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
|_| Definitive Proxy Statement of the Commission Only
|_| Definitive Additional Materials (as permitted by Rule
|_| Soliciting Material Pursuant to 14a-6(e)(2)
ss.240.14a-12
TARRANT APPAREL GROUP
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No Fee Required
|X| 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:
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(4) Proposed maximum aggregate value of transaction: $106,988,000
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(5) Total fee paid: $11,448
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|_| Fee paid with preliminary materials:
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|_| 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 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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TARRANT APPAREL GROUP
______________________, 2007
Dear Shareholders:
I am pleased to inform you that the Board of Directors of Tarrant
Apparel Group (or Tarrant) has approved a Stock and Asset Purchase Agreement to
purchase the business and assets of The Buffalo Group. The Buffalo Group
consists of a group of related entities founded and managed by Messrs. David,
Gabriel, Charles, Gilbert and Michel Bitton and their affiliates. The stock and
asset purchase agreement provides for the purchase of the outstanding capital
stock of four principal operating subsidiaries through which The Buffalo Group
carries on its operations and certain intellectual property assets held in a
trust that are used in the business operations of The Buffalo Group. The Buffalo
Group designs, imports and sells branded high fashion denim and other apparel
products primarily in Canada and the United States, and licenses to third
parties rights to its brand names and trademarks for apparel and accessories.
The consideration for the stock and assets to be purchased under the
stock and asset purchase agreement will consist of $40 million in cash, subject
to reduction before closing, promissory notes in the principal amount of $15
million and securities of Tarrant and its wholly-owned Canadian subsidiary. In
the stock and asset purchase transaction, Tarrant's wholly-owned Canadian
subsidiary will issue to the sellers 13 million shares of its non-voting stock
that will be exchangeable into shares of Tarrant common stock on a one for one
basis. In addition, Tarrant will issue to the voting trustee of a voting trust
130,000 shares of Tarrant's Series A preferred stock with voting rights that
will entitle the sellers, as the beneficiaries of the trust, to direct the
trustee to vote a number of shares equal to the number of exchangeable shares to
be issued by Tarrant's Canadian subsidiary that remain outstanding from time to
time. The shares of Tarrant common stock underlying the exchangeable shares to
be issued in the stock and asset purchase transaction will collectively comprise
approximately 30% of the total outstanding capital stock of Tarrant immediately
after the closing of the transactions contemplated by the stock and asset
purchase agreement. The shares of Tarrant's Series A preferred stock to be
issued in the transaction will effectively comprise approximately 30% of the
total voting power of Tarrant immediately after the closing of these
transactions. Tarrant will also assume certain obligations of The Buffalo Group
and will make up to $12 million in earn-out payments if specified performance
benchmarks are satisfied. Additionally, the sellers will be entitled to receive
a certain contingent payment if the highest volume weighted average market price
of Tarrant's common stock over a specified period does not equal or exceed
$3.076 per share.
In connection with this acquisition transaction, the Board of Directors
has approved amendments to our existing credit agreement with Guggenheim
Corporate Funding LLC and our credit facility with GMAC Commercial Financial LLC
to provide that $55 million under these facilities will be available to finance
the cash consideration payable under the stock and asset purchase agreement and
to repay some or all of Buffalo's obligations under Buffalo's existing credit
facility. In connection with the amendment of the Guggenheim credit facility,
Tarrant proposes to issue to Guggenheim warrants to purchase up to
_______________ additional shares of our common stock. The Board of Directors
has also approved certain other agreements and transactions contemplated by the
stock and asset purchase agreement.
We are inviting our shareholders to attend a special meeting of
shareholders to vote on the stock and asset acquisition and the related issuance
of shares and other securities. The special meeting is scheduled for __________,
2007, at ______________, at the time and for the purposes set forth in the
accompanying Notice of Special Meeting of Shareholders.
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The specific matters to be considered at the special meeting are
described in the accompanying Notice of Special Meeting of Shareholders and in
the proxy statement. These transactions have been approved by the Board but will
not be completed unless they are approved by holders of a majority of Tarrant's
outstanding common stock or by holders of a majority of the shares represented
and voting at the special meeting, as applicable. We require your approval of
the stock and asset acquisition and related transactions to comply with the
California Corporations Code and the NASDAQ Marketplace Rules. Under these
rules, we must obtain the approval of our shareholders before completing a
reorganization transaction and before issuing common stock or other securities
exchangeable for common stock in an amount to exceed a specified percentage of
the shares of our common stock or voting stock outstanding before completion of
the transaction. If Tarrant shareholders wish to approve the stock and asset
purchase agreement and the other transactions contemplated by the agreement,
they must approve the related transactions described in the accompanying Notice
of Special Meeting of Shareholders, including the issuance of Tarrant common
stock, other securities exercisable for common stock and the shares of Series A
preferred stock.
The close of business on _________, 2007 has been fixed for determining
the shareholders entitled to vote at the special meeting. Accordingly, only
shareholders of record on that date are entitled to notice of, and to vote at,
the special meeting or any adjournment or postponement of the special meeting.
Your vote is important. Please take the time to vote on the proposals
by completing and mailing the enclosed proxy card, even if you plan to attend
the special meeting. Thank you for your interest and participation in the
affairs of Tarrant Apparel Group.
Sincerely,
Chairman of the Board and Interim Chief Executive Officer
NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES REGULATOR HAS APPROVED THE ISSUANCE OF COMMON STOCK IN CONNECTION
WITH THE STOCK AND ASSET ACQUISITION OR DETERMINED IF THIS PROXY STATEMENT IS
ACCURATE OR ADEQUATE. ANY REPRESENTATIONS TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT IS DATED _____________, 2007, AND WAS FIRST MAILED
TO SHAREHOLDERS ON OR ABOUT ____________, 2007.
ADDITIONAL INFORMATION
Certain business and financial information about Tarrant Apparel Group
may be incorporated by reference from documents that are not included in or
delivered with this proxy statement. This information is available to you
without charge upon your written or oral request. You can obtain the documents
incorporated by reference in this proxy statement by requesting them in writing
or by telephone from Tarrant at 3151 East Washington Boulevard, Los Angeles,
California 90023, Attention: Chief Financial Officer, Telephone: (323)
780-8250.
See also "Where You Can Find More Information." If you would like to
request documents, please do so by _____________, 2007, in order to receive them
before the special meeting.
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TARRANT APPAREL GROUP
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON _______________________, 2007
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of
Tarrant Apparel Group, a California corporation, will be held on
_________________, _____________, 2007, at 10:00 A.M., local time, at Tarrant's
corporate headquarters located at 3151 East Washington Boulevard, Los Angeles,
California, for the following purposes:
1. To adopt the Stock and Asset Purchase Agreement dated December 6,
2006, by and among Tarrant Apparel Group, 4366883 Canada Inc., a wholly-owned
subsidiary of Tarrant, 3681441 Canada Inc., Buffalo Inc., 3163946 Canada Inc.,
Buffalo Corporation, BFL Management Inc., as sole trustee of The Buffalo Trust
and the shareholders of the target entities, the stock and asset purchase
transactions and the other transactions contemplated by the purchase agreement.
2. To approve the issuance of shares of Tarrant common stock, and
securities exercisable for common stock, in an amount to exceed 20% of the
outstanding shares of Tarrant's common stock.
3. To approve the issuance of 130,000 shares of Tarrant's Series A
Special Voting preferred stock, no par value, which have rights to vote a number
of shares exceeding 20% of the outstanding voting stock of Tarrant.
4. To transact any other business that may properly come before the
special meeting or any adjournment or postponement.
Tarrant's Board of Directors unanimously recommends that shareholders
vote FOR each of the proposals as described in the attached materials. Before
voting, you should carefully review all of the information contained in the
attached proxy statement and in particular you should consider the matters
discussed under "Risk Factors" under the first Proposal listed above.
All shareholders are cordially invited to attend the special meeting in
person. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SIGN AND
PROMPTLY RETURN THE ENCLOSED PROXY CARD, WHICH YOU MAY REVOKE AT ANY TIME BEFORE
ITS USE. Only shareholders of record at the close of business on ___________,
2007, are entitled to notice of and to vote at the special meeting and any
adjournment thereof. A complete list of shareholders entitled to vote at the
special meeting will be available at the special meeting. This proxy statement
is first being mailed to shareholders on or about ______________, 2007.
For more information about the proposed transactions, please review the
accompanying proxy statement, including the exhibits.
By order of the Board of Directors
Secretary
Los Angeles, California
_________________, 2007
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TABLE OF CONTENTS
SUMMARY TERM SHEET.............................................................1
INFORMATION CONCERNING SOLICITATION AND VOTING................................13
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS.................................15
QUESTIONS AND ANSWERS ABOUT THE ACQUISITION...................................16
RISK FACTORS..................................................................20
PROPOSAL 1 - STOCK AND ASSET ACQUISITION......................................34
STOCK AND ASSET PURCHASE AGREEMENT............................................49
TERMS OF THE EXCHANGEABLE SHARES AND RELATED MATTERS..........................55
SERIES A PREFERRED STOCK AND THE VOTING TRUST.................................59
UNAUDITED PRO FORMA FINANCIAL INFORMATION.....................................60
TARRANT APPAREL GROUP.........................................................65
BUSINESS OF THE BUFFALO GROUP.................................................71
BUFFALO'S SELECTED FINANCIAL DATA.............................................77
BUFFALO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................78
PROPOSAL 2 - ISSUANCE OF TARRANT COMMON STOCK AND WARRANTS IN THE
ACQUISITION TRANSACTION....................................................87
PROPOSAL 3 - ISSUANCE OF SERIES A PREFERRED STOCK.............................90
OTHER MATTERS.................................................................92
WHERE YOU CAN FIND MORE INFORMATION...........................................92
EXHIBIT A - STOCK AND ASSET PURCHASE AGREEMENT
EXHIBIT B - FAIRNESS OPINION
EXHIBIT C - CALIFORNIA DISSENTERS' RIGHTS STATUTE
EXHIBIT D - COMBINED FINANCIAL STATEMENTS OF THE BUFFALO GROUP AS OF, AND
FOR, THE NINE MONTHS ENDED SEPTEMBER 30, 2006 (UNAUDITED), AND
THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005
EXHIBIT E - ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2005 OF TARRANT
APPAREL GROUP*
EXHIBIT F - QUARTERLY REPORT FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,
2006 OF TARRANT APPAREL GROUP*
*Previously filed with the SEC and omitted from this filing. Report will be
attached and delivered to shareholders with the definitive proxy statement.
v
TARRANT APPAREL GROUP
PROXY STATEMENT
SUMMARY TERM SHEET
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT
AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A
COMPLETE UNDERSTANDING OF THE INFORMATION SET FORTH IN THIS PROXY STATEMENT, YOU
SHOULD CAREFULLY READ THIS ENTIRE PROXY STATEMENT AND THE DOCUMENTS TO WHICH IT
REFERS.
THE SPECIAL MEETING
DATE, TIME AND PLACE OF The special meeting will be held on ______________,
SPECIAL MEETING 2007, beginning at 10:00 A.M., Los Angeles time,
at Tarrant's corporate headquarters located at 3151
East Washington Boulevard, Los Angeles, California
90023.
RECORD DATE: SHAREHOLDERS Only holders of record of Tarrant common
stock on [ENTITLED TO VOTE; QUORUM]
__________________, 2007, are entitled to notice of
and to vote at the special meeting. As of the
record date, there were __________________ shares
of Tarrant common stock outstanding. The presence,
in person or by proxy, of the holders of at least a
majority of our common stock will constitute a
quorum.
VOTE REQUIRED The vote of holders of a majority of Tarrant's
outstanding common stock is required to vote in
favor of Proposal 1 for this proposal to pass.
Assuming a quorum is present, the affirmative vote
of a majority of the shares represented and voting,
either present in person or represented by proxy at
the special meeting are required to vote in favor
of Proposals 2 and 3 for such proposals to pass.
RECOMMENDATION OF BOARD OF Our Board of Directors unanimously approved each
DIRECTORS of the Proposals to be considered at the special
meeting. The Board recommends that the shareholders
vote FOR each proposal.
PROPOSAL 1 -- ACQUISITION OF STOCK AND ASSETS OF THE BUFFALO GROUP
COMPANIES AND ASSETS Tarrant Apparel Group is a design and sourcing
INVOLVED IN THE company for private label and private brand casual
ACQUISITION apparel serving mass merchandisers, department
stores, branded wholesalers and specialty chains
located primarily in the United States. Tarrant's
major customers include retailers, such as Chico's,
Macy's Merchandising Group, the Avenue, Lane
Bryant, Lerner New York, Mothers Work, J.C. Penney,
Kohl's, Sears, Mervyn's and Wal-Mart. Our products
are manufactured in a variety of woven and knit
fabrications and include jeans wear, casual pants,
t-shirts, shorts, blouses, shirts and other tops,
dresses and jackets.
The target companies, Buffalo Inc., 3163946 Canada
Inc., 3681441 Canada Inc. and Buffalo Corporation,
and The Buffalo Trust, are part of a group of
entities we refer to as The Buffalo Group. The
Buffalo Group was founded in 1985 by Mr. David
Bitton and is currently under the common control,
ownership and management of Messrs. David, Gabriel,
Charles, Gilbert and Michel Bitton, whom we refer
to collectively as the Bitton brothers, and their
affiliates. The Buffalo Group designs, imports and
markets high fashion denim and other apparel
products sold primarily in Canada and the United
States. The Buffalo Group operates 45 retail
locations in Canada and one location in the United
States. It also licenses to third parties the right
to operate a limited number of retails stores in
other countries abroad, such as Mexico and the
Philippines. The Buffalo Group also sells its
products through a variety of wholesale accounts in
Canada and the United States, including
Bloomingdale's, Nordstrom's, Fred Segal's and
Macy's East and West.
SUMMARY OF THE STOCK AND The parties to the stock and asset purchase
ASSET ACQUISITION agreement include us, 4366883 Canada Inc., our
wholly-owned Canadian subsidiary to which we
sometimes refer as TAG Canada in this proxy
statement, the target companies, their shareholders
and the trustee of The Buffalo Trust. Under the
stock and asset purchase agreement, among other
things, each of the following will occur:
1) Tarrant will acquire all outstanding
shares of capital stock of the following
principal operating subsidiaries of The
Buffalo Group:
o Buffalo Inc., a Canada
corporation, and 3163946 Canada
Inc., a Canada corporation, which
are wholly-owned subsidiaries of
Buffalo International, Inc.;
o 3681441 Canada Inc., a Canada
corporation and a wholly-owned
subsidiary of 4183517 Canada
Inc.; and
o Buffalo Corporation, a Delaware
corporation and a wholly-owned
subsidiary of 3979512 Canada Inc.
2) Concurrently with the purchase of these
shares, Tarrant will acquire the assets of
The Buffalo Trust that are used by the
operating subsidiaries in the operation of
The Buffalo Group's business.
3) As consideration for the outstanding
capital stock of the operating
subsidiaries to be sold to Tarrant, the
sellers of the operating subsidiaries will
receive $17 million in cash, $11 million
in promissory notes issuable by TAG
Canada, and 13,000,000 exchangeable shares
of TAG Canada, which will be exchangeable
into an equal number of shares of Tarrant
common stock comprising approximately 30%
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of Tarrant's total outstanding capital
stock immediately after the closing of the
acquisition;
4) In combination with the exchangeable
shares, Tarrant will issue 130,000 shares
of Series A preferred stock of Tarrant to
a trustee of a voting trust, under which
the sellers will have the right to direct
the trustee to vote a number of shares
equal to the number of exchangeable shares
of TAG Canada that remain outstanding at
any time;
5) The sellers will be entitled to receive up
to $12 million in earn-out payments if
certain conditions and specified
performance benchmarks are satisfied;
6) The sellers also will be entitled to
receive a contingent payment if the
highest volume weighted average market
price of Tarrant's common stock over any
10 day trading period with a trading
volume of at least 500,000 shares during
the five years following the closing does
not equal or exceed $3.076 per share;
7) As consideration for the assets to be
purchased under the purchase agreement,
The Buffalo Trust will receive $23 million
in cash, subject to reduction before
closing based on the revenue of The
Buffalo Trust, and $4 million in
promissory notes to be issued by TAG
Canada;
8) Tarrant will operate the Buffalo business
it acquires as a separate division of
Tarrant, and will appoint Gabriel Bitton
as the President of Tarrant's Buffalo
division upon completion of the proposed
acquisition; and
9) Messrs. Gabriel Bitton and Luis Padilla
or, if either or both of Messrs. Bitton or
Padilla are unwilling to serve or unable
to serve due to death or disability or for
other reasons as specified in the purchase
agreement, any other nominee or nominees
of the sellers reasonably acceptable to
Tarrant, will be nominated to serve on
Tarrant's Board of Directors upon
completion of the proposed acquisition.
A copy of the stock and asset purchase agreement is
attached to this proxy statement as Exhibit A.
PURCHASE PRICE DEPOSIT Upon signing the stock and asset purchase
agreement, Tarrant paid $5 million as a deposit on
the purchase price payable under the purchase
agreement. If the transaction closes, this amount
will be used to pay a portion of the purchase
price. Under certain circumstances, if the purchase
agreement is terminated and the transaction does
not close, the deposit will be retained by the
sellers as liquidated damages under the purchase
agreement. Under other circumstances, including if
shareholder approval of the transaction is not
obtained, if the transaction does not close, the
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amount will be returned to Tarrant, as provided in
the purchase agreement.
EARN-OUT PAYMENTS Under the purchase agreement, we are required to
make earn-out payments of up to $12 million if The
Buffalo Group satisfies specified earnings targets
from 2007 through 2010. The earn-out amount for any
of these years will become payable if The Buffalo
Group achieves the specified earnings target for
that year. If the applicable earnings target is
achieved with respect to any fiscal year, we will
be required to make an earn-out payment of $3
million for that year. Upon occurrence of certain
acceleration events specified under the purchase
agreement, we will be required to pay an
accelerated earn-out amount calculated based on the
net present value of the aggregate remaining
earn-out amounts as if all such remaining earn-out
amounts would have been earned in full. Events
triggering these accelerated payment obligations
include the consummation of a change of control
transaction, the termination of Mr. Gabriel
Bitton's employment by us without cause (as defined
in the purchase agreement) or Mr. Bitton's
resignation for good reason, our failure to make
any required earn-out payments and our breach of
certain specified obligations relating to the
ongoing management of The Buffalo Group following
the acquisition.
CONTINGENT PAYMENTS As part of the consideration payable under the
purchase agreement, the sellers will be entitled to
receive a contingent payment if the highest volume
weighted average market price of Tarrant's common
stock over any 10 consecutive trading days during
the five years following the closing of the
transaction does not equal or exceed $3.076 per
share, in which case the contingent payment will be
determined by multiplying the number of shares of
common stock issued or issuable to the sellers
(including shares issuable upon exchange of
exchangeable shares) by the difference between the
specified minimum price per share of $3.076 and
such highest volume weighted average market price
of Tarrant's common stock.
EXCHANGEABLE SHARES The exchangeable shares to be issued in the
acquisition will be issued by 4366883 Canada Inc.,
a wholly-owned Canadian subsidiary of Tarrant,
which we refer to as TAG Canada or Tarrant's
Canadian subsidiary throughout this proxy
statement. The exchangeable shares, as nearly as
practicable, will be the economic equivalent of
Tarrant common stock. The exchangeable shares will
be exchangeable at any time at the option of the
holder, on a one-for-one basis, for shares of
Tarrant common stock. The exchangeable shares
provide the opportunity for the sellers to achieve
a Canadian tax deferral in certain circumstances,
as described in the attached proxy statement.
SERIES A PREFERRED STOCK Tarrant will issue shares of its Series A preferred
stock to give the sellers the right to vote 13
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million shares of Tarrant's common stock before the
exchange of the exchangeable shares. We aim to
accomplish this by issuing 130,000 shares of Series
A preferred stock to a trustee under the terms of a
voting trust created for the benefit of the
sellers. Each share of Series A preferred stock
will have 100 votes. Under the terms of the voting
trust agreement between us and the trustee, the
sellers will have the right to direct the trustee
to vote the shares of Series A preferred stock on
shareholder matters. As a condition to exchanging
shares of exchangeable shares for Tarrant common
stock, we will redeem a corresponding number of
shares of Series A preferred stock so that the
shares of preferred stock and exchanged shares of
common stock that remain outstanding at any time do
not entitle their holders the right to vote more
than 13 million shares on a combined basis.
EMPLOYMENT MATTERS In connection with the proposed acquisition of
Buffalo and as a condition to the consummation of
the transactions contemplated by the purchase
agreement, Tarrant will enter into employment
agreements with each of the Bitton brothers and
grant to the Bitton brothers options to purchase up
to two million shares of Tarrant common stock in
the aggregate.
REGISTRATION RIGHTS Tarrant will be required to register the resale by
the sellers of the shares of Tarrant common stock
underlying the exchangeable shares to be issued to
the sellers in the acquisition under the terms of a
registration rights agreement between Tarrant and
the sellers.
FINANCING As a condition to the consummation of the proposed
acquisition, Tarrant will enter into one or more
amendments to its credit agreement with Guggenheim
Corporate Funding LLC and its facility with GMAC
Commercial Finance LLC. We expect $__ million will
be made available to Tarrant under its amended
credit facilities with Guggenheim and GMAC-CF to
pay for the cash portion of the purchase price in
the proposed acquisition of Buffalo and to pay off
some or all of Buffalo's obligations under
Buffalo's existing credit facility. In connection
with the amendment of the Guggenheim facility,
Tarrant will issue to Guggenheim warrants to
purchase shares of Tarrant common stock, as
described under Proposal 2 in this proxy statement.
PURPOSE OF ACQUISITION Tarrant is proposing to consummate the transactions
contemplated by the stock and asset purchase
agreement for the purpose of acquiring the business
and operations of The Buffalo Group.
REASONS FOR ACQUISITION The Board of Directors of Tarrant believes the
acquisition of The Buffalo Group will contribute to
its success and has identified various benefits
that are likely to result from the acquisition.
Tarrant's Board believes the acquisition will:
o expand Tarrant's operations by adding
additional proprietary brands and products
to compete more effectively;
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o expand the scope, scale and strength of
Tarrant's operations by expanding its
marketing, sales and distribution
capabilities;
o enhance Tarrant's capabilities to compete
in Canada, the United States and other
markets and utilize The Buffalo Group's
existing sales and marketing
infrastructure as a platform for expanding
sales of Tarrant's apparel products;
o provide potential opportunities for
Tarrant to penetrate new markets and
expand its share in existing markets;
o enhance sales capabilities and
profitability by transforming from
primarily a wholesale model to a
combination retail and wholesale model;
o enhance operating efficiencies through
vertical integration and consolidation
activities;
o expand Tarrant's management team and Board
of Directors by adding management
personnel and two new directors with
significant experience in the apparel
industry;
o reduce costs based on increased volume of
sourced merchandise;
o improve Tarrant's ability to withstand
pricing pressures resulting in inexpensive
apparel imports;
o enhance Tarrant's operations by improving
product mix of higher priced products; and
o enhance long-term shareholder value.
BACKGROUND AND Tarrant and The Buffalo Group have been discussing
NEGOTIATIONS RELATED TO the possibility of Tarrant's acquisition of the
THE ACQUISITION Buffalo business since the beginning of 2006. The
discussions led to entering into the Stock and
Asset Purchase Agreement on December 6, 2006.
OWNERSHIP AND VOTING Based on the number of outstanding shares of
POWER UPON COMPLETION Tarrant common stock as of the record date,
OF THE ACQUISITION immediately after the closing of the acquisition
transaction, our existing shareholders will own
approximately 70% of our total capital stock and
total voting power, calculated after giving effect
to the exchange of all exchangeable shares to be
issued by TAG Canada in the acquisition and the
exercise in full of all options and warrants to be
issued in connection with the transaction.
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EFFECT IN BOOK VALUE Based on shareholder's equity of $16.1 million as
PER SHARE of September 30, 2006, the book value per share of
shares held by the existing shareholders of Tarrant
is $0.53. Immediately following the acquisition
transaction, assuming the transaction had occurred
as of September 30, 2006, and assuming all
exchangeable shares are exchanged for Tarrant
common stock and all options to be issued in the
transaction are exercised in full, the PRO FORMA
book value per share of shares held by Tarrant's
existing shareholders would be $0.72, reflecting
an increase in book value per share of $0.19.
CONDITIONS TO THE The completion of the acquisition is subject to the
ACQUISITION satisfaction of a number of conditions, including
the following:
o approval of the acquisition by Tarrant's
shareholders;
o absence of a change having a material
adverse effect of $1.5 million or more in
value with respect to Tarrant and the
other parties to the stock and asset
purchase agreement;
o accuracy of representations and warranties
except as specified in the purchase
agreement and except for inaccuracies that
could not reasonably be expected to result
in a change having a material adverse
effect of $1.5 million or more in value;
o absence of adverse litigation; and
o receipt of all required consents.
TERMINATION OF The stock and asset purchase agreement may be
ACQUISITION AGREEMENT terminated:
o by mutual written consent of the parties;
o upon delivery of notice by either of the
parties if the closing has not occurred
before March 31, 2007, so long as the
terminating party has not caused the
failure to close;
o by Tarrant upon 30 days' written notice if
there has been a change having a material
adverse effect of $1.5 million or more in
value on the business or assets we agreed
to purchase or if any seller has breached
any representation or covenant under the
purchase agreement;
o by Tarrant on or before March 31, 2007, if
we are unable to obtain approval of the
transaction and the purchase agreement at
the special meeting of shareholders;
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o by the sellers upon 30 days' advance
written notice if there has been a
material adverse change on the business or
assets of Tarrant; and
o by Tarrant if we are unable to obtain the
financing necessary to complete the
acquisition.
EFFECT OF TERMINATION If we terminate the purchase agreement due to the
occurrence of a material adverse change in the
business and assets we are purchasing or due to the
breach by the sellers of their representations or
covenants under the agreement, we will be entitled
to a refund of the $5 million deposit and we will
have the right to pursue all legal remedies for
damages, except that the sellers will not be liable
for damages in excess of $5 million in the
aggregate. If we terminate the purchase agreement
due to our inability to obtain shareholder
approval, we will be entitled to a refund of the $5
million deposit but we will be required to pay the
sellers a termination fee equal to all actual and
reasonable out-of-pocket expenses incurred in
connection with the transactions contemplated by
the purchase agreement and other agreements. In
general, if the sellers terminate the purchase
agreement under the terms specified above or the
purchase agreement is terminated for failure to
close before the expiration date, the sellers will
be entitled to retain the $5 million deposit amount
we paid upon signing the purchase agreement as
their sole and exclusive remedy and as liquidated
damages.
FAIRNESS OPINION In deciding to approve the stock and asset purchase
agreement, the Tarrant Board considered an opinion
from Marshall & Stevens, Inc. as to the fairness,
from a financial point of view, to Tarrant of the
consideration payable under the stock and asset
purchase agreement. The opinion states that, as of
its date and based on and subject to the
assumptions and limitations contained in the
opinion, the terms of the proposed acquisition and
the consideration to be paid to the sellers are
fair from a financial point of view to Tarrant.
This opinion is included as Exhibit B to this proxy
statement, and we encourage you to read it.
ACCOUNTING TREATMENT Tarrant will account for the acquisition as a
purchase under the purchase method of accounting.
MATERIAL TAX Tarrant took into account a variety of tax
CONSEQUENCES TO TARRANT considerations in an attempt to mitigate
AND ITS SHAREHOLDERS potentially adverse tax consequences, but Tarrant
is unaware of any material tax consequences
associated with the acquisition. The acquisition
should not result in any material tax consequences
to either Tarrant or its shareholders.
DISSENTERS' RIGHTS If the acquisition is approved by the required vote
of Tarrant's shareholders and is not abandoned or
8
terminated, holders of Tarrant's common stock who
did not vote in favor of the acquisition and who
notify Tarrant in writing of their intent to demand
payment of their shares if the acquisition is
consummated, may be entitled to dissenters' rights
in certain circumstances by complying with Sections
1300 through 1312 of the California Corporations
Code. Tarrant's shareholders must notify Tarrant of
their intent to dissent no later than the date of
the special meeting.
REASON FOR THE PROPOSAL We are seeking our shareholders approval of the
stock and asset purchase agreement, the acquisition
of The Buffalo Group and the other transactions
contemplated under the purchase agreement in order
to comply with applicable provisions under the
California General Corporation Law. Under these
provisions, we are required to obtain shareholder
approval of any reorganization transaction that
results in our shareholders before the transaction
to own less than 5/6th of the outstanding capital
stock of our company immediately after the
transaction. We refer to these requirements as the
California Rule. Tarrant is also subject to the
NASDAQ Marketplace Rules, which prohibit Tarrant
from issuing, without shareholder approval, common
stock or securities exercisable into common stock
in an acquisition transaction in excess or
potentially in excess of 20% of the outstanding
shares of Tarrant common stock before issuance. We
refer to these requirements and rules as the NASDAQ
20% Rule. The terms of the purchase agreement and
the proposed acquisition of The Buffalo Group will
result in the issuance of shares and other
securities in an amount that require shareholder
approval under the California Rule and the NASDAQ
20% Rule. Accordingly, we are seeking shareholder
approval of the purchase agreement, the acquisition
and the other transactions contemplated by the
purchase agreement to comply with these rules and
requirements.
VOTE REQUIRED TO The affirmative vote of holders of a majority of
APPROVE THE STOCK AND Tarrant's outstanding common stock is required to
ASSET PURCHASE approve the Stock and Asset Purchase Agreement and
AGREEMENT AND THE the acquisition.
ACQUISITION
PROPOSAL 2 -- ISSUANCE OF TARRANT COMMON STOCK AND WARRANTS IN THE ACQUISITION
SHARES RESERVED FOR As explained in connection with Proposal 1, the
ISSUANCE UPON exchangeable shares issuable by TAG Canada in the
EXCHANGE OF acquisition transaction will be exchangeable at any
EXCHANGEABLE SHARES time at the option of the holder, on a one-for-one
basis, for shares of Tarrant common stock. Under
the terms of the stock and asset purchase
agreement, Tarrant is required to reserve an equal
number of shares of its common stock for issuance
9
upon exchange of the exchangeable shares. Tarrant
will issue these shares of common stock at various
times after the completion of the acquisition when
and if the holders of the exchangeable shares
exercise their rights to exchange these shares for
shares of Tarrant common stock.
WARRANTS ISSUABLE IN In connection with the acquisition and as a
CONNECTION WITH condition to its consummation, Tarrant is amending
AMENDMENT TO CREDIT its credit facility with Guggenheim Corporate
FACILITY Funding LLC (Guggenheim) to increase the amounts
available to Tarrant under the credit facility. As
consideration for Guggenheim's agreement to amend
the facility and provide this funding, Tarrant will
issue to Guggenheim warrants to purchase shares of
Tarrant common stock.
BACKGROUND AND In June 2006, Tarrant entered into a $65 million
DESCRIPTION OF credit facility with Guggenheim, as administrative
GUGGENHEIM AND agent and collateral agent for lenders under a
GMAC-CF FINANCINGS credit agreement with Guggenheim. This facility
consists of an initial term loan of up to $25
million, of which we borrowed $15.5 million at the
initial closing. The facility also provides for an
additional term loan of $40 million to finance
acquisitions acceptable to Guggenheim. Under the
terms of our credit agreement with Guggenheim, we
issued to Guggenheim warrants to purchase up to 3.9
million shares of our common stock. Concurrently
with the completion of our financing with
Guggenheim, we expanded our credit facility with
GMAC Commercial Financial LLC by increasing our
borrowing limit to a maximum of $55 million,
including a letter of credit of $4 million. We
entered into these facilities partly in
anticipation of a possible acquisition transaction
with The Buffalo Group, and to provide the funds
necessary to finance the cost of our expanded
operations.
PURPOSE OF AMENDMENTS Tarrant is amending the Guggenheim and GMAC-CF
credit facilities to provide that $55 million will
be made available under the facilities to finance
the cash portion of the purchase price payable
under the purchase agreement and to obtain
additional funds to pay off some or all of
Buffalo's obligations under Buffalo's existing
credit facility.
TERMS OF WARRANTS As consideration for amending the Guggenheim credit
facility, we are issuing to Guggenheim new warrants
to purchase up to an aggregate of _____________
shares of our common stock. The term of these
warrants are substantially the same as the warrants
we issued to Guggenheim previously under the terms
of our existing credit facility with Guggenheim.
The warrants we are proposing to issue have a term
of ten years and are exercisable at a price of
$_____ per share with respect to ___% of the
shares, $_____ per share with respect to ____% of
the shares, $_____ per share with respect to ____%
of the shares, $_____ per share with respect to
___% of the shares and $_____ per share with
respect to _____% of the shares. The exercise
prices are subject to adjustment for certain
dilutive issuances pursuant to the terms of the
warrants. A portion of the warrants will not
10
become exercisable unless and until a specified
portion of the initial term loan is actually funded
by the lenders under the credit facility.
REASONS FOR PROPOSAL Tarrant is seeking approval of the issuance of its
shares of common stock and warrants to purchase
shares of common stock in an amount in excess of
20% of the shares of common stock outstanding. As
explained under Proposal 1, Tarrant is subject to
the California Rule, which requires Tarrant to
obtain shareholder approval of any reorganization
transaction that results in our shareholders before
the transaction to own less than 5/6th of the
outstanding capital stock of our company
immediately after the transaction. Also as
explained in Proposal 1, Tarrant is subject to the
NASDAQ 20% Rule, which prohibits Tarrant from
issuing, without shareholder approval, common stock
or securities exercisable into common stock in an
acquisition transaction in excess or potentially in
excess of 20% of the outstanding shares of Tarrant
common stock before issuance. The terms of the
acquisition transaction and related Guggenheim
financing contemplate the issuance of shares of
Tarrant common stock and warrants to purchase
common stock in excess or potentially in excess of
the amounts that require shareholder approval under
the California Rule and the NASDAQ 20% Rule.
Accordingly, we are seeking our shareholders to
approve the issuance of the shares of Tarrant
common stock to be issued in exchange for
exchangeable shares issuable by TAG Canada in the
acquisition, and the issuance to Guggenheim of
warrants to purchase shares of Tarrant common stock
on the terms described in this proxy statement.
VOTE REQUIRED TO Assuming a quorum is present, the affirmative vote
APPROVE THE ISSUANCE OF of a majority of the shares represented and voting,
COMMON STOCK AND either present in person or represented by proxy at
WARRANTS the special meeting are required to vote in favor
of the issuance of common stock and warrants in
connection with the acquisition and the related
financing transactions.
PROPOSAL 3 -- ISSUANCE OF SPECIAL VOTING SHARES OF PREFERRED STOCK
TERMS OF SERIES A Under the terms of the purchase agreement, Tarrant
PREFERRED STOCK agreed to issue 130,000 shares of its Series A
preferred voting stock as further consideration for
the purchase of the stock and assets under the
purchase agreement. Tarrant's Board of Directors
designated 130,000 shares of Series A preferred
stock in connection with the acquisition
transaction. The Series A preferred stock is
entitled to voting rights identical to those
applicable to shares of Tarrant common stock. The
Series A preferred stock will be deposited under a
Voting Trust Agreement. Each share of Series A
preferred stock will be entitled to 100 votes, and
on a combined basis, the 130,000 shares of Series A
preferred will be entitled to a number of votes
equal to the number of exchangeable shares of TAG
Canada that are issued in the acquisition
11
transaction. The shares of Series A preferred stock
will be redeemed at nominal value as the
exchangeable shares are exchanged for common stock
of Tarrant, so that the total voting power
represented by the Series A preferred stock and the
shares of Tarrant common stock that are issued in
exchange for exchangeable shares does not exceed
the voting rights represented by the shares of
Series A preferred stock issued at the closing of
the acquisition transaction.
VOTING TRUST The shares of Series A preferred stock will be
deposited into a voting trust under the terms of a
Voting Trust Agreement between Tarrant, TAG Canada
and Computershare Trust Company of Canada, as the
trustee of the voting trust under the agreement.
The voting trust will be created for the benefit of
the holders of the exchangeable shares to be issued
by TAG Canada in the transaction. In accordance
with the terms and procedures set forth in the
voting trust agreement, the trustee of the trust
will vote the shares of Series A preferred stock in
accordance with the instructions of holders of the
exchangeable shares.
REASON FOR ISSUING We are issuing the Series A preferred stock to give
SERIES A PREFERRED STOCK the sellers the same voting rights they would have
had if they were to receive shares of Tarrant
common stock at the closing of the acquisition. The
exchangeable shares to be issued by TAG Canada will
be non-voting shares and will not entitle the
sellers with any voting rights with respect to the
shares of Tarrant common stock underlying the
exchangeable shares until such time as the sellers
exercise their exchange rights and receive the
shares of Tarrant common stock. Accordingly, we are
issuing the shares of Series A preferred stock to
give the sellers the right to direct the vote of
the same number of shares to which they would have
been entitled if they were to receive shares of
Tarrant common stock underlying the exchangeable
shares at the closing.
REASON FOR PROPOSAL As described elsewhere in this proxy statement,
Tarrant is subject to the NASDAQ 20% Rule. In
addition to the restrictions described under
Proposal 2, this rule prohibits Tarrant from
issuing securities in an acquisition transaction in
excess or potentially in excess of 20% of the
outstanding voting power of Tarrant. Although the
Series A preferred stock is not convertible into
Tarrant common stock, the Series A preferred stock
entitles its holder to vote a number of shares in
excess of 20% of Tarrant's shares of voting capital
stock. Accordingly, the issuance of the Series A
preferred stock without shareholder approval may
violate the NASDAQ 20% Rule. Accordingly, we are
seeking our shareholders to approve the issuance of
the special voting Series A preferred stock in the
acquisition transaction.
VOTE REQUIRED TO Assuming a quorum is present, the affirmative vote
APPROVE ISSUANCE OF of a majority of the shares represented and voting,
PREFERRED STOCK present either in person or represented by proxy at
the special meeting, is required to vote in favor
of the issuance of the shares of Series A preferred
stock.
12
TARRANT APPAREL GROUP
PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ________, 2007
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL INFORMATION
The enclosed proxy is solicited on behalf of the Board of Directors
(the "Board") of Tarrant Apparel Group, a California corporation, for use at the
Special Meeting of Shareholders to be held on __________________, 2007 at 10:00
A.M. local time, or at any adjournment or postponement thereof, for the purposes
set forth herein and in the accompanying Notice of Special Meeting. The special
meeting will be held at Tarrant's corporate headquarters located at 3151 East
Washington Boulevard, Los Angeles, California 90023. The Company intends to mail
this proxy statement and accompanying proxy card on or about _______________,
2007, to all shareholders entitled to vote at the special meeting.
SOLICITATION
Tarrant will bear the entire cost of soliciting proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to shareholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of common stock beneficially owned by
others to forward to such beneficial owners. Tarrant may reimburse persons
representing beneficial owners of common stock for their costs of forwarding
solicitation materials to such beneficial owners. In addition to use of the
mail, proxies may be solicited personally or by telephone, telegraph, facsimile
or other means of communication by directors, officers and employees of Tarrant,
who will not be specifically compensated for these activities, but who may be
reimbursed for reasonable expenses in connection with the solicitation. No
additional compensation will be paid to directors, officers or other regular
employees for such services.
VOTING, RECORD DATE AND QUORUM
The close of business on ______________, 2007 has been fixed by the
Tarrant Board as the record date for determination of the shareholders of
Tarrant entitled to notice of, and to vote at, the special meeting. Only
shareholders of record as of the close of business on the record date are
entitled to notice of, and to vote at, the special meeting. Each holder of
Tarrant common stock on the record date is entitled to one vote per share held
on all matters properly presented at the special meeting. As of the close of
business on the record date, ______________ shares of Tarrant common stock were
outstanding and entitled to vote, and held by approximately ____ holders of
record.
The presence in person or by proxy at the special meeting of the
holders of at least a majority of the votes entitled to be cast at the special
meeting is necessary to constitute a quorum for the transaction of business.
If an executed proxy card is returned and the shareholder has
explicitly abstained from voting on any matter, the shares represented by the
proxy will be considered present at the special meeting for the purposes of
determining a quorum and will count as votes cast on the matter but will not
count as votes cast in favor of any proposal and, therefore, will have the same
effect as a vote against the matter. Broker non-votes will be counted for the
purposes of determining whether a quorum exists at the special meeting, but will
not be considered to have been voted on any matter.
13
If the enclosed proxy card is properly executed, dated and returned to
Tarrant in time to be voted at the special meeting, the shares represented by
the proxy will be voted in accordance with the instructions marked on the proxy
card. Executed but unmarked proxies will be voted for approval and adoption of
each proposal. The Tarrant Board does not know of any matters other than those
described in the Notice of Special Meeting of Shareholders that are to come
before the special meeting. If any other business is properly brought before the
special meeting, including, among other things, a motion to adjourn or postpone
the special meeting to another time and/or place for the purpose of soliciting
additional proxies in favor of the proposal to approve and adopt each proposal
or to permit dissemination of information regarding material developments
relating to proposals or otherwise germane to the special meeting, one or more
of the persons named in the proxy card will vote the shares represented by the
proxy upon those matters as determined in their discretion. If the special
meeting is adjourned for any reason, the approval of any proposal may be
considered and voted upon by shareholders at the subsequent reconvened meeting,
if any.
HOW TO VOTE
Please sign, date and return the enclosed proxy card promptly. If your
shares are held in the name of a bank, broker, or other holder of record (that
is, in "street name") you will receive instructions from the holder of record
that you must follow for your shares to be voted.
REVOCABILITY OF PROXIES
The presence of a shareholder at the special meeting will not
automatically revoke that shareholder's proxy. Any proxy given pursuant to this
solicitation may be revoked by the person giving it by providing written notice
of such revocation to Tarrant at any time before it is voted, by delivery of a
duly executed, later-dated proxy or by attending the special meeting and voting
in person. All written notices of revocation and other communications with
respect to revocation of proxies should be addressed to 3151 East Washington
Boulevard, Los Angeles, California 90023, Attention: Chief Financial Officer.
VOTES REQUIRED TO APPROVE PROPOSALS
Shares represented by executed proxies that are not revoked will be
voted in accordance with the instructions in the proxy, or in the absence of
instructions, in accordance with the recommendations of the Board of Directors.
The vote of holders of a majority of Tarrant's outstanding common stock will be
required to approve Proposal 1. Assuming a quorum is present at the special
meeting, the vote of the majority of the shares represented and voting, either
in person or by proxy, at the special meeting will be required to approve each
of Proposal 2 and Proposal 3.
RECOMMENDATIONS OF TARRANT'S BOARD OF DIRECTORS
The Board of Directors unanimously approved each of the Proposals to be
considered at the special meeting and recommends that shareholders also vote FOR
approval of each Proposal.
14
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This proxy statement and the documents that are incorporated by
reference contain forward-looking statements that are subject to risks and
uncertainties. You should not place undue reliance on these statements, which
only speak as of the date of this proxy statement. Forward-looking statements
include the information concerning possible or assumed future results of
operations of Tarrant and the businesses and assets of The Buffalo Group that
Tarrant proposes to acquire under the stock and asset purchase agreement,
including any forecasts, projections and descriptions of anticipated synergies
related to the transactions contemplated by the stock and asset purchase
agreement. You should note that many factors could affect the actual financial
results of Tarrant and The Buffalo Group, and could cause actual results to
differ materially from those in the forward-looking statements. These factors
include the following:
o the stock and asset acquisition transactions not being
completed;
o costs or difficulties related to the integration of the
businesses being greater than expected;
o demands placed on management by the increase in the combined
company's size;
o unanticipated increases occurring in connection with financing
and other costs;
o general economic or business conditions being less favorable
than expected;
o legislative or regulatory changes adversely affecting the
businesses in which the companies are engaged; and
o other opportunities being presented to and pursued by the
companies.
15
QUESTIONS AND ANSWERS ABOUT THE ACQUISITION
Q: WHAT IS THE TRANSACTION TARRANT IS PROPOSING TO CONSUMMATE?
A: Tarrant is proposing to acquire the business and operations of a group
of related entities we refer to as The Buffalo Group, which are under the common
control, ownership and management of Messrs. David, Gabriel, Charles, Gilbert
and Michel Bitton and their affiliates. As more fully described in this proxy
statement, The Buffalo Group designs, imports and sells high fashion denim and
other apparel products marketed under the BUFFALO label and other labels in
Canada and the United States. We sometimes refer to this business and operations
as The Buffalo Group, Buffalo or the Buffalo business throughout this proxy
statement. To accomplish the proposed acquisition from a legal perspective,
Tarrant is proposing to purchase all outstanding shares of three Canadian
companies and one U.S. company, which are the principal operating subsidiaries
through which The Buffalo Group carries on its business. Tarrant is also
proposing to purchase the assets of The Buffalo Trust, which are used in the
business and operations of the The Buffalo Group. The transaction will be
carried out pursuant to the terms of a stock and asset purchase agreement dated
December 6, 2006, by and among us, 4366883 Canada, Inc., our wholly-owned
Canadian subsidiary which we also refer to as TAG Canada throughout this proxy
statement, the shareholders of the companies whose stock Tarrant proposes to
purchase and the trustee of The Buffalo Trust, as the seller of the assets
Tarrant proposes to acquire. We sometimes refer to this stock and asset purchase
agreement as the purchase agreement and we refer to these sellers of the stock
and assets Tarrant proposes to purchase as the sellers in this proxy statement.
Q: WHAT IS THE PURCHASE PRICE FOR THE STOCK AND ASSETS TARRANT IS
PROPOSING TO PURCHASE?
A: Under the terms of the purchase agreement, the purchase price for the
stock of the companies Tarrant proposes to purchase consists of $17 million in
cash, 13,000,000 exchangeable shares of TAG Canada, Tarrant's wholly-owned
Canadian subsidiary, promissory notes to be issued by TAG Canada in the
aggregate principal amount of $11 million, certain contingent amounts payable if
the highest volume weighted average market price of Tarrant's common stock
during the specified determination period does not equal or exceed $3.076 per
share, and certain earn-out amounts payable if the Buffalo business achieves
specified performance benchmarks. The exchangeable shares of TAG Canada will be,
as nearly as practicable, the economic equivalent of shares of Tarrant common
stock. These exchangeable shares will be exchangeable at any time at the option
of the holder, on a one-for-one basis, for shares of Tarrant common stock. The
exchangeable shares are also redeemable by TAG Canada in certain circumstances.
The purchase price for the assets Tarrant proposes to purchase consists
of $23 million in cash, subject to reduction based on the amount of revenue
generated by The Buffalo Trust, and a promissory note in the principal amount of
$4 million.
The cash payable and the promissory notes to be issued under the
purchase agreement, as well as the contingent, earn-out and other amounts
payable under the purchase agreement, are denominated in U.S. dollars. However,
a significant portion of TAG Canada's business, including the predominate
portion of the revenues that it will generate from Buffalo's business in Canada,
will be denominated in Canadian dollars. Also, the performance criteria that
need to be satisfied for payment of the earn-out payments are denominated in
Canadian dollars. In addition, the adjustments to the purchase price of the
assets will be determined in Canadian dollars and then converted into U.S.
dollars using the exchange rate specified in the purchase agreement.
Accordingly, we face currency fluctuation risk to the extent there is an adverse
change in the relative value of the Canadian dollar. If the value of the
Canadian dollar declines relative to the U.S. dollar, the value of the payments
we are required to make to the sellers may be higher, which could effectively
cause us to pay a higher price for the stock and assets we are acquiring.
16
The Buffalo Group's U.S. wholesale business will be acquired through a
U.S. subsidiary of Tarrant, which will operate the business after the
acquisition. This U.S. wholesale business comprises a significant portion of The
Buffalo Group's business and revenue generated by this business will be
denominated in U.S. dollars.
In conjunction with the issuance of exchangeable shares under the
purchase agreement and in order to achieve economic equivalency with the shares
of Tarrant common stock, Tarrant will issue 130,000 shares of its Series A
preferred stock. Each shares of Series A preferred stock will be entitled to 100
votes and the shares of Series A preferred stock will collectively be entitled
to 13 million votes in the aggregate, which is equal to the number of
exchangeable shares to be issued in the transaction. The shares of Series A
preferred stock will be issued to a trustee under a voting trust agreement,
under the terms of which the sellers will have the right to direct the trustee
to vote the shares. Upon any exchange of exchangeable shares and as a condition
to the exchange, Tarrant will be entitled to redeem shares of Series A preferred
stock at nominal value so that the total number of votes represented by the
outstanding shares of Series A preferred stock and shares of Tarrant common
stock issued in exchange for exchangeable shares is not higher than the total
number of votes corresponding to the original 130,000 shares of Series A
preferred stock issued in the acquisition.
As a condition to the consummation of the acquisition, Tarrant will
enter into employment agreements with Mr. Gabriel Bitton and each of the other
Bitton brothers, pursuant to which Tarrant will grant to these individuals
options to purchase up to an aggregate of two million shares of Tarrant common
stock as further inducement to providing services under their respective
employment agreements.
Q: WHY ARE EXCHANGEABLE SHARES BEING ISSUED TO THE SELLERS IN THE
TRANSACTION?
A: The sellers are Canadian entities, domiciled in Canada. The
exchangeable share structure, which is frequently used in transactions between
U.S. and Canadian companies, is intended to provide the sellers the opportunity
to make a valid tax election to defer Canadian income tax on any capital gain
resulting from the sale, until the exchangeable shares are exchanged for Tarrant
common stock. Each exchangeable share is substantially the economic equivalent
of a share of Tarrant common stock and is exchangeable at any time on a
one-for-one basis for a share of Tarrant common stock. In addition, the holders
of these exchangeable shares will, through the shares of Series A preferred
stock and the voting trust agreement, effectively have the ability to cast votes
along with holders of Tarrant common stock. These shares of Series A preferred
stock will be redeemed as the exchangeable shares are exchanged for Tarrant
common stock, as described elsewhere in this proxy statement.
Q: WHY IS TARRANT PROPOSING TO PURCHASE THE BUFFALO BUSINESSES?
A: Tarrant is proposing to purchase the businesses and assets of Buffalo
because we believe that the combination of Tarrant's business with these
businesses and assets will create a stronger, more competitive company with
greater growth potential than either Tarrant or Buffalo would have on its own.
Q: WHAT WILL HAPPEN TO MY COMMON STOCK IN THE ACQUISITION?
A: Each share of Tarrant common stock will be unaffected by the stock and
asset acquisition and will remain outstanding. Each share of Tarrant common
stock, however, will represent a smaller ownership percentage of a larger
company.
17
Q: HOW WILL THE ACQUISITION AFFECT THE DISTRIBUTION OF TARRANT COMMON
STOCK AMONG SHAREHOLDERS?
A: Before the acquisition, non-affiliates own 57% and affiliates own 43%
of the outstanding common stock of Tarrant. Immediately following the
acquisition, the same non-affiliates would own 30%, the same affiliates would
own 40% and the sellers would own 30% of the outstanding common stock of
Tarrant, assuming that all of the exchangeable shares are exchanged for Tarrant
common stock. Additionally, some or all of the sellers may become affiliates of
Tarrant at the closing and significantly increase the percentage of Tarrant's
outstanding common stock owned by affiliates.
Q: HOW DOES THE BOARD OF DIRECTORS OF TARRANT RECOMMEND I VOTE MY SHARES?
A: The Tarrant Board unanimously recommends that you vote FOR each of the
proposals described in this proxy statement.
Q: WHAT DO I NEED TO DO NOW?
A: After carefully reading and considering the information contained in
this proxy statement, please fill out, sign and date your proxy card and mail
your signed proxy card in the enclosed return envelope as soon as possible so
that your shares may be represented at the special meeting.
Q: WHAT SHAREHOLDER VOTES ARE NEEDED TO APPROVE THE ACQUISITION?
A: The affirmative vote of the holders of a majority of the outstanding
shares of Tarrant common stock is required to approve the proposed stock and
asset purchase agreement and the acquisition transaction contemplated by the
agreement.
Q: ARE TARRANT SHAREHOLDERS ENTITLED TO DISSENTERS' RIGHTS?
A: If the acquisition is approved by the required vote of Tarrant's
shareholders and is not abandoned or terminated, holders of the Tarrant's common
stock who did not vote in favor of the acquisition and who notify Tarrant in
writing of their intent to demand payment of their shares if the acquisition is
consummated, may, by complying with Sections 1300 through 1312 of the California
Corporations Code, a copy of which is attached hereto as Exhibit C, be entitled
to dissenters' rights as described therein. Tarrant's shareholders must notify
Tarrant of their intent to dissent no later than the date of the special meeting
of shareholders.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on
how to vote. You should follow the directions provided by your broker regarding
how to instruct your broker to vote your shares. Without instructions, your
shares will not be voted.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted at
the special meeting. You can do this in one of three ways. First, you can send a
written notice stating that you would like to revoke your proxy. Second, you can
complete and submit a new proxy. If you choose either of these two methods, you
must submit your notice of revocation to Tarrant at the address set forth at the
end of this section or submit your new proxy in the same way you submitted your
prior proxy. Third, you can attend the special meeting and vote in person.
Q: WHAT HAPPENS IF I DO NOT VOTE?
18
A: If you do not submit a proxy or vote at the special meeting, your
shares will not be counted for the purpose of determining the presence of a
quorum and your inaction will have the same effect as a vote against Proposal 1,
Proposal 2 and Proposal 3. If you submit a proxy and affirmatively elect to
abstain from voting, your shares will be counted for the purpose of determining
the presence of a quorum but will not be voted at the special meeting. As a
result, your abstention will have the same effect as a vote against Proposal 1,
Proposal 2 and Proposal 3.
Q: WHEN DO YOU EXPECT THE STOCK AND ASSET ACQUISITION TO BE COMPLETED?
A: We are working towards completing the stock and asset acquisition as
soon as possible. We expect to complete the transactions by March 31, 2007.
Q: ARE THERE ANY RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR
THE PROPOSALS DESCRIBED IN THIS PROXY STATEMENT?
A: We have listed in the section entitled "Risk Factors" the risks among
other that you should consider in deciding whether to vote for Proposal 1,
Proposal 2 and Proposal 3 described in this proxy statement.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have any questions about the stock and asset acquisition or if
you need additional copies of this proxy statement or the enclosed proxy, you
should contact Tarrant Apparel Group, 3151 East Washington Boulevard, Los
Angeles, California 90023, Attention: Investor Relations, Telephone: (323)
780-8250, Facsimile: (323) 881-0332, email: investors@tags.com.
19
RISK FACTORS
AN INVESTMENT IN TARRANT'S COMMON STOCK IS SUBJECT TO MANY RISKS. YOU
SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL OF THE
OTHER INFORMATION INCLUDED IN THIS PROXY STATEMENT, INCLUDING THE FINANCIAL
STATEMENTS AND THE RELATED NOTES, BEFORE YOU DECIDE WHETHER TO APPROVE THE
ACQUISITION. TARRANT'S BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD
BE HARMED BY ANY OF THE FOLLOWING RISKS. THE TRADING PRICE OF THE TARRANT'S
COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU COULD LOSE ALL OR
PART OF YOUR INVESTMENT.
RISKS ASSOCIATED WITH THE ACQUISITION
WE MAY NOT SUCCESSFULLY INTEGRATE BUFFALO'S OPERATIONS INTO OUR OWN,
AND THE INTENDED BENEFITS OF THE STOCK AND ASSET ACQUISITION MAY NOT BE
REALIZED, WHICH COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AFTER THE
ACQUISITION.
Achieving the intended benefits of the acquisition and our future
operations and earnings will depend in part on growing Buffalo's operations,
combining the operations of Buffalo with our existing operations, and developing
new markets for Buffalo's products and our products. We will be required to
successfully integrate Buffalo's business into our own and to realize synergies
and cost savings. This integration may be especially difficult and unpredictable
because our principal operations are based in Los Angeles, California, and a
significant part of the operations of Buffalo are based in Canada. We may not
succeed in integrating Buffalo's business with our own. If we fail to
successfully integrate our businesses and/or fail to realize the intended
benefits of the acquisition, our business would be adversely impacted and the
market price of our common stock could decline. To achieve the anticipated
benefits of the merger, we will need to, among other things:
o realize the anticipated increases in gross margin and
profitability from expansion of our retail operation;
o demonstrate to vendors, suppliers and customers that the
acquisition will not result in adverse changes to customer
service standards or business focus; and
o effectively control the progress of the integration process
and the associated costs.
Our assessment of the potential synergies and cost savings is
preliminary and subject to change. We may need to incur additional costs to
realize the potential synergies and cost savings, and there can be no assurance
that such costs will not be material.
THE INTEGRATION OF BUFFALO WITH OUR EXISTING BUSINESS WILL MAKE
SUBSTANTIAL DEMANDS ON OUR RESOURCES, WHICH COULD DIVERT NEEDED ATTENTION AWAY
FROM OUR OTHER OPERATIONS.
Our integration of Buffalo with our existing business will make
substantial demands on our management, operational resources and financial and
internal control systems. Our future operating results will depend in part on
our ability to continue to implement and improve our operating and financial
controls. The devotion of management's time to the integration of Buffalo with
our business may limit the time available to management to attend to other
operational, financial and strategic issues of our company.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION AS A RESULT OF
THIS TRANSACTION.
Under the terms of the proposed Buffalo acquisition, 4366883 Canada
Inc., our wholly-owned Canadian subsidiary to which we sometimes refer as TAG
Canada throughout this proxy statement, will issue 13,000,000 shares of its
non-voting stock that will be exchangeable into an equal number of shares of our
common stock. In addition, we will issue shares of our Series A preferred stock,
20
which in the aggregate will entitle the sellers to vote a number of shares equal
to the exchangeable shares issued by TAG Canada that remain outstanding from
time to time. Assuming full exchange of the exchangeable shares and full
redemption of the Series A preferred stock, but assuming no exercise of
outstanding warrants or options, the sellers will own approximately 30% of our
outstanding capital stock. Also, by virtue of the Series A preferred stock, the
sellers will have the right to vote 30% of our voting stock. In addition, in
connection with the acquisition, we will grant to the Bitton brothers options to
purchase up to two million shares of our common stock. These options will be
exercisable at an exercise price per share equal to the fair market value of our
common stock on date of closing. We also have allocated to other personnel of
Buffalo options to purchase up to one million shares of Tarrant common stock. In
addition, in connection with the amendment of our credit facility with
Guggenheim Corporate Funding LLC, we will issue to Guggenheim warrants to
purchase __________ shares of our common stock at an exercise price of ________
per share. The exercise of these options and warrants will result in further
dilution to our existing shareholders.
THE ACQUISITION WILL RESULT IN SIGNIFICANT COSTS TO US, WHETHER OR NOT
IT IS COMPLETED, WHICH COULD RESULT IN A REDUCTION IN OUR INCOME AND CASH FLOWS.
The proposed acquisition will result in significant costs to us.
Transaction costs are estimated to be at least $1.7 million. These costs are
expected to consist primarily of fees for attorneys, accountants, filing fees
and financial printers. We will also incur substantial fees and costs associated
with the amended credit facility that we are putting in place in connection with
the proposed acquisition. All of these costs will be incurred whether or not the
transaction is completed. In addition, if the stock and asset purchase agreement
is terminated under specified circumstances, the $5 million deposit we made upon
signing the purchase agreement will be retained by the sellers and will not be
returned to us. Under most circumstances, we are also required to pay
out-of-pocket expenses incurred by Buffalo in connection with the transaction.
Incurring these expenses will cause a reduction in our income and cash flows,
and harm our business.
FAILURE TO COMPLETE THE ACQUISITION COULD CAUSE OUR STOCK PRICE TO
DECLINE.
If the proposed acquisition is not consummated for certain reasons
specified in the purchase agreement, our stock price may decline because we will
incur significant costs relating to the acquisition that must be paid even
though the acquisition is not completed. Most importantly, the sellers may be
entitled to retain the $5 million deposit. In addition, we will incur
significant legal, accounting and other expenses, and may be required to pay
Buffalo's out-of-pocket expenses. If the acquisition is not completed for any
reason, our stock price may decline to the extent that the current market price
reflects a market assumption that the acquisition will be completed.
IF THE CONDITIONS TO THE PROPOSED ACQUISITION ARE NOT MET, THE
ACQUISITION WILL NOT OCCUR, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE AND
HARM OUR BUSINESS.
Specified conditions must be satisfied or waived to complete the
acquisition, including, without limitation, our ability to obtain financing to
complete the acquisition and approval of the acquisition and related
transactions by our shareholders. These conditions are summarized in the section
captioned "Stock and Asset Purchase Agreement - Conditions to Completion of the
Acquisition" and are described in detail in the stock and asset purchase
agreement. We cannot assure you that each of the conditions will be satisfied.
If the conditions are not satisfied in a timely manner or waived, the
21
transaction will not occur or will be delayed and we may lose some or all of the
intended or perceived benefits of the transaction, which could cause our stock
price to decline and harm our business.
WE COULD BE EXPOSED TO UNKNOWN LIABILITIES OF BUFFALO, WHICH COULD
CAUSE US TO INCUR SUBSTANTIAL FINANCIAL OBLIGATIONS AND HARM OUR BUSINESS.
If there are liabilities of Buffalo of which we are not aware, in all
likelihood, we would assume these liabilities and may have little or no recourse
against the sellers. If we were to discover that there were intentional
misrepresentations made to us by the sellers or Buffalo, or their
representatives, we would explore all possible legal remedies to compensate us
for any loss. However, there is no assurance that legal remedies would be
available or collectible. Our board of directors considered the possibility that
we could be exposed to unknown liabilities in connection with evaluating the
acquisition transaction. Accordingly, if such unknown liabilities exist, we
could incur substantial financial obligations, which could adversely affect our
financial condition and harm our business.
WE OR THE SELLERS MAY WAIVE ONE OR MORE OF THE CONDITIONS TO THE
TRANSACTION WITHOUT RE-SOLICITING SHAREHOLDER APPROVAL FOR THE TRANSACTION.
Each of the conditions to our obligations and the obligations of the
sellers to complete the transaction may be waived, in whole or in part, to the
extent permitted by applicable laws, by agreement between us and the sellers.
Our Board of Directors will evaluate the materiality of any such waiver to
determine whether amendment of this proxy statement and re-solicitation of
proxies is warranted. However, we generally do not expect any such waiver to be
sufficiently material to warrant re-solicitation of the shareholders. If our
Board of Directors determines any such waiver is not sufficiently material to
warrant re-solicitation of shareholders, we will have the discretion to complete
the acquisition without seeking further shareholder approval. Any waiver not
deemed material by the Board of Directors, and not put before the shareholders
for approval, would not be expected to create a material risk to shareholders.
The Board of Directors would only waive a condition after making a determination
that any such waiver would have no material affect on the rights and benefits
Tarrant and its shareholders expect to receive from the acquisition transaction.
If the Board chooses to waive a condition, a shareholder will not have an
opportunity to vote on that waiver and our company and shareholders will not
have the benefit, if any, of the condition waived.
SALES OF BUFFALO PRODUCTS COULD DECLINE OR BE INHIBITED IF CUSTOMER
RELATIONSHIPS ARE DISRUPTED BY THE ACQUISITION, WHICH WOULD HARM OUR BUSINESS.
The acquisition may have the effect of disrupting relationships between
Buffalo and its customers. Buffalo's wholesale customers or potential wholesale
customers may delay or alter buying patterns during the pendency of and
following the acquisition transaction. Customers may defer purchasing decisions
as they evaluate the likelihood of successful completion of the acquisition.
These customers or potential customers may instead increase their purchase of
competing products relative to products purchased from Buffalo. Any significant
delay or reduction in orders for Buffalo's products could cause our sales to
decline following the acquisition, which could cause our operating results to be
lower than expected. This could cause a decline in our stock price and harm our
business.
UNAVAILABILITY OF FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH U.S.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES MAKES IT MORE DIFFICULT TO OBTAIN A
MEANINGFUL AND ACCURATE UNDERSTANDING OF HOW THE ACQUISITION TRANSACTION WILL
AFFECT OUR COMPANY, OUR OPERATING RESULTS AND OUR FINANCIAL CONDITION.
22
The Buffalo Group is a Canadian enterprise and its financial statements
were prepared in accordance with Canadian generally accepted accounting
principles (or GAAP), and not in accordance with U.S. GAAP. There are
significant differences between Canadian GAAP and U.S. GAAP. Although the notes
to the Buffalo financial statements included in this proxy statement include a
reconciliation of the financial statements to U.S. GAAP, a review of the Buffalo
financial statements may not be as meaningful for a complete and accurate
understanding of Buffalo's financial condition and operating results in
comparison with those of our company.
FOLLOWING THE ACQUISITION, THE EXISTING SECURITY HOLDERS OF BUFFALO
WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL OR INFLUENCE OVER OUR COMPANY, AND
THE ACQUISITION WILL RESULT IN DIMINUTION OF VOTING CONTROL BY CURRENT
SHAREHOLDERS OF OUR COMPANY.
Assuming all exchangeable shares of TAG Canada to be issued in the
acquisition transaction are converted into shares of our common stock, the
security holders of Buffalo (or the sellers) and their principals and
shareholders, including Mr. Gabriel Bitton, his brothers and their affiliates,
will hold or have the right to direct the voting of approximately 30% of our
outstanding voting shares on a post-transaction basis. Also, by virtue of the
shares of Series A preferred stock to be issued in the transaction, these
parties will have substantially the same voting rights that they would have had
if they were to receive shares of Tarrant common stock at the closing of the
acquisition. As a result, our existing shareholders will not exert the same
degree of voting power with respect to the combined company that they did with
our company before the consummation of the acquisition transaction. Accordingly,
the security holders of Buffalo, their principals, shareholders and their
affiliates, will have significant influence over the management of our business,
the election of directors and all matters requiring shareholder approval.
In addition, Mr. Gabriel Bitton and a second nominee of the sellers
will serve on our Board of Directors. In addition, Mr. Gabriel Bitton will serve
as the Chief Executive Officer of the operations and business we acquire from
The Buffalo Group and will, subject to the control of our Board of Directors,
have general supervision, direction and control of the day-to-day operations,
business and officers of the acquired business. Accordingly, Gabriel Bitton and
his brothers will retain significant control over the operation of the Buffalo
business following the completion of the acquisition.
A SUBSTANTIAL NUMBER OF SHARES WILL BE ELIGIBLE FOR FUTURE SALE BY THE
SECURITY HOLDERS OF BUFFALO AND THE SALE OF THOSE SHARES COULD ADVERSELY AFFECT
OUR STOCK PRICE.
As part of the stock and asset purchase agreement with Buffalo, we have
agreed to register for sale all of the shares of common stock underlying the
exchangeable shares being issued as a result of the proposed transaction and the
2,000,000 options to be issued to the Bitton brothers. We also agreed to
register the shares of our common stock underlying warrants issued to Guggenheim
Corporate Funding LLC and other lenders under the terms of our amended credit
facilities with these lenders. Once that registration statement becomes
effective, all of the shares of common stock underlying these exchangeable
shares, options and warrants would become eligible for immediate public sale,
which could adversely affect the public market for our common stock if a
significant portion of these shares were to be offered for sale at any given
time. Although we will enter into a lock-up agreement with the Bitton brothers
that will limit the number of shares they and their affiliates can sell in a
three-month period, they will still have the ability to sell a significant
number of shares in the public market. This could cause a significant decline in
the market price for our common stock and therefore affect the value of any of
our securities you may own.
23
SOME OF BUFFALO'S MATERIAL AGREEMENTS HAVE PROVISIONS WHICH REQUIRE
THAT BUFFALO OBTAIN CONSENTS FROM OTHER PARTIES TO SUCH AGREEMENTS, AND/OR
PROVISIONS GRANTING TERMINATION RIGHTS TO THE OTHER PARTIES TO SUCH AGREEMENTS,
IN CONNECTION WITH A MERGER OR CHANGE OF CONTROL. BUFFALO'S FAILURE TO OBTAIN
SUCH CONSENTS OR THE EXERCISE OF SUCH TERMINATION RIGHTS COULD ADVERSELY IMPACT
OUR ABILITY TO CONSUMMATE THE ACQUISITION.
Some of Buffalo's material agreements, including the substantial
majority of its retail store lease agreements, require that Buffalo obtain
consents from other parties in connection with mergers or changes of control and
grant to certain parties the right to terminate such agreements in connection
with mergers or changes of control. Buffalo is currently in the process of
soliciting consents from all required third parties and is not aware of any
third parties who intend to exercise termination rights granted under Buffalo's
material agreements. However, there can be no assurance that Buffalo will obtain
consents from all required third parties or that third parties entitled to
exercise termination rights under Buffalo's material agreements will not do so.
Buffalo's failure to obtain necessary third party consents and the exercise by a
significant number of third parties of termination rights would materially
adversely impact the terms of the acquisition, potentially violate the
conditions to the closing, and could result in our failure to consummate the
acquisition.
WE WILL INCUR A NUMBER OF BURDENSOME FINANCIAL AND NON-FINANCIAL
OBLIGATIONS AS A RESULT OF THE ACQUISITION TRANSACTION AND THE RELATED FINANCING
WITH GUGGENHEIM CORPORATE FUNDING LLC, AND OUR INABILITY TO SATISFY THESE COULD
MATERIALLY AND ADVERSELY AFFECT OUR FINANCIAL RESULTS AND FINANCIAL CONDITIONS,
AND HARM OUR BUSINESS.
We are required to make substantial cash payments and issue securities
under the terms of the purchase agreement and ancillary agreements relating to
the acquisition. In particular, we are amending our credit facilities with
Guggenheim Corporate Funding LLC and GMAC Commercial Finance LLC to finance the
cash portion of the purchase price that we agreed to pay under the purchase
agreement and to refinance Buffalo's existing working capital facility. We
intend to borrow approximately $55 million under these expanded credit
facilities to pay this purchase price and refinance Buffalo's existing working
capital facility. We also expect that we will borrow additional funds to finance
the operating capital requirements of our expanded business after we complete
the acquisition. Accordingly, our borrowings and debt service requirements will
increase dramatically as a result of the proposed acquisition and related
financing with Guggenheim and other lenders, and we will face risks associated
with the use of debt to finance the acquisition such as refinancing risk. We
will also be subject to financial and non-financial restrictive covenants under
the terms of our credit facility. Any violation of these various covenants or
our inability to satisfy our debt service requirements could cause us to default
under our credit facility with Guggenheim and our credit facilities with other
lenders. If we materially default or breach our obligations under our credit
facilities, we could be required to pay a higher rate of interest on our
borrowings. Our lenders could also accelerate our repayment obligations or
require us to repay all amounts under the credit facilities. Accordingly, our
default of obligations under our credit facilities will significantly increase
our cash flow needs and cause us to incur substantial damages, all of which
could harm our business.
OUR STOCK PRICE MAY DECLINE AS A RESULT OF THE ACQUISITION, WHICH COULD
IN TURN CAUSE US TO MAKE ADDITIONAL PAYMENTS TO THE SELLERS UNDER THE TERMS OF
THE STOCK AND ASSET PURCHASE AGREEMENT.
Under the terms of the stock and asset purchase agreement, we are
required to make certain contingent payments to the sellers for shares of our
common stock issuable in exchange for the exchangeable shares of our Canadian
subsidiary that we issue in the transaction. The contingent payments will be
24
based on the market price of our common stock during the five year period
following the closing of the transactions contemplated by the stock and asset
purchase agreement. The contingent payments will be determined by comparing a
minimum share price to the highest volume weighted average price per share of
our common stock over any ten consecutive trading days during the five year
period following the closing date, during which the aggregate trading volume is
at least 500,000 shares. With respect to each share of our common stock issuable
in exchange for shares of our Canadian subsidiary that we are issuing in the
transaction, if during the five years following the closing date this volume
weighted average price per share does not equal or exceed the minimum per share
price of $3.076, we will be required to make a contingent payment equal to the
difference between this minimum per share price and the highest volume weighted
average price per share during the five year period. Any right to receive a
contingent payment is transferable either together with, or separately from, the
shares of common stock to which the right relates.
If acquisition is completed, the market price of our common stock
following the acquisition may vary significantly from the market price on the
closing date. These variances may arise due to, among other things:
o changes in the combined business, operations and prospects or
any portion of the business, operations or prospects;
o apparel industry performance; and
o general market and economic conditions and other factors.
If our stock price fails to increase to sufficient levels during the
five year period following the closing, it would give rise to the contingent
payment obligations described above, which would increase the amount of cash we
would be required to pay in connection with the proposed acquisition. This would
result in a decrease in our cash position and could have a material adverse
effect on our business and financial condition.
WE ARE EXPOSED TO THE RISK OF CURRENCY FLUCTUATIONS RELATING TO THE
AMOUNTS PAYABLE UNDER THE PURCHASE AGREEMENT, AND A RELATIVE DECLINE IN THE
VALUE OF THE UNITED STATES DOLLAR COULD INCREASE THE PURCHASE PRICE WE PAY UNDER
THE PURCHASE AGREEMENT, WHICH COULD HARM OUR BUSINESS.
The cash payable and the promissory notes to be issued under the
purchase agreement, as well as the contingent, earn-out and other amounts
payable under the purchase agreement, are denominated in U.S. dollars. However,
a significant portion of TAG Canada's business, including a substantial portion
of the revenues that it will generate from Buffalo's business, will be
denominated in Canadian dollars. Also, the performance criteria that need to be
satisfied for payment of the earn-out payments are denominated in Canadian
dollars. In addition, the adjustments to the purchase price of the assets will
be determined in Canadian dollars and then converted into U.S. dollars using the
exchange rate specified in the purchase agreement. Accordingly, we face currency
fluctuation risk to the extent there is an adverse change in the relative value
of the Canadian dollar. If the value of the Canadian dollar increases relative
to the U.S. dollar, the value of the payments we are required to make to the
sellers may be higher. This could effectively cause us to pay a higher price for
the stock and assets we are acquiring, which could harm our business.
RISK ASSOCIATED WITH THE BUSINESS OF BUFFALO
25
A SIGNIFICANT PORTION OF BUFFALO'S BUSINESS INVOLVES DESIGN,
IMPORTATION AND SALES OF APPAREL PRODUCTS THROUGH WHOLESALE ACCOUNTS.
ACCORDINGLY, MANY OF THE BUSINESS RISKS FACED BY BUFFALO ARE THE SAME AS OR
SIMILAR TO THE RISKS FACED BY US.
BUFFALO CURRENTLY OWNS AND OPERATES A LIMITED NUMBER OF PRINCIPAL
BRANDS. IF BUFFALO IS UNSUCCESSFUL IN MARKETING AND DISTRIBUTING THOSE BRANDS OR
IN EXECUTING OTHER STRATEGIES, ITS RESULTS OF OPERATIONS AND FINANCIAL CONDITION
WILL BE ADVERSELY AFFECTED.
Buffalo currently markets and sells a limited number of principal
brands. If Buffalo is unable to successfully market and distribute its branded
products, or if the recent popularity of its premium brands decreases, or if
Buffalo is unable to execute on a strategy to acquire and/or license additional
brands, its results of operations and financial condition will be adversely
affected.
BUFFALO'S WHOLESALE BUSINESS IS HIGHLY CONCENTRATED. THE DECISION BY
ANY OF BUFFALO'S LARGE CUSTOMERS TO DECREASE ITS PURCHASES OF PRODUCTS OR STOP
CARRYING BUFFALO PRODUCTS COULD HAVE A MATERIAL ADVERSE EFFECT ON BUFFALO'S
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
In 2005, approximately 30% of the Buffalo combined revenue came from
four customers. In the first nine months of 2006, approximately 32% of the
Buffalo combined revenue came from these four customers. Continued consolidation
in the retail industry could further decrease the number of, or concentrate the
ownership of, stores that carry Buffalo's and its licensees' products. Also, as
Buffalo expands the number of its retail stores, it runs the risk that wholesale
customers will perceive that Buffalo is increasingly competing directly with
them, which may lead them to reduce or terminate purchases of Buffalo's
products. In addition, in recent years there has been a significant increase in
the number of designer brands seeking placement in department stores, which
makes any one brand potentially less attractive to department stores. If any one
of our major customers decides to decrease purchases from Buffalo, to stop
carrying Buffalo's products or to carry its products only on less favorable
terms, Buffalo's sales and profitability could significantly decrease. This
could have a material adverse effect on Buffalo's results of operations and
financial condition.
BUFFALO'S OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD
CAUSE UNCERTAINTY REGARDING OUR OPERATING RESULTS AND RESULT IN A REDUCTION OR
DECLINE IN OUR STOCK PRICE.
Buffalo's management expects that Buffalo will experience substantial
variations in its net sales and operating results from quarter to quarter. We
believe the factors that influence this variability of quarterly results
include:
o the timing of introduction of new product lines;
o the level of consumer acceptance of each new product line;
o general economic and industry conditions that affect consumer
spending and retailer purchasing;
o the availability of manufacturing capacity;
o the seasonality of the markets in which Buffalo participates;
o the timing of trade shows;
o the product mix of customer orders;
o the timing of the placement or cancellation of customer
orders;
26
o the weather;
o transportation delays;
o quotas and other regulatory matters;
o the occurrence of charge backs in excess of reserves; and
o the timing of expenditures in anticipation of increased sales
and actions of competitors.
As a result of fluctuations in Buffalo's revenue and operating expenses
that may occur, management believes that period-to-period comparisons of
Buffalo's results of operations are not a good indication of its future
performance. It is possible that in some future quarter or quarters, operating
results will be below the expectations of securities analysts or investors. In
that case, our common stock price could fluctuate significantly or decline.
THE FINANCIAL CONDITION OF CUSTOMERS COULD AFFECT BUFFALO'S RESULTS OF
OPERATIONS.
Certain retailers, including some of Buffalo's customers, have
experienced in the past, and may experience in the future, financial
difficulties, which increase the risk of extending credit to such retailers and
the risk that financial failure will eliminate a customer entirely. These
retailers have attempted to improve their own operating efficiencies by
concentrating their purchasing power among a narrowing group of vendors. There
can be no assurance that Buffalo can remain a preferred vendor for its existing
customers. A decrease in business from or loss of a major customer could have a
material adverse effect on Buffalo's results of operations. In addition, Buffalo
could assume the collection risk on sales to the customer itself, require that
the customer provide a letter of credit, or choose not to make sales to the
customer.
FAILURE TO MANAGE ITS GROWTH AND EXPANSION COULD IMPAIR BUFFALO'S
BUSINESS.
Buffalo has experienced periods of rapid growth since its inception. No
assurance can be given that Buffalo will be successful in maintaining or
increasing sales in the future. Any future growth in sales will require
additional working capital and may place a significant strain on management,
management information systems, inventory management, sourcing capability,
distribution facilities and receivables management. Any disruption in order
processing, sourcing or distribution systems could cause orders to be shipped
late, and under industry practices, retailers generally can cancel orders or
refuse to accept goods due to late shipment. Such cancellations and returns
would result in a reduction in revenue, increased administrative and shipping
costs and a further burden on Buffalo's operations and distribution facilities.
BUFFALO'S DEPENDENCE ON INDEPENDENT MANUFACTURERS REDUCES ITS ABILITY
TO CONTROL THE MANUFACTURING PROCESS, WHICH COULD HARM BUFFALO'S SALES,
REPUTATION AND OVERALL PROFITABILITY.
Like us, Buffalo depends on independent contract manufacturers to
secure a sufficient supply of raw materials and maintain sufficient
manufacturing and shipping capacity in an environment characterized by declining
prices, labor shortage, continuing cost pressure and increased demands for
product innovation and speed-to-market. This dependence could subject Buffalo to
difficulty in obtaining timely delivery of products of acceptable quality. In
addition, a contractor's failure to ship products to us in a timely manner or to
meet the required quality standards could cause us to miss the delivery date
requirements of our customers. The failure to make timely deliveries may cause
Buffalo's customers to cancel orders, refuse to accept deliveries, impose
non-compliance charges through invoice deductions or other charge-backs, demand
27
reduced prices or reduce future orders, any of which could harm Buffalo's sales,
reputation and overall profitability. Buffalo does not have material long-term
contracts with any of its independent contractors and any of these contractors
may unilaterally terminate their relationship with Buffalo at any time. As a
result, Buffalo competes with other companies for the production capacity of
independent manufacturers. If Buffalo's vendors or manufacturers fail to ship
its fabrics or products on time or to meet its quality standards or are unable
to fill its orders, Buffalo might not be able to deliver products to its retail
stores and wholesale customers on time or at all. To the extent Buffalo is
unable to secure or maintain relationships with independent contractors that are
able to fulfill Buffalo's requirements; its business would be harmed.
Buffalo has in place a vendor compliance agreement with its suppliers,
but Buffalo does not control its contractors or its labor practices. The
violation of federal, state or foreign labor laws by one of the Buffalo
contractors could result in it being subject to fines and its goods that are
manufactured in violation of such laws being seized or their sale in interstate
commerce being prohibited. To date, Buffalo has not been subject to any
sanctions that, individually or in the aggregate, have had a material adverse
effect on its business, and Buffalo is not aware of any facts on which any such
sanctions could be based. There can be no assurance, however, that in the future
Buffalo will not be subject to sanctions as a result of violations of applicable
labor laws by its contractors, or that such sanctions will not have a material
adverse effect on its business and results of operations. In addition, certain
of Buffalo's customers, require strict compliance by their apparel
manufacturers, including Buffalo, with applicable labor laws and visit its
facilities often. There can be no assurance that the violation of applicable
labor laws by one of Buffalo's contractors will not have a material adverse
effect on its relationship with its customers.
SINCE BUFFALO DOES NOT CONTROL ITS LICENSEES' ACTIONS AND DEPENDS ON
ITS LICENSEES FOR A SUBSTANTIAL PORTION OF ITS EARNINGS FROM OPERATIONS, THE
CONDUCT OF THESE LICENSEES COULD HARM OUR BUSINESS.
Buffalo licenses to others the rights to produce and market products
that are sold with its trademarks. If the quality, focus, image or distribution
of our licensed products diminish, consumer acceptance of and demand for the
Buffalo brands and products could decline. This could materially and adversely
affect Buffalo's business and results of operations. A decrease in customer
demand for any of these product lines could have a material adverse effect on
our results of operations and financial condition.
BUFFALO SUCCESS DEPENDS ON ITS ABILITY TO PROTECT IS INTELLECTUAL
PROPERTY RIGHTS, AND ITS INABILITY TO DO SO COULD HAVE A MATERIAL ADVERSE EFFECT
ON BUFFALO'S BUSINESS.
Buffalo's success and competitive position depend significantly upon
its trademarks and other proprietary rights. Buffalo takes steps to establish
and protect its trademarks worldwide. Despite any precautions Buffalo my take to
protect its intellectual property, policing unauthorized use of its intellectual
property is difficult, expensive and time consuming, and Buffalo may be unable
to determine the extent of any unauthorized use. Buffalo also places significant
value on its trade dress and the overall appearance and image of its products.
However, we cannot assure you that Buffalo can prevent imitation of its products
by others or prevent others from seeking to block sales of Buffalo products for
violating their trademarks and proprietary rights. We also cannot assure you
that others will not assert rights in, or ownership of, trademarks and other
proprietary rights of Buffalo, that its proprietary rights would be upheld if
challenged or that it would, in that event, not be prevented from using its
trademarks, any of which could have a material adverse effect on Buffalo's
financial condition and results of operations. Further, Buffalo could incur
substantial costs in legal actions relating to its use of intellectual property
or the use of its intellectual property by others; even if Buffalo is
28
successful, the costs incurred could have a material adverse effect. In
addition, the laws of certain foreign countries do not protect proprietary
rights to the same extent as do the laws of the United States and Canada, and
the inability to have adequate protection of proprietary rights under the laws
of these foreign countries could reduce the value of our proprietary rights and
harm our business after we acquire The Buffalo Group.
AFTER OUR ACQUISITION OF BUFFALO AND ITS RETAIL OPERATIONS,
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS, COMPARABLE STORE SALES, SALES
PER SQUARE FOOT OR OTHER METRICS USED TO MEASURE THE PERFORMANCE OF RETAIL
STORES COULD HAVE A MATERIAL ADVERSE EFFECT ON BUFFALO'S RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
The quarterly results of operations for Buffalo's individual retail
stores and its comparable store sales and sales per square foot have fluctuated
in the past and can be expected to fluctuate in the future. These fluctuations
are caused by a variety of factors, including:
o Shifts in consumer tastes and fashion trends;
o The timing of new store openings and the relative proportion
of new stores to mature stores;
o Calendar shifts of holiday or seasonal periods;
o Changes in merchandise mix;
o The timing of promotional events;
o Actions by competitors;
o Weather conditions;
o Changes in style;
o Changes in the business environment;
o Population trends;
o Changes in patterns of commerce such as the expansion of
electronic commerce; and
o The level of pre-operating expenses associated with new
stores.
After our acquisition of Buffalo and its retail operations, an
unfavorable change in any of the above factors could have a material adverse
effect on our results of operations and financial condition.
WE MAY BE UNSUCCESSFUL IN IMPLEMENTING BUFFALO'S PLANNED RETAIL
EXPANSION, WHICH COULD HARM OUR BUSINESS AND NEGATIVELY AFFECT OUR RESULTS OF
OPERATIONS.
To open and operate new stores successfully, Buffalo must:
o Identify desirable locations, the availability of which is out
of its control:
o Negotiate acceptable lease terms, including desired tenant
improvement allowances;
o Build and equip the new stores;
o Source sufficient levels of inventory to meet the needs of the
new stores;
29
o Hire, train and retain competent store personnel;
o Successfully integrate the new stores into its existing
operations;
o Maintain access to funds sufficient to support expansion
plans; and
o Satisfy the fashion preferences of customers in the new
geographic areas.
Any of these challenges could delay store openings or prevent us from
completing Buffalo's store opening plans after our acquisition of Buffalo.
Unfavorable economic and business conditions and changing consumer preferences
could also interfere with current plans to expand. We cannot be sure that we can
successfully complete the planned expansion or that the new stores will be
profitable. If current retail store expansion plans, both domestically and
internationally, fail to meet expected results, our overhead and other related
expansion costs would increase without an offsetting increase in sales and net
revenue. This could have a material adverse effect on our results of operations
and financial condition.
BUFFALO'S BUSINESS COULD BE HARMED IF ITS FAILS TO MAINTAIN PROPER
INVENTORY LEVELS.
Buffalo maintains an inventory of selected products that it anticipates
will be in high demand. Buffalo may be unable to sell the products it has
ordered in advance from manufacturers or that it has in its inventory. Inventory
levels in excess of customer demand may result in inventory write-downs or the
sale of excess inventory at discounted or closeout prices. These events could
significantly harm our operating results and impair the image of the brands.
Conversely, if Buffalo underestimate consumer demand for its products or if its
manufacturers fail to supply quality products in a timely manner, it may
experience inventory shortages, which might result in unfilled orders,
negatively impact customer relationships, diminish brand loyalty and result in
lost revenues, any of which could harm business.
RISK ASSOCIATED WITH THE APPAREL INDUSTRY
OUR SALES ARE HEAVILY INFLUENCED BY GENERAL ECONOMIC CYCLES.
Apparel is a cyclical industry that is heavily dependent upon the
overall level of consumer spending. Purchases of apparel and related goods tend
to be highly correlated with cycles in the disposable income of our consumers.
Our customers anticipate and respond to adverse changes in economic conditions
and uncertainty by reducing inventories and canceling orders. As a result, any
substantial deterioration in general economic conditions, increases in interest
rates, acts of war, terrorist or political events that diminish consumer
spending and confidence in any of the regions in which we compete, could reduce
our sales and adversely affect our business and financial condition.
OUR BUSINESS IS HIGHLY COMPETITIVE AND DEPENDS ON CONSUMER SPENDING
PATTERNS.
The apparel industry is highly competitive. We face a variety of
competitive challenges including:
o anticipating and quickly responding to changing consumer
demands;
o developing innovative, high-quality products in sizes, colors
and styles that appeal to consumers of varying age groups and
tastes;
o competitively pricing our products and achieving customer
perception of value; and
o the need to provide strong and effective marketing support.
30
WE MUST SUCCESSFULLY GAUGE FASHION TRENDS AND CHANGING CONSUMER
PREFERENCES TO SUCCEED.
Our success is largely dependent upon our ability to gauge the fashion
tastes of our customers and to provide merchandise that satisfies retail and
customer demand in a timely manner. The apparel business fluctuates according to
changes in consumer preferences dictated in part by fashion and season. To the
extent we misjudge the market for our merchandise; our sales may be adversely
affected. Our ability to anticipate and effectively respond to changing fashion
trends depends in part on our ability to attract and retain key personnel in our
design, merchandising and marketing staff. Competition for these personnel is
intense, and we cannot be sure that we will be able to attract and retain a
sufficient number of qualified personnel in future periods.
OUR BUSINESS IS SUBJECT TO SEASONAL TRENDS.
Historically, our operating results have been subject to seasonal
trends when measured on a quarterly basis. This trend is dependent on numerous
factors, including the markets in which we operate, holiday seasons, consumer
demand, climate, economic conditions and numerous other factors beyond our
control. There can be no assurance that our historic operating patterns will
continue in future periods as we cannot influence or forecast many of these
factors.
RISKS ASSOCIATED WITH THE COMBINED BUSINESSES
WE WILL LIKELY REQUIRE ADDITIONAL CAPITAL TO FUND BUFFALO'S PLANNED
RETAIL EXPANSION AND FOR OTHER PURPOSES.
We will need additional capital to fund Buffalo's planned retail
expansion. We may not be able to fund our future growth or react to competitive
pressures if we lack sufficient funds. Following closing of the acquisition and
in the future we may need to raise additional funds through equity or debt
financings or collaborative relationships. This additional funding may not be
available or, if available, it may not be available on economically reasonable
terms. The cost of servicing additional debt could harm or business and
financial condition. In addition, any additional funding may result in
significant dilution to existing shareholders. If adequate funds are not
available, we may be required to curtail our operations or obtain funds through
collaborative partners that may require us to release material rights to our
products.
THE PROPOSED ACQUISITION AND RELATED FINANCINGS MAY PLACE A SIGNIFICANT
DEBT BURDEN ON US, WHICH COULD LIMIT OUR FLEXIBILITY IN MANAGING OUR BUSINESS
AND EXPOSE US TO CERTAIN RISKS.
The completion of the proposed acquisition will involve the incurrence
of substantial additional debt. The acquisition could result in our becoming
more leveraged on a consolidated basis under certain economic measures, and our
flexibility in responding to adverse changes in economic, business or market
conditions may be adversely affected, which could have a material adverse effect
on our results of operations.
Our high degree of leverage may have important consequences to you,
including the following:
o we may have difficulty satisfying our obligations under our
senior credit facilities or other indebtedness and, if we fail
to comply with these requirements, an event of default could
result;
31
o we may be required to dedicate a substantial portion of our
cash flow from operations to required payments on
indebtedness, thereby reducing the availability of cash flow
for working capital, capital expenditures and other general
corporate activities;
o covenants relating to our indebtedness may limit our ability
to obtain additional financing for working capital, capital
expenditures and other general corporate activities;
o covenants relating to our indebtedness may limit our
flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
o we may be more vulnerable to the impact of economic downturns
and adverse developments in our business; and
o we may be placed at a competitive disadvantage against any
less leveraged competitors.
The occurrence of any one of these events could have a material adverse
effect on our business, financial condition, results of operations, prospects
and ability to satisfy our obligations under our senior notes.
THE COMBINED BUSINESSES WILL HAVE SIGNIFICANT INTERNATIONAL SALES AND
WILL BE SUBJECT TO RISKS ASSOCIATED WITH OPERATING IN INTERNATIONAL MARKETS.
International sales will comprise a significant portion of the revenue
generated by our company after the completion of the Buffalo acquisition. We
estimate that international sales, including sales in Canada, will account for
approximately 15% of our total revenue for the first fiscal quarter following
the completion of the acquisition. Political and economic conditions outside the
United States could make it difficult for us to increase our international sales
or to operate abroad. International operations are subject to many inherent
risks, including:
o adverse changes in tariffs;
o political, social and economic instability and increased
security concerns;
o fluctuations in currency exchange rates;
o longer collection periods and difficulties in collecting
receivables from foreign entities;
o exposure to different legal standards;
o ineffectiveness of international distributors;
o reduced protection for our intellectual property in some
countries;
o burdens of complying with a variety of foreign laws;
o import and export license requirements and restrictions of the
United States and each other country in which we operate;
o trade restrictions;
o the imposition of governmental controls;
o unexpected changes in regulatory or certification
requirements;
o difficulties in staffing and managing international
manufacturing and sales operations; and
32
o potentially adverse tax consequences and the complexities of
foreign value added tax systems.
We believe that international sales will continue to increase and
represent a significant portion of our sales, and we intend to further expand
our international operations. Our sales in Canada are denominated in Canadian
dollars, while our sales in Europe will be denominated principally in Euros.
Sales in other international markets will be denominated principally in dollars,
but may also be denominated in the local currencies of the markets where we do
business. As a result, an increase in the relative value of the dollar against
the Canadian dollar or Euro would lead to less income from sales denominated in
Canadian dollars or Euros, unless we increase prices, which may not be possible
due to competitive conditions in the applicable markets. In addition, we may
experience difficulties associated with managing our operations remotely and
complying with foreign regulatory and legal requirements for maintaining our
manufacturing operations in other countries. Any of these factors may adversely
affect our future international sales and operations and, consequently,
negatively impact our business, financial condition and operating results.
Despite these risks, we believe the market for our products outside the United
States justifies our effort to expand our international operations.
WE DEPEND ON OUR COMPUTER AND COMMUNICATIONS SYSTEMS.
As a multi-national corporation, we rely on our computer and
communication network to operate efficiently. Any interruption of this service
from power loss, telecommunications failure, weather, natural disasters or any
similar event could have a material adverse affect on our business and
operations. Additionally, hackers and computer viruses have disrupted operations
at many major companies. We may be vulnerable to similar acts of sabotage, which
could have a material adverse effect on our business and operations.
33
PROPOSAL 1
THE STOCK AND ASSET ACQUISITION
OVERVIEW
On December 6, 2006, Tarrant and 4366883 Canada Inc., a wholly-owned
Canadian subsidiary of Tarrant to which we sometimes refer as TAG Canada or our
Canadian subsidiary throughout this proxy statement, entered into a Stock and
Asset Purchase Agreement with The Buffalo Group that provides for the purchase
of (1) all outstanding capital stock of 3681441 Canada Inc., Buffalo Inc. and
3163946 Canada Inc., three Canadian operating subsidiaries of The Buffalo Group,
(2) all outstanding capital stock of Buffalo Corporation, a U.S. operating
subsidiary of The Buffalo Group, and (3) certain intellectual property assets
from The Buffalo Trust, which are used in the business operations of the
operating subsidiaries. The Buffalo Group designs, manufactures and markets high
fashion denim and other apparel and accessories under the principal brand name
Buffalo. The three Canadian subsidiaries referenced above operate The Buffalo
Group's wholesale and retail business in Canada. The U.S. subsidiary referenced
above is the principal subsidiary through which The Buffalo Group operates its
U.S. wholesale business, which is a significant portion of The Buffalo Group's
overall operations. The assets we are acquiring from The Buffalo Trust consist
of trademark licenses and other intellectual property rights that are used in
these businesses. The Buffalo Group consists of a group of entities, including
the above-referenced operating companies as well as The Buffalo Trust, which are
under the common ownership of entities controlled by Messrs. Gabriel, Charles,
David, Michel and Gilbert Bitton, and their affiliates. Messrs. Charles, David,
Gabriel and Gilbert Bitton are brothers and we refer to them as the Bitton
brothers throughout this proxy statement. We sometimes refer to the business of
The Buffalo Group we are acquiring under the purchase agreement as Buffalo, the
Buffalo business or the business of The Buffalo Group for the purposes of this
proxy statement.
The purchase price for the stock and assets we are acquiring consists
of $40 million in cash, promissory notes in the aggregate principal amount of
$15 million and 13 million exchangeable shares of TAG Canada, which is a newly
formed subsidiary of Tarrant that we formed in connection with the transactions
contemplated by the stock and asset purchase agreement. The Buffalo Group has
$15 million of working capital indebtedness under its existing working capital
facility. We may use a portion of our expanded debt facilities to refinance this
working capital indebtedness. In addition, we agreed to make contingent payments
if the price of our stock does not equal or exceed $3.076 within any 10 trading
days during the five year period following the closing of the purchase
transaction and earn-out payments of up to $12 million if specified performance
benchmarks are satisfied. The terms of these contingent and earn-out payments
are described below under the summary description of the Stock and Asset
Purchase Agreement.
The shares of the Canadian subsidiary we agreed to issue under the
purchase agreement will be non-voting and will be exchangeable on a one for one
basis for shares of Tarrant common stock. As further consideration under the
purchase agreement, we also agreed to issue 130,000 shares of our newly created
Series A preferred stock, which are intended to give the sellers effectively the
same voting rights that they would have had if they were to receive the shares
of Tarrant common stock underlying the exchangeable shares at the closing of the
acquisition. Each of these shares will be entitled to 100 votes and will be
redeemed as exchangeable shares are exchanged for Tarrant common stock.
The shares of Tarrant common stock underlying the exchangeable shares
of TAG Canada to be issued under the purchase agreement will collectively
comprise approximately 30% of the total outstanding capital stock of Tarrant
34
immediately after the closing of the stock and asset purchase transactions. In
addition, by virtue of the shares of Series A preferred stock, the sellers will
have the right to direct the voting of a number of shares constituting 30% of
the outstanding voting stock or combined voting power of Tarrant.
We agreed to nominate Messrs. Gabriel Bitton and Luis Padilla or, if
either one or both of Messrs. Bitton or Padilla are unwilling to serve or unable
to serve due to death or disability, other nominees of sellers reasonably
acceptable to us, to serve on our Board of Directors. We also agreed to nominate
Messrs. Bitton and Padilla or such other nominees for reelection to our Board of
Directors for a period of five years after the closing of the transactions under
the purchase agreement. In addition, following the acquisition, we will operate
the business and assets that we acquire from The Buffalo Group as a separate
division through TAG Canada, our Canadian subsidiary, and one or more of our
other subsidiaries. Mr. Gabriel Bitton will be appointed as the Chief Executive
Officer of TAG Canada and President of Tarrant's Buffalo division for so long as
we may be required to make earn-out payments under the terms of the purchase
agreement. In these capacities, Mr. Bitton will, subject to the control of our
Board of Directors, have general supervision, direction and control of the
day-to-day operations, business and officers of our Buffalo division following
the acquisition.
As a condition to the closing of the transactions contemplated by the
purchase agreement, we will enter into employment agreements with the Bitton
brothers to provide services to us following the acquisition. As further
inducement to provide services to us and as a condition under the purchase
agreement, we will issue to the Bitton brothers options to purchase up to two
million shares of Tarrant's common stock in the aggregate.
In connection with the acquisition of Buffalo under the purchase
agreement, our Board of Directors approved amendments to our existing $65
million credit facility with Guggenheim Corporate Funding LLC and our credit
facility with GMAC Commercial Finance LLC to increase the amounts available to
us under these facilities. Pursuant to these amendments, up to $55 million will
be made available under our expanded facilities to finance the cash portion of
the purchase price payable to the sellers under the purchase agreement and to
refinance The Buffalo Group's $15 million working capital facility. Under the
terms of our expanded Guggenheim facility, Tarrant proposes to issue to
Guggenheim warrants to purchase up to _______________ shares of our common
stock.
The Board of Directors has also approved certain other agreements and
transactions contemplated by the stock and asset purchase agreement.
REASON FOR PROPOSAL
The proposed acquisition transaction and the other transactions
contemplated by the purchase agreement, including without limitation the
issuance of Tarrant common stock and other securities, will not be completed
unless they are approved by holders of a majority of Tarrant's outstanding
common stock. Tarrant seeks shareholder approval of the stock and asset
acquisition and related transactions to comply with California Corporations Code
and the NASDAQ Marketplace Rules. Under the applicable provisions of the
California Corporations Code, which we refer to as the California Rule, we are
required to obtain shareholder approval of any reorganization transaction that
results in our shareholders before the transaction owning less than 5/6th of the
outstanding capital stock of our company immediately after the transaction. The
NASDAQ Marketplace Rules, which we refer to as the NASDAQ 20% Rule, prohibits us
from issuing, without shareholder approval, common stock or securities
exercisable into common stock in an acquisition transaction in excess or
potentially in excess of 20% of the outstanding shares of Tarrant common stock
before issuance. Accordingly, because the terms of the purchase agreement and
35
our proposed acquisition of Buffalo will result in the issuance of shares in an
amount that require shareholder approval under the California Rule and the
NASDAQ 20% Rule, we are seeking shareholder approval of the purchase agreement
and the acquisition to comply with these rules and requirements.
REASONS FOR THE ACQUISITION
In approving the acquisition and in recommending that Tarrant's
shareholders approve the stock and asset purchase agreement and the acquisition,
the Board of Directors considered a number of factors, including, without
limitation, the following factors which the company believes include all
material factors:
o information concerning Tarrant's and Buffalo's respective
businesses, prospects, business plans, financial performance
and condition, results of operations, technology and
competitive positions;
o the compatibility of Tarrant's business with that of Buffalo's
business;
o the due diligence investigation conducted by Tarrant's
management;
o the terms of the stock and asset purchase agreement, including
price and structure;
o the fairness of the transaction to Tarrant's existing
shareholders;
o the fairness opinion and analysis rendered by Marshall &
Stevens, Inc., in connection with the proposed acquisition,
including matters considered by Marshall & Stevens, Inc. in
rendering its opinion and analysis; and
o the current financial market conditions and historical stock
market prices, volatility and trading information.
Tarrant's Board of Directors also considered the following potentially
negative factors:
o the risk that the potential benefits sought in the acquisition
might not be fully realized;
o the dilution to the company's existing shareholders;
o the potential negative effect on the company's stock price
associated with public announcement of the proposed
acquisition;
o the potential negative effect on the company's stock price if
revenue, earnings and cash flow expectations of the company
following the acquisition are not met;
o the potential dilutive effect on the company's common stock
price if revenue and earnings expectations for the acquired
business operations are not met;
o the ability to successfully manage the combined operations of
the company and The Buffalo Group; and
o the other risks and uncertainties discussed under "Risk
Factors."
In view of the variety of factors considered in connection with its
evaluation of the acquisition, Tarrant's Board of Directors did not find it
practical to, and did not quantify or otherwise attempt to, assign relative
weight to the specific factors considered in reaching its conclusions.
Additionally, the Board of Directors did not undertake to make any specific
determination as to whether any particular factor, or any aspect of any
particular factor, was favorable or unfavorable to its ultimate determination,
but rather conducted an overall analysis of the factors described above. In
36
considering the factors described above, individual members of the board of
directors may have given different weight to different factors.
After taking into account all of the factors set forth above, the
members of the Board of Directors concluded that the stock and asset purchase
agreement and the related acquisition were advisable and in the best interests
of the company and its shareholders and that the company should proceed with the
acquisition. Tarrant's Board believes the acquisition will:
o expand Tarrant's operations by adding additional proprietary
brands and products to compete more effectively;
o expand the scope, scale and strength of Tarrant's operations
by expanding its marketing, sales and distribution
capabilities;
o enhance Tarrant's capabilities to compete in Canada, the
United States and other markets and utilize The Buffalo
Group's existing sales and marketing infrastructure as a
platform for expanding sales of Tarrant's apparel products;
o provide potential opportunities for Tarrant to penetrate new
markets and expand its share in existing markets;
o enhance sales capabilities and profitability by transforming
from primarily a wholesale model to a combination retail and
wholesale model;
o enhance operating efficiencies through vertical integration
and consolidation activities;
o expand Tarrant's management team and Board of Directors by
adding management personnel and two new directors with
significant experience in the apparel industry;
o reduce costs based on increased volume of sourced merchandise;
o improve Tarrant's ability to withstand pricing pressures
resulting in inexpensive apparel imports;
o enhance Tarrant's operations by improving product mix of
higher priced products; and
o enhance long-term shareholder value.
EFFECT ON EXISTING SHAREHOLDERS
The following table illustrates the effect on existing shareholders of
outstanding common stock held and book value per share, on a pro forma basis,
after giving effect to each of the following as of September 30, 2006:
o the consummation of the proposed acquisition of Buffalo,
assuming exchange of all exchangeable shares to be issued by
TAG Canada for shares of Tarrant common stock, but assuming no
exercise of any warrants or options to be issued in connection
with the acquisition; and
o the consummation of the proposed acquisition of Buffalo,
assuming exchange of all exchangeable shares for Tarrant
common stock and the exercise in full of all warrants and
options to be issued in connection with the acquisition
transaction.
37
--------------------------------------------------------------------------------
Pre-Acquisition Post-Acquisition
--------------------------------------------------------------------------------
Holdings% Book Value Holdings% Book Value
Per share Per Share
--------------------------------------------------------------------------------
Existing shareholders (1) 100% $0.53 70% $0.72
Sellers (2) N/A N/A 30% $0.72
(1) Existing shareholders excluding exercise of outstanding
warrants and options
(2) Sellers and new shareholders assuming exchange of exchangeable
shares and exercise of options issuable in acquisition
In the fourth quarter of 2005, Gerard Guez, our Chairman and currently
our interim Chief Executive Officer, engaged in conversations with Gabriel
Bitton in which Mr. Bitton discussed with Mr. Guez The Buffalo Group's desire to
seek additional capital to expand The Buffalo Group's retail business. Mr. Guez
and Mr. Bitton had previously known each other, and Mr. Bitton hoped that Mr.
Guez may be able to assist him in identifying a potential source of capital. At
this time, the parties did not discuss the prospect of Tarrant acquiring The
Buffalo Group.
In the first half January 2006, Mr. Guez was introduced to Guggenheim
Corporate Funding LLC by our advisor, Durham Capital. Mr. Guez began discussions
with Guggenheim regarding a potential credit facility to provide us with
additional working capital.
In late February 2006, Mr. Guez and Todd Boehly of Guggenheim Corporate
Funding traveled to Montreal, Canada and Mr. Guez introduced Mr. Boehly to
Gabriel Bitton. At the time of and following this meeting, Mr. Guez and Mr.
Gabriel Bitton first engaged in general conversations regarding the possibility
of a strategic transaction involving Tarrant and The Buffalo Group. These
discussions occurred at approximately three in-person meetings and during
several telephone conversations. During these discussions, Mr. Guez received
some initial information regarding The Buffalo Group relating to its financial
performance and business and the parties discussed preliminarily a purchase
price for The Buffalo Group. Following these initial discussions, Mr. Guez began
informal discussions with members of our Board of Directors regarding a
potential acquisition of The Buffalo Group.
At a board meeting on March 7, 2006, Mr. Guez provided our Board of
Directors with an update on his preliminary discussions with The Buffalo Group.
In this presentation, Mr. Guez described The Buffalo Group and its financial
performance. Mr. Guez and the other directors considered the potential for
increased shareholder value that could result from the combined companies. The
directors further discussed the fact that, based on initial discussions with The
Buffalo Group, a significant portion of the price to acquire The Buffalo Group
would be required to consist of cash and we would have to borrow substantially
all of the required cash. The board resolved that Mr. Guez should continue
discussions for an acquisition of The Buffalo Group.
During March 2006, Mr. Guez and Mr. Gabriel Bitton engaged in further
discussions, and we began exchanging information with The Buffalo Group and
negotiating the material economic terms of a potential acquisition of The
Buffalo Group. At this time, both parties involved legal counsel in the
discussions and commenced negotiating a term sheet for the acquisition.
During April and May of 2006, we continued negotiating a term sheet
with The Buffalo Group for the proposed acquisition. These negotiations occurred
by telephone and were primarily between Mr. Guez and Mr. Gabriel Bitton, with
counsel participating primarily in drafting the term sheet. During the course of
these negotiations, the parties agreed upon a purchase price of up to $110
million, consisting of: $40 million in cash, $18 million in promissory notes,
earn-out payments of up to $12 million over a four year period, 13 million
38
shares of our common stock, and a contingent payment due after five years if the
volume weighted average price of our common stock did not reach at least $3.076
for 10 consecutive days (on which there was an unspecified minimum trading
volume) during the 5 year period after closing. On May 17, 2006, the parties
also agreed upon certain other material terms of the proposed acquisition, which
were set forth in a non-binding term sheet.
On May 15, 2006, we entered into a commitment letter with Guggenheim
Corporate Funding LLC with respect to a $65 million credit facility. The
commitment letter contemplated that the credit facility would consist of an
initial term loan of $30 million, which would be used to repay certain existing
indebtedness and fund general operating and working capital needs, with a second
term loan of $35 million available to be used to finance acquisitions acceptable
to Guggenheim. On June 16, 2006, we entered into a definitive credit agreement
with Guggenheim, as agent for the lenders. This credit facility consisted of an
initial term loan of up to $25 million, of which we borrowed $15.5 million at
the initial funding, to be used to repay certain existing indebtedness and fund
general operating and working capital needs. An additional term loan of up to
$40 million was made available under this facility to finance acquisitions
acceptable to Guggenheim.
On June 19, 2006, at a telephonic meeting of our Board of Directors,
Mr. Guez presented the board with the proposed terms of The Buffalo Group
acquisition as set forth in the non-binding term sheet previously provided to
the board along with various other background materials. Following a thorough
and detailed discussion, and upon a motion duly made and seconded, the term
sheet was approved. Following approval of the term sheet, management instructed
legal counsel and its financial advisors to begin a thorough due diligence
investigation of The Buffalo Group. At the request of the board, management also
began a search to identify an investment banking firm to render an opinion as to
the fairness from a financial point of view of the proposed acquisition.
During the week of June 26, 2006, Mr. Guez and David Burke, our Vice
President of Finance, visited The Buffalo Group's principal offices in Montreal.
During this trip, Messrs. Guez and Burke met with management of The Buffalo
Group, visited its offices and facilities and coordinated with our financial
advisors and Canadian legal counsel in connection with the financial and legal
due diligence investigation of The Buffalo Group.
During the week of July 16, 2006, Mr. Burke traveled to Montreal again
along with a representative of our U.S. corporate counsel, Stubbs, Alderton &
Markiles LLP. Mr. Burke met with our financial advisors and Canadian legal
counsel over several days to discuss the results to date of the due diligence
investigation. In addition, Mr. Burke and our advisors met with management of
The Buffalo Group and their legal counsel. During this meeting, the parties
discussed various issues relating to the corporate structure of The Buffalo
Group, including ownership of trademark rights and various related party
transactions. The parties also discussed proposals for the most efficient
structure for the parties for the proposed acquisition from both a legal and tax
perspective.
On August 7, 2006, our Board of Directors approved our engagement of
Marshall & Stevens Incorporated to render an opinion to the board as the
fairness to Tarrant from a financial point of view of the proposed acquisition.
In addition, in August 2006, we began working with our legal counsel on an
initial draft of the definitive stock and asset purchase agreement.
During the week of September 18, 2006, Mr. Burke returned to Montreal
and had additional meetings with The Buffalo Group regarding financial due
39
diligence and related matters. At this time, representatives of Marshall &
Stevens were also in Montreal conducting on-site due diligence in connection
with their fairness opinion.
On September 28, 2006, Mr. Burke and our U.S. legal counsel met with
Gabriel and Gilbert Bitton and their legal counsel in Montreal. These meetings
occurred over several days, and the parties continued negotiations on the legal
structure for the proposed acquisition and the provisions of the definitive
purchase agreement. Mr. Guez and Mr. Gabriel Bitton subsequently met in New
York, New York in early October to discuss some of the remaining unresolved
issues. During these negotiations, it was agreed that the amount of the
promissory notes to be issued as part of the purchase price would be reduced to
$15 million, with the first payment on the second anniversary of the closing
date. It was also agreed that the cash portion of the purchase price would be
subject to adjustment as of the closing date pursuant to a formula to be agreed
upon.
During the week of November 6, 2006, Mr. Burke traveled to Montreal to
further review the business and financial condition of The Buffalo Group. Mr.
Burke met with The Buffalo Group management and with their auditors, RSM
Richter, to further review the historical financial statements being audited by
RSM Richter. At this time, Todd Hearle and Matt Bloom of Guggenheim Corporate
Funding were also in Montreal conducting their due diligence investigation of
The Buffalo Group.
During October and November, the parties and their counsel continued to
negotiate the terms and provisions of the definitive stock and asset purchase
agreement. On November 13, 2006, Messrs. Guez and Burke, our legal counsel and
The Buffalo Group's legal counsel met in Los Angeles to further negotiate the
provisions of the definitive purchase agreement and ancillary agreements. Mr.
Gabriel Bitton participated in portions of these meetings by teleconference and
participated in person in meetings on November 15, 2006. These meetings
continued through the week, with the parties reaching agreement on substantially
all remaining issues on November 17, 2006.
During the last week of November 2006, the parties continued to engage
in negotiations to finalize the definitive purchase agreement. At this time, the
parties agreed upon the formula for the cash purchase price adjustment at
closing. We also completed our due diligence review of The Buffalo Group during
this week.
On November 30, 2006, our Board of Directors held a special meeting by
teleconference to consider the proposed acquisition on the terms set forth in
the stock and asset purchase agreement. Marshall & Stevens was in attendance at
the board meeting and made a presentation to the board. Marshall & Stevens
provided a detailed summary of the transaction, including what companies and
assets were being acquired and the price being paid, and the valuation
approaches used by Marshall & Stevens in reaching their conclusion on the
fairness of the transaction. Marshall & Stevens had concluded that the proposed
acquisition is fair from a financial point to view to Tarrant, and discussed
with the board their basis for the conclusion. Marshall & Stevens also responded
to questions from the board regarding the fairness opinion. Following the
presentation by Marshall & Stevens, Messrs. Guez and Burke, with assistance from
legal counsel, reviewed with the board in detail the material terms and
conditions of the stock and asset purchase agreement and the ancillary
agreements. Mr. Burke and legal counsel discussed with the board the results of
the due diligence investigation of The Buffalo Group. Following a thorough and
detailed discussion, the board unanimously approved the acquisition of The
Buffalo Group pursuant to the stock and asset purchase agreement and other terms
and conditions of the transaction. In approving the transaction, our Board of
40
Directors determined that the acquisition was fair to, and in the best interests
of, Tarrant and our shareholders, and recommended that the shareholders approve
the acquisition.
On December 6, 2006, we obtained the consent of Guggenheim Corporate
Funding and certain of our other secured lenders to enter into the stock and
asset purchase agreement, as required under our credit facilities with these
lenders.
On December 6, 2006, we entered into the stock and asset purchase
agreement with The Buffalo Group.
FEDERAL OR STATE REGULATORY APPROVAL REQUIREMENTS
No federal or state regulatory approval requirements need to be
satisfied in connection with the purchase of the stock and assets under the
purchase agreement.
MANAGEMENT FOLLOWING THE ACQUISITION
The business and operations of Buffalo that Tarrant proposes to acquire
will be managed as a separate division of Tarrant through its Canadian
subsidiary, TAG Canada, and one or more of its other subsidiaries. Mr. Gabriel
Bitton will be appointed as the Chief Executive Officer of TAG Canada and
President of Tarrant's Buffalo division and will report directly to Tarrant's
Board of Directors. In these capacities, Mr. Bitton will have extensive and
comprehensive rights to manage the business and operations of Tarrant's Buffalo
division during the period in which we are required to make earn-out payments.
In addition, Messrs. Gabriel Bitton and Luis Padilla, or other nominees of the
sellers reasonably acceptable to Tarrant if either or both of Messrs. Bitton or
Padilla are unwilling to serve or unable to serve due to death or disability,
will be nominated to Tarrant's Board of Directors and re-nominated for election
to the Board during the five year period following the closing. Accordingly, Mr.
Gabriel Bitton will continue to exercise management control over Buffalo's
operations following the consummation of the acquisition transaction.
EMPLOYMENT MATTERS
Tarrant will enter into employment agreements with each of the Bitton
brothers as a condition to consummating the Buffalo acquisition.
Under the terms of his employment agreement with us, Mr. Gabriel Bitton
will serve as the Chief Executive Officer of TAG Canada, with the title and
designation of President, Buffalo Division. Mr. Gabriel Bitton will, subject to
the control of our Board of Directors, have general supervision, direction and
control of the day-to-day operations, business and officers of the acquired
business. Mr. Gabriel Bitton's agreement provides for a term of 5 years, unless
his employment is earlier terminated as provided in the agreement. Mr. Gabriel
Bitton's agreement may be terminated by us or by Mr. Bitton for any reason by
advance written notice.
Mr. Gabriel Bitton's employment agreement provides for a base salary of
$500,000 per annum. As further consideration under the employment agreement, Mr.
Bitton will receive options to purchase ______ shares of Tarrant common stock.
These options will be exercisable at an exercise price per share equal to the
fair market value of Tarrant's common stock on the date of grant. The options
will vest and become exercisable in four equal annual installments commencing on
the first anniversary of the closing of the acquisition. Mr. Bitton will also be
entitled to receive a performance bonus at such times and such amounts as may be
determined in the sole discretion of Tarrant's Board of Directors. Mr. Bitton
will be entitled to vacation and certain other benefits available to other
41
employees, and will be entitled to reimbursement for reasonable costs and
expenses he incurs in connection with the performance of his duties under his
employment agreement with Tarrant.
If the agreement is terminated by us without cause or if the agreement
is terminated by Mr. Bitton due to a material reduction in his title or
responsibilities, a reduction in salaries or other good reason as specified in
the agreement, Mr. Bitton will be entitled to receive a severance payment equal
to Mr. Bitton's base salary for the 12 months following the date of termination
or the remainder of the five year term under the agreement, whichever is less.
The severance will not be payable if we terminate the agreement for cause, as
defined in the agreement, or if Mr. Bitton is terminated due to death or
disability or if he terminates the agreement without good reason. In general,
"cause" is defined in the agreement to include acts undertaken with the intent
of causing damage to Tarrant or its affiliates, any act involving a material
person profit to Mr. Bitton, his consistent failure to perform his normal duties
or obligations under the agreement, conviction of a crime or felony or his
breach of the employment agreement. Also, cause includes situations where the
actual capital expenditures of TAG Canada in any fiscal quarter exceed by more
than ten percent (10%) the budgeted capital expenditures as set forth in the
budget approved by Tarrant's Board of Directors from time to time.
In general, the terms of our employment agreements with each of the
other Bitton brothers will be substantially the same as the terms of our
employment agreement with Mr. Gabriel Bitton, except that the other Bitton
brothers will be charged with different responsibilities and entitled to
different compensation and benefits. The term of employment under each of these
agreements will also differ from the term provided under Mr. Gabriel Bitton's
employment agreement.
REGISTRATION RIGHTS
As a condition to consummating the acquisition, we are required to sign
and deliver to the sellers and the Bitton brothers a registration rights
agreement under which we agree to register the shares of Tarrant common stock
underlying the exchangeable shares to be issued by TAG Canada and shares of
Tarrant common stock underlying options that we grant to the Bitton brothers in
connection with the acquisition. The registration rights agreement that we are
required to deliver provides that we will use our best efforts to file, as soon
as practicable after the agreement, a registration statement relating to the
resale of the shares we agreed to register and cause the registration statement
to go effective as soon as practicable after its filing. The registration
statement also provides that we will include these shares in any subsequent
registration statement we file to register for sale any of our common stock for
our own account or for the account of others, subject to certain limitations and
exceptions as specified in the registration rights agreement.
FINANCING
The consummation of the proposed acquisition of Buffalo is conditioned
on Tarrant obtaining financing to pay the cash portion of the purchase price
under the purchase agreement and to refinance Buffalo's working capital
facility. In connection with the acquisition, Tarrant is amending its credit
facilities with Guggenheim Corporate Funding LLC and GMAC Commercial Finance LLC
to provide that Tarrant may borrow up to $55 million in additional funds, which
will be available to Tarrant under these facilities to pay the cash
consideration under the purchase agreement and to refinance Buffalo's working
capital facility. Under the terms of the amended facility with Guggenheim,
Tarrant will issue to Guggenheim new warrants to purchase up to __________
shares of Tarrant common stock in the aggregate. The terms of the amendments and
the warrants we propose to issue are described in further detail under Proposal
2 below.
42
FAIRNESS OPINION
In August 2006, Tarrant's management interviewed the firm of Marshall &
Stevens, Inc. to render a fairness opinion with respect to the acquisition.
Tarrant formally engaged the services of Marshall & Stevens on September 6,
2006, to render an opinion as to the fairness, from a financial point of view,
of the acquisition transaction to Tarrant. Tarrant selected Marshall & Stevens
based upon its reputation within the southwestern region of the United States,
its proximity to Tarrant and cost considerations.
The Board of Directors received a valuation analysis report together
with the fairness opinion dated December 6, 2006, from Marshall & Stevens
related to the fairness of the acquisition transaction to Tarrant. The full text
of Marshall & Stevens' fairness opinion, a copy of which is attached as an
exhibit to this proxy statement, sets forth, among other things, the assumptions
made, procedures followed, matters considered, and limitations of the review
undertaken by Marshall & Stevens. You are urged to, and should, read the
fairness opinion carefully and in its entirety.
You should note that the Marshall & Stevens opinion is addressed to the
Tarrant board of directors and addresses the fairness of the acquisition from a
financial point of view and does not address any other aspect of the proposed
acquisition or the stock and asset purchase agreement, nor does it constitute a
recommendation to any Tarrant shareholder as to how to vote at the Tarrant
special meeting. Marshall & Stevens did not, and was not requested by Tarrant
to, make any recommendations as to the purchase price or to solicit third party
indications of interest in acquiring all or part of Tarrant.
In arriving at its opinion, Marshall & Stevens, among other things:
o reviewed audited financial statements for The Buffalo Group;
o reviewed publicly available financial data concerning certain
companies deemed comparable, by Marshall & Stevens;
o reviewed third party reports concerning the apparel retail and
manufacturing industries;
o reviewed brochures and literature related to The Buffalo
Group;
o considered the nature of Buffalo's business, history, earnings
before interest and taxes, depreciation and amortization
(EBITDA), earnings before interest and taxes (EBIT), revenue,
book capital, and total assets for the inclusive fiscal years
2002 through 2006 and the latest interim periods;
o considered Buffalo's future EBITDA, EBIT; revenue;
dividend-paying capacity and overall financial health;
o analyzed financial statements, prices and other materials
regarding certain comparable and publicly traded companies
involved in the apparel retail and manufacturing industries;
o analyzed prevailing rates of return on debt and equity
capital;
o analyzed materials discussing the general and industry
specific economic outlook;
o compared particular statistical and financial information of
Buffalo to particular statistical and financial information of
certain comparable and publicly traded companies;
43
o reviewed the stock and asset purchase agreement and various
other agreements contemplated by the purchase agreement in
connection with the acquisition; and
o reviewed information prepared or discussed with Marshall &
Stevens by members of senior management of Tarrant relating to
the relative contributions of Buffalo and Tarrant to the
merged company.
Marshall & Stevens also held discussions with members of the senior
management of Tarrant regarding Tarrant's history, financial performance and
future prospects. In addition, Marshall & Stevens performed financial analysis
of the proposed combined company and conducted such other studies, analyses,
inquiries and investigations as it deemed appropriate.
In preparing its opinion, Marshall & Stevens relied on the accuracy and
completeness of all information that was publicly available, supplied or
communicated to Marshall & Stevens by or on behalf of Tarrant or The Buffalo
Group. The opinion does not address the relative merits of the proposed
acquisition and any other transactions or strategies, which may have been
discussed as alternatives to the proposed acquisition. Tarrant did not place any
limitations on Marshall & Stevens with respect to the procedures followed or
factors considered in rendering the opinion. In addition, Marshall & Stevens did
not make an independent evaluation or appraisal of the assets and liabilities of
Tarrant or The Buffalo Group and was not furnished with any such evaluation or
appraisal.
METHODOLOGIES
The following is a summary of the material financial analyses used by
Marshall & Stevens in connection with providing its opinion to the Tarrant board
of directors. Marshall & Stevens utilized substantially the same type of
financial analyses in connection with providing the written opinion attached as
Exhibit B. Marshall & Stevens reviewed the historical pricing of Tarrant.
Marshall & Stevens also reviewed the historical financial statements for Tarrant
and The Buffalo Group to ascertain the financial position and performance of the
companies. Marshall & Stevens also reviewed the economic and industry outlook
for the apparel industry. In addition, Marshall & Stevens reviewed the proposed
impact on the financial position of Tarrant resulting from the acquisition
transaction with The Buffalo Group.
Marshall & Stevens considered a number of factors in its analysis and
used several methodologies in reaching its conclusion. Marshall & Stevens did
not ascribe a specific range of values to the shares and assets Tarrant proposes
to purchase under the purchase agreement, but rather made its determination as
to the fairness, from a financial point of view, to Tarrant on the basis of
financial and comparative analyses. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial and comparative analysis and the application of those methods to
the particular circumstances. In arriving at its opinion, Marshall & Stevens did
not attribute any particular weight to any analysis or factor considered by it,
but rather made qualitative judgments as to the significance and relevance of
each analysis and factor. Accordingly, Marshall & Stevens believes that its
analysis must be considered as a whole and that considering any portion of such
analyses and factors, without considering all analyses and factors, as a whole,
could create a misleading or incomplete view of the process underlying its
opinion. In its analyses, Marshall & Stevens made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Tarrant. Neither Tarrant,
nor Marshall & Stevens nor any other person assumes responsibility if future
results are materially different from those discussed.
44
In its analysis, Marshall & Stevens made numerous assumptions regarding
the performance of Tarrant and The Buffalo Group, the industry and the economy,
many of which are beyond the control of Tarrant and The Buffalo Group. The
estimates used in the analysis are not necessarily indicative of actual values
or predictive of future values, which may vary significantly from those set
forth herein and in the written opinion. In addition, analyses relating to the
value of the businesses do not purport to be appraisals or to reflect the prices
at which businesses may actually be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty.
The analyses were prepared solely for the purpose of Marshall & Stevens
providing its opinion to the Tarrant board of directors as to the fairness of
the transactions from a financial point of view. Analyses based upon forecasts
of future results are not necessarily indicative of actual future results, which
may be significantly more or less favorable than suggested by such analyses.
Because such analyses are inherently subject to uncertainty, being based upon
numerous factors or events beyond the control of the parties or their respective
advisors, none of Tarrant, The Buffalo Group, Marshall & Stevens or any other
person assumes responsibility if future results are materially different from
those in the forecast. As described above, Marshall & Stevens' opinion to the
Tarrant board of directors was one of many factors taken into consideration by
the Tarrant board of directors in making its determination to approve and adopt
the stock and asset purchase agreement.
FEES PAYABLE TO MARSHALL & STEVENS
Pursuant to letter agreements between Tarrant and Marshall & Stevens,
Tarrant agreed to pay Marshall & Stevens a fee for rendering its opinion.
Tarrant has also agreed to reimburse Marshall & Stevens for its reasonable
out-of-pocket expenses. No portion of Marshall & Stevens' fee is contingent upon
the successful completion of the proposed transactions. In addition, Tarrant has
agreed to indemnify Marshall & Stevens and its employees, directors, officers,
control persons, affiliates and agents against certain liabilities incurred in
connection with its services, including liabilities under federal securities
laws]
As part of Marshall & Stevens' financial advisory business, it
regularly issues fairness opinions and is continually engaged in the valuation
of companies and their securities in connection with business reorganizations,
private placements, negotiated underwritings, mergers and acquisitions and
valuations for estate, corporate and other purposes. Marshall & Stevens is
familiar with Tarrant and regularly provides valuation services to companies in
the apparel business and apparel industries.
In connection with the debt financing transaction completed with
Guggenheim Corporate Funding LLC in June 2006, Tarrant engaged Marshall &
Stevens on a limited basis to assist with the valuation of warrants issued to
Guggenheim in the financing transaction. As consideration for its services,
Tarrant paid to Marshall & Stevens a fee of $5,500.
COMPLETION OF THE ACQUISITION
Tarrant and Buffalo are working toward completing the acquisition as
quickly as possible. Tarrant and Buffalo intend to complete the acquisition
promptly after the shareholders of Tarrant approve the acquisition at the
special meeting of shareholders. Tarrant and Buffalo expect to complete the
acquisition in the first quarter of 2007.
The obligations of Tarrant and Buffalo to complete the acquisition are
subject to customary closing conditions. The purchase agreement may be
terminated before the acquisition is completed under certain circumstances
described elsewhere in this proxy statement.
45
DISSENTERS' RIGHTS OF APPRAISAL
The rights of shareholders of Tarrant to dissent from approval of the
stock and asset acquisition and demand payment for their shares are governed by
Chapter 13 of the California General Corporation Law ("CGCL") the full text of
which is reprinted as Exhibit C to this proxy statement. The summary of these
rights set forth below is not intended to be complete and is qualified in its
entirety by reference to Exhibit C.
Under the CGCL, shareholders of Tarrant will not have any dissenters'
rights with respect to the acquisition unless demands for payment are duly filed
with respect to five percent (5%) or more of the outstanding shares of Tarrant
common stock or shareholders of Tarrant shares which are subject to restrictions
upon transfer imposed by Tarrant. If the holders of five percent (5%) or more of
the outstanding shares of Tarrant common stock or holders of such restrictive
shares duly file demands for payment and fully comply with Chapter 13 of the
CGCL, they will have the right to be paid in cash the fair market value of their
shares in accordance with Chapter 13 of the CGCL.
Under the CGCL, "fair market value" is determined as of the day before
the first announcement of the terms of the proposed transaction, excluding any
appreciation or depreciation as a consequence of the transaction, but adjusted
for any stock split, reverse stock split, or share dividend which becomes
effective thereafter. If the parties are unable to agree on a fair market value,
the dissenting shareholder may request the Superior Court for Los Angeles County
to determine the fair market value of the shares. The court's decision would be
subject to appellate review.
Dissenters' rights cannot be validly exercised by persons other than
shareholders of record regardless of the beneficial ownership of the shares.
Persons who are beneficial owners of shares held of record by another person,
such as a broker, a bank or a nominee, should instruct the record holder to
follow the procedures outlined below if such beneficial owners wish to dissent
from the approval of the acquisition.
As described more fully below, in order to perfect their dissenters'
rights, shareholders of record must: (1) make written demand for the purchase of
their dissenting shares to Tarrant or its transfer agent on or before the date
of the special meeting, (2) vote their dissenting shares against approval of the
acquisition, and (3) within 30 days after the mailing to shareholders by Tarrant
of notice of approval of the acquisition, submit the certificates representing
their dissenting shares to Tarrant or its transfer agent, for notation on such
certificates that they represent dissenting shares. Failure to follow any of
these procedures may result in the loss of statutory dissenters' rights.
DEMAND FOR PURCHASE
Dissenting shareholders of Tarrant must submit to Tarrant at its
principal office, 3151 East Washington Blvd., Los Angeles, CA 90023, Attention
:Chief Financial Officer, or to its transfer agent, Computershare Trust Company,
a written demand that Tarrant purchase for cash those shares with respect to
which they wish to act as dissenting shareholders. Such demand will not be
effective unless it is received by not later than the date of the special
meeting.
The demand must state the number and class of shares held of record
which the shareholder demands to be purchased and the amount claimed to be the
"fair market value" of such shares as of the day before the announcement of the
acquisition. That statement of fair market value will constitute an offer by the
dissenting shareholder to sell such shares at that price.
46
Dissenting shareholders may not withdraw their demand for payment
without the consent of the Tarrant Board of Directors. The rights of dissenting
shareholders to demand payment terminate (1) if the acquisition is abandoned
(although dissenting shareholders are entitled upon demand in such a
circumstance to reimbursement of expenses incurred in a good faith assertion of
their dissenters'rights), (2) if the shares are transferred prior to submission
for endorsement as dissenting shares, or (3) if Tarrant and the dissenting
shareholders do not agree upon the status of the shares as dissenting shares or
upon the purchase price, and neither files a complaint or intervenes in a
pending action within six months after the date on which notice of approval of
the reorganization merger was mailed to the shareholders.
No shareholder who has a right to demand payment in cash of the "fair
market value" for such shareholder's shares will have any right to attack the
validity of the acquisition, except in an action to test whether Tarrant has
received the affirmative vote of the number of shares required to approve the
acquisition.
VOTE AGAINST APPROVAL OF THE ACQUISITION
Dissenting shareholders must vote their dissenting shares against
approval of the acquisition. Voting against the acquisition is required in the
public situation to inform the company of the extent of objections to the
acquisition and consequently exposure to potential demand for cash. Record
shareholders may vote part of the shares that they are entitled to vote in favor
of the acquisition or abstain from voting a part of such shares without
jeopardizing their dissenters' rights as to other share. [However, if record
shareholders vote part of the shares they are entitled to vote in favor of the
acquisition and fail to specify the number of shares they are so voting, it is
conclusively presumed under California law that their approving vote is with
respect to all shares that they are entitled to vote.] Voting against the
acquisition will not of itself, absent compliance with the provisions of Chapter
13 of the CGCL summarized herein, satisfy the requirement of the CGCL for
exercise and perfection of dissenters' rights. Also, under CGCL, a shareholder's
failure to vote against a proposal does not constitute a waiver of appraisal
rights.
NOTICE OF APPROVAL
If shareholders have a right to require Tarrant to purchase their
shares in cash for the "fair market value" thereof under the dissenters' rights
provisions of the CGCL, Tarrant will mail to each such shareholder a notice of
approval of the acquisition within ten days after the date of shareholder
approval, stating the price determined by it to represent the "fair market
value" of the dissenting shares. The statement of price will constitute an offer
to purchase any dissenting shares at that price.
SUBMISSION OF STOCK CERTIFICATES
Within 30 days after the mailing of the notice of approval of the
acquisition, dissenting shareholders must submit to Tarrant or its transfer
agent, at the address set forth above, certificates representing the dissenting
shares to be purchased, to be stamped or endorsed with a statement that the
shares are dissenting shares or are to be exchanged for certificates of
appropriate denomination so stamped or endorsed. The notice of approval of the
acquisition will specify the date by which the submission of certificates for
endorsement must be made and a submission made after that date will not be
effective for any purpose.
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PURCHASE OF DISSENTING SHARES
If a dissenting shareholder and Tarrant agree that the shares are
dissenting shares and agree upon the price of the shares, Tarrant will, upon
surrender of the certificates, make payment of that amount, plus interest on
such amount at the legal rate on judgments from the date of such agreement,
within 30 days after the agreement on price. Any agreement between dissenting
shareholders and Tarrant fixing the "fair market value" of any dissenting shares
must be filed with the corporate secretary of Tarrant.
If Tarrant denies that the shares are dissenting shares, or Tarrant and
a dissenting shareholder fail to agree upon the "fair market value" of the
shares, the dissenting shareholder may, within six months after the date on
which notice of approval of the acquisition was mailed to the shareholder, but
not thereafter, file a complaint, or intervene in a pending action, if any, in
the Superior Court for Los Angeles County, State of California, requesting that
the Superior Court determine whether the shares are dissenting shares and the
"fair market value" of such dissenting shares. The Superior Court may determine,
or appoint one or more impartial appraisers to determine, the "fair market
value" per share of the dissenting shares. The costs of the action, including
reasonable compensation to the appraisers to be fixed by the court, will be
assessed or apportioned as the Superior Court considers equitable, but if the
"fair market value" is determined to exceed the price offered to the shareholder
by Tarrant, then Tarrant will be required to pay such costs (including, in the
discretion of the Superior Court, attorneys' fees, fees of expert witnesses and
interest at the legal rate on judgments, if such "fair market value" is
determined to exceed 125% of the price offered by Tarrant). A dissenting
shareholder must bring this action within six months after the date on which
notice of approval of the acquisition was mailed to the shareholder whether or
not the corporation responds within such time to the shareholder's written
demand that Tarrant purchase in cash for "the fair market value" shares voted
against the approval of the acquisition.
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STOCK AND ASSET PURCHASE AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF ALL OF THE MATERIAL TERMS OF THE
STOCK AND ASSET PURCHASE AGREEMENT. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE TEXT OF THE STOCK AND ASSET PURCHASE AGREEMENT, WHICH IS
ATTACHED AS EXHIBIT A TO THIS PROXY STATEMENT. THE EXHIBITS TO THE STOCK AND
ASSET PURCHASE AGREEMENT ARE NOT ATTACHED HERETO, BUT ARE AVAILABLE FOR REVIEW
UPON REQUEST.
GENERAL
Under the terms of the stock and asset purchase agreement, we agreed to
purchase all of the outstanding capital stock of three Canadian companies
through which The Buffalo Group operates its wholesale and retail business in
Canada, and one U.S. company through which The Buffalo Group operates its
wholesale business in the United States. The Canadian companies are Buffalo
Inc., 3681441 Canada Inc., 3163946 Canada Inc., and the U.S. company is Buffalo
Corporation, a Delaware corporation. We also agreed to purchase certain
trademark rights and certain other assets owned by The Buffalo Trust, which are
used in the business of the above-referenced companies in Canada and the United
States.
As consideration for the stock we are purchasing under the agreement,
we agreed to pay the sellers $17 million in cash and to issue to them promissory
notes in the aggregate principal amount of $11 million and 13 million shares of
a Canadian subsidiary we formed for the purpose of consummating the transactions
under the purchase agreement. The shares of the Canadian subsidiary we agreed to
issue under the purchase agreement will be non-voting and will be exchangeable
for shares of our common stock on a one for one basis. We agreed to make up to
$12 million in earnout payments if specified performance conditions are
satisfied, and a contingent payment if the price of our stock does not equal to
exceed $3.076 per share within the five year period following the closing of the
purchase transaction.
As consideration for the assets we are purchasing from The Buffalo
Trust, we agreed to pay $23 million in cash and a promissory note in the
principal amount of $4 million. The cash amount payable to The Buffalo Trust is
subject to reduction before the closing, based on the amount of revenue
generated by The Buffalo Trust. We also agreed to assume liabilities of The
Buffalo Trust under certain agreements specified in the purchase agreement,
subject to certain adjustments and exceptions. We will not assume any
liabilities arising from a breach of the specified agreements or any tax
liabilities attributable to the trust or its settler, trustee or beneficiary.
The purchase agreement provides that the purchase price for the assets will be
decreased by the adjusted net revenue of the trust, which is defined as all
revenue of The Buffalo Trust less certain expenses.
DEPOSIT
Upon execution of the stock and asset purchase agreement, we paid a $5
million deposit toward the purchase of the stock and assets under the agreement.
If we close the transactions contemplated by the stock and asset purchase
agreement, this amount will be applied to the cash portion of the purchase
price. If the closing of the transactions contemplated by the agreement does not
occur on or before March 31, 2007, and either we or the sellers terminate this
agreement, the $5 million deposit will be retained by the sellers and we will
not be returned to us. Similarly, if the agreement is terminated by the sellers
due to our breach of our obligations under the purchase agreement, or due to a
change having a material adverse effect to us or our business of $1.5 million or
more, the sellers will be entitled to retain the entire $5 million deposit. To
the extent that the sellers retain the $5 million deposit, this will be their
sole and exclusive remedy and will constitute liquidated damages under the
49
purchase agreement. If the agreement is terminated due to our failure to obtain
shareholder approval or if a change occurs resulting in a material adverse
effect of $1.5 million or more with respect to The Buffalo Group or its
business, or if the sellers breach their representations or obligations under
the purchase agreement, we will be entitled to a refund of the deposited amount
less a termination fee equal to the out of pocket expenses incurred by The
Buffalo Group in connection with the proposed acquisition transaction.
CONTINGENT PAYMENTS
We agreed to make contingent payments for shares of our common stock
issuable in exchange for the shares of our Canadian subsidiary that we issue in
the transaction. The contingent payments will be based on the market price of
our common stock during the five year period following the closing of the
transactions contemplated by the stock and asset purchase agreement. The
contingent payments will be determined by comparing a minimum share price to the
weighted average price per share of our common stock over any ten consecutive
trading days during the five year period following the closing date, during
which the aggregate trading volume is at least 500,000 shares. With respect to
each share of our common stock issuable in exchange for shares of our Canadian
subsidiary that we are issuing in the transaction, if during the five years
following the closing date this weighted average price per share does not equal
or exceed the minimum per share price of $3.076, we will be required to make a
contingent payment equal to the difference between this minimum per share price
and the highest weighted average price per share over any ten consecutive
trading days during the five year period following the closing. Any right to
receive a contingent payment is transferable either together with, or separately
from, the shares of common stock to which the right relates.
EARN OUT PAYMENTS
The stock and asset purchase agreement provides for payment of an
earn-out amount (payable in cash) for each of the fiscal years ending December
31, 2007 through 2010. If the applicable earnings target is achieved with
respect to any fiscal year, we will be required to make an earn-out payment of
$3 million for that year. Accordingly, if the earn-out targets are satisfied for
each of these years, we will be required to make total earn-out payments of $12
million. In general, the term "adjusted earnings" is defined to include the net
income of these target companies increased by interest, taxes and certain other
expenses incurred in connection with the financing of the transactions
contemplated by the stock and asset purchase agreement, and decreased by
amounts, charges, claims and monies paid by us or our affiliates in relation to
the business, asset or operations of the target companies or the assets that we
purchase under the stock and asset purchase agreement. The purchase agreement
provides that adjusted earnings will be calculated without taking into account
the effect of certain items, including (among other things) gain or loss from
any sale of assets not in the ordinary course of business.
Upon occurrence of certain acceleration events specified under the
purchase agreement, we will be required to pay an accelerated earn-out amount
calculated based on the net present value of the aggregate remaining earn-out
amounts as if all such remaining earn-out amounts would have been earned in
full. The purchase agreement provides that a discount rate of 7.0% will be used
in determining the net present value of this earn-out amount. Events that would
trigger these accelerated payments include the consummation of a change of
control transaction, the termination of Mr. Gabriel Bitton's employment by us
without cause (as defined in the purchase agreement) or Mr. Bitton's resignation
for good reason, our failure to make any required earn-out payments and our
breach of certain specified obligations relating to the ongoing management of
Buffalo following the acquisition. Change of control transactions that would
qualify as a triggering event for payment of the accelerated earn-out amount
include transactions in which we sell all or substantially all of the assets of
the Buffalo business or otherwise transfer or sell control over the Buffalo
business through a sale or transfer of the shares of the target companies we are
50
acquiring or a sale of the shares of TAG Canada. Change of control transactions
triggering the payment of earn-out amounts also include any transaction in which
Tarrant or TAG Canada sells all or substantially all of its assets or it enters
into a merger or other reorganization as a result of which less than 50% of the
total voting power of the surviving company are held by persons who were holders
of voting securities immediately before the transaction.
MANAGEMENT OF THE ACQUIRED BUSINESSES
Under the agreement, Mr. Gabriel Bitton will be appointed as the
President of Tarrant's Buffalo Division and the Chief Executive Officer of our
Canadian subsidiary through which we will operate the Canadian business we are
acquiring from The Buffalo Group. Mr. Bitton will be entitled to serve in these
capacities commencing promptly after closing of the transactions under the stock
and asset purchase agreement until the end of the final period for which
earn-out payments may be due or the termination of his employment by him
voluntarily or due to his death or permanent disability, or for cause. During
this time period, subject to the control of our Board of Directors of Parent,
Mr. Bitton will have general supervision, direction and control of the
day-to-day operations, the business and the officers of our Canadian subsidiary.
Our Board of Directors will be entitled to terminate Mr. Bitton's employment for
cause.
The purchase agreement further provides that during the period
commencing on the closing and ending at the end of the final period for which
earn-out payments may be due, subject to the powers of our Board of Directors,
the day-to-day management of our Canadian subsidiary will be conducted by its
executive officers, in accordance with the budgets and business plans approved
by our Board of Directors. Also, the agreement provides that all officers of our
Canadian subsidiary will report to its Chief Executive Officer. The purchase
agreement further includes procedures for holding meetings and approval of
annual and quarterly budgets for the acquired businesses, and provides certain
restrictions with respect to the management of our Canadian subsidiary.
REPRESENTATIONS AND WARRANTIES OF SELLER PARTIES
The sellers of the shares and assets we are purchasing under the
purchase agreement made representations to us relating to:
o Their status as entities duly organized, validly existing and
in good standing under the laws of their respective
jurisdictions of formation or organization, and the absence of
any actions for dissolution or liquidation;
o Their power and authority to execute and deliver the purchase
agreement and other transaction documents, and the taking of
all actions necessary to authorize the execution and deliver
of all such documents;
o The authorization, execution and delivery of each of the
purchase agreement and the other transaction documents, and
the enforceability of each such document against the seller
that is a party to such agreement or document;
o The execution and delivery of the purchase agreement and other
documents not resulting in any breach of law or a material
breach of any contract to which the representing seller is a
party or by which it is bound or requiring any consent of any
governmental authorities;
o Residence of the sellers as Canadian residents for Canadian
income tax purposes;
o Absence of any obligation to pay fees to brokers or finders;
51
o Ownership of the shares of the acquired businesses free and
clear of any liens or encumbrances; and
o Qualification as sophisticated investors and review of all
relevant information necessary to evaluate the risk and merits
of their investment in our securities and securities to be
issued by our Canadian subsidiary in the transaction.
We received similar representations from the four target companies
whose shares we are purchasing. In addition, we received additional
representations from these companies relating to:
o Their capitalization and outstanding capital stock;
o Delivery to us of complete and accurate corporate records;
o List of subsidiaries and information concerning the
capitalization of such subsidiaries;
o Delivery of audited annual and unaudited interim financial
statements prepared in accordance with Canadian generally
accepted accounting principles;
o Absence of specified matters outside the ordinary course of
business since the date of the interim balance sheet of
September 30, 2006;
o Absence of liabilities required to be disclosed on the
financial statements;
o Compliance with laws;
o Payment of all required taxes, filing of all required tax
returns and the absence of tax related liabilities or
obligations;
o Good and valid title to assets and valid leasehold interest in
personal and real property;
o List of all intellectual property rights and validity of
intellectual property rights, including without limitation,
rights to use trademarks owned by or licensed to The Buffalo
Trust or that relate to the operation of its business;
o Non-infringement of the intellectual property rights of third
parties;
o The condition of inventory maintained by the acquired
companies;
o List of contracts to which any acquired company or The Buffalo
Trust is a party and the absence of material contracts not
otherwise disclosed to us;
o Collectible status of accounts receivable and maintenance of
adequate insurance coverage;
o Absence of litigation relating to enforceability of the
purchase agreement or that could result in a material adverse
change in the business of the companies we propose to acquire;
o Absence of warranties beyond standard terms and absence of
liability for injury resulting from use of products sold by
the companies we propose to acquire;
o Absence of employee disputes and compliance of all employee
benefit plans with applicable laws;
o Compliance with environmental laws and standards and absence
of environmental liability;
o Status of relationships with major customers and suppliers;
52
o Possession of all permits required to operate businesses and
operations of companies that we propose to acquire;
o Absence of certain business relationships with affiliated
parties; and
o Accuracy of information provided by seller parties for
inclusion in this proxy statement.
PRE-CLOSING AND POST-CLOSING COVENANTS
Under the purchase agreement, the seller parties agreed to various
customary pre-closing covenants relating to the operation of the businesses that
we propose to acquire under the purchase agreement, the preservation of this
business, and the repayment and discharge of certain liabilities and obligations
by the seller parties.
The purchase agreement also includes customary post-closing covenants
relating to transition of the business, confidentiality and other matters. The
purchase agreement provides that, upon the closing of the stock and asset
purchase transaction, we will appoint Messrs. Gabriel Bitton and Luis Padilla,
or if either or both of them are unwilling or unable to serve, other nominees of
the sellers reasonably acceptable to us, to serve on our Board of Directors.
Subject to certain conditions and requirements, we further agreed to use our
commercially reasonable efforts to nominate these individuals, or such other
nominees, for reelection as a director at each meeting at which shareholders are
voting for this seat on the Board of Directors. This obligation to use our
efforts to nominate these individuals or such other nominees for reelection
after the closing date will expire five years after the closing date or the date
the sellers and their affiliates own less than five million shares of our common
stock, whichever is sooner.
In addition, the purchase agreement provides that we will
enter into an agreement pursuant to which we will receive an exclusive royalty
free license to use the name "David Bitton" in connection with the wholesale and
retail sale in Canada and the United States of jeans and related sportswears.
CLOSING CONDITIONS
The obligations of the parties to consummate the transactions
contemplated by the purchase agreement are conditioned on the satisfaction of a
number customary closing conditions, including without limitation, accuracy of
representations and warranties, no change having a material adverse effect of
$1.5 million or more in value in the businesses of the companies we propose to
acquire, absence of adverse litigation seeking to restrain or prohibit the
transaction, receipt of all required third party consents, execution and
delivery of various ancillary agreements, and approval of the transaction by our
shareholders. In addition, our obligation to consummate the transactions
contemplated by the purchase agreement is conditioned on the satisfaction or
release of certain liabilities owed by the target companies that we are
purchasing under the purchase agreement and the trust from which we are
acquiring assets under the agreement.
TERMINATION
The agreement may be terminated by mutual written consent of us and the
sellers at any time before the closing. The agreement may also be terminated
either by us or the sellers upon delivery of notice if the closing has not
occurred before March 31, 2007, so long as the party delivering the notice has
not caused the failure to close as a result of the party's default under the
agreement. In addition, we may terminate the purchase agreement with 30 days
advance written notice to the sellers if there has been a material adverse
change on the businesses or assets we agreed to purchase, or if any seller has
breached any representation or covenant under the purchase agreement. We can
53
also terminate the purchase agreement if we are unable to obtain approval of the
transactions and the purchase agreement at the special meeting of shareholders
to which this proxy statement relates. The sellers may terminate the purchase
agreement with 30 days advance written notice to us at any time before the
closing if there has been a material adverse change in our company or our
business.
If we terminate the purchase agreement due to the occurrence of a
material adverse change in the businesses we are purchasing or due to the breach
by the sellers of their representations or covenants under the agreement, we
will be entitled to a refund of the $5 million deposit and we will have the
right to pursue all legal remedies for damages, except that no seller will be
liable for damages in excess of $5 million. If we terminate the purchase
agreement due to our inability to obtain shareholder approval, we will be
entitled to a refund of the $5 million deposit but we will be required to pay
the sellers a termination fee equal to all actual and reasonable out-of-pocket
expenses incurred in connection with the transactions contemplated by the
purchase agreement and other agreements to be executed and delivered in
connection with these transactions. In general, if the sellers terminate the
purchase agreement under the terms specified above or the purchase agreement is
terminated for failure to close before the expiration date, the sellers will be
entitled to retain the $5 million deposit amount we paid upon signing the
purchase agreement as their sole and exclusive remedy and as liquidated damages
under the purchase agreement.
54
TERMS OF THE EXCHANGEABLE SHARES AND RELATED MATTERS
Upon the consummation of the proposed acquisition, the outstanding
capital stock of TAG Canada will consist of the exchangeable shares held by the
sellers in the acquisition transaction and common shares held by Tarrant.
EXCHANGE RIGHTS
Holders of the exchangeable shares are entitled to exchange them at any
time for shares of Tarrant common stock on a one for one basis. In connection
with any exercise of the exchange rights, Tarrant has the right to redeem shares
of its Series A preferred stock held under the voting trust agreement executed
in connection with the acquisition transaction.
DIVIDENDS AND DISTRIBUTIONS
The exchangeable shares are entitled to preferential dividends and
distribution of assets in the case of a liquidation, dissolution or winding-up
of TAG Canada. In general, the exchangeable shares rank senior or equal to other
shares of TAG Canada. Holders of the exchangeable shares are entitled to receive
any cash or non-cash dividends declared on Tarrant common stock. All such
dividends payable on the exchangeable shares must be paid before any dividends
are declared or paid on other shares.
PROTECTIVE PROVISIONS
Under the terms of the exchangeable shares, TAG Canada agreed not to
take certain actions without the approval of the holders of the exchangeable
shares. Actions that may not be taken without the approval of the holders of the
exchangeable shares include amending the governing instruments of TAG Canada so
as to adversely affect the holders of the exchangeable shares, issuing
additional exchangeable shares other than shares to be issued as dividends,
paying dividends on stock ranking junior to the exchangeable shares, initiating
voluntary liquidation or dissolution proceedings, or redeeming other shares of
TAG Canada. The restrictions on redeeming other shares are inapplicable if all
dividends and distributions on the outstanding exchangeable shares corresponding
to the dividends and distributions declared and paid on Tarrant common stock
have been declared and paid in full.
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding-up of TAG Canada
or any other distribution of its assets to its shareholders, a holder of
exchangeable shares will be entitled to receive, subject to applicable law, a
share of common stock of Tarrant, plus all declared and unpaid cash and non-cash
dividends or other distributions made by Tarrant on a share of Tarrant common
stock, unless the corresponding equivalent has already been paid to the
exchangeable shareholders. Upon the occurrence of this type of event, Tarrant
will have an overriding right to purchase all of the outstanding exchangeable
shares for a payment amount equal to the above-specified amount payable on the
exchangeable shares.
Upon the insolvency, winding up, liquidation or dissolution of TAG
Canada, the holder of each exchangeable share has the right to require Tarrant
to purchase the exchangeable share for a purchase price equal to the
above-specified consideration amount (consisting of one share of Tarrant common
stock, plus all cash and non-cash dividends or other distributions made by
Tarrant. In addition, in the event of liquidation (voluntary or involuntary) or
dissolution of Tarrant or winding up proceeding with respect to of its affairs,
each exchangeable share will be automatically exchanged to an equivalent number
of Tarrant common stock.
55
Any share of Tarrant common stock issued pursuant to an insolvency,
winding up, liquidation or dissolution or the automatic exchange will be
entitled to registration rights under the Registration Rights Agreement by and
among Tarrant and the holders of the exchangeable shares.
RETRACTION RIGHTS
The holder of the exchangeable shares can require TAG Canada to redeem
either all of the exchangeable shares or a minimum of 100 exchangeable shares
registered in the name of such holder for the specified consideration consisting
of one share of Tarrant common stock plus all cash and non-cash dividends or
other distributions made by Tarrant. Upon the exercise of this right by the
holders, Tarrant has the right to purchase all of the shares for the purchase
price per share equal to this consideration amount.
REDEMPTION RIGHTS
TAG Canada will redeem all of the outstanding exchangeable shares on a
redemption date as determined by its board but not earlier than December 1,
2016, except under specified circumstances. The redemption price per share will
be equal to the same price payable by Tarrant upon exercise of its overriding
right to purchase all of the shares. TAG Canada's redemption rights are subject
to Tarrant's right to purchase the shares.
VOTING RIGHTS
The holders of exchangeable shares will not have any voting rights,
except as required by applicable law and provided in the terms of the
exchangeable shares. However, in tandem with the exchangeable shares, Tarrant is
issuing 130,000 shares of Series A preferred stock with special voting rights,
as described elsewhere in this proxy statement.
AMENDMENT AND APPROVAL
The terms of the exchangeable shares may be amended only with the
approval of the exchangeable shareholders. Any such approval will be sufficient
if given in accordance with applicable law subject to a minimum requirement that
at least 20% of the outstanding exchangeable shareholders are present or
represented by proxy at a meeting at which at least two-thirds approve any such
change, subject to other restrictions.
RECIPROCAL CHANGES
If Tarrant issues dividends in the form of Tarrant common stock to its
shareholders or other securities allowing existing holders of Tarrant common
stock to purchase additional shares of Tarrant common stock, or assets of
Tarrant, then TAG Canada will ensure that the economic equivalent on a per share
basis of these shares of Tarrant common stock (or securities exchangeable for or
convertible into or carrying rights to acquire Tarrant Shares), rights, options,
securities, shares, evidences of indebtedness or other assets is issued or
distributed simultaneously to the exchangeable shareholders. The terms of the
exchangeable shares also provide that the terms of the exchangeable shares will
be adjusted in the event of any stock split or reclassification of the Tarrant
common stock, so as to ensure that the exchangeable shares receive the same or
an economically equivalent change.
COMMON AND PREFERRED SHARES OF TAG CANADA
TAG Canada's common shares are held by Tarrant and will be entitled to
attend and vote at any meeting of the shareholders of TAG Canada, except for
56
meetings of shareholders of other classes. The board of directors of TAG Canada
may issue specified preferred shares, from time to time, under such terms as
determined by the board.
SUPPORT AGREEMENT
Concurrently with the execution and delivery of the stock and asset
purchase agreement, Tarrant and TAG Canada entered into a Support Agreement in
relation to the exchangeable shares. The support agreement requires Tarrant to
comply with certain affirmative and restrictive covenants so long as any
exchangeable shares (not owned by Tarrant or its affiliates) remain outstanding.
Under the terms of the support agreement, Tarrant agreed not to declare or pay
any dividends on Tarrant common stock unless TAG Canada simultaneously declared
or pays an equivalent dividend on the exchangeable shares, and not to permit TAG
Canada from issuing any further exchangeable shares or any other shares that
permit the holders of the shares to exchange or convert the shares into Tarrant
common stock or the shares of any affiliate of Tarrant. Tarrant also agreed to
ensure that record date for declaring dividends on Tarrant common stock is not
less than 10 days after the declaration date of the dividend, and to take all
additional actions necessary to enable TAG Canada to pay its obligations with
respect to the exchangeable shares.
In addition, so long as exchangeable shares remain outstanding (other
than shares held by Tarrant or its affiliates), Tarrant agreed not to take
action with respect to any of the following without the prior approval of TAG
Canada and the holders of the exchangeable shares, unless the economic
equivalent on a per share basis of such rights, options, securities, shares,
evidences of indebtedness or other assets is issued or distributed
simultaneously to holders of the exchangeable shares or an equivalent change be
simultaneously made to, or in the rights of these holders:
o issue Tarrant common stock by way of dividend or other
distribution, other than to holders of Tarrant common stock
exercising an option to receive dividends in lieu of receiving
cash dividends;
o issue rights, options or warrants to the holders of the
outstanding Tarrant common stock entitling them to purchase
Tarrant common stock;
o issue shares or securities of Tarrant of any class other than
Tarrant common stock, rights, options or warrants other than
those referred in previous sentence, evidences of indebtedness
of Tarrant or assets of Tarrant, unless the economic
equivalent is issued to the holders of the exchangeable
shares; or
o subdivide, re-divide or change the then outstanding Tarrant
common stock into a greater number of Tarrant common stock; or
reduce, combine, consolidate or change the then outstanding
Tarrant common stock into a lesser number of shares of Tarrant
common stock; or reclassify or otherwise change Tarrant common
stock or effect an amalgamation, merger, reorganization or
other transaction affecting Tarrant common stock.
TAG Canada agreed to take all actions reasonably necessary to enable
Tarrant or any of its affiliates to perform its obligations arising upon the
exercise by Tarrant or such of its affiliates of the overriding right to
purchase all of the exchanged shares, including in connection with the
liquidation, the retraction or the redemption of the exchangeable shares. TAG
Canada also agreed to notify Tarrant of certain significant events, including
determinations regarding liquidation, dissolution or winding up of TAG Canada,
receipt or notification of any claim or proceeding with respect to an
involuntary liquidation or dissolution of TAG Canada, and certain other matters.
57
In addition, Tarrant agreed that in the event of any proposed tender
offer, share exchange offer or similar transaction with respect to the Tarrant
common stock, Tarrant will take all actions necessary to enable the exchangeable
shareholders to participate in such transaction to the same extent and on an
economically equivalent basis as Tarrant's shareholders. Under the terms of the
support agreement, Tarrant further agreed to certain restrictions applicable to
any sale of all or substantially all of its assets or properties, which are
designed to ensure that appropriate adjustments are made to the exchangeable
shares so they remain the economic equivalent of Tarrant common stock.
58
THE SERIES A PREFERRED STOCK AND THE VOTING TRUST
GENERAL
Tarrant's Certificate of Incorporation authorizes the Board of
Directors to designate one or more series preferred stock having such terms as
determined by the Board of Directors. Pursuant to a certificate of determination
filed with the California Secretary of State, the Board of Directors designated
130,000 shares of Series A Special Voting Preferred Stock, no par value.
The following summary of the terms of the Series A preferred stock and
the voting trust are qualified in its entirety by the text of the Series A
preferred stock certificate of determination and the related voting trust
agreement.
VOTING RIGHTS AND VOTING TRUST AGREEMENT
Pursuant to the terms of the Series A preferred stock, the record
holder of the Series A preferred stock on the record date for any action of
Tarrant's shareholders will have voting rights identical to those held by the
holders of shares of Tarrant common stock, and will vote together with the
holders of the common stock. The Series A preferred stock is entitled to vote on
any matters on which Tarrant shareholders are entitled to vote. Except as
required by law, the holders of Tarrant common stock and the Series A preferred
stock will vote together as a single class.
Pursuant to the terms of a Voting Trust Agreement to be entered into at
the closing of the acquisition by and among Tarrant, TAG Canada and
Computershare Trust Company of Canada, each share of Series A preferred stock
will be entitled to 100 voting shares. Computershare Trust Company of Canada, as
the trustee of the trust under the Voting Trust Agreement, will be required to
vote the Series A preferred stock in accordance with the terms of the Voting
Trust Agreement. The voting rights accompanying the Series A preferred stock
will terminate pursuant to the Voting Trust Agreement.
REDEMPTION
Tarrant will be entitled to redeem shares of Series A preferred stock
at nominal value as exchangeable shares are exchanged for shares of Tarrant
common stock. In connection with any exchange of the exchangeable shares and as
a condition to the exchange, Tarrant will be entitled to redeem such number of
shares of Series A preferred stock so that the total number of votes represented
by shares of Series A preferred stock and Tarrant common stock issued upon
exercise of exchange rights that remain outstanding after the redemption and
exchange do not exceed the number of votes represented by such shares of Series
A preferred stock and Tarrant common stock outstanding immediately before the
redemption and exchange. The terms of the Series A preferred stock set forth
notice requirements and other procedures in relation to the redemption of the
Series A preferred stock. In connection with any redemption, the holder of the
Series A preferred stock will be required to surrender the certificate
representing the Series A preferred stock, in exchange for payment of the
nominal redemption price.
NO DIVIDENDS OR CONVERSION RIGHTS
The Series A preferred stock are not entitled to receive any dividends
and are not convertible into other securities of Tarrant.
59
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial statements
should be read in conjunction with the historical financial statements of The
Buffalo Group (attached to this proxy statement as Exhibit D) as well as those
of Tarrant (incorporated by reference from the annual and periodic reports
attached as Exhibit E and Exhibit F to this proxy statement). The unaudited pro
forma consolidated financial statements do not purport to be indicative of the
financial position or results of operation that would have actually been
obtained had such transactions been completed as of the assumed dates and for
the periods presented, or which may be obtained in the future. The pro forma
adjustments are described in the accompanying notes and are based upon available
information and certain assumptions that our management believes are reasonable.
A preliminary allocation of the purchase price of the assets purchased
from The Buffalo Group has been made to intangible assets. The actual allocation
of the purchase price and the resulting effect on income (loss) from operations
may differ significantly from the pro forma amounts included below. The pro
forma adjustments represent our preliminary determination of purchase accounting
adjustments and are based upon available information and certain assumptions
that our management believes to be reasonable. Consequently, the amounts
reflected in the unaudited pro forma consolidated financial statements are
subject to change, and the final amounts may differ substantially.
60
TARRANT APPAREL GROUP
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2006
PRO FORMA PRO FORMA
TAGS BUFFALO ADJUSTMENT COMBINED
------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ........... 976,481 1,277,044 (1,200,000)a 1,053,525
Accounts receivable, net ............ 46,175,909 18,687,828 -- 64,863,737
Due from related parties ............ 3,918,287 -- -- 3,918,287
Inventory ........................... 20,455,702 22,100,036 -- 42,555,738
Other current assets ................ 1,356,570 887,204 -- 2,243,774
------------ ------------ ------------ ------------
Total current assets ............. 72,882,949 42,952,112 (1,200,000) 114,635,061
Property and equipment ................ 1,477,101 9,944,087 -- 11,421,188
Notes receivable ...................... 14,000,000 -- -- 14,000,000
Due from related parties .............. 2,213,416 1,743,413 (400,000)b 3,556,829
Other long-term assets ................ 5,210,036 1,306,000 838,000 a 7,354,036
Trademark ............................. 126,675 89,469 15,910,531 a 16,126,675
Licenses .............................. -- 18,858,871 (7,858,871)b 11,000,000
Goodwill .............................. 8,582,845 -- 42,977,111 a 51,559,956
------------ ------------ ------------ ------------
Total assets ..................... 104,493,022 74,893,952 50,266,771 229,653,745
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings .......... 12,534,937 17,938,768 -- 30,473,705
Accounts payable and accrued expenses 27,972,376 9,110,584 1,338,000 a 38,420,960
Income taxes ........................ 17,035,409 -- -- 17,035,409
Current portion of long-term
obligations and factoring
arrangement ...................... 19,769,030 -- -- 19,769,030
------------ ------------ ------------ ------------
Total current liabilities ........ 77,311,752 27,049,352 1,338,000 105,699,104
Term loan, net ........................ 10,941,948 -- 40,000,000 a 50,941,948
Other long-term obligations ........... 65,405 33,313,090 (31,527,719)b 1,850,776
Notes payable ......................... -- -- 15,000,000 a 15,000,000
Retractable preferred shares .......... -- 5,232,607 (5,232,607)b --
Accrued consideration ................. -- -- 22,698,000 a 22,698,000
------------ ------------ ------------ ------------
Total liabilities ................ 88,319,105 65,595,049 42,275,674 196,189,828
Minority interest in consolidated
subsidiary ......................... 57,469 -- -- 57,469
Commitment and Contingencies
Shareholders' equity:
Preferred stock, 2,000,000 shares
authorized; no shares at
September 30, 2006 issued and
outstanding (see note m) ......... -- -- -- --
Common stock, no par value,
100,000,000 shares authorized;
30,543,763 shares at September
30, 2006 issued and outstanding .. 114,977,465 5,472,721 (5,472,721)b 114,977,465
Warrants to purchase common stock ... 7,314,239 -- -- 7,314,239
Exchangeable shares ................. -- -- 17,290,000 a 17,290,000
Contributed capital ................. 10,101,151 -- -- 10,101,151
Retained earnings (Accumulated
deficit) ......................... (114,094,373) 8,163,840 (8,163,840)b (114,094,373)
Notes receivable from
officer/shareholder .............. (2,182,034) -- -- (2,182,034)
Cumulative translation adjustment ... -- (4,337,658) 4,337,658 b --
------------ ------------ ------------ ------------
Total shareholders' equity ....... 16,116,448 9,298,903 7,991,097 33,406,448
------------ ------------ ------------ ------------
Total liabilities and
shareholders' equity .......... 104,493,022 74,893,952 50,266,771 229,653,745
============ ============ ============ ============
61
TARRANT APPAREL GROUP
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
PRO FORMA PRO FORMA
TAGS BUFFALO ADJUSTMENT COMBINED
------------ ------------ ------------ ------------
Net sales ................................ 174,989,008 74,792,601 -- 249,781,609
Cost of sales ............................ 138,006,628 38,770,338 -- 176,776,966
------------ ------------ ------------ ------------
Gross profit ............................. 36,982,380 36,022,263 -- 73,004,643
Selling and distribution expenses ........ 8,295,815 19,375,759 -- 27,671,574
General and administrative expenses
19,914,629 9,897,998 (559,185)c,g 29,253,442
Royalty expenses ......................... 2,099,392 2,099,392
Loss on notes receivable - related parties 27,137,297 -- -- 27,137,297
------------ ------------ ------------ ------------
Income (loss) from operations ............ (20,464,753) 6,748,506 559,185 (13,157,062)
Interest expense ......................... (4,696,279) (3,040,347) (1,162,853)e,i (8,899,479)
Interest income .......................... 1,131,601 -- -- 1,131,601
Other income (expense), net .............. (45,747) -- -- (45,747)
Adjustment to fair value of derivative ... 511,087 -- -- 511,087
------------ ------------ ------------ ------------
Income (loss) before provision for income
taxes ................................. (23,564,091) 3,708,159 (603,668) (20,459,600)
Provision for income taxes ............... 340,667 1,326,000 (241,467)k 1,425,200
------------ ------------ ------------ ------------
Net income (loss) ........................ (23,904,758) 2,382,159 (362,201) (21,884,800)
============ ============ ============ ============
Net income (loss) per share:
Basic & Diluted ..................... (0.78) (0.72)
============ ============
Weighted average common and
common equivalent shares:
Basic and Diluted ................... 30,546,217 30,546,217
============ ============
Net income (loss) ........................ (23,904,758) 2,382,159 (362,201) (21,884,800)
Foreign currency translation adjustment .. -- (277,443) -- (277,443)
------------ ------------ ------------ ------------
Total comprehensive income (loss) ........ (23,904,758) 2,104,716 (362,201) (22,162,243)
============ ============ ============ ============
62
TARRANT APPAREL GROUP
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED DECEMBER 31, 2005
PRO FORMA PRO FORMA
TAGS BUFFALO ADJUSTMENT COMBINED
------------ ------------ ------------ ------------
Net sales ..................................... 214,648,218 104,071,846 -- 318,720,064
Cost of sales ................................. 169,767,051 61,155,418 -- 230,922,469
------------ ------------ ------------ ------------
Gross profit .................................. 44,881,167 42,916,428 -- 87,797,595
Selling and distribution expenses ............. 10,726,425 23,071,741 -- 33,798,166
General and administrative expenses ........... 26,864,789 11,760,890 (568,539)d,h 38,057,140
Royalty expenses .............................. 3,664,454 -- -- 3,664,454
------------ ------------ ------------ ------------
Income (loss) from operations ................. 3,625,499 8,083,797 568,539 12,277,835
Interest expense .............................. (4,624,590) (3,794,899) (1,723,526)f,j (10,143,015)
Interest income ............................... 2,081,456 -- -- 2,081,456
Other income (expense), net ................... 838,160 -- -- 838,160
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes 1,920,525 4,288,898 (1,154,987) 5,054,436
Provision for income taxes .................... 927,181 1,855,000 (461,995)l 2,320,186
------------ ------------ ------------ ------------
Net income .................................... 993,344 2,433,898 (692,992) 2,734,250
============ ============ ============ ============
Net income per share:
Basic .................................... 0.03 0.09
============ ============
Diluted .................................. 0.03 0.06
============ ============
Weighted average common and
common equivalent shares:
Basic .................................... 29,728,997 29,728,997
============ ============
Diluted .................................. 29,734,291 42,734,291
============ ============
Net income .................................... 993,344 2,433,898 (692,992) 2,734,250
Foreign currency translation adjustment ....... -- (221,049) -- (221,049)
------------ ------------ ------------ ------------
Total comprehensive income .................... 993,344 2,212,849 (692,992) 2,513,201
============ ============ ============ ============
63
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED COMBINED FINANCIAL STATEMENTS
a Reflects the acquisition of The Buffalo Group by Tarrant for a purchase
price of $40 million in cash, $15 million in promissory notes and 13
million exchangeable shares of Tarrant's Canadian subsidiary, which
will be exchangeable into 13 million shares of Tarrant common stock.
The sellers also will be entitled to receive a contingent payment if
the highest volume weighted average market price of Tarrant's common
stock over the 10 day trading period with a trading volume of at least
500,000 shares during the five years following the closing does not
equal or exceed $3.076 per share.
b Reflects the elimination of assets not acquired and liabilities not
assumed as part of the acquisition.
c Reflects the elimination of amortization of trademark and license in
the amounts of $2.0 million for the nine months ended September 30,
2006.
d Reflects the elimination of amortization of trademark and license in
the amounts of $2.5 million for the fiscal year ended December 31,
2005.
e Reflects the elimination of interest paid on a loan that is not assumed
as part of acquisition in the amounts of $2.0 million for the nine
months ended September 30, 2006.
f Reflects the elimination of interest paid on a loan that is not assumed
as part of acquisition in the amounts of $2.5 million for the fiscal
year ended December 31, 2005.
g Reflects the amortization of trademark and license in the amounts of
$1.4 million for the nine months ended September 30, 2006 assuming the
life of trademark is twenty years and license is ten years.
h Reflects the amortization of trademark and license in the amounts of
$1.9 million for the fiscal year ended December 31, 2005 assuming the
life of trademark is twenty years and license is ten years.
i Reflects the interest paid on the new financing in the amounts of $3.2
million for the nine months ended September 30, 2006.
j Reflects the interest paid on the new financing in the amounts of $4.2
million for fiscal year ended December 31, 2005.
k Reflects the change of tax provision of $241,000 on the pro forma
adjustment for the nine months ended September 30, 2006.
l Reflects the change of tax provision of $462,000 on the pro forma
adjustment for the fiscal year ended December 31, 2005.
m In combination with the exchangeable shares, Tarrant will issue 130,000
shares of a special series of preferred stock of Tarrant to a trustee
of a voting trust, under which the sellers will have the right to
direct the trustee to vote a number of shares equal to the number of
exchangeable shares Tarrant's Canadian subsidiary that remain
outstanding at any time.
64
TARRANT APPAREL GROUP
GENERAL
Tarrant Apparel Group is a design and sourcing company for private
label and private brand casual apparel serving mass merchandisers, department
stores, branded wholesalers and specialty chains located primarily in the United
States. Our major customers include retailers, such as Chico's, Macy's
Merchandising Group, the Avenue, Lane Bryant, Lerner New York, Mothers Work,
J.C. Penney, Kohl's, Sears, Mervyn's and Wal-Mart. Our products are manufactured
in a variety of woven and knit fabrications and include jeans wear, casual
pants, t-shirts, shorts, blouses, shirts and other tops, dresses and jackets.
In 2003 and 2004, our net sales were $320 million and $155 million,
respectively. In 2005, our net sales increased by 38.1% to $215 million. In
2003, we experienced a net loss of $35.9 million, which included non-cash
charges of inventory write-down of $11 million and an impairment of asset charge
of $22.3 million. In 2004, we experienced a net loss of $104.7 million, which
included non-cash charges of $22.8 million of foreign currency translation loss
and $78.0 million of asset impairments. In 2005, we experienced net income of
$1.0 million. Our net sales increased by $10.1 million to $175 million in the
first nine months of 2006 from $164.9 million in the first nine months of 2005.
See Tarrant's Annual Report on Form 10-K for the year ended December
31, 2005, and its Quarterly Report on Form 10-Q for the period ended September
30, 2006, for further information concerning Tarrant's business, products,
properties and legal proceedings. Copies of these reports are attached to this
proxy statement as Exhibits E and F.
CONTACT US
Tarrant maintains its principal office at 3151 East Washington
Boulevard, Los Angeles, California 90023. You can reach us by telephone at (323)
780-8250.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF TARRANT
The following table sets forth as of December 15, 2006, unless
otherwise indicated, certain information relating to the ownership of our common
stock by (i) each of Tarrant's directors, (ii) each of its current named
executive officers, and (iii) all of its current named executive officers and
directors as a group. Except as listed below, there are no other persons known
to us to the beneficial owner of more than five percent of the outstanding
shares of our common stock. Except as may be indicated in the footnotes to the
table and subject to applicable community property laws, each such person has
the sole voting and investment power with respect to the shares owned. The
address of each person listed is in care of the Company, 3151 East Washington
Blvd., Los Angeles, CA 90023, unless otherwise set forth below such person's
name.
65
NUMBER OF SHARES
OF COMMON STOCK
NAME AND ADDRESS BENEFICIALLY OWNED (1) PERCENT (1)
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
Gerard Guez...................................... 12,883,084 (2) 38.7%
Todd Kay......................................... 4,995,999 (3) 15.1%
Corazon Reyes.................................... 284,888 (4) *
Charles Ghailian................................. 322,000 (5) *
Stephane Farouze................................. 100,000 (6) *
Henry Chu ....................................... 100,000 (5) *
Milton Koffman................................... 34,000 (7) *
Joseph Mizrachi.................................. 28,000 (5) *
Mitchell Simbal.................................. 24,000 (5) *
Simon Mani....................................... 20,000 (5) *
DIRECTORS AND OFFICERS AS A GROUP (11 PERSONS)... 18,791,971 (8) 51.7%
OTHER 5% OWNERS:
Guggenheim Capital, LLC.......................... 3,500,000 (9) 10.3%
227 West Monroe Street, Suite 4900
Chicago, IL 60606
* Less than one percent.
(1) Under Rule 13d-3, certain shares may be deemed to be beneficially owned
by more than one person (if, for example, persons share the power to vote
or the power to dispose of the shares). In addition, shares are deemed to
be beneficially owned by a person if the person has the right to acquire
the shares (for example, upon exercise of an option) within 60 days of
the date as of which the information is provided. In computing the
percentage ownership of any person, the amount of shares outstanding is
deemed to include the amount of shares beneficially owned by such person
(and only such person) by reason of these acquisition rights. As a
result, the percentage of outstanding shares of any person as shown in
this table does not necessarily reflect the person's actual ownership or
voting power with respect to the number of shares of common stock
actually outstanding at December 15, 2006. Percentage ownership is based
upon 30,543,763 shares of common stock issued and outstanding as of
December 15, 2006.
(2) Includes 461,518 shares held by GKT Investments, LLC, a Delaware limited
liability company owned 100% by Mr. Guez and 2,766,668 shares of common
stock issuable upon exercise of stock options which are or will become
exercisable on or prior to February 13, 2007.
(3) Includes 2,433,332 shares of common stock issuable upon exercise of stock
options which are or will become exercisable on or prior to February 13,
2007.
(4) Includes 52,000 shares of common stock issuable upon exercise of stock
options which are or will become exercisable on or prior to February 13,
2007.
(5) Consists of shares of common stock issuable upon exercise of stock
options which are or will become exercisable on or prior to February 13,
2007.
(6) Includes 20,000 shares of common stock issuable upon exercise of stock
options which are or will become exercisable on or prior to February 13,
2007.
(7) Includes 24,000 shares of common stock issuable upon exercise of stock
options which are or will become exercisable on or prior to February 13,
2007.
(8) Includes 5,665,000 shares of common stock issuable upon exercise of stock
options which are or will become exercisable on or prior to February 13,
2007.
(9) Consists of shares of common stock issuable upon exercise of warrants.
Voting and dispositive power over 1,892,857 shares is exercised through
Guggenheim Investment Management, LLC, which is a subsidiary of
Guggenheim Capital, LLC. Voting and dispositive power over 1,607,143
shares is exercised through Midland Advisors Company, which is a
subsidiary of Guggenheim Capital, LLC. Information is taken from the
Schedule 13D as filed with the Securities and Exchange Commission on June
27, 2006.
66
The information as to shares beneficially owned has been individually
furnished by the respective directors, named executive officers, and other
shareholders of Tarrant, or taken from documents filed with the SEC.
MARKET PRICE OF COMMON STOCK
Tarrant's common stock has been quoted on The NASDAQ Stock Market's
National Market System under the symbol "TAGS" since 1995.
The following table sets forth, for the periods indicated, the range of
high and low sale prices for our common stock as reported by NASDAQ.
Low High
--------- ---------
2004
First Quarter..................................... 1.68 3.73
Second Quarter.................................... 1.45 2.53
Third Quarter..................................... 0.79 1.57
Fourth Quarter.................................... 0.78 2.44
2005
First Quarter..................................... 1.50 2.62
Second Quarter.................................... 1.35 3.88
Third Quarter..................................... 2.76 4.12
Fourth Quarter.................................... 1.02 3.15
2006
First Quarter..................................... 1.06 1.44
Second Quarter.................................... 1.25 2.11
Third Quarter..................................... 1.29 2.00
On December 15, 2006, the last reported sale price of our common stock
as reported by NASDAQ was $1.35. As of December 15, 2006, we had 25 shareholders
of record.
SELECTED FINANCIAL DATA
The following selected financial data is qualified in its entirety by,
and should be read in conjunction with, the other information and financial
statements, including the notes thereto, appearing in Tarrant's annual report on
Form 10-K for the year ended December 31, 2005, a copy of which is attached as
Exhibit E to this proxy statement.
67
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2001 2002 2003 2004 2005
--------- --------- --------- --------- ---------
(in thousands, except per share data)
INCOME STATEMENT DATA:
Net sales ............................ $ 330,253 $ 347,391 $ 320,423 $ 155,453 $ 214,648
Cost of sales ........................ 277,525 302,082 288,445 134,492 169,767
--------- --------- --------- --------- ---------
Gross profit ...................... 52,728 45,309 31,978 20,961 44,881
Selling and distribution
expenses .......................... 14,345 10,757 11,329 9,291 10,726
General and administrative
expenses .......................... 33,136 30,082 31,767 32,084 26,865
Royalty expense ...................... 500 656 242 605 3,665
Amortization of intangibles (2) ...... 3,317 -- -- -- --
Impairment charges (3) ............... -- -- 22,277 77,982 --
Cumulative translation loss (4) ...... -- -- -- 22,786 --
--------- --------- --------- --------- ---------
Income (loss) from operations ........ $ 1,430 3,814 (33,637) (121,787) 3,625
Interest expense ..................... (7,808) (5,444) (5,603) (2,857) (4,625)
Interest income ...................... 3,256 4,748 425 377 2,081
Minority interest .................... (412) (4,581) 3,461 15,331 (75)
Interest in income of equity
method investee ................... -- -- -- 770 560
Other income (1) ..................... 1,853 2,648 4,784 6,366 354
Other expense (1) .................... (356) (1,348) (1,183) (529) --
--------- --------- --------- --------- ---------
Income (loss) before provision
for income taxes and cumulative
effect of accounting change ....... (2,037) (163) (31,753) (102,329) 1,920
Provision for income taxes ........... (852) (1,051) (4,132) (2,348) (927)
--------- --------- --------- --------- ---------
Income (loss) before cumulative
effect of accounting change ....... $ (2,889) $ (1,214) $ (35,885) $(104,677) $ 993
Cumulative effect of accounting
change (2) ........................ -- (4,871) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) .................... $ (2,889) $ (6,085) $ (35,885) $(104,677) $ 993
Dividend to preferred stockholders ... -- -- (7,494) -- --
--------- --------- --------- --------- ---------
Net income (loss) available to
common stockholders (as restated) . $ (2,889) $ (6,085) $ (43,379) $(104,677) $ 993
========= ========= ========= ========= =========
Net income (loss) per share - Basic:
Before cumulative effect of
accounting change (as
restated) ..................... $ (0.18) $ (0.08) $ (2.38) $ (3.64) $ 0.03
Cumulative effect of
accounting change ............... -- (0.30) -- -- --
After cumulative effect of
accounting change (as
restated) ..................... $ (0.18) $ (0.38) $ (2.38) $ (3.64) $ 0.03
Net income (loss) per share - Diluted:
Before cumulative effect of
accounting change (as
restated) ..................... $ (0.18) $ (0.08) $ (2.38) $ (3.64) $ 0.03
Cumulative effect of
accounting change ............... -- (0.30) -- -- --
After cumulative effect of
accounting change (as
restated) ..................... $ (0.18) $ (0.38) $ (2.38) $ (3.64) $ 0.03
Weighted average shares
outstanding (000)
Basic ............................. 15,825 15,834 18,215 28,733 29,729
Diluted ........................... 15,825 15,834 18,215 28,733 29,734
68
AS OF DECEMBER 31,
-------------------------------------------------------------
2001 2002 2003 2004 2005
--------- --------- --------- --------- ---------
(in thousands)
BALANCE SHEET DATA:
Working capital ...................... $ 25,109 $ 11,731 $ (18,018) $ (12,295) $ (11,004)
Total assets ......................... 288,467 316,444 253,105 131,811 151,242
Bank borrowings, convertible
debenture and long-term
obligations ....................... 111,336 106,937 68,587 48,455 56,148
Shareholders' equity ................. 125,164 121,161 107,709 30,678 35,360
----------
(1) Major components of other income (expense) (as presented above) include
rental and lease income, and foreign currency gains or losses. See
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(2) Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets." According to
this statement, goodwill and other intangible assets with indefinite
lives are no longer subject to amortization, but rather an annual
assessment of impairment applied on a fair-value-based test. We adopted
SFAS No. 142 in fiscal 2002 and performed our first annual assessment
of impairment, which resulted in an impairment loss of $4.9 million.
(3) The expense in 2004 was the impairment of long-lived assets of our
Mexico operations due to our decision to sell the manufacturing
operations in Mexico. The expense in 2003 was the impairment of our
goodwill and intangible assets and write-off of prepaid expenses due to
our decision to cease directly operating a substantial majority of our
equipment and fixed assets in Mexico commencing in the third quarter of
2003. See Note 5 and Note 7 of the "Notes to Consolidated Financial
Statements."
(4) Cumulative translation loss attributable to liquidated Mexico
operations in 2004 was due to our decision to cease our Mexico
operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
See Tarrant's annual report on Form 10-K for the year ended December
31, 2005, which was filed with the SEC on April 3, 2006, a copy of which are
attached hereto as Exhibit E. See also Tarrant's quarterly report on Form 10-Q
for the quarterly period ended September 30, 2006, a copy of which is attached
hereto as Exhibit F.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Tarrant's financial statements for the nine months ended September 30,
2006 are incorporated by reference from its quarterly report on Form 10-Q for
the nine months then ended, which is attached as Exhibit F to this proxy
statement. Tarrant's financial statements for the years ended December 31, 2005,
2004 and 2003 are incorporated by reference from its annual report on Form 10-K
for the year ended December 31, 2005, which is attached as Exhibit E to this
proxy statement.
The following table sets forth, for the periods indicated, certain
items in our consolidated statements of income in millions of dollars and as a
percentage of net sales:
69
QUARTER ENDED
SEP. 31 JUN. 30 MAR. 31
2006 2006 2006
------- ------- -------
Net Sales ........................... $ 54.6 $ 59.1 $ 61.3
Gross profit ........................ 11.8 12.7 12.5
Operating income (loss) ............ (24.7) 2.6 1.6
Net income (loss) ................... (25.3) 0.6 0.8
QUARTER ENDED
SEP. 31 JUN. 30 MAR. 31
2006 2006 2006
----- ----- -----
Net Sales ......................... 100.0% 100.0% 100.0%
Gross profit ...................... 21.6 21.4 20.4
Operating income (loss) ........... (45.3) 4.4 2.7
Net income (loss) ................. (46.4) 1.0 1.4
70
BUSINESS OF THE BUFFALO GROUP
OVERVIEW
Buffalo designs, imports and markets high fashion denim and other
apparel products and accessories under the principal brand name Buffalo. These
products include jeans, jackets, dresses, belts and T-shirts. Buffalo sells
apparel products and accessories through a chain of 45 retail stores in Canada.
Buffalo's products are also sold in upscale department stores and boutiques
across North America, including Bloomingdale's, Nordstrom's, Fred Segal's and
Macy's East and West. Buffalo also maintains approximately 200 "shop in shops,"
which are Buffalo environments, within retail stores. Buffalo sells products to
its wholesale customers directly as well as licensees. Buffalo also sells its
products in overseas markets such as the United Kingdom and South East Asia, as
well as Mexico, other countries in Central and South America, through wholesale
accounts and licensees.
Buffalo's goal is to build a broad and diversified portfolio of brands
selling high fashion denim and other apparel products and accessories across a
range of retail price points through wholesale and retail distribution channels,
to expand the U.S. distribution of the BUFFALO brand through the opening of
retail stores and to expand its licensing portfolio.
COMPETITIVE STRENGTHS
Buffalo's management believes its portfolio of casual brands,
international distribution relationships with retailers and its retail chain
positions Buffalo for sustained growth and profitability. Buffalo intends to
capitalize on the following competitive strengths to achieve these goals:
STRONG DOMESTIC AND INTERNATIONAL PRESENCE. Buffalo sells its products
to retailers and to wholesalers in North America. Buffalo also sells its
products through licensees in other countries abroad. Buffalo's key retailers in
the United States include department stores such as Bloomingdale's, Nordstrom's,
Lord & Taylor and Macy's East and West, and upscale boutiques such as Fred
Segal's. Buffalo's products have been distributed across North America in over
3,000 department stores and fashion boutiques, including Buffalo's retail
stores. Internationally, Buffalo lines are offered in five countries with
additional countries being added shortly.
HIGH QUALITY DESIGN AND MANUFACTURING. Buffalo's success has been
largely due to the design of its collection and the high quality of its product.
Buffalo has design offices in both Canada and the United States. Also, Buffalo
has teams of buyers constantly reviewing the international markets for new
design influences. Buffalo prides itself on its ability to quickly turn in the
moment trends into product and bring to market.
RESPONSIVENESS TO EMERGING TRENDS. Buffalo has established a strong
international network of raw material sourcing and manufacturing. Establishing
relationships with agents around the world has enabled Buffalo to deal with
quality manufacturers at competitive prices.
EXPERIENCED MANAGEMENT TEAM. Mr. Gabriel Bitton and the other Bitton
brothers each have over 25 years of experience in the apparel industry. The
Buffalo Group of companies is a leading North American company founded and
controlled by the Bitton family. The Bitton family is comprised of five
brothers, each taking an active role in the business. The management team
develops the strategic focus of The Buffalo Group and makes top-level decisions
71
affecting its future orientation. During the past several years, management has
developed and implemented successful strategies for growth through new market
penetration, licensing and diversification.
The management team consists of:
Gilbert Bitton (age: 60) was one of the founders of The Buffalo Group
in 1985. Mr. Bitton has served as president of The Buffalo Group since its
inception. Mr. Gilbert Bitton has also served as the director of buying and
production since the inception of The Buffalo Group. Before founding The Buffalo
Group, Mr. Bitton was a production manager of a leading Canadian apparel
company.
David Bitton (age: 52) David Bitton was one of the founders of The
Buffalo Group in 1985. Mr. Bitton has been the director of marketing and ladies
denim development since the inception of The Buffalo Group. Mr. Bitton was also
a driving force behind the expansion into the U.S. market in 1993. Mr. Bitton
has been serving as the chief executive officer of the retail division since
2005.
Gabriel Bitton (age: 49) was one of the founders of The Buffalo Group
in 1985. Mr. Bitton has served as director of business development and sales
from inception of The Buffalo Group in 1985. He was also the driving force
behind the diversification into retail in 1996. Mr. Bitton has also served as
the director of licensing since the acquisition of the licenses in 2003.
Michel Bitton (age: 56) was one of the founders of The Buffalo Group in
1985. Mr. Bitton has served as director of ladies sportswear development since
its inception. Mr. Bitton has extensive in production, manufacturing and product
quality control.
Charles Bitton (age: 46) has been the director of mens product
development since the inception of The Buffalo Group. Mr. Bitton was also a
driving force behind the expansion into the U.S. market.
DIVERSIFICATION OF PRODUCT LINES. Buffalo develops extensive lines of
denim and other apparel products and accessories for women and men across a
range of retail price points. Buffalo's products range in price at retail from
$88 to $128.
RETAIL STRATEGY. Retail distribution affords Buffalo several key
advantages over its competitors. Buffalo competes against such brands as Miss
Sixty, Diesel, Lucky and Guess. By selling directly to consumers at retail
prices, Buffalo achieves higher gross margins and profitability than the margins
and profitability it would generate solely through wholesale distribution. With
the acquisition of Buffalo, Tarrant is transforming from a wholesale model to a
combination retail and wholesale model. The acquisition will give Tarrant an
immediate retail presence in Canada, eliminating the costly and time consuming
process of developing an equivalent retail operation over a number of years. The
retail stores will also provide a platform for Tarrant and the combined company
to expand the retail operations to the United States and other jurisdictions,
thereby increasing consumer exposure to, and awareness of, the combined
company's brands, and reducing the risk associated with cyclical or seasonal
downturns in sales of any one or more brands.
GROWTH STRATEGY
Buffalo's goal is to build a broad and diversified portfolio of brands
and become a leading seller of casual apparel products and accessories across a
range of retail price points through our wholesale and retail distribution
channels by focusing on the following key elements of our growth strategy:
72
EXPAND RETAIL BUSINESS. Buffalo plans to expand its retail business. In
order to take full advantage of its retail management team and infrastructure,
and fully leverage its ability to increase gross margins through sale of its own
products in its retail stores, Buffalo plans to significantly grow its retail
business by adding new stores in attractive markets and new locations in
existing markets.
EXPAND WHOLESALE DISTRIBUTION. Buffalo currently sells its products
directly to major department stores and boutiques in Canada, United States,
Mexico and other Latin American countries, and through distribution arrangements
in a number of countries abroad. Buffalo plans to expand its wholesale
distribution in several ways. In Canada and the United States, it plans to add
retailers of high-end denim products that do not already sell its products.
Buffalo also plans to expand the floor space and diversify the product lines of
retailers who currently sell its products. Internationally, Buffalo will
negotiate distribution agreements for territories where Buffalo does not already
have a strong presence. Also, Buffalo plans to rollout over 150 shop in shops
concepts with its present retailers. This will enhance the presentation of the
brand and will emphasize the Buffalo image and concept. This will further
strengthen the image of the BUFFALO brand on an international scale.
CONTINUE TO DIVERSIFY PRODUCT LINES. Buffalo has diversified its
product lines, both by increasing the price point range for denim products and
adding complementary non-denim products. Buffalo will continue to sensibly
diversify its product lines, particularly with new denim products. Buffalo will
also continue to evaluate licensing arrangements with quality manufacturers for
ancillary products that it wishes to add.
Buffalo currently markets the majority of its products under the
BUFFALO brand. Buffalo intends to continue to use its extensive experience in
the apparel industry to identify and evaluate strategic opportunities to acquire
other businesses and to develop, license or acquire new brands. Buffalo seeks to
acquire or license additional businesses and brands that will contribute to its
growth through additional sales revenue, name and brand recognition, and
synergies with its existing brands.
PRODUCTS AND BRANDS
Buffalo offers denim and non-denim apparel products under the principal
brand name BUFFALO. Buffalo currently sells apparel products in men's and
women's styles, and in children's styles developed by a licensee. Buffalo's
product line has grown to encompass a diverse range of products, including
belts, footwear, lingerie and sleepwear, watches and home furnishings through
licensing arrangements. Buffalo products are made from high quality fabrics
milled in Italy and Spain and are processed with cutting-edge treatments and
finishes. Buffalo's concepts and designs, including BUFFALO'S distinct western
flair, embellishments, unique finishes, hand stitching and other attention to
detail and quality give its products a competitive advantage in the markets and
sectors in which Buffalo competes.
Buffalo's jeans are available in multiple combinations of washes,
fabrics and finishes. In addition to the introduction of new styles every
season, Buffalo typically introduces new versions of its major styles on a
regular basis in different colors, washes and finishes. Although its denim
products have accounted for the substantial majority of Buffalo's total sales,
Buffalo anticipates sales of its non-denim products will continue to increase as
a percentage of its overall sales in future periods.
73
RETAIL OPERATIONS
Buffalo operates 45 stores in Canada. New stores are under negotiation
and scheduled to open before the end of 2007.
The retail stores possess the unique ability to market emerging and
establishing styles with consumer impulse in mind in both high traffic and local
neighborhood environments.
DESIGN AND DEVELOPMENT
The Buffalo brand has a design team striving to develop a distinct look
and feel to the products based on an overall design philosophy. Buffalo is known
for being a leader in denim fabrications, washes, fits and a complete lifestyle
brand made & fashion tops, sportswear & outer wear for men and women. Buffalo's
design team has extensive know-how and apparel experience. Through constant
review of the European and U.S. shows and year round market visits, Buffalo
design team keeps abreast of any tendencies and `in the moment' trends.
Benefiting from Buffalo's developed and long lasting relationship with agents
and factories around the world, the products can be developed in a relatively
short period of time and introduced immediately into the corporate retail
stores. This allows the design team the ability to get quick feedback on
products before the style is launched in all Buffalo areas of distribution.
SOURCING
Buffalo purchases its fabric, thread and other raw materials from
various industry suppliers. The fabric, thread and other raw materials used by
Buffalo are available from a large number of suppliers worldwide. Buffalo has
the ability to replace its suppliers of raw materials as needed without
significantly affecting its business or operations.
Buffalo presently relies on the services of several buying agencies for
its manufacturing needs. It does not rely on any one manufacturer and Buffalo
management believes additional manufacturing capacity is available to meet our
current and planned needs. Buffalo maintains rigorous quality control systems
for both raw and finished goods. Buffalo's management believes it can realize
significant cost savings in product manufacturing because of its strong
relationships with a diverse group of international buying agents established by
Buffalo's management team through their experience in the apparel industry.
MARKETING, DISTRIBUTION AND SALES
Buffalo markets, distributes and sells its products in Canada, the
United States and internationally in a number of other countries and territories
such as the United Kingdom, Mexico, other Latin American countries and
Australia.
Buffalo distributes its products in North America through department
stores, retail stores and fashion boutiques. Buffalo's products are sold in
Canada in department stores and boutiques such as The Bay and chain stores as
well as through Buffalo's retail stores in 45 locations throughout Canada.
Buffalo's products are sold in the United States in department stores and
boutiques. Internationally, Buffalo products are also distributed through
licensing and distribution arrangements in countries such as the United Kingdom,
Mexico, other Latin American countries and Australia.
Buffalo markets and distributes its products by participating in
industry trade shows, as well as through its own retail stores and show rooms.
Buffalo currently has no exclusive or long term distribution agreements with any
74
party covering any territory, and does not depend on any single distributor to
distribute its products.
Buffalo has and will continue to expand its distribution worldwide
through licensing agreements.
Buffalo's management feels that this method of expansion is two-fold.
First, it allows penetration into new territories on the international scale
through the issuance of licensing agreements. Secondly, it allows for the
diversification into complementary product lines by licensing with companies
specialized in the manufacturing and distribution of these complementary product
lines.
COMPETITION
Apparel production in Asia and the Far East, and other regions in which
labor is relatively inexpensive, has led to increased imports and heightened
competition in the domestic marketplace. As a result of increased cost
pressures, the apparel industry has experienced significant restructuring and
consolidation, and achieving economies of scale through vertical integration is
necessary to remain competitive.
Buffalo's current competitors are companies that sell denim and apparel
brands. Many of these competitors have greater financial resources, operating
capacity, name recognition and market penetration than Buffalo. Sales of
Buffalo's products are affected by style, price, quality, brand reputation and
general fashion trends.
TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
Buffalo is the holder of trademarks for the BUFFALO brand. It also
licenses its brands for distribution of products in several countries such as
Mexico and other Latin American countries. It diversifies its product lines by
adding complementary non-denim products such as linens and watches in Canada and
USA. The duration of a license is usually three years with the possibility of
renewal.
Buffalo has made and will continue to make efforts to minimize domestic
and international counterfeiting of our brands and design, and infringement of
our other intellectual property rights, including through litigation if
necessary. Buffalo has a team responsible for its portfolio brands that oversee
international trademarks watch.
The trademarks owned by Buffalo are registered for the period provided
by the law applicable in the countries where the registrations are completed.
The duration of a registration is usually ten years. At expiration of the
duration, the trademarks can be renewed. Buffalo currently owns approximately 70
registrations in relation with the brand Buffalo diversified into 30 different
countries including Australia, Barbados, Bolivia, Canada, Costa Rica, Denmark,
Dominican Republic, Ecuador, Japan, Lebanon, Mexico, Netherlands Antilles,
Panama, Philippines, Puerto Rico, Russia, Saudi Arabia, Singapore, Taiwan, USA
and Venezuela.
GOVERNMENT REGULATION AND SUPERVISION
Buffalo benefits from certain international treaties and regulations,
such as the North American Free Trade Agreement (NAFTA), which allows for the
duty and quota free entry into the Canada and the United States of certain
qualifying merchandise. International trade agreements and embargoes by entities
such as the World Trade Organization also can affect Buffalo's business,
although their impact has historically been favorable.
75
EMPLOYEES
As of December, 2006, Buffalo had approximately 250 employees in its
wholesale group and over 600 employees in the retail group including part
timers. Buffalo's employees are not unionized except for part of the employees
of the Canadian warehouse which represent less than 30 employees. Several
employees are subject to existing employment agreements with Buffalo.
As a condition to the consummation of the acquisition of Buffalo,
Tarrant will enter into employments agreements with Mr. Gabriel Bitton and each
of the other four Bitton brothers, as described elsewhere in this proxy
statement.
FACILITIES
PRINCIPAL EXECUTIVE OFFICES
Buffalo's principal executive offices are located at 400 Sauve West,
Montreal, Quebec, H3L 1Z8 CANADA. Its telephone number is (514) 388-3551.
DESCRIPTION OF PROPERTY
The Buffalo Group occupies approximately 160,000 square feet of office
and warehouse space in Canada. It also has approximately 72,000 square feet of
office and warehouse space in the U.S. The sales offices are located in major
cities across North America with the U.S. sales offices located in New York.
LEGAL PROCEEDINGS
Except for the matters described below, Buffalo is not involved in any
material legal proceedings. A former employee of 3163946 Canada Inc., one of the
operating subsidiaries of The Buffalo Group, has initiated a lawsuit against
this company claiming involuntary resignation. The case was filed with the
Superior Court of Quebec and the plaintiff seeks damages of approximately
$400,000. It is not possible at this time to determine the outcome of this
matter and accordingly, no provision has been made in the accounts for this
claim. Another former employee of The Buffalo Group has made a claim for
reinstatement and compensation for salary loses pending reinstatement, as well
as damages due to psychological distress. It is difficult to determine the
outcome of this case.
76
BUFFALO'S SELECTED FINANCIAL DATA
The following selected financial data is qualified in its entirety by,
and should be read in conjunction with, the other information and financial
statements, including the notes thereto, attached to this proxy statement as
Exhibit D.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
2005 2004 2003 2002 2001
INCOME STATEMENT DATA: $USD $USD $USD $USD $USD
------------ ------------ ------------ ------------ ------------
Net sales .......................... $104,071,846 $ 87,788,920 $ 75,248,392 $ 68,554,476 $ 60,282,863
Cost of sales ...................... 61,155,418 50,222,074 44,746,624 45,718,525 40,393,375
------------ ------------ ------------ ------------ ------------
Gross profit ....................... $ 42,916,428 $ 37,566,846 $ 30,501,768 $ 22,835,951 $ 19,889,488
Store expenses ..................... 12,256,741 11,471,058 9,366,474 7,445,221 7,506,000
Selling and distribution expenses .. 9,761,281 8,136,118 8,490,919 8,086,511 6,514,738
General and administrative expenses 8,523,525 7,854,156 6,506,071 5,400,037 3,794,183
Amortization expense ............... 4,291,084 3,713,405 1,638,130 788,849 696,812
------------ ------------ ------------ ------------ ------------
Income from operations ............. $ 8,083,797 $ 6,392,109 $ 4,500,174 $ 1,115,333 $ 1,377,755
Interest expense ................... 3,794,899 3,323,438 1,788,015 885,443 1,083,524
Interest income .................... -- -- -- 17,097 34,854
------------ ------------ ------------ ------------ ------------
Income before provision for
income taxes ................... $ 4,288,898 $ 3,068,671 $ 2,712,159 $ 246,987 $ 329,085
Provision (benefit) for income taxes 1,855,000 1,551,000 (51,000) 328,509 438,901
------------ ------------ ------------ ------------ ------------
Income (loss) ...................... $ 2,433,898 $ 1,517,671 $ 2,763,159 $ (81,522) $ (109,816)
============ ============ ============ ============ ============
AS OF DECEMBER 31,
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Working capital .................... $ 10,202,577 $ 5,128,814 $ 3,086,823 $ 3,781,579 $ 2,142,175
Total assets ....................... 67,706,180 64,840,793 57,346,023 33,404,891 27,748,629
Bank borrowings .................... 10,519,592 12,396,905 9,428,636 12,440,852 9,283,430
Shareholders' equity ............... 7,398,261 (123,778) (605,421) (1,059,313) (977,790)
77
BUFFALO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH BUFFALO'S
FINANCIAL STATEMENTS AND RELATED NOTES ATTACHED AS EXHIBIT D TO THIS PROXY
STATEMENT, AS WELL AS THE SECTION ENTITLED "RISK FACTORS," THAT APPEAR ELSEWHERE
IN THIS PROXY STATEMENT.
OVERVIEW
The Buffalo Group designs, develops, markets and distributes high-end
fashion denim and other apparel products under the principal brand name BUFFALO.
Buffalo's products currently include belts, shoes, lingerie and sleepwear, kids
wear, watches and home decor under license. In addition, products in development
include sunglasses, swimwear and fragrances. Buffalo operates 45 retail
locations in Canada. It also distributes its clothing through upscale retailers
such as Bloomingdale's, Nordstrom's, Fred Segal's and Macy's East and West.
Buffalo currently has approximately 200 shop in shops. These are Buffalo shops
in retail stores. Due to its success and rapid growth in North America, Buffalo
has expanded overseas through its global licensing agreements. Presently,
Buffalo has strong brand presence in the UK, Latin America, Mexico, Southeast
Asia and the Middle East, with growing presence in Italy, Greece, Ireland and
other locations across Europe.
Buffalo operates in the high-end fashion denim and apparel industry.
Its competitors are companies that market such brands as Miss Sixty, Diesel,
Lucky and Guess.
The Buffalo Group consists of a large number of related companies
ultimately owned, controlled and managed by the Bitton brothers and their
affiliates. By virtue of Tarrant's acquisition of all the outstanding capital
stock of 3681441 Canada Inc., Buffalo Inc. and 3163946 Canada Inc., the three
Canadian operating subsidiaries of The Buffalo Group, all outstanding capital
stock of Buffalo Corporation, a U.S. operating subsidiary through which The
Buffalo Group operates its U.S. wholesale business, and the assets of The
Buffalo Trust, Tarrant is effectively acquiring the entire business and
operations of The Buffalo Group. Tarrant will operate the business and
operations it acquires in this transaction as a separate division through its
wholly-owned Canadian subsidiary, TAG Canada, and one or more of its other
subsidiaries.
The principal components of Buffalo's operations include its Canadian
wholesale operations, its wholesale operations in the United States and its
Canadian retail operations. Buffalo Inc. represents Buffalo's Canadian wholesale
operations. The wholesale operations consist of Buffalo, private labels for men
and women and Request apparel. Buffalo Inc.'s main customers include Zellers
Inc., Winners Apparel Ltd., Costco Wholesale Canada, Sears Merchandising, and
Wal-Mart Canada. Buffalo distributes in exclusivity for Zellers Inc. the
collection Request, for Costco Wholesale Canada the collection Gasoline and for
Athletes World the collection Vibe. These brands are owned by Buffalo. Buffalo
also produces private label for Wal-Mart.
Buffalo Corporation represents Buffalo's U.S. wholesale operations. The
wholesale operations consist of Buffalo, private labels for men and women and
American Exchange apparel. The main U.S. wholesale customers include Sears
Roebuck, Federated Stores, Lord & Taylor, Dillard's, Bloomingdales and
Nordstrom.
3163946 Canada Inc represents Buffalo's Canadian retail operations. The
retail operations consist of Buffalo stores in Quebec, Ontario, British
78
Columbia, Alberta and Manitoba. Buffalo's retail operations sell a different
line of clothing with the exception of denim in order to differentiate from
their wholesale operations.
Buffalo's customer mix consists of both wholesale customers and retail
customers. For 2005, Canada wholesale accounted for 46% of wholesale sales and
U.S. wholesale accounted for 54% of wholesale sales. Buffalo's retail operation
in Canada revenue for 2005 accounted for 100% of retail sales.
CORPORATE BACKGROUND
Buffalo was founded by the Bitton brothers in 1985. The business
originally began as a wholesale and distribution of BUFFALO branded products in
Canada. The Bitton brothers obtained the rights to the brand through licenses
giving them the exclusive rights to distribute the BUFFALO brand in Canada. Over
the years, the business expanded through the addition of product categories to
what was predominately a denim line. Also, the company has acquired the rights
to other brands and currently markets and sells products under other brand
names.
In 1993, The Buffalo Group expanded into the U.S. market by
establishing a showroom in New York and establishing a network of independent
sales agents across the U.S. to distribute the BUFFALO brand.
In 2000, The Buffalo Group began developing a private label business
for major department stores in Canada.
In 1996, The Buffalo Group opened its first retail stores which grew to
a chain of 45 stores today.
In 2003, The Buffalo Group acquired the international rights to the
BUFFALO and REQUEST brands. Effective January 1, 2004, The Buffalo Group began
receiving licensing royalties from third party domestic and international
licenses as well as from their related companies for the brands.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. On an ongoing basis, Buffalo evaluates estimates, including those
related to returns, discounts, bad debts, inventories, intangible assets, income
taxes, contingencies and litigations. Buffalo bases its estimates on historical
experience and on various assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
REVENUE
Revenue is recognized when merchandise has been shipped against a
customer's written purchase order, the risk of ownership has passed, selling
price has been fixed and determined and collection is reasonably assured either
through payment received, or fulfillment of all the terms and conditions of the
79
particular purchase order. Revenue is recorded net of estimated returns, charge
backs and markdowns based on management's estimates and historical experience.
ACCOUNTS RECEIVABLES
Trade accounts receivable are recorded at invoiced amounts, less
amounts accrued for returns, discounts and allowances. An allowance is provided
for specific customer accounts where collection is doubtful and for inherent
risk in our ability to ultimate collect. There is no off-balance sheet credit
exposure related to customer receivables.
INVENTORIES
Inventory is stated at the lower of cost (first-in, first-out method)
and net realizable value. The valuation of retail inventory in the stores is
determined by the retail inventory method which approximates the lower of cost
(first-in, first-out method) and net realizable value. Under the retail
inventory method, inventory is converted to a cost basis by applying an average
cost to selling ratio. Inventory includes items that have been marked down to
management's best estimate of their net realizable value.
INCOME TAXES:
The Buffalo Group provides for income taxes using the liability method
of tax allocation. Under this method, future income tax assets and liabilities
are determined based on deductible or taxable temporary differences between
financial statements values and tax values of assets and liabilities using
substantively enacted income tax rates expected to be in effect for the year in
which the differences are expected to reverse.
The Buffalo Group established a valuation allowance against future
income tax assets if, based upon available information, it is more likely than
not that some or all of the future income tax assets will not be realized.
The net earnings of the Buffalo Trust, if any, for the period
constitute income of the trust's beneficiaries and are subject to income tax in
their hands and accordingly, no provision for income taxes on the income of the
Trust has been made.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items in the consolidated statements of income of The Buffalo Group as a
percentage of net sales:
SEP-06 SEP-05 2005 2004 2003
----- ----- ----- ----- -----
Net Sales ..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales ................................. 51.8% 53.7% 58.8% 57.2% 59.5%
----- ----- ----- ----- -----
Gross Profit .................................. 48.2% 46.3% 41.2% 42.8% 40.5%
Store expenses ................................ 12.0% 10.8% 11.8% 13.1% 12.4%
Selling and distribution expenses ............. 12.8% 10.0% 9.4% 9.3% 11.3%
General and administration expenses ........... 9.7% 6.7% 8.2% 8.9% 8.6%
Amortization expense .......................... 4.6% 3.8% 4.1% 4.2% 2.2%
----- ----- ----- ----- -----
Income loss from operations ................... 9.1% 15.0% 7.7% 7.3% 6.0%
Interest expense .............................. 4.1% 3.6% 3.6% 3.8% 2.4%
Other income (expense) ........................ 0.0% 0.0% 0.0% 0.0% 0.0%
----- ----- ----- ----- -----
Income (loss) before provision for income taxes 5.0% 11.4% 4.1% 3.5% 3.6%
Provision for income taxes .................... 1.8% 4.1% 1.8% 1.8% -0.1%
----- ----- ----- ----- -----
Net Income (loss) ............................. 3.2% 7.3% 2.3% 1.7% 3.7%
===== ===== ===== ===== =====
80
COMPARISON OF NINE MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND 2005
Net sales increased by $678,000, or 0.9%, to $74.8 million in the first
nine months of 2006 as compared with net sales of $74.1 million in the first
nine months of 2005. The increase in net sales the first nine months was
primarily due to increased sales of Buffalo brand as offset by a decrease in
sales of private label.
Gross profit consists of net sales less product costs, duty, quota,
freight in and brokerage charges. Gross profit increased by $1.7 million, or
4.9%, to $36.0 million, or 48.2% of net sales in the first nine months of 2006
as compared with $34.3 million or 46.3% of net sales in the first nine months of
2005. The increase in gross profit was primarily due to the higher margins
generated by the Buffalo brand and an increase in the relative value of the
Canadian dollar to the value of the U.S. dollar.
Store expenses consist of store labor costs, occupancy costs and
general direct store operating costs. Store expenses increased by $1.0 million,
or 12.8%, to $9.0 million in the first nine months of 2006 as compared to $8.0
million in the first nine months of 2005. The increase in store expenses was due
to an increase in the store occupancy costs, in store labor costs and in other
various direct store expenses. As a percentage of net sales, these expenses
increased from 10.8% in the first nine months of 2005 to 12.0% in the first nine
months of 2006.
Selling and distribution expenses consist of sales commission, showroom
occupancy, advertising costs, and distribution costs. Selling and distribution
expenses increased by $2.1 million, or 29.0%, to $9.5 million in the first nine
months of 2006 as compared to $7.4 million in the first nine months of 2005. The
increase in selling and distribution expenses was primarily due to the increase
in advertising, commission expense and other selling expenses based on increase
in sales. As a percentage of net sales, these expenses increased from 10.0% in
the first nine months of 2005 to 12.8% in the first nine months of 2006.
General and administrative expenses increased by approximately $2.3
million, or 45.9% to $7.2 million in the first nine months of 2006, as compared
with $5.0 million in the first nine months of 2005. The increase in these
expenses was due to increase in overhead because of the expansion on the retail
division. As a percentage of net sales, these expenses increased from 6.7% in
the first nine months of 2005 to 9.7% in the first nine months of 2006.
Amortization expense consists of amortization of store leasehold
improvements, office fixed assets and amortization of an intangible asset.
Amortization expense increased by $641,000, or 22.7%, to 3.5 million in the
first nine months of 2006, as compared with $2.8 million in the first nine
months of 2005. As a percentage of net sales, these expenses increased from 3.8%
in the first nine months of 2005 to 4.6% in the first nine months of 2006.
Interest expense increased by approximately $392,000, or 14.8%, to $3.0
million in the first nine months of 2006, as compared with $2.6 million in the
first nine months of 2005. As a percentage of net sales, these expenses
increased from 3.6% in the first nine months of 2005 to 4.1% in the first nine
months of 2006.
81
Provision for income taxes was $1.3 million in the first nine months of
2006, as compared with provision for income taxes of $3.0 million in the first
nine months of 2005. As a percentage of net sales, these expenses decreased from
4.1% in the first nine months of 2005 to 1.8% in the first nine months of 2006.
FISCAL YEAR ENDED DECEMBER 31, 2005 COMPARED WITH DECEMBER 31, 2004
Net sales increased by $16.3 million, or 18.5%, to $104.1 million in
2005 as compared with net sales of $87.8 million in 2004. The increase in net
sales was primarily due to increased sales of a new exclusive brand named
AMERICAN EXCHANGE, which accounted for $13.4 million of net sales in 2005. Net
sales also increased by approximately $6.4 million due to an increase in the
relative value of the Canadian dollar to the value of the U.S. dollar. These
increases were partially offset by a $3.9 million reduction in net sales of
private label brands sold in Canada.
Gross profit consists of net sales less product costs, duty, quota,
freight in and brokerage charges. Gross profit increased by $5.3 million, or
14.2%, to $42.9 million, or 41.2% of net sales in 2005 as compared with $37.6
million or 42.8% of net sales in 2004. The increase in gross profit was
primarily due to the higher margins generated by the sales of American Exchange
line of products.
Store expenses consist of store labor costs, occupancy costs and
general direct store operating costs. Store expenses increased by $786,000, or
6.8%, to $12.3 million in 2005 as compared to $11.5 million in 2004. The
increase in store expenses was due to an increase in the relative value of the
Canadian dollar to the value of the U.S. dollar. As a percentage of net sales,
these expenses decreased from 13.1% in 2004 to 11.8% in 2005.
Selling and distribution expenses consist of sales commission, showroom
occupancy, advertising costs, and distribution costs. Selling and distribution
expenses increased by $1.6 million, or 20.0%, to $9.8 million in 2005 as
compared to $8.1 million in 2004. The increase in selling and distribution
expenses was primarily due to the increase in advertising, commission expense
and other selling expenses based on increase in sales. As a percentage of net
sales, these expenses increased from 9.3% in 2004 to 9.4% in 2005.
General and administrative expenses increased by approximately
$669,000, or 8.5% to $8.5 million in 2005, as compared with $7.9 million in the
2004. As a percentage of net sales, these expenses decreased from 8.9% in 2004
to 8.2% in 2005.
Amortization expense consists of amortization of store leasehold
improvements, office fixed assets and amortization of an intangible asset.
Amortization expense increased by $578,000, or 15.6%, to 4.3 million in 2005, as
compared with $3.7 million in 2004. The increase in amortization was due to a
change in accounting policy in Canada in the accounting for shop in shops, which
required us to capitalize the expenses associated with building shop in shops in
2005. These costs were previously expensed in 2004. As a percentage of net
sales, these expenses decreased from 4.2% in 2004 to 4.1% in 2005.
Interest expense increased by approximately $471,000, or 14.2%, to $3.8
million in 2005, as compared with $3.3 million in 2004. The increase in interest
expense was primarily due to a $217,000 loss on foreign exchange. As a
percentage of net sales, these expenses decreased from 3.8% in 2004 to 3.6% in
2005.
82
Provision for income taxes was $1.9 million in 2005, as compared with
provision for income taxes of $1.6 million in 2004, representing 1.8% of net
sales in both 2004 and 2005.
FISCAL YEAR ENDED DECEMBER 31, 2004 COMPARED WITH DECEMBER 31, 2003
Net sales increased by $12.5 million, or 16.7% to $87.8 million in 2004
as compared with net sale of $75.2 million in 2003. The increase in net sales
was due to increased sales of BUFFALO and REQUEST products following the
completion of a licensing arrangement that generated approximately $3.3 million
in royalties; an increase in retail sales generated from four additional store
locations in 2004 and an increase in sales in the wholesale division. Net sales
also increased by approximately $5.6 million due to an increase in the relative
value of the Canadian dollar relative to the value of the U.S. dollar.
Gross profit increased by $7.1 million, or 23.2%, to $37.6 million, or
42.8% of net sales in 2004 as compared with $30.5 million, or 40.5% of net sales
in 2003. The increase in gross profit was primarily due to the increase in sales
generated by the completion of the licensing arrangement that generated
approximately $3.3 million in royalties and the increase of sales in both the
retail and wholesale divisions.
Store expenses increased by $2.1 million, or 22.5%, to $11.5 million in
2004 as compared to $9.4 million in 2003. The increase was due to an increase in
store labor costs of approximately $1 million and an increase in store occupancy
costs of approximately $1 million because of the increase in sales and the
addition of four store locations in 2004. As a percentage of net sales, these
expenses increased from 12.4% in 2003 to 13.1% in 2004.
Selling and distribution expenses decreased by $355,000, or 4.2%, to
8.1 million in 2004, as compared with $8.5 million in 2003. As a percentage of
net sales, these expenses decreased from 11.3% in 2003 to 9.3% in 2004.
General and administrative expenses increased by $1.3 million, or
20.7%, to $7.9 million in 2004, as compared with $6.5 million in 2003. The
increase was primarily due to the purchase of the BUFFALO and REQUEST licenses,
additional expenses of $0.5 million for professional fees associated with the
purchase of the licenses. The increase was also due to a provision of $0.7
million associated with the forgiveness of indebtedness owed to an affiliated
third party outside of The Buffalo Group. As a percentage of net sales, these
expenses increased from 8.6% in 2003 to 8.9% in 2004.
Amortization expense increased by $2.1 million, or 126.7%, to 3.7
million in 2004, as compared with $1.6 million in 2003. The increase was
primarily due to the purchase of the BUFFALO and REQUEST licenses, causing an
increase of $1.8 million in amortization of the licenses. As a percentage of net
sales, these expenses increased from 2.2% in 2003 to 4.2% in 2004.
Interest expense increased by $1.5 million, or 85.9%, to $3.3 million
in 2004, as compared with $1.8 million in 2003. The increase was primarily due
to the debt service obligation arising from the completion of a licensing
arrangement and offset by a decrease in the Canadian prime rate from 4.5% in
2003 to 4.25% in 2004 and a decrease in average bank borrowing. As a percentage
of net sales, these expenses increased from 2.4% in 2003 to 3.8% in 2004.
83
Provision for income taxes increased by approximately $1.6 million, to
$1.6 million in 2004, as compared with a benefit for income taxes of $51,000 in
2003. The increase is primarily attributable to an income tax reassessment for
prior years of approximately $1 million in 2004.
LIQUIDITY AND CAPITAL RESOURCES
Similar to Tarrant, the liquidity requirements of The Buffalo Group
arise from the funding of its working capital needs, principally inventory,
finished goods shipments-in-transit, work-in-process and accounts receivable.
Buffalo's primary sources for working capital and capital expenditures are cash
flow from operations, borrowings under its working capital credit facility and
other credit facilities, issuance of long-term debt, sales of equity and debt
securities, and vendor financing. In the near term, The Buffalo Group expects
that its operations and borrowings under bank and other credit facilities will
provide sufficient cash to fund Buffalo's operating expenses, capital
expenditures and interest payments on debt. In the long-term, The Buffalo Group
expects to use internally generated funds and external sources to satisfy debt
and other long-term liabilities.
Liquidity is dependent, in part, on customers paying on time. Any
abnormal chargebacks or returns may affect short-term liquidity. Any changes in
credit terms given to major customers may have an impact on cash flow.
Suppliers' credit is another major source of short-term financing and any
adverse changes in their terms will have negative impact on Buffalo's cash flow.
Other principal factors that could affect the availability of
internally generated funds include:
o deterioration of sales due to weakness in the markets in which
Buffalo products are sold;
o decreases in market prices for products;
o increases in costs of raw materials; and
o changes in our working capital requirements.
Principal factors that could affect Buffalo's ability to obtain cash
from external sources include:
o financial covenants contained in Buffalo's current or future
bank and debt facilities; and
o volatility in the market price of Tarrant's common stock or in
the stock markets in general.
CASH FLOWS:
Cash flows for the years ended December 31, 2003, 2004 and 2005, and
for the nine months ended September 30, 2006, were as follows:
SEP-06 DEC-05 DEC-04 DEC-03
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities $ (7,164,878) $ 3,608,730 $ 1,159,605 $ 6,742,756
Net cash provided by (used in) investing activities $ (3,020,909) $ (1,723,869) $ (2,239,254) $(26,145,859)
Net cash provided by (used in) financing activities $ 11,606,711 $ (1,779,986) $ 2,529,421 $ 21,326,666
84
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006
During the first nine months of 2006, net cash used in operating
activities was $7.2 million. Net cash used by operating activities resulted
primarily from the following: net income of $2.4 million, depreciation and
amortization of $3.3 million, a decrease in accounts receivables and royalties
receivable of $1.3 million; offset by an increase in inventory of $5.4 million,
a decrease of $1.3 million in accounts payable; in income taxes of $2.2 million;
and in interest payable of $4.5 million.
During the first nine months of 2006, net cash used in investing
activities was $3.0 million. Net cash used in investing activities resulted
primarily from the addition of property and equipment of $3.7 million partially
offset by the collection of $685,000 of loans receivable.
During the first nine months of 2006, net cash provided by financing
activities was $11.6 million. Net cash provided by financing activities resulted
primarily from $7.4 million borrowing from our banking facility and $4.2 million
of proceeds from related third parties.
DECEMBER 31, 2005 AND 2004
During the year ended December 31, 2005, net cash provided by operating
activities was $3.6 million, as compared with net cash provided by operating
activities of $1.2 million for the year ended December 31, 2004. Net cash
provided by operating activities resulted primarily from a net income of $2.4
million, depreciation and amortization of $4.1 million and a decrease of
$838,000 in income taxes, $2.7 million in interest payable offset by an increase
of $ 4.7 million in accounts receivables and royalties receivable and a decrease
of $1.6 million of royalties payable.
During the year ended December 31, 2005, net cash used in investing
activities was $1.7 million as compared with net cash used in investing
activities of $2.2 million for the year ended December 31, 2004. Net cash used
in investing activities resulted primarily from the addition of property and
equipment of $2.7million offset by the collection of $938,000 of loans
receivable.
During the year ended December 31, 2005, net cash used in financing
activities was $1.8 million as compared with net cash provided by financing
activities of $2.5 million for the year ended December 31, 2004. Net cash used
in financing activities resulted primarily from a $1.9 million repayment of our
operating line of credit.
CONTRACTUAL OBLIGATIONS
Operating Leases
As at September 30, 2006, there were contractual obligations for leases
amounting to approximately $33,186,000. The leases extend over various periods
up to the year 2017 and is expected that in the normal course of operations most
will be renewed under option clauses or will be renegotiated.
The aggregate minimum rentals, exclusive of other occupancy charges and
additional rental based on a percentage of sales, for the five succeeding years
and the total lease payments for the duration of the leases for The Buffalo
Group's premises area approximately as follows:
85
--------------------------------------------------------------------------------
2007 $ 5,280,000
2008 4,695,000
2009 4,419,000
2010 4,092,000
2011 3,699,000
Thereafter 11,001,000
The rent for store, warehouse showroom, design office and corporate
headquarters' operating leases included in the accompanying combined statements
of earnings are as follows:
Nine Month
Period Ended YEARS ENDED DECEMBER 31,
September 30, ----------------------------------------
2006 2005 2004 2003
(Unaudited)
---------- ---------- ---------- ----------
Basic rent ......... $5,582,525 $7,705,816 $7,025,651 $5,608,530
OFF BALANCE SHEET ARRANGEMENTS
None.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK. The earnings of The Buffalo Group are affected
by fluctuations in the value of the Canadian dollar as compared with foreign
currencies as a result of doing business in foreign jurisdictions. As a result,
The Buffalo Group bears the risk of exchange rate gains and losses that may
result in the future.
INTEREST RATE RISK. The Buffalo Group's obligations under its credit
facility bear interest at floating rates. Accordingly, Buffalo is sensitive to
changes in prevailing interest rates.
Interest expense is sensitive to changes in the general level of U.S.
interest rates. In this regard, changes in U.S. interest rates affect interest
paid on our debt. The Buffalo Group's working capital credit facility is at
variable rates. The Buffalo Group is exposed to interest rate risk in the event
of fluctuations in the bank's prime rate as the interest rate on the line of
credit is dependent on the bank's prime rate.
86
PROPOSAL 2
ISSUANCE OF TARRANT COMMON STOCK AND WARRANTS IN THE ACQUISITION TRANSACTION
ISSUANCE OF TARRANT COMMON STOCK AND WARRANTS
We are seeking shareholder approval to reserve for issuance, and to
issue, up to 13,000,000 shares of our common stock upon exchange of exchangeable
shares to be issued by TAG Canada in the acquisition. The terms on which the
exchangeable shares may be exchanged are described under Proposal 1 of this
proxy statement. In general, the holders of the exchangeable shares may exchange
them for Tarrant common stock at any time (and from time to time) after the
closing of the acquisition transaction.
In addition, we seek shareholder approval for issuance of warrants to
Guggenheim Corporate Funding LLC under our amended credit facility with
Guggenheim. The terms of the amended credit facilities and the warrants issuable
to Guggenheim are described below.
AMENDED GUGGENHEIM FACILITY
In June 2006, we entered into a Credit Agreement with Guggenheim
Corporate Funding LLC, as administrative agent and collateral agent for the
lenders under the agreement, with respect to a $65 million credit facility. This
facility consists of an initial term loan of up to $25 million. An additional
term loan of up to $40 million is available under this facility to finance
acquisitions acceptable to Guggenheim. We borrowed approximately $15.5 million
at the initial funding to repay certain existing indebtedness and fund general
operating and working capital needs. We also amended the terms of this credit
facility to provide that we may borrow an additional $7 million at any time
within 180 days after the credit agreement upon compliance with the borrowing
procedures under the facility, and not just for repayment of convertible
debentures. In connection with proposed acquisition of Buffalo and as a
condition to its consummation, we entered into an amendment to this facility
which provides that $40 million under the facility will be available to finance
the cash portion of the purchase price payable under the purchase agreement.
All amounts under the term loans become due and payable in December
2010. Interest under this facility is payable quarterly, with the interest rate
equal to the [LIBOR rate plus an applicable margin based on our debt leverage
ratio (as defined in the credit agreement)]. Our obligations under the
Guggenheim credit facility are secured by a lien on substantially all of our
assets and the assets of our subsidiaries. This credit facility contains
customary financial covenants, including covenants that we maintain minimum
levels of EBITDA and interest coverage ratio and limitations on additional
indebtedness. This facility includes customary default provisions, and all
outstanding obligations may become immediately due and payable in the event of a
default.
Concurrently with the completion of our financing with Guggenheim, we
expanded our credit facility with GMAC Commercial Financial LLC by increasing
our borrowing limit to a maximum of $55 million, including a letter of credit of
$4 million. We entered into these facilities with Guggenheim and GMAC-CF partly
in anticipation of a possible acquisition transaction with The Buffalo Group,
and to provide the funds necessary to finance the cost of our expanded
operations.
87
WARRANTS TO GUGGENHEIM
Under the terms of our amended credit facility with Guggenheim, we are
required to issue to Guggenheim warrants to purchase up to an aggregate of
_____________ shares of our common stock. These warrants have a term of __
years. These warrants are exercisable at a price of $____ per share with respect
to ___% of the shares, $___ per share with respect to ___% of the shares, $_____
per share with respect to ____% of the shares, $_____ per share with respect to
_____% of the shares and $____ per share with respect to ____% of the shares.
The exercise prices are subject to adjustment for certain dilutive issuances
pursuant to the terms of the warrants. A portion of the warrants will not become
exercisable unless and until a specified portion of the initial term loan is
actually funded by the lenders.
EFFECT OF ISSUANCE OF COMMON STOCK AND WARRANTS
The issuance of the shares of Tarrant common stock and warrants will
have the effect of diluting the ownership of stock of our existing shareholders
and the net book value of shares held by them. The effect of the issuance of
shares of Tarrant common stock and warrants in connection with the acquisition
is described in detail under Proposal 1.
REASONS FOR PROPOSAL
As described elsewhere in this proxy statement, Tarrant is subject to
the NASDAQ Marketplace Rules, which prohibit Tarrant from issuing, without
shareholder approval, common stock or securities exercisable into common stock
in an acquisition transaction in excess or potentially in excess of 20% of the
outstanding shares of Tarrant common stock before issuance. We refer to these
requirements and rules as the NASDAQ 20% Rule. The issuance of shares of Tarrant
common stock and warrants to purchase common stock will result in the issuance
of securities in excess or potentially in excess of the amounts that require
shareholder approval under the NASDAQ 20% Rule. Accordingly, we are seeking
shareholder approval for the issuance of the shares of Tarrant common stock in
exchange for the exchangeable shares to be issued by TAG Canada in the
acquisition, and the issuance to Guggenheim of warrants to purchase shares of
Tarrant common stock on the terms described in this proxy statement.
EFFECT OF PROPOSAL
If our shareholders approve this Proposal 2, provided Proposal 1 and
Proposal 3 are also approved, we will be able to issue shares of Tarrant common
stock, together with securities exchangeable or exercisable for common stock, in
compliance with the NASDAQ 20% Rule, and any other applicable
shareholder-approval requirements under the NASDAQ Marketplace Rules.
As a result, we would expect to accomplish the following:
(1) consummate the acquisition and the other transactions
contemplated by the stock and asset purchase agreement,
specifically including the issuance of the shares of Tarrant
common stock upon exchange of the exchangeable shares and the
issuance of the warrants collectively representing
approximately 30% of our outstanding common stock on a fully
diluted basis (assuming exercise in full of the warrants), and
(2) maintain compliance with all applicable NASDAQ Marketplace
Rules requiring shareholder approval.
88
VOTE REQUIRED
Assuming a quorum is present, the affirmative vote of a majority of the
shares represented and voting, either present in person or represented by proxy
at the special meeting are required for approval of Proposal 2. A shareholder
who abstains with respect to this proposal is considered to be present and
entitled to vote on the proposal at the special meeting, and in effect casting a
negative vote. If a proxy is signed and returned without indicating any voting
instructions, the shares represented by the proxy will be voted FOR this
proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF TARRANT'S
ISSUANCE OF COMMON STOCK AND SECURITIES EXCHANGEABLE OR EXERCISABLE FOR COMMON
STOCK IN THE ACQUISITION IN EXCESS OF 20% OF THE OUTSTANDING SHARES OF TARRANT
COMMON STOCK OUTSTANDING IMMEDIATELY BEFORE THE ACQUISITION.
89
PROPOSAL 3
ISSUANCE OF SERIES A PREFERRED STOCK
INTRODUCTION
At the special meeting, in addition to seeking approval of our
acquisition of Buffalo and the issuance of Tarrant common stock and other
securities to be issued in connection with the transaction, we will seek our
shareholders' express approval of our issuance of shares of our Series A
preferred stock in the acquisition. In the acquisition, we will issue 130,000
shares of the Series A preferred stock, which will be deposited in a voting
trust pursuant to a Voting Trust Agreement. The shares of Series A preferred
stock will be entitled to vote a number of shares equal to the exchangeable
shares that remain outstanding from time to time. As exchangeable shares are
exchange for Tarrant common stock, Tarrant will have the right to redeem a
corresponding number of shares of Series A preferred stock. The terms of the
Series A preferred stock and the Voting Trust Agreement are described in detail
under Proposal 1 in this proxy statement.
REASONS FOR ISSUING PREFERRED STOCK
The Series A preferred stock is intended to give the sellers of Buffalo
the same voting rights that they would have if they were to receive shares of
Tarrant common stock as opposed to exchangeable shares of TAG Canada in the
acquisition transaction. The exchangeable shares of TAG Canada to be issued in
the acquisition will not be entitled to voting rights, but will be exchangeable
for shares of voting Tarrant common stock. The exchangeable shares are designed
to allow the sellers to take advantage of certain tax benefits under Canadian
law, and are intended to be the economic equivalent of Tarrant common stock.
Accordingly, Tarrant is issuing the shares of Series A preferred stock in tandem
with the exchangeable shares of TAG Canada to give the sellers of Buffalo the
right to direct the voting of the same number of shares to which they would be
entitled if they were to receive shares of Tarrant common stock upon closing of
the acquisition transaction.
REASONS FOR PROPOSAL
As described elsewhere in this proxy statement, Tarrant is subject to
the NASDAQ 20% Rule. In addition to the restrictions described under Proposal 1
and Proposal 2, this rule prohibits Tarrant from issuing securities in an
acquisition transaction in excess or potentially in excess of 20% of the
outstanding voting stock or voting power of Tarrant. Although the Series A
preferred stock is not convertible into Tarrant common stock, the Series A
preferred stock entitles its holder to vote a number of shares in excess of 20%
of Tarrant's shares of voting capital stock. Accordingly, the issuance of the
Series A preferred stock without shareholder approval may violate the NASDAQ 20%
Rule. Accordingly, we are seeking our shareholders to approve the issuance of
the special voting Series A preferred stock in the acquisition transaction.
EFFECT OF PROPOSAL
If our shareholders approve this Proposal 3, provided Proposal 1 and
Proposal 2 are also approved, we will be able to issue shares of our Series A
preferred stock in compliance with the NASDAQ 20% Rule and any other applicable
shareholder-approval requirements under the NASDAQ Marketplace Rules.
As a result, we would expect to accomplish the following:
90
(1) consummate the acquisition and the other transactions
contemplated by the stock and asset purchase agreement,
specifically including the issuance of the shares of Tarrant
Series A preferred stock, and
(2) maintain compliance with the California Rule and all
applicable NASDAQ Marketplace Rules requiring shareholder
approval.
VOTE REQUIRED
Assuming a quorum is present, the affirmative vote of a majority of the
shares represented and voting, either present in person or represented by proxy
at the special meeting are required for approval of Proposal 3. A shareholder
who abstains with respect to this proposal is considered to be present and
entitled to vote on the proposal at the special meeting, and in effect casting a
negative vote. If a proxy is signed and returned without indicating any voting
instructions, the shares represented by the proxy will be voted FOR this
proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF TARRANT'S
ISSUANCE OF SERIES A PREFERRED STOCK REPRESENTING VOTES IN EXCESS OF 20% OF THE
OUTSTANDING VOTING CAPITAL STOCK OF TARRANT AND IN EXCESS OF 20% OF TARRANT'S
COMBINED VOTING POWER.
91
OTHER MATTERS
As of the date of this proxy statement, the Tarrant Board knows of no
matters that will be presented for consideration at the special meeting other
than as described in this proxy statement. If any other matters shall properly
come before the special meeting or any adjournment or postponement and be voted
upon, the enclosed proxies will be deemed to confer discretionary authority on
the individuals named as proxies to vote the shares represented by the proxies
as to any other matters. The persons named as proxies intend to vote or not to
vote in accordance with the recommendation of the management of Tarrant.
WHERE YOU CAN FIND MORE INFORMATION
Tarrant files annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission (or SEC). You
may read and copy any reports, statements or other information we file in the
SEC's public reference facilities at 100 F Street, N.E., Washington, D.C. 20549.
Copies of all or any portion of these documents may be obtained from the SEC at
prescribed rates. Information on the public reference facilities may be obtained
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site
that contains reports, proxy and information statements and other information
that is filed through the SEC's EDGAR System. The web site can be accessed at
http://www.sec.gov.
The SEC allows us to incorporate by reference information into this
proxy statement, which means that we can disclose important information to you
by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be a part of this proxy
statement, except for any information superseded by information in this proxy
statement. This proxy statement incorporates by reference the following
documents that we have previously filed with the SEC.
(1) Annual Report on Form 10-K for the year ended December 31,
2005; and
(2) Quarterly Report on Form 10-Q for the quarter ended September
30, 2006.
If you are a shareholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them without charge,
excluding all exhibits unless we have specifically incorporated by reference an
exhibit in this proxy statement. Shareholders may obtain documents incorporated
by reference in this proxy statement by requesting them in writing or by
telephone from Tarrant at 3151 East Washington Boulevard, Los Angeles,
California 90023, Telephone: (323) 780-8250. If you would like to request
documents from us, please do so by ______________, 2006 to receive them before
the special meeting.
You should rely only on the information contained or incorporated by
reference in this proxy statement. We have not authorized anyone to provide you
with information that is different from what is contained in this proxy
statement. This proxy statement is dated _________________, 2006. You should not
assume that the information contained in this proxy statement is accurate as of
any date other than ______________, 2006, and the mailing of this proxy
statement to stockholders shall not create any implication to the contrary.
92
TARRANT APPAREL GROUP
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, a shareholder of TARRANT APPAREL GROUP, a California
corporation (the "Company"), hereby nominates, constitutes and appoints Gerard
Guez and Corazon Reyes, or either one of them, as proxy of the undersigned, each
with full power of substitution, to attend, vote and act for the undersigned at
the Special Meeting of Shareholders of the Company, to be held on ____________,
2006, and any postponements or adjournments thereof, and in connection
therewith, to vote and represent all of the shares of the Company which the
undersigned would be entitled to vote with the same effect as if the undersigned
were present, as follows:
A VOTE FOR ALL PROPOSALS IS RECOMMENDED BY THE BOARD OF DIRECTORS:
Proposal 1. To adopt the Stock and Asset Purchase Agreement dated December
6, 2006, by and among Tarrant Apparel Group, 4366883 Canada
Inc., a wholly-owned subsidiary of Tarrant, 3681441 Canada
Inc., Buffalo Inc., 3163946 Canada Inc., Buffalo Corporation,
BFL Management Inc., as sole trustee of The Buffalo Trust and
the shareholders of the target entities, the stock and asset
purchase transactions and the other transactions contemplated
by the purchase agreement.
|_| FOR |_| AGAINST |_| ABSTAIN
Proposal 2. To approve the issuance of shares of Tarrant common stock, and
securities exercisable for common stock, in an amount to
exceed 20% of the outstanding shares of Tarrant's common
stock.
|_| FOR |_| AGAINST |_| ABSTAIN
Proposal 3. To approve the issuance of 130,000 shares of Tarrant's Series
A Special Voting preferred stock, no par value, which have
rights to vote a number of shares exceeding 20% of the
outstanding voting stock of Tarrant.
|_| FOR |_| AGAINST |_| ABSTAIN
The undersigned hereby revokes any other proxy to vote at the Special Meeting,
and hereby ratifies and confirms all that said attorneys and proxies, and each
of them, may lawfully do by virtue hereof. With respect to matters not known at
the time of the solicitation hereof, said proxies are authorized to vote in
accordance with their best judgment.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS SET FORTH ABOVE OR,
TO THE EXTENT NO CONTRARY DIRECTION IS INDICATED, WILL BE TREATED AS A GRANT OF
AUTHORITY TO VOTE FOR ALL PROPOSALS. IF ANY OTHER BUSINESS IS PRESENTED AT THE
SPECIAL MEETING, THIS PROXY CONFERS AUTHORITY TO AND SHALL BE VOTED IN
ACCORDANCE WITH THE RECOMMENDATIONS OF THE PROXIES.
The undersigned acknowledges receipt of a copy of the Notice of Special Meeting
and accompanying Proxy Statement dated _____________, 2007, relating to the
Special Meeting.
Dated:___________________________, 2007
Signature:_____________________________
Signature:_____________________________
Signature(s) of Shareholder(s)
(See Instructions Below)
The Signature(s) hereon should correspond
exactly with the name(s) of the
Shareholder(s) appearing on the Share
Certificate. If stock is held jointly, all
joint owners should sign. When signing as
attorney, executor, administrator, trustee
or guardian, please give full title as such.
If signer is a corporation, please sign the
full corporation name, and give title of
signing officer.
|_| Please indicate by checking this box if you anticipate
attending the Special Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE
EXHIBIT A
EXECUTION COPY
STOCK AND ASSET
PURCHASE AGREEMENT
BY
AND
AMONG
TARRANT APPAREL GROUP
4366883 CANADA INC.,
3681441 CANADA INC.
BUFFALO INC.
3163946 CANADA INC.
BUFFALO CORPORATION,
AND
BUFFALO INTERNATIONAL INC.
4183517 CANADA INC.
3979512 CANADA INC.
THE BUFFALO TRUST
DATED: DECEMBER 6, 2006
TABLE OF CONTENTS
ARTICLE 1. DEFINITIONS ....................................................................................1
ARTICLE 2. DEPOSIT ......................................................................................17
2.1 Deposit...............................................................................17
ARTICLE 3. PURCHASE AND SALE OF SHARES................................................................... 17
3.1 Purchase and Sale of Shares...........................................................17
3.2 Purchase Price for Shares.............................................................18
3.3 The Closing...........................................................................18
3.4 Delivery of Purchase Price for Shares at the Closing..................................18
3.5 Other Deliveries at the Closing.......................................................19
3.6 Tax Election..........................................................................20
3.7 Allocation of the Buffalo Inc. Purchase Price.........................................20
3.8 Contingent Payment....................................................................20
ARTICLE 4. PURCHASE AND SALE OF ASSETS....................................................................22
4.1 Purchase and Sale of Purchased Assets.................................................22
4.2 Assumed Liabilities...................................................................22
4.3 Purchase Price for Purchased Assets...................................................22
4.4 Asset Purchase Price Allocation.......................................................24
4.5 The Closing...........................................................................24
4.6 Delivery of Asset Purchase Price at the Closing.......................................24
4.7 Other Deliveries at the Closing.......................................................24
4.8 Certain Tax Treatment.................................................................25
ARTICLE 5. REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION......................................26
5.1 Representations and Warranties of Sellers.............................................26
5.2 Representations and Warranties of Buyer Parties.......................................28
5.3 Representations and Warranties of Trust...............................................32
ARTICLE 6. REPRESENTATIONS AND WARRANTIES CONCERNING ACQUIRED ENTITIES AND PURCHASED ASSETS...............33
6.1 Entity Status.........................................................................33
6.2 Power and Authority; Enforceability...................................................33
6.3 No Violation..........................................................................33
6.4 Brokers' Fees.........................................................................34
6.5 Capitalization........................................................................34
6.6 Records...............................................................................34
6.7 Acquired Subsidiaries.................................................................34
6.8 Financial Statements..................................................................35
6.9 Subsequent Events.....................................................................35
6.10 Liabilities...........................................................................37
6.11 Legal Compliance......................................................................38
i
6.12 Tax Matters...........................................................................38
6.13 Title to and Condition of Assets; Retail Stores.......................................41
6.14 Real Property.........................................................................41
6.15 Intellectual Property.................................................................42
6.16 Inventory.............................................................................44
6.17 Acquired Entity Contracts.............................................................45
6.18 Trust Contracts.......................................................................46
6.19 Receivables...........................................................................47
6.20 Powers of Attorney....................................................................47
6.21 Insurance.............................................................................48
6.22 Litigation............................................................................49
6.23 Product Warranty......................................................................49
6.24 Product Liability.....................................................................49
6.25 Labor and Employees...................................................................49
6.26 Employee Benefits.....................................................................50
6.27 Environmental, Health, and Safety Matters.............................................52
6.28 Customers and Suppliers...............................................................52
6.29 Permits...............................................................................53
6.30 Certain Business Relationships with Acquired Entities.................................53
6.31 Proxy Statement.......................................................................53
ARTICLE 7. PRE-CLOSING COVENANTS..........................................................................53
7.1 General...............................................................................54
7.2 Notices and Consents..................................................................54
7.3 Operation of Business.................................................................54
7.4 Preservation of Business..............................................................56
7.5 Access to Business Information........................................................56
7.6 Notice of Developments................................................................56
7.7 Exclusivity...........................................................................56
7.8 Affiliated Transactions...............................................................57
7.9 Repayment of Certain Liabilities of Sellers and Trust.................................57
7.10 Discharge of Certain Liabilities Payable to Sellers and Trust.........................57
7.11 Shareholders Meeting; Proxy Statement.................................................57
7.12 Publicity.............................................................................58
7.13 Trademark Purchase....................................................................59
7.14 Rights to Name........................................................................59
7.15 Security Agreement and Intercreditor Agreement........................................59
7.16 Discharge of Certain Security Interests of Acquired Entities..........................61
7.17 Ancillary Agreements..................................................................61
7.18 Tax Returns; Affidavit................................................................61
ARTICLE 8. POST-CLOSING COVENANTS.........................................................................62
8.1 General...............................................................................62
8.2 Litigation Support....................................................................62
8.3 Transition............................................................................62
8.4 Confidentiality.......................................................................62
8.5 Release...............................................................................63
ii
8.6 Stock Certificates....................................................................64
8.7 Board Representation..................................................................65
8.8 Treatment of Certain Tax Matters Post-Closing.........................................65
8.9 Restrictive Covenant..................................................................68
8.10 Option Awards.........................................................................69
ARTICLE 9. CLOSING CONDITIONS.............................................................................69
9.1 Conditions Precedent to Obligation of Buyer Parties...................................69
9.2 Conditions Precedent to Obligation of Sellers and Trust...............................71
ARTICLE 10. TERMINATION...................................................................................73
10.1 Termination of Agreement..............................................................73
10.2 Effect of Termination.................................................................74
ARTICLE 11. INDEMNIFICATION...............................................................................75
11.1 Survival of Representations and Warranties............................................75
11.2 Indemnification Provisions for Parent's Benefit.......................................76
11.3 Indemnification Provisions for Trust's and Sellers' Benefit...........................76
11.4 Indemnification Claim Procedures......................................................77
11.5 Limitations on Indemnification Liability..............................................78
11.6 Set-Off Rights; Limitation on Cash Recovery; Other Matters............................79
ARTICLE 12. EARN-OUT......................................................................................80
12.1 Earn-Out..............................................................................80
12.2 Retirement of Earn Out................................................................81
12.3 Certain Definitions...................................................................82
12.4 Accounting and Other General Principles...............................................84
12.5 Resolution of Conflicts...............................................................85
12.6 Management of Acquired Business.......................................................86
12.7 Contributions to Buyer................................................................88
ARTICLE 13. MISCELLANEOUS.................................................................................88
13.1 Schedules.............................................................................88
13.2 Entire Agreement......................................................................89
13.3 Successors............................................................................89
13.4 Assignments...........................................................................89
13.5 Notices...............................................................................90
13.6 Specific Performance..................................................................91
13.7 Submission to Jurisdiction; Service of Process........................................91
13.8 Time..................................................................................92
13.9 Counterparts..........................................................................92
13.10 Headings..............................................................................92
13.11 Governing Law.........................................................................92
13.12 Amendments and Waivers................................................................92
13.13 Severability..........................................................................92
13.14 Expenses..............................................................................93
iii
13.15 Construction..........................................................................93
13.16 Incorporation of Exhibits, Annexes, and Schedules.....................................93
13.17 Joint and Several Obligations.........................................................93
13.18 Remedies..............................................................................94
13.19 Electronic Signatures.................................................................94
NOTE REGARDING ATTACHMENTS: ALL OF THE FOLLOWING SCHEDULES, EXHIBITS AND OTHER
ATTACHMENTS HAVE BEEN OMITTED PURSUANT TO ITEM 601(b)(2) OF REGULATION S-K. THE
REGISTRANT HEREBY AGREES TO FURNISH SUPPLEMENTALLY A COPY OF ANY OMITTED
ATTACHMENT TO THE SECURITIES AND EXCHANGE COMMISSION UPON REQUEST.
ATTACHMENTS
EXHIBITS
Exhibit A -- Stockholders of each Target Companies
Exhibit B -- Assignment and Assumption Agreement
Exhibit C -- Bill of Sale and Assignment of Contract Rights
Exhibit D -- Rights, Privileges, Restrictions and Conditions
related to the Non-Voting Exchangeable Shares
Exhibit E -- Non-Negotiable Secured Promissory Note
Exhibit F-1 -- Employment Agreement for Gabriel Bitton
Exhibit F-2 -- Form of Employment Agreement for other Bitton
Brothers
Exhibit G -- Term of Employment Agreements
Exhibit H -- Exchange Right Agreement
Exhibit I -- Form of Non-Competition Agreement
Exhibit J -- Registration Rights Agreement
Exhibit K -- Standstill Agreement
Exhibit L -- Support Agreement
Exhibit M -- Form of Trademark Purchase Agreement
Exhibit N -- Voting Trust Agreement
SCHEDULES
Schedule 4.3(b) -- Trust Adjusted Net Revenue
Schedule 4.4 -- Asset Purchase Price Allocation
Schedule 5.1(c) -- Notices and Consents (of Seller)
Schedule 5.1(i) -- Assets and Liabilities
Schedule 5.2(c) -- Notices and Consents (of Buyer)
Schedule 5.2(e) -- Commitment with respect to Parent Common Stock
Schedule 5.2(l) -- Litigation
Schedule 5.3 (c) -- Notices and Consents (of Trust)
Schedule 6.1 -- Acquired Entities' Directors and Officers
Schedule 6.3 -- Notices and Consents (of Acquired Entities)
Schedule 6.5 -- Capitalization of Target Companies
Schedule 6.7 -- Acquired Subsidiaries
Schedule 6.8 -- Financial Statements
Schedule 6.9 -- Events Out of the Ordinary Course of Business
(threshold $15,000)
iv
SCHEDULES
Schedule 6.10 -- Liabilities
Schedule 6.12(a) -- No Waiver of Limitation for Collection of Tax
Schedule 6.12(b) -- Tax Returns Reassessment
Schedule 6.12(e) -- Tax Returns outside Canada
Schedule 6.12(f) -- Tax Returns and Audits
Schedule 6.13(a) -- Security Interest (of Acquired Entities)
Schedule 6.13(b) -- Security Interest (of Trust)
Schedule 6.13(c) -- Capital Expenditure since December 31, 2005)
Schedule 6.14(b) -- Real Property (List of lease or sublease contracts
of each Acquired Entity)
Schedule 6.15(b) -- Acquired Entities' Listed Marks & Jurisdictions
Schedule 6.15(c) -- Trust Trade Marks (Owned or Licensed)
Schedule 6.15(e) -- Acquired Entities Intellectual Property
Schedule 6.15(f) -- Marks Restriction of Use & Infringement
Schedule 6.17 -- Acquired Entities' Contracts
Schedule 6.18 -- Assumed Liabilities of Trust
Schedule 6.20 -- Powers of Attorney
Schedule 6.21 -- Insurance
Schedule 6.22 -- Litigation
Schedule 6.23 -- Product Warranty
Schedule 6.25(a) -- Employees
Schedule 6.25(e) -- Bargaining Certificate
Schedule 6.26 -- Employee Benefits
Schedule 6.27 -- Environmental, Health & Safety
Schedule 6.28 -- Customers and Suppliers
Schedule 6.29 -- Permits
Schedule 6.30 -- Business Relationship
Schedule 7.8 -- Affiliated Transactions
Schedule 7.9 -- Liabilities (of Sellers and Trust)
Schedule 7.10 -- Liabilities (payable by Acquired Entities to Sellers
or Trust)
Schedule 7.16 -- Securities Interests of Acquired Entities to be
Discharged
v
STOCK AND ASSET PURCHASE AGREEMENT
This Stock and Asset Purchase Agreement (this "AGREEMENT"), dated
December 6, 2006, is by and among (i) Tarrant Apparel Group, a California
corporation ("PARENT"), (ii) 4366883 Canada Inc., a corporation incorporated
under the CANADA BUSINESS CORPORATIONS ACT ("CBCA") ("BUYER" and, together with
Parent, each a "BUYER PARTY" and collectively the "BUYER PARTIES"), (iii)
3681441 Canada Inc., a corporation incorporated under the CBCA ("368 CANADA"),
(iv) Buffalo Inc., a corporation incorporated under the CBCA ("BUFFALO INC."),
(v) 3163946 Canada Inc., a corporation incorporated under the CBCA ("316
CANADA"), (vi) Buffalo Corporation, a Delaware corporation ("BUFFALO US" and,
together with 368 Canada, Buffalo Inc., and 316 Canada, each a "TARGET COMPANY"
and collectively the "TARGET COMPANIES"), (vii) BFL Management Inc. in its
capacity as the sole trustee of The Buffalo Trust ("TRUST"), and (viii) each
stockholder of Target Companies set forth in EXHIBIT A (individually, "SELLER"
and, collectively, "SELLERS" and, together with Target Companies and Trust, each
a "SELLER PARTY" and collectively the "SELLER PARTIES").
RECITALS:
A. Sellers own all of the outstanding shares in the share capital
of Target Companies, and Trust owns certain assets that are used by Target
Companies in the operation of their respective businesses.
B. Buyer Parties desire to purchase from Sellers all of the
outstanding shares in the share capital of Target Companies, and Sellers desire
to sell to Buyer Parties all of the outstanding shares in the share capital of
Target Companies, in accordance with this Agreement's terms and conditions.
C. Buyer Parties desire to purchase from Trust, and Trust desires
to sell to Buyer Parties, certain of Trust's assets in accordance with this
Agreement's terms and conditions.
AGREEMENT:
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants contained herein, each Buyer Party and each Seller Party agree as
follows:
ARTICLE 1.
DEFINITIONS
"316 CANADA" is defined in the preamble to this Agreement.
"316 CANADA SHARES" means the issued and outstanding 100 Class "A"
shares in the share capital of 316 Canada.
"316 PURCHASE PRICE" is defined in SECTION 3.2(C).
"368 CANADA" is defined in the preamble to this Agreement.
"368 CANADA SHARES" means the issued and outstanding 100 Class "A"
shares in the share capital of 368 Canada.
"368 PURCHASE PRICE" is defined in SECTION 3.2(A).
"397 CANADA" means 3979512 Canada Inc., a corporation incorporated
under the CBCA and the sole stockholder of Buffalo US, and a Seller under this
Agreement.
"418 CANADA" means 4183517 Canada Inc., a corporation incorporated
under the CBCA and the sole stockholder of 368 Canada and Buffalo International,
and a Seller under this Agreement.
"ACCELERATED EARN-OUT AMOUNT" is defined in SECTION 12.3.
"ACCELERATION EVENT" is defined in SECTION 12.3.
"ACQUIRED BUSINESS" is defined in SECTION 12.3.
"ACQUIRED ENTITIES" means, collectively, Target Companies and Acquired
Subsidiaries.
"ACQUIRED SUBSIDIARY" means any Subsidiary listed on SCHEDULE 6.7.
"ACTION" means any action, appeal, petition, plea, charge, complaint,
claim, suit, audit, request, demand, litigation, arbitration, mediation,
hearing, inquiry, investigation or similar event, occurrence, or proceeding.
"ADJUSTED EARNINGS" is defined in SECTION 12.3.
"AFFILIATE" or "AFFILIATED" with respect to any specified Person, means
a Person that, directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with, such specified
Person. For this definition, "control" (and its derivatives) means the
possession, directly or indirectly, or as trustee or executor, of the power to
direct or cause the direction of the management and policies of a Person,
whether through ownership of voting Equity Interests, as trustee or executor, by
contract or credit arrangements or otherwise. In furtherance, and not in
limitation, of the foregoing, each of the Bitton Brothers shall be deemed to be
an Affiliate of Seller Parties and Acquired Entities.
"AFFILIATED GROUP" means any affiliated group under Code Section
1504(a) or any similar group defined under provisions of applicable Law.
"AGREEMENT" is defined in the preamble to this Agreement.
"ANCILLARY AGREEMENTS" means the Buyer Notes, Security Agreement,
Intercreditor Agreement, Exchange Right Agreement, Support Agreement, Standstill
Agreement, Employment Agreements, Non-Competition Agreements, and Registration
Rights Agreement.
"ASSET PURCHASE PRICE" is defined in SECTION 4.3.
"ASSET PURCHASE PRICE ADJUSTMENT" is defined in SECTION 4.3(B)(I).
2
"ASSIGNMENT AND ASSUMPTION AGREEMENT" means the Assignment and
Assumption Agreement in the form of EXHIBIT B.
"ASSUMED LIABILITIES" means all unperformed or unfulfilled Liabilities
of Trust under those Contracts set forth on SCHEDULE 6.18, excluding, however,
any Liabilities of Trust under any such Contract arising or accruing on or
before the Closing Date and, for greater certainty, excluding all and any past,
present and future Tax Liability that is or may be attributable to Trust, its
settlor, trustee or beneficiary.
"BALANCE SHEET DATE" is defined in SECTION 6.8.
"BEST EFFORTS" means the efforts, time, and costs that a prudent Person
desirous of achieving a result would use, expend, or incur in similar
circumstances to ensure that such result is achieved as expeditiously as
possible; PROVIDED, HOWEVER, that no such use, expenditure, or incurrence will
be required if it would be manifestly unreasonable from a commercial perspective
to incur them.
"BILL OF SALE" means the Bill of Sale and Assignment of Contract Rights
in the form of EXHIBIT C.
"BITTON BROTHERS" means Charles Bitton, David Bitton, Gabriel Bitton,
Gilbert Bitton and Michael Bitton.
"BREACH" means any breach, inaccuracy, failure to perform, failure to
comply, failure to notify, default, or violation which would (i) permit any
Person to accelerate any obligation or terminate, cancel, or modify any right or
obligation, or (ii) require the payment of money or other consideration.
"BUDGETS" is defined in SECTION 12.6(D).
"BUFFALO INC." is defined in the preamble to this Agreement.
"BUFFALO INC. PURCHASE PRICE" is defined in SECTION 3.2(B).
"BUFFALO INC. SHARES" means, collectively, the issued and outstanding
100 Class "A" Common shares in the share capital of Buffalo Inc., the issued and
outstanding 4,731,301 Class "E" preferred shares in the share capital of Buffalo
Inc., and the issued and outstanding 1,117,184 Class "F" preferred shares in the
share capital of Buffalo Inc.
"BUFFALO INTERNATIONAL" means Buffalo International Inc., a corporation
incorporated under the CBCA and the sole stockholder of Buffalo Inc., 316
Canada, and 397 Canada, and a Seller under this Agreement.
"BUFFALO US" is defined in the preamble to this Agreement.
"BUFFALO US PURCHASE PRICE" is defined in SECTION 3.2(D).
3
"BUFFALO US SHARES" means the issued and outstanding 120 Common shares
in the share capital of Buffalo US.
"BUYER" is defined in the preamble to this Agreement.
"BUYER COMMON SHARES" means the common shares in the share capital of
Buyer.
"BUYER EXCHANGEABLE SHARES" means the non-voting exchangeable shares in
the share capital of Buyer, having substantially the rights, privileges,
restrictions and conditions set forth in EXHIBIT D.
"BUYER NOTES" means the promissory notes of Buyer in substantially the
form of EXHIBIT E.
"BUYER PARTIES" is defined in the preamble to this Agreement.
"CALCULATION PERIOD" is defined in SECTION 12.3.
"CANADIAN GAAP" means, at any time, generally accepted accounting
principles in Canada, approved by the Canadian Institute of Chartered
Accountants and in force at such time.
"CANADIAN PENSION PLAN" means any agreement other than a registered
retirement savings plan, whether written or oral, providing for retirement
benefits to any current or former employer, consultant, independent contractor
or any other individual residing or located in Canada and having provided
services to any Acquired Entity whether or not such agreement is formal or
informal, funded or unfunded, and registered or not.
"CBCA" is defined in the preamble to this Agreement.
"CHANGE OF CONTROL" means any of the following: (a) Parent and Buyer
(or any of their Affiliates) shall sell or transfer to any Person who is not an
Affiliate of Parent all or substantially all of the assets of the Acquired
Business; (b) Buyer shall sell or transfer all or substantially all of the
voting securities of the Acquired Entities to any Person who is not an Affiliate
of Parent; (c) Parent (or any of its Affiliates) shall sell or transfer all or
substantially all of the voting securities of Buyer to any Person who is not an
Affiliate of Parent; (d) Parent shall sell or otherwise transfer all or
substantially all of its assets (on a consolidated basis) or merge, consolidate
or reorganize with any other corporation or entity, as a result of which less
than 50% of the total voting power represented by the capital stock or other
equity interests of the corporation or entity to which Parent's assets are sold
or transferred or surviving such merger, consolidation or reorganization shall
be held by the Persons who were holders of voting securities of Parent
immediately prior to such transaction; (e) Buyer shall sell or otherwise
transfer all or substantially all of its assets (on a consolidated basis) or
merge, consolidate or reorganize with any other corporation or entity, as a
result of which less than 50% of the total voting power represented by the
capital stock or other equity interests of the corporation or entity to which
Buyer's assets are sold or transferred or surviving such merger, consolidation
or reorganization shall be held by the Persons who were holders of voting
securities of Buyer immediately prior to such transaction; or (f) (i) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act), excluding the Bitton Brothers and any of their Affiliates and any
4
Affiliate of Parent as of the Closing Date, shall become, or obtain rights
(whether by means of warrants, options or otherwise) to become, the "beneficial
owner" (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act) of more
than 35% of the total voting power of the capital stock of Parent then
outstanding and (ii) such "person" or "group" become, or obtain rights to
become, the beneficial owners of a greater percentage of the total voting power
of all the outstanding capital stock of Parent than any other person or group,
including the Bitton Brothers and their Affiliates or any Affiliate of Parent as
of the Closing Date.
"CGCL" means the California General Corporation Law, as amended from
time to time.
"CLOSING" is defined in SECTION 3.3.
"CLOSING DATE" is defined in SECTION 3.3.
"CLOSING DATE ADJUSTED ASSET PURCHASE PRICE" is defined in SECTION
4.3(B)(II).
"CLOSING DATE ADJUSTMENT AMOUNT" is defined in SECTION 4.3(B)(II).
"CLOSING TAX RETURNS" shall have the meaning set forth in SECTION
8.8(B).
"CODE" means the Internal Revenue Code of 1986, as amended.
"COLLATERAL" is defined in SECTION 7.15.
"COMMERCIALLY REASONABLE EFFORTS" means efforts that are designed to
enable a Party, directly or indirectly, to satisfy a condition to, or otherwise
assist in the consummation of, the Transactions and that do not require the
performing Party to expend any funds or assume Liabilities other than
expenditures and Liabilities that are customary and reasonable in nature and
amount in the context of the Transactions.
"COMMITMENT" means (a) options, warrants, convertible securities,
exchangeable securities, subscription rights, conversion rights, exchange
rights, or other Contracts that require a Person to issue any of its Equity
Interests; (b) any other securities convertible into, exchangeable or
exercisable for, or representing the right to subscribe for any Equity Interest
of a Person; (c) statutory pre-emptive rights or pre-emptive rights granted
under a Person's Organizational Documents; and (d) stock appreciation rights,
phantom stock, profit participation, or other similar rights with respect to a
Person.
"CONCLUSIVE ADJUSTMENT AMOUNT" is defined in SECTION 4.3(B)(III)(B).
"CONFIDENTIAL INFORMATION" means any information concerning the
businesses and affairs of any Buyer Party or any Acquired Entity.
"CONSENT" means any consent, approval, notification, waiver, or other
similar action.
"CONSOLIDATED BUDGET" as defined in SECTION 12.6(D).
"CONTINGENT PAYMENT" is defined in SECTION 3.8(A).
5
"CONTINGENT RIGHTHOLDER" is defined in SECTION 3.8(D).
"CONTRACT" means any contract, agreement or commitment, whether written
or oral.
"COPYRIGHTS" means all copyrights, whether registered or unregistered,
in both published works and unpublished works, and pending applications to
register the same.
"DAMAGES" means all damages, losses (including any diminution in value
but excluding incidental consequential lost profits, indirect punitive or
exemplary damages), Liabilities, payments, Taxes, amounts paid in settlement,
obligations, fines, penalties, interest, expenses, costs associated with
obtaining injunctive relief, and other costs, including reasonable fees and
expenses of attorneys, accountants and other professional advisors, and of
expert witnesses and other costs of investigation, preparation, and litigation
in connection with any Action or threatened Action.
"DEFERRED INTERCOMPANY TRANSACTIONS" is defined in Treas. Reg. Section
1.1502-13.
"DEPOSIT" is defined in SECTION 2.1.
"DISPUTED AMOUNT" as defined in SECTION 12.5.
"DRAFT LEGISLATION" as defined in SECTION 8.9.
"EARN-OUT AMOUNT" is defined in SECTION 12.3.
"EARN-OUT SHARE" is defined in SECTION 12.3.
"EMPLOYEE AGREEMENT" means each management, employment, severance,
change of control, consulting, or similar Contract between any Acquired Entity
and any employee, consultant, independent contractor, or other individuals
providing services thereto pursuant to which any Acquired Entity has or may have
any Liability.
"EMPLOYEE BENEFIT PLAN" means each plan, program, policy, payroll
practice, contract, agreement (including Employee Agreements), or other
arrangement providing for compensation, notice, severance, termination pay,
change of control awards, performance awards, stock or stock related awards,
insurance coverage, fringe benefits, registered retirement savings plan, or
other employee benefits of any kind, whether formal or informal, funded or
unfunded, written or oral and whether or not legally binding, including each
"employee benefit plan," within the meaning of Section 3(3) of ERISA and each
"Multiemployer Plan" within the meaning of Sections 3(37) or 4001(a)(3) of
ERISA.
"EMPLOYEE PENSION BENEFIT PLAN" is defined in ERISA Section 3(2).
"EMPLOYEE WELFARE BENEFIT PLAN" is defined in ERISA Section 3(1).
"EMPLOYMENT AGREEMENTS" means the employment agreements together with
non-qualified stock option agreements to be entered into as of the Closing Date
between Buyer, on the one hand, and each of the Bitton Brothers, on the other
hand, substantially in the form of
6
EXHIBIT F-1 with respect to Gabriel Bitton and EXHIBIT F-2 with respect to each
other Bitton Brother, and completed for each other Bitton Brother with the terms
on EXHIBIT G, setting forth the terms of employment of such Person by Buyer
following the Closing.
"ENCUMBRANCE" means any Order, Security Interest, easement, servitude,
right of first refusal, or restriction on voting, transfer, or receipt of
income, other than restrictions under federal and state securities laws and
regulations.
"ENFORCEABLE" - a Contract is "Enforceable" if it is the legal, valid,
and binding obligation of the applicable Person enforceable against such Person
in accordance with its terms, except as such enforceability may be subject to
(i) the effects of bankruptcy, winding-up, insolvency, arrangement,
reorganization, moratorium, or other Laws relating to or affecting the rights of
creditors, (ii) the discretion that a court may exercise in the granting of
extraordinary remedies such as specific performance and injunction, (iii)
general principles of equity, (iv) general principles of public policy with
respect to specific provisions that violate such public policy, and (v) the
legal capacity of natural persons or the corporate or other power of each Person
not a natural person, or lack thereof, other than the parties to this Agreement
and their respective Affiliates.
"ENVIRONMENTAL, HEALTH, AND SAFETY REQUIREMENTS" means all Orders and
Laws concerning or relating to public health and safety, worker/occupational
health and safety, and pollution or protection of the environment, including
those relating to the presence, use, manufacturing, refining, production,
generation, handling, transportation, treatment, recycling, transfer, storage,
disposal, distribution, importing, labeling, testing, processing, discharge,
release, threatened release, control, or other action or failure to act
involving cleanup of any hazardous materials, substances or wastes, chemical
substances, or mixtures, pesticides, pollutants, contaminants, toxic chemicals,
petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise, or
radiation, each as amended and as now or hereafter in effect and in effect at
Closing.
"EQUITY INTEREST" means (a) with respect to a corporation, any and all
shares of capital stock and any Commitments with respect thereto, (b) with
respect to a partnership, limited liability company, trust, or similar Person,
any and all units, interests, or other partnership/limited liability company
interests, and any Commitments with respect thereto, and (c) any other direct or
indirect equity ownership or participation in a Person.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA AFFILIATE" means each business or entity which is a member of a
"controlled group of corporations," under "common control" or an "affiliated
service group" with any Acquired Entity within the meaning of Sections 414(b),
(c) or (m) of the Code, or required to be aggregated with any Acquired Entity
under Section 414(o) of the Code, or is under "common control" with any Acquired
Entity, within the meaning of Section 4001(a)(14) of ERISA.
"EXCESS LOSS ACCOUNT" is defined in Treas. Reg. Section 1.1502-19.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
7
"EXCHANGE RATE" means, for the purpose of translating an amount
denominated in a currency other than United States Dollars into United States
Dollars as of a specified date, the closing mid-range rate for exchanges between
the relevant currency and United States Dollars on the Business Day for which
that rate is so quoted in the Wall Street Journal immediately prior to such
specified date (and, if relevant, the 1-month forward rate shall be used).
"EXCHANGE RIGHT AGREEMENT" means the agreement to be entered into as of
the Closing Date among Parent, Buyer and Sellers, substantially in the form of
EXHIBIT H.
"EXPIRATION DATE" means March 31, 2007.
"FIDUCIARY" is defined in ERISA Section 3(21).
"FINAL ASSET PURCHASE PRICE" is defined in SECTION 4.3(B)(III)(C).
"FINANCIAL STATEMENTS" is defined in SECTION 6.8.
"FUTURE PAYMENTS" means any amounts payable in respect of the Buyer
Notes, the Earn-Out Payments and the Contingent Payment.
"GMAC CF" means GMAC Commercial Finance LLC.
"GOVERNMENTAL BODY" means any legislature, government, agency, board,
bureau, branch, department, division, subdivision of any kind whatsoever,
commission, court, tribunal, magistrate, judicial, regulatory, administrative,
justice, multi-national organization, quasi-governmental body, or other similar
recognized organization or body of any federal, provincial, state, county,
municipal, local, or foreign government or other similar recognized organization
or body exercising, or purporting to exercise, similar powers or authority.
"GUGGENHEIM" means Guggenheim Corporate Funding, LLC.
"INDEMNIFICATION CLAIM" is defined in SECTION 11.4(A).
"INDEMNIFIED PARTIES" means, individually and as a group, the Parent
Indemnified Parties and the Seller Indemnified Parties.
"INDEMNITOR" means any Party having any Liability to any Indemnified
Party under this Agreement.
"INTELLECTUAL PROPERTY" means any rights, licenses, and other claims
that any Person may have to claim ownership, authorship, or invention, or the
right to use, to object to or prevent the modification of, to withdraw from
circulation, or to control the publication or distribution of, any Marks,
Patents, Copyrights, Trade Secrets, Software or other intellectual property or
proprietary rights.
"INTERCREDITOR AGREEMENT" is defined in SECTION 7.15.
"INTERIM FINANCIAL STATEMENTS" is defined in SECTION 6.8.
8
"JURISDICTIONS" is defined in SECTION 6.15(B).
"KEY EMPLOYEES" is defined in SECTION 6.25(C).
"KNOWLEDGE" means the knowledge of a Person's officers and directors as
of the date hereof and the Closing Date after due investigation. With respect to
particular areas of interest, "Knowledge" includes the knowledge of such
Person's employees or of an employee of an Affiliate of such Person, charged
with responsibility for a particular functional or regional area of such
Person's operations (E.G., an employee directing the environmental section with
respect to knowledge of environmental matters or a regional manager). In
furtherance, and not in limitation, of the forgoing, each Seller Party shall be
deemed to have Knowledge of all matters of which any Acquired Subsidiary has
Knowledge.
"LAW" means any law (statutory, common, or otherwise), statute,
constitution, treaty, convention, ordinance, code, rule, regulation, executive
order, by-law, or other similar authority enacted, adopted or promulgated by any
Governmental Body and having the force of law, each as amended and now and
hereinafter in effect.
"LIABILITY" or "LIABLE" means any liability or obligation, whether
absolute or contingent, matured or unmatured, conditional or unconditional,
accrued or unaccrued, liquidated or unliquidated, or due or to become due.
"LISTED MARK" is defined in SECTION 6.15(B).
"MARKS" means all fictitious business names, trademarks, service marks,
brand names, trade dress, logos, domain names, trade names and corporate names,
whether or not registered, including all common law rights, and registrations
and applications for registration thereof throughout the world, and all rights
therein provided by international treaties or conventions.
"MATERIAL ADVERSE CHANGE (OR EFFECT)" means any change (or effect) that
is materially adverse to the business, operations, condition (financial or
otherwise), assets, or liabilities of Acquired Entities taken as a whole;
PROVIDED, HOWEVER, that a Material Adverse Change (or Effect) shall not include
any adverse change or effect (i) resulting from any change in general economic
or market conditions, including, without limitation, any change in general
economic or market conditions due to any act of war, terrorism or threat, (ii)
which negatively affects the wholesale or retail apparel industries generally,
unless the change or effect with respect to either clause (i) or (ii)
disproportionately affects Acquired Entities, (iii) resulting from the execution
and performance of or compliance with this Agreement, (iv) resulting from the
announcement of this Agreement and the transactions contemplated hereby
(including, without limitation, any (x) actions by customers or competitors or
(y) loss of personnel or customers, or (v) resulting from any outbreak or
escalation of hostilities involving the United States, the declaration by the
United States of a national emergency or war, or the occurrence of any acts of
terrorism; PROVIDED, HOWEVER, that, with respect to ARTICLE 9 and ARTICLE 10
only, "MATERIAL ADVERSE CHANGE (OR EFFECT)" means any materially adverse event,
series of events or the lack of occurrence thereof which, singularly or in the
aggregate, (a) if capable of being reduced to a dollar amount, would be valued
at an amount at least equal to $1,500,000, or (b) if not capable of
9
being reduced to a dollar amount, would be expected to cause a third-party
purchaser, acting reasonably, to refuse to complete the Transactions on the
terms set forth in this Agreement.
"MINIMUM SHARE PRICE" is defined in SECTION 3.8(D).
"MOST RECENT YEAR END" is defined in SECTION 6.8.
"MULTIEMPLOYER PLAN" is defined in ERISA Section 3(37).
"NON-COMPETITION AGREEMENTS" means the agreements to be entered into as
of the Closing Date between Parent, on the one hand, and each of the Bitton
Brothers, on the other hand, substantially in the form of EXHIBIT I, whereby
each of the Bitton Brothers will agree, for a term ending on the later of three
years from the Closing Date and one year from termination of employment with
Parent or any of its Affiliates, not to engage in any business related to the
sale of apparel products in Canada or the United States in competition with
Parent or its Affiliates.
"ORDER" means any order, ruling, decision, verdict, decree, writ,
subpoena, award, judgment, injunction, or other similar determination or finding
by, before, or under the supervision of any Governmental Body or arbitrator.
"ORDINARY COURSE OF BUSINESS" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity,
quality, and frequency) of the relevant Person and its Subsidiaries.
"ORGANIZATIONAL DOCUMENTS" means the articles of incorporation,
certificate of incorporation, charter, bylaws, articles of formation,
regulations, operating agreement, certificate of limited partnership,
partnership agreement, declaration of trust, and all other similar documents,
instruments, Contracts, or certificates executed, adopted, or filed in
connection with the creation, formation, or organization of a Person, including
any amendments thereto.
"PARENT" is defined in the preamble to this Agreement.
"PARENT BOARD" as defined in SECTION 12.6(A).
"PARENT COMMON STOCK" means the common stock, no par value, of Parent.
"PARENT CONTRIBUTION" is defined in SECTION 12.7.
"PARENT CONTRIBUTION AMOUNT" is defined in SECTION 12.7.
"PARENT FINANCIAL STATEMENTS" is defined in SECTION 5.2(F).
"PARENT INDEMNIFIED PARTIES" means each Seller and Trust, and its
officers, directors, managers, employees, agents, representatives, controlling
Persons, stockholders, trustees, beneficiaries, and their Affiliates.
"PARENT MATERIAL ADVERSE CHANGE (OR EFFECT)" means any change (or
effect) that is materially adverse to the business, operations, condition
(financial or otherwise), assets, or
10
liabilities of Parent taken as a whole; PROVIDED, HOWEVER, that a Parent
Material Adverse Change (or Effect) shall not include any adverse change or
effect (i) resulting from any change in general economic or market conditions,
including, without limitation, any change in general economic or market
conditions due to any act of war, terrorism or threat, or (ii) which negatively
affects the wholesale or retail apparel industries generally, unless the change
or effect with respect to either clause (i) or (ii) disproportionately affects
Parent, (iii) resulting from the execution and performance of or compliance with
this Agreement, (iv) resulting from the announcement of this Agreement and the
transactions contemplated hereby (including, without limitation, any (x) actions
by customers or competitors or (y) loss of personnel or customers or, (v)
resulting from any outbreak or escalation of hostilities involving the United
States, the declaration by the United States of a national emergency or war, or
the occurrence of any acts of terrorism; PROVIDED, HOWEVER, that, with respect
to ARTICLE 9 and ARTICLE 10 only, "PARENT MATERIAL ADVERSE CHANGE (OR EFFECT)"
means any materially adverse event, series of events or the lack of occurrence
thereof which, singularly or in the aggregate, (a) if capable of being reduced
to a dollar amount, would be valued at an amount at least equal to $1,500,000,
or (b) if not capable of being reduced to a dollar amount, would be expected to
cause a third-party purchaser, acting reasonably, to refuse to complete the
Transactions on the terms set forth in this Agreement.
"PARENT SEC DOCUMENTS" is defined in SECTION 5.2(F).
"PARENT SHARE VALUE" is defined in SECTION 3.8(D).
"PARENT SHARES" is defined in SECTION 3.5(C).
"PARENT SPECIAL VOTING SHARES" means 130,000 shares of Series A Special
Voting Preferred Stock of Parent issued in its own series which entitles the
holder of record to 100 votes per share at meetings of holders of Parent Common
Stock, which shares are to be issued to, deposited with, and voted by, the
Voting Trustee in accordance with the Voting Trust Agreement.
"PARTIES" means, collectively, Buyer Parties and Seller Parties, and
each permitted assignee, if any, of any Buyer Party that becomes a party to this
Agreement in accordance with the terms hereof.
"PATENTS" means all patents and patent applications.
"PAYMENT DEFAULT" is defined in SECTION 7.15.
"PBGC" means the Pension Benefit Guaranty Corporation.
"PERFORMANCE SUMMARY" is defined in SECTION 12.6(E).
"PERMIT" means any permit, license, certificate, approval, consent,
waiver, accreditation, or other similar authorization required by any Law or
Governmental Body.
"PERSON" means any individual, partnership, limited liability company,
unlimited liability company, corporation, association, joint stock company,
trust, entity, joint venture, labor organization, unincorporated organization,
Governmental Body, or other business entity.
11
"PERSONAL INDICIA" is defined in SECTION 7.14.
"POST-CLOSING ESTIMATED ADJUSTMENT AMOUNT" is defined in SECTION
4.3(B)(III)(A).
"PRIVATE ISSUER" means a Person:
(a) that is not a "reporting issuer" within the meaning of the
SECURITIES ACT (Quebec) as of the date of this Agreement or an
"investment fund" within the meaning of Regulation 45-106 as
of the date of this Agreement;
(b) the securities (other than non-convertible debt securities) of
which:
(i) are subject to restrictions on transfer contained in
that Person's constating documents or in agreements
to which its security holders are parties; and
(ii) are beneficially owned, directly or indirectly, by
not more than 50 holders (not including employees and
former employees of the Person or any Affiliate of
the Person), provided that each holder is counted as
one beneficial owner unless the holder is created or
used solely to purchase or hold securities of that
Person in which case each beneficial owner or each
beneficiary of the holder, as the case may be, shall
be counted as a separate beneficial owner; and
(c) that has distributed, within the meaning of Law, securities
only to persons described in section 2.4(2) of Regulation
45-106.
"PROHIBITED TRANSACTIONS" is defined in ERISA Section 406 and Code
Section 4975.
"PRIORITY COLLATERAL" is defined in SECTION 7.15.
"PROPOSED EARN-OUT AMOUNT" as defined in SECTION 12.1(B).
"PROXY STATEMENT" is defined in SECTION 7.11(B).
"PURCHASED ASSETS" means (i) all cash and cash equivalents of Trust,
(ii) the Related Party Receivables, and (iii) all of the right, title and
interest that Trust possesses and has the right to transfer in and to
Intellectual Property, including, without limitation, Trust Marks set forth on
SCHEDULE 6.15(C), the Contracts set forth on SCHEDULE 6.18, all Contracts with
respect to the Trust Marks entered into after the date of this Agreement and
before the Closing, and in respect of all such Intellectual Property: (a)
goodwill associated therewith, Contracts (including licenses and sublicenses
granted and obtained) with respect thereto, and rights thereunder, remedies
against infringements thereof, and rights to protection of interests therein
under the laws of all jurisdictions; (b) claims, deposits, prepayments, advances
(including payments of royalties or other obligations to Trust prior to, and not
recouped or earned as of, the Closing), refunds, causes of action, chooses in
action, rights of recovery, rights of set off, and rights of recoupment; and (c)
books, records, ledgers, files, documents, correspondence, lists, drawings,
creative materials, advertising and promotional materials, and other printed or
written materials.
12
"REALLOCATION" as defined in SECTION 8.9.
"RECEIVABLES" means all receivables of Acquired Entities, including all
Contracts in transit, manufacturers warranty receivables, notes receivable,
accounts receivable, trade account receivables, and insurance proceeds
receivable.
"REGISTRATION RIGHTS AGREEMENT" means a registration rights contract,
substantially in the form of EXHIBIT J, providing for registration under the
Securities Act of the resale of the Parent Common Stock by the holders thereof
after the Closing.
"REGULATION 45-106" means Regulation 45-106 respecting prospectus and
registration exemptions (Quebec).
"RELATED PARTY RECEIVABLES" means the loans receivable of Trust payable
by Buffalo Inc. (CAD $1,117,535), Buffalo de France Corp ($2,872,000), and 368
Canada (CAD $188,624) as described more fully on SCHEDULE 7.10.
"RELEASEE" and "RELEASEES" is defined in SECTION 8.5.
"REQUISITE VOTE" is defined in SECTION 5.2(H).
"RESTRICTED AREAS" is defined in SECTION 7.14.
"RETAIL BUDGET" as defined in SECTION 12.6(D).
"REVISED BUDGET" as defined in SECTION 12.6(E).
"SCHEDULES" means the Schedules to this Agreement.
"SEC" means the U.S. Securities and Exchange Commission.
"SECRETARY'S CERTIFICATE" of a specified Person means a certificate,
duly executed on behalf of such Person by its Secretary, attaching and
certifying to the truth and correctness of: (a) the Organizational Documents of
such Person, as in effect at the time of the Closing; (b) a good standing
certificate with respect to such Person from the applicable authority in the
jurisdiction of such Person's organization, dated a recent date before the
Closing; (c) the resolutions approved by the board of directors or similar
governing body of such Person authorizing the Transaction and the Transaction
Documents; (d) the resolutions, if required, of such Person's equity holders
approving the Transaction and the Transaction Documents; and (e) the incumbency
of such Person's officers who are authorized to execute, deliver and perform
Transaction Documents and any other agreements, instruments, certificate or
other documents required to be executed by it in connection therewith.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITY AGREEMENT" is defined in SECTION 7.15.
13
"SECURITY INTEREST" means any security interest, deed of trust,
hypothec, mortgage, pledge, lien, charge, claim, or other similar interest or
right, except for (i) liens for taxes, assessments, governmental charges, or
claims that are being contested in good faith by appropriate Actions promptly
instituted and diligently conducted and only to the extent that a reserve or
other appropriate provision, if any, has been made on the face of the Financial
Statements in an amount equal to the Liability for which the lien is asserted,
(ii) statutory liens of landlords and warehousemen's, carriers', mechanics',
suppliers', materialmen's, repairmen's, or other like liens (including
Contractual landlords' liens) arising in the Ordinary Course of Business and
with respect to amounts not yet delinquent, or with respect to amounts being
contested in good faith by appropriate proceedings, only to the extent that a
reserve or other appropriate provision, if any, has been made on the face of the
Financial Statements in an amount equal to the Liability for which the lien is
asserted; and (iii) liens incurred or deposits made in the Ordinary Course of
Business in connection with workers' compensation, unemployment insurance and
other similar types of social security.
"SELLER" and "SELLERS" are defined in the preamble to this Agreement.
"SELLER DOCUMENTS" is defined in SECTION 7.15.
"SELLER INDEMNIFIED PARTIES" means (a) Buyer Parties, and their
respective Affiliates, officers, directors, managers, employees, agents,
representatives, controlling Persons, and stockholders, and (b) each Acquired
Entity.
"SELLER OBLIGATIONS" is defined in SECTION 7.15.
"SELLER PARTIES" is defined in the preamble to this Agreement.
"SELLER PRIORITY COLLATERAL" is defined in SECTION 7.15.
"SELLER RELEASEE" and "SELLER RELEASEES" are defined in SECTION 8.5(B).
"SENIOR OBLIGATIONS" is defined in SECTION 7.15.
"SENIOR OFFICER" as defined in SECTION 12.6(A).
"SHAREHOLDER APPROVAL" means approval of this Agreement, the Ancillary
Agreements, and the Transactions, including, without limitation, the issuance
and sale of the Parent Shares, by the Requisite Vote obtained in compliance with
applicable Law.
"SHARES" means, collectively, the 368 Shares, the Buffalo Inc. Shares,
the 316 Shares and the Buffalo US Shares.
"SHORTFALL" is defined in SECTION 12.3.
"SOFTWARE" means computer software or middleware.
"SPECIAL MEETING" is defined in SECTION 7.11(A).
14
"STANDSTILL AGREEMENT" means the Standstill and Voting Agreement in the
form of EXHIBIT K.
"SUBSIDIARY" means, with respect to any Person: (a) any corporation of
which more than 50% of the total voting power of all classes of the Equity
Interests entitled (without regard to the occurrence of any contingency) to vote
in the election of directors is owned by such Person directly or through one or
more other Subsidiaries of such Person, and (b) any Person other than a
corporation of which at least a majority of the Equity Interests (however
designated) entitled (without regard to the occurrence of any contingency) to
vote in the election of the governing body, partners, managers or others that
will control the management of such entity is owned by such Person directly or
through one or more other Subsidiaries of such Person.
"SUPPORT AGREEMENT" means the agreement to be entered into as of the
Closing Date among Parent and Buyer substantially in the form of EXHIBIT L
pursuant to which such parties agree to take certain actions so long as there
are any Buyer Exchangeable Shares outstanding.
"SURPLUS" is defined in SECTION 12.3.
"TARGET" is defined in SECTION 12.3.
"TARGET COMPANIES" is defined in the preamble to this Agreement.
"TAX" or "TAXES" means all taxes, charges, duties, fees, levies,
imposts, and any other charges of any kind lawfully levied, assessed,
reassessed, charged, collected, withheld or imposed in any manner by any
Governmental Body under any applicable Law, including:
(a) federal, provincial, municipal and local, foreign or other
income, franchise, profits, capital (including large
corporations), capital gains, alternative, net worth, gross
receipts, immovable or real property, movable or personal
property, tangible, withholding, payroll, employment-related,
health, safety, severance, transfer, registration, sales,
value added, goods and services, harmonized sales, license,
stamp, use, excise, occupation, consumption, anti-dumping,
customs, import, AD VALOREM, countervail duties, Canada
pension plan contributions, Quebec pension plan contributions,
unemployment and employment insurance payments, social
security, provincial workers' compensation payments, and value
added taxes and all other taxes, contributions, duties and
charges of any kind whatsoever for which any corporation of
Acquired Entities may have any liability imposed by any
Governmental Body, together with any installments with respect
thereto, whether disputed or not; and
(b) interest, fines, penalties and additions associated therewith
imposed by any Governmental Body, whether disputed or not.
"TAX PROCEEDING" is defined in SECTION 8.8(E).
"TAX RETURN" means all reports, declarations, remittances, returns,
claims, elections, statements, designations, forms, and other documents and
information filed or required to be filed in respect of Taxes or in respect of
or pursuant to any domestic or foreign federal,
15
provincial, state, municipal, territorial, or other taxing statute, including
any schedule or attachment thereto and any amendment thereof.
"TERMINATION DATE" means the earlier to occur of (a) the Expiration
Date and (b) the date on which this Agreement is terminated pursuant to SECTION
10.1 (other than SECTION 10.1(B)).
"TERMINATION FEE" is defined in SECTION 10.2(F).
"TRADEMARK PURCHASE" means the acquisition by Trust of rights in the
Trust Marks pursuant to and in accordance with the Trademark Purchase
Agreements.
"TRADEMARK PURCHASE AGREEMENTS" means the series of agreements
providing for the sale and transfer by Sarafina Invest Limited and Hurstwood
Limited of their respective interests in the Trust Marks to Beldene Limited, and
the subsequent sale and transfer of such acquired interests in the Trust Marks
by Beldene Limited to Trust, substantially in the form of EXHIBIT M.
"TRADE SECRETS" means all know-how, trade secrets and confidential
information, including customer lists, supplier lists, technical information,
data, process technology, plans, drawings, designs, inventions, and conceptions
of inventions whether patentable or unpatentable and whether or not reduced to
practice.
"TRADING DAY" is defined in SECTION 3.8(D).
"TRADING MARKET" is defined in SECTION 3.8(D).
"TRANSACTION DOCUMENTS" means this Agreement and the Ancillary
Agreements.
"TRANSACTIONS" means all of the transactions contemplated by this
Agreement, including: (a) the sale of the Shares by Sellers to Buyer Parties and
Buyer Parties' delivery of the purchase price therefor; (b) the sale of the
Assets by Trust to Buyer Parties and Buyer Parties' delivery of the purchase
price therefore; (c) the execution, delivery, and performance of all of the
documents, instruments, and agreements to be executed, delivered, and performed
in connection herewith, including each Ancillary Agreement; and (d) the
performance by the Parties of their respective covenants and obligations (pre-
and post-Closing) under this Agreement.
"TREAS. REG." means the temporary and final regulations promulgated
under the Code.
"TRUST" is defined in the preamble to this Agreement.
"TRUST ADJUSTED NET REVENUE" is defined in SECTION 4.3(B)(I).
"TRUSTEE" is defined in SECTION 5.3(A).
"TRUST MARK" is defined in SECTION 6.15(C).
"US GAAP" means, at any time, United States generally accepted
accounting principles in force at such time.
16
"VOTING TRUST AGREEMENT" means an agreement with respect to voting by
the Voting Trustee of the Parent Special Voting Shares substantially in the form
of EXHIBIT N.
"VOTING TRUSTEE" means Computershare Trust Company of Canada, a trust
company incorporated under the laws of Canada, or such other trust company
incorporated under the laws of Canada reasonably acceptable to Parent and
Sellers.
ARTICLE 2.
DEPOSIT
2.1 DEPOSIT
Upon the execution of this Agreement, Parent shall pay to Buffalo
International, the amount of $5,000,000 as a deposit (the "DEPOSIT"), to be held
by Buffalo International and applied as follows:
(a) If the Closing occurs, the Deposit shall be retained by
Buffalo International and applied to the Buffalo Inc. Purchase
Price, and the cash portion of the Buffalo Inc. Purchase Price
payable by Buyer at the Closing shall be reduced by the amount
of the Deposit.
(b) If this Agreement is terminated by Sellers or Parent, as the
case may be, in accordance with SECTIONS 10.1(B), 10.1(D), or
10.1(E) then, as Sellers Parties' sole and exclusive remedy
and as liquidated damages, the Deposit shall be retained by
Buffalo International.
(c) If this Agreement is terminated by Sellers or Parent, as the
case may be, in accordance with SECTIONS 10.1(A), 10.1(C), or
10.1(F), the Deposit less, in the case of termination pursuant
to SECTION 10.1(F) only, the Termination Fee, shall be
refunded by Buffalo International to Buyer promptly following
such termination.
ARTICLE 3.
PURCHASE AND SALE OF SHARES
3.1 PURCHASE AND SALE OF SHARES
(a) On and subject to the terms and conditions of this Agreement,
Parent agrees to cause Buyer to purchase from 418 Canada, and
418 Canada agrees to sell to Buyer, all of the 368 Canada
Shares for the consideration specified in SECTION 3.2 and
delivered in the manner specified in SECTION 3.4.
(b) On and subject to the terms and conditions of this Agreement,
Parent agrees to cause Buyer to purchase from Buffalo
International, and Buffalo International agrees to sell to
Buyer, all of the Buffalo Inc. Shares and the 316 Shares for
the consideration specified in SECTION 3.2 and delivered in
the manner specified in SECTION 3.4.
17
(c) On and subject to the terms and conditions of this Agreement,
Parent agrees to purchase from 397 Canada, and 397 Canada
agrees to sell to Parent, all of the Buffalo US Shares for the
consideration specified in SECTION 3.2 and delivered in the
manner specified in SECTION 3.4.
3.2 PURCHASE PRICE FOR SHARES
(a) The purchase price for the 368 Canada Shares (the "368
PURCHASE PRICE") consists of: (i) 1,000,000 Buyer Exchangeable
Share; and (ii) a right to receive the Contingent Payment
described in SECTION 3.8 which the Parties agree currently has
a nominal value.
(b) The purchase price for the Buffalo Inc. Shares (the "BUFFALO
INC. PURCHASE PRICE") consists of: (i) 3,000,000 Buyer
Exchangeable Shares; (ii) balance of portion of Buffalo Inc.
Purchase Price of $11,000,000 evidenced by Buyer Notes (iii) a
right to receive the Contingent Payment described in SECTION
3.8 which the Parties agree currently has a nominal value; and
(iv) any portion of the Earn Out Amount payable to Buffalo
International by virtue of ARTICLE 12.
(c) The purchase price for the 316 Canada Shares (the "316
PURCHASE PRICE") consists of: (i) 9,000,000 Buyer Exchangeable
Shares; (ii) a right to receive the Contingent Payment
described in SECTION 3.8 which the Parties agree currently has
a nominal value; and (iii) any portion of the Earn Out Amount
payable to Buffalo International by virtue of ARTICLE 12.
(d) The purchase price for the Buffalo US Shares (the "BUFFALO US
PURCHASE PRICE") consists of: (i) $17,000,000 in cash; and
(ii) any portion of the Earn Out Amount payable to 397 Canada
by virtue of ARTICLE 12.
3.3 THE CLOSING
The closing of the purchase and sale of the Shares (the "CLOSING")
shall take place at the offices of Blake, Cassels & Graydon LLP, Suite 2200, 600
de Maisonneuve Boulevard West, Montreal, Quebec H3A 3J2, commencing at 9:00
a.m., local time, on the second (2nd) business day following the satisfaction or
waiver of all conditions to the obligations of the Parties to consummate the
purchase and sale of the Shares and Assets (other than conditions with respect
to actions the respective Parties will take at the Closing itself) or such other
date as Buyer Parties, Sellers and Trust may mutually determine (the "CLOSING
DATE").
3.4 DELIVERY OF PURCHASE PRICE FOR SHARES AT THE CLOSING
(a) Parent shall cause Buyer to deliver the 368 Purchase Price at
the Closing by delivering to 418 Canada, stock certificates
representing 1,000,000 Buyer Exchangeable Shares.
(b) Parent shall cause Buyer to deliver the Buffalo Inc. Purchase
Price at the Closing as follows: (i) to Buffalo International,
stock certificates representing 3,000,000
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Buyer Exchangeable Shares; and (ii) to Buffalo International,
$11,000,000 in principal amount of Buyer Notes.
(c) Parent shall cause Buyer to deliver the 316 Purchase Price at
the Closing by delivering to Buffalo International, stock
certificates representing 9,000,000 Buyer Exchangeable Shares.
(d) Parent shall deliver the Buffalo US Purchase Price at the
Closing, by delivering to 397 Canada, $17,000,000 in cash via
Fedwire transfer.
3.5 OTHER DELIVERIES AT THE CLOSING
(a) At the Closing, Sellers shall deliver to applicable Buyer
Party:
(i) Certificates representing the Shares, duly endorsed
or accompanied by duly executed stock powers in favor
of Buyer or Parent, as the case may be, or their
nominee in form acceptable to applicable Buyer Party;
(ii) An Officers' certificate, in form and substance
reasonably satisfactory to Parent, duly executed on
Sellers' behalf, certifying as to whether each
condition specified in SECTIONS 9.1(A) through (d)
has been satisfied in all respects;
(iii) A Secretary's Certificate, in form and substance
reasonably satisfactory to Parent, duly executed on
Sellers' behalf;
(iv) The resignation, effective as of the Closing, of each
Acquired Entity's directors and officers requested by
Parent; and
(v) Each Seller's counterpart signatures to each of the
Transaction Documents to which it is a party, and
each Bitton Brother's counterpart signature to each
of the Transaction Documents to which such Bitton
Brother is a party.
(b) At the Closing, Parent shall deliver to Sellers:
(i) An Officers' certificate, in form and substance
reasonably satisfactory to Sellers, duly executed on
Parent's behalf, certifying as to whether each
condition specified in SECTIONS 9.2(A) and 9.2(D) has
been satisfied in all respects;
(ii) A Secretary's Certificate, in form and substance
reasonably satisfactory to Sellers, duly executed on
Parent's behalf; and
(iii) Each Buyer Party's counterpart signatures to each of
the Transaction Documents to which it is a party.
(c) At the Closing, Parent shall deliver to Voting Trustee, the
Parent Special Voting Shares to be held in accordance with the
Voting Trust Agreement.
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3.6 TAX ELECTION
Buyer agrees that, at the request of a Seller who has received Buyer
Exchangeable Shares on Closing and who is a resident of Canada for purposes of
the INCOME TAX ACT (Canada), Buyer will make a joint election with such Seller
with respect to the Shares sold to Buyer by such Seller under this Agreement
under Subsection 85(1) of the INCOME TAX ACT (Canada) and the corresponding
provisions of any applicable provincial income tax statute, with such "agreed
amount" as is determined by such Seller in its sole discretion (within the
limits under applicable Law). Such Seller shall have sole responsibility for the
timely and proper filing of the elections with the relevant tax authorities. The
sole obligation of Buyer shall be to provide any information reasonably
requested by the Seller for the election form(s) concerning Buyer, and to
execute and return to such Seller within ten (10) days of receipt such election
form(s) which are received by Buyer at the address set forth in this Agreement
not later than one hundred twenty (120) days following the Closing Date.
3.7 ALLOCATION OF THE BUFFALO INC. PURCHASE PRICE
The Buffalo Inc. Purchase Price shall be allocated as follows among the
Buffalo Inc. Shares:
(a) For the 4,731,301 Class "E" preferred shares, and amount in US
Dollars that is the equivalent of 4,731,301 Canadian Dollars
at the Exchange Rate as of the Closing Date;
(b) For the 1,117,184 Class "F" preferred shares, and amount in US
Dollars that is the equivalent of 1,117,184 Canadian Dollars
at the Exchange Rate as of the Closing Date; and
(c) For the 100 Class "A" Common shares, the remaining balance of
the Buffalo Inc. Purchase Price.
3.8 CONTINGENT PAYMENT
(a) Upon the terms and subject to the conditions set forth in this
SECTION 3.8, the Contingent Rightholder shall have the right
to receive from Buyer an amount equal to any additional
payment (the "CONTINGENT PAYMENT") required to be made
pursuant to this Section and Parent agrees to cause Buyer to
pay such Contingent Payment.
(b) The Contingent Payment, if any, to be made by Buyer to the
Contingent Rightholder shall be determined for each Parent
Share on the basis of the market price per share of Parent
Common Stock during the five year period following the
Closing, as follows:
(i) With respect to each Parent Share, Parent shall cause
Buyer to pay to the Contingent Rightholder an amount
equal to the excess of (i) the Minimum Share Price
over (ii) the Parent Share Value, unless the Parent
Share Value for such Parent Share equals or exceeds
the Minimum Share Price at any time on or before the
fifth anniversary of the Closing Date. For example,
if the Parent Share
20
Value is $2.80, then Parent shall cause Buyer to pay
to the Contingent Rightholder an amount equal to
$0.276 for each Parent Share. As a further example,
if the Parent Share Value is $3.15, then Parent shall
have no obligation to pay the Contingent Payment.
(ii) The Contingent Payment shall be payable by Buyer no
sooner than five (5) days and no later than thirty
(30) days following the fifth anniversary of the
Closing Date in cash via Fedwire transfer pursuant to
instructions provided by the Contingent Rightholder.
(c) Each Seller receiving Buyer Exchangeable Shares at Closing,
and each subsequent Contingent Rightholder, shall have the
right to transfer the right to receive the Contingent Payment
either together with, or separate from, the Parent Shares with
respect to which such Contingent Payment relates. Any
Contingent Rightholder that desires to transfer its right to
receive the Contingent Payment shall first deliver to Buyer a
copy of an assignment agreement.
(d) For purposes of this SECTION 3.8, the following terms shall
have the following meanings:
"CONTINGENT RIGHTHOLDER" means any Person that has the right to receive
a Contingent Payment in respect of a Parent Share. The initial Contingent
Rightholder for all of the Parent Shares shall be Sellers receiving Buyer
Exchangeable Shares at Closing, and thereafter shall include any Person to whom
such Seller or any subsequent Contingent Rightholder transfers a right to
receive a Contingent Payment in accordance with this SECTION 3.8.
"MINIMUM SHARE PRICE" means $3.076 per share of Parent Common Stock (as
adjusted for stock splits, reverse stock splits, and similar transactions after
the date of this Agreement which affect the price of Parent Common Stock).
"PARENT SHARE VALUE" means the highest volume weighted average price
per share of the Parent Common Stock (a reported by Bloomberg Financial Markets)
on the Trading Market over ten (10) consecutive Trading Days during the five
years following the Closing Date, during which the aggregate trading volume of
the Parent Common Stock traded on the Trading Market during such ten (10)
Trading Days is at least 500,000 shares (as adjusted for stock splits, reverse
stock splits, and similar transactions after the date of this Agreement which
affect the number of issued and outstanding shares of Parent Common Stock).
"TRADING DAY" means a day on which the principal national securities
exchange on which the Parent Common Stock is listed or admitted to trading or
traded is open for the transaction of business or, if the Stock is not listed or
admitted to trading on any national securities exchange, a business day.
"TRADING MARKET" means the Nasdaq Global Market or, if the Parent
Common Stock is not then listed or admitted to trading on the Nasdaq Global
Market, such other principal securities market or exchange or automated
quotation system on which the Parent Common Stock is then traded, listed or
quoted on the date in question.
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ARTICLE 4.
PURCHASE AND SALE OF ASSETS
4.1 PURCHASE AND SALE OF PURCHASED ASSETS
On and subject to the terms and conditions of this Agreement, Buyer
Parties agree to purchase from Trust, and Trust agrees to sell to Buyer Parties,
all of the Purchased Assets for the consideration specified in SECTION 4.3 and
delivered in the manner specified in SECTION 4.6. At least ten (10) days prior
to the expected Closing, the Buyer Parties shall determine and notify Trust of
which of the Purchased Assets will be acquired by Parent and Buyer at the
Closing and the portion of the Asset Purchase Price to be paid by Parent and
Buyer for the Purchased Assets to be acquired by such Buyer Party; PROVIDED,
HOWEVER, that in all events, the Buyer Note to be delivered in payment of the
Purchase Assets shall be paid by Buyer for the Purchase Assets acquired by
Buyer. Nothing in this SECTION 4.1 shall restrict a Buyer Party from assigning
its rights under this Agreement in accordance with SECTION 13.4.
4.2 ASSUMED LIABILITIES
On and subject to the terms and conditions of this Agreement, Buyer
Parties agree to assume and become responsible for all of the Assumed
Liabilities as of the Closing Date. Buyer Parties will not assume or have any
responsibility, however, with respect to any other obligation or Liability of
Trust not included within the definition of Assumed Liabilities.
4.3 PURCHASE PRICE FOR PURCHASED ASSETS
(a) ASSET PURCHASE PRICE. The purchase price for the Purchased
Assets (the "ASSET PURCHASE PRICE") consists of: (i)
$23,000,000 in cash; and (ii) balance of portion of Asset
Purchase Price of $4,000,000 evidenced by Buyer Notes.
(b) ADJUSTMENTS TO ASSET PURCHASE PRICE. The Asset Purchase Price
will be adjusted in the following manner. Any such adjustment
will be applied against, and reduce, the cash portion of the
Asset Purchase Price.
(i) PURCHASE PRICE ADJUSTMENT. The Asset Purchase Price
will be decreased by the amount by which the Trust
Adjusted Net Revenue attributable to the period from
January 1, 2005 up to (and including) the Closing
exceeds the amount of cash and cash equivalents of
Trust as of the Closing Date and which are included
in the Purchased Assets acquired by Buyer Parties
(the "ASSET PURCHASE PRICE ADJUSTMENT"). For purposes
hereof, the "TRUST ADJUSTED NET REVENUE" means (w)
all revenues of Trust LESS (x) all expenses of Trust
(including income taxes of Trust and 6144195 Canada
Inc. relating to revenues of Trust or 6144195 Canada
Inc. revenues from Trust and which are actually paid
to the taxing authorities either during or after the
period for which the applicable revenues were
accrued), other than (A) expenses paid or payable to
Affiliates of Trust other than for bona fide services
actually rendered by such Affiliate for the Trust's
benefit (which in no event shall include interest
expense payable to Affiliates) and (B) non-cash
expenses (including, without limitation, amortization
expense), LESS (y) the Related Party Receivables
(provided that the amount of the loans giving rise to
22
such Related Party Receivables have not been
distributed by the Acquired Entities to Sellers),
LESS (z) $3,000,000, all determined in accordance
with Canadian GAAP and the financial statements of
Trust. The Asset Purchase Price Adjustment shall be
determined in Canadian Dollars and converted to
United States Dollars using the Exchange Rate on the
Closing Date.
(ii) INITIAL ASSET PURCHASE PRICE ADJUSTMENT. Ten calendar
days prior to the expected Closing Date, Trust will
deliver to Buyer a written statement setting forth
Trust's good faith estimate of the Asset Purchase
Price Adjustment as of the Closing Date (the "CLOSING
DATE ADJUSTMENT AMOUNT"). The Asset Purchase Price as
adjusted by the Closing Date Adjustment Amount is the
"CLOSING DATE ADJUSTED ASSET PURCHASE PRICE."
(iii) DEFINITIVE ASSET PURCHASE PRICE ADJUSTMENT.
(A) As promptly as practicable after the Closing
Date, but not later than 60 calendar days
thereafter, Parent will deliver to Trust a
schedule setting forth in reasonable detail
Parent's calculation of the Asset Purchase
Price Adjustment as of the Closing Date
based on actual results (the "POST-CLOSING
ESTIMATED ADJUSTMENT AMOUNT"). If Parent
fails to deliver such schedule within such
period, the Closing Date Adjusted Asset
Purchase Price will be deemed to be the
Final Asset Purchase Price.
(B) The Post-Closing Estimated Adjustment Amount
will be subject to Trust's review. In
reviewing the Post-Closing Estimated
Adjustment Amount, Trust will have the right
to communicate with, and to review the work
papers, schedules, memoranda and other
documents Parent prepared or reviewed in
determining the Post-Closing Estimated
Adjustment Amount and thereafter will have
access to all relevant books and records,
all to the extent Trust reasonably requires
to complete its review of Parent's
calculation of the Post-Closing Estimated
Adjustment Amount. Within 30 calendar days
after its receipt of Parent's calculation of
the Post-Closing Estimated Adjustment
Amount, Trust will advise Parent whether,
based on such review, it has any exceptions
to such calculation. Unless Trust delivers
to Parent within such 30 calendar day period
a letter describing its exceptions to
Parent's calculation of Post-Closing
Estimated Adjustment Amount as set forth in
the schedule delivered by Parent described
in SECTION 4.3(B)(III)(A), the Post-Closing
Estimated Adjustment Amount will be
conclusive and binding on Parent and Trust.
If Trust submits a letter detailing any
exceptions to the calculation of the
Post-Closing Estimated Adjustment Amount,
then (1) for 20 days after the date Parent
receives such letter, Trust and Parent will
use their Commercially Reasonable Efforts to
agree on the calculation of the Post-Closing
Estimated Adjustment Amount and (2) lacking
such agreement, the matter will be referred
to an independent accounting firm reasonably
acceptable to Parent and Sellers, who will
determine the correct Post-Closing Estimated
Adjustment Amount within 30 days of
23
such referral, which determination will be
final and binding on Parent and Trust for
all purposes. Such amount determined in
accordance with this SECTION 4.3(B)(III)(B)
is the "CONCLUSIVE ADJUSTMENT AMOUNT."
(C) If the Conclusive Adjustment Amount is
different than the Closing Date Adjustment
Amount, then, within two business days of
the determination of the Conclusive
Adjustment Amount, Sellers (Parent) will pay
to Parent (Sellers), as appropriate, an
amount equal to the difference between the
Closing Date Adjustment Amount and the
Conclusive Adjustment Amount, together with
interest thereon at a rate of seven percent
(7%) per annum during the period commencing
on and including the Closing Date and
continuing through but excluding the date
such amount is paid. The "FINAL ASSET
PURCHASE PRICE" is the Closing Date Adjusted
Asset Purchase Price, increased or
decreased, as applicable, by the amount paid
by Parent or Seller pursuant to this SECTION
4.3(B)(III)(C).
4.4 ASSET PURCHASE PRICE ALLOCATION
Buyer Parties and Sellers agree to cooperate in good faith to determine
on or prior to the Closing Date the manner in which the Asset Purchase Price
shall be allocated among the Purchased Assets, which determination shall be set
forth on SCHEDULE 4.4 and initialed by the parties hereto at the Closing. Buyer
Parties and Sellers shall file and cause to be filed all Tax Returns, and
execute such other documents as may be required by any taxing authority, in a
manner consistent with the Asset Purchase Price allocation, and shall refrain,
and cause their Affiliates to refrain, from taking any position inconsistent
with such Asset Purchase Price allocation with any taxing authority unless, and
then only to the extent, required to do so by a taxing authority.
4.5 THE CLOSING
The closing of the purchase and sale of the Purchased Assets shall
occur concurrently with the closing of the purchase and sale of the Shares at
the Closing on the Closing Date.
4.6 DELIVERY OF ASSET PURCHASE PRICE AT THE CLOSING
Buyer Parties shall deliver to Trust at Closing: (i) the cash portion
of the Closing Date Adjusted Asset Purchase Price in cash via Fedwire transfer;
and (ii) $4,000,000 in principal amount of Buyer Notes.
4.7 OTHER DELIVERIES AT THE CLOSING
(a) At the Closing, Trust shall deliver to Buyer Parties:
(i) The Bill of Sale and the Assignment and Assumption
Agreement, each duly executed by Trust;
(ii) Such other bills of sale, assignments, and other
instruments of transfer or conveyance as Parent may
reasonably request or as may be otherwise
24
necessary to evidence and effect the sale,
assignment, transfer, conveyance, and delivery of the
Purchased Assets to Buyer Parties, including, without
limitation, duly executed assignments of trademarks
for all applicable jurisdictions and suitable to be
recorded therein;
(iii) All cash and cash equivalents of Trust;
(iv) An Officers' certificate, in form and substance
reasonably satisfactory to Parent, duly executed on
Trust's behalf, certifying as to whether each
condition specified in SECTIONS 9.1(A) through (D)
has been satisfied in all respects;
(v) A Secretary's Certificate, in form and substance
reasonably satisfactory to Parent, duly executed on
Trust's behalf; and
(vi) Trust's counterpart signatures to each of the
Transaction Documents to which it is a party.
(b) At the Closing, Buyer Parties shall deliver to Trust:
(i) The Assignment and Assumption Agreement, duly
executed by each Buyer Party;
(ii) An Officers' certificate, in form and substance
reasonably satisfactory to Trust, duly executed on
each Buyer Party's behalf, certifying as to whether
each condition specified in SECTIONS 9.2(A) through
(F) has been satisfied in all respects;
(iii) A Secretary's Certificate, in form and substance
reasonably satisfactory to Trust, duly executed on
each Buyer Party's behalf; and
(iv) Each Buyer Party's counterpart signatures to each of
the Transaction Documents to which it is a party.
4.8 CERTAIN TAX TREATMENT
Buyer Parties and Trust agree that, pursuant to Section 10 of Part V of
Schedule VI of the EXCISE TAX Act (Canada) and section 188 of an ACT RESPECTING
THE QUEBEC SALES TAX, no Goods and Services Tax under the EXCISE TAX ACT
(Canada) or Quebec Sales Tax under an ACT RESPECTING THE QUEBEC SALES TAX is
payable in respect of the purchase and sale of the Purchased Assets. In that
respect, Parent represents that it is not registered under Subdivision d of
Division V of Part IX of the EXCISE TAX ACT (Canada) and under Division I of
Chapter VIII of an ACT RESPECTING THE QUEBEC SALES TAX.
25
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES
CONCERNING THE TRANSACTION
5.1 REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers, jointly and severally, represent and warrant to Buyer Parties
the following as of the date of this Agreement:
(a) STATUS OF CERTAIN SELLERS. Each Seller is an entity duly
created, formed or organized, validly existing, and in good
standing under the Laws of the jurisdiction of its creation,
formation, or organization. There is no pending or threatened
Action for the dissolution, liquidation, insolvency, or
rehabilitation of any Seller.
(b) POWER AND AUTHORITY; ENFORCEABILITY. Each Seller has the power
and authority to execute and deliver each Transaction Document
to which such Seller is a party, and to perform and consummate
the Transactions. Each Seller has taken all actions necessary
to authorize the execution and delivery of each Transaction
Document to which it is party, the performance of such
Seller's obligation's thereunder, and the consummation of the
Transactions. Each Transaction Document has been duly
authorized, executed, and delivered by, and assuming the due
authorization, execution, and delivery thereof by each other
party thereto, is Enforceable against, each Seller that is
party thereto.
(c) NO VIOLATION. Except as set forth on SCHEDULE 5.1(C), the
execution and the delivery of the Transaction Documents by
each Seller party thereto and the performance and consummation
of the Transactions by such Seller will not (i) result in a
material Breach of any Law or Order to which such Seller is
subject or any provision of its Organizational Documents, (ii)
result in a material Breach of any Contract, Order, or Permit
to which such Seller is a party or by which such Seller is
bound or to which any of such Seller's assets is subject, or
(iii) require any Consent, except any SEC and other filings
required to be made by Parent or Buyer. No Seller that is
party to any Contract to which any Acquired Entity is a party
or by which any Acquired Entity is bound or any of its assets
is subject has Breached any such Contract.
(d) RESIDENCE OF SELLERS. Each Seller is not a non-resident of
Canada for purposes of section 116 of the INCOME TAX ACT
(Canada) and Part II of the TAXATION ACT (Quebec).
(e) BROKERS' FEES. No Seller has any Liability to pay any
compensation to any broker, finder, or agent with respect to
the Transactions for which any Buyer Party or any Acquired
Entity could become directly or indirectly Liable.
(f) SHARES; SELLER INFORMATION. Each Seller holds of record and
owns beneficially the number of Shares as set forth next to
such Seller's name in EXHIBIT A, free and clear of any
Encumbrances (other than any restrictions under the Securities
Act and state securities Laws). With respect to each Seller,
EXHIBIT A also sets forth the address, state of residence and
federal tax identification number (or social security
26
number, as applicable) of such Seller as of the date hereof.
No Seller is a party to any Contract that could require such
Seller to sell, transfer, or otherwise dispose of any capital
stock of any Acquired Entity (other than this Agreement). No
Seller is a party to any other Contract with respect to any
capital stock of any Acquired Entity.
(g) INVESTMENT. Each Seller (i) understands that none of the Buyer
Notes, the Buyer Exchangeable Shares or the Parent Common
Stock have been, nor will be, except as provided for in the
Registration Rights Agreement, registered under the Securities
Act, under any state securities Laws, or under any Canadian
securities Laws, and that the Buyer Notes, the Buyer
Exchangeable Shares and the Parent Common Stock are being
offered and sold in reliance upon United States federal and
state, and Canadian provincial, exemptions for transactions
not involving any public offering, (ii) is acquiring the Buyer
Notes, the Buyer Exchangeable Shares and the Parent Common
Stock solely for Seller's own account for investment purposes,
and not with a view to the distribution thereof, (iii) is a
sophisticated investor with knowledge and experience in
business and financial matters, (iv) has received certain
information concerning Buyer Parties and has had the
opportunity to obtain additional information as desired to
evaluate the merits and the risks inherent in holding the
Buyer Notes, the Buyer Exchangeable Shares and the Parent
Common Stock, (v) is able to bear the economic risk and lack
of liquidity inherent in holding the Buyer Notes, the Buyer
Exchangeable Shares and the Parent Common Stock, (vi) is an
"accredited investor" as defined in Regulation D promulgated
under the Securities Act and as defined under Regulation
45-106 and, where applicable, has not been created or used
solely to purchase or hold securities as an "accredited
investor" for purposes of Regulation 45-106, (vii) has not
entered into this transactions as a result of any general
solicitation or general advertising (within the meaning of
Regulation D under the Securities Act and (viii) understands
that the Buyer Notes, the Buyer Exchangeable Shares, and the
Parent Shares issuable in exchange thereof will be "restricted
securities" within the meaning of Rule 144(a)(3) of the
Securities Act and may not be offered or sold in the United
States or to a U.S. Person except pursuant to a registration
statement under the Securities Act or an exemption therefrom
and except pursuant to a prospectus filed and receipted under
applicable Canadian securities legislation or an exemption
therefrom.
(h) BUYER REVIEW. Each Seller:
(i) Has such knowledge and experience in financial and
business matters that it is capable of evaluating the
merits and risks of such Seller's investment in the
Buyer Notes, the Buyer Exchangeable Shares and the
Parent Common Stock contemplated hereby, and that
such Seller is able to bear the economic risk of such
investment indefinitely.
(ii) Has (A) had the opportunity to meet with
representative officers and other representatives of
Parent to discuss its business, assets, liabilities,
financial condition, cash flow, and operations, and
(B) received all materials, documents and other
information that it deems necessary or advisable to
evaluate the Buyer Notes, the Buyer Exchangeable
Shares and the Parent Common Stock and the
Transactions.
27
(iii) Has made its own independent examination,
investigation, analysis and evaluation of the Buyer
Notes, the Buyer Exchangeable Shares and the Parent
Common Stock Buyer, including its own estimate of the
value of the Buyer Notes, the Buyer Exchangeable
Shares and the Parent Common Stock.
(iv) Has undertaken such due diligence (including a review
of Parent's assets, properties, liabilities, books,
records, and contracts) as it deems adequate,
including that described above.
Nothing in SECTION 5.1(H) will preclude a Seller from relying
on the representations, warranties, covenants, and agreements of Buyer
Parties herein or from pursuing their remedies with respect to a Breach
thereof.
(i) ASSETS AND LIABILITIES. Except as set forth on SCHEDULE
5.1(I), each Seller is a holding company and does not operate
any business nor have any assets or Liabilities other than
such Seller's ownership of the Shares and Liabilities related
thereto.
5.2 REPRESENTATIONS AND WARRANTIES OF BUYER PARTIES
Buyer Parties, jointly and severally, represent and warrant to Sellers
and Trust the following as of the date of this Agreement.
(a) ENTITY STATUS. Each Buyer Party is a corporation duly created,
formed or organized, validly existing and in good standing
under the Laws of the jurisdiction of its creation, formation
or organization. Each Buyer Party has the requisite power and
authority to own or lease its properties and to carry on its
business as currently conducted. There is no pending or
threatened Action for the dissolution, liquidation,
insolvency, or rehabilitation of any Buyer Party. Buyer (not
Parent) is a Private Issuer.
(b) POWER AND AUTHORITY; ENFORCEABILITY. Each Buyer Party has the
relevant corporate power and authority to execute and deliver
each Transaction Document to which it is party, and, subject
to obtaining Shareholder Approval, to perform and consummate
the Transactions. Other than obtaining Shareholder Approval,
each Buyer Party has taken all action necessary to authorize
the execution and delivery of each Transaction Document to
which it is party, the performance of its obligations
thereunder, and the consummation of the Transactions. Each
Transaction Document has been duly authorized, executed and
delivered by, and assuming the due authorization, execution,
and delivery thereof by each other party thereto and obtaining
Shareholder Approval, is Enforceable against, each Buyer Party
that is a party thereto.
(c) NO VIOLATION. Except as set forth on SCHEDULE 5.2(C), the
execution and delivery of the Transaction Documents by each
Buyer Party party thereto and the performance and consummation
of the Transactions by such Buyer Party will not (i) Breach
any Law or Order to which such Buyer Party is subject or any
provision of its Organizational Documents; (ii) Breach any
Contract, Order, or Permit to which such Buyer Party is a
party or by which it is bound or to which any of its assets is
subject; (iii) require any Consent, except (A) obtaining
Shareholder Approval, and (B) any SEC and
28
other filings required to be made by Buyer or Parent,
including the Proxy Statement to be filed in connection with
obtaining Shareholder Approval.
(d) BROKERS' FEES. No Buyer Party has any Liability to pay any
compensation to any broker, finder, or agent with respect to
the Transactions for which any Seller could become directly or
indirectly Liable.
(e) CAPITALIZATION.
(i) Buyer's authorized share capital consists of an
unlimited number of Buyer Common Shares, of which 100
shares are issued and outstanding and no shares are
held in treasury, an unlimited number of Buyer
Exchangeable Shares, of which no shares are issued
and outstanding and no shares are held in treasury,
an unlimited number of first preferred shares, of
which no shares are issued and outstanding and no
shares are held in treasury, and an unlimited number
of second preferred shares, of which no shares are
issued and outstanding and no shares are held in
treasury. All of the issued and outstanding Buyer
Common Shares (A) have been duly authorized, are
validly issued, fully paid, and nonassessable, (B)
were issued in compliance with all applicable United
States federal and state securities Laws and all
applicable Canadian securities Laws, and (C) were not
issued in Breach of any Commitments. No Commitments
exist with respect to any Buyer Common Shares and no
such Commitments will arise in connection with the
Transactions. There are no Contracts with respect to
the voting or transfer of Buyer's share capital,
other than the Ancillary Agreements and Voting Trust
Agreement. Buyer is not obligated to redeem or
otherwise acquire any of its outstanding share
capital other than the Buyer Exchangeable Shares.
(ii) The Buyer Exchangeable Shares to be issued pursuant
to this Agreement will be duly authorized, validly
issued, fully paid and nonassessable, and the Buyer
Exchangeable Shares and the Buyer Notes to be issued
pursuant to this Agreement will be issued in
compliance with all applicable United States federal
and state securities Laws and all applicable Canadian
securities Laws.
(iii) Parent's authorized capital stock consists of
100,000,000 shares of Parent Common Stock, of which
30,543,763 shares are issued and outstanding as of
November 24, 2006 and no shares are held in treasury,
and 2,000,000 shares of preferred stock, no par
value, of which 250,000 shares have been designated
Series B Preferred Stock, of which no shares are
issued and outstanding and no shares are held in
treasury. Prior to the Closing, Parent's authorized
capital stock also will include the Parent Special
Voting Shares. All of the issued and outstanding
shares of Parent Common Stock (A) have been duly
authorized, are validly issued, fully paid, and
nonassessable, (B) were issued in compliance with all
applicable state, federal and foreign securities
Laws, and (C) were not issued in Breach of any
Commitments. Except as described in SCHEDULE 5.2(E)
or disclosed in the Parent SEC Documents, no
Commitments exist with respect to any Parent Common
Stock and no such Commitments will arise in
connection with the Transactions. Parent is not
obligated to redeem or otherwise acquire any of its
outstanding capital stock.
29
(iv) The shares of Parent Common Stock and the Parent
Special Voting Shares to be issued pursuant to this
Agreement will be duly authorized, validly issued,
fully paid and nonassessable and will be issued in
compliance with all applicable United States federal
and state securities Laws and all applicable Canadian
securities Laws.
(f) PARENT'S SECURITIES FILINGS AND FINANCIAL STATEMENTS. Parent
has furnished or made available to Sellers and Trust true and
complete copies of all reports or registration statements
Parent has filed with the SEC under the Securities Act and the
Exchange Act, for all periods subsequent to December 31, 2004,
all in the form so filed (collectively the "PARENT SEC
DOCUMENTS"). As of their respective filing dates, the Parent
SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as
applicable, and none of the Parent SEC Documents filed under
the Exchange Act contained any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements made therein, in
light of the circumstances in which they were made, not
misleading, except to the extent corrected by a subsequently
filed document with the SEC. None of the Parent SEC Documents
filed under the Securities Act contained an untrue statement
of material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements
therein not misleading at the time such Parent SEC Documents
became effective under the Securities Act. Parent's financial
statements, including the notes thereto, included in the
Parent SEC Documents (the "PARENT FINANCIAL STATEMENTS")
comply as to form in all material respects with applicable
accounting requirements and with the published rules and
regulations of the SEC with respect thereto, have been
prepared in accordance with US GAAP consistently applied
(except as may be indicated in the notes thereto) and present
fairly Parent's consolidated financial position at the dates
thereof and of its operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to
normal audit adjustments). Since the date of the most recent
Parent SEC Document, Parent has not effected any change in any
method of accounting or accounting practice, except for any
such change required because of a concurrent change in US
GAAP. Except as disclosed in the Parent SEC Documents, there
has not been an event or development that has had or would
reasonably be expected to have a Parent Material Adverse
Effect.
(g) ACQUIRED ENTITY REVIEW. Each Buyer Party:
(i) Has such knowledge and experience in financial and
business matters that it is capable of evaluating the
merits and risks of its investment in the Shares
being acquired by such Buyer Party contemplated
hereby, and that such Buyer Party is able to bear the
economic risk of such investment indefinitely.
(ii) Has (A) had the opportunity to meet with
representative officers and other representatives of
each Acquired Entity to discuss its business, assets,
liabilities, financial condition, cash flow, and
operations, and (B) received all materials, documents
and other information that it deems necessary or
advisable to evaluate the Shares and the
Transactions.
30
(iii) Has made its own independent examination,
investigation, analysis and evaluation of the Shares,
including its own estimate of the value of the
Shares.
(iv) Has undertaken such due diligence (including a review
of Acquired Entities' assets, properties,
liabilities, books, records, and contracts) as it
deems adequate, including that described above.
Nothing in this SECTION 5.2(G) will preclude any Buyer Party
from relying on the representations, warranties, covenants, and
agreements of Seller Parties herein or from pursuing their remedies
with respect to a Breach thereof.
(h) REQUIRED VOTE. The affirmative vote of the holders of a
majority of the votes entitled to be cast by the holders of
the Parent Common Stock (the "REQUISITE VOTE") is the only
vote of the holders of any class or series of Parent's capital
stock necessary to approve this Agreement, the Ancillary
Agreements, and the Transactions, including, without
limitation, the issuance and sale of the Parent Shares.
(i) RIGHTS AGREEMENT. The Board of Directors of Parent has
unanimously approved this Agreement, the Ancillary Agreements,
and the Transactions, including, without limitation, the
issuance and sale of the Parent Special Voting Shares and
Parent Shares, and Parent has otherwise taken all action
sufficient to render inapplicable to this Agreement, the
Ancillary Agreements, and the Transactions, including, without
limitation, the issuance and sale of the Parent Special Voting
Shares and Parent Shares, the provisions of that Rights
Agreement, dated as of November 21, 2003, by and between
Parent and Computershare Trust Company, as amended.
(j) NO UNDISCLOSED LIABILITIES. Except as disclosed in the Parent
SEC Documents, and except for normal or recurring Liabilities
in the ordinary course of business consistent with past
practice, the Parent and its Subsidiaries do not have any
liabilities, either accrued, contingent or otherwise, whether
due or to become due, which individually or in the aggregate
are reasonably likely to have a Parent Material Adverse
Effect.
(k) LEGAL COMPLIANCE. Each of Parent and its Subsidiaries has
complied in all material respects with all applicable Laws,
and no Action is pending or, to Parent's Knowledge, threatened
against it alleging any such failure to comply.
(l) LITIGATION.
(i) Except as disclosed in SCHEDULE 5.2(L) or the Parent
SEC Reports, neither Parent nor any of its
Subsidiaries (a) is subject to any outstanding Order
or (b) is a party, the subject of, or, to Parent's
Knowledge, is threatened to be made a party to or the
subject of any Action that seeks monetary Damages in
excess of $500,000. Except as disclosed in SCHEDULE
5.2(L), no Action questions the Enforceability of
this Agreement or the Transactions, or could result
in any Parent Material Adverse Change, and Parent has
no basis to believe that any such Action may be
brought or threatened against any of Parent or
Subsidiaries.
31
(ii) To Parent's Knowledge, there is no instance where,
due either to (a) rights asserted by another Person,
(b) a covenant granted by Parent or any
predecessor-in-interest or Affiliate thereof, or (c)
any Order, there is any restriction on the ability of
Parent or its Subsidiaries to carry on the business
currently carried on by such Parent or Subsidiary
anywhere in the world, whether or not such
restriction results in a Parent Material Adverse
Change.
5.3 REPRESENTATIONS AND WARRANTIES OF TRUST
Trust represents and warrants to Buyer Parties that the statements
contained in this SECTION 5.3 are correct and complete as of the date of this
Agreement:
(a) STATUS OF TRUST. Trust is a trust duly created, formed or
organized, validly existing, and in good standing under the
Laws of the jurisdiction of its creation, formation, or
organization, pursuant to Declaration of Trust dated as of
October 1, 2003, which is currently in effect. There is no
pending or threatened Action for the dissolution, liquidation,
insolvency, or rehabilitation of Trust. The sole trustee (the
"TRUSTEE") of Trust is BFL Management Inc., a Canada
corporation, which is wholly-owned, directly or indirectly, by
418 Canada. The sole beneficiary of Trust is 6144195 Canada
Inc., a Canada corporation, which is wholly-owned, directly or
indirectly, by 418 Canada. Trust is not a non-resident of
Canada for purposes of Section 116 of the INCOME TAX ACT
(Canada) and Part II of the TAXATION ACT (Quebec).
(b) POWER AND AUTHORITY; ENFORCEABILITY. Each of Trust and Trustee
has the power and authority to execute and deliver each
Transaction Document to which Trust is a party, and to perform
and consummate the Transactions. Each of Trust and Trustee has
taken all actions necessary to authorize the execution and
delivery of each Transaction Document to which Trust is party,
the performance of Trust's obligation's thereunder, and the
consummation of the Transactions. Each Transaction Document to
which Trust is a party has been duly authorized, executed, and
delivered by, and assuming the due authorization, execution,
and delivery thereof by each other party thereto, is
Enforceable against, Trust.
(c) NO VIOLATION. Except as set forth on SCHEDULE 5.3(C), the
execution and the delivery of the Transaction Documents by
Trust to the extent a party thereto and the performance and
consummation of the Transactions by Trust, including, without
limitation, the sale and transfer of the Purchase Assets, will
not (i) result in a material Breach of any Law (including the
Bulk Sales Act (Ontario)) or Order to which Trust is subject
or any provision of its Organizational Documents, (ii) result
in a material Breach of any Contract, Order, or Permit to
which Trust is a party or by which Trust is bound or to which
any of Trust's assets is subject, or (iii) require any
Consent, except any SEC and other filings required to be made
by Parent or Buyer. To the extent Trust is a party thereto,
Trust has not Breached any Contract to which any Acquired
Entity is a party or by which any Acquired Entity is bound or
any of its assets is subject.
32
(d) BROKERS' FEES. Trust has no Liability to pay any compensation
to any broker, finder, or agent with respect to the
Transactions for which any Buyer Party or any Acquired Entity
could become directly or indirectly Liable.
ARTICLE 6.
REPRESENTATIONS AND WARRANTIES CONCERNING
ACQUIRED ENTITIES AND PURCHASED ASSETS
Each Seller Party, jointly and severally, represents and warrants to
each Buyer Party the following as of the date of this Agreement:
6.1 ENTITY STATUS
Each Acquired Entity is an entity duly created, formed, or organized,
validly existing, and in good standing under the Laws of the jurisdiction of its
creation, formation, or organization. Each Acquired Entity is duly authorized to
conduct its business and is in good standing under the laws of each jurisdiction
where such qualification is required. Each Acquired Entity has the requisite
power and authority necessary to own or lease its properties and to carry on its
businesses as currently conducted. SCHEDULE 6.1 lists each Acquired Entity's
directors and officers. Sellers have delivered to Parent correct and complete
copies of each Acquired Entity's Organizational Documents, as amended to date.
No Acquired Entity is in Breach of any provision of its Organizational
Documents. There is no pending or, to each Seller Party's Knowledge, threatened
Action for the dissolution, liquidation, insolvency, or rehabilitation of any
Acquired Entity. Each Acquired Entity is a Private Issuer.
6.2 POWER AND AUTHORITY; ENFORCEABILITY
Each Acquired Entity has the relevant power and authority necessary to
execute and deliver each Transaction Document to which it is a party and to
perform and consummate the Transactions. Each Acquired Entity has taken all
action necessary to authorize the execution and delivery of each Transaction
Document to which it is a party, the performance of such Acquired Entity's
obligations thereunder, and the consummation of the Transactions. Each
Transaction Document to which any Acquired Entity is party has been duly
authorized, executed, and delivered by, and assuming the due authorization,
execution, and delivery thereof by each other party thereto, is Enforceable
against, such Acquired Entity.
6.3 NO VIOLATION
Except as listed on SCHEDULE 6.3, the execution and the delivery of the
Transaction Documents to which an Acquired Entity is a party by such Acquired
Entity and the performance of their respective obligations hereunder and
thereunder, and consummation of the Transactions by each Acquired Entity will
not (a) result in a material Breach of any Law or Order to which any Acquired
Entity is subject or any provision of its Organizational Documents; (b) result
in a material Breach of any Contract, Order, or Permit to which any Acquired
Entity is a party or by which it is bound or to which any of its assets is
subject (or result in the imposition of any Encumbrance upon any of its assets);
(c) require any Consent; (d) trigger any rights of first refusal, preferential
purchase, or similar rights; or (e) cause the recognition of gain or loss for
33
Tax purposes with respect to any Acquired Entity or subject any Acquired Entity
or its assets to any Tax.
6.4 BROKERS' FEES
No Acquired Entity has any Liability to pay any compensation to any
broker, finder, or agent with respect to the Transactions for which any Buyer
Party or any Acquired Entity could become directly or indirectly Liable.
6.5 CAPITALIZATION
Each of Target Companies' authorized Equity Interests are described on
SCHEDULE 6.5, of which only the Shares are issued and outstanding and no shares
are held in treasury by any Target Company. All of the issued and outstanding
Shares: (a) have been duly authorized and are validly issued, fully paid, and
nonassessable, (b) were issued in compliance with all applicable state, federal
and foreign securities Laws, (c) were not issued in Breach of any Commitments,
and (d) are held of record and owned beneficially by the respective Sellers as
set forth in EXHIBIT A. No Commitments exist with respect to any Equity Interest
of Target Companies, and no Commitments will arise in connection with the
Transactions. There are no Contracts with respect to the voting or transfer of
any of Target Companies' Equity Interests. None of Target Companies is obligated
to redeem or otherwise acquire any of its outstanding Equity Interests.
6.6 RECORDS
The copies of Acquired Entities' Organizational Documents that were
provided to Parent are accurate and complete and reflect all amendments made
through the date hereof. Acquired Entities' minute books and in all material
respects other records made available to Parent for review were correct and
complete in all material respects as of the date of such review, no further
entries have been made through the date of this Agreement, such minute books and
records contain the true signatures of the persons purporting to have signed
them, and such minute books and records contain an accurate record of all
material actions of the stockholders, directors, members, managers, or other
such representatives of Acquired Entities taken by written consent, at a
meeting, or otherwise since formation.
6.7 ACQUIRED SUBSIDIARIES
Set forth on SCHEDULE 6.7 is a list of each Target Company's
Subsidiaries (collectively, the "ACQUIRED SUBSIDIARIES") and for each Acquired
Subsidiary (a) its name and jurisdiction of creation, formation, or
organization, (b) if such Acquired Subsidiary is a corporation, (i) the number
of authorized Equity Interests of each class of its Equity Interests, (ii) the
number of issued and outstanding Equity Interests of each class of its Equity
Interests, the names of the holders thereof, and the number of Equity Interests
held by each such holder, and (iii) the number of Equity Interests held in
treasury, and (c) if such Acquired Subsidiary is not a corporation, (i) the
class of Equity Interests created under such Acquired Subsidiary's
Organizational Documents and (ii) the holder(s) of such Equity Interests. Each
Acquired Subsidiary is a Private Issuer. All of the issued and outstanding
Equity Interests of each Acquired Subsidiary (A) that is a corporation have been
duly authorized and are validly issued,
34
fully paid, and nonassessable and (B) that is not a corporation (i) have been
duly created pursuant to the Laws of the jurisdiction of such Acquired
Subsidiary, (ii) have been issued and paid for in accordance with the
Organizational Documents governing such Acquired Subsidiary, and (iii) are fully
paid and non-assessable and require no further capital contribution, loans, or
credit support. Acquired Entities hold of record and own beneficially all of the
outstanding Equity Interests of Acquired Subsidiaries, free and clear of any
Encumbrances (other than restrictions under the Securities Act and state
securities Laws). No Commitments exist or are authorized with respect to any
Acquired Subsidiaries or their Equity Interests and no such Commitments will
arise in connection with the Transactions. No Acquired Subsidiary is obligated
to redeem or otherwise acquire any of its Equity Interests. No Acquired Entity
controls, directly or indirectly, or has any direct or indirect Equity Interest
in any Person that is not an Acquired Subsidiary.
6.8 FINANCIAL STATEMENTS
Set forth on SCHEDULE 6.8 are the following financial statements
(collectively the "FINANCIAL Statements"):
(a) audited combined balance sheets and statements of income,
changes in stockholders' equity, and cash flow as of and for
the fiscal years ended December 31, 2003, December 31, 2004
and December 31, 2005 (the "MOST RECENT YEAR END") for Target
Companies (consolidated with each Target Company's
Subsidiaries) and Trust; and
(b) unaudited combined balance sheets and statements of income,
changes in stockholders' equity, and cash flow as of and for
the nine months ended September 30, 2006 (the "BALANCE SHEET
DATE") for Target Companies (consolidated with each Target
Company's Subsidiaries) and Trust (the "INTERIM FINANCIAL
STATEMENTS").
The Financial Statements have been prepared in accordance with Canadian
GAAP applied on a consistent basis throughout the periods covered thereby,
present fairly the financial condition of Acquired Entities and Trust on a
combined basis as of such dates and the results of operations of Acquired
Entities and Trust on a combined basis for such periods, are consistent with the
books and records of Acquired Entities and Trust, and include a reconciliation
to US GAAP prepared in accordance with Item 17 of Form 20-F promulgated by the
SEC; PROVIDED, HOWEVER, that the Interim Financial Statements are subject to
normal year-end adjustments (which will not be material individually or in the
aggregate) and lack footnotes and other presentation items. Since the Balance
Sheet Date neither Trust nor any Acquired Entity has effected any change in any
method of accounting or accounting practice, except for any such change required
because of a concurrent change in Canadian GAAP.
6.9 SUBSEQUENT EVENTS
Except as set forth in SCHEDULE 6.9, since the Balance Sheet Date, each
Acquired Entity and Trust has operated in the Ordinary Course of Business and,
as of the date hereof, there have been no events, series of events or the lack
of occurrence thereof which, singularly or in the
35
aggregate, have had a Material Adverse Effect. Without limiting the foregoing,
except as set forth in SCHEDULE 6.9, since the Balance Sheet Date, none of the
following have occurred:
(a) Neither Trust nor any Acquired Entity has sold, leased,
transferred, or assigned any assets other than for a fair
consideration in the Ordinary Course of Business and sales of
assets have not exceeded $25,000 singularly or $50,000 in the
aggregate.
(b) Trust has not sold, leased, transferred, or assigned any
Purchased Assets.
(c) Neither Trust nor any Acquired Entity has entered into any
Contract (or series of related Contracts) either involving
more than $30,000 or outside the Ordinary Course of Business.
(d) No Security Interest has been imposed upon any assets of any
Acquired Entity or Trust.
(e) Neither Trust nor any Acquired Entity has made any capital
expenditure (or series of related capital expenditures)
involving more than $25,000 individually, $50,000 in the
aggregate, or outside the Ordinary Course of Business.
(f) Neither Trust nor any Acquired Entity has made any capital
investment in, any loan to, or any acquisition of the
securities or assets of, any other Person involving more than
$25,000 singularly, $50,000 in the aggregate, or outside the
Ordinary Course of Business.
(g) Neither Trust nor any Acquired Entity has issued any note,
bond, or other debt security or created, incurred, assumed, or
guaranteed any Liability for borrowed money or capitalized
lease Contract either involving more than $15,000 individually
or $30,000 in the aggregate.
(h) Neither Trust nor any Acquired Entity has delayed or postponed
the payment of accounts payable or other Liabilities either
involving more than $15,000 singularly, $30,000 in the
aggregate, or outside the Ordinary Course of Business.
(i) Neither Trust nor any Acquired Entity has canceled,
compromised, waived, or released any Action (or series of
related Actions) either involving more than $15,000 or outside
the Ordinary Course of Business.
(j) Neither Trust nor any Acquired Entity nor any of their
respective Affiliates, customers, or licensees has granted, or
has become party to any Contracts granting, any rights with
respect to any Intellectual Property.
(k) There has been no change made or authorized to be made to the
Organizational Documents of any Acquired Entity or Trust.
(l) No Acquired Entity has issued, sold, or otherwise disposed of
any of its Equity Interests.
36
(m) No Acquired Entity has declared, set aside, or paid any
dividend or made any distribution with respect to its Equity
Interests (whether in cash or in kind) or redeemed, purchased,
or otherwise acquired any of its Equity Interests.
(n) Neither Trust nor any Acquired Entity has experienced any
damage, destruction, or loss (whether or not covered by
insurance) to its properties involving more than $25,000
singularly or $50,000 in the aggregate.
(o) Neither Trust nor any Acquired Entity has made any loan to, or
entered into any other transaction with, any of its directors,
officers, employees, trustees, or beneficiaries.
(p) No Acquired Entity has entered into any collective bargaining
Contract, or any employment Contract not terminable by the
Acquired Entity upon no more than sixty (60) days notice at no
cost to the Acquired Entity, or modified the terms of any such
existing Contract.
(q) No Acquired Entity has committed to pay any bonus or granted
any increase in the base compensation (i) of any director or
officer, or an employee who is also a Seller or an Affiliate
of Seller, or (ii) outside of the Ordinary Course of Business,
of any of its other employees.
(r) No Acquired Entity has adopted, amended, modified, or
terminated any bonus, profit-sharing, incentive, severance, or
similar Contract for the benefit of any of its directors,
officers, or employees (or taken any such action with respect
to any other Employee Benefit Plan).
(s) No Acquired Entity has made any other change in employment
terms for any of its officers, directors or employees outside
the Ordinary Course of Business.
(t) No Acquired Entity has made or pledged to make any charitable
or other capital contribution either involving more than
$15,000 (individually or in the aggregate) or outside the
Ordinary Course of Business.
(u) Neither Trust nor any Acquired Entity has committed to any of
the foregoing.
6.10 LIABILITIES
Except as set forth on SCHEDULE 6.10, neither Trust nor any Acquired
Entity has any liabilities required to be disclosed on the Interim Financial
Statements in accordance with Canadian GAAP, except for (a) liabilities
reflected in the Interim Financial Statements and not heretofore paid or
discharged, and (b) liabilities that have arisen after the Balance Sheet Date in
the Ordinary Course of Business which are not material.
6.11 LEGAL COMPLIANCE
Each Acquired Entity has complied in all material respects with all
applicable Laws, and no Action is pending or, to each Seller Party's Knowledge,
threatened against it alleging any such failure to comply. No material
expenditures are, or based on applicable Law will be, required of any Acquired
Entity for it and its business and operations to remain in compliance with
applicable Law.
37
6.12 TAX MATTERS
(a) Each Acquired Entity has prepared and filed with all
appropriate Governmental Bodies all Tax Returns required to be
filed in respect of Taxes within the times and in the manner
prescribed by applicable Law for all fiscal periods ending
prior to the date hereof and will continue to do so in respect
of all fiscal periods ending before the Closing Date and,
where applicable, has been assessed with respect to all fiscal
periods up to and including those set forth in SCHEDULE
6.12(A) and has given no waiver of any limitation period for
collection, assessment or reassessment of Tax to any
Governmental Body. All such Tax Returns were accurate, correct
and complete in all material respects; accurately reflect the
facts regarding the income, business, assets, operations,
activities, status, or other matters of each Acquired Entity
or any other information required to be shown or considered
thereon. No Acquired Entity currently is the beneficiary of
any extension of time within which to file any Tax Return.
Each Acquired Entity has paid in full all Taxes as reflected
on all such Tax Returns, including on all assessments in
respect of all such returns, and has paid, and will continue
paying, all installments and made all other remittances on
account of Tax required to be paid by such corporation in
respect of all periods for which a Tax Return has not been
filed. Without limiting in any manner whatsoever the effect
and validity of SECTION 6.12(A) and any Tax matters addressed
in this Agreement, all Tax Returns that may have been prepared
and filed after the time prescribed by applicable Law, if any,
have not and will not result in any adverse Tax consequences
for the Acquired Entity so concerned or any other Acquired
Entities. For greater certainty, subject only for having been
filed after the prescribed time, such Tax Returns remain
subject to all Tax matters addressed in this Agreement.
(b) Except as provided in SCHEDULE 6.12(B), no Tax Return of any
Acquired Entity has been reassessed by any Governmental Body.
To each Seller Party's Knowledge, except as provided in
SCHEDULE 6.12(B), there is no review, audit, request, Action,
demand or reassessment in respect of any Tax Return or Tax
liability of any Acquired Entity at present in course, pending
or threatened by any Governmental Body. No Seller Party has
Knowledge of any contingent Tax liabilities or any grounds for
an assessment or reassessment of an Acquired Entity, other
than as disclosed in SCHEDULE 6.12(B).
(c) Each Acquired Entity has paid in full all Taxes required by
applicable Law to be paid on or prior to the date hereof, and
is not and will not be liable for any Taxes in respect of any
fiscal period ending on or before the Closing Date, nor in
respect of such portion of a fiscal period ending after the
Closing Date which, for purposes of this
38
Agreement, is deemed to end on the Closing Date, other than
Tax liabilities the amount of which shall have been accrued in
the Financial Statements (rather than in any notes thereto).
(d) Each Acquired Entity has withheld or deducted, and will
continue to do so until the Closing Date, from each payment
made or owed to its present and former officers, directors,
employees, independent contractors, shareholders, Affiliates,
creditors, other third party, and to all Persons who are
non-residents of Canada for the purposes of the INCOME TAX ACT
(Canada), all amounts which it is required by any applicable
Law to which it is subject to withhold or deduct and has duly
remitted, and will continue to do so until the Closing Date,
all amounts so withheld or deducted to the proper Governmental
Authority thereof within the delays and in the manner required
by applicable Law. Each Acquired Entity has charged, collected
and remitted, and will continue to do so, on a timely basis
and in the manner required by applicable Law all Taxes on any
sale, supply or delivery whatsoever, made by it or on its
behalf. The Interim Financial Statements (rather than in the
notes thereto) show adequate reserves for all such amounts and
Taxes not required by applicable Law to be remitted on or
before the Closing Date.
(e) Except as provided in SCHEDULE 6.12(E) which confirms the
subject Acquired Entity and the applicable jurisdiction, to
each Seller Party's Knowledge, none of Acquired Entities has
ever been nor is required to file any Tax Return or to pay
Taxes with any Governmental Body located in any jurisdiction
outside Canada. No action has ever been initiated or, to each
Seller Party's Knowledge, threatened by a Governmental Body in
a jurisdiction with respect to a fiscal period for which an
Acquired Entity did not file a Tax Return in such jurisdiction
that it is or may be subject to Tax by that jurisdiction for
such period. There are no Encumbrances on any Assets that
arose in connection with any failure (or alleged failure) to
pay any Tax.
(f) Sellers have delivered or has made available to Parent correct
and complete copies of all Tax Returns, reports and statements
of deficiencies assessed or reassessed against or agreed to by
any Acquired Entity for all fiscal periods or other periods
for which the relevant limitation period or prescription in
any applicable Laws has not expired, including written
communications relating thereto from any Governmental Body and
the responses, if any, of the Acquired Entity to such
communication. SCHEDULE 6.12(F) indicates such periods that
have not been audited.
(g) No Acquired Entity will at any time be deemed to have a
capital gain pursuant to Subsection 80.03(2) of the INCOME TAX
ACT (Canada) or any analogous Canadian provincial legislative
provision as a result of any transaction or event taking place
in any taxation year ending on or prior to the Closing Date.
(h) There are no circumstances existing which could result in the
application of Sections 78, 80, 160, or 247 of the INCOME TAX
ACT (Canada) or any equivalent Canadian provincial provision
to any Acquired Entity.
(i) There is no contract, plan, or arrangement, including but not
limited to the provisions of this Agreement, covering any
employee or former employee of an Acquired
39
Entity that, individually or collectively, could give rise to
the payment after the Closing Date of any amount that would
not be deductible by such entity as an expense under any
applicable Law other than reimbursements of a reasonable
amount of entertainment expenses and other non-deductible
expenses that are commonly paid by similarly situated
businesses in reasonable amounts.
(j) There is no tax sharing agreement, tax indemnity obligation,
or similar written or unwritten agreement, understanding, or
practice with respect to Taxes (including any advance pricing
agreement, closing agreement, or other arrangement relating to
Taxes) that will require any payment by any Acquired Entity to
any other Person as a transferee or successor by contract or
otherwise.
(k) No Acquired Entity has filed a consent under Code Section
341(f) concerning collapsible corporations.
(l) No Acquired Entity has been a United States real property
holding corporation within the meaning of Code Section
897(c)(2) during the applicable period specified in Code
Section 897(c)(1)(A)(ii).
(m) Each Acquired Entity has disclosed on its Tax Returns all
positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of
Code Section 6662.
(n) No Acquired Entity is a party to any Tax allocation or sharing
Contract (other than a group the common parent of which is or
was a Target Company).
(o) No Acquired Entity (i) has been a member of an Affiliated
Group filing a consolidated federal income Tax Return (other
than a group the common parent of which is or was a Target
Company) or (ii) has any Liability for the Taxes of any Person
(other than each Acquired Entity) under Treas. Reg. Section
1.1502-6 or similar Law, as a transferee or successor, by
Contract, or otherwise.
(p) The unpaid or unremitted Taxes of Acquired Entities (i) did
not, as of the Balance Sheet Date, exceed the reserve for Tax
Liability (other than any reserve for deferred Taxes
established to reflect timing differences between book and Tax
income) set forth on the face of the Interim Financial
Statements (other than in any notes thereto) and (ii) do not
exceed that reserve as adjusted for the passage of time
through the Closing Date in accordance with the past custom
and practice of Acquired Entities in filing their Tax Returns.
Since the Balance Sheet Date, no Acquired Entity has incurred
any liability for Taxes outside the Ordinary Course of
Business consistent with past custom and practice.
(q) No Acquired Entity will be required to include any item of
income in, or exclude any item of deduction from, taxable
income for any taxable period (or portion thereof) ending
after the Closing Date as a result of any: (A) change in
method of accounting for a taxable period ending on or prior
to the Closing Date; (B) "closing agreement" as described in
Code section 7121 (or any corresponding or similar provision
of state, local or foreign income Tax law) executed on or
prior to the Closing Date; (C)
40
intercompany transactions or any excess loss account described
in Treasury Regulations under Code Section 1502 (or any
corresponding or similar provision of state, local or foreign
income Tax law); (D) installment sale or open transaction
disposition made on or prior to the Closing Date; or (E)
prepaid amount received on or prior to the Closing Date.
6.13 TITLE TO AND CONDITION OF ASSETS; RETAIL STORES
(a) Acquired Entities have good, and indefeasible title to, or a
valid leasehold interest in, all buildings, machinery,
equipment, and other tangible assets located on their
premises, shown on the Interim Financial Statements, or
acquired after the Balance Sheet Date, which are necessary for
the conduct of their business as currently conducted, in each
case free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of
Business since the Balance Sheet Date and Security Interests
listed on SCHEDULE 6.13(A). Each such tangible asset has been
maintained in accordance with normal industry practice and, is
in good operating condition (subject to normal wear and tear).
(b) Trust has good and indefeasible title to the cash and cash
equivalents that comprise part of the Purchased Assets free
and clear of all Security Interests, except to the extent
listed on SCHEDULE 6.13(B).
(c) Since December 31, 2005, the Acquired Entities have built or
are in the process of building seven (7) retail stores. As of
the date of this Agreement, the Acquired Entities own and
operate a total of forty four (44) retail stores. SCHEDULE
6.13(C) lists the approved capital expenditures and
development committee economic model for the current retail
stores built or under construction since December 31, 2005.
6.14 REAL PROPERTY
(a) No Acquired Entity owns (or has ever owned) any real property.
(b) SCHEDULE 6.14(B) lists and describes briefly all real property
leased or subleased to each Acquired Entity, each lease and
sublease Contract, and in respect of each such Contract: the
municipal address and applicable unit or premises leased at
the date of such contract and any amendments; the parties
thereto; the area of the space subject thereto; the remaining
term and any unexpired options to extend or renew; the current
basic and percentage rent; the amount of any prepaid rent;
deposit, guarantee, indemnity or security; any current or
future rent-free period, all of such information being true
and accurate. Sellers have made available to Parent correct
and complete copies of the lease and sublease Contracts (as
amended to date) listed in SCHEDULE 6.14(B). Except as set
forth in SCHEDULE 6.14(B), with respect to each lease and
sublease Contract required to be listed in such schedule:
(i) the Contract is Enforceable and unamended;
(ii) the Contract will continue to be Enforceable on
identical terms following the consummation of the
Transactions;
41
(iii) no Acquired Entity (and to each Seller Party's
Knowledge without investigation beyond the Seller
Party), no counter-party is in Breach of such
Contract, and no event has occurred which, with
notice or lapse of time, would constitute a material
Breach by an Acquired Entity thereunder;
(iv) no party to the Contract has delivered a written
demand for early termination thereof;
(v) there are no Actions, Orders, or forbearances in
effect as to the Contract;
(vi) with respect to each sublease Contract, the
representations and warranties set forth in SECTIONS
6.14(B)(I) - (V) are, to each Seller Party's
Knowledge without investigation beyond the Seller
Party, true and correct with respect to the
underlying lease Contract;
(vii) no Acquired Entity has granted or suffered to exist
any Security Interest in the leasehold or
subleasehold Contract save for the Security Interests
listed on SCHEDULE 6.13(A);
(viii) the Contract has not been assigned in favor of any
Person;
(ix) all facilities leased or subleased under the Contract
have received all Permits required in connection with
the operation thereof by the Seller Parties and have
been operated and maintained in all material respects
in accordance with applicable Laws; and
(x) all facilities leased or subleased under the Contract
are supplied with utilities and other services
necessary for the operation of said facilities.
6.15 INTELLECTUAL PROPERTY
(a) Neither Trust nor any Acquired Entity owns any Patents or
registered Copyrights.
(b) SCHEDULE 6.15(B) contains a complete and accurate list of (i)
all Marks that are owned by or licensed to any Acquired Entity
(each such Mark listed or required to be listed in SCHEDULE
6.15(B) is referred to herein as a "LISTED MARK"), and (ii)
for each Listed Mark, the countries, states or other
jurisdictions (the "JURISDICTIONS") in which such Listed Mark
is registered or in which a registration application is
pending, the registration or application number, the dates of
registration (or application), the classes of registration and
the name of the Person in which each Listed Mark is
registered. All Listed Marks that have been registered in a
Jurisdiction are currently in compliance with all formal legal
requirements (including the timely post-registration filing of
affidavits of use and incontestability and renewal
applications) and, to each Seller Party's Knowledge and except
as disclosed in SCHEDULE 6.15(B), are valid and Enforceable.
Except as disclosed in SCHEDULE 6.15(B), no Listed Mark is now
involved in any opposition, invalidation, or cancellation and,
to each Seller Party's Knowledge and except as disclosed in
SCHEDULE 6.15(B), no such action is threatened with the
respect to any such Listed Mark. As of the Closing, to each
Seller Party's Knowledge and except as
42
disclosed in SCHEDULE 6.15(B), each Acquired Entity will have
the exclusive ownership of and right to use the Listed Marks
now owned by such Acquired Entity and at least the
nonexclusive right to use the Listed Marks now licensed to
such Acquired Entity, in each case, in the Jurisdictions and
for the classes of registration under which the Licensed Marks
are now used by such Acquired Entity to the fullest extent
permitted under applicable trademark law. No Person has any
right, by Contract or otherwise, to acquire from Trust, any
Acquired Entity, Sarafina Invest Limited, Hurstwood Limited,
Beldene Limited, or any Affiliate of any of the foregoing,
beneficial or legal ownership of any Listed Mark.
(c) SCHEDULE 6.15(C) contains a complete and accurate list of (i)
all Marks that are owned by or licensed to Trust (each such
Mark listed or required to be listed in SCHEDULE 6.15(C) is
referred to herein as a "TRUST MARK"), and (ii) for each Trust
Mark, the Jurisdictions in which such Trust Mark is registered
or in which a registration application is pending, the
registration or application number, the dates of registration
(or application), the classes of registration and the name of
the Person in which each Trust Mark is registered. All Trust
Marks that have been registered in a Jurisdiction are
currently in compliance with all formal legal requirements
(including the timely post-registration filing of affidavits
of use and incontestability and renewal applications) and, to
each Seller Party's Knowledge and except as disclosed in
SCHEDULE 6.15(C), are valid and Enforceable. Except as
disclosed in SCHEDULE 6.15(C), no Trust Mark is now involved
in any opposition, invalidation, or cancellation and, to each
Seller Party's Knowledge and except as disclosed in SCHEDULE
6.15(C), no such action is threatened with the respect to any
such Trust Mark. As of the Closing, after giving effect to the
Trademark Purchase and immediately prior to the sale of the
Purchased Assets to Buyer Parties, to each Seller Party's
Knowledge and except as disclosed in SCHEDULE 6.15(C), Trust
will have the exclusive right to use, and Trust and 368 Canada
collectively will have exclusive ownership of, Trust Marks
listed on SCHEDULE 6.15(C) in the Jurisdictions and for the
classes of registration under which the Licensed Marks are now
used by Trust to the fullest extent permitted under applicable
trademark law, subject only to the rights of third parties
under the Contracts listed on SCHEDULE 6.18. No Person has any
right, by Contract or otherwise, to acquire from Trust, any
Acquired Entity, Sarafina Invest Limited, Hurstwood Limited,
Beldene Limited, or any Affiliate of any of the foregoing,
beneficial or legal ownership of any Trust Mark.
(d) To each Seller Party's Knowledge, the Acquired Entities own or
have the right to use pursuant to an Enforceable Contract all
Intellectual Property necessary to operate Acquired Entities'
businesses as currently conducted. Each item of Intellectual
Property that each Acquired Entity owned or used immediately
prior to the Closing will be owned or available for use by
such Acquired Entity on identical terms and conditions
immediately subsequent to the Closing. Each Acquired Entity
has taken all necessary action to maintain and protect each
item of Intellectual Property that it owns or uses.
(e) Seller Parties have delivered or will prior to Closing deliver
to Parent correct and complete copies of all written
documentation evidencing ownership and
43
prosecution (if applicable) of each item of any Acquired
Entity's Intellectual Property. With respect to each such item
of Intellectual Property and except as disclosed in SCHEDULE
6.15(E):
(i) to each Seller Party's Knowledge, an Acquired Entity
possesses all right, title, and interest in and to
the item, free and clear of any Security Interest;
(ii) the item is not subject to any outstanding Order;
(iii) no Action is pending or, to each Seller Party's
Knowledge, threatened which challenges the
Enforceability, use, or ownership of the item;
(iv) no Acquired Entity has ever agreed to indemnify any
Person for or against any interference, infringement,
misappropriation, or other conflict with respect to
the item; and
(v) except as disclosed in SCHEDULE 6.15(E), no Seller
Party has Knowledge of any covenants, rights of any
other Person, or other restriction on or in respect
of the ability to sell wares presently being sold by
any Acquired Entity in association with any of the
Marks anywhere in world, including, without
limitation, Marks containing or consisting of the
words REQUEST or BUFFALO.
(f) Except as disclosed in SCHEDULE 6.15(F), no Seller or Acquired
Entity has received any notice alleging that any Acquired
Entity has interfered with, infringed upon, misappropriated,
or otherwise violated or come into conflict with any other
Person's Intellectual Property (including any claim that any
Acquired Entity must license or refrain from using any other
Person's Intellectual Property). To each Seller Party's
Knowledge and except as disclosed in SCHEDULE 6.15(F), no
third Person has any Intellectual Property that interferes or
would be likely to interfere with any Acquired Entity's use of
any of its Intellectual Property. To each Seller Party's
Knowledge and except as disclosed in SCHEDULE 6.15(F), no
Acquired Entity will interfere with, infringe upon,
misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of any other Person as a result
of the continued operation of its businesses as currently
conducted. To each Seller Party's Knowledge and except as
disclosed in SCHEDULE 6.15(F), no other Person has interfered
with, infringed upon, misappropriated, or otherwise come into
conflict with any Acquired Entity's Intellectual Property.
6.16 INVENTORY
Acquired Entities' inventory, whether reflected on the Financial
Statements or not, consists of raw materials and supplies, manufactured and
processed parts, goods in process, and finished goods, all of which is
merchantable and, except as has been written down on the face of the Interim
Financial Statements (rather than the notes thereto), none of which has been in
inventory for more than one hundred twenty (120) days or is damaged. Any
inventory that has been written down has either been written off or written down
to its net realizable value. There has been no change in inventory valuation
standards or methods with respect to the inventory of Acquired Entities in the
prior three years. No Acquired Entity holds any items of inventory on
44
consignment from other Persons and no other Person holds any items of inventory
on consignment from any Acquired Entity.
6.17 ACQUIRED ENTITY CONTRACTS
Except as otherwise disclosed in SCHEDULES 6.14(B), 6.21, and 6.26,
SCHEDULE 6.17 lists the following Contracts to which any Acquired Entity is a
party:
(a) Any Contract (or group of related Contracts) for the lease of
personal property to or from any Person providing for lease
payments in excess of $15,000 per annum.
(b) Any Contract (or group of related Contracts) for the purchase
or sale of raw materials, commodities, supplies, products, or
other personal property, or for the furnishing or receipt of
services, the performance of which will extend over a period
of more than one year, result in a material loss to any
Acquired Entity, or involve annual consideration in excess of
$30,000.
(c) Any Contract concerning a limited liability company,
partnership, joint venture or similar arrangement. (d) Any
Contract (or group of related Contracts) under which any
Acquired Entity has created, incurred, assumed, or guaranteed
any Liability for borrowed money or any capitalized lease in
excess of $15,000 per annum, or under which the Contract has
imposed or the Acquired Entity has suffered to exist an
Encumbrance on any of its assets.
(e) Any Contract restricting any Acquired Entity's right to
compete.
(f) Any Contract with any Seller or any Affiliates of any Seller
other than Acquired Entities.
(g) Any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other
similar Contract for the benefit of its current or former
directors, officers, and employees.
(h) Any collective bargaining Contract.
(i) Any Contract for the employment of any individual on a
full-time, part-time, consulting, or other basis providing
annual compensation in excess of $40,000 or providing
severance benefits.
(j) Any Contract under which it has advanced or loaned any amount
to any of its directors or officers or any Seller or Affiliate
or any Seller or, outside the Ordinary Course of Business, to
its employees that are not Sellers or Affiliates of any
Seller.
(k) Any Contract pursuant to which any Acquired Entity has granted
to a Person rights under or with respect to any of the
Acquired Entity's Intellectual Property.
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(l) Any Contract pursuant to which any Acquired Entity has
obtained from a Person rights under or with respect to any of
the Acquired Entity's Intellectual Property.
(m) Any other Contract (or group of related Contracts) the
performance of which involves receipt or payment of annual
consideration in excess of $40,000.
Sellers have delivered to Parent a correct and complete copy of each
written Contract (as amended to date) listed in SCHEDULE 6.17 and a written
summary setting forth the terms and conditions of each oral Contract referred to
in SCHEDULE 6.17. With respect to each such Contract:
(i) the Contract is Enforceable and unamended;
(ii) the Contract will continue to be Enforceable on
identical terms following the consummation of the
Transactions;
(iii) no Acquired Entity (and to each Seller Party's
Knowledge, no counter-party) is in material Breach of
such Contract, and no event has occurred which, with
notice or lapse of time, would constitute a Breach by
any Acquired Entity thereunder; and
(iv) no party to the Contract has delivered a written
demand for early termination thereof;
(v) the Contract has not been assigned in favor of any
Person;
(vi) no Consent is required from any Person as a result of
the Transactions (for assignment, change of control
or otherwise); and
(vii) there are no renegotiations of, attempts to
renegotiate or outstanding rights to renegotiate any
material amounts paid or payable to any Acquired
Entity under such Contract with any Person having the
contractual or statutory right to demand or require
such renegotiation and no such Person has made
written demand for such renegotiation.
6.18 TRUST CONTRACTS
(a) SCHEDULE 6.18 lists each Contract pursuant to which (a) Trust
has granted to a Person rights under or with respect to any of
Trust's Intellectual Property, and (b) Trust has obtained from
a Person rights under or with respect to any of Trust's
Intellectual Property.
(b) Trust has delivered to Parent a correct and complete copy of
each written Contract (as amended to date) listed in SCHEDULE
6.18 and a written summary setting forth the terms and
conditions of each oral Contract referred to in SCHEDULE 6.18.
With respect to each such Contract:
(i) the Contract is Enforceable and unamended;
46
(ii) upon the Closing, the Contract will continue to be
Enforceable on identical terms in effect immediately
prior to the Closing, except to the extent such
Contract is amended or terminated prior to the
Closing as contemplated by this Agreement;
(iii) Trust (and to each Seller Party's Knowledge, no
counter-party) is in Breach of such Contract, and no
event has occurred which, with notice or lapse of
time, would constitute a Breach by Trust thereunder;
(iv) no party to the Contract has delivered a written
demand for early termination thereof;
(v) the Contract has not been assigned in favor of any
Person;
(vi) no Consent is required from any Person as a result of
the Transactions (for assignment, change of control
or otherwise); and
(vii) there are no renegotiations of, attempts to
renegotiate or outstanding rights to renegotiate any
material amounts paid or payable to Trust under such
Contract with any Person having the contractual or
statutory right to demand or require such
renegotiation and no such Person has made written
demand for such renegotiation.
(c) Trust has not received any prepayments, advances or other
amounts from Persons that have rights to Trust's Intellectual
Property with respect to rights or obligations for periods or
activities occurring from and after the Closing, including,
without limitation, advance payments of royalties not recouped
or earned as of the Closing.
6.19 RECEIVABLES
All of the Receivables represent bona fide transactions, and arose in
the Ordinary Course of Business of Acquired Entities, and are reflected properly
in their books and records. All of the Receivables are good and collectible
receivables in accordance with past practice and the terms of such Receivables,
without set off or counterclaims, subject only to the reserve for bad debts set
forth on the face of the Interim Financial Statements (rather than in any notes
thereto) as adjusted for the passage of time through the Closing Date in
accordance with the Ordinary Course of Business of Acquired Entities, consistent
with Canadian GAAP. No customer or supplier of any Acquired Entity has any basis
to believe that it has or would be entitled to any payment terms other than
terms in the Ordinary Course of Business, including any prior course of conduct.
6.20 POWERS OF ATTORNEY
Except as set forth in SCHEDULE 6.20 and for revocable powers of
attorney related to the management of trademarks, there are no outstanding
powers of attorney executed on behalf of any Acquired Entity.
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6.21 INSURANCE
SCHEDULE 6.21 sets forth the following information with respect to each
insurance policy Contract (including policies providing property, casualty,
liability, and workers' compensation coverage, and bond and surety arrangements)
to which any Acquired Entity has been a party, a named insured, or otherwise the
beneficiary of coverage at any time within the past three years:
(a) the name, address, and telephone number of the agent;
(b) the name of the insurer, the name of the policyholder, and the
name of each covered insured;
(c) the policy number and the period of coverage;
(d) the scope (including an indication of whether the coverage was
on a claims made, occurrence, or other basis) and amount
(including a description of how deductibles and ceilings are
calculated and operate) of coverage; and
(e) a description of any retroactive premium adjustments or other
loss-sharing arrangements.
With respect to each insurance policy Contract:
(i) the Contract is Enforceable and unamended;
(ii) the Contract will continue to be Enforceable on
identical terms following the consummation of the
Transactions;
(iii) no Acquired Entity (and to each Seller Party's
Knowledge, no counter-party) is in material Breach of
such Contract, and no event has occurred which, with
notice or lapse of time, would constitute a Breach by
an Acquired Entity thereunder;
(iv) the Contract has not been assigned in favor of any
Person; and
(v) no party to the Contract has delivered a written
demand for early termination thereof.
No insurance that any Acquired Entity has ever carried has been
canceled nor, to each Seller Party's Knowledge, has any such cancellation been
threatened. No Acquired Entity has ever been denied coverage nor, to each Seller
Party's Knowledge, has any such denial been threatened. Each Acquired Entity has
been covered during the past three years by insurance in scope and amount
customary and reasonable for the businesses in which it has engaged during such
period. SCHEDULE 6.21 also describes any self-insurance arrangements affecting
any Acquired Entity.
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6.22 LITIGATION
(a) SCHEDULE 6.22 sets forth each instance in which any Acquired
Entity (a) is subject to any outstanding Order or (b) is a
party, the subject of, or, to each Seller Party's Knowledge,
is threatened to be made a party to or the subject of any
Action. No Action required to be set forth in SCHEDULE 6.22
questions the Enforceability of this Agreement or the
Transactions, or could result in any Material Adverse Change,
and Seller Parties have no basis to believe that any such
Action may be brought or threatened against any Acquired
Entity.
(b) SCHEDULE 6.22 sets forth, to each Seller Party's Knowledge,
each instance where, due either to (a) rights asserted by
another Person, (b) a covenant granted by any Seller or
Acquired Entity or any predecessor-in-interest or Affiliate
thereof, or (c) any Order, there is any restriction on the
ability of any Acquired Entity or its Affiliates to carry on
the business currently carried on by such Acquired Entity
anywhere in the world, whether or not such restriction results
in a Material Adverse Change.
6.23 PRODUCT WARRANTY
To each Seller Party' Knowledge, each product manufactured, sold,
leased, or delivered by Acquired Entities has been in conformity with all
applicable Law, Contracts, and all express and implied warranties, and no
Acquired Entity has any Liability (and there is no basis for any present or
future Action against any of them giving rise to any Liability) for replacement
or repair thereof or other Damages in connection therewith, subject only to the
reserve for product warranty claims set forth on the face of the Interim
Financial Statements (rather than in any notes thereto) as adjusted for the
passage of time through the Closing Date in accordance with the Ordinary Course
of Business of Acquired Entities, consistent with Canadian GAAP. No product
designed, manufactured, sold, leased, or delivered by any Acquired Entity is
subject to any guaranty, warranty, or other indemnity or similar Liability
beyond the applicable standard terms and conditions of sale or lease. SCHEDULE
6.23 includes copies of the standard terms and conditions of sale or lease for
each Acquired Entity (containing applicable guaranty, warranty, and similar
Liability indemnity provisions).
6.24 PRODUCT LIABILITY
No Acquired Entity has any Liability (and to each Seller Party's
Knowledge, there is no basis for any present or future Action against any of
them giving rise to any Liability) arising out of any injury to individuals or
property as a result of the ownership, possession, or use of any product
designed, manufactured, sold, leased, or delivered by any Acquired Entity.
6.25 LABOR AND EMPLOYEES
(a) SCHEDULE 6.25(A) lists all the employees, consultants and
independent contractors providing services to each Acquired
Entity by their employee number without providing their names
with, where applicable, their respective position. SCHEDULE
6.25(A) also includes another list with the salary or
financial compensation, location, unionized or non-unionized
status, years of service, and whether or not a written
agreement was signed, with respect to all the employees,
consultants and independent
49
contractors providing services to each Acquired Entity. All
Employee Agreements have been disclosed and a copy of each
written Employee Agreement has been provided to Buyer Parties
prior to the Closing Date. No Employee Agreement contains any
provision triggering the payment of any financial compensation
in relation to the Transactions.
(b) Except as disclosed in SCHEDULE 6.25(A), Acquired Entities
have complied at all times and are in compliance with all
applicable Laws in relation to employment, labor relations,
workers' compensation, and pay equity.
(c) The location, and position of each key employee is listed in
SCHEDULE 6.25(A) (the "KEY EMPLOYEES").
(d) To each Seller Party's Knowledge, no executive, Key Employee,
or group of employees has any plans to terminate employment
with any Acquired Entity; PROVIDED, HOWEVER, that, with
respect to each executive officer of an Acquired Entity, the
determination of whether any Seller Party has Knowledge of any
such executive's plans to terminate employment with any
Acquired Entity shall be made without reference to such
executive's Knowledge.
(e) Except as disclosed in SCHEDULE 6.25(E), no Acquired Entity is
bound by any bargaining certificate or is a party to or bound
by any collective bargaining Contract, nor has any of them
experienced any strikes or lockouts in the last five (5)
years. To each Seller Party's Knowledge, there is no
organizational effort currently being made or threatened by or
on behalf of any labor union with respect to any Acquired
Entity's employees.
(f) No Acquired Entity has committed any unfair labor practice (as
determined under any Law) and there is no complaint, claim or
any other legal procedure filed or, to each Seller Party's
Knowledge, threatened against any Acquired Entity.
6.26 EMPLOYEE BENEFITS
(a) SCHEDULE 6.26 lists each Employee Benefit Plan that is now
sponsored, maintained, contributed to, or required to be
contributed to, or with respect to which any withdrawal
Liability (within the meaning of Section 4201 of ERISA) has
been incurred, by any Acquired Entity or any ERISA Affiliate
for any employee's benefit, and pursuant to which any Acquired
Entity or any ERISA Affiliate has or may have any Liability.
(b) None of Acquired Entities is party to, bound by or has any
obligations in relation to any Canadian Pension Plan.
(c) Sellers have made available to Parent correct and complete
copies of all Employee Benefit Plans required to be listed on
SCHEDULE 6.26 and, if applicable, the plan Contracts and
summary plan descriptions and any modifications thereto, the
most recent determination letter received from the Internal
Revenue Service, the most recent Form 5500 Annual Report, the
three (3) more recent actuarial valuations and financial
reports, whether or not filed with the competent authorities,
and all related trust, insurance, and
50
other funding Contracts that implement each such Employee
Benefit Plan and any modifications thereto.
(d) Each such Employee Benefit Plan (and each related trust,
insurance Contract, or fund) complies in form and in operation
in all respects with the applicable requirements of ERISA, the
Code, other Laws, and its own terms.
(e) All required reports and descriptions (including Form 5500
Annual Reports, Summary Annual Reports, PBGC-l's, and Summary
Plan Descriptions) have been filed or distributed
appropriately with respect to each such Employee Benefit Plan,
if applicable. The requirements of Part 6 of Subtitle B of
Title I of ERISA and of Code Section 4980B have been met with
respect to each such Employee Benefit Plan that is an Employee
Welfare Benefit Plan.
(f) All contributions (including all employer contributions and
employee salary reduction contributions) that are due have
been paid to each such Employee Benefit Plan that is an
Employee Pension Benefit Plan and all contributions for any
period ending on or before the Closing Date that are not yet
due have been paid to each such Employee Pension Benefit Plan
or accrued in the Ordinary Course of Business by Acquired
Entities. All premiums or other payments that are due for all
periods ending on or before the Closing Date have been paid or
accrued on the Financial Statements with respect to each such
Employee Benefit Plan that is an Employee Welfare Benefit
Plan.
(g) No Employee Benefit Plan is an Employee Pension Benefit Plan
that is intended to meet the requirements of a "qualified
plan" under Code Section 401(a).
(h) With respect to each Employee Benefit Plan that any Acquired
Entity or any ERISA Affiliate sponsors or in the last seven
years sponsored, maintains, or in the last seven years has
maintained or to which any of them contributes, has ever
contributed, or has ever been required to contribute:
(i) no such Employee Benefit Plan is subject to Title IV
of ERISA;
(ii) there have been no Prohibited Transactions with
respect to any such Employee Benefit Plan;
(iii) no Fiduciary has any Liability for breach of
fiduciary duty or any other failure to act or comply
with the requirements of applicable Law in connection
with the administration or investment of the assets
of any such Employee Benefit Plan; and
(iv) no Action with respect to the administration or the
investment of the assets of any such Employee Benefit
Plan (other than routine claims for benefits) is
pending or, to each of the Seller Party's Knowledge,
threatened, and no Acquired Entity has incurred, and
no Seller Party has any reason to expect that any
Acquired Entity will incur, any Liability to the PBGC
(other than PBGC premium payments) or otherwise under
Title IV of ERISA (including any withdrawal
51
Liability) or under the Code with respect to any such
Employee Benefit Plan that is an Employee Pension
Benefit Plan.
(i) No Acquired Entity or any ERISA Affiliate contributes to, ever
has contributed to, or ever has been required to contribute to
any Multiemployer Plan or has any Liability (including
withdrawal Liability) under any Multiemployer Plan.
(j) No Acquired Entity or any ERISA Affiliate (i) maintains or
contributes to any Employee Benefit Plan that provides, or has
any Liability to provide, life insurance, medical, severance
or other employee welfare benefits to any employee or any
dependent of any employee upon his or her retirement or
termination of employment, except as may be required by Code
Section 4980B; or (ii) has ever represented, promised or
Contracted (whether in oral or written form) to any employee
(either individually or to employees as a group) that such
employee(s) or dependents would be provided with life
insurance, medical, severance or other employee welfare
benefits upon their retirement or termination of employment,
except to the extent required by Code Section 4980B.
(k) Except as disclosed in SCHEDULE 6.26, the execution of this
Agreement and the consummation of the Transactions will not
(either alone or upon the occurrence of any additional or
subsequent events) (i) constitute an event under any Employee
Benefit Plan, Employee Agreement, trust, or loan that will or
may result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness,
vesting, distribution, increase in benefits, or obligation to
fund benefits with respect to any employee, or (ii) result in
the triggering or imposition of any restrictions or
limitations on the right of any Acquired Entity or the any
Buyer Party to amend or terminate any Employee Benefit Plan
and receive the full amount of any excess assets remaining or
resulting from such amendment or termination, subject to
applicable Taxes. No payment or benefit that has been made,
will be made, or may be made by any Acquired Entity, any Buyer
Party, or any of their respective Affiliates with respect to
any Acquired Entity's employee will be characterized as an
"excess parachute payment," within the meaning of Code Section
280G(b)(l).
6.27 ENVIRONMENTAL, HEALTH, AND SAFETY MATTERS
Except as set forth in SCHEDULE 6.27, (a) each Acquired Entity is in
compliance in all material respects with all Environmental, Health and Safety
Requirements in connection with owning, using, maintaining, or operating its
business or assets; (b) each location at which any Acquired Entity operates its
business is in compliance, in all material respects, with all Environmental,
Health and Safety Requirements; and (c) there are no pending or, to each Seller
Party's Knowledge, threatened Actions by any Person that any Acquired Entity's
properties or assets is not, or that its businesses has not been conducted, in
compliance with all Environmental, Health and Safety Requirements.
6.28 CUSTOMERS AND SUPPLIERS
SCHEDULE 6.28 lists Acquired Entities' (a) 10 largest customers in
terms of sales during (i) the 12 month period ended as of the Most Recent Year
End and (ii) the nine month period
52
ended as of the Balance Sheet Date and states the approximate total sales by
Acquired Entities to each such customer during such periods, respectively and
(b) ten largest suppliers during the 12 month period ended as of the Most Recent
Year End and the nine month period ended as of the Balance Sheet Date. Except as
set forth in SCHEDULE 6.28, no Seller Party has received notice of termination
or an intention to terminate the relationship with Acquired Entities from any
customer or supplier.
6.29 PERMITS
Acquired Entities possess all Permits required to be obtained for their
businesses and operations. SCHEDULE 6.29 sets forth a list of all such Permits.
Except as set forth in SCHEDULE 6.29, with respect to each such Permit:
(a) it is valid, subsisting and in full force and effect;
(b) there are no violations of such Permit that would result in a
termination of such Permit;
(c) if applicable, no Acquired Entity has received written notice
that such Permit will not be renewed; and
(d) the Transactions will not adversely affect the validity of
such Permit or cause a cancellation of or otherwise adversely
affect such Permit.
6.30 CERTAIN BUSINESS RELATIONSHIPS WITH ACQUIRED ENTITIES
Except as set forth on SCHEDULE 6.30, no Seller or any of its
Affiliates has been involved in any business arrangement or relationship with
any Acquired Entity at any time since January 1, 2003, and no Seller or any of
its Affiliates owns any asset that is used in any Acquired Entity's business.
6.31 PROXY STATEMENT
None of the information to be supplied in writing by any Seller Party
or Acquired Entity for inclusion in the Proxy Statement will, on the date the
Proxy Statement (or any amendment or supplement thereto) is first mailed to
shareholders of Parent, or will at the time of the Special Meeting contain any
untrue statement of a material fact, or omit to state any material fact required
to be stated therein or necessary in order to make the statements made therein,
in the light of the circumstances under which they are made, not misleading.
ARTICLE 7.
PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period between the
execution of this Agreement and the earlier of the Closing and the Termination
Date:
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7.1 GENERAL
Each Party shall use its Commercially Reasonable Efforts to take all
actions and to do all things necessary to consummate, make effective, and comply
with all of the terms of this Agreement and the Transactions applicable to it
(including satisfaction, but not waiver, of the Closing conditions for which it
is responsible or otherwise in control, as set forth in ARTICLE 9).
7.2 NOTICES AND CONSENTS
(a) Each Seller Party shall give any notices to third parties, and
shall use its Best Efforts to obtain any third party Consents
listed or required to be listed on SCHEDULES 5.1(C), 5.3(C),
or 6.3, or that Parent reasonably may otherwise request in
connection with the matters referred to in SECTIONS 5.1(C),
5.3(C) and 6.3. Each Seller Party shall give any notices to,
make any filings with, and use its Best Efforts to obtain any
Consents of Governmental Bodies, if any, required or
reasonably deemed advisable by Buyer pursuant to any
applicable Law in connection with the Transactions including
in connection with the matters referred to in SECTIONS 5.1(C),
5.3(C) and 6.3.
(b) Each Buyer Party shall give any notices to third parties, and
shall use its Best Efforts to obtain any third party Consents
listed or required to be listed on SCHEDULE 5.2(C), or that
Sellers reasonably may otherwise request in connection with
the matters referred to in SECTION 5.2(C). Each Buyer Party
shall give any notices to, make any filings with, and use its
Best Efforts to obtain any Consents of Governmental Bodies, if
any, required or reasonably deemed advisable by Sellers
pursuant to any applicable Law in connection with the
Transactions including in connection with the matters referred
to in SECTION 5.2(C).
(c) Each Party shall cooperate and use its Best Efforts to agree
jointly on a method to overcome any objections by any
Governmental Body to the Transactions.
(d) Nothing in this SECTION 7.2 will require that (i) Parent or
its Affiliates divest, sell, or hold separately any of its
assets or properties, or (ii) Parent, its Affiliates, or
Acquired Entities take any actions that could affect the
normal and regular operations of Parent, its Affiliates, or
Acquired Entities after the Closing.
7.3 OPERATION OF BUSINESS
(a) Each Seller Party covenants and agrees to ensure that no
Acquired Entity or Trust shall engage in any practice, take
any action, or enter into any transaction outside the Ordinary
Course of Business or engage in any practice, take any action,
or enter into any transaction of the sort described in SECTION
6.9, except that (i) an Acquired Entity (but not Trust) may
engage in any practice, take any action, or enter into any
transaction described in SECTIONS 6.9(A), 6.9(C), 6.9(E),
6.9(F), 6.9(G), 6.9(H), 6.9(I), 6.9(J), 6.9(N), 6.9(P), or
6.9(T) that is in the Ordinary Course of Business, and (ii)
Trust may enter into Contracts granting third parties rights
to the Trust Marks in the Ordinary Course of Business so long
as such Contracts constitute Purchased Assets hereunder.
Subject to compliance with applicable Law, from the date
hereof until the earlier to occur of the
54
Closing or the Termination Date, Seller Parties shall confer
on a regular and frequent basis with one or more
representatives of Parent to report on operational matters and
the general status of Acquired Entities' ongoing business,
operations and finances and promptly provide to Parent or its
representatives copies of all material filings they make with
any Governmental Body during such period. Notwithstanding
SECTION 13.5, Seller Parties may request consent to any
activity under this SECTION 7.3 by communicating such request
in writing or by electronic mail to the Vice President of
Finance (or such Person as may be designated by such Person)
of Parent. Consent shall be deemed to be given if such Person
does not respond to Seller Parties in writing or by electronic
mail on or before 5:00 p.m., Pacific time, on the third (3rd)
business day following the day on which such Person receives
such request in writing or by electronic mail from Seller
Parties.
(b) Notwithstanding SECTION 7.3(A) to the contrary, not later than
ten (10) business days prior to the Closing, subject to Buyer
Parties' prior written consent, which consent shall not be
unreasonably withheld, Sellers may cause any of the Acquired
Entities to increase its stated capital or issue a stock
dividend on the Shares held by any of the Sellers, or pay to a
Seller a dividend in cash or in the form of a note, provided
that (i) any such cash dividend or note dividend is solely
used by such Seller to subscribe for share capital of the
Acquired Entity immediately following the distribution
thereof, (ii) such transaction does not cause and is not
reasonably likely to cause an adverse Tax consequence for any
Acquired Entity or Buyer Party, and (iii) if an Acquired
Entity issues a stock dividend to a Seller, the securities
that comprise such stock dividend shall, without any further
action of the parties, become part of the Shares of such
Acquired Entity for all purposes under this Agreement, and
shall be transferred and sold to the applicable Buyer Party at
the Closing in the same manner and to the same extent as all
other Shares to be transferred by such Seller at the Closing,
for the same total consideration to such Seller set forth in
this Agreement (i.e., no additional consideration for
securities issued as a stock dividend).
(c) Notwithstanding SECTION 7.3(A) to the contrary, not later than
ten (10) business days prior to the Closing, subject to Buyer
Parties' prior written consent, which consent shall not be
unreasonably withheld, any Seller may amalgamate, merger,
wind-up, liquidate, proceed to dissolution with or into
another Seller, or transfer all or part of Shares of any of
the Acquired Entities to another Seller, provided that (i) any
such transaction does not cause and is not reasonably likely
to cause an adverse Tax consequence for any Acquired Entity or
Buyer Party, and (ii) adequate provision is made for the
purchase and sale of the Shares held by such Seller from the
Seller surviving such transaction, which Shares shall be
transferred and sold to the applicable Buyer Party at the
Closing for the same total consideration for such Shares as
set forth in this Agreement.
(d) Each Seller Party covenants and agrees to ensure that the
maximum indebtedness of Trust and the Acquired Entities to
HSBC Bank Canada and its Affiliates does not at any time
exceed $25,000,000 (or the equivalent in Canadian Dollars at
the Exchange Rate) in principal amount.
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7.4 PRESERVATION OF BUSINESS
Each Seller Party covenants and agrees to ensure that Trust and each
Acquired Entity shall conduct its business in substantially the same manner as
it has been previously conducted, including maintaining its physical facilities
and its relationships with lessors, licensors, licensees, suppliers, customers,
officers, employees, and any other Person having business relationships with
Trust or such Acquired Entity.
7.5 ACCESS TO BUSINESS INFORMATION
Each Seller Party covenants and agrees to ensure that Trust and each
Acquired Entity shall permit representatives of Parent (including financing
providers) to have full access at all reasonable times, and in a manner so as
not to interfere with the normal business operations of Trust or Acquired
Entities, to all premises, properties, personnel, books, records, Contracts and
documents pertaining to Trust and such Acquired Entity and shall furnish copies
of all such books, records, Contracts and documents and all financial, operating
and other data, and other information as Parent may reasonably request.
7.6 NOTICE OF DEVELOPMENTS
Seller Parties shall give prompt written notice to Parent of any
development occurring after the date of this Agreement, or with respect to
representations and warranties that are qualified by Knowledge, any item about
which such Person did not have Knowledge on the date of this Agreement, which in
each case causes or reasonably could be expected to cause a Breach of any of the
representations and warranties in SECTIONS 5.1 or 5.3 or ARTICLE 6. Parent shall
give prompt written notice to Sellers and Trust of any development occurring
after the date of this Agreement, or with respect to representations and
warranties that are qualified by Knowledge, any item about which such Person did
not have Knowledge on the date of this Agreement, which causes or reasonably
could be expected to cause a Breach of any of the representations and warranties
in SECTION 5.2. No disclosure by any Party pursuant to this SECTION 7.6 shall be
deemed to amend or supplement the Schedules or to prevent or cure any
misrepresentation or Breach of any representation, warranty, or covenant.
7.7 EXCLUSIVITY
No Seller Party will (a) solicit, initiate, or encourage the submission
of any proposal or offer from any Person relating to the acquisition of any
Equity Interests or any substantial portion of the assets of Trust or any
Acquired Entity (including any acquisition structured as a merger,
consolidation, or share exchange) or (b) participate in any discussions or
negotiations regarding, furnish any information with respect to, assist or
participate in, or facilitate in any other manner any effort or attempt by any
Person to do or seek any of the foregoing. No Seller will vote its Shares in
favor of any such transaction. Seller Parties will notify Buyer immediately if
any Person makes any proposal, offer, inquiry, or contact with respect to any of
the foregoing and the terms of any such proposal, offer, inquiry, or contact.
No Buyer Party or any of its Affiliates will (a) solicit, initiate, or
encourage the submission of any proposal or offer from any Person with respect
to a merger, acquisition or similar transaction involving the purchase of all or
substantially all of the assets or equity
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securities of a third party (including any acquisition structured as a merger,
consolidation, or share exchange), or (b) participate in any discussions or
negotiations regarding, furnish any information with respect to, assist or
participate in, or facilitate in any other manner any effort or attempt by any
Person to do or seek any of the foregoing.
7.8 AFFILIATED TRANSACTIONS
Except as disclosed on SCHEDULE 7.8, Seller Parties shall cause all
Contracts and transactions by and between any Seller, Trust or any Affiliate of
any Seller (other than an Acquired Entity), on the one hand, and Acquired
Entities, on the other hand, to be terminated effective as of the Closing,
without any cost or continuing obligation to Acquired Entities or any Buyer
Party, and shall deliver to Parent evidence of such terminations that is
reasonably acceptable to Parent.
7.9 REPAYMENT OF CERTAIN LIABILITIES OF SELLERS AND TRUST
At or prior to the Closing, each Seller and Trust shall satisfy, pay in
full, or discharge all Liabilities that such Seller or Trust or any of their
respective Affiliates (other than an Acquired Entity) may have to Acquired
Entities, including the Liabilities described on SCHEDULE 7.9, other than up to
$400,000 of such Liabilities to be forgiven by the Acquired Entities prior to
the Closing as expressly provided for on SCHEDULE 7.9. Sellers and Trust shall
provide evidence to Parent of such repayment, discharge, or forgiveness in form
and substance reasonably acceptable to Parent.
7.10 DISCHARGE OF CERTAIN LIABILITIES PAYABLE TO SELLERS AND TRUST
At or prior to the Closing, each Acquired Entity shall satisfy, pay in
full or discharge all Liabilities it may have to any Seller or Trust or any of
their respective Affiliates (other than an Acquired Entity), all of which
Liabilities are described on SCHEDULE 7.10. Acquired Entities shall provide
evidence to Parent of such repayment, discharge, or forgiveness in form and
substance reasonably acceptable to Parent.
7.11 SHAREHOLDERS MEETING; PROXY STATEMENT
(a) If required by Parent's articles of incorporation, as amended
and now or hereafter in effect, and/or applicable law in order
to consummate the Transactions, Parent shall use Commercially
Reasonable Efforts to take all action necessary in accordance
with the CGCL and Parent's articles of incorporation and
bylaws, each as amended and now or hereafter in effect, duly
to call, give notice of, convene and hold a meeting of
Parent's shareholders (the "SPECIAL MEETING") as promptly as
practicable following the date of this Agreement for the
purpose of considering and taking action upon this Agreement
and the Transactions.
(b) If required under applicable law, Parent shall prepare and
file with the SEC a preliminary proxy or information statement
relating to this Agreement and the Transactions and obtain and
furnish the information required to be included by the SEC in
the Proxy Statement and, after consultation with Seller
Parties, respond promptly to any comments made by the SEC with
respect to the preliminary proxy or information
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statement and cause a definitive proxy or information
statement, including any amendments or supplements thereto
(the "PROXY STATEMENT") to be mailed to its shareholders at
the earliest practicable date, provided that no amendments or
supplements to the Proxy Statement will be made by Parent
without consultation with Seller Parties and their counsel.
The Parties shall cooperate with each other in the preparation
of the Proxy Statement, and Parent shall notify Seller Parties
of the receipt of any comments of the SEC with respect to the
Proxy Statement and of any requests by the SEC for any
amendment or supplement thereto or for additional information
and shall provide to Seller Parties promptly copies of all
correspondence between Parent or any representative of Parent
and the SEC. Parent shall give Seller Parties and their
counsel the opportunity to review and comment thereon. If at
any time after the date the Proxy Statement is mailed to
shareholders and prior to the Special Meeting any information
relating to Buyer Parties, Sellers, Acquired Entities, Trust,
or any of their respective Affiliates, officers or directors,
is discovered by any of the Parties which is required to be
set forth in an amendment or supplement to the Proxy Statement
so that the Proxy Statement will not include any untrue
statement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, the
party which discovers such information shall promptly notify
the other party hereto and an appropriate amendment or
supplement describing such information shall be promptly filed
with the SEC by Parent and to the extent required by law,
disseminated to Parent's shareholders. Seller Parties agree
that (i) they will provide Parent with all information
concerning Sellers, Trust, and Acquired Entities and their
respective Affiliates necessary or appropriate to be included
in the Proxy Statement, (ii) at the Special Meeting or any
postponement or adjournment thereof (or at any other meeting
at which the Transactions or this Agreement are considered by
shareholders), they will vote, or cause to be voted, all of
the shares of Parent Common Stock then owned by them, or any
of their Affiliates, if any, in favor of adoption of this
Agreement and the Transactions, and (iii) they will promptly
notify Parent of any request by the SEC and use Commercially
Reasonable Efforts to assist Parent in responding promptly to
all such comments of and requests by the SEC. As promptly as
practicable after the Proxy Statement has been cleared by the
SEC, Parent shall mail the Proxy Statement to the shareholders
of Parent.
7.12 PUBLICITY
Buyer Parties will consult with Seller Parties before issuing, and
provide Sellers reasonable time and opportunity to review and comment upon, and
use reasonable efforts to agree on the form and substance of, any press release
or other public statement with respect to the Transactions, and shall not issue
any such press release or make such other public announcement prior to such
consultation, except as required under applicable Laws (including securities
Laws). Seller Parties will not issue any press release or other statements to
any third party (other than to their respective agents) with respect to the
Transactions without the express written consent of the Parent.
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7.13 TRADEMARK PURCHASE
Prior to the Closing, Trust shall acquire the Trust Marks pursuant to
and in accordance with the Trademark Purchase Agreements.
7.14 RIGHTS TO NAME
The Sellers shall procure and cause David Bitton, without further
consideration payable by the Buyer Parties or the Acquired Entities, to enter
into an agreement with Buyer, in a form that is mutually acceptable to Buyer
Parties and David Bitton, that provides in substance that: (a) subject to the
exclusions below, Buyer and its Affiliates collectively shall have a fully-paid
up, fully transferable and sub licensable, exclusive license to use his name,
surname signature, likeness and other personal indicia ("PERSONAL INDICIA") in
perpetuity in association with the operation of a business in the field of
apparel and apparel accessories, including clothing, footwear, belts, totes,
leather goods, and hats, and fragrances ("RESTRICTED AREAS"); (b) a covenant
that David Bitton will not use his Personal Indicia in perpetuity in conjunction
with goods or services in the Restricted Areas; but (c) notwithstanding the
foregoing, David Bitton shall be free to use his Personal Indicia in association
with all activities other than in the Restricted Areas. Additionally, the
agreement with David Bitton shall restrict Buyer and its Affiliates from using
the Personal Indicia in association with merchandise sold through certain lower
tier distribution channels (budget and mass market retailers) if the Personal
Indicia was not used previously in connection with the sale of merchandise by
Buyer or the Acquired Entities through such distribution channels prior to the
Closing or after the Closing while Gabriel Bitton serves as the Senior Officer
of Buyer.
7.15 SECURITY AGREEMENT AND INTERCREDITOR AGREEMENT
(a) At Closing, the Buyer Parties and the Sellers shall execute
and deliver a Security Agreement in form and substance
reasonably acceptable to Buyer Parties and the Sellers (the
"SECURITY AGREEMENT"), pursuant to which the Buyer Parties
will grant the Sellers, as security for the Buyer Parties'
obligations to make the Future Payments (the "SELLER
OBLIGATIONS"), a first priority Security Interest in the
Seller Priority Collateral and a Security Interest, ranking
second in priority only to the Security Interest of Guggenheim
therein to the extent securing the Senior Obligations, in the
Trust Marks and all proceeds thereof (the "SELLER SUBORDINATED
COLLATERAL" and together with the Seller Priority Collateral,
the "COLLATERAL"). Sellers acknowledge and agree that Buyer
Parties shall be free to grant a Security Interest in the
Collateral to Guggenheim provided that Sellers' Security
Interest in the Seller Priority Collateral pursuant to the
Security Agreement shall have priority over any other Security
Interests in the Collateral.
(b) At Closing, the Sellers shall execute and deliver an
Intercreditor Agreement with Guggenheim, GMAC CF and other
lenders to Buyer Parties, in form and substance acceptable to
Sellers, Guggenheim and the other lenders a party thereto (the
"INTERCREDITOR AGREEMENT"), and containing, among other terms
and conditions, the following terms and conditions:
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(i) The Sellers acknowledge and agree that each of
Guggenheim and certain other lenders of the Buyer
Parties has been or will be granted a Security
Interest in the Collateral and that Sellers have no
right or interest in any other property of the Buyer
Parties, other than the Collateral.
(ii) Except for Guggenheim's first priority (to the extent
it secures the Senior Obligations) Security Interest
in the Seller Subordinated Collateral, the Security
Interests of each of Guggenheim, GMAC CF and any
other secured creditors of Buyer Parties in the
Collateral will be subordinated to Sellers' Security
Interest in the Collateral.
(iii) Each of the Sellers will agree to subordinate its
Security Interest in the Seller Subordinated
Collateral to the Security Interest of Guggenheim to
the extent such Security Interest secures the Senior
Obligations.
(iv) The Sellers will agree not to exercise any remedies
or rights under this Agreement and the Security
Agreement (the "SELLER DOCUMENTS") with respect to
any Collateral, other than as set forth below with
respect to Seller Priority Collateral.
(v) The Sellers will agree not to exercise any remedies
or rights under the Seller Documents with respect to
the Collateral, provided that such standstill will
terminate with respect to the Seller Priority
Collateral on a date which is 180 days following
delivery of a notice of a Payment Default following a
Payment Default under the Seller Documents.
(vi) The Sellers will grant Guggenheim a right (but not an
obligation) to purchase all of the Seller Obligations
after the occurrence of a breach under any of the
Seller Documents.
(vii) Sellers will agree that, if an event of default with
respect to the Senior Obligations has occurred and is
continuing and Sellers have received written notice
of such event of default, all payments of the Seller
Obligations shall be subordinate and junior in right
of payment to the Senior Obligations, provided that
such subordination shall continue only for a period
of 180 days following delivery of a notice by Sellers
to Guggenheim of a Payment Default following a
Payment Default under the Seller Documents.
(viii) The Sellers and Guggenheim will agree to grant to
GMAC CF a nonexclusive, royalty-free license to use
the Collateral to sell or otherwise dispose of any
inventory (including raw materials, work-in-process
and finished goods) on hand or ordered, against which
inventory GMAC CF has directly loaned amounts to the
Buyer Parties and which inventory secures such
financing arrangements between GMAC CF, on the one
hand, and the Buyer Parties and any of their
respective Affiliates and Subsidiaries, on the other
hand. The license will be similar in substance to the
limited license granted to GMAC CF with respect to
American Rag(R) and other trademarked apparel
inventory as provided for in that
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certain Intercreditor Agreement, dated as of June 16,
2006, between GMAC CF and Guggenheim.
(c) For purposes of this SECTION 7.15, the following terms shall
have the following meanings: "PAYMENT DEFAULT" means the
failure by the Buyer Parties to make any payment on the Seller
Obligations when due (after giving effect to any grace
periods) which has continued for a period of fifteen (15)
days; "SELLER PRIORITY COLLATERAL" means Contracts
constituting part of the Purchased Assets and pursuant to
which Trust has granted to a Person rights under or with
respect to any of Trust's Intellectual Property and the
proceeds thereof, all renewals of any of the forgoing
Contracts for an additional term, and all new Contracts that
replace any of the forgoing Contracts entered into with the
existing licensee or any new licensee, so long as such renewal
or replacement Contract grants substantially the same rights
with respect to substantially the same merchandise in
substantially the same territory provided for in the original
Contract being renewed or replaced; and "SENIOR OBLIGATIONS"
means the obligations of the Buyer Parties and/or their
Affiliates to Guggenheim and the lenders under the Credit
Agreement, dated June 16, 2006, among Parent, Guggenheim, the
lenders thereunder and other parties thereto, as the same is
amended, restated, renewed, extended or otherwise modified
from time to time, but solely with respect to up to
$65,000,000 in principal amount of advances made by Guggenheim
and such lenders to Buyer Parties or their Affiliates (which
amount shall be reduced by the amount of any repayments of
principal on the Senior Obligations after the Closing).
7.16 DISCHARGE OF CERTAIN SECURITY INTERESTS OF ACQUIRED ENTITIES
At or prior to the Closing, each Seller Party shall discharge or caused
to be discharged the Security Interest listed on SCHEDULE 7.16 and shall provide
confirmation of the discharges received from the relevant authorities to the
Buyer Parties.
7.17 ANCILLARY AGREEMENTS
At the Closing, the Sellers shall procure and cause each of the Bitton
Brothers to enter into each Ancillary Agreement to which such Bitton Brother is
a party.
7.18 TAX RETURNS; AFFIDAVIT
Prior to Closing, the Sellers shall cause each Acquired Entity to have
prepared and filed with all appropriate Governmental Bodies all Tax Returns in
respect of Taxes required to be filed by applicable Law on or prior to Closing.
At or immediately before Closing, Sellers Parties shall deliver to Parent an
affidavit, under penalties of perjury, stating that Buffalo US is not and has
not been a United States real property holding corporation, dated as of the
Closing Date and in form and substance required under Treasury Regulations
Sections 1.897-2(h) and 1.1445-2(c)(3) so that Parent is exempt from withholding
any portion of the US Buffalo Purchase Price.
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ARTICLE 8.
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following the
Closing:
8.1 GENERAL
In case at any time after the Closing any further action is necessary
to carry out the purposes of this Agreement, each Party shall take such further
action (including executing and delivering such further instruments and
documents) as any other Party reasonably may request, all at the requesting
Party's sole cost and expense (unless the requesting Party is entitled to
indemnification therefor under ARTICLE 11). After the Closing, Buyer shall be
entitled to possession of all documents, books, records, agreements, and
financial data of any sort relating to Acquired Entities.
8.2 LITIGATION SUPPORT
So long as any Party actively is contesting or defending against any
Action in connection with (a) the Transactions or (b) any fact, situation,
circumstance, status, condition, activity, practice, plan, occurrence, event,
incident, action, failure to act, or transaction on or prior to the Closing Date
involving any Acquired Entity or the Purchased Assets, each other Party shall
cooperate with such Party and such Party's counsel in the contest or defense,
make available their personnel, and provide such testimony and access to their
books and records as will be necessary in connection with the contest or
defense, at the sole cost and expense of the contesting or defending Party
(unless the contesting or defending Party or one of its Affiliates is entitled
to indemnification therefor under ARTICLE 11).
8.3 TRANSITION
No Seller or Trust shall take any action that is designed or intended
to have the effect of discouraging any lessor, licensor, licensee, customer,
supplier, or other business associate of any Acquired Entity or relating to the
Purchased Assets from maintaining at least as favorable business relationships
with Acquired Entities or Buyer Parties after the Closing as it maintained with
Acquired Entities or Trust prior to the Closing. Each Seller and Trust shall,
and shall cause its Affiliates to, refer all customer, supplier, and other
inquiries relating to the businesses of Acquired Entities or the Purchased
Assets to Buyer Parties or an Affiliate thereof.
8.4 CONFIDENTIALITY
Each Seller and Trust shall treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential Information
except in connection with this Agreement. If Trust or any Seller is ever
requested or required (by oral question or request for information or documents
in any Action) to disclose any Confidential Information, Trust or such Seller
shall notify Parent promptly of the request or requirement so that Parent may
seek an appropriate protective Order or waive compliance with this SECTION 8.4.
If, in the absence of a protective Order or the receipt of a waiver hereunder,
Trust or any Seller that, on the written advice of counsel, is compelled to
disclose any Confidential Information to any Governmental Body, arbitrator, or
mediator or else stand Liable for contempt, Trust or that Seller may disclose
the
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Confidential Information to the Governmental Body, arbitrator, or mediator;
PROVIDED, HOWEVER; that the disclosing Party shall use its Commercially
Reasonable Efforts to obtain, at the request of Parent, an Order or other
assurance that confidential treatment shall be accorded to such portion of the
Confidential Information required to be disclosed as Parent may designate.
8.5 RELEASE
(a) Trust and each Seller, on behalf of such Person and each of
such Person's heirs, representatives, successors, and assigns,
hereby releases and forever discharges each Acquired Entity,
and each of its respective officers, directors, managers,
employees, agents, stockholders, controlling persons,
representatives, Affiliates, successors, assigns
(individually, a "RELEASEE" and collectively, "Releasees")
from any and all Actions, Orders, Damages, Liabilities, and,
except as expressly contemplated by this Agreement and the
Ancillary Agreements, Contracts whatsoever, whether known or
unknown, suspected or unsuspected, both at Law and in equity,
which such Person or any of such Person's respective heirs,
representatives, successors or assigns now has, have ever had
or may hereafter have against the respective Releasees arising
on or prior to the Closing Date or on account of or arising
out of any matter, cause, or event occurring on or prior to
the Closing Date including any rights to indemnification or
reimbursement from any Acquired Entity, whether pursuant to
their respective Organizational Documents, Contract or
otherwise and whether or not relating to Actions pending on,
or asserted after, the Closing Date; PROVIDED, HOWEVER, that
nothing contained herein will operate to release any
obligations of any Acquired Entity arising under this
Agreement and the Ancillary Agreements. Trust and each Seller
hereby irrevocably covenants to refrain from, directly or
indirectly, asserting any cause of Action, or commencing,
instituting or causing to be commenced, any Action, of any
kind against any Releasee, based upon any matter purported to
be released hereby.
(b) Each Acquired Entity, on behalf of such Person and each of
such Person's heirs, representatives, successors, and assigns,
hereby releases and forever discharges each of Sellers and
Trust, and each of its respective officers, directors,
managers, employees, agents, stockholders, controlling
persons, representatives, Affiliates, successors, assigns
(individually, a "SELLER RELEASEE" and collectively, "SELLER
RELEASEES") from any and all Actions, Orders, Damages,
Liabilities, and, except as expressly contemplated by this
Agreement and the Ancillary Agreements, Contracts whatsoever,
whether known or unknown, suspected or unsuspected, both at
Law and in equity, which such Person or any of such Person's
respective heirs, representatives, successors or assigns now
has, have ever had or may hereafter have against the
respective Seller Releasees on or prior to the Closing Date or
on account of or arising out of any matter, cause, or event
occurring on or prior to the Closing Date whether or not
relating to Actions pending on, or asserted after, the Closing
Date; PROVIDED, HOWEVER, that nothing contained herein will
operate to release any obligations of any of Seller Party or
Trust arising under this Agreement and the Ancillary
Agreements. Each Acquired Entity hereby irrevocably covenants
to refrain from, directly or indirectly, asserting any cause
of Action, or commencing, instituting or causing to be
commenced, any Action, of any kind against any Seller
Releasee, based upon any matter purported to be released
hereby.
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8.6 STOCK CERTIFICATES
(a) Each stock certificate representing Buyer Exchangeable Shares
will be imprinted with a legend substantially in the following
form:
UNLESS PERMITTED UNDER CANADIAN SECURITIES LEGISLATION, THE HOLDER OF
THIS SECURITY MUST NOT TRADE THE SECURITY BEFORE THE DATE THAT IS FOUR
(4) MONTHS AND A DAY AFTER THE LATER OF (I) [CLOSING DATE] AND (II) THE
DATE THE ISSUER BECAME A REPORTING ISSUER IN ANY PROVINCE OR TERRITORY.
NEITHER THE SECURITIES EVIDENCED BY THIS CERTIFICATE NOR THE SECURITIES
ISSUABLE IN EXCHANGE THEREOF HAVE BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ISSUED IN
RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY,
NOR ANY SECURITIES ISSUABLE IN EXCHANGE THEREOF, NOR ANY INTEREST OR
PARTICIPATION THEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED,
PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT
TO, SUCH REGISTRATION.
(b) Each stock certificate representing Parent Shares will be
imprinted with legends substantially in the following form:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN
RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE
DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT
FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN AGREEMENT
RESTRICTING THEIR TRANSFER, A COPY OF WHICH IS ON FILE AT THE OFFICE OF
THE COMPANY AND WILL BE FURNISHED TO ANY PROSPECTIVE PURCHASERS ON
REQUEST. THE AGREEMENT PROVIDES, AMONG OTHER THINGS, FOR CERTAIN
RESTRICTIONS ON THE SALE,
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TRANSFER, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THE SHARES
REPRESENTED BY THIS CERTIFICATE."
8.7 BOARD REPRESENTATION
Effective upon the Closing, Parent shall appoint Gabriel Bitton and
Louis Padilla or, if either or both of Gabriel Bitton or Louis Padilla is
unwilling to serve or is unable to serve due to death or disability or for the
reasons described in clause (ii) of this paragraph, any other nominee of Sellers
reasonably acceptable to Parent (Gabriel Bitton and Louis Padilla or such other
nominee, the "SELLER NOMINEES") to serve on Parent's Board of Directors.
Following the Closing and until the earlier of (a) the fifth anniversary of the
Closing Date and (b) the date that Sellers and their Affiliates as of the
Closing Date collectively "beneficially own" (as determined pursuant to Rule
13d-3 of the General Rules and Regulations under the Exchange Act) less than
five million shares (as adjusted for stock splits, reverse stock splits, etc.)
of the issued and outstanding Parent Common Stock, Parent shall use its best
efforts to nominate the Seller Nominees as nominees of Parent's Board of
Directors for reelection as directors at each shareholders meeting at which the
Seller Nominees' seats on Parent's Board of Directors are being voted upon;
PROVIDED, HOWEVER, that Parent shall not be required to nominate a Seller
Nominee (i) if the Seller Nominee does not agree to be named as a nominee and
provide all information required to be included in Parent's proxy statement for
the applicable shareholders meeting or otherwise required to be disclosed by
Parent or (ii) the Seller Nominee is prohibited or disqualified from serving on
the Board of Directors of Parent pursuant to any order, judgment, or decree of
any Governmental Authority.
Parent will indemnify the Seller Nominees to the fullest extent
permitted by Law against any liability for any act or omission relating to his
appointment as director of Parent. Nothing in this Agreement limits the rights
of a Seller Nominee to claim indemnity apart from the provisions of this
Agreement, if he is entitled to such indemnity. Parent will purchase and
maintain customary directors and officers' insurance coverage for the benefit of
the Seller Nominees and all other members of Parent's Board of Directors, in
such amounts and on such terms as are approved by Parent's Board of Directors.
8.8 TREATMENT OF CERTAIN TAX MATTERS POST-CLOSING
The following provisions shall govern the allocation of responsibility
as between Buyer Parties and Sellers for certain Tax matters following the
Closing Date:
(a) TAXABLE PERIODS AND ALLOCATION OF TAXES. The Target Companies
shall, unless prohibited by applicable Law, close the taxable
period of each of Acquired Entities as of the close of the
Closing Date. For purposes of this Section, in the case of any
Taxes that are imposed on a periodic basis and are payable for
a Taxable period which begins before the Closing Date and ends
after the Closing Date, the portion of such Tax which relates
to the portion of such Taxable period ending on the Closing
Date shall (x) in the case of any Taxes other than Taxes based
upon or related to income or receipts, be deemed to be the
amount of such Tax for the entire Taxable period multiplied by
a fraction the numerator of which is the number of days in the
Taxable period ending on the Closing Date and the denominator
of which is the number of days in the entire
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Taxable period, and (y) in the case of any Tax based upon or
related to income or receipts, be deemed equal to the amount
which would be payable if the relevant Taxable period ended on
the Closing Date. Any credits relating to a Taxable period
that begins before and ends after the Closing Date shall be
taken into account as though the relevant Taxable period ended
on the Closing Date. All determinations necessary to give
effect to the foregoing allocations of income, gains, loss,
deduction, and credits shall be made in a manner consistent
with prior practice of the applicable Target Company.
(b) CLOSING TAX RETURNS. The Target Companies shall prepare or
cause to be prepared and file or cause to be filed all Tax
Returns for Acquired Entities for all periods ending on or
prior to the Closing Date which are required to be filed after
the Closing Date and all Tax Returns for each Acquired Entity
for Tax periods which begin before the Closing Date and end
after the Closing Date (the "CLOSING TAX RETURNS"). The
applicable Acquired Entity shall cause copies of such Closing
Tax Returns (other than informational returns such as Forms
1099 and Forms W-2) to be delivered to Parent and Sellers at
least forty five (45) days prior to the filing date for their
review and approval, which shall not be unreasonably withheld
or delayed. Parent and Sellers shall give any comments on such
Closing Tax Returns in writing to the applicable Acquired
Entity, with a copy to Parent or Sellers, as applicable,
within ten (10) days following the delivery of the Closing Tax
Returns. The applicable Acquired Entity, Parent and Sellers
shall attempt in good faith mutually to resolve any
disagreements regarding such Closing Tax Returns prior to the
due date for filing thereof. Any disagreements regarding such
Closing Tax Returns which are not resolved by thirty (30) days
prior to the filing date for such Closing Tax Returns shall be
promptly referred to the Neutral Accounting Firm. The Neutral
Accounting Firm shall prepare the final Closing Tax Return
within twenty five (25) days of such referral, and such
preparation shall be final and binding on the Acquired Entity,
Parent and Sellers. The fees and expenses of the Neutral
Accounting Firm shall be paid by Parent and Sellers equally.
Closing Tax Returns shall so far as practicable be prepared
using elections consistent with past practices, and financial
statement Tax accruals for any timing differences from
financial statement income will be treated as Taxes paid or
payable for purposes of the allocations contained in this
paragraph.
(c) AMENDMENTS. Without the prior written consent of Sellers,
which consent shall not be unreasonably withheld, neither the
Acquired Entity nor Parent shall file or cause to be filed for
fiscal periods ending on or prior to the Closing Date or
deemed to end on the Closing Date for the purpose of this
Agreement, any amended Tax Return if any such filing affects
the obligation of Sellers to provide indemnification for any
Tax Liability of the Acquired Entity pursuant to this
Agreement.
(d) COOPERATION ON TAX MATTERS.
(i) After the Closing Date, Acquired Entities, Parent and
Sellers shall cooperate fully, as and to the extent
reasonably requested by the other parties, in
connection with the filing of Tax Returns pursuant to
this Section and any audit, litigation or other
proceeding with respect to Taxes for which Sellers
are or may be partially or fully liable to the Seller
Indemnified Parties pursuant to this
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Agreement. Such cooperation shall include the
retention and (upon any other party's request) the
provision of records and information which are
reasonably relevant to any such audit, litigation or
other proceeding and making employees available on a
mutually convenient basis to provide additional
information and explanation of any material provided
hereunder.
(ii) Parent and each Acquired Entity further agree, upon
request, to provide the other Parties with all
information that such Party may be required to report
pursuant to Section 6043 of the Code and all Treasury
Regulations promulgated thereunder.
(e) TAX PROCEEDINGS. Notwithstanding any other provision contained
in this Agreement, after the Closing Date, in the case of any
audit, examination, or other proceeding with respect to Taxes
("TAX Proceeding") for which Sellers are or may be partially
or fully liable to the Seller Indemnified Parties pursuant to
this Agreement, the applicable Acquired Entity shall inform
Sellers within ten (10) business days after the receipt of any
notice of such Tax Proceeding. The Acquired Entity shall be
responsible for the management of the Tax Proceeding, provided
that Sellers shall have the right (1) to participate fully in
the Tax Proceeding, either personally or through a
representative (including separate counsel of its own choosing
at its sole cost and expense) to the extent it is affected by
such proceeding, (2) to receive copies of all correspondence
regarding the Tax Proceeding, and reasonable advance notice
from the Acquired Entity of any meetings, hearings or
proceedings, (3) to review in advance and comment on any
pleadings, briefs, or other documents to be filed, and (4) to
approve any judgment or settlement, closing or other agreement
with respect to any Tax Proceeding, which approval shall not
be unreasonably withheld or delayed.
(f) CERTAIN TAXES. All transfer, documentary, sales, use, stamp,
registration and other such Taxes and fees (including any
penalties and interest) incurred in connection with this
Agreement, if any, shall be paid by the applicable Acquired
Entity when due, and such Acquired Entity shall, at its own
expense, file all necessary Tax Returns and other
documentation with respect to all such transfer, documentary,
sales, use, stamp, registration and other Taxes and fees, and,
if required by applicable Law, Buyer Parties shall, and shall
cause its Affiliates to, join in the execution of any such Tax
Returns and other documentation.
(g) RETENTION OF DOCUMENTS. Each Acquired Entity agrees to retain
all books and records with respect to Tax matters pertinent to
such Acquired Entity relating to any taxable period beginning
before the Closing Date until the expiration of the
prescription period of the statute of limitations (and, to the
extent notified by Buyer Parties, any extensions thereof) of
the respective taxable periods, and to abide by all record
retention agreements entered into with any taxing authority.
(h) TAX INDEMNIFICATION. Without limiting the rights of the Seller
Indemnified Parties to be indemnified pursuant to ARTICLE 11,
Sellers and Trust, jointly and severally, shall indemnify and
hold the Seller Indemnified Parties harmless from and pay any
and all Damages directly or indirectly resulting from,
relating to, arising out of,
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or attributable to (i) any Tax payable by or on behalf of any
Seller Party or Acquired Entity for any taxable period ending
on or prior to the Closing Date, (ii) Taxes of any member of a
consolidated or combined tax group of which any Seller Party
is, or was at any time, a member, for which any Acquired
Entity is jointly or severally liable as a result of its
inclusion in such group prior to the Closing Date, and (iii)
with respect to any Taxes payable by or on behalf of any
Acquired Entity due for period beginning before and ending
after the Closing Date (whether or not assessed prior to the
Closing Date), the Taxes allocable to the portion of such
period that ends on and includes the Closing Date ("SELLERS'
PRO RATA SHARE"). For purposes of calculating Sellers' Pro
Rata Share of Taxes described in clause (iii), the Closing
Date will be treated as the last day of a taxable period, and
the portion of any such Tax that is allocable to the taxable
period that is so deemed to end on the Closing Date will be:
(1) in the case of Taxes that are either (x) based upon or
related to income or receipts, (y) imposed in connection with
any sales or other transfer or assignment of property (real or
personal, tangible or intangible) other than transfers
pursuant to this Agreement, or (z) imposed on a periodic basis
and measured by the level of any item that is required to be
determined as of the Closing Date or that is reasonably
determinable as of the Closing Date and such determination is
made by a party in a manner reasonably acceptable to Parent
and Sellers, deemed equal to the amount that would be payable
if the period for which such Tax is assessed ended with the
Closing Date; and (2) in the cases of Taxes imposed on a
periodic basis and measured by the level of any item, other
than Taxes described in clause (1) hereof, will be deemed to
be the amount of such Taxes for the entire period (or, in the
case of such taxes determined on an arrears basis, the amount
of such Taxes for the immediately preceding period) multiplied
by a fraction the numerator of which is the number of calendar
days in the period ending with the Closing Date and the
denominator of which is the number of calendar days in the
entire period; and (3) exemptions, allowances or deductions
that are calculated on an annual basis such as the deduction
for depreciation, will be apportioned on a daily basis in the
same manner as Taxes under clause (2) hereof. Returns for
periods beginning before closing and ending after closing
shall so far as practicable be prepared using elections
consistent with past practices, and financial statement tax
accruals for any timing differences from financial statement
income will be treated as taxes paid or payable for purposes
of the allocations contained in this paragraph. For the
avoidance of doubt, the allocation of tax liabilities under
this paragraph shall be unaffected by the carryback of tax
losses, credits or other attributes attributable to periods
beginning after closing even though such carrybacks may have
the effect of reducing taxes paid or accrued for periods
covered by this tax allocation.
Notwithstanding anything in this SECTION 8.8(H) to the
contrary, Sellers and Trust will have no obligation to indemnify Seller
Indemnified Parties for Taxes to the extent adequate provision was made
therefor on the balance sheet included in the Interim Financial
Statements (other than in the notes thereto) or to the extent arising
after the Balance Sheet Date in the Ordinary Course of Business.
8.9 RESTRICTIVE COVENANT
The Buyer Parties and the Seller Parties agree that no portion of the
368 Purchase Price, Buffalo Inc. Purchase Price, 316 Purchase Price, Buffalo US
Purchase Price or the Asset
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Purchase Price be allocated to a "restrictive covenant" as that term is defined
for the purpose of the INCOME TAX ACT (Canada). However, if any portion of the
368 Purchase Price, Buffalo Inc. Purchase Price, 316 Purchase Price, Buffalo US
Purchase Price or the Asset Purchase Price is determined by tax authorities to
be in respect of a "restrictive covenant" (the "REALLOCATION"), then the Buyer
Parties and the Seller Parties agree to use their best effort in order that the
full amount of such portion be subject to an election under Section 56.4 of the
INCOME TAX ACT (Canada), or any other provision to the same effect, in order for
such amount to be treated as proceeds of disposition of the shares in the
capital of the Acquired Entities or as part of the cumulative eligible capital
account under subsection 14(5) of the INCOME TAX ACT (Canada). In this respect,
the consideration paid to the Sellers for the Shares of the Acquired Entities
and the consideration paid to the Sellers for entering into this Agreement will
be deemed to be and always to have been the corresponding amounts under the
Reallocation. Upon the Sellers' request, Parties shall file the prescribed form
in accordance with the INCOME TAX ACT (Canada) and any subsequent amendment. If
any Canadian provincial taxing authority proposes a similar provision, and it is
determined by such provincial tax authority that any portion of the 368 Purchase
Price, Buffalo Inc. Purchase Price, 316 Purchase Price, Buffalo US Purchase
Price or the Asset Purchase Price is in respect of a "restrictive covenant",
then the Seller Parties and the Buyer Parties shall make a similar provincial
election.
8.10 OPTION AWARDS
For a period of twenty-four (24) months following the Closing, the
Senior Officer shall have authority to provide for the grant to employees of
Buyer and its Subsidiaries (other than the Bitton Brothers), of options to
purchase up to an aggregate of 1,000,000 shares of Parent Common Stock pursuant
to, and in accordance with, the terms and conditions of Parent's 2006 Stock
Incentive Plan or such other plan approved for such purpose by Parent's Board of
Directors. The options shall have an exercise price equal to the fair market
value of Parent Common Stock on the date of grant, vest over four (4) years in
accordance with Parent's then current vesting schedule for similarly situated
employees, and otherwise be subject to Parent's form of option agreement for
similarly situated employees.
ARTICLE 9.
CLOSING CONDITIONS
9.1 CONDITIONS PRECEDENT TO OBLIGATION OF BUYER PARTIES
Buyer Parties' obligation to consummate the Transactions contemplated
to occur in connection with the Closing and thereafter is subject to the
satisfaction of each condition precedent listed below.
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each
representation and warranty set forth in SECTIONS 5.1 and 5.3
and ARTICLE 6 must have been accurate and complete in all
respects (without giving effect to any provisions including
the word "material" or words of similar import, or to
materiality, as reflected under Canadian GAAP, in the
representations in SECTION 6.8 relating to the Financial
Statements), as of the date of this Agreement, and must be
accurate and complete in all respects (without giving effect
to any provisions including the word "material" or words of
similar import,
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or to materiality, as reflected under Canadian GAAP, in the
representations in SECTION 6.8 relating to the Financial
Statements), as of the Closing Date, as if made on the Closing
Date (except as expressly provided in a representation or
warranty, as arising as a direct results of the implementation
of the Transaction Documents in accordance with their
respective terms and except for inaccuracies that individually
or in the aggregate could not reasonably be expected to result
in a Material Adverse Change (or Effect)).
(b) COMPLIANCE WITH OBLIGATIONS. Each Seller Party must have
performed and complied with all of its covenants to be
performed or complied with at or prior to Closing (singularly
and in the aggregate) in all material respects.
(c) NO MATERIAL ADVERSE CHANGE OR DESTRUCTION OF PROPERTY. Since
the date hereof there must have been no event, series of
events or the lack of occurrence thereof which, singularly or
in the aggregate, has had or could reasonably be expected to
have a Material Adverse Effect. Without limiting the
foregoing, (i) there must have been no Material Adverse
Change, (ii) there must not have been any action or inaction
by a Governmental Body, arbitrator, or mediator which caused
or could reasonably be expected to cause a Material Adverse
Change, and (iii) there must not have been any fire, flood,
casualty, act of God or the public enemy or other cause
(regardless of insurance coverage for such damage) which has
had or could reasonably be expected to have a Material Adverse
Effect.
(d) NO ADVERSE LITIGATION. There must not be pending or threatened
any Action by or before any Governmental Body, arbitrator, or
mediator which seeks to restrain, prohibit, invalidate, or
collect Damages arising out of the Transactions, or which, in
the reasonable judgment of Parent, makes it inadvisable to
proceed with the Transactions.
(e) SELLER PARTY CONSENTS. Seller Parties must have received
Consents to the Transactions and waivers of rights to
terminate or modify any rights or obligations of any Acquired
Entity from any Person (i) from whom such Consent is required,
including Consents listed on SCHEDULES 5.1(C), 5.3(C), and
6.3, and under any Contract listed or required to be listed in
SCHEDULES 6.17, 6.21, and 6.26, or under Law, or (ii) who as a
result of the Transactions, would have such rights to
terminate or modify such Contracts, either by their terms or
as a matter of Law, other than (A) Consents required under
real property leases to which the Acquired Entities are party,
(B) the Consent of HSBC Bank Canada, or (C) unless, in each
case, the failure to receive such consents or waivers either
individually or in the aggregate would not have a Material
Adverse Effect.
(f) BUYER PARTY CONSENTS. Buyer Parties must have obtained all
Consents listed on SCHEDULE 5.2(C).
(g) LIABILITIES. Prior to the Closing, Seller Parties must have
obtained and delivered to Parent full satisfactions or
releases of all Liabilities due to or from Acquired Entities
and Trust which are due to be satisfied or released under this
Agreement to or on behalf of (i) any Affiliate of Acquired
Entities, (ii) Trust or any Affiliate of Trust, or (iii)
Sellers or any Affiliate of Sellers.
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(h) LEGAL OPINIONS. Parent shall have received from Stikeman
Elliot, LLP, counsel for Seller Parties, written opinions,
dated as of the Closing Date, addressed to Parent, in form and
substance reasonable satisfactory to Parent.
(i) SHAREHOLDER APPROVAL. Parent shall have obtained Shareholder
Approval.
(j) DISSENTING SHARES. The holders of no more than 4.99% of the
Parent Common Stock shall have exercised their right to
dissent from the Transactions under the applicable provisions
of the CGCL.
(k) NO ORDER OR INJUNCTION. There must not be issued and in effect
any Order restraining or prohibiting the Transactions.
(l) EMPLOYMENT AGREEMENTS. Each of the Bitton Brothers shall have
executed and delivered to Buyer the Employment Agreements.
(m) NON-COMPETITION AGREEMENTS. Each of the Bitton Brothers shall
have executed and delivered to Parent the Non-Competition
Agreements.
(n) INTERCREDITOR AGREEMENT; SECURITY AGREEMENT. Each of the
Intercreditor Agreement and Security Agreement contemplated by
SECTION 7.15 shall have been executed and delivered by all
parties thereto.
(o) REGISTRATION RIGHTS AGREEMENT. Each Seller receiving Buyer
Exchangeable Shares at Closing shall have executed and
delivered to Parent the Registration Rights Agreement.
(p) STANDSTILL AGREEMENT. Each Seller receiving Buyer Exchangeable
Shares at Closing and the Bitton Brothers shall have executed
and delivered to Parent the Standstill Agreement.
9.2 CONDITIONS PRECEDENT TO OBLIGATION OF SELLERS AND TRUST
Trust's and each Seller's obligation to consummate the Transactions contemplated
to occur in connection with the Closing and thereafter is subject to the
satisfaction of each condition precedent listed below.
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each
representation and warranty set forth in SECTION 5.2 must have
been accurate and complete in all respects (without giving
effect to any provisions including the word "material" or
words of similar import, or to materiality, as reflected under
US GAAP, in the representations in SECTION 5.2(F) relating to
the financial statements of Parent), as of the date of this
Agreement, and must be accurate and complete in all respects
(without giving effect to any provisions including the word
"material" or words of similar import, or to materiality, as
reflected under US GAAP, in the representations in SECTION
5.2(F) relating to the financial statements of Parent), as of
the Closing Date, as if made on the Closing Date (except as
expressly provided in a representation or warranty, as arising
as a direct
71
results of the implementation of the Transaction Documents in
accordance with their respective terms and except for
inaccuracies that individually or in the aggregate could not
reasonably be expected to result in a Parent Material Adverse
Change (or Effect)).
(b) COMPLIANCE WITH OBLIGATIONS. Each Buyer Party must have
performed and complied with all its covenants and obligations
required by this Agreement to be performed or complied with at
or prior to Closing (singularly and in the aggregate) in all
material respects.
(c) NO PARENT MATERIAL ADVERSE CHANGE OR DESTRUCTION OF PROPERTY.
Since the date hereof there must have been no event, series of
events or the lack of occurrence thereof which, singularly or
in the aggregate, has had or could reasonably be expected to
have a Parent Material Adverse Effect. Without limiting the
foregoing, (i) there must have been no Parent Material Adverse
Change, (ii) there must not have been any action or inaction
by a Governmental Body, arbitrator, or mediator which caused
or could reasonably be expected to cause a Parent Material
Adverse Change, and (iii) there must not have been any fire,
flood, casualty, act of God or the public enemy or other cause
(regardless of insurance coverage for such damage) which has
had or could reasonably be expected to have a Parent Material
Adverse Effect.
(d) NO ADVERSE LITIGATION. There must not be pending or threatened
any Action by or before any Governmental Body, arbitrator, or
mediator which seeks to restrain, prohibit, invalidate, or
collect Damages arising out of the Transactions, or which, in
the reasonable judgment of Seller Parties, makes it
inadvisable to proceed with the Transactions.
(e) BUYER PARTY CONSENTS. Buyer Parties must have obtained all
Consents listed in SCHEDULE 5.2(C).
(f) NO ORDER OR INJUNCTION. There must not be issued and in effect
any Order restraining or prohibiting the Transactions.
(g) LEGAL OPINION. Trust and Sellers shall have received from
Stubbs, Alderton & Markiles LLP and Pillsbury Winthrop Shaw
Pittman LLP (or such other counsel reasonable acceptable to
Sellers), each counsel for Buyer Parties, written opinions,
dated as of the Closing Date, addressed to such Parties, in
form and substance reasonable satisfactory to such Parties.
(h) SHAREHOLDER APPROVAL. Parent shall have obtained Shareholder
Approval
(i) DISSENTING SHARES. The holders of no more than 4.99% of the
Parent Common Stock shall have exercised their right to
dissent from the Transactions under the applicable provisions
of the CGCL.
(j) REGISTRATION RIGHTS AGREEMENT. Parent shall have executed and
delivered to each Seller receiving Buyer Exchangeable Shares
at Closing the Registration Rights Agreement.
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(k) INTERCREDITOR AGREEMENT; SECURITY AGREEMENT. Each of the
Intercreditor Agreement and Security Agreement contemplated by
SECTION 7.15 shall have been executed and delivered by all
parties thereto.
ARTICLE 10.
TERMINATION
10.1 TERMINATION OF AGREEMENT
The Parties may terminate this Agreement as provided below:
(a) Parent and Sellers may terminate this Agreement as to all
Parties by mutual written consent at any time prior to the
Closing.
(b) Parent or Sellers may terminate this Agreement upon delivery
of notice if the Closing has not occurred prior to the
Expiration Date, PROVIDED that the Party delivering such
notice (or in the case of a delivery by Sellers, each Seller
Party) shall not have caused such failure to close as a result
of such Party's default hereunder. In the event the
preliminary Proxy Statement related to the Shareholder
Approval has not been filed with the SEC by December 31, 2006,
Parent or Sellers may terminate this Agreement upon delivery
of notice prior to January 19, 2007.
(c) Parent may terminate this Agreement within thirty (30) days of
giving written notice to Sellers at any time prior to the
Closing if there has been a Material Adverse Change (or
Effect) or Trust or any Seller has Breached any
representation, warranty, or covenant contained in this
Agreement (without giving effect to materiality for any
provisions including the word "MATERIAL" or words of similar
import and SECTION 6.8), provided such Breach, individually or
in the aggregate, could reasonably be expected to result in a
Material Adverse Change (or Effect), and such Material Adverse
Change (or Effect) or Breach has not been remedied within ten
(10) days of the receipt of such notice by Seller.
(d) Sellers may terminate this Agreement within thirty (30) days
of giving written notice to Parent at any time prior to the
Closing if there has been a Parent Material Adverse Change (or
Effect) or if any Buyer Party has Breached any representation,
warranty, or covenant contained in this Agreement (without
giving effect to materiality for any provisions including the
"MATERIAL" or words of similar import and SECTION 5.2(F),
provided such Breach, individually or in the aggregate, could
reasonably be expected to result in a Parent Material Adverse
Change (or Effect) and such Parent Material Adverse Change (or
Effect) or Breach has not been remedied within ten (10) days
of the receipt of such notice by Parent.
(e) Parent may terminate this Agreement by giving notice to
Sellers on or before the Expiration Date that it has not
obtained or reasonably believes that it will be unable to
obtain on terms and conditions reasonably satisfactory to
Parent all of the financing it needs to consummate the
Transactions.
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(f) Parent may terminate this Agreement by giving notice to
Sellers on or before the Expiration Date if Shareholder
Approval was not obtained at a special meeting of Parent's
shareholders at which Shareholder Approval was sought by
Parent.
10.2 EFFECT OF TERMINATION
(a) Except for the obligations under ARTICLE 2, this ARTICLE 10
and ARTICLE 13, if this Agreement is terminated under SECTION
10.1, then, except as provided in this SECTION 10.2 all
further obligations of the Parties under this Agreement shall
terminate.
(b) If Parent terminates this Agreement pursuant to SECTION
10.1(C), then the rights of Buyer Party(ies) to pursue all
legal remedies for Damages such Buyer Party(ies) suffer shall
survive such termination unimpaired and no election of
remedies shall have been deemed to have been made; PROVIDED,
HOWEVER, that Seller Parties shall not be liable, in the
aggregate, for any Damages in excess of $5,000,000.
(c) If Sellers terminate this Agreement pursuant to 10.1(D),
Buffalo International shall be entitled to retain the Deposit
as contemplated by SECTION 2.1(B) as the Sellers' sole and
exclusive remedy and as liquidated damages, and all further
obligations of the Parties under this Agreement shall
terminate.
(d) If Parent or Sellers, as the case may be, terminate this
Agreement pursuant to SECTIONS 10.1(B) or 10.1(E), then
Buffalo International shall be entitled to retain the Deposit
as contemplated by SECTION 2.1(B) as the Sellers Parties' sole
and exclusive remedy and as liquidated damages with respect to
such termination of this Agreement, and all further
obligations of the Parties under this Agreement shall
terminate.
(e) If Parent terminates this Agreement pursuant to SECTION
10.1(F), then Parent shall pay to Sellers the Termination Fee,
on the tenth (10th) business day following final determination
of the Termination Fee as provided in SECTION 10.2(E), by wire
transfer in immediately available funds, to compensate Sellers
for, among other things, their expenses and management time in
pursuing the Transactions and for lost opportunity costs.
Seller Parties agree that such payment shall be Seller
Parties' sole and exclusive remedy and as liquidated damages
with respect to such termination of this Agreement, and all
further obligations of the Parties under this Agreement shall
terminate.
(f) The "TERMINATION FEE" shall be an amount equal to Seller
Parties' actual and reasonable, documented, out-of-pocket,
third party transaction costs and expenses incurred in
connection with the structuring and negotiation of (i) the
term sheet dated May 17, 2006 delivered by Parent to Buffalo
Inc., (ii) this Agreement and the Ancillary Agreements, and
(iii) the Transactions (including, without limitation, all
reasonable fees and expenses of counsel and independent
auditors), provided that Seller Parties have provided Parent
with copies of reasonably detailed invoices, receipts or other
adequate documentation substantiating all such costs and
expenses. Notwithstanding anything to the contrary in this
SECTION 10.2, in no event shall Parent have any obligation to
pay such
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costs and expenses, or any portion thereof, to the extent that
any Seller Party has already deducted the amount of such costs
and expenses from funds deposited with Seller Parties by
Parent or any third party in connection with the Transactions
unless Seller Parties thereafter reimburse Parent or any such
third party for any amounts so deducted. If Parent disputes
any the amount of such costs and expenses, the parties agree
to negotiate in good faith to resolve any dispute between them
regarding the Termination Fee. If the negotiations do not
resolve the dispute to the reasonable satisfaction of both
parties, then each party shall nominate one senior officer of
the rank of Vice President or higher as its representative.
These representatives shall, within thirty (30) days of a
written request by either party to call such a meeting, meet
in person and alone (except for one assistant for each party)
and shall attempt in good faith to resolve the dispute. If the
disputes cannot be resolved by such senior managers in such
meeting, the parties agree that they shall, if requested in
writing by either party, meet within thirty (30) days after
such written notification for one (1) day with an impartial
mediator and consider dispute resolution alternatives other
than litigation. If an alternative method of dispute
resolution is not agreed upon within thirty (30) days after
the one (1) day mediation, either party may begin litigation
proceedings. This procedure shall be a prerequisite before
taking any additional action hereunder; provided, however,
that if the timeframe imposed by this procedure could
materially adversely affect a party's rights or remedies under
any dispute, then the above procedure shall not apply to such
party with respect to such dispute.
ARTICLE 11.
INDEMNIFICATION
11.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES
(a) Each representation and warranty of Sellers contained in
SECTION 5.1 and Trust contained in SECTION 5.3 and any
certificate related to such representations and warranties
shall survive the Closing and shall continue in full force and
effect, forever, except for the representations and warranties
set forth in SECTIONS 5.1(E) and 5.3(D) which and shall
continue in full force and effect until the applicable statute
of limitations expires (or for 7 years if there is no
applicable statue of limitations). Each representation and
warranty of Seller Parties contained in ARTICLE 6 and any
certificate related to such representations and warranties
shall survive the Closing and shall continue in full force and
effect for two years thereafter, except (i) the
representations and warranties set forth in SECTIONS 6.4 and
6.26, which shall survive the Closing and shall continue in
full force and effect until the applicable statute of
limitations expires (or for 7 years if there is no applicable
statute of limitations), (ii) the representations and
warranties set forth in SECTIONS 6.1, 6.2, 6.5 and 6.7, which
shall survive the Closing and shall continue in full force and
effect forever, and (iii) the representations and warranties
set forth in SECTION 6.12 which shall survive the Closing and,
notwithstanding such Closing, and the receipt by the Buyer
Parties of any opinion, certificate or other document, shall
continue in full force and effect for the benefit of the
Seller Indemnified Parties until the date that is ninety (90)
days after the relevant Governmental Body is no longer
entitled to assess or reassess the subject Acquired Entity in
respect of the Taxes in question, having regard, without
limitation, to (a) any waiver given by such Acquired Entity in
respect of such
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Taxes; and (b) any entitlement of a Governmental Body to
assess or reassess such Acquired Entity without limitation in
the event of fraud or misrepresentation attributable to
neglect, carelessness or willful default.
(b) Each representation and warranty of Buyer Parties contained in
SECTION 5.2 and any certificate related to such
representations and warranties shall survive the Closing and
shall continue in full force and effect for two years
thereafter, except (i) the representations and warranties set
forth in SECTION 5.2(D), which shall survive the Closing and
shall continue in full force and effect until the applicable
statute of limitations expires (or for 7 years if there is no
applicable statute of limitations) and (ii) the
representations and warranties set forth in SECTIONS 5.2(A)
and 5.2(B), which shall survive the Closing and shall continue
in full force and effect forever.
(c) Each other provision in this Agreement or any certificate or
document delivered pursuant hereto will survive for the
relevant statute of limitations period, unless a different
period is expressly contemplated herein or thereby.
(d) Where a notice of a claim is given in accordance with this
Agreement in respect of a representation, warranty or
obligation of the Seller Parties relating to Taxes, the
representation, warranty or obligation to which such notice
applies shall survive in respect of such claim until the final
determination or settlement of such claim.
11.2 INDEMNIFICATION PROVISIONS FOR PARENT'S BENEFIT
Sellers and Trust, jointly and severally, shall indemnify and hold the
Seller Indemnified Parties harmless from and pay any and all Damages directly or
indirectly resulting from, relating to, arising out of, or attributable to any
one of the following:
(a) Any Breach of any representation or warranty any Seller Party
has made in this Agreement as if such representation or
warranty were made on and as of the Closing Date.
(b) Any Breach by any Seller Party of any covenant or obligation
of any Seller Party in this Agreement.
(c) All Liabilities of Trust or related to the Purchased Assets or
operation by Trust of its business prior to Closing other than
Assumed Liabilities.
11.3 INDEMNIFICATION PROVISIONS FOR TRUST'S AND SELLERS' BENEFIT
Buyer Parties shall indemnify and hold the Parent Indemnified Parties
harmless from and pay any and all Damages, directly or indirectly, resulting
from, relating to, arising out of, or attributable to any of the following:
(a) Any Breach of any representation or warranty any Buyer Party
has made in this Agreement as if such representation or
warranty were made on and as of the Closing Date.
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(b) Any Breach by any Buyer Party of any covenant or obligation of
any Buyer Party in this Agreement.
(c) The payment, performance, and satisfaction when due of the
Assumed Liabilities.
11.4 INDEMNIFICATION CLAIM PROCEDURES
(a) If any third party notifies any Indemnified Party with respect
to the commencement of any Action that may give rise to a
claim for indemnification against any Indemnitor under this
ARTICLE 11 (an "INDEMNIFICATION CLAIM"), then such Indemnified
Party shall promptly give notice to the Indemnitor. The
failure to give such notice shall not affect whether an
Indemnitor is liable for reimbursement hereunder, unless the
defense of such Action is materially and irrevocably
prejudiced by the Indemnified Party's failure to give such
notice.
(b) Unless provided otherwise in this Agreement, an Indemnitor
shall have the right to defend against an Indemnification
Claim with counsel of its choice reasonably satisfactory to
the Indemnified Party if (i) within fifteen (15) days
following the receipt of notice of the Indemnification Claim
the Indemnitor notifies the Indemnified Party in writing that
the Indemnitor shall indemnify the Indemnified Party from and
against the entirety of any Damages the Indemnified Party may
suffer resulting from, relating to, arising out of, or
attributable to the Indemnification Claim, (ii) the
Indemnification Claim involves only money Damages and does not
seek an injunction or other equitable relief, (iii) settlement
of, or an adverse judgment with respect to, the
Indemnification Claim is not in the good faith judgment of the
Indemnified Party likely to establish a precedential custom or
practice materially adverse to the continuing business
interests of the Indemnified Party, and (iv) the Indemnitor
continuously conducts the defense of the Indemnification Claim
actively and diligently.
(c) So long as the Indemnitor is conducting the defense of the
Indemnification Claim in accordance with SECTION 11.4(B), (i)
the Indemnified Party may retain separate co-counsel at its
sole cost and expense and participate in the defense of the
Indemnification Claim, (ii) the Indemnified Party shall not
consent to the entry of any Order with respect to the
Indemnification Claim without the prior written Consent of the
Indemnitor (not to be withheld unreasonably), and (iii) the
Indemnitor shall not Consent to the entry of any Order with
respect to the Indemnification Claim without the prior written
Consent of the Indemnified Party (not to be withheld
unreasonably, provided that it shall not be deemed to be
unreasonable for an Indemnified Party to withhold its Consent
(A) with respect to any finding of or admission (1) of any
Breach of any Law, Order or Permit, (2) of any violation of
the rights of any Person, or (3) which Indemnified Party
believes could have a material adverse effect on its business,
including on any other Actions to which the Indemnified Party
or its Affiliates are party or to which Indemnified Party has
a good faith belief it may become party, or (B) if any portion
of such Order would not remain sealed).
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(d) If any condition in SECTION 11.4(B) is or becomes unsatisfied,
(i) the Indemnified Party may defend against an
Indemnification Claim in any manner it may deem appropriate
(and the Indemnified Party need not consult with, or obtain
any Consent from, any Indemnitor in connection therewith),
provided that the Indemnified Party may not concede, settle or
compromise any Indemnification Claim without the Consent of
the Indemnitor which will not be unreasonably withheld, (ii)
each Indemnitor shall, unless such the Indemnification Claim
is being contested by the Indemnitor, jointly and severally be
obligated to reimburse the Indemnified Party promptly and
periodically for the Damages relating to defending against the
Indemnification Claim, and (iii) each Indemnitor shall remain
jointly and severally Liable for any Damages the Indemnified
Party may suffer relating to the Indemnification Claim to the
fullest extent provided in this ARTICLE 11.
(e) In the event any Indemnified Party shall have a claim against
any Indemnitor that does not involve an Indemnification Claim
(i.e., a direct claim), the Indemnified Party shall deliver
notice of such claim with reasonable promptness to the
Indemnitor. The failure to give such notice shall not affect
whether an Indemnitor is liable for reimbursement unless such
failure has resulted in the loss of substantive rights with
respect to the Indemnitor's ability to defend such claim, and
then only to the extent of such loss. If the Indemnitor
notifies the Indemnified Party that it does not dispute the
claim described in such notice or fails to notify the
Indemnified Party within forty five (45) days after delivery
of such notice by the Indemnified Party whether the Indemnitor
disputes the claim described in such notice, the Damages in
the amount specified in the Indemnified Party's notice shall
be conclusively deemed a liability of the Indemnitor and the
Indemnitor shall pay the amount of such Damages to the
Indemnified Party on demand.
(f) Each Party hereby consents to the non-exclusive jurisdiction
of any Governmental Body, arbitrator, or mediator in which an
Action is brought against any Indemnified Party for purposes
of any Indemnification Claim that an Indemnified Party may
have under this Agreement with respect to such Action or the
matters alleged therein, and agrees that process may be served
on such Party with respect to such claim anywhere in the
world.
11.5 LIMITATIONS ON INDEMNIFICATION LIABILITY
Any claims any Indemnified Party makes under this ARTICLE 11 shall be
limited as follows:
(a) The amount of Damages required to be paid for Damages shall be
reduced to the extent of any amounts an Indemnified Party
actually receives pursuant to the terms of the insurance
policies (if any) covering such Indemnification Claim.
(b) All indemnification obligations shall be limited to Damages.
(c) Any Liability of any Acquired Entity to any Seller Indemnified
Party under this Agreement shall terminate for all purposes
upon the Closing and have no
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further force or effect. Although the representations and
warranties made in ARTICLE 6 are made jointly and severally by
Seller Parties (including Target Companies), Sellers and Trust
are solely responsible for any and all indemnification of the
Seller Indemnified Parties hereunder. Further, neither Trust
nor Sellers shall have any claim for contribution against any
Acquired Entity. Knowledge of any Acquired Entity (including
Knowledge of any officer, director or other employee of any
Acquired Entity) shall not be imputed to any Buyer Party for
any purpose.
(d) Neither the Sellers and Trust, nor the Buyer Parties, shall
have Liability for money Damages related to Breaches of the
representations and warranties in ARTICLE 5 or ARTICLE 6
unless and until the aggregate Damages claimed under SECTION
11.2 or SECTION 11.3, as applicable, exceed $500,000; PROVIDED
that the limitation contemplated hereby will not be applicable
with respect to (A) Breaches of SECTIONS 5.1(B), 5.1(F),
5.2(B), 5.2(E), 5.3(B), 6.2, 6.5, or 6.12, (B) instances of
fraud, willful misconduct or gross negligence by the
applicable Indemnitor, and (C) matters covered by SECTION
8.8(H); and PROVIDED, further, that once such amount exceeds
$500,000, the applicable Indemnified Parties will be entitled
to recover all amounts to which they are entitled in excess of
$500,000.
(e) The aggregate Liability of Sellers and Trust, and the
aggregate Liability of Buyer Parties, for money Damages under
this Agreement related to Breaches of the representations and
warranties herein will not exceed $7,000,000; PROVIDED that
the limitation contemplated hereby will not be applicable with
respect to (A) Breaches of SECTIONS 5.1(B), 5.1(F), 5.2(B),
5.2(E), 5.3(B), 6.2, 6.5, or 6.12, with respect to which the
aggregate Liability for money Damages shall not exceed
$110,000,000, (B) instances of fraud, willful misconduct or
gross negligence by the applicable Indemnitor, and (C) matters
covered by SECTION 8.8(H), with respect to which the aggregate
Liability for money Damages shall not exceed $110,000,000.
(f) Excluding instances of fraud, willful misconduct or gross
negligence by any of the Parties, and other than to the extent
covered by the indemnification provisions of SECTION 8.8(H),
if the Closing occurs the indemnification provisions of this
ARTICLE 11 shall be the exclusive remedy with respect to the
Breach of this Agreement.
(g) A claim for any matter not involving a third party may be
asserted by notice to the Party from whom indemnification is
sought.
11.6 SET-OFF RIGHTS; LIMITATION ON CASH RECOVERY; OTHER MATTERS
(a) Buyer Parties shall have the right and option, but not the
obligation, of setting off all or any part of any Damages a
Seller Indemnified Party suffers and for which it is entitled
to indemnification by Sellers and Trust under this Agreement
by notifying Sellers and Trust that the applicable Buyer Party
is reducing the amount of the Future Payments by the amount of
such Damages, provided however that Buyer Parties shall not
have the right or option to effect a set off in respect of any
portion of any Damages that is disputed by a Seller or Trust,
in which case SECTION 11.6(C) shall apply.
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Any offset against Future Payments shall be applied against
the next scheduled payment of any Future Payment.
(b) Any offset against amounts outstanding under the Buyer Notes
shall affect the timing and amount of payments required under
the Buyer Notes in the same manner as if Buyer had made a
permitted prepayment (without premium or penalty) thereunder.
(c) If at the time of any scheduled Future Payment there is
pending or, to any Party's Knowledge, threatened, a claim for
Damages with respect to which Parent believes in good faith
that a Seller Indemnified Party is entitled to be indemnified
by Sellers and Trust under this Agreement and such claim has
not been finally resolved, a portion of the next scheduled
Future Payments sufficient to satisfy the amount of Damages
shall be withheld by the applicable Buyer Party and deposited
with an escrow agent on terms reasonably acceptable to Parent
and the applicable Seller Indemnified Parties. Upon final
determination of Damages, if any, for which Seller Indemnified
Parties are entitled to indemnification under this Agreement,
the amount of the scheduled Future Payments so withheld shall
be reduced by the amount of such Damages and the balance, if
any, shall be paid in accordance with the terms of obligation
creating such Future Payments.
(d) A Buyer Party's exercise, if in good faith, of its withholding
and set off rights in accordance with this SECTION 11.6 shall
not constitute an event of default under this Agreement or any
Ancillary Agreement or any related security documents. Neither
the exercise of nor failure to exercise its rights under this
SECTION 11.6 will constitute an election of remedies or limit
any Buyer Party in any matter in the enforcement of any other
remedies available to it.
(e) Subject to Buyer Parties' right and option to set off all or
any part of any Damages a Seller Indemnified Party suffers
against Future Payments as provided for in this SECTION 11.6,
if Sellers and Trust have an obligation to pay Damages to a
Seller Indemnified Party under this ARTICLE 11, such Damages
shall be paid as follows: (i) an amount equal to the lesser of
(A) 40% of such Damages and (B) the then-remaining outstanding
balance under the Buyer Notes shall be set off against (and
reduce the amount outstanding under) the Buyer Notes; and (ii)
the remaining amount of such Damages shall be paid in cash.
(f) Any Damages paid by Sellers and Trust in satisfaction of its
indemnification obligations under this under this ARTICLE 11
shall be treated by Sellers and Trust and Buyer Parties as an
adjustment to the purchase price paid for the Purchased Assets
or the Shares to which the Damages paid relate, as the case
may be.
ARTICLE 12.
EARN-OUT
12.1 EARN-OUT
(a) As additional consideration for the Shares, Buyer Parties
shall pay to each Seller, a portion of the Earn-Out Amount, if
any, equal to the product of such Seller's
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Earn-Out Share TIMES the Earn-Out Amount for the applicable
Calculation Period. The Earn-Out Amount shall be paid in cash
and otherwise in accordance with the terms and conditions of
this ARTICLE 12. The Earn-Out Amount, if any, shall be payable
by Buyer with respect to the Buffalo Inc. Shares, 316 Canada
Shares, and 368 Canada Shares (and allocated as an adjustment
to the purchase price for such Shares in a reasonable manner),
and by Parent with respect to the Buffalo US Shares.
(b) Within one hundred twenty (120) days of the end of each
Calculation Period, Parent shall deliver to Sellers a schedule
setting forth the Parent's determination of whether the
Earn-Out Amount for such period was earned together with the
Parent's calculation of Adjusted Earnings for such period; the
Parent's determination shall be based on the audited financial
statements of Buyer and Parent for the period ended as at the
end of the then relevant Calculation Period (the "PROPOSED
EARN-OUT AMOUNT"). The Proposed Earn-Out Amount will be
subject to Sellers' review. In reviewing the Proposed Earn-Out
Amount, Sellers shall have the right to communicate with, and
to review the work papers, schedules, memoranda, details of
reconciliation entries and other documents Buyer, Parent or
the auditors for Buyer and Parent prepared or reviewed in
determining the Proposed Earn-Out Amount for such period and
thereafter shall have reasonable access to all relevant books
and records, all to the extent Sellers reasonably require to
complete their review of Parent's determination of the
Proposed Earn-Out Amount. Within forty five (45) days after
its receipt of Parent's calculation of the Proposed Earn-Out
Amount, Sellers shall advise Parent whether, based on such
review, they have any exceptions to such determination and
related calculations. Unless Sellers deliver to Parent within
such forty five (45) day period a letter describing their
exceptions to Parent's calculation of the applicable Adjusted
Earnings and the corresponding Earn-Out Amount as set forth in
the schedule delivered by Parent described in this SECTION
12.1(B), the Proposed Earn-Out Amount for the applicable
Calculation Period will be conclusive and binding on Buyer
Parties and Sellers as to the Adjusted Earnings and as to
whether the Earn-Out Amount for such period is payable. If the
Sellers deliver such letter, the Parties shall follow the
procedures for resolution of disputes set forth in SECTION
12.5.
(c) Within five (5) business days of the determination of the
applicable Earn-Out Amount under this SECTION 12.1 or SECTION
12.5, Buyer shall pay to Sellers an amount equal to such
amount.
(d) Subject to SECTION 12.2, Buyer Parties' obligations under this
ARTICLE 12 will survive, and Buyer shall have the obligation
to pay all Earn-Out Amounts, if any, in accordance with this
ARTICLE 12, notwithstanding the cessation of employment for
any reason (including as a result of death, disability,
retirement or voluntary termination of service) of any or all
of the Bitton Brothers.
12.2 RETIREMENT OF EARN OUT
Within ten (10) business days after the occurrence of an Acceleration
Event, Buyer shall have the obligation to terminate payment of future Earn-Out
Amounts by making a lump sum payment in cash to each Seller equal to such
Seller's share of the Accelerated Earn-Out Amount determined by multiplying such
Seller's Earn-Out Share by the Accelerated Earn-Out Amount.
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12.3 CERTAIN DEFINITIONS
For this Agreement, the following terms shall have the indicated
meanings:
(a) "ACCELERATED EARN OUT AMOUNT" means the amount equal to the
net present value of the aggregate remaining Earn Out Amounts,
calculated as if all of such remaining Earn-Out Amounts would
have been earned in full. In determining the net present value
of such Earn Out Amounts, a discount rate equal to 7.0% will
be used.
(b) "ACCELERATION EVENT" means the occurrence of any of the
following events: (i) a Change of Control occurs; (ii) Gabriel
Bitton's employment with Buyer is terminated by Buyer other
than for "Cause" or "permanent disability" or Gabriel Bitton
resigns for "Good Reason" (as such terms are defined in the
Employment Agreement contemplated herein to be entered into by
Gabriel Bitton, Buyer and Parent at Closing); (iii) if Parent
and Buyer fails to pay any Earn-Out Amount within thirty (30)
days of the date such payment is required to be made in
accordance with this SECTION 12; (iv) at any time Parent or
Buyer is in Breach of any material obligation on its part to
be performed pursuant to SECTION 12.6 and such Breach has not
been cured within thirty (30) days of receipt by Parent of
notice of such Breach. For avoidance of doubt, an Acceleration
Event shall not occur if Gabriel Bitton's employment is
terminated by Buyer for "Cause" in accordance with the
Employment Agreement contemplated hereby or as a result of the
death, "permanent disability," or voluntary termination other
than for "Good Reason" of such employment by Gabriel Bitton.
(c) "ACQUIRED BUSINESS" means the business comprised of the
combined businesses of the Acquired Entities and the Purchased
Assets.
(d) "ADJUSTED EARNINGS" means the net income, including a
provision for all year-end accounting adjustments, consistent
with Canadian GAAP and accounting policies of the Target
Companies used as of the Closing, of the Acquired Business for
the relevant Calculation Period, including the following
adjustments:
(i) INCREASES TO ADJUSTED EARNINGS. To the extent
included in combined net income of the Acquired
Business, Adjusted Earnings for each Calculation
Period shall be increased by the following without
duplication:
(A) Interest expense accrued, including, without
limitation, cash interest, payment-in-kind
interest and amortization of original issue
discount.
(B) Provision for Taxes based on or measured by
income.
(C) The amount of depreciation and amortization
expense, or impairment of goodwill and
intangible assets.
(D) Any expenses the Acquired Business directly
incurred in connection with the financing of
the Transactions by Parent or any
refinancing of such debt.
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(E) Any expenses the Acquired Business incurred
in connection with the Transactions,
including all related additional costs
incurred in order to conform all financial
statements to US GAAP.
(F) Direct costs, including professional fees,
incurred in connection with any new credit
facility for the Acquired Business which
replaces the credit facility in effect at
the Closing.
(ii) DECREASES IN ADJUSTED EARNINGS. To the extent
included in combined net income of the Acquired
Business for a Calculation Period, Adjusted Earnings
for each Calculation Period shall be reduced by an
amount equal to all charges, expenses, claims, and
monies, if any, Parent or its Affiliates (other than
the Acquired Entities) pay or incur during the
Calculation Period, and that are not otherwise
reimbursed, related primarily to the Acquired
Entities' business, assets, and operations during the
Calculation Period or the Purchased Assets.
(iii) EXCLUSIONS FROM ADJUSTED EARNINGS. To the extent
included in, or excluded from, the combined net
income of the Acquired Business for a Calculation
Period, Adjusted Earnings for each Calculation Period
shall not include the effect of the following without
duplication:
(A) The gain or loss from any sale, exchange, or
other disposition of assets other than in
the Ordinary Course of Business, except for
sales of inventory and sales or other
dispositions or impairment of assets in
connection with the closure of retail
stores.
(B) The gain or loss from the exchange of
securities, or any increase or reduction in
the carrying value of such securities.
(C) Gains or losses from the condemnation of the
Acquired Entities' assets or the Purchased
Assets. (D) Insurance proceeds in excess of
basis of damaged or destroyed assets and any
proceeds of "key-man" life insurance or
permanent disability insurance.
(E) All income or expense relating to the
operations or business of any Person
acquired after the date of this Agreement.
(iv) If any product line or brand of the Acquired Entities
should be sold or otherwise transferred to, or if any
Acquired Entity is merged or consolidated with,
Parent or an Affiliate of Parent that is not an
Acquired Entity without the prior consent of the
Sellers after the Closing Date, then the Adjusted
Earnings related to such disposed of asset or the
business of such merged or consolidated Acquired
Entity after the effective date of such disposal
shall be included in the Adjusted Earnings for
purposes of determining the Earn-Out Amount.
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(v) To the extent any Acquired Entity's employees are
provided with employee benefit programs available to
Parent's employees instead of or in addition to those
currently provided to such employees, any additional
costs or savings shall be excluded from the
calculation of Adjusted Earnings.
(vi) All inter-company revenues and inter-company expenses
generated between the Acquired Entities, on the one
hand, and Parent or any of its Affiliates that is not
an Acquired Entity, on the other hand, shall be
excluded from the Adjusted Earnings for purposes of
determining the Earn-Out Amount, unless Parent and
Gabriel Bitton shall otherwise agree.
(vii) Any other adjustments to which Parent and Sellers
agree will be taken into account in determining
Adjusted Earnings.
(e) "EARN-OUT AMOUNT" means the dollar amount set forth on
SCHEDULE 12, to be due and payable upon achievement of the
Adjusted Earnings target set forth on SCHEDULE 12 (each, a
"TARGET") for each of the applicable twelve month periods set
forth on SCHEDULE 12 (each a "CALCULATION PERIOD"). In the
event of a Surplus for any Calculation Period, then (i) first,
if the amount of the Surplus for any Calculation Period (other
than the first Calculation Period) equals or exceeds the
amount of any Shortfall for the immediately preceding
Calculation Period, Buyer shall pay to each Seller such
Seller's Earn-Out Share of the Earn-Out Amount for such
immediately preceding Calculation Period, and (ii) second, the
amount of the Surplus, if any, for any Calculation Period
(other than the final Calculation Period) in excess of any
Shortfall for the immediately preceding Calculation Period
shall be applied and added to Adjusted Earnings for the
immediately following Calculation Period.
(f) "EARN-OUT SHARE" means, with respect to a Seller, such
Seller's proportionate share of any Earn-Out Amount as set
forth on EXHIBIT A, which amount is based on the consolidated
Adjusted Earnings of the Acquired Business acquired from such
Seller over the total consolidated Adjusted Earnings of the
Acquired Business for the nine months ended September 30,
2006.
(g) "SHORTFALL" means, with respect to any Calculation Period in
which the Adjusted Earnings were less than the corresponding
Target, the difference between such Target and the Adjusted
Earnings attributable to such Calculation Period.
(h) "SURPLUS" means, with respect to any Calculation Period, the
amount, if any, by which the Adjusted Earnings for such period
exceeds the corresponding Target.
12.4 ACCOUNTING AND OTHER GENERAL PRINCIPLES
For purposes of making calculations in this ARTICLE 12, the following
provisions will apply.
(a) Adjusted Earnings of the Acquired Business shall be calculated
in Canadian Dollars.
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(b) Adjusted Earnings of the Acquired Business shall be determined
in accordance with Canadian GAAP and the accounting policies
of the Target Companies used as of the Closing on a basis
consistent with the Financial Statements.
(c) Inventory will be accounted for on a basis consistent with the
method under Canadian GAAP and the accounting policies of the
Target Companies used as of the Closing as reflected in the
Financial Statements.
(d) No gain, loss, income, or expense or recognition or
non-recognition of revenue resulting from a change in the
Acquired Entities' accounting methods, principles, or
practices from those in effect as of the Closing as reflected
in the Financial Statements will be taken into account.
(e) Any account receivable that is not collected in full within
one hundred twenty (120) days after the date it first becomes
due and payable shall be deducted from revenue in the period
in which it is determined to be uncollectible, net of any
allocated bad debt reserve, and to the extent it has not been
treated as deferred revenue (and excluded from earnings),
subject to inclusion in revenue in a later period, if, as, and
when collected.
12.5 RESOLUTION OF CONFLICTS
If Parent and Sellers are unable to agree on the Adjusted Earnings for
any Calculation Period (the "DISPUTED AMOUNT"), then (A) for twenty (20) days
after the Parent receives the letter describing Sellers' exceptions to Parent's
calculation of the Disputed Amount, Sellers and Parent will use their
Commercially Reasonable Efforts to agree on the calculation of the Disputed
Amount and (B) lacking such agreement, the matter will be referred to an
independent accounting firm selected by Parent and the Sellers, who will
determine the correct Disputed Amount within sixty (60) days of such referral,
which determination will be final and binding on Buyer Parties and Sellers for
all purposes. The non-prevailing party in such dispute shall be determined by
the independent accounting firm and shall be the party whose calculation of the
Adjusted Earnings in dispute was furthest from the Adjusted Earnings as
determined by the independent accounting firm. The Purchaser and the Sellers
shall each bear and pay 50% of the fees and other expenses of the independent
accounting firm in connection with the dispute resolution process set forth in
this SECTION 12.5; provided, however, that if the difference between the
non-prevailing party's calculation of the Adjusted Earnings in dispute and the
actual Adjusted Earnings (as determined by the independent accounting firm) is
greater than 5% of the actual Adjusted Earnings, then the non-prevailing party
shall be responsible for reimbursing the prevailing party for all of its
reasonable out-of-pocket costs and expenses incurred in connection with the
resolution of the dispute, including all reasonable attorneys' fees, accounting
fees and experts' fees, and shall also be responsible for paying all of the
costs associated with the dispute resolution process provided for by this
SECTION 12.5, including all fees and expenses of the independent accounting firm
in connection with the dispute resolution process.
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12.6 MANAGEMENT OF ACQUIRED BUSINESS
(a) PRESIDENT, BUFFALO DIVISION; CHIEF EXECUTIVE OFFICER. Promptly
following the Closing, Gabriel Bitton shall be appointed as
the President, Buffalo Division of Parent and Chief Executive
Officer of Buyer (the "SENIOR OFFICER"). Until the earlier of
the end of the final Calculation Period or the termination of
the Senior Officer's employment with Buyer (through such
individual's voluntarily termination, due to such individual's
death or "permanent disability" or due to such individual's
termination for or without "Cause," as such terms are defined
in such individual's employment agreement with Buyer or an
Affiliate of Buyer), Gabriel Bitton shall have the title and
customary responsibilities of President, Buffalo Division of
Parent and Chief Executive Officer of Buyer and shall, subject
to the control of the Board of Directors of Parent (the
"PARENT BOARD"), have general supervision, direction and
control of the day-to-day operations, the business and the
officers of Buyer. Notwithstanding anything to the contrary
contained in this Agreement, the Parent Board shall have the
authority to terminate the employment of the Senior Officer
for "Cause" (as such term is defined in such individual's
employment agreement with Buyer).
(b) MANAGEMENT OF THE ACQUIRED BUSINESS. From Closing through the
end of the final Calculation Period, subject to the
supervisory and enumerated powers of the Parent Board, the
day-to-day management of Buyer shall be conducted by the
executive officers of Buyer in accordance with the Budgets and
business plans approved by the Parent Board; PROVIDED,
HOWEVER, that Buyer shall at all times be subject to the
Parent's policies and procedures relating to corporate
governance, internal financial and disclosure controls,
internal audit policies, documentation of contracts,
contractual obligations of Parent which affect or involve
Buyer, compensation and benefits and regulatory and legal
compliance. All officers of Buyer (other than the Chief
Executive Officer of Buyer) shall report to Buyer's Chief
Executive Officer.
(c) BOARD MEETINGS AND APPROVAL. From Closing until the end of the
final Calculation Period: (i) the Parent Board shall hold at
least one regularly scheduled meeting per calendar quarter at
which the operation of the Acquired Business will be
discussed; (ii) the overall strategic direction of Buyer shall
at all times be as contemplated by the Budgets and the
business plans approved by the Parent Board in accordance with
the applicable provisions of this SECTION 12.6, but otherwise
shall be the responsibility of the executive officers of
Buyer; and (iii) approval of a majority of the members of the
Parent Board shall be required to review and approve actions
customarily approved by a board of directors, including
ordinary course business plans and Budgets of Buyer.
(d) APPROVAL OF ANNUAL BUDGETS. From Closing until the end of the
final Calculation Period, at least sixty (60) days prior to
the beginning of each calendar year during any Calculation
Period, the Senior Officer shall provide to each member of the
Parent Board a proposed annual budget with respect to such
calendar year and for each calendar month in such calendar
year for each of the following businesses of the Acquired
Business (collectively, the "BUDGETS"): (i) the retail
business (the "RETAIL BUDGET"); (ii) the wholesale business,
(iii) the private label/private brands business, (iv) the
trademark licensing business; and (v) the Acquired Business as
a whole (the
86
"CONSOLIDATED BUDGET"). The Parent Board shall meet prior to
the beginning of such calendar year to consider the proposed
Budgets, and approve final Budgets for such calendar year. Any
modifications to the Budgets, including any Revised Budgets,
must be approved by the Parent Board. Notwithstanding the
foregoing, the Budgets for calendar year 2007 shall be
submitted by Senior Officer to the Parent Board no later than
sixty (60) days following the Closing, and shall be considered
and, if acceptable, approved by the Parent Board within thirty
(30) days following the initial submission of such Budgets.
(e) QUARTERLY BUDGET UPDATES. Following each calendar quarter, the
Senior Officer shall provide each member of the Parent Board
with a summary of the financial and operating results of each
of the businesses of the Acquired Business for which a Budget
is prepared and for the Acquired Business as a whole for the
most recently completed calendar quarter and year-to-date
period with a comparison to the Budgets for such quarter and
year-to-date period (the "PERFORMANCE SUMMARY"). If the
Performance Summary for such period shows a negative variance
to any of the Budgets of more than five percent (5%) with
respect to earnings before interest expenses, taxes,
depreciation and amortization (or EBITDA) for the applicable
period or periods, then the Senior Officer shall deliver with
such Performance Summary a revised Budget for the applicable
calendar year and the remaining portion of such calendar year
(the "REVISED Budgets"). The Parent Board shall meet as soon
as practicable following delivery of such Revised Budgets to
consider the proposed Revised Budgets, and approve final
Revised Budgets on terms acceptable to the Parent Board.
(f) DEVIATIONS FROM BUDGETS.
(i) In no event shall the Senior Officer or other
officers of Buyer take or commit to take any of the
following actions unless such actions are included in
the Budgets approved by the Parent Board or are
otherwise approved by the Parent Board: (A) make,
approve or authorize any capital expenditures in
excess of 105% of the amount authorized in the
Budgets; (B) incur any indebtedness in excess of 105%
of the amount authorized in the Budgets (other than
trade payables incurred in the ordinary course of
business); (C) open or commit to any new retail
locations, by executing a lease agreement or
otherwise; or (D) enter into any new line of business
that does not constitute part of the Acquired
Business as of the Closing Date or that previously
has been approved by the Parent Board.
(ii) If the Senior Officer is obligated to deliver a
Revised Budget as provided for in this SECTION 12.6,
then, notwithstanding prior approval as part of the
Budgets then in effect, in no event shall the Senior
Officer or other officers of Buyer take or commit to
take any of the actions described in SECTION
12.6(F)(I)(A) TO (D) unless and until such actions
are included in a Revised Budget submitted and
approved by the Parent Board in accordance with
SECTION 12.6(E) or otherwise approved by the Parent
Board; PROVIDED, HOWEVER, that Buyer may take any
such action to the extent Buyer is obligated to take
such action pursuant to an Enforceable Contract
entered into with a third party prior to Buyer's
delivery of the applicable Performance Summary.
87
(g) EXCULPATION AND FIDUCIARY DUTIES. The Sellers hereby agree
that none of the members of the Parent Board shall have any
liability (express, implied or otherwise) to any Seller or
other person for failure of the Acquired Business to achieve
any of the financial results required for any Earn-Out Amount
to become payable to the Sellers. Members of the Parent Board
shall owe their fiduciary duties to Parent and its
shareholders and not to any employee, creditor, or other
person.
12.7 CONTRIBUTIONS TO BUYER
(a) Within five (5) business days following the final
determination of the Earn-Out Amount for any Calculation
Period, and in any event within one hundred twenty (120) days
following the end of each Calculation Period, Parent shall
make a cash contribution to Buyer (each, a "PARENT
CONTRIBUTION") in an amount equal to the Parent Contribution
Amount.
(b) For purposes of this Agreement, the term "PARENT CONTRIBUTION
AMOUNT" means, with respect to a Parent Contribution, an
amount equal to: (i) the sum of the amount of any payments of
principal due under the Buyer Notes in the calendar year the
Parent Contribution is to be made plus the Earn-Out Amount, if
any, due for the Calculation Period ending on December 31st of
the immediately preceding calendar year; LESS (ii) (A) the
amount of the cumulative after tax profits of Buyer on a
consolidated basis from January 1, 2007 through December 31st
of the immediately preceding calendar year MINUS (B) the
cumulative amount of any after tax profits of Buyer on a
consolidated basis applied to reduce prior Parent
Contributions (if any) in accordance with this definition.
ARTICLE 13.
MISCELLANEOUS
13.1 SCHEDULES
(a) The disclosures in the Schedules, and those in any supplement
thereto, relate only to the representations and warranties in
the Section or paragraph of the Agreement to which they
expressly relate and not to any other representation or
warranty in this Agreement.
(b) If there is any inconsistency between the statements in the
body of this Agreement and those in the Schedules (other than
an exception expressly set forth as in the Schedules with
respect to a specifically identified representation or
warranty), the statements in the body of this Agreement will
control.
(c) Nothing in the Schedules will be deemed adequate to disclose
an exception to a representation or
88
warranty made herein, unless the Schedules identify the
exception with reasonable particularity and describes the
relevant facts in reasonable detail.
(d) The mere listing (or inclusion of a copy) of a document or
other item in a Schedule will not be deemed adequate to
disclose an exception to a representation or warranty made in
this Agreement (unless the representation or warranty pertains
to the existence of the document or other item itself).
(e) Disclosure of any Contract or other matter in the Schedules,
whether or not in response to a requirement contained in this
Agreement to schedule material matters, or matters exceeding a
specific monetary threshold, shall not be deemed to be an
admission that such Contract or other matter is or could be
material, or necessarily will exceed such threshold merely
because of such disclosure.
13.2 ENTIRE AGREEMENT
This Agreement, together with the Exhibits and Schedules hereto, the
Ancillary Agreements, the confidentiality agreement between Buffalo Inc. and
Parent dated June 1, 2006 as amended to date, and the certificates, documents,
instruments and writings that are delivered pursuant hereto, constitutes the
entire agreement and understanding of the Parties in respect of its subject
matters and supersedes all prior understandings, agreements, or representations
by or among the Parties, written or oral, to the extent they relate in any way
to the subject matter hereof or the Transactions, including the term sheet,
dated May 17, 2006, delivered by Parent to Buffalo Inc. Except as set forth in
any of the foregoing, there are no representations, warranties, covenants,
conditions or other agreements, express or implied, collateral, statutory or
otherwise among the Parties in connection with the subject matter of any of the
foregoing. Except as expressly contemplated by herein, there are no third party
beneficiaries having rights under or with respect to this Agreement.
13.3 SUCCESSORS
All of the terms, agreements, covenants, representations, warranties,
and conditions of this Agreement are binding upon, and inure to the benefit of
and are enforceable by, the Parties and their respective successors. If the
principal business, operations or a majority or substantial portion of the
assets of Trust or a Seller are assigned, conveyed, allocated or otherwise
transferred, including, by sale, merger, consolidation, amalgamation, conversion
or similar transactions, such receiving Person or Persons will automatically
become bound by the subject to the provisions of this Agreement, and Trust or
such Seller will cause the receiving Person or Persons to expressly assume its
obligations hereunder.
13.4 ASSIGNMENTS
No Party may assign either this Agreement or any of its rights,
interests, or obligations hereunder without the prior written approval of Buyer
Parties, Sellers and Trust; PROVIDED, HOWEVER, that any Buyer Party may (a)
assign any or all of its rights and interests hereunder to one or more of its
Affiliates, (b) designate one or more of its Affiliates to perform its
obligations hereunder (in any or all of which cases such Buyer Party nonetheless
shall remain responsible for the performance of all of its obligations
hereunder), and (c) after the Closing, assign any or all of its rights and
interests hereunder to Guggenheim and GMAC CF, as agent.
89
13.5 NOTICES
All notices, requests, demands, claims and other communications
hereunder will be in writing. Any notice, request, demand, claim or other
communication hereunder will be deemed duly given if (and then three (3)
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to any Buyer Party and after Closing to Acquired Entities:
Attn: Gerard Guez
c/o Tarrant Apparel Group
3151 East Washington Boulevard
Los Angeles, CA 90023
Tel: (323) 881-0335
Fax: (323) 881-0383
Copy to (which will not constitute notice):
Stubbs, Alderton & Markiles LLP
Attn: John McIlvery, Esq.
Stubbs, Alderton & Markiles LLP
15260 Ventura Blvd., 20th Floor
Sherman Oaks, CA 91403
Tel: (818) 444-4502
Fax: (818) 444-4520
If to Sellers, Trust and before Closing to Acquired Entities:
Attn: Gabriel Bitton
400 Sauve West
Montreal, Quebec
H3L 1Z8
Tel: (514) 388-3551
Fax: (514) 388-1972
Copy to (which will not constitute notice):
Attn: Sidney Horn and Serge Tousignant
Stikeman Elliott LLP
1155 Rene-Levesque Blvd W.
40th Floor
Montreal, Quebec
H3B 3V2
Tel: (514) 397-3000
Fax: (514) 397-3222
90
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, expedited courier, messenger
service, telecopy, telex, ordinary mail, or electronic mail), but no such
notice, request, demand, claim, or other communication will be deemed to have
been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other Parties notice in the manner herein set forth.
13.6 SPECIFIC PERFORMANCE
Each Party acknowledges and agrees that the other Parties would be
damaged irreparably if any provision of this Agreement is not performed in
accordance with its specific terms or is otherwise Breached. Accordingly, each
Party agrees that the other Parties will be entitled to an injunction or
injunctions to prevent Breaches of the provisions of this Agreement and to
enforce specifically this Agreement and its terms and provisions in any Action
instituted in any court having jurisdiction over the Parties and the matter,
subject to SECTIONS 13.7 and 13.11, in addition to any other remedy to which
they may be entitled, at Law or in equity.
13.7 SUBMISSION TO JURISDICTION; SERVICE OF PROCESS
(a) SUBMISSION TO JURISDICTION. Each Party submits to the
exclusive jurisdiction of the federal courts sitting in New
York City, New York, in any Action arising out of or relating
to this Agreement and agrees that all claims in respect of the
Action shall be heard and determined in any such court. Each
Party agrees that a final judgment in any Action so brought
shall be conclusive and may be enforced by Action on the
judgment or in any other manner provided at Law or in equity.
Each Party waives any defense of inconvenient forum to the
maintenance of any Action so brought and waives any bond,
surety, or other security that might be required of any other
party with respect thereto.
(b) WAIVER OF JURY TRIAL. THE PARTIES EACH HEREBY AGREE TO WAIVE
THEIR RESPECTIVE RIGHTS TO JURY TRIAL OF ANY DISPUTE BASED
UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER AGREEMENTS
RELATING HERETO OR ANY DEALINGS AMONG THEM RELATING TO THE
TRANSACTIONS. The scope of this waiver is intended to be all
encompassing of any and all Actions that may be filed in any
court and that relate to the subject matter of the
Transactions, including, Contract claims, tort claims, breach
of duty claims, and all other common Law and statutory claims.
Each of the Parties acknowledges that this waiver is a
material inducement to enter into a business relationship and
that they will continue to rely on the waiver in their related
future dealings. Each Party further represents and warrants
that it has reviewed this waiver with its legal counsel, and
that each knowingly and voluntarily waives its jury trial
rights following consultation with legal counsel.
NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, THIS WAIVER
IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED ORALLY OR
IN WRITING, AND THE WAIVER WILL APPLY TO ANY AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR
91
TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING HERETO. In the
event of an Action, this Agreement may be filed as a written
consent to trial by a court.
(c) SERVICE OF PROCESS. Any Party may make service on any other
Party by sending or delivering a copy of the process to the
Party to be served at the address and in the manner provided
for the giving of notices in SECTION 13.7. Nothing in this
SECTION 13.7(C) shall affect any Party's right to bring any
Action arising out of or relating to this Agreement in any
other court or to serve legal process in any other manner
permitted at Law or in equity.
13.8 TIME
Time is of the essence in the performance of this Agreement.
13.9 COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which will be deemed an original but all of which together will constitute one
and the same instrument.
13.10 HEADINGS
The article and section headings contained in this Agreement are
inserted for convenience only and will not affect in any way the meaning or
interpretation of this Agreement.
13.11 GOVERNING LAW
This Agreement and the performance of the Transactions and obligations
of the Parties hereunder will be governed by and construed in accordance with
the laws of the State of New York, without giving effect to any choice of Law
principles.
13.12 AMENDMENTS AND WAIVERS
No amendment, modification, replacement, termination or cancellation of
any provision of this Agreement will be valid, unless the same will be in
writing and signed by Buyer and Sellers. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, may be deemed to extend to any prior or subsequent default,
misrepresentation, or Breach of warranty or covenant hereunder or affect in any
way any rights arising because of any prior or subsequent such occurrence.
13.13 SEVERABILITY
The provisions of this Agreement will be deemed severable and the
invalidity or unenforceability of any provision will not affect the validity or
enforceability of the other provisions hereof; provided that if any provision of
this Agreement, as applied to any Party or to any circumstance, is adjudged by a
Governmental Body, arbitrator, or mediator not to be enforceable in accordance
with its terms, the Parties agree that the Governmental Body, arbitrator, or
mediator making such determination will have the power to modify the provision
in
92
a manner consistent with its objectives such that it is enforceable, and/or to
delete specific words or phrases, and in its reduced form, such provision will
then be enforceable and will be enforced.
13.14 EXPENSES
Buyer Parties will bear their own costs and expenses incurred in
connection with the preparation, execution and performance of this Agreement and
the Transactions including all fees and expenses of agents, representatives,
financial advisors, legal counsel and accountants. Seller Parties costs and
expenses (including any legal fees and expenses of any Seller Party) incurred in
connection with the preparation, execution and performance of this Agreement and
the Transactions shall be borne by Buffalo Inc.
13.15 CONSTRUCTION
The Parties have participated jointly in the negotiation and drafting
of this Agreement. If an ambiguity or question of intent or interpretation
arises, this Agreement will be construed as if drafted jointly by the Parties
and no presumption or burden of proof will arise favoring or disfavoring any
Party because of the authorship of any provision of this Agreement. Any
reference to any federal, state, local, or foreign Law will be deemed also to
refer to Law as amended and all rules and regulations promulgated thereunder,
unless the context requires otherwise. words "include," "includes," and
"including" will be deemed to be followed by "without limitation." Pronouns in
masculine, feminine, and neuter genders will be construed to include any other
gender, and words in the singular form will be construed to include the plural
and vice versa, unless the context otherwise requires. The words "this
Agreement," "herein," "hereof," "hereby," "hereunder," and words of similar
import refer to this Agreement as a whole and not to any particular subdivision
unless expressly so limited. All references to "$" shall mean currency of the
United States of America unless indicated otherwise. The Parties intend that
each representation, warranty, and covenant contained herein will have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty or covenant relating to the same subject
matter (regardless of the relative levels of specificity) which the Party has
not breached will not detract from or mitigate the fact that the Party is in
breach of the first representation, warranty, or covenant.
13.16 INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES
The Exhibits, Annexes, Schedules, and other attachments identified in
this Agreement are incorporated herein by reference and made a part hereof.
13.17 JOINT AND SEVERAL OBLIGATIONS
Notwithstanding anything to the contrary in this Agreement, the
covenants and obligations of, and the representations and warranties made by or
attributable to, any Seller Party pursuant to this Agreement will be deemed to
be made by and attributable to each Seller Party, jointly and severally, and
each Buyer Party will have the right to pursue remedies against Trust and/or one
or more Sellers, or, before Closing, any Seller Party, without any obligation to
give notice to or pursue all Seller Parties or to give notice to or pursue any
individual Seller Party before pursuing any other Seller Party.
93
13.18 REMEDIES
Except as expressly provided herein, the rights, obligations and
remedies created by this Agreement are cumulative and in addition to any other
rights, obligations, or remedies otherwise available at Law or in equity. Except
as expressly provided herein, nothing herein will be considered an election of
remedies.
13.19 ELECTRONIC SIGNATURES
(a) Notwithstanding the Electronic Signatures in Global and
National Commerce Act (15 U.S.C. Sec. 7001 et.seq.), the
Uniform Electronic Transactions Act, or any other Law relating
to or enabling the creation, execution, delivery, or
recordation of any Contract or signature by electronic means,
and notwithstanding any course of conduct engaged in by the
Parties, no Party will be deemed to have executed a
Transaction Document or other document contemplated thereby
(including any amendment or other change thereto) unless and
until such Party shall have executed such Transaction Document
or other document on paper by a handwritten original signature
or any other symbol executed or adopted by a Party with
current intention to authenticate such Transaction Document or
such other document contemplated.
(b) Delivery of a copy of a Transaction Document or such other
document bearing an original signature by facsimile
transmission (whether directly from one facsimile device to
another by means of a dial-up connection or whether mediated
by the worldwide web), by electronic mail in "portable
document format" (".pdf") form, or by any other electronic
means intended to preserve the original graphic and pictorial
appearance of a document, will have the same effect as
physical delivery of the paper document bearing the original
signature. "Originally signed" or "original signature" means
or refers to a signature that has not been mechanically or
electronically reproduced.
(SIGNATURES CONTINUE ON FOLLOWING PAGES)
94
IN WITNESS WHEREOF, the Parties have executed this Agreement on the
date first above written.
TARRANT APPAREL GROUP
By: /s/ Gerard Guez
-----------------------------------
Name: Gerard Guez
-----------------------------------
Title: Chief Executive Officer
-----------------------------------
4366883 CANADA INC.
By: /s/ Gerard Guez
-----------------------------------
Name: Gerard Guez
-----------------------------------
Title: Chief Executive Officer
-----------------------------------
BUFFALO INTERNATIONAL INC.
By: /s/ Gilbert Bitton
-----------------------------------
Name: Gilbert Bitton
-----------------------------------
Title: President
-----------------------------------
3681441 CANADA INC.
By: /s/ Gilbert Bitton
-----------------------------------
Name: Gilbert Bitton
-----------------------------------
Title: President
-----------------------------------
BUFFALO CORPORATION
By: /s/ Gilbert Bitton
-----------------------------------
Name: Gilbert Bitton
-----------------------------------
Title: President
-----------------------------------
(SIGNATURES CONTINUE ON FOLLOWING PAGE)
S-1
(SIGNATURES CONTINUED)
4183517 CANADA INC.
By: /s/ Gilbert Bitton
-----------------------------------
Name: Gilbert Bitton
-----------------------------------
Title: President
-----------------------------------
3979512 CANADA INC.
By: /s/ Gilbert Bitton
-----------------------------------
Name: Gilbert Bitton
-----------------------------------
Title: President
-----------------------------------
THE BUFFALO TRUST
By: BFL MANAGEMENT INC.
Title: TRUSTEE
By: /s/ Martin Rochwerg
--------------------------
Name: Martin Rochwerg
--------------------------
Title: Director
--------------------------
S-2
EXHIBIT B
FAIRNESS OPINION FOR
TARRANT APPAREL GROUP
B-1
December 6, 2006 File Reference: 31-11-21739
Tarrant Apparel Group
3157 East Washington Blvd.
Los Angeles, CA 90023
Dear Ladies and Gentlemen:
It is our understanding that Tarrant Apparel Group (herein referred as the
Company or the Buyer) has offered to purchase the following entities and assets
which comprise The Buffalo Group from the owners thereof: (i) 3681441 Canada
Inc., a corporation incorporated under the CANADA BUSINESS CORPORATION'S ACT
("CBCA") ("368 Canada"); (ii) Buffalo Inc., a corporation incorporated under the
CBCA ("Buffalo Inc."); (iii) 3163946 Canada Inc., a corporation incorporated
under the CBCA ("316 Canada"); (iv) Buffalo Corporation, a Delaware corporation
("Buffalo US" and, together with 368 Canada, Buffalo Inc., and 316 Canada, each
a "Target Company" and collectively the "Target Companies"), and (v) certain
assets of The Buffalo Trust ("Trust"). The proposed purchase of the Target
Companies and the assets of Trust is referred to herein as the "Transaction."
As part of the Transaction you have requested Marshall & Stevens, Inc. (Marshall
Stevens) to prepare a Fairness Opinion (the Opinion) on behalf of the Company.
You have requested our Opinion as to whether the Transaction is fair from a
financial point of view, pursuant to the terms and conditions set forth in the
Stock and Asset Purchase Agreement (the "Agreement"), dated December 1, 2006, by
and among Buyer, 4366883 Canada Inc., a corporation incorporated under the CBCA,
the Target Companies, Buffalo Management Inc. in its capacity as the sole
trustee of Trust, and each stockholder of Target Companies ("Sellers" and,
together with Target Companies and Trust, the "Seller Parties"). We have not
been engaged to give advice on whether the shareholders should approve the
Buyer's offer, nor have we been requested to seek or identify alternative
business strategies and no such advice or alternative business strategy is given
or provided. The date of this Opinion is December 6, 2006.
In arriving at our Opinion, we made such reviews, analyses and inquiries of
other information as we deemed necessary and appropriate, such as, but not
limited to:
1. The Agreement;
B-2
Tarrant Apparel Group
December 6, 2006
Page 2
2. Audited financial statements for the fiscal year ends and
unaudited financial statements for the interim periods for all
three entities of Buffalo Group. We reviewed audited financial
statements for the fiscal years ended December 31, 2002
through the nine months ended 2006 for Buffalo de France,
financial statements for fiscal years ended December 31, 2003
through the eight months ended 2007 for Buffalo Canada and
financial statements for the fiscal years ended December 31,
2002 through the nine months ended 2006 for Buffalo Inc; and
3. Audited combined balance sheets and statements of income,
changes in stockholders' equity, and cash flow as of and for
the fiscal years ended December 31, 2003, December 31, 2004
and December 31, 2005 (the "MOST RECENT YEAR END") for Target
Companies (consolidated with each Target Company's
Subsidiaries) and Trust; and
4. Unaudited combined balance sheets and statements of income,
changes in stockholders' equity, and cash flow as of and for
the nine months ended September 30, 2006 (the "BALANCE SHEET
DATE") for Target Companies (consolidated with each Target
Company's Subsidiaries) and Trust (the "INTERIM FINANCIAL
STATEMENTS").
5. Various product brochures and other literature relative to the
Target Companies.
In addition to reviewing the above information, we have among other things:
1. Considered the nature of The Buffalo Group's business,
history, earnings before interest and taxes, depreciation and
amortization (EBITDA), earnings before interest and taxes
(EBIT), revenue, book capital, and total assets for the
inclusive fiscal years 2002 through 2005 and the latest
interim periods;
2. Analyzed financial statements, prices and other materials
regarding guideline publicly traded companies in the retail
and apparel industry; required rates of return on debt and
equity capital; materials discussing the economic outlook, in
general; and the specific outlook for the retail and apparel
industry; and such other material as we deemed appropriate;
3. Analyzed the financial terms and operating results and
financial condition of companies, to the extent publicly
available, involved in certain recent business combinations in
the retail and apparel industry;
B-3
Tarrant Apparel Group
December 6, 2006
Page 3
4. Compared certain statistical and financial information of The
Buffalo Group with similar information for certain guideline
publicly traded companies in the retail and apparel industry;
5. Compared certain statistical and financial information of The
Buffalo Group with similar information for mergers and
acquisitions transactions in the retail and apparel industry;
6. Visited The Buffalo Group's headquarters in Montreal, Canada,
and conducted interviews with management and relied upon their
representations concerning the operations, financial
condition, future prospects, and projected operations and
performance of The Buffalo Group;
7. Visited the Buyer's headquarters in Los Angeles, CA, and
conducted interviews with management and relied upon their
representations concerning the operations, financial
condition, future prospects, and projected operations and
performance of The Buffalo Group; and
8. Conducted such other financial studies, analyses and
inquiries, and considered such other matters as we deemed
necessary and appropriate for our Opinion.
In rendering our Opinion, we have not independently verified the accuracy and
completeness of the financial information or other information furnished by The
Buffalo Group orally or in writing, or other information obtained from publicly
available sources. We reviewed most current and best available estimates and
judgments of the management of The Buffalo Group, as to the expected future
financial and operating performance of The Buffalo Group, and did not undertake
any obligation to assess whether such forecasts, estimates or judgments were
reasonable or were likely to be accurate, nor did we undertake any obligation
independently to verify the underlying assumptions made in connection with such
forecasts, estimates or judgments. In addition, we did not make an independent
valuation or appraisal of any particular assets or liabilities of The Buffalo
Group. Our Opinion is based on business, economic, market and other conditions
as they exist as of the date of this Opinion. We have assumed that the factual
circumstances agreements and terms, as they exist at the date of this Opinion,
will remain substantially unchanged through the time the Transaction is
completed. Marshall Stevens did not (i) opine as to the tax or accounting
treatment of the Transaction or any related matter thereto, (ii) assess the
impact of compliance with any labor laws, including without limitations, the
federal Warn Act, or (iii) rely upon any third party appraisals in arriving at
this Opinion.
B-4
Tarrant Apparel Group
December 6, 2006
Page 4
This Opinion has been prepared solely for the benefit of the Buyer in connection
with the Transaction and may not be quoted, published, used or referred to in
whole or in part, in connection with the Transaction or for any other purpose
without Marshall Stevens' prior written consent; provided that, this Opinion may
be included in the proxy statement sent by the Company to its shareholders
concerning the Transaction so long as the Opinion is reproduced in full in such
proxy statement and any summary of the Opinion in the proxy statement is
reasonably acceptable to Marshall Stevens. Our fee for this Opinion is not
contingent upon our conclusion regarding the fairness of the consideration
received by the public shareholders.
Based upon the foregoing and upon such other factors as deemed relevant,
including the attached assumptions and limiting conditions, it is our Opinion
that, as of the date of this Opinion, the transaction is fair to the Buyer, from
a financial point of view, pursuant to the terms and subject to the conditions
set forth in the Agreement.
Very truly yours,
/s/ Marshall & Stevens Incorporated
-----------------------------------
MARSHALL & STEVENS INCORPORATED
31-11-21739
B-5
ASSUMPTIONS AND LIMITING CONDITIONS
TITLE
No investigation of legal title was made, and we render no opinion as to
ownership of The Buffalo Group (the Seller) or the underlying assets.
DATE OF VALUE
The date of this Opinion is December 6, 2006. The dollar amount reported is
based on the purchasing power of the U.S. dollar as of that date. The analyst
assumes no responsibility for economic or physical factors occurring subsequent
to the date of this Opinion that may affect the Opinion reported.
VISITATION
The Buffalo Group was visited by senior analysts of Marshall Stevens. When the
date of our visit differs from the date of our Opinion, we assume no material
change in the operations of The Buffalo Group or the underlying assets unless
otherwise noted in the report.
NON-VALUATION EXPERTISE
No opinion is intended to be expressed for matters that require legal or
specialized expertise, investigation, or knowledge beyond that customarily
employed by financial analysts.
INFORMATION AND DATA
Information supplied by others that was considered in this analysis is from
sources believed to be reliable, and no further responsibility is assumed for
its accuracy. We reserve the right to make such adjustments to the Opinion
herein reported based upon consideration of additional or more reliable data
that may become available subsequent to the issuance of this Opinion.
LITIGATION SUPPORT
Depositions, expert testimony, attendance in court, and all preparations/support
for same arising from this Opinion shall not be required unless arrangements for
such services have been previously made.
MANAGEMENT
The Opinion expressed herein assumes the continuation of prudent management
policies over whatever period of time is deemed reasonable and necessary to
maintain the character and integrity of The Buffalo Group or the underlying
assets.
PURPOSE
We have presented Marshall Stevens' considered Opinion based on the facts and
data obtained during the course of this investigation. This Opinion has been
prepared for the sole purpose stated herein and shall not be used for any other
purpose.
B-6
UNEXPECTED CONDITIONS
We assume there are no hidden or unexpected conditions associated with The
Buffalo Group or the underlying assets that might adversely affect value. We
also assume no responsibility for changes in market condition that may require
an adjustment to our Opinion.
HAZARDOUS SUBSTANCES
Hazardous substances, if present within a business, can introduce an actual or
potential liability that may adversely affect the marketability and value of The
Buffalo Group or the underlying assets. In this Opinion, no consideration has
been given to such liability or its impact on value.
CONTINGENT LIABILITIES
Our conclusions do not consider the impact of any contingent liabilities of The
Buffalo Group, either known or unknown. According to the Management of the
Buyer, as of the date of this Opinion, there were no contingent liabilities that
were considered material.
FUTURE EVENTS/PROJECTIONS
The reader is advised that this Opinion is heavily dependent upon future events
with respect to industry performance, economic conditions, and the ability of
The Buffalo Group to meet certain operating projections. In this Opinion, the
operating projections have been developed from information supplied by the
Management of the Buyer. The operating projections incorporate various
assumptions including, but not limited to, net sales, net sales growth, profit
margins, income taxes, depreciation, capital expenditures, working capital
levels, and discount rates, all of which are critical to the Opinion. The
operating projections are deemed to be reasonable and valid at the date of this
Opinion; however, there is no assurance or implied guarantee that the assumed
facts will be validated or that the circumstances will actually occur. We
reserve the right to make adjustments to this Opinion herein reported as may be
required by any modifications in the prospective outlook for the economy, the
industry, and/or the operations of The Buffalo Group.
B-7
EXHIBIT C
CHAPTER 13. DISSENTERS' RIGHTS
1300. Reorganization or short-form merger; dissenting shares; corporate purchase
at fair market value; definitions
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split, or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by the
Commissioner of Corporations under subdivision (o) of Section 25100 or (B)
listed on the list of OTC margin stocks issued by the Board of Governors of the
Federal Reserve System, and the notice of meeting of shareholders to act upon
the reorganization summarizes this section and Sections 1301, 1302, 1303 and
1304; provided, however, that this provision does not apply to any shares with
respect to which there exists any restriction on transfer imposed by the
corporation or by any law or regulation; and provided, further, that this
provision does not apply to any class of shares described in subparagraph (A) or
(B) if demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that sub-paragraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
1301. Notice to holders of dissenting shares in reorganizations; demand for
purchase; time; contents
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
C-1
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302. Submission of share certificates for endorsement; uncertificated
securities
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
1303. Payment of agreed price with interest; agreement fixing fair market value;
filing; time of payment
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304. Action to determine whether shares are dissenting shares or fair market
value; limitation; joinder; consolidation; determination of issues; appointment
of appraisers
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. Report of appraisers; confirmation; determination by court; judgment;
payment; appeal; costs
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
C-2
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
1306. Prevention of immediate payment; status as creditors; interest
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
1307. Dividends on dissenting shares
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
1308. Rights of dissenting shareholders pending valuation; withdrawal of demand
for payment
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
1309. Termination of dissenting share and shareholder status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of dissenting shares.
1310. Suspension of right to compensation or valuation proceedings; litigation
of shareholder's approval
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
1311. Exempt shares
C-3
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
1312. Right of dissenting shareholder to attack, set aside or rescind merger or
reorganization; restraining order or injunction; conditions
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attach the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions, or if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form set aside or rescinded shall not restrain
or enjoin the consummation of the transaction except upon 10 days' prior notice
to the corporation and upon a determination by the court that clearly no other
remedy will adequately protect the complaining shareholder or the class of
shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
C-4
EXHIBIT D
THE BUFFALO GROUP
COMBINED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
D-1
THE BUFFALO GROUP
COMBINED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
CONTENTS
Report of Independent Registered Public Accounting Firm .......................1
Combined Balance Sheets .......................................................2
Combined Statements of Shareholders' Equity ...................................3
Combined Statements of Earnings ...............................................4
Combined Statements of Cash Flows .........................................5 - 6
Notes to Combined Financial Statements ...................................7 - 28
D-2
RSM RICHTER S.E.N.C.R.L.
COMPTABLES AGREES
CHARTERED ACCOUNTANTS
2, Place Alexis Nihon
Montreal (Quebec) H3Z 3C2
Telephone / Telephone : (514)934-3400
Telecopieur / Facsimile : (514)934-3408
www.rsmrichter.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Directors of
THE BUFFALO GROUP
We have audited the accompanying combined balance sheets of The Buffalo Group as
at December 31, 2005 and 2004 and the combined statements of earnings,
shareholders' equity and cash flows for the three years then ended. These
combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with Canadian generally accepted auditing
standards and the standards of the Public Accounting Oversight Board (United
States). Those standards require that we plan and perform an audit to obtain
reasonable assurance 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, these combined financial statements present fairly, in all
material respects, the financial position of The Buffalo Group as at December
31, 2005 and 2004 and the results of their operations and their cash flows for
the three years then ended in accordance with Canadian generally accepted
accounting principles.
Generally accepted accounting principles in Canada vary in certain respects from
generally accepted accounting principles in the United States of America. The
Buffalo Group has disclosed the effect of the significant differences between
the Buffalo Group's accounting policies and the application of generally
accepted accounting principles in the United States of America on Other
Comprehensive Income for each of the years in the three-year period ended
December 31, 2005 and on the liabilities and shareholders' equity as of December
31, 2005 and 2004 in note 16 to the combined financial statements.
CHARTERED ACCOUNTANTS
Montreal, Quebec
April 6, 2006
(Except for note 17, which is dated December 6, 2006)
D-3
THE BUFFALO GROUP
COMBINED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
AS AT
SEPTEMBER 30, AS AT DECEMBER 31,
2006 ----------------------------
(UNAUDITED) 2005 2004
------------ ------------ ------------
ASSETS
CURRENT
Cash ................................... $ 1,277,044 $ 485,093 $ 692,432
Accounts receivable .................... 16,835,117 19,357,147 14,462,464
Inventory .............................. 22,100,036 16,656,830 16,524,677
Royalties receivable ................... 1,852,711 679,603 876,855
Prepaid expenses ....................... 444,369 191,549 56,291
Income taxes receivable ................ 442,835 -- --
------------ ------------ ------------
42,952,112 37,370,222 32,612,719
PROPERTY AND EQUIPMENT (note 3) .......... 9,944,087 7,393,340 7,016,807
LOANS RECEIVABLE (note 4) ................ 1,743,413 2,346,235 3,180,192
LICENSES (note 5) ........................ 18,948,340 20,148,383 21,837,075
FUTURE INCOME TAXES ...................... 1,306,000 448,000 194,000
------------ ------------ ------------
$ 74,893,952 $ 67,706,180 $ 64,840,793
============ ============ ============
LIABILITIES
CURRENT
Bank indebtedness (note 6) ............. 17,938,768 10,519,592 12,396,905
Accounts payable and accrued liabilities 8,439,563 9,741,317 10,067,334
Income taxes payable ................... -- 1,747,664 909,571
Royalties payable ...................... -- -- 1,614,255
Interest payable ....................... 671,021 5,159,072 2,495,840
------------ ------------ ------------
27,049,352 27,167,645 27,483,905
LOANS PAYABLE (note 7) ................... 31,527,719 26,492,226 31,206,688
DEFERRED LEASE INDUCEMENTS ............... 386,726 463,211 452,414
DEFERRED LEASE OBLIGATION ................ 491,500 482,977 385,949
DEFERRED TENANT ALLOWANCES ............... 907,145 673,333 570,261
RETRACTABLE SHARES (note 9) .............. 5,232,607 5,028,527 4,865,354
------------ ------------ ------------
TOTAL LIABILITIES ........................ 65,595,049 60,307,919 64,964,571
============ ============ ============
COMMITMENTS AND CONTINGENCIES (note 8)
SHAREHOLDERS' EQUITY
CUMULATIVE TRANSLATION ADJUSTMENT ........ (4,337,658) (3,856,135) (3,471,913)
CAPITAL STOCK (note 10) .................. 5,472,721 5,472,715 352
RETAINED EARNINGS ........................ 8,163,840 5,781,681 3,347,783
------------ ------------ ------------
9,298,903 7,398,261 (123,778)
------------ ------------ ------------
$ 74,893,952 $ 67,706,180 $ 64,840,793
============ ============ ============
See accompanying notes
APPROVED ON BEHALF OF THE BOARD:
Director
-------------------------------
D-4
THE BUFFALO GROUP
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIODS ENDED
(EXPRESSED IN U.S. DOLLARS)
Retained Cumulative
Capital Earnings Translation
Stock (Deficit) Adjustment TOTAL
----------- ----------- ----------- -----------
BALANCE - JANUARY 1, 2003 .. $ 227 $ (933,047) $ (126,493) $(1,059,313)
Net earnings for the year
ended December 31, 2003 .. -- 2,763,159 -- 2,763,159
Currency translation ....... 29 -- (2,309,372) (2,309,343)
Issuance of common stock ... 77 -- -- 77
----------- ----------- ----------- -----------
BALANCE - DECEMBER 31, 2003 333 1,830,112 (2,435,865) (605,420)
Net earnings for the year
ended December 31, 2004 .. -- 1,517,671 -- 1,517,671
Currency translation ....... 19 -- (1,036,048) (1,036,029)
----------- ----------- ----------- -----------
BALANCE - DECEMBER 31, 2004 352 3,347,783 (3,471,913) (123,778)
Net earnings for the year
ended December 31, 2005 .. -- 2,433,898 -- 2,433,898
Currency translation ....... -- -- (384,222) (384,222)
Issuance of common stock ... 5,472,363 -- -- 5,472,363
----------- ----------- ----------- -----------
BALANCE - DECEMBER 31, 2005 5,472,715 5,781,681 (3,856,135) 7,398,261
Net earnings for the period
ended September 30, 2006 . -- 2,382,159 -- 2,382,159
Currency translation ....... 6 -- (481,523) (481,517)
----------- ----------- ----------- -----------
BALANCE - SEPTEMBER 30, 2006 $ 5,472,721 $ 8,163,840 $(4,337,658) $ 9,298,903
=========== =========== =========== ===========
See accompanying notes
D-5
THE BUFFALO GROUP
COMBINED STATEMENT OF EARNINGS
(EXPRESSED IN U.S. DOLLARS)
NINE MONTH
PERIOD ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------
2006 2005 2004 2003
(Unaudited)
------------- ------------- ------------- -------------
SALES .......................... $ 74,792,601 $ 104,071,846 $ 87,788,920 $ 75,248,392
COST OF SALES .................. 38,770,338 61,155,418 50,222,074 44,746,624
------------- ------------- ------------- -------------
GROSS PROFIT ................... 36,022,263 42,916,428 37,566,846 30,501,768
------------- ------------- ------------- -------------
EXPENSES
Stores ................... 9,012,911 12,256,741 11,471,058 9,366,474
Selling .................. 9,547,549 9,761,281 8,136,118 8,490,919
Administrative and general 7,208,633 8,013,285 7,854,156 6,506,071
Amortization ............. 3,465,993 4,291,084 3,713,405 1,638,130
Interest ................. 934,368 1,101,864 1,017,993 1,769,457
Interest on loan payable . 1,987,147 2,476,474 2,305,445 18,558
Foreign exchange ......... 118,832 216,561 -- --
Write-off of property and
equipment .............. 38,671 510,240 -- --
------------- ------------- ------------- -------------
32,314,104 38,627,530 34,498,175 27,789,609
------------- ------------- ------------- -------------
EARNINGS BEFORE INCOME TAXES ... 3,708,159 4,288,898 3,068,671 2,712,159
Income taxes
Current (note 11) ........ 2,184,000 2,109,000 1,344,000 350,000
Future ................... (858,000) (254,000) 207,000 (401,000)
------------- ------------- ------------- -------------
1,326,000 1,855,000 1,551,000 (51,000)
------------- ------------- ------------- -------------
NET EARNINGS ................... $ 2,382,159 $ 2,433,898 $ 1,517,671 $ 2,763,159
============= ============= ============= =============
See accompanying notes
D-6
THE BUFFALO GROUP
COMBINED STATEMENT OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
NINE MONTH
PERIOD ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------------------
2006 2005 2004 2003
(Unaudited)
------------ ------------ ------------ ------------
FUNDS PROVIDED (USED) -
OPERATING ACTIVITIES
Net earnings .............. $ 2,382,159 $ 2,433,898 $ 1,517,671 $ 2,763,159
Future income tax ......... (858,000) (254,000) 207,000 (401,000)
Amortization of property
and equipment ............ 1,481,808 1,822,545 1,409,407 1,100,197
Amortization of licenses .. 1,984,185 2,468,539 2,303,998 537,933
Amortization of deferred
lease inducements ........ (90,245) (131,445) (100,983) (103,018)
Amortization of deferred
tenant allowances ........ (79,232) (81,940) (45,349) (31,472)
Loss on disposal of
property and equipment ... -- -- -- 42,069
Write-off of property and
equipment ................ 38,671 510,240 -- --
Write-off of deferred lease
inducements .............. -- (24,915) -- (27,696)
Deferred tenant allowances 314,114 188,422 321,681 171,585
Deferred lease obligation . (10,930) 81,175 62,178 273,394
------------ ------------ ------------ ------------
5,162,530 7,012,519 5,675,603 4,325,151
Changes in non-cash
operating elements of
working capital (note 13) (12,327,408) (3,403,789) (4,515,998) 2,417,605
------------ ------------ ------------ ------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES ..... (7,164,878) 3,608,730 1,159,605 6,742,756
------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Bank indebtedness ......... 7,419,176 (1,877,313) 2,968,376 (1,255,191)
Increase in deferred lease
inducements .............. -- 155,194 17,279 174,433
Increase (decrease) in
loans payable ............ 4,187,535 (57,867) (456,234) 22,407,424
------------ ------------ ------------ ------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIEs ..... 11,606,711 (1,779,986) 2,529,421 21,326,666
------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Loans receivable .......... 685,271 938,495 (750,541) (389,240)
Additions to property and
equipment ................ (3,706,180) (2,662,364) (1,488,713) (2,703,583)
Disposal of property and
equipment ................ -- -- -- 42,827
Additions to trademarks ... -- -- -- (23,095,863)
------------ ------------ ------------ ------------
NET CASH USED IN INVESTING
ACTIVITIES ............... (3,020,909) (1,723,869) (2,239,254) (26,145,859)
------------ ------------ ------------ ------------
FOREIGN CURRENCY TRANSLATION .. (628,973) (312,214) (1,057,499) (1,769,773)
------------ ------------ ------------ ------------
D-7
THE BUFFALO GROUP
COMBINED STATEMENT OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
NINE MONTH
PERIOD ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------------------
2006 2005 2004 2003
(Unaudited)
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................ $ 791,951 $ (207,339) $ 392,273 $ 153,790
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR ............. 485,093 692,432 300,159 146,369
------------ ------------ ------------ ------------
END OF YEAR ................... $ 1,277,044 $ 485,093 $ 692,432 $ 300,159
============ ============ ============ ============
See accompanying notes
D-8
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
1. NATURE OF BUSINESS
The Buffalo Group consists of the following companies: Buffalo Inc.,
Buffalo Corporation, 3163946 Canada Inc., 3681441 Canada Inc. and The
Buffalo Trust.
The Buffalo Group (the "Group") are importers, wholesalers and
retailers of casual wear selling to customers across Canada and the
United States and is a licensor of various trademarks across Canada and
the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These combined financial statements have been prepared in accordance
with accounting principles generally accepted in Canada ("Canadian
GAAP"). There are certain measurement differences between Canadian GAAP
and United States generally accepted accounting policies ("U.S. GAAP").
Differences which relate to the Buffalo Group are summarized in note
16.
BASIS OF PRESENTATION
The combined financial statements reflect the historical financial
position, results of operation and cash flows of the entities to be
acquired by Tarrant Apparel Group ("The Buffalo Group") and therefore
these financial statements comprise of the businesses of Buffalo Inc.,
Buffalo Corporation, 3681441 Canada Inc. and The Buffalo Trust, who
have a December 31 year end and 3163946 Canada Inc. whose fiscal year
ends on the Saturday closest to January 31st. On combination all
significant intercompany transactions and balances have been
eliminated, except for the balance resulting from the non-coterminous
year ends which are included in the combined accounts payable and
accrued liabilities in the amount of approximately $Nil, $ 474,000 and
$157,000 for the period ended September 30, 2006, and the years ended
December 31, 2005 and 2004, respectively.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited combined financial statements for the nine
month period ended September 30, 2006 of the Buffalo Group has been
prepared in accordance with generally accepted accounting principles
for interim financial reporting and do not include all disclosures
required by Canadian generally accepted accounting principles for
annual financial reporting.
The accompanying unaudited combined financial statements of the Group
reflect all adjustments, consisting only of normal recurring accruals,
which management considers necessary for a fair statement of the
results of operations for the interim period and is subject to year end
adjustments. The results of operations for the interim period is not
necessarily indicative of the results for the full year.
The interim combined financial statements include the results of
operations of the combined entities for nine months except for 3163946
Canada Inc. which includes only eight months.
D-9
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
USES OF ESTIMATES
In preparing the Group's financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the combined financial statements and
reported amounts of revenues and expenses during the reporting period
because of the use of estimates inherent in the financial reporting
process. Actual results may differ from these estimates. Significant
estimates in these financial statements include the allowance for
doubtful accounts, recovery of future income taxes, useful lives and
impairment of long-lived assets and fair value for disclosure purposes.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with
original maturities of three months or less when purchased.
REVENUE RECOGNITION
Revenue from wholesale product sales is recognized at the time of
shipment of goods to customers, when title passes, the sales price is
fixed or determinable and collectibility is reasonably assured. The
Group accrues for estimated sales returns and other allowances in the
period in which the related revenue is recognized.
Sales of products from the Group's stores are recognized at the point
of sale.
Sales of product to licensees are recognized in accordance with the
specific terms of agreement with each licensee.
VALUATION OF INVENTORY
Inventory is stated at the lower of cost (first-in, first-out method)
and net realizable value.
The valuation of retail inventory in the stores is determined by the
retail inventory method which approximates the lower of cost (first-in,
first-out method) and net realizable value. Under the retail inventory
method, inventory is converted to a cost basis by applying an average
cost to selling ratio. Inventory includes items that have been marked
down to management's best estimate of their net realizable value.
D-10
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
AMORTIZATION
Property and equipment are amortized over the estimated useful lives of
the respective assets as follows:
On the declining balance method -
Furniture and fixtures ...................20%
Data processing equipment ................30%
Machinery and equipment ..................30%
On the straight-line method -
Leasehold improvements ...................Base, non-cancelable
term of leases
In store furniture and fixtures ..........three years
Licenses .................................ten years
IMPAIRMENT OF LONG-LIVED ASSETS
In fiscal 2005, the Group adopted the Canadian Institute of Chartered
Accountants' ("CICA") Handbook Section 3036 "Impairment of Long-Lived
Assets". The new standards require an impairment loss to be recognized
when the carrying amount of a long-lived asset to be held and used,
such as property and equipment and licenses exceeds the sum of the
undiscounted cash flows expected from its use and eventual disposition.
The impairment recognized should be measured as the amount by which the
carrying amount of the asset exceeds its fair value. The standard has
been applied prospectively and had no impact on the Group's combined
financial statements.
OPERATING LEASES
The Group recognizes rental expense and inducements received from
landlords on a straight-line basis over the base, non-cancelable lease
terms. Any difference between the calculated expense and the amounts
actually paid is reflected as a liability in the Companies' balance
sheet. The Group recognizes contingent rental expense when the
achievement of specified sales targets are considered probable.
FUNCTIONAL CURRENCY
The Group's functional currency for its operations is the Canadian
dollar except for Buffalo Corporation whose functional currency is the
U.S. dollar. However, the Group's reporting currency is the U.S.
dollar. Therefore, the financial statements for all periods presented
have been translated into the U.S. dollar using the current rate
method. Under this method, the income statement and the cash flows
statement items for each period have been translated into U.S. dollar
using the rates in effect at the date of the transactions, and assets
and liabilities have been translated using the exchange rate at the end
of the period. All resulting exchange differences are reported in the
cumulative translation adjustment account as a separate component of
shareholder's equity.
D-11
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
LICENSES
The licenses are intangible assets which have a finite life and are
recorded at cost less accumulated amortization. The licenses are
assessed for impairment loss annually and any necessary write-down
arising from impairment value is recorded in the period for which the
impairment is identified.
FOREIGN CURRENCY TRANSLATION
Transactions concluded in currencies other than the functional currency
have been translated as follows: monetary assets and liabilities have
been translated at the exchange rate in effect at the balance sheet
date and revenues and expenses have been translated at the average
exchange rate for each period; non-monetary assets and liabilities have
been translated at the rates prevailing at the dates of the respective
transactions. Exchange gains and losses arising from such transactions
are included in net earnings for the period.
INCOME TAXES
The Group provides for income taxes using the liability method of tax
allocation. Under this method, future income tax assets and liabilities
are determined based on deductible or taxable temporary differences
between financial statements values and tax values of assets and
liabilities using substantively enacted income tax rates expected to be
in effect for the year in which the differences are expected to
reverse.
The Group establishes a valuation allowance against future income tax
assets if, based upon available information, it is more likely than not
that some or all of the future income tax assets will not be realized.
The net earnings of the Buffalo Trust, if any, for the period
constitute income of the trust's beneficiaries and are subject to
income tax in their hands and accordingly, no provision for income
taxes on the income of the Trust has been made.
PREFERRED SHARES RETRACTABLE AT THE OPTION OF THE HOLDER
The Group applied the guidelines of the CICA's Emerging Issues
Committee which has issued Abstract 149 ("EIC-149"), Accounting for
Retractable or Mandatorily Redeemable Shares, to provide guidelines on
the classification of retractable or mandatorily redeemable shares, and
their subsequent valuation when they are classified as liabilities.
Under EIC-149, retractable or mandatorily redeemable shares should be
classified as liabilities unless specific criteria are met. If all of
these criteria are not met, these shares are classified as liabilities
and valued at their redemption value at each closing date. Gains or
losses resulting from the remeasurement of the instrument should be
recognized in income.
D-12
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
3. PROPERTY AND EQUIPMENT
AS AT SEPTEMBER 30, 2006
------------------------------------------
Accumulated Net Carrying
Cost Amortization Amount
------------ ------------ ------------
Furniture and fixtures ............ $ 4,186,571 $ 2,399,653 $ 1,786,918
Data processing equipment ......... 3,073,782 1,961,578 1,112,204
Machinery and equipment ........... 223,883 206,171 17,712
In store furniture and fixtures ... 635,691 232,462 403,229
Leasehold improvements ............ 11,826,724 5,202,700 6,624,024
------------ ------------ ------------
$ 19,946,651 $ 10,002,564 $ 9,944,087
============ ============ ============
AS AT DECEMBER 31, 2005
------------------------------------------
Accumulated Net Carrying
Cost Amortization Amount
------------ ------------ ------------
Furniture and fixtures ............ 3,922,506 2,095,428 1,827,078
Data processing equipment ......... 2,430,331 1,680,324 750,007
Machinery and equipment ........... 210,687 194,919 15,768
In store furniture and fixtures ... 384,307 88,137 296,170
Leasehold improvements ............ 8,965,332 4,461,015 4,504,317
------------ ------------ ------------
15,913,163 8,519,823 7,393,340
============ ============ ============
AS AT DECEMBER 31, 2004
------------------------------------------
Accumulated Net Carrying
Cost Amortization Amount
------------ ------------ ------------
Furniture and fixtures ............ 3,846,481 1,796,733 2,049,748
Data processing equipment ......... 2,203,862 1,482,605 721,257
Machinery and equipment ........... 201,493 182,473 19,020
In store furniture and fixtures ... -- -- --
Leasehold improvements ............ 8,242,216 4,015,434 4,226,782
------------ ------------ ------------
14,494,052 7,477,245 7,016,807
============ ============ ============
D-13
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
4. LOANS RECEIVABLE
DECEMBER 31,
SEPTEMBER 30, -------------------------
2006 2005 2004
(unaudited)
----------- ----------- -----------
Loans receivable, employees ............. $ 173,193 $ 438,927 $ 1,062,326
Loans receivable, indirect shareholders . 554,497 708,796 412,533
Loans receivable, companies controlled by
indirect shareholders ................. 1,015,723 1,198,512 1,705,333
----------- ----------- -----------
$ 1,743,413 $ 2,346,235 $ 3,180,192
=========== =========== ===========
Loans receivable are non-interest bearing and have no specified terms
of repayment.
5. LICENSES
Licenses consist of the following:
DECEMBER 31,
SEPTEMBER 30, -------------------------
2006 2005 2004
(unaudited)
------------ ------------ ------------
Licenses ................................... $ 26,901,364 $ 25,859,372 $ 24,875,208
Option to purchase the Buffalo and
Request trademarks ....................... 89,469 85,986 83,195
------------ ------------ ------------
26,990,833 25,945,358 24,958,403
Accumulated amortization ................... (8,042,493) (5,796,975) (3,121,328)
------------ ------------ ------------
$ 18,948,340 $ 20,148,383 $ 21,837,075
------------ ------------ ------------
The option to purchase the Buffalo and Request trademarks gives the
Buffalo Trust the right to purchase the licensed trademarks for
$1,000,000 Canadian (approximately U.S.$895,000) at anytime up to
December 31, 2013.
6. BANK INDEBTEDNESS
The Group's $40,000,000 Canadian (approximately U.S.$35,788,000) credit
facility is subject to review annually and consists of an operating
demand line of credit, letters of credit facility, a banker's
acceptance facility and a Libor loan facility. Borrowings can be drawn
down in Canadian or U.S. funds. Borrowings under the operating demand
line of credit bear interest at either prime plus 0.25% per annum or
Libor plus 2% per annum and the letters of credit facility is limited
to $20,000,000 Canadian (approximately U.S.$17,894,000).
D-14
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
6. BANK INDEBTEDNESS (CONT'D)
The Group has an additional $15,000,000 (approximately
(U.S.$13,420,000) credit facility which is subject to annual review and
consists of foreign exchange contracts.
The credit facilities are secured by the Group's accounts receivable
and inventories. The terms of the banking agreement require the Group
to comply with certain financial covenants.
7. LOANS PAYABLE
SEPTEMBER 30,
2006
(unaudited) 2005 2004
------------ ------------ ------------
7.5 % loan from company controlled by indirect
shareholders ............................... $ 26,840,833 $ 25,795,357 $ 24,958,403
Loan payable, indirect shareholder ........... 557,168 535,583 518,059
Loans payable, company controlled by indirect
shareholder ................................ 4,129,718 161,286 --
Loan payable, repaid in 2005 ................. -- -- 5,730,226
------------ ------------ ------------
$ 31,527,719 $ 26,492,226 $ 31,206,688
============ ============ ============
Except as noted above, loans are non-interest bearing and have no
specified terms of repayment and will not be repaid before October 1,
2007.
8. COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT
The Group's letters of credit outstanding and the amounts in accounts
payable and accrued liabilities are approximately as follows:
INCLUDED IN
OUTSTANDING LETTERS ACCOUNTS PAYABLE AND
OF CREDIT ACCRUED LIABILITIES
------------------- --------------------
September 30, 2006 (unaudited) $ 1,973,000 $ 398,000
December 31, 2005 2,685,000 558,000
December 31, 2004 3,027,000 1,299,000
D-15
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
8. COMMITMENTS AND CONTINGENCIES (CONT'D)
GUARANTEES
The Group has furnished a 25% guarantee of a loan of a company
controlled by the ultimate shareholders. As at September 30, 2006, the
loan amounted to $3,460,000 Canadian (2005 - $Nil) (approximately
U.S.$3,096,000).
CLAIM
Legal proceedings have been instituted against 3163946 Canada Inc. by a
former employee, claiming involuntary resignation in the amount of
approximately $400,000. It is not possible at this time to determine
the outcome of this matter and accordingly, no provision has been made
in the accounts for this claim.
OPERATING LEASES
As at September 30, 2006, there were contractual obligations for leases
amounting to approximately $33,186,000. The leases extend over various
periods up to the year 2017 and is expected that in the normal course
of operations most will be renewed under option clauses or will be
renegotiated.
The aggregate minimum rentals, exclusive of other occupancy charges and
additional rental based on a percentage of sales, for the five
succeeding years and the total lease payments for the duration of the
leases for the Group's premises are approximately as follows:
--------------------------------------------------------------------------------
2007 $ 5,280,000
2008 4,695,000
2009 4,419,000
2010 4,092,000
2011 3,699,000
Thereafter 11,001,000
The rent for store, warehouse showroom, design office and corporate
headquarters' operating leases included in the accompanying combined
statements of earnings are as follows:
NINE MONTH
PERIOD ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, ----------------------------------------
2006 2005 2004 2003
(Unaudited)
---------- ---------- ---------- ----------
Basic rent ......... $5,582,525 $7,705,816 $7,025,651 $5,608,530
D-16
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
9. RETRACTABLE PREFERRED SHARES
--------------------------------------------------------------------------------
BUFFALO INC.
Authorized without limit as to number
and without par value -
Class "D" voting, retractable (at the
amount paid thereon) preferred
shares with the right to a non-
cumulative dividend of the prime
lending rate less 1%
Class "E" retractable (at fair value
calculated based on a formula)
preferred shares with the right to
a non-cumulative monthly dividend
of 1%
Class "F" retractable (at fair value
calculated based on a formula)
preferred shares with the right to
a non-cumulative monthly dividend
of 1%
Class "G" retractable (at fair value
calculated based on a formula)
preferred shares with the right to
a non-cumulative monthly dividend
of half of 1%
Class "H" retractable (at the amount
paid thereon) preferred shares
with the right to a non-cumulative
yearly dividend of 8%
3163946 CANADA INC.:
Authorized without limit as to number
and without par value -
Class "D" redeemable and retractable
(at the amount paid thereon)
preferred shares with the right to
a non-cumulative monthly dividend
of 1%
Class "E" redeemable and retractable
(at the amount paid thereon)
preferred shares with the right to
a non-cumulative monthly dividend
of 1%
Class "F" redeemable and retractable
(at the amount paid thereon)
preferred shares with the right to
a non-cumulative yearly dividend
of $1 per share
Class "G" redeemable and retractable
(at the amount paid thereon)
preferred shares with the right to
a non-cumulative yearly dividend
of $1 per share
D-17
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
9. RETRACTABLE PREFERRED SHARES (CONT'D)
SEPTEMBER 30, DECEMBER 31,
2006 -----------------------
(unaudited) 2005 2004
---------- ---------- ----------
3681441 CANADA INC.:
Authorized without limit as to number and
without par value -
Class "D" voting, redeemable and
retractable (at the amount paid
thereon) preferred shares with a
right to a non-cumulative annual
dividend of the prime lending rate
less 1%
Class "E" redeemable and retractable
(at fair value calculated based on
a formula) preferred shares with a
right to a non-cumulative monthly
dividend of 1%
Class "F" redeemable and retractable
(at fair value calculated based on
a formula) preferred shares with a
right to a non-cumulative monthly
dividend of 1%
Class "G" redeemable and retractable
(at fair value calculated based on
a formula) preferred shares with a
right to a non-cumulative monthly
dividend of the prime lending rate
plus 1%
Class "H" redeemable and retractable
(at the amount paid thereon)
preferred shares with a right to a
non-cumulative annual dividend of 8%
--------------------------------------------------------------------------------
Issued -
BUFFALO INC.
4,731,301 Class "E" preferred shares $4,233,069 $4,067,972 $3,935,969
1,117,184 Class "F" preferred shares 999,538 960,555 929,385
---------- ---------- ----------
$5,232,607 $5,028,527 $4,865,354
========== ========== ==========
D-18
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
10. CAPITAL STOCK
The authorized capital stock, in addition to those retractable
preferred shares described in note 9, is as follows:
--------------------------------------------------------------------------------
BUFFALO INC.
Authorized without limit as to number
and without par value -
Class "A" common shares
Class "B" non-voting common shares
Class "C" voting preferred shares
Class "I" redeemable (at the amount
paid thereon) preferred shares with
the right to a non-cumulative yearly
dividend of 8%
BUFFALO CORPORATION
Authorized without par value -
10,000 common shares
3163946 CANADA INC.
Authorized without limit as to number
and without par value -
Class "C" redeemable (at the amount
paid thereon), voting preferred
shares
Class "A" common shares, convertible
into Class "D" preferred shares on a
one-for-one basis
Class "B" common shares
3681441 CANADA INC.
Authorized without limit as to number
and without par value -
Class "C" voting, redeemable (at the
amount paid thereon) preferred shares
Class "I" redeemable (at the amount
paid thereon) preferred shares with
the right to a non-cumulative annual
dividend of 8%
Class "A" common shares
Class "B" common shares, convertible
into class "E" preferred shares on a
one-for-one basis
D-19
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
10. CAPITAL STOCK (CONT'D)
SEPTEMBER 30, DECEMBER 31,
2006 ------------------------
(Unaudited) 2005 2004
---------- ---------- ----------
BUFFALO INC
Issued -
100 Class "A" common shares .......... $ 90 $ 90 $ 86
---------- ---------- ----------
BUFFALO CORPORATION
Issued -
110 (2004 - 100) common shares ....... $5,472,453 $5,472,453 $ 100
---------- ---------- ----------
3163946 CANADA INC
Issued -
100 Class "A" common shares .......... $ 89 $ 86 $ 83
---------- ---------- ----------
3681441 CANADA INC
Issued -
100 Class "A" common shares .......... 89 86 83
---------- ---------- ----------
TOTAL ................................ $5,472,721 $5,472,715 $ 352
========== ========== ==========
During fiscal 2005, Buffalo Corporation issued 10 common shares in
exchange for the repayment of $5,472,363 of their loan payable.
D-20
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
11. INCOME TAXES
Significant components of future income tax assets and liabilities are
approximately as follows:
AS AT AS AT DECEMBER 31,
SEPTEMBER 30,-------------------------------------
2006 2005 2004 2003
(Unaudited)
---------- ---------- ---------- ----------
Future income tax assets:
Property and equipment .. $ 100,000 $ 90,000 $ 119,000 $ 86,000
Losses carry forward .... 1,201,000 395,000 46,000 315,000
Other ................... 5,000 (37,000) 29,000 --
---------- ---------- ---------- ----------
$1,306,000 $ 448,000 $ 194,000 $ 401,000
========== ========== ========== ==========
The Group's tax losses that may be applied against earnings of future
years, not later than as follows:
DECEMBER 31,
------------------------------------------------
2005 2004 2003
---------- ---------- ----------
2008 ............ $ -- $ -- $ 71,000
2009 ............ 178,000 178,000 1,081,000
2015 ............ 861,000 -- --
---------- ---------- ----------
$1,039,000 $ 178,000 $1,152,000
========== ========== ==========
D-21
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
11. INCOME TAXES (CONT'D)
Income taxes reported differ from the amount computed by applying the
statutory rates to earnings before income taxes. The reasons are
approximately as follows:
NINE MONTH
PERIOD ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -----------------------------------------
2006 2005 2004 2003
(Unaudited)
----------- ----------- ----------- -----------
INCOME TAXES
Statutory income taxes . $ 1,335,000 $ 1,544,000 $ 1,105,000 $ 976,000
Non-deductible expenses 24,000 21,000 78,000 31,000
Timing differences ..... 14,000 56,000 (15,000) (13,000)
Losses of an entity that
cannot be deducted
against the income of
the Group ............ -- 285,000 102,000 206,000
Losses carried forward . -- -- (311,000) (172,000)
Unrealized foreign
exchange ............. -- -- -- (1,079,000)
Tax reassessment ....... -- -- 726,000 --
Other .................. (47,000) (51,000) (134,000) --
----------- ----------- ----------- -----------
Effective income taxes . $ 1,326,000 $ 1,855,000 $ 1,551,000 $ (51,000)
=========== =========== =========== ===========
12. SEGMENT DISCLOSURE
The Group's reportable segments are strategic business units that offer
different products and services. Each segment is managed separately
because it is subject to different marketing strategies. The operations
of the Group and its combined companies are comprised of three
reportable operating segments: wholesale, retail and licensing.
The following information is provided with respect to the Group's
operating segments:
NINE MONTHS ENDED SEPTEMBER 30, 2006
--------------------------------------------------------------------
Consolidation
Wholesale Retail Licensing Entry TOTAL
----------- ----------- ----------- ----------- -----------
Revenues ....... $57,556,171 $15,158,765 $ 4,701,379 $(2,623,714) $74,792,601
Operating costs 46,132,213 14,717,627 2,146,356 (2,623,714) 60,372,482
----------- ----------- ----------- ----------- -----------
Operating income $11,423,958 $ 441,138 $ 2,555,023 $ -- $14,420,119
=========== =========== =========== =========== ===========
D-22
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
12. SEGMENT DISCLOSURE (CONT'D)
YEAR ENDED DECEMBER 31, 2005
-------------------------------------------------------------------------
Consolidation
Wholesale Retail Licensing Entry TOTAL
------------ ------------ ------------ ------------ ------------
Revenues ....... $ 78,959,767 $ 23,165,194 $ 4,902,523 $ (2,955,638) $104,071,846
Operating costs 68,519,605 20,811,609 2,777,100 (2,955,638) 89,152,676
------------ ------------ ------------ ------------ ------------
Operating income $ 10,440,162 $ 2,353,585 $ 2,125,423 $ -- $ 14,919,170
============ ============ ============ ============ ============
YEAR ENDED DECEMBER 31, 2004
-------------------------------------------------------------------------
Consolidation
Wholesale Retail Licensing Entry TOTAL
------------ ------------ ------------ ------------ ------------
Revenues ....... $ 62,726,854 $ 22,819,722 $ 4,850,261 $ (2,607,917) $ 87,788,920
Operating costs 56,160,329 19,237,306 2,305,387 (2,607,917) 75,095,105
------------ ------------ ------------ ------------ ------------
Operating income $ 6,566,525 $ 3,582,416 $ 2,544,874 $ -- $ 12,693,815
============ ============ ============ ============ ============
YEAR ENDED DECEMBER 31, 2003
-------------------------------------------------------------------------
Consolidation
Wholesale Retail Licensing Entry TOTAL
------------ ------------ ------------ ------------ ------------
Revenues ....... $ 58,130,702 $ 17,862,096 $ 196,958 $ (941,364) $ 75,248,392
Operating costs 50,194,914 15,133,459 131,916 (941,364) 64,518,925
------------ ------------ ------------ ------------ ------------
Operating income $ 7,935,788 $ 2,728,637 $ 65,042 $ -- $ 10,729,467
============ ============ ============ ============ ============
NINE MONTH
PERIOD ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------------------
Geographical 2006 2005 2004 2003
Information (Unaudited)
---------------- ------------ ------------ ------------ ------------
REVENUES
Canada ...... $ 43,663,439 $ 61,717,299 $ 61,108,625 $ 51,823,578
U.S.A ....... 30,746,756 41,899,337 26,326,664 23,424,814
Other ....... 382,406 455,210 353,631 --
------------ ------------ ------------ ------------
$ 74,792,601 $104,071,846 $ 87,788,920 $ 75,248,392
============ ============ ============ ============
D-23
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
13. STATEMENT OF CASH FLOWS INFORMATION
Net change in non-cash working capital components are as follows:
NINE MONTH
PERIOD ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------------------
2006 2005 2004 2003
(Unaudited)
------------ ------------ ------------ ------------
Accounts receivable ........ $ 2,522,030 $ (4,894,683) $ (4,048,555) $ (403,285)
Prepaid expenses ........... (252,820) (135,258) 24,826 (41,205)
Inventory .................. (5,443,206) (132,153) (573,642) (424,075)
Royalties receivable ....... (1,173,108) 197,252 (876,855) --
Accounts payable and accrued
liabilities .............. (1,301,754) (326,017) 118,832 1,963,106
Income taxes ............... (2,190,499) 838,093 525,758 24,140
Interest payable ........... (4,488,051) 2,663,232 2,495,840 --
Royalties payable .......... -- (1,614,255) (2,182,202) 1,298,924
------------ ------------ ------------ ------------
$(12,327,408) $ (3,403,789) $ (4,515,998) $ 2,417,605
============ ============ ============ ============
ADDITIONAL CASH FLOW INFORMATION:
NINE MONTH
PERIOD ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------------------
2006 2005 2004 2003
(Unaudited)
------------ ------------ ------------ ------------
Interest paid .............. $ 7,482,415 $ 1,271,000 $ 818,000 $ 326,000
Income taxes paid .......... 4,374,425 929,000 860,000 976,000
D-24
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
14. RELATED PARTY TRANSACTIONS
The Group has engaged in transactions with the following related
entities:
COMPANY RELATIONSHIP
Angel Garment Limited Company owned 50% by an indirect shareholder
3296776 Canada Inc. Company controlled by an indirect shareholder
155671 Canada Inc. Company owned by indirect shareholders
Buffalo Promenade Inc. Company owned by an indirect shareholder
6144195 Canada Inc. Company owned by indirect shareholders
The following transactions occurred between the Group and the
afore-noted entities:
Angel
Garment
NINE MONTH PERIOD Limited 3296776 155671
SEPTEMBER 30, 2006 Agency Canada Inc. Canada Inc. TOTAL
------------------------ ---------- ---------- ---------- ----------
Expenses
Commissions ......... $1,177,000 $ -- $ -- $1,177,000
Rent ................ -- 234,000 27,000 261,000
---------- ---------- ---------- ----------
$1,177,000 $ 234,000 $ 27,000 $1,438,000
========== ========== ========== ==========
Angel
Garment
YEAR ENDED Limited 3296776 155671
DECEMBER 31, 2005 Agency Canada Inc. Canada Inc. TOTAL
------------------------ ---------- ---------- ---------- ----------
Expenses
Commissions ......... $1,637,000 $ -- $ -- $1,637,000
Rent ................ -- 149,000 38,000 187,000
---------- ---------- ---------- ----------
$1,637,000 $ 149,000 $ 38,000 $1,824,000
========== ========== ========== ==========
Angel
Garment
YEAR ENDED Limited 3296776 155671
DECEMBER 31, 2004 Agency Canada Inc. Canada Inc. TOTAL
------------------------ ---------- ---------- ---------- ----------
Expenses
Commissions ......... $1,326,000 $ -- $ -- $1,326,000
Rent ................ -- 134,000 35,000 169,000
---------- ---------- ---------- ----------
$1,326,000 $ 134,000 $ 35,000 $1,495,000
========== ========== ========== ==========
D-25
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
14. RELATED PARTY TRANSACTIONS (CONT'D)
Angel
Garment
YEAR ENDED Limited 3296776 155671
DECEMBER 31, 2003 Agency Canada Inc. Canada Inc. TOTAL
------------------------ ---------- ---------- ---------- ----------
Expenses
Commissions ......... $1,179,000 $ -- $ -- $1,179,000
Rent ................ -- 122,000 22,000 144,000
---------- ---------- ---------- ----------
$1,179,000 $ 122,000 $ 22,000 $1,323,000
========== ========== ========== ==========
Included in accounts receivable are the following approximate amounts
due from 6144195 Canada Inc.:
September 30, 2006 (unaudited) .............. $4,139,000
December 31, 2005 ........................... 4,113,000
December 31, 2004 ........................... 1,970,000
December 31, 2003 ........................... --
Included in accounts payable and accrued liabilities are the following
approximate amounts due to Angel Garmet Limited Agency for the period:
September 30, 2006 (unaudited) .............. $ 354,000
December 31, 2005 ........................... 343,000
December 31, 2004 ........................... 290,000
December 31, 2003 ........................... 228,000
Interest payable is due to 6144195 Canada Inc.
These transactions were measured at the exchange amount which is the
amount of consideration established and agreed to by the related
parties.
15. FINANCIAL INSTRUMENTS
FAIR VALUE
Cash, accounts receivable, royalties receivable, interest receivable,
bank indebtedness, accounts payable and accrued liabilities, royalties
payable and interest payable are all short-term in nature and as such,
their carrying values approximate fair values.
It is not practical to determine the fair value of the amounts due to
and from related parties due to their related party nature and the
absence of a market for such instruments.
D-26
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
15. FINANCIAL INSTRUMENTS (CONT'D)
The fair value of a financial instrument is the price at which an asset
could be exchanged, or a liability settled, between knowledgeable,
willing parties in an arm's length transaction.
CREDIT RISK
The Company, in the normal course of business, monitors the financial
condition of its customers and reviews the credit history of each new
customer. The Company does not have a significant exposure to any
individual customer or counter party. The Company establishes an
allowance for doubtful accounts that corresponds to the credit risk of
its specific customers, historical trends and economic circumstances.
The Company does not believe that it is exposed to an unusual level of
customer credit risk.
INTEREST RATE RISK
The Company is exposed to interest rate risk in the event of
fluctuations in the bank's prime rate as the interest rate on the line
of credit is dependent on the bank's prime rate.
16. RECONCILIATION OF ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN CANADA
AND IN THE UNITED STATES
The Group prepares its financial statements in accordance with Canadian
generally accepted accounting principles (Canadian GAAP), which conform
in all material respects to those in the Unites States (U.S.GAAP)
except for the following:
RETRACTABLE PREFERRED SHARES
(a) Under Canadian GAAP, the retractable preferred shares were
accounted for as a liability. Under U.S. GAAP, these retractable
preferred shares should be presented as a component of shareholders'
equity.
(b) Under U.S. GAAP the retractable preferred shares are recorded at
the historical foreign exchange rate as opposed to the current rate
under Canadian GAAP.
OTHER COMPREHENSIVE INCOME
(c) Under Canadian GAAP, cumulative translation adjustment is presented
as a component of shareholders' equity. Under U.S. GAAP, the cumulative
translation adjustment should be included in other comprehensive
income.
(d) Under U.S. GAAP, a statement of comprehensive income is required.
The above adjustments have no material impact on the combined
statements of earnings and the combined statement of cash flows.
D-27
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
16. RECONCILIATION OF ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN CANADA
AND IN THE UNITED STATES (CONT'D)
The effect of the above adjustments on the combined balance sheets are
as follows:
AS AT SEPTEMBER 30, 2006
CANADIAN GAAP ADJUSTMENTS U.S. GAAP
------------ ------------ ------------
LIABILITIES
Current liabilities ............. $ 27,049,352 $ -- $ 27,049,352
Loans payable ................... 31,527,719 -- 31,527,719
Deferred lease inducements ...... 386,726 -- 386,726
Deferred lease obligations ...... 491,500 -- 491,500
Deferred tenant allowances ...... 907,145 -- 907,145
Retractable shares .............. 5,232,607 (5,232,607)(a) --
------------ ------------ ------------
$ 65,595,049 $ (5,232,607) $ 60,362,442
============ ============ ============
SHAREHOLDERS' EQUITY
Cumulative translation adjustment $ (4,337,658) $ 4,337,658 (c) $ --
Capital stock ................... 5,472,721 3,814,382 (a),(b) 9,287,103
Retained earnings ............... 8,163,840 -- 8,163,840
Other comprehensive income ...... -- (2,919,433)(b),(c) (2,919,433)
------------ ------------ ------------
$ 9,298,903 $ 5,232,607 $ 14,531,510
============ ============ ============
AS AT DECEMBER 31, 2005
CANADIAN GAAP ADJUSTMENTS U.S. GAAP
------------ ------------ ------------
LIABILITIES
Current liabilities .......... $ 27,167,645 $ -- $ 27,167,645
Loans payable ................ 26,492,226 -- 26,492,226
Deferred lease inducements ... 463,211 -- 463,211
Deferred lease obligations ... 482,977 -- 482,977
Deferred tenant allowances ... 673,333 -- 673,333
Retractable shares ........... 5,028,527 (5,028,527)(a) --
------------ ------------ ------------
$ 60,307,919 $ (5,028,527) $ 55,279,392
============ ============ ============
D-28
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
16. RECONCILIATION OF ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN CANADA
AND IN THE UNITED STATES (CONT'D)
Canadian GAAP Adjustments U.S. GAAP
------------ ------------ ------------
SHAREHOLDERS' EQUITY
Cumulative translation adjustment $ (3,856,135) $ 3,856,135 (c) $ --
Capital stock ................... 5,472,715 3,814,382 (a),(b) 9,287,097
Retained earnings ............... 5,781,681 -- 5,781,681
Other comprehensive income ...... -- (2,641,990)(b),(c) (2,641,990)
------------ ------------ ------------
$ 7,398,261 $ 5,028,527 $ 12,426,788
============ ============ ============
AS AT DECEMBER 31, 2004
Canadian GAAP Adjustments U.S. GAAP
------------ ------------ ------------
LIABILITIES
Current liabilities ............. $ 27,483,905 $ -- $ 27,483,905
Loans payable ................... 31,206,688 -- 31,206,688
Deferred lease inducements ...... 452,414 -- 452,414
Deferred lease obligations ...... 385,949 -- 385,949
Deferred tenant allowances ...... 570,261 -- 570,261
Retractable shares .............. 4,865,354 (4,865,354)(a) --
------------ ------------ ------------
$ 64,964,571 $ (4,865,354) $ 60,099,217
============ ============ ============
SHAREHOLDERS' EQUITY
Cumulative translation adjustment $ (3,471,913) $ 3,471,913 (c) $ --
Capital stock ................... 352 3,814,382 (a),(b) 3,814,734
Retained earnings ............... 3,347,783 -- 3,347,783
Other comprehensive income ...... -- (2,420,941)(b),(c) (2,420,941)
------------ ------------ ------------
$ (123,778) $ 4,865,354 $ 4,741,576
============ ============ ============
D-29
THE BUFFALO GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2006 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2006 IS UNAUDITED)
(EXPRESSED IN U.S. DOLLARS)
16. RECONCILIATION OF ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN CANADA
AND IN THE UNITED STATES (CONT'D)
STATEMENT OF COMPREHENSIVE INCOME
SEPTEMBER 30, December 31, December 31, December 31,
2006 2005 2004 2003
(Unaudited)
----------- ----------- ----------- -----------
Foreign currency translation adjustment $ (277,443) $ (221,049) $ (681,631) $(1,505,790)
Net earnings ............................ 2,382,159 2,433,898 1,517,671 2,763,159
----------- ----------- ----------- -----------
TOTAL COMPREHENSIVE INCOME .............. $ 2,104,716 $ 2,212,849 $ 836,040 $ 1,257,369
=========== =========== =========== ===========
17. SUBSEQUENT EVENT
Subsequent to September 30, 2006, the Group's shareholders are in
negotiation with Tarrant Apparel Group for the sales of its shares in
Buffalo Inc., Buffalo Corporation, 3163946 Canada Inc., 3681441 Canada
Inc. and the assets of the Buffalo Trust. As consideration for the
purchase, the Group's shareholders will receive cash consideration of
$40,000,000, $15,000,000 in promissory notes and shares exchangeable
into 13,000,000 shares of Tarrant Apparel Group.
D-30
EXHIBIT E
EXHIBIT F