SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14(a)-12
ACTIVE APPAREL GROUP, INC.
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(Name of Registrant as Specified in Charter)
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(Name of Person(s) filing Proxy Statement, if other than Registrant)
Payment of filing fee (check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
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(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was
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paid previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement no.:
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(3) Filing Party:
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(4) Date Filed:
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ACTIVE APPAREL GROUP, INC.
1350 Broadway, Suite 2300
New York, New York 10018
NOTICE OF SPECIAL MEETING AND PROXY STATEMENT
NOTICE IS HEREBY GIVEN that the 2000 Special Meeting of Stockholders
of Active Apparel Group, Inc. (the "Company") will be held on Tuesday, October
24, 2000 at 10:00 AM local time at The Doral Park Avenue, 70 Park Avenue, New
York, New York 10016, in the Morgan Room on the 2nd floor, for the following
purposes.
1. To approve an amendment to the Company's Certificate of
Incorporation to increase its authorized capitalization.
2. To approve the adoption of the Company's 2000 Stock Option
Plan.
3. To approve an amendment to the Company's Certificate of
Incorporation to change the name of the Company from "Active
Apparel Group, Inc." to "Everlast Worldwide Inc."
The Board of Directors has fixed the close of business on September
21, 2000 as the record date for the determination of holders the Company's
Common Stock and Class A Common Stock entitled to notice of, and to vote, at the
Special Meeting and any adjournments thereof.
IMPORTANT
Whether or not you expect to attend in person, we urge you to sign,
date and return the enclosed proxy at your earliest convenience to ensure the
presence of a quorum at the meeting. A self-addressed stamped envelope is
enclosed for that purpose. If you send in your proxy and then decide to attend
the meeting to vote your stock in person, you may still do so. Your proxy is
revocable at your request.
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ACTIVE APPAREL GROUP, INC.
1350 Broadway, Suite 2300
New York, New York 10018
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
This Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors (the "Board") of Active
Apparel Group, Inc. (the "Company") to be voted at the Special Meeting of
Stockholders to be held on Tuesday, October 24, 2000 at 10:00 AM local time at
The Doral Park Avenue, 70 Park Avenue, New York, New York 10016, in the Morgan
Room on the 2nd floor, and at any adjournments thereof (the "Meeting") for the
purposes set forth in the accompanying Notice of Special Meeting of
Stockholders.
When a proxy is returned properly signed, the shares represented
thereby will be voted by the proxies in accordance with the stockholder's
directions. If the proxy is signed and returned without choices having been
specified, the shares will be voted for the increase of authorized
capitalization of the Company, for the adoption of the 2000 Stock Option Plan
and for the change of name of the Company. A stockholder giving a proxy has the
right to revoke it at any time before it is voted by filing with the Secretary
of the Company a written notice of revocation, or a duly executed later-dated
proxy, or by requesting return of the proxy at the Meeting and voting in person.
Only stockholders of record at the close of business on September
21, 2000 are entitled to notice of, and to vote at the Meeting. As of September
21, 2000, there were outstanding 2,492,581 shares of the Company's Common Stock,
$.002 par value per share (the "Common Stock"), each of which is entitled to one
vote per share at the Meeting; and there were 100,000 shares of the Company's
Class A Common Stock, $.01 par value per share (the "Class A Common Stock"),
each of which is entitled to five (5) votes per share at the Meeting. A majority
of the outstanding shares of Common Stock and Class A Common Stock, combined,
present in person or by proxy is required for a quorum. Broker "non-votes" and
the shares as to which a stockholder abstains are included for purposes of
determining whether a quorum of shares is present at a meeting. A broker
"non-vote" occurs when a nominee holding shares for a beneficial owner does not
vote on a particular proposal because the nominee does not have the
discretionary voting power with respect to that item and has not received
instructions from the beneficial owner. Broker "non-votes" are not included in
the tabulation of the voting results on the authorization to increase the
capitalization of the Company and the change of name of the Company, each of
which requires the vote of the holders of outstanding shares of Common Stock and
Class A Common Stock, voting together, representing a majority of the votes
entitled to be voted thereon and, therefore, will have the effect of votes in
opposition in such tabulations. Broker "non-votes" are not included in the
tabulation of the voting results on issues requiring approval of the majority of
the votes present and, therefore, do not have the effect of votes in opposition
in such tabulations. An abstention from voting on a matter has the same effect
as a vote against a matter since it is one less vote for approval.
The cost of solicitation of proxies will be borne by the Company. In
addition to the solicitation of proxies by use of the mails, some of the
officers, directors and regular employees of the Company, without extra
remuneration, may solicit proxies personally or by telephone, telefax or similar
transmission. The Company will reimburse record holders for their expenses in
forwarding proxies and proxy soliciting materials to the beneficial owners of
the shares held by them.
The approximate date on which the enclosed form of proxy and this
proxy statement are first being sent to stockholders is September 27, 2000.
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TABLE OF CONTENTS
Page
SUMMARY.....................................................................1
WHERE YOU CAN FIND MORE INFORMATION.........................................5
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS..................5
PROPOSAL NO. 1 - AMENDING THE CERTIFICATE OF
INCORPORATION TO INCREASE ITS AUTHORIZED CAPITALIZATION...............7
PROPOSAL 2 - APPROVAL OF THE ADOPTION OF 2000 STOCK PLAN....................9
Options to be Granted to George Q Horowitz............................9
Administration of the Plan............................................9
Common Stock Subject to the 2000 Plan................................10
Participation........................................................10
Option Price.........................................................10
Terms of the Option..................................................10
Restrictions on Grant and Exercise...................................11
Registration of Shares...............................................11
Rule 16b-3 Compliance................................................11
Tax Treatment of Incentive Stock Options.............................11
Tax Treatment of Nonqualified Stock Options..........................11
Withholding Tax......................................................12
Required Vote........................................................12
PROPOSAL NO. 3 - CHANGING THE NAME OF THE COMPANY..........................13
DESCRIPTION OF AAGP/EVERLAST MERGER........................................14
Background of the Merger.............................................14
Reasons for the Merger...............................................14
Accounting Treatment/Federal Income Tax Consideration................16
Dilution............................................................ 16
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Management After the Merger........................................ .16
Vote Required and Dissenter's Rights.................................17
Government and Regulatory Approval...................................17
THE MERGER AGREEMENT.......................................................17
Consideration........................................................17
Effective Date of the Merger.........................................17
Redeemable Preferred Stock...........................................18
Make-Whole Shares................................................... 19
Ancillary Documents................................................. 19
Representations and Warranties.......................................20
Conduct of Business Prior to closing.................................21
Closing Conditions...................................................23
Merger Expenses......................................................23
Indemnification......................................................24
Termination..........................................................24
BUSINESS OF EVERLAST WORLD'S BOXING HEADQUARTERS CORP......................24
Overview.............................................................24
Description of Business..............................................25
Market for Common Equity and Related Stockholder Matters.............27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF EVERLAST WORLD'S
BOXING HEADQUARTERS CORP.............................................28
General..............................................................28
Six Months Ended June 30, 2000 Compared to
Six Months Ended June 30, 1999....................................28
Fiscal Year Ended December 31, 1999 Compared to
Fiscal Year Ended December 31, 1998...............................29
Fiscal Year Ended December 31, 1998 Compared
to Fiscal Year Ended December 31, 1997............................29
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF ACTIVE APPAREL GROUP, INC...................30
General..............................................................30
Six Months Ended June 30, 2000 Compared to
Six Months Ended June 30, 1999....................................30
Fiscal Year Ended December 31, 1999 Compared
to Fiscal Year Ended December 31, 1998............................32
Fiscal Year Ended December 31, 1998 Compared
to Fiscal Year Ended December 31, 1997............................33
HISTORICAL AND PRO FORMA COMPARATIVE PER SHARE DATA OF THE
COMPANY AND EVERLAST (UNAUDITED).....................................35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............36
EXECUTIVE COMPENSATION.....................................................38
SHAREHOLDERS PROPOSALS.....................................................42
INDEPENDENT PUBLIC ACCOUNTANTS.............................................42
OTHER MATTERS..............................................................42
INDEX TO FINANCIAL STATEMENTS.............................................F-1
APPENDIX A - AGREEMENT AND PLAN OF MERGER.................................A-1
APPENDIX B - 2000 STOCK OPTION PLAN.......................................B-1
APPENDIX C - FORM OF CERTIFICATE OF DESIGNATION FOR REDEEMABLE
PARTICIPATING PREFERRED STOCK...............................C-1
APPENDIX D - FORM OF REGISTRATION RIGHTS AGREEMENT........................D-1
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SUMMARY
This summary highlights selected information from this document and
may not contain all of the information that is important to you. For a more
complete understanding of the merger and for a more complete description of the
legal terms of the merger, you should carefully read this entire document, the
merger agreement which is attached as Appendix A and the other available
information referred to in "Where You Can Find More Information" on page 5. For
convenience, in this proxy statement, Everlast Holding Corp. will be referred to
as "Everlast Holding," Everlast World's Boxing Headquarters Corp. will be
referred to as "Everlast" and together with Everlast Holding as the "Everlast
Companies," Active Apparel Group, Inc. will be referred to as "AAGP" and Active
Apparel New Corp. will be referred to as "AAGP New Corp.", and together with
AAGP as the "Company" or by the terms "we," "us" or "our."
The Companies (See page 23)
Active Apparel Group, Inc. &
Active Apparel New Corp.
1350 Broadway, Suite 2300
New York, New York 10018
(212) 239-0990
Contact Person: George Q Horowitz
Chairman, Chief Executive Officer & President
We are a designer, marketer and supplier of women's and men's
activewear, sportswear, and swimwear. We sell our product collections under the
Everlast brand name in addition to other exclusive licensing arrangements. Our
products are manufactured by third party independent manufacturing contractors
and are sold to over 20,000 retail locations throughout the United States and
Canada, including a variety of department stores, specialty stores, catalog
operations and better mass merchandisers. We are Delaware corporations with
principal executive offices in New York, New York.
Everlast World's Boxing Headquarters Corp. &
Everlast Holding Corp.
750 East 132nd Street
Bronx, New York 10454
(718) 993-0100
Contact Person: Ben Nadorf
President
Everlast is a New York corporation and Everlast Holding is a
Delaware corporation. Both companies have their principal offices in the Bronx,
New York. Everlast owns the exclusive trademark to the name "Everlast." Everlast
is the market leader in several of its product categories, including boxing
gloves, heavy bags, protective headgear and speed bags. Everlast has licensing
arrangements with domestic and foreign distributors in over 20 countries around
the world. Its licensing program not only enhances its brand name and image, it
also generates a substantial amount of cash flow.
Neither of the Everlast Companies is an affiliate of AAGP.
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Description of the AAGP/Everlast Merger
We entered into an Agreement and Plan of Merger with Everlast,
Everlast Holding, and the stockholders of Everlast Holding which provides, among
others things that Everlast Holding will be merged with and into AAGP New Corp.,
with AAGP New Corp. surviving the merger as a wholly-owned subsidiary of AAGP.
We are not required to ask you, nor are you being asked, to approve the merger.
However, in order for us to satisfy the conditions to the closing of the merger,
all three proposals in this proxy statement must be approved at the meeting.
Accounting Treatment/Federal Income Tax Consideration (See page 16)
-------------------------------------------------------------------
We will acquire all of the outstanding shares of Everlast.
Simultaneous with the acquisition, Everlast will be merged into one of our
wholly-owned subsidiary. For accounting purposes, the merger will be treated
using the purchase method of accounting. Under the purchase method of
accounting, the purchase price is allocated to the assets and liabilities
acquired based upon the estimated fair values of such assets and liabilities on
the date of acquisition. Any excess of the fair market value of the
consideration given over the fair market value of the identifiable net assets
acquired is reported as goodwill.
In our statements of operations subsequent to the merger, we will
include the operating results of Everlast. Our expenses which are directly
related to the merger will be added to the total cost of the acquisition.
Management After the Merger (See page 16)
-----------------------------------------
After the merger is completed, our board of directors is expected to
consist of seven members, five of whom are currently members of our board of
directors and two of whom will be elected by the holders of redeemable
participating preferred stock.. The holders of redeemable participating
preferred stock shall have the right to elect two directors as long as these
shares remain outstanding. The directors will serve until their successors have
been duly elected and qualified or otherwise as provided by law. You will be
asked to elect five directors at our next annual meeting.
As the sole stockholder of the surviving corporation, we shall elect
its directors.
Our officers will not change because of the merger. Mr. Ben Nadorf,
currently the president of Everlast, has agreed to provide us advice upon our
request.
Dissenters' Appraisal Rights (See page 17)
------------------------------------------
Under the Delaware General Corporation Law, you are not entitled to
appraisal rights in connection with the merger and the other transactions
contemplated by the merger agreement.
Governmental and Regulatory Approvals (See page 17)
---------------------------------------------------
Neither we nor the Everlast Companies is required to make filings
with or obtain approvals from regulatory authorities in connection with the
merger, other than compliance with applicable state securities laws and the
filing of a certificate of merger with the State Department of Delaware.
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The Merger Agreement
The following is a brief summary of certain provisions of the merger
agreement. For more detail, see "The Merger Agreement" starting on page 17 and
the pages referred to below and the copy of the merger agreement attached as
Attachment A to this proxy statement.
Consideration (See pages 17 through 19)
---------------------------------------
The stockholders of Everlast Holding will receive the following
consideration in exchange for all issued and outstanding shares of Everlast
Holding common stock:
o $10,000,000 cash;
o 505,000 shares of our common stock; and
o 45,000 shares of our redeemable participating preferred stock with
an aggregate redemption value of $45,000,000.
Additionally, on the five-year anniversary of the merger, we will issue to the
former stockholders of Everlast Holding additional shares of our common stock
equal in value to the difference between $5,000,000 and the value of 380,000
shares of our common stock issued at the closing of the merger. We may satisfy
this future obligation by paying cash instead of issuing more shares of our
common stock.
Other Terms of the Merger Agreement (See pages 17 and 19)
---------------------------------------------------------
The merger agreement is attached to this proxy statement as Appendix
A. You should read the merger agreement. It is the legal document that governs
the merger. Pursuant to the conditions to closing of the merger (the "Closing
Conditions"), we are required to enter into employment agreements with Ben
Nadorf and Wayne Nadorf, a consulting agreement with David Shechet, a
registration rights agreement with the stockholders of Everlast Holding, and an
option grant agreement with George Q Horowitz, our chairman, chief executive
officer and president, granting options to purchase shares of our common stock
(these documents are referred to collectively as the ancillary documents).
Effective Date of the Merger (See page 17)
------------------------------------------
The merger will be consummated and become effective once the
Certificate of Merger meeting the requirements of the General Corporation Law of
Delaware is filed with the Secretary of State of the State of Delaware. We
anticipate that, if all three proposals are approved at the meeting and all
other conditions to the merger have been fulfilled or waived, the Certificate of
Merger will be filed promptly following the meeting.
Closing Conditions (See page 23)
--------------------------------
The completion of the merger depends upon the satisfaction of a
number of conditions, including:
o the continued accuracy of each party's representations and
warranties and the fulfillment of each party's agreements contained
in the merger agreement;
o the absence of any order or legal restraint of any court or
governmental entity preventing or prohibiting the merger;
o execution and delivery by the parties of the signed ancillary
documents;
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o the delivery by each of our counsel and the Everlast Companies'
counsel of a legal opinion; and
o your approval to:
(1)increase our authorized capital stock, including authorizing
preferred stock upon terms designated by our board of
directors;
(2) adopt the 2000 Stock Option Plan; and
(3) change our corporate name from "Active Apparel Group, Inc." to
"Everlast Worldwide Inc." at or prior to the Closing Date.
A condition to closing the merger is the grant by our board of
directors to George Q Horowitz of stock options to purchase an aggregate of
505,000 shares of our common stock. The option exercise price for each share for
the first 125,000 shares is the greater of $4.00 or the fair market value of one
share of common stock at the date of grant. The option exercise price for each
share for the remaining 380,000 shares is $13.00.
Other than the condition requiring stockholder approval of the three
proposals in this proxy statement, which is a legal requirement, each party to
the merger may waive any condition that is intended for its benefit. If either
we or the Everlast Companies elect to waive a condition and complete the merger,
we will evaluate the facts and circumstances giving rise to the waiver at that
time. EVEN IF THE HOLDERS OF OUR COMMON STOCK APPROVE THE THREE PROPOSALS IN
THIS PROXY STATEMENT, THERE CAN BE NO ASSURANCE THAT THE MERGER WILL BE
CONSUMMATED.
Termination (See page 24)
-------------------------
Any party to the merger agreement may terminate it under a number of
circumstances, including the following material circumstances:
o any of the representations or warranties of the other parties prove
to be inaccurate or untrue in any material respect;
o any obligation, term or condition to be performed, kept or observed
by the other party under the merger agreement has not been
performed, kept or observed in any material respect at or prior to
the time specified in the merger agreement;
o The merger has not closed by December 31, 2000; or
o a court of competent jurisdiction or governmental authority has
issued a final and non-appealable order, decree or ruling
permanently restraining, enjoining or otherwise prohibiting the
merger.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). You
may read and copy any document we file at the SEC's public reference room at the
following locations:
- Main Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
- Regional Public Reference Room
75 Park Place, 14th Floor
New York, New York 10007
- Regional Public Reference Room
Northwestern Atrium Center
500 West Madison Street, Suite 1400
Chicago, Illinois 60661-2511
You may obtain information on the operation of the SEC's public
reference rooms by calling the SEC at (800) SEC-0330.
We are required to file these documents with the SEC electronically.
You can access the electronic versions of these filings on the Internet at the
SEC's web site, located at http://www.sec.gov.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Proxy Statement constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The forward-looking statements relate to
anticipated financial performance, management's plans and objectives for future
operations, business prospects, market conditions and other matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements in certain circumstances. The following discussion is
intended to identify the forward-looking statements and certain factors that
could cause future outcomes to differ materially from those set forth in the
forward-looking statements.
Forward-looking statements include the information concerning
possible or assumed future results of operations of the Company, on a
consolidated basis, and other future events set forth under "Summary-Closing
Conditions," "Description of the AAGP/Everlast Merger-Reasons for the Merger"
and other statements in this Proxy Statement identified by words such as
"anticipate," "estimate," "expect," "intend," "believe," and "objective".
Readers are cautioned not to place undue reliance on such
forward-looking statements, which involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors may affect the Company's operations, markets, products, services and
prices. In addition to any assumptions and other factors referred to
specifically in connection with such forward-looking statements, factors that
could cause the Company's actual results to differ materially from those
contemplated in any forward-looking statement include, among others, the
following: general economic and business conditions; changes in technology;
changes in political, social and economic conditions; regulatory
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matters; integration of the operations of the Company and Everlast; the actual
costs required to effect the Merger; the loss of any significant customers;
changes in business strategy or development plans; the speed and degree to which
competition enters the Company's industry; changes in the capital markets
affecting the ability to finance capital requirements and the factors listed in
the other reports previously or hereafter filed with the SEC. Other factors and
assumptions not identified above were also involved in the derivation of these
forward-looking statements, and the failure of such other assumptions to be
realized, as well as other factors, may also cause actual results to differ
materially from those projected. The Company assumes no obligation to update
such forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
statements.
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PROPOSAL NO. 1 - AMENDING THE CERTIFICATE OF INCORPORATION TO INCREASE
ITS AUTHORIZED CAPITALIZATION
The Board recommends an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock from
ten million one hundred thousand (10,100,000) shares to nineteen million one
hundred thousand (19,100,000) shares, consisting of nineteen million
(19,000,000) shares of Common Stock and one hundred thousand (100,000) shares of
Class A Common Stock, and to create a new class of capital stock consisting of
one million (1,000,000) shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"). If approved by the stockholders, the first paragraph Article
FOURTH of the Company's Certificate of Incorporation would be amended and a new
paragraph would be added to provide as follows:
"FOURTH: The aggregate number of shares which the Corporation shall
have authority to issue is 20,100,000 shares of capital stock,
consisting of 19,000,000 shares of Common Stock, par value $.002 per
share ("Common Stock"), 100,000 shares of Class A Common Stock, par
value $0.01 per share ("Class A Common Stock"), and 1,000,000 shares
of Preferred Stock, par value $.01 per share ("Preferred Stock")."
"Preferred Stock. The Board of Directors is expressly
authorized to provide for the issuance of all or any shares of the
Preferred Stock, in one or more series, and to fix for each such
series such voting powers, full or limited, or no voting powers, and
such designations, preferences and relative, participating, optional
or other special rights and such qualifications, limitations or
restrictions thereof as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors
providing for the issue of such series (a "Preferred Stock
Designation") and as may be permitted by the General Corporation Law
of the State of Delaware. The number of authorized shares of
Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote
of the holders of a majority of the voting power of all of the then
outstanding shares of capital stock of the Corporation entitled to
vote generally in the election of directors, voting together as a
single class, without a separate vote of the holders of the
Preferred Stock, or any series thereof, unless a vote of any such
holders is required pursuant to any Preferred Stock Designation."
The Company is currently authorized to issue 10,100,000 shares of
Common Stock. As of September 20, 2000, the record date for the Meeting,
2,492,581 shares of Common Stock and 100,000 shares of Class A Common Stock were
issued and outstanding, and approximately an additional 1,543,900 shares of
Common Stock were reserved for issuance upon exercise of outstanding stock
options and warrants and for options that may be granted in the future under the
1993 Stock Option Plan, the 1995 Non-Employee Director Stock Option Plan and the
2000 Stock Option Plan (assuming the adoption of the 2000 Stock Option Plan,
described in this Proxy Statement, by stockholders). The Company is currently
not authorized to issue any Preferred Stock.
The Board believes that it is advisable and in the best interest of
the Company to increase the capitalization of the Company and to have available
authorized but unissued shares of Common Stock and Preferred Stock in an amount
adequate to provide for the merger of Everlast Holding into the Company's
wholly-owned subsidiary, AAGP New Corp. (the "Merger"), and the future needs of
the Company. Pursuant to the terms of the Merger, as such transaction is
described elsewhere in this Proxy Statement (see the Section entitled
"Description of AAGP/Everlast Merger"), the Company is required to issue to the
stockholders of Everlast an aggregate of 505,000 shares of Common Stock and
45,000 shares of Preferred Stock. Except as set forth in the description of the
Merger below, the Company has no present plans, understandings or agreements for
the issuance or use of the proposed additional shares of Common Stock and
Preferred Stock. However, the Board believes that if an increase in the
authorized
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number of shares of Common Stock and Preferred Stock greater than that required
to consummate the Merger were to be postponed until a specific need arose, the
delay and expense incident to obtaining the approval of the Company's
stockholders at that time could significantly impair the Company's ability to
meet financing requirements or other objectives. The additional shares will be
available for issuance from time to time by the Company in the discretion of the
Board, normally without further stockholder action (except as may be required
for a particular transaction by applicable law, requirements of regulatory
agencies or by stock exchange or Nasdaq rules), for any proper corporate purpose
including, among other things, future acquisitions of property or securities of
other corporations, stock dividends, stock splits, convertible debt financing
and equity financing. In future issuances of Preferred Stock, the powers,
preferences and rights, such as dividend or interest rates, conversion prices,
voting rights, redemption prices, maturity dates and similar matters, will be
determined by the Board, without further authorization of the stockholders. No
stockholder of the Company would have any preemptive rights regarding future
issuance of any shares of Common Stock and Preferred Stock.
The issuance of additional shares of Common Stock and Preferred
Stock may have the effect of diluting the stock ownership of persons seeking to
obtain control of the Company. Although the Board has no present intention of
doing so, the Company's authorized but unissued Common Stock and Preferred Stock
could be issued in one or more transactions that would make more difficult or
costly, and less likely, a takeover of the Company. The proposed amendment to
the Company's Certificate of Incorporation is not being recommended in response
to any specific effort of which the Company is aware to obtain control of the
Company, nor is the Board currently proposing to stockholders any anti-takeover
measures.
The affirmative vote of the holders of outstanding shares of Common
Stock and Class A Common Stock, voting together, representing a majority of the
votes entitled to be voted thereon is required for approval of the proposal to
amend the Company's Certificate of Incorporation to increase the number of
authorized shares of capital stock. If for any reason the Board deems it
advisable to do so, the proposal to increase the authorized capitalization of
the Company may be abandoned by the Board anytime before, during, or after the
Meeting and prior to the filing the amendment to the Certificate of
Incorporation with the office of the Secretary of State of the State of Delaware
pursuant to Section 242(c) of the Delaware General Corporation Law, without
further action of the stockholders of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
APPROVAL OF THE PROPOSAL TO AMEND
THE COMPANY'S CERTIFICATE OF INCORPORATION
TO INCREASE ITS AUTHORIZED CAPITALIZATION
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PROPOSAL 2 - APPROVAL OF THE ADOPTION OF 2000 STOCK PLAN
The Board has unanimously approved for submission to a vote of the
stockholders a proposal to adopt the 2000 Stock Option Plan (the "2000 Plan").
The purpose of the 2000 Plan is to provide a means for the Company to retain in
the employ of and as directors, consultants and advisors to the Company persons
of training, experience and ability, to be able to attract new employees,
directors, advisors and consultants whose services are considered valuable, to
encourage the sense of proprietorship and to stimulate the active interest of
such persons in the development and financial success of the Company and its
subsidiaries. As the Company continues to develop, it believes that grants of
options and other forms of equity participation will become an increasingly
important means to retain and compensate employees, directors, advisors and
consultants.
Each option granted pursuant to the 2000 Plan shall be designated at
the time of grant as either an "incentive stock option" or as a "nonqualified
stock option." A summary of the significant provisions of the 2000 Plan is set
forth below. The full text of the 2000 Plan is set forth as Appendix B to this
Proxy Statement. This discussion of the 2000 Plan is qualified in its entirety
by reference to Appendix B.
Options to be Granted to George Q Horowitz
Pursuant to the terms of the Merger, George Q Horowitz, the
Chairman, President and Chief Executive Officer of the Company, will continue to
serve in the same capacity and will receive options to purchase up to an
aggregate of 505,000 shares of Common Stock. The options will be granted upon
the closing of the Merger and shall be immediately exercisable. The exercise
price per share of the first 125,000 options to be granted to Mr. Horowitz upon
the consummation of the Merger shall be the greater of (i) $4.00 or (ii) the
fair market value of one share of Common Stock. The exercise price per share of
the remaining 380,000 options shall be $13.00 per share of Common Stock.
Administration of the Plan
The 2000 Plan will be administered by the Board or a committee
consisting of two or more directors who are "Non-Employee Directors" (as such
term is defined in Rule 16b-3 of the Securities Exchange Act of 1934, as
amended) and "Outside Directors" (as such term is defined in Section 162(m) of
the United States Internal Revenue Code of 1986, as amended ) (the "Committee").
All references to the term "Committee" herein shall be deemed references to the
Board or the Committee, whichever is administering the 2000 Plan. The Committee
determines to whom among those eligible, and the time or times at which, options
will be granted, the number of shares to be subject to options, the duration of
options, any conditions to the exercise of options, and the manner in and price
at which options may be exercised. In making such determinations, the Committee
may take into account the nature and period of service of eligible persons,
their level of compensation, their past, present and potential contributions to
the Company and such other factors as the Committee in its discretion deems
relevant.
The Committee is authorized to amend, suspend or terminate the 2000
Plan, except that it is not authorized without stockholder approval (except with
regard to adjustments resulting from changes in capitalization) to (i)
materially increase the number of shares that may be issued under the 2000 Plan,
except as is provided in Section 8 of the 2000 Plan; (ii) materially increase
the benefits accruing to the option holders under the 2000 Plan; (iii)
materially modify the requirements as to eligibility for participation in the
2000 Plan; (iv) decrease the exercise price of an incentive stock option to less
than 100% of the Fair Market Value per share of Common Stock on the date of
grant thereof, or decrease the exercise price of a non-qualified stock option to
less than 80% of the Fair Market Value per share of Common Stock on the date of
grant thereof; or (v) extend the term of any option beyond that provided for in
Section 5 of the 2000 Plan.
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Unless the 2000 Plan is terminated earlier by the Committee, it will
terminate on August 10, 2010.
Common Stock Subject to the 2000 Plan
The 2000 Plan provides that options may be granted with respect to a
total of 1,000,000 shares of Common Stock. The maximum number of shares of stock
that can be subject to options granted under the 2000 Plan to any individual in
any calendar year shall not exceed 600,000. Under certain circumstances
involving a change in the number of shares of Common Stock, such as a stock
split, stock consolidation or payment of a stock dividend, the class and
aggregate number of shares of Common Stock in respect of which options may be
granted under the 2000 Plan, the class and number of shares subject to each
outstanding option and the option price per share will be proportionately
adjusted. In addition, if the Company is involved in a merger, consolidation,
dissolution, liquidation or upon a transfer of substantially all of the assets
or more than 80% of the outstanding Common Stock, the options granted under the
2000 Plan will be adjusted or, under certain conditions, will terminate, subject
to the right of the option holder to exercise his option or a comparable option
substituted at the discretion of the Company prior to such event. If any option
expires or terminates for any reason, without having been exercised in full, the
unpurchased shares subject to such option will be available again for the
purposes of the 2000 Plan.
Participation
Any employee, officer or director of, and any consultant or advisor
to, the Company or any of its subsidiaries shall be eligible to receive stock
options under the 2000 Plan. Only employees of the Company or its subsidiaries
shall be eligible to receive incentive stock options.
Option Price
The exercise price of each option is determined by the Committee,
but may not be less than 100% of the Fair Market Value (as defined in the 2000
Plan) of the shares of Common Stock covered by the option on the date the option
is granted in the case of an incentive stock option, nor less than 80% of the
Fair Market Value of the shares of Common Stock covered by the option on the
date the option is granted in the case of a non-statutory stock option. If an
incentive stock option is to be granted to an employee who owns over 10% of the
total combined voting power of all classes of the Company's capital stock, then
the exercise price may not be less than 110% of the Fair Market Value of the
Common Stock covered by the option on the date the option is granted. For
purposes of the 2000 Plan, the fair market value shall be equal to the average
of the bid and ask prices at the close of each trading day of a share of Common
Stock on the Nasdaq SmallCap Market, or the Company's then principal trading
market, for the 10 consecutive trading days ending on the second business day
prior to the date of grant.
Terms of Options
The Committee shall, in its discretion, fix the term of each option,
provided that the maximum term of each option shall be 10 years. Incentive stock
options granted to an employee who owns over 10% of the total combined voting
power of all classes of stock of the Company shall expire not more than five
years after the date of grant. The 2000 Plan provides for the earlier expiration
of options of a participant in the event of certain terminations of employment
or engagement. In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Common Stock of the Company, the Committee shall make an
appropriate and equitable adjustment in the number and kind of shares reserved
for issuance under the 2000 Plan and in the number and option price of shares
subject to outstanding options granted under the 2000 Plan, to the
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end that after such event each option holder's proportionate interest shall be
maintained as immediately before the occurrence of such event.
Restrictions on Grant and Exercise
Generally, an option may not be transferred or assigned other than
by will or the laws of descent and distribution or pursuant to a qualified
domestic relations order and, during the lifetime of the option holder, may be
exercised solely by him. The aggregate Fair Market Value (determined at the time
the incentive stock option is granted) of the shares as to which an employee may
first exercise incentive stock options in any one calendar year under all
incentive stock option plans of the Company and its subsidiaries may not exceed
$100,000. The Committee may impose any other conditions to exercise as it deems
appropriate.
Registration of Shares
The Company may file a registration statement under the Securities
Act of 1933, as amended, with respect to the Common Stock issuable pursuant to
the 2000 Plan subsequent to the approval of the 2000 Plan by the Company's
stockholders.
Rule 16b-3 Compliance
In all cases, the terms, provisions, conditions and limitations of
the 2000 Plan shall be construed and interpreted consistent with the provisions
of Rule 16b-3 of the Securities Exchange Act of 1934, as amended.
Tax Treatment of Incentive Stock Options
In general, no taxable income for Federal income tax purposes will
be recognized by an option holder upon receipt or exercise of an incentive stock
option and the Company will not then be entitled to any tax deduction. Assuming
that the option holder does not dispose of the option shares before the
expiration of (i) two years from the date of grant, and (ii) one year after the
transfer of the option shares (the "required holding periods"), upon
disposition, the option holder will recognize capital gain equal to the
difference between the sale price on disposition and the exercise price.
If, however, the option holder disposes of his option shares prior
to the expiration of the required holding periods, he will recognize ordinary
income for Federal income tax purposes in the year of disposition equal to the
excess of the fair market value of the shares at date of exercise over the
exercise price, or if less, the excess of the sale price upon disposition and
the exercise price. Any additional gain on such disqualifying disposition will
be treated as capital gain. In addition, if such a disqualifying disposition is
made by the option holder, the Company will be entitled to a deduction equal to
the amount of ordinary income recognized by the option holder provided such
amount constitutes an ordinary and reasonable expense of the Company.
Tax Treatment of Nonqualified Stock Options
No taxable income will be recognized by an option holder upon
receipt of a non-statutory stock option, and the Company will not be entitled to
a tax deduction for such grant.
Upon the exercise of a nonqualified stock option, the option holder
will include in taxable income for Federal income tax purposes the excess in
value on the date of exercise of the shares
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acquired upon exercise of the nonqualified stock option over the exercise price.
Upon a subsequent sale of the shares, the option holder will derive capital gain
or loss, upon the subsequent appreciation or depreciation in the value of the
shares.
The Company generally will be entitled to a corresponding deduction
at the time that the participant is required to include the value of the shares
in his income.
Withholding of Tax
The Company is permitted to deduct and withhold amounts required to
satisfy its withholding tax liabilities with respect to its employees.
Required Vote
The affirmative vote of the holders of outstanding shares of Common
Stock and Class A Stock, voting together, representing a majority present, in
person or by proxy, is required for approval of the adoption of the 2000 Plan.
An abstention, withholding of authority to vote or broker non-vote, therefore,
will not have the same legal effect as an "against" vote and will not be counted
in determining whether the proposal has received the requisite stockholder vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
APPROVAL OF ADOPTION OF THE 2000 STOCK OPTION PLAN
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PROPOSAL NO. 3 - CHANGING THE NAME OF THE COMPANY
The Board recommends an amendment to the Company's Certificate of
Incorporation to change the Company's name from Active Apparel Group, Inc. to
Everlast Worldwide Inc. If approved by the stockholders, Article FIRST of the
Company's Certificate of Incorporation would be amended to provide as follows:
"FIRST: The name of the corporation (hereinafter called
the "Corporation") is EVERLAST WORLDWIDE INC."
The Company is required to change its name to include the word
"Everlast" pursuant to the terms of the Merger Agreement. Moreover, in the
judgment of the Board, the change of corporate name is desirable because of the
significant reliance of the Company's products on the "Everlast" trademark, the
high recognition of the "Everlast" brand name among the Company's target
markets, and the strategic focus to maximize the use of the "Everlast" trademark
in its products and services as a result of the Merger (see the Section entitled
"Description of AAGP/Everlast Merger").
Since changing the name of the Company requires an amendment to its
Certificate of Incorporation, the Company must obtain stockholder approval. If
this amendment is adopted, stockholders will not be required to exchange
outstanding stock certificates for new certificates.
The affirmative vote of the holders of outstanding shares of Common
Stock and Class A Common Stock, voting together, representing a majority of the
votes entitled to be voted thereon is required for approval of the proposal to
amend the Company's Certificate of Incorporation to change the Company's name.
If for any reason the Board deems it advisable to do so, the proposal to change
the name of the Company may be abandoned by the Board anytime before, during, or
after the Meeting and prior to the filing the amendment to the Certificate of
Incorporation with the office of the Secretary of State of the State of Delaware
pursuant to Section 242(c) of the Delaware General Corporation Law, without
further action of the stockholders of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
APPROVAL OF THE PROPOSAL TO AMEND
THE COMPANY'S CERTIFICATE OF INCORPORATION
TO CHANGE THE COMPANY'S NAME
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DESCRIPTION OF AAGP/EVERLAST MERGER
The Company, Active Apparel New Corp. ("AAGP New Corp."), a
wholly-owned subsidiary of the Company, Everlast Holding Corp. ("Everlast
Holding"), Everlast World's Boxing Headquarters Corp. ("Everlast", and together
with Everlast Holding, the "Everlast Companies"), a wholly-owned subsidiary of
Everlast Holding, and the stockholders of Everlast Holding (the "Stockholders")
have entered into an Agreement and Plan of Merger (the "Merger Agreement"),
which provides, among others things, that Everlast Holding will be merged with
and into AAGP New Corp., with AAGP New Corp. surviving the Merger (the
"Surviving Corporation"), as set forth in Appendix A to this Proxy Statement.
Background of Merger
The Company has had an ongoing business relationship with Everlast
since it became a licensee in the United States and Canada of the Everlast
trademark for women's active wear in 1992. It expanded that relationship in 1999
when it added the men's license to its business arrangement with Everlast.
In January 2000, Ben Nadorf informed George Horowitz that Everlast
had previously engaged Chase Securities Corp. as a financial advisor in order
to, among other things, find a buyer for the business of Everlast. Mr. Nadorf
further asked if the Company would be interested in acquiring Everlast.
Following that inquiry from Mr. Nadorf, Mr. Horowitz, on behalf of the Company,
began to seek third party financing for a cash acquisition. Beginning on
February 10, 2000, the Company, Everlast and representatives of a third party
which would be providing the equity portion of the consideration to be paid in a
proposed acquisition met to discuss a possible cash transaction. Those
discussions and negotiations terminated during May 2000.
Following that termination, Mr. Nadorf again approached Mr. Horowitz
asking if the Company would be interested in acquiring Everlast on terms
combining cash and securities of the Company. Following that conversation, a
meeting between the Company and Everlast was held at the offices of Everlast. At
that meeting, the basic parameters for the business combination between the
Company and Everlast were discussed. Lawyers for the Company then began working
on a term sheet to clarify certain points of the transaction.
At a special meeting of the Board held on July 31, 2000 and at a
regular meeting of the Board held on August 10, 2000, the Board discussed the
terms of the proposed business combination between the Company and Everlast.
Following presentations and discussions with respect to the Merger and related
transactions, the Board, on August 10, 2000, with Mr. Horowitz abstaining, voted
to approve (i) the Merger, (ii) the proposed amendments to the certificate of
incorporation of the Company to increase its capitalization (including the
adopting of authorized preferred stock) and to change the name of the Company,
effective upon the Merger, to Everlast Worldwide Inc. and (iii) the 2000 Plan.
On August 21, 2000, the Merger Agreement was executed.
Reasons for the Merger
At the meeting held on August 10, 2000, the Board unanimously
concluded (with Mr. Horowitz abstaining) that the terms of the Merger were fair
to and in the best interests of the Company and its stockholders. As a result,
the Board declared that the Merger was advisable, unanimously approved the terms
of the Merger and authorized the officers the Company to enter into a merger
agreement containing the terms of the Merger. Furthermore, the Board unanimously
resolved to recommend that the Company's stockholders vote to approve the
proposed amendments to the certificate of incorporation of
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the Company to increase its capitalization (including the adopting of authorized
preferred stock) and to change the name of the Company, effective upon the
Merger, to Everlast Worldwide Inc. and the 2000 Plan. In reaching this
determination, the Board concluded that being a stockholder of the Company that
has, as a wholly-owned subsidiary, the assets and operations of the Everlast
Companies, on the terms provided under the Merger Agreement, represented a more
favorable investment opportunity than being a stockholder of the Company alone,
after taking into account the risks inherent in each investment. In evaluating
this investment opportunity, and in reaching its decision to recommend that the
Company's stockholders vote to approve and adopt the three proposals in this
Proxy Statement to enable the Company to fulfill the conditions to closing of
the Merger, the Board considered the following:
o historical and prospective information concerning the
Company's and Everlast's respective businesses,
financial performance and condition, operations and
management;
o the views of senior management of the Company as to
prospective information concerning Everlast's business,
financial performance and condition, operations, and
management, based upon the Company's senior management's
discussions with senior management and representatives
of Everlast;
o the working capital available to the company on a
consolidated basis;
o the uncertainty inherent in any acquisition of Everlast
by a third party given the importance of the Everlast
license to the business of the Company;
o the anticipated revenue growth opportunities which
senior management of the Company believes will present
themselves from a repositioning of the Everlast brand;
o that the combination of the Company and Everlast could
potentially provide expense savings through, among other
things, the elimination of duplicative functions; and
o the terms and conditions of the Merger Agreement.
In its deliberations concerning the Merger, the Board also
considered certain potentially negative factors concerning the Merger, including
the following:
o the possibility that the Merger may not be consummated
and the potential adverse effect on the Company's
business, operations and financial condition should it
not be possible to consummate the Merger following the
public announcement that the Merger Agreement had been
entered into;
o the risk that the potential benefits of the Merger may
not be realized;
o the risk that, notwithstanding the efforts of management
of the Company to retain them, key employees might not
remain with the Surviving Corporation;
o the significant redemption payments required to be made
to the former stockholders of Everlast pursuant to the
Merger and the consequences of being unable to fund such
redemptions;
o the fact that a significant percentage of the profits of
the Company, on a consolidated basis, are required to be
paid to the former stockholders of Everlast; and
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o the costs of the transaction.
Based on the consideration of the factors enumerated above and other
relevant matters, the Board unanimously determined that the Merger, upon the
terms and conditions set forth in the Merger Agreement, is in the best interests
of the Company and its stockholders.
Because of the variety of factors considered in connection with its
evaluation of the Merger, the Board did not find it practicable to, and did not
quantify or assign any relative weights to the factors considered, and
individual directors may have given different weights to different factors. The
Board also considered presentations by, and consulted with, members of the
Company's management as well as its outside legal counsel. The above discussion
of the factors considered by Board is not intended to be exhaustive, but is
believed to include all material factors considered by the Board.
The Board (with Mr. Horowitz abstaining) has determined that the
Merger is in the best interests of the Company and its stockholders, has
declared the Merger advisable, and has unanimously approved the Merger Agreement
and the Merger. Accordingly, the Board unanimously (with Mr. Horowitz
abstaining) recommends that the stockholders vote to approve the three proposals
in this Proxy Statement to enable the Company to fulfill the conditions to
closing of the Merger.
Accounting Treatment/Federal Income Tax Consideration
The Company will acquire 100% of the outstanding shares of Everlast.
Simultaneous with the acquisition, Everlast will be merged into a wholly-owned
subsidiary of the Company. For accounting purposes, the Merger will be treated
using the purchase method of accounting. Under the purchase method of
accounting, the purchase price is allocated to the assets and liabilities
acquired based upon the estimated fair values of such assets and liabilities on
the date of acquisition. Any excess of the fair market value of the
consideration given (common stock, redeemable preferred stock, cash) over the
fair market value of the identifiable net assets acquired is reported as
goodwill.
The statement of operations will report combined results only for
the period subsequent to the Merger. Expenses incurred that are directly related
to the Merger are included as part of the total cost of the acquisition.
For federal income tax purposes, no gain or loss will be recognized
by the Company, the Everlast Companies or by the Company's stockholders as a
result of the merger.
The Company has not requested a ruling from the Internal Revenue
Service ("IRS") with regard to the federal income tax consequences of the Merger
and, accordingly, the IrS is not bound by the tax consequences to the Company
and the Everlast Companies described above.
Dilution
After the Merger, the present Everlast stockholders will own
approximately 16.8% of the Company's outstanding Common Stock.
Management After the Merger
After the merger is completed, the Board is expected to consist of
seven members, five of whom are currently members of the Board and two of whom
will be elected by the holders of Redeemable Participating Preferred Stock of
the Company (the "Redeemable Preferred Stock"). The holders of Redeemable
Preferred Stock shall have the right to elect two directors as long as these
shares remain outstanding. The directors will serve until their successors have
been duly elected and qualified or otherwise as provided by law. The Company's
stockholders will be asked to elect five directors at the next annual meeting of
the Company.
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The Company, as the sole stockholder, shall elect the directors of
the Surviving Corporation.
The officers of the Company will not change because of the Merger.
Mr. Ben Nadorf, currently the president of Everlast, has agreed to provide
advice to the Company upon its request.
Vote Required and Dissenter's Rights
The Merger does not have to be approved by the stockholders of the
Company. Holders of a majority of the issued and outstanding shares of Common
Stock and Class A Common Stock of the Company entitled to vote, voting together,
need to approve all three proposals in this Proxy Statement to enable the
Company to satisfy its obligations prior to closing of the Merger. Additionally,
under the Delaware General Business Corporation Law, the Company's stockholders
are not entitled to appraisal rights in connection with the Merger and the other
transactions contemplated by Merger Agreement.
Governmental and Regulatory Approvals
The parties to the Merger Agreement are not aware of any
governmental or regulatory approvals required for consummation of the Merger,
other than compliance with applicable securities and "blue sky" laws of various
states and the filing of the Certificate of Merger under Delaware law.
THE MERGER AGREEMENT
The following description of the terms and conditions under the
Merger Agreement does not purport to be fully descriptive and is qualified in
its entirety by reference to Appendix A.
Consideration
At the closing of the Merger (the "Closing"), the Stockholders will
receive in exchange for all the outstanding shares of common stock of Everlast
Holding ("Everlast Common Stock") the following consideration: (i) $10,000,000
cash; (ii) 125,000 shares of Common Stock (the "Payment Shares"); (iii) 380,000
shares of Common Stock (the "Additional Shares") subject to a provision which
may require the Company to issue additional shares of Common Stock (as described
in the subsection entitled "Make-Whole Shares") five years after the Closing;
and (iv) 45,000 shares of Redeemable Participating Preferred Stock of the
Company (whose rights and preferences are described below) with an aggregate
redemption value of $45,000,000.
As conditions to Closing (the "Closing Conditions"), the Company is
required to enter into Employment Agreements with each of Messrs. Ben Nadorf and
Wayne Nadorf, a Consulting Agreement with David Shechet, a Registration Rights
Agreement with the Stockholders, and grant George Q Horowitz options to purchase
505,000 shares of Common Stock (the employment agreements, the consulting
agreement, the registration rights agreement and the grant of stock options are
collectively referred to as "Ancillary Documents").
Effective Date of the Merger
The Merger will be consummated and become effective once the
Certificate of Merger meeting the requirements of the General Corporation Law of
Delaware is filed with the Secretary of State of the State of Delaware. The
Company anticipates that, if all the three proposals are approved at the Special
Meeting and all other conditions to the Merger have been fulfilled or waived,
the Certificate of Merger will be promptly filed promptly following the Special
Meeting.
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Redeemable Preferred Stock
A form of the Certificate of Designation of the Redeemable Preferred
Stock is set forth as Appendix C to this Proxy Statement. The following summary
of the rights, preferences and designation of the shares of Redeemable Preferred
Stock is qualified in its entirety by reference to Appendix C.
The Stockholders shall receive 45,000 shares of Redeemable Preferred
Stock having an aggregate redemption value of $45 million (with each share of
Redeemable Preferred Stock having a redemption value of $1,000, the "Redemption
Value"). Shares of Redeemable Preferred Stock are transferable subject to the
consent of the Company. The holders of Redeemable Preferred Stock have no voting
rights but are entitled to elect two seats in the board of directors of the
Company as long as any shares of Redeemable Preferred Stock remain outstanding.
The holders of Redeemable Preferred Stock have priority over the holders of
Common Stock of the Company in an event of a liquidation, dissolution or winding
up of the Company.
The holders of the Redeemable Preferred Stock are entitled to
receive a dividend annually in an amount equal to two-thirds of the net
after-tax profits, excluding certain non-cash items, of the Company (reduced on
a proportional basis to the extent shares of Redeemable Preferred Stock have
been redeemed). Dividends for each fiscal year are due on March 15th of the
succeeding fiscal year, or such later date that the Company's audited financial
statements have been completed but in any event not later than March 31. The
dividend payable for the fiscal years ending December 31, 2000 and December 31,
2001 shall be due on March 15, 2002.
The Company shall redeem, so long as any shares of Redeemable
Preferred Stock remain outstanding, an aggregate of $5,000,000 of Redeemable
Preferred Stock on December 31, 2001 and every December 31st thereafter (the
"Mandatory Redemption Date") until all shares of Redeemable Preferred Stock have
been redeemed. If the Company is not able to redeem an aggregate of $5,000,000
of Redeemable Preferred Stock within 30 days of any Mandatory Redemption Date,
the Company shall execute an assignment in favor of the Stockholders of the
licenses and trademarks it received from Everlast pursuant to the Merger. Such
assignment will only become effective 60 days after the date of its execution
and if the Company has not fulfilled its redemption obligation within such time
period. If such assignment becomes effective, the Company shall revert back to
being a licensee of Everlast, under the same terms and conditions set forth in
its license agreements with Everlast prior to the Closing Date. If the Company
honors its redemption obligation within 60 days of the execution of the
assignment, such assignment shall be void and have no legal effect.
The Company may also, at the end of any fiscal quarter, redeem all
of the shares of Redeemable Preferred Stock then outstanding. The Company may
also redeem all or any portion of the shares of Redeemable Preferred Stock then
outstanding at the end of each fiscal year. Upon any such optional redemption,
the Company shall pay a price per share equal to 105% of the Redemption Value;
provided, in the event of a partial redemption, the Corporation shall only pay
105% of the Redemption Value of the shares so redeemed once the Company has
redeemed shares having an aggregate Redemption Value of $5,000,000.
The Company is also required to redeem all shares of Redeemable
Preferred Stock which are outstanding upon a change of control of the Company.
For these purposes, a change of control means the acquisition by a person (other
than Ben Nadorf or George Horowitz) of greater than 50% of the fully diluted
shares of Common Stock of the Company or the sale by the Company of all or
substantially all of its assets.
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The Certificate of Designation governing the rights of the holders
of the Redeemable Preferred Stock prohibits certain actions by the Company
without the prior written consent of the holders of the Redeemable Preferred
Stock. Those actions include, but not limited to (i) the creation of a class of
capital stock ranking senior to or pari passu with the Redeemable Preferred
Stock, (ii) amending the designations, powers, preferences or rights of the
shares of Redeemable Preferred Stock in a manner adverse to the holders thereof,
(iii) incurrence of debt in excess of $100,000 other than to redeem the
Redeemable Preferred Stock, (iv) transactions with persons affiliated with the
Company, acquiring a capital asset, other than in the ordinary course of
business, requiring a payment of greater than $100,000, (v) entering into a
lease for a capital asset requiring payments of more than $100,000 per annum,
(vi) hiring employees with compensation in excess of $100,000 per annum, and
(vii) amending the terms of the current employment agreement with George
Horowitz.
Make-Whole Shares
In the event that, on the fifth anniversary of the Closing Date, the
sum of (i) the Gross Proceeds (as defined herein) received by the Stockholders
from the sale of the Additional Shares, and (ii) the Market Value (as defined
herein) of any remaining Additional Shares then held by the Stockholders, is
less than $5 million (the "Deficit"), the Company shall issue pro rata to the
Stockholders that number of additional shares of Common Stock (the "Make-Whole
Shares") determined by dividing the Deficit by the Market Value; provided,
however, that if such issuance results in the Stockholders holding in excess of
20% of the outstanding shares of Common Stock, the Company may satisfy all or
any portion of the Deficit through a cash payment made within sixty (60) days
after the five-year anniversary of the Closing Date. The Gross Proceeds shall be
the aggregate sales price received by the Stockholders from the sale of
Additional Shares (prior to any deduction of sales commissions or similar
charges). Market Value means (i) if shares of the Common Stock are listed or
admitted for trading on a national securities exchange, the average of the bid
and ask prices at the close of each trading day of a share of Common Stock on
the Nasdaq SmallCap Market, or the Company's then principal trading market, for
the 10 consecutive trading days ending on the second business day prior to the
fifth year anniversary of the Closing Date or (ii) if no such quotations are
available for such 10-day period, as determined in good faith by the Board.
Ancillary Documents
Prior to Closing, the Company shall enter into the following
agreements:
A) Ben Nadorf Employment Agreement. The Company shall enter
into a thirty-month employment agreement with Ben Nadorf providing for, among
other things, an annual salary of $200,000 and a one-time bonus payment of
$150,000, to be paid upon Closing. Mr. Nadorf shall be subject to
confidentiality and non-competition conditions throughout the term of the
agreement and for 24 months thereafter.
B) David Shechet Consulting Agreement. The Company shall
enter into a consulting agreement with David Shechet providing for, among other
things, an annual consulting fee of $60,000. The consulting agreement shall be
effective for as long as shares of Redeemable Preferred Stock remain
outstanding. Mr. Shechet shall be subject to confidentiality and non-competition
conditions throughout the term of the agreement and for 24 months thereafter.
C) Wayne Nadorf Employment Agreement. The Company shall
enter into a three-year employment agreement with Wayne Nadorf providing for,
among other things, an annual salary of $60,000. Wayne Nadorf will be entitled
to benefits normally available to other executive employees of the Company. He
shall be subject to non-disclosure and non-competition conditions during the
term of his employment. If he is terminated for cause or terminates his
employment prior to the end of the term
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of the employment agreement, Wayne Nadorf shall be subject to a non-competition
condition for six months from the date on which his employment terminates. Wayne
Nadorf shall have the title of Assistant Vice President of Sales.
D) Registration Rights Agreement. The Company shall grant
the Stockholders piggy-back and demand registration rights for the Payment
Shares and the Additional Shares. The Company covenants to keep the registration
statement on which the Payment Shares and/or the Additional Shares are
registered effective for a period expiring upon the earlier to occur of (i) five
years from the closing of the transaction contemplated by the Merger Agreement,
and (ii) the date upon which all the securities covered by the registration
statement can be transferred without volume limitation.
E) George Horowitz Bonus and Option Grant Agreement. The
Company shall grant to George Horowitz upon the Closing,a one-time bonus
resulting in net after-tax proceeds of $90,000 to be used to repay a loan to Mr.
Horowitz by the Company, and options to purchase 505,000 shares of Common Stock.
Representations and Warranties
In the Merger Agreement, the Everlast Companies and Ben Nadorf have
made various representations and warranties (subject in some cases to
materiality, knowledge qualifiers and prior disclosure to the Company) relating
to, among other things, Everlast's business and financial condition, the
parties' requisite corporate authority to enter into and perform their
obligations under the Merger Agreement, the absence of a breach or violation of
or default under the Everlast Companies' charters or bylaws or internal rules or
regulations governing conduct of corporate actions as a result of the
consummation of the Merger, the capitalization of the Everlast Companies, that
upon the transfer to AAGP New Corp. of the issued and outstanding capital stock
of Everlast Holding, such shares will be duly authorized, validly issued, fully
paid and nonassessable, the proprietary rights of the Everlast Companies to its
intangible assets, the assets and liabilities of Everlast, the filing of
Everlast's tax returns and other filings with applicable taxing authorities, the
satisfaction of certain legal requirements, including the receipt of all
governmental, regulatory and other necessary consents or waivers for the Merger,
the absence of any present litigation and the absence of certain changes in
Everlast's business having a material adverse effect on Everlast's business.
The Stockholders have made representations and warranties relating
to their ownership of the Everlast Holding common stock, including that the
Stockholders have or will have good and marketable title to such shares, free
and clear of any liens, and that the transfer of such shares in connection with
the Merger will pass good and marketable title to such shares, free and clear of
any liens, and as to their intent to acquire the Common Stock and Redeemable
Preferred Stock to be issued in the Merger solely for each Stockholder's own
account and without a view to, or for offer or resale in connection with, any
distribution thereof.
The Company has made various representations and warranties (subject
in some cases to materiality, knowledge qualifiers, and prior disclosure to the
Everlast Companies and Ben Nadorf) relating to, among other things, the
corporate existence and good standing under the laws of the State of Delaware of
the Company and AAGP New Corp., the Company's business and its requisite
corporate authority to enter into and perform its obligations under the Merger
Agreement, the absence of a breach or violation of or default under its charter
or bylaws or internal rules or regulations governing conduct of corporate
actions as a result of the consummation of the Merger, the accuracy and
timeliness of its various filings with the Securities and Exchange Commission,
the Company's business and financial condition, the capitalization of the
Company and AAGP New Corp., the satisfaction of certain legal requirements,
including the receipt of all governmental, regulatory and other necessary
consents or waivers for the
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Merger, and the absence of litigation. In addition, the Company has made
representations and warranties, that, upon issuance pursuant to the terms of the
Merger Agreement, the Payment Shares, the Make-Whole Shares and the Additional
Shares, will be validly issued, fully paid and nonassessable.
Conduct of Business Prior to Closing
Pursuant to the Merger Agreement, the Everlast Companies and the
Stockholders have agreed that, prior to the Closing and except as otherwise set
forth in the Merger Agreement or consented to or approved by the Company in
writing:
A) the Everlast Companies shall cause Everlast (a) to
conduct its business in the ordinary course consistent with past practice and
(b) to use its commercially reasonable efforts to preserve intact its business
organizations and relationships with third parties;
B) the Everlast Companies, shall not cause or otherwise
suffer or permit Everlast to:
o adopt or propose any change in its certificate of
incorporation or by-laws;
o adopt a plan or agreement of complete or partial
liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other material
reorganization of Everlast;
o issue, sell, pledge, dispose of, encumber or authorize
any shares of capital stock or options, warrants,
convertible securities or other rights of any kind to
acquire shares of capital stock or other ownership
interest in Everlast;
o split, combine, subdivide or reclassify its outstanding
shares of capital stock
o declare, set aside or pay any dividend or other
distribution payable in cash, stock or property with
respect to its capital stock;
o redeem, purchase or otherwise acquire directly or
indirectly any of Everlast's capital stock;
o incur any indebtedness for borrowed money or guarantee
any such indebtedness of another person, issue or sell
any debt securities or warrants or other rights to
acquire any debt securities of the Company, guarantee
any debt securities of another person, enter into any
agreement to maintain any financial statement condition
of another person or enter into any arrangement having
the economic effect of any of the foregoing, except in
the ordinary course of business;
o make any loans, advances or capital contributions to, or
investments in, any other person;
o increase the compensation or benefits of any director,
officer or employee, except for normal increases in the
ordinary course of business or as required under
applicable law or any existing agreement or commitment;
o except for any such change which is not significant or
which is required by reason of a concurrent change in
GAAP, change any method of accounting or accounting
practice (other than any change for tax purposes); or
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o take any action that would make any representation or
warranty of Everlast in the Merger Agreement inaccurate
in any material respect at, or as of any time prior to,
the Effective Time;
C) the Everlast Companies and Ben Nadorf, the principal
stockholder of the Everlast Companies, shall not, nor shall they authorize or
permit any of the Everlast Companies' subsidiaries or representatives to,
directly or indirectly through another person, disclose any confidential
information or data relevant to the Company to any person or entity other than
to the parties to the Merger Agreement and their representatives. The
Stockholders also shall not induce any employee or representative of Everlast
not to become or continue as an employee or employee of the Surviving
Corporation;
D) the Everlast Companies shall afford to the Company and
its officers, employees, accountants, counsel and other authorized
representatives full and complete access during normal business hours,
throughout the period prior to the earlier of the Closing or the date of
termination of the Merger Agreement, to Everlast's and its subsidiaries'
contracts, commitments, books and records (including but not limited to tax
returns) and any report, schedule or other document filed or received by it
pursuant to the requirements of federal or state securities laws;
E) the Everlast Companies and the Stockholders shall use
all reasonable efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by the Merger Agreement, including using its reasonable efforts to
obtain all necessary or appropriate waivers, consents and approvals and to
effect all necessary filings and submissions and shall use its reasonable best
efforts to fulfill or obtain the fulfillment of all of the conditions to
Closing; and
F) the Everlast Companies and the Stockholders shall not,
nor shall it authorize or permit any of its subsidiaries or representatives to,
directly or indirectly through another person, solicit, initiate or encourage,
participate in any discussions or negotiations, or enter into any letter of
intent, agreement in principle, acquisition agreement or other similar agreement
relating to the sale of the Everlast to a third party.
Similarly, the Company has agreed that, prior to the Closing:
A) the Company shall (a) conduct its business in the ordinary course
consistent with past practice and (b) use its commercially reasonable efforts to
preserve intact its business organizations and relationships with third parties;
B) the Company shall not, nor shall it authorize or permit
any of its subsidiaries or representatives to, directly or indirectly through
another person, disclose any confidential information or data relevant to the
Everlast Companies or to the Stockholders, to any person or entity other than to
the parties to the Merger Agreement and their representatives;
C) the Company shall afford to Everlast and its officers,
employees, accountants, counsel and other authorized representatives full and
complete access during normal business hours, throughout the period prior to the
earlier of the Closing or the date of termination of the Merger Agreement, to
the Company's and its subsidiaries', contracts, commitments, books and records
and any report, schedule or other document filed or received by it pursuant to
the requirements of federal or state securities laws; and
D) the Company shall use all reasonable efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by the Merger
Agreement, including
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<PAGE>
using its reasonable efforts to obtain all necessary or appropriate waivers,
consents and approvals and to effect all necessary filings and submissions and
shall use its reasonable best efforts to fulfill or obtain the fulfillment of
all of the conditions to Closing.
Closing Conditions
The obligations of the Company, AAGP New Corp, the Everlast
Companies and the Stockholders are subject to the satisfaction or waiver of
conditions set forth below.
The respective obligations of the Company, AAGP New Corp., the
Everlast Companies and the Stockholders to consummate the Merger are subject to:
o the continued accuracy of each party's representations and
warranties and the fulfillment of each party's agreements contained
in the Merger Agreement;
o the condition that there will be no judgement, injunction, order or
decree prohibiting or enjoining the consummation of the Merger;
o execution and delivery by the parties of the signed Ancillary
Documents;
o the delivery by each of the Company's counsel and the Everlast
Companies' counsel of a legal opinion;
o the absence of a material adverse change or effect with respect to
the Company or Everlast; and
o the approval of the stockholders of the Company to:
(1) increase the Company's authorized capital stock, including
authorizing preferred stock upon terms designated by the Board;
(2) adopt the 2000 Stock Option Plan; and
(3) change the Company's corporate name from "Active Apparel Group,
Inc." to "Everlast Worldwide Inc." at or prior to the Closing
Date.
The obligation of Everlast to complete the Merger is also subject to
the grant by the Board to George Q Horowitz of stock options to purchase an
aggregate of 505,000 shares of Common Stock at an exercise price equal to the
greater of $4.00 per share or the fair market value of one share of Common Stock
at the date of grant for the first 125,000 shares and at an exercise price equal
to the fair market value of one share of common stock for the remaining 380,000
shares.
Other than the condition requiring stockholder approval of the three
proposals in this Proxy Statement, which is a legal requirement, each party to
the Merger may waive any condition that is intended for its benefit.
Merger Expenses
The Company shall pay all reasonable costs and expenses incurred by
it and Everlast, including, but not limited to, brokerage fees due to Chase
Securities Inc., and the Stockholders in connection with the Merger Agreement
and the transactions contemplated thereby. Such payments or accrual of expenses
shall be reflected on the Closing Date Balance Sheet, provided that all expenses
related to legal,
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accounting and other related fees incurred by Stockholders in excess of $100,000
shall be paid by the Stockholders. The Company shall pay all costs and expenses
incurred by it and New Corp. in connection with the Merger Agreement and the
transactions contemplated thereby.
Indemnification
The parties to the Merger Agreement have agreed to indemnify each
other for any inaccuracy in or breach of any of the representations, warranties
or agreements made such party in the Merger Agreement. The Stockholders have
also agreed to indemnify the Company for half of any taxes, fees or penalties
that may arise as a result of ongoing or future audits by any federal, state
local, foreign tax authority of any tax return filed by Everlast prior to the
date of the Closing. The Company has agreed that any indemnification by the
Stockholders with respect to any such taxes may, at the Stockholders' option, be
satisfied by offsetting the redemption payments required to be made by the
Company pursuant to the Redeemable Preferred Stock beginning with the next
redemption period.
Termination
The Merger Agreement may be terminated and cancelled at any time
prior to the Closing Date by mutual written consent of the Company, Everlast and
the Stockholders. The Merger Agreement may be terminated by either the Company,
on one hand, or Everlast and the Stockholders, on the other hand, if:
o any of the representations or warranties of the other parties prove
to be inaccurate or untrue in any material respect;
o any obligation, term or condition to be performed, kept or observed
by the other party under the Merger Agreement has not been
performed, kept or observed in any material respect at or prior to
the time specified in the Merger Agreement;
o the Merger has not closed by December 31, 2000; or
o a court of competent jurisdiction or governmental authority has
issued a final and non-appealable order, decree or ruling
permanently restraining, enjoining or otherwise prohibiting the
Merger.
BUSINESS OF EVERLAST WORLD'S BOXING HEADQUARTERS CoRP.
Overview
Everlast World's Boxing Headquarters Corp. ("Everlast") was founded
in 1910, originally as a manufacturer of men's swimwear under the name
"Everlast". Soon after, Everlast began to manufacture boxing gloves, protective
headgear and related items in its Bronx, New York facility. Over the past 90
years, Everlast products have been used by boxers for training and professional
fights.
Everlast is a leading name in boxing and a widely-recognized brand
name in sporting goods. Everlast is the market leader in several of its product
categories, including boxing gloves, heavy bags, protective headgear and speed
bags. Boxing equipment is assembled and manufactured in Everlast's two
facilities located in the Bronx, New York and Moberly, Missouri. In addition,
products such as men's and women's sportswear and activewear, childrenswear,
footwear, athletic socks, watches, cardiovascular exercise equipment and
gym/duffel bags are produced and marketed under licensing agreements. Everlast
also has licensing arrangements with foreign distributors in over 20 countries
around the world.
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With some relationships dating back to the 1960's, Everlast has
strong ties with many national sporting goods retailers, including Big 5 Corp.,
Dunham's Athleisure Corp., Gart Companies, Hibbett Sporting Goods, Inc. and
Sports Authority, Inc. Everlast is considered to be an important resource to
many sporting goods retailers, and has been awarded "Supplier of the Year" on
several occasions.
Description of Business
History
Everlast was founded in 1910 and is headquartered in the Bronx, New
York. Everlast began as a manufacturer of men's swimwear. Shortly thereafter,
Everlast began manufacturing and distributing boxing gloves and protective
headgear. Everlast developed a relationship with the legendary boxer Jack
Dempsey, furnishing him with all of his training gear. In 1919, Dempsey won the
world's heavyweight championship wearing Everlast boxing gloves. By the 1920's,
Everlast was manufacturing a diverse line of boxing and athletic training
equipment, including exercise bicycles, rowing machines, gym mats and other
related equipment.
Everlast has established itself as a leading brand in boxing.
Everlast products have been used or endorsed by boxers such as Muhammad Ali, Lou
Duva (trainer), Joe Louis, "Sugar" Ray Robinson, Jake LaMotta, Larry Holmes,
Mike Tyson, Evander Holyfield, George Foreman and Pernell Whitaker.
Everlast acquired the Narragansett Gymnasium Equipment Manufacturing
Corp. (the "Narragansett Facility" in Moberly, Missouri) in the 1960's. The
Narragansett Facility primarily manufactured and distributed gymnasium equipment
such as metal and wooden bleachers. Everlast converted the operations to
manufacture the wooden and metal parts for speed and heavy bags and boxing
rings. Since the 1980's, Everlast has utilized licensing arrangements in the
United States and in over 20 international licensees which sell Everlast
products in specific geographies worldwide. These territories include Canada,
Australia, Pacific Rim, Europe, South America, and Mexico.
Product Overview (Manufactured)
o Boxing Gloves: Everlast's most recognizable product,
boxing gloves, are made for professional, amateur and
home gym use. Everlast's professional gloves are
certified by the World Boxing Conference, World Boxing
Association and International Boxing Federation for all
of their professional fights, and in all 50 states.
o Heavy Bags: Everlast's heavy bags are punching bags
weighing between 25 and 150 lbs.
o Speed Bags: Speed bags are small, air-filled bags which
are mounted on swivels and platforms (at eye level).
o Platforms: Platforms are the wall mountings used in
suspending speed or heavy bags.
o Boxing Trunks.
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o Miscellaneous Gym Equipment: In addition to the
aforementioned core offerings, Everlast also
manufactures the following products to complement its
product line: protective head gear; protection cups;
mouthpieces; hand wraps; boxing rings; martial arts
equipment; skip ropes/tug-o-war ropes; ankle/wrist
weights; push-up/pull-up bars; hand grips; weight
lifting gloves & belts; dumbbell/barbell racks; gym mats
(assorted); medicine balls; professional training head
guard; rubber medicine balls.
Product Overview (Licensed)
In addition to manufacturing sports equipment, Everlast licenses its
brand name to several companies which source or manufacture ancillary products.
This has enabled Everlast to expand product offerings into areas outside of its
core manufacturing competencies, strengthen the brand image, and increase
profitability, while at the same time minimizing inventory risk.
Everlast's licensing agreements typically call for royalty payments
between five percent (5%) and seven percent (7%) of net revenues. In addition,
licensees are required to achieve certain minimum annual sales levels. Renewals
of the agreement are at the option of the licensee, provided that they had
adhered to the contract throughout the initial term. Renewal options are usually
two to four years in length.
Everlast utilizes a network of licensees for its international
distribution to over 20 foreign countries. It also sells directly to
distributors and retailers. In return for exclusive rights to market Everlast
products in certain regions, the licensees pay Everlast a royalty rate between
five percent (5%) and seven percent (7%) of net revenues. Terms of the
international licensing agreements are substantially similar to the domestic
license agreements.
Customers
Everlast is recognized by many national and regional sporting good
retailers as the leading provider of boxing and related equipment. Everlast's
major customers include: Big 5 Corp.; Dunham's Athleisure Corp.; Gart Companies;
Hibbett Sporting Goods, Inc.; K-Mart Corp.; MC Sporting Goods; Modell's, Inc.;
MVP Sports Stores, Inc.; Service Merchandise Co., Inc.; Sports Authority, Inc.
Product Development
Everlast's core product offerings of boxing gloves, heavy and speed
bags, and platforms have changed little in the past several decades in terms of
design. With their core products, management has focused on improving production
techniques and manufacturing efficiencies. Everlast's management also keeps
track of the latest fitness equipment trends in order to anticipate new products
to add to their mix. The most recent example of this are Everlast medicine
balls. In addition, Everlast has begun to market boxing rings which are smaller
than the professional rings it also manufactures. Everlast's management believes
that demand for the smaller rings is being driven by the popularity of boxing as
an alternative to traditional aerobic classes offered at health clubs and an
overall increase in women participating in the sport.
Manufacturing
Everlast has two manufacturing facilities which produce most of its
non-licensed products. The Company's leased Bronx, New York facility is a
235,000 square foot cut and sew operation, where boxing gloves, speed bags,
boxing trunks and other related items are produced. Additionally, Everlast-owned
304,000 square foot Moberly, Missouri facility houses its heavier manufacturing
for such items as platforms, heavy bags and boxing rings.
Sales and Marketing (Manufactured)
Ben Nadorf and two regional sales managers oversee the entire sales
and marketing effort for the Company's manufactured products. Everlast employs,
on a full-time basis, nine sales representatives who are assigned territories.
The sales force is responsible primarily for servicing
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sporting goods retailers across the United States. For the geographic areas
which are not directly covered by Everlast's sales force, independent sales
representatives are used.
Everlast's management has focused its marketing efforts in the
following areas:
o Trade Shows: Everlast's participates in more than twelve
trade shows annually, which are attended by most major
sporting goods retailers and manufacturers;
o Product Catalogues: A catalogue is published as
required, which features all products manufactured by
Everlast. Catalogues for selected licensed items are
also produced;
o Mail-Order: Through its American Fitness Products
subsidiary, Everlast operates as a mail-order
distributor to the general public; and
o Amateur Boxing Sponsorship: Everlast sponsors various
amateur boxing organizations and events, with donations
of cash and Everlast equipment. As a matter of policy,
Everlast does not pay individual professional boxers to
use their equipment. However, free equipment is provided
to some professionals.
Suppliers
Raw materials used in Everlast's core product offerings
are top-grain leather, synthetic fabrics, canvas, assorted wood and steel
tubing, and various materials used in stuffing gloves and punching bags. As
these raw materials are basically commodities, Everlast uses several different
suppliers for each. No one supplier accounts for more than ten percent (10%) of
Everlast's purchases. The majority of raw materials are sourced domestically,
with the exception of Nevatear(TM) - the material used in the moderately-priced
gloves, bags and gym mats. Nevatear(TM) is a vinyl coated fabric with tire-cord
nylon content, which is designed to withstand years of usage (five year
guarantee).
Management Information Systems
Everlast tracks its inventory, accounts receivable and
accounts payable on standard business computer software and systems. Upon a
customer's request, Everlast is fully capable of shipping through EDI. The
Company can electronically provide retailers with purchase orders, invoicing,
labels and advance shipping notices, in addition to other items.
Insurance
Everlast maintains insurance coverage on all real
estate, machinery, automotive and computer equipment. Additional coverage
includes commercial general liability, employee benefits, commercial crime and
umbrella liabilities.
Legal Proceedings
Everlast is not party to any material legal proceedings.
Market For Common Equity and Related Stockholder Matters
There is no public trading market for Everlast's common equity.
There are currently three holders of record of Everlast common equity.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF EVERLAST WORLD'S BOXING HEADQUARTERS CORP.
General
Everlast is the premiere name in boxing, and a widely-recognized
name in sporting goods. Everlast's products are sold to major sporting goods
stores and gyms throughout the United States In addition, products such as men's
and women's sportswear and activewear, childrenswear, footwear, athletic socks,
watches, cardiovascular exercise equipment and gym/duffel bags are produced and
marketed under licensing agreements. Everlast also has licensing arrangements
with foreign distributors in over 20 countries around the world. At the retail
level, Everlast's licensed products generate in excess of $200.0 million in
revenues.
The consolidated financial statements of Everlast and the notes
thereto, which are set forth elsewhere in this Proxy Statement, contain detailed
information that should be referred to in conjunction with this discussion.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Results of Operations
---------------------
Net revenues were $10.2 million for the six months ended June 30,
2000, which represents a 12.8% decrease over the same period of the prior fiscal
year's $11.7 million. Wholesale revenues decreased to $1.7 million due to a loss
of two major customers because of bankruptcies. License revenues increased
$220,000 compared to the prior period.
Operating profits decreased by $630,000 compared to the same period
for the prior fiscal year due to lower absorption of relatively fixed
manufacturing and operating expenses.
Liquidity and Capital Resources
-------------------------------
Net cash provided by operating activities was relatively unchanged
at $3.3 million at June 30, 2000, compared to $3.2 million at June 30, 1999. Net
cash used by investing activities decreased to $2.8 million at June 30, 2000
from $8.5 million at June 30, 1999 as Everlast converted its cash and cash
equivalents to investments in commercial paper during the first half of 1999.
Net cash used by financing activities declined to $150,000 at June 30, 2000 from
$850,000 at June 30, 1999 as the result of payments made to a former shareholder
in 1999.
Working capital was $20.8 million at June 30, 2000, which was used
to fund Everlast's operations.
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2000 Liquidity Outlook
----------------------
Financial condition is expected to remain strong. Working capital is
expected to increase as Everlast increases inventory with the anticipated
introduction of new products. Historically, Everlast's internal cash flows have
funded revenue growth and working capital needs.
Fiscal Year Ended December 31, 1999 Compared to Fiscal Year Ended
December 31, 1998
Results of Operations
---------------------
Net revenues were $22.7 million for fiscal year ended December 31,
1999, which represents a 1.7% decrease from the prior fiscal year's $23.1
million. Wholesale revenues decreased $300,000 while license revenues had a
slight increase of $40,000. In terms of wholesale revenues, Everlast was
experiencing strong growth in the first half of the year, as many retailers'
inventory levels were lean. However, management experienced a slower second half
of the season, as this situation at retail corrected itself. Consequently, flat
wholesale revenues were experienced for fiscal year ended December 31, 1999.
Operating profits remained static for the fiscal year ended December
31, 1999 versus the fiscal year ended December 31, 1998 due to relative flatness
in the sales and license revenues compared to the prior year. Operating expenses
remained stable and therefore had little impact on net operating income.
Liquidity and Capital Resources
-------------------------------
Net cash provided from operating activities was $2.9 million for the
fiscal year ended December 31, 1999 compared to $5.4 million for the fiscal year
ended December 31, 1998, a decrease of $2.5 million. The decrease in net cash is
mainly due to an increase in inventory due to the anticipated increase in orders
for new products. Net cash used in investing activities was $8.3 million for
fiscal year ended December 31, 1999, which was primarily an $8.0 million
investment in higher yielding commercial paper. The other $300,000 was used for
the purchase of fixed assets, which is primarily composed of maintenance capital
expenditures.
Working capital was $19.5 million at December 31, 1999, which was
used to fund Everlast's operations.
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended
December 31, 1997
Results of Operations
---------------------
Net revenues for fiscal year ended December 31, 1998 remained static
at $23.1 million compared to fiscal year ended December 31, 1997. Wholesale
revenues increased slightly to $18.4 million from $18.2 million the prior year,
despite overall downward pressure on prices in the sporting goods industry.
Licensing revenues decreased marginally to $4.7 million for the fiscal year
ended December 31, 1998, as compared to $5.0 million the prior year due to the
loss of a licensee (due to bankruptcy) which was not replaced in 1998.
Operating profits decreased for the fiscal year ended December 31,
1998 compared to fiscal year ended December 31, 1997. The decrease was primarily
due to a 1% decline in wholesale profit margins and a decrease in licensing
income directly impacted overall operating profit margins.
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Liquidity and Capital Resources
-------------------------------
Net cash provided from operating activities was $5.4 million for
fiscal year ended December 31, 1998, compared to $50,000 for the fiscal year
ended December 31, 1997, an increase of $5.3 million. The increase in net cash
is mainly due to a decrease in inventory and prepaid taxes due to the
liquidation of excess inventory and a reduction of taxes respectively. Net cash
used in financing activities was $1.7 million for both years, which was
primarily an $1.6 million payment of a note due to the estate of a former
shareholder.
Working capital was $16.7 million at December 31, 1998, which was
used to fund Everlast's operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ACTIVE APPAREL GROUP, INC.
General
The Company is a designer, marketer and supplier of women's and
men's activewear, sportswear, swimwear and accessories. The Company sells its
principal product collections under the Everlast brand name through exclusive
licensing arrangements. The Company's products are manufactured by independent
manufacturing contractors and are sold to over 20,000 retail locations mostly
throughout the United States and Canada, including a variety of department
stores, specialty stores, sporting goods stores, catalog operations and better
mass merchandisers.
The financial statements of the Company and the notes thereto, which
are set forth elsewhere in this Proxy Statement, contain detailed information
that should be referred to in conjunction with this discussion.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Results of Operations
---------------------
Net sales increased to $16,184,470 for the six months ended June 30,
2000 from $11,148,223 for the six months ended June 30, 1999, an increase of
$5,036,247, or 45.2%. The increase in net sales is primarily attributed to
increased sales volume of the Company's men's and women's products through
continued market penetration with new accounts and increased orders from
established accounts.
Gross profit increased to $6,346,083 for the six months ended June
30, 2000 from $4,654,232 for the six months ended June 30, 1999, an increase of
$1,691,851, or 36.4%. Gross profit decreased as a percentage of net sales to
39.2% from 41.7%. The decrease as a percentage of net sales is primarily
attributed a change in the Company's product mix.
Selling and shipping expenses increased to $3,400,307 for the six
months ended June 30, 2000 from $2,639,989 for the six months ended June 30,
1999, an increase of $760,318, or 28.8%. Selling and shipping expenses as a
percentage of net sales decreased to 21.0% from 23.7%. The decrease as a
percentage of net sales was primarily attributable to the increase in sales as
it relates to the fixed portion of selling and shipping expenses.
General and administrative expenses increased to $1,061,199 for the
six months ended June 30, 2000 from $988,711 for the six months ended June 30,
1999, an increase of $72,488, or 7.3%. General
30
<PAGE>
and administrative expenses as a percentage of net sales decreased to 6.6% from
8.9%. The decrease as a percentage of net sales is primarily attributed to the
relative fixed nature of general and administrative expenses.
Financial expenses increased to $371,845 for the six months ended
June 30, 2000 from $212,718 for the six months ended June 30, 1999, an increase
of $159,127, or 74.8%. The increase is attributed to the increase in the
Company's net borrowings from the factor, for the six months ended June 30, 2000
versus the comparable period in 1999, to finance growth.
Operating income increased to $1,512,732 for the six months ended
June 30, 2000 from $812,814 for the six months ended June 30, 1999, an increase
of $699,918, or 86.1%, because of the reasons stated in the preceding
paragraphs. Operating income as a percentage of net sales was 9.3% for the six
months ended June 30, 2000 as compared to 7.3% for the six months ended June 30,
1999.
The Company incurred a tax provision of $650,473 for the six months
ended June 30, 2000 as compared to $349,648 for the six months ended June 30,
1999, an increase of $300,825, or 86.0%.
The Company had net income of $862,259 for the six months ended June
30, 2000 as compared to $463,166 for the six months ended June 30, 1999, an
increase of $399,093, or 86.2%, because of the reasons stated in the preceding
paragraphs.
Liquidity and Capital Resources
-------------------------------
Net cash provided by operating activities for the six months ended
June 30, 2000 was $216,664 compared to $76,067 for the six months ended June 30,
1999. This increase was primarily attributable to an increase in net income. Net
cash used for investing activities for the six months ended June 30, 2000 was
$116,590 compared to $81,360 for the six months ended June 30, 1999. The
increase was attributable to the purchase of fixed assets.
During the six months ended June 30, 2000, the Company's primary
need for funds was to finance working capital for the growth in net sales of the
Company's products. The Company has relied primarily upon cash flow from
operations and advances drawn against factored receivables to finance its
operations and expansion. At June 30, 2000, working capital was $6,566,252
compared to $5,409,043 at June 30, 1999 an increase of $1,157,209.
Due from factor represents the amount owed to the Company for
factored receivables less the amount of outstanding advances made by the factor.
At June 30, 2000 due from factor was $3,504,618 as compared to $1,815,835 at
June 30, 1999, an increase of $1,688,783. This increase is primarily the result
of increased volume for the six months ended June 30, 2000. The Company's
inventory increased to $5,115,244 at June 30, 2000 as compared to $4,191,123 at
June 30, 1999 due to an increase in booked and anticipated orders. Accounts
payable increased to $2,295,231 at June 30, 2000 as compared to $1,106,877 at
June 30, 1999 an increase of $1,188,354. The increase was due to more favorable
terms received from the Company's vendors.
Management anticipates it will retain a net receivable position with
its factor, although no assurance to that effect can be given. Positive cash
flow, if it occurs, will provide for a further reduction in advances, creating
sufficient working capital to fund the Company's anticipated growth for the next
twelve months. If a positive cash flow does not occur, borrowings with the
factor will increase.
31
<PAGE>
Fiscal Year Ended December 31, 1999 Compared to Fiscal Year
Ended December 31, 1998
Results of Operations
---------------------
Net sales increased to $24,464,139 for the year ended December 31,
1999 from $15,011,926 for the year ended December 31, 1998, an increase of
$9,452,213 or 63.0%. The increase in net sales is primarily attributed to
increased sales volume of the Company's women's products through continued
market penetration and introduction of the Company's men's products.
Gross profit increased to $9,885,763 for the year ended December
31,1999 from $5,528,335 for the year ended December 31, 1998, an increase of
$4,357,428 or 78.8%. Gross profit increased as a percentage of net sales to
40.4% from 36.8%. The increase as a percentage of net sales is primarily
attributed to higher prices received for the Company's products.
Selling and shipping expenses increased to $5,871,751 for the year
ended December 31, 1999 from $3,637,729 for the year ended December 31, 1998, an
increase of $2,234,022 or 61.4%. Selling and shipping expenses as a percentage
of net sales decreased to 24.0% from 24.2%. The decrease as a percentage of net
sales is primarily attributed to the increase in sales as it relates to the
fixed portion of the selling and shipping expenses.
General and administrative expenses increased to $2,024,539 for the
year ended December 31, 1999 from $1,911,621 for the year ended December 31,
1998, an increase of $112,918 or 5.9%. General and administrative expenses as a
percentage of net sales decreased to 8.3% from 12.7%. The decrease as a
percentage of net sales is primarily attributed to the relative fixed nature of
general and administrative expenses.
Financial expenses increased to $557,627 for the year ended December
31, 1999 from $413,713 for the year ended December 31, 1998, an increase of
$143,914 or 34.8%. The increase is attributed to the increase in the Company's
net borrowings from the factor and factor commissions paid on increased sales,
for the year ended December 31, 1999 as compared to the year ended December 31,
1998, to finance growth.
Operating income increased to $1,431,846 for the year ended December
31, 1999 from a loss of $434,728 for the year ended December 31, 1998, an
increase of $1,866,574 for the reasons stated above. Operating income as a
percentage of net sales was 5.85% for the year ended December 31, 1999 as
compared to negative 2.9% for the year ended December 31, 1998.
The Company incurred a tax provision of $615,694 for the year ended
December 31, 1999 as compared to a tax benefit of $194,093 for the year ended
December 31, 1998. This income tax provision is in proportion to the increase in
the Company's income.
The Company had net income of $816,152 for the year ended December
31, 1999 as compared to a loss of $240,635 for the year ended December 31, 1998,
an increase of $1,056,787.
2000 Market Outlook
-------------------
While the retail environment remains difficult, the Company's
management believes it will continue to increase its sales growth, although no
assurance can be given that such increase will continue.
32
<PAGE>
The continued market penetration of the Everlast men's activewear
and sportswear line and the expansion of the Company's internet web site are
expected to add to the Company's distribution base. The Company continues to
focus on its core Everlast brand and to explore other opportunities for growth.
Liquidity and Capital Resources
-------------------------------
Net cash provided by operating activities for the year ended
December 31, 1999 was $222,766 compared to $202,937 for the year ended December
31, 1998. This increase was primarily attributable to an increase in net income.
Net cash used for investing activities for the year ended December 31, 1999 was
$176,540 compared to $79,414 for the year ended December 31, 1998 due to an
increase in capital expenditures for computer related equipment. Net cash
provided by financing activities was $0 for the year ended December 31, 1999
compared to $9,906 for the year ended December 31, 1998 due to a decline in the
proceeds received from the exercise of stock options.
During the year ended December 31, 1999, the Company's primary need
for funds was to finance working capital due to growth in net sales of the
Company's products. The Company has relied primarily upon cash flow from
operations and advances drawn against factored receivables to finance its
operations and expansion. At December 31, 1999, working capital was $5,850,064
compared to $4,994,000 at December 31, 1998, an increase of $856,064. This
increase was primarily attributable to the Company's net income for the year
ended December 31, 1999, as compared to a net loss for the year ended December
31, 1998.
Due from factor represents the amount receivable by the Company for
factored receivables net of outstanding advances made by the factor to the
Company under the factoring agreement. At December 31, 1999 due from factor was
$1,549,047 as compared to $1,887,245 at December 31, 1998. The Company's
inventory increased by 73.2% to $5,240,152 at December 31, 1999 from $3,026,241
at December 31, 1998 to support the increased backlog of open orders and the
Company's expanded product lines.
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year
Ended December 31, 1997
Results of Operations
---------------------
Net sales decreased to $15,011,926 for the year ended December 31,
1998 from $16,687,271 or the year ended December 31, 1997, a decrease of
$1,675,345 or 10.0%. This decrease was principally attributable to decreased
sales volume of the Company's Converse and MTV licensed products.
Gross profit decreased to $5,528,335 for the year ended December 31,
1998 from $6,355,284 or the year ended December 31, 1997, a decrease of $826,949
or 13.0%. Gross profit decreased as a percentage of net sales to 36.8% from
38.1%. This decrease was primarily due to the lower sales prices received for
the Converse and MTV licensed products.
Selling and shipping expenses decreased to $3,637,729 for the year
ended December 31, 1998 from $3,743,862 for the year ended December 31, 1997, a
decrease of $106,133 or 2.8%. Selling and
33
<PAGE>
shipping expenses as a percentage of net sales increased to 24.2% from 22.4%.
This increase was attributable to greater sales sample expense and an increase
in salaries of employees involved in the sale, shipping and design of the
Company's products.
General and administrative expenses increased to $1,911,621 for the
year ended December 31, 1998 from $1,850,203 for the year ended December 31,
1997, an increase of $61,418 or 3.3%. General and administrative expenses as a
percentage of net sales increased to 12.7% from 11.1%. The increase was
primarily attributable to an increase in outside consulting expense.
Financial expenses decreased to $413,713 for the year ended December
31, 1998 from 417,159 of the year ended December 31, 1997, a decrease of $3,446
or 0.8%. This decrease was primarily attributable to the decrease in the
Company's net borrowings from its factor for the year ended December 31, 1998,
versus the year ended December 31, 1997 and offset by foreign currency
transaction losses in the Canadian branch. Of the total financial expenses,
interest expense decreased to $120,950 for the year ended December 31, 1998 from
$171,318 for the year ended December 31, 1997. Such decrease reflects the
decreased level of borrowings due to lower inventory levels.
Operating income decreased to a loss of $434,728 for the year ended
December 31, 1998 from a profit of $344,060 for the year ended December 31,
1997, a decrease of $778,788 for the reasons stated above. Operating income as a
percentage of net sales was negative 2.9% for the year ended December 31, 1998
as compared to positive 2.1% for the year ended December 31, 1997.
The Company recognized a tax benefit of $194,093 for the year ended
December 31, 1998 as compared to a tax provision of $132,575 for the year ended
December 31, 1997. This income tax reduction is in proportion to the decline in
the Company's income.
The Company had a net loss of $240,635 for the year ended December
31, 1998 as compared to net income of $211,485 for the year ended December 31,
1997, a decrease of $452,120.
Liquidity and Capital Resources
-------------------------------
Net cash provided by operating activities for the year ended
December 31, 1998 was $202,937 compared to $49,058 for the year ended December
31, 1997. This increase was primarily attributable to a decrease in inventory.
Net cash used for investing activities for the year ended December 31, 1998 was
$79,414 compared to $223,757 for the year ended December 31, 1997 due to a
decline in capital expenditures. Net cash provided by financing activities was
$9,906 for the year ended December 31, 1998 compared to $70,899 for the year
ended December 31, 1997 due to a decline in the proceeds received from the
exercise of stock options.
During the year ended December 31, 1998, the Company's primary need
for funds was to finance working capital due to anticipated growth in net sales
of the Company's products. The Company has relied primarily upon cash flow from
operations and advances drawn against factored receivables to finance its
operations and expansion. At December 31, 1998, working capital was $4,994,000
compared to $5,187,272 at December 31, 1997, a decrease of $193,272. This
decrease as primarily attributable to the Company's net loss for the year ended
December 31, 1998.
Due from factor represents the amount receivable by the Company for
factored receivables less the amount of outstanding advances made by the factor
to the Company under the factoring agreement. At December 31, 1998 Due from
Factor was $1,887,245 as compared to $1,656,283 at December 31, 1997. The
Company's inventory decreased by 21.3% to $3,026,241 at December 31, 1998 from
$3,847,556 at December 31, 1997.
34
<PAGE>
HISTORICAL AND PRO FORMA COMPARATIVE PER SHARE DATA OF
THE COMPANY AND EVERLAST (UNAUDITED)
The following tables present comparative per share information for
the Company and Everlast on a historical basis and on a pro forma basis assuming
that the acquisition had occurred at January 1, 1999 and 2000 for cash dividends
and earnings per common share--diluted and as of June 30, 2000 for book value
per common share.
The pro forma information was prepared using the purchase method of
accounting. The pro forma information presented reflects the results of pro
forma adjustments that are based on preliminary estimates of fair market value
and certain assumptions that the Company believes are reasonable under
circumstances. The actual allocation of the consideration paid by the Company
for Everlast may differ from that reflected in this pro forma information after
a more extensive review of the fair market values of the assets acquired and
liabilities assumed has been completed. The unaudited pro forma information does
not purport to present the financial position or results of operations of the
Company had the transactions and events assumed therein occurred on the dates
specified, nor is it necessarily indicative of the results of operations that
may be achieved in the future. The unaudited pro forma information does not give
effect to any operating efficiencies or cost savings that may be realized as a
result of the merger, primarily related to reduction of duplicative operating,
general and administrative expenses.
The tables should be read in conjunction with the Company's
financial statements and notes incorporated by reference in this Proxy Statement
and the financial statements and notes of Everlast included elsewhere in this
Proxy Statement.
ACTIVE APPAREL GROUP, INC. HISTORICAL PRO FORMA
June 30, June 30,
2000 2000
Book value per common share $ 2.86 $ 3.16
Dividends per common share 0 0
Earnings per common share--diluted $ 0.32 $ 0.07
EVERLAST WORLD'S BOXING
HEADQUARTERS CORP. HISTORICAL(1) PRO FORMA
June 30, June 30,
2000 2000
Book value per common share $ 772,674 $ 3.16
Dividends per common share 0 0
Earnings per common share--diluted $ 43,949 $ 0.07
(1) Based on 31 shares of common stock of Everlast World's Boxing
Headquarters outstanding as of June 30, 2000.
35
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
the beneficial ownership of the Company's Common Stock and Class A Common Stock
as of Record Date for (i) each of the Company's directors, (ii) each of the
Company's executive officers, (iii) each stockholder known to be the beneficial
owner of more than five percent of any class of the Company's voting securities,
and (iv) all directors and executive officers as a group:
<TABLE>
<CAPTION>
Beneficial Ownership Common and Class A Common Stock (1)
----------------------------------------------------------------
Name and Address of Beneficial Percentage of Outstanding
Owner Number (2) Stock
------------------------------ ------------------------------ -------------------------
<S> <C> <C>
George Q Horowitz 624,795(3) 23.7%
c/o Active Apparel Group, Inc.
1350 Broadway, Suite 2300
New York, NY 10018
James K. Anderson 104,662(4) 4.0%
4903 163rd Ave., N.E.
Redmond, WA 98052
Rita Cinque Kriss 106,033(5) 4.0%
c/o Active Apparel Group, Inc.
1350 Broadway, Suite 2300
New York, NY 10018
Larry Kring 29,522(6) 1.1%
3265 126th Ave., N.E.
Bellevue, WA 98005
Edward R. Epstein 8,867(7) *
915 Middle River Drive
Suite 419
Fort Lauderdale, FL 33304
Angelo Giusti 6,200(8) *
19 Deer Path
Holmdel, NJ 07733
All directors and executive officers 880,079 (3) (4) 32.3%
as a group (6 persons) (5) (6) (7) (8)
</TABLE>
-------------------
(1) Under rules adopted by the Securities and Exchange Commission, a person is
deemed to be a beneficial owner of securities with respect to which such person
has or shares: (i) voting power, which includes the power to vote or direct the
vote of the security, or (ii) investment power, which includes the power to
dispose of or to direct the disposition of the security. Unless otherwise
indicated below, the
36
<PAGE>
persons named in the table above have sole voting and investment power with
respect to all shares beneficially owned.
(2) As of September 20, 2000, there were outstanding 2,492,581 shares of Common
Stock and 100,000 shares of Class A Common Stock. The Class A Common Stock,
while held by George Horowitz, as they currently are, entitle George Horowitz to
five (5) votes for each share held. Thus, while there are 2,592,581 total shares
outstanding (not including any unexercised options) this represents 2,992,581
votes.
(3) Consists of (i) 478,128 shares of Common Stock (500 of which are owned by
minor children) (ii) 100,000 shares of super-voting Class A Common Stock and
(iii) 46,667 shares of Common Stock issuable upon exercise of options
exercisable currently or within 60 days, including (A) options to purchase
15,000 shares granted by the Company at the exercise price of $2.23 per share,
which expire on November 3, 2005, (B) options to purchase 25,000 shares at an
exercise price $2.23 per share, which expire on November 7, 2006, and (C)
options to purchase 6,667 shares at an exercise price of $3.97 per share, which
expire March 22, 2009.
(4) Consists of (i) 84,300 shares of Common Stock of which Mr. Anderson owns
44,300 shares of Common Stock with his wife, as joint tenants, and (ii) 20,362
shares of Common Stock issuable upon exercise of options exercisable currently
or within 60 days, including
(A) 839 shares @ $ 1.75 expires December 31, 2004
(B) 839 shares @ $ 3.00 expires December 31, 2004
(C) 839 shares @ $ 5.00 expires December 31, 2004
(D) 839 shares @ $ 6.25 expires December 31, 2004
(E) 4,706 shares @ $ 0.85 expires December 31, 2003
(F) 3,200 shares @ $ 2.23 expires November 3, 2002
(G) 3,200 shares @ $ 2.23 expires January 2, 2003
(H) 3,100 shares @ $ 2.23 expires January 3, 2004
(I) 1,733 shares @ $ 3.59 expires January 2, 2005
(J) 1,067 shares @ $ 9.38 expires January 3, 2006
(5) Consists of (i) 77,200 shares of Common Stock and (ii) 28,833 shares of
Common Stock issuable upon exercise of options exercisable currently or within
60 days including (A) options to purchase 10,500 shares of Common Stock at an
exercise price of $2.23 per share, which expire on November 3, 2005 and (B)
15,000 shares of Common Stock at an exercise price of $2.23 per share, which
expire on December 13, 2006 and (C) 3,333 shares of Common Stock, at an exercise
price of $3.97 per share which expire March 22, 2009.
(6) Consists of (i) 10,338 shares of Common Stock and (ii) 19,184 shares of
Common Stock issuable upon the exercise of options currently exercisable or
within 60 days, including
(A) 839 shares @ $ 1.75 expires December 31, 2004
(B) 839 shares @ $ 3.00 expires December 31, 2004
(C) 839 shares @ $ 5.00 expires December 31, 2004
(D) 839 shares @ $ 6.25 expires December 31, 2004
(E) 3,762 shares @ $ 0.85 expires December 31, 2003
(F) 3,100 shares @ $ 2.23 expires November 3, 2002
(G) 3,100 shares @ $ 2.23 expires January 2, 2003
(H) 3,100 shares @ $ 2.23 expires January 3, 2004
(I) 1,733 shares @ $ 3.59 expires January 2, 2005
(J) 1,033 shares @ $ 9.38 expires January 3, 2006
37
<PAGE>
(7) Consists of 8,867 shares of Common Stock issuable upon exercise of options
exercisable currently or within 60 days, including (A) options to purchase 3,000
shares of Common Stock at an exercise price of $2.23 per share, which expire on
January 2, 2003 and (B) options to purchase 3,000 shares of Common Stock at an
exercise price of $2.23 per share, which expire on January 3, 2004, (C) 1,800
shares of Common Stock at an exercise price of $3.59 which expire January 2,
2005, (D) 1,067 shares at an exercise price of $9.38 which expire January 3,
2006.
(8) Consists of (i) 700 shares of Common Stock and (ii) 5,500 shares of Common
Stock issuable upon exercise of options exercisable currently or within 60 days,
including (A) options to purchase 3,000 shares of Common Stock at an exercise
price of $2.23 per share, which expire on January 3, 2004 and (B) options to
purchase 1,667 shares of Common Stock at an exercise price of $2.094 per share,
which expire on June 6, 2008, (C) 833 shares of Common Stock at an exercise
price of $3.97 which expire March 22, 2009.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain
information concerning total annual compensation paid to George Horowitz, the
Company's President, Chief Executive Officer and Treasurer, Rita Cinque Kriss,
the Company's Executive Vice President and Secretary and Angelo Giusti, Vice
President of Operations (the "Named Executive Officers"), for services rendered
in all capacities by them to the Company during fiscal years 1999, 1998 and,
1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
Underling
Securities
Other Annual All Other Compensation
Name and Principal Positions(1) Year Salary ($) Bonus ($) Compensation ($) Compensation ($) Options(11) (#)
------------------------------- ---- ---------- --------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
George Horowitz (President;
Chief Executive Officer;
Treasurer) 1999 277,697 21,000 21,068(3) 983(6) 40,000
1998 265,000 12,000 19,534(4) 853(6) 0
1997 265,000 18,000 17,257(5) 595(6) 0
Rita Cinque Kriss (Executive
Vice President; Secretary) 1999 128,462 18,265 12,048(7) 0 25,500
1998 140,000 0 20,308(8) 0 0
1997 140,000 12,000(2) 9,565(9) 0 0
Angelo Giusti (Vice President of
Operations & Director) 1999 121,846 3,000 0 0 3,000
1998 110,000 0 0 0 0
1997 63,139(10) 0 0 0 0
</TABLE>
38
<PAGE>
----------------
(1) Other than George Horowitz , Rita Cinque Kriss and Angelo Giusti, no Named
Executive Officer of the Company was paid more than $100,000 in total salary and
bonus for fiscal year 1999, and accordingly, no other Named Executive Officers
are included in the table above.
(2) The Company has agreed to pay the amount of tax owed on the bonus payment
noted in the column above.
(3) Consists of an aggregate of $21,068 paid to or on behalf of Mr. Horowitz by
the Company in fiscal year 1999 in connection with automobile lease installment
payments ($15,242), related insurance premiums ($1,422) and parking expenses
($4,404).
(4) Consists of an aggregate of $19,534 paid to or on behalf of Mr. Horowitz by
the Company in fiscal year 1998 in connection with automobile lease installment
payments ($13,659), related insurance premiums ($1,088) and parking expenses
($4,787).
(5) Consists of an aggregate of $17,257 paid to or on behalf of Mr. Horowitz by
the Company in fiscal year 1997 in connection with automobile lease installment
payments ($13,660), related insurance premiums ($1,088) and parking expenses
($2,509).
(6) Represents premiums paid by the Company in fiscal year 1999, 1998 and 1997
on term life Insurance policies for the benefit of Mr. Horowitz.
(7) Consists of an aggregate of $12,048 paid to or on behalf of Ms. Cinque Kriss
by the Company in fiscal year 1999 in connection with automobile lease
installment payments ($9,558), and related insurance premiums ($2,490).
(8) Consists of an aggregate of $12,732 paid to or on behalf of Ms. Cinque Kriss
by the Company in fiscal year 1998 in connection with automobile lease
installment payments ($8,019), related insurance premiums ($3,806) and parking
expenses ($907), and $7,576 for income taxes on 1997 bonus.
(9) Consists of an aggregate of $9,565 paid to or on behalf of Ms. Cinque Kriss
by the Company in fiscal year 1997 in connection with automobile lease
installment payments ($5,601), related insurance premiums ($1,846) and parking
expenses ($2,118).
(10) Mr. Giusti has been an employee of the Company since June 1997.
(11) See report on repricing of options section for details of repriced options.
Long-Term Incentive and Pension Plans
The Company currently has no long-term incentive or defined pension
plans. The Company offers all employees a 401(k) savings plan that allows the
employee to voluntarily defer a certain portion of their income before taxes.
The Company pays all the administrative fees for the plan.
39
<PAGE>
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options Granted Exercise Or Options
Underlying To Employees in Base Price Expiration
Name Options Granted Fiscal Year ($/Sh) Date
<S> <C> <C> <C> <C>
George Horowitz 20,000 18.5% $3.97 3/22/09
20,000 18.5% $2.23 12/31/09
Rita Cinque Kriss 10,000 9.3% $3.97 3/22/09
10,000 9.3% $2.23 12/31/09
Angelo Giusti 2,500 2.3% $3.97 3/22/09
2,500 2.3% $2.23 12/31/09
</TABLE>
There were no other option grants to Named Executive Officers during
the year ended December 31, 1999.
Aggregated Option Exercises and Year-End Option Values Table
No stock options were exercised by the Named Executive Officers
during the year ended December 31, 1999. The following sets forth certain
information regarding unexercised options held by each of the Named Executive
Officers at December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities Underlying
Unexercised Options Held at
December 31, 1999 Value of Unexercised In-The-Money
(# of options) Options at December 31, 1999(1)
------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
George Horowitz 46,667 33,333 $0 $0
Rita Cinque Kriss 28,833 16,667 $0 $0
Angelo Giusti 5,500 5,000 $193(2) $97
</TABLE>
-------------------
(1) Represents the total realized if all the in-the-money options held at
December 31, 1999 were exercised, determined by multiplying the number of shares
underlying the options by the difference between the per share option exercise
price and the closing sale price of Common Stock of $ 2.21 per share as reported
on the Nasdaq SmallCap Market for December 31, 1999. An option is in-the-money
if the fair market value of the underlying shares exceeds the exercise price of
the option.
(2) Includes options which are exercisable within 60 days hereof at an exercise
price of $2.094.
Employment Contracts
George Q Horowitz. The Company and George Horowitz are parties to an
employment agreement, dated as of January 1, 2000 (the "Horowitz Employment
Agreement") pursuant to which
40
<PAGE>
Mr. Horowitz will serve as the President and Chief Executive Officer of the
Company through December 31, 2005 (the "Term"). Mr. Horowitz's annual salary
shall initially be $320,000 (the "Base Salary") and shall be considered for
increase by the Board.
In addition to the Base Salary, Mr. Horowitz is entitled to an
annual cash bonus (the "Cash Bonus") based upon certain "net sales" and "before
tax profits" targets. Mr. Horowitz is also entitled to receive under the
Horowitz Employment Agreement a monthly automobile allowance, reimbursement for
parking expenses, health and medical insurance, and participation in any
retirement, life and disability insurance, dental insurance and any bonus,
incentive or profit-sharing plans which the Company makes available from time to
time to its executives. The Company has also agreed to include Mr. Horowitz as a
named insured in any director or officer liability insurance policy the Company
maintains on the same basis as is made available to the directors and other
executive officers of the Company. The Horowitz Employment Agreement generally
restricts Mr. Horowitz from disclosing certain confidential information during
the Term and for a period of one year following the Term, and further restricts
Mr. Horowitz from competing with the Company for a period of one year following
the Term. The Horowitz Employment Agreement may be terminated by Mr. Horowitz
for "good reason" or the Company "for cause". If the Horowitz Employment
Agreement is terminated by the Company "for cause" or in the event of the
resignation by Mr. Horowitz without "good reason," the obligations of the
Company under the Horowitz Employment Agreement will terminate (except with
respect to certain indemnification provisions). In the event of termination of
the Horowitz Employment Agreement by reason of Mr. Horowitz's death, his estate
is entitled to receive the pro rata amount of the Cash Bonus as of the time of
his death at the end of the same fiscal ear. If Mr. Horowitz's employment is
terminated due to a Change of Control (as defined in the Horowitz Employment
Agreement), he will be entitled to a lump sum payment of 2.99 times the sum of
the Base Salary, Cash Bonus and benefits, and payment for expenses incurred as a
result of such termination and any deferred compensation, including but not
limited to deferred bonuses allocated or credited to Mr. Horowitz as of the date
of his termination.
Upon the Closing of the Merger, the Horowitz Employment Agreement
may not be amended or otherwise modified without the consent of a majority in
interest of the Redeemable Preferred Stock. The Company and Mr. Horowitz also
agreed that the Company's Board will not, so long as any shares of Redeemable
Preferred Stock remain outstanding, without the consent of both of the directors
elected by of the holders of the Redeemable Preferred Stock, increase the salary
of Mr. Horowitz on an annual basis, greater than the either (i) 10% or (ii)
twice the Cost of Living Allowance (as defined herein), whichever is less. The
Cost of Living Allowance shall be equal to the percentage by which the Consumers
Price Index for Urban Wage Borrowers and Clerical Workers: New York, N.Y. -
Northeastern New Jersey (1982-84 equals 100), as published by the Bureau of
Labor Statistics of the United States Department of Labor, shall have increased
over the preceding year. If publication of the Consumer Price Index is
discontinued, comparable statistics on the cost of living for the New York, N.Y.
- Northeastern New Jersey area as computed and published by an agency of the
United States or by a responsible financial periodical of recognized authority
to be selected by the parties shall be used.
Rita Cinque Kriss. The Company and Rita Cinque Kriss are parties to
an employment agreement, dated as of August 1, 1994, pursuant to which Ms.
Cinque Kriss serves as Executive Vice President of the Company, for which Ms.
Cinque Kriss was paid an annual base salary of $70,000 from August 1, 1994
through December 31, 1994, $90,000 from January 1, 1995 through June 30, 1995,
$105,000 from July 1, 1995 through December 31, 1995, $125,000 from January 1,
1996 through December 31, 1996, and is paid an annual base salary of $140,000
commencing January 1, 1997 and continuing thereafter through the Term (as
defined below) of the agreement, unless increased by the Board on an annual
basis during the Term. The initial term of such agreement expired on July 31,
1997 but was and will continue to be renewed for additional one-year periods
unless either Ms. Cinque Kriss or the Company gives the other ninety days' prior
written notice of non-renewal (as and if so extended, the "Term"). At the
discretion of
41
<PAGE>
the Board, the Company may also pay Ms. Cinque Kriss a cash bonus on or before
December 31 of any year during the Term. In addition to such base salary and
contingent cash bonuses, Ms. Cinque Kriss is entitled to receive an automobile
allowance of $9,000 annually, reimbursement for parking expenses up to $4,800
annually, health and medical insurance, and is also entitled to participate in
any retirement, life and disability insurance, dental insurance and any bonus,
incentive or profit-sharing plans which the Company makes available from time to
time to its executives. Ms. Cinque Kriss is also entitled to receive
reimbursement for all reasonable out-of-pocket expenses that she incurs relating
to her services under such agreement. The Company is the beneficiary of a
"key-executive" life insurance policy on Rita Cinque Kriss in the amounts of
$1,000,000.
Report on Repricing of Options
On December 31, 1999, the Company's Board approved the cancellation
and replacement grant with a new exercise price of previously granted options
under the 1993 Employee Stock Option Plan and the 1995 Non-Employee Directors
Option Plan (collectively referred to as the "Option Plans") to its directors as
follows:
Director No. of Option Shares Original Option Exercise Price
George Horowitz 15,000 $11.75
25,000 $14.25
James Anderson 3,200 $11.75
3,200 $12.50
3,100 $14.25
Rita Cinque-Kriss 10,500 $11.75
15,000 $14.75
Larry Kring 3,100 $11.75
3,100 $12.50
3,100 $14.75
Edward Epstein 3,000 $12.50
3,000 $14.75
Angelo Giusti 3,000 $12.50
3,000 $14.75
The Board determined that the original option exercise prices shown
above were significantly in excess of the then current market price of the
Common Stock, and was not fulfilling its designated purpose under their
respective Option Plans of providing the various directors incentive to remain
in the employ and service of the Company and to stimulate their efforts on
behalf of the Company. Accordingly, to restore the purpose for which the options
were granted, the exercise price of the options was reduced to $2.23, the
average of the high and low trading price of the Common Stock as quoted on the
Nasdaq SmallCap Market on December 30, 1999. All replacement options are
immediately exercisable and terminate based on their respective original
termination date. This action was taken to help restore the incentive value of
the options.
SHAREHOLDERS PROPOSALS
In order to be eligible for inclusion in the Company's proxy
materials for the next year's annual meeting of shareholders, any shareholder
proposal (other than the submission of nominees for directors) must be received
by the Company at its principal offices not later than the close of business on
January 9, 2001. Management of the Company is allowed to use its discretionary
proxy voting authority in connection with any shareholder proposal received by
the Company after March 24, 2001 intended for presentation from the floor of the
next annual meeting of shareholders.
INDEPENDENT PUBLIC ACCOUNTANTS
A representative of Berenson & Co., which served as the Company's
independent public accountants for the current fiscal year and the fiscal year
ended December 31, 1999, is expected to be present at the Meeting and, if he so
desires, will have the opportunity to make a statement, and in any event will be
available to respond to appropriate questions.
OTHER MATTERS
The Board does not intend to present and has not been informed that
any other person intends to present any matters for action at the Meeting other
than those specifically referred to in this proxy statement. If any other
matters properly come before the Meeting, the holders of the proxies will not be
able to act in respect thereof.
September __, 2000
By Order of the Board of Directors
/s/ George Q Horowitz
--------------------------------------
George Q Horowitz
Chairman of the Board
Chief Executive Officer & President
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
ACTIVE APPAREL GROUP, INC.
Report of Independent Auditors........................................F-4
Balance Sheets as of December 31, 1999 and December 31, 1998..........F-5
Statements of Operations for Fiscal Years Ended
December 31, 1999 and December 31, 1998....................F-6
Statements of Changes in Stockholders' Equity for Fiscal Years
Ended December 31, 1999 and December 31, 1998..............F-7
Statements of Cash Flows for Fiscal Years Ended December 31, 1999
And December 31, 1998......................................F-8
Notes to Financial Statements for Fiscal Years Ended
December 31, 1999 and December 31, 1998....................F-9
Balance Sheets as of June 30, 2000 and December 31, 1999..............F-18
Statements of Income for Six Months Ended June 30, 2000 and 1999
and Three Months Ended June 30, 2000 and 1999.............F-19
Statements of Changes in Stockholders' Equity for Six Months Ended
June 30, 2000 and June 30, 1999............................F-20
Statements of Cash Flows for Six Months Ended
June 30, 2000 and June 30, 1999............................F-21
Notes to Financial Statements for Six Months Ended
June 30, 2000 and June 30, 1999............................F-22
EVERLAST WORLD'S BOXING HEADQUARTERS CORP.
Report of Independent Auditors........................................F-24
Consolidated Balance Sheet for Fiscal Year Ended
December 31, 1998 and December 31, 1997...................F-25
Consolidated Statements of Income and Retained Earnings for
Fiscal Years Ended December 31, 1998
and December 31, 1997.....................................F-27
Consolidated Statement of Cash Flows for Fiscal Years Ended
December 31, 1998 and December 31, 1997....................F-28
Notes to Consolidated Financial Statements for
Fiscal Year Ended December 31, 1998........................F-29
F-1
<PAGE>
Report of Independent Auditors........................................F-35
Consolidated Balance Sheet for Fiscal Year Ended
December 31, 1999 and December 31, 1998....................F-36
Consolidated Statements of Income and Retained Earnings for
Fiscal Years Ended December 31, 1999 and
December 31, 1998.........................................F-38
Consolidated Statement of Cash Flows for Fiscal Years Ended
December 31, 1999 and December 31, 1998....................F-39
Notes to Consolidated Financial Statements for
Fiscal Year Ended December 31, 1999........................F-40
Report of Independent Auditors........................................F-46
Unaudited Consolidated Balance Sheet for Six Months Ended
June 30, 2000 and June 30, 1999............................F-47
Unaudited Consolidated Statements of Income and Retained Earnings
For Six Months Ended June 30, 2000 and
Three Months Ended June 30, 2000 and
June 30, 1999.............................................F-49
Pro Forma Consolidated Financial Statements...........................F-51
F-2
<PAGE>
ACTIVE APPAREL GROUP, INC.
TABLE OF CONTENTS
Page
----
Independent Auditors' Report 1f
Balance Sheet 2f
Statements of Operations 3f
Statements of Changes in Stockholders' Equity 4f
Statements of Cash Flows 5f
Notes to Financial Statements 6f-14f
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Active Apparel Group, Inc.
New York, NY
We have audited the accompanying balance sheet of Active Apparel Group, Inc. as
of December 31, 1999, and the related statements of operations, changes in
stockholders' equity, and cash flows for the years ended December 31, 1999 and
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Active Apparel Group, Inc. as
of December 31, 1999 and the results of its operations and its cash flows for
the years ended December 31, 1999 and 1998 in conformity with generally accepted
accounting principles.
/S/ Berenson & Co. LLP
New York, NY
January 21, 2000
F-4
<PAGE>
Page 2f
ACTIVE APPAREL GROUP, INC.
BALANCE SHEET
DECEMBER 31, 1999
A S S E T S
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash and cash equivalents $ 239,096 $ 192,870
Refundable Income Taxes 0 284,478
Due from factor 1,549,047 1,887,245
Inventory 5,240,152 3,026,241
Prepaid expenses and other current assets 379,840 354,822
Deferred tax asset 155,399 106,130
------------ ----------
Total current assets 7,563,534 5,851,786
Note receivable, officer 91,200 120,000
Property and equipment, net 419,954 360,233
Security deposits and other assets 199,510 270,343
------------ ----------
$8,274,198 $6,602,362
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,479,081 822,119
Accrued expenses and other current liabilities 234,389 35,667
------------ ----------
Total liabilities, all current 1,713,470 857,786
------------ ----------
Commitments
Stockholders' equity:
Common stock, par value $.002; 10,000,000 shares authorized;
2,666,581 issued; 2,492,581 outstanding 5,333 5,333
Class A common stock, par value $.01; 100,000 shares
authorized; 100,000 shares issued and outstanding 1,000 1,000
Paid-in capital 6,136,341 6,136,341
Retained earnings 1,145,273 329,121
----------- ----------
7,287,947 6,471,795
Less treasury stock, at cost (174,000 common shares) 727,219 727,219
------------ ----------
6,560,728 5,744,576
------------
$8,274,198 $6,602,362
============ ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
Page 3f
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended
December 31,
1 9 9 9 1 9 9 8
---------------- ----------------
<S> <C> <C>
Net sales $24,464,139 $15,011,926
Cost of goods sold 14,578,376 9,483,591
------------ -------------
Gross profit 9,885,763 5,528,335
------------- -------------
Operating expenses:
Selling and shipping 5,871,751 3,637,729
General and administrative 2,024,539 1,911,621
Financial expenses 557,627 413,713
-------------- --------------
8,453,917 5,963,063
------------- -------------
Income (loss) before provision
for (recovery of) income taxes 1,431,846 (434,728)
Provision for (recovery of) income taxes 615,694 (194,093)
-------------- --------------
Net income (loss) $ 816,152 $ (240,635)
============= =============
Basic earnings per share $.31 $(.09)
==== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
Page 4f
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Class A
Common stock common stock
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 2,469,375 $5,283 100,000 $1,000
Stock options exercised 24,706 50 - -
Purchase of treasury stock (1,500) - - -
Net loss, year ended December 31, 1998 - - - -
--------------- ---------- ----------- ----------
Balance, December 31, 1998 2,492,581 5,333 100,000 1,000
Net income, year ended December 31, 1999 - - - -
---------------- ---------- ------------ ----------
Balance, December 31, 1999 2,492,581 $5,333 100,000 $1,000
========= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Paid-in Retained Treasury stock
capital earnings Shares Amount Total
------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
$6,124,891 $ 569,756 172,500 $(725,625) $5,975,305
11,450 - - - 11,500
- - 1,500 (1,594) (1,594)
- (240,635) - - (240,635)
---------------- ----------- ----------- -------------- ------------
6,136,341 329,121 174,000 (727,219) 5,744,576
- 816,152 - - 816,152
---------------- ------------ ------------ --------------- ------------
$6,136,341 $1,145,273 174,000 $(727,219) $6,560,728
========== ========== ======= ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
Page 5f
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
December 31,
-------------------------------
1 9 9 9 1 9 9 8
-------------- --------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 816,152 $ (240,635)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Bad debts 55,000 -
Depreciation 145,619 125,873
Deferred tax benefit (49,269) (18,077)
Changes in assets (increase) decrease:
Refundable income taxes 284,478 (130,978)
Due from factor 338,198 (230,962)
Inventory (2,213,911) 821,315
Prepaid expenses and other current assets (80,018) (3,849)
Security deposits and other assets 70,833 (9,002)
Changes in liabilities increase (decrease):
Accounts payable and accrued expenses and
other current liabilities 855,684 (110,748)
------------ ------------
Net cash provided by operating activities 222,766 202,937
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (205,340) (79,414)
Note receivable, officer 28,800 -
------------- -----------------
Net cash used by investing activities (176,540) (79,414)
------------ -------------
Cash flows from financing activities:
Purchase of treasury stock - (1,594)
Proceeds from stock options exercised - 11,500
------------------ -------------
Net cash provided by financing activities - 9,906
------------------ --------------
Net increase in cash and cash equivalents 46,226 133,429
Cash and cash equivalents, beginning of year 192,870 59,441
------------ -------------
Cash and cash equivalents, end of year $ 239,096 $ 192,870
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 279,804 $ 120,950
Income taxes 433,959 88,584
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE>
Page 6f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. Nature of business:
Active Apparel Group, Inc. (the "Company") is a distributor of licensed
women's and men's activewear, sportswear, and swimwear, throughout the
United States and Canada.
2. Significant accounting policies:
a. Inventory:
Inventory, consisting solely of finished goods, is stated at the lower
of cost (first-in, first-out basis) or market.
b. Property and equipment:
Property and equipment are stated at cost. Depreciation is computed by
the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the terms of the
respective leases or estimated life of the assets, whichever is
shorter. Expenditures for maintenance and repairs are charged to
operations as incurred.
c. Cash and cash equivalents:
The Company maintains its cash and cash equivalents accounts at
various commercial banks. The cash balances are insured by the Federal
Deposit Insurance Corporation (FDIC) up to $100,000, at each bank.
For purposes of the statements of cash flows, the Company considers
all short-term investments with an original maturity of three months
or less to be cash equivalents.
d. Fair value of financial instruments:
i. Cash and cash equivalents:
The carrying amount reflected in the balance sheet for cash and
cash equivalents, none of which are held for trading purposes,
approximates fair value due to the short maturity of these
instruments.
ii. Due from factor and accounts payable:
The carrying amounts of due from factor and accounts payable
approximate its fair values because of the short maturities of
these instruments.
F-9
<PAGE>
Page 7f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
2. Significant accounting policies: (Continued)
e. Advertising expense:
The Company expenses advertising costs as they are incurred.
As of December 31, 1999 and 1998, the Company had incurred advertising
and promotional expenses of $794,259 and $657,505, respectively.
f. 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 year. Actual results could differ
from those estimates.
g. Accounting for stock based compensation:
The Company applies APB Opinion 25 to account for employee stock
option plans (note 8). Accordingly, no compensation cost has been
recognized in 1999 and 1998. Had compensation cost been determined on
the basis of FASB Statement 123, net income (loss) and earnings per
share would have been reduced as follows:
1 9 9 9 1 9 9 8
----------- ------------
Net income (loss):
As reported $816,152 $(240,635)
======== =========
Pro forma $758,392 $(297,068)
======== =========
Basic earnings per share:
As reported $.31 $(.09)
==== =====
Pro forma $.29 $(.12)
==== =====
F-10
<PAGE>
Page 8f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
2. Significant accounting policies: (Continued)
g. Accounting for stock based compensation: (Continued)
The fair value of compensation was computed using an option-pricing
model which took into account the following factors as of the grant
date:
o the exercise price and expected life of the option
o the current price of the stock and its expected volatility o
expected dividends, if any
o the risk-free interest rate for the expected term of the option
using Treasury Note rates with a remaining term equal to the
expected life of the options
3. Due from factor:
Substantially all of the Company's accounts receivable are assigned
without recourse to a commercial factor. The amount due from the factor
represents net sales assigned in excess of advances received. The amount
due from the factor is net of a provision for future chargebacks of
$62,317 at December 31, 1999. Interest is charged at 1% above prime on
advances. This factoring arrangement is collateralized by the Company's
accounts receivable.
4. Property and equipment:
Furniture and fixtures $178,104
Machinery and equipment 666,122
Leasehold improvements 69,030
---------
913,256
Less accumulated depreciation and amortization 493,302
---------
$419,954
=========
5. Note receivable, officer:
The Company had a promissory note dated December 23, 1996 with the
President and Chief Executive Officer in the amount of $120,000 that was
due July 31, 2000. At December 31, 1999, this note was refinanced at its
outstanding balance of $91,200 with the term extended through July 31,
2009. The unpaid principal bears interest at prime plus 1-1/2%.
F-11
<PAGE>
Page 9f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
6. Commitments:
a. License agreements:
Revenues are generated principally from the sale of licensed
merchandise. The Company is the licensee on seven agreements which
provide for certain royalty payments and charges. Pursuant to five of
the agreements (with the same licensor), the Company is required to
pay a royalty of 6% of net sales, on licensed merchandise sold in the
U.S. and Canada, and to spend 2 1/2% of annual net sales on
advertising. The original two agreements with this licensor expired
December 31, 1996. Effective January 1, 1997, the agreements were
amended to reflect a new expiration date of December 31, 2002 with two
five year renewal options, subject to minimum sales requirements,
available to the Company. Effective January 1, 1999, the Company
entered into two new agreements with this licensor covering the period
January 1, 1999 to December 31, 2001 with two five-year renewal
options, subject to minimum sales requirements, available to the
Company. The agreements provide for minimum guaranteed payments
annually. Future minimum guaranteed payments are approximately as
follows:
<TABLE>
<CAPTION>
United States Canada
Royalty Advertising Royalty Advertising
Twelve months ending
<S> <C> <C> <C> <C> <C>
December 31, 2000 $ 980,000 $408,000 $228,000 $ 95,000
2001 1,149,000 479,000 291,000 121,000
2002 779,000 325,000 154,000 64,000
</TABLE>
The amounts for Canada are presented in U.S. dollars assuming an
exchange rate of $.69.
The Company is required to maintain a standby letter of credit equal
to the annual minimum royalties due per the licensing agreements or a
cash deposit in varying amounts. At December 31, 1999, the Company
maintained deposits of $135,000 for the US agreements and CN$40,000
for the Canadian agreements.
The sixth and seventh license agreements expired on March 31, 1999 and
June 30, 1999, respectively. The Company did not renew these
agreements.
Royalty expense for the years ended December 31, 1999 and 1998 was
approximately $1,309,000 and $809,000, respectively.
F-12
<PAGE>
Page 10f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
6. Commitments: (Continued)
b. Lease commitments:
The Company has three leases for office and showroom space, one of
which will expire April 30, 2000 and the other two will expire on
April 30, 2005.
At December 31, 1999, future minimum rental payments required under
the noncancelable leases are approximately as follows:
Twelve months ending December 31, 2000 $215,000
2001 225,000
2002 229,000
2003 243,000
2004 243,000
Thereafter 81,000
Rent expense for the years ended December 31, 1999 and 1998 was
approximately $206,000 and $197,000, respectively.
c. Employment agreements:
i. The Company has an employment agreement with its President and
Chief Executive Officer at an annual base salary of $265,000
through the term (as defined) of the agreement. The initial term
of the agreement expires on July 31, 2000 but continues
thereafter for additional one-year periods unless either the
President and Chief Executive Officer of the Company or the Board
of Directors gives the other ninety days prior written notice of
nonrenewal. At the discretion of the Board of Directors, the
Company may pay the President and Chief Executive Officer a bonus
on or before December 31, of any year during the term.
Effective January 1, 2000, the Board of Directors increased the
annual base salary of the President and Chief Executive Officer
to $320,000.
The agreement also includes a noncompete clause for a period of
one year following its expiration or termination.
F-13
<PAGE>
Page 11f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
6. Commitments: (Continued)
c. Employment agreements: (Continued)
ii. The Company has an employment agreement with a Director of the
Company, whereby the Company has agreed to employ her as the
Executive Vice-President at an annual compensation of $140,000.
The agreement with the Executive Vice-President has restrictive
covenants similar to those of the President and Chief Executive
Officer.
7. Class A common stock:
The holder of the Class A common stock is entitled to five votes on all
matters upon which each holder of common stock is entitled to vote. After
the effective date of the initial public offering, the Board of Directors
issued 100,000 shares of the Class A common stock exclusively to the
President and Chief Executive Officer in order to permit him to maintain
approximately the same voting power after the initial public offering as
held prior to the offering. In exchange for the shares of Class A common
stock issued to him, he surrendered 112,500 shares of common stock.
8. Stock options:
The Company has three stock option plans; the stock option plan, the 1993
stock option plan and the 1995 non-employee director stock option plan.
Pursuant to the stock option plan, grants were awarded in 1993 to four
individuals for services performed regarding the private offering of
preferred stock. These options are exercisable at $.375 for a term of five
years through September 30, 1998. All unexercised options were cancelled
in 1998. Under the 1993 stock option plan, a maximum of 443,900 shares may
be granted by the Company.
The option price of shares designated as nonqualified shall be determined
by the Board of Directors each year for the following year at 85% of fair
market value and in the case of incentive stock options will be no less
than the fair market value of the shares on the date of the grant.
F-14
<PAGE>
Page 12f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
8. Stock options (Continued):
The 1995 non-employee director stock option plan provides for automatic
grants of options to purchase 3,000 shares and thereafter yearly grants to
purchase 3,000 shares of common stock to each active director serving on
the Board at the time of the grant who is not an officer or employee of
the Company. The Director Plan provides additional grants of options to
non-employee directors of 100 shares to the Chairman of a committee and
200 shares to the Chairman and Secretary of the Board of Directors.
Effective December 31, 1999, the Company granted 93,300 options pursuant
to the 1993 stock option plan and the 1995 non-employee director stock
plan to certain key employees and directors. The options were granted in
exchange for the employees and directors cancellation of the same number
of previously granted options which had a higher exercise price. The
options granted have an effective exercise price of $2.23.
The exercise price for options granted is the fair market value of the
shares of common stock on the date of the grant. The term of each option
is seven years from the date of the grant.
<TABLE>
<CAPTION>
S H A R E S
1993 1995
Stock stock non-employee
option option director stock Option exercise
1 9 9 9 plan plan option plan Total prices
------------------- -------- ---------- ---------------- --------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, - 195,979 35,700 231,679 $ .85 - $14.75
Granted - 176,000 46,800 222,800 $2.23 - $ 9.38
Cancelled - 86,300 27,800 114,100 $2.09 - $14.75
Exercised - - - - -
------------------ -----------
Outstanding at December 31, - 285,679 54,700 340,379 $ .85 - $ 9.38
====== ======= ====== =======
Exercisable at December 31, - 166,976 24,566 191,542 $ .85 - $ 6.25
====== ======= ====== =======
</TABLE>
F-15
<PAGE>
Page 13f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
8. Stock options: (Continued)
<TABLE>
<CAPTION>
S H A R E S
------------------------------------------------------------------------------
1993 1995
Stock stock non-employee
option option director stock Option exercise
1 9 9 8 plan plan option plan Total prices
------------------- -------- ---------- --------------- --------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1 48,700 243,187 27,800 319,687 $ .38 - $14.75
Granted - 16,000 7,900 23,900 $ 2.09 - $ 3.59
Cancelled 28,700 58,502 - 87,202 $ .38 - $ 5.38
Exercised 20,000 4,706 - 24,706 $ .38 - $ .85
------ -------- ---------- --------
Outstanding at
December 31 - 195,979 35,700 231,679 $ .85 - $14.75
====== ======= ====== =======
Exercisable at
December 31 - 165,647 16,567 182,214 $ .85 - $14.75
====== ======= ====== =======
</TABLE>
9. Income taxes:
a. For the year ended December 31, 1999 and 1998, the Company had a
provision for (recovery of) income taxes consisting of the following:
<TABLE>
<CAPTION>
1 9 9 9 1 9 9 8
------------ -----------
Current tax provision (recovery):
<S> <C> <C>
Federal $525,785 $(123,815)
State and local 139,178 (53,891)
Foreign - 1,690
--------------- ------------
664,963 (176,016)
Deferred tax benefit:
Federal (38,957) (13,015)
State and local (10,312) (5,062)
---------- ------------
Income tax provision (recovery) $615,694 $(194,093)
======== =========
</TABLE>
The deferred tax benefit primarily consists of the utilization of net
operating loss carryforwards.
b. The deferred tax asset primarily consists of the temporary difference
between the book and tax basis of inventory.
F-16
<PAGE>
Page 14f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
10. Economic dependency:
For the year ended December 31, 1999, three customers accounted for
approximately 39% of sales. For the year ended December 31, 1998, four
customers accounted for approximately 48% of sales.
11. Geographic data:
Geographic information for net sales is as follows:
<TABLE>
<CAPTION>
1 9 9 9 1 9 9 8
---------------- ----------------
<S> <C> <C>
U.S. $22,331,244 $13,680,460
Canada 2,075,649 1,234,441
Other foreign countries 57,246 97,025
-------------- --------------
$24,464,139 $15,011,926
=========== ===========
</TABLE>
12. Earnings per share:
Basic earnings per share amounts are computed based on the weighted
average number of shares actually outstanding during the year.
Diluted earnings per share is not presented for December 31, 1999 because
it is not materially dilutive. Diluted earnings per share is not presented
for December 31, 1998 because it is anti-dilutive.
<TABLE>
<CAPTION>
1 9 9 9 1 9 9 8
---------- -------------
<S> <C> <C>
Basic earnings per share:
Net income (loss) available for common stock $816,152 $ (240,635)
======== ==========
Weighted average common stock outstanding 2,592,581 2,592,155
========= ==========
Basic earnings per share $.31 $(.09)
==== =====
</TABLE>
13. Financial expenses:
Included in financial expenses is interest expense of $279,804 and
$120,950 for the years ended December 31, 1999 and 1998, respectively.
F-17
<PAGE>
ACTIVE APPAREL GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2 0 0 0 1 9 9 9
----------- -------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 339,170 $ 239,096
Due from factor 3,504,618 1,549,047
Inventory 5,115,244 5,240,152
Prepaid expenses and other current assets 475,351 379,840
Deferred tax asset 155,399 155,399
------------ -----------
Total current assets 9,589,782 7,563,534
Note receivable, officer 86,400 91,200
Property and equipment, net 460,656 419,954
Security deposits and other assets 309,679 199,510
------------ -----------
Total Assets $10,446,517 $8,274,198
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,295,231 $ 1,479,081
Accrued expenses and other current liabilities 728,299 234,389
--------- -----------
Total liabilities, all current 3,023,530 1,713,470
--------- -----------
Stockholders' equity:
Common stock, par value $.002; 10,000,000 shares
authorized; 2,666,581 issued, 2,492,581 outstanding 5,333 5,333
Class A common stock, par value $.01; 100,000 shares
authorized; 100,000 shares issued and outstanding 1,000 1,000
Paid-in capital 6,136,341 6,136,341
Retained earnings 2,007,532 1,145,273
------------ -----------
8,150,206 7,287,947
Less treasury stock, at cost (174,000 common shares) (727,219) (727,219)
----------- -----------
Total Stockholders' Equity 7,422,987 6,560,728
----------- ----------
Total Liabilities and Stockholders' Equity $10,446,517 $8,274,198
=========== ==========
</TABLE>
F-18
See accompanying notes to financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
---------------------------------- --------------------
2 0 0 0 1 9 9 9 2 0 0 0 1 9 9 9
------- ------- --------- -------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $16,184,470 $11,148,223 $8,184,467 $5,613,775
Cost of goods sold 9,838,387 6,493,991 4,965,504 3,214,905
--------- --------- --------- ---------
Gross profit 6,346,083 4,654,232 3,218,963 2,398,870
--------- --------- --------- ---------
Operating expenses:
Selling and shipping 3,400,307 2,639,989 1,705,871 1,350,002
General and administrative 1,061,199 988,711 527,528 530,020
Financial expenses, including interest
expense of $214,715 and $100,349 for
the six months ended June 30, 2000 and 1999 371,845 212,718 193,985 114,740
--------- --------- --------- ----------
4,833,351 3,814,418 2,427,384 1,994,762
--------- --------- --------- ---------
Income before provision for income taxes 1,512,732 812,814 791,579 404,108
Provision for income taxes 650,473 349,648 340,677 173,648
----------- ---------- ----------- -----------
Net income $ 862,259 $ 463,166 $ 450,902 $ 230,460
=========== =========== =========== ==========
Basic earnings per share $.33 $.18 $.17 $.09
==== ==== ==== ====
Diluted earnings per share $.32 $.18 $.16 $.09
==== ==== ==== ====
</TABLE>
F-19
See accompanying notes to financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000 and 1999
<TABLE>
<CAPTION>
Class A
Common Stock Common Stock
Shares Amount Shares Amount Paid in Capital Retained Earnings
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 2,492,581 $5,333 100,000 $1,000 $6,136,341 $329,121
Net income - six months
ended June 30, 1999 - - - - - 463,166
--------- ------ ------- ------ ---------- ----------
Balance, June 30, 1999 2,492,581 $5,333 100,000 $1,000 $6,136,341 $792,287
========= ====== ======= ====== ========== ========
Balance, December 31, 1999 2,492,581 $5,333 100,000 $1,000 $6,136,341 $1,145,273
Net income - six months
ended June 30, 2000 - - - - - 862,259
--------- ------ ------- ------ ---------- ----------
Balance, June 30, 2000 2,492,581 $5,333 100,000 $1,000 $6,136,341 $2,007,532
========= ====== ======= ====== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
Shares Amount Total
------ ------ -----
<S> <C> <C> <C>
Balance, December 31, 1998 174,000 $(727,219) $5,744,576
Net income - six months
ended June 30, 1999 - - 463,166
------- --------- ----------
Balance, June 30, 1999 174,000 $(727,219) $6,207,742
======= ========== ==========
Balance, December 31, 1999 174,000 $(727,219) $6,560,728
Net income - six months
ended June 30, 2000 - - 862,259
------- --------- ----------
Balance, June 30, 2000 174,000 $(727,219) $7,422,987
======= ========== ==========
</TABLE>
F-20
See accompanying notes to financial statements.financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
June 30,
2 0 0 0 1 9 9 9
------- -------
(Unaudited) (Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 862,259 $ 463,166
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 80,688 64,488
Amortization - 2,857
Changes in assets (increase) decrease:
Refundable income taxes - 284,478
Due from factor (1,955,571) 71,410
Inventory 124,908 (1,164,882)
Prepaid expenses and other current assets (95,511) (185,694)
Deferred tax asset - (130,870)
Security deposits and other assets (110,169) (34,108)
Changes in liabilities increase (decrease):
Accrued expenses and other current liabilities 493,910 420,464
Accounts payable 816,150 284,758
------- -------
Net cash provided by operating activities $ 216,664 $ 76,067
------- ------------
Cash flows from investing activities:
Notes receivable, officer 4,800 -
Acquisition of property and equipment (121,390) (81,360)
----------- --------
Net cash used by investing activities: (116,590) (81,360)
Net increase (decrease) in cash and cash equivalents 100,074 (5,293)
Cash and cash equivalents, beginning of period 239,096 192,870
------- -------
Cash and cash equivalents, end of period $339,170 $ 187,577
======== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 214,715 $ 100,349
Income taxes 310,420 -
</TABLE>
F-21
See accompanying notes to financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
1. Active Apparel Group, Inc. (the "Company") and basis of presentation:
The financial statements presented herein as of June 30, 2000 and for
the six months and the three months ended June 30, 2000 and 1999 are
unaudited and, in the opinion of management, include all adjustments
(consisting only of normal and recurring adjustments) necessary for a
fair presentation of financial position and results of operations. Such
financial statements do not include all of the information and footnote
disclosures normally included in audited financial statements prepared
in accordance with generally accepted accounting principles. The
accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB. The results of
operations for the six and three month periods ended June 30, 2000 are
not necessarily indicative of the results that may be expected for any
other interim period or the full year ending December 31, 2000.
2. Earnings per share:
Basic earnings per share amounts are computed based on the weighted
average number of shares actually outstanding during the period.
Diluted earnings per share amounts are based on an increased number of
shares that would be outstanding assuming the exercise of dilutive
stock options. For purposes of the diluted computation, the number of
shares that would be issued from the exercise of stock options has been
reduced by the number of shares which could have been purchased from
the proceeds at the average market price of the Company's stock on June
30, 2000 and 1999.
The number of shares used in the computation of basic earnings per
share was 2,592,581 at June 30, 2000 and 1999. The number of shares
used in the computation of diluted earnings per share was 2,657,738 and
2,605,942 at June 30, 2000 and 1999 respectively.
F-22
<PAGE>
EVERLAST WORLD'S BOXING HEADQUARTERS CORP.
AND SUBSIDIARIES
DECEMBER 31, 1998
I N D E X
Page No.
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Accountants' Report........................................1
Balance Sheets as at December 31, 1998 and 1997.......................2-3
Statements of Income and Retained Earnings
For the Years Ended December 31, 1998 and 1997.........................4
Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997.......................5
Notes of Consolidated Financial Statements............................6-10
F-23
<PAGE>
INDEPENDENTS ACCOUNTANTS' REPORT
To the Board of Directors
Everlast World's Boxing Headquarters Corp.
We have audited the accompanying consolidated balance sheets of Everlast World's
Boxing Headquarters Corp. and subsidiaries, as of December 31, 1998 and 1997 and
the related consolidated statements of income, retained earnings, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and signficant 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 consolidated financial position of
Everlast World's Boxing Headquarters, Corp. and subsidiaries as at December 31,
1998 and 1997 and their consolidated results of operations and their cash flows
for the years ended in conformity with generally accepted accounting principles.
/s/ WEINICK SANDERS LEVENTHAL & CO., LLP
----------------------------------------
WEINICK SANDERS LEVENTHAL & CO., LLP
New York, N.Y.
February 26, 1999
F-24
<PAGE>
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
December 31,
--------------------
1998 1997
---- ----
Current assets:
Cash and cash equivalents (Note 2) $10,702,452 $ 7,059,981
Accounts receivable, less allowance for
doubtful accounts (Notes 2, 3 and 7) 5,577,953 5,566,919
Notes receivable - current portion (Note 4) 8,586 --
Inventories (Notes 2 and 5) 3,084,362 3,671,479
Prepaid income taxes 353,621 1,283,212
Prepaid insurance 184,852 231,920
Other prepaid expenses 19,003 88,640
---------- ----------
Total current assets 19,930,829 17,902,151
---------- ----------
Property, plant and equipment:
Land, buildings, machinery and equipment
(Notes 2 and 7) 6,744,663 7,359,553
Less: Accumulated depreciation 1,548,113 1,221,823
---------- ----------
Net property, plant and equipment 5,196,550 6,137,730
---------- ----------
Other assets:
Deposits 18,052 18,040
Notes receivable (Note 4) 310,721 --
Deferred financing costs, less accumulated
amortization of $143,611 and $90,741,
respectively (Note 2) 144,271 197,141
Deferred trademark costs, less accumulated
amortization of $20,610 and $13,974,
respectively (Note 2) 80,975 83,514
Cash surrender value - officer's life
insurance, net of loans payable of
$208,556 in each year 670,117 590,759
Investment in U.S. treasury bonds, at cost
(held in trust) (Note 6) 125,012 104,816
---------- ----------
Total other assets 1,349,148 994,270
---------- ----------
$26,476,527 $25,034,151
=========== ===========
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997
------------- -----------
Current liabilties:
<S> <C> <C>
Accounts payable $ 836,156 $ 725,171
Current maturities of long-term debt (Note 7):
Former stockholders 1,566,571 1,566,571
Industrial bond 100,000 100,000
Other 59,607 83,587
Accrued expenses 640,745 697,209
------------- ---------------
Total current liabilities 3,203,079 3,172,538
------------- ---------------
Long-term debt (Note 7):
Former Stockholders - 1,566,571
Industrial bond 3,839,266 3,933,057
Other - 16,387
------------- ---------------
Total long-term debt 3,839,266 5,516,015
------------- ---------------
Total liabilities 7,042,345 8,688,553
------------- ---------------
Commitments (Note 8) - -
Stockholder's equity:
Common Stock, no par value
Authorized - 100 shares
Issued - 62 shares 155,883 155,883
Retained earnings 28,186,705 25,098,121
Less: Treasury stock - 31 shares at cost (8,908,406) (8,908,406)
------------- ---------------
Total stockholders' equity 19,434,182 16,345,598
------------- ---------------
$26,476,527 $25,034,151
------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Sales $20,126,454 $19,838,047
Less: Returns, allowances, and discounts 1,677,451 1,649,534
------------ ------------
Net Sales 18,449,003 100.0% 18,188,513 100.0%
Cost of goods sold 10,641,124 57.7 10,187,708 56.0
------------ ------- ------------ -------
Prime gross profit on sales 7,807,879 42.3 8,000,805 44.0
Factory overhead 2,937,718 15.9 2,975,001 16.4
------------ ------- ------------ -------
Gross profit on sales 4,870,161 26.4 5,025,804 27.6
------------ ------- ------------ -------
Operating expenses:
Selling 2,236,097 12.1 2,102,773 11.6
Shipping 892,391 4.8 1,065,253 5.8
General and administrative 1,814,236 9.8 1,703,565 9.4
------------ ------- ------------ -------
Total operating expenses 4,942,724 26.7 4,871,591 26.8
------------ ------- ------------ -------
Income (loss) from operations (72,563) (0.3) 154,213 0.8
Other income (net of other deductions) 4,741,147 25.7 4,964,571 27.3
------------ ------- ------------ -------
Income before provision for income taxes 4,668,584 25.4 5,118,784 28.1
Provision for income taxes 1,580,000 8.6 1,835,000 10.1
------------ ------- ------------ -------
Net income 3,088,584 16.8% 3,283,784 18.0%
======= =======
Retained earnings at beginning of year 25,098,121 21,814,337
------------ ------------
Retained earnings at end of year $28,186,705 $25,098,121
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------------------
1998 1997
----------------- ---------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 3,088,584 $ 3,283,784
----------------- ---------------
Adjustments to reconcile net income of net cash provided by
operating activities:
Depreciation and amortization 572,344 409,406
Loss (gain) on sale of plant 102,619 -
Increase (decrease) in cash flows as a result of changes in
asset and liability account balances:
Accounts receivable (11,034) 688,588
Inventories 587,117 (1,410,723)
Prepaid income taxes 929,591 (1,283,212)
Prepaid expenses and sundry receivables 116,693 7,940
Net cash surrender value of officers' life insurance (79,358) (76,589)
Other assets - (36,922)
Accounts payable 110,985 (55,014)
Accrued expenses (56,466) (130,386)
Income taxes payable - (840,166)
----------------- ---------------
Total adjustments 2,272,491 (3,227,078)
----------------- ---------------
Net cash provided by operating activities 5,361,075 56,706
----------------- ---------------
Cash flows from investing activities:
Sales (purchases) of property and equipment - net 1,628 (2,274,529)
Decrease in notes receivable 693 -
Trustee project fund - 1,349,608
----------------- ---------------
Net cash provided by (used in) investing activities 2,321 (924,921)
----------------- ---------------
Cash flows from financing activities
Treasury bonds (20,196) (19,277)
Decrease in long-term debt (1,700,729) (1,665,948)
----------------- ---------------
Net cash used in financing activities (1,720,925) (1,685,225)
----------------- ---------------
Net increase (decrease) in cash 3,642,471 (2,553,440)
Cash and cash equivalents at beginning of year 7,059,981 9,613,421
----------------- ---------------
Cash and cash equivalents at end of year 10,702,452 7,059,981
================= ===============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year:
Interest $ 340,194 $ 126,682
================= ===============
Income taxes $ 1,562,369 $ 4,009,387
================= ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - BASIS OF FINANCIAL STATEMENTS.
The consolidated financial statements include the accounts of
Everlast World's Boxing Headquarters Corp. and its wholly owned
subsidiaries Everlast Sports Mfg. Corp., Everlast Sports International,
Inc. and Everlast Fitness Mfg. Corp., together with its wholly owned
subsidiary American Fitness Products, Inc. The Company, together with
its subsidiaries, manufactures and distributes sporting goods and gym
apparatus. The Company also licenses the use of its trademark to
unaffiliated companies for which it receives significant royalties. The
parent company acts as a labor contractors for its subsidiary, Everlast
Sports Mfg. Corp. Everlast Sports International, Inc. sells only to
customers outside the United States and its possessions. Everlast
Fitness Mfg. Corp. manufactures products for Everlast Sports Mfg. Corp.
for the latter's distribution. American Fitness Products, Inc. operates
as a mail-order distributor to the general public. All significant
inter-company transactions and accounts have been eliminated.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
(b) Concentration of Credit Risk:
The Company maintains cash balances at several banks. Amounts at
each institution at time may exceed the Federal Deposit Insurance
Corporation insurance limitation.
(c) Accounts Receivable:
For financial reporting purposes the companies have established
allowances for doubtful accounts at various percentages of the trade
accounts receivable outstanding at December 31, 1999 and 1998. For
income tax reporting purposes the companies charge bad debts to
operations as incurred.
F-29
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(d) Inventories:
Inventories are priced at the lower of cost or market on a
first-in, first-out basis.
(e) Property and Equipment:
Property and equipment are stated at cost. Depreciation is
computed utilizing either the straight-line or accelerated methods over
the estimated useful lives of the related assets.
(f) Deferred Financing and Trademark Costs:
The Company incurred $287,882 of financial costs in conjunction
with the borrowings to construct its new plant in Missouri. These costs
are being amortized over varying periods based upon the respective
underlying debt to which they apply. Amortization of $52,870 was
charged to operations for the years ended December 31, 1998 and 1997,
respectively.
The Company incurs expenses in connection with obtaining and
maintaining its trademark worldwide. These costs are amortized over 17
years. For the years ended December 31, 1998 and 1997, amortization of
$6,636 and $5,542, respectively, were charged to operations.
(g) Income Taxes:
The Company and its wholly owned subsidiaries, with the exception
of Everlast Sports International, Inc., ("ESI"), file a consolidated
Federal income tax return. ESI qualifies as a DISC which results in a
deferral of tax on a substantial amounts of its income. Various state
and local income tax returns are filed pursuant to reporting
requirements in those locales. ESI is authorized to operate in Canada
and files a separate Canadian income tax return reporting only the
income fro that country. The provision for income tax is based upon the
consolidated taxable income including that portion of ESI's income
previously noted.
F-30
<PAGE>
NOTE 3 - ACCOUNTS RECEIVABLE - NET.
The accounts receivable at December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
Everlast Sports
Mfg. Corp. and
American Fitness Everlast Sports
Consolidated Products, Inc. International, Inc.
------------ ---------------- -------------------
December 31, 1998
<S> <C> <C> <C>
Accounts receivable $5,759,124 $11,377 $5,747,747
Less: Allowance for doubtful accounts 181,171 - 181,171
------------ ---------------- -------------------
Accounts receivable - net $5,577,953 $11,377 $5,566,576
============ ================ ===================
December 31, 1997
Accounts receivable $5,793,197 $ 4,325 $5,788,872
Less: Allowance for doubtful accounts 226,278 - 226,278
------------ ---------------- -------------------
Accounts receivable - net $5,566,919 $ 4,325 $5,562,594
============ ================ ===================
</TABLE>
NOTE 4 - NOTES RECEIVABLES.
Notes receivable of $319,307 resulted from the sale of one of the
Company's plants. The notes bear interest at 6% per annum, and are
payable in monthly installments of approximately $2,300, including
interest, with a final payment of approximately $208,000 due in
November 2008.
NOTE 5 - INVENTORIES.
Inventories consist of the following:
December 31,
------------
1998 1997
---------- ----------
Raw material $1,002,418 $2,242,558
Work-in process 968,489 357,231
Finished goods 1,113,455 1,071,690
---------- ----------
$3,084,362 $3,671,479
========== ==========
F-31
<PAGE>
NOTE 6 - INVESTMENT - TREASURY BONDS.
As s result of a product liability suit adjudicated in a prior
year the Company was obligated to create a trust which would pay an
injured party $60,000 annually for the lesser of 40 years or his life.
The Company is required to collateralize the trust with treasury bonds
sufficient to fund this obligation which has a remaining life of 21
years. The amount on the share in the investment to meet the
aforementioned liability.
NOTE 7 - LONG-TERM DEBT.
(a) During 1995, the Company exercised its option under a
shareholders' agreement to purchase all of the Company's shares held by
a deceased shareholder's estate and family. These shares, representing
50% of the Company's outstanding capital stock, were valued at
$8,908,406. After a downpayment of $2,672,122, the balance was to be
paid by a series of notes extending to July, 1999, bearing interest of
4%. At December 31, 1998 and 1997 the respective unpaid balance were as
follows:
December 31,
------------
1998 1997
------------ ----------
Due to former shareholder $1,566,571 $3,133,142
Less: Current maturities 1,566,571 1,566,571
------------ ----------
Long-term portion $ - $1,566,571
============ ==========
(b) To finance the construction of its new facility in Missouri and
the acquisition of related production equipment, the Company, udner the
aegis of the Industrial Development Authority of the City of Moberly,
Missouri ("Issuer"), issued $4,250,000 of Industrial Revenue Bonds. The
bonds mature April 1, 2016 with a "put" provision allowed weekly to the
holder as well as a weekly variable interest rate. The interest rate
cannot exceed 10% per annum. There is a letter of credit issued by
Chase Bank, expiring April, 1999, guaranteeing the bonds. The letter of
credit is collateralized by accounts receivable, property, plant and
equipment.
To keep the letter of credit in force the Company is obligated to
meet certain targeted consolidated financial goals each yar, which have
been met.
F-32
<PAGE>
The bonds are subject to an annual sinking fund for redemption
each April 1st with redemption as follows:
Years Annual Amount
----- -------------
1999 $100,000
2000 - 2005 300,000
2006 400,000
2007 - 2016 175,000
Interest expense on all of the foregoing debt amounted to
$272,910 and $262,721 for the years ended December 31, 1998 and 1997,
respectively.
NOTE 8 - COMMITMENT.
The lease for the New York facility extends through April 30,
2004. The agreement requires the following annual minimum base rents.
Periods Minimum Annual Base Rental
------- --------------------------
May 1, 1997 - April 30, 2000 $383,043
May 1, 2000 - April 30, 2004 401,043
Rent expense amounted to $456,358 and $465,326 for the years ended December
31, 1998 and 1997, respectively.
F-33
<PAGE>
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
DECEMBER 31, 1999
I N D E X
Page No.
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Accountants' Report ................................ 1
Balance Sheets as at December 31, 1999 and 1998 ................ 2-3
Statements of Income and Retained Earnings
For the Years Ended December 31, 1999 and 1998 .............. 4
Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998 .............. 5
Notes to Consolidated Financial Statements ..................... 6-10
F-34
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
Everlast World's Boxing Headquarters Corp.
We have audited the accompanying consolidated balance sheets of Everlast World's
Boxing Headquarters Corp. and subsidiaries as at December 31, 1999 and 1998 and
the related consolidated statements of income, retained earnings, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Everlast World's
Boxing Headquarters, Corp. and subsidiaries as at December 31, 1999 and 1998 and
their results of operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ WEINICK SANDERS LEVENTHAL & CO., LLP
----------------------------------------
WEINICK SANDERS LEVENTHAL & CO., LLP
New York, N. Y.
March 1, 2000
F-35
<PAGE>
-2-
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,372,116 $10,702,452
Investment in commercial paper 8,025,207 --
Accounts receivables, less allowance for doubtful accounts 4,992,256 5,577,953
Notes receivable - current portion 9,116 8,586
Inventories 4,626,543 3,084,362
Prepaid income taxes -- 353,621
Prepaid insurance 181,803 184,852
Other prepaid expenses 46,809 19,003
----------- -----------
Total current assets 21,253,850 19,930,829
----------- -----------
Property, plant and equipment:
Land, buildings, machinery and equipment 7,051,153 6,744,663
Less: Accumulated depreciation 1,966,871 1,548,113
----------- -----------
Net property, plant and equipment 5,084,282 5,196,550
----------- -----------
Other assets:
Deposits 18,057 18,052
Notes receivable 301,605 310,721
Deferred financing costs, less accumulated amortization of
$172,700 and $143,611, respectively
115,182 144,271
Deferred trademark costs, less accumulated amortization of
$28,194 and $20,610, respectively
97,750 80,975
Cash surrender value - officer's life insurance, net of loans
payable of $208,556 in each year
736,823 670,117
Investment in U.S. treasury bonds, at cost (held in trust) 146,189 125,012
----------- -----------
Total other assets 1,415,606 1,349,148
----------- -----------
$27,753,738 $26,476,527
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE>
-3-
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDER'S EQUITY
December 31,
--------------------------
1999 1998
----------- ----------
Current liabilties:
Accounts payable $ 997,204 $ 836,158
Current maturities of long-term debt:
Former stockholders -- 1,566,571
Industrial bond 300,000 100,000
Other -- 59,607
Corporate taxes payable 103,888 --
Accrued expenses 376,448 640,743
------------ ------------
Total current liabilities 1,777,540 3,203,079
------------ ------------
Long-term debt:
Industrial bond 3,385,716 3,839,266
------------ ------------
Total liabilities 5,163,256 7,042,345
------------ ------------
Commitments and contingencies -- --
Stockholder's equity:
Common Stock, no par value
Authorized - 100 shares 155,883 155,883
Issued - 62 shares 31,343,005 28,186,705
Retained earnings (8,908,406) (8,908,406)
------------ ------------
Treasury stock - 31 shares - at cost 22,590,482 19,434,182
------------ ------------
Total stockholders' equity $ 27,753,738 $ 26,476,527
============ ============
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
-4-
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1999 % 1998 %
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Sales $ 19,333,007 $ 20,126,454
Less: Returns, allowances, and discounts 1,208,821 1,677,451
------------ ------------
Net Sales 18,124,186 100.00 18,449,003 100.00
Prime cost of good sold 10,303,218 56.90 10,641,124 57.70
------------ --------- ------------ ---------
Prime gross profit on sales 7,820,968 43.10 7,807,879 42.30
Factory overhead 2,973,202 16.40 2,937,718 15.90
------------ --------- ------------ ---------
Gross profit on sales 4,847,766 26.70 4,870,161 26.40
------------ --------- ------------ ---------
Operating expenses:
Selling 2,005,157 11.00 2,236,097 12.10
Shipping 863,659 4.80 892,391 4.80
General and administrative 1,856,640 10.20 1,814,236 9.80
------------ --------- ------------ ---------
Total operating expenses 4,725,456 26.00 4,942,724 26.70
------------ --------- ------------ ---------
Income (loss) from operations 122,310 0.70 (72,563) (0.30)
Other income (net of other deductions) 4,779,990 26.30 4,741,147 25.70
------------ --------- ------------ ---------
Income before provision for income taxes 4,902,300 27.00 4,668,584 25.40
Provision for income taxes 1,746,000 9.60 1,580,000 8.60
------------ --------- ------------ ---------
Net income 3,156,300 17.40 3,088,584 16.80
========= =========
Retained earnings at beginning of year 28,186,705 25,098,121
------------ ------------
Retained earnings at end of year $ 31,343,005 $ 28,186,705
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
-5-
For the Years Ended
December 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,156,300 $ 3,088,584
------------ ------------
Adjustments to reconcile net income of net cash provided by
operating activities:
Depreciation and amortization 493,116 572,344
Loss (gain) on sale of plant (46,809) 102,619
Increase (decrease) in cash flows as a result of changes in
asset and liability account balances:
Accounts receivable 585,697 (11,034)
Inventories (1,542,181) 587,117
Prepaid income taxes 353,621 929,591
Prepaid expenses and sundry receivables (24,762) 116,693
Net cash surrender value of officers' life insurance (66,706) (79,358)
Accounts payable 161,046 110,985
Accrued expenses (264,295) (56,466)
Income taxes payable 103,888 --
------------ ------------
Total adjustments (247,385) (2,272,491)
------------ ------------
Net cash provided by operating activities 2,908,915 5,361,075
------------ ------------
Cash flows from investing activities:
Investment in commercial paper (8,025,207) --
Sales (purchases) of property and equipment - net (321,725) 1,628
Decrease in notes receivable 8,586 693
------------ ------------
Net cash provided by (used in) investing activities (8,338,346) 2,321
------------ ------------
Cash flows from financing activities
Treasury bonds (21,177) (20,196)
Decrease in long-term debt (1,879,728) (1,700,729)
------------ ------------
Net cash used in financing activities (1,900,905) (1,720,925)
------------ ------------
Net increase (decrease) in cash (7,330,336) 3,642,471
Cash and cash equivalents at end of year 10,702,452 7,059,981
------------ ------------
Supplemental Disclosures of Cash Flow Information: $ 3,372,116 $ 10,702,452
============ ============
Cash paid during the year:
Interest $ 519,262 $ 340,194
============ ============
Income taxes $ 1,274,730 $ 1,562,369
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE>
-6-
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - BASIS OF FINANCIAL STATEMENTS.
The consolidated financial statements include the accounts
of Everlast World's Boxing Headquarters Corp. and its wholly owned
subsidiaries Everlast Sports Mfg. Corp., Everlast Sports
International, Inc. and Everlast Fitness Mfg. Corp., together with
its wholly owned subsidiary, American Fitness Products, Inc. The
Company, together with its subsidiaries, manufactures and
distributes sporting goods and gym apparatus. The Company also
licenses the use of its trademark to unaffiliated companies for
which it receives significant royalties. The parent company acts as
a labor contractor for its subsidiary, Everlast Sports Mfg. Corp.
Everlast Sports International, Inc. sells only to customers outside
the United States and its possessions. Everlast Fitness Mfg. Corp.
manufactures products for Everlast Sports Mfg. Corp. for the
latter's distribution. American Fitness Products, Inc. operates as a
mail-order distributor to the general public. All significant
inter-company transactions and accounts have been eliminated.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(a) Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
(b) Concentration of Credit Risk:
The Company maintains cash balances at several banks.
Amounts at each institution at times may exceed the Federal Deposit
Insurance Corporation insurance limitation.
(c) Cash Equivalents:
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
F-40
<PAGE>
-7-
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(d) Accounts Receivable:
For financial reporting purposes the companies have
estab-lished allowances for doubtful accounts at various percentages
of the trade accounts receivable outstanding at December 31, 1999
and 1998. For income tax reporting purposes the companies charge bad
debts to operations as incurred.
(e) Inventories:
Inventories are priced at the lower of cost or market on a
first-in, first-out basis.
(f) Property and Equipment:
Property and equipment are stated at cost. Depreciation is
computed utilizing either the straight-line or accelerated methods
over the estimated useful lives of the related assets.
(g) Deferred Financing and Trademark Costs:
The Company incurred $287,882 of financing cost ($103,321
were fully amortized in 1999) in conjunction with the borrowings to
construct its new plant in Missouri. These costs are being amortized
over varying periods based upon the respective underlying debt to
which they apply. Amortization of $29,089 and $52,870 were charged
to operations for the years ended December 31, 1999 and 1998,
respectively.
The Company incurs expenses in connection with obtaining
and maintaining its trademark worldwide. These costs are amortized
over 17 years. For the years ended December 31, 1999 and 1998,
amortization of $7,584 and $6,636, respectively, were charged to
operations.
(h) Income Taxes:
The Company and its wholly owned subsidiaries, with the
exception of Everlast Sports International, Inc., ("ESI"), file a
consolidated Federal income tax return. ESI qualifies as a DISC
which results in a deferral of tax on a substantial amount of its
income. Various state and local income tax returns are filed
pursuant to reporting requirements in those locales. ESI is
authorized to operate in Canada and files a separate Canadian income
tax return reporting only the income from that country. The
provision for income tax is based upon the consolidated taxable
income including that portion of ESI's income previously noted.
F-41
<PAGE>
-8-
NOTE 3 - ACCOUNTS RECEIVABLE - NET.
The accounts receivable at December 31, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
Everlast Sports
American Mfg. Corp. and
Fitnes Everlast Sports
Consolidated Products, Inc. International, Inc.
------------ -------------- -------------------
December 31, 1999
-----------------
<S> <C> <C> <C>
Accounts receivable $5,176,386 $ 6,031 $5,170,355
Less: Allowance for doubtful accounts 184,130 -- 184,130
---------- ---------- ----------
Accounts receivable - net $4,992,256 $ 6,031 $4,986,225
========== ========== ==========
December 31, 1998
-----------------
Accounts receivable $5,759,124 $ 11,377 $5,747,747
Less: Allowance for doubtful accounts 181,171 -- 181,171
---------- ---------- ----------
Accounts receivable - net $5,577,953 $ 11,377 $5,566,576
========== ========== ==========
</TABLE>
NOTE 4 - NOTES RECEIVABLE.
Notes receivable resulted from the 1998 sale of a former
plant in Missouri. The notes bear interest at 6% per annum, and are
payable in monthly installments of approximately $2,300, including
interest, with a final payment of approximately $208,000 due in
November 2008.
NOTE 5 - INVENTORIES.
Inventories consist of the following:
December 31,
-----------------------------
1999 1998
--------- ---------
Raw material $1,198,924 $1,002,418
Work-in process 1,759,094 968,489
Finished goods 1,668,525 1,113,455
---------- ----------
$4,625,543 $3,084,362
========== ==========
F-42
<PAGE>
-9-
NOTE 6 - INVESTMENT IN U.S. TREASURY BONDS.
As a result of a product liability suit adjudicated in a
prior year the Company was obligated to create a trust which would
pay an injured party $60,000 annually for the lesser of 40 years or
his life. The Company is required to collateralize the trust with
treasury bonds sufficient to fund this obligation which has a
remaining life of 20 years. The amount on the Company's balance
sheet represents the present value of its share in the investment to
meet the aforementioned liability.
NOTE 7 - LONG-TERM DEBT.
(a) During 1995, the Company exercised its option under a
shareholders' agreement to purchase all of the Company's
shares held by a deceased shareholder's estate and family.
These shares, representing 50% of the Company's outstanding
capital stock, were valued at $8,908,406. After a
downpayment of $2,672,122, the balance was to be paid by a
series of notes extending to July, 1999, bearing interest
of 4%, and this note was fully paid in 1999. At December
31, 1998 the unpaid balance was $1,566,571.
(b) To finance the construction of its new facility in Missouri
and the acquisition of related production equipment, the
Company, under the aegis of the Industrial Development
Authority of the City of Moberly, Missouri ("Issuer"),
issued $4,250,000 of Industrial Revenue Bonds. The bonds
mature April 1, 2016 with a "put" provision allowed weekly
to the holder as well as a weekly variable interest rate.
The interest rate cannot exceed 10% per annum. There is a
letter of credit issued by Chase Bank, expiring April
30,2000, guaranteeing the bonds. The letter of credit is
collateralized by accounts receivable, property, plant and
equipment.
To keep the letter of credit in force the Company is
obligated to meet certain targeted consolidated financial
goals each year, which have been met.
F-43
<PAGE>
-10-
NOTE 7 - LONG-TERM DEBT. (Continued)
The Bonds are subject to an annual sinking fund for
redemption each April 1st with redemptions as follows:
Years
-----
2000 - 2005 $300,000
2006 400,000
2007 - 2016 175,000
Interest expense on all of the foregoing debt amounted to
$186,696 and $272,910 for the years ended December 31, 1999 and
1998, respectively.
NOTE 8 - COMMITMENT.
The lease for the New York facility extends through April
30, 2004 and requires an annual minimum base rent of $383,043. Rent
expense amounted to $455,693 and $456,358 for the years ended
December 31, 1999 and 1998, respectively.
NOTE 9 - 401(k) PROFIT-SHARING PLAN.
In October 1999, the Company adopted a 401(k)
Profit-Sharing Plan for all qualified non-union, full-time
employees. The plan contains a profit sharing component with tax
deferred contributions to each employee based upon certain criteria
and also permits employees to make contributions up to the maximum
limits allowed by Internal Revenue Code Section 401(k). Currently
the Company matches 40% of the first 5% of each employee's
contribution. The Company's contribution was $10,203 in 1999.
F-44
<PAGE>
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
JUNE 30, 2000
(Unaudited)
I N D E X
Page No.
FINANCIAL STATEMENTS:
Independent Accountants' Compilation Report ...................... 1
Consolidated Financial Statements:
Balance Sheets as at June 30, 2000 and 1999 ................... 2-3
Statements of Income and Retained Earnings
For the Six Months and Three Months
Ended June 30, 2000 and 1999 ............................. 4
F-45
<PAGE>
INDEPENDENT ACCOUNTANTS' COMPILATION REPORT
To the Board of Directors
Everlast World's Boxing Headquarters Corp.
We have compiled the accompanying consolidated balance sheets of Everlast
World's Boxing Headquarters Corp. and subsidiaries, as of June 30, 2000 and 1999
and the related consolidated statements of income and retained earnings for the
six months and three months then ended and the accompanying supplementary
schedules in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements and
supplemental financial data information that is the representation of
management. We have not audited or reviewed the accompanying financial
statements and supplemental financial data and, accordingly, do not express an
opinion or any other form of assurance on them.
Management has elected to omit substantially all of the disclosures and the
consolidated statements of cash flows required by generally accepted accounting
principles. If the omitted disclosures and statements of cash flows were
included in the financial statements, they might influence the user's
conclusions about the Company's financial position and results of operations and
cash flows. Accordingly, these financial statements are not designed for those
who are not informed about such matters.
/s/ WEINICK SANDERS LEVENTHAL & CO., LLP
----------------------------------------
WEINICK SANDERS LEVENTHAL & CO., LLP
New York, N. Y.
August 17, 2000
F-46
<PAGE>
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
A S S E T S
June 30,
--------------------------
2000 1999
----------- -----------
Current assets:
Cash and cash equivalents $ 3,723,891 $ 4,503,880
Investment in commercial paper 10,828,315 8,548,680
Accounts receivable, less allowance
for doubtful accounts 3,074,820 3,988,353
Notes receivable - current portion 9,116 8,847
Inventories 4,412,450 3,528,143
Prepaid income taxes 381,717 --
Prepaid insurance 208,851 --
Other prepaid expenses 159,463 186,197
----------- -----------
Total current assets 22,798,623 20,764,100
----------- -----------
Property, plant and equipment:
Land, building, machinery and equipment 7,068,454 6,927,291
Less: Accumulated depreciation 2,164,566 1,740,829
----------- -----------
Net property, plant and equipment 4,903,888 5,186,462
----------- -----------
Other assets:
Deposits 18,067 18,057
Notes receivable 297,116 306,232
Deferred financing costs - net 105,967 117,836
Deferred trademark costs - net 102,653 92,337
Cash surrender value - officer's life
insurance, net of loans payable 736,823 670,117
Investment in U.S. Treasury bonds,
at cost (held in trust) 215,066 135,474
----------- -----------
Total other assets 1,475,692 1,340,053
----------- -----------
$29,178,203 $27,290,615
=========== ===========
See accompanying independent accountants' compilation report.
F-47
<PAGE>
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
----------------------------
2000 1999
------------ ------------
Liabilities:
Current liabilities:
Accounts payable $ 1,435,612 $ 963,501
Current maturities of long-term debt:
Former stockholders -- 875,539
Industrial bond 300,000 300,000
Other -- 48,274
Corporate taxes payable 38,940 171,930
Accrued expenses 218,979 417,918
------------ ------------
Total current liabilities 1,993,531 2,777,162
Long-term debt:
Industrial bond 3,231,783 3,539,623
------------ ------------
Total liabilities 5,225,314 6,316,785
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, no par value
Authorized - 100 shares
Issued - 62 shares 155,883 155,883
Retained earnings 32,705,412 29,726,353
Less: Treasury stock, 31 shares - at cost (8,908,406) (8,908,406)
------------ ------------
Total stockholders' equity 23,952,889 20,973,830
------------ ------------
$29,178,203 $27,290,615
============ ============
See accompanying independent accountants' compilation report.
F-48
<PAGE>
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
----------------------------------------------------
2000 % 1999 %
------------ --------- ------------ ---------
<S> <C> <C>
Sales $ 8,236,214 $ 9,786,697
Less: Returns, allowances
and discounts 704,225 543,483
------------ ------------
Net sales 7,531,989 100.00 9,243,214 100.00
Prime cost of goods sold 4,458,298 59.19 5,362,628 58.02
------------ --------- ------------ ---------
Prime gross profit on sales 3,073,691 40.81 3,880,586 41.98
Factory overhead 1,445,388 19.19 1,524,770 16.50
------------ --------- ------------ ---------
Gross profit on sales 1,628,303 21.62 2,355,816 25.48
------------ --------- ------------ ---------
Operating expenses:
Selling 979,659 13.01 940,049 10.17
Shipping 421,215 5.59 424,024 4.59
General and administrative 992,371 13.18 908,135 9.82
------------ --------- ------------ ---------
Total operating expenses 2,393,245 31.78 2,272,208 24.58
------------ --------- ------------ ---------
Income (loss) from operations (764,942) (10.16) 83,608 0.90
Other income (net of other deductions) 2,956,349 39.25 2,659,040 28.77
------------ --------- ------------ ---------
Income before provision
for income taxes 2,191,407 29.09 2,742,648 29.67
Provision for income taxes 829,000 11.01 1,203,000 13.01
------------ --------- ------------ ---------
Net income 1,362,407 18.08 1,539,648 16.66
===== =====
Retained earnings at beginning of period 31,343,005 28,186,705
------------ ------------
Retained earnings at end of period $ 32,705,412 $ 29,726,353
============ ============
</TABLE>
See accompanying independent accountants' compilation report.
F-49
<PAGE>
EVERLAST WORLD'S BOXING HEADQUARTERS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
-----------------------------------------------------
2000 % 1999 %
------------ --------- ------------ ---------
<S> <C> <C>
Sales $ 3,674,337 $ 4,693,168
Less: Returns, allowances
and discounts 308,513 234,017
------------ ------------
Net sales 3,365,824 100.00 4,459,151 100.00
Prime cost of goods sold 2,089,943 62.09 2,534,384 56.84
------------ --------- ------------ ---------
Prime gross profit on sales 1,275,881 37.91 1,924,767 43.16
Factory overhead 723,691 21.50 754,463 16.92
------------ --------- ------------ ---------
Gross profit on sales 552,190 16.41 1,170,304 26.24
------------ --------- ------------ ---------
Operating expenses:
Selling 415,462 12.34 419,537 9.41
Shipping 187,118 5.56 167,255 3.75
General and administrative 548,885 16.31 478,438 10.73
------------ --------- ------------ ---------
Total operating expenses 1,151,465 34.21 1,065,230 23.89
------------ --------- ------------ ---------
Income (loss) from operations (599,275) (17.80) 105,074 2.35
Other income (net of other deductions) 1,396,076 41.48 1,228,142 27.54
------------ --------- ------------ ---------
Income before provision
for income taxes 796,801 23.68 1,333,216 29.89
Provision for income taxes 313,000 9.30 583,000 13.07
------------ --------- ------------ ---------
Net income 483,801 14.38 750,216 16.82
========= =========
Retained earnings at beginning of period 32,221,611 28,976,137
------------ ------------
Retained earnings at end of period $ 32,705,412 $ 29,726,353
============ ============
</TABLE>
See accompanying independent accountants' compilation report.
F-50
<PAGE>
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The pro forma consolidated condensed statements of operations
presented herein gives effect, for the year ended December 31, 1999 and 2000,
respectively, and the six months ended June 30, 2000 to the Acquisition as if
such transaction took place on January 1, 1999. It is based on the historical
financial statements of the Company for the year ended December 31, 1999, as
adjusted to reflect the combined results from recording the transaction. The pro
forma consolidated condensed balance sheet also presented herein is based upon
the Company's historical balance sheet as of June30, 2000, and includes pro
forma adjustments assuming the transaction had occurred on that date. These
statements should be read in conjunction with the historical financial
statements, and notes thereto, of Everlast included in this Proxy Statement and
of the Company included in the Company's report on Form 10-KSB, for the year
ended December 31, 1999 and on Form 10-QSB for the period ended June 30, 2000.
The pro forma financial statements do not necessarily reflect results that would
have occurred had the transaction been consummated on the dates indicated, or
future results, and does not reflect benefits to be derived, if any, from the
transactions. The Company is accounting for the acquisition under the purchase
method of accounting. The assumptions and adjustments upon which the pro forma
financial statements are based are set forth in the accompanying notes.
F-51
<PAGE>
Active Apparel Group, Inc
Pro-forma Consolidated Condensed Balance Sheets
June 30, 2000
(Unaudited)
Assets
---------------------
<TABLE>
<CAPTION>
Historical Historical Pro-forma Pro-forma
Active Apparel Everlast Adjustments Consolidated
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 339,170 $ 3,723,891 $ 10,828,315 (B) $ 4,891,376
(10,000,000) (A)
Investment in commercial paper 10,828,315 (10,828,315) (B) -
Accounts receivable - net 3,074,820 3,074,820
Due from factor 3,504,618 3,504,618
Inventory 5,115,244 4,412,450 9,527,694
Other current assets 630,750 759,147 1,389,897
-------------- -------------- -------------- -------------
Total Current Assets 9,589,782 22,798,623 (10,000,000) 22,388,405
Property and equipment, net 460,656 4,903,888 500,000 (A) 5,864,544
Other assets 396,079 1,475,692 1,871,771
Intangible assets 20,547,111 (A) 33,926,924
10,000,000 (A)
1,000,000 (A)
2,379,813 (A)
-------------- -------------- -------------- -------------
Total Assets $ 10,446,517 $ 29,178,203 $ 24,426,924 $ 64,051,644
============== ============== ============== =============
</TABLE>
F-52
<PAGE>
Active Apparel Group, Inc
Pro-forma Consolidated Condensed Balance Sheets
June 30, 2000
(Unaudited)
Liabilities, Redeemable Preferred Stock & Stockholders Equity
<TABLE>
<CAPTION>
Historical Historical Pro-forma Pro-forma
Active Apparel Everlast Adjustments Consolidated
---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Current Liabilities:
Accounts Payable $ 2,295,231 $ 1,435,612 $ 3,730,843
Current maturities of long term
debt - industrial bond 300,000 300,000
Accrued Expenses & Other Liabilities 728,299 257,919 1,000,000 (C) 1,986,218
-------------- ---------------- -------------- --------------
Total Current Liabilities 3,023,530 1,993,531 1,000,000 6,017,061
Long term debt
Industrial Bond - 3,231,783 3,231,783
-------------- ---------------- -------------- --------------
Total liabilities 3,023,530 5,225,314 1,000,000 9,248,844
-------------- ---------------- -------------- --------------
Redeemable preferred stock 45,000,000 (A) 45,000,000
-------------- ---------------- -------------- --------------
Stockholders equity:
Common stock 6,333 155,883 1,010 (A) 7,343
(155,883) (A)
Paid in capital 6,136,341 2,378,803 (A) 8,515,144
Retained earnings 2,007,532 32,705,412 (32,705,412) (A) 2,007,532
-------------- ---------------- -------------- --------------
8,150,206 32,861,295 (30,481,482) 10,530,019
Less treasury Stock 727,219 8,908,406 (8,908,406) (A) 727,219
-------------- ---------------- -------------- --------------
Total stockholders' equity 7,422,987 23,952,889 (21,573,076) 9,802,800
-------------- ---------------- -------------- --------------
Total liabilities, redeemable
preferred stock and stock-
holders' equity $ 10,446,517 $ 29,178,203 $ 24,426,924 $ 64,051,644
============== ================ ============== ==============
Book value per common share $ 2.86 $ 3.16
============== ==============
Common shares outstanding 2,592,581 3,097,581
============== ==============
</TABLE>
F-53
<PAGE>
Active Apparel Group, Inc
Pro-forma Consolidated Condensed Statements of Income
For the Six Months Ended June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Historical Historical Pro-forma Pro-forma
Active Apparel Everlast Adjustments Consolidated
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 16,184,470 $ 7,531,989 $ 23,716,459
Cost of sales 9,838,387 5,844,642 60,000 (D) 15,743,029
------------ ------------ ------------ ------------
Gross profit 6,346,083 1,687,347 (60,000) 7,973,430
Net license revenues 2,682,418 (844,922) (E) 1,837,496
------------ ------------ ------------ ------------
6,346,083 4,369,765 (904,922) 9,810,926
Operating expenses
Selling and shipping 3,400,307 1,244,669 (844,922) (E) 3,830,054
20,000 (D)
10,000 (F)
General and administrative 1,061,199 1,235,369 (150,000) (G) 2,196,568
30,000 (I)
20,000 (D)
Financial expenses 371,845 118,789 490,634
------------ ------------ ------------ ------------
Total operating expenses 4,833,351 2,598,827 (914,922) 6,517,256
Income from operations 1,512,732 1,770,938 10,000 3,293,670
Amortization 424,086 (J) 424,086
Interest income 407,293 (275,000) (K) 132,293
Other income 13,176 13,176
------------ ------------ ------------ ------------
Income before taxes 1,512,732 2,191,407 (689,086) 3,015,053
Provision for taxes 650,473 829,000 (111,300) (L) 1,368,173
------------ ------------ ------------ ------------
Net income $ 862,259 $ 1,362,407 $ (577,786) $ 1,646,880
============ ============ ============ ============
Common shares outstanding 2,592,581 3,097,581
Basic earnings per share $ 0.33 505,000 (M) $ 0.09
Diluted earnings per share $ 0.32 $ 0.07
</TABLE>
F-54
<PAGE>
Active Apparel Group, Inc
Pro-forma Consolidated Condensed Statements of Income
For the Year Ended December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Historical Historical Pro-forma Pro-forma
Active Apparel Everlast Adjustments Consolidated
---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 24,464,139 $ 18,124,186 $ 42,588,325
Cost of sales 14,578,376 13,152,908 60,000 (D) 27,791,284
---------------- ---------------- --------------- --------------
Gross profit 9,885,763 4,971,278 (60,000) 14,797,041
Net license revenues 4,613,942 (1,268,901) 3,345,041
---------------- ---------------- --------------- --------------
9,885,763 9,585,220 (1,328,901) 18,142,082
Operating expenses
Selling and shipping 5,871,571 2,519,130 (1,268,901) (E) 7,161,800
20,000 (D)
20,000 (F)
General and administrative 2,024,539 2,607,528 (300,000) (G) 4,562,067
150,000 (H)
20,000 (D)
60,000 (I)
Financial expenses 557,627 243,299 800,926
---------------- ---------------- --------------- --------------
Total operating expenses 8,453,737 5,369,957 (1,298,901) 12,524,793
Income from operations 1,432,026 4,215,263 (30,000) 5,617,289
Amortization 848,173 (J) 848,173
Interest income 618,933 (550,000) (K) 68,933
Other income 68,104 68,104
---------------- ---------------- --------------- --------------
Income before taxes 1,432,026 4,902,300 (1,428,173) 4,906,153
Provision for taxes 615,694 1,746,000 (243,600) (L) 2,118,094
---------------- ---------------- ---------------
--------------
Net income $ 816,332 $ 3,156,300 $ (1,184,573) $ 2,788,059
================ ================ =============== ==============
Common shares outstanding 2,592,581 505,000 3,097,581
Basic earnings per share $ 0.31 (M) $ 0.12
Diluted earnings per share $ 0.31 $ 0.10
</TABLE>
F-55
<PAGE>
ACTIVE APPAREL GROUP, INC.
NOTES TO PRO FORMA CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
The acquisition of Everlast's common stock for AAGP common and preferred stock,
and cash, is being accounted for using purchase accounting for financial
reporting purposes. As such, the assets and liabilities of Everlast, have been
adjusted to their estimated fair values. The final allocation of the purchase
price will be determined after completion of the acquisition and will be based
on a final evaluation of the fair value of the assets acquired and liabilities
assumed at the time of the acquisition.
(A) Represents adjustments to record the acquisition based upon an assumed
purchase price of Everlast stock of $57,379,813, plus $1,000,000 in
transaction costs. The purchase price was calculated using the fair
value of AAGP's redeemable preferred stock and assuming a market value
of AAGP's common shares of $4.7125 per share. The share price was
determined based upon the closing stock prices for the 5 days ended
September 8, 2000.
Calculation of purchase price:
Redeemable preferred stock $45,000,000
Common stock (505,000 shares) 2,379,813
Cash 10,000,000
Transaction costs 1,000,000
-----------
Total 58,379,813
-----------
Allocation of purchase price:
Net book value of Everlast 23,952,889
Adjustment to reflect land
and building at fair value 500,000
-----------
24,452,889
Excess of acquisition cost over
value of tangible net assets $33,926,924
===========
Note: The historical costs of the assets and liabilities of Everlast are
estimated to be at their fair market value, except certain properties
and certain intangible assets.
F-56
<PAGE>
Active Apparel Group, Inc.
Notes to Pro Forma Consolidated
Condensed Financial Statements
Page 2 - Continued
(B) To reflect the liquidation of commercial paper into cash and cash
equivalents.
(C) To reflect an increase in accrued expenses of $1,000,000 for
transaction costs.
(D) To reflect bonus totaling $100,000 paid to Everlast supervisors
provided they remain employed for at least six months after the
acquisition is completed.
(E) To record elimination of royalty fee in the amount of $1,268,801 paid
by AAGP to Everlast for the year ended December 31, 1999 ($844,922 for
six months ended June 30, 2000).
(F) To reflect the impact of Everlast's Assistant Vice President's contract
which increases his salary by $20,000, for the year ended December 31,
1999 ($10,000 for the six months ended June 30, 2000).
(G) To reflect reduction of Everlast President's compensation in the amount
of $300,000, in accordance with a new employment contract, for the year
ended December 31, 1999 ($150,000 for the six months ended June 30,
2000).
(H) To reflect bonus of $150,000 paid to AAGP's CEO, subsequent to the
closing date of this acquisition, the proceeds of which will be used to
pay down the note receivable due from the CEO.
(I) To reflect consulting fees of $60,000, as per contractual agreement,
for the year ended December 31, 1999 ($30,000 for the six months ended
June 30, 2000).
(J) To reflect amortization of intangible assets over 40 years of $848,173
for the year ended December 31, 1999 ($424,086 for the six months ended
June 30, 2000).
(K) To reflect loss of interest income in the amount of $550,000 for the
year ended December 31, 1999 ($275,000 for the six months ended June
30, 2000), as a result of the $10,000,000 cash payment payable at the
closing date.
(L) To reflect tax benefit of pro forma adjustments at an effective tax
rate of 42%.
(M) To increase the common shares outstanding to 3,097,581 shares, for the
issuance of 505,000 shares of AAGP at the closing date, used in the
computation of basic earnings per share. In addition, for dilutive
earnings per share purposes, common shares outstanding have been
increased to 3,792,891 shares. These shares have been accounted for on
a pro forma basis to be outstanding during the entire year.
F-57
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
EVERLAST WORLD'S BOXING HEADQUARTERS CORP.
EVERLAST HOLDING CO.
ACTIVE APPAREL GROUP, INC.
ACTIVE APPAREL NEW CORP.
AND THE
STOCKHOLDERS LISTED ON SCHEDULE I HERETO
As of August 21, 2000
A-1
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I TRANSACTIONS AND TERMS OF THE MERGER; EXCHANGE OF SHARES............1
Section 1.1 Merger......................................................2
Section 1.2 Time and Place of Closing...................................2
Section 1.3 Effective Time..............................................2
Section 1.4 Charter.....................................................2
Section 1.5 Bylaws......................................................2
Section 1.6 Directors and Officers......................................2
Section 1.7 Consideration...............................................2
Section 1.8 Exchange Procedures.........................................3
Section 1.9 Rights of Former Stockholders of Everlast...................3
Section 1.10 Make-Whole Adjustment......................................4
ARTICLE II REPRESENTATIONS AND WARRANTIES OF EVERLAST,
EVERLAST HOLDING AND BEN NADORF..........................................5
Section 2.1 Corporate Existence..........................................5
Section 2.2 Authorization; Validity......................................5
Section 2.3 No Breach of Statute or Contract.............................6
Section 2.4 Subsidiaries.................................................6
Section 2.5 Capitalization...............................................6
Section 2.6 Financial Statements.........................................6
Section 2.7 Absence of Certain Changes or Events.........................7
Section 2.8 Liabilities..................................................9
Section 2.9 Taxes........................................................9
Section 2.10 Proprietary Rights..........................................10
Section 2.11 Insurance...................................................11
Section 2.12 Litigation..................................................11
Section 2.13 Compliance with Laws........................................11
Section 2.14 Employee Benefit Plans......................................12
Section 2.15 Labor Matters...............................................15
Section 2.16 Environmental Matters.......................................16
Section 2.17 Illegal Payments............................................17
Section 2.18 Business Relationships......................................18
Section 2.19 Suppliers and Customers.....................................18
Section 2.20 Restrictive Documents or Laws...............................18
Section 2.21 Properties..................................................18
A-2
<PAGE>
Section 2.22 Contracts and Commitments...................................20
Section 2.23 Accounts Receivable.........................................20
Section 2.24 Officers, Employees and Compensation........................20
Section 2.25 Banks; Safe Deposit Boxes...................................21
Section 2.26 Books of Account; Records...................................21
Section 2.27 Complete Disclosure.........................................21
Section 2.28 Formation and Authority of Everlast Holding.................21
ARTICLE III REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS...................22
Section 3.1 Shares.......................................................22
Section 3.2 Stockholder's Addresses, Access to Information,
Experience, Etc..............................................22
Section 3.3 Purchase Entirely for Own Account............................22
Section 3.4 Restricted Securities........................................22
Section 3.5 Legends......................................................23
Section 3.6 Brokers......................................................24
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF AAGP AND
NEW CORP.................................................................24
Section 4.1 Corporate Existence..........................................24
Section 4.2 Authorization; Validity......................................24
Section 4.3 Capitalization...............................................25
Section 4.4 Litigation 25
Section 4.5 No Breach of Statute or Contract.............................25
Section 4.6 SEC Reports and Financial Statements.........................26
Section 4.7 Absence of Undisclosed Liabilities...........................26
Section 4.8 Complete Disclosure..........................................26
Section 4.9 Formation and Authority of New Corp..........................26
Section 4.10 Filings.....................................................27
ARTICLE V COVENANTS..........................................................27
Section 5.1 Covenant Against Distribution................................27
Section 5.2 Covenant Against Disclosure..................................28
Section 5.3 Covenant Against Hiring......................................29
Section 5.4 Injunctive Relief............................................29
Section 5.5 Severability.................................................30
Section 5.6 Further Assurances...........................................30
Section 5.7 Announcements................................................30
Section 5.8 Consents.....................................................30
Section 5.9 George Horowitz Agreements...................................30
Section 5.10 Ben Nadorf Employment Agreement.............................30
Section 5.11 David Shechet Consulting Agreement..........................31
Section 5.12 Wayne Nadorf Employment Agreement...........................31
A-3
<PAGE>
Section 5.13 George Horowitz Option Agreement............................31
Section 5.14 Registration Rights Agreement...............................31
Section 5.15 Title Documents Agreements..................................31
Section 5.16 Life Insurance..............................................31
Section 5.17 Substance Constitute........................................31
Section 5.18 Health Insurance............................................32
ARTICLE VI CLOSING DOCUMENTS.................................................32
Section 6.1 Deliveries by Stockholders...................................32
Section 6.2 Deliveries by AAGP and New Corp..............................33
ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS..............................34
Section 7.1 Conditions to Obligations of AAGP and New Corp...............34
Section 7.2 Conditions to Obligations of Stockholders and Everlast.......36
ARTICLE VIII INDEMNIFICATION.................................................37
Section 8.1 Survival of Representations, Warranties and Agreements.......37
Section 8.2 Indemnification..............................................38
Section 8.3 Limitations on Indemnification...............................39
Section 8.4 Procedure for Indemnification with
Respect to Third-Party Claims................................40
Section 8.5 Procedure For Indemnification with
Respect to Non-Third-Party Claims............................41
ARTICLE IX MISCELLANEOUS PROVISIONS..........................................41
Section 9.1 Notices 41
Section 9.2 Entire Agreement.............................................42
Section 9.3 Binding Effect; Assignment...................................42
Section 9.4 Captions 42
Section 9.5 Expenses of Transaction......................................42
Section 9.6 Waiver; Consent..............................................43
Section 9.7 No Third Party Beneficiaries.................................43
Section 9.8 Counterparts.................................................43
Section 9.9 Gender 43
Section 9.10 Governing Law and Jurisdiction..............................43
Section 9.11 Termination.................................................44
A-4
<PAGE>
Index of Schedules and Exhibits
Schedules
Description
Schedule I (List of Stockholders - Stockholders)
Schedule 2.2 (Necessary Third Party Approvals)
Schedule 2.3 (Potentially Conflicting Agreements)
Schedule 2.4 (Subsidiaries)
Schedule 2.6 (Other Liabilities Not Reflected in Financial Statements)
Schedule 2.7 (Certain Changes)
Schedule 2.8 (Material Liabilities)
Schedule 2.9 (Audits and Other Tax Matters)
Schedule 2.10 (Intellectual Property)
Schedule 2.11 (Insurance Policies)
Schedule 2.12 (Litigation)
Schedule 2.13(b) (Permits)
Schedule 2.14 (Employee Plans)
Schedule 2.14(a) (Pension Plans)
Schedule 2.14(b) (Employee Benefit Plans and Benefit Trusts)
Schedule 2.14(h) (Pension Plan Reportable Events)
Schedule 2.14(i) (Certain Payments Due to Employees)
Schedule 2.14(j) (Presence of Stock in Certain Plans)
Schedule 2.14(k) (Deficiencies)
Schedule 2.14(l) (Pension Benefit Guaranty Corporation Payments)
Schedule 2.14(m) (Investigations or Suits Against Certain Plans)
Schedule 2.14(n) (Benefits Due to Employees)
Schedule 2.14(o) (Liabilities for Failure to Provide Health Care)
Schedule 2.15 (Labor Matters)
Schedule 2.16 (Environmental Matters)
Schedule 2.18 (Changes to Business Relationships)
Schedule 2.19 (Cancellations of Supplier or Customer Relationships)
Schedule 2.20 (Restrictive Documents or Laws)
Schedule 2.21(a) (Leases and Defaults Thereof)
Schedule 2.21(b) (Permitted Liens)
Schedule 2.21(e) (Financing Statements)
Schedule 2.21(f) (Personal Property Valued Above $10,000)
Schedule 2.22 (Contracts and Encumbrances Thereof)
Schedule 2.24 (Employee Compensation)
Schedule 2.25 (Bank Accounts)
Schedule 3.1 (Restrictions on Shares)
A-5
<PAGE>
Schedule 4.3 (List of Option Holders)
Schedule 4.10 (Government Consents Required)
Exhibits
Exhibit A (Certificate of Designation of Redeemable Participating
Preferred Stock)
Exhibit B (Form of Ben Nadorf Employment Agreement)
Exhibit C (Form of Wayne Nadorf Employment Agreement)
Exhibit D (Form of David Shechet Consulting Agreement)
Exhibit E (Form of George Horowitz Option Agreement)
Exhibit F (Form of Registration Rights Agreement)
Exhibit G (Form of Legal Opinion of Counsel to Everlast, Everlast
Holding and Stockholders)
Exhibit H (Form of Legal Opinion of Counsel to Active Apparel
Group, Inc. and Active Apparel New Corp.)
Exhibit I (Environmental Matters Representations and Warranties
Definitions)
A-6
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER dated as of August 21,
2000, is by and among Everlast World's Boxing Headquarters Corp., a New York
corporation ("Everlast"), Everlast Holding Co., a Delaware corporation and
parent corporation of Everlast ("Everlast Holding"), each of the stockholders
listed on Schedule I hereto (each a "Stockholder" and collectively,
"Stockholders"), Active Apparel Group, Inc., a Delaware corporation ("AAGP"),
and Active Apparel New Corp., a Delaware corporation and a wholly-owned
subsidiary of AAGP ("New Corp.").
W I T N E S S E T H:
- - - - - - - - - -
PREAMBLE
The Boards of Directors of Everlast, Everlast Holding,
AAGP and New Corp. are of the opinion that the transactions described herein are
in the best interests of the parties and their respective stockholders. This
Agreement provides for the acquisition of Everlast Holding, and indirectly its
wholly-owned subsidiary Everlast, by AAGP pursuant to a merger whereby Everlast
Holding merges with and into New Corp. At the effective time of the Merger (as
hereinafter defined), the outstanding shares of the capital stock of Everlast
Holding, no par value per share (the "Everlast Common Stock") shall be converted
into (i) the shares of Common Stock, $ .002 par value per share, of AAGP (the
"AAGP Common Stock"), and (ii) shares of Redeemable Participating Preferred
Stock of AAGP. As a result, Stockholders shall become shareholders of AAGP,
Everlast Holding shall be merged into New Corp. and shall cease to exist, and
New Corp. shall continue to conduct the business and operations of Everlast as a
wholly-owned subsidiary of AAGP.
The transactions described in this Agreement have been
approved by Stockholders, who constitute all of the stockholders of Everlast
Holding, and the satisfaction of certain other conditions described in this
Agreement.
It is the intention of the parties to this Agreement
that the Merger shall qualify for federal income tax purposes as a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code, as amended (the "Code").
NOW, THEREFORE, in consideration of the above and the
mutual warranties, representations, covenants, and agreements set forth herein,
the parties agree as follows:
A-7
<PAGE>
ARTICLE I
---------
TRANSACTIONS AND TERMS OF THE MERGER; EXCHANGE OF SHARES
--------------------------------------------------------
Section 1.1 Merger. Subject to the terms and conditions
of this Agreement, at the Effective Time (as hereinafter defined), Everlast
Holding shall be merged with and into New Corp. in accordance with the
provisions of Section 251 of the Delaware General Corporation Law (the "DGCL")
and with the effect provided in Sections 259 and 261 of the DGCL (the "Merger").
New Corp. shall be the surviving corporation of the Merger (the "Surviving
Corporation"), shall continue to be a wholly-owned subsidiary of AAGP and
governed by the laws of the State of Delaware. The Merger shall be consummated
pursuant to the terms of this Agreement, which has been approved and adopted by
the respective Boards of Directors of Everlast, Everlast Holding, AAGP and New
Corp. and approved by each Stockholder.
Section 1.2 Time and Place of Closing. The closing of
the transactions contemplated hereby (the "Closing") will take place on the date
that the Effective Time occurs but in no event later than, or at such other time
as the parties, acting through their authorized officers, may mutually agree
(the date on which such closing occurs being hereinafter referred to as the
"Closing Date"). The Closing shall be held at the office of AAGP's counsel,
Olshan Grundman Frome Rosenzweig & Wolosky LLP, 505 Park Avenue, New York, New
York 10022-1170.
Section 1.3 Effective Time. The Merger and other
transactions contemplated by this Agreement shall become effective on the date
and at the time the Certificate of Merger reflecting the Merger (the
"Certificate of Merger") shall become effective with the Secretary of State of
the State of Delaware (the "Effective Time").
Section 1.4 Charter. The Certificate of Incorporation of
New Corp. in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation until otherwise
amended or repealed.
Section 1.5 Bylaws. The Bylaws of New Corp. in effect
immediately prior to the Effective Time shall be the Bylaws of the Surviving
Corporation until otherwise amended or repealed.
Section 1.6 Directors and Officers. The directors and
officers of New Corp. in office immediately prior to the Effective Time,
together with such additional persons as may thereafter be elected, shall serve
as the respective directors and officers of the Surviving Corporation from and
after the Effective Time in accordance with the Bylaws of the Surviving
Corporation.
Section 1.7 Consideration. Subject to the provisions of
this Section 1.7 through Section 1.9 hereof, at the Effective Time, by virtue of
the Merger and without any action on the part of Everlast, Everlast Holding,
AAGP, New Corp. or the stockholders of any of the foregoing, the shares of the
constituent corporations to the Merger shall be converted as follows:
A-8
<PAGE>
(a) Each share of AAGP Common Stock issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding from and after the Effective Time.
(b) Each share of common stock, $.01 par value of New
Corp. (the "New Corp Common Stock") issued and outstanding immediately prior to
the Effective Time shall remain issued and outstanding from and after the
Effective Time.
(c) All of the shares of Everlast Common Stock issued
and outstanding at the Effective Time shall cease to be outstanding. The
Stockholders will then be issued or delivered, as the case may be, the following
consideration for the Everlast Common Stock:
(i) 125,000 shares of AAGP Common Stock (the
"Payment Shares") to be issued and delivered by
AAGP to each Stockholder as set forth next to each
such Stockholder's name on Schedule I hereto.
(ii) 380,000 Shares of additional Common Stock (the
"Additional Shares") to be issued and delivered by
AAGP to each Stockholder as set forth next to each
such Stockholder's name on Schedule I hereto.
(iii) 45,000 Shares of Redeemable Participating
Preferred Stock of AAGP in the form set forth as
Exhibit A hereto (the "Redeemable Preferred Stock")
and having an aggregate redemption value of $45
million. AAGP shall issue and deliver to each
Stockholder such number of shares of Redeemable
Preferred Stock as set forth next to each such
Stockholder's name on Schedule I hereto.
(iv) $10 million in cash. AAGP shall pay to each
Stockholder such amount as set forth next to each
such Stockholder's name on Schedule I hereto.
Section 1.8 Exchange Procedures. At the Closing, each
holder of shares of Everlast Common Stock issued and outstanding at the
Effective Time shall surrender the certificate or certificates representing such
shares to AAGP and shall promptly upon surrender thereof receive in exchange
therefor the consideration provided in Section 1.7(c) of this Agreement. The
certificate or certificates of Everlast Common Stock so surrendered shall be
duly endorsed in blank for transfer or accompanied by separate stock powers duly
executed in blank.
Section 1.9 Rights of Former Stockholders of Everlast.
At the Effective Time, the stock transfer book of Everlast Holding shall be
closed as to holders of Everlast Common Stock immediately prior to the Effective
Time and no transfer of Everlast Common Stock by any such holder shall
thereafter be made or recognized. Until surrendered for exchange in accordance
with the provisions of Section 1.8 of this Agreement, each certificate
theretofore representing shares of
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Everlast Common Stock shall from and after the Effective Time represent for all
purposes only the right to receive the consideration provided in Sections 1.7(c)
of this Agreement in exchange therefor, subject, however, to Everlast Holding's
obligation to pay any dividends or make any other distributions with a record
date prior to the Effective Time which have been declared or made by Everlast
Holding in respect of its shares of Everlast Common Stock in accordance with the
terms of this Agreement and which remain unpaid at the Effective Time. Whenever
a dividend or other distribution is declared by AAGP on the AAGP Common Stock,
the record date for which is at or after the Effective Time, the declaration
shall include dividends or other distributions on all AAGP Common Stock issuable
pursuant to this Agreement, but no dividend or other distribution payable to the
holders of record of AAGP Common Stock as of any time subsequent to the
Effective Time shall be delivered to the holder of any certificate representing
shares of Everlast Common Stock issued and outstanding at the Effective Time
until such holder surrenders such certificate for exchange as provided in
Section 1.8 of this Agreement. However, upon surrender of such certificate, the
AAGP Common Stock certificate (together with all such undelivered dividends or
other distributions without interest), any undelivered dividends and cash
payments payable hereunder (without interest), and the Redeemable Preferred
Stock shall be delivered with respect to each share represented by such
certificate.
Section 1.10 Make-Whole Adjustment. (a) In the event
that, on the fifth anniversary of the Closing Date, the sum of (i) the Gross
Proceeds (as defined herein) received by the Stockholders from the sale of the
Additional Shares, and (ii) the Market Value (as defined herein) of any
remaining Additional Shares then held by the Stockholders, is less than $5
million (the "Deficit"), AAGP shall issue pro-rata to the Stockholders a number
of additional shares of AAGP Common Stock (the "Make-Whole Shares") equal to the
Deficit divided by the Market Value; provided, however, that if such issuance
results in the Stockholders holding in excess of 20% of the outstanding shares
of AAGP Common Stock, AAGP may satisfy all or any portion of the Deficit through
a cash payment made within sixty (60) days after the fifth anniversary of the
Closing Date. For purposes of this Section 1.10, Gross Proceeds shall be the
aggregate sales price received by the Stockholders from the sale of Additional
Shares (prior to any deduction of sales commissions or similar charges). Market
Value means (i) if shares of the Common Stock are listed or admitted for trading
on a national securities exchange, the average of the bid and ask prices at the
close of each trading day of a share of Common Stock on the Nasdaq Small Cap
Market, or the Corporation's then principal trading market, for the 10
consecutive trading days ending on the second business day prior to the fifth
year anniversary of the Closing Date or (ii) if no such quotations are available
for such 10-day period, as determined in good faith by the Board of AAGP. Also
for purposes of this Section 1.10, any sales by the Stockholders of AAGP Common
Stock shall be deemed to be sales of Additional Shares.
(b) If AAGP agrees to merge or consolidate with another entity and
AAGP is not the surviving entity upon consummation of such merger or
consolidation, and the closing of such transaction occurs prior to the five year
anniversary of the Closing Date, the entity surviving such transaction shall
have the obligation to issue to the Stockholders, at its option and on the five
year anniversary of the Closing Date, additional shares of the surviving entity
whose aggregate market
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value is equal to what the Stockholders would have received if the merger or
consolidation transaction did not occur, or cash in an amount equal to the
Deficit.
ARTICLE II
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REPRESENTATIONS AND WARRANTIES OF EVERLAST HOLDING,
---------------------------------------------------
EVERLAST AND BEN NADORF
-----------------------
Everlast Holding, Everlast, and Ben Nadorf hereby,
jointly and severally, represent and warrant to AAGP and New Corp. as of the
date hereof as follows:
Section 2.1 Corporate Existence. Everlast Holding,
Everlast and the subsidiaries set forth on Schedule 2.4 (each a "Subsidiary" and
collectively, the "Subsidiaries") are corporations duly organized, validly
existing and in good standing under the laws of their jurisdiction of
incorporation and have the corporate power to own, operate or lease their
properties and to carry on their businesses as now being conducted. Complete and
correct copies of the Certificates of Incorporation of Everlast Holding,
Everlast and the Subsidiaries, and all amendments thereto, certified by the
Secretary of State of their respective States of incorporation, and of the
By-Laws of Everlast Holding, Everlast and the Subsidiaries, and all amendments
thereto, certified by the Secretaries of Everlast Holding, Everlast and the
Subsidiaries, respectively, have been heretofore delivered to AAGP and New Corp.
Section 2.2 Authorization; Validity. Everlast, Everlast
Holding, and the Stockholders have all requisite corporate power and authority
to enter into this Agreement, perform its obligations hereunder and to
consummate the transactions contemplated hereby without the approval of any
third party except as listed on Schedule 2.2 hereto. All necessary corporate
action has been taken by Everlast, Everlast Holding and the Stockholders with
respect to the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby. The execution and delivery
of this Agreement and the performance by Everlast Holding and Everlast of its
obligations hereunder have been duly authorized by their Boards of Directors and
no further authorization on the part of Everlast Holding and Everlast is
necessary to authorize the execution and delivery by them of, and the
performance of their obligations under, this Agreement. Except as set forth on
Schedule 2.2 hereto, there are no corporate, contractual, statutory or other
restrictions of any kind upon the power and authority of Everlast Holding and
Everlast to execute and deliver this Agreement and to consummate the
transactions contemplated hereunder and no action, waiver or consent by any
foreign, Federal, state, municipal or other governmental department, commission
or agency ("Governmental Authority") is necessary to make this Agreement an
instrument binding upon Everlast Holding, Everlast and the Stockholders in
accordance with its terms. This Agreement has been duly executed and delivered
by Everlast Holding , Everlast and the Stockholders and constitutes, legal,
valid and binding obligations of Everlast Holding, Everlast and the
Stockholders, enforceable in accordance with their terms, except (i) as such
enforceability may be limited by or subject to any bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally, (ii) as such obligations are subject to general principles of
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equity and (iii) as rights to indemnity may be limited by federal or state
securities laws or by public policy.
Section 2.3 No Breach of Statute or Contract. Neither
the execution and delivery of any of this Agreement nor the consummation by
Everlast Holding, Everlast or the Stockholders of the transactions contemplated
hereby, nor compliance by Everlast Holding, Everlast or the Stockholders with
any of the provisions hereof, will violate or cause a default under any statute
(domestic or foreign), judgment, order, writ, decree, rule or regulation of any
court or Governmental Authority applicable to Everlast Holding, Everlast or any
Subsidiary, or any of their properties; breach or conflict with any of the
terms, provisions or conditions of the Certificates of Incorporation or By-Laws
of Everlast Holding, Everlast or any Subsidiary; or, except as provided on
Schedule 2.3 hereto, violate, conflict with or breach any agreement, contract,
mortgage, instrument, indenture or license to which Everlast Holding, Everlast
or any Subsidiary is a party or by which Everlast Holding, Everlast or any
Subsidiary is or may be bound, or constitute a default (in and of itself or with
the giving of notice, passage of time or both) thereunder, or result in the
creation or imposition of any encumbrance upon, or give to any other party or
parties any claim, interest or right, including rights of termination or
cancellation in, or with respect to, any of Everlast Holding's, Everlast's, or
any Subsidiary's properties or the shares of Everlast Common Stock.
Section 2.4 Subsidiaries. Everlast is a wholly-owned
subsidiary of Everlast Holding. Except as set forth on Schedule 2.4 hereto,
neither Everlast Holding nor Everlast has any other subsidiaries or equity
investments in any other corporation, association, partnership, joint venture or
other entity.
Section 2.5 Capitalization. Everlast authorized capital
stock consists of 100 shares, of which 62 shares are issued and outstanding,
included in which are 31 shares held in the treasury as shown in the Financial
Statements (as defined hereafter). All issued and outstanding shares of Everlast
capital stock are duly authorized and issued, fully paid and non-assessable.
Everlast Holding authorized capital stock consists of 31 shares, all of which
shares are issued and outstanding. No shares of Everlast Holding capital stock
are owned directly or indirectly by Everlast Holding. All issued and outstanding
shares of Everlast Holding capital stock are duly authorized and issued, fully
paid and non-assessable. There are no subscriptions, options, warrants, calls,
rights, contracts, commitments, understandings, restrictions or arrangements of
any kind relating to the issuance, sale or transfer of any shares of Everlast
Holding and Everlast capital stock including, without limitation, any rights of
conversion or exchange under any outstanding securities or other instruments.
There are no voting trusts or other agreements or understandings of any kind
with respect to Everlast Holding's and Everlast's outstanding capital stock.
Section 2.6 Financial Statements. The following
consolidated financial statements, together with the notes thereto, prepared by
Weinick, Sanders, Leventhal & Co., L.L.P., independent public accountants, will
have been previously delivered (or in the case of the compiled unaudited balance
sheet as of June 30, 2000 and the compiled unaudited consolidated statement of
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income and retained earnings for the six month ended June 30, 2000, will be
delivered) to AAGP and New Corp. (collectively the "Financial Statements"):
(a) audited consolidated balance sheets of Everlast and
its Subsidiaries as of December 31, 1999, 1998 and 1997
and compiled unaudited consolidated balance sheet of
Everlast and its Subsidiaries as of June 30, 2000 (the
"Balance Sheets");
(b) audited consolidated statements of income and
retained earnings of Everlast and its Subsidiaries for
the 12 month periods ended December 31, 1999, 1998 and
1997 and compiled unaudited consolidated statement of
income and retained earning of Everlast and its
Subsidiaries for the six month period ended June 30,
2000 (the "Income Statements"); and
(c) audited consolidated statements of cash flows of
Everlast and its Subsidiaries for the 12 month periods
ended December 31, 1999, 1998 and 1997 (the "Cash Flow
Statements").
The consolidated statements of Everlast World's Boxing Headquarters
and its Subsidiaries as of December 31, 1999, 1998, 1997 and for the years then
ended were prepared in accordance with generally accepted accounting principles
("GAAP") consistently applied. Except as disclosed by management on Schedule 2.6
hereto, Everlast and its Subsidiaries had at December 31, 1999 no liability or
obligation of any kind or manner, either liquidated, unliquidated, direct
accrued, absolute, contigent or otherwise, whether due or to become due, except
as incurred in the ordinary course of business , which required to be reflected
by GAAP in the financial statements and which were not accurately reflected in
the consolidated financial statements.
The compiled consolidated financial statements as of
June 30, 2000 and for the six months and three months then ended will be the
representations of management. Weinick Sanders Leventhal & Co., Everlast's
independent public accountants, has neither audited nor reviewed those
consolidated financial statements and supplementary information and,
accordingly, do not express an opinion or any other form of assurance on them.
The consolidated balance sheet at June 30, 2000 will show a cash balance of not
less than $14 million and Net Cash (as hereinafter defined) of not less than
$12.5 million. Net Cash shall mean total Cash minus Accounts Payable.
Section 2.7 Absence of Certain Changes or Events. Except
as set forth on Schedule 2.7 hereto, since December 31, 1999 there has not been
with respect to Everlast:
(a) Any change in its business operations (as now
conducted or as presently proposed to be conducted), assets,
properties or rights, prospects or condition (financial or
otherwise), or combination thereof (collectively, the "Business")
which reasonably could be expected to have a material adverse effect
on the Business as presently conducted, properties, assets,
liabilities, financial condition or operations of Everlast(a
"Material Adverse Effect").
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(b) Any transaction entered into or carried out other
than in the ordinary and usual course of its business including,
without limitation, any such transaction resulting in the incurrence
of liabilities or obligations;
(c) Any material change made in the methods of doing
business or in the accounting principles or practices or the method
of application of such principles or practices;
(d) Any mortgage, pledge, lien, security interest,
hypothecation, charge or other encumbrance imposed or agreed to be
imposed on or with respect to any of its properties which will not
be discharged prior to the Closing Date except for financing
statements filed by personal property lessors as a matter of
notification only or liens for taxes, assessments, governmental
charges or levies that are not yet due and payable, liens with
respect to the non-material claims of contractors, materialmen,
mechanics and similar persons, any liens or imperfections of title
which are matters of record which do not render title unmarketable
(collectively, "Permitted Liens");
(e) Except in the ordinary course of business and in a
manner consistent with past practice, any sale, lease or other
disposition of, or any agreement to sell, lease or otherwise dispose
of any of its properties, assets, individually or in the aggregate
in excess of $100,000 or any agreement to provide services for
consideration greater than $50,000;
(f) Except in the ordinary course of business and in a
manner consistent with past practice, any purchase of or any
agreement to purchase capital assets or any lease or any agreement
to lease, as lessee, any capital assets, individually or in the
aggregate in excess of $100,000;
(g) Any modification, waiver, change, amendment,
release, rescission or termination of, or accord and satisfaction
with respect to any term, condition or provision of any contract,
agreement, license or other instrument to which Everlast is a party,
other than any satisfaction by performance in accordance with the
terms thereof in the usual and ordinary course of its business;
(h) The execution of any contract, agreement, license or
other instrument by Everlast or the commitment to do any of the
foregoing;
(i) Any declaration of, or dividend or other
distribution to Everlast's stockholders, purchase, redemption or
reclassification of any of Everlast's capital stock or stock split,
stock dividend, exchange or recapitalization or execution of any
agreement in respect of the foregoing;
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(j) Any change in any assets, licenses, permits or
franchises (which change is material and adverse to the business),
financial condition, results of operations or prospects of Everlast,
or any change in the nature of the business, or manner of conducting
the business, of Everlast which has had, or may reasonably be
expected to have, a material adverse effect on its business,
financial condition, results of operations, prospects, assets,
licenses or permits;
(k) Any damage, destruction or similar loss, whether or
not covered by insurance, adversely affecting the Business;
(l) Any increase in the rate of compensation or in the
benefits payable or to become payable by Everlast to any of its
employees over the level in effect at December 31, 1999 other than
increases required by contracts disclosed pursuant hereto.
Section 2.8 Liabilities. Except as reflected on the
Financial Statements of Everlast as of December 31, 1999 or set forth on
Schedule 2.8 hereto, Everlast has no material liability or obligation of any
nature (whether liquidated, unliquidated, accrued, absolute, contingent or
otherwise and whether due or to become due).
Section 2.9 Taxes. Except as set forth on Schedule 2.9
hereto:
(a) Everlast and the Subsidiaries have duly filed all
federal, state, local and foreign tax returns and tax reports
required to be filed by them for all periods up to and including
December 31 1998 and is not beneficiary of any extension of time
within which to file such returns, all such returns and reports are
true, correct and complete, none of such returns and reports has
been amended, and all taxes, assessments, fees and other
governmental charges shown to be due under such returns and reports
have been fully paid for all periods up to, and including, December
31, 1998 or will be timely paid and all estimated tax payments for
the calendar year 2000 have been or will be timely paid; and with
respect to the tax returns for the year ended December 31, 1999, all
such returns will have been filed and payments shown to be due
therein will have been paid by Everlast by September 15, 2000
pursuant to a valid extension.
(b) As disclosed on Schedule 2.9, Everlast and the
Subsidiaries have pending federal tax audits and has not concluded
any agreement with any federal, state, local or foreign tax
authority that may affect the subsequent tax liabilities of Everlast
or any Subsidiary. To the extent such audits have been completed,
Schedule 2.9 hereto sets forth the dates and results of any and all
audits of federal, state, local and foreign tax returns of Everlast
and its Subsidiaries performed by federal, state, local or foreign
taxing authorities. No waivers of any applicable statutes of
limitations are outstanding. All deficiencies proposed as a result
of any completed audits have been paid or settled;
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(c) Neither Everlast nor any Subsidiary has any
liabilities for state or federal taxes based on income other than as
reflected on the Financial Statements or arising in the ordinary
course of business since December 31, 1999 except for possible
assessment that may arise as a result of ongoing or future audits.
(d) Everlast and the Subsidiaries have withheld and paid
all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor,
creditor, stockholder, or other third party;
(e) The Stockholders have delivered to AAGP correct and
complete copies of all federal and state income tax returns,
examination reports, and statements of deficiencies assessed against
or agreed to by Everlast and its Subsidiaries since January 1, 1996;
(f) Everlast and its Subsidiaries have not filed a
consent under Code ss.345(f) concerning collapsible corporations.
Everlast and its Subsidiaries have not made any payments, are not
obligated to make any payments, or are not parties to any agreement
that under certain circumstances could obligate them to make any
payments that will not be deductible under Code ss.280G. Neither
Everlast nor any of its Subsidiaries are parties to any tax
allocation or sharing agreement. Everlast and its Subsidiaries have
(a) not been members of an affiliated group filing a consolidated
federal income tax return (other than a group the common parent of
which was Everlast) or (b) any liability for the taxes of any other
person under Reg. ss.1.1502-6 (or any similar provision of state,
local, or foreign law), as a transferee or successor, by contract,
or otherwise;
(g) Without limiting the foregoing, (i) the books and
records of Everlast and its Subsidiaries include adequate provision
(in accordance with GAAP) for all taxes and assessments and
governmental charges that have been assessed against Everlast and
its Subsidiaries for all periods ending on or prior to the Closing
Date, and (ii) Neither Everlast nor its Subsidiaries are, as of the
Closing Date, and will not be as of the Closing Date, liable for
taxes, assessments, fees or governmental charges for which Everlast
and its Subsidiaries have not made adequate provision on its books
and records except possible taxes and other charges resulting from
tax audits; and
(h) The Merger will not give rise to any New York City
or New York State real property transfer taxes.
Section 2.10 Proprietary Rights. Schedule 2.10 hereto
sets forth all patents, inventions, trade secrets, processes, proprietary
rights, proprietary knowledge, know-how, computer software, trademarks, names,
service marks, trade names, registered copyrights, symbols, logos, franchises
and permits of Everlast or any Subsidiary and all applications therefor,
registrations thereof and licenses, sublicenses or agreements in respect thereof
which Everlast or any Subsidiary own or has the right to use or to which
Everlast or any Subsidiary is a party and all filings, registrations or
issuances of any of the foregoing with or by any federal, state, local or
foreign
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regulatory, administrative or governmental office or offices (collectively, the
"Proprietary Rights"). Except as set forth on Schedule 2.10 hereto, Everlast or
any Subsidiary is the sole and exclusive owner of all right, title and interest
in and to all Proprietary Rights free and clear of all liens, claims, charges,
equities, rights of use, encumbrances and restrictions whatsoever. The Business
as conducted prior to the Closing Date was not, is not and will not be in
contravention of any patent, trademark, copyright or other Proprietary Right of
any third party.
Except as set forth on Schedule 2.10 hereto, none of the
Proprietary Rights has been hypothecated, sold, assigned or licensed by
Everlast, any of its Subsidiaries or any other person, corporation, firm or
other legal entity and none of the Proprietary Rights infringe upon or violate
the rights of any person, firm, corporation, or other legal entity. Everlast or
any Subsidiary has not given any indemnification against patent, trademark or
copyright infringement as to any equipment, materials, products, services or
supplies that Everlast or any Subsidiary uses, licenses or sells; there is not
pending or threatened any claim to sell, engage in or employ any such product,
process, method or operation.
Section 2.11 Insurance. Schedule 2.11 hereto lists all
policies of life, fidelity bonds, casualty, liability and other forms hereto of
insurance owned or held by Everlast, or owned and held by the licensees of
Everlast for the benefit of Everlast, true and complete copies of which have
been heretofore delivered to AAGP, and all such policies are currently in full
force and effect. Everlast and the Stockholders have not received any notice
from any insurer thereunder with respect to the cancellation of any such
insurance. All premiums due and payable on such policies have been paid. Other
than with respect to customary deductible amounts (which is $10,000 for product
liability claims), Everlast is not a co-insurer under any term of any insurance
policy. Everlast will use its best efforts to keep such policies duly in force
with all premiums paid through a date not less than 10 days after the Closing
Date.
Section 2.12 Litigation. Except as set forth on Schedule
2.12 hereto, there are no claims, actions, suits or proceedings pending or
threatened against or affecting Everlast Holding or Everlast (or any officer or
director of Everlast Holding or Everlast) or any of Everlast's properties,
before any federal, state, local or foreign court or other governmental body.
Everlast Holding or Everlast is not subject to or in default with respect to any
judgment, order, writ, injunction or decree or any governmental restriction.
Section 2.13 Compliance with Laws.
(a) Everlast Holding and Everlast is in compliance in
all material respects with all laws including, without limitation,
all Environmental Laws (as hereinafter defined), ordinances, rules,
codes, regulations and orders applicable to it, the Business and the
Properties (as hereinafter defined) and has no notice or knowledge
of any violations, whether actual, claimed or alleged, thereof.
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(b) Schedule 2.13(b) hereto lists all franchises,
licenses, permits, Environmental Permits (as hereinafter defined)
consents, authorizations, approvals and certificates of any
Governmental Authority or body used in conducting the Business or in
occupying and using each of the Properties (collectively, the
"Permits"). Each of the Permits is currently valid and in full force
and effect and the Permits constitute all franchises, licenses,
permits, consents, authorizations, approvals and certificates of any
regulatory, administrative or other governmental agency or body
necessary to the conduct of the Business or in occupying and using
each of the Properties. Everlast Holding and Everlast is not in
violation of any of the Permits and there is no pending or
threatened proceeding which could result in the revocation or
cancellation of, or inability of Everlast Holding and Everlast to
renew, any Permit. There are no Permits that are nontransferable or
require consent or other action to remain in full force and effect
following the consummation of the transactions contemplated hereby.
Section 2.14 Employee Benefit Plans. Schedule 2.14
hereto comprises a listing of each bonus, stock option, stock purchase, benefit,
profit sharing, savings, retirement, liability, insurance, incentive, deferred
compensation, and other similar fringe or employee benefit plans, programs or
arrangements for the benefit of or relating to, any employee of, or independent
contractor or consultant to, and all other compensation practices, policies,
terms or conditions, whether written or unwritten (the "Employee Plans") which
Everlast presently maintains, to which Everlast presently contributes or under
which Everlast has any liability and which relate to employees or independent
contractors of Everlast. The Employee Plans administered by Everlast have been
administered in all material respects in accordance with all requirements of
applicable law and terms of each such plan. Each Employee Plan that is required
or intended to be qualified under applicable law or registered or approved by a
governmental agency or authority, has been so qualified, registered or approved
by the appropriate governmental agency or authority and, to the best of
Everlast's or Stockholders' knowledge, nothing has occurred since the date of
the last qualification, registration or approval to adversely affect, or cause,
the appropriate governmental agency or authority to revoke such qualification,
registration or approval. All contributions (including premiums) in material
amounts required by law or contract to have been made or accrued by Everlast
under or with respect to any Employee Plan have been paid or accrued by
Everlast, as the case may be. Without limiting the foregoing, there are no
material unfunded liabilities under any Employee Plan. Neither Everlast nor the
Stockholders have received notice of any investigation, litigation or other
enforcement action against Everlast with respect to any of the Employee Plans.
There are no pending actions, suits or claims by former or present employees of
Everlast (or their beneficiaries) with respect to Employee Plans or the assets
or fiduciaries thereof (other than routine claims for benefits).
(a) Each "employee pension benefit plan," as defined in
section 3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), maintained by Everlast or any trade or business (whether or not
incorporated) which is under common control, or which is treated as a single
employer, with Everlast ("ERISA Affiliate") under section 414(b), (c), (m) or
(o) of the Internal Revenue Code of 1986, as amended (the "Code") or to which
Everlast or any ERISA
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Affiliate contributed or is obligated to contribute thereunder (the "Pension
Plans"), is listed on Schedule 2.14(a). All such plans that are intended to
qualify under section 401 et seq. of the Code do so qualify, the trusts
maintained pursuant thereto (the "Pension Trusts") that are intended to be
exempt from federal income taxation under section 501 of the Code are so exempt,
and Everlast has received a determination letter from the Internal Revenue
Service (the "IRS") with respect to each such Pension Plan and each such Pension
Trust to the effect that such Pension Plan is qualified and such Pension Trust
is exempt. No such determination letter has been revoked, no revocation has been
threatened and nothing has occurred with respect to the operation of any Pension
Plan that could reasonably be expected to cause such revocation. Except as
described on Schedule 2.14 (a), none of the Pension Plans or Pension Trusts have
been amended since the effective date of each respective determination letter.
(b) Each "employee welfare benefit plan," as defined in
section 3(1) of ERISA, each other employee benefit arrangement or payroll
practice, including, without limitation, all severance pay, sick leave, vacation
pay, salary continuation for disability, retirement, deferred compensation,
bonus, long-term incentive, stock option, stock purchase, hospitalization,
medical insurance, life insurance, and scholarship plans or programs maintained
by Everlast or to which Everlast contributed or is obligated to contribute
thereunder (all such plans being hereinafter referred to as the "Employee
Benefit Plans") and each trust maintained pursuant to an Employee Benefit Plan
(the "Benefit Trusts") is listed on Schedule 2.14(b). Everlast has received a
determination letter from the IRS with respect to each Employee Benefit Trust
that is intended to be exempt from federal taxation under section 501 of the
Code. No such determination letter has been revoked, no revocation has been
threatened, and nothing has occurred with respect to the operation of any
Employee Benefit Trust that could reasonably be expected to cause such
revocation. Except as described on Schedule 2.14(b), none of the Employee
Benefit Trusts have been amended since the effective date of each respective
determination letter.
(c) Everlast has delivered to AAGP (i) a true, correct,
and complete copy of each Pension Plan, including copies of all amendments made
since the most recent favorable determination letter, or Employee Benefit Plan,
or, in the case of any unwritten Employee Benefit Plan, descriptions thereof;
(ii) copies of the three most recent annual reports (Form 5500 series) filed
with the IRS with respect to each Pension Plan or Employee Benefit Plan for
which such report is required by applicable law, including, without limitation,
all schedules thereto and all financial statements with attached opinions of
independent accountants; (iii) the most recent summary plan description for each
Pension Plan or Employee Benefit Plan for which such a summary plan description
is required by applicable Law; (iv) each trust agreement and insurance or
annuity contract relating to any Pension Plan or Employee Benefit Plan; and (v)
each service agreement and other administrative contract relating to any Pension
Plan or Employee Benefit Plan.
(d) Everlast and any ERISA Affiliate have not incurred
any liability on account of a "partial withdrawal" or a "complete withdrawal"
(within the meaning of ERISA ss.ss.4205 and 4203, respectively) from any
multi-employer plan, no such liability has been asserted, and there are no
events or circumstances which could result in any such partial or complete
withdrawal; and
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Everlast and any ERISA Affiliate are not bound by any contract or agreement or
has any obligation or liability described in ERISA ss.4204. Each multi-employer
plan complies in form and has been administered in accordance with the
requirements of ERISA and, where applicable, the Code, and each multi-employer
plan is qualified under Code ss.401(a).
(e) There is no violation of ERISA, the Code or other
applicable law with respect to the filing of reports, returns, and other similar
documents required to be filed with any governmental agency with respect to any
Pension Plan or Employee Benefit Plan. All reports, returns or similar documents
required to be distributed to any Pension Plan or Employee Benefit Plan
participant have been timely distributed.
(f) The Pension Plans and Employee Benefit Plans have
been maintained and administered in accordance with their terms and with all
provisions of ERISA, the Code and other applicable Law, and neither Everlast or
any "party-in-interest" or "disqualified person" with respect to the Pension
Plans and the Employee Benefit Plans has engaged in a "prohibited transaction"
within the meaning of section 4975 of the Code or section 406 of ERISA. Everlast
and each ERISA Affiliate has performed all of its obligations currently required
to have been performed under all Pension Plans and Employee Benefit Plans. No
event has occurred that could subject Everlast, any ERISA Affiliate or any
Pension Trust or Employee Benefit Trust, as applicable, to any tax liability
arising under section 511 of the Code that has not been timely paid. Everlast
and all ERISA Affiliates have complied with all obligations imposed by section
4980B of the Code.
(g) None of Everlast, any trustee, administrator or
other fiduciary has engaged in any transaction or acted in a manner that could,
or failed to act so as to, subject Everlast or any fiduciary to any liability
for breach of fiduciary duty under ERISA or other applicable Law. With respect
to any Pension Plan and Employee Benefit Plan, Pension Trust or Employee Benefit
Trust, no insurance contract, annuity contract, or other agreement or
arrangement will impose a penalty, discount, sales charge, or other reduction on
account of the withdrawal of assets from such organization or the change in
investment or such assets.
(h) Except as disclosed on Schedule 2.14(h), there has
been no "reportable event" as that term is defined in section 4043 of ERISA and
the regulations thereunder with respect to the Pension Plans subject to Title IV
of ERISA that would require the giving of notice or any event requiring
disclosure under section 404(c)(3)(C) or 4063(a) of ERISA.
(i) Except as disclosed on Schedule 2.14(i), neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment becoming due to
any employee or group of employees; (ii) increase any benefits otherwise payable
under any Employee Benefit Plan or Pension Plan; or (iii) result in the
acceleration of the time of payment or vesting of any such benefits. Except as
disclosed on Schedule 2.14(i), there are no severance agreements, employment
agreements, or consulting agreements between Everlast and any employee or any
individual which provide for payments over a period in excess of one year or
which when aggregated with all such agreements or arrangements
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provides for total payments in excess of $100,000. True, correct and complete
copies of all such severance agreements, employment agreements and consulting
agreements have been provided to AAGP.
(j) Except as disclosed on Schedule 2.14(j) hereto, no
stock or other security issued by Everlast or any of its subsidiaries forms or
has formed a part of the assets of any Pension Plan or Employee Benefit Plan
within the last five years.
(k) Except as disclosed on Schedule 2.14(k), all
contributions to, and payments from, each Pension Plan and Employee Benefit Plan
that have been required to be made in accordance with the terms of such plans
and, when applicable, section 302 of ERISA or section 412 of the Code, have been
timely made; (ii) there has been no application for or waiver of the minimum
funding standards of section 412 of the Code with respect to the Pension Plan;
and (iii) none of the Pension Plans has an "accumulated funding deficiency"
within the meaning of section 412(a) of the Code as of the end of the most
recently completed plan year. As of the most recent valuation date for each
Pension Plan that is a "defined benefit pension plan," as defined in section
3(35) of ERISA (hereinafter a "Defined Benefit Plan"), there was not any amount
of "unfunded benefit liability." None of Stockholder nor Everlast is not aware
of any facts or circumstances that could change the funded status of any such
Defined Benefit Plan. Everlast has furnished AAGP with the most recent actuarial
report or valuation with respect to each Defined Benefit Plan.
(l) Except as disclosed on Schedule 2.14(l), all premium
payments due to the Pension Benefit Guaranty Corporation pursuant to section
4007 of ERISA prior to the date hereof have been timely paid.
(m) Except as disclosed on Schedule 2.14(m), there are
no investigations by any Governmental Authority, other claims, suits or
proceedings against or involving any Pension Plan or Employee Benefit Plan, and
no events of default that could give rise to liability to Everlast or any ERISA
Affiliate.
(n) Except as disclosed on Schedule 2.14(n), no employee
or former employee of Everlast or any ERISA Affiliate is, by reason of such
employee's or former employee's employment, entitled to receive any benefits,
including without limitation, death or medical benefits (whether or not insured)
beyond retirement or other termination of employment, other than (i) death or
retirement benefits under an Pension Plan; or (ii) continuation coverage
pursuant to section 4980B of the Code.
(o) Except as disclosed on Schedule 2.14(o), Everlast
has not incurred, nor, after the Closing, will Everlast or AAGP incur, any
liability under Section 4980B of the Code with respect to any failure to comply
by Everlast with the continuation health care coverage requirements of Section
4980B of the Code and Sections 601 and 608 of ERISA, which failure occurs with
respect to any person who is or was a qualified beneficiary of an Employee (as
defined in Section 4980B(g)(1) of the Code).
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Section 2.15 Labor Matters. Except as set forth on
Schedule 2.15 hereto, none of Everlast's employees is represented by any labor
union, association or other organization. Neither Everlast nor the Stockholders
have received any notice from any labor union, association or other
organization, other than those labor unions, association or other organizations
set forth in Schedule 2.15 hereto, that it represents or intends to represent
Everlast's employees. Everlast has complied with all applicable laws affecting
employment and employment practices, terms and conditions of employment and
wages and hours. Neither Everlast nor the Stockholders have received any notice
of and there is no complaint alleging unfair labor practices against Everlast
pending, or to the knowledge of Everlast or the Stockholders, threatened before
the National Labor Relations Board or any other charges or complaints pending,
or to the knowledge of Everlast or the Stockholders, threatened before the Equal
Employment Opportunity Commission, any state or local Human Rights Commission or
any other state or local agency in respect of labor or employment matters. No
labor strike, material dispute, slowdown or stoppage has occurred with respect
to Everlast's employees and there is no labor strike, material dispute, slowdown
or stoppage pending or, to the knowledge of Everlast, threatened with respect to
Everlast's employees. Schedule 2.15 hereto sets forth all pending grievances or
arbitration proceedings against Everlast with respect to Everlast' operation of
the Business.
Section 2.16 Environmental Matters. (a) The defined
terms used herein have meanings set forth on Exhibit I For purposes of this
Section 2.16, Everlast and Everlast Holding include any entity which is, in
whole or in part, a predecessor of Everlast or Everlast Holding, respectively.
(b) Except as disclosed on Schedule 2.16:
(i) no notice, notification, demand, request
for information, citation, summons,
complaint or order has been issued, no
complaint has been filed, no penalty has
been assessed and to Everlast's, Everlast
Holding's or Stockholder's knowledge, no
investigation, proceeding or review is
pending, or threatened by any governmental
entity or other person or entity with
respect to any (A) alleged violation by
Everlast or Everlast Holding, or to
Everlast's, Everlast Holdings's or
Stockholder's knowledge, any previous
occupants ("Previous Occupants") of any
property (individually, a "Property" and
collectively, the "Properties"), including,
without limitation, the Leased Real Property
and the Owned Real Property, now or
previously leased, owned or operated by
Everlast or Everlast Holding, of any
Environmental Law or liability thereunder,
(B) alleged failure by Everlast or Everlast
Holding, or to Everlast's , Everlast
Holding's or Stockholder's knowledge, by any
of the Previous Occupants, to have any
Environmental Permits, (C) Regulated
Activity on any of the Properties; (D)
Hazardous Substances Released on any of the
Properties; (E) condition which would give
rise to any liability of Everlast or
Everlast Holding under any Environmental
Laws;
(ii) (A) neither Everlast nor Everlast
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Holding or to Everlast's, Everlast
Holdings's or Stockholder's knowledge, any
Previous Occupants, has engaged in any
Regulated Activity and (B) no Regulated
Activity has occurred at or on any of the
Properties;
(iii) no polychlorinated biphenyls,
radioactive material, urea formaldehyde,
lead, asbestos, asbestos-containing material
or underground storage tank (active or
abandoned) is or has been present at any of
the Properties;
(iv) no Hazardous Substance has been
Released (and no notification of such
Release has been filed or made) or is
present (whether or not in a reportable or
threshold planning quantity) at, on or under
any of the Properties;
(v) neither Everlast nor Everlast Holding or
Stockholder have received any notice that it
is or may be liable under Environmental Laws
at any of the Properties or any property to
which Everlast or Everlast Holding has,
directly or indirectly, transported or
arranged for the transportation of, any
Hazardous Substances which is listed or, to
Everlast's, Everlast Holding's or
Stockholder's knowledge, proposed for
listing, on the National Priorities List
promulgated pursuant to CERCLA, on CERCLIS
(as defined in CERCLA) or on any similar
federal, state or foreign list of sites
requiring investigation or clean-up; and
(vi) there are no liens under Environmental
Laws on any of the Properties; no government
actions have been taken or are, to the
knowledge of Everlast, Everlast Holding or
Stockholder, in process, which could subject
any of such properties to such liens and
neither Everlast nor Everlast Holding are
now required to place any notice or
restriction relating to Hazardous Substances
on any deed to the Properties.
(c) AAGP may have an environmental audit of the Properties
conducted, which audit shall be conducted by a firm selected by AAGP at AAGP's
expense. Everlast Holding, Everlast and Stockholders shall cooperate in
connection therewith, including without limitation granting AAGP reasonable
access to any of the Properties.
(d) Except as identified on Schedule 2.16 hereto, there have been no
environmental studies, reports, investigations, audits, tests, reviews or other
analyses made or prepared relating to the current or prior business of Everlast
Holding or Everlast or any of the Properties which has not been delivered to
AAGP at least ten business days prior to the date hereof.
Section 2.17 Illegal Payments. Everlast has not, nor
have any of the Stockholders, directly or indirectly, paid or delivered any fee,
commission or other sum of money or item of
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property, however characterized, to any finder, agent, government official or
other party, in the United States or any other country, which is in any manner
related to the business or operations of Everlast, which Everlast or any of the
Stockholders know or have reason to believe to have been illegal under any
federal, state or local laws or the laws of any other country having
jurisdiction. Everlast and the Stockholders have not participated, jointly or
individually, directly or indirectly, in any boycotts affecting any of its
actual or potential customers.
Section 2.18 Business Relationships. Although there can
be no assurance that such relationships or arrangements will continue, except as
set forth on Schedule 2.18 hereto, Everlast and the Stockholders do not have
material business relationships or arrangements of any nature whatsoever which
they know or have reason to believe will not be available to the Surviving
Corporation, following the consummation of the transactions contemplated hereby,
on substantially the same terms or conditions as they are currently available to
Everlast.
Section 2.19 Suppliers and Customers. Except as set
forth on Schedule 2.19 hereto, no material supplier or customer of Everlast has
during the past twelve months canceled or otherwise terminated its services or
supplies to Everlast or its use or purchase of Everlast's products and services,
or has communicated any threat to Everlast's management to do so. Except as set
forth on Schedule 2.19 hereto, Everlast and Ben Nadorf do not have any knowledge
that any material supplier or customer intends to cancel or otherwise terminate
their relationship with Everlast or the usage or purchase of the products and
services of Everlast or that the transactions contemplated by this Agreement
will result in any such termination.
Section 2.20 Restrictive Documents or Laws. Except as
set forth on Schedule 2.20 hereto, neither Everlast Holding nor Everlast is a
party to or is bound under any, and there is no pending, proposed or, to the
best of Everlast Holding's, Everlast's and Ben Nadorf's knowledge, threatened
certificate, mortgage, lien, lease, agreement, contract, instrument, order,
judgment or decree, or any similar restriction which has, or reasonably could be
expected to have, a Material Adverse Effect with respect to Everlast.
Section 2.21 Properties.
(a) Schedule 2.21(a) hereto contains a correct and
complete schedule of all leases, subleases, easements, licenses and
other agreements of like kind, as amended, modified or supplemented
to date (collectively, the "Leases"), under which Everlast occupies
or has the right to occupy any real property (the land, buildings
and other improvements covered by the Leases being referred to
hereinafter as the "Leased Real Property.") Copies of all Leases
have been delivered to AAGP. Each Lease is valid, binding and in
full force and effect and enforceable against the parties thereto in
accordance with its respective terms; all rent and other sums and
charges payable by or to Everlast, as appropriate, as tenant,
sublessor or sublessee thereunder are current. Except as listed on
Schedule 2.21(a) hereto, no notice of default or termination under
any Lease is outstanding, no termination event or condition or
uncured default on the part of Everlast or, to Everlast's and Ben
Nadorf's
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<PAGE>
knowledge, on the part of the counterparty, exists under any Lease,
and no event has occurred and no condition exists, and the
consummation of the transactions contemplated by this Agreement will
not create or result in an event or condition, which with the giving
of notice or the lapse of time (or both) would constitute such a
default or termination event or condition. Neither Ben Nadorf nor
Everlast has any ownership interest in the landlord under any Lease.
Everlast holds valid leasehold title to the properties identified on
Schedule 2.21(a).
(b) Everlast is owner of valid fee title to the real
property listed on Schedule 2.21(b) hereto (such real properties
being referred to hereinafter as the "Owned Real Property"), which
Schedule contains a complete legal description of each such parcel
of real property. Except for Permitted Liens and as listed on
Schedule 2.21(b) hereto, all real property and leasehold interests
of Everlast are held free and clear of all mortgages, liens,
security interests, covenants, restrictions or encumbrances of any
nature whatsoever and Everlast has furnished AAGP copies of all
title, engineering, geologic and environmental reports and surveys
prepared by or for Stockholders or Everlast in respect of such real
property or Leased Real Property.
(c) Neither Stockholders nor Everlast have received
notice, and Everlast has no knowledge of any pending or threatened
condemnation proceeding affecting any real property of Everlast or
any sale or other disposition of the real property of Everlast in
lieu of condemnation.
(d) Except as provided in the Leases, Everlast does not
own or hold, and is not obligated under or a party to, any option,
right of first refusal or any other contractual right to purchase,
acquire, sell or dispose of the real property of Everlast or any
portion thereof or interest therein.
(e) Except as listed on Schedule 2.21(e) hereto, no
financing statement under the Uniform Commercial Code or similar law
naming Everlast as debtor has been filed in any jurisdiction in
respect of any of its properties, and Everlast is not a party to or
bound under any agreement or legal obligation authorizing any party
to file any such financing statement.
(f) Schedule 2.21(f) hereto contains a complete and
accurate list of all machinery, equipment, inventory, tooling,
parts, furniture, supplies and other tangible personal property
owned or used by Everlast valued at $100,000 or above, including,
without limitation, the equipment capitalized for financial
statement reporting purposes on the Financial Statements. It is
understood that a disposition of any single item of tangible
personal property with a net value on Everlast's books of more than
$100,000 shall not be deemed to be a disposition in the ordinary
course of business. The assets of Everlast are being maintained at
normal levels adequate for the conduct of the business of Everlast
as currently conducted and include all proprietary rights and other
properties and assets applicable to or used in connection with the
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business of Everlast All assets of Everlast are in suitable
condition and repair, except for ordinary wear and tear.
(g) The inventory of Everlast is being maintained at
normal levels adequate for the continuation of its business as
presently being conducted. The inventory shown on the books of
Everlast at the close of business on the day before the Closing
Date, will be, in the aggregate, substantially useable and saleable
in the ordinary course of business of Everlast in accordance with
the customary past practice and as valued by Everlast. Such
valuation and physical inventory shall be delivered to AAGP.
Section 2.22 Contracts and Commitments. Schedule 2.22
hereto lists all personal property leases, contracts, agreements, contract
rights, license agreements, franchise rights and agreements, policies, purchase
and sales orders, quotations and executory commitments, instruments, third party
guaranties, indemnifications, arrangements, obligations and understandings,
whether oral or written, to which Everlast is a party (whether or not legally
bound thereby) (collectively, the "Contracts"), other than purchase and sale
orders, quotations and executory commitments incurred in the ordinary course of
business of Everlast that are currently in effect and are not reasonably
expected to exceed $50,000, if relating to capital expenditures or acquisition,
or $10,000, if relating to rental or use of equipment, other personal property
or fixtures. Each of the Contracts is valid and binding, in full force and
effect and enforceable against Everlast and the other entities that are parties
thereto in accordance with its provisions. Other than as set forth on Schedule
2.22, Everlast has not assigned, mortgaged, pledged, encumbered, or otherwise
hypothecated any of its right, title or interest under any of the Contracts.
Except as set forth on Schedule 2.22 hereto, neither Everlast, nor any other
party thereto is in violation of, in default in respect of nor has there
occurred an event or condition which, with the passage of time or giving of
notice (or both), would constitute a material violation or a default of any
Contract. No notice has been received by Stockholders or Everlast claiming any
such default by Everlast or indicating the desire or intention of any other
party thereto to amend, modify, rescind or terminate the same.
Section 2.23 Accounts Receivable. All accounts
receivable and notes receivable reflected in the Financial Statements and any
account receivable and notes receivable arising between the date of such
Financial Statements and the Closing Date are or will be, to the extent not
collected between the date hereof and the Closing Date, subsisting; arose or
will arise in the ordinary and usual course of business; and except for the
reserves set forth in the Financial Statements and reserves established
thereafter in accordance with Everlast's prior practice, credit experience and
GAAP consistently applied, are not and will not be subject to any counterclaim,
set-off or defense and are not, and will not be, subject to any lien, charge or
encumbrance of any nature.
Section 2.24 Officers, Employees and Compensation.
Schedule 2.24 hereto lists and describes as of the date hereof, the base salary,
fringe benefits and perquisites of any key employee of Everlast (other than
temporary employees) whose total compensation for the fiscal year ending
December 31, 2000 is estimated to exceed $50,000. Except as disclosed on
Schedule 2.24 hereto, there are no other forms of compensation paid by Everlast
to any such officer or key
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employee. Except as disclosed on Schedule 2.24 hereto, the provisions for wages
and salaries accrued on the Financial Statements are and will be adequate to
reflect all obligations for wages and salaries and other compensation to
Everlast's employees through December 31, 1999 including, without limitation,
vacation pay, sick pay, and all commissions and other fees due and payable to
agents, salesmen and other employees of Everlast. Except as listed on Schedule
2.24 hereto, Everlast is not obligated, directly or indirectly, to any director
or shareholder of Everlast or any person related to such person by blood or
marriage, except for current liability for compensation. No shareholder or
director and no "affiliate" or "associate" (as such terms are defined in the
rules and regulations promulgated under the Securities Act of 1933, as amended
(the "Securities Act")) thereof holds any position or office with or has any
material financial interest, direct or indirect, in any supplier, customer or
account of, or other outside business that has material transactions with
Everlast. Schedule 2.24 hereto sets forth any rights of employees under existing
contracts with Everlast in respect of severance arrangements.
Section 2.25 Banks; Safe Deposit Boxes. Schedule 2.25
hereto lists the names and locations of all banks at which Everlast has an
account and/or safe deposit boxes, the numbers of any such accounts and the
names of all persons authorized to draw thereon or to have access thereto.
Section 2.26 Books of Account; Records. The general
ledgers, books of account and other records of Everlast are complete and
correct, have been maintained in accordance with good business practices and the
matters contained therein are appropriately and accurately reflected in the
Financial Statements.
Section 2.27 Complete Disclosure. No representation or
warranty made by Everlast, Everlast Holding or the Stockholders in this
Agreement, and no exhibit, schedule, statement, certificate or other writing
furnished to AAGP or New Corp. by or on behalf of Everlast, Everlast Holding or
the Stockholders pursuant to this Agreement or in connection with the
transactions contemplated hereby, contains or will contain, any untrue statement
of a material fact or omits or will omit to state a material fact necessary to
make the statements contained herein and therein not misleading.
Section 2.28 Formation and Authority of Everlast Holding
Everlast Holding was formed solely for the purposes of the Merger and engaging
in the transactions contemplated hereby. As of the date hereof and the Closing
Date, all issued and outstanding shares of capital stock of Everlast Holding are
and will be directly owned by the Stockholders. There are not as of the date
hereof, and there will not be as of the Closing Date, any outstanding or
authorized options, warrants, calls rights, commitments, or any other agreements
requiring Everlast Holding to issue, transfer, sell, purchase, redeem, or
acquire any shares of its capital stock. As of the date hereof and the Closing
Date, except for the obligations or liabilities incurred in connection with its
incorporation or organization in the transactions contemplated hereby, Everlast
Holding has not or will not have incurred, directly or indirectly, through any
subsidiary or affiliate, any obligations or liabilities, or engaged in any
activities of any kind whatsoever or entered into any agreements or arrangements
with any person or entity.
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ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS
----------------------------------------------
Each Stockholder individually hereby represents and
warrants to the AAGP and New Corp., with respect to such Stockholder, as of the
date hereof as follows:
Section 3.1 Shares. Each Stockholder owns the number of
shares of Everlast Common Stock as set forth next to its name on Schedule I
hereto, free and clear of all liens, claims or encumbrances except as set forth
on Schedule 3.1 hereto. Each Stockholder has full right, power, legal capacity
and authority to transfer and deliver the shares of Everlast Common Stock
pursuant to this Agreement.
Section 3.2 Stockholder's Addresses, Access to
Information, Experience, Etc.
(a) The address set forth on Schedule I hereto is each
Stockholder's true and correct business, residence or domicile address.
Each Stockholder has received and read and is familiar with the terms of this
Agreement. Each Stockholder or his representative has had an opportunity to ask
questions of and receive answers from representatives of AAGP concerning the
terms and conditions of this transaction. Each Stockholder or his representative
has substantial experience in evaluating non-liquid investments, and is capable
of evaluating the merits and risks of an investment in AAGP (or has consulted
with a purchaser representative who has such experience).
(b) Each Stockholder or his representative acknowledges
that it has had an opportunity to evaluate all information regarding AAGP as it
has deemed necessary or desirable in connection with the transactions
contemplated by this Agreement, has independently evaluated the transactions
contemplated by this Agreement and has reached its own decision to enter into
this Agreement.
Section 3.3 Purchase Entirely for Own Account. The
Payment Shares to be received by each Stockholder and the Additional Shares will
be acquired for investment for each Stockholder's own account, not as a nominee
or agent, and not with a view to the resale or distribution of any part thereof.
The Stockholders each have no present plan or arrangement to dispose of the
Payment Shares and the Additional Shares.
Section 3.4 Restricted Securities. Each Stockholder or
his representative understands and acknowledges that the Payment Shares and the
Additional Shares are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act only
in certain limited circumstances. In this regard, each Stockholder represents
that it is familiar with Rule 144 promulgated under the Securities Act ("Rule
144"), as presently in effect, and understands the resale limitations imposed
thereby and by the Securities Act. Each Stockholder further acknowledges that
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the issuance of the Payment Shares and the Additional Shares are intended to be
exempt from registration under the Securities Act, by virtue of Section 4(2) of
the Securities Act. In furtherance thereof, such Stockholder represents and
warrants to AAGP and New Corp. as follows:
(i) Such Stockholder has no need for liquidity with
respect to his investment in AAGP; and
(ii) Such Stockholder (together with such Stockholder's
Stockholder Representative(s) (which term is used herein
with the same meaning as given in Rule 501(h) of
Regulation D promulgated under the Securities Act), if
any), has such knowledge and experience in financial,
and business matters as to be capable of evaluating the
merits and risks of an investment in the Payment Shares
and the Additional Shares. If such Stockholder has
appointed a Stockholder Representative, such Stockholder
has been advised by such Stockholder Representative as
to the merits and risks of an investment in AAGP in
general and the suitability of an investment in the
Payment Shares and the Additional Shares for such
Stockholder in particular.
Section 3.5 Legends. It is understood that the
certificates evidencing the Payment Shares and the Additional Shares may bear a
legend substantially as follows:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS, SUPPORTED BY AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE
COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.
The legends referred to above shall be removed by AAGP
from any certificate at such time as the holder of the shares represented by
the certificate delivers an opinion of counsel reasonably satisfactory to AAGP
to the effect that such legend is not required in order to establish compliance
with any provisions of the Securities Act, or at such time as the holder of such
shares satisfies the requirements of Rule 144(k) under the Securities Act,
provided that AAGP has received from the holder a written representation that
(i) such holder is not an affiliate of AAGP and has not been an affiliate of
AAGP during the preceding three months, (ii) such holder has beneficially owned
the shares represented by the certificate for a period of at least two years or
such shorter period as required by Rule 144(k), and (iii) such holder otherwise
satisfies the requirements of Rule 144(k) as then in effect with respect to such
shares.
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Section 3.6 Brokers. All negotiations relative to this
Agreement and the transactions contemplated hereby have been carried on by or on
behalf of Stockholders and Everlast in such a manner as not to give rise to any
claim against New Corp. and AAGP.
ARTICLE IV
----------
REPRESENTATIONS AND WARRANTIES OF AAGP AND NEW CORP.
----------------------------------------------------
AAGP and New Corp. represent and warrant to Stockholders
and Everlast as of the date hereof as follows:
Section 4.1 Corporate Existence. Each of AAGP and New
Corp. is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation.
Section 4.2 Authorization; Validity. Each of AAGP and
New Corp. has all requisite corporate power and authority to enter into this
Agreement, the Option Grant Agreement to be entered into by and between New
Corp. and George Q Horowitz substantially in the form of Exhibit E(the "George
Horowitz Option Agreement"), the Consulting Agreement to be entered into by and
between New Corp and David Shechet substantially in the forms of Exhibit D (the
"David Shechet Consulting Agreement"), the Employment Agreements to be entered
into by and between New Corp and each of Ben Nadorf and Wayne Nadorf
substantially in the form of Exhibits B & C, respectively, (the "Ben Nadorf
Employment Agreement" and the "Wayne Nadorf Employment Agreement",
respectively), the Registration Rights Agreement to be entered into by and among
AAGP and the Stockholders substantially in the form of Exhibit F (the
"Registration Rights Agreement," and together with the George Horowitz Option
Agreement, the Ben Nadorf Employment Agreement, the David Shechet Consulting
Agreement and the Wayne Nadorf Employment Agreement, the "Ancillary
Agreements"), perform its obligations hereunder and thereunder and to consummate
the transactions contemplated hereby and thereby. All necessary corporate action
has been taken by each of AAGP and New Corp. with respect to the execution,
delivery and performance by each of AAGP and New Corp. of this Agreement and the
Ancillary Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby. Assuming the due execution and
delivery of this Agreement and the Ancillary Agreements by, among others, the
Stockholders, Everlast Holding, Everlast, and the other parties thereto (to the
extent each is a party thereto), each of this Agreement and the Ancillary
Agreements to which it is a party, is a legal, valid and binding obligation of
each of AAGP and New Corp., enforceable against each of AAGP and New Corp. in
accordance with its terms, except (i) as such ability to enforce may be limited
by or subject to any bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally, (ii) as such obligations are
subject to general principles of equity and (iii) as rights to indemnity may be
limited by federal or state securities laws of public policy. There does not
exist any circumstances that would operate to terminate, reduce, alter or impair
the obligation of AAGP to redeem the Redeemable Preferred Stock and to issue
Make-Whole Shares or that give rise to any defense to the performance of AAGP's
obligation to redeem the
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Redeemable Preferred Stock and to issue Make-Whole Shares in accordance with the
terms of this Agreement and their respective Certificates of Designation.
Section 4.3 Capitalization. The authorized capital stock
of AAGP consists of (i) 10,000,000 shares of AAGP Common Stock, 2,492,581 of
which were issued and outstanding at March 31, 2000 and (ii) 100,000 shares of
Class A Common Stock, all of which were issued and outstanding at March 31,
2000. Schedule 4.3 hereto provides a list of outstanding options granted as of
the date of this Agreement under AAGP's 1993 Employee Stock Option Plan and 1995
Non-Employee Director Stock Option Plan. No later than the Closing Date, the
authorized capital stock will consist of (i) 19,000,000 shares of AAGP Common
Stock, (ii) 100,000 shares of Class A Common Stock, and (iii) 1,000,000 shares
of Preferred Stock. The capital stock of AAGP is duly authorized and all issued
capital stock has been duly and validly issued and is fully paid and
nonassessable and free of preemptive rights. The Payment Shares are duly
authorized and when issued in accordance with the terms and conditions of this
Agreement, will be validly issued, fully paid and nonassessable. The Payment
Shares are not subject to any preemptive rights or other similar restrictions.
The authorized capital stock of New Corp. consists of 100 shares of common
stock, $.01 par value per share, all of which are issued and outstanding and
owned by AAGP. The capital stock of New Corp. is duly authorized and all issued
capital stock has been duly and validly issued and is fully paid and
nonassessable and free of preemptive rights. The shares of New Corp Common Stock
are duly authorized and when issued in accordance with the terms and conditions
of this Agreement, will be validly issued, fully paid and nonassessable.
Section 4.4 Litigation. There is no claim, litigation,
action, suit, proceeding, investigation or inquiry, administrative or judicial,
pending or, to the knowledge of AAGP, threatened against AAGP or New Corp., at
law or in equity, before any federal, state or local court or regulatory agency,
or other governmental authority, which might have an adverse effect on AAGP's or
New Corp.'s ability to perform any of its respective obligations under this
Agreement or upon the consummation of the transactions contemplated by this
Agreement.
Section 4.5 No Breach of Statute or Contract. Neither
the execution and delivery of this Agreement and the Ancillary Agreements, nor
the consummation by AAGP or New Corp. of the transactions contemplated hereby or
thereby, nor compliance by AAGP or New Corp. with any of the provisions hereof
and thereof, will violate or cause a default under any statute (domestic or
foreign), judgment, order, writ, decree, rule or regulation of any court or
governmental authority applicable to AAGP, New Corp. or any of AAGP's material
properties; breach or conflict with any of the terms, provisions or conditions
of the Certificates of Incorporation or By-laws of AAGP or New Corp.; or
violate, conflict with or breach any agreement, contract, mortgage, instrument,
indenture or license to which AAGP or New Corp. is party or by which AAGP or New
Corp. is or may be bound, or constitute a default (in and of itself or with the
giving of notice, passage of time or both) thereunder, or result in the creation
or imposition of any encumbrance upon, or give to any other party or parties,
any claim, interest or right, including rights of termination or cancellation
in, or with respect to any of AAGP's properties.
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Section 4.6 SEC Reports and Financial Statements. Since
January 1, 1998, AAGP has filed with the Securities and Exchange Commission (the
"SEC") all forms, reports, schedules, statements and other documents required to
be filed by it under the Securities Act and the Exchange Act (as such documents
have been amended or supplemented since the time of their filing, collectively,
the "SEC Reports"). As of their respective dates, the SEC Reports (including
without limitation, any financial statements or schedules included therein) (a)
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and (b) complied in all material respects with the applicable
requirements of the Securities Act and Exchange Act (as the case may be) and all
applicable rules and regulations of the SEC promulgated thereunder. Each of the
consolidated financial statements included in the SEC Reports has been prepared
from, and are in accordance with, the books and records of AAGP, comply in all
material respects with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly present in all
material respects the consolidated results of operations and cash flows (and
changes in financial position, if any) of AAGP as at the dates thereof or for
the periods presented therein. Since June 30, 2000 (the end of the period
covered by the last quarterly report on Form 10-Q filed by AAGP with the SEC),
there has been no material adverse change in the business, financial condition
and results of operations of AAGP and AAGP has not entered into an agreement or
contract which is not in the ordinary course of business.
Section 4.7 Absence of Undisclosed Liabilities. Except
as disclosed in the SEC Reports or as incurred in the ordinary course of
business, AAGP has no material debts, liabilities or obligations of any kind,
whether accrued, absolute, contingent or other, whether due or to become due,
that would have a Material Adverse Effect.
Section 4.8 Complete Disclosure. No representation or
warranty made by AAGP or New Corp. in this Agreement, and no exhibit, schedule,
statement, certificate or other writing furnished to Everlast or Stockholders by
or on behalf of AAGP or New Corp. pursuant to this Agreement or in connection
with the transactions contemplated hereby, contains or will contain, any untrue
statement of a material fact or omits or will omit to state a material fact
necessary to make the statements contained herein and therein not misleading.
Section 4.9 Formation and Authority of New Corp. New
Corp. was formed solely for the purposes of the Merger and engaging in the
transactions contemplated hereby. As of the date hereof and the Closing Date,
all issued and outstanding shares of capital stock of New Corp. are and will be
directly owned by AAGP. There are not as of the date hereof, and there will not
be as of the Closing Date, any outstanding or authorized options, warrants,
calls rights, commitments, or any other agreements requiring New Corp. to issue,
transfer, sell, purchase, redeem, or acquire any shares of its capital stock. As
of the date hereof and the Closing Date, except for the obligations or
liabilities incurred in connection with its incorporation or organization in the
transactions contemplated hereby, New Corp. has not or will not have incurred,
directly or indirectly, through
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any subsidiary or affiliate, any obligations or liabilities, or engaged in any
activities of any kind whatsoever or entered into any agreements or arrangements
with any person or entity.
Section 4.10 Filings. Except (a) for the filing of the
Certificate of Merger with the Secretary of the State of Delaware and any other
appropriate documents with the relevant authorities of other states in which New
Corp. or Everlast is qualified to do business, and (b) as described on Schedule
4.10 hereto, no consent, approval, or action of, filing with, or notice to any
Governmental Authority of other public or private third party is necessary or
required under any of the terms, conditions, or provisions of any law or order
of any Governmental Authority or any contract to which AAGP or New Corp. or any
of their respective assets or properties is bound for the execution and delivery
of this Agreement by AAGP or New Corp., the performance by AAGP and New Corp. of
their respective obligations hereunder, or the consummation of the transactions
contemplated hereby.
ARTICLE V
---------
COVENANTS
---------
Section 5.1 Covenants of Everlast Regarding Conduct of
Business Operations Pending the Closing. Everlast covenants and agrees that
between the date of this Agreement and the Closing Date, Everlast will carry on
its business in the ordinary course and consistent with past practice, will use
its best efforts to (a) preserve its respective business organization intact,
(b) retain the services of its respective present employees, and (c) preserve
the good will of its respective suppliers and customers, and will not, except in
the ordinary course of business, purchase, sell, lease or dispose of any
property or assets or incur any liability or enter into any other extraordinary
transaction. By way of amplification and not limitation, Everlast shall not,
between the date of this Agreement and the Closing Date, directly or indirectly,
do any of the following without the prior written consent of the AAGP:
(i) execute any contract, agreement, license (as to
which written consent may not be unreasonably withheld) or other instrument
which is material for the Business;
(ii) make any distribution, bonus or loan to its
shareholders or family members of its shareholders from the date hereof until
the Closing Date;
(iii) (a) issue, sell, pledge, dispose of, encumber,
authorize, or propose the issuance, sale, pledge, disposition, encumbrance or
authorization of any shares of its capital stock of any class, or any options,
warrants, convertible securities or other rights of any kind to acquire any
shares of its capital stock, or any other ownership interest; (b) amend or
propose to amend its Articles of Incorporation; (c) split, combine or reclassify
any of its outstanding shares, or declare, set aside or pay any dividend or
other distribution payable in cash, stock, property or otherwise with respect
thereto; or (d) redeem, purchase or otherwise acquire any shares of its capital
stock;
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(iv) (a) make any acquisition (by merger, consolidation,
or acquisition of stock or assets) of any corporation, partnership or other
business organization or division thereof; (b) except in the ordinary course of
business and in a manner consistent with past practice, sell, pledge, dispose
of, or encumber or authorize or propose the sale, pledge, disposition or
encumbrance of any of its assets; (c) other than under any existing credit
facility, incur any indebtedness for borrowed money, assume, guarantee, endorse
or otherwise become responsible for the obligations of any other individual,
partnership, firm or corporation, or make any loans or advances to any
individual, partnership, firm, or corporation, or enter into any contract or
agreement to do so, except in the ordinary course of business and consistent
with past practice; (d) authorize any single capital expenditure or series of
related capital expenditures each of which is in excess of $10,000; or (e)
release or assign any indebtedness owed to it or any claims held by it, except
in the ordinary course of business and consistent with past practice;
(v) take any action other than in the ordinary course of
business and in a manner consistent with past practice with respect to the grant
of any severance or termination pay (otherwise than pursuant to its policies in
effect on the date hereof) or with respect to any increase of benefits payable
under its severance or termination pay policies in effect on the date hereof;
(vi) make any payments (except in the ordinary course of
business and in amounts and in a manner consistent with past practice) under any
Employee Benefit Plan to any employee, independent contractor or consultant,
enter into any new Employee Benefit Plan or any new consulting agreement, grant
or establish any awards under such Employee Benefit Plan or agreement, in any
such case providing for payments or awards having a fair market value of more
than, $10,000, or adopt or otherwise amend any of the foregoing;
(vii) change any accounting policies or procedures
(including without limitation its procedures with respect to the payment of
accounts payable), other than such changes deemed necessary to comply with U.S.
GAAP or required as a result of a change in law;
(viii) take, or agree in writing or otherwise to take,
any of the foregoing actions or any action which would make any of its
representations or warranties contained in this Agreement untrue or incorrect in
any material respect as of the date when made.
Section 5.2 Covenant Against Disclosure. (a) Everlast,
Everlast Holding and each of the Stockholders each agree not to (i) disclose to
any person, association, firm, corporation or other entity (other than AAGP, New
Corp. or those designated in writing by AAGP and New Corp.) in any manner,
directly or indirectly, any confidential information or data relevant to AAGP,
whether of a technical or commercial nature, or (ii) use, or permit or assist,
by acquiescence or otherwise, any person, association, firm, corporation or
other entity (other than AAGP, New Corp. or those designated in writing by AAGP
and New Corp.) to use, in any manner, directly or indirectly, any such
information or data, excepting only use of such data or information as is at the
time generally known to the public and which did not become generally known
through any breach by Everlast, Everlast Holding, or any of the Stockholders of
any provision of this Section 5.2(a) and further
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excepting disclosure that is required pursuant to law or the order of a court of
competent jurisdiction, or other legal process or authority, it being
understood, however, that Everlast, Everlast Holding and Stockholders will
provide AAGP and New Corp. with prompt notice of the requirement for such
disclosure as soon as practical after Everlast, Everlast Holding or any
Stockholder is notified thereof and prior to its disclosure thereof so as to
enable AAGP and New Corp., at AAGP's and New Corp.'s sole cost and expense, to
challenge the order compelling such disclosure if AAGP and New Corp. so desire.
(b) AAGP and New Corp. agree not to (i) disclose to any
person, association, firm, corporation or other entity (other than Everlast,
Everlast Holding, each of the Stockholders or those designated in writing by
Everlast, Everlast Holding and the Stockholders) in any manner, directly or
indirectly, any confidential information or data relevant to Everlast, whether
of a technical or commercial nature, or (ii) use, or permit or assist, by
acquiescence or otherwise, any person, association, firm, corporation or other
entity (other than Everlast, Everlast Holding, the Stockholders or those
designated in writing by Everlast, Everlast Holding and the Stockholders) to
use, in any manner, directly or indirectly, any such information or data,
excepting only use of such data or information as is at the time generally known
to the public and which did not become generally known through any breach by
AAGP or New Corp. of any provision of this Section 5.2(b) and further excepting
disclosure that is required pursuant to law or the order of a court of competent
jurisdiction, or other legal process or authority, it being understood, however,
that AAGP and New Corp. will provide Everlast, Everlast Holding and the
Stockholders with prompt notice of the requirement for such disclosure as soon
as practical after AAGP or New Corp. is notified thereof and prior to its
disclosure thereof so as to enable Everlast, Everlast Holding and the
Stockholders, at their cost and expense, to challenge the order compelling such
disclosure if Everlast, Everlast Holding and the Stockholders so desire.
Section 5.3 Covenant Against Hiring. Stockholders each
understand and acknowledge that in AAGP's view, it is essential to the
successful operation of Everlast that AAGP retain substantially unimpaired
Everlast's operating organization. Neither the Stockholders nor Everlast shall
take any action which would induce any employee or representative of Everlast
not to become or continue as an employee or representative of the Surviving
Corporation, other than immediate family members of the Stockholders. Without
limiting the generality of the foregoing, Stockholders shall not, whether
directly or indirectly, through any subsidiary or affiliate, employ, whether as
an employee, officer, agent, consultant or independent contractor, or enter into
any partnership, joint venture or other business association with, any person
who was at any time during the 12 months preceding the Closing Date an employee,
representative or officer of Everlast, for a period of 12 months after the
Closing Date.
Section 5.4 Injunctive Relief. Each of the parties
hereto acknowledge and agree that the remedy at law for any breach of any of
party's obligations under Sections 5.1, 5.2, 5.3, and 5.4 hereof would be
inadequate, and agree and consent that temporary and permanent injunctive relief
may be granted in a proceeding that may be brought to enforce any provision of
Sections 5.1, 5.2, 5.3, and 5.4 without the necessity of proof of actual damage.
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Section 5.5 Severability. With respect to any provision
of this Agreement finally determined by a court of competent jurisdiction to be
unenforceable, such court shall have jurisdiction to reform such provision so
that it is enforceable to the maximum extent permitted by law, and the parties
shall abide by such court's determination. In the event that any provision of
this Agreement cannot be reformed, such provision shall be deemed to be severed
from this Agreement, but every other provision of this Agreement shall remain in
full force and effect.
Section 5.6 Further Assurances. On and after the Closing
Date, Stockholders shall prepare, execute and deliver, at Everlast's expense,
such further instruments or documents, and shall take or cause to be taken such
other or further action as AAGP or New Corp. shall reasonably request at any
time or from time to time in order to consummate the transactions contemplated
by this Agreement. On and after the Closing Date, AAGP shall prepare, execute
and deliver, at AAGP's expense, such further instruments, and shall take or
cause to be taken such other or further action as Stockholders shall reasonably
request at any time or from time to time in order to consummate the transactions
contemplated by this Agreement. On or after the Closing Date, AAGP shall, upon
reasonable notice, make available the books and records of New Corp. to
Stockholders and their representatives during normal business hours for the
purpose of assisting Stockholders in (i) defending litigation instituted by a
third party and (ii) performing their obligations under Article VIII hereof.
Section 5.7 Announcements. None of the parties to this
Agreement shall make any public announcements prior to the Closing Date with
respect to this Agreement or the transactions contemplated hereby without the
written consent of the other parties hereto, except as required by law.
Section 5.8 Consents. Stockholders and Everlast each
shall use their best efforts to take or cause to be taken all actions and do or
cause to be done all things necessary, proper or advisable to consummate the
transactions contemplated by this Agreement including, without limitation, to
obtain all permits, approvals (regulatory, governmental or otherwise),
authorizations and consents of all third parties and to make all filings with
and give all notices to third parties which may be necessary or required in
order to effectuate the transactions contemplated hereby.
Section 5.9 George Horowitz Agreements. The Employment
Agreement dated as of January 1, 2000 between AAGP and George Q Horowitz may not
be amended or otherwise modified without the consent of a majority in interest
of the Redeemable Preferred Stock. Upon consummation of the Merger, Mr. Horowitz
shall be entitled to receive from AAGP a one time bonus resulting in net
after-tax proceeds of $90,000, which Mr. Horowitz is required to use to repay
certain indebtedness owed by Mr. Horowitz to AAGP.
Section 5.10 Ben Nadorf Employment Agreement. AAGP and
Ben Nadorf shall use their commercially reasonable best efforts to enter into
the Ben Nadorf Employment Agreement between AAGP and Ben Nadorf substantially in
the form attached hereto as Exhibit B.
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Section 5.11 David Shechet Consulting Agreement. AAGP
and David Shechet shall use their commercially reasonable best efforts to enter
into the David Shechet Consulting Agreement between AAGP and David Shechet
substantially in the form attached hereto as Exhibit D.
Section 5.12 Wayne Nadorf Employment Agreement. AAGP and
Wayne Nadorf shall use their commercially reasonable best efforts to enter into
the Wayne Nadorf Employment Agreement between AAGP and Wayne Nadorf
substantially in the form attached hereto as Exhibit C.
Section 5.13 George Horowitz Option Agreement. AAGP and
George Q Horowitz shall use their commercially reasonable best efforts to enter
into the George Horowitz Option Agreement between AAGP and George Q Horowitz
substantially in the form attached hereto as Exhibit E.
Section 5.14 Registration Rights Agreement. AAGP and the
Stockholders shall use their commercially reasonable best efforts to enter into
the Registration Rights Agreement by and among AAGP and the Stockholders
substantially in the form attached hereto as Exhibit F.
Section 5.15 Title Documents. Everlast Holding,
Everlast, and Stockholders shall reasonably assist AAGP with respect to AAGP
obtaining an updated survey, updated title commitment and Uniform Commercial
Code search reports (state and local, personal property and fixture) with
respect to Everlast Holding, Everlast and Stockholder, for all counties and
states relating to the Owned Real Property and Leased Real Property. In
connection therewith, Everlast Holding, Everlast and Stockholder shall provide
to AAGP's counsel true and complete photostatic copies of all surveys and title
insurance policies or commitments in Everlast Holding's, Everlast's and
Stockholder's possession and covering the Owned Real Property and Leased Real
Property, ten days after the date hereof.
Section 5.16 Life Insurance. For so long as any share of
Redeemable Preferred Stock remains outstanding, AAGP shall keep in full force
and effect the life insurance currently in effect on the life of Ben Nadorf, and
shall solely use all proceeds realized from such life insurance to redeem any
outstanding shares of Redeemable Preferred Stock on a pro rata basis.
Section 5.17 Substitute Consultant. If David Shechet is
unable to perform services under the David Shechet Consulting Agreement due to
death or disability and as a result AAGP is no longer obligated to make payments
under the David Shechet Employment Agreement, Ben Nadorf or such other majority
holder of outstanding Redeemable Preferred Stock may select another person or
entity to examine the consolidated financial statements of AAGP on a quarterly
basis. AAGP shall reimburse Ben Nadorf or such other majority holder for the
costs of such person or entity up to a maximum of $30,000 per annum.
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Section 5.18 Health Insurance. Until his death, AAGP
shall use its commercially reasonable best efforts to include Ben Nadorf in the
health insurance coverage it provides to members of senior management.
ARTICLE VI
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CLOSING DOCUMENTS
-----------------
Section 6.1 Deliveries by Stockholders. On or prior to
the Closing Date, Stockholders shall deliver to AAGP and New Corp., duly and
properly executed, the following:
(a) A Certificate or Certificates representing the
shares of Everlast Common Stock duly endorsed in blank for transfer
or accompanied by separate stock powers duly executed in blank, with
all necessary documentary stamps evidencing the payment of all
applicable transfer taxes.
(b) Resignation letters, effective immediately, executed
by each incumbent director and officer of Everlast designated by
AAGP.
(c) Resolutions of the Boards of Directors of Everlast
Holding and Everlast authorizing the execution and delivery of this
Agreement by Everlast Holding and Everlast and the performance of
their respective obligations hereunder, certified by their
respective Secretaries.
(d) A Certificate of the Secretary of State of the
States of New York, Delaware and the respective States of
incorporation of each of the Subsidiaries, dated as of a recent date
as to the good standing of Everlast Holding, Everlast, and the
Subsidiaries, respectively, in such jurisdictions, along with
telephonic or facsimile confirmations of such good standing on the
Closing Date.
(e) A Certificate of the Secretary of State of each
state listed on Schedule 2.1, dated as of a recent date as to the
good standing of Everlast Holding, Everlast or any Subsidiary, if
applicable, in each such state, along with telephonic or facsimile
confirmation of such good standing on the Closing Date.
(f) The legal opinion of counsel to Stockholders,
Everlast Holding and Everlast in the form attached hereto as Exhibit
G hereto.
(g) A Certificate of the President and Secretary of
Everlast Holding and Everlast in accordance with Section 7.1(iv)
hereof and the satisfaction of Everlast of the conditions to closing
provided for in Section 5.1 hereof.
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(h) A Certificate of Stockholders in accordance with
Section 7.1(iv) hereof and the satisfaction of Everlast of the
conditions to closing provided for in Section 5.1 hereof.
(i) A Certificate of the Chief Executive Officer and
Chief Financial Officer of Everlast as to the accuracy of the
computation of the Net Current Assets.
(j) Such other separate instruments or documents that
AAGP may reasonably deem necessary or appropriate in order to
consummate the transactions contemplated by this Agreement.
Section 6.2 Deliveries by AAGP and New Corp. On or prior
to the Closing Date, AAGP and New Corp. shall deliver to Stockholders all duly
and properly executed, the following:
(a) Resolutions of the Board of Directors of each of
AAGP and New Corp. authorizing the execution and delivery of this
Agreement and the Ancillary Agreements to which it is a party by
each of AAGP and New Corp. and the performance of its obligations
hereunder and thereunder, certified by the Secretary of each of AAGP
and New Corp., as the case may be.
(b) A Certificate of the Secretary of State of the State
of Delaware dated as of a recent date as to the good standing of
AAGP and New Corp. in the State of Delaware,
(c) The legal opinion of counsel to each of AAGP and New
Corp. in the form attached hereto as Exhibit H hereto.
(d) A Certificate of the President and Secretary of AAGP
and New Corp. in accordance with Section 7.2(iv).
(e) The certificates of Payment Shares to be delivered
at Closing to Stockholders.
(f) The certificates of Additional Shares to be
delivered at Closing to the Stockholders.
(g) The certificates of Redeemable Preferred Stock to be
delivered at Closing to the Stockholders.
(h) Certified checks made to each of the Stockholders in
the amount as shown on Schedule I hereto.
(i) The George Horowitz Option Agreement.
(j) The Ben Nadorf Employment Agreement.
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(k) The David Shechet Consulting Agreement.
(l) The Wayne Nadorf Employment Agreement.
(m) The Registration Rights Agreement.
(n) Such other separate instruments or documents that
Stockholders may reasonably deem necessary or appropriate in order
to consummate the transactions contemplated by this Agreement.
ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS.
----------- ------------------------------------
Section 7.1 Conditions to Obligations of AAGP and New
Corp. Each and every obligation of each of AAGP and New Corp. to be performed on
the Closing Date shall be subject to the satisfaction as of or before the
Closing Date of the following conditions (unless waived in writing by AAGP and
New Corp.):
(a) Representations and Warranties. Stockholders' and
Everlast's representations and warranties set forth in Articles II
and III of this Agreement shall have been true and correct when made
and shall be true and correct at and as of the Closing Date as if
such representations and warranties were made as of the Closing
Date. No representation or warranty of Stockholders contained in
Article III hereof shall be deemed untrue or incorrect for the
purposes of this Section 7.1(i), as a consequence of the existence
of any fact, circumstance or event, unless such fact, circumstance
or event, individually or taken together with all other facts,
circumstances or events inconsistent with any Section of Article III
has or would have a Material Adverse Effect with respect to Everlast
Holding and Everlast or the Business taken as a whole, provided,
however, that as used above "Material Adverse Effect" shall exclude
(a) any change or effect due to general economic or industry wide
conditions, (b) any continuation of an adverse trend disclosed to
AAGP, New Corp. or any affiliate of AAGP on or prior to the date
hereof and (c) any condition described in the Schedules to this
Agreement.
(b) Performance of Agreement. All covenants, conditions
and other obligations under this Agreement which are to be performed
or complied with by Stockholders and Everlast Holding and Everlast
shall have been fully performed and complied with on or prior to the
Closing Date including, without limitation, the delivery of the
fully executed instruments and documents in accordance with Section
6.2.
(c) No Adverse Proceeding. There shall be no pending or
threatened claim, action, litigation or proceeding, judicial or
administrative, or governmental investigation against AAGP, New
Corp., Stockholders, Everlast Holding or Everlast, for the purpose
of
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enjoining or preventing the consummation of this Agreement, or
otherwise claiming that this Agreement or the consummation hereof is
illegal.
(d) Certificates. Each of Everlast Holding and Everlast
and each Stockholder shall have delivered to AAGP and New Corp. its
certificate, dated the Closing Date, executed by Everlast Holding's
President and Secretary, and each Stockholder, respectively, to the
effect that (a) the conditions set forth in subsections (i) and (ii)
and, to the best knowledge of such officers and Stockholders,
respectively, (iii), of this Section 7.1 have been satisfied, and
(b) the Certificates of Incorporation and By-laws of Everlast
Holding and Everlast shall have not been amended since the date upon
which certified copies of each had been delivered to AAGP and New
Corp. and remain in full force and effect.
(e) Operation of the Business. The operation of Everlast
in the ordinary course shall have continued without material adverse
change.
(f) Rights to Acquire Capital Stock. There shall not
exist any rights to acquire capital stock of Everlast Holding and
Everlast other than the rights of AAGP and New Corp. arising under
this Agreement.
(g) AAGP Stockholder Consent. The stockholders of AAGP
shall have affirmatively voted to (i) to amend the certificate of
incorporation of AAGP to provide for the issuance of preferred stock
of AAGP upon such terms as shall be designated by the Board of
Directors of AAGP, (ii) to change the name of AAGP to a name that
includes "Everlast," and (iii) to effect such other matters as may
be necessary to consummate the Merger.
(h) Government Consents and Approvals. All filings and
registrations with, and notifications to, all federal, state, local
and foreign authorities required for consummation of the
transactions contemplated by this Agreement shall have been made,
and all consents, approvals and authorizations of all federal,
state, local and foreign authorities and parties to contracts,
licenses, agreements or instruments required for consummation of the
transactions contemplated by this Agreement shall have been received
and shall be in full force and effect.
(i) Material Adverse Change. Since December 31, 1999
here shall not have been any material adverse change in the
business, operations, financial condition, assets, liabilities,
prospects of Everlast and its subsidiaries, taken as a whole.
Section 7.2 Conditions to Obligations of Stockholders
and Everlast.
Each and every obligation of Stockholders, Everlast
Holding and Everlast to be performed on the Closing Date shall be subject to
the satisfaction as of or before the Closing Date of the following conditions
(unless waived in writing by Stockholders, Everlast Holding and Everlast):
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(a) Representations and Warranties. AAGP's and New
Corp.'s representations and warranties set forth in Article IV of
this Agreement shall have been true and correct when made and shall
be true and correct at and as of the Closing Date as if such
representations and warranties were made as of the Closing Date.
(b) Performance of Agreement. All covenants, conditions
and other obligations under this Agreement which are to be performed
or complied with by AAGP and New Corp. shall have been fully
performed and complied with on or prior to the Closing Date
including the delivery and the fully executed instruments and
documents in accordance with Section 6.2.
(c) No Adverse Proceeding. There shall be no pending or
threatened claim, action, litigation or proceeding, judicial or
administrative, or governmental investigation against AAGP, New
Corp., Stockholders, Everlast Holding or Everlast, for the purpose
of enjoining or preventing the consummation of this Agreement, or
otherwise claiming that this Agreement or the consummation hereof is
illegal.
(d) Certificate. AAGP and New Corp. shall have
delivered to Stockholders a certificate, dated the Closing Date,
executed by each of AAGP's and New Corp.'s President and Secretary
to the effect that (a) the conditions set forth in subsections (i)
and (ii) and, to the best knowledge of such officers, (iii), of this
Section 7.2 have been satisfied and (b) the Certificate of
Incorporation and By-laws of each of AAGP and New Corp. shall have
not been amended since the date upon which certified copies of each
had been delivered to Stockholders and remain in full force and
effect.
[The remainder of this page was intentionally left blank.]
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<PAGE>
ARTICLE VIII
------------
INDEMNIFICATION
---------------
Section 8.1 Survival of Representations, Warranties and
Agreements.
Subject to the limitations set forth in this Article
VIII and notwithstanding any investigation conducted at any time with regard
thereto by or on behalf of AAGP, New Corp. or Stockholders, Everlast Holding and
Everlast all representations, warranties, covenants and agreements of AAGP and
New Corp. or Stockholders, Everlast Holding and Everlast in this Agreement and
in the Additional Documents (as hereinafter defined) shall survive the
execution, delivery and performance of this Agreement and shall be deemed to
have been made again by AAGP and New Corp. or Stockholders Everlast Holding and
Everlast on and as of the Closing Date. All statements contained in any
Additional Document shall be deemed representations and warranties of AAGP and
New Corp. or Stockholders, Everlast Holding and Everlast as the case may be, set
forth in this Agreement within the meaning of this Article. From and after the
Closing, none of the parties hereto shall be liable or responsible in any manner
whatsoever to any other party, whether for indemnification or otherwise, except
for indemnity as expressly provided in this Article VIII, which provides the
exclusive remedy and cause of action of the parties hereto with respect to any
matter arising out of or in connection with this Agreement or any Schedule
hereto, or any opinion or certificate delivered in connection herewith, provided
that the foregoing shall not restrict each party's right to (i) seek equitable
relief as provided in Section 5.4 hereof or (ii) assert a cause of action
against the other party under Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder, if such other party, with actual knowledge and the
intent to defraud, has (a) made an untrue statement of material fact or (b)
omitted to state a material fact, in either case in connection with the
transaction contemplated by this Agreement.
Section 8.2 Indemnification.
(a) Subject to the limitations set forth in this Article
VIII, Ben Nadorf shall indemnify and hold harmless AAGP and New
Corp. from and against any and all losses, liabilities, damages,
demands, claims, suits, actions, judgments or causes of action,
assessments, costs and expenses including, without limitation,
interest, penalties, reasonable attorneys' fees, any and all
reasonable expenses incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of any
claim or litigation (collectively, "Damages"), asserted against,
resulting to, imposed upon, or incurred or suffered by AAGP or New
Corp., directly or indirectly, as a result of or arising from the
following (individually an "Indemnifiable Claim" and collectively
"Indemnifiable Claims" when used in the context of AAGP or New Corp.
as the Indemnified Party (as defined below)):
(i) Any inaccuracy in or breach of any of
the representations, warranties or agreements made in
this Agreement by Stockholders, Everlast Holding and
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Everlast or the non-performance of any covenant or
obligation to be performed by Stockholders; or
(ii) Any misrepresentation in or any
omission from any certificate, schedule, exhibit or
other material document (collectively, the "Additional
Documents") furnished or to be furnished by or on behalf
of Stockholders, Everlast Holding and Everlast in their
capacity as such under this Agreement.
(b) Subject to the limitations set forth in this Article
VIII, the Stockholders shall indemnify and hold harmless AAGP and
New Corp. from and against any and all Damages, asserted against,
resulting to, imposed upon, or incurred or suffered by AAGP or New
Corp., directly or indirectly, as a result of or arising from the
following (also an "Indemnifiable Claim" and collectively
"Indemnifiable Claims" when used in the context of AAGP or New Corp.
as the Indemnified Party (as defined below)):
(i) Any inaccuracy in or breach of any of
the representations, warranties or agreements made in
this Agreement by Stockholders in Section 2.6, Section
2.9 or Article III hereof; and
(ii) Taxes, fees or penalties that may arise
as a result of ongoing or future audits of any tax
return filed by Everlast prior to the date of Closing by
any federal, state, local foreign tax authority
(provided, however, that the indemnity provided by the
Stockholders shall only be with respect to 50% of the
Damages).
(c) Subject to the limitations set forth in this Article
VIII, AAGP shall indemnify and hold harmless Stockholders from and
against any and all Damages asserted against, resulting to, imposed
upon, or incurred or suffered by Stockholders, directly or
indirectly, as a result of or arising from the following
(individually an "Indemnifiable Claim" and collectively
"Indemnifiable Claims" when used in the context of Stockholders as
the Indemnified Party):
(i) Any inaccuracy in or breach of any of
the representations, warranties or agreements made by
AAGP and New Corp. in this Agreement or the
non-performance of any covenant or obligation to be
performed by AAGP;
(ii) Any misrepresentation in or any
omission from any Additional Document furnished or to be
furnished by or on behalf of AAGP or New Corp.; or
(iii) Any use by AAGP of the name or
likeness of Muhammad Ali.
Section 8.3 Limitations on Indemnification. Rights to
indemnification hereunder are subject to the following limitations:
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(a) Neither AAGP and New Corp. nor Stockholders shall be
entitled to indemnification hereunder with respect to an
Indemnifiable Claim (or, if more than one Indemnifiable Claim is
asserted, with respect to all Indemnifiable Claims) unless the
aggregate amount of Damages with respect to such Indemnifiable Claim
or Claims on behalf of Stockholders on the one hand, and AAGP and
New Corp. on the other hand, exceeds $200,000, in which event the
Indemnified Party shall be entitled to be indemnified for the full
amount of all Indemnifiable Claims in excess of $200,000. The
$200,000 limitation referred to above shall not apply to
Stockholders', Everlast's and Everlast Holding's representations or
agreements set forth in Sections 2.5 and 3.1 hereof or AAGP's
representations set forth in Section 4.3 hereof.
(b) The obligation of indemnity provided herein with
respect to the representations and warranties set forth in Article
II (except Section 2.9) of this Agreement shall terminate one year
after the Closing Date (other than for claims made prior to such
date).
(c) The obligation of indemnity provided herein with
respect to the representations and warranties set forth in Section
2.9 of this Agreement shall terminate on:
(i) the expiration of the periods of
limitations and any extensions thereof applicable to
assessment and collection of federal income taxes under
the Code with respect to the representations as to the
absence of unpaid or undisclosed federal income taxes
(including any interest, penalties or expenses) of
Stockholders, Everlast and Everlast Holding; and
(ii) the expiration of the periods of
limitations and any extensions thereof applicable to
assessment and collection of state taxes, with respect
to the representations as to the absence of unpaid or
undisclosed state income taxes (including any interest,
penalties or expenses) of Stockholders, Everlast and
Everlast Holding.
(d) If, prior to the termination of any obligation to
indemnify as provided for herein, written notice of a claimed breach
is given by the party seeking indemnification including in detail
the basis therefor (the "Indemnified Party") to the party from whom
indemnification is sought (the "Indemnifying Party") or a suit or
action based upon a claimed breach is commenced against the
Indemnified Party, the Indemnified Party shall not be precluded from
pursuing such claimed breach or suit or action, or from recovering
from the Indemnifying Party (whether through the courts or
otherwise) on the claim, suit or action, by reason of the
termination otherwise provided for above.
(e) In calculating the amount of any damage, loss or
claim suffered or incurred by AAGP for which indemnification is
sought hereunder, the amount of indemnification to which AAGP shall
be entitled shall be net of any final reduction, after including
income from
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reimbursement, in AAGP's federal income tax liability attributable
to such damage, loss or claim for the tax year of AAGP in which such
damages, loss or claim is incurred, and for any other future income
tax benefits.
(f) With respect to the indemnity provided in Sections
8.2(a) and (b) hereof, the Stockholders may, at their option,
satisfy the indemnity obligations hereunder by requesting the AAGP
offset from redemption payments required to be made by AAGP pursuant
to the Redeemable Preferred Stock beginning with the next such
redemption payment.
Section 8.4 Procedure for Indemnification with Respect
to Third-Party Claims.
The Indemnified Party will give the Indemnifying Party
prompt written notice of any third party claim, demand, assessment, suit or
proceeding to which the indemnity set forth in Section 8.2 applies, which notice
to be effective must describe said claim in reasonable detail (the
"Indemnification Notice"). Notwithstanding the foregoing, the Indemnified Party
shall not have any obligation to give any notice of any assertion of liability
by a third party unless such assertion is in writing and the rights of the
Indemnified Party to be indemnified hereunder in respect of any third party
claim shall not be adversely affected by its failure to give notice pursuant to
the foregoing unless and, if so, only to the extent that, the Indemnifying Party
is materially prejudiced thereby. The Indemnifying Party will have the right to
control the defense or settlement, including the hiring of counsel, of any such
action subject to the provisions set forth below, but the Indemnified Party may,
at its election, participate in the defense of any action or proceeding at its
sole cost and expense. Should the Indemnifying Party fail to defend any such
action (except for failure resulting from the Indemnified Party's failure to
timely give the Indemnification Notice), then, in addition to any other remedy,
the Indemnified Party may settle or defend such action or proceeding through
counsel of its own choosing and may recover from the Indemnifying Party the
amount of such settlement, demand, or any judgment or decree and all of its
costs and expenses, including reasonable fees and disbursements of counsel. The
Indemnified Party will not compromise or settle any claim without the prior
written consent of the Indemnifying Party which consent shall not be
unreasonably withheld; provided, however, if such approval is unreasonably
withheld, the liability of the Indemnified Party will be limited to the total
sum represented in the amount of the proposed compromise or settlement and the
amount of the Indemnified Party's reasonable counsel fees incurred in defending
such claim, as permitted by the preceding sentence, accrued at the time said
approval is unreasonably withheld. Notwithstanding the preceding sentence, the
foregoing limitation on the liability of the Indemnified Party shall only be
applicable if (i) a complete release of the Indemnifying Party is contemplated
to be part of the proposed compromise or settlement of such third party claim
and (ii) the Indemnifying Party withholds its consent to such compromise or
settlement.
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Section 8.5 Procedure For Indemnification with Respect
to Non-Third-Party Claims.
In the event that the Indemnified Party asserts the
existence of an Indemnifiable Claim (but excluding claims resulting from the
assertion of liability by third parties), it shall give prompt written notice to
the Indemnifying Party specifying the nature and amount of the claim asserted
(the "Non-Third Party Claim Indemnification Notice"). If the Indemnifying Party,
within 30 days (or such greater time as may be necessary for the Indemnifying
Party to investigate such Indemnifiable Claim not to exceed 60 days), after
receiving the Non-Third Party Claim Indemnification Notice from the Indemnified
Party, shall not give written notice to the Indemnified Party announcing their
intent to contest such assertion of the Indemnified Party (the "Contest
Notice"), such assertion shall be deemed accepted and the amount of claim shall
be deemed a valid Indemnifiable Claim. During the time period set forth in the
preceding sentence, the Indemnified Party shall cooperate fully with the
Indemnifying Party in respect of such Indemnifiable Claim. In the event,
however, that the Indemnifying Party contests the assertion of a claim by giving
a Contest Notice to the Indemnified Party within said period.
ARTICLE IX
----------
MISCELLANEOUS PROVISIONS
------------------------
Section 9.1 Notices. All notices and other
communications required or permitted under this Agreement shall be deemed to
have been duly given and made if in writing and if served either by personal
delivery to the party for whom intended (which shall include delivery by Federal
Express or similar nationally recognized service or by facsimile) or three
business days after being deposited, postage prepaid, certified or registered
mail, return receipt requested, in the United States mail bearing the address
shown in this Agreement for, or such other address as may be designated in
writing hereafter by, such party:
If to Stockholders: At their addresses set forth on Schedule I
------------------
with a copies to: David Shechet
110-11 Queens Boulevard, Apartment 20B
Forest Hills, New York 11375
and
Lesser & Harrison
Two West 45th Street
New York, New York 10036
Attention: Stanley C. Lesser, Esq.
If to AAGP or Active Apparel Group, Inc.
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<PAGE>
New Corp.: 1350 Broadway, Suite 2300
---------
New York, New York 10018
Attention: Mr. George Q Horowitz
Facsimile Number : (212) 563-0824
with a copies to: Edward Epstein, Esq.
915 Middle River Drive, Suite 419
Fort Lauderdale, Florida 33304
and
Olshan Grundman Frome Rosenzweig
& Wolosky LLP
505 Park Avenue
New York, New York 10022
Attention: Robert H. Friedman, Esq.
Section 9.2 Entire Agreement. This Agreement, the
Additional Documents and the documents referred to herein embody the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof, and supersede all prior and contemporaneous agreements and
understandings, oral or written, relative to said subject matter.
Section 9.3 Binding Effect; Assignment. This Agreement
and the various rights and obligations arising hereunder shall inure to the
benefit of and be binding upon AAGP, New Corp., Stockholders, Everlast Holding
and Everlast and their respective successors and permitted assigns,
beneficiaries or personal representatives. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be transferred or assigned (by
operation of law or otherwise) by any of the parties hereto without the prior
written consent of the other parties except that AAGP shall have the right to
assign its rights but not its obligations hereunder to any affiliate of AAGP.
Any transfer or assignment of any of the rights, interests or obligations
hereunder in violation of the terms hereof shall be void and of no force or
effect.
Section 9.4 Captions. The Article and Section headings
of this Agreement are inserted for convenience only and shall not constitute a
part of this Agreement in construing or interpreting any provision hereof.
Section 9.5 Expenses of Transaction. Everlast Holding
shall pay all reasonable costs and expenses incurred by it and Everlast and
Stockholders in connection with this Agreement and the transactions contemplated
hereby, including, but not limited to, brokerage fees due to Chase Securities
Inc., which payment or accrual of expenses shall be reflected on the Closing
Date Balance Sheet, provided that all expenses related to legal, accounting and
other related fees relating to the sale of Everlast in excess of $100,000, shall
be the responsibility of Stockholders. AAGP shall
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pay all costs and expenses incurred by it and New Corp. in connection with this
Agreement and the transactions contemplated hereby.
Section 9.6 Waiver; Consent. This Agreement may not be
changed, amended, terminated, augmented, rescinded or discharged (other than by
performance), in whole or in part, except by a writing executed by each of the
parties hereto, and no waiver of any of the provisions or conditions of this
Agreement or any of the rights of a party hereto shall be effective or binding
unless such waiver shall be in writing and signed by the party claimed to have
given or consented thereto. Except to the extent that a party hereto may have
otherwise agreed to in writing, no waiver by that party of any condition of this
Agreement or breach by any other party of any of its obligations,
representations or warranties hereunder shall be deemed to be a waiver of any
other condition or subsequent or prior breach of the same or any other
obligation or representation or warranty by such other party, nor shall any
forbearance by the first party to seek a remedy for any noncompliance or breach
by such other party be deemed to be a waiver by the first party of its rights
and remedies with respect to such noncompliance or breach.
Section 9.7 No Third Party Beneficiaries. Subject to
Section 9.3 hereof, nothing herein, expressed or implied, is intended or shall
be construed to confer upon or give to any person, firm, corporation or legal
entity, other than the parties hereto, any rights, remedies or other benefits
under or by reason of this Agreement.
Section 9.8 Counterparts. This Agreement may be executed
in multiple counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument. Facsimile
signatures may be delivered; provided that original signatures follow by mail or
courier.
Section IX.9 Gender. Whenever the context requires,
words used in the singular shall be construed to mean or include the plural and
vice versa, and pronouns of any gender shall be deemed to include and designate
the masculine, feminine or neuter gender.
Section 9.10 Governing Law and Jurisdiction. This
Agreement shall in all respects be construed in accordance with and governed by
the laws of the State of New York, without regard to the principles of conflicts
of laws thereof. The parties hereto agree that any action or proceeding to
enforce any right arising out of this Agreement and the Ancillary Agreements may
be commenced in the Supreme Court of New York or in the United States District
Court for the Southern District of New York, and the parties hereto consent to
such jurisdiction, agree that venue to the extent permitted by applicable law,
will be proper in such courts in any such matter, agree, that New York is the
most convenient forum for litigation in any such suit, action or legal
proceeding, and agree that a summons and complaint commencing an action or
proceeding in any such court shall be properly served and shall confer personal
jurisdiction if served by registered or certified mail to the Surviving
Corporation, or as otherwise provided by the laws of the State of New York or
the United States. The parties hereto agree that a final judgment in any such
action or proceeding shall be conclusive
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and may be enforced in other jurisdictions by suit on the judgment or in any
other manner provided by law.
Section 9.11 Termination. (a) This Agreement may be
terminated and the transactions contemplated by this Agreement abandoned at any
time prior to the Closing:
(i) By mutual written consent of AAGP, New Corp.,
Stockholders, Everlast and Everlast Holdings.
(ii) By either AAGP, New Corp., Stockholders, Everlast
and Everlast Holdings if the transactions contemplated by this
Agreement shall not have been consummated on or before December 31,
2000.
(iii) By AAGP and New Corp. if any condition specified
in Section 7.1 hereto has not been met or waived by the
Stockholders, Everlast Holding and Everlast at such time as such
condition can no longer be satisfied;
(iv) By Stockholders, Everlast and Everlast Holding if
any condition specified in Section 7.2 hereto has not been met or
waived by AAGP and New Corp. at such time as such condition can no
longer be satisfied;
(v) By either Stockholders, Everlast Holding and
Everlast or AAGP and New Corp. if a court of competent jurisdiction
or regulatory authority shall have issued a final, non-appealable
order, decree or ruling or taken any other action (which order,
decree or ruling the parties hereto shall use their best efforts to
lift), in each case permanently restraining, enjoining or otherwise
prohibiting any of the transactions contemplated by this Agreement;
(b) Effect of Termination. In the event of any
termination of this Agreement in accordance with this Section 9.11 hereof, this
Agreement shall forthwith become void and there shall be no liability under this
Agreement on the part of any party hereto or their respective affiliates,
officers, directors, employees or agents by virtue of such termination.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the day and year first above written.
ACTIVE APPAREL GROUP, INC.
By: /s/ George Q Horowitz
----------------------------------------
Name: George Q Horowitz
Title: CEO
ACTIVE APPAREL NEW CORP.
By: /s/ George Q Horowitz
----------------------------------------
Name: George Q Horowitz
Title: CEO
EVERLAST WORLD'S BOXING HEADQUARTERS CORP.
By: /s/ Ben Nadorf
----------------------------------------
Name: Ben Nadorf
Title: Pres.
EVERLAST HOLDING CORP.
By: /s/ Ben Nadorf
----------------------------------------
Name: Ben Nadorf
Title: Pres.
STOCKHOLDERS:
/s/ Ben Nadorf
-------------------------------------------
Ben Nadorf
/s/ Arlene Shechet
-------------------------------------------
Arlene Shechet
/s/ Arthur Shechet
-------------------------------------------
Arthur Shechet
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<PAGE>
Schedule I
--------------------------------------------------------------------------------
Stockholder Number of
Shares of Number of
AAGP Shares of Number of
Common Redeemable Shares of New
Stock Preferred Stock Common Stock Cash Payment
--------------------------------------------------------------------------------
Ben Nadorf 112,500 40,500 342,000 $9,000,000
--------------------------------------------------------------------------------
Arlene Shechet 6,250 2,250 19,000 500,000
--------------------------------------------------------------------------------
Arthur Shechet 6,250 2.250 19,000 500,000
--------------------------------------------------------------------------------
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<PAGE>
APPENDIX B
ACTIVE APPAREL GROUP, INC.
2000 STOCK OPTION PLAN
1. Purpose of the Plan.
This 2000 Stock Option Plan (the "Plan") is intended as
an incentive, to retain in the employ of and as directors, advisors and
consultants to Active Apparel Group, Inc., a Delaware corporation (the
"Company") and any Subsidiary of the Company, within the meaning of Section
424(f) of the United States Internal Revenue Code of 1986, as amended (the
"Code"), persons of training, experience and ability, to attract new employees,
directors, consultants and advisors whose services are considered valuable, to
encourage the sense of proprietorship and to stimulate the active interest of
such persons in the development and financial success of the Company and its
Subsidiaries.
It is further intended that certain options granted
pursuant to the Plan shall constitute incentive stock options within the meaning
of
Section 422 of the Code (the "Incentive Options") while certain other options
granted pursuant to the Plan shall be nonqualified stock options (the
"Nonqualified Options"). Incentive Options and Nonqualified Options are
hereinafter referred to collectively as "Options."
The Company intends that the Plan meet the requirements
of Rule 16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act") and that transactions of the type
specified in subparagraphs (c) to (f) inclusive of Rule 16b-3 by officers and
directors of the Company pursuant to the Plan will be exempt from the operation
of Section 16(b) of the Exchange Act. Further, the Plan is intended to satisfy
the performance-based compensation exception to the limitation on the Company's
tax deductions imposed by Section 162(m) of the Code. In all cases, the terms,
provisions, conditions and limitations of the Plan shall be construed and
interpreted consistent with the Company's intent as stated in this Section 1.
2. Administration of the Plan.
The Board of Directors of the Company (the "Board")
shall appoint and maintain as administrator of the Plan a Committee (the
"Committee") consisting of two or more directors that are "Non-Employee
Directors" (as such term is defined in Rule 16b-3) and "Outside Directors" (as
such term is defined in Section 162(m) of the Code), which shall serve at the
pleasure of the Board. The Committee, subject to Sections 3 and 5 hereof, shall
have full power and authority to designate recipients of Options, to determine
the terms and conditions of respective Option agreements (which need not be
identical) and to interpret the provisions and supervise the administration of
the Plan. The Committee shall have the authority, without limitation, to
designate which Options granted under the Plan shall be Incentive Options and
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<PAGE>
which shall be Nonqualified Options. To the extent any Option does not qualify
as an Incentive Option, it shall constitute a separate Nonqualified Option.
Subject to the provisions of the Plan, the Committee
shall interpret the Plan and all Options granted under the Plan, shall make such
rules as it deems necessary for the proper administration of the Plan, shall
make all other determinations necessary or advisable for the administration of
the Plan and shall correct any defects or supply any omission or reconcile any
inconsistency in the Plan or in any Options granted under the Plan in the manner
and to the extent that the Committee deems desirable to carry into effect the
Plan or any Options. The act or determination of a majority of the Committee
shall be the act or determination of the Committee and any decision reduced to
writing and signed by all of the members of the Committee shall be fully
effective as if it had been made by a majority at a meeting duly held. Subject
to the provisions of the Plan, any action taken or determination made by the
Committee pursuant to this and the other Sections of the Plan shall be
conclusive on all parties.
In the event that for any reason the Committee is unable
to act or if the Committee at the time of any grant, award or other acquisition
under the Plan of Options or Stock as hereinafter defined does not consist of
two or more Non-Employee Directors, or if there shall be no such Committee, then
the Plan shall be administered by the Board, and references herein to the
Committee (except in the proviso to this sentence) shall be deemed to be
references to the Board, and any such grant, award or other acquisition may be
approved or ratified in any other manner contemplated by subparagraph (d) of
Rule 16b-3; provided, however, that options granted to the Company's Chief
Executive Officer or to any of the Company's other four most highly compensated
officers that are intended to qualify as performance-based compensation under
Section 162(m) of the Code may only be granted by the Committee.
3. Designation of Optionees.
The persons eligible for participation in the Plan as
recipients of Options (the "Optionees") shall include employees, officers and
directors of, and consultants and advisors to, the Company or any Subsidiary;
provided that Incentive Options may only be granted to employees of the Company
and the Subsidiaries. In selecting Optionees, and in determining the number of
shares to be covered by each Option granted to Optionees, the Committee may
consider the office or position held by the Optionee or the Optionee's
relationship to the Company, the Optionee's degree of responsibility for and
contribution to the growth and success of the Company or any Subsidiary, the
Optionee's length of service, age, promotions, potential and any other factors
that the Committee may consider relevant. An Optionee who has been granted an
Option hereunder may be granted an additional Option or Options, if the
Committee shall so determine.
4. Stock Reserved for the Plan.
Subject to adjustment as provided in Section 7 hereof, a
total of 1,000,000 shares of the Company's Common Stock, $0.002 par value per
share (the "Stock"), shall
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be subject to the Plan. The maximum number of shares of Stock that may be
subject to options granted under the Plan to any individual in any calendar year
shall not exceed 600,000, and the method of counting such shares shall conform
to any requirements applicable to performance-based compensation under Section
162(m) of the Code. The shares of Stock subject to the Plan shall consist of
unissued shares or previously issued shares held by any Subsidiary of the
Company, and such amount of shares of Stock shall be and is hereby reserved for
such purpose. Any of such shares of Stock that may remain unsold and that are
not subject to outstanding Options at the termination of the Plan shall cease to
be reserved for the purposes of the Plan, but until termination of the Plan the
Company shall at all times reserve a sufficient number of shares of Stock to
meet the requirements of the Plan. Should any Option expire or be canceled prior
to its exercise in full or should the number of shares of Stock to be delivered
upon the exercise in full of an Option be reduced for any reason, the shares of
Stock theretofore subject to such Option may be subject to future Options under
the Plan, except where such reissuance is inconsistent with the provisions of
Section 162(m) of the Code.
5. Terms and Conditions of Options.
Options granted under the Plan shall be subject to the
following conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:
(a) Option Price. The purchase price of each share of
Stock purchasable under an Incentive Option shall be determined by the Committee
at the time of grant, but shall not be less than 100% of the Fair Market Value
(as defined below) of such share of Stock on the date the Option is granted;
provided, however, that with respect to an Optionee who, at the time such
Incentive Option is granted, owns (within the meaning of Section 424(d) of the
Code) more than 10% of the total combined voting power of all classes of stock
of the Company or of any Subsidiary, the purchase price per share of Stock shall
be at least 110% of the Fair Market Value per share of Stock on the date of
grant. The purchase price of each share of Stock purchasable under a
Nonqualified Option shall not be less than 80% of the Fair Market Value of such
share of Stock on the date the Option is granted; provided, however, that if an
option granted to the Company's Chief Executive Officer or to any of the
Company's other four most highly compensated officers is intended to qualify as
performance-based compensation under Section 162(m) of the Code, the exercise
price of such Option shall not be less than 100% of the Fair Market Value (as
such term is defined below) of such share of Stock on the date the Option is
granted. The exercise price for each Option shall be subject to adjustment as
provided in Section 7 below. "Fair Market Value" means the closing price of
publicly traded shares of Stock on the principal securities exchange on which
shares of Stock are listed (if the shares of Stock are so listed), or on the
NASDAQ Stock Market (if the shares of Stock are regularly quoted on the NASDAQ
Stock Market), or, if not so listed or regularly quoted, the mean between the
closing bid and asked prices of publicly traded shares of Stock in the
over-the-counter market, or, if such bid and asked prices shall not be
available, as reported by any nationally recognized quotation service selected
by the Company, or as determined by the Committee in a manner consistent with
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the provisions of the Code. Anything in this Section 5(a) to the contrary
notwithstanding, in no event shall the purchase price of a share of Stock be
less than the minimum price permitted under the rules and policies of any
national securities exchange on which the shares of Stock are listed.
(b) Option Term. The term of each Option shall be fixed
by the Committee, but no Option shall be exercisable more than ten years after
the date such Option is granted and in the case of an Incentive Option granted
to an Optionee who, at the time such Incentive Option is granted, owns (within
the meaning of Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or of any Subsidiary, no
such Incentive Option shall be exercisable more than five years after the date
such Incentive Option is granted.
(c) Exercisability. Subject to Section 5(j) hereof,
Options shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee at the time of grant. Unless
otherwise determined by the Committee at grant, all options granted under this
plan and then outstanding shall immediately vest and become exercisable upon a
Change of Control. A "Change of Control" shall mean: (i) the sale of all or
substantially all of the assets of the Company in one or a series of related
transactions to any person or entity or group of persons or entities acting in
concert or (ii) the merger or consolidation of the Company with or into another
corporation with the effect that the then existing stockholders of the company
hold less than 50% of the combined voting power of the then outstanding
securities of the surviving corporation of such merger or the corporation
resulting from such consolidation or (iii) the acquisition by any person or
entity or group of persons or entities acting in concert of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act
of 1934, as amended) of 50% or more of the outstanding shares of the voting
stock of the Company or (iv) the adoption of a plan relating to the liquidation
or dissolution of the Company.
(d) Method of Exercise. Options to the extent then
exercisable may be exercised in whole or in part at any time during the option
period, by giving written notice to the Company specifying the number of shares
of Stock to be purchased, accompanied by payment in full of the purchase price,
in cash, or by check or such other instrument as may be acceptable to the
Committee. As determined by the Committee, in its sole discretion, at or after
grant, payment in full or in part may be made at the election of the Optionee
(i) in the form of Stock owned by the Optionee (based on the Fair Market Value
of the Stock on the trading day before the Option is exercised) which is not the
subject of any pledge or security interest, (ii) in the form of shares of Stock
withheld by the Company from the shares of Stock otherwise to be received with
such withheld shares of Stock having a Fair Market Value on the date of exercise
equal to the exercise price of the Option, or (iii) by a combination of the
foregoing, provided that the combined value of all cash and cash equivalents and
the Fair Market Value of any shares surrendered to the Company is at least equal
to such exercise price and except with respect to (ii) above, such method of
payment will not cause a disqualifying disposition of all or a portion of the
Stock received upon exercise of an Incentive Option. An Optionee shall have the
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right to dividends and other rights of a stockholder with respect to shares of
Stock purchased upon exercise of an Option at such time as the Optionee has
given written notice of exercise and has paid in full for such shares and (ii)
has satisfied such conditions that may be imposed by the Company with respect to
the withholding of taxes.
(e) Non-transferability of Options. Options are not
transferable and may be exercised solely by the Optionee during his lifetime or
after his death by the person or persons entitled thereto under his will or the
laws of descent and distribution. The Committee, in its sole discretion, may
permit a transfer of a Nonqualified Option to (i) a trust for the benefit of the
Optionee or (ii) a member of the Optionee's immediate family (or a trust for his
or her benefit). Any attempt to transfer, assign, pledge or otherwise dispose
of, or to subject to execution, attachment or similar process, any Option
contrary to the provisions hereof shall be void and ineffective and shall give
no right to the purported transferee.
(f) Termination by Death. Unless otherwise determined by
the Committee at grant, if any Optionee's employment with or service to the
Company or any Subsidiary terminates by reason of death, the Option may
thereafter be exercised, to the extent then exercisable (or on such accelerated
basis as the Committee shall determine at or after grant), by the legal
representative of the estate or by the legatee of the Optionee under the will of
the Optionee, for a period of one year after the date of such death or until the
expiration of the stated term of such Option as provided under the Plan,
whichever period is shorter.
(g) Termination by Reason of Disability. Unless
otherwise determined by the Committee at grant, if any Optionee's employment
with or service to the Company or any Subsidiary terminates by reason of total
and permanent disability, any Option held by such Optionee may thereafter be
exercised, to the extent it was exercisable at the time of termination due to
Disability (or on such accelerated basis as the Committee shall determine at or
after grant), but may not be exercised one year after the date of such
termination of employment or service or the expiration of the stated term of
such Option, whichever period is shorter; provided, however, that, if the
Optionee dies within such one-year period, any unexercised Option held by such
Optionee shall thereafter be exercisable to the extent to which it was
exercisable at the time of death for a period of one year after the date of such
death or for the stated term of such Option, whichever period is shorter.
(h) Termination by Reason of Retirement. Unless
otherwise determined by the Committee at grant, if any Optionee's employment
with or service to the Company or any Subsidiary terminates by reason of Normal
or Early Retirement (as such terms are defined below), any Option held by such
Optionee may thereafter be exercised to the extent it was exercisable at the
time of such Retirement (or on such accelerated basis as the Committee shall
determine at or after grant), but may not be exercised three months after the
date of such termination of employment or service or the expiration of the
stated term of such Option, whichever period is shorter; provided, however,
that, if the Optionee dies within such three-month period, any unexercised
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Option held by such Optionee shall thereafter be exercisable, to the extent to
which it was exercisable at the time of death, for a period of one year after
the date of such death or for the stated term of such Option, whichever period
is shorter.
For purposes of this paragraph (h) "Normal Retirement"
shall mean retirement from active employment with the Company or any Subsidiary
on or after the normal retirement date specified in the applicable Company or
Subsidiary pension plan or if no such pension plan, age 65, and "Early
Retirement" shall mean retirement from active employment with the Company or any
Subsidiary pursuant to the early retirement provisions of the applicable Company
or Subsidiary pension plan or if no such pension plan, age 55.
(i) Other Termination. Unless otherwise determined by
the Committee at grant, if any Optionee's employment with or service to the
Company or any Subsidiary terminates for any reason other than death, Disability
or Normal or Early Retirement, the Option shall thereupon terminate, except that
the portion of any Option that was exercisable on the date of such termination
of employment or service may be exercised for the lesser of three months after
the date of termination or the balance of such Option's term if the Optionee's
employment or service with the Company or any Subsidiary is terminated by the
Company or such Subsidiary without cause (the determination as to whether
termination was for cause to be made by the Committee). The transfer of an
Optionee from the employ of or service to the Company to the employ of or
service to a Subsidiary, or vice versa, or from one Subsidiary to another, shall
not be deemed to constitute a termination of employment or service for purposes
of the Plan.
(j) Limit on Value of Incentive Option. The aggregate
Fair Market Value, determined as of the date the Incentive Option is granted, of
Stock for which Incentive Options are exercisable for the first time by any
Optionee during any calendar year under the Plan (and/or any other stock option
plans of the Company or any Subsidiary) shall not exceed $100,000.
(k) Transfer of Incentive Option Shares. The stock
option agreement evidencing any Incentive Options granted under this Plan shall
provide that if the Optionee makes a disposition, within the meaning of Section
424(c) of the Code and regulations promulgated thereunder, of any share or
shares of Stock issued to him upon exercise of an Incentive Option granted under
the Plan within the two-year period commencing on the day after the date of the
grant of such Incentive Option or within a one-year period commencing on the day
after the date of transfer of the share or shares to him pursuant to the
exercise of such Incentive Option, he shall, within 10 days after such
disposition, notify the Company thereof and immediately deliver to the Company
any amount of United States federal, state and local income tax withholding
required by law.
6. Term of Plan.
No Option shall be granted pursuant to the Plan on or
after August 10, 2010, but Options theretofore granted may extend beyond that
date.
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7. Capital Change of the Company.
In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, or other change in corporate
structure affecting the Stock, the Committee shall make an appropriate and
equitable adjustment in the number and kind of shares reserved for issuance
under the Plan and in the number and option price of shares subject to
outstanding Options granted under the Plan, to the end that after such event
each Optionee's proportionate interest shall be maintained as immediately before
the occurrence of such event.
8. Purchase for Investment.
Unless the Options and shares covered by the Plan have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), or the Company has determined that such registration is unnecessary, each
person exercising an Option under the Plan may be required by the Company to
give a representation in writing that he is acquiring the shares for his own
account for investment and not with a view to, or for sale in connection with,
the distribution of any part thereof.
9. Taxes.
The Company may make such provisions as it may deem
appropriate, consistent with applicable law, in connection with any Options
granted under the Plan with respect to the withholding of any taxes or any other
tax matters.
10. Effective Date of Plan.
The Plan shall be effective on August 10, 2000;
provided, however, that the Plan shall subsequently be approved by majority vote
of the Company's stockholders not later than August 10, 2001.
11. Amendment and Termination.
The Board may amend, suspend, or terminate the Plan,
except that no amendment shall be made that would impair the rights of any
Optionee under any Option theretofore granted without the Optionee's consent,
and except that no amendment shall be made which, without the approval of the
stockholders of the Company would:
(a) materially increase the number of shares that may be
issued under the Plan, except as is provided in Section 7;
(b) materially increase the benefits accruing to the
Optionees under the Plan;
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(c) materially modify the requirements as to eligibility
for participation in the Plan;
(d) decrease the exercise price of an Incentive Option
to less than 100% of the Fair Market Value per share of Stock on the date of
grant thereof or the exercise price of a Nonqualified Option to less than 80% of
the Fair Market Value per share of Stock on the date of grant thereof; or
(e) extend the term of any Option beyond that provided
for in Section 5(b).
The Committee may amend the terms of any Option
theretofore granted, prospectively or retroactively, but no such amendment shall
impair the rights of any Optionee without the Optionee's consent. The Committee
may also substitute new Options for previously granted Options, including
options granted under other plans applicable to the participant and previously
granted Options having higher option prices, upon such terms as the Committee
may deem appropriate.
12. Government Regulations.
The Plan, and the grant and exercise of Options
hereunder, and the obligation of the Company to sell and deliver shares under
such Options, shall be subject to all applicable laws, rules and regulations,
and to such approvals by any governmental agencies, national securities
exchanges and interdealer quotation systems as may be required.
13. General Provisions.
(a) Certificates. All certificates for shares of Stock
delivered under the Plan shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations
and other requirements of the Securities and Exchange Commission, or other
securities commission having jurisdiction, any applicable Federal or state
securities law, any stock exchange or interdealer quotation system upon which
the Stock is then listed or traded and the Committee may cause a legend or
legends to be placed on any such certificates to make appropriate reference to
such restrictions.
(b) Employment Matters. The adoption of the Plan shall
not confer upon any Optionee of the Company or any Subsidiary any right to
continued employment or, in the case of an Optionee who is a director, continued
service as a director, with the Company or a Subsidiary, as the case may be, nor
shall it interfere in any way with the right of the Company or any Subsidiary to
terminate the employment of any of its employees, the service of any of its
directors or the retention of any of its consultants or advisors at any time.
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(c) Limitation of Liability. No member of the Board or
the Committee, or any officer or employee of the Company acting on behalf of the
Board or the Committee, shall be personally liable for any action, determination
or interpretation taken or made in good faith with respect to the Plan, and all
members of the Board or the Committee and each and any officer or employee of
the Company acting on their behalf shall, to the extent permitted by law, be
fully indemnified and protected by the Company in respect of any such action,
determination or interpretation.
(d) Registration of Stock. Notwithstanding any other
provision in the Plan, no Option may be exercised unless and until the Stock to
be issued upon the exercise thereof has been registered under the Securities Act
and applicable state securities laws, or are, in the opinion of counsel to the
Company, exempt from such registration in the United States. The Company shall
not be under any obligation to register under applicable federal or state
securities laws any Stock to be issued upon the exercise of an Option granted
hereunder in order to permit the exercise of an Option and the issuance and sale
of the Stock subject to such Option, although the Company may in its sole
discretion register such Stock at such time as the Company shall determine. If
the Company chooses to comply with such an exemption from registration, the
Stock issued under the Plan may, at the direction of the Committee, bear an
appropriate restrictive legend restricting the transfer or pledge of the Stock
represented thereby, and the Committee may also give appropriate stop transfer
instructions with respect to such Stock to the Company's transfer agent.
ACTIVE APPAREL GROUP, INC.
August 10, 2000
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Appendix C
CERTIFICATE OF THE DESIGNATIONS, POWERS,
PREFERENCES AND RIGHTS
OF THE
SERIES A REDEEMABLE PARTICIPATING PREFERRED STOCK
($.01 par value per share)
of
ACTIVE APPAREL GROUP, INC.
a Delaware Corporation
----------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
----------
ACTIVE APPAREL GROUP, INC., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That, pursuant to authority conferred upon the Board of
Directors of the Corporation (the "Board") by the Certificate of Incorporation
of said Corporation, and pursuant to the provisions of Section 151 of the
Delaware General Corporation Law, there hereby is created, out of the 1,000,000
shares of Preferred Stock of the Corporation authorized in Article FOURTH of the
Certificate of Incorporation (the "Preferred Stock"), a series of the Preferred
Stock consisting of 45,000 shares, $.01 par value per share, to be designated
"Series A Preferred Stock," and to that end the Board adopted a resolution
providing for the designations, powers, preferences and rights, and the
qualifications, limitations and restrictions of, the Series A Redeemable
Participating Preferred Stock, which resolution is as follows:
RESOLVED, that the Certificate of the Designations,
Powers, Preferences and Rights of the Series A Convertible Preferred
Stock ("Certificate of Designation") be and is hereby authorized and
approved, which Certificate of Designation shall be filed with the
Delaware Secretary of State in the form as follows:
1. Dividends.
----------
Commencing on the date of issuance of the Series A
Preferred Stock, dividends shall accrue to the holders of the Series
A Preferred Stock as provided in this Section 1. The aggregate
dividends for any fiscal year to be divided pro rata among all
holders of
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outstanding Series A Preferred Stock as of the start of such fiscal
year (or as of the date of issuance for the fiscal year ending
December 31, 2000) (the "Dividend Period") shall be the product of
(i) two-thirds (2/3) multiplied by (ii) the Net After Tax Profits
(as defined in Section 10 hereof) multiplied by (iii) the
Outstanding Redeemable Percentage (as defined in Section 10 hereof)
(the "Preferred Dividends"). The dividends payable for a fiscal year
shall be due on March 15 of the succeeding fiscal year, or such
later date that the Corporation's audited financial statements have
been completed and the Corporation shall have received a signed
opinion from its independent auditors in respect of such financial
statements, but in no event shall the payment be made later than
March 31 of the succeeding fiscal year to the extent the Corporation
has funds legally available; provided, however, that the dividend
payments payable for the fiscal year ending December 31, 2000 shall
be due on March 15, 2002, or such later date that the Corporation's
audited financial statements for fiscal year ending December 31,
2001 have been completed and the Corporation has received a signed
opinion from its independent auditors, but in no event shall the
payment be made later than March 31, 2002 to the extent the
Corporation has funds legally available. If the Corporation fails to
pay the dividends to any holder of Series A Preferred Stock, the
Corporation shall be subject to the provisions of Section 4(b)
hereof.
Preferred Dividends on shares of Series A Preferred
Stock shall be cumulative (whether or not there shall be net profits
or net assets of the Corporation legally available for the payment
of such dividends), so that if at any time the Preferred Dividends
upon the Series A Preferred Stock to the end of the last completed
Dividend Period shall not have been paid and a sum sufficient for
the payment thereof set apart, the amount of the deficiency in such
Preferred Dividends shall be fully paid (but without interest), or
Preferred Dividends in such amounts shall have been declared on the
shares of the Series A Preferred Stock and a sum sufficient for the
payment thereof shall have been set apart for such payment, before
any dividend shall be declared or paid or any other distribution
ordered or made upon any class of stock ranking as to dividends or
upon liquidation junior to the Series A Preferred Stock (other than
a dividend payable in such junior stock) and before any sum or sums
shall be set aside for or applied to the purchase or redemption of
any shares of any class of stock ranking as to dividends or upon
liquidation junior to the Series A Preferred Stock (with respect to
rights to dividends and on liquidation, the Series A Preferred Stock
shall rank prior to the Common Stock (as hereinafter defined)), the
Preferred Dividends must be paid. All Preferred Dividends declared
upon the Series A Preferred Stock shall be declared pro rata per
share. Holders of shares of Series A Preferred Stock shall not be
entitled to any Preferred Dividends, whether payable in cash,
property or stock, in excess of the Preferred Dividends at the rate
set forth above. All payments due under this Section 1 to any holder
of shares of Series A Preferred Stock shall be made to the nearest
cent.
2. Redemptions.
------------
(a) Mandatory Redemption. (i) So long as any Series A
Preferred Stock remains outstanding, the Corporation shall be
required to redeem $5,000,000 aggregate Redemption
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Value of Series A Preferred Stock (5,000 shares) on December 31,
2001 and every December 31st thereafter (the "Mandatory Redemption
Date") until all shares of Series A Preferred Stock have been
redeemed. For each share of Series A Preferred Stock which is to be
redeemed hereunder, the Corporation shall be obligated on each
Mandatory Redemption Date to deliver to the holder thereof (upon
surrender by such holder at the Corporation's principal office of
the certificate representing such shares of Series A Preferred
Stock) a check for the Redemption Value.
(ii) If the funds of the Corporation legally available
for redemption of shares of Series A Preferred Stock on any
Mandatory Redemption Date are insufficient to redeem the total
number of shares of Series A Preferred Stock to be redeemed on such
date pursuant to Section 2(a)(i), the Corporation shall be subject
to the provisions of Section 4(a) hereof. The Corporation shall use
all funds that are legally available for such redemption to redeem
the greatest number of share of Series A Preferred Stock possible,
pro rata among the holders of outstanding shares of Series A
Preferred Stock. At any time thereafter when additional funds of the
Corporation are legally available for the redemption of shares of
Series A Preferred Stock, such funds shall be used to redeem the
balance of the shares of Series A Preferred Stock as aforesaid which
the Corporation had become obligated to redeem on any Mandatory
Redemption Date but which it has not redeemed.
(b) Optional Redemptions. The Corporation may, at the
end of any quarter, redeem all of the shares of Series A Preferred
Stock then outstanding. The Corporation may also redeem a portion of
the shares of Series A Preferred Stock then outstanding at the end
of each fiscal year. Upon any such optional redemption, the
Corporation shall pay a price per share equal to 105% of the
Redemption Value; provided, in the event of a partial redemption,
the Corporation shall only pay 105% of the Redemption Value of the
shares so redeemed that year once the Company has redeemed shares
having an aggregate Redemption Value of $5,000,000.
(c) Redemption Upon a Change of Control. Upon a Change
of Control within three (3) years of the date hereof (as hereinafter
defined), the Corporation shall be required to redeem all shares of
Series A Preferred Stock that are outstanding on that date of the
Change of Control. For purposes of this Section 2(c), a Change of
Control shall mean the acquisition by a person (other than Ben
Nadorf or George Horowitz) of greater than 50% of the fully diluted
shares (inclusive of options, warrants and other similar rights) of
common stock, par value $.002 per share, of the Corporation, or the
sale by the Corporation of all or substantially all of its assets.
(d) Notice of Redemption. The Corporation shall mail
written notice of any proposed optional redemption of any Series A
Preferred Stock to each record holder thereof not more than 30 nor
less than ten days prior to the date on which such redemption is
intended to be made.
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(e) Replacement Certificates for Unredeemed Shares. If
fewer than the total number of shares of Series A Preferred Stock
represented by any certificate are redeemed, a new certificate
representing the number of unredeemed shares of Series A Preferred
Stock shall be issued to the holder thereof without cost to such
holder within three business days of the applicable Mandatory
Redemption Date.
(f) Determination of the Number of Each Holder's Shares
to be Redeemed. The number of shares of Series A Preferred Stock to
be redeemed from each holder thereof in redemptions hereunder shall
be the aggregate number of the shares of Series A Preferred Stock to
be redeemed times a fraction, the numerator of which shall be the
aggregate number of such shares of Series A Preferred Stock held by
such holder and the denominator of which shall be the aggregate
number of the shares of Series A Preferred Stock outstanding as of
January 1 of the year of such redemption.
(g) Redeemed or Otherwise Acquired Shares. Any shares of
Series A Preferred Stock that are redeemed or otherwise acquired by
the Corporation shall be canceled and retired and shall not be
reissued, sold or transferred. Immediately following such redemption
or acquisition, the rights of the holders of Series A Preferred
Stock in respect of the shares redeemed provided for in this
Certificate of Designation shall cease.
3. Priority Over Dividends and Redemptions.
---------------------------------------
So long as any Series A Preferred Stock remains
outstanding, without the prior written consent of the holders of a
majority of the outstanding shares of Series A Preferred Stock, the
Corporation shall not redeem, purchase or otherwise acquire directly
or indirectly any Junior Securities, nor shall the Corporation
directly or indirectly pay or declare any dividend or make any
distribution upon any Junior Securities other than dividends payable
in shares of Common Stock issued upon the outstanding shares of
Common Stock; provided, however, that the Corporation shall be
allowed to repurchase Junior Securities held by employees (other
than executive officers) upon the employees' termination.
4. Failure to Redeem.
-----------------
If the Corporation fails to make any mandatory
redemption payment within 30 days after a Mandatory Redemption Date,
the Corporation shall deliver an assignment (the "Assignment") of
all licenses and trademarks listed on Schedule 2.10 of the Merger
Agreement (the "Everlast Licenses and Trademarks") to the former
shareholders of Everlast who were parties to the Merger Agreement as
Shareholders (as defined therein). Such Assignment shall become
effective 60 days following its delivery, and the holders of Series
A Preferred Stock shall receive voting rights as provided in Section
6(c) hereof, unless the Corporation pays such outstanding mandatory
redemption payment prior to such date (in which case, the Assignment
shall be canceled and have no legal effect). If the Assignment
becomes effective, the Corporation shall become a licensee of
Everlast subject to the same
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terms and conditions set forth in two Licensee Agreements dated July
__, 1992 and January 1, 1999 between Everlast and the Corporation
(the "Everlast License Agreements"). The terms of the Everlast
License Agreements shall be deemed to have continuously run and been
automatically renewed from the date the Corporation acquired the
Everlast Licenses and Trademarks from Everlast through the date the
Assignment becomes effective.
The Corporation shall not be relieved of its obligation
to redeem the Series A Preferred Stock if the Assignment becomes
effective; provided, however, that the royalties earned in each
fiscal year by the former shareholders of Everlast from the Everlast
License Agreements shall reduce, on a dollar-for-dollar basis, any
mandatory redemption and dividend payments for such fiscal year. The
former shareholders of Everlast shall use their best efforts to
exploit the use and generate the most revenues from the Everlast
Licenses and Trademarks after the Assignment becomes effective. The
Corporation shall not be allowed to pay any accrued and unpaid
dividends or redeem any Junior Securities until it pays all
outstanding mandatory redemption payments.
5. Rights on Liquidation, Merger, Sale, Etc.
-----------------------------------------
In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation (each, a
"Liquidation"), the assets of the Corporation available for
distribution to its stockholders, whether from capital, surplus or
earnings, shall be distributed in the following order of priority:
(1) Each holder of Series A Preferred Stock
shall be entitled to be paid, before any
distribution or payment is made upon any
Junior Securities, an amount in cash equal
to the aggregate Redemption Value of all
shares of Series A Preferred Stock held by
such holder (plus all accrued and unpaid
dividends thereon), and the holders of
Series A Preferred Stock shall not be
entitled to any further payment. Not less
than ten (10) days prior to the payment date
stated therein, the Corporation shall mail
written notice of any such Liquidation to
each record holder of Series A Preferred
Stock, setting forth in reasonable detail
the amount of proceeds to be paid with
respect to each share of Series A Preferred
Stock in connection with such Liquidation.
Neither the consolidation or merger of the
Corporation into or with any other entity or
entities (whether or not the Corporation is
the surviving entity), nor the sale or
transfer by the Corporation of all or any
part of its assets, nor the reduction of the
capital stock of the Corporation nor any
other form of recapitalization or
reorganization affecting the Corporation
shall be deemed to be a Liquidation of the
Corporation within the meaning of this
Section 5.
(b) After distribution of the amounts set forth
in Section 5(a) hereof, the remaining assets
of the Corporation available for
distribution, if any, to the
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stockholders of the Corporation shall be
distributed to the holders of Junior
Securities.
6. Voting and Conversion Rights.
----------------------------
(a) Voting Rights. So long as any share of Series A
Preferred Stock remain outstanding, in addition to the rights
specified in Section 4(b) hereof, except as otherwise required by
law: (i) the holders of shares of Series A Preferred Stock shall be
entitled to vote on and to approve as a separate class (with no
other stockholders voting) all matters that adversely impact the
rights, value, ranking or preferences of the Series A Preferred
Stock; and (ii) the holders of Series A Preferred Stock, voting as a
separate class (with no other stockholders voting), shall be
entitled to elect two directors to the Board.
(b) Approval by Holders of Series A Preferred Stock. The
Corporation shall not, so long as any shares of Series A Preferred
Stock remain outstanding, without the prior written consent of Ben
Nadorf acting on behalf of the holders of Series A Preferred Stock
(but if Ben Nadorf is Unavailable, David Shechet, but if David
Shechet is Unavailable, holders of at least a majority of the
outstanding shares of Series A Preferred Stock):
(1) in any manner authorize, create or issue (A)
any class or series of capital stock
ranking, in any respect, including, without
limitation, as to payment of dividends,
distribution of assets or redemptions,
senior or pari passu to the Series A
Preferred Stock, or which in any manner
adversely affects the rights and preferences
of the holders of Series A Preferred Stock;
or (B) any shares of any class or series of
any bonds, debentures, notes or other
obligations convertible into or exchangeable
for, or having optional rights to purchase,
any series of capital stock ranking, either
as to payment of dividends, distribution of
assets or redemption, senior to the Series A
Preferred Stock or which adversely affects
the rights or preferences of the holders of
Series A Preferred Stock;
(ii) alter or change the designations, powers,
preferences or rights, or the
qualifications, limitations or restrictions
of the Series A Preferred Stock in a manner
adverse to the holders thereof;
(iii) reclassify the shares of Common Stock or any
other shares or any class or series of
capital stock hereafter created junior to
the Series A Preferred Stock into shares of
any class or series of capital stock (A)
ranking, either as to payment of dividends,
distribution of assets or redemptions, prior
to or on parity with the Series A Preferred
Stock, or (B) which adversely affects the
rights of the holders of Series A Preferred
Stock;
C-6
<PAGE>
(iv) amend any provision of the Corporation's
Certificate of Incorporation or by-laws in a
manner adverse to the holders of the Series
A Preferred Stock;
(v) issue any additional shares of Series A
Preferred Stock in addition to those shares
when the Series A Preferred Stock were
initially issued;
(vi) incur debt in excess of $100,000, other than
in the ordinary course of business;
provided, however, that the Corporation may
incur such debt in excess of $100,000 in
order to redeem outstanding shares of Series
A Preferred Stock or to pay dividends;
(vii) enter into any new transactions with
officers and directors or stockholders who
beneficially own more than five percent of
the outstanding shares of Common Stock of
the Corporation;
(viii) purchase or acquire, directly or indirectly,
in one or a series of related transactions,
other than in the ordinary course of
business, any capital asset which,
individually, requires the payment of at
least $100,000;
(ix) lease any capital asset requiring payment of
at least $100,000 per annum;
(x) hire an employee with a per annum salary of,
or grant any such employee a bonus or stock
option valued at, $100,000 or more;
(xi) hire any consultants or professionals who
were not previously employed by the
Corporation which is reasonably anticipated
to result in fees of over $100,000; and
(xii) amend the employment agreement effective as
of January 1, 2000, between the Corporation
and George Q Horowitz.
(c) Approval by Directors Nominated by Holders Series A
Preferred Stock. The Board of Directors of the Corporation shall
not, so long as any shares of Series A Preferred Stock remain
outstanding, without the consent of both the director nominees of
the holders of Series A Preferred Stock, increase the salary of
George Q Horowitz on an annual basis, greater than the either (i)
10% or (ii) twice the Cost of Living Allowance (as defined herein),
which ever is less. The Cost of Living Allowance shall be equal to
the percentage by which the Consumers Price Index for Urban Wage
Borrowers and Clerical Workers: New York, N.Y. - Northeastern New
Jersey (1982-84 equals 100), as published by the Bureau of Labor
Statistics of the United States Department of Labor, shall have
increased over the preceding
C-7
<PAGE>
year. If publication of the Consumer Price Index is discontinued,
the parties hereto shall accept comparable statistics on the cost of
living for the New York, N.Y. - Northeastern New Jersey area as
computed and published by an agency of the United States or by a
responsible financial periodical of recognized authority then to be
selected by the parties.
(d) Default on Redemption. In the event that the
Corporation defaults on its obligation to pay any mandatory
redemption payment, the holders of Series A Preferred Stock shall be
entitled to vote together with and in the same manner and with the
same effect as all other classes and series of stock of the
Corporation on all actions to be taken by the holders of Common
Stock of the Corporation but only through the date on which the
Corporation pays the holders of Series A Preferred Stock the
mandatory redemption payment that it failed to pay timely. Each
holder of shares of Series A Preferred Stock shall be entitled to
cast such number of votes in respect of such shares of Series A
Preferred Stock as shall equal (rounded to the nearest whole number)
the quotient of (i) the aggregate Redemption Value of the shares of
Series A Preferred Stock held by such holder divided by (ii) the
Fair Market Value of one share of Common Stock of the Corporation.
For purposes of this Section 6(d), "Fair Market Value"
of the Common Stock means (i) if shares of the Common Stock are
listed or admitted for trading on a national securities exchange,
the average of the bid and ask prices at the close of each trading
day of a share of Common Stock on the Nasdaq Small Cap Market, or
the Corporation's then principal trading market, for the 10
consecutive trading days ending on the second business day prior to
the applicable Mandatory Redemption Date or (ii) if no such
quotations are available for such 10-day period, as determined in
good faith by the Board.
(e) Conversion Rights. No holder of shares of Series A
Preferred Stock shall possess the right to convert the shares of
Series A Preferred Stock into any capital stock of the Corporation
(whether now or hereafter authorized) or securities of the
Corporation convertible into or carrying a right to subscribe to or
acquire shares of capital stock of the Corporation.
7. No Pre-emptive Rights.
---------------------
No holder of shares of the Series A Preferred Stock
shall possess any preemptive rights to subscribe for or acquire any
unissued shares of capital stock of the Corporation (whether now or
hereafter authorized) or securities of the Corporation convertible
into or carrying a right to subscribe to or acquire shares of
capital stock of the Corporation.
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<PAGE>
8. Transferability; Registration of Transfer.
-----------------------------------------
The shares of Series A Preferred Stock shall be
transferable, subject to the prior written approval of the
Corporation (and compliance with all applicable federal and state
securities laws), which approval shall not be unreasonably withheld.
The stock certificates representing the shares of Series A Preferred
Stock shall be imprinted with legends in substantially the following
forms:
"TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE REQUIRES THE PRIOR WRITTEN CONSENT OF THE
CORPORATION."
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT OR PURSUANT TO AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND
APPLICABLE STATE SECURITIES LAWS, SUPPORTED BY AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE
COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED. ADDITIONALLY, AS PART OF THE TERMS AND
CONDITIONS OF THE ISSUANCE OF THIS CERTIFICATE, THIS
SECURITY CANNOT BE TRANSFERRED WITHIN ONE YEAR OF THE
DATE HEREOF."
The Corporation shall keep at its principal office a
register for the registration of Series A Preferred Stock. Upon the
surrender of any certificate representing Series A Preferred Stock
at such place, the Corporation shall, at the request of the record
holder of such certificate, execute and deliver (at the
Corporation's expense) a new certificate or certificates in exchange
therefor representing in the aggregate the number of shares of
Series A Preferred Stock represented by the surrendered certificate.
Each such new certificate shall be registered in such name and shall
represent such number of shares of Series A Preferred Stock as is
requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate, and
dividends shall accrue on the Series A Preferred Stock represented
by such new certificate from the date such certificate issued and
the surrendered certificate is canceled. All transfer taxes, if any,
payable as a result of such transfer shall be paid by the holder of
the surrendered certificate at the time of delivering the
certificate for transfer or promptly upon receipt of a written
request of the Corporation for payment. No transfer shall be
recorded in the register until all transfer taxes, if any, have been
paid.
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<PAGE>
9. Replacement.
-----------
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be
satisfactory) of the ownership and the loss, theft, destruction or
mutilation of any certificate evidencing shares of Series A
Preferred Stock, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to
the Corporation (provided that if the holder is a financial
institution or other institutional investor or investment fund, its
own agreement shall be satisfactory) or, in the case of any such
mutilation upon surrender of such certificate, the Corporation shall
(at its expense) execute and deliver in lieu of such certificate a
new certificate of like kind representing the number of shares of
such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or
mutilated certificate, and dividends shall accrue on the Series A
Preferred Stock represented by such new certificate from the date
such certificate is issued and such lost, stolen, destroyed or
mutilated certificate is canceled.
10. Definitions.
-----------
"Common Stock" means the Corporation's common stock,
$.002 par value, and any other capital stock of any class of the
Corporation hereafter authorized which is not limited to a fixed sum
or percentage of par or stated value in respect to the rights of the
holders thereof to participate in dividends or in the distribution
of assets upon any liquidation, dissolution or winding up of the
Corporation.
"Disability" means that due to illness, accident or
other physical or mental incapacity, the Board of the Directors of
the Corporation has in good faith determined that an individual is
unable to render the decision required of him under this Certificate
of Designation.
"Junior Securities" means any capital stock or other
equity securities of the Corporation, except for the Series A
Preferred Stock and any shares of any other class or series of
Preferred Stock authorized pursuant to the Certificate of
Incorporation which rank senior to or on a parity with the Series A
Preferred Stock with respect to the payment of dividends,
redemptions or distributions upon liquidation or otherwise (as the
case may be).
"Mandatory Redemption Date" as to any share of Series A
Preferred Stock means the 31st of December of each year so long as
any shares of Series A Preferred Stock remain outstanding beginning
with December 31, 2001.
"Merger Agreement" refers to that certain Agreement and
Plan of Merger dated August 21, 2000 by and among Everlast World's
Boxing Headquarters Corp., Everlast Holding Co., Active Apparel
Group, Inc., Active Apparel New Corp, and the shareholders listed in
Schedule I thereof.
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<PAGE>
"Net After Tax Profits" shall be the net income after
tax of AAGP after this Merger, computed in accordance with generally
accepted accounting principles, for any fiscal year ending December
31, but (i) adding back, in their entirety without regard to any tax
provisions, the following accounts (x) the goodwill amortization as
it relates to this Merger, and (y) the compensation related to the
granting and the exercise of stock options under AAGP's employee
option plans; and (ii) multiplying by a fraction, the numerator of
which is the number of days in the fiscal year when any share of
Series A Preferred Stock is outstanding and the denominator is the
number of days in the whole year; provided, however, that the
denominator for the fiscal year ending December 31, 2000 shall be
equal to the number of days between the date of issuance of the
shares of Series A Preferred Stock and the earlier of the date when
the shares of Series A Preferred Stock are fully redeemed or
December 31, 2000.
"Outstanding Redeemable Percentage" is the aggregate
Redemption Value of the shares of Series A Preferred Stock
outstanding as of January 1st of the fiscal year for which
redemption is being computed divided by $45,000,000.
"Person" means an individual, a partnership, a
corporation, a limited liability company, an association, a joint
stock company, a trust, a joint venture, an unincorporated
organization and a governmental entity or any department, agency or
political subdivision thereof.
"Redemption Value" of any share of Series A Preferred
Stock as of any particular date shall be equal to $1,000.00, subject
to adjustment for any stock splits, dividends or recapitalization.
"Unavailable" means the death or Disability of the
individual.
11. Amendment and Waiver.
--------------------
No amendment, modification or waiver shall be binding or
effective with respect to any provision of Sections 1 to 11 without
the prior written consent of the Corporation and the holders of at
least a majority of the shares of Series A Preferred Stock
outstanding at the time such action is taken.
[The rest of this page is intentionally blank]
C-11
<PAGE>
IN WITNESS WHEREOF, Active Apparel Group, Inc. has caused this
Certificate of Designation to be executed this ___ day of _________, 2000.
ACTIVE APPAREL GROUP, INC.
------------------------------------------
Name: George Q Horowitz
Title: President & Chief Executive Officer
Attest:
----------------------------------
Name: Rita Cinque Kriss
Title: Secretary
C-12
<PAGE>
Appendix D
REGISTRATION RIGHTS AGREEMENT
-----------------------------
REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of
____________, 2000 by and among Active Apparel Group, Inc., a Delaware
corporation (the "Company") and each of the stockholders on Schedule I
(individually, a "Former Everlast Stockholder" and collectively, the "Former
Everlast Stockholders") of that certain Agreement and Plan of Merger dated as of
August 21, 2000, by and among the Company, Active Apparel New Corp., a Delaware
corporation, Everlast World Boxing Headquarters Corp., a New York corporation
("Everlast"), Everlast Holding Co., a Delaware corporation ("Everlast Holding")
and the Former Everlast Stockholders (the "Merger Agreement"). Capitalized terms
used herein without definition shall have the meanings set forth in the Merger
Agreement.
1. Definitions.
-----------
As used in this Agreement, the following terms shall
have the following meanings:
"Act" means the Securities Act of 1933, as amended, and
any similar or successor Federal statute, and the rules and regulations of the
Commission (or its successor) thereunder, all as the same shall be in effect at
the time.
"Board" means the Board of Directors of the Company.
"Commission" means the Securities and Exchange
Commission.
"Common Stock" means the common stock, $.002 par value
per share, of the Company.
"Company" shall have the meaning set forth in the first
paragraph of this Agreement.
"Exchange Act" means the Securities Exchange Act of
1934, as amended, and any similar or successor Federal statute, and the rules
and regulations of the Commission (or its successor) thereunder, all as the same
shall be in effect at the time.
"Holder" shall mean holder, or its respective
transferee, of Registrable Securities.
"Person" means an individual, partnership, corporation,
limited liability company, business trust, joint state company trust,
unincorporated organization, joint venture, a government authority or other
entity of whatever nature.
D-1
<PAGE>
"Prospectus" means the prospectus included in any
Registration Statement, as amended or supplemented by any prospectus supplement
with respect to the terms of the offering of any portion of the Registrable
Securities covered by such Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments to the
Registration Statement of which such Prospectus is a part, and all material
incorporated by reference in such Prospectus.
"Registrable Securities" means the Securities, but only
so long as they remain Restricted Securities.
"Registration Statement" means any registration
statement of the Company that covers any of the Registrable Securities pursuant
to the provisions of this Agreement, including the Prospectus, amendments and
supplements to such Registration Statement, including post-effective amendments,
all exhibits, and all material incorporated by reference in such Registration
Statement.
"Restricted Securities" means the Securities unless and
until, in the case of any such Securities, (i) they have been effectively
registered under the Act and disposed of in accordance with the Registration
Statement covering them, (ii) they are distributed to the public pursuant to
Rule 144 (or any similar provision then in force) under the Act, or (iii) they
are otherwise freely transferable without restriction under the Act.
"Securities" shall mean any and all shares of Common
Stock issued or issuable to the Former Everlast Stockholders, including the
Payment Shares (as such term is defined in the Merger Agreement) and the
Additional Shares (as such term is defined in the Merger Agreement).
"Selling Expenses" shall mean all underwriting discounts
and selling commissions and stock transfer taxes applicable to the
securities registered by the Former Everlast Stockholders and any fees of
counsel to any Former Everlast Stockholder (other than as allowable as a
Registration Expense).
2. Piggyback Registration Rights.
------------------------------
(a) Notice and Request. If the Company at any time or from
time to time proposes to register any securities under
the Act either for its own account or the account of any
selling security holders (other than pursuant to (i) a
registration statement on Forms S-4 or S-8 or any
successor or similar forms, or (ii) a registration on
any form that does not permit secondary sales), it will
give notice to each of the Former Everlast Stockholders
of its intention at least twenty (20) days in advance of
the filing of any registration statement with respect
thereto. Upon the written request of any of the Former
Everlast Stockholders given within fifteen (15) days
after receipt of such notice, the Company, subject to
Section 2(b) below, will use its best efforts to include
in such registration, and in any underwriting involved
therein, all the Registrable Securities or securities,
respectively, included in such request.
D-2
<PAGE>
(b) Underwritten Offerings.
----------------------
(i) In the case of an underwritten offering by
the Company of securities, each Former
Everlast Stockholder shall, with respect to
Securities that such Former Everlast
Stockholder then desires to sell, enter into
an underwriting agreement with the same
underwriters engaged by the Company with
respect to securities being offered by the
Company and the Company shall cause such
underwriters to include in any such
underwriting all of the Securities that a
Former Everlast Stockholder then desires to
sell; provided, however, that such
underwriting agreement is in substantially
the same form as the underwriting agreement
that the Company enters into in connection
with the primary offering it is making.
(ii) If the managing underwriter with respect to
such underwritten offering requests in
writing that the number of securities to be
offered by selling security holders be
reduced because in the judgment of the
managing underwriter the offering would be
materially and adversely affected, then such
securities shall be reduced by such amount
as the managing underwriter may determine so
as to not materially and adversely affect
the proposed offering, which reduced number
of securities shall be included in the
offering selected, first, from the Company
(including any securities that the Company
is registering on behalf of its
stockholders), and second, from all selling
security holders pro rata.
(c) Information. Upon making a request pursuant to this
Section 2, the Former Everlast Stockholders shall
specify the number of shares of Registrable Securities
to be registered on its behalf and the intended method
of disposition thereof; provided, however, upon making a
request pursuant to this Section 2, that if the Former
Everlast Stockholders holding a majority of the
Registrable Securities included in such request for
registration specify one particular type of underwritten
offering, such method of disposition shall be the type
of underwritten offering or a series of such
underwritten offerings used in connection with the
disposition of the Securities pursuant to such
Registration Statement as the Former Everlast
Stockholders of a majority of the Registrable Securities
may elect during the time period the Registration
Statement is effective.
The Company may require the Former Everlast
Stockholders to furnish to the Company such information
in writing regarding themselves and the distribution of
Registrable Securities as the Company may from time to
time reasonably request in writing in order to comply
with the Act. The Former Everlast Stockholders agree to
supply the Company as promptly as practicable with such
information and to notify
D-3
<PAGE>
the Company as promptly as practicable of any inaccuracy
or change in information they have previously furnished
to the Company.
(3) Demand Registration.
(a) Request for Registration. Subject to the provisions of
Section 3(b) hereof, one or more Holders owning in the
aggregate in excess of 50% of the issued and outstanding
Registrable Securities (or Preferred Stock convertible
into Registrable Securities) may make a written request
to the Company for registration under and in accordance
with the provisions of the Securities Act of the
Registrable Securities owned by any such Holder (a
"Demand Registration"). If, however, the Company shall
furnish to the Holder or Holders requesting a
Registration Statement pursuant to this Section 3(a)
certificate signed by the President of the Company
stating that, in the good faith judgment of the Board of
Directors of the Company, a material acquisition or
disposition by the Company is being negotiated or has
been publicly announced or that such registration
statement would have a material detrimental effect on
the Company, the Company shall have the right to defer
such filing for a period of not more than one hundred
twenty (120) days; provided, however, that the Company
may not utilize this right more than once in any twelve
(12) month period. Unless the Company shall elect to
defer the Demand Registration as provided in the
previous sentence, upon receipt of such Demand
Registration request, the Company shall within fifteen
(15) days after receipt of such request, give written
notice (the "Notice") of such request to all other
Holders and will include in such registration all
Registrable Securities with respect to which the Company
receives written requests for inclusion therein within
twenty (20) days after it gives the Notice to the
applicable Holder. Unless the Holder or a majority in
interest of the Holders demanding the Demand
Registration shall agree in writing, no other party
including the Company (but excluding another Holder of
Registrable Securities) shall be permitted to offer
Securities under any such Demand Registration.
(b) Number of Registrations. The Holders are entitled to one
(1) Demand Registration regardless of the Person or
Persons making demand. Each Holder agrees that if the
Company determines that there are material developments
which the Company determines require the filing of a
post-effective amendment to the Registration Statement,
then each Holder agrees to refrain from selling any
Registrable Securities until the post-effective
amendment is declared effective. The Company agrees to
file and attempt to have declared effective such
post-effective amendment as soon as possible.
Notwithstanding the foregoing, (i) if the Board
determines in its good faith judgment, after
consultation with a firm of nationally recognized
underwriters, that there will be an adverse effect on a
then contemplated public offering of the Company's
equity securities, the Company may defer the filing of
the Registration Statement which is required to effect
any registration and may withdraw any Registration
Statement without thereby incurring any liability to the
holders of
D-4
<PAGE>
Registrable Securities and (ii) if the Company shall at
any time furnish to a holder of Registrable Securities
who requests registration of a certificate signed by the
President of the Company or any other officer of the
Company stating that the Company has pending or in
process a material transaction, the disclosure of which
would, in the good faith judgment of the Board,
materially and adversely affect the Company, the Company
may defer the filing of a Registration Statement for up
to 90 days. The Company shall not be deemed to have
effected a Demand Registration unless and until such
Demand Registration is declared effective.
(c) Priority on Demand Registrations. If the managing
underwriter or underwriters of a Demand Registration (or
in the case of a Demand Registration not being
underwritten, Holders owning in the aggregate in excess
of 50% of the Registrable Securities to be registered in
such Demand Registration) advise the Company in writing
that in its or their opinion the number of Securities
proposed to be sold in such Demand Registration exceeds
the number of Securities that can be sold in such
offering without an adverse effect on such offering, the
Company will include in such registration only the
number of securities that, in the opinion of such
underwriter or underwriters (or Holders, as the case may
be) can be sold, selected pro rata among the Holders
that have requested to be included in such Demand
Registration; provided, that if any Holder has requested
inclusion in such Demand Registration and 50% or more of
the Registrable Securities that such Holder has
requested to be included in such Demand Registration
pursuant to this Section 3 are not so included, such
Holder, together with all other Holders whose number of
Registrable Securities so registered has been reduced by
50% or more, shall be entitled to one additional Demand
Registration (an "Additional Registration") hereunder
(with all expenses of registration relating to such
additional Demand Registration to be borne by the
Company) on the same terms and conditions as would have
applied to such Holders had such earlier Demand
Registration not been made. The Company shall send
notice of such Additional Registration to all Holders as
soon as practicable after the right to the Additional
Registration has vested.
(d) Selection of Underwriters and Counsel. If any Demand
Registration is an underwritten offering with respect to
any issue of Registrable Securities, the Holders of a
majority of such Registrable Securities to be included
in such Demand Registration will select the investment
banker or bankers and manager or managers of nationally
recognized standing to administer the offering subject
to the consent of the Company, such consent not to be
unreasonably withheld, and the Holders of a majority of
such Registrable Securities to be included in such
Demand Registration will select one counsel to the
sellers of such Registrable Securities in such offering.
The right of any Holder to registration shall be
conditioned upon such Holder's participation in such
underwriting. The Holders of the Registrable Securities
to be registered shall pay all underwriting discounts
and commissions of such investment banker or bankers and
manager or managers.
D-5
<PAGE>
4. Registration Procedures. In the case of each
registration, qualification or compliance effected by the Company pursuant to
this Agreement, the Company will keep each Former Everlast Stockholder advised
in writing as to the initiation of each registration, qualification and
compliance and as to the completion thereof. In connection with any registration
effected pursuant to this Agreement, the Company will prepare and file such
amendments and supplements to its registration statement as may be necessary to
comply with the provisions of the Act and any applicable blue sky or other state
securities laws with respect to the disposition of all securities covered by
such registration statement provided, however, that the Company shall not be
obligated to take any such action to effect any such registration under this
Agreement in any particular jurisdiction in which the Company would be requested
to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Act. At its
expense, the Company will furnish such number of prospectuses and other
documents incident thereto as the Former Everlast Stockholders from time to time
may reasonably request.
The Company shall keep such Registration Statement effective
for a period expiring upon the earlier to occur of (i) five years from the
Closing of the transaction contemplated by the Merger Agreement, and (ii) the
date upon which all Securities can be transferred without volume limitation.
5. Expenses of Registration. All reasonable fees and
expenses incident to the Company's performance of or compliance with this
Agreement shall be borne by the Company whether or not any Registration
Statement becomes effective including, without limitation: (i) all registration
and filing fees (including, without limitation, fees and expenses (A) with
respect to filings required to be made with the National Association of
Securities Dealers, Inc., and (B) with respect to compliance with securities or
blue sky laws); (ii) fees and disbursements of counsel for the Company; (iii)
fees and disbursements of all independent certified public accountants for the
Company (including, without limitation, the expenses of any special audit and
"cold comfort" letters required by or incident to such performance); (iv) Act
liability insurance if the Company so desires such insurance; and (v) fees and
expenses of all other persons retained by the Company. The Company shall not pay
any fees or expenses incurred by any Former Everlast Stockholder, including,
without limitation, accounting and legal expenses of any Former Everlast
Stockholder and commissions or discounts attributable to any Former Everlast
Stockholder's sale of Registrable Securities.
6. Indemnification and Contribution.
(a) Indemnification by the Company. Whenever, pursuant to
Sections 2 and 3, a Registration Statement relating to
the Registrable Securities is filed under the Act, the
Company will (except as to matters covered by Section
6(b) hereof) indemnify and hold harmless each
participant in the registration, each of their officers,
directors and employees, each underwriter of Registrable
Securities, and each Person, if any, who controls any
such Person within the meaning of Section 15 of the Act
and
D-6
<PAGE>
Section 20 of the Exchange Act (collectively, the
"Participant Indemnitees" and, individually, a
"Participant Indemnitee"), against any losses, claims,
damages or liabilities, including all actual legal or
other expenses reasonably incurred by a Participant
Indemnitee in connection with investigating or defending
against such loss, claim, damage, liability or action,
joint or several, to which such Participant Indemnitees
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 such Registration
Statement, or Prospectus contained therein, or any
amendment or supplement thereto, except as corrected by
amendment or prospectus supplement, or arise out of or
are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein, in light of
the circumstances under which they were made, not
misleading, unless any such statement or omission is
based on written information provided by the Participant
Indemnitee, or a representation of a Participant
Indemnitee, that such Participant Indemnitee has
requested be included in such Registration Statement or
Prospectus.
(b) Indemnification by Participants. Each participant in
such registration will indemnify and hold harmless the
Company, each of its directors, each of its officers who
has signed the Registration Statement and each other
Person, if any, who controls the Company, within the
meaning of the Act, each underwriter of Registrable
Securities and each Person, if any, who controls the
Company or any such underwriter within the meaning of
Section 15 of the Act and Section 20 of the Exchange Act
(collectively, the "Company Indemnitees" and,
individually, a "Company Indemnitee") and each other
Participant Indemnitee against all losses, claims,
damages or liabilities, joint or several, to which any
of the Company Indemnitees or the other Participant
Indemnitees 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 such
Registration Statement, or Prospectus contained therein,
or any amendment or supplement thereto, or arise out of
or are based upon the omission or alleged omission to
state therein a material fact required to be stated
therein or necessary to make the statements therein,
light of the circumstances under which they were made,
not misleading, but only if, and to the extent that,
such statement or omission is based on written
information provided by the Participant Indemnitee or a
representation of a Participant Indemnitee, that such
Participant Indemnitee, has requested be included in
such Registration Statement or Prospectus, and will
reimburse each Company Indemnitee or other Participant
Indemnitee for all legal or other expenses reasonably
incurred by it in connection with investigating or
defending against such loss, claim, damage, liability or
action; provided, however, that the maximum amount of
liability in respect of such indemnification (including,
but not limited to, attorneys' fees and expenses) shall
be limited, in the case of each
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<PAGE>
indemnifying participant, to an amount equal to the net
proceeds actually received by such indemnifying
participant from the sale of Registrable Securities
under such Registration Statement.
(c) Indemnification Procedures. Promptly after receipt by a
Participant Indemnitee or a Company Indemnitee
(collectively, "Indemnitees" and, individually, an
"Indemnitee") under Section 6(a) or 6(b) hereof of
notice of the commencement of any action, such
Indemnitee will, if a claim in respect thereof is to be
made against the indemnifying party under such clause,
notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the
indemnifying party will not relieve the indemnifying
party from any liability that it may have to any
Indemnitee otherwise than under such clauses. In case
any such action shall be brought against any Indemnitee,
and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall 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 Indemnitee, and
after notice from the indemnifying party to such
Indemnitee of its election to assume the defense
thereof, the indemnifying party shall not be liable to
such Indemnitee under such clause for any legal or other
expenses subsequently incurred by such Indemnitee in
connection with the defense thereof other than
reasonable costs of investigation; provided, however,
that the Indemnitee shall have the right to employ one
counsel to represent such Indemnitee if, in the
reasonable judgment of such Indemnitee, it is advisable
for such party to be represented by separate counsel
because separate defenses are available, or because a
conflict of interest exists between such indemnified and
indemnifying party in respect of such claim, and in that
event the fees and expenses of such separate counsel
shall be paid by the indemnifying party. Notwithstanding
the foregoing, if the Company is an Indemnitee, the
Company shall designate the one counsel, and in all
other circumstances, the one counsel shall be designated
by a majority in interest based upon the Registrable
Securities of the Indemnitees. For purposes of this
Section 6, the term "control," and "controlling person"
have the meanings that they have under the Act.
(d) Contribution. If for any reason the foregoing indemnity
is unavailable, or is insufficient to hold harmless an
Indemnitee, then the indemnifying party shall contribute
to the amount paid or payable by the Indemnitee as a
result of such losses, claims, damages, liabilities or
expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the
indemnifying party on the one hand and the Indemnitee on
the other from the registration or (ii) if the
allocation provided by clause (i) above is not permitted
by applicable law, or provides a lesser sum to the
Indemnitee than the amount hereinafter calculated, in
such proportion as is appropriate to reflect not only
the relative benefits received by the indemnifying party
on the one hand and the Indemnitee on the other but also
the relative fault of
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<PAGE>
the indemnifying party and the Indemnitee as well as any
other relevant equitable considerations. The relative
fault of the Company, on the one hand, and the
indemnifying party, on the other hand, shall be
determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a
material fact relates to information supplied by the
Company or by the indemnifying party and the parties'
relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or
omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f)
of the Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent
misrepresentation.
7. Amendment and Modification. This Agreement may be
amended, modified or supplemented in any respect only by written agreement by
the Company and the holders of a majority of the issued and outstanding shares
of Registrable Securities.
8. Governing Law. This Agreement and the rights and
obligations of the parties hereunder shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York, without
giving effect to the choice of law principles thereof.
9. Invalidity of Provision. The invalidity or
unenforceability of any provision of this Agreement in any jurisdiction shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of this Agreement, including
that provision, in any other jurisdiction.
10. Notices. All notices and other communications required
or permitted under this Agreement shall be deemed to have been duly given and
made if in writing and if served either by personal delivery to the party for
whom intended (which shall include delivery by Federal Express or similar
nationally recognized service or by facsimile) or three business days after
being deposited, postage prepaid, certified or registered mail, return receipt
requested, in the United States mail bearing the address shown in this Agreement
for, or such other address as may be designated in writing hereafter by, such
party:
If to Former Everlast
---------------------
Stockholders: At their addresses set forth on Schedule I
------------
With copies to: David Shechet
110-11 Queens Boulevard, Apartment 20B
Forest Hills, New York 11375
And Lesser & Harrison
Two West 45th Street
New York, New York 10036
Attention: Stanley C. Lesser, Esq.
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<PAGE>
If to Company: Active Apparel Group, Inc.
-------------
1350 Broadway, Suite 2300
New York, New York 10018
Attention: Mr. George Q Horowitz
Facsimile Number : (212) 563-0824
with copies to: Edward Epstein, Esq.
915 Middle River Drive, Suite 419
Fort Lauderdale, Florida 33304
and
Olshan Grundman Frome Rosenzweig
& Wolosky LLP
505 Park Avenue
New York, New York 10022
Attention: Robert H. Friedman, Esq.
11. Entire Agreement. This Agreement, including any exhibits
hereto and the documents and instruments referred to herein and therein,
embodies the entire agreement and understanding of the parties hereto in respect
of the subject matter contained herein. There are no restrictions, promises,
representations, warranties, covenants or undertakings, other than those
expressly set forth or referred to herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
12. Successors and Assigns. This Agreement shall be binding
upon the parties hereto and their successors and assigns.
[The remainder of this page was intentionally left blank.]
D-10
<PAGE>
IN WITNESS WHEREOF, this Agreement has been signed by
each of the parties hereto as of the day and year first above written.
ACTIVE APPAREL GROUP, INC.
By:
-----------------------------------------
Name: George Q Horowitz
Title: Chief Executive Officer
& President
FORMER EVERLAST STOCKHOLDERS:
--------------------------------------------
Ben Nadorf
--------------------------------------------
Arlene Shechet
--------------------------------------------
Arthur Shechet
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<PAGE>
ACTIVE APPAREL GROUP, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
SPECIAL MEETING OF STOCKHOLDERS
OCTOBER 24, 2000
The undersigned hereby appoints each of George Q Horowitz and James
Anderson as the undersigned's proxy, with full power of substitution, to vote
all of the undersigned's shares of Common Stock and Class A Common Stock in
Active Apparel Group, Inc. (the "Company"), at the Special Meeting of
Stockholders of the Company to be held on October 24, 2000 at 10:00 A.M. local
time, at The Doral Park Avenue, 70 Park Avenue, New York, New York 10016, in the
Morgan Room on the 2nd floor, or at any adjournment, on the matters described in
the Notice of Special Meeting and Proxy Statement and upon such other business
as may properly come before such meeting or any adjournments thereof, hereby
revoking any proxies heretofore given.
PROPOSAL 1. APPROVE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
TO INCREASE ITS AUTHORIZED CAPITAL :
FOR / / AGAINST / / ABSTAIN / /
PROPOSAL 2. APPROVE THE ADOPTION OF THE COMPANY'S 2000 STOCK OPTION PLAN:
FOR / / AGAINST / / ABSTAIN / /
PROPOSAL 3. APPROVE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
TO CHANGE THE NAME OF THE COMPANY:
FOR / / AGAINST / / ABSTAIN / /
(continued and to be signed on reverse side)
<PAGE>
EACH PROPERLY EXECUTED PROXY WILL BE VOTED IN ACCORDANCE WITH SPECIFICATIONS
MADE ON THE REVERSE SIDE HEREOF. IF NO SPECIFICATIONS ARE MADE, THE SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED FOR APPROVAL OF PROPOSALS 1, 2 AND 3.
--------------------------------------------
Signature
----------------------------------
Signature if held jointly
Dated: , 2000
-------------
SIGN EXACTLY, AS SET FORTH HEREIN. IF SIGNED AS EXECUTOR, ADMINISTRATOR, TRUSTEE
OR GUARDIAN, INDICATE THE CAPACITY IN WHICH YOU ARE ACTING. PROXIES BY
CORPORATIONS SHOULD BE SIGNED BY A DULY AUTHORIZED OFFICER AND BEAR CORPORATE
SEAL.
PLEASE SIGN AND RETURN THE PROXY CARD PROMPTLY IN ENCLOSED ENVELOPE.
