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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:
<TABLE>
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[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 14a-11(c) or Rule 14a-12
</TABLE>
FREDERICK'S OF HOLLYWOOD, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
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:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(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):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[X] 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:
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<PAGE> 2
[FREDERICK'S LOGO]
August , 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, among the Company, Royalty
Corporation, a Delaware corporation (the "Parent") and the Purchaser, which is a
direct subsidiary of the Parent, as amended by that certain First Amendment to
Agreement and Plan of Merger, dated as of July , 1997, by and among the
Company, the Parent and the Purchaser (collectively, the "Merger Agreement").
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 receipt of cash for Shares 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 such
stockholder owned immediately prior to the effective time of the Merger (the
"Effective Time"). For Federal income tax purposes, such gain or loss will be a
capital gain or loss if the Shares 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
<PAGE> 3
such legislation may be enacted. See "DESCRIPTION OF FEDERAL INCOME TAX
CONSEQUENCES OF MERGER" in the enclosed Consent Solicitation Statement.
The Merger is conditioned upon the approval of the Amendment and will not
be consummated unless the Amendment, the Merger Agreement and the Merger 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 Amendment, the Merger
Agreement and the Merger, it is expected that the Amendment will become
effective on or about August , 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,
the Merger Agreement and the Merger, has unanimously approved both proposals and
recommends that the Company's stockholders approve the Amendment, the Merger
Agreement and the Merger. For a discussion of the factors considered by the
Board of Directors in approving the Merger Agreement and 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 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 July 21, 1997 as
the record date (the "Record Date") for the determination of stockholders
entitled to consent to the adoption and approval of the Merger Agreement, the
Merger and the Amendment. The Board of Directors anticipates that the Consent
Solicitation Statement will be mailed to the Stockholders on or about August ,
1997. The Consent Solicitation Statement describes the Merger Agreement, the
Merger and the Amendment in detail. You are urged to read it carefully in making
your decision with respect to the Amendment, the Merger Agreement and the
Merger.
The solicitation of consents will be by mail. D.F. King & Co., Inc. will
assist in the solicitation of consents for the Company for a fee of
approximately $6,000, plus reimbursement of reasonable out-of-pocket expenses.
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 Amendment, the Merger Agreement and the Merger
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 Amendment, the Merger Agreement and the Merger
no later than August , 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 Amendment, the Merger Agreement and
the Merger.
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, the Merger Agreement 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.
2
<PAGE> 4
Any questions regarding the Amendment, the Merger Agreement or the Merger
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 AMENDMENT, THE MERGER AGREEMENT AND THE MERGER, YOU SHOULD
COMPLETE, DATE AND SIGN THE ENCLOSED CONSENT CARD(S) AND RETURN THEM NO LATER
THAN AUGUST , 1997.
3
<PAGE> 5
TABLE OF CONTENTS
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SUMMARY OF CONSENT SOLICITATION STATEMENT............................................. 8
INTRODUCTION.......................................................................... 15
VOTING................................................................................ 16
AMENDMENT TO CERTIFICATE OF INCORPORATION............................................. 17
SUMMARY OF MERGER TRANSACTION......................................................... 18
RECOMMENDATION OF THE BOARD........................................................... 19
BACKGROUND OF THE TRANSACTION......................................................... 19
APPROVAL BY THE BOARD OF DIRECTORS.................................................... 21
OPINION OF FINANCIAL ADVISOR.......................................................... 22
DESCRIPTION OF INTERESTS OF MANAGEMENT AND AFFILIATES IN THE MERGER................... 25
PAYMENT FOR SHARES OF COMPANY CAPITAL STOCK........................................... 26
MANAGEMENT OF THE COMPANY'S BUSINESS AFTER THE MERGER................................. 27
ACCOUNTING TREATMENT OF TRANSACTION................................................... 28
REGULATORY APPROVALS.................................................................. 28
DESCRIPTION OF MERGER AGREEMENT....................................................... 28
DESCRIPTION OF FEDERAL INCOME TAX CONSEQUENCES OF MERGER.............................. 35
APPRAISAL RIGHTS FOR DISSENTING STOCKHOLDERS.......................................... 36
DESCRIPTION OF FINANCING OF MERGER.................................................... 38
INFORMATION CONCERNING PARENT AND PURCHASER........................................... 39
PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS........ 40
MARKET FOR CAPITAL STOCK AND DIVIDENDS................................................ 41
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY............................ 43
INDEPENDENT AUDITORS.................................................................. 44
OTHER AVAILABLE INFORMATION........................................................... 44
</TABLE>
ANNEX A AGREEMENT AND PLAN OF MERGER AND FIRST AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
ANNEX B AMENDMENT TO COMPANY'S CERTIFICATE OF INCORPORATION
ANNEX C "MINORITY PROTECTION TRANSACTION" PROVISION PROPOSED TO BE DELETED
4
<PAGE> 6
ANNEX D OPINION OF FINANCIAL ADVISOR
ANNEX E SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
ANNEX F COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
AUGUST 31, 1996
TABLE OF CONTENTS
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PART I
Item 1. Business................................................... F-1
Item 2. Properties................................................. F-5
Item 3. Legal Proceedings.......................................... F-6
Item 4. Submission of Matters to a Vote of Security Holders........ F-6
Executive Officers of the Registrant....................... F-7
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................ F-8
Item 6. Selected Financial Data.................................... F-8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. F-9
Item 8. Financial Statements and Supplementary Data................ F-14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.................................. F-34
PART III
Item 10. Directors and Executive Officers of the Registrant......... F-35
Item 11. Executive Compensation..................................... F-35
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. F-35
Item 13. Certain Relationships and Related Transactions............. F-35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................ F-36
</TABLE>
ANNEX G COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED MAY 31, 1997
INDEX
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Title Page............................................................. G-1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated condensed balance sheets -- May 31, 1997 and
August 31, 1996............................................ G-4
Consolidated condensed statements of income(loss) -- Three
and nine months ended May 31, 1997 and June 1, 1996........ G-5
Consolidated condensed statements of cash flows -- Nine
months ended May 31, 1997 and June 1, 1996................. G-6
Notes to consolidated condensed financial statements..........G-8-11
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations........................................G-12-16
PART II -- OTHER INFORMATION........................................... G-17
SIGNATURES............................................................. G-18
EXHIBITS
</TABLE>
5
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ANNEX H COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED NOVEMBER 30, 1996
INDEX
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PAGE
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Title Page............................................................. H-1
PART I -- FINANCIAL INFORMATION (Unaudited)
Consolidated condensed balance sheets -- November 30, 1996
and August 31, 1996........................................ H-4
Consolidated condensed statements of income -- Three months
ended November 30, 1996 and December 2, 1995............... H-6
Consolidated condensed statements of cash flows -- Three
months ended November 30, 1996 and December 2, 1995........ H-7
Notes to consolidated condensed financial statements..........H-8-11
Management's Discussion and Analysis of Financial Condition
and
Results of Operations........................................H-12-16
PART II -- OTHER INFORMATION........................................... H-17
SIGNATURES............................................................. H-18
</TABLE>
ANNEX I COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED MARCH 1, 1997
INDEX
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Title Page............................................................. I-1
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated condensed balance sheets -- March 1, 1997 and
August 31, 1996............................................ I-3
Consolidated condensed statements of income -- Three and
six months ended March 1, 1997 and March 2, 1996........... I-4
Consolidated condensed statements of cash flows -- Six
months ended March 1, 1997 and March 2, 1996............... I-6
Notes to consolidated condensed financial statements....... I-8-10
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations........................................I-11-15
PART II -- OTHER INFORMATION........................................... I-16
SIGNATURES............................................................. I-17
</TABLE>
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ANNEX J COMPANY'S PROXY STATEMENT FOR THE ANNUAL MEETING OF
STOCKHOLDERS HELD ON JANUARY 30, 1997
INDEX
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VOTING SECURITIES........................................................ J-1
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF.......................... J-2
ELECTION OF DIRECTORS.................................................... J-3
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS........................ J-4
INFORMATION CONCERNING EXECUTIVE OFFICERS................................ J-5
EXECUTIVE COMPENSATION................................................... J-6
STOCK PERFORMANCE CHART.................................................. J-10
EMPLOYMENT OF INDEPENDENT PUBLIC ACCOUNTANTS............................. J-12
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT............. J-12
OTHER MATTERS............................................................ J-12
</TABLE>
7
<PAGE> 9
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. For more information about
the Parent and the Purchaser, see "Information Concerning Parent and Purchaser."
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, the 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, the 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, as amended by that certain First Amendment to Agreement and Plan of
Merger, dated as of July , 1997, by and among the Company, the Parent and the
Purchaser (collectively, 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 August , 1997. 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
8
<PAGE> 10
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 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 has entered 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 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, 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 Amendment, the Merger Agreement and the Merger 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 calendar days must have elapsed
since the mailing of the Consent Solicitation Statement.
Termination of Merger Agreement
(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
9
<PAGE> 11
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.
(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 Time as if made at and as
of such time, subject to certain exceptions set forth in the Merger Agreement;
(b) the Company has failed to comply with its covenants under the Merger
Agreement, subject to certain exceptions set forth in the Merger Agreement; (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) Lender fails to fund the Merger pursuant to the Loan Agreements; (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 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").
(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, subject to certain exceptions set forth in the
Merger Agreement; or (b) the Parent or the Purchaser has failed to comply with
its obligations under the Merger Agreement, subject to certain exceptions set
forth in the Merger Agreement; (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
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<PAGE> 12
will be required to pay to the Purchaser the sum of $1,800,000 as compensation
for lost opportunities and reimbursement for out-of-pocket expenses. In the
event that holders of a majority of each class of Shares entitled to consent 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.
For a more detailed description of the rights of the Company, the Parent
and the Purchaser to terminate the Merger Agreement and the fees related
thereto, see "DESCRIPTION OF MERGER AGREEMENT."
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 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 the Amendment, the Merger Agreement and the Merger 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 Amendment, the Merger
Agreement and the Merger, it is expected that the Amendment will be come
effective on or about August , 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 Amendment, the Merger Agreement and the Merger 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
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<PAGE> 13
Company Capital Stock will receive a cash payment 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 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, 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 entered into an agreement with each such person
to 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
entered 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 a letter
agreement, dated as of May 14, 1996, 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.
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
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<PAGE> 14
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. See "DESCRIPTION OF FEDERAL INCOME TAX CONSEQUENCES OF MERGER."
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 May 31, 1997 (the "May 10-Q"). The
10-K, the May 10-Q, as well as the Company's Quarterly Reports on Form 10-Q for
the quarters ended November 30, 1996 and March 1, 1997, and the Company's Proxy
Statement for the Annual Meeting of Stockholders held on January 30, 1997, are
attached to the Consent Solicitation Statement as Annexes F, G, H, I and J,
respectively, 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.
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<PAGE> 15
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 nine months ended May 31, 1997 and June 1, 1996 are derived
from the Company's unaudited condensed 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>
NINE MONTHS ENDED
(UNAUDITED)
FISCAL YEARS -------------------
---------------------------------------------------- MAY 31, JUNE 1,
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 $118,752 $$116,489
Gross profit....................... 60,031 58,728 54,744 55,622 52,862 49,856 48,511
Earnings (loss) before income
taxes(1)......................... (664) 4,412 (1,705) 7,655 8,018 5,991 1,134
Net earnings (loss)(1)............. (438) 2,652 (903) 4,737 5,073 3,505 664
Primary earnings (loss) per
share -- Classes A & B(1)........ (.05) .31 (.10) .53 .57 .40 .08
Cash dividends per share -- Classes
A & B............................ .10 .075 .05 .05 .05 .075 .075
Primary weighted average shares
outstanding -- Classes A & B..... 8,745 8,693 8,876 8,915 8,698 8,773 8,731
FINANCIAL POSITION AT PERIOD END:
Working capital.................... 20,447 21,263 17,486 15,783 11,213 23,690 22,940
Total assets....................... 52,709 55,952 55,417 50,838 45,790 54,363 52,550
Long-term debt..................... 240 480 720 -- -- 240 480
Capital lease obligations.......... 672 884 701 1,207 1,663 505 726
Stockholders' equity............... 35,525 36,599 34,413 36,615 32,204 38,503 36,779
Equity per share -- Classes A &
B................................ 4.06 4.21 3.88 4.11 3.67 4.39 4.21
FINANCIAL RATIOS:
Net earnings (loss) to sales....... (0.3)% 1.9% (0.7)% 3.7% 4.3% 3.0% 0.6%
Net earnings (loss) to average
stockholders' equity............. (1.2)% 7.4% (2.5)% 13.8% 17.2% 9.5% 1.8%
Current ratio...................... 2.6 2.5 2.1 2.4 2.1 3.1 3.1
-------- -------- -------- -------- -------- -------- --------
</TABLE>
- ---------------
(1) Fiscal 1994 Earnings (loss) before income taxes includes a provision of
$3,442,000 for closing 12 stores. Fiscal 1995 Earnings (loss) before income
taxes reflects income of $790,000 representing the unutilized portion of the
store closing provision. For additional information, please see the Notes to
the Consolidated Financial Statements for Fiscal 1996 in the 10-K attached
as Annex F to the Consent Solicitation Statement.
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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<PAGE> 16
[FREDERICK'S LOGO]
CONSENT SOLICITATION STATEMENT
AUGUST , 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, among the Company, Royalty
Corporation, a Delaware corporation (the "Parent") and the Purchaser, which is a
direct subsidiary of the Parent, as amended by that certain First Amendment to
Agreement and Plan of Merger, dated as of July , 1997, by and among the
Company, the Parent and the Purchaser (collectively, the "Merger Agreement"). 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 the Amendment, the
Merger Agreement and the Merger 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 Amendment, the Merger Agreement and the Merger, it is expected
that the Amendment will become effective on or about August , 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
15
<PAGE> 17
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.
D.F. King & Co., Inc. will assist in the solicitation of consents for the
Company for a fee of approximately $6,000, plus reimbursement of reasonable
out-of-pocket expenses.
This Consent Solicitation Statement is being mailed on or about August ,
1997 to holders of Shares as of July 21, 1997.
VOTING
Section 228(a) of the DGCL permits the stockholders of the Company to
approve by written consent any matters, including mergers and charter
amendments, that could be approved at a stockholders' meeting unless the
corporation's charter otherwise provides. The Company's charter does not
otherwise provide and, accordingly, the Company's stockholders can act by
written consent.
Class A Capital Stock
In accordance with the DGCL, the Amendment, the Merger Agreement and the
Merger require approval and adoption by the affirmative consent 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 will be entitled to one vote on the
proposals to consent to the Amendment and to the Merger Agreement and the
Merger.
Class B Capital Stock
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, (ii) 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. Accordingly, the holders of Class B Capital Stock are entitled to consent
to the Amendment. Notwithstanding that the holders of the Company's Class B
Capital Stock are not, in all likelihood, entitled to consent to the Merger
Agreement and the Merger, because of the existence of an ambiguity under the
Certificate of Incorporation of the Company and to demonstrate that the Company
values the consent of the holders of Class B Capital Stock, 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 Agreement and the Merger. As of
, 1997, there were 5,903,118 shares of Class B Capital Stock issued
and outstanding, each share of which will be entitled to one vote on the
proposals to consent to the Amendment and to the Merger Agreement and the
Merger.
If the Board of Directors had elected not to permit the holders of Class B
Capital Stock to give such consent, all holders of Class B Capital Stock would
be entitled, subject to the satisfaction of other requirements under the DGCL,
to exercise appraisal rights under Delaware law. Because the holders of Class B
Capital Stock are being permitted to consent to the Merger Agreement and the
Merger, they should be aware that any stockholder who consents to the Merger
Agreement and the Merger will not be entitled to exercise appraisal rights under
Delaware law. For a detailed discussion of appraisal rights, see "APPRAISAL
RIGHTS FOR DISSENTING STOCKHOLDERS."
Generally
The Merger will not be consummated if the Merger Agreement and the Merger
are not approved and adopted by the affirmative consent of the holders of a
majority of the outstanding shares of Class B Capital Stock. However, the
Trusts, which as of , 1997, hold in the aggregate approximately
50.6% of the outstanding Class B Capital Stock (which percentage takes into
account both the outstanding shares of Class B Capital Stock and Options
therefor exercisable within 60 days) have indicated to the Company their intent
16
<PAGE> 18
to consent to the approval and adoption of the Merger Agreement and Merger, but
have not agreed irrevocably to do so.
In accordance with the DGCL and the Certificate of Incorporation, the
approval and adoption of the Amendment requires the affirmative consent of the
holders of a majority of the outstanding shares of Class A Capital Stock and
Class B Capital Stock consenting as separate classes.
Under Delaware law, written consents have no expiration date per se.
However, no consent is effective to approve the matter to which it relates
unless, within 60 days of the earliest dated consent delivered to the
corporation with respect to such matter, written consents signed by a sufficient
number of stockholders to take such action are delivered to the corporation in
accordance with Section 228 of the DGCL.
The Amendment, the Merger Agreement and the Merger are being submitted for
the approval of the holders of a majority of each of the Class A Capital Stock
and the Class B Capital Stock outstanding by written consent. Because only
written consents affirmatively consenting to such proposals can be counted
toward the requisite approval thereof, abstentions and broker non-votes
effectively count as votes against such proposals.
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, Janney Montgomery Scott Inc., 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 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
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<PAGE> 19
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 cash price in excess of the cash price
received by the holders of Class A Capital Stock 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 greater cash
price per Share for their non-voting shares will be eliminated.
The Merger is conditioned upon the approval of the Amendment and will not
be consummated unless the Amendment, the Merger Agreement and the Merger 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 Amendment, the Merger Agreement and the Merger, it is
expected that the Amendment will become effective on or about August , 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 Agreement and the Merger have been unanimously approved by the
Board of Directors of the Company (the "Board"). If the Merger Agreement and the
Merger are 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.
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.
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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, THE MERGER
AGREEMENT AND THE MERGER.
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 late 1996 and early 1997.
In all, JMS held discussions with over 100 prospective purchasers and received
indications of interest from twelve prospective purchasers, nine of whom
conducted additional due diligence.
Each due diligence meeting generally followed the same agenda. Each
prospective purchaser initially met with the Company's two top executives and
then separately with senior management of both the retail and mail order
divisions. The prospective purchaser then toured the flagship retail store and
distribution center in Hollywood, California and the mail order warehouse
facility in Compton, California. Thereafter, the prospective purchaser was given
access to additional due diligence materials for as long as such purchaser
required and, subsequently, was permitted to ask questions. The due diligence
visits generally lasted one or two days.
JMS submitted periodic status reports to the Board and kept the Board
informed of each prospective purchaser's progress and the amount and terms,
including financing and due diligence contingencies, of all bids received.
The twelve initial expressions of interest and resulting nine bids took the
form of submissions for either a) only the stock of the Company owned by the
Trusts, b) less than 100% of the stock of the Company or c) 100% of the stock of
the Company. The bids ranged in price from $3.75 to $7.25 per share with some
offering all cash and others offering a combination of cash, notes and/or stock.
Of the nine bids received, six required financing, including the Knightsbridge
offer. The other three bids, each of which was an all cash offer for 100% of the
stock of the Company, included one at a range of $3.75 to $4.50 per share and
two at $5.50 per share. As part of its engagement, JMS was instructed by the
Board that an all cash transaction was strongly preferred to an offer containing
notes or stock. Several of the rejected bids were at prices per share that were
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equal to or greater than Knightsbridge's offer but were rejected primarily
because of their financing status and, in some instances, because they contained
a substantial non-cash component.
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, pursuant to which
Knightsbridge agreed for a period of two years not to disclose to third parties
any non-public information disclosed to it during the process of evaluating the
business, financial position, operations and facilities of the Company in
connection with the sale of any or all of the stock or assets of the business or
the merger or consolidation of the Company. Shortly after executing the
confidentiality agreement, Knightsbridge received an information package,
including the Memorandum. 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.
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. 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 the period from May 5, 1997, when Knightsbridge confirmed its
interest in acquiring all outstanding shares of the Company until June 16, 1997,
the proposed transaction structure changed from the original two-step tender
offer/merger originally proposed by Knightsbridge to a straight merger. This
change in the proposed transaction structure occurred because it became apparent
that a tender by at least 90% of the Shares could not be assured in an initial
tender offer, and that therefore, the subsequent consummation of a short form
merger which Knightsbridge's financing required also could not be assured. If
the original two-step tender offer/merger approach had been pursued, the first
step in Purchaser's acquisition of the Company would have consisted of a
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cash tender offer intended to result in the purchase by the Purchaser of at
least 90% of the Shares, to be followed as soon as practicable following
consummation of the tender offer by the second step, a short form merger
intended to acquire all Shares not tendered and purchased in the tender offer.
Rather than this two-step tender offer/merger approach, for the reasons
described in this paragraph, the Company, the Parent and the Purchaser agreed on
a straight merger structure. See "DESCRIPTION OF THE MERGER AGREEMENT." The
final negotiated cash price for all outstanding shares was $6.14 per share.
The Board did not form a committee of disinterested directors to negotiate,
consider and, ultimately, approve the transaction, as all of the members of the
Board participated in the review and negotiation of all drafts of the Merger
Agreement. The final negotiated price was slightly above the mid-point of the
Price Range and reflected Knightsbridge's assumption of liabilities in
connection with employee compensation and termination.
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. Set forth below are the material factors considered by the Board:
(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 final bids for the Company, (f) an all cash
transaction was strongly preferred to an offer containing notes or stock,
(g) several of the other bids did not have firm financing commitments and,
in some instances, contained a substantial non-cash component, and (h) the
consideration offered by Knightsbridge exceeded all other fully financed
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 fact that the lengthy period of time which had elapsed since
the Company commenced the process of seeking prospective purchasers was
creating an atmosphere of uncertainty as to the future of the Company among
the key employees of the Company and its subsidiaries and in fact resulted
in the loss of two such key employees;
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(vi) the opinion of JMS that the consideration offered by
Knightsbridge was fair, from a financial point of view, to stockholders of
the Company;
(vii) the high equity component of the capital structure proposed by
Knightsbridge;
(viii) the firm financing commitments obtained by Knightsbridge;
(ix) recent trends in the earnings of the Company;
(x) the competitive nature of the business of the Company; and
(xi) the Company's competitive position in its industry as evidenced
by its physical plant, financial and management resources and product
image.
Additionally, the Board considered and was concerned about the ability of
the Parent and the Purchaser to obtain a firm financing commitment for the
Merger. However, their concerns were allayed by the subsequent execution by
Lender of the Loan Agreements. Accordingly, the foregoing matter was not deemed
to be material.
Further, although the Board recognized that the financial results of the
Company's operations in Fiscal 1997 had improved from comparable periods in
Fiscal 1996, the Board noted that such improvement was consistent with the
Company's internal annual plan, which plan had already been considered by all
parties in the negotiation of the final cash price. Accordingly, the Board did
not consider such improved financial results to be a material factor in its
decision to approve the Merger Agreement and the Merger.
The foregoing discussion of information and factors considered and given
weight by the Board is not intended to be an exhaustive description of each of
the factors. 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 oral opinion and update
delivered to the Board by JMS on May 28, 1997 and June 13, 1997, respectively,
did not vary in any material respect from the written opinion delivered on June
15, 1997. JMS will update its opinion as of the Effective Time.
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. 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 TO CONSENT TO THE MERGER
AGREEMENT AND THE MERGER.
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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 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 summary of all material 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
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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. Discount rates employed in (i) and (ii)
above were 12.5% for the stub period remaining in 1997, 15.0% for 1998, 17.5%
for 1999 and 20.0% for 2000. The Company's forecasts assumed modest annual
revenue growth of 5% to 6% and maintenance of historical gross margin and
operating expense to sales levels.
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 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.
JMS determined that no separate analysis of the Class A Capital Stock and
Class B Capital Stock was necessary to determine whether the Share Consideration
is fair to both classes because (i) the "Minority Protection Transaction"
provisions in the Company's Certificate of Incorporation were devised to 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 non-voting Class B Capital Stock, (ii) it was the clear
intention of the Company's Board of Directors at the time of the adoption of the
"Minority Protection Transaction" provisions that each holder of Class B Capital
Stock be entitled to receive the same per share consideration, if any, received
by any holder of the Class A Capital Stock in a merger or similar transaction,
and (iii) $6.14 per share of Class A Capital Stock and Class B Capital Stock was
the final price which the Purchaser offered to pay, and that price exceeded all
other fully financed bids for all of the Shares. For a more detailed description
of the "Minority Protection Transaction" provision, see "AMENDMENT TO
CERTIFICATE OF INCORPORATION." In the light of the foregoing and the fact that
at times the Class B Capital Stock has traded higher than the Class A Capital
Stock, JMS did not deem material the difference in trading price between the
Class A Capital Stock and the Class B Capital Stock in determining whether the
$6.14 per share price to be paid to both holders of Class A Capital Stock and
Class B Capital Stock is fair to both classes.
While the foregoing discussion does not purport to be a complete recitation
of the analyses performed by JMS in arriving at its opinion, it does summarize
all of the material financial analyses performed by JMS in connection with such
opinion. The preparation of a fairness opinion is a complex process not limited
to statistical data and is not necessarily susceptible to partial analysis or
summary description. JMS believes that its analyses, including the financial
analysis summarized above, 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. Such material assumptions were as follows:
continued low inflation and interest rates, moderate growth in the retail
apparel market and a stable international business climate. 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.
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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 as of 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. If the Merger is consummated, the expected total amount of JMS's
fee is $707,056 ($130,000 of which has already been paid as described above).
The Company has also 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. Additionally,
the Company has agreed to pay for pre-approved legal fees incurred by JMS in
connection with the services performed by it pursuant to the Engagement Letter.
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.
The following current executive officers of the Company will receive
approximately the amounts indicated parenthetically as consideration payable in
connection with cancellation of Options held by each of them: 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
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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 entered into an agreement with each such person
to 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 entered 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 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
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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 Agreement and 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 has entered into an agreement with each holder
of an option to purchase Shares (an "Option"), which agreement provides 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") 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, 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.
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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.
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 August ,
1997. 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
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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 and the Merger
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 and the Merger 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 Agreement and 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 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
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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 and the Merger 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 calendar 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 and the Merger 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
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
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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 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
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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 has entered into an agreement with each
holder of an option to purchase Shares (an "Option"), which agreement provides
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.
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, 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.
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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 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 non-public 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
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.
33
<PAGE> 35
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 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 Company and its
subsidiaries taken as a whole (a "Company 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
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
34
<PAGE> 36
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
reimbursement for out-of-pocket expenses. In the event that holders of a
majority of each class of Shares entitled to consent to 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.
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<PAGE> 37
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.
Section 262 is reprinted in its entirety as Annex E to this Consent
Solicitation Statement. 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.
Company stockholders electing to exercise their appraisal rights under
Section 262 must not have consented to the adoption of the Merger Agreement and
the Merger. However, a stockholder's abstention or
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<PAGE> 38
choice not to consent to the adoption of the Merger Agreement and the Merger
shall not constitute a waiver of such stockholder's appraisal rights. 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
written demand must satisfy the foregoing requirements. Mere indication by a
stockholder on the consent enclosed with this Consent Solicitation Statement
that such stockholder abstains or does not consent to the adoption of the Merger
Agreement and the Merger shall not constitute a valid written demand for
appraisal.
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 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 consenting to the Merger Agreement and 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
37
<PAGE> 39
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 "[t]he 'accomplishment or exception' of the
merger exception in 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 Time.
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 Time,
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.
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<PAGE> 40
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. For more information about such
investors, see "INFORMATION CONCERNING PARENT AND PURCHASER." 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 for loans in 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 provides for a loan in the 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.
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. Knightsbridge
is controlled by David E. Lipson. The principal offices of Knightsbridge, 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 signing the Merger Agreement, the Parent received a
contribution to its capital in the aggregate amount of $10,000,000 from 1995
Investments, L.L.C., a Nevada limited liability company ("1995 Investments"),
and Monroe Holdings, L.L.C., a Nevada limited liability company ("Monroe").
Monroe is an affiliate of Knightsbridge. 1995 Investments is controlled by an
irrevocable trust for the benefit of
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<PAGE> 41
Mr. Lipson's family. Mr. Lipson is neither a beneficiary nor trustee of such
trust. Also, prior to signing the Merger Agreement, Parent obtained commitments
from the following equity investors to contribute an additional $7,000,000 to
Parent's capital in exchange for the fully diluted percentage interest in Parent
indicated parenthetically: Monroe (44.71%), Trumarq (Asia) Pte Ltd (20.0%), 1995
Investments (17.65%), Indosuez FOH Partners, a New York partnership ("Indosuez
FOH") (10.0%), ECC Spice, L.L.C., a Delaware limited liability company (5.88%),
and Bayview Investors, Ltd., a California limited partnership (1.76%). Parent
can reject any of the foregoing equity investments at any time prior to the
consummation of the Merger.
In addition, prior to signing the Merger Agreement, the Parent and the
Purchaser executed the Loan Agreements. Under the Loan Agreements, the Parent
and the 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. Indosuez FOH is an affiliate of Credit
Agricole Indosuez, which is serving as agent and lender under the Loan
Agreements. See "DESCRIPTION OF FINANCING OF MERGER".
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 as a Group (11 persons)(1) 1,583,770(3) 3,744,303(4) 50.5 59.9
</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.
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<PAGE> 42
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.
(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.
41
<PAGE> 43
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 declared
quarterly cash dividends on both Class A Capital Stock and Class B Capital Stock
of 2.5 cents per share in Fiscal 1996 and three dividends 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.
42
<PAGE> 44
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 May 31, 1997 (the "May 10-Q"). The
10-K, the May 10-Q, as well as the Company's Quarterly Reports on Form 10-Q for
the quarters ended November 30, 1996 and March 1, 1997, and the Company's Proxy
Statement for the Annual Meeting of Stockholders held on January 30, 1997, are
attached to this Consent Solicitation Statement as Annexes F, G, H, I and J,
respectively, 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 nine months ended May 31, 1997 and June 1, 1996 are derived from
the Company's unaudited condensed 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>
NINE MONTHS
ENDED
(UNAUDITED)
FISCAL YEARS -------------------
---------------------------------------------------- MAY 31, JUNE 1,
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 $118,752 $116,489
Gross profit.................................... 60,031 58,728 54,744 55,622 52,862 49,856 48,511
Earnings (loss) before income taxes(1).......... (664) 4,412 (1,705) 7,655 8,018 5,991 1,134
Net earnings (loss)(1).......................... (438) 2,652 (903) 4,737 5,073 3,505 664
Primary earnings (loss) per share -- Classes A &
B(1).......................................... (.05) .31 (.10) .53 .57 .40 .08
Cash dividends per share -- Classes A & B..... .10 .075 .05 .05 .05 .075 .075
Primary weighted average shares outstanding --
Classes A & B................................. 8,745 8,693 8,876 8,915 8,698 8,773 8,731
FINANCIAL POSITION AT PERIOD END:
Working capital................................. 20,447 21,263 17,486 15,783 11,213 23,690 22,940
Total assets.................................... 52,709 55,952 55,417 50,838 45,790 54,363 52,550
Long-term debt.................................. 240 480 720 -- -- 240 480
Capital lease obligations....................... 672 884 701 1,207 1,663 505 726
Stockholders' equity............................ 35,525 36,599 34,413 36,615 32,204 38,503 36,779
Equity per share -- Classes A & B............... 4.06 4.21 3.88 4.11 3.67 4.39 4.21
FINANCIAL RATIOS:
Net earnings (loss) to sales.................... (0.3)% 1.9% (0.7)% 3.7% 4.3% 3.0% 0.6%
Net earnings (loss) to average stockholders'
equity........................................ (1.2)% 7.4% (2.5)% 13.8% 17.2% 9.5% 1.8%
Current ratio................................... 2.6 2.5 2.1 2.4 2.1 3.1 3.1
-------- -------- -------- -------- -------- ------- -------
</TABLE>
- ---------------
(1) Fiscal 1994 Earnings (loss) before income taxes includes a provision of
$3,442,000 for closing 12 stores. Fiscal 1995 Earnings (loss) before income
taxes reflects income of $790,000 representing the unutilized portion of the
store closing provision. For additional information, please see the Notes to
the Consolidated Financial Statements for Fiscal 1996 in the 10-K attached
as Annex F to this Consent Solicitation Statement.
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.
43
<PAGE> 45
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
August , 1997
44
<PAGE> 46
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> 47
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> 48
<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> 49
<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> 50
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> 51
<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
A-2
<PAGE> 52
"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
A-3
<PAGE> 53
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
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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
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FIRST AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT (the "Amendment") dated as of July , 1997, to the
AGREEMENT AND PLAN OF MERGER, dated as of June 15, 1997 (the "Merger
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"), is entered into by and
among the Company, Buyer and Parent. All capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to them in the Merger
Agreement.
RECITALS:
WHEREAS, the Company, Buyer and Parent have entered into the Merger
Agreement providing for the merger of Buyer with and into the Company (the
"Merger"), with the Company surviving the Merger; and
WHEREAS, the Merger Agreement contains a condition to the obligation of the
Company, Buyer and Parent to effect the Merger that at least 20 business days
shall have elapsed following the mailing of the Consent Solicitation Statement.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions contained
herein, the parties hereto agree as follows:
1. Status of Merger Agreement. Except as specifically set forth
herein, the Merger Agreement shall remain in full force and effect and
shall not be waived, modified, superseded or otherwise affected by this
Amendment. This Amendment is not to be construed as a release, waiver or
modification of any of the terms, conditions, representations, warranties,
covenants, rights or remedies set forth in the Merger Agreement, except as
specifically set forth herein.
2. Amendment to the Merger Agreement. Section 7.3 of the Merger
Agreement is hereby deleted in its entirety and replaced by the following:
"MAILING OF CONSENT SOLICITATION STATEMENT. At least twenty (20)
calendar days shall have elapsed since the mailing of the Consent
Solicitation Statement to Company stockholders."
3. Representations and Warranties of the Company, Buyer and Parent.
Each of the Company, Buyer and Parent represents and warrants that its
execution, delivery and performance of this Amendment has been duly
authorized by all necessary corporate action and this Amendment is a legal,
valid and binding obligation of such entity in accordance with its terms.
4. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
shall constitute one and the same instrument.
5. Governing Law. This Amendment 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.
A-27
<PAGE> 77
IN WITNESS WHEREOF, the Company, Buyer and Parent have caused this
Amendment to be signed by their respective duly authorized officers as of the
date first written above.
COMPANY: BUYER:
FREDERICK'S OF HOLLYWOOD, INC. ROYALTY ACQUISITION CORP.
By: By:
---------------------------- ----------------------------
Its: Its:
--------------------------- ---------------------------
PARENT:
ROYALTY CORPORATION
By:
----------------------------
Its:
---------------------------
A-28
<PAGE> 78
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
B-1
<PAGE> 79
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
C-1
<PAGE> 80
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> 81
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.
D-1
<PAGE> 82
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> 83
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.
E-1
<PAGE> 84
(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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<PAGE> 85
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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<PAGE> 86
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.
E-4
<PAGE> 87
ANNEX F
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K 405
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 -- Fee Required
For the fiscal year ended August 31, 1996 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 -- No Fee Required
For the transition period from _______ to _______
Commission File No. 1-8252
FREDERICK'S OF HOLLYWOOD, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-2666265
(State of Incorporation) (IRS Employer Identification Number)
6608 HOLLYWOOD BOULEVARD, LOS ANGELES, CALIFORNIA 90028
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (213) 466-5151
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- -------------------
CLASS A CAPITAL STOCK $1 PAR VALUE NEW YORK STOCK EXCHANGE
CLASS B CAPITAL STOCK $1 PAR VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
The aggregate market value of capital stock held by nonaffiliates of the
registrant as of October 16, 1996 was approximately $8,165,000 for Class A
Capital Stock and $11,289,000 for Class B Capital Stock.
Number of shares of capital stock outstanding on October 18, 1996 was 2,955,309
- - Class A capital Stock and 5,903,118 - Class B Capital Stock.
<PAGE> 88
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant proxy statement and notice of annual meeting for the
meeting of January 30, 1997 is incorporated by reference in Part III.
<PAGE> 89
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I
Item 1. Business..................................... 1
Item 2. Properties................................... 3
Item 3. Legal Proceedings............................ 4
Item 4. Submission of Matters to a Vote of Security
Holders................................... 4
Executive Officers of the Registrant... 5
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters............... 6
Item 6. Selected Financial Data...................... 6
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 8. Financial Statements and Supplementary Data.. 11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures...... 25
PART III
Item 10. Directors and Executive Officers of the
Registrant................................ 26
Item 11. Executive Compensation....................... 26
Item 12. Security Ownership of Certain Beneficial
Owners and Management..................... 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................... 27
</TABLE>
<PAGE> 90
PART I
Item 1. BUSINESS
(a) General Development of Business
Frederick's of Hollywood, Inc., incorporated in 1962, as a successor to a
business established in 1946, is a retailer of women's apparel merchandise
through mail order catalogs and boutique specialty stores. Frederick's of
Hollywood, Inc., is a Delaware corporation with executive offices at 6608
Hollywood Boulevard, Los Angeles, California 90028, and its telephone number is
(213) 466-5151. Frederick's of Hollywood, Inc. and its consolidated subsidiaries
are hereby called "Registrant" or "Company".
On June 14, 1996, the Company, along with the founding family shareholders'
trusts, retained the investment banking firm Janney Montgomery Scott Inc. as
financial advisor in an exclusive agreement for the purpose of presenting to our
Board of Directors and the trusts, a program to enhance the value of the
Company's shares.
The program could include the sale of Frederick's shares owned by the trusts,
which aggregates approximately 50.2 percent of the total shares outstanding, or
possibly the sale of all shares or assets, merger or other consolidation, share
repurchase or by recapitalization, joint venture, or otherwise.
(b) Financial Information about Industry Segments
Information about industry segments is set forth on page 24 and under the
captions "Results of Operations" and "Financial Condition" starting on page 7.
(c) Narrative Description of Business
The information set forth under the captions "Results of Operations" and
"Financial Condition" starting on page 6 provides additional information on the
Company.
It is Registrant's policy to make frequent review of its selling price structure
in order to determine the advisability or necessity of marking down the selling
price of its merchandise.
Registrant purchases its merchandise from a variety of manufacturers. It is not
dependent on any one manufacturer. Registrant retains the services of buying
representatives in New York City to assist in fashion market coverage.
Buying and distributing personnel are jointly responsible for inventory
replenishment in the stores, principally by causing inventory to be shipped
F-1
<PAGE> 91
from Registrant's distribution center or by ordering drop-shipments of certain
items direct to stores by manufacturers.
F-2
<PAGE> 92
Employees
Registrant employs regularly on a full or part-time basis approximately 1,600
people. Due to the seasonal nature of the retail business, the number of
employees increases during the Christmas season to approximately 2,000.
Registrant does not have any collective bargaining agreements and Registrant
considers its relations with its employees to be good.
Capital Expenditures
During Fiscal 1996, Registrant opened three new stores, remodeled seven, and
closed one, resulting in a net increase of 11,000 square feet. During the year,
more than $4,073,000 was invested in new stores, remodels, fixtures and
equipment. The capital budget will be approximately $10,000,000 for fiscal 1997.
The Company anticipates it will have sufficient funds generated internally from
operations to support its operating and capital requirements. If internally
generated funds are not sufficient, capital expenditures will be limited to the
extent that funds are internally available.
Mail Order Catalog Operations
Registrant's mail order subsidiary engages in extensive operations in all 50
states. Sales are generated through catalogs published eleven times a year. Four
of these issues are reprinted in a revised form for which a second mailing is
made. The catalogs are distributed primarily to customers on a mailing list
which has been developed over a number of years. The list has been developed
through extensive list rental, advertising in magazines and newspapers and
undergoes continuous review and updating. Approximately 52,000,000 catalogs are
distributed annually. Advertising, catalog costs and mailing expenses,
approximated $21,393,000 in Fiscal 1996.
The subsidiary's mailing list of approximately 1.5 million names is one of its
more valued possessions. The company rents its list to other direct marketing
firms in order to maximize mail order sales and list rental revenue.
The subsidiary offers a money-back guarantee on all customer purchases.
Slow-moving and obsolete merchandise is offered at reduced prices through the
media of sale catalogs and package inserts.
Retail Store Operations
The Registrant operated 206 women's apparel stores in 39 states during Fiscal
1996 as compared with 204 stores in the prior fiscal year. Substantially all
stores are located in shopping malls with store size ranging from 900 to 5,400
square feet and totaling 277,000 square feet.
F-3
<PAGE> 93
During the past five years, 42 new stores have been opened and 29 stores have
been closed.
F-4
<PAGE> 94
Each of Registrant's retail stores employs a manager responsible for sales,
displaying merchandise, selecting and supervising personnel. Each manager
reports to a District Manager who reports to a Regional Vice President.
Inventory markup, pricing and distribution is determined by the respective
merchandising staffs of Registrant.
The retail stores offer a guarantee of customer satisfaction. Policy regarding
price adjustments to slow-selling and damaged or shopworn inventory is to reduce
the selling price to whatever level necessary to effect a sale of this
merchandise.
Trademarks
Registrant has registered its name as a trademark and markets its products under
such name. The trademarks are renewed every 20 years.
Competition
Registrant is in active competition with department stores and specialty stores
selling similar products. The department stores are generally larger,
well-established companies with greater financial resources. It is not practical
to estimate the number of all competitors because of the markets served.
Registrant competes on the basis of price, quality, and customer service.
Item 2. PROPERTIES
Registrant owns its principal office and retail store distribution center
located at 6608 Hollywood Boulevard, Los Angeles, California 90028. The 63,500
square-foot building includes 5,400 square feet used as a retail store.
With the exception of the retail store located at its principal place of
business, Registrant conducts all its retail operations in rented or leased
facilities. The majority of the leases are for terms of ten years. Substantially
all of the leases provided for fixed minimum annual rentals and a percentage
rental based on sales. In addition, Registrant, in most cases, must pay any
increase in real estate taxes over the base year of the lease as additional
rental.
In addition to the retail stores mentioned above, Registrant leases two other
facilities:
1. A 72,000 square foot concrete tilt-up building that is used as a mail order
warehouse, operations, order processing and fulfillment center.
2. A 14,200 square foot office space that is used for accounting, data
processing and administrative functions.
F-5
<PAGE> 95
Item 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which Registrant is a party or of
which any of its property is subject, other than ordinary routine litigation
incidental to its business which are not deemed material.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders during the fourth quarter ended
August 31, 1996.
F-6
<PAGE> 96
EXECUTIVE OFFICERS OF REGISTRANT
Executive officers of the Company are elected annually by the Board of
Directors and serve at the pleasure of the Board. Certain information concerning
such executive officers is set forth below:
<TABLE>
<S> <C> <C>
George W. Townson 55 Chairman, President, and Chief Executive Officer
since 1985.
John B. Hatfield 53 Executive Vice President, Chief Financial and
Administrative Officer, Secretary and
Treasurer since 1990.
Nitin G. Parikh 46 Vice President, Control and Planning since 1989.
Robert R. Genest 58 President - Retail Division since 1994; Executive
Vice President, General Manager - Retail
Division 1990-1994.
Geric B. Johnson 45 Executive Vice President - Mail Order Division
since 1994; Vice President - Mail
Order Operations 1989-1994.
</TABLE>
All of the above officers have been actively engaged in Registrant's business
for the past five years.
F-7
<PAGE> 97
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) MARKET PRICE RANGES
The capital stock of Frederick's of Hollywood, Inc. is traded on the New York
Stock Exchange. Ticker symbol: FOH.A and FOH.B. The following table sets forth
the closing high and low market prices per share of the Company's capital stock:
<TABLE>
<CAPTION>
Class A Class B
Capital Stock Capital Stock
------------------ ------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
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>
(b) As of October 3, 1996, Registrant had 580 Class A and 504 Class B
stockholders of record.
(c) The Company paid quarterly cash dividends on both Class A and Class B
shares of 2.5 cents per share in Fiscal 1996 and a semi-annual dividend of
2.5 cents per share in Fiscal 1995.
Item 6. SELECTED FINANCIAL DATA
The following table summarizes data from the Company's annual financial
statement for the years 1992 through 1996 and the notes thereto. 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. The
Company's complete annual financial statement and notes thereto for fiscal 1996
are on pages 13 through 25 of this Form 10-K 405.
F-8
<PAGE> 98
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(In thousands except percentages
and per share data) 1996 1995 1994 1993 1992
-------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales $148,090 $142,931 $132,153 $128,516 $117,030
Gross profit 60,031 58,728 54,744 55,622 52,862
Earnings (loss) before income taxes (664) 4,412 (1,705) 7,655 8,018
Net earnings (loss) (438) 2,652 (903) 4,737 5,073
Primary earnings (loss) per share
Classes A & B (.05) .31 (.10) .53 .57
Cash dividends per share -
Classes A & B .10 .075 .05 .05 .05
Primary weighted average shares
outstanding - Classes A & B 8,745 8,693 8,876 8,915 8,698
FINANCIAL POSITION AT YEAR END:
Working capital 20,447 21,263 17,486 15,783 11,213
Total assets 52,709 55,952 55,417 50,838 45,790
Long-term debt 240 480 720 -- --
Capital lease obligations 672 884 701 1,207 1,663
Stockholders' equity 35,525 36,599 34,413 36,615 32,204
Equity per share - Classes A & B 4.06 4.21 3.88 4.11 3.67
FINANCIAL RATIOS:
Net earnings (loss) to sales (0.3)% 1.9% (0.7)% 3.7% 4.3%
Net earnings (loss) to average
stockholders' equity (1.2)% 7.4% (2.5)% 13.8% 17.2%
Current ratio 2.6 2.5 2.1 2.4 2.1
-------- -------- -------- -------- --------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Management's discussion and analysis should be read in conjunction with the
Company's financial statements and the notes related thereto.
RESULTS OF OPERATIONS
SALES - Consolidated sales increased in 1996 to $148,090,000 from $142,931,000
in 1995 and $132,153,000 in 1994. The percentage of sales increases were 3.6%
and 8.2% in 1996 and 1995 respectively. The factors contributing to the increase
in each segment were as follows:
Retail Store sales volume increased $1,663,000 or 2.2% in 1996 when
compared to 1995 and increased $3,731,000 or 5.1% in 1995 when compared
to 1994. The increased sales volume for 1996 is attributable to
increased promotional activity, which includes increased markdowns
(13.7% of sales compared with 13.4% last year) and $643,000 in
additional promotional/advertising expenses. Despite achieving higher
sales for the year, the rate of sales growth was not sufficient to
offset the increased costs. The increase in retail store sales volume
in 1995 was due to the positive response to our value pricing program
which was implemented late in 1994. Comparable store sales volume for
1996 increased 1.3% and increased 6.5% in 1995.
F-9
<PAGE> 99
In Fiscal 1996, three stores were opened and one was closed while, in
1995, seven stores were opened and eleven were closed. At the end of
1996 the Company operated 206 stores in 39 states.
The Company conducts market tests and or market research on a
continuous basis in an effort to improve profitability. The effect on
net income associated with the tests and or research presently being
performed is not material. The effect of the successful execution of
current surveys' recommendations, test results or our current
implementation of new merchandise and marketing strategies on future
financial condition and results of operations is not presently
determinable.
Mail Order sales increased $3,496,000 or 5.2% in 1996 when compared to
1995 and $7,047,000 or 11.8% in 1995 when compared to 1994. The
increase in sales volume for 1996 when compared to 1995 is attributable
to an increase in the number of catalogs distributed. The increase in
sales volume for 1995 when compared to 1994 is attributable to an
increase in volume due to the number of catalogs distributed as well as
an increase in catalog productivity.
COST OF GOODS SOLD (INCLUDING BUYING AND OCCUPANCY COST) - Cost of goods sold
increased $3,856,000 or 4.6% in 1996 compared to 1995 and $6,794,000 or 8.8% in
1995 compared to 1994. As a percentage of sales, cost of goods sold were 59.5%
in 1996, 58.9% in 1995, and 58.6% in 1994. The increase in the cost of goods,
buying and occupancy cost percentage for 1996 is mainly attributable to
increased markdowns (mentioned above), inventory shrinkage and rent. The
increase in cost of goods sold for 1995 in dollars as well as a percentage of
sales is attributable to reduced markup to accommodate our value pricing program
and increased markdowns in both retail and mail order.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $5,914,000 from 1995 to 1996 and increased
$2,427,000 from 1994 to 1995. As a percentage of sales, these expenses were
41.1% in 1996, 38.5% in 1995, and 39.7% in 1994. Expenses for 1996 reflect
higher payroll, catalog production, postage and our catalog toll-free line (due
to the implementation of telephone operators having access to inventory
availability while speaking with customers). Expenses for 1995 reflect slightly
higher payroll dollars while the percentage to sales decreased 0.8% and an
increase in advertising dollars as well as percentage increase of 0.3%.
PROVISION FOR STORE CLOSINGS - In the fourth quarter of fiscal 1994, the Company
recorded a provision for closing twelve stores and the write down of certain
display fixtures of $3,442,000.
In the fourth quarter of fiscal 1995, the Company recorded a $790,000 pre-tax
credit to the provision for store closing due to favorable lease
F-10
<PAGE> 100
settlements from landlords on some closed stores and the inability of the
Company to close two stores out of the original 12 stores identified for closure
because of changing business and economic conditions that made closing these two
stores unfeasible.
See Note 3 of Notes to Consolidated Financial Statements for additional
disclosure related to the provision for store closure.
The Company does not expect a material impact on liquidity or operating results
from its inability to close two of the stores as originally planned.
OTHER INCOME (EXPENSE) - Interest expense represents the payment of interest on
ESOP debt and capitalized leases. The decrease in miscellaneous other expense of
$296,000 for 1995 when compared to 1994 represents, primarily, an increase in
interest income. The increase in miscellaneous other income for 1996 of $314,000
represents a reduction in the loss on the sale of fixed assets.
INCOME TAXES - The effective tax rate for 1996 was (34.0%) compared with 39.9%
in the prior year.
CHANGE IN ACCOUNTING PRINCIPLE - Effective August 29, 1993, the Company changed
its method of accounting for income taxes by adopting the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("Statement 109"). Statement 109 requires a change from the deferred
method of accounting for income taxes under APB Opinion No. 11 to the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to differences between the financial
statement and tax basis of assets and liabilities using enacted tax rates
expected to apply in the years in which the temporary differences are expected
to reverse. As permitted by Statement 109, the Company has elected not to
restate the financial statements of prior years.
The adoption of Statement 109 resulted in the recognition of $120,000 of
deferred federal tax benefits in fiscal 1993.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES - Cash and cash equivalents were $8,379,000,
$11,441,000, and $10,556,000 for 1996, 1995, and 1994, respectively. Total
working capital decreased to $20,447,000 in 1996 from $21,263,000 in 1995 and
$17,486,000 in 1994. The current ratio was 2.6, 2.5, and 2.1 in 1996, 1995, and
1994, respectively.
Inventory decreased $309,000 to $19,553,000 in 1996 from $19,862,000 in 1995.
The Company continues to closely monitor its inventories and
F-11
<PAGE> 101
believes its inventory position is substantially on plan relative to the
anticipated sales trend.
Prepaid expenses decreased $400,000 in 1996. Total current liabilities,
excluding capital lease obligations and ESOP loan decreased $1,836,000 in 1996.
The decrease in prepaid expenses is attributed to the difference in the timing
of invoice payments.
The current income tax receivable of $945,000 for 1996 and $213,000 for 1995
represents the anticipated refund of taxes paid based upon required estimated
tax payments that exceeded the Company's liability.
Deferred catalog cost decreased $384,000. The decrease is attributable to the
timing difference of catalog mailings.
Stockholders' equity was $35,525,000, $36,599,000, and $34,413,000 in 1996,
1995, and 1994, respectively. Equity per share was $4.06, $4.21, and $3.88 in
1996, 1995, and 1994, respectively.
During the year more than $4,073,000 was invested in new stores, remodels,
fixtures, and equipment. Our capital expenditures budget is approximately
$10,000,000 for fiscal 1997 which we anticipate funding through cash generated
internally from operations or from cash on hand.
The Company expects to remodel 22 existing stores and open eight new stores by
the end of fiscal 1997. Management estimates that the Company's cash requirement
will be approximately $325,000 (excluding inventory) for each store.
Accordingly, the Company expects to use approximately $10,000,000 for store
openings and remodels during this period. The Company anticipates it will have
sufficient funds generated internally from operations or cash on hand to support
its operating and capital requirements in fiscal 1997. However, with the number
of lease expirations during fiscal 1998 and 1999 internally generated funds will
not be sufficient to support the Company's operating and capital expenditure
needs.
SHAREHOLDER VALUE PROGRAM
On June 14, 1996, the Company, along with the founding family shareholders'
trusts, retained the investment banking firm Janney Montgomery Scott Inc. as
financial advisor in an exclusive agreement for the purpose of presenting to our
Board of Directors and the trusts, a program to enhance the value of the
Company's shares.
The program could include the sale of Frederick's shares owned by the trusts,
which aggregates approximately 50.2% of the total shares outstanding, or
possibly the sale of all shares or assets, merger or other consolidation, share
repurchase or by recapitalization, joint venture, or otherwise.
F-12
<PAGE> 102
SEASONALITY
The Company's business is seasonal in nature with the Holiday Season and
Valentine's Day (which both fall within the second quarter) historically
accounting for the largest percentage of sales volume. In the Company's two most
recent fiscal years, the second quarter accounted for approximately 30% of the
Company's annual sales.
IMPACT OF INFLATION
The primary inflationary factor related to the Company's operations is reflected
in higher store rentals. Furthermore, some of the Company's present leases
provide for the escalation of annual rentals based upon increases in specific
cost of living indices. The Company expects that most of the leases it enters
into in the future will contain similar provisions.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
The preceding Management's Discussion and Analysis contains various forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended (the Securities Act), and Section 21E of the Exchange Act,
which represent the Company's expectations or beliefs concerning future events.
The Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward looking statements, including, the
F-13
<PAGE> 103
sufficiency of the Company's working capital and cash flows from operating
activities. In addition, these statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward looking statements, including, without limitation, a decline in demand
for the merchandise offered by the Company, the ability of the Company to locate
and obtain acceptable store sites and lease terms or renew existing leases, the
ability of the Company to gauge the fashion tastes of its customers and provide
merchandise that satisfied customer demand, management's ability to manage the
Company's expansion, the effect of economic conditions, the effect of severe
weather or natural disasters and the effect of competitive pressures from other
retailers.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Financial Statements: Page
<S> <C>
Report of Independent Auditors............................ 12
Consolidated Statements of Operations..................... 13
Consolidated Balance Sheets .............................. 14
Consolidated Statements of Cash Flows..................... 15
Consolidated Statements of Changes in Stockholders' Equity 16
Notes to Consolidated Financial Statements ............... 16
</TABLE>
Financial Statement Schedules:
Schedules and notes not included have been omitted because they are not
applicable or the required information is included in the consolidated financial
statement and notes thereto.
Supplementary Data:
<TABLE>
<S> <C>
Quarterly Financial Summary (unaudited).................. 25
</TABLE>
F-14
<PAGE> 104
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholders of Frederick's of Hollywood, Inc.:
We have audited the accompanying consolidated balance sheets of Frederick's of
Hollywood, Inc. and subsidiaries as of August 31, 1996, and September 2, 1995
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
August 31, 1996. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Frederick's of
Hollywood, Inc. and subsidiaries as of August 31,1996, and September 2, 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended August 31, 1996 in conformity with generally
accepted accounting principles.
Los Angeles, California
October 25, 1996
F-15
<PAGE> 105
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's Omitted, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales $148,090 $142,931 $132,153
-------- -------- --------
Costs and expenses:
Cost of goods sold,
buying and occupancy costs 88,059 84,203 77,409
Selling, general and
administrative expenses 60,871 54,957 52,530
Provision for store closing -- (790) 3,442
-------- -------- --------
148,930 138,370 133,381
-------- -------- --------
Operating profit(loss) (840) 4,561 (1,228)
-------- -------- --------
Other income (expense):
Interest expense (107) (118) (150)
Miscellaneous 283 (31) (327)
-------- -------- --------
176 (149) (477)
-------- -------- --------
Earnings(loss) before income taxes (664) 4,412 (1,705)
Income taxes (benefit) (226) 1,760 (682)
-------- -------- --------
Earnings (loss) before cumulative
effect of a change in
accounting principle (438) 2,652 (1,023)
-------- -------- --------
Cumulative effect of a change
in accounting principle -- -- 120
-------- -------- --------
Net earnings(loss) $ (438) $ 2,652 $ (903)
-------- -------- ---------
Earnings(loss) per share
Primary - Classes A & B $ (.05) $ .31 $ (.10)
Fully diluted - Classes A & B $ (.05) $ .30 $ (.10)
Weighted average shares outstanding
Primary - Classes A & B 8,745 8,693 8,876
Fully diluted - Classes A & B 8,745 8,702 8,875
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 106
CONSOLIDATED BALANCE SHEETS
(000'S OMITTED)
<TABLE>
<CAPTION>
ASSETS 1996 1995
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,379 $ 11,441
Short term investment 480 --
Accounts receivable 499 658
Income tax receivable 945 213
Merchandise inventories 19,553 19,862
Deferred income taxes 843 765
Prepaid expenses 2,215 2,615
-------- --------
Total current assets 32,914 35,554
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Land 128 128
Buildings and improvements 881 698
Fixtures and equipment 14,687 13,473
Leasehold improvements 20,130 18,878
Property under capital leases 1,686 1,686
-------- --------
37,512 34,863
Less accumulated depreciation
and amortization (19,479) (16,638)
-------- -------
Net property and equipment 18,033 18,225
Deferred catalog costs 1,723 2,107
Other assets 39 39
-------- --------
TOTAL ASSETS $ 52,709 $ 55,925
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,298 $11,617
Dividends payable 221 221
Current portion of:
Capital lease obligations 212 200
ESOP loan guarantee 240 240
Accrued payroll 430 526
Accrued insurance 828 1,018
Other accrued expenses 238 469
-------- --------
Total current liabilities 12,467 14,291
-------- --------
Capital lease obligations 672 884
ESOP loan guarantee 240 480
Deferred rent 811 669
Deferred income taxes 2,994 3,002
STOCKHOLDERS' EQUITY:
Capital stock of $1 par value
Authorized 15,000,000 Class A shares,
35,000,000 Class B shares; issued
2,955,000 Class A shares, 5,903,000
Class B shares in 1996 and 1995 8,858 8,858
Additional paid-in capital 732 738
Reduction for ESOP loan guarantee (456) (701)
Treasury stock (6) (5)
Retained earnings 26,397 27,709
-------- --------
</TABLE>
F-17
<PAGE> 107
<TABLE>
<S> <C> <C>
TOTAL STOCKHOLDERS' EQUITY 35,525 36,599
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 52,709 $ 55,925
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 108
CONSOLIDATED STATEMENTS OF CASH FLOWS (000'S OMITTED)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (438) $ 2,652 $ (903)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Provision for store closing -- (1,852) 3,290
Depreciation and amortization 4,174 4,105 4,206
ESOP compensation 257 224 --
Loss on sale of fixed assets 84 431 358
Changes in assets and liabilities:
Accounts receivable 159 (130) (54)
Income tax receivable (732) 668 (881)
Merchandise inventories 309 (1,948) (753)
Prepaid expenses 400 (403) (746)
Deferred catalog costs 384 (524) 183
Other assets -- (1) 5
Accounts payable and
accrued expenses (1,836) 677 3,011
Deferred rent 142 158 215
Deferred income taxes (86) 779 (1,062)
Income taxes payable -- -- (258)
-------- -------- --------
Net cash provided by operating activities 2,817 4,836 6,611
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 7 205 2
Purchase of short term investments (480) -- --
Capital expenditures (4,073) (3,082) (2,348)
-------- -------- --------
Net cash used for investing activities (4,546) (2,877) (2,346)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (200) (365) (506)
Payment of dividends (869) (431) (443)
Payment of dividends on unearned
ESOP shares (17) (11) --
Purchase of treasury stock (7) (26) --
Proceeds from exercise of
stock options -- -- 108
Net increase (decrease) in ESOP
loan guarantee (liability) (240) (240) 960
Reduction for ESOP loan
guarantee (equity) -- -- (960)
Stock split -- (1) (4)
-------- -------- --------
Net cash used for financing activities (1,333) (1,074) (845)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents (3,062) 885 3,420
Cash and cash equivalents at
beginning of year 11,441 10,556 7,136
-------- -------- --------
Cash and cash equivalents at
end of year $ 8,379 $ 11,441 $ 10,556
======== ======== ========
SUPPLEMENTAL DISCLOSURE TO CONSOLIDATED
STATEMENTS OF CASH FLOWS:
Cash flow information:
Interest paid $ 111 $ 118 $ 150
Income taxes paid 601 802 1,386
Non-cash investing and financing transactions:
</TABLE>
F-19
<PAGE> 109
<TABLE>
<S> <C> <C> <C>
Leases capitalized -- 747 --
Dividends declared 221 221 --
Provision for store closing
Fixed asset disposal -- 756
475
Inventory disposal -- 183 24
</TABLE>
See accompanying notes to consolidated financial statements
F-20
<PAGE> 110
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital Additional Treasury
Stock Paid-in ESOP Stock Retained
Amount Capital Loan at cost Earnings
------- ---------- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at August 28, 1993 $ 8,841 $ 698 -- -- $ 27,076
Stock split (2) (2) -- -- --
Stock options exercised 19 75 -- -- --
ESOP loan guarantee -- -- $(960) -- --
Tax benefit from
exercise of stock options -- 14 -- -- --
Cash dividends -- -- -- -- (443)
($.05 per share)
Net loss -- -- -- -- (903)
------- ----- ----- --- --------
Balance at September 3, 1994 8,858 785 (960) -- 25,730
Stock split -- (1) -- -- --
ESOP loan guarantee -- (46) 259 -- --
Purchase of treasury stock -- -- -- $(5) (21)
Cash dividends
($0.075 per share) -- -- -- -- (652)
Net earnings -- -- -- -- 2,652
------- ----- ----- --- --------
Balance at September 2, 1995 8,858 738 (701) (5) 27,709
ESOP loan guarantee -- (6) 245 -- --
Purchase of treasury stock -- -- -- (1) (5)
Cash dividends
($0.10 per share) -- -- -- -- (869)
Net loss -- -- -- -- (438)
------- ----- ----- --- --------
Balance at August 31, 1996 $ 8,858 $ 732 $(456) $(6) $ 26,397
======= ===== ===== === ========
</TABLE>
See accompanying notes to financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND BASIS OF PRESENTATION The consolidated financial statements
include the account of Frederick's of Hollywood, Inc. and its subsidiaries
(collectively referred to as the Company). All significant intercompany balances
and transactions have been eliminated in consolidation. Frederick's of
Hollywood, Inc. (a Delaware Corporation), incorporated in 1962, as a successor
to a business established in 1946, is a retailer of women's apparel merchandise
through mail order catalogs and boutique specialty stores.
On June 14, 1996, the Company, along with the founding family shareholders'
trusts, retained the investment banking firm Janney Montgomery Scott Inc. as
financial advisor in an exclusive agreement for the purpose of
F-21
<PAGE> 111
presenting to our Board of Directors and the trusts, a program to enhance the
value of the Company's shares.
F-22
<PAGE> 112
The program could include the sale of Frederick's shares owned by the trusts,
which aggregates approximately 50.2% of the total shares outstanding, or
possibly the sale of all shares or assets, merger or other consolidation, share
repurchase or by recapitalization, joint venture, or otherwise.
FISCAL YEAR The Company's fiscal year ends on the Saturday closest to August 31.
Fiscal years 1996, 1995, and 1994 ended on August 31, September 2, and September
3 respectively. Fiscal years 1996 and 1995 consisted of 52 weeks, while fiscal
year 1994 consisted of 53 weeks.
CASH EQUIVALENTS AND SHORT TERM INVESTMENTS The Company considers highly liquid
investments with an initial maturity of three months or less to be cash
equivalents. Cash equivalents and short term investments are carried at cost,
which approximates fair value. Short term investments consist solely of a
certificate of deposit with a maturity at date of purchase of 12 months.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost
or market on the first-in, first-out basis.
DEPRECIATION AND AMORTIZATION Properties and equipment are depreciated on the
straight-line method based upon useful lives which range from 10 to 25 years for
buildings and improvements and four to ten years for equipment. Leasehold
improvements are amortized over the remaining term of the lease or their useful
lives, whichever is shorter.
INCOME TAXES Income taxes are accounted for under the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-23
<PAGE> 113
Effective August 29, 1993, the Company adopted Statement 109 and has reported
the cumulative effect of that change in the method of accounting for income
taxes in the 1994 consolidated statement of operations. Pursuant to the deferred
method under APB Opinion No. 11, which was applied in 1993 and prior years,
deferred income taxes are recognized for income and expense items that are
reported in different years for financial reporting purposes and income tax
purposes using the tax rate applicable for the years of the calculation.
ADOPTION OF ACCOUNTING STANDARDS In October 1995 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" (FAS 123). The Company has elected to
adopt FAS 123 in fiscal 1997 through disclosure only.
DEFERRED CATALOG COSTS The Company expenses the costs of advertising for
magazines, radio, and other media the first time the advertising takes place,
except for direct-response advertising, which is capitalized and amortized over
its expected period of future benefits.
Direct-response advertising consists primarily of catalog production and mailing
costs that have not yet been fully amortized over the expected revenue stream,
and are classified as non-current assets. Prior to mailing, catalog costs are
classified as prepaid expenses.
Catalog costs reported as prepaid expenses were $829,000 and $1,351,000 for 1996
and 1995, respectively. Advertising expense (excluding postage) was $18,742,000,
$15,168,000 and $13,766,000 for 1996, 1995, and 1994, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS In the event that facts and circumstances
indicate that the cost of long-lived assets or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is required.
RECLASSIFICATIONS Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the 1996 presentation.
NOTE TWO. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share calculations are based on the weighted average number
of shares of common stock outstanding during each period plus common stock
equivalents. Common stock equivalents reflect the assumed exercise of dilutive
employees' stock options less the number of treasury shares assumed to be
purchased from the
F-24
<PAGE> 114
proceeds using average market price or, for fully diluted earnings per share,
the greater of the average market price or period end market price of the
Company's common stock.
The Company has two classes of stock, Class A capital stock and Class B capital
stock. Both classes of stock have substantially identical rights, including
dividend rights, except that the Class A stock will have one vote per share and
Class B stock will be non-voting, unless such class is entitled to vote as a
matter of law.
F-25
<PAGE> 115
<TABLE>
<CAPTION>
(In thousands except per share data) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net earnings (loss) $ (438) 2,652 (903)
------- ------ -------
Earnings (loss) per share
before cumulative effect
of a change in accounting
principle
Primary $ (.05) .31 (.11)
Fully diluted $ (.05) .30 (.11)
Per share cumulative effect
of change in accounting
principle
Primary $ -- -- .01
Fully diluted $ -- -- .01
Earnings (loss) per common
and equivalent share
Primary $ (.05) .31 (.10)
Fully diluted $ (.05) .30 (.10)
Common and common
equivalent shares
(weighted average)
Primary 8,745 8,693 8,876
Fully diluted 8,745 8,702 8,875
</TABLE>
NOTE THREE. PROVISION FOR STORE CLOSING
In the fourth quarter of fiscal 1994, the Company recorded a provision for
closing 12 stores and the write down of certain display fixtures of $3,442,000.
The provision reflects anticipated costs associated with lease buyouts of
$1,710,000, the non-recoverable investment in property, equipment and inventory
of $1,644,000, and other expenses directly related to the store closings of
$88,000.
In the fourth quarter of fiscal 1995, the Company recorded a $790,000 pre-tax
credit to the provision for store closing due to favorable lease settlements
from landlords on some closed stores and the inability of the Company to close
two stores out of the original 12 stores identified for closure because of
changing business and economic conditions that made closing these two stores
financially unfeasible.
Charges against the store closing reserve for fiscal years 1996, 1995 and 1994,
were $ -0-, $2,791,000 and $651,000, respectively. The summary for these charges
are as follows (000's Omitted):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
</TABLE>
F-26
<PAGE> 116
<TABLE>
<S> <C> <C> <C>
Lease buyouts $ -- $1,055 $ 150
Fixed assets/inventory -- 939 499
Other expenses -- 7 2
Unutilized portion of provision -- 790 --
------ ------ -------
Total $ -0- $2,791 $ 651
====== ====== =======
</TABLE>
The consolidated statement of operations includes sales and operating losses for
the ten stores designated in the provision for store closing that were actually
closed. A summary for the fiscal years 1996, 1995, and 1994 is as follows (000's
Omitted):
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- ------
<S> <C> <C> <C>
Net sales -0- $732 $1,909
Operating loss -0- 140 440
</TABLE>
NOTE FOUR. INCOME TAXES
The provisions for income taxes are as follows (000's Omitted):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
CURRENT: Federal $ (167) $ 910 $ 217
State 27 71 43
DEFERRED: Federal (53) 573 (764)
State (33) 206 (178)
------ ------ -----
$ (226) $1,760 $(682)
====== ====== =====
</TABLE>
A reconciliation of income tax expense with the expected tax expense computed by
applying the statutory Federal income tax rate to earnings before income taxes
follows (000's Omitted):
<TABLE>
<CAPTION>
1996 1995 1994
--------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss)
before taxes $ (664) 100.0% $4,412 100.0% $(1,705) 100.0%
-------------- -------------- ----------------
Computed "expected"
tax expense (benefit) $ (226) (34.0%) $1,500 34.0% $ (580) (34.0%)
State taxes, net of
Federal tax benefit
(expense) (6) (0.9%) 183 4.2% (89) (5.2%)
Other items 6 0.9% 77 1.7% (13) (0.8%)
-------------- -------------- -----------------
$ (226) (34.0%) $1,760 39.9% $ (682) (40.0%)
--------------- -------------- -----------------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at August 31, 1996,
September 2, 1995, September 3, 1994 are presented below:
<TABLE>
<CAPTION>
Deferred tax assets: 1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Provision for store closing $ -- $ -- $ 1,139
</TABLE>
F-27
<PAGE> 117
<TABLE>
<S> <C> <C> <C>
Inventories, principally due to
additional cost inventories
for tax purposes pursuant to
the Tax Reform Act of 1986 655 705 577
Accrued expenses 138 60 20
Other 50 -- --
------- ------- -------
Total deferred tax assets 843 765 1,736
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation (2,994) (3,002) (3,194)
------ ------ -------
Net deferred tax liability $(2,151) $(2,237) $(1,458)
======= ======= =======
</TABLE>
The Company has not provided for a valuation allowance against its deferred tax
assets as realization of such assets is considered to be more likely than not.
NOTE FIVE. EMPLOYEE STOCK OPTION AND BENEFIT PLANS
The Company has two stock options plans - The 1984 Plan which expired on
September 26, 1994, and the 1990 Plan("The Plans") which provide for the
granting of incentive stock options to officers and other key employees for the
purchase of up 750,000 shares (250,000 Class A Capital Stock, 500,000 Class B
Capital Stock) of the Company's capital stock. The exercisable features of the
stock options are established by the stock option committee at the time of
grant. The options are exercisable at prices not less than the market value at
date of grant, and expire no later than ten years after date of grant. The Plans
also provide for the granting of stock appreciation rights in conjunction with
the options. The rights enable the holder to receive a payment equal to the
excess of the fair market value of the Company's capital stock over the option
price at the date of exercise. Such right may be exercised only if the holder
exercises the accompanying stock option by purchasing one share of stock for
each appreciation right exercised.
Transactions involving the Plans are summarized as follows (000's Omitted):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -------
<S> <C> <C> <C>
Outstanding at
beginning of period 954 1,022 840
Granted -- -- 501
Exercised -- -- (19)
Cancelled (22) (68) (300)
------ ----- -----
Outstanding at
end of period 932 954 1,022
------ ----- ------
Price range of options $4.83-9.13 $4.83-9.13 $4.83-9.13
---------- ---------- ----------
</TABLE>
At August 31, 1996, September 2, 1995, and September 3, 1994, 868,000, 769,000,
and 341,000 shares, respectively, were exercisable. There were no
F-28
<PAGE> 118
stock appreciation rights outstanding during the three-year period ended August
31, 1996.
The sale of shares acquired from the exercise of incentive stock options within
one year of exercise results in state and federal income tax benefits to the
Company equal to the difference between the market price at the date of exercise
and the option price. During 1996, 1995, and 1994, $-0-, $-0-, and $14,000,
respectively, was credited to additional paid-in capital for these tax benefits.
During fiscal 1993, the Company established a trust to administer a leveraged
Employee Stock Ownership Plan (ESOP). In January 1994, the ESOP purchased
357,143 shares of the Company's Class A Capital Stock, financed by the proceeds
from a $1,200,000 note issued by the ESOP and an initial contribution of
$318,968 from the Company. The Company guaranteed the loan and is obligated to
make annual contributions sufficient to enable the ESOP to repay the loan
principal and interest. The loan guarantee is secured by a certificate of
deposit in an amount equal to the outstanding principal
F-29
<PAGE> 119
balance. The terms of the ESOP loan guarantee include various covenants, all of
which the Company was in full compliance. Charges to operations for this plan
were $288,000, $303,000, and $288,000 for 1996, 1995, and 1994, respectively.
The shares of stock held by the ESOP have been placed with the ESOP trustee and
are allocated to eligible employees annually. These shares are allocated in the
same proportion that the current year's principal and interest payments bear to
the total principal and interest paid over the life of the borrowing.
The ESOP shares, as of the end of 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Allocated shares 185,584 129,700
Shares released for allocation 58,418 61,617
Unreleased shares 107,165 165,583
Shares distributed (2,505) (5,733)
------- -------
ESOP shares 348,662 351,167
</TABLE>
Earnings per share includes 241,497 and 185,584 ESOP shares for 1996 and 1995
respectively.
The ESOP plan provides that, upon a change in control(see Note 1), the Company
will provide for the full payment of any outstanding loan, allocate all shares
and that all participant's accounts shall be fully vested.
The Company has non-qualified executive savings and retirement plans which
provide benefits for certain executives of the Company. The plans allow for
employee and matching employer contributions as well as an additional employer
contribution in an amount necessary to provide for specified levels of benefits
to participants upon retirement. The Company recorded expense of $177,000,
$187,000, and $190,000 in fiscal 1996, 1995, and 1994, respectively.
NOTE SIX. LEASES AND COMMITMENTS
The Company leases office equipment under capital leases expiring in various
years through 2000. Future minimum lease payments under capital leases are as
follows (000's Omitted):
<TABLE>
<S> <C>
1997 $ 211
1998 225
1999 238
2000 210
------
Total minimum lease payments $ 884
Less amount representing interest 102
------
Present value of minimum lease payments $ 782
======
</TABLE>
F-30
<PAGE> 120
There are no executory costs of contingent rental provisions in the capital
leases.
F-31
<PAGE> 121
Store, warehouse and office facilities are occupied under operating leases
providing for minimum rental commitments as follows (000's Omitted):
<TABLE>
<S> <C>
1997 $ 8,834
1998 7,307
1999 6,290
2000 5,309
2001 4,082
2002 and thereafter 8,871
-------
Total minimum payments required $40,693
=======
</TABLE>
On substantially all leases, the Company is responsible for incremental rental
increases based on sales, as well as repairs, maintenance and property taxes.
Renewal privileges exist on certain leases. Total rent expense for 1996, 1995,
and 1994 amounted to $12,344,000, $11,878,000, and $12,015,000, respectively.
The Company records rental expense on a straight line basis, any excess of
rental expense over amounts paid is recorded as deferred rent.
The Company has outstanding letters of credit of $1,875,000 on August 31, 1996
for import merchandise.
The Company is a party to various claims, complaints, and other legal actions
that have arisen in the normal course of business from time to time. The Company
believes that the outcome of all pending legal proceedings, in the aggregate,
will not have a material adverse effect on the Company's financial position or
the results of its operations.
F-32
<PAGE> 122
NOTE SEVEN. SEGMENT INFORMATION
The Company, through its wholly owned subsidiaries, operates a catalog mail
order business and a retail chain of women's specialty boutique stores.
Financial information for each of these two business segments follows (000's
Omitted):
<TABLE>
<CAPTION>
RETAIL CATALOG CONSOL.
STORES MAIL ORDER CORPORATE TOTAL
------- ------- --------- --------
<S> <C> <C> <C> <C>
1996
Net sales $77,780 $70,310 -- $148,090
Operating profit(loss) (1,762) 922 -- (840)
Depreciation and amortization
of property and equipment 3,758 416 -- 4,174
Capital expenditures 3,832 241 -- 4,073
Identifiable assets 26,430 15,632 $10,647 52,709
------- ------- ------- --------
1995:
Net sales $76,117 $66,814 -- $142,931
Operating profit 866 3,695 -- 4,561
Depreciation and amortization
of property and equipment 3,691 414 -- 4,105
Capital expenditures 3,281 548 -- 3,829
Identifiable assets 26,124 17,382 $12,419 55,925
------- ------- ------- --------
1994:
Net sales $72,386 $59,767 -- $132,153
Operating profit (loss) (3,641) 2,413 -- (1,228)
Depreciation and amortization
of property and equipment 3,804 402 -- 4,206
Capital expenditures 2,148 200 -- 2,348
Identifiable assets 27,361 14,989 $13,067 55,417
------- ------- ------- --------
</TABLE>
In determining operating profit, various expenses are allocated to segments on
the basis of sales, payroll and estimated assets employed. Identifiable assets
are those directly employed by each segment and allocated on the basis of
estimated usage.
Corporate assets are principally cash and cash equivalents.
F-33
<PAGE> 123
NOTE EIGHT. QUARTERLY RESULTS (UNAUDITED)
Quarterly financial data are summarized below (000's Omitted):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1996:
Net sales $36,642 $44,565 $35,282 $31,601
Gross profit 15,570 18,704 14,237 11,520
Net earnings(loss) 107 1,243 (686) (1,102)
Primary:
Classes A & B .01 .14 (.08) (.13)
Fully diluted:
Classes A & B .01 .14 (.08) (.13)
1995:
Net sales $36,048 $41,427 $33,312 $32,144
Gross profit 15,539 17,853 13,828 11,508
Net earnings(loss) 1,028 2,184 440 (1,000)
Primary:
Classes A & B .12 .25 .05 (.11)
Fully diluted:
Classes A & B .12 .25 .05 (.11)
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no disagreements with the Company's independent auditors.
F-34
<PAGE> 124
PART III
Information with respect to the following items is incorporated by reference in
Registrant's 1997 Proxy Statement and notice of annual meeting for the meeting
to be held on January 30, 1997 ("Proxy Statement"). However, information
regarding executive officers is contained in Part I of this report pursuant to
General Instruction G of this form.
Item 10. DIRECTOR AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the caption in Registrant's Proxy Statement -- "Election of
Directors" and is hereby incorporated by reference.
Item 11. EXECUTIVE COMPENSATION
Reference is made to the caption in Registrant's Proxy Statement -- "Executive
Compensation" and is hereby incorporated by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the caption in Registrant's Proxy Statement -- "Voting
Securities and Principal Holders Thereof", "Election of Directors", and
"Information Concerning Executive Officers" which are hereby incorporated by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
F-35
<PAGE> 125
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14.(a)(1) Financial Statements
Financial statement for Frederick's of Hollywood, Inc. listed in the
Index to Financial Statements on page 10 are filed as part of this annual
report.
14.(a)(2) Financial Statement Schedules
None
14.(a)(3) Index to Exhibits
Exhibits are as set forth in the "Index to Exhibits" on page 27 of this
annual report.
14.(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended August 31,
1996.
F-36
<PAGE> 126
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Title
- ----------- -----
<S> <C>
3(a) Certificate of Incorporation (incorporated by reference to
Exhibit 3(a) to Registration Statement on Form S-1, File No.
2-20034, filed on March 26, 1962)
3(b) Certificate of Amendment to Certificate of Incorporation effective
July 16, 1969 (incorporated by reference to Exhibit 3(b) to
Registration Statement on Form S-1, File No. 2-35116, filed on
October 27, 1969)
3(c) Certificate of Amendment to Certificate of Incorporation effective
February 6, 1984 (incorporated by reference to Exhibit 3(c) to Form
10-K for fiscal year ended September 2, 1984)
3(d) Certificate of Amendment to Certificate of Incorporation effective
December 24, 1986 (incorporated by reference to Exhibit 3(d) to
Form 10-K for fiscal year ended August 29, 1987)
3(e) Certificate of Amendment to Certificate of Incorporation filed with
the Delaware Secretary of State on February 5, 1992 (incorporated
by reference to Exhibit 3(e) to Form 10-K for fiscal year ended
August 29, 1992)
3(f) Bylaws, as amended (incorporated by reference to Exhibit 3(d) to
Form 10-K for fiscal year ended August 31, 1986)
4 See Exhibits 3(a), 3(b), 3(c) and 3(d) for rights of capital stock
9 Omitted (Inapplicable)
10(a) Copy of Profit Sharing Plan (incorporated by reference to Exhibit
10(a) to Form 10-K for the fiscal year ended August 28, 1981)
10(b) Copy of the 1984 Stock Option Plan (incorporated by reference to
Exhibit No. 4.1 to Registration Statement on Form S-8, File No.
2-97418, filed on April 18, 1985)
10(c) Copy of the 1990 Stock Option Plan (incorporated by reference to
exhibit No. 4.2 to Registration Statement on Form S-8, File No.
1-8252. Filed on January 31, 1991)
</TABLE>
F-37
<PAGE> 127
<TABLE>
<S> <C>
10(d) Copy of the Amended Employment Agreement dated August
31, 1989 with George W. Townson (incorporated by
reference to Exhibits 10(e) to Form 10-K for the
fiscal year ended September 2, 1989)
</TABLE>
F-38
<PAGE> 128
<TABLE>
<CAPTION>
Exhibit No. Title
- ----------- -----
<S> <C>
10(e) Copy of the second amendment to the Amended Employment Agreement
with George W. Townson dated August 30, 1992 (incorporated by
reference to Exhibit 10(e) to Form 10-K for fiscal year ended
August 29, 1992)
10(f) Copy of Lease Agreement with LAPCO Industrial Park dated May 11,
1989 (incorporated by reference to Exhibits 10(d) to Form 10-K for
fiscal year ended September 2, 1989)
10(g) Copy of Executive Savings Plan for key executives effective June 1,
1989 (incorporated by reference to Exhibit 10(f) to Form 10-K for
fiscal year ended September 2, 1989)
10(h) Copy of Executive Retirement Plan for key executives effective June
1, 1989 (incorporated by reference to Exhibit 10(g) to Form 10-K
for fiscal year ended September 2, 1989)
10(i) Copy of Term Lease Master Agreement with IBM Credit Corporation
identified as Agreement No. 3541686 (incorporated by reference to
Exhibit 10(i) to Form 10-K for fiscal year ended August 31, 1991)
10(j) Copy of Frederick's of Hollywood, Inc. Employee Stock Ownership
Plan
10(k) Copy of Frederick's of Hollywood, Inc. Employee Stock Ownership
Plan Trust Agreement
10(l) Copy of employment agreement dated April 19, 1996 with John B.
Hatfield
10(m) Copy of agreement dated May 14, 1996 with Janney Montgomery Scott
Inc. regarding increasing shareholder value
11 Omitted (Inapplicable)
12 Omitted (Inapplicable)
13 Omitted (Inapplicable)
18 Omitted (Inapplicable)
19 Omitted (Inapplicable)
</TABLE>
F-39
<PAGE> 129
<TABLE>
<S> <C>
22 List of subsidiaries of Frederick's of Hollywood, Inc.,
(incorporated by reference to Exhibit 22 to Form 10-K for the
fiscal year ended September 4, 1983)
23 Omitted (Inapplicable)
</TABLE>
F-40
<PAGE> 130
<TABLE>
<CAPTION>
Exhibit No. Title
- ----------- -----
<S> <C>
24 Consent of KPMG Peat Marwick LLP
25 Omitted (Inapplicable)
27 Financial Data Schedule
28 Omitted (Inapplicable)
</TABLE>
F-41
<PAGE> 131
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) or the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 21st day of November
1996.
FREDERICK'S OF HOLLYWOOD, INC.
By: /s/ GEORGE W. TOWNSON
--------------------------
George W. Townson
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on November 21, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ GEORGE W. TOWNSON Chief Executive Officer and
- ------------------------- Director (Principal
George W. Townson Executive Officer)
/s/ JOHN B. HATFIELD Executive Vice President -
- ------------------------- Chief Financial and
John B. Hatfield Administrative Officer
(Principal Financial and
Accounting officer)
/s/ MORTON R. FIELD Director
- -------------------------
Morton R. Field
/s/ WILLIAM J. BARRETT Director
- -------------------------
William J. Barrett
/s/ HUGH V. HUNTER Director
- -------------------------
Hugh V. Hunter
</TABLE>
F-42
<PAGE> 132
<TABLE>
<S> <C>
/s/ MERLE A. JOHNSTON Director
- -------------------------
Merle A. Johnston
/s/ RICHARD O. STARBIRD Director
- -------------------------
Richard O. Starbird
/s/ SYLVAN LEFCOE Director
- -------------------------
Sylvan Lefcoe
</TABLE>
F-43
<PAGE> 133
ANNEX G
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended May 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-8252
FREDERICK'S OF HOLLYWOOD, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-2666265
(State or other jurisdiction of (IRS Employers Identification No.)
incorporation or organization)
6608 HOLLYWOOD BOULEVARD
LOS ANGELES, CALIFORNIA 90028
Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (213) 466-5151
Former name, former address and former fiscal year, if change since last report:
Not Applicable.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
G-1
<PAGE> 134
Indicate the number of shares outstanding for each of the registrant's classes
of Common stock, as of the latest practicable date. 2,955,309 shares of Class A
Capital Stock ($1 par value) and 5,903,118 shares of Class B Capital Stock ($1
par value) at June 24, 1997.
G-2
<PAGE> 135
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Title Page 1
Index 2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated condensed balance sheets-
May 31, 1997 and August 31, 1996 3
Consolidated condensed statements of
income (loss) - Three and nine months
ended May 31, 1997 and June 1, 1996 4
Consolidated condensed statements of
cash flows - Nine months ended
May 31, 1997 and June 1, 1996 5
Notes to consolidated condensed
financial statements 6-8
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 9-12
PART II - OTHER INFORMATION 13
SIGNATURES 14
</TABLE>
G-3
<PAGE> 136
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED) (IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
May 31, August 31,
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and equivalents $ 11,551 $ 8,379
Short term investments 480 480
Accounts receivable 600 499
Income taxes receivable -- 945
Merchandise inventories 19,613 19,553
Deferred income taxes 843 843
Prepaid expenses 1,777 2,215
-------- --------
Total current assets 34,864 32,914
======== ========
Property and equipment, net 18,441 18,033
Deferred catalog costs 1,019 1,723
Other assets 39 39
-------- --------
$ 54,363 $ 52,709
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,872 $ 10,298
Dividends payable 221 221
Current portion:
Capital lease obligations 221 212
ESOP loan guarantee 240 240
Accrued payroll 233 430
Accrued insurance 896 828
Income taxes payable 205 --
Other accrued expenses 286 238
-------- --------
Total current liabilities 11,174 12,467
======== ========
Capital lease obligations 505 672
ESOP loan guarantee 240 240
Deferred rent 947 811
Deferred income taxes 2,994 2,994
Stockholders' equity:
Capital stock $1 par value 8,858 8,858
Additional paid-in capital 754 732
Reduction for ESOP loan guarantee (282) (456)
Treasury stock (20) (6)
Retained earnings 29,193 26,397
-------- --------
Total stockholders' equity 38,503 35,525
-------- --------
$ 54,363 $ 52,709
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements
G-4
<PAGE> 137
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share data - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------- ------- ------- -------
May 31, June 1, May 31, June 1,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $36,390 35,282 118,752 116,489
Cost of goods sold,
buying and occupancy costs 21,694 21,045 68,896 67,978
------- ------- ------- -------
Gross profit 14,696 14,237 49,856 48,511
Selling, general and
administrative expenses 13,632 15,438 43,903 47,534
------- ------- ------- -------
Operating profit 1,064 (1,201) 5,953 977
Other income and
(expense), net 32 27 38 157
------- ------- ------- -------
Earnings before income taxes 1,096 (1,174) 5,991 1,134
Income taxes 454 (488) 2,486 470
------- ------- ------- -------
Net earnings $ 642 (686) 3,505 664
======= ======= ======= =======
Earnings per share
Primary -
Class A & Class B $ .07 (.08) .40 .08
Fully diluted -
Class A & Class B .07 (.08) .40 .08
Weighted average shares
outstanding
Primary - Class A & Class B 8,772 8,730 8,773 8,731
Fully diluted -
Class A & Class B 8,781 8,730 8,782 8,731
Cash dividend per share -
Class A & Class B $ .025 .025 .075 .075
======= ======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
G-5
<PAGE> 138
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
-------- -------
May 31, June 1,
1997 1996
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,505 $ 664
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,199 3,112
ESOP compensation 204 187
Loss on sale of fixed assets 65 23
Changes in assets and liabilities
Accounts receivable (101) 61
Income tax receivable 945 (110)
Merchandise inventories (60) 754
Prepaid expenses 438 493
Deferred catalog costs 704 1,127
Other assets -- --
Accounts payable and accrued expenses (1,507) (3,516)
Deferred rent 136 110
Deferred income taxes -- --
Income tax payable 205 --
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,733 2,905
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets -- 5
Capital expenditures (3,672) (2,722)
- -------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (3,672) (2,717)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (158) (149)
Payment of dividends (654) (652)
Payment of dividends on unearned ESOP shares (9) (12)
Purchase of treasury stock (68) (7)
- -------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (889) (820)
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 3,172 (632)
Cash and cash equivalents at beginning
of year 8,379 11,441
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 11,551 $ 10,809
=================================================================================================
Supplemental disclosures to consolidated statements of cash flows:
Interest paid $ 35 $ 50
Income taxes paid $ 1,742 $ 589
</TABLE>
G-6
<PAGE> 139
<TABLE>
<S> <C> <C>
Non-cash investing and financing transactions:
Dividends declared $ 221 $ 221
</TABLE>
See accompanying notes to the consolidated financial statements.
G-7
<PAGE> 140
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THIRTY-NINE WEEKS ENDED
May 31, 1997 and June 1, 1996
NOTE 1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial position as of
May 31, 1997 and June 1, 1996, and the results of operations and cash flows for
the nine months ended May 31, 1997 and June 1, 1996.
These financial statements should be read in conjunction with the Company's 1996
annual report on Form 10-K405.
NOTE 2. EARNINGS PER SHARE
Earnings per share calculations are based on the weighted average number of
shares of both Class A and Class B capital stock outstanding during each period
plus capital stock equivalents. Capital stock equivalents reflect the assumed
exercise of dilutive employees' stock options less the number of treasury shares
assumed to be purchased from the proceeds using the average market price or, for
fully diluted earnings per share, the greater of the average market price or
period end market price of the Company's common stock. ESOP shares that have not
been committed to be released are not considered outstanding (See Note 3).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
(In thousands MAY 31, JUNE 1, MAY 31, JUNE 1,
except per share data) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings $ 642 $ (686) 3,505 664
- ----------------------------------------------------------------------------------------------------------
Earnings per common
and equivalent share
Primary .07 (.08) .40 .08
Fully diluted .07 (.08) .40 .08
- ----------------------------------------------------------------------------------------------------------
Weighted average
Primary 8,858 8,858 8,858 8,858
Fully diluted 8,858 8,858 8,858 8,858
Dilutive effect of
stock options
</TABLE>
G-8
<PAGE> 141
<TABLE>
<S> <C> <C> <C> <C>
Primary -- -- 1 1
Fully diluted 9 -- 10 1
Unallocated ESOP shares (66) (121) (66) (121)
Treasury stock (20) (7) (20) (7)
Weighted average used to
calculate earnings per share
Primary 8,772 8,730 8,773 8,731
Fully diluted 8,781 8,730 8,782 8,731
- ----------------------------------------------------------------------------------------------------------
</TABLE>
G-9
<PAGE> 142
NOTE 3. EMPLOYEE STOCK OWNERSHIP PLAN
Effective September 4, 1994, the Company adopted Statement of Position (SOP)
93-6 (Employers' Accounting for Employee Stock Ownership Plans). Under SOP 93-6
the debt of the ESOP is recorded as debt of the Company and the shares pledged
as collateral are reported as unearned ESOP shares in the statement of financial
position. As shares are released from collateral, the company reports
compensation expense equal to the current market price of the shares, and the
shares become outstanding for earnings-per-share computations. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are recorded as compensation expense. ESOP
compensation expense was $69,000 and $204,000 respectively for the three and
nine months ended May 31, 1997. The ESOP shares as of May 31, 1997 were as
follows:
<TABLE>
<S> <C>
Allocated shares 253,529
Shares released for allocation 13,798
Unreleased shares 65,771
-------
Total ESOP shares 333,098
=======
Fair value of unreleased
shares as of June 24, 1997 $386,000
</TABLE>
NOTE 4. INCOME TAXES
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at August 31, 1996 are
presented below (000's Omitted):
<TABLE>
<S> <C>
Deferred tax assets:
Inventories, principally due to
additional cost inventories
for tax purposes pursuant to
the Tax Reform Act of 1986 $ 655
Accrued expense 138
Other 50
-------
Total deferred tax assets 843
</TABLE>
G-10
<PAGE> 143
<TABLE>
<S> <C>
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation (2,994)
-------
Net deferred tax liability $(2,151)
=======
</TABLE>
The Company has not provided for a valuation allowance against its deferred tax
assets as realization of such assets is considered to be more likely than not.
NOTE 5. - SUBSEQUENT EVENT
On June 15, 1997, Frederick's of Hollywood, Inc., a Delaware corporation (the
"Company"), entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Royalty Corporation, a Delaware corporation (the "Parent"), and
Royalty Acquisition Corp., a Delaware corporation and wholly owned subsidiary of
the Parent (the "Purchaser"), pursuant to which the Purchaser will merge with
and into the Company (the "Merger"). At the effective time of the Merger, the
Parent will become the sole stockholder of the Company.
As a result of the Merger, (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.
The Merger is conditioned upon, among other things, the approval of the holders
of a majority of the Company's outstanding Class A Capital Stock and Class B
Capital Stock voting as separate classes and upon an amendment to the Company's
Certificate of Incorporation, which amendment also requires the approval of the
holders of a majority of the Company's outstanding Class A Capital Stock and
Class B Capital Stock voting as separate classes.
G-11
<PAGE> 144
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The most significant changes in the Company's balance sheet from August 31,
1996, the end of the preceding fiscal year, to May 31, 1997 are as follows:
o Accounts receivable increased $101,000. The increase is primarily due to
increased list rental receivables.
o The decrease in income taxes receivable from $945,000 at August 31, 1996 to
zero at May 31, 1997 is caused by the receivable being applied to the
Company's current year's taxes due.
o Inventory increased $60,000. The Company continues to closely monitor its
inventories and believes its inventory position is substantially on plan
relative to the anticipated sales.
o Prepaid expenses decreased $438,000. The decrease is mainly attributed to
the timing differences of invoice payments.
o Deferred catalog costs decreased $704,000. The decrease is attributable to
the timing differences of catalog mailings.
o The accounts payable decrease of $1,426,000 is mainly attributable to the
offsetting factors of increased customer deposits ($440,000), increased
payroll and sales taxes payable ($176,000), and decreased accounts payables
($2,278,000). These fluctuations are caused by the timing of the required
accounting entries as they relate to two different points in time; the end
of the fiscal year, and the end of the third quarter; as well as the
difference caused by the timing of the required accruals and the
corresponding payments.
o Accrued payroll decreased $197,000. This fluctuation (decrease) is
attributable to the difference in the length of time between the end of the
pay period (accrual of
G-12
<PAGE> 145
estimated payroll) and the payment of that payroll as it relates to two
different points in time; the end of the fiscal year and the end of the
third quarter.
o The increase in accrued insurance and other accrued expenses was $116,000.
The difference is caused by the timing of the required accruals and the
corresponding payments.
LIQUIDITY AND CAPITAL RESOURCES
o Cash and cash equivalents increased $3,172,000. The Company had working
capital of $23,690,000 at May 31, 1997 and net cash provided by operating
activities of $7,733,000 for the nine months ended May 31, 1997.
Design modifications and a general reduction in the size of our large
format stores have been made on stores to be remodeled during the remaining
fiscal year in order to increase their sales per square foot. We have
reduced the number of new and remodeled stores planned for fiscal 1997,
which has resulted in a capital expenditure reduction of $5,000,000 from
our original $10,000,000 plan.
Currently, the Company has certain tax returns under audit and any
assessment levied by the Internal Revenue Service would be covered by
current operations or its cash on hand.
RESULTS OF OPERATIONS
The following table summarizes the Company's net sales and operating profit
(loss) by business segment for the three and nine month periods ending May 31,
1997 and June 1, 1996:
<TABLE>
<CAPTION>
Net Sales
Three Months Nine Months
--------------------- -----------------------
(In Thousands)
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Retail Stores $18,328 $17,424 $ 65,148 $ 60,509
Mail Order 18,062 17,858 53,604 55,980
------- ------- -------- --------
Total $36,390 $35,282 $118,752 $116,489
======= ======= ======== ========
</TABLE>
********************************************************************************
Operating Profit (loss)
G-13
<PAGE> 146
<TABLE>
<CAPTION>
1997 1996 1997 1996
------- ------- ------ -------
<S> <C> <C> <C> <C>
Retail Stores $(1,159) $(2,007) $1,970 $ (592)
Mail Order 2,223 806 3,983 1,569
------- ------- ------ -------
Total $ 1,064 $(1,201) $5,953 $ 977
======= ======= ====== =======
</TABLE>
The results of the interim period are not necessarily indicative of results for
the entire year.
Net sales increased $1,108,000 (3.1%) for the three months and $2,263,000 (1.9%)
for the nine months ended May 31, 1997 as compared with the prior year. The
factors contributing to the increase in each segment were as follows:
o Retail store sales volume increased $904,000 (5.2%) and $4,639,000 (7.7%)
for the three and nine months ended May 31, 1997 as compared with the
similar periods last year. Comparable store sales volume increased 3.8% and
5.5% respectively for the three and nine months ended May 31, 1997 as
compared with the similar periods last year. There were no stores opened
and none were closed during the quarter for a total of 204 stores in 39
states.
The increase in retail sales is primarily attributable to planned increased
inventory levels, as well as an improved selection of merchandise during
the quarter.
o Mail Order sales volume increased $204,000 (1.1%) for the three months and
decreased $2,376,000 (4.2%) for the nine months ended May 31, 1997. The
nine month decrease is attributable to 1) a general softness in response to
our Christmas and December sale catalogs caused by a 10% reduction in the
number of catalog offerings, and 2) the elimination of a swimwear catalog
which was tested during the second quarter last year.
Gross profit amounted to $14,696,000 (40.4% of sales) and $49,856,000 (42.0% of
sales) for the three and nine months ended May 31, 1997. This compared with
$14,237,000 (40.4% of sales) and $48,511,000 (41.6% of sales) for the same
periods in the prior year. The increase in gross profit percentage is mainly
attributable to reduced markdowns in retail stores. The increase in gross profit
dollars for both the three and nine months is primarily attributable to
increased sales.
G-14
<PAGE> 147
Selling, general and administrative expenses decreased $1,806,000 (11.7%) and
$3,631,000 (7.6%) for the three and nine months ended May 31, 1997. For both the
three and nine month periods the decrease in selling, general, and
administrative expense is attributable mainly to our mail order subsidiary. The
decrease was due to the nonrecurrence of the costs associated with the
eliminated swimwear catalog in the second quarter, plus reduced catalog
advertising expense.
The decrease in other income (expense) for the nine months was caused by reduced
interest income and increased loss on disposal of fixed assets.
The Company's business is seasonal in nature with the Holiday Season and
Valentine's Day (which both fall within the second quarter) historically
accounting for the largest percentage of sales volume. In the Company's three
most recent fiscal years, the second quarter accounted for approximately 30% of
the Company's annual sales.
Income taxes are provided on the basis of estimated federal and state taxes for
each year. The rate used for the nine months ended May 31, 1997 and June 1, 1996
was 41.5%.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
The preceding Management's Discussion and Analysis contains various forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act,
which represent the Company's expectations or beliefs concerning future events.
The Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward looking statements, including, the sufficiency of the Company's working
capital and cash flows from operating activities. In addition, these statements
are further qualified by important factors that could cause actual results to
differ materially from those in the forward looking statements, including,
without limitation, a decline in demand for the merchandise offered by the
Company, the ability of the Company to locate
G-15
<PAGE> 148
and obtain acceptable store sites and lease terms or renew existing leases, the
ability of the company to gauge the fashion tastes of its customers and ability
to manage the Company's expansion, the effect of economic conditions, the effect
of severe weather or natural disasters and the effect of competitive pressures
from other retailers.
G-16
<PAGE> 149
PART II - OTHER INFORMATION
Items 1 - 5
Items 1 - 5 are omitted because they are not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<S> <C>
10(n) Stay bonus agreement between Company and
Robert R. Genest.
10(o) Stay bonus agreement between Company and
Nitin G. Parikh.
10(p) Stay bonus agreement between Company and
Geric B. Johnson.
10(q) Copy of the Termination and Release Agreement
dated June 14, 1997 with George W. Townson.
27 Financial Data Schedule.
</TABLE>
(b) No reports on Form 8-K were filed for this quarter.
G-17
<PAGE> 150
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FREDERICK'S OF HOLLYWOOD, INC.
(Registrant)
Date: July 14, 1997 By: /s/ George W. Townson
---------------------- -------------------------------
George W. Townson
Chairman of the Board, President
and Chief Executive Officer
Date: July 14, 1997 By: /s/ John B. Hatfield
----------------------- -------------------------------
John B. Hatfield
Executive Vice President,
Secretary, Treasurer,
Chief Financial, Accounting
and Administrative Officer
G-18
<PAGE> 151
Exhibit 10(n)
June 28, 1996
Mr. Robert Genest
Frederick's of Hollywood, Inc.
6608 Hollywood Boulevard
Hollywood, CA 90028
Dear Bob:
Frederick's of Hollywood, Inc. (Frederick's) and the founding family
shareholders' trusts have retained the investment banking firm Janney Montgomery
Scott Inc. as financial advisor in an exclusive agreement for the purpose of
presenting to Frederick's board of directors and the trusts, a program to
enhance the value of the company's shares.
The program could include the sale of Frederick's shares owned by the
trusts, which aggregates approximately 50.2% of the company's total shares
outstanding, or possibly the sale of all shares or assets, merger or other
consolidation, share repurchase, or by recapitalization, joint venture, or
otherwise.
We will be disclosing further details to the public and to our
employees when it is legally appropriate to do so.
In order to provide for a continuity of management during a period of
uncertainty as to the nature of any possible transaction, the Compensation
Committee of the Board of Directors of Frederick's has authorized me to make the
following offer to you:
1. In consideration of your continued "at will" employment with
Frederick's, and provided you are still in the employ of
Frederick's on the date of an occurrence of an "Event" as
defined below, you will receive as additional compensation a
lump sum payment equal to $50,000 (Fifty Thousand Dollars).
This lump sum payment will be made within 30 days after the
occurrence of an "Event".
2. The occurrence of any one or more of the following shall
constitute an "Event" for purposes of this Agreement:
a. If any person (other than any person who as of the
date hereof is the beneficial owner of ten percent
(10%) or more of Frederick's voting securities), or
group of persons acting in concert becomes the
beneficial owner of thirty percent (30%) or more of
Frederick's outstanding voting securities or
securities convertible into such amount of voting
securities; or
Exhibit 10(n)-1
<PAGE> 152
Mr. Robert Genest
June 28, 1996
Page 2
b. The shareholders of Frederick's approve (i) a merger
or consolidation of Frederick's with any other
corporation or (ii) an agreement for the sale or
disposition by Frederick's of all or substantially
all of Frederick's assets. However,no merger or
consolidation shall be deemed an Event if the voting
securities of Frederick's outstanding immediately
prior to a merger or consolidation continue to
represent at least eighty percent (80%) of the
combined voting power of the voting securities of
Frederick's, or any surviving entity, outstanding
immediately thereafter.
Except as modified above, until an Event occurs, your employment terms
and benefits will continue upon the same terms and conditions as existed before
the date of this agreement, which is not to be construed as a promise of
continued employment with Frederick's.
Your relationship to Frederick's and its management, and your "at will"
employment with Frederick's following an Event will be up to you and the
management of Frederick's subsequent to an Event.
If no Event has occurred within one year of the date of this
agreement,* the agreement shall terminate without further liability on your part
or that of Frederick's.
Sincerely,
/s/George W. Townson
George W. Townson,
Chairman of the Board,
President and Chief
Executive Officer
AGREED AND ACCEPTED, EFFECTIVE THE DATE OF THIS LETTER:
/s/Robert R. Genest
- -------------------------------------
Robert R. Genest
*Agreement extended through August 31, 1997.
/s/George W. Townson
George W. Townson
Dated April 17, 1997
Exhibit 10(n)-2
<PAGE> 153
Exhibit 10(o)
June 28, 1996
Mr. Nitin G. Parikh
Frederick's of Hollywood, Inc.
6608 Hollywood Boulevard
Hollywood, CA 90028
Dear Bob:
Frederick's of Hollywood, Inc. (Frederick's) and the founding family
shareholders' trusts have retained the investment banking firm Janney Montgomery
Scott Inc. as financial advisor in an exclusive agreement for the purpose of
presenting to Frederick's board of directors and the trusts, a program to
enhance the value of the company's shares.
The program could include the sale of Frederick's shares owned by the
trusts, which aggregates approximately 50.2% of the company's total shares
outstanding, or possibly the sale of all shares or assets, merger or other
consolidation, share repurchase, or by recapitalization, joint venture, or
otherwise.
We will be disclosing further details to the public and to our
employees when it is legally appropriate to do so.
In order to provide for a continuity of management during a period of
uncertainty as to the nature of any possible transaction, the Compensation
Committee of the Board of Directors of Frederick's has authorized me to make the
following offer to you:
1. In consideration of your continued "at will" employment with
Frederick's, and provided you are still in the employ of
Frederick's on the date of an occurrence of an "Event" as
defined below, you will receive as additional compensation a
lump sum payment equal to $50,000 (Fifty Thousand Dollars).
This lump sum payment will be made within 30 days after the
occurrence of an "Event".
2. The occurrence of any one or more of the following shall
constitute an "Event" for purposes of this Agreement:
a. If any person (other than any person who as of the
date hereof is the beneficial owner of ten percent
(10%) or more of Frederick's voting securities), or
group of persons acting in concert becomes the
beneficial owner of thirty percent (30%) or more of
Frederick's outstanding voting securities or
securities convertible into such amount of voting
securities; or
Exhibit 10(o)-1
<PAGE> 154
Mr. Nitin G. Parikh
June 28, 1996
Page 2
b. The shareholders of Frederick's approve (i) a merger
or consolidation of Frederick's with any other
corporation or (ii) an agreement for the sale or
disposition by Frederick's of all or substantially
all of Frederick's assets. However,no merger or
consolidation shall be deemed an Event if the voting
securities of Frederick's outstanding immediately
prior to a merger or consolidation continue to
represent at least eighty percent (80%) of the
combined voting power of the voting securities of
Frederick's, or any surviving entity, outstanding
immediately thereafter.
Except as modified above, until an Event occurs, your employment terms
and benefits will continue upon the same terms and conditions as existed before
the date of this agreement, which is not to be construed as a promise of
continued employment with Frederick's.
Your relationship to Frederick's and its management, and your "at will"
employment with Frederick's following an Event will be up to you and the
management of Frederick's subsequent to an Event.
If no Event has occurred within one year of the date of this
agreement,* the agreement shall terminate without further liability on your part
or that of Frederick's.
Sincerely,
/s/George W. Townson
George W. Townson,
Chairman of the Board,
President and Chief
Executive Officer
AGREED AND ACCEPTED, EFFECTIVE THE DATE OF THIS LETTER:
/s/Nitin G. Parikh
- -------------------------------------
Nitin G. Parikh
*Agreement extended through August 31, 1997.
/s/George W. Townson
George W. Townson
Dated April 17, 1997
Exhibit 10(o)-2
<PAGE> 155
Exhibit 10(p)
June 28, 1996
Mr. Geric B. Johnson
Frederick's of Hollywood, Inc.
6608 Hollywood Boulevard
Hollywood, CA 90028
Dear Bob:
Frederick's of Hollywood, Inc. (Frederick's) and the founding family
shareholders' trusts have retained the investment banking firm Janney Montgomery
Scott Inc. as financial advisor in an exclusive agreement for the purpose of
presenting to Frederick's board of directors and the trusts, a program to
enhance the value of the company's shares.
The program could include the sale of Frederick's shares owned by the
trusts, which aggregates approximately 50.2% of the company's total shares
outstanding, or possibly the sale of all shares or assets, merger or other
consolidation, share repurchase, or by recapitalization, joint venture, or
otherwise.
We will be disclosing further details to the public and to our
employees when it is legally appropriate to do so.
In order to provide for a continuity of management during a period of
uncertainty as to the nature of any possible transaction, the Compensation
Committee of the Board of Directors of Frederick's has authorized me to make the
following offer to you:
1. In consideration of your continued "at will" employment with
Frederick's, and provided you are still in the employ of
Frederick's on the date of an occurrence of an "Event" as
defined below, you will receive as additional compensation a
lump sum payment equal to $50,000 (Fifty Thousand Dollars).
This lump sum payment will be made within 30 days after the
occurrence of an "Event".
2. The occurrence of any one or more of the following shall
constitute an "Event" for purposes of this Agreement:
a. If any person (other than any person who as of the
date hereof is the beneficial owner of ten percent
(10%) or more of Frederick's voting securities), or
group of persons acting in concert becomes the
beneficial owner of thirty percent (30%) or more of
Frederick's outstanding voting securities or
securities convertible into such amount of voting
securities; or
Exhibit 10(p)-1
<PAGE> 156
Mr. Geric B. Johnson
June 28, 1996
Page 2
b. The shareholders of Frederick's approve (i) a merger
or consolidation of Frederick's with any other
corporation or (ii) an agreement for the sale or
disposition by Frederick's of all or substantially
all of Frederick's assets. However,no merger or
consolidation shall be deemed an Event if the voting
securities of Frederick's outstanding immediately
prior to a merger or consolidation continue to
represent at least eighty percent (80%) of the
combined voting power of the voting securities of
Frederick's, or any surviving entity, outstanding
immediately thereafter.
Except as modified above, until an Event occurs, your employment terms
and benefits will continue upon the same terms and conditions as existed before
the date of this agreement, which is not to be construed as a promise of
continued employment with Frederick's.
Your relationship to Frederick's and its management, and your "at will"
employment with Frederick's following an Event will be up to you and the
management of Frederick's subsequent to an Event.
If no Event has occurred within one year of the date of this
agreement,* the agreement shall terminate without further liability on your part
or that of Frederick's.
Sincerely,
/s/George W. Townson
George W. Townson,
Chairman of the Board,
President and Chief
Executive Officer
AGREED AND ACCEPTED, EFFECTIVE THE DATE OF THIS LETTER:
/s/Geric B. Johnson
- ------------------------
Geric B. Johnson
*Agreement extended through August 31, 1997.
/s/George W. Townson
George W. Townson
Dated April 17, 1997
Exhibit 10(p)-2
<PAGE> 157
Exhibit 10(q)
TERMINATION AND RELEASE AGREEMENT
THIS TERMINATION AND RELEASE AGREEMENT ("Agreement") is made
and entered into as of June 14, 1997, by and between Frederick's of Hollywood,
Inc., a Delaware corporation (the "Company"), and George W. Townson, an
individual ("Employee"), with reference to the following:
A. The parties hereto have heretofore entered into (i) that
certain Employment Agreement, dated as of July 30, 1987 (the "1987 Employment
Agreement"), (ii) that certain Amended and Restated Employment Agreement, dated
as of August 31, 1989 (the "Restated Employment Agreement"), and (iii) that
certain Second Amendment to Employment Agreement, dated as of August 30, 1992,
copies of which are attached hereto as Exhibits "A", "B" and "C", respectively,
(collectively, the "Employment Agreement").
B. Section 8a of the Restated Employment Agreement ("Section
8a") provides for a lump sum payment to be made to Employee upon the termination
by Employee of his employment with the Company upon the occurrence of an Event
(as such term is defined in Section 6 of the Restated Employment Agreement).
C. There exists a dispute between the Company and Employee as
to the amount payable to Employee under Section 8a.
D. The Company and Employee believe that it is in their
respective best interests to resolve this dispute amicably without resort to
litigation or other legal proceedings.
NOW, THEREFORE, for and in consideration of the premises and the mutual
promises contained herein, and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. Interpretation of Section 8a. With respect to the
interpretation of Section 8a, the parties agree as follow: (i) pursuant to
Section 4a of the Restated Employment Agreement, the term "Base Compensation"
shall mean Two Hundred Fifty Thousand Dollars ($250,000); (ii) the "Bonus," as
defined in Section 4b of the Restated Employment Agreement, was Zero Dollars
($0) for the fiscal years of the Company ended on September 3, 1994, September
2, 1995 and August 31, 1996 and is expected to be Zero Dollars ($0) for the
fiscal year ending August 30, 1997; and (iii) the applicable multiplier for
computing the lump sum payment under Section 8a is three (3) (which is the sum
of the initial term of the 1987 Employment Agreement plus one year).
Exhibit 10(q)-1
<PAGE> 158
2. Payment.
(a) In light of Section 1 above, if an Event shall
occur and the employment of Employee with the Company shall terminate as a
result thereof on or before August 29, 1998, in full satisfaction of any and all
amounts due or payable directly or indirectly for the benefit of Employee under
the Employment Agreement, whether now or hereafter due or payable, including,
without limitation, all amounts described in Section 8a, the Company shall pay
to Employee the aggregate amount of Seven Hundred Fifty Thousand Dollars
($750,000).
(b) The amount set forth in Section 2(a) above shall
be payable in full by cashier's check at the time of any termination of the
employment of Employee with the Company as described in said Section 2(a) above
and shall be subject to all applicable, if any, federal, state and local laws,
rules and regulations with regard to the withholding of taxes.
3. Release.
(a) The Company, on the one hand, and Employee, on
the other hand, for themselves and on behalf of (as applicable) their respective
officers, directors, shareholders, representatives, agents, attorneys,
administrators, executors, heirs, assigns, predecessors and successors in
interest, hereby release and forever discharge each other and each of their
respective past, present, and future officers, directors, shareholders, agents,
representatives, administrators, executors, predecessors in interest, successors
in interest and all other persons, firms, entities or corporations with whom any
of the former have been, are now, or may hereafter be affiliated (collectively,
the "Released Parties"), from all past, present and future claims, demands,
obligations, liabilities and causes of action of any nature whatsoever, whether
in tort (including, without limitation, acts of active negligence), contract or
any other theory of recovery in law or equity, whether for compensatory or
punitive damages, equitable relief or otherwise, and whether now known or
unknown, suspected or unsuspected, in any way arising out of, relating to,
resulting from or connected with the Employment Agreement (collectively, the
"Released Matters").
(b) Without limiting the generality of the foregoing,
the parties hereto expressly release any and all past, present and future claims
in connection with the Released Matters, but which said parties do not know of
or suspect to exist in their favor, whether through ignorance, oversight, error,
negligence or otherwise, and which, if known, would materially affect their
decision to enter into this Agreement, and to this end, they and each of them,
therefore, waive all rights under Section 1542 of the Civil Code of California
which states in full as follows:
Exhibit 10(q)-2
<PAGE> 159
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have
materially affected his settlement with the debtor."
4. Indemnification.
(a) If, as a result of the payments to Employee under
this Agreement, it shall be determined that any payment by the Company to or for
Employee's benefit (whether paid or payable pursuant to the terms of this
Agreement or otherwise) (a "Payment"), is subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (and any successor
provision and any similar provision of state or local income tax law)
(collectively, "Section 4999"), or any interest or penalty is incurred by
Employee with respect to such excise tax (such excise tax, together with any
such interest or penalty, hereinafter collectively to be referred to as the
"Excise Tax"), then Employee shall be entitled to receive from the Company or
have paid by the Company to the Internal Revenue Service or other appropriate
authority (and any relevant state or local authority) (collectively, "IRS") on
his behalf an additional payment or payments (each, a "Gross-Up Payment") in an
aggregate amount equal to the sum of (i) the Excise Tax plus (ii) all taxes,
penalties and interest (including any excise tax imposed by Section 4999 of the
Code) paid or payable by Employee on account of the operation of this Section 4,
such that, after payment by Employee of all such other taxes (including any
interest or penalty imposed with respect to such taxes) and any Excise Tax
imposed upon the Gross-Up Payment, Employee shall be in the same position as he
would have been had no Excise Tax been imposed upon the Payment.
(b) Employee shall give the Company written notice of
any claim by the IRS that, if successful, would require the payment by the
Company of a Gross-Up Payment. Employee shall give such notice, within ten (10)
business days after he is informed in writing of such claim, provided that
failure by Employee to provide such notice shall not result in a waiver or
forfeiture of any of Employee's rights under this Section except to the extent
of actual damages suffered by the Company as a result of such failure; provided
further that if such failure prevents the contest of such claim no payment shall
be required with respect to such claim by the Company under this Section 4.
Employee shall not pay such claim prior to the expiration of fifteen (15) days
following the date on which Employee gives such notice to the Company. If the
Company shall notify Employee in writing prior to the expiration of such fifteen
(15) day period that it desires to contest such claim, Employee shall (i) give
the Company any information reasonably requested by the Company relating to such
claim, (ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company, (iii) cooperate in good faith
with the Company's contest of such claim, and (iv) permit the
Exhibit 10(q)-3
<PAGE> 160
Company to control any proceedings to the extent relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest, penalties and attorneys' fees) incurred
in connection with such contest and shall be entitled to any recovery from the
IRS resulting from such contest.
5. Miscellaneous.
(a) Further Assurances. Each of the parties hereto
shall execute such documents and other papers and perform such further acts as
may be reasonably required or desirable to carry out the provisions hereof and
the transactions contemplated hereby.
(b) Entire Agreement. This Agreement constitutes and
is intended to constitute the entire agreement of the parties hereto concerning
the subject matter hereof. No covenants, agreements, representations or
warranties of any kind whatsoever have been made by any party hereto, except as
specifically set forth herein. This Agreement expressly supersedes all prior and
contemporaneous oral and all prior written discussions and negotiations between
the parties hereto with respect to the subject matter hereof.
(c) Modification. This Agreement and the other
agreements expressly referred to herein contain the entire agreement between the
parties hereto with respect to the subject matter hereof, and this Agreement may
not be amended, modified or terminated except by a written instrument signed by
all parties hereto.
(d) Successors and Assigns. The terms and provisions
of this Agreement shall be binding upon, and shall inure to the benefit of, the
parties hereto, their personal representatives, administrators, executors,
heirs, successors and assigns.
(e) Waiver. The failure of either party hereto at any
time to enforce performance by the other party of any provision of this
Agreement shall in no way affect such party's rights thereafter to enforce the
same, nor shall the waiver by either party of any breach of any provision hereof
be deemed to be a waiver by such party of any other breach of the same or any
other provision hereof.
(f) Notices. All notices, requests and other
communications hereunder shall be in writing and shall be delivered by courier
or other means of personal service (including by means of a nationally
recognized courier service or professional messenger service), or sent by telex
or telecopy or mailed first class, postage prepaid, by certified mail, return
receipt requested, in all cases, addressed to:
Exhibit 10(q)-4
<PAGE> 161
The Company:
Frederick's of Hollywood, Inc.
6608 Hollywood Boulevard
Hollywood, California 90028
Attention: Chief Executive Officer
With a copy to:
Loeb & Loeb LLP
1000 Wilshire Boulevard, Suite 1800
Los Angeles, California 90017
Attention: Kenneth R. Benbassat, Esq.
Employee:
George W. Townson
15370 Iron Canyon Road
Santa Clarita, California 91351
With a copy to:
Blum, Propper & Hardacre, Inc.
12100 Wilshire Boulevard, Suite 905
Los Angeles, California 90025
Attention: David W. Hardacre, Esq.
All notices, requests and other communications shall
be deemed given on the date of actual receipt or delivery as evidenced by
written receipt, acknowledgement or other evidence of actual receipt or delivery
to the address. In case of service by telecopy, a copy of such notice shall be
personally delivered or sent by registered or certified mail, in the manner set
forth above, within three (3) business days thereafter. Any party hereto may
from time to time by notice in writing served as set forth above designate a
different address or a different or additional Person to which all such notices
or communications thereafter are to be given.
(g) Time of Essence. Time is hereby declared to be of
the essence of this Agreement and of every part hereof.
(h) Attorneys' Fees. In the event of any action, suit
or other proceeding concerning the interpretation, validity, performance or
breach of this Agreement, the prevailing party shall recover all of such party's
reasonable attorneys' fees, expenses and costs, not limited to costs of suit,
incurred in each and every such
Exhibit 10(q)-5
<PAGE> 162
action, suit or other proceeding, including any and all appeals or petitions
relating thereto.
Exhibit 10(q)-6
<PAGE> 163
(i) Severance and Enforcement. All Sections, clauses
and covenants contained in this Agreement are severable, and in the event any of
them shall be held to be invalid by any court, this Agreement shall be
interpreted as if such invalid Sections, clauses or covenants were not contained
herein.
(j) Governing Law and Venue. This Agreement shall be
governed by and construed in accordance with the laws of the State of California
applicable to contracts made and to be performed wholly within such State, and
without regard to the conflicts of laws principles thereof. Any suit brought
hereon shall be brought in the state or federal courts sitting in Los Angeles,
California, the parties hereto hereby waiving any claim or defense that such
forum is not convenient or proper. Each party hereby agrees that any such court
shall have in personam jurisdiction over it and consents to service of process
in any manner authorized or permitted by California law.
(k) Gender. Where the context so requires, the use of
the masculine gender shall include the feminine and/or neuter genders and the
singular shall include the plural, and vice versa.
(l) Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same Agreement.
(m) Construction. The language in all parts of this
Agreement shall in all cases be construed simply, according to its fair meaning,
and not strictly for or against any of the parties hereto. Without limitation,
there shall be no presumption against any party on the ground that such party
was responsible for drafting this Agreement or any part thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"Company":
Frederick's of Hollywood, Inc.,
a Delaware corporation
By: /s/ George W. Townson
----------------------------------
Its: President
-------------------------------
"Employee":
/s/ George W. Townson
-------------------------------------
Exhibit 10(q)-7
<PAGE> 164
George W. Townson
Exhibit 10(q)-8
<PAGE> 165
EXHIBIT "A"
EMPLOYMENT AGREEMENT
Parties: FREDERICK'S OF HOLLYWOOD, INC., a California corporation ("Company"),
located at 6608 Hollywood Boulevard, Los Angeles, California 90028, and
GEORGE W. TOWNSON ("Employee").
Date: Executed as of July 30, 1987 ("Effective Date").
Recitals:
A. Employee is presently Chairman of the Board of Directors, President
and Chief Executive Officer of the Company. The Company and Employee desire to
enter into a long-term employment agreement.
Terms and Provisions:
1. Employment. Company hereby employs Employee and Employee hereby
accepts employment by Company on the terms and conditions hereinafter set forth.
2. Term of Employment. Subject to the provisions for termination
hereof, the term of this Agreement shall commence the date hereof and shall
terminate two (2) years from such date (the "Term"); provided, however, that the
commencement date of the two (2) year term of this Agreement after the date
hereof shall change each year on the first day of the Company's fiscal year to
such date unless the Board of Directors of Company (the "Board") takes
affirmative action not less than six months before termination not to renew the
Agreement.
Exhibit 10(q)-9
<PAGE> 166
3. Employee's Duties. Employee is to be Chairman of the Board of
Directors, President, Chief Executive Officer and General Manager of the
Company, and his duties shall include those which he has heretofore performed as
assigned to him by the Board including, but not limited to supervision over the
business and affairs of the Company and its subsidiaries and Employee shall
report and be responsible only to the Board, and shall have powers and authority
superior to those of any other officer or employees of the Company or any
subsidiary thereof. Employee shall devote his full time and effort thereto,
provided, however, that Employee shall not be required to perform functions
other than as described above.
4. Base Compensation.
(a) For all services rendered by Employee hereunder on behalf
of Company and its subsidiaries and divisions, both presently existing and
hereafter established or acquired, Company shall pay to Employee, and Employee
hereby accepts compensation of One Hundred Fifty Thousand Dollars ($150,000.00)
per annum, payable in the manner and at the times customary to the Company
("Base Compensation"). The amount of Base Compensation shall be reviewed by the
Board on an annual basis as of the close of each fiscal year of the Company, and
may be increased, but once increased shall not thereafter be decreased.
(b) The Board may, in its discretion, and in addition to any
incentive compensation plan adopted for the Company, award to Employee an annual
bonus. Such bonus shall be paid in such amount and based upon such criteria as
are from time to time adopted by the Board. Any such bonus will be payable at
the end of Company fiscal year, but the first such eligibility will be for that
fiscal period ending August 29, 1987.
5. Additional Benefits. In addition to the Compensation provided for in
Section 4. herein, Employee shall be entitled to receive:
(a) All employee fringe benefits in which Employee was entitled to
participate immediately prior to the Effective Date, subject to Company
eligibility
Exhibit 10(q)-10
<PAGE> 167
requirements for each of those benefits, including, without limitation, life
insurance, and medical plans, and such other employee benefits as may be
approved by the Board during the term of this Agreement. Nothing in this
paragraph shall be deemed to prohibit Company making any changes in any of the
plans, programs or benefits described in this Section 5., provided the change
similarly affects all executives similarly situated.
(b) Reimbursement for all reasonably incurred business related
expenses provided that Employee accounts therefore in accordance with Company
existing policies as modified from time to time.
Exhibit 10(q)-11
<PAGE> 168
6. Change of Control. The occurrence of any one or more of the
following shall constitute an "Event" for purposes of Sections 7.b. and 8.
hereof:
(a) An event that would be required to be reported in response
to Item 6(e) of Schedule 14A of Regulation 14a promulgated under the Securities
Exchange Act of 1934, as in effect on the date hereof, occurs; or
(b) Any person (other than any person who as of the date
hereof is the beneficial owner of ten percent (10%) or more of the Company's
voting securities) or group of persons acting in concert becomes the beneficial
owner of thirty percent (30%) or more of the Company's outstanding voting
securities or securities convertible into such amount of voting securities; or
(c) During any period of two (2) consecutive years following
the execution of this Agreement, individuals who at the beginning of such period
constitute the Board and any new director whose election by the Board or
nomination for election by Company stockholders was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority thereof; or
(d) The shareholders of Company approve a merger or
consolidation of the Company with any other corporation, or the shareholders of
Company approve a plan of complete liquidation of Company or an agreement for
the sale or disposition by Company of all or substantially all of Company's
assets, provided, however, that a merger or consolidation which would result in
the voting securities of Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least eighty percent (80%) of
the combined voting power of the voting securities of Company or such surviving
entity outstanding immediately after such merger or consolidation shall not be
deemed an Event.
Exhibit 10(q)-12
<PAGE> 169
(e) Termination. This Agreement may be terminated (a) by
Employee's death, Disability or Retirement, (b) by Employee for Good Reason, or
(c) by action of the Board for Cause.
Exhibit 10(q)-13
<PAGE> 170
Disability; Retirement. If, as a result of Employee's incapacity due to
physical or mental illness, Employee shall have been absent from the full-time
performance of his duties with Company for twelve (12) consecutive months, and
within thirty (30) days after written notice of termination is given Employee
shall not have returned to the full-time performance of his duties, Employee's
employment may be terminated for "Disability." Employee shall also have the
right to terminate this Agreement for Disability at any time, in the event that
a licensed physician determines that Employee's health would be jeopardized by
his continuing his employment hereunder. Termination by Company or Employee of
Employee's employment based on "Retirement" shall mean termination in accordance
with Company's retirement policy, including early retirement, generally
applicable to its salaried employees or in accordance with any retirement
arrangement established with Employee's consent with respect to him.
(f) Good Reason. Employee shall be entitled to terminate his
employment within one (1) year of an Event as defined at Section 6. for "Good
Reason." "Good Reason" shall mean the material breach of any of Company's
obligations under this Agreement, without Employee's express written consent, or
the occurrence of any of the following circumstances unless such breach or
circumstances are fully corrected prior to the Date of Termination specified in
the Notice of Termination pursuant to subsection 7.e. and d., respectively:
(1) An adverse alteration in the nature or status of
Employee's responsibilities from those in effect as of the date hereof;
(2) A reduction by Company in the Employee's annual
Base Compensation as in effect on the date hereof or as the same may be
increased from time to time;
(3) The relocation of Company's principal executive
offices to a location more than thirty (30) miles from the present location of
such offices in the Los Angeles Metropolitan Area, or Company requiring Employee
to be based anywhere other than Company's principal
Exhibit 10(q)-14
<PAGE> 171
executive offices except for required travel on Company business to an extent
substantially consistent with Employee's present business travel obligations;
(4) The failure by Company to continue in effect any
compensation plan in which Employee participates which is material to Employee's
total compensation, including but not limited to those plans specified in
Section 5.a. or any substitute plans adopted prior to an Event, unless an
equitable arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan, or the failure by Company to continue
Employee's participation therein (or in such substitute or alternative plan) on
a basis not materially less favorable, both in terms of the amount of benefits
provided and the level of Employee's participation relative to other
participants, as existed at the time of the Event; or
(5) Any purported termination of Employee's
employment which is not effected pursuant to a Notice of Termination (as defined
below) satisfying the requirements of subsection d. below.
(6) Employee's right to terminate his employment
pursuant to this subsection b. shall not be affected by his incapacity due to
physical or mental illness. Employee's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any circumstance constituting
Good Reason hereunder.
(g) For Cause. The Board may terminate Employee's employment
by action of the Board during the term of this Agreement For Cause, which shall
mean the commission of acts of willful malfeasance resulting in material damage
to the Company's business.
(h) Notice of Termination. Any purported termination of
Employee's employment by Company or by Employee shall be communicated by written
Notice of Termination to the other party hereto in accordance with Section 11.
hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall
Exhibit 10(q)-15
<PAGE> 172
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Employee's employment under the provisions so
indicated.
(i) Date of Termination, etc. "Date of Termination" shall mean
(i) if Employee's employment is terminated for Disability, thirty (30) days
after Notice of Termination is given (provided that Employee shall not have
returned to the full-time performance of his duties during such thirty (30) day
period), and (ii) if Employee's employment is terminated pursuant to subsection
b. or c. above or for any other reason (other than Disability) , the date
specified in the Notice of Termination; provided that if within fifteen (15)
days after any Notice of Termination is given, or if the Date of Termination is
later, prior to the Date of Termination the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, by a
binding arbitration award, or by a final judgment, or decree of a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided, further, that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Company will continue to
pay Employee his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Compensation) and
continue Employee as a participant in all compensation, benefit, and insurance
plans in which he was participating when the notice giving rise to the dispute
was given, until the dispute is finally resolved in accordance with this
subsection, but in no event past the expiration date of this Agreement. Amounts
paid under this subsection are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement.
Exhibit 10(q)-16
<PAGE> 173
7. Compensation Upon Occurrence of an Event or Termination.
(a) By Employee Upon Occurrence of an Event or for Good
Reason. Upon termination by Employee as a result of the occurrence of an Event
as described at Section 6. or for Good Reason as set forth at Section 7.b.,
Employee shall receive a lump sum amount (the "Termination Payment") in addition
to any other compensation received hereunder or otherwise, equal to the sum of
one year's Base Compensation as defined at Section 4. hereof and an amount equal
to the most recently received year's bonus received by Employee multiplied by
the number of complete and partial years remaining in the term of this
Agreement, plus one, and:
(1) All incentive compensation awards previously
granted but not yet paid, including, without limitation, awards granted under
the Company's Incentive Compensation Plan or any successor plan, plus an amount
equal to the amount of the highest incentive compensation award granted to
Employee for any year during
Exhibit 10(q)-17
<PAGE> 174
the two (2) calendar years immediately preceding the Date of Termination
multiplied by the number of partial and whole calendar years remaining in the
full unexpired term of this Agreement, plus
(2) If and to the extent Employee so elects, an
amount equal to (w) the number of shares of Common Stock of the Company subject
to unexercised options held by Employee at the Date of Termination, plus the
number of shares of Common Stock with respect to which stock appreciation
rights, if any, not granted in tandem with stock options ("SARs") are held by
Employee at the Date of Termination, multiplied by (x) the difference between
the average exercise price of such options and SARs and the per share fair
market value of the Common Stock, against surrender to the Company of all
options and SARs relating to the Common Stock held by Employee at the Date of
Termination and selected by him to be treated in accordance with this Section.
The per share fair market value of the Common Stock, for purposes of this
provision, shall be the higher of (y) the closing sale price of the Common Stock
as reported on the consolidated reporting system established pursuant to Section
11(a) of the Securities Exchange Act of 1934, as amended, on the Effective Date
or, if the Common Stock is not so reported, the closing sale price of the Common
Stock on the principal exchange market for the Common Stock on the Effective
Date or, if the principal market for the Common Stock is not an exchange, the
mean of closing high and low bid and asked prices for the Common Stock as
reported on the automated quotation system of the National Association of
Securities Dealers, Inc. or successor organization on the Effective Date, and
(z) the highest consideration per share paid to Company stockholders in
connection with the transactions which resulted in the Event constituting a
Change in Control as described at Section 6.
(3) For the full unexpired term of the Employment
Period, the Company shall continue Employee's participation in each employee
benefit plan (including, without limitation, life insurance and medical plans)
in which Employee was entitled to participate immediately prior to the Effective
Date as if he continued to be employed by the Company hereunder, and any
benefits arranged in
Exhibit 10(q)-18
<PAGE> 175
accordance with subsection iv. hereof. If the terms of any benefit plan of the
Company do not permit continued participation by Employee, the Company will
arrange to provide to Employee benefits substantially equivalent to, as
Exhibit 10(q)-19
<PAGE> 176
to time and amount, and no less favorable than, on an after-tax basis, the
benefits he would have been entitled to receive under such plan if he had been
continuously employed by the Company for the full unexpired term of the
Employment Period.
(4) Subsequent to the occurrence of an Event
constituting a Change in Control, as defined at Section 6., the Company shall
not eliminate, replace, or modify any plan referred to in subsection iii.
hereof, including, without limitation, the Pension Plan, so as to eliminate or
reduce any benefit which Employee would be entitled to receive under such plan
as in effect immediately prior to such Change in Control if he were continuously
employed by the Company for the full term of this Agreement, unless it arranges
to provide to Employee benefits substantially equivalent as to time and amount
and no less favorable on an after-tax basis than such benefits.
(b) By Company or Employee for Disability Upon Retirement and
by the Company for Good Cause. Upon termination of employment pursuant to the
provisions of Section 7.a. (Disability or Retirement) or 7.c. (For Good Cause),
Employee shall receive an amount (the "Separation Payment") in addition to any
other compensation received hereunder or otherwise, the following:
(1) All incentive compensation awards previously
granted but not yet paid, including, without limitation, awards granted under
the Company's Incentive Compensation Plan or any successor plan, plus
(2) The compensation provided at Section 8.a.(ii)
hereof with respect to stock options and SARs.
(c) Mitigation. Employee shall not be required to mitigate the
amount of any payment provided for in this Agreement or otherwise by seeking
other employment or otherwise, nor shall the amount of any payment or benefit
provided for in this Agreement or otherwise be reduced by any compensation
earned by Employee as the result of employment by another employer, by
retirement benefits, by
Exhibit 10(q)-20
<PAGE> 177
offset against any amount claimed to be owing by Employee to Company, or
otherwise.
8. Assignability. The obligations of Employee hereunder are personal
and may not be assigned or delegated by him or transferred in any manner
whatsoever, nor are such obligations subject to involuntary alienation,
assignment, or transfer. Company shall have the right to assign this Agreement
and to delegate all rights, duties, and obligations hereunder, either in whole
or in part, to any parent, affiliate, successor, or subsidiary organization or
company of Company, so long as the obligations of Company under this Agreement
remain the obligations of Company.
9. Termination Payment Limitation. Notwithstanding anything contained
herein to the contrary, any payment or benefit received or to be received by
Employee in connection with an Event or the termination of Employee's
employment, whether pursuant to this Agreement or otherwise ("Total Payment")
would not be deductible (in whole or in part) by the Company as a result of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), the
Total Payment shall be reduced until no portion of the Total Payment is not
deductible as a result of Section 280G of the Code. For purposes of its
limitation (i) no portion of the Total Payment the receipt of enjoyment of which
Employee shall have effectively waived in writing prior to the date of payment
of the Termination Payment shall be taken into account, (ii) no portion of the
Total Payment shall be taken into account which in the opinion of tax counsel
selected by Company's independent auditors and acceptable to Employee does not
constitute a "parachute payment" within the meaning of Section 280G of the Code,
(iii) the Termination Payment shall be reduced only to the extent necessary so
that the Total Payment (other than those referred to in clauses (i) or (ii)) in
their entirety constitute reasonable compensation for services actually rendered
within the meaning of Section 280G(b)(4) of the Code, in the opinion of the tax
counsel referred to in clause (ii); and (iv) the value of any non-cash benefit
or any deferred payment or benefit included in the Total Payment shall be
determined by Company's independent auditors in accordance with the principles
of Section
Exhibit 10(q)-21
<PAGE> 178
280G(d)(3) and (4) of the Code.
10. Notice. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
Company at its principal office address directed to the attention of the Board
with a copy to the Secretary of the Company, and to Employee at Employee's
residence address on the records of the Company or to such other address as
either party may have furnished to the other in writing in accordance herewith
except that notice of change of address shall be effective only upon receipt.
11. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
12. Successors; Binding Agreement.
(a) The Company will require any successor to all or
substantially all of the business and/or assets of the Company (whether direct
or indirect, by purchase, merger, consolidation, or otherwise) to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that Company would be required to perform it if no such succession had
taken place. Failure of Company to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle Employee to compensation from Company in the same amount and on
the same terms as he would be entitled to hereunder if he terminated his
employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, Company shall mean
Company as hereinbefore defined and any successor to its business and/or assets
as aforesaid which executes and delivers the Agreement provided for in this
Section 13, or
Exhibit 10(q)-22
<PAGE> 179
which otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law. This Agreement and all rights of Employee hereunder shall
inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees, and legatees. If Employee should die while any amounts would still
have been payable to him hereunder if he had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to Employee's devisee, legatee, or other designee, or,
if there be not such designee, to Employee's estate.
13. Miscellaneous. No provision of this Agreement may be modified,
waived, or discharged unless such waiver, modification, or discharge is agreed
to in a writing signed by Employee and such officer as may be specifically
authorized by the Board. No Waiver by either party hereto at any time of any
breach by the other party hereof of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. The validity,
interpretation, construction, and performance of this Agreement shall be
governed by the laws of the State of California. All references to sections of
the Securities Exchange Act of 1934 or the Internal Revenue Code of 1986 shall
be deemed also to refer to any successor provisions to such sections. Any
payments provided for hereunder shall be paid net of any applicable withholding
required under federal, state, or local law.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be
Exhibit 10(q)-23
<PAGE> 180
settled exclusively by arbitration in Los Angeles, California in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Employee shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement. The
Company shall reimburse Employee for all expenses, including, without
limitation, attorney's, accountant's, actuary's, and other experts' fees,
reasonably incurred by Employee at any time in connection with defending the
validity of, enforcing his rights under, or recovering amounts due or damages
under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and year first above written.
Company: FREDERICK'S OF HOLLYWOOD, INC.
By: /s/ Hugh V. Hunter
--------------------------------
Its Chairman of the
Compensation Committee
Employee: /s/ George W. Townson
--------------------------------
George W. Townson
Exhibit 10(q)-24
<PAGE> 181
EXHIBIT "B"
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
PARTIES: FREDERICK'S OF HOLLYWOOD, INC., a Delaware corporation ("Company"),
located at 6608 Hollywood Boulevard, Los Angeles, California 90028, and
GEORGE W. TOWNSON ("Employee").
DATE: Executed August 31, 1989
RECITALS:
A. Employee is presently Chairman of the Board of Directors, President
and Chief Executive Officer of the Company.
B. On July 30, 1987, the Company and Employee entered into an
Employment Agreement with an initial two year term, renewable annually on an
"evergreen" basis, unless the Board of Directors takes action not to renew not
less than six months before termination.
C. The parties wish to amend the July 30, 1987 agreement by execution
of this Amended and Restated Employment Agreement ("Agreement").
TERMS AND PROVISIONS:
D. Employment. Company hereby employs Employee and Employee hereby
accepts employment by Company on the terms and conditions hereinafter set forth.
E. Term of Employment. Subject to the provisions for termination
hereof, the term of this Agreement shall commence September 1, 1989 ("Effective
Date") and shall terminate three (3) years from such date (the "Term");
provided, however, that the commencement date of the three (3) year term of this
Agreement after the date hereof shall change each year on the first day of the
Company's fiscal year to such date unless the Board of
Exhibit 10(q)-25
<PAGE> 182
directors of Company ("the Board") takes affirmative action not less than six
months before termination not to renew the Agreement.
F. Employee's Duties. Employee is to be Chairman of the Board of
Directors, President, Chief Executive Officer and General Manager of the
Company, and his duties shall include those which he has heretofore performed as
assigned to him by the Board including, but not limited to supervision over the
business and affairs of the Company and its subsidiaries, and Employee shall
report and be responsible only to the Board, and have powers and authority
superior to those of any other officer or employees of the Company or any
subsidiary thereof. Employee shall devote his full time and effort thereto,
provided, however, that Employee shall not be required to perform functions
other than as described above.
G. Regular Compensation.
A. Base Compensation. For all services rendered by Employee
hereunder on behalf of Company and its subsidiaries and divisions, both
presently existing and hereafter established or acquired, Company shall pay to
Employee, and Employee hereby accepts compensation of Two Hundred Fifty Thousand
Dollars ($250,000) per annum, payable in the manner and at the times customary
to the Company ("Base Compensation"). The amount of Base Compensation shall be
reviewed by the Board on an annual basis as of the close of each fiscal year of
the Company, and may be increased, but once increased shall not thereafter be
decreased.
B. Annual Bonus. The Board shall, in addition to any other
compensation provided for herein, award to Employee an annual bonus (the
"Bonus") based upon the following criteria:
a. The Bonus shall be an amount equal to not less
than two percent (2%) of Company earnings before income taxes for any fiscal
year in which Company achieves earnings before income taxes of at least 5.5% of
sales, as reflected on its financial statements for the year then
Exhibit 10(q)-26
<PAGE> 183
ended. It is understood that no bonus shall be due Employee if earnings before
income taxes do not reach at least 5.5% of sales for the year then ended.
b. The Bonus amount shall be increased by an amount
equal to .25% of earnings for each additional .5% of earnings on sales before
income taxes in excess of earnings of 5.5% of sales.
Exhibit 10(q)-27
<PAGE> 184
By way of example and assuming sales of $80,000,000, the bonus shall be
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Bonus Amount
Earnings as a as a
Percentage of Percentage of Bonus
Earnings of Sales Earnings Dollars
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$4,400,000 5.5% 2.00% $ 88,000
- --------------------------------------------------------------------------------
$4,800,000 6.0% 2.25% 108,000
- --------------------------------------------------------------------------------
</TABLE>
c. For Bonus calculation purposes, the following
shall be assumed: 5.49% to 5.98% = 5.5%, 5.99% to 6.48% = 6.0%; 6.49% to 6.98% =
6.5% and so on.
d. Notwithstanding the foregoing, the Bonus payable
with respect to any one fiscal year of the Company shall not exceed an amount
equal to 5% of the Company's earnings before income taxes for such fiscal year.
e. The Bonus shall accrue and be due Employee with
respect to the end of Company's fiscal year and shall be payable not later than
January 10 of the next succeeding calendar year. Employee shall be eligible for
the Bonus with respect to the fiscal year ending September 2, 1989 and each
fiscal year ending thereafter.
C. Special Bonus. Without regard to the Bonus, if any, due
Employee under the provisions of Section 4b(v) with respect to the Company's
fiscal year ending September 2, 1989 and not as a part thereof, the Company
shall, on January 2, 1990, pay to Employee a One Hundred Thousand Dollar
($100,000,00) Special Bonus by way of extra compensation for services rendered
and results achieved during fiscal 1989.
D. Other Compensation Plans. Nothing contained in this Section
4 or otherwise in this Agreement shall limit to any degree Employee's right to
participate in any other compensation or incentive compensation plan of the
Company now or hereafter adopted with respect to which
Exhibit 10(q)-28
<PAGE> 185
Employee is otherwise eligible, including, but not limited to those described at
Section 5 hereof.
H. Additional Benefits.
In addition to the compensation provided for in Section 4
herein, Employee shall be entitled to receive:
Exhibit 10(q)-29
<PAGE> 186
A. All employee fringe benefits in which Employee was entitled
to participate immediately prior to the Effective Date, subject to Company
eligibility requirements for each of those benefits, including, without
limitation, life insurance, and medical plans, and such other employee benefits
as may be approved by the Board during the term of this Agreement. Nothing in
this paragraph shall be deemed to prohibit Company making any changes in any of
the plans, programs or benefits described in this Section 5, provided the change
similarly affects all executives similarly situated.
B. Reimbursement for all reasonably incurred business related
expenses provided that Employee accounts therefore in accordance with Company
existing policies as modified from time to time.
C. Employee shall, during the term hereof, be entitled to the
use of a new Mercedes Benz Model 420 SEL automobile or its equivalent
("Vehicle") to be replaced with a new Vehicle not less often than every three
(3) years with all expenses paid by Employer.
I. Change of Control. The occurrence of any one or more of the
following shall constitute an "Event" for purposes of Sections 7.b and 8 hereof:
A. An event that would be required to be reported in response
to Item 6(e) of Schedule 14A of Regulation 14a promulgated under the Securities
Exchange Act of 1934, as in effect on the date hereof, occurs; or
B. Any person (other than any person who as of the date hereof
is the beneficial owner of ten percent (10%) or more of the Company's voting
securities) or group of persons acting in concert becomes the beneficial owner
of thirty percent (30%) or more of the Company's outstanding voting securities
or securities convertible into such amount of voting securities; or
C. During any period of two (2) consecutive years following
the execution of this Agreement, individuals who at the beginning of such period
constitute the Board and
Exhibit 10(q)-30
<PAGE> 187
any new director whose election by the Board or nomination for election by
Company stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof; or
D. The shareholders of Company approve a merger or
consolidation of the Company with any other corporation, or the shareholders of
Company approve a plan of complete liquidation of Company or an agreement for
the sale or disposition by Company of all or substantially all of Company's
assets, provided, however, that a merger or consolidation which would result in
the voting securities of Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least eighty percent (80%) of
the combined voting power of the voting securities of Company or such surviving
entity outstanding immediately after such merger or consolidation shall not be
deemed an Event.
E. Notwithstanding the foregoing provisions of this Section 6,
the acquisition of any security of the Company by the trustee of any employee
stock ownership plan of the Company ("ESOP") qualified under Section 401(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), or any similar tax
qualified employee benefit plan now or hereafter authorized under the Code,
shall not be deemed an "Event" for purposes of Sections 7.b and 8 hereof.
J. Termination.
This Agreement may be terminated (a) by Employee's death,
Disability or Retirement, (b) by Employee for Good Reason, or (c) by action of
the Board for Cause.
A. Disability; Retirement. If, as a result of Employee's
incapacity due to physical or mental illness, Employee shall have been absent
from the full-time performance of his duties with Company for twelve (12)
consecutive months, and within thirty (30) days after
Exhibit 10(q)-31
<PAGE> 188
written notice of termination is given Employee shall not have returned to the
full-time performance of his duties, Employee's employment may be terminated for
"Disability". Employee shall also have the right to terminate this Agreement for
Disability at any time, in the event that a licensed physician determines that
Employee's health would be jeopardized by his continuing his employment
hereunder. Termination by Company or Employee of Employee's employment based on
"Retirement" shall mean termination in accordance with Company's retirement
policy, including early retirement, generally applicable to its salaried
employees or in accordance with any retirement arrangement established with
Employee's consent with respect to him.
Exhibit 10(q)-32
<PAGE> 189
B. Good Reason. Employee shall be entitled to terminate his
employment within one (1) year of an Event as defined at Section 6 or for "Good
Reason". "Good Reason" shall mean the material breach of any of Company's
obligations under this Agreement, without Employee's express written consent, or
the occurrence of any of the following circumstances unless such breach or
circumstances are fully corrected prior to the Date of Termination specified in
the Notice of Termination pursuant to subsection 7e and d, respectively:
a. An adverse alteration in the nature or status of
Employee's responsibilities from those in effect as of the date hereof;
b. Any attempted reduction by Company in the
Employee's Compensation as reflected at Section 4 hereof, and in effect on the
date hereof or as increased from time to time;
c. The relocation of Company's principal executive
offices to a location more than thirty (30) miles from the present location of
such offices in the Los Angeles Metropolitan Area, or Company requiring Employee
to be based anywhere other than Company's principal executive offices except for
required travel on company business to an extent substantially consistent with
Employee's present business travel obligations;
d. The failure by Company to continue in effect any
compensation plan in which Employee participates which is material to Employee's
total compensation, including but not limited to those plans specified in
Section 5a or any substitute plans adopted prior to an Event, unless an
equitable arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan, or the failure by Company to continue
Employee's participation therein (or in such substitute or alternative plan) on
a basis not materially less favorable, both in terms of the amount of benefits
provided and the level of Employee's participation relative to other
participants, as existed at the time of the Event; or
Exhibit 10(q)-33
<PAGE> 190
e. Any purported termination of Employee's employment
which is not effected pursuant to a Notice of Termination (as defined below)
satisfying the requirements of subsection d below.
Exhibit 10(q)-34
<PAGE> 191
f. Employee's right to terminate his employment
pursuant to this subsection b shall not be affected by his incapacity due to
physical or mental illness. Employee's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any circumstance constituting
Good Reason hereunder.
C. For Cause. The Board may terminate Employee's employment by
action of the Board during the term of this Agreement For Cause, which shall
mean the commission of acts of willful malfeasance resulting in material damage
to the Company's business.
D. Notice of Termination. Any purported termination of
Employee's employment by Company or by Employee shall be communicated by Written
Notice of Termination to the other party hereto in accordance with Section 11
hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Employee's employment under the
provisions so indicated.
E. Date of Termination, etc. "Date of Termination" shall mean
(i) if Employee's employment is terminated for Disability, thirty (30) days
after Notice of Termination is given (provided that Employee shall not have
returned to the full-time performance of his duties during such thirty (30) day
period), and (ii) if Employee's employment is terminated pursuant to subsection
b or c, above, or for any other reason (other than Disability), the date
specified in the Notice of Termination; provided that if within fifteen (15)
days after any Notice of Termination is given, or if the Date of Termination is
later, prior to the Date of Termination the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, by a
binding arbitration award, or by a final judgment, or decree of a court of
competent jurisdiction (which is not appealable or
Exhibit 10(q)-35
<PAGE> 192
with respect to which the time for appeal therefrom has expired and no appeal
has been perfected); provided, further, that the Date of Termination shall be
extended by a notice of dispute only if such notice is given in good faith and
the party giving such notice pursues the resolution of such dispute with
reasonable diligence. Notwithstanding the pendency of any such dispute, the
Company will continue to pay Employee his full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited to, Base
Compensation) and continue Employee as a participant in all compensation,
benefit, and insurance plans in which he was participating when the notice
giving rise to the dispute was given, until the dispute is finally resolved in
accordance with this subsection, but in no event past the expiration date of
this Agreement. Amounts paid under this subsection are in addition to all other
amounts due under this Agreement and shall not be offset against or reduce any
other amounts due under this Agreement.
K.Compensation Upon Occurrence of an Event or Termination.
A. By Employee Upon Occurrence of an Event or for Good Reason.
Upon termination by Employee as a result of the occurrence of an Event as
described at Section 6 or for Good Reason as set forth at Section 7b, Employee
shall receive a lump sum amount (the "Termination Payment") in addition to any
other compensation received hereunder or otherwise, equal to the sum of one
year's Base Compensation as defined at Section 4a hereof and an amount equal to
the most recently received Bonus as defined at Section 4b hereof received by
Employee multiplied by the number of complete and partial years remaining in the
term of this Agreement, plus one, and:
a. All incentive compensation awards previously
granted but not yet paid, including, without limitation, awards granted under
the Company's Incentive Compensation Plan or any successor plan, plus an amount
equal to the amount of the highest incentive compensation award granted to
Employee for any year during the three (3) calendar years immediately preceding
the Date of Termination multiplied by the number of partial and whole calendar
years
Exhibit 10(q)-36
<PAGE> 193
remaining in the full unexpired term of this Agreement, plus
b. If and to the extent Employee so elects, an amount
equal to (w) the number of shares of Common Stock of the Company subject to
unexercised options held by Employee at the Date of Termination, plus the number
of shares of Common Stock with respect to which stock appreciation rights, if
any, not granted in tandem with stock options ("SARs") are held by Employee at
the Date of Termination, multiplied by (x) the difference between the average
exercise price of such options and SARs and the per share fair market value of
the Common Stock, against surrender to the Company of all options and SARs
relating to the Common Stock held by Employee at the Date of Termination and
selected by him to be treated in accordance with this Section. The per share
fair market value of the Common Stock, for purposes of this provision, shall be
the higher of (y) the closing sale price of the Common Stock as reported on the
consolidated reporting system established pursuant to Section 11(a) of the
Securities Exchange Act of 1934, as amended, on the Effective Date or, if the
Common Stock is not so reported, the closing sale price of the Common Stock on
the principal exchange market for the Common Stock on the Effective Date or, if
the principal market for the Common Stock is not an exchange, the mean of
closing high and low bid and asked prices for the Common Stock as reported on
the automated quotation system of the National Association of Securities
Dealers, Inc. or successor organization on the Effective Date, and (z) the
highest consideration per share paid to Company stockholders in connection with
the transactions which resulted in the Event constituting a Change in Control as
described at Section 6.
c. For the full unexpired term of the Employment
Period, the Company shall continue Employee's participation in each employee
benefit plan (including, without limitation, life insurance and medical plans)
in which Employee was entitled to participate immediately prior to the Effective
Date as if he continued to be employed by the Company hereunder, and any
benefits arranged in accordance with subsection (iv) hereof. If the terms of any
benefit plan of the Company do not permit continued participation by Employee,
the Company will arrange to
Exhibit 10(q)-37
<PAGE> 194
provide to Employee benefits substantially equivalent to, as to time and amount,
and no less favorable than, on an aftertax basis, the benefits he would have
been entitled to receive under such plan if he had been continuously employed by
the Company for the full unexpired term of the Employment Period.
d. Subsequent to the occurrence of an Event
constituting a Change in Control, as defined at Section 6, the Company shall not
eliminate, replace, or modify any plan referred to in subsection (iii) hereof,
including, without limitation, the Pension Plan, so as to eliminate or reduce
any benefit which Employee would be entitled to receive under such plan as in
effect immediately prior to such Change in Control if he were continuously
employed by the Company for the full term of this Agreement, unless it arranges
to provide to Employee benefits substantially equivalent as to time and amount
and no less favorable on an after-tax basis than such benefits.
Exhibit 10(q)-38
<PAGE> 195
B. By Company or Employee for Disability Upon Retirement and
by the Company for Good Cause. Upon termination of employment pursuant to the
provisions of Section 7a (Disability or Retirement) or 7c (For Good Cause),
Employee shall receive an amount (the "Separation Payment") in addition to any
other compensation received hereunder or otherwise, the following:
a. All incentive compensation awards previously
granted but not yet paid, including, without limitation, awards granted under
the Company's Incentive Compensation Plan or any successor plan, plus
b. The compensation provided at Section 8a(ii) hereof
with respect to stock options and SARs.
C. Mitigation. Employee shall not be required to mitigate the
amount of any payment provided for in this Agreement or otherwise by seeking
other employment or otherwise, nor shall the amount of any payment or benefit
provided for in this Agreement or otherwise be reduced by any compensation
earned by Employee as the result of employment by another employer, by
retirement benefits, by offset against any amount claimed to be owing by
Employee to Company, or otherwise.
L. Assignability.
The obligations of the Employee hereunder are personal and may
not be assigned or delegated by him or transferred in any manner whatsoever, nor
are such obligations subject to involuntary alienation, assignment, or transfer,
Company shall have the right to assign this Agreement and to delegate all
rights, duties, and obligations hereunder, either in whole or in part, to any
parent, affiliate, successor, or subsidiary organization or company of Company,
so long as the obligations of Company under this Agreement remain the
obligations of Company.
M. Termination Payment Limitation. Notwith- standing anything contained
herein to the contrary, if any payment or benefit received or to be received by
Employee in
Exhibit 10(q)-39
<PAGE> 196
connection with an Event or the termination of Employee's employment, whether
pursuant to this Agreement or otherwise would as a result of the application of
Section 280G of the Code be deemed an "excess parachute payment" under Code
Section 280G(b)(i) Employee shall, nevertheless, receive such payment or benefit
in full and in the taxable year of Employee in which it would otherwise be
payable by Company hereunder, less the amount of additional withholding required
under Code Section 4999(c)(1) as a result of the imposition of the additional
tax on Employee imposed under Code Section 4999(a) as a result of such "excess
parachute payment" ("Excise Tax") and Company shall pay to Employee on or before
January 10 of Employee's next succeeding taxable year the amount of any such
Excise Tax and any other payment required so that he shall receive any payment
of benefit hereunder as net income without deduction, credit or exception and
without any reduction on account of any "Excise Tax" or other similar tax
withheld, or otherwise due with respect thereto either federal, or California
State which is imposed by way of a penalty or in addition to Employee's normal
taxes on earned income.
N. Notice.
For the purpose of this Agreement, notices and all other communications provided
for in the Agreement shall be in writing and shall be deemed to have been duly
given when delivered or mailed by United States registered mail, return receipt
requested, postage prepaid, addressed to the Company at its principal office
address directed to the attention of the Board with a copy to the Secretary of
the Company, and to Employee at Employee's residence address on the records of
the Company or to such other address as either party may have furnished to the
other in writing in accordance herewith except that notice of change of address
shall be effective only upon receipt.
O. Validity.
The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
Exhibit 10(q)-40
<PAGE> 197
P. Successors; Binding Agreement.
A. The Company will require any successor to all or
substantially all of the business and/or assets of the Company (whether direct
or indirect, by purchase, merger, consolidation, or otherwise) to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that Company would be required to perform it if no such succession had
taken place. Failure of Company to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle Employee to compensation from Company in the same amount and on
the same terms as he would be entitled to hereunder if he terminated his
employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, Company shall mean
Company as hereinbefore defined and any successor to its business and/or assets
as aforesaid which executes and delivers the Agreement provided for in this
Section 13 or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law.
B. This Agreement and all rights of Employee hereunder shall
inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees, and legatees. If Employee should die while any amounts would still
have been payable to him hereunder if he had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to Employee's devisee, legatee, or other designee, or,
if there be not such designee, to Employee's estate.
Q. Miscellaneous.
No provision of this Agreement may be modified, waived, or
discharged unless such waiver, modification, or discharge is agreed to in a
writing signed by Employee and such officer as may be specifically authorized by
the Board. No waiver by either party hereto at any time of any breach by the
other party hereof, or compliance with, any condition
Exhibit 10(q)-41
<PAGE> 198
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same or
at any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
The validity, interpretation, construction, and performance of this Agreement
shall be governed by the laws of the State of California. All references to
sections of the Securities Exchange Act of 1934 or the Internal Revenue Code of
1986 shall be deemed also to refer to any successor provisions to such sections.
Any payments provided for hereunder shall be paid net of any applicable
withholding required under federal, state, or local law.
R. Counterparts.
This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
Exhibit 10(q)-42
<PAGE> 199
S. Arbitration.
Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration in Los Angeles,
California in accordance with the rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction; provided, however, that Employee shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement. The Company shall reimburse Employee for all expenses,
including, without limitation, attorney's, accountant's, actuary's, and other
experts' fees, reasonably incurred by Employee at any time in connection with
defending the validity of, enforcing his rights under, or recovering amounts due
or damages under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and year first above written.
Company: FREDERICK'S OF HOLLYWOOD, INC.
By /s/ Hugh V. Hunter
-----------------------------------
Its Chairman of the
Compensation Committee
Employee: /s/ George W. Townson
-----------------------------------
GEORGE W. TOWNSON
Exhibit 10(q)-43
<PAGE> 200
EXHIBIT "C"
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
PARTIES: FREDERICK'S OF HOLLYWOOD, INC., a Delaware corporation ("Company"),
located at 6608 Hollywood Boulevard, Los Angeles, CA 90028, and GEORGE
W. TOWNSON ("Employee").
DATE: Effective as of August 30, 1992.
RECITALS:
T. Employee is presently Chairman of the Board of Directors, President
and Chief Executive Officer of the Company.
U. On July 30, 1987, the Company and Employee entered into an
employment agreement which was amended and restated August 31, 1989 (the
"Agreement").
V. The Agreement, as amended, provides for an initial three year term,
renewable annually on an "evergreen" basis unless terminated by action of the
Board not less than six months prior to termination. The Board has not taken
action to terminate.
W. The parties wish to change the term of the Agreement by this
amendment to provide for an initial term of five years also renewable on an
"evergreen" basis, as hereinabove described.
TERMS AND PROVISIONS: In consideration of the mutual promises contained herein
and other valuable consideration receipt of which is hereby acknowledged, the
parties agree to amend the Agreement as follows:
1. Paragraph 2 "Term of Employment" is deleted and the following
new paragraph is inserted in its place and stead:
2. Term of Employment. Subject to the
Exhibit 10(q)-44
<PAGE> 201
provisions for termination hereof, the term of this Agreement
shall commence August 30, 1992 ("Effective Date") and shall
terminate five (5) years from such date (the "Term");
provided, however, that the commencement date of the five (5)
year term of this Agreement after the date hereof shall change
each year on the first day of the Company's fiscal year to
such date unless the Board of Directors of the Company (the
"Board") takes affirmative action not less than six months
before termination not to renew the Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
COMPANY: FREDERICK'S OF HOLLYWOOD, INC.
By /s/ Hugh V. Hunter
-----------------------------------
Chairman of the
Compensation Committee
EMPLOYEE: /s/ George W. Townson
-----------------------------------
GEORGE W. TOWNSON
Exhibit 10(q)-45
<PAGE> 202
ANNEX H
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended November 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-8252
FREDERICK'S OF HOLLYWOOD, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-2666265
(State or other jurisdiction of (IRS Employers Identification No.)
incorporation or organization)
6608 HOLLYWOOD BOULEVARD
LOS ANGELES, CALIFORNIA 90028
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (213) 466-5151
Former name, former address and former fiscal year, if change since last report:
Not Applicable.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been
H-1
<PAGE> 203
subject to such filing requirements for the past 90 days. Yes X No .
----- -----
Indicate the number of shares outstanding for each of the registrant's classes
of Common stock, as of the latest practicable date. 2,955,309 shares of Class A
Capital Stock ($1 par value) and 5,903,118 shares of Class B Capital Stock ($1
par value) at December 27, 1996.
H-2
<PAGE> 204
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Title Page 1
Index 2
PART I -- FINANCIAL INFORMATION (Unaudited)
Consolidated condensed balance sheets-
November 30, 1996 and August 31, 1996 3
Consolidated condensed statements of income -
Three months ended November 30, 1996
and December 2, 1995 4
Consolidated condensed statements of cash flows -
Three months ended November 30, 1996 and
December 2, 1995 5
Notes to consolidated condensed financial
statements 6-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
PART II - OTHER INFORMATION 12
SIGNATURES 13
</TABLE>
H-3
<PAGE> 205
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED) (IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
November 30, August 31,
1996 1996
------------ ----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 8,235 $ 8,379
Short term investments 480 480
Accounts receivable 663 499
Income taxes receivable 852 945
Merchandise inventories 22,675 19,553
Deferred income taxes 843 843
Prepaid expenses 2,079 2,215
-------- --------
Total current assets 35,827 32,914
Property and equipment, net 18,432 18,033
Deferred catalog costs 2,161 1,723
Other assets 39 39
-------- --------
$ 56,459 $ 52,709
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,234 $ 10,298
Dividends payable 221 221
Current portion:
Capital lease obligations 215 212
ESOP loan guarantee 240 240
Accrued payroll 264 430
Accrued insurance 824 828
Other accrued expenses 237 238
-------- --------
Total current liabilities 16,235 12,467
Capital lease obligations 617 672
ESOP loan guarantee 240 240
Deferred rent 845 811
Deferred income taxes 2,994 2,994
Stockholders' equity:
Capital stock $1 par value 8,858 8,858
Additional paid-in capital 743 732
Reduction for ESOP loan guarantee (398) (456)
Treasury stock (6) (6)
Retained earnings 26,331 26,397
-------- --------
Total stockholders' equity 35,528 35,525
-------- --------
$ 56,459 $ 52,709
======== ========
</TABLE>
H-4
<PAGE> 206
See accompanying notes to the consolidated financial statements.
H-5
<PAGE> 207
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
November 30, December 2,
1996 1995
------------ -----------
<S> <C> <C>
Net sales $ 36,004 $36,642
Cost of goods sold,
buying and occupancy costs 21,045 21,072
-------- -------
Gross profit 14,959 15,570
Selling, general and
administrative expenses 14,693 15,442
-------- -------
Operating profit 266 128
Other income and (expense), net (4) 55
-------- -------
Earnings before income taxes 262 183
Income taxes 109 76
-------- -------
Net earnings $ 153 $ 107
======== =======
Earnings per share
Primary - Class A & Class B $ .02 $ .01
Fully diluted - Class A & Class B .02 .01
Weighted average shares outstanding
Primary - Class A and Class B 8,760 8,704
Fully diluted - Class A and Class B 8,764 8,704
Cash dividend per share - Class A & Class B $ .025 $ .025
</TABLE>
See accompanying notes to the consolidated financial statements.
H-6
<PAGE> 208
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
November 30, December 2,
1996 1995
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 153 $ 107
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,066 1,035
ESOP Compensation 71 53
Loss on sale of fixed assets 35 --
Changes in assets and liabilities:
Accounts receivable (164) (105)
Income tax receivable 93 50
Merchandise inventories (3,122) (3,955)
Prepaid expenses 136 60
Deferred catalog costs (438) (186)
Accounts payable and accrued expenses 3,765 5,663
Deferred rent 34 42
- ----------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,629 2,764
- ----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,500) (644)
- ----------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (1,500) (644)
- ----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (52) (49)
Payment of dividends (217) (217)
Payment of dividends on unearned ESOP shares (4) (4)
Purchase of treasury stock -- (7)
- ----------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (273) (277)
- ----------------------------------------------------------------------------
Net increase/decrease in cash and cash (144) 1,843
equivalents
Cash and cash equivalents at beginning of year 8,379 11,441
- ----------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,235 $ 13,284
- ----------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE TO CONSOLIDATED
STATEMENTS OF CASH FLOWS:
Cash flow information:
Interest paid $ 13 $ 16
Income taxes paid $ 16 $ 33
Non-cash investing and financing transactions:
Dividends declared $ 221 $ 221
</TABLE>
See accompanying notes to the financial statements.
H-7
<PAGE> 209
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED
November 30, 1996 and December 2, 1995
NOTE 1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial position as of
November 30, 1996 and August 31, 1996, and the results of operations and cash
flows for the three months ended November 30, 1996 and December 2, 1995.
These financial statements should be read in conjunction with the Company's 1996
annual report on Form 10-K.
NOTE 2. EARNINGS PER SHARE
Earnings per share calculations are based on the weighted average number of
shares of both Class A and Class B capital stock outstanding during each period
plus capital stock equivalents. Capital stock equivalents reflect the assumed
exercise of dilutive employees' stock options less the number of treasury shares
assumed to be purchased from the proceeds using the average market price or, for
fully diluted earnings per share, the greater of the average market price or
period end market price of the Company's common stock. ESOP shares that have not
been committed to be released are not considered outstanding (See Note 4).
<TABLE>
<CAPTION>
First Quarter First Quarter
1997 1996
------------- -------------
(In thousands
except per share data)
- -------------------------------------------------------------------------
<S> <C> <C>
Net Earnings $ 153 $ 107
----- -----
Earnings per common
and equivalent share
Primary $ .02 $ .01
Fully Diluted .02 .01
- -------------------------------------------------------------------------
Common and common
equivalent shares
(weighted average)
Primary 8,760 8,704
</TABLE>
H-8
<PAGE> 210
<TABLE>
<S> <C> <C>
Fully Diluted 8,764 8,704
- -------------------------------------------------------------------------
</TABLE>
H-9
<PAGE> 211
NOTE 3. EMPLOYEE STOCK OWNERSHIP PLAN
In accordance with Statement of Position 93-6 (Employers' Accounting for
Employee Stock Ownership Plans). The debt of an ESOP is recorded as debt of the
Company and the shares pledged as collateral are reported as unearned ESOP
shares in the statement of financial position. As shares are released from
collateral, the company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings-per-share
computations. Dividends on allocated ESOP shares are recorded as a reduction of
retained earnings; dividends on unallocated ESOP shares are recorded as
compensation expense. ESOP compensation expense was $71,000 for the three months
ended November 30, 1996. The ESOP shares as of November 30, 1996 were as
follows:
<TABLE>
<S> <C>
Allocated shares 241,495
Shares released for allocation 13,798
Unreleased shares 93,369
-------
Total ESOP shares 348,662
=======
Fair value of unreleased
shares as of November 30, 1996 $514,000
</TABLE>
NOTE 4. INCOME TAXES
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at August 31, 1996 are
presented below (000's Omitted):
<TABLE>
<S> <C>
Deferred tax assets:
Inventories, principally due to
additional cost inventories
for tax purposes pursuant to
the Tax Reform Act of 1986 $ 655
Accrued expense 138
Other 50
-------
Total deferred tax assets 843
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation (2,994)
-------
Net deferred tax liability $(2,151)
=======
</TABLE>
The Company has not provided for a valuation allowance against its deferred tax
assets as realization of such assets is considered to be more likely than not.
H-10
<PAGE> 212
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENT
During October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." The Company adopted this
Standard as of the beginning of fiscal 1997, electing the disclosure method of
accounting.
H-11
<PAGE> 213
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The most significant changes in the Company's balance sheet from August 31,
1996, the end of the preceding fiscal year to November 30, 1996 are as follows:
o Cash and cash equivalents decreased $144,000. The Company had working
capital of $19,592,000 and net cash provided by operating activities of
$1,629,000 for the three months ended November 30, 1996.
o Accounts receivable increased $164,000. The increase is primarily
attributable to increased credit card and list rental receivables.
o The decrease in income taxes receivable from $945,000 at August 31, 1996
to $852,000 at November 30, 1996 is due to the receivable being applied to
the Company's current year's taxes due.
o Inventory increased $3,122,000 from $19,553,000 to $22,675,000. Inventory
levels generally peak at the end of the first quarter in preparation for
the increased sales volume during the holiday season. The Company continues
to closely monitor its inventories and believes its inventory position is
substantially on plan relative to the anticipated sales.
o Prepaid expenses decreased $136,000. The decrease is mainly attributed to
the timing differences of invoice payments.
o Deferred catalog costs increased $438,000. The increase is attributed to
the timing differences of catalog mailings.
o Accounts payable rose $3,936,000. The major factor causing the increase
was the purchase of inventory for the holiday selling season.
o Accrued payroll decreased $166,000. This fluctuation (decrease) is
attributable to the difference in the length of time between the end of the
pay period (accrual of estimated payroll) and the payment of that payroll
as it relates to two different points in time; the end of the fiscal year
and the end of the first quarter.
H-12
<PAGE> 214
o The decrease in accrued insurance and other accrued expenses is caused by
the timing of the required accruals and the corresponding payments.
H-13
<PAGE> 215
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $19,592,000 and net cash provided by
operating activities of $1,629,000 for the three months ended November 30, 1996.
Design modifications and a general reduction in the size of our large format
stores will be made on stores to be remodeled during the remaining fiscal year
in order to increase their sales per square foot. We will be reducing the number
of new and remodeled stores planned for fiscal 1997. The Company has not at this
writing determined the extent of any reduction in its capital expenditures plan
for fiscal 1997.
Currently, the Company has certain tax returns under audit and any assessment
levied by the Internal Revenue Service would be covered by current operations or
it's cash on hand.
RESULTS OF OPERATIONS
The following table summarizes the Company's net sales and operating
profit(loss) by business segment for the three month period ending November 30,
1996 and December 2, 1995:
<TABLE>
<CAPTION>
Net Sales Operating Profit (Loss)
--------------------- -----------------------
1997 1996 1997 1996
------- ------- ------ ------
(In Thousands)
<S> <C> <C> <C> <C>
Retail Stores $18,664 18,314 (1,211) (980)
Mail Order 17,340 18,328 1,477 1,108
------- ------- ------ ------
Total $36,004 $36,642 266 128
======= ======= ====== ======
</TABLE>
The results of the interim period are not necessarily indicative of results for
the entire year.
Net sales decreased $638,000 (1.7%) for the three months ended November 30, 1996
as compared with the prior year. The factors contributing to the decrease in
each segment were as follows:
o Retail store sales volume increased $350,000 (1.9%) for the three months
ended November 30, 1996 as compared with the similar period last year.
Comparable store sales volume increased 0.8% for the three months ended
November 30, 1996. Comparable stores sales included nine stores converted
into a large-format store in the past year. Excluding these large-format
stores, comparable store sales increased 0.3%. There were two stores opened
and one closed during the quarter for a total of 207 stores in 39 states.
H-14
<PAGE> 216
o Mail Order sales volume decreased $988,000 (5.4%) for the three months
ended November 30, 1996 as compared with the similar period last year. The
decrease is attributable to a general softness in response to our Fall and
Christmas catalogs caused primarily by a 9.5% reduction in catalog page
count which reduced the number of merchandise offerings.
Gross profit amounted to $14,959,000 (41.5% of sales) for the three months ended
November 30, 1996. This compares with $15,570,000 (42.5% of sales) for the same
period in the prior year. The decrease in gross profit is mainly attributable to
the decreased sales volume and increased buying and occupancy costs.
Selling, general and administrative expenses decreased $749,000 (4.9%) to
$14,693,000 (40.8% of sales) from $15,442,000 (42.1% of sales) for the three
months ended November 30, 1996 as compared to the similar period last year. The
decrease is primarily attributable to decreased catalog costs.
The increased operating loss of $231,000 for Frederick's of Hollywood retail
stores is primarily attributable to increased rent expenses. The increase in
mail order operating profit was primarily due to lower catalog paper costs.
The decrease in other income of $59,000 reflects decreased interest income
($41,000) and a loss on disposal of fixed assets of $35,000.
The Company's business is seasonal in nature with the Holiday Season and
Valentine's Day (which both fall within the second quarter) historically
accounting for the largest percentage of sales volume. In the Company's three
most recent fiscal years, the second quarter accounted for approximately 30% of
the Company's annual sales.
Income taxes are provided on the basis of estimated federal and state taxes for
each year. The rate used for the first quarter of 1997 and 1996 was 41.5%.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
The preceding Management's Discussion and Analysis contains various forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act,
which represent the Company's expectations or beliefs concerning future events.
The Company cautions that these statements are further qualified by
H-15
<PAGE> 217
important factors that could cause actual results to differ materially from
those in the forward looking statements, including, the sufficiency of the
Company's working capital and cash flows from operating activities. In addition,
these statements are further qualified by important factors that could cause
actual results to differ materially from those in the forward looking
statements, including, without limitation, a decline in demand for the
merchandise offered by the Company, the ability of the Company to locate and
obtain acceptable store sites and lease terms or renew existing leases, the
ability of the company to gauge the fashion tastes of its customers and ability
to manage the Company's expansion, the effect of economic conditions, the effect
of severe weather or natural disasters and the effect of competitive pressures
from other retailers.
H-16
<PAGE> 218
PART II - OTHER INFORMATION
Items 1 - 5.
Items 1 - 5 are omitted because they are not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27. Financial Data Schedule
(b) No reports on Form 8-K were filed for this quarter.
H-17
<PAGE> 219
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FREDERICK'S OF HOLLYWOOD, INC.
(Registrant)
Date: January 7, 1997 By: /s/ George W. Townson
-------------------------- --------------------------------
George W. Townson
Chairman of the Board, President
and Chief Executive Officer
Date: January 7, 1997 By: /s/ John B. Hatfield
-------------------------- --------------------------------
John B. Hatfield
Executive Vice President,
Secretary, Treasurer,
Chief Financial, Accounting
and Administrative Officer
H-18
<PAGE> 220
ANNEX I
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 1, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-8252
FREDERICK'S OF HOLLYWOOD, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-2666265
(State or other jurisdiction of (IRS Employers Identification No.)
incorporation or organization)
6608 Hollywood Boulevard
Los Angeles, California 90028
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (213) 466-5151
Former name, former address and former fiscal year, if change since last report:
Not Applicable.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
I-1
<PAGE> 221
Indicate the number of shares outstanding for each of the registrant's classes
of Common stock, as of the latest practicable date. 2,955,309 shares of Class A
Capital Stock ($1 par value) and 5,903,118 shares of Class B Capital Stock ($1
par value) at March 20, 1997.
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Title Page 1
Index 2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated condensed balance sheets-
March 1, 1997 and August 31, 1996 3
Consolidated condensed statements of
income - Three and six months ended
March 1, 1997 and March 2, 1996 4
Consolidated condensed statements of
cash flows - Six months ended
March 1, 1997 and March 2, 1996 5
Notes to consolidated condensed
financial statements 6-8
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 9-12
PART II - OTHER INFORMATION 13
SIGNATURES 14
</TABLE>
I-2
<PAGE> 222
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED) (IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
March 1, 1997 August 31, 1996
------------- ---------------
<S> <C> <C>
Current assets:
Cash and equivalents $ 13,452 $ 8,379
Short term investments 480 480
Accounts receivable 595 499
Income taxes receivable -- 945
Merchandise inventories 18,283 19,553
Deferred income taxes 843 843
Prepaid expenses 2,116 2,215
-------- --------
Total current assets 35,769 32,914
======== ========
Property and equipment, net 18,394 18,033
Deferred catalog costs 1,339 1,723
Other assets 39 39
-------- --------
$ 55,541 $ 52,709
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,363 $ 10,298
Dividends payable 221 221
Current portion:
Capital lease obligations 218 212
ESOP loan guarantee 240 240
Accrued payroll 407 430
Accrued insurance 843 828
Income taxes payable 1,332 --
Other accrued expenses 204 238
-------- --------
Total current liabilities 12,828 12,467
======== ========
Capital lease obligations 562 672
ESOP loan guarantee 240 240
Deferred rent 904 811
Deferred income taxes 2,994 2,994
Stockholders' equity:
Capital stock $1 par value 8,858 8,858
Additional paid-in capital 746 732
Reduction for ESOP loan guarantee (340) (456)
Treasury stock (20) (6)
Retained earnings 28,769 26,397
-------- --------
Total stockholders' equity 38,013 35,525
-------- --------
$ 55,541 $ 52,709
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements
I-3
<PAGE> 223
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------- ------ ------ ------
March 1, March 2, March 1, March 2,
1997 1996 1997 1997
------- ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $46,358 44,565 82,362 81,207
Cost of goods sold,
buying and occupancy costs 26,157 25,861 47,202 46,933
------- ------ ------ ------
Gross profit 20,201 18,704 35,160 34,274
Selling, general and
administrative expenses 15,578 16,654 30,271 32,096
------- ------ ------ ------
Operating profit 4,623 2,050 4,889 2,178
Other income and
(expense), net 10 75 6 130
------- ------ ------ ------
Earnings before income taxes 4,633 2,125 4,895 2,308
Income taxes 1,923 882 2,032 958
------- ------ ------ ------
Net earnings $ 2,710 1,243 2,863 1,350
======= ====== ====== ======
Earnings per share
Primary -
Class A & Class B $ .31 .14 .33 .15
Fully diluted -
Class A & Class B .31 .14 .33 .15
Weighted average shares
outstanding
Primary - Class A & Class B $ 8,760 8,715 8,759 8,717
Fully diluted -
Class A & Class B 8,764 8,715 8,762 8,717
Cash dividend per share -
Class A & Class B $ .025 .025 .05 .05
======= ====== ====== ======
</TABLE>
I-4
<PAGE> 224
See accompanying notes to the consolidated financial statements.
I-5
<PAGE> 225
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
March 1, March 2,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,863 $ 1,350
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,138 2,063
ESOP compensation 136 120
Loss on sale of fixed assets 61 1
Changes in assets and liabilities
Accounts receivable (96) 134
Income tax receivable 945 213
Merchandise inventories 1,270 2,238
Prepaid expenses 99 417
Deferred catalog costs 384 (33)
Other assets -- --
Accounts payable and accrued expenses (977) (3,285)
Deferred rent 93 78
Deferred income taxes -- --
Income tax payable 1,332 413
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,248 3,709
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets -- 5
Capital expenditures (2,560) (1,429)
NET CASH USED FOR INVESTING ACTIVITIES (2,560) (1,424)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (104) (98)
Payment of dividends (436) (435)
Payment of dividends on unearned ESOP shares (7) (8)
Purchase of treasury stock (68) (7)
NET CASH USED FOR FINANCING ACTIVITIES (615) (548)
Net increase in cash and cash equivalents 5,073 1,737
Cash and cash equivalents at beginning
of year 8,379 11,441
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 13,452 $ 13,178
Supplemental disclosures to consolidated
statements of cash flows:
Interest paid $ 24 $ 35
Income taxes paid $ 160 $ 339
Non-cash investing and financing transactions:
Dividends declared $ 221 $ 221
</TABLE>
I-6
<PAGE> 226
See accompanying notes to the consolidated financial statements.
I-7
<PAGE> 227
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
TWENTY-SIX WEEKS ENDED
March 1, 1997 and March 2, 1996
NOTE 1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial position as of
March 1, 1997 and March 2, 1996, and the results of operations and cash flows
for the six months ended March 1, 1997 and March 2, 1996.
These financial statements should be read in conjunction with the Company's 1996
annual report on Form 10-K405.
NOTE 2. EARNINGS PER SHARE
Earnings per share calculations are based on the weighted average number of
shares of both Class A and Class B capital stock outstanding during each period
plus capital stock equivalents. Capital stock equivalents reflect the assumed
exercise of dilutive employees' stock options less the number of treasury shares
assumed to be purchased from the proceeds using the average market price or, for
fully diluted earnings per share, the greater of the average market price or
period end market price of the Company's common stock. ESOP shares that have not
been committed to be released are not considered outstanding (See Note 4).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ----------------------
(In thousands MARCH 1, MARCH 2, MARCH 1, MARCH 2,
except per share data) 1997 1996 1997 1996
------- ----- ----- -----
<S> <C> <C> <C> <C>
Net earnings $ 2,710 1,243 2,863 1,350
Earnings per common
and equivalent share
Primary .31 .14 .32 .15
Fully diluted .31 .14 .32 .15
</TABLE>
I-8
<PAGE> 228
<TABLE>
<S> <C> <C> <C> <C>
Weighted average
Primary 8,858 8,858 8,858 8,858
Fully diluted 8,858 8,858 8,858 8,858
Dilutive effect of
stock options
Primary 1 -- -- 2
Fully diluted 5 -- 3 2
Unallocated ESOP shares (79) (136) (79) (136)
Treasury stock (20) (7) (20) (7)
Weighted average used to
calculate earnings per share
Primary 8,760 8,715 8,759 8,717
Fully diluted 8,764 8,715 8,762 8,717
</TABLE>
NOTE 3. EMPLOYEE STOCK OWNERSHIP PLAN
Effective September 4, 1994, the Company adopted Statement of Position (SOP)
93-6 (Employers' Accounting for Employee Stock Ownership Plans). Under SOP 93-6
the debt of the ESOP is recorded as debt of the Company and the shares pledged
as collateral are reported as unearned ESOP shares in the statement of financial
position. As shares are released from collateral, the company reports
compensation expense equal to the current market price of the shares, and the
shares become outstanding for earnings-per-share computations. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are recorded as compensation expense. ESOP
compensation expense was $64,000 and $136,000 respectively for the three and six
months ended March 1, 1997. The ESOP shares as of March 1, 1997 were as follows:
<TABLE>
<S> <C>
Allocated shares 239,731
Shares released for allocation 13,798
Unreleased shares 79,569
-------
Total ESOP shares 333,098
=======
</TABLE>
I-9
<PAGE> 229
<TABLE>
<S> <C>
Fair value of unreleased
shares as of February 28, 1997 $318,276
</TABLE>
NOTE 4. INCOME TAXES
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at August 31, 1996 are
presented below (000's Omitted):
<TABLE>
<S> <C>
Deferred tax assets:
Inventories, principally due to
additional cost inventories
for tax purposes pursuant to
the Tax Reform Act of 1986 $ 655
Accrued expense 138
Other 50
-------
Total deferred tax assets 843
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation (2,994)
-------
Net deferred tax liability $(2,151)
=======
</TABLE>
The Company has not provided for a valuation allowance against its deferred tax
assets as realization of such assets is considered to be more likely than not.
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENT
During October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." The Company adopted this
Standard as of the beginning of fiscal 1997, electing the disclosure method of
accounting.
I-10
<PAGE> 230
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The most significant changes in the Company's balance sheet from August 31,
1996, the end of the preceding fiscal year, to March 1, 1997 are as follows:
o Accounts receivable increased $96,000. The increase is primarily due to
increased list rental receivables.
o The decrease in income taxes receivable from $945,000 at August 31, 1996 to
zero at March 1, 1997 is caused by the receivable being applied to the
Company's current year's taxes due.
o Inventory decreased $1,270,000. Inventory levels generally decrease after
the holiday and Valentine's Day selling periods. The Company continues to
closely monitor its inventories and believes its inventory position is
substantially on plan relative to the anticipated sales.
o Prepaid expenses decreased $99,000. The decrease is mainly attributed to
the timing differences of invoice payments.
o Deferred catalog costs decreased $384,000. The decrease is attributable to
the timing differences of catalog mailings.
o The accounts payable decrease of $935,000 is mainly attributable to the
offsetting factors of increased customer deposits ($750,000), increased
payroll and sales taxes payable ($443,000), and decreased accounts payables
($2,444,000). These fluctuations are caused by the timing of the required
accounting entries as they relate to two different points in time; the end
of the fiscal year, and the end of the second quarter; as well as the
difference caused by the timing of the required accruals and the
corresponding payments.
o Accrued payroll decreased $23,000. This fluctuation (decrease) is
attributable to the difference in the length of time between the end of the
pay period (accrual of
I-11
<PAGE> 231
estimated payroll) and the payment of that payroll as it relates to two
different points in time; the end of the fiscal year and the end of the
second quarter.
o The decrease in accrued insurance and other accrued expenses was $19,000.
The difference is caused by the timing of the required accruals and the
corresponding payments.
LIQUIDITY AND CAPITAL RESOURCES
o Cash and cash equivalents increased $5,073,000. The Company had working
capital of $22,941,000 at March 1, 1997 and net cash provided by operating
activities of $8,248,000 for the six months ended March 1, 1997.
Design modifications and a general reduction in the size of our large
format stores have been made on stores to be remodeled during the remaining
fiscal year in order to increase their sales per square foot. We have
reduced the number of new and remodeled stores planned for fiscal 1997,
which has resulted in a capital expenditure reduction of $5,000,000 from
our original $10,000,000 plan.
Currently, the Company has certain tax returns under audit and any
assessment levied by the Internal Revenue Service would be covered by
current operations or its cash on hand.
RESULTS OF OPERATIONS
The following table summarizes the Company's net sales and operating profit
(loss) by business segment for the three and six month periods ending March 1,
1997 and March 2, 1996:
<TABLE>
<CAPTION>
Net Sales
---------
Three Months Six Months
------------------------------------------
(In Thousands)
1997 1996 1997 1996
-----------------------------------------------------
<S> <C> <C> <C> <C>
Retail Stores $28,156 $24,771 $46,820 $43,085
Mail Order 18,202 19,794 35,542 38,122
-----------------------------------------------------
Total $46,358 $44,565 $82,362 $81,207
=====================================================
</TABLE>
********************************************************************************
I-12
<PAGE> 232
<TABLE>
<CAPTION>
Operating Profit (loss)
-----------------------
1997 1996 1997 1996
----------------------------------------------------
<S> <C> <C> <C> <C>
Retail Stores $4,340 $2,395 $3,129 $1,415
Mail Order 283 (345) 1,760 763
----------------------------------------------------
Total $4,623 $2,050 $4,889 $2,178
====================================================
</TABLE>
The results of the interim period are not necessarily indicative of results for
the entire year.
Net sales increased $1,793,000 (4.0%) for the three months and $1,155,000 (1.4%)
for the six months ended March 1, 1997 as compared with the prior year. The
factors contributing to the increase in each segment were as follows:
o Retail store sales volume increased $3,385,000 (13.7%) for the three months
and $3,735,000 (8.7%) for the six months ended March 1, 1997 as compared
with the similar periods last year. Comparable store sales volume increased
10.6% for the three months and 6.1% for the six months ended March 1, 1997.
One store was opened and four were closed during the quarter for a total of
204 stores in 39 states.
The increase in retail sales is primarily attributable to the Valentine's
Day selling period. This improvement is attributable to planned increased
inventory levels, as well as an improved selection of merchandise during
the quarter.
The stores continue to show positive comparable store increases, although
not at the same level as in the second quarter.
o Mail Order sales volume decreased $1,592,000 (8.0%) and $2,580,000 (6.8%)
for the three and six months ended March 1, 1997 as compared with the
similar periods last year. For the three months the decrease is
attributable to 1) a general softness in response to our December sale
catalogs caused by a 10% reduction in the number of catalog offerings, and
2) the elimination of a swimwear catalog which was tested during this
period last year.
Contributing to the overall decrease for the six-month period was the 9.5%
page count reduction in our Fall and Christmas catalogs.
I-13
<PAGE> 233
We are encouraged by the response to our Spring Catalog based on the
increased merchandise offering.
Gross profit amounted to $20,201,000 (43.6% of sales) and $35,160,000 (42.7% of
sales) for the three and six months ended March 1, 1997. This compared with
$18,704,000 (42.0% of sales) and $34,274,000 (42.2% of sales) for the same
periods in the prior year. The increase in gross profit percentage is mainly
attributable to reduced markdowns in retail stores. The increase in gross profit
dollars for both the three and six months is attributable to increased sales.
Selling, general and administrative expenses decreased $1,076,000 (6.5%) and
$1,825,000 (5.7%) for the three and six months ended March 1, 1997. For both the
three and six month periods the decrease in selling, general, and administrative
expense is attributable mainly to our mail order subsidiary. The decrease was
due to the nonrecurrence of the costs associated with the eliminated swimwear
catalog plus reduced catalog advertising.
The decrease in other income (expense) for the three months was caused by
reduced interest income and increased loss on disposal of fixed assets.
The Company's business is seasonal in nature with the Holiday Season and
Valentine's Day (which both fall within the second quarter) historically
accounting for the largest percentage of sales volume. In the Company's three
most recent fiscal years, the second quarter accounted for approximately 30% of
the Company's annual sales.
Income taxes are provided on the basis of estimated federal and state taxes for
each year. The rate used for the six months ended March 1, 1997 and March 2,
1996 was 41.5%.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
The preceding Management's Discussion and Analysis contains various forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act,
which
I-14
<PAGE> 234
represent the Company's expectations or beliefs concerning future events. The
Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward looking statements, including, the sufficiency of the Company's working
capital and cash flows from operating activities. In addition, these statements
are further qualified by important factors that could cause actual results to
differ materially from those in the forward looking statements, including,
without limitation, a decline in demand for the merchandise offered by the
Company, the ability of the Company to locate and obtain acceptable store sites
and lease terms or renew existing leases, the ability of the company to gauge
the fashion tastes of its customers and ability to manage the Company's
expansion, the effect of economic conditions, the effect of severe weather or
natural disasters and the effect of competitive pressures from other retailers.
I-15
<PAGE> 235
PART II - OTHER INFORMATION
Items 1 - 3
Items 1 - 3 are omitted because they are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on January 30, 1997.
At the annual meeting the following Directors were elected for fiscal 1997:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
--------- --------------
<S> <C> <C>
George W. Townson 2,806,916 32,354
William J. Barrett 2,811,954 27,316
Morton R. Field 2,811,990 27,280
Richard O. Starbird 2,810,637 28,633
Hugh V. Hunter 2,811,064 28,206
Sylvan Lefcoe 2,810,357 28,913
Merle A. Johnston 2,811,870 27,400
</TABLE>
At the Annual Meeting, the shareholders ratified the Company's selection of KPMG
Peat Marwick as the independent certified public accountant for fiscal 1997 by
an affirmative vote of 2,772,879 with 5,990 shares voting against and 60,400
shares abstaining.
Only shares of Class A Capital Stock are entitled to vote. Class B Capital Stock
does not have voting rights.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits 27 - Financial Data Schedule (EDGAR filing only).
(b) No reports on Form 8-K were filed for this quarter.
I-16
<PAGE> 236
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FREDERICK'S OF HOLLYWOOD, INC.
(Registrant)
Date: April 10, 1997 By:/s/ George W. Townson
------------------------ --------------------------------
George W. Townson
Chairman of the Board, President
and Chief Executive Officer
Date: April 10, 1997 By:/s/ John B. Hatfield
-------------------------- --------------------------------
John B. Hatfield
Executive Vice President,
Secretary, Treasurer,
Chief Financial, Accounting
and Administrative Officer
I-17
<PAGE> 237
ANNEX J
[FREDERICK'S LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
JANUARY 30, 1997
The Annual Meeting of Shareholders of Frederick's of Hollywood, Inc., will
be held at the Holiday Inn, 1755 North Highland Avenue, Los Angeles, California
90028 on Thursday, January 30, 1997 at 10:00 A.M. for the following purposes:
1. To elect a Board of Directors, seven in number to serve until the
next Annual Meeting of Shareholders and until their respective successors
shall be elected and qualified;
2. To consider and ratify the selection of KPMG Peat Marwick as
independent certified public accountants for fiscal year 1997; and
3. To consider and to transact such other business as may properly be
brought before the meeting or any adjournment or adjournments thereof.
The foregoing proposals are more fully described in the accompanying Proxy
Statement to which your attention is invited.
Only shareholders of record at the close of business on December 6, 1996
will be entitled to Notice of the Meeting and to vote at it or any adjournments
thereof.
Shareholders who do not expect to attend the Annual Meeting and who wish
their stock to be voted, are urged to fill in and execute the enclosed Proxy and
mail it promptly in the enclosed envelope.
/s/ JOHN B. HATFIELD
--------------------------------------
John B. Hatfield
Secretary
Los Angeles, California
December 6, 1996
Requests for additional copies of the Proxy Material should be addressed
to:
John B. Hatfield
Executive Vice President, Secretary, Chief Financial and
Administrative Officer
Frederick's of Hollywood, Inc.
6608 Hollywood Boulevard
Los Angeles, California 90028
<PAGE> 238
[FREDERICK'S LOGO]
------------------------
PROXY STATEMENT
------------------------
The following information is provided in connection with the solicitation
of the enclosed proxy, by and on behalf of the Board of Directors of Frederick's
of Hollywood, Inc. (hereinafter referred to as the "Company") for use at the
Annual Meeting of Shareholders of the Company to be held at the Holiday Inn,
1755 North Highland Avenue, Los Angeles, California on January 30, 1997, and at
any adjournment or adjournments thereof. The Company's principal executive
offices are located at 6608 Hollywood Boulevard, Los Angeles, California 90028.
Shares represented by duly executed proxies in the accompanying form
received by the Board of Directors prior to the meeting will be voted at the
meeting. A shareholder executing and delivering the enclosed proxy may revoke
such proxy at any time prior to exercise of the authority thereby given. If a
shareholder specifies a choice with respect to any matter to be voted upon by
means of the ballot provided in the accompanying form of proxy, the shares will
be voted in accordance with the specification so made.
The expense of this solicitation of proxies will be borne by the Company.
The principal solicitation of proxies is being made by mail, however, additional
solicitation may be made by telephone, telegraph or personal visits by
directors, officers and regular employees of the Company and its subsidiaries.
This proxy statement and the accompanying form of proxy are being mailed to
shareholders commencing on or about December 24, 1996.
VOTING SECURITIES
The holders of record of the Company's Class A Capital Stock at the close
of business on December 6, 1996 are entitled to vote on matters to come before
the meeting. On that date, 2,955,309 shares of Class A Capital Stock ("Class A
Stock") were issued and outstanding. In addition, at December 6, 1996, there
were approximately 5,903,118 shares of Class B Capital Stock ("Class B Stock")
outstanding, none of which will have voting rights at the meeting. Each Class A
Stock shareholder of record is entitled to one vote. Every Class A Stock
shareholder entitled to vote has the right in voting, to elect directors, to
cumulate his votes and give one candidate a number of votes equal to the number
of directors to be elected multiplied by the number of votes to which his shares
are entitled, or to distribute his votes on the same principle among as many
candidates as he shall see fit. Assuming a quorum is present, with respect to
the election of directors, the seven nominees receiving the greatest number of
votes cast by the holders of the Class A Stock will be elected directors.
As a condition to exercising the right to cumulative voting, the Class A
Stock shareholder must give prior notice at the meeting of his intent to
cumulate his votes and the candidate for whom he proposes to cast his vote must
have been placed in nomination prior to the vote.
J-1
<PAGE> 239
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table contains information with respect to each person known
to the Company to be the beneficial owner of more than five percent of the
Company's outstanding shares of Capital Stock and the total number of shares
beneficially owned by all directors and officers as a group as of December 6,
1996.
<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
14724 Ventura Boulevard
Suite 803
Sherman Oaks, CA 91409
Frederick N. Mellinger Trust(1)..... 820,193 1,579,386 26.1 25.3
14724 Ventura Boulevard
Suite 803
Sherman Oaks, CA 91409
Mr. Hugh V. Hunter(1)............... 1,315,591 3,223,768 41.9 51.6
14724 Ventura Boulevard
Suite 803
Sherman Oaks, CA 91409
Company ESOP(2)..................... 348,662 -0- 11.1 -0-
All Directors and Officers as a
Group (11 persons)(1)............. 1,583,770(3) 3,744,303(4) 50.5 59.9
</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 ("Mellinger Family
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
Mellinger Family Trusts.
(2) Each ESOP participant is entitled to vote (1) shares of stock allocated to
participants account and, (2) a portion of the unallocated stock equal to
the percentage of allocated stock participant is entitled to vote.
(3) Includes 116,961 shares, of which 102,086 are attributable to George W.
Townson, which officer having the right to acquire under immediately
exercisable options.
(4) Includes 208,914 shares, of which 179,164 are attributable to George W.
Townson, which officer having the right to acquire under immediately
exercisable options.
J-2
<PAGE> 240
ELECTION OF DIRECTORS
Shares of Class A Stock represented by the enclosed proxy are intended to
be voted, unless authority is withheld, for the election of seven nominees named
below as directors of the Company to serve until the next annual meeting of
shareholders and until their respective successors shall be elected and
qualified. The following table is furnished with respect to each person
nominated for election as a director and includes for each nominee, the
beneficial ownership of the Company's Capital Stock as of December 6, 1996.
<TABLE>
<CAPTION>
SHARES OF CAPITAL STOCK PERCENT
BENEFICIALLY OWNED(3) OUTSTANDING**
----------------------- -----------------
DIRECTOR CLASS A CLASS B CLASS A CLASS B
NAME PRINCIPAL OCCUPATION(1) AGE SINCE STOCK STOCK STOCK STOCK
- ------------------------ ------------------------ --- -------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
George W. Townson Chairman of the Board, 55 1985 116,961(4) 208,914(5) 3.7 3.3
President and Chief
Executive Officer of the
Company)
Richard O. Starbird(2) University Professor, 72 1977 54,369 108,738 1.7 1.7
Western Washington
University
Hugh V. Hunter(2) Certified Public 78 1972 1,315,591(6) 3,223,768(6) 41.9 51.6
Accountant; President,
Hugh V. Hunter
Accountancy Company
William J. Barrett(2) Senior Vice President, 57 1983 7,256 16,217 * *
Janney Montgomery Scott
Inc., Investment Bankers
Morton R. Field(2) Counsel to the law firm 73 1969 546 1,092 * *
of Loeb and Loeb
Sylvan Lefcoe Consultant, National 91 1984 168 336 * *
Aerosol Products Co.
Merle A. Johnston Sales and Marketing 64 1994 -- -- * *
Consultant, Conky
Johnston Inc.
</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) The principal occupation of each of the directors for the past five years is
stated in the foregoing table.
(2) Hugh V. Hunter is a director of K2 Inc. William J. Barrett is a director of
Supreme Industries, Inc., Contempre Homes, Inc., The Western Transmedia
Company, Inc., Shelter Components, Inc. and TGC Industries, Inc. The firm of
Janney Montgomery Scott Inc., of which Mr. Barrett is an officer, was
retained during the fiscal year for investment banking services and has also
been retained in 1997. Richard O. Starbird is a director of The Western
Transmedia Company, Inc. Morton R. Field is counsel to the law firm of Loeb
and Loeb, LLP, which has been retained to perform legal services for the
Company in 1997.
(3) All directors have sole voting and investment power as to all of the shares
of Capital Stock beneficially owned by them.
(4) George W. Townson has the right to acquire 102,086 shares of Class A Stock
under immediately exercisable options.
(5) George W. Townson has the right to acquire 179,164 shares of Class B Stock
under immediately exercisable options.
(6) 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.
J-3
<PAGE> 241
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors is responsible for the overall affairs of the
Company. To assist it in carrying out its duties, the Board has delegated
certain authority to several committees. The Board of Directors held six
meetings during the year ended August 31, 1996.
AUDIT COMMITTEE
The Audit Committee consists of Hugh V. Hunter, William J. Barrett and
Morton R. Field and they met three times in fiscal year 1996. Each year, the
Committee recommends the appointment of a firm of independent accountants to
examine the accounting records of the Company and its subsidiaries for the
coming year. In making this recommendation, the Committee reviews the nature of
services rendered or to be rendered to the Company and its subsidiaries by the
independent public accountants and also reviews the nature of non audit-related
services rendered to the Company and its subsidiaries. The Committee reviews
with representatives of the independent accountants the auditing arrangements
and scope of the independent accountants' examination of the accounting records,
results of those audits, their fees, and any problems identified by the
independent public accountants regarding internal accounting controls, together
with their recommendations. The Committee also meets with the Company's Chief
Financial Officer to review reports on the functioning of the Company's programs
for compliance with its policies and procedures regarding business ethics and
those regarding financial controls and internal auditing. This includes an
assessment of internal controls within the Company and its subsidiaries based
upon the activities of the Company's internal auditing staff as well as
evaluation of the performance of the staff. The Committee is also prepared to
meet at any time upon request of the independent public accountants or the Chief
Financial Officer to review any special situation arising in relation to any of
the foregoing subjects.
NOMINATING AND COMPENSATION COMMITTEE
The Nominating and Compensation Committee consists of Hugh V. Hunter,
Richard O. Starbird and Morton R. Field and they met three times in fiscal year
1996. The Committee makes recommendations to the Board as to the salary of the
Chief Executive Officer and sets the salaries of the other elected officers. It
grants bonuses and stock options to elected officers and other executives and
reviews guidelines for the administration of the Company's employee benefit
plans. The Committee reviews the qualifications of, and recommends to the Board,
candidates to fill Board vacancies as they may occur during the year. The
Committee also reviews proposed changes in the compensation of non-employee
directors.
J-4
<PAGE> 242
INFORMATION CONCERNING EXECUTIVE OFFICERS
Executive Officers of the Company are elected annually by the Board of
Directors and serve at the pleasure of the Board. Certain information concerning
such executive officers is set forth below:
<TABLE>
<CAPTION>
SHARES OF
CAPITAL STOCK PERCENT
BENEFICIALLY OWNED OUTSTANDING
------------------- ----------------- PRESENT POSITION
NAME AGE CLASS A CLASS B CLASS A CLASS B WITH THE COMPANY
- ------------------- --- ------- ------- ------- ------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
George W. Townson 55 116,961(1) 208,914(1) 3.7 3.3 Chairman, President, and Chief
Executive Officer since 1985
John B. Hatfield 53 40,836(2) 69,164(2) * * Executive Vice President, Chief
Financial and Administrative
Officer, Secretary and
Treasurer since 1990
Nitin G. Parikh 46 20,480(3) 50,957(3) * * Vice President, Control and
Planning since 1989
Robert R. Genest 58 17,500(4) 35,000(4) * * President -- Retail Division
since 1994; Executive Vice
President, General
Manager -- Retail Division
1990-1994
Geric B. Johnson 45 10,063(5) 30,122(5) * * Executive Vice
President -- Mail Order
Division since 1994; Vice
President -- Mail Order
Operations 1989-1994
</TABLE>
- ---------------
* Less than one percent
(1) Includes 102,086 Class A shares and 179,164 Class B Shares which George W.
Townson has the right to acquire beneficial ownership.
(2) Includes 40,836 Class A Shares and 69,164 Class B Shares which John B.
Hatfield has the right to acquire beneficial ownership.
(3) Includes 15,418 Class A Shares and 40,832 Class B Shares which Nitin G.
Parikh has the right to acquire beneficial ownership.
(4) Includes 17,500 Class A Shares and 35,000 Class B Shares which Robert R.
Genest has the right to acquire beneficial ownership.
(5) Includes 7,918 Class A Shares and 25,832 Class B Shares which Geric B.
Johnson has the right to acquire beneficial ownership.
J-5
<PAGE> 243
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information for each of the fiscal years
ended August 31, 1996, September 2, 1995, and September 3, 1994 concerning the
compensation of the Company's Chief Executive Officer and of each of the
Company's most highly compensated executive officers whose total annual salary
and bonus exceeded $100,000. All bonus awards are shown for the fiscal year when
paid but represent performance for the previous calendar year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
----------------------------------- COMPENSATION
OTHER ANNUAL OPTION(S) ALL OTHER
NAME AND FISCAL COMPENSATION ----------------- COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1)(2) CLASS A CLASS B ($)(3)
- ------------------------------ ------ --------- -------- ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
George W. Townson 1996 250,000 -0- 30,202 -0- -0- 40,130
Chairman, President and 1995 250,000 -0- 28,845 -0- -0- 45,830
Chief Executive Officer 1994 250,000 -0- 28,169 25,000 25,000 48,682
John B. Hatfield 1996 170,667 -0- -0- -0- -0- 28,385
Executive Vice 1995 160,000 -0- -0- -0- -0- 28,163
President, Chief 1994 147,333 25,000 -0- 12,500 12,500 24,819
Financial and Administrative
Officer, Secretary
Nitin G. Parikh 1996 103,333 -0- -0- -0- -0- 5,167
Vice President, 1995 98,334 -0- -0- -0- -0- 4,917
Control and Planning 1994 93,333 8,000 -0- -0- 10,000 4,666
Robert R. Genest 1996 185,000 -0- -0- -0- -0- 51,448
President, 1995 175,500 -0- -0- -0- -0- 52,950
Retail Division 1994 155,500 -0- -0- -0- -0- 44,945
Geric B. Johnson 1996 124,000 25,800 -0- -0- -0- 9,871
Executive Vice 1995 113,333 -0- -0- -0- -0- 9,416
President, General 1994 91,167 15,000 -0- -0- 10,000 5,753
Manager -- Mail Order
Division
</TABLE>
- ---------------
(1) Under the caption "Other Annual Compensation", the only reportable amount is
Mr. Townson's Company car.
(2) If no amount has been disclosed under the caption "Other Annual
Compensation" the value of the perquisites or other personal benefits
received do not equal the lesser of $50,000 or 10% of the total annual
salary and bonus reported for each named executive officer.
(3) Under the Caption "All Other Compensation", the only reportable amounts are
the contributions made or accrued by the Company under its defined
contributions plan on behalf of the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of stock options to the executive officers of the
Company named in the Summary Compensation Table during the fiscal year ended
August 31, 1996.
J-6
<PAGE> 244
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996 AND YEAR-END OPTION VALUE TABLE
No options were exercised by any option holder during fiscal year ended
August 31, 1996. The following table sets forth information as to the
outstanding options at fiscal year ended August 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
NUMBER OF FISCAL YEAR END FISCAL YEAR END(2)
SHARES ACQUIRED VALUE ---------------------------- ---------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- --------------- ----------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George W. Townson
Class A Stock........ -0- -0- 93,752 shs 8,334 shs -0- -0-
Class B Stock........ -0- -0- 170,830 shs 8,334 shs -0- -0-
John B. Hatfield
Class A Stock........ -0- -0- 36,669 shs 4,167 shs -0- -0-
Class B Stock........ -0- -0- 64,996 shs 4,168 shs -0- -0-
Nitin G. Parikh
Class A Stock........ -0- -0- 15,418 shs -0- -0- -0-
Class B Stock........ -0- -0- 37,498 shs 3,334 shs -0- -0-
Robert R. Genest
Class A Stock........ -0- -0- 17,500 shs -0- -0- -0-
Class B Stock........ -0- -0- 35,000 shs -0- -0- -0-
Geric B. Johnson
Class A Stock........ -0- -0- 7,918 shs -0- -0- -0-
Class B Stock........ -0- -0- 22,498 shs 3,334 shs -0- -0-
</TABLE>
- ---------------
(1) Value realized (if any) is calculated based on the aggregate difference
between the option exercise price and the closing market price of the stock
on the date of exercise multiplied by the number of shares to which such
exercise relates.
(2) The closing price for the Company's Capital Stock as reported by the New
York Stock Exchange ("NYSE") on August 30, 1996 (last trading day prior to
fiscal year end) was $4.00 for Class A Stock and $3.75 for Class B Stock.
Value (if any) is calculated on the basis of the aggregate of the
differences between the option exercise price of the in-the-money options
and the NYSE closing price multiplied by the number of shares underlying
such options.
REMUNERATION OF DIRECTORS
Directors who are employees of the Company do not receive additional
compensation for serving on the Board or any committee thereof. Directors who
are not employees of the Company receive $5,000 per annum and $4,000 per annum
for each Committee on which they serve plus $750 for attendance at each meeting
of the Board of Directors. The Chairman of the Audit Committee and the Chairman
of the Compensation Committee each receive $7,000 per annum.
NOMINATION AND COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Nomination and Compensation Committee are Hugh V.
Hunter, Richard O. Starbird and Morton R. Field. Morton R. Field is counsel to
the law firm of Loeb and Loeb, which is expected to perform legal services for
the Company from time to time. Hugh V. Hunter is co-trustee of the Frederick N.
Mellinger Trust and the Harriett Mellinger Trust and has the power to vote
approximately 42% of the outstanding Class A Capital Stock. In addition to
receiving compensation as a director and member of various board committees, Mr.
Hunter receives compensation as Chairman of the Nomination and Compensation
Committee, Chairman of the Audit Committee and Chairman of the Executive
Committee.
EMPLOYMENT AND CHANGE IN CONTROL AGREEMENT
The Company has an employment agreement with George W. Townson which
provides for his employment as Chairman of the Board, President and Chief
Executive Officer for a five (5) year term which presently goes through fiscal
year end 2001. Unless the Board takes action not to renew the agreement at least
J-7
<PAGE> 245
six (6) months prior to the end of any fiscal year, the agreement is deemed
renewed for an additional five (5) year term commencing on the first day of the
Company's next fiscal year.
Mr. Townson's Employment Agreement provides (a) an annual salary of
$250,000, subject to increases at the discretion of the Company's Board of
Directors, (b) an annual bonus calculated as a percent of the Company's pre-tax
earning, no bonus is due unless pre-tax earnings are at least 5.5% of sales, (c)
a Company car, and (d) fringe benefits the Company provides to its Vice
Presidents.
The Employment Agreement also provides for the following payment upon a
change in control: (a) one (1) year base salary plus an amount equal to the most
recently received bonus, both of which are multiplied by the number of complete
and partial years remaining in the term of the Agreement plus one (1), (b) for
all unexercised stock options, the difference between the exercise price and the
per share fair market value, and (c) the continuation of certain employment
benefits.
The Company has an Employment Agreement with John B. Hatfield providing for
one year's compensation plus the continuation of certain employment benefits
upon a change in control.
The Company also has change in control agreements with 14 employees
providing for a total payment of $500,000.
REPORT OF THE NOMINATION AND COMPENSATION COMMITTEE
The Nomination and Compensation Committee of the Board of Directors (the
"Committee") is made up of independent, non-employee directors. The Committee
regularly reviews and approves the compensation paid to all executive officers
except for the Chairman of the Board who performs under an employment agreement
approved by the Board of Directors.
Compensation for executive officers consists of three components: Salary,
Bonus and Stock Options.
Salary
Consistent with the Company's objectives, salaries for executive officers
are generally maintained near the average of salaries being paid by competitive
companies. The competitive companies by which the Committee compares salary
structures are companies engaged in the mail order business and/or retail women
specialty stores. In the past, the salary structure was adjusted based on the
individual's performance and contribution to the Company as well as to maintain
a competitive position.
The salary for the Chief Executive Officer is fixed by his employment
agreement with the Company which was executed in 1992 and is summarized under
"Employment and Change in Control Agreement."
Bonus
The annual bonus for the Chief Executive Officer is fixed by his employment
agreement as a percent of the Company's pre-tax profit. Therefore, the bonus
arrangement is directly tied into the Company's profitability and ultimately to
shareholder value.
At the start of each fiscal year, management established target levels of
operating income for each operating unit and for the Company as a whole. These
targets were based upon expected levels of sales as well as containment of
costs. Bonuses paid to executives other than the Chief Executive Officer were
based on two performance criteria: 1) corporate and/or subsidiary performance;
and 2) an overall assessment of an executive's performance.
These potential bonus amounts were reviewed and approved by the Committee.
Executive Savings and Retirement Plans
The Company has non-qualified executive savings and retirement plans which
provide benefits for certain executive officers. The plans allow for the
executive officers' contribution and matching Company contribution as well as an
additional Company contribution in an amount which is intended to provide up to
60% of the
J-8
<PAGE> 246
final five year average of his or her base salary less social security benefits.
The Company contributed a total of $177,000 to the above plans for fiscal year
1996.
Stock Options
The Company's Stock Option Plan is intended to provide an incentive for
employees who have the most impact on the management, growth and success of the
business. Approximately 50 employees participate in the Stock Option Plan,
including all executive officers. The Company makes stock option grants at no
less than 100% of the market price on the date of grant. The options are
exercisable after one year at the rate of 1/3 of the option per year thereafter.
Grants are only made to employees who have demonstrated a capacity for
contributing in a substantial way to the success of the Company. Stock options
encourage these executive officers and employees to become owners of the
Company, which helps to further align their interests with the shareholders.
Options have no significant value unless the price of the Company's stock
increases since they are exercisable only by the employee and cannot be
transferred except in the case of death.
In 1993 Congress adopted legislation that prohibited publicly held
companies from deducting certain compensation paid to Executive Officers that
exceeds $1,000,000 during the tax year. If in accordance with regulations issued
by the Internal Revenue Service, a portion of the compensation is based upon the
attainment of performance goals set by the Board pursuant to the plans approved
by the shareholders, then the corresponding deduction will not be limited by the
legislation. The Committee intends to modify its 1990 Stock Option Plan where
practical to comply with the legislation and retain the deductibility of
executive compensation.
This report is submitted by members of the Committee: Hugh V. Hunter,
Chairman, Richard O. Starbird and Morton R. Field.
The report of the Compensation Committee to the Board of Directors shall
not be deemed to be incorporated by reference into any filing by the Company
under either the Securities Act of 1934 ("Exchange Act"), including, without
limitation, that of outstanding shelf registration statements, periodic reports
on forms 10-Q, 10-K, etc., that incorporate future Securities Act or Exchange
Act filings by reference.
J-9
<PAGE> 247
STOCK PERFORMANCE CHART
The following chart shows a five-year comparison of cumulative total
returns (assumes reinvestment of dividends) on the Capital Stock of the Company,
the Wilshire Retail Index (all establishments engaged in re-sale of merchandise
to the general public for personal or household consumption) and the Wilshire
5000 index (all New York Stock Exchange and American Stock Exchange companies
plus the most active stock on the over the counter market). The Company's fiscal
year ends on the Saturday nearest August 31 in each year. The dates plotted on
the chart below correspond with the last trading day of each fiscal year.
COMPARISON OF FIVE-YEAR CUMULATIVE RETURNS
FREDERICK'S OF HOLLYWOOD CLASS A CAPITAL STOCK,
WILSHIRE 5000 AND WILSHIRE RETAIL
<TABLE>
<CAPTION>
08/30/91 08/28/92 08/27/93 09/02/04 09/01/95 08/30/96
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Frederick's of Hollywood, Inc. ...... $100 $ 60 $ 52 $ 44 $ 49 $ 37
Wilshire Retail ..................... $100 $104 $115 $117 $121 $143
Wilshire 5000 ....................... $100 $108 $127 $133 $164 $191
</TABLE>
J-10
<PAGE> 248
COMPARISON OF FIVE-YEAR CUMULATIVE RETURNS
FREDERICK'S OF HOLLYWOOD CLASS B CAPITAL STOCK,
WILSHIRE 5000 AND WILSHIRE RETAIL
<TABLE>
<CAPTION>
08/30/91 08/28/92 08/27/93 08/27/94 09/01/95 08/30/96
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Frederick's of Hollywood, Inc. ...... $100 $ 60 $ 52 $ 43 $ 48 $ 36
Wilshire Retail ..................... $100 $104 $115 $117 $121 $143
Wilshire 5000 ....................... $100 $108 $127 $133 $164 $191
</TABLE>
The charts assume $100 invested on August 30, 1991 in Frederick's of
Hollywood, Inc., the Wilshire Retail Index and the Wilshire 5000 Index. The
charts were plotted using the data shown in the tables following each of the
above graphs:
The historical stock performance shown on the charts above is not
necessarily indicative of future price performance.
EMPLOYMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed the firm of KPMG Peat Marwick ("KPMG")
Certified Public Accountants, who examined the corporation's consolidated
financial statements for fiscal year 1996, as independent accountants to examine
the consolidated financial statements of the Company for fiscal 1997. The
selection is being presented to the shareholders for ratification or disapproval
at this meeting. If the shareholders do not ratify the employment of KPMG, the
selection of independent accountants will be reconsidered by the Board of
Directors. Representatives from the firm of KPMG will be present at the Annual
Meeting. They will be provided the opportunity to make a statement if they
desire to do so, and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16 of the Securities Exchange Act of 1934 ("Section 16") requires
that reports of beneficial ownership of the Company's Capital Stock and change
in such ownership be filed with the Securities and Exchange Commission ("SEC")
by the Company's directors and executive officers. The Company is required to
conduct a review and to identify in its proxy statement each director or
executive officer who failed to file any required reports under Section 16 on a
timely basis. Based upon that review, and in the best knowledge of the Company,
all Section 16 reporting requirements applicable to its directors and executive
officers were filed on a timely basis.
J-11
<PAGE> 249
OTHER MATTERS
Management knows of no other business to be presented at the Meeting. If
other matters do properly come before the meeting, persons acting pursuant to
the proxy will vote on them in their discretion.
Proposals to be submitted for the 1997 Annual Meeting of Shareholders must
be received by the Company no later than August 12, 1997.
A copy of the Company's Annual Report, including financial statements for
the year ended August 31, 1996 has been mailed to shareholders.
/s/ JOHN B. HATFIELD
John B. Hatfield
Secretary
Los Angeles, California
December 6, 1996
J-12
<PAGE> 250
FREDERICK'S OF HOLLYWOOD, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
GEORGE W. TOWNSON and HUGH V. HUNTER, and each of them, with full power of
substitution, are hereby authorized to represent and to vote the stock of the
undersigned FREDERICK'S OF HOLLYWOOD, INC. at the Annual Meeting of
Shareholders, to be held on January 30, 1997 and at any adjournments thereof.
Please mark your
A [X]votes as in this
example.
1. ELECTION OF DIRECTORS
[ ] FOR all nominees listed to the right (except as marked to the
contrary)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed to the right
NOMINEES: George W. Townson
Richard O. Starbird
Hugh V. Hunter
Morton R. Field
William J. Barrett
Sylvan Lefcoe
Merle A. Johnston
Instruction: To withhold authority to vote for any individual nominee,
write that nominee's name in the space provided.
(CONTINUED AND TO BE VOTED, SIGNED AND DATED ON REVERSE SIDE)
<PAGE> 251
2. THE PROPOSAL TO RATIFY EMPLOYMENT OF KPMG PEAT MARWICK AS INDEPENDENT
CERTIFIED ACCOUNTANTS FOR THE CORPORATION FOR FISCAL YEAR 1997.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Upon or in connection with the transaction of such other business as may
properly come before the meeting or any adjournments thereof.
UNLESS OTHERWISE DIRECTED THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2.
Dated: , 1996
-------------------------
Signature
-------------------------
Signature, if held
jointly
NOTE: Please sign as
name(s) appears hereon.
If joint account, EACH
joint owner should sign.
<PAGE> 252
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> 253
JANNEY MONTGOMERY SCOTT INC.
26 BROADWAY
NEW YORK, NEW YORK 10004-1776
July 24, 1997
Board of Directors
Frederick's of Hollywood, Inc.
6608 Hollywood Boulevard
Hollywood, California 90028
Board of Directors:
We hereby grant our consent for the inclusion of our Fairness Opinion as an
Exhibit to any proxy or consent solicitation statement distributed in connection
with the Proposed Transaction as set forth in the Merger Agreement.
Sincerely yours,
JANNEY MONTGOMERY SCOTT INC.
By: /s/ HERBERT M. GARDNER
--------------------------------------
Herbert M. Gardner
Senior Vice President
<PAGE> 254
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 July 21, 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 July 21, 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> 255
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 July 21, 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 July 21, 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:
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(Signature of Stockholder)
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(Signature of Stockholder if held
jointly)
