<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1999
REGISTRATION NO. 333-____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
Kellwood Company
(Exact name of Registrant as specified in its Charter)
Delaware 3661
(State or other jurisdiction (Primary Standard Industrial
of Incorporation) Classification Code Number)
36-2472410
(I.R.S. Employer incorporation or
organization Identification No.)
600 Kellwood Parkway
St. Louis County, Missouri 63017
(314) 576-3100
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Thomas H. Pollihan
General Counsel
Kellwood Company
600 Kellwood Parkway
St. Louis County, Missouri 63017
(314) 576-3100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to
Frederick W. Axley Arthur D. Stout
McDermott, Will & Emery Squadron, Ellenoff, Plesent &
227 West Monroe Street Sheinfeld, LLP
Chicago, Illinois 60606 551 Fifth Avenue
(312) 372-2000 New York, New York 10176
(212) 661-6500
Approximate dare of commencement of proposed sale to the public: As
soon as practicable after the effective date of this registration statement and
the satisfaction or waiver of all other conditions to the merger (the ("Merger")
of Kellwood Acquisition II Corporation ("Sub") with and into Koret, Inc.
("Koret") pursuant to the Agreement and Plan of Merger dated as of December 1,
1998, as amended, among Kellwood Company ("Kellwood"), Sub and Koret and certain
stockholders of Koret, described in the enclosed Joint Proxy
Statement/Prospectus (the "Merger Agreement").
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Title of each Class of Proposed maximum Proposed maximum Amount of
securities to be Amount to be offering price per aggregate offering registration fee
Registered registered share price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
$.01 per value 5,241,000 shares (1) $6.49(2) $51,881,000 (3) $14,423(4)
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the maximum number of shares of common stock, $.01 par value
per share, of Kellwood to be delivered pursuant to Sections 1.5 (c) and
2.3(a) of the Merger Agreement, assuming (i) the exercise of all
currently outstanding options to purchase shares of Class A common
stock, $.01 par value per share, of Koret and (ii) the exercise of all
outstanding warrants to purchase Class B non-voting stock, par value
$.01 per share of Koret
(2) Estimated solely for purposes of determining the registration fee in
accordance with Rule 457(f). Calculated pursuant to Rule 457(f)(2)
based upon the book value per share of Koret Class A common stock and
Class C common stock (collectively, "Koret Stock") as of November 29,
1998.
(3) Calculated pursuant to Rule 457(f) based upon the book value per share
of Koret Stock multiplied by the 7,994,909 shares of Koret Stock to be
exchanged or cancelled in connection with the Merger.
(4) A fee of $27,746 was paid on December 18, 1998 in connection with the
Joint Proxy Statement/Prospectus of Kellwood and Koret filed with the
Securities and Exchange Commission. Pursuant to Rule 457(b), the
calculated fee shall be offset by the amount previously paid.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
securities act or until this registration statement shall become effective on
such date as the commission, acting pursuant to section 8(a), may determine.
<PAGE>
PRELIMINARY COPY
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
Kellwood Logo Koret Logo
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
TO THE STOCKHOLDERS OF KELLWOOD COMPANY AND KORET, INC.
The boards of directors of Kellwood Company and Koret, Inc. have unanimously
approved a merger designed to The boards of directors of Kellwood Company and
Koret, Inc. have unanimously approved a merger designed to strengthen Kellwood's
position in the apparel industry.
Upon completion of the merger, Koret stockholders will receive .6025391 shares
of Kellwood common stock in exchange for each share of Koret common stock they
own. Kellwood stockholders will continue to own their existing shares of
Kellwood common stock. After the merger, the Koret stockholders will hold
approximately 18.9% of Kellwood's outstanding common stock.
The merger requires the stockholders of Koret to approve the merger and the
stockholders of Kellwood to approve the stock issuance in the merger. We have
scheduled meetings for our stockholders to vote on this matter.
Whether or not you plan to attend a meeting, please take the time to vote by
completing and mailing the enclosed proxy card to us. Voting instructions are
inside.
The dates, times and places of the meetings are as follows:
For Koret Stockholders:
April 26, 1999
9:00 a.m.
505 14th Street
Oakland, California
For Kellwood Stockholders:
April 27, 1999
10:00 a.m.
600 Kellwood Parkway
St. Louis County, Missouri
This document provides you with detailed information about the merger. Kellwood
common stock is traded on the New York Stock Exchange under the symbol KWD.
- ------------------------ ---------------------------
Hal J. Upbin, President Martin J. Granoff, Chairman
Kellwood Company Koret, Inc.
For a discussion of risks which you should consider in evaluating the merger see
Risk Factors beginning on page ___.
Neither the SEC nor any state securities regulators have approved the Kellwood
Company common stock to be issued under this joint proxy statement/prospectus or
determined if this joint proxy statement/prospectus is accurate or adequate. Any
representation to the contrary is a criminal offense.
This joint proxy statement/prospectus dated March __, 1999 was first mailed to
stockholders on or about March __, 1999.
<PAGE>
PRELIMINARY COPY
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
KELLWOOD COMPANY
600 KELLWOOD PARKWAY
ST. LOUIS COUNTY, MISSOURI 63017
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 27, 1999
TO THE STOCKHOLDERS OF KELLWOOD COMPANY:
A special meeting of stockholders of Kellwood Company will be held on
April 27, 1999, at Kellwood's offices located at 600 Kellwood Parkway, St. Louis
County, Missouri, at 10:00 A.M., local time for the following purposes:
1. To consider and vote upon a proposal to approve the
issuance of Kellwood common stock under the Agreement and Plan of
Merger, dated December 1, 1998, in which each outstanding share of
Koret, will be converted into .6025391 shares of Kellwood common stock,
and Koret will become a wholly-owned subsidiary of Kellwood; and
2. To transact any other business which may properly come
before the Kellwood meeting or any one or more adjournments or
postponements thereof.
Only stockholders of record at the close of business on March 5, 1999
are entitled to notice of and to vote at the Kellwood meeting and any
adjournments or postponements.
Your board of directors believes that the merger is in the best
interest of Kellwood and its stockholders. Your board has unanimously approved
the merger and recommends that you vote for the issuance of Kellwood common
stock. Credit Suisse First Boston Corporation has issued its written opinion
that the exchange ratio of Kellwood common stock for Koret common stock is fair
to Kellwood from a financial point of view. The accompanying joint proxy
statement/prospectus provides detailed information concerning the merger.
Your vote is important. The affirmative vote of the holders of a
majority of Kellwood common stock is required to approve the issuance of
Kellwood common stock in the merger. Please complete, date and sign the
accompanying proxy and return it promptly in the enclosed envelope. If you
return a signed proxy card without indicating how you want to vote, your proxy
will be counted as a vote in favor of the stock issuance. If your shares are
held in "street name" by your broker or other nominee, only that holder may vote
your shares. You should follow the directions provided by them regarding how to
instruct them to vote your shares. Sending in the proxy will not prevent you
from attending the Kellwood meeting or voting in person. You may revoke your
proxy at any time by delivering a written notice or a proxy bearing a later date
to the Secretary of Kellwood at the address above prior to the Kellwood meeting
or by attending the Kellwood meeting and voting in person.
By Order of the Board of Directors,
March __, 1999
Thomas H. Pollihan, Esq.
Vice President, Secretary and General Counsel
<PAGE>
PRELIMINARY COPY
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
KORET, INC.
505 14TH STREET
OAKLAND, CA 94612-1406
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 26, 1999
TO THE STOCKHOLDERS OF KORET, INC.:
A meeting of stockholders of Koret, Inc. will be held on April 26, 1999
at Koret's offices located at 505 14th Street, Oakland, California, at 9:00
A.M., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt
the Agreement and Plan of Merger, providing for the merger of Koret
with Kellwood, in which
(a) each outstanding share of Class A, Class B Non-Voting and
Class C Special common stock of Koret, will be converted
into .6025391 shares of Kellwood common stock; and
(b) Koret will become a wholly-owned subsidiary of Kellwood;
and
2. To transact any other business which may properly come
before the Koret meeting or any one or more adjournments or
postponements thereof.
Only stockholders of record at the close of business on March 23, 1999
are entitled to notice of and to vote at the Koret meeting and any adjournments
or postponements thereof.
Your board of directors believes that the merger is in the best
interest of Koret and its stockholders. Your board has unanimously approved the
merger and recommends that you vote for its approval and adoption. You are
encouraged to read the accompanying joint proxy statement/prospectus, which
provides detailed information concerning the merger.
Your vote is important. The affirmative vote of the holders of 70% of all
outstanding shares of Koret common stock is required to approve the merger.
Please complete, date and sign the accompanying proxy and return it promptly in
the enclosed envelope. If you sign and return your proxy card without indicating
how you want to vote, your proxy will be counted as a vote in favor of the
merger. This will not prevent you from attending the Koret meeting or voting in
person. You may revoke your proxy at any time by filing a written notice of
revocation with, or by delivering a duly executed proxy bearing a later date to,
the Secretary of Koret at the address above prior to the Koret meeting or by
attending the Koret meeting and voting in person. Do not send stock certificates
for your shares at this time.
By Order of the Board of Directors,
------------------------------------
Bradley Kennison
Secretary
March __, 1999
<PAGE>
TABLE OF CONTENTS
Page
QUESTIONS AND ANSWERS ABOUT THE KELLWOOD/KORET MERGER..........1
SUMMARY........................................................2
The Companies..................................................2
Kellwood.......................................................2
Koret..........................................................2
The Merger.....................................................2
Selected Financial Data........................................4
Selected Consolidated Financial Data of Kellwood...............4
Selected Consolidated Financial Data of Koret..................5
Selected Unaudited Pro Forma Combined Financial Data
and Comparative Per Share Data of Kellwood and Koret.........6
RISK FACTORS...................................................8
Since the Exchange Ratio Is Fixed, the Market Value of
Kellwood Common Stock Issued to Koret Stockholders Will
Depend Upon the Market Price of Kellwood Common Stock
When the Merger is Completed.................................8
Expected Benefits from Integration of Operations May Not
Be Achieved..................................................8
Increased Competition May Adversely Impact Kellwood's
Profitability After the Merger...............................9
Historical Earnings of Kellwood and the Voting Interests of
Stockholders Will Be Diluted.................................9
Kellwood May Not Be Successful If It Cannot Retain and
Integrate Key Employees......................................9
WHERE YOU CAN FIND MORE INFORMATION............................9
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS..........10
KELLWOOD MEETING..............................................11
Purpose .....................................................12
Record Date; Voting Rights....................................12
Quorum........................................................12
Proxies .....................................................12
Solicitation of Proxies.......................................13
Required Vote.................................................13
Share Ownership of Management.................................13
KORET MEETING.................................................13
Purpose.......................................................13
Record Date; Voting Rights....................................13
Quorum........................................................13
Proxies.......................................................14
Solicitation of Proxies.......................................14
Required Vote.................................................14
i
<PAGE>
TABLE OF CONTENTS
Page
Share Ownership of Management.................................15
Conflicts of Interest.........................................15
THE MERGER....................................................17
General........................................................7
Background of the Merger......................................17
Kellwood's Reasons for The Merger; Recommendation
of its Board of Directors...................................19
Opinion of Kellwood's Financial Advisor.......................20
Koret's Reasons for The Merger; Recommendation of
its Board of Directors......................................23
Material Federal Income Tax Consequences......................24
Governmental and Regulatory Approvals.........................25
Percentage Ownership Interest of Koret Stockholders
After the Merger............................................26
Appraisal Rights..............................................26
Resales of Kellwood Common Stock..............................28
THE MERGER AGREEMENT..........................................29
Summary of the Merger Agreement...............................29
Surrender and Payment.........................................29
Fractional Shares.............................................30
Conditions to the Merger......................................30
Representations and Warranties................................31
Conduct of Business Pending the Merger........................31
Koret Stock Warrants and Options..............................32
Accounting Treatment..........................................32
Employee Benefit Plans and Agreements.........................33
No Solicitation...............................................33
Termination...................................................34
Fees and Expenses.............................................35
Amendment.....................................................35
Waiver........................................................35
DESCRIPTION OF KELLWOOD'S CAPITAL STOCK.......................36
Common Stock..................................................36
Preferred Stock...............................................36
Preferred Stock Purchase Rights...............................37
Exceptions....................................................37
Voting Rights of Common Stock.................................38
Certain Provisions of the Certificate of Incorporation........38
ii
<PAGE>
TABLE OF CONTENTS
Page
Business Combinations Under the Delaware General
Corporation Law.............................................38
COMPARISON OF THE RIGHTS OF HOLDERS OF KELLWOOD
COMMON STOCK AND KORET COMMON STOCK.........................39
General .....................................................39
Dividends.....................................................39
Voting Rights.................................................40
Directors.....................................................40
Special Meetings..............................................41
Action of Stockholders Without a Meeting......................41
Amendment to Certificate of Incorporation.....................41
Amendment to By-laws..........................................41
Approval of Mergers and Asset Sales...........................41
Indemnification of Directors and Officers.....................42
Pre-emptive Rights............................................43
MARKET PRICES.................................................43
Kellwood Common Stock.........................................43
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS..................................................44
Kellwood Company Unaudited Pro Forma Combined
Condensed Balance Sheet as of January 31, 1999..............45
Kellwood Company Unaudited Pro Forma Combined
Condensed Statement of Earnings For the Nine Months
Ended January 31, 1999......................................46
Kellwood Company Unaudited Pro Forma Combined Condensed
Statement of Earnings For the Year Ended April 30, 1998.....47
KELLWOOD COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL STATEMENTS...............50
BUSINESS OF KELLWOOD..........................................51
History .....................................................51
Strategy......................................................51
Popular-to-Moderate Women's Sportswear........................52
Better-to-Bridge Women's Sportswear...........................53
Private Label.................................................54
Smart Shirts..................................................54
Recreational Products.........................................55
Channels of Distribution and Customers........................55
Sourcing and Manufacturing....................................55
Acquisition of Fritzi.........................................56
iii
<PAGE>
TABLE OF CONTENTS
Page
Reorganization and Restructuring of Operating Assets..........56
BUSINESS OF KORET.............................................57
The Company...................................................57
History.......................................................57
Recapitalization..............................................58
Acquisitions..................................................58
Koret's Business Units........................................58
Koret of California...........................................58
Retail Stores.................................................59
The Canadian Business.........................................59
New Campaign..................................................59
KORET PRINCIPAL AND SELLING STOCKHOLDERS......................59
PLAN OF DISTRIBUTION..........................................62
STOCKHOLDER PROPOSALS.........................................64
EXPERTS.......................................................64
INDEPENDENT ACCOUNTANTS.......................................65
LEGAL OPINIONS................................................65
iv
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE KELLWOOD/KORET MERGER
Q: What do I need to do now?
A: After reviewing this joint proxy statement/prospectus, just sign your
proxy card and mail it in the enclosed return envelope as soon as
possible, so that your shares may be represented at the meeting. The
Kellwood meeting will take place on April 27, 1999 and the Koret
special meeting will take place on April 26, 1999. The boards of
directors of both Kellwood and Koret unanimously recommend voting in
favor of the proposed merger.
Q: Please explain the exchange ratio.
A: Koret stockholders will receive .6025391 shares of Kellwood common
stock in exchange for each share of Koret common stock they hold. No
fractional shares will be issued.
Q: When do you expect the merger to be completed?
A: We expect to complete the merger as quickly as possible after receiving
stockholder approvals at the stockholders' meetings.
Q: Should I send in my stock certificate now?
A: No. Kellwood stockholders will keep their current certificates. After
the merger, Koret stockholders will receive written instructions for
exchanging their stock certificates.
Q: Will I be able to sell my shares of Kellwood common stock?
A: Kellwood common stock, is listed on the New York Stock Exchange and,
subject to restrictions applicable to affiliates of Koret, is freely
tradable.
<PAGE>
SUMMARY
This summary highlights selected information from this joint proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger more fully and for a more complete
description of the legal terms of the merger, you should read carefully this
entire document and the documents we have referred you to. The merger agreement
is attached as Annex A. We encourage you to read the merger agreement. It is the
legal document that governs the merger.
The Companies
Kellwood (see pages ___)
Kellwood designs, manufactures and markets apparel and camping soft goods. With
sales of over $1.7 billion in fiscal year 1998, Kellwood is one of the largest
providers of popular-to-moderate women's sportswear in the United States,
servicing all channels of distribution. Additionally, it is a major manufacturer
of men's woven shirts and a supplier of outerwear and lingerie.
Kellwood sells its products through multiple channels of distribution, including
national retail chains, department stores, specialty stores, mass merchants,
mail order houses, sporting goods stores, discounters and other retailers.
Kellwood's global sourcing capability is diverse in terms of the range of
products produced and sourced. In order to enhance responsiveness to the
changing needs of the customer, to achieve flexibility and to reduce costs,
Kellwood maintains sourcing relationships with contract manufacturers around the
world. Kellwood supplements this network with 32 company-operated plants located
in the United States, Canada, Central America and the Caribbean Basin, Hong
Kong, the People's Republic of China, and Sri Lanka.
Koret (see pages ___)
Koret designs, manufactures and distributes moderately priced women's coordinate
sportswear. The Koret brand is considered to be one of the top three department
store brands of moderately priced women's sportswear in North America. The Koret
brand is targeted primarily to women over the age of 45.
Koret also manufactures and distributes popular and moderately priced women's
apparel under labels other than Koret, better and bridge priced women's career
sportswear under the Mr. Jax(R) label, and belts and small leather goods under
the Polo by Ralph Lauren(R) name.
Koret sells its products to department and specialty stores in North America,
and through company-owned retail stores located in premium outlet malls
throughout the United States.
The Merger (see pages __)
General. In the merger, Koret will become a wholly-owned subsidiary of Kellwood,
and each share of Koret common stock will be converted into .6025391 shares of
Kellwood common stock. Kellwood will issue up to 5,241,000 shares of Kellwood
stock to the Koret stockholders. Kellwood stock issued in the merger with an
aggregate value of approximately $12,500,000 will be held in escrow to cover
claims under the merger agreement. Cash will be paid in lieu of any fractional
share of Kellwood stock. In no event will the number of shares of Kellwood stock
placed in escrow exceed 10% of the total number of shares of Kellwood stock
issued in the merger.
Recommendation of the Kellwood Board. The Kellwood board believes that the
merger and the share issuance are fair to and in the best interests of Kellwood
and its stockholders and has unanimously
2
<PAGE>
approved the merger agreement. The Kellwood board unanimously recommends that
the stockholders of Kellwood vote in favor of the issuance of Kellwood stock to
the Koret stockholders.
Recommendation of the Koret Board. The Koret board believes that the merger is
fair to and in the best interests of Koret and its stockholders and has
unanimously approved and adopted the merger agreement and the transactions
contemplated thereby. The Koret board unanimously recommends that the Koret
stockholders vote in favor of approval and adoption of the merger agreement.
Opinion of Kellwood's Financial Advisor. On November 11, 1998, Credit Suisse
First Boston Corporation, financial advisor to Kellwood in connection with the
merger, delivered its written opinion to the Kellwood board stating that, as of
that date, the exchange ratio of Kellwood common stock for Koret common stock
was fair to Kellwood from a financial point of view. The full text of the
written opinion of CSFB, which sets forth assumptions made, matters considered
and limitations on the review undertaken, is attached as Annex B. The opinion of
CSFB does not constitute a recommendation as to how you should vote with respect
to your shares. Holders of Kellwood common stock are urged to, and should, read
the opinion of CSFB carefully and in its entirety.
Material Federal Income Tax Consequences. Kellwood's counsel has provided an
opinion that the merger will qualify as a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended. As such a
reorganization, generally no gain or loss will be recognized for United States
federal income tax purposes by the stockholders of Koret upon the exchange of
their Koret common stock for shares of Kellwood common stock in the merger,
except with respect to cash received in lieu of fractional shares. Stockholders
of Koret are urged to consult their own tax advisors regarding the specific tax
consequences to them of the merger, including the application of state, local
and foreign tax laws, as well as federal tax laws.
Accounting Treatment. The merger is conditioned on the ability to account for
the merger as a pooling of interests under applicable accounting rules. Prior to
the effective date of the merger, Kellwood will receive a letter from
PricewaterhouseCoopers LLP stating that they concur with Kellwood management
that no conditions exist that would preclude Kellwood from accounting for the
merger as a pooling of interests.
Appraisal Rights. Kellwood stockholders are not entitled to appraisal rights
under Delaware Law. Koret stockholders are entitled seek an appraisal of the
"fair value" of their Koret common stock. If Koret stockholders holding
approximately 10% or more of the total Koret shares outstanding comply with the
legal requirements for obtaining an appraisal, pooling of interest accounting
will not be available and the merger will not take place.
Exchange of Stock Certificates. Following the merger, Kellwood will advise each
Koret record holder how to exchange Koret common stock for Kellwood common
stock. Upon surrender of certificates for Koret common stock with a letter of
transmittal, a Koret stockholder will be entitled to receive a certificate
representing the number of whole shares of Kellwood common stock into which the
stockholder's shares have been converted, less the portion held in escrow.
Required Vote. Approval of the issuance of Kellwood common stock to the Koret
stockholders will require the vote of a majority of the shares present in person
or by proxy at the Kellwood meeting (assuming a quorum is present). Approval and
adoption of the merger will require the vote of the holders of 70% of the voting
power of all outstanding shares of Koret common stock. Stockholders of Koret who
have the right to vote approximately 4,349,834 shares, approximately 54.4% of
the outstanding shares of Koret common stock at the close of business on the
date of this joint proxy statement/prospectus, have agreed to vote in favor of
the merger at the Koret meeting.
3
<PAGE>
Selected Financial Data
Selected Consolidated Financial Data of Kellwood
The following financial information about Kellwood is derived from audited
financial statements for the five years ended April 30, 1998 and unaudited
financial statements for the nine months ended January 31, 1998 and 1999. All
share and per share data have been adjusted to reflect a three-for-two split of
the common stock which took place on March 18, 1994.
The following financial information is only a summary, and you should read it in
conjunction with the Kellwood historical financial statements and related notes
contained in the annual reports and other information filed by Kellwood with the
SEC. These financial statements provide further information about significant
events that impacted Kellwood's financial condition, including:
o the acquisition of Halmode, Inc. in September 1994, and
o the $14.0 million provision for business and facilities realignment
in April 1995 related to the shut-down of Kellwood's Saipan facility.
<TABLE>
<CAPTION>
As of or for the nine
months ended January 31, As of or for the years ended April 30,
------------------------ --------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Kellwood Historical
Net sales $ 1,326 $ 1,277 $ 1,781 $ 1,521 $ 1,466 $ 1,365 $ 1,203
Net earnings $ 28.3 $ 26.1 $ 42.7 $ 37.6 $ 28.0 $ 11.1 $ 35.6
Earnings per share - basic $ 1.30 $ 1.22 $ 2.00 $ 1.78 $ 1.32 $ .53 $ 1.71
Earnings per share - diluted $ 1.28 $ 1.19 $ 1.95 $ 1.75 $ 1.31 $ .52 $ 1.68
Total assets $1,008 $ 924 $ 1,016 $ 875 $ 797 $ 768 $ 642
Long-term debt $ 228 $ 243 $ 243 $ 110 $ 125 $ 145 $ 153
Dividends per common share $ .48 $ .48 $ .64 $ .60 $ .60 $ .60 $ .55
Book value per common share $ 19.01 $ 17.26 $ 17.86 $ 16.47 $ 15.32 $ 14.59 $ 14.64
</TABLE>
4
<PAGE>
Selected Consolidated Financial Data of Koret
The following financial information about Koret is derived from the audited
financial statements for the last five fiscal years. Koret's fiscal year is the
52 or 53 week period ending on the Sunday nearest November 30. This information
is only a summary and you should read it in conjunction with the Koret financial
statements and related notes contained in Annex C to this prospectus.
<TABLE>
<CAPTION>
As of or for the fiscal years ended
-----------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Koret Historical
Net sales $ 290 $ 295 $ 259 $ 276 $ 252
Net earnings / (loss) $10.1 $ 2.3 ($ 1.6) $ 3.6 $ 3.6
Earnings per share - basic $1.27 $ .30 ($ .20) $ .48 $ .62
Earnings per share - diluted $1.19 $ .28 ($ .20) $ .43 $ .57
Total assets $ 89 $ 93 $ 89 $ 103 $ 81
Long-term debt $ 6 $ 13 $ 9 $ 26 $ 19
Dividends per common share $ .00 $ .00 $ .00 $ .00 $ .00
Book value per common share $6.45 $5.29 $5.17 $5.40 $4.88
</TABLE>
The Koret historical data includes the following sales and pretax income/(loss)
related to the Counterparts business which was acquired in 1989 and disposed of
in March 1998.
As of or for the fiscal years ended
-------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ---- -
(in millions)
Net sales $ 6 $ 52 $ 57 $ 60 $ 59
Pretax profit (loss) ($2.5) ($ 1.8) $ .6 $ .2 ($ 1.8)
5
<PAGE>
Selected Unaudited Pro Forma Combined Financial Data and Comparative Per Share
Data of Kellwood and Koret
The merger will be accounted for as a pooling of interests, which means that for
future accounting and financial reporting purposes, we will treat our companies
as if they had always been combined.
The unaudited pro forma financial information presented below reflects the
pooling of interests method of accounting and is intended to give you a better
picture of what our businesses might have looked like had they always been
combined. We prepared the pro forma income statement and balance sheet by adding
or combining the historical amounts for each company. We then made certain
adjustments to the combined amounts. Kellwood has a fiscal year ending on April
30, and Koret has a fiscal year ending on the Sunday nearest to November 30.
Koret's most recent fiscal year ended November 29, 1998. Koret has historically
prepared its financial statements based on its fiscal year ending on the Sunday
nearest to November 30. The Koret data have been prepared based on a recasting
of the consolidated financial data of Koret to correspond to the fiscal year
that will be used by the combined entity after the merger which ends on April
30. The pro forma statement of income data recasts Koret's statement of income
data to Kellwood's April 30 year end, and combines Kellwood data with the
recasted Koret data for the periods shown. The pro forma balance sheet data
combine Kellwood's and Koret's financial positions as of the balance sheet
dates.
In connection with the merger, Kellwood and Koret will incur approximately $7.5
million (pre tax) in nonrecurring merger costs related to legal, accounting,
consulting, retention agreements, prepayment penalties and other costs. These
costs will be charged to the combined results of operations during the current
year and are not reflected in the pro forma information.
The pro forma information also does not reflect any additional expenses or any
cost savings and other synergies anticipated by Kellwood's management as a
result of the merger. The companies may have performed differently if they had
actually been combined. You should not rely on the pro forma information as
being indicative of the actual historical results that we would have had or the
future results that we will experience after the merger.
All pro forma per share data are based on the number of outstanding shares of
Kellwood common stock adjusted to include the number of additional shares of
Kellwood common stock that would have been issued in the merger if it had
occurred as of May 1, 1995. The Koret Pro Forma Equivalent data is calculated by
multiplying the Kellwood Pro Forma Combined data by the exchange ratio of
.6025391.
<TABLE>
<CAPTION>
As of or for the nine
months ended January 31, As of or for the years ended April 30,
------------------------ --------------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Selected unaudited pro forma
combined financial data
Net sales $ 1,523 $ 1,500 $ 2,094 $ 1,788 $ 1,740
Net earnings $ 33.0 $ 28.3 $ 50.3 $ 34.7 $ 31.9
Total assets $ 1,098 $ 1,017 $ 1,110 $ 958 $ 888
Long-term debt $ 233 $ 256 $ 253 $ 123 $ 149
Comparative per share data
Kellwood Historical
Earnings per share - basic $ 1.30 $ 1.22 $ 2.00 $ 1.78 $ 1.32
Earnings per share - diluted $ 1.28 $ 1.19 $ 1.95 $ 1.75 $ 1.31
Dividends per common share $ 0.48 $ 0.48 $ .64 $ .60 $ .60
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Book value per common share $ 19.01 $ 17.26 $ 17.86 $ 16.47 $ 15.32
</TABLE>
<TABLE>
<CAPTION>
As of or for the nine months
ended January 31, As of or for the years ended April 30,
---------------------------- --------------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> C<>
Koret Historical
Earnings per share - basic $ .59 $ .27 $ .97 ($ .38) $ .50
Earnings per share - diluted $ .55 $ .25 $ .90 ($ .38) $ .47
Dividends per common share $ .00 $ .00 $ .00 $ .00 $ .00
Book value per common share $ 6.55 $ 5.30 $ 6.04 $ 5.24 $ 5.63
Kellwood Pro Forma Combined
Earnings per share - basic $ 1.24 $ 1.09 $ 1.93 $ 1.35 $ 1.24
Earnings per share - diluted $ 1.20 $ 1.04 $ 1.86 $ 1.30 $ 1.20
Dividends per common share $ .48 $ .48 $ .64 $ .60 $ .60
Book value per common share $ 17.37 $ 15.73 $ 16.44 $ 15.07 $ 14.25
Koret Pro Forma Equivalent
Earnings per share - basic $ .75 $ .65 $ 1.16 $ .81 $ .75
Earnings per share - diluted $ .73 $ .63 $ 1.12 $ .78 $ .72
Dividends per common share $ .29 $ .29 $ .39 $ .36 $ .36
Book value per common share $ 10.47 $ 9.48 $ 9.91 $ 9.08 $ 8.59
</TABLE>
7
<PAGE>
RISK FACTORS
In addition to the information presented elsewhere in this prospectus, you
should consider carefully the following risk factors in deciding whether to
approve the issuance of shares of Kellwood common stock or to approve and adopt
the merger agreement.
Since the Exchange Ratio Is Fixed, the Market Value of Kellwood Common Stock
Issued to Koret Stockholders Will Depend Upon the Market Price of Kellwood
Common Stock When the Merger is Completed
The exchange ratio of shares of Koret common stock for shares of Kellwood common
stock is fixed and will not be adjusted in the event of any increase or decrease
in the market price of Kellwood common stock. The price of Kellwood common stock
on the date of the merger may vary from its price on the date of this joint
proxy statement/prospectus and on the dates of the stockholder meetings. The
variations may be the result of changes in the business, operations or prospects
of Kellwood, market assessments of the likelihood that the merger will be
completed and the timing thereof, regulatory considerations, general market and
economic conditions and other factors. Since the merger will occur after the
stockholders meetings, there can be no assurance that the price of Kellwood
common stock on the date of the special meetings will be indicative of its price
at the effective time.
Expected Benefits from Integration of Operations May Not Be Achieved
In determining that the issuance of shares of Kellwood common stock to the Koret
stockholders and the merger is fair to and in the best interests of their
stockholders, both boards considered, among other things, the financial
benefits, operating efficiencies and synergies expected to result from the
completion of the merger.
A successful combination of the two companies will require, among other things,
integration of the two companies':
o respective technological expertise;
o key personnel;
o sales and distribution channels;
o manufacturing and sourcing;
o products and product development efforts; and
o management information systems.
Neither company has been involved in a strategic merger of this size, in which
effective integration of corporate cultures may be especially important over the
long term to achieve the benefits of the merger. There can be no assurance that
the integration will be successfully accomplished. Moreover, the integration of
the operations following the merger will require the dedication of management
and other personnel which may distract their attention from the day-to-day
business of the combined companies, the development or acquisition of new
products and the pursuit of other business acquisition activities. Failure to
successfully accomplish the integration of the two companies' operations and
technologies, or a prolonged delay in accomplishing a reasonable measure of
integration, may have a material adverse effect on the combined company.
8
<PAGE>
Increased Competition May Adversely Impact Kellwood's Profitability After the
Merger
Competition in the apparel industry is intense and is dominated by a number of
very large brands, many of which have greater financial, technical and marketing
resources, greater manufacturing capacity and more extensive and established
customer relationships than either Kellwood or Koret. The competitive responses
encountered from these larger, more established apparel companies may be more
aggressive and comprehensive than those faced by either of Kellwood or Koret
individually, and after the merger, Kellwood may not be able to compete
successfully with its larger competitors. Aggressive competitive moves faced by
Kellwood after the merger may result in lower prices for its products, decreased
gross profit margins, or have a material adverse effect on its business,
financial condition and results of operations.
Historical Earnings of Kellwood and the Voting Interests of Stockholders Will Be
Diluted
The merger will have a dilutive effect on Kellwood's historical earnings per
share. The issuance of Kellwood common stock in the merger will dilute the
voting interests of both Kellwood and Koret stockholders.
Kellwood May Not Be Successful If It Cannot Retain and Integrate Key Employees
The success of Kellwood after the merger may depend on the retention and
integration of the key management, sales, manufacturing, marketing, engineering
and other employees of Kellwood and Koret. Competition for qualified personnel
in the apparel industry is intense, and competitors may use aggressive tactics
to recruit key employees during the integration phase following the merger.
There can be no assurance that key employees of either Kellwood or Koret will
remain with Kellwood after the merger.
WHERE YOU CAN FIND MORE INFORMATION
Kellwood files annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
reports, statements or other information at the SEC's public reference rooms in
Washington, D.C. (at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549),
New York, New York (at 7 World Trade Center, Suite 1300, New York, New York
10048) or Chicago, Illinois (at Suite 1400, 500 West Madison, Chicago, Illinois
60661). Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Kellwood's SEC filings are also available to the public
from commercial document retrieval services and at the web site maintained by
the SEC at "www.sec.gov". You can also review copies of Kellwood's SEC filings
at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005. Information about Kellwood can also be found at its web site at
"www.kellwood.com".
Kellwood has filed with the SEC a registration statement on Form S-4 to register
the issuance of shares of Kellwood common stock and the resale of a portion of
those shares. This joint proxy statement/prospectus is part of that registration
statement and, as permitted by the SEC's rules, does not contain all the
information set forth in the registration statement. For further information you
may refer to the registration statement and to the exhibits and schedules filed
as part of the registration statement. You can review and copy the registration
statement and its exhibits and schedules at the public reference facilities
maintained by the SEC as described above. This information is also available on
the SEC's web site.
The SEC allows Kellwood to incorporate by reference the information that
Kellwood files with the SEC, which means that Kellwood can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this joint proxy
9
<PAGE>
statement/prospectus, and the information that Kellwood files with the SEC later
will automatically update and supersede this information. Kellwood incorporates
by reference the documents listed below and any future filings Kellwood makes
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934, until all of the registered shares are sold by you:
o Annual Report on Form 10-K for the fiscal year ended April 30, 1998;
o Quarterly Report on Form 10-Q for the quarterly period ended October
31, 1998;
o Quarterly Report on Form 10-QA for the quarterly period ended October
31, 1998;
o Quarterly Report on Form 10-Q for the quarterly period ended January
31, 1999;
o Current Report on Form 8-K dated December 2, 1998;
o Current Report on Form 8-K dated December 3, 1998;
o Current Report on Form 8-K dated December 18, 1998;
o Current Report on Form 8-K dated February 25, 1999;
o The description of the common stock in Kellwood's registration
statement filed pursuant to Section 12 of the Securities Exchange Act
of 1934, and any amendment or report filed for the purpose of
updating such description; and
o The description of the Series A Junior Preferred Stock and the Series
A Junior Preferred Stock purchase rights in Kellwood's registration
statement filed pursuant to Section 12 of the Securities Exchange Act
of 1934, and any amendment or report filed for the purpose of
updating such description.
You may request a copy of these filings, and any other information incorporated
by reference in this joint proxy statement/prospectus registration statement, at
no cost by writing or telephoning Kellwood at: Kellwood Company, Attention:
Thomas H. Pollihan, Secretary, 600 Kellwood Parkway, Chesterfield, Missouri
63017; telephone number 314-576-3100. In order to ensure timely delivery of the
documents, any request should be made at least 5 business days prior to the
scheduled meeting date.
We have not authorized anyone to give any information or make any representation
about the merger or our companies that is different from or in addition to, that
contained in this joint proxy statement/prospectus or in any of the materials
that we have incorporated into this joint proxy statement/prospectus. Therefore,
if anyone gives you information of this sort, you should not rely on it. If you
are in a state where offers to exchange or sell, or solicitations of offers to
exchange or purchase, the securities offered by this document or the
solicitation of proxies is unlawful, or if you are a person to whom it is
unlawful to direct these activities, then the offer presented in this document
does not extend to you. The information contained in this document speaks only
as of the date of this joint proxy statement/prospectus, unless the information
specifically indicates that another date applies.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements, trend analyses and other information contained in this joint
proxy statement/prospectus or any document incorporated by reference herein
relating to markets for Kellwood's or Koret's products
10
<PAGE>
and trends in Kellwood's or Koret's results of operations or financial
conditions, as well as other forward-looking statements including those
containing words such as will, should, could, anticipate, believe, plan,
estimate, expect, intend, project, forecast, and other similar expressions,
constitute forward-looking statements under the Private Securities Litigation
Reform Act of 1995. These forward-looking statements involve known and unknown
risks and uncertainties that may cause results and conditions to differ
materially from the forward-looking statements. The risks and uncertainties
include the following:
o economic conditions, including the level of consumer spending;
o product demand, including the performance of Kellwood's and Koret's
products within the prevailing retail environment and customer
acceptance of both new designs and newly introduced product lines;
o industry capacity and competitive products and pricing;
o manufacturing efficiencies;
o research and new product development;
o patents and technology;
o ability to attract and retain highly qualified personnel;
o availability of components and critical manufacturing equipment;
o ability of Kellwood and Koret and their vendors and third parties to
respond to Year 2000 issues;
o facility construction and start-ups;
o the regulatory and trade environment;
o the timing and magnitude of spending on and savings realized from
Kellwood's Vision 2000 initiatives;
o the stability of governments and business conditions in the countries
where Kellwood's and Koret's products are manufactured;
o financial difficulties encountered by customers;
o the availability and terms of future acquisitions; and
o currency exchange fluctuations and other capital market conditions.
In addition to the above, the forward-looking statements are subject to
uncertainties relating to the synergies, charges and expenses associated with
the merger. Kellwood and Koret expressly disclaim any duty to update any
forward-looking statements.
KELLWOOD MEETING
The Kellwood meeting will be held on April 27, 1999, at 10:00 A.M., local time,
at the offices of Kellwood.
11
<PAGE>
Purpose
At the Kellwood meeting, Kellwood stockholders will vote upon a proposal to
approve the issuance of shares of Kellwood common stock to Koret stockholders.
Kellwood stockholders will also consider and take action upon any other business
which may properly come before the meeting.
The Kellwood board believes that the share issuance is fair to and in the best
interests of Kellwood and its stockholders and has unanimously approved the
merger agreement and the share issuance. The Kellwood board unanimously
recommends that the Kellwood stockholders vote for the share issuance.
Record Date; Voting Rights
Only holders of record of Kellwood common stock at the close of business on
March 5, 1999, are entitled to vote at the meeting. At the close of business on
March 5, 1999, there were 22,490,516 shares of Kellwood common stock
outstanding, held by approximately 4,292 record holders. Each share of Kellwood
common stock entitles the record holder to one vote.
Quorum
The holders of a majority of the outstanding shares of Kellwood stock entitled
to vote at the meeting, present in person or represented by proxy, constitute a
quorum.
Shares of Kellwood stock represented by proxies which are marked abstain will be
counted as shares present for purposes of determining the presence of a quorum
on all matters, as will shares that are represented by proxies that are executed
by any broker, fiduciary or other nominee on behalf of the beneficial owner(s)
thereof, regardless of whether authority to vote is withheld on one or more
matters. If a quorum is not present at the meeting, Kellwood management who hold
proxies will vote to adjourn the meeting to solicit additional proxies.
Proxies
The persons named on the enclosed proxy card will vote all shares of Kellwood
stock represented by proxies which are received in time for the meeting and have
not been revoked. If no instructions are indicated, the proxyholders will vote
the shares for the approval of the share issuance to the Koret stockholders.
Brokers who hold Kellwood stock as nominees will not have discretionary
authority to vote the shares in the absence of instructions from the beneficial
owners thereof. Proxies which are marked abstain and broker non-votes will have
the effect of a vote against the share issuance.
Kellwood does not know of any matter not described in the notice of meeting that
is expected to come before the meeting. If, however, any other matters are
properly presented for action at the meeting, proxies will be voted in the
discretion of the respective proxyholders, unless authority is withheld.
The stockholder may revoke a proxy at any time prior to its exercise by giving
written notice to the Secretary of Kellwood at Kellwood's principal executive
offices, by signing and returning a later dated proxy or by voting in person at
the meeting. Attendance at the meeting will not in and of itself revoke a proxy.
12
<PAGE>
Solicitation of Proxies
The Kellwood board is soliciting proxies on behalf of Kellwood. Kellwood will
bear the entire cost of proxy solicitation for the Kellwood meeting, including
all printing expenses, and filing fees in connection with this joint proxy
statement/prospectus and the registration statement on Form S-4. Directors,
officers and regular employees of Kellwood may solicit proxies by telephone or
otherwise, as well as through the mail. The directors, officers and regular
employees will not receive any additional compensation for any solicitation, but
may be reimbursed for out-of-pocket expenses. Kellwood expects its internal
expenses of solicitation to be nominal. In addition, Kellwood has retained
Morrow & Co., Inc. to assist in soliciting proxies and to provide materials to
banks, brokerage firms, nominees, fiduciaries and other custodians. For these
services, Kellwood will pay a fee of approximately $6,500, plus reasonable
expenses.
Required Vote
Provided a quorum is present, approval of the share issuance will require the
affirmative vote of the holders of a majority of the shares of Kellwood common
stock present in person or by proxy at the meeting. Broker non-votes and
abstentions will have the effect of a vote against the share issuance.
Share Ownership of Management
At the close of business on March 5, 1999, directors and executive officers of
Kellwood beneficially owned and had the right to vote an aggregate of 467,177
shares of the outstanding shares of Kellwood stock, or approximately 2% of the
shares of Kellwood stock then outstanding.
KORET MEETING
The Koret meeting will be held on April 26, 1999, at Koret's offices located at
505 14th Street, Oakland, California, at 9:00 A.M., local time.
Purpose
At the Koret meeting, Koret stockholders will vote upon a proposal to approve
and adopt the merger agreement. The Koret stockholders will also consider and
take action upon any other business which may properly come before the meeting.
The Koret board believes that the merger is fair to and in the best interests of
Koret and its stockholders and has unanimously approved and adopted the merger
agreement and the merger. The Koret board unanimously recommends that the Koret
stockholders vote in favor of approval and adoption of the merger agreement at
the Koret meeting.
Record Date; Voting Rights
Only holders of record of Koret common stock at the close of business on March
23, 1999, are entitled to receive notice of and to vote at the Koret meeting. At
the close of business on March 23, 1999, there were 7,994,909 shares of Koret
common stock outstanding, held by approximately 126 record holders. Each share
of Koret common stock entitles the record holder thereof to one vote.
Quorum
The holders of a majority of the outstanding shares of each class of Koret
common stock entitled to vote at the meeting, present in person or represented
by proxy, constitute a quorum.
13
<PAGE>
Shares of Koret common stock represented by proxies which are marked abstain
will be counted as shares present for purposes of determining the presence of a
quorum on all matters, as will shares that are represented by proxies that are
executed by any fiduciary or other nominee on behalf of the beneficial owner(s)
thereof, regardless of whether authority to vote is withheld on one or more
matters. If a quorum is not present at the meeting, Koret management who hold
proxies will vote to adjourn the meeting to solicit additional proxies.
Proxies
The persons named on the enclosed proxy card will vote all shares of Koret
common stock represented by proxies which are received in time for the meeting
and have not been revoked. If no instructions are indicated, the persons named
on the enclosed proxy card will vote the shares for the approval and adoption of
the merger agreement. Proxies which are marked abstain will have the effect of a
vote against the approval and adoption of the merger agreement.
Stockholders whose shares are registered in the name of an individual retirement
account, trust, commercial bank, trust company or other nominee, must request
the custodian, trustee or other nominee to complete, date, sign and return the
enclosed proxy card to vote such shares.
Koret does not know of any matter not described in the notice of meeting that is
expected to come before the meeting. If, however, any other matters are properly
presented for action at the meeting, the proxyholders will vote the proxies in
their discretion, unless authority is withheld.
The stockholder executing a proxy may revoke it at any time prior to its
exercise by giving written notice to the secretary of Koret at Koret's principal
executive offices, by signing and returning a later dated proxy or by voting in
person at the meeting. Attendance at the meeting will not revoke a proxy.
Solicitation of Proxies
The Koret board is soliciting proxies on behalf of Koret. Under the merger
agreement, Koret will bear the entire cost of its proxy solicitation for the
meeting, including all printing expenses and filing fees in connection with this
joint proxy statement/prospectus. Directors, officers and regular employees of
Koret may solicit proxies by telephone or otherwise as well as through the mail.
The directors, officers and regular employees will not receive any additional
compensation for any solicitation, but may be reimbursed for out-of-pocket
expenses incurred in connection therewith. Koret expects its internal expenses
of solicitation will be nominal.
Required Vote
Approval and adoption of the merger agreement will require the affirmative vote
of the holders of 70% of the voting power of all the outstanding shares of Koret
common stock.
Even if the merger is approved by the required vote, however, if holders of
approximately 10% of the outstanding Koret common stock exercise their appraisal
rights, pooling of interest accounting treatment for the merger will not be
available and, as a result, Kellwood will not be required to complete the
merger.
14
<PAGE>
Share Ownership of Management
At the close of business on March 23, 1999, directors and executive officers of
Koret beneficially owned and had the right to vote 2,067,277 shares of the
outstanding shares of Class A common stock. On March 23, 1999, the 2,067,277
Class A shares represented approximately 42.2% of the Class A shares then
outstanding and approximately 25.9% of the total voting power of the Koret
common stock then outstanding. In addition, Mr. Randall Blumenthal, the board
member elected by the holders of the Koret Class C common stock, is a Vice
President of Goldman, Sachs & Co., affiliates of which own an aggregate of
3,091,190 shares of Koret Class C common stock. On that date, the 3,091,190
Class C shares represented 100% of the Class C common stock and approximately
38.7% of the total voting power of Koret common stock then outstanding.
Conflicts of Interest
Stockholders should be aware that certain directors and executive officers of
Koret have interests that are in addition to or may be different from the
interests of Koret stockholders generally. The officers having these interests
negotiated the terms of the merger agreement and the directors having these
interests participated in the discussion, deliberation and voting of the Koret
board to adopt the merger agreement.
Treatment of Stock Option. Steven Rudin, the President and a director of Koret,
holds an option to purchase 100,000 shares of Koret common stock at a price of
$1.00 per share that was granted in 1992. This option will be converted at the
exchange ratio into an option to purchase 60,254 shares of Kellwood stock at a
price of $1.66 per share.
Indemnification; Insurance. Kellwood has agreed to indemnify officers and
directors of Koret in respect to acts or omissions occurring prior to the
effective time of the merger to the fullest extent permitted by Delaware law and
to advance expenses to the extent permitted by Delaware law. Kellwood will
maintain in effect for a period of six years following the effective time of the
merger, directors' and officers' liability insurance at no cost to the former
officers and directors of Koret with respect to acts or omissions occurring
prior to the effective time of the merger with substantially similar terms and
conditions as Kellwood's existing policies for officers and directors.
Registration Rights. This joint proxy statement/prospectus covers the reoffer
and resale of Kellwood common stock received by officers, directors and certain
stockholders of Koret in the merger. Kellwood agreed to register these shares
with the SEC and to maintain the registration until the shares have been resold,
or may be resold absent registration other than pursuant to Rules 144 and 145.
Employment Agreements. Mr. Martin Granoff has an employment agreement with
Koret under which he is employed as Koret's Chairman and Chief Executive
Officer, at an annual base salary of $200,000, for a term ending on June 1,
2003.
Mr. Rudin has an employment agreement with Koret under which he is employed as
Koret's President and Chief Operating Officer, at a current annual base salary
of $420,000, for a term ending June 1, 2003.
Mr. Fred Smeyne has an employment agreement with Koret under which he is
employed as Koret's Senior Vice President-Sales and Marketing at a current
annual base salary of $273,000, for a term ending on June 1, 2001.
Each of the employment agreements may be terminated only for the death or
disability of the employee or after written notice for cause. As a result, the
position and salary of each of these employees is protected following the merger
until the end of the term of his agreement.
15
<PAGE>
Transaction and Stay Bonuses. In conjunction with the merger, Kellwood retained
an independent consultant to perform a compensation study designed to promote
retention among Koret executives essential to the growth and profitability of
Kellwood after the merger and to compensate Koret executives instrumental to
completion of the merger. As recommended by the study, Kellwood has given
management of Koret verbal assurance that 27 employees of Koret will receive
transaction bonuses and stay bonuses totaling approximately $4.6 million. This
group includes four employee-directors who are currently expected to receive
transaction bonuses totaling $708,380 upon completion of the merger and stay
bonuses totaling $880,000 if each of them is still employed by Kellwood 27
months after the merger.
16
<PAGE>
THE MERGER
General
At the effective time of the merger, Koret will become a wholly-owned subsidiary
of Kellwood and each share of Koret common stock outstanding will be converted
into .6025391 shares of Kellwood common stock.
Background of the Merger
Kellwood continually evaluates corporate development opportunities to strengthen
its programs and lines. It seeks out companies, brands, licenses and products
that will introduce products that are important to its growth potential and its
customers. Management of Koret had been aware for some time that its
stockholders were interested in increasing the liquidity of their investment.
Over the past several years, Koret has considered and pursued various strategies
for accomplishing this, including initiating internal discussions with its
principal stockholders from time to time concerning the desirability and
practicability of selling Koret as a whole, selling certain divisions of Koret,
or undertaking a public offering of Koret's stock.
In May 1998, management of Koret met with representatives of Goldman Sachs to
discuss the feasibility of pursuing a sale of Koret. The Goldman Sachs
representatives included the individuals responsible for the investment in Koret
by investment partnerships affiliated with Goldman Sachs as well as members of
Goldman Sachs' mergers and acquisitions group. Following the meeting, the board
of directors of Koret directed management to investigate the sale of Koret to a
strategic buyer.
Koret management internally reviewed the SEC filings, security analysts' reports
and apparel industry information available to it concerning the largest 20 to 25
companies principally engaged in the manufacture and sale of apparel and
publicly traded in the United States. Koret management considered the financial
results and conditions of these companies, the business plans and strategies
disclosed by them, the type of acquisition transactions, if any, engaged in by
them, and the amount and type of consideration. Based on this analysis,
management of Koret and the Koret board determined that it was unlikely that
Koret would be able to identify an industry buyer willing to pay an amount of
cash for the entirety of Koret that would be acceptable to Koret's stockholders.
Koret management then reviewed the information with a view to identifying likely
candidates for a merger that would result in the stockholders of Koret receiving
publicly traded stock as consideration. In this review, Koret management
considered that the ability to account for the transaction as a pooling of
interests would be desirable for both the stockholders of Koret, as well as the
potential buyer.
The prospect of pursuing negotiations with each of the companies other than
Kellwood was rejected as unlikely or unsuitable for one or a combination of the
following reasons:
o The target was not likely to have the financial capacity to
complete the transaction and to effectively integrate the
Koret business;
o The target had publicly expressed a business strategy that did
not include a focus on moderately priced women's' apparel;
o Koret's recent financial results and current prospects would
have been dilutive to the target's earnings; and/or
17
<PAGE>
o The target had engaged in other recent capital stock
transactions that would have made pooling treatment
unavailable.
In addition, Koret management viewed Kellwood as a suitable candidate for a
strategic business combination, based on:
o complementary product lines and customer base. Both Koret and
Kellwood market moderately priced women's' apparel, but to
slightly different retail customers and consumers. As a
result, the two companies could reasonably expect to expand
their offerings to the other's customers without changing
their products, targeted consumers, or marketing approaches;
and
o compatible corporate cultures of Koret and Kellwood resulting
from similar management approaches to the business. Both Koret
and Kellwood emphasize management information analysis which
focuses on market research to determine the demographics of
consumers, market trends and sales analyses. Both Kellwood and
Koret's strategic business plans are substantially influenced
by this research which plays an important role in determining
markets, products and customers.
Koret management based this determination on publicly available financial
information, and on familiarity with Kellwood management, resulting, in part,
from preliminary discussions held during 1996 concerning the possible purchase
by Kellwood of Koret's Counterparts division and the acquaintance of Mr. Martin
Granoff, Chairman of Koret, and Mr. James Jacobsen, Vice-Chairman of Kellwood,
resulting from their serving together as officers of an apparel industry trade
association. Kellwood had determined not to pursue an acquisition of
Counterparts because Kellwood did not believe it would be able to improve
Counterparts' results sufficiently to provide a satisfactory return on its
investment.
On June 23, 1998, Mr. Granoff approached Mr. Jacobsen at an industry trade show
they were attending in Chicago to see if Kellwood might have an interest in
acquiring Koret. On July 9, 1998, Mr. Granoff, with the approval of the Koret
board, held a meeting with Mr. Hal Upbin, the President and Chief Executive
Officer of Kellwood, and John Henderson, Kellwood's Vice President of Marketing,
and the parties exchanged confidentiality agreements.
During the week of August 3, 1998, Mr. Granoff, Mr. Steven Rudin, President of
Koret, and Mr. Upbin met and discussed the possibility of merging Koret and
Kellwood. Koret management presented an initial price based upon their
evaluation of Koret. Koret management has many years of experience in the
apparel industry and was familiar with the valuation of similar companies in the
industry. After several meetings and discussions and after research into the
business and prospects of Koret, Kellwood management performed its own analysis
of the value of Koret. Kellwood management has many years of experience in the
apparel industry and its has maintained an active acquisition program, involving
the acquisition of more than 20 companies and the analysis of hundreds of
companies. Kellwood management made its own conclusion as to the valuation of
Koret, which amount was reasonably similar to Koret's own valuation. Mr. Granoff
and Mr. Upbin agreed to pursue the transaction and during August 1998 they held
several meetings and telephone conversations to discuss the price to be paid in
the transaction. In August and September 1998, operating and financial personnel
of each of Koret and Kellwood, and their legal and accounting advisors, also
commenced due diligence investigations as to the other company.
During the period between August 4, 1998 and September 18, 1998, both Kellwood
and Koret proposed terms for the transaction. Koret initially proposed a
purchase price of approximately $180 million, assuming a Kellwood stock price of
$32.00 per share, resulting in a proposed issuance in the merger of
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approximately 5.6 million Kellwood shares. The parties also discussed their
desire for protection against excessive changes in the merger consideration
which would result from extreme fluctuations in the market price of Kellwood
stock or the United States securities markets generally.
On September 18, 1998, the Koret board approved the execution of the letter of
intent. During October and November 1998, the parties and their representatives
continued their due diligence and negotiated definitive agreements concerning
the merger.
After the letter of intent was signed, Mr. Jacobsen contacted four financial
advisors. Kellwood management, in collaboration with the Finance Committee of
the Board of Directors, evaluated the different financial advisor's strengths,
weaknesses, knowledge of the business, proposed fees, and the type of services
the advisors could offer. CSFB was chosen in October of 1998. CSFB did not have
a role in negotiating the transaction as the parties had already agreed upon the
basic outline of the proposed transaction.
Due to the length of time involved in concluding the negotiation of the merger
agreement and the significant price fluctuations for Kellwood stock and in the
United States securities markets generally, both Koret and Kellwood determined
that it would be desirable to agree upon an exchange ratio to fix the maximum
number of shares of Kellwood stock that would be issuable in the merger at
5,241,000.
On November 23, 1998, the Koret board held a telephonic meeting at which it
reviewed the proposed terms of the transaction, the status of the negotiations,
and the merger agreement. The Koret board then unanimously determined that the
merger is fair to and in the best interests of Koret and its stockholders,
approved the transaction and the execution of the merger agreement and resolved
to recommend the approval of the merger and the merger agreement to Koret
stockholders.
At a meeting held on November 11, 1998, the Kellwood board unanimously
determined that the merger is fair to and in the best interests of Kellwood and
its stockholders and approved the merger agreement, the merger and the other
transactions contemplated thereby and resolved to recommend that the
stockholders of Kellwood vote in favor of the issuance of shares of Kellwood
common stock to the Koret stockholders.
Kellwood's Reasons for The Merger;
Recommendation of its Board of Directors
In reaching its decision to approve the merger agreement and to recommend that
the stockholders approve the share issuance, the Kellwood board, with the
assistance of management and Kellwood's financial advisor, Credit Suisse First
Boston Corporation, and its legal advisor, McDermott, Will & Emery, together
with Thomas Pollihan, Kellwood General Counsel, considered the following
factors:
o The results of operations, financial condition, business and
competitive position of Kellwood and Koret, both on a
historical and prospective basis, their respective strategic
business plans and various challenges and opportunities facing
Kellwood and Koret in executing their business plans;
o The opinion of CSFB to the Kellwood board on November 11, 1998
to the effect that, as of that date, the exchange ratio of
Koret common stock for Kellwood common stock was fair to
Kellwood from a financial point of view;
o The judgment, advice and analysis of Kellwood's management,
including the results of Kellwood's due diligence
investigations;
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o The potential synergies from the combination of Kellwood and
Koret, especially the potential of each of Kellwood and Koret
to cross-sell its products to the other's customers, the
potential financial and operating efficiencies that could
result from the combined operation, as well as the challenges
that exist in realizing these benefits from the merger;
o The product fit between the companies, which will give the
combined company a broader range of products to offer to
customers;
o The complementary sales channels of the two companies;
o The respective corporate cultures of the two companies, which
promote growth and performance and turning new ideas into
manufacturable, cost-effective products; and
o The expectation of the management of Kellwood and Koret that
the merger will be accretive to Kellwood's earnings per share
after the merger notwithstanding the dilutive effect on
Kellwood's historical earnings per share.
In view of the variety of factors considered in connection with its evaluation
of the merger, the Kellwood board did not find it practicable to and did not
quantify or otherwise assign relative weights to the specific factors considered
in reaching its determination. In addition, individual members of the Kellwood
board may have given different weights to different factors.
The Kellwood board has unanimously approved and adopted the merger agreement and
the share issuance and the transactions contemplated thereby and the Kellwood
board unanimously recommends that stockholders of Kellwood vote for the share
issuance.
Opinion of Kellwood's Financial Advisor
Credit Suisse First Boston Corporation has acted as financial advisor to
Kellwood in connection with the merger. CSFB was selected by Kellwood based on
CSFB's experience, expertise and familiarity with Kellwood and its business.
CSFB is an internationally recognized investment banking firm and is regularly
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, leveraged buyouts, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes.
In connection with CSFB's engagement, Kellwood requested that CSFB evaluate the
fairness of the consideration to be paid by Kellwood in the merger from a
financial point of view. On November 11, 1998, CSFB rendered to the Kellwood
board a written opinion to the effect that, as of that date and based upon and
subject to matters stated in their opinion, the exchange ratio of Kellwood
common stock for Koret common stock was fair to Kellwood from a financial point
of view.
The full text of CSFB's written opinion to the Kellwood board, dated November
11, 1998, which describes the procedures followed, assumptions made, matters
considered and limitations on the review undertaken in connection with its
opinion, is attached as Annex B to this joint proxy statement/prospectus. CSFB
has consented to the inclusion of its opinion letter in this joint proxy
statement/prospectus and references thereto under this section. In giving its
consent, CSFB does not admit that CSFB comes within the category of persons
whose consent is required under, and CSFB does not admit that it is an expert
with respect to any part of this prospectus for purposes of, the Securities Act
of 1933 and the rules and regulations thereunder. Stockholders of Kellwood are
urged to read CSFB's opinion carefully in its entirety. CSFB's opinion is
directed to the Kellwood board and
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relates only to the fairness of the exchange ratio from a financial point of
view to Kellwood, does not address any other aspect of the proposed merger and
does not constitute a recommendation to any stockholder as to how a stockholder
should vote at the Kellwood meeting.
In arriving at its opinion, CSFB reviewed the merger agreement and publicly
available business and financial information relating to Kellwood and Koret,
including financial forecasts provided to or otherwise discussed with CSFB by
Kellwood and Koret, and discussed the businesses and prospects of Kellwood and
Koret with their respective managements. CSFB also considered financial and
stock market data of Kellwood and Koret and compared that data with similar data
for other publicly held companies engaged in businesses similar to those of
Kellwood and Koret and considered, to the extent publicly available, the
financial terms of other business combinations and other transactions recently
effected. CSFB also considered other information, financial studies, analyses
and investigations, and financial, economic and market criteria that it deemed
relevant.
In connection with its review, CSFB assumed no responsibility for independent
verification of any of the information provided to or otherwise reviewed by CSFB
and relied on the information being complete and accurate in all material
respects. With respect to the financial forecasts, CSFB assumed that such
forecasts were prepared on bases reflecting reasonable estimates and judgments
as to the future financial performance of Kellwood and Koret and the cost
savings and other potential synergies, including the amount, timing and
achievability thereof, anticipated to result from the merger. In addition, CSFB
was not requested to, and did not, make an independent evaluation or appraisal
of the assets or liabilities, contingent or otherwise, of Kellwood or Koret, nor
was CSFB furnished with any evaluations or appraisals. CSFB's opinion was
necessarily based upon information available to CSFB, and financial, economic,
market and other conditions as they existed and could be evaluated, on the date
of its opinion. CSFB did not express any opinion as to what the value of the
Kellwood common stock actually will be when issued pursuant to the merger or the
prices at which the Kellwood common stock will trade subsequent to the merger.
Although CSFB evaluated the exchange ratio from a financial point of view, CSFB
was not requested to, and did not, recommend the specific consideration payable
in the merger, which consideration was determined through arms-length
negotiation between Kellwood and Koret. No limitations were imposed by Kellwood
on CSFB with respect to the investigations made or procedures followed by CSFB
in rendering its opinion.
In preparing its opinion to the Kellwood board, CSFB performed a variety of
financial and comparative analyses, including those described below. The summary
of these analyses does not purport to be a complete description of the analyses
underlying CSFB's opinion. The preparation of a fairness opinion is a complex
analytic process involving various determinations as to the most appropriate and
relevant methods of financial analyses and the application of those methods to
the particular circumstances and, therefore, such an opinion is not susceptible
to summary description. In arriving at its opinion, CSFB made qualitative
judgments as to the significance and relevance of each analysis and factor
considered by it. Accordingly, CSFB believes that its analyses must be
considered as a whole and that selecting portions of such analyses and factors,
without considering all analyses and factors, could create a misleading or
incomplete view of the processes underlying such analyses and its opinion. In
its analyses, CSFB made numerous assumptions with respect to Kellwood, Koret,
industry performance, regulatory, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Kellwood and Koret. No company, transaction or business used in such analyses as
a comparison is identical to Kellwood or Koret or the proposed merger, nor is an
evaluation of the results of such analyses entirely mathematical; rather, such
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 being analyzed. The estimates contained in such 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
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significantly more or less favorable than those suggested by such 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, such analyses and estimates are
inherently subject to substantial uncertainty. CSFB's opinion and financial
analyses were only one of many factors considered by the Kellwood board in its
evaluation of the proposed merger and should not be viewed as determinative of
the views of the Kellwood board or management with respect to the exchange ratio
or the proposed merger.
Discounted Cash Flow Analysis. CSFB estimated the present value of the future
streams of unlevered free cash flows that Koret could produce on a stand-alone
basis through fiscal year 2008 based on a financial forecast prepared by Koret's
management and, separately, based on an adjusted financial forecast using lower
revenue growth and earnings before interest, taxes, depreciation and
amortization margin assumptions. The ranges of the terminal value of Koret were
calculated primarily based upon Koret's financial and other characteristics by
applying multiples ranging from 6.0x to 8.0x to the projected 2008 earnings
before interest, taxes, depreciation and amortization of Koret. The free cash
flow streams and estimated terminal values were then discounted to present
values using discount rates ranging from 9.0% to 11.0%. Finally, the discounted
free cash flow streams and the discounted terminal values were added together.
After adjustment for net debt of $62 million, this analysis indicated the
following implied total equity value ranges for Koret based on the financial
forecast prepared by Koret's management.
Management Case
---------------
Terminal Value EBITDA Multiple
------------------------------
Discount Rate 6.0x 7.0x 8.0x
9% $234 $260 $286
10% $213 $237 $261
11% $195 $217 $238
After adjustment for net debt of $62 million, this analysis indicated the
following implied total equity value ranges for Koret based on the adjusted
financial forecast using lower revenue growth and earnings before interest,
taxes, depreciation and amortization margin assumptions.
Adjusted Case
-------------
Terminal Value EBITDA Multiple
------------------------------
Discount Rate 6.0x 7.0x 8.0x
9% $157 $176 $195
10% $142 $159 $177
11% $129 $144 $160
Comparable Trading Analysis. Using publicly available information, CSFB compared
selected financial, operating and stock market data for Kellwood and for the
aggregate exchange ratio based on the closing sale price of Kellwood common
stock of $30.13 on November 9, 1998, to be paid in the merger to corresponding
data of selected companies in the apparel industry. The selected companies and
observed multiples of last twelve months' sales, 1998 estimated earnings before
interest, taxes, depreciation and amortization, 1998 estimated earnings before
interest and taxes, and 1998 estimated net income, respectively, for the
selected companies based on closing stock prices as of November 9, 1998 were as
follows:
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Observed Multiples of:
----------------------
Company Sales EBITDA EBIT Net Income
------- ----- ------ ---- ----------
Donna Karan 0.3x 5.0x 9.9x NMF
Fruit of the Loom 1.2x 6.7x 9.5x 7.7x
Hartmarx 0.6x 9.2x 10.9 15.9x
Jones Apparel 1.0x 6.5x 6.9x 13.7x
Liz Claiborne 0.7x 5.5x 6.6x 11.1x
Nautica Enterprises 1.5x 7.3x 8.3x 12.9x
Oxford Industries 0.4x 6.4x 7.6x 10.3x
Phillips Van Heusen 0.4x 7.0x 10.0x 12.1x
Russell Corp. 1.0x 6.7x 10.9x 15.0x
VF Corp. 1.2x 8.1x 10.2x 15.7x
Warnaco Group 1.3x 7.7x 9.0x 12.3x
Applying these multiples to corresponding financial data of Koret, after
adjustment for net debt and cash, resulted in an implied equity value range for
Koret of approximately $138 million to $188 million.
Comparable Acquisition Analysis. Using publicly available information, CSFB
analyzed the purchase prices and implied transaction multiples paid in selected
merger and acquisition transactions involving companies in the apparel industry,
consisting of the following:
<TABLE>
<CAPTION>
Observed Multiples of LTM
-------------------------
Acquiror Target Sales EBITDA EBIT Net Income
-------- ------ ----- ------ ---- ----------
<S> <C> <C> <C> <C> <C>
Jones Apparel Sun Apparel 1.9x 14.5x 16.8x 21.7x
Tropical Sportswear Intl. Farah Inc. 0.5x 7.3x 10.6x 17.9x
Warnaco Group Designer Holdings 0.8x 6.7x 7.4x 12.8x
InvestCorp Helly Hansen AS 1.2x NA NA NA
Charterhouse Group Calvin Klein Jeans 1.0x NA NA NA
Warnaco Group Calvin Klein Underwear 1.1x NA NA NA
VF Corp. Nutmeg Industries 1.9x 12.8x NA NA
Cygne Designs Fenn, Wright & Manson 0.5x 23.7x 33.3 27.3x
Sara Lee Corp. Champion Products 1.6x 11.3x NA NA
</TABLE>
All multiples for the selected transactions were based on information available
at the time of announcement of the transaction. Applying these multiples, which
would normally be expected to reflect a portion of the anticipated synergies
from the transaction, to corresponding financial data of Koret, after adjustment
for net debt and cash, resulted in an implied total equity value reference range
for Koret of approximately $163 million to $263 million.
Merger Consequences Analysis. CSFB analyzed the potential pro forma effect of
the merger on Kellwood's earnings per share during the fiscal years 1999 through
2001, based upon estimates of Kellwood's management after giving effect to,
among other things, the net pretax cost savings and incremental earnings that
the management of Kellwood estimated could be generated by the merger. This
analysis compared Kellwood's status quo stand-alone earnings per share for each
of these years to a no synergies pro forma case, a low synergies pro forma case
and a high synergies pro forma case. This analysis indicated that the proposed
merger could be accretive to Kellwood's earnings per share on a fully diluted
basis in each of the years analyzed under each of the assumed pro forma cases.
The actual results achieved by the combined company may vary from projected
results and the variations may be material.
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The following table summarizes equity value ranges for Koret implied by the
analyses performed by CSFB.
Ranges of Implied Value
(in millions)
Analyses Performed: Low High
- ------------------ --- ----
Discounted Cash Flow (management forecast)........... $213 $261
Discounted Cash Flow (adjusted forecast)............. 142 177
Comparable Trading Analysis.......................... 138 188
Comparable Acquisition Analysis...................... 163 263
After completing all the analyses described above, CSFB concluded that the
exchange ratio of Kellwood common stock for Koret common stock was fair to
Kellwood from a financial point of view.
Fees. For services rendered in connection with the merger, Kellwood paid CSFB
$100,000 upon CSFB's engagement and an additional $150,000 upon delivery of the
written opinion described above. Kellwood has also agreed to reimburse CSFB for
its reasonable out-of-pocket expenses, including attorney's fees, and to
indemnify CSFB against certain liabilities, including certain liabilities under
the federal securities laws.
In the ordinary course of its business, CSFB and its affiliates may actively
trade the debt and equity securities of Kellwood for CSFB's and its affiliates'
own accounts and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
Koret's Reasons for The Merger;
Recommendation of its Board of Directors
In reaching its decision to approve the merger and to recommend that the Koret
stockholders vote to approve the merger, the Koret board considered the
following factors:
o the fact that Koret stockholders will receive shares of the common
stock of a publicly traded company and benefit from the growth and
business opportunities available to Kellwood;
o that the merger would qualify as a tax-free exchange of securities;
o the consolidating nature of the apparel industry, the future
prospects for Koret as a relatively small participant in the industry
and the improved competitive position and new opportunities available
as part of Kellwood's larger, more diversified operations;
o the effect on stockholder value of a combination with Kellwood, in
light of the financial condition and prospects of Koret and Kellwood
and the current economic and industry environment, and other possible
strategic alternatives for Koret, including potential business
combinations with industry participants other than Kellwood;
o a determination that the historical performance of the common stock
of Kellwood supported the exchange ratio of Koret common stock for
Kellwood common stock and the conclusion that the merger is fair to
Koret stockholders from a financial standpoint;
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o the results of the due diligence investigations by Koret's management
and its representatives concerning the business, technology,
products, operations, financial condition and prospects of Kellwood;
o the terms and conditions of the merger agreement, including the
consideration to be received by the stockholders of Koret;
o the compatibility of the respective business philosophies and
corporate cultures of Koret and Kellwood, which the Koret board
believed was important for the successful integration of the
companies;
o the impact of the merger on Koret's customers, employees and
suppliers; and
o the possibility of achieving synergies, operating efficiencies and
cost savings as a result of consummating the merger.
In addition, Koret's outside legal counsel discussed with the board its
fiduciary duties under Delaware law, and described the operation of the
termination provisions of the merger agreement. After taking into account all of
the factors set forth above, the Koret board has unanimously determined that the
merger is fair to and in the best interests of Koret and its stockholders.
The Koret board has unanimously approved and adopted the merger agreement and
the transactions contemplated thereby and the Koret board unanimously recommends
that stockholders of Koret vote "for" the approval and adoption of the merger
agreement.
Material Federal Income Tax Consequences
The following outlines the material United States federal income tax
consequences of the merger and is not a complete analysis of all tax effects of
the merger. The discussion does not address the effect of state, local or
non-U.S. tax laws, or the effect of any U.S. federal tax laws other than those
pertaining to United States federal income tax.
Kellwood and Koret have received an opinion from Kellwood's counsel, McDermott,
Will & Emery, substantially to the effect that for federal income tax purposes:
o the merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code of 1986; and
o Koret, Kellwood and Kellwood's merger subsidiary will each be a party
to the reorganization within the meaning of Section 368(b) of the
Code.
The opinion is based on current law and various other assumptions. In rendering
its opinion, McDermott, Will & Emery has relied upon representations of Kellwood
and Koret.
As a reorganization under Section 368(a) of the Code, the following are the
material United States federal income tax consequences of the merger:
o no gain or loss will be recognized by Koret, Kellwood or Kellwood's
merger subsidiary as a result of the merger;
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o no gain or loss will be recognized by Koret stockholders upon the
conversion of Koret common stock into shares of Kellwood common stock
pursuant to the merger, except with respect to cash, if any, received
in lieu of fractional shares of Kellwood common stock;
o the aggregate tax basis of the shares of Kellwood common stock
received in exchange for shares of Koret common stock pursuant to the
merger, including a fractional share of Kellwood common stock for
which cash is received, will be the same as the aggregate tax basis
of the shares of Koret common stock; and
o a Koret stockholder who receives cash in lieu of a fractional share
of Kellwood common stock will recognize gain or loss equal to the
difference, if any, between the stockholder's tax basis in the
fractional share and the amount of cash received.
The conclusions expressed above, including those expressed in the McDermott,
Will & Emery opinion, are based on current law. Future legislative,
administrative or judicial changes or interpretations, which can apply
retroactively, could affect the accuracy of those conclusions. No rulings have
or will be sought from the Internal Revenue Service concerning the tax
consequences of the merger. The opinion of McDermott, Will & Emery is not
binding on the Internal Revenue Service.
The discussion does not address all of the tax consequences that may be relevant
to particular taxpayers in light of their personal circumstances or to taxpayers
subject to special treatment under the Code. Such taxpayers include non-U.S.
persons, insurance companies, tax-exempt entities, retirement plans, dealers in
securities, banks and persons who acquired Koret stock pursuant to the exercise
of employee stock options or otherwise as compensation.
Because of the complexity of the tax laws, and because the tax consequences to
any particular Koret stockholder may be affected by matters not discussed above,
each Koret stockholder is urged to consult a personal tax advisor with respect
to the specific tax consequences of the merger to him taking into account his
own particular circumstances, including the applicability and effect of state,
local and non-U.S. tax laws, as well as of the federal tax laws.
Governmental and Regulatory Approvals
Filings with, notifications to, and authorizations and approvals of various
governmental agencies with respect to the merger, relating primarily to
antitrust and securities law issues, must be made and received prior to the
completion of the merger.
The parties have made the necessary filings under the Hart-Scott-Rodino
Antitrust Improvements Act and the necessary waiting periods have terminated.
At any time before or after the effective time of the merger, notwithstanding
the termination of the waiting period under the HSR Act, the Federal Trade
Commission or the Antitrust Division of the Department of Justice could take any
action to enjoin the completion of the merger or seeking divestiture of assets
of Kellwood or Koret. Similarly, any state or foreign governmental body could
take any action under its antitrust or similar laws. These entities could seek
to enjoin the completion of the merger or seek divestiture of businesses or
assets of Koret or Kellwood. Private parties may also take legal action under
the antitrust laws under certain circumstances.
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Percentage Ownership Interest of Koret Stockholders After the Merger
The following table reflects the ownership interest of Koret stockholders in
Kellwood following the merger. The numbers are based on the number of shares
actually outstanding as of March 11, 1999.
Kellwood shares pre-merger 22,488,702
Koret shares outstanding pre-merger 7,994,909
Koret stock warrants and options 703,282
Total Kellwood shares post-merger
assuming exercise of all Koret stock warrants and options 27,729,702
Kellwood shares issued to Koret stockholders
assuming exercise of all Koret stock warrants and options 5,241,000
Percentage beneficial ownership of pre-merger
Koret stockholders, optionholders and warrantholders 18.9%
Appraisal Rights
Under Delaware law, Kellwood stockholders are not entitled to appraisal rights
with respect to approval of the share issuance. Koret stockholders, however, are
entitled to appraisal rights with respect to the approval and adoption of the
merger agreement.
Koret stockholders who do not wish to accept the Kellwood stock to be issued in
the merger are entitled to seek an appraisal of the fair value of their Koret
common stock in the Delaware Court of Chancery. In order to exercise appraisal
rights, a Koret stockholder must comply with Section 262 of the Delaware General
Corporation Law.
This summary does not claim to be a complete statement of the method of
compliance with Section 262 and is qualified in its entirety by reference to
that Section, the full text of which is attached as Annex D. A Koret stockholder
who wants to seek appraisal of his or her shares should read Section 262 in
full, and is encouraged to consult legal counsel.
Any Koret stockholder wishing to exercise appraisal rights must, prior to the
vote on the merger at the Koret meeting, make a written demand for appraisal to
Koret at 505 14th Street, Oakland, CA 94612-1406, Attention: Corporate
Secretary. The demand must identify the stockholder and number of shares, as
well as the intention of the stockholder to demand appraisal. A stockholder
seeking an appraisal must not vote in favor of the merger. A vote against the
merger or a failure to vote will NOT satisfy the requirement of a written demand
for payment.
Only a holder of record of Koret common stock continuously from the date of the
demand for appraisal through the effective time of the merger, or a person duly
authorized to act on the holder's behalf, is entitled to appraisal. A demand for
appraisal of shares owned of record by two or more joint holders must identify
and be signed by, or on behalf of, all of the holders. A demand for appraisal
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity must identify the persons signing the demand.
A demand for appraisal may be withdrawn by the stockholder within 60 days after
the effective time of the merger, or thereafter with the approval of Kellwood.
Upon withdrawal of the demand for appraisal, the Koret stockholder will be
entitled to receive the number of shares of Kellwood common stock that he or she
would have received in the merger had he or she not demanded appraisal.
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Within 120 days after the completion of the merger, any Koret stockholder who
has properly demanded an appraisal, and who has not withdrawn his or her demand
as described above, and Kellwood each have the right to file in the Delaware
court a petition demanding a determination of the fair value of the Koret common
stock held by all Koret stockholders demanding an appraisal. If, within the
120-day period, no petition is filed, all rights to appraisal will cease and all
Koret stockholders will receive the Kellwood common stock to be issued in the
merger.
Upon the filing of the petition, the Delaware court may order that notice of the
time and place fixed for a hearing on the petition be mailed to Kellwood and all
of the Koret stockholders asserting appraisal rights, and be published at least
one week before the day of the hearing in a newspaper of general circulation
published in the City of Wilmington, Delaware, or in another publication
determined by the Delaware court. If a hearing on the petition is held, the
Delaware court is empowered to determine which Koret stockholders are entitled
to an appraisal of their shares. The Delaware court may require that dissenting
stockholders submit their stock certificates that had represented Koret common
stock for notation thereon of the pendency of the appraisal proceedings. The
Delaware court is empowered to dismiss the proceedings as to any Koret
stockholder who does not comply with this request. Accordingly, stockholders
asserting appraisal rights are cautioned to retain their stock certificates
pending resolution of the appraisal proceedings.
The shares of a Koret stockholder demanding an appraisal will be appraised by
the Delaware court at their fair value as of the effective time of the merger,
excluding any element of value arising from the accomplishment or expectation of
the merger. The determination of fair value of the remaining shares could be
based upon considerations other than the market value of the shares, including
values attributable to assets and earnings capacity. The Delaware court may
also, on application,
o determine a fair rate of interest, if any, to be paid to stockholders
in addition to value of the shares for the period from the effective
time of the merger to the date of payment,
o assess costs among the parties as the Delaware court deems equitable,
and
o order all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including reasonable
attorney's fees and fees and expenses of experts, to be charged pro
rata against the value of all shares entitled to appraisal.
Stockholders are generally permitted to participate in the appraisal
proceedings. No appraisal proceeding in the Delaware court shall be dismissed as
to any stockholder without the approval of the Delaware court, and this approval
may be conditioned upon terms the Delaware court deems just.
From and after the completion of the merger, stockholders asserting appraisal
rights are not entitled to vote their shares for any purpose, and are not
entitled to receive payment of dividends or other distributions on the shares
payable to stockholders of record thereafter.
If Koret stockholders holding approximately 10% or more of the total outstanding
Koret stock pursue their appraisal rights, pooling of interest accounting will
not be available and merger will not take place.
Koret stockholders asserting appraisal rights will not be subject to the terms
and conditions of the merger agreement and will not participate in the escrow
established to cover indemnification payments thereunder.
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Resales of Kellwood Common Stock
All shares of Kellwood common stock issued in connection with the merger have
been registered under the Securities Act of 1933. These shares may be traded
freely and without restriction by those stockholders not deemed to be affiliates
of Koret prior to the date of the Koret meeting, or of Kellwood following the
effective time of the merger. Affiliates are generally defined as persons who
control, are controlled by or are under common control with Koret at the time of
the Koret meeting or Kellwood following the effective time.
Kellwood has registered with the SEC, and this joint proxy statement/prospectus
covers, the resale of Kellwood common stock by those officers, directors and
other stockholders who may be affiliates of Koret for purposes of Rule 145. Each
director and executive officer of Koret, and each holder of more than 10% of the
outstanding Koret common stock, has agreed that he or she will not
o sell, pledge, transfer or otherwise dispose of any Koret common stock
or Kellwood common stock issued in the merger, except pursuant to an
effective registration statement under the Securities Act or in
compliance with Rule 144 or 145 or another exemption from the
registration requirements of the Securities Act; or
o sell or in any way reduce the person's risk relative to any Koret
common stock or Kellwood common stock received in the merger during
the period commencing 30 days prior to the effective time of the
merger and ending when the financial results covering at least 30
days of post-merger operations have been published by Kellwood.
Rule 144 resale restrictions apply to all affiliates of Kellwood including Koret
stockholders who become affiliates of Kellwood after the merger. An affiliate of
Kellwood must notify the SEC of all sales made in Kellwood common stock and all
sales must be made in compliance with Rule 144's manner of sale requirements. In
addition, during any three-month period, an affiliate may not sell more than the
greater of (a) one percent of the outstanding stock of Kellwood, or (b) the
average weekly reported volume of Kellwood common stock on the New York Stock
Exchange during the four calendar weeks preceding the filing of its notice of
sale with the SEC.
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THE MERGER AGREEMENT
The following is a summary of certain provisions of the merger agreement, a copy
of which is attached as Annex A to this joint proxy statement/prospectus. This
summary is qualified in its entirety by reference to the merger agreement. You
are urged to read the merger agreement in its entirety for a complete
description of the merger. Capitalized terms not otherwise defined herein shall
have the meanings defined in the merger agreement.
Summary of the Merger Agreement
After the conditions precedent to the merger have been fulfilled or waived, a
Certificate of Merger will be filed with the Delaware Secretary of State. The
merger will become effective upon the filing of the Certificate of Merger, and
Koret will become a wholly-owned subsidiary of Kellwood.
At the effective time of the merger:
o each share of Koret common stock outstanding will be converted
into .6025391 shares of Kellwood common stock,
o each option or warrant exercisable for Koret common stock will
be converted into an option or warrant exercisable for
Kellwood common stock, for a number of shares and at an
exercise price adjusted to reflect the exchange ratio, and
o all shares of Koret common stock, when converted, will no
longer be outstanding and will automatically be canceled and
retired.
A portion of the shares of Kellwood common stock issued to Koret stockholders
will be subject to a one-year escrow agreement. The total value of shares held
in escrow will be $12,500,000 based upon the closing price per share of Kellwood
common stock on the New York Stock Exchange on the trading day immediately
preceding the closing of the merger. The escrowed shares may be used to
indemnify Kellwood under the merger agreement. Martin J. Granoff and Randall
Blumenthal will act as the stockholders' representatives on behalf of the Koret
stockholders in all matters involving the escrowed shares. Escrowed shares which
are not subject to claims by Kellwood will be delivered to the Koret
stockholders. Dividends and other distributions, as well as voting rights, with
respect to the Kellwood common stock held in escrow shall be made to or
exercised by the Koret stockholders.
Surrender and Payment
Harris Trust and Savings Bank will act as exchange agent.
The exchange agent will mail a letter of transmittal which will contain
instructions for delivery of Koret stock for Kellwood common stock and cash in
lieu of fractional shares. The letter of transmittal will also authorize the
escrow agreement and the appointment of the stockholders' representatives under
the escrow agreement. Upon delivery of Koret common stock to the exchange agent
and the signed letter of transmittal, the Koret stockholder will receive
certificates representing the number of whole shares of Kellwood common stock
into which the shares have been converted, less the number of shares to be
delivered into escrow, and cash in lieu of any fractional share, and the
certificates surrendered will be canceled.
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Fractional Shares
No fractional shares will be issued. In lieu of fractional shares, each holder
of Koret common stock who would otherwise have been entitled to a fraction of a
share of Kellwood common stock will be paid an amount in cash, determined by
multiplying the closing price per share on the New York Stock Exchange of
Kellwood common stock on the last trading day immediately preceding the closing
date of the merger by the fractional interest.
Conditions to the Merger
The obligations of Kellwood and Koret to effect the merger are subject to the
fulfillment of certain conditions at or prior to the effective time, including:
o approval of the merger agreement by the requisite vote of
stockholders of Koret and approval of the stock issuance by
the requisite vote of the stockholders of Kellwood; and
o no stop order suspending the effectiveness of the registration
statement will have been issued by the SEC and no proceedings
for that purpose will have been initiated or threatened by the
SEC.
The obligations of Koret to effect the merger are also subject to the
satisfaction of certain conditions, including that:
o the representations and warranties of Kellwood will be true
and correct at the closing of the merger, except for changes
occurring in the ordinary course of business and breaches
which would not jeopardize the qualification of the merger as
a tax-free exchange;
o there will not be any suit, action or proceeding by any
governmental entity seeking to prevent the merger;
o no event will have occurred that would have a material adverse
effect on Kellwood's business, assets (including intangible
assets), financial condition, results of operations or
liabilities; and
o McDermott, Will & Emery, Kellwood's counsel, shall have
delivered its opinion that the merger will qualify as a
tax-free reorganization within the meaning of Section 368(a)
of the Code.
The obligations of Kellwood to effect the merger are subject to the satisfaction
of certain conditions at or prior to the effective time, including that:
o the representations and warranties of Koret will be true and
correct at the closing of the merger, except for changes
occurring in the ordinary course of business and breaches that
would not result in a material adverse effect on Koret's
business;
o Kellwood will have received a letter from
PricewaterhouseCoopers LLP that the merger will qualify for
pooling of interests accounting treatment under APB 16;
o no event will have occurred, and there will not have been any
change in Koret's business, that has resulted in a material
adverse effect on Koret's business, assets, financial
condition, results of operations or liabilities;
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o there will not be any suit, action or proceeding by any
governmental entity seeking to prevent the merger; and
o Koret shall have received all required third party consents.
Representations and Warranties
The merger agreement contains customary representations and warranties of
Kellwood, including that the information supplied by Kellwood included in this
joint proxy statement/prospectus will be free from material misstatements and
omissions.
The merger agreement also contains customary representations and warranties by
Koret, including a representation that it has not taken any action or failed to
take any action, that would prevent the merger from qualifying for treatment as
a pooling of interests and a tax-free reorganization.
Conduct of Business Pending the Merger
Actions by Koret. Koret has agreed to carry on its business in all material
respects in the ordinary course as conducted on the date of the merger
agreement, and has specifically agreed to:
o maintain inventories at current levels adequate for the
business and in accordance with past inventory practices of
Koret, except for sales in the ordinary course of business;
o maintain its assets in good repair, order and condition,
reasonable wear and tear excepted;
o maintain all insurance on assets and property or for the
benefit of Koret's employees, all liability and other casualty
insurance, and all bonds on personnel, presently carried;
o preserve intact the organization and reputation of Koret and
keep available the services of the present executives,
employees and agents of Koret;
o preserve the good will of suppliers, customers and others
having business relationships with Koret;
o maintain its books, accounts and records in the usual, regular
and ordinary manner on a basis consistent with prior years;
o except in the ordinary course of business, not enter into,
amend or terminate any employment, bonus, severance or
retirement contract or arrangement, nor increase any salary or
other compensation payable or to become payable to its
executives or employees;
o not enter into, amend or terminate, or agree to enter into,
amend or terminate, any material contract;
o not extend credit in the sale of products, collection of
receivables or otherwise, other than in the ordinary and
regular course of business;
o not declare, set aside or pay any dividend or make any other
distribution with respect to its capital stock;
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o not merge or consolidate with or agree to merge or consolidate
with, nor purchase or agree to purchase all or substantially
all of the assets of, nor otherwise acquire, any corporation,
partnership, or other business organization or division
thereof;
o not sell, lease or otherwise dispose of or agree to sell,
lease or otherwise dispose of, any of its assets, properties,
rights or claims, except in the ordinary course of business;
o not authorize for issuance, issue, sell or deliver any
additional shares of its capital stock of any class or any
securities or obligations convertible into capital stock or
issue;
o not grant any option, warrant or other right to purchase any
capital stock;
o not redeem or otherwise acquire any capital stock of Koret;
o not take any action or fail to take any reasonable action
which would prevent Kellwood from accounting for the merger as
a pooling of interests; or
o not incur or become subject to, nor agree to incur or become
subject to, any debt, obligation or liability, contingent or
otherwise, except current liabilities and contractual
obligations in the ordinary course of business.
Until the completion of the merger, Koret has agreed to confer on a regular and
frequent basis with Kellwood to report material operational matters and the
general status of on-going operations of its business. Koret will promptly
notify Kellwood of any material change in the financial condition, results of
operations, properties, business or prospects of its business.
Koret Stock Warrants and Options
Bankers Trust New York Corporation and BT Alex Brown Incorporated own warrants
to purchase 553,282 and 50,000 shares of Koret common stock, respectively. If
still outstanding at the time of the merger, the warrants will be converted into
warrants to purchase 333,374 and 30,126 shares of Kellwood common stock,
respectively. The exercise price per share of Kellwood common stock will equal
the exercise price per share of Koret common stock immediately prior to or at
the effective time of the merger divided by the exchange ratio. Kellwood will
pay cash in lieu of issuing fractional shares upon the exercise of warrants.
Each warrant will be otherwise exercisable upon the same terms and conditions as
were applicable under the related Koret warrant immediately prior to the merger.
It is expected that following the receipt of stockholder approvals at the
meetings, but prior to the effective time of the merger, Bankers Trust New York
Corporation and BT Alex Brown Incorporated will exercise their warrants to
purchase Koret common stock and that these shares will be converted into
Kellwood common stock based upon the exchange ratio.
Mr. Rudin holds an option to purchase 100,000 shares of Koret common stock at a
price of $1.00 per share. If Mr. Rudin does not exercise his option prior to
the merger, the option will be converted into an option to purchase 60,254
shares of Kellwood common stock at a price of $1.66 per share.
Accounting Treatment
The merger will be accounted for as a pooling of interests. Under this
accounting method, the recorded assets and liabilities of Kellwood and Koret
will be carried forward at their recorded amounts to the combined enterprise,
income of the combined enterprise will include income of Kellwood and Koret for
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the entire fiscal year in which the merger occurs and the reported income of
Kellwood and Koret for prior periods will be combined and restated as income of
the combined enterprise. It is a condition to the merger that Kellwood receive a
letter from PricewaterhouseCoopers LLP that the merger will qualify for pooling
of interests accounting treatment, which letter will be based, as to Koret, on a
customary letter from Koret's management and a letter from KPMG LLP. Pooling of
interests will not be achieved, and the merger will not occur if Koret
stockholders demand appraisal rights as to approximately 10% of the total Koret
shares outstanding.
Employee Benefit Plans and Agreements
Kellwood will provide Koret employees with:
o Kellwood's 401(k) plan,
o health and medical benefits, and
o other employee benefits that are, in the case of each category of
benefits, substantially similar to the current benefits provided by
Koret. Kellwood will honor, all plans and all contracts, plans, and
programs providing for compensation or benefits for Koret employees.
Except to the extent it would result in benefit accruals under a defined benefit
pension plan for periods prior to the merger, Kellwood will treat all service by
Koret employees as service with Kellwood, and with respect to any medical or
dental benefit plan, Kellwood will waive any pre-existing condition exclusions
and actively-at-work requirements.
Except for the three employment agreements described under the heading Conflicts
of Interest above, Kellwood has no obligation to continue the employment of any
Koret employee following the merger, other than employees whose terms and
conditions of employment are covered by a collective bargaining agreement.
No Solicitation
Under the merger agreement, neither Koret, nor the stockholders of Koret who are
parties to the merger agreement, nor any party related to Koret will authorize
or permit any of its officers, directors, employees, advisors or representatives
to solicit, initiate or knowingly encourage the submission of, any alternative
proposal. Alternative proposal means any proposal or offer to acquire or operate
all or any material part of Koret or its business or to acquire any person, if
the transaction would be materially inconsistent with or preclusive of the
merger.
Notwithstanding the foregoing, in response to an unsolicited alternative
proposal, Koret and the stockholders of Koret who are parties to the merger
agreement may furnish information to, or enter into discussions or negotiations
with the party making an alternative proposal if the Koret board concludes in
good faith the transaction contemplated by the alternative proposal:
o is reasonably capable of being completed, taking into account
all known legal, financial, regulatory and other aspects of
the alternative proposal and the person making the alternative
proposal, and
o would, if consummated, result in a transaction more favorable
to Koret's stockholders from a financial point of view than
the merger, if, and only to the extent that, prior to
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taking the action, Koret provides reasonable notice to
Kellwood that it is taking action, and receives from the
person or entity an executed confidentiality agreement.
Termination
The merger agreement may be terminated at any time prior to the completion of
the merger, whether before or after any approval of the matters presented in
connection with the merger by the stockholders of Koret or Kellwood:
o by mutual written consent of Kellwood, Koret and the Koret
stockholders who are parties to the merger agreement;
o by Koret, upon approval of the Koret board, if prior to
stockholder approval
o Koret receives an alternative proposal;
o the Koret board determines, in the exercise of its good
faith judgment, that the alternative proposal is more
favorable from a financial point of view to its
stockholders, than the transactions contemplated by the
merger agreement; and
o Koret gives Kellwood at least 4 business days' prior
written notice of the material terms and conditions of
any alternative proposal and of its intention to
terminate the merger agreement in order to effect the
alternative proposal; provided, however, that a
termination under this clause shall not be effective, and
Koret shall not be entitled to enter into a definitive
agreement providing for an alternative transaction, until
it pays Kellwood a $5,000,000 breakup fee;
o by Kellwood, if:
o the Koret board resolves to accept or recommend to
Koret's stockholders a definitive agreement with respect
to an alternative proposal which is more favorable to the
Koret stockholders from a financial point of view than
merger or withdraws or adversely modifies or takes a
public position materially inconsistent with its approval
or recommendation to the Koret stockholders of the merger
or fails to submit the merger agreement for the approval
of its stockholders or fails to use its reasonable best
efforts to obtain stockholder approval of the merger,
thereby obliging Koret to pay Kellwood a $5,000,000
breakup fee;
o a change of control of Koret occurs,
o Koret enters into a definitive agreement providing for,
or publicly announces its intention to effect, any
transaction involving a change of control of Koret; or
o a tender offer or exchange offer commences or is
announced that, if completed, would have the effect of a
change of control of Koret, thereby obliging Koret to pay
Kellwood a $5,000,000 breakup fee, provided that Koret
will not have to pay the breakup fee in the event of a
tender offer or exchange offer until a change of control
actually occurs;
o by either Kellwood or Koret, if:
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o if the merger does not occur for any reason on or before
April 30, 1999; provided, however, that if the merger
does not occur due to the act or omission of one of the
parties, that party may not terminate the merger
agreement;
o the approval of the stockholders of such party or the
other party is not obtained at the applicable
stockholders meeting
o the other party breaches any of its obligations under the
merger agreement and the breach is not cured within 10
days after receipt of written notice of the breach by the
non-breaching party and the breach results in a material
adverse effect on the non-breaching party's business,
assets, financial condition, results of operations or
liabilities; or
o by Koret, if Kellwood's board or a committee thereof withdraws
or adversely modifies its approval of, or recommendation to
the stockholders of Kellwood to approve, the share issuance,
or fails to submit the approval of the share issuance to a
stockholder vote or fails to use its reasonable best efforts
to obtain stockholder approval of the share issuance.
Fees and Expenses
All costs and expenses incurred by a party in connection with the merger
agreement shall be, in the case of expenses incurred by Kellwood, the obligation
of Kellwood, and, in the case of Koret and the Koret stockholders which are
parties to the merger agreement, the obligation of Koret; provided, however,
that if the merger agreement is terminated by Koret due to:
o the failure of Kellwood's stockholders to approve the share issuance;
or
o the breach by Kellwood of its representations and warranties and
covenants under the merger agreement and failure to cure the breach;
or
o Kellwood's withdrawal or adverse modification of its approval or
recommendation to Kellwood stockholders to approve the issuance of
Kellwood shares in the merger or failure to submit the share issuance
to the Kellwood stockholders or failure to use its reasonable best
efforts to obtain stockholder approval, Kellwood shall pay the
expenses of Koret.
If any action is brought by either party to enforce any provision of the merger
agreement, the prevailing party shall be entitled to recover court costs,
arbitration expenses and reasonable attorneys' fees.
Amendment
Except as otherwise provided by law, the merger agreement may be amended by the
parties thereto by execution of an instrument in writing signed by or on behalf
of each of the parties thereto.
Waiver
At any time prior to the effective time, the parties to the merger agreement may
o extend the time for the performance of any of the obligations or
other acts of the other parties thereto,
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o waive any inaccuracies in the representations and warranties
contained therein or in any document delivered pursuant thereto and
o waive compliance with any of the agreements or conditions contained
therein which may legally be waived.
DESCRIPTION OF KELLWOOD'S CAPITAL STOCK
The statements set forth under this heading with respect to the Delaware General
Corporation Law, Kellwood's certificate of incorporation and Kellwood's by-laws
are brief summaries thereof and do not purport to be complete; the statements
are subject to the detailed provisions of the Delaware General Corporation Law,
the Kellwood certificate of incorporation and the Kellwood by-laws.
Common Stock
Kellwood is authorized to issue 50,000,000 shares of common stock, $.01 par
value. Holders of common stock have full voting rights, one vote for each share
held of record, and, in the election of directors, are entitled to cumulate
their votes. Stockholders are entitled to receive dividends, if any, declared by
the board of directors out of funds legally available therefor, and they are
entitled to share equally and ratably in the assets remaining, if any, after
payment of all debts and liabilities upon Kellwood's winding up and dissolution,
subject to the rights of the holders of any outstanding preferred stock. The
holders of common stock have no preemptive or other rights to subscribe for, or
to purchase, additional shares of common stock. The outstanding shares are fully
paid and nonassessable. Harris Trust and Savings Bank is the transfer agent and
registrar for the Kellwood common stock.
Preferred Stock
General. Under the certificate of incorporation, the Kellwood board is
authorized to create and issue up to 500,000 shares of preferred stock in one or
more series and to determine the rights and preferences of each series, to the
extent permitted by the certificate of incorporation. No shares of preferred
stock have been issued.
The board of directors when designating a series of preferred stock may include
in a certificate of designation establishing the series of preferred stock
specific terms, including:
o The title and stated value of the preferred stock;
o The number of shares of the preferred stock offered, the liquidation
preference per share and the initial offering price of the preferred
stock;
o The dividend rate, period and/or payment date or method of
calculation thereof applicable to the preferred stock;
o The provisions for redemption, if applicable, of the preferred stock;
o The terms and conditions, if applicable, upon which the preferred
stock will be convertible into common stock of Kellwood;
o The relative ranking and preferences of the preferred stock as to
dividend rights and rights upon liquidation, dissolution or winding
up of the affairs of Kellwood; and
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o Any limitations on any senior series of preferred stock; and
Liquidation Preference. Unless otherwise specified in the preferred stock, upon
any liquidation, dissolution or winding up of Kellwood the holders of any series
of preferred stock will have preference and priority over the common stock and
any other class of stock or series of a class of stock of Kellwood ranking on
liquidation junior to the series of preferred stock, for payment out of the
assets of Kellwood or proceeds thereof in the amount set forth in the
certificate of designation. The assets of Kellwood or proceeds thereof are
insufficient to make the full liquidation payment in respect of a series of
preferred stock and liquidating payments on any other series of Preferred Stock
ranking on a parity with the series, then those assets and proceeds will be
distributed among the holders of the series of preferred stock and any other
series of preferred stock ranking on a parity with the series ratably in
accordance with the respective amounts which would be payable on the shares of
the series of preferred stock and the other series of preferred stock ranking as
to liquidation on a parity with the series if all amounts thereon were paid in
full. A sale of all or substantially all of Kellwood's assets or a consolidation
or merger of Kellwood with one or more corporations shall not be deemed to be a
liquidation, dissolution or winding up of Kellwood.
Preferred Stock Purchase Rights
A dividend of one Series A Junior Preferred Stock purchase right per share of
common stock was distributed to shareowners in June 1986, so that each share of
Kellwood common stock also represents a right, expiring June 11, 2006, to buy
1/100th of a share of Series A Junior Preferred Stock from Kellwood for $100.
The rights were issued pursuant to a rights agreement, dated as of June 11,
1986, as amended as of August 21, 1990, and as further amended as of May 31,
1996.
Rights are not exercisable or transferable apart from the common stock until the
earlier of
o ten days following the public announcement that a person or
group, other than Kellwood, its subsidiaries or any employee
benefit plan of Kellwood, has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the
outstanding shares of common stock or
o ten days following the commencement of, or announcement of an
intention to make, a tender offer or exchange offer if, upon
completion thereof, such person or group would be the
beneficial owner of 15% or more of the outstanding shares of
common stock - the earlier of these dates being the
distribution date.
If, on or after a distribution date, an acquiring person becomes a 15% or more
holder, each holder of a right, except the acquiring person, has the right to
receive, upon exercise at the then current exercise price, shares of common
stock valued at twice the then applicable exercise price of the right.
Similarly, on or after the distribution date, the rights may be exercisable at
the then current exercise price for the other party's stock having a value of
twice the exercise price if Kellwood is acquired in a merger or other business
combination where it does not survive or survives with a change or exchange of
its shares of common stock or if 50 percent or more of its assets, earning power
or cash flow is sold or transferred. Generally, rights may be redeemed by
Kellwood for five cents each prior to a stock acquisition date.
Exceptions
The exercise price and the number of units of Series A Junior Preferred Stock or
other securities or property issued upon exercise of the rights are subject to
adjustment to prevent dilution in the event of
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o stock dividend, subdivision, combination or reclassification of the
Series A Junior Preferred Stock,
o the grant to Series A Junior Preferred Stockholders of rights or
warrants, or
o the distribution to Series A Junior Preferred Stockholders of debt or
assets, other than regular quarterly cash dividends, or of rights or
warrants. No adjustments will be made until cumulative adjustments
equal or exceed a 1% adjustment. The rights plan exempts any
acquisition by an underwriter for the purpose of resale in a public
distribution. The rights will attach to shares of common stock sold
or delivered upon conversion or exchange of any convertible or
exchangeable securities.
Voting Rights of Common Stock
The holders of Kellwood common stock are entitled to one vote for each share
held on each matter submitted to a vote of stockholders and do have cumulative
voting rights. All elections and matters submitted to a vote of stockholders are
decided by the affirmative vote of a majority of the shares present in person or
by proxy and entitled to vote at a meeting at which a quorum is present, except
as otherwise required by the Delaware General Corporation Law or the Kellwood
certificate of incorporation.
Certain Provisions of the Certificate of Incorporation
The Kellwood certificate of incorporation provides for a classified board of
directors with two-year staggered terms. It also provides that stockholders may
remove an incumbent director only for cause, and then only upon the affirmative
vote of at least 75% of the outstanding shares entitled to vote on the election
of directors.
Although in general, the Kellwood certificate of incorporation can be amended by
the affirmative vote of the majority of each class of Kellwood's outstanding
shares of capital stock, certain provisions of the Kellwood certificate of
incorporation can only be amended by the affirmative vote of 75% of each class
of Kellwood's outstanding shares of capital stock. The Kellwood by-laws can be
amended by either the affirmative vote of 75% of each class of Kellwood's
outstanding shares of capital stock or by the majority vote of the board of
directors. Stockholders may not act by written consent without a meeting.
Business combinations and other significant corporate transactions involving
Kellwood and any beneficial owner of more than 25% of the outstanding voting
shares of Kellwood must be approved by at least 75% of each class of Kellwood's
outstanding shares entitled to vote thereon, and also by a majority of all votes
entitled to be cast in respect of shares held by stockholders other than the
owner of more than the 25%, unless the transaction has been approved by the
Kellwood board or unless the stockholders of Kellwood shall receive
consideration for the transaction not less than the highest per share price paid
by the 25% owner in acquiring any shares of stock of Kellwood.
Business Combinations Under the Delaware General Corporation Law
Section 203 of the Delaware law prohibits generally a public Delaware
corporation, including Kellwood, from engaging in a business combination with an
interested stockholder for a period of three years after the date of the
transaction in which an interested stockholder became such, unless:
o the board of directors of such corporation approved, prior to the
date the interested stockholder became such, either the business
combination or the transaction;
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o upon completion of the transaction, an interested stockholder owns at
least 85% of the voting shares of the corporation; or
o the business combination is approved by the board of directors of the
corporation and authorized by the affirmative vote at an annual or
special meeting of at least 66 2/3% of the outstanding voting shares
of the corporation, excluding shares held by the interested
stockholder.
For purposes of Section 203 of Delaware law, a business combination includes:
o mergers, consolidations and sales or other dispositions of 10% or
more of the assets of a corporation to or with an interested
stockholder;
o certain transactions resulting in the issuance or transfer to an
interested stockholder of any stock of such corporation or its
subsidiaries; and
o other transactions resulting in a disproportionate financial benefit
to an interested stockholder
o an interested stockholder is a person who, together with its
affiliates and associates, owns or within a three-year period did own
15% or more of a corporation's stock entitled to vote generally in
the election of directors.
COMPARISON OF THE RIGHTS OF HOLDERS OF
KELLWOOD COMMON STOCK AND KORET COMMON STOCK
The statements set forth under this heading with respect to the Delaware General
Corporation Law, Koret's certificate of incorporation, and stockholders'
agreement dated as of July 1, 1994 by and among Koret, Inc. and certain of its
stockholders, the Kellwood certificate of incorporation and the Kellwood by-laws
are brief summaries thereof and do not purport to be complete. These statements
are subject to the detailed provisions of Delaware law, the Koret certificate of
incorporation, the Koret by-laws, the Kellwood certificate of incorporation and
the Kellwood by-laws.
General
The following summary compares certain rights of the holders of Koret common
stock to the rights of the holders of Kellwood common stock. The rights of
holders of Koret common stock are governed principally by the Delaware law, the
Koret certificate of incorporation and the Koret by-laws and the Koret
stockholders agreement. Upon completion of the merger, the Koret stockholders
will become holders of Kellwood common stock, and their rights will be governed
principally by Delaware law, the Kellwood certificate of incorporation and the
Kellwood by-laws. In most respects, the rights of Kellwood stockholders are
similar to those of Koret stockholders. The following summarizes the material
differences between the rights of holders of Koret common stock and Kellwood
common stock.
Dividends
The holders of Koret Class A and Class B common stock are not entitled to
receive any dividends unless and until the holders of the Class C common stock
have been paid cumulative dividends of at least $6.47 per share. Thereafter, all
dividends, when and if any are declared, are required to be paid to all holders
of Koret common stock on an equal basis per share.
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<PAGE>
Following the merger, the Kellwood board, in its sole discretion, will have the
right to declare and pay dividends to its stockholders subject to loan covenants
and business conditions.
Voting Rights
The holders of Koret Class A common stock and Class C common stock are entitled
to one vote for each share held on each matter submitted to a vote of
stockholders, and vote together as a single class, except in the election of
directors. The Koret certificate of incorporation and the Koret stockholders
agreement provide that the holders of the Class C common stock are entitled to
elect up to three directors as long as the Koret board is composed of seven to
nine members; if the size of the Koret board is increased, the number of
directors which may be elected by the holders of the Class C common stock
increases proportionately. The holders of Class B common stock are not entitled
to vote, except in certain extraordinary circumstances. Some matters require the
vote of 70% of the outstanding voting power of Koret common stock, including the
vote of a majority of the shares of the Class C common stock, for approval. The
Koret stockholders are not entitled to cumulative voting.
The holders of Kellwood common stock are entitled to one vote for each share
held on each matter submitted to a vote of stockholders and do have cumulative
voting rights. All elections and matters submitted to a vote of stockholders are
decided by the affirmative vote of a majority of the shares present in person or
by proxy and entitled to vote at a meeting at which a quorum is present, except
as otherwise required by the Delaware law or the Kellwood certificate of
incorporation.
Directors
Classification. Directors on the Kellwood board serve staggered terms of
office. The Koret certificate of incorporation provides that all of the
directors are elected each year.
Selection. Directors of Kellwood are elected by the affirmative vote of a
majority of the shares of Kellwood common stock present and voting at any
election of directors. Pursuant to the Koret stockholders agreement, the
stockholders of Koret have agreed to vote their shares so that the seven members
of Koret's board of directors currently are selected as follows:
o one of the Koret directors is selected by the holders of the Koret
Class C common stock;
o five of the Koret directors, three of whom must be employees of
Koret, are selected by Mr. Granoff and Mr. Rudin, acting together;
o one of the Koret directors is selected by a nominating committee of
the Koret board, one of the members of which must be the director
selected by the holders of the Koret Class C common stock.
Removal. Directors of Kellwood may only be removed by the stockholders only for
cause and then only upon the affirmative vote of at least 75% of the outstanding
Kellwood shares. Under Kellwood's certificate of incorporation "cause" for
removal shall only exist if the director whose removal is proposed
o has been convicted of a felony by a court of competent jurisdiction
and such conviction is no longer subject to direct appeal or
41
<PAGE>
o has been adjudged by a court of competent jurisdiction to be liable
for negligence or misconduct in the performance of his duty to the
company in a matter of substantial importance to the company, and
such adjudication is no longer subject to direct appeal.
Directors elected by Koret stockholders may be removed, with or without cause,
by the persons or groups entitled to select the member to be removed, and the
resulting vacancy shall be filled by the person selected by such person or
group.
Special Meetings
The Kellwood by-laws provide that the chairman of the board or secretary at the
request in writing of a majority of the Kellwood board may call a special
meeting of stockholders. Special meetings of the Kellwood board may be called at
any time by the chairman of the board or at the request in writing of any two
directors. The Koret by-laws provide that a special meeting of the stockholders
of Koret may be called by the president of Koret, and shall be called by the
president or secretary of Koret upon the written request of a majority of the
directors or of any director selected by the holders of the Koret Class C common
stock. Special meetings of the Koret board may be called by the president of
Koret, and shall be called by the president or secretary of Koret upon the
written request of any director.
Action of Stockholders Without a Meeting
Delaware law permits stockholders to consent in writing to any action without a
meeting, unless the certificate of incorporation of such corporation provides
otherwise, provided such consent is signed by stockholders having at least the
minimum number of votes required to authorize such action at a meeting of
stockholders. The Kellwood certificate of incorporation provides that no action
may be taken by written consent.
Amendment to Certificate of Incorporation
Under Delaware law, the certificate of incorporation of a corporation may be
amended by resolution of the board of directors and the affirmative vote of the
holders of a majority of the outstanding shares of stock entitled to vote
thereon. With respect to any amendment to the certificate of incorporation of a
corporation that would adversely affect a particular class or series of stock,
Delaware law requires the separate approval by the holders of the affected class
or series of stock, voting together as a single class. In addition to the
foregoing, the Koret certificate of incorporation provides that any proposed
amendment of the Koret certificate of incorporation must be approved by the
affirmative vote of 70% of the directors, including a majority of the directors
selected by the holders of the Koret Class C common stock.
Amendment to By-laws
The Koret by-laws may be amended or repealed by the affirmative vote of 70% of
the directors, including a majority of the directors selected by the holders of
the Koret Class C common stock. The Kellwood by-laws may be amended or replaced
by either the affirmative vote of 75% of all classes of Kellwood capital stock
or the affirmative vote of the majority of the Kellwood board.
Approval of Mergers and Asset Sales
Under the Delaware law, unless required by its certificate of incorporation, no
vote of the stockholders of a constituent corporation surviving a merger is
necessary to authorize the merger if:
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<PAGE>
o the agreement of merger does not in any way amend the certificate of
incorporation of the constituent corporation;
o each share of stock of a constituent corporation outstanding
immediately prior to the merger is to be an identical outstanding or
treasury share of the surviving corporation after the merger;
o either no shares of common stock of the surviving corporation and no
shares, securities or obligations convertible into common stock are
to be issued under the plan of merger, or the number of shares of
common stock issued or so issuable does not exceed 20% of the number
thereof outstanding immediately prior to the merger; and
o certain other conditions are satisfied. In addition, Delaware law
provides that a parent corporation that is the record holder of at
least 90% of the outstanding shares of each class of stock of a
subsidiary may merge the subsidiary into the parent corporation
without the approval of the subsidiary's stockholders or board of
directors.
The Kellwood certificate of incorporation provides certain business combinations
and other significant corporate transactions involving Kellwood and a
Substantial Stockholder, as defined in the Kellwood certificate of
incorporation, require the approval of 75% of each class of Kellwood's
outstanding shares entitled to vote thereon. The Koret certificate of
incorporation provides that any merger of Koret with or into another company
requires the affirmative vote of 70% of the directors, including a majority of
the directors selected by the holders of the Koret Class C common stock, and the
affirmative vote of the holders of 70% of the outstanding voting power of Koret
common stock. In addition, the holder of the Koret Class B non-voting common
stock are entitled to vote as a separate class with respect to any merger or
consolidation of Koret with or into another entity or recapitalization or
reorganization if the holders of Koret Class B non-voting common stock would
receive different per share consideration in such transaction or otherwise be
treated differently from the holders of shares of Koret Class A common stock.
Indemnification of Directors and Officers
Section 145 of the Delaware law permits a corporation to indemnify any person
who was or is a party or is threatened to be made a party to:
o any action, suit or proceeding, whether civil, criminal,
administrative or investigative against expenses, judgments,
fines and reasonable settlement amounts if such person acted
in good faith and reasonably believed that his or her actions
were in or not opposed to the best interests of the
corporation and, with respect to any criminal proceeding, had
no reasonable cause to believe that his or her conduct was
unlawful; or
o any derivative action or suit on behalf of the corporation
against expenses actually and reasonably incurred in
connection with the defense or settlement of such action or
suit, if the person acted in good faith and reasonably
believed that his or her actions were in or not opposed to the
best interests of the corporation.
With respect to derivative suits and actions, if a person is adjudged to be
liable to the corporation, Delaware law prohibits indemnification, unless, and
then only to the extent that, either the Delaware Court of Chancery or the court
in which such derivative action or suit was brought determines that such person
is entitled to indemnification for those expenses which that court deems proper.
To the extent that a representative of a corporation has been successful on the
merits or otherwise in the defense of a third party or derivative action,
indemnification for actual and reasonable expenses incurred is mandatory.
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<PAGE>
The certificates of incorporation and by-laws of both companies provide for
indemnification of directors and officers to the maximum extent permitted under
Delaware law.
Pre-emptive Rights
Kellwood stockholders do not have pre-emptive rights. In some circumstances the
initial holders of Koret Class C common stock are entitled to pre-emptive rights
in connection with any proposed issuance by Koret prior to July 1, 2004 of any
shares of common stock or securities or rights exercisable or exchangeable for
or convertible into common stock.
MARKET PRICES
Kellwood common stock is traded on the New York Stock Exchange under the symbol
"KWD". The following table sets forth for the fiscal periods indicated the range
of the high and low sale prices of Kellwood common stock as reported on the
NYSE. Kellwood has paid a quarterly dividend of $0.16 per common share since
fiscal 1997.
Kellwood Common Stock
Fiscal year ended
April 30, 1997 High Low
----------------- ---- ---
1st Quarter $ 18 1/2 $ 16
2nd Quarter 18 1/4 15 3/4
3rd Quarter 22 5/8 17 3/4
4th Quarter 27 1/8 22 1/4
Fiscal year ended
April 30, 1998
-----------------
1st Quarter $ 34 1/2 $ 23 7/8
2nd Quarter 38 9/16 30 7/8
3rd Quarter 36 26 5/16
4th Quarter 34 5/8 29 1/8
Fiscal year ended
April 30, 1999
-----------------
1st Quarter $ 36 11/16 $ 30 1/8
2nd Quarter 32 11/16 22 1/2
3rd Quarter 30 3/4 24 1/16
4th Quarter (through _____ _____
March __, 1999)
Set forth below is the last reported sale price of Kellwood common stock on
December 1, 1998, the last trading day prior to the public announcement of the
execution of the merger agreement, and on March __, 1999, the last trading day
prior to the date of this joint proxy statement/prospectus, both as reported on
the NYSE:
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<PAGE>
December 1, 1998 $27.00
March __, 1999 $____
Koret Common Stock
As of the date of this prospectus, there were 4,903,719 shares of Koret Class A
common stock outstanding, which shares were owned by approximately 126 holders
of record, and 3,091,190 shares of Koret Class C common stock outstanding, which
shares were owned by three holders of record. Since there has been no public
market for Koret common stock, there is no current information as to the market
value of the stock. The most recent sale of Koret common stock at a price
obtained by negotiations between an unaffiliated buyer and seller occurred in
July 1994, pursuant to a private placement of Koret Class C common stock, at a
price of $6.47 per share.
Debt instruments to which Koret is a party restrict its ability to pay dividends
on its common stock. Accordingly, Koret has not paid any dividends on its common
stock since 1989.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements are
presented to reflect the estimated impact of the merger on the historical
consolidated financial statements of Kellwood and Koret using the pooling of
interests method of accounting. The unaudited pro forma condensed combined
financial statements have been prepared from, should be read with and are
qualified in their entirety by reference to:
o the historical consolidated financial statements and notes
thereto of Kellwood, which are incorporated by reference in
this joint proxy statement/prospectus, and
o the historical consolidated financial statements and notes
thereto of Koret, included in this joint proxy
statement/prospectus.
The unaudited pro forma condensed combined financial statements have been
included for illustrative purposes only, do not reflect any cost savings and
other synergies anticipated by Kellwood's management as a result of the merger
and are not necessarily indicative of the results of operations or financial
position that would have occurred had the merger been completed at the dates
indicated, nor are they necessarily indicative of future results of operations
or financial position of the merged companies.
45
<PAGE>
Kellwood Company
Unaudited Pro Forma Combined Condensed Balance Sheet as of January 31, 1999
(in millions)
The following Unaudited Pro Forma Combined Condensed Balance Sheet combines the
financial position of Kellwood and Koret as of January 31, 1999. This statement
has been prepared under the assumptions set forth in the accompanying notes.
This statement should be read in conjunction with the separate unaudited
condensed consolidated financial statements and notes thereto of Kellwood on
Form 10-Q incorporated by reference and of Koret included in this joint proxy
statement/prospectus. The Unaudited Pro Forma Combined Condensed Balance Sheet
is not necessarily indicative of the financial position of the combined
companies as they may be in the future or as they might have been had the merger
been effective January 31, 1999.
<TABLE>
<CAPTION>
Historical
---------- Pro Forma Pro Forma
Kellwood Koret Adjustments Combined
-------- ----- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and temporary cash investments $ 53.4 $ .8 $ 54.3
Receivables, net 284.1 0.0 284.1
Inventories 358.0 58.2 416.2
Other current assets 31.9 11.1 42.9
-------- -------- ---------
Total Current Assets 727.4 70.1 797.5
-------- -------- ---------
Property, plant and equipment 225.9 22.9 248.8
less accumulated depreciation & amort. (132.0) (17.7) (149.7)
-------- -------- ---------
93.9 5.2 99.1
-------- -------- ---------
Intangible assets 95.7 10.5 106.2
Other assets 91.0 4.2 95.2
-------- -------- ---------
Total Assets $1,008.0 $ 90.0 $ 1,098.0
======== ======== =========
LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities:
Current portion of long-term debt $ 15.8 $ 4.2 $ 19.9
Notes payable 135.5 0.0 135.5
Accounts payable 89.9 20.1 7.5 (4) 117.5
Accrued expenses 64.8 5.0 (2.0)(4) 67.8
-------- -------- ------ ---------
Total Current Liabilities 305.9 29.3 5.5 340.7
-------- -------- ------ ---------
Long-Term Debt 227.7 5.5 233.2
-------- -------- ---------
Deferred Income Taxes and Other 46.9 2.8 49.7
-------- -------- ---------
Stockholders' Equity 427.5 52.3 (5.5) 474.4
-------- -------- ------ ---------
Total Liabilities & Stockholders' Equity $1,008.0 $ 90.0 $ 0.0 $ 1,098.0
======== ======== ====== =========
</TABLE>
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<PAGE>
Kellwood Company
Unaudited Pro Forma Combined Condensed Statement of Earnings
For the Nine Months Ended January 31, 1999
(in millions, except per share and share amounts)
The following Unaudited Pro Forma Combined Condensed Statement of Earnings
combines the operations of Kellwood and Koret for the nine months ended January
31, 1999. This statement has been prepared under the assumptions set forth in
the accompanying notes. This statement should be read in conjunction with the
separate unaudited condensed consolidated financial statements and notes thereto
of Kellwood on Form 10-Q incorporated by reference and of Koret included in this
joint proxy statement/prospectus. The Unaudited Pro Forma Combined Condensed
Statement of Earnings is not necessarily indicative of the results of operations
of the combined companies as they may be in the future or as they might have
been had the merger been effective May 1, 1995.
<TABLE>
<CAPTION>
Historical
---------- Pro Forma Pro Forma
Kellwood Koret Adjustments Combined
-------- ----- ----------- ---------
<S> <C> <C> <C> <C>
Net Sales $ 1,326.2 $ 196.6 $ 1,522.7
Costs and Expenses
Cost of products sold 1,066.0 134.3 1,200.4
Selling, general and admin. expenses 178.8 47.8 226.6
Amortization of intangible assets 11.0 0.5 11.5
Interest expense 22.5 3.5 26.0
Interest income and other, net (1.2) 2.8 (1.6)
-------- ------- ---------
Earnings Before Income Taxes 49.1 7.6 56.7
Income Taxes 20.8 2.9 23.7
-------- ------- ---------
Net Earnings $ 28.3 $ 4.7 $ 33.0
======== ======= =========
Earnings Per Share
Basic $1.30 $ 1.24
-------- ---------
Diluted $1.28 $ 1.20
-------- ---------
Weighted average Kellwood shares outstanding (000's):
Basic 21,767 4,817 (2) 26,584
-------- ------- ---------
Diluted 22,205 5,219 (2) 27,424
-------- ------- ---------
</TABLE>
47
<PAGE>
Kellwood Company
Unaudited Pro Forma Combined Condensed Statement of Earnings
For the Year Ended April 30, 1998
(in millions, except per share and share amounts)
The following Unaudited Pro Forma Combined Condensed Statement of Earnings
combines the operations of Kellwood and Koret for the year ended April 30, 1998.
This statement has been prepared under the assumptions set forth in the
accompanying notes. This statement should be read in conjunction with the
separate unaudited consolidated financial statements and notes thereto of
Kellwood on Form 10-K incorporated by reference and of Koret included in this
joint proxy statement/prospectus. The Unaudited Pro Forma Combined Condensed
Statement of Earnings is not necessarily indicative of the results of operations
of the combined companies as they may be in the future or as they might have
been had the merger been effective May 1, 1995.
<TABLE>
<CAPTION>
Historical
---------- Pro Forma Pro Forma
Kellwood Koret Adjustments Combined
-------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Net Sales $ 1,781.6 $ 312.8 $ 2,094.4
Costs and Expenses
Cost of products sold 1,428.8 226.6 1,655.4
Selling, general and admin. expenses 236.0 64.6 300.5
Amortization of intangible assets 15.2 1.3 16.4
Interest expense 28.9 6.3 35.1
Interest income and other, net (1.2) 0.3 (0.9)
--------- ------- ---------
Earnings Before Income Taxes 73.9 13.8 87.8
Income Taxes 31.2 6.3 37.5
--------- ------- ---------
Net Earnings $ 42.7 $ 7.5 $ 50.3
========= ======= =========
Earnings per Share
Basic $ 2.00 $ 1.93
--------- ---------
Diluted $ 1.95 $ 1.86
--------- ---------
Weighted average Kellwood shares outstanding (000's):
Basic 21,408 4,688 (2) 26,096
--------- -------- ---------
Diluted 21,946 5,169 (2) 27,115
--------- -------- ---------
</TABLE>
48
<PAGE>
Kellwood Company
Unaudited Pro Forma Combined Condensed Statement of Earnings
For the Year Ended April 30, 1997
(in millions, except per share and share amounts)
The following Unaudited Pro Forma Combined Condensed Statement of Earnings
combines the operations of Kellwood and Koret for the year ended April 30, 1997.
This statement has been prepared under the assumptions set forth in the
accompanying notes. This statement should be read in conjunction with the
separate unaudited consolidated financial statements and notes thereto of
Kellwood on Form 10-K incorporated by reference and of Koret included in this
joint proxy statement/prospectus. The Unaudited Pro Forma Combined Condensed
Statement of Earnings is not necessarily indicative of the results of operations
of the combined companies as they may be in the future or as they might have
been had the merger been effective May 1, 1995.
<TABLE>
<CAPTION>
Historical
---------- Pro Forma Pro Forma
Kellwood Koret Adjustments Combined
-------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Net Sales $ 1,521.0 $ 266.5 $ 1,787.5
Costs and Expenses
Cost of products sold 1,211.5 203.6 1,415.1
Selling, general and admin. expenses 209.4 59.4 268.8
Amortization of intangible assets 15.4 1.1 16.5
Interest expense 21.6 5.2 26.8
Interest income and other, net (1.7) 0.2 (1.5)
--------- ------- ---------
Earnings Before Income Taxes 64.8 (3.0) 61.9
Income Taxes 27.2 (0.1) 27.2
--------- ------- ---------
Net Earnings $ 37.6 ($ 2.9) $ 34.7
========= ======= =========
Earnings per Share
Basic $ 1.78 $ 1.35
--------- ---------
Diluted $ 1.75 $ 1.30
--------- ---------
Weighted average Kellwood shares outstanding (000's):
Basic 21,131 4,622 (2) 25,753
--------- ------- ---------
Diluted 21,533 5,184 (2) 26,717
--------- ------- ---------
</TABLE>
49
<PAGE>
Kellwood Company
Unaudited Pro Forma Combined Condensed Statement of Earnings
For the Year Ended April 30, 1996
(in millions, except per share and share amounts)
The following Unaudited Pro Forma Combined Condensed Statement of Earnings
combines the operations of Kellwood and Koret for the year ended April 30, 1996.
This statement has been prepared under the assumptions set forth in the
accompanying notes. This statement should be read in conjunction with the
separate unaudited consolidated financial statements and notes thereto of
Kellwood on Form 10-K incorporated by reference and of Koret included in this
joint proxy statement/prospectus. The Unaudited Pro Forma Combined Condensed
Statement of Earnings is not necessarily indicative of the results of operations
of the combined companies as they may be in the future or as they might have
been had the merger been effective May 1, 1995.
<TABLE>
<CAPTION>
Historical
---------- Pro Forma Pro Forma
Kellwood Koret Adjustments Combined
-------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Net Sales $ 1,466.0 $ 273.4 $ 1,739.5
Costs and Expenses
Cost of products sold 1,175.1 203.1 1,378.3
Selling, general and admin. expenses 206.1 58.1 264.2
Amortization of intangible assets 15.5 1.0 16.4
Interest Expense 22.9 6.2 29.1
Interest income and other, net (2.1) (0.2) (2.2)
--------- ------- ---------
Earnings Before Income Taxes 48.5 5.2 53.7
Income Taxes 20.5 1.3 21.8
--------- ------- ---------
Net Earnings $ 28.0 $ 3.9 $ 31.9
========= ======= =========
Earnings per Share
Basic $ 1.32 $ 1.24
--------- ---------
Diluted $ 1.31 $ 1.20
========= =========
Weighted average Kellwood shares outstanding (000's):
Basic 21,170 4,621 (2) 25,791
--------- -------- ---------
Diluted 21,380 5,176 (2) 26,577
--------- -------- ---------
</TABLE>
50
<PAGE>
KELLWOOD COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
(All dollar amounts are in millions)
Note 1 - Accounting Treatment and Basis of Presentation
These financial statements assume that Kellwood will issue shares of its common
stock in exchange for all of the outstanding stock of Koret in accordance with
the exchange ratio discussed in Note 2, and that the transaction will be
accounted for as a pooling of interests. The Unaudited Pro Forma Combined
Condensed Balance Sheet presents the merger of Koret as if it had occurred on
the balance sheet date, while the Unaudited Pro Forma Combined Condensed
Statements of Earnings present the merger of Koret as if it had occurred on May
1, 1995.
Koret has previously had a fiscal year ending on the Sunday nearest to November
30. The Unaudited Pro Forma Combined Condensed Financial Statements were
prepared by restating Koret's operating results to Kellwood's April 30 fiscal
year end. Such presentation aligns comparable fiscal quarters for Kellwood and
Koret and provides a basis for future comparability of combined results.
The pro-forma financial results and weighted average shares outstanding exclude
the results of Fritzi and the shares issued to consummate the acquisition of
substantially all of the business assets of Fritzi. See Acquisition of Fritzi
on page __.
Some columns or rows may not add due to rounding.
Note 2 - Exchange Ratio
Under the merger agreement, each outstanding share of Koret common stock will be
converted into 0.6025391 shares of Kellwood common stock.
Note 3 - Counterparts business. The historical financial information of Koret
includes the following sales and operating profit (pretax) results of the
Counterparts business which was acquired in 1989 and disposed of in March 1998
See "Business of Koret" on page __:
<TABLE>
<CAPTION>
For the nine
months ended January 31, For the years ended April 30,
------------------------ -----------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 0 $41 $ 51 $ 46 $ 64
Pretax profit/(loss) ($1.6) ($.6) ($ .8) ($ .9) $ 2.0
</TABLE>
Note 4 - Costs of the transaction
In connection with the merger, Kellwood and Koret will incur approximately $7.5
(pre-tax) in nonrecurring merger costs related to legal, accounting, consulting,
retention agreements, prepayment penalties and other costs. These costs, net of
the related tax benefit, will be charged to the combined results of operations
during the current year and are not reflected in the Unaudited Pro Forma
Combined Condensed Statements of Earnings.
51
<PAGE>
BUSINESS OF KELLWOOD
History
Kellwood was founded in 1961 as the successor by merger of 15 independent
suppliers to Sears. During the second half of the 1980's and the first half of
the 1990's, Kellwood implemented a business strategy to expand its branded
products, broaden its customer base, increase its channels of distribution and
further develop its global products sourcing capability. Since 1985, the company
has acquired 14 domestic companies which principally market branded products. In
addition to its domestic acquisitions, in the early 1980's, the company acquired
Smart Shirts Limited of Hong Kong, a leading shirt and blouse manufacturer in
the Far East. As a result of these moves, the company redirected its focus from
primarily the manufacturing of private label apparel to a marketing-driven
emphasis on branded apparel and camping products. The company continually
evaluates corporate development opportunities in its search for companies,
brands, licenses, and products which augment its existing programs and lines and
which introduce Kellwood into new markets which are important to its customers
and offer growth potential.
Strategy
Kellwood's business strategy is to develop and operate a portfolio of businesses
with products, channels of distribution, and sourcing capabilities that provide
the company with the appropriate balance, flexibility and diversity necessary to
service the ever-changing needs of the retailer and the consumer. The company's
five business segments - Popular-to-Moderate Women's Sportswear,
Better-to-Bridge Women's Sportswear, Private Label, Smart Shirts and
Recreational Products - encompass its multiple operating units, several of which
manufacture and sell both branded and private label products. All five business
portfolios are supported by a global network of sourcing relationships with
contract manufacturers and company operated facilities. The elements of balance,
flexibility and diversity are achieved by the strategic movement of capital
within these five portfolios.
Business units representing approximately 76% of total Kellwood sales and pretax
earnings were acquired during the period of 1985-1995. The company believes that
there remain substantial opportunities for realizing economies of scale and
leveraging its purchasing power.
Operations - Vision 2000. In order to increase the value delivered to the
customer, Kellwood recognized that it must take the steps necessary to better
align its internal capabilities with the requirements of its retail customers
and, ultimately, the consumer. In fiscal year 1995, Kellwood embarked upon an
initiative to integrate and leverage its strengths. This initiative is called
Vision 2000.
Phase One of Vision 2000 began during the second half of fiscal year 1995 and
was largely concluded during the fourth quarter of fiscal year 1996. This phase
dealt with the restructuring of the assets and merchandising and management
capabilities of six divisions which collectively represented approximately 20%
of total company sales. Kellwood sold its Home Fashions division, installed new
general and design/merchandising management in five divisions, increased
offshore sourcing to enhance the price/value proposition of the product,
restructured a joint venture and consolidated certain divisions to gain
operating efficiencies.
Phase Two of Vision 2000 began in fiscal year 1997. The primary focus is on
operations, identifying and capitalizing on opportunities to leverage the size
of the company as the fourth largest publicly-traded apparel company in the
United States. Opportunities being pursued to reinvent the company include four
major initiatives:
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<PAGE>
o leveraging procurement of raw materials, finished product from
contractors, operating supplies and services;
o investing in modern shared regional distribution centers to more
efficiently service the requirements of our retail customers and
realize cost savings and economies of scale;
o installing technologically advanced common operating information
systems; and
o implementing company-wide shared service centers to eliminate
duplication and other non-value added activities.
These efforts began in October 1996 and are expected to continue through fiscal
year 2000. The Company began to enjoy some of the benefits from the four
initiatives in the second half of fiscal year 1998. These initiatives are
expected to generate substantial savings, some of which will be passed on to the
customer, and some of which will be retained to improve Kellwood's operating
margin.
Popular-to-Moderate Women's Sportswear
Total apparel consumption at retail in 1997 reached $177 billion - up 5% from
$169 billion in 1996. Women's apparel is the largest segment of the market at
$89 billion - with popular-to-moderately priced women's sportswear at $46
billion or over 50% of all women's apparel - thus representing the largest
single market. This market is defined as blazers, dresses, sweaters, blouses,
vests, other tops, skirts, pants, skorts, and other bottoms with "out the door"
prices below $50.
This segment of the market is Kellwood's core and represented 57% of total
company volume in fiscal year 1998.
The popular-to-moderate market is serviced by thousands of small-to-medium size
apparel manufacturers. Kellwood's volume is estimated to be nearly twice the
size of its nearest competitor.
Major channels of distribution include the National Chains (Sears, J. C. Penney,
Wards) with moderate representing the mid-price point -- Department Stores where
Kellwood is typically priced at the opening price point -- Discounters where
Kellwood is priced in the mid-to-upper end -- and Specialty Stores where we
occupy the mid range.
Kellwood has been able to grow its popular-to-moderate business at a compounded
rate of 24% - 19% excluding acquisitions - during the decade of the 1990s while
the overall market for popular-to-moderate sportswear grew at a compounded rate
of only 5%.
Within Kellwood's popular-to-moderate segment, three brands dominate and
represent the major drivers of growth Sag Harbor(R), Kathie Lee(R) and Cricket
Lane(R)/Cape Cod - and collectively represent 75% of total segment sales.
<TABLE>
<CAPTION>
Brand Names Products Distribution Channel
----------- -------- --------------------
<S> <C> <C> <C>
SAG HARBOR Sag Harbor(R), Sag Career related Department Stores,
Harbor Woman(TM), separates National Chains,
Sag Harbor Petites(TM) accessories with Mass Merchants,
sweaters, shirts and Specialty Stores and
Tee Tops creating a Catalogs.
total wardrobe
concept in all size ranges.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
HALMODE Kathie Lee(R). Dresses and Department Stores
APPAREL, INC. Melissa Harper(R), sportswear for misses National Chains,
M.H.M.(R), Halmode juniors, plus and Mass Merchants,
Plus(TM), Halmode petite sizes at Specialty Stores,
Plaza South Plus(TM), popular-to-better Mail Order and
Vintage Blue(TM), price points. Non-Retail.
Vintage Studio(TM), Maternity wear and
California Influence(TM) uniforms
CRICKET LANE Cricket Lane(R), The Sportswear for petite Department Stores,
American Collection(R), sizes 8 to 18, misses National Chains, &
Cape Cod Sportswear(R), sizes 10 to 20, Mass Merchants.
Simply Petites(TM), women's sizes 38 to 44.
Pembrooke Sport(R),
Prestige Collection(TM)
</TABLE>
Items sold under the Kathie Lee(R) trademark are manufactured under license from
Lambchop Productions Ltd., the owner of the trademark Kathie Lee(R).
Better-to-Bridge Women's Sportswear
The market at retail for Better-to-Bridge priced women's sportswear is
approximately $9 billion and is dominated by relatively few national brands such
as Jones New York, Liz Claiborne, Donna Karan, St. John Knits, etc. With fiscal
year 1998 sales in the range of $200 million, Kellwood is not a significant
factor in this market. However, the reason the company has invested in this
segment of the market is diversification.
Kellwood's customer base in this segment consists of approximately 5,000 small
specialty stores and specialty stores chains, regional/second tier department
stores and better specialty.
<TABLE>
<CAPTION>
Brand Names Products Distribution Channel
----------- -------- --------------------
<S> <C> <C> <C>
DAVID DART D.A.R.T.(TM), David Bridge casual Upscale Department
DESIGN GROUP Dart(R), David Dart sportswear and and Specialty Stores;
Collection, David dresses for misses and David Dart
Dart Dress(TM), David plus, and petite misses Emporiums.
Dart Emporium(R), Also, maternity.
David Dart Sport(R)
Melrose(R), Updated career and Specialty Stores,
Melrose Studio(R) key item separates Department Stores,
Melrose Collectibles sizes 6 to 16, with Mass Merchants and
Fern Bratten for specialty lines for National Chains.
Melrose(TM)
ROBERT SCOTT/ David Brooks(R), Better-priced Better Specialty
DAVID BROOKS Robert Scott(R), sportswear for Stores, Mail Order
Robert Terry(R), Bill women's and misses and Better
Burns(R) sizes 4 to 18 and Department Stores
Petites 2 to 14.
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
GOODMAN Northern Isles(R), Sweaters, knitwear Department Stores
KNITTING Portraits by and sportswear for Specialty Stores and
Northern Isles(R), misses, petites Catalogs.
Tisbury Bay(TM) by women. Casual
Northern Isles(R) and career dresses for
misses and petite sizes.
</TABLE>
Items manufactured under the Bill Burns(R) trademark are manufactured under
license from Bill Burns New York, Inc., the owner of the trademark Bill
Burns(R).
Private Label
Kellwood's private label capability covers a broad range of product from
intimate apparel and loungewear to outerwear, activewear, pants and jeans,
workwear and sweaters.
Kellwood's private label business has evolved over the past few years from a
contracting business into a product development business strategically
positioned to assist the retailer in differentiating their merchandise mix.
Kellwood has invested in design and merchandising talent and in computer aided
design technology. With these resources, Kellwood is able to partner with
leading retailers in the design and delivery of floor ready merchandise and
programs to meet targeted price points.
Kellwood is vertical in fashion, such as chenille and tricot; and performance,
such as nylon and lycra blends fabrications which provides a cost advantage, as
well as enhances our merchandising/product development capability.
The private label business is increasingly becoming a program versus item
business. As a result, stock replenishment and E.D.I. capability provide
Kellwood with a competitive advantage enabling the company to bid on
multi-million dollar programs with the leading retailers in the National Chain
(Sears, J. C. Penney, Wards), Mail Order and Department Store channels of
distribution. To date, only a limited amount of business is done with the
discounters -- which thus provides an opportunity for future growth.
Kellwood's private label business is uniquely positioned to service a broad
range of retail price points due principally to our flexible and diversified
sourcing base. By only producing 57% of what the company sells in plants that
are owned, Kellwood is not constrained by only being able to market what we make
or with having to fill excess capacity. By being able to outsource 43% of our
sales, Kellwood is able to shop the world in order to meet a price point.
Additionally, the mix of offshore sourcing has grown from 20% in 1992 to 57% in
1998.
Smart Shirts
Smart Shirts is a leading manufacturer of woven dress and sport shirts -- and
also manufacturers ladies blouses and men's pants. The company recently started
a knit shirt operation in Sri Lanka which will expand Smart Shirts' product
offering beyond woven shirts.
Smart Shirts has upgraded its customer base from a mix of contracting with other
apparel manufacturers and retail customers -- to a product development business
with the better department stores and catalog houses selling shirts which retail
at prices in excess of $30.
55
<PAGE>
In order to enhance its competitive position and provide for future growth,
during fiscal year 1998, Smart Shirts moved all woven shirt cutting operations
out of Hong Kong into China -- and relocated and expanded its woven shirt sewing
facilities in China. The improvements in production costs and the productivity
of the workers in the new facility have enabled Smart Shirts to grow as well as
enhance gross margins.
Recreational Products
American Recreation Products is a leading company in the camping products
industry servicing all channels of distribution under four major brands (Wenzel,
Slumberjack, Kelty, Sierra Designs) positioned within each channel.
Brands Channels of Distribution
------ ------------------------
Wenzel Mass Merchant/
Discount
Slumberjack Sporting Goods
Chains & Catalogs
Kelty Specialty Outdoor
Chains
Sierra Designs Upper End Specialty
Outdoor Chains
Markets served include family camping, backpacking and mountaineering. Major
product lines include tents, sleeping bags, back packs and technical apparel and
accessories.
Channels of Distribution and Customers
Kellwood sells its products through multiple channels of distribution, including
national retail chains, departments stores, specialty stores, mass merchants,
mail order houses, sporting goods stores, discounters and other retailers.
Apparel products accounted for approximately 92% of total sales in the fiscal
year ended April 30, 1998. Wal-Mart and J.C. Penney were Kellwood's largest
customers in fiscal year 1998 representing approximately 10.8% and 9.1%,
respectively, of total sales. The company's other principal customers include,
among others, Sears, Federated, Dayton Hudson, and L.L. Bean. In fiscal year
1998, Kellwood's top 20 customers accounted for 68% of total sales compared to
64% in fiscal year 1997.
Sourcing and Manufacturing
Kellwood's global sourcing is diversified in terms of the range of products
produced and sourced. Kellwood maintains sourcing relationships with a network
of contract manufacturers in the United States and in approximately 30 countries
around the world. Products sourced through these relationships account for
approximately 75% of Kellwood's total sales in fiscal year 1998. This network is
supplemented by 32 company-operated plants in the United States, Canada, the
Caribbean Basin, Central America, Hong Kong, the People's Republic of China and
Sri Lanka.
Through the use of its global sourcing network, Kellwood seeks to meet the
retailer's need for competitively priced merchandise, quick response and reorder
capability. As a result of Kellwood's
56
<PAGE>
global sourcing strategy, products sourced outside the United States from
contractors and Kellwood plants have increased from 54% in fiscal year 1996 and
66% in fiscal year 1997 to 73% in fiscal year 1998. No single supplier provides
more than five percent of total company purchases. The company's management is
continually evaluating further diversification of its sourcing and manufacturing
capabilities to ensure its position as a responsive and low cost producer.
Acquisition of Fritzi
Shortly before Kellwood's and Koret's agreement to merge, Kellwood reached an
agreement to purchase substantially all the assets of Fritzi California. The
acquisition was completed on December 11, 1998. The acquisition of Fritzi will
fill two voids in Kellwood's customer/category mix of merchandising capability -
namely, the junior, young women-ages 12-29 -- and young girls'-ages
6-11-markets.
Fritzi designs, contracts for manufacture and sells moderately priced dresses
and sportswear through multiple channels of distribution, including department
stores and specialty stores. The sportswear and dresses are sold under the My
Michelle(R) and You Babes(R) brands.
Fritzi had sales of approximately $106 million for its year ended September 30,
1998 - an increase of 14% over the prior year after adjustments to exclude the
discontinued missy business. Consumer demographics are favorable and should
support continued top line growth. Future growth will also come from new
products, new customers and new channels of distribution.
The purchase of Fritzi was done using 844,000 shares of Kellwood common stock
and accounted for as a purchase. After the recognition of any one-time charges
associated with purchase accounting, it is expected that the acquisition will be
accretive to Kellwood's earnings per share. Kellwood has filed a Registration
Statement on Form S-3 related to these shares.
Kellwood plans to consolidate selected Fritzi operations and reduce overhead.
The company also anticipates being able to reduce Fritzi's cost of goods sold
through leveraging the procurement needs of Fritzi with Kellwood's purchases
under the company's Vision 2000 program and by increasing the amount of product
manufactured off shore.
Reorganization and Restructuring of Operating Assets
As part of its Vision 2000 program, Kellwood developed and began implementing a
plan to reorganize and restructure several operating units that were
experiencing operating losses or performing below expectations. Key components
of the plan include the consolidation of similar types of operating units,
relocation and consolidation of distribution facilities in the northeast,
midwest and west coast, and elimination of redundancies between operating units.
These activities are currently in process and will continue through fiscal 2000.
Kellwood is presently evaluating the effect these changes and changing market
conditions have had or will have on the respective operations and will review
and analyze the financial plans which will be submitted by the operating units
in the fourth quarter of fiscal 1999. For each operating unit, Kellwood plans to
review expected future cash flows and assess the realizability of the carrying
value of intangible assets, including goodwill. The combined carrying value of
goodwill for these particular operating units approximates $50 million. It is
possible this assessment, which is expected to be completed in the fourth
quarter of fiscal 1999, will identify an impairment of goodwill and other
intangible assets or result in a change in the remaining useful lives of these
assets.
57
<PAGE>
BUSINESS OF KORET
The Company
Koret, Inc., headquartered in Oakland, California, is a leading North American
designer, manufacturer and distributor of moderately-priced women's coordinate
sportswear, which includes blazers, skirts, pants, shorts, blouses, shirts and
sweaters linked by color, fabric or theme. The Koret(R) brand is considered to
be one of the top three department store brands of moderately-priced women's
sportswear in North America and is targeted primarily towards women over the age
of 45. Koret believes that the strength of the Koret(R) brand name, together
with quality and classic styling has contributed to the success of its core
products.
Koret has built upon the success of these core products and the equity of the
Koret(R) brand by diversifying its product lines to include a full range of
coordinated groups. Koret's product lines cover both the career as well as the
casual clothing needs of its customers. Koret has also implemented changes in
its contractor sourcing network and technological changes at its U.S.
distribution facility in Chico, California to enhance the quality and efficiency
of its operations. Koret has expanded its distribution channels to include
company-owned retail outlets and distribution in Canada through its West Coast
Apparel, Inc. subsidiary. Koret has also diversified its product offering to
include accessories marketed through its New Campaign, Inc. subsidiary.
Koret, Inc. has its principal executive offices at 505 14th Street in Oakland,
California. It is a holding company with three operating subsidiaries engaged
in the following businesses: o Koret of California, Inc. designs,
manufactures and distributes women's coordinated sportswear, principally under
the Koret(R) brand name and includes company-owned retail stores.
o New Campaign, Inc. distributes belts and small leather goods under
the Polo by Ralph Lauren(R) license agreements.
o West Coast Apparel, Inc. manufactures and distributes the Koret(R)
line for the Canadian market out of its Vancouver, Canada facility.
This subsidiary also designs, manufactures and distributes Mr.
Jax(R), a leading Canadian line of better-to-bridge sportswear.
Koret has approximately 1,300 employees, approximately 40% of whom are
represented by a union.
History
Koret traces its origins to 1938 in San Francisco, where Joseph Koret and his
wife, Stephanie, founded Koret of California. They gained national recognition
as a leading women's apparel manufacturer, producing coordinated skirts and
sweaters. In 1964, Koret executives were instrumental in developing and
patenting the permanent press process that became known as Koratron. Koret of
California, Inc. became a publicly-owned company in May 1966, later changing its
name to Koracorp Industries, Inc. Koracorp Industries became a multinational
apparel company, with Koret of California as the leading company in its women's
apparel group. In 1979, Koracorp Industries was acquired by Levi Strauss.
In November 1986, Levi Strauss sold Koret of California, Inc. along with Koret
Canada, Inc. to KNA Acquisition Corp., which changed its name to Koret, Inc. in
1987. Koret, Inc.'s investors, led by Martin J. Granoff, included key members
of Koret's management, certain officers and employees of Oppenheimer & Co., Inc.
and certain outside investors.
58
<PAGE>
Recapitalization
Koret, Inc.'s capitalization was restructured in 1989, borrowing $50.5 million
from three insurance companies. The funds were used to repay the outstanding
balance of certain debt, including the remaining indebtedness owed to Levi
Strauss and to purchase stock from certain stockholders who participated in an
offer by Koret to purchase stock.
In June 1992, Koret refinanced its insurance company debt by entering into a
Revolving and Term Loan Agreement with BNY Financial Corporation, Koret's
factor, along with a Subordinated Credit Agreement for $15 million with Bankers
Trust Company.
In July 1994, Koret issued 3,091,190 shares of Class C Special common stock in a
private placement for an aggregate price of $20 million. The company used the
proceeds to repay $10 million of the secured term loan with its factor, and to
retire $10 million of the subordinated note with Bankers Trust.
Acquisitions
In 1989 Koret formed Counterparts Sportswear, Inc. which acquired the assets of
two related women's apparel companies from the companies' founders. Koret exited
this business in March 1998 by selling all trademarks, trade names, designs,
copyrights and other intellectual property of Counterparts.
In December 1994 Koret Canada acquired substantially all of the stock of Mr. Jax
Fashions, Inc., a Canadian designer, manufacturer and distributor of high
quality women's apparel, together with its subsidiary, West Coast Woollen Mills,
Ltd. In a related transaction, Koret of California acquired MJF Imports, Inc.,
a U.S. company focused on selling the Mr. Jax product line into the U.S. market.
In December 1995 Koret Canada, Inc. and Mr. Jax fashions, Inc. merged to form
West Coast Apparel, Inc.
In March 1995 Koret, through its newly formed subsidiary New Campaign, Inc.,
acquired the net assets of Campaign, Inc. and all of the outstanding stock of
Pheasant Incorporated. These companies, located in Norfolk, Virginia, are
jointly engaged in the manufacturing and distribution of high quality leather
products and accessories under the Polo by Ralph Lauren(R) and Campaign(R)
brands.
Koret's Business Units
Koret, Inc. comprises four main business units:
o Koret of California
o Retail stores
o Canada which consists of West Coast Apparel-Koret Canada, Mr. Jax(R),
West Coast Woollen Mills and MJF Imports
o New Campaign
The information presented below concerning the contributions of each of Koret's
four main business units to Koret's total 1998 sales excludes sales by the
Counterparts division, which was sold in 1998.
Koret of California
Koret of California accounted for approximately 73% of Koret's 1998 sales. This
business unit designs, manufactures, distributes and sells branded women's
sportswear sold to retailers under a variety of labels
59
<PAGE>
including "by Koret(R)", as well as certain Koret proprietary labels. Koret is
positioned at the upper end of the "moderate" price point. Koret of California's
price points, products and consumers are complementary to Kellwood's product
offerings generally.
In fiscal 1998, approximately 50% of Koret of California's product was sourced
from Asia, with 31% sourced from Mexico, the Caribbean basin and Central America
and 15% sourced from North America.
Koret's customer mix will help broaden Kellwood's base. Of Kellwood's top three
customers, Koret sells to only one, J.C. Penney. This customer accounted for
approximately 6% of Koret of California's 1998 sales. Koret of California's
largest customer is Dillard's, which accounted for approximately 17% of Koret of
California's 1998 sales. Dillard's is not among Kellwood's ten largest
customers.
Retail Stores
Retail stores accounted for approximately 6% of Koret's 1998 sales and carry
Koret merchandise only. Koret currently operates 33 outlet stores in upscale
outlet malls throughout the U.S. The stores generally range in size from 2,500
to 3,000 square feet. The merchandising strategy is to stock the stores with the
prior year's product lines, including closeouts.
The Canadian Business
The Canadian business accounted for approximately 10% of Koret's fiscal 1998
sales and consists principally of two parts. Approximately half of this business
is Koret and consists of the same moderately priced line of sportswear sold in
the U.S.; and the other half of the Canadian business is Mr. Jax(R) and related
brands, a better-to-bridge line of career sportswear.
West Coast Apparel, Inc.'s Canadian plant produces most of the Jax product and
approximately 20% of the Koret (R) line. The balance of the Koret line is
sourced through the same contractors that produce the Koret line for the U.S.
New Campaign
New Campaign is an accessory business that accounts for approximately 11% of
Koret's 1998 sales. Approximately 98% of New Campaign's current business is
product sold under the Polo by Ralph Lauren(R) brands, including belts, key
cases, attache cases, wallets and other small leather goods.
The majority of New Campaign's sales are to department stores, with the
remainder split between Polo(R) shops and specialty stores, duty free shops and
other channels.
KORET PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth information concerning the Koret common stock
beneficially owned, as of March 23, 1999, by
o directors of Koret,
o the chief executive officer and the four other most highly
compensated executive officers of Koret,
60
<PAGE>
o all directors and executive officers of Koret as a group,
o owners of more than 5% of the outstanding Koret common stock, and
o those holders of Koret common stock listed below who are entitled to
offer and sell shares of Kellwood common stock pursuant to this
prospectus and who are referred to below as selling stockholders.
Each of the persons and entities named below other than Bankers Trust
New York Corporation and BT Alex Brown Incorporated, are selling
stockholders.
The table below also sets forth information concerning the Kellwood common stock
which the persons named below will receive in the merger. Following the table is
additional information concerning the beneficial ownership of the shares of
Koret common stock shown as beneficially owned by the individuals and entities
named in the table. Except as otherwise noted in the text following the table,
each named person or entity has sole voting and investment power over the shares
beneficially owned by him, her or it. Unless otherwise indicated, the address of
each person named in the table is c/o Koret of California, Inc., 505 14th
Street, Oakland, California 94612-1406.
<TABLE>
<CAPTION>
Beneficial Ownership of
Kellwood Stock to be Received
in the Merger in Exchange for
Beneficial Ownership Prior to the Koret Stock, Warrants and
Merger Options
---------------------------------- --------------------------------
Percent of
Fully Number of
Number of Diluted Kellwood Shares
Number of Percent Kellwood Kellwood Offered by this
Title of Class Beneficial Owner Koret Shares of Class Shares Stock Prospectus
- ------------------ ------------------- ------------------- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Class A Common
Martin J. Granoff 1,458,644 29.75% 878,890 3.2% 878,890
Steven Rudin 193,750 3.87% 116,741 * 116,741
Nathan Gantcher 362,549 7.39% 218,449 * 218,449
Randall Blumenthal 0 0% 0 0% 0
Fred G. Smeyne 170,250 3.47% 102,582 * 102,582
Joanne T. Bjork 245,039 5.0% 147,645 * 147,645
Bradley Kennison 8,500 * 5,121 * 5,121
H. Richard Partida 30,000 * 18,076 * 18,076
All directors and 2,468,732 49.34% 1,487,504 5.4% 1,487,504
executive officers
as a group (8
persons)
Class B
Non-Voting Common
Bankers Trust New 603,282 100% 363,500 1.3% 0
York Corporation)
BT Alex Brown 603,282 100% 363,500 1.3% 0
Incorporated
Class C Special
Common
GS Capital 2,782,071 90.0% 1,676,306 6.0% 1,676,306
Partners, L.P.
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Stone Street Fund 151,005 4.89% 90,986 * 90,986
1994, L.P.
Bridge Street Fund 158,114 5.11% 95,269 * 95,269
1994, L.P.
</TABLE>
* Less than 1%
Set forth below is additional information concerning beneficial ownership of the
shares of Koret common stock which are shown in the above table as beneficially
owned by the named individual or entity prior to the merger.
Martin J. Granoff - includes 100,000 shares of Koret common stock held by trusts
for the benefit of Mr. Granoff's adult children, for which Mr. Granoff serves as
trustee, and 100,000 shares owned by Mr. Granoff's wife. Mr. Granoff disclaims
beneficial ownership of the Koret common stock held by his wife.
Steven Rudin - includes 100,000 shares subject to options held by Mr. Rudin, all
of which are currently exercisable.
Nathan Gantcher - includes 133,045 shares of Koret common stock held by CIBC
Oppenheimer Corp., for which Mr. Gantcher serves as Vice Chairman, as to which
shares Mr. Gantcher disclaims beneficial ownership. Mr. Gantcher's address is
c/o CIBC Oppenheimer Corp., World Financial Center, 200 Liberty Street, New
York, NY 10281.
Randall Blumenthal - Mr. Blumenthal is a Vice President of Goldman Sachs & Co.,
affiliates of which own 100% of the Class C common stock. Mr. Blumenthal's
address is c/o Goldman Sachs, 85 Broad Street, New York, NY 10004.
Fred G. Smeyne - includes 115,000 shares held by an individual retirement
account for the benefit of Fred Smeyne, for which Prudential Securities serves
as custodian.
Joanne T. Bjork - includes 131,590 shares held by an individual retirement
account for the benefit of Joanne T. Bjork, and 68,410 shares held by an
individual retirement account held by Arthur Bjork, Ms. Bjork's husband. Ms.
Bjork disclaims beneficial ownership of the Koret common stock held by her
husband.
Bradley Kennison - includes 5,000 shares held by an individual retirement
account for the benefit of Bradley B. Kennison, for which PaineWebber
Incorporated serves as custodian.
H. Richard Partida - these shares are held by The Partida Family Living Trust.
Bankers Trust New York Corporation and BT Alex Brown Incorporated - Includes
553,282 shares subject to warrants held by Bankers Trust New York Corporation
and 50,000 shares subject to warrants held by its subsidiary, BT Alex Brown
Incorporated. Bankers Trust New York Corporation and BT Alex Brown Incorporated
hold warrants to purchase an aggregate of 603,282 shares of Koret Class B
Non-Voting stock. None of these warrants has been exercised but all of them are
currently exercisable. It is expected that following receipt of stockholder
approvals at the meetings but prior to the effective time of the merger, Bankers
Trust New York Corporation and BT Alex Brown Incorporated will exercise their
warrants for Koret Class B stock and that such shares of Class B stock will be
converted into shares of Koret Class A stock. The address of Bankers Trust New
York Corporation and BT Alex Brown Incorporated is 130 Liberty Street, New York,
New York 10006.
GS Capital Partners, L.P., Stone Street Fund 1994, L.P. and Bridge Street Fund
1994, L.P. - represents 3,091,190 shares owned by certain investment
partnerships, of which affiliates of The Goldman Sachs
62
<PAGE>
Group, L.P. are the general partner, managing general partner or investment
manager. Includes 2,782,071 shares held of record by GS Capital Partners, L.P.,
151,005 shares held of record by Stone Street Fund 1994, L.P. and 158,114 shares
held of record by Bridge Street Fund 1994, L.P. The Goldman Sachs Group, L.P.
disclaims beneficial ownership of the shares owned by such investment
partnerships to the extent attributable to partnership interests therein held by
persons other than The Goldman Sachs Group, L.P. and its affiliates. Each such
investment partnership shares voting and investment power with certain of its
respective affiliates. The address of these investment partnerships is 85 Broad
Street, New York, New York 10004.
PLAN OF DISTRIBUTION
This joint proxy statement/prospectus also relates to the offer from time to
time following the merger of Kellwood common stock by the selling stockholders.
Kellwood has registered with the SEC the Kellwood common stock issued pursuant
to the merger. Registration of the Kellwood stock does not necessarily mean that
any of the shares of Kellwood stock will be sold by the selling stockholders.
Each of the selling stockholders has agreed that he, she or it will not sell or
otherwise reduce its risk relative to any Koret common stock or Kellwood common
stock received by it in the merger during the period commencing 30 days prior to
the effective time of the merger and ending when the financial results covering
at least 30 days of post-merger operations have been published by Kellwood. This
period is referred to below as the restricted period.
Kellwood will not receive any of the proceeds from the sale of the Kellwood
stock offered by the selling stockholders.
The distribution of shares of Kellwood stock may be effected from time to time
in one or more underwritten transactions at a fixed price or prices, which may
be changed, or in other transactions at market prices prevailing at the time of
sale, at prices related to the prevailing market prices or at negotiated prices.
Any underwritten offering may be on either a "best efforts" or a "firm
commitment" basis. In connection with any underwritten offering, underwriters or
agents may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders and/or from purchasers for whom they
may act as agents. Underwriters may sell this stock to or through dealers, and
the dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents.
The selling stockholders and any underwriters, dealers or agents that
participated in the distribution of their Kellwood stock may be deemed to be
underwriters within the meaning of the Securities Act, and any profit on the
sale of Kellwood stock by them and any discounts, commissions or concessions
received by those underwriters, dealers or agents might be deemed to be
underwriting discounts and commissions under the Securities Act.
At a time a particular offer of Kellwood stock is made by a selling stockholder,
a prospectus supplement, if required, will be distributed that will set forth
the names of any underwriters, dealers or agents and any discounts, commissions
and other terms constituting compensation from the selling stockholders and any
other required information.
The sale of Kellwood stock by the selling stockholders may also be effected from
time to time by selling the stock directly to purchasers or to or through
broker-dealers. In connection with any sale, a broker-dealer may act as agent
for the selling stockholders or may purchase from the selling stockholders all
or a portion of the selling stockholders' Kellwood stock as principal, and sales
may be made pursuant to any of the methods described below. These sales may be
made on the NYSE or other exchanges on
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which the Kellwood stock is then traded, in the over-the-counter market, in
negotiated transactions or otherwise, in each case at prices and at terms then
prevailing or at prices related to the then-current market prices or at prices
otherwise negotiated.
The Kellwood stock received by the selling stockholders may also be sold in one
or more of the following transactions:
o block transactions, which may involve crosses, in which a
broker-dealer may sell all or a portion of the shares as agent
but may position and resell all or a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by a
broker-dealer for its own account pursuant to a prospectus
supplement;
o a special offering, an exchange distribution or a secondary
distribution in accordance with applicable NYSE or other stock
exchange rules;
o ordinary brokerage transactions and transactions in which
these broker-dealers solicit purchasers;
o sales at the market to or through a market maker or into an
existing trading market, on an exchange or otherwise, for the
shares; and
o sales in other ways not involving market makers or established
trading markets, including direct sales to purchasers.
In effecting sales, broker-dealers engaged by the selling stockholders may
arrange for other broker-dealers to participate. Broker-dealers will receive
commissions or other compensation from the selling stockholders in amounts to be
negotiated immediately prior to the sale. Broker-dealers may also receive
compensation from purchasers of Kellwood stock from the selling stockholders,
which is not expected to exceed amounts that are customary for the types of
transactions involved.
In connection with distributions of Kellwood stock or otherwise, and after the
restricted period referred to above, the selling stockholders may enter into
hedging transactions with broker-dealers or others prior to or after the
effective time of the merger. These broker-dealers may engage in short sales of
Kellwood stock or other transactions in the course of hedging the positions
assumed by persons in connection with hedging transactions or otherwise. The
selling stockholders may also sell Kellwood stock short and redeliver Kellwood
stock to close out short positions; enter into option or other transactions with
broker-dealers or others which may involve the delivery to these persons of
Kellwood stock offered hereby, which Kellwood stock these people may resell
pursuant to this prospectus; and/or pledge Kellwood stock to a broker or dealer
or others and, upon a default, these people may effect sales of Kellwood stock
pursuant to this prospectus. In addition, any Kellwood stock covered by this
joint proxy statement/prospectus that qualifies for resale pursuant to Rule 145
of the Securities Act may be sold under Rule 145, rather than with this joint
proxy statement/prospectus.
In order to comply with securities laws of certain states, if applicable,
Kellwood stock held by the selling stockholders may be sold only through
registered or licensed brokers or dealers.
Until the distribution of Kellwood stock held by the selling stockholders is
completed, rules of the SEC may limit the ability of any underwriters and
selling group members to bid for and purchase Kellwood stock. As an exception to
these rules, underwriters are permitted to engage in certain transactions that
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stabilize the price of Kellwood stock. These transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of
Kellwood stock.
The lead underwriters may also impose a penalty bid on certain other
underwriters participating in the offering and selling group members. This means
that, if the lead underwriters purchase Kellwood stock in the open market to
reduce the underwriters' short position or to stabilize the price of Kellwood
stock, they may reclaim the amount of any selling concession from the
underwriters and selling group members who sold Kellwood stock as part of the
offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of these purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it
discouraged resale of the security before the distribution is completed.
Kellwood makes no representation or prediction as to the direction or magnitude
of any effect that the transactions described above might have on the price of
Kellwood stock. In addition, Kellwood makes no representation that underwriters
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.
All expenses associated with filing and maintaining the effectiveness of this
registration statement will be paid by Kellwood. Other expenses incident to the
offering and sale of Kellwood stock by the selling stockholders, including
brokerage and underwriting commissions, will be paid by the selling
stockholders.
STOCKHOLDER PROPOSALS
Stockholders of Kellwood may submit proposals to be considered for stockholder
action at the 2000 Annual Meeting of Stockholders of Kellwood if they do so in
accordance with applicable regulations of the SEC and with the requirements of
the Kellwood by-laws. Any stockholder proposal must be submitted to the
secretary of Kellwood no later than March 18, 2000 in order to be considered for
inclusion in Kellwood's 2000 proxy materials.
EXPERTS
The consolidated financial statements of Kellwood as of April 30, 1998 and 1997
and for each of the three years in the period ended April 30, 1998, incorporated
in this joint proxy statement/prospectus by reference to Kellwood's Annual
Report on Form 10-K for the year ended April 30, 1998, have been included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Koret as of November 29, 1998 and
November 30, 1997 and for each of the fiscal years in the three year period
ended November 29, 1998, included in this prospectus, have been included in
reliance on the report of KPMG LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
INDEPENDENT ACCOUNTANTS
Representatives of PricewaterhouseCoopers LLP and KPMG LLP are expected to be
present at the Kellwood meeting and the Koret meeting, respectively, will have
the opportunity to make a statement if they desire to do so, and will be
available to respond to appropriate questions.
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LEGAL OPINIONS
The validity of the shares of Kellwood common stock being offered hereby is
being passed upon for Kellwood by McDermott, Will & Emery. Members of McDermott,
Will & Emery own shares of Kellwood common stock.
It is a condition to the completion of the merger that McDermott, Will & Emery,
counsel to Kellwood, deliver its opinion concerning certain federal income tax
consequences of the merger, dated as of the effective time of the merger.
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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Delaware General Corporation Law (Section 102) allows a corporation to
eliminate the personal liability of directors of a corporation to the
corporation or to any of its stockholders for monetary damage for a breach of
his/her fiduciary duty as a director, except in the case where the director
breached his/her duty of loyalty, failed to act in good faith, engaged in
intentional misconduct or knowingly violated a law, authorized the payment of a
dividend or approved a stock repurchase in violation of Delaware corporate law
or derived an improper personal benefit. The Restated Certificate of
Incorporation, as amended, of Kellwood contains a provision which eliminates
directors' personal liability as set forth above.
The Delaware General Corporation Law (Section 145) gives Delaware corporations
broad powers to indemnify their present and former directors and officers and
those of affiliated corporations against expenses incurred in the defense of any
lawsuit to which they are made parties by reason of being or having been
directors or officers, subject to specified conditions and exclusions; gives a
director or officer who successfully defends an action the right to be
indemnified; and authorizes Kellwood to buy directors' and officers' liability
insurance. Indemnification provided under Section 145 is not exclusive of any
other right to which those indemnified may be entitled under any bylaw,
agreement, vote of stockholders or otherwise.
Kellwood's Restated Certificate of Incorporation, as amended, provides for
indemnification to the fullest extent expressly authorized by Section 145 of the
Delaware General Corporation Law for directors, officers and employees of
Kellwood and also to persons who are serving at the request of Kellwood as
directors, officers or employees of other corporations (including subsidiaries).
This right of indemnification is not exclusive of any other right which any
person may acquire under any statute, bylaw, agreement, contract, vote of
stockholders or otherwise.
Kellwood has purchased liability policies which indemnify its directors and
officers against loss arising from claims by reason of their legal liability for
acts as officers, subject to limitations and conditions as set forth in the
policies.
Item 21. Exhibits.
Exhibit
Number Description
3.1 Restated Certificate of Incorporation, as amended, of Kellwood
Company incorporated herein by reference to Form 10-Q for the
quarter ended July 31, 1987, SEC File No. 1-340.
3.2 Bylaws, as amended, of Kellwood Company, incorporated herein
by reference to Form 10-K for the fiscal year ended April 30,
1996, SEC File No. 1-7340.
4.1 Rights Agreement with respect to Rights to Acquire Series A
Junior Preferred Stock between the registrant and Boatmen's
Trust Company, incorporated herein by reference to
Registration Statement on Form 8-A, effective June 24, 1986,
Amendment dated August 21, 1990, incorporated herein by
reference to Form 10-Q for the quarter ended October 31, 1990,
and Amendment dated May 31, 1996 incorporated herein by
reference to Form 8-A/A effective June 3, 1996, SEC File No.
1-7340.
5.1 Opinion of McDermott, Will & Emery regarding legality
8.1 Opinion of McDermott, Will & Emery regarding tax matters
21.1 Subsidiaries of Kellwood
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG LLP
23.3 Consent of McDermott, Will & Emery (included in Exhibits 5.1
and 8.1)
24.1 Powers of Attorney
II-1
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Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar amount of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated offering
range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than a 20 percent change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
(c)
(1) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed
to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the
other items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is
filed pursuant to the paragraph immediately preceding, or (ii)
that purports to meet the requirements of section 10(a)(3) of
the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed as a
part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to
be a new registration statement
II-2
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relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. If a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of St. Louis, State of Missouri on March 24, 1999.
KELLWOOD COMPANY
By: /s/ THOMAS H. POLLIHAN
-----------------------------------
Thomas H. Pollihan
Vice President, Secretary and General
Counsel
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated and on the 24th day of March, 1999:
Signature Title
--------- -----
*
- ---------------------- Director, Chairman of the Board, Chief Executive
(William J. McKenna) Officer (principal executive officer)
*
- ---------------------- Director, President and Chief Operating Officer
(Hal J. Upbin)
*
- ---------------------- Director, Vice Chairman
(James C. Jacobsen)
*
- ---------------------- Vice President Finance (principal financial and
(Gerald M. Chaney) accounting officer)
*
- ---------------------- Director
(Raymond F. Bentele)
*
- ---------------------- Director
(Edward S. Bottum)
*
- ---------------------- Director
(Kitty G. Dickerson)
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Signature Title
--------- -----
*
- ---------------------- Director
(Leonard A. Genovese)
*
- ---------------------- Director
(Jerry M. Hunter)
*
- ---------------------- Director
(James S. Marcus)
*
- ---------------------- Director
(Fred W. Wenzel)
*By: /s/ THOMAS H. POLLIHAN
------------------------------
Thomas H. Pollihan
Attorney-in-fact
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INDEX TO EXHIBITS
Exhibit
Number Description
3.1 Restated Certificate of Incorporation, as amended, of Kellwood
Company incorporated herein by reference to Form 10-Q for the
quarter ended July 31, 1987, SEC File No. 1-340.
3.2 Bylaws, as amended, of Kellwood Company, incorporated herein
by reference to Form 10-K for the fiscal year ended April 30,
1996, SEC File No. 1-7340.
4.1 Rights Agreement with respect to Rights to Acquire Series A
Junior Preferred Stock between the registrant and Boatmen's
Trust Company, incorporated herein by reference to
Registration Statement on Form 8-A, effective June 24, 1986,
Amendment dated August 21, 1990, incorporated herein by
reference to Form 10-Q for the quarter ended October 31, 1990,
and Amendment dated May 31, 1996 incorporated herein by
reference to Form 8-A/A effective June 3, 1996, SEC File No.
1-7340.
5.1 Opinion of McDermott, Will & Emery regarding legality
8.1 Opinion of McDermott, Will & Emery regarding tax matters
21.1 Subsidiaries of Kellwood
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG LLP
23.3 Consent of McDermott, Will & Emery (included in Exhibits 5.1
and 8.1)
24.1 Powers of Attorney
<PAGE>
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONFORMED COPY
AGREEMENT AND
PLAN OF MERGER
AMONG
KELLWOOD COMPANY,
KELLWOOD ACQUISITION II CORPORATION
AND
KORET, INC.
AND
CERTAIN OF ITS STOCKHOLDERS
December 1, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<C> <S> <C>
ARTICLE I THE MERGER.................................................. 1
1.1. The Merger.................................................. 1
1.2. Effective Time.............................................. 2
1.3. Effects of the Merger....................................... 2
1.4. Charter and By-laws; Directors and Officers................. 2
1.5. Conversion of Securities.................................... 2
1.6. Kellwood to Make Certificates Available..................... 4
1.7. No Fractional Securities.................................... 5
1.8. Return of Exchange Fund..................................... 5
1.9. Adjustment of the Consideration............................. 5
1.10. No Further Ownership Rights in the Company Common Stock..... 5
1.11. Closing of the Company Transfer Books....................... 5
1.12. Lost Certificates........................................... 6
1.13. Further Assurances.......................................... 6
1.14. Escrow...................................................... 6
ARTICLE II THE CLOSING OF THE MERGER................................... 6
2.1. Closing..................................................... 6
2.2. Deliveries by Kellwood...................................... 6
2.3. Deliveries by the Company and the Stockholders.............. 7
2.4. Closing Agreements.......................................... 7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... 7
3.1. Authority................................................... 7
3.2. Validity.................................................... 7
3.3. Ownership of Stock.......................................... 8
3.4. Due Organization............................................ 8
3.5. Subsidiaries................................................ 8
3.6. Capital Stock............................................... 9
3.7. Transactions with Related Parties........................... 10
3.8. Financial Statements........................................ 10
3.9. Interim Change.............................................. 10
3.10. Banking Relationships and Investments....................... 11
3.11. Accounts Receivable......................................... 11
3.12. Inventory................................................... 11
3.13. Motor Vehicles.............................................. 11
3.14. Insurance................................................... 11
3.15. Title to Assets............................................. 11
3.16. Real Estate................................................. 12
3.17. Real Estate Leases.......................................... 12
3.18. Personal Property Leases.................................... 12
3.19. Intellectual Property....................................... 12
3.20. Software and Information Systems............................ 13
3.21. Customers and Suppliers..................................... 14
3.22. Employees................................................... 15
3.23. Employee Benefit Plans...................................... 16
3.24. Licenses and Permits........................................ 18
3.25. Material Contracts.......................................... 19
3.26. Taxes....................................................... 20
3.27. Product Warranty............................................ 21
</TABLE>
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3.28. Product Liability........................................... 21
3.29. Legal Proceedings........................................... 21
3.30. Environmental Matters....................................... 22
3.31. Compliance with Law......................................... 23
3.32. Absence of Undisclosed Liabilities.......................... 24
3.33. Brokers..................................................... 24
3.34. Disclosure.................................................. 24
3.35. Pooling of Interests; Reorganizations....................... 24
3.36. Required Vote of the Company Stockholders................... 24
3.37. Registration Statement and Joint Proxy Statement............ 24
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF KELLWOOD AND SUB.......... 25
4.1. Authority................................................... 25
4.2. Validity.................................................... 25
4.3. Due Organization............................................ 25
4.4. Brokers..................................................... 25
4.5. Registration Statement and Joint Proxy Statement............ 25
4.6. Opinion of Financial Advisor................................ 26
4.7. Required Vote of Kellwood Stockholders...................... 26
4.8. Capitalization of Kellwood and Sub.......................... 26
4.9. Kellwood Commission Reports................................. 26
4.10. Accounting Matters; Reorganization.......................... 27
4.11. No Material Adverse Change.................................. 27
4.12. Disclosure.................................................. 27
4.13. No Plan or Intention to Reacquire Stock..................... 27
4.14. Control..................................................... 27
4.15. No Plan to Dispose of Company Assets or Stock............... 27
4.16. Continuity of Business Enterprise........................... 27
4.17. Substantially all of Sub's Assets Transferred............... 27
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS AND THE
OBLIGATIONS OF THE COMPANY AND THE STOCKHOLDERS............. 28
5.1. Interim Conduct of Business................................. 28
5.2. Access...................................................... 29
5.3. Confidentiality............................................. 29
5.4. HSR Act Filing and Other Consents........................... 29
5.5. Waiver of Recourse.......................................... 30
5.6. Notice of Developments...................................... 30
5.7. Trading in Kellwood......................................... 30
5.8. Alternative Proposals....................................... 30
5.9. Stockholders' Agreements.................................... 31
5.10. Reasonable Best Efforts..................................... 31
5.11. Termination of 401(k) Plans................................. 31
ARTICLE VI COVENANTS OF KELLWOOD....................................... 32
6.1. HSR Act Filing and Other Consents........................... 32
6.2. Best Efforts................................................ 32
6.3. Indemnification; Directors' and Officers' Insurance......... 32
6.4. Sub......................................................... 32
6.5. Access...................................................... 33
6.6. Notice of Developments...................................... 33
6.7. Employees and Employee Benefits............................. 33
6.8. Confidentiality............................................. 33
</TABLE>
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6.9. Labor Agreement Compliance................................ 34
6.10. Interim Conduct of Business............................... 34
ARTICLE VII ADDITIONAL AGREEMENTS..................................... 34
7.1. Stockholder Meetings...................................... 34
7.2. Pooling of Interests; Reorganization...................... 34
7.3. Preparation of the Registration Statement and the Joint
Proxy Statement........................................... 35
ARTICLE VIII CONDITIONS PRECEDENT TO THE MERGER........................ 35
8.1. Conditions to Each Party's Obligation to Effect the
Merger.................................................... 35
8.2. Conditions to Obligation of the Company to Effect the
Merger.................................................... 36
8.3. Conditions to Obligations of Kellwood and Sub to Effect
the Merger................................................ 36
ARTICLE IX TERMINATION BY PARTIES.................................... 37
9.1. Termination............................................... 37
9.2. Termination Fees.......................................... 38
9.3. Effect of Termination..................................... 39
9.4. Change of Control......................................... 39
ARTICLE X SURVIVAL AND INDEMNIFICATION.............................. 39
10.1. Survival.................................................. 39
10.2. Indemnification........................................... 39
10.3. Notice of Claims.......................................... 39
10.4. Limitations on Stockholders' Indemnification Obligation... 40
10.5. Third Party Claims........................................ 40
ARTICLE XI GENERAL PROVISIONS........................................ 40
11.1. Amendments and Waiver..................................... 40
11.2. Notices................................................... 41
11.3. Expenses.................................................. 41
11.4. Counterparts.............................................. 41
11.5. Successors and Assigns.................................... 42
11.6. Entire Transaction........................................ 42
11.7. Applicable Law............................................ 42
11.8. Jurisdiction.............................................. 42
11.9. Accounting Terms.......................................... 42
11.10. Knowledge................................................. 42
11.11. Other Rules of Construction............................... 43
11.12. Announcements............................................. 43
11.13. Partial Invalidity........................................ 43
11.14. Certain Taxes............................................. 43
</TABLE>
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of December 1, 1998 (this
"Agreement"), by and among Kellwood Company, a Delaware corporation
("Kellwood"), Kellwood Acquisition II Corporation, a Delaware corporation and
a wholly-owned subsidiary of Kellwood ("Sub"), Koret, Inc., a Delaware
corporation (the "Company") (Sub and the Company being hereinafter
collectively referred to as the "Constituent Corporations"), and the
stockholders of the Company listed on the signature page hereof (the
"Stockholders").
WHEREAS, the Company is engaged in the design, manufacture, marketing and
distribution of apparel (the "Business");
WHEREAS, the respective Boards of Directors of Kellwood, Sub and the Company
have approved and declared advisable the merger of Sub with and into the
Company (the "Merger"), upon the terms and subject to the conditions set forth
herein, whereby (a) each issued and outstanding share of Class A Common Stock,
par value $.01 per share, Class B Non-Voting Common Stock, par value $.01 per
share, and Class C Special Common Stock, par value $.01 per share, of the
Company (collectively the "Company Common Stock") not owned directly or
indirectly by the Company will be converted into shares of Common Stock, par
value $.01 per share, of Kellwood (including associated rights to acquire
Kellwood's Series A Junior Preferred Stock) (the "Kellwood Common Stock"), (b)
outstanding options and warrants to acquire Company Common Stock will be
converted into options and warrants to acquire shares of Kellwood Common
Stock, and (c) Kellwood will become the sole stockholder of the Surviving
Corporation (as hereinafter defined);
WHEREAS, the respective Boards of Directors of Kellwood and the Company have
determined that the Merger is in furtherance of and consistent with the
respective long-term business strategies of Kellwood and the Company and is in
the best interest of the respective stockholders of Kellwood and the Company;
WHEREAS, in order to induce Kellwood and Sub to enter into this Agreement,
concurrently herewith the Stockholders are entering into this Agreement
pursuant to which, among other things, each Stockholder agrees, subject to the
terms and conditions of Section 5.9 hereof, to vote in favor of this Agreement
and the Merger and against any competing proposals;
WHEREAS, for federal income tax purposes, it is intended that the Merger
will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of
the Internal Revenue Code of 1986, as amended (the "Code") by reason of
Section 368(a)(2)(E) thereof; and
WHEREAS, it is intended that the Merger will be recorded for accounting
purposes as a pooling of interests.
NOW, THEREFORE, in consideration of the premises and promises herein
contained, the parties agree as set forth below:
ARTICLE I
THE MERGER
1.1. The Merger. Upon the terms and subject to the conditions hereof, and in
accordance with the Delaware General Corporation Law (the "DGCL"), Sub shall
be merged with and into the Company at the Effective Time (as hereinafter
defined). Following the Merger, the separate corporate existence of Sub shall
cease and the Company shall continue as the surviving corporation (the
"Surviving Corporation") and shall succeed to and assume all the rights and
obligations of Sub in accordance with the DGCL. Notwithstanding anything to
the contrary herein, at the election of Kellwood, any direct wholly-owned
Subsidiary (as hereinafter defined) of Kellwood may be substituted for Sub as
a constituent corporation in the Merger, provided that such substituted
corporation is a Delaware corporation which is formed solely for the purpose
of engaging in the transactions
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contemplated by this Agreement and has engaged in no other business
activities, and provided further that such substitution would not jeopardize
the qualification of the Merger as a reorganization within the meaning of
Section 368(a) of the Code. In such event, the parties agree to execute an
appropriate amendment to this Agreement, in form and substance reasonably
satisfactory to Kellwood and the Company, in order to reflect such
substitution.
1.2. Effective Time. The Merger shall become effective when a Certificate of
Merger (the "Certificate of Merger"), executed in accordance with the relevant
provisions of the DGCL, is filed with the Secretary of State of the State of
Delaware; provided, however, that, upon mutual consent of the Constituent
Corporations, the Certificate of Merger may provide for a later date of
effectiveness of the Merger not more than 30 days after the date the
Certificate of Merger is filed. When used in this Agreement, the term
"Effective Time" shall mean the date and time at which the Certificate of
Merger is accepted for recording or such later date and time established by
the Certificate of Merger. The filing of the Certificate of Merger shall be
made on the Closing Date (as hereinafter defined).
1.3. Effects of the Merger. The Merger shall have the effects set forth in
this Agreement and in Section 259 of the DGCL. From and after the Effective
Time, the Surviving Corporation shall be a wholly-owned subsidiary of
Kellwood.
1.4. Charter and By-laws; Directors and Officers.
(a) At the Effective Time, the Certificate of Incorporation, as amended, of
Sub (the "Sub Charter"), as in effect immediately prior to the Effective Time,
shall be the Certificate of Incorporation of the Surviving Corporation until
thereafter changed or amended as provided therein or by applicable law. At the
Effective Time, the By-laws of Sub (the "Sub By-laws"), as in effect
immediately prior to the Effective Time, shall be the By-laws of the Surviving
Corporation until thereafter changed or amended as provided therein or by the
Sub Charter, a copy of which is attached hereto.
(b) The directors of Sub at the Effective Time of the Merger shall be the
directors of the Surviving Corporation, until the earlier of their resignation
or removal or until their respective successors are duly elected and
qualified, as the case may be. The officers of the Sub at the Effective Time
of the Merger shall be the officers of the Surviving Corporation, until the
earlier of their resignation or removal or until their respective successors
are duly elected and qualified, as the case may be.
1.5. Conversion of Securities. As of the Effective Time, by virtue of the
Merger and without any action on the part of Sub, the Company or the holders
of any securities of the Constituent Corporations:
(a) Sub Common Stock. Each issued and outstanding share of common stock,
par value $.01 per share, of Sub shall be converted into one validly
issued, fully paid and non-assessable share of common stock, par value $.01
per share, of the Surviving Corporation;
(b) Treasury Stock. All shares, if any, of the Company Common Stock that
are held in the treasury of the Company or by any wholly-owned Subsidiary
of the Company shall be cancelled and no capital stock of Kellwood or other
consideration shall be delivered in exchange therefor;
(c) Conversion of the Company Common Stock. Subject to Sections 1.8 and
1.10 hereof, each share of the Company Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares to be cancelled
in accordance with Section 1.5(b)), shall be converted into and exchanged
solely for that number of shares of Kellwood Common Stock determined by
dividing (i) the total number of shares of Kellwood Common Stock to be
issued (Five Million Two Hundred Forty-One Thousand (5,241,000) shares of
Kellwood Common Stock) by (ii) the total number of issued and outstanding
shares of Company Common Stock on a fully diluted basis on the date hereof
(including the option and warrants described below) (Eight Million Six
Hundred Ninety-Eight Thousand One Hundred Ninety-One (8,698,191) shares of
Company Common Stock) resulting in an exchange ratio of 0.6025391 (the
"Exchange Ratio");
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(d) Conversion of Company Option. The option issued to Steven Rudin to
purchase One Hundred Thousand (100,000) shares of Company Common Stock for
One Dollar ($1.00) per share shall automatically and without any action of
the holder thereof be converted into an option to purchase such number of
whole shares of Kellwood Common Stock as is equal to the product of the
number of shares of Company Common Stock subject to such warrant multiplied
by the Exchange Ratio and then rounded to the nearest whole share of
Kellwood Common Stock, and having an exercise price per share of Kellwood
Common Stock equal to the quotient determined by dividing the exercise
price per share of such option by the Exchange Ratio rounded to the nearest
whole cent, and with other terms and conditions that are comparable to the
terms and conditions of the option to purchase Company Common Stock
immediately prior to the Effective Time, including, appropriate
documentation thereof, and from and after the Effective Time Kellwood shall
reserve for issuance the number of shares of Kellwood Common Stock that
will become subject to the option, subject to the terms and conditions
applicable thereto and shall register such shares under the Securities Act
on Form S-8 or other appropriate form. In the event that Steven Rudin is
deemed to be an "affiliate" of Kellwood under the Securities Act, such Form
S-8 or other form shall include appropriate resale provisions and
prospectus enabling Mr. Rudin to sell publicly the shares of Kellwood
Common Stock obtained upon his exercise of his option for a period of not
less than one year after the date of such exercise;
(e) Conversion of Company Warrants. Prior to Closing, the warrants issued
to Bankers Trust New York Corporation ("BTNY") and Bankers Trust Securities
Corporation ("BTSC") pursuant to the Warrant Acquisition Agreement among
the Company, BTNY and BTSC dated June 30, 1992 (as amended) and
Registration Agreement among the Company, BTNY and BTSC, dated as of June
30, 1992 (the "BT Warrant Agreement") may be exercised and any such shares
of Company Common Stock so acquired shall be converted into and exchanged
solely for Kellwood Common Stock as contemplated by Section 1.5(c). In the
event that the warrants issued to BTNY and BTSC pursuant to the BT Warrant
Agreement are not exercised prior to Closing, such warrants shall
automatically and without any action of the holder thereof be converted
into warrants to purchase such number of whole shares of Kellwood Common
Stock as is equal to the product of the number of shares of Company Common
Stock subject to such warrant multiplied by the Exchange Ratio and then
rounded to the nearest whole share of Kellwood Common Stock, and having an
exercise price per share of Kellwood Common Stock equal to the quotient
determined by dividing the exercise price per share of such warrants by the
Exchange Ratio rounded to the nearest whole cent, and with other terms and
conditions that are comparable to the terms and conditions of the warrants,
including appropriate documentation thereof, and from and after the
Effective Time Kellwood shall reserve for issuance the number of shares of
Kellwood Common Stock that will become subject to such warrants, subject to
the terms and conditions applicable thereto;
(f) Escrow. Such number of shares of Kellwood Common Stock issued
pursuant to Section 1.5(c) with an aggregate value of Twelve Million Five
Hundred Thousand Dollars ($12,500,000) based upon the Agreed Price (but in
no event more than 524,100 shares) shall be placed in escrow pursuant to
and in accordance with the terms of the Escrow Agreement by and among an
escrow agent acceptable to Kellwood and the Company (the "Escrow Agent"),
Kellwood, the Company and certain stockholders of the Company (the "Escrow
Agreement"); and by virtue of the Merger, each holder of Company Common
Stock converted into Kellwood Common Stock authorizes and agrees to be
bound by the terms and conditions of the Escrow Agreement, including the
appointment of Martin J. Granoff and Randall Blumenthal with full power of
substitution, as an agent and attorney-in-fact, each with full power and
authority to act jointly for and on behalf of such holder for all purposes
of the Escrow Agreement (the "Stockholders Representative"). Any action
taken by Messrs. Granoff and Blumenthal in their capacity as Stockholders
Representative shall require the consent of both Mr. Granoff and Mr.
Blumenthal; and
(g) Cancellation of Company Common Stock. All shares of Company Common
Stock when so converted, shall no longer be outstanding and shall
automatically be cancelled and retired and each holder of a certificate
representing any such shares shall cease to have any rights with respect
thereto, except the right to receive any dividends and other distributions
in accordance with Section 1.6, certificates
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representing the shares of Kellwood Common Stock into which such shares are
converted, and any cash, without interest, in lieu of fractional shares to
be issued or paid in consideration therefor upon the surrender of such
certificate in accordance with Section 1.6.
1.6. Kellwood to Make Certificates Available.
(a) Exchange of Certificates. Kellwood shall authorize its transfer agent
(or such other person or persons as shall be reasonably acceptable to Kellwood
and the Company) to act as exchange agent hereunder (the "Exchange Agent"). As
soon as practicable after the Effective Time, Kellwood shall deposit with the
Exchange Agent certificates representing the shares of Kellwood Common Stock
issuable pursuant to Section 1.5(c) for exchange with outstanding shares of
Company Common Stock and cash, as required to make payments in lieu of any
fractional shares pursuant to Section 1.7 (such cash and shares of Kellwood
Common Stock, together with any dividends or distributions with respect
thereto, being hereinafter referred to as the "Exchange Fund"). The Exchange
Agent shall deliver Kellwood Common Stock contemplated to be issued pursuant
to Section 1.5(c) out of the Exchange Fund to the holders of Company Common
Stock or to the Escrow Agent as provided herein.
(b) Exchange Procedures. Kellwood shall instruct the Exchange Agent, as soon
as practicable after the Effective Time, to mail to each record holder of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock converted in the Merger
(the "Certificates") a letter of transmittal (the "Letter of Transmittal").
The Letter of Transmittal shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon actual
delivery of the Certificates to the Exchange Agent, and shall contain
instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Kellwood Common Stock and
cash in lieu of fractional shares. The Letter of Transmittal shall also
authorize the Escrow Agreement and the appointment of the Stockholders
Representative. Such Stockholders' Representative shall be the agent and
attorney-in-fact for such stockholder with full power and authority to
authorize the payment of indemnification and settlement of claims as
contemplated by Article X hereof. Upon surrender for cancellation to the
Exchange Agent of all Certificates held by any record holder of a Certificate,
together with a duly executed Letter of Transmittal, the holder of such
Certificate shall be entitled to receive in exchange therefor a certificate
representing that number of whole shares of Kellwood Common Stock into which
the shares represented by the surrendered Certificate shall have been
converted at the Effective Time less the shares to be delivered to the Escrow
Agent pursuant to this Article I, cash in lieu of any fractional share in
accordance with Section 1.7 and certain dividends and other distributions in
accordance with this Section 1.6, and any Certificate so surrendered shall
forthwith be cancelled.
(c) Dividends, Transfer Taxes; Withholding. No dividends or other
distributions that are declared on or after the Effective Time on Kellwood
Common Stock, or are payable to the holders of record thereof on or after the
Effective Time, will be paid to any person entitled by reason of the Merger to
receive a certificate representing Kellwood Common Stock until such person
surrenders the related Certificate or Certificates, together with a duly
executed Letter of Transmittal, as provided in Section 1.6, and no cash
payment in lieu of fractional shares will be paid to any such person pursuant
to Section 1.7 until such person shall so surrender the related Certificate or
Certificates and a duly executed Letter of Transmittal. Subject to the effect
of applicable law, there shall be paid to each record holder of a new
certificate representing such Kellwood Common Stock: (i) at the time of such
surrender or as promptly as practicable thereafter, the amount of any
dividends or other distributions theretofore paid with respect to the shares
of Kellwood Common Stock represented by such new certificate and having a
record date on or after the Effective Time and a payment date prior to such
surrender; provided, however, that no dividends declared prior to Closing
shall be paid with respect to such shares; (ii) at the appropriate payment
date or as promptly as practicable thereafter, the amount of any dividends or
other distributions payable with respect to such shares of Kellwood Common
Stock declared on or after the Effective Time but prior to such surrender and
having a payment date on or subsequent to such surrender; and (iii) at the
time of such surrender or as promptly as practicable thereafter, the amount of
any cash payable with respect to a fractional share of Kellwood Common Stock
to which such holder is entitled pursuant to Section 1.7. In no event shall
the person
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entitled to receive such dividends or other distributions or cash in lieu of
fractional shares be entitled to receive interest on such dividends or other
distributions or cash in lieu of fractional shares. If any cash or certificate
representing shares of Kellwood Common Stock is to be paid to or issued in a
name other than that in which the Certificate surrendered in exchange therefor
is registered, it shall be a condition of such exchange that the Certificate
so surrendered shall be properly endorsed and otherwise in proper form for
transfer and that the person requesting such exchange shall pay to Kellwood
any transfer or other taxes required by reason of the issuance of certificates
for such shares of Kellwood Common Stock in a name other than that of the
registered holder of the Certificate surrendered, or shall establish to the
satisfaction of Kellwood that such tax has been paid or is not applicable.
Kellwood shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any holder of shares of the
Company Common Stock such amounts as Kellwood is required to deduct and
withhold with respect to the making of such payment under the Code or under
any provision of state, local or foreign tax law. To the extent that amounts
are so withheld by Kellwood, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the shares of
the Company Common Stock in respect of which such deduction and withholding
was made by Kellwood.
1.7. No Fractional Securities. No certificates or scrip representing
fractional shares of Kellwood Common Stock shall be issued upon the surrender
for exchange of Certificates pursuant to this Article I, and no Kellwood
dividend or other distribution or stock split shall relate to any fractional
share, and no fractional share shall entitle the owner thereof to vote or to
any other rights of a security holder of Kellwood. In lieu of any such
fractional share, each holder of the Company Common Stock who would otherwise
have been entitled to a fraction of a share of Kellwood Common Stock upon
surrender of Certificates for exchange pursuant to this Article I (after
aggregating all fractional shares of Kellwood Common Stock to be received by
such holder) will be paid an amount in cash (without interest), rounded to the
nearest cent, determined by multiplying (i) the Agreed Price per share of
Kellwood Common Stock by (ii) the fractional interest to which such holder
would otherwise be
entitled. As promptly as practicable after the determination of the amount of
cash, if any, to be paid to holders of fractional share interests, Kellwood
shall forward payments to such holders of fractional share interests subject
to and in accordance with the terms of this Section 1.7.
1.8. Return of Exchange Fund. Any portion of the Kellwood Common Stock and
any cash payment in lieu of fractional shares which remains undistributed to
the former stockholders of the Company for six months after the Effective Time
shall be returned to Kellwood, and any such former stockholders who have not
theretofore complied with this Article I shall thereafter look only to
Kellwood for payment of their claim for Kellwood Common Stock, any cash in
lieu of fractional shares of Kellwood Common Stocks and any dividends or
distributions with respect to Kellwood Common Stock. Neither Kellwood nor the
Surviving Corporation shall be liable to any former holder of the Company
Common Stock for any such shares of Kellwood Common Stock, cash and dividends
and distributions held in the Exchange Fund which is delivered to a public
official pursuant to any applicable abandoned property, escheat or similar
law.
1.9. Adjustment of the Consideration. In the event of any reclassification,
stock split, stock dividend, reorganization, recapitalization or like change
with respect to Kellwood Common Stock or any change or conversion of Kellwood
Common Stock into other securities (or if a record date with respect to any of
the foregoing should occur) prior to the Effective Time, appropriate and
proportionate adjustments, if any, shall be made to the amount of Kellwood
Common Stock to be issued pursuant to Section 1.5(c) and the options to be
issued pursuant to Section 1.5(d) and the warrants which may be issued
pursuant to Section 1.5(e).
1.10. No Further Ownership Rights in the Company Common Stock. All shares of
Kellwood Common Stock issued upon the surrender for exchange of Certificates
in accordance with the terms hereof (including any cash paid pursuant to
Section 1.7) shall be deemed to have been issued in full satisfaction of all
rights pertaining to the shares of the Company Common Stock represented by
such Certificates.
1.11. Closing of the Company Transfer Books. At the Effective Time, the
stock transfer books of the Company shall be closed and no transfer of shares
of the Company Common Stock shall thereafter be made on the records of the
Company. If, after the Effective Time, Certificates are presented to the
Surviving Corporation or Kellwood, such Certificates shall be cancelled and
exchanged as provided in this Article I.
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1.12. Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Kellwood,
the posting by such person of a bond, in such reasonable amount as Kellwood
may direct as indemnity against any claim that may be made against them with
respect to such Certificate, Kellwood will issue in exchange for such lost,
stolen or destroyed Certificate the shares of Kellwood Common Stock, any cash
in lieu of fractional shares of Kellwood Common Stock to which the holders
thereof are entitled pursuant to Section 1.7 and any dividends or other
distributions to which the holders thereof are entitled pursuant to Section
1.6.
1.13. Further Assurances. If at any time after the Effective Time the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are necessary,
desirable or proper in furtherance of the provisions of this Agreement (a) to
vest, perfect or confirm, of record or otherwise, in the Surviving Corporation
its right, title or interest in, to or under any of the rights, privileges,
powers, franchises, properties or assets of either of the Constituent
Corporations, or (b) otherwise to carry out the purposes of this Agreement,
the Surviving Corporation and its proper officers and directors or their
designees shall be authorized to execute and deliver, in the name and on
behalf of either of the Constituent Corporations, all such deeds, bills of
sale, assignments and assurances and to do, in the name and on behalf of
either Constituent Corporation, all such other acts and things as may be
necessary, desirable or proper to vest, perfect or confirm the Surviving
Corporation's right, title or interest in, to or under any of the rights,
privileges, powers, franchises, properties or assets of such Constituent
Corporation and otherwise to carry out the purposes of this Agreement.
1.14. Escrow. The shares of Kellwood Common Stock deposited in Escrow
pursuant to the Escrow Agreement shall be available to fund and satisfy
indemnification payments, if any, due to Kellwood hereunder, together with any
other claim of Kellwood or Sub hereunder. Following the Effective Time, the
Escrow shall be the sole and exclusive recourse of Kellwood and Sub for
breaches by the Company or the Stockholders of the representations, warranties
and covenants contained herein, absent fraud. The value of a share of Kellwood
Common Stock used to fund indemnification payments shall be the closing price
per share on The New York Stock Exchange on the trading day immediately
preceding the Closing Date (the "Agreed Price").
ARTICLE II
THE CLOSING OF THE MERGER
2.1. Closing. The closing of the transactions contemplated by this Agreement
(the "Closing") shall occur at the offices of McDermott, Will & Emery, 227
West Monroe Street, Chicago, Illinois, at 10:00 A.M. on the third business day
following the satisfaction of the conditions precedent in Article VIII hereof
or at such other time or place as may be mutually agreed upon by the parties
(the "Closing Date"). Upon consummation, the Closing shall be deemed to take
place as of the Effective Time.
2.2. Deliveries by Kellwood. At the Closing, Kellwood and Sub shall deliver
the following:
(a) upon surrender of Certificates properly endorsed for transfer or
accompanied by duly executed stock powers in either case executed in blank
or in favor of Kellwood and duly executed Transmittal Letters, the Exchange
Agent shall deliver or cause to be delivered to the holders of Company
Common Stock or any of their representatives surrendering such
Certificates, (i) certificates evidencing the number of shares of Kellwood
Common Stock to be received by each such holder under Section 1.5(c)
hereof, which certificates will be duly issued and registered in the name
of each such holder, and (ii) cash to be paid in lieu of delivery of a
fraction of a share of Kellwood Common Stock which shall be paid by
delivery of a check, in each case less the number of shares to be delivered
to the Escrow Agent;
(b) Kellwood shall cause the Exchange Agent to deliver to the Escrow
Agent certificates evidencing the number of shares of Kellwood Common Stock
to be held in escrow pursuant to Section 1.5(f) hereof, which certificates
will be duly issued and registered in the respective names of the Company
stockholders
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evidencing the number of shares of Kellwood Common Stock of each Company
stockholder held in escrow hereunder, plus cash to be paid in lieu of
delivery of a fraction of a share of Kellwood Common Stock;
(c) opinion of counsel in a form customary in transactions such as the
Merger and reasonably acceptable to the Company; and
(d) such other instruments or documents as may be necessary or
appropriate to carry out the transactions contemplated hereby.
2.3. Deliveries by the Company and the Stockholders. At the Closing, the
Company and the Stockholders shall deliver the following:
(a) the Certificates;
(b) a non-foreign affidavit for each Stockholder within the meaning of
Section 1445(b) of the Code exempting each such Stockholder from
withholding under Section 1445 of the Code;
(c) all other previously undelivered documents required to be delivered
by the Company to Kellwood at or prior to the Closing pursuant to the term
of this Agreement;
(d) opinion of counsel in a form customary in transactions such as the
Merger and reasonably acceptable to Kellwood; and
(e) such other endorsements, instruments or documents as may be necessary
or appropriate to carry out the transactions contemplated hereby.
2.4. Closing Agreements. At the Closing, the parties shall execute,
acknowledge and deliver the following:
(a) the Escrow Agreement;
(b) Non-competition Agreements between Sub and each of Martin J. Granoff,
Steve Rudin and Fred Smeyne containing restrictions comparable to those
contained in each such individual's current employment agreement with the
Company to extend for a period of two (2) years following the Closing Date.
(c) such other instruments or documents as may be necessary or
appropriate to carry out the transactions contemplated by this Agreement
and to comply with the terms hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Kellwood and Sub as of the date
hereof and as of the Closing Date, as set forth below:
3.1. Authority. Subject to the approval of the Merger and this Agreement by
the stockholders of the Company in accordance with the provisions of the
Company's Amended and Restated Certificate of Incorporation ("Required Company
Stockholder Approval") and compliance with the provisions of the Stockholders
Agreement dated as of July 1, 1994 by and among Koret, Inc. and certain
stockholders named therein (the "Company Stockholders Agreement"), the Company
and each Stockholder have full right, power and authority, without the consent
of any other person, to execute and deliver this Agreement and to carry out
the transactions contemplated hereby. Subject to the Required Company
Stockholder Approval, and compliance with the applicable provisions of the
Company Stockholders Agreement, all acts or proceedings required to be taken
by the Company or any Stockholder to authorize the execution, delivery and
performance of this Agreement, the documents to be delivered at Closing and
all transactions contemplated hereby and thereby have been duly and properly
taken.
3.2. Validity. This Agreement has been, and the documents to be delivered at
Closing will be, duly executed and delivered and constitute lawful, valid and
legally binding obligations of the Company and each Stockholder, enforceable
in accordance with their respective terms, subject to obtaining Required
Company Stockholder Approval and compliance with the Company Stockholders
Agreement. Except as set forth in Schedule 3.2, and except for compliance with
the applicable provisions of the Company Stockholders Agreement, the execution
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and delivery of this Agreement and the consummation of the transactions
contemplated hereby will not result in the creation of any lien, charge or
encumbrance of any kind or the termination or acceleration of any indebtedness
or other obligation of the Company, and are not prohibited by, do not violate
or conflict with any provision of, and do not constitute a default under or a
breach of (a) the charter or By-laws of the Company or any Stockholder, (b)
any material note, bond, indenture, contract, agreement, permit, license or
other instrument to which the Company is a party or by which the Company or
any of its assets is bound, (c) any order, writ, injunction, decree or
judgment of any court or governmental agency, or (d) any law, rule or
regulation applicable to the Company or any Stockholder. No approval,
authorization, registration, consent, order or other action of or filing with
any person, including any court, administrative agency or other governmental
authority, is required for the execution and delivery by the Company or any
Stockholder of this Agreement, the documents to be delivered at Closing or the
consummation by the Company or any Stockholder of the transactions
contemplated hereby and thereby, except for filings or consents required
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations thereunder (the "HSR Act").
3.3. Ownership of Stock. Each Stockholder has good and marketable title to
all of the Company Common Stock registered in his or its name as set forth on
Schedule 3.3 and, subject to compliance with the provisions of the Company
Stockholders Agreement, which will be terminated as of the Closing Date, the
absolute right, power and capacity to sell, assign, transfer and deliver all
right, title and interest both legal and equitable, in and to the Company
Common Stock registered in its name as set forth in Schedule 3.3, in
connection with the transactions contemplated hereby, free and clear of all
claims, security interests, liens, pledges, charges, escrows, options,
proxies, rights of first refusal, preemptive rights, mortgages,
hypothecations, prior assignments, title retention agreements, indentures,
security agreements or any other limitation, encumbrance or restriction of any
kind, except as disclosed on Schedule 3.3 with respect to certain liens to be
discharged as of Closing.
3.4. Due Organization. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, and has full power and authority and all requisite rights,
licenses, permits and franchises to own, lease and operate its assets and to
carry on the business in which it is engaged. The Company is duly licensed,
registered and qualified to do business as a foreign corporation and is in
good standing in all jurisdictions in which the ownership, leasing or
operation of its assets or the conduct of its business requires qualification
and in which the failure to so qualify to do business would have a material
adverse effect on the business, assets (including intangible assets),
financial condition, results of operations or liabilities of the Company and
its Subsidiaries taken as a whole (hereinafter referred to as a "Company
Material Adverse Effect"). Schedule 3.4 sets forth each state or other
jurisdiction in which the Company is licensed or qualified to do business. The
Company has delivered to Kellwood an accurate and complete copy of its charter
and by-laws and each agreement, trust, proxy or other arrangement among its
Stockholders to which the Company is a party or by which the Company is bound.
The books of account and other financial records of the Company are accurate
and complete in all material respects and have been maintained in accordance
with good business practices. The minute books of the Company in all material
respects contain accurate and complete records of all meetings and accurately
reflect all other material corporate action of the stockholders and directors
and any committees of the Board of Directors of the Company and the stock
record books of the Company accurately reflect the ownership of the Company.
3.5. Subsidiaries.
(a) Except as set forth in Schedule 3.5, the Company does not own stock or
have any material equity investment or other material interest in, does not
have the right to acquire any material interest, and does not control,
directly or indirectly, any corporation, association, partnership, joint
venture or other entity (individually, a "Subsidiary" and collectively the
"Subsidiaries"). Schedule 3.5 sets forth the state or other jurisdiction of
incorporation or organization of each Subsidiary, and each state or other
jurisdiction in which such Subsidiary is licensed or qualified to do business.
Each Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization. Each
Subsidiary has full power and authority and all requisite rights, licenses,
permits and franchises to own, lease and operate its assets and to carry on
the
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business in which it is engaged. Each Subsidiary is duly licensed and
qualified to do business as a foreign corporation and is in good standing in
all jurisdictions in which the ownership, leasing or operation of its assets
or the conduct of its business requires qualification and in which the failure
to so qualify would have a Company Material Adverse Effect.
(b) The capitalization, including debt and equity, of each Subsidiary is
accurately set forth in Schedule 3.5. All outstanding shares of capital stock
of each Subsidiary (the "Shares") are duly authorized, validly issued, fully
paid and non-assessable, were not issued in violation of any preemptive
subscription or other right of any person to acquire securities of any
Subsidiary and constitute in the aggregate all the issued and outstanding
capital stock of all classes of the Subsidiaries. There is no outstanding
subscription, option, convertible or exchangeable security, preemptive right,
warrant, call or agreement (other than this Agreement) relating to the Shares
or other obligation or commitment of any Subsidiary to issue any shares of
capital stock. There are no voting trusts or other agreements, arrangements or
understandings applicable to the exercise of voting or any other rights with
respect to any Shares. The Company has, either directly or indirectly through
one or more Subsidiaries, good and marketable title to all of the Shares and
the absolute right to sell, assign, transfer and deliver the Shares, free and
clear of all claims, security interests, liens, pledges, charges, escrows,
options, proxies, rights of first refusal, preemptive rights, mortgages,
hypothecations, prior assignments, title retention agreements, indentures,
security agreements or any other limitation, encumbrance or restriction of any
kind.
3.6. Capital Stock. The Company's entire equity capital consists of
20,000,000 authorized shares of Class A Common Stock, $.01 par value per
share, of which 4,903,719 shares are issued and outstanding, 1,000,000
authorized shares of Class B non-voting common stock, $.01 par value ("Company
Class B Common Stock"), of which no shares are issued or outstanding on the
date hereof, and 3,200,000 authorized shares of Class C Special Common Stock,
par value $.01 per share, of which 3,091,190 shares are issued and outstanding
and all of which are owned of record by the stockholders listed on Schedule
3.6. Prior to Closing, BTNY and BTSC may exercise their warrants to purchase
shares of Company Class B Common Stock pursuant to the BT Warrant Agreement,
conditioned upon the consummation of the Merger, which, if exercised, in full,
will result in the issuance immediately prior to the Effective Time to BTNY
and BTSC of up to 553,282 and 50,000 shares, respectively, of Company Class B
Common Stock. Prior to Closing, the option issued to Steven Rudin to purchase
100,000 shares of Company Common Stock may be exercised by him, which, if
exercised in full, will result in the issuance to Mr. Rudin of 100,000 shares
of Company Class A Common Stock. The capitalization, including debt and
equity, of the Company is accurately described in the financial statements set
forth in Schedule 3.9. All outstanding shares of the Company Common Stock are
duly authorized, validly issued, fully paid and nonassessable, and were not
issued in violation of any preemptive, subscription or other right of any
person to acquire securities. The Company Common Stock constitutes in the
aggregate all the issued and outstanding capital stock of all classes of the
Company on the date hereof. Schedule 3.6 lists all outstanding options and
warrants to purchase Company Common Stock or any other capital stock or
securities of the Company to which the Company is a party or by which the
Company is bound. Except as set forth on Schedule 3.6, there are no
outstanding subscriptions, options, convertible or exchangeable security,
preemptive right, warrants, call or agreement (other than this Agreement)
relating to the Company Common Stock or any capital stock or other obligation
or commitment (contingent or otherwise) to issue, repurchase or otherwise
acquire or retire any shares of capital stock of the Company to which the
Company is a party or by which the Company is bound. All shares of the
Company's capital stock, whether or not currently outstanding, were issued in
compliance (and if reacquired or cancelled by the Company, reacquired or
cancelled in compliance) with all laws, applicable laws, rules and regulations
of any foreign, federal, state or local governmental authority (collectively,
"Laws"), including securities Laws. Except as set forth on Schedule 3.6, there
are no voting trusts or other agreements, arrangements or understandings
applicable to the exercise of voting or any other rights with respect to any
Company Common Stock to which the Company is a party or by which the Company
is bound. Except as set forth on Schedule 3.6, there are no restrictions
affecting the transferability of the Company Common Stock to which the Company
is a party or by which the Company is bound. Except as listed on Schedule 3.6,
the Company has not lent or advanced any money to, or borrowed any money from,
or guaranteed or otherwise become liable for any indebtedness or other
obligations of, or acquired any capital stock, obligations or securities of,
any stockholder or any other person in each case in an amount of or value
greater than $10,000.
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3.7. Transactions with Related Parties. Since November 30, 1997, there has
not been any dividend or other distribution of assets by the Company. Except
as set forth in Schedule 3.7, no Related Party:
(a) owns or controls, directly or indirectly, a twenty-five (25%) or
greater voting or equity interest in any corporation, association or other
entity which is a competitor, lessor, lessee, customer, supplier,
distribution sales agent or advertiser of the Business;
(b) has any cause of action or other claim whatsoever against or owes any
material amount to, or is owed any material amount by, the Company;
(c) has any interest in or owns any material property or right used in
the conduct of the Business;
(d) is a party to any contract, lease or agreement with the Company; or
(e) except in the case of Related Parties who are executive officers
and/or directors of the Company and who performed services for the Company
and received compensation from the Company in the ordinary course of the
Business consistent with past practices, received from or furnished to the
Company any goods or services (with or without consideration) since
November 30, 1997.
The term "Related Party" shall mean: (i) Martin J. Granoff ("Mr. Granoff");
(ii) any member of Mr. Granoff's immediate family (i.e., spouse, brother,
sister or child); (iii) any executive officer or director of the Company
(except Randall Blumenthal and Nathan Gantcher); and (iv) any corporation,
partnership, trust or other entity in which any of the persons set forth in
subsections (i) through (iii) of this paragraph holds twenty-five (25%) or
greater voting interest or equity interest. The executive officers and
directors of the Company are set forth in Schedule 3.7.
3.8. Financial Statements. The financial statements of the Company for the
three (3) year period ended November 30, 1997 and the nine months ended August
31, 1997 and August 31, 1998 attached hereto as Schedule 3.8 (the "Financial
Statements") are, (a) accurate and complete in all material respects, (b) in
accordance with the books of account and records of the Company, (c) present
fairly the financial condition and results of operations of the Company as of
the dates and for the periods indicated and (d) prepared in accordance with
U.S. generally accepted accounting principles applied on a consistent basis
throughout the periods covered thereby ("GAAP"), except that the unaudited
financial statements of the Company as of and for the nine-month periods ended
August 31, 1997 and 1998, do not contain all of the footnotes required by
GAAP, are condensed and are subject to year-end adjustments consistent with
past practice. Such financial statements for interim periods reflect all
adjustments necessary for a fair presentation of financial position and, to
the extent presented, changes in financial position and results of operations
for the periods presented.
3.9. Interim Change. Except as set forth in Schedule 3.9, since November 30,
1997, there has not been (a) any change in the financial condition, assets,
liabilities, personnel or business of the Company or in its relationships with
suppliers, customers, distributors, lenders, lessors or others, except changes
in the ordinary course of the Business; (b) any damage, destruction or loss,
whether or not covered by insurance which has had a Company Material Adverse
Effect; (c) any forgiveness or cancellation of debts or claims, waiver of any
rights or any discharge or satisfaction of any lien, charge or encumbrance or
payment of any liability or obligation, other than current liabilities in the
ordinary course of the Business; (d) any event or condition of any character
which has had a Company Material Adverse Effect; (e) any decrease in the net
book value of the Company; or (f) any material change in the credit practices
of the Company or in the methods or accounting principles used in maintaining
their books, accounts or business records. Since November 30, 1997, the
Company has not incurred or become subject to, or agreed to incur or become
subject to, any liability or obligation, contingent or otherwise, except
current liabilities and contractual obligations in the ordinary course of the
Business in amounts consistent with past practices except as set forth in
Schedule 3.9. Except as set forth in Schedule 3.9, since November 30, 1997,
there have not been any material special sales of any products or services or
any material changes in the prices charged for any products or services other
than in the ordinary course of the Business, consistent with past practices.
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3.10. Banking Relationships and Investments. Schedule 3.10 sets forth an
accurate and complete list of all banks and financial institutions in which
the Company has an account, deposit, safe-deposit box, lock box or line of
credit or other loan facility or relationship, including the names of all
persons authorized to draw on those accounts or deposits, or to borrow under
such lines of credit or other loan facilities, or to obtain access to such
boxes. Schedule 3.10 sets forth an accurate and complete list of all
certificates of deposit, debt or equity securities and other investments
owned, beneficially or of record, by the Company (the "Investments"). The
Company has good and marketable title to all of the Investments. The
Investments reflected on the Company's financial statements are, (a) properly
valued at the lower of cost or market, (b) readily marketable, and (c) fully
paid and not subject to assessment or other claims upon the Company thereof.
3.11. Accounts Receivable. Schedule 3.11 sets forth an accurate and complete
list of all factoring or similar agreements governing the disposition, sale
and collection of its accounts and notes receivable (the "Factoring
Agreements").
3.12. Inventory. All inventories reflected on the financial statements
delivered to Kellwood are (a) properly recorded at the lower of standard cost
(which approximates average cost) or market (net realizable value) in
accordance with GAAP as consistently applied in prior annual financial
statements; (b) of good and merchantable quality and contain no material
amounts that are not salable and usable for the purposes intended in the
ordinary course of the Business and meet the current standards and
specifications of the Business; (c) in conformity with warranties customarily
given to buyers of like products; and (d) at levels adequate and not excessive
in relation to the circumstances of the Business and in accordance with past
inventory stocking practices. Except as set forth on Schedule 3.12, all
inventories disposed of subsequent to November 30, 1997, have been disposed of
only in the ordinary course of business and at prices and under terms that are
normal and consistent with past practice. No inventory is held by the Company
on consignment. The Company does not hold title to any inventory held by
others.
3.13. Motor Vehicles. Schedule 3.13 sets forth an accurate and complete list
of all motor vehicles used by the Company, whether owned or leased. All such
vehicles are (a) properly licensed and registered in accordance with
applicable law; (b) insured as set forth in Schedule 3.13; (c) in good
operating condition and repair (reasonable wear and tear excepted) and (d) not
subject to any lien or other encumbrance, except with respect to leased motor
vehicles, in accordance with the leases therefor.
3.14. Insurance. Schedule 3.14 sets forth an accurate and complete list
(including the name of the insurer, coverage, premium and expiration date) of
all binders, policies of insurance, self insurance programs or fidelity bonds
("Insurance") maintained by the Company in which the Company is a named
insured. To the knowledge of the Company, without inquiry, all Insurance has
been issued by financially sound insurance companies under valid and
enforceable policies or binders for the benefit of the Company, and all such
policies or binders are in full force and effect. There are no pending or
asserted claims against any Insurance as to which any insurer has denied
liability, and since November 30, 1997, there have been no new claims under
any Insurance that have been disallowed or improperly filed. Since November
30, 1997, the Company has received, no notice of cancellation or non-renewal
with respect to, or material increase of premium for, any insurance has been
received by the Company. The Company has no knowledge of any facts or the
occurrence of any event with respect to the Company, which (i) reasonably
might form the basis of any claim against the Company relating to the conduct
or operations of the Business which will materially increase the insurance
premiums payable under any insurance, or (ii) otherwise will materially
increase the insurance premiums payable under any insurance.
3.15. Title to Assets. The Company and the Subsidiaries have good and valid
title to, or in the case of leased properties and assets, valid leasehold
interests in, all of their respective material tangible properties and assets,
real, personal and mixed, used or held for use in the Business, free and clear
of liens or other encumbrances, except as stated in the Financial Statements
or in Schedule 3.15 and except for liens for taxes not yet due and payable and
such imperfections of title and encumbrances, which do not materially detract
from the value, or materially interfere with the present use, of the property
subject thereto or affected thereby. Schedule 3.15 sets forth an accurate and
complete list of all depreciable assets. The material assets owned and leased
or licensed by
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the Company and the Subsidiaries and used in the conduct of the Business are
in good operating condition and repair (reasonable wear and tear excepted),
are suitable for the purposes for which they are presently being used, and are
adequate to meet all present and reasonably anticipated requirements of the
Business as presently conducted. The assets owned and leased or licensed by
the Company and used in the conduct of the Business will furnish Kellwood with
all of the capacity and rights to design, manufacture, produce, develop, use,
sell, market and distribute the products and to perform the same services in
the same manner as presently conducted by the Company and the Subsidiaries and
to meet all reasonably anticipated requirements of the Business.
3.16. Real Estate. The Company does not own any real property.
3.17. Real Estate Leases. Schedule 3.17 sets forth an accurate and complete
list of all real property leased or subleased by the Company and the
Subsidiaries, setting forth the location (including street address) of each
leased or subleased premises, the lessor (or sublessor) thereof, the lessee
(or sublessee) thereof, the current use by lessee or sublessee of such
premises, the term of the lease or sublease therefor (the "Real Estate
Leases") and any renewal options held by the lessee or sublessee. The Company
and the Subsidiaries are in peaceable possession, respectively, of the
premises covered by each Real Estate Lease. The Company has delivered to
Kellwood accurate and complete copies of each Real Estate Lease. At the
Closing, the Company shall deliver to Kellwood any consents or approvals of
any parties with respect to those Real Estate Leases set forth on Schedule
8.3(d), or alternatively, prior to Closing, cooperate with Kellwood in
commercially reasonable efforts to provide Kellwood with the commercial
benefit of such Real Estate Leases.
3.18. Personal Property Leases. Schedule 3.18 sets forth an accurate and
complete list of each lease or bailment of personal property used in the
Business for which the Company's annual lease payment or other payment
obligation is $25,000 or more (the "Personal Property Leases"). The Company
and the Subsidiaries are in peaceable possession, respectively, of the
property covered by each Personal Property Lease. The Company has delivered to
Kellwood an accurate and complete copy of each Personal Property Lease. At the
Closing, the Company shall use commercially reasonable efforts to deliver to
Kellwood any consents or approvals of any parties with respect to the Personal
Property Leases required in connection with the transactions contemplated
hereby.
3.19. Intellectual Property. Schedule 3.19 sets forth an accurate and
complete list (showing in each case any product, device, process and service
covered thereby, the registered or other owner, registration number, and
registration status) of all material Patents Rights, Trademarks, and
Copyrights owned by the Company and its Subsidiaries or licensed to the
Company and its Subsidiaries for its business as it is currently conducted
(the "Intellectual Property"). With respect to the Intellectual Property:
(a) Except as set forth on Schedule 3.19 (which Schedule sets forth with
specificity the nature of the Company's and the Subsidiaries' rights (or
grant of rights), any limitations thereon, the owner of such rights (or the
licensee or grantee of such rights and the nature of such grant), and
attaches a copy of the relevant agreement(s) pursuant to which the Company
or the Subsidiaries obtained (or granted) such rights), the Company or the
Subsidiaries are the sole and exclusive owner of the Intellectual Property
and have the sole and exclusive right to use the Intellectual Property;
(b) Except as set forth on Schedule 3.19, with respect to the
Intellectual Property, (i) no action, suit, proceeding or investigation is
pending nor has the Company received any notice of a threatened action or
suit; (ii) the Company has received no notice that the Intellectual
Property owned by the Company or the Subsidiaries or the Intellectual
Property owned by third parties and licensed to the Company or the
Subsidiaries, interferes with, infringes upon, conflicts with or otherwise
violates the rights of others or is being interfered with or infringed upon
by others or is subject to any outstanding order, decree, judgment,
stipulation or charge; (iii) the Company and the Subsidiaries have received
no notice of any patent, invention or application therefor which would
infringe upon any of the Intellectual Property or render obsolete or
adversely affect the manufacture, processing, distribution or sale of
products or services of the Company; and (iv) all items of Intellectual
Property owned by the Company are registered under applicable
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law and all such registrations are valid and in force, and in the case of
applications, all patent applications with respect to Patent Rights and all
applications to register any unregistered Copyrights and Trademarks are
pending and in good standing, all without challenge of any kind;
(c) Except as set forth on Schedule 3.19, all rights of the Company and
the Subsidiaries in and to the Intellectual Property are transferable to
Kellwood as contemplated herein without any consent, approval or payment
which has not already been obtained or made by the Company;
(d) Except as set forth on Schedule 3.19, the Company and the
Subsidiaries are not subject to any judgment, order, writ, injunction or
decree of any court or any Federal, state, local or other governmental
agency or instrumentality, domestic or foreign, or any arbitrator, nor are
a party to any contract which restricts or impairs the Company's and the
use of any Intellectual Property owned by the Company;
(e) To the knowledge of the Company, the operation of the Company after
the Closing in the manner and geographic areas in which the Business is
currently conducted by the Company will not interfere with or infringe upon
any third party Patent Right, Trademark or Copyright or any asserted rights
of others, including without limitation, with respect to the current
labels, logos, product designation, trade dress or packaging of any
products; and
(f) Except as set forth on Schedule 3.19, during the preceding five (5)
years, the Company has not been known by or done business under any other
name not listed on Schedule 3.19.
(g) For purposes of this Agreement and the provisions of this Section
3.19, the following terms shall have the following meanings:
(i) "Copyrights" means United States and foreign copyrights,
copyrightable works, and mask works, whether registered or
unregistered, and pending applications to register the same, and all
material agreements, contracts, licenses, sublicenses, assignments and
indemnities that relate or pertain to any of the forgoing to which the
Company or a Subsidiary is a party or by which any of them is bound;
(ii) "Patent Rights" means United States and foreign patents, patent
applications, continuations, continuations-in-part, divisions,
reissues, patent disclosures, inventions (whether or not patented) or
improvements thereto, and all material agreements, contracts, licenses,
sublicenses, assignments and indemnities that relate or pertain to any
of the forgoing to which the Company or a Subsidiary is a party or by
which any of them is bound; and
(iii) "Trademarks" means United States, state and foreign trademarks,
service marks, logos, trade dress, trade styles, trade names (including
all assumed or fictitious names under which the party is conducting
business or has within the past five years conducted business), product
designations, labels, logos, designer designations, brands, and any
other source-identifying devices or symbols, and any combination or
variations thereof, whether registered or unregistered, and pending
applications to register the foregoing and all registrations thereof,
and all material agreements, contracts, licenses, sublicenses,
assignments and indemnities that relate or pertain to any of the
forgoing to which the Company is a party or by which any of them may be
bound.
Copies of all Intellectual Property applications, registration renewals, and
all correspondence with respect thereto, shall be delivered to Kellwood at
Closing.
3.20. Software and Information Systems. The Company and its Subsidiaries
have a possessory interest in the computer software programs and related
information platform systems, in any media, including, without limitation, all
program specifications, input data, databases, compilations, routines,
compilers, higher level or "proprietary" languages, report layouts and
formats, record file layouts, functional specifications and narrative
descriptions, whether in source code, object code or human readable form, used
by the Company and its Subsidiaries for their businesses as they are currently
conducted (collectively, the "Software"). With respect to the Software:
(a) To the knowledge of the Company, Schedule 3.20(a) sets forth an
accurate and complete list of the Software and identifies (i) Software that
is owned by the Company and its Subsidiaries; (ii) any other
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Software in which the Company and its Subsidiaries have any use, possessory
or proprietary rights; and (iii) all pending Software development projects,
together with a description of such projects and the stage of their
development, an identification of the persons undertaking the projects, and
a description of any Software licensed for use in the projects.
(b) Schedule 3.20(b) sets forth an accurate and complete list of the
Software that is licensed to the Company and its Subsidiaries, the licensor
of the Software and, if different, the owner thereof.
(c) Except as set forth on Schedule 3.20(c), the Software is not subject
to any material transfer, assignment, source code escrow agreement,
reversion, site, equipment, or other operational limitations.
(d) All Software documentation is sufficient in detail and content to
identify and explain the nature thereof, and to allow its full and proper
use by the Company and its Subsidiaries, as well as pertinent commentary
and explanation used for the development, implementation, maintenance and
use thereof.
(e) The Company and its Subsidiaries have received no notice of any
violation of patent, trade secret rights, copyright or other proprietary
rights with respect to the Software.
(f) Except as set forth on Schedule 3.20(f) as non-Year 2000 Compliant
Software ("Non-Y2K Compliant Software"), the Software and related systems
in their current form are Year 2000 Compliant. The Company and its
Subsidiaries shall have no obligation as of Closing to render as Year 2000
Compliant any Non-Y2K Compliant Software. "Year 2000 Compliant" means that
the Software and the hardware platform systems used or relied on in the
Business is designed to be used prior to, during and after the calendar
year 2000 A.D., and the Software will accurately receive, provide and
process date/time data from, into and between the 20th and 21st centuries,
including the years 1999 and 2000, and leap year calculations, and will not
malfunction, cease to function, or provide invalid or incorrect results as
a result of date/time data, which is detected prior to March 31, 2001, to
the extent that other information technology used in combination with the
Software properly exchanges date/time data with it.
(g) The Software owned by the Company and its Subsidiaries contains no
timer, virus, copy protection device, disabling code, clock, counter or
other limiting design or routine that causes the Software (or any operation
thereof) to become erased, inoperable, impaired or otherwise incapable of
being used in the full manner for which it was contemplated for use under
this Agreement.
(h) The Software owned by the Company and its Subsidiaries complies with
all applicable requirements relating to export or re-export and the
Software may be exported and re-exported to all countries, other than to
those countries specified as prohibited destinations pursuant to applicable
regulations of the United States Department of Commerce or the United
States State Department.
Copies of Software owned by the Company and its Subsidiaries and copies of
licenses and other agreements available to the Company and its Subsidiaries
with respect to the Software shall be delivered to Kellwood prior to
Closing.
3.21. Customers and Suppliers.
(a) Except as set forth on Schedule 3.21, all sales contracts and orders
with customers and suppliers which have been entered into by or on behalf of
the Company since November 30, 1997 were entered into in the ordinary course
of the Business consistent with past practices and require full performance
within six (6) months after the respective dates thereof. Schedule 3.21 sets
forth an accurate and complete list of the 25 largest customers and 25 largest
suppliers of the Company, determined on the basis of revenues from items sold
(with respect to customers) or costs of items purchased (with respect to
suppliers) for the fiscal year ended November 30, 1997 and the eleven-months
ended October 31, 1998. To the knowledge of the Company, without inquiry, no
customer or supplier will cease to do business with the Company after, or as a
result of, the consummation of any transactions contemplated hereby and no
customer or supplier is threatened with bankruptcy or insolvency, except as
set forth in Schedule 3.21. The Company has no knowledge, without inquiry, of
any fact, condition or event which would materially adversely affect its
relationship with any customer or supplier, except as set forth in Schedule
3.21. Since November 30, 1997, there has been no cancellation of backlogged
orders in excess of the average rate of cancellation prior to such date.
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(b) Neither the Company, nor, to the knowledge of the Company, any of its
officers or employees, has, directly or indirectly, given or agreed to give
any rebate, gift or similar benefit to any supplier, customer, distributor,
broker, governmental employee or other person, who was, is or may be in a
position to help or hinder the business (or assist in connection with any
actual or proposed transaction) which could subject the Company to any damage
or penalty in any civil, criminal or governmental litigation or proceeding or
which would have a Company Material Adverse Effect.
(c) Except as set forth on Schedule 3.21, (i) no Person listed on Schedule
3.21 within the last twelve months has threatened the Company in writing to
cancel or otherwise terminate, or to the Company's knowledge, has threatened
orally to cancel or otherwise terminate, the relationship of such Person with
the Company, and (ii) no such Person during the last twelve months has
decreased materially or threatened the Company in writing to decrease or limit
materially, or, to the Company's knowledge, without inquiry, intends to
decrease or limit materially, its supplies to the Company or its purchase of
the Company's services or the Company's products. Except as set forth on
Schedule 3.21, there is no purchase commitment which provides that any
supplier will be the exclusive supplier of the Company. There is no material
purchase commitment requiring the Company to purchase the entire output of a
supplier.
(d) None of the Company's customers is a "franchisee" of the Company under
any applicable federal or state law or any rules or regulations promulgated
thereunder.
3.22. Employees.
(a) Contracts. Schedule 3.22 sets forth an accurate and complete list of all
agreements, arrangements or understandings, written or oral, with any officer
or director of the Company whose annual salary (excluding bonus) as of the end
of the most recent fiscal year was in excess of $100,000 (a "Key Employee"),
regarding services to be rendered, terms and conditions of employment, and
compensation of such individual (the "Employment Contracts").
(b) Compensation. Schedule 3.22 sets forth an accurate and complete list of
all employees of the Company, including name, title or position, the present
annual compensation (including bonuses, commissions and deferred
compensation), years of service and any interests in any incentive
compensation plan. Schedule 3.22 sets forth an accurate and complete list of
each employee who will become entitled to receive supplementary retirement
benefits or allowances, whether pursuant to a contractual obligation or
otherwise, and the estimated amounts of such payments. Except as set forth in
Schedule 3.22, since November 30, 1997, except as provided in the collective
bargaining agreements set forth in Schedule 3.23, the Company has not (i)
paid, or made any accrual or arrangement for the payment of, bonuses or
special compensation of any kind, including any severance or termination pay,
to any present or former officer or employee, (ii) made any general wage or
salary increases or (iii) increased or altered any employee welfare or pension
benefits or insurance provided to any employee.
(c) Disputes. Except as set forth on Schedule 3.22, there are no grievances
pending or, to the knowledge of the Company, threatened between the Company
and any labor organization representing a bargaining unit of Company
employees, except individual grievances under any collective bargaining
agreement which, in the aggregate, are not material. Since November 30, 1997,
the Company has not suffered or sustained any strike or other work stoppage,
and, to the knowledge of the Company, no such work stoppage is threatened.
Except as set forth on Schedule 3.22, the Company has not been informed orally
or in writing that any petition concerning representation has been filed with
the National Labor Relations Board since November 30, 1997 or that any union
organizing or election activities involving any nonunion employees of the
Company are in progress or threatened.
(d) Compliance. The Company has complied with all laws, rules and
regulations relating to the employment of labor, including provisions relating
to wages, hours, equal opportunity, record keeping, occupational health and
safety, severance, collective bargaining and the payment of social security
and other taxes, and all contracts of employment with any individual employed
by the Company after November 30, 1997, except where such noncompliance,
individually or in the aggregate, would not result in a Company Material
Adverse Effect.
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(e) WARN Act. Schedule 3.22 sets forth an accurate and complete list of all
employees (excluding part-time employees) terminated (except for cause,
voluntary departure or normal retirement), laid off or subjected to a
reduction of more than 50% in hours or work during the two full months and the
partial month preceding the date of this Agreement. For purposes of this
Section 3.23(e) only, "part-time employee" means an employee who is employed
for an average of fewer than 20 hours per week or who has been employed for
fewer than 6 of the 12 months preceding the date of this Agreement.
(f) Officers, Directors and Key Employees. (i) Schedule 3.22 sets forth (i)
all wage and salary increases, bonuses and increases in any other direct or
indirect compensation received by officers, directors or Key Employees since
November 30, 1997, (ii) any payments or commitments of the Company to pay any
severance or termination pay to any such persons since November 30, 1997,
(iii) any accrual for, or any commitment or agreement by the Company to pay,
such increases, bonuses or pay since November 30, 1997 and (iv) any bonuses or
payment that would be payable to any employee, consultant, agent or other
representative of the Company (A) as an inducement for such person to not
terminate his or her relationship with the Business or (B) as a result of the
transactions contemplated hereby. None of such persons has, as of the date of
this Agreement, indicated that he or she will cancel or otherwise terminate
such person's relationship with the Company.
3.23. Employee Benefit Plans.
(a) Benefit Plans. As used herein, the term "Benefit Plans" includes
"welfare benefit plans" (as defined in Section 3(1) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), "employee pension benefit
plans" (as defined in Section 3(2) of ERISA), bonus, profit sharing, deferred
compensation, incentive, bonus, stock option, employee stock purchase or other
compensation plans or arrangements, and other employee fringe benefit plans
whether funded or unfunded, qualified or unqualified, exclusive of
multiemployer plans (as defined in Section 3(37) of ERISA), and exclusive of
Canadian Plans (as hereafter defined) maintained or contributed to by the
Company or any other organization ("Common Control Entity") which is a member
of a controlled group of organizations (within the meaning of Sections 414(b),
(c), (m) or (o) of the Code) for the benefit of any of its officers, employees
or other persons. Schedules 3.22 and 3.23 set forth an accurate and complete
list of each Benefit Plan maintained or contributed to by the Company or any
other Common Control Entity, since January 1, 1993 exclusive of benefits
provided pursuant to a collective bargaining agreement (each such plan
referred to as a "Scheduled Benefit Plan"). Except as set forth in Schedule
3.23, the Company has delivered to Kellwood accurate and complete copies of
(i) each Scheduled Benefit Plan (or, in the case of any unwritten Scheduled
Benefit Plans, descriptions thereof) and any amendments thereto exclusive of
terminated employment and consulting agreements, (ii) the three most recent
annual report on Form 5500 and attached Schedule B (including any related
actuarial valuation report), if any, filed with the Internal Revenue Service
with respect to any Benefit Plan, (if any such report was required), (iii)
each trust agreement and group annuity contract relating to any Scheduled
Benefit Plan, (iv) certified financial statements for each Scheduled Benefit
Plan, (v) attorney's response to an auditor's request for information, with
respect to Scheduled Benefit Plans (vi) collective bargaining agreements or
other such contracts, (vii) Form S-8, including any amendments thereto, if
any, (viii) each ruling letter or any outstanding ruling request on the tax
exempt status of any voluntary employees' beneficiary association ("VEBA")
implementing a Scheduled Benefit Plan, if any, (ix) each determination letter
from the Internal Revenue Service, and each outstanding request for such a
letter, on the tax qualified status of any employee pension benefit plan that
is intended to be qualified under Section 401(a) of the Code for each
Scheduled Benefit Plan, and (x) each general notification to employees of
their rights to continuation coverage under Sections 601 through 608 of ERISA
for each Scheduled Benefit Plan. The Company has never sponsored, contributed
to, nor been obligated to contribute to, an employee pension benefit plan that
is subject to Title I, Subtitle B, Part 3 of ERISA (relating to "funding")
exclusive of multiemployer plans (as defined in Section 3(37) of ERISA).
(b) Funding. All contributions to, and payments from, the Benefit Plans that
may have been required to be made in accordance with the Benefit Plans and,
when applicable, Section 302 of ERISA or Section 412 of the Code, have been
timely made. All such contributions to, and payments from, the Benefit Plans,
except those
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payments to be made from a trust qualified under Section 401(a) of the Code,
for any period ending before the Closing Date that are not yet, but will be,
required to be made, will be properly accrued and reflected in the Financial
Statements.
(c) Compliance With the Code and ERISA. Except as set forth in Schedule
3.23, the Company and each Benefit Plan (and any related trust agreement or
annuity contract, if any, or any other funding instrument) comply currently,
and have complied in the past, both as to form and operation, with the terms
of each Benefit Plan and with the provisions of the Code (where required in
order to be tax-qualified under Section 401(a) of the Code) and ERISA and all
other applicable laws, rules and regulations in all material respects; and all
necessary governmental approvals for the Benefit Plans have been obtained.
Except as set forth in Schedule 3.23, the Benefit Plans that are pension
benefit plans have received determination letters from the Internal Revenue
Service to the effect that such Benefit Plans are qualified and exempt from
Federal income taxes under Sections 401(a) and 501(a), respectively, of the
Code, and no such determination letter has been revoked nor, to the knowledge
of the Company, has revocation been threatened, nor has any such Benefit Plan
been amended since the date of its most recent determination letter or
application therefor in any respect which would adversely affect its
qualification or materially increase its cost.
(d) Administration. Except as set forth in Schedule 3.23, each Benefit Plan
has been administered to date in compliance with its terms and the
requirements of the Code and ERISA in all material respects. Except as set
forth in Schedule 3.23, all reports, returns and similar documents with
respect to the Benefit Plans required to be filed with any government agency
or distributed to any Benefit Plan participant have been duly and timely filed
or distributed. Except as set forth in Schedule 3.23, there are no
investigations by any governmental agency, termination proceedings or other
claims (except claims for benefits payable in the normal operation of the
Benefit Plans), suits or proceedings against or involving any Benefit Plan or
asserting any rights or claims to benefits under any Benefit Plan that could
give rise to any material liability, nor, to the knowledge of the Company, are
there any facts that could give rise to any material liability in the event of
any such investigation, claim, suit or proceeding. Except as set forth in
Schedule 3.23, future compliance with the requirements of ERISA as in effect
on the Closing Date or any collective bargaining agreements to which the
Company is a party will not result in any increase in the rate of benefit
accrual under any Benefit Plan. The Company's financial statements reflect all
of the Company's employee benefit liabilities in a manner satisfying the
requirements of FAS 35, 87, 88, 112 and 132. No event has occurred and no
condition exists under any Benefit Plan that would subject the Company to any
tax under Code Sections 4971, 4972, 4976, 4977, 4978, 4979, 4979A, 4980,
4980B, 4980C, 4980D and 4980E or to a fine under ERISA Section 502(c). All
forms, documents and other materials, if any, have been filed with the
Securities and Exchange Commission or otherwise distributed as required by the
Securities Act of 1933, as amended in connection with Benefit Plans. Except as
set forth in Schedule 3.23, there are no leased employees (as defined in
Section 414(l) of the Code) that must be taken into account under any Benefit
Plan.
(e) Prohibited Transactions. No "prohibited transaction" (as defined in
Section 4975 of the Code or Section 406 of ERISA) has occurred which involves
the assets of any Benefit Plan and which could subject the Company or any of
its employees, or a trustee, administrator or other fiduciary of any trusts
created under any Benefit Plan to the tax or penalty on prohibited
transactions imposed by Section 4975 of the Code or the sanctions imposed
under Title I of ERISA. Except as set forth in Schedule 3.23, no Benefit Plan
has been terminated within the last five years. Neither the Company nor any
trustee, administrator or other fiduciary of any Benefit Plan nor any agent of
any of the foregoing has engaged in any transaction or acted or failed to act
in a manner which could subject the Company to any liability for breach of
fiduciary duty under ERISA or any other applicable law.
(f) Multiemployer Plans. Except as set forth in Schedule 3.23, at no time
since January 1, 1992, has the Company been required to contribute to any
"multiemployer pension plan" (as defined in Section 3(37) of ERISA) or
incurred any withdrawal liability, within the meaning of Section 4201 of
ERISA, or announced an intention to withdraw, but not yet completed such
withdrawal, from any multiemployer pension plan. Prior to January 1, 1992, the
Company did not incur any withdrawal liability under Section 4201 of ERISA.
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(g) Canadian Plans. The term "Canadian Plan" includes all employee benefit
plans, bonus, profit sharing, deferred compensation, incentive, stock option,
employee stock purchase or other compensation plans or arrangements and other
employee fringe benefit plans whether funded or unfunded, qualified or
unqualified maintained or contributed to by the Company or any other Common
Control Entity for the benefit of any of its officers, employees or other
persons in Canada. Schedule 3.23 sets out an accurate and complete list of
each Canadian Plan maintained by or contributed to by the Company or any other
Common Control Entity since January 1, 1993 (each such plan referred to as a
"Scheduled Canadian Plan") exclusive of benefits provided pursuant to a
collective bargaining agreement. Since January 1, 1992, except as set forth in
Schedule 3.23, the Company has delivered to Kellwood accurate and complete
copies of (i) each Scheduled Canadian Plan (or, in the case of the unwritten
Scheduled Canadian Plan, descriptions thereof) and any amendments thereto,
(ii) all financial statements and accounting statements and reports and
investment reports for each of the last three years and the two most recent
actuarial reports with respect to each Scheduled Canadian Plan; (iii) all
reports, returns, filings and material correspondence with any regulatory
authority in the last three (3) years with respect to each Scheduled Canadian
Plan; (iv) each trust agreement and group annuity contract relating to any
Scheduled Canadian Plan; (v) collective bargaining agreements or other such
contracts.
Except as set forth in Schedule 3.23, all contributions to, and payments
from, the Canadian Plans that may have been required to be made in accordance
with the Canadian Plans and, when applicable, have been timely made. There are
no going concern unfunded actuarial liabilities, past service unfunded
liabilities or solvency deficiencies respecting any of the Pension Plans.
Except as set forth in Schedule 3.23, the Company and each Canadian Plan
(and any related trust agreement or annuity contract or any other funding
instrument) comply currently, and have complied in the past, both as to form
and operation, in all material respects with the terms of each Canadian Plan.
Each Canadian Plan has been administered to date in compliance in all
material respects with its terms and the requirements of applicable laws,
rules and regulations. All reports, returns and similar documents with respect
to the Canadian Plans required to be filed with any government agency or
distributed to any Canadian Plan participant have been duly and timely filed
or distributed. Except as set forth in Schedule 3.23, there are no
investigations by any governmental agency, termination proceedings or other
claims (except claims for benefits payable in the normal operation of the
Canadian Plans), suits or proceedings against or involving any Canadian Plan
or asserting any rights or claims to benefits under any Canadian Plan that
could give rise to any material liability, nor, to the knowledge of the
Company, are there any facts that could give rise to any material liability,
nor, to the knowledge of the Company, are there any facts that could give rise
to any material liability in the event of any such investigation, claim, suit
or proceeding.
(h) Validity and Enforceability. All Welfare Benefit Plans, Pension Benefit
Plans, Canadian Plans, related trust agreements or annuity contracts (or any
other funding instruments) and all plans, agreements, arrangements and
commitments referred to in this Section are legally valid and binding and in
full force and effect.
3.24. Licenses and Permits. Schedule 3.24 contains an accurate and complete
list of each material license, permit, certificate, approval, exemption,
franchise, registration, variance, accreditation or authorization issued to
the Company by a foreign, federal, state or local governmental agency
(collectively, the "Licenses and Permits"). The Licenses and Permits are valid
and in full force and effect and there are not pending, or, to the knowledge
of the Company without inquiry, threatened, any proceedings which could result
in the termination, revocation, limitation or impairment of any License or
Permit. The Company has all licenses, permits, certificates, approvals,
franchises, registrations, accreditations and other authorizations as are
necessary or appropriate in all material respects in order to enable it to own
and conduct the Business and to occupy and lease its real property. No
violations have been recorded in respect of any Licenses and Permits, and the
Company knows of no meritorious basis therefor. No fines or penalties are due
and payable in respect of any License or Permit or any violation thereof.
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3.25. Material Contracts. Schedule 3.25 sets forth an accurate and complete
list (or where disclosed on another Schedule to this Agreement, a cross-
reference to such Schedule) of all instruments, commitments, agreements,
arrangements and understandings related to the Business to which the Company
is a party or bound, or by which any of its assets are subject or bound, or
pursuant to which the Company is a beneficiary, meeting any of the
descriptions set forth below (the "Material Contracts"):
(a) Factoring Agreements, Real Estate Leases, Personal Property Leases,
Insurance, licenses of Intellectual Property, Software, Employment
Contracts, Benefit Plans and Licenses and Permits;
(b) Any uncompleted contract for capital expenditures or for the purchase
of goods or services in excess of $50,000;
(c) Any uncompleted purchase order, agreement or commitment in an amount
in excess of $50,000 entered into other than in the ordinary course of
business obligating the Company to sell or deliver any product or service
at a price which does not cover the cost (including labor, materials and
production overhead) plus the customary profit margin associated with such
product or service;
(d) Any outstanding financing agreement or other agreement for borrowing
money, any instrument evidencing indebtedness, any liability for borrowed
money, any obligation for the deferred purchase price of property, in each
case in excess of $50,000 (excluding normal trade payables), or any
instrument guaranteeing any indebtedness, obligation or liability in an
amount in excess of $50,000;
(e) Any outstanding joint venture, partnership, cooperative arrangement
or any other agreement involving a sharing of profits;
(f) Any outstanding advertising contract not terminable without payment
or penalty on sixty (60) days (or less) notice;
(g) Any outstanding contract with any government or any agency or
instrumentality thereof;
(h) Any outstanding contract with respect to the discharge, storage or
removal of effluent, waste or pollutants, other than ordinary nonhazardous
waste removal;
(i) Any outstanding contract, license or royalty agreement related to the
use of Intellectual Property requiring payments by the Company in amounts
aggregating in excess of $50,000;
(j) Any power of attorney, proxy or similar instrument;
(k) The Charter, By-laws and other organizational or constitutive
documents of the Company and any agreement among stockholders of the
Company;
(l) Any outstanding contract for the manufacture of any product of the
Business which has a term of one year or more;
(m) Any outstanding contract for the purchase or sale of any of its
assets, other than in the ordinary course or granting an option or
preferential rights to purchase or sell any assets;
(n) Any outstanding contract to indemnify any party or to share in or
contribute to the liability of any party;
(o) Any outstanding contract for the purchase or sale of foreign currency
or otherwise involving foreign exchange transactions;
(p) Any outstanding contract containing covenants not to compete in any
line of business or with any person in any geographical area;
(q) Any outstanding contract relating to the acquisition of a business or
the equity of any other person;
(r) Any outstanding contract relating to the purchase or sale of a
portion of its requirements or output;
(s) Any outstanding contract entered into outside the ordinary course of
the Business in an amount in excess of $100,000; and
(t) Any other contract, commitment, agreement, arrangement or
understanding related to the Business (other than those excluded by an
express exception from the descriptions set forth in subsections (a)
through (r) above) which (i) provides for payment or performance by either
party thereto having an aggregate value of $100,000 or more, or (ii) is
between a Related Party and the Company.
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Accurate and complete copies of each Material Contract have been delivered
to Kellwood. Each Material Contract is in full force and effect and is valid,
binding and enforceable in accordance with its terms. The Company and, to the
knowledge of the Company, each other party (except as set forth on Schedule
3.25) has complied with all material commitments and obligations on its part
to be performed or observed under each Material Contract. To the knowledge of
the Company, no event has occurred which is or, after the giving of notice or
passage of time, or both, would constitute, a default under or a breach of any
Material Contract by the Company, or, to the knowledge of the Company, by any
other party (except as set forth on Schedule 3.25). To the knowledge of the
Company, the Company has not received or given notice of an intention to
cancel or terminate a Material Contract or, as the result of the breach of
such Material Contract by another party thereto, to exercise or not exercise
options or rights under a Material Contract. The Company has not received any
notice of a default, offset or counterclaim under any Material Contract, or
any other communication calling upon the Company to comply with any provision
of any Material Contract or ascertaining noncompliance. Except as set forth on
Schedule 3.25, the consummation of the transactions contemplated hereby,
without notice to or consent or approval of any party, will not constitute a
default under or a breach of any provision of a Material Contract, and the
Company will have and may enjoy and enforce all rights and benefits under each
Material Contract.
3.26. Taxes. Each of the representations and warranties set forth in this
Section 3.26 are subject to the exceptions set forth on Schedule 3.26.
(a) Filings. The Company, and the Subsidiaries (collectively, the
"Taxpayers") have timely filed, been included in or sent, or will file, be
included in or send, all returns, declarations and reports and all information
returns and statements (collectively, "Returns") required to be filed or sent
with respect to all foreign, federal, state, county, local and other taxes of
every kind and however measured, including income, gross receipts, profits,
excise, franchise, property, value added, import duties, employment, payroll,
sales and use taxes and any additions to tax and any interest or penalties
thereon (collectively, "Taxes") for any period ending on or before the Closing
Date. As of the time of filing, the Returns correctly reflected, and Returns
not yet filed as of the date hereof will correctly reflect, the income,
business, assets, operations, activities and status of the relevant Taxpayers
and any other information required to be shown thereon. Each Taxpayer has
timely paid or made provision for all Taxes shown as due and payable on its
Returns required to be filed or sent prior to the date hereof and will timely
pay all Taxes that will be shown as due and payable on its Returns required to
be filed or sent after the date hereof. All required Tax estimates, deposits,
prepayments and similar reports or payments for current periods have been
properly made. No Taxpayer is delinquent in the filing of any Return or the
payment of any Tax or has requested any extension of time within which to file
any Return. The Company has delivered to Kellwood accurate and complete copies
of all federal and state income tax Returns for the last three (3) fiscal
years. No amended Returns or refund claims have been or are scheduled to be
filed by or on behalf of Taxpayer.
(b) Compliance. The Company has obtained all appropriate sales Tax exemption
certificates for all sales made without charging or remitting a sales Tax.
Each Taxpayer has withheld amounts from employees and others working for the
Company, as required under applicable law, has filed all Returns with respect
to employee income Tax withholding and social security and unemployment Taxes
in compliance with the tax withholding provisions of the Code and other
applicable Laws, and has timely paid all amounts shown as due and payable on
such Returns.
(c) Disputes. There are no Tax liens (other than for Taxes not yet due and
payable) on any assets of any Taxpayer and, to the knowledge of the Company,
no basis exists for the imposition of any such liens. No adjustment of or
deficiency for any Tax or claim for additional Taxes has been proposed,
asserted or assessed or, to the knowledge of the Company, threatened against
any Taxpayer or any member of any affiliated or combined group of which any
Taxpayer is or was a member for which the Company could be liable. No Taxpayer
has any dispute with any taxing authority as to Taxes of any nature. There are
no audit examinations being conducted or, to the knowledge of the Company,
threatened, and there is no deficiency or refund litigation or controversy in
progress or threatened, with respect to any Taxes previously paid by any
Taxpayer or with respect to any Returns previously filed by or on behalf of
any Taxpayer. No Taxpayer has any extension or waiver of any statute of
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limitations relating to the assessment or collection of Taxes. There are in
effect no powers of attorney or other authorizations to any persons to
represent any Taxpayer with respect to any Tax. No consent, agreement or other
undertaking has been filed by any Taxpayer to have the provisions of Section
341(f) of the Code apply. No notice or claim has ever been made by a
governmental authority in a jurisdiction where Taxpayer does not file Returns
that it is or may be subject to Taxes in that jurisdiction. Taxpayer is not a
party to any contractual obligation requiring the indemnification or
reimbursement of any person with respect to the payment of any Taxes. Taxpayer
is not a party to or a beneficiary of any financing, the interest on which is
tax exempt under the Code, and none of the assets of Taxpayer is "tax-exempt
use property." As of the Closing Date, Taxpayer is not a party to any
agreement, contract, arrangement or plan that has resulted or would result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code.
(d) Adequacy of Reserves. The Company has, or will have on the Closing Date
adequate accruals for all Taxes for all periods ending on or prior to the
Closing Date and for any period beginning before the Closing Date and ending
after the Closing Date in respect of the portion of such period up to the
Closing Date. Following the Closing, the Company shall have no liability for
Taxes of any kind for such periods in excess of the provisions or reserves for
such Taxes shown on the Financial Statements or, with respect to periods
ending after August 31, 1998, incurred in the ordinary course of the Business.
3.27. Product Warranty. All products manufactured, marketed, distributed,
shipped or sold by the Company have been in conformity in all material
respects with all applicable contractual commitments and all expressed or
implied warranties. No material liability exists or will arise for repair,
replacement or damage in connection with such sales or deliveries. Schedule
3.27 sets forth an accurate and complete statement of all written warranties,
warranty policies, service and maintenance agreements of the Company. No
products heretofore manufactured, marketed, distributed, shipped or sold by
the Company are now subject to any guarantee, warranty, claim for product
liability, or patent or other indemnity, other than those set forth in
Schedule 3.27. All warranties are in conformity with the labeling and other
requirements of the Magnuson-Moss Warranty Act and other applicable laws. The
product warranty and return experience for the three (3) years ended November
30, 1997 and the interim period through the date hereof is set forth in
Schedule 3.27. The product warranty reserves, if any, on the Company's
financial statements were prepared in accordance with GAAP and are adequate in
light of the circumstances of which the Company is aware.
3.28. Product Liability. Schedule 3.28 sets forth an accurate and complete
list of all existing and unresolved claims, duties, responsibilities,
liabilities or obligations arising from or alleged to arise from any injury to
person or property or economic damage as a result of the ownership, possession
or use of any product manufactured, marketed, distributed, shipped or sold by
the Company prior to the Closing Date. Except as set forth in Schedule 3.28,
the Company will not be subject to any claim, expense, liability or obligation
arising from any injury to person or property or economic damage as a result
of ownership, possession or use of any product manufactured, marketed,
distributed, shipped or sold by the Company prior to the Closing Date. All
existing claims are fully covered by product liability insurance or otherwise
provided for. There have been no recalls, and none are threatened or pending,
and no report has been filed or is required to have been filed with respect to
any products of the Business under the Consumer Products Safety Act, as
amended, or under any other law, rule or regulation. To the knowledge of the
Company, no circumstances exist involving the safety aspects of the Business'
products which would cause any obligation to report to any Federal, state or
local agency. Except as set forth on Schedule 3.28, there are no, and within
the last 12 months there have not been any, actions or claims relating to
product liability against or involving the Company or any of its products and
no actions or claims have been settled, adjudicated or otherwise disposed of
within the last 12 months.
3.29. Legal Proceedings. Except as set forth in Schedule 3.29, the Company
is not engaged in or a party to or threatened with any action, suit,
proceeding, complaint, charge, hearing, investigation or arbitration or other
method of settling disputes or disagreements; and, upon due inquiry, the
Company does not know, anticipate or have notice of any basis for any such
action. Except as set forth on Schedule 3.29, the Company has not received
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notice of any investigation threatened or contemplated by any Laws, including
those involving the safety of products, the working conditions of employees,
the Company's employment practices or policies, or compliance with
environmental regulations. Neither the Company, nor any of its assets is
subject to any judgment, order, writ, injunction, stipulation or decree of any
court or any governmental agency or any arbitrator. The Company has not
received any demand letters from an attorney or other legal representative of
a claimant, which, individually or in the aggregate, would (if adversely
determined) have a Company Material Adverse Effect. Except as set forth on
Schedule 3.29, no insurance company has asserted in writing that such action
is not covered by the applicable policy relating thereto.
3.30. Environmental Matters.
(a) The ownership, use and operation by the Company and its predecessors of
all real property and each facility on site used by the Company has been and
on the Closing Date will be in compliance with all federal, state and local
environmental and anti-pollution statutes, statutes, laws, ordinances, rules,
standards, orders, moratoria and regulations, including the Resource
Conservation and Recovery Act, as amended ("RCRA"), the Clean Air Act, as
amended, the Clean Water Act, as amended, the Safe Drinking Water Act, as
amended, the Toxic Substances Control Act, as amended, the Emergency Planning
and Community Right-to-Know Act, as amended, the Hazardous Material
Transportation Act, as amended, the Federal Insecticide, Fungicide and
Rodenticide Act, as amended, the Oil Pollution Control Act, as amended, the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, ("CERCLA") and the Occupational Safety and Health Act, as amended,
any state or local counterpart thereof and all rules and regulations
implementing any of the foregoing (collectively referred to as "Environmental
Laws").
(b) No action, suit, claim, demand, proceeding, investigation, complaint,
arbitration or charge alleging failure to comply with, violation of or
liability under any Environmental Laws (collectively, an "Environmental
Claim") has been made and the Company has not received any notice alleging an
Environmental Claim and. to the knowledge of the Company, there is no
meritorious basis therefore. The Company has not received a request for
information pursuant to an Environmental Law. The Company has no duty,
responsibility, liability or obligation under any Environmental Law, to effect
compliance with or discharge any duty, responsibility, liability or obligation
under any Environmental Laws. Except as set forth in Schedule 3.30, there has
not been, and is not occurring, at any facility or site operated, or
previously owned or operated, by the Company or any Subsidiary, any Release or
threatened Release of any Hazardous Substance or petroleum, including crude
oil or any fraction thereof, nor, to the knowledge of the Company, has such a
Release occurred. The Company has not applied or disposed of any Hazardous
Substance or petroleum, including crude oil or any fraction thereof, in any
manner which may form the basis for any present or future Environmental Claim
at any facility, site, location or body of water, surface or subsurface nor,
to the knowledge of the Company, has such an application or disposal occurred.
(c) To the knowledge of the Company, the Company has never sent, arranged
for disposal or treatment, arranged with a transporter for transport for
disposal or treatment, transported, or accepted for transport any Hazardous
Substance, Solid Waste or petroleum, including crude oil or any fraction
thereof, to a facility, site or location, which, pursuant to the CERCLA or any
similar state or local law, (i) has been placed, or is proposed to be placed,
on the National Priorities List or its state equivalent or (ii) is subject to
a claim, administrative order or other request to effect Removal or take
Remedial Action.
(d) The Company does not store, generate or produce any Hazardous Substance
or Hazardous Waste.
(e) Except as set forth in Schedule 3.30, there has not been any
contamination of groundwaters, surface waters, soils or sediments, as a result
of the manufacture, storage, processing, loss, leak, escape, spillage,
disposal or other handling or disposition by or on behalf of the Company of
any product or substance on or prior to the Closing Date in violation of
Environmental Laws.
(f) Schedule 3.30 sets forth an accurate and complete list of all
environmental audits or assessments or occupational health studies undertaken
by or on behalf of the Company, a governmental agency with respect to
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the Company or its assets, employees, facilities, sites or other properties,
the results of groundwater and soil testing, the results of underground fuel,
water or waste tank tests and soil samples, written communications with
Federal, state or local governments on environmental matters, and OSHA
citations in each case since November 30, 1995.
(g) To the knowledge of the Company, except as set forth in Schedule 3.30,
there are no Hazardous Substances, Hazardous Wastes, Solid Wastes, tanks,
containers, cylinders, drums or cans buried, stored or deposited in or on any
real property facility or site currently or formerly owned or operated by the
Company. To the knowledge of the Company, there has not been located on or
disposed of on any facility or site owned or operated by the Company during
any period of such ownerships or operations, or, to the knowledge of the
Company, at any other time: any polychlorinated biphenyl; any compound or
material containing any polychlorinated biphenyl; or any equipment, article or
item using, containing, or made up in whole or in part of any polychlorinated
biphenyl.
(h) Schedule 3.24 lists all permits, certificates, approvals,
authorizations, licenses and registrations required to own or operate the
Company and the Business or any facility or site under any Environmental Law
("Environmental Permits"). The Company has all Environmental Permits and is in
compliance with all terms and conditions thereof. All Environmental Permits
are in full force and effect, and the Company has not received any notice
alleging an Environmental Claim with respect thereto. The Company has not
breached, defaulted under or violated any of the Environmental Permits.
(i) To the knowledge of the Company, except as set forth in Schedule 3.30,
no underground storage tanks, as defined in RCRA or under applicable state
law, are present on any property operated by or on behalf of the Company at
any location, and, to the Company's knowledge, no such tanks were previously
abandoned or removed.
(j) To the knowledge of the Company, there is no environmental substance or
other condition or use of any property at which the Company operates the
Business, whether natural or manmade, which poses a present or potential
threat of damage to the health of persons, to property, to natural resources,
or to the environment in violation of Environmental Laws.
The Company expressly warrants that the representations and warranties
contained in this Section 3.31 apply not only to the present locations of its
business, but all prior locations as well. As used in this Agreement, the
terms "Removal," "Remedial Action," "Facility," "Release," "Hazardous
Substance," "Hazardous Materials," "National Priorities List," "Hazardous
Waste" and "Solid Waste" shall have the same meaning as those terms are given
in Environmental Laws.
3.31. Compliance with Law. The Company is in compliance in all material
respects with all applicable statutes, codes, ordinances, licensing
requirements, laws, rules and regulations, except as otherwise provided in
this Agreement and except for such violations as do not materially impair or
interfere with the use of the Company's assets. No notice from any
governmental body or other person of any violation of any statute, code,
ordinance, law, rule or regulation or requiring or calling attention to the
necessity of any repairs, installation or alteration in connection with the
Company has been served, and the Company knows of no meritorious basis
therefor. Neither the Company, nor, to the knowledge of the Company, any
officer or employee of the Company, nor, to the knowledge of the Company any
other person acting on behalf of the Company, (a) has made any unlawful
domestic or foreign political contributions, (b) has made any payment or
provided services which were not legal to make or provide or which the Company
or any officer, employee or other person should have known were not legal for
the payee or the recipient of the services to receive, (c) has received any
payments, services or gratuities which were not legal to receive or which the
Company or such person should have known were not legal for the payor or the
provider to make or provide, (d) has had any transactions or payments which
are not recorded in its accounting books and records or disclosed in its
financial statements, (e) has had any off-book bank or cash accounts, (f) has
made any payments to governmental officials in their individual capacities for
the purpose of affecting their action or the action of the government they
represent to obtain special concessions, or (g) has made illegal payments to
obtain or retain business.
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3.32. Absence of Undisclosed Liabilities. Except to the extent reflected on
the Financial Statements, or another Schedule attached hereto, the Company
does not and will not have any material indebtedness, duty, responsibility,
liability or obligation of any nature, whether absolute, accrued, contingent
or otherwise, related to or arising from the operation of the Company or the
ownership, possession or use of its assets through the Closing Date, other
than in the ordinary course of the Business on terms and conditions and in
amounts consistent with past practices pursuant to the agreements and other
documents referred to herein.
3.33. Brokers. The Company has not retained any broker, finder or agent or
incurred any liability or obligation for any brokerage fees, commissions or
finders fees with respect to this Agreement or the transactions contemplated
hereby.
3.34. Disclosure. The representations and warranties of the Company and the
Stockholders contained in this Agreement are accurate and complete in all
material respects, and do not contain any untrue statement of a material fact
or, considered in the context in which presented, omit to state a material
fact necessary in order to make the statements and information contained
herein or therein not misleading.
3.35. Pooling of Interests; Reorganizations. To the knowledge of the
Company, the Company has not (a) taken any action (or failed to take any
action) that would prevent the treatment of the transactions contemplated
hereby as a pooling of interest for accounting purposes or (b) take any action
(or failed to take any action) which would prevent the qualification of the
Merger as a reorganization within the meaning of Section 368(a) of the Code.
3.36. Required Vote of the Company Stockholders. The affirmative vote of the
holders of at least seventy percent (70%) of the voting power of all
outstanding shares of Common Stock of the Company is required to approve this
Agreement and to effect the Merger. No other vote of the securityholders of
the Company is required by law, the Company Charter or By-laws or otherwise in
order for the Company to consummate the Merger and the transactions
contemplated hereby.
3.37. Registration Statement and Joint Proxy Statement. None of the
information to be supplied by the Company or the Stockholders for inclusion or
incorporation by reference in the Registration Statement on Form S-4 (the
"Registration Statement") and the Joint Proxy Statement and Prospectus
included therein (together with any amendments and supplements thereto, the
"Joint Proxy Statement") will (i) in the case of the Registration Statement,
at the time it becomes effective, 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 therein not misleading or (ii) in
the case of the Joint Proxy Statement, at the time of the mailing of the Joint
Proxy Statement, at the time of each of the Stockholder Meetings 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 therein, in light of the circumstances under which they
are made, not misleading. If at any time prior to the Effective Time any event
with respect to the Company, its officers and directors or the Stockholders
shall occur which is required to be described in the Joint Proxy Statement or
the Registration Statement, such event shall be so described, and an
appropriate amendment or supplement shall be promptly filed with the
Securities and Exchange Commission (the "SEC") and, as required by law,
disseminated to the stockholders of the Company and Kellwood. The Registration
Statement will comply (with respect to the Company) as to form in all material
respects with the provisions of the Securities Act of 1933, as amended (the
"Securities Act"), and the Joint Proxy Statement will comply (with respect to
the Company) as to form in all material respects with the provisions of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
KELLWOOD AND SUB
Each of Kellwood and Sub hereby represents and warrants to the Company and
the Stockholders as of the date hereof, and as of the Closing Date, as
follows:
4.1. Authority. Each of Kellwood and Sub has full right, power and
authority, without the consent of any other person, to execute and deliver
this Agreement and to carry out the transactions contemplated hereby. All
corporate and other acts or proceedings required to be taken by Kellwood and
Sub to authorize the execution, delivery and performance of this Agreement and
all transactions contemplated hereby have been duly and properly taken. The
Kellwood Common Stock delivered at Closing will be duly authorized by all
necessary corporate action of Kellwood and when issued at Closing, will be
validly issued, fully paid, non-assessable and free of preemptive rights and
will be free and clear of all liens and encumbrances, except as may arise from
any action taken by the stockholders of the Company.
4.2. Validity. This Agreement has been, and the documents to be delivered at
Closing will be, duly executed and delivered by each of Kellwood and Sub and
constitute lawful, valid and legally binding obligations of Kellwood and Sub,
enforceable in accordance with their respective terms. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby will not result in the creation of any lien, charge or
encumbrance or the acceleration of any indebtedness or other obligation of
Kellwood or Sub and are not prohibited by, do not violate or conflict with any
provision of, and do not result in a default under or a breach of (a) the
charter or By-laws of Kellwood or Sub, (b) any contract, agreement, permit,
license or other instrument to which Kellwood or Sub is a party or by which
either of them is bound, (c) any order, writ, injunction, decree or judgment
of any court or governmental agency, or (d) any law, rule or regulation
applicable to Kellwood or Sub. No approval, authorization, consent or other
order or action of or filing with any court, administrative agency or other
governmental authority is required for the execution and delivery by Kellwood
or Sub of this Agreement or the consummation by Kellwood or Sub of the
transactions contemplated hereby, except for (a) filings or consents required
pursuant to the HSR Act, (b) filing the Certificate of Merger by the Delaware
Secretary of State, (c) filing of the Registration Statement and Joint Proxy
Statement with the SEC and the declaration of effectiveness thereof by the SEC
or other action by the SEC in connection therewith and (d) filings to
authorize listing and trading of the Kellwood Common Stock on The New York
Stock Exchange (the "NYSE").
4.3. Due Organization. Each of Kellwood and Sub is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware, with full power and authority and all requisite licenses, permits
and franchises to own, lease and operate its assets and to carry on the
business in which it is engaged. Each of Kellwood and Sub is duly qualified to
do business and good standing in each jurisdiction in which the nature of the
business conducted by it or the property it owns, leases or operates, makes
such qualification necessary, except where the failure to be so qualified
would not have a material adverse effect on the business, assets (including
intangible assets), financial condition, results of operations or liabilities
of Kellwood and its consolidated subsidiaries taken as a whole (a "Kellwood
Material Adverse Effect").
4.4. Brokers. Kellwood has not retained any broker or finder or incurred any
liability or obligation for any brokerage fees, commissions or finders fees
with respect to this Agreement or the transactions contemplated hereby.
4.5. Registration Statement and Joint Proxy Statement. None of the
information to be supplied by Kellwood or Sub for inclusion or incorporation
by reference in the Registration Statement or the Joint Proxy Statement will
(i) in the case of the Registration Statement, at the time it becomes
effective, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order
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to make the statements therein not misleading or (ii) in the case of the Joint
Proxy Statement, at the time of the mailing of the Joint Proxy Statement, at
the time of each of the Stockholder Meetings 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 therein, in light of the circumstances under which they are made,
not misleading. If at any time prior to the Effective Time any event with
respect to Kellwood, its officers and directors, the Company or the
Stockholders shall occur which is required to be described in the Joint Proxy
Statement or the Registration Statement, such event shall be so described, and
an appropriate amendment or supplement shall be promptly filed with the SEC
and, as required by law, disseminated to the stockholders of Kellwood and the
Company. The Registration Statement will comply (with respect to Kellwood) as
to form in all material respects with the provisions of the Securities Act,
and the Joint Proxy Statement will comply (with respect to Kellwood) as to
form in all material respects with the provisions of the Exchange Act.
4.6. Opinion of Financial Advisor. Kellwood has received the written opinion
of Credit Suisse First Boston Corporation, dated the date hereof, to the
effect that, as of the date hereof, the amount of shares of Kellwood Common
Stock to be issued in the transaction is fair to Kellwood from a financial
point of view (the "Kellwood Fairness Opinion").
4.7. Required Vote of Kellwood Stockholders. The affirmative vote of a
majority of the shares present in person or by proxy at Kellwood Stockholder
Meeting (as hereinafter defined) and entitled to vote on the Share Issuance is
required to approve the Share Issuance. No other vote of the securityholders
of Kellwood is required by law, Kellwood charter or Kellwood By-laws or
otherwise in order for Kellwood to consummate the Merger and the transactions
contemplated hereby.
4.8. Capitalization of Kellwood and Sub. The authorized capital stock of
Kellwood consists of 50,000,000 authorized shares of common stock, par value
$.01 per share and 500,000 shares of preferred stock. Nonvoting share purchase
rights, exercisable upon satisfaction of certain conditions, entitle the
holder to purchase Series A Junior Preferred Stock, or under certain
circumstances, common stock at prices specified in the Rights Agreement
between Kellwood and New York Trust Company, as successor to Centerre Trust
Company of St. Louis, dated June 24, 1986, as amended (the "Kellwood Poison
Pill"). The consummation of the Merger in accordance with this Agreement will
not trigger the Kellwood Poison Pill.
4.9. Kellwood Commission Reports. Kellwood has timely filed with the SEC and
furnished or made available to the Company all periodic reports, registration
statements, annual reports to stockholders, proxy statements and other
information required to be filed by it since May 1, 1995 under the Securities
Act and Exchange Act (such registration statements, periodic reports and other
documents, together with any amendments thereto, are sometimes collectively
referred to as the "Kellwood SEC Filings"). The Kellwood SEC Filings (a) did
not contain any untrue statements of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading as of their respective dates, and (b) complied as of their
respective dates in all material respects with the applicable requirements of
the Securities Act and Exchange Act and the applicable rules and regulations
of the SEC thereunder. The consolidated financial statements of Kellwood,
including the notes thereto, included in the Kellwood SEC Filings (the
"Kellwood Financial Statements") comply as to form in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with GAAP consistently applied (except as may be indicated in the notes
thereto or, in the case of unaudited statements, as permitted by Form 10-Q
under the Exchange Act) and present fairly the consolidated financial position
of Kellwood at the dates thereof and the consolidated results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year end, audit adjustments). Since April 30,
1998, neither Kellwood nor any of its Subsidiaries has incurred any
liabilities or obligations (whether absolute, accrued, fixed, contingent,
liquidated, unliquidated or otherwise and whether due or to become due) of any
nature, except liabilities, obligations or contingencies which (a) are
reflected on the audited consolidated balance sheet of Kellwood and its
Subsidiaries as at April 30, 1998
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(including the notes there) or (b) which (i) were incurred in the ordinary
course of Kellwood's business after April 30, 1998 and consistent with past
practices, (ii) are disclosed in the Kellwood SEC Filings filed after April
30, 1998 and (iii) would not, individually or in the aggregate, have a
Kellwood Material Adverse Effect. Since April 30, 1998, there has been no
change in Kellwood's accounting (including tax accounting) policies, practices
or procedures of Kellwood or any of its subsidiaries, except as described in
the notes to the Kellwood Financial Statements.
4.10. Accounting Matters; Reorganization. Neither Kellwood nor any of its
affiliates has taken or agreed to take any action that would (a) prevent
Kellwood from accounting for the business combination to be effected by the
Merger as a pooling-of-interests for financial reporting purposes or (b)
prevent the Merger from constituting a reorganization qualifying under the
provisions of Section 368(a) of the Code.
4.11. No Material Adverse Change. Since April 30, 1998, except as otherwise
disclosed in the Kellwood SEC Filings, there has been no change in the
business or financial condition of Kellwood which would reasonably be expected
to have a Kellwood Material Adverse Effect or a material adverse effect on
Kellwood's ability to consummate the Merger.
4.12. Disclosure. The representations and warranties of Kellwood and Sub
contained in this Agreement and each Schedule, certificate or other written
statement delivered pursuant to this Agreement or in connection with the
transactions contemplated herein are accurate and complete in all material
respects, and do not contain any untrue statement of a material fact or,
considered in the context in which presented, omit to state a material fact
necessary in order to make the statements and information contained herein or
therein not misleading.
4.13. No Plan or Intention to Reacquire Stock. Kellwood has no present plan
or intention to reacquire any of its stock issued in the Merger.
4.14. Control. Kellwood has no present plan or intention to cause the
Company to issue additional shares of its stock that would result in Kellwood
losing control of the Company within the meaning of Section 368(c) of the
Code.
4.15. No Plan to Dispose of Company Assets or Stock. Kellwood has no present
plan or intention to liquidate the Company, to merge the Company with or into
another corporation, to sell or otherwise dispose of the stock of the Company
except for transfers of stock to corporations controlled by Kellwood, or to
cause the Company to sell or otherwise dispose of any of its assets except for
dispositions made in the ordinary course of business and transfers of assets
to a corporation controlled by the Company.
4.16. Continuity of Business Enterprise. Kellwood has no present plan or
intention to take any action that would discontinue the Company's historic
business or discontinue the use of a significant portion of the Company's
historic business assets in a business for purposes of Treasury Regulations
(S)1.368-1(d).
4.17. Substantially all of Sub's Assets Transferred. Following the Merger,
the Company will hold at least 90% of the fair market value of the net assets
of Sub and 70% of the fair market value of the gross assets of Sub.
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ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS AND THE OBLIGATIONS
OF THE COMPANY AND THE STOCKHOLDERS
The Company and each of the Stockholders hereby agree to keep, perform and
fully discharge the following covenants and agreements.
5.1. Interim Conduct of Business. From the date hereof until the Closing,
the Company shall, and the Stockholders shall use their reasonable best
efforts to cause the Company to, use its reasonable best efforts to preserve,
protect and maintain the Company and its assets, and operate the Company
consistent with prior practice and in the ordinary course of the Business.
Without limiting the generality of the foregoing, from the date hereof until
the Closing, except for transactions expressly approved in writing by Kellwood
or as set forth on Schedule 5.1, the Company shall, and the Stockholders shall
use their reasonable best efforts to cause the Company to:
(a) maintain inventories at levels adequate for the Business and in
accordance with past inventory practices of the Company, and maintain the
properties of the Business and the Company's assets in good repair, order
and condition, reasonable wear and tear excepted;
(b) maintain and keep in full force and effect all insurance on assets
and property or for the benefit of employees of the Business, all liability
and other casualty insurance, and all bonds on personnel, presently
carried;
(c) preserve intact the organization and reputation of the Company and
keep available the services of the present executives, employees and agents
of the Company and preserve the good will of suppliers, customers and
others having business relationships with the Company;
(d) maintain its books, accounts and records in the usual, regular and
ordinary manner on a basis consistent with prior years;
(e) except in the ordinary course the Business in accordance with past
practice, and except as provided in Section 5.11, not enter into, amend or
terminate any employment, bonus, severance or retirement contract or
arrangement, nor increase any salary or other form of compensation payable
or to become payable to any executives or employees of the Business;
(f) not enter into, amend or terminate, or agree to enter into, amend or
terminate, any Material Contract;
(g) not extend credit in the sale of products, collection of receivables
or otherwise, other than in the ordinary and regular course of the
Business;
(h) not declare, set aside or pay any dividend or make any other
distribution with respect to the capital stock of the Company;
(i) not merge or consolidate with or agree to merge or consolidate with,
nor purchase or agree to purchase all or substantially all of the assets
of, nor otherwise acquire, any corporation, partnership, or other business
organization or division thereof;
(j) not sell, lease or otherwise dispose of or agree to sell, lease or
otherwise dispose of, any of its assets, properties, rights or claims,
except in the ordinary course of the Business;
(k) not authorize for issuance, issue, sell or deliver any additional
shares of its capital stock of any class or any securities or obligations
convertible into shares of its capital stock of any class or issue or grant
any option, warrant or other right to purchase any shares of its capital
stock of any class; provided, however, the Company may issue additional
shares of its capital stock upon the exercise of options and warrants
outstanding on the date of this Agreement;
(l) not redeem or otherwise acquire any capital stock of the Company;
(m) not take any action or fail to take any reasonable action which would
prevent Kellwood from accounting for the transactions contemplated hereby
as a pooling of interests; or
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(n) not incur or become subject to, nor agree to incur or become subject
to, any debt, obligation or liability, contingent or otherwise, except
current liabilities and contractual and other obligations incurred in the
ordinary course of business.
From the date hereof through the Closing, representatives of the Company
shall confer on a regular and frequent basis with one or more designated
representatives of Kellwood to report material operational matters and the
general status of on-going operations of the Business. The Company shall
promptly notify Kellwood of any material change in the financial condition,
results of operations, properties, business or prospects of the Business and
shall keep Kellwood fully informed of such events and permit Kellwood's
representatives to participate in all discussions relating thereto.
5.2. Access. From the date hereof through the Closing Date, the Company
shall, and the Stockholders shall cause the Company to, give Kellwood and its
representatives reasonable access to all properties, facilities, personnel,
books, contracts, leases, commitments and records, and during this period the
Company shall furnish Kellwood with all financial and operating data and other
information as to the Business and its assets, properties, rights and claims,
as Kellwood may from time to time request. In particular, the Company shall
(a) afford to the officers, employees, attorneys, accountants, appraisers,
environmental engineers and other authorized representatives of Kellwood
reasonable access, during normal business hours, to the offices, plants,
properties, books and records of the Company in order that Kellwood may have
full opportunity to make such engineering, environmental, legal, financial,
accounting and other reviews or investigations of the Company, the Business
and the products as Kellwood shall desire to make, (b) request its independent
public accountants to permit Kellwood's independent public accountants to
inspect their work papers and other records relating to the Company, the
Business, its assets and the products, and (c) furnish, and cause the officers
and employees of the Company to furnish, to Kellwood and its authorized
representatives all additional financial and operating data and other
information regarding their assets, properties, rights, claims, contracts,
goodwill and business as Kellwood shall from time to time request.
5.3. Confidentiality. After the Closing Date, no Stockholder shall (a)
retain any document, databases or other media embodying any confidential or
proprietary know-how which constitutes a part of the Company or its assets or
use, publish or disclose to any third person any confidential or proprietary
know-how or (b) use, publish or disclose any confidential or proprietary
information concerning Kellwood or the Company. In the event of any
termination of this Agreement, (i) the Company and the Stockholders shall
treat as confidential and proprietary and shall not disclose or use, directly
or indirectly, in any manner whatsoever, or permit others under its control to
disclose or to use, any information concerning Kellwood or its business or
products obtained pursuant to or in connection with the transactions which are
the subject matter of this Agreement, unless the information is or becomes a
matter of public knowledge through no fault of the Company or any Stockholder
or can be shown to have been in the possession of the Company or any
Stockholder prior to disclosure by Kellwood, and (ii) the Company and the
Stockholders shall promptly return to Kellwood, upon written request, all
written information and documents regarding Kellwood received from any other
party, its affiliates, accountants or counsel, in connection with such
transactions, including all copies thereof. Notwithstanding the foregoing, GS
Capital Partners, L.P., Stone Street Fund 1994, L.P. and Bridge Street Funds
1994 (collectively, the "GS Fund Stockholders") may retain information and
documents concerning the Company and its Subsidiaries, Kellwood and the
transactions contemplated hereunder and may disseminate to their partners and
fund participants such information and documents in accordance with general
practice or to the extent required by applicable law. The provisions of this
Section 5.3 shall survive any termination of this Agreement.
5.4. HSR Act Filing and Other Consents.
(a) As promptly as possible, but in any event not later than ten (10)
business days after the execution hereof, the Company (and, to the extent
necessary, stockholders) shall file with the Federal Trade Commission (the
"FTC") and the Antitrust Division of the United States Department of Justice
(the "Antitrust Division") a premerger notification in accordance with the HSR
Act with respect to the transactions contemplated pursuant to this Agreement.
The Company shall furnish promptly to the FTC and the Antitrust Division any
additional
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information requested by either of them pursuant to the HSR Act in connection
with such filings and shall diligently take, or cooperate in the taking of,
all steps that are necessary or desirable and proper to expedite the
termination of the waiting period under the HSR Act.
(b) Prior to the Closing Date, the Company shall use its reasonable best
efforts to, and the Stockholders shall use their reasonable best efforts to
cause the Company to, obtain at the earliest practicable date and in any event
before the Closing all other governmental consents, governmental
authorizations, approvals, estoppel certificates and filings required to be
obtained by them or which may be reasonably necessary to the consummation of
the transactions contemplated by this Agreement or which are reasonably
requested by Kellwood.
(c) On or prior to the Closing Date, the Company shall, with the advice,
cooperation and consent of Kellwood, develop and use commercially reasonable
efforts to implement a strategy to obtain all such waivers and consents under
any indenture, loan agreement or security agreement to which the Company or
any Subsidiary is a party as are necessary to prevent a breach or violation
of, or default under, any such indenture, loan agreement or security agreement
as a result of the consummation of the transactions contemplated hereby.
5.5. Waiver of Recourse. The Stockholders undertake (if any claim is made
against them in connection with the transactions contemplated hereby) not to
make any claim against the Company or any past or present director or employee
of the Company on whom Stockholders may have relied before agreeing to any of
the terms of this Agreement.
5.6. Notice of Developments. Prior to the Closing Date, the Company will
give prompt written notice to Kellwood of (i) any breach of any of the
Company's representations and warranties in Article III and (ii) any material
failure of the Company or a Stockholder to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder. No disclosure by any party pursuant to the preceding sentence,
however, shall be deemed to amend or supplement the Schedules or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant or to
limit or otherwise affect the remedies available hereunder to Kellwood.
Notwithstanding the foregoing, between the date hereof and a date three (3)
business days prior to the Closing, the Company may update and supplement the
Schedules hereto to reflect changes and developments which occur between the
date hereof and such date. Kellwood, in the reasonable exercise of its
discretion, may deem any such update or supplement to constitute a breach of
the applicable representation, warranty or covenant of the Company or any
Stockholder hereunder (entitling Kellwood to indemnification under Article X
hereof following Closing) or, if it reflects the occurrence of a Company
Material Adverse Effect or jeopardizes the treatment of the Merger as a
pooling of interests for accounting purposes, a cause for termination under
Section 9.1.
5.7. Trading in Kellwood. Except as otherwise expressly consented to by
Kellwood in writing, from the date of this Agreement until the Closing neither
the Company, nor the Stockholders, nor the Related Parties will, directly or
indirectly, purchase or sell (including short sales) any shares of Kellwood
Common Stock in any transactions effected on The New York Stock Exchange, the
Nasdaq Stock Market or otherwise.
5.8. Alternative Proposals. The Company and the Stockholders hereby agree as
set forth below:
(a) After the date hereof and prior to the Closing Date or earlier
termination of this Agreement, the Company and the Stockholders shall not,
and the Company shall not permit any of the Related Parties to, and the
Company and the Stockholders shall cause each officer, director and
employee of such party, and each attorney, accountant, investment banker,
financial advisor and other agent retained by them, not to, directly or
indirectly, initiate, solicit or encourage or take any other action to
knowingly facilitate or intentionally engage in any discussion in relation
to, any inquiries or the submission of any proposal or offer to acquire or
operate all or any material part of the Company or the Business or to
acquire any person, whether by merger, share exchange, purchase of stock,
purchase of assets, tender offer, joint venture or otherwise, and whether
for cash, securities or any other consideration or combination thereof, if
such
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transaction would be materially inconsistent with or preclusive of the
transactions contemplated hereby (any such inconsistent or preclusive
transaction being referred to herein as an "Alternative Transaction"). The
Company and the Stockholders will immediately cease and cause to be
terminated any existing initiation, solicitation, encouragement,
discussions or negotiations with parties other than Kellwood or the Sub
with respect to Alternative Transactions.
(b) Notwithstanding the provisions of Section 5.8(a), in response to a
proposal for an Alternative Transaction (an "Alternative Proposal") that is
unsolicited and made after the date hereof, the Company and the
Stockholders may furnish information to, or enter into discussions or
negotiations with (x) any person or entity that makes an Alternative
Proposal that the Board of Directors of the Company concludes in good faith
(i) is reasonably capable of being completed, taking into account all known
legal, financial, regulatory and other aspects of the Alternative Proposal
and the person making the Alternative Proposal, and (ii) would, if
consummated, result in a transaction more favorable to the stockholders of
the Company from a financial point of view than the transactions
contemplated hereby (any such more favorable Alternative Proposal being
referred to herein as a "Superior Proposal") if, and only to the extent
that, prior to taking such action, the Company provides reasonable notice
to Kellwood to the effect that it is taking such action, or (y) receives
from such person or entity an executed confidentiality agreement in
reasonably customary form.
5.9. Stockholders' Agreements. Each Stockholder hereby agrees that unless
and until this Agreement is terminated pursuant to the provisions of Section
9.1 hereof (a) at the Company Stockholder Meeting (as hereinafter defined) (or
any adjournment thereof) or any other circumstances upon which a vote, consent
or any other approval with respect to the Merger or this Agreement is sought,
the Stockholder will vote (or cause to be voted) those shares of Company
Common Stock owned by such Stockholder as of the date hereof and any other
shares of capital stock of the Company acquired by such Stockholder after the
date hereof ("Subject Shares") in favor of the Merger, the adoption of this
Agreement and the approval of the terms hereof and any other transactions
contemplated hereby; (b) at any Company Stockholder Meeting or at any
adjournment thereof or in any circumstances upon which the Stockholder's vote,
consent, or other approval is sought, the Stockholder will vote (or cause to
be voted) the Subject Shares against any amendment of the Amended and Restated
Certificate of Incorporation or the By-laws of the Company, which amendment
would in any manner impede, frustrate, prevent or nullify the Merger, or this
Agreement or the transactions contemplated hereby or change in any manner the
voting rights of any class of capital stock of the Company; (c) the
Stockholder will not (i) sell, transfer, pledge, assign or otherwise dispose
of (including by gift) (collectively, "Transfer"), or enter into any contract,
option or other agreement (including in profit-sharing arrangement) with
respect to the Transfer of the Subject Shares to any person or (ii) enter into
any voting arrangement, whether by proxy, voting agreement or otherwise, in
relation to the Subject Shares, will not commit or agree to take any of the
foregoing actions; and (d) each Stockholder will take all steps necessary
under the Company Stockholder Agreement to carry out the foregoing, including
amending, terminating and otherwise modifying such Agreement. The foregoing
agreement is not intended to limit the action that the Stockholder may take to
discharge the Stockholder's fiduciary duties as a director of the Company or
otherwise under applicable law.
5.10. Reasonable Best Efforts. The Company and the Stockholders (subject to
the fulfillment of their fiduciary duties to the Company and its stockholders)
shall use their reasonable best efforts to consummate the transactions
contemplated by this Agreement and shall not take any other action
inconsistent with their obligations hereunder or which could hinder or delay
the consummation of the transactions contemplated hereby. From the date hereof
through the Closing Date, the Company and the Stockholders (subject to the
fulfillment of their fiduciary duties to the Company and its stockholders)
shall use their reasonable best efforts to fulfill the conditions to their
obligations hereunder and to cause their representations and warranties to
remain true and correct in all material respects as of the Closing Date.
5.11. Termination of 401(k) Plans. Prior to the Closing Date, the
Stockholders shall cause (a) the Directors of the Company to adopt a
resolution that is customary and that is mutually agreed upon that terminates
the Koret Employees' Profit Sharing Plan effective immediately prior to the
Closing Date, and the Company shall
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notify plan participants of such termination by letter that is customary and
that is mutually agreed upon (with such changes as Kellwood may reasonably
request), and (b) the Directors of New Campaign, Inc. to adopt a resolution
that is customary and that is mutually agreed upon that terminates the New
Campaign, Inc. Employee Profit Sharing Plan effective immediately prior to the
Closing Date, and Campaign, Inc. shall notify plan participants of such
termination by letter that is customary and that is mutually agreed upon (with
such changes as Kellwood may reasonably request).
ARTICLE VI
COVENANTS OF KELLWOOD
Kellwood hereby agrees to keep, perform and fully discharge the following
covenants and agreements.
6.1. HSR Act Filing and Other Consents.
(a) As promptly as possible, but in any event not later than ten (10)
business days after the execution hereof, Kellwood shall file with the FTC and
the Antitrust Division a pre-merger notification in accordance with the HSR
Act with respect to the transactions contemplated hereby. Kellwood shall
furnish promptly to the FTC and the Antitrust Division any additional
information requested by either of them pursuant to the HSR Act in connection
with such filings and shall diligently take, or cooperate in the taking of,
all steps that are necessary or desirable and proper to expedite the
termination of the waiting period under the HSR Act. Kellwood shall pay its
HSR filing fee.
(b) Kellwood shall use its reasonable best efforts to, and shall use its
reasonable best efforts to cause its appropriate affiliates to, obtain or make
at the earliest practicable date and in any event before the Closing all other
consents, governmental authorizations, approvals, estoppel certificates and
filings required to be obtained by it or which may be reasonably necessary to
the consummation of the transactions contemplated by this Agreement or which
are reasonably requested by the Company.
6.2. Best Efforts. Kellwood shall use its reasonable best efforts to
consummate the transactions contemplated by this Agreement and shall not take
any other action inconsistent with its obligations hereunder or which could
hinder or delay the consummation of the transactions contemplated hereby. From
the date hereof through the Closing Date, Kellwood shall use its reasonable
best efforts to fulfill the conditions to its own and any affiliate's
obligations hereunder and to cause its representations and warranties to
remain true and correct in all material respects as of the Closing Date.
6.3. Indemnification; Directors' and Officers' Insurance.
(a) From and after the Effective Time, Kellwood shall indemnify, defend and
hold harmless the present and former officers and directors of the Company in
respect to acts or omissions occurring prior to the Effective Time to the
fullest extent permitted by Delaware law, including with respect to taking all
actions necessary to advance expenses to the extent permitted by Delaware law.
(b) Kellwood shall use all reasonable efforts to cause the Surviving
Corporation or Kellwood to obtain and maintain in effect for a period of six
years after the Effective Time policies or directors' and officers' liability
insurance at no cost to the beneficiaries thereof with respect to acts or
omissions occurring prior to the Effective Time with substantially the same
coverage and containing substantially similar terms and conditions as existing
policies for the benefit of Kellwood's officers and directors.
6.4. Sub. Prior to the Effective Time, Sub shall not conduct any business or
make any investments, other than as specifically contemplated by this
Agreement, and will not have any assets (other than a de minimis of cash paid
to Sub for the issuance of its stock to Kellwood) or any material liabilities.
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6.5. Access. From the date hereof until the earliest to occur of the Closing
or the termination of this Agreement, Kellwood shall permit representatives of
the Company to have appropriate access at all reasonable times to Kellwood's
premises, properties, books, records, contracts and documents. No
investigation conducted pursuant to this Section 6.5 shall affect or be deemed
to modify any representation or warranty made in this Agreement.
6.6. Notice of Developments. Kellwood shall give prompt written notice to
the Company and the Stockholders of (i) any breach of any Kellwood
representation or warranty contained in Article IV and (ii) any material
failure of Kellwood to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder. No disclosure by
Kellwood pursuant to the preceding sentence, however, shall be deemed to amend
or supplement the Schedules or to prevent or cure any misrepresentation,
breach of warranty, or breach of covenant or to limit or otherwise affect the
remedies available hereunder to the Company. Notwithstanding the foregoing,
between the date hereof and a date three (3) business days prior to the
Closing, Kellwood may update and supplement the Kellwood SEC filings to
reflect changes and developments which occur between the date hereof and such
date. The Company and/or the Stockholders, in the reasonable exercise of their
discretion, may deem any such update or supplement to constitute a breach of
the applicable representation, warranty or covenant of Kellwood hereunder
(entitling the Company and/or the Stockholders to indemnification under
Article X hereof following Closing) or, if it reflects the occurrence of a
Kellwood Material Adverse Effect, a cause for termination under Section 9.1.
6.7. Employees and Employee Benefits.
(a) For the period beginning on the Effective Time and ending on the earlier
of December 31, 1999 or the date that is one year from the Effective Time,
Kellwood and its affiliates shall provide Company Employees (as defined below)
with Kellwood's 401(k) Plan and (i) health and medical benefits, and (ii)
other employee benefits that are, in the case of each such category of
benefits, substantially similar to the current benefits provided. From and
after the Effective Time, Kellwood and its affiliates shall honor, in
accordance with their terms and except to the extent amended or terminated in
accordance with such terms, all plans and all contracts, plans, and programs
providing for compensation or benefits for Company Employees.
(b) From and after the Effective Time, Kellwood shall treat all service by
the Company Employees with the Company and its affiliates and their respective
predecessors prior to the Effective Time for all purposes as service with
Kellwood (except to the extent such treatment would result in benefit accruals
under a defined benefit pension plan (as such term is defined under ERISA) for
periods prior to the Closing Date), and, with respect to any medical or dental
benefit plan in which Company Employees participate after the Effective Time,
Kellwood shall waive or cause to be waived any pre-existing condition
exclusions and actively-at-work requirements (provided, however, that no such
waiver shall apply to a pre-existing condition of any Company Employee who
was, as of the Effective Time, excluded from participation in a Company
benefit plan by virtue of such pre-existing condition), and shall provide that
any covered expenses incurred on or before the Effective Time by a Company
Employee or a Company Employee's covered dependent shall be taken into account
for purposes of satisfying applicable deductible, coinsurance and maximum out-
of-pocket provisions after the Effective Time to the same extent as such
expenses are taken into account for the benefit of similarly situated
employees of Kellwood and subsidiaries.
(c) Nothing in this Section 6.7 shall be construed to impose upon Kellwood
and its affiliates any obligation to continue the employment of any Company
Employee following the Effective Time (other than pursuant to the terms of an
agreement between a Company Employee and the Company or a Subsidiary thereof
in effect on the date of the Effective Time). For purposes of this Section
6.7, "Company Employees" shall mean persons who are, as of the Effective Time,
employees of the Company or any of its Subsidiaries, other than employees
whose terms and conditions of employment are covered by a collective
bargaining agreement.
6.8. Confidentiality. In the event that for any reason this Agreement is
terminated and the Merger does not occur, neither Kellwood nor any of its
affiliates shall (a) retain any document, databases or other media
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embodying any confidential or proprietary know-how which constitutes a part of
the Company or its assets or use, publish or disclose to any third person any
confidential or proprietary know-how or (b) use, publish or disclose any
information concerning the Company or its Subsidiaries. In the event of any
termination of this Agreement, (i) Kellwood shall treat as confidential and
proprietary and shall not disclose or use, directly or indirectly, in any
manner whatsoever, or permit others under its control to disclose or to use,
any confidential or proprietary information concerning the Company or its
business or products obtained pursuant to or in connection with the
transactions which are the subject matter of this Agreement, unless the
information is or becomes a mater of public knowledge through no fault of
Kellwood or can be shown to have been in the possession of Kellwood prior to
disclosure by Kellwood, and (ii) Kellwood shall promptly return to the
Company, upon written request, all written information and documents received
from any other party, its affiliates, accountants or counsel, in connection
with such transactions, including all copies thereof. The provisions of this
Section 6.8 shall survive any termination of this Agreement.
6.9. Labor Agreement Compliance. After the Closing Date, Kellwood shall
cause the Company (or a Subsidiary thereof, as applicable) to honor and abide
by each collective bargaining agreement then existing between the Company or a
Subsidiary thereof, as applicable) and a labor organization until the
expiration of the term of such agreement and, to the extent required by
applicable Law, thereafter.
6.10. Interim Conduct of Business. From the date hereof until the Closing,
Kellwood shall use its reasonable best efforts to preserve, protect and
maintain Kellwood and its assets, and operate Kellwood consistent with prior
practice and in the ordinary course of its business.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1. Stockholder Meetings.
(a) The Company and Kellwood will each, as soon as practicable following the
date of this Agreement, duly call, give notice of, convene and hold a meeting
of stockholders (respectively, the "Company Stockholder Meeting" and the
"Kellwood Stockholder Meeting" and, collectively, the "Stockholder Meetings")
for the purpose of considering the approval of this Agreement and the Merger
(in the case of the Company) and the issuance of the shares of the Kellwood
Common Stock pursuant to this Agreement (the "Share Issuance") (in the case of
Kellwood). The Company and Kellwood shall coordinate and cooperate with
respect to the timing of such meetings and shall use their reasonable best
efforts to hold such meetings on the same day.
(b) Kellwood shall, through its Board of Directors, recommend to its
stockholders approval of the Share Issuance, subject to applicable fiduciary
duties, and use its reasonable best efforts to obtain such approval by its
stockholders and shall not withdraw or modify, or propose to withdraw or
modify in a manner adverse to the Company, such recommendation, except if in
the reasonable good faith judgment of Kellwood's Board of Directors, on the
basis of the advice of outside legal counsel of Kellwood, or the failure to
withdraw or modify, such recommendation would violate the fiduciary duties of
such Board of Directors to Kellwood's stockholders under applicable law. The
Company shall, through its Board of Directors, recommend to its stockholders
approval of this Agreement and the Merger, subject to applicable fiduciary
duties, and use its reasonable best efforts to obtain such approval by its
stockholders and shall not withdraw or modify, or propose to withdraw or
modify in a manner adverse to Kellwood, such recommendation.
7.2. Pooling of Interests; Reorganization. From the date hereof through the
Effective Time, unless the other party shall otherwise agree in writing, none
of the Stockholders, Kellwood, the Company or any of their respective
Subsidiaries shall (a) knowingly take or fail to take any action which action
or failure would prevent the treatment of the Merger as a pooling of interests
for accounting purposes or (b) knowingly take or fail to take any action which
action or failure would prevent the qualification of the Merger as a
reorganization within
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the meaning of Section 368(a) of the Code. Between the date of this Agreement
and the Closing, the Stockholders, Kellwood and the Company each shall take,
or cause to be taken, all actions reasonably necessary in order for the Merger
to be treated as a pooling-of-interests for accounting purposes, including
providing appropriate and customary representation letters from each director,
executive officer and other person who is an "affiliate" (for purposes of Rule
145 under the Securities Act and for purposes of qualifying the Merger for
pooling-of-interests accounting treatment) to the accountants of the Company
or Kellwood, as appropriate, so as to enable Kellwood to obtain a letter, in
form and substance reasonably satisfactory to Kellwood and the Company, from
Pricewaterhouse Coopers LLP dated the Closing Date stating that they concur
with Kellwood management's conclusion that the Merger will qualify as a
transaction to be accounted for by Kellwood in accordance with the pooling-of-
interests method of accounting. After the Closing Date, Kellwood shall not
take or fail to take any action which action or failure would jeopardize the
treatment of the Merger as a reorganization within the meaning of Section
368(a) of the Code.
7.3. Preparation of the Registration Statement and the Joint Proxy
Statement. The Company and Kellwood shall promptly prepare and file with the
SEC the Joint Proxy Statement and Kellwood shall prepare and file with the SEC
the Registration Statement, in which the Joint Proxy Statement will be
included as a prospectus. Kellwood shall, with the cooperation of the Company,
prepare and include in the Registration Statement appropriate provisions
(including a resale prospectus) under the Securities Act such that persons who
receive shares of Kellwood Common Stock in the Merger and who are "affiliates"
of the Company and/or Kellwood under the Securities Act may utilize the
Registration Statement to resell publicly such shares of Kellwood Common Stock
in compliance with the Securities Act. Each of Kellwood and the Company shall
use its reasonable best efforts to have the Registration Statement declared
effective under the Securities Act as promptly as practicable after such
filing. As promptly as practicable after the Registration Statement shall have
become effective, each of Kellwood and the Company shall mail the Joint Proxy
Statement to its respective stockholders. Kellwood shall also take any action
reasonably required to be taken under any applicable state securities laws in
connection with the issuance of Kellwood Common Stock in the Merger and the
resale of shares of Kellwood Common Stock by selling security holders pursuant
to the resale provisions of the Registration Statement, and the Company shall
furnish all information concerning the Company and the holders of the Company
Common Stock as may be reasonably requested in connection with any such action
and in the case of Company stockholders whose shares of Kellwood Common Stock
are registered for resale thereunder, information typically provided by
selling security holders. Kellwood shall take all action necessary to list on
the New York Stock Exchange the shares of Kellwood Common Stock issuable in
the Merger. Kellwood shall take all action necessary to maintain and
supplement the Joint Proxy and Registration Statement to enable stockholders
issued Kellwood Common Stock to freely resell such shares and to fulfill any
prospectus delivery requirement under the Securities Act in connection
therewith, in each case, for so long as such stockholder may not freely resell
his Kellwood Common Stock without an effective Registration Statement under
the Securities Act (without giving effect to sales under Rules 144 or 145
under the Securities Act).
ARTICLE VIII
CONDITIONS PRECEDENT TO THE MERGER
8.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) Stockholder Approval. This Agreement shall have been duly approved by
the requisite vote of stockholders of the Company in accordance with
applicable law and the Company's charter and the Company's By-laws and the
Company Stockholder Agreement, and the Share Issuance shall have been
approved by the requisite vote of the stockholders of Kellwood in
accordance with applicable rules of the NYSE, applicable Law and the
Kellwood charter and the Kellwood By-laws; and
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(b) Registration Statement. The Registration Statement shall have become
effective in accordance with the provisions of the Securities Act. No stop
order suspending the effectiveness of the Registration Statement shall have
been issued by the SEC and no proceedings for that purpose shall have been
initiated or, to the knowledge of Kellwood or the Company, threatened by
the SEC.
8.2. Conditions to Obligation of the Company to Effect the Merger. The
obligation of the Company to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Time of the following
additional conditions:
(a) Accuracy of Warranties and Performance of Covenants. The
representations and warranties of Kellwood contained herein shall be true
and correct as if made on and as of the Closing Date, except for changes in
the ordinary course of Kellwood's business or contemplated by this
Agreement and except for such breaches, inaccuracies or omissions of such
representations and warranties which (i) have neither had nor reasonably
would be expected to have a Kellwood Material Adverse Effect and/or (ii)
would not jeopardize the qualification of the Merger as a reorganization
within the meaning of Section 358(a) of the Code. Kellwood shall have
performed all of the obligations and complied in all material respects with
all of the covenants, agreements and conditions required to be performed or
complied with on or prior to the Closing;
(b) No Pending Action. No action, suit, proceeding or investigation
before any court, administrative agency or other governmental authority
shall be pending or threatened wherein an unfavorable judgment, decree or
order would prevent the carrying out of this Agreement or any of the
transactions contemplated hereby, declare unlawful the transactions
contemplated hereby or cause such transactions to be rescinded;
(c) Regulatory Approvals. All regulatory agencies shall have taken such
action as may be required to permit the consummation of the transactions
contemplated hereby and such actions shall remain in full force and effect
and shall be reasonably satisfactory in form and substance to the Company
and its counsel;
(d) Tax Opinion. The Company and the Stockholders shall have received an
opinion of McDermott, Will & Emery, in form and substance reasonably
satisfactory to the Company, dated the Closing Date, substantially to the
effect that on the basis of facts, representations and assumptions set
forth in such opinion which are consistent with the state of facts existing
as of the Closing Date, for federal income tax purposes:
(i) the Merger will constitute a "reorganization" within the meaning
of Section 368(a) of the Code, and the Company, Sub and Kellwood will
each be a party to that reorganization within the meaning of Section
368(b) of the Code;
(ii) no gain or loss will be recognized by Kellwood, Sub or the
Company as a result of the Merger; and
(iii) no gain or loss will be recognized by the stockholders of the
Company upon the conversion of their shares of the Company Common Stock
into shares of Kellwood Common Stock pursuant to the Merger, except
with respect to cash, if any, received in lieu of fractional shares of
Kellwood Common Stock.
In rendering such opinion, McDermott, Will & Emery may rely upon the
representations contained herein and may receive and rely upon
representations from Kellwood, the Company, and others; and
(e) Condition of Kellwood. There shall not have occurred a Kellwood
Material Adverse Effect since April 30, 1998.
8.3. Conditions to Obligations of Kellwood and Sub to Effect the Merger. The
obligations of Kellwood and Sub to effect the Merger shall be subject to, the
fulfillment or waiver at or prior to the Effective Time of the following
additional conditions:
(a) Accuracy of Warranties and Performance of Covenants. The
representations and warranties of the Company contained herein shall be
true and correct in all material respects as if made on and as of the
Closing Date, except for changes occurring in the ordinary course of the
Business or contemplated by this Agreement and except for such breaches,
inaccuracies or omissions of such representations and warranties
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which have neither had nor would be reasonably expected to have a Company
Material Adverse Effect and the Company and Stockholders shall have
performed all of the obligations and complied in all material respects with
all of the covenants, agreements and conditions required to be performed or
complied with by them on or prior to the Closing;
(b) No Pending Action. No action, suit, proceeding or investigation
before any court, administrative agency or other governmental authority
shall be pending or threatened wherein an unfavorable judgment, decree or
order would prevent the carrying out of this Agreement or any of the
transactions contemplated hereby, declare unlawful the transactions
contemplated hereby, cause such transactions to be rescinded, or which
might affect the right of the Company to own, operate or control the
Business or its assets;
(c) Regulatory Approvals. All regulatory agencies shall have taken such
action as may be required to permit the consummation of the transactions
contemplated hereby and such actions shall remain in full force and effect
and shall be reasonably satisfactory in form and substance to Kellwood and
its counsel;
(d) Consents. Kellwood shall have been furnished with the third party
consents set forth in Schedule 8.3(d);
(e) Condition of Business and Assets. The Business and its assets shall
not have been adversely affected in any way by any act of God, fire, flood,
accident, war, labor disturbance, legislation (proposed or enacted), or
other event or occurrence, whether or not covered by insurance, which has
resulted in a Company Material Adverse Effect and there shall have been no
change in the assets or the Business or its financial condition which has
resulted in a Company Material Adverse Effect;
(f) Multi-Year License. The Company shall have entered into a multi-year
license with Polo Ralph Lauren with terms reasonably acceptable to
Kellwood;
(g) Collective Bargaining Agreement. The Company shall have used
commercially reasonable efforts to enter into a collective bargaining
agreement for its operations in Florida and Canada with terms reasonably
acceptable to Kellwood; and
(h) Accounting. Kellwood shall have received a letter from
Pricewaterhouse Coopers LLP (or any successor thereto), in form and
substance reasonably satisfactory to Kellwood, that the Merger will qualify
for pooling of interests accounting treatment under Accounting Principles
Board Opinion No. 16, as amended by Statements of Financial Accounting
Standards Board ("FASB"), and the related interpretations of the American
Institute of Certified Public Accountants, the FASB, the Emerging Issues
Task Force and the rules and regulations of the U.S. Securities and
Exchange Commission (collectively, "APB Opinion No. 16 and its
Interpretations") if closed and consummated in accordance with this
Agreement (which opinion shall be based, as to the financial statements of
the Company, on a customary "pooling" letter of KPMG Peat Marwick LLP).
ARTICLE IX
TERMINATION BY PARTIES
9.1. Termination. This Agreement may be terminated and the transactions
contemplated herein may be abandoned at any time prior to the Closing:
(a) by mutual written consent of the parties hereto;
(b) by either Kellwood or the Company in the event that the Closing does
not occur for any reason on or before April 30, 1999 (the "Termination
Date"); provided, however, that if the Closing does not occur on or prior
to the Termination Date due to the act or omission of one of the parties,
that party may not terminate this Agreement pursuant to the provisions of
this Section;
(c) by the Company, upon approval of the Company Board of Directors, if
prior to stockholder approval (i) without violation of Section 5.8, the
Company shall have received after the date hereof an Alternative Proposal,
(ii) the Company's Board of Directors shall have determined, in the
exercise of its
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good faith judgment that such Alternative Proposal constitutes a Superior
Proposal, and (iii) the Company shall have given Kellwood at least four (4)
business days' prior written notice of the material terms and conditions of
such Superior Proposal and of its intention to terminate this Agreement
pursuant to this provision, in order to enter into an agreement with
respect to such Superior Proposal; provided, however, that such termination
under this clause (c) shall not be effective, and the Company shall not be
entitled to enter into a definitive agreement providing for such Superior
Proposal, until the Company has made payment to Kellwood of the fee
required to be paid pursuant to Section 9.2(a);
(d) by Kellwood, if the Company's Board of Directors or committee thereof
shall have resolved to accept or recommend to the Company's stockholders a
definitive agreement with respect to a Superior Proposal or shall have
withdrawn or adversely modified or taken a public position materially
inconsistent with its approval or recommendation to the stockholders of the
Company of the transactions contemplated hereby or shall not have submitted
this Agreement and the transactions contemplated hereby for the approval of
its stockholders at a meeting of stockholders or used its reasonable best
efforts to obtain such stockholder approval;
(e) by Kellwood, if (i) a Change of Control of the Company shall have
occurred, (ii) the Company shall have entered into a definitive agreement
providing for, or publicly announced its intention to effect, any
transaction involving a Change of Control of the Company or (iii) a tender
offer or exchange offer shall have been commenced or publicly announced
that, if consummated, would have the effect of a Change of Control of the
Company;
(f) by either Kellwood or the Company, if the approval of the
stockholders of such party or the other party contemplated by Section 7.1
is not obtained at the applicable stockholders meeting, including
adjournments thereof.
(g) by either Kellwood or the Company, if the other shall have breached,
or failed to comply with, in any material respect any of its obligations
under this Agreement, or any representation or warranty made in this
Agreement by such other party shall have been incorrect in any material
respect when made or shall have since ceased to be true and correct in any
material respect, and such breach, failure or misrepresentations is not
cured within ten (10) days after written notice thereof and such breaches,
failures or misrepresentations, individually or in the aggregate and
without regard to materiality qualifiers contained therein, result or would
be reasonably likely to result in a Company Material Adverse Effect or a
Kellwood Material Adverse Effect, as applicable; or
(h) by the Company, if Kellwood's Board of Directors or committee thereof
shall have withdrawn or adversely modified its approval of, or
recommendation to the stockholders of Kellwood to approve, the Share
Issuance or shall not have submitted the Share Issuance to the stockholders
of Kellwood for their approval at a meeting of stockholders or used its
reasonable best efforts to obtain such stockholder approval.
Any right of termination set forth above shall be exercised by written notice
from the terminating party to the other party.
9.2. Termination Fees.
(a) If this Agreement is terminated by the Company pursuant to Section
9.1(c), or by Kellwood pursuant to Section 9.1(d) or (e), or by Kellwood due
to the failure of the Company to obtain stockholder approval as set forth in
Section 9.1(f), then the Company shall pay Kellwood a fee of Five Million
Dollars ($5,000,000); provided, however, that no fee shall be payable
following a termination of this Agreement pursuant to Section 9.1(e)(iii),
unless and until the relevant tender offer or exchange offer has been
consummated and a Change of Control of the Company has occurred. Such amount
shall be paid in cash by wire transfer in immediately available funds not
later than five (5) business days after the obligation to make such payment
arises.
(b) If (i) this Agreement is terminated prior to the occurrence of the
Closing pursuant to Section 9.1(b) (except if such termination occurs as a
result of the failure of Kellwood to satisfy the conditions set forth in
Section 8.2 hereof) or Section 9.1(g) due to the breach or non-compliance by
the Company, (ii) prior to such
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date as is one hundred eighty (180) days after such termination the Company
shall enter into a definitive agreement providing for, or shall publicly
announce its intention to effect any transaction involving the sale of all or
substantially all of the Company's assets (whether by merger or sale of stock
or assets) to or with an unaffiliated person, and (iii) no fee has previously
been paid pursuant to Section 9.2(a), then the Company shall pay Kellwood the
fee set forth in Section 9.2(a).
9.3. Effect of Termination. In the event of any termination of this
Agreement as provided above, this Agreement shall forthwith become wholly void
and of no further force and effect and there shall be no liability on the part
of any party, their affiliates or their respective officers or directors;
provided, however, that upon any such termination the obligations of the
parties with respect to this Article IX (including Section 9.2), Section 5.3,
Section 11.3 and the Confidentiality Agreement previously entered into by and
between the Company and Kellwood shall remain in full force and effect; and
provided further, that nothing herein will relieve any party from liability
for damages for any breach of covenants or representations and warranties of
this Agreement prior to Closing.
9.4. Change of Control. For purposes of this Agreement, "Change of Control"
shall mean with respect to the Company the occurrence of any of the following
events: (i) an acquisition (whether directly from such party or otherwise) of
any voting securities of the Company (the "Voting Securities") by any "Person"
(as the term is used for purposes of Section 13(d) or 14(d) of the Exchange
Act) not a stockholder of the Company as of the date hereof, immediately after
which such Person has or would have "Beneficial Ownership" (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of forty percent (40%) or
more of the combined voting power of the Company's then outstanding Voting
Securities; (ii) the consummation of, or agreement to consummate: (A) a
merger, consolidation, share exchange or reorganization of the Company in
which the present stockholders of the Company, as a group, cease to hold a
majority equity interest in the surviving entity; (B) a liquidation or
dissolution of or appointment of a receiver, rehabilitator, conservator or
similar person for the Company; or (C) the sale or other disposition of all or
substantially all of the assets of the Company to any Person (other than a
transfer to a subsidiary).
ARTICLE X
SURVIVAL AND INDEMNIFICATION
10.1. Survival. All representations, warranties, covenants and agreements
contained in this Agreement or in any document delivered pursuant hereto shall
be deemed to be material and to have been relied upon by the parties hereto,
and shall survive the Closing and shall be fully effective and enforceable for
a period of one (1) year following the Closing Date (unless a different period
is specifically assigned thereto), but shall thereafter be of no further force
or effect, except as they relate to claims for indemnification timely made
pursuant to this Article or claims alleging fraud on the part of a party
hereto.
10.2. Indemnification. (a) Kellwood shall indemnify and hold harmless the
Company and the Stockholders and (b) the Company and the Stockholders shall
indemnify and hold harmless Kellwood, in each case, from and against any and
all loss, damage, expense (including court costs, amounts paid in settlement,
judgments, reasonable attorneys' fees or other expenses for investigating and
defending, but after giving effect to any tax benefits related thereto), suit,
action, claim, liability or obligation related to, caused by or arising from
any misrepresentation, breach of warranty by such party or failure by such
party to fulfill any covenant or agreement contained herein.
10.3. Notice of Claims. Kellwood, the Company or the Stockholders'
Representative, as applicable, shall give prompt written notice to the other
of the facts and circumstances giving rise to any claim for indemnification
hereunder (the "Notice") for which such indemnified party intends to assert a
right to indemnification under this Agreement (collectively, "Claims"). The
party receiving the Notice shall have the option to protest any Claim, at such
party's own cost and expense. Such option shall be exercised by the giving of
notice by the exercising party to the other parties within ten (10) days of
receipt of a Notice.
A-39
<PAGE>
10.4. Limitations on Stockholders' Indemnification Obligation. From and
after the Effective Time, subject to the terms and conditions of the Escrow
Agreement, Kellwood shall be entitled to be indemnified from the Escrow for
any and all Claims, regardless of the record or beneficial ownership of the
shares of Kellwood Common Stock or other assets held pursuant to the Escrow
Agreement. Kellwood and Sub shall not be entitled to indemnification under
this Agreement until the aggregate amount of all such Claims exceeds Seven
Hundred Fifty Thousand Dollars ($750,000) (the "Threshold Amount"), and then
Kellwood shall be entitled to recover only the amount of such Claims in excess
of the Threshold Amount. Kellwood shall provide the Escrow Agent and the
Stockholder Representative named pursuant to the Escrow Agreement with Notice
of all Claims included in the Threshold Amount. The value of Kellwood Common
Stock used to fulfill the indemnification obligation hereunder shall be the
Agreed Price. The Kellwood Common Stock held pursuant to the Escrow Agreement
shall constitute the sole and exclusive fund from which any Claims of Kellwood
or Sub and costs and expenses incurred in connection therewith hereunder may
be satisfied (other than claims based upon fraud) and the sole and exclusive
recourse for breaches by the Company or the Stockholders of the
representations, warranties and covenants contained herein, absent fraud. In
the event that the Kellwood Common Stock held pursuant to the Escrow Agreement
is insufficient to satisfy any claim of Kellwood hereunder, Kellwood and Sub
shall be barred from taking any other action against the Company, the
Stockholders or any stockholder of the Company.
10.5. Third Party Claims. The Stockholders' Representative appointed
pursuant to the Escrow Agreement shall have the right, at its own expense to
participate in the defense of any third party claim asserted against the
Company for which Kellwood would be entitled to indemnification hereunder;
provided, however, that such Stockholders' Representative shall have no right
to control the defense or settlement of any such claim. Kellwood shall not
settle any claim of a third party for which it is entitled to indemnification
hereunder without the prior written consent of the Stockholders'
Representative, which consent shall not be unreasonably withheld.
ARTICLE XI
GENERAL PROVISIONS
11.1. Amendments and Waiver. Except as otherwise required by applicable Law
after the Company Stockholder Meeting to approve this Agreement and the Merger
and/or the Kellwood Stockholder Meeting to approve the Share Issuance, this
Agreement may be amended by the parties hereto at any time by execution of an
instrument in writing signed by or on behalf of each of the parties hereto. No
amendment, waiver or consent with respect to any provision of this Agreement
shall in any event be effective, unless the same shall be in writing and
signed by the parties hereto, and then such amendment, waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given. The failure of any party at any time or times to require
performance of any provisions hereof shall in no manner affect that party's
right at a later time to enforce the same. No waiver by any party of the
breach of any term or covenant contained in this Agreement in any one or more
instances shall be deemed to be, or construed as, a further or continuing
waiver of any such breach, or a waiver of the breach of any other term or
covenant contained in this Agreement. Waivers may be made in advance or after
the right occurred has arisen or the breach or default waived has occurred.
Any waiver may be conditional.
A-40
<PAGE>
11.2. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be, personally delivered or sent by
facsimile transmission with confirming copy sent by overnight courier (such as
Express Mail, Federal Express, etc.) and a delivery receipt obtained and
addressed to the intended recipient as follows:
(a) if to Kellwood or Sub, to
Kellwood Company
600 Kellwood Parkway
Chesterfield, MO 63178
Attention: Thomas H. Pollihan, General Counsel
Telecopy No.: (314) 576-3388
with a copy to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606
Attention: Robert A. Schreck, Jr.
Telecopy No.: (312) 984-7700
(b) if to the Company or the Stockholders, to
Koret of California, Inc.
611 Mission Street
San Francisco, CA 94105
Attention: Steven Rudin
Telecopy No.: (415) 957-2170
with copies to:
Squadron, Ellenoff, Plesent & Sheinfeld, LLP
551 Fifth Avenue
New York, NY 10176-001
Attention: Arthur D. Stout
Telecopy No.: (212) 697-6686
Goldman Sachs & Co.
85 Broad Street
New York, NY 10004
Attention: Ben Adler
Fax No.: (212) 902-3000
Any party may change its address for receiving notice by written notice given
to the others named above.
11.3. Expenses. Except as otherwise expressly provided herein, all fees and
expenses incurred in connection with this Agreement and the Merger, including,
without limitation, all legal, accounting, financial advisory, printing,
consulting and filing and other fees and expenses of third parties ("Third
Party Expenses") incurred by a party in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the
transactions contemplated hereby, including the Joint Proxy Statement and
Registration Statement, shall be in the case of Third Party Expenses incurred
by Kellwood and Sub, the obligation of Kellwood, and in the case of the
Company and the Stockholders, the obligation of the Company. If this Agreement
is terminated by the Company pursuant to Section 9.1(g), 9.1(h) or 9.1(f) due
to the failure of Kellwood stockholders to approve the Share Issuance,
Kellwood shall pay the Third Party Expenses of the Company and the
Stockholders, without prejudice to any other remedies they may have to assert.
If any action is brought by either party to enforce any provision of this
Agreement, the prevailing party shall be entitled to recover court costs,
arbitration expenses and reasonable attorneys' fees. The provisions of this
Section shall survive any termination of this Agreement.
11.4. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
A-41
<PAGE>
11.5. Successors and Assigns. This Agreement shall bind and inure to the
benefit of the parties named herein and their respective successors and
permitted assigns. At the election of Kellwood, any direct wholly-owned
Subsidiary of Kellwood may be substituted for Sub as a constituent corporation
in the Merger, provided that such substituted corporation is a Delaware
corporation which is formed solely for the purpose of engaging in the
transactions contemplated by this Agreement and has engaged in no other
business activities and provided further that such substitution would not
jeopardize the qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code. Except as provided in the foregoing
sentence, this Agreement shall not be assigned by either party hereto without
the express prior written consent of the other party and any attempted
assignment, without such consents, shall be null and void. This Agreement does
not create any rights, claims or benefits inuring to any person that is not a
party hereto nor create or establish any third-party beneficiary hereto;
notwithstanding the foregoing, in the event of any breach by Kellwood of its
covenants set forth in Sections 6.3(a) and/or (b) or 7.3, each director and
officer of the Company or selling security holder, as the case may be, shall
be entitled to commence and maintain appropriate legal action to compel
Kellwood to comply with such covenants or to obtain monetary damages for the
breach thereof.
11.6. Entire Transaction. This Agreement and the documents referred to
herein contain the entire understanding among the parties with respect to the
transactions contemplated hereby and supersedes all other agreements,
understandings and undertakings among the parties on the subject matter
hereof; provided, however, that the provisions contained in the
Confidentiality Agreement dated July 9, 1998 as modified by paragraph 17 of
the Letter of Intent among the parties dated as of September 18, 1998 shall
survive any termination of this Agreement and shall remain in full force and
effect until the Closing contemplated hereby is consummated. All exhibits,
attachments and schedules hereto are hereby incorporated by reference and made
a part of this Agreement.
11.7. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the law that
might otherwise govern under applicable principles of conflicts of laws
thereof.
11.8. Jurisdiction.
(a) The parties to this Agreement agree that any suit, action or proceeding
arising out of, or with respect to, this Agreement or any judgment entered by
any court in respect thereof shall be brought in the courts of the State of
Delaware or in the U.S. District Court for Delaware, and Kellwood, the Company
and the Stockholders hereby irrevocably accept the exclusive personal
jurisdiction of those courts for the purpose of any suit, action or
proceeding.
(b) In addition, Kellwood, the Company and the Stockholders each hereby
irrevocably waives, to the fullest extent permitted by law, any objection
which it may now or hereafter have to the venue of any suit, action or
proceeding arising out of or relating to this Agreement or any judgment
entered by any court in respect thereof brought in the State of Delaware or
the U.S. District Court for Delaware, and hereby further irrevocably waives
any claim that any suit, action or proceedings brought in any such court has
been brought in any inconvenient forum.
11.9. Accounting Terms. Any accounting terms used in this Agreement shall,
unless otherwise specifically provided, have the meanings customarily given
them in accordance with GAAP, and all financial computations hereunder shall,
unless otherwise specifically provided, be computed in accordance with GAAP
consistently applied.
11.10. Knowledge. For purposes of this Agreement, any reference to "the
knowledge of" or "the best knowledge of" a party hereto when modifying any
representation and warranty shall mean, with respect to Kellwood, to the
actual knowledge (upon due inquiry) of all officers of such party with title
of vice president or higher; with respect to the Company, to the actual
knowledge (upon due inquiry) of Steven Rudin (President/COO of the Company),
Bradley Kennison (CFO/VP/Secretary/Treasurer) of the Company, Mustafa
A-42
<PAGE>
Kahn, Denise Johnston, Frank Matteucci, Barney Michela, Michael Rappaport,
Fred Smeyne, Richard Partida, Susan Unrath, Daniel Kempers, Joanne Bjork, and
Douglas Whiteley. The representations and warranties contained in this
Agreement shall not be affected by any investigation, verification or
examination by any party hereto or by anyone on behalf of any such party, or
any knowledge of facts determined or determinable pursuant to such
investigation, except as specifically set forth herein or in a Schedule or
document delivered pursuant to this Agreement.
11.11. Other Rules of Construction. References in this Agreement to
sections, schedules, attachments and exhibits are to sections of, and
schedules, attachments and exhibits to, this Agreement, unless otherwise
indicated. Words in the singular include the plural and in the plural include
the singular. The word "or" means "in the alternative" and is not exclusive.
The word "including" shall mean including, without limitation. The Section and
other headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
Each party hereto acknowledges that this Agreement has been negotiated at
arms-length by the parties and their respective counsel and that neither party
shall be deemed the author or drafter of this Agreement for purposes of
construction of the terms hereof or for any other purpose. All parties hereto
have participated substantially in the negotiation and drafting of this
Agreement and each party hereby disclaims any defense or assertion that any
ambiguity herein should be construed against the drafter.
11.12. Announcements. No announcement of this Agreement or any transaction
contemplated hereby shall be made by any party without the written approval of
the other parties hereto (which approval shall not be unreasonable withheld),
except as required by law or the regulations of any securities exchange.
11.13. Partial Invalidity. In the event that any provision of this Agreement
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provision
hereof.
11.14. Certain Taxes. Kellwood shall pay all stamp or other similar transfer
taxes arising as a result of the consummation of the transactions contemplated
hereby.
* * * *
A-43
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed as of the date first written above.
Koret, Inc. Stockholders:
/s/ Martin J. Granoff /s/ Martin J. Granoff
By: ___________________________ -------------------------------------
Martin J. GranoffChairman Martin J. Granoff
GS Capital Partners, L.P.
By: GS Advisors, Inc.
General Partner
By: GS Advisors, L.P.
General Partner
/s/ Eve M. Gerriets, V.P.
By: _________________________________
Eve M. Gerriets
Stone Street Fund 1994, L.P.
By: Stone Street Funding Corp.
General Partner
/s/ Eve M. Gerriets, V.P.
By: _________________________________
Eve M. Gerriets
Bridge Street Fund 1994
By: Stone Street Funding Corp.
General Partner
/s/ Eve M. Gerriets, V.P.
By: _________________________________
Eve M. Gerriets
Kellwood Company
/s/ Hal J. Upbin
By: _________________________________
Hal J. Upbin, President
Kellwood Aquisition II Corporation
/s/ Hal J. Upbin
By: _________________________________
Hal J. Upbin, President
A-44
<PAGE>
ANNEX B: OPINION OF CREDIT SUISSE FIRST BOSTON
Board of Directors
Kellwood Company
P.O. Box 14374
St. Louis, MO 63178
November 11, 1998
Members of the Board:
You have asked us to advise you with respect to the fairness to Kellwood
Company (the "Acquiror") from a financial point of view of the consideration
to be paid by the Acquiror pursuant to the terms of the draft of Agreement and
Plan of Merger among Kellwood Acquisition II Corporation (the "Subsidiary"),
the Acquiror, Koret Inc. (the "Company") and certain stockholders of the
Company, dated November 10, 1998 (the "Merger Agreement"). The Merger
Agreement provides for the merger of the Company with the Subsidiary pursuant
to which the Company will be the surviving corporation and will become a
wholly-owned subsidiary of the Acquiror (the "Merger") and each outstanding
share of Class A Common Stock, par value $0.01 per share, Class B Non-Voting
Common Stock, par value $0.01 per share, and Class C Common Stock, par value
$0.01 per share, of the Company (collectively, the "Company Common Stock")
will be converted into 0.6025 of a share (the "Exchange Ratio") of the
Acquiror's Common Stock, par value $0.01 per share ("Acquiror Common Stock").
We have assumed, with the consent of the Board of Directors of the Acquiror,
that the executed Merger Agreement will not vary materially from the November
10, 1998 Merger Agreement.
In arriving at our opinion, we have reviewed certain business and financial
information relating to the Company and the Acquiror. We have also reviewed
certain other information, including financial forecasts, provided to us by
the Acquiror, and have met with the Company's and the Acquiror's managements
to discuss the business and prospects of the Company and the Acquiror.
We have also considered certain financial data of the Company and the
Acquiror, and we have compared those data with similar data for publicly held
companies in businesses similar to the Company and the Acquiror and we have
considered the financial terms of certain other business combinations and
other transactions which have recently been effected. We also considered such
other information, financial studies, analyses and investigations and
financial, economic and market criteria which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied
on its being complete and accurate in all material respects. With respect to
the financial forecasts, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the Company's and the Acquiror's managements as to the future
financial performance of the Company and the Acquiror. You have informed us,
and we have assumed, that the Merger will be accounted for as a pooling of
interests in accordance with generally accepted accounting principles. In
addition, we have not been requested to make, and have not made, an
independent evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of the Company, nor have we been furnished with any such
evaluations or appraisals. Our opinion is necessarily based upon financial,
economic, market and other conditions as they exist and can be evaluated on
the date hereof. We are not expressing any opinion as to the actual value of
the Acquiror Common Stock when issued to the holders of the Company Common
Stock pursuant to the Merger or the prices at which such Acquiror Common Stock
will trade subsequent to Merger.
We have been engaged by the Acquiror to render this opinion in connection with
the Merger and will receive a fee for rendering this opinion.
B-1
<PAGE>
In the ordinary course of our business, we and our affiliates may actively
trade the debt and equity securities of the Acquiror for our and such
affiliates' own accounts and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of the Acquiror in connection with its consideration of the Merger
and is not to be quoted or referred to, in whole or in part, in any
registration statement, prospectus or proxy statement, or in any other
document used in connection with the offering or sale of securities, nor shall
this letter be used for any other purposes, without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair to the Acquiror from a financial point
of view.
Very truly yours,
Credit Suisse First Boston Corporation
/s/ Robert S. Murley
By: ______________________________________
Robert S. Murley
Managing Director
B-2
<PAGE>
ANNEX C
KORET, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
November 29, 1998, November 30, 1997 and December 1, 1996
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Koret, Inc.:
We have audited the accompanying consolidated balance sheets of Koret, Inc.
and subsidiaries as of November 29, 1998 and November 30, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended November 29, 1998.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Koret,
Inc. and subsidiaries as of November 29, 1998 and November 30, 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended November 29, 1998 in conformity with generally
accepted accounting principles.
KPMG LLP
San Francisco, California
February 4, 1999
C-1
<PAGE>
KORET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 29, 1998 and November 30, 1997
(in thousands except share amounts)
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ------- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 1,922 1,916
Due from factors and trade accounts receivable, net (note
3)......................................................... 2,542 3,228
Note receivable (note 5).................................... 3,400 --
Inventories (note 4)........................................ 52,671 57,712
Income tax receivable (note 6).............................. 1,041 --
Deferred income taxes (note 6).............................. 4,511 4,704
Other current assets........................................ 3,219 2,809
------- ------
Total current assets...................................... 69,306 70,369
Property, plant and equipment, net (note 5)................... 5,141 8,805
Deferred income taxes (note 6)................................ 3,605 1,825
Intangible assets and excess of purchase price over fair value
of assets acquired, less accumulated amortization of $6,700
and $5,958 in 1998 and 1997, respectively (note 1)........... 10,605 11,397
Other assets.................................................. 752 136
------- ------
Total assets.............................................. $89,409 92,532
======= ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Bank overdraft.............................................. $ 2,926 5,334
Current maturities of long-term debt (note 7)............... 4,167 3,948
Accounts payable............................................ 12,964 16,074
Accrued liabilities and deferred credits (note 5)........... 4,363 3,252
Accrued salaries, wages and employee benefits............... 4,364 3,798
Income taxes payable (note 6)............................... -- 1,401
------- ------
Total current liabilities................................. 28,784 33,807
Long-term debt (note 7)....................................... 6,199 13,313
Other non-current liabilities and deferred credits (notes 5, 8
and 12)...................................................... 2,829 3,472
------- ------
Total liabilities......................................... 37,812 50,592
------- ------
Stockholders' equity (notes 13 and 16):
Class A common stock, $.01 par value. Authorized 20,000,000
shares; 4,903,719 and 4,835,254 shares issued and
outstanding in 1998 and 1997, respectively................. 49 48
Class C special common stock, $1.00 par value. Authorized
3,200,000 shares; 3,091,190 shares issued and outstanding
in 1998 and 1997........................................... 3,091 3,091
Additional paid-in capital.................................. 21,336 21,042
Retained earnings........................................... 28,574 18,461
Foreign currency translation adjustment..................... (1,453) (702)
------- ------
Total stockholders' equity................................ 51,597 41,940
Commitments and contingencies (notes 3, 8, 10, 12 and 13)
------- ------
Total liabilities and stockholders' equity................ $89,409 92,532
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
C-2
<PAGE>
KORET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended November 29, 1998, November 30, 1997 and December 1, 1996
(in thousands except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Net sales......................................... $290,172 295,372 259,403
Cost of sales..................................... 200,536 219,898 196,139
-------- ------- -------
Gross margin.................................. 89,636 75,474 63,264
Selling, general and administrative expenses...... 64,974 62,928 58,481
Amortization of intangible assets and excess of
purchase price over fair value of assets
acquired......................................... 723 1,385 1,044
-------- ------- -------
Operating income.............................. 23,939 11,161 3,739
Interest expense, net............................. (5,186) (5,895) (5,457)
Loss on sale of subsidiary (note 15).............. (1,620) -- --
Other expense, net................................ (589) (309) (146)
-------- ------- -------
Income (loss) before income taxes............. 16,544 4,957 (1,864)
Provision (benefit) for income taxes (note 6)..... 6,431 2,650 (304)
-------- ------- -------
Net income (loss)............................. $ 10,113 2,307 (1,560)
======== ======= =======
Earnings per share (note 14):
Basic earnings (loss) per share............... $ 1.27 0.30 (0.20)
======== ======= =======
Diluted earnings (loss) per share............. $ 1.19 0.28 (0.20)
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
C-3
<PAGE>
KORET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended November 29, 1998, November 30, 1997 and December 1, 1996
(in thousands)
<TABLE>
<CAPTION>
Class C
Class A special Foreign
common stock common stock Additional currency Total
-------------- ------------- paid-in Retained translation stockholders'
Shares Amount Shares Amount capital earnings adjustment equity
------ ------ ------ ------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 3,
1995................... 4,579 $46 3,091 $3,091 20,788 17,714 (242) 41,397
Net loss................ -- -- -- -- -- (1,560) -- (1,560)
Translation adjustment.. -- -- -- -- -- -- (203) (203)
----- --- ----- ------ ------ ------ ------ ------
Balances at December 1,
1996................... 4,579 46 3,091 3,091 20,788 16,154 (445) 39,634
Net income.............. -- -- -- -- -- 2,307 -- 2,307
Translation adjustment.. -- -- -- -- -- -- (257) (257)
Exercise of warrants
(note 13).............. 256 2 -- -- 254 -- -- 256
----- --- ----- ------ ------ ------ ------ ------
Balances at November 30,
1997................... 4,835 48 3,091 3,091 21,042 18,461 (702) 41,940
Net income.............. -- -- -- -- -- 10,113 -- 10,113
Translation adjustment.. -- -- -- -- -- -- (751) (751)
Exercise of options
(note 13).............. 127 1 -- -- 288 -- -- 289
Tax benefit from
exercise of warrants
and options............ -- -- -- -- 506 -- -- 506
Stock buyback (note 8).. (58) -- -- -- (500) -- -- (500)
----- --- ----- ------ ------ ------ ------ ------
Balances at November 29,
1998................... 4,904 $49 3,091 $3,091 21,336 28,574 (1,453) 51,597
===== === ===== ====== ====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
C-4
<PAGE>
KORET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended November 29, 1998, November 30, 1997 and December 1, 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ 10,113 2,307 (1,560)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 3,412 3,880 3,747
Amortization of discount on subordinated note... -- 358 195
Net loss (gain) on disposal of equipment........ 115 20 (42)
Deferred rent................................... (64) (86) (127)
Deferred gain................................... (144) (144) (128)
Deferred income taxes........................... (1,587) (1,093) (1,871)
Changes in operating assets and liabilities:
Receivables transferred to factors/trade
accounts receivable, net..................... 6,660 (32,268) 20,359
Inventories................................... 5,041 (16,805) 1,850
Other assets.................................. (1,027) (161) 502
Income taxes refundable....................... (535) -- 261
Income taxes payable.......................... (1,401) 1,401 --
Accounts payable.............................. (3,110) 1,676 612
Accrued liabilities........................... 1,200 1,592 (990)
Other liabilities............................. (445) 880 --
-------- ------- -------
Net cash provided by (used in) operating
activities.................................. 18,228 (38,443) 22,808
-------- ------- -------
Cash flows from investing activities:
Proceeds from sale of property, plant and
equipment........................................ 1,091 27 3,772
Capital expenditures.............................. (2,568) (1,725) (1,769)
-------- ------- -------
Net cash (used in) provided by investing
activities.................................. (1,477) (1,698) 2,003
-------- ------- -------
Cash flows from financing activities:
Net (repayments) advances under factoring and line
of credit agreements............................. (5,974) 44,709 (15,719)
Principal payments on long-term debt and capital
lease obligations................................ (7,519) (14,745) (15,415)
Borrowings under long-term debt agreement......... -- 8,830 --
Change in bank overdraft.......................... (2,408) 963 1,185
Proceeds from exercise of options and warrants.... 289 256 --
Debt issuance costs............................... -- (100) --
Buyback of common stock........................... (500) -- --
-------- ------- -------
Net cash (used in) provided by financing
activities.................................. (16,112) 39,913 (29,949)
-------- ------- -------
Effect of exchange rate on changes in cash......... (633) (177) (175)
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................. 6 (405) (5,313)
Cash and cash equivalents at beginning of year..... 1,916 2,321 7,634
-------- ------- -------
Cash and cash equivalents at end of year........... $ 1,922 1,916 2,321
======== ======= =======
Supplemental disclosures of cash flow information:
Net cash paid during the period for:
Interest........................................ $ 5,220 5,742 5,338
======== ======= =======
Income taxes.................................... $ 9,954 2,609 1,306
======== ======= =======
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
In December 1996, a capital lease obligation of $398,000 was incurred when
the Company entered into a lease for new equipment.
In December 1997, a capital lease obligation of $624,000 was incurred when
the Company entered into a lease for equipment.
In 1998, the Company received a tax benefit related to the exercise of
warrants and options of $506,000.
In October 1998, the Company sold an office building in San Francisco,
California, for $3,810,000. As part of the consideration for the sale of
the building, Koret received a promissory note of $3,400,000 (note 5).
See accompanying notes to consolidated financial statements.
C-5
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 29, 1998, November 30, 1997 and December 1, 1996
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Koret, Inc.
("the Company") and its wholly owned subsidiaries, Koret of California, Inc.;
Counterparts Sportswear, Inc. (note 15); New Campaign, Inc. ("Campaign"); MJF
Imports; and West Coast Apparel, Inc. (note 2) (hereinafter collectively
referred to as "Koret"). All material intercompany transactions and accounts
have been eliminated.
(b) Fiscal Year
Koret's fiscal year is the 52- or 53-week period ending the Sunday nearest
to November 30.
(c) Cash, Cash Equivalents and Bank Overdrafts
Cash equivalents include highly liquid investments with maturities of less
than three months at the time of purchase.
Koret's central cash management system is designed to maintain minimal
balances at the bank. Koret's policy is to classify checks issued but not
presented to the bank as bank overdrafts.
(d) Inventory Valuation and Revenue Recognition
Inventories are recorded at the lower of standard cost (which approximates
average cost) or market (net realizable value). Inventory cost includes raw
materials, direct labor and manufacturing overhead costs. Sales are recognized
when merchandise is shipped to customers.
(e) Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation, including
amortization of capitalized leases, is computed using the straight-line method
over the estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Buildings................................. 20-25 years
Leasehold improvements and leasehold Shorter of the lease term or
equipment................................ the useful life of the asset
Machinery and equipment................... 3-7 years
</TABLE>
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is recognized in income for the period. The cost of maintenance and
repairs is charged to income as incurred; significant renewals and betterments
are capitalized.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
C-6
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 29, 1998, November 30, 1997 and December 1, 1996
(g) Foreign Currency Translation Adjustment
The balance sheet accounts of West Coast Apparel, Inc. are translated using
the exchange rate in effect at the balance sheet date and using the Canadian
dollar as the functional currency. Results of operations are translated using
the average exchange rate prevailing throughout the period. Unrealized
exchange rate gains and losses resulting from translating foreign currency
assets and liabilities into U.S. dollars are accumulated as a foreign currency
translation adjustment in stockholders' equity. Gains or losses from foreign
currency transactions for the period are included in "other expenses, net" in
the accompanying consolidated statements of operations.
(h) Amortization of Intangible Assets and Excess of Purchase Price over Fair
Value of Assets Acquired
Amortization is calculated on a straight-line basis over the following
periods:
<TABLE>
<S> <C>
Intangible assets:
Trade name............................................ 40 years
Debt issuance costs................................... 5 years
Excess of purchase price over fair value of assets
acquired............................................... 20 and 30 years
</TABLE>
The Company continually evaluates the recoverability of goodwill as well as
other intangible assets by assessing whether the amortization of the balance
over the remaining life can be recovered through expected and undiscounted
future results. As part of this review, the Company takes into consideration
any events and circumstances which might have diminished the fair values.
Remaining unamortized balances were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Intangible assets:
Trade name............................................. $ 218 226
Debt issuance costs.................................... 161 184
Excess of purchase price over fair value of assets
acquired................................................ 10,226 10,987
------- ------
$10,605 11,397
======= ======
</TABLE>
(i) Postretirement Benefits
The cost of postretirement benefits other than pensions are recognized in
the financial statements. Koret has no ongoing postretirement benefit plan
covering active employees; therefore, the entire accumulated postretirement
benefit obligation relates to retirees.
(j) Foreign Exchange Forward Contracts
Koret enters into foreign exchange forward option contracts to manage
exposure to currency rate fluctuations. At the time of recording, these
exchange agreements qualify for accounting as designated hedges. The realized
and unrealized gains and losses on these contracts are deferred and included
as a component of the related transaction. Koret does not engage in
speculation.
(k) Accounting for Stock Options
Prior to December 2, 1996, the Company accounted for its stock options in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded only if the current market
price of the
C-7
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 29, 1998, November 30, 1997 and December 1, 1996
underlying stock exceeded the exercise price on the date of grant. On December
2, 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of the grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income disclosures for employee stock option grants made
in fiscal 1996 and future years as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions required by SFAS No. 123 when the Company grants additional stock
options.
(l) Use of Estimates
Koret's management has made a number of estimates and assumptions relating
to the reporting of assets and liabilities, and revenues and expenses and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
amounts may ultimately differ from those estimates.
(m) Reclassifications
Certain 1997 and 1996 amounts not affecting net income have been
reclassified to conform to the 1998 consolidated financial statement
presentation.
(2) Organization
The Company, through its subsidiaries, is engaged in the design, manufacture
and wholesale of quality women's apparel and leather accessories. Koret also
operates several retail outlet stores. The Company distributes its products
throughout the United States and Canada.
On December 4, 1995, two of the Company's subsidiaries located in Canada
(Mr. Jax Fashions, Inc. and Koret Canada, Inc.) amalgamated into one company,
West Coast Apparel, Inc. An amalgamation, under Canadian law, is similar to a
merger, but results in the formation of a new company. The amalgamated company
retains all the characteristics of the predecessor companies such as ownership
of assets, obligations to creditors and tax bases.
(3) Due from Factors and Trade Accounts Receivable, Net
The Company's subsidiaries have each entered into factoring agreements,
whereby substantially all accounts receivable are transferred to the factor on
a nonrecourse basis, subject to credit approvals from the factor. These
transfers are accounted for as sales as the Company's subsidiaries have
surrendered control of these receivables in exchange for other consideration.
When transferred, these assets are beyond the reach of the Company even in
bankruptcy. The factor has the right, free of any conditions, to pledge or
exchange the accounts receivable and the Company has no ability to repurchase
the accounts receivable once factored.
In connection with the debt restructuring (note 7), the factoring commission
charged on the gross receivables transferred to the factor was changed from
0.50% to 0.45% during 1998. Additionally, the method of
applying credit for the collection of accounts receivable was modified from an
average maturity date method to an actual collection method. The Company is
permitted to receive, at the factors' discretion, advances on the uncollected
receivables. Interest is charged on such advances at the prime rate plus 0.25%
per annum or LIBOR plus 1.5% per annum. The weighted average interest rate for
advances was 7.83%, 8.15% and 8.00% for fiscal years ended 1998, 1997 and
1996, respectively. In order to minimize interest expense, advances are
requested as and when needed to meet immediate working capital requirements.
C-8
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 29, 1998, November 30, 1997 and December 1, 1996
Due from factors and trade accounts receivable consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Receivables transferred to factors................... $ 51,516 58,437
Advances from factors................................ (46,736) (52,710)
-------- -------
Due from factors................................. 4,780 5,727
Trade accounts receivable............................ 309 914
Allowances for discounts, returns and doubtful
accounts............................................ (2,547) (3,413)
-------- -------
$ 2,542 3,228
======== =======
</TABLE>
(4) Inventories
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Raw materials.............................................. $ 3,316 5,332
Work in process............................................ 10,092 12,201
Finished goods............................................. 39,263 40,179
------- ------
$52,671 57,712
======= ======
</TABLE>
(5) Property, Plant and Equipment, Net
Property, plant and equipment, net consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Land.................................................. $ -- 2,810
Buildings and leasehold improvements.................. 7,545 8,657
Machinery and equipment, including equipment under
capital leases of $2,011 and $1,387 in 1998 and 1997,
respectively......................................... 14,844 14,284
-------- -------
22,389 25,751
Accumulated depreciation, including accumulated
amortization of property and equipment under capital
leases of $1,310 and $1,172 in 1998 and 1997,
respectively......................................... (17,248) (16,946)
-------- -------
$ 5,141 8,805
======== =======
</TABLE>
In June 1996, Koret sold its manufacturing facility in Napa, California, for
an amount, net of expenses, totaling approximately $3,659,000 and entered into
an agreement to lease back the facility. The gain of approximately $2,164,000
resulting from this sale was deferred and is being recognized over the 15-year
term of the lease. The remaining unamortized gain at November 29, 1998 and
November 30, 1997 was $1,806,000 and $1,950,000, respectively, which are
included in other non-current liabilities in the accompanying consolidated
balance sheets. During 1998 Koret sold the equipment in its Napa facility to a
sewing contractor who assumed operations of the plant and is currently
subleasing the facility from Koret (note 8).
In October 1998, Koret sold an office building in San Francisco, California,
for a net amount of approximately $3,810,000. At the date of the sale, the
land and building had a net book value of approximately $3,368,000. As part of
the consideration, Koret received a promissory note in the amount of
$3,400,000 secured by a Deed of Trust, which is payable in full on April 1,
1999, with interest at 8.5% per annum. In accordance with FAS 66, Accounting
for Sales of Real Estate, the gain of $442,000 has been deferred as a current
liability on the balance sheet as of November 29, 1998. Koret agreed to lease
the building from the buyer for approximately six months, at which time Koret
will move into its new offices in Oakland, California (note 8).
C-9
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 29, 1998, November 30, 1997 and December 1, 1996
(6) Income Taxes
Koret's operations are conducted in the United States and Canada. The
provision (benefit) for domestic and foreign income taxes attributable to
income (loss) from continuing operations for the years ended November 29,
1998, November 30, 1997 and December 1, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Current:
Federal........................................ $ 6,225 2,990 1,469
State.......................................... 1,740 744 276
Foreign........................................ 53 9 (178)
------- ------ ------
Current income tax expense................... 8,018 3,743 1,567
------- ------ ------
Deferred:
Federal........................................ (1,513) (795) (1,360)
State.......................................... (74) (298) (532)
Foreign........................................ -- -- 21
------- ------ ------
Deferred income tax benefit.................. (1,587) (1,093) (1,871)
------- ------ ------
Provision (benefit) for income taxes............. $ 6,431 2,650 (304)
======= ====== ======
</TABLE>
Koret's provision (benefit) for income taxes differs from the expected
provision (benefit), computed by applying the statutory U.S. federal tax rate
to earnings before taxes.
The following table reconciles the income tax provision (benefit) at the
U.S. statutory rate to that in the financial statements (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- ----
<S> <C> <C> <C>
Taxes computed at 35% for 1998 and 34% for 1997 and
1996.............................................. $5,790 1,685 (634)
State taxes, net................................... 1,089 446 (256)
Change in valuation allowance...................... (779) 493 470
Other permanent differences........................ 331 26 116
------ ----- ----
$6,431 2,650 (304)
====== ===== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities consist of
the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts...................... $ 196 --
Inventory reserves and capitalization................ 2,480 2,502
Other reserves and accruals.......................... 1,618 1,089
Plant and equipment depreciation and basis
differences......................................... 2,234 2,768
Deferred gain........................................ 970 786
Foreign net operating losses......................... 2,650 2,799
Other................................................ 671 87
------- ------
Total gross deferred tax assets.................... 10,819 10,031
Less valuation allowance........................... (2,650) (3,429)
------- ------
Net deferred tax assets............................ 8,169 6,602
Other deferred liabilities............................. (53) (73)
------- ------
Net deferred tax asset............................. $ 8,116 6,529
======= ======
</TABLE>
C-10
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 29, 1998, November 30, 1997 and December 1, 1996
The net change in the total valuation allowance for the years ended November
29, 1998, November 30, 1997 and December 1, 1996 was a decrease of
approximately $779,000, increase of approximately $493,000 and a decrease of
approximately $1,322,000, respectively. Management considers it more likely
than not that the results of future operations will generate sufficient
taxable income to realize the net deferred tax assets.
In connection with the acquisition of Mr. Jax, the Company has certain net
operating loss carryforwards for tax purposes, the utilization of which is
subject to the restrictions under Canadian tax change of control rules. The
Company had foreign net operating losses during 1996, 1997 and 1998 which
begin expiring in 2002. No benefits for these net operating loss carryforwards
have been recognized in the accompanying consolidated financial statements.
(7) Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Term notes, payable in monthly principal installments of
$300,710 through June 1, 2001. Interest is payable
monthly at prime plus 0.75% per annum or LIBOR plus
2.0% per annum. The prime lending rate as of November
29, 1998 was 7.75% per annum. Secured by substantially
all assets............................................. $ 9,165 16,239
Obligations under capital leases (note 8)............... 676 297
Notes payable in quarterly installments of $50,000
commencing May 31, 1995 through February 29, 2000, plus
interest at 5.0% per annum. Unsecured.................. 250 450
Note payable plus accrued interest, due in 2001.
Interest accrues at 9.0% per annum. Unsecured.......... 275 275
------- ------
10,366 17,261
Less current maturities of long-term debt............... (4,167) (3,948)
------- ------
$ 6,199 13,313
======= ======
</TABLE>
The aggregate maturities of all long-term debt, including capital leases,
are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year ending:
1999........................... $ 4,167
2000........................... 3,899
2001........................... 2,300
-------
$10,366
=======
</TABLE>
In 1992, the Company issued warrants (note 13) to purchase a number of
shares of the Company's Class B non-voting common stock to the issuers of
$15,000,000 in subordinated notes. As of June 30, 1992, the warrants' fair
market value were determined to be $3,366,606. Accordingly, a discount was
established with an offsetting credit to additional paid in capital. The
discount was being amortized over the term of the subordinated note, using the
effective interest method. Amortization included in interest expense amounted
to approximately $358,000 and $195,000 for 1997 and 1996, respectively.
C-11
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 29, 1998, November 30, 1997 and December 1, 1996
During 1997, Koret completed a restructuring of its senior debt. This
restructuring included the repayment of the outstanding balances of Canadian
term notes of approximately $3,671,000 and the subordinated note of $5,000,000
as well as the extension of the debt repayments. Additionally, certain terms
of the associated factoring agreement were modified (note 3). The Company
recorded debt issuance costs of $100,000 in connection with this
restructuring. These costs are being amortized over the remaining term of the
notes payable and are included in amortization expense. The unamortized
original issue discount associated with the subordinated debt, amounting to
approximately $260,000 along with the unamortized portion of deferred debt
issuance costs related to notes repaid in full (primarily in Canada) amounting
to approximately $220,000, was written off in connection with this
restructuring.
The agreement for the term loan contains covenants requiring compliance with
various financial ratios and restriction of dividend payments. Additionally,
Koret has pledged substantially all of its assets as collateral under its
revolving and term loan agreement.
(8) Commitments and Contingencies
(a) Leases
Koret is obligated under both long-term capital and operating leases for
facilities, office space and equipment.
At November 29, 1998, obligations under non-cancelable, long-term leases are
as follows (in thousands):
<TABLE>
<CAPTION>
Type of lease
-----------------
Capital Operating
------- ---------
<S> <C> <C>
Fiscal year ending:
1999................................................ $ 390 5,757
2000................................................ 253 5,049
2001................................................ 79 4,316
2002................................................ -- 4,122
2003................................................ -- 3,235
Thereafter.......................................... -- 13,395
----- ------
Total minimum lease payments...................... 722 35,874
======
Amount representing interest.......................... (46)
-----
Present value of net minimum capital lease
payments (note 7)................................ $676
=====
</TABLE>
Certain leases include renewal options and/or contain rental escalation
clauses tied to the consumer price index.
Koret leases a distribution and warehouse facility in Chico, California. The
lease, which commenced on June 1, 1988 and expires in May 2003, contains three
5-year renewal options. The Company has exercised the first two 5-year renewal
options.
Koret entered into a lease for office space in Oakland, California, in
October 1998. This space is to replace the San Francisco office building sold
in 1998 (note 5) and other San Francisco administrative office space, which is
under lease through February 1999. The Oakland lease commences, in part, in
March 1999 and in April 1999, and has a ten-year term, with no renewal
options.
C-12
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 29, 1998, November 30, 1997 and December 1, 1996
On June 6, 1996, Koret concluded a sale and leaseback of real property in
Napa, California (note 5). This lease expires in May, 2011 and contains a 5-
year renewal option. Under the terms of the lease, rent payments increase
every 2.5 years by 7.5%. Total rental expense has been calculated on a
straight-line basis and the difference between cash payments and the straight-
line expense accrued as deferred rent. The unamortized deferred rent, included
as part of other non-current liabilities in the accompanying consolidated
balance sheets, was approximately $161,000 and $242,000 at November 29, 1998
and November 30, 1997, respectively. In 1998 Koret agreed to sublease the Napa
facility to a sewing contractor who has taken over the full operation of the
plant, including the assumption of the terms of the applicable collective
bargaining agreement, and has purchased the related manufacturing equipment
and fixtures. Under the sublease, the contractor will match Koret's lease
payments until April 2003, or through April 2008, if the sublease is extended
by exercise of the renewal option. In 1999, the scheduled lease payments under
the Napa lease are approximately $406,000. Koret has also entered into a
Production Agreement with the sewing contractor, whereby Koret has agreed to
purchase at least one million units per year from the contractor for the
initial five-year term of the sublease.
Rent expense on operating leases amounted to $5,842,333, $5,485,000 and
$5,731,000 for the periods ended November 29, 1998, November 30, 1997 and
December 1, 1996, respectively.
(b) License Agreements
Approximately 98% of the sales of Campaign (or about 11% of Koret's
consolidated net sales) are conducted under license agreements permitting the
sale of designated leather goods using the Polo/Ralph Lauren label. Required
minimum future royalty and design fee payments in 1999 are $1,411,200. The
license agreement expires on December 31, 1999, and Campaign is in the process
of negotiating an extension of the agreement through December 31, 2001.
Campaign is obligated to incur advertising costs based on a percentage of each
year's budgeted net sales.
In 1998, Koret entered into a licensing agreement with Carolee Designs,
Inc., whereby Koret will sell women's handbags, belts, attache cases and
various other small leather goods with the "Carolee" name and trademark within
the United States and Canada. The agreement, which requires minimum annual
royalty payments, has an initial termination date of June 30, 2000, and may be
extended through June 30, 2004. Minimum royalty payments during the first and
second years of the contract are $100,000 and $150,000, respectively.
(c) Employment and Consulting Agreements
At November 29, 1998 three executives of the Company had employment
agreements ending between June 2001 and June 2003.
In connection with the acquisition of Campaign in 1995, the Company entered
into employment and consulting agreements with the sellers. Such agreements
were to extend through 1999 and provide for annual bonuses to be paid based
upon attainment of certain annual and cumulative earnings levels defined in
such agreements. Such bonuses, amounted to approximately $0, $1,027,000 and
$354,000 for the periods ended November 29, 1998, November 30, 1997 and
December 1, 1996, respectively.
The employment agreement was terminated on December 15, 1997. The conditions
of the termination required the Company to pay the employee in two
installments of $500,000 each during fiscal years 1999 and 2000. Such amounts
have been discounted and were $940,000 and $880,000 at November 29, 1998 and
November 30, 1997, respectively. Additionally, in 1998 the employee returned
the 58,824 shares of Class A common stock for the same amount as previously
issued, which was $500,000.
C-13
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 29, 1998, November 30, 1997 and December 1, 1996
(d) Guarantee
Campaign is contingently liable as a guarantor on a mortgage payable to a
local bank for facilities previously leased. The balance outstanding at
November 29, 1998, was approximately $382,000.
Campaign is contingently liable under a letter of credit to guarantee a
$1,817,000 Industrial Development Revenue Bond from the Industrial Development
Authority of the City of Norfolk, as well as an interest reserve of $46,296,
in connection with facilities leased from a related party.
(e) Letters of Credit
Koret was contingently liable for undrawn letters of credit totaling
approximately $10,734,000 at November 29, 1998.
(f) Financial Instruments
Campaign enters into foreign exchange forward options to manage exposure to
currency fluctuations. These agreements qualify as designated hedges of
obligations payable in foreign currencies. At November 29, 1998, Campaign had
outstanding foreign exchange forward options to purchase or sell the
equivalent of $281,000 currency principally denominated in British and Italian
currencies. The contracts generally range from one month to eight months.
Maturities which are consistent with the settlement dates of items being
hedged extend through July 1999.
(g) Litigation
Koret is involved in certain legal matters, both insured and uninsured,
which could have an effect on operations. In the opinion of management, after
consultation with legal counsel, the outcome of these matters will not have a
materially adverse effect on the financial position or the results of
operations of Koret.
(9) Major Customer
One customer accounted for 14%, 13% and 10% of the Company's gross sales in
1998, 1997 and 1996, respectively.
(10) Retirement and Savings Plans
Koret has a defined contribution retirement plan containing a
noncontributory profit sharing plan together with a 401(k) plan. Under the
terms of the 401(k) plan, participating employees may make voluntary
contributions of up to 10% of their earnings, not to exceed $9,500 per
employee. On the first 5% of earnings contributed by an employee, Koret makes
an additional contribution of 50% of the amount, with a maximum of $1,500 per
employee. Contributions by the Company to these plans totaled approximately
$731,000, $747,000 and $279,000 for the periods ended November 29, 1998,
November 30, 1997 and December 1, 1996, respectively.
New Campaign, Inc. sponsors a profit-sharing plan covering all employees who
have completed at least six months of service prior to the beginning of the
plan year. Contributions to the plan are determined by the Board of Directors
of New Campaign, Inc. Contributions for the fiscal years ended November 29,
1998, November 30, 1997 and December 1, 1996 amounted to approximately
$13,000, $135,000 and $50,000, respectively.
C-14
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 29, 1998, November 30, 1997 and December 1, 1996
In accordance with applicable collective bargaining agreements, Koret makes
contributions to jointly administered, multi-employer defined benefit pension
plans on behalf of certain employees. Under the terms of its principal plan,
Koret contributed approximately $993,000, $757,000 and $745,000 during the
periods ended November 29, 1998, November 30, 1997 and December 1, 1996,
respectively. Provisions of the Multi-employers Pension Plan Amendments Act of
1980 require participating employers to assume a proportionate share of multi-
employer plan's unfunded vested benefits in the event of withdrawal from or
termination of the plan. The plan administrator estimates that if Koret were
to withdraw from the plan, its potential liability for unfunded plan benefits
would be approximately $3,942,000 as of December 31, 1997, the date of the
most recent actuarial valuation report.
(11) Related Party Transactions
Certain suppliers of manufacturing services to Koret are controlled by a
director/officer/shareholder of the Company. Management believes all
transactions with these suppliers are carried out at terms similar to those
arranged with other suppliers. During the fiscal years ended November 29,
1998, and November 30, 1997 and December 1, 1996, Koret paid these suppliers
approximately $2,278,000, $2,054,000 and $2,396,000, respectively. At November
29, 1998 and November 30, 1997 the balance due from these suppliers totaled
$40,000 and $1,000, respectively. Koret leases office and warehouse space from
a related party in Virginia, and expensed approximately $300,000 for rent
during 1998, 1997 and 1996.
(12) Postretirement Benefits
The obligation recognized in connection with postretirement benefits,
included as part of other non-current liabilities on the accompanying
consolidated balance sheets, was $400,000 at November 29, 1998 and November
30, 1997, respectively.
For measurement purposes, a 6% medical cost trend rate was assumed for the
calculation of accumulated postretirement benefit obligation as of November
29, 1998. The medical cost trend rate has a significant effect on the amounts
reported. A discount rate of 7.75% was assumed in the present value
calculation. By increasing the assumed medical cost trend rate by 1 percentage
point in each year, the accumulated postretirement benefit obligation at
November 29, 1998 would increase by approximately $27,000.
(13)Stockholders' Equity
(a) Stock Options
During 1988, Koret established a non-qualified stock option plan for certain
officers and employees, which was amended in 1989. Koret has reserved 241,289
shares of Class A common stock for issuance upon exercise of options granted.
As of November 30, 1997, 101,500 options were outstanding and exercisable at
any time through April 30, 1998 for an exercise price of $1.00 per share. In
1992, the remaining 139,789 employee stock options were issued with an
exercise price of $5.00 per share exercisable at any time through April 30,
1998. During 1997, 2,500 of these options were forfeited. No further options
are available for future grant. During 1998, 127,289 employee stock options
were exercised and 111,500 were allowed to expire.
During 1992, under a separate stock option agreement, an officer and
director of the Company was granted options to purchase the 100,000 Class A
common shares. The options have an exercise price of $1.00 per share with no
expiration date. No options have been exercised.
The weighted average exercise prices are $1.00 per share at November 29,
1998 and $2.62 per share at November 30, 1997 and $2.64 per share at December
1, 1996.
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<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 29, 1998, November 30, 1997 and December 1, 1996
(b) Warrants
Common stock purchase warrants for 326,302 shares of Class A common stock
were issued with an exercise price of $1.00 per share on November 26, 1986
which were due to expire on November 30, 1997. At November 30, 1997, 70,464 of
these warrants expired and 255,838 warrants had been exercised.
In connection with a subordinated credit agreement dated June 30, 1992, the
Company issued warrants for the right to purchase, at an aggregate price of
$550,099, a number of shares of the Company's Class B non-voting common stock
(convertible to Class A common stock) to the subordinated lender in
consideration for executing the financing agreement. Under the terms of the
agreement, the warrants are exercisable at any time before June 30, 2000. The
effective exercise price of the warrants at the date of grant was
approximately $1.00 per share and is effectively adjusted downward each year
beginning after June 30, 1994 until June 30, 1997. At November 29, 1998, the
effective exercise price of the warrants was approximately $0.91 per share. No
warrants were exercised as of November 28, 1998. The fair market value of the
warrants at the date of issuance, as determined through an independent
valuation, computed under the non-marketable minority interest basis, was
determined to be $3,366,606. These Warrants contain certain "put" and "call"
provisions whereby the warrantholder can, at any time after June 30, 1999,
require the Company to repurchase all of the underlying warrant stock at the
then fair market value; and the Company can, at any time, require the
warrantholder to sell back to the Company all of the underlying warrant stock
at the then fair market value.
(14) Earnings Per Share
Earnings per share have been computed in accordance with SFAS No. 128. Basic
earnings per share considers only weighted average common shares outstanding
while diluted earnings per share considers the dilutive effects of stock
options and warrants. A reconciliation of basic earnings per common share and
diluted earnings per common share follows (dollars and shares in thousands
except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------- ----- ------
<S> <C> <C> <C>
Basic earnings per share computation:
Numerator:
Net income (loss)............................... $10,113 2,307 (1,560)
------- ----- ------
Denominator:
Weighted average common shares outstanding........ 7,947 7,694 7,671
------- ----- ------
Basic earnings (loss) per share................. $ 1.27 0.30 (0.20)
======= ===== ======
Diluted earnings per share computation:
Numerator:
Net income (loss)............................... 10,113 2,307 (1,560)
------- ----- ------
Denominator:
Weighted average common shares outstanding........ 7,947 7,694 7,671
Impact of stock options........................... 82 168 --
Impact of warrants................................ 502 498 --
------- ----- ------
8,531 8,360 7,671
------- ----- ------
Diluted earnings (loss) per share............... $ 1.19 0.28 (0.20)
======= ===== ======
</TABLE>
In 1996, the impact of stock options and warrants on diluted earnings per
share is anti-dilutive, therefore, such stock options and warrants do not
adjust the denominator for 1996.
C-16
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
November 29, 1998, November 30, 1997 and December 1, 1996
(15) Sale of Counterparts
In March 1998, Koret entered into an Agreement to sell all trademarks, trade
names, designs, copyrights and other intellectual property of its wholly owned
subsidiary, Counterparts Sportswear, Inc., for $2.5 million. The Agreement,
which was consummated on March 16, 1998, provided for the immediate transfer
of all intellectual property, as well as the transfer of inventories as such
inventories are shipped to customers during the transition period. In
consideration, Koret received $2.4 million, as well as periodic payments
during the transition period to cover the cost of the inventory shipped on
behalf of the Purchaser and services performed on behalf of the Purchaser.
Koret retained the risk of ownership of the existing inventory until it was
shipped to the customer. During the transition period, Koret continued to
provide operational support to the Purchaser for a fee. Counterparts' net
sales during the fiscal years ended November 29, 1998, November 30, 1997 and
December 1, 1996 amounted to approximately $6.5 million, $51.9 million and
$57.1 million, respectively.
On December 11, 1998 the Purchaser filed for relief under Chapter 11 in the
United States Bankruptcy Court, Central District of California, Los Angeles
Division. Koret had a receivable from the Purchaser of approximately $3.4
million which has been fully provided for as of November 29, 1998. In 1998,
Koret has recorded a total loss on the sale of Counterparts of $1.6 million.
The loss includes the gain on sale of the trademarks, trade names, and
intellectual property of $2.5 million, the bad debt expense of $3.4 million
and the
sum of all other fees earned and expenses incurred since the sale of $0.7
million. In early 1999, the Purchaser's senior secured creditor conducted an
auction of substantially all of the business assets of the Purchaser. Koret
has commenced legal action against the Purchaser's officers and directors, as
well as against the Purchaser's senior secured creditor. There can be no
assurance that Koret will obtain a judgment in either of these actions or
ultimately collect any of the amounts owed.
(16) Plan of Merger
On December 1, 1998, Koret entered into an agreement and plan of merger with
Kellwood Company (Kellwood). Kellwood designs, manufactures and markets
apparel and soft camping goods and is based in St. Louis, Missouri. Kellwood's
common stock is traded on the New York Stock Exchange. Under the agreement and
plan of merger, Koret will become a wholly owned subsidiary of Kellwood and
Koret stockholders will receive 0.6025 shares of Kellwood common stock in
exchange for each share of Koret common stock held. Consummation of the merger
is expected to occur during the spring of 1999, and is subject to various
conditions, including but not limited to approval by the shareholders of the
Company and Kellwood. It is expected the merger will be accounted for as a
pooling of interests.
C-17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Koret has maintained and improved its market share over the past few years
in spite of the merger or consolidation of a number of its customers and
generally flat demand in the apparel industry for moderate and popular priced
products during the period. Koret management believes that consumer
satisfaction with Koret's designs and coordinated collections, Koret's
acquisition and development of better and bridge priced product lines through
its Mr. Jax division, and Koret's disposition of its Counterparts division,
has enabled Koret to emerge from a difficult period for the apparel industry
in good financial condition.
Fiscal 1998 Compared to Fiscal 1997
Net sales for the fiscal year ended November 29, 1998 ("Fiscal 1998") were
approximately $290.2 million, a 1.8% decrease from approximately $295.4
million for the fiscal year ended November 30, 1997 ("Fiscal 1997"). This
decrease was principally due to a $45.4 million drop in the sales of Koret's
Counterparts division, which was sold in March 1998. This was offset
principally by an increase of approximately $34.1 million in sales of Koret of
California's product lines to U.S. retailers, and additional sales of
approximately $6.1 million through Koret's retail outlet stores. The large
sales increase for Koret of California was due to an increase in the number of
units shipped to several larger retailers (from approximately 10.3 million
units in Fiscal 1997 to approximately 12.4 million units in Fiscal 1998), with
a slight decrease in the overall average selling price.
Gross margin, as a percentage of net sales, for Fiscal 1998 was
approximately 30.9%, compared with approximately 25.6% for Fiscal 1997. This
increase was principally due to the sale of Koret's Counterparts business in
March 1998, as Counterparts operated at a significantly lower gross margin
than Koret's other divisions. In addition, Koret of California's gross margin
improved due to lower manufacturing costs for products made in Asia and
Mexico.
Selling, general and administrative expenses for Fiscal 1998 were
approximately $65.0 million, a 3.3% increase over approximately $62.9 million
for Fiscal 1997. In addition to general price, wage and salary increases,
approximately $2.9 million of the increase in expenses was attributable to the
expansion of Koret's retail outlet store operations. Approximately $0.8
million of additional expenses were incurred in the development and marketing
of new products in connection with its license agreement with Carolee Designs,
Inc. Also, approximately $0.7 million of severance costs, which were paid in
1998 upon the closure of Koret of California's manufacturing facilities, also
contributed to the increase in expenses. These increases were offset in part
by a reduction of approximately $4 million in expenses related to the
Counterparts division, which was sold in March 1998.
Amortization expense for Fiscal 1998 was approximately $0.7 million, a 47.8%
decrease from approximately $1.4 million for Fiscal 1997. This decrease was
principally due to the write-off in 1997 of approximately $0.5 million of
capitalized debt issuance costs in connection with the restructuring of long-
term debt in which certain notes were repaid in full ahead of the original
repayment schedule.
Interest expense, net of interest income, for Fiscal 1998 was $5.2 million,
a 12% decrease from approximately $5.9 million for Fiscal 1997. This decrease
was principally due to a reduction in bank borrowings, in part due to the
reduced need for working capital financing for the Counterparts' operation.
In Fiscal 1998 Koret recognized a loss of $1.6 million on the sale of its
Counterparts division. (See discussion in "Sale of Counterparts")
Other expense, net for Fiscal 1998 was approximately $0.6 million, compared
with approximately $0.3 million for Fiscal 1997. Other expense principally
represented foreign currency losses from Koret's Canadian operations, due to
the repayment of U.S. dollar obligations with Canadian dollars.
C-18
<PAGE>
The effective tax rate was approximately 38.9% for the Fiscal 1998, and was
approximately 53.5% for Fiscal 1997. The decrease in the effective tax rate
was principally due to a shift from a pre-tax loss for the Canadian operations
in Fiscal 1997, for which no tax benefit was recognized, to a small taxable
profit in Fiscal 1998, for which net operating loss carryforwards are
available.
Fiscal 1997 Compared to Fiscal 1996
Net sales for the fiscal year ended November 30, 1997 ("Fiscal 1997") were
approximately $295.4 million, a 13.9% increase over approximately $259.4
million for the fiscal year ended December 1, 1996 ("Fiscal 1996"). This
increase was principally due to increased sales of approximately $30 million
for Koret of California's product lines to U.S. retailers, and approximately
$3.8 million in increased sales through Koret's expanded outlet stores, along
with a $6.7 million sales increase for New Campaign, offset in part by a
decline of approximately $5.2 million in sales by Koret's Counterparts
division. The large sales increase for Koret of California was due to an
increase in the number of units shipped to several larger retailers (from
approximately 8.8 million units in 1996 to approximately 10.3 million units in
1997), along with a slight increase in the overall average selling price.
Gross margin, as a percentage of net sales, for Fiscal 1997 was
approximately 25.6%, compared with approximately 24.4% for Fiscal 1996. This
increase was principally due to lower delivery costs associated with imports,
and increased manufacturing efficiencies for Koret of California products,
combined with higher volume.
Selling, general and administrative expenses for Fiscal 1997 were $62.9
million, a 7.6% increase over approximately $58.5 million for Fiscal 1996.
Approximately $1.9 million of this increase was due to higher expenses (such
as advertising and distribution costs) which tend to vary with sales volume,
as well as approximately $1.9 million in higher accruals for bonuses and
profit sharing plan contributions, and approximately $0.7 million associated
with the opening and operating costs of six additional outlet stores.
Amortization expense for Fiscal 1997 was $1.4 million, a 32.7% increase over
approximately $1.0 million for Fiscal 1996. This increase was principally due
to the write-off in Fiscal 1997 of approximately $0.5 million of capitalized
debt issuance costs in connection with the restructuring of long-term debt in
which certain notes were prepaid in full ahead of the original repayment
schedule.
Interest expense, net of interest income, for Fiscal 1997 was $5.9 million,
an 8.0% increase over approximately $5.5 million for Fiscal 1996. This
increase was principally due to higher working capital requirements associated
with the higher sales volume in Fiscal 1997.
The effective tax rate was approximately 53.5% for Fiscal 1997, and
approximately 16.3% (benefit) for Fiscal 1996. The increase in the effective
tax rate is due to an increase in taxable income domestically in 1997, while
still incurring a pre-tax loss in Canada for which no tax benefit was
recognized. In addition, the valuation allowance included in the determination
of the deferred tax asset was reduced in 1996.
Liquidity and Capital Resources
Koret has a revolving and term loan agreement with BNY Financial
Corporation, its principal lender, which agreement expires on July 1, 2002.
Pursuant to a series of factoring agreements, this lender also acts as the
Company's factor for all of its trade receivables, which are transferred to
the factor on a non-recourse basis, subject to credit approvals from the
factor. Under this arrangement, Koret has a term loan and draws down working
capital advances (up to an aggregate maximum of $75 million) and opens letters
of credit (up to a maximum of $18 million) against the facility in amounts
determined by a formula based on factored receivables, inventory and other
collateral, which advances and term loan are secured by the Company's assets.
At November 29, 1998, the factoring charge was 0.45% of the gross receivables
assigned and the interest on advances was at LIBOR plus one and one-half
percent. At November 29, 1998 Koret's outstanding advances under the revolving
C-19
<PAGE>
loan amounted to approximately $47 million, and the outstanding balance on the
term loan amounted to approximately $9 million. At November 29, 1998, the
amount of outstanding under letters of credit was approximately $10.7 million.
The factoring agreements, which also expire on July 1, 2002, include
provisions for minimum aggregate volume of $200 million annually.
Koret's operating activities provided net cash flow of approximately $18.2
million for Fiscal 1998 and used cash of approximately $38.4 million during
Fiscal 1997. The increase in net cash from operations in 1998 as compared to
1997 was principally attributable to increases in factored accounts receivable
and inventory in 1997, which did not recur in 1998. To a large extent, the
increase in receivables transferred to the factor was the result of a change
during 1997 in the accounting methodology used by the factor in applying
credit for the collection of accounts receivable. The method was changed in
Fiscal 1997 from an average maturity date method to an actual collection
method. Inventory increased in 1997, in part to accommodate the increased
volume in sales orders and the increase in the number of outlet stores either
opened, or scheduled to be opened in 1998. In Fiscal 1998 accounts receivable
and inventory decreased slightly, due to the sale of Counterparts early in
1998. In addition, net income for Fiscal Year 1998 was $7.8 million higher
than in Fiscal 1997.
Koret's investing activities used net cash of approximately $1.5 million in
Fiscal 1998 and approximately $1.7 million during the Fiscal 1997. Capital
expenditures during Fiscal 1998 consisted largely of purchases of computer
equipment, and leasehold improvements, principally in connection with the
expansion of the retail outlet store operation.
Koret's financing activities used net cash of approximately $16.1 million in
Fiscal 1998 and provided net cash in financing activities of approximately
$39.9 million in Fiscal 1997. The decrease in net cash provided by financing
activities in 1998 as compared to 1997 is primarily attributable to an
increase in 1997 in the net advances and borrowings under the revolving loan
with its lender.
Year 2000
Koret has a Year 2000 compliance project that addresses its information
technology systems and certain equipment which contain micro-processors. The
Company has identified three phases of its Year 2000 project: 1) affected
systems inventory, 2) problem assessment, and 3) remediation and testing. As
of February 12, 1999, the inventory and assessment phases have been completed,
and 85% of the remediation phase has been completed. Of the 15% still
outstanding, 6% is currently in testing, and 9% is currently in programming.
Final completion is expected by April 30, 1999. Any required remediation or
replacement of "non-IT" systems, including telephone systems and security
systems and equipment is expected to be completed by June 30, 1999. The
Company does not expect the costs associated with ensuring Year 2000
compliance to have a material impact on the Company's business, operations or
financial condition. All costs associated with Year 2000 compliance are being
funded with cash flow generated from operations and are being expensed as
incurred.
To date, the expenses incurred by Koret in order to become Year 2000
compliant, including computer software costs, have been approximately $0.1
million and the current additional estimated costs to complete such
remediation is expected to be approximately $0.1 million. All such costs,
other than purchased software packages, have been and will continue to be
expensed as incurred. The Year 2000 efforts have not caused a significant
delay to other information technology system related projects.
If some or all of the Company's remediated or replaced internal computer
systems and equipment fail the testing phase, or if any software applications
or embedded microprocessors critical to the Company's operations are
overlooked in the assessment and remediation phases, there could be a material
adverse effect on the Company's results of operations, liquidity and financial
condition of a magnitude which the Company has not fully analyzed.
The Company is in the process of requesting written confirmation from what
it believes to be all of its significant trading partners such as customers,
suppliers, banks, shipping companies and insurance companies to
C-20
<PAGE>
assess their Year 2000 compliance status, and is taking steps to determine the
extent to which the Company's interface systems are vulnerable to those third
parties' failure to remedy their own Year 2000 issues. There can be no
assurance that the systems of other companies with which the Company does
business will be timely converted or that any such failure to upgrade or
convert would not have an adverse effect on the Company's systems and
operations.
The Company believes its most reasonably likely worst case scenario, with
respect to its own systems, would involve particular system modules which are
not fully or properly remediated. In this case, the Company would retain the
appropriate resources to correct the problems. Until necessary system
modifications could be made, manual procedures would be employed. Such a
situation may result in additional remediation costs to be incurred and/or
delays in operating activities. With respect to its key trading partners, the
Company is in the process of identifying alternative suppliers for significant
raw material needs, in the event that current key suppliers prove unable to
satisfactorily address Year 2000 issues and supply necessary raw materials.
The Company believes its contractors' most significant challenges will relate
to transportation and infrastructure of the foreign countries in which they
operate. Alternative contractors will be identified if current key contractors
are unable to satisfactorily address Year 2000 issues and manufacture product.
Should customers be unable to satisfactorily address Year 2000 issues, manual
procedures would be employed to ensure key functions such as ordering and
invoicing could be continued.
If the vendors of the Company's most important goods and services, or
suppliers of the Company's necessary energy, telecommunications and
transportation needs, fail to provide the Company with the materials and
services which are necessary to produce, distribute and sell its products, the
electrical power and other utilities to sustain its operations, or reliable
means of obtaining supplies and transporting products to its customers, such
failures could have a material adverse effect on the results of operations,
liquidity and financial condition of the Company.
The Company presently believes that the Year 2000 issue will not pose
significant operational problems for its computer systems. However, the
Company does not presently have a formal contingency plan in the event its
Year 2000 compliance program is unsuccessful or not completed on a timely
basis. The Company has not had any independent verification and validation to
assure the reliability of the risk and cost estimates disclosed above.
Sale of Counterparts
In March 1998, Koret entered into an Agreement to sell all trademarks, trade
names, designs, copyrights and other intellectual property of its wholly-owned
subsidiary, Counterparts Sportswear, Inc. The Agreement, which was consummated
on March 16, 1998, provides for the immediate transfer of all intellectual
property, as well as the transfer of inventories as such inventories are
shipped to customers during the transition period. In consideration, Koret
received $2.4 million, as well as periodic payments during the transition
period to cover the cost of the inventory shipped on behalf of the Purchaser
and services performed on behalf of the Purchaser. Koret retained risk of
ownership of existing inventory until it is shipped to the customer. During
the transition period, Koret continued to provide operational support to the
Purchaser for a fee.
Counterparts' net sales during the fiscal years ended November 29, 1998,
November 30, 1997 and December 1, 1996 amounted to approximately $6.5 million,
$51.9 million and $57.1 million, respectively.
On December 11, 1998 the Purchaser filed for relief under Chapter 11 in the
United States Bankruptcy Court, Central District of California, Los Angeles
Division. Koret had a total receivable from the Purchaser of approximately
$3.4 million, which has been fully provided for as of November 29, 1998. Koret
has recorded a total loss on the sale of Counterparts of $1.6 million in
Fiscal 1998.
In early 1999, the Purchaser's senior secured creditor conducted an auction
of substantially all the business assets of the Purchaser. Koret has commenced
legal action against the Purchaser's officers and directors, as well as
against the Purchaser's senior secured creditor. There can be no assurance
that Koret will obtain a judgment in either of these actions or ultimately
collect any of the amounts owed.
C-21
<PAGE>
ANNEX D
APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing pursuant
to (S)228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S)251 (other than a merger effected pursuant to
(S)251(g) of this title), (S)252, (S)254, (S)257, (S)258, (S)263 or (S)264 of
this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S)251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all
D-1
<PAGE>
or substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or consented to the
merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to (S)228 or
(S)253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise
D-2
<PAGE>
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms
offered upon the merger or consolidation. Within 120 days after the effective
date of the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate number of
shares not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after such stockholder's written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted such stockholder's
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that such
stockholder is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of any
state.
D-3
<PAGE>
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of such stockholder's demand for an appraisal and an acceptance of the merger
or consolidation, either within 60 days after the effective date of the merger
or consolidation as provided in subsection (e) of this section or thereafter
with the written approval of the corporation, then the right of such
stockholder to an appraisal shall cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 339,
L.'98, eff. 7-1-98.)
D-4
<PAGE>
Exhibit 5.1
March 24, 1999
Exhibit 5.1
Kellwood Company
600 Kellwood Parkway
P.O. Box 14374
St. Louis, Missouri 63178
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel to you (the "Company") in connection with the
preparation of a registration statement on Form S-4 (the "Registration
Statement"), pertaining to the registration of an offering of up to 5,241,000
shares of the Company's Common Stock, par value $.01 per share (the "Shares").
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate records,
and other instruments as we have deemed necessary for the purposes of the
opinion, including the following: (a) the Certificate of Incorporation of the
Company, together with all amendments thereto; (b) the Bylaws of the Company, as
amended; and (c) resolutions of the Company adopted by the Board of Directors of
the Company at its November 11, 1998 meeting. For purposes of this opinion, we
have assumed the authenticity of all documents submitted to us as originals, the
conformity to the original documents of all documents submitted to us as copies,
and the authenticity of the originals of all documents submitted to us as
copies. We have also assumed the genuineness of the signatures on documents
reviewed by us and the legal capacity of natural persons.
Based on the foregoing, we are of the opinion that the Shares, when
duly executed and delivered by authorized officers of the Company and issued
upon receipt of the consideration to be paid therefor, will be legally issued,
fully paid, and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this Firm under the section
entitled "Legal Opinions" in the Registration Statement.
<PAGE>
Kellwood Company
March 24, 1999
Page 2
This opinion is furnished to you in connection with the filing of the
Registration Statement, and is not to be used, circulated, quoted, or otherwise
relied upon for any other purposes.
Very truly yours,
/s/ McDermott, Will & Emery
McDermott, Will & Emery
<PAGE>
Exhibit 8.1
March 8, 1999
Kellwood Company Koret, Inc. and its Stockholders
600 Kellwood Parkway 611 Mission Street
Chesterfield, Missouri 63178 San Francisco, California 94105
Re: Kellwood Company/Koret, Inc.
Dear Gentlemen:
You have asked our opinion as to the material United States
federal income tax consequences of the merger (the "Merger") of Kellwood
Acquisition II Corporation, a Delaware corporation ("Merger Sub") and a
wholly-owned subsidiary of Kellwood Company, a Delaware corporation ("Kellwood")
with and into Koret, Inc., a Delaware corporation ("Koret"), pursuant to an
Agreement and Plan of Merger dated as of December 1, 1998 (the "Agreement").
Capitalized terms not otherwise defined herein shall have the meaning set forth
in the Agreement.
In formulating our opinion, we have examined the Agreement,
the Joint Proxy Statement/Prospectus of Kellwood and Koret (the "Proxy
Statement") and such other documents as we deem relevant for purposes of this
opinion. In addition, we have assumed that (i) the Merger will be consummated in
the manner contemplated by the Proxy Statement and in accordance with the
provisions of the Agreement, (ii) the statements concerning the Merger set forth
in the Proxy Statement and Agreement including the purposes of the parties for
consummating the Merger are accurate and complete, and (iii) the representations
made to us by Kellwood and Koret in connection with the Merger (in the form of
officers' certificates dated, respectively, March 8, 1999 and March 5, 1999) are
accurate.
Based upon the foregoing, we are of the opinion that, for
United States federal income tax purposes:
(i) the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended and
Koret, Merger Sub and Kellwood will each be a party to that reorganization
within the meaning of Section 368(b) of the Code;
<PAGE>
Kellwood Company
March 8, 1999
Page 2
(ii) no gain or loss will be recognized by Kellwood,
Merger Sub or Koret as a result of the Merger;
(iii) no gain or loss will be recognized by the stockholders
of Koret upon the conversion of their shares of Koret Common Stock into shares
of Kellwood Common Stock pursuant to the Merger, except with respect to cash, if
any, received in lieu of fractional shares of Kellwood Common Stock;
(iv) the aggregate tax basis of shares of Kellwood common
stock received in exchange for shares of Koret common stock pursuant to the
merger (including a fractional share of common stock for which cash is received)
will be the same as the aggregate tax basis of the shares of Koret common stock;
and
(v) a Koret stockholder who receives cash in lieu of a
fractional share of Kellwood common stock will recognize gain or loss equal to
the difference, if any, between the stockholder's tax basis in the fractional
share and the amount of cash received.
The opinions expressed above with respect to tax consequences
of Koret stockholders apply to Koret stockholders who hold their shares of Koret
stock as a capital asset within the meaning of Section 1221 of the Code. This
opinion relates solely to the United States federal income tax consequences of
the Merger and no opinion is expressed as to the tax consequences under any
foreign, state or local tax law. Furthermore, our opinion is based on current
federal income tax law and administrative practice, and we do not undertake to
advise you as to any changes after the date hereof in federal income tax law or
administrative practice that may affect our opinion.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to this Firm in the summary
and under the section entitled "Material Federal Income Tax Consequences" in the
Registration Statement.
Very truly yours,
/s/ McDermott, Will & Emery
McDermott, Will & Emery
<PAGE>
EXHIBIT 21.1
PARENTS AND SUBSIDIARIES
Kellwood Company and its subsidiaries* as of March 24, 1999 are as follows:
State (Country) of Percentage of Voting
Name of Company Incorporation Securities Owned
- --------------- ------------------ --------------------
Kellwood Company Delaware Parent
American Recreation Products, Inc. Delaware 100%
Kellwood Asia Limited Hong Kong 100%
Smart Shirts Limited Hong Kong 100%
South Asia Garment Limited Hong Kong 100%
KWD Holdings, Inc. Delaware 100%
Robert Scott & David Brooks
Outlet Stores, Inc. Delaware 100%
Tri-W Corporation North Carolina 100%
Halmode Apparel, Inc. Delaware 100%
Fritzi of California, Inc. Delaware 100%
* Some of the above subsidiaries also have subsidiaries which are not listed
because, in the aggregate, they are not considered to be significant.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Kellwood Company
of our report dated May 28, 1998, which appears on page 16 of Kellwood Company's
1998 Annual Report to Shareholders, which is incorporated by reference in its
Annual Report on Form 10-K for the year ended April 30, 1998. We also consent to
the incorporation by reference of our report on the Financial Statement
Schedule, which appears on page 13 of such Annual Report on Form 10-K. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 24, 1999
<PAGE>
Exhibit 23.2
The Board of Directors
Koret, Inc.:
We consent to the inclusion of our report dated February 4, 1999, with respect
to the consolidated balance sheets of Koret, Inc. and subsidiaries as of
November 29, 1998 and November 30, 1997 and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the years in the
three year period ended November 29, 1998 in the registration statement (No.
333-XXXX) on Form S-4 of Kellwood Company and to the reference to our firm under
the heading "Experts" in that registration statement.
/s/ KPMG LLP
San Francisco, California
March 23, 1999
<PAGE>
Exhibit 24.1
CERTIFICATION
I, Thomas H. Pollihan, do hereby certify that I am the only elected, qualified
and acting Secretary of Kellwood Company, a corporation duly organized under the
laws of the State of Delaware, having its principal place of business at 600
Kellwood Parkway, Chesterfield, Missouri 63017. I do further certify that the
following is a true and correct copy of resolutions duly adopted at a meeting of
the Board of Directors of Kellwood Company held on November 11, 1998, pursuant
to proper notice, a quorum being present, and that said resolutions have not
been rescinded or modified and are consistent with the Certificate of
Incorporation and By-Laws of said corporation.
WHEREAS, the Board of Directors (the "Board") of Kellwood Company (the
"Corporation"), based upon its judgment and upon the advice of Credit
Suisse First Boston, financial advisors to the Board, deems it to be
desirable and in the best interest of the Corporation to enter into
that certain Merger Agreement by and among the Corporation, a
wholly-owned Delaware subsidiary of the Corporation ("Subsidiary"),
Koret, Inc., a Delaware corporation ("Koret"), and the stockholders of
Koret incorporating the terms and conditions of the merger as presented
to the Board (the "Merger Agreement"), pursuant to which Subsidiary
will merge into Koret and Koret will be the surviving corporation of
such merger (the "Merger") and will continue its corporate existence
under the laws of the State of Delaware under the name Koret, Inc.; and
WHEREAS, the terms of the Merger Agreement require the Corporation to
prepare and file a registration statement under the Securities Act of
1933 and the rules and regulations promulgated thereunder (the
"Securities Act") for the purpose of registering the Common Stock for
resale by the stockholders of Koret;
NOW, THEREFORE, BE IT RESOLVED, that the Merger of Subsidiary with and
into Koret in accordance with the terms and conditions of the Merger
Agreement is hereby authorized and approved in all respects, and each
of the Chairman, the President and Chief Executive Officer, the Vice
Chairman, any Vice President, Treasurer, or Secretary (each, a "Proper
Officer") is hereby authorized, empowered and directed to execute and
deliver, on behalf of the Corporation, the Merger Agreement and such
other documents that are required to be executed and delivered to
consummate the transactions contemplated by the Merger Agreement
(collectively, the "Transaction Documents"), together with such
changes, additions and omissions thereto as the Proper Officer signing
the Transaction Documents shall approve, such approval to be
conclusively evidence by such Proper Officer's execution and delivery
of the
<PAGE>
Transaction Documents, and such changes, additions and omissions are
hereby further authorized and approved;
FURTHER RESOLVED, that the Proper Officers be, and each of them hereby
is, authorized and empowered, for, in the name of and on behalf of the
Corporation, to prepare or cause to be prepared, and to execute and
file with the Securities and Exchange Commission (the "Commission")
pursuant to the Securities Act, a Registration Statement on Form S-4
(the "Registration Statement"), including all necessary exhibits
thereto, covering the offer and sale of the Common Stock;
FURTHER RESOLVED, that the Proper Officers be, and each of them hereby
is, authorized and empowered, for, in the name of and on behalf of the
Corporation, to prepare or cause to be prepared, and to execute and
file with the Commission pursuant to the Securities Act, such
amendments (including post-effective amendments) and supplements and
exhibits to the Registration Statement and to any prospectus schedules
and documents, and to take any and all such other action, as they may
deem necessary or appropriate in order that the Registration Statement
may become and continue to be effective in compliance with and pursuant
to the Securities Act;
FURTHER RESOLVED, that the Proper Officers be, and each of them hereby
is, authorized and empowered, for, in the name of and on behalf of the
Corporation, to prepare or cause to be prepared and to execute, verify
and file such other applications, declarations, powers of attorney or
other instruments or documents, and any amendment or amendments
thereto, together with any and all exhibits and instruments relating
thereto that, in the judgment of the director or officer taking such
action, are necessary or advisable in order to obtain any order or
orders, approval or approvals, certificate or certificates of approval
of the Commission or any other regulatory authority that may have
jurisdictions in the premises and in connection with any of the
foregoing matters;
FURTHER RESOLVED, that each Proper Officer who may be required to
execute the Registration Statement (or any amendment thereto) be, and
each hereby is, authorized to execute a power of attorney appointing
Hal J. Upbin and Thomas H. Pollihan; and each of them severally, his
true and lawful attorneys or attorney with power to act with or without
the others and with full power of substitution or resubstitution, to
execute in his name, place and stead, in his capacity as a director
and/or officer of the Corporation, any and all amendments to the
Registration Statement and all instruments necessary or incidental in
connection therewith and to file the same with the Commission and that
each attorney-in-fact shall have full power and authority to do and
perform, in the name and on behalf of such
-2-
<PAGE>
officer and/or director, every act whatsoever necessary or desirable to
be done in connection with the foregoing premises, as fully to all
intents and purposes as such officer and/or director might or could do
in person;
FURTHER RESOLVED, that Thomas H. Pollihan, Vice President, Secretary,
and General Counsel of the Corporation, be, and the same hereby is,
designated as the agent for service to be named in the Registration
Statement and any amendment or post-effective amendment thereto, and
that he is authorized to receive notices and communications with
respect to the registration of the Common Stock under the Securities
Act and to exercise all powers consequent to such designation under the
Securities Act.
Witness my hand as Secretary of said corporation and with its corporate seal
hereunto affixed this 8th day of December, 1998.
/s/ Thomas H. Pollihan
----------------------------------
(CORPORATE SEAL) Thomas H. Pollihan, Secretary
-3-
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of Kellwood Company, (the "Company"), does
hereby constitute and appoint Thomas H. Pollihan or Donald J. Gramke his/her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him/her and in his/her name, place and stead, to sign the
Company's Form S-4 Registration Statement regarding the Koret Merger, and to
file the same, with the Securities and Exchange Commission, granting unto the
attorney-in-fact full power and authority to sign such document on behalf of the
undersigned and to make such filing, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that the attorney-in-fact, or his/her substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: November 12, 1998
/s/ William J. McKenna
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<PAGE>
POWER OF ATTORNEY
The undersigned, a director of Kellwood Company, (the "Company"), does
hereby constitute and appoint Thomas H. Pollihan or Donald J. Gramke his/her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him/her and in his/her name, place and stead, to sign the
Company's Form S-4 Registration Statement regarding the Koret Merger, and to
file the same, with the Securities and Exchange Commission, granting unto the
attorney-in-fact full power and authority to sign such document on behalf of the
undersigned and to make such filing, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that the attorney-in-fact, or his/her substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: November 13, 1998
/s/ Hal J. Upbin
- ----------------------------------
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<PAGE>
POWER OF ATTORNEY
The undersigned, a director of Kellwood Company, (the "Company"), does
hereby constitute and appoint Thomas H. Pollihan or Donald J. Gramke his/her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him/her and in his/her name, place and stead, to sign the
Company's Form S-4 Registration Statement regarding the Koret Merger, and to
file the same, with the Securities and Exchange Commission, granting unto the
attorney-in-fact full power and authority to sign such document on behalf of the
undersigned and to make such filing, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that the attorney-in-fact, or his/her substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: November 12, 1998
/s/ James C. Jacobsen
- ----------------------------------
-6-
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of Kellwood Company, (the "Company"), does
hereby constitute and appoint Thomas H. Pollihan or Donald J. Gramke his/her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him/her and in his/her name, place and stead, to sign the
Company's Form S-4 Registration Statement regarding the Koret Merger, and to
file the same, with the Securities and Exchange Commission, granting unto the
attorney-in-fact full power and authority to sign such document on behalf of the
undersigned and to make such filing, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that the attorney-in-fact, or his/her substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: November 10, 1998
/s/ Raymond F. Bentele
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<PAGE>
POWER OF ATTORNEY
The undersigned, a director of Kellwood Company, (the "Company"), does
hereby constitute and appoint Thomas H. Pollihan or Donald J. Gramke his/her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him/her and in his/her name, place and stead, to sign the
Company's Form S-4 Registration Statement regarding the Koret Merger, and to
file the same, with the Securities and Exchange Commission, granting unto the
attorney-in-fact full power and authority to sign such document on behalf of the
undersigned and to make such filing, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that the attorney-in-fact, or his/her substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: November 11, 1998
/s/ Edward S. Bottum
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<PAGE>
POWER OF ATTORNEY
The undersigned, a director of Kellwood Company, (the "Company"), does
hereby constitute and appoint Thomas H. Pollihan or Donald J. Gramke his/her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him/her and in his/her name, place and stead, to sign the
Company's Form S-4 Registration Statement regarding the Koret Merger, and to
file the same, with the Securities and Exchange Commission, granting unto the
attorney-in-fact full power and authority to sign such document on behalf of the
undersigned and to make such filing, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that the attorney-in-fact, or his/her substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: November 10, 1998
/s/ Kitty G. Dickerson
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<PAGE>
POWER OF ATTORNEY
The undersigned, a director of Kellwood Company, (the "Company"), does
hereby constitute and appoint Thomas H. Pollihan or Donald J. Gramke his/her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him/her and in his/her name, place and stead, to sign the
Company's Form S-4 Registration Statement regarding the Koret Merger, and to
file the same, with the Securities and Exchange Commission, granting unto the
attorney-in-fact full power and authority to sign such document on behalf of the
undersigned and to make such filing, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that the attorney-in-fact, or his/her substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: November 9, 1998
/s/ Leonard A. Genovese
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<PAGE>
POWER OF ATTORNEY
The undersigned, a director of Kellwood Company, (the "Company"), does
hereby constitute and appoint Thomas H. Pollihan or Donald J. Gramke his/her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him/her and in his/her name, place and stead, to sign the
Company's Form S-4 Registration Statement regarding the Koret Merger, and to
file the same, with the Securities and Exchange Commission, granting unto the
attorney-in-fact full power and authority to sign such document on behalf of the
undersigned and to make such filing, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that the attorney-in-fact, or his/her substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: November 24, 1998
/s/ Jerry M. Hunter
- ----------------------------------
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<PAGE>
POWER OF ATTORNEY
The undersigned, a director of Kellwood Company, (the "Company"), does
hereby constitute and appoint Thomas H. Pollihan or Donald J. Gramke his/her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him/her and in his/her name, place and stead, to sign the
Company's Form S-4 Registration Statement regarding the Koret Merger, and to
file the same, with the Securities and Exchange Commission, granting unto the
attorney-in-fact full power and authority to sign such document on behalf of the
undersigned and to make such filing, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that the attorney-in-fact, or his/her substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: November 11, 1998
/s/ James S. Marcus
- ----------------------------------
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<PAGE>
POWER OF ATTORNEY
The undersigned, a director of Kellwood Company, (the "Company"), does
hereby constitute and appoint Thomas H. Pollihan or Donald J. Gramke his/her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him/her and in his/her name, place and stead, to sign the
Company's Form S-4 Registration Statement regarding the Koret Merger, and to
file the same, with the Securities and Exchange Commission, granting unto the
attorney-in-fact full power and authority to sign such document on behalf of the
undersigned and to make such filing, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that the attorney-in-fact, or his/her substitutes, may lawfully do or cause to
be done by virtue hereof.
Dated: November 10, 1998
/s/ Fred W. Wenzel
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<PAGE>
POWER OF ATTORNEY
The undersigned, the Vice President Finance and Chief Financial Officer
of Kellwood Company, (the "Company"), does hereby constitute and appoint Thomas
H. Pollihan or Donald J. Gramke his/her true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him/her and in
his/her name, place and stead, to sign the Company's Form S-4 Registration
Statement regarding the Koret Merger, and to file the same, with the Securities
and Exchange Commission, granting unto the attorney-in-fact full power and
authority to sign such document on behalf of the undersigned and to make such
filing, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all that the attorney-in-fact, or
his/her substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: February 22, 1999
/s/ Gerald M. Chaney
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