<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or 240.14a-12
FREDERICK'S OF HOLLYWOOD, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Class A Capital Stock, $1.00 par value per share, and Class B Capital
Stock, $1.00 par value per share
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
9,729,927 shares of Class A and Class B Capital Stock
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$54,684,258, representing (a) the sum of all shares outstanding
multiplied by $6.14, plus (b) the product of (i) the difference
between $6.14 and the exercise price of each option whose exercise
price is less than or equal to $6.14, and (ii) the number of shares
subject to each such option, plus (c) the product of (i) $.05 and (ii)
the number of shares subject to options whose exercise price exceeds
$6.14.
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$54,684,258
------------------------------------------------------------------------
(5) Total fee paid:
$10,937
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[FREDERICK'S LOGO]
July , 1997
Dear Stockholder:
We are seeking your consent as a holder of the outstanding Class A Capital
Stock and/or Class B Capital Stock of Frederick's of Hollywood, Inc., a Delaware
corporation (the "Company"), to two proposals.
The first proposal involves an amendment (the "Amendment") to the
Certificate of Incorporation, as amended (the "Certificate of Incorporation") of
the Company. The Amendment would delete certain provisions in the Company's
Certificate of Incorporation which were adopted in 1993 when the Company was
recapitalized and two classes of Company Capital Stock, Class A Capital Stock
and Class B Capital Stock, were established. The provisions proposed to be
deleted were intended to help ensure that the two classes of stock would be
treated equally in a merger or similar transaction. For an explanation of the
reason for and general effect of the Amendment, see "AMENDMENT TO CERTIFICATE OF
INCORPORATION" in the enclosed Consent Solicitation Statement.
The second proposal involves the merger (the "Merger") of Royalty
Acquisition Corp., a Delaware corporation (the "Purchaser"), into the Company
(with the Company being the surviving corporation) pursuant to an Agreement and
Plan of Merger, dated as of June 15, 1997 (the "Merger Agreement") among the
Company, Royalty Corporation, a Delaware corporation (the "Parent") and the
Purchaser, which is a direct subsidiary of the Parent. Pursuant to the Merger
Agreement, (i) each outstanding share of the Company's Class A Capital Stock and
Class B Capital Stock, each par value $1.00 per share (collectively the
"Shares") (other than Shares held by the Company or any subsidiary of the
Company or held in the Company's treasury and other than Shares as to which
appraisal rights have been properly exercised under the General Corporation Law
of the State of Delaware (the "DGCL")), will be converted into the right to
receive $6.14 in cash, without interest, and (ii) each Share held by the Company
or any of its subsidiaries or held in the Company's treasury will be cancelled,
and no payment will be made with respect thereto. At the effective time of the
Merger, the Company would become a privately held subsidiary of Parent. For a
detailed discussion of the Merger Agreement, see "DESCRIPTION OF MERGER
AGREEMENT" in the enclosed Consent Solicitation Statement.
Holders of Shares who do not wish to accept the $6.14 cash payment per
Share provided in the Merger Agreement have the right to seek an appraisal of
the "fair value" of their shares under Section 262 of the DGCL. For a discussion
of the rights of holders of Shares to appraisal thereof, see "APPRAISAL RIGHTS
FOR DISSENTING STOCKHOLDERS" in the enclosed Consent Solicitation Statement.
The Merger is conditioned upon the approval of the Amendment and will not
be consummated unless both the Amendment and the Merger Agreement are approved
by the holders of a majority of both the Company's outstanding Class A Capital
Stock and Class B Capital Stock consenting as separate classes. If the requisite
stockholders consent to the adoption of the Merger and the Amendment, it is
expected that the Amendment will become effective on or about ,
1997, and the Certificate of Merger will be filed and the Merger will become
effective immediately thereafter on the same date.
The Company's Board of Directors has reviewed and considered the Amendment
and the Merger Agreement, has unanimously approved both proposals and has
determined to recommend that the Company's stockholders approve both the
Amendment and the Merger Agreement. For a discussion of the factors considered
by the Board of Directors in approving the Merger, see "APPROVAL BY THE BOARD OF
DIRECTORS" in the enclosed Consent Solicitation Statement.
The Frederick N. Mellinger Trust and the Harriett R. Mellinger Trust (who,
as of , 1997, hold in the aggregate approximately 40.9% of the
outstanding Class A Capital Stock and 50.6% of the outstanding Class B Capital
Stock, which percentages take into account both the outstanding shares of Class
A and Class B Capital Stock and options exercisable within 60 days), have
indicated their intent to
<PAGE> 3
consent to the approval of the Amendment and the approval and adoption of the
Merger Agreement and Merger, but have not agreed irrevocably to do so.
The Board of Directors has fixed the close of business on June 26, 1997 as
the record date (the "Record Date") for the determination of stockholders
entitled to consent to the adoption and approval of the Merger and the
Amendment. The Board of Directors anticipates that the Consent Solicitation
Statement will be mailed to the Stockholders on or about July , 1997. The
Consent Solicitation Statement describes the Merger and the Amendment in detail.
You are urged to read it carefully in making your decision with respect to the
Merger and the Amendment.
The solicitation of consents will be by mail. Officers of the Company may
also solicit consents by personal interviews or telephone. The expenses of
solicitation will be borne by the Company. Such expenses may also include
charges and expenses of brokerage houses and other fiduciaries for forwarding
documents to beneficial owners.
The forms of consent for the Merger and the Amendment are enclosed with the
Consent Solicitation Statement and are color coded as follows: holders of Class
A Capital Stock will receive a WHITE card, and holders of Class B Capital Stock
will receive a BLUE card.
The timing of the proposed Merger requires that we obtain your properly
signed and dated consents for the Merger and the Amendment no later than
, 1997, unless such deadline is extended by the Board of Directors.
Therefore, to ensure that your consent will be counted, please complete, date
and sign the enclosed consent card(s) and return them promptly in the enclosed
envelope(s), which require no postage if mailed in the United States. The WHITE
envelope should be used to return the WHITE card, and the BLUE envelope should
be used to return the BLUE card. Your failure to consent will have the same
effect as a vote against the Merger Agreement and the Amendment.
An executed consent may be revoked at any time by a written revocation
thereof executed and delivered to the Company, at the office of the Secretary,
6608 Hollywood Boulevard, Los Angeles, California 90028 prior to the time that
the action authorized by such consent becomes effective. A revocation may be in
any written form provided that it clearly states that the consent is no longer
effective.
Stock certificates should not be returned with the enclosed consent. If the
Amendment and the Merger are approved by the requisite stockholders and the
Merger Agreement is consummated, stockholders will be furnished instructions for
exchanging their Shares into cash.
Any questions regarding the Merger or the Amendment should be directed to
John B. Hatfield, Executive Vice President, Secretary, Chief Financial Officer
and Administrative Officer, (213) 466-5151.
By Order of The Board of Directors,
/s/ JOHN B. HATFIELD
John B. Hatfield
Secretary
YOUR CONSENT IS IMPORTANT.
PLEASE SIGN AND RETURN THE ENCLOSED
CONSENT(S) PROMPTLY IN THE ENCLOSED ENVELOPE(S).
TO APPROVE THE MERGER AGREEMENT AND THE AMENDMENT, YOU SHOULD COMPLETE,
DATE AND SIGN THE ENCLOSED CONSENT CARD(S) AND RETURN THEM NO LATER THAN
, 1997.
2
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF CONSENT SOLICITATION STATEMENT............................................. 4
INTRODUCTION.......................................................................... 9
VOTING................................................................................ 10
AMENDMENT TO CERTIFICATE OF INCORPORATION............................................. 10
SUMMARY OF MERGER TRANSACTION......................................................... 11
RECOMMENDATION OF THE BOARD........................................................... 12
BACKGROUND OF THE TRANSACTION......................................................... 12
APPROVAL BY THE BOARD OF DIRECTORS.................................................... 13
OPINION OF FINANCIAL ADVISOR.......................................................... 14
DESCRIPTION OF INTERESTS OF MANAGEMENT AND AFFILIATES IN THE MERGER................... 17
PAYMENT FOR SHARES OF COMPANY CAPITAL STOCK........................................... 18
MANAGEMENT OF THE COMPANY'S BUSINESS AFTER THE MERGER................................. 19
ACCOUNTING TREATMENT OF TRANSACTION................................................... 19
REGULATORY APPROVALS.................................................................. 19
DESCRIPTION OF MERGER AGREEMENT....................................................... 20
DESCRIPTION OF FEDERAL INCOME TAX CONSEQUENCES OF MERGER.............................. 27
APPRAISAL RIGHTS FOR DISSENTING STOCKHOLDERS.......................................... 27
DESCRIPTION OF FINANCING OF MERGER.................................................... 30
INFORMATION CONCERNING PARENT AND PURCHASER........................................... 31
PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS........ 31
MARKET FOR CAPITAL STOCK AND DIVIDENDS................................................ 33
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY............................ 34
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 34
INDEPENDENT AUDITORS.................................................................. 35
OTHER AVAILABLE INFORMATION........................................................... 35
</TABLE>
ANNEX A AGREEMENT AND PLAN OF MERGER
ANNEX B AMENDMENT TO COMPANY'S CERTIFICATE OF INCORPORATION
ANNEX C "MINORITY PROTECTION TRANSACTION" PROVISION PROPOSED TO BE DELETED
ANNEX D OPINION OF FINANCIAL ADVISOR
ANNEX E SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
3
<PAGE> 5
SUMMARY OF CONSENT SOLICITATION STATEMENT
The following is a summary (the "Summary") of certain information contained
elsewhere in this Consent Solicitation Statement. Certain capitalized terms used
in this Summary are defined elsewhere in this Consent Solicitation Statement.
Reference is made to, and this Summary is qualified in its entirety by, the more
detailed information contained in this Consent Solicitation Statement and in the
Annexes hereto. Stockholders are urged to carefully read this Consent
Solicitation Statement, including the Annexes hereto, in its entirety.
THE COMPANIES
Frederick's of Hollywood, Inc. Frederick's of Hollywood, Inc. (the
"Company") is a retailer of women's apparel merchandise through mail order
catalogs and boutique specialty stores. The Company is a Delaware corporation
with principal executive offices located at 6608 Hollywood Boulevard, Hollywood,
California 90028 and its telephone number is (213) 466-5151.
Royalty Acquisition Corp. Royalty Acquisition Corp., a Delaware corporation
(the "Purchaser") and wholly owned subsidiary of Royalty Corporation, a Delaware
corporation (the "Parent"), was, along with the Parent, organized by
Knightsbridge Capital Corp. ("Knightsbridge") to acquire the Company. The
principal offices of the Purchaser and the Parent are located at 225 West
Washington St., Suite 2150, Chicago, Illinois 60606.
Until immediately prior to the Merger, it is not anticipated that the
Purchaser or the Parent will have engaged in activities other than those
incident to their formation and capitalization and in connection with the
Merger. Immediately prior to the signing of the Merger Agreement, Parent
received a contribution to its capital of $10,000,000 and obtained commitments
from certain other investors, including an affiliate of Knightsbridge, to
contribute an additional $7,000,000 to Parent's capital. In addition, prior to
signing the Merger Agreement, Parent and Purchaser executed a Credit Agreement
with Credit Agricole Indosuez ("Lender"), as agent and lender, and a Senior
Subordinated Loan Agreement with Lender, as lender (collectively, the "Loan
Agreements"). Under the Loan Agreements, Parent and Purchaser have total
available credit in the aggregate amount of up to $48,000,000 for use in
connection with the Merger and for working capital and general corporate
purposes.
THE MERGER AGREEMENT
General. Pursuant to and subject to the terms and conditions of the Merger
Agreement, dated as of June 15, 1997, among the Parent, the Purchaser and the
Company (the "Merger Agreement"), the Company will merge (the "Merger") with the
Purchaser, with the Company continuing as the surviving corporation (the
"Surviving Corporation"). In the Merger, each outstanding share (collectively,
the "Shares") of the Company's Class A Capital Stock and Class B Capital Stock
(collectively, the "Company Capital Stock") (excluding Shares held (a) in the
treasury of the Company or owned by any direct or indirect subsidiary of the
Company (which will be cancelled and retired without any conversion thereof and
without any payment with respect thereto) or (b) by holders who have effectively
exercised their appraisal rights with respect to such Shares in accordance with
Section 262 of the Delaware General Corporation Law (the "DGCL")) will be
cancelled and converted into the right to receive $6.14 per share in cash,
without interest thereon (the "Share Consideration"). All shares of issued and
outstanding capital stock of the Purchaser will be converted into and exchanged
for one duly and validly issued, fully paid and nonassessable share of common
stock of the Surviving Corporation. The effective time of the Merger will be the
date and time of the filing of a Certificate of Merger with the Secretary of
State of Delaware (the "Effective Time"), which is scheduled to occur as soon as
practicable following satisfaction of certain closing conditions and will occur
no earlier than 20 business days from the date of this Consent Solicitation
Statement. As a result of the Merger, at the Effective Time, the Surviving
Corporation will be a wholly owned subsidiary of the Parent and the Parent will
hold all the outstanding voting securities of the Surviving Corporation. The
Surviving Corporation will continue to own all of the voting securities of the
Company's four subsidiaries: Frederick's of Hollywood Stores, Inc., Hollywood
Mail Order Corp., Private Moments, Inc., and Walger's, Inc. A copy of the Merger
4
<PAGE> 6
Agreement is attached to this Consent Solicitation Statement as Annex A. For a
more detailed discussion of the Merger Agreement, see "DESCRIPTION OF MERGER
AGREEMENT."
Payment for Shares; No Further Ownership of Company Capital Stock. As of
the Effective Time, the Purchaser will deposit, or will cause to be deposited,
with American Stock Transfer & Trust Company (the "Paying Agent"), for the
benefit of the holders of Shares, for payment in accordance with the Merger
Agreement through the Paying Agent, cash in an amount equal to the Share
Consideration multiplied by the number of Shares outstanding immediately prior
to the Effective Time (such cash being hereinafter referred to as the "Payment
Fund"). Promptly after the Effective Time, the Paying Agent will mail to each
record holder, as of the Effective Time, of a certificate that immediately prior
to the Effective Time evidenced outstanding Shares (the "Certificates") a form
of letter of transmittal which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon proper
delivery of the Certificates to the Paying Agent and instructions for use in
surrendering such Certificates and receiving the Share Consideration therefor.
Upon the surrender of each such Certificate, the Paying Agent shall promptly pay
the holder of such Certificate in exchange therefor cash in an amount equal to
the Share Consideration multiplied by the number of Shares formerly represented
by such Certificate, and such Certificate shall forthwith be cancelled. Said
payment, if in excess of $100,000 and if requested by the stockholder entitled
thereto, shall be paid to said stockholder by wire transfer in immediately
available funds. Until so surrendered, each such Certificate (other than
Certificates representing Shares outstanding immediately prior to the Effective
Time and held by a holder who did not consent to the Merger in writing and who
has demanded appraisal for such shares in accordance with Section 262 of the
DGCL ("Dissenting Shares") and Certificates representing Shares held in the
treasury of the Company or by any wholly owned subsidiary of the Company) shall
represent solely the right to receive the aggregate Share Consideration relating
thereto. No interest shall be paid or accrued on such Share Consideration.
Stock Options. The Company will use best efforts to enter into agreements
with each holder of an option to purchase Shares (an "Option"), which agreement
will provide that by virtue of the Merger and without any action on the part of
the holders thereof, each Option that is outstanding immediately before the
Effective Time, whether or not presently exercisable, will be cancelled and, in
consideration of such cancellation, each holder of an Option will be entitled to
receive at the Effective Time an amount equal to (a) the product of (i) the
excess, if any, by which the Share Consideration exceeds the exercise price of
the Option and (ii) the number of Shares subject thereto, plus (b) the product
of (i) $.05 and (ii) the number of Shares subject to Options whose exercise
price exceeds the Share Consideration.
The plans of the Company and its subsidiaries providing for Options
("Option Plans") shall terminate as of the Effective Time and the provisions in
any other plan, program or arrangement, providing for the issuance or grant by
the Company or any of its subsidiaries of any interest in respect of the capital
stock of the Company or any of its subsidiaries shall be terminated as of the
Effective Time, and following the Effective Time, subject to all holders of
Options entering into agreements to cancel their respective Options, no holder
of Options or any participant in the Option Plans or any other such plans,
programs or arrangements shall have any right thereunder to acquire any equity
securities of the Company or any subsidiary thereof.
Conditions to the Merger. The obligations of the Company and the Purchaser
to consummate the Merger are subject to certain conditions, including the
approval of the Merger and the Amendment to the Company's Certificate of
Incorporation by holders of a majority of each class of the Company Capital
Stock, no court or other authority shall have entered any order or law
prohibiting or otherwise restricting the consummation of the Merger, and at
least 20 business days must have elapsed since the mailing of the Consent
Solicitation Statement.
AMENDMENT TO COMPANY'S CERTIFICATE OF INCORPORATION
The proposed Amendment would delete Section 1(e) of Article Fourth of the
Company's Certificate of Incorporation ("Section 1(e)"), as amended (the
"Certificate of Incorporation"). Section 1(e) contains certain provisions which
were adopted in 1993 in connection with the recapitalization of the Company at
which time two classes of Company Capital Stock, the voting Class A Capital
Stock and the non-voting
5
<PAGE> 7
Class B Capital Stock, were established. These "Minority Protection Transaction"
provisions were designed to help ensure that the two classes of stock would be
treated equally in a merger or similar transaction, and that the Class A Capital
Stock would not trade at a premium in relation to the nonvoting Class B Capital
Stock. A copy of the Amendment and Section 1(e) are attached to this Consent
Solicitation Statement as Annexes B and C, respectively. This "Minority
Protection Transaction" feature set forth in Section 1(e) and the reasons for
and general effects of the Amendment are explained in detail under the heading
"AMENDMENT TO CERTIFICATE OF INCORPORATION."
The Merger is conditioned upon the approval of the Amendment and will not
be consummated unless both the Amendment and the Merger Agreement are approved
by the holders of a majority of the Company's outstanding Class A Capital Stock
and Class B Capital Stock consenting as separate classes. If the requisite
stockholders consent to the adoption of the Merger and the Amendment, it is
expected that the Amendment will be come effective on or about ,
1997, and a Certificate of Merger will be filed and the Merger will become
effective immediately thereafter on the same date.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company (the "Board") unanimously approved
the Merger and the Merger Agreement on June 13, 1997 and believes that the
Merger is in the best interests of the stockholders of the Company. For a
description of certain factors considered by the Board in evaluating the Merger,
see "BACKGROUND OF THE TRANSACTION" and "APPROVAL BY THE BOARD OF DIRECTORS."
The Board also unanimously approved the Amendment to the Company's Certificate
of Incorporation. For a more detailed discussion of the reasons for and general
effect of the Amendment, see "AMENDMENT TO CERTIFICATE OF INCORPORATION."
Approval by the stockholders of the Amendment is a condition to consummating the
Merger solely in favor of the Purchaser and the Parent and may be waived by them
at their discretion.
FAIRNESS OPINION
The Company retained the investment banking firm of Janney Montgomery Scott
Inc. ("JMS") as its financial advisor in connection with the Merger. JMS
provided the Board with a fairness opinion relating to the fairness, from a
financial point of view, of the consideration to be received by stockholders in
connection with the Merger. See "OPINION OF FINANCIAL ADVISOR." A copy of JMS's
opinion is attached to this Consent Solicitation Statement as Annex D.
INTERESTS OF MANAGEMENT IN THE MERGER AGREEMENT
The directors and executive officers of the Company who own Company Capital
Stock will receive $6.14 per share of Company Capital Stock owned, and the
executive officers who hold Options to purchase Company Capital Stock will
receive a cash payment equal to the difference between $6.14 and the applicable
Option exercise price. The table set forth under the heading "DESCRIPTION OF
INTERESTS OF MANAGEMENT AND AFFILIATES IN THE MERGER" identifies such directors
and officers, the number of Shares owned, the number of Options owned and the
cash payments to be received by each in respect of such ownership.
In addition to payments listed in the table referenced above for his
ownership of Company Capital Stock and Options, George W. Townson ("Townson"),
the Chairman of the Board, President and Chief Executive Officer of the Company,
has entered into a Termination and Release Agreement, dated June 14, 1997,
between Townson and the Company, pursuant to which, upon consummation of the
Merger, the Company will pay to Townson the sum of $750,000. In addition,
Townson and the Purchaser have entered into a Noncompetition and Consulting
Agreement, dated June 15, 1997, pursuant to which Townson has agreed not to
compete in certain respects with the Purchaser in all states in the United
States for a period of four years following the Effective Time and has agreed to
provide certain consulting services to the Company during such period, in
consideration of the payment to Townson of $250,000 at the Effective Time and 16
equal quarterly payments of $100,000 commencing on the first day of the calendar
quarter following the Effective Time,
6
<PAGE> 8
which quarterly payments will be secured by a letter of credit, which shall be
irrevocable except if Townson breaches the agreement. Pursuant to the foregoing
agreements, each of the Company and the Purchaser also agreed to indemnify
Townson from and against certain liabilities which may arise from the payments
described above.
In order to provide for continuity of management during the period of the
Merger, the Board has designated 12 persons (including the following executive
officers of the Company: Nitin Parikh, Robert Genest and Geric Johnson) as key
employees of the Company to receive a "stay bonus" in the amount of $30,000 or
$50,000, which "stay bonus" is to be paid to such employees within 30 days after
the occurrence of an event such as the Merger. The terms and conditions of
employment of the recipients of the "stay bonus" continue to be "at will" and
are not otherwise affected by the "stay bonus." As a further inducement to such
key employees to continue to remain in the employ of the Company until at least
January 2, 1998, the Company has requested that each such person continue their
employment until such date at his or her existing rate of pay and defer his or
her "stay bonus," which would be increased to $30,875 (for stay bonuses
currently in the amount of $30,000) and $51,460 (for stay bonuses currently in
the amount of $50,000) (such agreements to continue employment to be referred to
herein as the "Extension Agreements"). If any employee who enters into an
Extension Agreement is terminated prior to such date, such employee will
continue to receive his or her existing rate of pay through January 2, 1998,
except if such termination is as a result of an act or acts of malfeasance or
similar conduct, and will be paid his or her "stay bonus" immediately upon
termination regardless of the reason for termination. If any such employee
voluntarily resigns prior to January 2, 1998, such employee will immediately
receive the "stay bonus", but will not be entitled to continue to receive such
employee's existing rate of pay through January 2, 1998.
William J. Barrett, a director of the Company since 1983, is also a Senior
Vice President of JMS, which will receive certain fees pursuant to the
Engagement Letter in connection with the rendering by JMS of certain financial
advisory services to the Company, including the rendering of an opinion in
connection with the Merger. See "OPINION OF FINANCIAL ADVISOR."
Each non-employee member of the Board has received a bonus in the amount of
$5,000 in compensation for his/her efforts in connection with the Company's
program to enhance the value of the Company Capital Stock.
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
The following table summarizes certain data from the Company's annual
consolidated financial statements for the years 1992 through 1996 excerpted or
derived from the information contained in the Company's Annual Report on Form
10-K for the year ended August 31, 1996 (the "10-K") and the Company's Quarterly
Report on Form 10-Q for the quarter ended February 28, 1997 (the "February
10-Q"). The 10-K, the February 10-Q, as well as the Company's Quarterly Report
on Form 10-Q for the quarter ended November 30, 1996, and the Company's Proxy
Statement for the Annual Meeting of Stockholders held on January 30, 1997,
accompany the Consent Solicitation Statement and should be read by stockholders
in conjunction herewith. More comprehensive financial and business information
concerning the Company is included in such reports and other documents filed by
the Company with the Securities and Exchange Commission, and the following
information is qualified in its entirety by reference to such reports and such
other documents and all the financial information (including any related notes)
contained therein.
7
<PAGE> 9
The Company's fiscal year ends on the Saturday closest to August 31. Fiscal
year 1994 consisted of 53 weeks. All other years presented consisted of 52
weeks. Data for the six months ended February 28, 1997 and 1996 are derived from
the Company's unaudited consolidated financial statements for such period and
reflect all adjustments which are, in the opinion of management, necessary to a
fair statement of the results for such period.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED FEBRUARY
28,
FISCAL YEARS (UNAUDITED)
---------------------------------------------------- -----------------
1996 1995 1994 1993 1992 1997 1996
-------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS EXCEPT PERCENTAGES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales............................ $148,090 $142,931 $132,153 $128,516 $117,030 $82,362 $81,207
Gross profit......................... 60,031 58,728 54,744 55,622 52,862 35,160 34,274
Earnings (loss) before income
taxes.............................. (664) 4,412 (1,705) 7,655 8,018 4,895 2,308
Net earnings (loss).................. (438) 2,652 (903) 4,737 5,073 2,863 1,350
Primary earnings (loss) per share --
Classes A & B...................... (.05) .31 (.10) .53 .57 .33 .15
Cash dividends per share -- Classes A
& B................................ .10 .075 .05 .05 .05 .05 .05
Primary weighted average shares
outstanding -- Classes A & B....... 8,745 8,693 8,876 8,915 8,698 8,759 8,717
FINANCIAL POSITION AT PERIOD END:
Working capital...................... 20,447 21,263 17,486 15,783 11,213 22,941 22,864
Total assets......................... 52,709 55,952 55,417 50,838 45,790 55,541 54,053
Long-term debt....................... 240 480 720 -- -- 240 480
Capital lease obligations............ 672 884 701 1,207 1,663 562 780
Stockholders' equity................. 35,525 36,599 34,413 36,615 32,204 38,013 37,619
Equity per share -- Classes A & B.... 4.06 4.21 3.88 4.11 3.67 4.34 4.32
FINANCIAL RATIOS:
Net earnings (loss) to sales......... (0.3)% 1.9% (0.7)% 3.7% 4.3% 3.5% 1.7%
Net earnings (loss) to average
stockholders' equity............... (1.2)% 7.4% (2.5)% 13.8% 17.2% 7.8% 3.6%
Current ratio........................ 2.6 2.5 2.1 2.4 2.1 2.8 3.0
-------- -------- -------- -------- -------- ------- --------
</TABLE>
Because the Parent and the Purchaser are newly formed corporations and have
minimal assets and capitalization (other than an initial contribution to the
capital of the Parent in the amount of $10,000,000), no meaningful financial
information regarding the Purchaser is available. For a description of the
source of funds which will enable the Purchaser to consummate the Merger, see
"DESCRIPTION OF FINANCING OF MERGER."
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[FREDERICK'S LOGO]
CONSENT SOLICITATION STATEMENT
JULY , 1997
INTRODUCTION
This Consent Solicitation Statement is being furnished to the holders of
Class A Capital Stock ("Class A Stock") and Class B Capital Stock ("Class B
Stock"), each par value $1.00 per share (collectively, the "Company Capital
Stock"), of Frederick's of Hollywood, Inc., a Delaware corporation (the
"Company"), in connection with two proposals.
The first proposal involves an amendment (the "Amendment") to the
Certificate of Incorporation, as amended (the "Certificate of Incorporation") of
the Company. The Amendment would delete Section 1(e) of Article Fourth of the
Certificate of Incorporation ("Section 1(e)"). Section 1(e) contains certain
provisions which were adopted in 1993 in connection with the recapitalization of
the Company at which time two classes of Capital Stock, the Class A Capital
Stock and the Class B Capital Stock, were established. The "Minority Protection
Transaction" provisions of Section 1(e) were designed to help ensure that the
two classes of stock would be treated equally in a merger or similar
transaction, and that the voting Class A Capital Stock would not trade at a
premium in relation to the non-voting Class B Capital Stock.
The second proposal involves the merger (the "Merger") of Royalty
Acquisition Corp., a Delaware corporation (the "Purchaser"), into the Company
(with the Company being the surviving corporation) pursuant to an Agreement and
Plan of Merger, dated as of June 15, 1997 (the "Merger Agreement") among the
Company, Royalty Corporation, a Delaware corporation (the "Parent") and the
Purchaser, which is a direct subsidiary of the Parent. At the effective time of
the Merger, the Company will become a wholly owned subsidiary of the Parent.
Pursuant to the Merger Agreement, (i) each outstanding share of the Company's
Class A Capital Stock and Class B Capital Stock, each par value $1.00 per share
(collectively the "Shares") (other than Shares held by the Company or any
subsidiary of the Company or held in the Company's treasury and other than
Shares as to which appraisal rights have been properly exercised under the
General Corporation Law of the State of Delaware (the "DGCL")), will be
converted into the right to receive $6.14 in cash, without interest (the "Share
Consideration"), and (ii) each Share held by the Company or any of its
subsidiaries or held in the Company's treasury will be cancelled, and no payment
will be made with respect thereto. For a detailed discussion of the Merger
Agreement, see "DESCRIPTION OF MERGER AGREEMENT."
Holders of Shares who do not wish to accept the $6.14 cash payment per
Share provided in the Merger have the right to seek an appraisal of the "fair
value" of their shares provided that they comply with the conditions established
by Section 262 of the DGCL. For a discussion of the rights of holders of Shares
to appraisal thereof, see "APPRAISAL RIGHTS FOR DISSENTING STOCKHOLDERS."
Consummation of the Merger is conditioned upon the approval of the
Amendment, and the Merger will not be consummated unless both the Amendment and
the Merger Agreement are approved by the holders of a majority of both the
Company's outstanding Class A Capital Stock and Class B Capital Stock consenting
as separate classes. If the requisite stockholders consent to the adoption of
the Merger and the Amendment, it is expected that the Amendment will become
effective on or about , 1997, and that a Certificate of Merger will
be filed and the Merger will become effective immediately thereafter on the same
date. For a detailed discussion of the provisions proposed to be deleted and the
reasons for and general effects of the Amendment, see "AMENDMENT TO CERTIFICATE
OF INCORPORATION." Approval by the stockholders of the Amendment is a condition
to consummating the Merger solely in favor of the Purchaser and the Parent and
may be waived by them at their discretion.
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This Consent Solicitation Statement is being mailed on or about July ,
1997 to holders of Shares as of June 26, 1997.
D.F. King & Co., Inc. will assist in the solicitation of proxies for the
Company for a fee of approximately $6,000, plus reimbursement of reasonable
out-of-pocket expenses.
VOTING
In accordance with the DGCL, the Merger Agreement requires approval and
adoption by the affirmative vote of the holders of a majority of the outstanding
shares of Class A Capital Stock. As of , 1997, there were 2,955,309
shares of Class A Capital Stock issued and outstanding, each share of which was
entitled to one vote on the proposal to approve and adopt the Merger Agreement.
Under the terms of the Certificate of Incorporation, the holders of Class B
Capital Stock are not entitled to vote on any matters, except such stockholders
are entitled to vote separately as a class with respect to (i) proposals to
change the par value of the Class B Capital Stock, amendments to the Certificate
of Incorporation that alter or change the powers, preferences or special rights
of the holders of the Class B Capital Stock so as to affect them adversely, and
(iii) such other matters as may require class voting under the DGCL.
Notwithstanding that the holders of the Company's Class B Capital Stock are not,
in all likelihood, entitled to vote in connection with the Merger Agreement
under the Certificate of Incorporation, the Board of Directors of the Company
has decided to request the consent of all stockholders of the Company, including
the holders of shares of Class B Capital Stock, consenting as separate classes,
to the Merger. As of , 1997, there were 5,903,118 shares of Class B
Capital Stock issued and outstanding.
In accordance with the DGCL and the Certificate of Incorporation, the
approval and adoption of the Amendment requires the affirmative vote of the
holders of a majority of the outstanding shares of Class A Capital Stock and
Class B Capital Stock consenting as separate classes.
AMENDMENT TO CERTIFICATE OF INCORPORATION
The proposed Amendment to the Certificate of Incorporation would delete
Section 1(e) thereof. Section 1(e) contains certain provisions which were
adopted in 1993 in connection with the recapitalization of the Company at which
time two classes of Capital Stock, Class A Capital Stock and Class B Capital
Stock, were established. At such time, all rights to vote were exclusively
vested in the Class A Capital Stock. The holders of Class B Capital Stock are
only entitled to vote separately as a class with respect to (i) proposals to
change the par value of the Class B Capital Stock, (ii) other amendments to the
Certificate of Incorporation that would alter or change the powers, preferences
or special rights of the holders of Class B Capital Stock so as to affect them
adversely, and (iii) as otherwise required under the DGCL.
Recognizing that it might be possible for a stockholder to acquire voting
rights disproportionate to equity ownership through acquisitions of Class A
Capital Stock, the Company's financial advisors at the time advised the Board of
Directors that the Class A Capital Stock could trade at a premium to the
non-voting Class B Capital Stock under certain circumstances. In order to reduce
or eliminate the economic reasons for the Class A Capital Stock and the Class B
Capital Stock to trade at disparate market prices, certain "Minority Protection
Transaction" provisions were included in the amendments to the Certificate of
Incorporation at the time. These provisions are set forth in Section 1(e). The
provisions of Section 1(e) were designed with the intent that the Class B
Capital Stock would not be unfairly treated in the event that a person attempted
to acquire control of or to take over the Company. The provisions also include
anti-takeover measures.
The "Minority Protection Transaction" provisions contained in Section 1(e)
include two features: a restriction on voting and a "fair price" provision. The
first feature was designed to prevent a person or group who crossed a certain
ownership threshold from gaining control of the Company by acquiring Class A
Capital Stock without buying shares of the Class B Capital Stock. Consequently,
anyone, except the Company's Employee Stock Ownership Plan, who acquires more
than 10% of the outstanding shares of Class A Capital Stock and does not acquire
a percentage of the Class B Capital Stock outstanding at least equal to the
percentage of Class A Capital Stock that the person acquired (a "Related
Person") will be allowed to vote
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only those shares of Class A Capital Stock just acquired constituting 10% of the
outstanding Class A Capital Stock.
The second feature of the "Minority Protection Transaction" provisions is a
"fair price" requirement. It is intended to prevent a person seeking to acquire
control of the Company from paying a discounted price for the Class B Capital
Stock required to be purchased by the Related Person under the "Minority
Protection Transaction" provisions to avoid the restrictions on voting of shares
of Class A Capital Stock in excess of the 10% threshold. The relevant provision
provides that a "fair price" has been paid for the Class B Capital Stock only
when such shares have been acquired at a price equal to the greater of (i) the
highest per share price paid by the acquiring person, in cash or in non-cash
consideration, for any shares of Class A Capital Stock acquired in the six-month
period ending on the date such person becomes a "Related Person" or (ii) the
highest closing market sale price of the Class A Capital Stock during the 30-day
period preceding and following the acquisition of shares of Class B Capital
Stock. As a practical matter, therefore, a person seeking to acquire control of
the Company would have to buy the Class A Capital Stock and Class B Capital
Stock at virtually the same time and the same price as might occur in a tender
offer, in order to ensure that the acquiring person would be able to vote the
shares of Class A Capital Stock acquired in excess of the 10% threshold.
In the proposed Merger transaction, both classes of the Company's Capital
Stock are being treated equally. Each outstanding share of the Company's Class A
Capital Stock and Class B Capital Stock will be converted into the right to
receive $6.14 in cash, without interest. See "DESCRIPTION OF MERGER AGREEMENT."
If the formula for determining the purchase price for shares of Class B Capital
Stock set forth in such provisions were to be applied in the case of the
proposed Merger, depending upon the market price of such shares relative to the
Class A Capital Stock, it is possible that the holders of the Class B Capital
Stock would be entitled to receive a premium for their non-voting shares in the
Merger notwithstanding that the intent of such provisions when adopted was to
prevent the Class A Capital Stock from trading at a premium relative to the
Class B Capital Stock.
Since there may be some ambiguity as to the applicability of the "Minority
Protection Transaction" provisions of Section 1(e) in connection with the
proposed Merger, the Company and the Purchaser desire to delete such provisions
from the Certificate of Incorporation prior to the Merger. As a practical
matter, the Company believes that the purpose and intent of the provisions of
Section 1(e) will be fulfilled in the Merger since both classes of Company
Capital Stock will receive the same Share Consideration and the possibility of
the holders of the Class B Capital Stock receiving any unintended premium for
their non-voting shares will be eliminated.
The Merger is conditioned upon the approval of the Amendment and will not
be consummated unless both the Amendment and the Merger Agreement are approved
by holders of a majority of the Company's outstanding Class A Capital Stock and
Class B Capital Stock consenting as separate classes, except in the event of a
waiver as set forth below. If the requisite stockholders consent to the adoption
of the Merger and the Amendment, it is expected that the Amendment will become
effective on or about , 1997, and a Certificate of Merger will be
filed and the Merger will become effective immediately thereafter on the same
date. A copy of the Amendment and the "Minority Protection Transaction"
provisions proposed to be deleted from the Certificate of Incorporation are
attached to this Consent Solicitation Statement as Annexes B and C,
respectively. Approval by the stockholders of the Amendment is a condition to
consummating the Merger solely in favor of the Purchaser and the Parent and may
be waived by them at their discretion.
SUMMARY OF MERGER TRANSACTION
The Merger and the Merger Agreement have been unanimously approved by the
Board of Directors of the Company (the "Board"). If the Merger Agreement is
approved by the requisite consent of the stockholders of the Company and the
other conditions to consummating the Merger are satisfied or waived, the Company
will be acquired by the Parent for approximately $54.7 million (the "Purchase
Price"). The Purchase Price represents a price of $6.14 per share of Company
Capital Stock based upon 8,858,427 shares issued and outstanding and cash
consideration for the cancellation of Options to purchase 871,500 shares.
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The purpose of the Merger is to enable the Parent, through the Purchaser,
to acquire the entire equity interest in the Company. The purchase of the
Company by the Parent will be effected through an all-cash merger of the
Purchaser into the Company. Following the Merger, the current stockholders of
the Company will cease to be stockholders of the Company and the Company will be
deregistered under the Securities Exchange Act of 1934 (the "Exchange Act") and
will cease to be traded on the New York Stock Exchange.
The Company's address is 6608 Hollywood Boulevard, Los Angeles, California
90028. Its telephone number is (213) 466-5151. As described below, the Parent
and the Purchaser were formed for the sole purpose of acquiring the Company. The
address of both the Parent and the Purchaser is 225 West Washington Street,
Suite 2150, Chicago, Illinois 60606; telephone number: (312) 641-6029.
RECOMMENDATION OF THE BOARD
THE BOARD BELIEVES THAT THE AMENDMENT AND THE MERGER ARE IN THE BEST
INTERESTS OF THE STOCKHOLDERS OF THE COMPANY. ACCORDINGLY, THE BOARD HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE MERGER AND THE AMENDMENT AND
RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS CONSENT TO THE AMENDMENT AND THE
MERGER AGREEMENT.
BACKGROUND OF THE TRANSACTION
On June 14, 1996, the Company announced it had retained the investment
banking firm of Janney Montgomery Scott Inc. ("JMS") as financial advisor for
the purpose of embarking on a program to enhance shareholder value. The program
was to include either the sale of the shares owned by the Harriett R. Mellinger
Trust and the Frederick N. Mellinger Trust (which are the founding family
stockholders' trusts) (the "Trusts") (which, as of , 1997,
constitute in the aggregate approximately 40.9% of the outstanding Class A
Capital Stock and 50.6% of the outstanding Class B Capital Stock which
percentages take into account both the outstanding shares of Class A and Class B
Capital Stock and Options exercisable within 60 days), or possibly the sale of
all the Company's shares or assets, by merger or other consolidation, share
repurchase, recapitalization, joint venture, or otherwise. JMS conducted its due
diligence, an information memorandum (the "Memorandum") was prepared by the
Company, and JMS initiated a search for interested parties in July 1996.
In the ensuing months, JMS and the Company held discussions and meetings
with numerous interested parties. However, due to the Company's disappointing
operating results in the third and fourth quarters of the fiscal year ended
August 31, 1996, the expressions of interest received were at prices per share
that were deemed inadequate by JMS and the Board. JMS and the Company continued
discussions and meetings with various parties during the fall of 1996 and winter
of 1997.
In January 1997, JMS initiated discussions with Knightsbridge Capital Corp.
("Knightsbridge"), a private investment company formed to effectuate private
equity investments in middle market companies. Knightsbridge executed a
confidentiality agreement with JMS on January 23, 1997 and received an
information package, including the Memorandum, shortly thereafter. At the end of
January, Knightsbridge submitted a preliminary indication of interest and, on
February 12, 1997, Knightsbridge, along with representatives from its advisors
at Robertson, Stephens & Company ("RS&Co."), Bain & Company and Arthur Andersen
& Company, met at the Company's offices to interview key management, tour the
Company's facilities, and receive additional due diligence information.
Based on the information received during the due diligence process,
Knightsbridge and its advisors indicated a strong interest in pursuing an
acquisition of the Company, subject to the availability of financing.
Representatives of Knightsbridge and RS&Co. held numerous discussions with JMS
regarding an acceptable valuation for the Company.
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In March 1997, representatives of Knightsbridge and RS&Co. visited with
selected institutions to assess the viability of financing the acquisition of
the Company. On April 8, 1997, Knightsbridge received a proposal from Indosuez
Capital ("Indosuez") to provide senior and subordinated debt financing as well
as a revolving credit facility. Indosuez's proposal also indicated an interest
in an equity investment in the transaction. Based on the financing proposal
received from Indosuez, as well as the equity contributions it was prepared to
make, Knightsbridge submitted a formal offer, addressed to the Board, to
purchase the Company (the "Offer"). The Offer, dated April 9, 1997, proposed to
purchase all the outstanding shares of the Company for not less than $6.00 and
not more than $6.25 per share, in cash (the "Price Range"). A condition to the
Offer was that Knightsbridge receive the exclusive opportunity to pursue
intensive due diligence at the Company and to finalize the financing for the
acquisition. On April 11, 1997, the Board approved an Exclusivity Agreement with
Knightsbridge, effective April 14, 1997, which granted a three-week period for
Knightsbridge to complete its due diligence and to obtain a firm financing
commitment from its lender (the "Standstill Period").
Through the remainder of April 1997, Knightsbridge and its advisors
performed due diligence at the Company. On May 5, 1997, Knightsbridge contacted
JMS to confirm, based on a review of the due diligence information gathered at
the Company, that it was interested in acquiring all outstanding shares of the
Company in the Price Range and would like to proceed expeditiously to sign a
definitive agreement. A first draft of the Merger Agreement had previously been
delivered by Knightsbridge to the Company on May 2, 1997. Knightsbridge
subsequently presented a signed commitment letter, dated May 5, 1997, from
Indosuez confirming their interest and intent to assist in financing the
acquisition of the Company. In light of the foregoing, on May 8, 1997, the Board
approved retroactively an extension of the termination of the Standstill Period
from May 6, 1997 to May 24, 1997 in order to allow time for final negotiation of
a definitive agreement and Knightsbridge's completion of loan documentation.
With negotiations towards a definitive agreement proceeding, on May 20,
1997, the Board approved, an extension of the Standstill Period from May 24,
1997 to June 2, 1997. Subsequent extensions approved by the Board extended the
Standstill Period from June 2, 1997 to June 9, 1997, from June 9, 1997 to June
11, 1997, from June 11, 1997 to June 13, 1997, and from June 13, 1997 to June
16, 1997. Over this period, the structure of the transaction changed from a two
step tender offer/merger to a straight merger as it became apparent that the
tender by at least 90% of the Shares could not be assured on an initial tender
offer, and therefore the subsequent consummation of a short form merger which
Knightsbridge's financing required also could not be assured. The final
negotiated cash price for all outstanding shares was $6.14 per share.
Based upon the Board's review and consideration of the terms of the Merger
Agreement and, among other things, the oral presentation of the opinion of JMS,
on June 13, 1997, the Board unanimously determined that the Merger and the
Amendment are in the best interests of the stockholders of the Company and
approved the Amendment, the Merger and the Merger Agreement.
APPROVAL BY THE BOARD OF DIRECTORS
At a special meeting of the Board held on June 13, 1997, the Company's
management and representatives of JMS and the Company's legal advisors made a
presentation concerning the proposed acquisition of the Company by the Parent,
including a review of the terms of the Merger Agreement and the proposed
Amendment to the Certificate of Incorporation. At such meeting, the Board
unanimously determined that the Amendment and the Merger are in the best
interests of the stockholders of the Company and approved the Amendment, the
Merger and the Merger Agreement.
In reaching its determination, the Board consulted with the Company's
management, as well as its financial and legal advisors, and considered a number
of factors, including, without limitation, the following:
(i) the fact that (a) the Company had issued a press release on June
14, 1996 regarding its program to enhance stockholder value, including a
possible sale of the Company, (b) JMS held discussions with over 100
prospective purchasers of the Company, and requested such prospective
purchasers to bid for the Company, (c) JMS distributed written information
to sixty-two of such prospective purchasers, (d) twelve of such prospective
purchasers submitted indications of interests for the Company, (e) nine of
such prospective purchasers performed additional due diligence subsequent
to the initial bids and made
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final bids for the Company, and (f) the consideration offered by
Knightsbridge exceeded all other fully funded bids for all of the Class A
Capital Stock and Class B Capital Stock of the Company;
(ii) the fact that the consideration offered by Knightsbridge was
higher than the high-end of a range of per share implied values produced by
a discounted cash flow analysis presented by JMS;
(iii) the fact that the consideration offered by Knightsbridge was at
the high end of a range of selected financial ratios for comparable
publicly traded companies identified by JMS;
(iv) the fact that the Share Consideration reflects a significant
premium over the current market price of the Shares;
(v) the opinion of JMS that the consideration offered by Knightsbridge
was fair, from a financial point of view, to stockholders of the Company;
(vi) the high equity component of the capital structure proposed by
Knightsbridge;
(vii) the firm financing commitments obtained by Knightsbridge;
(viii) recent trends in the earnings of the Company; and
(ix) the competitive nature of the business of the Company.
The foregoing discussion of information and factors considered and given
weight by the Board is not intended to be exhaustive. In view of the wide
variety of factors considered in connection with its evaluation of the terms of
the Merger, the Board did not find it practicable to, and did not, quantify or
otherwise attempt to assign relative weight to the specific factors considered
in reaching its determinations. Rather, the Board viewed its determination and
recommendations as being based upon the totality of the information presented to
it and considered by it. In addition, individual members of the Board may have
given different weight to different factors.
OPINION OF FINANCIAL ADVISOR
On May 28, 1997, JMS delivered its oral opinion to the Board of Directors
that, as of such date, the estimated cash price per Share to be paid (the "Share
Consideration") is fair, from a financial point of view, to the holders of
outstanding shares of Company Capital Stock. On June 13, 1997, JMS delivered an
oral update of its opinion to the Board of Directors. JMS subsequently updated
and confirmed its oral opinion by delivery of a written opinion dated, June 15,
1997, the date of execution of the Merger Agreement.
THE FULL TEXT OF THE WRITTEN OPINION OF JMS, DATED JUNE 15, 1997, WHICH
SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED, PROCEDURES FOLLOWED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN BY JMS IN CONNECTION WITH THE OPINION, IS
ATTACHED HERETO AS ANNEX D AND IS INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS
OF THE COMPANY ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. THE
DESCRIPTION OF THE JMS OPINION CONTAINED HEREIN IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION. THE OPINION WAS PREPARED FOR THE
BOARD, IS DIRECTED ONLY TO THE FAIRNESS TO THE STOCKHOLDERS OF THE COMPANY AS OF
JUNE 15, 1997 FROM A FINANCIAL POINT OF VIEW OF THE SHARE CONSIDERATION PURSUANT
TO THE MERGER AGREEMENT AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER AS TO HOW TO VOTE ON THE MERGER AGREEMENT.
In connection with its opinion, JMS reviewed the Merger Agreement and
certain financial and other information of the Company, including internal
analyses, reports, forecasts and other information. JMS held discussions with
senior management of the Company concerning the current operations, financial
conditions and prospects of the Company. In addition, JMS (i) reviewed the price
and trading histories of the Company's two classes of stock and compared those
prices and trading histories with those of publicly traded companies JMS deemed
relevant; (ii) compared the financial positions and operating results of the
Company
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with those of publicly traded companies JMS deemed relevant; (iii) compared
certain financial terms of the Merger to certain financial terms of selected
other business combinations JMS deemed relevant; (iv) performed a net present
value calculation on a three year forecasted income statement provided to JMS by
the Company; and (v) conducted such other financial studies, analyses and
investigations, and reviewed such other factors, as JMS deemed relevant.
JMS assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by it for purposes of its opinion.
With respect to financial projections, JMS assumed that they had been reasonably
prepared on bases reflecting the best currently available information and
judgments of the future financial performance of the Company. JMS has not made
any independent valuation or appraisal of the assets or liabilities of the
Company, nor has it been furnished with any such valuations or appraisals. JMS'
opinion is necessarily based on financial, economic, market and other conditions
as they existed on, and information made available to it as of, the date of the
opinion.
The following is a brief summary of the financial analyses utilized by JMS
in connection with providing its opinion to the Board on June 15, 1997.
Comparative Stock Price Performance. As part of its analysis, JMS reviewed
the history of the trading prices for both the Class A Capital Stock and the
Class B Capital Stock of the Company. The review indicated that the Class A
Capital Stock traded between $3.70 and $6.00 for the twelve months ending May
27, 1997 and between $3.63 and $6.25 for the three years ending May 27, 1997.
The review indicated that the Class B Capital Stock traded between $3.50 and
$5.63 for the twelve months ending May 27, 1997 and between $3.25 and $6.50 for
the three years ending May 27, 1997. The last sale of Class A Capital Stock on
the day immediately preceding June 14, 1996, the date the Company issued a press
release announcing that it had engaged JMS to assist it in a program to enhance
stockholder value was at a price of $4.13. The last sale of Class B Capital
Stock on the day immediately preceding such announcement was at a price of
$3.88.
Selected Companies Analysis. JMS compared certain financial information of
the Company with a group of publicly traded companies in the apparel and
specialty retail, including mail order that, in JMS' judgment were comparable to
the Company (the "Comparable Companies"). The Comparable Companies were chosen
by JMS as companies that possess general business, operation, and financial
characteristics representative of companies in the industry in which the Company
operates, although JMS recognizes that each of the Comparable Companies is
distinguishable from the Company in certain respects. The Comparable Companies
consist of Intimate Brands (Victoria's Secret), Deb Shops, Wet Seal, Charming
Shops, Lilian Vernon, Talbots, Lands' End and Gadzook's.
The financial information considered by JMS included, among other items,
selected balance sheet data, operating statement data and earning per share
estimates made by research analysts. JMS calculated several market multiples for
the Comparable Companies which included price ranges of 0.29 to 2.18 times
sales, 7.75 to 24.91 times operating income, 13.26 to 42.86 times pro forma
earnings and 0.73 to 12.82 times book value. These figures were then used to
calculate an implied common stock price range for the Company of $4.82 to $36.88
based upon the Company's sales, $1.64 to $5.26 based upon operating income,
$1.61 to $5.20 based upon pro forma earnings and $3.11 to $55.01 based upon book
value. JMS found that the price per share to be paid to the holders of Class A
Capital Stock and Class B Capital Stock as contemplated by the Merger Agreement,
is within or above these ranges of values.
Discounted Cash Flow. The Company provided forecasts from which JMS
developed a discounted cash flow model to estimate the values of the Company
based upon (i) the present value of the after-tax free cash flow over a
three-year three month period from June 1997 through fiscal year 2000; (ii) the
terminal value of the Company at the end of such period assuming multiples of
10, 11, 12, 13, 14 and 15 times projected fiscal year 2000 after-tax net income,
and (iii) excess cash assumed at $7 million. The enterprise value per Share
calculated for the Company under the foregoing analyses ranged from $4.48 to
$5.85.
Comparable Transaction Analysis and Other Premium Studies. JMS examined
certain pending and completed domestic merger and acquisition transactions
involving the specialty and apparel retail industries. JMS examined closed
transactions in the U.S. specialty and apparel retail industries which
represented a
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change of control of a public company since January 1, 1994 and with transaction
value between $10 million and $500 million. The first transaction that was
reviewed by JMS was the acquisition of A Pea in the Pod by Mother's Work. The
second transaction that was reviewed by JMS was the acquisition of Younker's,
Inc. by Profitt's, Inc. The third transaction that was reviewed by JMS was the
acquisition of Baby Superstores, Inc. by Toys 'R' Us, Inc. For a variety of
reasons, none of these transactions was deemed by JMS to be directly comparable
to the proposed Merger.
An article in the December 31, 1996 issue of The Wall Street Journal cited
data compiled by JP Morgan that indicated that "excluding mergers of equals,
buyers between 1993 and September 30, 1996, paid a medium premium of 30% when
pooling of interests is used, compared with a 21.5% median premium when pooling
was not used." Based upon the last sale price of the Company's Class A Capital
Stock and Class B Capital Stock on the date prior to the date the Company issued
the press release announcing it had retained JMS to assist it in a program to
enhance stockholder value, the estimated price represents a premium of 48.8% for
the Company's Class A Capital Stock and 58.5% for the Company's Class B Capital
Stock.
The foregoing discussion does not purport to be a complete description of
the analyses performed by JMS in arriving at its opinion. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. JMS believes that its analyses and the
foregoing summary must be considered as a whole and that selecting portions of
its analyses, without considering all factors and analyses, could create an
incomplete view of the process underlying the analyses performed by JMS in
connection with the preparation of its opinion letter. In performing its
analyses, JMS made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond the control of the Company. The analyses performed by JMS are not
necessarily indications of actual values, which may be significantly more or
less favorable than suggested by such analyses. In addition, analyses relating
to the value of a business do not purport to be appraisals or to reflect the
price at which businesses actually may be sold.
JMS is a nationally recognized investment banking firm and is continually
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements, and valuations for corporate and
other purposes. JMS has from time-to-time provided investment banking services
to the Company prior to its services related to the proposed Merger. While JMS
does not make a market in Company Capital Stock, as a full service securities
firm, JMS may from time-to-time effect transactions for its own account or the
accounts of customers and hold positions in securities of the Company.
Prior to retaining JMS as the Company's financial advisor, the Board
considered several leading investment banking firms to assist it in exploring
various strategic alternatives to enhance stockholder value. In making its
decision, the Board considered, among other things, the reputation and
experience of each firm, each firm's familiarity with the Company, the manner in
which each firm proposed to assist the Company in exploring its strategic
alternatives, and the competitiveness of the fee structure proposed by each
firm. Ultimately, the Board retained JMS based on, among other things, its over
ten-year association with the Company and its resulting knowledge of the
Company, its trends and prospects.
Pursuant to a letter agreement, dated May 14, 1996 (the "Engagement
Letter"), the Company engaged JMS to act as financial advisor in connection with
the Company's program to enhance stockholder value. Pursuant to the Engagement
Letter, the Company has agreed to pay JMS upon consummation of the Merger a
transaction fee in an amount equal to 5% of the first million dollars of the
consideration paid in the Merger, 4% of the second million dollars, 3% of the
third million dollars, 2% of the fourth million dollars and 1% of the balance
thereafter. In addition, JMS has received a nonrefundable $30,000 one-time, due
diligence and offering memorandum preparation payment upon the signing of the
Engagement Letter, which will be credited 100% against any fees owed to it by
the Company, and JMS has been paid $100,000 upon the rendering of its opinion to
the Board, 50% of which fee shall be credited against all other fees owed to JMS
by the Company. The Company has agreed to reimburse JMS for its accountable
out-of-pocket expenses up to $30,000 and to indemnify JMS against certain
liabilities, including certain liabilities under the federal securities laws.
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DESCRIPTION OF INTERESTS OF MANAGEMENT AND AFFILIATES
IN THE MERGER
The directors and officers of the Company who own Company Capital Stock
will receive $6.14 per share of Company Capital Stock owned. For a description
of the beneficial ownership of the Company Capital Stock by directors and
executive officers, see "PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP OF DIRECTORS
AND EXECUTIVE OFFICERS." In addition, the executive officers who hold Options to
purchase Company Capital Stock will receive a cash payment in an amount equal to
(a) the product of (i) the excess, if any, by which the Share Consideration
exceeds the exercise price of each Option and (ii) the number of Shares subject
thereto, plus (b) the product of (i) $.05 and (ii) the number of Shares subject
to Options whose exercise price exceeds the Share Consideration.
Subject to entering into agreements with respect to the cancellation of
Options held by each of them, the following current executive officers of the
Company will receive approximately the amounts indicated parenthetically as
consideration payable in connection with such cancellation: George W. Townson
($108,251), John B. Hatfield ($42,350), Nitin G. Parikh ($22,275), Robert R.
Genest ($26,238) and, Geric B. Johnson ($3,838).
In addition to the payment listed in the preceding table for his ownership
of Company Capital Stock and Options, George W. Townson ("Townson"), the
Chairman of the Board, President and Chief Executive Officer of the Company, has
entered into a Termination and Release Agreement, dated June 14, 1997, between
Townson and the Company, pursuant to which, upon consummation of the Merger, the
Company will pay to Townson the sum of $750,000. In addition, Townson and the
Purchaser have entered into a Noncompetition and Consulting Agreement, dated
June 15, 1997, pursuant to which Townson has agreed not to compete in certain
respects with the Purchaser in all states in the United States for a period of
four years following the Effective Time and has agreed to provide certain
consulting services to the Company during such period, in consideration of the
payment to Townson of $250,000 at the Effective Time and 16 equal quarterly
payments of $100,000 commencing on the first day of the calendar quarter
following the Effective Time, which quarterly payments will be secured by a
letter of credit, which shall be irrevocable except if Townson breaches such
agreement. Pursuant to the foregoing agreements, each of the Company and the
Purchaser also agreed to indemnify Townson from and against certain liabilities
which may arise from the payments described above.
In order to provide for continuity of management during the period of the
Merger, the Board has designated 12 persons (including the following executive
officers of the Company: Nitin Parikh, Robert Genest and Geric Johnson) as key
employees of the Company to receive a "stay bonus" in the amount of $30,000 or
$50,000, which "stay bonus" is to be paid to such employees within 30 days after
the occurrence of an event such as the Merger. The terms and conditions of
employment of the recipients of the "stay bonus" continue to be "at will" and
are not otherwise affected by the "stay bonus." As a further inducement to such
key employees to continue to remain in the employ of the Company until at least
January 2, 1998, the Company has requested that each such person continue their
employment until such date at his or her existing rate of pay and defer his or
her "stay bonus," which would be increased to $30,875 (for stay bonuses
currently in the amount of $30,000) and $51,460 (for stay bonuses currently in
the amount of $50,000). If any employee who enters into an Extension Agreement
is terminated prior to such date, such employee will continue to receive his or
her existing rate of pay through January 2, 1998, except if such termination is
as a result of an act or acts of malfeasance or similar conduct, and will be
paid his or her "stay bonus" immediately upon termination regardless of the
reason for termination. If any such employee voluntarily resigns prior to
January 2, 1998, such employee will immediately receive the "stay bonus", but
will not be entitled to continue to receive such employee's existing rate of pay
through January 2, 1998.
Pursuant to the Merger Agreement, the Parent has agreed to cause the
Surviving Corporation to honor the Employment Agreement, dated as of April 19,
1996, between the Company and John B. Hatfield, Executive Vice President,
Secretary, Chief Financial Officer and Administrative Officer of the Company.
William J. Barrett, a director of the Company since 1983, is also a Senior
Vice President of JMS, which will receive certain fees pursuant to the
Engagement Letter in connection with the rendering by JMS of
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certain financial advisory services to the Company, including the rendering of
an opinion in connection with the Merger. See "OPINION OF FINANCIAL ADVISOR."
Each non-employee member of the Board of Directors of the Company has
received a bonus in the amount of $5,000 in compensation for his/her efforts in
connection with the Company's program to enhance the value of the Company's
shares.
The Parent has agreed to cause the Surviving Corporation to assume the
obligations under existing indemnification agreements between the Company and
each member of the Board, and between the Company and certain officers of the
Company and its subsidiaries. In addition, the Parent has agreed that for a
period of six years after the Effective Time, it will cause the Surviving
Corporation to maintain in effect a six-year "run-off" directors and officers
insurance policy (the "New D&O Insurance Policy").
PAYMENT FOR SHARES OF COMPANY CAPITAL STOCK
Payment for Shares; No Further Ownership of Company Capital Stock. As a
result of the Merger, holders of certificates formerly evidencing shares of
Company Capital Stock will cease to have any equity interest in the Company.
After consummation of the Merger, all certificates formerly evidencing shares of
Company Capital Stock, (excluding shares held (a) in the treasury of the Company
or owned by any direct or indirect subsidiary of the Company (which will be
cancelled and retired without any conversion thereof and without any payment
with respect thereto) or (b) by holders who shall have effectively exercised
their appraisal rights with respect to such shares in accordance with Section
262 of the DGCL) will be cancelled and converted into the right only to receive
a cash payment of $6.14 per share, without interest thereon. No interest will be
paid or accrued on the cash payable upon the surrender of such certificates.
Assuming approval of the Merger by the holders of the Company's Class A
Capital Stock and Class B Capital Stock and satisfaction of the other conditions
to the Merger, as of the Effective Time, the Purchaser will deposit, or will
cause to be deposited, with American Stock Transfer & Trust Company (the "Paying
Agent"), for the benefit of the holders of Shares, for payment in accordance
with the Merger Agreement through the Paying Agent, cash in an amount equal to
the Share Consideration multiplied by the number of Shares outstanding
immediately prior to the Effective Time, (such cash being hereinafter referred
to as the "Payment Fund"). The Paying Agent will, pursuant to irrevocable
instructions, deliver the cash contemplated to be paid pursuant to the Merger
Agreement out of the Payment Fund. The Payment Fund will not be used for any
other purpose. Promptly after the Effective Time, the Paying Agent will mail to
each record holder, as of the Effective Time, of a certificate that immediately
prior to the Effective Time evidencing outstanding Shares (the "Certificates") a
form of letter of transmittal which will specify that delivery will be effected,
and risk of loss and title to the Certificates will pass, only upon proper
delivery of the Certificates to the Paying Agent and instructions for use in
surrendering such Certificates and receiving the Share Consideration therefor.
Upon the surrender of each such Certificate, the Paying Agent will promptly pay
the holder of such Certificate in exchange therefor cash in an amount equal to
the Share Consideration multiplied by the number of Shares formerly represented
by such Certificate, and such Certificate will thereafter be cancelled. A
Payment in excess of $100,000 will, if requested by the stockholder entitled
thereto, be paid to such stockholder by wire transfer in immediately available
funds. Until so surrendered, each such Certificate (other than Certificates
representing Dissenting Shares and Certificates representing Shares held in the
treasury of the Company or by any wholly owned subsidiary of the Company) will
represent solely the right to receive the aggregate Share Consideration relating
thereto. No interest will be paid or accrued on such Share Consideration.
Stock Options. The Company will use best efforts to enter into an agreement
with each holder of an option to purchase Shares (an "Option"), which agreement
will provide that by virtue of the Merger and without any action on the part of
the holders thereof, each Option that is outstanding immediately before the
Effective Time, whether or not presently exercisable, will be cancelled and, in
consideration of such cancellation, each holder of an Option will be entitled to
receive at the Effective Time an amount equal to (a) the product of (i) the
excess, if any, by which the Share Consideration exceeds the exercise price of
the
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Option and (ii) the number of Shares subject thereto, plus (b) the product of
(i) $.05 and (ii) the number of Shares subject to Options whose exercise price
exceeds the Share Consideration.
The plans of the Company and its subsidiaries providing for Options
("Option Plans") will terminate as of the Effective Time and the provisions in
any other plan, program or arrangement, providing for the issuance or grant by
the Company or any of its subsidiaries of any interest in respect of the capital
stock of the Company or any of its subsidiaries will be terminated as of the
Effective Time, and following the Effective Time, subject to all holders of
Options entering into agreements to cancel their respective Options, no holder
of Options or any participant in the Option Plans or any other such plans,
programs or arrangements will have any right thereunder to acquire any equity
securities of the Company or any subsidiary thereof.
DETAILED INSTRUCTIONS ABOUT THE SURRENDER OF CERTIFICATES TOGETHER WITH A
LETTER OF TRANSMITTAL, WILL BE FORWARDED TO FORMER HOLDERS OF SHARES BY THE
PAYING AGENT PROMPTLY FOLLOWING THE EFFECTIVE TIME OF THE MERGER. HOLDERS OF
SHARES SHOULD NOT SUBMIT THEIR CERTIFICATES TO THE PAYING AGENT UNTIL THEY HAVE
RECEIVED SUCH MATERIALS. PAYMENT FOR SHARES WILL BE MADE TO FORMER HOLDERS OF
SHARES AS PROMPTLY AS PRACTICABLE FOLLOWING RECEIPT BY THE PAYING AGENT OF THEIR
CERTIFICATES AND OTHER REQUIRED DOCUMENTS.
MANAGEMENT OF THE COMPANY'S BUSINESS AFTER THE MERGER
Under the Merger Agreement, the Company will merge with the Purchaser at
the Effective Time. Although the Company will continue as the Surviving
Corporation, it will be a wholly owned subsidiary of the Parent as of the
Effective Time. As of the Effective Time, the Certificate of Incorporation and
By-laws of the Purchaser, as in effect immediately prior to the Effective Time,
will become the Certificate of Incorporation and By-laws of the Company as the
Surviving Corporation, and the directors of the Purchaser immediately prior to
the Effective Time will be the initial directors of the Company after the
Merger, each to hold office until their respective successors are duly elected
or appointed and qualified.
ACCOUNTING TREATMENT OF TRANSACTION
The Merger will be accounted for as a "purchase" for accounting and
financial reporting purposes. Accordingly, a determination of the fair value of
the Company's assets and liabilities will be made in order to allocate the
purchase price to the assets acquired and the liabilities assumed.
REGULATORY APPROVALS
The Company is not aware of any approval or other action, except as
otherwise described herein, by any governmental entity that would be required
for the consummation of the Merger as contemplated herein. Should any such
approval or other action be required, the Company currently contemplates that
such approval or other action will be sought.
The Federal Trade Commission (the "FTC") and the Antitrust Division of the
United States Department of Justice frequently scrutinize the legality under the
antitrust laws of transactions such as the proposed Merger. The Parent, the
Purchaser and the Company have concluded that the Merger is not subject to the
filing and waiting period requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. However, at any time before consummation of the
Merger, the Antitrust Division or the FTC could take such action under the
antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the consummation of the Merger or seeking the
divestiture of shares of the Surviving Corporation acquired by the Purchaser or
the divestiture of substantial assets of the Parent or its subsidiaries, or the
Company or its subsidiaries. Private parties may also bring legal action under
the antitrust laws under certain circumstances. There can be no assurance that a
challenge to the Merger on antitrust grounds will not be made or, if such a
challenge is made, of the results thereof.
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<PAGE> 21
DESCRIPTION OF MERGER AGREEMENT
The following is a summary of certain provisions of the Merger Agreement, a
conformed copy of which is attached to this Consent Solicitation Statement as
Annex A. Such summary is qualified in its entirety by reference to the Merger
Agreement.
General. Pursuant to and subject to the terms and conditions of the Merger
Agreement, at the Effective Time, the Company will merge with the Purchaser,
with the Company continuing as the Surviving Corporation. The Effective Time is
scheduled to occur as soon as practicable following satisfaction of certain
closing conditions described below, but in no event earlier than 20 business
days from the date of this Consent Solicitation Statement. As a result of the
Merger, at the Effective Time, the Surviving Corporation will be a wholly owned
subsidiary of the Parent and the Parent will hold all the outstanding voting
securities of the Company as the Surviving Corporation. The Company, as the
Surviving Corporation, will continue to own all the voting securities of its
four subsidiaries: Frederick's of Hollywood Stores, Inc., Hollywood Mail Order
Corp., Private Moments, Inc., and Walger's, Inc.
The Merger. The Merger Agreement provides that, upon the terms and subject
to the conditions thereof, and in accordance with the DGCL, at the Effective
Time, the Purchaser will be merged with and into the Company. As a result of the
Merger, the separate corporate existence of the Purchaser will cease and the
Company will continue as the Surviving Corporation and will become a direct,
wholly owned subsidiary of the Parent. Upon consummation of the Merger, each
issued and then outstanding share of Company Capital Stock (other than any
shares held in the treasury of the Company, or owned by any direct or indirect
subsidiary of the Company and any shares that are held by stockholders who have
not voted in favor of the Merger Agreement or consented thereto in writing and
who shall have demanded properly in writing appraisal for such shares in
accordance with Section 262 of the DGCL) will be cancelled and converted into
the right to receive the Share Consideration.
Pursuant to the Merger Agreement, all shares of capital stock of the
Purchaser issued and outstanding immediately prior to the Effective Time will be
converted into and exchanged for one share of common stock, par value $.01 per
share, of the Surviving Corporation.
The Merger Agreement provides that, at the Effective Time, the Certificate
of Incorporation and By-Laws of the Purchaser, as in effect immediately prior to
the Effective Time, will become the Certificate of Incorporation and By-Laws of
the Surviving Corporation, and the directors of the Purchaser immediately prior
to the Effective Time will be the initial directors of the Surviving
Corporation.
Payment for Shares. The Merger Agreement provides that any Shares
outstanding immediately before the Effective Time and held by a stockholder who
has not voted in favor of or consented to the Merger Agreement in writing and
who complies with the provisions of the DGCL concerning the right of holders of
shares of capital stock to dissent from the Merger and require appraisal of
their shares (a "Dissenting Stockholder" and "Dissenting Shares") will not be
converted into the right to receive the Share Consideration but instead will be
converted, at the Effective Time, by virtue of the Merger and without any
further action, into the right to receive from the Surviving Corporation any
consideration that may be determined to be due to the Dissenting Stockholder
pursuant to the DGCL; provided, that Shares outstanding immediately before the
Effective Time and held by a Dissenting Stockholder who, after the Effective
Time, fails to perfect or withdraws or loses the Dissenting Stockholder's right
to appraisal, in either case pursuant to the DGCL, will be deemed to have been
converted as of the Effective Time into the right to receive the Share
Consideration, without interest thereon. The Company may not, without the prior
written consent of the Purchaser, voluntarily make any payment with respect to,
or settle or offer to settle, any demands for appraisal of Shares by Dissenting
Stockholders.
The Parent has designated American Stock Transfer & Trust Company to act as
paying agent (the "Paying Agent") in effecting the payment of the Share
Consideration. At the Effective Time, the Parent will deposit, or cause to be
deposited, in trust with the Paying Agent sufficient funds to permit the Paying
Agent to make the payments contemplated by the Merger Agreement. Promptly after
the Effective Time, the Paying Agent will mail to each record holder of
certificates ("Certificates") representing Shares (other than Certificates
representing Shares held by the Purchaser in the treasury of the Company or by
any wholly owned
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subsidiary of the Company) a form of letter of transmittal which specifies that
delivery may be effected, and risk of loss and title to the Certificates will
pass, only upon proper delivery of the Certificates to the Paying Agent and
instructions for use in surrendering such Certificates and receiving the Share
Consideration therefor. Upon the surrender of each such Certificate, the Paying
Agent will pay the holder of such Certificate in exchange therefor cash in an
amount equal to the Share Consideration multiplied by the number of Shares
formerly represented by such Certificate, and such Certificate will be
cancelled. Until so surrendered, each Certificate (other than Certificates
representing Dissenting Shares and Certificates representing Shares held in the
treasury of the Company or by any wholly owned subsidiary of the Company) will
represent solely the right to receive the aggregate Share Consideration relating
thereto. After the Effective Time, there will be no transfers on the stock
transfer books of the Surviving Corporation of any Shares which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates formerly representing Shares (other than Certificates representing
Shares held in the treasury of the Company or by any wholly owned subsidiary of
the Company) are presented to the Surviving Corporation or the Paying Agent,
they will be surrendered and cancelled in return for the payment of the
aggregate Share Consideration relating thereto, without interest, as provided in
the Merger Agreement. The Share Consideration will be net to each holder of
Certificates in cash, subject to reduction only for any applicable federal
back-up withholding or stock transfer taxes payable by such holder. If payment
of cash in respect of any Certificate is to be made to a person other than the
person in whose name such Certificate is registered, it shall be a condition to
such payment that the Certificate so surrendered shall be properly endorsed or
shall be otherwise in proper form for transfer and that the person requesting
such payment shall have paid any transfer and other taxes required by reason of
such payment in a name other than that of the registered holder of the
Certificate surrendered or shall have established to the satisfaction of the
Parent or the Paying Agent that such tax either has been paid or is not payable.
Promptly following the date which is one hundred eighty (180) days after the
Effective Time, the Paying Agent will deliver to the Parent all cash,
Certificates and other documents in its possession relating to the transactions
described in this Agreement, and the Paying Agent's duties will terminate.
Thereafter, each holder of a Certificate formerly representing a Share (other
than Certificates representing Dissenting Shares and Certificates representing
Shares held in the treasury of the Company or by any wholly owned subsidiary of
the Company) may surrender such Certificate to the Parent and (subject to
applicable abandoned property, escheat and similar laws) receive in
consideration therefor the aggregate Share Consideration relating thereto,
without any interest or dividends thereon. Neither the Parent nor the Surviving
Corporation will be liable to any holder of Shares for any amount paid to a
public official in accordance with applicable abandoned property, escheat or
similar laws. For a description of the rights of holders of Dissenting Shares,
see "APPRAISAL RIGHTS FOR DISSENTING STOCKHOLDERS."
Conditions to the Merger. The obligation of all parties to effect the
Merger is subject to the satisfaction or, if permissible, waiver on or before
the Effective Time of each of the following conditions: (i) the holders of a
majority of each class of Shares consenting as a separate class must have
approved and adopted the Merger Agreement in accordance with the DGCL and the
rules and regulations of the New York Stock Exchange, (ii) there must not have
been any statute, rule, or regulation promulgated, enacted, entered or enforced,
or any other legally binding, final and nonappealable action taken, by any
domestic, foreign or supranational government or governmental, administrative,
or regulatory authority or agency of competent jurisdiction or by any court or
tribunal of competent jurisdiction, domestic, foreign or supranational, that in
any of the foregoing cases has the effect of making illegal or directly or
indirectly restraining, prohibiting or restricting the consummation of the
Merger, and (iii) at least 20 business days must have elapsed since the mailing
of this Consent Solicitation Statement.
The obligation of the Purchaser and the Parent to effect the Merger is also
subject to the satisfaction by the Company or, if permissible, waiver by the
Purchaser or the Parent at or prior to the Effective Time, of each of the
following conditions: (i) the number of Shares voted against the Merger
Agreement shall not have exceeded thirty percent (30%) of either class of the
outstanding Shares, (ii) the Amendment must have been approved by all requisite
action of the Company's stockholders, and must have been duly filed with the
Delaware Secretary of State, (iii) the Company must have performed or complied
in all material respects with all agreements and covenants required by the
Merger Agreement to be performed or complied with by it on or
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<PAGE> 23
prior to the Effective Time, and (iv) all third party consents necessary to the
Merger, other than consents of landlords, must have been obtained or waived by
the Company.
The obligation of the Company to effect the Merger is also subject to the
satisfaction by the Purchaser or the Parent, as the case may be, or, if
permissible, waiver by the Company at or prior to the Effective Time, of each of
the following conditions: (i) the Parent must have received contributions to its
capital in an aggregate amount equal to $17,000,000, and its definitive
agreements with its lender must have remained in full force and effect and must
not have been amended, modified or otherwise supplemented in any material
respect since the date of the Merger Agreement, (ii) the premium for the New D&O
Insurance Policy must have been paid in full and be non-cancelable, and (iii)
each of the Parent and the Purchaser must have performed or complied in all
material respects with all agreements and covenants required by the Merger
Agreement to be performed or complied with by it on or prior to the Effective
Time.
Interim Operations of the Company. In the Merger Agreement, the Company has
agreed that, except as expressly provided in the Merger Agreement or consented
to in writing by the Purchaser, from the date of the Merger Agreement to the
Effective Time, (i) the business of the Company and its subsidiaries will be
conducted only in the ordinary course of business consistent with past practice
(except for certain exceptions specified in the Merger Agreement), and (ii) the
Company's Board of Directors will not permit the Company nor any of its
subsidiaries to:
a. except for the Amendment, amend or propose to amend its certificate
or articles of incorporation or by-laws (or similar constituent documents);
b. authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise) any stock of any class or any other securities or equity
equivalents (including, without limitation, any stock options or stock
appreciation rights), except for Shares issued upon exercise of Options
outstanding as of the date of the Merger Agreement (in accordance with
their respective terms), or amend any of the terms of any such securities
or agreements outstanding as of the date of the Merger Agreement, except as
specifically contemplated by the Merger Agreement;
c. except as disclosed to the Parent and the Purchaser, split, combine
or reclassify any shares of its capital stock, declare, set aside or pay
any dividend or other distribution (whether in cash, stock or property or
any combination thereof) in respect of its capital stock, or redeem or
otherwise acquire any of its securities or any securities of its
subsidiaries;
d. (i) incur, assume or prepay any long-term or short-term debt or
issue any debt securities; (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise)
for any obligations of any other person except for obligations of wholly
owned subsidiaries of the Company; (iii) make any loans, advances or
capital contributions to, or investments in, any other person (other than
to wholly owned subsidiaries of the Company or customary loans or advances
to employees in the ordinary course of business consistent with past
practice); (iv) pledge or otherwise encumber shares of capital stock of the
Company or any of its subsidiaries; or (v) mortgage or pledge any of its
assets, tangible or intangible, or create or suffer to exist any lien
thereupon, excluding Permitted Liens and liens existing on the date of the
Merger Agreement;
e. except as may be required by law, as contemplated by the Merger
Agreement, with respect to compensating non-employee directors of the
Company or with respect to parity increases in compensation, enter into,
adopt or amend or terminate any bonus, profit sharing, compensation,
severance, termination, stock option, stock appreciation right, restricted
stock, performance unit, stock equivalent, stock purchase agreement, stock
ownership plan, pension, retirement, deferred compensation, employment,
severance or other employee benefit agreement, trust, plan, fund or other
arrangement for the benefit or welfare of any director, officer or employee
in any manner, or (except for normal increases in the ordinary course of
business consistent with past practice that, in the aggregate, do not
result in a material increase in benefits or compensation expense to the
Company, and as required under existing agreements) increase in any manner
the compensation or fringe benefits of any director, officer or
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<PAGE> 24
employee or pay any benefit not required by any plan and arrangement as in
effect as of the date of the Merger Agreement (including, without
limitation, the granting of stock options, stock appreciation rights or
performance units);
f. other than in accordance with specified new store leases, lease any
assets (other than automobile and office equipment leases entered into in
the ordinary course of business and consistent with past practice) or
acquire, sell, or dispose of any assets outside the ordinary course of
business or any assets which in the aggregate are material to the Company
or its subsidiaries, or enter into any commitments, contracts, agreements
or transactions outside the ordinary course of business consistent with
past practice or which would, individually or in the aggregate, be material
to the Company or its subsidiaries, or modify, amend, terminate or waive
any material rights under any contract or agreement;
g. except as may be required as a result of a change in law or in
generally accepted accounting principles, change any of the accounting
principles or practices used by it;
h. (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof or any equity interest therein; (ii) except as
contemplated by the Merger Agreement, enter into any contract or agreement
other than in the ordinary course of business consistent with past practice
which would be material to the Company or its subsidiaries; or (iii) enter
into or amend any contract, agreement, commitment or arrangement providing
for the taking of any action that would be prohibited under the Merger
Agreement;
i. revalue in any material respect any of its assets, including,
without limitation, writing down the value of inventory or writing-off
notes or accounts receivable other than in the ordinary course of business;
j. make any tax election or settle or compromise any federal, state or
local tax liability or assent to the extension of time for collection or
assessment of any federal, state or local tax in excess of $50,000;
k. pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of
business of liabilities reflected or reserved against in, or contemplated
by, the consolidated financial statements (or the notes thereto) of the
Company and its subsidiaries or incurred in the ordinary course of business
consistent with past practice;
l. settle or compromise any pending or threatened suit, action or
claim relating to the transactions contemplated hereby or material to the
Company and its subsidiaries taken as a whole;
m. other than certain capital expenditures specified in the Merger
Agreement, authorize or make any (i) new capital expenditure or (ii) other
than those made in the ordinary course of business, expenditures which
individually is in excess of $100,000 or which in the aggregate are in
excess of $500,000; or
n. take, or agree in writing or otherwise to take, any of the actions
described in Sections (a) through (m) above or, except as contemplated by
the Merger Agreement, take, or omit to take, any action which would make
any of the representations or warranties of the Company contained in the
Merger Agreement untrue or incorrect in any material respect as of the date
when made.
Stock Option Plans. The Company will use best efforts to enter into an
agreement with each holder of an option to purchase Shares (an "Option"), which
agreement will provide that by virtue of the Merger and without any action on
the part of the holders thereof, each Option that is outstanding immediately
before the Effective Time, whether or not presently exercisable, will be
cancelled and, in consideration of such cancellation, each holder of an Option
will receive at the Effective Time an amount equal to (a) the product of (i) the
excess, if any, by which the Share Consideration exceeds the exercise price of
the Option and (ii) the number of Shares subject thereto, plus (b) the product
of (i) $.05 and (ii) the number of Shares subject to Options whose exercise
price exceeds the Share Consideration.
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The plans of the Company and its subsidiaries providing for Options
("Option Plans") will terminate as of the Effective Time and the provisions in
any other plan, program or arrangement, providing for the issuance or grant by
the Company or any of its subsidiaries of any interest in respect of the capital
stock of the Company or any of its subsidiaries will be terminated as of the
Effective Time, and following the Effective Time, subject to all holders of
Options entering into agreements to cancel their respective Options, no holder
of Options or any participant in the Option Plans or any other such plans,
programs or arrangements will have any right thereunder to acquire any equity
securities of the Company or any subsidiary thereof.
Employee Stock Ownership Plan. The Company has agreed that prior to the
Effective Time, the Company will take such actions as may be necessary (a) to
terminate the Company's Employee Stock Option Plan (the "ESOP"), effective as of
and contingent upon the Merger becoming effective, and (b) to amend the ESOP to
provide that effective as of such ESOP termination, distributions will be
payable solely in cash.
As of the Effective Time, the Company will take such actions as may be
necessary to terminate the membership of all members of the Administrative
Committee which administers the ESOP, the Committee which administers the
Company's Profit-Sharing Plan (if a different committee than the Administrative
Committee), and any other committee which serves as "plan administrator" of any
other of the Company's employee benefit plans, programs or arrangements.
In addition, the Parent has covenanted that as soon as administratively
feasible, but in no event more than twelve months following the Effective Time,
it will cause the Surviving Corporation to arrange for the orderly unwinding of
the ESOP in accordance with all applicable legal requirements. Without limiting
the foregoing, the Surviving Corporation will (i) make application to the
Internal Revenue Service for a determination that the ESOP termination does not
adversely affect the ESOP's qualified status under the Internal Revenue Code of
1986, as amended (the "Code"), (ii) arrange for the ESOP to pay off the
remaining balance of the ESOP "acquisition loan" (as such term is defined in the
ESOP) from the assets held in the ESOP's "loan suspense account" (as such term
is defined in the ESOP), and allocate the remaining assets held in such loan
suspense account to the ESOP participants in accordance with the ESOP qualified
plan rules, and (iii) arrange for each ESOP participant to receive his or her
entire interest in the ESOP, which receipt, at the election of each participant,
will be either by direct payment to the participant, by direct payment to an IRA
(or qualified plan which receives rollovers) designated by the participant, or
by direct rollover to a qualified plan maintained by the Surviving Corporation
after the Effective Time.
No Solicitation. The Company has agreed, and has agreed to direct its
officers, directors, employees, representatives and agents (including, without
limitation, its attorneys, investment bankers and accountants) to, refrain from
any discussions and negotiations with any parties other than the Parent and the
Purchaser with respect to any proposal relating to an Acquisition Transaction
(defined below); provided, however, that the Company may seek clarification,
either directly or through its representatives, of an unsolicited proposal. The
Company has agreed that, prior to the Effective Time, it will not, and will not
authorize or permit any of its subsidiaries or any of its or its subsidiaries'
directors, officers, employees, agents or representatives (including, without
limitation, its attorneys, investment bankers and accountants), directly or
indirectly, to solicit, initiate or encourage (including by way of furnishing or
disclosing non-public information) any inquiries or the making of any proposal
with respect to any acquisition of all or substantially all of the Company by
means of a merger, consolidation or other business combination involving the
Company or its subsidiaries or acquisition of all or substantially all of the
assets or capital stock of the Company and its subsidiaries taken as a whole (an
"Acquisition Transaction") or initiate, negotiate, explore or otherwise engage
in substantive communications in any way with any person (other than the
Purchaser, the Parent and their directors, officers, employees, agents and
representatives) with respect to any Acquisition Transaction, or enter into any
agreement, arrangement or understanding requiring it to abandon, terminate or
fail to consummate the Merger or any other transactions contemplated by the
Merger Agreement. However, nothing in the Merger Agreement prevents the Company
or the Board from furnishing non-public information to, or entering into
discussions or negotiations with, any person or entity in connection with an
unsolicited bona fide written proposal for an Acquisition Transaction by such
person or entity, or recommending an unsolicited bona fide written proposal for
an Acquisition Transaction to the stockholders of the Company, if and only to
the extent that (A) the Board believes in good faith (after consultation with
its financial adviser) that such proposal for an Acquisition
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Transaction would, if consummated, result in a transaction more favorable to the
Company's stockholders from a financial point of view than the transactions
contemplated by the Merger Agreement and the Board of Directors of the Company
determines in good faith after consultation with its legal counsel that such
action is necessary for the Company to comply with its fiduciary duties to
stockholders under applicable law, and (B) prior to furnishing such nonpublic
information to, or entering into discussions with, such person or entity, the
Board of Directors of the Company receives from such person or entity an
executed confidentiality agreement, with terms no more favorable to such party
than those contained in the Confidentiality Agreement, dated January 23, 1997,
between Knightsbridge, Inc. and JMS.
Employment Agreements. The Parent has agreed to cause the Surviving
Corporation to perform (i) the "Stay Bonus" Agreements, dated June 28, 1996 (as
may be amended by the Extension Agreements), between the Company and each of
Nitin Parikh, James Glenny, Chris McGinley, John Treiman, Robert Genest, Shirli
Sumida, Chuck Gann, Alan Matuny, Kevin Townson, Geric Johnson, Susan Norris and
Dennis Warden; (ii) the Employment Agreement, dated as of April 19, 1996,
between the Company and John Hatfield; (iii) that certain Termination and
Release Agreement, dated June 14, 1997, between Townson and the Company; and
(iv) that certain Noncompetition and Consulting Agreement, dated June 15, 1997,
between Townson and the Purchaser.
Representations and Warranties. In the Merger Agreement, the Company has
made customary representations and warranties to the Purchaser with respect to,
among other things, the Company's organization, capitalization, authority to
enter into the Merger Agreement and to consummate the transactions contemplated
thereby, potential conflicts, consent and approvals, public filings, absence of
certain events, undisclosed liabilities, litigation, compliance with laws, tax
matters, termination, severance and employment agreements, employee benefit
plans, environmental matters, assets (including real property, intellectual
property and information systems), broker's fees, labor matters, the
non-application of Section 203 of the DGCL, and information set forth in the
Company's filings with the SEC or any other governmental entity in connection
with the transactions contemplated by the Merger Agreement, including this
Consent Solicitation Statement. The Purchaser and the Parent have made
representations and warranties to the Company with respect to organization,
authority to enter into the Merger Agreement and to consummate the transactions
contemplated thereby, potential conflicts, the provision of required
information, the ownership of securities, financing, and brokers' fees. None of
the representations or warranties in the Merger Agreement will survive the
Effective Time of the Merger.
Amendment. Subject to applicable law, the Company, the Parent and the
Purchaser may amend or supplement the Merger Agreement at any time before the
Effective Time by a written instrument signed by each of them.
Termination. (i) The Merger Agreement may be terminated, and the Merger may
be abandoned, notwithstanding approval thereof by the stockholders of the
Company, at any time before the Effective Time, (a) by mutual written consent of
the Parent, the Purchaser and the Company, (b) by any party if, without any
material breach by the terminating party of its obligations under the Merger
Agreement, the Merger has not occurred on or before 5:00 p.m. (Los Angeles time)
on the fortieth (40th) business day after the date of this Consent Solicitation
Statement (the "Merger Deadline") or (c) by the Parent, the Purchaser or the
Company if any court of competent jurisdiction in the United States or other
governmental body in the United States has issued an order (other than a
temporary restraining order), decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Merger, and such order,
decree, ruling or other action has become final and nonappealable. However, the
party seeking to terminate the Merger Agreement must have used its reasonable
best efforts to remove or lift any such order, decree or ruling.
(ii) In addition, the Merger Agreement may be terminated and the Merger may
be abandoned by the Parent or the Purchaser, if (a) the representations or
warranties of the Company contained in the Merger Agreement are not true and
correct at and as of any date prior to the Effective Date as if made at and as
of such time, except for (x) failures to be true and correct as could not,
individually or in the aggregate, reasonably be expected to result in a material
adverse effect on the business or financial condition of the Company and its
subsidiaries taken as a whole (a "Company Material Adverse Effect"), (y)
failures to
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comply as are capable of being and are cured (other than by mere disclosure of
the breach) within five (5) days after written notice from the Parent or the
Purchaser to the Company of such failure, or (z) representations and warranties
that speak as of a certain date which were true and correct in all material
respects as of such date; (b) the Company has failed to comply with its
covenants under the Merger Agreement, except for (x) failures to so comply as
could not, individually or in the aggregate, reasonably be expected to result in
a Company Material Adverse Effect, or (y) failures to comply as are capable of
being and are cured within five (5) days after written notice from the Purchaser
to the Company of such failure; (c) the conditions to the Merger to be satisfied
by the Company have not been satisfied or waived by the Parent or the Purchaser
prior to the Merger Deadline; (d) Credit Agricole Indosuez fails to fund the
Merger pursuant to loan documentation entered into with the Parent and the
Purchaser; (e) the Board (x) withdraws its recommendation or approval in respect
of the Merger Agreement or the Merger or (y) modifies or changes its
recommendation or approval in respect of the Merger Agreement or the Merger in a
manner materially adverse to the Parent or the Purchaser; or (f) the Board
approves any proposal other than by the Parent or the Purchaser in respect of an
Acquisition Transaction.
(iii) The Merger Agreement may be terminated and the Merger may be
abandoned by the Company notwithstanding approval thereof by the stockholders of
the Company at any time prior to the Effective Time if (a) the representations
and warranties of the Purchaser or the Parent contained in the Merger Agreement
are not true and correct at and as of any date prior to the Effective Time as if
made at and as of such time, except for (x) failures to be true and correct as
could not, individually or in the aggregate, reasonably be expected to result in
a material adverse effect on the business or financial condition of the
Purchaser (a "Purchaser Material Adverse Effect"), (y) failures to comply as are
capable of being and are cured (other than by mere disclosure of the breach)
within five (5) days after written notice from the Company to the Parent or the
Purchaser of such failure, or (z) representations and warranties which speak as
of a certain date which were true and correct in all material respects as of
such date; or (b) the Parent or the Purchaser has failed to comply with its
obligations under the Merger Agreement, except for (x) failures to so comply as
could not, individually or in the aggregate, reasonably be expected to result in
a Purchaser Material Adverse Effect, or (y) failures to comply as are capable of
being and are cured within five (5) days after written notice from the Company
to the Parent or the Purchaser of such failure; (c) the conditions to the Merger
to be satisfied by the Purchaser or the Parent have not been satisfied by the
Purchaser or the Parent or waived by the Company prior to the Merger Deadline,
or (d) the Board approves any proposal other than by the Parent and the
Purchaser in respect of an Acquisition Transaction.
(iv) If the Merger Agreement is terminated as provided in subsections
(i)-(iii) above, the Merger will be deemed abandoned, the Merger Agreement will
become void (except for certain provisions concerning confidentiality and the
payment of expenses), and no party will have any liability to or claim against
any other party, except as follows. In the event that the Merger Agreement is
terminated by the Parent or the Purchaser pursuant to subsections (ii)(a) or
(ii)(b) above, where the failure giving rise to such right of termination is
caused in whole or in material part by any action or inaction within the control
of the Company or any subsidiary of the Company, the Company will be required to
pay to the terminating party an amount equal to the actual out-of-pocket fees
and expenses reasonably incurred by such terminating party in connection with
the Merger and the transactions contemplated by the Merger Agreement, such
amount not to exceed $750,000. In the event that the Merger Agreement is
terminated by the Company (a) pursuant to subsections (iii)(a) or (iii)(b)
above, where the failure giving rise to such right of termination is caused in
whole or in material part by any action or inaction within the control of the
Parent or the Purchaser, or (b) because the Parent fails to receive
contributions to its capital in an aggregate amount equal to $17,000,000 or the
Loan Agreements cease to be in full force and effect or are amended, modified or
otherwise supplemented in any material respect, the Parent will be required to
pay to the Company an amount equal to the actual out-of-pocket fees and expenses
reasonably incurred by the Company in connection with the Merger and the
transactions contemplated by the Merger Agreement, such amount not to exceed
$500,000.
(v) In the event the Merger Agreement is terminated by the Parent or the
Purchaser pursuant to subsections (ii)(e) or (ii)(f) above, or by the Company
pursuant to subsection (iii)(d) above, the Company will be required to pay to
the Purchaser the sum of $1,800,000 as compensation for lost opportunities and
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reimbursement for outof-pocket expenses. In the event that holders of a majority
of each class of Shares entitled to vote on the Merger fail to approve the
Merger Agreement, the Company will be required to pay to the Purchaser, the
greater of (a) $750,000, and (b) the actual out-of-pocket fees and expenses
reasonably incurred and paid by the Purchaser in connection with the Merger and
the transactions contemplated by the Merger Agreement, such amount not to exceed
$1,000,000, as compensation for lost opportunities and reimbursement for
out-of-pocket expenses.
Indemnification. The Parent has agreed to cause the Surviving Corporation
to perform existing indemnification agreements between the Company and each
member of the Board, and between the Company and certain officers of the Company
and its subsidiaries. In addition, the Parent has agreed that for a period of
six years after the Effective Time, it will cause the Surviving Corporation to
maintain in effect the New D&O Insurance Policy.
The parties have also agreed that in the event the Surviving Corporation or
any of its successors or assigns (a) consolidates with or merges into any other
person and is not the continuing or surviving corporation or entity of such
consolidation or merger, or (b) transfers or conveys all or substantially all of
its properties and assets to any person, then, and in each such case, proper
provision will be made by the Parent so that the successors and assigns of the
Surviving Corporation assume the indemnification obligations set forth in the
Merger Agreement.
DESCRIPTION OF FEDERAL INCOME TAX CONSEQUENCES
OF MERGER
The receipt of cash for shares of Company Capital Stock in the Merger or
pursuant to the exercise of dissenters' appraisal rights will be a taxable
transaction for Federal income tax purposes and may also be a taxable
transaction under applicable state, local, foreign or other tax laws. Generally,
a stockholder will recognize gain or loss for such purposes equal to the
difference between the cash received in connection with the Merger and such
stockholder's tax basis for the shares of Company Capital Stock such stockholder
owned immediately prior to the Effective Time. For Federal income tax purposes,
such gain or loss will be a capital gain or loss if the shares of Company
Capital Stock are a capital asset in the hands of the stockholder, and a
long-term capital gain or loss if the stockholder's holding period is more than
one year as of the Effective Time. There are limitations on the deductibility of
capital losses.
Under current law, the maximum federal tax rate applicable to long-term
capital gains recognized by an individual is 28%, and the maximum Federal tax
rate applicable to ordinary income (including dividends and short-term capital
gains recognized by individuals) is 39.6%. The maximum Federal tax rate
applicable to all capital gains and ordinary income recognized by a corporation
is 35%. It is possible that legislation may be enacted that would reduce the
maximum federal tax rate applicable to long-term capital gains, possibly with
retroactive effect. It is not possible to predict whether or in what form any
such legislation may be enacted.
The summary of tax consequences set forth above is for general information
only. The tax treatment of each stockholder will depend in part upon his or her
particular situation. Actual tax consequences not described herein may be
applicable to particular classes of taxpayers, such as financial institutions,
broker-dealers, persons who are not citizens or residents of the United States,
stockholders who acquired the shares of Company Capital Stock through the
exercise of an employee stock option or otherwise as compensation, and persons
who received payments in respect of options to acquire shares of Company Capital
Stock. ALL STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES OF THE MERGER TO THEM, INCLUDING THE APPLICABILITY
AND EFFECT OF ANY STATE, LOCAL AND FOREIGN LAWS.
APPRAISAL RIGHTS FOR DISSENTING STOCKHOLDERS
Holders of shares of Company Capital Stock are entitled to appraisal rights
under Section 262 of the DGCL ("Section 262"), provided that they comply with
the requirements established by Section 262.
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Section 262 is reprinted in its entirety as Annex E to this Consent
Solicitation Statement. The following discussion is not a complete statement of
the law relating to appraisal rights and is qualified in its entirety by
reference to Annex E. THIS DISCUSSION AND ANNEX E SHOULD BE REVIEWED CAREFULLY
BY ANY HOLDER WHO WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO
PRESERVE THE RIGHT TO DO SO, AS FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH
HEREIN OR THEREIN WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS.
A record holder of shares of Company Capital Stock who makes the demand
described below with respect to such shares, and who otherwise complies with the
statutory requirements of Section 262 will be entitled to an appraisal by the
Delaware Court of Chancery, (the "Delaware Court") of the fair value of his or
her shares of Company Capital Stock. All references in this summary of appraisal
rights to a "stockholder" or "holders of shares of Company Capital Stock" are to
the record holder or holders of shares of Company Capital Stock.
Under Section 262, where a merger is accomplished pursuant to Section 228
of the Delaware General Corporation Law, either before or within 10 days after
the effective date of the merger, each constituent corporation (or, after the
effective date of the merger, the surviving corporation) must notify each
stockholder of each constituent corporation entitled to appraisal rights of the
merger and that appraisal rights are available to such stockholders and include
in each such notice (the "Notice") a copy of Section 262.
Holders of shares of Company Capital Stock who desire to exercise their
appraisal rights must deliver a written demand for appraisal to the Company
within 20 days after the date of mailing of the Notice. A demand for appraisal
must be executed by or on behalf of the stockholder of record and must
reasonably inform the Company of the identity of the stockholder of record and
that such stockholder intends thereby to demand appraisal of his or her shares
of Company Capital Stock.
A stockholder who elects to exercise appraisal rights should mail or
deliver his or her written demand to: Secretary, Frederick's of Hollywood, Inc.,
6608 Hollywood Boulevard, Hollywood, California 90028.
A person having a beneficial interest in shares of Company Capital Stock
that are held of record in the name of another person, such as a broker,
fiduciary, depositary or other nominee, must act promptly to cause the record
holder to follow the steps summarized herein properly and in a timely manner to
perfect appraisal rights. If the shares of Company Capital Stock are owned of
record by a person other than the beneficial owner, including a broker,
fiduciary (such as a trustee, guardian or custodian), depositary or other
nominee, such demand must be executed by or for the record owner. If the shares
of Company Capital Stock are owned of record by more than one person, as in a
joint tenancy or tenancy in common, such demand must be executed by or for all
joint owners. An authorized agent, including an agent for two or more joint
owners, may execute the demand for appraisal for a stockholder of record;
however, the agent must identify the record owner and expressly disclose the
fact that, in exercising the demand, such person is acting as agent for the
record owner. If a stockholder holds shares of Company Capital Stock through a
broker who in turn holds the shares through a central securities depository
nominee such as Cede & Co., a demand for appraisal of such shares must be made
by or on behalf of the depository nominee and must identify the depository
nominee as record holder.
A record holder, such as a broker, fiduciary, depositary or other nominee,
who holds shares of Company Capital Stock as a nominee for others, may exercise
appraisal rights with respect to the shares held for all or less than all
beneficial owners of shares as to which such person is the record owner. In such
case, the written demand must set forth the number of shares covered by such
demand. Where the number of shares is not expressly stated, the demand will be
presumed to cover all shares of Company Capital Stock outstanding in the name of
such record owner.
Within 120 days after the Effective Time, either the Company or any
stockholder who has complied with the required conditions of Section 262 may
file a petition in the Delaware Court, with a copy served on the Company in the
case of a petition filed by a stockholder, demanding a determination of the fair
value of the shares of all dissenting stockholders. There is no present intent
on the part of the Company to file an appraisal
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petition and stockholders seeking to exercise appraisal rights should not assume
that the Company will file such a petition or that the Company will initiate any
negotiations with respect to the fair value of such shares. Accordingly, holders
of Company Capital Stock who desire to have their shares appraised should
initiate any petitions necessary for the perfection of their appraisal rights
within the time periods and in the manner prescribed in Section 262. Within 120
days after the Effective Time, any stockholder who has theretofore complied with
the applicable provisions of Section 262 will be entitled, upon written request,
to receive from the Company a statement setting forth the aggregate number of
shares of Company Capital Stock not voting in favor of the Merger and with
respect to which demands for appraisal were received by the Company and the
number of holders of such shares. Such statement must be mailed within 10 days
after the written request therefor has been received by the Company.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which stockholders are entitled to
appraisal rights. The Delaware Court may require the stockholders who have
demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Delaware Court may dismiss
the proceedings as to such stockholder. Where proceedings are not dismissed, the
Delaware Court will appraise the shares of Company Capital Stock owned by such
stockholders, determining the fair value of such shares exclusive of any element
of value arising from the accomplishment or expectation of the Merger, together
with a fair rate of interest, if any, to be paid upon the amount determined to
be the fair value.
Although the Company believes that the Share Consideration is fair, no
representation is made as to the outcome of the appraisal of fair value as
determined by the Delaware Court and stockholders should recognize that such an
appraisal could result in a determination of a value higher or lower than, or
the same as, the Share Consideration. Moreover, the Company does not anticipate
offering more than the Share Consideration to any stockholder exercising
appraisal rights and reserves the right to assert, in any appraisal proceeding,
that, for purposes of Section 262, the "fair value" of a share of Company
Capital Stock is less than the Share Consideration. In determining "fair value"
the Delaware Court is required to take into account all relevant factors. In
Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), the Delaware Supreme Court
stated, among other things, that "proof of value by any techniques or methods
which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered in an appraisal proceeding.
Section 262 provides that "fair value" is to be "exclusive of any element of
value arising from the accomplishment or expectation of the merger." In
Weinberger, the Delaware Supreme court held that "elements of future value,
including the nature of the enterprise, which are known or susceptible of proof
as of the date of the merger and not the product of speculation, may be
considered." In Cede & Co. v. Technicolor, Inc., 684 A.2d 289 (Del. 1996), the
Delaware Supreme Court stated that "Section 262 is very narrow, designed to
eliminate use of pro forma data and projections of a speculative variety
relating to the completion of a merger. [citing Weinberger]. That narrow
exclusion does not encompass known elements of value, including those which
exist on the date of the merger because of a majority acquiror's interim action
in a two-step cash-out transaction."
Holders of shares of Company Capital Stock considering seeking appraisal
should recognize that the fair value of their shares determined under Section
262 could be more than, the same as or less than the Share Consideration which
they are entitled to receive if they do not seek appraisal of their shares. The
cost of the appraisal proceeding may be determined by the Delaware Court and
taxed against the parties as the Delaware Court deems equitable in the
circumstances. Upon application of a dissenting stockholder of the Company, the
Delaware Court may order that all or a portion of the expenses incurred by any
dissenting stockholder in connection with the appraisal proceeding, including
without limitation, reasonable attorneys' fees and the fees and expenses of
experts, be charged pro rata against the value of all shares of stock entitled
to appraisal.
Any holder of shares of Company Capital Stock who has duly demanded
appraisal in compliance with Section 262 will not be entitled to vote for any
purpose any shares subject to such demand or to receive payment of dividends or
other distributions on such shares, except for dividends or distributions
payable to stockholders of record at a date prior to the Effective Date.
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At any time within 60 days after the Effective Time, any stockholder will
have the right to withdraw such demand for appraisal and to accept the Share
Consideration; after this period, the stockholder may withdraw such demand for
appraisal only with the consent of the Company. If no petition for appraisal is
filed with the Delaware Court within 120 days after the Effective Date,
stockholders' rights to appraisal shall cease, and all holders of shares of
Company Capital Stock will be entitled to receive the Share Consideration.
Inasmuch as the Company has no obligation to file such a petition, and the
Company has no present intention to do so, any holder of shares of Company
Capital Stock who desires such a petition to be filed is advised to file it on a
timely basis. Any stockholder may withdraw such stockholder's demand for
appraisal by delivering to the Company a written withdrawal of his or her demand
for appraisal and acceptance of the Share Consideration, except (i) that any
such attempt to withdraw made more than 60 days after the Effective Time will
require written approval of the Company and (ii) that no appraisal proceeding in
the Delaware Court shall be dismissed as to any stockholder without the approval
of the Delaware Court, and such approval may be conditioned upon such terms as
the Delaware Court deems just.
DESCRIPTION OF FINANCING OF MERGER
The total amount of funds required by the Purchaser to acquire all of the
outstanding shares of the Company Capital Stock and to cancel all Options
pursuant to the Merger and to pay the fees and expenses related to the Merger is
estimated to be approximately $55 million. The Purchaser plans to obtain all
funds needed for the Merger through the sale of approximately $17 million of the
equity of the Purchaser that will be made to certain investors, and
approximately $38 million through debt financing. Immediately prior to the
signing of the Merger Agreement, Parent received a contribution to its capital
of $10,000,000 and obtained commitments from certain investors to contribute an
additional $7,000,000 to Parent's capital. In addition, prior to signing the
Merger Agreement, Parent and Purchaser executed a Credit Agreement (the "Credit
Agreement") with Credit Agricole Indosuez ("Lender"), as agent and lender and a
Senior Subordinated Loan Agreement with Lender, as lender (the "Subordinated
Loan Agreement"), each (collectively, the "Loan Agreements"). Under the Loan
Agreements, Parent and Purchaser have total available credit of up to
$48,000,000 for use in connection with the Merger and for working capital and
other general corporate purposes.
The Credit Agreement is composed of three credit facilities (the
"Facilities"), with varying maturity dates, interest rates and other terms. The
Facilities provide commitments for an aggregate principal amount of up to $35
million. The Facilities will be secured by a first priority security interest in
all accounts receivable, inventory, property, plant and equipment, intangibles,
contract rights and other personal, intellectual and real property of the
Surviving Corporation and its subsidiaries. In addition, the Facilities will be
guaranteed by the Parent, which guarantee will be secured by a pledge of the
stock of the Surviving Corporation.
The Subordinated Loan Agreement is a commitment for a principal amount of
$13 million (the "Subordinated Debt"), maturing seven years from the Loan
Closing Date. Interest is payable under the Subordinated Loan Agreement at the
rate of 12.5% payable quarterly in arrears. The Subordinated Debt will be
redeemable at the option of the Company, in whole or in part, at any time after
three years from the Loan Closing Date. The Subordinated Debt will be unsecured
and subordinated to all senior debt.
Conditions to funding of the Facilities and the Subordinated Debt include,
among other matters, (1) the absence of material adverse change, (2) the absence
of an injunction or order which would prohibit the making of the loans
thereunder or the consummation of the Merger, (3) satisfactory evidence of the
solvency of the Company as the Surviving Corporation on a going forward basis
after consummation of the Merger, and the Merger having been consummated, and
(4) other standard and customary conditions for credit facilities of this
nature. The Loan Agreements include customary representations, warranties and
covenants, including financial covenants.
The Lender is entitled to certain fees on the Facilities and on the
Subordinated Debt, each payable on the date of the closing of the Facilities and
the Subordinated Debt. In addition, an affiliate of the Lender will become an
equity investor in the Surviving Corporation, and the Lender will be entitled to
receive a commitment fee on the undrawn portion of the Revolving Credit Facility
and an annual agency fee.
30
<PAGE> 32
INFORMATION CONCERNING PARENT AND PURCHASER
The Purchaser and the Parent, both Delaware corporations, were organized by
Knightsbridge Capital Corp. ("Knightsbridge") to acquire the Company and have
not conducted any unrelated activities since their organization. The principal
offices of the Purchaser and the Parent are located at 225 West Washington St.,
Suite 2150, Chicago, Illinois 60606.
Until immediately prior to the Merger, it is not anticipated that the
Purchaser or the Parent will have engaged in activities other than those
incident to their formation and capitalization and in connection with the
Merger. Immediately prior to the signing of the Merger Agreement, Parent
received a contribution to its capital of $10,000,000 and obtained commitments
from certain investors, including an affiliate of Knightsbridge, to contribute
an additional $7,000,000 to Parent's capital. In addition, prior to signing the
Merger Agreement, Parent and Purchaser executed the Loan Agreements. Under the
Loan Agreements, Parent and Purchaser have total available credit in the
aggregate amount of up to $48,000,000 for use in connection with the Merger and
for working capital and other general corporate purposes.
PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP OF DIRECTORS AND
EXECUTIVE OFFICERS
Set forth below is certain information with respect to those persons known
to the Company to be the beneficial owners of more than 5% of the shares of the
Company Capital Stock outstanding as of , 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OUTSTANDING*
NAME AND ADDRESS OF ------------------------------- -------------------------------
BENEFICIAL OWNER CLASS A STOCK CLASS B STOCK CLASS A STOCK CLASS B STOCK
- ------------------------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Harriett R. Mellinger Trust(1) 463,066 1,579,718 14.8 25.3
16633 Ventura Boulevard
Suite 1211
Encino, CA 91436
Frederick N. Mellinger Trust(1) 820,193 1,579,386 26.1 25.3
16633 Ventura Boulevard
Suite 1211
Encino, CA 91436
Mr. Hugh V. Hunter(1) 1,315,591 3,223,768 41.9 51.6
16633 Ventura Boulevard
Suite 1211
Encino, CA 91436
Company ESOP(2) 348,662 -0- 11.1 -0-
All Directors and Executive Officers 1,583,770(3) 3,744,303(4) 50.5 59.9
as a Group (11 persons)(1)
</TABLE>
- ---------------
* The percentage calculation is based on the number of shares outstanding plus
shares represented by options exercisable within 60 days.
(1) Hugh V. Hunter, a director of the Company, is the Co-Trustee of the Harriett
R. Mellinger Trust and the Frederick N. Mellinger Trust (the "Trusts"), and
has the power to direct the voting of the Company's Capital Stock held by
the Trusts. Wells Fargo Bank is the Co-Trustee of the Trusts.
(2) Each ESOP participant is entitled to vote (a) shares of stock allocated to
participants account and, (b) a portion of the unallocated stock equal to
the percentage of allocated stock participant is entitled to vote.
(3) Includes 183,758 shares, of which 102,086 are attributable to George W.
Townson, such officer having the right to acquire under immediately
exercisable options.
(4) Includes 349,992 shares, of which 179,164 are attributable to George W.
Townson, such officer having the right to acquire under immediately
exercisable options.
31
<PAGE> 33
The following table sets forth information regarding the beneficial
ownership of the directors of the Company of shares of Company Capital Stock as
of , 1997.
<TABLE>
<CAPTION>
SHARES OF CAPITAL STOCK PERCENT
BENEFICIALLY OWNED(1) OUTSTANDING**
------------------------- ---------------------
CLASS A CLASS B CLASS B CLASS B
NAME STOCK STOCK STOCK STOCK
- ---------------------------------------------- --------- --------- ------- -------
<S> <C> <C> <C> <C>
George W. Townson............................. 116,961(2) 208,914(3) 3.7 3.3
Richard O. Starbird........................... 54,369 108,738 1.7 1.7
Hugh V. Hunter................................ 1,315,591(4) 3,223,768(4) 41.9 51.6
William J. Barrett............................ 7,256 16,217 * *
Merle A. Johnston............................. -- -- * *
</TABLE>
- ---------------
* Less than one percent.
** The percentage calculation is based on the number of shares outstanding plus
shares represented by options exercisable within 60 days.
(1) All directors have sole voting and investment power as to all of the shares
of Capital Stock beneficially owned by them.
(2) George W. Townson has the right to acquire 102,086 shares of Class A Stock
under immediately exercisable options.
(3) George W. Townson has the right to acquire 179,164 shares of Class B Stock
under immediately exercisable options.
(4) Hugh V. Hunter is a Co-Trustee of the Harriett R. Mellinger Trust and the
Frederick N. Mellinger Trust ("Mellinger Family Trusts"). The Mellinger
Family Trusts own 1,283,259 shares of Class A Stock and 3,159,104 shares of
Class B Stock. Mr. Hunter has the power to vote the Class A Stock held by
the Mellinger Family Trusts and to dispose of the Class A Stock and Class B
Stock. The shares held by the Mellinger Family Trusts are included in the
table above.
The following table sets forth information regarding the beneficial
ownership of the executive officers of the Company of shares of Company Capital
Stock as of , 1997.
<TABLE>
<CAPTION>
SHARES OF CAPITAL
STOCK PERCENT
BENEFICIALLY OWNED OUTSTANDING
--------------------- ---------------------
NAME CLASS A CLASS B CLASS A CLASS B
- ------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
George W. Townson................................ 116,961(1) 209,914(1) 3.7 3.3
John B. Hatfield................................. 40,836(2) 69,164(2) * *
Nitin G. Parikh.................................. 20,480(3) 50,957(3) * *
Robert G. Genest................................. 17,500(4) 35,000(4) * *
Geric B. Johnson................................. 10,063(5) 30,122(5) * *
</TABLE>
- ---------------
* Less than one percent
(1) Includes 102,086 shares of Class A Stock and 179,164 shares of Class B Stock
which George W. Townson has the right to acquire beneficial ownership.
(2) Includes 40,836 shares of Class A Stock and 69,164 shares of Class B Stock
which John G. Hatfield has the right to acquire beneficial ownership.
(3) Includes 15,418 shares of Class A Stock and 40,832 shares of Class B Stock
which Nitin G. Parikh has the right to acquire beneficial ownership.
(4) Includes 17,500 shares of Class A Stock and 35,000 shares of Class B Stock
which Robert R. Genest has the right to acquire beneficial ownership.
32
<PAGE> 34
(5) Includes 7,918 shares of Class A Stock and 25,832 shares of Class B Stock
which Geric B. Johnson has the right to acquire beneficial ownership.
MARKET FOR CAPITAL STOCK AND DIVIDENDS
The shares of Company Capital Stock are listed and traded on the New York
Stock Exchange (the "NYSE") under the symbols "FOH.A" and "FOH.B." The following
table sets forth, for the fiscal quarters indicated, the range of closing high
and low market prices for shares of the Company Capital Stock as reported on the
NYSE.
<TABLE>
<CAPTION>
CLASS A CLASS B
CAPITAL CAPITAL
STOCK STOCK
------------ ------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
Fiscal 1997
First quarter.................................. $5 7/8 $4 $5 $3 5/8
Second quarter................................. $4 7/8 $3 7/8 $5 $3 1/2
Third quarter.................................. $6 $3 3/4 $5 5/8 $3 5/8
Fourth quarter (through 6/24/97)............... $6 $5 $6 $4 3/4
Fiscal 1996
First quarter.................................. $5 5/8 $4 3/8 $5 1/2 $4 1/4
Second quarter................................. $4 7/8 $3 7/8 $4 3/4 $3 1/2
Third quarter.................................. $4 3/4 $3 3/4 $4 3/4 $3 1/4
Fourth quarter................................. $5 3/4 $3 7/8 $5 1/4 $3 5/8
Fiscal 1995
First quarter.................................. $4 7/8 $3 3/4 $4 3/4 $3 1/4
Second quarter................................. $6 1/8 $3 5/8 $5 5/8 $3 1/2
Third quarter.................................. $5 1/2 $4 3/8 $5 1/2 $3 7/8
Fourth quarter................................. $6 1/4 $5 1/8 $6 1/2 $4 1/2
</TABLE>
On June 13, 1997, the last full day of trading prior to execution of the
Merger Agreement and the announcement of the Parent's offer to acquire the
Company, the closing sale price as reported by the NYSE was $5.25 per share of
Class A Capital Stock and $4.75 per share of Class B Capital Stock. STOCKHOLDERS
ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE COMPANY CAPITAL STOCK.
On April 18, 1997, the Company declared a cash dividend of 2.5 cents per
share on both the Class A Capital Stock and Class B Capital Stock payable on
July 1, 1997 to record holders as of June 13, 1997. The Company paid quarterly
cash dividends on both Class A Capital Stock and Class B Capital Stock of 2.5
cents per share in Fiscal 1996 and a semi-annual cash dividend of 2.5 cents per
share in Fiscal 1995. Pursuant to the Merger Agreement, the Company has agreed
not to declare, set aside, or pay any additional dividend or other distribution
in respect of the Company Capital Stock until consummation of the Merger.
33
<PAGE> 35
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
The following table summarizes certain data from the Company's annual
consolidated financial statements for the years 1992 through 1996 excerpted or
derived from the information contained in the Company's Annual Report on Form
10-K for the year ended August 31, 1996 (the "10-K") and the Company's Quarterly
Report on Form 10-Q for the quarter ended February 28, 1997 (the "February
10-Q"). The 10-K, the February 10-Q, as well as the Company's Quarterly Report
on Form 10-Q for the quarter ended November 30, 1996, and the Company's Proxy
Statement for the Annual Meeting of Stockholders held on January 30, 1997,
accompany the Consent Solicitation Statement and should be read by stockholders
in conjunction herewith. More comprehensive financial and business information
concerning the Company is included in such reports and other documents filed by
the Company with the Securities and Exchange Commission, and the following
information is qualified in its entirety by reference to such reports and such
other documents and all the financial information (including any related notes)
contained therein.
The Company's fiscal year ends on the Saturday closest to August 31. Fiscal
year 1994 consisted of 53 weeks. All other years presented consist of 52 weeks.
Data for the six months ended February 28, 1997 and 1996 are derived from the
Company's unaudited consolidated financial statements for such period and
reflect all adjustments which are, in the opinion of management, necessary to a
fair statement of the results for such period.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED FEBRUARY
28,
FISCAL YEARS (UNAUDITED)
---------------------------------------------------- -----------------
1996 1995 1994 1993 1992 1996 1997
-------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS EXCEPT PERCENTAGES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales......................................... $148,090 $142,931 $132,153 $128,516 $117,030 $82,362 $81,207
Gross profit...................................... 60,031 58,728 54,744 55,622 52,862 35,160 34,274
Earnings (loss) before income taxes............... (664) 4,412 (1,705) 7,655 8,018 4,895 2,308
Net earnings (loss)............................... (438) 2,652 (903) 4,737 5,073 2,863 1,350
Primary earnings (loss) per share -- Classes A &
B............................................... (.05) .31 (.10) .53 .57 .33 .15
Cash dividends per share -- Classes A & B....... .10 .075 .05 .05 .05 .05 .05
Primary weighted average shares outstanding --
Classes A & B................................... 8,745 8,693 8,876 8,915 8,698 8,759 8,717
FINANCIAL POSITION AT PERIOD END:
Working capital................................... 20,447 21,263 17,486 15,783 11,213 22,941 22,864
Total assets...................................... 52,709 55,952 55,417 50,838 45,790 55,541 54,053
Long-term debt.................................... 240 480 720 -- -- 240 480
Capital lease obligations......................... 672 884 701 1,207 1,663 562 780
Stockholders' equity.............................. 35,525 36,599 34,413 36,615 32,204 38,013 37,619
Equity per share -- Classes A & B................. 4.06 4.21 3.88 4.11 3.67 4.34 4.32
FINANCIAL RATIOS:
Net earnings (loss) to sales...................... (0.3)% 1.9% (0.7)% 3.7% 4.3% 3.5% 1.7%
Net earnings (loss) to average stockholders'
equity.......................................... (1.2)% 7.4% (2.5)% 13.8% 17.2% 7.8% 3.6%
Current ratio..................................... 2.6 2.5 2.1 2.4 2.1 2.8 3.0
-------- -------- -------- -------- -------- ------- -------
</TABLE>
Because the Purchaser is a newly formed corporation and has minimal assets
and capitalization (other than an initial capital contribution to the capital of
the Parent in the amount of $10,000,000), no meaningful financial information
regarding the Purchaser is available.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company under the Exchange
Act with the SEC are incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the year ended August
31, 1996.
(2) The Company's Quarterly Report on Form 10-Q for the quarterly
period ended November 30, 1996.
34
<PAGE> 36
(3) The Company's Proxy Statement for the Annual Meeting of
Stockholders held on January 30, 1997.
(4) The Company's Quarterly Report on Form 10-Q for the quarterly
period ended February 28, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Consent Solicitation
Statement and prior to the Effective Time shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Consent Solicitation Statement to the extent that a
statement contained herein or in any other subsequently filed documents that
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Consent Solicitation Statement. The Company will provide, without charge, to
each person to whom a copy of this Consent Solicitation Statement has been
delivered, on the written or oral request of such person, a copy of any or all
of the documents referred to above that have been or may be incorporated by
reference herein other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference herein). Requests for such copies should
be directed to: John B. Hatfield, Secretary, Frederick's of Hollywood, Inc.,
6608 Hollywood Boulevard, Hollywood, California 90028; (213) 466-5151.
INDEPENDENT AUDITORS
The consolidated financial statements of the Company as of August 31, 1996
and September 2, 1995 and for each of the fiscal years in the three-year period
ended August 31, 1996 accompanying the Consent Solicitation Statement have been
audited by KPMG Peat Marwick LLP, independent certified public accountants, the
Company's independent auditors.
OTHER AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Exchange Act
and, in accordance therewith, is required to file reports and other information
with the Commission relating to its business, financial condition and other
matters. Information as of particular dates concerning the Company's directors
and officers, their remuneration, the principal holders of the Company's
securities and any material interest of such persons in transactions with the
Company is required to be disclosed in proxy statements distributed to the
Company's stockholders and filed with the Commission. Such reports, proxy
statements and other information should be available for inspection at the
public reference facilities of the Commission located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located in
the Citicorp Center, 500 West Madison Street (Suite 1400), Chicago, Illinois
60661-2511 and Seven World Trade Center, Suite 1300, New York, New York 10048.
Copies should be obtainable, by mail, upon payment of the Commission's customary
charges, by writing to the Commission's principal office at 450 Fifth Street,
N.W., Washington, D.C. 20549. Such material should also be available for
inspection at the library of the NYSE, 20 Broad Street, New York, New York 10005
and through the internet at the Commission's website (http://www.sec.gov).
By Order of the Board of Directors,
/s/ JOHN B. HATFIELD
JOHN B. HATFIELD
Secretary
, 1997
35
<PAGE> 37
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
FREDERICK'S OF HOLLYWOOD, INC.,
ROYALTY ACQUISITION CORP.
AND
ROYALTY CORPORATION
DATED AS OF JUNE 15, 1997
<PAGE> 38
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER............................................................ A-2
1.1. THE MERGER..................................................... A-2
1.2. EFFECTIVE TIME................................................. A-2
1.3. CERTIFICATE OF INCORPORATION AND BY-LAWS OF SURVIVING
CORPORATION.................................................... A-3
1.4. DIRECTORS AND OFFICERS OF SURVIVING CORPORATION................ A-3
1.5. COMPANY DELIVERIES............................................. A-3
1.6. PARENT AND BUYER DELIVERIES.................................... A-3
ARTICLE II CONVERSION OF SHARES.................................................. A-3
2.1. EFFECT ON SHARES AND BUYER'S CAPITAL STOCK..................... A-3
2.2. COMPANY OPTION PLANS........................................... A-4
2.3. TERMINATION OF ESOP............................................ A-4
2.4. CONSUMMATION OF THE MERGER..................................... A-4
ARTICLE III DISSENTING SHARES; PAYMENT FOR SHARES................................. A-5
3.1. DISSENTING SHARES.............................................. A-5
3.2. PAYMENT FOR SHARES............................................. A-5
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................... A-6
4.1. ORGANIZATION................................................... A-6
4.2. CAPITALIZATION................................................. A-6
4.3. AUTHORITY...................................................... A-7
4.4. SEC DOCUMENTS; FINANCIAL STATEMENTS............................ A-7
4.5. ABSENCE OF CERTAIN CHANGES; NO UNDISCLOSED LIABILITIES......... A-8
4.6. LITIGATION..................................................... A-8
4.7. COMPLIANCE WITH APPLICABLE LAW................................. A-8
4.8. TAXES.......................................................... A-8
4.9. TERMINATION, SEVERANCE AND EMPLOYMENT AGREEMENTS............... A-9
4.10. EMPLOYEE BENEFIT PLANS; ERISA.................................. A-9
4.11. ENVIRONMENTAL MATTERS.......................................... A-11
4.12. ASSETS; REAL PROPERTY; INTELLECTUAL PROPERTY................... A-11
4.13. SYSTEMS AND SOFTWARE........................................... A-12
4.14. LABOR MATTERS.................................................. A-13
4.15. INFORMATION.................................................... A-13
4.16. DELAWARE SECTION 203........................................... A-13
4.17. BROKER'S FEES.................................................. A-13
4.18. REPRESENTATIONS AND WARRANTIES................................. A-13
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER.................... A-14
5.1. ORGANIZATION................................................... A-14
5.2. AUTHORITY...................................................... A-14
5.3. NO VIOLATIONS; CONSENTS AND APPROVALS.......................... A-14
5.4. INFORMATION.................................................... A-14
</TABLE>
i
<PAGE> 39
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
5.5. OWNERSHIP OF SECURITIES........................................ A-15
5.6. FINANCING...................................................... A-15
5.7. BROKER'S FEES.................................................. A-15
5.8. REPRESENTATIONS AND WARRANTIES................................. A-15
ARTICLE VI COVENANTS............................................................. A-15
6.1. CONDUCT OF BUSINESS OF THE COMPANY............................. A-15
6.2. NO SOLICITATION................................................ A-17
6.3. ACCESS TO INFORMATION; CONFIDENTIALITY......................... A-17
6.4. REASONABLE BEST EFFORTS; OTHER ACTIONS......................... A-18
6.5. PUBLIC ANNOUNCEMENTS........................................... A-18
6.6. NOTIFICATION OF CERTAIN MATTERS................................ A-18
6.7. EXPENSES....................................................... A-18
6.8. INDEMNIFICATION OF DIRECTORS AND OFFICERS...................... A-19
6.9. CONSENT SOLICITATION STATEMENT................................. A-19
6.10. CHARTER AMENDMENT.............................................. A-19
6.11. EMPLOYMENT AGREEMENTS.......................................... A-19
6.12. PARENT CAPITAL CONTRIBUTION.................................... A-20
6.13. CASH AND CASH EQUIVALENT....................................... A-20
ARTICLE VII CONDITIONS TO OBLIGATIONS OF THE COMPANY, PARENT AND BUYER............ A-20
7.1. STOCKHOLDER APPROVAL........................................... A-20
7.2. NO LEGAL IMPEDIMENTS........................................... A-20
7.3. MAILING OF CONSENT SOLICITATION STATEMENT...................... A-20
ARTICLE VIII CONDITIONS TO THE OBLIGATIONS OF PARENT AND BUYER..................... A-20
8.1. DISSENTING SHARES.............................................. A-20
8.2. CHARTER AMENDMENT.............................................. A-21
8.3. COMPLIANCE WITH COVENANTS...................................... A-21
8.4. THIRD PARTY CONSENTS........................................... A-21
ARTICLE IX CONDITIONS TO THE OBLIGATIONS OF THE COMPANY.......................... A-21
9.1. FINANCES....................................................... A-21
9.2. NEW D&O INSURANCE POLICY....................................... A-21
9.3. COMPLIANCE WITH COVENANTS...................................... A-21
ARTICLE X TERMINATION AND ABANDONMENT........................................... A-21
10.1. TERMINATION.................................................... A-21
10.2. TERMINATION BY PARENT OR BUYER................................. A-21
10.3. TERMINATION BY THE COMPANY..................................... A-22
10.4. PROCEDURE FOR TERMINATION...................................... A-22
10.5. EFFECT OF TERMINATION.......................................... A-22
10.6. TERMINATION FEE................................................ A-22
10.7. TOPPING FEE.................................................... A-23
10.8. REMEDIES....................................................... A-23
</TABLE>
ii
<PAGE> 40
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE XI MISCELLANEOUS......................................................... A-23
11.1. AMENDMENT AND MODIFICATION..................................... A-23
11.2. WAIVER......................................................... A-23
11.3. SURVIVABILITY; INVESTIGATIONS.................................. A-23
11.4. NOTICES........................................................ A-24
11.5. ASSIGNMENT..................................................... A-24
11.6. GOVERNING LAW.................................................. A-24
11.7. COUNTERPARTS................................................... A-24
11.8. INTERPRETATION................................................. A-24
11.9. ENTIRE AGREEMENT............................................... A-25
</TABLE>
iii
<PAGE> 41
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of June 15, 1997 (the "Agreement"),
by and among FREDERICK'S OF HOLLYWOOD, INC., a Delaware corporation (the
"Company"), ROYALTY ACQUISITION CORP., a Delaware corporation ("Buyer"), and
ROYALTY CORPORATION, a Delaware corporation ("Parent").
RECITALS:
WHEREAS, Buyer is a wholly-owned subsidiary of Parent;
WHEREAS, the Boards of Directors of Buyer, Parent and the Company have each
approved the merger of Buyer with and into the Company in accordance with the
terms of this Agreement and the General Corporation Law of the State of Delaware
(the "DGCL");
WHEREAS, Janney Montgomery Scott Inc. ("JMS"), the Company's financial
advisor, has rendered to the Board of Directors of the Company (the "Board") its
written opinion that the Merger Price to be received by the stockholders of the
Company pursuant to the Merger (as such terms are hereinafter defined) is fair
to such stockholders from a financial point of view; and
WHEREAS, the Board has, in light of and subject to the terms and conditions
set forth herein, (i) determined that the Merger is in the best interests of the
stockholders of the Company, and (ii) resolved to approve and adopt this
Agreement and the transactions contemplated hereby;
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions contained
herein, the parties hereto agree as follows:
DEFINITIONS. The following terms used herein shall have the meanings ascribed in
the indicated sections:
<TABLE>
<S> <C>
Acquisition Transaction.......................................................... 6.2(a)
Advisors......................................................................... 6.7
Agreement........................................................................ Preamble
Board............................................................................ Recitals
Buyer............................................................................ Preamble
Buyer Material Adverse Effect.................................................... 10.3
Cash Target...................................................................... 6.13
Certificate of Merger............................................................ 1.2
Certificates..................................................................... 3.2 (a)
Charter Amendment................................................................ 6.10
Closing.......................................................................... 1.2
Code............................................................................. 2.3(c)
Company.......................................................................... Preamble
Company Material Adverse Effect.................................................. 10.2
Company Permits.................................................................. 4.7
Consent Solicitation Statement................................................... 6.9
Delaware Secretary of State...................................................... 1.2
DGCL............................................................................. Recitals
Disclosure Letter................................................................ Article IV
Dissenting Shares................................................................ 3.1
Effective Time................................................................... 1.2
Employee Benefit Plan............................................................ 4.10(a)
Environmental Laws............................................................... 4.11
ERISA............................................................................ 4.10(a)
ERISA Affiliate.................................................................. 4.10(b)
</TABLE>
<PAGE> 42
<TABLE>
<S> <C>
ESOP............................................................................. 2.3(a)
Exchange Act..................................................................... 4.3(c)
Extension Agreements............................................................. 4.9
Hazardous Substances............................................................. 4.11
Indemnification Agreements....................................................... 6.8(a)
Intellectual Property............................................................ 4.12(c)
JMS.............................................................................. Recitals
Loan Agreements.................................................................. 5.6
Merger........................................................................... 1.1
Merger Deadline.................................................................. 10.1
Merger Price..................................................................... 2.1(a)
Multi-employer Plan.............................................................. 4.10(a)
New D&O Insurance Policy......................................................... 6.8(b)
New Store Leases................................................................. 6.1
Option........................................................................... 2.2(a)
Option Plans..................................................................... 2.2(b)
Parent Capital Contribution...................................................... 5.6
Paying Agent..................................................................... 3.2(a)
Pension Plan..................................................................... 4.10(a)
Permitted Liens.................................................................. 4.12(b)
Plans............................................................................ 4.10(a)
SEC.............................................................................. 4.3(c)
SEC Documents.................................................................... 4.4(a)
Shares........................................................................... 2.1
Surviving Corporation............................................................ 1.1
Stay Bonus Agreements............................................................ 4.9
Systems.......................................................................... 4.13
Tax.............................................................................. 4.8
Termination Agreement............................................................ 1.5
Townson.......................................................................... 1.5
Townson Agreements............................................................... 1.6
Trademarks....................................................................... 4.12(c)
Welfare Plan..................................................................... 4.10(a)
</TABLE>
ARTICLE I
THE MERGER
SECTION 1.1. The Merger. In accordance with the provisions of this
Agreement and the DGCL, at the Effective Time, Buyer shall be merged with and
into the Company (the "Merger"), and the Company shall be the surviving
corporation (hereinafter sometimes called the "Surviving Corporation") and shall
continue its corporate existence under the laws of the State of Delaware. The
Merger shall have the effects on the Company and Buyer as provided under the
DGCL. At the Effective Time, the separate existence of Buyer shall cease, and
the name of the Surviving Corporation shall be Frederick's of Hollywood, Inc.
SECTION 1.2. Effective Time. As promptly as practicable after the
satisfaction or, if permissible, waiver of the conditions set forth in Articles
VII, VIII and IX hereof, the parties hereto shall cause the Merger to be
consummated by filing a certificate of merger (the "Certificate of Merger") with
the Secretary of State of the State of Delaware (the "Delaware Secretary of
State"), in such form as required by, and executed in accordance with the
relevant provisions of, the DGCL (the date and time of the filing of the
Certificate of Merger or the time specified therein being the "Effective Time").
Prior to such filing, a closing (the
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"Closing") shall be held at the offices of D'Ancona & Pflaum, 30 North LaSalle
Street, Chicago, Illinois, or such other place as the Company and Buyer shall
agree, for the purpose of confirming the satisfaction or waiver, as the case may
be, of the conditions set forth in Article VII, VIII and IX hereof.
SECTION 1.3. Certificate of Incorporation and By-Laws of Surviving
Corporation. The Certificate of Incorporation and By-laws of Buyer, shall,
subject to Sections 1.1 and 6.10, be the Certificate of Incorporation and
By-laws of the Surviving Corporation upon the effectiveness of the Merger until
thereafter amended as provided by law.
SECTION 1.4. Directors and Officers of Surviving Corporation. Subject to
applicable law, the initial directors of the Surviving Corporation upon the
effectiveness of the Merger at the Effective Time shall be those persons who are
the directors of Buyer immediately prior to the Effective Time, to hold office
until their respective successors are duly elected and qualified, or their
earlier death, resignation or removal.
SECTION 1.5. Company Deliveries. (a) Signing Deliveries. On the date
hereof, the Company has delivered to Parent and Buyer: (i) duly executed, true
and complete copies of the Stay Bonus Agreements; and (ii) the Disclosure
Letter.
(b) Closing Deliveries. At the Closing and subject to the terms and
conditions of this Agreement, the Company shall deliver to Parent and Buyer: (i)
certified resolutions of the Board approving the Merger, the Charter Amendment
and the transactions contemplated hereby; (ii) a certificate of the secretary of
the Company certifying as to the Company's and its subsidiaries' respective
certificates of incorporation, by-laws, capitalization and incumbency of
officers immediately prior to the Effective Time; (iii) the legal opinion of
Loeb & Loeb LLP, with respect to matters agreed upon by counsel to the parties
prior to the date hereof; (iv) the legal opinion of Morris, Nichols, Arsht &
Tunnell, with respect to matters agreed upon by counsel to the parties prior to
the date hereof; (v) a duly executed true and complete copy of that certain
Termination and Release Agreement ("Termination Agreement"), dated June 14,
1997, between George W. Townson ("Townson") and the Company; and (vi)
resignations by each current member of the Board and by Townson as Chairman of
the Board, President and Chief Executive Officer of the Company, each effective
as of the Effective Time.
SECTION 1.6. Parent and Buyer Deliveries. (a) Signing Deliveries. On the
date hereof, Parent and Buyer have delivered to the Company true, complete and
fully executed copies of the Loan Agreements.
(b) Closing Deliveries. At the Closing and subject to the terms and
conditions of this Agreement, Parent and Buyer shall each deliver to the
Company: (i) a duly executed true and complete copy of that certain
Noncompetition and Consulting Agreement (the "Noncompetition Agreement"), of
even date herewith, between Buyer and Townson (the Noncompetition Agreement and
the Termination Agreement are collectively referred to herein as the "Townson
Agreements"); (ii) certified resolutions of its respective Board and certified
resolutions of the sole stockholder of Buyer, each approving the Merger and the
transactions contemplated hereby, including, without limitation, the
Noncompetition Agreement; (iii) a certificate of its respective secretary
certifying as to its respective certificate of incorporation, by-laws,
capitalization and incumbency of officers as of the Effective Time; and (iv) the
legal opinion of D'Ancona & Pflaum, with respect to such matters reasonably
requested by the Company.
ARTICLE II
CONVERSION OF SHARES
SECTION 2.1. Effect on Shares and Buyer's Capital Stock. (a) As of the
Effective Time, by virtue of the Merger and without any action on the part of
the holders thereof, each share of the Company's Class A and Class B Capital
Stock, par value $1.00 per share (the "Shares"), issued and outstanding
immediately prior to the Effective Time (other than any Shares held in the
treasury of the Company or by any wholly-owned subsidiary of the Company, which
Shares, by virtue of the Merger and without any action on the part of the holder
thereof, shall be canceled and shall cease to exist with no payment being made
with respect thereto, and other than any Dissenting Shares (as defined in
Section 3.1 hereof)) shall be converted into the right to
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receive $6.14 net to the holder in cash (the "Merger Price"), payable to the
holder thereof, without interest thereon, as set forth in Section 3.2 hereof.
(b) As of the Effective Time, by virtue of the Merger and without any
action on the part of the holders thereof, each share of capital stock of Buyer
issued and outstanding immediately prior to the Effective Time shall be
converted into one fully paid and nonassessable share of Common Stock, par value
$0.01 per share, of the Surviving Corporation.
SECTION 2.2. Company Option Plans. (a) As of the Effective Time, the
Company shall use best efforts to take such actions to provide that by virtue of
the Merger and without any action on the part of the holders thereof, each
option to purchase Shares (an "Option") that is outstanding immediately before
the Effective Time, whether or not presently exercisable, shall be canceled and,
in consideration of such cancellation, each holder of an Option shall receive at
the Effective Time an amount equal to the product of (i) the excess, if any, by
which the Merger Price exceeds the exercise price of the Option and (ii) the
number of Shares subject thereto, such amount to be paid to the holder in cash
at the Effective Time.
(b) As of the Effective Time, the Company shall take such actions to
provide that the plans of the Company and its subsidiaries providing for Options
("Option Plans") shall terminate as of the Effective Time and the provisions in
any other plan, program or arrangement, providing for the issuance or grant by
the Company or any of its subsidiaries of any interest in respect of the capital
stock of the Company or any of its subsidiaries shall be terminated as of the
Effective Time, and following the Effective Time no holder of Options or any
participant in the Option Plans or any other such plans, programs or
arrangements shall have any right thereunder to acquire any equity securities of
the Company or any subsidiary thereof.
SECTION 2.3. Termination of ESOP. (a) (i) Prior to the execution of this
Agreement, the Company shall have taken such actions as may be necessary to
amend the Company's Employee Stock Ownership Plan ("ESOP") to eliminate those
provisions therein which require the Company to make a special contribution to
the ESOP upon a "change in control" (as such term is defined in the ESOP), and
(ii) prior to the Closing, the Company shall take such actions as may be
necessary (x) to terminate the ESOP, effective as of and contingent upon the
Merger becoming effective, and (y) to amend the ESOP to provide that effective
as of such ESOP termination, distributions shall be payable solely in cash.
(b) As of the Effective Time, the Company shall take such actions as may be
necessary to terminate the membership of all members of the Administrative
Committee which administers the ESOP, the Committee which administers the
Company's Profit-Sharing Plan (if a different committee than the Administrative
Committee), and any other committee which serves as "plan administrator" of any
other of the Company's employee benefit plans, programs or arrangements.
(c) Parent covenants that as soon as administratively feasible, but in no
event more than twelve months following the Effective Time, it shall cause the
Surviving Corporation to arrange for the orderly unwinding of the ESOP in
accordance with all applicable legal requirements. Without limiting the
foregoing, the Surviving Corporation shall (i) make application to the Internal
Revenue Service for a determination that the ESOP termination does not adversely
affect the ESOP's qualified status under the Internal Revenue Code of 1986, as
amended (the "Code"), (ii) arrange for the ESOP to pay off the remaining balance
of the ESOP "acquisition loan" (as such term is defined in the ESOP) from the
assets held in the ESOP's "loan suspense account" (as such term is defined in
the ESOP), and allocate the remaining assets held in such loan suspense account
to the ESOP participants in accordance with the ESOP qualified plan rules, and
(iii) arrange for each ESOP participant to receive his or her entire interest in
the ESOP, which receipt, at the election of each participant, shall be either by
direct payment to the participant, by direct payment to an IRA (or qualified
plan which receives rollovers) designated by the participant, or by direct
rollover to a qualified plan maintained by the Surviving Corporation after the
Effective Time.
SECTION 2.4. Consummation of the Merger. As soon as practicable after the
satisfaction or, if permissible, waiver of the conditions set forth in Articles
VII, VIII and IX hereof, (a) the Surviving Corporation shall execute in the
manner required by the DGCL and file with the Delaware Secretary of State
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the Certificate of Merger and (b) the parties shall take such other and further
actions as may be required by law to make the Merger effective.
ARTICLE III
DISSENTING SHARES; PAYMENT FOR SHARES
SECTION 3.1. Dissenting Shares. Notwithstanding anything in this Agreement
to the contrary, Shares outstanding immediately prior to the Effective Time and
held by a holder who has not voted in favor of the Merger or consented thereto
in writing and who has demanded appraisal for such Shares in accordance with
Section 262 of the DGCL, if such Section 262 provides for appraisal rights for
such Shares in the Merger ("Dissenting Shares"), shall not be converted into the
right to receive the Merger Price, as provided in Section 2.1 hereof, unless and
until such holder fails to perfect or withdraws or otherwise loses such holder's
right to appraisal and payment under the DGCL. If, after the Effective Time, any
such holder fails to perfect or withdraws or loses such holder's right to
appraisal, such Dissenting Shares shall thereupon be treated as if they had been
converted as of the Effective Time into the right to receive the Merger Price to
which such holder is entitled, without interest or dividends thereon. The
Company shall give Buyer prompt notice of any demands received by the Company
for appraisal of Shares and Buyer shall have the right to participate in all
negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of Buyer, make any voluntary payment
with respect to, or settle or offer to settle, any such demands.
SECTION 3.2. Payment for Shares. (a) From and after the Effective Time, a
bank or trust company designated by Buyer and approved by the Company in its
reasonable discretion shall act as paying agent (the "Paying Agent") in
effecting the payment of the Merger Price for certificates formerly representing
Shares and entitled to payment of the Merger Price pursuant to Section 2.1
hereof (the "Certificates"). At the Effective Time, Parent shall deposit, or
cause to be deposited, in trust with the Paying Agent sufficient funds to permit
the Paying Agent to make the payments contemplated by this Section 3.2 and
Section 2.2 hereof.
(b) Promptly after the Effective Time, Parent shall cause the Paying Agent
to mail to each record holder of Certificates (other than Certificates
representing Shares held in the treasury of the Company or by any wholly-owned
subsidiary of the Company) a form of letter of transmittal which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon proper delivery of the Certificates to the Paying Agent
and instructions for use in surrendering such Certificates and receiving the
Merger Price therefor. Upon the surrender of each such Certificate, the Paying
Agent shall promptly pay the holder of such Certificate in exchange therefor
cash in an amount equal to the Merger Price multiplied by the number of Shares
formerly represented by such Certificate, and such Certificate shall forthwith
be canceled. Said payment, if in excess of One Hundred Thousand Dollars
($100,000) and if requested by the stockholder entitled thereto, shall be paid
to said stockholder by wire transfer in immediately available funds. Until so
surrendered, each such Certificate (other than Certificates representing
Dissenting Shares and Certificates representing Shares held in the treasury of
the Company or by any wholly-owned subsidiary of the Company) shall represent
solely the right to receive the aggregate Merger Price relating thereto. No
interest shall be paid or accrued on such Merger Price.
(c) After the Effective Time, there shall be no transfers on the stock
transfer books of the Surviving Corporation of any Shares which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates formerly representing a Share or Shares (other than Certificates
representing Shares held in the treasury of the Company or by any wholly-owned
subsidiary of the Company) are presented to the Surviving Corporation or the
Paying Agent, they shall be surrendered and canceled in return for the payment
of the aggregate Merger Price relating thereto, without interest, as provided in
this Article III hereof subject to applicable law in the case of Dissenting
Shares.
(d) The Merger Price shall be net to each holder of Certificates in cash,
subject to reduction only for any applicable federal back-up withholding or, as
set forth in Section 3.2(e) hereof, stock transfer taxes payable by such holder.
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(e) If payment of cash in respect of any Certificate is to be made to a
person other than the person in whose name such Certificate is registered, it
shall be a condition to such payment that the Certificate so surrendered shall
be properly endorsed or shall be otherwise in proper form for transfer and that
the person requesting such payment shall have paid any transfer and other taxes
required by reason of such payment in a name other than that of the registered
holder of the Certificate surrendered or shall have established to the
satisfaction of Parent or the Paying Agent that such tax either has been paid or
is not payable.
(f) Promptly following the date which is one hundred eighty (180) days
after the Effective Time, the Paying Agent shall deliver to Parent all cash,
Certificates and other documents in its possession relating to the transactions
described in this Agreement, and the Paying Agent's duties shall terminate.
Thereafter, each holder of a Certificate formerly representing a Share or Shares
(other than Certificates representing Dissenting Shares and Certificates
representing Shares held in the treasury of the Company or by any wholly-owned
subsidiary of the Company) may surrender such Certificate to Parent and (subject
to applicable abandoned property, escheat and similar laws) receive in
consideration therefor the aggregate Merger Price relating thereto, without any
interest or dividends thereon. Neither Parent nor the Surviving Corporation will
be liable to any holder of Shares for any amount paid to a public official in
accordance with applicable abandoned property, escheat or similar laws.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Buyer as follows, except
as disclosed by the Company to Parent and Buyer in a Disclosure Letter dated of
even date herewith, including the materials referenced therein (the "Disclosure
Letter"):
SECTION 4.1. Organization. The Company and each of its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its respective jurisdiction of incorporation and the Company and each of its
subsidiaries has all requisite corporate power and authority to own, lease and
operate its respective properties and to carry on its respective business as now
being conducted. To the Company's knowledge, the Company and each of its
subsidiaries is duly qualified or licensed and in good standing to do business
in each jurisdiction in which the property owned, leased or operated by it or
the nature of the business conducted by it makes such qualification necessary.
The Disclosure Letter sets forth all of the jurisdictions in which the Company
and its subsidiaries are qualified to do business as foreign corporations.
Copies of the Certificate of Incorporation and By-laws of the Company and the
articles or certificate of incorporation and by-laws of each of its
subsidiaries, including all amendments, have been made available to Buyer and
such copies are accurate and complete. The Disclosure Letter lists all of the
Company's subsidiaries. The Company owns directly or indirectly all of the
outstanding capital stock of each of its subsidiaries, free and clear of any
lien, claim or encumbrance.
SECTION 4.2. Capitalization. The authorized capital stock of the Company
consists of 50,000,000 shares, of which 15,000,000 are shares of Class A Capital
Stock and 35,000,000 are shares of Class B Capital Stock, each par value $1.00
per share. As of May 31, 1997, there were 2,955,309 shares of Class A Capital
Stock issued and outstanding, 5,903,118 shares of Class B Capital Stock issued
and outstanding and an aggregate of 20,186 shares of Class A Capital Stock held
in the Company's treasury. No shares of Class B Capital Stock are held in the
Company's treasury. As of May 31, 1997, there were outstanding options to
purchase 264,686 shares of Class A Capital Stock and 600,814 shares of Class B
Capital Stock under the Option Plans and the Company has provided to Buyer
complete and accurate copies of such Options Plans, including terms and
conditions of Options issued thereunder. Except for Options under the Option
Plans (which shall be canceled as provided in Section 2.2 hereof), there are not
as of the date hereof, and at all times hereafter through the Effective Time
there will not be, any options, warrants, calls, subscriptions, or other rights
or other agreements or commitments obligating the Company or any of its
subsidiaries to issue, transfer, sell or vote any shares of capital stock of the
Company or any of its subsidiaries or any other securities convertible into or
evidencing the right to subscribe for any such shares. All issued and
outstanding Shares, and all outstanding shares of capital stock of each
subsidiary, are duly authorized and validly issued, fully paid,
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nonassessable and free of preemptive rights with respect thereto. The rights and
preferences of the Class A Capital Stock and the Class B Capital Stock are as
set forth in the Certificate of Incorporation of the Company. The capitalization
of each of the subsidiaries of the Company is set forth in the Disclosure
Letter.
SECTION 4.3. Authority. (a) The Company has full corporate power and
authority to execute and deliver this Agreement and, subject to the approval of
its stockholders, to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized and
approved by the Board, and, other than approval by the Company's stockholders,
no other corporate proceedings are necessary to authorize this Agreement or the
consummation of the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by the Company and constitutes a legal,
valid and binding agreement of the Company, enforceable against it in accordance
with its terms.
(b) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby nor compliance by the
Company with any of the provisions hereof will (i) violate any provision of its
or any of its subsidiaries' articles or certificate of incorporation or by-laws,
(ii) to the Company's knowledge, result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default, or
give rise to any right of termination, cancellation or acceleration or any right
which becomes effective upon the occurrence of a merger, consolidation or change
in control or ownership, under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture or other instrument of indebtedness for
money borrowed to which the Company or any of its subsidiaries is a party, or by
which the Company or any of its subsidiaries or any of their respective
properties is bound, (iii) to the Company's knowledge, result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default, or give rise to any right of termination, cancellation or acceleration
or any right which becomes effective upon the occurrence of a merger,
consolidation or change in control or ownership, under, any of the terms,
conditions or provisions of any license, franchise, permit or agreement to which
the Company or any of its subsidiaries is a party, or by which the Company or
any of its subsidiaries or any of their respective properties may be bound, or
(iv) to the Company's knowledge, violate any statute, rule, regulation, order or
decree of any public body or authority by which the Company or any of its
subsidiaries or any of their respective properties is bound, excluding from the
foregoing clauses (ii), (iii) and (iv) violations, breaches, defaults or rights
which either would not individually or in the aggregate materially impair the
Company's ability to consummate the transactions contemplated hereby or for
which the Company has received or, prior to the consummation of the Merger,
shall have received appropriate consents or waivers.
(c) To the Company's knowledge and assuming the accuracy of the
representations set forth in Section 5.3(c) hereof, no filing or registration
with, notification to, or authorization, consent or approval of, any
governmental entity is required in connection with the execution and delivery of
this Agreement by the Company, or the consummation by the Company of the
transactions contemplated hereby, except (i) in connection, or in compliance,
with the provisions of the Securities Exchange Act of 1934 ("Exchange Act"),
(ii) the filing of a Certificate of Merger with the Delaware Secretary of State,
(iii) such filings and consents as may be required under any environmental law
pertaining to any notification, disclosure or required approval triggered by the
Merger or the transactions contemplated by this Agreement, (iv) filing with, and
approval of, the New York Stock Exchange, Inc. and the Securities and Exchange
Commission ("SEC") with respect to the delisting and deregistration of the
Shares and (v) such other consents, approvals, orders, authorizations,
notifications, registrations, declarations and filings not obtained or made
prior to the consummation of the Merger the failure of which to be obtained or
made would not, individually or in the aggregate, materially impair the
Company's ability to perform its obligations hereunder or prevent the
consummation of any of the transactions contemplated hereby.
SECTION 4.4. SEC Documents; Financial Statements. (a) The Company has made
available to Buyer accurate and complete copies of each registration statement,
report, proxy statement, information statement or schedule, together with all
amendments thereto, that were required to be filed with the SEC by the Company
since December 31, 1991 (the "SEC Documents"), each of which was timely filed
with the SEC. As of their respective dates, the SEC Documents complied, in all
material respects, with the applicable requirements of the Securities Act of
1933, as amended, and the Exchange Act, as the case may be, and none of the SEC
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Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(b) Neither the Company nor any of its subsidiaries, nor any of their
respective assets, businesses, or operations, is a party to, or is bound or
affected by, or receives benefits under, any contract or agreement or amendment
thereto, that in each case was required to be filed as an exhibit to a Form 10-K
that has not been, or timely will not be, filed as an exhibit to an SEC
Document.
SECTION 4.5. Absence of Certain Changes; no Undisclosed Liabilities. (a)
Except as disclosed or reflected in the SEC Documents, disclosed in the
Disclosure Letter, and except for current liabilities for trade or business
obligations incurred since March 1, 1997 in connection with the purchase of
goods or services in the ordinary course of business and consistent with past
practice (none of which would violate the covenants in Section 6.1 hereof and
none of which is for breach of contract, breach of warranty, tort or
infringement), the Company has not (i) incurred any liabilities or obligations
of any nature, whether or not accrued, contingent or otherwise, which,
individually or in the aggregate, could reasonably be expected to have a Company
Material Adverse Effect, or (ii) made any changes in accounting methods,
principles or practices or (iii) declared, set aside or paid any dividend or
other distribution with respect to its capital stock. Since March 1, 1997, each
of the Company and its subsidiaries has conducted its operations according to
its ordinary course of business consistent with past practice.
(b) Except as and to the extent disclosed by the Company in the SEC
Documents or disclosed in the Disclosure Letter, since March 1, 1997, neither
the Company nor any of its subsidiaries had any material liabilities or
obligations of any nature, whether or not accrued, contingent or otherwise, that
would have required the Company to amend the SEC Documents.
SECTION 4.6. Litigation. Except as disclosed by the Company in the SEC
Documents or the Disclosure Letter, there is no suit, claim, action, proceeding
or investigation pending or, to the knowledge of the Company, threatened against
the Company or any of its subsidiaries or any of their respective properties or
assets before any court or governmental entity, nor, to the knowledge of the
Company, are there any facts that are reasonably likely to give rise to any such
suit, claim, action, proceeding or investigation. Except as disclosed in the SEC
Documents, neither the Company nor any of its subsidiaries is subject to any
outstanding order, writ, injunction or decree.
SECTION 4.7. Compliance with Applicable Law. To the Company's knowledge and
except as disclosed by the Company in the SEC Documents, the Company and its
subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all governmental entities necessary for the lawful conduct of their
respective businesses (the "Company Permits"). To the Company's knowledge and
except as disclosed by the Company in the SEC Documents, the Company and its
subsidiaries are in compliance with the terms of the Company Permits. To the
Company's knowledge and except as disclosed by the Company in the SEC Documents,
the businesses of the Company and its subsidiaries have not been and are not
being conducted in violation of any law, ordinance or regulation of any
governmental entity. To the Company's knowledge and except as disclosed by the
Company in the SEC Documents, no investigation by any governmental entity with
respect to the Company or any of its subsidiaries is pending or threatened nor
has any governmental entity indicated an intention to conduct the same.
SECTION 4.8. Taxes. Each of the Company and its subsidiaries has filed, or
caused to be filed, all federal, state, local and foreign income and other
material tax returns required to be filed by it, has paid or withheld, or caused
to be paid or withheld, all taxes of any nature whatsoever, with any related
penalties, interest and liabilities (any of the foregoing being referred to
herein as a "Tax"), that are shown on such tax returns as due and payable, other
than such Taxes as are being contested in good faith and for which adequate
reserves have been established. Except as disclosed in the Disclosure Letter,
the Company and each of its subsidiaries have paid or will timely pay all Taxes
due with respect to any period ending at or prior to the Effective Time, or
where the payment of Taxes is not yet due, have established, or with respect to
Taxes incurred after the date hereof will timely establish in accordance with
past practices, an adequate accrual in accordance with generally accepted
accounting practices. Except as disclosed in the Disclosure Letter, there
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are no material claims, assessments or audits pending, or to the Company's
knowledge threatened, against the Company or its subsidiaries for any alleged
deficiency in any Tax. There are no waivers or extensions of any applicable
statute of limitations to assess any Taxes. There are no outstanding requests
for any extension of time within which to file any return or within which to pay
any Taxes shown to be due on any return. To the Company's knowledge, there are
no liens for any Taxes upon the assets of the Company or any of its subsidiaries
(other than statutory liens for Taxes not yet due and payable and liens for real
estate taxes being contested in good faith). Neither the Company nor any of its
subsidiaries is a party to, is bound by or has any obligation under, a tax
sharing or tax allocation agreement or arrangement for the allocation,
apportionment, sharing, indemnification or payment of taxes.
SECTION 4.9. Termination, Severance and Employment Agreements. The
Disclosure Letter contains a complete and accurate list of each (a) written
employment or severance agreement not terminable without liability or obligation
on 30 days' or less notice; (b) written agreement with any director, officer or
other employee of the Company or any of its subsidiaries (i) the benefits of
which are contingent, or the terms of which are materially altered, on the
occurrence of a transaction involving the Company or any of its subsidiaries of
the nature of any of the transactions contemplated by this Agreement or relating
to an actual or potential change in control of the Company or any of its
subsidiaries or (ii) providing any term of employment or other compensation
guarantee or extending severance benefits or other benefits after termination
not comparable to benefits available to employees of the Company or its
subsidiaries generally; (c) written agreement, plan or arrangement under which
any person may receive payments that may be subject to tax imposed by Section
4999 of the Code or included in the determination of such person's "parachute
payment" under Section 280G of the Code; and (d) written agreement or plan,
including, but not limited to, any stock option plan, stock appreciation right
plan, restricted stock plan or stock purchase plan, any of the benefits of which
will be increased, or the vesting of the benefits of which will be accelerated,
by the occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Agreement, other than as contemplated
by this Agreement. Except as previously disclosed to Buyer in the Disclosure
Letter, and except in relation to the Townson Agreements and the Stay Bonus
Agreements (as defined below), since December 31, 1996, neither the Company nor
any of its subsidiaries has entered into or amended any written employment or
severance agreement with any director, officer or other employee of the Company
or any of its subsidiaries or granted any severance or termination pay to any
director, officer or employee of the Company or any of its subsidiaries. The
Company shall offer to extend all payments due from it under the letter
agreements dated as of June 28, 1996 (the "Stay Bonus Agreements") between it
and certain employees of the Company. No payment under such Stay Bonus
Agreements has been made by or is due from the Company to any employee who
accepts (such acceptances to be referred to herein as the "Extension
Agreements") such offer of extension prior to the Effective Time, and no payment
shall be due to the employees who accept such offer of extension thereunder from
the Surviving Corporation until at least January 2, 1998. A true and complete
copy of the Townson Agreements has been furnished to Buyer.
Section 4.10. Employee Benefit Plans; ERISA. (a) The Company does not
maintain, administer, contribute to or have any liability under, and has not
maintained, administered, contributed to or had any liability under any:
employee pension benefit plan (as defined in Section 3(2) of the Employment
Retirement Income Security Act of 1974, as amended ("ERISA")) ("Pension Plan"),
including, without limitation, any multi-employer plan as defined in Section
3(37) of ERISA ("Multi-employer Plan") or any non-qualified deferred
compensation plan or retirement plan; employee welfare benefit plan (as defined
in Section 3(1) of ERISA) ("Welfare Plan"), including any other plan, program,
agreement or arrangement under which former employees of the Company (or their
beneficiaries) are entitled, or current employees of the Company will be
entitled, following termination of employment, to medical, health or life
insurance or other benefits other than pursuant to benefit continuation rights
granted by state or federal law; or bonus, stock, stock purchase, or stock
option plan, severance plan, salary continuation, vacation, sick leave, fringe
benefit, incentive, insurance, welfare or similar plan or arrangement ("Employee
Benefit Plan") other than those Pension Plans, Welfare Plans and Employee
Benefit Plans described in the Disclosure Letter. The Pension Plans, Welfare
Plans and Employee Benefit Plans shall be collectively referred to herein as the
"Plans".
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(b) Neither the Company, nor any corporation or business which is now or at
the relevant time was an affiliate of the Company, as determined under Section
414(b), (c), (m) or (o) of the Code (an "ERISA Affiliate"), (i) maintains,
administers, contributes to or has any liability under any pension plan subject
to the minimum funding standards set forth in Section 412 of the Code or subject
to Title IV of ERISA; or (ii) has ever maintained, administered, contributed to
or had any liability under any Pension Plan subject to either the Code Section
412 minimum funding standards or Title IV of ERISA, other than a Plan as to
which all liabilities have been satisfied in full.
(c) Except as set forth in the Disclosure Letter, all Plans and related
trusts, insurance contracts or other funding arrangements have been maintained
and administered in all material respects in compliance with each applicable
provision of ERISA, the Code, other federal statutes, state law (including,
without limitation, state insurance law) and the regulations and rules
promulgated pursuant thereto or in connection therewith. Each Pension Plan which
is intended to be qualified under Code Section 401(a) has been administered in
material compliance with such requirements and has received a post-Tax Reform
Act of 1986 determination letter from the IRS that such Pension Plan satisfies
the requirements of Section 401(a) of the Code.
(d) Contributions with respect to all current Plan years (i.e., from the
first day of the current plan year to the Closing Date) shall be made or accrued
prior to the Closing Date by Company with respect to each Pension Plan. With
respect to all other Welfare Plans and Employee Benefit Plans, all required or
recommended (in accordance with plan terms and past practice) payments,
premiums, contributions, reimbursements or accruals for all periods ending prior
to or as of the Closing Date shall have been made or properly accrued on the
financial statements. None of the Plans has any material unfunded liabilities
which are not reflected on the financial statements of the Company. The Company
has no plans, programs, arrangements or made any other commitments to its
employees, former employees or their beneficiaries under which it has any
obligation to provide any retiree or other employee benefit payments which are
not adequately funded through a trust, insurance or other funding arrangement.
There have been no changes in the operation or interpretation of any of the
Plans since the most recent annual report which would have any material effect
on the cost of operating or maintaining such Plans.
(e) Except as provided in the immediately following sentence, no Pension
Plan has been completely or partially terminated other than a Plan as to which
all liabilities have been satisfied in full. Notwithstanding the preceding
sentence, (i) contributions to the Company's Profit Sharing Plan have not been
made since 1993, which may have resulted in its termination, and (ii) in
accordance with Section 2.3 hereof, upon consummation of the Merger as
contemplated by this Agreement, the ESOP shall be terminated. Subject to the
preceding sentence, any Plan which has been terminated has been terminated in
compliance with ERISA and the Code, all required reports, certifications or
notices, have been or will be appropriately filed or distributed and an
application for a favorable determination letter has been or will be filed with
the IRS.
(f) The Company has made available to Buyer true and complete copies of:
(i) the plan documents and any related trusts or funding vehicles, policies or
contracts and the related summary plan descriptions with respect to each Plan;
(ii) any pending applications, filings or notices with respect to any of the
Plans with the IRS, the pension Benefit Guaranty Corporation, the Department of
Labor or any other governmental agency; (iii) the latest financial statements
and annual reports for each of the Plans and related trusts or funding vehicles,
policies or contracts as of the end of the most recent plan year with respect to
which the filing date for such information has passed; and (iv) all corporate
resolutions or other documents pertaining to the adoption of the Plans or any
amendments thereto.
(g) There are no pending or, to the Company's knowledge, threatened claims,
lawsuits or arbitration asserted or instituted against any of the Plans by any
employee or beneficiary covered under any Plans or otherwise involving any Plans
(other than routine claims for benefits); and the Company has no knowledge of
any facts which would give rise to or could reasonably be expected to give rise
to any such claims, lawsuits or arbitrations.
(h) Except as provided for in this Agreement or as disclosed in the
Disclosure Letter, the consummation of the transactions contemplated by this
Agreement will not (i) entitle any current or former director, officer or
employee of the Company or any ERISA Affiliate to severance pay, unemployment
compensation or any
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other payment, or (ii) accelerate the time of payment or vesting or increase the
amount of compensation due any such employee or officer.
SECTION 4.11. Environmental Matters. To the Company's knowledge, the
Company and each of its subsidiaries has obtained and is in compliance in all
material respects with the terms and conditions of all required permits,
licenses, registrations and other authorizations required under Environmental
Laws. To the Company's knowledge, no asbestos in a friable condition, equipment
containing polychlorinated biphenyls, or leaking underground or above-ground
storage tanks are contained in or located at any facility currently owned,
leased or controlled by the Company or any of its subsidiaries, nor, to the
Company's knowledge, was any of the foregoing contained in or located at any
facility previously owned, leased or controlled by the Company or any of its
subsidiaries. To the Company's knowledge, the Company has not released,
discharged or disposed of on, under or about any facility currently or
previously owned, leased or controlled by the Company or any of its
subsidiaries, any Hazardous Substances, and to the Company's knowledge, no third
party has released, discharged or disposed of on, under or about any facility
currently or previously owned, leased or controlled by the Company or any of its
subsidiaries, any Hazardous Substances, except for ordinary and necessary
quantities of cleaning, pest control and office supplies and other chemicals
used in the ordinary course of business and used and stored in compliance with
applicable Environmental Laws, or ordinary rubbish, debris and non-hazardous
solid waste stored in garbage cans or bins for regular disposal off-site, or
petroleum contained in, and de minimis quantities discharged from, motor
vehicles in their ordinary operation on real property owned, used or leased by
the Company and its subsidiaries. To the Company's knowledge, the Company and
each of its subsidiaries is in compliance with all applicable Environmental
Laws. To the Company's knowledge, the Disclosure Letter contains a true and
accurate list of all past and present noncompliance by the Company with, or
liability under, Environmental Laws, and all past discharges, emissions, leaks,
releases or disposals by it of any substance or waste regulated under or defined
by Environmental Laws that have formed or could reasonably be expected to form
the basis of any material claim, action, suit, proceeding, hearing or
investigation against the Company under any applicable Environmental Laws. With
respect to environmental matters, neither the Company nor any of its
subsidiaries has received notice of any past or present events, conditions,
circumstances, activities, practices, incidents, actions or plans of the Company
or its subsidiaries that have resulted in or threaten to result in any common
law or legal liability, or otherwise form the basis of any claim, action, suit,
proceeding, hearing or investigation under, any applicable Environmental Laws.
For purposes of this Section 4.11, (a) "Environmental Laws" mean applicable
federal, state, local and foreign laws, regulations and codes relating in any
respect to pollution or protection of the environment and (b) "Hazardous
Substances" means any toxic, caustic, or otherwise dangerous substance (whether
or not regulated under federal, state or local environmental statutes, rules,
ordinances, or orders), including (i) "hazardous substance" as defined in 42
U.S.C. Section 9601, and (ii) petroleum products, derivatives, byproducts and
other hydrocarbons.
SECTION 4.12. Assets; Real Property; Intellectual Property.
(a) The Company and its subsidiaries own or have rights to use all assets
necessary to permit the Company and its subsidiaries to conduct their businesses
as they are currently being conducted.
(b) Except as disclosed in the Disclosure Letter, the Company has, either
directly or through its subsidiaries, (i) good, valid and marketable or
indefeasible title to all real property material to its business operations and
described in the Disclosure Letter as owned by it in fee, free and clear of any
liens, encumbrances, mortgages and security interests other than Permitted
Liens, or (ii) rights by lease or other agreement to use all such real property.
The term "Permitted Liens" shall mean (i) liens or encumbrances for water,
sewage and similar charges and current taxes and assessments not yet due and
payable or being contested in good faith, (ii) mechanics', carriers', workers',
repairers', materialmen's, warehousemen's and other similar liens or
encumbrances arising or incurred in the ordinary course of business, (iii)
liens, encumbrances, mortgages and security interests arising or resulting from
any action taken by Parent or Buyer, (iv) liens, encumbrances, mortgages and
security interests of record or securing indebtedness described in the SEC
Documents and (v) easements, rights of way, restrictions and other similar
charges or encumbrances that do not materially interfere with the ordinary
conduct of the Company's business. All real property leases
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under which the Company or any of its subsidiaries is a lessee or lessor are
valid, binding and enforceable in all material respects in accordance with their
terms, and there are no existing defaults thereunder. The Company has not
received notice of and does not otherwise have knowledge of any condemnation,
requisition or taking by any public authority of all or any portion of its owned
or leased real property. Except as disclosed in the Disclosure Letter, there is
no construction work being done at, or construction materials being supplied to,
the real property owned or leased by the Company, except in connection with
routine maintenance projects. Notwithstanding the foregoing sentence, the
Company may be liable for invoices for construction occurring prior to the date
hereof.
(c) The Disclosure Letter identifies all of the following which are used in
the Company's or any of its subsidiaries' businesses or in which the Company or
any of its subsidiaries claims any ownership rights: (i) all trademarks, service
marks, slogans, trade names, trade dress and the like (collectively with the
associated goodwill of each, "Trademarks"), together with information regarding
all registrations and pending applications to register any such rights anywhere
in the world; (ii) all common law Trademarks; (iii) without extensive or
revealing descriptions, all proprietary formulations, manufacturing methods,
know-how and trade secrets which are material to the business of the Company or
any of its subsidiaries; all patents on and pending applications to patent any
technology or design; (iv) all registrations of and applications to register
copyrights since 1978; and (v) all licenses of rights in computer software,
Trademarks, patents, copyrights, unpatented formulations, manufacturing methods
and other know-how, whether to or by the Company or any of its subsidiaries. The
rights required to be so identified are referred to herein collectively as the
"Intellectual Property".
(d) Except as identified in the Disclosure Letter: (i) the Company or one
of its subsidiaries is the owner of or duly licensed to use each Trademark and
its associated goodwill; (ii) each Trademark registration exists and has been
maintained in good standing; (iii) each patent and application included in the
Intellectual Property exists, is owned by or licensed to the Company or one of
its subsidiaries, and has been maintained in good standing; (iv) each copyright
registration exists and is owned by the Company or its subsidiaries; (v) to the
Company's knowledge, no other firm, corporation, association or person claims
the right to use in connection with similar or related goods and in any
geographic area, any mark, logo, name, symbol, device, or slogan which is
identical or confusingly similar to any of the Trademarks or which could serve
to dilute the distinctiveness of the Trademarks; (vi) to the Company's
knowledge, no third party claims or asserts ownership rights in any of the
Intellectual Property; (vii) to the Company's knowledge, the use by the Company
or any of its subsidiaries of any Intellectual Property does not now, and has
never been alleged to, infringe any right of any third party; and (viii) to the
Company's knowledge, no third party is now infringing, or has ever been accused
by the Company of infringing, on any rights of the Company or any of its
subsidiaries in any of the Intellectual Property. The Disclosure Letter sets
forth a description of all known claims made or facts known to the Company
regarding any third party claims or actions to use a Trademark confusingly
similar to the Trademarks owned or used by the Company anywhere in the world.
SECTION 4.13. Systems and Software. The Company and its subsidiaries owns
or has the right to use pursuant to lease, license, sublicense, agreement, or
permission all computer hardware, software and information systems necessary for
the operation of the businesses of the Company and its subsidiaries as presently
conducted (collectively, "Systems"). To the Company's knowledge, each System
owned or used by the Company or its subsidiaries immediately prior to the
Effective Time will be owned or available for use by the Company or its
subsidiaries on identical terms and conditions immediately subsequent to the
Effective Time. With respect to each System owned by a third party and used by
the Company or its subsidiaries pursuant to lease, license, sublicense,
agreement or permission, to the Company's knowledge: (a) the lease, license,
sublicense, agreement, or permission covering the System is legal, valid,
binding, enforceable, and in full force and effect; (b) the lease, license,
sublicense, agreement, or permission will continue to be legal, valid, binding,
enforceable, and in full force and effect on identical terms following the
Effective Time; (c) no party to any such lease, license, sublicense, agreement,
or permission is in breach or default, and no event has occurred which with
notice or lapse of time would constitute a breach or default or permit
termination, modification, or acceleration thereunder; (d) no party to any such
lease, license, sublicense, agreement, or permission has repudiated any
provision thereof; (e) neither the Company nor its subsidiaries have granted
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any sublicense, sublease or similar right with respect to any such lease,
license, sublicense, agreement, or permission; (f) the Company's or its
subsidiaries' use and continued use of such Systems will not interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of its business as presently conducted.
SECTION 4.14. Labor Matters. Neither the Company nor any of its
subsidiaries has, since March 1, 1997, (i) been subject to, or threatened with,
any material strike, lockout or other labor dispute or engaged in any unfair
labor practice, or (ii) received notice of any pending petition for
certification before the National Labor Relations Board with respect to any
material group of employees of the Company or any of its subsidiaries who are
not currently organized. The Company has no collective bargaining agreements.
SECTION 4.15. Information. Neither the Consent Solicitation Statement, nor
any other document filed or to be filed by or on behalf of the Company with the
SEC or any other governmental entity or stock exchange in connection with the
transactions contemplated by this Agreement contained when filed or will, at the
respective times filed with the SEC or other governmental entity or stock
exchange contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading; provided, that the foregoing shall not apply to
information supplied by Parent or Buyer specifically for inclusion or
incorporation by reference in any such document. Neither the Consent
Solicitation Statement nor any amendment or supplement thereto shall, when
mailed to the Company's stockholders, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading; provided, that the
foregoing shall not apply to information supplied by Parent or Buyer
specifically for inclusion or incorporation by reference therein. To the
Company's knowledge, the Consent Solicitation Statement will comply in all
material respects with the provisions of the Exchange Act, the Listed Company
Manual of the New York Stock Exchange and the rules and regulations thereunder.
None of the information supplied by the Company specifically for inclusion or
incorporation by reference in any document filed or to be filed by or on behalf
of Buyer with the SEC or any other governmental entity or stock exchange in
connection with the transactions contemplated by this Agreement contains, or
will contain, any untrue statement of a material fact or omits, or will omit, to
state any material fact required to be stated therein or necessary in order to
make the statements made therein, in light of the circumstances under which they
were made, not misleading.
SECTION 4.16. Delaware Section 203. Assuming the accuracy of the
representation contained in Section 5.5 hereof, the provisions of Section 203 of
the DGCL will not apply to this Agreement or any of the transactions
contemplated hereby. The Company has heretofore delivered to Buyer a complete
and correct copy of the resolutions of the Board of Directors of the Company to
the effect that pursuant to Section 203(a)(1) of the DGCL and assuming the
accuracy of the representations in Section 5.5 hereof (without giving effect to
the knowledge qualification therein), the restrictions contained in Section 203
of the DGCL are and shall be inapplicable to the Merger and the transactions
contemplated by this Agreement.
SECTION 4.17. Broker's Fees. Except for the fees payable to JMS set forth
in the Letter Agreement dated May 14, 1996 between JMS and the Company, and
extended by letter dated January 30, 1997, copies of which letters have been
provided to Buyer, neither the Company, nor any of its subsidiaries nor any of
their respective directors or officers has incurred any liability for any
broker's fees, commissions, or financial advisory or finder's fees in connection
with any of the transactions contemplated by this Agreement, and neither the
Company, any of its subsidiaries nor any of their respective directors or
officers has employed any other broker, finder or financial advisor in
connection with any of the transactions contemplated by this Agreement.
SECTION 4.18. Representations and Warranties. None of the information
contained in the representations and warranties of the Company set forth in this
Agreement or in any certificate or writing delivered to Buyer as contemplated by
this Agreement contains or will contain any untrue statement of a material fact
or omits or will omit to state a material fact necessary to make the statements
contained herein or therein not misleading.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER
Each of Parent and Buyer, jointly and severally, represents and warrants to
the Company, as to itself, as follows:
SECTION 5.1. Organization. It is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation and
it has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. True and
complete copies of the Certificate of Incorporation and By-laws of Buyer have
been provided to the Company.
SECTION 5.2. Authority. It has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized and approved by its Board of Directors and its stockholders to the
extent required by applicable law and its certificate of incorporation and no
other corporate proceedings are necessary to authorize this Agreement or the
consummation of the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by it and constitutes its legal, valid
and binding agreement, enforceable against it in accordance with its terms.
SECTION 5.3. No Violations; Consents and Approvals. (a) Neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby nor compliance by it with any of the provisions
hereof will (i) violate any provision of its certificate of incorporation or
by-laws, (ii) result in a violation or breach of, or constitute (with or without
due notice or lapse of time or both) a default, or give rise to any right of
termination, cancellation or acceleration or any right which becomes effective
upon the occurrence of a merger, under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture or other instrument of
indebtedness for money borrowed to which it is a party, or by which it or any of
its properties is bound, (iii) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default, or give rise to
any right of termination, cancellation or acceleration or any right which
becomes effective upon the occurrence of a merger, under any of the terms,
conditions or provisions of any license, franchise, permit or agreement to which
it is a party, or by which it or any of its properties is bound, or (iv) violate
any statute, rule, regulation, order or decree of any public body or authority
by which it or any of its properties is bound, excluding from the foregoing
clauses (ii), (iii) and (iv) violations, breaches, defaults or rights for which
it has received or, prior to the Effective Time, shall have received,
appropriate consents or waivers.
(b) No filing or registration with, notification to, or authorization,
consent or approval of, any governmental entity is required by it in connection
with the execution and delivery of this Agreement, or the consummation by it of
the transactions contemplated hereby, except (i) in connection, or in
compliance, with the provisions of the Exchange Act, (ii) the filing of the
Certificate of Merger with the Delaware Secretary of State, and (iii) such
filings and consents as may be required under any environmental law pertaining
to any notification, disclosure or required approval triggered by the Merger or
the transactions contemplated by this Agreement.
(c) No stockholder of Parent holds or has the present right to hold fifty
percent (50%) or more of the voting securities of Parent. Neither Buyer nor
Parent satisfies the "size of person" test under Section 7A(a)(2) of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
SECTION 5.4. Information. None of the information supplied by it
specifically for inclusion or incorporation by reference in the Consent
Solicitation Statement or any other document filed or to be filed by or on
behalf of the Company with the SEC or any other governmental entity or stock
exchange in connection with the transactions contemplated by this Agreement
contains, or will contain, any untrue statement of a material fact or omits, or
will omit, to state any material fact required to be stated therein or necessary
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
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SECTION 5.5. Ownership of Securities. Neither it nor any of its affiliates
or associates (as such terms are defined in Section 203 of the DGCL) was at the
time the Board approved the Merger, an "interested stockholder" (as defined in
Section 203 of the DGCL) of the Company.
SECTION 5.6. Financing. Parent has received a contribution to its capital
in the amount of Ten Million Dollars ($10,000,000) (the "Parent Capital
Contribution"). True and correct copies of (a) that certain Credit Agreement,
entered into concurrently herewith, among Parent, Buyer and Credit Agricole
Indosuez, as agent and lender, and (b) that certain Senior Subordinated Loan
Agreement, entered into concurrently herewith, among Parent, Buyer and Credit
Agricole Indosuez, as agent and lender (collectively, the "Loan Agreements")
have been provided to the Company. The Loan Agreements are and as of the
Effective Time shall be in full force and effect, and as of the Effective Time,
the Loan Agreements shall not since the date hereof have been amended, modified
or supplemented in any material respect.
SECTION 5.7. Broker's Fees. It does not have any liability for any broker's
fees, commissions, or financial advisory or finder's fees in connection with any
of the transactions contemplated by this Agreement which will have the effect of
reducing the Merger Price.
SECTION 5.8. Representations and Warranties. None of the information
contained in its representations and warranties set forth in this Agreement or
in any certificate or writing delivered to the Company as contemplated by this
Agreement contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements
contained herein or therein not misleading.
ARTICLE VI
COVENANTS
SECTION 6.1. Conduct of Business of the Company. Except as contemplated by
this Agreement or as expressly agreed to in writing by Buyer, during the period
from the date hereof to the Effective Time, the Company will not, nor will it
permit any of its subsidiaries to, conduct its operations otherwise than in the
ordinary course of business consistent with past practice; provided, however,
that notwithstanding anything to the contrary set forth in this entire Section
6.1, the Company shall be permitted to (i) execute leases with respect to the
two new stores described in Section 6.1 of the Disclosure Letter (the "New
Stores Leases"), and (ii) take any actions required to enable the Company to
comply with Section 6.13 hereof. Without limiting the generality of the
foregoing, and except as otherwise expressly provided in this Agreement, prior
to the Effective Time, the Board will not, without the prior written consent of
Buyer, permit the Company or any of its subsidiaries to:
(a) except for the amendment contemplated by Section 6.10 hereof,
amend or propose to amend its certificate or articles of incorporation or
by-laws (or similar constituent documents);
(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise) any stock of any class or any other securities or equity
equivalents (including, without limitation, any stock options or stock
appreciation rights), except for Shares issued upon exercise of Options
outstanding as of the date of this Agreement (in accordance with their
respective terms), or amend any of the terms of any such securities or
agreements outstanding as of the date hereof, except as specifically
contemplated by this Agreement;
(c) except as disclosed in the Disclosure Letter, split, combine or
reclassify any shares of its capital stock, declare, set aside or pay any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, or redeem or
otherwise acquire any of its securities or any securities of its
subsidiaries;
(d) (i) incur, assume or prepay any long-term or short-term debt or
issue any debt securities; (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise)
for any obligations of any other person except for obligations of
wholly-owned subsidiaries of the Company; (iii) make any loans, advances or
capital contributions to, or investments in, any other
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person (other than to wholly-owned subsidiaries of the Company or customary
loans or advances to employees in the ordinary course of business
consistent with past practice); (iv) pledge or otherwise encumber shares of
capital stock of the Company or any of its subsidiaries; or (v) mortgage or
pledge any of its assets, tangible or intangible, or create or suffer to
exist any lien thereupon, excluding Permitted Liens and liens existing on
the date hereof;
(e) except as may be required by law, as contemplated by this
Agreement, with respect to compensating non-employee directors of the
Company or with respect to parity increases in compensation, enter into,
adopt or amend or terminate any bonus, profit sharing, compensation,
severance, termination, stock option, stock appreciation right, restricted
stock, performance unit, stock equivalent, stock purchase agreement, stock
ownership plan, pension, retirement, deferred compensation, employment,
severance or other employee benefit agreement, trust, plan, fund or other
arrangement for the benefit or welfare of any director, officer or employee
in any manner, or (except for normal increases in the ordinary course of
business consistent with past practice that, in the aggregate, do not
result in a material increase in benefits or compensation expense to the
Company, and as required under existing agreements) increase in any manner
the compensation or fringe benefits of any director, officer or employee or
pay any benefit not required by any plan and arrangement as in effect as of
the date hereof (including, without limitation, the granting of stock
options, stock appreciation rights or performance units);
(f) other than in accordance with the New Store Leases, lease any
assets (other than automobile and office equipment leases entered into in
the ordinary course of business and consistent with past practice) or
acquire, sell, or dispose of any assets outside the ordinary course of
business or any assets which in the aggregate are material to the Company
or its subsidiaries, or enter into any commitments, contracts, agreements
or transactions outside the ordinary course of business consistent with
past practice or which would, individually or in the aggregate, be material
to the Company or its subsidiaries, or modify, amend, terminate or waive
any material rights under any contract or agreement;
(g) except as may be required as a result of a change in law or in
generally accepted accounting principles, change any of the accounting
principles or practices used by it;
(h) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof or any equity interest therein; (ii) except as
contemplated by this Agreement, enter into any contract or agreement other
than in the ordinary course of business consistent with past practice which
would be material to the Company or its subsidiaries; or (iii) enter into
or amend any contract, agreement, commitment or arrangement providing for
the taking of any action that would be prohibited hereunder;
(i) revalue in any material respect any of its assets, including,
without limitation, writing down the value of inventory or writing-off
notes or accounts receivable other than in the ordinary course of business;
(j) make any tax election or settle or compromise any federal, state
or local tax liability or assent to the extension of time for collection or
assessment of any federal, state or local tax in excess of Fifty Thousand
Dollars ($50,000);
(k) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of
business of liabilities reflected or reserved against in, or contemplated
by, the consolidated financial statements (or the notes thereto) of the
Company and its subsidiaries or incurred in the ordinary course of business
consistent with past practice;
(l) settle or compromise any pending or threatened suit, action or
claim relating to the transactions contemplated hereby or material to the
Company and its subsidiaries taken as a whole;
(m) other than capital expenditures appearing on the Company's
forecasted June and July Cash Flow Statements appearing in Section 6.1(m)
of the Disclosure Letter, authorize or make any (i) new
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capital expenditure or (ii) other than those made in the ordinary course of
business, expenditures which individually is in excess of $100,000 or which
in the aggregate are in excess of $500,000; or
(n) take, or agree in writing or otherwise to take, any of the actions
described in Sections 6.1(a) through 6.1(m) hereof or, except as
contemplated by this Agreement, take, or omit to take, any action which
would make any of the representations or warranties of the Company
contained in this Agreement untrue or incorrect in any material respect as
of the date when made.
SECTION 6.2. No Solicitation. (a) The Company shall, and shall direct its
officers, directors, employees, representatives and agents (including, without
limitation, its attorneys, investment bankers and accountants) to, refrain from
any discussions and negotiations with any parties other than Parent and Buyer
with respect to any proposal relating to an Acquisition Transaction; provided,
however, that the Company may seek clarification, either directly or through its
representatives, of an unsolicited proposal. The Company agrees that, prior to
the Effective Time, it shall not, and shall not authorize or permit any of its
subsidiaries or any of its or its subsidiaries' directors, officers, employees,
agents or representatives (including, without limitation, its attorneys,
investment bankers and accountants), directly or indirectly, to solicit,
initiate or encourage (including by way of furnishing or disclosing non-public
information) any inquiries or the making of any proposal with respect to any
acquisition of all or substantially all of the Company by means of a merger,
consolidation or other business combination involving the Company or its
subsidiaries or acquisition of all or substantially all of the assets or capital
stock of the Company and its subsidiaries taken as a whole (an "Acquisition
Transaction") or initiate, negotiate, explore or otherwise engage in substantive
communications in any way with any person (other than Buyer, Parent and their
directors, officers, employees, agents and representatives) with respect to any
Acquisition Transaction, or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
Merger or any other transactions contemplated by this Agreement. Notwithstanding
the foregoing, nothing contained in this Agreement shall prevent the Company or
the Board from furnishing non-public information to, or entering into
discussions or negotiations with, any person or entity in connection with an
unsolicited bona fide written proposal for an Acquisition Transaction by such
person or entity or recommending an unsolicited bona fide written proposal for
an Acquisition Transaction to the stockholders of the Company, if and only to
the extent that (A) the Board believes in good faith (after consultation with
its financial adviser) that such proposal for an Acquisition Transaction would,
if consummated, result in a transaction more favorable to the Company's
stockholders from a financial point of view than the transactions contemplated
by this Agreement and the Board determines in good faith after consultation with
its legal counsel that such action is necessary for the Company to comply with
its fiduciary duties to stockholders under applicable law, and (B) prior to
furnishing such nonpublic information to, or entering into discussions with,
such person or entity, the Board receives from such person or entity an executed
confidentiality agreement, with terms no more favorable to such party than those
contained in the Confidentiality Agreement, dated January 23, 1997, between
Knightsbridge, Inc. and JMS.
(b) The Company shall immediately advise Parent and Buyer in writing of the
receipt of any inquiries or proposals relating to an Acquisition Transaction,
including the terms of any such inquiries or proposals, and the actions taken by
the Company or its agents or representatives with respect thereto.
SECTION 6.3. Access to Information; Confidentiality.
(a) From the date of this Agreement until the Effective Time, the Company
will give Parent and Buyer and their authorized representatives (including
counsel, consultants, financial advisors, accountants, banks, financial
institutions and auditors), and including no more than one full-time, on-site
representative of Buyer unless the Company consents to additional on-site
representatives which consent shall not be unreasonably withheld, full access
during normal business hours to all facilities, personnel and operations and to
all books and records of the Company and its subsidiaries, will permit Buyer and
its on-site representative to make such inspections as it may reasonably require
and will cause its officers and those of its subsidiaries to furnish Buyer and
its on-site representative with such financial and operating data and other
information with respect to its business and properties as Buyer or such on-site
representative may from time to time request; provided, however, that,
notwithstanding the foregoing, Buyer and such on-site representative shall have
no authority with respect to the facilities, personnel, management or operations
of the Company and, provided further that
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Buyer and such on-site representative shall not interfere with the day-to-day
operations of the Company; provided, further that, any such inspections and
examinations shall be conducted at reasonable times and under reasonable
circumstances. The Company shall give Parent and Buyer and their authorized
representatives full and reasonable access to the Company's management.
(b) Each of Parent and Buyer agrees to keep confidential and not divulge to
any other party or person (other than to the employees, attorneys, accountants
and consultants of each who have a need to receive such information and other
than as may be required by law or the rules of the New York Stock Exchange) any
information received from the Company, unless and until such documents and other
information otherwise becomes publicly available. In the event of termination of
this Agreement for any reason, each of Parent and Buyer shall promptly return,
or at the election of the Company, destroy all non-public documents obtained
from the Company and any copies or notes of such documents (except as otherwise
required by law) and, upon the request of the Company, confirm such destruction
to the Company in writing.
SECTION 6.4. Reasonable Best Efforts; Other Actions. Subject to the terms
and conditions herein provided and applicable law, each of the Company, Parent
and Buyer shall use its reasonable best efforts promptly to take, or cause to be
taken, all other actions and do, or cause to be done, all other things
necessary, proper or appropriate under applicable laws and regulations to
consummate and make effective the Merger and all other transactions contemplated
by this Agreement, including, without limitation, using such reasonable best
efforts to (a) obtain all necessary consents, approvals or waivers under its
material contracts (including, without limitation, its real property leases),
(b) cooperate in making available information and personnel to the lenders to
Parent with respect to financing for the transactions contemplated by this
Agreement and (c) lift any legal bar to the Merger. If any "fair price,"
"moratorium," "control share acquisition" or other form of antitakeover statute,
regulation, charter provision or contract is or becomes applicable to the
transactions contemplated by this Agreement, the Company will use its reasonable
best efforts to grant such approvals and take such actions as are necessary
under such laws, provisions or contracts so that the transactions contemplated
by this Agreement may be consummated as promptly as practicable on the terms
contemplated by this Agreement and otherwise act to eliminate or minimize the
effects of such statute, regulation, provision or contract on the transactions
contemplated by this Agreement.
SECTION 6.5. Public Announcements. Neither Buyer nor Parent shall issue any
press release or otherwise make any public statements with respect to this
Agreement or the Merger, without the prior written consent of the Company, which
consent shall not be unreasonably withheld; provided, that any press release or
public statement required by applicable law or any obligations pursuant to any
listing agreement with any national securities exchange shall not be deemed
unreasonable.
SECTION 6.6. Notification of Certain Matters. Each of the Company, Parent
and Buyer shall give prompt notice to the other party of (a) the occurrence, or
non-occurrence, of any event the occurrence, or non-occurrence, of which would
be likely to cause either (i) any representation or warranty of any party
contained in this Agreement to be untrue or inaccurate in any material respect
at any time from the date hereof to the Effective Time, or (ii) any condition
set forth in Articles VII, VIII or IX hereof to be unsatisfied at any time from
the date hereof to the Effective Time, and (b) any material failure of the
Company, Parent or Buyer, as the case may be, or any officer, director, employee
or agent thereof, to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it hereunder; provided, however, that the
delivery of any notice pursuant to this Section 6.6 shall not limit or otherwise
affect the remedies available hereunder to the party receiving such notice. If
either Loan Agreement shall be revoked, withdrawn, amended, modified or
otherwise supplemented in any material respect, Parent shall give the Company
written notice within 24 hours of such revocation, withdrawal or amendment,
modification or supplement.
SECTION 6.7. Expenses. Except as set forth in Section 10.6 hereof, Parent,
Buyer and the Company shall each bear their respective expenses incurred in
connection with this Agreement and the Merger, including, without limitation,
the preparation, execution and performance of this Agreement and the
transactions contemplated hereby, and all fees and expenses of investment
bankers, finders, brokers, agents, representatives, counsel and accountants, and
their counsel (collectively, "Advisors"). Such fees and expenses (which shall
include fees and expenses incurred as of the business day prior to the date on
which the Closing
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occurs, plus an estimate of fees and expenses incurred subsequent thereto in
connection with the Closing and post-closing matters), to the extent not paid by
the Company prior to the Effective Time, of Advisors who have acted on behalf of
the Company as have been presented to Buyer shall be paid by the Company at the
Closing, or as otherwise agreed by Buyer, Parent and the Company.
SECTION 6.8. Indemnification of Directors and Officers. (a) Parent shall
cause the Surviving Corporation to perform those certain Indemnification
Agreements between the Company and each member of the Board, and between the
Company and certain officers of the Company and its subsidiaries described in
Section 6.8 of the Disclosure Letter (collectively, the "Indemnification
Agreements").
(b) For a period of six years after the Effective Time, Parent shall cause
the Surviving Corporation to maintain in effect the policy of directors' and
officers' liability insurance described in Section 6.8 of the Disclosure Letter
(the "New D&O Insurance Policy").
(c) In the event the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger, or (ii) transfers or conveys all or substantially all of its properties
and assets to any person, then, and in each such case, proper provision shall be
made by Parent so that the successors and assigns of the Surviving Corporation
assume the obligations set forth in this Section 6.8.
(d) The provisions of this Section 6.8 are intended to be for the benefit
of, and shall be enforceable by, each party to the Indemnification Agreements
other than the Company and his or her heirs, successors and legal and personal
representatives.
SECTION 6.9. Consent Solicitation Statement. As promptly as practicable
after the execution of this Agreement, the Company shall prepare and file with
the SEC a Consent Solicitation Statement to solicit the written consent of the
stockholders of the Company with respect to the Merger and the Charter Amendment
(the "Consent Solicitation Statement"). The Company shall use its reasonable
efforts to cause the Consent Solicitation Statement to be "cleared" by the SEC
for mailing to the stockholders of the Company as promptly as practicable and
shall mail the Consent Solicitation Statement to its stockholders as promptly as
practicable thereafter. Buyer shall furnish all information concerning it and
the holders of its capital stock as the Company may reasonably request for
inclusion in such Consent Solicitation Statement. Subject to the Board's
compliance with its fiduciary duties pursuant to Section 6.2(a) hereof, the
Consent Solicitation Statement shall include the recommendation in favor of
approval and adoption of this Agreement by those members of the Board who
actually voted in favor therefor. Buyer shall have the right to review the
Consent Solicitation Statement before it is filed with the SEC.
SECTION 6.10. Charter Amendment. Prior to the Effective Time, the Board
shall (a) approve and adopt the amendment of Article Fourth of the Company's
Certificate of Incorporation so that such Article Fourth shall read in its
entirety as set forth on Exhibit "A" attached hereto (the "Charter Amendment");
(b) resolve to recommend approval and adoption of the Charter Amendment by the
stockholders of the Company; (c) cause the inclusion of necessary disclosures
with respect to the Charter Amendment in the Consent Solicitation Statement; and
(d) subject to the satisfaction or, if permissible, waiver of the conditions set
forth in Articles VII, VIII and IX hereof, and further subject to stockholder
approval of the Charter Amendment and the Merger, cause the Charter Amendment to
be effected by filing a certificate of amendment with the Delaware Secretary of
State immediately prior to the filing of the Certificate of Merger.
SECTION 6.11. Employment Agreements. (a) Parent shall cause the Surviving
Corporation to perform (i) the "Stay Bonus" Agreements, dated June 28, 1996 (as
may be amended by the Extension Agreements), between the Company and each of
Nitin Parikh, James Glenny, Chris McGinley, John Treiman, Robert Genest, Shirli
Sumida, Chuck Gann, Alan Matuny, Kevin Townson, Geric Johnson, Susan Norris and
Dennis Warden; (ii) the Employment Agreement, dated as of April 19, 1996,
between the Company and John Hatfield; and (iii) the Townson Agreements.
(b) Notwithstanding anything to the contrary in this Agreement, any claim
or controversy arising out of or relating to the agreements referred to in
Section 6.11(a) hereof shall be settled exclusively by arbitration in
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Los Angeles, California, in accordance with the Commercial Arbitration Rules of
the American Arbitration Association, and judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction. The prevailing
party shall be entitled to recover its actual attorneys' fees and other costs
incurred in any such action or proceeding.
(c) The persons referenced in Section 6.11(a) hereof who are not parties to
this Agreement are intended to be third party beneficiaries of this Agreement.
SECTION 6.12. Parent Capital Contribution. Prior to the Effective Time,
Parent shall not declare, set aside or pay any cash dividend or other cash
distribution, or, except for the payment of fees and expenses incurred in
connection with the transactions contemplated by this Agreement, otherwise use,
transfer, convey or dispose of all or any part of the Parent Capital
Contribution or enter into any agreement (whether written or oral) to do any of
the foregoing. In the event this Agreement is terminated by the Company pursuant
to Section 10.3 hereof and such termination entitles the Company to payment
under Section 10.6(b) hereof, Parent shall, until the earlier of the date when
such payment is made and the date which is six (6) months following the Closing,
at all times have cash and cash equivalents in an aggregate amount of not less
than Five Hundred Thousand Dollars ($500,000).
SECTION 6.13. Cash and Cash Equivalent. At the close of business on June
28, 1997, the Company and its subsidiaries will have on a consolidated basis
cash and cash equivalents in an aggregate amount of not less than Ten Million
Dollars ($10,000,000) (the "Cash Target"). The Cash Target shall be measured
without taking into effect payment of any of the following: (i) any fees and
expenses incurred by the Company in connection with this Agreement and the
Merger, and (ii) payment of the premium for the New D&O Insurance Policy.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF THE COMPANY, PARENT AND BUYER
The obligations of the parties to effect the Merger shall be subject to the
satisfaction or, if permissible, waiver at or prior to the Effective Time of
each of the following conditions:
SECTION 7.1. Stockholder Approval. The holders of a majority of each class
of Shares entitled to vote thereon shall have approved and adopted this
Agreement in accordance with the DGCL and the rules and regulations of the New
York Stock Exchange.
SECTION 7.2. No Legal Impediments. No statute, rule or regulation shall
have been promulgated, enacted, entered or enforced, and no other legally
binding, final and nonappealable action shall have been taken, by any domestic,
foreign or supranational government or governmental, administrative or
regulatory authority or agency of competent jurisdiction or by any court or
tribunal of competent jurisdiction, domestic, foreign or supranational, that in
any of the foregoing cases has the effect of making illegal or directly or
indirectly restraining, prohibiting or restricting the consummation of the
Merger.
SECTION 7.3. Mailing of Consent solicitation Statement. At least twenty
(20) business days shall have elapsed since the mailing of the Consent
Solicitation Statement to Company stockholders, as required by Rule 14a-101
under the Exchange Act.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF PARENT AND BUYER
The obligations of Parent and Buyer to effect the Merger shall be subject
to the satisfaction by the Company or, if permissible, waiver by Parent and
Buyer at or prior to the Effective Time of each of the following conditions:
SECTION 8.1. Dissenting Shares. The number of Shares voted against the
Merger shall not exceed thirty percent (30%) of either class of the outstanding
Shares.
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SECTION 8.2. Charter Amendment. The Charter Amendment shall have been
adopted and approved by all requisite action of the Board and the Company's
stockholders, and shall have been duly filed with the Delaware Secretary of
State.
SECTION 8.3. Compliance with Covenants. The Company shall have performed or
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it on or prior to the
Effective Time.
SECTION 8.4. Third Party Consents. The Company shall have obtained, or
Parent and Buyer shall have waived, the consent of any third parties the consent
of whom is required under any agreement, contract or license, other than a real
property lease, to which the Company is a party or by which the Company is bound
or licensed for the consummation of the Merger and the transactions contemplated
by this Agreement and as to whom failure to obtain such consent would have a
Company Material Adverse Effect or a material adverse effect on the Merger.
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
The obligations of the Company to effect the Merger shall be subject to the
satisfaction by Parent and/or Buyer, as the case may be, or, if permissible,
waiver by the Company at or prior to the Effective Time of each of the following
conditions:
SECTION 9.1. Finances. Parent shall have received contributions to its
capital in an aggregate amount equal to Seventeen Million Dollars ($17,000,000),
and the Loan Agreements shall have remained in full force and effect and shall
not have been amended, modified or otherwise supplemented in any material
respect since the date hereof.
SECTION 9.2. New D&O Insurance Policy. The premium for the New D&O
Insurance Policy shall have been paid in full and be non-cancelable.
SECTION 9.3. Compliance with Covenants. Each of Parent and Buyer shall have
performed or complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or prior to
the Effective Time.
ARTICLE X
TERMINATION AND ABANDONMENT
SECTION 10.1. Termination. This Agreement may be terminated (and the Merger
contemplated hereby may be abandoned) notwithstanding approval thereof by the
stockholders of the Company at any time prior to the Effective Time: (a) by
mutual written consent of Parent, Buyer and the Company; (b) by any party if,
without any material breach by such terminating party of its obligations under
this Agreement, the Merger shall not have occurred on or before 5:00 p.m. (Los
Angeles time) on the fortieth (40th) business day after the date when the
Consent Solicitation Statement is mailed to the Company's stockholders (the
"Merger Deadline"), which date may be extended by mutual written consent of the
parties hereto; or (c) by Parent, Buyer or the Company if any court of competent
jurisdiction in the United States or other governmental body in the United
States shall have issued an order (other than a temporary restraining order),
decree or ruling or taken any other action restraining, enjoining or otherwise
prohibiting the Merger, and such order, decree, ruling or other action shall
have become final and nonappealable; provided that the party seeking to
terminate this Agreement shall have used its reasonable best efforts to remove
or lift such order, decree or ruling.
SECTION 10.2. Termination by Parent or Buyer. This Agreement may be
terminated and the Merger may be abandoned by Parent or Buyer prior to the
Effective Time if (a) the representations or warranties of the Company contained
in this Agreement are not true and correct at and as of any date prior to the
Effective Time as if made at and as of such time, except for (i) failures to be
true and correct as could not, individually or in the aggregate, reasonably be
expected to result in a material adverse effect on the business or financial
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condition of the Company and its subsidiaries taken as a whole (a "Company
Material Adverse Effect"), (ii) failures to comply as are capable of being and
are cured (other than by mere disclosure of the breach) within five (5) days
after written notice from Parent or Buyer to the Company of such failure, or
(iii) representations and warranties which speak as of a specified date which
were true and correct in all material respects as of such specified date; (b)
the Company has failed to comply with its covenants under this Agreement, except
for (i) failures to so comply as could not, individually or in the aggregate,
reasonably be expected to result in a Company Material Adverse Effect or (ii)
failures to comply as are capable of being and are cured within five (5) days
after written notice from Parent or Buyer to the Company of such failure; (c)
the conditions specified in Articles VII and VIII to be satisfied by the Company
shall not have been satisfied by the Company or waived by Parent and Buyer prior
to the Merger Deadline; (d) Credit Agricole Indosuez shall fail to fund the
Merger pursuant to the Loan Agreements; (e) the Board shall (i) withdraw its
recommendation or approval in respect of this Agreement or the Merger or (ii)
modify or change its recommendation or approval in respect of this Agreement or
the Merger in a manner materially adverse to Parent or Buyer; or (f) the Board
shall have approved any proposal other than by Parent and Buyer in respect of an
Acquisition Transaction.
SECTION 10.3. Termination by the Company. This Agreement may be terminated
and the Merger may be abandoned by the Company notwithstanding approval thereof
by the stockholders of the Company at any time prior to the Effective Time if
(a) the representations and warranties of Parent or Buyer contained in this
Agreement are not true and correct at and as of any date prior to the Effective
Time as if made at and as of such time, except for (i) failures to be true and
correct as could not, individually or in the aggregate, reasonably be expected
to result in a material adverse effect on the business or financial condition of
Parent or Buyer (a "Buyer Material Adverse Effect"), (ii) failures to comply as
are capable of being and are cured (other than by mere disclosure of the breach)
within five (5) days after written notice from the Company to Parent or Buyer of
such failure, or (iii) representations and warranties which speak as of a
specified date which were true and correct in all material respects as of such
specified date; (b) Parent or Buyer has failed to comply with its covenants
under this Agreement, except for (i) failures to so comply as could not,
individually or in the aggregate, reasonably be expected to result in a Buyer
Material Adverse Effect; or (ii) failures to comply as are capable of being and
are cured within (5) days after written notice from the Company to Parent or
Buyer of such failure; (c) the conditions in Articles VII and IX to be satisfied
by the Buyer or Parent shall not have been satisfied by the Buyer or Parent or
waived by the Company prior to the Merger Deadline; or (d) the Board shall have
approved any proposal other than by Parent and Buyer in respect of an
Acquisition Transaction.
SECTION 10.4. Procedure for Termination. In the event of termination and
abandonment of the Merger by Parent, Buyer or the Company pursuant to this
Article X, written notice thereof shall be given by the terminating party to the
other parties.
SECTION 10.5. Effect of Termination. In the event of termination of this
Agreement pursuant to and in accordance with this Article X, the Merger shall be
deemed abandoned and this Agreement shall forthwith become void, except as
provided in Sections 6.3(b) and 6.7 hereof (which Sections shall survive any
termination of this Agreement), without liability on the part of any party
hereto or its affiliates, directors, officers or stockholders except as provided
in Sections 10.6 and 10.7 hereof, and each of the parties hereto hereby waives
and releases any other claim which may otherwise exist upon such termination.
SECTION 10.6. Termination Fee.
(a) Termination by Parent or Buyer. In the event this Agreement is
terminated by Parent or Buyer pursuant to Section 10.2(a) or 10.2(b) hereof,
where the failure giving rise to such right of termination shall have been
caused in whole or in material part by any action or inaction within the control
of the Company or any subsidiary of the Company (it being understood that any
action or inaction outside the control of the Company or any subsidiary of the
Company such as, by way of example only, the filing of a lawsuit against them,
shall not come within this Section 10.6(a)), the Company shall promptly pay to
the terminating party an amount equal to the actual out-of-pocket fees and
expenses reasonably incurred and paid by such terminating party in connection
with the Merger and the transactions contemplated by this Agreement, such
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amount not to exceed $750,000. Notwithstanding anything to the contrary set
forth in this Section 10.6(a): (i) in the event that Buyer is entitled to a fee
pursuant to Section 10.7 hereof, neither Parent nor Buyer shall be entitled to
any fee under this Section 10.6(a), and (ii) under no circumstances shall both
Parent and Buyer be entitled to a fee pursuant to this Section 10.6(a).
(b) Termination by Company. In the event this Agreement is terminated by
the Company (i) pursuant to Section 10.3(a) or 10.3(b) hereof, where the failure
giving rise to such right of termination shall have been caused in whole or in
material part by any action or inaction within the control of Buyer or Parent
(it being understood that any action or inaction outside the control of Buyer or
Parent shall not come within this Section 10.6(b)), or (ii) pursuant to Section
10.3(c) hereof (but only where such termination is due to the failure of the
condition set forth in Section 9.1 hereof), Parent shall promptly pay to the
Company an amount equal to the actual out-of-pocket fees and expenses reasonably
incurred by the Company in connection with the Merger and the transactions
contemplated by this Agreement, such amount not to exceed $500,000.
SECTION 10.7. Topping Fee.
(a) In the event this Agreement is terminated by Parent or Buyer pursuant
to Section 10.2(e) or 10.2(f) hereof, or by the Company pursuant to Section
10.3(d) hereof, the Company shall pay to Buyer the sum of One Million Eight
Hundred Thousand Dollars ($1,800,000) as compensation for lost opportunities and
reimbursement for out-of-pocket expenses.
(b) In the event this Agreement is terminated by Parent or Buyer pursuant
to Section 10.2(c) hereof (but only where such termination is due to the failure
of the condition set forth in Section 7.1 hereof), the Company shall pay to
Buyer the greater of (i) the sum of Seven Hundred Fifty Thousand Dollars
($750,000), and (ii) the actual out-of-pocket fees and expenses incurred and
paid by Buyer and Parent in connection with the Merger and the transactions
contemplated by this Agreement, such amount not to exceed One Million Dollars
($1,000,000), in either case, as compensation for lost opportunities and
reimbursement for out-of-pocket expenses.
SECTION 10.8. Remedies. Each party hereto hereby agrees that the sole and
exclusive remedy of such party arising out of, resulting from, in connection
with or relating to, directly or indirectly, another party's material breach,
default or failure in performance of any of such other party's covenants,
agreements, representations or warranties occurring prior to the Effective Time,
shall be termination of this Agreement pursuant to this Article X, and receipt
of a fee pursuant to Section 10.6 or 10.7 hereof, if applicable.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1. Amendment and Modification. At any time prior to the
Effective Time, subject to applicable law, this Agreement may be amended,
modified or supplemented only by written agreement (referring specifically to
this Agreement) of Parent, Buyer and the Company with respect to any of the
terms contained herein.
SECTION 11.2. Waiver. At any time prior to the Effective Time, Parent and
Buyer, on the one hand, and the Company, on the other hand, may (i) extend the
time for the performance of any of the obligations or other acts of the other,
(ii) waive any inaccuracies in the representations and warranties of the other
contained herein or in any documents delivered pursuant hereto and (iii) waive
compliance by the other with any of the agreements or conditions contained
herein which may legally be waived. Any such extension or waiver shall be valid
only if set forth in an instrument in writing specifically referring to this
Agreement and signed on behalf of each party.
SECTION 11.3. Survivability; Investigations. The respective representations
and warranties of Parent, Buyer and the Company contained herein or in any
certificates or other documents delivered prior to or as of the Effective Time
(i) shall not be deemed waived or otherwise affected by any investigation made
by any party hereto and (ii) shall not survive beyond the Effective Time. The
covenants and agreements of the parties
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hereto (including the Surviving Corporation after the Merger) shall survive the
Effective Time without limitation (except for those which, by their terms,
contemplate a shorter survival period).
SECTION 11.4. Notices. All notices and other communications hereunder shall
be in writing and shall be delivered personally or by next-day courier or
telecopied with confirmation of receipt, to the parties at the addresses
specified below (or at such other address for a party as shall be specified by
like notice; provided that notices of a change of address shall be effective
only upon receipt thereof). Any such notice shall be effective upon receipt, if
personally delivered or telecopied, or one day after delivery to a courier for
next day delivery.
(a) if to the Company, to: Frederick's of Hollywood, Inc.
6608 Hollywood Blvd.
Los Angeles, California 90028
Attention: George W. Townson
Fax No.: (213) 463-8847
with a copy to: Loeb & Loeb LLP
1000 Wilshire Blvd., Suite 1800
Los Angeles, California 90017
Attention: Kenneth R. Benbassat, Esq.
Fax No.: (213) 688-3460
(b) if to Parent or Buyer, to: Royalty Corporation
c/o D'Ancona & Pflaum
30 North LaSalle St., Suite 2900
Chicago, Illinois 60602
Attention: Suzanne L. Saxman, Esq.
Fax No.: (312) 580-0923
SECTION 11.5. Assignment. This Agreement and all of the provisions hereto
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder may be assigned by any of the
parties hereto without the prior written consent of the other parties, provided
that Buyer may assign its rights and obligations under this Agreement to any
direct or indirect wholly-owned subsidiary of Parent, but no such assignment
will relieve any party of its obligations under this Agreement. This Agreement,
except for the provisions of Sections 2.3, 3.2, 6.8 and 6.11 hereof (which are
intended to be for the benefit of the persons identified therein, and may be
enforced by such persons), is not intended to confer any rights or remedies
hereunder upon any other person except the parties hereto.
SECTION 11.6. Governing Law. This Agreement shall be governed by the laws
of the State of Delaware (regardless of the laws that might otherwise govern
under applicable Delaware principles of conflicts of law) as to all matters,
including but not limited to matters of validity, construction, effect,
performance and remedies.
SECTION 11.7. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument.
SECTION 11.8. Interpretation. The article and section headings contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement. Where the context or construction requires,
all words applied in the plural shall be deemed to have been used in the
singular, and vice versa; the masculine shall include the feminine and neuter,
and vice versa; and the present tense shall include the past and future tense,
and vice versa. As used in this Agreement, (i) the term "person" shall mean and
include an individual, a partnership, a joint venture, a corporation, a trust,
an unincorporated organization and a government or any department or agency
thereof; (ii) the term "subsidiary" of any specified corporation shall mean any
corporation of which a majority of the outstanding securities having ordinary
voting power to elect a majority of the board of directors are directly or
indirectly owned by such specified corporation or any other person of which a
majority of the equity interests therein are, directly or indirectly, owned by
such specified corporation; (iii) the term
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"including" and words of similar import shall mean "including, without
limitation," unless the context otherwise requires or unless otherwise
specified; and (iv) the term "to the Company's knowledge" (or words of similar
import) shall mean to the knowledge of the Board or any executive officer of the
Company.
SECTION 11.9. Entire Agreement. This Agreement and the Disclosure Letter
and the exhibits and schedules hereto (which are incorporated herein by this
reference) embody the entire agreement and understanding of the parties hereto
in respect of the subject matter contained herein and therein and supersede all
prior agreements and understandings among the parties with respect to such
subject matter. There are no representations, promises, warranties, covenants or
undertakings in respect of such subject matter, other than those expressly set
forth or referred to herein and therein.
*****
IN WITNESS WHEREOF, Buyer and the Company have caused this Agreement to be
signed by their respective duly authorized officers as of the date first above
written.
COMPANY:
FREDERICK'S OF HOLLYWOOD, INC.
By: /s/ GEORGE W. TOWNSON
----------------------------------
Its: President BUYER:
ROYALTY ACQUISITION CORP.
By: /s/ DAVID E. LIPSON
----------------------------------
Its: Chairman and President
PARENT:
ROYALTY CORPORATION
By: /s/ DAVID E. LIPSON
----------------------------------
Its: Chairman and President
<PAGE> 66
EXHIBIT "A"
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FREDERICK'S OF HOLLYWOOD, INC.
Frederick's of Hollywood, Inc., a corporation duly organized and existing
under the Delaware General Corporation Law (the "Corporation"), does hereby
certify:
FIRST: That Article FOURTH of the Certificate of Incorporation of the
Corporation, as heretofore amended, is hereby amended to delete in its entirety
Paragraph (e) of Section 1 of said Article FOURTH.
SECOND: That said amendment was duly adopted in accordance with Section
242, and duly approved by written consent in accordance with Section 228, of the
Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be executed by its duly authorized officer this day of
, 1997.
FREDERICK'S OF HOLLYWOOD, INC.
By:
--------------------------------------
George W. Townson, President
<PAGE> 67
ANNEX B
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FREDERICK'S OF HOLLYWOOD, INC.
Frederick's of Hollywood, Inc., a corporation duly organized and existing
under the Delaware General Corporation Law (the "Corporation"), does hereby
certify:
FIRST: That Article FOURTH of the Certificate of Incorporation of the
Corporation, as heretofore amended, is hereby amended to delete in its entirety
Paragraph (e) of Section 1 of said Article FOURTH.
SECOND: That said amendment was duly adopted in accordance with Section
242, and duly approved by written consent in accordance with Section 228, of the
Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be executed by its duly authorized officer this day of
, 1997.
FREDERICK'S OF HOLLYWOOD, INC.
By:
------------------------------------
George W. Townson, President
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<PAGE> 68
ANNEX C
SECTION 1(e) OF ARTICLE FOURTH
PROPOSED TO BE DELETED
(e)(1) Any person or group, except for a Corporation's Employee Stock
Ownership Plan, after the Effective Time, who acquires shares of Class A Stock
may not exercise the voting power of that number of shares of Class A Stock so
acquired that are deemed to be excess shares of Class A Stock for purposes of
this subdivision (e)(1) (other than upon original issuance or sale by this
Corporation, by operation of law, by will or the laws of descent and
distribution, by gift or by foreclosure of a bona fide loan). An acquisition of
shares of Class A Stock hereunder shall be deemed to include shares of Class A
Stock with respect to which the person (a "Related Person") acts or agrees to
act in concert with any other person. The number of shares of Class A Stock
deemed hereunder to be excess Class A Stock shall be determined by application
of the following formula:
(i) the percentage which the number of shares of Class A Stock
acquired by a Related Person since the Effective Time bears to the
aggregate number of outstanding shares of Class A Stock;
(ii) minus 10%;
(iii) minus the percentage which the number of shares of Class B Stock
acquired by the Related Person bears to the aggregate number of outstanding
shares of Class B Stock;
(iv) multiplied by the aggregate number of outstanding shares of Class
A Stock (a "Minority Protection Transaction").
(e)(2) In determining the number of outstanding shares of Class A Stock and
Class B Stock for purposes of determining excess shares of Class A Stock under
subdivision (e)(1) hereof, any shares of Class A Stock or Class B Stock acquired
by this Corporation since the last date on which a Related Person acquired any
Class A Stock or Class B Stock (whether treasury or retired) shall be deemed
still to be outstanding. Determination of excess shares of Class A Stock for
purposes of subdivision (e)(1) shall be made as of the date that a Related
Person, directly or indirectly, alone or with others, would seek to exercise or
direct the exercise of voting power with respect to those shares of Class A
Stock.
(e)(3) In the event the Related Person elects to acquire a sufficient
number of shares of Class B Stock in order to eliminate excess shares of Class A
Stock as determined by paragraph (e)(1) hereof, the price to be paid by the
Related Person for the shares of Class B Stock shall be at least equal to the
higher of (a) the highest per share price (including any brokerage commissions
and transfer taxes) paid by the Related Person, in cash or in non-cash
consideration, for any shares of Class A Stock acquired by that person in the
six-month period ending on the date such person becomes a Related Person or (b)
the highest closing sale price of the Class A Stock during the 30-day period
preceding and following the acquisition of shares of the Class B Stock. The
value of any non-cash consideration will be determined by the Board of Directors
of the Corporation acting in good faith. The highest closing sale price of the
Class A Stock will be the highest closing price on the Composite Tape for the
New York Stock Exchange -- Listed Stocks or, if the Class A Stock is not quoted
on the Composite Tape on the New York Stock Exchange, or, if the Class A Stock
is not listed on the New York Stock Exchange, then on any other principal United
States national securities exchange on which the Class A Stock is listed, or, if
the Class A Stock is not listed on any United States national securities
exchange, the highest closing bid quotation for the Class A Stock during the
30-day period on the National Association of Securities Dealers, Inc. Automated
Quotations System or any system in use, or, if no quotations are available, the
fair market value during the 30-day period of the Class A Stock as determined in
good faith by the Board of Directors of the Company.
(e)(4) A Minority Protection Transaction shall also be required to be
effected by any Related Person that acquires beneficial ownership of the next
higher integral multiple of 5% (e.g. 15%, 20%, 25%, etc.) of the outstanding
shares of Class A Stock after the Effective Time (other than upon original
issuance, by operation of law, by will or the laws of descent and distribution,
by gift or by foreclosure of a bona fide loan) if such
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<PAGE> 69
Related Person does not then own an equal or greater percentage of the
outstanding shares of Class B Stock in excess of 10% acquired after the
Distribution Date. Such Related Person desiring not to have excess shares of
Class A Stock shall be required to acquire by any legal means that number of
shares of Class B Stock prescribed by the formula set forth in the preceding
clauses hereof.
(e)(5) Unless there are affirmative attributes of concerted action, acting
or agreement to act in concert with any other person shall not include for
purposes of subdivision (e)(1), actions taken or agreed to be taken by persons
acting in their official capacities as directors or officers of the Corporation
including voting revocable proxies solicited by management of the Corporation or
action by persons related by blood or marriage.
(e)(6) If any Related Person fails to acquire a sufficient number of shares
of Class B Stock to eliminate excess shares of Class A Stock pursuant to
subdivision (e)(3) hereof, such Related Person shall not be entitled to vote any
excess shares of Class A Stock beneficially owned by such Related Person unless
and until such requirements are complied with or unless and until all excess
shares of Class A Stock are no longer beneficially owned by such Related Person.
To the extent that the voting power of any Class A Stock cannot be exercised
pursuant to this subdivision, that Class A Stock shall not be included in the
determination of the voting power of the Corporation for any purpose under this
Certificate of Incorporation as amended or under the Delaware General
Corporation Law.
(e)(7) The Minority Protection Transaction requirement shall not apply to
any increase in percentage ownership of Class A Stock resulting solely from a
change in the total amount of Class A Stock outstanding, provided that any
acquisition by any person or group owning 10% or more of the Class A Stock
occurring after such change shall be subject to any Minority Protection
Transaction requirement that would be imposed with respect to a Related Person
pursuant to this subdivision (e) of Article FOURTH.
(e)(8) All calculations with respect to percentage ownership of issued and
outstanding shares of either class of Capital Stock will be based upon the
number of issued and outstanding shares reported by the Corporation to the
Securities and Exchange Commission on the latest of the following filings, (i)
the Corporation's most recent Annual Report on Form 10-K, (ii) its most recent
Quarterly Report on Form 10-Q, or (iii) if any, its most recent Current Report
on Form 8-K.
(e)(9) For purposes of this subdivision (e) of this Article FOURTH, the
term "person" means a natural person, company, government or political
subdivision, agency or instrumentality of a government or other entity.
"Beneficial Ownership" shall be determined pursuant to Rule 13d-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "1934 Act") or any
successor regulation. The formation or existence of a "group" shall be
determined pursuant to Rule 13d-5(b) under the 1934 Act or any successor
regulation.
C-2
<PAGE> 70
ANNEX D
JANNEY MONTGOMERY SCOTT INC.
26 BROADWAY
NEW YORK, NEW YORK 10004
June 15, 1997
Board of Directors
Frederick's of Hollywood, Inc.
6608 Hollywood Boulevard
Hollywood, California 90028
Board of Directors:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of outstanding shares of common stock ("Stockholders")
of Frederick's of Hollywood, Inc. ("FOH" or the "Company") of the $6.14 cash
price per share to be paid to the Stockholders (the "Consideration") in the
proposed merger pursuant to the Agreement and Plan of Merger dated June 15, 1997
("Merger Agreement") entered into between FOH, and an entity ("Buyer") to be
formed by Knightsbridge, Inc. (the "Proposed Transaction"). The terms and
conditions of the Proposed Transaction are more fully set forth in the Merger
Agreement.
Janney Montgomery Scott Inc. ("JMS"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with the preparation of fairness opinions, mergers and
acquisitions, rights offerings, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate, and other purposes.
In connection with our opinion, we have reviewed the Merger Agreement,
certain financial and other information of FOH, including internal analyses,
reports, forecasts and other information. We have held discussions with senior
management of FOH concerning the current operations, financial conditions and
prospects of FOH. In addition, we have (i) reviewed the price and trading
histories of FOH's two classes of common stock and compared those prices and
trading histories with those of publicly traded companies we deemed relevant;
(ii) compared the financial positions and operating results of FOH with those of
publicly traded companies we deemed relevant; (iii) compared certain financial
terms of the Proposed Transaction to certain financial terms of selected other
business combinations we deemed relevant; (iv) performed a net present value
calculation on a three year forecasted income statement provided to JMS by the
Company; and (v) conducted such other financial studies, analyses and
investigations, and reviewed such other factors, as we deemed relevant.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for purposes of this
opinion. With respect to financial forecasts, we assumed that they have been
reasonably prepared on basis reflecting the best currently available information
and judgment of the future financial performance of FOH. We have not made any
independent valuation or appraisal of the assets or liabilities of the Company,
nor have we been furnished with such valuations or appraisals.
Our opinion is necessarily based on financial, economic, market and other
conditions as they exist on, and information made available to us as of, the
date hereof. It should be understood that, although subsequent developments may
affect this opinion, we do not have any obligation to update, revise or reaffirm
this opinion. Payment of JMS' fairness opinion fee is not contingent upon the
conclusion reported. In our role as investment banker to the Company, JMS will
be paid an additional fee upon completion of the Transaction.
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<PAGE> 71
It should be understood that this letter is for the information of the
Board of Directors only in connection with its consideration of the Proposed
Transaction and does not constitute a recommendation to any Stockholder on the
Proposed Transaction, and may not be used for any other purpose without our
prior written consent.
Based upon and subject to the foregoing, it is our opinion, as of the date
hereof, the Consideration is fair, from a financial point of view, to the
Stockholders of FOH.
Sincerely yours,
JANNEY MONTGOMERY SCOTT INC.
By: /s/ HERBERT M. GARDNER
------------------------------------
Herbert M. Gardner
Senior Vice President
D-2
<PAGE> 72
ANNEX E
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SEC. 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
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<PAGE> 73
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholder of
the effective date of the merger or consolidation. Any stockholder entitled
to appraisal rights may, within twenty days after the date of mailing of
such notice, demand in writing from the surviving or resulting corporation
the appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such
constituent corporation shall send a second notice before the effective
date of the merger or consolidation notifying each of the holders of any
class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be
sent to each stockholder who is entitled to appraisal rights and who has
demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice
that such notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than
10 days prior to the date the notice is given; provided that, if the notice
is given on or after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is fixed and
the notice is given
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prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1
week before the day of the hearing, in a newspaper of general circulation
published in the City of Wilmington, Delaware or such publication as the Court
deems advisable. The forms of the notices by mail and by publication shall be
approved by the Court, and the costs thereof shall be borne by the surviving or
resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or
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compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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INDEPENDENT AUDITOR'S CONSENT
The Directors and Shareholders of
Frederick's of Hollywood, Inc.:
We consent to the use of our reports incorporated herein by reference and
to the reference to our firm under the heading "Independent Auditors" in the
Consent Solicitation Statement.
KPMG PEAT MARWICK LLP
Los Angeles, California
June 24, 1997
<PAGE> 77
FREDERICK'S OF HOLLYWOOD, INC.
WRITTEN CONSENT OF STOCKHOLDER
This consent is solicited on behalf of the Board of Directors and must be
received by the Company no later than , 1997.
The undersigned, as the record holder of shares of Class A Capital Stock,
par value $1.00 per share (the "Class A Capital Stock"), of Frederick's of
Hollywood, Inc., a Delaware corporation (the "Company"), hereby:
[ ] CONSENTS [ ] DOES NOT CONSENT [ ] ABSTAINS
by written consent pursuant to sec. 228 of the Delaware General Corporation Law
with respect to all of the shares of the Company's Class A Capital Stock of
which the undersigned is the record holder on June 26, 1997, to an amendment to
the Company's Certificate of Incorporation which would delete Section 1(e) of
Article Fourth thereof.
================================================================================
The undersigned, as the record holder of shares of Class A Capital Stock of
the Company, hereby:
[ ] CONSENTS [ ] DOES NOT CONSENT [ ] ABSTAINS
by written consent pursuant to sec. 228 of the Delaware General Corporation Law
with respect to all of the shares of the Company's Class A Capital Stock of
which the undersigned is the record holder on June 26, 1997, to the adoption of
the Agreement and Plan of Merger (the "Merger Agreement"), dated as of June 15,
1997, among the Company, Royalty Corporation, a Delaware corporation, and
Royalty Acquisition Corp., a Delaware corporation (the "Purchaser"), and to the
merger of the Purchaser into the Company (with the Company being the surviving
corporation) pursuant to the terms of the Merger Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Written Consent of
Stockholder on the date indicated below.
Dated: ------------------------------------
(Signature of Stockholder)
------------------------------------
(Signature of Stockholder if held
jointly)
<PAGE> 78
FREDERICK'S OF HOLLYWOOD, INC.
WRITTEN CONSENT OF STOCKHOLDER
This consent is solicited on behalf of the Board of Directors and must be
received by the Company no later than , 1997.
The undersigned, as the record holder of shares of Class B Capital Stock,
par value $1.00 per share (the "Class B Capital Stock"), of Frederick's of
Hollywood, Inc., a Delaware corporation (the "Company"), hereby:
[ ] CONSENTS [ ] DOES NOT CONSENT [ ] ABSTAINS
by written consent pursuant to sec. 228 of the Delaware General Corporation Law
with respect to all of the shares of the Company's Class B Capital Stock of
which the undersigned is the record holder on June 26, 1997, to an amendment to
the Company's Certificate of Incorporation which would delete Section 1(e) of
Article Fourth thereof.
================================================================================
The undersigned, as the record holder of shares of Class B Capital Stock of
the Company, hereby:
[ ] CONSENTS [ ] DOES NOT CONSENT [ ] ABSTAINS
by written consent pursuant to sec. 228 of the Delaware General Corporation Law
with respect to all of the shares of the Company's Class B Capital Stock of
which the undersigned is the record holder on June 26, 1997, to the adoption of
the Agreement and Plan of Merger (the "Merger Agreement"), dated as of June 15,
1997, among the Company, Royalty Corporation, a Delaware corporation, and
Royalty Acquisition Corp., a Delaware corporation (the "Purchaser"), and to the
merger of the Purchaser into the Company (with the Company being the surviving
corporation) pursuant to the terms of the Merger Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Written Consent of
Stockholder on the date indicated below.
Dated: ------------------------------------
(Signature of Stockholder)
------------------------------------
(Signature of Stockholder if held
jointly)
