SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No.: 01-13470
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BIG SMITH BRANDS, INC.
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(Name of small business issuer in its charter)
Delaware 13-3005371
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7100 West Camino Real, Suite 402, Boca Raton, Florida 33433
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (561) 367-8283
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Classes on Which Registered
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Common Stock, $.01 par value N/A
Securities registered under Section 12(g) of the Exchange Act: NONE
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this Form 10-KSB, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $13,210,107.
As of March 12, 1998, Registrant had 7,354,683 shares of Common Stock
outstanding ($.01 par value). On that Date, the aggregate market value of the
Common Stock held by persons other than those who may be deemed affiliates of
Registrant was $5,610,926 (based on the average of the reported high and low
sales prices on Nasdaq's over-the-counter market on such date).
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Recent Developments
On February 2, 1999, the Company's Board of Directors unanimously
voted in favor of the sale to Walls Industries, Inc., Cleburne, Texas ("Walls")
of all assets of the Company's workwear business, other than real estate and
trademarks, and the license to Walls of the "Big Smith" trademark and certain
related trademarks for use in the manufacture, sale and licensing of workwear
products and unanimously voted to recommend to stockholders of the Company that
they vote in favor of such sale and license (the "Walls Sale and License").
The Walls Sale and License is subject to approval by the holders
of a majority of the shares of the Company's common stock, par value $.01 per
share (the "Common Stock"), issued and outstanding as of March 3, 1999 at the
annual meeting of the Company's stockholders to be held on or about April 20,
1999. The Company will also need to obtain the consent of NationsCredit
Commercial Funding with whom the Company has a credit facility. See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company has entered into an Asset Purchase Agreement with
Walls, pursuant to which, if the stockholders approve the Walls Sale and
License, the Company will sell to Walls its entire inventory of workwear
products and raw materials and its machinery and equipment used in the
manufacture of workwear products (excluding only certain computer equipment).
The Company will also lease to Walls its facilities in Carthage, Missouri for a
minimum of twelve months and its retained computer equipment for a minimum of
three months. Walls will assume responsibility for all of the Company's leases
for properties used in the manufacture and distribution of workwear products.
Walls will hire substantially all of the employees of the Company currently
involved in the workwear business. The Company will retain substantially all of
the assets currently used in its sportswear business. Although historically part
of the workwear business, the Company will also retain its ladieswear and
childrenswear products.
In addition, the Company will place all of the trademarks it
currently owns in a subsidiary, the stock of which will be owned 60% by the
Company and 40% by Walls. Walls will appoint one representative on the Board of
Directors of this subsidiary, Big Smith Holdings, Inc. ("Holdings"), and the
Company will appoint the remaining directors. The Certificate of Incorporation
of Holdings will restrict its activities solely to owning and licensing these
trademarks.
Holdings will grant to Walls a royalty-free, perpetual license to
use the "Big Smith" trademark and certain related tradenames in connection with
the manufacture, sale and licensing of workwear products. Holdings will grant to
the Company a royalty-free,
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perpetual license to use the "Big Smith" trademark and certain related
tradenames for sportswear and, subject to certain approval rights of Walls, for
all other purposes. Any other licenses granted by Holdings will require the
unanimous vote of its Board of Directors.
In consideration of the Walls Sale and License, Walls will pay to
the Company for the assets purchased a price equal to the appraised value (on a
liquidated basis) of the machinery and equipment sold plus the book value of the
Company's good, saleable and useable inventory. The Company currently estimates
the purchase price based on this formula to be approximately $3,135,000. Walls
will pay the Company $2,000 per month for a minimum of one year for its lease of
the Company's Carthage, Missouri facilities and $10,000 per month for a minimum
of three months for its lease of the Company's retained computer equipment.
In addition, in consideration for the Company entering a ten-year
non-compete agreement, Walls will pay the Company an aggregate of $4.6 million
over the eight-year period commencing at closing. Payments under the non-compete
agreement together with the consideration to be paid for machinery, equipment
and inventory and rental payments for the Carthage, Missouri facility and the
computer equipment will result in total payments to the Company estimated at
approximately $7,780,000. If the Walls Sale and License is not approved by the
Company's stockholders, the Company must reimburse Walls for its reasonable
out-of-pocket expenses including attorney's fees and must pay to Walls a
termination fee of $150,000.
The proposed transaction will free the Company from its
low-potential workwear focus and the related overhead and interest costs
enabling it to focus on the growth of its higher-margin sportswear business.
Until the consummation of the Walls Sale and License, the Company will continue
to operate its workwear business in accordance with past practice.
The Company expects its outstanding line of credit to be reduced
to approximately $1,968,000 upon closing of the transaction, reducing interest
costs. See "Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations - - Liquidity and Capital Resources."
If the Walls Sale and License is consummated, the business of the
Company will change substantially, primarily as the result of its ceasing to be
engaged in the manufacture, holding inventory and marketing associated with its
workwear business. Stockholders should read the information presented in this
Annual Report on Form 10-KSB with the understanding that if the Walls Sale and
License is consummated the workwear related operations described below will no
longer be conducted by the Company. For more information on the Walls Sale and
License, see the Proxy Statement for the Annual Meeting of Stockholders to be
held on or about April 20, 1999 which was mailed to the Company's stockholders
of record as of March 3, 1999 with this Annual Report on or about March 30,
1999. The Proxy Statement can also be viewed at the web site maintained by the
Securities and Exchange Commission that contains reports, proxy and information
statements and other information regarding the Company. The address of this site
is http://www.sec.gov.
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General
The Company is an apparel company which currently sells quality
work apparel ("workwear") under its own brand names Big Smith, Smith Mountain
Classics, Big Smith Vintage and Big Smith Kids and, since May 1997, sportswear
under its brand name Big Smith. This focus reflected the Company's growth
strategy of concentrating on workwear and sportswear products under
Company-owned labels rather than through dependence on licensed labels, as was
the Company's strategy prior to the Caterpillar Termination (as defined below).
In addition, the Company currently manufactures and sells workwear to mass
merchandisers for sale under their private labels.
Workwear has been produced in the United States under the Big
Smith label since 1916. The Company was organized in 1980 as a Delaware
corporation, and in 1985 acquired certain assets of Smith Brothers Manufacturing
Company, including the rights to the Big Smith and related trade names. The
Company built its workwear product line around its flagship overalls, jeans and
jackets, all of which are made in the United States. The Company's workwear
products are relatively stable in design and styling and, with the exception of
insulated products sold for the fall and winter retail season, are generally
sold throughout the year. The Company's workwear products are sold at moderate
prices through 840 mass merchandisers and other customers, including Wal-Mart,
Sears and J.C. Penney, which re-market the products through approximately 3300
stores primarily in the American heartland.
The Company's sportswear line is marketed under the Big Smith
label. The sportswear line differs significantly, however, from the traditional
workwear products marketed under the Big Smith label primarily in design, target
sales market and higher margin sales. The Company's sportswear product line is
centered on fashion oriented top and bottom apparel designed for purchase by the
young adult market. The sportswear products change from season to season
following the dynamic nature of the marketplace being served. Big Smith
sportswear is sold at moderate prices relative to the market through chains such
as Gadzooks, J.C. Penney, Jean Country, Delia's, Scream and Marshalls. The
Company's sportswear products are sold to approximately 30 customers which
re-market the products through approximately 800 stores.
Going Concern
The Company's viability as a going concern is dependent upon its
ability to raise sufficient working capital and to meet any liquidity needs that
may exceed the availability under the Credit Facility. The Company experienced a
loss from operations in 1998 and 1997 and had a working capital deficiency at
December 31, 1998 and December 31, 1997. Also, the Company's liquidity needs
could exceed the amount of borrowings available under the Credit Facility. See
"Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations, -- Liquidity and Capital Resources" and
"Item 3. Legal Proceedings -- Caterpillar Litigation." The Company's plan for
raising sufficient working capital and meeting its liquidity needs includes the
consummation of the Walls Sale and License, further income from the recent
equity
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placement by inducing exercise of the warrants with the reverse stock split and
increasing efficiencies in the operation of the sportswear, ladieswear and
childrenswear businesses. See "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Products
Sportswear
The Company's line of sportswear currently includes fashion
jeans, casual pants, shirts, jackets and sweaters for adults, young men and
teenagers. Substantially all of the Company's sportswear products are
manufactured by contractors in the United States typically employing processes
designed to produce sturdy, high-quality, long-lasting garments. Sportswear
products are also manufactured by an international sublicensee for distribution
in Italy. See "Item 1. Description of Business -- Wholesale Operations --
Foreign Sportswear."
The production of Big Smith sportswear involves more design and
styling changes than the workwear line from year to year. These products require
fashion industry driven alterations from year to year. The higher cost of
production, however, is recovered in the higher margin sales of Big Smith
sportswear. Items in this line of products sell at retail in the $30 to $55
range.
Workwear
The Company's line of workwear currently includes overalls,
coveralls, quilted coats, industrial jeans, denim jeans and jackets, vests,
aprons, dungarees, shirts, tee shirts and caps, all for adults. Substantially
all of the Company's branded products historically have been manufactured in the
United States from American made fabrics typically employing processes designed
to produce sturdy, high-quality, long-lasting garments.
The Company's line of workwear also includes ladieswear and
childrenswear, each including overalls, jeans, vests, jackets, tee shirts and
caps. If the Walls Sale and License is consummated, the Company will continue to
source and market these lines of products. The ladieswear and childrenswear
products are manufactured by contractors in the United States.
The production of workwear involves relatively few changes in
design and styling from year to year. The Company's fall and winter line differs
from its spring and summer line primarily in that the fall and winter products
are quilted and insulated while the spring and summer products are not. Items in
each line sell at retail in the $15 to $35 range except for coats and insulated
overalls, which sell at retail in the $50 to $75 range. The higher prices of the
insulated products in its fall and winter line have historically resulted in the
Company recognizing higher gross sales and higher margins during the second half
of its fiscal year.
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Manufacturing and Sourcing
Sportswear
The Company maintains an in-house design team and contracts for
more extensive outside design services when necessary. Sample designs are
reviewed by the senior management of the Company who establish the final line of
sportswear products from such samples.
All of the Company's sportswear products are produced by
manufacturing contractors. Such manufacturing contractors assemble sportswear
products according to the Company's specifications. The contractors supply all
fabric and trim except for any necessary labels which are provided by the
Company. The Company's design and quality control personnel monitor the
manufacturing process to ensure that sportswear products to be marketed by the
Company under the Company's brand names meet the Company's quality standards.
The Company's quality control program includes on-site inspection of
work-in-process and finished goods during the manufacturing process and
inspection of finished goods upon receipt. Currently the Company experiences a
return rate for poor quality garments of less than 1%.
Workwear
The Company purchases raw materials, consisting mainly of piece
goods made from cotton, synthetics and blends of cotton and synthetics, from a
number of textile mills and converters. Thread, zippers, brass snaps and
buttons, labels, boxes and trim are purchased from a number of suppliers. No
single supplier of raw materials is critical to the Company's production needs,
and the Company believes that an ample number of alternative suppliers exists
should the Company need to secure additional or replacement raw materials. The
Company has no long-term contracts with any of its suppliers. Approximately 97%
of the Company's fabric requirements were obtained from four suppliers in the
year ended December 31, 1998. See "Item 12. Certain Relationships and Related
Transactions." The Company has experienced little difficulty in obtaining raw
materials and believes that the current and potential sources of fabric and trim
supply are sufficient to meet its needs for the foreseeable future.
The Company's manufacturing process consists of four principal
operations: the computer-aided design of cutting patterns to minimize fabric
waste, the cutting of the fabric, the sewing of cut fabric into complete
garments, and the affixing of brass snaps and fittings. After the Company
receives bolts of fabric, it performs substantially all pattern-cutting
operations at its own facilities. After the patterns are cut, the fabrics and
piece goods are manufactured and assembled at the Company's facilities or sent
to one of its contractors for manufacture and assembly. If permanent press or
pre-washing is required, the heat treating of the finished garment in a
permanent press curing oven or laundering is done by an unaffiliated contractor.
Quality-control personnel inspect work-in-progress and finished goods during the
production process and again upon receipt. Substantially all of the Company's
fabrics are inspected upon receipt in the Company's warehouse. Because the
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Company's strategy is to build on its existing products, all of the apparel
manufactured or sourced by the Company is planned and designed through the
efforts of its in-house marketing personnel. The Company does not maintain an
in-house design team and contracts for more extensive outside design services
when necessary.
The Company from time to time will use outside contractors which
receive fabric from the Company and assemble garments to the Company's
specifications. Garments assembled by contractors accounted for approximately
20% of the Company's unit production in the year ended December 31, 1998. The
Company's design and quality control personnel normally monitor the
manufacturing processes at the Company's contractors in order to ensure that
they meet Company quality standards. In addition, the Company's quality control
program includes on-site inspections of work-in-progress and finished goods
during the production process and inspection of finished goods upon receipt.
Currently the Company experiences a return rate for poor quality garments of
less than 1%.
Ladieswear and childrenswear products are produced by
manufacturing contractors. Such manufacturing contractors assemble sportswear
products according to the Company's specifications. The contractors supply all
fabric and trim except for any necessary labels which are provided by the
Company. The Company's design and quality control personnel monitor the
manufacturing process to ensure that sportswear products to be marketed by the
Company under the Company's brand names meet the Company's quality standards.
Warehousing and Distribution
Sportswear
All of the Company's sportswear products are manufactured by
contractors and stored in and distributed from the Company's finished goods
warehouse located in Carthage, Missouri. Substantially all such deliveries to
customers are made by common carriers with which the Company has long-standing
relationships on a collect basis per customer supplied routing guides. If the
Walls Sale and License is consummated, the Company will secure warehouse and
shipping facilities in south Florida to replace the warehouse and shipping
facilities leased or assigned to Walls.
Workwear
Substantially all of the Company's workwear products, whether
manufactured by the Company or by a contractor, are stored in and distributed
from the Company's finished goods warehouses located in Carthage, Missouri and
Miami, Oklahoma. All of the Company's workwear products which are produced
domestically are distributed by truck from its warehouses. Substantially all
such deliveries to customers are made by common carriers with which the Company
has long-standing relationships on a collect basis per customer supplied routing
guides.
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Competition
General
The apparel industry, including the workwear and sportswear
markets, is fragmented and highly competitive. The Company competes with a large
number of domestic and foreign manufacturers in all of its product markets. Many
of the Company's competitors have financial resources, sales organizations and
manufacturing capacities considerably larger than those of the Company.
Sportswear
As the Company continues to increase its sportswear business, it
expects its largest competitors will be Union Bay, Pinnacle, DKNY, Dickie, Hugo
Boss and other large internationally known branded sportswear manufacturers.
Competition in this market is intense. The Company's principal means of meeting
competition are through pricing and design. Unlike the workwear market, the
sportswear market requires more attention to consumer trends. The Company's
strategy for Big Smith sportswear is to anticipate customer demand in design and
styling while providing a solid, dependable sportswear product.
Workwear
Among its largest competitors in the workwear market are Carhartt
Corp., Williamson-Dickie Manufacturing Company, Inc., Key Industries, Inc., and
Walls Industries, Inc., Cleburne, Texas. Competition is generally in terms of
quality, price, service and style. The Company's principal means of meeting
competition have been high-quality workmanship and materials, a strong
fundamental product offered at a moderate price, maintaining what the Company
believes is its reputation as one of the most reliable suppliers in the market,
a sales organization trained to assist customers in merchandise planning and the
prominence of its labels. The Company has historically sought to adjust its
product mix and markets to the demands of its customers, rather than attempting
to establish consumer trends or to design in anticipation of short-term market
fads.
Wholesale Operations
General
The Company is integrated into the program purchasing of mass
merchandisers whereby it is informed at the beginning or just prior to the
beginning of each calendar year of the minimum purchases to be made by the
customer during that calendar year, and informed weekly of updated delivery
schedules and locations. This system permits the Company to anticipate over half
of its annual sales and plan and schedule production accordingly.
The current overall average gross margins of all sales is
approximately 24% for the year ended December 31, 1998, compared to 9.6% for
the year ended December
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31, 1997. The increase in overall average gross margins of all sales resulted
from an increase in the selling price of workwear products, the introduction of
ladieswear products which sell at higher margins than the Company's historical
workwear products and the increase in sales of the higher margin sportswear
products.
Domestic Sportswear
The Company formally introduced Big Smith sportswear at the
leading annual industry trade show in August 1997. Sales of this line for the
year ended December 31, 1998, were approximately $1.14 million or 8.61% of total
net sales, compared to $0.17 million, or 1.3% of total net sales for the year
ended December 31, 1997. Big Smith sportswear is marketed at higher margins than
much of the workwear under the Company-owned labels. The current margin on Big
Smith sportswear is between 20% and 35%.
The Company's sportswear products are marketed through a growing
number of department stores and independent fashion apparel shops. The Company
estimates that its sportswear products were sold in approximately 800 stores and
400 stores in the years ended December 31, 1998 and December 31, 1997,
respectively. Substantial customers for the Company's sportswear products
include Gadzooks, Jean Country, J.C. Penney, Delia's, Scream and Marshalls.
Eighty percent of the Company's sales of sportswear are to three
customers. Sales to Gadzooks, J.C. Penney and Jean Country of sportswear
products represented approximately 39%, 22% and 20%, respectively, of the
Company's net sales of sportswear for the year ended December 31, 1998. If any
one or more of these three customers were to cease or materially reduce its
purchases from the Company, the financial condition of the Company might be
materially adversely affected. The Company intends to continue to broaden the
customer base for its sportswear products, lessening the concentration in any
one customer or small group of customers.
Foreign Sportswear
Approximately three years ago the Company began to implement a
corporate strategy designed to convert the Company from a workwear manufacturing
company exclusively based and operated in the United States to a multi-brand,
regionally conceived, designed and sourced global producer and marketer of both
workwear and sportswear.
Beginning in 1997, the Company began an effort to establish
international markets for Company branded products including Big Smith
sportswear through participation in international trade shows and meetings with
international distributors. Cash flow restrictions have impeded the success of
such efforts. If the Walls Sale and License is consummated, the Company believes
that necessary resources for establishing the international markets for
sportswear products will be freed and the Company will be able to increase
international distribution of its sportswear products.
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In December 1998, the Company entered into a one-year, renewable
sublicense with Amita srl, an Italian corporation ("Amita"), as the exclusive
sales representative throughout Italy for Big Smith branded sweaters, jackets
and other sportswear products. The Company maintains quality and design control
over the products produced under this sublicense.
The Company also intends to sublicense certain international
rights to Big Smith and related trademarks to other manufacturers of sportswear.
The Company also intends to leverage its experience in the international market
to create a network of international distribution channels for its Big Smith
branded sportswear.
Workwear
Most of the Company's workwear products are marketed through
various mass merchandisers, the largest of which was Wal-Mart during 1998 and
1997. Sales to Wal-Mart represented 55.4% of the Company's net sales of workwear
products in 1998 and 45.6% in 1997. This increase reflected the reduction in
other private label sales as well as an increase in actual sales to Wal-Mart.
The Company's relationship with Wal-Mart has given it wide access to the U.S.
market and a stable source of sales.
The Company's products are also marketed through a large number
of independent department stores, farm and fleet stores and buying collectives.
The Company estimates that its workwear products were sold in approximately 3300
stores and 3200 stores in the years ended December 31, 1998 and December 31,
1997, respectively. In addition to Wal-Mart, other substantial customers for the
Company's workwear products include Mills Fleet & Farm Corp., Bass Pro Shop, Wet
Seals Stores and Blain's Supply Corp.
Domestic Receivables
Receivables from Wal-Mart are typically paid in full between 45
and 55 days from purchase. Receivables from the Company's remaining domestic
customers for all products are generally on thirty day terms. The average age of
receivables of the Company's domestic customers, at December 31, 1998 was 49.5
days, as compared with an average age of 48.5 days at December 31, 1997.
Retail Operations
Sportswear
In February 1998, the Company opened a retail store in the South
Beach area of Miami, Florida to create visibility for its sportswear products
and to serve as a center for showing the Company's sportswear products to
potential wholesale customers. This retail store focuses primarily on the sale
of first quality Big Smith sportswear products and had net sales of
approximately $16,000 for the year ended December 31, 1998. The Company
currently has no plans for further expanding its retail network for its
sportswear products.
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Workwear
Historically, the Company maintained retail outlets at each of
four manufacturing locations. When two of these manufacturing locations were
closed, the Company continued to maintain the retail outlets in those locations.
In September 1998, the retail store in Garnett, Kansas was closed. The three
remaining retail outlets currently sell both first and second quality
merchandise into the local communities of which the Company is a part and had
net sales of approximately $644,729 for the year ended December 31, 1998 and net
sales of approximately $706,000 for the year ended December 31, 1997. If the
Walls Sale and License is consummated, the Company will cease to operate the
three remaining retail stores selling workwear products.
Trademarks and Licenses
For the past two years, the Company's branded products have
become the central focus of the Company's business strategy. In addition to the
Big Smith label, which has been used on workwear since 1916, the Company
produces goods under Smith Mountain Classics, Big Smith Vintage and Big Smith
Kids labels, as well as Big Smith sportswear. In 1995, the Company purchased the
"Big Smith" trademark in the seven countries in Europe for which the Company did
not previously have trademark rights for an aggregate purchase price of $500,000
payable over four years.
Employees
As of December 31, 1998, the Company employed approximately 205
people on a full-time basis, including 15 employees in administration and
accounting, 3 employees in marketing and sales, and 187 employees in
manufacturing. The Company also employed 3 part-time employees and 11
independent sales representatives. Approximately 72% of its employees are paid
on a piecework basis and the balance are hourly-paid or salaried.
The Company has never experienced a material work stoppage or
slowdown due to labor disagreements. The Company believes that its relations
with all employees are satisfactory. None of the employees are covered by a
collective bargaining agreement. The manufacturing employees are non-unionized
pieceworkers with an approximate average tenure of five years. The Company
provides a benefits package to all of its full-time employees, including health
insurance, paid holidays and vacations.
If the Walls Sale and License is consummated, the Company
estimates that it will continue to employ 6 persons on a full-time basis,
including 4 employees in administration and accounting, 2 employees in marketing
and sales, and no employees in manufacturing. The Company will have no part-time
employees and will establish relationships with a number of independent sales
representatives to insure adequate coverage of all appropriate North American
distribution points. All employees will be paid either on an hourly or salaried
basis.
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ITEM 2. DESCRIPTION OF PROPERTY.
Facilities
The Company owns or leases two clothing plants aggregating
approximately 184,000 square feet of floor space, including approximately
115,000 square feet of warehouse floor space. The Company also owns or leases
four retail locations. The Company's principal executive office is located in
Boca Raton, Florida. The following table sets forth certain information
concerning each of the Company's facilities.
Properties Owned
<TABLE>
<CAPTION>
LOCATION FLOOR SPACE PRINCIPAL USES
(SQUARE FEET)
<S> <C> <C>
Carthage, Missouri 153,500 Manufacturing,
warehousing, retail, and
distribution center
Properties Leased
LOCATION FLOOR SPACE LEASE PRINCIPAL
(SQUARE FEET) EXPIRES USES
Monett, Missouri 3,700 9/23/99 (a) Retail
Miami, Oklahoma 30,000 8/31/99 (b) Manufacturing
(3 locations) 16,000 5/11/99 (c) Warehousing
3,000 1/31/98 (d) Retail
Boca Raton, Florida 1,839 9/1/2000 Office Space
Miami Beach, Florida 700 2/28/2003 Retail
</TABLE>
(a) Automatic annual renewal unless either party gives notice of
termination prior to such renewal.
(b) The lease is renewable for three additional one-year terms at the
Company's option.
(c) The lease is renewable for three additional one-year terms at the
Company's option.
(d) The Company has a month to month lease for this property.
All of the Company's manufacturing facilities are of brick, block
or metal construction and have sprinklers throughout. The Company's retail,
office and other
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facilities all meet local building code requirements. All of the Company's
facilities have been well-maintained and are adequate for their present uses.
The Company uses outside contractors for portions of its current
production. See "Item 1. Description of Business -- Manufacturing and Sourcing."
Substantially all of the machinery and equipment used by the
Company in its manufacturing operations is either owned or subject to lease
purchase arrangements. The Company's machinery and equipment is well-maintained
and adequate for its present uses.
If the Walls Sale and License is consummated, the Company will
lease its Carthage, Missouri property to Walls for a minimum of one year and the
Company will close its workwear retail operations in Monett, Missouri, Miami,
Oklahoma and Carthage, Missouri and will sublease its manufacturing and
warehouse facilities in Miami, Oklahoma to Walls. The Company will retain its
facilities in Boca Raton, Florida and Miami, Florida. See "Item 1. Description
of Business -- Recent Developments."
ITEM 3. LEGAL PROCEEDINGS.
Caterpillar Litigation
On June 25, 1996, Big Smith Global Ltd. ("BSG"), a wholly owned
subsidiary of the Company holding the rights to the Company's agreement (the
"Agreement") with Caterpillar licensing the use by the Company of the
Caterpillar and related trademarks, received a purported notice of termination
of the Agreement, citing purported violations of the Agreement.
On July 9, 1996, the Company was served with a summons and
complaint naming it, BSG and S. Peter Lebowitz, the Company's CEO, defendants in
a suit by Caterpillar in the U.S. District Court for the Central District Court
of Illinois (the "District Court"). The complaint alleges trademark
infringement, unfair competition, false advertising and breach of contract, and
seeks injunctive relief and unspecified damages in connection with the Company's
alleged violations of the Agreement and Caterpillar's proprietary marks.
On July 26, 1996, the defendants answered the complaint filing
responsive defenses of failure to assert a claim, waiver, amendment, promissory
estoppel, equitable estoppel, laches, failure to provide an opportunity to cure,
unclean hands and misuse. The Company and BSG (collectively, the "Corporate
Defendants") filed counterclaims for breach of contract, tortious interference
with contractual relations, interference with prospective business relations,
conspiracy, commercial disparagement and breach of franchise agreement in
connection with what the Corporate Defendants believe to be Caterpillar's
wrongful efforts to terminate the Corporate Defendants' license to use certain
Caterpillar trademarks on its apparel. S. Peter Lebowitz also filed a motion to
dismiss for failure to state a claim against him in his individual capacity.
12
<PAGE>
On July 18, 1996, Caterpillar filed an emergency motion for
summary judgment seeking a declaratory judgment that the Agreement had been
properly terminated. On July 29, 1996, the Company filed a motion for a
preliminary injunction against Caterpillar's purported termination of the
Agreement. On August 19, 1996, the District Court entered an order (the "August
19th Order"), which was subsequently confirmed in a Reconsideration Order
denying the Corporate Defendants' motion for a preliminary injunction and
granting Caterpillar's motion for summary judgment on the basis of a finding
that the Agreement, by its terms, provided for termination by Caterpillar
following certain breaches of the Agreement by BSG regardless of whether or not
such breaches were material. On August 28, 1996, the District Court granted in
part Mr. Lebowitz's motion and dismissed him from the breach of contract and
declaratory judgment counts of the complaint.
On April 16, 1997, Big Smith filed an Amended Counterclaim adding
Overland Group, Ltd. and Stephen Palmer as counterdefendants seeking damages in
excess of $20 million plus costs. Thereafter, on October 31, 1997, a Corrected
Second Amended Counterclaim was filed by Big Smith naming Overland Footwear,
Limited as an additional counter-defendant. The Second Amended Counterclaim
alleges similar claims as in the original counterclaim and, among others, newly
alleges that Caterpillar was barred from terminating the Corporate Defendants'
license to use its marks since a common law franchise relationship existed
between the parties which could not be terminated absent good cause.
Counterdefendants have filed motions to dismiss the Second
Amended Counterclaim for failure to state a claim. Additionally, Palmer and the
Overland defendants have filed motions seeking dismissal for lack of
jurisdiction over them. On December 16, 1997, the Court heard oral arguments on
the motions to dismiss. To date the Court has not ruled on said motions.
Management intends to vigorously defend the claims of Caterpillar
and to diligently pursue its counterclaims and its claims against Palmer and the
Overland defendants. At this stage of litigation, it is not possible to evaluate
the likelihood of favorable or unfavorable outcome. There can be no assurance
that the outcome of this litigation will be favorable to the Company, that the
Company's defenses to the claims against it will be vindicated or that any of
its counterclaims will be found to be valid. If the outcome of the litigation is
not favorable, such outcome could have a material adverse effect on the
financial condition of the Company.
Other Litigation
The Company has been involved in litigation with a number of its
foreign distributors in connection with their refusal to pay royalties the
Company believed to be due in respect of sales by such distributors of
Caterpillar branded products prior to the Company's ceasing to sell such
products. Additionally, certain distributors made claims against the Company
relating to the effects of the purported termination of the Caterpillar license
on their arrangements with the Company. Most of these litigations have been
resolved. The Company has begun discussions with Selected Brands Shoe Company
seeking recovery of at least $73,000 of accounts receivable it believes are due
and payable and with
13
<PAGE>
Fashion Fever CC seeking recovery of an as yet undetermined amount of royalties
it believes are due and payable. These discussions are preliminary to filing
collection actions if satisfactory settlements cannot be reached.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The Company's securities were delisted by the Nasdaq Stock
Market's Small-Cap Market on December 4, 1997. On March 1, 1999, the Pacific
Exchange applied to the Securities and Exchange Commission for permission to
delist the Company's securities effective April 1, 1999.
The following table sets forth the high and low trading range
prices for the Common Stock and Warrants, as quoted on the over-the-counter
bulletin board for the periods indicated. The quotes represent interdealer
prices without retail markup, markdown or commission, and may not necessarily
represent actual transactions. The trading volume of the Company's securities
fluctuates and may be limited during certain periods. As a result, the liquidity
of an investment in the Company's securities may be adversely affected.
14
<PAGE>
<TABLE>
<CAPTION>
Common Stock Warrants(1) (2)
------------ ---------------
<S> <C> <C>
Fiscal Year Ending December 31, 1997
Quarter ended March 31, 1997................. 4 13/64 2 5/8 17/32 1/8
Quarter ended June 30, 1997.................. 4 5/16 29/64 3/32
Quarter ended September 30, 1997............. 1 1/32 3/16 3/16 1/32
Quarter ended December 31, 1997.............. 1 9/16 1/8 5/32 1/64
Fiscal Year Ending December 31, 1998
Quarter ended March 31, 1998................. 1 13/32 9/64 - -
Quarter ended June 30, 1998.................. 2 3/64 7/8 - -
Quarter ended September 30, 1998............. 2 1/4 1 1/4 - -
Quarter ended December 31, 1998.............. 3 1/2 1 1/4 - -
</TABLE>
- --------------------------
(1) Each of the Warrants entitled the holder to purchase one share of
Common Stock, par value $.01 per share at an exercise price of
$4.60 per share, subject to certain adjustments. The Warrants
expired by their terms on February 8, 1998.
(2) Warrants expired on February 8, 1998. The last trade was on
November 19, 1997.
At March 3, 1999, the Company's Common Stock was held by 37
holders of record and approximately 821 beneficial holders. When they expired on
February 8, 1998, the Company's Warrants were held by 18 holders of record. At
March 15, 1999, the high and low bid prices for the Company's Common Stock on
the over-the-counter bulletin board were $1.524 and $1.50.
Dividends
The Company intends to retain any future earnings that may be
generated from operations to help finance the operations and expansion of the
Company and accordingly does not plan to pay cash dividends to holders of the
Common Stock during the reasonably foreseeable future. Any decisions as to the
future payment of dividends will depend on the earnings and financial position
of the Company and such other factors as the Company's Board of Directors deems
relevant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
When used in this report, press releases and elsewhere by the
management of the Company from time to time, the words "believes",
"anticipates", and "expects" and similar expressions are intended to identify
forward-looking statements that involve certain risks and uncertainties.
Additionally, certain statements contained in this discussion may be deemed
forward-looking statements that involve a number of risks and uncertainties.
Among
15
<PAGE>
the factors that could cause actual results to differ materially or adversely
are the following: the ability of the Company to meet its working capital and
liquidity needs, the status of relations between the Company, its primary
customers and distributors, whether the Walls Sales and License is consummated,
the availability of long-term credit, unanticipated changes in the U.S. and
international economies, business conditions and growth in the workwear and
sportswear industries and the level of growth in retail sales generally, the
timely development and acceptance of new products, the impact of competitive
products and pricing, changes in the cost of raw materials, changes in product
mix, the outcome of litigation in which the Company is involved, along with
product delays and other risks detailed from time to time in the Company's SEC
reports, including but not limited to the Form 10-KSB. Readers are cautioned not
to place undue reliance on these forward-looking statements which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
results of any events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Going Concern
The Company's viability as a going concern is dependent upon its
ability to raise sufficient working capital and to meet any liquidity needs that
may exceed the availability under the Credit Facility. The Company experienced a
loss from operations in 1998 and 1997 and had a working capital deficiency at
December 31, 1998 and December 31, 1997. Also, the Company's liquidity needs
could exceed the amount of borrowings available under the Credit Facility. See "
- -- Results of Operation", " -- Liquidity and Capital Resources" and "Item 3.
Legal Proceedings -- Caterpillar Litigation."
General
The discussion and analysis set forth below is for the years
ended December 31, 1998 and December 31, 1997. It should be read in conjunction
with the Financial Statements of the Company and the related Notes thereto
appearing elsewhere in this Form 10-KSB.
The Company's Big Smith sportswear products differ significantly
from its traditional products primarily in design, target sales market and
higher margin sales. The Company's sportswear product line is centered on
fashion oriented top and bottom apparel designed for purchase by the young adult
market. The sportswear products change from season to season following the
dynamic nature of the marketplace being served. Big Smith sportswear is sold at
moderate prices relative to the market through chains such as Gadzooks, J.C.
Penney, Jean Country, Delia's, Scream and Marshalls at higher margins than much
of the workwear under the Company-owned labels.
Sales to Wal-Mart of the Company's workwear products marketed
under Company owned brands represented 55.4% of the Company's net sales in 1998.
As sales of Big Smith sportswear increase, the Company believes that the
percentage of its net sales represented by sales of workwear products to
Wal-Mart will decrease.
16
<PAGE>
Eighty percent of the Company's sales of sportswear are to three
customers. Sales to Gadzooks, J.C. Penney and Jean Country of sportswear
products represented approximately 39%, 22% and 20%, respectively, of the
Company's net sales of sportswear for the year ended December 31, 1998. See
"Item 1. Description of Business -- Wholesale Operations -- Domestic
Sportswear."
The Company believes that its business is seasonal and has
historically experienced and expects to continue to experience lower revenues
and net income in the first half of each fiscal year (primarily January through
April) as compared to the second half of its fiscal year. The seasonality is due
in part to the general decrease in sales in the apparel industry following the
Christmas season as well as the increase in sales of the Company's winter weight
garments, which sell at higher prices, and back-to-school clothes during the
months of August through November. In addition, the Company's quarterly results
may fluctuate depending upon, among other things, the timing of delivery of
large orders and the introduction of new product lines or additional labels. See
"-- Seasonality."
In the following discussion, the figures presented for Big Smith
workwear and other branded workwear include the Company's ladieswear and
childrenswear which will be retained by the Company if the Walls Sale and
License is consummated. For the year ended December 31, 1998, ladieswear
represented 1.7% of net sales and childrenswear represented 1.4% of net sales.
The following discussion and analysis should be read in
conjunction with the Company's financial statements appearing elsewhere in this
report.
Results of Operation
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Net sales for the year ended December 31, 1998 increased by $.65
million, or 5.1%, to $13.21 million from $12.56 million for the year ended
December 31, 1997. Net sales for the year ended December 31, 1998 of Big Smith
workwear and other branded workwear, Big Smith sportswear and private label
products were $11.43 million, $1.14 million and $1.57 million, respectively, as
compared with $11.11 million, $0.17 and $1.2 million, respectively, for the year
ended December 31, 1997. The increase in sales resulted from the increase in
sales of Big Smith sportswear to new and existing customers, the addition of new
customers including Mills Fleet & Farm Corp., and increased product purchases by
existing customers, especially Wal-Mart Stores, Inc., reflecting the increased
marketing by the Company of such products.
Cost of goods sold for the year ended December 31, 1998 decreased
by $1.37 million, or 12.0%, to $9.99 million from, $11.36 million for the year
ended December 31, 1997. This decrease resulted primarily from increased
production levels and plant efficiencies, a decrease in employee turnover, the
elimination of certain supervisory positions and savings recognized by the
Company by extending its annual summer vacation closing for two additional
weeks. The Company planned and implemented the extension to temporarily
17
<PAGE>
reduce its cash flow requirements to facilitate bringing certain accounts with
suppliers current and to implement planned changes relating to supervisory and
executive personnel reductions. The annual summer closing allowed the Company to
make needed repairs and improvements to its manufacturing plant and equipment
and to effect other routine maintenance.
Gross profit for the year ended December 31, 1998 was $3.22
million, or 24.3% of net sales, compared to $1.21 million, or 9.6% of net
sales, excluding income from net royalties, for the year ended December 31,
1997. The increase in gross profit percentage was primarily due to the increased
production levels and plant efficiencies and an increase in gross profit margins
of Big Smith sportswear compared to Big Smith workwear and other branded
workwear and private label products along with the maintenance of lower
inventory levels, for the year ended December 31, 1998 compared to the year
ended December 31, 1997 and the depression of profit margins in 1997 as a result
of a provision for obsolete inventory of $218,000 at December 31, 1997. For the
year ended December 31, 1998, Big Smith workwear and other branded workwear, Big
Smith sportswear and private label products accounted for 79.5%, 8.61% and
11.92% of net sales, respectively, as compared with 88.6%, 1.3% and 9.5% of net
sales, respectively, for the year ended December 31, 1997.
Selling expenses decreased by $.76 million to $1.67 million, or
12.6% of net sales, for the year ended December 31, 1998, from $1.75 million, or
13.9% of net sales, for the year ended December 31, 1997. This decrease in
selling expenses resulted principally from reductions in supervisory personnel,
including the vice president of sales and marketing. General and administrative
expenses were $1.63 million, or 12.3% of net sales, for the year ended December
31, 1998, compared with $1.90 million, or 15.1% of net sales, for the year ended
December 31, 1997. The decrease in the general and administrative expenses was
primarily due to a decrease in restructuring and related litigation costs, a
permanent and significant reduction in executive personnel salaries and related
overhead costs due to the streamlining of executive staff and a decrease in
travel and entertainment costs related to reduced foreign sales activities.
The Company's interest expense for the year ended December 31,
1998 was $.59 million, or 4.4% of net sales, as compared with $.64 million, or
5.1% of net sales, for the year ended December 31, 1997. The decrease in
interest expense was primarily due to a decrease in borrowings on the Credit
Facility.
On March 19, 1998, the holders of the Company's 6% Convertible
Preferred Debentures due March 31, 2000 (the "Debentures") converted the
remaining $1,631,500 of the Debentures into 2,900,000 shares of Common Stock
resulting in a non-recurring charge to earnings of $606,204 of related discount.
As a result of the foregoing, the Company's net loss for the year
ended December 31, 1998 was $1.38 million compared to a net loss of $4.62
million for the year ended December 31, 1997. Excluding a one time non-recurring
charge of convertible debenture amortization discount of $606,204 arising as a
result of the retirement of all
18
<PAGE>
outstanding convertible debentures of the Company in March 1998, the Company's
net loss for the year ended December 31, 1998 was $.77 million.
Liquidity and Capital Resources
The Company's viability as a going concern is dependent upon its
ability to raise sufficient working capital and to meet any liquidity needs that
may exceed the availability under the Credit Facility. The Company experienced a
loss from operations in 1998 and 1997 and had a working capital deficiency at
December 31, 1998 and December 31, 1997. Also, the Company's liquidity needs
could exceed the amount of borrowings available under the Credit Facility. At
December 31, 1998 and 1997, working capital deficiency was approximately $2.5
million and $1.5 million, respectively, primarily as a result of the purported
termination effective in January 1997 by Caterpillar, Inc. ("Caterpillar") of
the Company's license to manufacture and sell workwear under the Caterpillar
label (the "Caterpillar Termination"). As a result, the Company has faced an
on-going liquidity need. Working capital also may vary from time to time as a
result of seasonal inventory requirements, the level of trade credit available
and the level of accounts receivable balances. The Company has taken several
steps to obtain additional sources of liquidity.
The Company's Board of Directors has recommended to the
stockholders a sale to Walls of all assets of the Company's workwear business,
other than real estate and trademarks, and the license to Walls of the "Big
Smith" trademark and certain related trademarks for use in the manufacture, sale
and licensing of workwear products. The proposed transaction will free the
Company from its low-potential workwear focus and the related overhead and
interest costs enabling it to focus on the growth of its higher-margin
sportswear business.
In order to fund its cash needs, on April 2, 1997, the Company
completed a Regulation S placement of $1.7 million of its 6% Convertible
Preferred Debentures due March 31, 2000. By March 1998, the Debentures had been
converted to 3,169,842 shares of the Company's Common Stock.
On December 10, 1997, the Company obtained a new revolving
line-of-credit and term loan credit facility (the "Credit Facility") with
NationsCredit Commercial Funding, a NationsBank Company ("NationsCredit")
allowing for maximum availability of $10,000,000 based on a specified percentage
of eligible accounts receivable, inventories, real property, equipment, and
trademarks. At December 31, 1998, the Company had approximately $121,816 of
unused availability under the total credit facility. The amount outstanding
under the Credit Facility as of December 31, 1998 was $4.65 million, with $3.91
million on the revolving line-of-credit and $0.74 under the term loan portion of
the Credit Facility. The loan bears interest at prime rate plus 1.875% (9.625%
at December 31, 1998) and matures in December 2000. The agreement also provides
for additional interest under certain circumstances and other fixed fees
payable. The loan is secured by all of the assets of the Company which includes,
without limitation, accounts receivable, inventories, property and equipment and
trademarks.
19
<PAGE>
On or about August 10, 1998, the Company sold Units to accredited
investors including warrants to purchase 20,000 shares of the Company's Common
Stock, and $200,000 of the Company's 12% promissory notes in a private placement
through D.L. Cromwell Investments, Inc. ("Cromwell"). Cromwell was paid a total
commission of $16,000. The Units were sold to accredited investors without
registration under the 1933 Act, or the securities laws of any state, in
reliance on the exemptions contained in Rule 506 of Regulation D promulgated
under the 1933 Act.
On February 18, 1999, the Company received the proceeds of a
private placement offering of 1,100,000 units (the "Units") of the Company's
securities, with each Unit consisting of one share of the Company's Common Stock
and two warrants each to purchase one share of the Company's Common Stock, one
of which is exercisable at a price of $1.50 per share and the second of which is
exercisable at a price of $1.75 per share. The warrants have a three-year term.
Cromwell was the placement agent for the offering. The Company paid Cromwell a
commission of 11% of the total aggregate purchase price and Cromwell also
received warrants to purchase 110,000 Units of the Company's securities as
described above at an exercise price of $1.20 per Unit. Pursuant to the terms of
the offering, the Company will effect a three-to-one reverse stock split shortly
after the Annual Meeting of Stockholders to be held on or about April 20, 1999,
provided that the number and exercise prices of the warrants shall not be
adjusted by virtue of such reverse stock split. As a result, the Company
believes that the holders of a substantial portion of the warrants will exercise
their warrants and that the Company will realize further proceeds from such
exercises. The Company has also agreed to register the resale of the shares of
Common Stock, the Units and the shares underlying the warrants included in the
offering.
In 1998, the Company financed its operations primarily with
borrowings under its Credit Facility with NationsCredit. Cash used in operating
activities totaled $0.53 million for the year ended December 31, 1998 as
compared with cash used in operating activities of $0.76 million for the
year ended December 31, 1997. This change reflected primarily a permanent and
significant reduction in executive personnel salaries and related overhead costs
due to streamlining of executive staff and a decrease in travel and
entertainment costs related to reduced foreign sales activities, along with the
introduction of the sportswear line to more mass merchandise stores. The Company
typically experiences negative cash flow from operations during the first half
of each year due to the build-up of inventory in preparation for increased sales
volume in the second half of each year. See "-- Seasonality."
Capital Expenditures
Capital expenditures totaled $126,179 for the year ended December
31, 1998. These expenditures consisted primarily of improvements to the
Carthage, Missouri plant and leasehold improvements to the retail store in
Miami, Florida.
20
<PAGE>
Intangible Assets
In 1995, the Company purchased the "Big Smith" trademark from
Amita in the seven countries in Europe for which the Company did not previously
have trademark rights for an aggregate purchase price of $500,000 payable over
four years. A final payment of $50,000 is due in April 1999. See "Item 1.
Description of Business -- Wholesale Operations -- Foreign Sportswear."
Seasonality
The Company's sales are generally higher in the last six months
of the year as compared to the first six months of the year both in terms of
revenues generated and, to a lesser extent, total garments sold. This
seasonality is due to an increase in sales of winter weight garments, which sell
at higher prices, combined with continued sales of regular weight garments. This
seasonality has a significant impact on the cash flow of the Company because the
Company's inventory levels tend to increase during the summer months in
preparation for anticipated higher sales levels in September, October and
November.
If the Walls Sale and License is consummated, the Company
believes that its continuing business will be less subject to seasonal variation
than it historically has been. The Company's sportswear products sell at a
generally constant rate with some acceleration of sales in the spring and fall.
ITEM 7. FINANCIAL STATEMENTS.
See the financial statements and notes related thereto, beginning
on page F-1, included elsewhere in this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
A change in the Company's independent auditors to Daszkal, Bolton
& Manela, CPAs, of Boca Raton, Florida, was reported on Current Reports on Form
8-K filed with the Securities and Exchange Commission on January 26, 1998 (as
amended January 28, 1998) and February 11, 1998.
21
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT.
The information required by this item is incorporated by
reference to the Company's Definitive Proxy Statement on Schedule 14A filed with
the Securities and Exchange Commission on March 18, 1999 and mailed on or about
March 30, 1999 to stockholders of record on March 3, 1999.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by
reference to the Company's Definitive Proxy Statement on Schedule 14A filed with
the Securities and Exchange Commission on March 18, 1999 and mailed on or about
March 30, 1999 to stockholders of record on March 3, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item is incorporated by
reference to the Company's Definitive Proxy Statement on Schedule 14A filed with
the Securities and Exchange Commission on March 18, 1999 and mailed on or about
March 30, 1999 to stockholders of record on March 3, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company purchases some of its raw materials from a
corporation whose President is the Secretary of the Company. Such purchases for
the years ended December 31, 1998 and 1997 were $438,354 and $224,916,
respectively. The Company also purchased approximately $145,000 of finished
package goods for its ladieswear clothing line. Accounts payable to this related
party totaled $78,522 and $1,269 at December 31, 1998 and 1997, respectively.
Accounts receivable from this related party totaled $0 and $0 at December 31,
1998 and 1997, respectively.
If the Walls Sale and License is consummated, the Company
estimates that it will cease to purchase raw materials when it ceases to
manufacture workwear. The Company will continue, however, to purchase finished
package goods for its women's clothing line from the above referenced company at
approximately the same levels as in 1998.
The Company's President, Chief Executive Officer and Chairman of
the Board, participated in the Company's Credit Facility by providing partial
security in the form of a $200,000 certificate of deposit. Mr. Lebowitz holds
the Company's promissory note for $200,000 as security for this participation.
If the Walls Sale and License is consummated,
22
<PAGE>
the Company will pay down its Credit Facility to a sufficient level for
NationsCredit to release the certificate of deposit as security. Mr. Lebowitz
also holds the Company's promissory note dated December 23, 1998 for $250,000
given in exchange for Mr. Lebowitz's repayment of bridge financing obtained by
the Company in May 1998.
23
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT TABLE
Exhibit
No. Description
--- -----------
3(a) Form of Restated Certificate of Incorporation.*
(b) By-laws.*
10(c) Loan and Security Agreement, dated December __, 1997, between the
Company and National Credit Commercial Funding, Inc., a NationsBank
Company.***
(z) Amended and Restated Employment Agreement, dated January 1, 1998,
between the Company and S. Peter Lebowitz***
(ab) Warrant to Purchase Common Stock, dated as of April 2, 1997.**
(ac) Letter of Intent, dated February 10, 1998, from D.L. Cromwell
Investments, Inc. ("Cromwell") to Willora Company Limited ("Willora")
with respect to the conversion of the remaining Debentures.***
(ad) Letter Agreement, dated February 10, 1998, among the Company, Willora
and Cromwell, with respect to the conversion of the remaining
Debentures.***
(ae) Form of Subscription Agreement with respect to the 1999 private
placement offering through D.L. Cromwell Investments, Inc.****
(af) Form of Warrant to Purchase Common Stock with respect to the 1999
private placement offering through D.L. Cromwell Investments,
Inc.****
(ag) Form of Placement Agent's Agreement with respect to the 1999 private
placement offering through D.L. Cromwell Investments, Inc.****
(ah) Asset Purchase Agreement, dated February 26, 1999, by and between
Walls Industries, Inc., Cleburne, Texas and the Company.****
(ai) Agreement Not to Compete, dated February 26, 1999, by and between
Walls Industries, Inc., Cleburne, Texas and the Company.****
(aj) Agreement Not to Compete, dated February 26, 1999, by and between
Walls Industries, Inc., Cleburne, Texas and S. Peter Lebowitz.****
27 Financial Data Schedule****
- --------------------------
* Previously filed with, and incorporated herein by reference to, the
Registrant's Registration Statement on Form SB-2 (No. 33-85302), as
amended, declared effective on February 8, 1995 ("Form SB-2").
** Previously filed with, and incorporated herein by reference to, the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1996, filed on April 15, 1997.
24
<PAGE>
*** Previously filed with, and incorporated herein by reference to, the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1997, filed on April 15, 1998.
**** Filed herewith.
(b) Reports on Form 8-K.
None.
25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 29, 1999 BIG SMITH BRANDS, INC.
By: /s/ S. Peter Lebowitz
----------------------
S. Peter Lebowitz
Chairman of the Board,
President and Chief
Executive Officer
In accordance with the Exchange Act, 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/ S. Peter Lebowitz Chairman of the Board, President March 29, 1999
- --------------------------
S. Peter Lebowitz and Chief Executive Officer
(Principal Executive Officer)
/s/ Glen Freeman Director March 29, 1999
- --------------------------
Glen Freeman
/s/ Julian H. Shaps Director March 29, 1999
- --------------------------
Julian H. Shaps
/s/ Theodore L. Listerman Director March 29, 1999
- ---------------------------
Theodore L. Listerman
/s/ Jack Schultz Director March 29, 1999
- --------------------------
Jack Schultz
/s/ Susan A. Leonhardt Director of Accounting March 29, 1999
- -------------------------- and Administration
Susan A. Leonhardt (Principal Accounting Officer)
</TABLE>
26
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<PAGE>
BIG SMITH BRANDS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants...................................................F-1
Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997......................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997......................................................F-4
Consolidated Statements of Changes in Stockholders' Deficit
for the Years Ended December 31, 1998 and 1997..................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997......................................................F-6
Notes to Consolidated Financial Statements........................................F-8
</TABLE>
<PAGE>
DASZKAL, BOLTON & MANELA
CERTIFIED PUBLIC ACCOUNTANTS
----------------------------
A PARTNERSHIP OF PROFESSIONAL ASSOCIATIONS
240 W. PALMETTO PARK ROAD, SUITE 300 o BOCA RATON, FLORIDA 33432
TELEPHONE (561) 367-1040 FAX (561) 750-3236
<TABLE>
<CAPTION>
<S> <C>
JEFFREY A. BOLTON, CPA, P.A. MEMBER OF THE AMERICAN INSTITUTE
MICHAEL I. DASZKAL, CPA, P.A. OF CERTIFIED PUBLIC ACCOUNTANTS
ROBERT A. MANELA, CPA, P.A.
TIMOTHY R. DEVLIN, CPA, P.A.
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders
Big Smith Brands, Inc.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Big Smith
Brands, Inc., and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows for the years ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Big Smith Brands,
Inc., and subsidiary as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company experienced a loss from operations
in 1998 and 1997 and had a working capital deficiency at December 31, 1998 and
1997. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management has completed an equity offering in the
first quarter of 1999 and has also entered into a contract to sell certain
assets of the Company, as described in Notes 14 and 16. Additionally, Management
contemplates additional funding from the exercise of warrants that are attached
to the equity offering. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/DASZKAL, BOLTON & MANELA, CPA's
Boca Raton, Florida
February 26, 1998
F-1
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
------
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash $ 112,917 $ 111,190
Cash - foreign (Note 10) 4,799 7,762
Accounts receivable, less allowance for
doubtful accounts; 1998 - $58,210;
1997 - $253,768 (Note 1) 2,327,240 2,004,176
Inventories (Notes 1,2,7) 3,340,741 3,265,983
Prepaid expenses 122,802 147,985
------------- -------------
Total current assets 5,908,499 5,537,096
------------- -------------
Property and equipment, at cost: (Notes 1, 7)
Land 20,000 20,000
Buildings 557,289 497,978
Equipment 1,936,213 1,940,252
Vehicles 62,985 81,511
Leasehold improvements 43,028 -
------------- -------------
2,619,515 2,539,741
Less: accumulated depreciation (1,607,886) (1,361,754)
------------- -------------
Net property and equipment 1,011,629 1,177,987
------------- -------------
Other assets:
Certificate of deposit (Note 12) 200,000 -
Trademarks, less accumulated amortization;
1998 - $117,501; 1997 - $34,391 398,359 432,749
Security deposits 42,280 26,139
Deferred finance charges, less accumulated
amortization of 1998 - $160,522; 1997 -
$69,949 (Note 1) 527,285 352,504
------------- -------------
Total other assets 1,167,924 811,392
------------- -------------
Total assets $ 8,088,052 $ 7,526,475
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Current liabilities:
Revolving line-of-credit (Note 3) $ 3,911,316 $ 2,595,088
Current maturities of long-term debt (Note 4) 379,176 429,609
Checks outstanding in excess of bank balance 181,596 277,284
Accounts payable 2,562,052 2,266,548
Accrued expenses 357,202 506,602
Accrued restructuring/litigation (Note 13) 130,291 330,863
Accrued royalties (Note 7) 664,587 665,674
Note payable - stockholder (Note 12) 250,000 -
------------- -------------
Total current liabilities 8,436,220 7,071,668
------------- -------------
Long-term debt (Note 4) 555,245 2,160,486
Note payable - stockholder (Note 12) 200,000 -
------------- -------------
Total long-term debt 755,245 2,160,486
------------- -------------
Commitments, contingencies and subsequent events
(Notes 5, 11, 13 & 16) - -
Stockholders' deficit (Note 4):
Common stock, $.01 par value; authorized
10,000,000 shares; issued and outstanding
1998 - 7,354,683 and 1997 - 4,199,842 shares 73,547 41,998
Additional paid-in capital 9,130,767 7,181,620
Accumulated deficit (10,307,727) (8,929,297)
------------- -------------
Total stockholders' deficit (1,103,413) (1,705,679)
------------- -------------
Total liabilities and stockholders' deficit $ 8,088,052 $ 7,526,475
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Revenues: (Notes 1, 7)
Net sales $ 13,210,107 $ 12,560,715
------------- -------------
Costs of goods sold 9,989,048 11,355,677
------------- -------------
Gross profit 3,221,059 1,205,038
------------- -------------
Operating expenses:
Selling 1,673,469 1,749,968
General and administrative 1,634,869 1,902,663
Restructuring and litigation charges (Note 13) - 1,007,897
Bad debts (7,652) 205,440
------------- -------------
Total operating expenses 3,300,686 4,865,968
------------- -------------
Loss from operations (79,627) (3,660,930)
------------- -------------
Other income (expense):
Royalty income (Notes 4, 8) 50,000 -
Interest income 261 6,235
Interest expense (593,996) (644,192)
Amortization of debenture discount (Note 4) (606,204) (193,796)
Amortization of trademarks and loan fees (124,963) (104,340)
Foreign currency transaction gain (loss) (596) (10,693)
Loss on sale of equipment (19,363) (21,514)
Other income (expenses) (3,942) 2,807
------------- -------------
Total other (expense) (1,298,803) (965,493)
------------- -------------
Loss before income taxes (1,378,430) (4,626,423)
Provision for income taxes (Note 6) - -
------------- -------------
Net loss $ (1,378,430) $ (4,626,423)
============= =============
Net loss per share (basic and diluted) (Note 1) $ (.21) $ (1.16)
============= =============
Weighted average common shares outstanding
(Note 1) 6,530,366 3,985,484
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 39,300 $ 6,315,818 $ (4,302,874) $ 2,052,244
Discount on convertible debentures (Note - 800,000 - 800,000
4)
Conversion of convertible debentures
into common shares (Note 4) 2,698 65,802 - 68,500
Net loss - 1997 - - (4,626,423) (4,626,423)
----------- ------------ ------------ ------------
Balance, December 31, 1997 41,998 7,181,620 (8,929,297) (1,705,679)
Conversion of convertible debentures
into common shares (Note 4) 29,000 1,602,500 - 1,631,500
Conversion of accounts payable
and interest costs into common shares 2,549 378,743 - 381,292
Debenture issuance cost - (32,096) - (32,096)
Net loss - 1998 - - (1,378,430) (1,378,430)
----------- ------------ ------------ ------------
Balance, December 31, 1998 $ 73,547 $ 9,130,767 $(10,307,727) $ (1,103,413)
=========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,378,430) $ (4,626,423)
Items not requiring cash:
Depreciation and amortization 395,062 375,364
Loss on sale or impairment of property
and equipment 19,363 26,457
Amortization of debenture discount 606,204 193,796
Allowance for doubtful accounts (195,558) (72,376)
Allowance for inventory obsolescence (127,096) 49,077
Changes in assets and liabilities:
Accounts receivable (127,506) 1,219,030
Royalties receivable - 1,195,803
Inventories 52,338 829,704
Prepaid expenses 25,183 3,993
Other assets (16,141) (14,009)
Accounts payable and accrued expenses 409,230 (378,439)
Accrued restructuring and litigation (200,572) (320,439)
------------- -------------
Net cash used in operating activities (537,923) (761,971)
------------- -------------
Cash flows from investing activities:
Proceeds from the sale of property and equipment 3,075 1,250
Purchase of property and equipment (126,179) (65,561)
Proceeds from temporary investments 2,963 137,144
------------- -------------
Net cash (used in) provided by investing
activities (120,141) 72,833
------------- -------------
</TABLE>
(Continued on next page)
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
BIG SMITH BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(Continued from previous page)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from financing activities:
Checks outstanding in excess of bank balance (95,688) (7,268)
Proceeds from long-term debt (50,433) 1,103,840
Net borrowings (repayments) under line-of-credit
agreement 1,316,228 (1,038,089)
Principal payments on long-term debt (579,945) (706,253)
Proceeds from issuance of convertible debentures - 1,700,000
Increase in deferred finance costs (180,371) (422,453)
Increase in loan from stockholder 250,000 -
------------- -------------
Net cash provided by financing activities 659,791 629,777
------------- -------------
Increase (decrease) in cash 1,727 (59,361)
Cash, beginning of year 111,190 170,551
------------- -------------
Cash, end of year $ 112,917 $ 111,190
============= =============
Supplemental schedule of non-cash investing and financing activities:
Imputed discount on convertible debentures $ - $ 800,000
Conversion of convertible debentures into
common stock $ 1,631,500 $ 68,500
Conversion of accounts payable and accrued
expenses into common stock $ 381,291 $ -
Additional cash payment information:
- ------------------------------------
Interest paid $ 594,604 $ 767,817
============= =============
Income taxes $ - $ -
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Operations
- --------------------
The Company's revenues are predominately earned from manufacture and sale of
quality work apparel under a variety of brand names, including Big Smith, Smith
Mountain Classics and Big Smith Vintage. During 1998, the Company also
introduced its new sportswear line with sales of approximately $1,137,000. The
Company extends unsecured credit principally to national chains and local stores
throughout the United States and certain manufacturers and distributors in
Europe. One unaffiliated customer (Wal-Mart Stores, Inc.), accounted for 55.4%
and 45.6% of the Company's operating revenues for the years ended December 31,
1998 and 1997, respectively. Accounts receivable for this customer totaled
approximately $1,325,550 and $1,023,000, at December 31, 1998 and 1997,
respectively.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Big Smith Global Limited. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventory Pricing
- -----------------
All inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market.
Property and Equipment
- ----------------------
Property and equipment are depreciated over the estimated useful life of each
asset. Annual depreciation is computed using the straight-line method.
Depreciation expense for the years ended December 31, 1998 and 1997 was $270,099
and $271,024, respectively.
F-8
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Intangibles and Deferred Finance Charges
- ----------------------------------------
Trademark acquisition costs are being amortized using the straight-line method
based upon the economic useful life of fifteen years. Deferred finance charges
are recognized using the straight-line method over the term of the related debt,
and are included in amortization of trademarks and loan fees. The Company
periodically evaluates the carrying value of intangible assets to determine
whether any impairment has occurred in the value of such assets. Impairments are
recognized when the present value of projected future cash flows is less than
their carrying value. See Note 7 regarding certain impairment write downs that
were recorded during 1997.
Earnings Per Share
- ------------------
Earnings per share are computed based on the weighted average number of common
shares outstanding during the year. Stock warrants and options outstanding are
common stock equivalents and are included in the calculation of earnings per
share to the extent they are dilutive using the treasury-stock method. Basic and
diluted earnings per share are the same.
Cash and Cash Equivalents
- -------------------------
The Company considers highly liquid investments purchased with an original
maturity date of three months or less to be cash equivalents. There were no cash
equivalents at December 31, 1998 and 1997.
Revenue Recognition
- -------------------
Revenue from sales is recognized when title passes to the customer.
Advertising Costs
- -----------------
Advertising costs are expensed as incurred. The Company incurred approximately
$153,000 and $87,000 in advertising costs during the years ended December 31,
1998 and 1997, respectively.
Income Taxes
- ------------
Deferred tax liabilities and assets are recognized for the tax effects of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a deferred tax asset will not be realized.
F-9
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INVENTORIES
Inventories at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Raw materials $ 656,913 $ 760,759
Work-in-process 358,784 440,591
Finished goods 2,325,044 2,064,633
------------- -------------
Total inventories $ 3,340,741 $ 3,265,983
============= =============
NOTE 3 - REVOLVING LINE-OF-CREDIT
1998 1997
------------- -------------
Revolving line-of-credit $ 3,911,316 $ 2,595,088
============= =============
</TABLE>
At December 10, 1997, the Company secured a revolving loan and credit
accommodation allowing for maximum borrowing of $10,000,000 with borrowing
levels based upon a specified percentage of eligible accounts receivable,
inventories, real property, equipment, and trademarks (see Note 4). The loan
bears interest at prime rate plus 1.875% (9.625% at December 31, 1998 and
10.375% at December 31, 1997), and matures in December 2000. At December 31,
1998, the Company has approximately $121,000 available under the entire
accommodation with $0 available under the revolving line-of-credit.
The agreement also provides for additional interest under certain circumstances
and other stated fees.
The loan is secured by the accounts receivable, inventories, property and
equipment, and trademarks. The loan agreement contains a restriction regarding a
capital expenditure limit.
F-10
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LONG-TERM DEBT
Long-term debt includes the following notes payable:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
6% convertible debentures due 2000 (a) $ - $ 1,025,296
Facility loans (b) 743,840 1,103,840
Trademark note (c) 50,000 200,000
Equipment financing (d) 118,421 210,239
Other 22,160 50,720
------------- -------------
934,421 2,590,095
Less: current maturities 379,176 429,609
------------- -------------
$ 555,245 $ 2,160,486
============= =============
</TABLE>
Aggregate annual maturities of long-term debt at December 31, 1998 were:
1999 $ 379,176
2000 555,245
-------------
Total future maturities $ 934,421
=============
(a) On April 2, 1997, the Company sold convertible debentures in the principal
amount of $1,700,000 to an offshore accredited investor in a private placement.
The debentures accrued interest at 6%, mature on March 31, 2000 and were
unsecured. After May 15, 1997, the debentures were convertible into common stock
of the Company at the option of the holder.
The conversion price for each share specified is the lesser of $2.80 or 70% of
the stock's market price on the conversion date if converted between May 16 and
July 10, 1997, and the lesser of $2.80 or 67.5% of the stock's market price on
the conversion date if converted after July 10, 1997. The Company paid fees
aggregating $280,000 and issued a warrant to purchase 100,000 shares of the
Company's common stock to the investment banker that arranged the transaction.
The warrant provides for a purchase price of $2.00 per share and expires March
31, 2002.
F-11
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LONG-TERM DEBT (Continued)
Because at the time of issuance the debenture holder's conversion rights allowed
a conversion into common shares with a market value in excess of the debenture
principal, this excess at the debenture issuance date of approximately $800,000,
was credited to additional paid-in capital. The resulting discount on the
debentures is charged to operations as imputed interest. During the year and
period ended December 31, 1998 and 1997, $1,631,500 and $68,500, respectively,
of convertible debt has been converted into 2,900,000 and 269,842 shares of
common stock and the un-amortized portion of the discount of $606,204 at
December 31, 1997 has been charged to expense in 1998.
(b) December 10, 1997, the Company obtained a facility loan in the amount of
$1,103,840 along with a revolving line-of-credit loan, (see Note 3). The
facility loan is secured by real estate, equipment and trademarks of the
Company. The loan provides for equal monthly payments over a five year period of
time and bears interest at prime plus 1.875% (9.625% and 10.375% at December 31,
1998 and 1997.)
(c) The trademark note is non-interest bearing, payable in annual installments
of $100,000 and due April 18, 1999. At December 18, 1998, an exclusive sales
territory agreement was granted to the creditor for purchase and sale of Big
Smith Branded apparel throughout Italy. In consideration of these rights and
privileges, the Company charged the creditor a one-time royalty fee of $50,000
and in return, the creditor reduced the outstanding balance of the debt by the
same amount (see Note 8).
(d) The equipment loan bears interest at 9.7% and is payable $7,921 per month
including interest through April 20, 2000 and secured by certain equipment.
NOTE 5 - OPERATING LEASES
The Company leases real property under noncancellable operating leases for
periods of 36 to 60 months. Rent expense for the years ended December 31, 1998
and 1997 was approximately $165,000 and $123,000, respectively.
Future minimum lease payments at December 1998 were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 98,422
- --------------------------------------------------------------------------------
2000 71,315
- --------------------------------------------------------------------------------
2001 39,168
- --------------------------------------------------------------------------------
2002 40,343
- --------------------------------------------------------------------------------
2003 6,757
- --------------------------------------------------------------------------------
Thereafter -
- --------------------------------------------------------------------------------
Total future minimum lease payments $ 256,005
=========
- --------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES
The provision (benefit) for income taxes includes these components:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Current $ - $ -
Deferred - -
Change in beginning of year valuation allowance - -
------------- -------------
Total $ - $ -
============= =============
A reconciliation of income tax expense at the statutory rate to the Company's
actual income tax expense is shown below:
1998 1997
------------- -------------
Computed at the statutory rate (34%) $ (486,272) $ (1,548,938)
Increase (decrease) resulting from:
Non-deductible expenses 17,446 19,333
State income taxes and other, net of federal
tax benefit (50,036) (163,289)
Change in deferred tax asset valuation allowance 518,862 1,692,894
------------- -------------
Actual tax provision $ - $ -
============= =============
The tax effects of temporary differences related to deferred taxes shown on the
balance sheets were:
Deferred tax assets: 1998 1997
------------- -------------
Allowance for doubtful accounts $ 22,702 $ 98,970
Inventories 653 85,050
Provision for impairment losses on property
and equipment 60,966 60,966
Accrued health insurance 69,462 71,757
Accrued compensated absences 3,738 -
Accrued stock option compensation 24,130 17,997
Accrued restructuring/litigation 50,813 129,037
Net operating loss carryforward 3,712,641 2,975,915
------------- -------------
3,945,105 3,439,692
Deferred tax liabilities:
Accumulated depreciation (119,596) (133,045)
------------- -------------
Net deferred tax asset before valuation allowance 3,825,509 3,306,647
------------- -------------
Valuation allowance:
Beginning balance (3,306,647) (1,613,753)
Increase during the period (518,862) (1,692,894)
------------- -------------
Ending balance (3,825,509) (3,306,647)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
</TABLE>
F-13
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES (Continued)
The above net deferred tax asset is presented on the balance sheets as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax asset - current $ 96,555 $ 255,777
Deferred tax asset - long-term 3,728,954 3,050,870
Valuation allowance (3,825,509) (3,306,647)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
</TABLE>
The Company has unused operating loss carryforwards of approximately $9,520,000
and $7,630,000, at December 31, 1998 and 1997, respectively, which expire
principally in 2013 and 2012.
NOTE 7 - SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain concentrations.
Those matters include the following:
Royalties Receivable and Payable
- --------------------------------
At December 31, 1998 and 1997, the Company has recorded accrued royalties
payable of $664,587 and $665,674 for 1998 and 1997 as a current liability. As
discussed in Note 13 the Company is currently involved in various litigation
involving purported termination of the Caterpillar licensing agreement,
including amounts to be received from licenses for sale of Caterpillar goods
manufactured abroad and royalties to be paid to Caterpillar. Management's
position is that there will be no payment made regarding the amount of recorded
royalties payable. Because the payable is involved in litigation, events could
occur in the near term that would materially affect the amount and timing of
payments of this account.
Provision for Inventory Obsolescence and Marketability
- ------------------------------------------------------
At December 31, 1997, the Company had quantities of certain fabric, trim and
finished goods that exceeded the current year volume of sales or use. Management
reduced the carrying value of these items by approximately $218,000, through a
charge included in the 1997 cost of goods sold. The Company sold these goods
during 1998.
Reduction of Value of Long-Lived Assets
- ---------------------------------------
In connection with the restructuring/litigation described in Note 13, the
Company had reduced the carrying value of certain building improvements and
equipment by approximately $156,000 at December 31, 1997.
F-14
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SIGNIFICANT ESTIMATES AND CONCENTRATIONS (Continued)
Self Insurance
- --------------
The Company maintains a self-insured health program covering substantially all
of its employees. The Company retains the liability for claims amounts up to
$25,000 annually for each covered employee and has reinsured the liability for
annual claim amounts in excess thereof and $1,000,000 in aggregate with a
commercial insurer. Provisions for claims costs are recorded based upon
management's estimates of the Company's aggregate liability for claims incurred.
Claims payments based on actual claims ultimately filed could differ materially
from these estimates.
Litigation - Related Obligations
- --------------------------------
As discussed in Note 13, the Company is a defendant in several lawsuits. The
Company intends to defend against these lawsuits and pursue counterclaims, if
available. The financial statements include estimates of the costs of defense;
they include no accruals of any amounts receivable for counterclaims. The
amounts of ultimate costs related to these lawsuits and amounts which may be
recoverable through counterclaims could differ materially in the near term.
Major Customers
- ---------------
Current vulnerabilities due to concentrations of major customers are discussed
in Note 1.
Revenues from Major Products.
- -----------------------------
Net sales of overalls accounted for approximately $6.4 million and $7.7 million
in 1998 and 1997, respectively.
NOTE 8 - LICENSING AGREEMENTS
The Company has entered into a one year licensing agreement at December 18,
1998, with a company in Italy that will design, manufacture and distribute,
throughout Italy, sweaters and jackets bearing the Big Smith trademark, label
and/or brand. During the term of this agreement, the company in Italy will also
have the exclusive right to sell other apparel products purchased from Big Smith
Brands, Inc.
As discussed in Note 13, the Company's license with Caterpillar purportedly has
been terminated.
F-15
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCK OPTIONS AND WARRANTS
Stock Option Plan
- -----------------
Under the Company's stock option plan, 500,000 shares of common stock were
reserved for issuance upon exercise of options granted to directors, officers
and employees of the Company. Options issued through December 31, 1998 carry
exercise prices ranging from 27% to 75% of the quoted market price on the date
of the grant. The options vest equally over a period of four years following the
date of grant and the unexercised portion of the options expires and ceases to
be exercisable on the earlier of the fifth year after the date of the grant or
specified date following termination of employment.
In 1996, the Company elected to continue measuring compensation cost using the
intrinsic value based method of accounting prescribed in Accounting Principles
Board Opinion 25, "Accounting for Stock Issued to Employees." Compensation
(benefit) cost recognized for the stock option plan amounted to $(24,575) and
$40,300 for 1998 and 1997, respectively. Disclosures about the fair value of
options and pro forma disclosures of the effect of measuring compensation based
on the fair value method of accounting have not been presented because
management believes such values do not have a material effect.
On February 11, 1998, the Board of Directors granted each non-employee member of
the Board of Directors an option to purchase 10,000 shares of common stock of
the Company. Also, the President of the Company was granted options to purchase
1,000,000 shares of the Company's common stock. A senior advisor to the Company
was granted options to purchase 50,000 shares of the Company's stock. The option
exercise price at the date of grants is equal to the fair market value of the
common stock.
Information related to options is summarized below:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Price
Options Per Option
------------- -------------
<S> <C> <C>
Outstanding at December 31, 1996 (24,413 exercisable) 202,650 $ 2.77
Granted 110,100 .47
Exercised - -
Forfeited (17,050) 3.18
------------- -------------
Outstanding at December 31, 1997 (67,850 exercisable) 295,700 2.04
------------- -------------
Granted 1,112,000 .55
Exercised - -
Forfeited (63,900) 1.97
------------- -------------
Outstanding at December 31, 1998 (108,850) exercisable 1,343,800 $ .81
============= =============
</TABLE>
F-16
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCK OPTIONS AND WARRANTS (Continued)
Information related to options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Exercise price range $0.42 - $4.00
Number of options:
Outstanding 1,343,800
Exercisable 108,850
Weighted average exercise price:
Outstanding $ .81
Exercisable $2.50
Weighted average remaining contractual life 4 years
</TABLE>
At December 31, 1997, the Company had 1,955,000 warrants outstanding that allows
the holder to purchase one share of common stock, par value $.01 per share until
February 8, 1998 at an exercise price of $4.60 per share. None of the warrants
were exercised.
At August 10, 1998, the Company granted 20,000 warrants to accredited investors
to purchase the common stock of the Company at an exercise price of $1.00 for a
period of five years.
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods were used to estimate the fair value of financial
instruments:
Cash and Checks Outstanding in Excess of Bank Balance
- -----------------------------------------------------
The carrying amount is a reasonable estimate of fair value.
Cash - Foreign
- --------------
The carrying amount of cash held in foreign bank accounts is a reasonable
estimate of their fair value.
Certificate of Deposit
- ----------------------
The carrying amount of the certificate of deposit is a reasonable estimate of
its face value.
F-17
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
Notes Payable and Long-term Debt
- --------------------------------
Fair value is estimated based on the borrowing rates currently available to the
Company for bank loans with similar terms and maturities.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 112,917 $ 112,917 $ 111,190 $ 111,190
Temporary investments 4,799 4,799 7,761 7,761
Certificate of deposit 200,000 200,000 - -
Financial liabilities:
Checks outstanding in
excess of bank balance 181,596 181,596 277,284 277,284
Line-of-credit 3,911,316 3,911,316 2,595,088 2,595,088
Long-term debt 934,421 934,421 2,590,095 2,590,095
</TABLE>
NOTE 11 - COMMITMENTS
The Company has existing significant purchase commitments of approximately
$1,304,000 for raw materials with various scheduled delivery dates in 1999.
These obligations will be assigned to Walls Industries, Inc. (see Note 16).
The Company is committed to pay an annual $50,000 facility fee on the revolving
loans and credit accommodations to the bank.
NOTE 12 - RELATED-PARTY TRANSACTIONS
The Company purchases some of its raw materials from a corporation whose
President is the Secretary of the Company. Such purchases for the years ended
December 31, 1998 and 1997 were $468,354 and $224,916, respectively.
In July 1998, a $200,000 certificate of deposit was pledged as collateral for
the revolving line-of-credit lender by the Chairman of the Board of Directors.
The Company issued a note payable to the Chairman for the repayment of the
collateral and has reflected the certificate of deposit and note payable in the
December 31, 1998 Balance Sheet.
In December 1998, the Chairman also loaned the Company $250,000 and the Company
issued an 8% demand note payable to the Chairman.
F-18
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - LITIGATION AND RESTRUCTURING
Caterpillar Litigation and Other Related Matters
- ------------------------------------------------
The Company is currently engaged in litigation in the United States and in Great
Britain with Caterpillar, Inc., with respect to the Company's rights to continue
to manufacture and sell Caterpillar branded products through December 31, 1999,
the expiration date of the license.
There can be no assurance that the outcome of the litigation will be favorable
to the Company. If the outcome of the litigation is not favorable, such outcome
could have a material adverse effect on the financial condition of the Company.
The Company is involved in pending or threatened litigation in foreign
jurisdictions with a number of its foreign distributors in connection with their
refusal to pay royalties and accounts receivable for the sales of goods to such
distributors. Certain of these distributors have made claims against the Company
relating to the effects of the purported termination of the Caterpillar license
on their arrangements with the Company.
The Company's attorneys have advised the Company that it has valid claims in
these actions for royalties and accounts receivable owing. There can be no
assurance that the outcome of these litigations will be favorable to the
Company. Additionally, the Company believes that the outcome of these actions,
and particularly with respect to any claims against it in these actions, may
depend, in part, on the outcome of the Caterpillar litigation.
Restructuring
- -------------
Because of the purported termination of the Caterpillar licensing agreement and
the resulting litigation discussed above, management adopted a plan to downsize
and restructure the Company's operations. This plan included liquidation of the
remaining inventory of Caterpillar goods, closure of two manufacturing
facilities, sale or transfer of equipment at those facilities, termination or
relocation of certain employees and reorganization of the remaining personnel
and business structure.
Provisions were accrued in 1997 and 1996 for costs associated with the
litigation arising from the Caterpillar agreement and the subsequent
restructuring of the Company. Provision with respect to inventory write downs
and closeouts were accrued during 1997 and 1996 in cost of goods sold.
F-19
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - LITIGATION AND RESTRUCTURING (Continued)
Restructuring (Continued)
- -------------------------
Operating expenses were accrued in 1997 and 1996 for the costs of closing
domestic and foreign facilities and impairment of property and equipment and
other long-lived assets, as well as the costs of litigation and collection of
disputed amounts receivable related to the Caterpillar matters.
Activity in the accrued restructuring/litigation liability account during 1998
and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Beginning balance $ 330,863 $ 651,302
Subsequent adjustments of costs and losses
recognized - 1,007,897
Cash paid and noncash amounts utilized (200,572) (1,328,336)
------------- -------------
Ending balance $ 130,291 $ 330,863
============= =============
</TABLE>
NOTE 14 - MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS
As discussed in Notes 3 and 13, the Company's liquidity needs could exceed the
amount of borrowings available under the existing agreement. The Company has
commenced steps to obtain additional sources of liquidity including the sale of
additional common stock of $1,100,000 in January 1999. The company also signed
an agreement dated February 26, 1999 to sell certain assets and inventory
relating to its' workwear line and grant a license to manufacture workwear under
the Big Smith label (see Note 16). Management also plans to raise additional
equity during 1999. Management believes these actions will provide the necessary
capital and cash requirements to ensure the Company's ability to continue as a
going concern.
F-20
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED, NOT REVIEWED BY
INDEPENDENT AUDITORS)
<TABLE>
<CAPTION>
Provision
Total Operating (Credit)for Earnings
Calendar Operating Income Other Income (Loss) per
Quarter Revenues (Loss) Expenses Taxes Share
------------ ------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
1998
First (1) $ 2,263,917 $ (374,064) $ 762,744 $ - $ (.23)
Second (1) 2,541,746 (380,536) 164,398 - (.08)
Third 4,123,616 430,306 180,860 - .04
Fourth 4,280,828 244,667 190,801 .06
------------- ------------- ------------ ------------- ------------
$ 13,210,107 $ (79,627) $ 1,298,803 (2) $ - $ (.21)
============= ============= ============ ============= ============
1997
First $ 1,743,823 $ (491,941) $ 134,151 $ - $ (.16)
Second 2,365,784 (488,872) 247,818 - (.19)
Third (3) 4,232,496 (603,061) 217,792 - (.21)
Fourth (3) 4,218,612 (2,077,056) 365,732 - (.60)
------------- ------------- ------------ ------------- ------------
$ 12,560,715 $ (3,660,930) $ 965,493 (2) $ - $ (1.16)
============= ============= ============ ============= ============
</TABLE>
(1) The first and second quarter operating (loss) is attributable to the
increases of selling and administrative expenses associated with the new Big
Smith Sportswear line.
(2) Other expenses are comprised primarily of interest and amortization of the
debenture discount expense in the amounts of $1,200,200 and $837,987 for 1998
and 1997, respectively. The first quarter of 1998 included $606,204 of
converting debenture discount expense arising as a result of the retirement of
all of the outstanding convertible debentures.
(3) Operating (loss) reflects provisions approximately of $650,000 and $358,000
for the fourth and third quarters, respectively, for restructuring and
litigation costs. Also included in fourth quarter operating results are
approximately $304,000 of inventory write downs and accounts payable adjustments
charged to costs of goods sold and additional allowance for doubtful accounts of
approximately $169,000 charged to bad debts expense.
F-21
<PAGE>
BIG SMITH BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SUBSEQUENT EVENTS
At February 18, 1999, the Company completed a $1,100,000 private placement for
1,100,000 shares of the Company's common stock with two warrants to purchase a
share of the Company's common stock at $1.50 and $1.75, respectively. The
warrants will have a three-year term. After the completion of the offering, the
Company will affect a three-to-one reverse stock split. The number and exercise
prices of the warrants will not be adjusted by such stock split.
Upon completion of the exercise of the warrants, the Company will pay the
placement agent a consulting fee of $5,000 per month for a period of two years,
payable annually in advance. The Company has also agreed to prepare and file a
registration statement covering all of the securities in the units including the
placement agents securities.
On February 26, 1999, the Company entered into a series of agreements with Walls
Industries, Inc. to sell to Walls its workwear manufacturing machinery and
entire workwear inventory and raw materials. The Company also will grant Walls a
license to manufacture workwear under the Big Smith label.
The purchase price will be computed based upon the appraised value of certain
machinery and equipment and the book value of inventory and raw materials at
closing. The Company will receive the majority of the purchase price at closing
with the remaining amount within thirty-five days after closing. In
consideration for a ten-year non-competition agreement, Walls will pay the
Company $4,600,000 over an eight-year period with $400,000 due at closing and
400,000 six months thereafter. The transaction is contingent upon stockholder
and lender approval.
The following financial information assumes the transaction occurred at December
31, 1998 and represents the assets that would be sold pursuant to the agreement
(in thousands):
- -----------------------------------------------------------------------
Inventory $2,809
- -----------------------------------------------------------------------
Property and equipment, net 321
- -----------------------------------------------------------------------
The majority of the proceeds will be applied to the revolving line-of-credit and
long-term debt. Workwear represented 86% of the Company's sales in 1998.
Management has not estimated pro-forma affect the proposed sale would have had
on 1998 operations had the transaction occurred on January 1, 1998 or the effect
on the carrying value of the remaining assets and liabilities.
NOTE 17 - RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements to
conform to the 1998 financial statement presentation. These reclassifications
had no effect on reported net loss.
F-22
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
3(a) Form of Restated Certificate of Incorporation.*
(b) By-laws.*
10(c) Loan and Security Agreement, dated December __, 1997, between the
Company and National Credit Commercial Funding, Inc., a NationsBank
Company.***
(z) Amended and Restated Employment Agreement, dated January 1, 1998,
between the Company and S. Peter Lebowitz***
(ab) Warrant to Purchase Common Stock, dated as of April 2, 1997.**
(ac) Letter of Intent, dated February 10, 1998, from D.L. Cromwell
Investments, Inc. ("Cromwell") to Willora Company Limited ("Willora")
with respect to the conversion of the remaining Debentures.***
(ad) Letter Agreement, dated February 10, 1998, among the Company, Willora
and Cromwell, with respect to the conversion of the remaining
Debentures.***
(ae) Form of Subscription Agreement with respect to the 1999 private
placement offering through D.L. Cromwell Investments, Inc.****
(af) Form of Warrant to Purchase Common Stock with respect to the 1999
private placement offering through D.L. Cromwell Investments,
Inc.****
(ag) Form of Placement Agent's Agreement with respect to the 1999 private
placement offering through D.L. Cromwell Investments, Inc.****
(ah) Asset Purchase Agreement, dated February 26, 1999, by and between
Walls Industries, Inc., Cleburne, Texas and the Company.****
(ai) Agreement Not to Compete, dated February 26, 1999, by and between
Walls Industries, Inc., Cleburne, Texas and the Company.****
(aj) Agreement Not to Compete, dated February 26, 1999, by and between
Walls Industries, Inc., Cleburne, Texas and S. Peter Lebowitz.****
27 Financial Data Schedule****
- --------------------------
* Previously filed with, and incorporated herein by reference to, the
Registrant's Registration Statement on Form SB-2 (No. 33-85302), as
amended, declared effective on February 8, 1995 ("Form SB-2").
** Previously filed with, and incorporated herein by reference to, the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1996, filed on April 15, 1997.
*** Previously filed with, and incorporated herein by reference to, the
Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1997, filed on April 15, 1998.
**** Filed herewith.
Exhibit 10(ae)
BIG SMITH BRANDS, INC.
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT made as of this __ day of __, 1999 between Big Smith
Brands, Inc., a Delaware corporation (the "Company") and the undersigned (the
"Subscriber").
WHEREAS, the Company desires to issue 1,100,000 Units ("Units" ) for
$1.00 per Unit on the terms and conditions hereinafter set forth and the
Subscriber desires to acquire the Units in a private placement, each Unit
consisting of 1 share of Common Stock, $.01 par value per share (the "Common
Stock") and 2 warrants to purchase shares of Common Stock of the Company. The
Class A Warrant will have an exercise price of $1.50 per share and the Class B
Warrants will have an exercise price of $1.75 per share (the "Warrants");
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto do hereby agree as follows:
I. SUBSCRIPTION FOR UNITS AND REPRESENTATIONS BY SUBSCRIBER
1.1 Subject to the terms and conditions hereinafter set forth, the Subscriber
hereby subscribes for and agrees to purchase from the Company ___ Units for a
price equal to $1.00 per Unit and the Company agrees to sell such Units to the
Subscriber for said purchase price. The purchase price is payable by certified
or bank check or wire transfer payable to the Company, contemporaneously with
the execution and delivery of this Subscription Agreement.
1.2 The Subscriber recognizes that the purchase of Units involves a high degree
of risk in that (i) the Company has had substantial losses in recent periods and
requires substantial funds in addition to the proceeds of this private
placement; (ii) an investment in the Company is highly speculative and only
investors who can afford the loss of their entire investment should consider
investing in the Company; (iii) the Subscriber may not be able to liquidate this
investment; (iv) transferability of the Units is extremely limited; and (v) in
the event of a disposition, a Subscriber could sustain the loss of the
Subscriber's entire investment.
1.3 The Subscriber represents that the Subscriber is an "accredited investor" as
such term in defined in Rule 501 of Regulation D promulgated under the United
States Securities Act of 1933, as amended (the "Act") qualifying as such on the
basis set forth in the executed Investor Questionnaire provided by the
Subscriber to the Company concurrently herewith and that the Subscriber is able
to bear the economic risk of an investment in the Units.
1.4 The Subscriber acknowledges that the Subscriber has prior investment
experience, including investment in non-listed and non-registered securities and
to evaluate the merits and risks of such an investment on the Subscriber's
behalf, and that the Subscriber recognizes the highly speculative nature of this
investment. The Subscriber or the Subscriber's purchaser representative has such
knowledge and experience in finance, securities, investments and other business
matters so as to be able to protect the interests of the Subscriber in
connection with this transaction, and the Subscriber's investment in the Company
hereunder is not material when compared to the Subscriber's total financial
capacity. The Subscriber understands the various risks of an investment in the
Company
<PAGE>
as proposed herein and can afford to bear such risks, including, without
limitation, the risks of losing the entire investment.
1.5 The Subscriber represents that the Subscriber has been furnished by the
Company during the course of this transaction with all information regarding the
Company which the Subscriber had requested or desired to know; that all
documents which could be reasonably provided have been made available for the
Subscriber's inspection and review; and that such information and documents
have, in the Subscriber's opinion, afforded the Subscriber with all of the same
information that would be provided the Subscriber in a registration statement
filed under the Act; that the Subscriber has been afforded the opportunity to
ask questions of and receive answers from duly authorized officers or other
representatives of the Company concerning the terms and conditions of the
offering, and any additional information which the Subscriber had requested.
1.6 The Subscriber hereby acknowledges that this offering of Units has not been
reviewed by the United States Securities and Exchange Commission ("SEC") because
of the Company's representations that this is intended to be a nonpublic
offering pursuant to Sections 4(2) or 3(b) of the Act. The Subscriber represents
that the Units are being purchased for his own account, for investment and not
for distribution or resale to others. The Subscriber agrees that he will not
sell or otherwise transfer such securities unless they are registered under the
Act or unless an exemption from such registration is available.
1.7 The Subscriber understands that the Units have not been registered under Act
by reason of a claimed exemption under the provisions of the Act which depends,
in part, upon his investment intention and other representations and warranties
set forth herein. In this connection, the Subscriber understands that it is the
position of the SEC that the statutory basis for such exemption would not be
present if his representation merely meant that his present intention was to
hold such securities for a short period, such as the capital gains period of tax
statutes, for a deferred sale, for a market rise, assuming that a market
develops, or for any other fixed period. The Subscriber realizes that, in the
view of the SEC, a purchase now with an intent to resell would represent a
purchase with an intent inconsistent with his representation to the Company, and
the SEC might regard such a sale or disposition as a deferred sale to which such
exemptions are not available.
1.8 The Subscriber understands that there is no public market for the Units. The
Subscriber understands that even if a public market develops for the Common
Stock, Rule 144 (the "Rule") promulgated under the Act requires, among other
conditions, a one year holding period prior to the resale (in limited amounts)
of securities acquired in a non-public offering without having to satisfy the
registration requirements under the Act. The Subscriber understands and hereby
acknowledges that the Company is under no obligation to register the securities
comprising the Units under the Act, except as provided in Paragraph 4 hereof.
The Subscriber consents that the Company may, if it desires, permit the transfer
of the securities comprising the Units out of his name only when his request for
transfer is accompanied by an opinion of counsel reasonably satisfactory to the
Company that neither the sale nor the proposed transfer results in a violation
of the Act or any applicable state "blue sky" laws (collectively "Securities
Laws"). The Subscriber agrees to hold the Company and its directors, officers
and controlling persons and their respective heirs, representatives, successors
and assigns harmless and to indemnify them against all liabilities, costs and
expenses incurred by them as a result of any misrepresentation made by him
contained herein or any sale or distribution by the undersigned Subscriber in
violation of any Securities Laws.
2
<PAGE>
1.9 The Subscriber consents to the placement of a legend on any certificate or
other document evidencing the Units stating that they have not been registered
under the Act and setting forth or referring to the restrictions on
transferability and sale thereof and a lockup that the Securities may not be
sold without the prior written consent of D.L. Cromwell Investments for a period
of one year.
1.10 The Subscriber hereby represents that the address of Subscriber furnished
by him at the end of this Subscription Agreement is the undersigned's principal
residence if he is an individual or its principal business address if it is a
corporation or other entity.
1.11 The Subscriber hereby represents that no representations or warranties have
been made to the Subscriber by the Company or any agent, employee or affiliate
of the Company and in entering into this transaction, the Subscriber is not
relying on any information, other than that contained in this Agreement and the
results of independent investigation by the Subscriber.
In furtherance of the foregoing and not by way of limitation, it never has been
represented, guaranteed or warranted by any broker, the Company, D.L. Cromwell
Investments, Inc., Fin-Atlantic Securities, any of their officers, directors,
stockholders, partners, employees or agents, or any other persons, whether
expressly or by implication, that: (i) the Company or the Subscriber will
realize any given percentage of profits and/or amount or type of consideration,
profit or loss as a result of the Company's activities or the Subscriber's
investment in the Company; or (ii) the past performance or experience of the
management of the Company, or of any other person, will in any way indicate the
predictable results of the ownership of the securities or of the Company's
activities.
1.12 If a natural person, the Subscriber is a bona fide resident of the State
contained in the address set forth on the signature page of this Agreement as
the undersigned's home address; at least 21 years of age; and legally competent
to execute this Subscription Agreement. If an entity, the undersigned is duly
authorized to execute this Agreement and this Agreement constitutes the legal,
valid and binding obligation of the undersigned enforceable against the
undersigned in accordance with its terms.
1.13 The undersigned will acquire the Securities for the undersigned's own
account (or for the joint account of the undersigned and the undersigned's
spouse either in joint tenancy, tenancy by the entirety or tenancy in common)
for investment and not with a view to the sale or distribution thereof or the
granting of any participation therein, and has no present intention of
distributing or selling to others any of such interest or granting any
participation therein.
1.14 No oral or written representations have been made other than as stated in
this Agreement, and no oral or written information furnished to the Subscriber
or the Subscriber's advisor(s) in connection with this offering were in any way
inconsistent with the information stated herein.
1.15 The Subscriber is not subscribing for Units as a result of or subsequent to
any advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, or
presented at any seminar or meeting, or any solicitation of a subscription by a
person other than a representative of D.L. Cromwell Investments, Inc.,
Fin-Atlantic Securities or the Company with which the undersigned had a
pre-existing relationship in connection with investments in securities
generally.
3
<PAGE>
1.16 The Subscriber is not relying on the Company with respect to the tax and
other economic considerations of an investment.
1.17 The Subscriber has received and carefully read copies of the Company's
Annual Report on Form 10-KSB for the period ended December 31, 1997 and the
Quarterly Report on Form 10-QSB for the period ended September 30, 1998. The
Subscriber has had the opportunity to ask questions about the contents of such
reports and is satisfied as to the responses of the Company.
1.18 Without limiting any of the Subscriber's other representations and
warranties hereunder, the Subscriber acknowledges that the undersigned has
reviewed and is aware of the risk factors described in the Company's annual
report on Form 10-KSB for the fiscal year ended December 31, 1997 and the
Company's other periodic reports filed with the SEC from time to time.
1.19 The Subscriber acknowledges that the representations, warranties and
agreements made by the Subscriber herein shall survive the execution and
delivery of this Agreement and the purchase of the Units.
1.20 The Subscriber has consulted his own financial, legal and tax advisors with
respect to the economic, legal and tax consequences of an investment in the
Units and has not relied on the Company, its officers, directors or professional
advisors for advice as to such consequences.
II. REPRESENTATIONS BY THE COMPANY
The Company represents and warrants to the Subscriber that prior to the
consummation of this offering and at the Closing Date:
(a) The Company is a corporation duly organized and existing under the laws of
the State of Delaware and has the corporate power to conduct the business which
it conducts and proposes to conduct. Upon the payment of past due franchise
taxes upon the closing of this offering, the Company will be in good standing in
the State of Delaware
(b) The execution, delivery and performance of this Subscription Agreement by
the Company will have been duly approved by the Board of Directors of the
Company and all other actions required to authorize and effect the offer and
sale of the Units will have been duly taken and approved.
(c) The Common Stock and Warrants comprising the Units have been duly and
validly authorized and when issued and paid for in accordance with the terms
hereof, the Common Stock will be fully paid and nonassessable and the Warrants
will be valid and binding obligations of the Company enforceable in accordance
with their respective terms.
(d) Except as disclosed in its public filings, the Company knows of no pending
or threatened legal or governmental proceedings to which the Company is a party
which could materially adversely affect the business, property, financial
condition or operations of the Company.
III. TERMS OF SUBSCRIPTION
3.1 The subscription period will begin as of January 19, 1999 and will terminate
at 11:59 PM Eastern time on January 29, 1999, unless extended by the Company for
an additional 10 days (the
4
<PAGE>
"Termination Date"). All Units will be offered on a "best efforts-all or none"
basis.
3.2 Placement of the Units will be made by D.L. Cromwell Investments, Inc, which
will receive a placement fee of 10% of the purchase price of the Units placed
and a nonaccountable expense allowance of 1% of the purchase price. Cromwell may
give a portion of such fees to another broker-dealer that participates in the
Offering.
IV. REGISTRATION RIGHTS
4.1 As soon as practicable but not later than 15 days following completion of
the 1998 audit, the Company shall file with the SEC a registration statement on
Form SB-2 or other applicable form (the "Registration Statement"), and to cause
the Registration Statement to be declared effective. The Registration Statement
shall cover the resale of the Common Stock, the Warrants and the shares of
Common Stock issuable upon exercise of the Warrants (the "Securities").
4.2 In connection with the filing of the Registration Statement, the Company
shall
(a) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement and take such
other reasonable action as may be necessary to keep the Registration Statement
effective until the earlier of the (A) public sale of the Securities or (B) the
Securities becoming capable of full and complete public sale without
registration under the Securities Act and to comply with the provisions of the
Securities Act and the Exchange Act, and the rules and regulations thereunder,
provided that the Registration Statement shall be kept effective so long as any
Warrants are outstanding;
4.3 Notify the Subscriber, after becoming aware thereof, (a) when the
Registration Statement or the prospectus included therein or any prospectus
amendment or supplement or post-effective amendment has been filed and, with
respect to the Registration Statement or any post-effective amendment, when the
same has become effective or (b) of any request by the SEC for amendment of or
supplement to the Registration Statement or related prospectus or for additional
information;
4.4 Furnish promptly to the Subscriber such reasonable number of copies of a
prospectus, and all amendments and supplements thereto, in conformity with the
requirements of the Securities Act, and such other documents as the Subscriber
may reasonably request in order to facilitate their disposition of any
Securities;
4.5 Use its best efforts to register and qualify the Securities under the
securities or Blue Sky laws of such states as shall be reasonably requested by
the Subscriber, and prepare and file in those states such amendments (including
post-effective amendments) and supplements and to take such other actions as may
be necessary to maintain such registration and qualification in effect at all
times during the period the Company is required to maintain the Registration
Statement effective, and to take all
5
<PAGE>
other actions necessary or advisable to enable the disposition of the Securities
in such states, provided that the Company shall not be required in connection
therewith or as a condition thereto to subject itself to taxation, to qualify to
do business or to file a general consent to service of process in any such
states; and
4.6 Notify the Subscriber, at any time when a prospectus relating to the
Securities is required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The Company shall promptly amend or
supplement the Registration Statement to correct any such untrue statement or
omission, and provide the Subscriber with an amended or supplemented prospectus
with respect to the Securities that corrects such untrue statement or omission.
4.7 It shall be a condition precedent to the obligations of the Company to the
Subscriber to take any action pursuant to this Section that the Subscriber shall
furnish to the Company such information regarding the Subscriber, the
Securities, and other shares of the Company's Common Stock held by the
Subscriber and the intended method of disposition of such securities as shall be
reasonably required to effect the registration of the Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
4.8 All expenses incurred by the Company in complying with this section,
including, without limitation, registration and filing fees, fees and expenses
of complying with state securities and Blue Sky laws, printing expenses, and
fees and disbursements of the Company's counsel and accountants, shall be paid
by the Company. All selling commissions applicable to the disposition of the
Securities shall not be borne by the Company but shall be borne by the
Subscriber.
4.9. (a) Whenever pursuant to Section 4 a Registration Statement relating to the
Securities is filed under the Act, amended or supplemented, the Company will
indemnify and hold harmless each holder of the securities covered by such
registration statement, amendment, or supplement (such holder being hereinafter
called the "Distributing Holder"), and each person, if any, who controls (within
the meaning of the Act) the Distributing Holder, and each underwriter (within
the meaning of the Act) of such securities and each person, if any, who controls
(within the meaning of the Act) any such underwriter, against any losses,
claims, damages, or liabilities, joint or several, to which the Distributing
Holder, any such controlling person or any such underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any such registration statement or any preliminary prospectus or final
prospectus constituting a part thereof or any amendment or supplement thereto,
or arise out of or are based upon the omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; and will reimburse the Distributing Holder and each such controlling
person and underwriter for any legal or other expenses reasonably incurred by
the
6
<PAGE>
Distributing Holder or such controlling person or underwriter in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage, or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in said registration statement, said preliminary prospectus, said
final prospectus, or said amendment or supplement in reliance upon and in
conformity with written information furnished by such Distributing Holder or any
other Distributing Holder, for use in the preparation thereof.
(b) The Distributing Holder will indemnify and hold harmless the Company, each
of its directors, each of its officers who have signed said registration
statement and such amendments and supplements thereto, each person, if any, who
controls the Company (within the meaning of the Act) against any losses, claims,
damages, or liabilities, joint and several, to which the Company or any such
director, officer, or controlling person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages, or liabilities arise out of
or are based upon any untrue or alleged untrue statement of any material fact
contained in said registration statement, said preliminary prospectus, said
final prospectus, or said amendment or supplement, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in said registration statement, said preliminary prospectus, said final
prospectus, or said amendment or supplement in reliance upon and in conformity
with written information furnished by such Distributing Holder for use in the
preparation thereof; and will reimburse the Company or any such director,
officer, or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability, or action.
(c) Promptly after receipt by an indemnified party under this paragraph 4.9 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party, give the
indemnifying party notice of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than under this paragraph 4.9.
In case any such action is brought against any indemnified party, and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this paragraph 4.2 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof.
V. MISCELLANEOUS
5.1 Any notice or other communication given hereunder shall be deemed sufficient
if in writing and sent by registered or certified mail, return receipt
requested, addressed to the Company, at 7100 W. Camino Real, Suite 402, Boca
Raton, Florida 33433, Attention: President and to the Subscriber at his address
indicated on the last page of this Subscription Agreement. Notices shall be
deemed to have been given on the date of mailing, except notices of change of
address, which shall be deemed
7
<PAGE>
to have been given when received.
5.2 This Subscription Agreement shall not be changed, modified or amended except
by a writing signed by the parties to be charged, and this Subscription
Agreement may not be discharged except by performance in accordance with its
terms or by a writing signed by the party to be charged.
5.3 This Subscription Agreement shall be binding upon and inure to the benefit
of the parties hereto and to their respective heirs, legal representatives,
successors and assigns. This Subscription Agreement sets forth the entire
agreement and understanding between the parties as to the subject matter thereof
and merges and supersedes all prior discussions, agreements and understandings
of any and every nature among them.
5.4 Notwithstanding the place where this Subscription Agreement may be executed
by any of the parties hereto, the parties expressly agree that all the terms and
provisions hereof shall be construed in accordance with and governed by the laws
of the State of Florida.
5.5 This Subscription Agreement may be executed in counterparts. Upon the
execution and delivery of this Subscription Agreement by the Subscriber, this
Subscription Agreement shall become a binding obligation of the Subscriber with
respect to the purchase of Units as herein provided; subject, however, to the
right hereby reserved to the Company to enter into the same agreements with
other subscribers and to add and/or to delete other persons as subscribers.
5.6 The holding of any provision of this Subscription Agreement to be invalid or
unenforceable by a court of competent jurisdiction shall not affect any other
provision of this Subscription Agreement, which shall remain in full force and
effect.
5.7 It is agreed that a waiver by either party of a breach of any provision of
this Subscription Agreement shall not operate, or be construed, as a waiver of
any subsequent breach by that same party.
5.8 The parties agree to execute and deliver all such further documents,
agreements and instruments and take such other and further action as may be
necessary or appropriate to carry out the purposes and intent of this
Subscription Agreement.
V. BLUE SKY LEGENDS
Connecticut
-----------
The undersigned acknowledges that the Securities have not been registered under
the Connecticut Uniform Securities Act, as amended (the "Act") and are subject
to restrictions on transferability and sale of securities as set forth herein.
The undersigned hereby agrees that such Securities will not be transferred or
sold without registration under the Act or exemption therefrom.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Subscription Agreement as of
the day and year first written above.
- ------------------------------ ------------------------------------
Signature of Subscriber(s)
- ------------------------------ ------------------------------------
Name of Subscriber(s)
[please print]
- ------------------------------ ------------------------------------
Address of Subscriber(s)
- ------------------------------ ------------------------------------
Social Security or Taxpayer
Identification Number of
Subscriber(s)
Subscription Accepted:
BIG SMITH BRANDS, INC.
By: ______________________________
Name:
Title:
Date: ____________________
9
<PAGE>
BIG SMITH BRANDS, INC.
INVESTOR QUESTIONNAIRE
Purpose of this Questionnaire
- -----------------------------
The Units are being offered without registration under the Securities Act of
1933, as amended (the "1933 Act"), or the securities laws of any state, in
reliance on the exemptions contained in Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended. The Company may be required to
determine that an individual, or an individual together with a "purchaser
representative" or each individual equity owner of an investing entity meets
certain suitability requirements before selling the Units to such individual or
entity. You understand that the Company will rely on the following information
for purposes of such determination, and that the Units will not be registered
under the 1933 Act in reliance on an exemption from registration provided under
Section 4(2) under the 1933 Act. THE COMPANY MAY, AT ITS ELECTION, NOT SELL
UNITS TO A SUBSCRIBER WHO HAS NOT THOROUGHLY FILLED OUT A QUESTIONNAIRE. IN THE
CASE OF AN INVESTOR THAT IS A PARTNERSHIP, TRUST, OR CORPORATION, EACH EQUITY
OWNER MUST COMPLETE A QUESTIONNAIRE. This Questionnaire does not constitute an
offer to sell or a solicitation of an offer to buy the Units or any other
security.
Instructions
- ------------
One (1) copy of this Questionnaire should be completed, signed, dated, and
delivered to David Davidson, D.L. Cromwell Investments, Inc., 1200 N. Federal
Highway, Boca Raton, Florida 33432 . Please contact Michael Karsch-- telephone
(305) 373-9423-- if you have any questions with respect to the Questionnaire.
Please Answer All Questions
- ---------------------------
If the appropriate answer is "None" or "Not Applicable," so state. Please print
or type your answers to all questions. Attach additional sheets if necessary to
complete your answers to any item.
Your answers will be kept strictly confidential at all times; however, the
Company may present this Questionnaire to such parties as it deems appropriate,
including its counsel, in order to assure itself that the offer and sale of the
Units will not result in a violation of the registration provisions of the 1933
Act or a violation of the securities laws of any state and if called on to
establish that the proposed offer and sale of the security is exempt from
registration under the 1933 Act or meets the requirements of applicable state
securities laws.
(1) Please provide the following personal information:
Name: ____________________ Age: ____________________
Residence Address
(including zip code): ________________________
------------------------
10
<PAGE>
Telephone Numbers: Residence:________________________
Business: ________________________
(2) Please describe your present or most recent business or occupation and
indicate such information as the nature of your employment, the
principal business of your employer, the principal activities under your
management or supervision, and the scope (e.g., dollar volume, industry
rank, etc.) of such activities.
(3) Please provide the following information concerning your financial
experience.
3.1 Indicate by check mark which of the following categories best
describes the extent of your prior experience in the areas of
investment listed below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
========================================================
Substantial Limited No
Experience Experience Experience
=================================--------------------------------------------------------
Marketable Securities
- -----------------------------------------------------------------------------------------
Equity Securities for which
no market exists
- -----------------------------------------------------------------------------------------
Limited Partnerships
- -----------------------------------------------------------------------------------------
Initial Public Offerings
=========================================================================================
3.2 Indicate by check mark whether or not you maintain any of the
following types of accounts over which you, rather than a third
party, exercise investment discretion, and the length of time you
have maintained each type of account.
Securities (cash) _______ _______ Number of years ______
Yes No
Securities (margin) _______ _______ Number of years ______
Yes No
</TABLE>
(4) Please answer the following questions concerning your financial condition:
4.1 Does your net worth1 (or joint net worth with your spouse, if
greater) exceed $1,000,000?
- ---------------------------------
1 For purposes hereof, net worth shall be deemed to include all
of your assets, liquid or illiquid (including such items as home, furnishings,
automobile, and restricted securities) minus any liabilities (including such
items as home mortgages and other debts and liabilities).
11
<PAGE>
Yes _____ No _____
4.2 Did you have an individual income2 in excess of $200,000 or joint
income together with your spouse in excess of $300,000 in each of
1998 and 1997 and do you reasonably expect to reach the same
income level in the current year?
Yes _____ No _____
(5) Check, if appropriate:
(6) By signing this Questionnaire, I hereby confirm the following statements:
a. I am aware that the offering of the Units will involve securities
for which no market currently exists, thereby requiring any
investment to be maintained for an indefinite period of time, and
I have no need to liquidate the investment.
b. I acknowledge that any delivery to me of any documentation
relating to the Units prior to the determination by the Company
of my suitability as an investor shall not constitute an offer of
the Units until such determination of suitability shall be made,
and I agree that I shall promptly return all such documentation
to the Company upon request.
c. I hereby represent and warrant that I have such knowledge and
experience in financial and business matters that I am capable of
evaluating the merits and risks of any prospective investment in
the Company.
d. Neither I nor any of my associates or affiliates: (i) are a
member or a person associated with a member firm of the NASD,
(ii) own any stock or other securities of any NASD member, or
(iii) made subordinated loans to any NASD member.
e. My answers to the foregoing questions are true and complete to
the best of my information and belief, and I will promptly notify
the Company of any changes in the information I have provided.
f. I also understand and agree that, although the Company will use
its best efforts to keep
- --------
2 For purposes hereof, the term "income" is not limited to
"adjusted gross income" as that term is defined for Federal Income Tax purposes,
but rather includes certain items of income which are deducted in computing
"adjusted gross income." For investors who are salaried employees, the gross
salary of such investor, minus any significant expenses personally incurred by
such investor in connection with earning the salary, plus any income from any
other source including unearned income, is a fair measure of "income" for
purposes hereof. For investors who are self-employed, "income" is generally
construed to mean total revenues received during the calendar year minus
significant expenses incurred in connection with earning such revenues.
12
<PAGE>
the information provided in answers to this Questionnaire
strictly confidential, the Company may present this Questionnaire
and the information provided in answers to it to such parties as
it may deem advisable if called upon to establish the
availability under any federal or state securities laws of an
exemption from registration of the private placement or if the
contents thereof are relevant to any issue in any action, suit,
or proceeding to which the Company is a party or by which it or
they are or may be bound.
g. I realize that this Questionnaire does not constitute an offer by
the Company to sell the Units but is merely a request for
information.
-------------------------------------
Printed Name
-------------------------------------
Signature
-------------------------------------
Social Security Number or
Employee Identification Number
Date and Place Executed:
Date:
---------------------------
Place:
---------------------------
13
Exhibit 10(af)
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), NOR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED,
SOLD, ASSIGNED OR OTHERWISE TRANSFERRED UNTIL A (1) REGISTRATION STATEMENT UNDER
THE ACT AND ANY APPLICABLE STATE SECURITIES LAW HAS BECOME EFFECTIVE WITH
RESPECT THERETO, OR (2) RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL TO THE
COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE ACT OR APPLICABLE STATE
SECURITIES LAW IS NOT REQUIRED IN CONNECTION WITH THE PROPOSED TRANSFER.
WARRANT TO PURCHASE __,000 SHARES
OF COMMON STOCK
OF
BIG SMITH BRANDS, INC.
This is to Certify That, FOR VALUE RECEIVED, ______________ (the
"Holder"), is entitled to purchase, subject to the provisions of this Warrant,
from Big Smith Brands, Inc., a Delaware corporation (the "Company"), ___,000
fully paid, validly issued and nonassessable shares of Common Stock, par value
$.01 per share, of the Company ("Common Stock") at a price of $1.50 per share at
any time or from time to time from February 1, 1999 to January 31, 2002. The
number of shares of Common Stock to be received upon the exercise of this
Warrant and the price to be paid for each share of Common Stock may be adjusted
from time to time as hereinafter set forth. The shares of Common Stock
deliverable upon such exercise, and as adjusted from time to time, are
hereinafter sometimes referred to as "Warrant Shares" and the exercise price of
a share of Common Stock in effect at any time and as adjusted from time to time
is hereinafter sometimes referred to as the "Exercise Price".
(a) EXERCISE OF WARRANT. (1) These Warrants may be exercised in
whole or in part at any time or from time to time from February 1, 1999 to
January 31, 2002 (the "Exercise Period"); provided, however, that if either such
day is a day on which banking institutions in the State of New York are
authorized by law to close, then on the next succeeding day which shall not be
such a day. This Warrant may be exercised by presentation and surrender hereof
to the Company at its principal office, or at the office of its stock transfer
agent, if any, with the Purchase Form annexed hereto duly executed and
accompanied by payment of the Exercise Price for the number of Warrant Shares
specified in such form. As soon as practicable after each such exercise of the
Warrants, but not later than seven (7) days from the date of such exercise, the
Company shall issue and deliver to the Holder a certificate or certificates for
the Warrant Shares issuable upon such exercise, registered in the name of the
Holder or its designee. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver a new Warrant evidencing the rights of the Holder thereof to purchase
the balance of the Warrant Shares purchasable thereunder. Upon receipt by the
Company of this Warrant at its office, or by the stock transfer agent of the
Company at its office, in proper form for exercise, together with payment of the
Exercise Price for the number of Warrant Shares specified in the Purchase Form,
the Holder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer books
of the Company shall then be closed or
<PAGE>
that certificates representing such shares of Common Stock shall not then be
physically delivered to the Holder.
(2) At any time after February 1, 2000 that a registration statement
relating to the Warrants is not effective, the Holder may, at its option,
exchange this Warrant, in whole or in part (a "Warrant Exchange"), into the
number of Warrant Shares determined in accordance with this subsection (a)(2),
by surrendering this Warrant at the principal office of the Company or at the
office of its stock transfer agent, if any, accompanied by a notice stating such
Holder's intent to effect such exchange, the number of Warrant Shares to be
exchanged and the date on which the Holder requests that such Warrant Exchange
occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the
date specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company (the "Exchange Date"). Certificates for the
shares issuable upon such Warrant Exchange and, if applicable, a new warrant of
like tenor evidencing the balance of the shares remaining subject to this
Warrant, shall be issued as of the Exchange Date and delivered to the Holder
within seven (7) days following the Exchange Date. In connection with any
Warrant Exchange, this Warrant shall represent the right to subscribe for and
acquire the number of Warrant Shares (rounded to the next highest integer) equal
to (i) the number of Warrant Shares specified by the Holder in its Notice of
Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to
the quotient obtained by dividing (A) the product of the Total Number and the
existing Exercise Price by (B) the current market value of a share of Common
Stock. Current market value shall have the meaning set forth Section (c) below,
except that for purposes hereof, the date of exercise, as used in such Section
(c), shall mean the Exchange Date.
(b) RESERVATION OF SHARES. The Company shall at all times reserve
for issuance and/or delivery upon exercise of this Warrant such number of shares
of its Common Stock as shall be required for issuance and delivery upon exercise
of the Warrants.
(c) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value ("Market Value") of a share, determined
as follows:
(1) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange or
listed for trading on the Nasdaq system, the current market value shall be
the last reported sale price of the Common Stock on such exchange or
system on the last business day prior to the date of exercise of this
Warrant or if no such sale is made on such day, the average closing bid
and asked prices for such day on such exchange or system; or
(2) If the Common Stock is not so listed or admitted to unlisted
trading privileges, the current market value shall be the mean of the last
reported bid and asked prices reported by the National Quotation Bureau,
Inc. on the last business day prior to the date of the exercise of this
Warrant; or
2
<PAGE>
(3) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount, not less than book value
thereof as at the end of the most recent fiscal year of the Company
ending prior to the date of the exercise of the Warrant, determined in
such reasonable manner as may be prescribed by the Board of Directors of
the Company.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. Upon surrender of this Warrant together with (in
the case of loss, theft or destruction) an indemnity and/or security against any
claim that may be made against the Company on account of such lost, stolen or
destroyed Warrant to the Company at its principal office or at the office of its
stock transfer agent, if any, with the Assignment Form annexed hereto duly
executed and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment and this Warrant shall promptly be
canceled. This Warrant may be divided or combined with other warrants which
carry the same rights upon presentation hereof at the principal office of the
Company or at the office of its stock transfer agent, if any, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued and signed by the Holder hereof. The term "Warrant" as used herein
includes any Warrants into which this Warrant may be divided or exchanged. Upon
receipt by the Company of evidence satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of reasonably satisfactory indemnification, and upon surrender and
cancellation of this Warrant, if mutilated, the Company will execute and deliver
a new Warrant of like tenor and date.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time
and the number and kind of securities purchasable upon the exercise of the
Warrants shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(1) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of
Common Stock, (ii) subdivide or reclassify its outstanding shares of
Common Stock into a greater number of shares, or (iii) combine or
reclassify its outstanding shares of Common Stock into a smaller number
of shares, the Exercise Price in effect at the time of the record date
for such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be adjusted so that
it shall equal the price determined by multiplying the Exercise Price by
a fraction, the denominator of which shall be the number of shares of
Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such action. Such adjustment shall be
made
3
<PAGE>
successively whenever any event listed above shall occur.
Notwithstanding the foregoing, no adjustment in the Exercise Price or
number of Warrant Shares shall be made as a result of the 1-for-3
reverse stock split that is expected to occur by March 31, 1999.
(2) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to subsection (1) above, the number of
Warrant Shares purchasable upon exercise of this Warrant shall
simultaneously be adjusted by multiplying the number of Warrant Shares
initially issuable upon exercise of this Warrant by the Exercise Price
in effect on the date hereof and dividing the product so obtained by the
Exercise Price, as adjusted.
(3) No adjustment in the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least five
cents ($0.05) in such price; provided, however, that any adjustments
which by reason of this subsection (3) are not required to be made shall
be carried forward and taken into account in any subsequent adjustment
required to be made hereunder. All calculations under this Section (f)
shall be made to the nearest cent or to the nearest one-hundredth of a
share, as the case may be. Anything in this Section (f) to the contrary
notwithstanding, the Company shall be entitled, but shall not be
required, to make such changes in the Exercise Price, in addition to
those required by this Section (f), as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution
in shares of Common Stock, or any subdivision, reclassification or
combination of Common Stock, hereafter made by the Company shall not
result in any federal income tax liability to the holders of Common
Stock or securities convertible into Common Stock (including the
Warrants).
(4) Whenever the Exercise Price is adjusted, as herein provided,
the Company shall promptly but no later than 20 days after any request
therefor by the Holder, cause a notice setting forth the adjusted
Exercise Price and adjusted number of Warrant Shares issuable upon
exercise of each Warrant, and, if requested, information describing the
transactions giving rise to such adjustments, to be mailed to the Holder
at the last address appearing in the Warrant Register, and shall cause a
certified copy thereof to be mailed to its transfer agent, if any. The
Company may retain a firm of independent certified public accountants
selected by the Board of Directors (who may be the regular accountants
employed by the Company) to make any computation required by this
Section (f), and a certificate signed by such firm shall be conclusive
evidence of the correctness of such adjustment.
(5) In the event that at any time, as a result of an adjustment
made pursuant to Subsection (1) above, the Holder of this Warrant
thereafter shall become entitled to receive any shares of the Company,
other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of this Warrant shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock contained
in subsection (1) above.
(6) Irrespective of any adjustments in the Exercise Price or the
number or kind of shares purchasable upon exercise of this Warrant,
Warrants theretofore or thereafter issued may continue to express the
same price and number and kind of shares as are stated in the
4
<PAGE>
similar Warrants initially issuable pursuant to this Agreement.
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted
as required by the provisions of the foregoing Section (f), the Company shall
forthwith file in the custody of its Secretary or an Assistant Secretary at its
principal office and with its stock transfer agent, if any, an officer's
certificate showing the adjusted Exercise Price determined as herein provided,
setting forth in reasonable detail the facts requiring such adjustment,
including a statement of the number of additional shares of Common Stock, if
any, and such other facts as shall be necessary to show the reason for and the
manner of computing such adjustment. Each such officer's certificate shall be
made available at all reasonable times for inspection by the Holder or any
holder of a Warrant executed and delivered pursuant to Section (a) and the
Company shall, forthwith after each such adjustment, mail a copy by certified
mail of such officer's certificate to the Holder or any such holder.
(h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any distribution
upon the Common Stock or (ii) if the Company shall offer to the holders of
Common Stock for subscription or purchase by them any share of any class or any
other rights or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then in any such case, the Company shall cause
to be mailed by certified mail to the Holder, at least fifteen days prior the
date specified in (x) or (y) below, as the case may be, a notice containing a
brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) such reclassification, reorganization, consolidation, merger, conveyance,
lease, dissolution, liquidation or winding up is to take place and the date, if
any is to be fixed, as of which the holders of Common Stock or other securities
shall receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
(i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Holder shall have the right thereafter by exercising this Warrant at any time
prior to the expiration of the Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
which might have been purchased upon exercise of this Warrant immediately prior
to such reclassification, change, consolidation, merger, sale or conveyance.
(j) RESTRICTIVE LEGEND. Each Warrant Share, when issued, shall include a
legend
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in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE
OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN OPINION OF
COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED,
SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES
LAWS."
(k) The Holder acknowledges that it has been advised by the Company that
neither this Warrant nor the Warrant Shares have been registered under the Act,
that this Warrant is being or has been issued and the Warrant Shares may be
issued on the basis of the statutory exemption provided by Section 4(2) of the
Act or Regulation D promulgated thereunder, or both, relating to transactions by
an issuer not involving any public offering. The Holder acknowledges that it has
been informed by the Company of, or is otherwise familiar with, the nature of
the limitations imposed by the Act and the rules and regulations thereunder on
the transfer of securities. In particular, the Holder agrees that no sale,
assignment or transfer of this Warrant or the Warrant Shares issuable upon
exercise hereof shall be valid or effective, and the Company shall not be
required to give any effect to any such sale, assignment or transfer, unless (i)
the sale, assignment or transfer of this Warrant or such Warrant Shares is
registered under the Act, it being understood that neither this Warrant nor such
Warrant Shares nor the shares of Common Stock issuable upon conversion of the
Warrant Shares are currently registered for sale and that the Company has no
obligation or intention to so register this Warrant or such Warrant Shares
except as specifically provided herein, or (ii) this Warrant or such Warrant
Shares are sold, assigned or transferred in accordance with all the requirements
and limitations of Rule 144 under the Act, or (iii) such sale, assignment, or
transfer is otherwise exempt from registration under the Act.
(l) This Warrant shall be construed in accordance with the laws of the
State of Florida applicable to contracts made and performed within such State,
without regard to principles governing conflicts of law.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by authorized persons.
Dated: January __, 1999 BIG SMITH BRANDS, INC.
By: _________________________________
S. Peter Lebowitz, President
[SEAL]
Attest:
- ------------------------
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PURCHASE FORM
-------------
Dated ___________, 199__
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing shares of Common Stock and hereby makes
payment of in payment of the actual exercise price thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
--------------------------------------
Name ______________________________________________________________________
(Please typewrite or print in block letters)
Address _________________________________________________________
Signature ________________________________
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, _____________________________________
hereby sells, assigns and transfers unto
Name _____________________________________________________________________
(Please typewrite or print in block letters)
Address __________________________________________________________________
the right to purchase Common Stock represented by this Warrant to the extent of
shares as to which such right is exercisable and does hereby irrevocably
constitute and appoint res ____________________________Attorney, to transfer the
same on the books of the Company with res full power of substitution in the
premises. res
Date ______________,
Signature____________________________
Exhibit 10(ag)
As of January 19, 1999
Big Smith Brands, Inc.
7100 W. Camino Real
Boca Raton, Florida 33433
Ladies and Gentlemen:
Big Smith Brands, Inc., a Delaware corporation (the "Company"), hereby confirms
its agreement with D.L. Cromwell Investments, Inc. (the "Placement Agent") as
follows:
1. Description of Transaction. The Company proposes to issue and sell through
the Placement Agent, in a transaction exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"), to a limited number
of persons meeting criteria for "Accredited Investor" status (as more fully
described in the confidential private offering Term Sheet dated the date hereof
and exhibits thereto, as the same may be supplemented from time to time (the
"Term Sheet"), 1,100,000 units (the "Units"), each consisting of (1) share
("Shares") of the Company's Common Stock, $0.01 par value per share (the "Common
Stock") and one Class A Warrant and one Class B Warrant (the "Warrants") to
purchase one (1) share of Common Stock at an offering price of $1.00 per Unit
(the "Private Offering"). The Shares and the Warrants which comprise the Units
will be detached and are separately transferable. Each Class A Warrant shall be
exercisable at a price of $1.50 per share and each Class B Warrant shall be
exercisable at a price of $1.75 during the period commencing February 1, 1999
and terminating January 31, 2002. The Private Offering shall be conducted on a
"best efforts" basis by the Placement Agent.
The full terms of the Private Offering and the securities to be
sold in connection therewith, are more fully described in the Term Sheet.
Capitalized terms not defined herein shall have the meaning set forth in the
Term Sheet.
2. Appointment of the Placement Agent. On the basis of the representations,
warranties, covenants and agreements of the Placement Agent contained herein and
subject to the conditions contained herein, the Company hereby appoints the
Placement Agent as its exclusive agent to offer and sell to Accredited Investors
the Units, on a "best efforts" basis, until the earlier of (i) the date on which
all of the Units offered in the Private Offering have been sold, or (ii) on or
before the close of business on January 29, 1999, or (iii) such earlier date as
shall be determined by the Company in its sole discretion (the "Offering
Expiration Date"). The Placement Agent, on the basis of the representations,
warranties, covenants and agreements of the Company contained herein, and
subject to the conditions contained herein, accepts such appointment and agrees
to use its reasonable efforts to sell the Units. It is understood that the
Placement Agent has no commitment to sell the Units other than to use its
reasonable efforts.
3. Purchase, Sale and Delivery of the Units. On the basis of the representations
and warranties contained herein, and subject to the terms and conditions set
forth herein, the parties agree that:
<PAGE>
(a) Regulation D Placement. Neither the offer nor the sale of the Units
has been or will be registered with the U.S. Securities and Exchange Commission
("SEC"). The Units will be offered and sold in reliance upon the exemption from
registration provided by Regulation D ("Reg D") adopted under the Securities
Act, and will only be sold to "Accredited Investors" as such term is defined
under Reg D; the Units will be offered for sale only in states in which the
Units have been qualified or registered for sale or are exempt from such
qualification or registration and the conditions for such exemption have been
met; and the Company will provide the Placement Agent for delivery to all
offerees and purchasers and their representatives, if any, with any information,
documents and instruments which the Placement Agent and the Company deem
necessary to comply with the rules, regulations and judicial and administrative
interpretations concerning compliance with applicable federal and state statutes
and regulations.
(b) Subscription for the Units. Subscription for the Units shall occur
by execution and delivery by the subscriber of a subscription agreement (the
"Subscription Agreement") in the form annexed to the Term Sheet, together with
the accredited investor questionnaire form (the "Investor Questionnaire" and
together with the Subscription Agreement the "Subscription Documents") and such
other documents and instruments as are set forth in the Term Sheet and payment
of the required subscription amount (the "Subscription Payment") all in
accordance with the terms of the Subscription Agreement.
(c) Distribution of Proceeds; Closing; Termination of Private Offering.
The Company shall deliver to the Placement Agent within 5 days following each
Closing Date, on behalf of the Subscribers, the certificates evidencing the Unit
against payment therefor, after deducting the amounts set forth in Section 4
below.
(d) Registration Rights. The Subscribers shall have registration rights,
as described in the Subscription Agreement.
(e) Closing. Each of the Closings will occur on such date and at such
time and place as the Placement Agent and the Company agree, prior to the
Offering Expiration Date. On each Closing Date, the parties shall deliver the
closing documents described in Section 8 of this Agreement as well as such other
documents as the Company and the Placement Agent and their respective legal
counsel reasonably request.
4. Compensation of Placement Agent. As compensation for its services rendered as
Placement Agent under this Agreement, the Placement Agent shall receive at each
Closing: (i) a placement fee equal to ten percent (10%) of the gross proceeds
from the sale of the Units, (ii) a nonaccountable expense allowance of one
percent (1%) of the gross proceeds, and (ii) Placement Agent warrants (the
"Placement Agent Warrants") to purchase that number of Units equal to ten
percent (10%) of the aggregate number of Units sold. The Placement Agent
Warrants will be exercisable for a period ending three (3) years after issuance
of the Units upon which such Placement Agent Warrants are based, at an exercise
price per Unit equal to $1.20 per Unit. The securities underlying the Placement
Agent Warrants will be registered contemporaneously with the registration of the
Units.
5. Representations and Warranties of the Company. The Company represents and
warrants
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to the Placement Agent that:
(a) Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, with full power and authority to own or lease and operate its
properties and to conduct its business and to execute, deliver and perform this
Agreement and to consummate the transactions contemplated hereby. The Company is
duly qualified to do business as a foreign corporation and is in good standing
in all jurisdictions where such qualification is necessary and where failure to
so qualify could have a material adverse effect on the financial condition,
results of operations, business or properties of the Company (a "Material
Adverse Effect").
(b) Corporate Authorization. This Agreement has been duly executed and
delivered by the Company and constitutes the valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms except as
such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, or other similar laws or arrangements affecting creditors' rights
generally and subject to principles of equity and public policy considerations,
including with respect to indemnification and contribution for liabilities under
the Securities Act and the Securities Exchange Act of 1934 (the "Exchange Act").
The execution, delivery and performance of this Agreement by the Company, the
consummation by the Company of the transactions herein contemplated, and the
compliance by the Company with the terms of this Agreement have been duly
authorized by all necessary corporate action and do not and will not, with or
without the giving of notice or the lapse of time, or both: (i) result in any
violation of the Certificate of Incorporation or Bylaws of the Company, (ii)
result in a material breach of or material conflict with any of the terms or
provisions of, or constitute a default under, or result in the modification or
termination of, or result in the creation or imposition of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Company pursuant to any indenture, mortgage, note, contract, commitment or other
agreement or instrument to which the Company is a party or by which the Company
or any of its properties or assets are or may be bound or affected, (iii)
violate any existing applicable law, rule, regulation, judgment, order or decree
of any governmental agency or court, domestic or foreign, having jurisdiction
over the Company or any of its properties or business or (iv) have any effect on
any permit, certification, registration, approval, consent, license or franchise
necessary for the Company to own or lease and operate its properties and to
conduct its business.
(c) Consents. No authorization, approval, consent, order, registration,
license or permit of any court or governmental agency or body, other than under
the Securities Act, the rules and regulations of the SEC promulgated pursuant
thereto (the "Regulations"), and the rules and regulations of the state
securities laws of the states in which offers or sales will be made, is required
for the valid authorization, issuance, sale and delivery of the Securities in
accordance herewith or the consummation by the Company of the transactions
contemplated by this Agreement.
(d) Authorization. The issuance and sale of the Units have been duly
authorized and, upon closing of the Private Offering and delivery to the Company
of the net proceeds therefrom, the Shares included in the Units will be validly
issued, fully paid and non-assessable, and holders thereof will not be subject
to personal liability solely by reason of being such holders. Upon
3
<PAGE>
proper exercise of the Warrants and the Placement Agent's Warrants, the shares
of Common Stock issued thereby will be validly issued, fully paid and
non-assessable. Except as described in the Term Sheet, the Common Stock issuable
upon exercise of the Warrants and the Placement Agent's Warrants is not and will
not be subject to preemptive rights of any stockholder of the Company. The
Shares, the Warrants and the Placement Agent's Warrants conform to the
descriptions thereof contained in the Term Sheet.
(e) Noncontravention. The Company is not in violation of, or in default
under: (i) any term or provision of its Certificate of Incorporation or Bylaws;
(ii) any material term or provision or any financial covenants of any indenture,
mortgage, contract, commitment or other agreement or instrument to which it is a
party or by which it or its property or business is or may be bound or affected,
or (iii) any existing applicable law, rule, regulation, judgment, order or
decree of any governmental agency or court, domestic or foreign, having
jurisdiction over the Company or any its properties or business except for
violations or defaults which, individually or in the aggregate, do not have a
Material Adverse Effect. Except as disclosed in the Term Sheet, the Company
owns, possesses or has obtained all governmental and other (including those
obtainable from third parties) licenses, permits, certifications, patents,
registrations, approvals or consents and other authorizations necessary to own
or lease, as the case may be, and to operate its properties, whether tangible or
intangible, of which the failure to obtain could reasonably be expected to have
a Material Adverse Effect, and to conduct any of the business or operations of
the Company as presently conducted and all such licenses, permits,
certifications, patents, registrations, approvals, consents and other
authorizations are outstanding and in good standing, and there are no
proceedings pending or, to the best knowledge of the Company, threatened,
seeking to cancel, terminate or limit such licenses, permits, certifications,
patents, registrations, approvals or consents or other authorizations.
(f) Litigation. Except as set forth in the Term Sheet, there are no
pending actions, suits, proceedings, or arbitrations, and the Company is not
aware of any claims, investigations or inquiries, before any governmental
agency, court or tribunal, domestic or foreign, or before any private
arbitration tribunal against the Company or involving its properties or business
that, if determined adversely to the Company, could reasonably, individually or
in the aggregate, be expected to result in a Material Adverse Effect or that
question the validity of the capital stock of the Company or this Agreement or
of any action taken or to be taken by the Company pursuant to, or in connection
with, this Agreement. There are no outstanding orders, judgments or decrees of
any court, governmental agency or other tribunal naming the Company and
enjoining the Company from taking, or requiring the Company to take, any action,
or to which the Company, its properties or businesses are bound or subject.
(g) No Adverse Change. Since the respective dates as of which
information is given in the Term Sheet and the Company's latest financial
statements, except as disclosed in the Term Sheet, the Company has not incurred
any material liability or obligation, direct or contingent, or entered into any
material transaction, whether or not in the ordinary course of business, and has
not sustained any material loss or interference with its business from fire,
storm, explosion, flood or other casualty, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or decree;
prior to each Closing Date there will not be, any changes in the capital stock
or any material increases in the long-term debt of the Company or any
4
<PAGE>
materially adverse change in or affecting the general affairs, management,
financial condition, stockholders' equity, results of operations or prospects of
the Company, other than in the ordinary course of business or as set forth in
the Term Sheet.
6. Covenants of the Company.
(a) Term Sheet. The Company will furnish the Placement Agent, during the
Private Offering, with as many copies of the Term Sheet (and any amendments or
supplements thereto) as the Placement Agent may reasonably request. If, during
the Private Offering, any event occurs as a result of which the Term Sheet, as
then amended or supplemented, would include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
made in light of the circumstances in which they were made not misleading, or if
it otherwise shall be necessary to amend or supplement the Term Sheet to comply
with applicable law, the Company will forthwith notify the Placement Agent
thereof, and furnish to the Placement Agent in such quantities as may be
reasonably requested, an amendment or supplement to the Term Sheet, or an
amended or supplemented Term Sheet which corrects such statements or omissions
or causes the Term Sheet to comply with applicable law.
(b) State Securities Registration. The Company will take all necessary
action and file all necessary forms and documents in order to qualify or
register the Units for sale under the securities laws of the states in which
offers or sales will be made, such states to be mutually agreed upon between the
Company and the Placement Agent (the "Agreed-Upon States"), or to take any
necessary action and file any necessary forms which are required to obtain an
exemption from such qualification or registration in such jurisdictions; it
being understood that the Company's obligation herein is subject to the
Placement Agent not soliciting investors in states other than the Agreed-Upon
States and advising the Company and its counsel promptly of the states in which
Subscribers who submit Subscription Documents to the Placement Agent reside.
The Company will promptly advise the Placement Agent:
(i) if any securities regulator of any state shall make a request
or suggestion of or to the Company of any amendment to the Term Sheet or
any registration materials or for any additional information, including
the nature and substance thereof; and
(ii) of the issuance of a stop order suspending the qualification
of the Securities for sale in any state, including the initiation or
threatening of any proceeding for such purpose, and the Company will use
its reasonable best efforts to prevent the issuance of such a stop
order, or if such an order shall be issued, to obtain the withdrawal
thereof at the earliest reasonably practicable date.
The Company will provide the Placement Agent with copies of any additional
information, documents and instruments which the Placement Agent's counsel shall
determine to be necessary to comply with the rules, regulations and judicial and
administrative interpretations in those states and jurisdictions where the Units
are to be offered for sale or sold for delivery to all offerees and purchasers.
The Company will file all post-offering forms, documents or materials and take
all other actions required by states in which the Units have been offered or
sold. The Placement Agent will not make offers or sales of the Units in any
jurisdiction in which the Units have not
5
<PAGE>
been qualified or registered, or are not exempt from such qualification or
registration.
(c) Stock Listing. The Company's Common Stock is currently traded on the
OTC Bulletin Board. The Company will cooperate with the Placement Agent in
listing the Units on the OTC Bulletin Board.
(d) Reservation of Shares. The Company will reserve for issuance
sufficient shares of Common Stock for issuance in connection with the Units and
the exercise of the Warrants and the Placement Agent Warrants.
(e) Delivery of Certificates. Within five days after the Closing Date,
the Company will have delivered to the Placement Agent certificates evidencing
the Units and Placement Agent Warrants.
(f) Issuance of Additional Securities. The Company hereby agrees to not
issue any additional shares of Common Stock or securities convertible into or
exercisable for Common Stock until July 22, 2000 without the prior written
consent of the Placement Agent, except for the issuance of shares issuable upon
exercise of options under the Company's plan outstanding on the date hereof,
provided that options held by officers and directors shall be subject to the
lockup described in Section 7(d) of this Agreement.
7. Conditions to Obligations. The obligations of the Placement Agent hereunder
will be subject to the accuracy of the representations and warranties of the
Company herein contained as of the date hereof and as of each Closing Date, to
the performance by the Company of its obligations hereunder and to the following
additional conditions:
(a) Compliance with Agreements. The Company will have complied with all
agreements and satisfied all conditions on its part to be performed or satisfied
in all material respects hereunder at or prior to each Closing Date;
(b) Corporate Action. The Company will have taken all necessary
corporate action, including, without limitation, obtaining the approval of the
Company's board of directors for the execution and delivery of this Agreement,
the issuance of the Shares, the Warrants and the Placement Agent's Warrants and
the performance by the Company of its obligations hereunder and thereunder, if
applicable, and the consummation of the Private Offering;
(c) Representations and Warranties. The representations and warranties
of the Company, set forth in Section 5 hereof, will be, as of the Closing Date,
accurate in all material respects; and
(d) Lockups. All officers directors and the Lebowitz Family Trust have
executed Lockup Agreements in the form provided by the Placement Agent and the
Company shall have delivered the Stop Transfer Instructions to the Transfer
Agent.
8. Expenses of Sale. In addition to the fees payable to the Placement Agent
pursuant to Section 4 herein, the Company will pay all of its expenses incident
to the proposed sale and
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<PAGE>
delivery of the Units, whether or not the Private Offering is consummated,
including, without limitation, (a) the fees, disbursements and expenses of its
counsel and accountants, (b) all fees and expenses of registering or qualifying
the Units for offer and sale in the applicable states, or obtaining exemptions
therefrom, and (c) all other expenses relating to the offering of the Units. The
Placement Agent shall be responsible for the fees, disbursements and expenses of
its counsel.
If the Private Offering is not completed because (i) of any reason solely within
the control of the Company, its management, or its stockholders, (ii) the
Company unilaterally terminates the Private Offering or withdraws the Private
Offering from the Placement Agent for any reason, other than unreasonable delays
by the Placement Agent, or (iii) of any material discrepancy in any
representation made by the Company to the Placement Agent or the failure of the
Company to meet any of its material obligations under this Agreement, then the
Company will be obligated to reimburse the Placement Agent as to its
out-of-pocket expenses of up to $25,000 for its reasonable costs, expenses and
legal fees incurred in connection with the Private Offering, of which amount may
be increased at the request of the Placement Agent and with the approval of the
Company.
9. Indemnification and Contribution.
(a) Indemnification by the Company. The Company agrees to indemnify and
hold harmless the Placement Agent and each person, if any, who controls the
Placement Agent within the meaning of the Securities Act or the Exchange Act
against any losses, claims, damages or liabilities, joint or several, to which
the Placement Agent or such controlling person may become subject, under the
Securities Act or otherwise, to the extent and only to the extent such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of a
material fact contained (A) in the Term Sheet, or (B) in any Blue Sky
Application (as hereinafter defined) or other document executed by the Company
specifically for that purpose or based upon false or misleading written
information furnished by the Company and filed in any state or other
jurisdiction in order to qualify any or all of the Shares under the securities
laws thereof (any such application, document or information being hereinafter
called a "Blue Sky Application"), (ii) the omission or alleged omission to state
in the Term Sheet or in any Blue Sky Application a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of a material fact
contained in the Term Sheet or the omission or alleged omission to state therein
a material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and will reimburse the Placement Agent and each such
controlling person for any legal or other expenses reasonably incurred by the
Placement Agent or such controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by the Placement Agent or counsel for the Placement Agent specifically
for use in the preparation of the Term Sheet or any such Blue Sky Application.
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<PAGE>
(b) Indemnification by the Placement Agent. The Placement Agent agrees
to indemnify and hold harmless the Company, its directors and officers and each
person, if any, who controls the Company within the meaning of the Securities
Act and the Exchange Act against any losses, claims, damages or liabilities,
joint or several, to which the Company or such controlling person may become
subject, under the Securities Act or otherwise to the extent such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of a
material fact contained (A) in the Term Sheet, or (B) in any Blue Sky
Application, (ii) the omission or alleged omission to state in the Term Sheet or
in any Blue Sky Application a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii) any untrue
statement or alleged untrue statement of a material fact contained in the Term
Sheet, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and will reimburse the Company and each director, officer and
controlling person for any legal or other expenses reasonably incurred by the
Company or such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Placement Agent will not be liable in any such case
to the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by the Placement Agent or counsel for the
Placement Agent specifically for use in the preparation of the Term Sheet or any
such Blue Sky Application.
(c) Procedure. Within five (5) business days (unless shorter period is
required) of receipt by an indemnified party under this Section 10 of notice of
the commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under this Section
9, notify in writing the indemnifying party of the commencement thereof; and the
omission so to notify the indemnifying party will relieve it from any liability
under this Section 9 as to the particular item for which indemnification is then
being sought, but not from any other liability which it may have to any
indemnified party. In case any such action is brought against any indemnified
party, and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein, and to the extent
that it may wish, jointly with any other indemnifying party, similarly notified,
to assume the defense thereof, with counsel who shall be to the reasonable
satisfaction of such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party
under this Section 9 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation. Any such indemnifying party shall not be
liable to any such indemnified party on account of any settlement of any claim
or action effected without the consent of such indemnifying party.
(d) Contribution. If the indemnification provided for in this Section 9
is unavailable to any indemnified party with respect to any losses, claims,
damages, liabilities or expenses referred to therein, then the indemnifying
party, in lieu of indemnifying such indemnified party, will contribute to the
amount paid or payable by such indemnified party, as a result of such losses,
claims, damages, liabilities or expenses (i) in such proportion as is
appropriate to reflect
8
<PAGE>
the relative benefits received by the Company on the one hand, and the Placement
Agent on the other hand, from the offering of the Shares, or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand, and of the Placement Agent on the other hand, in connection with
the statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand, and the Placement
Agent on the other hand, shall be deemed to be in the same proportion as the
total proceeds from the Private Offering (net of sales commissions and
non-accountable expense allowance, but before deducting expenses) received by
the Company relative to the commissions and non-accountable expense allowance
received by the Placement Agent. The relative fault of the Company on the one
hand, and the Placement Agent on the other hand, will be determined with
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission to state a material fact relates to
information supplied by the Company or the Placement Agent, and its relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The amount payable by a party as a result of the
losses, claims, damages, liabilities or expenses referred to above will be
deemed to include, subject to the limitations set forth in Section 9(e) below,
any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim.
(e) Equitable Considerations. The Company and the Placement Agent agree
that it would not be just and equitable if contribution pursuant to this Section
9 were determined by pro rata allocation or by any other method of allocation
which does not take into account the equitable considerations referred to in the
immediately preceding paragraph. No person committing fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution or indemnification from any person not
committing such fraudulent misrepresentation.
10. Representations and Agreements to Survive Delivery. All representations,
warranties and agreements of the Company and of the Placement Agent herein will
survive the delivery and execution hereof and the closing hereunder, and shall
remain operative and in full force and effect for a period of two years from the
Closing Date regardless of any investigation made by or on behalf of the
Placement Agent or any person who controls the Placement Agent within the
meaning of the Securities Act, or by the Company or any person who controls the
Company within the meaning of the Securities Act, and will survive delivery of
the securities constituting the Shares hereunder and any termination of this
Agreement. Notwithstanding anything contained herein to the contrary, the
Placement Agent will promptly notify the Company if it becomes aware of any
facts that could be deemed to be a breach of any representation or warranty of
the Company.
11. Termination.
(a) Either the Placement Agent or the Company will have the right to
terminate this Agreement by giving written notice as herein specified, at any
time, at or prior to each Closing Date if the other shall have failed, refused,
or been unable, at or prior to the Offering Expiration
9
<PAGE>
Date, to perform any of its respective obligations hereunder.
(b) If the Placement Agent or the Company elects to terminate this
Agreement pursuant to Subsections (i) or (ii) hereof, notice will be provided to
the non-terminating party promptly by telephone, telecopier or telegram, and
such notification will be confirmed by written notice as provided for in Section
13 below.
12. Notices. Any notice hereunder shall be in writing and shall be effective
when delivered, or mailed by certified or registered mail, postage prepaid,
return receipt requested, to the appropriate party or parties, at the following
addresses: if to the Placement Agent, to D.L. Cromwell Investments, Inc., 1200
N. Federal Highway, Boca Raton, Florida 33432 attention: David Davidson; with a
copy to Broad and Cassel, Miami Center, 201 South Biscayne Boulevard, Suite
3000, Miami, Florida 33131, Attention: Michael D. Karsch, Esq.; if to the
Company, 7100 W.Camino Real, Suite 402, Boca Raton, Florida 33433 Attention: S.
Peter Lebowitz, or, in each case, to such other address as the parties may
hereinafter designate by like notice.
13. Parties. This Agreement will inure to the benefit of and be binding upon the
Placement Agent, the Company and their respective successors and assigns. This
Agreement is intended to be, and is for the sole and exclusive benefit of the
parties hereto and the persons described in Sections 9(a) and 9(b) hereof, and
their respective successors and assigns, and for the benefit of no other person,
and no other person will have any legal or equitable right, remedy or claim
under, or in respect of this Agreement and the parties hereto may not assign
their rights or obligations hereunder. No purchaser of any of the Shares will be
construed as successor or assign merely by reason of such purchase.
14. Amendment and/or Modification. Neither this Agreement, nor any term or
provision hereof, may be changed, waived, discharged, amended, modified or
terminated orally, or in any manner other than by an instrument in writing
signed by each of the parties hereto.
15. Further Assurances. Each party to this Agreement will perform any and all
acts and execute any and all documents as may be necessary and proper under the
circumstances in order to accomplish the intents and purposes of this Agreement
and to carry out its provisions.
16. Validity. In case any term of this Agreement will be held invalid, illegal
or unenforceable, in whole or in part, the validity of any of the other terms of
this Agreement will not in any way be affected thereby.
17. Non-Waiver. The failure of any party hereto to insist upon strict
performance of any of the covenants and agreements herein contained, or to
exercise any option or right herein conferred in any one or more instances, will
not be construed to be a waiver or relinquishment of any such option or right,
or of any other covenants or agreements, and the same will be and remain in full
force and effect.
18. Entire Agreement. This Agreement contains the entire agreement and
understanding of the parties with respect to the entire subject matter hereof,
and there are no representations, inducements, promises or agreements, oral or
otherwise, not embodied herein Any and all prior
10
<PAGE>
discussions, negotiations, commitments and understanding relating thereto are
superseded hereby, including, without limitation, that certain engagement letter
dated January 15, 1999, between the Company and the Placement Agent. There are
no conditions precedent to the effectiveness of this Agreement other than as
stated herein, and there are no related collateral agreements existing between
the parties that are not referred to herein.
19. Counterparts. This Agreement may be executed in counterparts and each of
such counterparts will for all purposes be deemed to be an original, and such
counterparts will together constitute one and the same instrument.
20. Law. This Agreement will be deemed to have been made and delivered in Boca
Raton, Florida, and will be governed as to validity, interpretation,
construction, effect and in all other respects by the internal laws of the State
of Florida, without application of the principles of conflicts of law.
If the foregoing correctly sets forth our understanding, please so
indicate in the space provided below for that purpose, whereupon this letter
will constitute a binding agreement between us.
BIG SMITH BRANDS, INC., a Delaware corporation
By:
S. Peter Lebowitz, President and Chief Executive Officer
CONFIRMED and ACCEPTED as of this 21st day of January, 1999 by the undersigned
authorized representative.
D.L. CROMWELL INVESTMENTS, INC.
By:
David Davidson, Chief Executive Officer
11
Exhibit 10(ah)
====================================================
ASSET PURCHASE AGREEMENT
by and between
WALLS INDUSTRIES, INC., CLEBURNE, TEXAS
and
BIG SMITH BRANDS, INC.
--------------------------
February 26, 1999
--------------------------
====================================================
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
TABLE OF CONTENTS
Page
1. Transfer of Assets and Liabilities............................................1
1.1. Assets to be Sold......................................................1
1.2. Excluded Assets........................................................1
1.3. Liabilities to be Assumed..............................................1
1.4. Liabilities Not Assumed................................................2
2. Consideration and Payment.....................................................2
2.1. Consideration..........................................................2
2.2 Calculation of Purchase Price..........................................2
2.3. Payment of Purchase Price..............................................3
2.4. Allocation of Purchase Price. ........................................3
3. Closing; Closing Date.........................................................4
4. Representations and Warranties of the Seller..................................4
4.1. Due Organization, Authority and Qualification..........................4
4.2. Subsidiaries...........................................................4
4.3. Authority to Execute and Perform Agreements............................4
4.4. Organizational Documents and Corporate Records.........................5
4.5. Financial Statements; Liabilities......................................5
4.6. No Material Adverse Change.............................................5
4.7. Taxes..................................................................6
4.8. Compliance with Laws...................................................6
4.9. Permits................................................................6
4.10. No Breach..............................................................6
4.11. Environmental Matters..................................................7
4.12. Claims and Proceedings.................................................7
4.13. Contracts..............................................................8
4.14. Inventory..............................................................8
4.15. Real Estate............................................................9
4.16. Product Warranty......................................................10
4.17. Tangible Property.....................................................11
4.18. Intellectual Property. ..............................................11
4.19. Title to the Assets...................................................12
4.20. All Material Assets...................................................13
4.21. Suppliers and Customers...............................................13
4.22. Employee Benefit Plans................................................13
4.23. Labor Matters.........................................................14
4.24. Insurance.............................................................15
4.25. Officers, Directors and Employees.....................................15
i
<PAGE>
Page
----
4.26. Seller Products.......................................................16
4.27. Operations of the Seller. ...........................................16
4.28. Potential Conflicts of Interest.......................................16
4.29. Public Disclosure.....................................................17
4.30. Pre-Closing Actions...................................................17
4.31. Year 2000 Compliance..................................................17
5. Representations and Warranties of the Buyer..................................17
5.1. Due Organization and Authority........................................17
5.2. Authority to Execute and Perform Agreements...........................17
5.3. No Breach.............................................................18
5.4 Availability of Funds.................................................18
6. Covenants and Agreements.....................................................18
6.1. Conduct of Business...................................................18
6.2. Corporate Examinations and Investigations.............................19
6.3. Publicity.............................................................19
6.4. Indemnification of Brokerage..........................................19
6.5. Required Consents.....................................................19
6.6. Collection of Outstanding Receivables.................................20
6.7. Employees and Benefit Plans...........................................20
6.8. Transfer of the Marks.................................................22
7. Conditions Precedent to the Obligations of the Buyer.........................22
7.1. Representations and Covenants.........................................22
7.2. Consents and Approvals................................................22
7.3. Opinion of Counsel to the Seller......................................22
7.4. Additional Closing Documents..........................................23
7.4.1 Closing Documents of the Seller................................23
7.4.2 Closing Documents of the Licensor..............................23
7.5. Non-Compete Agreements................................................23
7.6. Title Insurance.......................................................23
7.7. Survey................................................................24
7.8. Tax Returns...........................................................24
7.9. FIRPTA Affidavit......................................................24
7.10 Landlord Estoppel Certificate.........................................24
7.11 Repayment of Loans....................................................25
8. Conditions Precedent to the Obligation of the Seller.........................25
8.1. Representations and Covenants.........................................25
8.2. Consents and Approvals................................................25
8.3. Additional Closing Documents of the Buyer.............................25
8.4. Opinion of Counsel to the Buyer.......................................26
8.5. Non-Compete Agreements................................................26
ii
<PAGE>
Page
----
9. Post-Closing Covenants and Agreements........................................26
9.1. Prorations............................................................26
9.2. Bulk Sales Laws.......................................................26
9.3. Further Assurances....................................................27
10. Survival of Representations and Warranties of the Seller.....................27
11. Indemnification..............................................................27
11.1. Obligation of the Seller to Indemnify.................................27
11.2. Obligation of the Buyer to Indemnify..................................27
11.3. Notice and Opportunity to Defend......................................28
11.3.1 Notice of Asserted Liability...................................28
11.3.2 Opportunity to Defend..........................................28
11.4. Limitation on Indemnification.........................................29
11.5. Payment under Indemnification Provisions..............................29
12. Termination of Agreement.....................................................29
12.1. Termination...........................................................29
12.2. Survival After Termination............................................30
12.3. Termination Payments..................................................30
13. Miscellaneous................................................................30
13.1. Certain Definitions...................................................30
13.2. Consent to Jurisdiction and Service of Process........................33
13.3. Notices...............................................................34
13.4. Entire Agreement......................................................35
13.5. Waivers and Amendments; Non-Contractual Remedies......................35
13.6. Governing Law.........................................................35
13.7. Binding Effect; Assignment............................................35
13.8. Counterparts..........................................................35
13.9. Exhibits and Schedules................................................36
13.10. Headings..............................................................36
</TABLE>
iii
<PAGE>
EXHIBITS
A. Form of Trademark License
B. Form of Seller Non-Compete Agreement
C. Form of Shareholder Non-Compete Agreement
SCHEDULES
1.1(a) Assets
1.2 Excluded Assets
1.3 Assumed Liabilities
1.4(c) Excluded Liabilities
4.1 Qualifications of the Seller
4.2 Subsidiaries of the Seller
4.5(b) Liabilities
4.9 Permits
4.10 Required Consents
4.12 Claims and Proceedings
4.13(a) Assumed Contracts
4.13(b) Excluded Contracts
4.15(a)(i) Owned Real Property
4.15(a)(ii) Excluded Real Property
4.15(a)(iii) Permitted Liens
4.15(b)(i) Real Property Leases
4.15(b)(ii) Excluded Leases
4.16 Product Warranty
4.18(b) Intellectual Property (Seller)
4.18(c) Intellectual Property (Third Party)
4.19 Title to the Assets
4.21 Suppliers and Customers
4.22 Benefit Plans
4.22(i) Unfunded Obligations
4.24 Insurance
4.25(a) Transferred Officers, Directors and Employees
4.25(b) Excluded Officers, Directors and Employees
4.26 Seller Products
4.27 Operations of the Business
4.28 Potential Conflicts of Interest
5.3 Authority of the Buyer
6.4 Brokers
iv
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
DEFINED TERMS
Page
Buyer.................................................................................1
Seller................................................................................1
Contemplated Transactions.............................................................1
Assets................................................................................1
Licensor..............................................................................1
"Trademark License....................................................................1
Marks.................................................................................1
Excluded Assets.......................................................................1
Assumed Liabilities...................................................................1
Excluded Liabilities..................................................................2
Transaction Expenses..................................................................2
Purchase Price........................................................................2
GAAP .................................................................................2
Appraiser.............................................................................2
PP&E Value............................................................................2
Estimated Inventory Value.............................................................3
Inventory Value.......................................................................3
Initial Inventory Payment.............................................................3
Allocation Schedule...................................................................3
Section 1060..........................................................................3
Objections Notice.....................................................................3
Accounting Referee....................................................................4
Closing Date..........................................................................4
Condition of the Business.............................................................4
Financial Statements..................................................................5
Audited Financial Statements..........................................................5
Interim Financial Statements..........................................................5
Pro Forma Financial Statements........................................................5
Balance Sheet Date....................................................................5
Taxes.................................................................................6
Orders................................................................................6
Laws .................................................................................6
Governmental Bodies...................................................................6
Permits...............................................................................6
Required Consents.....................................................................7
Contracts.............................................................................7
Claims................................................................................7
Seller Products.......................................................................8
Excluded Contracts....................................................................8
v
<PAGE>
Page
----
Owned Real Property...................................................................9
Title Defects.........................................................................9
Permitted Liens.......................................................................9
Real Property Leases..................................................................9
Leased Real Property..................................................................9
Excluded Leases.......................................................................9
Real Property........................................................................10
Improvements.........................................................................10
Tangible Property....................................................................11
Seller Benefit Plans.................................................................13
Seller Products......................................................................16
SEC ................................................................................17
Systems..............................................................................17
Year 2000 Compliant..................................................................17
Accounts Receivable..................................................................20
Transferred Employees................................................................20
Shares...............................................................................22
Licensor Organizational Documents....................................................22
Shareholder Consent..................................................................22
Real Property Lease Assignment and Assumption Agreement..............................23
Computer and Software Lease..........................................................23
Facility Lease.......................................................................23
Seller Non-Compete Agreement.........................................................23
Shareholder Non-Compete Agreement....................................................23
Title Company........................................................................24
Credit Facility......................................................................25
NationsCredit........................................................................25
Assumption of Liabilities............................................................26
Losses...............................................................................27
Indemnitee...........................................................................28
Indemnifying Party...................................................................28
Asserted Liability...................................................................28
Claims Notice........................................................................28
Basket Amount........................................................................29
Termination Costs....................................................................30
Termination Fee......................................................................30
affiliate............................................................................30
Benefit Plan.........................................................................30
Code ................................................................................30
Commonly Controlled Entity...........................................................30
Documents............................................................................31
Employee.............................................................................31
Environment..........................................................................31
vi
<PAGE>
Page
----
Environmental Compliance Costs.......................................................31
ERISA................................................................................31
Hazardous Substance..................................................................31
Intellectual Property................................................................31
IRS ................................................................................32
Liability............................................................................32
Lien ................................................................................32
Pension Plan.........................................................................32
Person...............................................................................32
property.............................................................................32
properties...........................................................................32
Release..............................................................................32
Remedial Action......................................................................32
Safety and Environmental Laws........................................................33
Subsidiary...........................................................................33
Tax Return...........................................................................33
</TABLE>
vii
<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
AGREEMENT, dated February 26, 1999, by and between WALLS
INDUSTRIES, INC., CLEBURNE, TEXAS, a Delaware corporation (the "Buyer"), and BIG
SMITH BRANDS, INC., a Delaware corporation (the "Seller").
The Buyer wishes to purchase from the Seller, and the Seller
wishes to sell to the Buyer, certain of the assets, properties, rights and
business of the Seller upon the terms and subject to the conditions of this
Agreement (the "Contemplated Transactions").
Certain terms used in this Agreement are defined in Section 13.1.
Accordingly, the parties agree as follows:
1. Transfer of Assets and Liabilities.
----------------------------------
1.1. Assets to be Sold.
(a) At the Closing, the Seller shall sell to the
Buyer and the Buyer shall purchase from the Seller, all of the intangible
(except as set forth in Section 1.1(b)) and the specified tangible assets of the
Seller relating to the Seller's workwear lines of business set forth on Schedule
1.1(a) (collectively, the "Assets"). The Assets shall include, without
limitation, the inventory, property, plant, equipment, contracts and
intellectual property rights set forth on Schedule 1.1(a).
(b) In addition, at the Closing, a subsidiary of
the Seller (the "Licensor") and the Buyer shall enter into a trademark license
agreement in the form of Exhibit A (the "Trademark License"). Under the
Trademark License, the Licensor shall grant the Buyer a perpetual, royalty-free
license for workwear (with rights to sublicense) in the name "Big Smith" and
related trademarks, service marks and trade names (collectively, the "Marks").
1.2. Excluded Assets. The Buyer shall not purchase any
of the assets of the Seller relating to its sportswear lines of business,
including, without limitation, those assets set forth on Schedule 1.2
(collectively, the "Excluded Assets"). The Excluded Assets shall also include
any of the Seller's cash or accounts receivable attributable to the sale of
products in the workwear lines of business prior to the Closing.
1.3. Liabilities to be Assumed. The Buyer shall not
assume any of the Seller's liabilities except such contracts and agreements as
are specifically identified and set forth on Schedule 1.3 (collectively, the
"Assumed Liabilities"). The
<PAGE>
2
Buyer's liability under any Assumed Liability shall be only for obligations
arising from and after the Closing Date.
1.4. Liabilities Not Assumed. The Buyer shall not assume
or in any way be liable for the payment, performance and discharge of any
liabilities or obligations of the Seller except as specifically provided in
Section 1.3. Without limiting the foregoing, the Buyer shall not assume and the
Seller shall retain, the following liabilities and obligations of the Seller
(collectively, the "Excluded Liabilities"):
(a) all liabilities, obligations and expenses of
any kind or nature relating to Taxes of the Seller and, with respect to the
Assets, for any period ending on or before the Closing Date (including, without
limitation, any liabilities, obligations and expenses pursuant to any tax
sharing agreement, tax indemnification or similar arrangement) and any Taxes
payable in connection with the transactions contemplated by this Agreement;
(b) all liabilities, obligations and expenses
arising from the Contemplated Transactions, including, without limitation, all
legal fees payable in connection with this Agreement (collectively, the
"Transaction Expenses");
(c) all liabilities, obligations and expenses
arising pursuant to Safety and Environmental Laws from the operation of the
Assets on or before the Closing Date or from any events, conditions or
circumstances existing on or before the Closing Date; and
(d) all such other liabilities, obligations and
expenses set forth on Schedule 1.4(d).
2. Consideration and Payment.
-------------------------
2.1. Consideration. At the Closing, upon the terms and
subject to the conditions of this Agreement, and in consideration of the sale of
the Assets referred to in Section 1.1, the Buyer will deliver to the Seller an
aggregate purchase price (the "Purchase Price") equal to the sum of: (i) the
appraised value of the Company's property, plant and equipment included in the
Assets; and (ii) the book value of the Company's good, saleable and usable
inventory included in the Assets, such book value to be calculated in accordance
with generally accepted accounting principles ("GAAP") consistently applied.
<PAGE>
3
2.2 Calculation of Purchase Price.
-----------------------------
(a) The property, plant and equipment included
in the Assets shall be appraised by the Buyer's financing source or its designee
the "Appraiser") during the period between the date hereof and the Closing Date.
The Appraiser shall calculate the value, on a liquidated basis, of the property,
plant and equipment included in the Assets (the "PP&E Value").
(b) Prior to the Closing, the Seller shall
estimate, and the Buyer shall review and confirm, the book value of the
inventory included in the Assets in accordance with GAAP consistently applied
(the "Estimated Inventory Value"). The Buyer shall then have thirty days after
the Closing Date to establish, and the Seller shall review and confirm, the book
value of the inventory included in the Assets on and as of the Closing Date in
accordance with GAAP consistently applied (the "Inventory Value").
2.3. Payment of Purchase Price.
-------------------------
(a) At the Closing, the Buyer shall deliver to
the Seller cash, by wire transfer of immediately available funds, in an amount
equal to the sum of: (i) the PP&E Value; and (ii) 80% of the Estimated Inventory
Value.
(b) No more than five days after the date upon
which the Inventory Value is established pursuant to section 2.2(b) of this
Agreement: (i) if the Inventory Value exceeds the amount paid at the Closing
pursuant to Section 2.3(a)(ii) of this Agreement (the "Initial Inventory
Payment"), then the Buyer shall deliver to the Seller cash, by wire transfer of
immediately available funds, in an amount equal to the difference between the
Inventory Value and the Initial Inventory Payment; and (ii) if the Initial
Inventory Payment exceeds the Inventory Value, then the Seller shall deliver to
the Buyer cash, by wire transfer of immediately available funds, in an amount
equal to the difference between the Initial Inventory Payment and the Inventory
Value.
2.4. Allocation of Purchase Price.
----------------------------
(a) Within a reasonable period following the
Closing, the Buyer shall prepare and deliver to the Seller a schedule (an
"Allocation Schedule") allocating the sum of the Purchase Price and the Assumed
Liabilities among the Assets, in such amounts reasonably determined by the Buyer
to be consistent with Section 1060 of the Code, and the regulations thereunder
("Section 1060").
(b) The Seller shall have a period of twenty
business days after the delivery of the Allocation Schedule to present in
writing to the Buyer
<PAGE>
4
notice of any objections the Seller may have to the allocations set forth
therein (an "Objections Notice"). Unless the Seller timely objects, such
Allocation Schedule shall be binding on the parties without further adjustment,
absent manifest error.
(c) If the Seller shall raise any objections within
the twenty-business day period, the Buyer and the Seller shall negotiate in good
faith and use their reasonable best efforts to resolve such dispute. If the
parties fail to agree within fifteen days after the delivery of the Objections
Notice, then the disputed items shall be resolved by Deloitte & Touche, or if
such firm declines to act in such capacity, by such other firm of independent
nationally recognized accountants chosen and mutually accepted by both parties
(the "Accounting Referee"), whose determination shall be final and binding on
the parties. The Accounting Referee shall resolve the dispute within thirty days
after the item has been referred to it. The costs, fees and expenses of the
Accounting Referee shall be borne equally by the Seller and the Buyer.
(d) For all Tax (as defined in Section 4.7)
purposes, the Buyer and the Seller agree to report the transactions contemplated
by this Agreement in a manner consistent with the terms of this Agreement, and
that neither of them will take any position inconsistent therewith in any Tax
Return.
3. Closing; Closing Date. The Closing of the sale and purchase of
the Assets contemplated hereby shall take place at the offices of Paul, Weiss,
Rifkind, Wharton & Garrison at 11:00 a.m. on April 9, 1999, or at such other
place or such other time or date as the parties may mutually agree in writing,
provided that all of the conditions to the Closing set forth in Articles 7 and 8
have been satisfied or waived by the party entitled to waive the same. The time
and date upon which the Closing occurs is herein called the "Closing Date."
4. Representations and Warranties of the Seller. The Seller
represents and warrants to the Buyer as follows:
4.1. Due Organization, Authority and Qualification. The
Seller is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the corporate power and lawful
authority to own, lease and operate its properties and to carry on its business
as now being and heretofore conducted. The Seller is duly qualified or otherwise
authorized as a foreign corporation to transact business and is in good standing
in each jurisdiction set forth on Schedule 4.1, which are the only jurisdictions
in which such qualification or authorization is required by law and in which the
failure to so qualify or be authorized could have a material adverse effect on
the Assets or the business, prospects, results of operations or financial
condition of the business of the Seller (the "Condition of the Business").
<PAGE>
5
4.2. Subsidiaries. Except as set forth on Schedule 4.2,
the Seller does not own any interest in any Subsidiary.
4.3. Authority to Execute and Perform Agreements. The
Seller has the requisite corporate power and authority to enter into, execute
and deliver this Agreement and each and every other agreement and instrument
contem plated hereby to which the Seller is or will be a party, and to perform
fully the Seller's obligations hereunder and thereunder. This Agreement has been
duly executed and delivered by the Seller, and each and every other agreement
and instrument contemplated by this Agreement to which the Seller is a party
will be duly executed and delivered by the Seller and (assuming due execution
and delivery hereof and thereof by the other parties hereto and thereto) this
Agreement and each such other agreement and instrument will be valid and binding
obligations of the Seller enforceable against the Seller in accordance with
their respective terms.
4.4. Organizational Documents and Corporate Records.
The Seller has heretofore delivered to the Buyer true and complete copies of the
Certificate of Incorporation (certified by the Secretary of State of Delaware)
and the By-laws of the Seller as in effect on the date hereof.
4.5. Financial Statements; Liabilities.
---------------------------------
(a) The Seller has previously furnished to the
Buyer a copy of the following financial statements of the Seller (collectively
the "Financial Statements"): (i) audited balance sheets and the related
statements of income and cash flow as of and for the years ended December 31,
1995, December 31, 1996 and December 31, 1997 (collectively, the "Audited
Financial Statements"); (ii) unaudited balance sheets and the related statements
of income and cash flow as of and for the nine months ended September 30, 1998
(collectively, the "Interim Financial Statements"); and (iii) unaudited balance
sheets and related statements of income and cash flows prepared on a pro forma
basis for the workwear lines of business for the years ended December 31, 1996,
December 31, 1997, and December 31, 1998 (collectively, the "Pro Forma Financial
Statements"). The Financial Statements (including the notes thereto) have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby and present fairly the financial position of the Seller
as of such dates and the results of operations of the Seller for such periods,
subject, in the case of the Interim Financial Statements, to year-end audit
adjustments; provided, however, that both the Interim Financial Statements and
Pro Forma Financial Statements may lack footnotes and other presentation items.
(b) Except as set forth on Schedule 4.5(b), the
Seller does not have any material indebtedness, liability or obligation,
absolute or contingent, of a nature required to be reflected on a balance sheet
prepared in accordance with
<PAGE>
6
GAAP, other than: (i) liabilities fully and adequately reflected or reserved
against in the Interim Financial Statements; and (ii) liabilities incurred after
September 30, 1998 in the ordinary course of business consistent with the past
practices of the Seller.
4.6. No Material Adverse Change. Since September 30,
1998 (the "Balance Sheet Date"), there has been no material adverse change in
the Condition of the Business, and the Seller does not know of any such change
which is threatened, nor has there been any damage, destruction or loss which
could have or has had a material adverse effect on the Condition of the
Business, whether or not covered by insurance.
4.7. Taxes. No state of facts exists or has existed that
would constitute grounds for the assessment against the Buyer, whether by reason
of transferee liability or otherwise, of any liability for any federal, state,
county, local, foreign or other tax (including, without limitation, income,
profits, premium, estimated, excise, sales, use, occupancy, gross receipts,
franchise, ad valorem, severance, capital levy, production, transfer,
withholding, employment, unemployment compensation, payroll related and property
taxes, import duties and other governmental charges and assessments), whether or
not measured in whole or in part by net income, and including deficiencies,
interest, additions to tax or interest, and penalties with respect thereto and
obligations under any tax sharing, tax allocation or similar agreement to which
the Seller is a party, and including expenses associated with contesting any
proposed adjustment related to any of the foregoing (hereinafter "Taxes")
attributable to any period ending on or before the Closing Date relating to the
Seller's income, assets and operations, including the Assets, or arising out of
the Contemplated Transactions. There is no pending or threatened Tax audit of
any Tax Return filed by or on behalf of the Seller or with respect to the
Seller's income, assets and operations, including the Assets.
4.8. Compliance with Laws. The Seller is not in material
violation of any applicable order, judgment, injunction, award, decree or writ
(collectively, "Orders"), or any applicable law, statute, code, ordinance,
regulation or other requirement (collectively, "Laws"), of any government or
political sub division thereof, or any agency or instrumentality of any such
government or political subdivision, or any insurance company or fire rating and
any other similar board or organization or other non-governmental regulating
body (to the extent that the rules, regulations or orders of such body have the
force of law), or any court or arbitrator (collectively, "Governmental Bodies"),
and the Seller has not received notice that any such violation is being or may
be alleged.
4.9. Permits. The Seller has all licenses, permits,
exemptions, consents, waivers, authorizations, rights, certificates of
occupancy, franchises, orders or approvals of, and has made all required
registrations with, any Governmental Body
<PAGE>
7
that are material to the conduct of the business of, or the intended use of any
properties of, the Seller (collectively,"Permits"). All Permits are listed on
Schedule 4.9 and are in full force and effect; no material violations are or
have been recorded in respect of any Permit; and no proceeding is pending or, to
the knowledge of the Seller, threatened to revoke or limit any Permit.
4.10. No Breach. None of the execution and delivery by
the Seller of this Agreement or any other agreement or instrument contemplated
hereby, the consummation of the transactions contemplated hereby or thereby or
the per formance by the Seller of this Agreement or any other agreement or
instrument contemplated hereby in accordance with their respective terms and
conditions: (a) violates any provision of the Certificate of Incorporation or
By-laws of the Seller; (b) requires the Seller to obtain any consent, approval
or action of, or make any filing with or give any notice to, any Governmental
Body or any other Person, except its shareholders and as set forth on Schedule
4.10 (the "Required Consents"); (c) if the Required Consents are obtained,
violates, conflicts with or results in the breach of any of the terms of,
results in a material modification of the effect of, otherwise causes the
termination of or gives any other contracting party the right to terminate, or
constitutes (or with notice or lapse of time or both constitutes) a default (by
way of substitution, novation or otherwise) under, any contract, agreement,
indenture, note, bond, loan, instrument, lease, conditional sale contract,
mortgage, license, franchise, commitment or other binding arrangement
(collectively, the "Contracts") to which the Seller is a party or by or to which
it or any of its properties may be bound or subject, or results in the creation
of any Lien upon any of the Assets; (d) if the Required Consents are obtained,
violates any Order of any Governmental Body against, or binding upon, the Seller
or upon the Assets or the Seller's properties or business; or (e) if the
Required Consents are obtained, violates any Law of any Governmental Body.
4.11. Environmental Matters.
---------------------
(a) The Seller has complied and is in compliance
in all material respects with all Safety and Environmental Laws.
(b) The Seller has not received any notification
pursuant to Safety and Environmental Laws or principles of common law relating
to pollution, protection of the environment or health and safety that the
Seller, any of its current or past operations, or any of the Assets is or may be
implicated in or subject to any Claim, Order, hearing notice, agreement or
evaluation by any Governmental Body or any other Person.
(c) There are no past or present events,
conditions, circumstances, activities, practices, incidents, agreements, actions
or plans which may prevent compliance with Safety and Environmental Laws, or
which have given rise to
<PAGE>
8
or will give rise to liabilities, costs or expenses pursuant to Safety and
Environmental Laws or principles of common law relating to pollution, protection
of the environment or health and safety.
4.12. Claims and Proceedings. There are no outstanding
Orders of any Governmental Body against or involving the Seller. Except as set
forth on Schedule 4.12, there are no material actions, suits, claims or legal,
administrative or arbitral proceedings or investigations (collectively,"Claims")
(whether or not the defense thereof or liabilities in respect thereof are
covered by insurance) pending, or, to the knowledge of the Seller, threatened,
against or involving the Seller. All notices required to have been given to any
insurance company listed as insuring against any Claim set forth on Schedule
4.12 have been timely and duly given and, except as set forth on Schedule 4.12,
no insurance company has asserted, orally or in writing, that such Claim is not
covered by the applicable policy relating to such Claim. Except as set forth on
Schedule 4.12, there are no product liability Claims against or involving the
Seller or any product manufactured, marketed or distributed at any time by the
Seller ("Seller Products") and no such Claims have been settled, adjudicated or
otherwise disposed of since January 1, 1995.
4.13. Contracts.
(a) Schedule 4.13(a) sets forth all of the
Contracts and other agreements, whether or not in writing, which are being
assigned hereby to the Buyer and the obligations under which are Assumed
Liabilities. /1/
(b) Schedule 4.13(b) sets forth all of the other
Contracts or agreements, whether or not in writing, that are material to the
Seller's business or by which the Assets are bound (collectively, the "Excluded
Contracts"). The Buyer shall not assume any of the Excluded Contracts.
(c) There have been delivered or made available to
the Buyer true and complete copies of all of the Contracts set forth on Schedule
4.13(a), Schedule 4.13(b) or on any other Schedule. All of the Contracts set
forth on Schedule 4.13(a) are valid, binding and in full force and effect. The
Seller is not in default in any material respect under any of such Contracts,
and no condition exists that with notice or lapse of time or both would
constitute such a material default thereunder. To the knowledge of the Seller,
no other party to any such Contract is in default thereunder in any material
respect nor does any condition exist that with notice or lapse of time or both
would constitute such a material default thereunder.
- ------------------------------
/1/ So as not to impose an unnecessary burden, Schedule 4.13(a) may refer to
certain types of ordinary course contracts (e.g., sales orders) below a
reasonable dollar amount generically, as opposed to listing each one.
<PAGE>
9
4.14. Inventory. The inventory of the Seller consists of
raw materials, work in process and finished goods, all of which is in good and
merchantable condition, and suitable and usable or saleable in the ordinary
course of business for the purpose for which it was procured or manufactured,
and none of which is slow moving, obsolete, damaged or defective, subject only
to the reserve for inventory writedown set forth on the Interim Financial
Statements; provided, however, that the Seller shall not be liable for a breach
of this Section 4.14 to the extent that the Inventory Value reflects the reduced
value of any such slow moving, obsolete, damaged or defective inventory.
4.15. Real Estate.
-----------
(a) Ownership of the Premises.
-------------------------
(i) The Seller is the owner of good and
marketable title to the land described on Schedule 4.15(a)(i) and to all of the
buildings, structures and other improvements located thereon (collectively, the
"Owned Real Property") free and clear of all Title Defects (as defined below)
except as set forth on Schedule 4.15(a)(i). The Owned Real Property constitutes
all of the real property included in the Assets.
(ii) Schedule 4.15(a)(ii) sets forth all
of the other real property owned by the Seller (collectively, the "Excluded Real
Property"). The Buyer shall not acquire, and the Assets shall not include, any
of the Excluded Real Property.
(iii) For purposes of this Agreement, "Title
Defects" shall mean and include any mortgage, deed of trust, Lien, pledge,
security interest, lease, charge, option, right of first refusal, easement,
restrictive covenant, encroachment or other survey defect or encumbrance other
than the matters set forth on Schedule 4.15(a)(iii) (collectively "Permitted
Liens").
(b) Leased Properties.
-----------------
(i) Schedule 4.15(b)(i) sets forth a
true, correct and complete schedule of all leases and other agreements,
including all modifications, amendments and supplements thereto included in the
Assumed Liabilities (collectively, the "Real Property Leases"), under which the
Seller uses or occupies or has the right to use or occupy, now or in the future,
any real property (the land, buildings and other improvements covered by the
Real Property Leases being hereinafter called the "Leased Real Property"), which
Schedule sets forth the date of and parties to each Real Property Lease, the
date of and parties to each amendment, modification and supplement thereto, the
term and renewal terms (whether or not exercised) thereof, the annual rent
payable thereunder and a brief description of the Real Property (as defined
<PAGE>
10
below) covered thereby. All rent and other sums and charges payable by the
Seller as tenant under each Real Property Lease are current. No event has
occurred and no condition exists that would materially interfere with the
Seller's quiet enjoyment and use of the Real Property. The Real Property Leases
are in full force and effect and the Seller has not received any notice of
default thereunder.
(ii) Schedule 4.15(b)(ii) sets forth all
of the other leases and other agreements including all modifications, amendments
and supplements thereto to which the Seller is a party (collectively, the
"Excluded Leases"), which Schedule contains the same categories of information
as are required to be set forth in Schedule 4.15(b)(i). The Buyer shall not
assume, and the Assets shall not include, any Excluded Leases.
(c) Entire Premises. The Owned Real Property
and the Leased Real Property include all of the land, buildings, structures and
other improvements required to conduct the workwear lines of business on an
on-going basis. The Owned Real Property and the Leased Real Property are
hereinafter collectively referred to as the "Real Property."
(d) Condemnation. The Seller has not received
notice, and the Seller has no knowledge of, any pending, threatened or
contemplated condemnation proceeding affecting the Real Property or any part
thereof, or of any sale or other disposition of the Real Property or any part
thereof, in lieu of condemnation.
(e) Condition and Operation of Improvements. All
buildings, structures, fixtures and other improvements in, on or within the
Owned Real Property (the "Improvements"), are, taken as a whole, in reasonable
operating condition and repair, normal wear and tear excepted, subject to
continued repair and replacement in accordance with past practice.
(f) Real Property Taxes. Each of the parcels
included in the Owned Real Property is assessed for real estate tax purposes as
a wholly independent tax lot, separate from any adjoining land or improvements
not constituting a part of such parcel.
(g) Survey. There are no encroachments or other
facts or conditions affecting any parcel of Owned Real Property that would be
revealed by an accurate survey which would, individually or in the aggregate,
(i) interfere in any material respect with, or materially increase the cost of,
the use, occupancy or operation thereof as currently used, occupied and operated
or (ii) materially reduce the fair market value thereof below the fair market
value such parcel would have had but for such encroachment or other fact or
condition. No portion of any Improvement
<PAGE>
10
encroaches upon any property not included within the Owned Real Property or upon
the area of any easement affecting the Owned Real Property.
(h) Space Leases. Other than the lessors under
the Real Property Leases, no Person other than the Seller has any right to the
possession, use, occupancy or enjoyment of the Real Property or any portion
thereof.
4.16. Product Warranty. Schedule 4.16 sets forth a
description of all express warranties provided by the Seller with respect to
products sold by it and includes a copy of the standard terms and conditions of
sale for the Seller.
4.17. Tangible Property. The facilities, machinery,
equipment, furniture, buildings and other improvements, fixtures, vehicles,
structures, any related capitalized items and other tangible property included
in the Assets (the "Tangible Property") are in all material respects in
reasonable operating condition and repair, normal wear and tear excepted,
subject to continued repair and replacement in accordance with past practice.
During the past three years there has not been any significant interruption of
the operations of the Seller due to inadequate maintenance of the Tangible
Property.
4.18. Intellectual Property.
---------------------
(a) The Seller is not infringing any
Intellectual Property rights of others in the operation of its businesses, as
currently conducted, nor to the Seller's knowledge is any other Person
infringing the Intellectual Property rights of the Seller. The Seller has not
received any claim or notice alleging any such infringement during the past 12
months (including any claim that the Seller must license or refrain from using
any Intellectual Property rights of any third party).
(b) Schedule 4.18(b) identifies each patent or
registered trademark owned by the Seller which has been issued to the Seller
with respect to any of its Intellectual Property, identifies each pending patent
or trademark application which the Seller has made with respect to any of its
Intellectual Property, and identifies each license, sublicense, agreement or
other permission which the Seller has granted to any third party with respect to
any of its Intellectual Property (together with any exceptions). The Seller has
delivered or made available to the Buyer correct and complete copies of all such
patents, registered trademarks, registrations, applications, licenses,
sublicenses, agreements and permissions (as amended to date). Schedule 4.18(b)
also identifies each trade name or unregistered trademark presently used by the
Seller in connection with its business. With respect to each item of
Intellectual Property required to be identified in Schedule 4.18(b), except as
set forth therein:
<PAGE>
12
(i) to the knowledge of the Seller, the
Seller possesses all right, title and interest in and to the item, free and
clear of any Lien;
(ii) the item is not subject to any
outstanding Order; and
(iii) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand is pending or, to the
knowledge of the Seller, is threatened which challenges the legality, validity,
enforceability, use or ownership of the item.
With respect to each license, sublicense, agreement or other permission which
the Seller has granted to any third party with respect to any of its
Intellectual Property and which remains in full force and effect, the Seller has
not agreed to indemnify any Person for or against any interference,
infringement, misappropriation or other conflict with respect to the item of
Intellectual Property subject to such license, sublicense, agreement or other
permission.
(c) Schedule 4.18(c) identifies each material item
of Intellectual Property that any third party owns and that the Seller uses
pursuant to license, sublicense, agreement or permission. The Seller has
delivered or made available to the Buyer correct and complete copies of all such
licenses, sublicenses, agreements and permissions (as amended to date). With
respect to each item of Intellectual Property required to be identified in
Schedule 4.18(c), except as set forth therein:
(i) the license, sublicense, agreement or
permission covering the item is legal, valid, binding, enforceable and in full
force and effect;
(ii) the Seller is not, and to the
knowledge of the Seller, the other parties to such license, sublicense,
agreement or permission are not, in breach or default thereunder;
(iii) to the knowledge of the Seller, the
underlying item of Intellectual Property is not subject to any outstanding
Order;
(iv) to the knowledge of the Seller, no
action, suit, proceeding, hearing, investigation, claim or demand is pending or
threatened which challenges the legality, validity or enforceability of the
underlying item of Intellectual Property; and
<PAGE>
13
(v) the Seller has not granted any
sublicense or similar right with respect to the license, sublicense, agreement
or permission.
4.19. Title to the Assets. Except as set forth on
Schedule 4.19, the Seller has good title to, or a valid leasehold interest in,
all of the Assets, free and clear of any Liens, except for liens for taxes not
yet due and payable and such imperfections of title and encumbrances, if any,
which are not material in character or amount and which do not materially
detract from the value or use of the assets subject thereto or affected thereby.
Upon completion of the Contemplated Transactions, the Buyer will acquire good
title to all of the Assets, free and clear of any Liens, except for Liens, if
any, imposed by the Buyer.
4.20. All Material Assets.
-------------------
The Assets include all of the assets required to
operate the Seller's workwear lines of business on an on-going basis, consistent
with past practice.
4.21. Suppliers and Customers.
-----------------------
Schedule 4.21 lists, by dollar volume paid, for the
nine months ended September 30, 1998, the 25 largest suppliers and the 25
largest customers of the Seller. The relationships of the Seller with such
suppliers and customers are good commercial working relationships and, except as
set forth on Schedule 4.21: (i) no Person listed on Schedule 4.21, within the
last twelve months, has threatened to cancel or otherwise terminate, or to the
knowledge of the Seller, intends to cancel or otherwise terminate, the
relationship of such Person with the Seller; and (ii) no such Person has, during
the last twelve months, decreased materially or threatened to decrease or limit
materially, or to the knowledge of the Seller intends to modify materially its
relationship with the Seller or intends to decrease or limit materially its
services or supplies to the Seller or its usage or purchase of the services or
products of the Seller.
4.22. Employee Benefit Plans.
----------------------
(a) Schedule 4.22 lists each Benefit Plan that
the Seller maintains or to which the Seller contributes (the "Seller Benefit
Plans"). The Seller has no liability, and does not reasonably expect to incur
any liability in the future, under any Benefit Plans other than the Seller
Benefit Plans. None of the Benefit Plans is a Pension Benefit Plan or a
multiemployer plan (within the meaning of Section 3(37) of ERISA). Each such
Benefit Plan (and related trust, insurance contract or fund) complies in form
and in operation in all material respects with its terms and applicable law,
including the applicable requirements of ERISA and the Code. All contributions
(including all employer contributions and employee salary reduction
contributions)
<PAGE>
14
which are due have been paid to each such Benefit Plan. The Seller has delivered
to the Buyer correct and complete copies of the plan documents and summary plan
descriptions, the most recent Form 5500 Annual Report, the most recent
determination letter and all related trust agreements, insurance contracts and
other funding agreements which implement each such Benefit Plan.
(b) No Claim with respect to the administration
or the investment of the assets of any such Benefit Plan (other than routine
claims for benefits) is pending.
(c) With respect to each Benefit Plan, no event has
occurred, and there exists no condition or set of circumstances in connection
with which the Buyer could, directly or indirectly, be subject to any material
liability under ERISA, the Code or any other applicable law.
(d) Each Benefit Plan that is intended to be
qualified under Section 401(a) of the Code is so qualified and has been so
qualified during the period since its adoption; each trust created under any
such Plan is exempt from tax under Section 501(a) of the Code and has been so
exempt since its creation.
(e) No other trade or business is or at any time
within the past six years, has been treated, together with the Company, as a
single employer under Section 414 of the Code or Section 401 of ERISA.
(f) No Benefit Plan is a Retiree Welfare Plan.
(g) The consummation of the transactions
contemplated by this Agreement will not entitle any current or former employee
to severance pay, unemployment compensation or any similar payment under any
Benefit Plan or accelerate the time of payment or vesting, or increase the
amount of any compensation due to, or in respect of, any current or former
employee under any Benefit Plan.
(h) As of the Closing, the Seller has not
incurred any liability or obligation under the Worker Adjustment and Retraining
Notification Act, as it may be amended from time to time, and within the 90-day
period immediately following the Closing, the Buyer will not incur any such
liability or obligation if, during such 90-day period, only terminations of
employment in the normal course of operations occur.
(i) There are no unfunded obligations under any
Benefit Plan which are not fully set forth on Schedule 4.22(i).
<PAGE>
15
(j) Each Benefit Plan may be amended or
terminated at any time and there is nothing preventing the assignment of any of
the Benefit Plans [and all required consents, if any, in connection with the
assignment of the Benefit Plans in accordance with this Agreement have been
obtained.]
(k) There is no Seller Benefit Plan that could
individually or collectively give rise to the payment of any amount that would
not be deductible pursuant to Section 280G or 162(m) of the Code.
4.23. Labor Matters. The Seller is not a party to or
bound by any union or collective bargaining agreement. The Seller is not a party
to any pending arbitration or grievance proceeding or other claim relating to
any labor contract nor, to the knowledge of the Seller, is any such action
threatened. Within the previous 12 months, the Seller has not experienced any
labor disputes, union organization attempts or any work stoppage due to labor
disagreements in connection with its business, and there is currently no labor
strike, request for representation, slowdown or stoppage actually pending or, to
the knowledge of the Seller, threatened against the Seller. The Seller has
provided to the Buyer all written employment agreements with the Transferred
Employees (as defined below) which are presently in effect.
4.24. Insurance. Schedule 4.24 sets forth a list
(specifying the insurer, describing each pending Claim thereunder of more than
$50,000 and setting forth the aggregate amounts paid out under each such policy
through the date hereof and the aggregate limit, if any, of the insurer's
liability thereunder) of all policies or binders of fire, liability, product
liability, worker's compensation, vehicular and other insurance held by or on
behalf of the Seller. Such policies and binders are valid and binding in
accordance with their terms, are in full force and effect, and insure against
risks and liabilities to an extent and in a manner customary in the industries
in which the Seller operates. The Seller is not in default with respect to any
provision contained in any such policy or binder. The Seller has not failed to
give any notice or present any Claim under any such policy or binder in due and
timely fashion. Except for Claims set forth on Schedule 4.24, there are no
outstanding unpaid Claims under any such policy or binder, and the Seller has
not received any notice of cancellation or non-renewal of any such policy or
binder.
4.25. Officers, Directors and Employees.
---------------------------------
(a) Schedule 4.25(a), which will be completed by the
parties during the period between the date hereof and the Closing, sets forth:
(i) the name, title and total compensation of each officer, director or
comparable Person of the Seller who will be offered continued employment by the
Buyer after the Closing Date; (ii) the name, title, and total compensation of
each other employee, consultant or other representative of the Seller who will
be offered continued employment by the Buyer
<PAGE>
16
after the Closing Date and whose current or committed annual rate of
compensation (including bonuses and commissions) exceeds $20,000; (iii) all wage
and salary increases, bonuses and increases in any other direct or indirect
compen sation received by such Persons since the Balance Sheet Date; (iv) any
payments or commitments to pay any severance or termination pay to any such
Persons; and (v) any accrual for, or any commitment or agreement by the Seller
to pay, such increases, bonuses or pay. None of such Persons has indicated that
he or she will cancel or otherwise terminate such Person's relationship with the
Seller.
(b) Schedule 4.25(b) sets forth the name and title of (i)
each officer, director or comparable Person of the Seller who will not be
offered continued employment by the Buyer after the Closing Date and (ii) each
other employee, consultant or other representative of the Seller who will not be
offered continued employment by the Buyer after the Closing Date.
4.26. Seller Products. There are no statements, citations
or decisions by any Governmental Body specifically stating that any products
sold by the Seller (collectively the "Seller Products") are defective or unsafe
or fail to meet any standards promulgated by any such Governmental Body. Except
as set forth on Schedule 4.26, there is no (a) fact relating to any Seller
Product that may impose upon the Seller a duty to recall any Seller Product or a
duty to warn customers of a defect in any Seller Product, (b) latent or overt
design, manufacturing or other defect in any Seller Product or (c) material
liability for warranty claims or returns with respect to any Seller Product not
fully reflected on the Audited or Interim Financial Statements.
4.27. Operations of the Seller. Except as set forth on
Schedule 4.27, since the Balance Sheet Date the Seller has not: (a) waived any
material right under any Contract or other agreement of the type required to be
set forth on any Schedule; (b) made any change in its accounting methods or
practices or made any change in depreciation or amortization policies or rates
adopted by it; (c) materially changed any of its business policies, including,
without limitation, advertising, investment, marketing, pricing, purchasing,
production, personnel, sales, returns, budget or product acquisition policies;
(d) made any acquisition of all or any part of the properties, capital stock or
business of any other Person; (e) terminated or failed to renew, or received any
written threat (that was not subsequently withdrawn) to terminate or fail to
renew, any Contract or other agreement that is or was material to the Condition
of the Business; (f) amended its Certificate of Incorporation, or merged with or
into or consolidated with any other Person, subdivided or in any way
reclassified any of its ownership interests or any shares of its capital stock
or changed or agreed to change in any manner the rights of its ownership
interests or the character of its business; (g) made any material capital
expenditures (or series of related capital expenditures) outside the ordinary
course of business; (h) granted any license or sublicense of any rights under or
with respect to any Intellectual Property outside
<PAGE>
17
the ordinary course of business; or (i) engaged in any other material
transaction other than in the ordinary course of business.
4.28. Potential Conflicts of Interest. Except as set
forth on Schedule 4.28, (a) the Seller does not, (b) no officer, director or
affiliate of the Seller, (c) no relative or spouse (or relative of such spouse)
of any such officer, director or affiliate and (d) no entity controlled by one
or more of the foregoing:
(i) own(s), directly or indirectly, any interest in
(excepting less than 5% stock holdings for investment purposes in securities of
publicly held and traded companies), or is an officer, director, employee or
consultant of, any Person which is, or is engaged in business as, a competitor,
lessor, lessee, supplier, distributor, sales agent or customer of the Seller;
(ii) own(s), directly or indirectly, in whole or in
part, any property that the Seller uses in the conduct of its business; or
(iii) has any cause of action or other claim
whatsoever against, or owes any amount to, the Seller, except for claims in the
ordinary course of business such as for accrued vacation pay, accrued benefits
under Benefit Plans, and similar matters and agreements existing on the date
hereof.
4.29. Public Disclosure. No document filed with the
Securities and Exchange Commission (the "SEC") by or on the behalf of the
Seller, during the five years prior to the date hereof, contains an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements made, in the context in which
made, not materially false or misleading.
4.30. Pre-Closing Actions. The Seller has not sold,
transferred or made any other disposition of any of its inventory or other
assets other than in the ordinary course of business, consistent with past
practice.
4.31. Year 2000 Compliance. Except as set forth on
Schedule 4.31, all software, hardware, databases and embedded control systems
used by the Seller (collectively, the "Systems") and, as applicable, each of the
Seller Products are Year 2000 Compliant. As used herein, the term "Year 2000
Compliant" means that the Systems and Seller Products: (i) accurately process
date and time data (including, without limitation, calculating, comparing, and
sequencing) from, into, and between the twentieth and twenty-first centuries,
the years 1999 and 2000, and leap year calculations; and (ii) operate accurately
with other software and hardware that use standard date format (4 digits) for
representation of the year. Following the Closing, the Buyer shall not incur any
material expenses arising from or relating to the failure of any of the Systems
or Seller Products to be Year 2000 Compliant.
<PAGE>
18
5. Representations and Warranties of the Buyer. The Buyer
represents and warrants to the Seller as follows:
5.1. Due Organization and Authority. The Buyer is a
corporation duly organized, validly existing and in good standing under the laws
of the state of Delaware and has the corporate power and lawful authority to
own, lease and operate its assets, properties and business and to carry on its
business as now conducted.
5.2. Authority to Execute and Perform Agreements. The
Buyer has the requisite corporate power and authority to enter into, execute and
deliver this Agreement and each and every other agreement and instrument
contemplated hereby to which the Buyer is or will be a party, and to perform
fully the Buyer's obligations hereunder and thereunder. This Agreement has been
duly executed and delivered by the Buyer, and each and every other agreement and
instrument contemplated by this Agreement to which the Buyer is a party will be
duly executed and delivered by the Buyer and (assuming due execution and
delivery hereof and thereof by the other parties hereto and thereto) this
Agreement and each such other agreement and instrument will be valid and binding
obligations of the Buyer enforceable against the Buyer in accordance with their
respective terms.
5.3. No Breach. Except as set forth on Schedule 5.3,
none of the execution and delivery by the Buyer of this Agreement or any other
agreement or instrument contemplated hereby, the consummation of the
transactions contemplated hereby or thereby nor the performance by the Buyer of
this Agreement or any other agreement or instrument contemplated hereby in
accordance with their respective terms and conditions: (a) violates any
provision of the Certificate of Incorporation or By-laws of the Buyer; (b)
requires the Buyer to obtain any consent, approval or action of, or make any
filing with or give any notice to, any Governmental Body or any other Person;
(c) violates, conflicts with or results in the breach of any of the terms of,
results in a material modification of the effect of, otherwise causes the
termination of or gives any other contracting party the right to terminate, or
constitutes (or with notice or lapse of time or both constitutes) a default (by
way of substitution, novation or otherwise) under, any of the Contracts to which
the Buyer is a party or by or to which it or any of its properties may be bound
or subject, or results in the creation of any Lien upon any of its properties;
(d) violates any Order of any Governmental Body against, or binding upon, the
Buyer or upon its properties or business; or (e) violates any Law of any
Governmental Body.
5.4 Availability of Funds. The Buyer has delivered to
the Seller evidence satisfactory to the Seller that the Buyer has available, and
will have available on the Closing Date, sufficient funds to enable it to
consummate the Contemplated Transactions.
<PAGE>
19
6. Covenants and Agreements. Each party shall use its best
efforts to fulfill or obtain the fulfillment of the conditions to the Closing
set forth in Articles 7 and 8, and, in addition, the parties covenant and agree
as follows:
6.1. Conduct of Business. From the date hereof through
the Closing Date, the Seller agrees that it shall conduct its business in the
ordinary course and, in a manner such that the representations and warranties
contained in Article 4 shall continue to be true and correct on and as of the
Closing Date as if made on and as of the Closing Date. The Seller shall give the
Buyer prompt notice of any event, condition or circumstance occurring from the
date hereof through the Closing Date that would constitute a violation or breach
of any representation or warranty, whether made as of the date hereof or as of
the Closing Date, or that would constitute a violation or breach of any covenant
of the Seller contained in this Agreement.
6.2. Corporate Examinations and Investigations. Prior
to the Closing Date, the Seller agrees that the Buyer shall be entitled, through
its employees and representatives, to make such investigation of the properties,
businesses and operations of the Seller, and such examination of the books,
records and financial condition of the Seller, as it wishes. Any such
investigation and examination shall be conducted at reasonable times and under
reasonable circumstances, and the Seller shall cooperate fully therein. No
investigation by the Buyer shall diminish or obviate any of the representations,
warranties, covenants or agreements of the Seller contained in this Agreement.
6.3. Publicity. The parties agree that, except to the
extent required by Law or the rules or regulations of any applicable stock
exchange, no publicity release or announcement concerning this Agreement or the
Contemplated Transactions shall be made without advance approval thereof by the
Seller and the Buyer. If a party is required by Law or the rules or regulations
of any applicable stock exchange to issue a release or make an announcement
concerning this Agreement or the Contemplated Transactions, such party shall
notify the other before doing so.
6.4. Indemnification of Brokerage.
----------------------------
(a) The Seller represents and warrants to the
Buyer that except as set forth on Schedule 6.4 no Broker has acted on behalf of
the Seller in connection with this Agreement or the Contemplated Transactions,
and that there are no brokerage commissions, finder's fees or similar fees or
commissions payable in connection therewith based on any agreement, arrangement
or understanding with the Seller, or any action taken by the Seller. The Seller
agrees to indemnify and hold harmless the Buyer from any claim or demand for
commission or other compensation by any Broker claiming to have been employed by
or on behalf of the Seller, and to bear the cost of legal expenses incurred in
defending against any such claim.
<PAGE>
20
(b) The Buyer represents and warrants to the
Seller that no Broker has acted on behalf of the Buyer in connection with this
Agreement or the Contemplated Transactions, and that there are no brokerage
commissions, finders' fees or similar fees or commissions payable in connection
therewith based on any agreement, arrangement or understanding with the Buyer,
or any action taken by the Buyer. The Buyer agrees to indemnify and hold
harmless the Seller from any claim or demand for commission or other
compensation by any Broker claiming to have been employed by or on behalf of the
Buyer, and to bear the cost of legal expenses incurred in defending against any
such claim.
6.5. Required Consents. The Seller shall, prior to the
Closing, obtain or make, at its sole expense, all Required Consents and
undertake all actions, incur all expenses, costs and obligations and provide all
bonds, guarantees or other financial instruments required pursuant to the
Required Consents. The Seller agrees to indemnify and hold harmless the Buyer
from any costs, expenses, obligations or liabilities arising in connection with
or pursuant to any of the Required Consents.
6.6. Collection of Outstanding Receivables. After the
Closing Date, the Buyer will collect any payments remitted to the Buyer for
products shipped by the Seller prior to the Closing Date (the "Accounts
Receivable") and remit such payments to the Seller on the second and fourth
Fridays of each month. In addition, the Buyer will make reasonable efforts to
assist the Seller in securing payments for outstanding Accounts Receivable upon
the request of the Seller.
6.7. Employees and Benefit Plans.
(a) Offers of Employment. The Buyer shall offer
employment as of the Closing to those current full time employees of the Seller
listed on Schedule 4.25(a) (such employees who accept such offer of employment
shall hereinafter be referred to as "Transferred Employees") on substantially
the same, or better, terms and conditions of employment as provided to such
employees by the Seller immediately prior to the Closing; provided, however,
that nothing in this Agreement shall be construed to limit or restrict the
ability of the Buyer to terminate the employment of the Transferred Employees
following the Closing or to require the Buyer to maintain the terms of such
employment, including any particular level of benefits. As of the Closing, the
Buyer shall offer each Transferred Employee benefits that are comparable, in the
aggregate, to benefits being provided to an existing employee of the Buyer who
holds a position in the Buyer's organization comparable to that being offered to
such Transferred Employee. The Seller shall be responsible and indemnify the
Buyer for all employment-related liabilities incurred or accrued prior to, or
solely as a result of the Closing, including any severance liabilities incurred
under WARN, or otherwise.
<PAGE>
21
(b) Coverage Under Medical Plan. The Buyer shall
offer each Transferred Employee who participated in the Seller's health plan
immediately prior to the Closing (and each such Transferred Employee's
beneficiaries and dependents) with immediate coverage under a health benefit
plan not materially less favorable than the health benefit plan in which each
such Transferred Employee participated immediately prior to the Closing. Each
Transferred Employee shall receive credit under such health benefit plan for all
amounts paid by each of them under the Seller's health benefit plan for purposes
of any applicable 1999 calendar year deductibles, co-payments or out-of-pocket
maximums under such health benefit plan. The Buyer shall be solely responsible
for providing Transferred Employees with any continuation coverage (and shall
have sole liability in respect of any failure to provide such continuation
coverage) under Section 4980B of the Code or Part 6 of Subtitle B of Title I of
ERISA resulting from any "qualifying event" occurring on or after the Closing
Date or as a result of the transactions contemplated by this Agreement (without
regard to whether the Buyer otherwise would have been required to provide such
coverage in the absence of this Agreement). The Seller shall retain such
liability with respect to any "qualifying event" occurring on or prior to the
Closing Date.
(c) Certain Welfare Plans and Worker's
Compensation Liabilities.
(i) Except as otherwise provided in this
Section, the Seller shall remain responsible for all claims under welfare
benefit plans with respect to all the Seller's employees until they are treated
as Transferred Employees and in respect of all persons who are not Transferred
Employees. Except as otherwise provided in this Section, the Seller will be
solely responsible for all claims that are pending or incurred with respect to
Transferred Employees before the Closing Date under any welfare benefit plan
maintained by the Seller. The buyer will be solely responsible for all claims
under any welfare benefit plan maintained by the Buyer with respect to all
persons who are treated as Transferred Employees that are incurred on or after
the Closing Date. For purposes of this paragraph, a claim will be deemed to have
been incurred under any medical or dental plan on the date services with respect
to such claim are performed (regardless of whether such services are a part of a
continuing course of treatment), and a claim will be deemed to have been
incurred under any disability plan on the date the participant satisfies the
conditions for disability.
(ii) The Seller shall be responsible for any
liabilities in respect of any claim for worker's compensation benefits in
respect of all the Seller's employees until they are treated as Transferred
Employees and in respect of all persons who are not Transferred Employees. The
Buyer shall be solely responsible for all liabilities in respect of any claim
for worker's compensation benefits of any Transferred Employees that are
asserted on or after the Closing Date.
<PAGE>
22
(d) WARN. The Buyer shall be responsible and
indemnify the Seller for all employment-related liabilities incurred or accrued
after the Closing with respect to any Transferred Employees, including any
severance liabilities incurred under WARN, or otherwise.
(e) FICA/FUTA Cooperation. The Seller and the
Buyer each will (i) treat the Buyer as a "successor employer" and the Seller as
a "predecessor," within the meaning of sections 3121(a)(1) and 3306(b)(1) of the
Code with respect to Transferred Employees for purposes of taxes imposed under
the Federal Unemployment Tax Act ("FUTA") or the Federal Insurance Contributions
Act ("FICA") and (ii) cooperate with each other to avoid, to the extent
possible, the filing of more than one IRS Form W-2 with respect to a Transferred
Employee for the calendar year in which the Closing Date occurs.
6.8. Transfer of the Marks. The Seller agrees that upon
the Closing, it shall:
(a) transfer all its rights in the Marks to the
Licensor, whose sole corporate purpose shall be to hold and license the Marks;
(b) transfer 40 shares of the Licensor's Class B
Common Stock (the "Shares") to the Buyer, which shares shall represent 40% of
the issued common stock of the Licensor; and
(c) ensure that the Licensor's articles of
incorporation and by-laws (the "Licensor Organizational Documents") provide: (i)
that the Licensor's sole corporate purpose shall be to hold and license the
Marks, (ii) that the Shares give the Buyer the right to appoint one director to
the Licensor's board of directors and (iii) that the unanimous consent of the
directors shall be necessary to (A) amend the Licensor Organizational Documents,
(B) pledge, assign or otherwise transfer the Marks and (C) file or consent to
the filing of any petition to take advantage of any applicable insolvency,
bankruptcy, liquidation or reorganization statute, or make any assignment for
the benefit of any creditor.
7. Conditions Precedent to the Obligations of the Buyer. The
obligation of the Buyer to enter into and complete the Closing is subject to the
fulfill ment on or prior to the Closing Date of the following conditions, any
one or more of which may be waived by the Buyer:
7.1. Representations and Covenants. The representations
and warranties of the Seller contained in this Agreement shall be true in all
material respects on and as of the Closing Date with the same force and effect
as though made on and as of the Closing Date. The Seller shall have performed
and complied in all
<PAGE>
23
material respects with all covenants and agreements required by this Agreement
to be performed or complied with by the Seller on or prior to the Closing Date.
The Seller shall have delivered to the Buyer a certificate, dated the date of
the Closing and signed by an officer of the Seller, to the foregoing effect.
7.2. Consents and Approvals. The Seller shall have
obtained the consent of its shareholders (the "Shareholder Consent") and all
other Required Consents, and the Buyer shall have been furnished with evidence
reasonably satisfactory to it that such Shareholder Consent and Required
Consents have been obtained and remain in full force and effect.
7.3. Opinion of Counsel to the Seller. The Buyer shall
have received the opinion of Kramer Levin Naftalis & Frankel LLP, counsel to the
Seller, as of the Closing Date, addressed to the Buyer, in a form to be mutually
agreed upon by the Buyer and the Seller.
7.4. Additional Closing Documents.
7.4.1 Closing Documents of the Seller. The Seller
shall have executed and delivered to the Buyer the following documents, each
dated as of the Closing Date:
(a) a bill of sale and assignment in a form to
be mutually agreed upon by the Buyer and the Seller;
(b) an assignment and assumption in a form to be
mutually agreed upon by the Buyer and the Seller (a "Real Property Lease
Assignment and Assumption Agreement") for each Real Property Lease;
(c) a lease relating to the Seller's mainframe
computer and software (the "Computer and Software Lease") in a form to be
mutually agreed upon by the Buyer and the Seller;
(d) a lease relating to the Seller's facility in
Carthage, Missouri (the "Facility Lease") in a form to be mutually agreed upon
by the Buyer and the Seller; and
(e) such further instruments of sale, transfer,
conveyance, assignment or delivery covering the Assets or any part thereof as
the Buyer may reasonably require to assure the full and effective sale,
transfer, conveyance, assignment or delivery to it of the Assets (including the
Permits, to the extent transferable).
<PAGE>
24
7.4.2 Closing Documents of the Licensor. The
Seller shall have caused the Licensor to execute, the Licensor shall have
executed and the Seller shall have delivered to the Buyer, the Trademark License
dated as of the Closing Date.
7.5. Non-Compete Agreements. Each of the following
non-compete agreements remain in full force and effect:
(a) the non-compete agreement in the form of
Exhibit B by and between the Buyer and the Seller (the "Seller Non-Compete
Agreement"); and
(b) the non-compete agreement in the form of
Exhibit C by and between the Buyer and S. Peter Lebowitz (the "Shareholder
Non-Compete Agreement").
7.6. Title Insurance. The Buyer shall have received an
owner's extended coverage policy of title insurance with respect to each parcel
of Owned Real Property, issued on the date of Closing by Chicago Title Insurance
Company or another title insurance company reasonably acceptable to counsel for
the Buyer (the "Title Company"). Each such title insurance policy shall be in an
amount designated by the Buyer (but not in excess of the portion of the Purchase
Price allocable thereto) and shall insure the Buyer's ownership of fee title
without any of the Schedule B standard preprinted exceptions (other than taxes
not yet due and payable) and free and clear of Title Defects and other
exceptions to or exclusions from coverage other than Permitted Liens. Each such
title insurance policy shall otherwise be in form reasonably satisfactory to
counsel to the Buyer.
7.7. Survey. The Buyer shall have received a current
survey of each parcel of Owned Real Property prepared in insurable form in
accordance with standards applicable to registered and licensed land surveyors
making surveys in the States in which such parcels are located and in accordance
with the further provisions of this Section 7.7. Each such survey shall be
certified to the Buyer and the Title Company and shall show (i) the courses and
distances of all boundary lines of such parcel (including, appurtenant
easements), (ii) the location of all Improvements situated on or above such
parcel and on or above any easements or rights of way affecting said parcel,
(iii) all encroachments of adjoining properties or improvements onto such
parcel, (iv) all encroachments of Improvements onto any adjoining property, (v)
the location of all easements and other rights burdening such parcel and all
encroachments of Improvements onto the areas of such easements, (vi) the
location of all roadways, alleys, rights of way and the like affecting such
parcel, (vii) all accessways from such parcel to public streets and (viii) such
other facts and conditions affecting such parcel as are appropriate, or as may
have been reasonably requested by the Buyer, to be shown
<PAGE>
25
on such survey. Each such survey shall otherwise be in form reasonably
satisfactory to counsel for the Buyer.
7.8. Tax Returns. The Buyer shall have received any and
all real property transfer tax returns and other similar filings required by law
in connection with the transactions contemplated hereby and relating to the
Owned Real Property, any part thereof or ownership interest therein, all duly
and properly executed and acknowledged by the Seller. The Seller shall also have
executed such affidavits in connection with such filings as shall have been
required by law or reasonably requested by the Buyer.
7.9. FIRPTA Affidavit. The Buyer shall have received an
affidavit of an officer of the Seller sworn to under penalty of perjury, setting
forth the Seller's address and Federal tax identification number and stating
that the Seller is not a "foreign person" within the meaning of Section 1445 of
the Code.
7.10 Landlord Estoppel Certificate. The Buyer shall
have received, at the Sellers' expense, a current estoppel certificate from the
landlord under each Real Property Lease stating (i) that such Real Property
Lease is in full force and effect and has not been amended, modified or
supplemented other than as set forth on Schedule 4.15(b)(i); (ii) that all rent
and other sums and charges payable under such Real Property Lease are current,
and setting forth the date through which such payments have been made; (iii) the
amount of any tenant security or other similar deposit held by or on behalf of
such landlord under such Real Property Lease; (iv) that no notice of default on
the part of the Seller or termination notice has been served under such Real
Property Lease which remains outstanding; (v) that, to the knowledge of such
landlord, no uncured default or termination event or condition exists under such
Real Property Lease, and that no event has occurred or condition exists which,
with the giving of notice or the lapse of time or both, would constitute such a
default or termination event or condition; and (vi) that the consummation of the
transactions contemplated under this Agreement will not constitute a default
under such Real Property Lease or grounds for the termination thereof or for the
exercise of any other right or remedy adverse to the interests of the tenant
thereunder.
7.11 Repayment of Loans. The Seller shall apply [90%]
of the Purchase Price to the repayment of amounts borrowed under its revolving
loan and credit agreement (the "Credit Facility") with NationsCredit Commercial
Funding ("NationsCredit") in accordance with the terms of the Credit Facility,
and the Buyer shall have received evidence satisfactory to it that NationsCredit
has released all Liens relating to the Assets and waived any claims it may have
against the Buyer pursuant to any applicable fraudulent conveyance, insolvency,
bankruptcy, liquidation or reorganization statute.
<PAGE>
26
8. Conditions Precedent to the Obligation of the Seller. The
obligation of the Seller to enter into and complete the Closing is subject, to
the fulfillment on or prior to the Closing Date of the following conditions, any
one or more of which may be waived by the Seller:
8.1. Representations and Covenants. The representations
and warranties of the Buyer contained in this Agreement shall be true in all
material respects on and as of the Closing Date with the same force and effect
as though made on and as of the Closing Date. The Buyer shall have performed and
complied in all material respects with all covenants and agreements required by
this Agreement to be performed or complied with by it on or prior to the Closing
Date. The Buyer shall have delivered to the Seller a certificate, dated the date
of the Closing and signed by an officer of the Buyer, to the foregoing effect.
8.2. Consents and Approvals. Shareholder Consent and
all other Required Consents shall have been obtained and be in full force and
effect.
8.3. Additional Closing Documents of the Buyer. The
Buyer shall have executed and delivered to the Seller the following documents,
each dated the Closing Date:
(a) an assumption of liabilities in a form to be
mutually agreed upon by the Buyer and the Seller (the "Assumption of
Liabilities");
(b) a Real Property Lease Assignment and
Assumption Agreement for each Real Property Lease;
(c) the Computer and Software Lease; and
(d) the Facility Lease.
8.4. Opinion of Counsel to the Buyer. The Seller shall
have received the opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel
to the Buyer, as of the Closing Date, addressed to the Seller in a form to be
mutually agreed upon by the Buyer and the Seller.
8.5. Non-Compete Agreements. Each of the following non-
compete agreements remain in full force and effect:
(a) the Seller Non-Compete Agreement; and
(b) the Shareholder Non-Compete Agreement.
<PAGE>
27
9. Post-Closing Covenants and Agreements.
-------------------------------------
9.1. Prorations. All real estate and personal property
Taxes and all rents, utilities and other charges against, or payable by the
owner of, any of the Assets (including the Real Property) relating to a time
period beginning prior to, and ending after, the Closing shall be prorated
(based on the most recent available tax statement, latest tax valuation and
latest bills) as of the Closing. If the Closing occurs before the tax rate is
fixed for the then current fiscal or calendar year, whichever is applicable, the
proration of the corresponding Taxes shall be on the basis of the tax rate for
the last preceding year applied to the latest assessed valuation. The Seller's
estimated accrued liability (to the Closing) for any of the above-described
Taxes and charges that are due and payable after the Closing shall be a credit
against the amount payable at the Closing by the Buyer and the amount of all of
the above described Taxes and charges that were paid prior to the Closing but
relate to periods after the Closing, as well as the amount of all security
deposits under Real Property Leases, shall be added to the Purchase Price
payable by the Buyer at the Closing.
9.2. Bulk Sales Laws. The Buyer hereby waives compliance
with the provisions of any bulk transfer laws applicable to the transactions
contemplated by this Agreement. The Seller agrees promptly and diligently to pay
and discharge when due or to contest or litigate all claims of creditors that
are asserted against the Buyer by reason of any non-compliance with such laws.
9.3. Further Assurances. At any time and from time to
time after the Closing, at the Buyer's request and without further
consideration, the Seller shall execute and deliver such further documents, and
perform such further acts, as may be necessary in order to effectively transfer
and convey the Assets to the Buyer, on the terms herein contained, and to
otherwise comply with the terms of this Agreement and consummate the
Contemplated Transactions.
10. Survival of Representations and Warranties of the Seller. All
representations, warranties, covenants and agreements in this Agreement shall
survive the execution and delivery hereof and the Closing hereunder. All
representa tions and warranties of the Seller contained in this Agreement shall
terminate and expire two years after the Closing Date, except for (i) those
representations and warranties in Sections 4.1, (first sentence only) 4.3, 4.4,
4.10 (clauses (a) and (b) only) and 4.19, which representations and warranties
shall survive without any limitation; and (ii) those representations and
warranties, the breach of which the Buyer shall have given notice to the Seller
prior to the expiration of the two year period referred to in the foregoing
clause.
<PAGE>
28
11. Indemnification.
---------------
11.1. Obligation of the Seller to Indemnify. Subject to
the limitations contained in Article 10 and Section 11.4, the Seller agrees to
indemnify, defend and hold harmless the Buyer (and its directors, officers,
employees, affiliates, successors and assigns) from and against all losses,
liabilities, damages, deficiencies, demands, claims, actions, judgments or
causes of action, assessments, costs or expenses (including, without limitation,
interest, penalties and reasonable fees, expenses and disbursements of
attorneys, experts, personnel and consultants incurred by the indemnified party
in any action or proceeding between the indemnifying party and the indemnified
party or between the indemnified party and any third party, or otherwise)
("Losses") based upon, arising out of or otherwise in respect of: (a) any
inaccuracy in or any breach of any representation, warranty, covenant or
agreement of the Seller contained in this Agreement or in any Documents
delivered by the Seller pursuant to this Agreement; or (b) any Excluded
Liability.
11.2. Obligation of the Buyer to Indemnify. The Buyer
shall indemnify, defend and hold harmless the Seller (and its directors,
officers, employees, affiliates, successors and assigns) from and against any
Losses based upon, arising out of or otherwise in respect of: (a) any inaccuracy
in or any breach of any representation, warranty, covenant or agreement of the
Buyer contained in this Agreement or in any Documents delivered by the Buyer
pursuant to this Agreement; or (b) any Assumed Liability.
11.3. Notice and Opportunity to Defend.
--------------------------------
11.3.1 Notice of Asserted Liability. The party
making a claim under this Article 11 is referred to as the "Indemnitee," and the
party against whom such claims are asserted under this Article 11 is referred to
as the "Indemnifying Party." All claims by any Indemnitee under this Article 11
shall be asserted and resolved as follows: Promptly after receipt by an
Indemnitee of notice of any demand, claim or circumstances which, with the lapse
of time, would or might give rise to a claim or the commencement (or threatened
commencement) of any action, proceeding or investigation (an "Asserted
Liability") that may result in a Loss, an Environmental Claim or Environmental
Compliance Costs, the Indemnitee shall give notice thereof (the "Claims Notice")
to the Indemnifying Party. The Claims Notice shall describe the Asserted
Liability in reasonable detail, and shall indicate the amount (estimated, if
necessary and to the extent feasible) of the Loss that has been or may be
suffered by the Indemnitee.
<PAGE>
29
11.3.2 Opportunity to Defend.
---------------------
(a) The Indemnifying Party may elect to compromise
or defend, at its own expense and by its own counsel, any Asserted Liability,
except any Asserted Liability which is likely to result in Environmental
Compliance Costs, which shall be subject to Section 11.3.2(b). If the
Indemnifying Party elects to compromise or defend such Asserted Liability, it
shall within 30 days (or sooner, if the nature of the Asserted Liability so
requires) notify the Indemnitee of its intent to do so, and the Indemnitee shall
cooperate, at the expense of the Indemnifying Party, in the compromise of, or
defense against, such Asserted Liability. If the Indemnifying Party elects not
to compromise or defend the Asserted Liability, fails to notify the Indemnitee
of its election as herein provided or contests its obligation to indemnify under
this Agreement, the Indemnitee may pay, compromise or defend such Asserted
Liability. Notwithstanding the foregoing, neither the Indemnifying Party nor the
Indemnitee may settle or compromise any claim over the objection of the other;
provided, however, that (i) if the settlement or compromise does not result in
any liability to the Indemnifying Party, consent to settlement or compromise
shall not be unreasonably withheld and (ii) if the Indemnitee is fully released
from any potential Liability, consent to settlement or compromise shall not be
unreasonably withheld. In any event, the Indemnitee and the Indemnifying Party
may participate, at their own expense, in the defense of such Asserted
Liability. If the Indemnifying Party chooses to defend any claim, the Indemnitee
shall make available to the Indemnifying Party any books, records or other
documents within its control that are necessary or appropriate for such defense.
(b) Notwithstanding anything to the contrary in
Section 11.3.2(a), the Indemnitee shall have the exclusive right at its option
to manage and control all actions resulting in Environmental Compliance Costs
with respect to which the Indemnitee has made a claim for indemnification
pursuant to Section 11.1 hereof. The Indemnitee shall keep the Indemnifying
Party fully informed of the progress of such actions. The Indemnifying Party
shall be obligated to indemnify the Indemnitee for all Environmental Compliance
Costs resulting from such actions to the extent such Environmental Compliance
Costs resulted from occurrences or conditions which occurred or existed on or
prior to the Closing Date; provided, however, that the Indemnifying Party shall
not be obligated to indemnify the Indemnitee pursuant to Section 11.1 hereof to
the extent that any Environmental Compliance Costs for which the Indemnitee
seeks indemnification are not incurred or undertaken in a manner in which a
prudent business person acting in a commercially reasonable manner, seeking to
mitigate such Environmental Compliance Costs to the extent reasonably possible,
would do so.
11.4. Limitation on Indemnification. The Seller shall not
be obligated to pay any amounts for indemnification provided for in Section
11.1(a) for breaches of representations or warranties until the aggregate of
such amounts equals
<PAGE>
30
$50,000 (the "Basket Amount"), whereupon the Seller shall be obligated to pay in
full all such amounts for such indemnification, including the Basket Amount;
provided, however, that the Seller shall not be obligated to pay such amounts in
the aggregate in excess of 50% of the sum of (i) the Purchase Price and (ii) the
total amount of the payments to be made under the Seller Non-Compete Agreement.
11.5. Payment under Indemnification Provisions. The Buyer
shall have the right to offset any amounts due to it from the Seller under
Section 11.1 hereof, from the amount the Buyer is obligated to pay to the Seller
under the Seller Non-Compete Agreement. This right of the Buyer shall not be
considered exclusive, and the Buyer shall have the right to collect any amounts
due from the Seller under Section 11.1 by whatever means are available under law
or in equity.
12. Termination of Agreement.
------------------------
12.1. Termination. This Agreement may be terminated prior
to the Closing as follows:
(a) by either party, if the other party has
breached any material representation, warranty, covenant or agreement contained
in this Agreement, which breach cannot reasonably be, or is not, cured by the
Closing Date;
(b) by either party, if the Closing Date shall
not have occurred before August 15, 1999, for any reason other than the failure
of the party purporting to terminate this Agreement to perform its obligations
hereunder;
(c) at any time on or prior to the Closing Date,
by mutual written consent of the Seller and the Buyer.
If this Agreement so terminates, it shall become null and
void and have no further force or effect, except as provided in Section 12.2.
12.2. Survival After Termination. If this Agreement
terminates pursuant to Section 12.1, it shall become null and void and have no
further force or effect, except that any such termination shall be without
prejudice to the rights of any party on account of the nonsatisfaction of the
conditions set forth in Articles 7 and 8 resulting from the intentional or
willful breach or violation of the representations, warranties, covenants or
agreements of another party under this Agreement. Notwithstanding anything in
this Agreement to the contrary, Sections 12.3, 13.2 and 13.6 shall survive any
termination of this Agreement.
12.3. Termination Payments. In the event that this
Agreement is terminated prior to the Closing on account of the Seller's failure
to obtain
<PAGE>
31
Shareholder Consent, the Seller shall pay the Buyer (a) an amount equal to the
reasonable out-of-pocket costs, including attorneys fees, the Buyer incurred in
connection with the Contemplated Transactions (the "Termination Costs") and (b)
a termination fee (the "Termination Fee") of $150,000; provided, however, that
if, within one year of the date upon which this Agreement is terminated, the
Seller enters into (i) an agreement for the disposition, directly or indirectly,
of a material portion of the Assets or of the workwear lines of business of the
Seller or (ii) any business combination then the Termination Fee shall also
include 25% of any amount in excess of $7 million total consideration paid,
including any deferred compensation.
13. Miscellaneous.
-------------
13.1. Certain Definitions. As used in this Agreement, the
following terms have the following meanings:
"affiliate" means, with respect to any Person, any other Person
controlling, controlled by or under common control with, such Person.
"Benefit Plan" means any employee benefit plan, arrangement, policy or
commitment (whether or not an employee benefit plan within the meaning of
section 3(3) of ERISA), including, without limitation, any employment,
consulting or deferred compensation agreement, executive compensation, bonus,
incentive, pension, profit-sharing, savings, retirement, stock option, stock
purchase or severance pay plan, any life, health, disability or accident
insurance plan or any holiday or vacation practice, as to which the Seller or
any Commonly Controlled Entity has or in the future could have any direct or
indirect, actual or contingent liability.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commonly Controlled Entity" means any entity which is under common
control with the Seller within the meaning of Code section 414(b), (c), (m), (o)
or (t).
"Documents" means documents, Contracts, instruments, certificates,
notices, consents, affidavits, letters, telegrams, telexes, statements,
schedules (including Schedules to this Agreement), exhibits (including Exhibits
to this Agreement) and any other papers whatsoever.
"Employee" means any individual employed at any time by the Seller.
"Environment" means navigable waters, waters of the contiguous zone,
ocean waters, natural resources, surface waters, ground water, drinking water
supply, land surface, subsurface strata, ambient air, both inside and outside of
buildings and structures, man-made buildings and structures, and plant and
animal life on earth.
<PAGE>
32
"Environmental Compliance Costs" means any expenditures, costs,
assessments or expenses (including, without limitation, any expenditures, costs,
assessments or expenses in connection with the conduct of any Remedial Action,
as well as reasonable fees, disbursements and expenses of attorneys, experts,
personnel and consultants), whether direct or indirect, necessary to cause the
operations, real property, assets, equipment or facilities owned, leased,
operated or used by the Seller to be in compliance with any and all
requirements, as in effect at the Closing Date, of Safety and Environmental
Laws, principles of common law concerning pollution, protection of the
Environment or health and safety, or Permits issued pursuant to Safety and
Environmental Laws; provided, however, that Environmental Compliance Costs do
not include expenditures, costs, assessments or expenses necessary in connection
with normal maintenance of such real property, assets, equipment or facilities
or the replacement of equipment in the normal course of events due to ordinary
wear and tear.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Hazardous Substance" means any toxic waste, pollutant, hazardous
substance, toxic substance, hazardous waste, special waste, industrial substance
or waste, petroleum or petroleum-derived substance or waste, radioactive
substance or waste, or any constituent of any such substance or waste, or any
other substance regulated under or defined by any Safety and Environmental Law.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto
and all patents, patent applications and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions and
reexaminations thereof; (b) all trademarks, service marks, trade dress, logos,
trade names and corporate names, together with all translations, adaptations,
derivations and combinations thereof and including all goodwill associated
therewith and all applications, registrations and renewals in connection
therewith; (c) all copyrightable works, all copyrights and all applications,
registrations and renewals in connection therewith; (d) all mask works and all
applications, registrations and renewals in connection therewith; (e) all trade
secrets and confidential business information (including ideas, research and
development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, pricing and cost information and business and
marketing plans and proposals); (f) all computer software (including data and
related documentation); (g) all other proprietary rights; and (h) all copies and
tangible embodiments in any of the foregoing (in whatever form or medium).
"IRS" means the Internal Revenue Service.
<PAGE>
33
"Liability" means any direct or indirect indebtedness, liability, claim,
loss, damage, deficiency, obligation or responsibility, known or unknown, fixed
or unfixed, choate or inchoate, liquidated or unliquidated, secured or
unsecured, accrued, absolute, contingent or otherwise, of a kind required by
generally accepted accounting principles to be set forth on a financial
statement or in the notes thereto.
"Lien" means any lien, pledge, mortgage, security interest, claim,
lease, license, charge, option, right of first refusal, easement, servitude,
transfer restriction, encumbrance or any other restriction or limitation
whatsoever.
"Pension Plan" means any Benefit Plan which is a pension plan within the
meaning of ERISA section 3(2) (regardless of whether the plan is covered by
ERISA).
"Person" means any individual, corporation, partnership, firm, joint
venture, limited liability company, association, joint-stock company, trust,
unincorporated organization, Governmental Body or other entity.
"property" or "properties" means real, personal or mixed property,
tangible or intangible.
"Release" means any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration into
or through the indoor or outdoor Environment or into, through or out of any
property, including the movement of Hazardous Substances through or in the air,
soil, surface water, ground water or property.
"Remedial Action" means all actions, whether voluntary or involuntary,
reasonably necessary to comply with, or discharge any obligation under, Safety
and Environmental Laws to: (a) clean up, remove, treat, cover or in any other
way adjust Hazardous Substances in the indoor or outdoor Environment; (b)
prevent or control the Release of Hazardous Substances so that they do not
migrate or endanger or threaten to endanger public health or welfare or the
Environment; or (c) perform remedial studies, investigations, restoration and
post-remedial studies, investigations and monitoring on, about or in any real
property.
"Safety and Environmental Laws" means all Laws and Orders relating to
pollution, protection of the Environment, public or worker health and safety, or
the emission, discharge, release or threatened release of Hazardous Substances
into the Environment or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Substances including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. ss. 9601 et
seq., the Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901 et seq.,
the Toxic Substances Control Act, 15 U.S.C. ss. 2601 et seq.,
<PAGE>
34
the Federal Water Pollution Control Act, 33 U.S.C. ss. 1251 et seq., the Clean
Air Act, 42 U.S.C. ss. 7401 et seq., the Federal Insecticide, Fungicide and
Rodenticide Act, 7 U.S.C. ss. 121 et seq., the Occupational Safety and Health
Act, 29 U.S.C. ss. 651 et seq., the Asbestos Hazard Emergency Response Act, 15
U.S.C. ss.2601 et seq., the Safe Drinking Water Act, 42 U.S.C. ss. 300f et seq.,
the Oil Pollution Act of 1990, 33 U.S.C. ss. 2701 et seq. and analogous state
acts.
"Subsidiary" means as to any Person, any corporation 50% or more of the
outstanding voting power of which, or any partnership, joint venture or other
entity 50% or more of the total equity interest of which, is directly or
indirectly owned by such Person.
"Tax Return" means all tax returns, reports, forms, and other such
documents.
13.2. Consent to Jurisdiction and Service of Process. Any
legal action, suit or proceeding arising out of or relating to this Agreement,
each and every agreement and instrument contemplated hereby or the Contemplated
Transactions may be instituted in any federal court of the Southern District of
New York or any state court located in New York County, State of New York, and
each party agrees not to assert, by way of motion, as a defense or otherwise, in
any such action, suit or proceeding, any claim that it is not subject personally
to the jurisdiction of such court, that the action, suit or proceeding is
brought in an inconvenient forum, that the venue of the action, suit or
proceeding is improper or that this Agreement, or each such other agreement and
instrument or the subject matter hereof or thereof may not be enforced in or by
such court. Each party further irrevocably submits to the jurisdiction of such
court in any such action, suit or proceeding. Any and all service of process and
any other notice in any such action, suit or proceeding shall be effective
against any party if given personally or by regis tered or certified mail,
return receipt requested, or by any other means of mail that requires a signed
receipt, postage prepaid, mailed to such party as herein provided. Nothing
herein contained shall be deemed to affect the right of any party to serve
process in any manner permitted by law or to commence legal proceedings or
otherwise proceed against any other party in any other jurisdiction according to
the laws of such jurisdiction.
13.3. Notices. Any notice or other communication required
or permitted hereunder shall be in writing and shall be delivered personally,
sent by facsimile transmission or sent by certified, registered or express mail,
postage prepaid. Any such notice shall be deemed given when so delivered
personally or sent by facsimile transmission or, if mailed, five days after the
date of deposit in the United States mails, as follows:
<PAGE>
35
(i) if to the Buyer, to:
Walls Industries, Inc.
1905 N. Main Street
Cleburne, TX 76033
Attention: Albert Archer
Telephone: (817) 645-4366
Facsimile: (817) 645-7946
and with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: Robert M. Hirsh, Esq.
Telephone: (212) 373-3000
Facsimile: (212) 757-3990
(ii) if to the Seller, to:
Big Smith Brands, Inc.
7100 W. Camino Real Blvd.
Boca Raton, FL 33433
Attention: S. Peter Lebowitz
Telephone: (561) 367-8283
Facsimile: (561) 367-8986
with a copy to:
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Attention: Michael S. Nelson, Esq.
Telephone: (212) 715-9100
Facsimile: (212) 715-8000
Any party may by notice given in accordance with this
Section to the other parties designate another address or Person for receipt of
notices hereunder.
<PAGE>
36
13.4. Entire Agreement. This Agreement (including the
Exhibits and Schedules) and any collateral agreements executed in connection
with the consummation of the Contemplated Transactions contain the entire
agreement among the parties with respect to the transactions contemplated hereby
and supersede all prior agreements, written or oral, with respect thereto.
13.5. Waivers and Amendments; Non-Contractual
Remedies. This Agreement may be amended, superseded, canceled, renewed or
extended, and the terms hereof may be waived, only by a written instrument
signed by the Buyer and the Seller or, in the case of a waiver, by the party
waiving compliance. No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any such right, power or privilege, nor any
single or partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power or
privilege. The rights and remedies herein provided are cumulative and are not
exclusive of any rights or remedies that any party may otherwise have at law or
in equity.
13.6. Governing Law. This Agreement shall be governed
and construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed entirely within such State.
13.7. Binding Effect; Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and legal representatives. This Agreement is not assignable except by
operation of law, except that the Buyer may assign its rights hereunder to any
of its affiliates, to any successor to all or substantially all of its business
or assets or to any bank or other financial institution that may provide
financing for the Contemplated Transactions.
13.8. Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a number
of copies hereof each signed by less than all, but together signed by all of the
parties hereto.
13.9. Exhibits and Schedules. The Exhibits and Schedules
are a part of this Agreement as if fully set forth herein. All references herein
to Sections, Exhibits and Schedules shall be deemed references to such parts of
this Agreement, unless the context shall otherwise require.
13.10. Headings. The headings in this Agreement are for
reference only, and shall not affect the interpretation of this Agreement.
<PAGE>
37
IN WITNESS WHEREOF, the parties have executed this Agreement on
the date first above written.
BUYER:
WALLS INDUSTRIES, INC.,
CLEBURNE, TEXAS
By: /s/ Albert A. Archer
-------------------------------
Name: Albert A. Archer
Title: President
SELLER:
BIG SMITH BRANDS, INC.
By:
By: /s/ S. Peter Lebowitz
-------------------------------
Name: S. Peter Lebowitz
Title: President
Exhibit 10(ai)
NON-COMPETE AGREEMENT
---------------------
AGREEMENT, dated as of February 26, 1999, by and between WALLS
INDUSTRIES, INC., CLEBURNE, TEXAS, a Delaware corporation (the "Buyer"), and BIG
SMITH BRANDS, INC., a Delaware corporation (the "Seller").
WHEREAS, pursuant to an asset purchase agreement executed as of
the date hereof (the "Asset Purchase Agreement"), the Buyer is acquiring certain
of the assets of the Seller (the "Assets");
WHEREAS, it is a condition precedent to the execution of the
Asset Purchase Agreement that the Seller enter into this Agreement and a
condition of closing to the Asset Purchase Agreement that this Agreement remain
in full force and effect;
WHEREAS, the Seller acknowledges that the Seller has been
involved in the business (the "Business") of manufacturing, distributing and
selling apparel defined as Workwear Products by the trademark license agreement
executed as of the date hereof (the "Trademark License"); and
WHEREAS, the Seller acknowledges that its officers, directors,
employees, consultants, agents and other representatives have collectively had
close contact with many confidential affairs of the Seller not readily available
to the public, and plans for future developments.
NOW, THEREFORE, the parties hereto agree as follows:
1. Restrictive Covenants.
---------------------
(a) Non-Compete. For a period (the "Restricted Period")
commencing on the Closing Date (as defined in the Asset Purchase Agreement) and
<PAGE>
2
terminating on the tenth anniversary of the Closing Date, the Seller shall not
anywhere in the world (the "Territory"), directly or indirectly, (i) engage in
the Business (or any material facet thereof) for the Seller's own account or
(ii) render any services to, or become interested in, any person, partnership,
firm or corporation in material direct competition with the Buyer or any of its
affiliates with respect to the Business, including, without limitation, as a
partner or shareholder; provided, however, that the Seller may own, directly or
indirectly, but solely as a passive investment, less than 5% of any class of
equity securities of any corporation that is publicly traded. The Seller agrees
that the geographic scope of the covenants set forth in this Section 1(a) is
necessary in order to secure for the Buyer the benefits it has contracted for
and is reasonable.
(b) Confidential Information; Personal Relationships.
During and after the Restricted Period, the Seller's officers, directors,
employees, consultants, agents and other representatives shall keep secret and
retain in strictest confidence, and shall not use for the benefit of the Seller,
themselves or others, all confidential information relating to the Business or
the Assets, including, without limitation, "know-how", trade secrets, customer
lists, details of client or consultant contracts, pricing policies, operational
methods, marketing plans or strategies, product development techniques or plans,
business acquisition plans, new personnel processes, designs and design
projects, inventions and research projects relating to the Business or the
Assets
<PAGE>
3
and shall not disclose them to anyone outside of the Buyer, except with the
Buyer's express written consent.
(c) Employees of the Buyer. During the Restricted
Period, the Seller shall not, directly or indirectly, hire or solicit (i) any
person then employed by the Buyer or any of its affiliates or (ii) any person
employed by the Seller who, within one year of the Closing Date, has been
offered employment by the Buyer, or encourage any such employee as described in
clause (i) or (ii) to leave or decline such employment.
(d) Consultants of the Buyer Group. During the
Restricted Period, the Seller shall not, directly or indirectly, hire or solicit
any consultant then under exclusive contract with the Buyer or any of its
affiliates or encourage any such consultant to terminate such relationship.
2. Consideration. The Seller acknowledges that the Buyer is not
obligated, and would not otherwise agree, to close its purchase under the Asset
Purchase Agreement without the Seller's execution and delivery of this
Agreement. As consideration to induce the Buyer to purchase the Assets from the
Seller, and as a condition precedent for entering into the Asset Purchase
Agreement, the Seller agrees to be bound by the representations, warranties,
covenants and agreements contained in this Agreement. In addition, the Buyer
shall pay the Seller over a period of eight years, the following amounts (the
"Non-Compete Payments"): (i) $400,000 at the Closing; (ii) $400,000 at the end
of the sixth month after the Closing Date;
<PAGE>
4
(iii) $700,000 on each of the second and third anniversaries of the Closing
Date; (iv) $600,000 on each of the fourth and fifth anniversaries of the Closing
Date; and (v) $400,000 on each of the sixth, seventh and eighth anniversaries of
the Closing Date. The Buyer's obligation to make the Non-Compete Payments shall
terminate in the event that (a) the Seller materially breaches this Agreement,
(b) S. Peter Lebowitz (the "Shareholder") materially breaches the separate
non-compete agreement into which the Buyer and the Shareholder entered as of the
date hereof, (c) the Seller or the Licensor (as defined in the Trademark
License) materially breaches the Trademark License or (d) the Seller or the
Licensor terminates or attempts to terminate the Trademark License by rejection
in bankruptcy or otherwise.
3. Rights and Remedies Upon Breach. If the Seller breaches, or
threatens to commit a breach of, any of the provisions of Section 1 (the
"Restrictive Covenants"), the Buyer shall have, in addition to, and not in lieu
of, any other rights and remedies available to the Buyer under law or in equity,
the right and remedy to have the Restrictive Covenants specifically enforced by
any court of competent jurisdiction, it being agreed that any breach or
threatened breach of the Restrictive Covenants would cause irreparable injury to
the Buyer and that money damages would not provide an adequate remedy to the
Buyer.
4. Severability of Covenants. The Seller acknowledges and agrees
that the Restrictive Covenants are reasonable and valid in geographic and
temporal scope and in all other respects. If any court determines that any of
the Restrictive
<PAGE>
5
Covenants, or any part thereof, is invalid or unenforceable, then the remainder
of the Restrictive Covenants shall not thereby be affected and shall be given
full effect without regard to the invalid portions. In addition, such court
shall have the power to reduce the duration or scope of a temporal or geographic
provision, as the case may be, it finds unenforceable as written and, in its
reduced form, such provision shall then be enforceable.
5. Enforceability in Jurisdictions. The Buyer and the Seller
intend to and hereby confer jurisdiction to enforce the Restrictive Covenants
upon the courts of any jurisdiction within the Territory. If the courts of any
one or more of such jurisdictions hold the Restrictive Covenants unenforceable
by reason of the breadth of such scope or otherwise, it is the intention of the
Buyer and the Seller that such determination not bar or in any way affect the
Buyer's right to the relief provided above in the courts of any other
jurisdiction within the Territory, as to breaches of such Restrictive Covenants
in such other respective jurisdictions, such Restrictive Covenants as they
relate to each jurisdiction being, for this purpose, severable into diverse and
independent covenants.
6. Successors and Assigns. The Agreement is binding upon and
shall inure to the benefit of the parties hereto and any successors to the
Buyer. This Agreement and all of the Seller's rights, duties and obligations
hereunder are personal in nature and shall not be assignable by the Seller. Any
purported assignment shall not be valid or binding on the Buyer.
<PAGE>
6
7. Waiver, Modification or Amendment. No waiver of any provision
of this Agreement or modification or amendment of the same shall be effective,
binding or enforceable unless in writing and signed by the party to be charged
therewith.
8. Applicable Law. This Agreement shall be governed by and
administered in accordance with the laws of the State of New York applicable to
agreements made and to be entirely performed therein.
9. Entire Agreement. This Agreement sets forth the entire
agreement and understanding of the parties relating to the subject matter
hereof, and supersedes all prior agreements, arrangements and understandings,
written or oral, relating to the subject matter hereof. No representation,
promise or inducement has been made by either party that is not embodied in this
Agreement, and neither party shall be bound by or liable for any alleged
representation, promise or inducement not so set forth.
10. Termination. This Agreement shall be terminated and become
null and void and have no further force or effect upon termination of the Asset
Purchase Agreement.
11. Section Headings. The section headings contained in this
Agreement are for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
<PAGE>
7
12. Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
<PAGE>
8
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
WALLS INDUSTRIES, INC., CLEBURNE,
TEXAS
By: /s/ Albert A. Archer
-----------------------------------
Name: Albert A. Archer
Title: President
BIG SMITH BRANDS, INC.
By: /s/ S. Peter Lebowitz
-----------------------------------
Name: S. Peter Lebowitz
Title: President
Exhibit 10(aj)
NON-COMPETE AGREEMENT
---------------------
AGREEMENT, dated as of February 26, 1999, by and between WALLS
INDUSTRIES, INC., CLEBURNE, TEXAS, a Delaware corporation (the "Buyer"), and S.
PETER LEBOWITZ (the "Shareholder").
WHEREAS, (a) the Shareholder is presently a direct significant
shareholder of Big Smith Brands, Inc., a Delaware corporation (the "Seller") and
an officer of the Seller and (b) pursuant to an asset purchase agreement
executed as of the date hereof (the "Asset Purchase Agreement"), the Buyer is
acquiring certain of the assets of the Seller (the "Assets");
WHEREAS, it is a condition precedent to the execution of the
Asset Purchase Agreement that the Shareholder enter into this Agreement and a
condition of closing to the Asset Purchase Agreement that this Agreement remain
in full force and effect;
WHEREAS, the Shareholder acknowledges that the Seller has been
involved in the business (the "Business") of manufacturing, distributing and
selling apparel defined as Workwear Products by the trademark license agreement
executed as of the date hereof; and
WHEREAS, the Shareholder acknowledges that his position as a
significant shareholder of the Seller and an officer of the Seller has brought
him into close contact with many confidential affairs of the Seller not readily
available to the public, and plans for future developments.
<PAGE>
2
NOW, THEREFORE, the parties hereto agree as follows:
1. Restrictive Covenants.
(a) Non-Compete. For a period (the "Restricted Period")
commencing on the Closing Date (as defined in the Asset Purchase Agreement) and
terminating on the tenth anniversary of the Closing Date, the Shareholder shall
not anywhere in the world (the "Territory"), directly or indirectly, (i) engage
in the Business (or any material facet thereof) for the Shareholder's own
account or (ii) enter the employ of, render any services to, or become
interested in, any person, partnership, firm or corporation in material direct
competition with the Buyer or any of its affiliates with respect to the
Business, including, without limitation, as an individual, partner, shareholder,
director, officer, principal, agent, employee, trustee or consultant; provided,
however, that the Shareholder may own, directly or indirectly, but solely as a
passive investment, less than 5% of any class of equity securities of any
corporation that is publicly traded. The Shareholder agrees that the geographic
scope of the covenants set forth in this Section 1(a) is necessary in order to
secure for the Buyer the benefits it has contracted for and is reasonable.
(b) Confidential Information; Personal Relationships.
During and after the Restricted Period, the Shareholder shall keep secret and
retain in strictest confidence, and shall not use for the benefit of himself or
others, all confidential information relating to the Business or the Assets,
including, without limitation, "know-how", trade secrets, customer lists,
details of client or consultant contracts, pricing
<PAGE>
3
policies, operational methods, marketing plans or strategies, product
development techniques or plans, business acquisition plans, new personnel
processes, designs and design projects, inventions and research projects
relating to the Business or the Assets and shall not disclose them to anyone
outside of the Buyer, except with the Buyer's express written consent.
(c) Employees of the Buyer. During the Restricted
Period, the Shareholder shall not, directly or indirectly, hire or solicit (i)
any person then employed by the Buyer or any of its affiliates or (ii) any
person employed by the Seller who, within one year of the Closing Date, has been
offered employment by the Buyer, or encourage any such employee as described in
clause (i) or (ii) to leave or decline such employment.
(d) Consultants of the Buyer Group. During the
Restricted Period, the Shareholder shall not, directly or indirectly, hire or
solicit any consultant then under exclusive contract with the Buyer or any of
its affiliates or encourage any such consultant to terminate such relationship.
2. Consideration. The Shareholder acknowledges that the Buyer is not
obligated, and would not otherwise agree, to close its purchase under the Asset
Purchase Agreement without the Shareholder's execution and delivery of this
Agreement. As consideration to induce the Buyer to purchase the Assets from the
Seller, and as a condition precedent for entering into the Asset Purchase
Agreement,
<PAGE>
4
the Shareholder agrees to be bound by the representations, warranties, covenants
and agreements contained in this Agreement.
3. Rights and Remedies Upon Breach. If the Shareholder breaches,
or threatens to commit a breach of, any of the provisions of Section 1 (the
"Restrictive Covenants"), the Buyer shall have, in addition to, and not in lieu
of, any other rights and remedies available to the Buyer under law or in equity,
the right and remedy to have the Restrictive Covenants specifically enforced by
any court of competent jurisdiction, it being agreed that any breach or
threatened breach of the Restrictive Covenants would cause irreparable injury to
the Buyer and that money damages would not provide an adequate remedy to the
Buyer.
4. Severability of Covenants. The Shareholder acknowledges and
agrees that the Restrictive Covenants are reasonable and valid in geographic and
temporal scope and in all other respects. If any court determines that any of
the Restrictive Covenants, or any part thereof, is invalid or unenforceable,
then the remainder of the Restrictive Covenants shall not thereby be affected
and shall be given full effect without regard to the invalid portions. In
addition, such court shall have the power to reduce the duration or scope of a
temporal or geographic provision, as the case may be, it finds unenforceable as
written, and, in its reduced form, such provision shall then be enforceable.
5. Enforceability in Jurisdictions. The Buyer and the Shareholder
intend to and hereby confer jurisdiction to enforce the Restrictive Covenants
upon the
<PAGE>
5
courts of any jurisdiction within the Territory. If the courts of any one or
more of such jurisdictions hold the Restrictive Covenants unenforceable by
reason of the breadth of such scope or otherwise, it is the intention of the
Buyer and the Shareholder that such determination not bar or in any way affect
the Buyer's right to the relief provided above in the courts of any other
jurisdiction within the Territory, as to breaches of such Restrictive Covenants
in such other respective jurisdictions, such Restrictive Covenants as they
relate to each jurisdiction being, for this purpose, severable into diverse and
independent covenants.
6. Successors and Assigns. The Agreement is binding upon and
shall inure to the benefit of the parties hereto and any successors to the
Buyer. This Agreement and all of the Shareholder's rights, duties and
obligations hereunder are personal in nature and shall not be assignable by the
Shareholder. Any purported assignment shall not be valid or binding on the
Buyer.
7. Waiver, Modification or Amendment. No waiver of any provision
of this Agreement or modification or amendment of the same shall be effective,
binding or enforceable unless in writing and signed by the party to be charged
therewith.
8. Applicable Law. This Agreement shall be governed by and
administered in accordance with the laws of the State of New York applicable to
agreements made and to be entirely performed therein.
<PAGE>
6
9. Entire Agreement. This Agreement sets forth the entire
agreement and understanding of the parties relating to the subject matter
hereof, and supersedes all prior agreements, arrangements and understandings,
written or oral, relating to the subject matter hereof. No representation,
promise or inducement has been made by either party that is not embodied in this
Agreement, and neither party shall be bound by or liable for any alleged
representation, promise or inducement not so set forth.
10. Termination. This Agreement shall be terminated and become
null and void and have no further force or effect upon termination of the Asset
Purchase Agreement.
11. Section Headings. The section headings contained in this
Agreement are for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
12. Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
<PAGE>
7
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
WALLS INDUSTRIES, INC.,
CLEBURNE, TEXAS
By: /s/ Albert A. Archer
-----------------------------------
Name: Albert A. Archer
Title: President
/s/ S. Peter Lebowitz
--------------------------
S. Peter Lebowitz
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000931688
<NAME> BIG SMITH BRANDS, INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 118
<SECURITIES> 0
<RECEIVABLES> 2,385
<ALLOWANCES> (58)
<INVENTORY> 3,341
<CURRENT-ASSETS> 5,908
<PP&E> 2,620
<DEPRECIATION> (1,607)
<TOTAL-ASSETS> 8,088
<CURRENT-LIABILITIES> 8,436
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> (1,177)
<TOTAL-LIABILITY-AND-EQUITY> 8,088
<SALES> 13,210
<TOTAL-REVENUES> 13,210
<CGS> 9,989
<TOTAL-COSTS> 3,301
<OTHER-EXPENSES> 705
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 594
<INCOME-PRETAX> (1,378)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,378)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,378)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
