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
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the
Commission Only
(as permitted by Rule 14a-6(e)(2))
|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):
|X| No fee required.
|_| 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:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(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):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
|_| 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>
HAPPY KIDS INC.
100 WEST 33RD STREET, SUITE 1100
NEW YORK, NEW YORK 10001
April 26, 1999
To Our Shareholders:
You are cordially invited to attend the 1999 Annual Meeting of
Shareholders of Happy Kids Inc. at 2:00 P.M., local time, on May 25, 1999 at The
Grand Hyatt, Park Avenue at Grand Central, New York, New York 10017.
The Notice of Meeting and Proxy Statement on the following pages describe
the matters to be presented at the meeting.
It is important that your shares be represented at this meeting to assure
the presence of a quorum. Whether or not you plan to attend the meeting, we hope
that you will have your stock represented by signing, dating and returning your
proxy in the enclosed envelope, as soon as possible. Your stock will be voted in
accordance with the instructions you have given in your proxy.
Thank you for your continued support.
Sincerely,
Jack M. Benun
President and Chief Executive Officer
<PAGE>
HAPPY KIDS INC.
100 WEST 33RD STREET, SUITE 1100
NEW YORK, NEW YORK 10001
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 25, 1999
The Annual Meeting of Shareholders (the "Meeting") of HAPPY KIDS INC., a
New York corporation (the "Company"), will be held at The Grand Hyatt, Park
Avenue at Grand Central, New York, New York 10017 on May 25, 1999, at 2:00 P.M.,
local time, for the following purposes:
(1) To elect six directors to serve until the next Annual Meeting of
Shareholders and until their respective successors shall have been duly
elected and qualified;
(2) To ratify the appointment of Grant Thornton LLP as independent auditors for
the year ending December 31, 1999; and
(3) To transact such other business as may properly come before the Meeting or
any adjournment or adjournments thereof.
Holders of Common Stock of record at the close of business on April 15,
1999 are entitled to notice of and to vote at the Meeting, or any adjournment or
adjournments thereof. A complete list of such shareholders will be open to the
examination of any shareholder at the Meeting. The Meeting may be adjourned from
time to time without notice other than by announcement at the Meeting.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER
OF SHARES YOU MAY HOLD. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON,
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN
THE ENCLOSED RETURN ENVELOPE. THE PROMPT RETURN OF PROXIES WILL ENSURE A QUORUM
AND SAVE THE COMPANY THE EXPENSE OF FURTHER SOLICITATION. EACH PROXY GRANTED MAY
BE REVOKED BY THE SHAREHOLDER APPOINTING SUCH PROXY AT ANY TIME BEFORE IT IS
VOTED. IF YOU RECEIVE MORE THAN ONE PROXY CARD BECAUSE YOUR SHARES ARE
REGISTERED IN DIFFERENT NAMES OR ADDRESSES, EACH SUCH PROXY CARD SHOULD BE
SIGNED AND RETURNED TO ASSURE THAT ALL OF YOUR SHARES WILL BE VOTED.
By Order of the Board of Directors
Mark J. Benun
Secretary
New York, New York
April 26, 1999
THE COMPANY'S 1998 ANNUAL REPORT ACCOMPANIES THE PROXY STATEMENT.
<PAGE>
HAPPY KIDS INC.
100 WEST 33RD STREET, SUITE 1100
NEW YORK, NEW YORK 10001
----------------------------------------------------
PROXY STATEMENT
----------------------------------------------------
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Happy Kids Inc. (the "Company") of proxies to be voted
at the Annual Meeting of Shareholders of the Company to be held on May 25, 1999
(the "Meeting") at The Grand Hyatt, Park Avenue at Grand Central, New York, New
York 10017 at 2:00 P.M., local time, and at any adjournment or adjournments
thereof. Holders of record of Common Stock, $0.01 par value ("Common Stock"), as
of the close of business on April 15, 1999, will be entitled to notice of and to
vote at the Meeting and any adjournment or adjournments thereof. As of that
date, there were 10,375,693 shares of Common Stock issued and outstanding and
entitled to vote. Each share of Common Stock is entitled to one vote on any
matter presented at the Meeting. The number of votes entitled to be cast at the
Meeting is 10,375,693.
If proxies in the accompanying form are properly executed and returned, the
Common Stock represented thereby will be voted in the manner specified therein.
If not otherwise specified, the Common Stock represented by the proxies will be
voted (i) FOR the election of the six nominees named below as directors, (ii)
FOR the ratification of the appointment of Grant Thornton LLP as independent
auditors for the year ending December 31, 1999 and (iii) in the discretion of
the persons named in the enclosed form of proxy, on any other proposals which
may properly come before the Meeting or any adjournment or adjournments thereof.
Any shareholder who has submitted a proxy may revoke it at any time before it is
voted, by written notice addressed to and received by the Secretary of the
Company, by submitting a duly executed proxy bearing a later date or by electing
to vote in person at the Meeting. The mere presence at the Meeting of the person
appointing a proxy does not, however, revoke the appointment.
The presence, in person or by proxy, of holders of Common Stock having a
majority of the votes entitled to be cast at the Meeting shall constitute a
quorum. The affirmative vote by the holders of a plurality of the shares of
Common Stock represented at the Meeting is required for the election of
directors, provided a quorum is present in person or by proxy. All actions
proposed herein other than the election of directors may be taken upon the
affirmative vote of shareholders possessing a majority of the voting power
represented at the Meeting, provided a quorum is present in person or by proxy.
Abstentions and Broker non-votes (when shares are represented at the
Meeting by a proxy specifically conferring only limited authority to vote on
certain matters and no authority to vote on other matters) are included in the
determination of the number of shares represented at the Meeting for purposes of
determining whether a quorum is present but are not counted for purposes of
determining whether a proposal has been approved and thus have no effect on the
outcome.
This Proxy Statement, together with the related proxy card, is being mailed
to the shareholders of the Company on or about April 26, 1999. The Annual Report
to Shareholders of the Company for the year ended December 31, 1998, including
financial statements (the "Annual Report"), is being mailed together with this
Proxy Statement to all shareholders of record as of April 15, 1999. In addition,
the Company has provided brokers, dealers, banks, voting trustees and their
nominees, at the Company's expense, with additional copies of the Annual Report
so that such record holders could supply such materials to beneficial owners as
of April 15, 1999.
<PAGE>
ELECTION OF DIRECTORS
At the Meeting, six directors are to be elected (which number shall
constitute the entire Board of Directors of the Company) to hold office until
the next Annual Meeting of Shareholders and until their successors shall have
been elected and qualified.
It is the intention of the persons named in the enclosed form of proxy to
vote the stock represented thereby, unless otherwise specified in the proxy, for
the election as directors of the persons whose names and biographies appear
below. All of the persons whose names and biographies appear below are at
present directors of the Company. In the event any of the nominees should become
unavailable or unable to serve as a director, it is intended that votes will be
cast for a substitute nominee designated by the Board of Directors. The Board of
Directors has no reason to believe that the nominees named will be unable to
serve if elected. Each of the nominees has consented to being named in this
Proxy Statement and to serve if elected.
The current Board of Directors and nominees for election to the Board are
as follows:
SERVED AS A POSITIONS WITH
NAME AGE DIRECTOR SINCE THE COMPANY
- ---- --- -------------- --------------
Jack M. Benun............. 57 1988 Chairman of the Board,
President and Chief
Executive Officer
Mark J. Benun............. 32 1988 Executive Vice President,
Secretary and Director
Isaac Levy................ 35 1988 Senior Vice President and
Director
Andrew Glasgow............ 46 1999 Vice President, President
of the Glasgow Division
and Director
Marvin Azrak.............. 57 1998 Director
Stephen I. Kahn........... 33 1998 Director
The principal occupations and business experience, for at least the past
five years, of each nominee are as follows:
Jack M. Benun. Mr. Benun founded the predecessor to the Company in 1979 and
is the Company's Chairman of the Board, President and Chief Executive Officer.
Mr. Benun has over 30 years experience in the apparel industry. Prior to
founding the Company, Mr. Benun managed a family domestic apparel manufacturing
business.
Mark J. Benun. Mr. Benun joined the predecessor to the Company in 1984 and
currently oversees all sales for the Company. He currently serves as Executive
Vice President, Secretary and as a Director.
Isaac Levy. 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. He currently serves as the Company's Senior Vice President and as
a Director.
Andrew Glasgow. Mr. Glasgow was elected as a Director of the Company in
April 1999. In addition, he currently serves as Vice President of the Company
and President of the Company's Glasgow Division. 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.
See "Certain Relationships and Related Transactions."
Marvin Azrak. Mr. Azrak was elected as a Director of the Company in March
1998. Mr. Azrak founded Azrak-Hamway International, Inc., a toy company, in
1964, which acquired the Remco Toy name in 1974. Mr. Azrak sold Azrak-Hamway
International, Inc. in late 1997. He established the first Harley Davidson Cafe
in New York in 1993, and, in 1997, he opened a second Harley Davidson Cafe in
Las Vegas. He is also the founder of A.M.E., a children's underwear and
accessory company.
-2-
<PAGE>
Stephen I. Kahn. Mr. Kahn was elected as a Director of the Company in March
1998. Mr. Kahn is the co-founder and the President, Chief Executive Officer and
Chairman of the Board of dELiA*s Inc., a direct marketer of casual apparel and
related accessories to Generation Y consumers. He is also President, Chief
Executive Officer and Chairman of the Board of iTurf Inc., a leading provider of
Internet community and commerce services focused primarily on Generation Y
consumers. iTurf Inc. is a subsidiary of dELiA*s Inc. Prior to founding dELiA*s
Inc., from 1989 to 1993, Mr. Kahn worked at the Paine Webber Group, Inc. in the
merchant banking group where his focus included retail and apparel companies.
Mr. Kahn holds a B.A. from Yale College, an M.A. from Oxford University and an
M.B.A. from Columbia Business School.
Other than Jack Benun and Mark Benun, who are father and son, there are no
family relationships among any of the Directors, executive officers and key
employees of the Company.
All directors hold office until the next annual meeting of shareholders and
until their successors shall have been duly elected and qualified.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR EACH OF THE
NOMINEES FOR THE BOARD OF DIRECTORS.
COMMITTEES AND MEETINGS OF THE BOARD
The Board of Directors has a Compensation Committee (the "Compensation
Committee"), which approves salaries and certain incentive compensation for
management and key employees of the Company; an Audit Committee, which reviews
the results and scope of the audit and other services provided by the Company's
independent accountants; and an Option Committee, which administers the
Company's 1997 Stock Option Plan. The Compensation and Audit Committees
currently consist of Jack M. Benun, Marvin Azrak and Stephen I. Kahn. The
Compensation Committee was established in December 1997 and held one meeting in
1998. The Audit Committee was established in December 1997 and held one meeting
in 1998. The Option Committee currently consists of Marvin Azrak and Stephen I.
Kahn. The Option Committee was established in December 1997 and held one meeting
in 1998. There was one meeting of the Board of Directors during 1998. Each
incumbent director attended all such meetings of the Board of Directors and each
such committee on which he served during the period, if applicable. Prior to the
consummation of the Company's initial public offering of Common Stock on April
2, 1998 (the "IPO"), the Board of Directors often acted by written consent.
COMPENSATION OF DIRECTORS
Each of the Company's outside (non-employee) Directors receives
compensation of $1,500 per meeting for each regularly-scheduled meeting in which
he participates. In addition, each of the outside members of the Board who serve
on the Audit, Option and/or Compensation Committee of the Board receives a $750
fee per meeting for each regularly-scheduled Committee meeting in which such
Committee member participates, as long as such Committee meeting or meetings is
or are held on a day or days other than the day of a regularly-scheduled Board
meeting. The Company also provides reimbursement to Directors for reasonable and
necessary expenses incurred in connection with attendance at meetings of the
Board of Directors or its Committees. Directors are eligible to receive stock
option grants pursuant to the Company's 1997 Stock Option Plan (the "Plan"). In
connection with the election of Messrs. Azrak and Kahn to the Company's Board of
Directors, each such Director was granted ten-year options to purchase 40,000
shares of Common Stock, exercisable at $10.00 per share, and vesting at a rate
of twenty percent (20%) each year, commencing on the first anniversary of the
date of grant.
-3-
<PAGE>
EXECUTIVE OFFICERS
The following table identifies the current executive officers of the
Company:
CAPACITIES IN IN CURRENT
NAME AGE WHICH SERVED POSITION SINCE
- ---- --- ------------- --------------
Jack M. Benun.............. 57 President, Chief Executive 1988
Officer and Director
Mark J. Benun.............. 32 Executive Vice President, 1997
Secretary and Director
Isaac Levy................. 35 Senior Vice President and 1997
Director
Stuart Bender (1).......... 44 Chief Financial Officer 1988
and Treasurer
Andrew Glasgow............. 46 Vice President and 1999
President of the Glasgow
Division
- ------------
(1) Stuart Bender, CPA. Mr. 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, officers and shareholders who
beneficially own more than 10% of any class of equity securities of the Company
registered pursuant to Section 12 of the Exchange Act to file initial reports of
ownership and reports of changes in ownership with respect to the Company's
equity securities with the Securities and Exchange Commission (the "SEC"). All
reporting persons are required by SEC regulation to furnish the Company with
copies of all reports that such reporting persons file with the SEC pursuant to
Section 16(a).
Based solely on the Company's review of the copies of such forms received
by the Company and upon written representations of the Company's reporting
persons received by the Company, all reporting persons timely filed all such
reports with the SEC pursuant to Section 16(a).
-4-
<PAGE>
EXECUTIVE COMPENSATION
Summary of Compensation in Fiscal 1998 and 1997
The following Summary Compensation Table sets forth information concerning
compensation for services in all capacities awarded to, earned by or paid to
each person who served as the Company's Chief Executive Officer at any time
during 1998 and each other executive officer of the Company whose aggregate cash
compensation exceeded $100,000 at the end of 1998 (collectively, the "Named
Executives") during the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
AWARDS
--------------------------------------- ------------
OTHER
ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPEN- UNDERLYING COMPENSA-
NAME AND PRINCIPAL POSITION YEAR SATION OPTIONS TION
($) ($) ($) (#) ($)
(a) (b) (c) (d) (e)(1) (g) (i)(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jack M. Benun................ 1998 431,432 -- -- -- 2,500
President, Chief Executive 1997 551,064 -- 52,000 -- 2,373
Officer and Director
Mark J. Benun................ 1998 300,708 -- -- -- 2,496
Executive Vice President, 1997 590,416 -- -- -- 2,292
Secretary and Director
Isaac Levy................... 1998 297,131 -- -- -- 2,500
Senior Vice President and 1997 400,242 -- -- -- 2,266
Director
Stuart Bender................ 1998 220,506 75,000 -- 100,000 2,339
Chief Financial Officer 1997 209,803 75,000 -- -- 2,114
and Treasurer
- -----------------------------------------------------------------------------------------------
</TABLE>
- --------------
(1) The costs of certain benefits are not included because, in the aggregate,
they did not exceed, in the case of each Named Executive, the lesser of
$50,000 or 10% of the total annual salary and bonus reported in columns
(c) and (d) of the above table. In the case of Jack M. Benun, for 1997,
$36,842 of such amount represents payment for automobile allowances.
(2) Represents 401(k) contributions made by the Company on behalf of the
Named Executive.
-5-
<PAGE>
Option Grants in 1998
The following table sets forth information concerning individual grants of
stock options made pursuant to the Plan during 1998 to each of the Named
Executives. The Company has never granted any stock appreciation rights.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
- ---------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
- ---------------------------------------------------------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK
UNDERLYING EMPLOYEES EXERCISE PRICE APPRECIATION FOR
OPTIONS IN FISCAL OR BASE OPTION
GRANTED YEAR PRICE EXPIRATION TERM (3)
-------------------------
NAME (#)(1) (%)(2) ($/SH) DATE 5%($) 10%($)
(a) (b) (c) (d) (e) (f) (g)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jack M. Benun...... -- -- -- -- -- --
Mark J. Benun...... -- -- -- -- -- --
Isaac Levy......... -- -- -- -- -- --
Stuart Bender...... 100,000 100 10.00 2/24/08 628,895 1,593,742
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- ------------
(1) Such options were granted pursuant to the Plan. A total of 800,000 shares
are reserved for issuance upon the exercise of options and/or stock
purchase rights granted under the Plan, 180,000 of which had been granted
as of December 31, 1998.
See " - 1997 Stock Option Plan."
(2) Based on an aggregate of 100,000 options granted to employees in 1998,
including options granted to Named Executives.
(3) Based on a grant date fair market value of $10.00 for the grant to Mr.
Bender.
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 the exercise of options and/or stock
purchase rights to be granted under the Plan. Of such amount, options to
purchase 180,000 shares of the Company's Common Stock were granted in 1998 and
options to purchase 125,000 shares of the Company's Common Stock have been
granted in 1999, through March 31. No other options or rights have been granted
under the Plan. Those eligible to receive stock option grants or stock purchase
rights under the Plan include employees, non-employee Directors and consultants.
The Plan is administered by the Option Committee of the Board of Directors of
the Company, which is comprised solely of outside directors.
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 non-qualified 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 of the Common Stock 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 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 of the Common
Stock 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.
-6-
<PAGE>
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; provided, however, 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. Options are not assignable or
otherwise transferable except by will or the laws of descent and distribution.
In the event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets in
which the successor corporation does not assume outstanding options or issue
equivalent options, the Board of Directors of the Company is required to provide
accelerated vesting of outstanding options. The Plan terminates on December 31,
2007.
In February 1998, the Company granted options to purchase 100,000 shares of
Common Stock to Mr. Bender. Such options are, or will be, exercisable at $10.00
per share, have an expiration date of February 24, 2008, and vest at a rate of
thirty-three and one-third percent (33 1/3 %) per year from the date of grant.
In addition, on April 2, 1998, the Company granted options to purchase 40,000
shares of Common Stock to each of Messrs. Azrak and Kahn, which are, or will be,
exercisable at $10.00 per share, have an expiration date of April 1, 2008, and
vest at a rate of twenty percent (20%) per year from the date of grant.
Aggregated Option Exercises in 1998
and Year End Option Values
The following table sets forth information concerning each exercise of
options during 1998 by each of the Named Executives and the year end value of
unexercised in-the-money options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
- --------------------------------------------------------------------------------
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL FISCAL
SHARES YEAR-END YEAR-END
ACQUIRED ON VALUE (#) ($) (1)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
(a) (b) (c) (d) (e)
- --------------------------------------------------------------------------------
Jack M. Benun........ -- -- -- / -- -- / --
Mark J. Benun........ -- -- -- / -- -- / --
Stuart Bender........ -- -- -- /100,000 -- /275,000
Isaac Levy........... -- -- -- / -- -- / --
- --------------
(1) Based on a year-end fair market value of the underlying securities equal
to $12.75 less the exercise price for such shares.
-7-
<PAGE>
EMPLOYMENT AGREEMENTS, INDEMNIFICATION AGREEMENTS AND CHANGE-IN-CONTROL
SEVERANCE PAY ARRANGEMENTS
Each of Messrs. Jack M. Benun, Mark J. Benun, Isaac Levy and Stuart Bender
entered into a two-year employment agreement with the Company commencing January
1, 1998. Under the current terms of the respective agreements, each of Messrs.
Jack Benun, Mark Benun, Isaac Levy and Stuart Bender are entitled to an annual
base salary of $425,000, $300,000, $300,000 and $225,000, respectively, and
bonuses, the amounts and payments of which are within the discretion of the
Compensation Committee of the Board of Directors. In addition, on April 13,
1999, Mr. Glasgow entered into a five-year employment agreement with the
Company. Under the terms of such agreement, Mr. Glasgow is entitled to an annual
base salary of $250,000 and bonuses commensurate with such 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 also entitled to receive, in quarterly payments, subject to annual
adjustment, a percentage of certain divisional profits and certain import sales
profits. These agreements require each individual to maintain the
confidentiality of Company information. In addition, with the exception of Mr.
Bender, each of such persons has agreed that during the term of his respective
agreement 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 by engaging in any capacity in a business which is competitive with the
business of the Company. Each of the foregoing employment agreements also
provides that, for a period of two years following the termination of
employment, each such individual shall not solicit the Company's licensors,
customers or employees.
In addition to the foregoing employment contracts, the Company has executed
indemnification agreements with each of its executive officers and Directors
pursuant to which the Company has agreed to indemnify such parties to the full
extent permitted by law, subject to certain exceptions, if such party becomes
subject to an action because such party is a Director, officer, employee, agent
or fiduciary of the Company.
On January 12, 1999, the Company entered into a Change-in-Control Severance
Pay Agreement with Mr. Bender, providing for, among other things, in the event
of the termination of Mr. Bender's employment with the Company for certain
reasons, severance pay equal to three (3) times the sum of Mr. Bender's annual
regular compensation as in effect immediately prior to Mr. Bender's termination
or change-in-control, as applicable, plus an amount equal to the bonus, if any,
paid to Mr. Bender in the year prior to such termination or change-in-control.
KEY MAN INSURANCE
Messrs. Jack Benun, Mark Benun and Isaac Levy are key employees of the
Company and the contribution of each of them to the Company has been and will be
a significant factor in the Company's future success. The loss of any of them
could adversely affect the Company's business and results of operations. The
Company maintains, and is the beneficiary of, a life insurance policy on the
life of Jack Benun, the face amount of which is $3.0 million. The Company does
not maintain key man life insurance on the life of either Mark Benun or Isaac
Levy.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From January 1, 1998 until immediately prior to the effectiveness of the
IPO, the then current directors of the Company (consisting of Messrs. Jack
Benun, Mark Benun and Isaac Levy) participated in deliberations concerning
executive officer compensation, including decisions relative to their own
compensation. The Compensation Committee consists of, and during the rest of
1998 consisted of, Jack Benun, Marvin Azrak and Stephen Kahn. There are no, and
during 1998 there were no, Compensation Committee Interlocks.
The Company and certain of its subsidiaries had been treated for federal
and state income tax purposes as S Corporations under Sub-chapter S of the
Internal Revenue Code of 1986, as amended, since 1988. As a result of such S
Corporation status, the then current shareholders of each such entity
(consisting solely of the shareholders of each such entity immediately prior to
the effectiveness of the IPO), rather than such entities, had
-8-
<PAGE>
been taxed directly on earnings for federal and certain state income tax
purposes, whether or not such earnings were distributed. Immediately prior to
the effectiveness of the IPO, each such entity terminated its status as an S
Corporation and since then has been subject to federal and state income taxes at
applicable C Corporation rates.
Prior to the termination of such S Corporation status, each such entity
declared an S Corporation distribution to the shareholders of record on the date
of such declaration. Such shareholders consisted solely of Messrs. Jack Benun,
the Company's Chairman of the Board, President and Chief Executive Officer, Mark
Benun, the Company's Executive Vice President and Secretary, and Isaac Levy, the
Company's Senior Vice President with respect to the Company, and solely of Jack
Benun and Mark Benun with respect to each such subsidiary. Such distribution,
amounting to $7.6 million, represented substantially all of the remaining
undistributed S Corporation earnings of each such entity and is evidenced by
four-year 5.7% promissory notes issued to such shareholders in connection with
the termination of S Corporation status. Of this amount, $2.0 million of the net
proceeds from the Company's IPO (distributed evenly to the three aforementioned
shareholders) was used to make a partial payment of amounts due under such
notes. The balance of such S Corporation distributions will be paid in
accordance with the terms and provisions of such promissory notes and provide
for the timely distribution of amounts necessary to pay personal income taxes of
the shareholders due on amounts earned by the S Corporations for the period
January 1, 1998 through the termination of S Corporation status. In addition to
amounts paid pursuant to the promissory notes, $314,000 was distributed to the
aforementioned shareholders in 1998 in the form of dividends to fund their tax
liabilities resulting from such S Corporation status.
From time to time, the Company has made loans to Messrs. Jack Benun, Mark
Benun and Isaac Levy and received loans from Jack Benun. All outstanding loans
made to such individuals by the Company, totaling $347,211, were repaid to the
Company during 1998. Loans received by the Company from Jack Benun, totaling
$1.4 million, will be repaid to Mr. Benun on the same terms and conditions as
those included in the four-year 5.7% promissory notes issued in connection with
the termination of the Company's S Corporation status.
Immediately prior to the effectiveness of the Company's IPO in April 1998,
the Company acquired all of the issued and outstanding shares of certain related
entities of the Company, in exchange for shares of Common Stock of the Company,
from each of Jack Benun and Mark Benun. Each of Jack Benun and Mark Benun
received 2,131,250 shares of the Company's Common Stock in exchange for each of
their 50.0% ownership interests in each of Happy Kids Children's Apparel, Ltd.,
Talk of the Town Apparel Corp., O.P. Kids, L.L.C., H.O.T. Kidz, L.L.C., Hawk
Industries, Inc. and J & B 18 Corp.
Messrs. Jack Benun, Mark Benun and Isaac Levy have entered into a
shareholders agreement dated January 1, 1998 (the "Shareholders Agreement"). The
Shareholders Agreement provides tag-along rights to each of the parties thereto
in the event that any of the other parties elects to sell his Common Stock. 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 Shareholders
Agreement. Finally, Mark Benun has granted Jack Benun an irrevocable proxy to
vote any of the Company's voting securities beneficially owned by Mark Benun for
the life of Jack Benun.
In connection with the election of Messrs. Azrak and Kahn to the Company's
Board of Directors, each such Director was granted ten-year options to purchase
40,000 shares of Common Stock, exercisable at $10.00 per share, and vesting at a
rate of twenty percent (20%) each year, commencing on the first anniversary of
the date of grant.
-9-
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the
Company's Common Stock with the cumulative total return on the Nasdaq Composite
Index and a Peer Group Index (capitalization weighted) for the period beginning
on the date on which the Securities and Exchange Commission declared effective
the Company's Form 8-A Registration Statement pursuant to Section 12 of the
Exchange Act and ending on the last day of the Company's last completed fiscal
year. The stock performance on the graph below is not indicative of future price
performance.
COMPARISON OF 9 MONTH CUMULATIVE TOTAL RETURN *(1)(2)(3)
Among the Company, the Nasdaq Composite Index and the
Peer Group Index (4)
(Capitalization Weighted)
[GRAPH INSERTED HERE]
* $100 INVESTED ON 4/3/98 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31
<TABLE>
<CAPTION>
Base Period
Company/Index Name April 3, 1998 June 30, 1998 September 30, 1998 December 31, 1998
------------------ ------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
HKID.................... $ 100 $ 125 $ 80 $ 116
Nasdaq.................. 100 102 92 119
Peer Group Index........ 100 108 71 81
</TABLE>
- ---------------
(1) Graph assumes $100 invested on April 3, 1998 in the Company's Common
Stock, the Nasdaq Composite Index and the Peer Group Index.
(2) Cumulative total return assumes reinvestment of dividends.
(3) Year ended December 31.
(4) The Company has constructed a Peer Group Index consisting of Columbia
Sportswear Company; Cutter & Buck Inc.; Jones Apparel Group Inc.; Liz
Claiborne Inc.; Nautica Enterprises, Inc.; Oshkosh B'Gosh, Inc.; Polo
Ralph Lauren Corp.; Quiksilver Inc.; Tarrant Apparel Group and Tommy
Hilfiger Corp.
-10-
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee has furnished the following report:
The Compensation Committee is composed of one employee director and two
non-employee directors. The Compensation Committee recommends, and the Board
approves, all matters relating to executive compensation, including setting and
administering policies governing executive salaries, bonuses (if any) and stock
option awards (if any). The Compensation Committee meets at least annually to
set performance objectives for the Chief Executive Officer ("CEO") and to
determine the annual compensation of the CEO and other senior executives of the
Company. The CEO is not present during the discussion of his compensation.
EXECUTIVE COMPENSATION POLICY
The goal of the Company's executive compensation policy is to ensure that
an appropriate relationship exists between executive compensation and the
creation of shareholder value, while at the same time attracting and retaining
qualified senior management. Since the inception of its predecessor corporation
in 1979, the Company has operated with a small number of highly experienced
senior executives determining and executing the Company's strategy.
COMPENSATION MIX
The Company's executive compensation packages generally include three
components: base salary, a discretionary annual cash bonus and stock options.
BASE SALARY
The Compensation Committee seeks to establish base salaries for each
position and level of responsibility which are competitive with those of
executive officers at other children's apparel companies.
DISCRETIONARY CASH BONUS
The Compensation Committee believes that discretionary cash bonuses are
important to motivate and reward executive officers. However, cash bonuses are
not guaranteed. Annual cash bonuses are awarded to executives based on their
achievements against a stated list of objectives developed at the beginning of
each year by senior management and the Compensation Committee. Such objectives
are reviewed and approved by the Board of Directors.
STOCK OPTIONS
Stock option grants under the Company's stock option plans are designed to
align the long term interests of the Company's executives with those of its
shareholders by rewarding executives for increasing shareholder value. In
addition, the Compensation Committee may award additional stock option grants
annually. When granting stock options, the Compensation Committee considers the
recommendation of the CEO and the relative performance and contributions of each
officer compared to that of other officers within the Company with similar
levels of responsibility.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
In establishing Jack M. Benun's compensation package, the Compensation
Committee seeks to maintain a level of total current compensation that is
competitive with that paid to CEOs of other comparable children's apparel
companies. In addition, in order to align Mr. Benun's interests with the
interests of the Company's shareholders, the Compensation Committee attempts to
make a substantial portion of the value of his total compensation dependent upon
the appreciation of the Company's stock price.
-11-
<PAGE>
Mr. Benun's performance is evaluated annually by the Compensation Committee
against a stated list of short, medium and long term objectives developed by the
Compensation Committee at the beginning of each year and approved by the Board.
Based on his achievements relating to these objectives, the Compensation
Committee recommended, and the board approved a compensation package for Mr.
Benun consisting of an annual base salary of $425,000 and bonuses, the amounts
and payments of which are within the discretion of the Compensation Committee.
Section 162(m) of the Internal Revenue Code disallows the deductibility by
the Company of any compensation over $1 million paid to the CEO or any of the
other four most highly compensated executives, unless certain criteria are
satisfied. The Company's CEO and the other named executives have not received
annual compensation over $1 million, and the Company has not determined what
measures, if any, it should take to comply with Section 162.
Compensation Committee Members:
(as constituted at year end)
Jack M. Benun
Marvin Azrak
Stephen I. Kahn
-12-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are, as of April 15, 1999, approximately 23 holders of record and 926
beneficial holders of the Company's Common Stock. The following table sets forth
certain information, as of April 15, 1999, with respect to holdings of the
Company's Common Stock by (i) each person known by the Company to be the
beneficial owner of more than 5% of the total number of shares of Common Stock
outstanding as of such date, (ii) each of the Company's directors (which
includes all nominees) and Named Executives, and (iii) all directors and
officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2) OF CLASS(3)
- ------------------------------------ -------------------- --------
<S> <C> <C>
(i) Directors (which includes all nominees) and
Named Executives:
Jack M. Benun................................... 6,587,500(4) 63.5%
Mark J. Benun................................... 3,293,750 31.7%
Isaac Levy...................................... 1,162,500(5) 11.2%
Stuart Bender................................... 33,333(6) *
Andrew Glasgow.................................. 95,693(7) *
Marvin Azrak.................................... 8,000(8) *
Stephen I. Kahn................................. 8,000(9) *
(ii) All Directors and officers as a group
(7 persons)............................... 7,895,026(4)(5)(6)(7)(8)(9) 75.7%
</TABLE>
- -------------
(1) The address of each beneficial owner of more than 5% of the outstanding
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 Common Stock shown as
beneficially owned by such shareholder.
(3) Applicable ownership percentage is based on 10,375,693 shares of Common
Stock outstanding on April 15, 1999 plus any presently exercisable stock
options held by each such holder, and options which will become exercisable
within 60 days after April 15, 1999.
(4) Includes 3,293,750 shares of Common Stock owned of record by Mark Benun, as
to which shares Jack Benun exercises voting power. Also includes 300,000
shares of 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, and each of Mr. Benun's three daughters is a limited partner
with a 33% interest.
(5) Excludes 100,000 shares of Common Stock underlying options which are not yet
exercisable as of April 15, 1999 and which do not become exercisable within
sixty (60) days after such date.
(6) Represents 33,333 shares of Common Stock underlying options which are
exercisable as of April 15, 1999 or which will become exercisable within
sixty (60) days after such date. Excludes 91,667 shares of Common Stock
underlying options which become exercisable over time after such period.
(7) Represents 95,693 shares of Common Stock owned of record by Mr. Glasgow
which he received in connection with the Acquisition. See "Certain
Relationships and Related Transactions."
(8) Represents 8,000 shares of Common Stock underlying options which are
exercisable as of April 15, 1999 or which will become exercisable within
sixty (60) days after such date. Excludes 32,000 shares of Common Stock
underlying options which become exercisable over time after such period.
(9) Represents 8,000 shares of Common Stock underlying options which are
exercisable as of April 15, 1999 or which will become exercisable within
sixty (60) days after such date. Excludes 32,000 shares of Common Stock
underlying options which become exercisable over time after such period.
-13-
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For transactions involving Jack M. Benun, Mark J. Benun, Isaac Levy, Marvin
Azrak and Stephen I. Kahn, see "Executive Compensation - Compensation Committee
Interlocks and Insider Participation."
On April 13, 1999, the Company acquired certain of the assets of D. Glasgow
& Sons, Inc. (the "Acquisition"). The assets acquired 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. In
connection with the Acquisition, Andrew Glasgow was elected as a Director of the
Company in April 1999. In addition, Mr. Glasgow was appointed Vice President of
the Company and will remain as President of the Company's Glasgow Division. See
"Executive Compensation - Employment Agreements, Indemnification Agreements and
Change-In-Control Severance Pay Arrangements." In exchange for the foregoing
assets, the Company paid to D. Glasgow & Sons, Inc. consideration consisting of
$3.7 million in cash and issued 95,693 shares of Common Stock of the Company
having a fair market value of $1.0 million. The Common Stock issued in
connection with the Acquisition is restricted stock, and the Company has granted
certain piggy-back registration rights to the holder of such restricted stock.
Finally, the Company also purchased certain inventory from D. Glasgow & Sons,
Inc. for $2.9 million.
The Board of Directors of the Company has adopted a policy requiring that
any transactions between the Company and its officers, Directors, principal
shareholders and their affiliates be on terms no less favorable to the Company
than could be obtained from unrelated third parties and that any such
transactions be approved by a majority of the disinterested members of the
Company's Board of Directors.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of the Company intends, subject to shareholder
approval, to retain Grant Thornton LLP as independent auditors of the Company
for the year ending December 31, 1999. Grant Thornton LLP also served as
independent auditors of the Company for 1998. Neither the firm nor any of its
members has any direct or indirect financial interest in or any connection with
the Company in any capacity other than as auditors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF GRANT THORNTON LLP AS THE INDEPENDENT AUDITORS OF THE COMPANY FOR
THE YEAR ENDING DECEMBER 31, 1999.
One or more representatives of Grant Thornton LLP is expected to attend the
Meeting and have an opportunity to make a statement and/or respond to
appropriate questions from shareholders.
SHAREHOLDERS' PROPOSALS
Shareholders who wish to submit proposals for inclusion in the Company's
proxy statement and form of proxy relating to the 2000 Annual Meeting of
Shareholders must advise the Secretary of the Company of such proposals in
writing by December 27, 1999.
OTHER MATTERS
The Board of Directors is not aware of any matter to be presented for
action at the Meeting other than the matters referred to above and does not
intend to bring any other matters before the Meeting. However, if other matters
should come before the Meeting, it is intended that holders of the proxies will
vote thereon in their discretion.
-14-
<PAGE>
GENERAL
The accompanying proxy is solicited by and on behalf of the Board of
Directors of the Company, whose notice of meeting is attached to this Proxy
Statement, and the entire cost of such solicitation will be borne by the
Company.
In addition to the use of the mails, proxies may be solicited by personal
interview, telephone and telegram by directors, officers and other employees of
the Company who will not be specially compensated for these services. The
Company also requested that brokers, nominees, custodians and other fiduciaries
forward soliciting materials to the beneficial owners of shares held of record
by such brokers, nominees, custodians and other fiduciaries. The Company will
reimburse such persons for their reasonable expenses in connection therewith.
Certain information contained in this Proxy Statement relating to the
occupations and security holdings of directors and officers of the Company is
based upon information received from the individual directors and officers.
HAPPY KIDS INC. WILL FURNISH, WITHOUT CHARGE, A COPY OF ITS REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1998, INCLUDING FINANCIAL STATEMENTS AND
SCHEDULES THERETO BUT NOT INCLUDING EXHIBITS, TO EACH OF ITS SHAREHOLDERS OF
RECORD ON APRIL 15, 1999, AND TO EACH BENEFICIAL SHAREHOLDER ON THAT DATE UPON
WRITTEN REQUEST MADE TO MARK J. BENUN, SECRETARY, HAPPY KIDS INC., 100 WEST 33rd
STREET, SUITE 1100, NEW YORK, NEW YORK 10001. A REASONABLE FEE WILL BE CHARGED
FOR COPIES OF REQUESTED EXHIBITS.
PLEASE DATE, SIGN AND RETURN THE PROXY CARD AT YOUR EARLIEST CONVENIENCE IN
THE ENCLOSED RETURN ENVELOPE. A PROMPT RETURN OF YOUR PROXY CARD WILL BE
APPRECIATED AS IT WILL SAVE THE EXPENSE OF FURTHER MAILINGS.
By Order of the Board of Directors
Mark J. Benun
Secretary
New York, New York
April 26, 1999
-15-
<PAGE>
HAPPY KIDS INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE COMPANY FOR THE ANNUAL MEETING OF SHAREHOLDERS
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 Annual Meeting of Shareholders
of the Company to be held at The Grand Hyatt, Park Avenue at Grand Central, New
York, New York 10017 at 2:00 P.M., local time, on May 25, 1999, and at any
adjournment or adjournments thereof, upon the following proposals more fully
described in the Notice of Annual 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>
Please Detach and Mail In the Envelope Provided
A |X| Please mark your
votes as in this
example.
1. ELECTION OF Nominees:
DIRECTORS: Jack M. Benun
Mark J. Benun
Isaac Levy
Andrew Glasgow
Marvin Azrak
Stephen I. Kahn
VOTE FOR all the nominees listed; except vote withheld from
the following nominees, if any. (To withhold authority to vote for
any individual nominated, write that nominee's name in the space
provided below.) | |
- --------------------------------------------------------------------------------
VOTE WITHHELD from all nominees. | |
2. APPROVAL OF PROPOSAL TO RATIFY FOR AGAINST ABSTAIN
THE APPOINTMENT OF GRANT THORNTON LLP
AS THE INDEPENDENT AUDITORS OF THE COMPANY | | | | | |
FOR THE YEAR ENDING DECEMBER 31, 1999.
3. In his discretion, the proxy is authorized to vote upon other matters as
may properly come before the Meeting.
I will I will not
| | | |
attend the Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.
Signature of Signature of
Shareholder Shareholder Dated:
------------------- ------------------- ----------
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.
