<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 1999
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission file number 33-80570
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APPAREL VENTURES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-4475766
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
204 WEST ROSECRANS, GARDENA, CALIFORNIA 90248
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(Address of principal executive offices) (Zip Code)
(310) 538 - 4980
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
Name of each exchange
Title of each class on which registered
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT : None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes [X] No [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
AT SEPTEMBER 28, 1999, 209,356 SHARES OF $.01 PAR VALUE COMMON STOCK OF
THE REGISTRANT WERE OUTSTANDING.
Documents incorporated by reference: None
<PAGE> 2
PART I
ITEM 1. BUSINESS
Apparel Ventures, Inc. , a Delaware corporation ("AVI" or the
"Company"), was incorporated on April 20, 1994 and is headquartered in Gardena,
California. As of June 30, 1999, AVI was a wholly-owned subsidiary of AVI
Holdings, Inc. ("AVI Holdings"). On August 11, 1999 in a series of transactions
the Company completed a comprehensive financial restructuring whereby the senior
and junior noteholders in AVI Holdings and the preferred and common stockholders
in AVI Holdings converted their ownership interests into new common stock of AVI
Holdings. Subsequently AVI Holdings was merged into AVI whereby the new AVI
Holdings common stock holders received 25% of the AVI stock on a fully diluted
basis. Simultaneously new investors purchased from AVI $8.75 million of 10%
subordinated debentures due July 31, 2004. Interest on these subordinated
debentures is due semi-annually on April 30 and October 31 of each year. These
subordinated debentures have detachable warrants having a nominal exercise price
which may be exercised for 75% of the stock of AVI. Approximately $7.8 million
of the proceeds from the new subordinated debentures was used by AVI to retire
$34.85 million of AVI Senior Notes.
AVI designs, manufactures and markets branded women's swimwear. The
Company offers seven proprietary branded lines catering to the children and
pre-teen (age 7 to 13), Junior (age 14 to 30 years) and Missy (age 30 and over)
categories, distributed through major department stores and specialty retail
stores nationwide. By using multiple brand lines, AVI is able to achieve the
broadest possible coverage of the women's swimwear market.
PRODUCT LINE
The Company's current product line offerings by its U.S. Division are as
follows:
<TABLE>
<CAPTION>
Sassafras Group La Blanca Group
--------------- ---------------
<S> <C> <C> <C>
Sassafras Citrus La Blanca Elisabeth Stewart
Sessa Too Hot Studio La Blanca Private Label
Private Label Nautica (licensed) Ocean Pacific (licensed)
</TABLE>
SASSAFRAS GROUP
The Sassafras Group, focusing on the junior market (ages 14 to 30) and
the missy market (ages 30 and over), is currently comprised of five major
branded product lines, as described below.
SASSAFRAS. Introduced in 1976, Sassafras has been successfully positioned as
both fashionable and practical swimwear appealing to younger women with an eye
for value. Sassafras offers approximately 90 styles, with most featuring full
derriere coverage and padded bra tops. Featured cover-ups include matching
sarongs. Priced at retail around $58, management believes that Sassafras'
innovative design and high quality fabrication provide one of the best
price/value relationships in the junior market. Sassafras is distributed
primarily through department stores, national chain stores and specialty stores.
SESSA. Introduced in 1991, Sessa has been designed to bridge the junior and
missy segments of the contemporary swim market by focusing on the fashion
conscious baby boomer who seeks support and coverage while maintaining a forward
style. Sessa targets ages 25 to 50 and is priced at retail between $55 and $90.
Sessa offers approximately 140 styles featuring a multitude of textures and
patterns in its one and two piece styles. Sessa's extensive cover-up and
beachwear collection features pareaus, dresses, boy shorts, oversize shirts ,
shorts and skirts at retail prices ranging from $32 to $79. Sessa is primarily
distributed through department stores, catalog accounts and specialty stores.
CITRUS. Introduced in 1987, Citrus swimwear is designed to focus on the active,
surf, fashion forward juniors aged 13 to 28, and is priced at retail between $44
and $72. Citrus offers approximately 140 styles with each featuring sporty
v-neck tanks, halter boy shorts, sport bras or triangle tops, with vivid colors
in graphic prints and textures. Shapely padding and functional lingerie strap
underwire styles characterize the Citrus two piece tops. Cover-ups include hot
pants, sundresses and board shorts. A junior separates collection is offered
annually, sized extra small to large in novelty textures and prints, and
features full, moderate and surfer cut bottoms, as well as D cups. Citrus is
distributed primarily through department stores and specialty stores.
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<PAGE> 3
TOO HOT. Reintroduced in 1998, Too Hot is designed to focus on the "surfer
girl", aged 14 to 26, and is priced at retail between $50 and $74. Too Hot
offers approximately 60 styles, mostly two piece designs, including "cami" tops,
sport bras, triangles and the hot trend "Tankinis". The Too Hot color story is a
retro Hawaiian one that appeals to the customer who wants a unique look for
herself. Too Hot is primarily distributed through swim and specialty stores.
NAUTICA. The Nautica license was acquired in June 1996. The initial controlled
release was very successful. The 1999 lines take the Nautica brand into two
directions. The first direction is Nautica collections, a brand concept with all
American styling and attitude targeted at affluent customers who identify with
designer merchandise. The second direction is athletic attitude, featuring color
blocking and clear suits with piping and binding features. Retail prices range
from $40 to $100. Nautica separates were introduced in the summer of 1998 and
have been very attractive at retail. Nautica is distributed through a selective
group of department, swim and specialty stores.
LA BLANCA GROUP
The La Blanca Group, focusing on the Missy market (ages 25 and over),
the Junior market (ages 14 to 25) and the children and pre-teen market (ages 7
to 13) is comprised of the following product lines:
LA BLANCA. Introduced in 1981, La Blanca is AVI's largest selling line and is a
leader in the Missy market. La Blanca offers approximately 100 styles between
swimwear and cover-ups and is particularly well known for its innovative styling
and excellent fit. Priced at retail between $65 and $100, management believes La
Blanca's high quality fabrics and suit construction provide a price/value
relationship which is superior to any of La Blanca's competitors. La Blanca's
sales of two piece suits is approximately 40% of its total net sales. This has
lead to developing a La Blanca separates line introduced for Cruise 1999 season.
The most innovative addition is La Blanca Curva, introduced in August 1998,
offering bra sized swimwear which management believes will increase the sales as
the consumer is responding to fit enhancement. La Blanca is distributed
primarily through department stores, national chains and specialty stores.
STUDIO LA BLANCA. Introduced for the 1995 Cruise Season, Studio La Blanca is a
fashion leader in the "contemporary Junior" market, appealing to the
sophisticated junior as well as the missy customer with a young attitude. Retail
prices range from $40 to $80. Primarily a two piece business, Studio addresses
the demand from the younger market for separates and the ability to buy a
different size top than bottom. Studio is distributed through department stores,
national chains and specialty stores.
ELISABETH STEWART. AVI acquired the Elisabeth Stewart Label in April, 1994. This
line gives the Company a presence in the market niche serving the more mature
customer. The merchandising approach is typically more conservative and features
"figure control" design with matching cover-ups. Retail prices $60 to $90 are
similar to other branded products.
OCEAN PACIFIC. AVI acquired the Ocean Pacific or OP label through a licensing
agreement signed in February 1997. OP produces swimwear and beachwear for the
junior and kids market. Ocean Pacific is designed with the California beach
style in mind. The line has been upgraded from past offerings by using textured
fabrics and print fabrications that give the product a more "rich" feeling. The
fit is conservative and will appeal to the junior customer who wants a clean
covered look. The children's fit has remained consistent from years past and
focuses on the customer who is in and out of the water all day long. It is
distributed primarily through department stores, national chain stores and
specialty stores.
PRIVATE LABEL. The Company sells specially designed and manufactured products
for retail customers such as as Wal*Mart, JC Penney, Sears, and others. Entry
into this segment of the market provides the Company with balance to its heavy
focus on the branded business.
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<PAGE> 4
FOREIGN OPERATIONS - APPAREL VENTURES EUROPA AND AVI DE MEXICO
In 1992, in order to have the ability to manufacture and sell product in
the European Economic Community ("EEC"), the Company purchased 79% of the
capital stock of a small manufacturing operation in Portugal, which it renamed
Apparel Ventures Europa - Textil, LDA ("AVE"). Management of AVE owns the
remaining 21% of AVE's stock. Upon acquiring AVE, management of the Company
realized that the implementation of a comprehensive strategy required for
creative development, manufacturing and sales for the EEC would take three to
five years. AVE currently manufactures the product lines "Citrus" and "Too Hot
Brazil" for the European market. AVE also sells specially designed and
manufactured products for Marks & Spencer. AVE accounted for $4.7 million
(excluding intercompany sales) of net sales for the fiscal year ended June 30,
1999.
During fiscal 1997, the Company established an operating company in
Cuernavaca, Mexico. The wholly-owned subsidiary's name is AVI De Mexico, S.A.
De C.V. Under NAFTA rules, this company produces swimwear and coverups primarily
for the U.S. market.
GROUP NET SALES AND GROSS PROFIT
The table below illustrates a breakdown of the net sales and gross
profit for each of the Company's three U.S. Division/Groups and AVE for each of
the last three fiscal years.
<TABLE>
<CAPTION>
NET SALES GROSS PROFIT
------------------------------------- -------------------------------------
FISCAL YEAR ENDED JUNE 30, FISCAL YEAR ENDED JUNE 30,
------------------------------------- -------------------------------------
1997 1998 1999 1997 1998 1999
------- ------- ------- ------- ------- -------
($ in Millions)
<S> <C> <C> <C> <C> <C> <C>
Sassafras Group ... $ 27.3 $ 28.1 $ 33.9 $ 10.9 $ 7.7 $ 12.5
La Blanca Group ... 35.6 44.0 38.6 12.3 15.7 12.5
Import Group ...... 0.1 0.0 0.0 0.0 0.0 0.0
AVE ............... 3.3 4.2 4.7 1.4 1.7 1.8
------------------------------------- -------------------------------------
Total $ 66.3 $ 76.3 $ 77.2 $ 24.6 $ 25.1 $ 26.8
===================================== =====================================
</TABLE>
DESIGN AND MANUFACTURING
The Company's product lines have been well-received in the marketplace
due to AVI's innovative combinations of color, fabric, style and pattern, as
well as heavy emphasis on proper fit. Input into the design process is obtained
from close contact with department and specialty store buyers as well as
customer responses to designs offered in "Early Cruise" lines two to three
months before the major selling season. AVI schedules its design process to
ensure that it has a full complement available for the "Early Cruise" season, as
this season affords AVI with an opportunity to revise its production schedule
depending on the success of each particular style.
AVI purchases the majority of its textile inputs from American
manufacturers of nylon Lycra spandex-based knitted fabric. The Company's major
suppliers include Guilford Mills, Inc., S. Edwards and Tricot Liesse. The
Company does not believe it is reliant on any one supplier.
AVI is able to maintain control over the manufacturing process while
achieving a degree of flexibility to respond to market changes. All of AVI's
cutting is performed in-house at its Gardena, California facility. Two Company
operated facilities in South Gate and Norwalk, California fulfill approximately
25% of AVI's sewing requirements. These plants manufacture the Company's labels
and products exclusively. AVI currently subcontracts outside contractors the
remaining 75% of its sewing requirements, of which approximately 50% is
subcontracted to local Los Angeles area contractors and 50% to Mexico
contractors (including AVI De Mexico). AVI maintains control over the quality of
the garments at all sewing facilities through its quality control staff who
approve all cuts at the sewing site and re-check garments at the Company's
distribution centers. All plants have been moved to an 11-month production cycle
to minimize the impact of seasonality. This is achieved through various cut-up
and Private Label programs which help absorb the fixed overhead during otherwise
non productive periods.
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<PAGE> 5
The Company believes that long term it must increase its lower cost
Mexican production capacity. At June 30, 1999 the Company had 170 operators in
Mexico.
DISTRIBUTION AND SALES
AVI sells its products through all major distribution channels. AVI's
brands are sold through prestige department stores such as Saks, Bloomingdales,
Lord & Taylor and Nordstrom, and traditional department stores such as Dillards,
Macy's and Robinson May and specialty stores such as Everything But Water and
California Sunshine. AVI sells branded close-out merchandise to MARMAXX Group
and Ross. AVI sells Private Label products to Wal*Mart, JC Penney and Sears.
AVI's top ten customers accounted for approximately 53% of gross sales and no
single customer for more than 10% of AVI's gross sales in fiscal 1999.
Although AVI's design process targets the ultimate consumer, in order to
optimize the distribution of AVI's products, the Company's marketing process
targets the specific buyer characteristics of each distribution channel. In
particular, department store buyers and national chain store buyers tend to
focus on items such as pricing and product availability. As a result, AVI
provides these buyers with significant guidance in style selection. Conversely,
local specialty store buyers tend to be much more design conscious, and AVI must
instead concentrate its marketing efforts on coordinating product delivery and
payment schedules.
Because of the seasonal nature of the swimwear industry, significant
functions in the design and selling process typically occur on a well-defined
time schedule. The following schedule illustrates this pattern for the product
lines developed for a Cruise Season.
Function Time Frame
- ---------------------------------- -------------------------
Line Development November to July
Marketing July to May
Manufacturing and Sales August to June
These time parameters reflect the peak activity for a given function.
Based on the results of the nationwide Early Cruise Season, during which buyers
make their selections for the season from the full range of product lines
offered by the industry, swimsuit manufacturers modify production schedules in
order to accommodate the expected demand for their products during Cruise.
Manufacturing occurs between August and May and peak shipping occurs between
November and June.
In order to optimize its product offerings, AVI takes full advantage of
the "Early Cruise" season by providing test product lines and working closely
with buyers to obtain feedback for the Cruise season. AVI encourages early
ordering by specialty stores, offering dating programs that allow up to 102 days
for payment at the start of the season. AVI offers an exchange program where AVI
takes back slow moving products in exchange for more popular selling products.
During the past three years, returns and allowances have averaged 8.2% of gross
sales.
AVI maintains national showrooms in Los Angeles and New York which are
staffed by a total of four clerical and eight employed salespeople. AVI covers
other major markets by utilizing independent sales representatives from 10
different organizations. These independent sales representatives are paid a
commission based on a fixed percentage of net sales, with lower rates
established for off-price or promotional sales. In addition, two officers of
the Company and two sales principals of each brand Group play an active role in
developing customer relationships and managing certain house accounts. The most
extensive marketing effort occurs at tradeshows, where the Company's products
are showcased along with competitors' merchandise. Major tradeshows occur in
Florida, New York and Los Angeles, usually from July through October.
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<PAGE> 6
FACTORING
The Company currently factors substantially all of its accounts
receivable with the CIT Group. Under the factoring agreement, the factor
purchases substantially all of the Company's accounts receivable and assumes
substantially all credit risks with respect to such accounts for a factoring
charge negotiated as a percentage of the invoice amount assigned. The Company
employs eight employees who are responsible for following up on adjustments
claimed by customers on chargebacks prepared by the factor.
COMPETITION
The women's swimwear segment of the apparel industry is highly
competitive and fragmented. The Company must remain competitive in the areas of
style, quality, brand recognition, price and customer service. The Company
competes with numerous apparel manufacturers, including companies marketing
predominantly swimwear, companies marketing a full line of apparel and others
which, unlike the Company, have become vertically integrated by expanding into
retail distribution. Many of the Company's competitors have greater financial
resources than the Company.
In general the branded women's swimwear business is dominated by AVI,
Jantzen (a division of VF Corp.), Beach Patrol ( a privately held company ), and
Authentic Fitness, Inc. The balance of the industry is characterized by small
companies with sales of less than $10 million.
Foreign competition has not historically been a significant factor in
swimsuit manufacturing for three major reasons: (i) material, rather than labor,
is the highest cost component in swimsuits, (ii) foreign producers have
historically been unable to fit the consumer as well as domestic producers who
retain control over the manufacturing process and (iii) domestic manufacturers
can provide shorter delivery and reorder lead times.
EMPLOYEES
During the peak season from July through April, the production headcount
increases from approximately 400 to 775. None of the Company's domestic
workforce is unionized, and employee relations are considered to be good. The
employee count as of June 30, 1999 was as follows:
<TABLE>
<CAPTION>
NUMBER OF
EMPLOYEES
---------
<S> <C>
Executive Management 5
Administrative 40
Design and sample makers 48
Production 499
Marketing and Showroom 13
Shipping and Distribution 37
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642
=======
</TABLE>
TRADEMARKS AND LICENSING AGREEMENTS
Company owned brands are protected by trademark registration or similar
protection in the United States and most other markets where the related
products are sold. These trademark rights are enforced and protected by
litigation against infringement as necessary. The Company has also granted
licenses to other parties to manufacture products under the Company's trademarks
in product categories and/or geographic areas in which the Company does not
operate.
In February 1997, the Company entered into a license agreement with
Ocean Pacific Apparel Corp. for the design, manufacture and marketing of
children's, pre-teen and junior's swimwear and related cover-ups, special
make-up goods and tee-shirts under the "Ocean Pacific" and "OP" brand names. The
agreement covers the U.S. and its territories and is valid for a term up to and
including June 30, 2000 and provides for the payment of certain minimum royalty
and advertising payments based on net sales for each agreement year. Ocean
Pacific Apparel Corp. has the right to approve design specification of products
bearing the licensed trademark.
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<PAGE> 7
In June 1996, the Company entered into a license agreement with Nautica
Apparel, Inc. for the design, manufacture and marketing of women's swimwear and
related cover-ups under the "Nautica" brand name. The agreement covers the
U.S. and its territories and is valid for a term up to and including June 30,
2000 and provides for the payment of certain minimum royalty and advertising
payments based on net sales for each agreement year. Nautica Apparel, Inc. has
the right to approve design specifications of products bearing the licensed
trademark.
Minimum annual royalty payments under these licensing agreements are
approximately $436,000 for the year ending June 30, 2000.
Management believes that loss of any license would not have a material
adverse effect on the Company.
BACKLOG
Backlog represents booked unshipped customer orders which, although
terminable without penalty, are believed by the Company to be firm. Because of
the seasonality of the Company's business , the Company's backlog varies over
the course of the year. Backlog usually peaks in December and January. At
January 31, 1999 the Company's backlog was approximately $33.7 million. The
backlog at September 17, 1999 was $23.9 million compared to $19.7 million at
September 18, 1998. See also "Seasonality" below.
SEASONALITY
The Company's business is highly seasonal. In fiscal 1999, approximately
74% of the Company's gross sales were generated in the second half of its fiscal
year. The Company expects this pattern to continue in its current and subsequent
fiscal years. This seasonality and the relatively long lead times required to
design and manufacture new products have led to the development of this standard
selling cycle. The Company operates with a deficit in cash flow from operations
(seasonal working capital requirements) for the first nine months of each fiscal
year.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Certain statements included in Item 1 - "Business", Item 3 - "Legal
Proceedings" and Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are "forward-looking statements" within
the meaning of the federal securities laws. This includes any statements
concerning plans and objectives of management relating to the Company's
operations or economic performance, and assumptions related thereto.
These forward-looking statements are made based on management's
expectations and beliefs concerning future events impacting the Company and
therefore involve a number of risks and uncertainties. Management cautions that
forward-looking statements are not guarantees and that actual results could
differ materially from those expressed or implied in the forward looking
statements.
Important factors that could cause the actual results of operations or
financial condition of the Company to differ include, but are not necessarily
limited to, the overall level of consumer spending for swimwear; changes in
trends in the swimwear industry market in which the Company competes; actions of
competitors that may impact the Company's business; and the impact of unforeseen
economic changes in the markets where the Company competes, such as changes in
interest rates, currency exchange rates, recession and other external economic
and political factors over which the Company has no control.
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<PAGE> 8
ITEM 2. PROPERTIES
The following is a summary of all Company operated facilities:
<TABLE>
<CAPTION>
SQUARE LEASED OR
FACILITY LOCATION FOOTAGE OWNED
- ------------------------------------------ ----------------------------------------------- ------- ---------
<S> <C> <C> <C>
Corporate Headquarters and 204 W. Rosecrans Ave.
Finished Goods Warehouse Gardena, CA. 63,000 Owned
Fabric & Trim Warehouse and 230 W. Rosecrans Ave.
Cutting Operations Gardena, CA. 63,600 Leased
Shipping Department and 312 E. Rosecrans Ave.
Finished Goods Warehouse Gardena, CA. 48,964 Leased
AVI Sewing Plant 11101 Palmer Ave.
South Gate, CA. 17,000 Leased
AVI Sewing Plant 14010 Shoemaker Ave.
Norwalk, CA. 24,468 Leased
Eastern Showroom 1411 Broadway #3111
New York, NY. 5,175 Leased
Western Showroom 110 E. 9th St. #C1117
Los Angeles, CA. 2,805 Leased
Offices, Sewing, Design - Portugal Bairro Campo da Bola
Albarraque
2735 Rio de Mouro, PORTUGAL 10,753 Leased
Raw Material and Finished Goods E. N. 113 - KM 31.6
Warehouse, Cutting, & Sewing - Portugal Alburitel
2490 Ourem, PORTUGAL 22,500 Leased
Sewing Plant - Mexico Parque Industrial "Ciudad de la Confeccion"
Camino Temixco Emiliano Zapata Km.3, Lote 6
Col. Palo Escrito, C.P. 62760
Municipio de Emiliano Zapata, Morelos Leased/
Emiliano Zapata, Morelos, MEXICO 35,628 Option to buy
-------
Total 293,893
=======
</TABLE>
The Company believes that the existing facilities are in good condition.
On December 31, 1999 the lease on the 312 E. Rosecrans Ave. building expires.
The Company could not negotiate for an extended term at a reasonable rental rate
which forced the Company to find other facilities. On September 13, 1999 the
Company executed a lease on a 100,000 sq. ft. building which has approximately
70,000 sq. ft. of warehouse and 30,000 sq. ft. of office space. The Company will
consolidate the two finished goods warehouses and its administrative staff in
this building. The lease has a favorable lease rate for a period of 7 years with
a 7 year option to renew at COLA. The Company will vacate the 312 E. Rosecrans
building and close one of the other buildings in Gardena, California.
The Company owns substantially all of the equipment used in all of its
facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation. No
litigation in which the Company is presently involved is material to its
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter of the fiscal year ended June 30, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's common
stock.
ITEM 6. SELECTED FINANCIAL DATA
($ IN MILLIONS)
The following table presents selected consolidated historical financial
data of the Company.
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 19.5 $ 19.2 $ 19.1 $ 12.3 $ 12.0
Total assets 66.0 52.0 50.4 56.5 48.9
Long-term debt 39.3 38.0 38.0 36.7 36.7
Stockholder's equity (deficit) 2.6 3.8 2.8 (4.7) (5.7)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales $ 76.5 $ 75.4 $ 66.3 $ 76.3 $ 77.2
Gross profit 22.8 23.1 24.6 25.1 26.8
Operating expenses 22.3 19.7 19.4 22.0 22.5
Depreciation & amortization 2.1 2.5 1.9 1.9 2.0
Income (loss) before income taxes (6.1) (4.1) (1.2) (4.2) (3.6)
Net income (loss) (4.2) (2.8) (0.9) (7.2) (3.5)
Provision (benefit) for income taxes $ (1.9) $ (1.3) $ (0.3) $ 3.0 $ (0.1)
Net income (loss) (4.2) (2.8) (0.9) (7.2) (3.5)
Capital Expenditures 1.7(1) 0.6 0.8 2.2(4) 1.2
Ratio of earnings to fixed charges(2) 0.1x 0.4x 0.8x 0.3x 0.4x
OTHER FINANCIAL DATA:(3)
EBITDA $ 2.5 $ 5.0 $ 6.1 $ 3.8 $ 4.8
EBITA 1.2 3.9 5.1 2.8 3.6
Net sales growth 10.9% -1.5% -12.1% 15.2% 1.1%
Gross margin 29.8% 30.6% 37.1% 32.9% 34.7%
EBITDA margin 3.3% 6.6% 9.2% 5.0% 6.2%
EBITDA/Net interest expense 0.4x 0.7x 1.1x 0.6x .8x
EBITA/Net interest expense 0.2x 0.6x 0.9x 0.5x .6x
CASH FLOW INFORMATION:
Operating activities $ (10.3) $ 8.3 $ 4.5 $ (10.7) $ 4.2
Investing activities (1.9) (0.8) (0.9) (0.9) (1.2)
Financing activities 12.3 (8.0) (3.4) 11.6 (3.0)
</TABLE>
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(1) This includes the cost of certain real estate acquired pursuant to the
acquisition of the Company's business in 1994 (the "Acquisition") and
the allocation of excess purchase price in the Acquisition to equipment.
(2) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" represent income before income taxes plus fixed charges, and
"fixed charges" consist of interest expense.
(3) The Company has included information concerning EBITDA and EBITA because
it understands that such information is used by certain investors as
measures of the Company's operating performance. EBITDA and EBITA should
not be considered as alternatives to, or more meaningful than, income
from operations or cash flow (as determined in accordance with generally
accepted accounting principles) as measures of the Company's operating
performance. EBITDA and EBITA do not necessarily indicate whether cash
flows have been or will be sufficient to fund cash needs. Furthermore,
EBITDA and EBITA presented herein may not be comparable to similarly
titled measures of other companies because of variations of the
"adjustments" that might exist in the computations.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net income (loss) $ (4.2) $ (2.8) $ (0.9) $ (7.2) $ (3.5)
Add:
Interest expense, net of interest income
and amortization of debt issue costs 6.5 6.7 5.5 6.2 6.4
Provision (benefit) for income taxes (1.9) (1.3) (0.3) 3.0 (0.1)
Amortization of goodwill and
organization costs 0.3 0.4 0.3 0.3 0.3
Amortization of debt issue costs 0.5 0.6 0.5 0.5 0.5
Miscellaneous(*) -- 0.3 --
------- ------- ------- ------- -------
EBITA 1.2 3.9 5.1 2.8 3.6
Depreciation 1.3 1.1 1.0 1.0 1.2
------- ------- ------- ------- -------
EBITDA 2.5 5.0 6.1 3.8 4.8
</TABLE>
Other measures of performance, including the Net Sales Growth, Gross
Margin, and EBITDA and EBITA margins and ratios to net interest expense, are
presented as additional information which management considers relevant to the
performance of the Company. The measures of Sales Growth and Gross Margin are
customarily considered key indicators of performance within the apparel
industry, and the EBITDA and EBITA margins and ratios are relevant to investors
in debt instruments. Management believes this additional information is relevant
to an investor's understanding of the Company's performance since it is believed
such information is used to measure performance of other companies in the
apparel industry and those which are significantly debt financed.
(*) In fiscal 1996, the Company recorded an extraordinary item of $0.3
million related to the write-off of deferred debt issue costs and bond
discount due to the repurchase of $4.0 million of Senior Notes.
(4) Capital expenditures includes $1,310,000 in capitalized building cost
under capital lease obligation (AVI De Mexico).
10
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following tables also set forth information with respect to the percentage
relationship to net sales of certain items of the consolidated statements of
operations of the Company for the years ended June 30, 1997, 1998 & 1999.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------------------
1997 % 1998 % 1999 %
------------ ---------- ------------ ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 66,261,000 100.0% $ 76,328,000 100.0% $ 77,192,000 100.0%
COST OF SALES 41,672,000 62.9% 51,210,000 67.1% 50,385,000 65.3%
---------- ---------- ----------
Gross profit 24,589,000 37.1% 25,118,000 32.9% 26,807,000 34.7%
OPERATING EXPENSES
Design 2,510,000 3,032,000 2,860,000
Selling 6,112,000 7,900,000 8,173,000
Shipping 1,923,000 2,527,000 2,629,000
General and administrative 8,877,000 8,575,000 8,821,000
------------ ---------- ------------
19,422,000 29.3% 22,034,000 28.9% 22,483,000 29.1%
------------ ---------- ------------
Income from operations 5,167,000 7.8% 3,084,000 4.0% 4,324,000 5.6%
OTHER (EXPENSE) INCOME
Interest expense (5,946,000) (6,744,000) (6,899,000)
Royalty income 214,000 205,000 152,000
Royalty expense (122,000) (799,000) (1,092,000)
Other (477,000) 24,000 (36,000)
------------ ---------- ------------
(6,331,000) -9.6% (7,314,000) -9.6% (7,875,000) -10.2%
------------ ---------- ------------
LOSS BEFORE INCOME TAX BENEFIT (1,164,000) -1.8% (4,230,000) -5.5% (3,551,000) -4.6%
INCOME TAX PROVISION (BENEFIT) (264,000) -0.4% 3,006,000 3.9% (98,000) -0.1%
------------ ---------- ------------
NET LOSS $ (900,000) -1.4% $ (7,236,000) -9.5% $ (3,453,000) -4.5%
============ ============ ============
</TABLE>
FISCAL 1999 VS. 1998
NET SALES
The Company's net sales for fiscal 1999 increased by $.9 million or 1.1%
as compared to fiscal 1998. This increase was due primarily to a $5.8 million
increase in Nautica sales, a $1.7 million increase in private label sales a $.8
million increase in Sessa sales and a $.4 million increase in AV Europe sales.
These increases were offset by a $2.5 million decrease in Sassafras sales, a
$1.1 million decrease in La Blanca sales, a $3.6 million decrease in Studio
sales and a $.6 million decrease in Ocean Pacific sales. The increase in net
sales for Nautica was the result of improved designs and increased distribution
of the brand. The increase in private label sales was due primarily to a new
private label program for Mervyns. The decrease in La Blanca, Studio and Ocean
Pacific was due to a less than enthusiastic reception for the designs and our
interim strategy to cut off production to minimize end of season closeout
merchandise and customer markdown allowances.
GROSS PROFIT
Gross profit for fiscal 1999 increased $1.7 million or 6.7%, and
increased as a percent of net sales from 32.9% to 34.7% in fiscal 1999. Gross
profit on branded merchandise increased from 34.9% of net sales in fiscal 1998
to 36.4% of net sales in fiscal 1999. This increase in gross profit, as a
percent of net sales was primarily in the Sassafras Group, where the gross
profit increased significantly for the house brands. Gross profit for the
Sassafras group house brands increased from 23% in fiscal 1998 to 36.7% in
fiscal 1999. As compared to last year the improvement is directly attributable
to improved design, production planning and delivery. The gross profit for the
house branded lines for the La Blanca Group decreased from 39.5% in fiscal 1998
to 34.4% in fiscal 1999 as the result of the poor performance of La Blanca and
Studio.
11
<PAGE> 12
OPERATING EXPENSES
Operating expenses for fiscal 1999 increased $.4 million or 2.0%, and
increased as a percent of net sales from 28.9% in fiscal 1998 to 29.1% in fiscal
1999. This increase in operating expenses is due to: increased selling expense
of $.3 million; increased distribution expense of $0.1 million; and increased
general and administrative expense of $.2 million, offset by reduced design
expense of $.2 million. The increase in selling expense is primarily due to
license and co-operative advertising. The increase in distribution is primarily
due to increased wages as a result of the minimum wage increase and additional
expense to make merchandise floor-ready for the customer. The increase in
general and administrative expense is due to consulting fees which had been had
been waived in the prior year.
OTHER INCOME (EXPENSE)
Other expenses for fiscal 1999 were $.6 million higher than in fiscal
1998 due primarily to increased interest expense on the working capital loan of
$0.5 million and increased royalty expense for the Nautica and Ocean Pacific
licenses of $.3 million, increased other miscellaneous expense of $.1 million
and reduced royalty income $.1 million, offset by reduced bondholder consent fee
expense of $.4 million.
INCOME TAX PROVISION (BENEFIT) AND NET LOSS
Net loss before income taxes was $(3.6) million in fiscal 1999 compared
to $(4.2) million in fiscal 1998. The $.6 million improvement in net loss
reflects the (i) improved gross margin of $1.7 million, offset by increased
operating and other expenses of $1.1 million.
The Company's effective income tax benefit for fiscal 1999 was (2.8)% of
pre tax loss compared to income tax provision rate of 71.1% in fiscal 1998. In
fiscal 1998 the Company recorded a valuation allowance of $4,359,000 to account
for uncertainties related to the Company's possible decreased use of deferred
tax assets to shelter future income, resulting in additional income tax expense
for the fiscal year. The benefit differs from statutory rates primarily because
of increases in the aforementioned valuation allowance.. Management periodically
reviews the factors and may change the amount of valuation allowance as facts
and circumstances dictate. The Federal and state net operating loss
carryforwards amount to approximately $15,895,000 and $7,499,000 respectively,
as of June 30, 1999. Unused net operating loss carryforwards expire between
fiscal 2009 and 2013.
FISCAL 1998 VS. 1997
NET SALES
The Company's net sales for fiscal 1998 increased by $10.1 million or
15.2% as compared to fiscal 1997. This increase was due primarily to the
increase in the sale of licensed merchandise totaling $12.1 million, increased
private label sales for mass merchants of $4.1 million, increased La Blanca and
Studio La Blanca sales of $3.6 million, increased AVE sales of $0.9 million,
offset by a decrease in the Sassafras Group branded merchandise sales of $7.3
million and a decrease in prior season and other merchandise sales of $3.3
million. The increase in net sales for the La Blanca labels was due to improved
designs, improved product performance at retail, as a result of improved
marketing and sales efforts. The decrease in net sales for the Sassafras Group
was due primarily to the late start in product development for the cruise 1998
season which resulted in late production and delivery to the customer.
GROSS PROFIT
Gross profit for fiscal 1998 increased $0.5 million or 2.2%, but
decreased as a percent of net sales, from 37.1% to 32.9% in fiscal 1998. Gross
profit on branded merchandise decreased from 39.0% of net sales in fiscal 1997
to 34.9% of net sales in fiscal 1998. This decrease in gross profit, as a
percent of net sales was totally in the Sassafras Group, where the gross margin
decreased from 39.8% in fiscal 1997 to 27.0% in fiscal 1998. This deterioration
was due primarily to the late delivery and poor reception of the Sassafras,
Sessa, Citrus and Too Hot brands which resulted in larger discounts being given
to move merchandise. The gross profit for the branded lines in the La Blanca
Group increased from 37.8% in in fiscal 1997 to 39.1% in fiscal 1998.
OPERATING EXPENSES
Operating expenses for fiscal 1998 increased $2.6 million or 13.4%, but
decreased as a percent of net sales from 29.3% in fiscal 1997 to 28.9% in fiscal
1998. This increase in operating expenses is primarily due to: increased design
expense of $0.5 million; increased selling expense of $1.8 million; increased
distribution expense of $0.5 million, offset by decreased general and
administrative expense of $0.3 million. The increase in design expense is
primarily due to the increased amortization of fiscal 1998 design and sample
expenses . The increase in selling expense is primarily due to increased
commissions of $0.2 million, increased advertising expense of $0.4 million,
relating to payments on licensed products, increased co-op advertising expense
on branded merchandise of $0.5 million and increased amortization expense of
fiscal 1998 sample cost deferred in the prior year. The decrease in general and
administrative expense is attributable primarily to reduced bonus accrual of
$0.4 million, Jordan consulting fees of $0.2 million waived for fiscal 1998,
offset by increased management information system expense of $0.2 relating to
Year 2000 compliance and increased factor fees of $0.1 million due to increased
sales.
12
<PAGE> 13
OTHER INCOME (EXPENSE)
Other expenses for fiscal 1998 were $1.0 million higher than in fiscal
1997 due primarily to increased interest expense on the working capital loan of
$0.4 million and increased royalty expense for the newly acquired Nautica and
Ocean Pacific licenses of $0.7 million and bondholder consent fee of $0.4
million, offset by reduced litigation settlement expense of $0.4 million and
reduced foreign exchange loss of $0.1 million.
INCOME TAX PROVISION (BENEFIT) AND NET LOSS
Net loss before income taxes was $(4.2) million in fiscal 1998 compared
to $(1.2) million in fiscal 1997. The $3.0 million increase in net loss reflects
the (i) increase in operating expenses of $2.6 million, (ii) increased other
expenses of $0.9 million( mainly due to royalty expense and increased interest
expense), offset by increase in gross profit margin of $0.5 million.
The Company's effective income tax provision rate for fiscal 1998 was
71.1% compared to income tax benefit rate of (32.1)% in fiscal 1997. In fiscal
1998 the Company recorded a valuation allowance of $4,359,000 to account for
uncertainties related to the Company's possible decreased use of deferred tax
assets to shelter future income, resulting in additional income tax expense for
the fiscal year. Management periodically reviews the factors and may change the
amount of valuation allowance as facts and circumstances dictate. The Federal
and state net operating loss carryforwards amount to approximately $13,400,000
and $6,400,00 respectively, as of June 30, 1998. Unused net operating loss
carryforwards expire between fiscal 2009 and 2013.
CAPITAL RESOURCES AND LIQUIDITY
The Company's working capital decreased from $12.3 million in fiscal
1998 to $12.0 million in fiscal 1999. The cash used by operations was ($10.7)
million in 1998, compared with cash provided by operations of $4.2 million in
fiscal 1999. The increase in cash provided from operations in fiscal 1999
compared to fiscal 1998 was primarily due to the reduced net loss and reduced
inventory and accounts receivable levels.
In June, 1999 the Company notified its bank that for the period ended
April 30, 1999 the Company was in default of certain of the covenants in the
Loan Agreement. The bank notified the Company it wanted to protect its rights
and would not waive the covenant violations. Further, the bank reduced the
credit facility to $18 million, and eliminated the seasonal over advance and
finished goods inventory availability of the Credit Facility. The bank reserved
its rights under the agreement to further modify the lending arrangement if the
April event of default was not cured or further events of default occur.
The line of credit contains covenants requiring the maintenance of
minimum tangible net worth, fixed charge coverage ratios and other matters. For
the year ended June 30, 1999 the Company failed to meet the minimum tangible net
worth, fixed charge coverage ratio and minimum EBITDA requirement as defined by
the credit agreement.
On August 11, 1999 in concert with the Company's financial restructuring
the bank waived the covenant violations and reinstated virtually all of the
provisions of the original Loan Agreement. The Company has a line of credit with
the bank ("Credit Facility") which provides for advances and commercial letters
of credit up to $32.0 million (see Note 7 in the accompanying financial
statements incorporated herein by reference). The Credit Facility expires July
31, 2000.
For the year ended June 30, 1998 the Company failed to meet the fixed
charge coverage ratio requirement under the indenture governing the Senior
Notes. This violation was waived and an amendment modifying the indenture was
approved by the bondholders. In connection with such waiver and amendment, the
Company agreed to pay $360,000 to the Bondholders. This amount was accrued as of
June 30, 1998, and is included in interest expense.
For the year ended June 30, 1999 the Company failed to meet the fixed
charge coverage ratio requirement under the indenture governing the Senior
Notes. On August 11, 1999 the indenture was amended to eliminate all restrictive
and performance covenants. Subsequently, substantially all of the Senior Notes
were retired by the Company at a discount. This action by the Company eliminated
the fixed charge coverage default which existed at June 30, 1999.
13
<PAGE> 14
At June 30, 1999 the Company had insufficient cash to meet its debt
service requirements and operational cash flow needs to continue operations.
This financial issue was remedied on August 11, 1999 with the complete financial
restructuring. (See Note 1 to the accompanying financial statements)
Other than the Credit Facility, Subordinated Debenture which is due July
31, 2004 and the remaining $1.15 million of Senior Notes due December 31, 2000
the Company does not have any other substantial debt principal payment
requirement.
Based on current levels of operations, anticipated growth and the
effects of the restructuring, the Company expects that it will be able to meet
all of its debt service requirements as well as its capital expenditure, and
other cash requirements through the fiscal year ending June 30, 2000.
At June 30, 1999, the net collateral availability under the line of
credit was approximately $4,600,000.
COMPUTER SYSTEMS
The Company has completely retrofitted the Management Information System
used to run its operations. The inventory management, order entry, billing and
credit and collection and financial systems have been rendered Y2K compliant.
The Company is presently using these retrofitted programs to manage the
information flow. The system has undergone independent third party testing, in
conjunction with our customers, and has been certified Y2K compliant. The
Company believes all of its internal systems, major vendor systems and major
customer systems are Y2K compliant. However, there can be no assurance given
that the Company will not experience interruptions in supply, production, or
order fulfillment as the result of external Y2K problems.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements and the report of
Independent Auditors thereon and the Financial Statement Schedule listed in the
accompanying Index to Financial Statements are hereby incorporated by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
14
<PAGE> 15
PART III
----------------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to
each of the Company's directors and executive officers. Each of
the persons named below is elected to their respective office or
offices annually.
<TABLE>
<CAPTION>
<S> <C>
NAME, AGE AND PRESENT POSITION PRINCIPAL OCCUPATION FOR PAST FIVE YEARS;
WITH THE COMPANY OTHER DIRECTORSHIPS; BUSINESS EXPERIENCE
---------------------------------------- ---------------------------------------------------------------------------
MARVIN L. GOODMAN, 66 Mr. Goodman has been the President or CEO and Chairman of the
Chief Executive Officer Board and a Director of the Company since May, 1994. He held
Director, similar positions prior to May, 1994 with the Company which he founded
Chairman of the Board of Directors in 1976 after selling Maro Manufacturing Co. (dba High Tide Swimwear),
a company which he founded in 1961, to Warnaco in 1974. Mr. Goodman holds a
Bachelor of Science Degree from the University of California at Berkeley, a
Masters of Business Administration from the University of Pennsylvania's
Wharton School of Business and an Advanced Management Program Certificate
from the Harvard School of Business.
LYNNE KOPLIN, 43 Ms. Koplin joined Apparel Ventures, Inc in April, 1999 as Senior Vice
President President of Merchandising and Design. In August, 1999 she became
Chief Operating Officer President and Chief Operating Officer. For the two years before joining
Apparel Ventures, Inc. she was Senior Vice President Merchandising
and Design for the Designer division of the Authentic Fitness Corporation.
Prior to that, she merchandised several product lines for the Cole of
California swimwear company for a period of 8 years. She spent 8 years
in retail buying for Burdines, Marshall Field, and I. Magnin after graduating
with a B. A. degree from Duke University.
WILLIAM F. SINGLETARY, 51 Mr. Singletary has been Chief Financial Officer of the Company
Chief Financial Officer since June, 1995. For more than five years he was the controller for
Catalina/Cole of California (a division of Taren Holdings), which
was bought by Authentic Fitness Corp. (a designer, manufacturer and
marketer of swimwear, swim accessories and active fitness apparel)
where Mr. Singletary was Vice President of Finance. Mr. Singletary
holds a Bachelor of Arts Degree in Economics and a Masters of
Business Administration from Rutgers University.
JEFF POFSKY, 36 Mr. Pofsky joined AVI as National Sales Manager of Private Label
Vice President Merchandising and Design and Elisabeth Stewart in April 1994. He held various positions in the
La Blanca Group and was promoted to President of the Sassafras Group in
December 1997. In August, 99 he was made Vice President Merchandising and
Design. Prior to joining AVI he had been with Club Sportswear as Director
of Sales, and Macys California as buyer of men's activewear and outerwear.
Mr. Pofsky graduated from Colgate University in 1985 with honors.
JOHN R. LOWDEN, 42 Mr. Lowden has been a Vice President and Director of the Company
Director since April, 1994. Mr. Lowden has been a Managing Director of The
Jordan Company, a private merchant banking firm since 1985. He serves on
the Board of Directors of a number of private companies
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
<S> <C>
NAME, AGE AND PRESENT POSITION PRINCIPAL OCCUPATION FOR PAST FIVE YEARS;
WITH THE COMPANY OTHER DIRECTORSHIPS; BUSINESS EXPERIENCE
---------------------------------------- ---------------------------------------------------------------------------
JOHN W. JORDAN II, 51 Mr. Jordan has served as a Director of the Company since May 1994.
Director Mr. Jordan is a Managing Director of The Jordan Company, a private
merchant banking firm which he founded in 1982. Mr. Jordan is also a
Director of Jordan Industries, AmeriKing, Inc., Carmike Cinimas, Inc.
RockShox, Inc., Motors and Gears, Inc., GFSI Holdings, Inc. and Jordan
Telecommunication Products, Inc. as well as other privately
held companies.
DAVID W. ZALAZNICK, 45 Mr. Zalaznick has served as a Director of the Company since May
Director 1994. Since 1982, Mr. Zalaznick has been a Managing Director of The
Jordan Company, a private merchant banking firm. Mr. Zalaznick is also a
Director of Jordan Industries, Carmike Cinemas, Inc., AmeriKing, Inc.,
Marisa Christina, Inc., Motors and Gears, Inc, GFSI Holdings, Inc. and
Jordan Telecommunication Products, Inc. as well as other privately held
companies.
MICHAEL LERNER, 55 Mr. Lerner has been a Director of the Company since May 1994. Mr.
Director Lerner is the President /CEO and a Director of Marisa Christina, Inc.,
a designer and a manufacturer of women's and children's apparel and one of
the companies affiliated with The Jordan Company.
</TABLE>
ITEM 11- EXECUTIVE COMPENSATION
Summary Compensation Table
- ---------------------------
The following table discloses aggregate compensation paid or accrued by
the Company for the past three fiscal years to the Company's chief executive
officer and to the other four most highly compensated executive officers serving
in such capacities at the end of the 1999 fiscal year.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------
Name and
Principal Position Year Salary Bonus
- --------------------------------------- ------ ------------ ----------------
<S> <C> <C> <C>
MARVIN L. GOODMAN, 1999 $282,787 $ 0
Chief Executive Officer and Chairman of 1998 $272,709 $ 82,231 (**)
the Board 1997 $271,148 $ 45,400 (*)
LYNNE KOPLIN 1999 $ 28,558 $ 0
President, Chief Operating Officer
(Hired April, 1999)
WILLIAM F. SINGLETARY, 1999 $203,823 $ 0
Chief Financial Officer 1998 $192,307 $ 37,100 (**)
1997 $180,000 $ 0
ANNE HANSON 1999 $198,393 $ 0
President, La Blanca Group 1998 $187,692 $100,000 (**)
(Terminated September, 1999) 1997 $156,000 $ 25,000 (*)
JEFF POFSKY 1999 180,020 0
Vice President Merchandising and Design 1998 151,290 34,215 (**)
</TABLE>
(*) Amount reflects bonus for fiscal 1996 paid in fiscal 1997.
(**) Amount reflects bonus for fiscal 1997 paid in fiscal 1998. There were no
bonuses in fiscal 1998.
16
<PAGE> 17
EMPLOYMENT AGREEMENTS
In connection with the 1994 Acquisition, the Company entered into an
employment agreement with Mr. Goodman. The Employment Agreement provided that
Mr. Goodman will be employed for a term of five years, although the Company has
the right to terminate the Employment Agreement at any time upon payment of a
severance amount equal to the employee's fixed annual compensation for a period
of twelve months or eighteen months, depending upon when such termination
occurs. Mr. Goodman's Employment Agreement expired on May 23, 1999 and was
verbally renewed in August, 1999 effective July 1, 1999. The agreement is in
process of documentation.
Mr. Goodman's Employment Agreement provides that he will receive fixed
annual compensation plus performance-based incentive compensation. The fixed
annual compensation for Mr. Goodman will be $282,000. Mr. Goodman will be
eligible to participate in the incentive compensation plan to be determined at a
later date. The agreement is for a period of three years with an option to renew
at Mr. Goodman's request for an additional two years.
COMPENSATION OF DIRECTORS
Directors receive annual fees in the amount of $8,000, plus
reimbursement for out-of-pocket expenses incurred in connection with the
attendance at meetings. For fiscal year 1999 $56,000 in fees were accrued but
not paid.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following chart reflects the beneficial ownership of the Company's
common stock as of August 31, 1999, after giving effect to the financial
restructuring of the Company pursuant to certain agreements dated August 11,
1999. The following table sets forth certain information with respect to the
beneficial ownership of the Company by each person who owns more than 5% of the
common stock currently issued and outstanding, each of the Company's directors,
named executive officers and all of its directors and executive officers as a
group. Except as otherwise noted below, the address of each person listed below
is the Company's address. To the knowledge of the Company, all persons listed
have sole voting and investment power with respect to their shares of common
stock.
<TABLE>
<CAPTION>
Name Number of Shares Percent of Class*
- ---------------------- ---------------- -----------------
<S> <C> <C>
JZ Equity Partners 385,726 (1) 84.0%
c/o The Jordan Company
767 Fifth Avenue
New York, NY 10153
Marvin Goodman 246,774 (2) 13.5%
John R. Lowden 21,379 (3) **
John W. Jordan, II 37,808 (4) **
David W. Zalaznick 37,198 (5) **
Michael Lerner 18 **
Lynne Koplin 0
William Singletary 0
Jeff Pofsky 0
All directors and executive officers 343,177 (6) 14.2%
as a group (8 persons)
</TABLE>
- ------------------------------------
* Calculated based on actual outstanding shares only as of August 31, 1999 of
209,356 without giving effect to unexercised common stock purchase warrants.
** Represents less than 1% of the outstanding.
17
<PAGE> 18
(1) Includes currently exercisable warrants to acquire 209,464 shares of common
stock issued in connection with the issuance to this person of 10%
subordinated debentures.
(2) Includes currently exercisable warrants to acquire 218,571 shares of common
stock issued in connection with the issuance to this person of 10%
subordinated debentures.
(3) Includes currently exercisable warrants to acquire 20,946 shares of common
stock issued in connection with the issuance to this person of 10%
subordinated debentures.
(4) Includes currently exercisable warrants to acquire 36,984 shares of common
stock issued in connection with the issuance to this person of 10%
subordinated debentures.
(5) Includes currently exercisable warrants to acquire 36,984 shares of common
stock issued in connection with the issuance to this person of 10%
subordinated debentures.
(6) Includes the currently exercisable common stock purchase warrants described
on notes (2) through (5) above.
18
<PAGE> 19
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT. In 1994 in connection with the consummation of the
Acquisition and issuance of the Series A Notes, the Company and TJC Management
Corporation ("TJC"), an affiliate of Jordan, entered into an agreement (the
"Management Agreement") pursuant to which TJC or its designee provides
management services to the Company upon consideration of the payment of certain
fees, not to exceed $250,000 per annum, and reasonable out of pocket expenses.
On August 11, 1999 the Company completed a comprehensive financial restructuring
which included a renegotiated Management Agreement with TJC Management
Corporation. Quarterly AVI will pay to TJC a fee of 3% of EBITDA based on the
prior year's audited results. During fiscal year 1999 the Company accrued $.2
million of management fees which were not paid.
FINANCIAL RESTRUCTURING. On August 11, 1999 in a series of transactions
the Company completed a comprehensive financial restructuring whereby the senior
and junior noteholders in AVI Holdings and the preferred and common stockholders
in AVI Holdings converted their ownership interests into new common stock of AVI
Holdings. Subsequently AVI Holdings was merged into AVI whereby the new AVI
Holdings common stock holders received 25% of the AVI stock on a fully diluted
basis. Simultaneously new investors purchased from AVI $8.75 million of 10%
subordinated debentures due July 31, 2004. Interest on these subordinated
debentures is due semi-annually on April 30 and October 31 of each year. These
subordinated debentures have detachable warrants having a nominal exercise price
which may be exercised for 75% of the stock of AVI. Approximately $7.8 million
of the proceeds from the new subordinated debentures was used by AVI to retire
$34.85 million of AVI Senior Notes.
As a part of the restructuring, stockholders of AVI Holdings became direct
common stockholders of the Company. These stockholders include Mr. Goodman,
Chief Executive Officer and Chairman of the Board (28,203 shares representing
approximately 13.5% of the currently issued and outstanding shares of the
Company); John W. Jordan II, a director of the Company (824 shares representing
less than 1% of the outstanding); David W. Zalaznick (214 shares representing
less than 1% of the outstanding); John R. Lowden (433 shares representing less
than 1% of the outstanding); Michael Lerner (18 shares representing less than
1% of the outstanding); and JZ Equity Partners (176,262 shares representing
approximately 84% of the currently outstanding shares of the Company).
Certain of the Company's directors and executive officers, as well as
the principal stockholder of the Company, JZ Equity Partners, participated in
the 10% subordinated debenture offering. Specifically, Mr. Goodman invested $3
million, Messrs. John W. Jordan, II and David W. Zalaznick each invested
$507,630, Mr. John R. Lowden invested $287,500 and JZ Equity Partners, invested
$2,875,000. In connection with their acquisition of the debentures, each of
these persons also acquired the detachable common stock purchase warrants
described above.
Also on August 11, 1999 the Company and its new stockholders (including those
named above) entered into a Stockholder Agreement pursuant to which the parties
agreed to certain management arrangements, stock transfer restrictions and
rights and other terms relating to the investors' rights as stockholders of the
Company.
PART IV
-------------
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C> <C>
(a) (1) FINANCIAL STATEMENTS. PAGE
-----
See "Index to Financial Statements" F-1
(a) (2) FINANCIAL STATEMENTS SCHEDULES.
Report of Independent Accountants on Financial Statement Schedule S-1
Schedule II - Valuation and Qualifying Accounts. S-2
(a) (3) EXHIBITS.
See "Index to Exhibits" 21
(b) REPORTS ON FORM 8-K
Item 5 Form 8-K filed on June 18, 1999.
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The Company has not sent to its security holders any annual report or
proxy materials with respect to its 1999 fiscal year or with respect to any
annual meeting of its security holders.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
APPAREL VENTURES, INC.
/ s / MARVIN L. GOODMAN
------------------------------------------------
By : Marvin L. Goodman
Chief Executive Officer and Chairman of the Board
Date: September 28, 1999
------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/ s / MARVIN L. GOODMAN September 28, 1999
- ------------------------------------ --------------------------
Marvin L. Goodman Chief Executive Officer and Chairman
of the Board and Director
(Principal Executive Officer)
/ s / WILLIAM F. SINGLETARY September 28, 1999
- ----------------------------------- --------------------------
William F. Singletary Chief Financial Officer
(Principal Financial and
Accounting Officer)
/ s /JOHN W. JORDAN September 28, 1999
- ------------------------------------ --------------------------
John W. Jordan II Director
/ s /JOHN R. LOWDEN September 28, 1999
- ------------------------------------ --------------------------
John R. Lowden Director
/ s /DAVID W. ZALAZNICK September 28, 1999
- ------------------------------------ --------------------------
David W. Zalaznick Director
/ s /MICHAEL LERNER September 28, 1999
- ------------------------------------ --------------------------
Michael Lerner Director
</TABLE>
20
<PAGE> 21
EXHIBIT INDEX
-------------
The exhibits listed on this Exhibit Index are filed as part of this Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Certificate of Incorporation of Apparel Ventures, Inc.
3.2 * Bylaws of Apparel Ventures, Inc.
4.1 * Indenture dated as of May 23, 1994 between Apparel Ventures, Inc.
and American National Bank Trust Company, as Trustee, relating to
$40,000,000 12.25% Senior Notes due December 31, 2000, Series A
and Series B.
4.2* Form of Series A Notes (included in Exhibit No. 4.1)
4.3* Form of Series B Notes (included in Exhibit No. 4.1)
4.4* Registration Rights Agreement dated as of May 23, 1994 between
Apparel Ventures, Inc. and Jefferies & Company, Inc.
4.5 First Supplement Indenture between Apparel Ventures, Inc. and
American National Bank and Trust Company, as trustee.
(Incorporated by reference to the same number Exhibit to the
Registrant's Annual Report on Form 10K for the fiscal year
ended June 30, 1998).
4.6 Second Supplement Indenture between Apparel Ventures, Inc. and
American National Bank and Trust Company, as trustee.
(Incorporated by reference to the same number Exhibit to the
Registrant's Annual Report on Form 10K for the fiscal year
ended June 30, 1998).
4.7 Third Supplement Indenture between Apparel Ventures, Inc. and
Firstar Bank of Minnesota, N.A. formerly American National Bank
and Trust Company, as trustee.
10.1 * Agreement for Purchase and Sale of Stock dated May 4, 1994 by and
among AVI Acquisition Co., AVI Holdings, Inc. and all of the
Stockholders of Apparel Ventures, Inc.
10.2 * Purchase Agreement dated May 16, 1994 by and among AVI
Acquisition Co., AVI Holdings, Inc. and Jefferies & Company, Inc.
10.3 * Employment Agreement dated as of May 23, 1994 between Apparel
Ventures, Inc. and Marvin L. Goodman.
10.4 * Employment Agreement dated as of May 23, 1994 between Apparel
Ventures, Inc. and William D. Bussiere.
10.5 * Employment Agreement dated as of May 23, 1994 between Apparel
Ventures, Inc. and Teresa A. DeBruno.
10.6 * Noncompetition Agreement dated as of May 23, 1994 between AVI
Acquisition Co. and Marvin L. Goodman.
10.7 * Noncompetition Agreement dated as of May 23, 1994 between AVI
Acquisition Co. and William D. Bussiere.
10.8 * Noncompetition Agreement dated as of May 23, 1994 between AVI
Acquisition Co. and Teresa A. DeBruno.
10.9 * Tax Sharing Agreement dated as of May 23, 1994 between AVI
Acquisition Co. and AVI Holdings, Inc.
10.10 * Real Estate Contract dated May 23, 1994 by and among Marvin L.
Goodman, Patricia Clark and AVI Acquisition Co.
10.11 * Loan and Security Agreement dated as of May 23, 1994 between
Apparel Ventures, Inc. and Barclays Business Credit, Inc.
10.12 Amendment No. 1 and No. 2 to Loan and Security Agreement between
Apparel Ventures, Inc. and Shawmut Capital Corporation - formerly
Barclays Business Credit, Inc. (Incorporated by reference to the
same number Exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1995).
10.13 Employment Letter dated as of June 7, 1995 between Apparel
Ventures, Inc. and William F. Singletary (Incorporated by
reference to the same number Exhibit to the registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1995).
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.14 Employment Letter dated as of June 12, 1995 between Apparel
Ventures, Inc. and Anne Hanson. (Incorporated by reference to the
same number Exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1995).
10.15 Amendment No. 3 to Loan and Security Agreement between Apparel
Ventures, Inc. and Shawmut Capital Corporation - formerly
Barclays Business Credit, Inc. (Incorporated by reference to
Exhibit Number 10.2 to the Registrant's Quarterly report on Form
10-Q for the period ended December 31, 1995).
10.16 Amendment No. 4 to Loan and Security Agreement between Apparel
Ventures, Inc. and Fleet Capital Corporation - formerly Barclays
Business Credit, Inc. (Incorporated by reference to Exhibit
Number 10.3 to the Registrant's Quarterly report on Form 10-Q for
the period ended March 31, 1996).
10.17 Amendment No. 5 to Loan and Security Agreement between Apparel
Ventures, Inc. and Fleet Capital Corporation - formerly Shawmut
Capital Corporation (Incorporated by reference to Exhibit No.
10.4 to the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1996).
10.18 Amendment No. 6 to Loan and Security Agreement between Apparel
Ventures, Inc. and Fleet Capital Corporation - formerly Shawmut
Capital Corporation (Incorporated by reference to Exhibit No.
10.5 to the Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 1997).
10.19 Amendment No. 7 to Loan and Security Agreement between Apparel
Ventures, Inc. and Fleet Capital Corporation - formerly Shawmut
Capital Corporation (Incorporated by reference to Exhibit No.
10.1 to the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1997).
10.20 Amendment No. 8 to Loan and Security Agreement between Apparel
Ventures, Inc. and Fleet Capital Corporation - formerly Shawmut
Capital Corporation. (Incorporated by reference to the same
number Exhibit to the Registrant's Annual Report on Form 10K for
the fiscal year ended June 30, 1998).
10.21 Amendment No. 9 to Loan and Security Agreement between Apparel
Ventures, Inc. and Fleet Capital Corporation - formerly Shawmut
Capital Corporation (Incorporated by reference to Exhibit No.
10.1 to the Registrant's Quarterly Report on Form 10-Q/A for the
period ended September 30, 1998).
10.22 Amendment No. 10 to Loan and Security Agreement between Apparel
Ventures, Inc. and Fleet Capital Corporation - formerly Shawmut
Capital Corporation (Incorporated by reference to Exhibit No.
10.1 to the Registrant's Quarterly Report on Form 10-Q for the
period ended December 31, 1998).
10.23 Amendment No. 11 to Loan and Security Agreement between Apparel
Ventures, Inc. and Fleet Capital Corporation - formerly Shawmut
Capital Corporation (Incorporated by reference to Exhibit No.
10.1 to the Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 1999).
10.24 Amendment No. 12 to Loan and Security Agreement between Apparel
Ventures, Inc. and Fleet Capital Corporation - formerly Shawmut
Capital Corporation.
10.25 Stock Option Agreement dated August 11, 1999 between Apparel
Ventures, Inc. and Marvin L. Goodman.
10.26 Stock Option Agreement dated August 11, 1999 between Apparel
Ventures, Inc. and Lynne Koplin.
10.27 Stock Option Agreement dated August 11, 1999 between Apparel
Ventures, Inc. and William F. Singletary.
10.28 Purchase Agreement dated August 11, 1999 between Apparel
Ventures, Inc. and Marvin L. Goodman, Various Jordan Party
Investors, and JZ Equity Partners PLC.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1* List of Subsidiaries.
27 Financial Data Schedule.
</TABLE>
- -----------------------------
(*) (Incorporated by reference to the same number Exhibit to the
Registrant's Registration Statement on Form S-4 (Registration No.
33-80570).
22
<PAGE> 23
APPAREL VENTURES, INC.
AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
<PAGE> 24
<TABLE>
<CAPTION>
CONTENTS
- --------------------------------------------------------------------------------
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED BALANCE SHEET
June 30, 1998 and 1999 F-3
CONSOLIDATED STATEMENT OF OPERATIONS AND OTHER
COMPREHENSIVE INCOME (LOSS)
Years ended June 30, 1997, 1998 and 1999 F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
DEFICIT
Years ended June 30, 1997, 1998 and 1999 F-5
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended June 30, 1997, 1998 and 1999 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 to F-18
</TABLE>
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Apparel Ventures, Inc. and
Subsidiaries
We have audited the accompanying consolidated balance sheet of Apparel Ventures,
Inc., a wholly owned subsidiary of AVI Holdings, Inc., and Subsidiaries as of
June 30, 1998 and 1999 and the consolidated statements of operations and other
comprehensive income (loss), stockholder's equity (deficit), and cash flows for
each of the years in the three year period ended June 30, 1999. 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 audits 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 Apparel Ventures,
Inc. and Subsidiaries as of June 30, 1998 and 1999, and the results of their
operations and cash flows for each of the years in the three year period ended
June 30, 1999 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, on August 11, 1999 the
Company completed a comprehensive debt and capital restructuring.
/S/ MOSS ADAMS LLP
- -------------------
MOSS ADAMS LLP
Los Angeles, California
September 10, 1999
<PAGE> 26
APPAREL VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1998 1999
- ------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $ 487,000 $ 502,000
Due from factor 17,324,000 14,358,000
Accounts receivable, net of allowance for
doubtful accounts and discounts of $515,000 and $636,000 3,173,000 3,817,000
Inventories 12,195,000 7,898,000
Deferred charges 2,411,000 2,241,000
Deferred income taxes 640,000 654,000
Prepaid expenses 459,000 377,000
------------ ------------
Total current assets 36,689,000 29,847,000
PROPERTY AND EQUIPMENT, net 5,867,000 5,986,000
OTHER ASSETS
Goodwill and organizational costs, net of accumulated
amortization of $1,356,000 and $1,693,000 12,158,000 11,813,000
Deferred loan costs, net of accumulated amortization
of $2,160,000 and $2,680,000 1,072,000 552,000
Deferred income taxes -- 93,000
Other 722,000 669,000
------------ ------------
$ 56,508,000 $ 48,960,000
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Line of credit $ 12,766,000 $ 9,831,000
Accounts payable 3,084,000 1,677,000
Accrued interest payable 2,512,000 2,410,000
Accrued expenses 3,334,000 3,627,000
Current portion of note payable and
capital lease obligations 2,711,000 378,000
------------ ------------
Total current liabilities 24,407,000 17,923,000
SENIOR NOTES PAYABLE 35,664,000 35,787,000
OTHER LONG TERM OBLIGATIONS, net of current portion 1,001,000 813,000
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 170,000 149,000
STOCKHOLDER'S EQUITY (DEFICIT)
Common stock, $.01 par value, 50,000 shares authorized,
25,500 shares issued and outstanding 1,000 1,000
Additional paid-in capital 11,038,000 13,488,000
Due from parent (253,000) (253,000)
Accumulated other comprehensive income (194,000) (169,000)
Accumulated deficit (15,326,000) (18,779,000)
------------ ------------
(4,734,000) (5,712,000)
------------ ------------
$ 56,508,000 $ 48,960,000
============ ============
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-3
</TABLE>
<PAGE> 27
APPAREL VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND
OTHER COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 66,261,000 $ 76,328,000 $ 77,192,000
COST OF SALES 41,672,000 51,210,000 50,385,000
------------ ------------ ------------
Gross profit 24,589,000 25,118,000 26,807,000
OPERATING EXPENSES
Design 2,510,000 3,032,000 2,860,000
Selling 6,112,000 7,900,000 8,173,000
Shipping 1,923,000 2,527,000 2,629,000
General and administrative 8,877,000 8,575,000 8,821,000
------------ ------------ ------------
19,422,000 22,034,000 22,483,000
------------ ------------ ------------
Income from operations 5,167,000 3,084,000 4,324,000
OTHER INCOME (EXPENSE)
Interest expense, including amortization
of deferred loan costs of $635,000, $519,000,
and $519,000 (5,946,000) (6,744,000) (6,899,000)
Royalty income 214,000 205,000 152,000
Royalty expense (122,000) (799,000) (1,092,000)
Minority interest and other (477,000) 24,000 (36,000)
------------ ------------ ------------
(6,331,000) (7,314,000) (7,875,000)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,164,000) (4,230,000) (3,551,000)
INCOME TAX PROVISION (BENEFIT) (264,000) 3,006,000 (98,000)
------------ ------------ ------------
NET LOSS (900,000) (7,236,000) (3,453,000)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translations (108,000) (38,000) 25,000
------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ (1,008,000) $ (7,274,000) $ (3,428,000)
============ ============ ============
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-4
</TABLE>
<PAGE> 28
APPAREL VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Due from
Shares Amount Capital Parent
<S> <C> <C> <C> <C>
BALANCE, June 30, 1996 1,000 $ 1,000 $ 11,038,000 $ --
Change in cumulative translation adjustment -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
BALANCE, June 30, 1997 1,000 1,000 11,038,000 --
Advance to Parent -- -- -- (253,000)
Change in cumulative translation adjustment -- -- -- --
Net loss -- -- -- --
---------- ------------ ------------ -----------
BALANCE, June 30, 1998 1,000 1,000 11,038,000 (253,000)
Change in cumulative translation adjustment -- -- -- --
Contribution of capital -- -- 2,450,000 --
Net loss -- -- -- --
---------- ------------ ------------ -----------
BALANCE, June 30, 1999 1,000 $ 1,000 $ 13,488,000 $ (253,000)
========== ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
APPAREL VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
- --------------------------------------------------------------------------------------------------------------------
Accumulated
Other Total
Comprehensive Accumulated Stockholder's
Income Deficit Equity (Deficit)
<S> <C> <C> <C>
BALANCE, June 30, 1996 $ (48,000) $ (7,190,000) $ 3,801,000
Change in cumulative translation adjustment (108,000) -- (108,000)
Net loss -- (900,000) (900,000)
------------ ------------ ------------
BALANCE, June 30, 1997 (156,000) (8,090,000) 2,793,000
Advance to Parent -- -- (253,000)
Change in cumulative translation adjustment (38,000) -- (38,000)
Net loss -- (7,236,000) (7,236,000)
------------ ------------ ------------
BALANCE, June 30, 1998 (194,000) (15,326,000) (4,734,000)
Change in cumulative translation adjustment 25,000 -- 25,000
Contribution of capital -- -- 2,450,000
Net loss -- (3,453,000) (3,453,000)
------------ ------------ ------------
BALANCE, June 30, 1999 $ (169,000) $(18,779,000) $ (5,712,000)
============ ============ ============
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-5
</TABLE>
<PAGE> 29
APPAREL VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 1998 1999
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (900,000) $ (7,236,000) $ (3,453,000)
Depreciation and amortization 1,903,000 1,948,000 2,021,000
Deferred income taxes (273,000) 3,000,000 (107,000)
Minority interest earnings (loss) -- 20,000 (21,000)
Foreign currency translation adjustment (108,000) (38,000) 25,000
Changes in assets and liabilities
Due from factor 2,840,000 (4,355,000) 2,966,000
Accounts receivable, net (12,000) (633,000) (644,000)
Inventories (688,000) (3,823,000) 4,297,000
Prepaid expenses and other assets (922,000) 50,000 341,000
Accounts payable 1,799,000 (215,000) (1,407,000)
Accrued interest, expenses and taxes 863,000 525,000 191,000
------------ ------------ ------------
Net cash provided (used) by operating activities 4,502,000 (10,757,000) 4,209,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (817,000) (851,000) (1,148,000)
Acquisition of intangibles (55,000) (13,000) (40,000)
------------ ------------ ------------
Net cash used by investing activities (872,000) (864,000) (1,188,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under (repayment of) line of credit, net (3,303,000) 11,925,000 (2,935,000)
Repayment of notes payable (95,000) (190,000) (2,521,000)
Advances to parent company -- (253,000) --
Contribution of capital -- -- 2,450,000
Minority interest capital investment in subsidiary -- 150,000 --
------------ ------------ ------------
Net cash provided (used) by financing activities (3,398,000) 11,632,000 (3,006,000)
------------ ------------ ------------
NET INCREASE IN CASH 232,000 11,000 15,000
CASH, beginning of year 244,000 476,000 487,000
------------ ------------ ------------
CASH, end of year $ 476,000 $ 487,000 $ 502,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 5,895,000 $ 6,157,000 $ 6,442,000
============ ============ ============
Income taxes $ 9,000 $ 6,000 $ 33,000
============ ============ ============
NON-CASH INVESTING AND FINANCING ACTIVITY
Building and equipment purchased under capital lease obligation $ -- $ 1,310,000 $ --
------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-6
</TABLE>
<PAGE> 30
APPAREL VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
- --------------------------------------------------------------------------------
NOTE 1 - OPERATIONS AND FINANCIAL CONDITION
OPERATIONS - The Company, a wholly owned subsidiary of AVI Holdings,
Inc., is headquartered in Gardena, California and designs, manufactures and
markets branded women's swimwear. The Company offers seven proprietary lines
catering to the Junior and Missy categories distributed through major department
stores and specialty retail stores nationwide and, through a subsidiary,
throughout Europe.
DEBT AND CAPITAL RESTRUCTURE - On August 11, 1999 in a series of
transactions, the Company completed the following comprehensive debt and capital
restructuring:
Noteholders and preferred shareholders of the Company's parent, AVI
Holdings, Inc., converted their interests into newly issued common stock of AVI
Holdings, Inc. One holder of a note of approximately $63,000 elected not to
convert such interest into common stock, and this debt was assumed by the
Company. The common shareholders of AVI Holdings, Inc. then exchanged their
shares of AVI Holdings, Inc. for all of the outstanding shares of the Company
and the shares of AVI Holdings, Inc. were canceled.
Concurrent with the above transaction, certain investors of AVI
Holdings, Inc. advanced $8,750,000 to the Company under subordinated notes
bearing interest at 10% per annum. The proceeds were used to retire Series A
senior notes (see below) and to provide working capital. Interest is payable
semi-annually, and the notes are due July 31, 2004. The subordinated notes were
issued with detachable warrants for the purchase of 75% of the common stock of
the Company. The warrants may be exercised immediately, and permit the holder to
purchase common shares of the Company for $.01 per share.
As a result of an agreement in connection with the Company's tender
offer to repurchase Series A senior notes at a discount, Series A senior notes
with a face value of $34,850,000 were retired for $7,754,000 ($222.50 per $1,000
face value). Holders of the remaining $1,150,000 Series A senior notes elected
to not accept the tender offer. In conjunction with this debt restructure, the
bond debenture was substantially modified to eliminate financial covenants,
conditions and restrictions.
- --------------------------------------------------------------------------------
F-7
<PAGE> 31
APPAREL VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
- --------------------------------------------------------------------------------
NOTE 1 - OPERATIONS AND FINANCIAL CONDITION (Continued)
The proforma effect of these transactions on June 30, 1999 balance sheet
is as follows:
<TABLE>
<CAPTION>
Proforma Adjustments Proforma
As Reported Debit Credit Balance
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash $ 502,000 $ 8,750,000(a) $ 7,754,000(b) $ 758,000
740,000(c)
Other current assets 29,345,000 29,345,000
------------ ------------ ------------ ------------
Total current assets 29,847,000 30,103,000
Property and equipment, net 5,986,000 5,986,000
Other assets 13,127,000 1,770,000(e) 11,357,000
------------ ------------ ------------ ------------
$ 48,960,000 $ 8,750,000 $ 10,264,000 $ 47,446,000
============ ============ ============ ============
Note payable $ 9,831,000 $ 9,831,000
Accounts payable and accrued liabilities 7,714,000 $ 2,135,000(f) $ 3,000,000(g) 8,579,000
Current portion of notes payable 378,000 378,000
------------ ------------
Total current liabilities 17,923,000 18,788,000
------------ ------------
Senior notes payable 35,787,000 34,644,000(b) 1,143,000
Subordinated notes payable -- 8,743,000(a) 8,806,000
63,000(d)
Other long-term obligations 813,000 813,000
Minority interest 149,000 149,000
Shareholders' equity (deficit) (5,712,000) 740,000(c) 7,000(a) 17,747,000
316,000(d) 253,000(d)
1,770,000(e) 26,890,000(b)
3,000,000(g) 2,135,000(f)
------------ ------------ ------------ ------------
$ 48,960,000 $ 42,605,000 $ 41,091,000 $ 47,446,000
============ ============ ============ ============
</TABLE>
(a) Proceeds from subordinated debt from shareholders. Value of
detachable warrants estimated to be $7,000.
(b) Retirement of senior notes payable and related gain recognition.
(c) Estimated administrative fees associated with restructure
transaction.
(d) Merger of AVI Holdings, Inc. with the Company.
(e) Write off of deferred debt issue costs and organization costs.
(f) Write off interest accrued on senior notes.
(g) Estimated tax effect of capital restructuring.
- --------------------------------------------------------------------------------
F-8
<PAGE> 32
APPAREL VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company, its 79%-owned Portuguese subsidiary,
Apparel Ventures Europa-Textil, LDA, and its wholly owned subsidiary, AVI de
Mexico, S.A. de C.V. Significant intercompany accounts and transactions are
eliminated in consolidation.
REVENUE RECOGNITION - Revenue is recognized when shipment of product
occurs. An estimate for returns and allowances is recorded against gross sales
amounts to arrive at net sales.
INVENTORIES - Inventories are stated at the lower of cost, determined on
a first-in, first-out basis, or market.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization of
property and equipment is provided using straight-line and accelerated methods
over estimated useful lives, ranging from 3 to 30 years. Amortization of
goodwill and organization costs is provided over 40 years on the straight-line
method. Deferred financing costs are amortized on the straight-line method over
60 to 78 months.
Long-lived assets such as property and equipment, goodwill, and
trademarks are recorded at cost, less accumulated depreciation and amortization.
As of June 30, 1999 management considers the stated value of long-lived assets
to be recoverable.
ADVERTISING COSTS - Advertising costs are expensed in the period
incurred. Advertising expense was approximately $1,420,000, $2,421,000, and
$2,729,000 for the years ended June 30, 1997, 1998, and 1999, respectively.
INCOME TAXES - Income taxes are accounted for using an asset and
liability method. Under this method, deferred Federal and state income tax
assets and liabilities are provided for temporary differences between the
financial reporting basis and the tax reporting basis of the Company's assets
and liabilities. Income taxes are further explained in Note 10.
DEFERRED CHARGES - Deferred charges primarily consist of costs incurred
for the design changes of swimsuit styles to be produced and sold in the
upcoming year. The costs are deferred and are charged against the period
benefited, on the basis of unit sales to total unit sales expected for the next
season.
INTEREST EXPENSE - Interest expense includes amortization of the related
deferred loan costs over the term of the loan. In conjunction with the debt
restructuring indicated in Note 1, all deferred loan costs were written off
subsequent to June 30, 1999.
STATEMENT OF CASH FLOWS - For purposes of cash flows, all highly liquid
investments purchased with an original maturity of three months or less are
considered to be cash equivalents.
- --------------------------------------------------------------------------------
F-9
<PAGE> 33
APPAREL VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CONCENTRATION OF CREDIT RISK - The Company sells its branded products
through all major retail distribution channels, with the exception of the mass
merchandise segment. The Company currently factors substantially all of its
accounts receivable and uses the factor for credit administration and cash
collection purposes. Under its factoring agreement, the factor purchases trade
accounts receivable and assumes substantially all credit risks. The Company is
responsible for following up on adjustments claimed by customers. Management
believes there are no significant concentrations of credit risk. There is one
customer balance included in non-factored accounts receivable totaling
approximately $1.1 million.
TRANSLATION OF FOREIGN CURRENCIES - Cumulative translation adjustments,
which arise from consolidating Portuguese and Mexican operations, are included
in stockholder's equity.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - During 1999 the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 133 ("Accounting for Derivative instruments and Hedging
Activities"), SFAS No. 134 ("Accounting for Mortgage Backed Securities"), and
SFAS No. 137 ("Accounting for Derivative Instruments and Hedging Activities").
All of these standards are effective for fiscal years beginning after June 30,
1999. Management believes these pronouncements will not have a material effect
on the Company's financial statements.
NOTE 3 - SUBSIDIARIES
The Company has a 79% stock ownership in Apparel Ventures Europa-Textil,
LDA. The excess of the purchase price paid over the estimated fair value of the
net assets acquired (approximately $126,000) has been recorded as goodwill and
is being amortized over 40 years.
The Company's wholly-owned subsidiary in Mexico, AVI de Mexico, S.A. de
C.V. (AVIM), was formed in fiscal 1997 and began full production in fiscal 1999.
- --------------------------------------------------------------------------------
F-10
<PAGE> 34
APPAREL VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
- --------------------------------------------------------------------------------
NOTE 4 - DUE FROM FACTOR
Due from factor consists of the following as of June 30:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Uncollected receivables:
Without recourse $ 16,876,000 $ 13,448,000
With recourse 1,985,000 1,551,000
------------ ------------
18,861,000 14,999,000
Credits due customers (1,537,000) (641,000)
------------ ------------
$ 17,324,000 $ 14,358,000
============ ============
</TABLE>
NOTE 5 - INVENTORIES
Inventories consist of the following as of June 30:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Piece goods and trim $ 3,457,000 $ 2,238,000
Work-in-process 1,700,000 1,918,000
Finished goods 7,038,000 3,742,000
------------ ------------
$ 12,195,000 $ 7,898,000
============ ============
</TABLE>
- -------------------------------------------------------------------------------
F-11
<PAGE> 35
APPAREL VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
- --------------------------------------------------------------------------------
NOTE 6 - PROPERTY AND EQUIPMENT
The components of property and equipment as of June 30 are:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Buildings $ 3,453,000 $ 3,745,000
Machinery and equipment 3,165,000 3,979,000
Furniture and equipment 240,000 52,000
Computer equipment 1,962,000 2,041,000
Automobiles and other 113,000 264,000
Leasehold improvements 1,135,000 1,135,000
------------ ------------
10,068,000 11,216,000
Accumulated depreciation
and amortization (4,625,000) (5,654,000)
------------ ------------
5,443,000 5,562,000
Land 424,000 424,000
------------ ------------
$ 5,867,000 $ 5,986,000
============ ============
</TABLE>
NOTE 7 - LINE OF CREDIT AND NOTES PAYABLE
The Company has a revolving credit agreement with a bank which provides
for advances and commercial letters of credit of up to $32 million through July
31, 2000. The line of credit has sublimits of $3 million for commercial letters
of credit. Borrowings are limited to a predetermined percentage of eligible
factored accounts receivable, select non-factored customer accounts receivable,
eligible finished goods inventory, and certain real estate owned by the Company,
plus a seasonal overadvance of $2.5 million during September and increasing to
$4.5 million from October to March 15 of each year, the amount of which is tied
to bookings and finished goods inventory. Interest on base borrowings is charged
at the bank's prime rate plus .5%, however, borrowings may be fixed, at
management's discretion, for periods of 30 to 180 days at LIBOR plus 2.75%.
Interest on seasonal overadvances is charged at the bank's prime rate plus 1.5%,
however, borrowings may be fixed, at management's discretion, for periods of 30
to 180 days at LIBOR plus 3.75%.The line is collateralized by receivables,
finished goods inventories, and general intangibles. As of June 30, 1999 the
Company had $567,000 in outstanding letters of credit. Maximum and average
amounts outstanding during the year ended June 30, 1999 were $33,071,000 and
$20,044,000, respectively. The weighted average interest rate, including bank
fees, during the year ended June 30, 1999 was 8.89%.
The credit agreement included a $2,450,000 term loan which was retired
on September 24, 1998. The Company's president contributed $2,450,000 cash to
AVI Holdings, Inc. in exchange for class D preferred stock. Concurrently, AVI
Holdings, Inc. contributed $2,450,000 to the Company which was used to retire
the term loan.
- --------------------------------------------------------------------------------
F-12
<PAGE> 36
APPAREL VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
- --------------------------------------------------------------------------------
NOTE 7 - LINE OF CREDIT AND NOTES PAYABLE (Continued)
The line of credit contains covenants requiring the maintenance of a
minimum tangible net worth, fixed charge coverage ratios and other matters. For
the year ended June 30, 1999 the Company failed to satisfy the fixed charge
coverage ratio, minimum EBITDA, and the minimum tangible net worth covenants as
required by the credit agreement. The violations have been waived by the bank
for fiscal 1999.
NOTE 8 - ACCRUED LIABILITIES
<TABLE>
<CAPTION>
Accrued liabilities consist of the following as of June 30,
1998 1999
----------- -----------
<S> <C> <C>
Compensation and related taxes $ 935,000 $ 1,235,000
Director, consulting and professional fees 1,127,000 985,000
Royalties payable to licensors 469,000 629,000
Other 803,000 778,000
----------- -----------
$ 3,334,000 $ 3,627,000
=========== ===========
NOTE 9 - OTHER LONG-TERM OBLIGATIONS
Other long-term obligations consist of the following as of June 30:
1998 1999
----------- -----------
Capital lease obligation to vendor secured by
computer equipment, due in monthly payments
of $7,000 through November 2000 $ 197,000 $ 116,000
Note payable to vendor secured by
equipment, due in quarterly payments of
$17,000 including interest at 10% through
September 2001 -- 124,000
Capital lease obligation to vendor secured by building and land,
due in monthly payments of $14,000 and semiannual installments of
$38,000 through November 2002 with a balloon payment of $225,000
due November 18, 2002 1,258,000 1,016,000
Other 29,000 66,000
----------- -----------
1,484,000 1,322,000
Less: amount representing interest (222,000) (131,000)
----------- -----------
1,262,000 1,191,000
Less: current portion (261,000) (378,000)
----------- -----------
$ 1,001,000 $ 813,000
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
F-13
<PAGE> 37
APPAREL VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
- --------------------------------------------------------------------------------
NOTE 9 - OTHER LONG-TERM OBLIGATIONS (Continued)
Minimum payments under other long-term obligations, including interest,
and long term debt for future years ending June 30 are:
<TABLE>
<S> <C>
2000 $ 446,000
2001 338,000
2002 245,000
2003 293,000
Thereafter -
-----------------
1,322,000
Less: amount representing interest (131,000)
-----------------
$ 1,191,000
=================
</TABLE>
The assets under capital lease consist of a building and computer
equipment with an aggregate cost of $1,139,000 and accumulated depreciation of
$39,000 as of June 30, 1999.
NOTE 10 - SENIOR NOTES PAYABLE
Series A Senior Notes are due December 31, 2000 and bear interest of
12.25%, payable July 1 and January 1 each year. As part of the indenture, the
bondholders received stock warrants allowing them to purchase 10% of the
outstanding shares of the Parent Company's common stock at $.01 per share. The
notes were issued at a discount of $800,000, which is being amortized over the
term of the notes to yield a constant interest rate of 12.7%. As of June 30,
1999, $36 million principal amount of bonds remain outstanding net of $213,000
unamortized discount.
As indicated in Note 1, on August 11, 1999 $34,850,000 of the Series A
senior notes were retired for $7,754,000, and all related warrants were
canceled. Following the transaction, $1,150,000 principal amount of Series A
senior notes remain outstanding, bearing interest and payable as indicated
above.
- --------------------------------------------------------------------------------
F-14
<PAGE> 38
APPAREL VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES
Deferred income taxes reflect the tax effect of temporary differences
between the financial reporting and tax reporting bases of assets and
liabilities. The income tax expense (benefit) for the years ended June 30, 1997,
1998, and 1999 is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Currently payable
Federal $ -- $ -- $ --
State 9,000 6,000 9,000
----------- ----------- -----------
9,000 6,000 9,000
----------- ----------- -----------
Deferred
Federal (232,000) 2,760,000 (91,000)
State (41,000) 240,000 (16,000)
----------- ----------- -----------
(273,000) 3,000,000 (107,000)
----------- ----------- -----------
Expense (benefit) $ (264,000) $ 3,006,000 $ (98,000)
=========== =========== ===========
</TABLE>
The primary differences between the income tax expense (benefit)
computed at the U.S. statutory corporate income tax rate and the effective
income tax rate for the years ended June 30, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal income tax at the U.S.
statutory rate (34.0)% (34.0)% (34.0)%
State taxes, net (3.0) (3.1) (3.1)
Increase in valuation allowance -- 103.2 24.6
Officers' life insurance 3.1 .4 1.3
Amortization of intangibles 11.5 4.9 3.8
Other (.2) (.3) 4.6
----- ----- -----
Effective income tax rate (22.6)% 71.1% (2.8)%
----- ----- -----
</TABLE>
- --------------------------------------------------------------------------------
F-15
<PAGE> 39
APPAREL VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (Continued)
At June 30, 1998 and 1999, net deferred tax assets (liabilities) are
comprised of the following:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Current
Receivable reserves $ 554,000 $ 468,000
Inventory basis (capitalization
costs and reserves) 1,081,000 820,000
Accrued expenses 57,000 258,000
Tax effect of net operating losses
and tax credits 640,000 5,853,000
Deferred charges (960,000) (892,000)
----------- -----------
1,372,000 6,507,000
Valuation allowance (732,000) (5,853,000)
----------- -----------
$ 640,000 $ 654,000
=========== ===========
Long-term
Tax effect of net operating losses $ 4,200,000 $ --
Foreign subsidiary losses 3,000 --
Plant and equipment 80,000 189,000
Intangibles and other (96,000) (96,000)
----------- -----------
4,187,000 93,000
Valuation allowance (4,187,000) --
----------- -----------
$ -- $ 93,000
=========== ===========
</TABLE>
Federal and state net operating loss carryforwards amount to
approximately $15,895,000 and $7,499,000 respectively, as of June 30, 1999. As a
result of the debt restructuring referred to in Note 1, these loss carryforwards
will be reduced in proportion to the debt forgiveness income that is non-taxable
as a result of the Company's insolvency, as defined by the Internal Revenue
Code. The net operating losses are anticipated to be substantially eliminated by
non-taxable debt forgiveness income in fiscal 2000. Therefore, the deferred tax
asset for these loss carryforwards continues to be reserved as of June 30, 1999.
- --------------------------------------------------------------------------------
F-16
<PAGE> 40
APPAREL VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
- --------------------------------------------------------------------------------
NOTE 12 - ROYALTIES AND LICENSE AGREEMENTS
ROYALTY INCOME - The Company licenses various trademarks to entities for
the design, manufacture, and distribution of products within the United States
and foreign territories. The agreements generally provide for the receipt of
royalties based on a percent of net sales, subject to minimum royalty
requirements. Included in accounts receivable are $38,000 and $106,000 due from
the licensees at June 30, 1998 and 1999, respectively. Royalty income recognized
under these agreements amounted to $214,000, $205,000 and $152,000 for the years
ended June 30, 1997, 1998 and 1999, respectively.
ROYALTY EXPENSE - During fiscal 1997, the Company began licensing
various trademarks from entities for the design and manufacture of branded
products within the United States. The agreements generally provide for payment
of royalties based on a percentage of net sales, subject to a minimum royalty
requirement. For the years ended June 30, 1997, 1998, and 1999, royalty expenses
related to these licensing agreements were approximately $122,000, $799,000, and
$1,092,000, respectively. Minimum annual royalty payments are approximately
$833,000 for the year ending June 30, 2000.
NOTE 13 - LEASE COMMITMENTS
The Company leases its office, showrooms and warehouse facilities under
various operating leases expiring from December 1999 through March 2005. Rent
expense for the years ended June 30, 1997, 1998 and 1999 amounted to $1,003,000,
$1,070,000 and $1,044,000, respectively.
Minimum payments required under non-cancelable operating leases with
terms in excess of one year are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 690,000
2001 459,000
2002 461,000
2003 269,000
2004 211,000
Thereafter 144,000
------------
$ 2,234,000
------------
</TABLE>
On December 31, 1999 the lease of a finished goods warehouse expires.
The Company could not negotiate for an extended term at a reasonable rental rate
which prompted the Company to find other facilities. In September 1999, the
Company executed a lease on a new building which has approximately 70,000 sq.
ft. of warehouse and 30,000 sq. ft. of office space. The Company will close one
of its other facilities in Gardena, California and consolidate the two finished
goods warehouses and its administrative staff in this new building. The lease
has a term of seven years with a seven year option to renew with a cost of
living price adjustment. The new lease requires annual payments of $542,000.
- --------------------------------------------------------------------------------
F-17
<PAGE> 41
APPAREL VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
- --------------------------------------------------------------------------------
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes the carrying amount of the following financial
instruments approximates their current fair value: cash, receivables, accounts
payable, line of credit, and notes payable. The fair value amounts have been
estimated by the Company considering the nature of the instrument and applicable
market information.
As indicated by a restructuring of debt on August 11, 1999 (Note 1), the
fair value of senior notes payable is less than the carrying value as of June
30, 1999. The difference between the carrying cost and the fair value will be
recognized as a gain in fiscal 2000 upon the retirement of the senior notes on
August 11, 1999.
NOTE 15 - OPERATING SEGMENTS
The Company's products comprise a single operating segment. Sales are
made to a large number of customers primarily throughout the United States and
Europe. No single customer accounted for 10% or more of total sales for 1997,
1998 or 1999.
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter
-------------------------------------------------------------------
First Second Third Fourth Total
-------- -------- -------- -------- --------
(in thousands)
Year ended June 30, 1999
<S> <C> <C> <C> <C> <C>
Revenues $ 4,092 $ 14,626 $ 35,037 $ 23,437 $ 77,192
Operating income (loss) (2,963) 169 7,161 (43) 4,324
Income (loss) before income (4,599) (1,613) 4,864 (2,203) (3,551)
Net income (loss) (3,127) (1,136) 3,305 (2,495) (3,453)
Year ended June 30, 1998
Revenues $ 2,710 $ 15,087 $ 34,266 $ 24,265 $ 76,328
Operating income (loss) (3,259) 383 7,301 (1,341) 3,084
Income (loss) before income (4,602) (1,171) 5,229 (3,686) (4,230)
Net income (loss) (3,130) (796) 3,555 (6,865) (7,236)
</TABLE>
- -------------------------------------------------------------------------------
F-18
<PAGE> 42
SUPPLEMENTAL INFORMATION
- -------------------------------------------------------------------------------
<PAGE> 43
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
Apparel Ventures, Inc. and
Subsidiaries
Our audits of the consolidated financial statements of Apparel Ventures, Inc.
and Subsidiaries referred to in our report dated September 10, 1999 appearing in
item 8 in this Annual Report on Form 10-K also included an audit of the
financial statement schedule listed in item 14(a)(2) of Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/S/MOSS ADAMS LLP
- ------------------
MOSS ADAMS LLP
Los Angeles, California
September 10, 1999
- -------------------------------------------------------------------------------
S-1
<PAGE> 44
APPAREL VENTURES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED JUNE 30, 1997, 1998 AND 1999
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Allowance for doubtful accounts and discounts
------------------------------------------------------------
Balance Additions
beginning charged to Amounts Balance at
of year cost & expense written off end of year
----------- ----------- ------------ -----------
Year ended June 30,
<S> <C> <C> <C> <C>
1999 $ 515,000 $ 124,000 $ 3,000 $ 636,000
1998 468,000 78,000 31,000 515,000
1997 445,000 104,000 81,000 468,000
----------- ------------ ------------ -----------
Allowance for credits due customers
------------------------------------------------------------
Balance Additions
beginning charged to Amounts Balance at
of year cost & expense written off end of year
----------- -------------- ------------ -----------
Year ended June 30,
1999 $ 1,537,000 $10,949,000 $11,845,000 $ 641,000
1998 919,000 10,586,000 9,968,000 1,537,000
1997 1,080,000 8,066,000 8,227,000 919,000
----------- -------------- ------------ -----------
Allowance for valuation of deferred tax assets
------------------------------------------------------------
Balance Additions
beginning charged to Balance at
of year cost & expense Deductions end of year
----------- -------------- ------------ -----------
Year ended June 30,
1999 $ 4,919,000 $ 934,000 $ - $ 5,853,000
1998 - 4,919,000 - 4,919,000
1997 - - - -
----------- -------------- ------------ -----------
</TABLE>
- -------------------------------------------------------------------------------
S-2
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
APPAREL VENTURES, INC.
The undersigned, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, as amended (the
"GCL"), DOES HEREBY CERTIFY as follows:
1. The Certificate of Incorporation of Apparel Ventures, Inc. (the
"Corporation") was filed in the Office of the Secretary of State of the State of
Delaware on April 20, 1994, which was incorporated under the name of AVI
Acquisition Corp.
2. In the manner prescribed by Sections 242 and 245 of the GCL,
resolutions were duly adopted by the Board of Directors and the stockholders of
the Corporation, respectively, duly adopting this Amended and Restated
Certificate of Incorporation and amending the Certificate of Incorporation of
the Corporation as herein provided.
3. The text of the Certificate of Incorporation, as amended and
restated herein, shall read as follows:
* * *
FIRST: The name of the Corporation is "Apparel Ventures, Inc."
SECOND: The address of the Corporation's registered office in the State
of Delaware is 1209 Orange Street, in the city of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
THIRD: The nature or purpose of the business to be conducted or
promoted by the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the GCL.
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is one million (1,000,000) shares of Common Stock, par
value $.01 per share.
<PAGE> 2
FIFTH: The duration of the corporation is perpetual.
SIXTH:
1. Limits on Director Liability. Directors of the Corporation shall
have no personal liability to the Corporation or its stockholders for monetary
damages for breach of a fiduciary duty as a director; provided that nothing
contained in this ARTICLE SIXTH shall eliminate or limit the liability of a
director (i) for any breach of a director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violations of law, (iii) under Section
174 of the GCL, or (iv) for any transaction from which a director derived an
improper personal benefit. If the GCL is amended to authorize corporate action
further eliminating or limiting the personal liability of directors, then by
virtue of this ARTICLE SIXTH the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the GCL, as so
amended.
2. Indemnification.
(a) The Corporation shall indemnify, in accordance with the By-laws of
the Corporation and to the fullest extent permitted from time to time by the GCL
or any other applicable laws as presently or hereafter in effect, any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, including, without limitation, an action by or in the right of
the Corporation, by reason of his acting as a director or officer of the
Corporation (and the Corporation, in the discretion of the Board of Directors,
may so indemnify a person by reason of the fact that he is or was an employee or
agent of the Corporation or is or was serving at the request of the Corporation
in any other capacity for or on behalf of the Corporation) against any liability
or expense actually and reasonably incurred by such person in respect thereof;
provided, however, the Corporation shall be required to indemnify an officer or
director in connection with an action, suit or proceeding (or part thereof)
initiated by such person only if (i) such action, suit or proceeding (or part
thereof) was authorized by the Board of Directors and (ii) the indemnification
does not relate to any liability arising under Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any rules or regulations promulgated
thereunder. Such indemnification is not exclusive of any other right to
indemnification provided by law or otherwise. The right to indemnification
conferred by this Section 2 shall be deemed to be a contract between the
Corporation and each person referred to herein.
(b) If a claim under subdivision (a) of this paragraph 2 of this
ARTICLE SIXTH is not paid in full by the Corporation, the claimant may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
-2-
<PAGE> 3
expenses incurred in defending any proceeding in advance of its final
disposition where any undertaking required by the By-laws of the Corporation has
been tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the GCL and subdivision (a) of this
paragraph 2 of this ARTICLE SIXTH for the Corporation to indemnify the claimant
for the amount claimed, but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she has met the applicable standard of
conduct set forth in the GCL, nor an actual determination by the Corporation
(including its Board of Directors, legal counsel, or its stockholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that the claimant has not met the applicable
standard of conduct.
(c) Indemnification shall include payment by the Corporation of
expenses in defending an action or proceeding in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by the
person indemnified to repay such payment if it is ultimately determined that
such person is not entitled to indemnification under this ARTICLE SIXTH, which
undertaking may be accepted without reference to the financial ability of such
person to make such repayment.
3. Insurance. The Corporation shall have the power (but not the
obligation) to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss incurred by such person in any
such capacity or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the ARTICLE SIXTH or the GCL.
4. Other Rights. The rights and authority conferred in this ARTICLE
SIXTH shall not be exclusive of any other right which any person may otherwise
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, by-law, agreement, contract, vote of stockholders or
disinterested directors or otherwise.
5. Additional Indemnification. The Corporation may, by action of its
Board of Directors, provide indemnification to such of the directors, officers,
employees and agents of the Corporation to such extent and to such effect as the
Board of Directors shall determine to be appropriate and authorized by the GCL.
6. Effect of Amendments. Neither the amendment, change, alteration nor
repeal of this ARTICLE SIXTH, nor the adoption of any provision of this
Certificate of Incorporation or the by-laws of the Corporation, nor, to the
fullest extent permitted by GCL, any modification of law, shall eliminate or
reduce the effect of this ARTICLE SIXTH or the rights or any protection afforded
-3-
<PAGE> 4
under this ARTICLE SIXTH in respect of any acts or omissions occurring prior to
such amendment, repeal, adoption or modification.
SEVENTH: The Board of Directors of the corporation is authorized and
empowered to make, alter, amend or repeal any or all of the Bylaws of the
corporation, subject to the power of the stockholders of the corporation to
make, alter, amend or repeal any or all of the Bylaws of the corporation.
EIGHTH: The Corporation reserves the right at any time and from time to
time to amend, alter, change, or repeal any provision contained in these
Articles of Incorporation, in the manner now or hereafter prescribed by law; and
all rights conferred upon stockholders, directors, or any other persons
whomsoever by and pursuant to these Articles of Incorporation in their present
form or as hereafter amended are granted subject to this reservation.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the Vice President and Assistant Secretary has
signed this Certificate of Incorporation, as of August 11, 1999.
-----------------------------
Name: John R. Lowden
Title: Vice President and
Assistant Secretary
-5-
<PAGE> 1
EXHIBIT 4.7
APPAREL VENTURES, INC.
-------------
12 1/4% SERIES A AND SERIES B SENIOR NOTES DUE DECEMBER 31, 2000
-------------
THIRD SUPPLEMENTAL INDENTURE
-------------
DATED AS OF AUGUST 11, 1999
-------------
THIRD SUPPLEMENT TO INDENTURE DATED AS OF MAY 23, 1994
-------------
FIRSTAR BANK OF MINNESOTA, N.A, AS TRUSTEE
-------------
<PAGE> 2
THIRD SUPPLEMENTAL INDENTURE dated as of August 11, 1999 (the "Third
Supplemental Indenture"), between APPAREL VENTURES, INC. (formerly AVI
Acquisition Co.), a Delaware corporation (the "Company"), and FIRSTAR BANK OF
MINNESOTA, N.A., as trustee (the "Trustee").
WHEREAS, the Company has executed and delivered to the Trustee that
certain Indenture dated as of May 23, 1994, as amended, between the Company and
the Trustee (the "Indenture");
WHEREAS, there have been issued and are now outstanding under the
Indenture $36,000,000 principal amount of 12 1/4% Series A and Series B Senior
Notes, due December 31, 2000 (the "Notes");
WHEREAS, pursuant to a plan of restructuring ( the "Restructuring Plan")
between the Company, and its parent, AVI Holdings, Inc. ("Holdings"), a Delaware
Corporation, the Company, an affiliate of the Company, or a stockholder of the
Company will make a tender offer (the "Note Tender Offer") to purchase all of
the Notes of the Company upon the terms and subject to the conditions set forth
in the Note Tender Offer and Consent Solicitation dated as of July 1, 1999;
WHEREAS, the Company intends to raise approximately $8.75 million by
contribution from an investor group, including affiliates of the Jordan Company
LLC and a certain member of the Company's management;
WHEREAS, in connection with the Note Tender Offer, the Company has
solicited the consents from holders of the Notes ("Holders") to certain proposed
amendments to the Indenture to amend, eliminate or modify certain of the
covenants and other provisions contained in the Indenture;
WHEREAS, Section 9 of the Indenture provides, in relevant part, that the
Company and the Trustee may amend or supplement the Indenture with the consent
of the Holders of at least 66 2/3% of the principal amount of the then
outstanding Notes;
WHEREAS, this Third Supplemental Indenture evidences the Proposed
Amendments described in the Note Tender Offer;
WHEREAS, the Company has received and delivered to the Trustee the
requisite consents to effect the Proposed Amendments to the Indenture;
WHEREAS, the Company has been authorized by a resolution of its Board of
Directors to enter into this Third Supplemental Indenture; and
WHEREAS, all other things necessary to make this Third Supplemental
Indenture a valid and binding supplemental indenture and agreement according to
its terms have been done.
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and the Trustee covenant and agree as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
1.1 Definition of Terms. Unless the context otherwise requires, a term
defined in the Indenture has the same meaning when used in this Third
Supplemental Indenture unless otherwise defined herein (in which case the
definition set forth herein shall govern).
<PAGE> 3
1.2 Reaffirmation of Indenture. Except as expressly provided herein, all
of the terms, provisions and conditions of the Indenture and the Notes
outstanding thereunder shall apply and remain in full force and effect.
1.3 Governing Law. This Third Supplemental Indenture is executed as and
shall constitute a supplement to the Indenture and shall be construed in
connection with and as part of the Indenture. This Third Supplemental Indenture
shall be governed by and construed in accordance with the laws of the State of
New York without regard to the conflict of laws provision thereof.
1.4 Trust Indenture Act Controls. If any provision of this Third
Supplemental Indenture limits, qualifies or conflicts with another provision of
this Third Supplemental Indenture or the Indenture that is required to be
included by the Trust Indenture Act of 1939 (the "Act"), as amended, as in force
as the date this Third Supplemental Indenture is executed, the provision
required by said Act shall control.
1.5 Recitals. The recitals contained herein shall be taken as the
statements of the Company and the Trustee assumes no responsibility for their
correctness. The Trustee makes no representation as to the validity or
sufficiency of this Third Supplemental Indenture.
1.6 Counterparts. This Third Supplemental Indenture may be signed in any
number of counterparts with the same effect as if the signatures to each
counterpart were upon a single instrument, and all such counterparts together
shall be deemed an original of this Third Supplemental Indenture.
1.7 Effect of Headings. The Article and Section headings in this Third
Supplemental Indenture are for convenience only and shall not affect the
construction of the Indenture or this Third Supplemental Indenture.
1.8 Successors and Assigns. All covenants and agreements in this Third
Supplemental Indenture by the Company shall bind its successors and assigns,
whether so expressed or not.
1.9 Separability Clause. In case any provision in this Third
Supplemental Indenture shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
ARTICLE II
AMENDMENT
2.1 Deletion of Certain Provisions.
Pursuant to the terms of the Note Tender Offer and the consent of the
requisite amount of Holders having been obtained by the Company, the Indenture
is hereby amended to delete the following sections in their entirety and, in the
case of each such section, insert in lieu thereof the phrase "[intentionally
omitted]", and any and all references to such sections and any and all
obligations thereunder are hereby deleted throughout the Indenture:
(a) Section 4.3(b) Reports.
(b) Section 4.7 - Limitation on Restricted Payment.
(c) Section 4.8 - Limitation on Restrictions on Subsidiary Dividends.
(d) Section 4.9 - Limitation on Incurrence of Indebtedness and Issuance
of Preferred Stock.
(e) Section 4.10- Asset Sales.
(f) Section 4.11- Limitation on Transactions with affiliates.
(g) Section 4.12- Limitation on Liens.
(h) Section 4.14- Change of Control.
(i) Section 4.15- Maintenance of Fixed Charge Cover Ratio.
(j) Section 4.19- Liquidation.
3
<PAGE> 4
(k) Section 5.1 - When the Company may Merge, etc.
(l) Section 6.1 - Events of Default.
2.2 Deletion of Definitions. Delete those definitions from the Indenture
when references to such definitions would be eliminated as a result of the
foregoing.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Third
Supplemental Indenture to be duly executed all as of the day and year first
above written.
APPAREL VENTURES, INC.
By:
--------------------------------
Name:
Title:
FIRSTAR BANK OF MINNESOTA, N.A.
as Trustee
By:
--------------------------------
Name:
Title:
5
<PAGE> 1
EXHIBIT 10.24
CONSENT, WAIVER AND AMENDMENT NO. 12
TO
LOAN AND SECURITY AGREEMENT
THIS CONSENT, WAIVER AND AMENDMENT NO. 12 ("Amendment") is
entered into as of August 11, 1999, by and between APPAREL VENTURES, INC., a
Delaware corporation having its chief executive office and principal place of
business at 204 West Rosecrans Avenue, Gardena, California 90248 ("Borrower")
and FLEET CAPITAL CORPORATION ("Lender").
BACKGROUND
Borrower and Lender are parties to a Loan and Security Agreement
dated as of May 23, 1994 (as amended, supplemented, restated or otherwise
modified from time to time, the "Loan Agreement") pursuant to which Lender
provided Borrower with certain financial accommodations.
Borrower has requested that Lender (i) waive Events of Default
resulting from Borrower's failure to comply with certain financial covenants
contained in the Loan Agreement, (ii) consent to the restructuring of Borrower
and Holdings and subsequent merger of Holdings into Borrower and (iii) amend
certain provisions of the Loan Agreement and Lender is willing to do so on the
terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant
of credit heretofore or hereafter made to or for the account of Borrower by
Lender, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Definitions. All capitalized terms not otherwise defined
herein shall have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement. Subject to the satisfaction of
the conditions precedent set forth in Section 5 below, the Loan Agreement is
hereby amended as follows:
(a) Section 1.1 of the Loan Agreement is hereby amended as
follows:
(i) the following defined terms are hereby added in their
appropriate alphabetical order:
<PAGE> 2
Equipment - with respect to Borrower, all machinery,
apparatus, equipment, fittings, furniture, fixtures, motor
vehicles and other tangible personal Property (other than
Inventory) of every kind and description used in
Borrower's operations or owned by Borrower, or in which
Borrower has an interest, whether now owned or hereafter
acquired by Borrower and wherever located, and all parts,
accessories and special tools and all increases and
accessions thereto and substitutions and replacements
therefor.
Second Supplemental Indenture - the amendment of the
Indenture dated as of August 11, 1999 between Borrower and
Firstar Bank of Minnesota, N.A., as trustee.
JZEP - JZ Equity Partners PLC, a public limited liability
company incorporated in England and Wales under the
Companies Act (1985).
New Merger Documents - the certificate, plan or agreement
for filing with the Secretary of State of Delaware
pursuant to which Holdings shall merge with and into
Borrower with Borrower surviving the merger.
Senior Note Repurchase Agreement - collectively, the Offer
to Purchase and Consent Solicitation by Borrower, dated
June 29, 1999, relating to the Senior Notes and all
amendments and waivers thereto and the letter agreement,
dated June 29, 1999, among Borrower and holders of
approximately 96.5% of the aggregate outstanding principal
amount of the Senior Notes to tender the Senior Notes.
Subordinated Note Purchase Agreement - the Purchase
Agreement including all exhibits and attachments thereto
dated as of August 11, 1999 among Borrower, JZEP, Marvin
L. Goodman and each of the Jordan Parties (as such term is
defined therein).
Subsidiary Stock - all of the issued and outstanding
shares of stock of each subsidiary (Excluding the Mexican
Subsidiary) owned by Borrower or any Subsidiary of
Borrower or any of its respective Subsidiaries.
(ii) the following defined term is hereby amended in its
entirety to
provide as follows:
Change of Control means (i) the sale, assignment,
transfer, conveyance or other disposition of all or
substantially all the assets of Borrower to any Person
other than the Principals and their Related Parties, (ii)
the liquidation or dissolution of Borrower or the adoption
of a plan of liquidation by Borrower, (iii) the
acquisition by any Person (other than the
<PAGE> 3
Principals and their Related Parties) of a direct or
indirect majority in interest (more than 50%) of the
Voting Stock of Borrower by way of merger or consolidation
or otherwise; (iv) any transaction the result of which is
that any Person beneficially owns, directly or indirectly,
more of the Voting Stock of Borrower than is owned
beneficially, directly or indirectly, by the Principals
and their Related Parties, (v) after the first sale of
common equity by Borrower pursuant to a registration
statement under the Securities Act of 1933, as amended
that results in at least 20% of the then outstanding
common equity of Borrower being held by the public, the
Principals and their Related Parties own beneficially,
directly or indirectly, less than 25% of the aggregate
amount of Voting Stock or (vi) after the first sale of
common equity by Borrower pursuant to a registration
statement under the Securities Act of 1933, as amended,
that results in at least 20% of the then outstanding
common equity of Borrower being held by the public, during
any period of two consecutive years, individuals who at
the beginning of such period constituted the board of
directors of Borrower (together with any new directors
whose election by such board of directors or whose
nomination for election by the stockholders of Borrower
was approved by a vote of at least 66 2/3% of the
directors then still in office who were either directors
at the beginning of such period or whose election or
nomination for election was previously so approved) cease
for any reason to constitute a majority of the board of
directors of Borrower then in office.
Fixed Charge Coverage Ratio - shall mean, for any period,
with respect to the period then ended, the ratio of (I)(A)
EBITDA of Borrower for such period minus (B) actual
non-financed Capital Expenditures of Borrower during such
period to (ii)(A) cash interest expense of Borrower during
such period plus (B) the sum of the aggregate of payments
of regularly scheduled principal with respect to
Indebtedness for Money Borrowed (including, without
limitation in respect of Capital Lease Obligations) during
such period plus (C ) cash income taxes actually paid by
Borrower during such period plus (D) without duplication,
all Distributions actually made during such period in
accordance with 7.2(K) of the Loan Agreement.
(b) Section 4.1 of the Loan Agreement is hereby amended in
its entirety to provide as follows:
"Security Interest in Collateral. To secure the prompt
payment and performance to Lender of the
Obligations, Borrower hereby grants to Lender a continuing
security interest and Lien upon all of Borrower's assets,
including all of the following Property and interests in
Property of Borrower, whether now owned or existing or
hereafter created, acquired or arising and wheresoever
located:
<PAGE> 4
(A) Accounts;
(B) Inventory;
(C) Equipment;
(D) General Intangibles;
(E) All monies and other Property of any kind now or at
any time or times hereafter in the possession or under the
control of Lender or a bailee or Affiliate of Lender;
(F) All Subsidiary Stock;
(G) All investment property;
(H) All accessions to, substitutions for and all
replacements, products and cash and non-cash proceeds of (A)
through (G) above, including, without limitation, proceeds of and
unearned premiums with respect to insurance policies insuring any
of the Collateral; and
(I) All books and records (including, without limitation,
customer lists, credit files, computer programs, print-outs,
and other computer materials and records) of Borrower pertaining
to any of (A) through (H) above."
(c) Section 6.1(AE) of the Loan Agreement is hereby amended to
provide as follows:
(i) the word "and" is deleted before clause (c); and
(ii) the following language is added before the period
at the end of clause (c):
", and (d) the Senior Note Repurchase Agreement,
the First Supplemental Indenture, the Subordinated
Note Purchase Agreement and the New Merger
Documents.
(d) Section 7.2(B) of the Loan Agreement is hereby amended in its
entirety to provide as follows:
"(B) Loans. Make any loans or other advances of money
(other than for salary, travel advances, advances against
commissions and other similar advances in the ordinary
course of business) to any Person, including, without
limitation, any of Borrower's Affiliates, officers or
employees, except for (a) loans or other advances to AVE
together with the value of all assets transferred to AVE
by Borrower at any time outstanding
<PAGE> 5
("Advances to AVE") and (b) loans or other advances to
Mexican Subsidiary together with the value of all assets
transferred to Mexican Subsidiary by Borrower at any time
outstanding ("Advances to Mexican Subsidiary") that in the
aggregate (collectively (a) and (b)) do not exceed at any
time $6,500,000."
(e) Section 7.2(C)(iii) of the Loan Agreement is hereby amended
in its entirety to provide as follows:
"(iii) Subordinated Debt including the Subordinated Debt
issued pursuant to the Subordinated Note Purchase
Agreement which Indebtedness may only be paid in
accordance with the terms of Section 7.2(I);"
(f) Section 7.2(I) of the Loan Agreement is hereby amended in its
entirety to provide as follows:
"(I) Subordinated Debt. Make, take any action to authorize
or effect or permit any Subsidiary to(a) make any payment
of any part or all of any Subordinated Debt (I) in
violation of any subordination agreement of the
subordination provision provided in the Senior Note
Repurchase Agreement relating to such Subordinated Debt or
(ii) if a Default or Event of Default exists or would
exist after giving effect to the payment then proposed to
be made on a pro forma basis based on the most recent
financial statements furnished to Lender by Borrower in
accordance with Section 7.1(k)(ii) of this Agreement or,
(b) voluntarily prepay any Subordinated Debt or otherwise
repurchase, redeem or retire any instrument evidencing any
such Subordinated Debt prior to maturity or, (c) enter
into any agreement (oral or written) which could in any
way be construed to amend, modify, alter or terminate any
one or more instruments or agreements evidencing or
relating to any Subordinated Debt."
(g) Section 7.2 (V) of the Loan Agreement is hereby amended in
its entirety to provide as follows:
"Stock of Subsidiary, Etc. (I) Sell or otherwise dispose
of any shares of capital stock of any Subsidiary or permit
any Subsidiary to issue any additional shares of it
capital stock except director's qualifying shares or
shares sold to Borrower or (ii) pledge, assign,
hypothecate or transfer any shares of stock of the Mexican
Subsidiary."
(h) Section 7.3 of the Loan Agreement is hereby amended in
its entirety to provide as follows:
<PAGE> 6
"7.3. Specific Financial Covenants. During the term of this
Agreement, and thereafter for so long as there any Obligations to Lender,
Borrower covenants that, unless otherwise consented to by Lender in writing, it
shall:
(A) Minimum Adjusted Tangible Net Worth. Maintain at all
times an Adjusted Tangible Net Worth of not less than the amount ("Net Worth
Amount") shown below for the period corresponding thereto:
<TABLE>
<CAPTION>
Period Amount
------------------------ ------------
<S> <C> <C>
8/31/99 through 12/30/99 $7,500,000
12/31/99 through 1/30/00 $8,500,000
1/31/00 through 2/27/00 $9,000,000
2/28/00 through 3/30/00 $10,000,000
3/31/00 through 4/29/00 $12,000,000
From 4/30/00 and thereafter $13,000,000
</TABLE>
(B) Fixed Charge Coverage Ratio. Maintain a Fixed Charge
Coverage
Ratio, to be measured as of the end of each quarter for the periods described
below, of not less than:
(i) 1.25 to 1.0 for the three consecutive fiscal quarter
period ending March 31, 2000; and
(ii) 1.25 to 1.0 for the four consecutive fiscal quarter
period ending on June 30, 2000, and for the four consecutive fiscal quarter
period ending on each fiscal quarter thereafter.
(C) Minimum EBITA. Maintain EBITDA, measured as of the end
of each month, of not less than the amount shown below for the period
corresponding thereto:
<TABLE>
<CAPTION>
Period Amount
--------------------------- ------------
<S> <C> <C>
2 months ended 8/31/99 ($2,554,000)
3 months ended 9/30/99 ($3,411,000)
4 months ended 10/31/99 ($4,349,000)
5 months ended 11/30/99 ($4,173,000)
6 months ended 12/31/99 ($3,141,000)
7 months ended 1/31/00 ($1,000,000)
8 months ended 2/28/00 $1,537,000
thereafter not applicable"
</TABLE>
3. Waiver. Subject to satisfaction of the conditions precedent
set forth in Section 5 below, Lender hereby waives the following Events of
Default which have occurred as a
<PAGE> 7
result of Borrower's non-compliance with the following provisions of the Loan
Agreement solely with respect to periods ending on or prior to June 30, 1999:
(a) Section 7.3(A) as a result of Borrower's failure to
maintain an Adjusted Tangible Net Worth of not less than ($24,000,000).
(b) Section 7.3(B) as a result of Borrower's failure to
maintain a Fixed Charge Coverage Ratio of not less than 1.25 to 1.0.
(c) Section 7.3(C) as a result of Borrower's failure to
maintain EBITDA of not less than $8,100,000.
4. Consent. Subject to satisfaction of the conditions precedent
set forth in Section 5 below, Lender hereby consents to each of the following:
(a) The repurchase, pursuant to the Senior Note Repurchase
Agreement, of the Senior Notes outstanding in an aggregate principal amount of
not less than $34,560,000 for $222.50 of each $1,000 of outstanding principal
solely with proceeds received from the issuance of equity securities and the
issuance of notes under the Subordinated Note Purchase Agreement.
(b) Issuance by Borrower of 10.0% subordinated promissory
notes in the aggregate principal amount of $8,750,000 pursuant to the
Subordinated Note Purchase Agreement.
(c) The merger of Holdings, pursuant to the New Merger
Documents, with and into Borrower with Borrower as the surviving Person.
5. Conditions of Effectiveness. This Amendment shall become
effective upon satisfaction of the following conditions precedent: Lender shall
have received (i) four (4) copies of this Amendment executed by Borrower and
Lender, (ii) the Senior Note Repurchase Agreement, the Second Supplemental
Indenture, the Subordinated Note Purchase Agreement, each of which shall be in
form and substance reasonably satisfactory to Lender and its counsel and
consummation of the transactions contemplated thereunder including, without
limitation, the conversion of all indebtedness of Holdings (excluding that
certain promissory note made by Holdings to Francisco Falcon in the original
principal amount of $63,405) into equity prior to the merger of Holdings into
Borrower, and (iii) such other certificates, instruments, documents and
agreements as may be required by Lender or its counsel, each of which shall be
in form and substance reasonably satisfactory to Lender and its counsel.
6. Representations and Warranties. Borrower hereby represents and
warrants as follows:
<PAGE> 8
(a) This Amendment and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of Borrower and are enforceable
against Borrower in accordance with their respective terms.
(b) Upon the effectiveness of this Amendment, Borrower hereby
reaffirms all covenants, representations and warranties made in the Loan
Agreement to the extent the same are not amended hereby and agree that all such
covenants, representations and warranties shall be deemed to have been remade as
of the effective date of this Amendment.
(c) No Event of Default or Default has occurred and is continuing
or would exist after giving effect to this Amendment.
(d) Borrower has no defense, counterclaim or offset with respect
to the Loan Agreement.
7. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each reference in
the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words
of like import shall mean and be a reference to the Loan Agreement as amended
hereby.
(b) Except as specifically amended herein, the Loan Agreement,
and all other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided in Section 3, operate as a waiver of any
right, power or remedy of Lender, nor constitute a waiver of any provision of
the Loan Agreement, or any other documents, instruments or agreements executed
and/or delivered under or in connection therewith.
8. Governing Law. This Amendment shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and assigns
and shall be governed by and construed in accordance with the laws of the State
of New York.
9. Headings. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
10. Counterparts. This Amendment may be executed by the parties
hereto in one or more counterparts, each of which shall be deemed an original
and all of which taken together shall constitute one and the same agreement.
<PAGE> 9
IN WITNESS WHEREOF, this Amendment has been duly executed as of
the day and year first written above.
APPAREL VENTURES, INC.
By: /s/ William F. Singletary
---------------------------------------------
Name: William F. Singletary
Title: Chief Financial Officer
FLEET CAPITAL CORPORATION
By: /s/ Walter Schuppe
--------------------------------------------
Name: Walter Schuppe
Title: Senior Vice President
<PAGE> 1
EXHIBIT 10.25
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT made as of August 11, 1999, between Apparel
Ventures, Inc., a Delaware corporation (the "Company"), and Marvin Goodman
("Employee").
Reference is made to the Stock Option Agreements made as of August 11,
1999, between the Company and Lynne Koplin and William Singletary (the "Company
Options").
To afford Employee the opportunity to purchase shares of common stock of
the Company ("Stock"), and in consideration of the mutual agreements and other
matters set forth herein, the Company and Employee hereby agree as follows:
1. Grant of Option. The Company hereby irrevocably grants to Employee the
right and option ("Option") to purchase all or any part of an aggregate of
seventy-five thousand (75,000) shares of Class A Common Stock, par value $0.01
(the "Stock"), on the terms and conditions set forth herein.
2.
3. Purchase Price. The purchase price of Stock purchased pursuant to the
exercise of this Option shall be $0.01 per share.
4.
5. Exercise of Option. Subject to the earlier expiration of this Option as
herein provided, this Option will vest immediately upon the date of the grant
hereof and may be exercised, by written notice to the Company at its principal
executive office (located at 204 West Rosencrans, Gardena, California) addressed
to the attention of its Chief Executive Officer, immediately upon or at any time
and from time to time after the date of grant hereof.
6.
7. This Option is not transferable by Employee otherwise than by will or
the laws of the descent and distribution, and may be exercised only during
Employee's lifetime and while Employee remains an employee of the Company or a
subsidiary of the Company and will terminate, expire and cease to be exercisable
upon Employee's termination of employment with the Company or a subsidiary of
the Company for any reason, including involuntary and voluntary termination,
permanent disability or death; provided, however, that this Option may be
exercised by Employee (or Employee's estate or the person who acquires this
Option by will or the laws of descent and distribution or otherwise by reason of
the death of Employee) at any time during the period of 90 days following such
termination, but only as to the number of vested shares Employee was entitled to
purchase hereunder as of the date of such termination.
8.
9. This Option shall not be exercisable in any event after the expiration
of ten years from the date of grant hereof. Except as provided in Paragraph 4,
the purchase price of shares as to which this Option is exercised shall be paid
in full at the time of exercise (a) in cash (including
1
<PAGE> 2
check, bank draft or money order payable to the order of the Company), (b) by
delivering to the Company shares of Stock having a fair market value equal to
the purchase price, or (c) any combination of cash or Stock. No fraction of a
share of Stock shall be issued by the Company upon exercise of an Option or
accepted by the Company in payment of the purchase price thereof; rather,
Employee shall provide a cash payment for such amount as is necessary to effect
the issuance and acceptance of only whole shares of Stock. Unless and until a
certificate or certificates representing such shares shall have been issued by
the Company to Employee, Employee (or the person permitted to exercise this
Option in the event of Employee's death) shall not be or have any of the rights
or privileges of a shareholder of the Company with respect to shares acquirable
upon an exercise of this Option, except as provided for in the Stockholders
Agreement, dated as of August, 1999 between the Company and the persons named
therein (the "Stockholders Agreement").
10.
11. In the event of Employee's termination of employment with the Company
for any reason, including involuntary and voluntary termination, permanent
disability (as determined by the Company's regular physician) or death, then
this Option shall terminate, but only as to the number of shares that had not
vested or that Employee was not entitled to purchase pursuant to this paragraph
3 as of the date of such termination, death or permanent disability; provided,
however, that the vested portion of this Option may be exercised by Employee (or
Employee's estate or the person who acquires this Option by will or the laws of
descent and distribution or otherwise by reason of the death of Employee) at any
time during the period of 90 days following such termination. If the Company
recapitalizes, reclassifies its capital stock, or otherwise changes its capital
structure (a "recapitalization"), the number and class of shares of Stock
covered by the Option theretofore granted shall be adjusted so that the Option
shall thereafter cover the number and class of shares of stock and securities to
which the Employee would have been entitled pursuant to the terms of the
recapitalization if, immediately prior to the recapitalization, the Employee had
been the holder of record of the number of shares of Stock then covered by such
Option. If (i) the Company shall not be the surviving entity in any merger,
consolidation or other reorganization (or survives only as a subsidiary of an
entity), (ii) the Company sells, leases or exchanges all or substantially all of
its assets to any other person or entity, (iii) the Company is to be dissolved
and liquidated, or (iv) any person or entity, including a "group" as
contemplated by Section 13(b)(3) of Securities Exchange Act of 1934, as amended,
acquires or gains ownership or control (including, without limitation, power to
vote) of more than 50% of the outstanding shares of the Company's voting stock
(based upon voting power) no later than (a) ten days after the approval by the
shareholders of the Company of such merger, consolidation, reorganization, sale,
lease or exchange of assets, dissolution or liquidation or (b) thirty days after
a change of control of the type described in Clause (iv), the exercise term of
the Option shall accelerate, any Stock that had not vested shall immediately
vest and this Option shall become immediately exercisable in full.
12.
13. WITHHOLDING OF TAX. TO THE EXTENT THAT THE EXERCISE OF THIS OPTION OR
THE DISPOSITION OF SHARES OF STOCK ACQUIRED BY EXERCISE OF THIS OPTION RESULTS
IN COMPENSATION INCOME TO EMPLOYEE FOR FEDERAL OR STATE INCOME TAX PURPOSES,
EMPLOYEE SHALL DELIVER TO THE COMPANY AT THE TIME OF SUCH EXERCISE OR
DISPOSITION SUCH AMOUNT OF MONEY OR SHARES OF
2
<PAGE> 3
STOCK AS THE COMPANY MAY REQUIRE TO MEET ITS OBLIGATION UNDER APPLICABLE TAX
LAWS OR REGULATIONS, AND, IF EMPLOYEE FAILS TO DO SO, THE COMPANY IS AUTHORIZED
TO WITHHOLD FROM ANY CASH OR STOCK REMUNERATION THEN OR THEREAFTER PAYABLE TO
EMPLOYEE ANY TAX REQUIRED TO BE WITHHELD BY REASON OF SUCH RESULTING
COMPENSATION INCOME. UPON AN EXERCISE OF THIS OPTION, THE COMPANY IS FURTHER
AUTHORIZED IN ITS DISCRETION TO SATISFY ANY SUCH WITHHOLDING REQUIREMENT OUT OF
ANY CASH OR SHARES OF STOCK DISTRIBUTABLE TO EMPLOYEE UPON SUCH EXERCISE.
14.
15. Status of Stock. Employee understands that at the time of the execution
of this Agreement the shares of Stock to be issued upon exercise of this Option
have not been registered under the Securities Act of 1933, as amended (the
"Act"), or any state securities law, and that the Company does not currently
intend to effect any such registration. Until the shares of Stock acquirable
upon the exercise of the Option have been registered for issuance under the Act,
the Company will not issue such shares unless the holder of the Option provides
the Company with a written opinion of legal counsel, who shall be satisfactory
to the Company, addressed to the Company and satisfactory in form and substance
to the Company's counsel, to the effect that the proposed issuance of such
shares to such Option holder may be made without registration under the Act. In
the event exemption from registration under the Act is available upon an
exercise of this Option, Employee (or the person permitted to exercise this
Option in the event of Employee's death), if requested by the Company to do so,
will execute and deliver to the Company in writing an agreement containing such
provisions as the Company may require to assure compliance with applicable
securities laws.
16.
17. Employee agrees that the shares of Stock which Employee may acquire
by exercising this Option shall be acquired for investment without a view to
distribution, within the meaning of the Act, and shall not be sold, transferred,
assigned, pledged or hypothecated except as provided for in the Stockholders
Agreement. Employee also agrees that the shares of Stock which Employee may
acquire by exercising this Option will not be sold or otherwise disposed of in
any manner which would constitute a violation of any applicable securities laws,
whether federal or state.
18.
19. In addition, Employee agrees (i) that the certificates representing the
shares of Stock purchased under this Option may bear such legend or legends as
the Company deems appropriate and as provided for in the Stockholders Agreement
in order to assure compliance with applicable securities laws or any
stockholders agreements in effect, (ii) that the Company may refuse to register
the transfer of the shares of Stock purchased under this Option on the stock
transfer records of the Company if such proposed transfer would in the opinion
of counsel satisfactory to the Company constitute a violation of any applicable
securities law and (iii) that the Company may give related instructions to its
transfer agent, if any, to stop registration of the transfer of the shares of
Stock purchased under this Option.
20.
21. Employment Relationship. For purposes of this Agreement, Employee shall
be considered to be in the employment of the Company as long as Employee remains
an employee of either the Company, or a subsidiary corporation of the Company.
Any question as to whether
3
<PAGE> 4
and when there has been a termination of such employment, and the cause of such
termination, shall be determined by the Board of Directors of the Company, and
its determination shall be final.
22.
23. Recapitalization or Reorganization. This Agreement is subject to all the
terms and conditions set forth in the Company's Stockholders Agreement and in
the event that a conflict exists between this Agreement and the Stockholders
Agreement, the terms and conditions of the Stockholders Agreement shall
continue.
24. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of any successors to the Company and all persons lawfully claiming under
Employee.
25.
26. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
27.
28. Amendments. This Agreement may not be amended or modified without the
prior written approval of the Company and the Employee.
29.
30. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its President thereunto duly authorized, and Employee has executed
this Agreement, all as of the day and year first above written.
31.
32. APPAREL VENTURES, INC.
33.
34.
35.
36. By: /s/ John R. Lowden
----------------------------------------
37. Name: John R. Lowden
38. Title: Vice President
39.
40.
41. EMPLOYEE:
42.
43.
44. By: /s/ Marvin L. Goodman
----------------------------------------
Name: Marvin L. Goodman
4
<PAGE> 1
EXHIBIT 10.26
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT made as of August 11, 1999, between Apparel
Ventures, Inc., a Delaware corporation (the "Company"), and Lynne Koplin
("Employee").
Reference is made to the Stock Option Agreements made as of August 11,
1999, between the Company and Marvin Goodman and William Singletary (the
"Company Options").
To afford Employee the opportunity to purchase shares of common stock of
the Company ("Stock"), and in consideration of the mutual agreements and other
matters set forth herein, the Company and Employee hereby agree as follows:
1. Grant of Option. The Company hereby irrevocably grants to Employee the
right and option ("Option") to purchase all or any part of an aggregate of fifty
thousand (50,000) shares of Class A Common Stock, par value $0.01 (the "Stock"),
on the terms and conditions set forth herein.
2.
3. Purchase Price. The purchase price of Stock purchased pursuant to the
exercise of this Option shall be $0.01 per share.
4.
5. Exercise of Option. Subject to the earlier expiration of this Option
as herein provided, this Option will vest and may be exercised, by written
notice to the Company at its principal executive office (located at 204 West
Rosencrans, Gardena, California 90248) addressed to the attention of its Chief
Executive Officer, immediately upon or at any time and from time to time after
the third anniversary of the date of grant hereof.
6.
7. This Option is not transferable by Employee otherwise than by will or
the laws of the descent and distribution, and may be exercised only during
Employee's lifetime and while Employee remains an employee of the Company or a
subsidiary of the Company and will terminate, expire and cease to be exercisable
upon Employee's termination of employment with the Company or a subsidiary of
the Company for any reason, including involuntary and voluntary termination,
permanent disability or death; provided, however, that this Option may be
exercised by Employee (or Employee's estate or the person who acquires this
Option by will or the laws of descent and distribution or otherwise by reason of
the death of Employee) at any time during the period of 90 days following such
termination, but only as to the number of vested shares Employee was entitled to
purchase hereunder as of the date of such termination.
8.
9. This Option shall not be exercisable in any event after the expiration
of ten years from the date of grant hereof. Except as provided in Paragraph 4,
the purchase price of shares as to which this Option is exercised shall be paid
in full at the time of exercise (a) in cash (including check, bank draft or
money order payable to the order of the Company), (b) by delivering to the
1
<PAGE> 2
Company shares of Stock having a fair market value equal to the purchase price,
or (c) any combination of cash or Stock. No fraction of a share of Stock shall
be issued by the Company upon exercise of an Option or accepted by the Company
in payment of the purchase price thereof; rather, Employee shall provide a cash
payment for such amount as is necessary to effect the issuance and acceptance of
only whole shares of Stock. Unless and until a certificate or certificates
representing such shares shall have been issued by the Company to Employee,
Employee (or the person permitted to exercise this Option in the event of
Employee's death) shall not be or have any of the rights or privileges of a
shareholder of the Company with respect to shares acquirable upon an exercise of
this Option, except as provided for in the Stockholders Agreement, dated as of
August 10, 1999 between the Company and the persons named therein (the
"Stockholders Agreement").
10.
11. In the event of Employee's termination of employment with the Company
for any reason, including involuntary and voluntary termination, permanent
disability (as determined by the Company's regular physician) or death, then
this Option shall terminate, but only as to the number of shares that had not
vested or that Employee was not entitled to purchase pursuant to this paragraph
3 as of the date of such termination, death or permanent disability; provided,
however, that the vested portion of this Option may be exercised by Employee (or
Employee's estate or the person who acquires this Option by will or the laws of
descent and distribution or otherwise by reason of the death of Employee) at any
time during the period of 90 days following such termination. If the Company
recapitalizes, reclassifies its capital stock, or otherwise changes its capital
structure (a "recapitalization"), the number and class of shares of Stock
covered by the Option theretofore granted shall be adjusted so that the Option
shall thereafter cover the number and class of shares of stock and securities to
which the Employee would have been entitled pursuant to the terms of the
recapitalization if, immediately prior to the recapitalization, the Employee had
been the holder of record of the number of shares of Stock then covered by such
Option. If (i) the Company shall not be the surviving entity in any merger,
consolidation or other reorganization (or survives only as a subsidiary of an
entity), (ii) the Company sells, leases or exchanges all or substantially all of
its assets to any other person or entity, (iii) the Company is to be dissolved
and liquidated, or (iv) any person or entity, including a "group" as
contemplated by Section 13(b)(3) of Securities Exchange Act of 1934, as amended,
acquires or gains ownership or control (including, without limitation, power to
vote) of more than 50% of the outstanding shares of the Company's voting stock
(based upon voting power) no later than (a) ten days after the approval by the
shareholders of the Company of such merger, consolidation, reorganization, sale,
lease or exchange of assets, dissolution or liquidation or (b) thirty days after
a change of control of the type described in Clause (iv), the exercise term of
the Option shall accelerate, any Stock that had not vested shall immediately
vest and this Option shall become immediately exercisable in full.
12.
13. WITHHOLDING OF TAX. TO THE EXTENT THAT THE EXERCISE OF THIS OPTION OR
THE DISPOSITION OF SHARES OF STOCK ACQUIRED BY EXERCISE OF THIS OPTION RESULTS
IN COMPENSATION INCOME TO EMPLOYEE FOR FEDERAL OR STATE INCOME TAX PURPOSES,
EMPLOYEE SHALL DELIVER TO THE COMPANY AT THE TIME OF SUCH EXERCISE OR
DISPOSITION SUCH AMOUNT OF MONEY OR SHARES OF STOCK AS THE COMPANY MAY REQUIRE
TO MEET ITS OBLIGATION UNDER APPLICABLE TAX LAWS OR
2
<PAGE> 3
REGULATIONS, AND, IF EMPLOYEE FAILS TO DO SO, THE COMPANY IS AUTHORIZED TO
WITHHOLD FROM ANY CASH OR STOCK REMUNERATION THEN OR THEREAFTER PAYABLE TO
EMPLOYEE ANY TAX REQUIRED TO BE WITHHELD BY REASON OF SUCH RESULTING
COMPENSATION INCOME. UPON AN EXERCISE OF THIS OPTION, THE COMPANY IS FURTHER
AUTHORIZED IN ITS DISCRETION TO SATISFY ANY SUCH WITHHOLDING
REQUIREMENT OUT OF ANY CASH OR SHARES OF STOCK DISTRIBUTABLE TO EMPLOYEE UPON
SUCH EXERCISE.
14.
15. Status of Stock. Employee understands that at the time of the execution
of this Agreement the shares of Stock to be issued upon exercise of this Option
have not been registered under the Securities Act of 1933, as amended (the
"Act"), or any state securities law, and that the Company does not currently
intend to effect any such registration. Until the shares of Stock acquirable
upon the exercise of the Option have been registered for issuance under the Act,
the Company will not issue such shares unless the holder of the Option provides
the Company with a written opinion of legal counsel, who shall be satisfactory
to the Company, addressed to the Company and satisfactory in form and substance
to the Company's counsel, to the effect that the proposed issuance of such
shares to such Option holder may be made without registration under the Act. In
the event exemption from registration under the Act is available upon an
exercise of this Option, Employee (or the person permitted to exercise this
Option in the event of Employee's death), if requested by the Company to do so,
will execute and deliver to the Company in writing an agreement containing such
provisions as the Company may require to assure compliance with applicable
securities laws.
16.
17. Employee agrees that the shares of Stock which Employee may acquire by
exercising this Option shall be acquired for investment without a view to
distribution, within the meaning of the Act, and shall not be sold, transferred,
assigned, pledged or hypothecated except as provided for in the Stockholders
Agreement. Employee also agrees that the shares of Stock which Employee may
acquire by exercising this Option will not be sold or otherwise disposed of in
any manner which would constitute a violation of any applicable securities laws,
whether federal or state.
18.
19. In addition, Employee agrees (i) that the certificates representing the
shares of Stock purchased under this Option may bear such legend or legends as
the Company deems appropriate and as provided for in the Stockholders Agreement
in order to assure compliance with applicable securities laws or any
stockholders agreements in effect, (ii) that the Company may refuse to register
the transfer of the shares of Stock purchased under this Option on the stock
transfer records of the Company if such proposed transfer would in the opinion
of counsel satisfactory to the Company constitute a violation of any applicable
securities law and (iii) that the Company may give related instructions to its
transfer agent, if any, to stop registration of the transfer of the shares of
Stock purchased under this Option.
20.
21. Employment Relationship. For purposes of this Agreement, Employee shall
be considered to be in the employment of the Company as long as Employee remains
an employee of either the Company, or a subsidiary corporation of the Company.
Any question as to whether and when there has been a termination of such
employment, and the cause of such termination,
3
<PAGE> 4
shall be determined by the Board of Directors of the Company, and its
determination shall be final.
22.
23. Recapitalization or Reorganization. This Agreement is subject to all
the terms and conditions set forth in the Company's Stockholders Agreement and
in the event that a conflict exists between this Agreement and the Stockholders
Agreement, the terms and conditions of the Stockholders Agreement shall
continue.
24. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of any successors to the Company and all persons lawfully claiming under
Employee.
25.
26. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
27.
28. Amendments. This Agreement may not be amended or modified without
the prior written approval of the Company and the Employee.
29.
30. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its President thereunto duly authorized, and Employee has executed
this Agreement, all as of the day and year first above written.
31.
32. APPAREL VENTURES, INC.
33.
34.
35.
36. By: John R. Lowden
-------------------------------------
37. Name: John R. Lowden
38. Title:Vice President
39.
40.
41. EMPLOYEE:
42.
43.
44. By: /s/ Lynne Koplin
-------------------------------------
By: Lynne Koplin
4
<PAGE> 1
EXHIBIT 10.27
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT made as of August 11, 1999, between Apparel
Ventures, Inc., a Delaware corporation (the "Company"), and William Singletary
("Employee").
Reference is made to the Stock Option Agreements made as of August 11,
1999, between the Company and Marvin Goodman and Lynne Koplin (the "Company
Options").
To afford Employee the opportunity to purchase shares of common stock of
the Company ("Stock"), and in consideration of the mutual agreements and other
matters set forth herein, the Company and Employee hereby agree as follows:
1. Grant of Option. The Company hereby irrevocably grants to Employee the
right and option ("Option") to purchase all or any part of an aggregate of
twenty-five thousand (25,000) shares of Class A Common Stock, par value $0.01
(the "Stock"), on the terms and conditions set forth herein.
2.
3. Purchase Price. The purchase price of Stock purchased pursuant to the
exercise of this Option shall be $0.01 per share.
4.
5. Exercise of Option. Subject to the earlier expiration of this
Option as herein provided, this Option will vest and may be exercised, by
written notice to the Company at its principal executive office (located at 204
West Rosencrans, Gardena, California) addressed to the attention of its Chief
Executive Officer, immediately upon or at any time and from time to time after
the third anniversary of the date of grant hereof.
6.
7. This Option is not transferable by Employee otherwise than by will or
the laws of the descent and distribution, and may be exercised only during
Employee's lifetime and while Employee remains an employee of the Company or a
subsidiary of the Company and will terminate, expire and cease to be exercisable
upon Employee's termination of employment with the Company or a subsidiary of
the Company for any reason, including involuntary and voluntary termination,
permanent disability or death; provided, however, that this Option may be
exercised by Employee (or Employee's estate or the person who acquires this
Option by will or the laws of descent and distribution or otherwise by reason of
the death of Employee) at any time during the period of 90 days following such
termination, but only as to the number of vested shares Employee was entitled to
purchase hereunder as of the date of such termination.
8.
9. This Option shall not be exercisable in any event after the
expiration of ten years from the date of grant hereof. Except as provided in
Paragraph 4, the purchase price of shares as to which this Option is exercised
shall be paid in full at the time of exercise (a) in cash (including
1
<PAGE> 2
check, bank draft or money order payable to the order of the Company), (b) by
delivering to the Company shares of Stock having a fair market value equal to
the purchase price, or (c) any combination of cash or Stock. No fraction of a
share of Stock shall be issued by the Company upon exercise of an Option or
accepted by the Company in payment of the purchase price thereof; rather,
Employee shall provide a cash payment for such amount as is necessary to effect
the issuance and acceptance of only whole shares of Stock. Unless and until a
certificate or certificates representing such shares shall have been issued by
the Company to Employee, Employee (or the person permitted to exercise this
Option in the event of Employee's death) shall not be or have any of the rights
or privileges of a shareholder of the Company with respect to shares acquirable
upon an exercise of this Option, except as provided for in the Stockholders
Agreement, dated as of August 10, 1999 between the Company and the persons named
therein (the "Stockholders Agreement").
10.
11. In the event of Employee's termination of employment with the Company
for any reason, including involuntary and voluntary termination, permanent
disability (as determined by the Company's regular physician) or death, then
this Option shall terminate, but only as to the number of shares that had not
vested or that Employee was not entitled to purchase pursuant to this paragraph
3 as of the date of such termination, death or permanent disability; provided,
however, that the vested portion of this Option may be exercised by Employee (or
Employee's estate or the person who acquires this Option by will or the laws of
descent and distribution or otherwise by reason of the death of Employee) at any
time during the period of 90 days following such termination. If the Company
recapitalizes, reclassifies its capital stock, or otherwise changes its capital
structure (a "recapitalization"), the number and class of shares of Stock
covered by the Option theretofore granted shall be adjusted so that the Option
shall thereafter cover the number and class of shares of stock and securities to
which the Employee would have been entitled pursuant to the terms of the
recapitalization if, immediately prior to the recapitalization, the Employee had
been the holder of record of the number of shares of Stock then covered by such
Option. If (i) the Company shall not be the surviving entity in any merger,
consolidation or other reorganization (or survives only as a subsidiary of an
entity), (ii) the Company sells, leases or exchanges all or substantially all of
its assets to any other person or entity, (iii) the Company is to be dissolved
and liquidated, or (iv) any person or entity, including a "group" as
contemplated by Section 13(b)(3) of Securities Exchange Act of 1934, as amended,
acquires or gains ownership or control (including, without limitation, power to
vote) of more than 50% of the outstanding shares of the Company's voting stock
(based upon voting power) no later than (a) ten days after the approval by the
shareholders of the Company of such merger, consolidation, reorganization, sale,
lease or exchange of assets, dissolution or liquidation or (b) thirty days after
a change of control of the type described in Clause (iv), the exercise term of
the Option shall accelerate, any Stock that had not vested shall immediately
vest and this Option shall become immediately exercisable in full.
12.
13. WITHHOLDING OF TAX. TO THE EXTENT THAT THE EXERCISE OF THIS OPTION OR
THE DISPOSITION OF SHARES OF STOCK ACQUIRED BY EXERCISE OF THIS OPTION RESULTS
IN COMPENSATION INCOME TO EMPLOYEE FOR FEDERAL OR STATE INCOME TAX PURPOSES,
EMPLOYEE SHALL DELIVER TO THE COMPANY AT THE TIME OF SUCH EXERCISE OR
DISPOSITION SUCH AMOUNT OF MONEY OR SHARES OF
2
<PAGE> 3
STOCK AS THE COMPANY MAY REQUIRE TO MEET ITS OBLIGATION UNDER APPLICABLE TAX
LAWS OR REGULATIONS, AND, IF EMPLOYEE FAILS TO DO SO, THE COMPANY IS AUTHORIZED
TO WITHHOLD FROM ANY CASH OR STOCK REMUNERATION THEN OR THEREAFTER PAYABLE TO
EMPLOYEE ANY TAX REQUIRED TO BE WITHHELD BY REASON OF SUCH RESULTING
COMPENSATION INCOME. UPON AN EXERCISE OF THIS OPTION, THE COMPANY IS FURTHER
AUTHORIZED IN ITS DISCRETION TO SATISFY ANY SUCH WITHHOLDING REQUIREMENT OUT OF
ANY CASH OR SHARES OF STOCK DISTRIBUTABLE TO EMPLOYEE UPON SUCH EXERCISE.
14.
15. Status of Stock. Employee understands that at the time of the execution
of this Agreement the shares of Stock to be issued upon exercise of this Option
have not been registered under the Securities Act of 1933, as amended (the
"Act"), or any state securities law, and that the Company does not currently
intend to effect any such registration. Until the shares of Stock acquirable
upon the exercise of the Option have been registered for issuance under the Act,
the Company will not issue such shares unless the holder of the Option provides
the Company with a written opinion of legal counsel, who shall be satisfactory
to the Company, addressed to the Company and satisfactory in form and substance
to the Company's counsel, to the effect that the proposed issuance of such
shares to such Option holder may be made without registration under the Act. In
the event exemption from registration under the Act is available upon an
exercise of this Option, Employee (or the person permitted to exercise this
Option in the event of Employee's death), if requested by the Company to do so,
will execute and deliver to the Company in writing an agreement containing such
provisions as the Company may require to assure compliance with applicable
securities laws.
16.
17. Employee agrees that the shares of Stock which Employee may acquire by
exercising this Option shall be acquired for investment without a view to
distribution, within the meaning of the Act, and shall not be sold, transferred,
assigned, pledged or hypothecated except as provided for in the Stockholders
Agreement. Employee also agrees that the shares of Stock which Employee may
acquire by exercising this Option will not be sold or otherwise disposed of in
any manner which would constitute a violation of any applicable securities laws,
whether federal or state.
18.
19. In addition, Employee agrees (i) that the certificates representing the
shares of Stock purchased under this Option may bear such legend or legends as
the Company deems appropriate and as provided for in the Stockholders Agreement
in order to assure compliance with applicable securities laws or any
stockholders agreements in effect, (ii) that the Company may refuse to register
the transfer of the shares of Stock purchased under this Option on the stock
transfer records of the Company if such proposed transfer would in the opinion
of counsel satisfactory to the Company constitute a violation of any applicable
securities law and (iii) that the Company may give related instructions to its
transfer agent, if any, to stop registration of the transfer of the shares of
Stock purchased under this Option.
20.
21. Employment Relationship. For purposes of this Agreement, Employee shall
be considered to be in the employment of the Company as long as Employee remains
an employee of either the Company, or a subsidiary corporation of the Company.
Any question as to whether
3
<PAGE> 4
and when there has been a termination of such employment, and the cause of such
termination, shall be determined by the Board of Directors of the Company, and
its determination shall be final.
22.
23. Recapitalization or Reorganization. This Agreement is subject to all the
terms and conditions set forth in the Company's Stockholders Agreement and in
the event that a conflict exists between this Agreement and the Stockholders
Agreement, the terms and conditions of the Stockholders Agreement shall
continue.
24. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of any successors to the Company and all persons lawfully claiming
under Employee.
25.
26. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York.
27.
28. Amendments. This Agreement may not be amended or modified without the
prior written approval of the Company and the Employee.
29.
30. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its President thereunto duly authorized, and Employee has executed
this Agreement, all as of the day and year first above written.
31.
32. APPAREL VENTURES, INC.
33.
34.
35.
36. By: /s/ John R. Lowden
--------------------------------------------
37. Name: John R. Lowden
38. Title: Vice President
39.
40.
41. EMPLOYEE:
42.
43.
44.
By: /s/ William Singletary
--------------------------------------------
Name: William F. Singletary
4
<PAGE> 1
EXHIBIT 10.28
PURCHASE AGREEMENT,
dated as of August 11, 1999,
between
APPAREL VENTURES, INC.,
as the Issuer,
and
MARVIN L. GOODMAN,
VARIOUS JORDAN PARTY INVESTORS,
and
JZ EQUITY PARTNERS PLC,
as the Purchasers,
for
$8,750,000 Principal Amount of
10.0% Subordinated Notes due July 31, 2004
and
Warrants to Purchase
637,500 Common Shares.
<PAGE> 2
TABLE OF CONTENTS
PAGE
<TABLE>
<CAPTION>
ARTICLE I
DEFINITIONS
<S> <C> <C>
SECTION 1.1. Defined Terms....................................2
SECTION 1.2. Use of Defined Terms............................15
SECTION 1.3. Cross References................................15
ARTICLE II
PURCHASE AND SALE OF SUBJECT SECURITIES
SECTION 2.1. Purchase Commitment.............................15
SECTION 2.2. Issue Price.....................................15
SECTION 2.3. Closing.........................................15
SECTION 2.4. Purchasers'Acknowledgments......................16
ARTICLE III
CONDITIONS TO CLOSING
SECTION 3.1. Certificates of Incorporation...................16
SECTION 3.2. Resolutions, etc................................17
SECTION 3.3. Satisfaction of Conditions to Recapitalization..17
SECTION 3.5. Certain Affiliate Agreements....................18
SECTION 3.6. Senior Credit Agreement.........................19
SECTION 3.7. Certificate as to Solvency, etc.................19
SECTION 3.8. Opinion of Counsel..............................19
SECTION 3.9. Legal Expenses..................................19
SECTION 3.10. Satisfactory Legal Form.........................19
ARTICLE IV
PAYMENTS, REGISTRATION, ETC.
SECTION 4.1. Place of Payment................................19
SECTION 4.2. Home Office Payment.............................20
SECTION 4.3. Optional Payments...............................20
SECTION 4.4. Allocation......................................21
SECTION 4.5. Mandatory Redemption of Notes...................21
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 4.6. Registration, Transfer, etc.....................21
SECTION 4.7. Transfer and Exchange...........................22
SECTION 4.8. Replacement.....................................22
SECTION 4.9. Taxes...........................................22
ARTICLE V
WARRANTIES, ETC.
SECTION 5.1. Organization, Power, Authority, etc.............24
SECTION 5.2. Due Authorization...............................24
SECTION 5.3. Validity, etc...................................24
SECTION 5.4. Financial Information...........................25
SECTION 5.5. Capitalization..................................25
SECTION 5.6. Margin Regulations..............................26
SECTION 5.7. Government Regulation...........................26
SECTION 5.8. Offering of Subject Securities..................26
SECTION 5.9. Accuracy of Information.........................27
ARTICLE VI
COVENANTS
SECTION 6.1. Certain Affirmative Covenants...................27
SECTION 6.1.1. Financial Information, etc......................28
SECTION 6.1.2. Notice of Default, Litigation, etc..............28
SECTION 6.1.3. Use of Proceeds.................................29
SECTION 6.1.4. Books and Records...............................29
SECTION 6.2. Certain Negative Covenants......................29
SECTION 6.2.1. Business Activities.............................29
SECTION 6.2.2. Restricted Payments, etc........................30
SECTION 6.2.3. Consolidation, Merger, etc......................30
ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.1. Events of Default...............................30
SECTION 7.1.1. Non-Payment of Obligations......................30
SECTION 7.1.2. Default on Other Indebtedness...................30
SECTION 7.1.3. Bankruptcy, Insolvency,etc......................31
SECTION 7.1.4. Judgments.......................................31
SECTION 7.2. Action if Bankruptcy............................31
SECTION 7.3. Action if Other Event of Default................32
SECTION 7.4. Suits for Enforcement...........................32
</TABLE>
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<TABLE>
<S> <C> <C>
SECTION 7.5. Remedies Cumulative.............................32
ARTICLE VIII
SUBORDINATION
SECTION 8.1. Payment Over Upon Dissolution, etc..............32
SECTION 8.2. Payment Block Upon Senior Default...............33
SECTION 8.3. Payment Otherwise Permitted, etc................34
SECTION 8.4. Subrogation to Rights of Holders of Senior
Indebtedness.................................35
SECTION 8.5. Provisions Solely to Define Relative Rights.....35
SECTION 8.6. Effect of Failure to Pay........................35
SECTION 8.7. No Waiver of Subordination Provisions...........35
SECTION 8.8. Notice to Noteholders...........................36
SECTION 8.9. Proving, etc.Claims.............................36
SECTION 8.10. Reliance on Judicial Order or Certificate of
Liquidating Agent............................36
SECTION 8.11. Notice to Senior Agent..........................37
SECTION 8.12. Amendment of Subordination, etc.Provisions......37
ARTICLE IX
MISCELLANEOUS
SECTION 9.1. Waivers, Amendments, etc........................37
SECTION 9.2. Notices.........................................38
SECTION 9.3. Costs and Expenses..............................38
SECTION 9.4. Indemnification.................................38
SECTION 9.5. Survival........................................39
SECTION 9.6. Severability....................................39
SECTION 9.7. Headings........................................39
SECTION 9.8. Counterparts....................................39
SECTION 9.9. Governing Law; Entire Agreement.................40
SECTION 9.10. Jurisdiction....................................40
SECTION 9.11. Successors and Assigns..........................40
SECTION 9.12. Waiver of Jury Trial............................40
</TABLE>
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SCHEDULE I
EXHIBIT A Subordinated Note
EXHIBIT B Warrant
EXHIBIT C Certificate as to Certificate of Incorporation
EXHIBIT D Certificate as Authorizing Resolutions, etc.
EXHIBIT E Certificate as to Recapitalization, etc.
EXHIBIT F Certificate as to Merger Filing, etc.
EXHIBIT G Certificate as to Affiliate Agreements
EXHIBIT H Certificate as to Senior Credit Agreement
EXHIBIT I Certificate as to Solvency
EXHIBIT J Opinion of Counsel
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<PAGE> 6
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT, dated as of August 11, 1999, is among APPAREL
VENTURES, INC., a Delaware corporation (alternatively, "OAVI" and "Old AVI"),
Marvin L. Goodman ("Goodman"), each of the Jordan Parties (such and other
capitalized terms are used herein with the meanings provided in Section 1.1)
identified on the signature pages hereto and JZ EQUITY PARTNERS PLC, a public
limited liability company incorporated in England and Wales under the Companies
Act (1985) ("JZEP" and, collectively with Goodman and each such Jordan Party, a
"Purchaser").
W I T N E S S E T H:
WHEREAS, the parties are proposing to restructure the capitalization of
AVI Holdings, Inc., a Delaware corporation (alternatively, "AVIHI" and
"Holdings"), and its wholly-owned Subsidiary Old AVI (the "Recapitalization"),
such that inter alia on the Closing Date,
(a) pursuant to the Recapitalization Agreement, the holders of
all AVIHI Liabilities, all AVIHI Old Preferred Stock and all AVIHI Old
Common Stock will exchange their securities for 2,125,000 AVIHI New
Common Shares;
(b) Old AVI has authorized the sale to the Purchasers of, and the
Purchasers are willing on the terms and conditions hereinafter set forth
(including Article III) to purchase, for an aggregate amount of
$8,750,000,
(i) $8,750,000 principal amount of 10.0% Notes
substantially in the form of Exhibit A hereto due July 31, 2004,
and
(ii) Warrants substantially in the form of Exhibit B
hereto to purchase up to 637,500 SAVI Common Shares, representing
after the Merger on a Fully-Diluted Basis 54.1875% of all SAVI
Common Shares;
(c) pursuant to the Senior Note Repurchase Arrangement, (x)
Holdings will repurchase at least 51% of the Senior Noteholder 1994
AVIHI Warrants for $0.01 a piece and at least 51% of the Senior
Noteholder 1996 AVIHI Warrants for $0.01 a piece and (y) Old AVI will
repurchase at least $34,740,000 of the Senior Notes outstanding in an
aggregate principal amount of $36,000,000 for $222.50 of each $1,000 of
outstanding principal amount or at least $7,700,000 in the aggregate;
(d) pursuant to the Merger Documents, (x) Holdings will merge
(the "Merger") with and into Old AVI, and the Delaware corporation
surviving the Merger (alternatively, "SAVI" and "Surviving AVI") will be
named "Apparel Ventures, Inc." and (y) all of the
<PAGE> 7
then issued and outstanding AVIHI New Common Shares will be converted
into 212,500 SAVI Common Shares; and
(e) pursuant to the Management Options, Surviving AVI will
reserve 150,000 SAVI Common Shares for issuance from time to time to
directors, officers and employees of Surviving AVI and its Subsidiaries;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Defined Terms. The following terms (whether or not
italicized) when used in this Agreement, including its preamble and recitals,
shall, except where the context otherwise requires, have the following meanings
(such meanings to be equally applicable to the singular and plural forms
thereof):
"Affiliate" means, relative to any Person, any other Person which,
directly or indirectly, controls or is controlled by or under common control
with such Person. For the purposes of this definition, "control" (including the
correlative terms "controlling", "controlled by" and "under common control
with") means, relative to any Person, the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of Voting Stock, by agreement or
otherwise; provided, however, that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control.
"this Agreement" means, on any date, this Purchase Agreement as
originally in effect and as thereafter from time to time amended, supplemented
or otherwise modified in accordance with the terms hereof and in effect on such
date.
"Amended Certificate of Incorporation" means the certificate of
incorporation of Holdings as it is to become effective on the Closing Date in
the form furnished to the requesting Purchasers prior to the execution and
delivery of this Agreement and as it is to be further amended on the Closing
Date by the Merger Documents.
"Applicable Law" means, relative to any Person, (x) all provisions of
laws, statutes, ordinances, rules, regulations, requirements, restrictions,
permits, certificates or orders of any Governmental Authority applicable to such
Person or any of its assets or property and (y) all judgments, injunctions,
orders and decrees of all courts and arbitrators in proceedings or actions in
which such Person is a party or by which any of its assets or properties are
bound.
"Approval" means, relative to any Person, each approval, license,
permit, consent, exemption, filing or registration by or with any Governmental
Authority necessary to (x)
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<PAGE> 8
authorize or permit the execution, delivery or performance of, or for the
validity or enforceability of, any Transaction Document or (y) its conduct of
its business.
"Authorized Officer" means, relative to the Company, those of its
officers whose signatures and incumbency shall have been certified to each
requesting Purchaser pursuant to clause (a)(ii) of Section 3.2.
"AVIHI" is defined in the first recital.
"AVIHI New Common Shares" means the 2,125,000 shares of common stock,
$0.01 par value per share, of Holdings to be authorized by the Amended
Certificate of Incorporation and issued pursuant to the Recapitalization of
Holdings (and prior to the effectiveness of the Merger).
"AVIHI Old Common Stock" means the 64,450 shares of all classes of
common stock, $0.01 par value per share, of Holdings, 41,000 Class A Common
Stock shares of which are authorized (and 25,500 of which shares are issued and
outstanding) by the Certificate of Incorporation of Holdings in effect prior to
the Closing Date.
"AVIHI Old Preferred Stock" means the preferred shares, $1.00 par value
per share, of Holdings of which 1,700, 1,700, 900 and 6,450 are issued and
outstanding as Class A Preferred Shares, Class B Preferred Shares, Class C
Preferred Shares and Class D Preferred Shares, respectively.
"AVIHI Liability" means (x) the 12% promissory notes of Holdings due
April 30, 2004 and outstanding in the aggregate principal amount of $10,000,000
and the 14% promissory notes of Holdings due April 30, 2004 and outstanding in
the aggregate principal amount of $6,155,881, all of which notes were issued
pursuant to the purchase agreement, dated as of May 20, 1994 and as amended
through October 31, 1998, between Holdings and JZEP (as the successor to
Mezzanine Capital & Income Trust 2001 plc), together with all unpaid interest
accrued thereon, and (y) the 10.78% non-negotiable subordinated notes of
Holdings due June 30, 2004 and outstanding in the aggregate principal amount of
$3,149,122.00, all of which notes were issued pursuant to the agreement for
purchase and sale of stock, dated April 21, 1994, among Holdings, AVI
Acquisition Co., a Delaware corporation, and all of the shareholders of Apparel
Ventures, Inc., a California corporation, together with all unpaid interest
accrued thereon.
"Business Day" means any day, excluding, however, a Saturday, Sunday and
each legal holiday on which banks are authorized or required to close in New
York, New York.
"Capital Stock" means, relative to any Person, any and all shares,
partnership or membership interests, participations, rights or other equivalents
(however designated) of corporate stock, including (w) capital shares of such
Person (whether voting or non-voting), (x) if such Person is a partnership,
capital partnership interests (whether general or limited), (y) any other
indicia of ownership of such Person and (z) all warrants, options, purchase
rights,
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<PAGE> 9
conversion or exchange rights, voting rights, calls or any claims of any
character with respect thereto, including SARs.
"Change of Control" means
(a) the sale, lease or transfer of all or substantially all the
assets of the Company to any Person or group (as such term is defined in
Section 13(d)(3) of the Exchange Act) other than the Jordan Investors;
(b) the liquidation or dissolution of (or the adoption of a plan
of liquidation by) the Company;
(c) the acquisition by any Person or group (as so defined) (other
than the Jordan Investors) of a direct or indirect majority in interest
(more than 50%) of the issued and outstanding Voting Stock of the
Company by way of merger or consolidation or otherwise; and
(d) any transaction the result of which is that any Person or
group (as so defined) (other than the Jordan Investors) beneficially
owns, directly or indirectly, more of the issued and outstanding Voting
Stock of the Company than is owned beneficially, directly or indirectly,
by the Jordan Investors.
"Closing" is defined in Section 2.3.
"Closing Date" is defined in Section 2.3.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
"Common Share" means (x) on the Closing Date (and prior to the
occurrence of the Merger), a AVIHI New Common Share and (y) on the Closing Date
(and after the occurrence of the Merger) and thereafter, a SAVI Common Share.
"Company" means (x) at any time prior to the occurrence of the Merger,
Old AVI and (y) at any time on or after the occurrence of the Merger, Surviving
AVI.
"Contractual Undertaking" means, relative to any Person, any provision
of any debt or equity security issued by it or of any Instrument or undertaking
to which it is a party or by which it or any of its property is bound or
subject.
"Default" means
(a) any Event of Default or any act, condition or event which,
after notice or lapse of time or both, would constitute an Event of
Default; and
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<PAGE> 10
(b) any act, condition or event which has resulted in, or would
(without notice or lapse of time or both) permit, any or all of the
monetary obligations of under the Senior Credit Agreement to be declared
immediately due and payable prior to their stated maturity.
"Director Indemnification Agreement" is defined in clause (a) of Section
3.5. At any time after the Closing Date, "Director Indemnification Agreement"
also means any other agreement in substantially similar form entered into by the
Company and any of its directors from time to time after the Closing Date.
"Disclosure Schedule" means Schedule I hereto.
"Event of Default" is defined in Section 7.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Letter" means the letter, dated July 14, 1999, from Holdings
to (and to be accepted by) all holders of AVIHI Liabilities, AVIHI Old Preferred
Stock and AVIHI Old Common Stock pursuant to which such holders, inter alia,
consent to the Recapitalization, agree to exchange their AVIHI Liabilities and
AVIHI Old Preferred Stock for AVIHI New Common Shares and acknowledge the
dilution of their AVIHI Old Common Stock by the AVIHI New Common Shares.
"Financing Memorandum" is defined in Section 5.9.
"Fiscal Quarter" or "FQ" means any period of three consecutive calendar
months comprising a quarter of a Fiscal Year; references to a Fiscal Quarter
with numbers corresponding to a calendar year and a number corresponding to a
Fiscal Quarter (e.g., "1999 FQ 1") refer to such Fiscal Quarter (i.e., the
first) of such Fiscal Year.
"Fiscal Year" or "FY" means a period of 12 consecutive calendar months
ending on each June 30; references to a Fiscal Year with a number corresponding
to any calendar year (e.g., "the 1999 Fiscal Year" or "1999 FY") refer to the
Fiscal Year ending on June 30 of such calendar year.
"F.R.S. Board" means the Board of Governors of the Federal Reserve
System or any successor thereto.
"Fully-Diluted Basis" means, relative to the number of SAVI Common
Shares into which the Warrants are convertible, the percentage which such SAVI
Common Shares is of the sum of
(a) all SAVI Common Shares issued on the Closing Date (after
giving effect to the transactions contemplated by this Agreement),
including all SAVI Shares into which AVIHI New Common Shares are
converted pursuant to the Merger Documents,
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<PAGE> 11
plus
(b) all SAVI Common Shares issuable upon the exercise of the
Warrants,
plus
(c) all SAVI Common Shares issuable from time to time pursuant to
the Management Options.
"Goodman" is defined in the preamble.
"Governmental Authority" means any international, national, federal,
state, provincial, local, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, or any court, in each case
whether of the United States or foreign.
"herein", "hereof", "hereto", "hereunder" and similar terms contained in
this Agreement or any other Purchase Document refer to this Agreement or such
other Purchase Document, as the case may be, as a whole and not to any
particular Article, Section, paragraph or provision of this Agreement or such
other Purchase Document.
"holder" is defined, relative to a Note, in Section 4.6.
"Holdings"is defined in the first recital.
"including" means including without limiting the generality of any
description preceding such term.
"Indemnified Liability" is defined in Section 9.4.
"Indemnified Party" is defined in Section 9.4.
"Instrument" means any contract, agreement, indenture, mortgage,
document or other writing (whether by formal agreement, letter or otherwise)
under which any obligation is evidenced, assumed or undertaken or any lien (or
right or interest therein) is granted or perfected.
"Jordan Industries" or "JI" means Jordan Industries, Inc., an Illinois
corporation.
"Jordan Investor" means any Jordan Party or JZEP.
"Jordan Party" means TJC, Jordan Industries and their respective
Affiliates and Subsidiaries (excluding, however, the Company and Subsidiaries)
and, relative to each of the foregoing,
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<PAGE> 12
(a) each general partner, limited partner, stockholder, member,
principal or employee thereof or any Affiliate thereof;
(b) any 50% (or more) owned Subsidiary of any one (or jointly of
more than one of any) Person specified in clause (a); and
(c) the spouse or any immediate family member of any Person
specified in clause (a) or any trust solely for the benefit of any such
Person or the spouse or any immediate family member of such Person.
"Jordan Payment" means any payment to any Jordan Party of management
fees, consulting fees, advisory fees, investment banking fees, director's fees
or other fees for services provided to the Company and Subsidiaries, whether
pursuant to a Jordan Services Agreement or otherwise (excluding, however,
amounts paid as (x) reimbursement of out-of-pocket expenses paid to Persons who
are not Affiliates in connection with the delivery of such services and (y)
payments made pursuant to any Director Indemnification Agreement).
"Jordan Services Agreement" means the TJC Management Consulting
Agreement or the TJC Advisory Agreement.
"JZAI" means Jordan/Zalaznick Advisers, Inc., a Delaware corporation.
"JZEP" is defined in the preamble.
"Management Employment Agreement" is defined in clause (e) of Section
3.3.
"Management Option" means each option issued on the Closing Date by SAVI
to each Person identified under the caption "Management Optionees" of Item 3.3
("Stockholders") of the Disclosure Schedule for the number of SAVI Common Shares
set forth opposite such Person's name in such Item 3.3. At any time after the
Closing Date, "Management Option" also means any other option awarded from time
to time by the Board of Directors of the Company to any other officer, director
or employee of the Company or any Subsidiary for a number of SAVI Common Shares
not to exceed, together with all other Management Options awarded after the
Closing Date, the number of SAVI Common Shares set forth opposite the word
"Reserved" in Item 3.3 ("Stockholders") of the Disclosure Schedule.
"Management Stockholder" means each Stockholder identified under the
caption "Management Optionees" of Item 3.3 ("Stockholders") of the Disclosure
Schedule. At any time after the Closing Date, "Management Stockholder" also
means any other officer, director or employee of the Company or any Subsidiary
who shall purchase any of the Common Shares shown as "RESERVED" in Item 3.3
("Stockholders") of the Disclosure Schedule pursuant to an offer made by the
Board of Directors of the Company and who shall in connection therewith have
executed the Stockholders' Agreement.
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<PAGE> 13
"Materially Adverse Effect" means (x) a material adverse effect on the
financial condition, business, assets, operations, properties or prospects of
the Company and Subsidiaries, taken as a whole, (y) a material impairment of the
ability of any Obligor to perform its respective payment obligations under the
Purchase Documents to which it is or will be a party or (z) an impairment of the
validity or enforceability of, or a material impairment of the rights, remedies
or benefits available to the Noteholders under, this Agreement or any other
Purchase Document.
"Merger" is defined in clause (d) of the first recital.
"Merger Document" means the certificate, plan or agreement of merger for
filing with the Secretary of State of the State of Delaware in the form
furnished to the requesting Purchasers prior to the execution and delivery of
this Agreement pursuant to which (x) Holdings shall merge with and into Old AVI
and (y) each AVIHI New Common Share will be converted into one tenth of one SAVI
Share.
"Non-U.S. Noteholder" is defined in Section 4.9.
"Note" means each 10.0% subordinated promissory note of the Company,
issued on the Closing Date in accordance with Section 2.3, substantially in the
form of Exhibit A hereto (as such promissory note may be amended, endorsed or
otherwise modified from time to time) and all other promissory notes accepted
from time to time in substitution, replacement or renewal therefor, including
pursuant to Section 4.7 or 4.8.
"Noteholder" means at any time each Person (including the Purchasers)
then registered in accordance with Section 2.3, 4.7 or 4.8 as the owner or
holder of a Note; requesting Noteholder means JZEP and each Noteholder who shall
from time to time notify the chief financial Authorized Officer that it wishes
to receive copies of all financial information, notices and other information
delivered from time to time pursuant to Section 6.1.
"OAVI" is defined in the preamble.
"Obligation" means all obligations of the Company with respect to the
repayment or performance of all obligations (monetary or otherwise) of the
Company arising under or in connection with the Notes or under this Agreement or
any other Purchase Document in respect of the Notes, the indebtedness evidenced
thereby or to any Person as the holder of a Note.
"Old AVI" is defined in the preamble.
"or" is not exclusive.
"Organizational Document" means, relative to any Person, each Instrument
that (x) defines its legal existence (including, in the case of a corporation,
its articles or certificate of incorporation), as filed or recorded with an
applicable Governmental Authority or (y) governs its internal affairs
(including, in the case of a corporation, its by-laws and all shareholder
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<PAGE> 14
agreements, voting trusts and similar arrangements applicable to any of its
authorized shares of Capital Stock), in each case as amended, supplemented or
restated.
"outstanding" means, at any time relative to the Notes, any Notes
theretofore issued pursuant to Section 2.3, 4.6 or 4.7 and not surrendered
pursuant to Section 4.6 or 4.7 but excluding, however, all Notes which are
deemed pursuant to Section 4.8 to be not outstanding.
"Permitted Junior Payment" means any Restricted Payment (excluding,
however, any payment of the nature referred to in clause (a) or (b) of the
definition of such term) which is made by the Company or any Subsidiary at any
time when, after giving effect thereto and in the good faith determination of
the Board of Directors of the Company evidenced by a duly adopted resolution of
such Board, (x) the funds then available to the Company are sufficient (and are
reasonably expected to continue to be sufficient) to make the next scheduled
payment of interest to become due, and all other payments due and to become due
in the next 190 days, on the Notes and (y) no Default shall have occurred and be
continuing (or would reasonably be expected to occur within the next 190 days).
"Person" means any natural person, corporation, firm, association,
partnership, limited liability partnership, limited liability company,
government, trust, governmental agency or any other entity, whether acting in an
individual, fiduciary or other capacity.
"Post-Petition Interest" means, relative to any Senior Indebtedness, all
interest accrued or accruing on such Senior Indebtedness after the commencement
of any insolvency or liquidation proceeding against such Person in accordance
with and at the contract rate, including any rate applicable upon default,
specified in the Instrument creating, evidencing or governing such Senior
Indebtedness, whether or not, pursuant to Applicable Law or otherwise, the claim
for such interest is allowed as a claim in such insolvency or liquidation
proceeding.
"Pro Forma Balance Sheet" is defined in clause (b) of Section 5.4.
"Projections" means the projections and calculations for the periods
from the Closing Date (assuming the Closing Date has occurred on June 30, 1999)
through the close of each Fiscal Year through and including the 2006 Fiscal Year
set forth in the Financing Memorandum, including the projected income and cash
flow statements, the EBITDA, balance sheets, amortization and capitalization
calculations, the ratio analyses and the revenue and related cost assumptions.
"Purchase Document" means this Agreement, the Notes, and each other
Instrument executed and delivered from time to time by the Company or any
Subsidiary to any other Noteholder pursuant hereto, whether or not mentioned
herein.
"Purchaser" is defined in the preamble; "requesting Purchaser" means
JZEP and each other Purchaser who shall notify counsel to the Company on or
prior to the Closing Date that it wishes to receive copies of all documentation
identified in Article III or IV as being delivered to a requesting Purchaser;
"required Purchaser" means, at any time prior to the purchase of the
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<PAGE> 15
Notes in accordance with Section 2.3, Purchasers committed pursuant to Section
2.1 to purchase at least 50.1% of the original principal amount of the Notes.
"Ratably" means, relative to the Noteholders, ratably according to the
aggregate outstanding principal amount of all Notes held by each Noteholder.
"Recapitalization" is defined in the first recital.
"Recapitalization Agreement" means the recapitalization and exchange
agreement, dated the Closing Date, among Holdings, Old AVI, all holders of AVIHI
Liabilities, all holders of Old AVIHI Preferred Stock and all holders of Old
AVIHI Common Stock.
"Recapitalization Document" means the Recapitalization Agreement, the
Exchange Letter, the Senior Note Repurchase Arrangement, the Merger Documents
and all documents, certificates and Instruments in connection with any thereof.
"Reorganization Security" means, relative to any insolvency or
liquidation proceeding involving the Company or any Subsidiary, any Capital
Stock or other securities of the Company or any Subsidiary as reorganized or
readjusted (or Capital Stock or any other securities of any other Person
provided for by a plan of reorganization or readjustment involving the Company
or any Subsidiary) that are subordinated, at least to the same extent as the
Notes, to the payment of all outstanding Senior Indebtedness after giving effect
to such plan of reorganization or readjustment and authorized by an order or
decree of a court of competent jurisdiction in a reorganization proceeding under
any applicable bankruptcy, insolvency or similar law, giving effect, and stating
in such order or decree that effect has been given, to Article VIII.
"Required Noteholders" means, at any time, Noteholders owning more than
50.1% of the then outstanding principal amount of the Notes.
"Restricted Payment" means
(a) relative to any Capital Stock of the Company,
(i) any dividend or other distribution (in cash, property
or obligations), direct or indirect, by the Company on account of
(x) any shares of any class of such Capital Stock (now or
hereafter outstanding) or (y) any warrants, options or other
rights with respect to any shares of any class of such Capital
Stock (now or hereafter outstanding), excluding, however, in each
case, dividends or distributions payable in such Capital Stock,
or warrants to purchase such Capital Stock, or split-ups or
reclassifications of such Capital Stock into additional or other
shares of its Capital Stock),
(ii) any redemption, retirement, sinking fund or similar
payment, purchase or other acquisition for value, direct or
indirect, by the Company or any
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<PAGE> 16
Subsidiary of any shares of any class of such Capital Stock
(now or hereafter outstanding), and
(iii) any payment by the Company or any Subsidiary made to
retire, or to obtain the surrender of, any outstanding warrants,
options or other rights to acquire shares of any class of such
Capital Stock now or hereafter outstanding;
(b) any payment or prepayment by the Company or any Subsidiary of
principal of, premium, if any, or interest on, or redemption, purchase,
retirement, defeasance (including in-substance or legal defeasance),
sinking fund or similar payment with respect to, any indebtedness
subordinated in right of payment to the Obligations;
(c) any Jordan Payment by the Company or any Subsidiary; and
(d) any deposit to fund any of the foregoing.
"SAR" means, relative to any Person, stock appreciation, phantom stock,
incentive stock or similar contractual rights arising under stock-based
incentive or compensation plans or programs established by such Person for
employees which do not involve any issuance of any Capital Stock or other
securities convertible thereinto.
"SAVI" is defined in clause (d) of the first recital.
"SAVI Common Share" means a share of common stock, $0.01 par value per
share, of Surviving AVI as authorized by the Amended Certificate of
Incorporation.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Agent" means Fleet Capital Corporation (as successor to Barclays
Business Credit, Inc.) and also refers to any replacement or successor agent
under a successor Senior Credit Agreement as provided in clause (a) of the
definition of such term.
"Senior Credit Agreement" means the loan and security agreement, dated
May 23, 1994 and as amended as of January 15, 1995, October 6, 1995, December 5,
1995, March 31, 1996, September 30, 1996, April 30, 1997, November 4, 1997,
September 24, 1998, December 4, 1998, January 4, 1999, and February 26, 1999,
and as it is to be further amended on the Closing Date by Senior Credit
Agreement Amendment No. 12, among Old AVI, the Senior Lenders and the Senior
Agent. At any time after the Closing Date, "Senior Credit Agreement" also means
the Senior Credit Agreement as originally executed and delivered, together with
(a) each successor Instrument pursuant to which the Company
obtains from other financial institutions loans to refinance
indebtedness outstanding under the Senior Credit Agreement in effect on
the date of such refinancing; and
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(b) all amendments, supplements, extensions, renewals and other
modifications made thereto or to any such successor Instrument from time
to time after the Closing Date.
"Senior Credit Agreement Amendment No.12" means the amendment, to be
dated the Closing Date, to the Senior Credit Agreement consenting to the
Recapitalization in substantially the form furnished to the requesting
Purchasers in connection with the execution and delivery of this Agreement.
"Senior Indebtedness" means the sum of (x) the aggregate principal
amount of all indebtedness, all unpaid interest thereon (including Post-Petition
Interest) and all other Senior Liabilities outstanding from time to time under
the Senior Credit Agreement and (y) all Hedging Liabilities owing to a Senior
Lender or any Affiliate thereof with respect to indebtedness outstanding under
the Senior Credit Agreement.
"Senior Indenture Trustee" means Firstar Bank of Minnesota, N.A.,
acting, as the context may require, as trustee relative to the Senior Notes or
Senior Noteholder Warrants.
"Senior Lender" means Fleet Capital Corporation (as successor to
Barclays Business Credit, Inc.) and the other lenders, if any, parties to the
Senior Credit Agreement and also refers to any replacement or successor senior
lenders under a successor Senior Credit Agreement as provided in clause (a) of
the definition of such term.
"Senior Liability" means all Obligations under (and as defined in) the
Senior Credit Agreement of the Company and Subsidiaries. At any time after the
Closing Date, "Senior Liability" also means all liabilities or obligations of
the Company and Subsidiaries under each successor Instrument which qualifies as
the "Senior Credit Agreement" in accordance with clause (a) of the definition of
such term which are analogous to the Obligations of the Company and Subsidiaries
as defined on the Closing Date in the Senior Credit Agreement.
"Senior Loan" means a loan outstanding from time to time under the
Senior Credit Agreement.
"Senior Loan Document" means any "Loan Document" as defined in the
Senior Credit Agreement as in effect on the Closing Date. At any time after the
Closing Date, "Senior Loan Document" also means all Instruments which are
analogous to the "Loan Documents" (as defined on the Closing Date in the Senior
Credit Agreement) under each successor Instrument which qualifies as the "Senior
Credit Agreement" in accordance with clause (a) of the definition of such term.
"Senior Note" means the 12 1/4% Series A and Series B Senior Notes of
Old AVI due December 31, 2000 and outstanding prior to the Recapitalization in
the aggregate principal amount of $36,000,000, and of which an aggregate
principal amount not to exceed $1,188,000 of 12 1/4% Series A Senior Notes may
remain outstanding after the Recapitalization as obligations of SAVI.
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"Senior Noteholder AVIHI Warrant" means a Senior Noteholder 1994 AVIHI
Warrants or Senior Noteholder 1996 AVIHI Warrant.
"Senior Noteholder 1994 AVIHI Warrant" means the warrants to purchase an
aggregate of 3,333" shares of AVIHI Old Common Stock issued pursuant to the
warrant agreement, dated as of May 23, 1994, between Holdings and the Senior
Indenture Trustee.
"Senior Noteholder 1996 AVIHI Warrant" means the warrants to purchase up
to an aggregate of 1,764.6 shares of AVIHI Old Common Stock, issued pursuant to
the warrant agreement, dated as of June 21, 1996, between Holdings and the
Senior Indenture Trustee.
"Senior Note Repurchase Arrangement" means collectively (u) the Offer to
Purchase and Consent Solicitation by Old AVI, dated June 29, 1999, relating to
the Senior Notes, (v) the second supplemental indenture, to be dated the Closing
Date, to the indenture, dated as of May 23, 1994 and amended as of December 5,
1995, (and modified by waivers thereto, dated June 21, 1996 and September 22,
1997), relating to the Senior Notes between Old AVI and the Indenture Trustee,
(w) the Offer to Purchase and Consent Solicitation by Holdings, dated June 29,
1999, relating to the Senior Noteholder AVIHI Warrants, (x) the amendment to the
warrant agreement, to be dated the Closing Date, to the Warrant Agreement, dated
as of May 23, 1994, relating to the Senior Noteholder 1994 AVIHI Warrants, (y)
the amendment to the Warrant Agreement, to be dated the Closing Date, to the
Warrant Agreement, dated as of June 21, 1996, relating to the Senior Noteholders
1996 AVIHI Warrants, and (z) the letter agreement, dated June 29, 1999, among
Old AVI and holders of approximately 96.5% of the aggregate outstanding
principal amount of the Senior Notes to tender the Senior Notes and Senior
Noteholder AVIHI Warrants pursuant to the tender offers referred to in items (v)
and (x).
"Senior Payment Bar Notice" is defined in clause (c) of Section 8.2.
"Senior Payment Default" is defined in clause (a) of Section 8.2.
"Senior Performance Default" is defined in clause (b) of Section 8.2.
"Stockholder" means each Person identified in Item 3.3 ("Stockholder")
of the Disclosure Schedule. At any time after the Closing Date, "Stockholder"
also means any employee of the Company becoming a "Management Stockholder" in
accordance with the second sentence of the definition of such term.
"Stockholders' Agreement" means an agreement, to be dated the Closing
Date, between Surviving AVI and all Stockholders.
"Subject Security" means all Notes and Warrants purchased on the Closing
Date pursuant to Section 2.3, together, in each case, with all other securities
issued in replacement or exchange therefor or as a distribution thereon or upon
the conversion thereof.
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"Subsidiary" means, relative to any Person, (x) any corporation,
association or other business entity more than 50.0% of the outstanding shares
of Voting Stock of which is owned directly or indirectly by such Person and (y)
any partnership in which such Person is a general partner. Except as otherwise
indicated herein, references to Subsidiaries refer to Subsidiaries of the
Company.
"Surviving AVI" is defined in clause (d) of the first recital.
"Tax" is defined in Section 4.9.
"TJC" means The Jordan Company LLC, a Delaware limited liability
corporation.
"TJC Advisory Agreement" is defined in clause (b) of Section 3.5.
"TJC Management" means TJC Management Corporation, a Delaware
corporation, or its designees.
"TJC Management Consulting Agreement" is defined in clause (b) of
Section 3.5.
"Transaction Cost" means any fee, cost or expense payable by Holdings,
the Company or any Subsidiary in connection with this Agreement or any
transaction contemplated hereby.
"Transaction Document" means the Purchase Documents, the Amended
Certificate of Incorporation, the Stockholders' Agreement, Recapitalization
Documents, the Management Employment Agreements, the Management Options, the
Jordan Services Agreement, the Director Indemnification Agreements and the
Senior Loan Documents and all documents, certificates and Instruments delivered
in connection with any thereof.
"Voting Stock" means, relative to any Person, Capital Stock of any class
or kind, including any Capital Stock of such Person of any other class or kind
which is then convertible Capital Stock of such class or kind but, ordinarily
having the power to vote (and irrespective of whether at the time Capital Stock
of such Person of any other class or kind shall or might upon the occurrence of
a contingency have voting power) for the election of directors, managers or
other voting members of the governing body of such Person.
"Warrant" means each warrant of the Company, issued on the Closing Date
in accordance with Section 2.3, substantially in the form of Exhibit B hereto
for an aggregate of 150,000 SAVI Common Shares.
"wholly-owned Subsidiary" means, relative to any Person, any Subsidiary
of such Person all of the Capital Stock (and all rights and options to purchase
such Capital Stock) of which, other than directors' qualifying shares, are
owned, beneficially and of record, by such Person or its wholly-owned
Subsidiaries.
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SECTION 1.2. Use of Defined Terms. Unless otherwise defined or the
context otherwise requires, terms for which meanings are provided in this
Agreement shall have such meanings when used in the Disclosure Schedule, each
Note and any other Purchase Document or any notice or other communication
delivered from time to time in connection with any Purchase Document.
SECTION 1.3. Cross References. Unless otherwise specified, references
in this Agreement and in each other Purchase Document to any Article or Section
are references to such Article or Section of this Agreement or such other
Purchase Document, as the case may be, and unless otherwise specified,
references in any Article, Section or definition to any item or clause are
references to such item or clause of such Article, Section or definition.
ARTICLE II
PURCHASE AND SALE OF SUBJECT SECURITIES
SECTION 2.1. Purchase Commitments. Each Purchaser hereby severally
agrees, subject, however, to the terms and conditions of this Agreement
(including Article III), to purchase from the Company, and the Company hereby
agrees to sell to each Purchaser, at the Closing the following securities:
(a) a Note in the original principal amount set forth in Item
3.3 ("Stockholder") of the Disclosure Schedule opposite the name of such
Purchaser and below the caption "Notes"; and
(b) a Warrant to purchase the number of SAVI Common Shares set
forth in Item 3.3 ("Stockholder") of the Disclosure Schedule opposite
the name of such Purchaser and below the caption "Warrants".
SECTION 2.2. Issue Price. The Company and the Purchaser agree that, for
purposes of section 1271 et seq. of the Code, the issue price of the Note in the
aggregate is equal to $8,750,000 less the Warrant Issue Price (as defined below)
and the purchase price of the Warrants in the aggregate is equal to $6,375 (the
"Warrant Issue Price"), and that this agreement is intended to constitute an
agreement as to the issue price for all Federal and other income tax purposes.
SECTION 2.3. Closing. The purchase of the Notes and the other Subject
Securities shall take place at a closing (the "Closing") at the offices of
Mayer, Brown & Platt, 1675 Broadway, New York, New York, at 10:00 a.m., local
time, on August 11, 1999 or such other Business Day on or prior to August 15,
1999 as may be agreed upon by the Company and the required Purchasers (the
"Closing Date"). At the Closing, the Company will deliver to each Purchaser
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(a) a single Note in the aggregate principal amount determined
in accordance with clause (a) of Section 2.1, dated the Closing Date,
and registered in the Purchaser's name,
(b) a Warrant to purchase the aggregate number of Common Shares
determined in accordance with clause (b) of Section 2.1, dated the
Closing Date, and registered in such Purchaser's name,
each against delivery by the Purchaser to the Company of immediately
available funds in the amount of the purchase price therefor. If, at the
Closing, the Company shall fail to tender to the Purchasers the Subject
Securities as provided in this Section or any of the conditions specified in
Article III shall not have been fulfilled to the satisfaction of the Required
Noteholders, all of the Purchasers shall, at the election of such Purchasers, be
relieved of all further obligations under this Agreement, without thereby
waiving any other rights the Purchaser may have by reason of such failure or
such nonfulfillment.
SECTION 2.4. Purchasers' Acknowledgments. Without limitation of the
representations, warranties and acknowledgments of each Purchaser contained in
paragraphs 1, 3, 4, 5, 7, 8, 9, 10 and 13 of the Exchange Letter (which are
hereby incorporated herein by reference as representations, warranties and
acknowledgments of each Purchaser), each Purchaser hereby acknowledges its
knowledge and understanding that the Notes and Warrants are speculative
investments involving a high degree of risk of loss.
ARTICLE III
CONDITIONS TO CLOSING
Each Purchaser's obligation to purchase and pay for the Subject
Securities is subject, however, to the fulfillment, to the satisfaction of the
required Purchasers, prior to, at or concurrently with the Closing, of all of
the following conditions:
SECTION 3.1. Certificates of Incorporation. Each of the following shall
have occurred (and each requesting Purchaser shall have received from Holdings
and Old AVI a certificate, dated the Closing Date, of its Secretary or Assistant
Secretary in the form of Exhibit C hereto confirming inter alia that each of the
following shall have occurred):
(a) its Certificate of Incorporation (or, in the case of
Holdings, its Amended Certificate of Incorporation) shall have been
filed with the Secretary of State of Delaware; and
(b) no further amendments or modifications thereto shall have
been adopted or filed other than the Merger Documents.
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SECTION 3.2 Resolutions, etc. Each requesting Purchaser shall have
received:
(a) from each of Holdings, Old AVI and Surviving AVI, a certificate,
dated the Closing Date, in the form of Exhibit D hereto as to:
(i) resolutions of its Board of Directors then in full force
and effect authorizing (x) in the case of Holdings, the
Recapitalization, the execution, delivery and performance of this
Agreement and each other Purchase Document to be executed by it,
(y) in the case of Old AVI, the Recapitalization, the issuance of
the Notes and the execution, delivery and performance of this
Agreement and each other Purchase Document to be executed by it
and (z) in the case of Surviving AVI, the issuance of the
Warrants and the execution, delivery and performance of this
Agreement, each other Purchase Document to be executed by it and
the Stockholders' Agreement, and
(ii) the incumbency and signatures of those of its officers
authorized to act with respect to this Agreement and each other
Purchase Document executed by it (and, in the case of the
Company, the Stockholders' Agreement).
SECTION 3.3 Satisfaction of Conditions to Recapitalization , etc. Each
of the following shall have occurred (and each requesting Purchaser shall have
received a certificate, dated the Closing Date, in the form of Exhibit E hereto
confirming inter alia that):
(a) the Recapitalization Documents shall be in full force and
effect, and no material term or condition thereof shall have been
amended, waived or otherwise modified;
(b) all Approvals necessary or advisable in connection with the
Recapitalization shall have been obtained and be in full force and
effect, and all applicable waiting periods shall have expired without
any action being taken or threatened by any Governmental Authority which
would restrain, prevent or otherwise impose adverse conditions on the
Recapitalization;
(c) no pending or threatened material litigation, proceeding or
investigation shall exist which contests the consummation of the
Recapitalization;
(d) the Recapitalization shall be consummated simultaneously with
the Closing in the manner contemplated in all material respects by the
Recapitalization Documents and the Financing Memorandum, including
(i) pursuant to the Recapitalization Agreement (a true and
correct copy of which is attached hereto as Attachment 1), the
holders of all AVIHI Liabilities, all AVIHI Old Preferred Stock
and all AVIHI Old Common Stock have exchanged their securities
for 2,125,000 AVIHI New Common Shares, and
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(ii) pursuant to the Senior Note Repurchase Arrangement
(true and correct copies of the constituent documents of which
referred to as items (v) through (z) of the definition of such
term are attached hereto as Attachments 2, 3, 4, 5, 6, and 7),
(x) Holdings has repurchased at least 50.1% of the Senior
Noteholder 1994 AVIHI Warrants for $0.01 per warrant and at least
50.1% of the Senior Noteholder 1996 AVIHI Warrants for $0.01 per
warrant (or, in either case, to the extent that Holdings shall
not be purchasing 51% of such class of Warrants, Holdings having
obtained consents from holders of Warrants of such class,
sufficient to cover such deficiency, to the supplemental
indenture or amendment, as the case may be, referred to in item
(x) of the definition of the term "Senior Note Repurchase
Arrangement") and (y) Old AVI has repurchased at least
$34,740,000 of the Senior Notes outstanding in an aggregate
principal amount of $36,000,000 for $222.50 of each $1,000 of
outstanding principal amount or not more than $7,700,000 in the
aggregate; and
(a) Goodman with Surviving AVI shall have entered into an employment
and non-competition agreement (the "Management Employment Agreement").
SECTION 3.4 Merger Filing, etc. Each of the following shall have
occurred (and each requesting Purchaser shall have received a certificate, dated
the Closing Date, in the form of Exhibit F hereto confirming inter alia that):
(a) the Merger Documents (x) shall have been duly executed by the
parties thereto in recordable form and (y) counterparts of the Merger
Documents shall be available for filing with the Secretary of State of
the State of Delaware (which filing shall have been authorized by all
parties thereto and shall be consummated simultaneously with the
Closing);
(b) Surviving AVI shall have exchanged executed counterparts of the
Stockholders' Agreement with each Stockholder; and
(c) Surviving AVI shall have issued the Management Options.
SECTION 3.5 Certain Affiliate Agreements. Each of the following shall
have occurred (and each requesting Purchaser shall have received a certificate,
dated the Closing Date, in the form of Exhibit G hereto confirming inter alia
that):
(a) Surviving AVI shall have entered into with its directors an
indemnification agreement (as so originally executed and delivered the
"Director Indemnification Agreements"), and
(b) Surviving AVI shall have entered into with TJC Management an
agreement for the provision of management consulting services (as so
originally executed and
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delivered, the "TJC Management Consulting Agreement") and an agreement
for the provision of transaction advisory services (as so originally
executed and delivered, the "TJC Advisory Agreement"),
in each case in the form furnished to the requesting Purchasers prior to the
execution and delivery of this Agreement.
SECTION 3.6 Senior Credit Agreement. The Senior Lenders shall have
executed and delivered to Old AVI the Senior Credit Agreement Amendment No. 12
which shall have become effective in accordance with its terms, and each
requesting Purchaser shall have received a certificate, dated the Closing Date,
in the form of Exhibit H hereto.
SECTION 3.7 Certificate as to Solvency, etc. Each requesting Purchaser
shall have received a certificate, dated the Closing Date, of the chief
financial Authorized Officer of Surviving AVI, in the form of Exhibit I hereto.
SECTION 3.8 Opinion of Counsel. Each requesting Purchaser shall have
received an opinion, dated the Closing Date, from Mayer, Brown & Platt, counsel
to the Company, substantially in the form of Exhibit J hereto. I.6. I.7. SECTION
Legal Expenses.The Company shall have made payment in full of all fees and
expenses of counsel to each requesting Purchaser which shall have been invoiced
to the Company on or prior to the Closing Date (including amounts invoiced on
account).
SECTION 3.9 Satisfactory Legal Form. All documents executed or submitted
pursuant hereto by or on behalf of the Company or any Subsidiary shall be
satisfactory in form and substance to each requesting Purchaser; each requesting
Purchaser shall have received all information, and such counterpart originals or
such certified or other copies of all Instruments, as each requesting Purchaser
or its respective counsel may reasonably request; and all legal matters incident
to the transactions contemplated by this Agreement shall be satisfactory to
counsel to each requesting Purchaser.
ARTICLE IV
PAYMENTS, REGISTRATION, ETC.
SECTION 4.1 Place of Payment. Payments of principal and interest
becoming due and payable on the Notes and any dividends or other payments on or
in respect of any other Subject Securities shall be made at the office of
Republic National Bank of New York, 452 Fifth Avenue, 26th Floor, New York, New
York 10018.
SECTION 4.2 Home Office Payment. So long as any Purchaser or its
nominee shall be the holder of any Subject Security, and notwithstanding
anything contained in Section 4.1 or in
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any Subject Security to the contrary, the Company will pay all sums becoming due
for principal of and interest on such Note and all dividends or other payments
on or in respect of any other Subject Security, not later than 12:00 noon, New
York City time, on the date such payment is due, in immediately available funds,
(a) in accordance with the payment instructions set forth below such
Purchaser's signature hereto with instructions to the payee identified
in such instructions to telephone advice of credit in accordance with
such instructions, or
(b) by such other method or at such other address or bank account as
such Purchaser may designate in writing,
without the presentation or surrender of such Note or other Subject Security or
the making of any notation thereon, except that any Note paid or prepaid (or any
other Subject Security redeemed) in full shall be surrendered to the Company at
its principal office for cancellation. Prior to any sale or other disposition of
any Note held by any Purchaser, such Purchaser will, at its election, either
endorse thereon the amount of principal paid thereon and the last date to which
interest has been paid thereon or surrender such Note to the Company in exchange
for a new Note or Notes, as the case may be, pursuant to Section 4.6. The
Company will afford the benefits of this Section to any institutional holder
which is the direct or indirect transferee of any Subject Security purchased by
a Purchaser under this Agreement and which has made the same agreement relating
to such Subject Security as such Purchaser has made in this Section.
SECTION 4.3 Optional Payments. The Company may, at its option, prepay at
any time, without premium or penalty, all or any part (in an integral multiple
of $1,000) of the outstanding principal amount of, or of interest due or to
become due on the next semi-annual payment date under, the Notes; provided,
however, that no such prepayment may be made at any time unless, concurrently
therewith, the Company shall have made payment in full in cash of all interest,
if any, on the Notes which shall, in lieu of having been paid in cash when due,
have been accrued in accordance with clause (b) of Section 9.1 or the proviso to
the first paragraph of the Notes and which shall remain unpaid. Prepayments of
principal of Notes shall be in the amount so prepaid and be accompanied by
payment in full of all interest accrued on such principal amount and not yet
paid. Each prepayment shall be subject, however, to the Company having given
each holder of Notes written notice of such prepayment not more than 10 days and
not less than five days prior to the date fixed for such prepayment, in each
case specifying (x) such date, (y) the aggregate principal amount, if any, of
(and the amount of unpaid interest accrued on such principal amount), or the
amount of unpaid interest on, the Notes to be prepaid on such date and (z) the
principal amount, if any, of (and the amount of unpaid interest accrued on such
principal amount), or the amount of unpaid interest on, each Note held by such
Noteholder to be prepaid on such date. Such notice shall be accompanied by an
officers' certificate certifying that the conditions to such prepayment have
been fulfilled and specifying the particulars of such fulfillment.
SECTION 4.4 Allocation. Each partial prepayment paid or to be prepaid of
principal of the Notes and each prepayment of interest paid or to be prepaid
shall be allocated Ratably (in
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integral multiples of $1,000) among all of the Notes at the time outstanding, as
nearly as practicable, with adjustments, to the extent practicable, to
compensate for any prior prepayments not made exactly in such proportion. In the
case of each voluntary prepayment of principal of or interest on the Notes, the
principal amount to be prepaid, if any, (together with interest on such
principal amount accrued to such date), or the amount of interest to be prepaid,
as the case may be, shall mature and become due and payable on the date fixed
for such prepayment. From and after the date of any such prepayment of
principal, unless the Company shall fail to pay such principal amount when so
due and payable, together with the interest, as aforesaid, interest on such
principal amount shall cease to accrue. Any Note paid or prepaid in full shall
be surrendered to the Company and cancelled and shall not be reissued, and no
Note shall be issued in lieu of any prepaid principal amount of any Note.
SECTION 4.5 Mandatory Redemption of Notes. Upon the earliest to occur of
(a) any Change of Control,
(b) the Company entering into any written or other arrangement which
will give rise to a Change of Control, or
(c) the Company having notice that any other Person has entered into
a written or other arrangement which will give rise to a Change of
Control,
the Company will immediately give written notice of such transaction or event to
each Noteholder, which notice shall describe such transaction or event in
reasonable detail. Immediately upon (and concurrently with) the occurrence of
any Change of Control, the Company will (x) purchase from each Noteholder all of
the outstanding Notes held by it at a purchase price, payable in immediately
available funds, equal to the unpaid principal amount thereof together with all
unpaid interest accrued thereon to the date of such purchase and (y) make
payment in full in immediately available funds of all interest, if any, on the
Notes which shall, in lieu of having been paid in cash when due, have been
accrued in accordance with clause (b) of Section 9.1 or the proviso to the first
paragraph of the Notes and which shall remain unpaid.
SECTION 4.6 Registration, Transfer, etc. The Company will keep at its
principal office a register in which the Company will provide for the
registration of the Notes and their transfer. The Company may treat the Person
in whose name any Note is registered on such register as the owner thereof for
the purpose of receiving payment of the principal of and interest on such Note
and for all other purposes, whether or not such Note shall be overdue, and the
Company shall not be affected by any notice to the contrary from any Person
other than the applicable Noteholder. All references in this Agreement to a
"holder" of any Note shall mean the Person in whose name such Note is at the
time registered on such register.
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SECTION 4.7 Transfer and Exchange. Upon surrender of any Note for
registration of transfer or for exchange to the Company at its principal office,
the Company at its expense will execute and deliver in exchange therefor a new
Note or Notes, as the case may be, of the same class in denominations of at
least $100,000 (except a Note may be issued in a lesser principal amount if the
unpaid principal amount of the surrendered Note is not evenly divisible by, or
is less than, $100,000), as requested by the holder or transferee, which
aggregate the unpaid principal amount of such Note, registered as such holder or
transferee may request, dated so that there will be no loss of interest on such
surrendered Note and otherwise of like tenor.
SECTION 4.8 Replacement. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Note and, in the case of any such loss, theft or destruction of any Note, upon
delivery of an indemnity bond in such reasonable amount as the Company may
determine (or, in the case of any Note or Notes held by any Purchaser or an
institutional holder, of an unsecured indemnity agreement from such Purchaser or
institutional holder reasonably satisfactory to the Company), or, in the case of
any such mutilation, upon the surrender of such Note for cancellation to the
Company at its principal office, the Company at its expense will execute and
deliver, in lieu thereof, a new Note of the same class and of like tenor, dated
so that there will be no loss of interest on (and registered in the name of the
holder of) such lost, stolen, destroyed or mutilated Note. Any Note in lieu of
which any such new Note has been so executed and delivered by the Company shall
be deemed to be not outstanding for any purpose of this Agreement.
SECTION 4.9 Taxes. Except as otherwise provided in this Section, all
payments by the Company of principal of, and interest on, the Notes, and all
other amounts payable hereunder shall be made free and clear of and without
deduction for any present or future income, excise, stamp or franchise taxes and
other taxes, fees, duties, withholdings or other charges of any nature
whatsoever imposed by any taxing authority, excluding, however, franchise taxes
and taxes imposed on or measured by any Noteholder's net income or receipts
(such non-excluded items being called "Taxes"). In the event that any
withholding or deduction from any payment to be made by the Company hereunder is
required in respect of any Taxes pursuant to any Applicable Law, then, the
Company will
(a) pay directly to the relevant authority the full amount required
to be so withheld or deducted;
(b) promptly forward to each affected Noteholder an official receipt
or other documentation satisfactory to such Noteholder evidencing such
payment to such authority; and
(c) except as otherwise provided in this Section, pay to each
affected Noteholder such additional amount or amounts as is necessary to
ensure that the net amount actually received by each Noteholder will
equal the full amount such Noteholder would have received had no such
withholding or deduction been required.
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Moreover, if any Taxes are directly asserted against any Noteholder with respect
to any payment received by such Noteholder hereunder, such Noteholder may pay
such Taxes, and, except as otherwise provided in this Section, the Company will
promptly pay such additional amount (including any penalties, interest or
expenses) as is necessary in order that the net amount received by such
Noteholder after the payment of such Taxes (including any Taxes on such
additional amount) shall equal the amount such Noteholder would have received
had no such Taxes been asserted.
If the Company fails to pay any Taxes when due to the appropriate taxing
authority or fails to remit to any Noteholder the required receipts or other
required documentary evidence, the Company shall indemnify such Noteholder for
any incremental Taxes, interest or penalties that may become payable by
Noteholder as a result of any such failure. For purposes of this Section, a
distribution hereunder by any Noteholder to or for the account of any other
Noteholder shall be deemed a payment by the Company.
Each Noteholder shall provide to the Company on or prior to the due date
of the first payment under the Notes (and any Noteholder which is not a United
States person (as such term is defined in Section 7701(a)(30) of the Code) for
U.S. Federal income tax purposes (a "Non-U.S. Noteholder") that becomes a
Noteholder under this Agreement after the Closing shall, upon the date of such
Noteholder becoming a Noteholder hereunder, provide to the Company) either (i)
(x) two duly completed copies of either (A) Internal Revenue Service Form W-8BEN
(or, if delivered on or before December 31, 1999, Internal Revenue Service Form
1001) or (B) Internal Revenue Service Form W-8ECI (or, if delivered on or before
December 31, 1999, Internal Revenue Service Form 4224), or in either case an
applicable successor form, and (y) for periods prior to January 1, 2000, a duly
completed copy of Internal Revenue Service Form W-8 or W-9 or applicable
successor form; or (ii) in the case of a Non-U.S. Noteholder that is not legally
entitled to deliver either form listed in item(i)(x), (x) a certificate of a
duly authorized officer of such Non-U.S. Noteholder to the effect that such
Non-U.S. Noteholder is not (A) a "bank" within the meaning of Section
881(c)(3)(A) of the Code, (B) a "10 percent shareholder" of the Company with the
meaning of Section 881(c)(3)(B) of the Code or (C) a controlled foreign
corporation receiving interest from a related person within the meaning of
Section 881(c)(3)(C) of the Code and (y) two duly completed copies of Internal
Revenue Service Form W-8 or applicable successor form. To the extent legally
entitled to do so, on or before the date any such form expires or becomes
obsolete or after the occurrence of any event requiring a change in the most
recent form previously delivered by it to the Company, and otherwise from time
to time upon the reasonable written request of the Company after the Closing,
each Noteholder that is a Non-U.S. Noteholder will provide to the Company two
original signed copies of any forms or certificates required pursuant to this
paragraph.
Notwithstanding anything to the contrary contained in this Section, the
Company shall be entitled, to the extent it is required to do so by law, to
deduct or withhold income or similar taxes imposed by the United States (or any
political subdivision or taxing authority thereof or therein) from interest,
fees or other amounts payable hereunder for the account of any Noteholder that
is a Non-U.S. Noteholder and that has not provided to the Company the forms
required to be provided to the Company pursuant to the preceding paragraph, and
the Company
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shall have no obligation to pay any additional amount to a Non-U.S.
Noteholder with respect to such withheld amounts or with respect to Taxes
incurred by such Non-U.S. Noteholder to the extent such withholding would not
have been required or such Taxes would not have been incurred if such Non-U.S.
Noteholder would have provided such forms to the Company in the manner required
by the preceding paragraph.
ARTICLE V
WARRANTIES, ETC.
To induce the Purchasers to enter into this Agreement and to purchase
the Subject Securities hereunder, the Company represents and warrants unto the
Purchasers as follows (and, for all purposes of this Agreement, all of such
representations and warranties shall be understood to be made by the Company on
(and only on) the date of execution and delivery of this Agreement and the
Closing Date; provided, however, that (x) the representations in Section 5.4 and
5.9 relative to any financial, other information or projections delivered from
time to time pursuant to this Agreement or any other Purchase Document shall
also be understood to be made with respect thereto on the date of delivery
thereof:
SECTION 5.1 Organization, Power, Authority, etc. The Company is a
corporation validly organized and existing and in good standing under the laws
of the jurisdiction of its incorporation and has full power and authority and
holds all requisite Approvals to own and hold its property and to conduct its
business substantially as currently conducted by it. The Company has full power
and authority to enter into and perform its obligations under this Agreement,
the Notes, the other Subject Securities, each other Purchase Document to which
it is a party and the Stockholders' Agreement and to issue the Subject
Securities (and any Common Shares issuable upon exercise of any thereof).
SECTION 5.2 Due Authorization. The execution and delivery by the Company
of this Agreement, the Notes, and other Subject Securities, each other Purchase
Document to which it is a party and the Stockholders' Agreement, the performance
by the Company of its obligations hereunder and thereunder, and the issuance of
the Subject Securities (and the issuance of other Common Shares issuable upon
exercise of any thereof) by the Company have been duly authorized by all
necessary corporate action, do not and will not require any Approval, do not and
will not conflict with, result in any violation of, or constitute any default
under, any provision of any Organizational Document, any Applicable Law or
material Contractual Undertaking and will not result in or require the creation
or imposition of any lien on any of its properties pursuant to the provisions of
any material Contractual Undertaking.
SECTION 5.3 Validity, etc. This Agreement constitutes, and the Notes,
and other Subject Securities, each other Purchase Document to which the Company
is a party and the Stockholders' Agreement will on the due execution and
delivery thereof constitute the legal, valid and binding obligations of the
Company enforceable in accordance with their respective terms, subject, however,
as to enforcement only, to bankruptcy, insolvency, reorganization,
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moratorium or similar laws at the time in effect affecting the enforceability of
the rights of creditors generally.
SECTION 5.4 Financial Information. All balance sheets, all statements of
operations, of shareholders' equity and of cash flow and all other financial
information of Holdings and its Subsidiaries and Old AVI and its Subsidiaries
which have been furnished by or on behalf of the Company to any requesting
Purchaser for the purposes of or in connection with this Agreement or any
transaction contemplated hereby, including
(a) the consolidated balance sheets at June 30, 1998 and June 30,
1997, and the related consolidated statements of operations, of
shareholders' equity and of cash flow, for each of the Fiscal Years then
ended, of Holdings and its Subsidiaries certified by Moss Adams LLP, and
(a) the pro forma consolidated balance sheet at June 30, 1999 (and
after giving effect to this Agreement or any transaction contemplated
hereby, assuming it had occurred on such date) of Surviving AVI and its
Subsidiaries (collectively, the "Pro Forma Balance Sheet") contained in
the Financing Memorandum,
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved (except as disclosed
therein) and present fairly (subject, however, in the case of the Pro Forma
Balance Sheet, to the assumptions specified therein, including as to the
occurrence of the transactions contemplated under this Agreement at an earlier
date) the consolidated financial condition of the corporations covered thereby
as at the dates thereof and the results of their operations for the periods then
ended. All financial information as to the Company and Subsidiaries which shall
hereafter from time to time be furnished by or on behalf of the Company to any
requesting Noteholder for the purposes of or in connection with this Agreement
or any transaction contemplated hereby will be prepared in accordance with GAAP
consistently applied throughout the periods involved (except as disclosed
therein) and will present fairly (subject, however, in the case of pro forma
financial information, to the assumptions specified therein) the consolidated
financial condition of the corporations covered thereby as at the dates thereof
and the results of their operations for the periods then ended.
SECTION 5.5 Capitalization. On the Closing Date, the authorized Capital
Stock of Surviving AVI will be 1,000,000 shares, consisting of Common Shares, of
which 212,500 Common Shares will be issued and outstanding in conformity with
Item 3.3 ("Stockholders") of the Disclosure Schedule. Of the 787,500 authorized
Common Shares which will be unissued on the Closing Date,
(a) 637,500 Common Shares will be reserved for issuance upon
exercise of the Warrants; and
(b) 150,000 Common Shares will be reserved for issuance pursuant
to the Management Options.
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The Common Shares to be issued upon the exercise of the Warrants have been duly
authorized for issuance and, when delivered a Warrant therefor as provided
herein, will be validly issued, fully paid and non-assessable and will be free
and clear of all preemptive rights and liens except as otherwise provided herein
or in the Stockholders' Agreement and will be entitled to the respective voting
powers, designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions thereof as are
set forth with respect thereto in the Amended Certificate of Incorporation. The
Company does not have outstanding any Capital Stock or securities convertible
into or exchangeable for any shares of its Capital Stock, nor does it have
outstanding any rights or options to subscribe for or to purchase any Capital
Stock or securities convertible into or exchangeable for any of its shares of
Capital Stock, except as described in this Section. Except as disclosed in Item
5.5 ("Repurchase, etc. Agreements") of the Disclosure Schedule, the Company is
not subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire any shares of its Capital Stock. Except for the
Stockholders' Agreement, none of the Company or any Subsidiary has entered into
an agreement to register any of its securities under the Securities Act.
SECTION 5.6. Margin Regulations. The Company is not engaged principally,
or as one of its important activities, in the business of extending credit for
the purpose of purchasing or carrying margin stock, and less than 25% of the
assets of the Company, individually and on a consolidated basis with all
Subsidiaries, consists of margin stock. Terms for which meanings are provided in
F.R.S. Board Regulation U or any regulations substituted therefor, as from time
to time in effect, are used in this Section with such meanings.
SECTION 5.7. Government Regulation. Neither the Company nor any
Subsidiary is (or shall upon the consummation of the transactions contemplated
under this Agreement become) (x) an "investment company" within the meaning of
the Investment Company Act of 1940, as amended, or a "holding company," or a
"subsidiary company" of a "holding company," or an "affiliate" of a "holding
company" or of a "subsidiary company" of a "holding company," within the meaning
of the Public Utility Holding Company Act of 1935, as amended, or (y) subject to
regulation under the Federal Power Act, the Interstate Commerce Act, the
Commodity Exchange Act or any Applicable Law limiting its ability to incur or
assume indebtedness for borrowed money.
SECTION 5.8. Offering of Subject Securities. Neither the Company, nor
any Jordan Party (or any Person employed to act on behalf of any thereof in
connection with the offer and sale of the Subject Securities) has directly or
indirectly offered the Notes, the Common Shares or any part thereof or any
similar securities for sale to, or solicited any offer to buy any of the same
from, or otherwise approached or negotiated in respect thereof with, anyone
other than the Persons identified in Item 5.5 ("Stockholders") of the Disclosure
Schedule. Neither the Company nor any Jordan Party (or anyone acting on behalf
of any of them) has taken or will take any action which would subject the
issuance or sale of the Notes, Common Shares or Preferred Shares to the
provisions of Section 5 of the Securities Act or to the registration or
qualification requirements of any securities or blue sky law of any applicable
jurisdiction.
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SECTION 5.9. Accuracy of Information. All factual information (and, for
the sake of clarity, not including any projections) heretofore or
contemporaneously furnished by or on behalf of the Company in writing to each
requesting Purchaser for purposes of or in connection with the transactions
contemplated under this Agreement, including the financing memorandum, dated
July 1999 (the "Financing Memorandum"), prepared by TJC and transmitted under
JZAI's letter, dated July 13, 1999, to JZEP and under the Exchange Letter to the
other Purchasers is collectively, and all other such factual information
hereafter furnished by or on behalf of the Company or any Subsidiary to any
requesting Noteholder will be individually true and accurate in every material
respect taken as a whole on the date as of which such information is dated or
certified, and such information is not, or shall not be, as the case may be,
incomplete by omitting to state any material fact necessary to make such
information not misleading. There is, to the Company's knowledge, no fact that
the Company has not disclosed to the Purchasers in writing that would,
individually or in the aggregate, reasonably be expected to have a Materially
Adverse Effect. All projections (including the Projections) heretofore,
contemporaneously and hereafter furnished by or on behalf of the Company or any
Subsidiary in writing to any requesting Purchaser or requesting Noteholder for
purposes of this Agreement or any transaction contemplated hereby are and will
be based on good faith estimates and assumptions which the Company believes are
fair and reasonable in light of the historical financial performance of Old AVI
and current and reasonably foreseeable business conditions, and, to the
Company's knowledge, there are or will be no facts or circumstances existing at
the time such projections are furnished which would, individually or in the
aggregate, reasonably be expected to cause a material change in such
projections, it being recognized, however, by each requesting Purchaser and
Noteholder that projections as to future events are not to be viewed as fact and
that actual results during the period or periods covered by any such projections
may differ from the projected results and that the differences may be material.
ARTICLE VI
COVENANTS
SECTION 6.1. Certain Affirmative Covenants. The Company agrees with
(a) each Noteholder that, until all Obligations have been paid and
performed in full, the Company will perform all of the covenants
contained in Section 6.1; and
(b) requesting Noteholder that, for so long as it shall hold any
Subject Security (other than a Note), the Company will perform for the
benefit of such requesting Noteholder the covenants contained in clauses
(c) and (e) of Section 6.1.1 and in Section 6.1.4, in each case as if it
were the holder of a Note.
SECTION 6.1.1. Financial Information, etc. The Company will furnish, or
will cause to be furnished, to each requesting Noteholder copies of the
following financial statements, reports and information:
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(a) promptly when available and in any event when furnished pursuant
to the Senior Credit Agreement, copies of all financial statements,
certificates, audit and other reports, filings, projections, management
letters and other information furnished pursuant to Section 7.1(K)(i),
7.1(K)(ii), 7.1(K)(iv) and 7.1(K)(vi) thereof (and the Company hereby
agrees that (x) each requesting Noteholder is hereby entitled to rely on
such information as if it were required to have been furnished directly
pursuant to this Agreement and (y) all certifications and
representations made therein shall be deemed to be made directly to each
requesting Noteholder as if such information was expressly addressed to
them);
(b) promptly when available and in any event within 90 days after
the close of each Fiscal Year (and only if, and to the extent, financial
information is not being routinely furnished pursuant to clause (a) in
accordance with the Senior Credit Agreement to each requesting
Noteholder), a consolidated balance sheet as of the end of such Fiscal
Year, and consolidated statements of operations, of shareholders' equity
and of cash flow for such Fiscal Year, of the Company and Subsidiaries,
prepared, commencing with the 2001 Fiscal Year, on a comparative basis
with the preceding Fiscal Year and certified without qualification by
Moss Adams LLP (or other independent public accountants of recognized
national standing selected by the Company;
(c) promptly when available and in any event within 45 days after
the close of each of the first three Fiscal Quarters of each Fiscal Year
(and only if, and to the extent, financial information is not being
routinely furnished pursuant to clause (a) in accordance with the Senior
Credit Agreement to each requesting Noteholder), consolidated balance
sheets at the close of such Fiscal Quarter, and the related consolidated
statements of operations, of shareholders' equity and of cash flow for
such Fiscal Quarter and for the period commencing at the close of the
previous Fiscal Year and ending with the close of such Fiscal Quarter,
of the Company and Subsidiaries (with, commencing with the 2001 FQ 1,
comparative information at the close of and for the corresponding Fiscal
Quarter of the prior Fiscal Year and for the corresponding portion of
such prior Fiscal Year), certified by the chief accounting, executive or
financial Authorized Officer; and
(d) such other information with respect to the financial condition,
business, property, assets, revenues and operations of the Company or
any Subsidiary as or any requesting Noteholder may from time to time
reasonably request.
SECTION 6.1.2. Notice of Default, Litigation, etc. The Company will
furnish, or will cause to be furnished, to each requesting Noteholder prompt
notice (with a description in reasonable detail) of:
(a) the occurrence, to the Company's knowledge, of any Default which
might likely result in a Materially Adverse Effect; and
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(b) each amendment, waiver or other modification to the Senior
Credit Agreement (and each approval, consent, notice, communication or
other writing delivered, received or exchanged pursuant to Section
7.1(L) or 9 of the Senior Credit Agreement) and, in each case, enclosing
therewith a copy of such modification or approval, etc.).
SECTION 6.1.3. Use of Proceeds. The proceeds of the Notes and other
Subject Securities, together with other funds available to the Company, shall be
applied by the Company to fund the Recapitalization and to pay Transaction
Costs. No portion of the proceeds of any Subject Securities shall be used by the
Company in any manner that might cause the issuance and sale of the Subject
Securities or the application of such proceeds to violate F.R.S. Board
Regulation T, U or X or any other regulation of such Board or to violate the
Exchange Act, in each case as in effect on the date or dates of such issuance
and sale and such use of proceeds.
SECTION 6.1.4. Books and Records. The Company will, and will cause each
Subsidiary to, keep books and records reflecting all of its business affairs and
transactions in accordance with GAAP and permit each Noteholder owning more than
25% of the then outstanding principal amount of the Notes or any of their
respective representatives, at reasonable times and intervals and on reasonable
notice, to visit all of its offices, to discuss its financial matters with its
officers and independent public accountant (and hereby authorizes such
independent public accountant to discuss its financial matters with such
Noteholder or its representatives whether or not any representative of the
Company is present) and to examine (and, at the expense of the Company,
photocopy extracts from) any of its books or other corporate records. The
Company shall pay any fees of such independent public accountant incurred in
connection with any such Noteholder's exercise of its rights pursuant to this
Section.
SECTION 6.2. Certain Negative Covenants. The Company agrees with
(a) each Noteholder that, until all Obligations have been paid and
performed in full, the Company will perform all of the covenants
contained in Section 6.2; and
(b) JZEP that, for so long as it shall hold any Subject Security
(other than a Note), the Company will, for the benefit of JZEP, comply
with the limitations contained in items (v) through (z) of the proviso
to Section 6.2.2 as if it were the holder of a Note.
SECTION 6.2.1. Business Activities. The Company will not, and will not
permit any Subsidiary to, engage in any business activity, excluding, however,
its consummation of the transactions contemplated under this Agreement, its
performance from time to time of its obligations under the Transaction Documents
and its engaging in activities in which Old AVI is engaged on the Closing Date,
and, in each case, activities incidental or related thereto.
SECTION 6.2.2. Restricted Payments, etc. On or after the Closing Date,
the Company will not, and will not permit any Subsidiary to, declare, pay, make,
apply any of its funds, property or assets to making or making any deposit to
fund any Restricted Payment; provided, however, that the Company may pay the
Jordan Parties or their designees (v) closing fees on the
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Closing Date in an aggregate amount not to exceed $3,000,000, (w) consulting
fees on a quarterly basis at an aggregate annual rate not to exceed 3% of net
income before interest, depreciation, taxes, amortization and other non-cash
charges for such Fiscal Year, (x) directors fees in an aggregate amount not to
exceed $90,000 in any Fiscal Year, (y) disposition fees in an aggregate amount
not to exceed 2% of either (1) the total sale proceeds on a sale of the equity
capital of the Company or of all or substantially all of the assets of the
Company and Subsidiaries or (2) the total market capitalization of the Company
in connection with the first sale of common equity by the Company pursuant to a
registration statement under the Securities Act and (z) without duplication of
any of the foregoing, investment banking fees not to exceed 2% of the value to
the Company of other transactional events, subject, however, in the case of any
payment of the nature referred to in item (w) through (z), to such payment then
being permitted to be made as a Permitted Junior Payment.
SECTION 6.2.3. Consolidation, Merger, etc. The Company will not, and
will not permit any Subsidiary to, (x) liquidate or dissolve, consolidate with,
or merge into or with, any other corporation or (y) sell, transfer, convey or
otherwise dispose of all or any substantial part of its assets; provided,
however, that any Subsidiary may liquidate or dissolve voluntarily into, and may
merge with and into, any other Subsidiary.
ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.1. Events of Default. The term "Event of Default" means any
of the following events:
SECTION 7.1.1. Non-Payment of Obligations. The Company shall default in
the payment or prepayment when due of any principal of any Note, or the Company
shall default (and such default shall continue unremedied for a period of 30
days) in the payment when due of interest on any Note or any other Obligation;
provided, however, that, for purposes of this Section, interest accrued on any
Note and due and payable on any date shall be deemed to have been paid on such
date if the Company, pursuant to a resolution duly adopted by or on behalf of
its Board of Directors, shall, if and to the extent permitted by clause (b) of
Section 9.1 or the proviso to the first paragraph of such Note, have accrued as
a liability due and payable to the holder of such Note the full amount of such
interest accrued thereon.
SECTION 7.1.2. Default on Other Indebtedness. Any default shall occur
under the terms applicable to any indebtedness (excluding, however, any
Obligation) outstanding in a principal amount exceeding $5,000,000 of the
Company or any Subsidiary, in each case representing any borrowing or financing
or arising under any other material agreement, and such default shall (x)
consist of the failure to make any payment of principal or interest on, or any
redemption (or to make any required offer to redeem) of, such indebtedness when
due (subject, however, to any applicable grace period) in accordance with the
terms thereof, and such failure, if it shall have occurred under the Senior
Credit Agreement, shall continue unremedied and
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unwaived for a period of 180 days or (y) have resulted in any or all of such
indebtedness having become due and payable in accordance with its terms prior to
its stated maturity, whether by declaration or otherwise.
SECTION 7.1.3. Bankruptcy, Insolvency, etc. The Company or any
Subsidiary shall
(a) become insolvent or generally fail to pay, or admit in writing
its inability to pay, debts as they become due;
(a) apply for, consent to or acquiesce in, the appointment of a
trustee, receiver, sequestrator or other custodian for the Company or
any Subsidiary or any property of any thereof or make a general
assignment for the benefit of creditors;
(c) in the absence of such application, consent or acquiescence,
permit or suffer to exist the appointment of a trustee, receiver,
sequestrator or other custodian for the Company or any Subsidiary or for
a substantial part of the property of any thereof, and such trustee,
receiver, sequestrator or other custodian shall not be discharged within
60 days;
(d) permit or suffer to exist the commencement of any bankruptcy,
reorganization, debt arrangement or other case or proceeding under any
bankruptcy or insolvency law, or any dissolution, winding up or
liquidation proceeding, in respect of the Company or any Subsidiary,
and, if such case or proceeding is not commenced by the Company or such
Subsidiary, such case or proceeding shall be consented to or acquiesced
in by the Company or such Subsidiary or shall result in the entry of an
order for relief or shall remain for 60 days undismissed; or
(e) take any corporate action authorizing, or in furtherance of, any
of the foregoing.
SECTION 7.1.4. Judgments. A final judgment, to the extent not fully
covered by insurance, shall be rendered against the Company or any Subsidiary
and such judgment shall remain in force, undischarged, unsatisfied and unstayed
for more than 30 days, whether or not consecutive, and such judgment, together
with all other such outstanding final judgments against the Company and
Subsidiaries, exceeds (to the extent of all such uninsured portions) an
aggregate of $5,000,000.
SECTION 7.2. Action if Bankruptcy. If any Event of Default described in
clauses (a) through (d) of Section 7.1.3 shall occur, the outstanding principal
amount of all outstanding Notes and all other Obligations shall automatically be
and become immediately due and payable, without notice or demand.
SECTION 7.3. Action if Other Event of Default. If any Event of Default
(excluding, however, any Event of Default described in clauses (a) through (d)
of Section 7.1.3) shall occur for any reason, whether voluntary or involuntary,
and be continuing, the Required Noteholders
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may, upon notice or demand, declare all or any portion of the outstanding
principal amount of the Notes to be due and payable and any or all other
Obligations to be due and payable, whereupon the full unpaid amount of such
Notes and any and all other Obligations which shall be so declared due and
payable shall, subject, however, if any Senior Indebtedness is outstanding, to
the provisions of Sections 8.3 and 8.11, be and become immediately due and
payable, without further notice, demand or presentment.
SECTION 7.4. Suits for Enforcement. If any Event of Default shall have
occurred and be continuing, the Required Noteholders may proceed, subject,
however, if any Senior Indebtedness is outstanding, to the provisions of
Sections 8.3 and 8.11, to protect and enforce the rights of the holders of such
Notes, either by suit in equity or by action at law, or both, whether for the
specific performance of any covenant or agreement contained in this Agreement or
in aid of the exercise of any power granted in this Agreement, and may proceed
to enforce the payment of all sums due upon such Notes, and such further amounts
as shall be sufficient to cover the costs and expenses of collection (including
reasonable counsel fees and disbursements), or to enforce any other legal or
equitable right of the holder of such Notes.
SECTION 7.5. Remedies Cumulative. No remedy conferred in this Agreement
or in the other Purchase Documents upon the Noteholders is intended to be
exclusive of any other remedy and each and every such remedy shall be cumulative
and shall be in addition to every other remedy given hereunder or now or
hereafter existing at law or in equity or otherwise.
ARTICLE VIII
SUBORDINATION
Notwithstanding any other provision of this Agreement, the Company
covenants and each Noteholder, by its acceptance of a Note, likewise covenants
and agrees for the benefit of the holders of Senior Indebtedness, that, to the
extent and in the manner hereinafter set forth in this Article, all Obligations
of the Company are hereby expressly made subordinate and subject in right of
payment to the prior payment in full in cash of all Senior Indebtedness (and the
termination of all commitments of the Senior Lenders under the Senior Credit
Agreement); provided, however, that the Notes, the indebtedness represented
thereby and the payment of the principal of and interest on the Notes and all
other Obligations in all respects shall rank equally with or prior to all
existing and future unsecured indebtedness of the Company that is not Senior
Indebtedness.
SECTION 8.1. Payment Over Upon Dissolution, etc. In the event of (x) any
insolvency or bankruptcy case or proceeding, or any receivership, liquidation,
reorganization or other similar case or proceeding in connection therewith,
relative to the Company or to its creditors, as such, or to its assets, (y) any
liquidation, dissolution or other winding up of the Company, whether voluntary
or involuntary and whether or not involving insolvency or bankruptcy, or (z) any
assignment for the benefit of creditors or any other marshalling of assets and
liabilities of the Company, then, and in any such event, the holders of Senior
Indebtedness shall be entitled to
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receive payment in full in cash of all amounts due on or in respect of all
Senior Indebtedness, or provision shall be made for such payment, before any
Noteholder is entitled to receive any payment or distribution (excluding,
however, Reorganization Securities) on account of the Obligations, and, to that
end, the holders of Senior Indebtedness shall be entitled to receive, for
application to repayment thereof, any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, by
off-set or otherwise, to which the Noteholders would be entitled but for the
provisions of this Article (excluding, however, Reorganization Securities),
including any such payment or distribution which may be payable or deliverable
by reason of the payment of any other indebtedness of the Company being
subordinated to the payment of the Notes.
In the event that, notwithstanding the foregoing provisions of this
Section, the holder of any Note shall have received any payment or distribution
(excluding, however, Reorganization Securities) of assets of the Company of any
kind or character, whether in cash, property or securities, including any such
payment or distribution which may be payable or deliverable by reason of the
payment of any other indebtedness of the Company being subordinated to the
payment of the Notes, before all Senior Indebtedness is paid in full in cash or
payment thereof provided therefor, then, and in such event, such payment or
distribution shall be held in trust for and paid over or delivered forthwith to
the Senior Agent or to the trustee in bankruptcy, receiver, liquidating trustee,
custodian, assignee, agent or other Person making payment or distribution of
assets of the Company for application to the payment of all Senior Indebtedness
remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full
in cash, after giving effect to any concurrent payment or distribution to or for
the holders of Senior Indebtedness.
SECTION 8.2. Payment Block Upon Senior Default. In the event
(a) of the occurrence and continuation of
(i) any default in the payment of principal of or interest on
any Senior Indebtedness beyond any applicable grace period with
respect thereto, or
(ii) any event of default with respect to Senior Indebtedness
which shall have resulted in all of such Senior Indebtedness
becoming or being declared due and payable prior to the date on
which it would otherwise have become due and payable,
(any such default or event of default, being a "Senior Payment
Default"), or
(b) that any Event of Default of the nature referred to in Section
9.1 of the Senior Credit Agreement (other than a Senior Payment Default)
with respect to any Senior Indebtedness shall have occurred and be
continuing (or would occur after giving effect to the payment of any
Obligation then proposed to be made on a pro forma basis based on the
most recent financial statements then required to have been furnished to
the Senior Agent pursuant to the Senior Credit Agreement) permitting the
holders of such Senior Indebtedness (or a trustee on behalf of the
holders thereof) to declare such Senior
-33-
<PAGE> 39
Indebtedness due and payable prior to the date on which it would have
otherwise have become due and payable (a "Senior Performance Default"),
then, no payment shall be made by the Company, or be demanded or received by any
Noteholder, on account of any Obligation or on account of the purchase or
redemption or other acquisition of the Notes,
(c) in case of any Senior Payment Default, from the date on which
the Company or the Noteholders shall have received written notice (a
"Senior Payment Bar Notice") from the Senior Agent specifically pursuant
to this clause of such Senior Payment Default and continuing until (x)
such Senior Payment Default shall have been cured or waived or shall
have ceased to exist or (y) such acceleration shall have been rescinded
or annulled, or
(d) in case of any Senior Performance Default, from the date the
Company or the Noteholders shall have received a Senior Payment Bar
Notice from the Senior Agent specifically pursuant to this clause of
such Senior Performance Default and continuing until the earlier of (x)
180 days after such date and (y) the date, if any, on which the Senior
Indebtedness to which such Senior Performance Default relates is
discharged or such Senior Performance Default is waived by the holders
of such Senior Indebtedness or otherwise cured.
In the event that, notwithstanding the foregoing, the Company shall make any
payment of any Obligation to any Noteholder prohibited by the foregoing
provisions of this Section, then, and in such event, such payment shall be held
in trust for the benefit of the Senior Lenders and paid over and delivered
forthwith to the Senior Agent for the account of the holders of Senior
Indebtedness. The provisions of this Section shall not apply to any payment with
respect to which Section 8.1 would be applicable.
SECTION 8.3. Payment Otherwise Permitted, etc. Nothing contained in this
Article or elsewhere in this Agreement or in the Notes shall, at any time,
(a) prevent the Company from making payments at any time of
principal of or interest on the Notes or of any other Obligation, except
during the pendency (x) of any case, proceeding, dissolution,
liquidation or other winding up, assignment for the benefit of creditors
or other marshalling of assets and liabilities of the Company or other
circumstance referred to in Section 8.1 or (y) any condition described
in Section 8.2; or
(b) impair the terms of Section 7.2 or 7.3 pursuant to which the
Notes may become due and payable prior to their stated maturity;
provided, however, that any declaration made pursuant to Section 7.3 by
the Required Noteholders shall become effective only upon the first to
occur of (x) the 180th day after notice thereof to the Senior Agent
pursuant to Section 8.11 (unless, on or prior to such day, the Company
shall have cured all Events of Default and have given the Noteholders
notice of such cure) and (y) the acceleration of any Senior
Indebtedness.
-34-
<PAGE> 40
SECTION 8.4. Subrogation to Rights of Holders of Senior Indebtedness.
Subject to the payment in full in cash of all Senior Indebtedness (and the
termination of all commitments of the Senior Lenders under the Senior Credit
Agreement), each Noteholder shall, to the extent of all payments or
distributions made to the holders of Senior Indebtedness pursuant to this
Article which would otherwise be payable in respect of Obligations, be
subrogated to the rights of the holders of Senior Indebtedness to receive
payments and distributions of cash, property and securities applicable to the
Senior Indebtedness until the principal of and interest on the Notes and all
other Obligations shall be irrevocably paid in full in cash. For purposes of
such subrogation, no payments or distributions to the holders of Senior
Indebtedness of any cash, property or securities to which any Noteholder would
be entitled except for the provisions of this Article, and no payments over
pursuant to the provisions of this Article to the holders of Senior Indebtedness
by the Noteholders, shall, as among the Company, its creditors other than
holders of Senior Indebtedness, and the Noteholders, be deemed to be a payment
or distribution by the Company to or on account of the Senior Indebtedness.
SECTION 8.5. Provisions Solely to Define Relative Rights. The provisions
of this Article are intended solely for the purpose of defining the relative
rights of the Noteholders on the one hand and the holders of Senior Indebtedness
on the other hand. Nothing contained in this Article or elsewhere in this
Agreement or in the Notes is intended to or shall (x) impair, as among the
Company, its creditors other than holders of Senior Indebtedness and the
Noteholders, the obligation of the Company, which is absolute and unconditional,
to pay to the Noteholders the principal of and interest on the Notes and any and
all other Obligations as and when the same shall become due and payable in
accordance with their terms or (y) affect the relative rights against the
Company or any Noteholder and creditors of the Company other than the holders of
Senior Indebtedness.
SECTION 8.6. Effect of Failure to Pay. The fact that any failure to make
any payment on account of principal of or interest on any Note or of any other
Obligation occurs by reason of the operation of any provision of this Article
shall not be construed as preventing the occurrence of an Event of Default under
this Agreement.
SECTION 8.7. No Waiver of Subordination Provisions. No right of any
present or future holder of any Senior Indebtedness to enforce subordination as
herein provided shall at any time in any way be prejudiced or impaired by any
act or failure to act on the part of the Company or by any act or failure to
act, in good faith, by any such holder, or by any non-compliance by the Company
with the terms, provisions and covenants of this Agreement, regardless of any
knowledge thereof any such holder may have or be otherwise charged with. Without
in any way limiting the generality of the foregoing, the holders of Senior
Indebtedness may, at any time and from time to time, without the consent of or
notice to any Noteholder, without incurring responsibility to any Noteholder and
without impairing or releasing the subordination provided in this Article or the
obligations hereunder of the Noteholders to the holders of Senior Indebtedness,
do any one or more of the following:
(a) rescind, amend, waive, supplement or otherwise modify in any
manner any Senior Loan Document;
-35-
<PAGE> 41
(b) exercise or refrain from exercising its rights as to, foreclose
upon, seize, sell, exchange, release or otherwise deal with any property
pledged, mortgaged or otherwise securing Senior Indebtedness;
(c) release any Person liable in any manner for the collection of
Senior Indebtedness; and
(d) exercise or refrain from exercising any rights, remedies, powers
or privileges against the Company and any other Person, whether under
the Senior Loan Documents, Applicable Law or otherwise, including any
waiver, consent, extension, indulgence or other action or inaction in
respect of any thereof.
SECTION 8.8. Notice to Noteholders. The Company shall give prompt
written notice to holders of all Notes of any fact known to the Company which
would prohibit the making of any payment to the Noteholders in respect of the
Notes. Notwithstanding the provisions of this Article or any other provision of
this Agreement, no Noteholder (x) shall be charged with knowledge of the
existence of any facts which would prohibit the making of any payment to the
Noteholders in respect of the Notes, unless and until the Noteholders shall have
received a Senior Payment Bar Notice pursuant to Section 8.2 or other written
notice thereof from the Company or a holder of Senior Indebtedness or from any
trustee therefor of any proceeding referred to in Section 8.1 (and, prior to the
receipt by the Noteholders of any Senior Payment Bar Notice or other such
written notice, the Noteholders shall be entitled in all respects to assume that
no such facts exist) and (y) shall be entitled to receive and retain all
payments made by or on behalf of the Company prior to the receipt by the
Noteholders under this Agreement of any such written notice. Each notice
delivered pursuant to this Article to the Company by a holder of Senior
Indebtedness shall be deemed conclusively to have been given to each Noteholder
upon (and only upon) its being forwarded by the Company to such Noteholder.
SECTION 8.9. Proving, etc. Claims. If the Noteholders have not filed,
proved or voted, as the case may be, in any proceeding of the nature referred to
in Section 8.1, the Senior Agent, upon 15 days prior written notice to the
Noteholders (and unless the Noteholders do file, prove or vote, as the case may
be during such period), may so file, prove or vote, as the case may be, in the
name of the Noteholders or otherwise, with respect to any and all claims of the
Noteholders relating to the Obligations of the Company.
SECTION 8.10. Reliance on Judicial Order or Certificate of Liquidating
Agent. Upon any payment or distribution of assets of the Company referred to in
this Article, the Noteholders shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such insolvency,
bankruptcy, receivership, liquidation, reorganization, dissolution, winding up
or similar case or proceeding is pending and giving effect (and stating in such
order or decree that effect has been given) to this Article, or a certificate so
stating of the trustee in bankruptcy, receiver, liquidating trustee, custodian,
assignee for the benefit of creditors, agent or other Person making such payment
or distribution, delivered to the Noteholders, for the purpose of ascertaining
the Persons entitled to participate in such payment or distribution, the holders
of Senior Indebtedness and other indebtedness of the Company, the amount thereof
or payable
-36-
<PAGE> 42
thereon, the amount or amounts paid or distributed thereon and all
other facts pertinent thereto or to this Article.
SECTION 8.11. Notice to Senior Agent. The Noteholders will give notice
to the Senior Agent of any declaration made pursuant to Section 7.3, and no such
declaration shall become effective until the first to occur, subject, however,
to Section 8.3, of (x) the acceleration of any Senior Indebtedness and (y) five
days after delivery of such notice to the Senior Agent.
SECTION 8.12. Amendment of Subordination, etc. Provisions. The
subordination, postponement, standstill and other provisions contained in this
Article are for the benefit of the holders of Senior Indebtedness and may not be
rescinded, cancelled, amended or modified in any way without the prior written
consent thereto of the Senior Agent.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1. Waivers, Amendments, etc. The provisions of this Agreement
and of each Purchase Document may from time to time be amended, waived or
otherwise modified, if such amendment, waiver or modification is in writing and
consented to by the Company and the Required Noteholders; provided, however,
that no such amendment, waiver or other modification:
(a) which would modify any requirement hereunder that any particular
action be taken by each Noteholder or by the Required Noteholders shall
be effective unless consented to by each Noteholder;
(b) which would modify this Section or change the definition of
"Required Noteholders" or which would extend the due date for, or reduce
the amount of, any payment or prepayment of principal of or interest on
any Note (or reduce the rate of interest on any Note) shall be made
without the consent of each Noteholder; provided, however, that, in the
case of any non-payment of interest when due on the Notes which is not
permitted to be accrued in accordance with the proviso to the first
paragraph of the Notes by reason of the two accruals permitted thereby
having already occurred, such non-payment may instead be permitted to be
accrued pursuant to this clause with the consent of the holders of 75%
of the aggregate outstanding principal amount of all Notes and otherwise
in accordance with the terms of such proviso;
(c) which would modify clause (b) of Section 6.2 (or any of the
limitations referred to therein) shall be made without the consent of
JZEP; or
-37-
<PAGE> 43
(d) which would amend the subordination, postponement, standstill
and other provisions of Article VIII shall be effective unless made in
accordance with Section 8.12.
No failure or delay on the part of any Noteholder in exercising any power or
right under this Agreement or any other Purchase Document shall operate as a
waiver thereof, nor shall any single or partial exercise of any such power or
right preclude any other or further exercise thereof or the exercise of any
other power or right. No notice to or demand on the Company in any case shall
entitle it to any notice or demand in similar or other circumstances. No waiver
or approval by any Noteholder under this Agreement or any other Purchase
Document shall, except as may be otherwise stated in such waiver or approval, be
applicable to subsequent transactions. No waiver or approval hereunder shall
require any similar or dissimilar waiver or approval thereafter to be granted
hereunder.
SECTION 9.2. Notices. All notices and other communications provided to
any party hereto under this Agreement or any other Purchase Document shall be in
writing and addressed or delivered to it at its address set forth below its
signature hereto or at such other address as may be designated by such party in
a notice to the other parties. Any notice, if sent by mail or courier and
properly addressed and prepaid, shall be deemed given when received; any notice,
if transmitted by facsimile, shall be deemed given when transmitted and
electronically confirmed.
SECTION 9.3. Costs and Expenses. The Company agrees to pay all expenses
of each requesting Purchaser(including reasonable fees and expenses of counsel)
for the negotiation, preparation, execution and delivery of this Agreement,
including Schedules and Exhibits hereto, each other Purchase Document, any
Subject Security and the Stockholders' Agreement and any amendments, waivers,
consents, supplements or other modifications to any thereof, as may from time to
time hereafter be required whether or not the transactions contemplated under
this Agreement are consummated, and to pay all expenses of such requesting
Purchaser (including reasonable fees and expenses of counsel to such requesting
Purchaser) incurred from time to time after the Closing Date in connection with
the administration hereof and thereof, the consideration of legal questions
relevant hereto and thereto or to the enforcement or preservation of rights as
to, or restructuring or "work-out" of, any Obligations or the rights and
preferences of any Subject Security.
SECTION 9.4. Indemnification. In consideration of the execution and
delivery of this Agreement by each Purchaser, the Company hereby indemnifies,
exonerates and holds such Purchaser and its officers, directors, employees,
trustees and agents (the "Indemnified Parties") free and harmless from and
against any and all actions, causes of action, suits, losses, costs, liabilities
and damages and expenses actually incurred in connection therewith (irrespective
of whether such Indemnified Party is a party to the action for which
indemnification hereunder is sought), including reasonable attorneys' fees and
disbursements (the "Indemnified Liabilities"), incurred by the Indemnified
Parties or any of them as a result of, or arising out of, or relating to
(a) any transaction financed or to be financed in whole or in
part, directly or indirectly, with the proceeds of any Note,
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<PAGE> 44
(b) the entering into and performance of this Agreement and any
other Purchase Document by any of the Indemnified Parties (including any
action brought by or on behalf of the Company as the result of any
determination by the required Purchasers pursuant to Article III to not
purchase the Subject Securities), or
(c) any investigation, litigation or proceeding related to the
transactions contemplated under this Agreement,
excluding, however, any such Indemnified Liabilities arising for the account of
a particular Indemnified Party by reason of the relevant Indemnified Party's
gross negligence or wilful misconduct. If, and to the extent that, the foregoing
undertaking may be unenforceable for any reason, the Company hereby agrees to
make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under Applicable Law.
SECTION 9.5. Survival. The obligations of the Company under clause (b)
of Section 6.1 and clause (b) of Section 6.2 shall survive the payment in full
of all Obligations and the termination of any other provisions of this Agreement
or any other Purchase Document and shall continue for the benefit of JZEP for so
long as it shall hold the relevant Subject Securities. The obligations of the
Company under Section 9.4 shall remain in full force and effect, regardless of
any investigation made by or on behalf of any Indemnified Party, and the
obligations of the Company under Sections 9.3 and 9.4 shall survive the payment
or prepayment of the Subject Securities, at maturity, upon redemption or
otherwise, any transfer of the Subject Securities by each requesting Purchaser,
and any termination of this Agreement and the other Purchase Documents. The
representations and warranties made by the Company in this Agreement and in each
other Purchase Document shall survive the execution and delivery of this
Agreement and each such other Purchase Document.
SECTION 9.6. Severability. Any provision of this Agreement or any other
Purchase Document which is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition
or unenforceability without invalidating the remaining provisions of this
Agreement or such Purchase Document or affecting the validity or enforceability
of such provision in any other jurisdiction.
SECTION 9.7. Headings. The various headings of this Agreement and of
each other Purchase Document are inserted for convenience only and shall not
affect the meaning or interpretation of this Agreement or such Purchase Document
or any provisions hereof or thereof.
SECTION 9.8. Counterparts. This Agreement may be executed by the parties
hereto in several counterparts, each of which shall be executed by the Company
and a Purchaser and be deemed to be an original and all of which shall
constitute together but one and the same agreement.
SECTION 9.9. Governing Law; Entire Agreement. This Agreement, the Notes
and each other Purchase Document shall each be deemed to be a contract made
under and governed by the internal laws of the State of New York. This
Agreement, the Notes, and the other
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<PAGE> 45
Purchase Documents, the Recapitalization Document and the Stockholders'
Agreement constitute the entire understanding among the parties hereto with
respect to the subject matter hereof and supersede any prior agreements, written
or oral, with respect thereto.
SECTION 9.10. Jurisdiction. For purpose of any action or proceeding
involving this Agreement or any other Purchase Document, the Company hereby
expressly submits to the jurisdiction of all Federal and State Courts located in
the City of New York, State of New York and consents that it may be served with
any process or paper by registered mail or by personal service within or without
the State of New York, provided a reasonable time for appearance is allowed.
SECTION 9.11. Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that:
(a) the Company may not assign or transfer its rights or
obligations hereunder without the prior written consent of all holders
of Notes; and
(b) the rights of sale, assignment, and transfer of the Notes are
subject to Section 4.6.
SECTION 9.12. WAIVER OF JURY TRIAL. THE PURCHASERS AND THE COMPANY
HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF,
UNDER OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER PURCHASE DOCUMENT, OR
ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN)
OR ACTIONS OF THE PURCHASERS OR THE COMPANY. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE PURCHASERS ENTERING INTO THIS AGREEMENT.
-40-
<PAGE> 46
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
APPAREL VENTURES, INC.
By
--------------------------------------
Name: John R. Lowden
Title:
--------------------------------------
Address: c/o The Jordan Company
767 Fifth Avenue
New York, New York 10153
Facsimile: 212-755-5263
Attention: John R. Lowden
MARVIN L. GOODMAN AND
MELINDA K. GOODMAN REVOCABLE TRUST
By
--------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
Address: c/o Marvin L. Goodman
Apparel Ventures, Inc.
204 W. Rosecrans Avenue
Gardena, California 90248
Telephone: 310-538-4980
Attention: Marvin L. Goodman
----------------------------------------
Marvin L. Goodman
Address: c/o Marvin L. Goodman
Apparel Ventures, Inc.
204 W. Rosecrans Avenue
Gardena, California 90248
Telephone: 310-538-4980
<PAGE> 47
LEUCADIA INVESTORS, INC.
By
------------------------------------
Name:
----------------------------------
Title:
----------------------------------
Address: c/o The Jordan Company
767 Fifth Avenue
New York, New York 10153
Facsimile: 212-755-5263
Attention: John R. Lowden
JOHN W. JORDAN II REVOCABLE TRUST
By:
------------------------------------
Name: John W. Jordan II
Title: Trustee
----------------------------------------
David W. Zalaznick
----------------------------------------
Jonathan F. Boucher
----------------------------------------
John R. Lowden
----------------------------------------
Adam E. Max
----------------------------------------
A. Richard Caputo
<PAGE> 48
JZ EQUITY PARTNERS PLC
By
----------------------------------------
Name: James E. Jordan
Title: Director
Notices: c/o Jordan/Zalaznick
Advisers, Inc.
767 Fifth Avenue
New York, New York 10153
Facsimile: 212-750-5690
Attention: Mr. James E. Jordan
Copy to: Jay Parry Monge, Esq.
Mayer, Brown & Platt
1675 Broadway
New York, New York 10019-5820
Payments to: Account No.: 458-105-198
Republic National
Bank of New York
(ABA No. 026-0048-28)
452 Fifth Avenue
26th Floor
New York, New York 10018
Confirmation to: Mr. James E. Jordan
c/o Jordan/Zalaznick
Advisers, Inc.
Telephone No.: 212-572-0840
<PAGE> 49
----------------------------------------
William Curtis
-44-
<PAGE> 50
In connection with the Merger on the date hereof of Holdings and Old AVI,
Apparel Ventures, Inc., the Delaware corporation surviving the Merger, hereby
absolutely and unconditionally confirms its assumption and agreement, jointly
and severally, to pay, perform, observe and discharge all of the obligations of
the Company under the foregoing Agreement and each other Purchase Agreement.
APPAREL VENTURES, INC.
By
---------------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
<PAGE> 1
EXHIBIT 12.1
APPAREL VENTURES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF NET EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIO OF EARNINGS TO FIXED CHARGES)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income (loss) before income
taxes $(6,099) $(4,077) $(1,164) $(4,230) $(3,453)
Add fixed charges 7,001 7,351 5,946 6,384 6,380
-------- -------- -------- -------- --------
Earnings before income taxes
and fixed charges 902 3,274 4,782 2,154 2,927
FIXED CHARGES
Interest expense 7,001 7,351 5,946 6,384 6,380
RATIO OF EARNINGS
TO FIXED CHARGES .1x .4x .8x .3x .4x
-------- -------- -------- -------- --------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF APPAREL VENTURES, INC. FOR THE YEAR ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 502,000
<SECURITIES> 0
<RECEIVABLES> 18,811,000
<ALLOWANCES> 636,000
<INVENTORY> 7,898,000
<CURRENT-ASSETS> 29,847,000
<PP&E> 11,640,000
<DEPRECIATION> 5,654,000
<TOTAL-ASSETS> 48,960,000
<CURRENT-LIABILITIES> 17,923,000
<BONDS> 35,787,000
0
0
<COMMON> 1,000
<OTHER-SE> (5,712,000)
<TOTAL-LIABILITY-AND-EQUITY> 48,960,000
<SALES> 77,192,000
<TOTAL-REVENUES> 77,192,000
<CGS> 50,385,000
<TOTAL-COSTS> 50,385,000
<OTHER-EXPENSES> 23,459,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,899,000
<INCOME-PRETAX> (3,551,000)
<INCOME-TAX> (98,000)
<INCOME-CONTINUING> (3,453,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,453,000)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
