor of the Merger Agreement, shareholders should be
aware that certain members of Happy Kids' management and Board of Directors
have certain interests in the Merger that are in addition to, and may be
deemed to be in conflict with, the interests of the shareholders of Happy Kids
generally.
Officers of the Surviving Corporation. All members of the Company's current
management will continue as such after the Effective Time until their
successors are duly appointed or elected in accordance with applicable law.
See "Directors and Executive Officers of the Surviving Corporation."
Benefits Under Employment Agreements. Jack M. Benun, Mark J. Benun, and
Isaac Levy (the "Management Group") have executed employment agreements (the
"Employment Agreements") with the Company which agreements shall become
effective upon consummation of the Merger. The Employment Agreements each (a)
have a three-year term, and (b) provide for certain severance payments to be
made upon (i) termination of the officer's employment by the Surviving
Corporation without "cause" or (ii) the resignation of the officer for "good
reason" (as defined in each Employment Agreement). In addition, the Management
Group will be eligible to receive cash bonuses of up to an aggregate of
approximately $9.5 million (equally divided among the members of the
Management Group) for the period including fiscal years 1999, 2000 and 2001
and stock option grants representing up to an aggregate of 3% (1% per member
of the Management Group) of the Surviving Corporation Common Stock immediately
following the Effective Time, if the Company achieves certain earnings
targets.
Retention of Rollover Shares. At the Effective Time, an aggregate of
875,348 shares of Happy Kids Common Stock held by members of the Management
Group will be converted into shares of Surviving Corporation Common Stock on a
share-for-share basis. The Rollover Shares represent approximately 8.44% of
the outstanding shares of Happy Kids Common Stock and will represent
approximately 23.61% of the total outstanding shares of the Surviving
Corporation Common Stock immediately following the Effective Time.
The Rollover Shares are held as follows:
<TABLE>
<CAPTION>
Name Number of Shares
---- ----------------
<S> <C>
Jack M. Benun............................................... 372,023
Mark J. Benun............................................... 372,023
Isaac Levy.................................................. 131,302
-------
Total..................................................... 875,348
</TABLE>
Jack M. Benun, President, Chief Executive Officer and Chairman of the Board
of the Company is the father of Mark J. Benun, Executive Vice President,
Secretary and a Director of the Company. Isaac Levy is Vice President and a
Director of the Company.
Options. As of September 17, 1999, the directors and executive officers of
the Company held Options to acquire an aggregate of 305,000 shares of Happy
Kids Common Stock. Under the terms of the Merger Agreement, each holder of
Options will receive in cash an amount equal to the number of shares of Happy
Kids Common Stock subject to such Option, but only to the extent such Option
is fully exercisable as of the Effective Time (except for non-employee holders
of Options, in which case the amount received shall be equal to the number of
shares of Happy Kids Common Stock subject to such Option regardless of whether
or not such Options are then exercisable or vested) multiplied by the amount
by which the Cash Merger Price exceeds the exercise price of such Option, less
any applicable withholding taxes. Pursuant to such provision, the executive
officers and directors of Happy Kids will be entitled to receive for their
Options an aggregate of approximately $226,667 (before federal and state
income taxes) upon consummation of the Merger. All non-exerciseable Options
which are not cashed-out pursuant to this provision shall be assumed by the
Surviving Corporation.
The executive officers and directors named in the table below (a) held the
number of outstanding Options indicated as of September 17, 1999, and (b) will
receive the indicated amounts before federal and state income taxes in respect
of Options pursuant to the Merger Agreement.
33
<PAGE>
<TABLE>
<CAPTION>
Amount
Options Exercise of
Name Outstanding Price Payment
- ---- ----------- -------- --------
<S> <C> <C> <C>
Jack M. Benun..................................... 0 $ 0 0
Mark J. Benun..................................... 0 $ 0 0
Isaac Levy........................................ 100,000 $14.85 0
Stuart Bender..................................... 100,000 $10.00 $ 66,667
25,000 $13.50 0
Andrew Glasgow.................................... 0 $ 0 0
Marvin Azrak...................................... 40,000 $10.00 $ 80,000
Stephen I. Kahn................................... 40,000 $10.00 $ 80,000
------- ------ --------
Total........................................... 305,000 $226,667
======= ====== ========
</TABLE>
Present Interests in Happy Kids Common Stock. As of September 17, 1999, the
directors and executive officers of Happy Kids owned an aggregate of 7,845,693
shares of Happy Kids Common Stock (excluding shares subject to Options).
Excluding the Rollover Shares, 6,874,652 shares will be converted into the
right to receive the Management Cash Price per share pursuant to the Merger
Agreement. Such Management Cash Price will be $49,250,007 in the aggregate.
The executive officers and directors named in the table below (a) held the
number of shares of Happy Kids Common Stock indicated as of September 17,
1999, (b) will receive the Management Cash Price in respect of the number of
shares indicated, (c) will receive the Cash Merger Price in respect of the
number of shares indicated, (d) will receive the indicated aggregate amount in
respect of all shares held other than the Rollover Shares, and (e) will retain
the indicated number of Rollover Shares. Jack M. Benun, Mark J. Benun and
Isaac Levy have informed the Company that, prior to the consummation of the
Merger, shares of Happy Kids Common Stock owned by each of them may be donated
to charitable foundations controlled by them.
<TABLE>
<CAPTION>
Shares To Be
Exchanged Shares To Be Aggregate
Aggregate For Exchanged Amount
Number Of Management For Cash To Be Rollover
Name Shares Owned Cash Price Merger Price Received Shares
- ---- ------------ ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Jack M. Benun...... 3,293,750 2,921,727 0 $20,931,252 372,023
Mark J. Benun...... 3,293,750 2,921,727 0 20,931,252 372,023
Isaac Levy......... 1,162,500 1,031,198 0 7,381,503 131,302
Stuart Bender...... 0 0 0 0 0
Andrew Glasgow..... 95,693 0 95,693 1,148,316 0
Marvin Azrak....... 0 0 0 0 0
Stephen I. Kahn.... 0 0 0 0 0
--------- --------- ------ ----------- -------
Total............ 7,845,693 6,874,652 95,693 $50,392,323 875,348
========= ========= ====== =========== =======
</TABLE>
Indemnification of Officers and Directors. The Merger Agreement provides
that the Surviving Corporation shall cause to be maintained in effect for not
less than six years from the Effective Time the policies of directors and
officers liability insurance maintained by the Company and in effect as of
September 1, 1999, provided that the Surviving Corporation may substitute
therefor other policies of at least the same coverage amounts and which
contain terms and conditions not less advantageous to the beneficiaries of the
current policies and provided further that such substitution shall not result
in any gaps or lapses in coverage with respect to matters occurring on or
prior to the Effective Time and provided further that the Surviving
Corporation shall not be required to pay an annual premium in excess of 200%
of the last annual premium paid by the Company prior to the execution of the
Merger Agreement. In addition, the Merger Agreement provides that all rights
to indemnification for acts or omissions occurring at or prior to the
Effective Time in favor of the current or former directors or officers of the
Company, as provided in the Certificate of Incorporation or By-laws of the
Company, will survive the Merger and continue in full force and effect in
accordance with their terms from the Effective Time to the maximum extent
permitted by law with respect to any claims against the current or former
directors or officers of the Company arising out of such acts or omissions.
34
<PAGE>
Support Agreement. Each member of the Management Group acting in his
capacity as a shareholder has entered into the Support Agreement with Merger
Sub, pursuant to which they have each agreed to vote their respective shares
of Happy Kids Common Stock (including shares issuable upon exercise of Options
prior to the Effective Time) in favor of the Merger Agreement and the
transactions contemplated thereby at the Special Meeting or any adjournment
thereof. Unless the Merger Agreement is terminated in accordance with its
terms, such shareholders agreed to vote their respective shares of Happy Kids
Common Stock against (i) any merger agreement or merger (other than the Merger
Agreement and Merger), consolidation, combination, sale of substantial assets,
reorganization, recapitalization, dissolution, liquidation or winding up of or
by the Company or any other Acquisition Proposal, and (ii) any amendment of
the Company's Certificate of Incorporation or By-Laws or other proposal or
transaction involving the Company or any of its subsidiaries, which amendment
or other proposal or transaction would in any manner impede, frustrate,
prevent, or nullify the Merger, the Merger Agreement, or any of the other
transactions contemplated thereby. Until the Merger is consummated or the
Merger Agreement is terminated in accordance with its terms, such shareholders
agree they will not sell, transfer, pledge, assign or otherwise dispose of
their shares to any person other than Merger Sub or its designee, will not
enter into any other contract, option or other arrangement or understanding
with respect to their shares or take any other action that would in any way
restrict, limit or interfere with the performance of their obligations under
the Support Agreement or otherwise with respect to the Merger. The obligations
of the Management Group to vote in favor of the Merger Agreement and the
related proxy granted under the Support Agreement terminate upon the
consummation of the transactions contemplated by the Merger Agreement or
termination of the Merger Agreement in accordance with its terms. However, if
the Merger Agreement is terminated for any reason that results in the payment
of a termination fee by the Company to Merger Sub, then pursuant to the terms
of the Support Agreement, the Management Group will be jointly and severally
liable to Merger Sub for the Management Termination Fee. If, within twelve
months following any termination for which a Management Termination Fee has
been paid by the Management Group, any member of the Management Group sells
all or any portion of the Happy Kids Common Stock held by him to any person
other than Merger Sub or an affiliate of Merger Sub, then the Management Group
shall be jointly and severally liable to Merger Sub for the payment of a fee
equal to the product of (i) 90% multiplied by (ii) the aggregate number of
shares of Happy Kids Common Stock sold by members of the Management Group in
such transaction multiplied by (iii) the excess of (a) the price per share to
be received plus any other consideration to be received by members of the
Management Group over (b) $7.164. As of September 17, 1999, the parties to the
Support Agreement owned 7,750,000 shares of Happy Kids Common Stock, or 74.69%
of the outstanding Happy Kids Common Stock.
Special Committee Fees. Messrs. Azrak and Kahn have each received from the
Company, as compensation for their service as members of the Special
Committee, a fee of $25,000.
35
<PAGE>
LITIGATION
Persons purporting to be public shareholders of the Company brought three
separate actions, as purported class actions on behalf of all public
shareholders, in July 1999 following the Company's press release of July 12,
1999 announcing that HIG had proposed a "going private" transaction for the
Company and to purchase the shares of all public shareholders for $11.50 per
shares in a "cash out" merger. These actions challenge the proposed
transaction, if and when approved by the Company's Board of Directors, as a
violation of the Board's fiduciary duties to Company's public shareholders.
The defendants named in one or more of those actions were the Company, Messrs.
Jack and Mark Benun, Isaac Levy, Andrew Glasgow (another director of the
Company) and the Special Committee, as well as HIG which is named as alleged
joint tortfeasor. Although the original complaints in these actions have
different allegations, they collectively allege that the earlier proposed
offering price of $11.50 per share to public shareholders of the Company was
inadequate, was supposedly arrived by an arbitrary method (not specified), was
not arrived at as a result of disinterested arms' length bargaining with the
benefit of advice from disinterested professionals and that the price for such
shares was arrived at without adequately "shopping" the Company or its
businesses, that certain of the directors allegedly possess non-public
information about the "true value" of the Company that they have not disclosed
to the public shareholders, and that the Board of Directors had otherwise
failed to take some unspecified steps required to obtain the best possible
price for the public shareholders. Plaintiffs sought relief enjoining the
earlier proposed transaction or alternatively damages in some unspecified
amount from the defendants. The allegations made by the Plaintiffs in the
three lawsuits are detailed in the Complaints on file with the Clerk of the
Court in the following actions now pending in the Supreme Court of the State
of New York for the County of New York: Glenn Whipple v. Happy Kids Inc. et
al., Civil Action No. 99-603371; Arthur Kaplan v. Happy Kids Inc. et al.,
Civil Action No. 99-114421; and John Tsapelas v. Happy Kids Inc. et al., Civil
Action No. 99-115078.
Defendants agreed to the consolidation of the three actions and to accept
service of any consolidated amended complaint that plaintiffs' counsel might
choose to file after the Company's announcement that its Board of Directors
had approved a "going private" transaction.
The board-approved transaction was publicly announced on September 17,
1999. Plaintiffs' counsel have not yet filed any consolidated amended
complaint and the Company does not now know whether such a complaint will be
filed or the nature of the claims that may be asserted in such a complaint.
Defendants believe that they would have meritorious defenses to any claims
that might be made by plaintiffs' counsel in any consolidated amended
complaint and intended to vigorously defend against them.
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CERTAIN EFFECTS OF THE MERGER
If the Merger is consummated, the Company's shareholders (other than the
holders of the Rollover Shares, the Management Shares and the Excluded Shares)
will have the right to receive $12.00 in cash, without interest, for each
share of Happy Kids Common Stock held immediately prior to the Effective Time.
As a result of the Merger, such shareholders will cease to have any ownership
interest in Happy Kids and will cease to participate in future earnings and
growth, if any, of Happy Kids. Moreover, if the Merger is consummated, public
trading of the Happy Kids Common Stock will cease, the Happy Kids Common Stock
will cease to be quoted on the Nasdaq National Market, the registration of the
Happy Kids Common Stock under the Exchange Act will be terminated and the
Company will cease filing reports with the Commission. Holders of Management
Shares (other than Rollover Shares) will have the right to receive $7.164 in
cash, without interest, for each Management Share held immediately prior to
the Effective Time.
Immediately after the Merger, approximately 76.39% of the outstanding
shares of Surviving Corporation Common Stock will be owned by HIG-HK and the
remaining 23.61% will be owned by certain officers, directors, and principal
shareholders of the Company. See "--Interests of Certain Persons in the
Merger" and "of the Merger--Treatment of Securities in the Merger."
The Merger Agreement provides that the current directors of the Company
will be replaced by the directors of the Merger Sub. All members of the
Company's current management will continue as such after the Effective Time.
See "Directors and Executive Officers of the Surviving Corporation."
Upon consummation of the Merger, the Surviving Corporation expects to
refinance certain existing indebtedness and capital leases of Happy Kids. See
"Financing of the Merger."
Accounting Treatment of Transaction
It is the intention of the parties that the Merger be accounted for as a
recapitalization. If the Merger is accounted for as a recapitalization, the
historical basis of Happy Kids' assets and liabilities will not be impacted by
the Merger and the transactions contemplated thereby.
Certain Federal Income Tax Consequences of the Merger
The following discussion summarizes the material federal income tax
consequences of the Merger that are generally applicable to holders of Happy
Kids Common Stock who, pursuant to the Merger, exchange all of their Happy
Kids Common Stock for cash. The discussion is based upon current provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), currently
applicable Treasury regulations, and judicial and administrative decisions and
rulings. Future legislative, judicial, or administrative changes or
interpretations could alter or modify the statements and conclusions set forth
herein, and any such changes or interpretations could be retroactive and could
affect the tax consequences to the shareholders of the Company.
The discussion below does not purport to deal with all aspects of federal
income taxation that may affect particular shareholders in light of their
individual circumstances, and is not intended for shareholders subject to
special treatment under the federal income tax law (including insurance
companies, tax-exempt organizations, financial institutions, broker-dealers,
foreign persons, shareholders who hold their stock as part of a hedge,
appreciated financial position, straddle or conversion transaction,
shareholders who do not hold their stock as capital assets, and shareholders
who have acquired their stock upon the exercise of employee options or
otherwise as compensation). Furthermore, the discussion below does not address
the federal income tax consequences of the Merger to (i) shareholders who hold
Rollover Shares (including, without limitation, the federal income tax
consequences to such shareholders of the receipt of cash pursuant to the
Merger) or (ii) shareholders who may be considered to own shares of stock of
the Surviving Corporation after the Effective Time through application of
constructive ownership rules of Section 318 of the Code (which, in very
general terms, deem a shareholder to own shares of stock that are owned by
certain members of his or her family (spouse,
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children, grandchildren, and parents) and other related parties including, for
example, certain entities in which such shareholder has a direct or indirect
interest (including partnerships, estates, trusts and corporations), as well
as shares of stock that such shareholder (or a related party) has the right to
acquire upon exercise of an option or conversion right). In addition, the
discussion below does not consider the effect of any applicable state, local,
or foreign tax laws.
EACH HOLDER OF HAPPY KIDS COMMON STOCK IS STRONGLY URGED AND EXPECTED TO
CONSULT WITH SUCH HOLDER'S TAX ADVISOR TO DETERMINE THE PARTICULAR FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER IN LIGHT OF SUCH HOLDER'S
SPECIFIC CIRCUMSTANCES AS WELL AS THE APPLICABILITY AND EFFECT OF STATE,
LOCAL, AND FOREIGN TAX LAWS.
The Merger. A shareholder who, pursuant to the Merger, exchanges all of his
or her Happy Kids Common Stock for cash will recognize gain or loss equal to
the difference between (a) the amount of cash such shareholder receives in the
Merger and (b) the shareholder's adjusted tax basis in such shares. Such gain
or loss will be capital gain or loss, and generally will be long-term capital
gain or loss if at the Effective Time the shareholder's holding period for the
Happy Kids Common Stock is more than one year. In the case of individuals,
"net capital gain," i.e., the excess of net long-term capital gain over net
short-term capital loss, is generally subject to a reduced rate of federal
income tax.
Backup Withholding. Shareholders who own Happy Kids Common Stock should be
aware that the Company will be required in certain cases to withhold and remit
to the United States Internal Revenue Service 31% of amounts payable in the
Merger to any person (a) who has provided either an incorrect tax
identification number or no number at all, (b) who is subject to backup
withholding by the Internal Revenue Service for failure to report the receipt
of interest or dividend income properly, or (c) who has failed to certify to
the Company that it is not subject to backup withholding or that is an "exempt
recipient." Backup withholding is not an additional tax, but rather may be
credited against the taxpayer's tax liability for the year.
Dissenter's Rights
Since the Company's common stock is designated as a national market system
security on the Nasdaq National Market, pursuant to Section 910 of the BCL,
dissenter's rights will not be available to shareholders of the Company.
Accordingly, although a shareholder who objects to the Merger may vote against
its adoption, since the members of the Management Group have indicated that
they will vote in favor of the Merger, the approval by shareholders is assured
and an objecting shareholder's only available alternative may be limited to
selling the shareholder's common stock before the Merger takes place.
CERTAIN RELATED AGREEMENTS
Certain related agreements have been entered into in connection with the
Merger Agreement, which agreements shall take effect upon consummation of the
Merger. These agreements include a shareholder's agreement governing certain
aspects of the relationship between the holders of the Rollover Shares, the
Company and HIG-HK and employment agreements between the Company and each of
Jack M. Benun, Mark J. Benun and Isaac Levy on the other hand.
Shareholders Agreement
The Shareholders Agreement dated as of September 17, 1999, by and among
Happy Kids, HIG-HK, the Management Investors (as defined therein) and the New
Shareholders (as defined therein) provides that from and after the Effective
Time each party thereto shall vote his or its shares of Surviving Corporation
Common Stock (and any other voting securities of the Surviving Corporation
over which he or it has voting control) and shall take all other necessary or
desirable action within his or its control to insure that (a) the authorized
number of directors of the Surviving Corporation shall be the number
determined by the Investor, (b) each of the five
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representatives designated by HIG-HK (the "Investment Directors") and each of
the four representatives designated by the Management Group (the "Management
Directors") shall be elected to the Board of Directors of the Surviving
Corporation, (c) no Investment Director shall be removed, except upon the
written request of HIG-HK, (d) no Management Director shall be removed, except
upon the written request of a majority of the Management Directors (other than
the director to be removed), (e) any Management Director who ceases to be an
employee of the Surviving Corporation shall be removed as a director, unless
such director was terminated "without cause" or resigned for "good reason" and
such director holds a minimum of five percent (5%) of the outstanding
Surviving Corporation Common Stock, and (f) in the event that any Investment
Director or Management Director ceases to serve as a member of the Board of
Directors during his term of office, the resulting vacancy shall be filled by
a representative designated by the vote of a majority of the shares controlled
by HIG-HK (the "Investor Shares") or a majority of the shares controlled by
the Management Group (the "Executive Shares"), as applicable, provided that if
a Management Director ceases to serve as a result of his termination with
"cause" or resignation without "good reason" then the resulting vacancy shall
be filled by the vote of a majority of the Investor Shares.
In addition, the terms of the Shareholders Agreement prohibit each holder
of Executive Shares from selling, transferring, assigning, pledging or
otherwise disposing of ("transferring") any interest in his shares without the
prior written consent of HIG-HK, except that no prior written consent will be
required in the event of (i) a public sale (a) pursuant to an offering
registered under the Securities Act or (b) through a broker, dealer or market
maker pursuant to Rule 144 under the Securities Act, (ii) a sale (upon
approval by the Board of Directors and by holders of a majority of the then
outstanding Surviving Corporation Common Stock) of all or substantially all of
the Surviving Corporation's capital stock (whether by merger, consolidation,
recapitalization, reorganization or other business combination) to any
independent third party or group of third parties or (iii) a transfer of
shares pursuant to the laws of descent and distribution or to the spouse
and/or descendants of the holder, or a trust for the benefit of any of them;
provided that any transferee pursuant to clause (iii) above shall be subject
to the same restrictions set forth above. Holders of Investor Shares must
provide notice to the Surviving Corporation and holders of Executive Shares at
least 30 days prior to transferring Investor Shares to any person (other than
an affiliate of HIG-HK). Such notice must (i) specify in reasonable detail the
identity of the proposed transferee and the terms and conditions of the
transfer and (ii) provide the opportunity for holders of Executive Shares to
participate on a pro rata basis in the proposed sale, at the same price and on
the same terms. Each holder of Investment Shares is obligated to use
reasonable efforts to obtain the agreement of the proposed transferee to the
participation of the other shareholders and will not transfer any of the
Investor Shares unless (A) the proposed transferee agrees to allow the
participation of such other shareholders or (B) the holder of Investor Shares
purchases the number of shares of such class of Surviving Corporation capital
stock from the other shareholder which the other shareholders would have been
entitled to sell in a participation. Any transfer or purported transfer by any
holder of Executive Shares or Investor Shares of any shares of capital stock
of the Company in violation of the Shareholders Agreement shall be void ab
initio and shall no longer be in force and effect.
Upon termination of the employment of any member of the Management Group or
his resignation (other than termination without cause or resignation with good
reason) all shares of Surviving Corporation Common Stock issued or issuable to
him shall be subject to repurchase by HIG-HK (including any shares of
Surviving Corporation Common Stock held by his transferees), at a price per
share equal to $7.164 per share, except that in the event of his death or
disability, such shares may be transferred to the remaining members of the
Management Group provided that if such shares are not transferred within 60
days of the death or disability of the holder, such shares shall be subject to
repurchase by HIG-HK. All shares eligible for repurchase by HIG-HK that are
not repurchased shall be subject to repurchase by the Surviving Corporation.
Prior to consummation of an initial public offering, if the Board of
Directors determines to sell all or substantially all of the Surviving
Corporation's assets or outstanding capital stock (a "Sale") the holders of
Executive Shares will be given the opportunity to participate in the sale
process, to the extent such participation does not materially impede the
process, and will have the opportunity to make an offer to the Board to
purchase such assets or capital stock if they so desire. If the Board of
Directors and the holders of a majority of the
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outstanding shares of Surviving Corporation Common Stock approve a Sale to an
independent third party or group of independent third parties, then all
parties to the Shareholders Agreement will consent to and raise no objection
to such Sale, will waive all dissenter's rights, appraisal rights or similar
rights in connection with such Sale (if the sale is structured as a merger or
consolidation) and will agree to sell all of their respective shares and
rights to acquire shares in a sale of stock) on the terms and conditions
approved by the Board and a majority of the outstanding shares of Surviving
Corporation Common Stock.
Employment Agreements
Each member of the Management Group has entered into an Employment
Agreement dated as of September 17, 1999. Each Employment Agreement is
effective as of the Effective Time and provides for a term of three years
(with an automatic renewal for successive one-year periods unless either party
provides 60 days prior written notice otherwise). Jack M. Benun, Mark J. Benun
and Isaac Levy will serve the Company as its President and Chief Executive
Officer, Executive Vice President and Secretary, and Senior Vice President,
respectively. In the event that the Merger is not consummated, the Employment
Agreements shall be null and void ab initio.
Pursuant to their Employment Agreements, Messrs. Jack M. Benun, Mark J.
Benun and Isaac Levy will earn an annual base salary equal to $425,000 for
Jack M. Benun and $300,000 for each of Messrs. Mark J. Benun and Isaac Levy.
In addition, each will be eligible to receive based upon the financial
performance of the Company, cash bonuses to the members of the Management
Group in a aggregate amount of up to approximately $9.5 million (approximately
$3.17 million per member), based upon the Company's achievement of certain
financial targets for fiscal year 1999, 2000 and 2001 and stock option grants
in fiscal year 2001 representing, in the aggregate, up to 3% (1% per member)
of the outstanding shares of Surviving Corporation Common Stock immediately
following the Effective Time, based upon the Company's achievement of certain
financial targets in fiscal year 2001. Benun, Benun and Levy will each also be
entitled to participate in all employee benefit programs provided by the
Company and will be reimbursed for all reasonable expenses incurred in the
course of fulfilling his duties under the Employment Agreement.
Upon termination of his employment by the Company without "cause" (as
defined in the Employment Agreement) or resignation by the officer for "good
reason" (as defined in the Employment Agreement), the officer will receive his
base salary and health benefits for 180 days, and the maximum bonus for the
fiscal 2000 to which each Officer would be entitled had his employment
continued through the term subject to certain stated conditions. If the
officer's employment is terminated for cause or the officer resigns without
good reason, officer will receive only his base salary and accrued vacation.
If the officer is terminated due to death or Permanent Disability or
Incapacity (as defined under the Employment Agreement), the officer or his
estate will receive his base salary at the current rate for three months after
the termination plus a pro rata portion or such officer's annual bonus. All
other benefits and bonuses payment terminate upon termination of the
Employment Agreement.
Each Employment Agreement contains non-competition and non-solicitation
provisions prohibiting the officer, during the period of his employment and
for two years thereafter, from (i) directly or indirectly participating
anywhere in the world in the Company's business (as conducted by or proposed
to be conducted), (ii) inducing or attempt to induce any employee of the
Company or its subsidiaries to leave the employment of the Company or its
subsidiaries or interfering with the relationship of the Company and the
Company's employees, (iii) hiring any person who was a salaried employee of
the Company during the officer's employment period, (iv) inducing or attempt
to induce any customer or supplier of the Company to cease doing business with
the Company or interfering with the relationship between such customer or
supplier and the Company.
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CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The following is a brief summary of the material aspects of the Merger
Agreement, which appears as Annex A to this Proxy Statement and is
incorporated herein by reference. This summary is qualified in its entirety by
reference to the Merger Agreement.
General
The Merger Agreement provides that, following the approval of the Merger
and the adoption of the Merger Agreement by the vote of the holders of a
majority of the issued and outstanding shares of the Happy Kids Common Stock
and the satisfaction or waiver of the other conditions to the Merger, Merger
Sub will be merged with and into Happy Kids, and Happy Kids will continue as
the Surviving Corporation after the Merger.
Upon the terms and subject to the conditions of the Merger Agreement,
immediately following the closing of the Merger the parties will cause the
Merger to become effective by filing the Certificate of Merger with the New
York Department of State in accordance with the relevant provisions of the BCL
and the parties shall take such other and further actions as may be required
by law to make the Merger effective.
Treatment of Securities in the Merger
At the Effective Time, the shares of Happy Kids Common Stock and Options in
respect thereof will be treated as follows:
Cash Merger Price and Management Cash Price. At the Effective Time, each
share of Happy Kids Common Stock held by the Company's shareholders (other
than the Rollover Shares and the Management Shares) will be converted into the
right to receive the Cash Merger Price. At the Effective Time, each Management
Share will be converted into the right to receive the Management Cash Price.
Payment of Cash Merger Price and Management Cash Price. The Cash Merger
Price (or, if applicable, the Management Cash Price) will be paid promptly,
but in any event not later than three business days following receipt by the
Exchange Agent of certificates representing the shares (other than Rollover
Shares) of Happy Kids Common Stock held by such shareholders. No interest will
be paid or accrued on the Cash Merger Price (or, if applicable, the Management
Cash Price). At the Effective Time, Merger Sub will deposit with the Exchange
Agent for the benefit of the holders of shares of Happy Kids Common Stock, the
funds necessary to pay the Cash Merger Price (or, if applicable, the
Management Cash Price) for each share payable pursuant to the terms of the
Merger Agreement. Promptly after the Effective Time, and in any event not
later than three business days following the Effective Time, the Company shall
cause the Exchange Agent to mail to each record holder of Happy Kids Common
Stock immediately prior to the Effective Time (other than Rollover Shares) a
letter of transmittal specifying that delivery shall be effected and risk of
loss and title to the certificates representing the Happy Kids Common Stock
held by such shareholder shall pass, only upon proper delivery of such
certificates or an affidavit of loss in lieu of such certificates to the
Exchange Agent, and providing instructions for use in surrendering
certificates to the Exchange Agent for exchange into the Cash Merger Price
(or, if applicable, the Management Cash Price). In the event that any
certificate representing Happy Kids Common Stock has been lost, stolen or
destroyed, in addition to providing an affidavit of lost certificate to the
Exchange Agent, a shareholder receiving the Cash Merger Price (or, if
applicable, the Management Cash Price) may, as a condition precedent to the
payment thereof, be obligated to give the Surviving Corporation a bond in such
sum as the Surviving Corporation might direct or may otherwise be required to
indemnify the Surviving Corporation in an manner satisfactory to it against
any claim that many be made against the Surviving Corporation with respect to
the certificate claimed to have been lost, stolen or destroyed. Shareholders
should not forward stock certificates to the Exchange Agent until they have
received transmittal forms. Certificates should not be returned with the
enclosed proxy cards. From and after the Effective Time, the stock transfer
books of the Company in place prior to the Effective Time will be closed and
thereafter there will be no transfers on such books of the shares of Happy
Kids Common Stock which were outstanding immediately prior to the Effective
Time.
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Rollover Shares. At the Effective Time, the Rollover Shares will be
converted on a share-for-share basis into shares of the Surviving Corporation
Common Stock. The Rollover Shares represent approximately 8.44% of the
outstanding shares of Happy Kids Common Stock and will represent approximately
23.61% of the total outstanding shares of Surviving Corporation Common Stock
immediately following the Effective Time. Jack M. Benun, Mark J. Benun and
Isaac Levy own, respectively, 372,023, 372,023 and 131,302 Rollover Shares,
which represent approximately 3.59%, 3.59% and 1.27% of the outstanding shares
of Happy Kids Common Stock and which will represent approximately 10.03%,
10.03% and 3.59%, respectively, of the total outstanding shares of Surviving
Corporation Common Stock immediately following the Effective Time. See
"Special Factors--Interests of Certain Persons in the Merger--Retention of
Rollover Shares."
Excluded Shares. At the Effective Time, each share of Happy Kids Common
Stock held in the Company's treasury, if any, will be canceled and retired
without payment of any consideration therefor.
Issuance of Surviving Corporation Common Stock to HIG-HK. At the Effective
Time, the issued and outstanding shares of Merger Sub will be converted into
2,832,183 shares of Surviving Corporation Common Stock, representing
approximately 76.39% of the total outstanding shares of Surviving Corporation
Common Stock.
Payment for Options. Immediately prior to the Effective Time each holder of
a then-outstanding employee stock option to purchase Happy Kids Common Stock,
other than holders of certain non-vested employee Options, will be entitled to
receive in settlement of such Option a cash payment from the Company equal to
the product of (i) the total number of shares previously subject to such
Option, but only to the extent such Option is exercisable as of the Closing
Date and (ii) the excess of the Cash Merger Price over the exercise price per
share subject to such Option, subject to any required withholding of taxes.
The surrender of an Option to the Company as heretofore described shall be
deemed a release of any and all rights the holder had or may have had in
respect of such Option. The Surviving Corporation will assume each employee's
Option (or portion thereof) which is currently non-exercisable.
Board of Directors and Officers of the Surviving Corporation
The directors of Merger Sub immediately prior to the Effective Time shall
be the initial directors of the Surviving Corporation and shall hold office
until their respective successors are duly elected and qualified, or their
earlier death, resignation or removal. A majority of the initial directors of
the Surviving Corporation will be designees of HIG-HK. Jack M. Benun, Mark J.
Benun, Isaac Levy and Andrew Glasgow will also be directors of the Surviving
Corporation. The officers of the Company immediately prior to the Effective
Time shall be the initial officers of the Surviving Corporation and shall hold
office until their respective successors are duly elected and qualified, or
their earlier death, resignation or removal. See "Directors and Executive
Officers of the Surviving Corporation."
Certificate of Incorporation and By-laws of the Surviving Corporation
Immediately following the Effective Time, the Certificate of Incorporation
of the Company in effect immediately prior to the Effective Time shall be
amended to provide for the number and types of shares to be issued by the
Surviving Corporation and shall thereafter be the Certificate of Incorporation
of the Surviving Corporation, until thereafter amended in accordance with the
provisions thereof, the Merger Agreement and applicable law.
The bylaws of the Company in effect at the Effective Time shall be the
bylaws of the Surviving Corporation, until duly amended in accordance with the
provisions thereof, of the Merger Agreement and of applicable law.
Payment for Shares
At the Effective Time, the Company will deposit with the Exchange Agent for
the benefit of the holders of shares of Happy Kids Common Stock the funds
necessary to pay the Cash Merger Price (or, if applicable, the Management Cash
Price) for each share payable pursuant to the terms of the Merger Agreement.
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Promptly after the Effective Time, but in no event later than three
business days following the Effective Time, the Exchange Agent will send to
each record holder of Happy Kids Common Stock a letter of transmittal
specifying that delivery shall be effected and risk of loss and title to the
certificates representing the Happy Kids Common Stock held by such shareholder
shall pass, only upon proper delivery of such certificates or an affidavit of
loss in lieu of such certificates to the Exchange Agent, and providing
instructions for use in surrendering to the Exchange Agent certificates for
exchange into the Cash Merger Price (or, if applicable, the Management Cash
Price). In the event that any certificate representing Happy Kids Common Stock
has been lost, stolen or destroyed, in addition to providing an affidavit of
lost certificate to the Exchange Agent, a shareholder receiving the Cash
Merger Price (or, if applicable, the Management Cash Price) may, as a
condition precedent to the payment thereof, be obligated to give the Surviving
Corporation a bond in such sum as the Surviving Corporation might direct or
may otherwise be required to indemnify the Surviving Corporation in an manner
satisfactory to it against any claim that many be made against the Surviving
Corporation with respect to the certificate claimed to have been lost, stolen
or destroyed.
SHAREHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE AGENT
UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS. SHAREHOLDERS SHOULD NOT RETURN
STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD.
Upon surrender to the Exchange Agent of such certificate or certificates
together with a letter of transmittal duly executed each holder of an
outstanding share certificate or certificates which prior to the Effective
Time represented shares of Happy Kids Common Stock (other than the Rollover
Shares), by the Exchange Agent, shall be entitled to receive promptly, but in
any event not later than three business days following receipt thereof the
Cash Merger Price (or, if applicable, the Management Cash Price) in respect of
each share of Happy Kids Common Stock theretofore evidenced by such
certificate or certificates so surrendered. Until surrendered, each such
certificate (other than certificates representing Excluded Shares), will be
deemed for all purposes to evidence only the right to receive the Cash Merger
Price (or, if applicable, the Management Cash Price) for holders of Happy Kids
Common Stock (other than the Rollover Shares). In no event will the holder of
any surrendered certificate be entitled to receive interest on the Cash Merger
Price (or, if applicable, the Management Cash Price).
Upon surrender to the Exchange Agent of a certificate or certificates
representing Rollover Shares together with a letter of transmittal duly
executed, each holder of an outstanding share certificate or certificates
which prior to the Effective Time represented Rollover Shares shall be
entitled to receive promptly, but in any event not later than three business
days following receipt thereof, on a share-for-share basis, a certificate or
certificates representing the shares of Surviving Corporation Common Stock.
Until surrendered, each certificate representing Rollover Shares will be
deemed for all purposes to evidence only the right to receive shares of
Surviving Corporation Common Stock in exchange therefor.
If the Cash Merger Price (or, if applicable, the Management Cash Price) (or
any portion thereof) is to be delivered to a person other than the person in
whose name the certificates surrendered in exchange therefor are registered,
it shall be a condition to the payment of such consideration that the
certificates so surrendered are properly endorsed and otherwise are in proper
form for transfer and that the person surrendering such shares shall request
such transfer pay to the Exchange Agent any transfer or other taxes required
by reason of the payment of the Cash Merger Price (or, if applicable, the
Management Cash Price) to a person other than the registered holder of the
share certificate surrendered or establish to the satisfaction of the Exchange
Agent that such taxes have been paid or are not required to be paid.
From and after the Effective Time, the stock transfer books of the Company
in place prior to the Effective Time will be closed and thereafter there will
be no transfers on such books of the shares of Happy Kids Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, certificates are presented to the Surviving Corporation, they
will be canceled and exchanged for the Cash Merger Price (or, if applicable,
the Management Cash Price).
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Any funds remaining with the Exchange Agent 180 days following the
Effective Time will be delivered to the Surviving Corporation. Thereafter each
holder of Happy Kids Common Stock (other than Rollover Shares) prior to the
Merger may surrender such shares to the Surviving Corporation and (subject to
applicable abandoned property, escheat and similar laws) receive in
consideration therefor the aggregate Cash Merger Price (or, if applicable, the
Management Cash Price) relating thereto.
Representations and Warranties
Representations and Warranties of the Company. The Merger Agreement
contains representations and warranties of the Company with respect to the
Company and its subsidiaries relating to, among other things, (a) organization
and qualification of the Company and its subsidiaries; (b) capitalization of
the Company and its subsidiaries; (c) the authorization, execution, delivery,
performance, and enforceability of the Merger Agreement and related matters;
(d) non-contravention of organizational documents, contracts and applicable
laws; (e) consents and approvals; (f) Commission reporting, financial
statements and other financial information; (g) compliance with applicable
laws; (h) litigation; (i) accuracy of information provided in this Proxy
Statement and in other filings with governmental authorities; (j) benefit
plans and other matters relating to the Employee Retirement Income Security
Act of 1974, as amended, and the regulations thereunder ("ERISA"); (k) tax
matters; (l) environmental, health and safety matters; (m) absence of certain
changes in the Company's business and that of its subsidiaries; (n) matters
related to the use of brokers and finders, and payment of fees or other
expenses related thereto; (o) the receipt of the opinion of the Company's
financial advisor; (p) material contracts of the Company and its subsidiaries;
(q) recommendation of the Company's Board of Directors and the Special
Committee of the Board of Directors with respect to the Merger, the Merger
Agreement and the transactions related thereto; (r) the required shareholder
approval with respect to the Merger, the Merger Agreement and the transactions
related thereto; (s) intellectual property matters (including without
limitation, licenses); (t) related party transactions; (u) the applicability
of state takeover statutes; (v) labor relations and employment; (w) Year 2000
compliant technology and systems; (x) real estate; and (y) compliance with
international trade laws and regulations.
Representations and Warranties of Merger Sub. The Merger Agreement contains
representations and warranties of Merger Sub relating to, among other things,
(a) organization and qualification; (b) the authorization, execution,
delivery, performance, and enforceability of the Merger Agreement and related
matters; (c) consents and approvals; (d) the non-contravention of
organizational documents, contracts, and applicable laws; (e) the accuracy of
information provided by Merger Sub for use in this Proxy Statement and other
filings with governmental authorities; (f) the financing of the Merger; (g)
beneficial ownership of Happy Kids Common Stock; (h) matters relating to the
use of brokers and finders, and payment of fees or other expenses related
thereto; (i) activities of Merger Sub prior to the Merger; (j) litigation; and
(k) compliance with the confidentiality agreement previously executed by HIG.
Covenants
Interim Operations. In general, the Company has agreed that prior to the
Effective Time, except as otherwise provided in the Merger Agreement or unless
Merger Sub has consented in writing thereto, the Company will, and will cause
its subsidiaries to, (a) conduct its business in the ordinary course
consistent with past practice; and (b) use its commercially reasonable efforts
to maintain its business organizations, keep available its officers and
employees, and preserve its business relationships and goodwill. Furthermore,
the Company has generally agreed that, prior to the Effective Time, except as
otherwise provided in the Merger Agreement or unless Merger Sub has consented
in writing thereto, the Company will not, and will cause its subsidiaries not
to (a) adopt or amend in any material respect any bonus, profit-sharing,
compensation, severance, stock option or other employee benefit plan,
agreement or arrangement (other than annual bonuses made in the ordinary
course of business) for the benefit of any employee, officer or director of
the Company or any of its subsidiaries or pay any benefit not required by any
existing agreement or place any assets in trust for the benefit of any
employee, officer or director, in each other than in the ordinary course of
business; (b) incur indebtedness for borrowed money (other than under existing
lines of credit drawn to fund working capital (up to a maximum
44
<PAGE>
of $3 million); (c) make capital expenditures in excess of $50,000; (d) (x)
declare, set aside or pay dividends on any of its capital stock, (y) split,
combine or reclassify any of its capital stock or (z) purchase, redeem or
otherwise acquire any shares of its capital stock (or any other of its
securities or any rights, warrants or options to acquire any such shares or
other securities); (e) other than issuances upon exercise of the Options or
pursuant to the Stock Option Plan, authorize the issuance of, or issue, grant,
deliver or sell, or commit to issue, grant, deliver, sell, dispose of, pledge
or encumber (i) any capital stock of the Company or any of its subsidiaries
(whether through the issuance of options, warrants, commitments,
subscriptions, rights to purchase or otherwise) or (ii) any other voting
securities of the Company or any of its subsidiaries or securities convertible
into or exchangeable for such securities or any options, warrants, rights,
calls or commitments to acquire any such shares, voting securities or other
securities of the company or any of its subsidiaries; (f) amend its
Certificate of Incorporation or by-laws, or enter into any merger,
recapitalization, reorganization or other restructuring of the Company or any
of its subsidiaries; (g) make or agree to make any acquisition of assets other
than purchases of inventory in the ordinary course of business or acquisitions
in the ordinary course of business requiring payments not in excess of
$100,000; (h) settle or compromise any shareholder litigation or settle, pay
or compromise any claims not required to be paid; (i) take any action that
would cause the representations and warranties set forth in the Merger
Agreement to be untrue; (j) make any change to its accounting methods or
periods, file any amended tax return or settle any tax claim or assessment,
consent to the extension or waiver of any period of limitation applicable to
any tax claim or assessment or take any similar action, or omit to take any
action relating to the filing of any tax return or payment of any tax, if such
action or omission would have the effect of increasing the present or future
tax liability or decreasing the present or future tax asset of the Company,
any of its subsidiaries, Merger Sub or HIG.
Investigation by Merger Sub. Under the Merger Agreement, the Company has
agreed to, and cause its subsidiaries and the Company's counsel, accountants
and other representatives to give Merger Sub, its counsel, accountants and
other representatives reasonable access upon reasonable notice and during
normal business hours to the offices and other facilities and to the books and
records of the Company and its subsidiaries. The Company and its subsidiaries
shall furnish to Merger Sub and its representatives and BT and BTC and their
representatives information with respect to the business as Merger Sub, or
representatives of BT or BTC may from time to time reasonably request. All
information furnished by the Company pursuant to this covenant will be subject
to the provisions of the letter agreement between HIG and BDO, dated March 3,
1999 (the "Confidentiality Agreement").
Additional Covenants. In addition to the foregoing, the Company and Merger
Sub have agreed to certain covenants regarding (a) governmental or regulatory
filings; (b) cooperation of the Company's officers, employees and advisors in
connection with the arrangement of financing; (c) public announcements; (d)
the treatment of existing employee benefit arrangements following the
Effective Time; (e) the indemnification of the present and former officers,
directors, employees and agents of the Company and its subsidiaries and the
continued provision of officers and directors insurance following the
Effective Time; (f) notices of changes with respect to the accuracy of
representations or warranties or the ability of any obligations, conditions or
covenants under the Merger Agreement to be fulfilled, satisfied or complied
with; (g) challenging the applicability of a state take over law; (h) the
payment of interim liabilities of the Company; (i) the provision of interim
financial information with respect to the Company to Merger Sub; (j) the
preparation and filing of the Proxy Statement (and all amendments thereto) and
the convening of a special meeting of the shareholders for the purpose of
approving the Merger, the Merger Agreement and the other transactions
contemplated thereby; (k) the Company using reasonable efforts to obtain a
letter from its independent accountants certifying that the Merger will be
accounted for as a recapitalization; (l) payment of conveyance taxes; and (m)
the delisting of the Happy Kids Common Stock from Nasdaq National Market and
the termination of the Company's registration under the Exchange Act.
The Company covenants under the Merger Agreement that the Proxy Statement
will comply in all material respects with the provisions of applicable federal
securities laws and that on the date filed with the Commission and on the date
first published, sent or given to the Company's shareholders, the Proxy
Statement will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary
45
<PAGE>
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading. Notwithstanding the foregoing, the
Company make no representation with respect to information supplied by Merger
Sub for inclusion in the Proxy Statement. Both Merger Sub and the Company
covenant and agree to promptly correct any information provided by either of
them for use in the Proxy Statement if and to the extent that such information
shall be or become false or misleading.
No Solicitation
Under the Merger Agreement, from and after October 15, 1999 until the
termination of the Merger Agreement, the Company and its representatives are
prohibited taking any of the following actions: (i) directly or indirectly
soliciting, initiating, or encouraging or taking any other action for the
purpose of facilitating any inquiries or proposals from any person that
constitute, or may reasonably be expected to lead to, an acquisition,
purchase, merger, consolidation, share exchange, recapitalization, business
combination or similar transaction involving any material portion of the
assets or any securities of, any merger, consolidation or business combination
with, or any public announcement of a proposal, plan or intention to do any of
the foregoing by, the Company or any of its subsidiaries (each, an
"Acquisition Proposal"); (ii) entering into, maintaining or continuing
discussions or negotiations with any person in furtherance of such inquiries
or to obtain an Acquisition Proposal; (iii) agreeing to or endorsing any
Acquisition Proposal; (iv) entering into any agreement, arrangement or
understanding requiring the Company to abandon, terminate or fail to
consummate the Merger or any other transaction contemplated by the Merger
Agreement or (v) authorizing any representative of the Company to take any of
the foregoing actions.
Notwithstanding the foregoing, prior to the approval of the Merger and the
Merger Agreement by the shareholders of the Company, neither the Board of
Directors of the Company nor the Special Committee of the Board of Directors
is prohibited from (i) furnishing information to and engaging in discussion
and negotiations with any person or entity who makes an unsolicited bona fide
written Acquisition Proposal if the Board or the Special Committee, as
applicable, believes in good faith after consultation with independent legal
counsel that it has a fiduciary obligation to furnish such information or
engage in such discussions or negotiations, provided that prior to taking such
action, the Company notifies Merger Sub of its intentions and provided,
further, that prior to taking such action the Company obtains a written
confidentiality agreement from the appropriate parties, which agreement shall
be substantially similar to the Confidentiality Agreement; (ii) failing to
make or withdrawing its recommendation of the Merger and the Merger Agreement
if the Board or the Special Committee, as the case may be, after consultation
with independent legal counsel, determines in good faith that it has a
fiduciary obligation to do so and (iii) disclosing to the holders of Happy
Kids Common Stock a position contemplated by Rules 14d-9 and 14e-2 promulgated
under the Exchange Act or taking any other legally required action or any
action required by the rules or regulations of any self-regulating securities
exchange, market or other body. No action taken by the Board or the Special
Committee, as the case may be, in reliance upon the provisions of clauses (i),
(ii) or (iii) above, shall constitute a breach of the Merger Agreement by the
Company. In addition to complying with the foregoing restrictions, the Merger
Agreement obligates the Company to inform Merger Sub of the receipt of any
written Acquisition Proposal (including any subsequent changes or
modifications of such proposal) and of the identity of the person making such
proposal. Further, to the extent that, as of October 14, 1999, the Company or
any of its representatives are engaged in discussions or negotiations with any
person that do not at such time meet the requirements of clause (i) above, the
Company is obligated to terminate such discussions and negotiations and to
cause its affiliates and representatives to terminate such discussions and
negotiations.
If the existence of an Acquisition Proposal results in the termination of
the Merger Agreement by the Company or Merger Sub, the Company may be
obligated to pay a fee of $4.0 million to Merger Sub in connection therewith.
46
<PAGE>
Conditions To The Consummation Of The Merger
Conditions to Each Party's Obligations to Effect the Merger. The respective
obligations of each of the Company and Merger Sub to effect the Merger are
subject to the satisfaction at or prior to the closing date of the Merger of
the following conditions:
(a) The Merger Agreement and the transactions contemplated thereby shall
have been approved by two-thirds of the holders of the issued and outstanding
shares of the Happy Kids Common Stock in accordance with the BCL;
(b) No United States federal or state statute, rule or shall have been
enacted or promulgated after the date of the Merger Agreement that would
result in the imposition of material limitations on the ability of Merger Sub
to acquire or hold the business of the Company and its subsidiaries taken as a
whole; and
(c) The waiting period, if any (and any extension thereof), applicable to
the Merger under the HSR Act shall have expired or been terminated.
Conditions to the Obligations of Merger Sub to Effect the Merger. The
obligations of Merger Sub to effect the Merger are subject to the satisfaction
of the following conditions, any of which may be waived by Merger Sub:
(a) the representations and warranties of the Company set forth in the
Merger Agreement shall be true and correct as of the date of the Merger
Agreement and as of the closing date in all respects, (except where the
failure to be true and correct does not have a Material Adverse Effect on
the Company, other than representations and warranties of the Company that
relate to a specific date which shall be true and correct in all respects
as of such date. Merger Sub shall have received a certificate signed on
behalf of the Company by the chief executive officer and the chief
financial officer of the Company certifying the foregoing;
(b) the Company shall have performed all obligations required to be
performed by it prior to the closing date in all material respects.
(c) Merger Sub shall have received evidence, in form and substance
reasonably satisfactory to Merger Sub, that all required consents,
licenses, permits, approvals, authorizations, qualifications and orders of
any governmental authority and all consents of third parties designated by
Merger Sub have been obtained;
(d) No court of competent jurisdiction in the United States or other
United States governmental entity shall have issued any order, decree or
ruling or taken any other action restraining, enjoining or otherwise
(i) prohibiting the consummation of the Merger or any of the other
transactions contemplated by the Merger Agreement, (ii) prohibiting or
limiting the ownership or operation by the Company or any of its
subsidiaries of any material portion of the business or assets of the
Company or any of its subsidiaries, or to dispose of or hold separate any
material portion of the business or assets of the Company or any of its
subsidiaries, as a result of the Merger or any of the other transactions
contemplated by the Merger Agreement or (iii) imposing limitations on the
ability of Merger Sub (or any shareholder of Merger Sub), to acquire or
hold, or exercise full right of ownership of, any Happy Kids Common Stock,
including, without limitation, the right to vote Happy Kids Common Stock on
all matters properly presented to shareholders of the Company;
(e) The funding contemplated by the Financing Letters shall have been
obtained provided that if the failure to receive such funding is caused by
Merger Sub's breach in any material respect of any representation,
warranty, covenant or agreement made by Merger Sub and solely within the
control of Merger Sub in any Financing Letter, then in such event Merger
Sub's obligation to consummate the Merger shall not be subject to the
satisfaction of this condition;
(f) From the date of execution of the Merger Agreement, there shall not
have occurred a Material Adverse Effect on the Company (as defined in the
Merger Agreement) provided that neither any event relating to matters
disclosed to Merger Sub, HIG or any of their affiliates with respect to
issues discussed in press releases of the Company dated July 1, 1999 and
August 12, 1999, nor any suit, claim, action or
47
<PAGE>
proceeding disclosed on the disclosure schedule relating to the Merger
Agreement (or any suit, or action alleging facts or stating claims of a
similar nature or that could reasonably be expected to arise out of or in
connection with the negotiation and consummation of the Merger) shall
constitute a Material Adverse Effect on the Company.
(g) All Options, except for certain unvested employee options, shall
have been canceled after payment of consideration in exchange therefor as
contemplated by the Merger Agreement. After the Effective Time, the
Surviving Corporation will continue the Stock Option Plan.
(h) all existing directors of the Company shall have tendered their
resignations effective as of the Effective Time.
(i) Merger Sub shall have received an opinion from counsel for the
Company in form and substance satisfactory to Merger Sub, and Merger Sub's
lenders shall have been allowed to rely thereon.
Conditions to the Obligations of the Company to Effect the Merger. The
obligations of the Company to effect the Merger are subject to the
following conditions, any of which may be waived by the Company:
(a) the representations and warranties of Merger Sub contained in
the Merger Agreement shall be true and correct in all material respects
as of the date of the Merger Agreement and as of the closing date other
than representations and warranties of the Company that relate to a
specific date which shall be true and correct in all respects as of
such date. The Company shall have received a certificate signed by the
President or a Vice President of Merger Sub certifying the foregoing;
(b) Merger Sub shall have performed the obligations required to be
performed by it under the Merger Agreement in all material respects.
(c) The Company shall have received an opinion from counsel for
Merger Sub in form and substance satisfactory to the Company;
(d) at the closing, the Surviving Corporation shall have paid in
full the Notes, which Notes are held by members of the Management
Group; and
(e) no court of competent jurisdiction in the United States or
other United States governmental entity shall have issued any order,
decree or ruling or taken any other action restraining, enjoining or
otherwise (i) prohibiting the consummation of the Merger or any of the
other transactions contemplated by the Merger Agreement, (ii)
prohibiting or limiting the ownership or operation by the Company or
any of its subsidiaries of any material portion of the business or
assets of the Company or any of its subsidiaries, or to dispose of or
hold separate any material portion of the business or assets of the
Company or any of its subsidiaries, as a result of the Merger or any of
the other transactions contemplated by the Merger Agreement or (iii)
imposing limitations on the ability of Merger Sub (or any shareholder
of Merger Sub), to acquire or hold, or exercise full right of ownership
of, any Happy Kids Common Stock, including, without limitation, the
right to vote Happy Kids Common Stock on all matters properly presented
to shareholders of the Company.
Termination; Effects of Termination
Termination by Mutual Written Consent. The Merger Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, whether before or after approval of the Merger by the shareholders of
the Company by mutual written consent of Merger Sub and the Company upon
action by their respective Boards of Directors.
Termination by the Company. The Merger Agreement may be terminated by the
Company at any time prior to the Effective Time, if a person has made a Formal
Acquisition Proposal (as defined in the Merger Agreement) or has commenced a
tender or exchange offer for the Happy Kids Common Stock and the Board of
Directors of the Company or the Special Committee, determines in good faith
that its fiduciary duties require it to accept such proposal, provided that
the Company must provide two days prior written notice to Merger Sub. In the
event that the Merger Agreement is terminated by the Company pursuant to the
provision of the Merger Agreement described in this paragraph, the Company
shall pay Merger Sub a fee of $4.0 million.
48
<PAGE>
Termination by Merger Sub. The Merger Agreement may be terminated at any
time prior to the Effective Time by Merger Sub if the Board of Directors of
the Company shall have (i) failed to recommend to the shareholders of the
Company that they approve the Merger, the Merger Agreement and the
transactions contemplated thereby, (ii) withdrawn or modified in a manner
adverse to Merger Sub, its approval or recommendation of the Merger Agreement
or the Merger, (iii) approved, recommended or endorsed an Acquisition
Proposal, or (iv) resolved to do any of the foregoing. In the event that the
Merger Agreement is terminated by the Company pursuant to the provision of the
Merger Agreement described in this paragraph, the Company shall pay Merger Sub
a fee of $4.0 million.
Termination by Either Merger Sub or the Company. The Merger Agreement may
be terminated and the Merger may be abandoned at any time prior to the
Effective Time, whether before or after approval of the Merger by the
shareholders of the Company by either Merger Sub or the Company if:
(a) the Merger shall not have been consummated by February 15, 2000;
provided, that the terminating party shall not have materially breached the
Merger Agreement;
(b) Any court of competent jurisdiction in the United States or other
United States governmental entity shall have issued any order, decree or
ruling or taken any other action restraining, enjoining or otherwise
prohibiting the Merger and such order, decree or ruling or other action
shall have become final and nonappealable, provided that the party seeking
to terminate the Merger Agreement had used its commercially reasonable
efforts to remove or lift such order, decree, ruling or other action;
(c) if the approval of the Company's shareholders is not obtained due
to the failure to obtain the required vote at a duly held meeting of the
shareholders; or
(d) if the other party is in material breach of the Merger Agreement,
which breach has not been cured within 20 days of receipt by the breaching
party of written notice from the non-breaching party of such breach.
So long as prior to such termination Merger Sub has not materially breached
the Merger Agreement, the Company shall pay Merger Sub a fee of $4.0 million
in the event that the Merger Agreement is terminated: (a) by the Company in
order to accept a Formal Acquisition Proposal, (b) by Merger Sub if the Merger
has not been consummated on or prior to February 15, 2000, if such failure is
due at least in part to a material breach of the Merger Agreement by the
Company, (c) by Merger Sub due to the Company Board's (i) failure to recommend
that the shareholders approve the Merger, the Merger Agreement and the
transactions contemplated thereby, (ii) withdrawal or modification of its
recommendation or approval in a manner adverse to Merger Sub, (iii) approval
or recommendation of an Acquisition Proposal or (iv) resolution to take any
action described in clauses (i)-(iii), or (d) by Merger Sub due to the
Company's material breach of the Merger Agreement, which breach is not cured
within 20 days of receipt of written notice from Merger Sub to the Company.
So long prior to such termination the Company has not materially breached
the Merger Agreement, Merger Sub shall reimburse the Company for all
reasonable out-of-pocket expenses and fees (including, without limitation,
fees payable to all banks, investment banking firms and other financial
institutions, and their respective agents and counsel, and all fees of
counsel, accountants, financial printers, experts and consultants) incurred by
the Company prior to the date of termination of the Merger Agreement in
connection with the Merger and the consummation of all transactions
contemplated by the Merger Agreement and the financing thereof if the Merger
Agreement is terminated (a) by the Company if the Merger has not been
consummated on or prior to February 15, 2000, if such failure is due at least
in part to a material breach of the Merger Agreement by Merger Sub or (b) by
the Company due to Merger Sub's material breach of the Merger Agreement, which
breach is not cured within 20 days of receipt of written notice from the
Company to Merger Sub.
Amendment
The Merger Agreement may be amended by the parties thereto at any time
before or after approval of the Merger Agreement by the shareholders of the
Company, but after any such shareholder approval, no amendment shall be made
which decreases the amounts payable to any shareholders without the approval
of such shareholders without obtaining such further approval. The Merger
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties thereto.
49
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of Happy Kids Inc. at
December 31, 1998 and as of and for each of the four years in the period
ending December 31, 1998 is derived from the Happy Kids Inc. audited financial
statements and are incorporated by reference to this proxy statement. The
selected statement of operations and balance sheet data as of and for the year
ended December 31, 1994 have been derived from the audited consolidated
financial statements of the Company not incorporated by reference therein. The
selected consolidated financial data of Happy Kids Inc. as of and for the nine
months ended September 30, 1999 and 1998 has been derived from unaudited
consolidated financial statements of Happy Kids Inc. incorporated by reference
in this proxy statement. In the opinion of Happy Kids Inc. management, the
nine month financial data includes all necessary adjustments for a fair
presentation of that data in conformity with generally accepted accounting
standards.
<TABLE>
<CAPTION>
Year ended Nine Months Ended
------------------------------------------ ---------------------------
September 30, September 30,
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- -------- ------------- -------------
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data
Net Sales............. $74,520 $79,828 $90,723 $106,673 $154,559 $114,721 $148,850
Gross Profit.......... 15,276 14,792 20,837 26,925 40,763 29,419 39,243
Operating Expenses.... 12,320 14,816 15,370 18,457 22,449 16,539 23,176
------- ------- ------- -------- -------- -------- --------
Operating income
(loss)............... 2,956 (24) 5,467 8,468 18,314 12,880 16,067
Interest expense,
net.................. 1,631 2,375 2,980 3,803 2,077 1,790 1,187
------- ------- ------- -------- -------- -------- --------
Income (loss) before
pro
forma income taxes... 1,325 (2,399) 2,487 4,665 16,237 11,090 14,880
Pro forma net
income(1)............ $ 703 $(1,463) $ 1,497 $ 2,704 $ 9,580 $ 8,276 $ 8,630
======= ======= ======= ======== ======== ======== ========
Pro forma basic net
income
per share............ $ 0.09 $ (0.19) $ 0.19 $ 0.35 $ 1.00 $ 0.88 $ 0.83
======= ======= ======= ======== ======== ======== ========
Pro forma diluted net
income per share..... $ 0.09 $ (0.19) $ 0.19 $ 0.35 $ 0.99 $ 0.88 $ 0.83
======= ======= ======= ======== ======== ======== ========
Pro forma weighted
average shares
outstanding--basic... 7,750 7,750 7,750 7,750 9,625 9,406 10,340
======= ======= ======= ======== ======== ======== ========
Pro forma weighted
average shares
outstanding--
diluted.............. 7,750 7,750 7,750 7,750 9,637 9,419 10,365
======= ======= ======= ======== ======== ======== ========
<CAPTION>
December 31,
------------------------------------------
September 30, September 30,
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- -------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital....... $ 5,942 $ 3,260 $ 5,228 $ 6,419 $ 36,295 $ 33,054 $ 39,867
Total Assets.......... 27,570 33,568 33,986 44,952 50,452 49,090 84,202
Due to bank........... 14,435 21,340 19,732 24,863 3,753 8,315 25,723
Due to shareholders... 1,200 1,500 1,560 1,400 5,719 5,405 5,570
Capital Lease
obligations.......... 14 52 123 68 27 -- --
Shareholders' Equity.. 6,135 3,848 5,573 6,644 32,531 29,123 42,161
</TABLE>
- --------
(1) Prior to April 2, 1998, the Company had operated as an S Corporation for
federal and New York state income tax purposes since 1988. Two of the
wholly-owned subsidiaries are C Corporations and, accordingly, have been
taxed at the appropriate corporate federal and state tax rates. The
historical Consolidated Financial Statements do not include a provision
for federal and state income taxes for such periods for those subsidiaries
which had elected to be treated as S Corporations. A provision for state
income taxes has been made for those states not recognizing S Corporation
status. Pro forma net income has been computed as if the Company had been
fully subject to federal and state income taxes based on the tax laws in
effect during the respective periods.
50
<PAGE>
HAPPY KIDS INC.
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
The accompanying unaudited pro forma condensed consolidated income
statement for the year ended December 31, 1998 and for the nine months ended
September 30, 1999 have been prepared to give effect to the acquisition of
certain assets of D. Glasgow & Sons, Inc. ("Glasgow"), in each case, as if it
had occurred on January 1, 1998 and January 1, 1999, respectively. The
acquisition of Glasgow was completed on April 13, 1999 and was accounted for
under the purchase method of accounting.
All adjustments necessary to fairly present this pro forma condensed
consolidated financial information have been made based on available
information and assumptions which, in the opinion of management, are
reasonable. All such pro forma adjustments and the assumptions on which they
are based are described in the accompanying notes to the pro forma condensed
consolidated financial statements. The unaudited pro forma condensed
consolidated financial information is based upon and should be read in
conjunction with, the historical consolidated financial statements of the
Company and the notes thereto incorporated by reference to this Proxy
Statement. The pro forma condensed consolidated financial statements do not
purport to represent what the Company's results of operations or financial
condition would actually have been had the acquisition of Glasgow and the
other adjustments described below in fact occurred as of such dates or to
project the Company's results of operations or financial condition for any
future period or as of any date. In addition, there can be no assurance that
the assumptions used in the preparation of the pro forma condensed
consolidated financial statements will prove to be correct.
51
<PAGE>
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-------------------------------------------------
Pro Forma
Happy Kids Glasgow Happy Kids
Historical Historical Adjustments and Glasgow
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales................... $154,559 $29,756 $184,315
Cost of goods sold.......... 113,796 23,991 137,787
-------- ------- --------
Gross profit................ 40,763 5,765 46,528
-------- ------- --------
Operating expenses.......... 22,449 5,142 $ 248(a) 27,839
-------- ------- ------- --------
Operating earnings.......... 18,314 623 (248) 18,689
-------- ------- ------- --------
Interest expense, net....... 2,077 1,039 546(b) 3,662
-------- ------- ------- --------
Income (loss) before income
taxes...................... 16,237 (416) (794) 15,027
-------- ------- ------- --------
Income taxes (benefit)...... 4,603 1,558(c)(d) 6,161
-------- ------- ------- --------
Net income (loss)........... $ 11,634 $ (416) $(2,352) $ 8,866
======== ======= ======= ========
Basic net income per share.. $ 1.21 $ 0.91
======== ========
Weighted average shares
outstanding-basic.......... 9,625 96(e) 9,721
======== ======= ========
Diluted net income per
share...................... $ 1.21 $ 0.91
======== ========
Weighted average shares
outstanding-diluted........ 9,637 96(e) 9,733
======== ======= ========
</TABLE>
52
<PAGE>
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
---------------------------------------------------------------
Pro Forma
Pro Forma Adjusted
Happy Kids Glasgow Happy Kids Happy Kids
Historical Historical(1) and Glasgow Adjustments and Glasgow
---------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............... $148,850 $7,882 $156,732 $156,732
Cost of goods sold...... 109,607 5,905 115,512 115,512
-------- ------ -------- --------
Gross profit............ 39,243 1,977 41,220 41,220
-------- ------ -------- --------
Operating expenses:
Operating expenses...... 23,176 1,356 24,532 $ 74(a) 24,606
-------- ------ -------- ----- --------
Operating earnings...... 16,067 621 16,688 (74) 16,615
-------- ------ -------- ----- --------
Interest expense, net... 1,187 252 1,439 155(b) 1,594
-------- ------ -------- ----- --------
Income before income
taxes.................. $ 14,880 369 $ 15,249 (229) $ 15,020
Provision for income
taxes.................. 6,250 -- 6,250 59(c)(d) 6,309
-------- ------ -------- ----- --------
Net income.............. $ 8,630 $ 369 $ 8,999 $(288) $ 8,711
======== ====== ======== ===== ========
Basic income per common
share.................. $ 0.83 $ 0.87 $ 0.84
======== ======== ========
Weighted average common
shares outstanding-
basic.................. 10,340 10,340 37(e) 10,377
======== ======== ===== ========
Diluted income per
common share........... $ 0.83 $ 0.87 $ 0.84
======== ======== ========
Weighted average common
shares outstanding-
diluted................ 10,356 10,356 37(e) 10,402
======== ======== ===== ========
</TABLE>
- --------
(1) Glasgow historical amounts include the unaudited results of Glasgow for
the period of January 1, 1999 through April 13, 1999.
53
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The adjustments below were prepared based on data currently available and
in some cases are based on estimates of approximations. It is possible that
the actual amounts to be recorded may have an impact on the results of
operations and the balance sheet different from that reflected in the
accompanying pro forma unaudited condensed consolidated financial statements.
Statement of operations for the year ended December 31, 1998 and the nine
months ended September 30, 1999:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended September 30,
December 31, 1998 1999
----------------- -----------------
<S> <C> <C>
(a) To record goodwill amortization based
on a twenty-year life................. $ 248 $ 74
====== ====
(b) To record interest on borrowings to
finance cash payment to Glasgow and
costs incurred in connection with the
acquisition line of credit of $6.8
million at 8%......................... $ 546 $155
====== ====
(c) To record the tax effect of pro forma
adjustments and record income tax
expense as if Glasgow and Happy Kids
had been subject to Federal and
additional state and local income
taxes which they were not subject to
because they were S corporations...... $1,558 $ 59
====== ====
(d) Prior to April 2, 1998, the Company
had operated as an S Corporation for
federal and New York state income tax
purposes since 1988. Two of the
wholly-owned subsidiaries are C
Corporations and, accordingly, have
been taxed at the appropriate
corporate federal and state tax rates.
The historical Consolidated Financial
Statements do not include a provision
for federal and state income taxes for
such periods for those subsidiaries
which had elected to be treated as S
Corporations. A provision for state
income taxes has been made for those
states not recognizing S Corporation
status. Pro forma net income has been
computed as if the Company had been
fully subject to federal and state
income taxes based on the tax laws in
effect during the respective periods.
(e) Common stock
Issuance of 95,693 shares of common
stock in connection with the
acquisition.
</TABLE>
54
<PAGE>
MARKET PRICES AND DIVIDENDS
Prior to April 2, 1998, there was no established market for the Company's
capital stock. On April 2, 1998, the Company made an initial public offering
of 2,200,000 shares of Happy Kids Common Stock at a price per share of $10.00,
for aggregate net proceeds of $20,460,000. Happy Kids Common Stock is traded
on the Nasdaq National Market under the symbol "HKID." On September 17, 1999,
the last trading day prior to the public announcement that Happy Kids and
Merger Sub had executed the Merger Agreement, the high and low sale prices per
share of Happy Kids Common Stock as reported on the Nasdaq National Market
were $10.50 and $10.3125, respectively.
The following table sets forth the high and low sale prices per share of
Happy Kids Common Stock on the Nasdaq National Market and the average daily
trading volume for Happy Kids Common Stock with respect to each quarterly
period since Second Quarter 1998.
<TABLE>
<CAPTION>
Average Daily
High Low Trading Volume
------ ------ --------------
(in shares)
<S> <C> <C> <C>
FISCAL 1998
Second Quarter (April 1-June 30)................. $14.75 $10.50 70,072
Third Quarter (July 1-September 30).............. $14.25 $ 7.38 22,356
Fourth Quarter (October 1-December 31)........... $14.00 $ 6.75 30,170
FISCAL 1999
First Quarter (January 1-March 31)............... $14.25 $ 8.82 36,782
Second Quarter (April 1-June 30)................. $14.88 $ 7.00 50,405
Third Quarter (July 1-September 30).............. $11.06 $ 8.75 38,355
Fourth Quarter (October 1-November 18)........... $11.50 $ 9.69 42,665
</TABLE>
The Company has not paid cash dividends on the Happy Kids Common Stock in
the past and has no present intention of paying cash dividends on its common
stock in the foreseeable future. In addition, the payment of dividends by the
Company is subject to certain restrictions under the Company's existing credit
agreements, which will be refinanced in connection with the Merger. Under the
Merger Agreement, the Company has agreed not to pay any dividends on the Happy
Kids Common Stock prior to the Effective Time. Pursuant to the terms of the
agreements contemplated by the Financing Letters, the Surviving Corporation's
ability to pay certain dividends will be restricted.
FINANCING OF THE MERGER
Financing of the Merger will require approximately $100.8 million to pay
the Cash Merger Price and the Management Cash Price, to pay the value of the
Options, to refinance certain existing indebtedness and capital leases of
Happy Kids and its subsidiaries (the "Refinancing"), to pay in full the Notes
held by members of the Management Group and to pay the fees and expenses in
connection with the Merger and such financing. These funds are expected to be
provided through (i) term loan facilities of up to $60 million; (ii) drawings
of up to $10.5 million under the Revolver; (iii) equity financing provided by
HIG in the amount of $20.3 million through the purchase of the common stock of
Merger Sub; and (iv) a $10 million senior subordinated loan (which may take
the form of senior subordinated notes). The Surviving Corporation expects to
repay the new debt described herein from its cash flow from operations and/or
proceeds from new debt or equity financings. Merger Sub's obligation to
consummate the Merger is conditioned upon Merger Sub having received the
proceeds of the financing described above on the terms and conditions
described in the Financing Letters.
Senior Secured Financing. HIG has obtained a written commitment from BT, as
Agent (the "BT Commitment Letter") to provide the Surviving Corporation with
secured credit facility (the "Senior Facility") in an aggregate amount of $110
million consisting of (i) a $60 million senior term loan ("Term Loan")
maturing
55
<PAGE>
five years from the date of initial borrowing under the Senior Facility and
(ii) a $50 million revolving credit facility (the "Revolver") maturing five
years from the date of initial borrowing under the Senior Facility. The
Revolver will have a $30 million sublimit available for the issuance of
letters of credit.
The Surviving Corporation and its subsidiaries will be the borrower under
the Senior Facility and all direct and indirect subsidiaries of the Surviving
Corporation will guarantee the Senior Facility.
The interest rates under the Senior Facility will be, at the Surviving
Corporations' option, either (i) the Base Rate (defined in the BT Financing
Letter as higher of BT's prime lending rate or 1/2 of 1% per annum in excess
of the weighted average of the rates on overnight federal funds transactions
with members of the Federal Reserve System) plus an applicable margin or (ii)
the Eurodollar Rate (LIBOR 360 day basis) plus an applicable margin. The
applicable margins will be fixed initially. Thereafter, the applicable margins
will be subject to quarterly stepdowns based upon a leverage test of the
Surviving Corporations' total debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA").
The documents for the Senior Facility will contain affirmative, negative
and financial covenants and events of default customary for credit facilities
of a size and type similar to the Senior Facility.
The BT Commitment Letter will expire in accordance with its terms if the
Merger is not consummated on or prior to December 15, 1999.
Senior Subordinated Loan
HIG has received a written commitment from BTC (the "BTC Commitment
Letter") to provide to the Surviving Corporation a $10 million senior
subordinated loan (which at the option of the Company may take the form of
senior subordinated notes) to assist in financing the merger (the "Senior
Subordinated Loan"). Under the terms of the BTC Commitment Letter, BTC has the
right to assign or transfer its interest in providing such financing to third
parties. HIG has entered into exclusive negotiations with J.H. Whitney & Co.
("Whitney") to provide the financing contemplated by the BTC Commitment Letter
on terms that may be more favorable to the Surviving Corporation. BTC remains
obligated under the BTC Commitment Letter to provide the Senior Subordinated
Loan on the terms set forth therein in the event that no agreement is reached
with Whitney (or any other third party) to provide such financing. If provided
by BTC, the Senior Subordinated Loan will mature nine years from the Closing
Date and will be senior or pari passu to all future and other existing
indebtedness of the Surviving Corporation, other than senior bank debt such as
the Senior Facility. It is expected that warrants to purchase Surviving
Corporation Common Stock will be issued to BTC or the third party providing
the Senior Subordinated Loan.
The documents for the Senior Subordinated Loan will contain affirmative,
negative and financial covenants, representations and warranties and events of
default customary for senior subordinated loan financing.
Consummation of the Senior Subordinated Loan is subject to the satisfaction
of customary conditions for similar senior subordinated loan offerings.
The BTC Commitment Letter will expire in accordance with its terms if the
Merger is not consummated on or prior to December 15, 1999.
Equity Investment
Pursuant to a commitment letter executed by HIG-HK in favor of Merger Sub,
and on which the Company is entitled to rely, HIG-HK will make a cash
contribution to Merger Sub in a aggregate amount of approximately
$20.3 million at the Effective Time, which Merger Sub will then contribute to
the Surviving Corporation by operation of law.
The total investment in the Surviving Corporation after the Effective Time
will be approximately $26.575 million, consisting of (a) approximately $20.3
million of Surviving Corporation Common Stock, in the form of approximately
$20.3 million contributed by HIG through the Merger Sub; and (b) the
approximately $6.275 million value of the Rollover Shares.
56
<PAGE>
Sources and Uses of Funds
The estimated cash sources and uses of the financing for the consummation
of the Merger and the refinancing of certain indebtedness and capital leases
of the Company are as follows:
<TABLE>
<CAPTION>
(In Millions)
-------------
<S> <C>
Sources of Funds:
Term Loan......................................................... $ 60.0
Revolver.......................................................... $ 10.5
Company Senior Subordinated Notes................................. $ 10.0
Equity financing from HIG......................................... $ 20.3
------
Total........................................................... $100.8
Uses of Funds:
Cash Merger Price(1).............................................. $ 31.5
Management Cash Price............................................. $ 49.3
Payment to holders of Options(2).................................. $ 0.2
Repayment of certain indebtedness and capital leases.............. $ 12.3
Estimated fees and expenses ...................................... $ 7.5
------
Total........................................................... $100.8
======
</TABLE>
It is a condition to the obligations of Merger Sub to affect the Merger
that sufficient funds have been received to finance the Merger and to
consummate the transactions contemplated by the Merger Agreement.
- --------
(1) Does not include the approximately $6.275 million value of the Rollover
Shares.
(2) Assumes all outstanding Options are canceled, except for certain non-
vested employee Options.
Expenses of the Merger
The Merger Agreement provides that the Company and Merger Sub will each
bear their respective expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby, whether or not the Merger
is consummated, except in certain circumstances specified in the Merger
Agreement relating to the termination thereof. See "Certain Provisions of the
Merger Agreement--Termination; Effects of Termination." The estimated fees and
expenses incurred and to be incurred by the Company and Merger Sub in
connection with the Merger and the related transactions (assuming the
consummation thereof) are as follows:
<TABLE>
<S> <C>
Financing and commitment fees.................................... $2,500,000
Financial advisory and other fees................................ $3,200,000
Legal fees....................................................... $1,400,000
Accounting fees.................................................. $ 100,000
SEC filing fees.................................................. $ 16,197
Printing and mailing............................................. $ 180,000
Miscellaneous.................................................... $ 103,803
----------
Total.......................................................... $7,500,000
==========
</TABLE>
57
<PAGE>
THE COMPANY
Business
Happy Kids is a designer and marketer of custom-designed, licensed and
branded children's apparel. The Company produces high-quality, coordinated
apparel programs, including knit tops, bottoms, overalls, shortalls, coveralls
and swimwear, for newborns, infants, toddlers, boys and girls (collectively,
"playwear"). The Company's major licensors include Nickelodeon's Rugrats, AND
1 and B.U.M. Equipment. The Company markets its playwear primarily to mass-
market retailers, mid-tier distributors, department stores, including Kmart,
Target and WalMart and specialty stores (including sporting goods chains), and
designs and delivers private label branded playwear programs for certain
leading retailers, including Sesame Street for Kmart.
The Company was incorporated in 1988 in New York under the name O'Boy Inc.
and changed its name to Happy Kids Inc. in December 1997. Historically, the
Company operated as separate business entities under the common ownership of
the members of the Management Group. The first of these entities commenced
operations in 1979. Immediately prior to the effectiveness of the Company's
initial public offering on April 2, 1998 (the "IPO"), all of such separate
entities became wholly-owned subsidiaries of the Company. On April 13, 1999
the Company acquired certain assets of Glasgow, including intellectual
property rights under license agreements to design and manufacture children's
apparel bearing logos, trademarks and tradenames of the National Football
League, the National Basketball Association, Major League Baseball and the
National Hockey League, as well as certain Warner Brothers' properties,
including Looney Tunes and Saban's Power Rangers, among other licenses.
Customers of the Company order specific quantities of goods on a fixed-
price basis three to nine months in advance of a selling season. Customer
orders are generally cancelable upon notice to the Company. The Company'
customarily produces the requested apparel upon receipt of customer orders.
Many of the Company's orders are received significantly in advance of the
anticipated delivery period. Consequently, the Company had a backlog of $91.5
million at September 30, 1999, all of which is expected to be shipped over the
next three to nine months. However, in recent months the Company has
experienced a significant increase in orders requiring rapid turnaround from
the date the order is placed to the shipment date.
All of the Company's sales are within the United States. Sales of the
Company's products to each of Kmart, Target and WalMart accounted for
approximately 16.1%, 21.2%, and 6.7%, respectively, of net sales for the first
nine months ended September 30, 1999, and 22.3%, 14.0% and 11.4% of net sales,
respectively, for 1998. Sales of the Company's products to each of
Price/Costco, Kmart and Kids R Us accounted for approximately 17.4%, 14.3% and
11.0% of net sales for 1997, respectively. Based upon historical and recent
results and existing relationships with customers, the Company believes that a
substantial portion of its net sales and gross profits will continue to be
derived from a small number of large customers.
The Company's current licensing arrangements have initial terms of between
eighteen months and five years, and typically include multiple renewal options
of between one and five years, subject to certain conditions. These licenses
will expire between December 1999 and May 2003. The Company's private label
relationships are conducted on a purchase order basis rather than pursuant to
contract. The Company's licenses generally require an initiation fee and/or
minimum annual royalties to be recouped from ongoing royalty payment
obligations, which currently range from 6.0% to 12.0% of the Company's net
sales of products incorporating a licensed property. Apparel industry licenses
typically are granted with respect to product categories, sizes and channels
of distribution, and may be either exclusive or nonexclusive. Virtually all of
the Company's licenses are non-assignable without the consent of the licensor
and many of these licenses may be terminated by the licensor upon a change of
control of the Company. Pursuant to the terms of the Merger Agreement, Merger
Sub will not be obligated to consummate the Merger and the other transactions
contemplated by the Merger Agreement unless the Company obtains certain
required consents from its licensors. See "Certain Provisions Of the Merger
Agreement--Conditions to the Consummation of the Merger."
58
<PAGE>
For the nine months ended September 30, 1999, net sales of the Company
attributable to licensing and private label arrangements for Nickelodeon's
Rugrats, B.U.M. Equipment, AND 1 and Sesame Street for Kmart accounted for
4.5%, 21.5%, 21.7% and 13.0% of net sales, respectively. Net sales
attributable to the Company's licensing and private label arrangements for
Nickelodeon's Rugrats, B.U.M. Equipment, AND I and Sesame Street for Kmart
accounted for 20.2%, 14.4%, 14.1 % and 17.8% of net sales, respectively, in
1998 and net sales attributable to the Company's licensing and private label
arrangements for B.U.M. Equipment, Nickelodeon's Rugrats, Ocean Pacific and
Sesame Street for Kmart accounted for 18.9%, 11.3%, 11.1% and 14.3% of net
sales, respectively, in 1997. No other licensing or private label arrangements
accounted for more than 10% of the Company's net sales during the first nine
months of 1999 or in either 1998 or 1997.
Rather than undertaking costly marketing initiatives, Happy Kids has been
able to leverage the popularity and goodwill associated with its licensed
properties and brand names to promote sales. The Company's playwear is
designed by over 50 in-house designers and graphic artists organized in teams
dedicated to each of the Company's licensed properties and private label
programs. Each team works closely with licensors, customers and contract
manufacturers utilizing state-of-the-art CAD systems, to design coordinated
apparel programs featuring textured fabrications and detailed graphics. The
design process incorporates product design, merchandising, sourcing and
production. The Company's design and merchandising teams continually monitor
and evaluate the children's playwear market for styles and trends in fabrics,
trims and accessories, and analyze online sales information provided by its
customers. The Company oversees all garment production, including pattern
development and color and sample approval, through regular communication with
the Company's customers and contract manufacturers.
In order to eliminate the significant capital investment requirements
associated with maintaining manufacturing facilities, the Company uses third-
party manufacturers to produce its playwear. Over 75 unaffiliated, foreign and
domestic contract manufacturers, many of whom have long-standing relationships
with the Company, manufacture the Company's products to exacting quality
standards and specifications. The Company believes that its customers rely on
its ability to design, and arrange the manufacture and delivery of
commercially successful apparel programs on a timely basis. During the nine
months ended September 30, 1999, foreign manufacturers produced approximately
77.7% of the Company's products, compared with 86.2% in 1998 and 93.4% in
1997.
The Company works with independent buying agents in five countries who
assist the Company in selecting its contract manufacturers. The Company and
such buying agents consider, among other things, the manufacturers reputation
for producing quality merchandise, the manufacturer's ability to meet the
Company's deadlines for delivery and price. The Company is not a party to
long-term contractual or other arrangements with any manufacturer and often
uses more than one manufacturer to produce a coordinated apparel program. The
Company believes that it has ready access to numerous qualified contract
manufacturers and that the contract manufacturers currently retained by the
Company have the ability to manufacture across several product lines. The
principal raw materials used by the Company in the production and sale of its
products -- yarn, fabric, trim, buttons and other accessories -- are purchased
by the manufacturers who deliver finished goods to the Company. The Company
believes that an adequate supply of raw materials used in the manufacture of
its products is readily available from existing and alternative sources at
reasonable prices.
For the nine month period ended September 30, 1999, various production
facilities located in Thailand accounted for an aggregate of 36.4% of the
Company's manufactured products, compared with an aggregate of 43.1% in 1998
and 41.4% in 1997. Various production facilities in Hong Kong accounted for an
aggregate of 21.4%, 29.1% and 30.7% of the Company's manufactured products,
respectively, during the same periods. No other country accounted for 10% or
more of the Company's manufactured products during the first three quarters of
1999 or for 1998 or 1997. In addition, one manufacturing facility located in
Hong Kong accounted for 7.8% of the Company's manufactured products for the
nine months ended September 30, 1999, and for 17.7% and 12.6% of the Company's
manufactured products during 1998 and 1997, respectively. Another facility in
Hong Kong accounted for 10.6% of the Company's manufactured products during
1997. No other single manufacturer accounted for 10% or more of the Company's
manufactured products for the nine months ended September 30, 1999 or during
1998 or 1997. The Company cannot predict the effect, if any, that China
resuming control
59
<PAGE>
over Hong Kong will have on its contract manufacturers in Hong Kong and there
can be no assurance that Hong Kong will not experience political, economic or
social disruption as a result of the resumption of Chinese sovereignty. In
addition, there have been a number of recent trade disputes between China and
the United States during which the United States has threatened to impose
tariffs and duties on some products imported from China and to withdraw
China's "most favored nation" trade status. The loss of such status for China,
changes in current tariff structures or the adoption by the United States of
trade policies or sanctions adverse to China could have a material effect on
the Company's business, financial condition or results of operations.
The Company's products are subject to bilateral textile agreements between
the United States and a number of foreign countries. Such agreements, which
have been negotiated under the framework established by the Arrangement
Regarding International Trade in Textiles, allow the United States to impose
restraints at any time on the importation of categories of merchandise that,
under the terms of the agreements are not currently subject to specified
limits. The Company does not own the right to import finished garments into
the United States, but relies on its contract manufacturers to obtain the
necessary quotas. In the past, to the extent that necessary import quotas have
not been available with respect to a particular source of supply, the Company
has been able to find an alternative source of supply. Accordingly, the
availability of quotas has not had a material effect upon the Company's
business, financial condition or results of operations. The Company's
continued ability to source products that it imports may be adversely affected
by a significant decrease in available import quotas as well as any additional
bilateral agreements or unilateral trade restrictions.
The Company has in place comprehensive quality control procedures,
utilizing both internal and independent quality control representatives, to
ensure that fabrics, materials and finished goods meet the Company's exacting
quality standards. In addition to the Company's representatives, certain of
the Company's buying agents engage their own personnel to monitor compliance
with the Company's quality control specifications. The Company oversees
testing of yarns and trim for colorfastness, washability and other standards
before sample garments are produced. Selected product samples are randomly
subjected to testing by the Company and/or are sent to independent testing
facilities which test garments for colorfastness, washability, size
specifications and other standards. Foreign and domestic contract
manufacturers are routinely visited on a spot check basis to ensure compliance
with the Company's quality standards. Finished garments are subject to final
inspection in the Company's warehouse for general appearance and quality prior
to shipment to customers. Prior to shipment, inspection certificates are
issued to indicate that the products have been inspected and found to be in
conformity with the order. Products which are manufactured in foreign
countries are tested to ensure that such products meet United States customs
import requirements by the foreign manufacturers prior to shipment, and the
results of such tests, along with samples of each product style, are sent to
the Company. Upon completion of the manufacturing and inspection process, the
Company's products are shipped from the contract manufacturers by sea, air or
land to the Company's domestic warehouse facilities. The Company utilizes its
warehouse facilities in New Brunswick, New Jersey, or its public warehouse
arrangement in Long Beach, California prior to shipping its products directly
to its customers' stores or distribution centers via common carrier.
While historically the children's apparel industry has been highly
fragmented and competitive, the industry has recently undergone significant
consolidation, with companies with greater financial resources acquiring
smaller companies and companies with less access to capital. The Company
competes with many companies engaged in the design, production and
distribution of children's apparel for newborns, infants, toddlers, boys and
girls, some of which have longer operating histories and financial, sales,
marketing, design capabilities and other competitive resources which are
substantially greater than those of the Company. The Company also faces
competition from its existing customers, who may themselves begin to produce
children's playwear directly. In addition, such customers have in the past
competed, and may continue in the future to compete, for available branded
programs. Further, to the extent that the Company's customers or competitors
maintain or initiate private label programs, such customers or competitors
will compete with the Company's licensed and branded properties. The Company
also competes with other manufacturers of children's apparel for retail floor
space. The Company believes that the principal competitive factors affecting
its business include: (i) the ability to deliver,
60
<PAGE>
on a timely basis, high quality coordinated playwear apparel; (ii) the ability
to successfully obtain licensing arrangements and private label relationships
based on characters and brands that are appealing to children and parents;
(iii) the ability to successfully design coordinated apparel programs based on
such licensing arrangements and relationships; and (iv) the ability to produce
playwear at competitive prices.
As of September 30, 1999, the Company employed 209 persons, consisting of
38 in sales and marketing, 84 in design and graphic arts, 41 in warehousing
and distribution and 46 in finance, administration and management. Twenty of
the Company's 41 employees at its New Brunswick, New Jersey warehouse facility
are subject to a collective bargaining agreement (the "Collective Bargaining
Agreement") between Hawk Industries, Inc. ("Hawk"), a wholly-owned subsidiary
of the Company, and Journeymen's and Production Allied Services of America and
Canada International Union, Local No. 157 (the "Union"). The initial term of
such Collective Bargaining Agreement began on August 1, 1996 and ended on July
31, 1999, at which time it was renewed for an additional one-year term. The
Collective Bargaining Agreement will continue to be automatically renewed for
successive one-year terms, unless terminated or modified by written notice
within certain time periods. Pursuant to the Collective Bargaining Agreement,
the Company must, among other obligations, recognize the Union as the
exclusive representative of all of the employees covered under the Collective
Bargaining Agreement. The Company has not had any significant work stoppages
and considers its relations with its employees to be good.
Quantitative and Qualitative Disclosure about Market Risk
The Company is subject to market risk from exposure to changes in interest
rates relating primarily to the Company's short-term debt obligations. The
Company primarily enters into such short-term debt obligations to support
general corporate purposes, including capital expenditures and working capital
needs. All of the Company's current debt is short-term with variable rates. To
manage its exposure to changes in interest rates, the Company's policy is to
manage such interest rate exposure through the use of short-term borrowings,
which are negotiated with their lenders on an annual basis. The Company does
not expect changes in interest rates to have a material adverse effect on
income or cash flows in fiscal 1999, although there can be no assurance that
interest rates will not significantly change. Immediately upon consummation of
the Merger, the Surviving Corporation will refinance certain of its existing
indebtedness. The interest rates applicable to these new borrowings of the
Surviving Corporation will also be variable. The Surviving Corporation expects
to repay these new debt obligations from its cash flow from operations and/or
proceeds from new debt or equity financings. See "Financing of the Merger."
61
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998.
Net Sales. Net sales increased $34.1 million, or 29.8% to $148.9 million
for the first nine months of 1999 from $114.7 million for the first nine
months of 1998. The increase in net sales is attributable primarily to sales
associated with the Glasgow product lines acquired in April 1999 and increased
sales of playwear of both licensed products and private label programs.
Gross Profit. Gross profit increased by $9.8 million, or 33.3%, to $39.2
million for the first nine months of 1999 from $29.4 million for the first
nine months of 1998. Such increase was due, in part, to gross profit
associated with the Glasgow product lines and to increased sales in certain
higher margin licensed products as well as efficiencies in transportation and
handling costs.
Operating Expenses. Operating expenses increased by $6.6 million, or 40.1%
to $23.2 million for the first nine months of 1999 from $16.5 million for the
first nine months of 1998. Operating expenses consist entirely of selling,
design and shipping expenses, and general and administrative expenses.
Selling, Design and Shipping Expenses. Selling, design and shipping
expenses increased by $5.2 million, or 53.7%, to $14.8 million for the
first nine months of 1999 from $9.7 million for the first nine months of
1998. This increase is attributable primarily to higher sales compensation,
advertising and shipping and freight costs associated with increased sales
volumes, travel expense and licensing fees. In addition, design and
production salaries and sampling costs increased as a result of the
Company's expanded product lines. As a percentage of net sales, selling,
design and shipping expenses increased to 10.0% in 1999 from 8.4% in 1998.
General and Administrative Expenses. General and administrative expenses
increased by $1.4 million, or 21.1%, to $8.3 million for the first nine
months of 1999 from $6.9 million for the first nine months of 1998. As a
percentage of net sales, general and administrative expenses decreased to
5.6% in 1999 from 6.0% in 1998 due to the operating leverage associated
with the higher sales.
Interest Expense, Net. Interest expense, net decreased $603,000, or 33.7%,
to $1.2 million in 1999 from $1.8 million in 1998. As a percentage of net
sales, interest expense decreased to 0.8% for 1999 compared to 1.6% in 1998.
This decrease is a result of the application of a substantial portion of the
proceeds from the Company's IPO to the repayment of the Company's bank debt in
the second quarter of 1998.
Income Before Income Taxes. Income before income taxes increased $3.8
million, or 34.2%, to $14.9 million in 1999 from $11.1 million in 1998 due to
the reasons described above. As a percentage of net sales, income before
income taxes was 10.0% in 1999 compared to 9.7% in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
Net Sales. Net sales increased $47.9 million, or 44.8%, to $154.6 million
in 1998 from $106.7 million in 1997. The increase in net sales is attributable
primarily to increased sales of playwear incorporating the properties covered
by the Company's licenses with Nickelodeon's Rugrats, AND 1, B.U.M. Equipment,
and increased sales to Kmart resulting from its Sesame Street private label
program. This increase was partially offset by lower sales in two of the
Company's licenses that are no longer active.
Gross Profit. Gross profit increased by $13.8 million, or 51.4%, to $40.8
million in 1998 from $26.9 million in 1997. Due to improved sales mix, the
gross profit margin increased to 26.4% in 1998 from 25.2% in 1997. In
addition, the 1997 gross margin amount includes $758,000 in income due to a
decrease in LIFO reserves, which accounted for .03% of such gross margin,
while the 1998 gross margin amount includes $181,000 in income due to a
decrease in LIFO reserves, which had no effect on gross margin for the year.
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<PAGE>
Operating Expenses. Operating expenses increased by $4.0 million, or 21.6%,
to $22.4 million in 1998 from $18.5 million in 1997. Operating expenses
consist entirely of selling, design and shipping expenses, and general and
administrative expenses.
Selling, Design and Shipping Expenses. Selling, design and shipping
expenses increased by $2.4 million, or 21.1%, to $13.7 million in 1998 from
$11.3 million in 1997. This increase is attributable primarily to higher
sales compensation, warehousing and shipping costs associated with
increased sales volumes. In addition, advertising expenses increased due to
cooperative advertising charges from a licensor associated with a major
licensing program. Also, design and production salaries and sampling costs
increased as a result of the Company's expanded product lines. As a
percentage of net sales, selling, design and shipping expenses decreased to
8.9% in 1998 from 10.6% in 1997.
General and Administrative Expenses. General and administrative expenses
increased $1.6 million, or 22.5%, to $8.8 million in 1998 from $7.2 million
in 1997. This increase is primarily the result of higher factor commissions
associated with increased sales volume, as well as higher professional and
data processing expenses offset somewhat by reduced officers' compensation
implemented in the first quarter of 1998. As a percentage of net sales,
general and administrative expenses decreased to 5.7% in 1998 from 6.7% in
1997 due to the operating leverage associated with the higher sales.
Interest Expense, net. Interest expense, net, decreased $1.7 million, or
45.4%, to $2.1 million in 1998 from $3.9 million in 1997. This decrease is a
result of the application of a substantial portion of the proceeds from the
Company's IPO to the repayment of the Company's bank debt in the second
quarter of 1998, as well as a decrease in interest rates and associated
lending fees in 1998. As a percentage of net sales, interest expense decreased
to 1.3% for 1998, as compared to 3.6% in 1997.
Income Before Income Taxes. Income before income taxes increased $11.6
million, to $16.2 million in 1998 from $4.7 million in 1997 due to the reasons
described above. As a percentage of net sales, income before income taxes
increased to 10.5% in 1998 from 4.4% in 1997. In connection with the Company's
IPO, effective April 2, 1998, the Company changed from an S Corporation to a C
Corporation. This resulted in an increase in current taxes offset by a
deferred tax asset recognized upon conversion to the C Corporation status.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. Net sales increased $16.0 million, or 17.6%, to $106.7 million
in 1997 from $90.7 million for 1996. The increase in net sales was
attributable primarily to increased sales of playwear incorporating the
properties covered by the Company's Rugrats license with Nickelodeon and
increased sales to Kmart resulting in part from the 1997 commencement of its
Sesame Street private label program. This increase was partially offset by a
decrease in net sales of products incorporating properties covered by one of
the Company's former major licenses, which license currently represents only a
small percentage of net sales.
Gross Profit. Gross profit increased by $6.1 million, or 29.2%, to $26.9
million in 1997 from $20.8 million in 1996. The gross profit margin increased
by 25.2% in 1997 from 23.0% in 1996. The increase in the gross margin was
attributable to the implementation of the Company's current sales strategy. As
part of such strategy, initiated in 1995, orders are received three to nine
months in advance of shipment resulting in finished goods being produced
according to customer order. Due to the timing of the order cycle and revenue
recognition (sales are recognized when products are shipped), the Company
first began to fully realize the benefits of such strategy in mid-1996. In
addition, during 1997, there was a decrease in the Company's product return
rates as compared to 1996. Gross profit is net of any royalties associated
with the use of licensed properties.
Operating Expenses. Operating expenses increased by $3.1 million, or 20.1%,
to $18.5 million in 1997 from $15.4 million in 1996. Operating expenses
consist entirely of selling, design and shipping expenses, and general and
administrative expenses.
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<PAGE>
Selling, Design and Shipping Expenses. Selling, design and shipping
expenses increased by $2.2 million, or 24.9%, to $11.3 million in 1997 from
$9.0 million in 1996. This increase was attributable primarily to higher
sales salaries and commissions for existing personnel and the hiring of
additional sales and design personnel during the year, as well as higher
travel, shipping and freight costs associated with increased sales volumes.
In addition, other design costs had increased as a result of the expansion
of the Company's production. As a percentage of net sales, selling, design
and shipping expenses increased to 10.6% in 1997 from 10.0% in 1996.
General and Administrative Expenses. General and administrative expenses
increased $839,000, or 13.3%, to $7.2 million in 1997 from $6.3 million in
1996. This increase was primarily the result of higher factor commissions
associated with increased sales volume, the hiring of additional office
personnel and normal annual salary rate increases. The Company utilized its
factoring arrangement for the entire year in 1997 as compared to only ten
months of the corresponding period in 1996. As a percentage of net sales,
general and administrative expenses decreased to 6.7% in 1997 from 7.0% in
1996.
Interest Expense, net. Interest expense, net increased $823,000, or 27.6%
to $3.8 million in 1997 from $3.0 million in 1996. This increase is a result
of higher sales volume resulting in an increase in borrowings, interest
expense and fees under the line of credit. As a percentage of net sales,
interest expense, net increased slightly to 3.6% in 1997, from $3.3% in 1996.
Income Before Income Taxes. Income before income taxes increased $2.2
million, or 87.6%, to $4.7 million in 1997 from $2.5 million in 1996 due to
the reasons described above. As a percentage of net sales, income before
income taxes increased to 4.3% in 1997 from 2.7% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its cash requirements primarily through operations
and borrowings under its banking line of credit. Historically, the Company's
borrowing requirements have been seasonal, with peak working capital needs
arising during the first and third quarters.
On April 2, 1998, the Company consummated its IPO of 2,200,000 shares of
its Common Stock at a price of $10.00 per share, all of which shares were
issued and sold by the Company. On April 23, 1998, the Company consummated the
exercise of the underwriters' over-allotment option granted by the Company to
the underwriters in connection with the IPO. As a result, the Company issued
and sold an additional 330,000 shares of the Company's Common Stock at the IPO
price of $10.00 per share. The net proceeds to the Company from such sales
were approximately $22.3 million.
Of the total net proceeds received by the Company upon the consummation of
its IPO and the exercise of the over-allotment option, $2.0 million was
distributed to certain shareholders of the Company in connection with the
payment of a portion of the S Corporation distribution and the remaining
amount was utilized to pay down a portion of the outstanding balance under the
Company's credit line.
On March 31, 1999, the Company executed an amendment of its existing credit
line whereby the Company's credit line was amended to provide for a
discretionary one year revolving line of credit, to expire on March 31, 2000,
renewable annually, providing for advances and letter of credit accommodations
up to the lesser of (a) $50.0 million from April 1, 1999 to March 31, 2000, or
(b) at all times the sum of (i) up to eighty-five percent of eligible accounts
receivables, plus (ii) up to fifty percent of finished goods inventory, plus
(iii) overadvances approved by the lender. The maximum amount of revolving
credit advances outstanding at any one time cannot exceed $40.0 million and
the maximum amount of letters of credit outstanding at any time may not exceed
$35.0 million. The interest rate on amounts borrowed will be the bank's then
prevailing prime rate (8.25% at September 30, 1999) less 0.5% or at LIBOR plus
2.0% at the option of the Company. The credit line is collateralized by
substantially all of the assets of the Company. As of September 30, 1999, the
Company had $25.7 million of outstanding direct borrowings and $15.2 million
of contingent liabilities under open letters of credit.
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<PAGE>
In addition, the Company's lender has sole discretion to make or withhold
advances under the credit line. There can be no assurance that the lender will
continue to lend under the credit line. If the lender exercises its discretion
to withhold advances, there would be a material adverse effect on the
Company's business, financial condition and results of operations.
As of September 30, 1999, the Company's other principal sources of
liquidity included cash of $5,000, amounts due from factor of $46.3 million
and net accounts receivable of $1.9 million. The Company had working capital
of $39.9 million and long-term debt of $5.6 million as of September 30, 1999.
For the nine months ended September 30, 1999, operating activities used
cash of $13.9 million primarily as a result of an increase in amounts due from
factor of $25.6 million, an increase in other current assets and royalties of
$3.3 million, an increase in accounts receivable of $1.5 million, offset in
part by net income of $8.6 million, a decrease in inventory of $5.4 million
and an increase in accounts payable and accrued expenses of $2.3 million. Net
cash used in investing activities was $8.1 million, primarily in connection
with the acquisition of certain of the assets of Glasgow and the acquisition
of fixed assets. Net cash used in financing activities resulted from
borrowings under the line of credit.
Historically, the Company's business has not required significant capital
expenditures. The Company's capital expenditures for the first nine months of
1999 and 1998 were $1.2 million and $251,000, respectively. The Company
expects to incur total capital expenditures in 1999 of $1.5 million for the
purchase of new computers, software and telecommunications equipment. The
Company believes that cash flow expected to be generated from operations,
together with borrowings under its existing credit line, as amended, will be
adequate to satisfy current and planned operations for at least the next 12
months.
The Company expects that the Surviving Corporation will refinance certain
existing indebtedness of the Company and its subsidiaries upon consummation of
the Merger. The Senior Secured Facility described in the BT Commitment Letter
is expected to provide the required funds for the Refinancing. The Company
expects to repay the new debt described herein from its cash flow from
operations and/or proceeds from new debt or equity financings. See "Financing
of the Merger."
BACKLOG
The Company's customers order specific quantities of goods on a fixed-price
basis three to nine months in advance of a selling season. Such customer
orders are placed in backlog upon their receipt and acceptance by the Company.
Customer orders are generally cancelable on notice to the Company without
penalty. Although the Company has not had significant cancellations in the
past, no assurance can be given that it will not experience a significant
level of cancellations in the future or that its backlog at any point in time
will be converted to sales. Many of the Company's orders are received
significantly in advance of scheduled delivery periods. Consequently, the
Company had backlog of $91.5 million at September 30, 1999, all of which it
expects to ship over the next three to nine months. However, in recent months
the Company has experienced a significant increase in orders involving a rapid
turnaround from the date the order is placed to the shipment date.
VARIABILITY OF RESULTS; SEASONALITY; CYCLICALITY
Sales of children's apparel are seasonal. Consequently, the Company's
operating results have varied substantially from quarter to quarter, and the
Company expects that they will continue to do so. Generally, the Company has
experienced significantly higher net sales in the first and third quarters as
compared to the second and fourth quarters, although this may change from time
to time. The seasonality of the Company's business also affects borrowings
under the Company's lines of credit and its level of backlog, which fluctuate
in response to demand for the Company's products. Therefore, the results of
any interim period are not necessarily indicative of the results that may be
achieved for an entire year. In addition, the apparel industry is a cyclical
industry heavily dependent upon the overall level of consumer spending, with
purchases of apparel and related goods tending to decline during recessionary
periods when disposable income is low. A difficult retail environment could
result in downward price pressure which could adversely impact the Company's
gross profit margins.
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<PAGE>
PRO FORMA ADJUSTMENTS FOR INCOME TAXES
The Company has operated as an S Corporation for federal and New york state
income tax purposes since 1988 up and until the termination of the Company's S
Corporation status on April 1, 1998, immediately prior to the effectiveness of
the Company's IPO. As a result for such tax periods, the Company's earnings
were taxed directly to the Company's shareholders. The effective tax rate for
the years ended December 31, 1998, 1997 and 1996 was 28.3%, 10.1% and 4.8%
respectively. The change in the effective tax rate is the result of payments
made in connection with a settlement of an Internal Revenue Service
examination in 1996, and the utilization of State net operating loss
carryforward claims in 1997 and 1996.
YEAR 2000 COMPLIANCE
General. The Company believes that advanced information processing is
essential to maintaining its competitive position. The Company participates in
the electronic data interchange program maintained by many of its larger
customers, including JC Penney, Kids R Us, Sears, Target and WalMart. This
program allows the Company to receive customer orders, provide advanced
shipping notices, monitor store inventory and track orders on-line from the
time such orders are placed through delivery.
Year 2000 Compliance. In 1998, the Company established an oversight
committee to review all of the Company's computer systems and programs, as
well as the computer systems of the third parties upon whose data or
functionality the Company relies in any material respect, and to assess their
ability to process transactions in the Year 2000 and beyond. The Company,
through such oversight committee, currently is upgrading its management
information systems, which it expects to complete during the fourth quarter of
1999, to ensure proper processing of transactions relating to Year 2000 and
beyond. The Company continues to evaluate appropriate courses of corrective
actions, including replacement of certain systems. Although the Company does
not expect the costs associated with ensuring Year 2000 compliance to have a
material effect on its financial position or results of operations, if the
computer systems used by the Company, or any of its suppliers or vendors fall
or experience significant difficulties related to the Year 2000, the Company
could experience delays in manufacturing, delays in shipping, an inability to
monitor customer orders or to manage inventory, or may experience related
risks that could materially adversely affect the Company's financial position
or its results of operations. The Company has identified and been in contact
with its major customers, its bank and its factor. The reply from each such
entity indicates that each is, or will be, Year 2000 compliant. The Company
has incurred approximately $100,000 of expenses for Year 2000 remediation
costs in 1998 and estimates future additional expenditures for Year 2000
remediation of approximately $100,000. All costs associated with Year 2000
compliance are being funded with cash flow generated from operations and are
being expensed as incurred. The Company has not developed a contingency plan
with respect to Year 2000 issues should they arise.
EUROPEAN MONETARY UNION
On January 1, 1999, eleven of the fifteen member countries of the European
Union set fixed conversion rates between their existing legacy currencies and
the euro. As such, these participating countries have agreed to adopt the euro
as their common legal currency. The eleven participating countries will issue
sovereign debt exclusively in euro and will redenominate outstanding sovereign
debt. The legacy currencies will continue to be used as legal tender through
January 1, 2002, at which point the legacy currencies will be canceled and
eurobills and coins will be used for cash transactions in the participating
countries. The Company does not denominate its agreements or transactions with
foreign entities in foreign currencies. The Company currently does not believe
that the euro conversion will have a material impact on the Company's
financial condition or results of operations.
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<PAGE>
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS No. 133"). "Accounting for Derivative Instruments and Hedging
Activities," which is effective for the Company's fiscal year endings December
31, 2000. SFAS No. 133 will require the Company to recognize all derivatives
on the balance sheet at fair value. Adoption of SFAS No. 133 is not expected
to have a material effect on the Company's financial statements.
Statements contained or incorporated by reference in this section that are
not based on historical facts are "forward-looking statements" within the
meaning of Section 21E of the Exchange Act, including without limitation,
statements regarding the Company's sales strategy, concentration on the
development of a diversified portfolio of licensed properties and private
label relationships and gross margins. Forward-looking statements also may be
identified by the use of forward-looking terminology such as "may", "will",
"expect", "estimate", "anticipate", "continue", or similar terms, variations
of such terms or the negative of those terms. This section contains forward-
looking statements that involve risks and uncertainties, including, but not
limited to, those related to: (i) general economic conditions; (ii) a
dependence on license arrangements; (iii) a dependence on private label
relationships; (iv) a dependence on contract manufacturers; (v) a reliance on
key customers; (vi) a dependence on access to credit facilities; (vii) the
risks associated with significant growth; (viii) competition; (ix) seasonality
of sales; (x) cyclicality and trends in the apparel industry; (xi) import
restrictions and other risks associated with international business; and (xii)
risks relating to the Company's Year 2000 compliance and the Year 2000
compliance of the Company's contract manufacturers, suppliers, distributors,
marketing partners and certain other parties. The Company's actual results may
differ materially from the results discussed in the forward-looking statements
contained herein. The following discussion should be read in conjunction with
the consolidated financial statements and notes appearing elsewhere in this
Proxy Statement.
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<PAGE>
MERGER SUB, HIG-HK AND THE MANAGEMENT GROUP
General
Merger Sub was recently incorporated under the laws of the State of New
York for the purpose of consummating the Merger. As of the date hereof, Merger
Sub has not owned any assets and Merger Sub will have no assets as of the
Effective Time. All of the issued and outstanding common stock of Merger Sub
is owned by HIG-HK, an affiliate of HIG. HIG is a Delaware limited liability
company principally engaged in the business of investing in companies. The
principal business office of each of Merger Sub, HIG-HK and HIG is 1001
Brickell Bay Drive, 27th Floor, Miami, Florida 33137. Each member of the
Management Group is a citizen of the United States. The principal business
office of each member of the Management Group is 100 West 33rd Street, Suite
1100, New York, New York 10001.
Except as set forth herein (i) none of Merger Sub or HIG-HK, nor, to the
best knowledge of Merger Sub or HIG-HK, any of the persons listed in Annex C
hereto, or any associate or majority owned subsidiary of such persons,
beneficially own any equity security of the Company; (ii) none of Merger Sub
or HIG-HK, nor to the best knowledge of Merger Sub or HIG-HK, any of the other
persons or entities referred to in clause (i) above, have effected any
transaction in any equity security of the Company during the past two years;
(iii) none of Merger Sub or HIG-HK, nor, to the best knowledge of Merger Sub
or HIG-HK, any of the other persons or entities referred to in clause (i)
above, have any contract, arrangement, understanding or relationship with any
other person with respect to any securities of the Company, including, without
limitation, any contract, arrangement, understanding or relationship
concerning the transfer or the voting of any securities of the Company, joint
venture, loan or option arrangements, puts or calls, guaranties of loans,
guaranties against loss, or the giving or withholding of proxies; (iv) none of
Merger Sub or HIG-HK, nor, to the best knowledge of Merger Sub or HIG-HK, any
of the other persons or entities referred to in clause (i) above have had any
transactions with the Company, or any of its executive officers, directors or
affiliates that would require reporting under the rules of the Commission; (v)
there have been no contacts, negotiations, or transactions between Merger Sub
or HIG-HK, or their respective subsidiaries, or, to the best knowledge of
Merger Sub or HIG-HK, any of the other persons or entities referred to in
clause (i) above, on the one hand, and the Company or its executive officers,
directors or affiliates, on the other hand, concerning a merger, consolidation
or acquisition, tender offer or other acquisition of securities, election of
directors, or a sale of other transfer or a material amount of assets.
During the past five years, neither Merger Sub HIG-HK nor any member of the
Management Group has been convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors). During the past five years,
neither Merger Sub HIG-HK nor any member of the Management Group has been a
party to a civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a
judgment, decree or final order enjoining further violations of, or
prohibiting activities subject to, federal or state securities laws or finding
any violation of such laws.
For additional information regarding the directors and officers of Merger
Sub, see "Directors and Executive Officers of the Surviving Corporation."
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<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the
beneficial ownership of Happy Kids Common Stock as of September 17, 1999 by
(a) each director of the Company, (b) each executive officer of the Company,
(c) all of the directors and executive officers as a group, and (d) each other
person known by the Company to be a beneficial owner of more than 5% of the
outstanding Happy Kids Common Stock. Unless otherwise indicated, each of the
shareholders has sole voting and investment power with respect to the shares
beneficially owned.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Beneficial Owner(1) Beneficial Ownership(2) Percentage Interest (3)
------------------- ----------------------- -----------------------
<S> <C> <C>
Jack M. Benun........... 6,587,500(4) 63.49%
Mark J. Benun........... 3,293,750 31.74%
Isaac Levy.............. 1,162,500(5) 11.20%
Stuart Bender........... 33,333(6) *
Andrew Glasgow.......... 95,693(7) *
Marvin Azrak............ 8,000(8) *
Stephen I. Kahn......... 8,000(9) *
All Directors and
officers as a group
(7 persons)............ 7,895,026(4)(5)(6)(7)(8) 76.09%
-----
76.09%
</TABLE>
* indicates a beneficial interest of less than 1% of outstanding shares.
- --------
(1) The address of each beneficial owner of more than 5% of the outstanding
Happy Kids Common Stock is 100 West 33rd Street, Suite 1100, New York, New
York 10001.
(2) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons named in the table have
sole voting and investment power with respect to all shares of Happy Kids
Common Stock shown as beneficially owned by such shareholder.
(3) Applicable ownership percentage is based on 10,375,693 shares of Happy
Kids Common Stock outstanding on September 17, 1999 plus any presently
exercisable stock options held by each such holder, and options which will
become exercisable within 60 days after September 17, 1999.
(4) Includes 3,293,750 shares of Happy Kids Common Stock owned of record by
Mark J. Benun, as to which shares Jack M. Benun exercises voting power.
Also includes 300,000 shares of Happy Kids Common Stock owned beneficially
and of record by the Jack M. Benun Family, L.P., of which Mr. Benun is the
general partner with a one percent (1%) interest, of which and each of Mr.
Benun's three daughters is a limited partner with a 33% interest.
(5) Excludes 100,000 shares of Happy Kids Common Stock underlying options
which are not yet exercisable as of September 17, 1999 and which do not
become exercisable within sixty (60) days after such date.
(6) Represents 33,333 shares of Happy Kids Common Stock underlying options
which are exercisable as of September 17, 1999 or which will become
exercisable within sixty (60) days after such date. Excludes 91,667 shares
of Happy Kids Common Stock underlying options which become exercisable
over time after such period.
(7) Represents 95,693 shares of Happy Kids Common Stock owned of record by Mr.
Glasgow which he received in connection with the acquisition by the
Company of D. Glasgow & Sons, Inc on April 13, 1999.
(8) Represents 8,000 shares of Happy Kids Common Stock underlying options
which are exercisable as of September 17, 1999 or which will become
exercisable within sixty (60) days after such date. Excludes 32,000 shares
of Happy Kids Common Stock underlying options which become exercisable
over time after such period.
(9) Represents 8,000 shares of Happy Kids Common Stock underlying options
which are exercisable as of September 17, 1999 or which will become
exercisable within sixty (60) days after such date. Excludes 32,000 shares
of Happy Kids Common Stock underlying options which become exercisable
over time after such period.
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE SURVIVING CORPORATION
It is expected that the Board of the Surviving Corporation following the
Merger will be comprised of Jack M. Benun, Mark J. Benun, Isaac Levy, Andrew
Glasgow and the directors of Merger Sub as of the Effective Time and that the
current officers of the Company immediately prior to the Effective Time and
John R. Black and Rick Rosen will be the officers of the Surviving Corporation
after the Merger. The directors and executive officers of the Surviving
Corporation following the Merger are expected to include:
<TABLE>
<CAPTION>
Capacities in In Current
Name Age Which Served Position Since
- ---- --- ------------- --------------
<S> <C> <C> <C>
Jack M. Benun........... 57 President, Chief Executive Officer and Director 1988
Mark J. Benun........... 32 Executive Vice President, Secretary and Director 1997
Isaac Levy.............. 35 Senior Vice President and Director 1997
Stuart Bender........... 45 Chief Financial Officer and Treasurer 1988
Andrew Glasgow.......... 46 Vice President and President of the Glasgow Division
and Director 1999
Sami W. Mnaymneh........ 38 Director 1999
Anthony A. Tamer........ 41 Director 1999
John R. Black........... 35 Vice President and Director 1999
Rick Rosen.............. 30 Vice President and Director 1999
John P. Bolduc.......... 35 Director 1999
</TABLE>
Mr. Jack M. Benun has been Chairman of the Board, President and Chief
Executive Officer of the Company since 1998. He founded the predecessor to the
Company in 1979 and has over 30 years experience in the apparel industry.
Prior to founding the Company, Mr. Benun managed a family domestic apparel
manufacturing business.
Mr. Mark J. Benun has been Executive Vice President, Secretary and a
Director of the Company since 1998. Mr. Benun joined the predecessor to the
Company in 1984 and currently oversees all sales for the Company.
Mr. Isaac Levy has been Senior Vice President and a Director of the Company
since 1998. Mr. Levy joined the predecessor to the Company in 1987 and is
responsible for all operations of the boys division, including buying, design
and marketing.
Mr. Stuart Bender joined the predecessor to the Company in 1985 as Chief
Financial Officer and Treasurer. Prior to joining the Company, Mr. Bender
served as the corporate controller and divisional controller for two private
companies. Mr. Bender has four years public accounting experience at Grant
Thornton LLP.
Mr. Andrew Glasgow has served as Vice President of the Company and
President of the Company's Glasgow Division since April, 1999. Mr. Glasgow was
elected as a Director of the Company in April 1999. Prior to that, Mr. Glasgow
was the President of D. Glasgow & Sons, Inc., a privately-held company which
designed, manufactured, and sold children's apparel products. Mr. Glasgow had
been employed by D. Glasgow & Sons, Inc. for in excess of twenty years. On
April 13, 1999, the Company acquired certain of the assets of D. Glasgow &
Sons, Inc.
Mr. Sami W. Mnaymneh will be a director of the Company following the
consummation of the Merger. Since 1993, Mr. Mnaymneh has been a Managing
Director of HIG. Mr. Mnaymneh is on the board of directors of Lets Talk
Cellular, Inc.
Mr. Anthony A. Tamer will be a director of the Company following the
consummation of the Merger. Since 1993, Mr. Tamer has been a Managing Director
of HIG. Mr. Tamer is on the board of directors of Let's Talk Cellular, Inc.
Mr. John R. Black will be a director and officer of the Company following
the consummation of the Merger. Since 1998, Mr. Black has been an Associate
with HIG. Prior to joining HIG, Mr. Black worked with Morris Anderson &
Associates.
70
<PAGE>
Mr. Rick Rosen will be a director and officer of the Company following the
consummation of the Merger. Since 1998, Mr. Rosen has been an Associate with
HIG. Prior to joining HIG, Mr. Rosen worked in Corporate Mergers &
Acquisitions at General Electric.
Mr. John P. Bolduc will be a director of the Company following the
consummation of the Merger. Since 1996, Mr. Bolduc has been a Managing
Director of HIG. Prior to joining HIG, Mr. Bolduc worked at Bain & Company.
Mr. Bolduc is on the board of directors of Let's Talk Cellular, Inc.
71
<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of September 17, 1999, the Company's authorized capital stock consists
of 30,000,000 shares of Common Stock, $.01 par value per share, and 5,000,000
shares of undesignated Preferred Stock, $.01 par value per share. At September
17, 1999, there were 10,375,693 shares of Common Stock issued and outstanding
and held of record by 24 shareholders. There are no shares of Preferred Stock
designated or issued.
The following statements are brief summaries of certain provisions with
respect to the Company's capital stock contained in its Certificate of
Incorporation and by-laws, copies of which have been filed as exhibits to the
Registration Statement. The following summary is qualified in its entirety by
reference thereto.
Common Stock
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the shareholders of the Company
and such holders are not entitled to cumulative voting rights. Holders of
shares of Common Stock will be entitled to receive dividends, subject to the
rights of preferred shareholders, if any, when, as and if declared by the
Board of Directors (see "Dividend Policy") and to share ratably in the assets
of the Company legally available for distribution to its shareholders in the
event of the liquidation, dissolution or winding-up of the Company. Holders of
Common Stock have no preemptive, subscription, redemption or conversion
rights. All of the issued and outstanding shares of Common Stock are duly
authorized, validly issued, fully paid and nonassessable.
Preferred Stock
The Company's Board of Directors may without further action by the
Company's shareholders, from time to time, direct the issuance of shares of
Preferred Stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. The holders of Preferred
Stock would normally be entitled to receive a preference payment in the event
of any liquidation, dissolution or winding-up of the Company before any
payment is made to the holders of the Common Stock. The Company does not
presently intend to issue any series of Preferred Stock.
The overall effect of the ability of the Company's Board of Directors to
issue Preferred Stock may be to render more difficult the accomplishment of
mergers or other takeover or change-in-control attempts. To the extent that
this ability has this effect, removal of the Company's incumbent Board of
Directors and management may be rendered more difficult. Further, this may
have an adverse impact on the ability of shareholders of the Company to
participate in a tender or exchange offer for the Common Stock and in so doing
diminish the market value of the Common Stock.
AVAILABLE INFORMATION
Happy Kids has filed with the Commission a Rule 13e-3 Transaction Statement
(including any amendments thereto, the "Schedule 13E-3") under the Exchange
Act with respect to the Merger. This Proxy Statement does not contain all of
the information set forth in the Schedule 13E-3 and the exhibits thereto,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission.
Happy Kids is subject to the informational requirements of the Exchange Act
and in accordance therewith files periodic reports, proxy statements and other
information with the Commission. The Schedule 13E-3 proxy statements and other
information filed by Happy Kids can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
offices located at Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at the prescribed rates. The Commission maintains a Website that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Such
reports, proxy and information statements and other information may be found
on the Commission's site address, http://www.sec.gov. Happy Kids Common Stock
is quoted on the Nasdaq National Market, and certain reports, proxy statements
and other information can also be inspected and copied at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, Washington,
D.C. 20006.
72
<PAGE>
INDEPENDENT AUDITORS
The consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, included in this
Proxy Statement have been audited by Grant Thornton LLP, independent auditors,
as stated in their report also included herein. Representatives of Grant
Thornton LLP are expected to be present at the Special Meeting and will have
an opportunity to make a statement should they desire to do so. Such
representatives are also expected to be available to respond to questions.
SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, shareholders may present
proper proposals for inclusion in the Company's proxy statement and for
consideration at the Annual Meeting of Shareholders by submitting such
proposals to the Company in a timely manner. The 1999 Annual Meeting will be
held only if the Merger is not consummated.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the
Company knows of no other matters that will be presented for consideration at
the Special Meeting other than as described in this Proxy Statement. However,
if any other matter shall come before the Special Meeting or any adjournments
or postponements thereof and shall be voted upon, it is intended that the
shares represented by proxy will be voted with respect thereto in accordance
with the judgment of the persons voting them.
By Order of the Board of Directors,
Mark J. Benun,
Secretary
73
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
HAPPY KIDS INC.
Consolidated Financial Statements of Happy Kids Inc
Report of Independent Certified Public Accountants...................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1997............... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996.................................................... F-4
Consolidated Statements of Common Stockholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.................................................... F-6
Notes to Consolidated Financial Statements for the Years Ended December
31, 1998, 1997 and 1996................................................ F-7
Interim Condensed Consolidated Financial Statements of Happy Kids Inc.
Condensed Consolidated Balance Sheets at September 30, 1999 (Unaudited)
and December 31, 1998.................................................. F-20
Condensed Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1999 and September 30, 1998 (Unaudited)..... F-21
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and September 30, 1998 (Unaudited)............ F-22
Notes to the Condensed Consolidated Financial Statements (Unaudited).... F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Happy Kids Inc.
We have audited the accompanying consolidated balance sheets of Happy Kids
Inc. and Subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 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 consolidated financial position of Happy Kids
Inc. and Subsidiaries as of December 31, 1997 and 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
We have also audited Schedule II of Happy Kids Inc. and Subsidiaries as of
and for the three years ended December 31, 1998. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
GRANT THORNTON LLP
New York, New York
February 5, 1999
F-2
<PAGE>
Happy Kids Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash......................................................... $ 139 $ 374
Due from factor.............................................. 20,640 24,232
Accounts receivable--trade (net of allowance for doubtful
accounts of $513 at December 31, 1997 and 1998)............. 347 316
Inventories.................................................. 23,579 16,316
Due from stockholders........................................ -- 347
Prepaid royalties............................................ 762 147
Deferred income taxes........................................ 1,029 40
Other current assets......................................... 1,496 952
------- -------
Total current assets....................................... 47,992 42,724
FIXED ASSETS--NET.............................................. 1,459 1,476
OTHER ASSETS................................................... 1,001 752
------- -------
Total assets............................................... $50,452 $44,952
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to bank.................................................. $ 3,753 $24,863
Current portion--capital lease obligations................... 27 49
Accounts payable............................................. 6,017 9,468
Accrued liabilities.......................................... 1,900 1,925
------- -------
Total current liabilities.................................. 11,697 36,305
DEFERRED RENT PAYABLE.......................................... 505 584
CAPITAL LEASE OBLIGATIONS...................................... -- 19
DUE TO STOCKHOLDERS............................................ 5,719 1,400
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock--5,000 shares authorized, $.01 par value; no
shares issued and outstanding............................... -- --
Common stock--30,000 shares authorized, $.01 par value; 7,750
and 10,280 shares issued and outstanding at December 31,
1997 and 1998, respectively................................. 103 78
Additional paid-in capital................................... 23,263 1,119
Retained earnings............................................ 9,165 5,447
------- -------
Total stockholders' equity................................. 32,531 6,644
------- -------
Total liabilities and stockholders' equity................. $50,452 $44,952
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Happy Kids Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Net sales............................................ $154,559 $106,673 $90,723
Cost of goods sold................................... 113,796 79,748 69,886
-------- -------- -------
Gross profit..................................... 40,763 26,925 20,837
Operating expenses................................... 22,449 18,457 15,370
-------- -------- -------
Operating earnings............................... 18,314 8,468 5,467
Interest expense, net................................ 2,077 3,803 2,980
-------- -------- -------
Income before income taxes....................... 16,237 4,665 2,487
Income taxes......................................... 4,603 473 119
-------- -------- -------
Net income....................................... $ 11,634 $ 4,192 $ 2,368
======== ======== =======
Basic income per share............................... $ 1.21 $ 0.54 $ 0.31
======== ======== =======
Diluted income per share............................. $ 1.21 $ 0.54 $ 0.31
======== ======== =======
Pro forma data (unaudited):
Historical income before income taxes.............. $ 16,237 $ 4,665 $ 2,487
Income taxes....................................... 6,657 1,961 990
-------- -------- -------
Net income....................................... $ 9,580 $ 2,704 $ 1,497
======== ======== =======
Pro forma basic net income per share............... $ 1.00 $ 0.35 $ 0.19
======== ======== =======
Pro forma weighted average shares outstanding--
basic............................................. 9,625 7,750 7,750
======== ======== =======
Pro forma diluted income per share................. $ 0.99 $ 0.35 $ 0.19
======== ======== =======
Pro forma weighted average shares outstanding--
diluted........................................... 9,637 7,750 7,750
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Happy Kids Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
(in thousands)
<TABLE>
<CAPTION>
Common stock Additional
------------- paid-in Retained
Shares Amount capital earnings
------ ------ ---------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1996.................. 7,750 $ 78 $ 1,041 $ 2,729
Waived payment of interest on shareholder's
note....................................... -- -- 78 --
Dividends................................... -- -- (721)
Net income.................................. -- -- -- 2,368
------ ---- ------- -------
Balance at December 31, 1996................ 7,750 78 1,119 4,376
Dividends................................... -- -- -- (3,121)
Net income.................................. -- -- -- 4,192
------ ---- ------- -------
Balance at December 31, 1997................ 7,750 78 1,119 5,447
Net proceeds from initial public offering... 2,530 25 22,144 --
Conversion of undistributed shareholder
equity to loan payable..................... -- -- -- (7,550)
Dividends................................... -- -- -- (366)
Net income.................................. -- -- -- 11,634
------ ---- ------- -------
Balance at December 31, 1998................ 10,280 $103 $23,263 $ 9,165
====== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
Happy Kids Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
December 31,
------------------------
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income.......................................... $11,634 $4,192 $ 2,368
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 338 336 388
Provision for losses on accounts receivable and
other receivables................................. 882 354 212
Deferred income taxes.............................. (912) 164 (8)
Noncash interest expense........................... -- -- 78
Changes in operating assets and liabilities:
Accounts receivable............................... (31) 741 10,521
Due from factor................................... 2,815 (7,307) (16,925)
Inventories....................................... (7,263) (6,829) 5,669
Other current assets.............................. (649) 815 (471)
Prepaid royalties................................. (615) 42 218
Other assets...................................... (488) 13 (196)
Accounts payable and accrued liabilities.......... (3,555) 5,083 919
Due from stockholders............................. 347 469 308
------- ------ -------
Net cash provided by (used in) operating
activities........................................ 2,503 (1,927) 3,081
------- ------ -------
Cash flows from investing activities:
Acquisition of fixed assets......................... (321) (79) (378)
------- ------ -------
Cash flows from financing activities:
Net borrowings (payments) under line of credit...... (21,110) 5,131 (1,608)
Payments on capital lease........................... (41) (56) (43)
Borrowings from (payments to) stockholders.......... (169) (160) 60
Dividends paid...................................... (366) (3,121) (721)
Payments on stockholders' notes payable............. (3,062) -- --
Proceeds from initial public offering, net.......... 22,331 (88) --
------- ------ -------
Net cash (used in) provided by financing
activities....................................... (2,417) 1,706 (2,312)
------- ------ -------
NET INCREASE (DECREASE) IN CASH................... (235) (300) 391
Cash at beginning of year............................ 374 674 283
------- ------ -------
Cash at end of year.................................. $ 139 $ 374 $ 674
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Happy Kids Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(in thousands, except per share data)
NOTE A--SUMMARY OF ACCOUNTING POLICIES
Happy Kids, Inc. (the "Company") was incorporated in 1988 in New York under
the name O'Boy Inc. and changed its name to Happy Kids Inc. in December
1997. Historically, the Company operated as separate business entities,
with the first of such entities commencing operations in 1979, all under
the common ownership of the stockholders of the Company. Immediately prior
to the effectiveness of the Initial Public Offering as described in Note K,
all of such separate entities became wholly-owned subsidiaries of the
Company. The Company issued 4,263 shares of common stock, to the principal
stockholders, in exchange for their ownership in these separate business
entities. All share and per share amounts have been restated to
retroactively reflect the reorganization.
The accompanying consolidated financial statements include the consolidated
accounts of the Company and its wholly-owned subsidiaries to reflect the
reorganization as stated above. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The Company operates in one business segment--as a designer and marketer of
licensed and branded children's apparel. The Company's revenues are derived
from the sale of children's apparel to mass market retailers, mid-tier
distributors and department stores in the United States.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows:
1. Revenue Recognition
Sales are recognized when merchandise is shipped to customers.
2. Inventories
Inventories, consisting primarily of finished goods, are stated at the
lower of cost or market. One subsidiary determines cost by the last-in,
first-out ("LIFO") method which represented approximately $407 and $808
of total inventory at December 31, 1998 and 1997, respectively. The
other subsidiaries determine cost by the first-in, first-out ("FIFO")
method.
3. Depreciation and Amortization
The Company depreciates fixed assets over their estimated useful lives
by the straight-line method. Leasehold improvements are depreciated
over their expected useful life or the life of the respective leases,
whichever is shorter.
The following are the estimated lives of the Company's fixed assets:
<TABLE>
<S> <C>
Furniture and fixtures............................. 5 years to 10 years
Equipment.......................................... 5 years to 10 years
Leasehold improvements............................. up to 10 years
</TABLE>
4. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and demand deposits.
F-7
<PAGE>
Happy Kids Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(In thousands, except per share data)
NOTE A (continued)
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Year ended December
31,
--------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cash paid during the year for
Interest......................................... $1,764 $2,992 $2,711
Income taxes..................................... 6,149 122 280
</TABLE>
Noncash investing and financing activities:
For the year ended December 31, 1996, the Company acquired equipment
totalling approximately $49 under capital leases.
5. Income Taxes
Prior to the completion of the Initial Public Offering, the Company had
elected to be treated as an S Corporation for Federal income tax
reporting purposes. An S Corporation is generally treated like a
partnership and is exempt from Federal income taxes, with certain
exceptions, and shareholders report their pro rata share of corporate
taxable income or loss on their individual tax returns. A provision for
state income taxes was made for those states not recognizing the
Company's S Corporation status. The Company's S Corporation status
terminated on the day prior to the effectiveness of the Company's
Initial Public Offering described in Note K-3.
Subsequent to the termination of the Company's S Corporation status,
the Company used the liability method for both Federal and state income
tax purposes. The effect of such change was reflected in net income for
the second quarter of 1998 when such termination occurred and resulted
in an increase in deferred tax assets and net earnings of approximately
$1,024.
The pro forma provision for income taxes represents the income tax
provision that would have been reported had the Company been subject to
Federal and additional state and local income taxes as a C Corporation
for all periods presented.
Deferred income taxes are determined based on the difference between
the tax basis of an asset or liability and its reported amount in the
financial statements using enacted tax rates for the year in which the
differences are expected to reverse.
The principal types of differences between assets and liabilities for
financial statement and tax return purposes giving rise to deferred
income taxes are accrued expenses, accumulated depreciation, certain
costs capitalized to inventory and allowance for doubtful accounts. A
deferred tax asset has been recorded for these differences.
6. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-8
<PAGE>
Happy Kids Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(In thousands, except per share data)
NOTE A (continued)
The Company estimates an allowance for doubtful accounts based on the
creditworthiness of their customers as well as general economic
conditions. Consequently, an adverse change in those conditions could
affect the Company's estimate. See Note I.
7. Fair Value of Financial Instruments
Due to the short-term nature of the bank loans, the fair value of the
Company's due to bank approximates carrying value. Furthermore, the
carrying value of all other financial instruments potentially subject
to valuation risk (principally consisting of cash, accounts receivable,
due from factor and accounts payable) also approximates fair value.
8. Future Effect of Recently Issued Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities," which is effective for the
Company's fiscal year ending December 31, 2000. SFAS No. 133 will
require the Company to recognize all derivatives on the balance sheet
at fair value. Adoption of SFAS No. 133 is not expected to have a
material effect on the Company's financial statements.
9. Earnings Per Share
Basic earnings per share is based on the weighted average number of
common shares outstanding without consideration of common stock
equivalents. Diluted earnings per share are based on the weighted
average number of common and common equivalent shares outstanding.
A reconciliation between basic and diluted earnings per share is as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Net income........................................ $11,634 $4,192 $2,368
======= ====== ======
Basic common shares............................... 9,625 7,750 7,750
======= ====== ======
Basic earnings per share.......................... $ 1.21 $ 0.54 $ 0.31
======= ====== ======
Basic common shares............................... 9,625 7,750 7,750
Diluted common shares............................. 12
------- ------ ------
Total diluted shares.............................. 9,637 7,750 7,750
======= ====== ======
Diluted earnings per share........................ $ 1.21 $ 0.54 $ 0.31
======= ====== ======
</TABLE>
10. Reclassification
Certain prior year amounts have been reclassified to conform to the
1998 presentation.
F-9
<PAGE>
Happy Kids Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(In thousands, except per share data)
NOTE B--INVENTORIES
Inventories consist of the following finished goods:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Warehouse.............................................. $16,531 $ 8,716
In-transit and overseas................................ 5,921 8,010
Raw materials.......................................... 1,356 --
LIFO valuation allowance............................... (229) (410)
------- -------
$23,579 $16,316
======= =======
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, the liquidation of
LIFO inventories decreased cost of sales and, therefore, increased income
before taxes by $181, $390 and $521, respectively.
NOTE C--FACTORED ACCOUNTS RECEIVABLE--WITHOUT RECOURSE AS TO CREDIT RISK
The Company has an agreement with a commercial finance company which
provides for the factoring of trade accounts receivable. The factoring
charge amounts to 0.55% of the receivables assigned. Factor charges for the
years ended December 31, 1998, 1997 and 1996 were approximately $966, $735
and $643, respectively. The commercial finance company also guarantees the
Company's letters of credit and issues letters of guarantee to company
suppliers. The commercial finance company has a first lien on all of the
Company's tangible assets as collateral for all of its obligations under
the financing agreement. Advances and loans under the agreement bear
interest at the prime rate.
The aggregate amounts of such guarantees and advances are limited by
formula based upon the uncollected balance of 85% of eligible factored
receivables, and 50% of eligible inventory collateral, plus 50% of letters
of credit outstanding, and 25% of open letters of credit and any
overadvance amount permitted by the lender. At December 31, 1998 and 1997,
the maximum amount of guarantees and advances permitted by such formula was
approximately $35,472 and $34,723, respectively.
Accounts receivable are factored without recourse as to credit risk but
with recourse for any claims by the customer for adjustments in the normal
course of business relating to price errors, shortages, etc. The
uncollected balance of receivables held by the commercial finance company
amounted to approximately $20,640 and $24,232 at December 31, 1998 and
1997, respectively.
NOTE D--FIXED ASSETS
Fixed assets are recorded at cost and consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
<S> <C> <C>
Furniture and fixtures.................................... $ 945 $ 893
Equipment................................................. 726 657
Leasehold improvements.................................... 1,358 1,158
------ ------
3,029 2,708
Less accumulated depreciation and amortization............ 1,570 1,232
------ ------
$1,459 $1,476
====== ======
</TABLE>
F-10
<PAGE>
Happy Kids Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(In thousands, except per share data)
NOTE E--DUE TO BANK
The Company has a financing agreement with several banks that expires on
March 31, 1999, subject to annual renewals. The agreement provides for
advances and letter of credit accommodations ranging between $42.0 million
and $49.0 million subject to borrowing base formulas. The maximum amount of
revolving credit advances outstanding at any time cannot exceed $35.0
million from January 1, 1998 to April 30, 1998 and $30.0 million
thereafter, and the maximum amount of letters of credit outstanding at any
time may not exceed $35.0 million. The borrowings under this line of credit
bear interest at the prime rate. Borrowings are collateralized by
substantially all of the assets of the Company. At December 31, 1997 and
1998, the Company has borrowed $24,863 and $3,753, respectively, under this
line. The agreement provides for various restrictive financial covenants,
including the requirement to maintain a minimum tangible net worth level.
The agreement prohibits the payment of dividends.
NOTE F--TRANSACTIONS WITH STOCKHOLDERS
Notes payable to stockholder consist of:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
<S> <C> <C>
5.7% due to stockholders.................................. $5,719 --
7% due to stockholder..................................... -- $1,400
------ ------
$5,719 $1,400
====== ======
</TABLE>
In connection with the termination of the Company's S Corporation status,
the Company agreed to distribute an aggregate $7,550 to the Company's pre-
Initial Public Offering shareholders, such amounts representing the
Company's total undistributed equity resulting from the S Corporation or
limited liability corporation ("LLC") status of the Company and its related
entities, prior to the Reorganization, of which $2,000 was paid from the
proceeds of the Initial Public Offering. The balance is due pursuant to
four-year, 5.7% notes payable to such shareholders. Such notes provide for
the timely distribution of amounts necessary to pay the remaining personal
income taxes of such shareholders or members due on amounts earned by such
S Corporations or LLCs for the period January 1, 1998 through the
termination of S Corporation or LLC status of approximately $314. In
addition, existing amounts due to shareholders of $1,400 as of April 2,
1998 were converted to the 5.7% note payable to such stockholder and are
subject to the same terms as the above promissory notes.
Interest expense on these notes for the years ended December 31, 1998, 1997
and 1996 was approximately $301, $98 and $107, respectively. Interest
totalling $78 for the year ended December 31, 1996, was waived and recorded
as additional paid-in capital.
The three principal stockholders have entered into a stockholders'
agreement dated January 1, 1998. Such agreement provides tag-along rights
to each of the parties thereto in the event that any of the other parties
elect to sell their common stock under certain circumstances. In addition,
each party is granted a right of first refusal to purchase any shares of
common stock offered for sale by any other party to the agreement.
For the years ended December 31, 1998, 1997 and 1996, the Company
contributed $165, $180 and $127, respectively, to a charitable foundation
managed by an executive of the Company.
F-11
<PAGE>
Happy Kids Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(In thousands, except per share data)
NOTE G--COMMITMENTS AND CONTINGENCIES
The Company leases showroom, office and warehouse facilities through May
31, 2006 at the following minimum annual rentals:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ ------
<S> <C>
1999............................................................ $1,281
2000............................................................ 1,043
2001............................................................ 947
2002............................................................ 947
2003............................................................ 947
Thereafter...................................................... 2,292
------
$7,457
======
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $1,187, $1,126 and $1,138, respectively.
At December 31, 1998, the Company is contingently liable under open letters
of credit in the amount of approximately $13,655.
The Company has entered into royalty agreements that provide for royalty
payments from 6% to 12% of net sales of licensed products. The Company
incurred royalty expense (included in cost of goods sold) of approximately
$7,886, $4,113 and $3,685 for the years ended December 31, 1998, 1997 and
1996, respectively. Based on minimum sales requirements, future minimum
royalty payments required under these agreements are:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ -------
<S> <C>
1999........................................................... $ 3,196
2000........................................................... 3,628
2001........................................................... 3,055
2002........................................................... 418
2003........................................................... 273
-------
$10,570
=======
</TABLE>
Executive Compensation
Effective January 1, 1998, the Company entered into employment agreements
with its executive officers for initial terms expiring in two years at
initial aggregate annual base salaries of $1,250.
In addition, the Company has a severance agreement with an officer of the
Company, which provides that, in the event of a change of control of the
Company, the executive would have the right to receive payments at a rate
of three times the individual's annual regular compensation upon
termination of employment within one year.
F-12
<PAGE>
Happy Kids Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(In thousands, except per share data)
NOTE G (continued)
Year 2000
The Year 2000 issue relates to limitations in computer systems and
applications that may prevent proper recognition of the Year 2000. The
potential effect of the Year 2000 issue on the Company and its business
partners will not be fully determinable until the Year 2000 and thereafter.
If Year 2000 modifications are not properly completed either by the Company
or entities with which the Company conducts business, the Company's
revenues and financial condition could be adversely impacted.
NOTE H--EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) Profit Sharing Plan covering
substantially all eligible employees. The plan allows employees to defer a
percentage of their annual earnings subject to limitation of Section 401(m)
of the Internal Revenue Code.
The plan provides that the Company can make discretionary contributions.
These contributions are allocated to the participant based on the
participant's compensation in proportion to the compensation of all
participants. The Company's contribution to the plan for the years ended
December 31, 1998, 1997 and 1996 was approximately $45, $34 and $31,
respectively.
NOTE I--CONCENTRATIONS
During the years ended December 31, 1998, 1997 and 1996, approximately 43%,
41% and 40%, respectively, of total purchases of the Company were made from
companies located in one overseas country. In addition, for the years ended
December 31, 1998, 1997 and 1996, 29%, 31% and 37%, respectively, of total
purchases of the Company were made from companies located in a second
overseas country. In addition, the Company relied on two manufacturers for
7%, 11% and 18%, and 18%, 13% and 11% of the Company's production for the
years ended December 31, 1998, 1997 and 1996, respectively. The Company's
import operations are subject to constraints imposed by bilateral textile
agreements between the United States and a number of foreign countries.
These agreements impose quotas on the amount and types of goods which can
be imported into the United States from these countries. The Company's
operations may be adversely affected by political instability, resulting in
the disruption of trade from foreign countries in which the Company's
contractors and suppliers are located, the imposition of additional
regulations relating to imports or duties, taxes, quotas and other charges
on imports. The Company is unable to predict whether any additional
regulations, duties, taxes, quotas or other charges may be imposed on the
importation of its products. The assessment of any of these items could
result in increases in the cost of such imports and affect sales and
profitability. In addition, the failure of manufacturers to ship some or
all of the Company's orders on time could impact the Company's ability to
deliver products to its customers. The Company does not have long-term
contracts with any of its contract manufacturers. The Company believes that
alternate sources of manufacturing are available if the need were to arise,
although any substantial delay in locating, or inability to locate,
acceptable alternate sources of manufacturing could have a material adverse
effect on the Company's business, financial condition and results of
operations.
F-13
<PAGE>
Happy Kids Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(In thousands, except per share data)
NOTE I (continued)
The Company's sales are made principally to department stores, mid-tier
distributors and mass market retailers of children's apparel. Sales to
customers that represent more than 10% of the Company's net sales are as
follows:
<TABLE>
<S> <C>
Year ended December 30, 1998............................ 22%, 14% and 11%
Year ended December 30, 1997............................ 17%, 14% and 11%
Year ended December 30, 1996............................ 22% and 13%
</TABLE>
NOTE J--INCOME TAXES
Prior to the completion of the Initial Public Offering, the Company had
elected to be treated as an S Corporation for Federal income tax reporting
purposes. An S Corporation is generally treated like a partnership and is
exempt from Federal income taxes, with certain exceptions, and shareholders
report their pro rata share of corporate taxable income or loss on their
individual tax returns. A provision for state income taxes was made for
those states not recognizing the Company's S Corporation status. The
Company's S Corporation status terminated on the day prior to the
effectiveness of the Company's Initial Public Offering described in Note K-
3.
The components of income tax expense (benefit) are summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
Current
Federal................................... $ 4,304 $ 347 $ 17
State and city............................ 1,211 (38) 109
--------- ------- -------
5,515 309 126
Deferred.................................... (912) 164 (7)
--------- ------- -------
$4,603 $ 473 $ 119
========= ======= =======
</TABLE>
Income tax expense for the years ended December 31, 1996 and 1997 and for
the period ended April 2, 1998 does not include income taxes for those
subsidiaries which are S Corporations or LLC's. Reference is made to Note
A-5.
F-14
<PAGE>
Happy Kids Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(In thousands, except per share data)
NOTE J (continued)
The tax effect of temporary differences which gave rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
December
31,
------------
1998 1997
------ ----
<S> <C> <C>
Provision for losses on accounts receivable and other
receivables............................................ $ 409 $ 33
Accrued expenses........................................ 200 280
Depreciation............................................ (2) (1)
Costs capitalized to inventory.......................... 636 16
Other................................................... -- --
------ ----
Net deferred tax asset.................................. $1,243 $328
====== ====
Current................................................. $1,029 $ 40
Long-term............................................... 214 288
</TABLE>
During the year ended December 31, 1996, the Internal Revenue Service
("IRS") completed an examination of the tax returns of Happy Kids, Ltd. for
the years ended December 31, 1991, 1992 and 1993. As a result of the
examination, Happy Kids, Ltd. recorded an additional $235 in Federal and
state income taxes and $55 in penalties and interest.
At December 31, 1998, the IRS has cleared the tax returns of Happy Kids,
Ltd. through December 31, 1996.
NOTE K--STOCKHOLDERS' EQUITY
1. Stock Option Plan
The Company's 1997 Stock Option Plan (the "Plan") was adopted by the Board
of Directors and approved by the shareholders of the Company on December
31, 1997. A total of 800,000 shares of common stock are reserved for
issuance upon exercise of options and/or stock purchase rights to be
granted under the Plan. Those eligible to receive stock option grants or
stock purchase rights under the Plan include employees, nonemployee
directors and consultants.
Subject to the provisions of the Plan, the administrator of the Plan has
the discretion to determine the optionees and/or grantees, the type of
options to be granted (incentive stock options ("ISOs") or nonqualified
stock options ("NQSOs")), the vesting provisions, the terms of the option
grants and such other related provisions as are consistent with the Plan.
The exercise price of an ISO may not be less than the fair market value per
share of the common stock on the date of grant or, in the case of an
optionee who beneficially owns 10% or more of the outstanding capital stock
of the Company, not less than 110% of the fair market value per share on
the date of grant. The exercise price of a NQSO may not be less than 85% of
the fair market value per share of the common stock on the date of grant,
or, in the case of any optionee who beneficially owns 10% or more of the
outstanding capital stock of the Company, not less than 110% of the fair
market value per share on the date of grant. The purchase price of shares
issued pursuant to stock purchase rights may not be less than 50% of the
fair market value of such shares as of the offer date of such rights.
F-15
<PAGE>
Happy Kids Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(In thousands, except per share data)
NOTE K (continued)
The options terminate not more than ten years from the date of grant,
subject to earlier termination on the optionee's death, disability or
termination of employment with the Company, but provide that the term of
any options granted to a holder of more than 10% of the outstanding shares
of common stock may be no longer than five years. The Plan terminates on
December 31, 2007.
The weighted average fair value at date of grant for options granted during
1998 was $4.47 per option. The fair value of each option at date of grant
was estimated using the Black-Scholes option pricing model with the
following weighted-average assumptions for grants in 1998:
<TABLE>
<S> <C>
Expected stock price volatility.................................. 35%
Expected lives of options........................................ 7 years
Risk-free interest rate.......................................... 5.7%
Expected dividend yield.......................................... 0%
</TABLE>
Information regarding these option plans for 1998 is as follows:
<TABLE>
<CAPTION>
Incentive options Nonqualified options
----------------- -----------------------
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Options outstanding at beginning of
year
Exercised.................. -- -- -- --
Granted.................... 100,000 $10 80,000 $ 10
Canceled or forfeited...... -- -- -- --
------- --- ----------- --------
Options outstanding at end of
year........................ 100,000 $10 80,000 $ 10
======= === =========== ========
Exercisable.................. -- --
======= ===========
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31 1998:
<TABLE>
<CAPTION>
Number Weighted- Number
outstanding average Weighted- exercisable Weighted-
as of remaining average as of average
Exercise December 31, contractual exercise December 31, exercise
price 1998 life price 1998 price
-------- ------------ ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$10 180,000 9.21 years $10 -- $10
</TABLE>
2. Stock Split
As of December 31, 1997, the Company effected a 34,875-for-1 stock split of
the Company's outstanding common stock. A total of 7,750 shares of common
stock will be issued and outstanding after the split. All share and per
share amounts have been restated to retroactively reflect the stock splits.
F-16
<PAGE>
Happy Kids Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
(In thousands, except per share data)
NOTE K (continued)
3. Initial Public Offering
On April 2, 1998, the Company consummated its Initial Public Offering of
2,200 shares of its common stock at a price of $10.00 per share, all of
which shares were issued and sold by the Company. On April 23, 1998, the
Company consummated the exercise of the underwriters' over allotment option
granted by the Company to the underwriters in connection with the Initial
Public Offering. As a result, the Company issued and sold an additional 330
shares of the Company's common stock at the Initial Public Offering price
of $10.00 per share. The net proceeds to the Company from such sales were
approximately $22,331.
Of the total net proceeds received by the Company upon the consummation of
its Initial Public Offering and the exercise of the over allotment option,
$2,000 was distributed to certain shareholders of the Company in connection
with the payment of a portion of the S Corporation distribution made by the
Company in connection with the Reorganization (Note F) and the remaining
amount was utilized to pay down a portion of the outstanding balance under
the Company's bank credit facility.
NOTE L--PRO FORMA INFORMATION (UNAUDITED)
1. Pro Forma Results of Operations and Pro Forma Income Taxes
Pro forma adjustments in the statements of operations for the years ended
December 31, 1996, 1997 and 1998 reflect a provision for income taxes based
upon pro forma pretax income as if the Company had been subject to Federal
and additional state and local income taxes for the full periods.
As disclosed in Note A-5, the Company elected for certain of its affiliates
to be taxed as an S Corporation or to be treated as a partnership pursuant
to the Internal Revenue Code. In connection with the Offering, the Company
terminated its S Corporation and Partnership elections and became subject
to Federal and additional state and local income taxes. The pro forma
provision for income taxes represents the income tax provisions that would
have been reported had the Company been subject to Federal and additional
state and local income taxes for the years ended December 31, 1996, 1997
and for the period ended April 2, 1998. The effective pro forma tax rate of
the Company differs from the Federal rate primarily due to the effects of
state income taxes.
The pro forma provision for income taxes, after giving effect to the
Federal statutory rate and an approximate state tax provision after
reflecting the Federal tax benefit, consists of the following:
<TABLE>
<CAPTION>
Year ended
December 31,
------------------
1998 1997 1996
------ ------ ----
<S> <C> <C> <C>
Federal............................................... $5,187 $1,481 $661
State................................................. 1,470 480 329
------ ------ ----
$6,657 $1,961 $990
====== ====== ====
</TABLE>
F-17
<PAGE>
Happy Kids Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
December 31, 1996, 1997 and 1998
(in thousands, except per share data)
NOTE L (Continued)
The differences between pro forma tax expense shown in the statements of
operations and the pro forma computed income tax expense based on the
Federal statutory corporate rate are as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Computed income taxes based on Federal statutory
rate of 34% in 1996 and 1997, 35% in 1998....... $5,683 $1,586 $ 845
State income taxes, net of Federal benefit....... 956 317 217
Benefit of utilization of net operating losses... -- -- (160)
Interest waived on debt.......................... -- -- 33
Officer's life insurance......................... -- 32 40
Other............................................ 18 26 15
------ ------ -----
$6,657 $1,961 $ 990
====== ====== =====
</TABLE>
2. Pro Forma Net Income and Net Income Per Common Share
Pro forma net income represents the historical amounts after the pro forma
adjustments discussed above.
Pro forma net income per share is based on the weighted average number of
shares outstanding immediately prior to the closing of the Offering, after
giving effect to a 34,875-for-1 stock split and the shares issued in the
Offering.
F-18
<PAGE>
Happy Kids Inc. and Subsidiaries
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- ---------- --------------------- -------------- ----------
Additions
---------------------
(1) (2)
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions (a) period
----------- ---------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996
Deducted from asset
accounts
Allowance for doubtful
accounts............. $274 $13 $199 -- $ 486
Year ended December 31,
1997
Deducted from asset
accounts
Allowance for doubtful
accounts and other
receivables.......... $486 $31 $323 -- $ 840
Year ended December 31,
1998
Deducted from asset
accounts
Allowance for doubtful
accounts and other
receivables.......... $840 $71 $838 -- $1,749
</TABLE>
- --------
(a) Accounts written off as uncollectible.
F-19
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash.................................................. $ 5 $ 139
Due from factor....................................... 46,283 20,640
Accounts receivable--trade, net....................... 1,854 347
Inventories........................................... 21,122 23,579
Prepaid royalties..................................... 1,700 762
Deferred income taxes................................. 1,029 1,029
Other current assets.................................. 3,900 1,496
------- -------
Total current assets................................ 75,893 47,992
FIXED ASSETS--NET....................................... 2,352 1,459
OTHER ASSETS............................................ 5,957 1,001
------- -------
Total assets........................................ $84,202 $50,452
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES
<S> <C> <C>
CURRENT LIABILITIES
Due to bank........................................... $25,723 $ 3,753
Accounts payable and accrued liabilities.............. 10,303 7,944
------- -------
Total current liabilities............................. 36,026 11,697
DEFERRED RENT PAYABLE................................. 445 505
DUE TO STOCKHOLDERS................................... 5,570 5,719
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock--5,000 shares authorized, $.01 par
value; no shares issued and outstanding.............. -- --
Common stock--30,000 shares authorized, $.01 par val-
ue; 10,376 and 10,280 shares issued and outstanding
at September 30, 1999 and December 31, 1998, respec-
tively............................................... 104 103
Additional paid-in capital............................ 24,262 23,263
Retained earnings..................................... 17,795 9,165
------- -------
Total stockholders' equity.......................... 42,161 32,531
------- -------
Total liabilities and stockholders' equity.......... $84,202 $50,452
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales...................... $65,547 $46,993 $148,850 $114,721
Cost of goods sold............. 48,426 34,750 109,607 85,302
------- ------- -------- --------
Gross profit................. 17,121 12,243 39,243 29,419
------- ------- -------- --------
Operating expenses:............
Operating expenses........... 9,244 5,958 23,176 16,539
------- ------- -------- --------
Operating earnings........... 7,877 6,285 16,067 12,880
------- ------- -------- --------
Interest expense, net.......... 609 472 1,187 1,790
------- ------- -------- --------
Income before income taxes..... 7,268 5,813 14,880 11,090
Provision for income taxes..... 3,053 2,442 6,250 2,814
------- ------- -------- --------
Net income................... $ 4,215 $ 3,371 $ 8,630 $ 8,276
======= ======= ======== ========
Basic income per common share.. $ 0.41 $ 0.33 $ 0.83 $ 0.88
======= ======= ======== ========
Weighted average common shares
outstanding................... 10,376 10,280 10,340 9,406
======= ======= ======== ========
Diluted income per common
share......................... $ 0.41 $ 0.33 $ 0.83 $ 0.88
======= ======= ======== ========
Weighted average common shares
outstanding................... 10,382 10,284 10,365 9,419
======= ======= ======== ========
Pro forma data (unaudited):....
Historical income before
provision for income taxes.. $ 7,268 $ 5,813 $ 14,880 $ 11,090
Income taxes................. 3,053 2,442 6,250 4,658
------- ------- -------- --------
Net income................... $ 4,215 $ 3,371 $ 8,630 $ 6,432
======= ======= ======== ========
Pro forma basic income per
share......................... $ 0.41 $ 0.33 $ 0.83 $ 0.68
======= ======= ======== ========
Pro forma weighted average com-
mon shares outstanding........ 10,376 10,280 10,340 9,406
======= ======= ======== ========
Pro forma diluted income per
share......................... $ 0.41 $ 0.33 $ 0.83 $ 0.68
======= ======= ======== ========
Pro forma weighted average com-
mon shares outstanding........ 10,382 10,284 10,365 9,419
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements
F-21
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 8,630 $ 8,276
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................... 433 226
Deferred taxes.......................................... -- (1,024)
Provision for losses on accounts receivable............. 3 45
Changes in operating assets and liabilities, net of assets
acquired:
Accounts receivable..................................... (1,510) (365)
Due from factor......................................... (25,643) (879)
Inventories............................................. 5,357 (5,015)
Prepaid royalties....................................... (938) (1,737)
Other current assets.................................... (2,404) (379)
Other assets............................................ (106) (30)
Accounts payable and accrued expenses................... 2,299 (1,386)
Due from shareholders................................... -- 347
-------- --------
Net cash used in operating activities..................... (13,879) (1,921)
-------- --------
Cash flows from investing activities:
Acquired assets of D. Glasgow........................... (6,853) --
Acquisition of fixed assets............................. (1,223) (251)
-------- --------
Net cash used in investing activities..................... (8,076) (251)
Cash flows from financing activities:
Net borrowings under line of credit..................... 21,970 (16,548)
Payments on capital lease............................... -- (31)
Issuance of common stock................................ -- 22,331
Payments to stockholders................................ (149) (169)
Dividends paid.......................................... -- (3,428)
-------- --------
Net cash provided by financing activities................. 21,821 2,155
-------- --------
Net decrease in cash...................................... (134) (17)
Cash at beginning of year................................. 139 374
-------- --------
Cash at end of period..................................... $ 5 $ 357
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
F-22
<PAGE>
HAPPY KIDS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 -- General:
The Company was incorporated in 1988 in New York under the name O'Boy Inc.
and changed its name to Happy Kids Inc. in December 1997. Historically, the
Company operated as separate business entities, with the first of such
entities commencing operations in 1979, all under the common ownership of
the Company's then-current shareholders. Immediately prior to the
effectiveness of the Company's initial public offering (the "Initial Public
Offering"), as described in Note 2, all of such separate entities became
wholly-owned subsidiaries of the Company (the "Reorganization"). The
Company issued 4,262,500 additional shares of common stock, to its then-
current shareholders, in exchange for their ownership in these separate
business entities.
The accompanying condensed consolidated financial statements include the
consolidated accounts of the Company and its wholly owned subsidiaries to
reflect the Reorganization as stated above. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Note 2 -- Initial Public Offering:
On April 2, 1998, the Company consummated its Initial Public Offering of
2,200,000 shares of its common stock, par value $0.01 per share (the
"Common Stock" or "Shares") at a price of $10.00 per share, all of which
shares were issued and sold by the Company. On April 23, 1998, the Company
consummated the exercise of the underwriters' over-allotment option granted
by the Company to the underwriters in connection with the Initial Public
Offering. As a result, the Company issued and sold an additional 330,000
shares of the Company's Common Stock at the Initial Public Offering price
of $10.00 per share. The net proceeds to the Company from such sales were
approximately $22.3 million.
Of the total net proceeds received by the Company upon the consummation of
its Initial Public Offering and the exercise of the over-allotment option,
$2.0 million was distributed to certain shareholders of the Company in
connection with the payment of a portion of the S Corporation distribution
made by the Company in connection with the Reorganization (the "S
Corporation Distribution") and the remaining amount was utilized to pay
down a portion of the outstanding balance under the Company's bank credit
facility (the "Line of Credit").
Note 3 -- Income Taxes:
Prior to the completion of the Initial Public Offering, the Company had
elected to be treated as an S Corporation for Federal income tax reporting
purposes. An S Corporation is generally treated like a partnership and is
exempt from Federal income taxes, with certain exceptions, and shareholders
report their pro rata share of corporate taxable income or loss on their
individual tax returns. A provision for state income taxes was made for
those states not recognizing the Company's S Corporation status. The
Company's S Corporation status terminated on the day prior to the
effectiveness of the Company's Initial Public Offering described in Note 2.
Subsequent to the termination of the Company's S Corporation status, the
Company used the liability method for both Federal and state income tax
purposes. The effect of such change was reflected in net income for the
second quarter of 1998 when such termination occurred and resulted in an
increase in deferred tax assets and net earnings of approximately $1.0
million.
The pro forma provision for income taxes represents the income tax
provision that would have been reported had the Company been subject to
Federal and additional state and local income taxes as a C Corporation for
all periods presented.
F-23
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--(Continued)
(in thousands, except per share amounts)
Deferred income taxes are determined based on the difference between the
tax basis of an asset or liability and its reported amount in the financial
statements using enacted tax rates for the year in which the differences
are expected to reverse.
The principal types of differences between assets and liabilities for
financial statement and tax return purposes giving rise to deferred income
taxes are accrued expenses, accumulated depreciation, certain costs
capitalized to inventory and allowance for doubtful accounts. A deferred
tax asset has been recorded for these differences.
Note 4 -- Due To Stockholders:
In connection with the termination of the Company's S Corporation status,
the Company agreed to distribute an aggregate of $7.6 million to the
Company's pre-Initial Public Offering shareholders, such amounts
representing the Company's total undistributed equity resulting from the S
Corporation or limited liability corporation ("LLC") status of the Company
and its related entities prior to the Reorganization, of which $2.0 million
was paid from the proceeds of the Initial Public Offering. The balance is
due pursuant to four-year 5.7% notes payable to such shareholders. Such
notes provide for the timely distribution of amounts necessary to pay the
remaining personal income taxes of such shareholders or members due on
amounts earned by such S Corporations or LLCs for the period January 1,
1998 through the termination of S Corporation or LLC status. In addition,
existing amounts due to shareholders of $1.4 million are subject to the
same terms as the above promissory notes.
Note 5 -- Pro Forma Information:
a. Pro Forma Results of Income and Pro Forma Income Taxes:
Pro Forma adjustments in the statement of income for the three-month and
nine-month periods ended June 30, 1998 reflect provisions for income taxes
based upon pro forma pretax income as if the Company had been subject to
Federal and additional state and local income taxes.
As disclosed in Note 3, the Company has, in the past, elected for certain
of its affiliates to be taxed as S Corporations pursuant to the Internal
Revenue Code. In connection with the Company's Initial Public Offering, the
Company terminated such S elections and partnership status and became
subject to Federal and additional state and local income taxes. The pro
forma provision for income taxes represents the income tax provisions that
would have been reported had the Company been subject to Federal and
additional state and local income taxes. The effective pro forma tax rate
of the Company differs from the Federal rate of 34% primarily due to the
effects of state and local income taxes.
b. Pro Forma Net Income
Pro forma net income represents the historical amounts after the pro forma
adjustments discussed above.
F-24
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--(Continued)
(in thousands, except per share amounts)
Note 6 -- Earnings Per Share:
A reconciliation between basic and diluted earnings per share from
operations is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------
1999 1998 1999 1998
--------------------------------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net Income........................... $ 4,215 $ 3,371 $ 8,630 $ 8,276
BASIC EPS:
Basic common shares................ 10,376 10,280 10,340 9,406
=========== =========== ========= ========
Basic EPS.......................... $ 0.41 $ 0.33 $ 0.83 $ 0.88
=========== =========== ========= ========
DILUTED EPS:
Basic common shares................ 10,376 10,280 10,340 9,406
Diluted common shares.............. 6 4 25 13
----------- ----------- --------- --------
Total diluted shares............... 10,382 10,284 10,365 9,419
=========== =========== ========= ========
Diluted EPS........................ $ 0.41 $ 0.33 $ 0.83 $ 0.88
=========== =========== ========= ========
</TABLE>
Note 7 -- Accounts Receivable:
Accounts Receivable consist of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(In thousands)
<S> <C> <C>
Accounts Receivable..................... $ 3,097 $ 860
Allowances.............................. (1,243) (513)
------- -------
$ 1,854 $ 347
======= =======
Note 8 -- Inventories:
Inventories consist of the following finished goods:
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(In thousands)
<S> <C> <C>
Warehouse................................. $17,114 $16,531
In-transit,overseas and raw materials .... 4,021 7,277
LIFO valuation allowance.................. (13) (229)
------- -------
$21,122 $23,579
======= =======
</TABLE>
For the nine months ended September 30, 1999, the liquidation of LIFO
inventories decreased the cost of sales and, therefore, increased income before
taxes by $216,000. For the nine months ended September 30, 1998, the
liquidation of LIFO inventories decreased the cost of sales and, therefore,
increased income before taxes by $53,000. For the three months ended September
30, 1999, the liquidation of LIFO inventories decreased the cost of sales and,
therefore, increased income before taxes by $216,000. There was no liquidation
of LIFO inventories for the three months ended September 30, 1998.
F-25
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--(Continued)
(in thousands, except per share amounts)
Note 9 -- Acquisition:
On April 13, 1999, the Company entered into an asset purchase agreement
(the "Purchase Agreement") with D. Glasgow & Sons Inc., a New York corporation
(the "Seller") and Mr. Andrew D. Glasgow, its sole shareholder, to acquire
certain of the assets (the "Assets") of the Seller. The Assets include
intellectual property rights under license agreements to design and
manufacture children's apparel bearing logos, trademarks and tradenames of the
National Football League, the National Basketball Association, Major League
Baseball and the National Hockey League, as well as certain Warner Brothers'
properties, including Looney Tunes, and Saban's Power Rangers, among other
licenses. The Company also acquired certain machinery and equipment from the
Seller. The purchase price for the Assets included a cash consideration of
$3.7 million and the issuance of 95,693 shares of Common Stock of the Company
having a fair market value of $1.0 million. Such shares of Common Stock are
restricted shares, and the Company has granted certain piggy-back registration
rights to the holder of such restricted stock. The Purchase Agreement also
provided for the Company to purchase the Seller's apparel inventory for an
additional cash payment of approximately $2.9 million.
In connection with the consummation of the transactions contemplated by the
Purchase Agreement, Mr. Glasgow, formerly the President of the Seller, was
elected as a Director of the Company in April 1999. In addition, Mr. Glasgow
was appointed Vice President of the Company and President of the Company's
Glasgow Division on the terms set forth in a five (5) year Employment
Agreement with the Company. Pursuant to such Employment Agreement, Mr. Glasgow
is entitled to an annual base salary of $250,000 and bonuses commensurate with
other executive officers of the Company, which amounts and payments are within
the discretion of the Compensation Committee of the Board of Directors. In
addition, Mr. Glasgow is entitled to receive, in quarterly payments, subject
to annual adjustment, a percentage of certain divisional profits and certain
import sales profits of the Company's Glasgow Division. Mr. Glasgow's
Employment Agreement requires Mr. Glasgow to maintain the confidentiality of
Company information and requires that during the term of his employment with
the Company and thereafter for a period of two years, he will not compete with
the Company in any state or territory of the United States where the Company
does business. Mr. Glasgow's Employment Agreement also provides that, for a
period of two years following the termination of his employment with the
Company, he will not solicit the Company's licensors, customers or employees.
Note 10 -- Plan of Merger:
On September 17, 1999, an Agreement and Plan of Merger, (as amended, the
"Merger Agreement"), was entered into by and between the Company and HK Merger
Corp. ("HK"). HK is a New York corporation newly-formed by H.I.G. Capital, LLC
("HIG") and controlled by HIG-HK Investment Inc. ("HIG-HK"), an affiliate of
HIG. HK was formed solely for the purpose of consummating the Merger (as
defined below). Under the terms of the Merger Agreement, HK will be merged
with and into the Company (the "Merger") with the Company continuing as the
surviving corporation. Pursuant to the Merger Agreement, all unaffiliated
shareholders of the Company will receive $12.00 per share in cash. Messrs.
Jack M. Benun, President and Chairman, Mark J. Benun, Vice Chairman and
Secretary, and Isaac Levy, Vice President (collectively, the "Management
Shareholders"), who hold 74.69% of the Company's outstanding shares, will
receive $7.164 per share in cash for their holdings of outstanding shares
except that such shareholders will retain shares representing, in the
aggregate, 23.61% of the outstanding shares of the surviving corporation. Each
holder of an outstanding stock option in the Company immediately prior to the
effective time of the Merger, other than holders of certain non-vested
employee options, will be entitled to receive a cash payment in settlement for
such option. Messrs. Benun, Benun and Levy will continue in their present
roles as senior management of the Company following the Merger and each of
them
F-26
<PAGE>
HAPPY KIDS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--(Continued)
(in thousands, except per share amounts)
has executed an employment agreement with the Company with respect thereto,
with each such employment agreement to be effective upon consummation of the
Merger. The employment agreements provide for annual base salaries and annual
bonuses (in cash and common stock of the Company) based upon the performance
of the Company. In connection with the Merger Agreement, the Management
Shareholders have also entered into a Support Agreement dated September 17,
1999 (the "Support Agreement") and a Shareholders Agreement dated September
17, 1999 (the "Shareholders Agreement") with HIG.
Consummation of the Merger is subject to customary conditions, including
the approval of two-thirds of the Happy Kids' shareholders entitled to vote
thereon and receipt of proceeds from financing. Pursuant to the Support
Agreement, Messrs. Benun, Benun and Levy, as shareholders, have agreed to vote
their shares in favor of the Merger.
Financing the Merger will require approximately $100.8 million to pay the
merger consideration to the Management Shareholders and unaffiliated
shareholders, to pay for the settlement of the stock options, to refinance
existing indebtedness, to repay certain notes, and to pay estimated fees and
expenses in connection with the Merger and such financing. HIG has received
commitments for debt financing from two Deutsche Bank affiliates, the
provision of which is subject to customary conditions. Such financing
commitments will expire in accordance therein if the Merger is not consummated
on or prior to December 15, 1999. In addition HIG has committed to provide
equity capital to the Company upon consummation of the Merger.
The Company expects that the Merger will be consummated no later than
December 15, 1999. The Merger Agreement has been approved and adopted by the
Company's Board of Directors upon the recommendation of its special committee
of disinterested directors, namely Messrs. Marvin Azrak and Stephen I. Kahn,
and the opinion of CIBC World Markets Corp. that the price to be received by
public shareholders is fair from a financial point of view to such holders. It
is expected that, in the event the Merger is consummated, the registration of
the Company's Common Stock pursuant to Section 12 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") would be terminated and the
Company's Common Stock would cease to be listed on the Nasdaq National Market.
F-27
<PAGE>
ANNEX A
-----------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
HK MERGER CORP.
AND
HAPPY KIDS INC.
September 17, 1999
-----------------------------------------------------------------------
-1-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 THE MERGER..................................................2
Section 1.1 The Merger.........................................2
Section 1.2 Closing and Effective Time.........................2
Section 1.3 Effects of the Merger..............................2
Section 1.4 Certificate of Incorporation and Bylaws
of the Surviving Corporation....................2
Section 1.5 Directors..........................................2
Section 1.6 Officers...........................................3
ARTICLE 2 EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE COMPANY....3
Section 2.1 Effect on Capital Stock............................3
(a) Merger Consideration...............................3
(b) Conversion of Shares...............................3
(c) Cancellation of Treasury Stock.....................4
Section 2.2 Options; Stock Plan................................4
Section 2.3 Payment for Common Shares..........................4
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............6
Section 3.1 Organization and Qualification;
Subsidiaries; Investments.......................6
Section 3.2 Capitalization; Subsidiaries.......................7
Section 3.3 Authority Relative to this Agreement...............7
Section 3.4 SEC Reports and Financial Statements...............8
Section 3.5 Compliance with Applicable Laws....................9
Section 3.6 Litigation........................................10
Section 3.7 Information.......................................10
Section 3.8 Employee Benefit Plans............................10
Section 3.9 Taxes.............................................11
Section 3.10 Environmental Matters.............................13
Section 3.11 Absence of Certain Changes........................15
Section 3.12 Brokers...........................................17
Section 3.13 Opinion of Investment Banker......................17
Section 3.14 Material Contracts................................17
Section 3.15 Board Recommendation..............................20
Section 3.16 Required Company Vote.............................20
Section 3.17 Intellectual Property.............................20
Section 3.18 Related Party Transactions........................21
Section 3.19 State Takeover Statutes...........................21
Section 3.20 Labor Relations and Employment....................22
Section 3.21 Year 2000.........................................23
Section 3.22 Real Estate.......................................23
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
(a) Owned Properties..................................23
(b) Leased Properties.................................23
(c) Real Property Disclosure..........................24
(d) No Proceedings....................................24
(e) Current Use.......................................24
(f) Condition and Operation of Improvements...........24
(g) Permits...........................................24
Section 3.23 International Trade Laws and Regulations..........25
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF HK.......................26
Section 4.1 Organization and Qualification....................26
Section 4.2 Authority Relative to this Agreement..............26
Section 4.3 No Violation......................................27
Section 4.4 Information.......................................27
Section 4.5 Financing.........................................27
Section 4.6 Beneficial Ownership of Shares....................27
Section 4.7 Brokers...........................................28
Section 4.8 Formation of HK; No Prior Activities..............28
Section 4.9 Litigation........................................28
Section 4.10 Confidentiality...................................28
ARTICLE 5 COVENANTS..................................................28
Section 5.1 Conduct of Business of the Company................28
Section 5.2 Access to Information.............................30
Section 5.3 Efforts...........................................31
Section 5.4 Public Announcements..............................32
Section 5.5 Employee Benefit Arrangements.....................32
Section 5.6 Indemnification; Directors' and
Officers' Insurance............................33
Section 5.7 Notification of Certain Matters...................34
Section 5.8 State Takeover Laws...............................34
Section 5.9 No Solicitation...................................34
Section 5.10 Interim Liabilities...............................36
Section 5.11 Reports...........................................36
Section 5.12 Shareholders' Meeting.............................36
Section 5.13 Letters of Accountants............................37
Section 5.15 Delisting.........................................37
ARTICLE 6 CONDITIONS TO CONSUMMATION OF THE MERGER ..................37
Section 6.1 Conditions........................................37
(a) Shareholder Approval..............................37
(b) Illegality........................................37
(c) HSR Act...........................................37
Section 6.2 Conditions to Obligations of HK...................37
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
(a) Representations and Warranties....................38
(b) Performance of Obligations of the Company.........38
(c) Consents, etc.....................................38
(d) No Injunction.....................................38
(e) Financing.........................................38
(f) No Material Adverse Effect........................38
(g) Options...........................................39
(h) Directors.........................................39
(i) Opinion of the Company's Counsel..................39
Section 6.3 Conditions to Obligation of the Company...........39
(a) Representations and Warranties....................39
(b) Performance of Obligations of HK..................39
(c) Opinion of HK's Counsel...........................39
(e) No Injunction.....................................39
ARTICLE 7 TERMINATION; AMENDMENTS; WAIVER............................40
Section 7.1 Termination.......................................40
Section 7.2 Effect of Termination.............................41
Section 7.3 Fees and Expenses.................................41
Section 7.4 Amendment.........................................42
Section 7.5 Extension; Waiver.................................42
ARTICLE 8 MISCELLANEOUS..............................................42
Section 8.1 Non-Survival of Representations and Warranties....42
Section 8.2 Entire Agreement; Assignment......................42
Section 8.3 Validity..........................................43
Section 8.4 Notices...........................................43
Section 8.5 Governing Law; Exclusive Jurisdiction.............44
Section 8.6 Descriptive Headings..............................44
Section 8.7 Counterparts......................................44
Section 8.8 Parties in Interest...............................44
Section 8.9 Certain Definitions...............................44
Section 8.10 Specific Performance..............................46
</TABLE>
-iii-
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of September 17,
1999, by and between HK Merger Corp., a New York corporation ("HK"), and Happy
Kids Inc., a New York corporation (the "Company").
WHEREAS, the respective Boards of Directors of HK and the Company have
approved the merger of HK with and into the Company, as set forth below (the
"Merger"), in accordance with the New York Business Corporation Law (the "BCL")
and upon the terms and subject to the conditions set forth in this Agreement,
holders of shares of common stock, par value $.01 per share, of the Company (the
"Common Shares") issued and outstanding immediately prior to the Effective Time
(as defined below) will be entitled, subject to the terms hereof and other than
as set forth herein, to receive cash pursuant to this Agreement or, in the case
of certain specifically designated holders of Common Shares listed on Schedule I
attached hereto (the "Affliates"), to receive shares of common stock of the
Surviving Corporation (as defined below);
WHEREAS, the Board of Directors of the Company (the "Company Board"), upon
the recommendation of its special committee of disinterested Directors (the
"Special Committee"), has, in light of and subject to the terms and conditions
set forth herein: (i) determined that (A) the consideration to be paid for each
Common Share held by shareholders other than the Affiliates (the "Non-Affiliated
Shares") in the Merger (as hereinafter defined) is fair to such shareholders of
the Company, and (B) the Merger is otherwise in the best interests of the
Company and its shareholders, and (ii) resolved to approve and adopt this
Agreement and the transactions contemplated hereby and to recommend approval and
adoption by the shareholders of the Company of this Agreement;
WHEREAS, the Merger requires the vote of two-thirds of the votes cast by
all of the issued and outstanding Common Shares entitled to vote for the
approval thereof (the "Company Shareholder Approval");
WHEREAS, in order to induce HK to enter into this agreement, certain
shareholders of the Company have entered into a Support Agreement of even date
herewith;
WHEREAS, HK and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger, and also to
prescribe various conditions to the Merger; and
WHEREAS, it is intended that the Merger be recorded as a recapitalization
for financial reporting purposes.
-1-
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, HK and
the Company agree as follows:
ARTICLE 1
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the satisfaction or
waiver of the conditions hereof, and in accordance with the applicable
provisions of this Agreement and the BCL, at the Effective Time HK shall be
merged with and into the Company. Following the Merger, the separate corporate
existence of HK shall cease and the Company shall continue as the surviving
corporation (the "Surviving Corporation").
Section 1.2 Closing and Effective Time. The closing of the Merger (the
"Closing") will take place at 10:00 a.m., local time, on the fifth business day
after satisfaction or waiver of all of the conditions set forth in Article 4 of
this Agreement (other than conditions that are to be satisfied at the Closing,
which shall be satisfied or waived at the Closing) or such other date and time
as HK and the Company may agree upon (the "Closing Date"), at the offices of
Kirkland & Ellis, New York, New York. Immediately following the Closing, the
parties hereto shall cause the Merger to become effective by filing a
Certificate of Merger with the New York Department of State in accordance with
the relevant provisions of the BCL, and the parties shall take such other and
further actions as may be required by law to make the Merger effective. The time
the Merger becomes effective in accordance with applicable law is referred to
herein as the "Effective Time."
Section 1.3 Effects of the Merger. The Merger shall have the effects set
forth in the BCL. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all the properties, rights, privileges, powers
and franchises of the Company and HK shall vest in the Surviving Corporation,
and all debts, liabilities and duties of the Company and HK shall become the
debts, liabilities and duties of the Surviving Corporation.
Section 1.4 Certificate of Incorporation and Bylaws of the Surviving
Corporation.
(a) The Certificate of Incorporation, as amended, of the Company, as
in effect immediately prior to the Effective Time and as further amended to
provide for the number and types of shares of capital stock designated on the
Rollover Schedule (as hereinafter defined), shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended in
accordance with the provisions thereof and hereof and applicable law.
(b) The Bylaws of the Company in effect at the Effective Time shall be
the Bylaws of the Surviving Corporation until amended, subject to the provisions
of Section 5.6 of this Agreement, in accordance with the provisions thereof and
applicable law.
-2-
<PAGE>
Section 1.5 Directors. Subject to applicable law, the directors of HK
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation and shall hold office until their respective successors
are duly elected and qualified, or their earlier death, resignation or removal.
Section 1.6 Officers. The officers of the Company immediately prior to the
Effective Time shall be the initial officers of the Surviving Corporation and
shall hold office until their respective successors are duly elected and
qualified, or their earlier death, resignation or removal. Section 1.6 of the
Disclosure Schedule sets forth the names and titles of each officer of the
Company and each of its Subsidiaries as of the date hereof.
ARTICLE 2
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE COMPANY
Section 2.1 Effect on Capital Stock. As of the Effective Time, by virtue of
the Merger and without any action on the part of the holder of any Common Shares
or any shares of capital stock of HK:
(a) Merger Consideration. The Merger Consideration shall be equal to
$12.00 per share, except for those Common Shares held by those holders of record
listed in the Rollover Schedule (attached hereto) under the heading
"Non-Rollover Shares," in which case the Merger Consideration shall be equal to
$7.164 per share for such Common Shares (i.e. $49.25 million in the aggregate)
(as applicable, the "Merger Consideration"). In addition, the parties
acknowledge that the shares listed on the Rollover Schedule under the heading
"Rollover Shares" (the "Rollover Shares") shall be retained by the holders of
such shares.
(b) Conversion of Shares.
(i) Each issued and outstanding Common Share (except for those
Common Shares held by those holders of record listed in the Rollover Schedule,
but only up to the levels indicated in such Rollover Schedule under the heading
"Rollover Shares") shall, by virtue of the Merger and without any action on the
part of the holder thereof, be converted into the right to receive from HK the
Merger Consideration, as applicable, without interest upon surrender of the
certificate formerly representing such Common Shares in the manner provided in,
and otherwise in accordance with, Section 2.3 hereof. All such Common Shares,
when so converted, shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each holder of a certificate
representing any such Common Shares shall cease to have any rights with respect
thereto, except the right to receive the Merger Consideration therefor upon the
surrender of such certificate in the manner provided in, and in accordance with,
Section 2.3 hereof.
(ii) At the Effective Time, (i) each Rollover Share and (ii) each
share of common stock, par value $.01 per share, of HK issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder
-3-
<PAGE>
thereof, be converted into and become one validly issued, fully paid and
non-assessable share of common stock, par value $.01 per share, of the Surviving
Corporation.
(c) Cancellation of Treasury Stock. Each Common Share that is owned by
the Company or by any wholly owned subsidiary of the Company shall automatically
be canceled and retired and shall cease to exist, and no cash or other
consideration shall be delivered or deliverable in exchange therefor.
Section 2.2 Options; Stock Plan. Immediately prior to the Effective Time,
each holder of a then-outstanding employee stock option to purchase Common
Shares (an "Option") granted under the Company's 1997 Stock Plan (the "Stock
Plan") will be entitled to receive in settlement of such Option a cash payment
(the "Option Consideration") from the Company equal to the product of (i) the
total number of Common Shares previously subject to such Option, but only to the
extent such Option is exercisable as of the Closing Date (except for
non-employee holders of an Option, in which case this shall be the total number
of Common Shares previously subject to such Option whether or not such Option is
fully exercisable as of the Closing Date) and (ii) the excess of the Merger
Consideration over the exercise price per Common Share subject to such Option,
subject to any required withholding of taxes. The surrender of an Option to the
Company in exchange for the Option Consideration shall be deemed a release of
any and all rights the holder had or may have had in respect of such Option.
Immediately prior to the Effective Time, the Company will cause each Option (or
portion thereof) which is non-exercisable to be canceled. The amounts payable
pursuant to this Section 2.2 shall be paid as soon as reasonably practicable
following the Closing Date and shall be subject to and made net of all
applicable withholding taxes.
Section 2.3 Payment for Common Shares.
(a) Prior to the Effective Time, HK and the Company shall designate
the Company's registrar and transfer agent or such other bank or trust company
as may be approved by HK and the Company Board, to act as exchange agent for the
holders of Common Shares in connection with the Merger, pursuant to an agreement
providing for the matters set forth in this Section 2.3 and such other matters
as may be appropriate and the terms of which shall be reasonably satisfactory to
the Company and HK (the "Exchange Agent"), to receive the funds to which holders
of Common Shares shall become entitled pursuant to Section 2.1(b) hereof. At the
Effective Time, HK shall deposit, or HK shall otherwise take all steps necessary
to cause to be deposited, in trust with the Exchange Agent in an account for the
benefit of holders of Common Shares (the "Exchange Fund") the aggregate Merger
Consideration to which holders of Common Shares shall be entitled at the
Effective Time pursuant to Section 2.1(b) hereof.
(b) Promptly after the Effective Time, and in any event not later than
three business days following the Effective Time, HK shall cause the Exchange
Agent to mail to each record holder of certificates (the "Certificates") that
immediately prior to the Effective Time represented Common Shares (other than
Rollover Shares) a form of letter of transmittal which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only
-4-
<PAGE>
upon proper delivery of the Certificates or an Affidavit of Loss in Lieu of Lost
Certificate (as defined below) to the Exchange Agent and instructions for use in
surrendering such Certificates and receiving the Merger Consideration in respect
thereof.
(c) In effecting the payment of the Merger Consideration in respect of
Common Shares (other than Rollover Shares) represented by Certificates entitled
to payment of the Merger Consideration pursuant to Section 2.1(b) hereof, upon
the surrender of each such Certificate, together with a letter of transmittal
duly executed, the Exchange Agent shall promptly, and in any event not later
than three business days following receipt of such Certificates and letter of
transmittal, pay the holder of such Certificate the Merger Consideration
multiplied by the number of Common Shares (other than Rollover Shares)
represented by such Certificate, in consideration therefor. Upon such payment
such Certificate shall forthwith be canceled.
(d) Until surrendered in accordance with paragraph (c) above, each
such Certificate (other than Certificates representing Common Shares held by HK
or any of its affiliates, in the treasury of the Company or by any wholly owned
subsidiary of the Company or Rollover Shares) shall represent solely the right
to receive the aggregate Merger Consideration relating thereto. No interest or
dividends shall be paid or accrued on the Merger Consideration. If the Merger
Consideration (or any portion thereof) is to be delivered to any person other
than the person in whose name the Certificate formerly representing Common
Shares surrendered therefor is registered, it shall be a condition to such right
to receive such Merger Consideration that the Certificate so surrendered shall
be properly endorsed or otherwise be in proper form for transfer and that the
person surrendering such Common Shares shall pay to the Exchange Agent any
transfer or other taxes required by reason of the payment of the Merger
Consideration to a person other than the registered holder of the Certificate
surrendered, or shall establish to the satisfaction of the Exchange Agent that
such tax has been paid or is not applicable.
(e) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person (who shall
be the record owner of such Certificate) claiming such Certificate to be lost,
stolen or destroyed (an "Affidavit of Loss in Lieu of Lost Certificate"), the
Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the Merger Consideration deliverable in respect thereof, provided
that the Person to whom the Merger Consideration is paid may, as a condition
precedent to the payment thereof, be required to give the Surviving Corporation
a bond in such sum as it may direct or may otherwise be required to indemnify
the Surviving Corporation in a manner satisfactory to it against any claim that
may be made against the Surviving Corporation with respect to the Certificate
claimed to have been lost, stolen or destroyed.
(f) No dividends or other distributions with respect to Common Shares
with a record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the Common Shares represented thereby
until the surrender of such Certificates or delivery of an Affidavit of Loss in
Lieu of Lost Certificate in accordance with this Section 2.3.
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(g) Promptly following the date which is 180 days after the Effective
Time, the Exchange Agent shall deliver to the Surviving Corporation all cash,
Certificates and other documents in its possession relating to the transactions
described in this Agreement, and the Exchange Agent's duties shall terminate.
Thereafter, each holder of a Certificate formerly representing a Common Share
(other than the Rollover Shares) may surrender such Certificate to the Surviving
Corporation and (subject to applicable abandoned property, escheat and similar
laws) receive in consideration therefor the aggregate Merger Consideration
relating thereto, without any interest or dividends thereon.
(h) After the Effective Time, there shall be no transfers on the stock
transfer books of the Surviving Corporation of any Common Shares which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates formerly representing Common Shares (other than the Rollover
Shares) are presented to the Surviving Corporation or the Exchange Agent, they
shall be surrendered and canceled in return for the payment of the aggregate
Merger Consideration relating thereto, as provided in this Article 2.
(i) None of HK, the Company or Exchange Agent shall be liable to any
person in respect of any cash from the Exchange Fund delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
If any Certificates shall not have been surrendered prior to seven years after
the Effective Time, any such shares, cash, dividends or distributions in respect
of such Certificate shall, to the extent permitted by applicable law, become the
property of the Surviving Corporation, free and clear of all claims or interest
of any person previously entitled thereto.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to HK as follows:
Section 3.1 Organization and Qualification; Subsidiaries; Investments. The
Company and each of its Subsidiaries (as hereinafter defined) is a corporation
duly organized, validly existing and in good standing under the laws of its
state or jurisdiction of incorporation and has all requisite corporate power and
corporate authority to own, lease and operate its properties and to carry on its
business as now being conducted and is in good standing as a foreign corporation
in each jurisdiction where the properties owned, leased or operated, or the
business conducted, by it require such qualification and where failure to be in
good standing or to so qualify would have a Material Adverse Effect on the
Company. The term "Material Adverse Effect on the Company," as used in this
Agreement, means any effect, event, occurrence, change or state of facts that
is, or when aggregated with other effects, events, occurrences, changes or
states of facts, is, or is reasonably likely to be, materially adverse to (i)
the assets, liabilities, business, property, operations or financial condition
of the Company and its Subsidiaries taken as a whole, or (ii) the ability of the
Company and its Subsidiaries, taken as a whole, to perform their obligations
under this Agreement. The Company has heretofore made available to HK a complete
and correct copy of its Certificate of
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Incorporation, as amended, and Bylaws. Except as set forth on Section 3.1 of the
Disclosure Schedule, there is no corporation, limited liability company,
partnership or other business organization or entity of which the Company owns
either directly or through its Subsidiaries, (a) more than 50% of (i) the total
combined voting power of all classes of voting securities of such entity, (ii)
the total combined equity interests therein, or (iii) the capital or profit
interests therein, in the case of a partnership; or (b) or otherwise has the
power to vote or direct the voting of sufficient securities to elect a majority
of the board of directors or similar governing body of such entity (the
"Subsidiaries"). Except as set forth on Schedule 3.1 of the Disclosure Schedule,
neither the Company nor any Subsidiary owns or holds the right to acquire any
shares of stock or any other security or interest in any other person.
Section 3.2 Capitalization; Subsidiaries. The authorized capital stock of
the Company consists of 30,000,000 Common Shares and 5,000,000 shares of
preferred stock, par value $.01 per share ("Preferred Stock"). As of the close
of business on September 17, 1999, 10,375,693 Common Shares were issued and
outstanding, all of which are entitled to vote on this Agreement except for
those shares held in treasury. The Company has no shares of Preferred Stock
issued and outstanding. As of September 17, 1999, except for 305,000 Common
Shares reserved for issuance pursuant to outstanding Options and rights granted
under the Stock Plan, there are not now, and at the Effective Time there will
not be, any existing options, warrants, calls, subscriptions, or other rights,
or other agreements or commitments, obligating the Company to issue, transfer or
sell any shares of capital stock of the Company or any of its Subsidiaries.
Section 3.2 of the Disclosure Schedule sets forth the name of each holder of an
outstanding Option under the Stock Plan, and with respect to each Option held by
any such holder, the grant date, vesting schedule, exercise price and number of
Common Shares for which such Option is exercisable. All issued and outstanding
Common Shares are, and all Common shares which may be issued pursuant to the
exercise of outstanding Options will be, when issued in accordance with the
respective terms thereof, validly issued, fully paid, nonassessable and free of
preemptive rights. All of the outstanding shares of capital stock of each of the
Company's Subsidiaries have been validly issued and are fully paid and
non-assessable and, except as set forth on Section 3.2 of the Disclosure
Schedule, are owned by either the Company or another of its Subsidiaries free
and clear of all liens, charges, claims or encumbrances. There are no
outstanding options, warrants, calls, subscriptions, or other rights, or other
agreements or commitments, obligating any Subsidiary of the Company to issue,
transfer or sell any shares of its capital stock.
Section 3.3 Authority Relative to this Agreement.
(a) The Company has all necessary corporate power and authority to
execute and deliver this Agreement and, except for the approval of this
Agreement by the shareholders of the Company, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by the Company Board upon the recommendation of the Special Committee
and no other corporate proceedings on the part of the Company or on the part of
the shareholders of the Company are necessary to authorize this Agreement or to
consummate the
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transactions so contemplated, other than the approval of this Agreement by
two-thirds of the issued and outstanding Common Shares of the Company. This
Agreement has been duly and validly executed and delivered by the Company, and
this Agreement constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms.
(b) Except as set forth in Section 3.3 of the Disclosure Schedule, the
execution and delivery of this Agreement does not, and the consummation of the
transactions contemplated by this Agreement and compliance with the provisions
of this Agreement will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of consent, termination, purchase, cancellation or acceleration of
any obligation or to loss of any property, rights or benefits under, result in
the imposition of any additional obligation under, or result in the creation of
any Lien (as defined herein) upon any of the properties or assets of the Company
or any of its Subsidiaries under or require the consent from, or the giving of
notice to, a third party pursuant to (i) the organizational documents of the
Company or any of its Subsidiaries, (ii) any contract, instrument, permit,
concession, franchise, license, loan or credit agreement, note, bond, mortgage,
indenture, lease or other property agreement, partnership or joint venture
agreement or other legally binding agreement or obligation, whether oral or
written (a "Contract"), applicable to the Company or any of its Subsidiaries or
their respective properties or assets or (iii) subject to the governmental
filings and other matters referred to in the following paragraph, any judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to the
Company or any of its Subsidiaries or their respective properties or assets,
other than, in the case of clauses (ii) and (iii), any such conflicts,
violations or defaults that would not, individually or in the aggregate, have a
Material Adverse Effect on the Company, or those rights that if exercised, Liens
that if imposed, consents that if not obtained or notices that if not given
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company. For purposes of this Agreement, "Lien" shall mean, with respect to
any asset, any imperfection of title, lien, lease, pledge, encumbrance,
mortgage, claim, option, voting trust, preemptive right, attachment,
encroachment or other charge or security interest in or on such asset.
(c) Other than in connection with, or in compliance with, the
provisions of the BCL with respect to the transactions contemplated hereby, the
Securities Exchange Act of 1934 (the "Exchange Act"), the securities laws of the
various states and the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), no authorization, consent or approval of, or filing
with, any Governmental Entity (as hereinafter defined) is necessary for the
consummation by the Company of the transactions contemplated by this Agreement
other than authorizations, consents and approvals the failure to obtain, or
filings the failure to make, which would not, in the aggregate, have a Material
Adverse Effect on the Company. As used in this Agreement, the term "Governmental
Entity" means any government or subdivision thereof, domestic, foreign or
supranational or any administrative, governmental or regulatory authority,
agency, commission, tribunal or body, domestic, foreign or supranational.
Section 3.4 SEC Reports and Financial Statements.
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(a) The Company has filed all forms, reports and documents ("SEC
Reports") with the SEC required to be filed by it pursuant to the federal
securities laws and the SEC rules and regulations thereunder. Copies of all such
SEC Reports have been made available to HK by the Company. None of such SEC
Reports (as of their respective filing dates) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited and
unaudited consolidated financial statements of the Company included in the SEC
Reports have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis (except as otherwise stated in such
financial statements, including the related notes) and fairly present the
financial position of the Company and its consolidated Subsidiaries as of the
dates thereof and the results of their operations and changes in cash flow for
the periods then ended, subject, in the case of the unaudited financial
statements, to year-end audit adjustments. Except as set forth in the SEC
Reports and except as disclosed in Section 3.4(a) of the Disclosure Schedule, at
the date of the most recent audited financial statements of the Company included
in the SEC Reports, neither the Company nor any of its Subsidiaries had, and
since such date neither the Company nor any of such Subsidiaries has incurred,
any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) which, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect with respect to the
Company except liabilities incurred in the ordinary and usual course of business
and consistent with past practice and liabilities incurred in connection with
the transactions contemplated by this Agreement.
(b) All accounts receivable of the Company (the "Accounts Receivable")
represent or will represent valid obligations arising from services actually
performed in the ordinary course of business and are subject to no valid
counterclaims or setoffs. Unless paid prior to the Closing Date, the Accounts
Receivable are or will be as of the Closing Date current and collectible net of
reserves. Subject to such reserves, each of the Accounts Receivable either has
been or will be collected in full, without any set-off, within 120 days after
the day on which it first becomes due and payable. Except as disclosed in
Section 3.4(b) of the Disclosure Schedule, since December 31, 1998, there have
been no material returns, allowances or charge-backs.
(c) All inventory of the Company consists or will consist of raw
materials and supplies, manufactured and purchased parts, goods, goods in
process, and finished goods, which is in all material respects merchantable and
fit for the purpose for which it was procured and manufactured, and no material
amount of which is obsolete, damaged, or defective.
Section 3.5 Compliance with Applicable Laws. Except as set forth on Section
3.5 of the Disclosure Schedule, (i) the Company and its Subsidiaries possess all
permits, licenses, certifications and other governmental or regulatory
authorizations and approvals necessary to enable the Company and its
Subsidiaries to carry on their business as presently conducted or as proposed to
be conducted, except for such failures to have such permits, licenses,
certifications or regulatory authorizations or approvals that would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on the Company, and all such permits are valid, and in full force
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and effect and there exists no default thereunder and (ii) the operations of the
Company and its Subsidiaries have been conducted in compliance with all laws,
ordinances, regulations, judgments and decrees of any Governmental Entity
applicable to the Company or such Subsidiary or by which it may be bound, except
for possible violations which would not, individually or in the aggregate, have
a Material Adverse Effect on the Company.
Section 3.6 Litigation. Except as set forth on Section 3.6 of the
Disclosure Schedule, there is no suit, claim, action, proceeding or
investigation pending or, to the knowledge of the Company, threatened, at law or
in equity, or before any Governmental Entity, against the Company or any of its
Subsidiaries, individually or in the aggregate, which would have a Material
Adverse Effect on the Company and its Subsidiaries taken as a whole or could
prevent or materially delay the consummation of the transactions contemplated by
this Agreement. Except as disclosed in the SEC Reports filed prior to the date
of this Agreement, neither the Company nor any of its Subsidiaries is subject to
any outstanding order, writ, injunction or decree which, individually or in the
aggregate, would have a Material Adverse Effect on the Company or could prevent
or materially delay the consummation of the transactions contemplated hereby.
Section 3.7 Information. None of the information supplied by the Company in
writing specifically for inclusion or incorporation by reference in (i) the
Proxy Statement (as defined in Section 5.12 below) or (ii) any other document to
be filed with the SEC or any other Governmental Entity in connection with the
transactions contemplated by this Agreement (the "Other Filings") will, at the
respective times filed with the SEC or other Governmental Entity and, in
addition, in the case of the Proxy Statement, at the date it or any amendment or
supplement is mailed to shareholders, at the time of the Special Meeting (as
defined in Section 5.12 below) and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading; provided
that the representations and warranties in this Section 3.7 do not apply to
information supplied by HK to the Company for inclusion in the Proxy Statement
or the Other Filings.
Section 3.8 Employee Benefit Plans.
(a) Section 3.8(a) of the Disclosure Schedule includes a true and
complete list of all material employee benefit plans and programs providing
benefits to any employee or former employee of the Company and its Subsidiaries
sponsored or maintained by the Company, any of its Subsidiaries or any ERISA
Affiliate (as defined below) or to which the Company or any of its Subsidiaries
contributes, is obligated to contribute or with respect to which there exists
any liability ("Plans"). Without limiting the generality of the foregoing, the
term "Plans" includes all employee welfare benefit plans within the meaning of
Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended,
and the regulations thereunder ("ERISA"), and all employee pension benefit plans
within the meaning of Section 3(2) of ERISA.
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(b) With respect to each Plan, the Company has made available to HK a
true, correct and complete copy of: (i) all plan documents, benefit schedules,
trust agreements, and insurance contracts and other funding vehicles; (ii) the
most recent Annual Report (Form 5500 Series) and accompanying schedule, if any;
(iii) the current summary plan description, if any; (iv) the most recent annual
financial report, if any; (v) the most recent actuarial report, if any; and (vi)
the most recent determination letter from the United States Internal Revenue
Service (the "IRS"), if any.
(c) The Company and each of its Subsidiaries has complied, and is now
in compliance, in all material respects with all provisions of ERISA, the
Internal Revenue Code of 1986, as amended, including the Treasury Regulations
thereunder (the "Code") and all laws and regulations applicable to the Plans.
With respect to each Plan that is intended to be a "qualified plan" within the
meaning of Section 401(a) of the Code ("Qualified Plans"), (i) such Plan is a
Qualified Plan within the meaning of Section 401(a) of the Code, (ii) except to
the extent that such Qualified Plans are within an applicable remedial amendment
period, each such Plan has been amended on a timely basis to comply with
applicable laws and has received a favorable determination letter on such Plan,
as amended.
(d) All contributions required to be made to any Plan by applicable
law or regulation or by any plan document or other contractual undertaking, and
all premiums due or payable with respect to insurance policies funding any Plan,
for any period through the date hereof have been timely made or paid in full or,
to the extent not required to be made or paid on or before the date hereof, have
been fully reflected in the financial statements of the Company included in the
SEC Reports to the extent required under generally accepted accounting
principles.
(e) Except as set forth on Section 3.8(e) of the Disclosure Schedule,
no Plan is subject to Title IV or Section 302 of ERISA or Section 412 or 4971 of
the Code. Without limiting the generality of the foregoing, no Plan is a
"multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA (a
"Multiemployer Plan") or a plan that has two or more contributing sponsors at
least two of whom are not under common control, within the meaning of Section
4063 of ERISA and which is subject to Title IV of ERISA (a "Multiple Employer
Plan").
(f) Except as set forth on Section 3.8(f) of the Disclosure Schedule,
there does not now exist, nor do any circumstances exist that could result in,
any material unfunded liability under (i) Title IV of ERISA, (ii) Section 302 of
ERISA, (iii) Sections 412 and 4971 of the Code, (iv) the continuation coverage
requirements of section 601 et seq. of ERISA and Section 4980B of the Code, or
(v) other applicable laws or regulations that would be a liability of the
Company or any of its Subsidiaries following the Effective Time. Without
limiting the generality of the foregoing, none of the Company, its Subsidiaries
nor any ERISA Affiliate of the Company or any of its Subsidiaries has engaged in
any transaction described in Section 4069 or Section 4204 or 4212 of ERISA. An
"ERISA Affiliate" means any entity, trade or business that is, or during the
relevant period was, a member of a group described in Section 414(b), (c), (m)
or (o) of the Code or Section 4001(b)(1) of ERISA that includes the Company or
any of its Subsidiaries, or that is a
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member of the same "controlled group" as the Company or any of its Subsidiaries,
pursuant to Section 4001(a)(14) of ERISA.
Section 3.9 Taxes.
(a) The Company and each of its Subsidiaries has timely filed all
federal, state, local and foreign income Tax Returns (as hereinafter defined)
required to be filed by it in all jurisdictions in which it is required to do
so, and all other material Tax Returns required to be filed by it, each such Tax
Return has been prepared in compliance with all applicable laws and regulations,
and such Tax Returns are true and complete in all material respects, and the
Company and each of its Subsidiaries has paid or caused to be paid all material
Taxes (as hereinafter defined) required to be paid in respect of the periods
covered by such returns and has made adequate provision in the Company's
financial statements including the SEC Reports for payment of all material Taxes
that have not been paid, whether or not shown as due and payable on any Tax
Return in respect of all taxable periods or portions thereof ending on or before
the Closing Date. All Tax Returns for the Company in respect of all years not
barred by the statute of limitations have heretofore been made available by the
Company to HK and are listed in Section 3.9 of the Disclosure Schedule. There
are no outstanding agreements, waivers or requests for waivers extending the
statutory period of limitation applicable to any Tax Return of the Company or
any of its Subsidiaries. There are no liens for Taxes (other than for current
Taxes not yet due and payable) upon the assets of the Company or any of its
Subsidiaries. HK will not be required to deduct and withhold any amount pursuant
to Code ss. 1445(a) upon consummation of the Merger. Except as set forth on
Section 3.9 of the Disclosure Schedule, neither the Company nor any of its
Subsidiaries (i) has been a member of an Affiliated Group (except for the group
of which the Company is the common parent), or filed or been included in a
combined, consolidated or unitary income Tax Return (other than one filed by the
Company), (ii) is a party to or has any liability pursuant to a Tax sharing or
Tax indemnity agreement or any other agreement of a similar nature that remains
in effect or (iii) has any liability for the Taxes of any person (other than any
of the Company or its Subsidiaries) under Treas. Reg. ss. 1.1502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise. Except as set forth in Section 3.9 of the
Disclosure Schedule, (A) except to the Knowledge of the Company, no claim has
ever been made by a taxing authority in a jurisdiction where the Company or any
of its Subsidiaries does not file Tax Returns that such person is or may be
subject to taxation by such jurisdiction; (B) no deficiency or proposed
adjustment which has not been settled or otherwise resolved for any amount of
Tax has been proposed, asserted or assessed by any taxing authority against the
Company or any of its Subsidiaries; (C) there is no action, suit, taxing
authority proceeding or audit now in progress, pending, or, to the Company's
Knowledge, threatened against or with respect to the Company or any of its
Subsidiaries with respect to any income Taxes; and (D) none of the property
owned or used by the Company or any of its Subsidiaries is subject to a lease,
other than a "true" lease for federal income tax purposes. None of the Company
or its Subsidiaries will be required to include any item of income in, or
exclude any item of deduction from, taxable income for any taxable period (or
portion thereof) ending after the Closing Date as a result of any (w) change in
method of accounting for a taxable period ending on or prior to the Closing Date
under Code ss. 481(c) (or any corresponding or similar provision of state, local
or foreign income Tax law); (x) "closing agreement" as described in Code ss.
7121 (or any
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corresponding or similar provision of state, local or foreign income Tax law);
(y) deferred intercompany gain or any excess loss account described in Treasury
Regulations under Code ss. 1502 (or any corresponding or similar provision of
state, local or foreign income Tax law); or (z) installment sale made prior to
the Closing Date. None of the Company or its Subsidiaries is 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 payment"
within the meaning of Code ss. 280G (or any corresponding provision of state,
local or foreign income Tax law).
(b) For purposes of this Agreement, the term "Affiliated Group" means
an affiliated group as defined in Code ss.1504 (or any analogous combined,
consolidated or unitary group defined under state, local or foreign income Tax
law) of which the Company or any of its Subsidiaries is or has been a member.
For purposes of this Agreement, the term "Code" means the Internal Revenue Code
of 1986, as amended. For purposes of this Agreement, the term "Taxes" means all
taxes, charges, fees, levies or other assessments, including, without
limitation, income, gross receipts, excise, property, sales, transfer, license,
payroll, withholding, capital stock and franchise taxes, imposed by the United
States or any state, local or foreign government or subdivision or agency
thereof, including any interest, penalties or additions thereto. For purposes of
this Agreement, the term "Tax Return" means returns, declarations, reports,
claims for refund, information returns or other documents (including any related
or supporting schedules, statements or information) filed or required to be
filed in connection with the determination, assessment or collection of Taxes of
any party or the administration of any laws, regulations or administrative
requirements relating to any Taxes.
Section 3.10 Environmental Matters.
Except as set forth on Section 3.10 of the Disclosure Schedule, to the
Knowledge of the Company:
(a) with respect to the Business, the Company and its Subsidiaries
have complied and are in compliance with all Environmental and Safety
Requirements;
(b) without limiting the generality of the foregoing, the Company and
its Subsidiaries have obtained and complied with, and are in compliance with,
all permits, licenses and other authorizations that may be required pursuant to
Environmental and Safety Requirements for the occupation of their facilities and
the operation of the Business and all such permits, licenses and authorizations
may be relied upon for the lawful operation of the Business and such facilities
on and after the Closing without transfer, reissuance or other governmental
action;
(c) neither the Company nor any Subsidiary has received any written or
oral notice, report or other information regarding any actual or alleged
violation of Environmental and Safety Requirements, or any liabilities or
potential liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise), including any investigatory, remedial or corrective obligations,
relating to the Business or its past or current facilities and arising under
Environmental and Safety Requirements;
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(d) none of the following exists at any property or facility owned or
operated by the Company or any Subsidiary in connection with the Business: (i)
underground storage tanks; (ii) asbestos-containing material in any form or
condition; (iii) materials or equipment containing polychlorinated biphenyls; or
(iv) landfills, surface impoundments, or disposal areas;
(e) with respect to the Business, neither the Company nor any
Subsidiary has treated, stored, disposed of, arranged for or permitted the
disposal of, transported, handled, or released any substance, including without
limitation any hazardous substance, or owned or operated any property or
facility (and no such property or facility is contaminated by any such
substance) in a manner that has given or would give rise to liabilities,
including any liability for response costs, corrective action costs, personal
injury, property damage, natural resources damages or attorney fees, or any
investigative, corrective or remedial obligations, pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA") or the Solid Waste Disposal Act, as amended ("SWDA") or any other
Environmental and Safety Requirements;
(f) no facts, events or conditions relating to the past or present
facilities, properties or operations of the Company, any Subsidiary, or any of
their respective affiliates or predecessors the Business will prevent, hinder or
limit continued compliance by the Business with Environmental and Safety
Requirements, give rise to any investigatory, remedial or corrective obligations
pursuant to Environmental and Safety Requirements, or give rise to any other
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise)
pursuant to Environmental and Safety Requirements, including without limitation
any relating to onsite or offsite releases or threatened releases of hazardous
materials, substances or wastes, personal injury, property damage or natural
resources damage;
(g) neither this Agreement nor the consummation of the transaction
that is the subject of this Agreement will result in any obligations for site
investigation or cleanup, or notification to or consent of government agencies
or third parties, pursuant to any of the so-called "transaction-triggered" or
"responsible property transfer" Environmental and Safety Requirements;
(h) with respect to the Business, neither the Company nor any
Subsidiary has, either expressly or by operation of law, assumed or undertaken
any liability, including without limitation any obligation for corrective or
remedial action, of any other person relating to Environmental and Safety
Requirements; and
(i) for purposes of this Agreement, "Environmental and Safety
Requirements" shall mean all federal, state, local and foreign statutes,
regulations, ordinances and similar provisions having the force or effect of
law, all judicial and administrative orders and determinations, all contractual
obligations and all common law concerning public health and safety, worker
health and safety, and pollution or protection of the environment, including
without limitation all those relating to the presence, use, production,
generation, handling, transportation, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, release, threatened
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release, control, or cleanup of any hazardous materials, substances or wastes,
chemical substances or mixtures, pesticides, pollutants, contaminants, toxic
chemicals, petroleum products or byproducts, asbestos, polychlorinated
biphenyls, noise or radiation, as such of the foregoing are enacted or in
effect, prior to, on, or after the Closing Date.
Section 3.11 Absence of Certain Changes. Except as set forth in Section
3.11 of the Disclosure Schedule, or except as disclosed in the SEC Reports, from
March 31, 1999, through the date of this Agreement the Company and its
Subsidiaries (a) have conducted its Business only in the ordinary course
consistent with past practice and (b) have not:
(i) incurred any indebtedness for borrowed money, except borrowings
from banks (or other financial institutions) necessary to meet ordinary
course working capital requirements and to finance ordinary course capital
expenditures;
(ii) mortgaged, pledged or subjected to any Lien, any asset or related
group of assets having a net book value in excess of $50,000;
(iii) sold, leased, assigned or transferred any tangible asset or
related group of assets having a net book value in excess of $50,000 except
for the sale of inventory and obsolete or used machinery and equipment in
the ordinary course of business consistent with past practice;
(iv) sold, purchased, leased, assigned or transferred any interest in
real estate having a net book value in excess of $50,000;
(v) sold, licensed, assigned or transferred any patents, trademarks,
trade names, copyrights, trade secrets or other intangible assets having a
fair market value in excess of $50,000 individually or in the aggregate;
(vi) waived or relinquished any right or claim or related group of
rights or claims except any such item which the Company believes has a fair
value of less than $50,000 individually or in the aggregate;
(vii) (a) issued or sold any of its Common Shares or other equity
securities or any warrants, options or other rights to acquire its Common
Shares or other securities of the Company, or (b) purchased or redeemed or
agreed to purchase or redeem any Common Shares or other equity securities;
(viii) made or entered into a binding commitment for any capital
expenditures or related group of capital expenditures in excess of
$100,000;
(ix) modified or amended in any material manner or terminated any
Material Contract (as defined in Section 3.14 below);
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(x) granted any increase in the base compensation of, or made any
other material change in the employment terms for, any of its directors,
officers, and employees other than normal periodic increases or changes
reflecting or based upon changed responsibilities or duties made in the
ordinary course of business consistent with past practice or changes made
pursuant to any collective bargaining agreements or existing contracts;
(xi) adopted, modified, or terminated any bonus, profit-sharing,
incentive, severance or other plan or contract for the benefit of any of
its directors, officers, and employees, other than for changes which do not
materially increase the aggregate cost of such plan or contract or which
are required by law or a collective bargaining agreement;
(xii) declared or paid any dividend or other distribution with
respect to the Common Shares;
(xiii) issued any notes, bonds or other debt securities or any capital
stock or other equity securities or any securities convertible,
exchangeable or exercisable into any capital stock or other equity
securities;
(xiv) discharged or satisfied any Lien or paid any obligation or
liability in excess of $100,000, other than obligations and liabilities
paid in the ordinary course of business;
(xv) suffered any extraordinary losses or waived any rights valued
in excess of $100,000, whether or not in the ordinary course of business or
consistent with past practice;
(xvi) delayed or postponed the payment of any accounts or commissions
payable or any other liability or obligations or agreed or negotiated with
any party to extend the payment date of any accounts or commissions payable
or accelerated the collection of any notes, accounts or commissions
receivable, other than in the ordinary course of business;
(xvii) suffered any damage, destruction or casualty loss exceeding in
the aggregate $50,000 whether or not covered by insurance;
(xviii) made any loans or advances to, investments in, or guarantees
for the benefit of, any Person or taken steps to incorporate any
Subsidiary;
(xix) made any change in any method of accounting or accounting
policies, other than those required by GAAP;
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(xx) entered into any other transaction, other than in the ordinary
course of business, or entered into any material transactions, whether or
not in the ordinary course of business;
(xxi) entered into or agreed to enter into any new or amended
contract with any labor unions representing employees of the Company;
(xxii) made any payments for political contributions or made any
bribes, kickback payments or other illegal payments of cash or other
consideration, including, without limitation, payments to customers or
employees of customers for purposes of doing business with such customers;
(xxiii) committed or agreed, whether orally or in writing, to do any
of the foregoing; and
(xxiv) been notified that any of its licenses or private label
programs have been terminated, canceled or repudiated.
Section 3.12 Brokers. Except as set forth on Section 3.12 of the Disclosure
Schedule and except for the engagement of the Investment Banker (as defined in
Section 3.13 hereof), none of the Company, any of its Subsidiaries, or any of
their respective officers, directors or employees has employed any broker or
finder or incurred any liability for any brokerage fees, commissions or finder's
fees in connection with the transactions contemplated by this Agreement.
Section 3.13 Opinion of Investment Banker. The Special Committee has
received the opinion of CIBC World Markets Corp. (the "Investment Banker") to
the effect that, as of the date hereof, the consideration to be received by the
holders of Non-Affiliated Shares pursuant to the Merger is fair to such holders
from a financial point of view.
Section 3.14 Material Contracts.
(a) Except as set forth on Section 3.14(a) of the Disclosure
Schedule, neither the Company nor any of its Subsidiaries is a party to any:
(i) collective bargaining agreement or contract with any labor
union;
(ii) bonus, pension, profit sharing, retirement, severance or
other form of deferred compensation plan;
(iii) stock purchase, stock option, stock appreciation or
similar plan;
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(iv) contract for the employment of any officer, individual
employee or other person on a full-time or consulting basis involving an annual
compensation commitment by the Company or a Subsidiary in excess of $75,000;
(v) agreement or indenture relating to the borrowing of money
or to mortgaging, pledging or otherwise placing a Lien (other than a Permitted
Lien (as defined herein)) on any material portion of the Company's assets;
(vi) guaranty of any obligation for borrowed money;
(vii) lease, sublease or agreement under which it is lessee of
or sublesee of, or holds or operates any personal property owned by any other
party, for which the annual rental exceeds $50,000;
(viii) contract or group of related contracts with the same party
for the purchase of inventories, supplies or services, under which the
undelivered balance of such inventories, supplies or services has a selling
price in excess of $50,000 (other than purchase orders for inventory in the
ordinary course of business);
(ix) contract or group of related contracts with the same party
for the sale of products or services under which the undelivered balance of such
products or services has a sales price in excess of $50,000;
(x) agreement pertaining to Intellectual Property (as
hereinafter defined) including license agreements or similar arrangements;
(xi) contract which prohibits or materially limits the Company
or any of its Subsidiaries in any material respect from freely engaging in
business in the United States or anywhere else in the world;
(xii) contract under which the Company has advanced, loaned or
invested or agreed to advance loan or invest monies to or in any other Person;
(xiii) lease, sublease or agreement under which the Company is
lessor or sublessor of or permits any third party to hold or operate any
property, real or personal, owned, leased or controlled by the Company involving
annual consideration in excess of $50,000;
(xiv) agreement or contract or group of related agreements or
contracts with the same party or group of affiliated parties the performance of
which involves consideration in excess of $75,000 annually;
(xv) warranty agreement with respect to its services rendered
or products sold or leased;
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(xvi) agreement under which it has granted any Person any
registration rights (including, without limitation, demand and piggyback
registration rights);
(xvii) management, sales representative, sales, distribution or
franchise agreement;
(xviii) outstanding power of attorney or other agency agreement;
(xix) nondisclosure or confidentiality agreement;
(xx) contract relating to the marketing, advertising or
promotion of its services or products;
(xxi) agreement with a term of more than six (6) months which is
not terminable by the Company upon 30 days notice without penalty;
(xxii) contract, agreement or other arrangement with any officer,
director, stockholder, employee or Affiliate or any Affiliate of any officer,
director, stockholder or employee, or any individual related by blood, marriage
or adoption to any such Person or any entity in which any such Person or
individual owns a beneficial interest;
(xxiii) contract or agreement with any entity or the
stockholder(s) of any entity with which the Company has a management agreement,
services and support agreement, or other similar agreement or arrangement;
(xxiv) contract or agreement that is not on arm's-length terms;
(xxv) contract or agreement that by its terms may be terminated
upon the consummation of the Merger or the other transactions contemplated
hereby; or
(xxvi) any other agreement which is material to its operations
and business prospects or involves a consideration in excess of $50,000
annually.
All such contracts and agreements, "Material Contracts."
(b) Except as set forth on Schedule 3.14(b) of the Disclosure
Schedule, all of the Material Contracts are valid, legal, binding and
enforceable in accordance with their respective terms, except as such
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or other laws (whether statutory, regulatory or
decisional), now or hereafter in effect, relating to or affecting the rights of
creditors generally or by equitable principles, and shall be in full force and
effect without penalty in accordance with their terms upon consummation of the
transactions contemplated hereby. Except as set forth on Schedule 3.14(b) of the
Disclosure Schedule, the Company has performed all material obligations required
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to be performed by it under each Material Contract and is not in material
default under or in material breach of nor in receipt of any claim of default or
breach under any Material Contract; no event has occurred which with the passage
of time or the giving of notice or both would result in a material default,
breach or event of noncompliance by the Company under any Material Contract; the
Company has no present expectation or intention of not fully performing all such
obligations; the Company has no Knowledge of any breach or anticipated breach by
the other parties to any Material Contract; and the Company is not a party to
any materially adverse or illegal contract or commitment.
(c) To the Knowledge of the Company, except as specifically disclosed
in Section 3.14(c) of the Disclosure Schedule, since December 31, 1998, none of
the Company's customers, suppliers, licensors, outside service providers or
sources of referral has indicated that it will stop or materially decrease the
rate of business done with or referred to the Company.
(d) Except as set forth on the Section 3.14(d) of the Disclosure
Schedule, the Company is not obligated to (i) purchase any property or services
at a price greater than the prevailing market price, (ii) sell any property or
services at a price less than the prevailing market price, (iii) pay rentals or
royalties at a rate greater than the prevailing market price or (iv) act as
lessor or licensor at a rate less than the prevailing market price.
(e) The Company has provided or made available to HK (i) true and
complete copies of all written Material Contracts, or (ii) with respect to such
Material Contracts that have not been reduced to writing, a written description
thereof, each of which is listed on Section 3.16 of the Disclosure Schedule. For
purposes of this Agreement, "Permitted Liens" shall mean (i) Liens for Taxes
(other than those pursuant to Section 412 of the Code) or governmental
assessments, charges or claims, the payment of which is not yet due, or for
Taxes, the validity of which are being contested in good faith by appropriate
proceedings; (ii) statutory Liens incurred in the ordinary course of business
for sums not yet due or being contested in good faith; (iii) Liens relating to
deposits made in the ordinary course of business; and (iv) Liens which do not
individually or in the aggregate materially interfere with or materially impair
the conduct of the Business, or the value, marketability, use or ownership of
the assets to which such Liens attach.
Section 3.15 Board Recommendation. The Company Board, upon the
recommendation of the Special Committee, at a meeting duly called and held, has
(a) determined that this Agreement and the transactions contemplated hereby,
taken together, are advisable and in the best interests of the Company and the
holders of Non-Affiliated Shares, and (b) subject to the other provisions
hereof, resolved to recommend that the holders of the Common Shares approve this
Agreement and the transactions contemplated hereby, including the Merger.
Section 3.16 Required Company Vote. The Company Shareholder Approval, being
the affirmative vote of two-thirds of the Common Shares, is the only vote of the
holders of any class or series of the Company's securities necessary to approve
this Agreement, the Merger and the other transactions contemplated hereby,
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Section 3.17 Intellectual Property.
(a) Section 3.17 of the Disclosure Schedule contains a complete and
accurate list of all (i) patented or registered Intellectual Property owned or
used by the Company or any Subsidiary, (ii) pending patent applications and
applications for registration of other Intellectual Property filed by or on
behalf of the Company or any Subsidiary, (iii) material unregistered trade
names, corporate names, Internet domain names or other material unregistered
Intellectual Property owned or used by the Company or any Subsidiary, (iv)
material unregistered trademarks, service marks, copyrights and mask works owned
or used by the Company or any Subsidiary, (v) all computer software owned and/or
used by the Company or any of its Subsidiaries (other than mass-marketed
software with a license fee of less than $5,000) that is material to the
Business, and (vi) all licenses, sublicenses, or similar agreements or
arrangements pertaining to Intellectual Property to which the Company or any of
its Subsidiaries is a party, either as licensee or licensor.
(b) Except as set forth on Section 3.17 of the Disclosure Schedule,
(i) the Company or one of its Subsidiaries owns all right, title and interest
to, or has a valid and enforceable license to use free and clear of all Liens or
other encumbrances or restrictions, all Intellectual Property necessary for the
operation of the Business; (ii) no claim by any other Person contesting the
validity, enforceability, use or ownership of any of the Intellectual Property
owned or used by the Company or any of its Subsidiaries (the "Company
Intellectual Property"), is currently pending or to the Knowledge of the
Company, is threatened, and to the Knowledge of the Company and its
Subsidiaries, there are no grounds for the same; (iii) the Company Intellectual
Property comprises all of the Intellectual Property necessary for the operation
of the Business; (iv) neither the Company nor any of its Subsidiaries have
received any notices of, nor has Knowledge of any facts which indicate a
likelihood of, any infringement or misappropriation by, or conflict with, any
third Person with respect to the Company Intellectual Property (including,
without limitation, any demand or request that the Company or its Subsidiaries
license any rights from a third Person); (v) to the Knowledge of the Company,
neither the Company nor its Subsidiaries have infringed, misappropriated, or
otherwise conflicted with any Intellectual Property or other rights of any third
Persons; (vi) to the Knowledge of the Company, no loss or expiration of any of
the Company Intellectual Property is threatened; (vii) the transactions
contemplated by this Agreement will have no Material Adverse Effect on the
right, title and interest in and to the Company Intellectual Property; and
(viii) the Company and its Subsidiaries have taken all reasonably necessary
action to maintain and protect the Company Intellectual Property.
Section 3.18 Related Party Transactions. Except as set forth in Section
3.18 of the Disclosure Schedule hereto, to the Knowledge of the Company, no
director, officer, partner, "affiliate" or "associate" (as such terms are
defined in Rule 12b-2 under the Exchange Act) of the Company or any of its
Subsidiaries (i) has borrowed any monies from or has outstanding any
indebtedness or other similar obligations to the Company or any of its
Subsidiaries; (ii) owns any direct or indirect interest of any kind in, or is a
director, officer, employee, partner, affiliate or associate of, or consultant
or lender to, or borrower from, or has the right to participate in the
management, operations or profits of, any person or entity which is (1) a
competitor, supplier,
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customer, distributor, lessor, tenant, creditor or debtor of the Company or any
of its Subsidiaries, (2) engaged in a business related to the Business, (3)
participating in any transaction to which the Company or any of its Subsidiaries
is a party or (iii) otherwise a party to any contract, arrangement or
understanding with the Company or any of its Subsidiaries.
Section 3.19 State Takeover Statutes. The Company Board has taken such
action so that no state takeover statute or similar statute or regulation of the
State of New York applies to this Agreement, the Merger, or any of the other
transactions contemplated hereby. Except as set forth in Section 3.19 of the
Disclosure Schedule, neither the Company nor any of its Subsidiaries has any
rights plan, preferred stock or similar arrangement which have any of the
aforementioned consequences in respect of the transactions contemplated hereby.
Section 3.20 Labor Relations and Employment.
(a) Except as set forth on Section 3.20(a) of the Disclosure Schedule,
(i) there is no labor strike, dispute, slowdown, stoppage or lockout pending,
or, to the Knowledge of the Company, threatened against the Company or any of
its Subsidiaries, and during the past three years there has not been any such
action; (ii) to the Knowledge of the Company, no union claims to represent the
employees of the Company or any of its Subsidiaries; (iii) neither the Company
nor any of its Subsidiaries is a party to or bound by any collective bargaining
or similar agreement with any labor organization, or work rules or practices
agreed to with any labor organization or employee association applicable to
employees of the Company or any of its Subsidiaries; (iv) none of the employees
of the Company or any of its Subsidiaries is represented by any labor
organization and the Company does not have any Knowledge of any current union
organizing activities among the employees of the Company or any of its
Subsidiaries, nor does any question concerning representation exist concerning
such employees; (v) the Company and its Subsidiaries are, and have at all times
been, in material compliance with all applicable laws respecting employment and
employment practices, terms and conditions of employment, wages, hours of work
and occupational safety and health, and are not engaged in any unfair labor
practices as defined in the National Labor Relations Act; (vi) there is no
unfair labor practice charge or complaint against the Company or any of its
Subsidiaries pending or, to the Knowledge of the Company, threatened before the
National Labor Relations Board or any similar state or foreign agency; (vii)
there is no grievance arising out of any collective bargaining agreement or
other grievance procedure; (viii) no charges with respect to or relating to the
Company or any of its Subsidiaries are pending before the Equal Employment
Opportunity Commission or any other agency responsible for the prevention of
unlawful employment practices; (ix) neither the Company nor any of its
Subsidiaries has received notice of the intent of any federal, state, local or
foreign agency responsible for the enforcement of labor or employment laws to
conduct an investigation with respect to or relating to the Company or any of
its Subsidiaries and no such investigation is in progress; and (x) there are no
complaints, lawsuits or other proceedings pending or to the Knowledge of the
Company threatened in any forum by or on behalf of any present or former
employee of the Company or any of its Subsidiaries alleging breach of any
express or implied contract of employment, any law or regulation governing
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employment or the termination thereof or other discriminatory, wrongful or
tortious conduct in connection with the employment relationship.
(b) Since the enactment of the Worker Adjustment and Retraining
Notification ("WARN") Act, there has not been (i) a "plant closing" (as defined
in the WARN Act) affecting any site of employment or one or more facilities or
operating units within any site of employment or facility of the Company or any
of its Subsidiaries; or (ii) a "mass layoff" (as defined in the WARN Act)
affecting any site of employment or facility of the Company or any of its
Subsidiaries; nor has the Company or any of its Subsidiaries engaged in layoffs
or employment terminations sufficient in number to trigger application of any
similar state or local law. Except as set forth in Section 3.20(b) of the
Disclosure Schedule, to the best Knowledge of the Company, none of the employees
of the Company or any of its Subsidiaries has suffered an "employment loss" (as
defined in the WARN Act) since three months prior to the date of this Agreement.
(c) Except as set forth on Section 3.20(c) of the Disclosure Schedule,
there are no employment, consulting, severance or indemnification arrangements
or agreements or understandings between the Company, on the one hand, and any
directors, officers or other employees of the Company.
Section 3.21 Year 2000. To the Knowledge of the Company, none of the
computer software, computer firmware, computer hardware (whether general or
special purpose) or other similar or related items of automated, computerized or
software systems that are used or relied on by the Company or by any of the
Subsidiaries in the conduct of their respective businesses will malfunction,
cease to function, generate incorrect data or produce incorrect results having a
Material Adverse Effect when processing, providing or receiving (i) date-related
data from, into and between the twentieth and twenty-first centuries or (ii)
data-related data in connection with any valid date in the twentieth and
twenty-first centuries.
Section 3.22 Real Estate.
(a) Owned Properties. Section 3.22 of the Disclosure Schedule sets
forth a list of all owned real property (the "Owned Real Property") used by the
Company in the operation of the Business. With respect to each such parcel of
Owned Real Property: (i) such parcel is free and clear of all encumbrances
(except for Permitted Liens); (ii) except as disclosed in Section 3.22 of the
Disclosure Schedule, there are no leases, subleases, licenses, concessions, or
other agreements, written or oral, granting to any person the right of use or
occupancy of any portion of such parcel; and (iii) there are no outstanding
actions or rights of first refusal to purchase such parcel.
(b) Leased Properties. Section 3.22 of the Disclosure Schedule sets
forth a list of all of the leases and subleases ("Leases") and each leased and
subleased parcel of real property in which the Company has a leasehold or
subleasehold interest or to which the Company is a party either as landlord or
sublandlord (the "Leased Real Property"). Each of the Leases are in full force
and effect, and the Company holds a valid and existing leasehold or subleasehold
interest or
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Landlord or Sublandlord interest as applicable, under each of the Leases
described in Section 3.22 of the Disclosure Schedule. The Company has delivered
to HK true, correct, complete and accurate copies of each of the Leases. With
respect to each Lease set forth on Section 3.22 of the Disclosure Schedule: (i)
the Lease is legal, valid, binding, enforceable and in full force and effect;
(ii) to the Knowledge of the Company the Lease will continue to be legal, valid,
binding, enforceable and in full force and effect on identical terms following
the Closing; (iii) neither the Company, nor, to the Knowledge of the Company,
any other party to the Lease, is in breach or default, and no event has occurred
which, with notice or lapse of time, would constitute such a breach or default
by the Company or permit termination, modification or acceleration under the
Lease by any other party thereto; (iv) the Company has not, and, to the
Knowledge of the Company, no third party has repudiated any provision of the
Lease; (v) there are no disputes, oral agreements, or forbearance programs in
effect as to the Lease; (vi) the Lease has not been modified in any respect,
except to the extent that such modifications are disclosed by the documents
delivered to HK; (vii) the Company has not assigned, transferred, conveyed,
mortgaged, deeded in trust or encumbered any interest in the Lease (except for
Permitted Liens); and (viii) the Lease is fully assignable to HK without the
necessity of any consent or the Company shall obtain all necessary consents
prior to the Closing.
(c) Real Property Disclosure. Except as disclosed on Section 3.22 of
the Disclosure Schedule, there is no Real Property leased or owned by the
Company that is used in the Business. The Owned Real Property and Leased Real
Property are referred to collectively herein as the "Real Property."
(d) No Proceedings. There are no proceedings in eminent domain or
other similar proceedings pending or, to the Knowledge of the Company,
threatened, affecting any portion of the Real Property (except for Permitted
Liens). There exists no writ, injunction, decree, order or judgment outstanding,
nor any litigation, pending or to the Knowledge of the Company, threatened,
relating to the ownership, lease, use, occupancy or operation by any person of
the Real Property (except for Permitted Liens).
(e) Current Use. The current use of the Real Property does not violate
in any material respect any instrument of record or agreement affecting such
Real Property. There is no violation of any covenant, condition, restriction,
easement, agreement or order of any governmental authority having jurisdiction
over any of the Real Property that affects such real property or the use or
occupancy thereof (except for Permitted Liens). No damage or destruction has
occurred with respect to any of the Real Property that, individually or in the
aggregate, has had or resulted in, or is reasonably likely to have or result in,
a Material Adverse Effect on the Company.
(f) Condition and Operation of Improvements. All buildings and other
improvements included within the Real Property (the "Improvements") are in good
condition and repair and adequate to operate such facilities as currently used,
and, to the Company's Knowledge, there are no facts or conditions affecting any
of the Improvements which would, individually or in the aggregate, interfere in
any significant respect with the current use, occupancy or operation thereof
which interference would, individually or in the aggregate, reasonably be
expected to have
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a Material Adverse Effect on the Company. No Improvement or portion thereof is
dependent for its access, operation or utility on any land, building or other
improvement not included in the Real Property.
(g) Permits. All required or appropriate certificates of occupancy,
permits, licenses, franchises, approvals and authorizations (collectively, the
"Real Property Permits") of all governmental authorities having jurisdiction
over the Real Property, the absence of which could have a Material Adverse
Effect on the Company, have been issued to the Company to enable the Real
Property to be lawfully occupied and used for all of the purposes for which it
is currently occupied and used have been lawfully issued and are, as of the date
hereof, in full force and effect. The Company has delivered complete and correct
copies of the Real Property Permits to HK. The Company has not received or been
informed by a third party of the receipt by it of any notice which could have a
Material Adverse Effect on the Company from any governmental authority having
jurisdiction over the Real Property threatening a suspension, revocation,
modification or cancellation of any Real Property Permit and, to the best
Knowledge of the Company, there is no basis for the issuance of any such notice
or the taking of any such action.
Section 3.23 International Trade Laws and Regulations. Except as disclosed
on Section 3.23 of the Disclosure Schedule:
(a) The Company and each of its Subsidiaries has, to the best of its
Knowledge, complied and is in compliance with all International Trade Laws and
Regulations applicable in connection with the conduct of their respective
businesses (including as the same relates to recordkeeping requirements), except
for possible violations which would not, individually or in the aggregate, have
a Material Adverse Effect on the Company.
(b) Neither the Company nor any of its Subsidiaries is or has been the
subject of any civil or criminal investigation, litigation, audit, penalty,
proceeding or assessment, liquidated damages proceeding or claim, forfeiture or
forfeiture action, claim for additional customs duties or fees, denial orders,
suspension of export privileges, governmental sanctions, or any other action,
proceeding or claim by any foreign, federal, state or local governmental agency
involving or otherwise relating to any alleged or actual violation of
International Trade Laws and Regulations or relating to any alleged or actual
underpayment of customs duties, fees, taxes or other amounts owed pursuant to
any International Trade Laws and Regulations and, to the Knowledge of the
Company and its Subsidiaries, there is no basis for any of the foregoing, except
for possible proceedings, claims or actions which would not, individually or in
the aggregate, have a Material Adverse Effect on the Company.
(c) Neither the Company nor any of its Subsidiaries has, to its
Knowledge, made or provided any false statement or omission to any agency of any
federal, state or local government, purchaser of products or services, or
foreign government or foreign agency, in connection with the exportation of
merchandise (including with respect to export licenses, exceptions and other
export authorizations and any filings required for or related to exportation of
any item), the importation of
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merchandise (including the valuation or classification of imported merchandise,
the duty treatment of imported merchandise, the eligibility of imported
merchandise for favorable duty rates or other special treatment,
country-of-origin marking, NAFTA Certificates or other statements or
certificates concerning origin, quota or visa rights) or other approvals
required by a foreign government or agency or any other requirement relating to
any International Trade Laws and Regulations, except for possible statements or
omissions which would not, individually or in the aggregate, have a Material
Adverse Effect on the Company.
(d) Neither the Company nor any of its Subsidiaries has made any
payment, offer, gift, promise to give, or authorized or otherwise to its
Knowledge participated in, assisted or facilitated any payment or gift that is
prohibited by the United States Foreign Corrupt Practices Act.
(e) Neither the Company nor any of its Subsidiaries has to its
Knowledge engaged in or otherwise participated in, assisted or facilitated any
transaction that is prohibited by any applicable embargo or related trade
restriction imposed by the United States Office of Foreign Assets Control or any
other agency of the United States government.
(f) Set forth on Section 3.23 of the Disclosure Schedule is a list of
each foreign jurisdiction to which the Company or any of its Subsidiaries
exports any products, equipment, services or technology, each foreign
jurisdiction from which the Company or any of its Subsidiaries imports any
products, equipment, services or technology and each foreign jurisdiction to
which the Company's or any of its Subsidiaries' products, equipment, services or
technology (or products of such technology) are reexported. The Company and each
of its Subsidiaries has complied and is in compliance with all International
Trade Laws and Regulations applicable in connection with the conduct of their
respective businesses (including as the same relates to recordkeeping
requirements), except for possible violations which would not, individually or
in the aggregate, have a Material Adverse Effect on the Company.
(g) To the Knowledge of the Company and its Subsidiaries, each of its
suppliers is in compliance with all applicable International Trade Laws and
Regulations (including, but not limited to, any quota regulations administered
by the United States Customs Service and any child labor-related International
Trade Laws and Regulations), except for possible violations which would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
The Company's business relationships with its suppliers hold the Company
harmless, and may be canceled by the Company without penalty or forfeiture, in
the event that its suppliers violate any such applicable International Trade
Laws and Regulations.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF HK
HK represents and warrants to the Company as follows:
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Section 4.1 Organization and Qualification. HK is a corporation duly
organized, validly existing and in good standing under the laws of its state or
jurisdiction of incorporation and is in good standing as a foreign corporation
in each other jurisdiction where the properties owned, leased or operated, or
the business conducted, by it require such qualification and where failure to be
in good standing or to so qualify would have a Material Adverse Effect on HK.
The term "Material Adverse Effect on HK", as used in this Agreement, means (i)
any effect, event, occurrence, change or state of facts that is, or when
aggregated with other effects, events, occurrences, changes or states of facts
is, or is reasonably likely to be materially adverse to the assets, liabilities,
business, property, condition (financial or otherwise), or operations or
prospects of HK or (ii) the ability of HK to perform its obligations under this
Agreement. HK has no Subsidiaries. HK is controlled, directly or indirectly, by
affiliates of H.I.G. Capital, LLC ("HIG").
Section 4.2 Authority Relative to this Agreement.
(a) HK has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of HK and no other corporate proceedings on the part of HK
are necessary to authorize this Agreement or to consummate the transactions so
contemplated. This Agreement has been duly and validly executed and delivered by
HK and, assuming this Agreement constitutes a valid and binding obligation of
the Company, this Agreement constitutes a valid and binding agreement of HK,
enforceable against HK in accordance with its terms.
(b) Other than in connection with, or in compliance with, the
provisions of the BCL with respect to the transactions contemplated hereby, the
Exchange Act, the securities laws of the various states and the HSR Act, no
authorization, consent or approval of, or filing with, any Governmental Entity
is necessary for the consummation by HK of the transactions contemplated by this
Agreement other than authorizations, consents and approvals the failure to
obtain, or filings the failure to make, which would not, in the aggregate, have
a Material Adverse Effect on HK.
Section 4.3 No Violation. Neither the execution or delivery of this
Agreement by HK nor the consummation by HK of the transactions contemplated
hereby will (i) constitute a breach or violation of any provision of the
Certificate of Incorporation, as amended, or Bylaws of HK, (ii) constitute a
breach, violation or default (or any event which, with notice or lapse of time
or both, would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in the creation of any Lien
upon any of the properties or assets of HK under, any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument to which
HK is a party or by which it or any of its properties or assets are bound or
(iii) any judgment, order, decree, statute, law, ordinances, rule or regulation
applicable to HK or its properties or assets other than, with respect to clauses
(ii) and (iii), breaches, violations, defaults, terminations, accelerations or
creation of Liens which, in the aggregate would not have a Material Adverse
Effect on HK.
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Section 4.4 Information. None of the information supplied by HK in writing
(other than projections of future financial performance) specifically for
inclusion or incorporation by reference in (i) the Proxy Statement or (ii) the
Other Filings will, at the respective times filed with the SEC or other
Governmental Entity and, in addition, in the case of the Proxy Statement, at the
date it or any amendment or supplement is mailed to shareholders, at the time of
the Special Meeting and at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. Notwithstanding the
foregoing, no representation is made by HK with respect to statements made in
any of the foregoing documents based upon information supplied by the Company.
Section 4.5 Financing. True and complete copies of commitment letters from
Bankers Trust Company and its affiliates and from Bankers Trust Corporation and
its affiliates, which provide for financing in amounts sufficient to consummate
the transactions contemplated hereby as contemplated by Section 6.2(e), are
attached hereto as Exhibit A.
Section 4.6 Beneficial Ownership of Shares. As of the date hereof, HK does
not "beneficially own" (as defined in Rule 13d-3 under the Exchange Act) more
than 1% of the outstanding shares of Common Shares or any securities convertible
into, or exchangeable for, Common Shares. HK will not buy additional Common
Shares between the date of this Agreement and the Closing.
Section 4.7 Brokers. Except as set forth on Schedule 4.7 of the Disclosure
Schedule, no broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
HK, that is or will be payable by the Company or any of its Subsidiaries. No fee
is due to any such person if the transactions contemplated hereby are not
consummated.
Section 4.8 Formation of HK; No Prior Activities. HK was formed solely for
the purpose of engaging in the transactions contemplated by this Agreement. As
of the date hereof and the Effective Time, except for (a) obligations or
liabilities incurred in connection with its incorporation or organization and
the transactions contemplated by this Agreement, and (b) this Agreement and any
other agreements or arrangements contemplated by this Agreement or in
furtherance of the transactions contemplated hereby, HK has not incurred,
directly or indirectly, through any subsidiary or affiliate, any obligations or
liabilities, owned any assets or engaged in any business activities of any type
or kind whatsoever or entered into any agreements or arrangements with any
Person.
Section 4.9 Litigation. There is no suit, claim, action, proceeding or
investigation pending or, to the Knowledge of HK, threatened, at law or in
equity, or before any Governmental Entity, against HK, which could prevent or
materially delay the consummation of the transactions contemplated by this
Agreement.
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Section 4.10 Confidentiality. Neither HK nor any affiliate or associate of
HK has breached in any material respect the Confidentiality Agreement (as
defined in Section 5.2).
ARTICLE 5
COVENANTS
Section 5.1 Conduct of Business of the Company. Except as contemplated by
this Agreement or as expressly agreed to in writing by HK, during the period
from the date of this Agreement to the Effective Time, the Company will, and
will cause each of its Subsidiaries to, conduct its operations according to its
ordinary and usual course of business and consistent with past practice and use
its and their respective commercially reasonable efforts to preserve intact
their current business organizations, keep available the services of their
current officers and employees and preserve their relationships with customers,
suppliers, licensors, licensees, advertisers, distributors and others having
business dealings with them and to preserve goodwill. Without limiting the
generality of the foregoing, and except as (x) otherwise expressly provided in
this Agreement, (y) required by law, or (z) set forth on Section 5.1 of the
Disclosure Schedule, prior to the Effective Time, the Company will not, and will
cause its Subsidiaries not to, without the consent of HK (which consent shall
not be unreasonably withheld):
(a) except with respect to annual bonuses made in the ordinary course
of business consistent with past practice, adopt or amend in any material
respect any bonus, profit sharing, compensation, severance, termination, stock
option, stock appreciation right, pension, retirement, employment or other
employee benefit agreement, trust, plan or other arrangement for the benefit or
welfare of any director, officer or employee of the Company or any of its
Subsidiaries or increase in any manner the compensation or fringe benefits of
any director, officer or employee of the Company or any of its Subsidiaries or
pay any benefit not required by any existing agreement or place any assets in
any trust for the benefit of any director, officer or employee of the Company or
any of its Subsidiaries (in each case, except with respect to employees and
directors in the ordinary course of business consistent with past practice);
(b) incur any indebtedness for borrowed money, other than indebtedness
under existing lines of credit drawn to fund working capital (defined as
accounts receivable plus inventory minus accounts payable) up to $3 million;
(c) expend funds for capital expenditures in excess of $50,000;
(d) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or otherwise dispose of any of its properties or assets other than
immaterial properties or assets (or immaterial portions of properties or
assets), except in the ordinary course of business consistent with past
practice;
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(e) (x) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock (except for dividends paid
by Subsidiaries to the Company with respect to capital stock), (y) split,
combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock or (z) purchase, redeem or otherwise acquire any
shares of capital stock of the Company or any of its Subsidiaries or any other
securities thereof or any rights, warrants or options to acquire any such shares
or other securities;
(f) authorize for issuance, issue, deliver, sell or agree or commit to
issue, sell, grant or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or otherwise),
pledge, dispose of or otherwise encumber any shares of its capital stock or the
capital stock of any of its Subsidiaries, any other voting securities or any
securities convertible into, or any rights, warrants, calls, commitments or
options to acquire, any such shares, voting securities or convertible securities
or any other securities or equity equivalents (including without limitation
stock appreciation rights) (other than issuances upon exercise of Options or
pursuant to the Stock Plan);
(g) amend its Certificate of Incorporation, as amended, Bylaws or
equivalent organizational documents or alter through merger, liquidation,
reorganization, restructuring or in any other fashion the corporate structure or
ownership of any Subsidiary of the Company;
(h) make or agree to make any acquisition of assets which is material
to the Company and its Subsidiaries, taken as a whole, except for (x) purchases
of inventory in the ordinary course of business or (y) pursuant to purchase
orders entered into in the ordinary course of business which do not call for
payments in excess of $100,000 per annum;
(i) settle or compromise any shareholder derivative suits arising out
of the transactions contemplated hereby or any other litigation (whether or not
commenced prior to the date of this Agreement) or settle, pay or compromise any
claims not required to be paid;
(j) take any action which is not set forth on Section 3.11 of the
Disclosure Schedule, if taken after March 31, 1999, but prior to the date
hereof, that would have caused the representations and warranties contained in
Section 3.11 hereof to be untrue; or
(k) make or change any election, change an annual accounting period,
adopt or change any accounting method, file any amended Tax Return, enter into
any closing agreement, settle any Tax claim or assessment relating to the
Company or any Subsidiary, surrender any right to claim a refund of Taxes,
consent to any extension or
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waiver of the limitation period applicable to any Tax claim or assessment
relating to the Company or any Subsidiary, or take any other similar action, or
omit to take any action relating to the filing of any Tax Return or the payment
of any Tax, if such election, adoption, change, amendment, agreement,
settlement, surrender, consent or other action or omission would have the effect
of increasing the present or future Tax liability or decreasing any present or
future Tax asset of the Company, any Subsidiary, HK or any Affiliate of HK.
Section 5.2 Access to Information. From the date of this Agreement until
the Effective Time, the Company will, and will cause its Subsidiaries, and each
of their respective officers, directors, employees, agents or other
representatives (including, without limitation, any investment banker, attorney
or accountant retained by the Company or its Subsidiaries) (the "Company
Representatives") to, give HK and their respective officers, employees, agents
or other representatives (including, without limitation, any investment banker,
attorney or accountant retained by HK) (the "HK Representatives") and
representatives of financing sources identified by HK reasonable access, upon
reasonable notice and during normal business hours, to the offices and other
facilities and to the books and records of the Company and its Subsidiaries and
will cause the Company Representatives and the Company's Subsidiaries to furnish
HK and the HK Representatives and representatives of financing sources
identified by HK with such financial and operating data and such other
information with respect to the Business as HK and representatives of financing
sources identified by HK may from time to time reasonably request. HK agrees
that any information furnished by the Company pursuant to this Section 5.2 (or
otherwise in compliance with this Agreement) will be subject to the provisions
of the letter agreement dated March 3, 1999, between H.I.G. Capital, L.L.C. and
BDO Seidman, LLP (the "Confidentiality Agreement").
Section 5.3 Efforts.
(a) Each of the Company and HK shall, and the Company shall cause each
of its Subsidiaries to, use commercially reasonable efforts to take all actions
and do all things necessary to consummate and make effective the transactions
contemplated by this Agreement (including the satisfaction, but not waiver, of
the closing conditions set forth in Article 5). In furtherance and not in
limitation of the foregoing, each of the Company and HK shall, and the Company
shall cause each of its Subsidiaries to, make all necessary filings with
Governmental Entities as promptly as practicable in order to facilitate prompt
consummation of the transactions contemplated by this Agreement. In addition,
each of HK and the Company will use its commercially reasonable efforts
(including, without limitation, payment of any required fees) and will cooperate
fully with each other to (i) comply as promptly as practicable with all
governmental requirements applicable to the transactions contemplated by this
Agreement, including the making of all filings necessary or proper under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including, but not limited to, the
Proxy Statement or other foreign filings and any amendments to any thereof and
(ii) obtain promptly all consents, waivers, approvals, authorizations or permits
of, or registrations or filings with or notifications to (any of the foregoing
being a "Consent"), any Governmental Entity necessary for the consummation of
the transactions contemplated by this Agreement (except for such Consents the
failure of which to obtain would not prevent or materially delay the
consummation of the Merger). Subject to the Confidentiality
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Agreement, HK and the Company shall furnish to one and other such necessary
information and reasonable assistance as HK or the Company may reasonably
request in connection with the foregoing.
(b) Without limiting Section 5.3(a) hereof, HK and the Company shall
each (i) promptly make or cause to be made the filings required of such party
under the HSR Act with respect to the Merger; (ii) use its best efforts to avoid
the entry of, or to have vacated or terminated, any decree, order, or judgment
that would restrain, prevent or delay the consummation of the Merger, including
without limitation defending through litigation on the merits any claim asserted
in any court by any third party; and (iii) take any and all steps which, in such
party's judgment, are commercially reasonable to avoid or eliminate each and
every impediment under any antitrust, competition, or trade regulation law that
may be asserted by any Governmental Entity with respect to the Merger so as to
enable consummation thereof to occur as soon as reasonably possible. Each party
hereto shall promptly notify the other parties of any communication to that
party from any Governmental Entity with respect to the transactions contemplated
by this Agreement and permit the other parties to review in advance any proposed
communication to any Governmental Entity. HK and the Company shall not (and
shall cause their respective affiliates and representatives not to) agree to
participate in any meeting with any Governmental Entity in respect of any
filings, investigation or other inquiry unless it consults with the other party
in advance and, to the extent permitted by such Governmental Entity, gives the
other party the opportunity to attend and participate thereat. Subject to the
Confidentiality Agreement, each of the parties hereto will coordinate and
cooperate fully with the other parties hereto in exchanging such information and
providing such assistance as such other parties may reasonably request in
connection with the foregoing and in seeking early termination of any applicable
waiting periods under the HSR Act or in connection with other Consents. Each of
the Company and HK agrees to respond promptly to and comply fully with any
request for additional information or documents under the HSR Act. Subject to
the Confidentiality Agreement, the Company will provide HK, and HK will provide
the Company, with copies of all correspondence, filings or communications (or
memoranda setting forth the substance thereof) between such party or any of its
representatives, on the one hand, and any Governmental Entity or members of its
staff, on the other hand, with respect to this Agreement and the transactions
contemplated hereby.
(c) The Company and HK each agree to provide, and to cause their
respective officers, employees and advisors to provide, and the Company agrees
to cause its Subsidiaries and their respective officers, employees and advisors
to provide, all commercially reasonable cooperation in connection with the
arrangement of any financing in respect of the transactions contemplated by this
Agreement, including, without limitation, (i) participation in meetings, due
diligence sessions and road shows, (ii) assisting the preparation of offering
memoranda, private placement memoranda, prospectuses and similar documents, and
(iii) the execution and delivery of any commitment letters, underwriting or
placement agreements, pledge and security documents, other definitive financing
documents, or other requested certificates or documents as may be reasonably
requested.
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Section 5.4 Public Announcements. The Company, on the one hand, and HK, on
the other hand, agree to consult promptly with each other prior to issuing any
press release or announcement or otherwise making any public statement with
respect to the Merger and the other transactions contemplated hereby, agree to
provide to the other party for review a copy of any such press release or
statement, and shall not issue any such press release or make any such public
statement prior to such consultation and review, unless required by applicable
law or any listing agreement with a securities exchange or the Nasdaq Stock
Market, Inc.
Section 5.5 Employee Benefit Arrangements.
(a) HK agrees that the Company will honor, and, from and after the
Effective Time, the Surviving Corporation will honor, in accordance with their
respective terms as in effect on the date hereof, the employment, severance and
bonus agreements and arrangements to which the Company is a party which are set
forth on Section 5.5 of the Disclosure Schedule.
(b) The Company agrees that for a period of one year following the
Effective Time, the Surviving Corporation shall continue the (i) compensation
(including bonus and incentive awards) programs and plans and (ii) employee
benefit and welfare plans, programs, contracts, agreements and policies
(including insurance and pension plans), fringe benefits and vacation policies
which are currently provided by the Company; provided that notwithstanding
anything in this Agreement to the contrary the Surviving Corporation shall not
be required to maintain any individual plan or program so long as the benefit
plan and agreements maintained by the Surviving Corporation are, in the
aggregate, not less favorable than those provided by the Company immediately
prior to the date of this Agreement; and, provided, further, that nothing in
this sentence shall be deemed to limit or otherwise affect the right of the
Surviving Corporation to terminate employment or change the place of work,
responsibilities, status or designation of any employee or group of employees as
the Surviving Corporation may determine in the exercise of its business judgment
and in compliance with applicable laws.
Section 5.6 Indemnification; Directors' and Officers' Insurance.
(a) The Company and, from and after the Effective Time, the Surviving
Corporation, shall indemnify, defend and hold harmless the present and former
officers, directors, employees and agents of the Company and its Subsidiaries
(the "Indemnified Parties") against all judgments, fines, losses, claims,
damages, costs or expenses (including reasonable attorneys' fees) or liabilities
arising out of or related to matters, actions or omissions or alleged actions or
omissions occurring at or prior to the Effective Time whether asserted or
claimed prior to or after the Effective Time (i) to the full extent permitted by
New York law or, if the protections afforded thereby to an Indemnified Person
are greater, (ii) to the same extent and on the same terms and conditions
(including with respect to advancement of expenses) provided for in the
Company's Certificate of Incorporation, as amended, and Bylaws and agreements in
effect at the date hereof (to the extent consistent with applicable law), which
provisions shall survive the Merger and continue in full force and effect after
the Effective Time. Without limiting the foregoing, (i) HK shall, and shall
cause the
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Surviving Corporation to, periodically advance expenses (including attorney's
fees) as incurred by an Indemnified Person with respect to the foregoing to the
full extent permitted under applicable law, and (ii) any determination required
to be made with respect to whether an Indemnified Party shall be entitled to
indemnification shall, if requested by such Indemnified Party, be made by
independent legal counsel selected by the Surviving Corporation and reasonably
satisfactory to such Indemnified Party.
(b) HK agrees that the Company, and, from and after the Effective
Time, the Surviving Corporation, shall cause to be maintained in effect for not
less than six years from the Effective Time the policies of the directors' and
officers' liability insurance maintained by the Company and in effect as of
September 1, 1999; provided that the Surviving Corporation may substitute
therefor other policies of at least the same coverage amounts and which contain
terms and conditions not less advantageous to the beneficiaries of the current
policies and, provided further, that such substitution shall not result in any
gaps or lapses in coverage with respect to matters occurring on or prior to the
Effective Time; and provided further, that the Surviving Corporation shall not
be required to pay an annual premium in excess of 200% of the last annual
premium paid by the Company prior to the date hereof and if the Surviving
Corporation is unable to obtain the insurance required by this Section 5.6(b) it
shall obtain as much comparable insurance as possible for an annual premium
equal to such maximum amount.
(c) This Section 5.6 shall survive the consummation of the Merger at
the Effective Time, is intended to benefit the Company, the Surviving
Corporation and the Indemnified Parties, shall be binding on all successors and
assigns of HK and the Surviving Corporation, and shall be enforceable by the
Indemnified Parties.
Section 5.7 Notification of Certain Matters. HK and the Company shall
promptly notify each other of (i) the occurrence or non-occurrence of any fact
or event which would be reasonably likely (A) 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 Effective Time or (B) to cause
any covenant, condition or agreement under this Agreement not to be complied
with or satisfied and (ii) any failure of the Company, or HK, as the case may
be, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided, however, that no such
notification shall affect the representations or warranties of any party or the
conditions to the obligations of any party hereunder. Each of the Company and HK
shall give prompt notice to the other parties hereof of any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement.
Section 5.8 State Takeover Laws. The Company shall, upon the request of HK,
take all reasonable steps to assist in any challenge by HK to the validity or
applicability to the transactions contemplated by this Agreement, including the
Merger, of any state takeover law.
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Section 5.9 No Solicitation.
(a) The parties acknowledge and agree that prior to October 15, 1999,
the Company and its affiliates and the Company Representatives shall be
permitted to take the actions proscribed in clauses (b)(i) through (v) below.
(b) From and after October 15, 1999 until the termination of this
Agreement, the Company and its affiliates shall not, and shall instruct the
Company Representatives not to:
(i) directly or indirectly solicit, initiate, or encourage
(including by way of furnishing nonpublic information or assistance),
or take any other action to facilitate, any inquiries or proposals
from any person that constitute, or may reasonably be expected to lead
to, an acquisition, purchase, merger, consolidation, share exchange,
recapitalization, business combination or other similar transaction
involving any material portion of the assets or any securities of, any
merger, consolidation or business combination with, or any public
announcement of a proposal, plan, or intention to do any of the
foregoing by, the Company or any of its Subsidiaries (such
transactions being referred to herein as "Acquisition Proposals");
(ii) enter into, maintain, or continue discussions or
negotiations with any person in furtherance of such inquiries or to
obtain an Acquisition Proposal;
(iii) agree to or endorse any Acquisition Proposal;
(iv) enter into any agreement, arrangement or understanding
requiring it to abandon, terminate or fail to consummate the Merger or
any other transaction contemplated by this Agreement, or
(v) authorize or permit the Company Representatives to take
any such action;
provided, however, that prior to the approval of the Merger by
the shareholders of the Company nothing in this Agreement shall prohibit the
Company Board or the Special Committee from (A) furnishing information to, and
engaging in discussions or negotiations with, any person or entity that makes an
unsolicited written, bona fide proposal to acquire the Company and/or its
Subsidiaries pursuant to a merger, consolidation, share exchange, tender offer,
recapitalization, business combination or other similar transaction, or any
transaction involving the sale of a material portion of the assets of the
Company, but only to the extent that the Company Board or the Special Committee
determines in good faith, after consulting with independent legal counsel (which
may be the Company's regularly engaged outside legal counsel), that it has a
fiduciary obligation to furnish such information or engage in such discussions
or negotiations with such person or entity (any such proposal meeting such
criteria, a "Superior Proposal"), provided,
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that prior to taking such action, the Company notifies HK of its intentions and
obtains an executed confidentiality agreement from the appropriate parties
substantially similar to the Confidentiality Agreement, (B) failing to make or
withdrawing or modifying its recommendation referred to in Section 5.12 hereof
if the Company Board or the Special Committee, after consultation with
independent legal counsel (who may be the Company's regularly engaged outside
legal counsel), determines in good faith that it has a fiduciary obligation to
do so, provided that HK is given two days' prior written notice of its
intentions to do so, and (C) disclosing to the Company's shareholders a position
contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange Act with
respect to any tender offer, or taking any other legally required action, or any
action required by the rules or regulations of any self-regulating securities
exchange, market or other body (including, without limitation, the making of
public disclosure as may be necessary or advisable under applicable securities
laws); and, provided further, that notwithstanding anything to the contrary in
this Agreement, the Company Board's or the Special Committee's exercise of its
rights under clause (A), (B) or (C) above shall not constitute a breach by the
Company of this Agreement.
(c) The Company will promptly notify HK of the receipt of any Formal
Acquisition Proposal, the terms and conditions of such proposal and the identity
of the person making it. The Company also will promptly notify HK of any change
to or modification of such Formal Acquisition Proposal and the terms and
conditions thereof.
(d) To the extent that, as of October 15, 1999, the Company, any of
its affiliates or any Company Representative is engaged in discussions or
negotiations with any person or entity (other than HK) with respect to any
proposal that does not at such time constitute a Superior Proposal as defined in
(b) above, the Company shall, and shall cause its affiliates and the Company
Representatives to, cease any and all activities, discussions or negotiations as
of such date. Nothing in this Section 5.9(d) is intended to prevent, deter, or
prohibit the Company Board or the Special Committee from taking any action
permitted by Section 5.9(b) above and the taking of any such action shall not
constitute a breach of this provision.
Section 5.10 Interim Liabilities. The Surviving Corporation will pay,
consistent with past practice, all liabilities, including all accounts payable
and other expenses, which arise in the ordinary course of business prior to the
Closing Date.
Section 5.11 Reports. The Company shall provide HK with monthly financial
statements, broken out by business segment (including management reports which
are prepared in the ordinary course of business and related thereto), no later
than the fifth business day following the end of each calendar month following
the date of this Agreement until the Effective Date.
Section 5.12 Shareholders' Meeting.
(a) The Company, acting through the Company Board, shall, in
accordance with applicable law:
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(i) subject to the fiduciary duties of the Company Board,
duly call, give notice of, convene and hold a special meeting of its
shareholders (the "Special Meeting") as soon as practicable following
the execution of this Agreement for the purpose of considering and
taking action upon this Agreement;
(ii) prepare and file with the SEC a preliminary proxy
statement relating to this Agreement, and use its reasonable efforts
(A) to obtain and furnish the information required to be included by
the SEC in a definitive proxy statement (the "Proxy Statement") and,
after consultation with HK, to respond promptly to any comments made
by the SEC with respect to the preliminary proxy statement and cause
the Proxy Statement to be mailed to its shareholders and (B) subject
to the fiduciary duties of the Company Board, to obtain the necessary
approvals of the Merger and this Agreement by its shareholders; and
(iii) subject to the fiduciary duties of the Company Board,
include in the Proxy Statement the recommendation of the Company Board
that shareholders of the Company vote in favor of the approval of this
Agreement.
(b) The Company covenants that the Proxy Statement will comply in all
material respects with the provisions of applicable federal securities laws and,
on the date filed with the SEC and on the date first published, sent or given to
the Company's shareholders, shall not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading, except that no
representation is made by the Company with respect to information supplied by HK
in writing for inclusion in the Proxy Statement. Each of the Company, on the one
hand, and HK, on the other hand, agree promptly to correct any information
provided by either of them for use in the Proxy Statement if and to the extent
that it shall have become false or misleading, and the Company further agrees to
take all steps necessary to cause the Proxy Statement as so corrected to be
filed with the SEC and to be disseminated to the holders of Shares, in each
case, as and to the extent required by applicable federal securities laws.
Section 5.13 Letters of Accountants. The Company shall use its commercially
reasonable efforts to cause to be delivered to HK from the Company's independent
accountants a letter dated within two business days prior to the Effective Time
stating that the Merger may be recorded for financial accounting purposes as a
recapitalization if the Merger is consummated in accordance with this Agreement.
Section 5.14 Conveyance Taxes. HK and the Company shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value-added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees or any similar taxes which become payable by the
Company or any of its Subsidiaries in connection with the transactions
contemplated by this Agreement that are required or permitted to be filed on or
before the Effective Time.
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Section 5.15 Delisting. Each of the parties agrees to cooperate with each
other in taking, or causing to be taken, all actions necessary to delist the
Common Shares from NASDAQ and to terminate registration under the Exchange Act,
provided that such delisting and termination shall not be effective until after
the Effective Time of the Merger.
ARTICLE 6
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 6.1 Conditions. The respective obligations of HK and the Company to
consummate the Merger are subject to the satisfaction, at or before the
Effective Time, of each of the following conditions:
(a) Shareholder Approval. The Company Shareholder Approval shall have
been obtained.
(b) Illegality. There shall not have been any United States federal or
state statute, rule or regulation enacted or promulgated after the date of this
Agreement that would result in the imposition of material limitations on the
ability of HK effectively to acquire or hold the business of the Company and its
Subsidiaries taken as a whole.
(c) HSR Act. Any waiting period (and any extension thereof) under the
HSR Act applicable to the Merger shall have expired or been terminated.
Section 6.2 Conditions to Obligations of HK. The obligations of HK to
effect the Merger are further subject to the following conditions:
(a) Representations and Warranties. The representations and warranties
of the Company set forth in this Agreement shall be true and correct as of the
date of this Agreement and as of the Closing Date as though made on and as of
the Closing Date in all respects (except where the failure to be true and
correct does not have a Material Adverse Effect on the Company), other than
representations and warranties of the Company that relate to a specific date
which shall be true and correct in all respects as of such date. HK shall have
received a certificate signed on behalf of the Company by the chief executive
officer and the chief financial officer of the Company to the effect set forth
in this paragraph.
(b) Performance of Obligations of the Company. The Company shall have
performed the obligations required to be performed by it under this Agreement
prior to the Closing in all material respects.
(c) Consents, etc. HK shall have received evidence, in form and
substance reasonably satisfactory to it, that all licenses, permits, consents,
approvals, authorizations,
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qualifications and orders of Governmental Entities and other third parties set
forth in Section 3.3 of the Disclosure Schedule and identified with an asterisk
shall have been obtained.
(d) No Injunction. No court of competent jurisdiction in the United
States or other United States Governmental Entity shall have issued any order,
decree or ruling or taken any other action restraining, enjoining or otherwise
(i) prohibiting the consummation of the Merger or any of the other transactions
contemplated by this Agreement, (ii) prohibiting or limiting the ownership or
operation by the Company or any of its Subsidiaries of any material portion of
the business or assets of the Company or any of its Subsidiaries, or to dispose
of or hold separate any material portion of the business or assets of the
Company or any of its Subsidiaries, as a result of the Merger or any of the
other transactions contemplated by this Agreement or (iii) imposing limitations
on the ability of HK (or any shareholder of HK), to acquire or hold, or exercise
full rights of ownership of, any Common Shares, including, without limitation,
the right to vote Common Shares on all matters properly presented to the
shareholders of the Company.
(e) Financing. HK shall have received proceeds of financing on the
terms and conditions and in the amounts described in the commitment letters
(each, a "Commitment Letter") attached hereto as Exhibit A; provided, however,
that if the failure to receive such financing is caused by HK's breach in any
material respect of any representation, warranty, covenant or agreement made by
HK and solely within the control of HK in any Commitment Letter, then in such
event HK's obligation to consummate the Merger shall not be subject to the
satisfaction of this condition.
(f) No Material Adverse Effect. There shall not after the execution
hereof have occurred a Material Adverse Effect on the Company, provided that (i)
no event relating to the disclosures made by the Company to, or the discussions
had by the Company with, HIG, HK or any of their respective affiliates prior to
the date hereof with respect to matters disclosed by the Company in its press
releases dated July 1, 1999 and August 12, 1999 and (ii) no suit, claim, action,
or proceeding disclosed on Schedule 3.6 hereto(or any suit or action alleging
facts or stating claims of a similar nature or that could otherwise be
reasonably expected to arise out of or in connection with the negotiation and
consummation of this transaction) shall constitute a Material Adverse Effect on
the Company.
(g) Options. Upon payment of the Option Consideration pursuant to
Section 2.02 hereof, all Options pursuant to any existing Option Plans shall
have been canceled and there shall be not other plans, programs or arrangements
which obligate the Company or the Surviving Corporation to issue any equity
securities or any securities with equity-like features.
(h) Directors. All existing directors of the Company shall have
tendered resignations from the Board which shall be effective as of the
Effective Time.
(i) Opinion of the Company's Counsel. HK shall have received from
Proskauer Rose LLP, counsel for the Company, an opinion in form and substance
satisfactory to HK,
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addressed to HK, dated as of the Closing Date, and HK's lenders shall have been
allowed to rely thereon.
Section 6.3 Conditions to Obligation of the Company. The obligation of the
Company to effect the Merger is further subject to the following conditions:
(a) Representations and Warranties. The representations and warranties
of HK set forth in this Agreement shall be true and correct in all material
respects (except for representations and warranties which are qualified by
"materiality," "Material Adverse Effect," or terms of similar import or effect,
in which case such representations and warranties shall be true and correct in
all respects), in each case as of the date of this Agreement and as of the
Closing Date as though made on and as of the Closing Date, other than
representations and warranties of HK that relate to a specific date which shall
be true and correct in all respects as of such date. The Company shall have
received certificates signed on behalf of HK by the President or a Vice
President of HK to the effect set forth in this paragraph.
(b) Performance of Obligations of HK. HK shall have performed the
obligations required to be performed by it under this Agreement in all material
respects.
(c) Opinion of HK's Counsel. The Company shall have received from
Kirkland & Ellis, counsel for HK, an opinion in form and substance satisfactory
to the Company, addressed to the Company, dated as of the Closing Date.
(d) Payment of Notes. At the Closing, the Surviving Corporation shall
have paid in full the four-year 5.7% promissory notes in an aggregate principal
amount of approximately $5.57 million, issued to certain shareholders in
connection with the termination of the Company's S Corporation status.
(e) No Injunction. No court of competent jurisdiction in the United
States or other United States Governmental Entity shall have issued any order,
decree or ruling or taken any other action restraining, enjoining or otherwise
(i) prohibiting the consummation of the Merger or any of the other transactions
contemplated by this Agreement, (ii) prohibiting or limiting the ownership or
operation by the Company or any of its Subsidiaries of any material portion of
the business or assets of the Company or any of its Subsidiaries, or to dispose
of or hold separate any material portion of the business or assets of the
Company or any of its Subsidiaries, as a result of the Merger or any of the
other transactions contemplated by this Agreement or (iii) imposing limitations
on the ability of HK (or any shareholder of HK), to acquire or hold, or exercise
full rights of ownership of, any Common Shares, including, without limitation,
the right to vote Common Shares on all matters properly presented to the
shareholders of the Company.
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ARTICLE 7
TERMINATION; AMENDMENTS; WAIVER
Section 7.1 Termination. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time prior to the Effective Time,
notwithstanding approval thereof by the shareholders of the Company:
(a) by the mutual written consent of HK and the Company, by action of
their respective Boards of Directors;
(b) by HK or the Company if the Merger shall not have been consummated
on or before February 15, 2000; provided, however, that neither HK nor the
Company may terminate this Agreement pursuant to this Section 7.1(b) if such
party shall have materially breached this Agreement;
(c) by HK or the Company if any court of competent jurisdiction in the
United States or other United States Governmental Entity has issued an order,
decree or ruling or taken any other action restraining, enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other action shall have
become final and nonappealable; provided, however, that the party seeking to
terminate this Agreement shall have used its commercially reasonable efforts to
remove or lift such order, decree, ruling or other action;
(d) by the Company if, prior to the Effective Time, any person has
made a bona fide Formal Acquisition Proposal (defined in Section 8.9(a) below),
or has commenced a tender or exchange offer for the Common Shares, and the
Company Board or Special Committee determines in good faith that its fiduciary
duties require it to accept such proposal; provided, however, that,
notwithstanding anything in this Agreement to the contrary, the termination of
this Agreement by the Company in compliance with this Section 7.1(d) shall not
be deemed to violate any other obligations of the Company under this Agreement,
and, provided further, that the Company shall have notified HK of its intent to
terminate at least two business days prior to the effective date of such
termination;
(e) by HK, if the Company Board shall have (i) failed to recommend to
the shareholders of the Company that they give the Company Shareholder Approval,
(ii) withdrawn or modified in a manner adverse to HK its approval or
recommendation of this Agreement or the Merger, (iii) approved or recommended an
Acquisition Proposal or (iv) resolved to effect any of the foregoing;
(f) by either HK or the Company, if the Company Shareholder Approval
shall not have been obtained by reason of the failure to obtain the required
vote upon a vote held at a duly held meeting of shareholders or at any
adjournment thereof; or
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<PAGE>
(g) by either HK or the Company, if the other party shall be in
material breach of this Agreement, and such breach shall not have been cured
within 20 days of receipt of written notice from the non-breaching party of such
breach.
Section 7.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 7.1 hereof, this Agreement shall forthwith become
void and have no effect, without any liability on the part of any party or its
directors, officers or shareholders, except that the terms and conditions of the
Confidentiality Agreement with respect to matters addressed by the last sentence
of Section 5.2 hereof and the provisions of this Section 7.2 and Section 7.3 of
this Agreement shall survive any such termination. Nothing contained in this
Section 7.2 shall relieve any party from liability for any breach of any
covenant of this Agreement or any breach of warranty or misrepresentation.
Section 7.3 Fees and Expenses.
(a) Subject to (b) below, in the event that this Agreement is
terminated pursuant to Section 7.1(g) or is terminated pursuant to Section
7.1(b) based at least in part upon a material breach of this Agreement by one of
the parties hereto (while the other party is not in material breach) and such
breach has not been previously waived by the non-breaching party, the breaching
party shall promptly reimburse the non-breaching party for all reasonable
out-of-pocket expenses and fees (including, without limitation, fees payable to
all banks, investment banking firms and other financial institutions, and their
respective agents and counsel, and all fees of counsel, accountants, financial
printers, experts and consultants to HK and its affiliates, collectively
referred to as "Costs"), whether incurred prior to, on or after the date hereof
(but prior to the date this Agreement is terminated), in connection with the
Merger and the consummation of all transactions contemplated by this Agreement,
and the financing thereof.
(b) In the event that this Agreement is terminated pursuant to Section
7.1(d) hereof, or by HK pursuant to Section 7.1(b) hereof based upon a material
breach of this Agreement by the Company, or by HK pursuant to Sections 7.1(e) or
7.1(g) hereof and prior to such termination HK has not materially breached this
Agreement, the Company will, within three business days of such termination, pay
to HK in cash by wire transfer in immediately available funds to an account
designated by HK a payment in an amount equal to $4 million (the "Termination
Fee"), and no amount will be owed to HK pursuant to clause (a) above.
(c) The prevailing party in any legal action undertaken to enforce
this Agreement or any provision hereof shall be entitled to recover from the
other party the costs and expenses (including attorneys' and expert witness
fees) incurred in connection with such action.
(d) Except as otherwise specifically provided for herein, whether or
not the Merger is consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated by this Agreement shall be
paid by the party incurring such expenses.
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<PAGE>
Section 7.4 Amendment. This Agreement may be amended by the Company and HK
at any time before or after any approval of this Agreement by the shareholders
of the Company but, after any such approval, no amendment shall be made which
decreases the Merger Consideration or which adversely affects the rights of the
Company's shareholders hereunder without the approval of such shareholders. This
Agreement may not be amended except by an instrument in writing signed on behalf
of all the parties.
Section 7.5 Extension; Waiver. At any time prior to the Effective Time, HK,
on the one hand, and the Company, on the other hand, may but shall not be
obligated to (i) extend the time for the performance of any of the obligations
or other acts of the other, (ii) waive any inaccuracies in the representations
and warranties contained herein of the other or in any document, certificate or
writing delivered pursuant hereto by the other or (iii) waive compliance by the
other with any of the agreements or conditions. Any agreement on the part of any
party to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
ARTICLE 8
MISCELLANEOUS
Section 8.1 Non-Survival of Representations and Warranties. The
representations and warranties made in this Agreement shall not survive beyond
the Effective Time.
Section 8.2 Entire Agreement; Assignment.
(a) This Agreement (including the documents and the instruments
referred to herein) and the Confidentiality Agreement constitute the entire
agreement and supersede all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof and
thereof.
(b) Neither this Agreement nor any of the rights, interests or
obligations hereunder will be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
party (except that HK may assign its rights, interest and obligations to any
affiliate or Subsidiary of HK without the consent of the Company, provided that
no such assignment shall relieve HK of any liability for any breach by such
assignee). Subject to the preceding sentence, this Agreement will be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
Section 8.3 Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, each of which shall remain in full force and
effect.
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<PAGE>
Section 8.4 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person, by overnight courier or telecopier to the
respective parties as follows:
If to HK: HK Merger Corp.
c/o H.I.G. Capital, LLC
1001 Brickell Bay Drive
27th Floor
Miami, FL 33137
Attention: John R. Black
Rick Rosen
Telecopier: (305) 379-2013
with a copy to: Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
Attention: James L. Learner, P.C.
Telecopier: (312) 861-2200
If to the Company: Happy Kids Inc.
100 West 33rd Street
Suite 1100
New York, NY 10001
Attention: Jack M. Benun
Telecopier: (212) 967-1357
with a copy to: Proskauer Rose LLP
1585 Broadway
New York, NY 10036
Attention: Jeffrey A. Horwitz, Esq.
Telecopier: (212) 969-3229
or to such other address as the person to whom notice is given may have
previously furnished to the other in writing in the manner set forth above;
provided that notice of any change of address shall be effective only upon
receipt thereof.
Section 8.5 Governing Law; Exclusive Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
regardless of the laws that might otherwise govern under applicable principles
of conflicts of laws thereof. HK and the Company each hereby submit to the
exclusive jurisdiction of the United States District Court for the Southern
District of New York and the Supreme Court of the State of New York, County of
New York, for the purpose of all legal proceedings arising out of or relating to
this Agreement or the
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transactions contemplated hereby. HK and the Company each irrevocably waive, to
the fullest extent permitted by law, any objection which either of them may now
or hereafter have to the laying of the venue of any such proceeding brought in
such a court and any claim that any such proceeding brought in such a court has
been brought in an inconvenient forum.
Section 8.6 Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
Section 8.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
Section 8.8 Parties in Interest. Except with respect to Sections 2.2, 5.5
and 5.6 hereof (which are intended to be for the benefit of the persons
identified therein, and may be enforced by such persons), this Agreement shall
be binding upon and inure solely to the benefit of each party hereto, and
nothing in this Agreement, express or implied, is intended to confer upon any
other person any rights or remedies of any nature whatsoever under or by reason
of this Agreement.
Section 8.9 Certain Definitions. As used in this Agreement:
(a) "Formal Acquisition Proposal" means a formal written proposal from
any person for the purpose of arranging an acquisition, purchase, merger,
consolidation, share exchange, recapitalization, business combination or other
similar transaction involving all or substantially all of the assets of the
Company or a majority of the outstanding Common Shares or all or substantially
all of the Common Shares held by the public shareholders or any merger,
consolidation or business combination with the Company.
(b) Other than with respect to the term "ERISA Affiliate," the term
"affiliate", as applied to any person, shall mean any other person directly or
indirectly controlling, controlled by, or under common control with, that
person. For the purposes of this definition, "control" (including, with
correlative meanings, the terms "controlling," "controlled by" and "under common
control with"), as applied to any person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of that person, whether through the ownership of voting securities, by
contract or otherwise;
(c) "Business" shall mean the businesses of the Company and its
Subsidiaries as currently conducted;
(d) "Intellectual Property" means (i) all patents, patent applications
and patent disclosures and all inventions (whether or not patentable and whether
or not reduced to practice, including but not limited to any reissues,
continuations, continuations-in-part, divisions, revisions, extensions or
reexaminations thereof); (ii) all trademarks, service marks, trade names,
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trade dress, logos, slogans, corporate names and Internet domain names and Web
sites, and all the goodwill associated with each of the foregoing; (iii) all
mask works and registrations and applications for registry thereof; (iv) all
registered and unregistered statutory and common law copyrights; (v) all
registrations, applications and renewals for any of the foregoing; (vi) all
trade secrets, confidential information, ideas, formulae, compositions,
know-how, manufacturing and production processes and techniques, research
information, drawings, specifications, designs, plans, improvements, proposals,
technical and computer data, documentation and software, financial business and
marketing plans, customer and supplier lists and related information and
marketing materials and all other proprietary rights; and (vii) all other
intellectual property rights;
(e) "International Trade Laws and Regulations" means all federal,
state, local and foreign statutes, executive orders, proclamations, regulations,
rules, directives, decrees, ordinances and similar provisions having the force
or effect of law and all judicial and administrative orders, rulings,
determinations and common law concerning the importation of merchandise, the
export or reexport of products, services and technology, the terms and conduct
of international transactions, making or receiving international payments and
the authorization to hold an ownership interest in a business located in a
country other than the United States, including the Tariff Act of 1930 as
amended and other laws administered by the United States Customs Service,
regulations issued or enforced by the United States Customs Service, the Export
Administration Act of 1979 as amended, the Export Administration Regulations,
the International Emergency Economic Powers Act, the Arms Export Control Act,
the International Traffic in Arms Regulations, any other export controls
administered by an agency of the United States government, Executive Orders of
the President regarding embargoes and restrictions on trade with designated
countries and Persons, the embargoes and restrictions administered by the United
States Office of Foreign Assets Control, the Foreign Corrupt Practices Act, the
antiboycott regulations administered by the United States Department of
Commerce, the antiboycott regulations administered by the United States
Department of the Treasury, legislation and regulations of the United States and
other countries implementing the North American Free Trade Agreement (NAFTA),
antidumping and countervailing duty laws and regulations, laws and regulations
by other countries concerning the ability of U.S. Persons to own businesses and
conduct business in those countries, restrictions by other countries on holding
foreign currency and repatriating funds and other laws and regulations adopted
by the governments or agencies of other countries relating to the same subject
matter as the United States statutes and regulations described above.
(f) the term "Person" or "person" shall include individuals,
corporations, partnerships, trusts, other entities and groups (which term shall
include a "group" as such term is defined in Section 13(d)(3) of the Exchange
Act); and
(g) "Knowledge of the Company" or words of similar import means the
actual knowledge of the following members of the Company's senior management:
Jack M. Benun, Mark J. Benun, Isaac Levy, Stuart Bender and Andrew Glasgow.
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Section 8.10 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, each of the parties has caused this Agreement and
Plan of Merger to be executed on its behalf by its respective officer thereunto
duly authorized, all as of the day and year first above written.
HAPPY KIDS INC.
/s/ Jack M. Benun
By: -------------------------------
Name: Jack M. Benun
Title: President
HK MERGER CORP.
/s/ Sami Mnaymneh
By: ----------------------------
Name: Sami Mnaymneh
Title: President
<PAGE>
Schedule I
----------
Rollover Schedule
-----------------
Holder of Record Pre-Closing Shares Non-Rollover Shares Rollover Shares
- ----------------- -------------------- --------------------- -----------------
Jack M. Benun 3,293,750 2,921,727 372,023
Mark J. Benun 3,293,750 2,921,727 372,023
Isaac Levy 1,162,500 1,031,198 131,302
Total 7,750,000 6,874,652 875,348
<PAGE>
EXHIBIT A
BANKERS TRUST COMPANY
130 LIBERTY STREET
NEW YORK, NEW YORK 10006
September 13, 1999
H.I.G. Capital LLC
1001 Brickell Bay Drive
Suite 2708
Miami, FL 33131
Attention: Sami Mnaymneh
re Commitment Letter
Gentlemen:
You have advised Bankers Trust Company ("BTCo") that H.I.G. Capital LLC
("HIG") is considering a recapitalization transaction (the "Acquisition") of
Happy Kids Inc. (the "Company") pursuant to which HIG, certain management
shareholders of the Company and other investors reasonably acceptable to us
(collectively, the "Equity Investors") would own 100% (on a fully diluted basis)
of the equity of the Company. We understand that (i) the purchase price for the
equity of the Company will be $81,100,000 and (ii) concurrently with the
consummation of the Acquisition, the Company will refinance $14,200,000 of its
existing debt (the "Refinancing" and, together with the Acquisition and the
incurrence of the financings described below, the "Transaction"). We also
understand that the Acquisition will be structured as a one-step merger
transaction pursuant to which a company newly formed by the Equity Investors
would merge with and into the Company, with the Company being the surviving
corporation.
BTCo understands that the aggregate funds needed to effect the
Acquisition and the Refinancing will be $95,300,000 and that the fees and
expenses incurred in connection with the Transaction will be approximately
$5,500,000. BTCo further understands that the funding required to effect the
Acquisition and the Refinancing, to pay fees and expenses owing in connection
with the Transaction and to provide working capital to the Company and its
subsidiaries shall be provided solely as follows: (i) a cash equity contribution
(the "Equity Financing") from the Equity Investors in the amount of $26,575,000
(of which up to $6,275,000 may be in the form of roll-over equity retained by
certain existing management shareholders of the Company (the "Equity
Rollover")), (ii) the issuance by the Company of subordinated notes
<PAGE>
(the "Subordinated Notes") generating gross cash proceeds of $10,000,000 and
(iii) the incurrence by the Company of the Senior Secured Financing as defined
and described below.
BTCo understands that the senior bank financing (the "Senior Secured
Financing") required by the Company to effect the foregoing transactions will
consist of (i) a $60,000,000 term loan facility (the "Term Loan Facility") and
(ii) a $50,000,000 revolving credit facility (the "Revolving Credit Facility"
and, together with the Term Loan Facility, the "Credit Facilities"), it being
understood that approximately $10,500,000 of the Revolving Credit Facility may
be utilized to effect the Acquisition and the Refinancing and to pay any fees
and expenses owing in connection with the Transaction. A summary of certain of
the terms and conditions of the Credit Facilities is set forth on Exhibit A
hereto (the "Term Sheet").
BTCo is pleased to confirm that (i) it commits to provide, on the terms
and conditions set forth herein and in the Term Sheet, all of the Senior Secured
Financing, (ii) it will act as sole Administrative Agent for a syndicate of
financial institutions (the "Lenders") party to the Senior Secured Financing and
(iii) Deutsche Bank Securities Inc. ("DBSI"), an affiliate of BTCo, will act as
sole Lead Arranger and sole Book Manager for the Senior Secured Financing. You
agree that no other agents, co-agents or arrangers will be appointed, no other
titles will be awarded and no compensation (other than that expressly
contemplated by the Term Sheet and the Fee Letter referred to below) will be
paid in connection with the Senior Secured Financing unless you and we shall so
agree.
BTCo reserves the right, prior to or after execution of the definitive
credit documentation for the Senior Secured Financing, to syndicate all or part
of its commitment for the Senior Secured Financing to one or more Lenders
pursuant to a syndication to be managed by BTCo. BTCo shall commence syndication
efforts promptly after your acceptance of this letter and you agree to actively
assist BTCo in achieving a syndication that is satisfactory to BTCo. Such
syndication will be accomplished by a variety of means, including direct contact
during the syndication between senior management and advisors of HIG, the
Company and the proposed syndicate members. To assist BTCo in its syndication
efforts, you hereby agree, both before and after the closing of the Senior
Secured Financing, (i) to provide and cause your advisors to provide BTCo and
the other syndicate members upon request with all information reasonably deemed
necessary by BTCo to complete syndication, including but not limited to
information and evaluations prepared by HIG and the Company or by your or their
respective advisors relating to the Transaction and the other transactions
contemplated hereby, (ii) to assist BTCo upon request in the preparation of an
Information Memorandum to be used in connection with the syndication of the
Senior Secured Financing and (iii) to make available officers of each of HIG and
the Company from time to time and to attend and make presentations regarding the
business and prospects of the Company and its subsidiaries at a meeting or
meetings of Lenders or prospective Lenders.
If BTCo discovers information not previously known to it which BTCo
reasonably believes is materially negative information with respect to the
Transaction or the condition (financial or otherwise), business, operations,
assets, liabilities or prospects of the Company or any of its subsidiaries, BTCo
may, in its sole discretion, suggest alternative
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<PAGE>
financing amounts or structures that assure adequate protection for it or
decline to provide or participate in the proposed financing.
You hereby agree to pay all reasonable costs and expenses of BTCo and
its affiliates (including the reasonable fees and expenses of White & Case LLP
and other counsel to BTCo and BTCo's and its affiliates' out-of-pocket expenses)
arising in connection with the preparation, execution and delivery of this
letter and the definitive financing arrangements (and BTCo's and its affiliates'
due diligence and syndication efforts in connection herewith), whether or not
the Transaction is consummated, the Senior Secured Financing is made available
or definitive credit documents are executed. In addition, you hereby agree to
indemnify and hold harmless each of the Lenders (including in any event BTCo)
and each director, officer, employee, agent and affiliate thereof (each of the
foregoing entities an "indemnified person") in connection with any losses,
claims, damages, liabilities or other expenses to which such indemnified persons
may become subject, insofar as such losses, claims, damages, liabilities (or
actions or other proceedings commenced or threatened in respect thereof) or
other expenses arise out of or in any way relate to or result from the
Transaction or this letter or the extension of the Senior Secured Financing
contemplated by this letter, or in any way arise from any use or intended use of
this letter or the proceeds of the Senior Secured Financing contemplated by this
letter, and you agree to reimburse each indemnified person for any legal or
other expenses incurred in connection with investigating, defending or
participating in any such loss, claim, damage, liability or action or other
proceeding (whether or not such indemnified person is a party to any action or
proceeding out of which such expenses arise), provided that you shall have no
obligation to indemnify any indemnified person for any loss, claim, damage,
expense or liability to the extent that same resulted primarily from the gross
negligence or willful misconduct of such indemnified person (as determined by a
court of competent jurisdiction in a final and non-appealable decision). This
letter is furnished for your benefit only and may not be relied upon by any
other person or entity. Neither BTCo nor any of its affiliates shall be
responsible or liable to you or any other person or entity for any consequential
damages which may be alleged as a result of this letter or BTCo's failure to
provide the Senior Secured Financing. You also hereby agree to pay to BTCo the
fees set forth in the separate fee letter (the "Fee Letter") dated the date
hereof with respect to the Senior Secured Financing, with such fees to be
payable in accordance with the terms of the Fee Letter.
BTCo reserves the right to employ the services of its affiliates,
including DBSI, in providing the services contemplated by this letter and to
allocate, in whole or in part, to such affiliates certain fees payable to BTCo
in such manner as BTCo and its affiliates may agree in their sole discretion.
You acknowledge that BTCo may share with any of its affiliates, and such
affiliates may share with BTCo, any information relating to the Transaction or
HIG, the Company and their respective subsidiaries and affiliates, including any
information as to the creditworthiness of any such entities. BTCo agrees to
treat, and cause any such affiliate to treat, all non-public information
provided to it by you with respect to the Transaction and the Company and
identified as confidential, as confidential information in accordance with
customary banking industry practices.
-3-
<PAGE>
The provisions of the immediately preceding two paragraphs shall
survive any termination of this letter.
No amendment, waiver or modification of any provision of this letter,
the Term Sheet or the Fee Letter shall be effective unless the same shall be in
writing and signed by each of the parties hereto.
BTCo shall have the right to review and approve all public
announcements and filings relating to the Transaction which refer to it, any of
its affiliates or any other Lender before they are made (such approval not to be
unreasonably withheld).
Except as and to the extent required by law, you are not authorized to
show or circulate this letter to any other person or entity (other than (i) your
legal and financial advisors in connection with your evaluation hereof and (ii)
the Company and its legal and financial advisors in connection with their
evaluation of your proposal for the Transaction), provided that after you have
accepted this letter as provided in the immediately succeeding paragraph you may
disclose a copy of this letter and the Term Sheet (but not the Fee Letter) as,
and to the extent, required in any public filing made in connection with the
Transaction (but otherwise subject to the immediately preceding paragraph). If
this letter is not accepted by you as provided in the immediately succeeding
paragraph, you are to immediately return this letter (and any copies hereof) to
the undersigned. This letter may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which
counterparts shall be an original, but all of which shall together constitute
one and the same instrument.
If you are in agreement with the foregoing, please sign and return to
BTCo the enclosed copy of this letter, together with a copy of the Fee Letter.
This offer shall terminate at 5:30 P.M., New York time, on September 17, 1999
unless a signed copy of this letter, together with a signed copy of the Fee
Letter, have been delivered to BTCo (including by way of facsimile transmission)
by such time.
* * *
-4-
<PAGE>
THIS LETTER AND THE FEE LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, AND ANY RIGHT TO TRIAL BY
JURY WITH RESPECT TO ANY CLAIM, ACTION, SUIT OR PROCEEDING ARISING OUT OF OR
CONTEMPLATED BY THIS LETTER AND/OR THE FEE LETTER IS HEREBY WAIVED. YOU HEREBY
SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW YORK STATE
COURTS LOCATED IN THE CITY OF NEW YORK IN CONNECTION WITH ANY DISPUTE RELATED TO
THIS LETTER AND/OR THE FEE LETTER OR ANY MATTERS CONTEMPLATED HEREBY OR THEREBY.
Very truly yours,
BANKERS TRUST COMPANY
By /s/ Ryan Zanin
--------------------------------
Name: Ryan Zanin
Title: Managing Director
Agreed to and Accepted this
_____ day of __________, 1999:
H.I.G. CAPITAL LLC
By /s/ Sami Mnaymneh
--------------------------
Name: Sami Mnaymneh
Title: President
<PAGE>
Exhibit A
---------
SUMMARY OF CERTAIN TERMS AND CONDITIONS OF THE
----------------------------------------------
CREDIT FACILITIES1
------------------
I. Description of the Credit Facilities
------------------------------------
A. Term Loan Facility
------------------
Amount: $60,000,000 term loan facility (the "Term Loan
Facility").
Maturity: The final maturity date for the Term Loan Facility
shall be five years from the date of initial
borrowing under the Senior Secured Financing (the
"Closing Date"). The loans under the Term Loan
Facility (the "Term Loans") shall amortize in equal
quarterly installments in aggregate annual amounts as
follows:
Amortization
------------
Loan Year Amount
--------- ------
1 $0
2 $6,000,000
3 $9,000,000
4 $15,000,000
5 $30,000,000
-----------
Total $60,000,000
===========
Use of Proceeds: The Term Loans shall be utilized solely to (x)
finance the Acquisition and the Refinancing and (y)
pay the fees and expenses incurred in connection with
the Transaction.
Availability: Term Loans may only be incurred on the Closing Date.
No amount of the Term Loans once repaid may be
reborrowed.
- ----------
1 Unless otherwise defined herein, capitalized terms used herein and defined
in the Commitment Letter to which this Term Sheet is attached (the
"Commitment Letter") are used herein as therein defined.
<PAGE>
Exhibit A
Page 2
B. Revolving Credit Facility
-------------------------
Amount: $50,000,000 revolving credit facility (the "Revolving
Credit Facility") with a $30,000,000 sublimit for
standby and commercial letters of credit (the
"Letters of Credit") to support obligations of the
Borrower (as defined below) and its subsidiaries
satisfactory to the Agent (as defined below).
Maturity: The date occurring five years from the Closing Date,
with all loans made pursuant to the Revolving Credit
Facility (the "Revolving Loans" and, together with
the Term Loans, the "Loans") to be repaid as a bullet
on such date and all Letters of Credit to terminate
by such date.
Use of Proceeds: The Revolving Loans shall be utilized for the working
capital and general corporate purposes of the
Borrower and its subsidiaries, it being understood
(i) that approximately $10,500,000 of Revolving Loans
may be used for the same purposes as the Term Loans
and (ii) no part of the Revolving Credit Facility
shall be used to finance acquisitions.
Availability: Revolving Loans may be borrowed, repaid and
reborrowed on or after the Closing Date and prior to
the maturity of the Revolving Credit Facility. The
Borrower's utilization under the entire Revolving
Credit Facility for both Revolving Loans and Letters
of Credit will be subject to a borrowing base ( the
"Borrowing Base") equal to the sum of (I) 85% of
Eligible Receivables and (II) 50 % of Eligible
Inventory (in each case, to be defined in a manner
satisfactory to the Agent).
II. Terms Applicable to all of the Credit Facilities
------------------------------------------------
Borrower: The Company (the "Borrower").
Administrative
Agent: BTCo (the "Agent").
Lead Arranger and
Book Manager: DBSI.
Lenders: A syndicate of lenders agented by BTCo and arranged
by DBSI (the "Lenders").
Guaranties: All amounts and obligations under the Senior Secured
Financing shall be unconditionally guaranteed (the
"Guaranty") by each of the direct
<PAGE>
Exhibit A
Page 3
and indirect subsidiaries of the Borrower (the
"Guarantors"), subject to customary exceptions for
transactions of this type.
Security: All amounts owing by the Borrower and the Guarantors
under the Senior Secured Financing will be secured by
(i) a first priority perfected pledge of (x) all
notes owned by the Borrower and the Guarantors and
(y) all capital stock and other equity interests
owned by the Borrower and the Guarantors and (ii) a
first priority perfected security interest in all
other assets owned by the Borrower and the
Guarantors, including, without limitation,
receivables, securities, inventory, equipment, real
estate, leasehold interests, cash, contracts,
contract rights, licenses, patents, copyrights,
trademarks and other general intangibles, subject to
customary exceptions for transactions of this type.
Interest Rates: At the Borrower's option, Loans may be maintained
from time to time as (x) Base Rate Loans, which shall
bear interest at the Base Rate (as defined below) in
effect from time to time plus the Applicable Margin
(as defined below) or (y) Reserve Adjusted Eurodollar
Loans, which shall bear interest at the Eurodollar
Rate (as determined by the Agent, and adjusted for
maximum reserves) for the respective interest period
plus the Applicable Margin, provided that, (A) except
as provided in succeeding clause (B), no Reserve
-------- Adjusted Eurodollar Loans may be incurred
prior to the earlier of (i) the 90th day following
the Closing Date and (ii) that date upon which BTCo
determines in its sole discretion that the primary
syndication of the Senior Secured Financing has been
completed and (B) prior to the earlier date set forth
in clause (A) above, the Borrower may select an
interest period of one week so long as (i) all
outstanding Reserve Adjusted Eurodollar Loans are
subject to the same interest period and (ii) the
selection of such an interest period will not
interfere with the Agent's closing of the primary
syndication of the Senior Secured Financing as
determined by the Agent in its sole discretion.
"Base Rate" shall mean the higher of (x) the rate
that BTCo announces from time to time as its prime
lending rate and (y) 1/2 of 1% in excess of the
overnight federal funds rate.
"Applicable Margin" shall mean (i) in the case of
Base Rate Loans, 2.25% per annum, and (ii) in the
case of Reserve Adjusted Eurodollar Loans, 3.25% per
annum, subject to quarterly pricing stepdowns to be
agreed based upon leverage ratios to be agreed upon.
Interest periods of 1, 2, 3 and 6 months shall be
available in the case of Reserve Adjusted Eurodollar
Loans, provided that an interest period of
<PAGE>
Exhibit A
Page 4
one week shall be available as and to the extent
provided in the third proceeding paragraph.
The Credit Facilities shall include customary
protective provisions for such matters as defaulting
banks, capital adequacy, increased costs, funding
losses, illegality and withholding taxes.
Interest in respect of Base Rate Loans shall be
payable quarterly in arrears on the last business day
of each quarter. Interest in respect of Reserve
Adjusted Eurodollar Loans shall be payable in arrears
at the end of the applicable interest period and
every three months in the case of interest periods in
excess of three months. Interest will also be payable
at the time of repayment of Loans and at maturity.
All interest, commitment commission and other fee
calculations shall be based on a 360-day year and
actual days elapsed.
Overdue principal and, to the extent permitted by
law, overdue interest and all other overdue amounts
shall bear interest at a rate per annum equal to the
greater of (i) the rate which is 2% in excess of the
rate otherwise applicable to the Base Rate Loans from
time to time and (ii) the rate which is 2% in excess
of the rate then borne by such borrowings. Such
interest shall be payable on demand.
Commitment Fees: 1/2 of 1% per annum of the unutilized commitments
under the Senior Secured Financing, as in effect from
time to time, commencing on the Closing Date to and
including the termination of the Senior Secured
Financing, payable quarterly in arrears and upon the
termination of the Senior Secured Financing.
Letter of
Credit Fees: The Applicable Margin as in effect from time to time
for Revolving Loans maintained as Reserve Adjusted
Eurodollar Loans to be shared proportionately by the
Lenders in accordance with their participation in the
respective Letter of Credit, and a facing fee of 1/8
of 1% per annum (but not less than $500 per --- -----
annum per Letter of Credit) to be paid to the issuer
of the Letter of Credit for its own account, in each
case calculated on the aggregate stated amount of all
Letters of Credit for the stated duration thereof. In
addition, the issuer of a Letter of Credit will be
paid its customary administrative charges in
connection with each Letter of Credit issued by it.
Voluntary Prepayments
and Commitment
Reductions: Permitted in whole or in part with prior notice but
without premium or penalty, provided that Reserve
Adjusted Eurodollar Loans that are
<PAGE>
Exhibit A
Page 5
prepaid on any day other than the last day of an
interest period applicable thereto shall be
accompanied by customary breakage costs. Voluntary
prepayments of Term Loans shall be applied to reduce
the then remaining scheduled amortizations of the
Term Loans on a pro rata basis.
Mandatory Prepayments
and Commitment
Reductions: Mandatory repayments of Term Loans (and after all
Term Loans have been repaid, mandatory reductions to
the commitments under the Revolving Credit Facility
except with respect to clause (iv) below) shall be
required in an amount equal to (i) 100% of the net
cash proceeds from any issuance or incurrence of
funded debt by the Borrower or any of its
subsidiaries, subject to customary exceptions to be
agreed upon, (ii) 100% of the net cash proceeds from
equity issuances and capital contributions, subject
to customary exceptions to be agreed upon, (iii) 100%
of the net sale proceeds from asset sales by the
Borrower or any of its subsidiaries, subject to
customary exceptions to be agreed upon, (iv) 75% of
annual excess cash flow (to be defined to the
satisfaction of BTCo) and (v) 100% of insurance and
condemnation proceeds, with certain reinvestment
rights to be agreed upon. Mandatory repayments of the
Term Loans shall be applied to reduce the then
remaining scheduled amortizations of the Term Loans
on pro rata basis.
In addition, (x) Revolving Loans shall be required to
be prepaid (and Letters of Credit cash
collateralized) if at any time the aggregate
principal amount thereof exceeds either the total
Revolving Credit Facility commitments or the
Borrowing Base, in each case with such prepayment
(and/or cash collateralization) to be in an amount
equal to such excess and (y) unless the Required
Lenders otherwise agree, all Loans shall be required
to be repaid in full and all commitments in respect
of the Credit Facilities shall terminate upon the
occurrence of a "change of control" of the Borrower
(to be defined to the satisfaction of BTCo).
Assignments and
Participations: The Borrower may not assign its rights or obligations
under the Credit Facilities without the prior written
consent of the Lenders. Any Lender may assign, and
may sell participations in, its rights and
obligations under the Credit Facilities, subject (x)
in the case of participations, to customary
restrictions on the voting rights of the participants
and (y) in the case of assignments, to such
limitations as may be established by BTCo, including
the consent of the Agent and, so long as no default
or event of default exists under the Credit
Facilities, the consent of the
<PAGE>
Exhibit A
Page 6
Borrower (each of which consents shall not be
unreasonably withheld or delayed). The Credit
Facilities shall provide for a mechanism which will
allow each assignee to become a direct signatory to
the Credit Facilities and will relieve the assigning
Lender of its obligations with respect to the
assigned portion of its commitment.
Documentation: The Lenders' commitments will be subject to the
negotiation, execution and delivery of definitive
financing agreements (and related security
documentation, guaranties, etc.) consistent with the
terms of this letter, in each case prepared by White
& Case LLP, counsel to the Agent, and satisfactory to
the Agent and the Required Lenders (including without
limitation as to the terms, conditions,
representations, covenants and events of default
contained therein). All documentation shall be
governed by New York law (except security
documentation that the Agent determines should be
governed by local law).
Commitment
Termination: The commitment of BTCo under the Commitment Letter
shall terminate on December 15, 1999 (or earlier in
the event that HIG has terminated the agreement with
respect to the Acquisition) unless a definitive
credit agreement for the Senior Secured Financing has
been executed and delivered, the Transaction has been
consummated and the Closing Date has occurred on or
prior to such date.
Conditions
Precedent: In addition to conditions precedent typical for these
types of facilities and any other conditions
appropriate in the context of the proposed
transaction, the following conditions, without
limitation, shall apply:
A. Conditions to the Initial Loans
- -----------------------------------
(i) The structure and all terms of, and the
documentation for, the Transaction shall be
reasonably satisfactory in form and substance
to the Agent and the Required Lenders, and
such documentation shall be in full force and
effect. All conditions precedent to the
consummation of the Transaction as set forth
in the documentation relating thereto shall
have been satisfied (including the receipt of
waivers of the change of control provisions
in the Borrower's and its subsidiaries'
licensing agreements), and not waived except
with the consent of the Agent and the
Required Lenders, to the satisfaction of the
Agent and the Required Lenders. The
Transaction shall have been consummated in
accordance with the respective documentation
therefor and all applicable laws.
<PAGE>
Exhibit A
Page 7
(ii) The Borrower shall have received gross cash
proceeds from the Equity Financing of
$26,575,000 (of which up to $6,275,000 may be
in the form of the Equity Rollover). All
terms and conditions (and the documentation)
of, or relating to, the Equity Financing
shall be reasonably satisfactory to the Agent
and the Required Lenders.
(iii) The Borrower shall have received gross cash
proceeds of $10,000,000 from the issuance of
a like principal amount of the Subordinated
Notes. The Subordinated Notes shall be
unsecured. All terms and conditions (and the
documentation) of, or relating to, the
Subordinated Notes (including, without
limitation, amortization, maturities,
interest rates, covenants, defaults,
remedies, mandatory prepayments, offer to
purchase, sinking fund provisions,
limitations on cash interest payable,
subordination provisions and other terms)
shall be reasonably satisfactory to the Agent
and the Required Lenders.
(iv) The Borrower shall have used all cash
proceeds received by it from the financings
described in clauses (ii) and (iii) above to
make payments owing in connection with the
Transaction before utilizing any proceeds of
Loans pursuant to the Senior Secured
Financing for such purpose.
(v) The corporate, capital and ownership
structure of the Borrower and its
subsidiaries shall be satisfactory to the
Agent and the Required Lenders.
(vi) All necessary governmental (domestic and
foreign) and third party approvals and/or
consents in connection with the Transaction
and the other transactions contemplated by
the Senior Secured Financing and otherwise
referred to herein shall have been obtained
and remain in effect, and all applicable
waiting periods shall have expired without
any action being taken by any competent
authority which restrains, prevents or
imposes materially adverse conditions upon,
the consummation of the Transaction or the
other transactions contemplated by the Senior
Secured Financing or otherwise referred to
herein. Additionally, there shall not exist
any judgment, order, injunction or other
restraint prohibiting or imposing materially
adverse conditions upon the Transaction or
the transactions contemplated by the Senior
Secured Financing.
(vii) The Lenders shall have a perfected first
priority security interest in all assets of
the Borrower and the Guarantors as required
<PAGE>
Exhibit A
Page 8
above. The Guaranty shall have been executed
by the Guarantors as required above.
(viii) Nothing shall have occurred (and neither the
Agent nor any of the Lenders shall have
become aware of any facts or conditions not
previously known, whether as a result of
their due diligence investigations or
otherwise) which the Agent or the Required
Lenders shall determine has had, or could
reasonably be expected to have, a material
adverse effect on the rights or remedies of
the Lenders or the Agent, or on the ability
of the Borrower or any of its subsidiaries to
perform its respective obligations to the
Lenders or which has had, or could reasonably
be expected to have, a material adverse
effect on the Transaction or on the business,
operations, property, assets, liabilities,
condition (financial or otherwise) or
prospects of the Borrower or any of its
subsidiaries.
(ix) No litigation by any entity (private or
governmental) shall be pending or threatened
with respect to the Transaction or the Senior
Secured Financing or any documentation
executed in connection therewith which the
Agent or the Required Lenders in their sole
discretion determine to be material, or which
the Agent or the Required Lenders shall
determine could reasonably be expected to
have a material adverse effect on the
Transaction or on the business, operations,
property, assets, liabilities, condition
(financial or otherwise) or prospects of the
Borrower or any of its subsidiaries.
(x) The Lenders shall have received legal
opinions from counsel, and covering matters,
reasonably acceptable to the Agent and the
Required Lenders.
(xi) All Loans and other financing to the Borrower
shall be in full compliance with all
applicable requirements of the margin
regulations.
(xii) The Lenders shall have received a solvency
certificate from the chief financial officer
of the Borrower, in form and substance
reasonably acceptable to the Agent and the
Required Lenders, setting forth the
conclusions that, after giving effect to the
Transaction and the incurrence of all the
financings contemplated herein, each of the
Borrower on a stand-alone basis, and the
Borrower and its subsidiaries taken as a
whole, are not insolvent and will not be
rendered insolvent by the indebtedness
incurred in connection therewith, and will
not be
<PAGE>
Exhibit A
Page 9
left with unreasonably small capital with
which to engage in their businesses and will
not have incurred debts beyond their ability
to pay such debts as they mature.
(xiii) There shall have been no material adverse
change to the syndication market for credit
facilities similar in nature to the Senior
Secured Financing contemplated herein and
there shall not have occurred and be
continuing a disruption of or an adverse
change in financial, banking, capital or loan
syndication markets that would have a
material adverse effect on the syndication of
the Senior Secured Financing, in each case as
determined by the Agent in its sole
discretion. HIG and the Borrower shall have
fully cooperated in the Agent's syndication
efforts, including without limitation by
promptly providing the Agent with all
information deemed necessary by the Agent to
successfully complete the syndication.
(xiv) The Agent and the Required Lenders shall be
satisfied with the management of the Borrower
and its subsidiaries and with their
employment and other compensation
arrangements.
(xv) The Agent shall have received, and shall be
satisfied with, an opening pro forma balance
sheet of, and projections for, the Borrower
and its subsidiaries, in each case after
giving effect to the Transaction.
(xvi) All costs, fees, expenses (including, without
limitation, legal fees and expenses) and
other compensation contemplated hereby
payable to the Lenders or the Agent shall
have been paid to the extent due.
(xvii) After giving effect to the Transaction and
the financings incurred in connection
therewith, the Borrower and its subsidiaries
shall have no outstanding indebtedness or
preferred stock other than (x) the Senior
Secured Financing, (y) the Subordinated Notes
and (z) such other indebtedness, if any, as
is reasonably acceptable to the Agent and the
Required Lenders.
(xviii) Neither the consummation of the Transaction,
nor the entering into of the Credit
Facilities shall conflict with, or give rise
to a default under, any material agreements
of the Borrower or any of its subsidiaries.
In addition, the Borrower's and its
subsidiaries' factoring arrangements with CIT
shall have been amended on a basis
satisfactory to the Agent to provide, inter
alia, (i) that CIT shall only have a lien on
the receivables
<PAGE>
Exhibit A
Page 10
purchased by it and (ii) that the Lenders are
entitled to a first priority security
interest in all other assets of the Borrower
and its subsidiaries as provided herein.
B. Conditions To all Loans
- ---------------------------
Absence of default or event of default under the
Credit Facilities and continued accuracy of
representations and warranties in all material
respects.
Covenants: Those typical for these types of facilities and any
additional covenants appropriate in the context of
the proposed transaction. Although the covenants have
not yet been specifically determined, we anticipate
that the covenants shall in any event include:
(i) Restrictions on other indebtedness.
(ii) Restrictions against mergers, consolidations
and acquisitions, joint ventures,
partnerships and acquisitions and
dispositions of assets.
(iii) Restrictions on sale-leaseback transactions.
(iv) Restrictions on dividends and stock
purchases.
(v) Restrictions on voluntary prepayments of
other debt and amendments thereto.
(vi) Restrictions on transactions with affiliates
and formation of subsidiaries.
(vii) Restrictions on investments.
(viii) Absence of liens, with customary exceptions
to be negotiated.
(ix) Various financial covenants customary for a
transaction of this type (including, without
limitation, maximum total leverage, minimum
interest coverage, minimum fixed charge
coverage (including cash earn-out payments as
a fixed charge), minimum EBITDA and minimum
asset value ratio).
(x) Restrictions on capital expenditures.
(xi) Adequate insurance coverage.
(xii) ERISA covenants.
<PAGE>
Exhibit A
Page 11
(xiii) The obtaining of interest rate protection in
amounts and for periods to be determined.
(xiv) Restrictions on material amendments of
organizational documents.
(xv) Maintenance of properties.
(xvi) Restrictions on changes in business.
Representations
and Warranties: The Credit Facilities and related documentation shall
contain representations and warranties typical for
these types of facilities, as well as any additional
ones appropriate in the context of the proposed
transaction.
Events of Default: Those typical for these types of facilities and any
additional ones appropriate in the context of the
proposed transaction, including, without limitation,
a default in the event of a change of control or
ownership of the Borrower.
Required Lenders: Majority
<PAGE>
EXHIBIT A [Commitment Letter]
BANKERS TRUST CORPORATION
130 LIBERTY STREET
NEW YORK, NY 10006
September 16, 1999
H.I.G. Capital LLC
1001 Brickell Bay Drive
Suite 2708
Miami, Florida 33131
Attention: Sami Mnaymneh
Re: Happy Kids Recapitalization Financing
-------------------------------------
Gentlemen:
We understand that you intend to consummate a recapitalization (the
"Recapitalization") of Happy Kids, Inc. (the "Company"), to be accomplished by
merger of a newly formed company ("Acquisition Corp.") owned by you and/or your
affiliates and other investors reasonably satisfactory to the Lender (the
"Equity Investors") with and into the Company, with the Company as the surviving
entity. We further understand that the cash requirements for the
Recapitalization, the refinancing of approximately $14.2 million of existing
debt of the Company and its subsidiaries (the "Refinancing") and related fees
and expenses will be approximately $100.8 million and will be provided solely
from (i) term loan facilities (the "Term Loan Facilities") of up to $60 million,
(ii) a revolving credit facility (the "Revolving Credit Facility" and, together
with the Term Loan Facilities, the "Bank Financing") of up to $50 million of
which it is estimated approximately $10.5 million will be drawn as of the
closing date of the Recapitalization (the "Closing Date"), (iii) a common equity
contribution to the Company of at least $26.575 million, $20.3 million of which
will be contributed in cash by the Equity Investors and up to $6.275 million of
which may be in the form of rollover equity of existing shareholders of the
Company (the "Equity Financing") and (iv) up to $10 million from the issuance of
senior subordinated debt of the Company. The Recapitalization, the Bank
Financing, the Equity Financing, the Refinancing and the issuance of senior
subordinated debt are herein collectively referred to as the "Transaction".
<PAGE>
-2-
You have requested that Bankers Trust Corporation (the "Lender")
commit to provide to the Company funds in the amount of up to $10 million in the
form of a senior subordinated loan (or note issuance) to be made available as
described in Section 1 hereof (the "Senior Subordinated Financing").
Accordingly, subject to the terms and conditions set forth or
incorporated in this letter, the Lender agrees with you as follows:
Section 1. Senior Subordinated Financing. The Lender hereby commits,
subject to the terms and conditions hereof and in the Summary Term Sheet
attached hereto as Exhibit A (the "Term Sheet"), to provide to the Company a
senior subordinated loan (which at the option of the Lender may take the form of
senior subordinated notes) in the aggregate principal amount of up to $10
million. The proceeds of the Senior Subordinated Financing shall be used,
together with the proceeds of the Bank Financing and the Equity Financing,
solely to finance the Recapitalization, to consummate the Refinancing and to pay
fees and expenses incurred in connection with the Recapitalization. The
principal terms of the Senior Subordinated Financing are summarized in the Term
Sheet.
Unless the Lender's commitment hereunder shall have been terminated
pursuant to Section 6, the Lender or its affiliates shall have the exclusive
right to provide the Senior Subordinated Financing or other mezzanine financing
required in connection with the Transaction.
You hereby represent and covenant that based on your review and
analysis, to the best of your knowledge (a) all information other than
Projections (as defined below), which has been or is hereafter made available to
the Lender by you or your representatives, advisors or affiliates in connection
with the transactions contemplated hereby (the "Information") has been reviewed
and analyzed by you in connection with the performance of your own due diligence
and is, or in the case of Information made available after the date hereof will
be, complete and correct in all material respects and does not and will not
contain any untrue statement of a material fact or omit to state a material fact
known to you and necessary to make the statements contained therein, in the
light of the circumstances under which such statements were or are made, not
misleading and (b) all financial projections concerning the Company that have
been or are hereafter made available to the Lender by you or your
representatives, advisors or affiliates in connection with the transactions
contemplated hereby (the
<PAGE>
-3-
"Projections") have been or, in the case of Projections made available after the
date hereof, will be prepared in good faith based upon reasonable assumptions
(it being understood that the Projections are subject to significant
uncertainties and contingencies, many of which are beyond your control and that
no assurance can be given that such Projections will be realized). You agree to
supplement the Information and the Projections from time to time until the
termination of the Lender's commitment hereunder so that the representation and
warranty made in the preceding sentence is correct as of such date. In arranging
and syndicating the Senior Subordinated Financing, the Lender will be using and
relying on the Information and the Projections without independent verification
thereof. The representations and covenants contained in this paragraph shall
remain effective until a definitive financing agreement is executed and
thereafter the disclosure representations contained herein shall be terminated
and of no further force and effect.
Section 2. Financing Documentation. The making of the Senior
Subordinated Financing will be governed by definitive loan (or an indenture or
note agreement in the case of a note financing) and related agreements and
documentation (collectively, the "Financing Documentation") in form and
substance reasonably satisfactory to the Lender. The Financing Documentation
shall be prepared by Cahill Gordon & Reindel, special counsel to the Lender. The
Financing Documentation shall contain such covenants, terms and conditions as
are consistent with this letter and the Term Sheet and such other covenants,
terms, conditions, representations, warranties, events of default and remedies
provisions as shall be satisfactory to the Lender and you and which are typical
for mezzanine financings.
Section 3. Conditions. The obligation of the Lender under Section 1 of
this letter to provide the Senior Subordinated Financing is subject to
fulfillment of the following conditions:
(a) Acquisition Agreement. The Company and Acquisition Corp. shall
have entered into a merger agreement or other acquisition agreement (the
"Acquisition Agreement") on terms and in form and substance reasonably
satisfactory to the Lender. The Acquisition Agreement shall not have been
amended in any material respect without the Lender's consent, which consent
shall not be unreasonably withheld. All conditions precedent to the
Recapitalization contained in the Acquisition Agreement shall have been
performed or complied with substantially on the terms set forth therein and
not waived without the Lender's consent, which consent
<PAGE>
-4-
shall not be unreasonably withheld, and the Recapitalization shall have
been consummated simultaneously with the making of the Senior Subordinated
Financing.
(b) Financing Documentation. The Company and the Lender shall have
entered into the Financing Documentation relating to the Senior
Subordinated Financing and the transactions contemplated thereby, on terms
and in form and substance reasonably satisfactory to the Lender.
(c) Bank Financing. The Company shall have entered into definitive
documentation on terms and in form and substance reasonably satisfactory to
the Lender with respect to the Bank Financing (collectively with all
documents and instruments related thereto or delivered in connection
therewith, the "Bank Documents") with a commercial lender or lenders or a
syndicate of commercial lenders in form and substance reasonably
satisfactory to the Lender. The Bank Documents shall be in full force and
effect and the parties thereto shall be in compliance with all material
agreements thereunder.
(d) Equity Financing. On or prior to the Closing Date, the Company
shall have received cash proceeds of not less than $26.575 million from the
Equity Financing (up to $6.275 million of which may be in the form of
rollover equity). The terms of the Equity Financing shall be reasonably
satisfactory to the Lender.
(e) No Adverse Change or Development, Etc. (i) Nothing shall have
occurred since December 31, 1998 (and the Lender shall have become aware of
no facts or conditions not previously known to the Lender) which the Lender
shall, in its reasonable discretion, determine could have a material
adverse effect on the rights or remedies of the Lender, or on the ability
of the Company to perform its obligations to the Lender or which could have
a materially adverse effect on the business, property, assets, liabilities,
condition (financial or otherwise), results of operations or prospects of
the Company (a "Material Adverse Effect"); (ii) trading in securities
generally on the New York or American Stock Exchange shall not have been
suspended and minimum or maximum prices shall not have been established on
any such exchange; (iii) a banking moratorium shall not have been declared
by New York or United States authorities; and (iv) there shall not have
been (A) an outbreak or escalation of hostilities between the United States
and any foreign power,
<PAGE>
-5-
or (B) an outbreak or escalation of any other insurrection or armed
conflict involving the United States or any other national or international
calamity or emergency, or (C) any material change in the general financial
markets of the United States which, in each case, in the reasonable
judgment of the Lender would have a material adverse effect on the ability
to syndicate loans or sell or place securities, as the case may be, such as
the Senior Subordinated Financing.
(f) Capital Structure. The pro forma consolidated capital structure
of the Company, after giving effect to the Recapitalization, shall be
consistent with the capital structure contemplated herein, and other than
the Senior Subordinated Financing, the Bank Financing and other
indebtedness reasonably satisfactory to the Lender, the Company, after
giving effect to, and upon consummation of, the Recapitalization, shall
have no outstanding indebtedness for money borrowed.
(g) Opinions. As of the Closing Date, the Lender shall have received
legal and other opinions (including all reports and certificates as to
solvency received by the lenders under the Bank Financing) from persons,
and covering matters, reasonably acceptable to the Lender.
(h) Litigation. There shall exist no action, suit, investigation,
litigation or proceeding pending or threatened in any court or before any
arbitrator or governmental or regulatory agency or authority that could
reasonably be expected to have a Material Adverse Effect.
Section 4. Indemnification and Contribution. You, together with
certain of your affiliates, agree to indemnify the Lender and its affiliates and
each person in control of the Lender and its affiliates and the respective
officers, directors, employees, agents and representatives of the Lender and its
affiliates and control persons, as provided in the Indemnity Letter dated the
date hereof (the "Indemnity Letter") and attached hereto.
Section 5. Expenses. In addition to any fees that may be payable to
the Lender hereunder and regardless of whether any of the transactions
contemplated by this letter are consummated, if this letter agreement is
terminated, the Senior Subordinated Financing is made available or the Financing
Documentation is executed and delivered, you hereby agree to reimburse the
Lender upon demand for all reasonable fees and dis-
<PAGE>
-6-
bursements of legal counsel, including but not limited to the reasonable fees
and disbursements of Cahill Gordon & Reindel, the Lender's special counsel, and
all of the Lender's travel and other reasonable and documented out-of-pocket
expenses incurred in connection with the Transaction or otherwise arising out of
the Lender's commitment hereunder; provided that if Lender fails to fulfill its
obligations hereunder, no such fees or expenses shall be payable to the Lender.
Section 6. Termination. The Lender's commitment hereunder to provide
the Senior Subordinated Loan shall terminate, unless expressly agreed to by the
Lender in its sole discretion to be extended to another date, on the earlier of
(A) December 15, 1999 if the Senior Subordinated Financing has not been funded
(other than as a result of failure of the Lender to fulfill its obligations
hereunder), and (B) the termination of the Acquisition Agreement in accordance
with its terms. No such termination of such commitment shall affect your
obligations under Sections 4 and 5 hereof or this Section 6, which shall survive
any such termination.
Section 7. Assignment. This letter shall not be assignable by any
party hereto without the prior written consent of the other parties (other than,
in the case of the Lender, to an affiliate of the Lender, it being understood
that any such affiliate shall be subject to the restrictions set forth in this
Section 7); provided, however, that the Lender shall have the right, in its sole
discretion, to syndicate the Senior Subordinated Financing among banks or other
financial institutions pursuant to the Financing Documentation or otherwise and
to sell, transfer or assign all or any portion of, or interests or
participations in, the Senior Subordinated Financing and any notes issued in
connection therewith. You agree to use your reasonable best efforts, whether
prior to or after the funding date of the Senior Subordinated Financing, to
assist the Lender in syndicating the Senior Subordinated Financing or its
commitment with respect thereto, including, without limitation, in connection
with (x) the preparation of an information package regarding the Transaction,
including the Information and the Projections described in Section 1 hereof, and
(y) meetings and other communications with prospective Lenders, including making
senior management of the Company and other representatives of the Company
available (at mutually agreeable times) to participate in such meetings.
Section 8. Miscellaneous. THIS LETTER SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO THE PRINCIPLES GOVERNING
<PAGE>
-7-
CONFLICTS OF LAWS, AND ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM,
ACTION, SUIT OR PROCEEDING ARISING OUT OF OR CONTEMPLATED BY THIS COMMITMENT
LETTER IS HEREBY WAIVED. YOU HEREBY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF
THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN THE CITY OF NEW YORK IN
CONNECTION WITH ANY DISPUTE RELATED TO THIS COMMITMENT LETTER OR ANY MATTERS
CONTEMPLATED HEREBY. This letter (including the provisions of the Indemnity
Letter and the Fee Letter dated the date hereof specifically incorporated
herein) embodies the entire agreement and understanding between you and the
Lender and supersedes all prior agreements and understandings relating to the
subject matter hereof. This letter may be executed in any number of
counterparts, each of which shall be an original, but all of which shall
constitute one instrument.
The Lender reserves the right to employ the services of its affiliates
in providing services contemplated by this letter and to allocate, in whole or
in part, to its affiliates certain fees payable to the Lender in such manner as
the Lender and its affiliates may agree in their discretion. You acknowledge
that the Lender may share with any of its affiliates, and such affiliates may
share with the Lender (in each case, subject to any confidentiality agreements
applicable thereto), any information related to you or your affiliates and the
Company (including information relating to creditworthiness) or the Transaction.
<PAGE>
-8-
If you are in agreement with the foregoing, please sign and return to
the Lender to Bankers Trust Corporation at 130 Liberty Street, New York, New
York 10006 the enclosed copy of this letter no later than 5:00 p.m., New York
time, on September 17, 1999, whereupon the undertakings of the parties shall
become effective to the extent and in the manner provided hereby. This offer
shall terminate if not so accepted by you on or prior to that time.
Very truly yours,
BANKERS TRUST CORPORATION
By: /s/ W.W. Archer
------------------------------------
Name: W.W. Archer
Title: Managing Director
Accepted and Agreed to as of
the date first above written:
H.I.G. CAPITAL LLC
By: /s/ Sami Mnaymneh
------------------------------------
Name: Sami Mnaymneh
Title: President
<PAGE>
EXHIBIT A
Summary Term Sheet1
Borrower: Happy Kids, Inc. (the "Borrower").
Guarantors: All obligations of the Borrower under the
Senior Subordinated Financing shall be
unconditionally guaranteed on a senior
subordinated basis by each of the Borrower's
subsidiaries that guarantees the Bank Financing
(the "Guarantors").
Lender: Bankers Trust Corporation.
Amount: $10 million senior subordinated loan or
note issuance (the "Senior Subordinated
Financing").
Maturity: The commitment shall automatically expire
on December 15, 1999 if no portion of the
Senior Subordinated Financing has been
funded (other than as a result of failure
of the Lender to fulfill its obligations
hereunder). Any outstanding amount under
the Senior Subordinated Financing will be
required to be repaid in full on the
earlier of (a) a change of control of the
Borrower (to be defined) or (b) nine years
from the Closing Date.
Commitment and As provided in the Fee Letter from
Funding Fees: the Lenders to you dated the date hereof
(the "Fee Letter").
Investor Fee: As provided in the Fee Letter.
- ----------------------------
1 Capitalized terms used herein and not defined herein shall have the
meanings provided in the commitment letter to which this summary term sheet
is attached.
<PAGE>
-2-
Use of Proceeds: To fund in part the Transaction and to pay
related fees and expenses.
Interest Rate: As provided in the Fee Letter.
Ranking: The obligations of the Borrower and the
Guarantors under the Senior Subordinated
Financing will be senior subordinated
obligations of the Borrower and the
Guarantors and will rank (i) junior in
right of payment to all senior
indebtedness of the Borrower or such
Guarantor, as the case may be, (ii) pari
passu with all other senior subordinated
indebtedness of the Borrower or such
Guarantor, as the case may be, and (iii)
senior to any subordinated indebtedness of
the Borrower or such Guarantor, as the
case may be.
Optional Redemption: As provided in the Fee Letter.
Mandatory Redemption: None.
Participation/Assign- The Lender may participate out or
ment or Syndication: sell or assign, or syndicate to other
lenders or financial institutions, the Senior
Subordinated Financing, in whole or in part, at
any time, subject to compliance with applicable
securities laws.
Covenants: The Financing Documentation will contain
customary affirmative and negative
covenants for mezzanine financings (with
customary carve-outs and exceptions),
including without limitation, restrictions
on the ability of the Borrower and its
Subsidiaries to incur additional
indebtedness and to incur indebtedness
which is subordinated to senior
indebtedness and senior to the Senior
Subordinated Financing, pay dividends and
make certain other restricted payments and
investments,
<PAGE>
-3-
impose restrictions on the ability of the
Borrower's subsidiaries to pay dividends or
make certain other payments to the Borrower,
create liens, enter into transactions with
affiliates, consummate certain asset sales, and
merge, consolidate or transfer all or
substantially all of their assets, and also
including a minimum interest coverage ratio
maintenance test.
Representations and Customary for transactions of this
Warranties: type.
Conditions Precedent: Customary for transactions of this type as
set forth in Section 3 of the commitment
letter.
Events of Default: Customary for transactions of this type,
including, without limitation, payment
defaults, covenant defaults, bankruptcy
and insolvency, judgments,
cross-acceleration of and failure to pay
at final maturity other indebtedness
aggregating $5 million or more and
foreclosure under the Bank Financing,
subject to, in certain cases, notice and
grace provisions.
Equity Participation: As provided in the Fee Letter.
Visitation Rights: The Lender will be entitled to board
visitation rights as are mutually agreed
upon.
Governing Law and Forum: The State of New York.
Indemnification and Customary for transactions of this
Expense Reimbursement: type.
<PAGE>
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
October 4, 1999, by and between HK Merger Corp., a New York corporation ("HK")
and Happy Kids, Inc., a New York corporation (the "Company").
WHEREAS, HK and the Company are parties to that certain Agreement and Plan
of Merger (the "Merger Agreement"), dated as of September 17, 1999;
WHEREAS, HK and the Company desire to amend the Merger Agreement;
NOW, THEREFORE, Section 2.2 of the Merger Agreement is hereby deleted in
its entirety and restated as follows:
Options; Stock Plan. Immediately prior to the Effective Time, each
holder of a then-outstanding employee stock option to purchase Common
Shares (an "Option") granted under the Company's 1997 Stock Plan (the
"Stock Plan") will be entitled to receive in settlement of such Option a
cash payment (the "Option Consideration") from the Company equal to the
product of (i) the total number of Common Shares previously subject to such
Option, but only to the extent such Option is exercisable as of the Closing
Date (except for non-employee holders of an Option, in which case this
shall be the total number of Common Shares previously subject to such
Option whether or not such Option is fully exercisable as of the Closing
Date) and (ii) the excess of the Merger Consideration over the exercise
price per Common Share subject to such Option, subject to any required
withholding of taxes. The surrender of an Option to the Company in
exchange for the Option Consideration shall be deemed a release of any and
all rights the holder had of may have had in respect of such Option. After
the Effective Time, the Surviving Corporation will continue the Stock Plan.
The amounts payable pursuant to this Section 2.2 shall be paid as soon as
practicable following the Closing Date and shall be subject to and made net
of all applicable withholding taxes.
*****
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Amendment to
Agreement and Plan of Merger to be executed on its behalf by its respective
officer thereunto duly authorized, all as of the day and year first written
above.
HAPPY KIDS, INC.
By: /s/ Jack M. Benun
----------------------------
Name: Jack M. Benun
Title: President
HK MERGER CORP.
By: /s/ Sami Mnaymneh
----------------------------
Name: Sami Mnaymneh
Title: President
2
<PAGE>
ANNEX B
[LETTERHEAD OF CIBC WORLD MARKETS CORP.]
September 15, 1999
Special Committee of the Board of Directors
Happy Kids Inc.
100 West 33rd Street, Suite 1100
New York, New York 10001
Members of the Special Committee:
You have asked CIBC World Markets Corp. ("CIBC World Markets") to render a
written opinion ("Opinion") to the Special Committee of the Board of Directors
as to the fairness, from a financial point of view, to the holders of the
common stock of Happy Kids Inc. ("Happy Kids"), other than affiliate Holders
(defined below), of the Cash Consideration (defined below) to be received by
such holders pursuant to an Agreement and Plan of Merger (the "Merger
Agreement") to be entered into by and between HK Merger Corp. ("Merger Sub"), an
affiliate of H.I.G. Capital, LLC, and Happy Kids. The Merger Agreement provides
for, among other things, the merger of Merger Sub with and into Happy Kids (the
"Merger") pursuant to which each outstanding share of the common stock, par
value $0.01 per share, of Happy Kids ("Happy Kids Common Stock"), other than
shares held by certain designated holders of Happy Kids Common Stock who are
affiliates of Happy Kids (the "Affiliate Holders"), will be converted into the
right to receive $12.00 per share in cash (the "Cash Consideration"). The Merger
Agreement further provides that the outstanding shares of Happy Kids Common
Stock held by Affiliate Holders will be converted into the right to receive
$7.164 per share in cash and shares of the common stock, par value $0.01 per
share, of the surviving corporation in the Merger, as more fully specified in
the Merger Agreement.
In arriving at our Opinion, we:
(a) reviewed the terms of a draft dated September 14, 1999 of the Merger
Agreement;
(b) reviewed audited financial statements for Happy Kids for the fiscal years
ended December 31, 1997 and December 31, 1998;
(c) reviewed unaudited financial statements for Happy Kids for the six-month
period ended June 30, 1999;
(d) reviewed financial projections for Happy Kids prepared by the management of
Happy Kids;
(e) held discussions with the senior management of Happy Kids with respect to
the business and prospects for future growth of Happy Kids;
(f) reviewed and analyzed certain publicly available financial data for certain
companies we deemed comparable to Happy Kids;
(g) performed a discounted cash flow analysis of Happy Kids using certain
assumptions of future performance provided to us by the management of Happy
Kids;
<PAGE>
Special Committee of the Board of Directors
Happy Kids Inc.
September 15, 1999
Page 2
CIBC World Markets Corp.
(h) reviewed and analyzed certain publicly available information for
transactions that we deemed comparable to the Merger,
(i) reviewed public information concerning Happy Kids;
(j) at the direction of the Special Committee, approached and held discussions
with third parties to solicit indications of interest in the acquisition of
all or a part of Happy Kids, and
(k) performed such other analyses and reviewed such other information as we
deemed appropriate.
In rendering our Opinion, we relied upon and assumed, without independent
verification or investigation, the accuracy and completeness of all of the
financial and other information provided to or discussed with us by Happy Kids
and its employees, representatives and affiliates. With respect to forecasts of
the future financial condition and operating results of Happy Kids provided to
or discussed with us, we assumed, at the direction of the management of Happy
Kids, without independent verification or investigation, that such forecasts
were reasonably prepared on bases reflecting the best available information,
estimates and judgments of the management of Happy Kids. We have been advised,
and therefore have also assumed, that it is intended that the Merger will be
recorded as a recapitalization for financial reporting purposes. At the
direction of the management of Happy Kids, we further have assumed that the
final terms of the Merger Agreement will not vary materially from those set
forth in the draft reviewed by us. We have neither made nor obtained any
independent evaluations or appraisals of the assets or liabilities of Happy
Kids or such other affiliated entities. We are not expressing any opinion as to
the underlying valuation, future performance or long-term viability of Happy
Kids, or the price at which the Happy Kids Common Stock will trade or otherwise
be transferable subsequent to announcement of the proposed Merger. We were not
requested to evaluate, and our Opinion does not address, the consideration to be
received in the Merger by Affiliate Holders and, at your direction, have
evaluated the Cash Consideration as though all shares of Happy Kids Common Stock
were transferred in the Merger for the Cash Consideration. Our Opinion is
necessarily based on the information available to us and general economic,
financial and stock market conditions and circumstances as they exist and can be
evaluated by us on the date hereof. It should be understood that, although
subsequent developments may affect this Opinion, we do not have any obligation
to update, revise or reaffirm the Opinion.
As part of our investment banking business, we are regularly engaged in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities, private
placements and valuations for other purposes.
We have acted as financial advisor to the Special Committee of the Board of
Directors of Happy Kids in connection with the Merger and in rendering this
Opinion and will receive a fee for our services, a significant portion of which
is payable upon the delivery of this Opinion. In the ordinary course of
business, CIBC World Markets and its affiliates may actively trade securities of
Happy Kids and its affiliates for their own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
2
<PAGE>
Special Committee of the Board of Directors
Happy Kids Inc.
September 15, 1999
Page 3
CIBC World Markets Corp.
Based upon and subject to the foregoing, and such other factors as we deemed
relevant, it is our opinion that, as of the date hereof, the Cash Consideration
to be received in the Merger by the holders of Happy Kids Common Stock (other
than Affiliate Holders) is fair to such holders from a financial point of view.
This Opinion is for the use of the Special Committee of the Board of Directors
of Happy Kids in its evaluation of the Merger, and does not constitute a
recommendation as to how any stockholder should vote with respect to any matters
relating to the Merger.
Very truly yours,
/s/ CIBC WORLD MARKETS CORP.
CIBC WORLD MARKETS CORP.
<PAGE>
ANNEX C
The following table sets forth the names, addresses and principal
occupations of the directors and executive officers of Merger Sub. Each such
person is a citizen of the United States.
DIRECTORS
NAME AND TITLE ADDRESS PRINCIPAL OCCUPATION
Sami Mnaymneh 1001 Brickell Bay Drive Investment Management
President 27/th/ Floor
Miami, FL 33131
Anthony Tamer 1001 Brickell Bay Drive Investment Management
Secretary 27/th/ Floor
Miami, FL 33131
John Black 1001 Brickell Bay Drive Investment Management
Assistant Secretary 27/th/ Floor
Miami, FL 33131
Rick Rosen 1001 Brickell Bay Drive Investment Management
Treasurer 27/th/ Floor
Miami, FL 33131
OFFICERS
NAME AND TITLE ADDRESS PRINCIPAL OCCUPATION
Sami Mnaymneh 1001 Brickell Bay Drive Investment Management
President 27/th/ Floor
Miami, FL 33131
Anthony Tamer 1001 Brickell Bay Drive Investment Management
Secretary 27/th/ Floor
Miami, FL 33131
John Black 1001 Brickell Bay Drive Investment Management
Assistant Secretary 27/th/ Floor
Miami, FL 33131
Rick Rosen 1001 Brickell Bay Drive Investment Management
Treasurer 27/th/ Floor
Miami, FL 33131
<PAGE>
DIRECTORS
NAME AND TITLE ADDRESS PRINCIPAL OCCUPATION
Sami Mnaymneh 1001 Brickell Bay Drive Investment Management
President 27/th/ Floor
Miami, FL 33131
Anthony Tamer 1001 Brickell Bay Drive Investment Management
Secretary 27/th/ Floor
Miami, FL 33131
OFFICERS
NAME AND TITLE ADDRESS PRINCIPAL OCCUPATION
Sami Mnaymneh 1001 Brickell Bay Drive Investment Management
President 27/th/ Floor
Miami, FL 33131
Anthony Tamer 1001 Brickell Bay Drive Investment Management
Secretary 27/th/ Floor
Miami, FL 33131
<PAGE>
Happy Kids Inc.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE COMPANY FOR THE SPECIAL MEETING OF SHAREHOLDERS DECEMBER 13, 1999
The undersigned hereby constitutes and appoints Jack M. Benun and Stuart Bender,
and each of them, his or her true and lawful agent and proxy with full power of
substitution in each, to represent and to vote on behalf of the undersigned all
of the shares of Common Stock of Happy Kids Inc., (the "Company") which the
undersigned is entitled to vote at the Special Meeting of Shareholders of the
Company to be held at the Holiday Inn, located at 49 West 32nd Street, New
York, New York 10001, at 10:00 A.M., local time, on December 13, 1999, and at
any adjournment or adjournments thereof, upon the following proposals more fully
described in the Notice of Special Meeting of Shareholders and Proxy Statement
for the Meeting (receipt of which is hereby acknowledged).
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1 AND 2.
- ---
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE>
A
[X] Please mark your
votes as in this example. DO NOT PRINT IN
THIS AREA
- --------------------------------------------------------------------------------
1. Approval of proposal to approve FOR AGAINST ABSTAIN
and adopt the agreement and plan [ ] [ ] [ ]
of merger by and between HK
Merger Corp. and Happy Kids Inc.
2. In his discretion, the proxy is
authorized to vote upon other
matters as may properly come
before the Meeting. I will I will not
DO NOT PRINT IN [ ] [ ]
THIS AREA Attend the Meeting
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY
CARD PROMPTLY, USING THE ENCLOSED ENVELOPE
________________________ Date:_____, 1999 _________________ Date:_________, 1999
SIGNATURE OF SHAREHOLDER SIGNATURE IF HELD
JOINTLY
NOTE: This proxy must be signed exactly as the name appears hereon. When shares
are held by joint tenants, both should sign. If the signer is a corporation
please sign full corporate name by duly authorized officer, giving full title as
such. If the signer is a partnership, please sign in partnership name by
authorized person.
