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| Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | ||
| ] | Definitive Proxy Statement | |
| [ | ] | Definitive Additional Materials | |
| ] | Soliciting Material |
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(Name of Registrant as Specified In Its Charter) |
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| [x | ] | Fee computed on table below per Exchange Act Rules 14a-6(i) | |||||
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| 3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth theamount on which the filing fee is calculated and state how it was determined): | |||||
| $4.55 per share | |||||||
| 4) | Proposed maximum aggregate value of transaction: | |||||
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| 5) | Total fee paid: | |||||
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| [x | ] | 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. | |||||
| Amount Previously Paid: $292.11 | ||||||
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| 3) | Filing Party: Nitches, Inc. | ||||||
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11.7.2006 | |||||||
NITCHES,INC.NITCHES, INC.
10280 Camino Santa Fe
San Diego, California 92121
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CONSENTSOLICITATIONSTATEMENT
To Our Shareholders:
NOTICE OF ANNUAL MEETING OF SHAREHOLDERSTO BE HELD MARCH 15, 2006
Notice is hereby given that the annual meeting The Board of the ShareholdersDirectors of Nitches, Inc. (“Nitches”) is soliciting your consent to and ratification of Nitches’ recent issuance of its shares of common stock to Taresha, LLC(“Taresha”).
Effective July 1, 2006, we completed a transaction with Taresha (the “Company”“Transaction”) will be heldin which we acquired the Home Décor business from Taresha pursuant to the terms of an Asset Purchase and Sale Agreement dated as of July 1, 2006 (the “Acquisition Agreement”) between Nitches and Taresha. Under the terms of the Acquisition Agreement:
Nitches acquired from Taresha substantially all of the assets related to Taresha’s Home Décor line of business.
Nitches issued to Taresha 600,000 shares of our common stock.
See “Terms of the Acquisition” below. Our Board of Directors unanimously approved the Acquisition and the transactions contemplated by the Acquisition Agreement at a board meeting which took place on June 23, 2006.
Subsequent to closing the Company’sTransaction, it was determined that because of certain related party aspects of the transaction, compliance with Nasdaq’s Marketplace Rules called for shareholder consent of the issuance of our common stock to Taresha in the Transaction. We are soliciting this consent as part of an agreement with Nasdaq to bring Nitches in compliance with Nasdaq’s Marketplace Rules.
We are soliciting the approval by written consent, and in lieu of a meeting of shareholders, because the Board of Directors believes that it is in the best interests of Nitches and its shareholders to solicit such approval in the most cost effective manner.
We intend to mail this consent solicitation statement and accompanying consent card on or about February 2, 2007. The consent solicitation statement is being mailed to the holders of record of our common stock as of the close of business on January 29, 2007. This date is referred to as the “record date.” Written consents of the shareholders representing a majority of the voting power of the common stock as of the record date are required to approve this proposal.
Our principal executive offices are located at 10280 Camino Santa Fe, San Diego, California 92121, at 9:30 a.m.and our telephone number is (858) 625-2633.
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THECONSENTPROCEDURE
General
This proposal to approve the issuance of our common stock to Taresha is submitted for shareholder approval by written consent in lieu of calling a meeting of the shareholders to vote on March 15, 2006this matter. The form of written consent is enclosed with this Consent Solicitation Statement.
Only holders of record on January 29, 2007, the record date, will be entitled to consent to the proposal. On the record date there were 5,253,507 shares of our common stock outstanding, including the 600,000 shares issued to Taresha in connection with the Transaction. The shares issued to Taresha in connection with the Transaction are subject to a lock up agreement and will not be voted. Accordingly, the number of common shares entitled to vote on the proposal is 4,653,507 shares of common stock.
A majority of the outstanding shares entitled to vote as of the record date are required to approve the proposal. Abstentions and broker non-votes will have the effect of a vote against the proposal. A consent card that has been signed, dated and delivered to us without any of the boxes for approval, withholding of consent, or abstention checked will constitute a consent for the proposal.
Consents, once dated, signed and delivered to us at the address set forth below, will remain effective unless and until revoked by written notice of revocation dated, signed and delivered to us at the address set forth below on or before the time that we have received written consents from holders of a majority of the outstanding voting power of the common stock. The proposal will be approved at such time as we hold unrevoked written consents of shareholders approving the amendment representing a majority of the outstanding shares of common stock as of the record date.
Written consents may be delivered to us at the following purposes:
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NITCHES, INC.address:
NITCHES,INC.
10280 Camino Santa Fe
San Diego, California 92121
Your consent is important regardless of the number of shares of stock that you hold. Your cooperation in promptly returning your consent will help limit expenses incident to consent solicitation.
Expense of Consent Solicitation
We will pay all of the costs of solicitation. Directors and officers, or employees of ours, may also solicit consents in person or by mail, telephone or telecopy.
Absence of Appraisal Rights
Shareholders who dissent or withhold from voting their shares do not have the right to an appraisal of their shares of common stock or any similar dissenters’ rights under applicable law.
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PPROXYROPOSAL TOAPPROVE THEISSUANCE OFCOMMONSTATEMENTTOCK TOTARESHA
This proxy statementproposal is solicitedsubmitted for shareholder approval by and is forwardedwritten consent in lieu of calling a meeting of the shareholders to vote on this matter.
The Transaction
Effective July 1, 2006, we issued 600,000 shares of our common stock to Taresha in connection with solicitationour acquisition of proxiesits Home Décor business.
Why We are Seeking Your Approval
We have been advised by Nasdaq that under Nasdaq Marketplace Rule 4350(i)(1)(C), we were required to obtain shareholder approval of the issuance of our shares to Taresha because, at the time of the Transaction, Taresha was majority owned and under the control of Mr. Haresh Tharani and Mr. Tharani was, at the time, a holder of more than 5% of our shares. Neither our acquisition of the Home Décor business or the issuance of our common stock required shareholder approval under California law. The value of the assets we acquired from Taresha was approximately 12% of our total assets on the date of the Transaction.
On September 20, 2006, Nasdaq notified us that it had determined that Mr. Tharani’s stockholdings prior to the Transaction rendered him a “substantial shareholder” of Nitches. Under Nasdaq Marketplace Rule 4350(i)(1)(C)(i), any transaction between an issuer and a substantial shareholder must be approved by the shareholders if: (i) it involves a sale of stock or assets, (ii) the substantial shareholder has more than a 5% interest in the target company or assets being acquired, and (iii) the consideration to be paid could result in an increase in more than 5% of the issuer’s outstanding common stock. At the time of the Transaction, Mr. Tharani owned a controlling interest in the equity of Taresha and the shares Nitches issued in the transaction amounted to almost 13% of the common stock outstanding at the time. We issued a press release and filed a Current Report on Form 8-K concerning Nasdaq’s determination on September 25, 2006.
When we acquired the Home Décor business from Taresha, Mr. Tharani was the beneficial owner of 371,000 shares of Nitches common stock, which represented 9.4% of our outstanding shares. Mr. Tharani’s interest in Taresha was reported in our Current Report on Form 8-K announcing the Transaction, which was filed with the Securities and Exchange Commission on June 28, 2006. Mr. Tharani had previously acquired 300,000 shares of our common stock in connection with the sale of his ownership interest in Designer Intimates, Inc. to Nitches. That transaction closed on October 24, 2005 and was reported in our Current Report on Form 8-K, which was filed with the Securities and Exchange Commission on October 31, 2005. Mr. Tharani was not, at the time of either transaction, an officer or director of Nitches, and there are no arrangements or agreements in place for Mr. Tharani to become an officer or director of Nitches. In addition, none of our directors or executive officers had or has any interest, direct or indirect, by security holdings or otherwise, in Taresha.
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Impact of Shareholder Consent
In order for Nitches to regain compliance with the Marketplace Rule, Taresha entered into a lock up agreement that restricts the transfer, voting and dividend rights of the 600,000 shares issued to it in the Transaction until such time, if ever, that we receive shareholder approval for the Transaction. Accordingly, the Board of Directors of Nitches Inc. foris now soliciting your consent to ratify the annual meetingissuance of shareholders600,000 shares of our common stock to be held on Wednesday, March 15, 2006. Only shareholders of record atTaresha.
Upon obtaining shareholder consent to the close of business on February 10, 2006 are entitled to notice of and to vote atTransaction, the meeting. Proxies and proxy statements are expected to be mailed to shareholders on approximately February 24, 2006. The number of outstanding Common Shares entitled to be voted at the meeting is 4,053,507.
The expense of soliciting proxies and the cost of preparing, assembling and mailing material in connectionlock up agreement will expire along with the solicitation of proxies will be paid by the Company. Approximately three employees of the Company may solicit proxies by telephone, other approved electronic media,restrictions on Taresha’s ability to transfer, vote and personal interviews.
The Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended August 31, 2005 is being sent simultaneously herewith to each shareholder of record. The Annual Report on Form 10-K is not incorporated in this Proxy Statement and is not to be considered a part of the proxy soliciting material.
The Company’s management knows of no matter to be brought before the meeting other than those matters mentioned herein. If, however, any other matters properly come before the meeting, it is intended that the proxies will be voted in accordance with the judgment of the person or persons voting such proxies.
ELECTION oF DIRECTORS(Proposal #1)
INFORMATION CONCERNING NOMINEES, DIRECTORS AND EXECUTIVE OFFICERS
The Directors of the Company are elected annually and hold office until the next annual meeting of shareholders and until their successors have been elected and have qualified. In the event any nominee is unable to or declines to serve as Director at the time of the annual meeting, the proxy will be voted for a substitute selected by the Nominating Committee. Management has no reason to believe, at this time, that the persons named will be unable or will decline to serve if elected.
During fiscal year 2005 the Board of Directors held five (5) meetings. The Company has standing Audit, Corporate Governance and Nominating, and Compensation Committees. The Audit Committee, which oversees the financial affairs of the Company and meets with the independent auditors, consisted of Mr. Straub, Mr. Price, and Mr. Sholtis. The Audit Committee met eleven (11) times during fiscal 2005. The Compensation Committee, which sets executive compensation and bonuses, consisted of Mr. Price and Mr. Sholtis and did not meet during fiscal 2005. The Corporate Governance and Nominating Committee met once during fiscal 2005. The Corporate Governance and Nominating Committee consists of Mr. Price, Mr. Sholtis, and Mr. Straub. During fiscal 2005, all directors attended at least 75% of the meetings of the Board and the Board Committees of which they were members.
All directors who are not employees of the Company receive $12,000 annually, plus $1,000 for attendance at each Board of Directors and Committee meeting and reimbursement of reasonable expenses. The $1,000 fee is not paid for attendance at a Committee meeting that is held the same day the Board of Directors meets nor for participation in any meeting telephonically.
The following table sets forth certain informationdividends with respect to the Directors and executive officers600,000 shares issued to it.
Under the terms of the Company,Acquisition Agreement, Nitches made certain representations and warranties to Taresha concerning, among other things, that it had taken all of whom are also nominees; THE BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” ALL FIVE NOMINEES LISTED BELOW:
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Mr. Steven Wyandt has been a director since 1989. He has been CEOrequisite steps to authorize, and received all necessary consents to approve, the issuance of the Company since 1987. Mr. Wyandt wasshares. To date, Taresha has voluntarily cooperated with Nitches in its request to execute the lock up agreement and bring Nitches into compliance with the Marketplace Rule. Taresha has also elected not to pursue Nitches for breach of the Acquisition Agreement, based on our assurances that we would secure shareholder consent as promptly as possible. However, there is no binding agreement or commitment that prohibits Taresha from pursuing all legal and equitable remedies available to it for breach of the Acquisition Agreement, and Taresha may pursue those remedies at any time.
Certain Information About Taresha
The Home Décor Business.Taresha’s address is 99 New Hook Road, Unit #1, Bayonne, New Jersey 07002. Since 2002, Taresha had been designing, selling, importing, and distributing home decor products, primarily candles, candle accessories, bath décor accessories, picture frames, tabletop, and general glass décor, to many levels of distribution through company owned brands, licensed national brands, and retailer private label programs. Taresha’s branded product lines include:
Michael Coffindaffer Home - Upscale designer candle and home decor accessory product with a
director“sophisticated” point of view.MC Home - Basic and
Chairmanseasonal candles and décor with an upscale flavor and many differentiated designs, fragrances, and fabrics.Bill Blass® Home Décor - Branded home décor with classic styling for today’s home.
Newport Blue® - Exciting, fun, resort-styled home décor developed around the national brand.
Products bearing these brands are sold to better department stores, specialty home décor stores, moderate department stores, home décor catalog companies, warehouse clubs, and national and regional chain stores. The company also developed, designed and manufactured private label product for many key home décor retailers and catalogs.
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In connection with the Transaction, Nitches acquired order backlog for Taresha Home Décor products of Body Drama, Inc. untilapproximately $2.1 million, with an estimated $800,000 on order for shipment to customers by August 31, 1998, which at2006, and the time was a wholly owned subsidiaryremaining $1.3 million for shipment during the first quarter of Nitches’ fiscal 2007. The Home Décor business had total sales volume of approximately $6.3 million for calendar year 2005 and we expect the Home Décor business to exceed this total by 25% for calendar 2006. Traditionally almost 60% of Taresha’s Home Décor volume is recorded in the second half of the Company but was merged into the Company as of that date. Steven Wyandt is the father of Paul Wyandt, an officer and directorcalendar year.
The Purpose of the Company.Transaction.The purpose of the Transaction was to expand and diversify our revenue stream while capitalizing on our international sourcing, domestic distribution infrastructure and platform, along with access to our key retailers to support continued organic growth of the Home Décor business.
Mr. Paul Wyandt has been a director since 2001. He has been President and COO since 2001. He has beenWe acquired the Home Décor business with the Companyintention to operate it as a new line of product. As part of the Transaction, we retained key executives in the areas of finance, accounting, marketingproduct development, sales and technology since 1997. Prior to that, he wasproduction. Home Décor President Ron Mangini and Senior Vice President of Finance and OperationsProduct Development Michael Coffindaffer have collaborated for six years, building on their combined experience of CMS Technologies, a company that designed hardware and software for personal computer security.almost twenty-five years in the home décor category.
Mr. Price has been a director since 1973. From 1973 until he retired in May 1987, Mr. Price was a Vice PresidentTerms of the CompanyTransaction.On July 1, 2006, we entered into the Acquisition Agreement with primary responsibilities in sales and administration.
Mr. Sholtis is a seasoned retail executiveTaresha pursuant to which we agreed to acquire from Taresha the assets associated with over 30 yearsits Home Décor line of management experience with regional and national retailers including Belk Stores, McCraes, Sears, May Company and Allied Stores. He is a current memberbusiness. The principal terms of the Retail, Textile and Marketing Board of the University of North Carolina, Greensboro.
Mr. Straub has served since 1975Transaction, were as the president of Profit Management Consultants, a firm specializing in strategic planning, capital finance, and mergers & acquisitions. He also teaches courses in finance and international business as an adjunct professor at Webster University. Mr. Straub was previously a founder and executive team member of Fotomat Corporation, a retail film development company, from 1967-1975. Mr. Straub is Chairman of the Audit Committee and Financial Expert of the Audit Committee.follows:
Mr. Price, Mr. Sholtis and Mr. Straub are independent directors as defined in NASD Rule 4200.
Communications with DirectorsAny security holder may communicate in writing by mail at any time with the whole board or any individual director (addressed to “Board of Directors” or to a named director) c/o Chairman, Nitches, Inc., 10280 Camino Santa Fe, San Diego, CA 92121. All communication will be promptly relayed to the appropriate recipient(s) and the Chairman will coordinate replies where necessary.Annual Meeting AttendanceIt is the policy of the Board of Directors that its members are encouraged to attend the Annual Meeting of Shareholders. The 2004 annual meeting was attended byWe acquired substantially all of theincumbent directors.assets of Taresha related to the Home Décor line of business, including intellectual property, inventories, order backlog, contract rights, and goodwill. We did not acquire, and the assets excluded, any cash or cash equivalents, securities, certain inventory and receivables.2APPROVAL OF THE NITCHES, INC. 2006 EQUITY INCENTIVE PLAN(Proposal #2)On February 2, 2006,The purchase price for theCompany’s Boardassets was 600,000 shares ofDirectors approved and adopted the Nitches, Inc. 2006 Equity Incentive Plan (the “Plan”), and recommended that it be submitted toourstockholderscommon stock, which, fortheir approval.Stockholder approvalpurposes of thePlan is required (i)Transaction were valued at $4.55 per share (based on the average closing price for the common stock for the ten trading days between June 7 and June 20, 2006), resulting in a total purchase price of $2,730,000.In connection with the Transaction, each party made certain standard representations and warranties to
comply with certain exclusions fromthelimitationsother including due organization ofSection 162(m)their respective company; that the Transaction had been duly authorized; the execution and performance of theInternal Revenue CodeAcquisition Agreement would not violate any charter documents or regulation affecting the party; the Transaction would not case a breach of1986 (the “Code”), as described below, (ii) forany material agreement affecting a party; compliance with applicable laws; and thePlanabsence of any material litigation pending against a party. In addition, Taresha made certain representations about the accuracy of financial information provided tobe eligible underNitches, title to, and the“plan lender” exemption fromcondition of, its assets; themargin requirementsstatus ofRegulation G promulgated undermaterial contracts; its intellectual property rights; theSecurities Exchange Actpayment of1934, as amended, (iii)taxes; and the absence of certain material adverse events.Each of Nitches, on the one hand, and Taresha, on the other hand, agreed to
comply withindemnify theincentive stock option rules under Section 422other, up to the amount of theCode, and (iv)purchase price, for liabilities, claims or actions resulting from a material breach or failure tocomply withperform thestockholder approval requirements ofobligations contained in thecertain stock exchanges.Acquisition Agreement.
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The following is aforegoing summary of the Plan. This summaryAcquisition Agreement is qualified in its entirety by reference to the complete text of the Plan. Stockholders are urgedAcquisition Agreement. We urge you to read the actual text of the PlanAcquisition Agreement in its entirety which is set forth asAppendix C“A” to this ProxyConsent Solicitation Statement.
DESCRIPTION OF THE PLAN
Purpose. The purpose of the Plan is to provide the Company a means to retain the services of qualified executives and other persons eligible to receive stock awards and to provide incentives for such persons to exert maximum efforts for the success of the Company and its affiliates, as well as to provide a means by which eligible recipients of stock awards may be given an opportunity to benefit from increases in value of the Common Stock through the granting of the awards, including: (i) incentive stock options, (ii) non-statutory stock options, and (iii) stock bonuses.
Eligible ParticipantsRegulatory Matters. Employees, directors and consultants of
No state or federal regulatory authority approvals were required in connection with the Company and any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing (each an “Affiliate”, as such terms are defined in Section 424(e) and (f) of the Internal Revenue Code of 1986, as amended (the “Code”)) are eligible to receive stock awards under the Plan.Acquisition.
Number of Shares of Common Stock Available Under the Plan. A total of 600,000 shares of Common Stock may be issued pursuant to stock awards under the Plan. If any stock award shall for any reason expire or otherwise terminates, in whole or in part, without having been exercised in full (or vested in the case of restricted stock), the stock not acquired under such stock award shall revert to and again become available for issuance under the Plan. If any Common Stock acquired pursuant to the exercise of an option shall for any reason be repurchased by the Company under an unvested share repurchase option provided under the Plan, the stock repurchased by the Company under such repurchase option shall not revert to and again become available for issuance under the Plan.
Administration of the Plan. The Board of Directors hasRecommends that the authority to administerShareholders
Approve the Plan or may delegate administration of the Plan to a Committee or Committees of one or more members of the Board of Directors. If administration is delegated to a Committee, the Committee shall have all administrative powers conferred upon the Board of Directors, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise, subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board of Directors. The Board of Directors may abolish the Committee at any time and revest the administration of the Plan in the Board of Directors.
In the discretion of the Board of Directors, a Committee may consist solely of two or more “outside directors”, in accordance with Section 162(m) of the Code, and/or solely of two or more “non-employee directors”, in accordance with Rule 16b-3. Within the scope of such authority, the Board of Directors or the Committee may (i) delegate to a committee of one or more members of the Board of Directors who are not outside directors under the Securities Exchange Act of 1934, the authority to grant stock awards to eligible persons who are either (1) not then covered employees and are not expected to be covered employees at the time of recognition of income resulting from such stock award or (2) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code and/or (ii) delegate to a committee of one or more members of the Board of Directors who are not non-employee directors the authority to grant stock awards to eligible persons who are not then subject to Section 16 of the Exchange Act.
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Change in Control. The Plan provides that in the event of a merger with or into another corporation or other entity, then the surviving corporation or acquiring corporation shall assume any stock awards outstanding under the Plan or shall substitute similar stock awards for those outstanding under the Plan. If the surviving corporation or acquiring corporation in an change of control refuses to assume such stock awards or to substitute similar stock awards for those outstanding under the Plan, then with respect to stock awards which are (i) held by participants whose continuous service has not terminated prior to such event, and (ii) would otherwise vest and become exercisable within one (1) year of the closing of such acquisition, the vesting of such stock award shall be accelerated and made fully exercisable at least thirty (30) days prior to the closing of such acquisition. Any stock award not exercised prior to the closing of an acquisition involving a change in control of the Company shall be terminated.
Amendment to the Plan and Awards. The Board of Directors at any time, and from time to time, may amend the Plan. However, except as provided in Section 11 of the Plan relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company to the extent shareholder approval is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any securities exchange listing requirements.
Termination and Suspension of the Plan. The Board of Directors may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board of Directors or approved by the stockholders of the Company, whichever is earlier. No stock awards may be granted under the Plan while the Plan is suspended or after it is terminated.
TYPES OF AWARDS
Stock Options. A stock option is the right to purchase sharesIssuance of our common stock at a fixed exercise price for a fixed period of time. The Committee will determine the exercise price of options granted under the Plan, but with respect to non-statutory stock options intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code and incentive stock options, the exercise price must be at least equal to the fair market value of our common stock on the date of grant. Notwithstanding the foregoing, an incentive stock option may be granted with an exercise price lower than that set forth in the preceding sentence if such option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Sections 424(a) of the Code. In addition, the exercise price for any incentive stock option granted to any employee owning more than 10% of our common stock may not be less than 110% of the fair market value of our common stock on the date of grant.
The exercise price of each non-statutory stock option granted under the plan shall not be less than 100% of the fair market value of the stock subject to the option on the date the option is granted. Notwithstanding the foregoing, a non-statutory stock option may be granted with an exercise price lower than that set forth in the preceding sentence if such option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provision of Section 424(a) of the Code. Additional terms including term, consideration vesting and early exercise shall be determined by the Board of Directors at the time of grant.
Stock Bonus Awards other than Options. The Committee will also have the authority to grant stock bonus awards pursuant to the terms of stock bonus agreement. Each stock bonus agreement shall be in such form and shall contain such terms and conditions as the Committee shall deem appropriate. The terms and conditions of stock bonus agreements may change from time to time, and the terms and conditions of separate stock bonus agreements need not be identical.
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FEDERAL INCOME TAX CONSEQUENCES OF AWARDS
The following is general summary as of this date of the federal income tax consequences to us and to U.S. participants for awards granted under the Plan. The federal tax laws may change and the federal, state and local tax consequences for any participant will depend upon his or her individual circumstances. Tax consequences for any particular individual may be different.
Incentive Stock Options. For federal income tax purposes, the holder of an incentive stock option receives no taxable income at the time of the grant or exercise of the incentive stock option. If such person retains the Common Stock for a period of at least two years after the option is granted and one year after the option is exercised, any gain upon the subsequent sale of the Common Stock will be taxed as a long-term capital gain. A participant who disposes of shares acquired by exercise of an incentive stock option prior to the expiration of two years after the option is granted or one year after the option is exercised will realize ordinary income as of the exercise date equal to the difference between the exercise price and fair market value of the share on the exercise date. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss. The difference between the option exercise price and the fair market value of the shares on the exercise date of an incentive stock option is an adjustment in computing the holder’s alternative minimum taxable income and may be subject to an alternative minimum tax which is paid if such tax exceeds the regular tax for the year.Taresha
Non-statutory Stock Options. A participant who receives a non-statutory stock option with an exercise price equal to the fair market value of the stock on the grant date generally will not realize taxable income on the grant of such option, but will realize ordinary income at the time of exercise of the option equal to the difference between the option exercise price and the fair market value of the shares on the date of exercise. Any additional gain or loss recognized upon any later disposition of shares would be capital gain or loss. Any taxable income recognized in connection with an option exercise by an employee or former employee of the company is subject to tax withholding by us.
Stock Awards. Stock awards will generally be taxed in the same manner as non-statutory stock options. However, a restricted stock award is subject to a “substantial risk of forfeiture” within the meaning of Section 83 of the Code to the extent the award will be forfeited in the event that the participant ceases to provide services to us. As a result of this substantial risk of forfeiture, the participant will not recognize ordinary income at the time of award. Instead, the participant will recognize ordinary income on the dates when the stock is no longer subject to a substantial risk of forfeiture, or when the stock becomes transferable, if earlier. The participant’s ordinary income is measured as the difference between the amount paid for the stock, if any, and the fair market value of the stock on the date the stock is no longer subject to forfeiture.
The participant may accelerate his or her recognition of ordinary income, if any, and begin his or her capital gains holding period by timely filing (i.e., within thirty (30) days of the award) an election pursuant to Section 83(b) of the Code. In such event, the ordinary income recognized, if any, is measured as the difference between the amount paid for the stock, if any, and the fair market value of the stock on the date of award, and the capital gain holding period commences on such date. The ordinary income recognized by an employee or former employee will be subject to tax withholding by us. If the stock award consists of stock units, no taxable income is reportable when stock units are granted to a participant or upon vesting. Upon settlement, the participant will recognize ordinary income in an amount equal to the value of the payment received pursuant to the stock units.
Tax Effect for Our Company. Unless limited by Section 162(m) of the Code, we generally will be entitled to a tax deduction in connection with an award under the Plan in an amount equal to the ordinary income realized by a participant at the time the participant recognizes such income (for example, upon the exercise of a stock option).
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Section 162(m) Limits. Section 162(m) of the Code places a limit of $1,000,000 on the amount of compensation that we may deduct in any one year with respect to each of our five most highly paid executive officers. Certain performance-based compensation approved by stockholders is not subject to the deduction limit. The Plan is qualified such that awards under the Plan may constitute performance-based compensation not subject to Section 162(m) of the Code. One of the requirements for equity compensation plans is that there must be a limit to the number of shares granted to any one individual under the plan. Accordingly, the Plan provides that no employee may be granted more than 100,000 shares in any calendar year.
The Plan is not qualified under the provisions of section 401(a) of the Code and is not subject to any provisions of the Employee Retirement Income Security Act of 1974.
Our Board of Directors recommends a vote “FOR” Proposal 2, Approval of the Nitches, Inc. 2006 Equity Incentive Plan.
Compensation Committee
The Compensation Committee is responsible for setting base compensation, awarding bonuses and setting the number and terms of options for the Company’s executive officers and approval of the number and terms of options for all other employees. The Committee establishes base salaries for executive officers at levels that it believes are sufficient to attract and retain such executives. The Committee may use independent survey reports for comparable companies to assist in establishing the base salaries. None of the current Committee members are employees of the Company. The Committee did not meet during fiscal year 2005.
Compensation Committee Interlocks and Insider Participation. The Committee consisted of Mr. Price and Mr. Sholtis. Neither Mr. Price nor Mr. Sholtis is an officer or employee of the Company.
EXECUTIVE OFFICER COMPENSATION AND OTHER INFORMATION
The following table shows the compensation provided to the Chief Executive Officer and each of the other most highly-compensated executive officers who served as such at the end of fiscal 2005 and whose annual compensation exceeds $100,000:
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| Bonus |
| Other |
| Restricted |
| Securities |
| LTIP |
| All |
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Steven P. Wyandt CEO & CFO |
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2005 |
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| 250,000 |
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| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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2004 |
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| 250,000 |
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| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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2003 |
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| 250,000 |
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| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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Paul M. Wyandt President & COO |
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2005 |
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| 160,000 |
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2004 |
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| 160,000 |
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2003 |
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| 160,000 |
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| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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There were no stock options outstanding or granted during fiscal year 2005.
6
Employment Agreements
The Company extended an employment agreement with Steven P. Wyandt, effective September 1, 2001 through August 31, 2004. Pursuant to this agreement, Mr. Wyandt serves as Chief Executive Officer and Chief Financial Officer of the Company. The agreement provides for a base annual salary of $250,000, or a higher amount as the Board of Directors may approve. In addition, Mr. Wyandt may receive a bonus at the discretion of the Board of Directors. No bonus was paid to Mr. Wyandt during fiscal 2003, 2004, or 2005. The agreement continues on a month-to-month basis after August 31, 2004.
The Company entered into an employment agreement with Paul M. Wyandt, effective September 1, 2001 through August 31, 2004. Pursuant to this agreement, Mr. Wyandt serves as President and Chief Operating Officer of the Company. The agreement provides for a base annual salary of $160,000, or a higher amount as the Board of Directors may approve. In addition, Mr. Wyandt may receive a bonus at the discretion of the Board of Directors. No bonus was paid to Mr. Wyandt during fiscal 2003, 2004, or 2005. The agreement continues on a month-to-month basis after August 31, 2004.
This report is submitted by the members of the Compensation Committee: Eugene B. Price II and Michael D. Sholtis.
AUDIT COMMITTEE REPORT
The Audit Committee of the Company’s Board of Directors is composed of three non-employee, independent directors (as defined by NASD). The responsibilities of the Audit Committee are set forth in the Audit Committee Charter adopted by the Board of Directors and included as Appendix A to this Proxy Statement. The Committee met eleven (11) times during the fiscal year.
The Audit Committee, as one of its responsibilities, provides oversight of the Company’s financial reporting. The management of the Company is responsible for the preparation and integrity of the financial reporting and the related systems of internal controls. The independent auditors are responsible for performing review of the quarterly financial reports and audit of the fiscal year end financial statements in accordance with generally accepted auditing standards. The Committee selects and appoints the Company’s independent auditors.
The Audit Committee selected Berenson LLP to serve as the Company’s registered independent auditor for the fiscal year ending August 31, 2005. As a result, the Company terminated its audit relationship with Moss Adams LLP. The Company filed a report on Form 8-K with the Securities and Exchange Commission on August 25, 2005 announcing this change and reported that during the two fiscal years ended August 31, 2003 and August 31, 2004, and the most recent quarterly review period ended May 31, 2005, the company had no reportable disagreement with Moss Adams on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, and that the audit reports and quarterly reviews of Moss Adams on the financial statements of the company for the fiscal years contained no adverse opinion or disclaimer of opinion.
T. Jefferson Straub, Chairman of the Audit Committee, commented, “Moss Adams is an outstanding firm that has provided Nitches with timely and professional service for many years. As Nitches prepares for complying with the new internal controls audit requirements under the Sarbanes-Oxley Act, we needed to be particularly sensitive to the company’s professional fee expenses. In light of the increased audit work that will be required under the Sarbanes-Oxley Act, the Audit Committee interviewed a number of firms, focusing on the proposed fees in addition to the capability of the audit team.” Section 404 of the Sarbanes-Oxley Act of 2002 requires a public company to include with its audited financial statements the attestation of its independent auditors to a report on the company’s internal controls over financial reporting. This additional requirement is expected substantially to increase the work required of the independent auditor. The Company will be subject to this requirement as of the end of its fiscal year ending August 31, 2007, although preparation to comply with this requirement must commence well in advance of that date and the company has already initiated several phases of this project.The Committee has reviewed and discussed with management and the auditors the Company’s audited financial statements for the fiscal year ending August 31, 2005. Management has confirmed that the financial statements have been prepared with integrity, objectivity, and in conformity with generally accepted accounting principles. The Committee has discussed with Berenson LLP the matters as
7
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSrequired by Statement on Auditing Standard No. 61. This statement requires our independent auditors to provide us with additional information regarding the scope and results of their audit of the fiscal year end financial statements with respect to their responsibility under generally accepted auditing standards, significant accounting principles, management judgements and estimates, any significant audit adjustments, any disagreements with management, and any difficulties encountered in performing the audit. Based on the review and discussions described above regarding the audited financial statements for fiscal year 2005, the Committee has recommended to the Board of Directors that these financial statements be included in the Company’s Annual Report on Form 10-K for filing with the Securities and Exchange Commission and mailing to the Shareholders of the Company. The Committee has received from Berenson LLP a letter providing the disclosures required by Independence Standards Board Standard No. 1 with respect to any relationships between them and the Company that in their judgement may reasonably be thought to bear on independence. The Committee has concluded that since there were no other services other than audit, that their independence is maintained. Berenson LLP has discussed their independence with us and has confirmed in such letter that it is independent of the Company within the meaning of the federal securities laws. The Audit Committee appointed Berenson LLP to serve as the independent auditors for fiscal year 2006. This report is submitted by the members of the Audit Committee: T. Jefferson Straub, Eugene B. Price II, and Michael D. Sholtis. Mr. Straub has been designated by the Board of Directors as the Audit Committee Financial Expert.AND MANAGEMENT
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Annual Audit and Quarterly Review Fees
The total fees billed for professional services rendered by Berenson LLP for the audit of our annual financial statements for fiscal 2005 were $57,525. The total fees billed for professional services rendered by Moss Adams LLP for the audit of our annual financial statements for fiscal 2005 were $11,120. The total fees billed for professional services rendered by Moss Adams LLP for the audit of our annual financial statements for fiscal 2004 and the review of our financial statements included in our Forms 10-Q for fiscal 2005 were $104,271.
Annual Audit and Review Related Fees
Related fees include billings for assurance and related services that are reasonably related to the performance of the annual audit or review of the Company’s financial statements, but are not reported as Audit and Review Fees. The aggregate fees billed for audit related services during fiscal 2005 and fiscal 2004 by Moss Adams LLP were $46,267 and $19,573, respectively. These services consisted of the review of controls and procedures.
Tax Fees
The aggregate fees billed by Moss Adams for tax services, including tax planning and preparation, during fiscal 2005 and fiscal 2004 were $25,657 and $30,835, respectively.
All Other Fees
The Company did not engage Berenson LLP or Moss Adams LLP on any other matters not otherwise included in the above categories in either fiscal 2005 or 2004.
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Audit Committee Pre-Approval Policy
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services include audit and audit-related services, tax services, and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.
CORPORATE GOVERNANCE AND NOMINATING COMMITTEE
The Corporate Governance and Nominating Committee of the Company was formed in January 2004. The Committee charter can be found as APPENDIX B of this Proxy. The Committee consists of three independent directors, Eugene B. Price II, Michael D. Sholtis, and T. Jefferson Straub. The Committee met once in fiscal 2005.
The Committee’s policy is that it will consider recommendations of the security holders received by the Corporate Secretary by October 31 of each year. Recommendations of candidates who have at least 10 years of management and apparel or retail industry experience with a company with sales of at least 75% of that of the Corporation, or who could bring appropriate diversity to the Board, or who possess other relevant qualifications (for example finance and accounting, marketing) would be preferred. If a vacancy in the Board occurs, the Committee will consult with all Board members to identify candidates known to them or whom they would recommend be considered and would review any security holder recommendations on file. It would screen and then personally interview appropriate candidates and have those candidates meet with some additional Board members, certain members of management and the Chairman of the Board. The Committee would evaluate responses and recommend to the full Board the name of any candidate it felt should become a management and Board nominee for election or appointment.
The Board consists of five directors, three of whom are independent. The Committee has not received or considered shareholder proposals for nomination as directors and has not received an unsolicited proposal regarding a candidate who might possess appropriate background and experience.
This report is submitted by the members of the Corporate Governance and Nominating Committee: Eugene B. Price II, Michael D. Sholtis, and T. Jefferson Straub.
9
PERFORMANCE GRAPH
The following graph compares the performance of the Company for the period September 1, 2000 through January 31, 2006 with the performance of the NASDAQ market index and the average performance of companies comprising the Dow Jones Industry Group CLO – Apparel, Clothing, which for this year numbered 68 companies, and which is published by the Dow Jones Corporation. The index reflects reinvested dividends and is weighted by the sum of the closing price times the shares outstanding divided by the total shares outstanding for the group.
10
Principal Shareholders and Management Shareholdings
The following table sets forth, as of February 10,November 30, 2006, certain information with respect to the beneficial ownership of Common Stockcommon stock by (a) each person known by the Company to be the beneficial owner of more than 5% of its outstanding Common Stock,common stock, (b) any of the Company’s directors, (c) the Company’s named executive officers, and (c)(d) all directors and executive officers as a group. Except as noted below, to the best of the Company’s knowledge, each of such persons has sole voting and investment power with respect to the shares beneficially owned.
| Amount and | ||||||||||||
| Nature of | ||||||||||||
| Beneficial | Percent of Class | |||||||||||
Name and Address of Beneficial Owner (1)(2) |
| Number of |
| Percent of Class |
| Ownership (3) | Outstanding | |||||
| Officers and Directors | Officers and Directors | |||||||||||
| Steven P. Wyandt (4) | Steven P. Wyandt (4) | 1,298,349 | 24.7 | % | ||||||||
| Eugene B. Price II | Eugene B. Price II | 69,417 | 1.3 | % | ||||||||
| Michael. D. Sholtis | Michael. D. Sholtis | 10,000 | 0.2 | % | ||||||||
| All directors and current officers as a group (5 persons) | All directors and current officers as a group (5 persons) | 1,377,766 | 26.2 | % | ||||||||
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Steven P. Wyandt (3) |
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| 1,298,349 |
| 32.0 | % | ||||||
Eugene B. Price II |
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| 69,417 |
| 1.7 | % | ||||||
All directors and current officers as a group (5 persons) |
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| 1,367,766 |
| 33.7 | % | ||||||
Haresh T. Tharani 1400 Broadway, 33rd Floor New York, NY 10018 |
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| 450,000 |
| 11.1 | % | ||||||
| 5% Shareholders | 5% Shareholders | |||||||||||
| Haresh T. Tharani (5) | Haresh T. Tharani (5) | |||||||||||
| 1400 Broadway, 33rdFloor | 1400 Broadway, 33rdFloor | |||||||||||
| New York, NY 10018 | New York, NY 10018 | 971,000 | 18.5 | % | ||||||||
| Arvind Singh (6) | Arvind Singh (6) | |||||||||||
| 3246 Story Rd. | 3246 Story Rd. | |||||||||||
| Irving, TX | Irving, TX | 300,000 | 5.7 | % | ||||||||
| Raji Singh (6) | Raji Singh (6) | |||||||||||
| 3246 Story Rd. | 3246 Story Rd. | |||||||||||
| Irving, TX | Irving, TX | 300,000 | 5.7 | % | ||||||||
____________________ (1) Except as otherwise indicated, the address of each beneficial owner is c/o Nitches, Inc., 10280 Camino Santa Fe, San Diego, CA 92121. (1) Except as otherwise indicated, the address of each beneficial owner is c/o Nitches, Inc., 10280 Camino Santa Fe, San Diego, CA 92121.
(2) Except as otherwise indicated, the persons named in this table have sole voting and investment power with respect to all shares of common stock listed.(3) A portion of the shares of Steven P. Wyandt are owned indirectly in Trusts, the terms of which establish sole voting power in Mr. Wyandt.(4) Includes 300,000 restricted shares (adjusted for the 200% stock dividend of January 3, 2006) Mr. Tharani received as a result of the Company’s acquisition of Designer Intimates, Inc.OTHER ITEMSPROPOSALS OF SHAREHOLDERS For proposals of shareholders to be included at the 2006 annual meeting of shareholders, anticipated to be held in February 2007, such proposals must be received by the Company not later than October 31, 2006. The acceptance of such proposals is subject to Securities and Exchange Commission guidelines.VOTING Each shareholder of record is entitled to one vote for each share held on all matters to come before the meeting, except that shareholders may have cumulative voting rights with respect to the electionall shares of Directors. All proxies thatcommon stock listed.returned will be counted by the Inspector of Elections in determining the presence of a quorum and on each issue to be voted on. An abstention from voting or a broker non-vote is not counted in the voting process under California law.
Cumulative Voting. The proxy process does not permit shareholders to cumulate votes. No shareholder can cumulate votes unless the candidate or candidates’ names for which such votes are to be cast have been placed in nomination prior to voting and a shareholder has given notice of the shareholder’s intention to cumulate the shareholder’s votes at the meeting and prior to the voting. If any shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. Management does not, at this time, intend to give notice of cumulative voting or to cumulate the votes it may hold pursuant to the proxies solicited herein unless the required notice by a shareholder is given in proper format at the meeting, in which instance management intends to cumulatively vote all of the proxies held by it in favor of the nominees for office as set forth herein. In the event cumulative voting is used, each shareholder may cast a number of votes equal to the number of directors to be elected multiplied by the number of votes that the shareholder’s shares would otherwise entitle the shareholder. The shareholder may cast these votes for one nominee or distribute these votes among as many candidates as the shareholder wishes. The candidates receiving the highest number of votes of the shares entitled to be voted for them, up to the number of directors to be elected by such shares, are elected.
11
Proxies. The shares represented by proxies that are returned properly signed will be voteddetermined in accordance with the shareholders’ directions. Ifdefinition of “beneficial ownership” set forth in the proxy card is signedregulations promulgated under the Exchange Act and, returned without direction as to how they are to be voted,accordingly, may include securities owned by or for, among others, the spouse and/ or minor children of an individual
(4) A portion of the shares will be votedof Steven P. Wyandt are owned indirectly in Trusts, the terms of which establish sole voting power in Mr. Wyandt.
(5) Includes 300,000 restricted shares (adjusted for the 200% stock dividend of January 3, 2006) that Mr. Tharani received as recommendeda result of the Company’s acquisition of Designer Intimates, Inc. as well as the 600,000 restricted shares beneficially owned by Mr. Tharani through Taresha LLC that were issued in the Boardtransaction that is the subject of Directors. Shareholders may revoke any proxy before it is voted by attendance atthis consent solicitation.
(6) Includes 300,000 restricted shares registered in the meeting and votingname of Impex, Inc. received as a result of Nitches’ recent acquisition of Saguaro LLC. The shareholder owns a 50% interest in person, by executing a new proxy with a later date or by giving written notice of revocationImpex, Inc.
8
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the Secretary of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a)information and reporting requirements of the Securities Exchange Act of 1934 requiresand in accordance with that act, we file periodic reports, documents and other information with the Company’s directorsSEC relating to our business, financial statements and executive officersother matters. These reports and persons who own more than ten percentother information may be inspected and are available for copying at the offices of the Company’sSEC, 100 F. Street NE, Washington, DC 20549 or may be accessed at www.sec.gov.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS
THAT THE SHAREHOLDERS APPROVE THE PROPOSAL.
| By Order of the Board of Directors | |
| Steven P. Wyandt, Chairman |
San Diego, California
January 26, 2007
9
APPENDIX “A”
ASSET SALE AND PURCHASE AGREEMENT
This ASSET SALE AND PURCHASE AGREEMENT (the “Agreement”) is entered into as of July 1, 2006, between Nitches, Inc., a California corporation (the “Buyer”),and Taresha, LLC, a New Jersey limited liability corporation (the “Seller”).
Background
WHEREAS, the Seller is in the business of designing, selling, importing, and distributing decorative accessories for the home (the “Business”); and
WHEREAS, on the terms and subject to the conditions contained in this Agreement, the Seller desires to sell, transfer, and assign to the Buyer, and the Buyer desires to purchase from the Seller, all of the Purchased Assets, as hereinafter defined;
NOW THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1Definitions.In addition to terms defined elsewhere in this Agreement, the following terms when used in this Agreement shall have the meanings indicated below:
“Affiliate” shall mean, with respect to any Person, any Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. For these purposes,“control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management of any Person, whether through the ownership of voting securities, by contract or otherwise.
“Aggregate Losses” shall have the meaning set forth inSection 8.3.
“Business” shall have the meaning set forth in the Background to this Agreement.
“Buyer” shall have the meaning set forth in the preamble to this Agreement.
“Buyer’s Common Stock” shall have the meaning set forth inSection 3.2.
“Buyer Indemnified Parties” shall have the meaning set forth inSection 8.1.
“Cash” shall have the meaning set forth inSection 2.2.
“Closing” and“Closing Date” shall have the meanings set forth inSection 3.1.
“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor statute thereto.
“Contract” shall mean any contract, indenture, mortgage, deed of trust, note, instrument, lease, license, arrangement or other agreement, whether oral or written and/or other agreements.
“Excluded Assets” shall have the meaning set forth inSection 2.2.
“GAAP” shall mean United States generally accepted accounting principles, as consistently applied.
“Governmental Entity” shall mean any federal, state, local, foreign or other governmental or administrative body, instrumentality, department or agency or any court, tribunal, administrative hearing, arbitration panel, commission or other similar dispute resolving panel or body.
“Indemnity Cap” shall have the meaning set forth inSection 8.3.
“Intellectual Property” shall have the meaning set forth inSection 2.1(a).
“Inventories” shall have the meaning set forth inSection 2.1(b).
“Law” shall have the meaning set forth inSection 2.2(b).
“Liabilities” shall mean any and all debts and liabilities, whether accrued or fixed, absolute, contingent or otherwise, matured or unmatured, determined or determinable, including without limitation, (i) those arising under an applicable law, rule, ordinance, statute; judgment or decree, and (ii) those arising under any Contract, commitment or undertaking.
“Lien” shall mean any mortgage, charge, pledge, lien, security interest, claim, encumbrance or restriction of any kind or nature except restrictions, liabilities or obligations of any kind or nature that arise by virtue of any of the Transaction Documents or restrictions that are imposed by the copyright, trademark or securities laws generally.
“Losses” shall mean any and all losses, shortages, damages, liabilities, claims, actions, causes of action, expenses, including reasonable attorneys and accountants and other professional fees and expenses, assessments, Taxes, including interest or penalties thereon, sustained, suffered or incurred by any indemnified party that are the subject of an indemnity provided underArticle VIII.
“Material Contract” and“Material Contracts” shall have the meaning set forth inSection 2.1(c).
“Person” shall mean any natural person, corporation, unincorporated organization, partnership, association, limited liability company, joint stock company, joint venture, trust or government, or any agency or political subdivision of any government, or any other entity.
2
“Prime Rate” shall mean the rate of interest publicly announced by Citibank N.A. as its prime rate as announced from time to time at its principal place of Business in California, California.
“Proceeding” shall mean any suit, litigation, arbitration, proceeding, including any civil, criminal, administrative, investigative or appellate proceeding, or prosecution.
“Purchase Price” shall have the meaning set forth inSection 3.2.
“Purchased Assets” shall have the meaning set forth inSection 2.1.
“Receivables” shall have the meaning set forth inSection 2.2(a).
“Seller” shall have the meaning set forth in the preamble to this Agreement.
“Seller Financial Statements” shall have the meaning set forth inSection 4.8.
“Seller Indemnified Parties” shall have the meaning set forth inSection 8.2.
“Seller Material Adverse Effect” shall mean a material adverse effect on the results of operations, financial condition, Business or assets of the Seller on a collective basis, in light of the applicable circumstances.
“Stock Consideration” shall have the meaning set forth inSection 3.2(a).
“Tax” and“Taxes” shall mean any material federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security, or similar, unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated or other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not.
“Tax Return” shall mean any return, declaration, report, claim for refund or information return or statement relating to Taxes filed with any taxing authority, including any schedule or attachment thereto and including any amendment thereof.
“Third Party Claim” shall have the meaning set forth inSection 8.4(b).
“To the knowledge of” a party hereto shall mean, as to such party, the actual knowledge and any assertion of a claim, dispute, right, demand or other state of facts set forth in a writing received by such party.
“Transaction Documents” shall mean this Agreement and any other agreements executed and delivered by the parties in connection with the transactions contemplated hereby.
3
ARTICLE II
SALE AND PURCHASE OF ASSETS
2.1Sale and Purchase of Assets.On the terms and subject to the conditions hereof, at the Closing, as hereinafter defined, the Seller will sell, transfer, convey, assign, and deliver to the Buyer, and the Buyer will purchase and accept, all right, title, and interest of Seller, in and to all rights, properties, and assets of every kind, character, and description, wherever located and whether tangible or intangible, real or personal, or fixed or contingent, of Seller set forth below in thisSection 2.1, in each case free and clear of all mortgages, liens, pledges, security interests, charges, claims, restrictions, and encumbrances of any nature, including pledges, defect or objection liens, easements, encroachments, or restrictions of any kind and other title or interest retention arrangements, reservations, or limitations of any nature whatsoever (collectively,“Liens”), including the rights, properties, and assets described in thisSection 2.1, all as they exist on the Closing Date (collectively, the“Purchased Assets”) but not including the Excluded Assets (as hereinafter defined):
(a)Intellectual Property. All right, title, and interest in all trade secrets, technical knowledge, know-how, all the books and records of the Seller relating to the purchase of materials, supplies, services, operations matters, product, design, importation and sale of goods and products, and all customer and vendor lists relating to the operation of the Business and all files and documents, including credit information, relating to customers and vendors of the Business, wherever located that is used in the normal course of the Business, provided that the Seller may keep duplicate copies of any records required to be retained by the Seller under applicable Law (collectively, the“Intellectual Property”);
(b)Inventories. All goods located at 99 New Hook Road, Unit #5, Bayonne, New Jersey, listed or described onSchedule 2.1(b) attached hereto (collectively,“Inventories”);
(c)Contract Rights. All rights and incidents of interest as of the date hereof in and to all contracts and orders with retailers, distributors and manufacturers, and the license agreement between the Seller and Bill Blass Licensing Company, Inc. (individually a“MaterialContract” and collectively,“Material Contracts”);
(d)Goodwill. All goodwill of the Business.
2.2Excluded Assets.Notwithstanding anything contained in this Agreement to the contrary, the following rights, properties, and assets (collectively, the“Excluded Assets”) will not be included in the Purchased Assets:
(a)Ordinary Course of Business Dispositions. All of the Receivables and Inventories which have been collected, sold, transferred, consumed, or otherwise disposed of by the Seller prior to the Closing.
(b)Corporate Documents. Seller’s corporate seal, minute books, charter documents, corporate stock record books, and such other books and records as pertain to the organization, existence, or share capitalization of Seller and duplicate copies of such records included in the Purchased Assets as are necessary to enable Seller to file its tax returns and reports or as are otherwise required to be retained by Seller under applicable Law, and any other records or materials relating to Seller generally and not involving or relating to the Purchased Assets or the operation or operations of the Business.
4
(c)Rights under this Agreement. Seller’s rights arising out of or relating to this Agreement or the transactions contemplated hereby;
(d)Cash; Stock Consideration; Other Excluded Assets. All of the Seller’s cash and cash equivalents on hand and/or in banks, including without limitation cash and balances due from the Seller’s factors (“Cash”), and the Stock Consideration;
ARTICLE III
CLOSING; CONSIDERATION
3.1Closing.
(a) Subject to the terms and conditions of this Agreement, the consummation of the sale and purchase of Purchased Assets and the other transfers and deliveries to be made pursuant to this Agreement (the“Closing”) shall take place on July 1, 2006, at 10:00 a.m. at the offices of Taresha, LLC, 99 New Hook Road, Unit #1, Bayonne, New Jersey, or at such other time and date as the parties hereto may agree (the“Closing Date”).
(b) All actions to be taken and all documents to be executed and delivered by all parties at the Closing shall be conditioned upon and subject to the taking and delivery, on the Closing Date, of all other actions to be taken and documents to be executed and delivered on the Closing Date and if any such action is not taken or any such document is not delivered on the Closing Date, no actions shall be deemed to have been taken nor shall any documents be deemed to have been executed and delivered.
3.2Consideration.The Buyer will pay for the Purchased Assets and the covenants of the Seller included herein, an aggregate purchase price consisting of 600,000 (six hundred thousand) restricted shares of Buyer’s Common Stock, valued at $4.55 per share (based on the average closing price for the common stock for the ten trading days between June 7 and June 20, 2006, inclusive (the“Stock Consideration”). The total value of the Stock Consideration, $2,730,000 (two million seven hundred and thirty thousand dollars), is referred to herein as the“Purchase Price”. Within 75 (seventy-five) days subsequent to the closing, the Buyer will file with the Securities and Exchange Commission initial reports of ownershipto register the Stock Consideration.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLER
In order to induce the Buyer to enter into this Agreement and reports of changes in ownershipto consummate the transactions contemplated hereby, as of the Company’s Common Stock. Upon filingdate hereof, the Seller represents and warrants to the Buyer as follows:
4.1Organization.
(a) Seller is a limited liability corporation, duly organized, validly existing and in good standing under the laws of the State of New Jersey. Seller has all requisite right, power and authority to (i) own or lease and operate the Purchased Assets, (ii) conduct its Business as presently conducted, and (iii) engage in and consummate the transactions contemplated hereby.
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(b) Seller is duly licensed or qualified to do Business as a foreign corporation and is in good standing in each jurisdiction in which a material part of its properties owned or leased by it or the operation of a material part of its Business makes such licensing or qualification necessary. The Seller has heretofore delivered to the Buyer true and complete copies of the certificate of incorporation and other organizational documents of the Seller as currently in effect.
(c) The Seller does not have any subsidiaries, any equity investments in, any securities of, or any other interests in, any Person.
4.2Authorization; Enforceability.Seller has the power and authority and has taken all necessary action to execute, deliver and perform this Agreement and the other Transaction Documents to which it is a party and to consummate the transactions contemplated hereby and thereby and to take all other actions required to be taken by them pursuant to the provisions hereof and thereof. This Agreement has been duly executed and delivered by, and prior to the Closing Date will have been duly authorized by all necessary corporate action of the Seller. This Agreement is, and each of the other Transaction Documents to which Seller is a party, when executed and delivered by them, will be, legal, valid and binding upon and enforceable against such party, in accordance with its respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws affecting creditors’ rights generally or by general equity principles.
4.3No Violation or Conflict. The execution, delivery and performance of this Agreement and the other Transaction Documents by Seller and the consummation by the Seller of the transactions contemplated hereby and thereby (i) will not violate, with or without the giving of notice or the lapse of time or both, any law, rule, regulation, court order, writ, judgment, injunction or decree applicable to any such reportparty or the Purchased Assets, (ii) will not violate or breach the certificate of incorporation or by-laws of the Seller, (iii) will not, with or without the passage of time or the giving of notice, result in the breach of, or constitute a default under, or result in the acceleration of the performance of the obligations of Seller under any Current License Agreement, or Material Contract to which the Seller is a party or by which the Seller or any of its respective assets is bound or affected, and (iv) will not result in the creation of any Lien, other than a Permitted Lien, on any of Purchased Assets.
4.4Consents and Approvals.Except for the approval of the assignment of the Bill Blass License no consent, approval, waiver or authorization of, or registration, qualification or filing with or notice to any Governmental Entity, or any other Person, is required to be made by the Seller in connection with the Commission,execution, delivery or performance of this Agreement by the filing person must furnishSeller and/or the Company with a copy of such report. Toconsummation by the Company’s knowledge, based solely upon a reviewSeller of the copiestransactions contemplated hereby.
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4.5Brokers.Seller has not employed any financial advisor, broker or finder and has not incurred and will not incur any broker’s, finder’s, investment banking or similar fees, commissions or expenses, in connection with the origination, negotiation or execution of such reportsthis Agreement or any of the other Transaction Documents.
4.6Compliance with Laws.
(a) Seller has operated its Business so as to comply with all applicable material foreign and domestic statutes, laws, ordinances, codes, governmental rules and regulations, judgments, orders, decrees, restrictions, licenses, property, privacy or other proprietary or intellectual property rights or any other rights whatsoever of any Person. Seller is not in violation of any applicable material law, ordinance, regulation or order relating to its operations or its owned, licensed or leased properties or rights.
(b) Seller has obtained all material licenses, permits, franchises or other governmental authorizations necessary for the ownership or operation of its properties or the conduct of its Business as presently conducted.
4.7Litigation.There is no Proceeding pending, or to the knowledge of the Seller, threatened against the Seller that questions the validity of this Agreement, any other Transaction Document or any action taken or to be taken hereunder, or that would have a material adverse effect on the ability of the Seller to perform its obligations under this Agreement. The Seller is not in default under any judgment, order or decree of any Governmental Entity. There are no outstanding written tax audit requests or pending audits, against Seller.
4.8Seller Financial Statements.
(a) The Seller has furnished to the CompanyBuyer a true and representations that no other reports were required, all reports required by Section 16(a) of the Securities Exchange Act of 1934 during fiscal year 2005 were filed on a timely basis.
The Company, on written request of any person being solicited by this proxy statement, shall provide, without charge to such person, acomplete copy of the Company’s Annual Report on Form 10-K (includingaudited financial statement of the Seller as of, and for the year ended December 31, 2005 (collectively, the “Seller Financial Statements”). The Seller’s Financial Statements (i) are in accordance with the books and records of the Seller, (ii) have been prepared in accordance with GAAP, (iii) fairly present the financial statementsposition and schedules thereto),results of operations of the Seller on a consolidated basis as of the respective dates thereof and for the periods referred to therein, and (iv) include all adjustments, consisting only of normal accounting accruals, that are necessary for a fair presentation of the consolidated financial condition of the Seller and the results of operations for the periods covered thereby.
4.9Contracts.Section 2.1(c) sets forth all Material Contracts to which Seller is a party or by which Seller is bound. All such Material Contracts set forth inSection 2.1(c) (i) are in full force and effect and there are no material defaults, or events, conditions or occurrences which, with notice or lapse of time or both, would constitute a material default, by Seller, or, to the knowledge of the Seller by any other party to any such Material Contract, (ii) no consent of any third party is required under any Material Contract to consummate the transactions contemplated by this Agreement, and (iii) neither the execution and delivery nor the consummation of the transaction contemplated by this Agreement will result in the termination of any Material Contract. The Seller has made available to the Buyer true, correct and complete copies of all Material Contracts set forth inSection 2.1(c) .
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4.10Title to Assets. Seller has, and following the Closing, the Buyer will have, good, valid, and transferable title to the Purchased Assets free and clear of all Liens.
4.11Sufficiency and Condition of Assets. Except for the Cash and Receivables, the Purchased Assets constitute all of the rights, properties, and assets of every kind, character, and description, wherever located and whether tangible or intangible, real or personal, or fixed or contingent, that are necessary to operate the Business as currently conducted by the Seller. All the Purchased Assets are in good operating condition and repair, subject to normal wear and maintenance, are usable in the regular and ordinary course of Business and conform in all material respects to all applicable laws and permits relating to its construction, use, and operation.
4.12Intellectual Property. The Intellectual Property includes all of the intellectual property rights owned by or licensed to the Seller and used in the operation of the Business. To the knowledge of the Seller, the conduct of the Seller’s Business as operated prior to the Closing did not and does not conflict with copyrights, trademarks, trade names, service marks or other intellectual property rights of others, (i) to the knowledge of the Seller, none of the Intellectual Property is invalid, (ii) Seller has not received written notice that any of the Intellectual Property rights infringes upon or violates the rights or claimed rights of any Person, and (iii) no litigation is pending or, to the knowledge of the Seller, threatened with respect to any of the Intellectual Property.
4.13Taxes.All returns in respect of Taxes required to be filed with respect to Seller for any period ending on or prior to the SecuritiesClosing Date have been timely filed, taking into account any extension of time to file granted to, or obtained on behalf of, such Seller, (i) all Taxes shown to be payable on such returns have been paid, (ii) no deficiency for any material amount of Tax has been asserted or assessed by a taxing authority against Seller, (iii) there are no outstanding waivers or agreements extending the statute of limitations for any period with respect to any Tax to which the Seller is subject, and Exchange Commission pursuant(iv) Seller is not a party to Rule 13a-1 underany Tax sharing, indemnity or allocation agreement.
4.14Absence of Certain Changes or Events. Except as contemplated by the Securities Exchange ActTransaction Documents, since June 24, 2006, the Seller has not:
(a) incurred any material obligation or liability, fixed or contingent, or engaged in any transactions except in the ordinary course of 1934, as amended,Business;
(b) suffered any material adverse change in its financial condition, results of operations, properties or Business;
(c) suffered the occurrence of any events which, individually or in the aggregate are reasonably expected to have a Seller Material Adverse Effect;
(d) sold, transferred, leased or terminated any of its assets or properties which would have been included in the Purchased Assets, except for the Company’s most recent fiscal year. Written requests should be directed to:sale of obsolete or worn out equipment and the collection of Receivables and sale of Inventory in the ordinary course of Business consistent with past practices;
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(e) transferred or granted any Intellectual Property or rights under any Master Contract immediately prior to the Closing, other than as a consequence of the conduct of Business in the ordinary course of Business;
(f) suffered any material casualty, loss or damage with respect to any of its rights, properties or assets, whether or not such loss or damage shall have been covered by insurance; or
Nitches, Inc.10280 Camino Santa FeSan Diego, California 92121Attention: Steven P. Wyandt (g) agreed to do any of the foregoing.
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San Diego, CaliforniaFebruary 10, 2006
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APPENDIX A4.15
Books and RecordsNITCHES, INC.AUDIT COMMITTEE OF THE BOARD OF DIRECTORS.
CHARTER
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The primary functionbooks of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing: the financial reportsaccount and other financial information providedand corporate records, including, without limitation, general ledgers and cost accounting records, of Seller is in all material respects complete and correct.
4.16Disclosure. No representation or warranty by the CorporationSeller contained in the Transaction Documents, and no certificate or schedule furnished or to be furnished by or on behalf of the Seller pursuant to the Transaction Documents, when taken together, contains any governmental bodyuntrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make such statements, in light of the circumstances under which they were made, not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BUYER
In order to induce the Seller to enter into this Agreement and to consummate the transactions contemplated hereby, as of the date hereof and as of the Closing Date, the Buyer represents and warrants to the Seller as follows:
5.1Organization.
(a) The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the state of California. The Buyer has all requisite right, power and authority to (i) own or lease and operate its properties and assets, (ii) conduct its Business as presently conducted, and (iii) engage in and consummate the transactions contemplated hereby.
(b) The Buyer is duly licensed or qualified to do Business as a foreign corporation and is in good standing in each jurisdiction in which a material part of its properties owned or leased by it or the public;operation of a material part of its Business makes such licensing or qualification necessary. The Buyer has heretofore delivered to the Corporation’s systemsSeller true and complete copies of internal controls regarding finance, accounting, legal compliancethe certificate of incorporation and ethics that managementother organizational documents of the Buyer as currently in effect.
5.2Authorization; Enforceability.The Buyer has the power and authority and has taken all necessary action to execute, deliver and perform this Agreement and the Boardother Transaction Documents to which it is a party and to consummate the transactions contemplated hereby and thereby and to take all other actions required to be taken by it pursuant to the provisions hereof and thereof. This Agreement has been duly executed and delivered by, and prior to the Closing Date will have established;been duly authorized by all necessary corporate action of, the Buyer. This Agreement is, and each of the other Transaction Documents to which the Buyer is a party, when executed and delivered by it, will be, legal, valid and binding upon and enforceable against it, in accordance with its respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws affecting creditors’ rights generally or by general equity principles.
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5.3No Violation or Conflict. The execution, delivery and performance of this Agreement and the Corporation’s auditing, accounting and financial reporting processes generally. Consistent with this function, the Audit Committee should encourage continuous improvement of, and should foster adherence to, the corporation’s policies, procedures and practices at all levels. The Audit Committee’s primary duties and responsibilities are to:
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The Audit Committee shall be comprised of three or more directors as determinedother Transaction Documents by the Board, each of whom shall be independent directors,Buyer and free from any relationship that, in the opinionconsummation by the Buyer of the Board, would interferetransactions contemplated hereby and thereby (i) will not violate, with or without the exercisegiving of hisnotice or her independentthe lapse of time or both, any law, rule, regulation, court order, writ, judgment, as a member of the Committee. All members of the Committee shall have a working familiarity with basic finance and accounting practices, and at least one member of the Committee shall have accountinginjunction or related financial management expertise. The members of the Committee shall be elected by the Board at the annual organizational meeting of the Board and shall serve until their successors shall be duly elected and qualified. Unless a Chair is elected by the full Board, the members of the Committee may designate a Chair by majority vote of the full Committee membership.
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The Committee shall hold such regular meetings in executive session as may be necessary and such special meetings as may be called by the Chair of the Committee or at the request of the independent accountants. The Committee will meet quarterly to approve the 10Q and 10K reports of the Company prior to their filing with the SEC. The Committee will meet at least annually with management and the independent accountants.
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To fulfill its responsibilities and duties the Audit Committee shall:
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APPENDIX B
NITCHES, INC.CORPORATE GOVERNANCE AND NOMINATING COMMITTEE CHARTER(Approved January, 2004)
I. STATEMENT OF POLICY
This Charter specifies the scope of the responsibilities of the Corporate Governance and Nominating Committee (the “Committee”) of the Board of Directors (the “Board”) of NITCHES, Inc. (the “Company”) and the manner in which those responsibilities shall be performed, including its structure, processes and membership requirements.
The primary responsibilities of the Committee are to (i) identify individuals qualified to become Board members; (ii) if necessary, select, or recommend to the Board, new director nominees, for any election of directors; (iii) develop and recommend to the Board criteria for selecting qualified director candidates; (iv) consider committee member qualifications, appointment and removal; (v) recommend corporate governance principles, codes of conduct and compliance mechanismsdecree applicable to the Company, and (vi) provide oversightBuyer or any of its properties or assets, (ii) will not violate or breach the organizational documents of the Buyer, (iii) will not, with or without the passage of time or the giving of notice, result in the evaluationbreach of, or constitute a default under, or result in the acceleration of the Boardperformance of the obligations of the Buyer under any material Contract to which such Buyer is a party or by which the Buyer or any of its assets is bound or affected, and each committee.
II. ORGANIZATION AND MEMBERSHIP REQUIREMENTS(iv) will not result in the creation of any Lien on any of the assets or properties of the Buyer.
The Committee shall be comprised5.4Consents and Approvals.No consent, approval, waiver or authorization of, three or more directors, each of whom shall satisfy the independence requirements established by the rules of The NASDAQ Stock Market (“NASDAQ”) and the Securities and Exchange Commission (the “SEC”); provided that one director who does not meet the NASDAQ independence criteria may serve on the Committee pursuantregistration, qualification or filing with or notice to the “exceptional and limited circumstances” exception as provided under the rules of NASDAQ. The members of the Committee shall be appointed by the Board and shall serve until their successors are duly elected and qualified or their earlier resignation or removal. Any member of the Committee may be removed or replaced by the Board. Unless a chairman is elected by the full Board, the members of the Committee may designate a chairman by majority vote of the full Committee membership. The Committee may, from time to time, delegate duties or responsibilities to subcommittees or to one member of the Committee. A majority of the members shall represent a quorum of the Committee, and, if a quorum is present, any action approved by at least a majority of the members present shall represent the valid action of the Committee.
The Committee shall have the authority to obtain advice or assistance from consultants, legal counsel, accounting or other advisors as appropriate to perform its duties hereunder, and to determine the terms, costs and fees for such engagements. Without limitation, the Committee shall have the sole authority to retain or terminate any search firm to be used to identify director candidates and to determine and approve the terms, costs and fees for such engagements. The fees and costs of any consultant or advisor engaged by the Committee to assist the Committee in performing its duties hereunder shall be borne by the Company.
III. MEETINGS
The Committee shall meet as often as it deems necessary to fulfill its responsibilities hereunder, but not less frequently than once each year, and may meet with management or individual directors at any time it deems appropriate to discuss any matters before the Committee. The Committee shall maintain written minutes of its meetings, which minutes will be filed with the minutes of the meetings of the Board.
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IV. COMMITTEE AUTHORITY AND RESPONSIBILITY
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APPENDIX C
NITCHES, INC.
2006 EQUITY INCENTIVE PLAN
ADOPTED FEBRUARY 2, 2006APPROVED BY SHAREHOLDERS __________, 2006TERMINATION DATE: __________, 2015
ARTICLE I. PURPOSES.
(a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive Stock Awards are the Employees, Directors and Consultants of the Company and its Affiliates.
(b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a means by which eligible recipients of Stock Awards may be given an opportunity to benefit from increases in value of the Common Stock through the granting of the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to acquire restricted stock.
(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive Stock Awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates.
ARTICLE II. DEFINITIONS.
(a) “AFFILIATE” means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code.
(b) “BOARD” means the Board of Directors of the Company.
(c) “CODE” means the Internal Revenue Code of 1986, as amended.
(d) “COMMITTEE” means a Committee appointed by the Board in accordance with subsection 3(c).
(e) “COMMON STOCK” means the common stock of the Company.
(f) “COMPANY” means Nitches, Inc., a California corporation.
(g) “CONSULTANT” means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) who is a member of the Board of Directors of an Affiliate. However, the term “Consultant” shall not include either Directors of the Company who are not compensated by the Company for their services as Directors or Directors of the Company who are merely paid a director’s fee by the Company for their services as Directors.
(h) “CONTINUOUS SERVICE” means that the Participant’s service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Participant’s Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant’s Continuous Service. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or a Director of the Company will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party’s sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leaveGovernmental Entity, or any other personal leave.
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(i) “COVERED EMPLOYEE” means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensationPerson, is required to be reported to shareholders undermade by the Exchange Act, as determined for purposesBuyer in connection with the execution, delivery or performance of Section 162(m)this Agreement by the Buyer and/or the consummation by the Buyer of the Code.transactions contemplated hereby.
(j) “DIRECTOR” means5.5Brokers.The Buyer has not employed any financial advisor, broker or finder and has not incurred and will not incur any broker’s, finder’s, investment banking or similar fees, commissions or expenses, in connection with the origination, negotiation or execution of this Agreement.
5.6Compliance with Laws.
(a) The Buyer has operated its business so as to comply with all applicable material foreign and domestic statutes, laws, ordinances, codes, governmental rules and regulations, judgments, orders, decrees, restrictions, licenses, property, privacy or other proprietary or intellectual property rights or any other rights whatsoever of any Person. The Buyer is not in violation of any applicable material law, ordinance, regulation or order relating to its operations or its owned, licensed or leased properties or rights.
(b) The Buyer has obtained all material licenses, permits, franchises or other governmental authorizations necessary for the ownership or operation of its properties or the conduct of the Buyer’s business.
5.7Litigation.There is no Proceeding pending, or to the knowledge of the Buyer, threatened against the Buyer that questions the validity of this Agreement or that would have a membermaterial adverse effect on the ability of the Buyer to perform its obligations under this Agreement or any other Transaction Document. The Buyer is not in default under any judgment, order or decree of any Governmental Entity. There are no outstanding written tax audit requests or pending audits, against the Buyer.
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5.8Authorization of Stock Consideration. The issuance, sale and delivery of the Stock Consideration to the Seller has been duly authorized by all requisite corporate action by the Buyer and the Stock Consideration to be issued to the Seller, when issued and delivered in accordance with the terms of this Agreement, will be validly issued and outstanding, fully paid and nonassessable, free and clear of any Liens and not subject to preemptive or other similar rights of the stockholders of the Buyer.
5.9Disclosure. No representation or warranty by the Buyer contained in the Transaction Documents, and no certificate or schedule furnished or to be furnished by or on behalf of the Buyer pursuant to the Transaction Documents, when taken together, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make such statements, in light of the circumstances under which they were made, not misleading.
ARTICLE VI
CONDITIONS PRECEDENT TO THE BUYER’S OBLIGATIONS
All obligations of the Buyer under this Agreement are subject to the fulfillment of each of the following conditions, any or all of which may be waived in whole or in part by the Buyer, in its sole discretion:
6.1Seller’s Performance. The Seller shall have performed and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed or complied with by them, and the Seller’s representations and warranties shall be true in all material respects as of the Closing Date as if made on the Closing Date. The Buyer shall have received a certificate, dated as of the Closing Date, executed on behalf of the Seller certifying that the conditions specified in thisSection 6.1 have been fulfilled.
6.2Secretary’s Certificate. Seller shall have delivered to the Buyer a certificate executed on behalf of such Seller by the authorized Secretary thereof dated the Closing Date certifying with respect to (i) a copy of such Seller’s certificate of incorporation and bylaws as in effect on the Closing Date and that such Seller is not in violation of or default under any provision of its certificate of incorporation or bylaws as of and on such Closing Date, (ii) board resolutions of Seller authorizing the transactions contemplated by this Agreement, (iii) shareholder resolutions authorizing the transactions contemplated in this Agreement and (iv) incumbency matters and such other proceedings relating to the authorization, execution and delivery of this Agreement as may be reasonably requested by the Buyer.
6.3Institution of Proceedings; Injunction. There shall not have been instituted by any Person, including any Governmental Entity, any bona fide Proceeding to restrain or invalidate the transactions contemplated by any of the Transaction Documents, and there shall not be in effect any injunction or restraining order issued by a court of competent jurisdiction in a Proceeding against the consummation of the transactions contemplated by any of the Transaction Documents.
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6.4Deliveries by Seller.The Seller shall have delivered to the Buyer:
(a)Transfer Documents. Such bills of sale, assignments, general warranty deeds, and other good and sufficient instruments of transfer as the Buyer may reasonably request conveying and transferring to the Buyer title to the Purchased Assets free and clean of all liens and encumbrances which shall be in form and substance reasonably satisfactory to the Buyer, on the hand, and the Seller, on the other hand.
(b)Certified Resolutions. Certified resolutions of (i) the Boards of Directors of Seller and (ii) shareholder resolutions of Seller, approving the execution and delivery of this Agreement and the other Transaction Documents and authorizing the consummation of the transactions contemplated hereby and thereby.
(c)Tax Certificates. Any clearance certificates or similar documents that are required by any taxing authority in order to relieve the Buyer of any obligation to withhold any portion of the considerations paid to the Seller pursuant to this Agreement.
(d)Good Standing Certificates. Governmental certificates showing that the Seller is duly incorporated and in good standing in the state or jurisdiction of its incorporation as applicable, certified as of a date not more than ten days before the Closing Date.
(e)Lien Searches. Lien Searches for federal and state tax liens, judgment liens, and other liens on standard form of Request for Information (Uniform Commercial Code Form UCC-11) for entries in the names of Seller, including under any assumed names, completed and certified by the Secretary of State of the applicable state or jurisdiction of its incorporation, dated no earlier than 20 days prior to the date of this Agreement and showing the absence of any such liens on the Assets.
ARTICLE VII
CONDITIONS PRECEDENT TO THE SELLER’S OBLIGATIONS
All obligations of the Seller under this Agreement are subject to the fulfillment of each of the following conditions, any or all of which may be waived in whole or in part by the Seller, in its sole discretion:
7.1Buyer’s Performance. The Buyer shall have performed and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed or complied with by it, and the Buyer’s representations and warranties shall be true in all material respects as of the Closing Date as if made on the Closing Date. The Seller shall have received a certificate, dated as of the Closing Date, executed on behalf of the Buyer certifying that the conditions specified in thisSection 7.1 have been fulfilled.
7.2Secretary’s Certificate. The Buyer shall have delivered to the Seller a certificate executed on behalf of the Buyer by the authorized Secretary thereof dated the Closing Date certifying with respect to (i) a copy of the Buyer’s certificate of incorporation and bylaws as in effect on the Closing Date and that such Buyer is not in violation of or default under any provision of its certificate of incorporation or bylaws as of and on such Closing Date, (ii) board resolutions of the Buyer authorizing the transactions contemplated by this Agreement, and (iii) incumbency matters and such other proceedings relating to the authorization, execution and delivery of this Agreement as may be reasonably requested by the Seller.
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7.3Institution of Proceedings; Injunction.There shall not have been instituted by any Person, including any Governmental Entity, any bona fide Proceeding to restrain or invalidate the transactions contemplated by any of the Transaction Documents, and there shall not be in effect any injunction or restraining order issued by a court of competent jurisdiction in a Proceeding against the consummation of the transactions contemplated by any of the Transaction Documents.
7.4Deliveries by the Buyer.The Buyer shall have delivered to the Seller:
(a)Purchase Price. Following the Closing, a copy of the certificate representing the Stock Consideration and a copy of the S-3 Registration Statement.
(b)Certified Resolutions. Certified resolutions of the Board of Directors of the Company.Buyer approving the execution and delivery of this Agreement and the other Transaction Documents and authorizing the consummation of the transactions contemplated hereby and thereby.
(k) “DISABILITY” means(c)Good Standing Certificates. Governmental certificates showing that the permanentBuyer is duly incorporated and total disabilityin good standing in the state or jurisdiction of its incorporation, certified as of a person withindate not more than ten days before the meaning of Section 22(e)(3) ofClosing Date.
(d)Other Documents. Such additional information and materials as the Code.Buyer shall reasonably request.
ARTICLE VIII
INDEMNIFICATION
(l) “EMPLOYEE” means any person employed8.1Indemnity by the Company or an Affiliate. Mere service as a Director or payment of a director’s feeSeller. The Seller jointly agree to indemnify and hold harmless the Buyer and the Buyer’s Affiliates, officers, directors, employees and agents (collectively, the“Buyer Indemnified Parties”) from and against, and to reimburse the Buyer with respect to, any and all Losses incurred by the CompanyBuyer Indemnified Parties by reason of or an Affiliate shall not be sufficient to constitute “employment”arising out of or in connection with (i) the breach of any representation or warranty contained inArticle IV hereof, or any certificate or schedule delivered by the CompanySeller to the Buyer under this Agreement, or an Affiliate.(ii) the failure or Seller to perform any agreement required by this Agreement to be performed by them.
(m) “EXCHANGE ACT” means8.2Indemnity by the Securities Exchange ActBuyer.The Buyer agrees to indemnify and hold harmless the Seller, and its respective Affiliates, officers, directors, employees and agents (collectively, the“Seller Indemnified Parties”), from and against, and to reimburse the Seller Indemnified Parties on demand with respect to, any and all Losses incurred by the Seller Indemnified Parties by reason of 1934, as amended.
(n) “FAIR MARKET VALUE” means, asor arising out of or in connection with (i) the breach of any date, the value of the Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchangerepresentation or traded on the Nasdaq National Market or the Nasdaq Small Cap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of tradingwarranty contained in the Common Stock) on the last market trading day prior to the day of determination, as reported in THE WALL STREET JOURNAL or such other source as the Board deems reliable.
(ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board.
(iii) Prior to the Listing Date, the value of the Common Stock shall be determined in a manner consistent with Section 260.140.50 of Title 10 of the California Code of Regulations.
(o) “INCENTIVE STOCK OPTION” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.
(p) “LISTING DATE” means the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on any securities exchange or designated (or approved for designation) upon notice of issuance as a national market security on an inter-dealer quotation system if such securities exchange or inter-dealer quotation system has been certified in accordance with the provisions of Section 25100(o) of the California Corporate Securities Law of 1968.
(q) “NON-EMPLOYEE DIRECTOR” means a Director of the Company who either
(i) is not a current Employee or Officer of the Company or its parent or a subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or a subsidiary for services rendered as a consultantArticle V hereof or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuantcertificate or schedule delivered by the Buyer to the Securities Act (“Regulation S-K”)), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or
(ii) is otherwise considered a “non-employee director” for purposes of Rule 16b-3.
(r) “NONSTATUTORY STOCK OPTION” means an Option not intended to qualify as an Incentive Stock Option.
(s) “OFFICER” means (i) before the Listing Date, any person designated by the Company as an officer and (ii) on and after the Listing Date, a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.
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(t) “OPTION” means an Incentive Stock Option or a Nonstatutory Stock Option grantedSeller pursuant to the Plan.
(u) “OPTION AGREEMENT” means a written agreement between the Company and an Option holder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan.
(v) “OPTIONHOLDER” means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option.
(w) “OUTSIDE DIRECTOR” means a Director of the Company who either
(i) is not a current employee of the Company or an “affiliated corporation” (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an “affiliated corporation” receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an “affiliated corporation” at any time and is not currently receiving direct or indirect remuneration from the Company or an “affiliated corporation” for services in any capacity other than as a Director or
(ii) is otherwise considered an “outside director” for purposes of Section 162(m) of the Code.
(x) “PARTICIPANT” means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award.
(y) “PLAN” means this Nitches, Inc.. 2006 Equity Incentive Plan.
(z) “RULE 16B-3” means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time.
(aa) “SECURITIES ACT” means the Securities Act of 1933, as amended.
(bb) “STOCK AWARD” means any right granted under the Plan, including an Option, a stock bonus and a right to acquire restricted stock.
(cc) “STOCK AWARD AGREEMENT” means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan.
(dd) “TEN PERCENT SHAREHOLDER” means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates.
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ARTICLE III. ADMINISTRATION.
(a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c).
(b) POWERS OF BOARD. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; what type or combination of types of Stock Award shall be granted; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive stock pursuant to a Stock Award; and the number of shares with respect to which a Stock Award shall be granted to each such person.
(ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in Section 12.
(iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan.
(c) DELEGATION TO COMMITTEE.
(i) GENERAL. The Board may delegate administration of the Plan to a Committee or Committees of one or more members of the Board, and the term “Committee” shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan.
(ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED. At such time as the Common Stock is publicly traded, in the discretion of the Board, a Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, and/or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such authority, the Board or the Committee may (i) delegate to a committee of one or more members of the Board who are not Outside Directors the authority to grant Stock Awards to eligible persons who are either (1) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award or (2) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code and/or) (ii) delegate to a committee of one or more members of the Board who are not Non-Employee Directors the authority to grant Stock Awards to eligible persons who are not then subject to Section 16 of the Exchange Act.
ARTICLE IV. SHARES SUBJECT TO THE PLAN.
(a) SHARE RESERVE. Subject to the provisions of Section 11 relatingthis Agreement, or (ii) the failure or breach of the Buyer to adjustments upon changes in stock,perform any agreement required by this Agreement to be performed by them.
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8.3Limitations on Indemnification.Neither the stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate 600,000 shares of Common Stock.
(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full (or vested in the case of Restricted Stock), the stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. If any Common Stock acquired pursuant to the exercise of an Option shall for any reason be repurchased by the Company under an unvested share repurchase option provided under the Plan, the stock repurchased by the Company under such repurchase option shall not revert to and again become available for issuance under the Plan.
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(c) SOURCE OF SHARES. The stock subject to the Plan may be unissued shares or reacquired shares, boughtBuyer Indemnified Parties, on the market or otherwise.
ARTICLE V. ELIGIBILITY.
(a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may be granted only to Employees. Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants.
(b) TEN PERCENT SHAREHOLDERS. No Ten Percent Shareholder shall be eligible forone hand, nor the grant of an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant.
Prior to the Listing Date, no Ten Percent Shareholder shall be eligible for the grant of a Nonstatutory Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant.
Prior to the Listing Date, no Ten Percent Shareholder shall be eligible for a restricted stock award unless the purchase price of the restricted stock is at least one hundred percent (100%) of the Fair Market Value of the Common Stock at the date of grant.
(c) SECTION 162(m) LIMITATION. Subject to the provisions of Section 11 relating to adjustments upon changes in stock, no employee shall be eligible to be granted Options covering more than 100,000 shares of the Common Stock during any calendar year. This subsection 5(c) shall not apply prior to the Listing Date and, following the Listing Date, this subsection 5(c) shall not apply until
(i) the earliest of: (1) the first material modification of the Plan (including any increase in the number of shares reserved for issuance under the Plan in accordance with Section 4); (2) the issuance of all of the shares of Common Stock reserved for issuance under the Plan; (3) the expiration of the Plan; or (4) the first meeting of shareholders at which Directors of the Company are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security under Section 12 of the Exchange Act; or
(ii) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder.
ARTICLE VI. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions:
(a) TERM. Subject to the provisions of subsection 5(b) regarding Ten Percent Shareholders, no Option shall be exercisable after the expiration of ten (10) years from the date it was granted.
(b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the provisions of subsection 5(b) regarding Ten Percent Shareholders, the exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the OptionSeller Indemnified Parties, on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code.
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(c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. Subject to the provisions of subsection 5(b) regarding Ten Percent Shareholders, the exercise price of each Nonstatutory Stock Option granted prior to the Listing Dateother hand, shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. The exercise price of each Nonstatutory Stock Option granted on or after the Listing Date shall be not less than one hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code.
(d) CONSIDERATION. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised or (ii) at the discretion of the Board at the time of the grant of the Option (or subsequently in the case of a Nonstatutory Stock Option) by (1) delivery to the Company of other Common Stock, (2) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other Common Stock) with the Participant or (3) in any other form of legal consideration that may be acceptable to the Board; provided, however, that at any time that the Company is incorporated in Delaware, payment of the Common Stock’s “par value,” as defined in the Delaware General Corporation Law, shall not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement.
(e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing provisions of this subsection 6(e), the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option.
(f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock Option granted prior to the Listing Date shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. A Nonstatutory Stock Option granted on or after the Listing Date shall be transferable to the extent provided in the Option Agreement. If the Nonstatutory Stock Option does not provide for transferability, then the Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing provisions of this subsection 6(f), the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option.
(g) VESTING GENERALLY. The total number of shares of Common Stock subject to an Option may, but need not, vest and therefore become exercisable in periodic installments which may, but need not, be equal. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this subsection 6(g) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised.
(h) MINIMUM VESTING PRIOR TO THE LISTING DATE. Notwithstanding the foregoing subsection 6(g), Options granted prior to the Listing Date shall provide for vesting of the total number of shares at a rate of at least twenty percent (20%) per year over five (5) years from the date the Option was granted, subject to reasonable conditions such as continued employment. However, in the case of such Options granted to Officers, Directors or Consultants, the Option may become fully exercisable, subject to reasonable conditions such as continued employment, at any time or during any period established by the Company; for example, the vesting provision of the Option may provide for vesting of less than twenty percent (20%) per year of the total number of shares subject to the Option.
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(i) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder’s Continuous Service terminates (other than upon the Optionholder’s death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise it as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder’s Continuous Service (or such longer or shorter period specified in the Option Agreement, which, for Options granted prior to the Listing Date, shall not be less than thirty (30) days, unless such termination is for cause), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate.
(j) EXTENSION OF TERMINATION DATE. An Optionholder’s Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholder’s Continuous Service (other than upon the Optionholder’s death or Disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in subsection 6(a) or (ii) the expiration of a period of three (3) months after the termination of the Optionholder’s Continuous Service during which the exercise of the Option would not be in violation of such registration requirements.
(k) DISABILITY OF OPTIONHOLDER. In the event an Optionholder’s Continuous Service terminates as a result of the Optionholder’s Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of
(i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement, which, for Options granted prior to the Listing Date, shall not be less than six (6) months) or
(ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate.
(l) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder’s Continuous Service terminates as a result of the Optionholder’s death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder’s Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise the Option as of the date of death) by the Optionholder’s estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionholder’s deathindemnified pursuant to subsection 6(e)clause (i) ofSection 8.1 hereof, or 6(f), but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement, which, for Options granted prior to the Listing Date, shall not be less than six (6) months) or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate.
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ARTICLE VII. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
(a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of stock bonus agreements may change from time to time, and the terms and conditions of separate stock bonus agreements need not be identical, but each stock bonus agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:
(i) CONSIDERATION. A stock bonus shall be awarded in consideration for past services actually rendered to the Company for its benefit.
(ii) VESTING. Shares of Common Stock awarded under the stock bonus agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board.
(iii) TERMINATION OF PARTICIPANT’S CONTINUOUS SERVICE. Subject to the “Repurchase Limitation” in subsection 10(h), in the event a Participant’s Continuous Service terminates, the Company may reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the stock bonus agreement.
(iv) TRANSFERABILITY. For a stock bonus award made before the Listing Date, rights to acquire shares under the stock bonus agreement shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant. For a stock bonus award made on or after the Listing Date, rights to acquire shares under the stock bonus agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the stock bonus agreement, as the Board shall determine in its discretion, so long as stock awarded under the stock bonus agreement remains subject to the terms of the stock bonus agreement.
(b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of the restricted stock purchase agreements may change from time to time, and the terms and conditions of separate restricted stock purchase agreements need not be identical, but each restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:
(i) PURCHASE PRICE. Subject to the provisions of subsection 5(b) regarding Ten Percent Shareholders, the purchase price under each restricted stock purchase agreement shall be such amount as the Board shall determine and designate in such restricted stock purchase agreement. For restricted stock awards made prior to the Listing Date, the purchase price shall not be less than one hundred percent (100%) of the stock’s Fair Market Value on the date such award is made or at the time the purchase is consummated. For restricted stock awards made on or after the Listing Date, the purchase price shall not be less than one hundred percent (100%) of the stock’s Fair Market Value on the date such award is made or at the time the purchase is consummated.
(ii) CONSIDERATION. The purchase price of stock acquired pursuant to the restricted stock purchase agreement shall be paid either:clause (i) in cash at the time of purchase; (ii) at the discretion of the Board, according to a deferred payment or other arrangement with the Participant; or (iii) in any other form of legal consideration that may be acceptable to the Board in its discretion; provided, however, that at any time that the Company is incorporated in Delaware, then payment of the Common Stock’s “par value,” as defined in the Delaware General Corporation Law, shall not be made by deferred payment.
(iii) VESTING. Subject to the “Repurchase Limitation” in subsection 10(h), shares of Common Stock acquired under the restricted stock purchase agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board.
(iv) TERMINATION OF PARTICIPANT’S CONTINUOUS SERVICE. Subject to the “Repurchase Limitation” in subsection 10(h), in the event a Participant’s Continuous Service terminates, the Company may repurchase or otherwise reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the restricted stock purchase agreement.
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(v) TRANSFERABILITY. For a restricted stock award made before the Listing Date, rights to acquire shares under the restricted stock purchase agreement shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant. For a restricted stock award made on or after the Listing Date, rights to acquire shares under the restricted stock purchase agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the restricted stock purchase agreement, as the Board shall determine in its discretion, so long as stock awarded under the restricted stock purchase agreement remains subject to the terms of the restricted stock purchase agreement.
ARTICLE VIII. COVENANTS OF THE COMPANY.
(a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Stock Awards.
(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained.
ARTICLE IX. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company.
ARTICLE X. MISCELLANEOUS.
(a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest.
(b) SHAREHOLDER RIGHTS. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms.
(c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Participant or other holder of Stock Awards any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant’s agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated,Section 8.2 hereof, as the case may be.
(d) INCENTIVE STOCK OPTION $100,000 LIMITATION. Tobe, unless, until and to the extent that the aggregate Fair Market Value (determinedof all Losses (other than those referred to in the proviso to this sentence) incurred by the Buyer Indemnified Parties or the Seller Indemnified Parties, as the case may be (“Aggregate Losses”), exceeds $25,000; provided that, notwithstanding the foregoing, the Seller Indemnified Parties shall be entitled to be indemnified on a dollar-for-dollar basis from and against all Losses arising out of or in connection with the breach by the Buyer ofSection 5.6, and the Buyer Indemnified Parties shall be entitled to be indemnified on a dollar-for-dollar basis from and against all Losses arising out of or in connection with the breach by the Seller ofSection 4.6 hereof. In no event shall the liability of the Seller, on the one hand, or the Buyer, on the other hand, for all Aggregate Losses hereunder exceed 100% of the amount of the Purchase Price received by the Seller as of the date on which payment of such Losses is made by the applicable indemnifying party (the“IndemnityCap”); provided however, that if such Aggregate Losses exceed the Indemnity Cap, they shall remain accrued and shall be paid promptly at such time, if any, that the payment of an installment of the Purchase Price shall be made (which shall increase the Indemnity Cap by the amount of such payment), at which time the applicable indemnifying party shall promptly pay over any such accrued excess plus interest as provided inSection 8.4(f), subject to the then applicable Indemnity Cap. The representations and warranties contained in or made pursuant to this Agreement shall survive the Closing Date, regardless of grant)any investigation made by or on behalf of stockany party, through June 30, 2007. Claims made for indemnification hereunder for a breach of a representation or a warranty or an agreement must be made in writing with reasonable specificity on or prior to June 30, 2007; provided however, that claims made for indemnification for a breach of the representations and warranties contained inSections 4.6 and5.6 hereof may be made at any time until the expiration of the statute of limitations applicable to claims made with respect to such representations and warranties.
8.4Procedures for Certain Claims.
(a) In order to be entitled to indemnification underSection 8.1 or8.2 hereof, whether or not in respect of, arising out of or involving a Third Party Claim, as hereinafter defined below, the indemnified party seeking to be indemnified shall furnish written notice promptly thereof to the indemnifying parties, which Incentive Stock Options are exercisablenotice shall specify in reasonable detail the basis for such claim for indemnification; provided, however, that the first timefailure to notify the indemnifying parties shall not relieve the indemnifying parties from any liability which they may have under this Agreement, except to the extent that such party has been materially prejudiced by such failure.
(b) In order to be entitled to indemnification underSection 8.1 or8.2 hereof, in respect of, arising out of or involving a claim, demand or commencement of any action (a“Third Party Claim”) made by any Optionholder during any calendar year (under all plansthird party against an indemnified party, the indemnified party shall promptly notify the indemnifying parties in writing and in reasonable detail of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000)Third Party Claim;provided,however, that the Options or portions thereoffailure to notify the indemnifying parties shall not relieve the indemnifying parties from any liability which exceed such limit (accordingthey may have under this Agreement, except to the order in which they were granted)extent that such party has been materially prejudiced by such failure.
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(c) If a Third Party Claim shall be treated as Nonstatutory Stock Options.
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(e) INVESTMENT ASSURANCES. The Company may require a Participant, as a condition of exercising or acquiring stock under any Stock Award, (i)made against an indemnified party, the indemnifying parties shall be entitled to give written assurances satisfactoryparticipate in the defense thereof and to assume the Company as to the Participant’s knowledge and experience in financial and business matters and/or to employ a purchaser representativedefense thereof with counsel reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together withindemnified party.
(d) After notice from the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactoryindemnifying parties to the Company stating thatindemnified party of its election to assume the Participant is acquiringdefense of the stock subjectThird Party Claim, the indemnifying parties shall not be liable to the Stock Awardindemnified party for the Participant’s own account and not with any present intention of sellinglegal or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (iii) the issuance of the shares upon the exercise or acquisition of stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act or (iv) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock.
(f) WITHHOLDING OBLIGATIONS. To the extent providedother expense subsequently incurred by the terms of a Stock Award Agreement, the Participant may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means (in addition to the Company’s right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (iii) delivering to the Company owned and unencumbered shares of the Common Stock.
(g) INFORMATION OBLIGATION. Prior to the Listing Date, to the extent required by Section 260.140.46 of Title 10 of the California Code of Regulations, the Company shall deliver financial statements to Participants at least annually. This subsection 10(g) shall not apply to key Employees whose dutiesindemnified party in connection with the defense thereof, other than reasonable costs of investigation;provided,however, that if counsel defending such Third Party Claim shall advise the parties of a potential conflict of interest arising from the existence of one or more legal defenses available to the indemnified party which are different from or additional to those available to a Company, assure them accessthe indemnifying party or its Affiliates, then the indemnified party may retain separate counsel to equivalent information.
(h) REPURCHASE LIMITATION. The termsdefend it and in that event the reasonable fees and expenses of any repurchase optionsuch separate counsel shall be specified inpaid by the Stock Award and may be either at Fair Market Value at the time of repurchase or at not less than the original purchase price. To the extent required by Section 260.140.41 and Section 260.140.42 of Title 10 of the California Code of Regulations, any repurchase option contained in a Stock Award granted priorindemnifying parties if applicable under thisArticle VIII. Subject to the Listing Dateproviso to a person who is not an Officer, Director or Consultantthe foregoing sentence, if the indemnifying parties assume such defense, the indemnified party shall be upon the terms described below:
(i) FAIR MARKET VALUE. If the repurchase option gives the Companyhave the right to repurchaseparticipate in the shares upon terminationdefense thereof and to employ counsel, at its own expense, separate from the counsel employed by the indemnifying parties. The indemnifying parties shall be liable for the reasonable fees and expenses of employment atcounsel employed by the indemnified party for any period during which the indemnifying parties have not lessassumed the defense thereof if they ultimately are found to be liable underSection 8.1 or8.2 hereof, to indemnify the indemnified party. If the indemnifying parties choose to defend or prosecute any Third Party Claim, all of the parties hereto shall cooperate in the defense or prosecution thereof.
(e) Whether or not the indemnifying parties shall have assumed the defense of a Third Party Claim, the indemnified party shall not without the indemnifying parties’ written consent, which shall not be unreasonably withheld or delayed, admit any liability with respect to, or settle, compromise or discharge such Third Party Claim in excess of $5,000 individually or $25,000 in the aggregate unless, in connection with such admission, settlement or compromise, the indemnified party shall assume liability therefor underSection 8.1 or8.2. Without the indemnified party’s written consent, the indemnifying parties shall not settle or compromise any Third Party Claim or consent to the entry of any judgment which does not include as an unconditional term thereof the delivery by the claimant or other plaintiff to the indemnified party of a written release from all liability in respect of such Third Party Claim or if such settlement shall include injunctive or other relief that affects or relates to the right or obligations of such indemnified party, other than the Fair Market Value ofobligation to pay monetary damages where such damages have been satisfied by the sharesindemnifying parties or its respective Affiliates.
(f) All indemnification payments hereunder shall be made, together with interest thereon at a per annum rate equal to be purchased onthe Prime Rate plus 2%; from the date of termination of Continuous Service, then (i) the right to repurchase shall be exercised for cash or cancellation of purchase money indebtedness for the shares within ninety (90) days of termination of Continuous Service (or in the case of shares issued upon exercise of Stock Awards after such date of termination, within ninety (90)that is 30 days after the date of the exercise)indemnified party’s notification of the applicable Loss to the date paid.
ARTICLE IX
FURTHER AGREEMENTS
9.1Access to Information.Prior to the Closing Date, the Seller will afford to the Buyer, through its officers, attorneys, accountants and authorized representatives, reasonable access to the offices, properties, books and records of Seller on reasonable notice during normal Business hours in order to permit the Buyer to make such investigation of the Business, properties and operations of Seller as the Buyer may deem necessary or desirable.
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The Buyer will conduct its due diligence investigation in a manner which will not interfere with the ongoing Business of Seller; and the Buyer will coordinate communications with the employees through representatives of the Seller and will use its best efforts to maintain the confidentiality of the transaction contemplated hereby with respect to the employees prior to the Closing Date.
9.2Confidentiality; Publicity.
(a) The Buyer, on the one hand, and the Seller, on the other hand, shall keep confidential all information obtained by it or them with respect to the other in connection with this Agreement and the negotiations preceding this Agreement, and will use such longer periodinformation solely in connection with the transactions contemplated by this Agreement, and if the transactions contemplated hereby are not consummated, each shall return to the other upon request, without retaining a copy thereof, any schedules, documents, or other written information obtained from the other in connection with this Agreement and the transactions contemplated hereby. Notwithstanding the foregoing, no party shall be required to keep confidential or return any information which (a) is required to be disclosed by Law, pursuant to an order or request of a judicial authority or Governmental Entity having competent jurisdiction, or pursuant to the rules and regulations of any national stock exchange applicable to the disclosing party and its Affiliates, provided the party seeking to disclose such information provides the other party with reasonable prior written notice thereof, or (b) which can be shown to have been generally available to the public other than as a result of a breach of thisSection 9.2.
(b) The Buyer, on the one hand, and the Seller, on the other hand, will maintain in confidence the transactions contemplated by this Agreement and the terms thereof, and none of such persons will issue any press release or make any other public announcement or public disclosure relating to the transactions contemplated by this Agreement or the terms thereof without the written prior consent of the other party, provided that any party may make any disclosure required to be made by it under applicable law if it determines in good faith that it is required to do so and gives prior notice to the other party. The Buyer agrees that, prior to the Closing Date, it will not make any disclosure regarding the transactions contemplated hereby to any employees of the Seller without the prior written consent of the Seller.
9.3Conduct of Business.From and after the date hereof and prior to the Closing Date, the Seller shall conduct its Business in the ordinary course thereof, consistent with past practices, except as may be agreedreasonably necessary or desirable to effectuate the transactions contemplated hereby.
9.4Reasonable Efforts.Each of the parties shall use reasonable efforts to effectuate the transactions hereby contemplated and to fulfill the conditions to the other party’s obligations set forth inArticle VI and VII hereof, as applicable.
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ARTICLE X
TAX MATTERS
10.1Tax Indemnity. The following provision shall govern the allocation of responsibility as between the Buyer and the Seller for certain tax matters following the Closing Date:
(a) The Seller agree to indemnify the Buyer against all Taxes of the Company.
10.2Miscellaneous.
(a) The Seller and the Buyer agree to treat all payments made under the indemnity provisions of this Agreement as adjustments to the Purchase Price for Tax purposes.
(b) Payments by the Seller hereunder shall be limited to the amount of any liability or damage that remains after deducting therefrom (i) any tax benefit realizable by the Buyer or any Company by reason of the deductibility of such liability or damage, determined by multiplying such deductible amount by the then applicable highest effective corporate income tax rate, (ii) any indemnity, contribution or other similar payment recoverable by the Buyer or any Company from any third party with respect thereto, and (iii) any reserves.
(c) Neither the Participant (for example, for purposesBuyer nor any Company, nor any of satisfying the requirements of Section 1202(c)(3)its Affiliates, shall make any election under section 338 of the Code regarding “qualified small business stock”) and (ii) the right terminates when the shares become publicly traded.
(ii) ORIGINAL PURCHASE PRICE. If the repurchase option gives the Company the right to repurchase the shares upon termination of Continuous Service at the original purchase price, then (i) the right to repurchase at the original purchase price shall lapse at the rate of at least twenty percent (20%) of the shares per year over five (5) years from the date the Stock Award is granted (withoutwith respect to the datetransactions contemplated by this Agreement.
(d) Notwithstanding any provision in this Agreement to the Stock Award was exercisedcontrary, the obligation of the Seller to indemnify and hold harmless the Buyer and the Companies under this Agreement for Taxes shall terminate at the close of business on the expiration of the applicable statute of limitations with respect to the Tax liabilities in question.]
ARTICLE XI
TERMINATION
11.1Right to Terminate.This Agreement and the transactions contemplated hereby may be terminated at any time prior to the Closing:
(a) by the mutual written consent of the Buyer and the Seller;
(b) by the Buyer, upon written notice to the Seller, if the Seller has not fulfilled one or became exercisable) and (ii)more of the right to repurchaseconditions specified inArticle VI at the time at which the Closing would otherwise occur or if satisfaction of such a condition is or becomes impossible, provided that at the time of such notice the Buyer has complied in all material respects with its obligations under this Agreement, provided further that the Seller shall be exercised for cash or cancellation of purchase money indebtedness for the shares within ninety (90) days of termination of Continuous Service (or in the case of shares issued upon exercise of Options after such date of termination, within ninety (90)have 10 days after the datenotice sent by the Buyer pursuant to this subsection (b) in which to fulfill such conditions not fulfilled;
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(c) by the Seller, upon written notice to the Buyer, if the Buyer has not fulfilled one or more of the exercise)conditions specified inArticle VII at the time at which the Closing would otherwise occur or if satisfaction of such longer period as may be agreed to bya condition is or becomes impossible, provided that at the Company andtime of such notice the Participant (for example, for purposes of satisfyingSeller has complied in all material respects with its obligations under this Agreement, provided further that the requirements of Section 1202(c)(3) ofBuyer shall have 10 days after the Code regarding “qualified small business stock”).
ARTICLE XI. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the stock subjectnotice sent to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger,
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consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the PlanBuyer pursuant to this subsection 4(a) and the maximum number of securities subject(c) in which to award to any person pursuant to subsection 5(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of securities and price per share of stock subject tofulfill such outstanding Stock Awards. The Board, the determination of which shall be final, binding and conclusive, shall make such adjustments. (The conversion of any convertible securities of the Company shallconditions not be treated as a transaction “without receipt of consideration” by the Company.)fulfilled.
(b) DISSOLUTION OR LIQUIDATION. 11.2Effect of Termination.In the event of a dissolution or liquidationtermination of this Agreement pursuant to any subsection ofSection 11.1 all further obligations of the Company other than in an Acquisition (as defined below), then such Stock Awardsparties under this Agreement except for the obligations underSection 9.2 shall be terminated if not exercised (if applicable) prior to such event, unless such outstanding Stock Awards are assumed by a subsequent purchaser.
(c) CHANGE IN CONTROL.
(i) For the purposes ofterminate, no party shall have any right under this Section 11, “Acquisition” shall mean (1) any consolidation or merger of the Company with or intoAgreement against any other corporationparty except as set forth in thisSection 11.2, and each party shall bear its own costs and expenses; provided, however, that termination underSection 11.1 shall not relieve any party of liability for any failure to perform or other entity or person in which the shareholders of the Company prior to such consolidation or merger own less than fifty percent (50%) of the Company’s voting power immediately after such consolidation or merger, excluding any consolidation or merger effected exclusively to change the domicile of the Company; or (2) a sale of all or substantially all of the assets of the Company.
(ii) In the event the Company undergoes an Acquisition then any surviving corporation or acquiring corporation shall assume any Stock Awards outstanding under the Plan or shall substitute similar stock awards (including an award to acquire the same consideration paid to the shareholders in the transaction described incomply with this subsection 11(c)) for those outstanding under the Plan.
(iii) In the event any surviving corporation or acquiring corporation in an Acquisition refuses to assume such Stock Awards or to substitute similar stock awards for those outstanding under the Plan, then with respect to (1) Stock Awards which (i) are held by Participants whose Continuous Service has not terminated prior to such event, and (ii) would otherwise vest and become exercisable within one (1) year of the closing of the Acquisition, the vesting of such Stock Awards (and, if applicable, the time during which such Stock Awards may be exercised) shall be accelerated and made fully exercisable at least thirty (30) daysAgreement prior to the closingdate of the Acquisition (and the Stock Awards terminated if not exercised priortermination, or constitute a waiver of any claim with respect thereto.
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1Notices. Any notice, request, demand or other communication required or permitted under this Agreement shall be in writing and shall be delivered personally or sent by prepaid courier, with guaranteed next day service or other guaranteed delivery date, to the closing ofparties at the addresses set forth below its names below, or at such Acquisition), and (2) any other Stock Awards outstanding under the Plan, such Stock Awardsaddresses as shall be terminated ifspecified by the parties by like notice.
| If to the Seller: | |
| Taresha, LLC | |
| 99 New Hook Road, Unit #1 | |
| Bayonne, NJ 07002 | |
| Attention: Haresh T. Tharani | |
| With a copy to: | |
| Thelen Reid & Priest LLP | |
| 875 Third Avenue | |
| New York, NY 10022 | |
| Attention: H. Joseph Mello, Esq. | |
| If to the Buyer: | |
| Nitches, Inc. | |
| 10280 Camino Santa Fe | |
| San Diego, CA 92121 | |
| Attention: Chairman |
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| With copies to: | |
| Duane Morris LLP | |
| 101 West Broadway, Suite 900 | |
| San Diego, CA 92101 | |
| Attention: Jamie Mercer Esq. |
Such notices, demands, claims and other communications shall be deemed given when actually received or in the case of delivery by courier service with guaranteed delivery, the day guaranteed by such service for delivery.
12.2No Offset: Cross Default. The Buyer shall have no right to, and shall not, exercised prioroffset any amounts payable by the Buyer to any Seller underSection 3.2 hereof against any amounts owed to the closing of the Acquisition..
(iv) In the event the Company undergoes an Acquisition and the surviving corporation or acquiring corporation does assume such Stock Awards (or substitutes similar stock awards for those outstandingBuyer by any Seller under the Plan), then, with respect to each Stock Award held by persons then performing services as Employees or Directors, the vesting of each such Stock Award (and, if applicable, the time during which such Stock Award may be exercised) shall be accelerated and such Stock Award shall become fully vested and exercisable, if any of the following events occurs within one (1) month before or eighteen (18) months after the effective date of the Acquisition: (1) the service to the Company or an Affiliate of the Employee or Director holding such Stock Award is terminated without Cause (as defined below); (2) the Employee holding such Stock Award terminates his or her service to the Company or an Affiliate due to the fact that the principal place of the performance of the responsibilities and duties of the Employee is changed to a location more than fifty (50) miles from such Employee’s existing work location without the Employee’s express consent (not applicable to Directors); or (3) the Employee holding such Stock Award terminates his or her service to the Company or Affiliate due to the fact that there is a material reduction in such Employee’s responsibilities and duties without the Employee’s express consent (not applicable to Directors).
(v) For the purposesArticle VIII of this Section 11(c), “Cause” means an individual’s misconduct, including but not limited to: (1) conviction of any felony or any crime involving moral turpitude or dishonesty, (2) participation in a fraud or act of dishonesty against the Company, (3) conduct that, based upon a good faith and reasonable factual investigation and determination by the Board, demonstrates your gross unfitness to serve, or (4) intentional, material violation of any contract with the Company or any statutory duty to the Company that is not corrected within thirty (30) days after written notice thereof. Physical or mental disability shall not constitute “Cause.”
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(vi) The acceleration of vesting provided for under this Section 11(c) may be limited in certain circumstances as follows: If any such acceleration (the “Benefit”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code and (ii) but for such acceleration, be subject to the excise tax imposed by Section 4999 of the Code, then such Benefit shall be reducedAgreement except to the extent necessary so(i) the Seller shall have agreed in writing that no portionthe applicable amount to be offset is then due and owing or (ii) there shall have been entered a final judgment by a court of the Benefit would becompetent jurisdiction which is not subject to such excise tax,appeal or as determined in good faithto which the time to appeal has expired, which holds that the applicable amount to be offset is then due and owing by the Company; provided, however, that if, in the absence of any such reduction (or after such reduction), such Employee believes that the Benefit or any portion thereof (as reduced, if applicable) would be subject to such excise tax, the Benefit shall be reduced (or further reduced)Seller to the extent determinedBuyer.
12.3Survival. All statements, certifications, indemnifications, representations and warranties made hereby by such Employee in his or her discretion so that the excise tax would not apply. If, notwithstanding any such reduction (or in the absence of such reduction), the Internal Revenue Service (“IRS”) determines that such Employee is liable for the excise tax as a result of the Benefit, then such Employee shallparties to this Agreement, and its respective covenants, agreements and obligations to be obligated to returnperformed pursuant to the Company, within thirty (30) days of such determinationterms hereof, shall survive the Closing Date and the representations and warranties made hereby by the IRS, a portion of the Benefit sufficient such that none of the Benefit retained by such Employee constitutes a “parachute payment” within the meaning of Section 280G of the Code that is subject to the excise tax.
ARTICLE XII. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 11 relating to adjustments upon changes in stock, no amendmentparties shall be effective unless approved by the shareholders of the Company to the extent shareholder approval is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any NASDAQ or securities exchange listing requirements.
(b) SHAREHOLDER APPROVAL. The Board may, in its sole discretion, submit any other amendment to the Plan for shareholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limitterminate on corporate deductibility of compensation paid to certain executive officers.
(c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith.
(d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing.
(e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to time, may amend the terms of any one or more Stock Awards;February 28, 2007; provided however, that the rights underrepresentations and warranties contained inSections 4.6 and5.6 shall survive until the expiration of the statute of limitations applicable to claims made with respect to such representations and warranties.
12.4Entire Agreement. This Agreement and the exhibits and schedules to this Agreement and the other Transaction Documents contain every obligation and understanding between the parties relating to the subject matter hereof and merge all prior discussions, negotiations and agreements, if any, Stock Awardbetween them, and none of the parties shall be bound by any representations, warranties, covenants, or other understandings, other than as expressly provided or referred to herein.
12.5Assignment. This Agreement may not be impairedassigned by any such amendment unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing.
ARTICLE XIII. TERMINATION OR SUSPENSION OF THE PLAN.
(a) PLAN TERM. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the shareholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated.
(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except withparty without the written consent of the Participant.
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ARTICLE XIV. EFFECTIVE DATE OF PLAN.other party, except that this Agreement be assigned by any party hereto to an Affiliate, provided that the assigning party shall remain jointly and severally liable with such Affiliate for its obligations hereunder. Subject to the preceding sentence, this Agreement shall be binding upon and inure to the benefit of the parties hereto and its respective successors and permitted assigns.
The Plan shall become effective as determined12.6Waiver and Amendment. Any representation, warranty, covenant, term or condition of this Agreement which may legally be waived, may be waived, or the time of performance thereof extended, at any time by the Board, but no Stock Awardparty hereto entitled to the benefit thereof, and any term, condition or covenant hereof may be amended by the parties hereto at any time. Any such waiver, extension or amendment shall be exercised (or,evidenced by an instrument in the case of a stock bonus, shall be granted) unless and until the Plan has been approved by the shareholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board.
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PROXY - NITCHES, INC.ANNUAL MEETING OF SHAREHOLDERS – March 15, 2006
The undersigned shareholder(s) of Nitches, Inc. (the “Company”) hereby appoints Steven P. Wyandt the attorney, agent and proxy of the undersigned, with full power of substitution, to vote all shares of the Company which the undersigned is entitled to vote at the Annual Meeting of Shareholders to be held at 10280 Camino Santa Fe, San Diego, California, on March 15, 2006 at 9:30 a.m. local time, and any and all adjournments thereof, as fully and with the same force and effect as the undersigned might or could do if personally present thereat, as follows:
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In his discretion, the Proxy is authorized to vote upon such other business as may properly come before the meeting and any adjournment(s) thereof.
This proxy when properlywriting executed will be voted in the manner directed herein by the undersigned shareholder. Shareholders who are present at the meeting may withdraw their proxy and vote in person if they so desire. This proxy is solicited on behalf of the Boardappropriate party by a person who has been authorized by such party to execute waivers, extensions or amendments on its behalf.
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No waiver by any party hereto, whether express or implied, of Directors.its rights under any provision of this Agreement shall constitute a waiver of such party’s rights under such provisions at any other time or a waiver of such party’s rights under any other provision of this Agreement. No failure by any party hereto to take any action against any breach of this Agreement or default by another party shall constitute a waiver of the former party’s right to enforce any provision of this Agreement or to take action against such breach or default or any subsequent breach or default by such other party.
Please sign exactly12.7Books and Records. From and after the Closing, the Buyer shall provide the Seller with such information as your name appearsmay be reasonably requested for all periods prior to the Closing Date to enable the Seller to prepare tax returns and financial and other reports and the Seller shall, on your stock certificates. When shares are heldreasonable notice to the Buyer, have access during usual Business hours to the books and records included in the Purchase Assets for all periods prior to the Closing Date and may make copies and extracts from such books and records, for all reasonable Business and tax purposes. The Buyer agrees to retain its books and records for all periods prior to the Closing Date for at least 10 years after the Closing Date.
12.8No Third Party Beneficiary.Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any Person other than the parties hereto and its respective successors and permitted assigns, any rights or remedies under or by joint tenants, both should sign. When signing as executor, administrator, attorney, trusteereason of this Agreement.
12.9Severability.In the event that any one or guardian, please give full title as such. If a corporation, please signmore of the provisions contained in this Agreement shall be declared invalid, void or unenforceable, the remainder of the provisions of this Agreement shall remain in full corporate nameforce and effect, and such invalid, void or unenforceable provision shall be interpreted as closely as possible to the manner in which it was written.
12.10Expenses; Transfer Taxes. Each party agrees to pay, without right of reimbursement from the other party, the costs incurred by presidentit incident to the performance of its obligations under this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, costs incident to the preparation of this Agreement, and the fees and disbursements of counsel, accountants and consultants employed by such party in connection herewith. The Buyer agrees to pay all sales, transfer, stamp, real property transfer or gains and similar Taxes incurred in connection with the transfer of the Purchased Assets contemplated hereby.
12.11Headings. Article titles and headings to sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. The schedules and exhibits referred to herein shall be construed with and as an integral part of this Agreement to the same extent as if they were set forth verbatim herein. The specification of any dollar amount in the representations or warranties contained in this Agreement or the inclusion of any specific item in any schedules hereto is not intended to imply that such amounts, or higher or lower amounts, or the items so included or other authorized officer. Ifitems, are or are not material, and neither party shall use the fact of the setting of such amounts or the inclusion of any such item in any dispute or controversy between the parties as to whether any obligation, item or matter not described herein or included in a partnership, please signschedule is or is not material for purposes of this Agreement. Notwithstanding anything contained herein to the contrary, any item or group of items that is disclosed with reasonable specificity by a party in partnership namea schedule attached hereto shall be deemed to be disclosed by authorized person.such party on all other schedules attached hereto for all purposes of this Agreement as to which the applicable disclosure on its face applies.
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12.12Counterparts.This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.
12.13Governing Law; Jurisdiction.This Agreement has been entered into and shall be construed and enforced in accordance with the laws of the State of California without reference to the choice of law principles thereof. Each party hereto agrees that any action, proceeding or claim it commences against any other party pursuant to this Agreement shall be brought in either the courts of the State of California, sitting in San Diego County, or the courts of the United States for the Southern District of California. Each party hereby irrevocably submits to the jurisdiction of the courts of the State of California, sitting in San Diego County, and the courts of the United States for the Southern District of California. Each party irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court, any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum and the right to object, with respect to any such suit, action or proceeding brought in any such court, that such court does not have jurisdiction over such party. In any such suit, action or proceeding, each party waives, to the fullest extent it may effectively do so, personal service of any summons, complaint or other process and agrees that the service thereof may be made by certified or registered mail, addressed to such party at its address set forth inSection 12.1. Each party agrees that a final non-appealable judgment in any such suit, action or proceeding brought in such a court shall be conclusive and binding.
12.14Number and Gender.Whenever the context of this Agreement requires, words used in the singular shall be construed to include the plural and vice versa, and pronouns of whatsoever gender shall be deemed to include and designate the masculine, feminine, or neuter gender.
12.15Further Assurances.From time to time following the Closing, the Seller shall execute and deliver, or cause to be executed and delivered, to the Buyer such other instruments of conveyance and transfer as the Buyer may reasonably request or as may be otherwise necessary to more effectively convey and transfer to, and vest in, the Buyer and to put the Buyer in possession of, any part of the Purchased Assets. From time to time following the Closing, the Buyer shall execute and deliver, or cause to be executed and delivered, to the Seller such other instruments and documents as the Seller may reasonably request or as may be otherwise necessary to more effectively consummate the transactions contemplated hereby. Following the Closing, the Seller agree to forward to the Buyer any correspondence or other communications relating to the Purchased Assets, received by them.
12.16Remedies.The parties acknowledge and understand that its obligations pursuant toSections 9.1 and9.2 of this Agreement are of a special and unique nature, the loss of which cannot be adequately compensated for in damages by an action at law, and that the breach or threatened breach of such provisions of this Agreement would cause the other parties irreparable harm.
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In the event of a breach or threatened breach by any of the parties of the provisions ofSections 9.1 or9.2 of this Agreement, the non-breaching party shall be entitled to seek specific performance or an injunction restraining any or all of the breaching parties from such breach. Nothing herein contained shall be construed as prohibiting any party from or limiting any party in pursuing any other remedies available for any breach or threatened breach ofSections 9.1 or9.2 of this Agreement.
12.17Bulk Sales. The Buyer waives compliance by the Seller with the provisions of the so-called bulk sales Law of any jurisdiction; provided, however, that the Seller will indemnify defend, and hold harmless the Buyer in respect of any damage, loss, liability, cost, expense or obligation and any claims, demands or suits relating to, resulting from, or arising out of, the Seller’s failure to so comply with such Laws in connection with the transactions contemplated by this Agreement.
IN WITNESS WHEREOF, the parties hereto have each executed and delivered this Agreement as of the day and year first above written.
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| /s/ HARESH T. THARANI | ||
| By: Haresh T. Tharani | ||
| Title: Owner | ||
| NITCHES, INC. | ||
| /s/ STEVEN P. WYANDT | ||
| By: Steven P. Wyandt | ||
| Title: Chairman | ||
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WRITTEN CONSENT SOLICITED
ON BEHALF OF THE BOARD OF DIRECTORS
OF NITCHES, INC.
THIS CONSENT IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. WHEN PROPERLY EXECUTED, THIS CONSENT WILL BE VOTED AS DESIGNATED BY THE UNDERSIGNED. IN THE ABSENCE OF ANY DIRECTION, THIS CONSENT WILL BE VOTED FOR APPROVAL OF THE ACQUISITION AGREEMENT BETWEEN NITCHES, INC. AND TARESHA, LLC.
| 1. | Proposal to approve the terms of the Acquisition Agreement between Nitches, Inc. and Taresha, LLC. | |||||||
| [MARK ONLY ONE OF THE FOLLOWING THREE BOXES] | ||||||||
| o | CONSENTS / FOR | |||||||
| o | WITHHOLDS CONSENT / AGAINST | |||||||
| o | ABSTAINS | |||||||
| 2. | I represent that I own the following number of shares of the Company’s common stock (please insert correct number) _________________ | |||||||
Please sign exactly as the name or names appear on your stock certificate(s). If theshares are issued in the names of two or more persons, all such persons should sign theconsent form. A consent executed by a corporation should be signed in its name by itsauthorized officers. Executors, administrators, trustees, and partners should indicate theirtitles when signing. | ||||||||
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| Date: _________________, 2007 | ||||||||
| Signature | ||||||||
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| Signature if held jointly | ||||||||
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NO POSTAGE IS REQUIRED IF THIS PROXY IS RETURNEDIMPORTANT
PLEASE COMPLETE, SIGN, AND DATE YOUR
WRITTEN CONSENT PROMPTLY
AND RETURN IT IN THE ENCLOSED ENVELOPE AND MAILED IN THE UNITED STATES.