SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 8-K/A
AMENDED CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): June 29, 1998.
Commission file number 33-27126
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PEEBLES INC.
Virginia 54-0332635
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(State of Incorporation) (I.R.S. Employer
Identification No.)
One Peebles Street
South Hill, Virginia 23970-5001
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(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code:(804)447-5200
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<PAGE>
Item 7. Financial Statements and Exhibits
(dollars in thousands, except per share amounts)
AMENDMENT TO PRIOR REPORT: This Current Report on Form 8-K/A hereby amends and
makes reference to the registrant's Current Report on Form 8-K dated (and filed)
July 14, 1998 reporting Item 2, Acquisition of Assets, which is incorporated
herein by reference.
(a) HISTORICAL FINANCIAL STATEMENTS: The historical audited financial
statements of the Ira A. Watson Co. for the fiscal years ended January 3, 1998
and December 28, 1996 are included as Exhibit 99 to this Amended Current Report
on Form 8-K/A.
(b) PROFORMA FINANCIAL INFORMATION: On June 29, 1998, a merger (the "Watson
Merger") was consummated whereby the Ira A. Watson Co. ("Watson's"), a Delaware
corporation, became a wholly-owned subsidiary of Peebles Inc. ("Peebles" or the
"Company"), a Virginia corporation. The $4,451 cash purchase price included
$1,848 to the equity holders of Watson's, $1,352 to a financial services company
for the Watson's proprietary credit card accounts receivable, and $1,251 in
acquisition expenses. Proceeds used to fund the Watson Merger were provided
by the Company's Credit Agreement, as amended and restated on June 29, 1998 (the
"1998 Credit Agreement").
The Watson Merger has been accounted for under the purchase method of
accounting. The preliminary allocation of the purchase price is as follows:
Purchase Price $ 4,451
Tangible net assets (liabilities) acquired:
Accounts receivable, net $ 1,185
Merchandise inventory, net 10,000
Fixed assets, net 5,446
Bank debt (10,403)
Trade liabilities, net (6,290)
Other net liabilities (1,589)
----------
Tangible net assets (liabilities) acquired (1,651)
-----------
Excess of cost over net assets acquired $ 6,102
The excess of cost over net assets acquired is being amortized over a
twenty-five year period beginning June 29, 1998.
Watson's, with its corporate headquarters and distribution center located in
Knoxville, TN, operated 24 store locations in seven states immediately prior
to the Watson Merger. Subsequent to the Watson Merger, Peebles will continue to
operate the distribution center in Knoxville as a component of the Company's
logistics network. The corporate office was closed in August as all corporate
responsibilities were transferred to the Peebles corporate office in South Hill,
VA. Peebles will continue to operate 22 of the store locations as Watson's
through the end of the fiscal year, closing two store locations in August 1998.
The following unaudited proforma financial information reflects the results of
theCompany's operations as if the Watson Merger occurred at February 2, 1997,
the beginning of Peebles' fiscal year ended January 31, 1998 ("1997"). The
Watson'sfiscal year 1997 began on December 29, 1996 and ended January 3, 1998.
These proforma results have been prepared for comparison purposes only and do
not purport to be indicative of what would have occurred had the Watson Merger
taken place at the beginning of 1997 or of results which may occur in the
future.
<PAGE>
PEEBLES INC.
UNAUDITED PROFORMA FINANCIAL RESULTS
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(dollars in thousands, except per share amounts)
<TABLE>
<S> <C> <C> <C> <C>
Peebles Watson's
Fiscal Year Fiscal Year
Ended Ended Proforma Proforma
January 31, 1998 January 3, 1998 Adjustments Results
---------------- --------------- ----------- ---------
(Historical) (Historical)
NET SALES $ 217,694 $ 80,441 $ -- $ 298,135
COSTS AND EXPENSES
Cost of sales 130,820 54,328 -- 185,148
Selling, general and
administrative
expenses 60,324 28,121 -- 88,445
Depreciation and
amortization (Note 1) 6,648 1,214 466 8,328
-------- ------ ------ ---------
197,792 83,663 466 281,921
-------- ------- ------ ---------
OPERATING INCOME (LOSS) 19,902 (3,222) (466) 16,214
OTHER INCOME 444 1,590 -- 2,034
INTEREST EXPENSE (Note 2) 9,609 1,659 417 11,685
------- ------- ------ -------
EARNINGS (LOSS) BEFORE
INCOME TAXES 10,737 (3,291) (883) 6,563
INCOME TAXES 4,687 10 -- 4,697
-------- ------- ------ -------
NET INCOME (LOSS) $ 6,050 $ (3,301) $ (883) $ 1,866
======== ======== ======== ========
Weighted average common stock outstanding 1,000
========
Net income per share $ 1,866
</TABLE>
The unaudited proforma financial information presented below reflects the
results of the Company's operations as if the Watson Merger occurred at February
1, 1998, the beginning of Peebles' six-month period ended August 1, 1998. The
comparable Watson's six-month period ended June 28, 1998. These proforma
results have been prepared for comparison purposes only and do not purport to
be indicative of what would have occurred had the Watson Merger taken place
at February 1, 1998 or of results which may occur in the future.
PEEBLES INC.
UNAUDITED PROFORMA FINANCIAL RESULTS
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(dollars in thousands, except per share amounts)
<TABLE>
<S> <C> <C> <C> <C>
Peebles Watson's
(unaudited) Six-Month Period Six-Month Period
Ended Ended Proforma Proforma
August 1, 1998 June 28, 1998 Adjustments Results
---------------- ------------ ----------- ----------
(Historical) (Historical)
NET SALES $ 108,711 $ 24,208 $ -- $ 132,919
COSTS AND EXPENSES
Cost of sales 64,737 16,375 -- 81,112
Selling, general
and administrative
expenses 32,280 10,524 -- 42,804
Depreciation and
amortization (Note 1) 3,677 514 233 4,424
--------- --------- ---------- --------
100,694 27,413 233 128,340
========= ========= ========= ========
OPERATING INCOME(LOSS) 8,017 (3,205) (233) 4,579
OTHER INCOME 30 24 -- 54
INTEREST EXPENSE(Note 2) 4,682 574 209 5,465
--------- --------- -------- --------
EARNINGS (LOSS) BEFORE
INCOME TAXES 3,365 (3,755) (442) (832)
INCOME TAXES 1,346 -- -- 1,176
--------- --------- -------- --------
NET INCOME (LOSS) $ 2,019 $ (3,755) $ (442) $ (2,008)
Weighted average common stock outstanding 1,000
=========
Net income (loss) per share $ (2,008)
</TABLE>
NOTES TO THE UNAUDITED PROFORMA FINANCIAL RESULTS
(dollars in thousands)
1. Adjustment to record additional amortization expense related to $6,102
increase in the excess of cost over net assets acquired, and
$2,364 in acquisition and financing expenses related to the Watson Merger.
2. Adjustment to record additional interest expense associated with the funding
required to consummate the Watson Merger. Additional borrowings of $24,000
under the 1998 Credit Agreement are partially offset by the elimination of
Watson's pre-acquisition debt and certain trade liabilities totaling $17,895.
(c) EXHIBITS:
Number Exhibit
2.2 Merger Agreement, dated May 21, 1998, by and among the
Registrant, Peebles Inc., and the Ira A. Watson Co.
2.3 Stock Purchase Agreement, dated May 21, 1998, by and among
Registrant, the Ira A. Watson Stock Bonus (ESOP) Retirement
Plan, the Katherine Agnes Watson Testamentary Trust,
Constance Hewitt and the First Preferred Sellers, as
defined.
99 Audited Financial Statements of the Ira A. Watson Co. for
the fiscal years ended January 3, 1998 and December 28,
1996.
Pursuant to Rule 601 (b)(2) of Regulation S-K, the registrant agrees to furnish
supplementally to the Securities and Exchange Commission, upon request, any
omitted schedules or similar attachments to Exhibits 2.2 and 2.3.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized
PEEBLES INC.
------------------
(Registrant)
Dated: September 11, 1998 By: /s/ Michael F. Moorman
----------------------------------
Michael F. Moorman
President and Chief Executive
Officer (Principal Executive
Officer)
EXHIBIT INDEX
Number Exhibit
2.2 Merger Agreement, dated May 21, 1998, by and among the
Registrant, Peebles Inc., and the Ira A. Watson Co.
2.3 Stock Purchase Agreement, dated May 21, 1998, by and among
the Registrant, the Ira A. Watson Stock Bonus (ESOP)
Retirement Plan, The Katherine Agnes Watson Testamentary
Trust, Constance Hewitt and the First Preferred Sellers,
as defined.
99 Audited Financial Statements of the Ira A. Watson Co. for
the fiscal years ended January 3, 1998 and December 28,
1996.
EXHIBIT 2.2
MERGER AGREEMENT
THIS MERGER AGREEMENT (the "Agreement"), dated as of May 21,
1998, is made among IRA A. WATSON CO., a Delaware corporation
("Seller"), PEEBLES INC., a Virginia corporation ("Buyer"), and
PEEBLES ACQUISITION SUBSIDIARY, INC., a Delaware corporation and a
wholly owned subsidiary of Buyer ("PAS").
RECITALS
The Boards of Directors of Seller, Buyer and PAS deem a merger
of PAS into Seller (the "Merger"), pursuant to which Seller will
become a wholly owned subsidiary of Buyer, advisable and in the
best interests of their respective shareholders and have authorized
the Merger in accordance with the laws of Delaware.
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties and agreements herein contained, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. The following terms, as used herein, have
the following meanings:
"Acquisition Proposal" means any proposal (other than any
proposal by Buyer) regarding (i) any merger, consolidation, share
exchange, business combination or other similar transaction or
series of related transactions involving Seller; (ii) any sale,
lease, exchange, transfer or other disposition of the assets of
Seller constituting more than 50% of the consolidated assets of
Seller or accounting for more than 50% of the consolidated revenues
of Seller in any one transaction or in a series of related
transactions; and (iii) any offer to purchase, tender offer,
exchange offer or any similar transaction or series of related
transactions made by any Person involving more than 50% of the
outstanding shares of the capital stock of Seller.
"Adjustable Rate Cumulative Preferred Stock Series A" means
the Adjustable Rate Cumulative Preferred Stock Series A of Seller.
"Affiliate" of a Person means a Person, who, directly or
indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with, such Person.
"Audited Seller Financial Statements" has the meaning set
forth in Section 3.9.
"Bankruptcy Claims" means the currently outstanding claims of
the Class 6 and Class 6A creditors as contemplated in the Third
Amended Plan of Reorganization of Ira A. Watson Co., as confirmed
on November 10, 1993 by the United States District Court for the
Eastern District of Tennessee.
"Closing" has the meaning set forth in Section 8.1.
"Closing Date" has the meaning set forth in Section 8.1.
"Commitment" has the meaning set forth in Section 4.6.
"Common Merger Consideration" means the product of the number
of Outstanding Shares of Common Stock multiplied by the Per Share
Merger Consideration.
"Common Stock" means the unclassified common stock of Seller.
"Controlled Group Liability" has the meaning set forth in
Section 3.20 (g).
"DGCL" means the Delaware General Corporation Law.
"Dissenting Shares" has the meaning set forth in Section 2.11.
"Distribution Amount" means that portion of the Escrow Amount,
if any, to be distributed to Shareholders in accordance with
Article IX hereof and the Escrow Agreement.
"Effective Time" has the meaning set forth in Section 2.2.
"Employee Plans" has the meaning set forth in Section 3.20
(a).
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended.
"ERISA Affiliate" means, with respect to any person, entity,
trade or business, any other person, entity, trade or business that
is a member of a group described in Section 414(b), (c), (m) or (o)
of the Internal Revenue Code or Section 4001(b)(1) of ERISA that
includes the first person, entity, trade or business, or that is a
member of the same "controlled group" as the first person, entity,
trade or business pursuant to Section 4001(a)(14) of ERISA.
"Escrow Agent" shall mean Sun Trust Bank, in its role as
escrow agent under the Escrow Agreement.
"Escrow Agreement" means the Escrow Agreement among Buyer, one
or more shareholders of Seller or agent therefor and the Escrow
Agent, in the form attached hereto as Exhibit B, to be executed in
connection with the consummation of the transactions contemplated
by this Agreement.
"Escrow Amount" means that portion of the total Merger
Consideration equal to $703,745 to be held in escrow pursuant to
the Escrow Agreement.
"Escrow Committee" means Forrest I. Watson and Frank M.
Addicks.
"Escrow Period" has the meaning set forth in Section 9.4.
"Escrowed Funds" has the meaning set forth in Section 9.3.
"ESOP" has the meaning set forth in Section 3.20(f).
"ESOP Audit" has the meaning set forth in Section 5.1.
"First Preferred Merger Consideration" has the meaning set
forth in Section 2.7(b).
"First Preferred Stock" means the First Preferred Stock of
Seller.
"Handling Hazardous Substances" has the meaning set forth in
Section 3.6.
"Harrisonburg Lease" means that certain indenture of lease,
dated January 23, 1978 originally between General Growth Properties
and Ira A. Watson Co., as amended to date.
"Hazardous Emissions" has the meaning set forth in Section
3.6.
"HSR Act" means the Hart-Scott Rodino Antitrust Improvements
Act of 1976, as amended.
"Initial Merger Consideration" means the product of $5.00
times the Outstanding Shares of Common Stock.
"Initial Per Share Merger Consideration" means $5.00.
"Interim Seller Financial Statements" has the meaning set
forth in Section 3.9.
"Internal Revenue Code" means the Internal Revenue Code of
1986, as amended.
"Intellectual Property" has the meaning set forth in Section
3.16.
"Knowledge" with respect to Seller means the actual knowledge
of Forrest I. Watson, Gordon E. Pillsbury, Samuel A. Watson or Ron
Slone.
"Lease" has the meaning set forth in Section 3.14.
"Licenses and Permits" has the meaning set forth in Section
3.7.
"Material Adverse Effect" has the meaning set forth in Section
3.17.
"Material Contracts" has the meaning set forth in Section
3.17.
"Merger" has the meaning set forth in the Recitals.
"Merger Consideration" means an amount in cash equal to the
sum of the Common Merger Consideration, plus the First Preferred
Merger Consideration, plus the Series A Merger Consideration.
"Outstanding First Preferred Stock" has the meaning set forth
in Section 2.7(b).
"Outstanding Series A Stock" has the meaning set forth in
Section 2.7(c).
"Outstanding Shares" shall mean Outstanding Shares of Common
Stock, Outstanding First Preferred Stock and Outstanding Series A
Stock.
"Outstanding Shares of Common Stock" means the number of
shares of Common Stock outstanding at the Effective Time, excluding
shares of Common Stock owned by the Seller, Buyer or any Subsidiary
of the Seller or Buyer, and excluding Dissenting Shares, if any.
"Paying Agent" has the meaning set forth in Section 2.10(a).
"Per Share Common Merger Consideration" means the sum of $5.00
plus the Per Share Distribution Amount.
"Per Share Distribution Amount" means the quotient of the
Distribution Amount divided by the number of Outstanding Shares of
Common Stock.
"Per Share First Preferred Merger Consideration" shall mean
the sum of $78.40.
"Per Share Series A Merger Consideration" shall mean the sum
of $69.40.
"Permitted Exceptions" has the meaning set forth in Section
3.13.
"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including
a governmental or political subdivision or an agency or
instrumentality thereof.
"Real Property" has the meaning set forth in Section 3.13.
"Seller's Auditors" means Coulter & Justus, P.C.
"Seller Disclosure Schedule" means the disclosure schedule
delivered by Seller to Buyer prior to the execution and delivery of
this Agreement, which schedule constitutes an integral part of this
Agreement.
"Series A Merger Consideration" has the meaning set forth in
Section 2.7(c).
"Shareholders" has the meaning set forth in Section 9.3.
"Shoppers Charge" means Shoppers Charge Accounts Co.
"Stock Certificate" has the meaning set forth in Section
2.10(b).
"Subsidiary" with respect to any party to this Agreement means
any corporation or other business entity, whether or not
incorporated, of which at least 50% of the securities or interests
having, by their terms, ordinary voting power to elect members of
the board of directors, or other persons performing similar
functions with respect to such entity is held, directly or
indirectly, by such party.
"Survival Date" has the meaning set forth in Section 9.8.
"Surviving Corporation" has the meaning set forth in
Section 2.1.
"Tax" or "Taxes" means:
(a) Any federal or state income or franchise
tax; and
(b) Any interest, additions and penalties
(civil or criminal) imposed in connection with any Tax
and any interest in respect of any such additions or
penalties.
"Tax Law" means the Internal Revenue Code, federal, state or
local laws relating to Taxes and any regulations or official
administrative pronouncements released thereunder.
"Tax Returns" means all federal, state and local returns,
reports and declarations with respect to Taxes, including, without
limitation, consolidated United States federal income tax returns.
"Termination Agreement" means the agreement to be entered into
between Seller and Shoppers Charge Accounts Co. providing for the
termination of the Credit Card Plan Agreement between Seller and
Shoppers Charge Accounts Co.
"Trustee" has the meaning set forth in Section 3.20(f).
"West Knoxville Lease" means that certain lease agreement,
dated August 23, 1993, between Olde Kingston Towne II, Ltd. and Ira
A. Watson Co. and all amendments thereto.
ARTICLE II
THE MERGER
2.1 The Merger. Upon the terms and subject to the
satisfaction or waiver, if permissible, of the conditions hereof,
and in accordance with the DGCL, at the Effective Time, PAS shall
be merged with and into Seller. Following the Merger, the separate
corporate existence of PAS shall cease, Seller shall continue as
the surviving corporation (the "Surviving Corporation") and shall
become a wholly-owned Subsidiary of Buyer.
2.2 Effective Time. As soon as practicable after the
satisfaction or waiver, if permissible, of all the conditions to
the Merger, the parties shall cause the Merger to be consummated by
causing a certificate of merger with respect to the Merger to be
executed and filed in accordance with the relevant provisions of
the DGCL. The Merger shall become effective at the time of the
filing of the certificate of merger with the Secretary of State of
the State of Delaware in accordance with the relevant provisions of
the DGCL (the "Effective Time").
2.3 Effects of the Merger. The Merger shall have the effects
set forth in Section 259 of the DGCL.
2.4 Certificate of Incorporation and By-Laws. The
Certificate of Incorporation of Seller, as in effect immediately
prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation.
The Bylaws of PAS, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation.
2.5 Directors. The directors of PAS immediately prior to the
Effective Time shall be the initial directors of the Surviving
Corporation and shall hold office until their respective successors
are duly elected and qualified, or their earlier death, resignation
or removal.
2.6 Officers. The officers of PAS immediately prior to the
Effective Time shall be the initial officers of the Surviving
Corporation and shall hold office until their respective successors
are duly elected and qualified, or their earlier death, resignation
or removal.
2.7 Conversion of Shares.
(a) Each share of Common Stock outstanding immediately
prior to the Effective Time (other than Common Stock, if any, owned
by Buyer, PAS, Seller or any Subsidiary of Seller, Buyer or PAS,
and Dissenting Shares, if any) shall, by virtue of the Merger and
without any action on the part of the holder thereof, automatically
be converted into the right to receive, subject to Section 2.10(d),
the Per Share Merger Consideration upon surrender of the
certificate representing such Share as provided in Section 2.10.
(b) Each share of First Preferred Stock outstanding
immediately prior to the Effective Time (other than First Preferred
Stock, if any, owned by Buyer, PAS, Seller or any Subsidiary of
Buyer, PAS or Seller and Dissenting Shares, if any) (such number,
the "Outstanding First Preferred Stock") shall, by virtue of the
Merger and without any action on the part of the holder thereof,
automatically be converted into the right to receive the Per Share
First Preferred Merger Consideration upon surrender of the
certificate representing such shares of Outstanding First Preferred
Stock as provided in Section 2.10. The product of the Per Share
First Preferred Merger Consideration times the Outstanding First
Preferred Stock is referred to herein as the "First Preferred
Merger Consideration."
(c) Each share of Adjustable Rate Cumulative Preferred
Stock Series A outstanding immediately prior to the Effective Time
(other than Adjustable Rate Cumulative Preferred Stock Series A, if
any, owned by Buyer, PAS, Seller or any Subsidiary of Buyer, PAS or
Seller and Dissenting Shares, if any) (such number the "Outstanding
Series A Stock") shall, by virtue of the Merger and without any
action on the part of the holder thereof, automatically be
converted into the right to receive the Per Share Series A Merger
Consideration upon surrender of the certificate representing such
share of Outstanding Series A Stock as provided in Section 2.10.
The product of the Per Share Series A Merger Consideration times
the Outstanding Series A Stock is referred to herein as the "Series
A Merger Consideration."
(d) Each share of Common Stock, First Preferred Stock
and Adjustable Rate Cumulative Preferred Stock Series A owned by
Buyer, PAS, Seller or any Subsidiary of Seller, Buyer or PAS
immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof,
automatically be canceled and cease to exist at and after the
Effective Time and no consideration shall be paid with respect
thereto.
2.8 Conversion of PAS Common Stock. Each share of common
stock, par value $1.00 per share, of PAS issued and outstanding
immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof,
automatically be converted into and thereafter represent one
validly issued, fully paid and nonassessable common share, par
value $1.00 per share, of the Surviving Corporation, so that
thereafter Buyer will be the sole and exclusive owner of the
outstanding Common Stock of the Surviving Corporation.
2.9 Shareholders' Approval. Seller, acting through its Board
of Directors (which shall have recommended approval of the Merger
and approval and adoption of this Agreement to its shareholders),
shall, in accordance with applicable law and subject to the
provisions of Section 5.3 herein, use its best efforts to obtain
the approval of the Merger and the approval and adoption of this
Agreement by its shareholders.
2.10 Exchange of Shares; Payment.
(a) Sun Trust Bank (or such other Person as may be
selected by Seller with the prior written consent of Buyer, which
consent shall not be unreasonably withheld) shall act as Paying
Agent in the Merger (the "Paying Agent"). At the Effective Time,
Buyer will take all steps necessary to enable and cause PAS or the
Surviving Corporation to deposit (X) with the Paying Agent an
amount equal to the sum of (i) the product of the Initial Merger
Consideration times the Outstanding Shares of Common Stock, plus,
(ii) the First Preferred Merger Consideration and plus (iii) the
Series A Merger Consideration and (Y) with the Escrow Agent the
Escrow Amount, in each case in immediately available funds, for
disbursement to the holders of the Outstanding Shares in the manner
set forth herein. Such disbursement will be the responsibility of
the Paying Agent and the Escrow Agent and not Seller.
(b) As soon as practicable after the Effective Time,
Seller shall hand deliver or mail to each holder of record of an
outstanding certificate or certificates representing any
Outstanding Shares (or each such holder's duly authorized
attorney-in-fact), a form letter of transmittal, which shall
specify that delivery shall be effected, and risk of loss of and
title to such certificate shall pass, only upon proper delivery of
such certificate to the Paying Agent, and instructions for use of
such letter of transmittal in effecting the surrender of any such
certificate and obtaining payment therefor of the shareholder's
allocable portion of the Merger Consideration, as provided in this
Section 2.10. Subject to Section 2.10(d) hereof and the Paying
Agent's agreement to such procedures, upon the later of the
Effective Time and surrender to the Paying Agent of a certificate
which immediately prior to the Effective Time represented
Outstanding Shares of Common Stock, Outstanding First Preferred
Stock or Outstanding Series A Stock (a "Stock Certificate"), or
indemnity reasonably satisfactory to the Paying Agent if any such
Stock Certificate has been lost, stolen or destroyed together with
such letter of transmittal duly executed, such Stock Certificate
shall in exchange therefor be entitled to receive an amount, in
immediately available funds, equal to (i) in the case of
Outstanding Common Stock, the product of the number of shares
represented by such Stock Certificate multiplied by sum of the
Initial Per Share Merger Consideration plus the Per Share
Distribution Amount, (ii) in the case of Outstanding First
Preferred Stock, the product of the number of shares of Outstanding
First Preferred Stock represented by such Stock Certificate times
the Per Share First Preferred Merger Consideration and (iii) in the
case of Outstanding Series A Stock, the product of the number of
shares of Outstanding Series A Stock represented by such
certificate times the Per Share Series A Merger Consideration. No
interest will be paid or accrued on any amount payable upon the
surrender of a Stock Certificate. If payment is to be made to a
Person other than the Person in whose name a Stock Certificate
surrendered is registered, it shall be a condition of payment that
the Stock Certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer and that the Person
requesting such payment shall pay transfer or other taxes required
by reason of the payment to a Person other than the registered
holder of the Stock Certificate surrendered, or establish to the
satisfaction of the Paying Agent that such tax has been paid or is
not applicable, or provide assurances satisfactory to the Paying
Agent that any such tax will be paid by such Person. Until
surrendered in accordance with the provisions of this Section 2.10,
each Stock Certificate shall represent for all purposes only the
right to receive, as provided by this Agreement, the allocable
portion of the Merger Consideration and shall have no other rights.
Any funds (including interest earned on funds on deposit with the
Paying Agent) remaining with the Paying Agent one year following
the Effective Time shall be returned to Buyer or the Surviving
Corporation, as specified by Buyer, after which time former
shareholders of Seller, subject to applicable law, shall look only
to the Surviving Corporation for payment of the allocable portion
of the Merger Consideration, without interest thereon, and shall
have no greater rights against the Surviving Corporation than may
be accorded to general creditors of the Surviving Corporation under
Delaware law. Notwithstanding anything to the contrary contained
herein, neither the Paying Agent nor any party hereto shall be
liable to a holder of capital stock of the Company for any amount
paid to a public official pursuant to applicable abandoned
property, escheat or similar law.
(c) After the Effective Time, there shall be no
transfers of capital stock of the Company on the stock transfer
books of the Surviving Corporation. If, after the Effective Time,
Stock Certificates are presented to the Surviving Corporation, they
shall be canceled and exchanged as provided in this Section 2.10.
(d) Notwithstanding anything to the contrary set forth
herein, the allocable portion of the Merger Consideration to be
received by each shareholder upon surrender to the Paying Agent of
a certificate representing capital stock of the Company and any
other required documents, as provided in this Section 2.10, shall
be reduced by the amount, if any, the Paying Agent is required to
deduct and withhold with respect to the making of such payment
under any provision of Tax Law; provided that if any amounts are so
deducted and withheld, such amounts shall be treated as having been
paid to the transferring holder of such certificate.
2.11 Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, shareholders of the Company who have
properly exercised, perfected and not subsequently withdrawn or
lost their appraisal rights with respect thereto in accordance with
Section 262 of the DGCL (the "Dissenting Shares") shall not have
any of such shares converted into the right to receive, or become
exchangeable for, their allocable portion of the Merger
Consideration. The holders of Dissenting Shares shall be entitled
to receive payment of the fair value of Dissenting Shares in
accordance with the provisions of such Section 262 unless and until
such holders fail to perfect or shall have effectively withdrawn or
lost their dissenters' rights to payment under Section 262 of the
DGCL. If, after the Effective Time, any such holder fails to
perfect or shall have effectively withdrawn or lost such right,
each of such shareholder's shares shall thereupon be treated as if
it had been converted into the right to receive, and become
exchangeable for, at the Effective Time, the allocable portion of
the Merger Consideration, without interest thereon, as provided in
Section 2.10 hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer and PAS the following:
3.1 Organization; Qualification. Each of Seller and its
Subsidiary is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its
incorporation and has corporate power and authority to own all of
its properties and assets and to carry on its business as it is
presently being conducted. Each of Seller and its Subsidiary is
duly qualified and in good standing to do business in each
jurisdiction in which the property owned, leased or operated by it
or the nature of the business conducted by it makes such
qualification necessary except where the failure to so qualify or
be in good standing could not reasonably be expected to have a
Material Adverse Effect. Seller has heretofore delivered to Buyer
complete and correct copies of the Certificate of Incorporation and
Bylaws of Seller and its Subsidiary as currently in effect.
Schedule 3.1 of the Seller Disclosure Schedule contains a complete
and correct list of (i) any Person who is a Subsidiary of Seller
and (ii) the jurisdictions in which Seller and its Subsidiary,
respectively, are qualified to do business.
3.2 Authority Relative to this Agreement. Seller has
corporate power and authority to execute and deliver this Agreement
and to consummate the Merger, except that this Agreement and the
Merger must be approved by Seller's shareholders in accordance with
the DGCL. The execution and delivery by Seller of this Agreement
and the consummation of the Merger have been duly authorized by the
Board of Directors of Seller and, except for obtaining the approval
of the holders of a majority of the outstanding shares of Common
Stock and of the First Preferred Stock, no other corporate
proceedings on the part of Seller are necessary with respect
thereto. Subject to the aforementioned shareholder approval, and
assuming that Buyer and PAS have duly authorized the execution and
delivery of this Agreement, this Agreement constitutes the valid
and binding obligation of Seller and is enforceable against Seller
in accordance with its terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to creditors'
rights and general principles of equity.
3.3 Capitalization of Seller. The authorized capital stock
of Seller consists of 500,000 shares of Common Stock, no par value,
1,000 shares of First Preferred Stock, par value $100.00 per share,
5,000 shares of Adjustable Rate Cumulative Preferred Stock Series
A, par value $100.00 per share, 5,000 shares of Adjustable Rate
Cumulative Preferred Stock Series B, par value $100.00 per share,
50,000 shares of Junior Cumulative Preferred Stock, par value
$100.00 per share, of which, as of the date hereof, 325,504 shares
of Common Stock, 463 shares of First Preferred Stock and 5,000
shares of Adjustable Rate Cumulative Preferred Stock Series A are
outstanding, validly issued, fully paid and nonassessable, and each
of which was not issued in violation of any preemptive rights.
Seller has no commitment to issue or sell any shares of its capital
stock or any securities, options or obligations convertible into or
exercisable or exchangeable for, or giving any person the right to
acquire from it, any shares of its capital stock, and no such
securities or obligations are issued or outstanding.
3.4 Consents and Approvals. Except as set forth in Schedule
3.4 of the Seller Disclosure Schedule and except for (i) approvals
required under the HSR Act and (ii) the filing of a Certificate of
Merger in the Office of the Secretary of State of the State of
Delaware, there is no requirement applicable to Seller to make any
filing with, or to obtain any permit, authorization, consent or
approval of any public body as a condition to the consummation of
the Merger where the failure to so make or obtain would prevent or
materially restrict consummation of the Merger or fulfillment in
any material respect of any of the conditions to this Agreement.
Except as set forth in Schedule 3.4 of the Seller Disclosure
Schedule, there is no requirement that any party (including any
successor in title to the landlord's interest in any Lease) to any
Material Contract, Lease, license or permit for the use of
Intellectual Property or loan agreement to which Seller is a party
or by which it is bound, consent to the execution of this Agreement
by Seller or to the consummation of the Merger.
3.5 Non-Contravention. The execution and delivery by Seller
of this Agreement do not, and subject to the requisite approval of
the shareholders of Seller, the consummation of the Merger will not
(i) violate or result in a breach of any provision of the
Certificate of Incorporation or Bylaws of Seller or its Subsidiary,
(ii) except as set forth in Schedule 3.5 of the Seller Disclosure
Schedule, result in a default (or give rise to any right of
termination, cancellation or acceleration) under the terms,
conditions or provisions of any note, bond, mortgage, indenture,
license, agreement, Lease or other instrument or obligation to
which Seller or its Subsidiary is a party or by which Seller or its
Subsidiary or the business conducted by Seller or its Subsidiary,
may be bound, other than a default which, singly or in the
aggregate, would have an Material Adverse Effect or (iii) violate
any order, writ, injunction, decree, statute, rule or regulation
applicable to Seller or its Subsidiary, or to the business
conducted by Seller or its Subsidiary other than any violation
which, singly or in the aggregate, would not have a Material
Adverse Effect.
3.6 Environmental Matters. The term "Environmental Permits"
as used herein means federal, state and local governmental
licenses, permits and other authorizations and approvals, whether
foreign or domestic, which relate to the business of Seller as it
may be affected by the environment or to public health and safety
or worker health and safety as they may be affected by the
environment. Seller and its Subsidiary have obtained all material
Environmental Permits required to conduct their business as it is
presently being conducted including, without limitation, those
relating to (i) emissions or discharges of pollutants,
contaminants, hazardous or toxic substances or petroleum into the
air, surface water, ground water or the ocean, or on or into the
land ("Hazardous Emissions") and (ii) the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, hazardous or toxic
substances, or petroleum ("Handling Hazardous Substances").
Schedule 3.6 of the Seller Disclosure Schedule shall be amended
within ten (10) days hereof setting forth a complete and correct
list of all such Environmental Permits, all of which are in full
force and effect and none of which are subject to termination,
amendment or review or reauthorization as a consequence of the
consummation of the transactions contemplated hereby. Seller and
its Subsidiary are in compliance in all material respects with all
of the terms and conditions set forth in such Environmental Permits
and are also in compliance in all material respects with all of the
terms and conditions contained in or required of them by any law,
regulation, order, judgment or decree of any federal, state, local
or foreign court or governmental authority applicable to or having
jurisdiction over them or their business which relate to the
environment or to public health and safety or worker health and
safety as they may be affected by the environment. Except as set
forth on Schedule 3.6 of the Seller Disclosure Schedule, no
conditions exist which (w) interfere with, prevent, or, to the
Knowledge of Seller, with the passage of time, could interfere with
or prevent continued compliance with any of the aforementioned
Environmental Permits or any of the aforementioned laws,
regulations, orders, judgments or decrees, (x) may give rise to any
liability (including, without limitation, liability based in
contract, tort, implied or express warranty or criminal or civil
statute) under any existing law or regulation relating to the
Hazardous Emissions or Handling Hazardous Substances, (y) obligate
Seller or its Subsidiary or, to the Knowledge of Seller, with the
passage of time, could cause Seller or its Subsidiary to be
obligated to clean up, remedy or otherwise restore to a former
condition, by itself or jointly with others, any contaminated
surface water, ground water, soil or any natural resources
associated therewith, or (z) require the filing of any additional
information as a consequence of the consummation of the
transactions contemplated hereby. Except as set forth on Schedule
3.6 of the Seller Disclosure Schedule, none of the real property
owned, leased or occupied by Seller or its Subsidiary contains any
"hazardous substances" (as defined in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. 9601, et seq. and regulations promulgated thereto or as
defined under similar state law or regulations), petroleum or
petroleum products or to the Knowledge of Seller, any asbestos,
whether or not friable.
3.7 Licenses and Permits. The term "Licenses and Permits" as
used herein means federal, state and local governmental licenses,
permits, approvals and authorizations, whether foreign or domestic,
other than Environmental Permits. Seller and its Subsidiary have
all of the material Licenses and Permits required to conduct their
business as it is presently being conducted. To the Knowledge of
Seller, all of such Licenses and Permits are in full force and
effect and none of which are subject to termination, amendment,
review or reauthorization as a consequence of the consummation of
the transactions contemplated hereby. No written notice of a
violation of any such License or Permit has been received by Seller
or its Subsidiary or, to the Knowledge of Seller, threatened in
writing, and no proceeding is pending or, to the Knowledge of
Seller, threatened in writing, to revoke or limit any of them.
3.8 Compliance with Laws. In addition to the
representations and warranties contained in Section 3.6 relating to
environmental matters and in Section 3.7 relating to Licenses and
Permits, Seller represents and warrants that it and its Subsidiary
have operated their business in compliance with all laws,
regulations, orders, policies, guidelines, judgments or decrees of
any federal, state, local or foreign court or governmental
authority applicable to them or their business including, without
limitation, those related to antitrust and trade matters, civil
rights, zoning and building codes, public health and safety, worker
health and safety and labor and nondiscrimination, the failure to
comply with which could reasonably be expected to have a Material
Adverse Effect. Except as disclosed in Schedule 3.7 of the Seller
Disclosure Schedule, neither Seller nor its Subsidiary have
received any written notice within the past three years alleging
non-compliance with any of the aforementioned laws, regulations,
policies, guidelines, orders, judgments or decrees.
3.9 Financial Statements. Seller has previously furnished
to Buyer true and complete copies of (i) audited consolidated
financial statements of Seller for the years ended December 28,
1996 and January 3, 1998, including the notes thereto (the "Audited
Seller Financial Statements"), together with the report on such
statements of Seller's Auditors, and (ii) unaudited consolidated
financial statements of Seller for the three month period ended
April 4, 1998 (the "Interim Seller Financial Statements"). Such
financial statements present fairly in all material respects the
consolidated financial position of Seller and its Subsidiary as of
such dates and the results of its operations and changes in
financial position for such periods and have been prepared in
accordance with generally accepted accounting principles applied on
a consistent basis (except, in the case of the Interim Seller
Financial Statements, for the absence of notes).
3.10 Litigation. Except as set forth in Schedule 3.10 of
the Seller Disclosure Schedule, there are no actions, suits,
claims, investigations or proceedings (legal, administrative or
arbitrative) pending or, to the Knowledge of Seller, threatened in
writing, against Seller or its Subsidiary, whether at law or in
equity and whether civil or criminal in nature, before any federal,
state, municipal or other court, arbitrator, governmental
department, commission, agency or instrumentality, domestic or
foreign, nor are there any judgments, decrees or orders of any such
court, arbitrator, governmental department, commission, agency or
instrumentality outstanding against Seller and its Subsidiary
which have, or if adversely determined, could reasonably be
expected to have, a Material Adverse Effect or which seek
specifically to prevent, restrict or delay consummation of the
Merger or fulfillment of any of the conditions of this Agreement.
3.11 Absence of Changes. Except as set forth in Schedule 3.11
of the Seller Disclosure Schedule, since January 3, 1998 there has
not been:
(i) any damage, destruction or loss (whether
or not covered by insurance) which can reasonably be
expected to have a Material Adverse Effect;
(ii) any obligation or liability incurred by
Seller or its Subsidiary, other than in the ordinary and
usual course of business or involving more than $10,000;
(iii) any general uniform increase in the
compensation of the employees of Seller or its Subsidiary
(including, without limitation, any increase pursuant to
any bonus, pension, profit sharing or other plan);
(iv) any increase (other than normal increases
consistent with past practices and those required by law
or collective bargaining agreements) in the compensation
payable to any employee (including officers) of Seller or
its Subsidiary;
(v) any amendment to any employment agreement
to which any employee of Seller or its Subsidiary is a
party;
(vi) any sale of assets by Seller or its
Subsidiary other than in the ordinary course of business
or in connection with the closing of any store of Seller
or its Subsidiary;
(vii) except as contemplated by Section 5.5, any
direct or indirect redemption, purchase or other
acquisition of any shares of the capital stock of Seller
or its Subsidiary;
(viii) any split, combination or other similar
change in the outstanding capital stock of Seller or its
Subsidiary;
(ix) any declaration, setting aside or payment
of any dividend (whether in cash, capital stock or
property) with respect to the capital stock of Seller or
its Subsidiary; or
(x) any issuance by Seller or its Subsidiary
of any shares of its capital stock, or any securities or
obligations convertible into or exchangeable for, or
giving any person the right to acquire from it, any
shares of its capital stock.
3.12 No Undisclosed Liabilities. Other than liabilities
disclosed in the Seller's Disclosure Schedule, Seller has no
liabilities or obligations, whether absolute, accrued, contingent
or otherwise, including, without limitation, any uninsured
liabilities (i) which were not accrued or reserved against in the
Interim Seller Financial Statements, or (ii) which were incurred
after April 4, 1998 other than in the ordinary course of business,
in each case which have or can reasonably be expected to have a
Material Adverse Effect.
3.13 Title to Properties. Schedule 3.13 of the Seller
Disclosure Schedule contains a complete and correct list of all of
the real property, together with the fixtures and other
improvements located thereon and the appurtenances thereto, owned
by Seller (the "Real Property"). Except as set forth in Schedule
3.13 of the Seller Disclosure Schedule and except for Permitted
Exceptions, Seller has good and marketable title to all of the Real
Property free and clear of any liens, charges, pledges, security
interests or other encumbrances. The term "Permitted Exceptions"
as used in this Agreement means (i) statutory liens for current
taxes or assessments not yet due or delinquent; (ii) mechanics',
carriers', workers', repairers' and other similar liens arising or
incurred in the ordinary course of business relating to obligations
as to which there is no default, provided that the same shall be
fully discharged of record before the Effective Time; (iii)
exceptions shown on the surveys, if any, furnished by Seller to
Buyer on or before the date hereof and agreed to by Buyer; and (iv)
imperfections of title and encumbrances, if any, which do not
materially detract from the value of the property subject thereto
and do not materially impair the use of the property thereto in
connection with the operations of the business of Seller.
3.14 Leases.
(a) Schedule 3.14 of the Seller Disclosure Schedule sets
forth a complete and correct list of each lease and amendment
thereto to which Seller is a party (whether as signatory or by
assignment), whether as lessor or lessee, which relates to either
real or personal property, other than monthly leases of personal
property which may be canceled upon not more than 30 days notice
and require the payment of not more than $100 per month. The
documents listed in Schedule 3.14 of the Seller Disclosure Schedule
are referred to herein as "Leases". Except as set forth in
Schedule 3.14 of the Seller Disclosure Schedule, each of the Leases
is in full force and effect and neither Seller nor, to the
Knowledge of Seller, any other party thereto has breached any such
Lease and no event has occurred which, with the giving of notice or
the passage of time or both, would cause a default under, or permit
the termination, modification or acceleration of any such Lease by
any party thereto, except for such of the foregoing as would not
have a Material Adverse Effect. No written notice from any
governmental body or official has been given to Seller claiming
that any of the property subject to any of the Leases violates any
law, building, zoning or other ordinance, code or regulation
applicable to it, or calling attention to the need for any work,
repairs, construction, alterations or installations on or in
connection with those properties that has not been fully complied
with. Complete copies of all of the Leases have been delivered to
Buyer.
(b) Seller has good and marketable leasehold title to
the real property leased by the Leases.
3.15 Inventory.
(a) Except as set forth on Schedule 3.15 of the Seller
Disclosure Schedule, the retail prices of Seller's inventory are
marked at levels consistent with Seller's past practice and any
markdowns of such inventory have been taken at times and in amounts
consistent with Seller's past practice.
(b) The difference between the retail book value of
Seller's inventory as reflected on Seller's perpetual retail stock
ledger as of the close of Seller's business on the Saturday
immediately preceding the Effective Time and the retail value
determined by a physical inventory conducted by Seller and Buyer on
such date, expressed as a percentage of the net sales of the Seller
for the period from January 4, 1998 to the Effective Time, shall
not be greater than 4%.
3.16 Intellectual Property. The term "Intellectual Property"
as used herein means the rights of the owner thereof in all trade
names, trademarks and service marks, patents, patent rights,
copyrights, whether domestic or foreign, (as well as applications,
registrations or certificates for any of the foregoing),
inventions, trade secrets, proprietary processes, software and
other industrial and intellectual property rights. Seller owns or
is licensed or otherwise has the right to use all of the
Intellectual Property which is being used in its business as it is
presently being conducted. There is no claim, suit, action or
proceeding, pending or, to the Knowledge of Seller, threatened,
against Seller asserting that its use of any Intellectual Property
infringes the rights of any third party or otherwise contesting its
rights with respect to any Intellectual Property, and to the
Knowledge of Seller no third party is infringing upon the rights of
Seller in the Intellectual Property. Except as set forth on
Schedule 3.16 of the Seller Disclosure Schedule, all letters,
patents, registrations and certificates issued by any governmental
agency relating to the Intellectual Property are valid and
subsisting and have been properly maintained.
3.17 Material Contracts. Schedule 3.17 of the Seller
Disclosure Schedule sets forth a complete and correct list of each
contract, agreement or commitment of Seller, other than Leases:
(i) upon which any substantial part of its
business is dependent or which, if breached, could
reasonably be expected to have a Material Adverse Effect
on the earnings, assets, financial condition or
operations of the business of Seller and its Subsidiary,
taken as a whole (a "Material Adverse Effect");
(ii) which provides as of May 11, 1998 for
aggregate future payments of more than $5,000, except for
purchase orders arising in the ordinary and usual course
of business (a complete and accurate list of which has
been provided to Buyer), in which case they are listed
only if any party thereto is obligated to make payments
pursuant thereto aggregating more than $10,000;
(iii) which extends for more than one year from
the date hereof and is not cancelable by either party on
less than 31 days' notice;
(iv) which provides for the sale, after the
date hereof and other than in the ordinary course of
business or other than in connection with the closing of
any store, of any of its assets;
(v) which relates to the employment,
retirement or termination of the services of any officer
or former officer;
(vi) which provides for the payment of
severance or similar benefits to any employee of Seller;
or
(vii) which contains covenants pursuant to which
any person has agreed not to compete with any business
conducted by Seller or not disclose to others information
concerning Seller.
Each of the foregoing is referred to in this Agreement as a
"Material Contract." Except as set forth in Schedule 3.17 of the
Seller Disclosure Schedule, all of the Material Contracts are in
full force and effect and there has not occurred, with respect to
any Material Contract, any default or event of default which, with
or without due notice or with the lapse of time, or both, would
constitute a default or event of default on the part of Seller or,
to the Knowledge of Seller, any other party thereto, except for
such defaults as would not have a Material Adverse Effect.
Complete copies of all of the Material Contracts have been
delivered to Buyer.
3.18 Insurance. Schedule 3.18 of the Seller Disclosure
Schedule sets forth a list of insurance policies maintained by
Seller. Seller is not in default in any material respect under any
provision of any such policy nor to the Knowledge of Seller, has it
failed to give notice or present any claim thereunder in a timely
manner so as to bar recovery of any valid claim. Complete copies
of all insurance contracts have been delivered to Buyer.
3.19 Labor Matters. Seller is not a party to any collective
bargaining agreement covering employees of Seller. There are no
controversies pending or, to the Knowledge of Seller, threatened in
writing between Seller and any of its employees which can
reasonably be expected to have a Material Adverse Effect, or relate
to any specific effort to prevent, restrict or delay consummation
of the Merger.
3.20 Employee Benefit Plans.
(a) Schedule 3.20 of the Seller Disclosure Schedule
contains a complete list of all employee benefit plans, programs,
policies, practices, agreements, contracts and other arrangements
providing benefits to any employee or former employee or any
beneficiary or dependent thereof, whether or not written, whether
or not subject to ERISA, and whether covering one person or more
than one person, that are sponsored or maintained by the Seller, to
which the Seller is a party, or to which the Seller contributes or
is obligated to contribute (collectively, "Employee Plans").
Without limiting the generality of the foregoing, the term
"Employee Plans" includes employee welfare benefit plans within the
meaning of Section 3(1) of ERISA, employee pension benefit plans
within the meaning of Section 3(2) of ERISA and employment
agreements. No Employee Plan is a multiemployer plan as defined in
Section 3(37) of ERISA. For purposes of this Section 3.20, the
term "Seller" shall include the Seller and each of its ERISA
Affiliates.
(b) Seller has heretofore delivered to Buyer complete
and correct copies of the following with respect to each Employee
Plan: (A) all plan documents, trust agreements and insurance
contracts and other funding vehicles; (B) the three most recent
annual reports (Form 5500 Series, where applicable) and
accompanying schedules, if any; (C) the current summary plan
description, if any; (D) the three most recent annual financial
reports, valuations, or other appraisals of plan assets, if any;
and (E) the most recent determination letter from the Internal
Revenue Service, if any. Except as specifically provided in the
foregoing documents delivered to Buyer, there are no amendments to
any Employee Plan that have been adopted or approved, nor has the
Seller undertaken to make any such amendments.
(c) Except as set forth in Schedule 3.20 of the Seller
Disclosure Schedule, all Employee Plans are in all material
respects in compliance with, and have been administered in
compliance with, all applicable requirements of law, including but
not limited to the Internal Revenue Code and ERISA. All
contributions required to be made to each Employee Plan under the
terms of such plans, ERISA or the Internal Revenue Code for all
periods of time prior to the Closing Date have been or, as
applicable, will by the Closing Date be timely made or paid in
full.
(d) A favorable Internal Revenue Service determination
letter as to the qualification of each Employee Plan intended to be
qualified under Section 401(a) of the Internal Revenue Code has
been issued and remains in effect, and the related trust has been
determined to be exempt from taxation under Section 501(a) of the
Internal Revenue Code. Any amendment made or event relating to
such Employee Plan subsequent to the date of such determination
letter has not adversely affected the qualified status of such
Employee Plan. No issue concerning qualification of any Employee
Plan is pending before or threatened by the Internal Revenue
Service. The Seller has performed all material obligations
required to be performed by it under, and is not in default or in
violation of, the terms of any Employee Plan in any material
respect. No non-exempt "prohibited transaction" (as such term is
defined in Section 4975 of the Internal Revenue Code or Section 406
of ERISA) has occurred with respect to any Employee Plan. No
Employee Plan is a "top-heavy plan" within the meaning of Section
416 of the Internal Revenue Code or has ever been a "top-heavy
plan."
(e) No Employee Plan is subject to Title IV or Section
302 of ERISA, or Section 412 or 4971 of the Internal Revenue Code.
(f) Neither the execution, delivery or performance of
this Agreement, nor the consummation of any transactions
contemplated hereunder, will violate or conflict with any governing
document of the Ira A. Watson Co. Stock Bonus (ESOP) Retirement
Plan (the "ESOP"), any contract, agreement or other arrangement
binding upon the ESOP or its assets, or will subject the Seller or
any of its ERISA Affiliates (as defined in subsection (g) below) to
an excise tax described in Section 4978 of the Internal Revenue
Code. During the 3-year period ending on the Closing Date, there
have been no sales of securities to the ESOP to which Section 1042
of the Internal Revenue Code applied or was intended to apply.
Except as set forth in Schedule 3.20 of the Seller Disclosure
Schedule, there are no outstanding loans with respect to the ESOP
(including exempt loans within the meaning of Section 4975 of the
Internal Revenue Code and regulations thereunder) and there are no
unallocated shares held in a suspense account under the ESOP.
(g) There does not now exist, nor do any circumstances
exist that could result in, any Controlled Group Liability that
would be a liability of the Seller following the Closing Date.
"Controlled Group Liability" means any and all liabilities under
(i) Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections
412 and 4971 of the Internal Revenue Code,(iv) the continuation
coverage requirements of Section 601 et seq. of ERISA and section
4980B of the Internal Revenue Code, and (v) the group health plan
requirements of Section 701 et seq. of ERISA, Section 4980D of the
Internal Revenue Code, and Section 9801 et seq. of the Internal
Revenue Code. "ERISA Affiliate" means, with respect to any person,
entity, trade or business, any other person, entity, trade or
business that is a member of a group described in Section 414(b),
(c), (m) or (o) of the Code or Section 4001(b)(1) of ERISA that
includes the first person, entity, trade or business, or that is a
member of the same "controlled group" as the first person, entity,
trade or business pursuant to Section 4001(a)(14) of ERISA.
(h) There are no pending or threatened claims (other
than claims for benefits in the ordinary course), lawsuits, audits,
investigations or arbitrations which have been threatened, asserted
or instituted against the Employee Plans, any fiduciaries thereof
with respect to their duties to the Employee Plans or the assets of
any of the trusts under any of the Employee Plans which could
reasonably be expected to result in any material liability of the
Seller.
(i) The Seller has no liability for life, health,
medical or other welfare benefits to former employees or
beneficiaries or dependents thereof, except for health continuation
coverage as required by Section 4980B of the Internal Revenue Code
or Part 6 of Title I of ERISA.
(j) Except as set forth in Schedule 3.20 of the Seller
Disclosure Schedule, neither the execution or delivery of this
Agreement, nor the consummation of the transactions contemplated
hereunder, will (either alone or in conjunction with any subsequent
or related event, including without limitation, termination of
employment) (i) result in any material payment becoming due under
any Employee Plan (including, without limitation, severance,
unemployment compensation, or golden parachute payments), (ii)
materially increase any compensation or benefits otherwise payable
under any Employee Plan, or (iii) accelerate any material liability
under any Employee Plan because of an acceleration of the time of
payment or vesting of any rights or benefits to which employees may
be entitled thereunder. Neither the execution or delivery of this
Agreement, nor the consummation of the transactions contemplated
hereunder, has resulted or will result in payments to "disqualified
individuals" of the Seller which, individually or in the aggregate,
will constitute "excess parachute payments" (as such terms are
defined in Section 280G of the Internal Revenue Code).
(k) Schedule 3.17 of the Seller Disclosure Schedule sets
forth an accurate list of the accrued vacation pay due each
employee of Seller as of April 4, 1998.
3.21 Tax Matters. All Tax Returns required to be filed on or
before the date hereof with respect to Taxes have been duly filed,
and all Taxes shown or required to be shown thereon to be payable
have been paid or provided for in the Audited Seller Financial
Statements and the Interim Seller Financial Statements. No
deficiencies for any Taxes with respect to Seller have been
asserted, assessed or, to the Knowledge of Seller, proposed that
have not been paid in full. There is no pending or, to the
Knowledge of Seller, threatened in writing Tax audit of any Tax
Return filed with respect to Seller. There are no agreements by
Seller for the extension of time for the assessment of any Taxes.
There are no liens for Taxes (other than for Taxes not yet due and
payable) on the assets of Seller.
3.22 Insider Interests. Except as described on Schedule 3.22
of the Seller Disclosure Schedule, no officer, director or holder
of 5% or more of the shares of Common Stock (i) competes with or is
involved in or has a direct or indirect interest in any business
entity which competes with the business conducted by Seller, (ii)
has any agreement with Seller or (iii) has any interest, direct or
indirect, in any property, real or personal, tangible or
intangible, including, without limitation, Intellectual Property,
used in or pertaining to the business of Seller, except as a
shareholder or employee of Seller.
3.23 Certain Practices. Neither Seller nor any director,
officer, employee or agent of Seller has, directly or indirectly,
made or agreed to make, any improper or illegal payment, gift or
political contribution to, or taken any other improper or illegal
action, for the benefit of any customer, supplier, governmental
employee or other Person who is or may be in a position to assist
or hinder the business of Seller.
3.24 Finders. Except for Asset Services Investment
Securities, Inc. and Retail Consulting Services, the fees and
expenses of which will be paid by Seller, no broker, finder or
investment banker is entitled to any fee or commission from Seller
for services rendered on behalf of Seller in connection with the
transactions contemplated by this Agreement.
3.25 Full Disclosure. To the Knowledge of Seller, none of the
representations and warranties of Seller which are made in Article
III of this Agreement contains an untrue statement of a material
fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which
they were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER AND PAS
Buyer and PAS, jointly and severally, represent and warrant to
Seller the following:
4.1 Organization; Qualification. Each of Buyer and PAS, a
wholly owned Subsidiary of Buyer, is a corporation duly organized,
validly existing and in good standing under the laws of the
jurisdiction of its incorporation; and each of Buyer and PAS has
corporate power and authority to own all of its properties and
assets and to carry on its business as it is presently being
conducted.
4.2 Authority Relative to this Agreement. Buyer and PAS
have corporate power and authority to execute and deliver this
Agreement and to consummate the Merger. The execution and delivery
by Buyer and PAS of this Agreement and the consummation of the
Merger have been duly authorized by the Boards of Directors of
Buyer and PAS and no other corporate proceedings on the part of
Buyer or PAS are necessary with respect thereto. Assuming that
Seller has duly authorized the execution of this Agreement, this
Agreement constitutes valid and binding obligations of Buyer and
PAS and are enforceable against Buyer and PAS in accordance with
its terms, subject to applicable bankruptcy, insolvency, moratorium
or other similar laws relating to creditors' rights and general
principles of equity.
4.3 Consents and Approvals. Except for (i) approvals
required pursuant to the HSR Act and (ii) the filing of a
Certificate of Merger in the Office of the Secretary of State of
the State of Delaware, there is no requirement applicable to Buyer
or PAS to make any filing with, or to obtain any permit,
authorization, consent or approval of any public body as a
condition to the consummation of the Merger where the failure to so
make or obtain would prevent or materially restrict consummation of
the Merger or fulfillment of any of the conditions to this
Agreement.
4.4 Non-Contravention. The execution and delivery by Buyer
and PAS of this Agreement do not, and the consummation of the
Merger will not, (i) violate or result in a breach of any provision
of the Articles of Incorporation of Buyer or the Certificate of
Incorporation of PAS, or the Bylaws of Buyer or PAS, or (ii)
violate any order, writ, injunction, decree, statute, rule or
regulation applicable to Buyer or any of its Subsidiaries, or the
businesses conducted by any of them, excluding from the foregoing
clause such defaults and violations which would not prevent or
materially restrict consummation of the Merger or fulfillment of
any of the conditions to this Agreement.
4.5 Litigation. There are no actions, suits, claims,
investigations or proceedings (legal, administrative or
arbitrative) pending or, to the knowledge of Buyer, threatened,
against Buyer or PAS, whether at law or in equity and whether civil
or criminal in nature, before any federal, state, municipal or
other court, arbitrator, governmental department, commission,
agency or instrumentality, domestic or foreign, nor are there any
judgments, decrees or orders of any such court, arbitrator,
governmental department, commission, agency or instrumentality
outstanding against Buyer or PAS which have, or if adversely
determined, could reasonably be expected to prevent, restrict or
delay consummation of the Merger or fulfillment of any of the
conditions of this Agreement.
4.6 Financing. Buyer has delivered to Seller a complete
and correct copy of a commitment letter (the "Commitment")
addressed to Buyer from Fleet Bank, N.A. for the provision of
financing pursuant to a credit agreement on the terms and
conditions described in the Commitment. Such financing is in
amounts sufficient to provide Buyer with sufficient funds to
consummate the transactions contemplated by this Agreement.
4.7 Finders. No broker, finder or investment banker is
entitled to any fee or commission from Buyer or PAS for services
rendered on behalf of Buyer or PAS in connection with the
transactions contemplated by this Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Conduct of Business of Seller. From the date hereof
until the Effective Time, Seller will (i) conduct its business only
in the ordinary and usual course and in a manner consistent with
past practices, (ii) use its reasonable best efforts to preserve
intact its present business organization and operations, keep
available the services of its officers and employees and preserve
its relationships with licensors, suppliers, dealers, customers and
others having business relationships with it and (iii) permit Buyer
and its representatives to participate in all meetings and
discussions held between Seller and its representatives of the
United States Department of Labor in connection with the audit of
the ESOP (the "ESOP Audit"). Seller's management will meet with
Buyer, at such times as Buyer reasonably determines are necessary,
to discuss the general status of the ongoing operations of Seller
and any problems relating to the conduct of its business. Seller
will notify Buyer (w) of any emergency or change in the normal
conduct of the business or operations of Seller, (x) of the threat
of, or initiation of, any litigation against Seller or any member
of its Board of Directors with respect to the operation or
management of Seller, (y) of the initiation of any investigation of
Seller by any party, whether private or governmental, and (z) of
any budget revisions approved by the Board of Directors of Seller
involving the business of Seller and Seller will keep Buyer fully
informed of material developments with respect to the ESOP Audit
and the events listed in the immediately preceding sentence and
afford Buyer's representatives reasonable access to all materials
in its possession relating thereto.
5.2 Forbearances by Seller. Except as contemplated by this
Agreement, without the written consent of Buyer, Seller will not,
from the date hereof until the Effective Time:
(i) sell, dispose of, transfer or encumber any
of its assets except in the ordinary and usual course of
business;
(ii) mortgage, pledge or otherwise encumber any
of its assets;
(iii) amend, modify or cancel any Material
Contract or Lease;
(iv) make any commitments for capital
expenditures or incur any obligation or liability for
borrowed money, other than commitments or obligations not
exceeding $10,000 in the aggregate;
(v) make any investment by means of the
purchase of stock or securities, contributions to capital
or the purchase of property or assets from any other
Person other than investments in U.S. Treasury securities
in the ordinary and usual course of business;
(vi) assume, guarantee, endorse or otherwise
become responsible for the obligations of any other
Person or make loans or advances to any Person except in
the ordinary and usual course of business;
(vii) except as described in Schedule 5.2 of the
Seller Disclosure Schedule, increase in any manner the
compensation of any of its officers; pay or agree to pay
any pension or retirement allowance not required by an
existing plan or agreement to any officer or employee or
enter into or amend any employment agreement or any
incentive compensation, profit sharing, stock purchase,
stock option, stock appreciation rights, savings,
consulting, deferred compensation, retirement, pension or
other benefit plan or arrangement with or for the benefit
of any of its officers, employees or for the benefit of
any other person;
(viii) enter into any contract which will require
expenditures of more than $10,000, other than orders
placed in the ordinary course of business;
(ix) alter in any way the manner in which it
regularly and customarily maintains its books of account
and records, provided the accounting period which
ordinarily ends May 30, 1998 will be extended to the
Saturday immediately preceding the Closing Date;
(x) conduct any "going out of business" or
"inventory reduction" or similar sales or otherwise
reduce the marked retail sale price of its inventory,
other than Knoxville West, Concord and Harrisonburg
stores;
(xi) declare, set aside or pay any dividend in
cash or property with respect to its capital stock;
(xii) except as contemplated by Section 5.5,
split, combine or otherwise change its capital stock, or
redeem any of its capital stock;
(xiii) authorize the creation or issuance of, or
issue or sell any shares of, its capital stock or any
securities or obligations convertible into or
exchangeable for, or giving any Person any right to
acquire any shares of its capital stock;
(xiv) merge or consolidate with any other Person
or acquire all of the stock or business of any Person;
(xv) amend its Certificate of Incorporation or
Bylaws;
(xvi) cancel or allow any of its existing
insurance policies to lapse;
(xvii) enter into a settlement agreement or
consent decree in respect of the ESOP Audit; or
(xviii) enter into an agreement to do any of the
things described in clauses (i) through (xvii) above.
5.3 Negotiations with Others. From the date hereof until
the Effective Time, Seller will not, directly or indirectly,
without the written consent of Buyer, initiate discussions or
engage in negotiations with any Person other than Buyer, concerning
any merger or sale of capital stock or a substantial portion of the
assets of Seller outside the ordinary and usual course of business
provided; however, that nothing contained in this Section 5.3 shall
prohibit the Board of Directors of Seller from furnishing
information to or entering into discussions or negotiations with,
any Person that makes an unsolicited bona fide written proposal to
acquire Seller pursuant to a merger, consolidation, share exchange,
purchase of a substantial portion of the assets, business
combination or other similar transaction (an "Acquisition
Proposal"), if, and only to the extent that, (A) the Board of
Directors of Seller determines in good faith that such action is
required for the Board of Directors to comply with its fiduciary
duties to shareholders imposed by law, (B) prior to furnishing such
information to, or entering into discussions or negotiations with,
such Person, Seller provides written notice to Buyer to the effect
that it is furnishing information to or entering into discussions
or negotiations with, such Person and provides Buyer with a copy of
any such written proposal, and (C) Seller keeps Buyer informed of
the status (not the terms) of any such discussions or negotiations.
Nothing in this Section 5.3 shall (x) permit any party to terminate
this Agreement (except as specifically provided in Article X
hereof), (y) permit Seller to enter into any agreement with respect
to an Acquisition Proposal during the term of this Agreement (other
than a confidentiality agreement in customary form), or (z) affect
any other obligation of any party under this Agreement.
5.4 Investigation of Business and Properties;
Confidentiality. From the date hereof until the Effective Time,
Seller will afford Buyer and its attorneys, accountants, financial
advisors and other representatives complete access at all
reasonable times and upon reasonable notice to its officers,
employees, properties, contracts, books and records. In addition
Seller shall furnish Buyer with such financial, operating and
additional data as Buyer may reasonably request concerning
Seller's business, operations, properties and personnel. Buyer and
PAS shall continue to comply with the terms of the Confidentiality
Agreement, dated August 5, 1997 (the "Confidentiality Agreement")
between Buyer and Seller.
5.5 INTENTIONALLY OMITTED
5.6 Severance Payments. Following consummation of the Merger,
if any employee of Seller who is an employee at the Effective Time
(other than Forrest Watson) is (i) discharged by the Surviving
Corporation within one year after the consummation of the Merger,
(ii) terminates employment with the Surviving Corporation after
having been asked to relocate for continued employment with the
Surviving Corporation beyond a thirty-mile radius of the employee's
current work place location or (iii) is required to accept
compensation from the Surviving Corporation which is 10% or more
less than the compensation of such employee immediately prior to
the Merger, then the Surviving Corporation shall pay to such
employee (A) accrued vacation due to such employee and (B) a
severance payment in an amount set forth on Schedule 5.6 to the
Seller Disclosure Schedule.
5.7 Shareholder Approvals. Promptly after the date of
execution and delivery of this Agreement by Buyer and PAS, Seller
will give notice of a meeting of its shareholders to be held
promptly for the purpose of considering and voting upon a proposal
to approve and adopt this Agreement and the transactions
contemplated hereby. Seller's Board of Directors will recommend
that its shareholders vote to approve and adopt this Agreement.
5.8 Expenses. Whether or not the Merger is consummated, Buyer
will pay all of its expenses incurred in connection with this
Agreement and the transactions contemplated hereby and the
Shareholders shall pay all expenses incurred by Seller or the
Shareholders in connection with the transactions contemplated by
this Agreement (including legal and investment banking fees) in
excess of $200,000, which expenses shall be deducted from the
Escrow Amount.
5.9 Public Announcements. The parties will consult with
each other before issuing any press release or otherwise making any
public statement with respect to this Agreement and the Merger and
will not issue any such press release or make any such public
statement without the consent of the other unless such action is
required by law.
5.10 Subsequent Events. If any event shall occur prior to the
Closing which, had it occurred prior to the execution of this
Agreement, should have been disclosed by a party to this Agreement
in a representation and warranty or otherwise, then as soon as
practicable after the happening of such event, such party shall
disclose the happening of such event to the other parties hereto.
5.11 Efforts to Consummate. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to
use its reasonable best efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper
or advisable to consummate, as promptly as practicable, the
transactions contemplated hereby, including, but not limited to,
the obtaining of all necessary consents, waivers, authorizations,
orders and approvals of third parties, whether private or
governmental, required of it to enable it to comply with the
conditions precedent to consummating the Merger set forth in this
Agreement and, in the case of Buyer, obtaining financing to
consummate the transaction. Each party agrees to cooperate fully
with each of the other parties in assisting them to comply with the
provisions of this Section, and in the event any claim, action,
suit, investigation or other proceeding by any governmental body or
other person is commenced which questions the validity or legality
of the Merger or seeks damages in connection therewith, the parties
agree to cooperate and use their reasonable best efforts to defend
against such claim, action, suit, investigation or other
proceeding. If an injunction or other order is issued in any such
action, suit or other proceeding, the parties agree to use their
reasonable best efforts to have such injunction or other order
lifted. Notwithstanding the foregoing, no party hereto shall be
required to make any substantial payment or incur any material
economic burden, other than a payment otherwise required of it, to
obtain any consent, waiver, authorization order or approval, and
if, despite its efforts, any party is unable to obtain any material
consent, waiver, authorization, order or approval, the other
parties for whose benefit the consent, waiver, authorization, order
or approval is to be obtained may terminate this Agreement and
shall have no liability therefor, except as is provided in Section
10.2.
5.12 Performances by PAS. Buyer hereby agrees to cause PAS
to comply with its obligations under this Agreement and to cause
PAS to consummate the Merger as contemplated herein.
5.13 Estoppel Certificates. Seller shall obtain from each
lessor listed on Schedule 5.13 the applicable estoppel certificates
in substantially the form attached as Exhibit A and dated no sooner
than thirty days prior to the Effective Time. Seller warrants that
the representations set forth in each such estoppel certificate
will be true and accurate as of the Effective Time (except that
representations based on the lessor's knowledge shall not be so
qualified in the case of Seller's representation hereunder).
5.14 Title Insurance. Seller shall, at its expense, cause
to be issued owner's policy(ies) of title insurance covering the
Real Property in form and content reasonably satisfactory to Buyer
and in amount(s) equal to the fair market value thereof and
containing a non-imputation endorsement satisfactory to Buyer.
5.15 Filings. Seller and Buyer will each file or have filed
with the United States Federal Trade Commission and the Antitrust
Division of the United States Department of Justice, pursuant to
the HSR Act, Notification and Report Forms with respect to the
transactions contemplated by this Agreement, and each of them will
respond as promptly as is practicable to all inquiries received
from either agency for additional information or documentation.
Buyer shall pay the filing fees required in connection with such
filings.
5.16 Inventory Valuation. The retail price of all non-basic
merchandise for a season prior to Spring 1998 will be adjusted so
that the price does not exceed 25% of the original retail price if
the inventory is for a season prior to Fall 1997 or 50% of the
original retail price if the inventory is for the Fall 1997 season
(inventory delivered between July 1997 and December 1997). The
cost of the markdown that results from the price adjustment will be
determined by multiplying the markdown by the reciprocal of the
mark-on percentage for the Company's applicable merchandise
department. The resulting shortfall will be deducted from the
Escrow Amount.
5.17 Termination of the ESOP. The Seller shall adopt an
amendment to the ESOP (the "ESOP Amendment"), which ESOP Amendment
shall provide (i) that the portion of the ESOP consisting of shares
of common stock and shares of preferred stock allocated to ESOP
participants' accounts (the "Non-ESOP Portion") shall no longer be
considered part of an "employee stock ownership plan" or a "stock
bonus plan" (as defined in Sections 4975 and 401(a)(23) of the
Internal Revenue Code, respectively), (ii) that distributions to
participants in the form of "qualifying employer securities" (as
defined in Section 407 of ERISA) shall no longer be permitted under
the Non-ESOP Portion, (iii) that the entire balance of a
participant's account under the Non-ESOP Portion shall be
distributable solely in cash or rights to receive cash, and (iv)
that the ESOP shall be terminated effective as of the Closing Date,
subject to receipt of a favorable determination letter from the
Internal Revenue Service regarding the ESOP's termination.
5.18 Amendment to the 401(k) Plan. The Seller shall adopt an
amendment to the Ira A. Watson Co. Profit Sharing and 401(k) Plan
(the "401(k) Plan") which shall provide that, effective as of the
day before the Closing Date, no more contributions shall be made to
the 401(k) Plan, no person other than those persons who are
participants in the 401(k) Plan shall be eligible to become
participants in the 401(k) Plan and all participants shall be fully
vested in their account balances.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF BUYER AND PAS
The obligations of Buyer and PAS to consummate the Merger
shall be subject, to the extent not waived, to the following
conditions.
6.1 Representations and Warranties. Except for changes
contemplated by this Agreement, each of the representations and
warranties of Seller contained in Article III of this Agreement and
in the estoppel certificates attached as Exhibit A that are
qualified as to materiality or references to Material Adverse
Effect shall be true in all respects and those not so qualified
shall be true and correct in all material respects, as of the date
of this Agreement and as of the Effective Time, and Seller shall
have delivered to Buyer a certificate to that effect signed by its
Chief Executive Officer.
6.2 Performance of this Agreement. Seller shall have
complied in all material respects with each of its obligations
under this Agreement and shall have delivered to Buyer a
certificate to that effect signed by its Chief Executive Officer.
6.3 Corporate Authorization. All corporate action required to
be taken by Seller (including receiving the requisite approval of
its shareholders) in connection with the Merger shall have been
taken, all documents incident thereto shall be reasonably
satisfactory in substance and form to Buyer and Buyer shall have
received such copies of such documents as it may reasonably
request.
6.4 Consents and Approvals.
(a) All consents, authorizations, orders or approvals of
governmental or regulatory authorities which Seller is required to
obtain in order to be able to consummate the Merger shall have been
obtained and all waiting periods specified by law with respect
thereto shall have passed.
(b) All consents of Persons which Seller is required to
obtain in connection with the Merger, the failure to obtain which
could reasonably be expected to have a Material Adverse Effect,
shall have been obtained.
6.5 Injunction, Litigation, etc. No order of any court or
governmental agency shall be in effect which restrains or prohibits
the consummation of the Merger, and there shall not have been
threatened, nor shall there be pending, any action or proceeding by
or before any such court or governmental agency (X) seeking to
prohibit or delay or challenging the validity of the Merger or (Y)
against Seller or any member of its Board of Directors by any
shareholder or former shareholder of Seller concerning the
operations or management of Seller.
6.6 Legislation. No statute, rule or regulation shall have
been proposed or enacted which prohibits or might prohibit,
restrict or delay the consummation of the Merger.
6.7 Resignations. Such officers and directors of Seller as
Buyer shall request shall have tendered resignations to become
effective as of the Effective Time.
6.8 Repayment of Indebtedness. All indebtedness to Seller of
any employee, officer or director of Seller (other than employee
layaway accounts and amounts due for purchases of goods not
exceeding $500) shall have been paid in full.
6.9 Opinion of Counsel for Seller. Buyer shall have received
an opinion from Bass, Berry & Sims PLC, Counsel for Seller, in form
and substance reasonably satisfactory to Buyer.
6.10 Purchase of Stock. PAS shall have consummated the
purchase of (x) all of the Common Stock held by the ESOP, (y) all
of the outstanding shares of Adjustable Rate Cumulative Preferred
Stock Series A held by Persons other than Appalachian Distributing
Corporation and (z) not fewer than 400 shares of First Preferred
Stock.
6.11 Termination of Credit Card Program Agreement. Seller and
Shoppers Charge Accounts Co. shall have entered into the
Termination Agreement, the terms of which are otherwise reasonably
satisfactory to Buyer and all actions required to be taken by
Seller or Shoppers Charge pursuant to the Termination Agreement
(other than the payment of the repurchase price for such accounts
receivable by the Surviving Corporation and the redelivery of the
accounts receivable) shall have been taken.
6.12 Financing. Buyer shall have obtained, pursuant to the
Commitment or otherwise, the funds necessary to enable Buyer to
consummate the transactions contemplated by this Agreement on the
terms set forth herein.
6.13 Estoppel Certificates. Seller shall have obtained and
delivered to Buyer the estoppel certificates described in Section
5.13 and such amendments to the Leases as are a part of those
estoppel certificates.
6.14 Dissenter's Rights. Seller shall not have received
notice from the holders of Dissenting Shares equal to more than ten
percent (10%) of the shares of Common Stock outstanding immediately
prior to the Effective Time.
6.15 Absence of Material Change. There shall not have
occurred at any time after the date of this Agreement any material
adverse change in the assets, liabilities or financial condition of
Seller.
6.16 Escrow Agreement. Buyer and the Escrow Committee shall
have executed and delivered the Escrow Agreement.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF SELLER
The obligation of Seller to consummate the Merger shall be
subject, to the extent not waived, to the following conditions.
7.1 Representations and Warranties. Each of the
representations and warranties of Buyer and PAS contained in
Article IV of this Agreement shall be true and correct in all
material respects as of the date of this Agreement and as of the
Effective Time, and Buyer shall have delivered to Seller a
certificate to that effect signed by an executive officer.
7.2 Performance of this Agreement. Buyer and PAS shall have
complied in all material respects with each of their obligations
under this Agreement, and Buyer shall have delivered to Seller a
certificate to that effect signed by an executive officer.
7.3 Corporate Authorization. All corporate action required to
be taken by Buyer and PAS in connection with the Merger shall have
been taken, and Seller shall have received such copies of documents
incident to such approvals as it may reasonably request.
7.4 Consents and Approvals. All consents, authorizations,
orders or approvals of governmental or regulatory authorities which
Seller is required to obtain in order to enable it to consummate
the Merger shall have been obtained and all waiting periods
specified by law with respect thereto shall have passed.
7.5 Injunction, Litigation, etc. No order of any court or
governmental agency shall be in effect which restrains or prohibits
the consummation of the Merger and there shall not have been
threatened, nor shall there be pending, any action or proceeding by
or before any such court or governmental agency seeking to prohibit
or delay or challenging the validity of the Merger.
7.6 Legislation. No statute, rule or regulation shall have
been proposed or enacted which prohibits or might prohibit,
restrict or delay the consummation of the Merger.
7.7 Opinion of Counsel for Buyer and PAS. Seller shall have
received an opinion from McGuire, Woods, Battle & Boothe LLP,
Counsel for Buyer and PAS, in form and substance reasonably
satisfactory to Seller.
ARTICLE VIII
CLOSING
8.1 Time and Place of Closing. The closing (the "Closing")
shall take place at the offices of McGuire, Woods, Battle & Boothe
LLP in Richmond, Virginia at 10:00 a.m. local time on the later of
(i) June 15, 1998, (ii) the next business day after the last of the
closing conditions has been fulfilled or waived or (iii) such other
date as may be agreed upon by the parties (the "Closing Date"). At
the Closing the parties shall supply evidence to the other parties
of the fulfillment or waiver of the conditions to their obligations
under this Agreement. Concurrently with the Closing, or as
promptly as practicable thereafter, a Certificate of Merger shall
be filed with the Office of the Secretary of the State of Delaware.
ARTICLE IX
ESCROW
9.1 Appointment of Escrow Committee.
(a) By voting to approve the Merger or tendering
certificate representing shares of Common Stock for exchange in the
Merger, the Shareholders shall AUTOMATICALLY BE DEEMED TO HAVE
DESIGNATED FORREST I. WATSON AND FRANK M. ADDICKS AS THE "ESCROW
COMMITTEE." The Escrow Committee shall have full power to act on
behalf of the Shareholders in the manner specified herein in
connection with all matters with respect to which action by the
Escrow Committee is contemplated by this Agreement. The Escrow
Committee shall be entitled to reimbursement from the Shareholders
of all reasonable expenses included in the performance of the
duties contemplated under this Agreement, including, but to limited
to the right to employ financial advisors and other agents to
undertake or assist in the assessment, arbitration, litigation
and/or settlement of such claims. The Escrow Committee is
expressly authorized to rely upon the advice of such consultants
and agents. THE SHAREHOLDERS SHALL AUTOMATICALLY BE DEEMED TO HAVE
WAIVED ANY RIGHT OR CAUSE OF ACTION FOR ANY ACTION, OF ANY NATURE
WHATSOEVER, TAKE OR OMITTED FROM BEING TAKEN BY THE ESCROW
COMMITTEE OR ANY SUCCESSOR, ABSENT A CLEAR SHOWING OF HIS, HER OR
ITS GROSS ERROR OR FRAUD.
(b) The Escrow Committee shall take all actions required
to be taken by the Escrow Committee under this Agreement and may
take any action contemplated by this Agreement on behalf of the
Shareholders. By giving notice to the Escrow Committee in the
manner provided by Section 11.1, Buyer shall be deemed to have
given notice to all of the Shareholders and any action taken by the
Escrow Committee may be considered by Buyer to be the action of
each Shareholder for whom such action was taken for all purposes of
this Agreement. The Escrow Committee's duties shall terminate upon
the final distribution of the Escrowed Funds under the Escrow
Agreement.
9.2 Escrow Agreement. Seller, Buyer, the Escrow Committee
and the Escrow Agent will at the Closing enter into an Escrow
Agreement (the "Escrow Agreement") in substantially the form of
Exhibit B hereto. The provisions of the Escrow Agreement shall be
incorporated herein as if fully stated herein. A portion of the
Merger Consideration, consisting of the Escrow Amount, shall be
deposited by Buyer or PAS and held in escrow, as contingent
consideration for the holders of Common Stock, by the Escrow Agent
in compliance with the terms and conditions of the Escrow
Agreement. The funds held in escrow pursuant to this Article IX
will be invested by the Escrow Agent only in short-term government
securities.
9.3 Non-Transferability of the Escrowed Funds. The funds held
in escrow shall be held for the benefit of those persons who own
Outstanding Shares of Common Stock at the Effective Time (the
"Shareholders") and Buyer only and shall not be transferable by any
potential recipient thereof, except by will, intestate succession
or operation of law.
9.4 Escrowed Funds. The moneys deposited under the Escrow
Agreement pursuant to this Agreement and all interest and other
earnings thereon (collectively, the "Escrowed Funds") shall be
applied as provided in the Escrow Agreement and this Agreement.
The Escrow Committee shall be entitled to obtain distributions from
the Escrowed Funds from time to time prior to the end of the Second
Escrow Period (as defined below) in an aggregate amount not to
exceed $50,000 to pay expenses incurred by the Escrow Committee in
accordance with Section 9.1. Subject to the following sentence,
that portion of the Escrowed Funds exceeding $300,000 shall be held
for a period ending on the first anniversary of the Closing Date
(the "First Escrow Period"), and the remainder of the Escrowed
Funds (less any amount which has been previously distributed to
Buyer during the First Escrow Period in respect of claims under
Section 9.5(b)(xvi)) shall be held for a period ending on the third
anniversary of the Closing Date (the "Second Escrow Period") and
applied to the payment of claims, if any, made by Buyer pursuant to
Section 9.5(b)(xvi). At the end of the Second Escrow Period, any
Escrowed Funds which have not been previously distributed and which
are not the subject to any objection with respect to the
distribution thereof as provided in the Escrow Agreement, shall be
first, distributed to the Escrow Committee for the payment of the
fees and expenses incurred by the Escrow Committee in accordance
with Section 9.1 and not otherwise previously reimbursed out of the
Escrowed Funds and second, the remainder, if any, shall be
distributed as provided in the Escrow Agreement to the former
holders of Common Stock.
9.5 Adjustments to Purchase Price.
(a) The Distribution Amount shall be determined as
provided in this Section 9.5.
(b) The Distribution Amount shall be equal to
(i) $703,745;
(ii) plus 0.8648 times the amount, if any, by
which the prepayment penalty incurred by Buyer, Seller,
PAS or the Surviving Corporation in connection with the
payment amounts due Congress Financial Corporation
pursuant to that certain Secured Revolving Credit
Facility dated as of August 31, 1993 by Seller is less
than $120,000;
(iii) plus 0.8648 times the amount, if any, by
which the cash payment made or contractually committed to
be made to Buyer, Seller, PAS or the Surviving
Corporation on or before September 30, 1998 in connection
with the termination and settlement of the Harrisonburg
Lease exceeds $500,000;
(iv) minus 0.8648 times the total of amounts
paid by Buyer, Seller, PAS or the Surviving Corporation
in connection with the disposition of the lawsuit styled
Robert H. Jacobs v. Ira A. Watson Co., including amounts
paid pursuant to a judgment, amounts paid in settlement
and all attorneys fees, costs and expenses incurred in
connection therewith subsequent to the date of this
Agreement;
(v) minus 0.8648 times the sum of all amounts
paid by Buyer, Seller, PAS or the Surviving Corporation
to the landlord or third party consultants in connection
with the termination and settlement of the obligations of
the Seller under the West Knoxville Lease;
(vi) minus 0.8648 times the amount of
prepayment penalties or premiums paid by Buyer, Seller,
PAS or the Surviving Corporation in connection with the
prepayment of the principal and interest due the Fidelity
Mutual Life Insurance Company ("Fidelity Mutual") by
Seller pursuant to the Mortgage Loan Agreement dated as
of June 15, 1989, as amended by the First Amendment
thereto dated as of November 10, 1993, by and between
Fidelity Mutual and Seller;
(vii) minus 0.8648 times the amount of all
amounts owed on layaway receivables upon which no payment
has been made in 30 days per the layaway file report run
at each of Seller's stores as of the close of business on
the Saturday night immediately preceding the Effective
Date;
(viii) minus 0.8648 times the amount by which the
bad debt reserve maintained by Shoppers Charge on behalf
of Seller on the Closing Date is confirmed by Shoppers
Charge to exceed $105,000;
(ix) minus 0.8648 times the amount by which the
advertising receivable maintained by Watson's with
respect to Shoppers Charge on the Closing Date is
confirmed by Shoppers Charge to be less than $46,821;
(x) minus 0.8648 times the amount by which the
cash collateral account maintained by Shoppers Charge on
behalf of Seller on the Closing Date is confirmed by
Shoppers Charge to be less than $143,403;
(xi) plus 0.8648 times the amount by which the
total amount of principal and interest obligated to be
paid by Buyer, Seller, PAS or the Surviving Corporation
after the date hereof in respect of the Bankruptcy Claims
is less than $2,458,703;
(xii) minus 0.8648 times the amount, if any, by
which Seller's loss before income taxes (after equity in
earnings of Subsidiary have been posted) for the period
beginning on April 5, 1998 and ending on the Closing Date
exceeds $545,000 (such amount to be increased by $11,000
for each day the Closing Date extends beyond June 15,
1998) (for the avoidance of doubt, a loss of $600,000
during such period would result in a reduction of the
Distribution Amount by $55,000); provided, Seller's loss
before income taxes for purposes of this subsection (xii)
shall not include any item affecting the Distribution
Amount pursuant to any other subsection of this Section
9.5 or any charges relating to store closings or lease
renegotiations;
(xiii) minus 0.8648 times the amount, if any, by
which the expenses incurred by Seller in connection with
the transactions contemplated by this Agreement exceed
$200,000, provided any fees paid to Retail Consulting
Services shall not be included in such amount;
(xiv) minus 0.8648 times the amount, if any, of
the shortfall computed in accordance with Section 5.16 of
this Agreement;
(xv) minus 0.8648 times the amount, if any,
distributed from the Escrow Account in respect of any
damage, loss, liability or expense (including, without
limitation, reasonable expenses of investigation and
litigation and reasonable attorneys', accountants' and
other professional fees) arising out of a breach of any
representation, warranty or covenant made by Seller in
this Agreement. For purposes of this Section 9.5(b)(xv),
the determination of whether a representation or warranty
made by Seller in this Agreement has been breached shall
be made by ignoring references to "material" or "Material
Adverse Effect;" and
(xvi) minus the amount, if any, distributed from
the Escrow Account in respect of any damage, loss,
liability or expense (including, without limitation,
reasonable expenses of investigation and litigation and
reasonable attorneys', accountants' and other
professional fees) arising out of (A) failure by the
Seller, its directors, officers, employees or agents, or
any third party administrator or trustee to comply with
all applicable laws in respect of the administration,
operation or maintenance with, the ESOP, (B) the ESOP
Audit or (C) those matters listed in paragraphs (c) and
(f) of Schedule 3.20 of the Seller Disclosure Schedule).
The foregoing provisions notwithstanding, in no event
shall the Distribution Amount exceed the total of $703,745 plus
interest earned thereon and deposited in the Escrow Account.
(c) Buyer shall give written notice (a "Claim Notice")
to the Escrow Agent and the Escrow Committee if Buyer believes it
is entitled to distributions from the Escrow Fund with respect to
any of the matters set forth in Section 9.5(b). The Claim Notice
shall be provided promptly (but in no event later than ten days
prior to the time any response to an asserted claim is required)
after receipt of knowledge of the fact upon which such claim is
based and shall set forth in reasonable detail the facts giving
rise to any claim for a distribution hereunder.
(d) Upon receipt by the Escrow Committee of a Claim
Notice from Buyer with respect to any claim of a third party which
gives rise to Buyer's right to distribution pursuant to Section
9.5(b)(xv) or Section 9.5(b)(xvi),the Escrow Committee may assume
the defense thereof with counsel reasonably satisfactory to Buyer
and Buyer shall cooperate in the defense or prosecution thereof and
shall furnish such records, information and testimony and attend
all such conferences, discovery proceedings, hearing, trials and
appeals as may be reasonably requested in the connection thereof.
Buyer shall have the right to employ its own counsel in any such
case, but the fees and expenses of such counsel shall be at the
expense of Buyer unless (i) the Escrow Committee shall not have
promptly employed counsel reasonably satisfactory to Buyer to take
charge of the defense of any such action or (ii) counsel for Buyer
determines, in its reasonable judgment, that Buyer and the Escrow
Committee may have conflicting defenses or claims. Neither Buyer
nor the Escrow Committee shall make any settlement of any claim
without the written consent of the other, which consent shall not
be unreasonably withheld. Without limiting the generality of the
foregoing, it shall not be deemed unreasonable for Buyer to
withhold consent to a settlement involving injunctive or other
equitable relief against Buyer, the Surviving Corporation or their
respective assets, employees or business.
(e) The Escrow Committee shall have the right to object,
by written notice delivered within 20 days after a Claim Notice is
received to the Buyer and the Escrow Agent, to all or any portion
of a proposed distribution contained in any Claim Notice.
9.6 Limitations on Distributions. Notwithstanding the
foregoing provisions of this Article IX, and other than with
respect to claims for fraud, as to which no limitation set forth in
this Article IX shall apply, (i) Buyer shall not be entitled to any
distributions of Escrowed Funds for claims pursuant to Sections
9.5(b)(xv) and 9.5(b)(xvi) until the aggregate amount of
distributions to which Buyer is otherwise entitled for claims
pursuant to Sections 9.5(b)(xv) and 9.5(b)(xvi) exceeds $43,240,
and then entitlement for any claims related to matters arising
under Sections 9.5(b)(xv) and 9.5(b)(xvi) of this Agreement in
excess of $43,240 shall be limited to the Escrowed Funds.
9.7 Provision of Information. Buyer shall provide to the
Escrow Committee on request all information and documentation
reasonably necessary to support and verify any claims that Buyer
believes give rise to a claim for distribution of Escrowed Funds
and shall give the Escrow Committee reasonable access to all books,
records and personnel in the possession or under the control of the
Buyer or the Surviving Corporation that would have a bearing on
such claim.
9.8 Survival; Investigation. The representations and
warranties of Seller contained in this Agreement shall survive any
investigation by Buyer and shall not terminate until the first
anniversary of the Closing Date (the "Survival Date") at which time
they shall lapse. Notwithstanding the provisions of the preceding
sentence, any representation or warranty in respect of which
indemnification may be sought under this Article IX shall survive
the Survival Date if written notice, given in good faith, of a
specific breach thereof is given to Seller in accordance with
Section 9.5 prior to the Survival Date.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
10.1 Termination. This Agreement may be terminated at any
time prior to the Effective Time, whether before or after approval
by the shareholders of Seller:
(i) by mutual consent of the Boards of
Directors of Seller and Buyer;
(ii) by Seller or Buyer if there has been a
material breach by the other of a representation,
warranty or agreement contained herein, which breach is
not curable or, if curable, is not cured within 20 days
after written notice of such breach is given to the other
party, or if any condition to the consummation of the
Merger which must be met by the other, becomes impossible
to fulfill;
(iii) by Seller if in the exercise of its good
faith judgment as to its fiduciary duties to its
shareholders imposed by law, the Board of Directors of
Seller determines that such termination is required by
reason of an Acquisition Proposal being made;
(iv) by either Buyer or Seller if Seller's
shareholders fail to approve this Agreement and the
Merger at the initial convening of the meeting of
Seller's shareholders held to consider and vote upon this
Agreement and the Merger; or
(v) by Seller or Buyer if the Closing has not
occurred by 11:59 p.m. July 15, 1998; provided, however,
that the right to terminate this Agreement pursuant to
this paragraph (v) shall not be available to any party
whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the
failure of the Closing to have occurred on or before such
date.
10.2 Effect of Termination.
(a) In the event of the termination of this Agreement as
provided in Section 10.1, this Agreement shall become wholly void
and of no further force and effect and, except as provided in
Sections 10.2(b) and 10.2(c), there shall be no further liability
or obligation on the part of any party hereto except to pay such
expenses as are required of it, but such termination shall not
constitute a waiver by any party of any claim it may have for
damages caused by reason of a breach of a representation or
warranty made by another party to in this Agreement.
(b) If Seller terminates this Agreement pursuant to
Section 10.1(iii), then Seller shall pay Buyer a fee of $500,000,
which amount shall be paid in same day funds no later than two
business days after the termination of this Agreement.
(c) If (A) either Buyer or Seller terminates this
Agreement pursuant to Section 10.1(iv) and prior to termination
pursuant to Section 10.1 (iv) Seller has received an Acquisition
Proposal, or (B) Seller terminates this Agreement pursuant to
Section 10.1(v) and prior to termination pursuant to Section
10.1(v) Seller has received an Acquisition Proposal, then, in
either event, Seller shall pay Buyer a fee of $500,000, which
amount shall be payable in same day funds on the date of
consummation of the transaction resulting from such Acquisition
Proposal, regardless of when such consummation occurs.
10.3 Amendment. This Agreement and the Exhibits and
Schedules hereto may be amended at any time prior to the Effective
Time provided that any such amendment is approved in writing by
each of the parties hereto; provided, however, that no amendment
may be made after approval of this Agreement by Seller's
shareholders without first obtaining such further approval from
Seller's shareholders as may be required by law. All
representations and warranties of Seller and Buyer which are true
and correct as modified and approved shall be deemed true and
correct for the purposes of Sections 6.1 and 7.1.
10.4 Extension, Waiver. At any time prior to the Effective
Time any party to this Agreement who is entitled to the benefits
thereof may (i) extend the time for the performance of any of the
obligations of another party hereto, (ii) waive a breach of a
representation or warranty of the other party hereto, whether
contained herein or in any exhibit, schedule or document delivered
pursuant hereto, or (iii) waive compliance by any other party
hereto with any of the agreements or conditions contained herein.
Any such extension or waiver shall be valid if set forth in a
written instrument signed by the party giving the extension or
waiver.
ARTICLE XI
GENERAL PROVISIONS
11.1 Notices. All notices required to be given hereunder
shall be in writing and shall be deemed to have been given if (i)
delivered personally, (ii) transmitted by telefax, (iii) mailed by
registered or certified mail (return receipt requested and postage
prepaid) or (iv) sent by a nationally recognized overnight
delivery courier with proof of delivery to the following listed
persons at the addresses and telefax numbers specified below, or to
such other persons, addresses or telefax numbers as a party
entitled to notice shall give, in the manner hereinabove described,
to the others entitled to notice:
(a) If to Seller to:
Ira A. Watson Co.
200 Hayfield Road
Knoxville, Tennessee 37933-0900
Attention: Forrest I. Watson
Telefax No.: (423) 531-4556
with a copy to:
Bass, Berry & Sims PLC
2700 First American Center
Nashville, Tennessee 37238-2700
Attention: J. Page Davidson
Telefax No.: (615)742-2753
(b) If to Buyer to:
Peebles Inc.
One Peebles Street
South Hill, Virginia 23970
Attention: E. Randolph Lail
Telefax No.: (804) 447-5326
with a copy to:
McGuire, Woods, Battle & Boothe LLP
One James Center
901 East Cary Street
Richmond, Virginia 23219
Attention: R. Marshall Merriman, Jr.
Telefax No.: (804) 698-2120
(C) If to Escrow Committee to:
Forrest I. Watson
4176 Lake Meadow Way
Louisville, TN 37777
and to:
Frank M. Addicks
6701 Baum Drive #250
Knoxville, TN 37919
with a copy to:
Bass, Berry & Sims PLC
2700 First American Center
Nashville, Tennessee 37238-2700
Attention: J. Page Davidson
Telefax No.: (615)742-2753
If given personally or transmitted by telefax, a notice shall be
deemed to have been given when it is received. If given by mail,
it shall be deemed to have been given on the third business day
following the day on which it was posted.
11.2 Interpretation. The headings contained in this Agreement
are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
11.3 Schedules. The information contained in any exhibit or
schedule which is referred to in a representation and warranty
shall be deemed to have been disclosed in connection with and be a
part of, that particular representation and warranty only and shall
not be deemed a part of any other representation and warranty.
11.4 Counterparts. This Agreement may be executed 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.
11.5 Miscellaneous. This Agreement, (i) together with the
Confidentiality Agreement among Buyer and Seller dated August 5,
1997 and the Seller Disclosure Schedule, constitute the entire
agreement and supersedes all other prior agreements and
understandings, both written and oral, between the parties with
respect to the subject matter hereof; (ii) is not intended to and
shall not confer upon any other person or business entity, other
than the parties hereto, any rights or remedies with respect to the
subject matter hereof; (iii) shall not be assigned by operation of
law or otherwise; and (iv) shall be governed by the laws of the
State of Delaware without regard to its choice of law rules.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers.
PEEBLES INC.
By:_____________________________________
Title:__________________________________
PEEBLES ACQUISITION SUBSIDIARY, INC.
By:_____________________________________
Title:__________________________________
IRA A. WATSON CO.
By:_____________________________________
Title:__________________________________
By:_____________________________________
Title:__________________________________
EXHIBIT 2.3 STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of
May 21, 1998, is made among the IRA A. WATSON STOCK BONUS (ESOP)
RETIREMENT PLAN (the "ESOP"), THE KATHERINE AGNES WATSON
TESTAMENTARY TRUST, CONSTANCE HEWITT and those persons signing this
Agreement as "First Preferred Sellers" (collectively, the "First
Preferred Sellers" and, together with the ESOP, the "Sellers"), and
PEEBLES INC., a Virginia corporation ("Peebles").
RECITALS
A. The ESOP owns 44,006 of the 325,504 issued and
outstanding shares (the "Common Shares") of common stock of the
Company and 3,000 shares of the Company's Adjustable Rate
Cumulative Preferred Stock Series A (the "Series A Preferred
Stock"). The Sellers own shares of the Company's First Preferred
Stock (the "First Preferred Stock"). The Common Shares, the Series
A Preferred Shares and the First Preferred Stock to be sold
pursuant to this Agreement are collectively referred to herein as
the "Shares").
B. Sellers desire to sell and Buyer desires to purchase the
Shares on the terms and for the consideration hereinafter set
forth.
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties and agreements herein contained, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. The following terms, as used herein, have
the following meanings:
"Affiliate" of a Person means a Person, who, directly or
indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with, such Person.
"Bankruptcy Claims" means the currently outstanding claims of
the Class 6 and Class 6A creditors as contemplated in the Third
Amended Plan of Reorganization of Ira A. Watson Co., as confirmed
on November 10, 1993 by the United States District Court for the
Eastern District of Tennessee.
"Closing" has the meaning set forth in Section 8.1.
"Closing Date" has the meaning set forth in Section 8.1.
"Commitment" has the meaning set forth in Section 4.6.
"Common Stock" means the unclassified common stock of the
Company.
"DGCL" means the Delaware General Corporation Law.
"Distribution Amount" means that portion of the Escrow Amount,
if any, to be distributed to the ESOP in accordance with Article
IX hereof and the Escrow Agreement.
"Escrow Agent" shall mean Sun Trust Bank, in its role as
escrow agent under the Escrow Agreement.
"Escrow Agreement" means the Escrow Agreement among Peebles,
the Escrow Committee and the Escrow Agent, in the form attached
hereto as Exhibit B, to be executed in connection with the
consummation of the transactions contemplated by this Agreement.
"Escrow Amount" means that portion of the total purchase price
for the Common Stock owned by the ESOP equal to $110,015 to be held
in escrow pursuant to the Escrow Agreement.
"Escrow Committee" means Forrest I. Watson and Frank M.
Addicks.
"Escrowed Funds" has the meaning set forth in Section 9.4.
"First Preferred Stock" means the First Preferred Stock of the
Company.
"Harrisonburg Lease" means that certain indenture of lease,
dated January 23, 1978 originally between General Growth Properties
and Ira A. Watson Co., as amended to date.
"HSR Act" means the Hart-Scott Rodino Antitrust Improvements
Act of 1976, as amended.
"Mercer Capital" means Mercer Capital Management, Inc.
"Merger" means the merger of PAS with and into the Company
pursuant to the Merger Agreement.
"Merger Agreement" means the Merger Agreement, dated as of the
date hereof, by and among Peebles, PAS and the Company.
"PAS" means Peebles Acquisition Subsidiary, Inc., a Delaware
corporation and a wholly-owned subsidiary of Peebles.
"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including
a governmental or political subdivision or an agency or
instrumentality thereof.
"Subsidiary" with respect to any party to this Agreement means
any corporation or other business entity, whether or not
incorporated, of which at least 50% of the securities or interests
having, by their terms, ordinary voting power to elect members of
the board of directors, or other persons performing similar
functions with respect to such entity is held, directly or
indirectly, by such party.
"Survival Date" has the meaning set forth in Section 9.8.
"Tax" or "Taxes" means:
(a) Any federal or state income or franchise
tax; and
(b) Any interest, additions and penalties
(civil or criminal) imposed in connection with any Tax
and any interest in respect of any such additions or
penalties.
"Surviving Corporation" means Ira A. Watson Co., the surviving
corporation in the Merger.
"Tax Law" means the Internal Revenue Code, federal, state or
local laws relating to Taxes and any regulations or official
administrative pronouncements released thereunder.
"Trustee" means Home Federal Bank of Tennessee, the trustee
for the ESOP.
"West Knoxville Lease" means that certain lease agreement,
dated August 23, 1993, between Olde Kingston Towne II, Ltd. and Ira
A. Watson Co. and all amendments thereto.
ARTICLE II
PURCHASE AND SALE OF SHARES
2.1 Purchase and Sale of Shares. At the Closing the Sellers
shall sell the Shares to Peebles and Peebles shall purchase the
Shares from Sellers (the "Stock Purchase") in exchange for the
payment of (i) in the case of Common Shares, an amount in cash
equal to $220,030 plus the Distribution Amount, if any, (ii) $69.40
in cash per shares of Series A Preferred Stock and (iii) $78.40 in
cash per share of First Preferred Stock. The cash portion of the
purchase price described in this Section 2.1 shall be paid in
immediately available funds at the Closing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
3.1 ESOP Representations and Warranties. The ESOP represents
and warrants to Peebles the following:
3.1.1 Authority Relative to this Agreement.
(a) The ESOP is a trust established pursuant
to an employee stock ownership plan, is duly formed and
validly existing and has full power and authority to own
the Shares set forth next to its name on Exhibit A and to
sell such Shares to Peebles pursuant to this Agreement.
The Trustee has been duly appointed trustee of the ESOP,
has accepted such trusteeship and has all requisite power
and authority to carry out the obligations of the Trustee
arising in connection with the transactions contemplated
by this Agreement.
(b) This Agreement has been duly executed and
delivered by the ESOP. This Agreement constitutes valid
and binding obligations of the ESOP in accordance with
its terms except as such enforceability may be limited by
(i) bankruptcy, insolvency or similar laws affecting
creditors' rights generally or (ii) general principles of
equity, whether considered in a proceeding in equity or
at law.
3.1.2 No Violation. The execution and delivery by the
ESOP of this Agreement, and the consummation of the transactions
contemplated hereby and thereby will not (i) violate or result in
a breach of any provision of the governing instruments of the ESOP,
(ii) result in a default or give rise to any right of termination,
modification or acceleration under the provisions of any agreement
or other instrument or obligation to which the ESOP is a party or
by which the ESOP or the Shares owned by the ESOP may be bound, or
(iii) violate any law or regulation, or any judgment, order or
decree of any court, governmental body, commission, agency or
arbitrator applicable to the ESOP or the Shares owned by the ESOP.
3.1.3 Consents and Approvals. Except as required by the
HSR Act and as set forth in Schedule 3.1.3 there is no requirement
applicable to the ESOP to make any filing with, or obtain the
consent or approval of, any Person as a condition to the
consummation of the transactions contemplated by this Agreement.
3.1.4 Valuation Opinion. The Trustee has received a
letter, a copy of which has been provided to Peebles, from Mercer
Capital stating that Mercer Capital has determined that the sale of
the Shares by the ESOP on the terms described in this Agreement is
fair to the participants in the ESOP from a financial point of
view. Mercer Capital has not withdrawn, rescinded, modified,
qualified or changed its opinion described in this Section 3.1.4.
3.1.5 Title to Shares. The ESOP owns 44,006 shares of
Common Stock, 3,000 shares of Series A Preferred Stock and 151
shares of First Preferred Stock. Upon delivery to Peebles of
certificates evidencing such Shares, duly endorsed for transfer
pursuant to this Agreement, Peebles will have good title to such
Shares, free of all liens, claims, charges or encumbrances.
3.1.6 Finders. No broker, finder or investment banker
is entitled to any fee or commission from the ESOP for services
rendered on behalf of the ESOP in connection with the transactions
contemplated by this Agreement.
3.2 First Preferred Sellers Representations and Warranties.
Each First Preferred Seller, as to itself only, represents and
warrants to Peebles the following:
3.2.1 Authority Relative to this Agreement. Such First
Preferred Seller has the power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly executed and delivered by
such First Preferred Seller. This Agreement constitutes valid and
binding obligations of such First Preferred Seller, enforceable
against such First Preferred Seller, in accordance with its terms
except as such enforceability may be limited by (i) bankruptcy,
insolvency or similar laws affecting creditors' rights generally or
(ii) general principles of equity, whether considered in a
proceeding in equity or at law.
3.2.2 No Violation. The execution and delivery by such
First Preferred Seller of this Agreement, and the consummation of
the transactions contemplated hereby and thereby will not (i)
violate or result in a breach of any provision of the governing
instruments of such First Preferred Seller, (ii) result in a
default or give rise to any right of termination, modification or
acceleration under the provisions of any agreement or other
instrument or obligation to which such First Preferred Seller is a
party or by which such First Preferred Seller or the Shares owned
by such First Preferred Seller may be bound, or (iii) violate any
law or regulation, or any judgment, order or decree of any court,
governmental body, commission, agency or arbitrator applicable to
such First Preferred Seller or the Shares owned by such First
Preferred Seller.
3.2.3 Consents and Approvals. Except as required by the
HSR Act and as set forth in Schedule 3.2.3 there is no requirement
applicable to such First Preferred Seller to make any filing with,
or obtain the consent or approval of, any Person as a condition to
the consummation of the transactions contemplated by this
Agreement.
3.2.4 Title to Shares. Such First Preferred Seller owns
the shares of First Preferred Stock set forth next to its name in
Exhibit A hereto. Upon delivery to Peebles of certificates
evidencing such Shares, duly endorsed for transfer pursuant to this
Agreement, Peebles will have good title to such Shares, free of all
liens, claims, charges or encumbrances.
3.2.5 Finders. No broker, finder or investment banker
is entitled to any fee or commission from such First Preferred
Seller for services rendered on behalf of such First Preferred
Seller in connection with the transactions contemplated by this
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PEEBLES
Peebles represents and warrants to the Sellers the following:
4.1 Organization; Qualification. Peebles is a corporation
duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has corporate
power and authority to own all of its properties and assets and to
carry on its business as it is presently being conducted.
4.2 Authority Relative to this Agreement. Peebles has
corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated by this Agreement.
The execution and delivery by Peebles of this Agreement and the
consummation of the transactions contemplated by this Agreement
have been duly authorized by the Board of Directors of Peebles and
no other corporate proceedings on the part of Peebles is necessary
with respect thereto. Assuming that the Sellers have duly
authorized the execution of this Agreement, this Agreement
constitutes valid and binding obligations of Peebles and is
enforceable against Peebles in accordance with its terms, subject
to applicable bankruptcy, insolvency, moratorium or other similar
laws relating to creditors' rights and general principles of
equity.
4.3 Consents and Approvals. Except for approvals required
pursuant to the HSR Act, there is no requirement applicable to
Peebles to make any filing with, or to obtain any permit,
authorization, consent or approval of any public body as a
condition to the consummation of the transactions contemplated by
this Agreement where the failure to so make or obtain would prevent
or materially restrict consummation of the transactions
contemplated by this Agreement or fulfillment of any of the
conditions to this Agreement.
4.4 Non-Contravention. The execution and delivery by Peebles
of this Agreement do not, and the consummation of the transactions
contemplated by this Agreement will not, (i) violate or result in
a breach of any provision of the Articles of Incorporation or
Bylaws of Peebles or (ii) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Peebles or any of
its Subsidiaries, or the businesses conducted by any of them,
excluding from the foregoing clause such defaults and violations
which would not prevent or materially restrict consummation of the
transactions contemplated by this Agreement or fulfillment of any
of the conditions to this Agreement.
4.5 Litigation. There are no actions, suits, claims,
investigations or proceedings (legal, administrative or
arbitrative) pending or, to the knowledge of Peebles, threatened,
against Peebles or its Subsidiaries, whether at law or in equity
and whether civil or criminal in nature, before any federal, state,
municipal or other court, arbitrator, governmental department,
commission, agency or instrumentality, domestic or foreign, nor are
there any judgments, decrees or orders of any such court,
arbitrator, governmental department, commission, agency or
instrumentality outstanding against Peebles or its Subsidiaries
which have, or if adversely determined, could reasonably be
expected to prevent, restrict or delay consummation of the
transactions contemplated by this Agreement or fulfillment of any
of the conditions of this Agreement.
4.6 Financing. Peebles has delivered to the Company a
complete and correct copy of a commitment letter (the "Commitment")
addressed to Peebles from Fleet Bank, N.A. for the provision of
financing pursuant to a credit agreement on the terms and
conditions described in the Commitment. Such financing is in
amounts sufficient to provide Peebles with sufficient funds to
consummate the transactions contemplated by this Agreement.
4.7 Finders. No broker, finder or investment banker is
entitled to any fee or commission from Peebles for services
rendered on behalf of Peebles in connection with the transactions
contemplated by this Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Negotiations with Others. From the date hereof until
the earlier of the Closing Date or the termination of this
Agreement in accordance with Section 10.1 hereof, none of Sellers
will, directly or indirectly, without the written consent of
Peebles, initiate discussions or engage in negotiations with any
Person other than Peebles or its Affiliates, concerning any merger
or sale of capital stock or a substantial portion of the assets of
the Company outside the ordinary and usual course of business.
5.2 Expenses. Whether or not the transactions contemplated by
this Agreement are consummated, Peebles will pay all of its
expenses incurred in connection with this Agreement and the
transactions contemplated hereby and the Sellers shall pay all
expenses incurred by them in connection with the transactions
contemplated by this Agreement.
5.3 Public Announcements. The parties will consult with
each other before issuing any press release or otherwise making any
public statement with respect to this Agreement and the Merger and
will not issue any such press release or make any such public
statement without the consent of the other unless such action is
required by law.
5.4 Subsequent Events. If any event shall occur prior to the
Closing which, had it occurred prior to the execution of this
Agreement, should have been disclosed by a party to this Agreement
in a representation and warranty or otherwise, then as soon as
practicable after the happening of such event, such party shall
disclose the happening of such event to the other parties hereto.
5.5 Efforts to Consummate. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to
use its reasonable best efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper
or advisable to consummate, as promptly as practicable, the
transactions contemplated hereby, including, but not limited to,
the obtaining of all necessary consents, waivers, authorizations,
orders and approvals of third parties, whether private or
governmental, required of it to enable it to comply with the
conditions precedent to consummating the transactions set forth in
this Agreement and, in the case of Peebles, obtaining financing to
consummate the transaction. Each party agrees to cooperate fully
with each of the other parties in assisting them to comply with the
provisions of this Section, and in the event any claim, action,
suit, investigation or other proceeding by any governmental body or
other person is commenced which questions the validity or legality
of the transactions contemplated by this Agreement or seeks damages
in connection therewith, the parties agree to cooperate and use
their reasonable best efforts to defend against such claim, action,
suit, investigation or other proceeding. If an injunction or other
order is issued in any such action, suit or other proceeding, the
parties agree to use their reasonable best efforts to have such
injunction or other order lifted. Notwithstanding the foregoing,
no party hereto shall be required to make any substantial payment
or incur any material economic burden, other than a payment
otherwise required of it, to obtain any consent, waiver,
authorization order or approval, and if, despite its efforts, any
party is unable to obtain any material consent, waiver,
authorization, order or approval, the other parties for whose
benefit the consent, waiver, authorization, order or approval is
to be obtained may terminate this Agreement and shall have no
liability therefor, except as is provided in Section 10.2.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF PEEBLES
The obligation of Peebles to consummate the transactions
contemplated by this Agreement shall be subject, to the extent not
waived, to the following conditions.
6.1 Representations and Warranties. Each of the
representations and warranties of the Sellers contained in Article
III of this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing
Date, and the Sellers shall each have delivered to Peebles a
certificate to that effect.
6.2 Satisfaction of Conditions to Merger. All of the
conditions to the consummation of the Merger set forth in Article
VI of the Merger Agreement (other than the condition set forth in
Section 6.10 "Purchase of Capital Stock") shall have been satisfied
or waived.
6.3 Performance of this Agreement. The Sellers shall have
complied in all material respects with each of their respective
obligations under this Agreement and shall have delivered to
Peebles a certificate to that effect.
6.4 Corporate Authorization. All corporate action required to
be taken by any Seller in connection with the transactions
contemplated by this Agreement shall have been taken, all documents
incident thereto shall be reasonably satisfactory in substance and
form to Peebles and Peebles shall have received such copies of such
documents as it may reasonably request.
6.5 Consents and Approvals. All consents, authorizations,
orders or approvals of governmental or regulatory authorities which
any Seller is required to obtain in order to be able to consummate
the transactions contemplated by this Agreement shall have been
obtained and all waiting periods specified by law with respect
thereto shall have passed.
6.6 Injunction, Litigation, etc. No order of any court or
governmental agency shall be in effect which restrains or prohibits
the consummation of the transactions contemplated by the Agreement,
and there shall not have been threatened, nor shall there be
pending, any action or proceeding by or before any such court or
governmental agency seeking to prohibit or delay or challenging the
validity of the transactions contemplated by this Agreement.
6.7 Legislation. No statute, rule or regulation shall have
been proposed or enacted which prohibits or might prohibit,
restrict or delay the consummation of the transactions contemplated
by this Agreement.
6.8 Financing. Peebles shall have obtained, pursuant to the
Commitment or otherwise, the funds necessary to enable Peebles to
consummate the transactions contemplated by this Agreement on the
terms set forth herein.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF THE SELLERS
The obligation of the Sellers to consummate the transactions
contemplated by this Agreement shall be subject, to the extent not
waived, to the following conditions.
7.1 Representations and Warranties. Each of the
representations and warranties of Peebles contained in Article IV
of this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing
Date, and Peebles shall have delivered to the Sellers a certificate
to that effect signed by an executive officer.
7.2 Performance of this Agreement. Peebles shall have
complied in all material respects with each of their obligations
under this Agreement, and Peebles shall have delivered to the
Sellers a certificate to that effect signed by an executive
officer.
7.3 Corporate Authorization. All corporate action required to
be taken by Peebles in connection with the transactions
contemplated by this Agreement shall have been taken, and the
Sellers shall have received such copies of documents incident to
such approvals as it may reasonably request.
7.4 Consents and Approvals. All consents, authorizations,
orders or approvals of governmental or regulatory authorities which
the Sellers are required to obtain in order to enable it to
consummate the transactions contemplated by this Agreement shall
have been obtained and all waiting periods specified by law with
respect thereto shall have passed.
7.5 Injunction, Litigation, etc. No order of any court or
governmental agency shall be in effect which restrains or prohibits
the consummation of the transactions contemplated by this Agreement
and there shall not have been threatened, nor shall there be
pending, any action or proceeding by or before any such court or
governmental agency seeking to prohibit or delay or challenging the
validity of the transactions contemplated by this Agreement.
7.6 Legislation. No statute, rule or regulation shall have
been proposed or enacted which prohibits or might prohibit,
restrict or delay the consummation of the transactions contemplated
by this Agreement.
ARTICLE VIII
CLOSING
8.1 Time and Place of Closing. The closing (the "Closing")
shall take place at the offices of McGuire, Woods, Battle & Boothe
LLP in Richmond, Virginia at 9:00 a.m. local time on the later of
(i) June 15, 1998, (ii) the next business day after the last of the
closing conditions has been fulfilled or waived or (iii) such other
date as may be agreed upon by the parties (the "Closing Date"). At
the Closing the parties shall supply evidence to the other parties
of the fulfillment or waiver of the conditions to their obligations
under this Agreement.
8.2 Deliveries by the Sellers. At the Closing the Sellers
shall deliver to Peebles the following:
(i) the certificates representing the Shares
duly endorsed or with stock powers attached thereto duly
signed;
(ii) the certificates required by Sections 6.1
and 6.3;
(iii) evidence that the action required by
Section 6.4 has been taken; and
(iv) copies of the consents required by Section
6.5.
8.3 Deliveries by Peebles. At the Closing Peebles shall
deliver to the Sellers the following:
(i) their respective portion of the Purchase
Price in immediately available funds;
(ii) the certificates required by Sections 7.1
and 7.2; and
(iii) evidence that the corporate action
described in Section 7.3 has been taken.
ARTICLE IX
ESCROW
9.1 Appointment of Escrow Committee.
(a) By executing this Agreement the ESOP shall
AUTOMATICALLY BE DEEMED TO HAVE DESIGNATED FORREST I. WATSON AND
FRANK M. ADDICKS AS THE "ESCROW COMMITTEE." The Escrow Committee
shall have full power to act on behalf of the ESOP in the manner
specified herein in connection with all matters with respect to
which action by the Escrow Committee is contemplated by this
Agreement. The Escrow Committee shall be entitled to reimbursement
from the Escrowed Funds, in accordance with Section 9.4, of all
reasonable expenses included in the performance of the duties
contemplated under this Agreement, including, but not limited to
the right to employ financial advisors and other agents to
undertake or assist in the assessment, arbitration, litigation
and/or settlement of such claims. The Escrow Committee is
expressly authorized to rely upon the advice of such consultants
and agents. THE ESOP SHALL AUTOMATICALLY BE DEEMED TO HAVE WAIVED
ANY RIGHT OR CAUSE OF ACTION FOR ANY ACTION, OF ANY NATURE
WHATSOEVER, TAKEN OR OMITTED FROM BEING TAKEN BY THE ESCROW
COMMITTEE OR ANY SUCCESSOR, ABSENT A CLEAR SHOWING OF HIS, HER OR
ITS GROSS ERROR OR FRAUD.
(b) The Escrow Committee shall take all actions required
to be taken by the Escrow Committee under this Agreement and may
take any action contemplated by this Agreement on behalf of the
ESOP. By giving notice to the Escrow Committee in the manner
provided by Section 11.1, Peebles shall be deemed to have given
notice to the ESOP and any action taken by the Escrow Committee may
be considered by Peebles to be the action of the ESOP for all
purposes of this Agreement. The Escrow Committee's duties shall
terminate upon the final distribution of the Escrowed Funds under
the Escrow Agreement.
9.2 Escrow Agreement. The Company, Peebles, the Escrow
Committee and the Escrow Agent will at the Closing enter into an
Escrow Agreement (the "Escrow Agreement") in substantially the form
of Exhibit B hereto. The provisions of the Escrow Agreement shall
be incorporated herein as if fully stated herein. The Escrow
Amount shall be deposited by Peebles and held in escrow, as
contingent consideration for the ESOP in connection with the sale
of the Common Stock, by the Escrow Agent in compliance with the
terms and conditions of the Escrow Agreement. The funds held in
escrow pursuant to this Article IX will be invested by the Escrow
Agent only in short-term government securities.
9.3 Non-Transferability of the Escrowed Funds. The funds held
in escrow shall be held for the benefit of the ESOP and Peebles
only and shall not be transferable by any potential recipient
thereof, except by will, intestate succession or operation of law.
9.4 Escrowed Funds. The moneys deposited under the Escrow
Agreement pursuant to this Agreement and all interest and other
earnings thereon (collectively, the "Escrowed Funds") shall be
applied as provided in the Escrow Agreement and this Agreement. At
the end of the period ending on the first anniversary of the
Closing, any Escrowed Funds which have not been previously
distributed and which are not the subject to any objection with
respect to the distribution thereof as provided in the Escrow
Agreement, shall be distributed as provided in the Escrow
Agreement.
9.5 Adjustments to Purchase Price.
(a) The Distribution Amount shall be determined as
provided in this Section 9.5.
(b) The Distribution Amount shall be equal to the
product of 0.1352 times the sum of the following:
(i) $813,760;
(ii) plus the amount, if any, by which the
prepayment penalty incurred by Peebles, the Company, PAS
or the Surviving Corporation in connection with the
payment amounts due Congress Financial Corporation
pursuant to that certain Secured Revolving Credit
Facility dated as of August 31, 1993 by the Company is
less than $120,000;
(iii) plus the amount, if any, by which the cash
payment made or contractually committed to be made to
Peebles, the Company, PAS or the Surviving Corporation on
or before September 30, 1998 in connection with the
termination and settlement of the Harrisonburg Lease
exceeds $500,000;
(iv) minus the total of amounts paid by
Peebles, the Company, PAS or the Surviving Corporation in
connection with the disposition of the lawsuit styled
Robert H. Jacobs v. Ira A. Watson Co., including amounts
paid pursuant to a judgment, amounts paid in settlement
and all attorneys fees, costs and expenses incurred in
connection therewith subsequent to the date of this
Agreement;
(v) minus the sum of all amounts paid by
Peebles, the Company, PAS or the Surviving Corporation to
the landlord or third party consultants in connection
with the termination and settlement of the obligations of
the Company under the West Knoxville Lease;
(vi) minus the amount of prepayment penalties
or premiums paid by Peebles, the Company, PAS or the
Surviving Corporation in connection with the prepayment
of the principal and interest due the Fidelity Mutual
Life Insurance Company ("Fidelity Mutual") by the Company
pursuant to the Mortgage Loan Agreement dated as of June
15, 1989, as amended by the First Amendment thereto dated
as of November 10, 1993, by and between Fidelity Mutual
and the Company;
(vii) minus the amount of all amounts owed on
layaway receivables upon which no payment has been made
in 30 days per the layaway file report run at each of The
Company's stores as of the close of business on the
Saturday night immediately preceding the Effective Date;
(viii) minus the amount by which the bad debt
reserve maintained by Shoppers Charge on behalf of the
Company on the Closing Date is confirmed by Shoppers
Charge to exceed $105,000;
(ix) minus the amount by which the advertising
receivable maintained by Watson's with respect to
Shoppers Charge on the Closing Date is confirmed by
Shoppers Charge to be less than $46,821;
(x) minus the amount by which the cash
collateral account maintained by Shoppers Charge on
behalf of the Company on the Closing Date is confirmed by
Shoppers Charge to be less than $143,403;
(xi) plus the amount by which the total amount
of principal and interest obligated to be paid by
Peebles, the Company, PAS or the Surviving Corporation
after the date hereof in respect of the Bankruptcy Claims
is less than $2,458,703;
(xii) minus the amount, if any, by which The
Company's loss before income taxes (after equity in
earnings of Subsidiary have been posted) for the period
beginning on April 5, 1998 and ending on the Closing Date
exceeds $545,000 (such amount to be increased by $11,000
for each day the Closing Date extends beyond June 15,
1998) (for the avoidance of doubt, a loss of $600,000
during such period would result in a reduction of the
Distribution Amount by $55,000); provided, the Company's
loss before income taxes for purposes of this subsection
(xii) shall not include any item affecting the
Distribution Amount pursuant to any other subsection of
this Section 9.5 or any changes relating to store
closings or lease renegotiations;
(xiii) minus the amount, if any, by which the
expenses incurred by the Company in connection with the
transactions contemplated by this Agreement and the
Merger Agreement exceed $200,000, provided any fees paid
to Retail Consulting Services shall not be included in
such amount;
(xiv) minus the amount, if any, of the shortfall
computed in accordance with Section 5.16 of the Merger
Agreement; and
(xv) minus the amount, if any, distributed from
the Escrow Account in respect of any damage, loss,
liability or expense (including, without limitation,
reasonable expenses of investigation and litigation and
reasonable attorneys', accountants' and other
professional fees) arising out of a breach of any
representation, warranty or covenant made by the ESOP in
this Agreement or by the Company in the Merger Agreement.
For purposes of this Section 9.5(b)(xv), the
determination of whether a representation or warranty
made by the ESOP in this Agreement or the Company in the
Merger Agreement has been breached shall be made by
ignoring references to "material" or "Material Adverse
Effect."
The foregoing provisions notwithstanding, in no event
shall the Distribution Amount exceed the total of $110,015 plus
interest earned thereon and deposited in the Escrow Account.
(c) Peebles shall give written notice (a "Claim Notice")
to the Escrow Agent and the Escrow Committee if Peebles believes it
is entitled to distributions from the Escrow Fund with respect to
any of the matters set forth in Section 9.5(b). The Claim Notice
shall be provided promptly (but in no event later than ten days
prior to the time any response to an asserted claim is required)
after receipt of knowledge of the fact upon which such claim is
based and shall set forth in reasonable detail the facts giving
rise to any claim for a distribution hereunder.
(d) Upon receipt by the Escrow Committee of a Claim
Notice from Peebles with respect to any claim of a third party
which gives rise to Peebles's right to distribution pursuant to
Section 9.5(b)(xv), the Escrow Committee may assume the defense
thereof with counsel reasonably satisfactory to Peebles and Peebles
shall cooperate in the defense or prosecution thereof and shall
furnish such records, information and testimony and attend all such
conferences, discovery proceedings, hearing, trials and appeals as
may be reasonably requested in the connection thereof. Peebles
shall have the right to employ its own counsel in any such case,
but the fees and expenses of such counsel shall be at the expense
of Peebles unless (i) the Escrow Committee shall not have promptly
employed counsel reasonably satisfactory to Peebles to take charge
of the defense of any such action or (ii) counsel for Peebles
determines, in its reasonable judgment, that Peebles and the Escrow
Committee may have conflicting defenses or claims. Neither Peebles
nor the Escrow Committee shall make any settlement of any claim
without the written consent of the other, which consent shall not
be unreasonably withheld. Without limiting the generality of the
foregoing, it shall not be deemed unreasonable for Peebles to
withhold consent to a settlement involving injunctive or other
equitable relief against Peebles, the Surviving Corporation or
their respective assets, employees or business.
(e) The Escrow Committee shall have the right to object,
by written notice delivered within 20 days after a Claim Notice is
received to Peebles and the Escrow Agent, to all or any portion of
a proposed distribution contained in any Claim Notice.
9.6 Limitations on Distributions. Notwithstanding the
foregoing provisions of this Article IX, and other than with
respect to claims for fraud, as to which no limitation set forth in
this Article IX shall apply, Peebles shall not be entitled to any
distributions of Escrowed Funds for claims pursuant to Section
9.5(b)(xv) of this Agreement until the aggregate amount of
distributions to which Peebles is otherwise entitled for claims
pursuant to Section 9.5(b)(xv) of this Agreement exceeds $6,760,
and then entitlement for claims pursuant to Section 9.5(b)(xv) of
this Agreement in excess of $6,760 shall be limited to the Escrowed
Funds.
9.7 Provision of Information. Peebles shall provide to the
Escrow Committee on request all information and documentation
reasonably necessary to support and verify any claims that Peebles
believes give rise to a claim for distribution of Escrowed Funds
and shall give the Escrow Committee reasonable access to all books,
records and personnel in the possession or under the control of the
Peebles or the Surviving Corporation that would have a bearing on
such claim.
9.8 Survival; Investigation. The representations and
warranties of the Sellers contained in this Agreement shall survive
any investigation by Peebles and shall not terminate until the
first anniversary of the Closing Date (the "Survival Date") at
which time they shall lapse. Notwithstanding the provisions of the
preceding sentence, any representation or warranty in respect of
which indemnification may be sought under this Article IX shall
survive the Survival Date if written notice, given in good faith,
of a specific breach thereof is given to the Company in accordance
with Section 9.5 prior to the Survival Date.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
10.1 Termination. This Agreement may be terminated at any
time prior to the Closing Date:
(i) by mutual consent of the Sellers and
Peebles;
(ii) by the Sellers or Peebles in the event the
Merger Agreement is terminated;
(iii) by the Sellers or Peebles if there has
been a material breach by the other of a representation,
warranty or agreement contained herein, which breach is
not curable or, if curable, is not cured within 20 days
after written notice of such breach is given to the other
party, or if any condition to the consummation of the
transactions contemplated by this Agreement which must be
met by the other, becomes impossible to fulfill; or
(iv) by the Sellers or Peebles if the Closing
has not occurred by 11:59 p.m. July 15, 1998; provided,
however, that the right to terminate this Agreement
pursuant to this paragraph (iii) shall not be available
to any party whose failure to fulfill any obligation
under this Agreement has been the cause of, or resulted
in, the failure of the Closing to have occurred on or
before such date.
10.2 Effect of Termination. In the event of the termination
of this Agreement as provided in Section 10.1, this Agreement shall
become wholly void and of no further force and effect and there
shall be no further liability or obligation on the part of any
party hereto except to pay such expenses as are required of it, but
such termination shall not constitute a waiver by any party of any
claim it may have for damages caused by reason of a breach of a
representation or warranty made by another party to in this
Agreement.
10.3 Amendment. This Agreement and the Exhibits and
Schedules hereto may be amended at any time prior to the Closing
Date that any such amendment is approved in writing by each of the
parties hereto. All representations and warranties of the Sellers
and Peebles which are true and correct as modified and approved
shall be deemed true and correct for the purposes of Sections 6.1
and 7.1.
10.4 Extension, Waiver. At any time prior to the Closing Date
any party to this Agreement who is entitled to the benefits thereof
may (i) extend the time for the performance of any of the
obligations of another party hereto, (ii) waive a breach of a
representation or warranty of the other party hereto, whether
contained herein or in any exhibit, schedule or document delivered
pursuant hereto, or (iii) waive compliance by any other party
hereto with any of the agreements or conditions contained herein.
Any such extension or waiver shall be valid if set forth in a
written instrument signed by the party giving the extension or
waiver.
ARTICLE XI
GENERAL PROVISIONS
11.1 Notices. All notices required to be given hereunder
shall be in writing and shall be deemed to have been given if (i)
delivered personally, (ii) transmitted by telefax, (iii) mailed by
registered or certified mail (return receipt requested and postage
prepaid) or (iv) sent by a nationally recognized overnight
delivery courier with proof of delivery to the following listed
persons at the addresses and telefax numbers specified below, or to
such other persons, addresses or telefax numbers as a party
entitled to notice shall give, in the manner hereinabove described,
to the others entitled to notice:
(a) If to the Sellers to:
Home Federal Bank of Tennessee
515 Market Street, Suite 500
Knoxville, TN 37902
Attention: William G. McGhee
Telefax No.: (423) 541-6969
and to:
The address shown next to such
Seller's name on the signature
pages to this Agreement
with a copy to:
Bass, Berry & Sims PLC
2700 First American Center
Nashville, Tennessee 37238-2700
Attention: J. Page Davidson
Telefax No.: (615)742-2753
and to:
William E. Mason, P.C.
5410 Homberg Drive, Suite 13
Knoxville, TN 37919
Attention: William E. Mason
Telefax No.: (423) 584-5603
(b) If to Peebles to:
Peebles Inc.
One Peebles Street
South Hill, Virginia 23970
Attention: E. Randolph Lail
Telefax No.: (804) 447-5326
with a copy to:
McGuire, Woods, Battle & Boothe LLP
One James Center
901 East Cary Street
Richmond, Virginia 23219
Attention: R. Marshall Merriman, Jr.
Telefax No.: (804) 698-2120
(c) If to Escrow Committee to:
Forrest I. Watson
4716 Lake Meadow Way
Louisville, TN 37777
with a copy to:
Bass, Berry & Sims PLC
2700 First American Center
Nashville, Tennessee 37238-2700
Attention: J. Page Davidson
Telefax No.: (615)742-2753
and to:
William E. Mason, P.C.
5410 Homberg Drive, Suite 13
Knoxville, TN 37919
Attention: William E. Mason
Telefax No.: (423) 584-5603
If given personally or transmitted by telefax, a notice shall be
deemed to have been given when it is received. If given by mail,
it shall be deemed to have been given on the third business day
following the day on which it was posted.
11.2 Interpretation. The headings contained in this Agreement
are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
11.3 Schedules. The information contained in any exhibit or
schedule which is referred to in a representation and warranty
shall be deemed to have been disclosed in connection with and be a
part of, that particular representation and warranty only and shall
not be deemed a part of any other representation and warranty.
11.4 Counterparts. This Agreement may be executed 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.
11.5 Miscellaneous. This Agreement, (i) together with the
Exhibits and Schedules hereto, constitute the entire agreement and
supersedes all other prior agreements and understandings, both
written and oral, between the parties with respect to the subject
matter hereof; (ii) is not intended to and shall not confer upon
any other person or business entity, other than the parties hereto,
any rights or remedies with respect to the subject matter hereof;
(iii) shall not be assigned by operation of law or otherwise; and
(iv) shall be governed by the laws of the State of Delaware without
regard to its choice of law rules.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers.
PEEBLES INC.
By:_____________________________________
Title:__________________________________
IRA A. WATSON STOCK BONUS (ESOP)
RETIREMENT PLAN
By:_____________________________________
FIRST PREFERRED SELLERS:
THE KATHERINE AGNES WATSON
TESTAMENTARY TRUST
Address: By: ___________________________________
Trustee
________________________________________
CONSTANCE HEWITT
________________________________________
________________________________________
________________________________________
________________________________________
________________________________________
________________________________________
Consolidated Financial Statements
Ira A. Watson Co.
Years ended January 3, 1998, and
December 28, 1996
with Report of Independent Auditors
<PAGE>
Contents
Audited Consolidated Financial Statements
Report of Independent Auditors 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 4
Consolidated Statements of Shareholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 9
<PAGE>
Report of Independent Auditors
Board of Directors
Ira A. Watson Co.
We have audited the accompanying consolidated balance sheets of
Ira A. Watson Co. and subsidiary, as of January 3, 1998, and
December 28, 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Ira A. Watson Co. and subsidiary, at January 3, 1998,
and December 28, 1996, and the results of their operations and
cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern.
As discussed in Note 16 to the consolidated financial statements,
the Company's recurring losses from operations have created a
cash flow problem which raises substantial doubt about its
ability to continue as a going concern. Management's plans and
actions regarding this matter are also described in Note 16. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
- ---------------------------
Coulter & Justus, P.C.
- ---------------------------
March 6, 1998,
except for Note 4, as to which the date is
April 2, 1998, and Note 7, as to which the
date is May 12, 1998
<PAGE>
Ira A. Watson Co.
Consolidated Balance Sheets
<TABLE>
<C> <C> <C>
January 3 December 28
1998 1996
--------- -----------
Assets
Current assets:
Cash and cash equivalents $2,121,837 $1,957,622
Short-term investment 417,107 408,026
Merchandise inventories 14,532,610 15,255,590
Refundable income taxes 10,309 195,944
Deferred income taxes 481,886 357,879
Current portion of deferred costs 93,103 98,531
Prepaid expenses and other current assets 1,234,091 1,595,020
----------- ----------
Total current assets 18,890,943 19,868,612
Other assets:
Note receivable from retirement plan 106,461 98,316
Deferred costs, less current portion 67,614 161,032
Other 25,066 21,617
----------- ----------
Total other assets 199,141 280,965
Property, plant and equipment
Land 174,327 287,903
Buildings and leasehold improvements 7,738,902 7,930,269
Fixtures and equipment 16,481,233 16,418,981
------------ ----------
24,394,462 24,637,153
Less allowances for depreciation
and amortization (18,292,631) (17,449,971)
------------- -----------
6,101,831 7,187,182
Assets under capital leases, less
accumulated amortization of $595,420
in 1997 and $498,774 in 1996 185,237 281,883
------------ -----------
Net property, plant and equipment 6,287,068 7,469,065
------------ -----------
Total assets $25,377,152 $27,618,642
</TABLE>
<PAGE>
[C] [C] [C]
January 3 December 28
1998 1996
------------ ------------
Liabilities and shareholders' equity
Current liabilities:
Trade accounts payable $ 4,181,675 $1,876,295
Accrued compensation 578,800 448,143
Withholding, payroll, sales and
other taxes 1,057,370 1,280,032
Other accrued liabilities 2,416,122 2,221,777
Current portion of deferred rent credits 68,857 118,857
Current portion of capital lease obligations 140,163 130,677
Current portion of long-term debt 731,056 425,142
Current portion of liabilities under the
Plan of Reorganization 2,407,642 2,176,551
------------ -----------
Total current liabilities 11,581,685 8,677,474
Other liabilities:
Deferred income taxes 481,886 357,879
Deferred rent credits, less current portion 662,237 731,094
Capital lease obligations, less
current portion - 140,077
Long-term debt, less current portion 10,302,532 10,848,058
Liabilities under the Plan of
Reorganization, less current portion - 1,206,745
------------ -----------
Total other liabilities 11,446,655 13,283,853
------------ -----------
Total liabilities 23,028,340 21,961,327
Shareholders' equity:
Capital stock 2,323,885 2,323,885
Paid-in capital 1,275,131 1,275,131
Retained earnings (accumulated deficit) (330,940) 2,970,543
------------ -----------
3,268,076 6,569,559
Less cost of 30,013 shares of common
treasury stock (793,244) (793,244)
Less cost of 2,000 shares of preferred
treasury stock (126,020) (119,000)
Total shareholders' equity 2,348,812 5,657,315
------------ -----------
Total liabilities and
shareholders' equity $25,377,152 $27,618,642
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
Ira A. Watson Co.
Consolidated Statements of Operations
Year ended
<C> <C> <C>
January 3, 1998 December 28, 1996
--------------- -----------------
Net sales $80,440,742 $84,995,230
Cost of goods sold 54,328,227 56,173,879
------------- -------------
Gross profit 26,112,515 28,821,351
Costs and expenses:
Operating, general and
administrative expenses 20,892,433 20,574,836
Provision for depreciation
and amortization 388,925 360,588
------------- -------------
Store operating profit 4,831,157 7,885,927
Corporate(income)expenses:
Corporate operating, general
and administrative expenses 7,228,946 7,549,796
Corporate provision for
depreciation and
amortization 824,600 986,101
Interest income (52,647) (45,525)
Interest expense 1,465,018 1,339,789
------------ -------------
Net corporate expenses 9,465,917 9,830,161
------------ -------------
Operating loss (4,634,760) (1,944,234)
Interest on liabilities under
the Plan of Reorganization (194,380) (282,895)
Gain on sales of property,
plant and equipment 1,588,833 3,550
Loss on store closing (51,150) (45,335)
------------- -------------
Loss before income taxes (3,291,457) (2,268,914)
Income tax (benefit)
Current 10,026 (119,049)
Deferred - (144,728)
------------- -------------
Net income tax expense
(benefit) 10,026 (263,777)
------------ -------------
Net loss $(3,301,483) $(2,005,137)
============ =============
Net loss per Common Share $(10.14) $(6.16)
============ =============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
Ira A. Watson Co.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<C> <C> <C> <C> <C> <C> <C>
Common Preferred
Capital Paid-In Retained Treasury Treasury
Stock Capital Earnings Stock Stock Total
-----------------------------------------------------------------------
Balance at December 31, 1995 $2,323,885 $1,275,131 $4,975,680 $(793,244) $(83,300) $7,698,152
Purchase of preferred
treasury stock - - - - (35,700) (35,700)
Net Loss - - (2,005,137) - - (2,005,137)
-----------------------------------------------------------------------
Balance at December 28, 1996 2,323,885 1,275,131 2,970,543 (793,244) (119,000) 5,657,315
Purchase of preferred
treasury stock - - - - (7,020) (7,020)
Net Loss - - (3,301,483) - - (3,301,483)
-----------------------------------------------------------------------
Balance at January 3, 1998 $2,323,885 1,275,131 $ (330,940)$(793,244)$(126,020) $2,348,812
=======================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
Ira A. Watson Co.
Consolidated Statements of Cash Flows
<TABLE>
<C> <C>
Year ended
January 3 December 28
1998 1996
-------------- ---------------
Operating activities
Receipts from customers $81,807,853 $85,693,731
Payments to suppliers (52,221,096) (55,439,866)
Operating, general and
administrative expenses (27,756,125) (28,690,406)
Interest paid (1,593,669) (1,263,265)
Interest received 53,582 44,653
Net income taxes refunded (paid) 175,609 (34,272)
------------ -------------
Net cash provided by operating
activities 466,154 310,575
Investing activities
Purchase of short-term investment (9,081) (6,355)
Proceeds from sales of property,
plant and equipment 1,845,076 24,050
Purchases of property, plant and
equipment (188,925) (577,112)
------------ -------------
Net cash provided by (used in)
investing activities 1,647,070 (559,417)
Financing activities
Purchase of preferred treasury stock (7,020) (35,700)
Proceeds from long-term borrowings - 10,777
Net change in revolving credit
balance 1,465,548 1,497,263
Principal payments on long-term
borrowings (1,705,160) (476,518)
Principal payments on capital
lease obligation (130,591) (110,970)
Advances from landlords - 207,455
Repayment of advances from
landlords (118,857) (97,458)
Payments on liabilities under
the Plan of Reorganization (1,452,929) -
------------ -----------
Net cash provided by (used in)
financing activities (1,949,009) 994,849
Increase in cash and cash
equivalents 164,215 746,027
Cash and cash equivalents at
beginning of year 1,957,622 1,211,615
----------- -----------
Cash and cash equivalents
at end of year $2,121,837 $1,957,622
</TABLE>
<PAGE>
Ira A. Watson Co.
Consolidated Statements of Cash Flows (continued)
Reconciliation of Net Loss to Net Cash Provided by Operating Activities
<TABLE>
Year ended
<C> <C> <C>
January 3 December 28
1998 1996
------------ -------------
Net loss $(3,301,483) $(2,005,137)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Interest on liabilities under the
Plan of Reorganization 194,380 282,895
Depreciation and amortization 1,213,525 1,346,689
Gains on sales of property and
equipment (1,588,833) (3,550)
Provision for deferred income
taxes (benefit) - (144,728)
Provision for bad debts 162,254 43,265
Changes in operating assets and
liabilities:
Merchandise inventories 722,980 1,131,317
Refundable income taxes 185,635 (153,321)
Other assets 187,081 (525,534)
Accounts payable 2,305,380 397,514
Accrued compensation 130,657 (117,561)
Other liabilities 254,578 58,726
----------- -----------
Net cash provided by operating
activities $ 466,154 $ 310,575
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
Ira A. Watson Co.
Notes to Consolidated Financial Statements
January 3, 1998
1. Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Ira
A. Watson Co. ("the Company") and its wholly-owned subsidiary,
Appalachian Distributing Corporation ("Appalachian"). All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Year-end
The Company's fiscal year ends on the Saturday closest to
December 31 and consisted of 53 weeks for the year ended January
3, 1998 ("1997") and 52 weeks for the year ended December 28,
1996 ("1996").
Description of Business
The Company has retail operations conducted in twenty-six stores
across the southeastern United States. The majority of these
stores are located in county seat communities which do not have
major department stores. The Company's main office facility and
distribution center are located in Knoxville, Tennessee. The
Company focuses on first-line brand merchandise, although salvage
merchandise is also sold in selected locations.
Appalachian's principal business activities are real estate and
equipment investments which are leased primarily to the Company.
Merchandise Inventories
Merchandise inventories and related cost of sales are accounted
for by the retail inventory method using the first-in, first-out
(FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. The
provision for depreciation of buildings and equipment is based on
the estimated useful lives of the related assets, and leasehold
improvements are being amortized over the shorter of the lease
periods or the useful lives of the improvements. Depreciation
and amortization are computed principally by the straight-line
method.
Investment Tax Credits
Investment tax credits are accounted for by the flow-through
method.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could
differ from those estimates.
Ira A. Watson Co.
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Earnings Per Common Share
Earnings per common share are computed based on the weighted
average number of shares of common stock outstanding during the
year, after giving effect to dividends on preferred stock (no
dividends were paid on preferred stock in 1997 or 1996). In 1997
and 1996, the weighted average number of shares used to compute
earnings per share was 325,504.
Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Reclassifications
Certain amounts in the prior year have been reclassified to
conform with 1997 classifications.
2. Chapter 11 Reorganization
On February 18, 1992, the Company filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code in
the United States Bankruptcy Court for the Eastern District of
Tennessee (the "Bankruptcy Court"). The filing did not include
the Company's wholly-owned subsidiary, Appalachian.
As Debtor-in-Possession, the Company continued to operate its
business and manage its properties. The Company formulated a
business plan for future operations. This plan formed the basis
for the Company's proposed plan of reorganization that was
intended to enable the Company to satisfy its pre-petition
obligations and emerge from Chapter 11. This proposed plan of
reorganization developed into the Third Amended Plan of
Reorganization dated November 5, 1993 (as implemented and
approved by the Confirmation Order, the "Plan of
Reorganization"). On November 10, 1993, the Bankruptcy Court
entered an order confirming the Plan of Reorganization.
The Plan of Reorganization provided that holders of claims in
Class 1 (Norwest Bank Minnesota, N.A., and any other lender which
provided Debtor-in-Possession financing on a super priority
basis), Class 2 (Administrative Claims), Class 3 (Tax Priority
Claims), Class 8 (Executory Contract Claims), Class 9 (IAW Stock
Bonus and PAYSOP Retirement Plan) and Class 13 (Northwestern
Mutual Life) receive cash payments in an amount equal to the
allowed claims of such holders and the holder of the claim in
Class 4 (Fidelity Mutual Life Insurance Company) be repaid as
outlined in Note 6. The Plan of Reorganization provided that
holders of claims in Class 5 (unsecured creditors with allowed
claims less than $7,500) could elect payment of 60% of their
respective claims upon confirmation or become a member of Class 6
and be treated accordingly. The Plan of Reorganization provided
that holders of claims in Class 6 (unsecured creditors with
allowed claims of $7,500 or more) and certain holders of claims
in Class 6A (Bank Group Term Loan) receive annual installments
through December 1998 in amounts equal to the allowed claims of
such holders and remaining holders of claims in Class 6A be
repaid as outlined in Note 6. The Plan of Reorganization
provided that holders of claims in Class 7 (accrued vacation) be
paid in annual installments through December 1998 if
a former employee and revested if a current employee. Holders of
claims in Class 10 (First Preferred Shareholders) and Class 11
(Adjustable Rate Cumulative Preferred Series A Shareholders) will
retain their preferred stock and cumulative dividends will
continue to accrue, although no dividends will be paid until all
Classes other than Classes 4 and 6A have been paid in full.
Holders of claims in Class 12 (Common Shareholders) will retain
their common stock and no dividends will be paid until all
Classes other than Classes 4, 6A, 10 and 11 have been paid-in-
full.
In accordance with the provisions of the American Institute of
Certified Public Accountants Statement of Position 90-7 (AICPA
SOP 90-7), "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code," the Company did not adopt fresh-start
reporting upon consummation of the Plan of Reorganization. The
Company did not qualify for fresh-start reporting because holders
of voting shares were the same before and after confirmation of
the Plan of Reorganization.
3. Chapter 11 Final Decree
On September 13, 1995, the Bankruptcy Court entered an order of
final decree that the Company's bankruptcy case was closed.
4. Reorganization Items
As discussed in Note 2, certain members of Classes 6 and 7 will
be repaid in future installments equal to their respective
allowed claims. The Plan of Reorganization did not provide for
interest to be paid on these claims. However, AICPA SOP 90-7
requires that liabilities compromised by confirmed plans be
stated at the present value of amounts to be paid, determined at
appropriate current interest rates. Accordingly, the Company
recorded the present value of the future installments using an
interest rate of 8.25% as a liability in the Consolidated Balance
Sheet and recognized a gain on debt settlement. This gain will
be offset by the recognition of interest expense in prior and
future years (see below).
A summary of liabilities payable under the Plan of Reorganization
is as follows:
January 3 December 28
1998 1996
Class 6 - due in annual installments
of $1,318,523 through December 1998 $2,402,493 $3,368,996
Class 7 - due in annual installments
of $5,574 through December 1998 5,149 14,300
----------- -----------
2,407,642 3,383,296
Less current portion 2,407,642 2,176,551
----------- -----------
Long-term portion $ - $1,206,745
The 1996 payment was made subsequent to year-end on December 31,
1996. The Company did not make the December 31, 1997, payment to
Class 6 creditors. On April 2, 1998, the Company received
approval from the Creditors Committee to defer the December 31,
1997, payment to Class 6 creditors until June 30, 1998.
The Company is required to make accelerated distributions to
Classes 6 and 6A in an amount equal to excess cash flow as
defined by the Plan of Reorganization. No accelerated
distributions were required for 1997 or 1996.
5. Capital Stock
Capital stock includes the following as of January 3, 1998, and
December 28, 1996:
First Preferred Stock, par value $100 per
share, 7% cumulative, redeemable at $103
per share:
Authorized--1,000 shares
Issued and outstanding--463 shares $ 46,300
Adjustable Rate Cumulative Preferred Stock
Series A, par value $100 per share,
dividend rate variable from 6%-12%,
redeemable at the rate of one share for
five shares of Common Stock:
Authorized--5,000 shares
Issued and outstanding--5,000 shares,
including shares held in treasury 500,000
Common Stock, no par, stated value--$5 per
share:
Authorized--500,000 shares
Issued and outstanding--355,517 shares,
including shares held in treasury 1,777,585
-----------
$2,323,885
===========
During 1996, Appalachian purchased 600 shares of Adjustable Rate
Cumulative Preferred Stock Series A from the Ira A. Watson Co.
Employee Stock Ownership (ESOP) and PAYSOP Retirement Plan ("ESOP
Plan"), respectively. The sales price was determined to be
$35,700 based on an independent appraisal of the stock as of
December 31, 1994. During 1997, an additional $7,020 was paid by
Appalachian based on an updated appraisal as of December 30,
1995. As of January 3, 1998, Appalachian has purchased a total
of 2,000 shares of this stock for $126,020.
Dividends on the shares of First Preferred and Series A
Adjustable Rate Cumulative Preferred stock are cumulative and
must be paid in the event of liquidation and before any
distribution to holders of Common Stock. The Company has not
made any dividend payments on its preferred or common stock since
1991, and the ability to pay dividends in the future is limited
by the provisions of the Company's Plan of Reorganization (Note
2) and debt agreements (Note 6). Cumulative dividends on
preferred shares that have not been declared or paid since 1991
are approximately: First Preferred - $16,205 ($35 per share) and
Series A Adjustable Rate Cumulative Preferred - $133,800 ($30 per
share).
The First Preferred and Series A Adjustable Rate Cumulative
Preferred Shareholders have liquidation preferences of $103 and
$100 per share, respectively. First Preferred Shareholders shall
be entitled to full payments before any payments are made to
Series A Adjustable Rate Cumulative Preferred Shareholders. If
net assets are not sufficient for full payment of these
liquidation preferences, the net assets shall be distributed
ratably to the Preferred Shareholders. If following the
liquidation preference distributions there are assets of the
Company remaining to be distributed, these assets would be
distributed ratably to the Common Shareholders. The First
Preferred shareholders are not entitled to any voting power,
except that these shareholders will be entitled to vote as a
separate class to elect one director in the event of two
consecutive defaults in the payment of quarterly dividends and
may elect a majority of the directors in the event of eight
consecutive defaults in the payment of quarterly dividends. Any
such privilege shall be retained, when once acquired, until all
accumulated dividends are paid. Except as any provision of the
law may otherwise require, the Series A Adjustable Rate
Cumulative Preferred Shareholders are not entitled to any voting
power.
The First Preferred Stock and Adjustable Rate Cumulative
Preferred Stock Series A are subject to redemption at any time at
the determination of the Board of Directors.
The Company's authorized capital also includes 5,000 shares of
Adjustable Rate Cumulative Preferred Stock Series B and 50,000
shares of Junior Cumulative Preferred Stock, each having a par
value of $100 per share. No shares of these stocks have been
issued. The Adjustable Rate Cumulative Preferred Stock Series B
may be converted into Common Stock at the rate of four shares of
Common for each share of Preferred. With respect to dividends,
the holders of outstanding Adjustable Rate Cumulative Preferred
Stock Series B shall be entitled to receive quarterly dividends
at a variable rate ranging from 6% to 12%. Dividends on the
Junior Cumulative Preferred Stock will be determined by the Board
of Directors.
All common stock shares held by the ESOP Plan are treated as
outstanding in computing the Company's earnings per share.
6. Leases
The Company leases land and buildings for use as retail
department stores and certain data processing and other
equipment. The land and buildings are leased under long-term
noncancelable operating leases expiring at various dates through
2010 and include contingent rentals based on sales in excess of
stipulated amounts. Several of the building leases have renewal
options for additional periods of up to thirty years. Data
processing equipment is leased under noncancelable operating
leases expiring in 1999 and a capital lease agreement expiring in
1998. The operating leases include an option to purchase at the
end of the lease term for fair market value.
Future minimum payments, by year and in the aggregate, under the
capital lease and noncancelable operating leases with initial or
remaining terms of one year or more consisted of the following at
January 3, 1998:
Capital Operating
Lease Leases
----------- -----------
1998 $151,866 $ 3,442,704
1999 - 3,309,540
2000 - 3,027,616
2001 - 2,922,984
2002 - 2,824,336
Thereafter - 12,348,158
---------- ----------
Total minimum lease payments 151,866 27,875,338
Sublease income to be received - (263,612)
---------- ----------
151,866 $27,611,726
Amounts representing interest (11,703)
---------
Present value of future minimum
lease payments $140,163
Amortization of assets under capital lease agreements is included
with depreciation expense in the financial statements. Rental
expense for all operating leases consisted of:
Year ended
January 3 December 28
1998 1996
--------- -----------
Minimum rentals $3,843,798 $3,666,466
Contingent rentals based on sales 90,999 98,598
---------- ----------
$3,934,797 $3,765,064
Certain landlords have advanced money to the Company when the
related lease was signed to assist with items such as fixtures
and other expenditures related to store openings. These advances
are to be repaid over the term of the lease through lease
payments. Advances of this nature totaled $207,455 in 1996.
These deferred rent credits are summarized as follows:
January 3 December 28
1998 1996
Portion classified as current
liability $ 68,857 $118,857
Portion classified as long-term
liability 662,237 731,094
--------- ---------
$731,094 $849,951
7. Notes Payable and Long-term Debt
Long-term debt is summarized as
follows:
January 3 December 28
1998 1996
Ira A. Watson Co. (Parent Company)
8.25% note payable to insurance
company, due in monthly installments
of $46,750, including interest,
through October 2003, when the
unpaid balance will be due, as
specified in the Plan of
Reorganization (Class 4) $ 4,634,336 $ 5,988,799
Unsecured notes payable to banks, due
in annual installments of $121,165,
plus interest at 6%, through 2001,
as specified in the Plan of
Reorganization (Class 6A) 424,078 666,409
Revolving loan and security agreement
with financial institution (see
below) 5,937,544 4,471,996
Other 21,473 23,195
------------ -----------
Total Ira A. Watson Co.
(Parent Company) long-term debt 11,017,431 11,150,399
Less portion classified as current
liability 717,184 319,432
------------ -----------
Long-term portion $10,300,247 $10,830,967
The insurance company loan agreement requires the Company to,
among other things: (a) meet certain working capital
requirements, (b) limit additional indebtedness and (c) limit the
payment of dividends on Common Stock and certain other payments.
The agreement is collateralized by property and equipment with a
cost of $5,424,004. During 1997, the Company sold a portion of
the property, plant and equipment collateralizing the agreement
resulting in net proceeds of approximately $1,700,000. These
proceeds were used principally to reduce debt outstanding under
the agreement. Also, $408,561 of the proceeds was placed in
escrow to cover income taxes and other items associated with the
transaction; this amount is included in cash and cash equivalents
in the January 3, 1998, Consolidated Balance Sheet. As no taxes
or other items will be paid for 1997 due to the Company's net
operating loss position (see Note 9), the amount will be used to
reduce debt outstanding under the agreement in 1998; accordingly,
this amount has been included in the current portion of long-term
debt.
The Company borrows operating funds under a revolving loan and
security agreement with a financial institution which was amended
March 30, 1998. The agreement now allows maximum credit,
including amounts available for the issuance of documentary
overseas letters of credit, equal to the lesser of $12,000,000 or
60% of the Company's eligible merchandise inventories. This
agreement expires in December 1999, with provisions for renewal.
Interest is payable monthly on any used portion at prime plus 2%.
This agreement also has annual facility fees of 0.5% of the
average monthly unused portion of the maximum credit and is
collateralized by a first priority security interest in all of
the Company's personal property, including merchandise
inventories, accounts receivable, cash and cash equivalents, all
other rights to payment, certain fixtures and equipment and
general intangibles. This agreement requires the Company to,
among other things, maintain a minimum adjusted tangible net
worth and not pay any dividends. The Company failed to meet this
minimum adjusted tangible net worth covenant for the quarter
ended April 4, 1998. However, the Company obtained a waiver
dated May 12, 1998 so that the loan is not in default.
The Company has obtained two standby irrevocable letters of
credit from two financial institutions providing for aggregate
credit limits of $400,000 and $200,000, respectively, for sight
drafts on overseas purchases presented by company suppliers. The
$400,000 letter of credit expires in March 1998 and is
collateralized by a $400,000 United States Treasury Bill maturing
in March 1998. This Treasury Bill has a carrying value of
$417,107 and is classified as a short-term investment in the
Consolidated Balance Sheet. The $200,000 letter of credit
expires in December 1998. Subsequent to year-end, the expiration
date of the $400,000 letter of credit and maturity of the
Treasury Bill were extended to March 1999.
January 3 December 28
1998 1996
----------- ------------
Appalachian Distributing Corporation
Notes payable to various banks, due
in monthly installments totaling
$1,722 including interest, with
the unpaid balances due on various
dates (from August 1998 to April
1999), with interest at varying
rates (from 8.25% to 8.9% at
January 3, 1998), collateralized
by the assignment of leases with
Ira A. Watson Co. and property and
equipment with a cost of $63,962 $ 16,157 $ 114,377
Notes payable repaid in 1997 - 8,424
----------- -----------
Total Appalachian Distributing
Corporation long-term debt 16,157 122,801
Less portion classified as current
liability 13,872 105,710
---------- -----------
Long-term portion $ 2,285 $ 17,091
Summary of long-term debt:
Total long-term debt of Ira A. Watson
Co. and subsidiary $11,033,588 $11,273,200
Less portion classified as current
liability 731,056 425,142
----------- -----------
Long-term portion $10,302,532 $10,848,058
Scheduled maturities of long-term debt for the next five years as
of January 3, 1998, are as follows:
Appalachian
Ira A. Distributing
Watson Co. Corporation Total
----------------------------------------
1998 $ 717,184 $13,872 $ 731,056
1999 6,156,119 2,285 6,158,404
2000 214,259 - 214,259
2001 161,660 - 161,660
2002 109,829 - 109,829
Thereafter 3,658,380 - 3,658,380
------------------------------------------
$11,017,431 $16,157 $11,033,588
8. Income Taxes
For tax purposes at January 3, 1998, the Company has net
operating loss, general business credit and alternative minimum
tax credit carryovers. These carryovers expire as follows:
<TABLE>
<C> <C> <C> <C> <C> <C>
Net Operating Loss Carryover General Alternative
Alternative Business Minimum
Year Year of Regular Minimum Credit Tax Credit
Generated Expiration Tax Tax Carryover Carryover
- -----------------------------------------------------------------------------
1983 1998 $ - $ - $ 16,636 $ -
1984 1999 - - 102,653 -
1985 2000 - - 92,611 -
1987 n/a - - - 15,276
1988 n/a - - - 86,474
1989 n/a - - - 13,749
1993 n/a - - - 20,486
1994 n/a - - - 28,324
1996 2011 1,503,389 1,033,927 - -
1997 2012 2,804,120 2,804,120 - -
--------- --------- --------- ---------
$4,307,509 $3,838,047 $211,900 $164,309
For financial statement purposes, a valuation allowance of
$1,924,140 has been recognized to offset a portion of the
deferred tax assets related to these carryovers. The valuation
allowance was increased $1,183,247 in 1997 and $534,681 in 1996.
Carryovers of $78,457 were used to reduce deferred income tax
liabilities in 1996.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred tax assets and liabilities are as follows:
January 3 December 28
1998 1996
----------- -------------
Deferred tax liabilities:
Tax over book depreciation $ 380,592 $ 535,440
Gains on debt settlements 38,355 111,272
Prepaid expenses deducted for tax
purposes 209,170 212,787
Other 80,472 104,757
---------- ---------
Total deferred tax liabilities 708,589 964,256
Deferred tax assets:
Capitalized inventory costs 343,158 357,306
Vacation accruals 82,984 106,550
Health claims accruals 106,288 96,798
Tax credit carryovers 2,011,339 1,079,335
Other 88,960 65,160
---------- ---------
Total deferred tax assets 2,632,729 1,705,149
Valuation allowance for deferred tax
assets (1,924,140) (740,893)
Net deferred tax assets 708,589 964,256
Net deferred taxes $ - $ -
Significant components of the provision for income tax expense
(benefit) are as follows:
1997 1996
--------- --------
Current:
Federal $ - $(140,359)
State 10,026 21,310
----------- ----------
Total current 10,026 (119,049)
Deferred:
Federal - (137,815)
State - (6,913)
--------- ----------
Total deferred - (144,728)
Net income tax expense (benefit) $ 10,026 $(263,777)
========== ============
The net income tax benefit is less than the amount that would
result from applying U. S. statutory rates to loss before income
taxes due mainly to reserves being established for tax carryovers
being generated.
9. Benefit Plans
The Company has a noncontributory employee stock bonus (ESOP) and
PAYSOP retirement plan which covers substantially all permanent
employees. In each plan year during which there are sufficient
profits, the Company contributes an amount equal to 1% of
eligible participants' compensation. Additional amounts may be
contributed at the option of the Company. The Company has not
made contributions to this plan for 1997 or 1996. The Company
has a $83,711 note receivable from this plan at January 3, 1998,
under which interest at prime plus 1% (10.25% at January 3,
1998), is payable annually and the outstanding principal is due
in December 1999. Interest accrued since 1995 totaling $22,750
(including $8,144 in 1997 and $7,227 in 1996) is included in the
note receivable on the Consolidated Balance Sheet.
The Company also has a profit sharing plan established pursuant
to Section 401(k) of the Internal Revenue Code which also covers
substantially all permanent employees. Under the terms of this
plan, Company contributions are at the discretion of management.
Company contributions totaled $18,170 in 1997 and $23,799 in
1996.
The Company has a self-funded plan for employee accident and
health insurance. A liability has been established for those
claims incurred but not paid prior to year-end. The Company's
risk is $75,000 per covered employee up to an annual maximum of
$1,559,034. An insurance company has insured $2,000,000 of
claims exceeding $1,559,034 with a maximum of $500,000 per
employee, with the Company at risk on all claims exceeding the
$2,000,000 insured amount. Expense of this Plan was $933,064 in
1996 and $770,403 in 1996.
10. Cash and Cash Equivalents
As of January 3, 1998, the Company has cash and cash equivalents
on deposit with financial institutions and cash funds as follows:
Carrying Financial Institution
Amount Balance
---------- ------------------------
Insured (FDIC) $ 925,316 $ 794,353
Uninsured 984,966 1,839,104
Cash funds 211,555 -
---------- ------------
$2,121,837 $2,633,457
The financial institution balance exceeds the carrying amount due
primarily to checks which have been recorded by the Company but
have not been processed by the financial institution.
11. Incentive Stock Option Plan
The Company has an incentive stock option plan under which
options may be granted to certain key employees to purchase
shares of the Company's common stock. Under the terms of the
Plan, 30,000 shares of stock are reserved for issuance. No
options have been granted as of January 3, 1998.
12. Deferred Costs
Deferred costs consist principally of costs associated with
obtaining loan agreements. These costs are being amortized over
the term of the related debt agreement using the straight-line
method. The unamortized portion of these costs is summarized as
follows:
January 3 December 28
1998 1996
---------- ------------
Total deferred costs $649,298 $693,025
Less accumulated amortization 488,581 433,462
--------- --------
Net deferred costs 160,717 259,563
Less current portion 93,103 98,531
--------- --------
Long-term portion $ 67,614 $161,032
13. Advertising Costs
Advertising costs are expensed as incurred and range from 4% to
5% of purchases at retail.
14. Private Label Credit Card
During 1996, the Company entered into a credit card program and
security agreement with a financial institution that provided for
the issuance of a private label credit card. The agreement
provides for the Company to sell the related charge card
receivable with full recourse to the financial institution at a
defined discount rate over the term of the agreement (1.25% and
1.4% during the 1997 and 1996, respectively). The Company bears
the loss on all charge card receivables deemed uncollectible and
established a reserve for these accounts of $105,000 (uncollected
balance of approximately $1,980,000) as of January 3, 1998, and
$43,265 (uncollected balance of approximately $1,700,000) as of
December 28, 1996. The Company does not require collateral from
these customers. Costs associated with the establishment and
maintenance of the credit card program are expensed as incurred.
15. Loss on Store Closings
The Company closed two stores in 1997. Costs associated with the
closings of $51,150 were recognized in 1997, including results of
operations from October 7, 1997, until the date the stores were
actually closed (net sales of $1,375,444).
The Company closed one store in 1996. Costs associated with the
closing of $45,335 were recognized during 1996, including results
of operations from March 7, 1996, until the date the store was
actually closed (net sales of $666,426).
16. Continuing Operations
Operating losses in 1997, 1996 and 1995 caused by declining net
sales and margins have caused the Company to experience cash flow
problems. The ability of the Company to continue as a going
concern is dependent on management's ability to restore
profitable operations and maintain adequate financing until cash
flow from operations is sufficient.
Management has implemented revised merchandising and marketing
strategies to enhance the Company's operations. In addition to
the stores closed in 1997, the Company has closed an additional
store in 1998 and is considering additional closings. The stores
being closed have consistently had operating losses. Also,
organizational downsizing and other cost reductions implemented
after January 3, 1998, are expected to help restore profitable
operations. Finally, subsequent to January 3, 1998, the Company
has been able to obtain revisions and/or waivers of financial
covenants in its revolving loan and security agreements in order
for the loans to continue to be not in default.
In addition to the above actions, management has made contingency
plans which they do not expect to utilize unless the benefits of
the above strategies are not realized as expected. In order to
ensure that cash flow needs are met, discussions with viable
sources of equity financing, the Company's banks and potential
new sources of debt financing are being actively conducted by
management.
Management is confident the above actions will enable the Company
to resume profitable operations and continue as a going concern.
17. Contingency
During 1997, the Company received a $367,500 claim against the
Company for future wages by an employee asserting a breach of an
employment contract. Management believes, according to the terms
of the employee's contract, there is little merit to the claim
and intends to vigorously defend their position. No amounts have
been recorded by the Company as the amount of loss, if any, is
not presently determinable.
</TABLE>
