SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(E) OF THE SECURITIES & EXCHANGE ACT OF 1934
AND RULE 13E-3 (SECTION240.13E-3) THEREUNDER)
LILLIAN VERNON CORPORATION
(NAME OF THE ISSUER)
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Lillian Vernon Corporation Lillian Vernon
VB Investment Corporation David C. Hochberg
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(NAME OF PERSONS FILING STATEMENT)
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS OF SECURITIES)
532430 10 5
(CUSIP NUMBER OF CLASS OF SECURITIES)
ANDREW GREGOR
LILLIAN VERNON CORPORATION
543 MAIN STREET
NEW ROCHELLE, NY 10801
(914) 576-6400
COPY TO
JOEL SALON, ESQ.
SALON, MARROW & DYCKMAN, LLP
685 THIRD AVENUE
NEW YORK, NY 10017
(212) 661-7100
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES
AND COMMUNICATIONS ON
BEHALF OF PERSONS FILING STATEMENT.)
This Statement is filed in connection with the filing of solicitation
materials subject to Regulation 14A under the Securities Exchange Act of
1934.
Check the following box if the soliciting materials are preliminary
copies: [X]
CALCULATION OF FILING FEE
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TRANSACTION VALUATION* AMOUNT OF FILING FEE
$171,200,194 $34,240.04
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[X] Check box if any part of the fee is offset as provided by Rule 0-11
(a)(2) and identify the filing with which the offsetting fee was previously
paid. Identify the previous filing by registration statement number, or the
form or schedule and the date of its filing.
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Amount Previously Paid $34,240.04 Filing Party: Lillian Vernon Corporation
Form or Registration No.: Preliminary Proxy Statement--Schedule 14A Date Filed: June 30, 1995
</TABLE>
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* For purposes of calculating fee only. This transaction applies to an
aggregate 9,671,706 Securities (sum of (i) 8,679,206 outstanding shares
<PAGE>
of Common Stock not including 224,349 treasury shares or 657,895 and
394,737 shares of Common Stock held by Lillian Vernon and David Hochberg,
respectively, to remain outstanding after the Merger and (ii) 992,500
outstanding options to purchase shares of Common Stock).
The per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 is $19.00 per unit.
The proposed maximum aggregate value of transaction is $171,200,194 (sum
of (i) product of number of shares referred to in (2) (i) above and $19.00,
(ii) product of 8,000 options to purchase Shares of Common Stock expiring on
or before August 31, 1995 and $19.00, and (iii) product of (A) 984,500
options to purchase shares of Common Stock not expiring on or before August
31, 1995, and (B) the difference between $19.00 and the exercise price of
such options)
The total fee is $34,240.04 paid by wire transfer on June 29, 1995 to the
designated lockbox depositary maintained by the Commission at Mellon Bank.
The amount of the filing fee, calculated in accordance with Rule 0-11
promulgated under the Securities Exchange Act of 1934, as amended, equals
1/50 of one percent of the value of the Common Stock to be acquired.
<PAGE>
This joint Transaction Statement (the "Statement") is being filed with the
Securities and Exchange Commission by Lillian Vernon Corporation, a Delaware
corporation (the "Company"), VB Investment Corporation, a Delaware
corporation ("Investor"), Lillian Vernon and David C. Hochberg in connection
with the filing under the Securities Exchange Act of 1934, as amended, of a
Proxy Statement.
This Statement relates to the proposed approval and adoption of an
Agreement and Plan of Merger between the Company and Investor, dated June 13,
1995 pursuant to which Investor would be merged with and into the Company.
Upon the consummation of the merger, each share of the Company's common
stock, par value $.01 per share (the "Shares"), other than certain Shares
held by Lillian Vernon, her son David Hochberg and certain members of
management, and by stockholders who perfect their dissenters' rights, will be
converted into the right to receive $19.00 in cash per Share.
Pursuant to General Instruction F to Schedule 13E-3, the information
indicated below as contained in the Proxy Statement is hereby incorporated by
reference in answer to the items of this Statement. Where substantially
identical information required by Schedule 13E-3 is included under more than
one caption, reference is made to only one caption of the Proxy Statement.
2
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CROSS REFERENCE SHEET
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ITEM OF LOCATION IN PROXY STATEMENT
SCHEDULE 13E-3 (FOR INCORPORATION BY REFERENCE)
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ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) ..................... "SUMMARY OF PROXY STATEMENT--The Special Meeting; Time, Date and
Place"
(b) ...................... "SUMMARY OF PROXY STATEMENT--The Merger"
(c) ...................... "MARKET PRICES AND DIVIDENDS ON THE COMPANY'S CAPITAL STOCK"
(d) ...................... "MARKET PRICES AND DIVIDENDS ON THE COMPANY'S CAPITAL STOCK"
(e) ...................... Not applicable
(f) ...................... Not applicable
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ITEM 2. IDENTITY AND BACKGROUND.
This Schedule 13E-3 is being filed by the Company, the issuer of the class
of equity securities which is the subject of this Rule 13e-3 transaction, and by
Investor, Lillian Vernon and David C. Hochberg, all of whom are affiliates of
the issuer.
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(a) - (d) ............... "PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP OF MANAGEMENT";
"CERTAIN INFORMATION CONCERNING INVESTOR AND AFFILIATES"; "ANNEX D"
(e) - (f) ............... Neither the Company, Investor nor any natural person listed in
"ANNEX D" or "CERTAIN INFORMATION CONCERNING INVESTOR AND
AFFILIATES" of the Proxy Statement during the past five years (i)
has been convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors) or (ii) was a party to a civil
proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject
to a judgment, decree or final order enjoining further violation
of, or prohibiting activities subject to, Federal or State
securities laws or finding any violation of such laws.
(g) ...................... "ANNEX D"; "CERTAIN INFORMATION CONCERNING INVESTOR AND AFFILIATES"
ITEM 3. PAST CONTRACTS, TRANSACTIONS OR NEGOTIATIONS.
(a)(1) ................... Not Applicable
(a)(2) ................... "SPECIAL FACTORS--Background of the Merger"; "SPECIAL
FACTORS--Interests of Certain Persons in the Merger"; "THE
MERGER--The Merger Agreement"; "THE MERGER--The Voting Agreement";
"THE MERGER--The Stockholders Agreement"
(b) ...................... "SPECIAL FACTORS--Background of the Merger"; "SPECIAL
FACTORS--Interests of Certain Persons in the Merger"; "THE
MERGER--The Merger Agreement"; "THE MERGER--The Voting Agreement";
"THE MERGER-- The Stockholders Agreement"
3
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ITEM OF LOCATION IN PROXY STATEMENT
SCHEDULE 13E-3 (FOR INCORPORATION BY REFERENCE)
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ITEM 4. TERMS OF THE TRANSACTION.
(a) ...................... "SPECIAL FACTORS--Background of the Merger"; "SPECIAL
FACTORS--Interests of Certain Persons in the Merger"; "THE
MERGER--The Merger Agreement"; "THE MERGER--The Voting Agreement";
"THE MERGER --The Stockholders Agreement"; "FINANCING OF THE
MERGER"
(b) ...................... "SPECIAL FACTORS--Interests of Certain Persons in the Merger";
"SPECIAL FACTORS--Management of the Company's Business After the
Merger; Certain Effects of the Merger"; "THE MERGER--The Merger
Agreement"; "THE MERGER--The Voting Agreement"; "THE MERGER --The
Stockholders Agreement"
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a) - (g) ................ "SPECIAL FACTORS--Management of the Company's Business After the
Merger"; "SPECIAL FACTORS-- Management of the Company's Business
After the Merger; Certain Effects of the Merger"; "SPECIAL
FACTORS--Interests of Certain Persons in the Merger"; "THE
MERGER--The Voting Agreement"; "THE MERGER--The Stockholders
Agreement"; "FINANCING OF THE MERGER"
ITEM 6. SOURCES AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) - (d) ................ "FINANCING OF THE MERGER"
ITEM 7. PURPOSES, ALTERNATIVES, REASONS AND EFFECTS.
(a) - (c) ................ "SPECIAL FACTORS--Background of the Merger"; "SPECIAL
FACTORS--Purpose and Reasons of Investor, Lillian Vernon and David
Hochberg for the Merger"; "SPECIAL FACTORS--Recommendation of the
Board of Directors"; "SPECIAL FACTORS--Position of Investor,
Lillian Vernon and David Hochberg Regarding Fairness of Merger"
(d) ...................... "SPECIAL FACTORS--Background of the Merger"; "SPECIAL
FACTORS--Recommendation of the Board of Directors"; "SPECIAL
FACTORS--Management of the Company's Business After the Merger;
Certain Effects of the Merger"; "CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER"; "THE MERGER--The Merger
Agreement"; "THE MERGER--The Voting Agreement"; "THE MERGER --The
Stockholders Agreement"
4
<PAGE>
ITEM OF LOCATION IN PROXY STATEMENT
SCHEDULE 13E-3 (FOR INCORPORATION BY REFERENCE)
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ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) - (e) ............... "SPECIAL FACTORS--Background of the Merger"; "SPECIAL
FACTORS--Purpose and Reasons of Investor, Lillian Vernon and David
Hochberg for the Merger"; "SPECIAL FACTORS--Recommendation of the
Board of Directors"; "SPECIAL FACTORS--Opinion of Financial
Advisor"; "SPECIAL FACTORS--Position of Investor, Lillian Vernon
and David Hochberg Regarding Fairness of Merger"
(f) ...................... "SPECIAL FACTORS--Background of the Merger"
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a) - (c) ................ "SPECIAL FACTORS--Background of the Merger"; "SPECIAL
FACTORS--Opinion of Financial Advisor"; "SPECIAL FACTORS--Position
of Investor, Lillian Vernon and David Hochberg Regarding Fairness
of Merger"; "ANNEX C"
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) - (b) ................ "SPECIAL FACTORS--Interests of Certain Persons in the Merger"; "THE
MERGER--The Merger Agreement"; "THE MERGER--The Voting Agreement";
"THE MERGER --The Stockholders Agreement"; "PRINCIPAL STOCKHOLDERS
AND SHARE OWNERSHIP OF MANAGEMENT"
ITEM 11. CONTRACTS, ARRANGEMENTS OF UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S SECURITIES.
.................. "SPECIAL FACTORS--Interests of Certain Persons in Merger"; "THE
MERGER--The Merger Agreement"; "THE MERGER--The Voting Agreement";
"THE MERGER --The Stockholders Agreement"; "FINANCING OF THE
MERGER"
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO THE
TRANSACTION.
(a) - (b) ................ "SUMMARY OF PROXY STATEMENT--Vote Required; Record Date"
ITEM 13. OTHER PROVISION OF THE TRANSACTION.
(a) ............ "RIGHTS OF DISSENTING STOCKHOLDERS"; "ANNEX B"
(b) - (c) ............ Not applicable
ITEM 14. FINANCIAL INFORMATION.
(a) ..................... "SELECTED HISTORICAL AND FINANCIAL DATA OF THE COMPANY"; Company's
Financial Statements (as set forth in the F-pages) accompanying the
Proxy Statement
(b) ..................... Not applicable
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) - (b) ................ "PROXY SOLICITATION"; "FINANCING OF THE MERGER"
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5
<PAGE>
ITEM OF LOCATION IN PROXY STATEMENT
SCHEDULE 13E-3 (FOR INCORPORATION BY REFERENCE)
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ITEMS 16. ADDITIONAL INFORMATION.
The Proxy Statement and the Financial Statements and Annexes attached
thereto.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
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(a) ...................... Commitment letter, dated June 13, 1995, submitted by Merrill
Lynch Capital Corporation to VB Investment Corporation
(b) ...................... (1)Opinion of Goldman, Sachs & Co., dated the date of the Proxy
Statement incorporated herein by reference from "ANNEX C" of the
Proxy Statement, to be filed with the definitive Proxy Statement
(2)Presentation to the Board of Directors regarding Project
Monogram, prepared by Goldman, Sachs & Co. June 13, 1995
(c) ...................... (1)Agreement and Plan of Merger, dated June 13, 1995, by and
between Lillian Vernon Corporation and VB Investment Corporation,
incorporated herein by reference from "ANNEX A" of the Proxy
Statement
....................... (2)Form of Stockholders Agreement, by and among FS Equity Partners
III, L.P., FS Equity Partners International, L.P., Lillian Vernon,
David C. Hochberg and the Lillian Vernon Corporation
....................... (3)Voting Agreement, dated as of June 13, 1995, by and among FS
Equity Partners III, L.P., FS Equity Partners International, L.P.,
Lillian Vernon, David C. Hochberg and Fred P. Hochberg
(d) ...................... (1)Letter to Stockholders, Notice of Special Meeting of Stockholders of Lillian Vernon
Corporation, Proxy Statement of Lillian Vernon Corporation, Form of
Proxy Card
(2)The pertinent pages of the Annual Report on Form 10-K of Lillian
Vernon Corporation for the fiscal year ending February 25, 1995, which
have been incorporated by reference into "BUSINESS OF THE COMPANY" in the Proxy Statement
(e) ...................... Section 262 of the Delaware General Corporation Law, incorporated
herein by reference from "ANNEX B" of the Proxy Statement
(f) ...................... Not Applicable
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6
<PAGE>
SIGNATURES
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and
correct.
Dated:
June 30, 1995
Lillian Vernon Corporation
By: /s/ Susan N. Cortazzo
--------------------------------------
Name: Susan N. Cortazzo
Title: Secretary
VB Investment Corporation
By: /s/ Mark Doran
--------------------------------------
Name: Mark Doran
Title: Secretary
/s/ Lillian Vernon
--------------------------------------
Lillian Vernon
/s/ David C. Hochberg
--------------------------------------
David C. Hochberg
7
<PAGE>
EXHIBIT INDEX
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EXHIBIT
NUMBER PAGE NO.
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(a) Commitment letter, dated June 13, 1995, submitted by Merrill Lynch Capital Corporation to
VB Investment Corporation []
(b)(1) Opinion of Goldman, Sachs & Co., dated the date of the Proxy Statement incorporated
herein by reference from "ANNEX C" of the Proxy Statement, to be filed with the definitive
Proxy Statement *
(b)(2) Presentation to the Board of Directors regarding Project Monogram, prepared by Goldman,
Sachs & Co. June 13, 1995
(c)(1) Agreement and Plan of Merger, dated June 13, 1995, by and between Lillian Vernon Corporation
and VB Investment Corporation, incorporated herein by reference from "ANNEX A" of the Proxy
Statement *
(c)(2) Form of Stockholders Agreement by and among FS Equity Partners III, L.P., FS Equity Partners
International, L.P., Lillian Vernon, David C. Hochberg and the Lillian Vernon Corporation []
(c)(3) Voting Agreement, dated as of June 13, 1995, by and among FS Equity Partners III, L.P.,
FS Equity Partners International, L.P., Lillian Vernon, David C. Hochberg and Fred P. Hochberg []
(d)(1) Letter to Stockholders, Notice of Special Meeting of Stockholders of Lillian Vernon Corporation,
Proxy Statement of Lillian Vernon Corporation, Form of Proxy Card [] []
(d)(2) The pertinent pages of the Annual Report on Form 10-K of Lillian Vernon Corporation for
the fiscal year ending February 25, 1995, which have been incorporated by reference into
"BUSINESS OF THE COMPANY" in the Proxy Statement []
(e) Section 262 of the Delaware General Corporation Law, incorporated herein by reference from
"ANNEX B" of the Proxy Statement *
<FN>
* Incorporated by Reference
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EXHIBIT (a)
MERRILL LYNCH CAPITAL CORPORATION
World Financial Center,
North Tower
250 Vesey Street
New York, New York 10281
June 13, 1995
VB Investment Corporation
c/o Freeman Spogli & Co. Incorporated
599 Lexington Avenue, 18th floor
New York, NY 10022
Attention: John M. Roth
Re: Commitment Letter
Ladies and Gentlemen:
You have advised Merrill Lynch Capital Corporation
("Merrill Lynch") that Lillian Vernon Corporation, a Delaware
corporation (the "Borrower"), intends to implement a recapital-
ization (the "Recapitalization") through a merger of
VB Investment Corporation, a Delaware corporation ("VBI")
formed by Freeman Spogli & Co. Incorporated, a California cor-
poration ("Freeman Spogli"), and/or by one or more affiliates
of Freeman Spogli (collectively, the "Investor"), with and into
the Borrower (the "Merger" and, together with the Recapitaliza-
tion, the "Transaction").
You have further advised us that prior to the Merger
the Investors will contribute to VBI as equity not less than
$52,000,000 in cash (the "Investor Contribution") and that pur-
suant to the Transaction (i) the Investor will own approxi-
mately 70% of the outstanding common stock of the Borrower, as
survivor of the Merger, (ii) a portion of the shares of the
Borrower held by Lillian Vernon (the "LVF Shares") immediately
prior to the Merger will be converted into approximately 17% of
the outstanding common stock of the Borrower, as survivor of
the Merger (and that such LVF Shares shall have a value, based
upon the Merger Consideration (as defined below) of approxi-
mately $12,500,000 in the aggregate (the "LVF Investment"),
(iii) a portion of the shares of the Borrower held by David
Hochberg (the "DH Shares") immediately prior to the Merger will
be converted into approximately 10% of the outstanding common
stock of the Borrower, as survivor of the Merger (and that such
DH Shares shall have a value, based upon the Merger Considera-
tion of approximately $7,500,000 in the aggregate (the "DH
Investment") and (iv) each share of common stock of the Bor-
rower issued and outstanding immediately prior to the Merger,
other than the LVF Shares, will be converted into the right to
receive $19.00 in cash (the "Merger Consideration"). You have
further advised us that simultaneously with or immediately fol-
lowing the consummation of the Merger, certain members of
management of the Borrower (collectively, "Management") will
purchase up to $3,000,000 but not less than $2,000,000 of the
outstanding common stock of the Borrower, as the survivor of
the Merger of which not more than $1,500,000 may be paid in the
form of a full recourse notes secured by the common stock so
purchased (the "Management Investment"). Nothwithstanding the
foregoing, in no event shall the aggregate of the Investor Con-
tribution, the LVF Investment, the DH Investment and the
Management Investment be less than $75,0000,000.
Additionally, each of the Borrower's direct and indi-
rect subsidiaries (existing or hereafter acquired, including
Lillian Vernon International, Ltd. and Lillian Vernon Fulfill-
ment Services, Inc. (collectively, the "Guarantors")) will
unconditionally guarantee all of the obligations of the Bor-
rower in connection with the Credit Facilities (as defined
below). As hereinafter used, the term "Borrower" includes the
Guarantors.
You have requested senior financing to provide funds,
together with the cash on hand following the Transaction, to
finance the Recapitalization and to provide for the working
capital and general corporate purpose requirements of the Bor-
rower. In accordance therewith, you have requested that
Merrill Lynch commit to provide to the Borrower $190,000,000
principal amount of senior secured credit facilities (the
"Credit Facilities") in the form of (a) four Senior Secured
Term Loan Facilities to be provided to the Borrower in an
aggregate principal amount of $140,000,000 (the "Term Loan
Facilities"), such aggregate principal amount to be allocated
between (i) a Tranche A Term Loan Facility in an aggregate
principal amount of $25,000,000 (the "Tranche A Term Loan
Facility"), (ii) a Tranche B Term Loan Facility in an aggregate
principal amount of $45,000,000 (the "Tranche B Term Loan
Facility"), (iii) a Tranche C Term Loan Facility in an aggre-
gate principal amount of $40,000,000 (the "Tranche C Term Loan
Facility") and (iv) a Deferred Draw Term Loan Facility in an
aggregate principal amount of $30,000,000 (the "Deferred Draw
Term Loan Facility"), to be drawn at a time or times subsequent
to the consummation of the Transaction, and (b) a Revolving
Credit Facility to be provided to the Borrower in an aggregate
principal amount of $50,000,000 (the "Revolving Facility"), a
portion of which, not to exceed $23,000,000, may be drawn at
the time of the consummation of the Transaction (the "Initial
Revolver Drawdown"). The proceeds of borrowings under the
Tranche A, Tranche B and Tranche C Term Loan Facilities and the
Initial Revolver Drawdown, together with the cash on hand fol-
lowing the Transaction, will be available (i) to finance the
Recapitalization and the fees and expenses related thereto,
(ii) for the prepayment of approximately $5,700,000 of existing
indebtedness, which figure includes the aggregate principal
amount of the Borrower's 10% Senior Notes Due 1998 and 10.09%
Senior Notes Due 1998, including fees, expenses and penalties
in connection therewith (the "Debt Repayment") and (iii) to pay
other fees and expenses in connection with the Transaction.
The Deferred Draw Term Loan Facility will be available at a
time or times subsequent to the consummation of the Transaction
for the payment of predetermined capital expenditures of the
Borrower and the remaining amounts available under the Revolv-
ing Facility will be available for the working capital require-
ments and general corporate purposes of the Borrower and let-
ters of credit.
Accordingly, subject to the terms and conditions set
forth below, Merrill Lynch hereby agrees with you as follows:
1. Commitments. Merrill Lynch hereby commits to
provide the Tranche A Term Loan Facility, the Tranche B Term
Loan Facility, the Tranche C Term Loan Facility, the Deferred
Draw Term Loan Facility and the Revolving Facility upon the
terms and subject to the conditions set forth or referred to
herein, in the fee letter (the "Fee Letter") dated the date
hereof and delivered to the Borrower and in the Summary of
Terms and Conditions attached hereto as Exhibit A (the "Term
Sheet").
It is a condition of Merrill Lynch's commitment here-
under that Merrill Lynch act as sole and exclusive arranger and
documentation agent (the "Agent") for the Credit Facilities, it
being understood and agreed that the Agent will perform all
functions and exercise all authority (including, without limi-
tation, (a) serving as sole manager of the syndication effort,
(b) selecting counsel for the Agent and (c) negotiating defini-
tive credit documentation) customarily performed and exercised
by agent banks in such capacity. It is agreed that the
appointment of any co-agents for the Credit Facilities would be
subject to the prior approval of Merrill Lynch after consulta-
tion with you. The co-agent title and other titles awarded to
syndicate participants would not entail any role with respect
to the matters referred to in this paragraph, without the prior
consent of Merrill Lynch. Each of Merrill Lynch and the Bor-
rower acknowledges and agrees that Merrill Lynch may appoint,
after consultation with you, a Lender (as defined) to act as an
administrative and collateral agent (the "Administrative
Agent") to perform such ministerial and administrative func-
tions as are customary for the transactions contemplated hereby
and by the Credit Facilities.
2. Syndication. Merrill Lynch reserves the right
and intends, prior to the execution of definitive documentation
for the Credit Facilities, after consultation with the Bor-
rower, to syndicate a portion of its commitment to one or more
financial institutions (Merrill Lynch and such financial insti-
tutions being referred to herein as the "Lenders") that will
become parties to the definitive credit documentation for the
Credit Facilities and, in that connection, promptly following
your acceptance of Merrill Lynch's commitments hereunder,
Merrill Lynch will commence the syndication of the Credit
Facilities to such other Lenders. The Borrower agrees that no
Lender will receive compensation outside the terms contained
herein and in the Fee Letter in order to obtain its commitment
to participate in the Credit Facilities. It is understood and
agreed that the amount and distribution of the fees referred to
herein among the Lenders and to any Administrative Agent will
be at Merrill Lynch's sole discretion. It is understood and
agreed that Merrill Lynch will manage all aspects of the syndi-
cation, including, without limitation, decisions as to the
selection of potential Lenders to be approached and when they
will be approached, when their commitments will be accepted,
which Lenders will participate, any naming rights (including
the naming of co-agents, subject to your reasonable approval)
and the final allocations of the commitments among the Lenders
(which are likely not to be pro rata across facilities among
Lenders).
You agree to assist actively and in a timely manner
Merrill Lynch in its efforts to achieve syndication of the
Credit Facilities. The syndication efforts will be accom-
plished by a variety of means, including direct contact during
the syndication between senior management (including, but not
limited to, the chief executive officer and chief financial
officer of the Borrower) and advisors and affiliates of the
Borrower on the one hand and the proposed syndicate Lenders on
the other hand. To assist Merrill Lynch in its syndication
efforts, you agree that you will, promptly, upon Merrill
Lynch's request, (a) provide, and cause your affiliates and
advisors to provide, to Merrill Lynch all information reasonably
deemed necessary by Merrill Lynch to complete successfully
the syndication, including but not limited to, information and
projections (including, without limitation, any updated projec-
tions requested by Merrill Lynch) prepared by you or on your
behalf relating to the transactions contemplated hereby, and
(b) to assist, and to cause your affiliates and advisors to
assist, Merrill Lynch in the preparation of a confidential
information memorandum and other marketing materials to be used
in connection with the syndication, including making available
representatives of the Borrower and its subsidiaries. Your
assistance in connection with the syndication will also
include, if Merrill Lynch so requests, your assisting Merrill
Lynch in obtaining for the Borrower (at the sole expense of the
Borrower) credit ratings from one or more nationally recognized
rating agencies. It is understood and agreed that Merrill
Lynch shall be entitled, with your prior written consent,
(a) to change the structure, terms and conditions of any of the
Credit Facilities as described herein and in the Term Sheet
(provided that the aggregate principal amount of the Credit
Facilities, taken as a whole, remains the same) and (b) to
eliminate any of the Credit Facilities (provided that the
aggregate commitments under the Credit Facilities remain the
same), if Merrill Lynch deems such actions advisable in order
to ensure a successful syndication or an optimal credit
structure.
To ensure an orderly and effective syndication of the
Credit Facilities, you agree that, until the termination of the
syndication (as determined by Merrill Lynch), you will not, and
will not permit any of your affiliates to, syndicate or issue,
attempt to syndicate or issue, announce or authorize the
announcement of the syndication or issuance of, or engage in
discussions concerning the syndication or issuance of, any debt
facility or debt security (including any renewals thereof)
without the prior written consent of Merrill Lynch.
3. Fees. As consideration for Merrill Lynch's com-
mitment hereunder and its agreement to arrange, manage, struc-
ture and syndicate the Credit Facilities, you agree to pay to
Merrill Lynch the fees as set forth in the Term Sheet and in
the Fee Letter. You agree that, once paid, such fees and any
part thereof shall be nonrefundable under any and all circum-
stances and regardless of whether the transactions or borrow-
ings contemplated hereby are consummated. All such fees shall
be paid by wire transfer of immediately available funds in
United States dollars.
4. Conditions. Merrill Lynch's commitment hereun-
der is subject to the negotiation, execution and delivery of
definitive documentation with respect to the Credit Facilities
satisfactory in all respects to Merrill Lynch and its counsel.
Such definitive documentation shall reflect the terms and con-
ditions set forth herein and in the Term Sheet and contain such
other indemnities, covenants, representations and warranties,
events of default, conditions precedent, security arrangements
and other terms and conditions as are satisfactory to Merrill
Lynch and the Borrower. Those matters that are not covered by
or made clear under the provisions hereof or of the Term Sheet
are subject to the approval and agreement of Merrill Lynch and
you (it being understood that the terms and conditions of the
definitive documentation with respect to the Credit Facilities
shall not be inconsistent with the terms and conditions set
forth herein).
Merrill Lynch's commitment hereunder is also subject
to (a) there not having occurred or becoming known (i) any
material adverse change in the business, assets, liabilities
(contingent or otherwise), operations, condition (financial or
otherwise), solvency or prospects of the Borrower (either
before or after giving effect to the Transaction) except as
contemplated hereby since February 25, 1995, (ii) any transac-
tion entered into by the Borrower, other than in the ordinary
course of business that is or would be material and adverse to
the Borrower (either before or after giving effect to the
Transaction and except as contemplated hereby) since
February 25, 1995, or (iii) any dividend or other distribution
of any kind declared, paid or made by the Borrower since
February 25, 1995; provided that the Borrower may pay its regu-
lar quarterly dividend of $.07 per share of Common Stock as per
its ordinary course of business, (b) there not having occurred
and continuing a material disruption of or material adverse
change in financial, banking or capital market conditions gen-
erally since the date hereof that, individually or in the
aggregate, in the judgment of Merrill Lynch, would have a mate-
rial adverse effect on the successful syndication of the Credit
Facilities and (c) the compliance with, to the satisfaction of
Merrill Lynch, the other terms and conditions set forth or
referred to herein and in the Term Sheet.
5. Information and Investigations. You hereby rep-
resent and covenant that (a) all Information and data (exclud-
ing financial projections) concerning the Borrower and the
transactions contemplated hereby (the "Information") that have
been made or will be prepared by or on behalf of you or any of
your affiliates or authorized representatives or advisors and
that have been or will be made available to Merrill Lynch by
you or on your behalf in connection with the transactions con-
templated hereby (as such Information may be supplemented from
time to time) is and will be complete and correct in all mate-
rial respects and does not and will not, taken as a whole, con-
tain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements
contained therein not misleading in light of the circumstances
under which such statements are made and (b) all financial pro-
jections concerning the Borrower and the transactions contem-
plated hereby (the "Projections") that have been prepared by or
on behalf of you or any of your affiliates or authorized repre-
sentatives and that have been or will be made available to
Merrill Lynch by you or on behalf of you or any of your affili-
ates or authorized representatives or advisors in connection
with the transactions contemplated hereby (as such Projections
may be supplemented from time to time) have been and will be
prepared in good faith based upon assumptions believed by you
to be reasonable. You agree to supplement the Information and
the Projections from time to time until the closing of the
Credit Facilities and, if requested by Merrill Lynch, for a
reasonable period thereafter necessary to complete the syndica-
tion of the Credit Facilities so that the representation and
covenant in the preceding sentence remain correct in all mate-
rial respects. In arranging the Credit Facilities, including
the syndication of the Credit Facilities, Merrill Lynch will be
using and relying primarily on the Information and the Projec-
tions without independent check or verification thereof.
Merrill Lynch's commitment hereunder is based upon
the accuracy and completeness of the financial and other infor-
mation provided to us by or on behalf of the Borrower. If
Merrill Lynch's ongoing due diligence investigation discloses
information, or Merrill Lynch otherwise discovers information
not previously disclosed to it, that it believes has had or
could have, individually or in the aggregate, a materially
adverse impact on (a) the business, assets, liabilities (con-
tingent or otherwise) operations, condition (financial or
otherwise), solvency, prospects or material agreements of the
Borrower (before or after giving effect to the transactions
contemplated hereby) or (b) on the tax or accounting
consequences of the Transaction, then Merrill Lynch (i) shall
be entitled to decline to participate in the financing contem-
plated hereby or (ii) may, in its sole discretion, suggest
alternative financing amounts or structures that ensure ade-
quate protection for it and the other Lenders.
6. Indemnification. By executing this Commitment
Letter, you agree to indemnify and hold harmless Merrill Lynch
and each of the other Lenders and their respective officers,
directors, employees, affiliates, agents and controlling per-
sons (Merrill Lynch and each such other person being an "Indem-
nified Party") from and against any and all losses, claims,
damages and liabilities, joint or several, to which any such
Indemnified Party may become subject arising out of or in con-
nection with or relating to this Commitment Letter, the Fee
Letter, the Term Sheet, the Credit Facilities, the loans under
the Credit Facilities, the use of proceeds of any such loan,
the Transaction or any related transaction and the performance
by the Indemnified Party of the services contemplated by this
Commitment Letter and will reimburse any such Indemnified Party
for any and all expenses (including reasonable counsel fees and
expenses) as they are incurred in connection with the investi-
gation of or preparation for or defense of any pending or
threatened claim or any action or proceeding arising therefrom,
whether or not such Indemnified Party is a party and whether or
not such claim, action or proceeding is initiated or brought by
or on behalf of the Borrower. Notwithstanding the foregoing,
this Section 6 will be superseded by, and will no longer have
any effect on the rights and obligations of the parties hereto,
following the execution, if any, of the definitive credit docu-
mentation for the Credit Facilities concurrent with the consum-
mation of the Transaction. The Borrower will not be liable
under the foregoing indemnification provision to an Indemnified
Party to the extent that any loss, claim, damage, liability or
expense is found in a final judgment by a court of competent
jurisdiction to have resulted solely from such Indemnified Par-
ty's bad faith or gross negligence.
The Borrower agrees that, without Merrill Lynch's
prior written consent, it will not settle, compromise or con-
sent to the entry of any judgment in any pending or threatened
claim, action or proceeding in respect of which indemnification
could be sought under the indemnification provisions of this
Commitment Letter (whether or not Merrill Lynch or any other
Indemnified Party is an actual or potential party to such
claim, action or proceeding), unless such settlement, compro-
mise or consent includes an unconditional written release in
form and substance satisfactory to the Indemnified Parties of
each Indemnified Party from all liability arising out of such
claim, action or proceeding and does not include any statement
as to an admission of fault, culpability or failure to act by
or on behalf of any Indemnified Party.
In the event that an Indemnified Party in the employ-
of Merrill Lynch is requested or required to appear as a wit-
ness in any action brought by or on behalf of or against the
Borrower or any affiliate of the Borrower in which such Indem-
nified Party is not named as a defendant, the Borrower agrees
to reimburse Merrill Lynch for all expenses incurred by it in
connection with such Indemnified Party's appearing and prepar-
ing to appear as such a witness, including, without limitation,
the reasonable fees and disbursements of its legal counsel, and
to reimburse Merrill Lynch in an aggregate amount, not to
exceed $20,000.
7. Costs and Expenses. By executing this Commit-
ment Letter, you agree to reimburse Merrill Lynch from time to
time, upon demand for all reasonable out-of-pocket expenses
(including, without limitation, expenses of Merrill Lynch's due
diligence investigation, consultants' fees (if such consultants
are engaged by Merrill Lynch), syndication expenses, appraisal
and valuation fees and expenses, travel expenses and the rea-
sonable fees, disbursements and other charges of counsel)
incurred in connection with the Credit Facilities and the prep-
aration of this Commitment Letter, the Term Sheet, the Fee Let-
ter, the definitive documentation for the Credit Facilities and
the security arrangements in connection therewith.
8. Confidentiality. You agree that you will not
disclose this Commitment Letter, the Fee Letter, the contents
of any of the foregoing or Merrill Lynch's activities pursuant
hereto or thereto to any person without the prior written con-
sent of Merrill Lynch, except that you may disclose this Com-
mitment Letter, the Fee Letter and the contents hereof and
thereof (i) to your officers, directors, employees, auditors,
attorneys and advisors on a confidential and need-to-know
basis, (ii) to the members of the board of directors of the
Borrower and their attorneys and advisors on a confidential
need-to-know basis and (iii) as required by applicable law
(including, but not limited to, the Securities Exchange Act of
1934, as amended, as it relates to the Borrower) or compulsory
legal process.
9. Termination. In the event that either (i) the
initial borrowing in respect of the Credit Facilities does not
occur on or before October 31, 1995 or (ii) the circumstances
described under the second paragraph of paragraph 5 shall have
occurred or (iii) any circumstance described in clause (a) or
(b) of the second paragraph of paragraph 4 shall have occurred,
this Commitment Letter and Merrill Lynch's commitments hereun-
der shall terminate unless Merrill Lynch shall, in its discre-
tion, agree to an extension. Notwithstanding the foregoing,
the compensation, reimbursement, indemnification and confiden-
tiality provisions hereof and of the Term Sheet and the Fee
Letter shall survive any termination of this Commitment Letter
or Merrill Lynch's commitments hereunder.
10. Assignment, Etc. This Commitment Letter and
Merrill Lynch's commitments hereunder shall not be assignable
by you without the prior written consent of Merrill Lynch, and
any attempted assignment shall be void. Merrill Lynch may (in
its sole discretion) perform any of its duties hereunder
through any of its affiliates and you will owe any related
duties (including those set forth in paragraph 2 above) to any
such affiliate. This Commitment Letter is intended to be
solely for the benefit of the parties hereto and is not
intended to confer any benefits upon, or create any rights in
favor of, any person other than the parties hereto.
11. Governing Law. This Commitment Letter shall be
governed by, and construed in accordance with, the laws of the
State of New York (without regard to principles of conflicts of
law).
12. Execution in Counterparts. This Commitment Let-
ter may be executed in any number of counterparts and by dif-
ferent parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same
agreement.
13. Amendments, Etc. No amendment or waiver of any
provision of this Commitment Letter, nor any consent or
approval to any departure therefrom, shall in any event be
effective unless the same shall be in writing and signed by the
parties hereto and then any such waiver, consent or approval
shall be effective only in the specific instance and for the
specific purpose for which given.
14. Waiver of Jury Trial. Each of you and Merrill
Lynch (in each case on its own behalf and, to the extent per-
mitted by applicable law, on behalf of its shareholders) waives
all right to trial by jury in any action, proceeding or
counterclaim (whether based upon contract, tort or otherwise)
related to or arising out of any of the transactions contem-
plated by this Commitment Letter, or the performance by Merrill
Lynch of the services contemplated by, this Commitment Letter.
Please indicate your acceptance of the terms hereof
and of the Fee Letter by signing in the appropriate space below
and in the Fee Letter and returning to Merrill Lynch the two
enclosed duplicate originals of this Commitment Letter and the
Fee Letter not later than 5:00 p.m., New York City time, on
June 14, 1995, at which time Merrill Lynch's commitments here
under will expire in the event Merrill Lynch has not received
such executed duplicate originals.
Very truly yours,
MERRILL LYNCH CAPITAL CORPORATION
By: /s/ Christopher Birosak
Name: Christopher Birosak
Title: Vice President
Accepted and agreed to as of
the date first above written:
VB INVESTMENT CORPORATION
By: /s/ John M. Roth
Name: John M. Roth
Title: Vice President
CONFIDENTIAL EXHIBIT A
SUMMARY OF TERMS AND CONDITIONS
LILLIAN VERNON CORPORATION
$190,000,000 Credit Facilities
Borrower: Lillian Vernon Corporation,
a Delaware corporation (the
"Borrower").
Guarantors: Each of the Borrower's
direct and indirect subsid-
iaries (existing or here-
after acquired, including
Lillian Vernon Interna-
tional, Ltd. ("LVI") and
Lillian Vernon Fulfillment
Services, Inc. ("LVFS")
(collectively, the "Guaran-
tors")) shall uncondition-
ally guarantee all obliga-
tions of the Borrower under
the definitive agreement and
documentation of the credit
facilities (the "Credit
Agreement"). For the pur-
poses of this summary, the
Borrower shall include the
Guarantors, unless the con-
text otherwise requires.
Facilities: (A) Senior Secured Term Loan
Facilities in an aggregate
principal amount of
$140,000,000 (the "Term Loan
Facilities"), such aggregate
principal amount to be allo-
cated between (i) a
Tranche A Term Loan Facility
in an aggregate principal
amount of $25,000,000 (the
"Tranche A Term Loan Facil-
ity"), (ii) a Tranche B Term
Loan Facility in an aggre-
gate principal amount of
$45,000,000 (the "Tranche B
Term Loan Facility"),
(iii) a Tranche C Term Loan
Facility in an aggregate
principal amount of
$40,000,000 (the "Tranche C
Term Loan Facility"), and
(iv) a Deferred Draw Term
Loan Facility in an aggre-
gate principal amount of
$30,000,000 (the "Deferred
Draw Term Loan Facility").
(B) Senior Secured Revolving
Credit Facility in an aggre-
gate principal amount of
$50,000,000 (the "Revolving
Facility" and, together with
the Term Loan Facilities,
the "Credit Facilities"), of
which up to $12,000,000 will
be available as a letter of
credit facility.
Purpose: The proceeds of the Tranche
A, Tranche B and Tranche C
Term Loan Facilities (the
"Initial Term Loan Facili-
ties") and a portion of the
proceeds, not to exceed
$23,000,000, of the Revolv-
ing Facility to be drawn
down upon the consummation
of the Transaction (as
defined below) (the "Initial
Revolver Drawdown"),
together with cash on hand
following the recapitaliza-
tion of a portion of the
outstanding common stock
(the "Recapitalization") of
the Borrower through a
merger of VB Investment Cor-
poration, a Delaware corpo-
ration ("VBI"), formed by
Freeman Spogli & Co. Incor-
porated, a California
corporation ("Freeman
Spogli"), and/or by one or
more affiliates of Freeman
Spogli (collectively, the
"Investor"), with and into
the Borrower (the "Merger"
and, together with the
Recapitalization, the
"Transaction"), will be used
solely (i) to finance the
Recapitalization and the
fees and expenses related
thereto, (ii) for the pre-
payment of approximately
$5,700,000 of existing
indebtedness, which figure
includes the aggregate prin-
cipal amount of the Borrow
er's 10% Senior Notes Due
1998 and 10.09% Senior Notes
Due 1998, including fees,
expenses and penalties in
connection therewith (the
"Debt Repayment") and
(iii) to pay other fees and
expenses in connection with
the Transaction.
The Deferred Draw Term Loan
Facility shall be used at a
time or times subsequent to
the consummation of the
Transaction for the payment
of predetermined Capital
Expenditures (as defined
below).
The remaining amounts avail-
able under the Revolving
Facility shall be used
solely to provide for the
working capital requirements
and general corporate pur-
poses of the Borrower and
letters of credit.
Agent: Merrill Lynch will act as
sole and exclusive arranger
and documentation agent (the
"Agent") for a syndicate of
financial institutions (the
"Lenders").
Administrative Agent: A Lender or other financial
institution to be selected
by Merrill Lynch in consul-
tation with the Borrower.
Final Maturity and Amortization: (A) The Tranche A Term Loan
Facility will mature five
and one-half years following
the date of execution of the
Credit Agreement (the "Clos-
ing Date"), (B) the Tranche
B Term Loan Facility will
mature seven and one-half
years following the Closing
Date, (C) the Tranche C Term
Loan Facility will mature
eight and one-half years
following the Closing Date,
and (D) the Deferred Draw
Term Loan Facility will
mature six and one-half
years following the Closing
Date.
Amounts outstanding under
the Term Loan Facilities
will amortize on the dates
and in the amounts set forth
on Schedule I attached
hereto.
(E) The Revolving Facility
will mature five and one-
half years following the
Closing Date.
Availability: (A) (i) The Initial Term
Loan Facilities will be
available for the purpose
described above in a single
drawing on the Closing Date
and (ii) the Deferred Draw
Term Loan will be available
at a time or times subse-
quent to the Closing Date
for the specific capital
expenditures to be set forth
in a Schedule to the Credit
Agreement (the "Capital
Expenditures"); provided
that, in the event payment
of any such Capital Expendi-
ture is made from a source
other than the Deferred Draw
Term Loan Facility, the
availability for borrowings
thereunder shall be
decreased by the amount of
such Capital Expenditure.
Amounts borrowed under the
Term Loan Facilities that
are repaid or prepaid may
not be reborrowed.
(B) The Initial Revolver
Drawdown will be available
upon the consummation of the
Transaction and the remain-
ing amounts available under
the Revolving Facility will
be available in amounts not
exceeding the Borrowing Base
and in accordance with the
Cleandown provisions, each
as described below, in the
form of revolving loans and
letters of credit subsequent
to the thirtieth business
day following the first
Cleandown Payment (as
defined below) and until 30
business days prior to the
final maturity of the
Revolving Facility. Amounts
repaid under the Revolving
Facility may be reborrowed.
During the term of the
Revolving Facility the Bor-
rower must repay all loans
outstanding in excess of (x)
$15,000,000 during the first
fiscal year, which includes
the Closing Date,
(y) $12,000,000 during the
second fiscal year and
(z) $10,000,000 during each
fiscal year thereafter and
may not make drawings there
under in excess of
$15,000,000 in the case of
(x) above, $12,000,000 in
the case of (y) above or
$10,000,000 in the case of
(z) above, for 30 consecu-
tive days following the date
of such Cleandown Payment.
Borrowing Base: The Borrowing Base at any
time shall be equal to the
sum of (a) 85% of Eligible
Accounts Receivable (to be
defined in the Credit Agree-
ment) at such time and
(b) 60% of Eligible Inven-
tory (to be defined in the
Credit Agreement) at such
time.
The Borrowing Base will be
computed monthly by the Bor-
rower and a certificate pre-
senting the Borrower's com-
putation will be delivered
to the Agent promptly, but
in no event later than the
15th day of the following
month.
Letters of Credit: Letters of credit under the
Revolving Facility will be
issued by a Lender selected
by the Agent satisfactory to
the Borrower (in such
capacity, the "L/C Lender").
Each standby letter of
credit shall expire no later
than the earlier of
(a) twelve months after its
date of issuance and (b) the
thirtieth business day prior
to the final maturity of the
Revolving Facility. Each
standby letter of credit may
contain "evergreen" provi-
sions whereby such letter of
credit will, upon request of
the Borrower to the L/C
Lender not more than 30 days
prior to the scheduled
maturity date, be extended
for up to an additional
twelve months so long as no
Default or Event of Default
has occurred and is continu-
ing and provided such letter
of credit matures not more
than thirty business days
prior to the thirtieth busi-
ness day prior to the final
maturity of the Revolving
Facility. Each trade letter
of credit shall expire no
later than the earlier of
(a) 270 days after its date
of issuance and (b) the
thirtieth business day prior
to the final maturity of the
Revolving Facility.
Drawings under any letter of
credit shall be reimbursed
by the Borrower not later
than the next business day.
To the extent that the Bor-
rower does not reimburse the
L/C Lender on the next busi-
ness day, the Lenders under
the Revolving Facility shall
be irrevocably obligated to
reimburse the L/C Lender pro
rata based upon their
respective Revolving Facil-
ity commitments, with the
amount of such reimbursement
payment being deemed to be a
drawing under the Revolving
Facility.
The issuance of all letters
of credit shall be subject
to the customary procedures
of the L/C Lender.
Interest Rates and Fees: Interest rates and fees in
connection with the Credit
Facilities will be as speci-
fied on Schedule II attached
hereto.
The Borrower will be enti-
tled to make borrowings
based on the Base Rate or
Adjusted LIBOR (each as
defined on Schedule II), and
may select interest periods
of one, two, three or six
months for Adjusted LIBOR
borrowings.
Default Rate: The applicable interest rate
plus 2% per annum.
Guarantees: The Credit Facilities and
the obligations of the Bor-
rower under each approved
interest rate protection
agreement entered into with
a Lender will be uncondi-
tionally guaranteed by the
Guarantors (the "Guar-
antees").
Security: The Credit Facilities, the
related Guarantees, as
applicable, and the obliga-
tions of the Borrower under
each approved interest rate
protection agreement entered
into with a Lender will be
secured by the following
(none of which shall be sub-
ject to any other liens,
except for customary excep-
tions and as agreed to by
the Lenders and permitted
under the Credit Agreement):
(a) a perfected first pri-
ority lien on, and pledge
of, all the capital stock
and intercompany debt of
each existing and each sub-
sequently acquired or orga-
nized direct or indirect
subsidiary of the Borrower,
including LVI and LVFS;
(b) perfected first priority
liens on, and security
interests in, the following
(subject to exceptions to be
agreed upon): all inventory,
machinery, equipment, pat-
ents, trademarks, accounts
receivable and other per-
sonal property of the Bor-
rower and of each existing
and each subsequently
acquired or organized direct
or indirect subsidiary of
the Borrower, including LVI
and LVFS; and (c) first pri-
ority mortgages on and other
perfected first priority
liens on, and security
interests in, the real
estate of the Borrower and
each existing and each sub-
sequently acquired subsid-
iary of the Borrower,
including LVI and LVFS
(collectively, the
"Security").
The Credit Facilities will
provide for the release of
certain of such Security in
the event the Borrower
obtains Qualified Refinanc-
ing Indebtedness (to be
defined in the Credit Agree-
ment) in respect of its
warehouse and distribution
center (including the annex)
and certain assets related
thereto.
Mandatory Prepayments/ Subject to the immediately
Reductions in Commitments: succeeding paragraph, the
Credit Facilities will be
prepaid with (a) 75% of
Excess Cash Flow (to be
defined); provided that such
percentage shall decline to
not less than 50% in accor-
dance with a reduction in
the Borrower's Ratio of
Total Debt to Consolidated
EBITDA, (b) 100% of the net
proceeds (including insur-
ance proceeds) of certain
nonordinary course asset
sales, (c) 100% of the net
proceeds of the issuance or
incurrence of certain debt
or of any sale and
lease-back and (d) 100% of
the net proceeds from any
issuance of certain equity
securities in any public
offering or private place
ment or from any capital
contribution (other than in
connection with the Transac-
tion). All mandatory pre-
payments will be credited in
inverse order of maturity
against the remaining sched-
uled amortization payments
under the Term Loan Facili-
ties and credited pro rata
against the remaining sched-
uled amortization payments
among the Term Loan Facili-
ties. All payments of the
Term Loan Facilities shall
be made on a pro rata basis
as between the Term Loan
Facilities, except that the
holders of loans under the
Tranche B and Tranche C Term
Loan Facilities may decline
to receive their pro rata
portion of such prepayments
and the amounts declined
shall be applied to make
additional prepayments of
loans under the other Term
Loan Facilities on a pro-
rata basis until no such
loans remain outstanding.
Voluntary Prepayments/ (A) Term Loan Facilities:
Reductions in Commitments: Permitted in whole or in
part at the option of the
Borrower, in a minimum prin-
cipal amount of $1,000,000
and in multiples of
$500,000, without premium or
penalty, only on the last
day of the relevant Interest
Period. Voluntary prepay-
ments under the Term Loan
Facilities will be applied,
(a) first, in any six month
period prior to a scheduled
amortization payment,
against such scheduled amor-
tization payment and
(b) second, pro rata against
the remaining scheduled
amortization payments among
the Term Loan Facilities and
credited pro rata against
the remaining scheduled
amortization payments under
the Term Loan Facilities.
(B) Revolving Facility:
Voluntary reduction of the
unutilized portion of the
Revolving Facility commit-
ments and voluntary prepay-
ments of loans under the
Revolving Facility will be
permitted only on the last
day of the relevant Interest
Period, without premium or
penalty, in a minimum prin-
cipal amount of $1,000,000
and in multiples of
$500,000.
Conditions to Effectiveness The effectiveness of the
and to Initial Borrowing: loan documentation for the
Credit Facilities and the
borrowings thereunder shall
be subject to conditions
precedent that are usual for
facilities and transactions
of this type, to those spec-
ified below and to such
additional conditions prece-
dent as may be required by
Merrill Lynch (all such con-
ditions to be satisfied in a
manner satisfactory in all
respects to Merrill Lynch
and the Borrower), including
but not limited to execution
and delivery of definitive
documentation acceptable in
form and substance to
Merrill Lynch; delivery of
borrowing certificates and
written legal opinions;
delivery of financial state-
ments; receipt of valid
security interests as con-
templated hereby; accuracy
of representations and war-
ranties; absence of defaults
and material litigation;
evidence of authority, gov-
ernmental and other neces-
sary approvals; compliance
with laws; adequate insur-
ance and payment of fees.
In addition, the initial
borrowings thereunder will
be subject to the following
additional conditions:
(i) The terms, conditions
and structure of the Trans-
action (and the documenta-
tion therefor) shall be in
form and substance satisfac-
tory to Merrill Lynch,
including, without limita-
tion, (a) the sufficiency of
the Guarantees, (b) the
terms and conditions of the
agreement for the Merger and
(c) the indemnities, repre-
sentations and warranties
set forth in all such
documentation.
(ii) Merrill Lynch shall be
satisfied that there has
been no adverse change in
the amount of cash proceeds
from the Recapitalization
and the proceeds available
pursuant to the Credit
Facilities as set forth in
the Commitment Letter, such
that such proceeds are
insufficient to effect the
Transaction, to pay all fees
and expenses in connection
with the Transaction and to
provide for the ongoing
working capital needs of the
Borrower.
(iii) On the Closing Date,
each element of the Transac-
tion shall have been consum-
mated in accordance with the
terms hereof and the terms
set forth in the agreement
and plan of merger dated as
of the date hereof. All
obligations of the Borrower
with respect to the existing
indebtedness, including the
Debt Repayment, shall be
repaid in full (or provision
made therefor) to the satis-
faction of Merrill Lynch and
all lending commitments
thereunder terminated to the
satisfaction of Merrill
Lynch with all security
interests in favor of exist-
ing lenders being uncondi-
tionally released.
(iv) Merrill Lynch shall be
satisfied that there has
been no material adverse
change in the tax or
accounting consequences of
the Transaction since the
date hereof.
(v) All requisite third par-
ties shall have approved or
consented to the Transaction
and the other transactions
contemplated hereby to the
extent required, which lack
of consent would in the
judgment of Merrill Lynch,
singly or in the aggregate,
involve a reasonable possi-
bility of a material adverse
effect on the condition
(financial or otherwise),
operations, business,
assets, liabilities (contin-
gent or otherwise) or pros-
pects of the Borrower taken
as a whole or the ability of
the Borrower and the Guaran-
tors to fully and timely
perform each of its
obligations under the Credit
Agreement, or the ability of
the parties to consummate
the financing or the other
transactions contemplated
hereby or the validity or
enforceability of any of the
definitive credit documenta-
tion or the rights, remedies
and benefits available to
the Agent and the Lenders
under the Credit Agreement,
and there shall be no gov-
ernmental or judicial
action, actual or threat-
ened, that would, singly or
in the aggregate, reasonably
restrain, prevent or impose
burdensome conditions on the
transactions contemplated
hereby.
(vi) There shall be no liti-
gation or administrative
proceedings or other legal
or regulatory developments,
actual or overtly threat-
ened, that, in the judgment
of Merrill Lynch, singly or
in the aggregate, involve a
reasonable possibility of a
material adverse effect on
the condition (financial or
otherwise), operations,
business, assets, liabili-
ties (contingent or other
wise) or prospects of the
Borrower taken as a whole or
the ability of the Borrower
and the Guarantors to fully
and timely perform each of
its obligations under the
Credit Agreement and the
documentation pursuant
thereto, or the ability of
the parties to consummate
the financing or the other
transactions contemplated
hereby or the validity or
enforceability of any of the
definitive credit documenta-
tion or the rights, remedies
and benefits available to
the Agent and the Lenders
under the Credit Agreement,
or which would be materially
inconsistent with the stated
assumptions underlying the
Projections.
(vii) Merrill Lynch shall be
satisfied that there has
been no material adverse
change in the amount and
nature of any environmental
and employee health and
safety exposures and tax and
other contingent liabilities
to which the Borrower may be
subject, and the plans of
the Borrower with respect
thereto since the date
hereof.
(viii) Merrill Lynch shall
have received such other
legal opinions, corporate
documents and other instru-
ments and/or certificates as
they may reasonably request.
(ix) There shall be no mate-
rial adverse change in the
business, assets, liabili-
ties (contingent or other
wise), operations, condition
(financial or otherwise),
solvency or prospects of the
Borrower (either before or
after giving effect to the
Transaction) except as con-
templated hereby since Feb-
ruary 25, 1995.
Representations and Warranties: Customary for facilities
similar to the Credit Facil-
ities and such additional
representations and warran-
ties as may be required by
the Agent, including, but
not limited to, no Default
or Event of Default; absence
of material adverse change;
receipt of financial state
ments (including pro forma
financial statements);
absence of undisclosed lia-
bilities or material contin-
gent liabilities not known
to Agent prior to the date
hereof; compliance with Fed-
eral Reserve Board regula-
tions (including margin reg-
ulations); compliance with
laws (including environmen-
tal laws and ERISA); sol-
vency; no conflicts with
laws, charter documents or
agreements; good standing;
inapplicability of the
Investment Company Act of
1940 and the Public Utility
Holding Company Act of 1935;
payment of taxes; ownership
of properties; absence of
liens and security
interests.
Affirmative Covenants: Customary for facilities
similar to the Credit Facil-
ities, including but not
limited to maintenance of
corporate existence and
rights; compliance with
laws; performance of obliga-
tions; maintenance of prop-
erties in good repair; main-
tenance of appropriate and
adequate insurance; inspec-
tion of books and proper-
ties; payment of taxes and
other liabilities; notice of
defaults; litigation and
other adverse action; deliv-
ery of financial statements
as normally prepared by the
Borrower, financial projec-
tions as normally prepared
by the Borrower in connec-
tion with the preparation of
its annual budget, and com-
pliance certificates; and
further assurances.
Negative Covenants: Customary for facilities
similar to the Credit Facil-
ities and such others as may
be required by the Agent,
including but not limited to
limitations on indebtedness;
limitations on liens; limi-
tations on loans, invest-
ments and joint ventures;
limitations on guarantee or
other contingent obliga-
tions; limitations on
restricted payments (includ-
ing limitations on divi-
dends, redemptions and
repurchases of capital
stock); limitations on fun-
damental changes (including
limitations on mergers,
acquisitions and asset
sales); limitations on oper-
ating leases; limitations on
sale-leaseback transactions;
limitations on sale or dis-
count of receivables; limi-
tations on transactions with
affiliates; limitation on
creation of subsidiaries;
limitations on payment
restrictions affecting sub-
sidiaries; limitations on
issuance, sale or other dis-
position of subsidiary
stock; limitations on
capital expenditures; limi-
tations on changes in busi-
ness conducted; limitations
on amendment of indebtedness
and other material docu-
ments; and limitations on
prepayment or repurchase of
other indebtedness.
Financial Covenants: The Credit Facilities will
contain financial covenants
appropriate in the context
of the proposed transaction
based upon the financial
information provided to the
Agent, including but not
limited to: minimum inter-
est coverage ratio (Consoli-
dated EBITDA to Consolidated
Interest Expense), minimum
consolidated net worth and
maximum leverage ratio (Con-
solidated Total Debt to Con-
solidated EBITDA). The
financial covenants contem-
plated above will be tested
quarterly, each such quar-
terly test period to include
such quarter and each of the
three immediately preceding
quarters and will apply to
the Borrower and its subsid-
iaries on a consolidated
basis. The above capital-
ized financial covenant
terms shall have the stan-
dard meanings given to such
terms in the definition sec-
tion of a standard Merrill
Lynch credit agreement.
Such definitions are
attached hereto as Annex A.
Interest Rate Management: Approximately 50% of the
outstanding indebtedness
under the Term Loan Facili-
ties must be hedged on terms
and for a period of time
satisfactory to the Agent.
Events of Default: Customary for facilities
similar to the Credit Facil-
ities and others to be spec-
ified by the Agent, includ-
ing but not limited to non-
payment of principal, inter-
est, fees or other amounts
when due; violation of cove-
nants; failure of any repre-
sentation or warranty to be
true in all material
respects; cross-default and
cross-acceleration; Change
in Control; bankruptcy
events; material judgments;
ERISA; and actual or
asserted (by the Borrower or
any affiliate) invalidity of
loan documents or security
interests.
Yield Protection and Provisions customary for
Increased Costs: facilities similar to the
Credit Facilities, including
but not limited to compensa-
tion in respect of redeploy-
ment costs, reserve require-
ments, taxes (including
gross-up provisions for
withholding taxes) and
decreased profitability
resulting from changes in
U.S. or foreign capital ade-
quacy requirements, guide-
lines or policies or their
interpretation or applica-
tion, whether or not having
the force of law. Compensa-
tion will be payable by the
Borrower upon presentation
by the affected Lender of a
certificate as to the
amounts involved, which will
be conclusive absent mani-
fest error.
Assignments and Participations: Neither the Borrower nor any
of its affiliates may assign
its rights or obligations in
connection with the Credit
Facilities without the prior
written consent of all the
Lenders.
Lenders will be permitted to
participate and, with the
consent of the Agent, assign
loans, notes and commit-
ments. Each assignment will
be in a minimum amount of
$5,000,000. Non-pro-rata
assignments of loans, notes
and commitments under the
Credit Facilities will be
permitted. Participations
shall be without restric-
tions and participants will
have the same benefits as
the original syndicate Lend-
ers with regard to yield
protection and increased
costs, collateral benefits
and provision of information
on the Borrower and its sub-
sidiaries. Voting rights of
participants will be limited
to proposed increases in
amount, release of all or
substantially all collat-
eral, decreases in interest
rate or fees and extensions
of scheduled final maturity
date.
Voting: Amendments and waivers of
the definitive credit docu-
mentation will require the
approval of Lenders holding
loans and commitments repre-
senting not less than
66 2/3% of the aggregate
amount of the loans and com-
mitments under the Credit
Facilities, except that the
consent of all affected
Lenders shall be required
with respect to
(a) increases in commit-
ments, (b) reductions of
principal, interest or fees,
(c) extensions of scheduled
final maturity and
(d) certain releases of
collateral.
Expenses and Indemnification: All out-of-pocket expenses
of the Agent and the Admin-
istrative Agent (and the
Lenders for enforcement
costs and documentary taxes)
associated with the perfor-
mance of due diligence by
the Agent and the Adminis-
trative Agent, the syndica-
tion of the Credit Facili-
ties (including but not lim-
ited to printing, duplicat-
ing, mailing and similar
expenses) and the prepara-
tion, execution and deliv-
ery, waiver or modification,
and enforcement of the
definitive credit documenta-
tion contemplated hereby
(including the reasonable
fees, disbursements and
other charges of counsel for
the Agent and the Adminis-
trative Agent) are to be
paid by the Borrower. The
Borrower will indemnify each
of the Agent, the Adminis-
trative Agent and the other
Lenders and hold them harm-
less from and against all
costs, expenses (including
fees, disbursements and
other charges of counsel)
and liabilities arising out
of or relating to any liti-
gation or other proceeding
(regardless of whether the
Agent, the Administrative
Agent or any such other
Lender is a party thereto)
that relate to the Transac-
tion or any transactions
related thereto, provided
that none of the Agent, the
Administrative Agent or any
such other Lender will be
indemnified for its gross
negligence or bad faith.
Governing Law and Forum: New York.
<PAGE>
SCHEDULE I
TERM LOAN FACILITIES AMORTIZATION SCHEDULE
(Dollars in millions)
<TABLE>
<CAPTION>
YEARS
------------------------------------
$ AMORTIZATION TOTAL 1 2 3
- -------------- -------- ----- ----- --------
<S> <C> <C> <C> <C>
Term Loan A(1) .............. $25.0 $ 3.0 $ 3.0 $ 4.0
Term Loan B(2) .............. 45.0 0.5 0.5 0.5
Term Loan C(3) .............. 40.0 0.4 0.4 0.4
Deferred Draw Term Loan (4) 30.0 0.0 0.0 2.0
-------- ------- ------- -------
Total Amortization .......... $140.0 $ 3.9 $ 3.9 $ 6.9
======== ======= ======= =======
% Amortization
Term Loan A ................. 100.0% 12.0% 12.0% 16.0%
Term Loan B ................. 100.0% 1.0% 1.0% 1.0%
Term Loan C.................. 100.0% 1.0% 1.0% 1.0%
Deferred Draw Term Loan .... 100.0% 0.0% 0.0% 6.7%
-------- ------- ------- -------
Total Amortization .......... 100.0% 2.8% 2.8% 4.9%
======== ======= ======= =======
Cumulative % Amortization
Term Loan A ................. -- 12.0% 24.0% 40.0%
Term Loan B ................. -- 1.0% 2.0% 3.0%
Term Loan C ................. -- 1.0% 2.0% 3.0%
Deferred Draw Term Loan .... -- 0.0% 0.0% 6.7%
-------- ------- ------- -------
Total Amortization ........ -- 2.8% 5.5% 10.4%
======== ======= ======= =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEARS
------------------------------------------------------
$ AMORTIZATION 4 5 6 7 8 9
- -------------- -------- ----- ----- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
TERM LOAN A(1)................ $ 5.0 $5.0 $5.0 -- -- --
TERM LOAN B(2)................ 0.5 0.5 0.5 0.5 41.9 --
Term Loan C(3) ............... 0.4 0.4 0.4 0.4 0.4 36.8
Deferred Draw Term Loan (4)... 5.0 5.0 8.0 10.0 -- --
------- ------- -------- -------- -------- -------
Total Amortization .......... $10.9 $10.9 $ 13.9 $ 10.9 $ 42.3 $ 36.8
======= ======= ======== ======== ======== =======
% Amortization
Term Loan A ................. 20.0% 20.0% 20.0% -- -- --
Term Loan B ................. 1.0% 1.0% 1.0% 1.0% 93.0% --
Term Loan C ................. 1.0% 1.0% 1.0% 1.0% 1.0% 92.0%
Deferred Draw Term Loan .... 16.7% 16.7% 26.7% 33.3% -- --
------- ------- -------- -------- -------- -------
Total Amortization .......... 7.8% 7.8% 9.9% 7.8% 30.2% 26.3%
======= ======= ======== ======== ======== =======
Cumulative % Amortization
Term Loan A ................. 60.0% 80.0% 100.0% -- -- --
Term Loan B ................. 4.0% 5.0% 6.0% 7.0% 100.0% --
Term Loan C ................. 4.0% 5.0% 6.0% 7.0% 8.0% 100.%
Deferred Draw Term Loan .... 23.3% 40.0% 66.7% 100.0% -- --
------- ------- -------- -------- -------- -------
Total Amortization ........ 18.1% 25.9% 35.8% 43.5% 73.7% 100.0%
======= ======= ======== ======== ======== =======
</TABLE>
- ---------------
(1) Final amortization payment occurs in year 5 1/2.
(2) Final amortization payment occurs in year 7 1/2.
(3) Final amortization payment occurs in year 8 1/2.
(4) Final amortization payment occurs in year 6 1/2.
SCHEDULE II
Interest Rates: The Borrower will be entitled to make
borrowings at either Adjusted LIBOR (defined
as the average of the offered rates for
deposits in U.S. Dollars for a period
approximately equal to the interest period
for which the interest rate is being
calculated, as set forth on the Reuters
Screen LIBOR page as of 11:00 a.m., London
time, on the date on which the interest for
such period is calculated, adjusted for
statutory reserves at all time ("Adjusted
LIBOR")) or the Alternate Base Rate ("ABR")
(defined as the higher of the Prime Rate as
published in The Wall Street Journal or the
Federal Funds Rate plus 50 basis points
("bps")), in each case, plus the applicable
spread which is based on a matrix tied to the
Borrower's total debt to EBITDA coverage
ratio computed at the end of each fiscal
quarter. The Borrower may select interest
periods of one, two, three or six months.
The initial interest rates will be set forth
in the Initial Interest Rate chart below,
subject to reduction under a pricing matrix
set forth in the Pricing Matrix chart below.
Such Pricing Matrix is applicable solely to
the Revolving Facility and the Tranche A Term
Loan Facility.
Initial Interest Rate
LIBOR ABR
Spread Spread
------ ------
Revolving Facility 275 bps 175 bps
Tranche A Term Loan Facility 275 bps 175 bps
Deferred Draw Term Loan Facility 300 bps 200 bps
Tranche B Term Loan Facility 325 bps 225 bps
Tranche C Term Loan Facility 375 bps 275 bps
Pricing Matrix
<TABLE>
<CAPTION>
LIBOR ABR
Level Total Debt/EBITDA Spread Spread
- ----- ----------------------------------- ------ -------
<S> <C> <C> <C>
I greater than
or equal to
[ ]x 275 bps 175 bps
II greater than
or equal to
[ ]x but less than [ ]x [ ] bps [ ] bps
III greater than
or equal to
[ ]x but less than [ ]x [ ] bps [ ] bps
IV but less than [ ]x [ ] bps [ ] bps
</TABLE>
Interest shall be payable at the end of each
interest period and, in any event, at least
every three months or 90 days, as the case
may be.
Letter of Credit Fees: A fee equal to (a) with respect to standby
letters of credit, the then-applicable LIBOR
spread under the Revolving Facility
(initially 2.75%) on the
aggregate face amount of outstanding standby
letters of credit under the Revolving
Facility and (b) with respect to trade
letters of credit, one-half of the then-
applicable LIBOR spread under the Revolving
Facility (rounded up to the nearest one-
eighth) (initially 1.375%) on the aggregate
face amount of the outstanding trade letters
of credit under the Revolving Facility, in
each case calculated on a per-annum basis and
payable in arrears at the end of each quarter
and upon the termination of the Revolving
Facility for the actual number of days
elapsed over a 360-day year. Such fees shall
be distributed to the Lenders participating
in the Revolving Facility pro rata in
accordance with the amount of each such
Lender's Revolving Facility commitment. Out
of the fee referred to above, each L/C Lender
shall be paid, for its own account, a fee
equal to .25% per annum on the face amount of
all outstanding letters of credit, payable in
arrears at the end of each quarter and upon
the termination of the letter of credit
facility, in each case for the actual number
of days elapsed over a 360-day year.
Commitment Fees: .50% per annum on the undrawn amount of the
Credit Facilities, commencing to accrue, with
respect to each
Lender, on the date of acceptance of such
Lender's commitment. For purposes of
determining the amount of the Commitment
Fees, letters of credit shall be deemed to be
outstanding amounts under the Revolving
Facility.
Commitment fees will be payable on the
Closing Date, in arrears at the end of each
quarter and upon any termination of any
commitment, in each case for the actual
number of days elapsed over a 365-day year.
Annex A
Standard Financial Covenant Definitions
"Consolidated Amortization Expense" for any Person
shall mean, for any period, the consolidated amortization
expense of such Person for such period, determined on a consol-
idated basis for such Person and its Subsidiaries in conformity
with GAAP.
"Consolidated Capital Expenditures" of any Person
shall mean, for any period, the aggregate gross increase during
that period, in the property, plant or equipment reflected in
the consolidated balance sheet of such Person and its consoli-
dated Subsidiaries, in conformity with GAAP, but excluding
expenditures made in connection with the replacement, substitu-
tion or restoration of assets (i) to the extent financed from
insurance proceeds paid on account of the loss of or damage to
the assets being replaced or restored, (ii) with awards of com-
pensation arising from the taking by eminent domain or condem-
nation of the assets being replaced or (iii) with regard to
equipment that is purchased simultaneously with the trade-in of
existing equipment, fixed assets or improvements, the credit
granted by the seller of such equipment for the trade-in of
such equipment, fixed assets or improvements; provided that
Consolidated Capital Expenditures shall in any event include
the purchase price paid in connection with the acquisition of
any other Person (including through the purchase of all of the
capital stock or other ownership interests of such Person or
through merger or consolidation) to the extent allocable to
property, plant and equipment.
"Consolidated Current Assets" shall mean, with
respect to any Person as at any date of determination, the
total assets of such Person and its consolidated Subsidiaries
which may properly be classified as current assets on a consol-
idated balance sheet of such Person and its Subsidiaries in
accordance with GAAP.
"Consolidated Current Liabilities" shall mean, with
respect to any Person as at any date of determination, the
total liabilities of such Person and its consolidated Subsid-
iaries which may properly be classified as current liabilities
(other than the current portion of any Loans) on a consolidated
balance sheet of such Person and its consolidated Subsidiaries
in accordance with GAAP.
"Consolidated Depreciation Expense" for any Person
shall mean, for any period, the consolidated depreciation
expense of such Person for such period, determined on a consol-
idated basis for such Person and its consolidated Subsidiaries
in conformity with GAAP.
"Consolidated EBITDA" for any Person shall mean, for
any period, without duplication, the amount equal to (A) the
sum of the amounts for such period of (i) Consolidated Net
Income, (ii) Consolidated Tax Expense, (iii) Consolidated
Interest Expense, (iv) Consolidated Amortization Expense and
(v) Consolidated Depreciation Expense (with respect to clauses
(ii) through (iv), to the extent such amounts were deducted in
computing Consolidated Net Income) less (B) the sum of the
amounts for such period of (i) interest income (net of income
taxes) and (ii) gains or losses on sales of assets (net of
income taxes) to the extent included in Consolidated Net
Income, whether or not extraordinary (excluding sales in the
ordinary course of business) and other extraordinary gains, all
as determined on a consolidated basis for such Person and its
consolidated Subsidiaries in accordance with GAAP.
"Consolidated Interest Expense" for any Person shall
mean, for any period, the sum of (x) total interest expense
(including that attributable to Capital Leases in accordance
with GAAP) and (y) total cash dividends paid on any preferred
stock, in each case of such Person and its Subsidiaries on a
consolidated basis with respect to all outstanding Indebtedness
and preferred stock of such Person and its Subsidiaries,
including, without limitation, all commissions, discounts and
other fees and charges owed with respect to letters of credit
financing, but excluding, however, any amortization of deferred
financing costs, all as determined on a consolidated basis for
such Person and its consolidated Subsidiaries in accordance
with GAAP. For purposes of clause (y) above, dividend require-
ments shall be increased to an amount representing the pretax
earnings that would be required to cover such dividend require-
ments; accordingly, the increased amount shall be equal to such
dividend requirements multiplied by a fraction, the numerator
of which is such dividend requirement and the denominator of
which is 1 minus the applicable actual combined Federal, state,
local and foreign income tax rate of such Person and its sub-
sidiaries (expressed as a decimal), on a consolidated basis,
for the fiscal year immediately preceding the date of the
transaction giving rise to the need to calculate Consolidated
Interest Expense.
"Consolidated Net Income" for any Person shall mean,
for any period, the net income (or loss) of such Person and its
Subsidiaries on a consolidated basis for such period taken as a
single accounting period determined on a consolidated basis for
such Person and its consolidated Subsidiaries in conformity
with GAAP; provided that there shall be excluded (i) the income
(or loss) of any other Person (other than consolidated Subsid-
iaries of such Person) in which any third Person (other than
such Person or any of its consolidated Subsidiaries) has a
joint interest, except to the extent of the amount of divi-
dends, distributions and intercompany loans actually paid to
such Person or any of its Subsidiaries by such other Person
during such period, (ii) the income (or loss) of any other Per-
son accrued prior to the date it becomes a consolidated Subsid-
iary of such Person or is merged into or consolidated with such
Person or any of its consolidated Subsidiaries or such other
Person's assets are acquired by such Person or any of its con-
solidated Subsidiaries and (iii) the income of any consolidated
Subsidiary of such Person to the extent that the declaration or
payment of dividends or similar distributions by that consoli-
dated Subsidiary of that income is not at the time permitted by
operation of the terms of its charter or any agreement, instru-
ment, judgment, decree, order, statute, rule or governmental
regulation applicable to that consolidated Subsidiary, except
to the extent of the dividends or distributions actually paid
to such Person or any of its Subsidiaries by such other Person
during such period.
"Consolidated Net Worth" of any Person shall mean, at
any time for the determination thereof, the sum of the capital
stock and additional paid-in capital plus retained earnings (or
minus accumulated deficit) of such Person and its consolidated
Subsidiaries, all as determined on a consolidated basis for
such Person and its consolidated Subsidiaries in conformity
with GAAP.
"Consolidated Tax Expense" for any Person shall mean,
for any period, the consolidated tax expense of such Person for
such period, determined on a consolidated basis for such Person
and its consolidated Subsidiaries in conformity with GAAP.
"Eligible Accounts Receivable" shall mean, as at any
applicable date of determination, the aggregate face amount of
Borrower's Accounts included in clause (i) of the definition of
Account hereunder, without duplication, in each case less
(without duplication) the aggregate amount of all reserves,
limits and deductions with respect to such Accounts set forth
below or as otherwise provided in this Agreement and less the
aggregate amount of all returns, discounts, claims, credits,
charges (including warehouseman's charges) and allowances of
any nature with respect to such Accounts (whether issued,
owing, granted or outstanding). Unless otherwise approved in
writing by the Agent in its sole discretion (or, if the aggre-
gate amount of approvals exceeds $[ ] at any one time,
the approval of the Required Banks), no individual Account
shall be deemed to be an Eligible Account Receivable if:
(a) the Borrower does not have legal and valid title
to the Account; or
(b) the Account is not the valid, binding and
legally enforceable obligation of the account debtor sub-
ject, as to enforceability, only to (i) applicable bank-
ruptcy, insolvency, reorganization, moratorium or similar
laws at the time in effect affecting the enforceability of
creditors' rights generally and (ii) judicial discretion
in connection with the remedy of specific performance and
other equitable remedies; or
(c) the Account arises out of a sale made by the
Borrower to an Affiliate of the Borrower; or
(d) the Account is unpaid more than [ ] days after
the original payment date; provided, however, that the
aggregate amount of all invoices providing for payment
more than [ ] days from the date of the invoice that may
constitute Eligible Accounts Receivable shall not exceed
$[ ] at any one time; or
(e) the Account, when aggregated with all other
Accounts of the same account debtor (or any Affiliate
thereof), exceeds [ ] percent in face value of all
Accounts of Borrower then outstanding, to the extent of
such excess; or
(f) (i) the account debtor is also a creditor of the
Borrower, to the extent of the amount owed by the Borrower
to the account debtor, (ii) the Account is subject to any
claim on the part of the account debtor disputing lia-
bility under such Account in whole or in part, to the
extent of the amount of such dispute or (iii) the Account
otherwise is or is reasonably likely to become subject to
any right of setoff or any counterclaim, claim or defense
by the account debtor, to the extent of the amount of such
setoff or counterclaim, claim or defense; or
(g) the account debtor has commenced a voluntary
case under the federal bankruptcy laws, as now constituted
or hereafter amended, or made an assignment for the bene-
fit of creditors or if a decree or order for relief has
been entered by a court having jurisdiction in the prem-
ises in respect of the account debtor in an involuntary
case under the federal bankruptcy laws, as now constituted
or hereafter amended, or if any other petition or other
application for relief under the federal bankruptcy laws
has been filed by or against the account debtor, or if the
account debtor has failed, suspended business, ceased to
be solvent, or consented to or suffered a receiver, trus-
tee, liquidator or custodian to be appointed for it or for
all or a significant portion of its assets or affairs; or
(h) the Agent does not have a valid and perfected
first priority security interest in such Account (subject
only to a tax lien being contested in good faith and by
appropriate proceedings and permitted by Section [ ];
or
(i) the sale to the account debtor is on a consign-
ment, bill-and-hold, sale on approval, guaranteed sale or
sale-and-return basis or pursuant to any written agreement
providing for repurchase or return; or
(j) it is from the same account debtor (or any
Affiliate thereof) and [ ] percent ([ ]%) or more, in
face amount, of other Accounts from either such account
debtor or any Affiliate thereof are due or unpaid for more
than [ ] days after the original invoice date; or
(k) [ ] percent ([ ]%) or more, in face amount,
of other Accounts from the same account debtor are not
deemed Eligible Accounts Receivable hereunder; or
(l) with respect to the Account, the account debtor
is a foreign government or any agency, department or
instrumentality thereof; or
(m) the Account is an Account a security interest in
which would be subject to the Federal Assignment of Claims
Act of 1940, as amended (31 U.S.C. { 3727 et seq.), unless
Borrower has assigned the Account to the Agent in compli-
ance with the provisions of such Act; or
(n) the sale is to an account debtor outside the
continental United States or incorporated in or conducting
substantially all of its business in any jurisdiction
located outside the United States, unless the sale is
(i) on letter of credit, guaranty or acceptance terms, in
each case acceptable to the Agent, or (ii) otherwise
approved by and acceptable to the Agent; or
(o) the Agent determines in good faith in accordance
with its internal credit policies that (i) collection of
the Account is insecure or (ii) the Account may not be
paid by reason of the account debtor's financial inability
to pay; provided, however, that any Account referred to in
this clause (o) shall not become ineligible until the
Agent shall have given the Borrower three Business Days'
advance notice of such determination; or
(p) the goods giving rise to such Account have not
been shipped and delivered to and accepted by the account
debtor or the services giving rise to such Account have
not been performed by the Borrower and accepted by the
account debtor or the Account otherwise does not represent
a final sale; or
(q) the Account does not comply in all material
respects with all applicable legal requirements, includ-
ing, where applicable, the Federal Consumer Credit Protec-
tion Act, the Federal Truth in Lending Act and Regulation
Z of the Board of Governors of the Federal Reserve System,
in each case as amended.
In addition to the foregoing, Eligible Accounts
Receivable shall include such Accounts as the Borrower shall
request and that the Agent approves in advance, in writing and
in its sole discretion.
"Eligible Inventory" shall mean (A) the gross amount
of the Borrower's Inventory, valued at the lower of cost (on a
[FIFO] basis) or market, which (i) is owned solely by the Bor-
rower and with respect to which the Borrower has good, valid
and marketable title; (ii) is stored on property that is either
(a) owned or leased by the Borrower or (b) owned or leased by a
warehouseman that has contracted with the Borrower to store
Inventory on such warehouseman's property (provided that, with
respect to Inventory stored on property leased by the Borrower,
the Borrower shall have delivered in favor of the Agent an
acknowledgment agreement executed by the lessor of such prop-
erty, and, with respect to the Inventory stored on property
owned or leased by a warehouseman, the Borrower shall have
delivered to the Agent acknowledgment agreements executed by
such warehouseman); (iii) is subject to a valid, enforceable
and first priority Lien in favor of the Agent subject to a tax
lien being contested in good faith and by appropriate proceed-
ings and permitted by Section [ ], except with respect to
Eligible Inventory stored at sites described in clause (ii)(b)
above, for Liens for normal and customary warehouseman charges;
(iv) is located in the United States; and (v) is not, in the
reasonable judgment of the Agent, obsolete or slow moving, and
which otherwise conforms to the warranties and standards for
eligibility contained herein; (B) less any goods returned or
rejected by the Borrower's customers and goods in transit; and
(C) less any reserves required by the Agent for special order
goods and market value declines. In addition to the foregoing,
Eligible Inventory shall include such items of the Borrower's
Inventory as Borrower shall request and that the Agent approves
in advance, in writing and in its sole discretion [(or if the
aggregate amount of approvals exceeds $[ ] at any one
time, the approval of the Required Banks)]; provided that this
definition of Eligible Inventory shall under no circumstances
include work in progress or raw materials.
"Indebtedness" of any Person shall mean, without
duplication, (i) all indebtedness of such Person for borrowed
money, (ii) the deferred purchase price of assets or services
which in accordance with GAAP would be shown on the liability
side of the balance sheet of such Person, (iii) the face amount
of all letters of credit issued for the account of such Person
and, without duplication, all drafts drawn thereunder, (iv) all
Indebtedness of a second Person secured by any Lien on any
property owned by such first Person, whether or not such
Indebtedness has been assumed by such first Person, (v) all
Capitalized Lease Obligations of such Person, (vi) all obliga-
tions of such Person to pay a specified purchase price for
goods or services whether or not delivered or accepted, i.e.,
take-or-pay and similar obligations, (vii) all obligations of
such Person under Interest Rate Agreements and (viii) all Con-
tingent Obligations of such Person.
EXHIBIT (b)(2)
CONFIDENTIAL
MATERIAL PRESENTED TO THE BOARD OF DIRECTORS
OF
LILLIAN VERNON CORPORATION
AT A MEETING ON JUNE 13, 1995
The following pages contain material that was provided to the Board of
Directors of Lillian Vernon Corporation (the "Company") in connection with a
meeting of the Board of Directors of the Company held to evaluate the
acquisition proposal made by FS Equity Partners II, L.P. and FS Equity Partners
International, L.P. described in other materials filed by the Company with the
Securities and Exchange Commission. The accompanying material was prepared for
use solely by the Board of Directors of the Company and not with a view toward
public disclosure under federal or state securities laws. The information
contained in this material was obtained from the Company and other sources
without independent verification by Goldman, Sachs & Co. or is derived
therefrom. No representation or warranty, express or implied, is made as to the
accuracy or completeness of such information.
All estimates and projections contained herein, including financial
projections for the Company which have been prepared by the management of the
Company involve numerous and significant subjective determinations which may or
may not be correct. Because this material was prepared for use solely in the
context of a presentation or presentations to the Board of Directors of the
Company, was not prepared to comply with the disclosure standards set forth
under any securities laws and may be used by persons not as familiar with the
business and affairs of the Company as the Board of Directors, the Company,
Goldman, Sachs & Co. and their respective legal and financial advisors and
accountants disclaim any responsibility to any such person relating to the use
of any of the material contained herein. Neither the Company, nor Goldman, Sachs
& Co. expects to update or otherwise revise the accompanying materials.
Goldman
Sachs
Goldman
Sachs
Presentation to
The Board of Directors
Regarding
Project Monogram
Prepared by
Goldman, Sachs & Co.
June 13, 1995
Table of Exhibits
Review of Marketing Process I
Financial Pressures Impacting Monogram II
Selected Financial Information
- -- Historical and Projected Financial Statements III
Valuation
- -- $19 Transaction Price Relative to Various Valuation Parameters IV
- -- Comparison of Publicly Traded Mail Order and Specialty Retailers V
- -- Stock Price History Graphs VI
- -- Comparison of Selected Recent Transactions VII
- -- Discounted Cash Flow Analysis VIII
- -- Leveraged Transaction Analysis IX
Review of Marketing Process
[ ] The Company authorized Goldman Sachs to contact three potential financial
buyers in November/December of 1994.
[ ] The Board of Directors authorized Goldman Sachs to expand the field of
potential buyers on January 24th.
[ ] The Board of Directors authorized a public announcement regarding its study
of strategic alternatives on March 10th.
[ ] The Board of Directors authorized Goldman Sachs to request preliminary
indications of interest by April 20th.
Review of Potential Acquirors
<TABLE>
<CAPTION>
Unsolicited
Final Preliminary Parties Sent Parties who Parties Pro-
Proposals Indications of Confidential Participated in Actively
Received Value Information Process Contacted
- --------- -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Freeman Spogli Brown-Forman AEA Investors AEA Investors Amer. Greetings
Hicks Muse Freeman Spogli Bain Capital Bain Capital CML
Hicks Muse Brown-Forman Brown-Forman Fingerhut
J.C. Penney Freeman Spogli Golder, Thoma Franklin Mint
Kelso Golder, Thoma Hallmark Freeman Spogli
Montgomery Great Universal Hartz Group Great Universal
Ward Hicks Muse Kelso Hicks Muse
Patricof/ J.C. Penney Lechters J.C. Penney
Saunders Karp(a) Kelso Patricof Jusco
Montgomery Saunders Karp Montgomery
Ward Ward
Patricof Neiman Marcus
Saunders Karp Phillips-Van
Heusen
Pinault Printemps
Reader's Digest
Stanhome
</TABLE>
(a) Patricof and Saunders Karp decided to proceed in transaction together.
Project Monogram
Financial Pressures Impacting Monogram
FY 1996 Effective Postage
Increase of 10%
Monogram
Management Estimated Capital Expenditures
Increase of Total Paper Totaling more than $34 mm
Cost from FY95 to (over the next 3 years)
FY96=47%
Near-Term Capital Expenditure Requirements
[ ] As a result of the Company's growth prospects, Monogram will need to spend
approximately $37 million in a Capacity Improvement Plan over the next 6 years;
$34 million is estimated to be spent over the next 3 years
[ ] The Company firmly believes that it cannot achieve its projected growth
without the planned capital expenditures
[ ] Of the approximately $34 million will be spent in the next 3 years: $4
million in FY96, $18 million in FY97 and $12 million in FY98
[ ] There are three major components to the Capacity Improvement Plan
[ ] a 216,000 square foot expansion of the Company's Distribution Center
(more than doubling the Company's effective floorspace)
[ ] a 125,000 square foot expansion of the Company's Warehouse
(increasing the pallet storage capacity from 23,300 to 53,300)
[ ] installation of a wave pick materials handing system (automating and
improving the efficiency of the Company's order fulfillment operations)
[ ] Monogram anticipates the program to be "on-line" in the spring of 1997 and
that this Plan will satisfy the Company's needs until 2002-2003
[ ] Below is a breakdown of the anticipated expenditures relating to the Plan
for the next six years
Capital Requirements
Total
Outlay
---------
Distribution Center Expansion $ 5.4mm
Material Handling Equipment ("Wave Pick") 14.0
MIS Software and Hardware (Support) 9.7
Design and Implementation 1.7
Warehouse 6.0
-----
$36.8mm
Project Monogram
Increased Paper Costs
[ ] Due to considerable capacity constraints in the paper industry, Monogram's
catalog paper costs are projected to increase nearly 50% from $18.5 million in
FY95 to $27.2 million in FY96.
[ ] Although the Company has not made a detailed forecast of paper costs after
FY1996, management's projections assume paper prices remain at their current (Q1
1995) levels for the remainder of the decade.
[ ] To somewhat mitigate the adverse impact of paper prices on the company's
financial performance, management has chosen to use a lighter-weight paper (on
selected catalogs) and will keep the total number of catalog pages printed in
FY96 approximately equal to FY95.
[ ] Attached is Goldman Sachs' Research Department's forecast of Coated
Groundwood (Catalog Paper) Prices. This forecast suggests that the Company may
experience additional cost pressure above current projections through the
beginning of 1997.
Project Monogram
Goldman Sachs Paper Costs Forecast
Coated Groundwood (Catalog Paper)
Description of Graphic Material:
On a quarterly basis, paper price per short ton for
1994 and estimates for 1995, 1996 and 1997.
Source: Goldman Sachs Research, May 1995
Note: The average quarterly price for Coated
Groundwood for the period of 1982-1993 was
$741 per short ton. The previous high during
the past 12 years occurred in the fourth
quarter of 1988 at a price of $840 per short
ton.
End of Description of Graphic Material.
Postage Increase
[ ] In January 1995, the U.S. Postal Service increased postage by 14% on third-
class mail
[ ] As a result, the Company's catalog postage cost are projected to increase on
an absolute basis by 14.3% from $28.7 million in FY95 to $32.8 million in FY96
[ ] The Company plans to mitigate the effect of the postage increase two ways:
[ ] Use lighter weight paper thereby reducing the total mailing cost-
providing an effective catalog mailing cost increase of 10.4%
[ ] Increase Shipping and Handling charges to customers by an average
of 11%
[ ] The Company does not anticipate any additional postage increases for at
least 3 years
Project Monogram
Summary of Assumptions Used for Management Projections
Overview
- ---------
[ ] Projected revenue growth of 14.1% annually versus a historical 4-year
average of 9.7%.
[ ] Operating margin increase from 8.9% in FY1995 to 11.2% in FY2000 versus a 4-
year historical average of 9.3%.
[ ] 1996 projections reflect the Company's detailed operating plan. The
remaining years were developed by the Company in connection with the sale of the
Company. Revenue and gross margins for FY97 to FY2000 were determined by senior
management and the executive responsible for such catalog. Numbers below the
gross margin line as well as balance sheet and cash flow items were extrapolated
from FY96 projections by management.
Income Statement
- ----------------
[ ] Projected revenue growth of 14.1% annually. Driven largely by rapid growth
of specialty catalogs such as Christmas Memories, Personalization, and Kitchen
as well as expansion of current product lines such as organization items
(historical 4-year average of 9.7%).
[ ] Slight decrease in gross margin from 63.5% in FY96 to 62.5% in FY2000
resulting from an increased contribution by the Kitchen Catalog which on average
has a 9% lower gross margin than the Company's other catalogs (historical 4-year
average of 64.9%, although 1994 and 1995 margins were 63.8%).
[ ] Operations expense held constant at 14.1% of sales versus historical 4-year
average of 13.3%. (FY95 operations expense of 13.9%)
[ ] Net postage income annual growth of 17.2%. Factors include growing number of
packages shipped and increases in Shipping and Handling charges more than
offsetting postage expense.
[ ] Catalog costs remain constant at 37.0% of sales. Implicit assumption is that
paper costs will remain at this level. (4-year historical average of 34.8%)
Assumptions for Management Projections
[ ] S, G+A costs will decline as a percent of sales from 13.5% in FY96 to 9.7%
in FY2000 due to operating efficiences. (FY95 percentage of sales was 15.3%)
[ ] Mail order operating margin is projected to increase from 6.3% in FY96 to
9.2% in FY2000 versus a 4-year historical average 7.1%. FY95 level of 6.4%.
[ ] Special Markets income increases on an annual basis of 10%.
[ ] Retail and list rental income increase annually by 5%.
[ ] Operating margin increases from 8.9% in FY96 to 11.2% in FY2000 (FY95
percentage is 8.9% and the 4-year historical average is 9.3%).
Cash Flow
- ----------
[ ] Capital expenditures reflect the Capacity Improvement Plan.
[ ] Useful lives for the capital expenditures:
-- 30 years for the Distribution Center and Warehouse (similar to current
buildings)
-- 10 years for Equipment (same as existing equipment)
-- 5 years for MIS software and hardware (also the same as existing MIS
lives)
Assumptions for Management Projections
Balance Sheet
- -------------
[ ] Accounts receivables remain constant at 10.4% of sales. FY95 percentage was
also 10.4%. Comparisons prior to FY95 are not relevant as the Company
implemented a deferred billing program in FY95 which increased the level of
accounts receivables.
[ ] Inventories on an absolute basis in FY1996 assumed to be constant versus
FY1995. Inventory as a percent of sales varies from 12.4% to 14.2% post FY96.
4-Year historical average of 14.1%. FY95 level of 14.7% and FY96 percentage of
12.8%.
[ ] Accounts payable represent 16% to 21% of cost of goods sold versus a 4-year
historical average of 25.5% and 22.8% for FY95.
Historical and Projected Net Mail Order Revenue
Description of Graphic Material in Tabular Form:
<TABLE>
<CAPTION>
<S> <C>
Net Mail Order Revenue
Year ($ in millions)
---- ------------------------
Actual
------
1992 156
1993 165
1994 184
1995 206
CAGR = 9.7%
Estimated
---------
1996 234
1997 268
1998 311
1999 357
2000 399
CAGR = 14.1%
</TABLE>
End of Description of Graphic Material in Tabular Form.
Historical and Projected Operating Income
Description of Graphic Material in Tabular Form:
<TABLE>
<CAPTION>
<S> <C>
Historical and Projected
Operating Income
Year ($ in millions)
---- ------------------------
Actual
------
1992 13.8
1993 15.5
1994 18.6
1995 18.4
CAGR = 10.1%
Estimated
---------
1996 20.9
1997 25.8
1998 30.7
1999 37.1
2000 44.5
CAGR = 19.3%
</TABLE>
End of Description of Graphic Material in Tabular Form.
Historical and Projected Operating Margin
Description of Graphic Material in Tabular Form:
<TABLE>
<CAPTION>
<S> <C>
Historical and Projected
Year Operating Margin (%)
---- ------------------------
Actual
------
1992 8.8%
1993 9.4%
1994 10.1%
1995 8.9%
Estimated
---------
1996 8.9%
1997 9.6%
1998 9.9%
1999 10.4%
2000 11.2%
</TABLE>
End of Description of Graphic Material in Tabular Form.
<PAGE>
SUMMARY HISTORICAL AND PROJECTED INCOME STATEMENTS (A)
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
--------------------------------------
1992 1993 1994 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Mail Order Revenues ........ $156.1 $164.7 $183.8 $206.2
Cost of Sales ................. 51.6 57.3 66.6 74.7
-------- -------- -------- --------
Gross Profit ................... 104.5 107.4 117.2 131.5
Operations .................... 21.0 21.2 23.6 28.6
Net Postage ................... (10.3) (10.6) (11.4) (13.2)
Catalog Costs ................. 58.2 56.3 60.6 71.5
SG&A .......................... 24.9 28.0 30.4 31.5
-------- -------- -------- --------
Total Op, Post, Catalog & SG&A 93.8 94.9 103.2 118.4
-------- -------- -------- --------
Mail Order Operating Income ... 10.7 12.5 14.0 13.1
Special Markets, Retail & List
Rental ....................... 3.1 3.0 4.6 5.3
-------- -------- -------- --------
Total Operating Income ......... 13.8 15.5 18.6 18.4
Interest and Other Income .... 0.6 1.0 0.9 0.7
-------- -------- -------- --------
Pretax Income .................. 14.4 16.5 19.5 19.1
Income Tax Expense ............ 4.8 5.6 6.7 5.5
-------- -------- -------- --------
Net income ..................... $ 9.5 $ 10.8 $ 12.8 $ 13.6
Shares Outstanding ............. 9.3 9.4 9.4 9.9
Earnings per Share ............. $ 1.02 $ 1.15 $ 1.35 $ 1.38
======== ======== ======== ========
Selected Ratios:
Sales Growth Rate .............. 1.2% 5.5% 11.6% 12.2%
Gross Margin ................... 66.9% 65.2% 63.8% 63.8%
Mail Order Operating Margin ... 6.9% 7.6% 7.6% 6.4%
Total Operating Margin ......... 8.8% 9.4% 10.1% 8.9%
Tax Rate ....................... 33.3% 33.9% 34.4% 28.8%
Net Margin (b) ................. 6.1% 6.6% 7.0% 6.6%
EPS Growth ..................... 2.0% 12.7% 17.4% 2.2%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1996E 1997E 1998E 1999E 2000E
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Mail Order Revenues ........ $233.7 $268.3 $311.2 $356.6 $398.9
Cost of Sales ................. 85.3 98.5 115.4 132.8 149.4
-------- -------- -------- -------- --------
Gross Profit ................... 148.4 169.8 195.8 223.8 249.5
Operations .................... 33.0 37.9 44.7 51.3 56.7
Net Postage ................... (17.2) (19.7) (22.9) (26.2) (29.2)
Catalog Costs ................. 86.4 98.8 115.1 132.0 147.0
SG&A .......................... 31.4 33.6 35.2 37.0 38.5
-------- -------- -------- -------- --------
Total Op, Post, Catalog & SG&A 133.6 150.6 172.1 194.1 213.0
-------- -------- -------- -------- --------
Mail Order Operating Income ... 14.8 19.2 23.7 29.7 36.5
Special Markets, Retail & List
Rental ....................... 6.1 6.6 7.0 7.4 8.0
-------- -------- -------- -------- --------
Total Operating Income ......... 20.9 25.8 30.7 37.1 44.5
Interest and Other Income .... 1.1 1.3 0.6 0.8 1.4
-------- -------- -------- -------- --------
Pretax Income .................. 22.0 27.1 31.3 37.9 45.9
Income Tax Expense ............ 7.2 9.5 11.0 13.3 16.1
-------- -------- -------- -------- --------
Net income ..................... $ 14.7 $ 17.6 $ 20.4 $ 24.6 $ 29.9
Shares Outstanding ............. 10.0 10.0 10.1 10.2 10.2
Earnings per Share ............. $ 1.47 $ 1.76 $ 2.01 $ 2.42 $ 2.93
======== ======== ======== ======== ========
Selected Ratios:
Sales Growth Rate .............. 13.3% 14.8% 16.0% 14.6% 11.9%
Gross Margin ................... 63.5% 63.3% 62.9% 62.8% 62.5%
Mail Order Operating Margin ... 6.3% 7.2% 7.6% 8.3% 9.2%
Total Operating Margin ......... 8.9% 9.6% 9.9% 10.4% 11.2%
Tax Rate ....................... 32.7% 35.1% 35.1% 35.1% 35.1%
Net Margin (b) ................. 6.3% 6.6% 6.6% 6.9% 7.5%
EPS Growth ..................... 6.5% 19.7% 14.2% 20.4% 21.1%
<FN>
(a) 1992 - 1995 figures are based on audited financial information; 1996E
- 2000E are based on management projections.
(b) Net margin represents the total net income as a percent of net mail
order sales.
</TABLE>
<PAGE>
SUMMARY BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
------------------------------------------------
1992 1993 1994 1995 1996E
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Assets
Cash and Equivalents ..................... $ 43.5 $ 51.1 $ 52.8 $ 38.8 $ 50.3
Accounts Receivable ...................... 2.1 4.4 11.2 21.5 24.4
Inventories .............................. 22.7 19.9 27.3 30.4 30.0
Prepayments and Other Current Assets (a) 8.3 8.2 9.7 14.4 14.6
-------- -------- -------- -------- --------
Total Current Assets ...................... 76.6 83.6 101.0 105.1 119.3
Plant, Property & Equipment .............. 23.8 28.1 26.7 29.6 31.0
Other Assets ............................. 4.2 3.4 3.1 3.0 2.5
-------- -------- -------- -------- --------
TOTAL ASSETS .............................. $104.5 $115.1 $130.8 $137.7 $152.8
======== ======== ======== ======== ========
Liabilities and Shareholders Equity
Current Liabilities:
A/P & Accrued Expenses (b) ............... $ 11.5 $ 14.7 $ 20.8 $ 17.0 $ 18.2
Customer Deposits ........................ 0.1 0.6 0.2 0.4 0.4
Current portion of LT Debt & Cap Leases . 1.5 1.4 1.4 1.4 1.4
Other Current Liabilities (c) ............ 2.8 4.1 4.2 3.6 5.3
-------- -------- -------- -------- --------
Total Current Liabilities ................. 15.9 20.7 26.6 22.4 25.3
Capital leases & LT Debt, less current
portion ................................. 11.0 7.2 5.8 4.3 3.0
Deferred taxes payable ................... 2.2 2.0 1.3 0.9 0.9
-------- -------- -------- -------- --------
TOTAL LIABILITIES ......................... 29.1 29.9 33.7 27.6 29.2
SHAREHOLDERS EQUITY ....................... 75.5 85.2 97.1 110.1 123.6
-------- -------- -------- -------- --------
TOTAL LIABILITY & SHAREHOLDERS EQUITY .... $104.5 $115.1 $130.8 $137.7 $152.8
======== ======== ======== ======== ========
<FN>
(a) Primarily deferred catalog costs.
(b) Includes deferred compensation.
(c) Primarily income taxes payable and deferred income taxes.
</TABLE>
<PAGE>
CASH FLOW STATEMENTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-----------------------------------
1992 1993 1994 1995
------- ------- ------- --------
<S> <C> <C> <C> <C>
Cash Flow from Operating
Activities
Net Income ........................ $ 9.5 $10.8 $12.8 $ 13.6
Depreciation and Amortization ... 3.9 4.3 4.1 3.9
(Gain) Loss on the Sale of
Assets .......................... 0.0 (0.7) 0.1 0.0
(Inc) Dec in Accounts Receivable 0.3 (2.3) (6.9) (10.3)
(Inc) Dec in Inventories ......... 0.7 2.8 (7.4) (3.1)
(Inc) Dec in Prepay & Other
Assets (a) ...................... 1.9 (0.6) (1.6) (5.3)
Inc (Dec) in Trade Acct Payable
& Acc Exp (b) ................... (3.1) 3.2 6.1 (3.8)
Inc (Dec) in Customer Deposits .. (0.7) 0.5 (0.3) 0.2
Inc (Dec) in Current Liabilities (1.6) 1.2 (1.2) (0.8)
------- ------- ------- --------
Net Cash Provided by Operating
Activities ....................... 10.9 19.2 5.7 (5.6)
Cash Flow from Investing
Activities
Purchases of PP&E ................ (1.7) (7.5) (1.8) (6.3)
Proceeds from the Sale of Assets 0.0 1.1 0.0 0.0
------- ------- ------- --------
Net Cash Used in Investing
Activities ....................... (1.7) (6.4) (1.8) (6.3)
Cash Flows from Financing
Activities
Principal Payments on LTD and
Cap. Leases ..................... (1.5) (4.0) (1.4) (1.4)
Proceeds from Issuance of Common
Stock ............................ 0.2 0.5 0.8 1.6
Dividends Paid ................... 0.0 (1.9) (1.9) (2.5)
Other ............................ 0.0 0.1 0.4 0.2
------- ------- ------- --------
Net Cash from Financing Activities (1.4) (5.3) (2.1) (2.1)
------- ------- ------- --------
Net Increase (Decrease) in Cash &
Equivalents ...................... 7.8 7.6 1.8 (14.0)
------- ------- ------- --------
Cash & Cash Equivalents at
Beginning of Period .............. 35.7 43.5 51.1 52.8
------- ------- ------- --------
Cash & Cash Equivalents at End of
Period ........................... $43.5 $51.1 $52.8 $ 38.8
======= ======= ======= ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1996E 1997E 1998E 1999E 2000E
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash Flow from Operating
Activities
Net Income ........................ $14.7 $ 17.6 $ 20.4 $24.6 $29.9
Depreciation and Amortization ... 4.1 4.4 5.7 6.4 6.2
(Gain) Loss on the Sale of
Assets .......................... 0.0 0.0 0.0 0.0 0.0
(Inc) Dec in Accounts Receivable (2.9) (3.6) (4.5) (4.7) (4.4)
(Inc) Dec in Inventories ......... 0.4 (8.2) (4.2) (2.6) (4.5)
(Inc) Dec in Prepay & Other
Assets (a) ...................... 0.0 (2.1) (2.0) (2.2) (2.0)
Inc (Dec) in Trade Acct Payable
& Acc Exp (b) ................... 1.3 1.4 1.7 1.6 1.2
Inc (Dec) in Customer Deposits .. 0.0 0.0 0.0 0.0 0.0
Inc (Dec) in Current Liabilities 1.7 0.0 0.5 0.9 0.3
------- -------- -------- ------- -------
Net Cash Provided by Operating
Activities ....................... 19.3 9.5 17.6 24.0 26.7
Cash Flow from Investing
Activities
Purchases of PP&E ................ (5.0) (20.0) (14.0) (4.0) (4.0)
Proceeds from the Sale of Assets 0.0 0.0 0.0 0.0 0.0
------- -------- -------- ------- -------
Net Cash Used in Investing
Activities ....................... (5.0) (20.0) (14.0) (4.0) (4.0)
Cash Flows from Financing
Activities
Principal Payments on LTD and
Cap. Leases ..................... (1.4) (1.4) (1.4) (1.4) 0.0
Proceeds from Issuance of Common
Stock ............................ 1.6 1.6 1.7 1.7 1.8
Dividends Paid ................... (3.0) (3.4) (4.0) (4.6) (5.3)
Other ............................ 0.0 0.0 0.0 0.0 0.0
------- -------- -------- ------- -------
Net Cash from Financing Activities (2.8) (3.2) (3.7) (4.3) (3.5)
------- -------- -------- ------- -------
Net Increase (Decrease) in Cash &
Equivalents ...................... 11.5 (13.7) (0.1) 15.7 19.2
------- -------- -------- ------- -------
Cash & Cash Equivalents at
Beginning of Period .............. 38.8 50.3 36.6 36.5 52.2
------- -------- -------- ------- -------
Cash & Cash Equivalents at End of
Period ........................... $50.3 $ 36.6 $36.5 $52.2 $71.4
======= ======== ======== ======= =======
<FN>
(a) Includes deferred catalog costs.
(b) Includes deferred compensation.
</TABLE>
<PAGE>
1ST QUARTER PRELIMINARY RESULTS
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FY95 FY96 ESTIMATE
----------------------------- -----------------------------
$ % OF TOTAL $ % OF TOTAL
--------------- ------------ --------------- ------------
<C> <S> <C> <C> <C> <C>
Net Mail Order Sales $ 23.5 100.0% $ 27.0 100.0%
The IBES average Cost of Sales ........ 8.2 34.9 10.9 40.4
first quarter FY96 --------------- ------------ --------------- ------------
earnings estimate* is
a loss of 12 cents a Gross Profit ......... 15.3 65.1 16.1 59.6
share Operations ........... 4.3 18.3 5.0 18.5
Net Postage Income.... (1.6) (6.8) (1.8) (6.7)
Catalog Costs ........ 8.8 37.4 11.4 42.2
SG&A ................. 6.3 26.8 7.0 25.9
--------------- ------------ --------------- ------------
Mail Order Op Income (2.5) (10.6) (5.5) (20.4)
Special Markets ...... 0.2 0.9 0.1 0.4
Retail ............... (0.1) (0.4) (0.2) (0.7)
List Rental .......... 0.7 3.0 0.8 3.0
--------------- ------------ --------------- ------------
Operating Income .... (1.7) (7.2) (4.8) (17.8)
Other ................ 0.1 0.4 0.0 0.0
Interest Income ...... 0.4 1.7 0.5 1.9
Interest Expense .... (0.2) (0.9) (0.2) (0.7)
--------------- ------------ --------------- ------------
Pre-Tax .............. (1.4) (6.0) (4.5) (16.7)
Income Tax ........... 0.5 2.1 1.5 5.6
--------------- ------------ --------------- ------------
Net Loss ............. $ (0.9) (3.8)% $ (3.0) (11.1)%
--------------- ------------ --------------- ------------
Net Loss Per Share .. $(0.10)/share -- $(0.30)/share --
* As of May 18, 1995,
latest date available
</TABLE>
<PAGE>
$19 TRANSACTION PRICE RELATIVE TO VARIOUS
VALUATION PARAMETERS(A)
(Amounts in millions, except per share values)
<TABLE>
<CAPTION>
<S> <C>
Net Debt(b) ...........................................$(33.1)
Equity ................................................ 191.0
---------
Total Enterprise Value ................................ 157.9
---------
Price per Share ....................................... $19.00
</TABLE>
[CAPTION]
<TABLE>
<S> <C> <C>
Enterprise Value as a Multiple of Sales
FY 1994 .................................... $183.8 0.86x
FY 1995 .................................... 206.2 0.77
FY 1996E ................................... 233.7 0.68
FY 1997E ................................... 268.3 0.59
Enterprise Value as a Multiple of EBITDA
FY 1994 .................................... $ 22.7 6.9x
FY 1995 .................................... 22.3 7.1
FY 1996E ................................... 25.0 6.3
FY 1997E ................................... 30.2 5.2
Enterprise Value as a Multiple of EBIT
FY 1994 .................................... $ 18.6 8.5x
FY 1995 .................................... 18.4 8.6
FY 1996E ................................... 20.9 7.6
FY 1997E ................................... 25.8 6.1
Equity Value as a Multiple of Earnings (P/E)
FY 1994 .................................... $ 12.8 14.9x
FY 1995 .................................... 13.6 14.0
FY 1996E ................................... 14.7 13.0
FY 1997E ................................... 17.6 10.9
</TABLE>
(a) Assumes 10.05 million shares outstanding calculated on a fully diluted
basis.
(b) Assumes a cash balance of $38.8 million and total debt of $5.7 million.
Summary of Valuation Benchmarks
Common Stock Comparison (($) Price per Share)
Description of Graphic Material:
52-Week High
Range of $10.50 to $16.00
LTM Revenue Multiple
Range of $12.25 to $21.50
LTM EBITDA Multiple
Range of $15.50 to $20.50
1995E P/E Multiple
Range of $13.50 to $23.00
1996E P/E Multiple
Range of $13.75 to $21.88
LTM Trading Range Prior to Announcement
Range of $14.50 to $22.50
Prior Transactions
LTM Sales Multiple
Range of $6.13 to $29.00
LTM EBIT Multiple
Range of $11.00 to $32.75
Discounted Cash Flow Analysis
Management Projections
Range of $18.75 to $21.50
Historical Financial Profile
Range of $15.00 to $17.00
End of Description of Graphic Material.
Analysis of Monogram's Current Stock Price
[ ] Monogram's current stock price is trading at levels which reflect
anticipation of a potential merger transaction
[ ] Goldman Sachs estimates that Monogram's stock price, absent merger
speculation, would trade at approximately 10- 11x Management's FY1996 EPS or $14
to $16 per share for the following factors:
-- Comparable companies are currently trading at 47% to 72% of their
52-week highs versus Monogram trading at 92% of its year high
-- Industry trends such as overcapacity, increased postage costs and higher
paper costs have led to lower earnings prospects
-- Specifically for Monogram, its 4th quarter FY 1995 results were and its
1st quarter Fiscal 1996 earnings are considerably lower than the IBES
estimates prior to earnings release
On April 20th, the IBES consensus estimate for 4th quarter FY 1995
was $0.49/share vs FY 1995 actual of $0.42/share
On May 18th, the latest date available, the IBES 1st Quarter estimate
was $(0.12)/share vs management's preliminary estimate of $(0.25-0.30)/
share which could lead to downward revisions of FY96 earnings estimates
<PAGE>
PROJECT MONOGRAM -- COMMON STOCK COMPARISON
<TABLE>
<CAPTION>
SHARE PRICE % OF
AS OF 52-WEEK MARKET ENTERPRISE
6/9/95 HIGH CAP VALUE
----------- ------- ------ ----------
<S> <C> <C> <C> <C>
Monogram (d) ............. $20.38 91.6% $ 198 $ 164
Mail Order Retailers
Blair Corporation (e)(f) $33.25 70.9% $ 308 $ 363
Fingerhut (g) ............ 14.38 48.7% 658 908
Hanover Direct (h) ....... 3.06 47.1% 284 338
Lands' End ............... 15.75 72.2% 547 549
Spiegel .................. 11.38 48.4% 1,225 2,425
Median ...................
Specialty Retailers
Circuit City ............. $30.00 99.2% $ 2,894 $ 3,028
The Gap .................. 35.63 79.6% 5,126 4,541
Home Depot ............... 41.13 82.3% 19,545 20,544
Lechters (f)(i) .......... 15.00 78.9% 257 280
The Limited (j) .......... 21.63 93.0% 7,725 8,157
Liz Claiborne (k) ........ 17.88 74.1% 1,338 1,089
Nordstrom's (l) .......... 43.25 86.9% 3,557 3,986
Pep Boys (m) ............. 29.38 79.7% 1,808 2,208
Tiffany & Co. ............ 34.00 77.9% 535 676
Toys R Us ................ 27.38 70.2% 7,589 8,128
Wal-Mart ................. 25.00 95.2% 57,440 68,986
Williams-Sonoma .......... 21.00 59.6% 532 522
Median ...................
Other Direct Marketers
American Greetings ....... $28.77 91.7% $ 2,145 $ 2,256
CML Group (n)(o) ......... 7.38 52.2% 368 362
Reader's Digest (o)(p)(q) 40.87 83.9% 4,529 4,187
Median ...................
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
HISTORICAL
LTM MARGIN(A) 5-YEAR CAGR(B)
--------------------- ---------------- PROJECTED
DEBT TO NET NET 5-YEAR EPS
TOTAL CAP EBITDA EBIT INCOME REVENUE INCOME CAGR(C)
--------- ------ ----- ------ ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Monogram (d) ............. 4.6% 10.8% 8.9% 6.6% 9.7% 8.4% 15.1%
Mail Order Retailers
Blair Corporation (e)(f) 22.5% 12.0% 11.2% 6.7% 6.0% 5.9% N.A.
Fingerhut (g) ............ 20.3% 8.0% 6.0% 3.1% 15.6% (4.0)% 15.0%
Hanover Direct (h) ....... 30.2% 1.9% 1.0% 0.9% 19.0% N.A. 25.0%
Lands' End ............... 3.9% 7.1% 6.0% 3.6% 16.2% 4.4% 13.0%
Spiegel .................. 68.8% 5.7% 4.1% 0.3% 12.7% (34.1)% 15.0%
Median ................... 22.5% 7.1% 6.0% 3.1% 15.6% 0.2% 15.0%
Specialty Retailers
Circuit City ............. 17.1% 6.2% 5.0% 3.0% 28.0% 19.5% 18.0%
The Gap .................. 0.2% 19.0% 14.5% 8.6% 23.8% 26.8% 18.0%
Home Depot ............... 22.6% 9.0% 7.9% 4.8% 45.8% 29.9% 30.0%
Lechters (f)(i) .......... 36.0% 9.2% 5.6% 2.5% 26.3% 2.1% 15.0%
The Limited (j) .......... 19.6% 14.6% 10.9% 6.1% 12.0% 5.3% 13.0%
Liz Claiborne (k) ........ 0.1% 8.8% 7.1% 4.7% 11.1% (9.2)% 11.0%
Nordstrom's (l) .......... 25.6% 10.7% 7.8% 5.2% 9.9% 12.1% 14.5%
Pep Boys (m) ............. 41.2% 13.7% 10.6% 5.7% 15.2% 17.9% 20.5%
Tiffany & Co. ............ 45.6% 11.9% 9.5% 4.3% 15.5% (2.5)% 18.0%
Toys R Us ................ 20.9% 12.3% 10.4% 6.1% 16.3% 10.6% 15.0%
Wal-Mart ................. 47.7% 6.2% 4.9% 3.2% 33.7% 20.0% 18.0%
Williams-Sonoma .......... 5.5% 8.8% 6.6% 3.7% 23.4% 17.1% 27.5%
Median ................... 21.8% 9.9% 7.9% 4.8% 19.8% 14.6% 18.0%
Other Direct Marketers
American Greetings ....... 14.6% 16.2% 12.5% 8.0% 9.3% 15.6% 13.0%
CML Group (n)(o) ......... 16.3% 12.5% 9.2% 5.8% 31.3% 27.8% 17.4%
Reader's Digest (o)(p)(q) 0.0% 14.3% 12.9% 8.0% 10.7% 6.6% 15.0%
Median ................... 14.6% 14.3% 12.5% 8.0% 10.7% 15.6% 15.0%
</TABLE>
<PAGE>
PROJECT MONOGRAM - COMMON STOCK COMPARISON
<TABLE>
<CAPTION>
MULTIPLE OF ENTERPRISE VALUE
------------------------------------
LTM REV. LTM EBIT LTM EBITDA
---------- ---------- ------------
<S> <C> <C> <C>
Monogram (d) ............. 0.79x 9.0x 7.4x
Mail Order Retailers
Blair Corporation (e)(f) 0.67x 6.0x 5.5x
Fingerhut (g) ............ 0.46 7.6 5.7
Hanover Direct (h) ....... 0.44 44.6 23.6
Lands' End ............... 0.55 9.2 7.8
Spiegel .................. 0.89 21.5 15.7
Median ................... 0.55x 9.2x 7.8x
SPECIALTY RETAILERS
Circuit City ............. 0.54x 10.9x 8.8x
The Gap .................. 1.22 8.4 6.4
Home Depot ............... 1.65 20.8 18.4
Lechters (f)(i) .......... 0.70 12.4 7.6
The Limited (j) .......... 1.11 10.2 7.6
Liz Claiborne (k) ........ 0.51 7.2 5.8
Nordstrom's (l) .......... 1.02 13.1 9.6
Pep Boys (m) ............. 1.57 14.8 11.4
Tiffany & Co. ............ 0.99 10.5 8.3
Toys R Us ................ 0.93 8.9 7.6
Wal-Mart ................. 0.84 17.0 13.5
Williams-Sonoma .......... 0.99 15.0 11.3
Median ................... 0.99x 11.6x 8.5x
OTHER DIRECT MARKETERS
American Greetings ....... 1.21x 9.6x 7.4x
CML Group (n)(o) ......... 0.44 4.7 3.5
Reader's Digest (o)(p)(q) 1.39 10.8 9.7
Median ................... 1.21x 9.6x 7.4x
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
MULTIPLE OF ENTERPRISE VALUE P/E RATIO (S)
-------------------------------- ----------------
1995E EBITDA(R) 1996E EBITDA(R) 1995E 1996E
--------------- --------------- ------- -------
<S> <C> <C> <C> <C>
Monogram (d) ............. 6.5x 5.5x 13.9x 11.6x
Mail Order Retailers
Blair Corporation (e)(f) 6.1x 5.2x 9.2x 7.8x
Fingerhut (g) ............ 6.3 5.7 11.7 9.8
Hanover Direct (h) ....... 15.6 10.7 34.0 19.1
Lands' End ............... 8.0 6.6 15.6 12.4
Spiegel .................. 11.1 8.8 34.5 18.1
Median ................... 8.0x 6.6x 15.6x 12.4x
SPECIALTY RETAILERS
Circuit City ............. 7.6x 6.7x 15.1x 12.9x
The Gap .................. 6.5 5.7 15.6 13.0
Home Depot ............... 14.3 11.4 24.8 19.3
Lechters (f)(i) .......... 6.5 5.5 20.3 15.0
The Limited (j) .......... 6.9 6.2 15.0 12.9
Liz Claiborne (k) ........ 5.5 5.0 12.2 10.8
Nordstrom's (l) .......... 7.5 6.8 16.1 13.9
Pep Boys (m) ............. 10.2 8.8 19.3 15.6
Tiffany & Co. ............ 7.8 7.0 15.3 12.9
Toys R Us ................ 7.7 6.9 14.5 12.6
Wal-Mart ................. 10.0 8.9 18.1 15.5
Williams-Sonoma .......... 10.2 8.0 23.9 17.5
Median ................... 7.6x 6.8x 15.8x 13.5x
OTHER DIRECT MARKETERS
American Greetings ....... 6.6x 6.1x 12.8x 11.6x
CML Group (n)(o) ......... 5.6 5.1 16.4 14.0
Reader's Digest (o)(p)(q) 8.9 7.7 17.0 14.7
Median ................... 6.6x 6.1x 16.4x 14.0x
</TABLE>
Project Monogram -- Common Stock Comparison
Footnotes
(a) As of June 9, 1995.
(b) Includes the effects of mergers, acquisitions and divestitures.
(c) Based on First Call 5-year projected earnings growth rates as of 6/9/95.
(d) Monogram's cash balance is assumed to be $38.8 million as of fiscal
year-end 1995. The calendarized 1995E and 1996E EPS and EBITDA and
Projected 5-Year EPS CAGR estimates are based on management projections.
Historical 5-Year CAGR for revenue is for 4 years as a result of
unavailability of net mail order sales figure.
(e) Includes finance charges on time payment accounts and recoveries on
customer accounts previously charged off.
(f) The tax rate, interest expense and depreciation for the LTM was used as
an estimate for 1995 and 1996 values.
(g) Includes net financing income and excludes a one-time $29.9 million
pre-tax charge for the cancellation of a 24-hour shopping channel.
(h) Net Income available to common shareholders. Tax rate used for projected
EBITDA calculations has been normalized to exclude the effects of tax
carry forwards.
(i) Excludes a one-time pre-tax restructuring charge of $11 million to close
15 unprofitable stores.
(j) Excludes a one-time pre-tax gain of $2.6 million related to the sale
and closure of unprofitable facilities.
(k) Excludes a $30 million pre-tax charge for the cost of restructuring the
Retail Operations.
(l) Includes service charge income. Excludes the effects of promotional
accounting changes.
(m) Excludes "Checks Outstanding" as a short-term liability of $8.4 million.
(n) Excludes extraordinary revenue of $1.1 million from the early
retirement of debt.
(o) 1996E EPS have been estimated using the 1995E EPS and IBES 5-year
growth rate.
(p) Excludes a one-time pre-tax gain of $114 million due to a change in
accounting and a one-time pre-tax loss of $76 million due to the
termination of leases.
(q) Reader's Digest has two classes of common stock - these figures
represent the weighted average of the two classes.
(r) Projected EBITDA was calculated using First Call earnings estimates
and backing into a projected "Street Average" EBITDA using research
reports available in the first quarter of calendar 1995.
(s) Earnings per share estimates based on First Call (6/9/95). EPS
estimates have been calendarized.
<PAGE>
MONOGRAM
DAILY COMMON STOCK PRICE & TRADING VOLUME HISTORY
Description of Graphic Material:
Daily common stock price and trading volume history of
Lillian Vernon Corporation common stock from May 31,
1994 to May 31, 1995.
End of Description of Graphic Material.
<PAGE>
DAILY INDEXED COMMON STOCK PRICE HISTORY
Description of Graphic Material:
Daily indexed common stock price history of Lillian
Vernon Corporation, a mail order composite, the
Standard & Poor's 400 Stock Index and the Standard &
Poor's Retail Composite from May 22, 1994 to May 22,
1995.
End of Description of Graphic Material.
MAIL ORDER COMPOSITE:
BLAIR CORP
HANOVER DIRECT
FINGERHUT
SPIEGEL
LAND'S END
S&P RETAIL COMPOSITE (Stock Symbol):
DDS, MA, MST,
NOBE, JCP, LDG,
RAD, WAG, ABS,
ASC, BRNO, GFSA,
GAP, KR, WIN,
DH, KM, S, WMT,
CC, HD, LOW, MES,
PBY, PCCW, TAN,
TOY, Z, CHRS,
GPS, LTD AND
TJX
<PAGE>
DAILY INDEXED COMMON STOCK PRICE HISTORY
Description of Graphic Material:
Daily indexed common stock price history of Lillian
Vernon Corporation and a composite from December 1,
1994 to June 5, 1995.
End of Description of Graphic Material.
COMPOSITE:
BLAIR CORP
FINGERHUT COMPANIES
HANOVER DIRECT
LANDS END
SPIEGEL
<PAGE>
COMPARISON OF SELECTED ACQUISITIONS IN THE
MAIL ORDER INDUSTRY
<TABLE>
<CAPTION>
EACH SHARE OF
ACQUIRING ACQUIRED AGGREGATE
CLOSE COMPANY/ COMPANY CONSIDERATION
DATE ACQUIRED COMPANY RECEIVED ($000'S)
- ------ ---------------- ------------ ---------------
<C> <S> <C> <C>
02/94 GROUPE PINAULT- ONE SHARE OF FFR5,238
PRINTEMP/ PINAULT-
LA REDOUTE PRINTEMPS
08/93 Freeman Spogli/ -- $475,000
60% of Brylane
Division
(of the Limited)
08/93 Spiegel/ -- 40,100
New Hampton
08/91 Bain Capital/ -- 25,000
Brookstone
05/91 La Redoute/ -- pounds
Empire Store sterling 49,100
Group plc
04/91 Otto Versand/ -- pounds
Grattan plc sterling 75,000
(Next plc)
09/89 Kaufhof -- DM300,000(a)
(Germany)/
60% stake in
Opperman Versand
10/88 Neiman-Marcus -- $125,000
Group/
Horchow Mail
Order
06/88 Thermawear/ 35p per pounds
Andre DeBrett share(b) sterling 2,800
plc
05/88 ICA (Sweden)/ N.A. $161,000
Ellos (Sweden)
01/88 Sears plc/ 315 pence pounds
Freemans plc sterling 477,000
07/86 Next plc/ N.A. pounds
Grattan plc sterling 299,000
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
MULTIPLE OF LEVERED MULTIPLE OF PREMIUM PREMIUM
LATEST 12 LTM OVER OVER
CLOSE MONTHS EPS/ --------------------- TANGIBLE MARKET
DATE NET INCOME SALES EBIT EBITD BOOK VALUE VALUE BUSINESS OF ACQUIRED COMPANY
- ------ ----------- ------- ------ ----- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
02/94 20.5x 0.68x N.M. N.M. N.A. N.A. La Redoute is the largest
mail order house in France.
Products include family
clothing, home furniture,
beauty products, accessories
and leisure goods
08/93 18.3 1.14 12.0x N.A. N.A. -- Distributes apparel through
3 catalogues in the U.S.
08/93 N.A. 0.14 4.2 N.A. N.A. N.A. Specialty catalogue company
selling moderately priced
women's apparel. Company had
gone into chapter 11
bankruptcy due to a heavy
debt burden from 1987 LBO
08/91 N.A. 0.25 N.A. N.A. N.A. N.A. Retailer and mail order
catalogue business with 96
stores
05/91 N.M. 0.38 12.6 8.6x (13)% N.A. Mail order company with 7%
of the U.K. market
04/91 N.M. 0.40 12.2 N.A. N.A. -- Owns and operates a retail
mail order house
09/89 N.A. 0.82 14.4 N.A. N.A. N.A. German mail-order group
servicing primarily the
French and U.S. markets
10/88 N.A. 0.80x N.A. N.A. N.A. N.A. Privately-held upscale
mail-order retail business
which offers home
furnishings, novelty and
decorative items and other
giftwares
06/88 N.M. 0.63 N.M. N.M. 141 N.A. Direct mail order
specializing in outside
clothing. 86% of sales are
in the U.K.
05/88 N.A. 0.77 N.A. N.A. N.A. N.A. At the time of the
transaction Scandinavian's
largest mail-order firm
01/88 23.1 1.11 14.3 13.1 293 93% Number three U.K. mail order
retailer at time of
transaction with 15% market
share
07/86 23.4 1.25 16.1 15.4 335 37 Mail order company with 10%
of the U.K. at the time of
<FN> the transaction
(a) Estimated.
(b) Two shareholders (holding a combined stake of 4.6mm shares) accepted
33.32p per share.
</TABLE>
<PAGE>
SUMMARY COMPARISON OF SELECTED ACQUISITIONS
IN THE MAIL ORDER/SPECIALTY RETAIL INDUSTRY
<TABLE>
<CAPTION>
LEVERED MULTIPLE OF LTM
MULTIPLE OF LATEST 12 -----------------------
MONTHS EPS/NET INCOME SALES EBIT EBITDA
--------------------- ------- ----- ------
<S> <C> <C> <C> <C>
# Data Points ................ 4 12 7 3
Maximum ...................... 23.4x 1.25x 16.1x 15.4x
Minimum ...................... 18.3 0.14 4.2 8.6
Mean ......................... 21.3 0.70 12.3 12.4
Median ....................... 21.8 0.73 12.6 13.1
Multiples of $19.00 per share
Monogram (a) ................. 14.0x 0.77x 8.6x 7.1x
<FN>
(a) Assumes a cash balance of $38.8 million, debt of $5.7 million and
10.05 million shares outstanding calculated on a fully diluted basis.
</TABLE>
<PAGE>
DISCOUNTED CASH FLOW ANALYSIS OF
MANAGEMENT PROJECTIONS
EQUITY VALUE (PER SHARE) = ENTERPRISE VALUE - NET DEBT(A)
<TABLE>
<CAPTION>
TERMINAL VALUE (MULTIPLE OF EBITDA) =
DISCOUNT ---------------------------------------------
RATE 4.0X 5.0X 6.0X 7.0X 8.0X
- ---------- -------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
14.0% $16.29 $18.91 $21.53 $24.15 $26.77
15.0% $15.76 $18.27 $20.78 $23.29 $25.79
16.0% $15.26 $17.66 $20.06 $22.46 $24.86
17.0% $14.78 $17.08 $19.38 $21.68 $23.98
18.0% $14.32 $16.53 $18.73 $20.94 $23.14
</TABLE>
(a) Assumes year-end Fiscal 1995 cash of $38.8 million, debt of $5.7
million and 10.05 million shares outstanding when calculated on a fully
diluted basis.
<PAGE>
DISCOUNTED CASH FLOW ANALYSIS OF MANAGEMENT PROJECTIONS
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
HISTORICAL
FINANCIALS MANAGEMENT PROJECTIONS
------------------ -------------------------------------------------
1994 1995 1996E 1997E 1998E 1999E 2000E
-------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET MAIL ORDER SALES .. $183.8 $206.2 $233.7 $268.3 $311.2 $356.6 $398.9
COST OF GOODS SOLD .... 66.6 74.7 85.3 98.5 115.4 132.8 149.4
OPERATIONS ............. 23.6 28.6 33.0 37.9 44.7 51.3 56.7
NET POSTAGE ............ (11.4) (13.2) (17.2) (19.7) (22.9) (26.2) (29.2)
CATALOG COSTS .......... 60.6 71.5 86.4 98.8 115.1 132.0 147.0
SG&A ................... 30.4 31.5 31.4 33.6 35.2 37.0 38.5
-------- -------- -------- --------- -------- -------- --------
MAIL ORDER OPERATING
INCOME ................ 14.0 13.1 14.8 19.2 23.7 29.7 36.5
OTHER OP INCOME ........ 4.6 5.3 6.1 6.6 7.0 7.4 8.0
-------- -------- -------- --------- -------- -------- --------
TOTAL EBIT ............ 18.6 18.4 20.9 25.8 30.7 37.1 44.5
TAX EXPENSE ............ (6.4) (5.3) (6.8) (9.0) (10.8) (13.0) (15.6)
-------- -------- -------- --------- -------- -------- --------
UNLEVERED NET INCOME .. 12.2 13.1 14.1 16.8 19.9 24.1 28.9
DEPRECIATION AND
AMORTIZATION .......... 4.1 3.9 4.1 4.4 5.7 6.4 6.2
CAPITAL EXPENDITURES .. (1.8) (6.3) (5.0) (20.0) (14.0) (4.0) (4.0)
CHANGE IN WC (INC)/DEC (22.3) (1.7) (12.4) (8.9) (8.0) (9.6)
-------- -------- -------- --------- -------- -------- --------
FREE CASH FLOW ......... $ 11.5 $(11.2) $ 2.7 $ 18.5 $ 21.5
Working Capital as % of
Sales ................. 16.1% 25.1% 22.9% 24.6% 24.0% 23.2% 23.2%
Working Capital (c) ... 29.5 51.8 53.5 65.9 74.8 82.8 92.4
Change in WC (Inc)/Dec (22.3) (1.7) (12.4) (8.9) (8.0) (9.6)
<FN>
(a) Assumes year-end Fiscal 1995 cash of $38.8 million and debt of $5.7
million.
(b) Assumes 10.05 million shares outstanding when calculated on a fully
diluted basis.
(c) Working Capital includes Total Current Assets less cash, AP & Accrued
Expenses, Customer Deposits and less Deferred Compensation.
</TABLE>
FORECAST ASSUMPTIONS:
<TABLE>
<CAPTION>
<S> <C>
Net Debt (a) = $(33.1)
Effective Tax Rate = 35.1%
Primary # of Shares = 9.70 mm
Options = 1.10 mm
Avg Ex Price = $13.00
Fully Dil # of Shares = 10.05 mm (b)
</TABLE>
The FCFs are assumed to
occur end-of-year and have
been discounted back to the
beginning of fiscal 1996.
<PAGE>
ASSUMPTIONS FOR PROJECTIONS BASED ON HISTORICAL PROFILE
o Revenue growth rate reflects 4-year historical growth rate of 9.7%
o Projected constant operating margin of 9.3% also reflects historical 4-year
average
o Tax rate of 32.7% in FY96 and 35.1% thereafter is similar to management's
scenario
o Capital expenditures are the same as management's case reflecting the
Company's need to increase capacity under either scenario
o Working capital as a % of sales is the same as management's scenario.
Historical working capital requirements are not applicable to future needs as
a result of the deferred billing program which was implemented in FY95. This
program has significantly increased the amount of accounts receivables
outstanding.
<PAGE>
DISCOUNTED CASH FLOW ANALYSIS OF
HISTORICAL FINANCIAL PROFILE
EQUITY VALUE (PER SHARE) = ENTERPRISE VALUE - NET DEBT(A)
<TABLE>
<CAPTION>
TERMINAL VALUE (MULTIPLE OF EBITDA) =
--------------------------------------------
DISCOUNT RATE 4.0X 5.0X 6.0X 7.0X 8.0X
- --------------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
14.0% $13.30 $15.19 $17.09 $18.98 $20.88
15.0% $12.90 $14.72 $16.53 $18.34 $20.16
16.0% $12.53 $14.26 $16.00 $17.74 $19.47
17.0% $12.17 $13.84 $15.50 $17.16 $18.83
18.0% $11.83 $13.43 $15.02 $16.62 $18.21
</TABLE>
(a) Assumes year-end Fiscal 1995 cash of $38.8 million, debt of $5.7 million
and 10.05 million shares outstanding when calculated on a fully diluted
basis.
<PAGE>
DISCOUNTED CASH FLOW ANALYSIS OF HISTORICAL FINANCIAL PROFILE (A)
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
HISTORICAL
FINANCIALS MANAGEMENT PROJECTIONS
------------------ ------------------------------------------------
1994 1995 1996E 1997E 1998E 1999E 2000E
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET MAIL ORDER SALES $183.8 $206.2 $226.2 $248.1 $272.2 $298.6 $327.6
Sales Growth Rate 11.6% 12.2% 9.7% 9.7% 9.7% 9.7% 9.7%
-------- -------- -------- -------- -------- -------- --------
TOTAL EBIT 18.6 18.4 21.0 23.1 25.3 27.8 30.5
Operating Margin 10.1% 8.9% 9.3% 9.3% 9.3% 9.3% 9.3%
-------- -------- -------- -------- -------- -------- --------
TAX EXPENSES (B) (6.4) (5.3) (6.9) (8.1) (8.9) (9.7) (10.7)
-------- -------- -------- -------- -------- -------- --------
UNLEVERED NET INCOME 12.2 13.1 14.2 15.0 16.4 18.0 19.8
DEPRECIATION AND AMORTIZATION 4.1 3.9 4.1 4.4 5.7 6.4 6.2
CAPITAL EXPENDITURES (1.8) (6.3) (5.0) (20.0) (14.0) (4.0) (4.0)
CHANGE IN WC (INC)/DEC (22.3) 0.0 (9.2) (4.5) (3.9) (6.5)
-------- -------- -------- -------- -------- -------- --------
FREE CASH FLOW $ 13.3 $ (9.8) $ 3.6 $ 16.5 $ 15.4
Working Capital as % of Sales 16.1% 25.1% 22.9% 24.6% 24.0% 23.2% 23.2%
Working Capital (c) 29.5 51.8 51.8 60.9 65.4 69.3 75.9
Change in WC (Inc)/Dec (22.3) 0.0 (9.2) (4.5) (3.9) (6.5)
Tax Rate 32.7% 35.1% 35.1% 35.1% 35.1%
</TABLE>
- ---------------
(a) Assumes the 4-year average operating margin and historical net mail order
sales growth rate are maintained in 1996 through 2000.
(b) Effective tax rate of 35.1% for the projected years.
(c) Working Capital includes total Current Assets less cash, AP & Accrued
Expenses, Customer Deposits and less Deferred Compensation.
(d) Assumes year-end Fiscal 1995 cash of $38.8 million and debt of $5.7
million.
(e) Assumes 10.05 million shares outstanding when calculated on a fully
diluted basis.
<TABLE>
<CAPTION>
<S> <C>
FORECAST ASSUMPTIONS:
Net Debt (d) = $(33.1)
Primary # of Shares = 9.70 mm
Options = 1.10 mm
Avg Ex Price = $13.00
Fully Dil # of Shares = 10.05 mm (b)
Effective Tax Rate = see below
WC % of Sales = 22.3%
</TABLE>
The FCFs are assumed to
occur end-of-year and have
been discounted back to the
beginning of fiscal 1996.
<PAGE>
LBO ANALYSIS
$19.00 PER SHARE
<TABLE>
<CAPTION>
CAPITALIZATION
(DOLLARS IN 000S) TABLE
-------------------
$ %
---------- -------
<S> <C> <C>
Bank Debt ............ $100,000 57.1%
Subordinated Debt ... 0 0.0
---------- -------
Total Long Term Debt 100,000 57.1
Common Equity ........ 75,000 42.9
---------- -------
$175,000 100.0%
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
STATISTICS PROJECTED STATISTICS
------------ ----------------------------------
1995 1996 1997 1998 1999
------------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
EBIT Coverage* .......... 1.83x 2.08x 2.72x 2.77x 3.26x
EBITDA Coverage* ........ 2.22 2.48 3.18 3.28 3.82
EBITDA-Cap Ex Coverage* 1.59 1.99 1.07 2.02 3.47
</TABLE>
<TABLE>
<CAPTION>
COMMON EQUITY RETURNS 1997 1998 1999 2000
- --------------------------- ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
4.0x Current Year's EBITDA NA NA 1.6% 10.6%
5.0x Current Year's EBITDA NA 0.5% 13.2 18.4
6.0x Current Year's EBITDA 2.3% 14.5 22.1 24.6
7.0x Current Year's EBITDA 20.4 25.7 29.4 29.8
8.0x Current year's EBITDA 36.1 35.2 35.6 34.2
<FN>
* net interest
Project Monogram
</TABLE>
Exhibit (c)(2)
STOCKHOLDERS AGREEMENT
by and among
FS EQUITY PARTNERS III, L.P.
FS EQUITY PARTNERS INTERNATIONAL, L.P.,
LILLIAN VERNON, DAVID C. HOCHBERG
AND THE
LILLIAN VERNON CORPORATION
________________, 1995
TABLE OF CONTENTS
Page
1. Definitions. . . . . . . . . . . . . . . . . . . . . . . 1
2. Rights Upon Issuance of Additional Securities. . . . . . 3
2.1 Issuance Notice. . . . . . . . . . . . . . . . . . . . . 3
2.2 Response Notice. . . . . . . . . . . . . . . . . . . . . 3
2.3 Revised Issuance Notice. . . . . . . . . . . . . . . . . 3
2.4 Pro Rata Share . . . . . . . . . . . . . . . . . . . . . 4
2.5 Termination and Assignment . . . . . . . . . . . . . . . 4
3. Transfer of Shares by FS Stockholder; Rights of
Inclusion. . . . . . . . . . . . . . . . . . . . . . . 4
3.1 Right of Inclusion . . . . . . . . . . . . . . . . . . . 4
3.2 Third Party Offer. . . . . . . . . . . . . . . . . . . . 5
3.3 Allocation of Included Shares. . . . . . . . . . . . . . 6
3.4 Consummation . . . . . . . . . . . . . . . . . . . . . . 6
3.5 Termination and Assignment . . . . . . . . . . . . . . . 7
4. Obligation to Sell Securities. . . . . . . . . . . . . . 7
4.1 Sale Obligation. . . . . . . . . . . . . . . . . . . . . 7
4.2 Termination and Assignment . . . . . . . . . . . . . . . 7
5. Restrictions on Transfers of Common Stock;
Right of First Offer . . . . . . . . . . . . . . . . . 8
5.1 Transfer Restrictions. . . . . . . . . . . . . . . . . . 8
5.2 Right of First Offer. . . . . . . . . . . . . . . . . . 8
5.3 Below Target Price Offer. . . . .. . . . . . . . . . . . 9
5.4 Public Market Sale . . . . . . . . . . . . . . . . . . . 10
5.5 Termination and Assignment . . . . . . . . . . . . . . . 10
6. Registration Rights. . . . . . . . . . . . . . . . . . . 10
6.1 "Piggy-Back" and Demand Rights . . . . . . . . . . . . . 10
6.2 Survival of Registration Rights. . . . . . . . . . . . . 10
7. Representation on the Board of Directors . . . . . . . . 10
7.1 The Board. . . . . . . . . . . . . . . . . . . . . . . . 10
7.2 Termination and Assignment . . . . . . . . . . . . . . . 11
8. Approval Rights. . . . . . . . . . . . . . . . . . . . . 12
9. Termination. . . . . . . . . . . . . . . . . . . . . . . 12
10. Copy of Agreement . . . . . . . . . . . . . . . . . . . . 13
11. Governing Law . . . . . . . . . . . . . . . . . . . . . . 13
12. Amendment and Waiver; Successors. . . . . . . . . . . . . 13
13. Interpretation. . . . . . . . . . . . . . . . . . . . . . 13
14. Notices . . . . . . . . . . . . . . . . . . . . . . . . . 13
15. Legends . . . . . . . . . . . . . . . . . . . . . . . . . 14
16. Further Assurances. . . . . . . . . . . . . . . . . . . . 14
17. Injunctive Relief; Disputes . . . . . . . . . . . . . . . 14
18. Severability. . . . . . . . . . . . . . . . . . . . . . . 14
19. Counterparts. . . . . . . . . . . . . . . . . . . . . . . 15
20. Opinions. . . . . . . . . . . . . . . . . . . . . . . . . 15
STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT (this "Agreement") is made and entered into
as of ________________, 1995 by and among Lillian Vernon Corporation, a Delaware
corporation (the "Company"), FS Equity Partners III, L.P., a Delaware limited
partnership ("FSEP III"), FS Equity Partners International, L.P., a Delaware
limited partnership ("FSEP International," and collectively with FSEP III, the
"FS Stockholder"), Lillian Vernon and David C. Hochberg (collectively, the
"Company Stockholders" and individually, a "Company Stockholder").
RECITALS
1. Pursuant to the transactions contemplated by the Agreement and
Plan of Merger dated as of June __, 1995 (among VB Investment Corporation, a
Delaware corporation ("Investor") and the Company), Investor has merged with and
into the Company, with the Company as the surviving corporation (the "Merger").
2. After giving effect to the Merger, there is outstanding, as of
the date hereof (i) __________ shares of Common Stock (as defined below) held by
the FS Stockholder, and (ii) __________ shares of Common Stock held by the
Company Stockholders and (iii) _____________ shares of Common Stock held by
other stockholders of the Company.
3. The parties hereto believe that it is desirable for FSEP III, FS
International, Lillian Vernon and David C. Hochberg to make certain agreements
with respect to their respective rights and obligations as holders of Common
Stock.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
1. Definitions. As used in this Agreement, the following
capitalized terms shall have the following meanings:
Additional Securities: All Securities which are issued and sold by the
Company after the date hereof other than (i) any Securities issued or issuable
to all of the holders of such Securities then outstanding on a proportionate
basis (based on such holders' respective ownership of such Securities), (ii) any
Securities issued or issuable to any Employees pursuant to any equity incentive
plan, individual agreement, bonus, award, stock purchase plan, stock option plan
or other stock agreement or arrangement (collectively, an "Employee Plan")
approved by the Company's Board of Directors; (iii) any Securities issued in
exchange for debt securities of the Company or any Subsidiary or to any source
of, or to any party arranging, financing for the Company or any Subsidiary of
the Company, (iv) any Securities issued pursuant to a public offering registered
under the Securities Act, (v) any Securities that are issued or issuable in
connection with the acquisition by the Company of any business, business assets
or securities from any Person; and (vi) any Securities that are issued or
issuable upon the exercise of rights, options or warrants to purchase Securities
or upon the conversion or exchange of Securities convertible into or
exchangeable for Securities where the parties to this Agreement received (or
were not required to receive) an Issuance Notice pursuant to Section 2.1 of this
Agreement.
Affiliate or Associate: Such terms shall have the meanings given them
pursuant to Rule 12b-2 of the General Rules and Regulations promulgated under
the Securities Exchange Act of 1934, as amended.
Common Stock: The Common Stock, par value $.01 per share, of the
Company.
Employee: Any employee, director or consultant of the Company or any
Subsidiary of the Company.
Equity Securities: All shares of Common Stock at any time outstanding,
and all shares of Common Stock issuable upon the exercise, exchange or
conversion of any Security.
Person: Any individual, corporation, entity, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or agency or political subdivision thereof.
Public Market Sale: Any sale of Voting Securities into the public
market after the Initial Public Offering which is made pursuant to Rule 144
promulgated by the SEC under the Securities Act or which is made pursuant to a
registration statement filed with and declared effective by the SEC.
Public Offering: A public offering of shares of Voting Securities of
the Company registered under the Securities Act, but shall not include an
offering registered on Form S-4 or Form S-8 (or any substitute form that is
adopted by the SEC), or an offering of Voting Securities in connection with a
sale of debt securities of the Company. The term "Initial Public Offering"
shall mean an underwritten Public Offering of Voting Securities which results in
gross proceeds to the Company in excess of $20 million from the sale of Voting
Securities.
Securities: All shares of Common Stock, all rights, options or warrants
to purchase shares of Common Stock, and all securities of any type whatsoever
that are convertible into or exchangeable for shares of Common Stock, and all
rights, options or warrants to purchase securities that are convertible into or
exchangeable for shares of Common Stock.
Securities Act: The Securities Act of 1933, as amended.
SEC: The Securities and Exchange Commission.
Subsidiary: With respect to any Person, a corporation or other entity
of which shares of stock or other ownership interests having ordinary voting
power to elect a majority of the directors of such corporation, or other Persons
performing similar functions for such entity, are owned, directly or indirectly,
by such Person.
Voting Securities: All Securities of the Company which possess general
voting power to elect members of the Board.
2. Rights Upon Issuance of Additional Securities. The Company
hereby grants to each of FSEP III, FSEP International and each Company
Stockholder the following rights with respect to any and all proposed issuances
or sales of Additional Securities by the Company:
2.1 Issuance Notice. The Company shall give each of FSEP III,
FSEP International and each Company Stockholder written notice of the Company's
intention to issue and sell Additional Securities for cash (the "Issuance
Notice"), describing the type of Additional Securities, the price at which the
Additional Securities will be issued and sold and the general terms upon which
the Company proposes to issue and sell the Additional Securities, including the
anticipated date of such issuance or sale.
2.2 Response Notice. FSEP III, FSEP International and each
Company Stockholder shall have 15 days from the date the Issuance Notice is
received to agree to purchase all or any portion of its Pro Rata Share (as
defined below) of such Additional Securities by giving written notice to the
Company of its desire to purchase Additional Securities (the "Response Notice")
and stating therein the quantity of Additional Securities to be purchased. Such
Response Notice shall constitute the irrevocable agreement of FSEP III, FSEP
International and each Company Stockholder, as the case may be, to purchase the
quantity of Additional Securities indicated in the Response Notice at the price
and upon the terms stated in the Issuance Notice. Any purchase by FSEP III,
FSEP International and each Company Stockholder of Additional Securities shall
be consummated on or prior to the later of the date on which Additional
Securities described in the applicable Issuance Notice are first issued and sold
or the tenth day following delivery of the Response Notice by FSEP III, FSEP
International and the Company Stockholders, as the case may be.
2.3 Revised Issuance Notice. The Company shall have 120 days
from the date of the Issuance Notice to consummate the proposed issuance and
sale of the Additional Securities at the price and upon the terms that are
specified in the Issuance Notice. Notwithstanding the foregoing, the Company
may sell the Additional Securities at a price and upon terms that are less
favorable to the Company than those specified in the Issuance Notice provided
that any purchase of Additional Securities by FSEP III, FSEP International and
each Company Stockholder consummated at the time of such sale shall be upon the
same less favorable terms; provided, further, that if FSEP III, FSEP
International and each Company Stockholder did not elect to purchase the whole
of its Pro Rata Share of Additional Securities based upon the terms specified in
the relevant Issuance Notice, the Company shall provide FSEP III, FSEP
International and each Company Stockholder with a revised Issuance Notice
reflecting such less favorable terms, and FSEP III, FSEP International and each
Company Stockholder as the case may be, shall have five business days from the
date such revised Issuance Notice is received to agree to purchase all or any
portion of its Pro Rata Share (as defined below) of such Additional Securities
to be issued upon the less favorable terms set forth in the revised Issuance
Notice by giving written notice to the Company of its desire to purchase such
Additional Securities and stating therein the quantity of Additional Securities
to be purchased. In the event the Company proposes to issue and sell Additional
Securities after such 120-day period or Additional Securities in addition to
those specified in the Issuance Notice, it must again comply with the procedures
set forth in this Section 2.
2.4 Pro Rata Share. For purposes of this Section 2, the Pro
Rata Share of FSEP III, FSEP International and each Company Stockholder, as the
case may be, shall be a fraction, the numerator of which shall be the total
number of Equity Securities owned by FSEP III, FSEP International or a Company
Stockholder, as the case may be, at the time of such calculation, and the
denominator of which shall be the total number of Equity Securities issued and
outstanding or issuable at the time of such calculation.
2.5 Termination and Assignment. The rights provided to each of
FSEP III, FSEP International and the Company Stockholders under this Section 2
shall terminate upon the consummation of an Initial Public Offering, and with
respect to FSEP III, FSEP International or a Company Stockholder, such rights
will terminate after such party has transferred a number of Voting Securities
which represents 50% of the number of Voting Securities held by such party on
the date hereof (with FSEP III and FSEP International considered collectively
for this purpose). Subject to Section 12(b), the rights granted under this
Section 2 shall not be assignable except that FS Stockholder may assign its
rights to an investment fund or partnership that is an Affiliate of FS
Stockholder (an "FS Fund") provided that the FS Fund executes a written
undertaking to be and becomes bound by this Agreement in the same manner and to
the same extent as the FS Stockholder.
3. Transfer of Shares by FS Stockholder; Rights of Inclusion.
3.1 Right of Inclusion. The FS Stockholder agrees not to sell
all or any portion of the shares of Common Stock it holds to any Person
(individually, a "Third Party" and, collectively, "Third Parties") unless each
of the Company Stockholders is given an opportunity to sell to the Third Party
such number of shares of Common Stock owned by the Company Stockholder as is
determined in accordance with Subsection 3.3 of this Section 3; provided,
however, that the Company Stockholders shall have no rights pursuant to this
Section 3 with respect to sales or other transfers by the FS Stockholder of
Common Stock to any Affiliate, limited or general partner or employee of the FS
Stockholder or any FS Fund and provided, further, that any Common Stock acquired
from the FS Stockholder by any Affiliate, limited or general partner or employee
of the FS Stockholder or any FS Fund pursuant to the immediately preceding
proviso shall be subject to the provisions of this Section 3 and prior to any
delivery of Common Stock to such Person, such Person shall have delivered a
written commitment to the Company to be and become bound by this Section 3 in
the same manner and to the same extent as the FS Stockholder.
3.2 Third Party Offer. Prior to the consummation of any sale
of all or any portion of the shares of Common Stock held by the FS Stockholder
to a Third Party, the FS Stockholder shall cause each bona fide offer from such
Third Party to purchase such shares from the FS Stockholder (a "Third Party
Offer") to be reduced to writing and shall send written notice of such Third
Party Offer (the "Initial Offer Notice") to each Company Stockholder. Each
Third Party Offer shall include an offer to purchase shares of Common Stock from
the Company Stockholder in the amounts determined in accordance with Subsection
3.3 of this Section 3, at the same time, at the same price and on the same terms
as the sale by the FS Stockholder to the Third Party, and according to the terms
and conditions of this Agreement. The Initial Offer Notice shall be accompanied
by a true copy of the Third Party Offer. If the Company Stockholder desires to
accept the offer contained in the Initial Offer Notice, such Company Stockholder
shall furnish written notice to the FS Stockholder, within 20 days after his or
her receipt of the Initial Offer Notice, indicating such Company Stockholder's
irrevocable acceptance of the offer included in the Initial Offer Notice and
setting forth the maximum number of shares of Common Stock such Company
Stockholder agrees to sell to the Third Party (the "Acceptance Notice"). If a
Company Stockholder does not furnish an Acceptance Notice to the FS Stockholder
in accordance with these provisions by the end of such 20-day period, such
Company Stockholder shall be deemed to have irrevocably rejected the offer
contained in the Initial Offer Notice. All shares of Common Stock set forth in
the applicable Acceptance Notice of the Company Stockholder together with the
shares of Common Stock proposed to be sold by the FS Stockholder to the Third
Party are referred to collectively as "All Offered Shares". Within three days
after the date on which the Third Party informs the FS Stockholder of the total
number of shares of Common Stock which such Third Party has agreed to purchase
in accordance with the terms specified in the Initial Offer Notice, the FS
Stockholder shall send written notice (the "Final Notice") to the Company
Stockholder setting forth the number of shares of Common Stock such Company
Stockholder shall sell to the Third Party as determined in accordance with
Subsection 3.3 of this Section 3, which number shall not exceed the maximum
number specified by the Company Stockholder in the applicable Acceptance Notice.
Within five days after the date of the Final Notice (or such shorter period as
may reasonably be requested by the FS Stockholder to facilitate the sale), each
Company Stockholder shall furnish to the FS Stockholder (i) a written
undertaking to deliver, upon the consummation of the sale of Common Stock to the
Third Party as indicated in the Final Notice, the certificates representing the
shares of Common Stock held by the Company Stockholder which will be transferred
pursuant to such Third Party Offer (such shares shall be referred to herein as
the "Included Shares") and (ii) a power-of-attorney authorizing the FS
Stockholder to transfer the Included Shares pursuant to the terms of such Third
Party Offer.
3.3 Allocation of Included Shares. The maximum number of
shares of Common Stock that may be sold by FSEP III, FSEP International and each
Company Stockholder and all other holders of Common Stock who have rights to
participate in sales of Common Stock by the FS Stockholder pursuant to written
agreements by and between the FS Stockholder and any such holder (the "Other
Tag-Along Rights Holders") in any sale governed by this Section 3 shall be (i)
All Offered Shares in the event the Third Party has agreed to purchase All
Offered Shares and all shares of Common Stock that the Other Tag-Along Rights
Holders who have elected to participate in such sale seek to include in such
sale, or (ii) such number of shares of Common Stock equal to the product of (a)
the total number of shares of Common Stock which the Third Party has agreed to
purchase times (b) a fraction, the numerator of which is the total number of
shares of Common Stock owned by FSEP III, FSEP International, a Company
Stockholder or each Other Tag-Along Rights Holder who has elected to participate
in such sale, as the case may be, on the date of the Final Notice and the
denominator of which is the total number of shares of Common Stock owned on the
date of the Final Notice by FSEP III, FSEP International, the Company
Stockholders and the Other Tag-Along Rights Holders who have elected to
participate in such sale; provided, however, that, in the event FSEP III, FSEP
International, the Company Stockholders or any Other Tag-Along Rights Holder
elects to sell a number of shares of Common Stock which is less than the number
of shares such holder could sell pursuant to clause (ii) above, the shares of
Common Stock that the other of such holders can sell in such transaction shall
be increased by an aggregate amount equal to the number of shares which any of
FSEP III, FSEP International, the Company Stockholders or any Other Tag-Along
Rights Holder could have sold in such transaction but chose not to sell, and any
such increase shall be allocated among such other holders on a pro rata basis
based upon the total number of shares of Common Stock owned on the date of the
Final Notice by such other holders.
3.4 Consummation. The FS Stockholder shall have 180 days from
the date of the Final Notice in which to sell to the Third Party the shares of
Common Stock owned by the FS Stockholder and the Included Shares of the Company
Stockholder on terms which are not materially less favorable to the sellers of
shares of Common Stock than those specified in the applicable Initial Offer
Notice; provided, however, that in the event there is a decrease in the price to
be paid by the Third Party for the shares of Common Stock to be sold from the
price set forth in the Initial Offer Notice, which decrease is acceptable to the
FS Stockholder, the FS Stockholder shall notify the Company Stockholders of such
decrease, and each of the Company Stockholders shall have five business days
from the date of receipt of the notice of such decrease to reduce the number of
shares of Common Stock it will sell to such Third Party as previously indicated
in the applicable Acceptance Notice. The FS Stockholder shall act as agent for
the Company Stockholders in connection with such sale and shall cause to be
remitted to a Company Stockholder the total sales price of the Included Shares
of such Company Stockholder sold pursuant thereto, which consideration shall be
in the same form as the consideration received by the FS Stockholder and as
specified in the applicable Initial Offer Notice, net of the Company
Stockholder's respective pro rata portion of the expenses incurred by the FS
Stockholder in connection with such sale. The FS Stockholder shall furnish, or
shall cause to be furnished, such other evidence of the completion and time of
completion of such sale and the terms thereof as may be reasonably requested by
the Company Stockholder including, without limitation, evidence of the expenses
incurred by the FS Stockholder in connection with such sale. If and to the
extent that, at the end of 180 days following the date of the Final Notice, the
FS Stockholder has not completed the sale contemplated thereby, the FS
Stockholder shall return to the Company Stockholder all certificates
representing the Included Shares and all powers-of-attorney which a Company
Stockholder may have transmitted pursuant to the terms hereof.
3.5 Termination and Assignment. Subject to Section 9(b), the
obligations of the FS Stockholder and any transferee or assignee of FS
Stockholder pursuant to the provisions of this Section 3 shall survive an
Initial Public Offering but shall not apply to a transfer without consideration
or a Public Market Sale. The FS Stockholder and any transferee or assignee of
FS Stockholder shall have no obligation pursuant to this Section 3 with respect
to a Company Stockholder who has transferred a number of Voting Securities which
represents 50% of the number of Voting Securities held by such Company
Stockholder on the date hereof. Subject to Section 12(b), the rights granted to
Company Stockholders under this Section 3 shall not be assignable.
4. Obligation to Sell Securities.
4.1 Sale Obligation. If the FS Stockholder finds a buyer for
all of the shares of Common Stock held by the FS Stockholder (whether such sale
is by way of purchase, merger or other form of transaction), upon the request of
the FS Stockholder, each of the Company Stockholders shall sell all of their
respective shares of Common Stock to such third-party buyer pursuant to the
terms and conditions negotiated by the FS Stockholder for the sale of all of the
FS Stockholder's shares of Common Stock. Each of the Company Stockholders
agrees to such sale and to execute such agreements, powers of attorney, voting
proxies or other documents and instruments as may be necessary to consummate
such sale. Each of the Company Stockholders further agrees to timely take such
other actions as the FS Stockholder may reasonably request to enforce their
respective obligation to sell their shares of Common Stock, and otherwise as
necessary in connection with the approval of the consummation of such sale,
including voting all Voting Securities in favor of such sale.
4.2 Termination and Assignment. The obligations of the Company
Stockholders pursuant to this Section 4 shall be binding on any transferee of
any shares of Common Stock held by the Company Stockholders (except for a
transferee purchasing shares in a Public Market Sale), and each Company
Stockholder shall obtain and deliver to the FS Stockholder a written commitment
to be bound by such provisions from such transferee prior to any transfer.
Subject to Section 9(b), the obligations of each Company Stockholder pursuant to
this Section 4, and the obligations of any such transferee, shall continue after
an Initial Public Offering. FS Stockholder's right to require a Company
Stockholder to sell shares of Common Stock will terminate after FSEP III and
FSEP International have together transferred a number of shares of Voting
Securities equal to 50% of the number of Voting Securities held by such parties
as at the date hereof.
5. Restrictions on Transfers of Common Stock; Right of First Offer.
5.1 Transfer Restrictions. Except as otherwise consented to in
writing by the parties hereto, FS Stockholder and each Company Stockholder
agrees not to pledge, hypothecate or encumber any shares of Common Stock held by
them. FS agrees that all sales or other dispositions of Common Stock will be
made in compliance with this Agreement. The Company Stockholders shall not
transfer or otherwise dispose of shares of Common Stock except in a sale subject
to Sections 5.2 or 5.3 or pursuant to Section 5.4 hereof. Any attempt to sell,
assign, pledge, hypothecate, encumber or otherwise dispose of shares of Common
Stock not in compliance with this Agreement shall be null and void, and the
Company shall not give effect to any such attempted transaction or transfer.
5.2 Right of First Offer. Subject to the provisions of
Subsection 5.3 of this Section 5, each of the Company Stockholders hereby agrees
not to sell, transfer or otherwise convey any of the shares of Common Stock held
by them to any Person unless FS Stockholder or any third party designated by FS
Stockholder (which may include any of its Affiliates or Associates or the
Company) is given the right to acquire such Common Stock pursuant to the
provisions of this Section 5. If any of the Company Stockholders receives an
offer from any Person to acquire any of the Common Stock, or decides to solicit
or cause to be solicited a proposal or proposals to acquire Common Stock, such
Company Stockholder shall first give FS Stockholder written notice (the "Company
Stockholder Notice") of such intention, which notice shall include a term sheet
stating, among other material terms, the minimum cash sales price that such
Company Stockholder would entertain for the shares of Common Stock to be sold
(the "Target Price"). FS Stockholder or its designee shall have the right for a
period of 20 days following the delivery of the Company Stockholder Notice (the
"FS Acceptance Period") to accept the offer to purchase all but not less than
all of the shares proposed to be sold at the Target Price and upon the other
terms provided with the Company Stockholder Notice. FS Stockholder or its
designee shall exercise such right by delivering to the applicable Company
Stockholder written notice of its election prior to 5:00 p.m. on the final day
of the FS Acceptance Period. If FS Stockholder or its designee exercises such
right, the sale of such Common Stock shall be consummated within 30 days of the
date of delivery to the applicable Company Stockholder of the notice from FS
Stockholder or its designee that it is exercising such right. If FS Stockholder
or its designee does not elect to purchase such Common Stock on such terms
within the FS Acceptance Period or fails to consummate a purchase of such Common
Stock within the 30-day period specified in the immediately preceding sentence,
the applicable Company Stockholder shall have the right to consummate the sale
of such Common Stock for a sales price equal to or greater than the Target Price
and on terms no more favorable than specified in the Company Stockholder Notice
for a period of 90 days (the "Consummation Period") after the expiration of the
FS Acceptance Period or, if applicable, such 30-day period. If the applicable
Company Stockholder does not complete such sale, transfer or conveyance within
the Consummation Period, such Company Stockholder shall not have the right to
sell, transfer or convey any of such Common Stock without again complying with
this Section 5. In the event a Company Stockholder intends to sell Common Stock
for consideration other than cash, the Company Stockholder shall notify the FS
Stockholder of the terms of such non-cash consideration. The FS Stockholder may
elect within 5 days of such notice to have the fair market value of such non-
cash consideration determined, with the parties jointly selecting an investment
banking firm to resolve any dispute regarding the fair market value of such non-
cash consideration; in the absence of agreement on such firm, Goldman, Sachs &
Co. shall determine such fair market value. If the sum of the fair market value
of the non-cash consideration and the cash consideration (in the case of a sale
that is partially for cash) is less than the cash price offered to the FS
Stockholder pursuant to this Section 5.2, the FS Stockholder may, within 10 days
of the determination of the fair market value of the non-cash consideration,
elect to purchase the Common Stock proposed to be sold for an amount equal to
the sum of (i) the fair market value of the non-cash consideration and (ii) the
cash consideration, if any. Such purchase must be consummated within 20 days of
the determination of fair market value.
5.3 Below Target Price Offer. If the Company Stockholder
proposing to sell shares of Common Stock receives a written offer for such
Common Stock at any time during the Consummation Period which is acceptable to
such Company Stockholder but is less than the Target Price or upon terms less
favorable to such Company Stockholder than the terms provided to FS Stockholder
in the Company Stockholder Notice (the "Below Target Price Offer"), such Company
Stockholder shall promptly deliver a copy of such written offer to FS
Stockholder. During the 15-day period following delivery of such written offer,
FS Stockholder or its designee shall have the right to accept the offer to
purchase the shares of Common Stock offered on the terms reflected in such
written offer. FS Stockholder shall, if it so desires, exercise such right by
delivery to such Company Stockholder written notice of its election prior to
5:00 p.m. Los Angeles time on the final day of such additional 15-day period and
the sale of such Common Stock shall be consummated within 30 days of the
delivery of such written notice. If FS Stockholder or its designee does not
elect to accept the offer to purchase the offered shares of Common Stock on such
terms within such 15-day period or fails to consummate the purchase of the
offered shares within 30 days of the date of FS Stockholder's or its designee's
acceptance of the Below Target Price Offer, the Company Stockholder shall have
90 days to consummate the sale of the offered shares of Common Stock at a price
and upon terms that are not less favorable to such Company Stockholder than the
price and terms specified in the written offer delivered to FS Stockholder. In
the event a Below Target Price Offer involves any non-cash consideration, the
procedures for valuing such non-cash consideration set forth in Section 5.2
above shall be utilized to determine the fair market value of such non-cash
consideration.
5.4 Public Market Sale. The obligations of a Company
Stockholder pursuant to this Section 5 shall not apply to a Public Market Sale.
5.5 Termination and Assignment. Subject to Section 9(b), the
obligations of a Company Stockholder pursuant to this Section 5 shall continue
after an Initial Public Offering. Any transferee of shares of Common Stock from
a Company Stockholder, except a transferee in a Public Market Sale or a
purchaser of shares from a Company Stockholder after the Company Stockholder has
duly complied with its obligations under this Section 5, shall be bound by the
provisions of this Section 5 and such Company Stockholder shall obtain and
deliver to FS Stockholder a written commitment to be bound by such provisions
from such transferee prior to any such transfer. A Company Stockholder or its
transferee shall not be obligated to comply with this Section 5 after FSEP III
and FSEP International have together transferred a number of shares of Voting
Securities equal to 50% of the number of Voting Securities held by such parties
as of the date hereof.
6. Registration Rights.
6.1 "Piggy-Back" and Demand Rights. Following the consummation
of an Initial Public Offering, FSEP III, FSEP International and each Company
Stockholder shall be entitled to certain "piggy-back" registration rights with
respect to future public offerings of Common Stock by Company and to certain
demand registration rights (the "Registration Rights"). The terms of the
Registration Rights are set forth in Exhibit A attached hereto.
6.2 Survival of Registration Rights. The Registration Rights
of each of FSEP III, FSEP International and the Company Stockholders and their
respective obligations set forth in Exhibit A hereto shall survive the
termination of this Agreement pursuant to Section 9(a) hereinbelow.
7. Representation on the Board of Directors.
7.1 The Board. Subject to the terms and conditions of this
Section 7, at each annual or special meeting of stockholders of the Company, or
in any written consent executed in lieu of a stockholder meeting, at or pursuant
to which persons are being elected to fill positions on the Board of Directors
of Holding, the FS Stockholder and the Company Stockholders agree to exercise,
or cause to be exercised, voting rights with respect to the shares of Common
Stock then owned or held of record or beneficially by them or any Affiliate, in
such a manner that four candidates nominated by FS Stockholder and one candidate
nominated by Lillian Vernon shall be elected to fill and continue to hold
positions on the Board of Directors of the Company. FS Stockholder and Lillian
Vernon shall also agree on two additional persons, at least one of whom shall be
an outside director of the Company on the date hereof, who shall be nominated
for election to the Board of Directors and shall exercise or cause to be
exercised voting rights with respect to the shares of Common Stock then owned or
held of record or beneficially by them to elect such nominees. The parties
shall use their reasonable best efforts to ensure that the Board consists of not
more than seven members. If necessary, the Board shall elect such additional
independent members, if any, as may be required under applicable law or stock
exchange requirements or by the National Association of Securities Dealers or
underwriters in connection with Public Offerings, and FSEP III, FSEP
International and the Company Stockholders shall each take all actions necessary
in connection therewith.
If at any time from and after the date hereof, either FS
Stockholder or Lillian Vernon shall notify the other of its or her desire to
remove any director previously nominated by that party to serve on the Board of
Directors of the Company, the FS Stockholder and the Company Stockholders agree
to exercise or cause to be exercised voting rights with respect to all shares of
Common Stock owned or held of record or beneficially by it or them so as to
remove such director of the Company. If at any time from and after the date
hereof, any director previously nominated by either FS Stockholder or Lillian
Vernon to serve on the Board of Directors of the Company ceases to be a director
(whether by reason of death, resignation, removal or otherwise), either FS
Stockholder, or Lillian Vernon (including Lillian Vernon's estate), as the case
may be, shall be entitled to nominate a successor director to fill the vacancy
created thereby, and the FS Stockholder and the Company Stockholders agree to
exercise voting rights with respect to the shares of Common Stock owned or held
of record by it or them so as to elect such nominee as a director of the
Company.
If FS Stockholder sells or otherwise disposes of, in the
aggregate, to any Person or Persons that number of Voting Securities of the
Company held or beneficially owned by FS Stockholder, as shall be equal to at
least 20% of FS Stockholder's Voting Securities held as of the date hereof (with
FSEP III and FS International considered collectively for this purpose), each of
FS Stockholder and the Company Stockholders shall exercise, or cause to be
exercised, voting rights with respect to the shares of Common Stock then held or
beneficially owned by each of them or any Affiliates of each of them in such a
manner that seven candidates nominated by FS Stockholder or Lillian Vernon, as
the case may be, are elected to the Board with candidates nominated by FS
Stockholder or Lillian Vernon to be elected in proportion to their respective
percentage ownership of Voting Securities at the time of such election (rounding
up or down to the nearest whole number).
The foregoing notwithstanding, as long as Lillian Vernon
beneficially owns a number of shares of Voting Securities at least equal to 10%
of the issued and outstanding shares of Common Stock, Lillian Vernon shall be
entitled to nominate, and the FS Stockholder shall vote in favor of, one person
for election to the Board; provided that Lillian Vernon's board representation
rights shall not continue if Lillian Vernon beneficially owns less than 10% of
the issued and outstanding shares of Common Stock. Lillian Vernon shall be
entitled to approve her replacement as Chief Executive Officer of the Company.
This right shall be personal to Lillian Vernon and shall not be exercisable by
any other Person.
7.2 Termination and Assignment. Subject to Section 12(b), the
right to designate members of the Board of Directors pursuant to Section 7.1
shall not be assigned or otherwise transferred to a transferee unless FS, or
Lillian Vernon, as the case may be, shall have transferred all of its securities
to the transferee, but shall not be assignable after an Initial Public Offering;
provided, that a transferee of all of FS Stockholder's securities in a sale
which is not a Public Market Sale after an Initial Public Offering shall agree
to vote the Voting Securities purchased from FS Stockholder in favor of Lillian
Vernon as a director of the Company as long as Lillian Vernon serves as Chief
Executive Officer of the Company.
8. Approval Rights. Except as set forth in clause (vi) below,
until the earlier of (i) the second anniversary of the date of this Agreement or
(ii) the date on which Lillian Vernon's board representation rights pursuant to
this Agreement terminate, the Company shall not take any action regarding any of
the following matters without the affirmative vote of the member of the Board
designated by Lillian Vernon:
(i) the sale, assignment, transfer or lease of any assets of
the Company with a fair market value in excess of $50 million, other than in the
ordinary course of business and other than the sale of all or substantially all
of the assets of the Company;
(ii) the purchase or other acquisition by the Company of assets
with a fair market value in excess of $75 million, other than in the ordinary
course of business;
(iii) the incurrence by the Company of indebtedness where,
after giving effect to such incurrence, the Company would have outstanding
indebtedness with an aggregate principal amount in excess of $70 million plus
the amount of the Company's indebtedness (including amounts available at any
time for borrowing by the Company) under its credit facilities on the date
hereof;
(iv) any transaction with any stockholder of the Company or any
affiliate of any stockholder other than transactions that are no less favorable
to the Company than could have been obtained with a person who is not a
stockholder or an affiliate of a stockholder (as determined in the good faith
judgment of the Board);
(v) the appointment or removal of the independent certified
public accountants of the Company; and
(vi) prior to the first anniversary of the date of this
Agreement, an Initial Public Offering.
9. Termination.
(a) Except as otherwise set forth in this Agreement, this
Agreement shall terminate on the tenth anniversary of the date of this
Agreement.
(b) Within 10 days after the consummation of an Initial
Public Offering and thereafter, until she has exercised the option described
below, for a ten-day period prior to each anniversary of the date of such
consummation, Lillian Vernon shall have the option to irrevocably terminate all
of the parties' rights and obligations under Sections 3, 4 and 5 by written
notice to the FS Stockholder.
10. Copy of Agreement. A copy of this Agreement and all amendments
hereto shall be filed with the Secretary of Company and shall be kept at the
principal executive offices of Company.
11. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware
without regard to the conflicts of laws rules thereof.
12. Amendment and Waiver; Successors.
(a) This Agreement may be amended, modified or supplemented,
and compliance with any provision hereof may be waived, only with the written
consent of FSEP III, FSEP International and those Company Stockholders then
holding a majority of the shares of Common Stock then held by the Company
Stockholders, and any amendment, modification, supplement or waiver so consented
to in writing shall be binding upon the parties hereto and all transferees of
Equity Securities held by FSEP III, FSEP International and the Company
Stockholders. This Agreement shall be binding on the parties hereto and, to the
extent permitted by this Agreement, their estate, heirs and successors.
(b) Upon the death of Lillian Vernon, her estate may
transfer all the Voting Securities then held by her to the Lillian Menasche
Vernon Foundation (the "Foundation") and any rights of Lillian Vernon under this
Agreement (other than her right to approve a successor Chief Executive Officer)
will be assigned to the Foundation, provided that the Foundation executes a
written undertaking to be and becomes bound by this Agreement in the same manner
and to the same extent as Lillian Vernon.
13. Interpretation. The headings of the Sections contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not affect the meaning or interpretation of this
Agreement.
14. Notices. All notices and other communications provided for or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally or delivered by telecopier (with receipt
confirmed), on the date of such delivery or transmission, or three (3) days
after deposit in the mail, by registered or certified mail (return receipt
requested) postage prepaid (i) if to Company, at the address or telecopier
number set forth in the Merger Agreement, (ii) if to the FS Stockholder, at
Freeman Spogli & Co. Incorporated, 11100 Santa Monica Boulevard, Suite 1900, Los
Angeles, California 90025, Attention: William M. Wardlaw, telecopier: (310) 444-
1870, (iii) if to Lillian Vernon, c/o Lillian Vernon Corporation, 543 Main
Street, New Rochelle, New York 10801, telecopier: (914) 647-5602 or (iv) if to
David C. Hochberg, c/o Lillian Vernon Corporation, 543 Main Street, New
Rochelle, New York 10801, (or at such other address or telecopier number for any
party as shall be specified by like notice provided that notices of a change of
address or telecopier number shall be effective only upon receipt thereof).
15. Legends. All certificates evidencing shares of Common Stock
which are issued to any of FSEP III, FSEP International, and the Company
Stockholders shall be legended as follows (in addition to any other legend
required to be placed thereon):
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS WITH RESPECT TO THE TRANSFER AND VOTING THEREOF AS SET
FORTH IN THAT CERTAIN STOCKHOLDERS' AGREEMENT DATED AS OF ________ ___, 1995,
WHICH MAY BE REVIEWED AT THE PRINCIPAL PLACE OF BUSINESS OF THE CORPORATION AND
A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER WITHOUT CHARGE UPON WRITTEN
REQUEST THEREFOR."
16. Further Assurances. The Company covenants and agrees that it
will act in good faith to preserve for each of FSEP III, FSEP International and
the Company Stockholders the benefits of this Agreement and that it will take no
voluntary action to impair the benefit hereof or to avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder or to deny to any of FSEP III, FSEP International or the Company
Stockholders any of the benefits or protections contemplated hereby. Any shares
of Common Stock transferred pursuant to the terms and requirements of this
Agreement shall be transferred free and clear of all mortgages, liens, pledges,
charges and security interests or encumbrances, or any obligations or
liabilities in connection therewith.
17. Injunctive Relief; Disputes. It is acknowledged that it will be
impossible to measure in money the damages that would be suffered if the parties
hereto fail to comply with any of the obligations herein imposed on them and
that, in the event of any such failure, an aggrieved party hereto will be
irreparably damaged and will not have an adequate remedy at law. Any such party
shall, therefore, be entitled to injunctive relief, including specific
performance, to enforce such obligations, and if any action should be brought in
equity to enforce any of the provisions of this Agreement, none of the parties
hereto shall raise the defense that there is an adequate remedy at law. In the
event of any dispute among the parties arising out of this Agreement, the
prevailing party shall be entitled to recover from the non-prevailing party the
reasonable expenses of the prevailing party, including, without limitation,
reasonable attorneys' fees.
18. Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect to the maximum extent permitted by applicable
law. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner in order that
this Agreement be enforced as originally contemplated to the greatest extent
possible.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
20. Opinions. Upon the execution of this Agreement, FS Stockholder
shall receive an opinion from ________________, with respect to the
enforceability of this Agreement and Lillian Vernon and David C. Hochberg shall
receive an opinion from Richards Layton & Finger with respect to the
enforceability of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
FS EQUITY PARTNERS III, L.P., Lillian Vernon Corporation
a Delaware limited partnership
By: FS Capital Partners, L.P. By: ________________________
Its: General Partner Its:
By: FS Holdings, Inc.
____________________________
Its: General Partner Lillian Vernon
By:____________________
John M. Roth
Vice President ____________________________
David C. Hochberg
FS EQUITY PARTNERS
INTERNATIONAL, L.P., a
Delaware limited partnership
By: FS&Co. International, L.P.
Its: General Partner
By: FS International
Holdings Limited
Its: General Partner
By:______________________
John M. Roth
Vice President
Exhibit A
Terms of the Registration Rights
Capitalized terms used herein and not otherwise defined shall have the
respective meanings given such terms in the Stockholders' Agreement (the
"Agreement") to which this Exhibit A is attached.
I
SECTION 1.1 Definitions. For purposes of this Exhibit A, the
following terms shall have the following meanings:
"Demand Registration" means a Demand Registration as defined in Section
2.1.
"Excess Amount" means the number of Registrable Securities requested by
a Holder or Holders to be sold pursuant to Section 2.1 or 2.2 which the managing
Underwriter or Underwriters determines exceeds the largest number of Registrable
Securities which can successfully be sold in an orderly manner in such offering
within a price range acceptable to the Company.
"Holder" means either FS Stockholder, any Company Stockholder or any
Affiliate of either.
"Other Holder Notice" means an Other Holder Notice as defined in Section
2.1.
"Piggy-Back Registration" means a Piggy-Back Registration as defined in
Section 2.2.
"Registrable Security" means any share of Common Stock outstanding until
(i) a registration statement covering such Common Stock has been declared
effective by the SEC and it has been disposed of pursuant to such effective
registration statement, (ii) it is sold under circumstances in which all of the
applicable conditions of Rule 144 (or any similar provisions then in force)
under the Securities Act are met or it may be sold pursuant to Rule 144(k) under
such Act or (iii) it has been otherwise Transferred, the Company has delivered a
new certificate or other evidence of ownership for it not bearing the legend
required pursuant to the Stockholders Agreement and it may be resold without
subsequent registration under the Securities Act.
"Requisite Share Number" means a number of Registrable Securities
representing not less than 10% of the total number of shares of Common Stock
then outstanding or shares of Common Stock representing not less than
$10,000,000 in fair market value as determined by the Board, or such lesser
number as constitutes all shares of Common Stock then held by the relevant
Selling Holder representing not less than 5% of the total number of shares of
Common Stock then outstanding.
"Selling Holder" means a Holder who is selling or causing its Affiliates
to sell Registrable Securities pursuant to a registration statement under the
Securities Act.
"Transfer" means any direct or indirect transfer, sale, assignment,
pledge, hypothecation, encumbrance or other disposition of Common Stock.
"Underwriter" means a securities dealer who purchases any Registrable
Securities as principal in an underwritten offering and not as part of such
dealer's market-making activities.
II
SECTION 2.1 Demand Registration.
(a) Request for Registration. At any time and from time to time on
or after the date which is six months following the closing of the Initial
Public Offering, any Holder, on behalf of itself or any of its Affiliates
owning, individually or in the aggregate, at least the Requisite Share Number
may make a written request for registration under the Securities Act of all or
part of its or their Registrable Securities (a "Demand Registration"); provided
that the Holder or Holders making the request are together requesting that the
Requisite Share Number be registered, and provided further that the Company
shall not be obligated to effect (i) more than two Demand Registrations in any
18-month period or (ii) more than two Demand Registrations for each of (A) the
FS Stockholder and its Affiliates and (B) the Company Stockholders as a group.
Such request will specify the number of shares of Registrable Securities
proposed to be sold and will also specify the intended method of disposition
thereof. The Company shall give written notice of such registration request
within 10 days after the receipt thereof to all other Holders. Within 20 days
after receipt of such notice by any Holder, such Holder may request in writing
that Registrable Securities be included in such registration and the Company
shall include in the Demand Registration the Registrable Securities of any such
Holder or any of its Affiliates requested to be so included, provided that the
inclusion of such Registrable Securities is expressly consented to in writing by
the Holder or Holders who requested the Demand Registration. Each such request
by such other Holders (each, an "Other Holder Notice") shall specify the number
of shares of Registrable Securities proposed to be sold and the intended method
of disposition thereof. Unless the Holder or Holders making such Demand
Registration request shall consent in writing, no other party, including the
Company, shall be permitted to offer securities under any such Demand
Registration.
(b) Effective Registration. A registration will not count as a
Demand Registration until it has become effective.
(c) Underwritten Offering. If the Holder initiating a Demand
Registration so elects, the offering of such Registrable Securities pursuant to
such Demand Registration shall be in the form of an underwritten offering. The
Company and such Holder shall select one or more nationally recognized firms of
investment bankers to act as the managing Underwriter or Underwriters in
connection with such offering and shall select any additional managers to be
used in connection with the offering.
(d) Required Delays. Notwithstanding anything contained in this
Section 2.1 to the contrary, if any request for Demand Registration is delivered
at a time when the Company has determined or is currently planning to file a
Registration Statement with respect to an underwritten primary registration of
Common Stock on behalf of the Company (so long as a Registration Statement is
filed with respect thereto within two months of the Holder's or Holders' request
for Demand Registration), the Company may, but only once with respect to each
such Demand Registration, require the Holder or Holders to postpone such request
until the sooner of the expiration of the 120-day period following the effective
date of such registration or six months from the day of the Holder's or Holders'
request for such Demand Registration; and, provided further, however, that if
either such request is delivered at a time when such registration would
adversely affect a material acquisition or merger to which the Company is a
party, the Company may require the Holder to postpone such request for an
appropriate period (not to exceed 90 days). In either such event, the Company
shall deliver a certificate signed by the President or the Chairman confirming
the Company's reasons for postponing the registration.
SECTION 2.2 Piggy-Back Registration. If at any time 90 days
following the closing of the Company's Initial Public Offering, the Company
proposes to file a registration statement under the Securities Act with respect
to an offering by the Company for its own account or for the account of any of
its respective security holders of any class of security of the same class as
the Registrable Securities (other than a registration statement on Form S-4 or
S-8 (or any substitute form that may be adopted by the SEC) or a registration
statement filed in connection with an exchange offer or offering of securities
solely to the Company's existing security holders), then the Company shall give
written notice of such proposed filing to the Holders as soon as practicable
(but in no event less than 10 days before the anticipated filing date), and such
notice shall offer such Holders the opportunity to register such number of
shares of Registrable Securities as each such Holder may request in writing
within 5 days of receipt of such notice on behalf of itself or its Affiliates
(which request shall specify the Registrable Securities intended to be disposed
of by such Holder and its Affiliates and the intended method of distribution
thereof) (a "Piggy-Back Registration"). The Company shall use its best efforts
to cause the managing Underwriter or Underwriters of a proposed underwritten
offering to permit the Registrable Securities requested to be included in a
Piggy-Back Registration to be included on the same terms and conditions as any
similar securities of the Company included therein to permit the sale or other
disposition of such Registrable Securities in accordance with the intended
method of distribution thereof. Subject to Section 2.3(b), any Holder shall
have the right to withdraw its request for inclusion of its Registrable
Securities in any Piggy-Back Registration by giving written notice to the
Company of its request to withdraw within 20 days of its request for inclusion.
The Company may withdraw a Piggy-Back Registration at any time prior to the time
it becomes effective.
SECTION 2.3 Reduction of Offering.
(a) Notwithstanding anything contained herein, if the managing
Underwriter or Underwriters of an offering described in Section 2.1 or 2.2
determine that the size of the offering that the Holders, the Company and/or
such other Persons intend to make is such that the success of the offering would
be adversely affected by inclusion of the Registrable Securities requested to be
included, then (i) with respect to a Demand Registration, if the size of the
offering is the basis of such Underwriter's or Underwriters' determination, the
Company shall not include in such registration an amount of Registrable
Securities requested to be included in such offering equal to the Excess Amount
(such reduction to be allocated pro rata among the Holder or Holders who did not
initiate the request for a Demand Registration according to the number of
Registrable Securities requested for inclusion, with the Holder or Holders who
initiated the request for a Demand Registration entitled to include shares
therein to the maximum extent possible) and (ii) in the case of a Piggy-Back
Registration, if securities are being offered for the account of other Persons
as well as the Company, the securities the Company seeks to include shall have
priority over securities sought to be included by any other Person (including
the Holders) and, with respect to the Registrable Securities intended to be
offered by Holders, the proportion by which the amount of such class of
securities intended to be offered by Holders is reduced shall not exceed the
proportion by which the amount of such class of securities intended to be
offered by such other Persons is reduced (it being understood that with respect
to the Holders and third parties such reduction may be all of such class of
securities).
(b) If, as a result of the proration provisions of Section 2.3(a),
any Holder shall not be entitled to include all Registrable Securities in a
Demand Registration or Piggy-Back Registration that such Holder has requested to
be included, such Holder may elect to withdraw his request to include
Registrable Securities in such registration (a "Withdrawal Election"); provided
however, that a Withdrawal Election shall be irrevocable and, after making a
Withdrawal Election, a Holder shall no longer have any right to include
Registrable Securities in the registration as to which such Withdrawal Election
was made.
III
SECTION 3.1 Filings; Information. Whenever any Holder requests that
any Registrable Securities be registered pursuant to Section 2.1 hereof, the
Company will use its best efforts to effect the registration and the sale of
such Registrable Securities in accordance with the intended method of
disposition thereof as quickly as practicable, and in connection with any such
request:
(a) The Company will as expeditiously as possible prepare and file
with the SEC a registration statement on any form for which the Company then
qualifies or which counsel for the Company shall deem appropriate and which form
shall be available for the sale of the Registrable Securities to be registered
thereunder in accordance with the intended method of distribution thereof, and
use its best efforts to cause such filed registration statement to become and
remain effective until the earlier of (i) 90 days from the date such
registration statement became effective or (ii) the date on which the sale of
Registrable Securities has been completed; provided that, if the Company shall
furnish to any Holder making a request pursuant to Section 2.1 a certificate
signed by either its Chairman or Chief Executive Officer stating that in his
good faith judgment it would be significantly disadvantageous to the Company or
its shareholders for such a registration statement to be filed as expeditiously
as possible, the Company shall have a period of not more than 90 days within
which to file such registration statement measured from the date of receipt of
the request in accordance with Section 2.1.
(b) The Company will, prior to filing a registration statement or
prospectus or any amendment or supplement thereto, furnish to each Selling
Holder, one counsel representing all such Selling Holders, and each Underwriter,
if any, of the Registrable Securities covered by such registration statement
copies of such registration statement as proposed to be filed, together with
exhibits thereto, which documents will be subject to prompt review and approval
by the foregoing, and thereafter furnish to such Selling Holder, counsel and
Underwriter, if any, such number of copies of such registration statement, each
amendment and supplement thereto (in each case including all exhibits thereto
and documents incorporated by reference therein), the prospectus included in
such registration statement (including each preliminary prospectus) and such
other documents as such Selling Holder or Underwriter may reasonably request in
order to facilitate the disposition of the Registrable Securities owned by such
Selling Holder.
(c) After the filing of the registration statement, the Company will
promptly notify each Selling Holder of Registrable Securities covered by such
registration statement of any stop order issued or threatened by the SEC and
take all reasonable actions required to prevent the entry of such stop order or
to remove it if entered.
(d) The Company will use its best efforts to (i) register or qualify
the Registrable Securities under such other securities or blue sky laws of such
jurisdictions in the United States as any Selling Holder reasonably (in light of
such Selling Holder's intended plan of distribution) requests and (ii) cause
such Registrable Securities to be registered with or approved by such other
governmental agencies or authorities in the United States as may be necessary by
virtue of the business and operations of the Company and do any and all other
acts and things that may be reasonably necessary or advisable to enable such
Selling Holder to consummate the disposition of the Registrable Securities owned
by such Selling Holder; provided that the Company will not be required to (A)
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this paragraph (d), (B) subject itself
to taxation in any such jurisdiction or (C) consent to general service of
process in any such jurisdiction.
(e) The Company will immediately notify each Selling Holder of such
Registrable Securities, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the occurrence of an event
requiring the preparation of a supplement or amendment to such prospectus so
that, as thereafter delivered to the purchasers of such Registrable Securities,
such prospectus will not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading and promptly make available to each
Selling Holder any such supplement or amendment.
(f) The Company will enter into customary agreements (including, if
applicable, an underwriting agreement in customary form) and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of such Registrable Securities.
(g) The Company will deliver promptly to each Selling Holder of such
Registrable Securities and each Underwriter, if any, subject to restrictions
imposed by the United States federal government or any agency or instrumentality
thereof, copies of all correspondence between the SEC and the Company, its
counsel or auditors and all memoranda relating to discussions with the SEC or
its staff with respect to the registration statement and make available for
inspection by any Selling Holder of such Registrable Securities, any Underwriter
participating in any disposition pursuant to such registration statement and any
attorney, accountant or other professional retained by any such Selling Holder
or Underwriter (collectively, the "Inspectors"), (it being understood that the
Company is responsible for payment of the reasonable fees and expenses of only
one counsel pursuant to clause (viii) of Section 3.2) all financial and other
records, pertinent corporate documents and properties of the Company
(collectively, the "Records"), subject to restrictions imposed by any
governmental authority governing access to classified information, as shall be
reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company's officers, directors and employees to
supply all information reasonably requested by any Inspectors in connection with
such registration statement. Records which the Company determines, in good
faith, to be confidential and which it notifies the Inspectors are confidential
shall not be disclosed by the Inspectors unless (i) the disclosure of such
Records is necessary to avoid or correct a misstatement or omission in such
registration statement or (ii) the disclosure or release of such Records is
requested or required pursuant to oral questions, interrogatories, requests for
information or documents or a subpoena or other order from a court of competent
jurisdiction or other process; provided that prior to any disclosure or release
pursuant to clause (ii), the Inspectors shall provide the Company with prompt
notice of any such request or requirement so that the Company may seek an
appropriate protective order or waive such Inspectors' obligation not to
disclose such Records; and provided further, that if failing the entry of a
protective order or the waiver by the Company permitting the disclosure or
release of such Records, the Inspectors, upon advice of counsel, are compelled
to disclose such Records, the Inspectors may disclose that portion of the
Records which counsel has advised the Inspectors that the Inspectors are
compelled to disclose. Each Selling Holder of such Registrable Securities agrees
that information obtained by it solely as a result of such inspections (not
including any information obtained from a third party who, insofar as is known
to the Selling Holder after reasonable inquiry, is not prohibited from providing
such information by a contractual, legal or fiduciary obligation to the Company)
shall be deemed confidential and shall not be used by it as the basis for any
market transactions in the securities of the Company or its Affiliates unless
and until such is made generally available to the public. Each Selling Holder
of such Registrable Securities further agrees that it will, upon learning that
disclosure of such Records is sought in a court of competent jurisdiction, give
notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of the Records deemed confidential.
(h) The Company will otherwise use its reasonable best efforts to
comply with all applicable rules and regulations of the SEC, and make available
to its security holders, as soon as reasonably practicable, an earnings
statement covering a period of 12 months, beginning within three months after
the effective date of the registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act.
(i) The Company will use its best efforts (a) to cause all such
Registrable Securities to be listed on a national securities exchange (if such
shares are not already so listed) and on each additional national securities
exchange on which similar securities issued by the Company are then listed (if
any), if the listing of such Registrable Securities is then permitted under the
rules of such exchange or (b) to secure designation of all such Registrable
Securities covered by such registration statement as a National Association of
Securities Dealers Automatic Quotation ("NASDAQ") "national market system
security" within the meaning of Rule 11Aa2-l of the SEC or, failing that, to
secure NASDAQ authorization for such Registrable Securities and, without
limiting the generality of the foregoing, to arrange for at least two market
makers to register as such with respect to such Registrable Securities with the
National Association of Securities Dealers.
(j) The Company may require each Selling Holder of Registrable
Securities to promptly furnish in writing to the Company such information
regarding the distribution of the Registrable Securities as the Company may from
time to time reasonably request and such other information as may be legally
required in connection with such registration.
Each Selling Holder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3.1(e)
hereof, such Selling Holder will forthwith discontinue and cause its Affiliates
to discontinue disposition of Registrable Securities pursuant to the
registration statement covering such Registrable Securities until such Selling
Holder's receipt of the copies of the supplemented or amended prospectus
contemplated by Section 3.1(e) hereof, and, if so directed by the Company, such
Selling Holder will deliver to the Company all copies, other than permanent file
copies then in such Selling Holder's possession, of the most recent prospectus
covering such Registrable Securities at the time of receipt of such notice. In
the event the Company shall give such notice, the Company shall extend the
period during which such registration statement shall be maintained effective
(including the period referred to in Section 3.1(a) hereof) by the number of
days during the period from and including the date of the giving of notice
pursuant to Section 3.1(e) hereof to the date when the Company shall make
available to the Selling Holders of Registrable Securities covered by such
registration statement a prospectus supplemented or amended to conform with the
requirements of Section 3.1(e) hereof.
SECTION 3.2 Registration Expenses. In connection with any Demand
Registration pursuant to Section 2.1 hereof, and any registration statement
filed pursuant to Section 2.2 hereof, the Company shall pay the following
registration expenses incurred in connection with the registration hereunder
(the "Registration Expenses"): (i) all registration and filing fees, (ii) fees
and expenses of compliance with securities or blue sky laws (including fees and
disbursements of counsel in connection with blue sky qualifications of the
Registrable Securities), (iii) printing expenses, (iv) the Company's internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), (v) the fees and
expenses, if any, incurred in connection with the listing of the Registrable
Securities, (vi) fees and disbursements of counsel for the Company and fees and
expenses for independent certified public accountants retained by the Company,
(vii) the fees and expenses of any special experts retained by the Company in
connection with such registration, and (viii) reasonable fees and expenses of
one counsel (who shall be reasonably acceptable to the Company) for all of the
Selling Holders. The Company shall have no obligation to pay any underwriting
fees, discounts or commissions attributable to the sale of Registrable
Securities, or any out-of-pocket expenses of the Holders.
IV
SECTION 4.1 Indemnification by the Company. The Company agrees to
indemnify and hold harmless each Selling Holder of Registrable Securities, its
officers, directors and agents, and each Person, if any, who controls such
Selling Holder within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act from and against any loss, claim, damage or liability and
any action in respect thereof to which such Selling Holder, its officers,
directors and agents, and any such controlling Person may become subject under
the Securities Act or otherwise, insofar as such loss, claim, damage, liability
or action arises out of, or is based upon, any untrue statement or alleged
untrue statement of a material fact contained in any registration statement or
prospectus relating to the Registrable Securities (as amended or supplemented if
the Company shall have furnished any amendments or supplements thereto) or any
preliminary prospectus, or arises out of, or is based upon, any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and shall reimburse
each Selling Holder, its officers, directors and agents, and each such
controlling Person for any legal and other expenses reasonably incurred by that
Selling Holder, its officers, directors and agents, or any such controlling
Person in investigating or defending or preparing to defend against any such
loss, claim, damage, liability or action. The Company also agrees to indemnify
any Underwriters of the Registrable Securities, their officers and directors and
each Person who controls such Underwriters on substantially the same basis as
that of the indemnification of the Selling Holders provided in this Section 4.1;
provided, that the indemnity agreement contained in this Section 4.1 shall not
apply to amounts paid in settlement of any such loss, claim, damage or liability
and any action in respect thereof if such settlement is effected without the
consent of the Company (which consent shall not be unreasonably withheld), nor
shall the Company be liable in any such case for any loss, claim, damage,
liability and any action in respect thereof to the extent that it arises from or
is based upon written information relating to a Person furnished expressly for
use in connection with such registration by such Person, nor shall the Company
be liable to any Person for any such loss, claim, damage or liability and any
action in respect thereof to the extent it arises from or is based upon (i) any
untrue statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus relating to the Registrable Securities
delivered by such Person after the Company had provided written notice to such
Person that such registration statement or prospectus contained such untrue
statement or alleged untrue statement of a material fact, (ii) any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading after the Company had
provided written notice to such Person that such registration statement or
prospectus contained such omission or alleged omission, or (iii) the failure of
such Person to deliver any preliminary or final prospectus, or any amendments or
supplements thereto, required under applicable securities laws, including the
Securities Act, to be so delivered, provided that a sufficient number of copies
thereof had been provided by the Company to such Person.
SECTION 4.2 Indemnification by Holders of Registrable Securities.
Each Selling Holder agrees, severally but not jointly, to indemnify and hold
harmless the Company, its officers, directors and agents and each Person, if
any, who controls the Company within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act to the same extent as the foregoing
indemnity from the Company to such Selling Holder, but only with reference to
information related to such Selling Holder furnished in writing by such Selling
Holder or on such Selling Holder's behalf expressly for use in any registration
statement or prospectus relating to the Registrable Securities, or any amendment
or supplement thereto, or any preliminary prospectus. Each Selling Holder also
agrees to indemnify and hold harmless Underwriters of the Registrable
Securities, their officers and directors and each Person who controls such
Underwriters on substantially the same basis as that of the indemnification of
the Company provided in this Section 4.2; provided that in no event shall any
indemnity obligation under this Section 4.2 exceed the gross proceeds from the
offering received by such Selling Holder.
SECTION 4.3 Conduct of Indemnification Proceedings. Promptly after
receipt by any person in respect of which indemnity may be sought pursuant to
Section 4.1 or 4.2 (an "Indemnified Party") of notice of any claim or the
commencement of any action, the Indemnified Party shall, if a claim in respect
thereof is to be made against the person against whom such indemnity may be
sought (an "Indemnifying Party") notify the Indemnifying Party in writing of the
claim or the commencement of such action provided that the failure to notify the
Indemnifying Party shall not relieve it from any liability which it may have to
an Indemnified Party otherwise than under Section 4.1 or 4.2 and except to the
extent of any actual prejudice resulting therefrom. If any such claim or action
shall be brought against an Indemnified Party, and it shall notify the
Indemnifying Party thereof, the Indemnifying Party shall be entitled to
participate therein, and, to the extent that it wishes, jointly with any other
similarly notified Indemnifying Party, to assume the defense thereof with
counsel satisfactory to the Indemnified Party. After notice from the
Indemnifying Party to the Indemnified Party of its election to assume the
defense of such claim or action, the Indemnifying Party shall not be liable to
the Indemnified Party for any legal or other expenses subsequently incurred by
the Indemnified Party in connection with the defense thereof other than
reasonable costs of investigation; provided that the Indemnified Party shall
have the right to employ separate counsel to represent the Indemnified Party and
its controlling Persons who may be subject to liability arising out of any claim
in respect of which indemnity may be sought by the Indemnified Party against the
Indemnifying Party, but the fees and expenses of such counsel shall be for the
account of such Indemnified Party unless (i) the Indemnifying Party and the
Indemnified Party shall have mutually agreed to the retention of such counsel or
(ii) based upon the written opinion of counsel of such Indemnified Party
representation of both parties by the same counsel would be inappropriate due to
actual or potential differing interests between them. No Indemnifying Party
shall, without the prior written consent of the Indemnified Party, effect any
settlement of any claim or pending or threatened proceeding in respect of which
the Indemnified Party is or could have been a party and indemnity could have
been sought hereunder by such Indemnified Party, unless such settlement includes
an unconditional release of such Indemnified Party from all liability arising
out of such claim or proceeding.
SECTION 4.4 Contribution. If the indemnification provided for in
this Article IV is unavailable to the Indemnified Parties in respect of any
losses, claims, damages or liabilities referred to herein, then each such
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such losses, claims, damages or liabilities (i) as between the Company and
the Selling Holders on the one hand and the Underwriters on the other, in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Holders on the one hand and the Underwriters on the
other from the offering of the Registrable Securities, or if such allocation is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits but also the relative fault of the Company and
the Selling Holders on the one hand and of the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations and (ii) as between the Company on the one hand and each Selling
Holder on the other, in such proportion as is appropriate to reflect the
relative fault of the Company and of each Selling Holder in connection with such
statements or omissions, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling Holders on the one
hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by the Company
and the Selling Holders bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the prospectus. The relative fault of the Company and the Selling
Holders on the one hand and of the Underwriters on the other shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company and the Selling
Holders or by the Underwriters. The relative fault of the Company on the one
hand and of each Selling Holder on the other shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by such party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Selling Holders agree that it would not be just and
equitable if contribution pursuant to this Section 4.4 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages or liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 4.4, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Registrable Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission, and no Selling Holder
shall be required to contribute any amount in excess of the amount by which the
total price at which the Registrable Securities of such Selling Holder were
offered to the public (less underwriting discounts and commissions) exceeds the
amount of any damages which such Selling Holder has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. Each
Selling Holder's obligations to contribute pursuant to this Section 4.4 are
several in proportion to the proceeds of the offering received by such Selling
Holder bears to the total proceeds of the offering received by all the Selling
Holders and not joint.
V
SECTION 5.1 Participation in Underwritten Registrations. No Person
may participate in any underwritten registration hereunder unless such Person
(a) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements and these
Registration Rights; provided that (i) if the FS Stockholder, the Company
Stockholders or any of their Affiliates participates in such registration, they
will not be required to make any representations or warranties except those
which relate solely to themselves and (ii) the liability of the FS Stockholder,
the Company Stockholders or any of their Affiliates to any Underwriter under
such underwriting agreement will be limited to liability arising from
misstatements in, or omissions from, written information regarding such Person
provided by or on behalf of such Person for inclusion in the prospectus.
SECTION 5.2 Rule 144. The Company covenants that it will use its
reasonable best efforts to file any reports required to be filed by it under the
Securities Act and the Exchange Act and that it will take such further action as
any Holder may reasonably request, all to the extent reasonably required from
time to time to enable Holders and their Affiliates to sell Registrable
Securities without registration under the Securities Act within the limitation
of the exemptions provided by (a) Rule 144 or Rule 144A under the Securities
Act, as such Rules may be amended from time to time, or (b) any similar Rule or
regulation hereafter adopted by the SEC. Upon the request of any Holder, the
Company will deliver to such Holder a written statement as to whether it has
complied with such requirements.
SECTION 5.3 Holdback Agreements. To the extent not inconsistent
with applicable law, each Holder of Registrable Securities agrees not to effect
any sale or distribution or to permit its Affiliate to effect any sale or
distribution of the issue being registered or of a similar security of the
Company, or any securities convertible into or exchangeable or exercisable for
such securities, including a sale pursuant to Rule 144 or Rule 144A under the
Securities Act, during the 14 days prior to, and during the 180-day period
beginning on, the effective date of the registration statement filed by the
Company (except as part of such registration) if, and to the extent, requested
by the managing Underwriter or Underwriters in the case of an underwritten
public offering.
SECTION 5.4 Stockholders Agreement. Notwithstanding anything above
to the contrary, all transfers of Registrable Securities subject to the
provisions of the Stockholders Agreement shall be made only in accordance with
such provisions.
AGREEMENT
This Agreement (the "Agreement") is made as of June 13, 1995, by and
among FS Equity Partners III, L.P., a Delaware limited partnership ("FSEP III"),
and FS Equity Partners International, L.P., a Delaware limited partnership
("FSEP International" and together with FSEP III, "FS"); Lillian Vernon ("Ms.
Vernon"); David C. Hochberg ("Mr. D. Hochberg"); and Fred P. Hochberg ("Mr. F.
Hochberg").
R E C I T A L S:
A. FS has caused the formation of VB Investment Corporation (the
"Company").
B. Lillian Vernon Corporation, a Delaware corporation ("Target"),
and the Company propose to enter into an Agreement and Plan of Merger, dated as
of the date hereof (the "Merger Agreement"), which provides, among other things,
that the Company will merge with and into Target pursuant to the merger
contemplated by the Merger Agreement (the "Merger");
C. As of the date hereof each of Ms. Vernon, Mr. D. Hochberg and
Mr. F. Hochberg owns the number of shares of common stock, par value $.01 per
share ("Target Common Stock"), of Target, set forth opposite such stockholders
name on Exhibit A hereto (all such shares and any shares hereafter acquired by
any of Ms. Vernon, Mr. D. Hochberg and Mr. F. Hochberg prior to termination of
this Agreement being referred to herein as the "Shares"); and
D. As a condition to the willingness of the Company to enter into
the Merger Agreement, FS has required that each of Ms. Vernon, Mr. D. Hochberg
and Mr. F. Hochberg agree, and in order to induce the Company to enter into the
Merger Agreement, each of Ms. Vernon, Mr. D. Hochberg and Mr. F. Hochberg has
agreed, to enter into this Agreement with respect to the Shares.
A G R E E M E N T:
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants and conditions contained herein, the parties agree as follows:
1. Other Agreements.
Immediately prior to the Merger, (i) FS, Ms. Vernon and Mr. D.
Hochberg will enter into a Stockholders Agreement substantially in the form
attached hereto as Exhibit B (the "Stockholders Agreement"), and (ii) Ms. Vernon
shall
enter into an amendment to her employment agreement with Target in substantially
the form attached hereto as Exhibit C, and Ms. Vernon shall enter into an
amendment to her deferred compensation arrangement with Target in substantially
the form attached hereto as Exhibit C-1. Each individual that retains Target
Common Stock in connection with the Merger will be an "accredited investor" as
defined in Rule 501 of Regulation D under the Act.
2. Voting and Transfer of Target Shares; No Negotiation.
(a) Each of Ms. Vernon, Mr. D. Hochberg and Mr. F. Hochberg
shall vote, at any meeting of stockholders or in connection with any written
consent, all Shares, (i) in favor of the Merger and the approval of the terms of
the Merger Agreement, (ii) against the following actions (other than the Merger
and the transactions contemplated by the Merger Agreement): (1) a merger,
consolidation or other business combination involving the Target or its
subsidiaries; (2) a sale, lease or transfer of a material amount of assets of
the Target or its subsidiaries, (3) a reorganization, recapitalization,
dissolution or liquidation of the Target or its subsidiaries; (4) any material
change in the present capitalization of the Target or any amendment of the
Target's Certificate of Incorporation; or (5) any other action which could
reasonably be expected, to impede, interfere with, delay, postpone, discourage
or materially adversely affect the Merger or the transactions contemplated by
the Merger Agreement or this Agreement or the contemplated economic benefits of
any of the foregoing. Each of Ms. Vernon, Mr. D. Hochberg and Mr. F. Hochberg
agrees to take all reasonable action pursuant to her or his rights or
obligations as a stockholder or securityholder of Target to effect the Merger,
having the securities owned by her or him being counted toward any required
quorum and not exercising any dissenters' or appraisal rights, which are hereby
waived.
(b) None of Ms. Vernon, Mr. D. Hochberg and Mr. F. Hochberg
shall transfer, exchange or pledge, hypothecate or encumber in any way the
shares of Target Common Stock beneficially owned by Ms. Vernon, Mr. D. Hochberg
or Mr. F. Hochberg, other than a transfer of shares of Target Common Stock
pursuant to the Merger; provided however that Mr. F. Hochberg may transfer by
gift 120,000 shares of Target Common Stock and such transferee shall not be
subject to the terms of this Agreement.
(c) None of Ms. Vernon, Mr. D. Hochberg and Mr. F. Hochberg
or any of her or his respective employees, representatives or agents shall,
directly or indirectly, solicit or initiate discussions or negotiations with, or
provide any information to, any corporation, partnership, person, or other
entity or group (other than in connection with the Merger or with FS or the
Company or an affiliate or an associate of FS or the Company or an officer,
partner, employee or other authorized representative of FS or the Company or
such affiliate or associate) concerning (i) any tender offer, merger or sale of
all or substantially all assets involving Target or (ii) any sale of shares of
capital stock or an option or warrant to purchase shares of capital stock of
Target or any reorganization or reclassification or subdivision of capital stock
of Target (including, without limitation, with respect to her or his ownership
interest in Target) or otherwise in connection with one of the foregoing
transactions or similar transaction involving Target (all such transactions
being referred to herein as "Acquisition Transaction"), or participate in any
negotiation regarding any Acquisition Transaction or otherwise cooperate or
facilitate in any way with or encourage any effort or attempt by any other
person to effectuate an Acquisition Transaction. None of Ms. Vernon, Mr. D.
Hochberg or Mr. F. Hochberg is currently involved in any existing discussions or
negotiations with any party (other than FS) with respect to any of the
foregoing. Ms. Vernon, Mr. D. Hochberg or Mr. F. Hochberg will promptly
communicate to FS the terms of any proposal she or he may receive from any other
party in respect of an Acquisition Transaction or of any proposal made to any of
Ms. Vernon, Mr. D. Hochberg or Mr. F. Hochberg of which any of them has
knowledge, and FS agrees to keep such information confidential and not to trade
on such information until such information is otherwise publicly disclosed.
Nothing in this Agreement shall prevent any of Ms. Vernon, Mr. D. Hochberg or
Mr. F. Hochberg from acting solely in her or his capacity as a director or
officer of Target to the extent necessary to comply with her or his fiduciary
responsibilities as such a director or officer.
(d) (i) Each of Ms. Vernon, Mr. D. Hochberg and Mr. F.
Hochberg hereby grants to and appoints Ronald P. Spogli and John M. Roth of FS,
and each of them individually, her or his irrevocable proxy and attorney-in-fact
(with full power of substitution) to vote her or his respective Shares in the
manner set forth in Section 2(a). Each of Ms. Vernon, Mr. D. Hochberg and Mr.
F. Hochberg intends this proxy to be irrevocable and coupled with an interest
and will take such further action and execute such other instruments as may be
necessary to effectuate the intent of this proxy and hereby revokes any proxy
previously granted by her or him with respect to her or his shares of Target
Common Stock and no subsequent proxy shall be given with respect thereto.
3. Covenants.
(a) Each of FS, Ms. Vernon and Mr. D. Hochberg shall use
their commercially reasonable best efforts to cause the consummation of the
Merger.
(b) None of FS, Ms. Vernon, Mr. D. Hochberg or Mr. F.
Hochberg will take any action which would make any of their respective
representations or warranties contained herein untrue or incorrect or have the
effect of preventing or disabling them from performing any of their respective
obligations under this Agreement.
(c) FS, Ms. Vernon, Mr. D. Hochberg and Mr. F. Hochberg
shall not make any filing, public announcement or press release regarding the
transactions
contemplated hereby without the prior approval of the other parties, which
approval shall not be unreasonably withheld or delayed.
(d) Each of Ms. Vernon, Mr. D. Hochberg and Mr. F. Hochberg
shall, at the reasonable request of Target, cooperate with Target in obtaining
additional life insurance with respect to themselves, in connection with
Target's deferred compensation obligations.
(e) Immediately prior to the consummation of the Merger, Ms.
Vernon shall execute an Assignment in the form attached hereto as Exhibit D.
4. Representations and Warranties.
(a) Representations of FS. Each of FSEP III and FSEP
International hereby represents and warrants to Ms. Vernon, Mr. D. Hochberg and
Mr. F. Hochberg as follows:
(i) It is a limited partnership duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has full authority under its agreement of limited partnership and
any amendments thereto to carry on its business as now conducted.
(ii) The execution, delivery, performance of
and compliance with this Agreement and the Stockholders Agreement by it do not
and will not (A) violate (1) any provision of its limited partnership agreement
or any amendments thereto, (2) the terms of any mortgage, indenture, lien,
lease, agreement, instrument, order, judgment or decree to which it is a party
or by which it is bound or (3) any provision of law, statute, ordinance, rule or
regulation or (B) require any consent or approval of any third party.
(iii) This Agreement has been and, when
executed, the Stockholders Agreement will be, duly authorized, duly and validly
executed and delivered by each of FSEP III and FSEP International and, assuming
due execution and delivery by the other parties hereto, each of such agreements
is, or upon execution will be, the valid and binding obligation of each of FSEP
III and FSEP International, enforceable against each of them in accordance with
their respective terms, except as the same may be limited by bankruptcy,
insolvency, moratorium or similar laws or by equitable principles relating to or
limiting creditors' rights generally.
(b) Representations of Ms. Vernon, Mr. D. Hochberg and Mr.
F. Hochberg. Each of Ms. Vernon, Mr. D. Hochberg and Mr. F. Hochberg hereby
represents and warrants to FS as follows:
(i) Such stockholder has full power, capacity, right
and authority and any required approvals and consents to enter into and perform
this Agreement and the Stockholders Agreement. Such stockholder has not entered
into any agreement to sell, purchase or acquire or any other agreement relating
to Target Common Stock other than this Agreement.
(ii) The execution, delivery, performance of and
compliance with this Agreement and the Stockholders Agreement by such
stockholder do not and will not violate (A) the terms of any mortgage,
indenture, lien, lease, agreement, instrument, order, judgment or decree to
which such stockholder is a party or by which such stockholder is bound or (B)
any provision of law, statute, ordinance, rule or regulation.
(iii) This Agreement has been and, when executed, the
Stockholders Agreement will be, duly and validly executed and delivered by such
stockholder and, assuming due execution and delivery by the other parties
hereto, each of such agreements is, or upon execution will be, the valid and
binding obligation of such stockholder, enforceable against such stockholder in
accordance with their respective terms, except as the same may be limited by
bankruptcy, insolvency, moratorium or similar laws or by equitable principles
relating to or limiting creditors' rights generally.
(iv) Such stockholder is, and at all times prior to
the consummation of the Merger will be, the record and beneficial owner of, and
holds, and will hold at all times prior to the consummation of the Merger, good
and marketable title to, the number of Shares opposite such stockholders name on
Exhibit A free and clear of liens, pledges, encumbrances, security interests,
restrictions or claims of any kind. Such stockholder has the sole power to
dispose of and vote such Shares.
5. Covenant Not to Compete.
Each of Ms. Vernon, Mr. D. Hochberg and Mr. F. Hochberg agrees
that, for the benefit of Target, for the period commencing on the consummation
of the Merger (the "Effective Time") and ending five years after the
consummation of the Merger (the "Non-Competition Period") such individual will
not, directly or indirectly, own, manage, operate, control or participate in the
ownership, management, operation or control of, or be connected in any manner
with, any business which shall be engaged anywhere in the world in the marketing
or sale in any manner of gift, household, gardening, decorative, Christmas and
children's products or any other products of the type currently sold or
contemplated to be sold by Target, other than through employment with or
ownership interests in Target; provided, however, that nothing in this Agreement
shall prevent Ms. Vernon, Mr. D. Hochberg or Mr. F. Hochberg from investing in
stocks, bonds or other securities of any business organization if (i) such
stocks, bonds or other securities are listed on a national or regional
securities exchange or are registered under Section 12(g) of the Securities Act
of 1934, and (ii) such investment in any class of such securities does not
exceed 5% of the issued and outstanding shares of such class, or 5% of the
aggregate principal amount of such class, as the case may be. During the Non-
competition Period, none of Ms. Vernon, Mr. D. Hochberg or Mr. F. Hochberg (or
any of their respective affiliates) shall (directly or indirectly) solicit any
then current employee of Target or any person who was employed by Target within
the previous six months, to enter their employ or to enter the employment of any
entity by which she or he is employed or in which she or he has an ownership
interest and none of them shall cause any such entity to do any of the
foregoing. In the event that this covenant not to compete is held by any court
of competent jurisdiction to be unenforceable because it is too extensive in
scope or time or territory, it shall be deemed to be and shall be amended
without any further act by the parties hereto to conform to the scope and period
of time and geographical area which would permit it to be enforced. If this
covenant is breached or threatened to be breached, each of Ms. Vernon, Mr. D.
Hochberg and Mr. F. Hochberg, expressly consents that, in addition to any other
remedy Target may have, Target shall be entitled to apply for and receive
injunctive relief in order to prevent the continuation of any existing breach or
the occurrence of any threatened breach. Notwithstanding the foregoing, Mr. F.
Hochberg may retain his existing equity interest in Shocking Grey (but may act
solely as a passive investor with respect to such company) and nothing will
prevent Mr. F. Hochberg from serving as a director of any company that operates
a catalog business, provided that the revenues of such catalog business shall
not account for more than 33 1/3% of such company's revenues (based upon a good
faith determination of the amounts of the revenues identified above). During
the Non-Competition Period, and subject to Mr. F. Hochberg's compliance with
this Section 5, Target shall not single Mr. F. Hochberg out for different
treatment from other employees of Target with respect to health and medical
benefits to which he is entitled under that certain Consulting Agreement dated
March 11, 1993 between Target and Mr. F. Hochberg.
6. Termination. Except for Sections 3(d), 5, 7(b) and 7(c)
hereof (which shall not terminate except in accordance with their terms), this
Agreement and all rights and obligations hereunder, will terminate upon the
earlier of (i) the Effective Time (as defined in the Merger Agreement), (ii) the
termination of the Merger Agreement in accordance with its terms upon a breach
of the Merger Agreement by the Company and (iii) (A) in the case of obligations
of Ms. Vernon, Mr. D. Hochberg and Mr. F. Hochberg pursuant to clauses (3) or
(4) of Section 2(a), 6 months from the date hereof, and (B) in the case of all
other rights and obligations hereunder, 10 months from the date hereof.
7. Miscellaneous.
(a) After Acquired Shares; Legends. The provisions of this
Agreement shall apply to any shares of Target Common Stock acquired after the
execution of the Agreement by Ms. Vernon, Mr. D. Hochberg or Mr. F. Hochberg and
shall be included in the term "Shares". The term "Shares" and "Target Common
Stock" as used herein includes any securities into which Target Common Stock may
hereafter be changed and any securities of Target of any other class or kind
hereafter issued to holders of shares of Target Common Stock upon any
reclassification thereof. Each of Ms. Vernon, Mr. D. Hochberg and Mr. F.
Hochberg shall present to Target within 10 days after the date of this Agreement
the certificates representing Target Common Stock beneficially owned by her or
him and Target shall place the following legend on such certificates: "The
shares of Common Stock par value $.01 per share, of Target represented by this
certificate are subject to an Agreement dated as of June 13, 1995, and may not
be sold or otherwise transferred, except in accordance therewith. Copies of
such Agreement may be obtained at the principal executive offices of Target."
Each of Ms. Vernon, Mr. D. Hochberg and Mr. F. Hochberg agrees that within ten
days after the date of this Agreement, she or he will no longer hold any shares
of Target Common Stock in "street name" or in the name of any nominee.
(b) Defense of Litigation. Each of FS, Ms. Vernon and Mr.
D. Hochberg shall use all reasonable efforts to (i) defend any action relating
to the transactions contemplated by this Agreement or adversely affecting the
ability of the parties to consummate the transactions contemplated by this
Agreement, including (without limitation) the Merger and (ii) lift or rescind
any injunction or restraining order or other order adversely affecting the
ability of the parties to consummate the transactions contemplated by this
Agreement, including (without limitation) the Merger. Each of Ms. Vernon, Mr.
D. Hochberg and Mr. F. Hochberg agrees that she or he shall not share in any way
in any proceeds resulting from a settlement or other resolution of any such
action. This covenant shall survive the consummation of the Merger.
(c) Expenses. Upon consummation of the Merger, the parties
agree that Target will pay all the reasonable expenses incurred in connection
with the formation of the Company and the Merger, including the expenses of FS
(and its affiliates) and Ms. Vernon, Mr. D. Hochberg and Mr. F. Hochberg.
(d) Further Assurances; Good Faith. Each party hereto
agrees to perform any further acts and to execute and deliver any document which
may be reasonably necessary to carry out the intent of this Agreement. Each
party hereto further agrees to (i) at all times in good faith act in such a
manner as to fulfill the intent and purpose of this Agreement and to protect the
rights created hereby against impairment and (ii) use its reasonable best
efforts to comply with all requirements of applicable law.
(e) Notices. All notices, requests and other communications
hereunder shall be in writing and, if by personal delivery, shall be deemed to
have been validly served, given or delivered upon actual delivery, and, if by
facsimile transmission, shall be deemed to have been validly served, given or
delivered upon transmission and acknowledgement of receipt thereof, in each case
addressed to the party or parties to be notified, at the following addresses (or
such other address(es) as a party may designate for itself by like notice):
If to FS:
FS Equity Partners III, L.P.
FS Equity Partners International, L.P.
c/o Freeman Spogli & Co. Incorporated
18th Floor
599 Lexington Avenue
New York, New York 10022
Facsimile: (212) 758-7499
Attention: John M. Roth
If to Ms. Vernon:
c/o Lillian Vernon Corporation
543 Main Street
New Rochelle, New York 10801
If to Mr. D. Hochberg:
c/o Lillian Vernon Corporation
543 Main Street
New Rochelle, New York 10801
If to Mr. F. Hochberg:
c/o Heyday Company
149 Fifth Avenue, Suite 1213
New York, New York 10010
(f) Amendments. Any amendment of this Agreement or waiver
of compliance with any provisions hereof shall be in writing and shall require
the written approval of each of the parties hereto and any amendment of Section
6 shall require the consent of Target. Any such amendment or waiver so approved
in writing shall be binding upon all of the parties hereto and their respective
successors and permitted assigns.
(g) Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Delaware
without regard to conflicts of law principles thereof.
(h) Disputes. In the event of any dispute among the parties
arising out of this Agreement, the prevailing party shall be entitled to recover
from the non-prevailing party the reasonable expenses of the prevailing party,
including, without limitation, reasonable attorneys' fees and expenses.
(i) Specific Performance. It is acknowledged that it will
be impossible to measure in money the damages that would be suffered if the
parties hereto fail to comply with any of the obligations imposed herein on them
and that, in the event of any such failure, an aggrieved party hereto will be
irreparably damaged and will not have an adequate remedy at law. In addition to
being entitled to exercise all rights granted by law, any such party shall,
therefore, be entitled to injunctive relief, including specific performance, to
enforce such obligations, and if any action should be brought in equity to
enforce any of the provisions of this Agreement, none of the parties hereto
shall raise the defense that there is an adequate remedy at law.
(j) Severability. Whenever possible, each provision or
portion of any provision of this Agreement will be interpreted in such manner as
to be effective and valid under applicable law but if any provision or portion
of any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or portion of any provision in such jurisdiction, and this
Agreement will be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision or portion of any provision had
never been contained herein.
(k) Headings. Introductory headings at the beginning of
each Section and paragraph of this Agreement are solely for the convenience of
the parties and shall not be deemed to be a limitation upon or description of
the contents of this Agreement.
(l) Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
shall constitute one and the same instrument.
(m) No Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and
permitted assigns and, with respect to Section 6, to the benefit of Target and
its successors and assigns.
(n) Copy of Agreement. A copy of this Agreement and all
permitted amendments hereto and waivers hereof shall be kept at the principal
executive offices of the Company.
(o) Agreement Conditional. This Agreement shall be of no
force or effect, and none of FS, Ms. Vernon, Mr. D. Hochberg or Mr. F. Hochberg
shall have any obligation hereunder, unless and until the Board of Directors of
Target shall have approved the terms of the Merger and this Agreement (and all
exhibits hereto).
(p) Filing of Schedule 13D. FS, Ms. Vernon, Mr. D. Hochberg
and Mr. F. Hochberg shall, within ten days of the execution of this Agreement,
file with the Securities and Exchange Commission one or more Schedule 13D
filings identifying each of the parties to this Agreement as a member of a
"group."
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the day and year first above written.
FS EQUITY PARTNERS III, L.P.,
a Delaware limited partnership
By: FS Capital Partners, L.P.
Its: General Partner
By: FS Holdings, Inc.
Its: General Partner
By: /s/ John M. Roth
John M. Roth
Vice President
FS EQUITY PARTNERS INTERNATIONAL, L.P.,
a Delaware limited partnership
By: FS&Co. International, L.P.
Its: General Partner
By: FS International Holdings Limited
Its: General Partner
By:
John M. Roth
Vice President
/s/ Lillian Vernon
Lillian Vernon
/s/ David C. Hochberg
David C. Hochberg
/s/ Fred P. Hochberg
Fred P. Hochberg
EXHIBIT A
Holder Shares
------ ------
Lillian Vernon 2,114,663
David C. Hochberg 1,232,000
Fred P. Hochberg 623,231
EXHIBIT B
FORM OF
STOCKHOLDERS AGREEMENT
Please see Exhibit (c)(2) to this Schedule 13E-3.
Exhibit C
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
BETWEEN
LILLIAN VERNON CORPORATION
AND
MS. LILLIAN VERNON
AGREEMENT, made this day of , 1995,
by and between Lillian Vernon Corporation (the "Company"), and Ms. Lillian
Vernon, previously known as Lillian Katz (the "Executive").
WHEREAS, the Company and Executive entered into an Employment
Agreement dated the first day of March 1987 (the "Agreement") amended as of
April 30, 1992 by the First Amendment; and
WHEREAS, the term of the Employment Agreement expires on
February 28, 1997; and
WHEREAS, the parties desire to extend the term of the Agreement
as set forth below,
NOW THEREFORE, it is mutually agreed that:
1. Paragraph 2 of the Agreement is hereby amended to read
as follows:
"2. Term. The employment term of this Agreement is extended
for a period of three (3) years commencing on the date of this Second Amendment
and terminating on the third anniversary of this Second Amendment, 1998
("Guaranteed Employment Period"). Thereafter, this Agreement shall continue at
will terminable on ninety (90) days prior written notice by either party to the
other, which notice may be given at any time provided that effective date of
termination set forth in such notice is on or after the third Anniversary of
this Second Amendment. (The entire period of employment is hereinafter referred
to as the "Employment Period")."
2. Sub-paragraph 3(c) is hereby amended by adding the
following sentence at the end of such sub-paragraph:
Throughout the Employment Term, the Executive (i) shall continue
to be eligible to participate in all benefit plans of the Company available to
senior executives of the Company, and (ii) shall continue to be provided by the
Company with the use of an automobile, driver and secretary (on terms identical
to those in effect as of the date hereof).
3. Except as amended herein, the Agreement as extended is
hereby ratified and confirmed.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement the year and day first above written.
LILLIAN VERNON CORPORATION
By:______________________
Name:
Title:
______________________
Lillian Vernon
EXHIBIT C-1
SECOND AMENDMENT TO
LILLIAN VERNON CORPORATION
EXECUTIVE DEFERRED COMPENSATION AGREEMENT
WITH
LILLIAN VERNON
AGREEMENT made this ___ day of ________, 1995 by and between
Lillian Vernon Corporation (the "Company") and Ms. Lillian Vernon, previously
known as Lillian Katz (the "Executive").
WHEREAS, the Company and Executive entered into a deferred
compensation agreement dated February 27, 1985 and amended as of April 30, 1992
(the "Agreement");
WHEREAS, the Company has entered into an Agreement and Plan of
Merger dated as of the date hereof with VB Investment Corporation, a Delaware
corporation ("VB Investment"), pursuant to which VB Investor shall be merged
with and into the Company, with the Company continuing as the surviving
corporation (the "Merger"); and
WHEREAS, in connection with the Merger, the parties hereto
desire to amend the Agreement as set forth below, such amendment to be effective
upon the consummation of the Merger,
NOW THEREFORE, it is mutually agreed that:
1. Paragraph 2 of the Agreement is hereby amended by
inserting the following language at the end of the second to last sentence of
such paragraph:
provided, however, that such payments shall not
commence prior to the first anniversary of the last date on
which the Executive is either employed by the Company or
receiving payments pursuant to an employment agreement with the
Company
2. Paragraph 2 is further amended by deleting the words "at
such time" from the end of the last sentence of such paragraph and replacing
them with the words "at the time she reaches the age of seventy (70)".
3. Except as amended herein, the Agreement is hereby
ratified and confirmed.
LILLIAN VERNON CORPORATION
By:______________________
Name:
Title:
_________________________
Lillian Vernon
EXHIBIT D
ASSIGNMENT AND CONSENT TO USE NAME AND LIKENESS
This Assignment and Consent to Use Name and Likeness
("Assignment") is entered into as of the 13th day of June 1995.
WHEREAS, Lillian Vernon Corporation (the "Company") desires to
exclusively use my likeness in connection with any commercial purpose relating
to the retail or mail order sales of products and exclusively use the "Lillian
Vernon" name and any portions or variations thereof, including (without
limitation) "Lillian" or "Lilly" and any names similar thereto (the "Name") in
connection with any commercial purpose whatsoever, in each case including but
not limited to the operation of the businesses currently conducted by the
Company (hereinafter the "Business") including the Company's advertising,
merchandising and public relations campaigns; and
WHEREAS, I, Lillian Vernon, desire to permit and consent to the
Company's exclusive use of my likeness in connection with any commercial purpose
relating to the retail or mail order sales of products and the Company's
exclusive use of the Name by the Company for any commercial purpose whatsoever,
in each case including but not limited to the operation of the Business, the use
of the Name and likeness on catalogs, advertisements, merchandise and in
connection with the promotion of the products or services of the Business, and
to assign to the Company the perpetual right to do so;
NOW, THEREFORE,I hereby agree as follows:
1. The above recitations are hereby incorporated in full by
reference.
2. For valuable consideration which I acknowledge I have
received, I hereby assign, grant and transfer in perpetuity to the Company, its
successors and assigns, the exclusive right to use my likeness in connection
with any commercial purpose relating to the retail or mail order sales of
products and the exclusive right to use the Name for any commercial purpose
whatsoever, in each case in all forms of media and including but not limited to
use in connection with the operation of the Business, on or in catalogs,
brochures, advertisements, mailings, invoices, products, and all other matters
and means used by the Business as it has heretofore been conducted. In granting
this right to the Company, and its successors and assigns, I understand that I
am granting the right to use photographs or the like of me as well as the right
to identify me by the Name and by the city in which I live or have lived, and to
use any testimonials, statements and/or specific circumstances which I have
previously made and/or described.
3. Where the Name is used in association with a
testimonial, another statement and/or specific circumstances which I have made
and/or described, I warrant that I have approved the use of the Name and my
likeness with such and that the testimonial, the statements attributed to me,
and/or the circumstances relayed by me and used by the Company are in fact true;
provided that the Name and/or my likeness shall not be used in the future in
association with a testimonial, another statement or a description of
circumstances without my or my representatives or heirs prior consent (which
will not be unreasonably withheld) if such testimonial, statement or description
is not the same as those I have made previously.
4. By entering into this Assignment, I promise and warrant
that I have the right to execute this Assignment and that I have not and will
not attempt to transfer any rights to use the Name and my likeness to another,
either during my lifetime or after my death.
5. I understand that under no circumstances shall I, my
heirs, executors or assigns have any right to maintain a cause of action against
the Company, or its successors or assigns, for use of the Name and my likeness
as described herein.
6. I hereby consent to the use and registration of the Name
on any and all trademark registers located anywhere within the world, including
without limitation, the principal register of the United States Patent and
Trademark Office, in the name of Company or its successors or its assigns.
My signature below certifies my intent to agree be bound to the
terms as stated above.
DATED: June __, 1995 ______________________________
(signature)
State of )
) ss.
County of )
On _______________ before me, ____________________, personally appeared
____________________, personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to
the within instrument and acknowledged to me that he/she/they executed the same
in his/her/their authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s), or the entity upon behalf of which
the person(s) acted, executed the instrument.
Witness my hand and official seal.
______________________________
Notary Public in and for said County and State
PRELIMINARY COPY
LILLIAN VERNON CORPORATION
July [ ], 1995
Dear Lillian Vernon Corporation Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders of
Lillian Vernon Corporation (the "Company") to be held on August [ ], 1995, at
10:00 a.m., local time, at the Company's offices at 543 Main Street, New
Rochelle, New York 10801. At the Special Meeting, you will be asked to
consider and vote upon a proposal to approve and adopt the Agreement and Plan
of Merger, dated as of June 13, 1995 (the "Merger Agreement"), between VB
Investment Corporation, a Delaware corporation ("Investor"), and the Company.
Upon the terms and subject to the conditions of the Merger Agreement,
Investor will be merged with and into the Company (the "Merger"), with the
Company to continue as the surviving corporation of the Merger (the
"Surviving Corporation"). The Merger will become effective at such time as a
copy of the Merger Agreement or a Certificate of Merger has been filed with
the Secretary of State of the State of Delaware in accordance with the laws
of the State of Delaware (the date and time of such filing being the
"Effective Time"). At the Effective Time, each outstanding share of common
stock, par value $.01 per share, of the Company (each, a "Share") (other than
(i) 657,895 and 394,737 Shares registered in the names of Lillian Vernon and
her son, David C. Hochberg ("David Hochberg"), respectively, which shall not
be canceled but shall remain outstanding and which will represent
approximately 27% of the common stock, par value $.01 per share, of the
Surviving Corporation (the "Surviving Corporation Common Stock") after the
Merger, and Shares retained by certain members of management, (ii) Shares
held in the treasury of the Company, or owned by the Company or Investor
which will be extinguished and canceled without conversion, no payment being
made in respect thereof, and (iii) any Shares that are held by stockholders
who have not voted in favor of 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 Delaware General Corporate Law (the
"DGCL")) shall be canceled and converted automatically into the right to
receive an amount equal to $19.00 in cash (the "Merger Consideration")
payable to the holder thereof, without interest, upon surrender of the
certificate formerly representing such Shares in the manner provided in the
Merger Agreement and in accordance with instructions to be provided to the
holders of such Shares subsequent to the Effective Time. Investor has been
organized by Freeman Spogli & Co. Incorporated, a California corporation
("FS&Co."). Certain affiliates of FS&Co. own 100% of the outstanding capital
stock of Investor. At the Effective Time in accordance with the Merger, the
shares of common stock, par value $.01 per share, of Investor (the "Investor
Common Stock") will be converted into approximately 2,763,158 shares of the
Surviving Corporation Common Stock, which will represent approximately 70% of
the Surviving Corporation Common Stock. Upon consummation of the Merger,
certain members of management, other than Lillian Vernon and David Hochberg,
will retain or purchase Surviving Corporation Common Stock having an
aggregate value of approximately $2.5 million, which will represent
approximately 3% of the Surviving Corporation Common Stock.
Under Section 251 of the DGCL, the affirmative vote of the holders of a
majority of the outstanding Shares entitled to vote thereon is required to
approve and adopt the Merger Agreement. Each of Lillian Vernon, and her sons,
David Hochberg and Fred Hochberg, have agreed to vote all of her or his
Shares in favor of the Merger. Lillian Vernon, David Hochberg and Fred
Hochberg collectively own approximately 40.7% of the outstanding Shares,
other than treasury shares, as of the date hereof.
THE DIRECTORS OF THE COMPANY, EXCLUDING LILLIAN VERNON AND FRED HOCHBERG,
WHO RECUSED THEMSELVES FROM THE VOTE ON SUCH MATTERS, AND DAVID HOCHBERG, WHO
DID NOT ATTEND THE BOARD OF DIRECTORS MEETING, WITH ONE OTHER DIRECTOR NOT
PARTICIPATING DUE TO ILLNESS, HAVE APPROVED THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, AND DETERMINED THAT
THE
<PAGE>
MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS OF THE
COMPANY, AND RECOMMEND THAT STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT.
YOUR VOTE IS IMPORTANT. A FAILURE TO SIGN AND RETURN YOUR PROXY IS THE
EQUIVALENT OF A VOTE AGAINST THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
Whether or not you are able to attend the Special Meeting, please
complete, sign and return the enclosed proxy card as soon as possible. A
postage-paid envelope is enclosed for your convenience. If you attend the
Special Meeting, you may revoke your proxy and, if you wish, vote your Shares
in person.
PLEASE DO NOT SEND US YOUR STOCK CERTIFICATES AT THIS TIME. If the Merger
becomes effective, you will be advised of the procedure for surrendering your
certificates in exchange for the $19.00 per Share cash consideration.
Sincerely,
Lillian Vernon
Chairman of the Board of Directors
and Chief Executive Officer
<PAGE>
PRELIMINARY COPY
LILLIAN VERNON CORPORATION
543 MAIN STREET
NEW ROCHELLE, NEW YORK 10801
Notice of Special Meeting
of Stockholders to be held
August , 1995
To the Holders of Common Stock of
Lillian Vernon Corporation:
The Special Meeting of Stockholders of Lillian Vernon Corporation (the
"Company") will be held on August , 1995, at 10:00 a.m., local time, at the
Company's offices at 543 Main Street, New Rochelle, New York 10801, for the
following purposes:
(i) To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of June 13, 1995 (the "Merger
Agreement"), between VB Investment Corporation, a Delaware corporation
("Investor"), and the Company. Upon the terms and subject to the
conditions of the Merger Agreement, Investor will be merged with and into
the Company (the "Merger"), with the Company to continue as the surviving
corporation of the Merger (the "Surviving Corporation"). The Merger will
become effective at such time as a copy of the Merger Agreement or a
Certificate of Merger has been filed with the Secretary of State of the
State of Delaware in accordance with the laws of the State of Delaware
(the date and time of such filing being the "Effective Time"). At the
Effective Time, each outstanding share of common stock, par value $.01 per
share, of the Company (each, a "Share"), (other than (i) 657,895 and
394,737 Shares registered in the names of Lillian Vernon and her son,
David C. Hochberg ("David Hochberg"), respectively, which shall not be
canceled but shall remain outstanding and which will represent
approximately 27% of the common stock, par value $.01 per share, of the
Surviving Corporation (the "Surviving Corporation Common Stock") after the
Merger, and Shares retained by certain members of management, (ii) Shares
held in the treasury of the Company, or owned by the Company or Investor
which will be extinguished and canceled without conversion, no payment
being made in respect thereof, and (iii) any Shares that are held by
stockholders who have not voted in favor of the Merger or consented
thereto in writing and who shall have demanded properly in writing
appraisal for such Shares in accordance with Section 262 ("Section 262")
of the Delaware General Corporate Law (the "DGCL")) shall be canceled and
converted automatically into the right to receive an amount equal to
$19.00 in cash (the "Merger Consideration") payable to the holder thereof,
without interest, upon surrender of the certificate formerly representing
such Shares in the manner provided in the Merger Agreement and in
accordance with instructions to be provided to the holders of such Shares
subsequent to the Effective Time. Investor has been organized by Freeman
Spogli & Co. Incorporated, a California corporation ("FS&Co."). Certain
affiliates of FS&Co. own 100% of the outstanding capital stock of
Investor. At the Effective Time, in accordance with the Merger, the shares
of common stock, par value $.01 per share, of Investor (the "Investor
Common Stock") will be converted into approximately 2,763,158 shares of
the Surviving Corporation Common Stock, which will represent approximately
70% of the Surviving Corporation Common Stock. Upon consummation of the
Merger, certain members of management, other than Lillian Vernon and David
Hochberg, will retain or purchase Surviving Corporation Common Stock
having an aggregate value of approximately $2.5 million, which will
represent approximately 3% of the Surviving Corporation Common Stock.
(ii) To transact such other business as may properly come before the
Special Meeting, including any and all adjournments and postponements
thereof.
<PAGE>
A conformed copy of the Merger Agreement appears as Annex A to, and is
described in, the accompanying Proxy Statement.
Stockholders who do not wish to accept the $19.00 per Share cash payment
in the Merger and who comply with the requirements of Section 262 have the
right to seek an appraisal by the Delaware Court of Chancery of the fair
value of their Shares. For a description of the rights of stockholders
pursuant to Section 262 and a description of the procedures to be followed in
order to obtain such an appraisal, see "Rights of Dissenting Stockholders",
in the accompanying Proxy Statement. A copy of the text of Section 262
appears as Annex B thereto.
Under Section 251 of the DGCL, the affirmative vote of the holders of a
majority of the outstanding Shares is required to approve and adopt the
Merger Agreement. Each of Lillian Vernon, and her sons, David and Fred P.
Hochberg ("Fred Hochberg"), have agreed to vote all of her or his Shares in
favor of the Merger. Lillian Vernon, David Hochberg and Fred Hochberg
collectively own approximately 40.7% of the outstanding Shares, other than
treasury shares, as of the date hereof.
A list of the stockholders of record entitled to vote at the Special
Meeting will be available for inspection by any stockholder of the Company
for any purpose germane to the Special Meeting during normal business hours
for a period of ten days prior to the date of the Special Meeting at the
Company's principal executive offices at 543 Main Street, New Rochelle, New
York.
Only holders of Shares of record at the close of business on [ ],
1995 are entitled to notice of and to vote at the Special Meeting or any
adjournment thereof.
By Order of the Board of Directors,
Susan N. Cortazzo
Secretary
July , 1995
YOUR ATTENTION IS DIRECTED TO THE ACCOMPANYING PROXY STATEMENT
YOUR VOTE IS IMPORTANT
THE MERGER AGREEMENT MUST BE APPROVED AND ADOPTED BY THE
AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST A MAJORITY OF THE
OUTSTANDING SHARES OF COMMON STOCK. FAILURE TO SIGN AND RETURN
YOUR PROXY IS THE EQUIVALENT OF A VOTE AGAINST APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT WHICH HAS BEEN RECOMMENDED BY
THE BOARD OF DIRECTORS OF THE COMPANY.
To ensure that your interest will be represented at the Special Meeting,
whether or not you plan to attend the Special Meeting, please complete, date,
sign and mail your proxy promptly in the enclosed postage-paid envelope.
Stockholders who attend the Special Meeting in person may revoke their
proxies and vote in person.
<PAGE>
PRELIMINARY COPY
LILLIAN VERNON CORPORATION
543 MAIN STREET
NEW ROCHELLE, NEW YORK 10801
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [ ], 1995
This Proxy Statement (the "Proxy Statement") is being furnished to
stockholders of Lillian Vernon Corporation, a Delaware corporation (the
"Company"), in connection with the solicitation of proxies by the Board of
Directors of the Company from holders of the outstanding shares, other than
shares held in the treasury of the Company, of the common stock, $.01 par
value per share, of the Company (each, a "Share") for use at the Special
Meeting of Stockholders to be held on August [ ], 1995, at 10:00 a.m., local
time, at the Company's principal executive offices at 543 Main Street, New
Rochelle, New York 10801 and at any adjournments or postponements thereof
(the "Special Meeting"). This Proxy Statement, the enclosed Notice of Special
Meeting and the enclosed form of proxy are first being sent or given to
stockholders of the Company on or about July [ ], 1995.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, stockholders will be asked to consider and vote
upon a proposal to approve and adopt the Agreement and Plan of Merger, dated
as of June 13, 1995 (the "Merger Agreement"), between VB Investment
Corporation, a Delaware corporation ("Investor"), and the Company. Upon the
terms and subject to the conditions of the Merger Agreement, Investor will be
merged with and into the Company (the "Merger"), with the Company to continue
as the surviving corporation of the Merger (the "Surviving Corporation"). The
Merger will become effective at such time as a copy of the Merger Agreement
or a Certificate of Merger has been filed with the Secretary of State of the
State of Delaware in accordance with the laws of the State of Delaware (the
date and time of such filing being the "Effective Time"). At the Effective
Time, each outstanding share of common stock, par value $.01 per share, of
the Company (each, a "Share"), (other than (i) 657,895 and 394,737 Shares
registered in the names of Lillian Vernon and her son, David C. Hochberg
("David Hochberg"), respectively, which shall not be canceled but shall
remain outstanding and which will represent approximately 27% of the common
stock, par value $.01 per share, of the Surviving Corporation (the "Surviving
Corporation Common Stock") after the Merger, and Shares retained by certain
members of management, (ii) Shares held in the treasury of the Company, or
owned by the Company or Investor which will be extinguished and canceled
without conversion, no payment being made in respect thereof, and (iii) any
Shares that are held by stockholders who have not voted in favor of 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
Delaware General Corporate Law (the "DGCL")) shall be canceled and converted
automatically into the right to receive an amount equal to $19.00 in cash
(the "Merger Consideration") payable to the holder thereof, without interest,
upon surrender of the certificate formerly representing such Shares in the
manner provided in the Merger Agreement and in accordance with instructions
to be provided to the holders of such shares subsequent to the Effective
Time. Investor has been organized by Freeman Spogli & Co. Incorporated, a
California corporation ("FS&Co."). Certain affiliates of FS&Co. own 100% of
the outstanding capital stock of Investor. At the Effective Time, in
accordance with the Merger, the shares of common stock, par value $.01 per
share, of Investor (the "Investor Common Stock") will be converted into
approximately 2,763,158 shares of the Surviving Corporation Common Stock,
which will represent approximately 70% of the Surviving Corporation Common
Stock. Upon consummation of the Merger, certain members of management, other
than Lillian Vernon and David Hochberg, will retain or purchase Surviving
Corporation Common Stock having an aggregate value of approximately $2.5
million, which will represent approximately 3%, of the Surviving Corporation
Common Stock.
As a result of the Merger, the Company's stockholders (except as described
above) will not have an opportunity to continue their equity interest in the
Company as an ongoing corporation and therefore will not share in its future
earnings and potential growth.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
The date of this Proxy Statement is July [ ], 1995.
<PAGE>
VOTING RIGHTS AND PROXY INFORMATION
Stockholders of record at the close of business on [ ], 1995 (the
"Record Date") will be entitled to notice of and to vote at the Special
Meeting and at any adjournment or postponement thereof. At that date, there
were issued and outstanding [ ] Shares, all of which are entitled to
notice of and to vote at the Special Meeting. As of the Record Date, there
were [ ] stockholders of record. At the Special Meeting, each holder of
Shares will be entitled to cast one vote for each Share held. As of June 30,
1995 there were 9,731,838 Shares and 421 stockholders of record.
Under Section 251 ("Section 251") of the DGCL, approval and adoption of
the Merger Agreement will require the affirmative vote of the holders of a
majority of the outstanding Shares. Pursuant to an agreement, dated as of
June 13, 1995, by and among FS Equity Partners III, L.P., a Delaware limited
partnership ("FSEP III"), and FS Equity Partners International, L.P., a
Delaware limited partnership ("FSEP International" and together with FSEP III
"Equity Partners"), Lillian Vernon, David Hochberg and Fred P. Hochberg
("Fred Hochberg") (the "Voting Agreement"), each of Lillian Vernon, and her
sons, David Hochberg and Fred Hochberg, has agreed to vote all of her or his
Shares in favor of the Merger. Lillian Vernon, David Hochberg and Fred
Hochberg collectively own approximately 40.7% of the outstanding Shares as of
the date hereof. To the Company's knowledge after reasonable inquiry, each of
the Company's other executive officers, directors and affiliates, holding in
the aggregate 74,367 Shares (approximately 0.8% of the outstanding Shares),
presently intends to vote all Shares held of record or beneficially owned by
such person in favor of the Merger. See "PRINCIPAL STOCKHOLDERS AND SHARE
OWNERSHIP OF MANAGEMENT." Except for the recommendation of the Board
contained in this Proxy Statement, to the Company's knowledge after
reasonable inquiry, no executive officer, director or affiliate of the
Company has made a recommendation in support of or opposed to the Merger.
THE BOARD OF DIRECTORS OF THE COMPANY, EXCLUDING LILLIAN VERNON AND FRED
HOCHBERG, WHO RECUSED THEMSELVES FROM THE VOTE ON SUCH MATTERS, AND DAVID
HOCHBERG, WHO DID NOT ATTEND THE BOARD OF DIRECTORS MEETING, WITH ONE OTHER
DIRECTOR NOT PARTICIPATING DUE TO ILLNESS, HAVE CONCLUDED THAT THE MERGER
AGREEMENT IS FAIR TO, AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS OF THE
COMPANY AND RECOMMEND THAT STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT.
Each proxy duly executed and returned by a stockholder will be voted in
accordance with the instructions contained therein. IF NO INSTRUCTIONS ARE
GIVEN, PROXIES WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT. Any stockholder is empowered to revoke a proxy at any time before
its exercise. A proxy may be revoked by filing with the Secretary of the
Company a written revocation or a duly executed proxy bearing a later date.
Any written notice revoking a proxy should be sent to Lillian Vernon
Corporation, 543 Main Street, New Rochelle, New York, 10801, Attention:
Secretary, or hand delivered to the Secretary at or before the taking of the
vote at the Special Meeting. Any stockholder may attend the Special Meeting
and vote in person, whether or not he or she has previously given a proxy.
Shares represented by a properly signed, dated and returned proxy will be
treated as present at the meeting for purposes of determining a quorum,
without regard to whether the proxy is marked as casting a vote or
abstaining. Brokers who hold Shares of Company Common Stock as nominees will
not have discretionary authority to vote such Shares in the absence of
instructions from the beneficial owners. Votes which are not cast for this
reason (the "broker non-votes") will also have the same legal effect as votes
cast against the approval and adoption of the Merger Agreement. ACCORDINGLY,
ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS VOTES AGAINST
THE APPROVAL OF THE MERGER AGREEMENT.
It is not expected that any matter other than the approval and adoption of
the Merger Agreement will be brought before the Special Meeting. If, however,
any other matters are properly presented at the Special Meeting, including,
among other things, consideration of a motion to adjourn the Special Meeting
to another time or place, the persons named in the enclosed form of proxy and
acting thereunder will have discretion to vote on such matters in accordance
with their best judgment. The annual meeting of stockholders scheduled for
July 20, 1995 has been suspended until a later date to be determined after
the Special Meeting.
2
<PAGE>
The Company will bear the costs of soliciting proxies from stockholders.
In addition to soliciting proxies by mail, directors, officers and employees
of the Company, without receiving additional compensation therefor, may
solicit proxies by telephone, by telegram or in person. Arrangements may also
be made with brokerage firms and other custodians, nominees and fiduciaries
to forward solicitation materials to the beneficial owners of Shares held of
record by such persons, and the Company will reimburse such brokerage firms,
custodians, nominees and fiduciaries for reasonable out-of-pocket expenses
incurred by them in connection therewith. The Company has retained [] to aid
in the solicitation of proxies. The fee of such firm is estimated to be $
[ ] plus reimbursement for out-of-pocket costs and expenses.
No person is authorized to give any information or to make any
representation not contained in this Proxy Statement or in the documents
incorporated herein by reference in connection with the solicitation made
hereby and, if given or made, such information or representation should not
be relied upon as having been authorized by the Company. The delivery of this
Proxy Statement shall not, under any circumstances, create any implication
that the information contained herein or in any document incorporated herein
by reference, is correct as of any time subsequent to the date hereof or the
date of such document, as the case may be, or that there has been no change
in the affairs of the Company since the date hereof or the date of such
document, as the case may be. This Proxy Statement does not constitute the
solicitation of a proxy from any person in any jurisdiction in which it is
unlawful to make such proxy solicitation.
AVAILABLE INFORMATION
The Company, Investor, Lillian Vernon and David Hochberg have filed a Rule
13E-3 Transaction Statement on Schedule 13E-3 (the "Schedule 13E-3") with the
Securities and Exchange Commission (the "Commission") with respect to the
Merger described in this Proxy Statement. As permitted by the rules and
regulations of the Commission, this Proxy Statement omits certain information
contained in the Schedule 13E-3 and exhibits thereto. Such additional
information can be inspected at and obtained from the Commission and the
American Stock Exchange (the "AMEX") in the manner set forth below. For
further information pertaining to the Company and Investor, reference is made
to the Schedule 13E-3 and the exhibits thereto. Statements contained herein
concerning any such documents are not necessarily complete and, in each
instance, reference is made to the copy of such document filed as an exhibit
to the Schedule 13E-3. Each such statement is qualified in its entirety by
such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith files reports, proxy statements and other information with the
Commission.
The Schedule 13E-3 and the respective exhibits thereto, as well as such
reports, proxy statements and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, DC 20549, and also should be available for inspection at the
Commission's regional offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
400, Chicago, Illinois 60611. Copies of such materials may also be obtained
by mail, upon payment of the Commission's customary fees, by writing to its
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Shares are quoted on the AMEX, and certain of the Company's reports and other
information may be available for inspection at the offices of the AMEX at 86
Trinity Place, New York, New York 10006.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
SUMMARY OF PROXY STATEMENT ................................................................. 7
The Special Meeting; Time, Date and Place ................................................ 7
Vote Required; Record Date ............................................................... 7
Parties to the Merger Agreement .......................................................... 8
The Merger ............................................................................... 8
Effective Time of the Merger; Payment for Shares ......................................... 9
Background of the Merger ................................................................. 9
Recommendation of the Board of Directors ................................................. 9
Opinion of Financial Advisor ............................................................. 9
Purpose and Reasons of Investor, Lillian Vernon and
David Hochberg for the Merger .......................................................... 9
Position of Investor, Lillian Vernon and David Hochberg Regarding Fairness of the Merger . 10
Interests of Certain Persons in the Merger; Conflicts of Interest ........................ 10
Certain Effects of the Merger ............................................................ 11
Conditions to Consummation of the Merger; Termination; Expenses .......................... 11
Certain United States Federal Income Tax Consequences of the Merger ...................... 12
Sources of Funds; Financing of the Merger ................................................ 12
Market Prices and Dividends .............................................................. 13
Rights of Dissenting Stockholders ........................................................ 13
Certain Stockholder Litigation ........................................................... 13
Expenses ................................................................................. 14
Summary of Selected Financial Information Concerning the Company ......................... 15
SPECIAL FACTORS ............................................................................ 16
Background of the Merger ................................................................ 16
Recommendation of the Board of Directors ................................................ 19
Opinion of Financial Advisor ............................................................ 21
Purpose and Reasons of Investor, Lillian Vernon and David Hochberg for the Merger ....... 24
Position of Investor, Lillian Vernon and David Hochberg Regarding Fairness of the Merger 25
Interests of Certain Persons in the Merger .............................................. 25
Management of the Company's Business After the Merger; Certain Effects of the Merger .... 27
Accounting Treatment of the Transaction ................................................. 28
Regulatory Approvals .................................................................... 28
Certain Stockholder Litigation .......................................................... 28
THE MERGER ................................................................................. 29
Vote Required; Record Date .............................................................. 29
Payment for Shares ...................................................................... 29
The Merger Agreement .................................................................... 30
The Voting Agreement .................................................................... 35
The Stockholders Agreement .............................................................. 36
4
<PAGE>
PAGE
--------
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER ........................ 38
FINANCING OF THE MERGER .................................................................... 39
General ................................................................................... 39
Bank Financing ............................................................................ 39
Estimated Costs and Fees .................................................................. 41
CERTAIN PROJECTIONS ........................................................................ 41
Summary of Assumptions Used for Management Projections .................................... 41
Projected Income Statements ............................................................... 42
Projected Cash Flow Statements ............................................................ 42
BUSINESS OF THE COMPANY .................................................................... 43
MARKET PRICES AND DIVIDENDS ON THE COMPANY'S CAPITAL STOCK ................................. 43
RIGHTS OF DISSENTING STOCKHOLDERS .......................................................... 44
SELECTED HISTORICAL AND FINANCIAL DATA OF THE COMPANY ...................................... 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..... 48
CAPITALIZATION ............................................................................. 52
PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP OF MANAGEMENT ................................... 53
CERTAIN INFORMATION CONCERNING INVESTOR AND AFFILIATES ..................................... 55
REVOCATION OF PROXIES ...................................................................... 55
INDEPENDENT AUDITORS ....................................................................... 56
PROXY SOLICITATION ......................................................................... 56
STOCKHOLDER PROPOSALS ...................................................................... 56
INCORPORATION BY REFERENCE ................................................................. 57
OTHER MATTERS .............................................................................. 58
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ................................................. F-1
</TABLE>
ANNEX A--Agreement and Plan of Merger
ANNEX B--Section 262 of the Delaware General Corporation Law
ANNEX C--Opinion of Goldman, Sachs & Co.
ANNEX D--Directors and Executive Officers of the Company
5
<PAGE>
CERTAIN ASPECTS OF THE MERGER AND THE MERGER AGREEMENT ARE SUMMARIZED IN
THIS PROXY STATEMENT. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ANNEXES ATTACHED TO THIS PROXY
STATEMENT, EACH OF WHICH IS INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS
ARE URGED TO READ THIS PROXY STATEMENT AND THE ANNEXES HERETO CAREFULLY AND
IN THEIR ENTIRETY.
6
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 30, 1995
SUMMARY OF PROXY STATEMENT
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement. Reference is made to, and this Summary is
qualified in its entirety by, the more detailed information contained
elsewhere in this Proxy Statement and the Annexes hereto. Cross-references in
this Summary are to captions in this Proxy Statement. Capitalized terms used
but not defined in this Summary shall have the meanings ascribed to them
elsewhere in this Proxy Statement. Stockholders are urged to read this Proxy
Statement and the Annexes attached hereto in their entirety.
THE SPECIAL MEETING; TIME, DATE AND PLACE
The Special Meeting of Stockholders (the "Special Meeting") of Lillian
Vernon Corporation, a Delaware corporation (the "Company"), will be held on
August [ ], 1995 at 10:00 a.m., local time, at the Company's principal
executive offices at 543 Main Street, New Rochelle, New York. The purpose of
the Special Meeting is to consider and vote upon the following matter: the
approval and adoption of the Agreement and Plan of Merger, dated as of June
13, 1995 (the "Merger Agreement"), between VB Investment Corporation, a
Delaware corporation ("Investor"), and the Company, which provides for the
merger (the "Merger") of Investor with and into the Company with the Company
to continue as the surviving corporation of the Merger (the "Surviving
Corporation").
VOTE REQUIRED; RECORD DATE
A majority of the outstanding shares, other than shares held in the
treasury of the Company, of the common stock, $.01 par value per share, of
the Company (each, a "Share") entitled to vote, represented in person or by
proxy, is required for a quorum at the Special Meeting. Under Section 251 of
the DGCL ("Section 251"), the affirmative vote of the holders of a majority
of the Shares is required to approve and adopt the Merger Agreement. Pursuant
to an agreement, dated as of June 13, 1995, by and among FS Equity Partners
III, L.P., a Delaware limited partnership ("FSEP III"), and FS Equity
Partners International, L.P., a Delaware limited partnership ("FSEP
International" and together with FSEP III "Equity Partners"), Lillian Vernon,
David C. Hochberg ("David Hochberg") and Fred P. Hochberg ("Fred Hochberg")
(the "Voting Agreement"), each of Lillian Vernon, and her sons, David
Hochberg and Fred Hochberg, has agreed to vote all of her or his Shares in
favor of the Merger. Lillian Vernon, David Hochberg and Fred Hochberg
collectively own approximately 40.7% of the outstanding Shares as of the date
hereof. To the Company's knowledge after reasonable inquiry, each of the
Company's executive officers, directors and affiliates, holding in aggregate
74,367 Shares (approximately 0.8% of the outstanding Shares), presently
intends to vote all Shares held of record or beneficially owned by such
person in favor of the Merger. See "PRINCIPAL STOCKHOLDERS AND SHARE
OWNERSHIP OF MANAGEMENT." Except for the recommendation of the Board
contained in this Proxy Statement, to the Company's knowledge after
reasonable inquiry, no executive officer, director or affiliate of the
Company has made a recommendation in support of or opposed to the Merger.
Only stockholders of record on [ ], 1995 (the "Record Date") are
entitled to vote at the Special Meeting or any adjournments or postponements
thereof. At the close of business on such date, there were [ ] Shares
issued and outstanding each of which is entitled to one vote at the Special
Meeting. As of the Record Date there were [ ] stockholders of record. As of
June 30, 1995 there were 9,731,838 Shares and 421 stockholders of record.
Shares represented by a properly signed, dated and returned proxy will be
treated as present at the meeting for purposes of determining a quorum,
without regard to whether the proxy is marked as casting a vote or
abstaining. Brokers who hold Shares of Company Common Stock as nominees will
not have discretionary authority to vote such Shares in the absence of
instructions from the beneficial owners. Votes which are not cast for this
reason (the "broker non-votes") will also have the same legal effect as
7
<PAGE>
votes cast against the approval and adoption of the Merger Agreement.
ACCORDINGLY, ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS
VOTES AGAINST THE APPROVAL OF THE MERGER AGREEMENT.
PARTIES TO THE MERGER AGREEMENT
Investor. Investor is a newly incorporated Delaware corporation organized
in connection with the Merger and has not carried on any activities other
than in connection with the Merger. Investor was formed by Freeman Spogli &
Co. Incorporated, a California corporation ("FS&Co."), and has not conducted
any prior business. Immediately prior to the consummation of the Merger,
Investor will be capitalized by a cash contribution from FSEP III and FSEP
International of not less than $52 million. FSEP III and FSEP International
were formed by FS&Co. as investment partnerships with an aggregate of $580
million in committed equity capital. FS&Co. is a private investment firm that
has invested more than $700 million in 20 companies since its founding in
1983.
Investor's principal executive offices are located at c/o Freeman Spogli &
Co. Incorporated, 11100 Santa Monica Boulevard, Suite 1900, Los Angeles,
California 90025; telephone (310) 444-1822.
The Company. The Company is a direct-mail specialty catalog company
concentrating on the marketing of gift, household, gardening, decorative,
Christmas and children's products. The Company, a predecessor of which was
founded in 1951, seeks to provide customers with reasonably priced products
that can be differentiated from competitive products either by design, price
or personalization. The Company's principal executive offices are located at
543 Main Street, New Rochelle, New York 10801; telephone (914) 576-6400. See
"BUSINESS OF THE COMPANY."
THE MERGER
Upon the terms and subject to the conditions of the Merger Agreement,
Investor will be merged with and into the Company with the Company to
continue as the surviving corporation of the Merger (the "Surviving
Corporation"). The Merger will become effective at such time as a copy of the
Merger Agreement or a Certificate of Merger has been filed with the Secretary
of State of the State of Delaware in accordance with the laws of the State of
Delaware (the date and time of such filing being the "Effective Time"). At
the Effective Time, each outstanding Share (other than (i) 657,895 and
394,737 Shares registered in the names of Lillian Vernon and her son, David
Hochberg, respectively, which shall not be canceled but shall remain
outstanding and which will represent approximately 27% of the common stock,
par value $.01 per share, of the Surviving Corporation (the "Surviving
Corporation Common Stock") after the Merger, and Shares retained by certain
members of management, (ii) Shares held in the treasury of the Company, or
owned by the Company or Investor which will be extinguished and canceled
without conversion, no payment being made in respect thereof, and (iii) any
Shares that are held by stockholders who have not voted in favor of the
Merger or consented thereto in writing and who shall have demanded properly
in writing appraisal for such Shares in accordance with Section 262 ("Section
262") of the Delaware General Corporate Law (the "DGCL")) shall be canceled
and converted automatically into the right to receive an amount equal to
$19.00 in cash (the "Merger Consideration") payable to the holder thereof,
without interest, upon surrender of the certificate formerly representing
such Share in the manner provided in the Merger Agreement and in accordance
with instructions to be provided to the holders of such Shares subsequent to
the Effective Time. Investor has been organized by FS&Co. Certain affiliates
of FS&Co. own 100% of the outstanding capital stock of Investor. At the
Effective Time, in accordance with the Merger, the shares of common stock,
par value $.01 per share, of Investor (the "Investor Common Stock") will be
converted into approximately 2,763,158 shares of the Surviving Corporation
Common Stock, which will represent approximately 70% of the Surviving
Corporation Common Stock. Upon consummation of the Merger, certain members of
management, other than Lillian Vernon and David Hochberg, will retain Shares
or purchase Surviving Corporation Common Stock having an aggregate value of
$2.5 million, which will represent approximately 3%, of the Surviving
Corporation Common Stock. A conformed copy of the Merger Agreement is
included with this Proxy Statement as Annex A. See "THE MERGER--The Merger
Agreement."
8
<PAGE>
EFFECTIVE TIME OF THE MERGER; PAYMENT FOR SHARES
The Merger will become effective at the Effective Time. The required
filing is expected to be made as soon as practicable after the approval of
the Merger Agreement by the Company's stockholders at the Special Meeting and
the satisfaction or waiver of the other conditions to consummation of the
Merger. See "THE MERGER--The Merger Agreement." Detailed instructions with
regard to the surrender of certificates, together with a letter of
transmittal, will be forwarded to former stockholders by Continental Stock
Transfer & Trust Company (the "Paying Agent") promptly following the
Effective Time. 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 stockholders as promptly as practicable following receipt
by the Paying Agent of their certificates and other required documents. No
interest will be paid or accrued on the cash payable upon the surrender of
certificates. See "SPECIAL FACTORS--Payment for Shares." STOCKHOLDERS SHOULD
NOT SEND ANY SHARE CERTIFICATES AT THIS TIME.
BACKGROUND OF THE MERGER
For a discussion of events leading to the execution of the Merger
Agreement, see "SPECIAL FACTORS--Background of the Merger."
RECOMMENDATION OF THE BOARD OF DIRECTORS
On June 13, 1995, the Board of Directors (the "Board of Directors" or the
"Board"), excluding Lillian Vernon and Fred Hochberg, who recused themselves
from the vote on such matters, and David Hochberg, who did not attend the
Board of Directors meeting (the "Disinterested Directors"), with one other
director not participating due to illness, approved the Merger Agreement and
the Merger and determined that the Merger is fair to, and in the best
interests of, the stockholders of the Company and recommended that the
stockholders of the Company adopt and approve the Merger Agreement and the
transactions contemplated thereby. ACCORDINGLY, THE DISINTERESTED DIRECTORS
RECOMMEND THAT THE STOCKHOLDERS OF THE COMPANY VOTE FOR APPROVAL OF THE
MERGER AGREEMENT. Certain members of the Board of Directors had and have
certain interests which may present them with a potential conflict of
interest in connection with the Merger. See "SPECIAL FACTORS--Recommendation
of the Board of Directors" and "SPECIAL FACTORS--Interests of Certain Persons
in the Merger."
OPINION OF FINANCIAL ADVISOR
On June 13, 1995, Goldman Sachs delivered their oral opinion to the Board
of Directors to the effect that, subject to Goldman Sachs' final review of
the Merger Agreement, as of such date, the $19.00 per Share in cash to be
received by the holders (other than Lillian Vernon, David Hochberg and
certain members of management who will retain Shares, purchase Surviving
Corporation Common Stock, or both) of Shares pursuant to the Merger Agreement
was fair to such holders. Goldman Sachs have subsequently confirmed such
opinion by delivery of their written opinion, dated as of the date of this
Proxy Statement, to the effect that, as of the date of such opinion, the
$19.00 per Share in cash to be received by the holders (other than Lillian
Vernon, David Hochberg and certain members of management who will retain
Shares, purchase Surviving Corporation Common Stock, or both) of Shares
pursuant to the Merger Agreement is fair to such holders.
The full text of the written opinion of Goldman Sachs, dated as of the
date of this Proxy Statement, which sets forth the matters considered and
limitations on the review undertaken in connection with such opinion, is
attached hereto as Annex C and is incorporated by reference herein. HOLDERS
OF SHARES ARE URGED TO, AND SHOULD, READ SUCH OPINION CAREFULLY AND IN ITS
ENTIRETY. See "SPECIAL FACTORS--Opinion of Financial Advisor."
PURPOSE AND REASONS OF INVESTOR, LILLIAN VERNON AND DAVID HOCHBERG FOR THE
MERGER
Investor's purpose for engaging in the transactions contemplated by the
Merger Agreement is to enable Equity Partners to obtain ownership of
approximately 70% of the Shares, thereby becoming
9
<PAGE>
entitled to all benefits that result from such ownership. Such benefits
include management and investment discretion with regard to the future
conduct of the business of the Company, the benefits of the profits generated
by operations and any increase in the Company's value. Similarly, Equity
Partners will also bear the risk of any decrease in the value of the Company.
Lillian Vernon and David Hochberg agreed to engage in the transaction
contemplated by the Merger Agreement in order to maximize the value of their
Shares as well as the value of the Company and the value of the Shares held
by the Company stockholders. Lillian Vernon and David Hochberg were required
by Investor to continue as minority owners of the Company after the Effective
Time as a condition to execution of the Merger Agreement.
Consequently, upon the consummation of the Merger, Equity Partners,
Lillian Vernon and David Hochberg will each have approximately a 70%, 17% and
10% interest, respectively, in the net book value and net earnings of the
Company.
POSITION OF INVESTOR, LILLIAN VERNON AND DAVID HOCHBERG REGARDING FAIRNESS OF
THE MERGER
Investor, Lillian Vernon and David Hochberg have considered the analyses
of and the factors examined by the Board (described in detail in "SPECIAL
FACTORS--Recommendation of the Board of Directors") and believe these
analyses and factors, in particular factors (i) through (v) of that section,
provide a reasonable basis for them to believe, as they do, that the Merger
is fair to the stockholders of the Company. This belief should not, however,
be construed as a recommendation by them to the Company's stockholders to
vote to approve and adopt the Merger Agreement.
Although none of Investor, Lillian Vernon or David Hochberg has quantified
or assigned specific relative weights to any of the factors referred to in
the previous paragraph, each has relied principally on and adopted the
opinion and analyses of Goldman, Sachs & Co. ("Goldman Sachs") as set forth
in Annex C hereto and the conclusion of the Board of Directors that the
Merger is fair to the Company's stockholders.
INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST
A total of 657,895 Shares and 394,737 Shares registered in the names of
Lillian Vernon and David Hochberg, respectively, shall remain outstanding
after the Merger. Upon consummation of the Merger (i) Lillian Vernon shall
receive $27,678,592 in Merger Consideration and $2,473,600 in option cash out
payments; (ii) David Hochberg shall receive $15,907,997 in Merger
Consideration and $515,250 in option cash out payments; (iii) Fred Hochberg
shall receive $11,696,609 in Merger Consideration and $18,750 in option cash
out payments. The Company's other executive officers, directors and
affiliates shall receive, in aggregate, approximately $1,412,973 in Merger
Consideration (assuming no Shares held by such individuals are retained) and,
in aggregate, approximately $2,248,180, in option cash payments (assuming no
options are exercised).
After the Merger, certain members of management, other than Lillian Vernon
and David Hochberg, will retain Shares or purchase Surviving Corporation
Common Stock having an aggregate value of approximately $2.5 million, which
will represent approximately 3% of the Surviving Corporation Common Stock. If
any of such members of management own Shares, they will retain such Shares
and enter into a Subscription Agreement pursuant to a Stock Subscription Plan
(the "Stock Subscription Plan") with respect to Surviving Corporation Common
Stock they will purchase. Under the Stock Subscription Plan expected to be
adopted by the Company immediately after consummation of the Merger, a number
of shares of Surviving Corporation Common Stock are expected to be offered to
certain members of management of the Company such that this number combined
with the number of Shares retained by the certain members of management will
be approximately 131,500. In connection with the Merger, certain members of
management will be able to elect not to receive all or a portion of the cash
consideration such members are entitled to receive in exchange for stock
options, in exchange for a right to receive an equal amount as deferred
compensation. Members of management purchasing stock may
10
<PAGE>
give a full recourse note to the Company for between 50% and 100% of the
purchase price. Upon consummation of the Merger, the Company is expected to
establish a Performance Option Plan (the "Performance Option Plan") which
will provide for the issuance of options covering up to approximately 190,000
shares of Surviving Corporation Common Stock to certain employees of the
Company. Such options will vest only if certain performance criteria are met
or a certain period of time has elapsed. Lillian Vernon is expected to
receive a significant portion of the options available under the Performance
Option Plan.
Lillian Vernon currently has an employment agreement with the Company
which expires on February 28, 1997 and receives certain other benefits
provided by the Company (the "Employment Terms"). Upon consummation of the
Merger, the Employment Terms shall be extended until three years from the
Effective Time. It is currently intended that prior to consummation of the
Merger, David Hochberg will enter into an employment agreement with the
Company which will become effective as of the Effective Time on the same
terms as he is currently employed. See "SPECIAL FACTORS--Interests of Certain
Persons in the Merger--Employment Agreements." See "SPECIAL FACTORS--Interest
of Certain Persons in the Merger."
The Company has agreed in the Merger Agreement to ensure that all
provisions for indemnification existing on the date of the Merger Agreement
in favor of any present or former director, officer, employee or agent of the
Company as set forth in its Certificate of Incorporation or Bylaws, or
pursuant to indemnity agreements in effect on the date of the Merger
Agreement, shall survive the Merger, shall not be amended, repealed or
modified, and shall continue in full force and effect for a period of six
years from the Effective Time. In addition, the directors and officers of the
Company will be provided with continuing directors' and officers' liability
insurance coverage following the Merger, subject to certain limitations. See
"THE MERGER--The Merger Agreement--Indemnification and Insurance."
See "SPECIAL FACTORS--Interests of Certain Persons in the Merger."
CERTAIN EFFECTS OF THE MERGER
Upon the effectiveness of the Merger, stockholders of the Company, other
than Lillian Vernon, David Hochberg and certain members of Company management
(see "SPECIAL FACTORS--Interests of Certain Persons in the Merger"), will no
longer have any continuing interest as stockholders in the Surviving
Corporation and will not share in any future earnings and growth of the
Company. The Shares will no longer be traded on the American Stock Exchange
(the "AMEX") or in the over-the-counter market, price quotes will not be
available on the AMEX and the registration of the Shares under the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), will be
terminated.
CONDITIONS TO CONSUMMATION OF THE MERGER; TERMINATION; EXPENSES
The respective obligations of Investor and the Company to effect the
Merger are subject to the satisfaction or waiver, at or prior to the
Effective Time, of certain conditions, including (i) approval of the
Company's stockholders, (ii) the obtaining of financing by the Company in
accordance with a commitment letter dated as of June 13, 1995 between Merrill
Lynch Capital Corporation ("Merrill Lynch") and Investor (the "Commitment
Letter"), and (iii) the consent of certain holders of stock options (the
"Stock Options") pursuant to the Company's 1987 Performance Unit, Restricted
Stock, Nonqualified Option and Incentive Stock Option Plan (the "1987 Plan")
to the cancellation of such Stock Options in exchange for the right to
receive cash representing the difference between the exercise price of the
respective options and the Merger Consideration. See "THE MERGER--The Merger
Agreement--Conditions to the Merger."
The Merger Agreement may be terminated by mutual written consent of
Investor and the Company and by either Investor or the Company under certain
other circumstances. See "THE MERGER--The Merger Agreement--Termination."
11
<PAGE>
The Company has agreed to pay $3.5 million to FS&Co. if the Merger is not
consummated under certain circumstances. In addition, the Company has agreed
to reimburse FS&Co. for certain fees and expenses incurred in connection with
the Merger, up to a maximum aggregate amount of $1.5 million, if the Merger
is not consummated under certain circumstances. See "THE MERGER--The Merger
Agreement--Termination Fees and Expenses."
In the event of the termination of the Merger Agreement, the Merger
Agreement will become void and there will be no liability on the part of any
party thereto except as described under "THE MERGER--The Merger
Agreement--Termination Fees and Expenses" or as otherwise expressly provided
for in the Merger Agreement.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The receipt of cash for Shares or upon the cancellation of options 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. The
retention of Shares in the Merger will not be a taxable event. STOCKHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
See "CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER."
SOURCES OF FUNDS; FINANCING OF THE MERGER
Approximately $189,000,000 (the "Transaction Costs") is required to pay
(i) the Merger Consideration payable to stockholders (approximately
$165,100,000 million in the aggregate, assuming all stockholders are paid the
Merger Consideration except for the Shares retained by Lillian Vernon and
David Hochberg), (ii) the holders of all outstanding options to purchase
Common Stock an amount for each option equal to the difference between the
Merger Consideration and the exercise price of such option multiplied by the
number of shares subject to such option (approximately $6,100,000 million in
the aggregate), (iii) repayment of debt of $4,500,000, (iv) the expenses of
the Company, Equity Partners, Investor, Lillian Vernon, David Hochberg and
Fred Hochberg (estimated at approximately $10,300,000 million in the
aggregate) and (v) a transaction fee of $3 million payable to FS&Co. by the
Company. It is currently expected that Investor and the Company will obtain
the amounts necessary to fund the aggregate amount of the Merger
Consideration from the not less than $55 million contributed by Equity
Partners and management to purchase Surviving Corporation Common Stock with
the balance of the Transaction Costs to be paid from the Company's available
funds and from certain credit facilities to be provided by Merrill Lynch
Capital Corporation ("Merrill Lynch"). See "FINANCING OF THE MERGER."
12
<PAGE>
MARKET PRICES AND DIVIDENDS
The Company's Shares are traded on the AMEX (symbol: LVC). The following
table sets forth the high and low sales prices for each quarterly period for
the two most recent fiscal years. The stock prices are rounded to the nearest
1/8 point.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ----------------- ------ -----
<S> <C> <C>
May 29, 1993 14 11 1/2
August 28, 1993 14 1/4 11 7/8
November 27, 1993 18 1/2 13 7/8
February 26, 1994 18 7/8 16 1/8
May 28, 1994 22 5/8 17
August 27, 1994 20 1/4 17 1/4
November 26, 1994 20 1/4 15 5/8
February 25, 1995 18 1/8 14 1/2
May 27, 1995 22 1/4 17 1/4
</TABLE>
On March 9, 1995, the last full trading day prior to the issuance of a
press release by the Company that the Company was considering a number of
strategic alternatives including a possible sale, the closing price per Share
as reported on the AMEX was $18 1/8 . On June 13, 1995, the last full trading
day prior to the announcement of the execution of the Merger Agreement, the
closing price per Share as reported on the AMEX was $20 1/8 . On [ ],
1995, the last full trading day prior to the mailing of this Proxy Statement,
the closing price per Share as reported on the AMEX was $[ ]. See "MARKET
PRICES AND DIVIDENDS ON THE COMPANY'S CAPITAL STOCK."
RIGHTS OF DISSENTING STOCKHOLDERS
STOCKHOLDERS ARE ENTITLED TO APPRAISAL RIGHTS IN CONNECTION WITH THE
MERGER UNDER SECTION 262. IN ORDER TO EXERCISE DISSENTERS' RIGHTS PURSUANT TO
SECTION 262, STOCKHOLDERS MUST COMPLY WITH ALL THE PROCEDURAL REQUIREMENTS OF
SUCH SECTION. A DESCRIPTION OF SECTION 262 IS PROVIDED IN "RIGHTS OF
DISSENTING STOCKHOLDERS" AND THE FULL TEXT OF SUCH SECTION IS INCLUDED WITH
THIS PROXY STATEMENT AS ANNEX B.
Under Section 262, absent an agreement between the Company and the
stockholders as to "fair value", such "fair value" will be determined in
judicial proceedings, the result of which cannot be predicted.
FAILURE TO TAKE ANY OF THE STEPS REQUIRED UNDER SECTION 262 MAY RESULT IN
TERMINATION OR WAIVER OF SUCH RIGHTS.
See "RIGHTS OF DISSENTING STOCKHOLDERS."
CERTAIN STOCKHOLDER LITIGATION
Several purported class action lawsuits relating to the Merger Agreement
have been filed in Delaware Chancery Court: Crandon Capital Partners v.
Lilyan H. Affinito, et al. Civil Action No. 14353, filed June 14, 1995;
Dennis Johnson v. David C. Hochberg, et al., Civil Action No. 14356, filed
June 14, 1995; Thakor T. Patel and Kanta T. Patel v. Lillian Vernon
Corporation, et al., Civil Action No. 14358, filed June 15, 1995; and Roy
McGeady v. Lillian Vernon Corporation, et al., Civil Action No. 14363, filed
June 16, 1995. Each of the foregoing actions purports to be a stockholder
class action on behalf of all stockholders of the Company (other than the
defendants and their affiliates) against the Company and the members of its
Board of Directors. The Johnson action also names FS&Co. as a defendant. The
Crandon Capital Partners and McGeady actions name Paul J. Bergmoser as a
defendant although Mr. Bergmoser
13
<PAGE>
has not been a director of the Company since August 1994, and do not name one
of the current directors as a defendant. Each of the actions alleges, among
other things, that in implementing the Merger Agreement, the individual
defendants have breached their fiduciary duties to the stockholders of the
Company and have acted to the detriment of the class members for their own
personal benefit. Each of the lawsuits seeks a preliminary and permanent
injunction preventing the Company from proceeding with the Merger Agreement,
rescission of the Merger Agreement if it is consummated, as well as
unspecified damages, attorneys' fees and other relief. The defendants believe
that the complaints are without merit and intend to defend the cases
vigorously.
See "SPECIAL FACTORS--Certain Stockholder Litigation."
EXPENSES
Upon consummation of the Merger, the Surviving Corporation shall pay all
expenses of the Company Investor, Equity Partners, Lillian Vernon, David
Hochberg and Fred Hochberg in connection with the transactions contemplated
by the Merger Agreement, and shall pay a $3 million transaction fee to FS&Co.
See "THE MERGER--The Merger Agreement" and "THE MERGER--The Voting
Agreement".
14
<PAGE>
SUMMARY OF SELECTED FINANCIAL INFORMATION CONCERNING THE COMPANY
The following table presents certain summary selected consolidated
financial data of the Company as of and for the fiscal years ended February
25, 1995, February 26, 1994, February 27, 1993, February 29, 1992 and
February 23, 1991, and for the fiscal quarters ended May 27, 1995 and May 28,
1994. This financial data, excluding the quarterly data, was derived from the
audited historical consolidated financial statements of the Company. The
financial data set forth below should be read in conjunction with the
financial statements of the Company and "Management's Discussion and Analysis
of Results of Operations and Financial Condition." See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION" and
"CONSOLIDATED FINANCIAL STATEMENTS" and "SELECTED HISTORICAL FINANCIAL DATA
OF THE COMPANY."
<TABLE>
<CAPTION>
(DOLLAR IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED QUARTER ENDED
------------------------------------------------------------ -------------------------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY MAY 27, MAY 28,
25, 1995 26, 1994 27, 1993 29, 1992(1) 23, 1991 1995 1994
- -------------------------------------- ---------- ---------- ---------- ----------- ---------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results
Revenues .............................. $222,211 $196,331 $172,932 $162,397 $160,293 $ 29,614 $ 26,002
Income (loss) before income taxes .... 19,134 19,495 16,323 14,319 13,898 (4,218) (1,522)
Net income (loss) ..................... 13,620 12,772 10,773 9,493 9,270 (2,826) (989)
Per Share (2)
Net income (loss) ..................... $ 1.38 $ 1.35 $ 1.15 $ 1.02 1.00 $ (.29) $ (.10)
Book Value ............................ $ 11.44 $ 10.22 $ 9.07 $ 8.10 $ 7.08 $ 11.09 $ 10.07
Dividends ............................. $ .26 $ .20 $ .20 -- -- $ .07 $ .07
Financial Position At Year End
Cash and cash equivalents ............. $ 38,779 $ 52,880 $ 51,063 $ 43,540 $ 35,710 $ 39,101 $ 39,735
Working capital (3) ................... 79,068 72,665 59,698 56,475 44,400 74,806 67,982
Total assets .......................... 137,768 130,937 115,040 104,561 101,769 132,160 119,636
Long-term obligations (4) ............. 5,755 7,150 8,525 12,505 14,035 5,086 6,486
Stockholders' equity .................. 110,187 97,255 85,104 75,507 65,792 107,647 95,941
Statistics
Return on revenues .................... 6.1% 6.5% 6.2% 5.8% 5.8% (9.5%) (3.8%)
Return on average equity .............. 13.1% 14.0% 13.4% 13.4% 15.2% (2.6%) (1.0%)
Long-term obligations to equity (4) .. 5.2% 7.4% 10.0% 16.6% 21.3% 4.7% 6.8%
Ratio of earnings to fixed charges (5) 27.1:1 23.3:1 14.6:1 10.9:1 8.0:1 -- --
Average shares outstanding (000's) (2) 9,892 9,448 9,355 9,310 9,289 9,686 9,520
</TABLE>
- ------------
(1) This fiscal year was comprised of 53 weeks.
(2) Reflects a 3-for-2 stock split effective July 30, 1990.
(3) Certain reclassifications have been made to conform to the current year's
presentation.
(4) Includes current installments and long-term portions of debt.
(5) Represents the ratio of pretax income before interest expense to interest
expense for the fiscal periods presented.
15
<PAGE>
SPECIAL FACTORS
BACKGROUND TO THE MERGER
In January 1994, the Company signed a confidentiality agreement with a
non-U.S. company in the mail order business in connection with a possible
joint venture or other strategic transaction, including a sale of the
Company. Over the next several months the prospective buyer conducted due
diligence meetings with Lillian Vernon and other members of the Company's
management that culminated in a proposal that was not brought to the Board
for a formal vote because of the inadequacy of the price offered, which was
well below the consideration to be received by stockholders in the Merger. In
April 1994 Goldman Sachs was retained as financial advisor to the Company in
connection with the possible sale of the Company.
Following the discussions with the non-U.S. company, the Board began to
consider various strategic alternatives, including a sale of the Company. In
November 1994, Goldman Sachs was authorized by the Company to approach
potential strategic and financial buyers that were perceived to be interested
in a possible transaction. Some of the parties contacted were not interested.
Preliminary discussions were held with certain parties, including FS&Co.
At a Board meeting held on January 24, 1995, the Board discussed various
strategic alternatives with its legal and financial advisors, including a
Share repurchase, various forms of a recapitalization, listing Shares on the
New York Stock Exchange and a possible sale. Goldman Sachs was authorized to
contact an expanded list of strategic and financial buyers that might be
interested in entering into a transaction, including a possible sale, with
the Company. Over the next month, Goldman Sachs contacted potential buyers
and provided them with public information concerning the Company. During this
period unsolicited inquiries from a number of parties were also received.
On March 10, 1995 a Board meeting was held where the Board reviewed the
status of discussions with potential purchasers. It was decided that in view
of increases in the trading volume of the Shares and the fact that several
parties that had not been previously contacted had approached the Company
believing the Company was considering a possible transaction, it would be
appropriate to issue a press release. On March 10, 1995, a press release was
issued stating that the Company was exploring a number of strategic
alternatives, including a possible sale of the Company, in order to further
the best interests of its stockholders.
The full text of the press release is set forth below:
Lillian Vernon Corporation (AMEX:LVC) announced today that it is
exploring strategic alternatives, including a possible business
combination or sale of the Company. In reviewing these alternatives, it
is working with Goldman, Sachs & Co., its financial advisor, and
Shearman & Sterling, its special legal counsel.
The Company emphasized that there can be no assurances that a
transaction will result and the retention of financial and legal
advisors was part of the Company's continuing efforts to ensure that it
considered all possibilities that could be in the best interests of the
Company and its stockholders.
Lillian Vernon is one of the most widely known specialty catalog
retailers in the country. The Company's catalogs include "Lillian
Vernon", "Lilly's Kids", "Christmas Memories", "Private Sale",
"Welcome", "Personalized Gifts", and its newest "Lillian Vernon's
Kitchen". There is also a special markets wholesale division and a chain
of outlet stores.
Following the March 10 press release the Company received a number of
additional inquiries from prospective purchasers that had not been previously
contacted. Discussions were held with a number of such parties and
discussions were continued with other prospective purchasers that had been
previously contacted.
A total of twelve potential buyers, including both strategic buyers and
financial buyers, signed confidentiality agreements and were sent
confidential financial information. Some of these parties had preliminary
discussions with Lillian Vernon, the Chief Financial Officer of the Company
or other
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representatives of senior management. On behalf of the Company, Goldman Sachs
requested that preliminary indications of interest be submitted by April 20.
On April 20, 1995, Goldman Sachs received, on behalf of the Company,
letters from two financial buyers, including FS&Co. A third potential
purchaser, a strategic buyer, confirmed its interest in the Company but
requested additional time to formulate its indication of interest. In
telephone conversations, two other potential buyers stated they would not be
prepared to offer a price that the Company would consider adequate. Goldman
Sachs continued to have discussions with other parties that did not result in
proposals. The letter from FS&Co. stated that it would be prepared to offer
$19 per Share in cash subject to arranging financing on behalf of the Company
and satisfactory completion of due diligence. The letter from the other
financial buyer expressed interest in a transaction for a per share value in
cash within a range and contemplated financing the transaction with a
combination of senior secured debt and, subordinated debt and common equity.
Both proposals were to be structured as recapitalizations and were
conditioned on Lillian Vernon and her sons retaining a significant
investment. FS&Co. also stated that management's willingness to invest in the
transaction was a critical component of its proposal.
At a Board meeting held on April 21, 1995, the Board, together with its
legal and financial advisors, discussed various strategic alternatives and
concluded that while it would continue to examine alternatives, a sale was
likely to maximize value to stockholders. Goldman Sachs was authorized to
respond to the three parties that had indicated preliminary interest and
obtain a more definitive response with respect to, among other things,
structure and timing, and in particular, price.
From April 21 to 24, 1995, Goldman Sachs requested from FS&Co. and the two
other potential buyers additional information concerning price, structure and
timing of a possible transaction. The three parties were each informed that a
decision on whether to pursue a particular transaction could be reached as
early as the end of the week of April 24.
On April 28, letters were received from all three parties. The letter from
the strategic buyer gave a preliminary estimation of a value range which such
potential buyer had not reviewed with its Board of Directors and stated that
the transaction could be financed from cash on hand. The letter from the
financial buyer other than FS&Co. stated that it valued the Company at $19
per Share, the low end of its earlier range. The letter reiterated that as a
condition to the offer, Lillian Vernon would need to retain an investment in
the common equity of the Company of approximately 20%. The letter from FS&Co.
increased its preliminary proposal from $19 a Share to $19.50 per Share
subject to obtaining financing for the Company, due diligence and execution
of a definitive agreement. FS&Co. also repeated its requirement that Lillian
Vernon and her sons would need to retain an aggregate equity investment of
approximately $15 million or approximately 30% of the recapitalized Company.
The FS&Co. letter also outlined the proposed financing and capital structure
for the transaction and indicated FS&Co.'s intention to obtain on behalf of
the Company a commitment for senior bank financing and a highly confident
letter for subordinated debt financing. FS&Co. also stated that it expected
senior management, other than Lillian Vernon and David Hochberg, to invest
approximately $3.0 million.
On April 28, Goldman Sachs was instructed by the Company to contact the
three potential buyers once again in order to encourage such buyers to be as
specific as possible as to price, structure and timing prior to the May 4
Board meeting.
Over the next week, Goldman Sachs had various conversations with the three
potential purchasers concerning price and other structural aspects of the
three proposals. Each was informed that a decision would likely be made at an
anticipated May 4 Board meeting to begin negotiations with one of the parties
on a definitive agreement. The strategic buyer was informed that it would
need to give a definitive price and to specify a necessary timetable to
complete a transaction before the May 4 Board meeting. That prospective
bidder responded that it would be unable to do so. On May 3, 1995, Goldman
Sachs received a letter from FS&Co. in which FS&Co. proposed a new structure
whereby the Company would make a self-tender and all financing would be
through senior debt and the equity component was increased, thereby
eliminating the need for the issuance of senior subordinated notes through a
private placement. As a result, FS&Co. was able to move the anticipated date
of closing significantly forward and to eliminate market risks involved in
financing a transaction through a highly confident letter. However, FS&Co.
stated
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that the transaction would be conditioned on an aggregate investment required
of Lillian Vernon, David Hochberg and Fred Hochberg of $20 million,
approximately 29% of the recapitalized Company. FS&Co.'s counsel, Riordan &
McKinzie, also discussed various terms of the proposed self-tender with
Shearman & Sterling, including: (i) the inclusion of a termination fee in the
range of $5.5 to $6.0 million and payment of costs and expenses if the Board
terminated the transaction in the exercise of its fiduciary responsibilities
or under certain other circumstances, (ii) the requirement that 90% of the
outstanding shares be tendered to the Company (exclusive of shares to be
retained by Lillian Vernon and her sons), and (iii) the Company's need to
revalue its assets to create revaluation surplus necessary to repurchase a
sufficient number of Shares in the self tender. The other financial buyer
indicated that $19 was indeed its best price.
On May 4, 1995 a Board meeting was held to review the status of the three
proposals. In light of (i) the strategic buyer's inability to respond with a
definite proposal, (ii) the $19.50 price proposed by FS&Co. and (iii) the
strong commitment to completing the transaction that FS&Co. displayed
compared to the other bidders, the Board decided to pursue the FS&Co. bid.
The Company's legal and financial advisors were instructed to begin
negotiations with FS&Co. In the afternoon of May 4, a meeting was held among
Goldman Sachs, Shearman & Sterling, Riordan & McKinzie and FS&Co. where
concerns about FS&Co.'s proposed new structure were discussed. In particular,
the Board expressed concern about the high tender condition required by
FS&Co. and the uncertainty created by that condition, the need to create
revaluation surplus, and FS&Co.'s requirement about the level of investment
by Lillian Vernon, David Hochberg, Fred Hochberg and by management. FS&Co.
was asked (i) whether it would consider a cash merger using only senior debt,
(ii) whether a $20 million investment by Lillian Vernon, David Hochberg and
Fred Hochberg was necessary and (iii) whether a $3 million investment by the
other senior members of management was necessary. The Company also informed
FS&Co. that the $6 million termination fee FS&Co. had proposed in the event
the Company withdrew its recommendation of the Merger or in the event certain
other events occurred was unacceptable. FS&Co. responded that (i) it would
consider a cash merger with all senior debt financing, (ii) there was some
flexibility in the size of the interest to be retained by Lillian Vernon,
David Hochberg and Fred Hochberg, but that a sizeable continuing investment
by Lillian Vernon and possibly her sons was necessary both because FS&Co.
wanted Lillian Vernon to continue in management and in order to obtain
recapitalization accounting treatment, and (iii) FS&Co. did not want to buy
the Company if senior management, other than Lillian Vernon, was not
enthusiastic enough about the prospects of the Company to invest in the
Company.
Over the next two weeks FS&Co. and Merrill Lynch conducted due diligence
on the Company and negotiations concerning the Merger Agreement, the Voting
Agreement and the Stockholders Agreement were conducted. In these
negotiations FS&Co. continued to insist on a termination fee of $6 million
and the Company proposed a termination fee of $2 million. During this period,
on May 15 and 16, FS&Co. held meetings in New York City and at the Company's
headquarters with the Company's senior executives. FS&Co. discussed with
these individuals the proposed transaction, the investment that would be
expected from the group as a whole, and FS&Co.'s plans for the Company going
forward. Subsequently, individual meetings were held with the executives. On
May 18, 1995, a meeting was held between FS&Co. and Goldman, Sachs at which
FS&Co. questioned certain assumptions in the Company's projections.
On May 23, 1995, a meeting was held between Goldman Sachs and FS&Co. in
which FS&Co. informed Goldman Sachs that FS&Co. had completed its assessment
of the financial projections it had received from the Company concerning the
Company's future income, cash flow and capital expenditures, and that based
upon its analysis of the projections FS&Co. would find it difficult to enter
into a transaction at $19.50 per share primarily due to financing
considerations. On May 25, FS&Co. informed the Company that FS&Co. would only
be prepared to enter into a transaction at a price of $19 per share and would
increase its equity investment by $5 million. Goldman Sachs informed FS&Co.
that lowering the price to $19 per share could jeopardize the possibility of
FS&Co. entering into a transaction with the Company. On May 25, the Company
suspended its discussions with FS&Co.
On June 1, a meeting was held among Lillian Vernon, Goldman Sachs and
FS&Co. After this meeting the Company decided to resume discussions with
FS&Co. and negotiations on the Merger Agreement proceeded.
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A Board meeting was held on June 5, 1995 to consider the revised proposal
from FS&Co. At the meeting the Board discussed various aspects of the
proposal including: (i) the $19 share price, (ii) the terms and conditions
that had been negotiated in the Merger Agreement and the remaining issues to
be negotiated including the termination fee, the payment of expenses and
closing conditions, (iii) the effect of (A) the proposed Voting Agreement
among FSEP III, FSEP International, Lillian Vernon, Fred Hochberg and David
Hochberg and (B) the proposed termination fee on potential bids from third
parties and (iv) the availability of any other transactions. At this meeting
it was decided to continue to negotiate with FS&Co. in order to reach
definitive agreement.
Negotiations concerning the Merger Agreement, the Voting Agreement and the
Stockholders Agreement were completed late on June 13 and a Board meeting was
held to consider the Merger on that afternoon. Prior to the June 13 Board
meeting Fred Hochberg informed FS&Co. that he would not be retaining an
interest in the recapitalized Company. The two final issues to be resolved
concerning the Merger Agreement were (i) the size of the termination fee,
which was finally agreed at $3.5 million, and (ii) whether it would be a
condition to the Merger that holders of options pursuant to the 1987 Plan
consent to the cancellation of their options in exchange for cash. This issue
was resolved by the addition of a condition that sufficient holders would
agree to such cancellation such that 95% of all outstanding stock options
would be cashed out. At the June 13 Board meeting, the Board received a
presentation by Goldman Sachs, at the conclusion of which Goldman Sachs
rendered their oral opinion to the effect that, as of such date, the $19.00
per Share in cash to be received by holders (other than Lillian Vernon, David
Hochberg and certain members of management who will retain Shares, purchase
Surviving Corporation Common Stock, or both) of Shares pursuant to the Merger
Agreement was fair to such holders. The Board evaluated the proposed
transaction without regard to the interest of Lillian Vernon, David Hochberg,
Fred Hochberg and the members of management participating in the transaction.
The Merger and the Merger Agreement were approved by the Board of Directors.
Lillian Vernon and Fred Hochberg left the meeting before a vote was taken
concerning the Merger, David Hochberg did not attend the meeting, and one
other director did not participate in the meeting due to illness. All of the
directors who voted approved the Merger and the Merger Agreement. None of the
directors who voted are employees of the Company.
The Merger Agreement and Voting Agreement were executed on June 13, 1995.
RECOMMENDATION OF THE BOARD OF DIRECTORS
On June 13, 1995, the Board of Directors of the Company, excluding Lillian
Vernon and Fred Hochberg, who recused themselves from the vote on such
matters, and David Hochberg, who did not attend the Board of Directors
meeting (the "Disinterested Directors"), with one other director not
participating due to illness, approved the Merger Agreement and determined
that the Merger is fair to, and in the best interests of, the stockholders of
the Company and recommended that all stockholders of the Company approve and
adopt the Merger Agreement and the transactions contemplated thereby. All of
the directors who voted at the June 13 Board Meeting voted to approve the
Merger and the Merger Agreement. ACCORDINGLY, THE DISINTERESTED DIRECTORS
RECOMMEND THAT THE STOCKHOLDERS OF THE COMPANY VOTE FOR APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT. Certain members of the Board of Directors had
certain interests which may present them with a potential conflict of
interest in connection with the Merger. See "--Interests of Certain Persons
in the Merger."
The Disinterested Directors considered a number of factors, including,
without limitation, the following:
(i) the premium represented by the consideration offered to holders
of the Shares in relation to the historical per share market value of the
Shares prior to the announcement on March 10, 1995 that the Board was
exploring strategic alternatives in the best interests of the Company's
stockholders, including a possible sale of the Company, and the belief of
the Board of Directors that absent the existence of a possible transaction
involving the Company, the Shares could well trade at
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prices significantly below $19.00 per Share. In that regard the Board
noted that the average market value of the Shares for the year ended March
9, 1995 was $17.98 per share and for the four years ended March 9, 1995
was $14.87 per share. See "MARKET PRICES AND DIVIDENDS ON THE COMPANY'S
CAPITAL STOCK";
(ii) the fact that the Company had issued a press release on March
10, 1995 regarding its exploration of strategic alternatives, including a
sale of the Company, and that of the prospective purchasers that had been
contacted or expressed an interest in acquiring the Company, none of these
prospective purchasers had proposed a transaction with a firm price in
excess of $19.00 per Share. See "--Background of the Merger";
(iii) the oral opinion of Goldman Sachs to the effect that, subject
to Goldman Sachs' final review of the Merger Agreement, as of June 13,
1995, the $19.00 per Share in cash to be received by the holders (other
than Lillian Vernon, David Hochberg and certain members of management who
will retain Shares, purchase Surviving Corporation Common Stock, or both)
of Shares pursuant to the Merger Agreement was fair to such holders. See
"--Opinion of Financial Advisor";
(iv) analyses presented to the Board of Directors by Goldman Sachs
on June 13, 1995. See "--Opinion of Financial Advisor";
(v) the fact that the Board of Directors, with the assistance of
Goldman Sachs, solicited proposals to acquire the Company without regard
to whether Lillian Vernon and David Hochberg or other members of
management would retain an investment in the Company;
(vi) the financial condition and historical and projected earnings
for the Company as well as projected capital expenditure requirements for
the Virginia Beach facility and the Company;
(vii) the nature of the Company's business and the industry in which
the Company operates;
(viii) information received by the Board of Directors regarding trends
in the direct mail specialty catalog industry and various uncertainties
associated with current and potential future industry, economic,
regulatory and market conditions including projected postage and paper
costs;
(ix) the fact that the Merger would permit a substantial number of
stockholders to realize a premium for their Shares in the near future as
compared to alternative transactions whose benefits were less certain or
might take longer to realize;
(x) the effect of termination fee provisions in the Merger
Agreement and the extent to which such provisions may increase the cost of
any alternative offers, should they materialize. See "THE MERGER--The
Merger Agreement--Termination Fees and Expenses";
(xi) the requirement that the Merger Agreement and the Merger
receive the approval of the holders of a majority of the Shares (which was
considered in light of the Voting Agreement). See "THE MERGER--The Merger
Agreement--Conditions to the Merger";
(xii) the nature and sources of the financing contemplated in
connection with the Merger, the institutions providing such financing
commitments and the conditions to the obligations of such institutions to
fund such commitments; and
(xiii) the effect of protracted negotiations and due diligence
investigations with prospective purchasers on the management and employees
of the Company.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger Agreement and the Merger, the Disinterested
Directors did not find it practicable to, and did not, quantify or otherwise
assign relative weights to the specific factors considered in reaching their
determination. The Disinterested Directors, however, gave significant weight
to the opinion of Goldman Sachs.
The Disinterested Directors reviewed carefully the interests of Lillian
Vernon, David Hochberg and certain of the Company's members of senior
management in the transaction, and do not believe that their determination to
recommend the Merger to stockholders of the Company was influenced by such
interests. The Disinterested Directors recognized that the investments by
Lillian Vernon and David Hochberg were at the request of FS&Co., and were a
condition to FS&Co. entering into the Merger Agreement.
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The Disinterested Directors and the Board recognized that the Merger is
not structured to require the approval of a majority of the unaffiliated
stockholders of the Company and that Lillian Vernon, David Hochberg and Fred
Hochberg would sign an agreement to vote the approximately 40.7% of the
Company they owned in favor of the Merger, but that it was still possible,
under the terms of the Merger Agreement, for a third party to make an offer
for the Company at a price higher than $19.00 per Share and obtain more than
50% of the Shares. The Disinterested Directors and the Board acknowledge that
the transaction would eliminate the opportunity for the stockholders, other
than Lillian Vernon, David Hochberg and certain members of management, to
participate in future growth of the Company, but would also limit the risk of
any future decreases in the value of the Company. Because the terms of the
Merger Agreement and the price paid to the stockholders were determined
through arm's-length negotiations among the Company, Investor, and their
respective advisors, and for the reasons set forth above, it was the opinion
of the Disinterested Directors that the Merger was fair to and in the best
interest of the stockholders.
The Board determined that it was not necessary to appoint a committee of
independent directors or an unaffiliated representative to act solely on
behalf of the unaffiliated stockholders of the Company for the purpose of
negotiating the terms of the Merger Agreement. In making such determination,
the Board carefully considered the fact that Goldman Sachs was not limited by
the Company to approaching prospective purchasers that would permit
management to retain an equity interest in the Surviving Corporation, and
noted that of the five directors who participated in the deliberations
concerning the Merger at the Board meeting on June 13, 1995, four are not
employed by the Company and will have no financial interest in the Company
following consummation of the Merger. None of the three directors who
participated in the vote to approve the Merger were employed by the Company
or will have a financial interest in the Company following consummation of
the Merger. All of the Directors who voted, voted to approve the Merger and
the Merger Agreement.
In reaching its determination, the Board relied upon and concurred with
the financial analyses presented by Goldman Sachs on June 13, 1995.
Neither the Company's nor the analyses presented to the Board by Goldman
Sachs included consideration of the liquidation value of the Company. The
Board did not consider the Company's liquidation value to be a relevant
measure of valuation, given that the consideration to be paid per Share in
the Merger significantly exceeded the book value per share of the Company,
and it was the Board's view that the Company is far more valuable as a going
concern. However, there can be no assurance that liquidation value would not
produce a higher valuation of the Company than book value.
To the Company's knowledge after reasonable inquiry, each of the Company's
executive officers, directors and affiliates, other than Lillian Vernon,
David Hochberg and Fred Hochberg, holding in aggregate 74,367 Shares
(approximately 0.8% of the outstanding Shares), presently intends to vote all
Shares held of record or beneficially owned by such person in favor of the
Merger. Except for the recommendation of the Board contained in this Proxy
Statement, to the Company's knowledge after reasonable inquiry, no executive
officer, director or affiliate of the Company has made a recommendation in
support of or opposed to the Merger.
OPINION OF FINANCIAL ADVISOR
On June 13, 1995, Goldman Sachs delivered their oral opinion to the Board
of Directors to the effect that, subject to Goldman Sachs' final review of
the Merger Agreement, as of such date, the $19.00 per Share in cash to be
received by the holders (other than Lillian Vernon, David Hochberg and
certain members of management who will retain Shares, purchase Surviving
Corporation Common Stock, or both) of Shares pursuant to the Merger Agreement
was fair to such holders. Goldman Sachs have subsequently confirmed such
opinion by delivery of their written opinion, dated as of the date of this
Proxy Statement, to the effect that, as of the date of such opinion, the
$19.00 per Share in cash to be received by the holders (other than Lillian
Vernon, David Hochberg and certain members of management who will retain
Shares, purchase Surviving Corporation Common Stock, or both) of Shares
pursuant to the Merger Agreement was fair to such holders.
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The full text of the written opinion of Goldman Sachs, dated as of the
date of this Proxy Statement, which sets forth the matters considered and
limitations on the review undertaken in connection with such opinion, is
attached hereto as Annex C and is incorporated by reference herein. HOLDERS
OF SHARES ARE URGED TO, AND SHOULD, READ SUCH OPINION CAREFULLY AND IN ITS
ENTIRETY.
In connection with their written opinion, Goldman Sachs reviewed, among
other things, the Schedule 13E-3 including this Proxy Statement relating to
the Special Meeting of stockholders of the Company to be held in connection
with the Merger Agreement; the Merger Agreement pursuant to which Lillian
Vernon and David Hochberg will retain an equity interest in the Company
following the consummation of the transactions contemplated by the Merger
Agreement; the Stockholders Agreement to be entered into at the Effective
Time by and among Equity Partners, Lillian Vernon, David Hochberg and the
Company; the Voting Agreement by and among Equity Partners, Lillian Vernon,
David Hochberg and Fred Hochberg; Annual Reports to Stockholders and Annual
Reports on Form 10-K of the Company for the five fiscal years ended February
25, 1995; certain interim reports to stockholders and Quarterly Reports on
Form 10-Q of the Company; certain other communications from the Company to
its stockholders; and certain internal financial analyses and forecasts for
the Company prepared by its management. Goldman Sachs also held discussions
with members of the senior management of the Company regarding the past and
current business operations, financial condition and future prospects of the
Company. In addition, Goldman Sachs reviewed the reported price and trading
activity for the Shares, compared certain financial and stock market
information for the Company with similar information for certain other
companies the securities of which are publicly traded, reviewed the financial
terms of certain recent business combinations in the mail order catalog
industry specifically and in other industries generally, and performed such
other studies and analyses as they considered appropriate.
Goldman Sachs relied without independent verification upon the accuracy
and completeness of all of the financial and other information reviewed by
them for purposes of their opinion. In addition, Goldman Sachs have not made
an independent evaluation or appraisal of the assets and liabilities of the
Company or any of its subsidiaries and have not been furnished with any such
evaluation or appraisal.
The following is a summary of certain of the financial analyses used by
Goldman Sachs in connection with providing their oral opinion to the Board of
Directors on June 13, 1995. Goldman Sachs used substantially the same
analyses in connection with providing their written opinion dated as of the
date of this Proxy Statement.
(i) Historical Stock Trading Analysis. Goldman Sachs reviewed the
historical public trading prices and volumes for the Shares (a) on a daily
basis from May 31, 1994 to May 31, 1995, (b) in comparison to a composite
of selected companies in the mail order catalog industry, including Blair
Corporation, the Fingerhut Companies, Inc., Hanover Direct, Inc., Lands'
End Inc., and Spiegel Inc. (the "Selected Mail Order Companies") on a
daily basis from May 22, 1994 to May 22, 1995 and from December 1, 1994 to
June 5, 1995 and (c) in comparison to a composite of approximately 32
selected companies in the retailing industry on a daily basis from May 22,
1994 to May 22, 1995.
(ii) Selected Companies Analysis. Goldman Sachs reviewed and compared
certain market and financial information relating to the Company to
corresponding market and financial information for (a) the Selected Mail
Order Companies, (b) selected specialty retailing companies, including
Circuit City Stores, Inc., The Gap, Inc., The Home Depot, Inc., Lechters,
Inc., The Limited, Inc., Liz Claiborne, Inc., Nordstrom's, Inc., The Pep
Boys--Manny, Moe & Jack, Tiffany & Co., Toys "R" Us, Inc., Wal-Mart
Stores, Inc. and Williams-Sonoma, Inc. (the "Selected Specialty Retailing
Companies"), and (c) other selected direct marketing companies, including
American Greetings Corporation, CML Group, Inc. and The Reader's Digest
Association Inc. (the "Selected Direct Marketing Companies"). Various
financial multiples for the Company were calculated and compared to
corresponding multiples for the Selected Mail Order Companies, the
Selected Specialty Retailing Companies and the Selected Direct Marketing
Companies using the closing prices of the common stock of such companies
on June 9, 1995 (the "Reference Prices"), publicly available historical
financial information and consensus analyst estimates of future financial
and operating results. Such
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analysis indicated that (a) the median Reference Price to estimated 1995
and 1996 earnings per share ratios (the "P/E Ratios") for the Selected
Mail Order Companies, the Selected Specialty Retailing Companies, and the
Selected Direct Marketing Companies were 15.6x and 12.4x, 15.8x and 13.5x,
and 16.4x and 14.0x, respectively, as compared to management of the
Company's estimates of 1995 and 1996 P/E Ratios for the Company of 13.9x
and 11.6x; (b) the median multiples of last twelve months' ("LTM")
revenues to Enterprise Value (defined as the market value at the Reference
Price plus debt for borrowed money less cash and cash equivalents) for the
Selected Mail Order Companies, the Selected Specialty Retailing Companies
and the Selected Direct Marketing Companies were 0.55x, 0.99x and 1.21x,
respectively, as compared to a multiple of LTM revenues to Enterprise
Value for the Company of 0.79x; (c) the median multiples of LTM earnings
before interest and taxes ("EBIT") to Enterprise Value for the Selected
Mail Order Companies, the Selected Specialty Retailing Companies and the
Selected Direct Marketing Companies were 9.2x, 11.6x and 9.6x,
respectively, as compared to a multiple of LTM EBIT to Enterprise Value
for the Company of 9.0x; (d) the median multiples of LTM earnings before
interest, taxes, depreciation and amortization ("EBITDA") to Enterprise
Value for the Selected Mail Order Companies, the Selected Specialty
Retailing Companies and the Selected Direct Marketing Companies were 7.8x,
8.5x and 7.4x, respectively, as compared to a multiple of LTM EBITDA to
Enterprise Value for the Company of 7.4x; and (e) the 1995 and 1996 median
estimated multiples of EBITDA to Enterprise Value for the Selected Mail
Order Companies, the Selected Specialty Retailing Companies and the
Selected Direct Marketing Companies were 8.0x and 6.6x, 7.6x and 6.8x, and
6.6x and 6.1x, respectively, as compared to estimated 1995 and 1996
multiples of EBITDA to Enterprise Value for the Company of 6.5x and 5.5x.
(iii) Discounted Cash Flow Analysis. Goldman Sachs performed a
discounted cash flow analysis of the Company based on estimates of future
financial and operating results provided by the management of the Company
(the "Management Case") and estimates of future financial and operating
results based on the historical performance of the Company (the
"Historical Case"). Assuming terminal value multiples of 4.0x to 8.0x year
2000 estimated EBITDA and discount rates of 14% to 18%, such analyses
indicated a net discounted cash flow value per Share ranging from $14.32
to $26.77 under the Management Case and $11.83 to $20.88 under the
Historical Case.
(iv) Selected Transactions Analysis. Goldman Sachs analyzed certain
publicly available information relating to selected transactions in the
mail order industry since 1986 (the "Selected Transactions"), and compared
such information to corresponding information for the proposed Merger
assuming holders of Shares would receive $19.00 per Share pursuant to the
Merger Agreement (the "Merger Case"). Such analysis indicated that (a)
aggregate consideration as a multiple of LTM sales for the Selected
Transactions ranged from 0.14x to 1.25x, with a mean of 0.70x and a median
of 0.73x, as compared to a multiple of 0.77x for the Merger Case, (b)
aggregate consideration as a multiple of LTM EBIT for the Selected
Transactions ranged from 4.2x to 16.1x, with a mean of 12.3x and a median
of 12.6x, as compared to a multiple of 8.6x for the Merger Case, (c)
aggregate consideration as a multiple of LTM EBITDA for the Selected
Transactions ranged from 8.6x to 15.4x, with a mean of 12.4x and a median
of 13.1x, as compared to a multiple of 7.1x for the Merger Case, and (d)
aggregate consideration as a multiple of LTM net income for the Selected
Transactions ranged from 18.3x to 23.4x, with a mean of 21.3x and a median
of 21.8x, as compared to a multiple of 14.0x for the Merger Case.
(v) Merger Consideration Multiples Analysis. Goldman Sachs analyzed
certain financial information of the Company based on the price of $19.00
per Share pursuant to the Merger Agreement and estimates of future
financial and operating results for the Company provided by the management
of the Company. Such analysis indicated that (a) Enterprise Value as a
multiple of sales was 0.86x for fiscal year ("FY") 1994 and 0.77x for FY
1995, and was estimated to be 0.68x for FY 1996 and 0.59x for FY 1997; (b)
Enterprise Value as a multiple of EBITDA was 6.9x for FY 1994 and 7.1x for
FY 1995, and was estimated to be 6.3x for FY 1996 and 5.2x for FY 1997;
(c) Enterprise Value as a multiple of EBIT was 8.5x for FY 1994 and 8.6x
for FY 1995, and was estimated to be 7.6x for FY 1996 and 6.1x for FY
1997; and (d) total market value as a multiple of earnings was 14.9x for
FY 1994 and 14.0x for FY 1995, and was estimated to be 13.0x for FY 1996
and 10.9x for FY 1997.
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(vi) Other Analyses. Goldman Sachs reviewed FS&Co.'s proposed
capitalization structure for the Company to assess potential interest
coverage ratios and returns on equity invested based on estimated
financial and operating results for the Company provided by the management
of the Company. Goldman Sachs also reviewed certain factors that might
affect the future financial performance of the Company, including
increased postage and paper costs and proposed capital expenditures.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying Goldman Sachs' opinion. In arriving at their fairness
determination, Goldman Sachs considered the results of all such analyses. No
company or transaction used in the above analyses as a comparison is
identical to the Company or the contemplated transaction. The analyses were
prepared solely for purposes of Goldman Sachs' providing their opinion to the
Board of Directors as to the fairness of the $19.00 per Share in cash to be
received by the holders of Shares pursuant to the Merger Agreement and do not
purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold. Analyses based upon forecasts
of future results are not necessarily indicative of actual future results,
which may be significantly more or less favorable than suggested by such
analyses. Because such analyses are inherently subject to uncertainty, being
based upon numerous factors or events beyond the control of the parties or
their respective advisors, none of the Company, Goldman Sachs or any other
person assumes responsibility if future results are materially different from
those forecast.
As described above, Goldman Sachs' opinion to the Board of Directors was
one of many factors taken into consideration by the Disinterested Directors
in making their determination to approve the Merger Agreement. The foregoing
summary does not purport to be a complete description of the analysis
performed by Goldman Sachs and is qualified by reference to the written
opinion of Goldman Sachs set forth in Annex C hereto.
Goldman Sachs, as part of their investment banking business, are
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. Goldman Sachs are familiar with the Company having provided certain
investment banking services to the Company from time to time, including
having acted as managing underwriter of the initial public offering of Shares
in 1987. Goldman Sachs also have in the past provided Equity Partners and
certain of their affiliates with investment banking services from time to
time, including having acted as their financial advisor in connection with
various divestitures and capital raising activities, and may provide
investment banking services to them in the future.
The Board of Directors selected Goldman Sachs to act as its financial
advisor based on Goldman Sachs' substantial experience in mergers and
acquisitions and in securities valuation generally. Pursuant to a letter
agreement dated April 21, 1994 (the "Engagement Letter"), the Company engaged
Goldman Sachs as its exclusive financial advisor in connection with the
possible sale of the Company. Pursuant to the terms of the Engagement Letter,
the Company has agreed to pay Goldman Sachs a fee of 0.75% of the aggregate
consideration paid in the sale of the Company (including the excess, if any,
of the principal amount of all indebtedness for borrowed money as set forth
on the most recent consolidated balance sheet of the Company prior to the
consummation of such sale over the value of the cash, cash equivalents and
marketable securities set forth thereon). Pursuant to the Engagement Letter,
the Company has also agreed to reimburse Goldman Sachs for their reasonable
out-of-pocket expenses, including the fees and disbursements of their
attorneys, and to indemnify Goldman Sachs against certain liabilities,
including certain liabilities under the federal securities laws.
PURPOSE AND REASONS OF INVESTOR, LILLIAN VERNON AND DAVID HOCHBERG FOR THE
MERGER
Investor's purpose for engaging in the transactions contemplated by the
Merger Agreement is to enable Equity Partners to obtain ownership of
approximately 70% of the Shares, thereby becoming entitled to all benefits
that result from such ownership. Such benefits include management and
investment
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discretion with regard to the future conduct of the business of the Company,
the benefits of the profits generated by operations and any increase in the
Company's value. Similarly, Equity Partners will also bear the risk of any
decrease in the value of the Company.
Lillian Vernon and David Hochberg agreed to engage in the transaction
contemplated by the Merger Agreement in order to maximize the value of their
Shares as well as the value of the Company and the value of the Shares held
by the Company stockholders. Lillian Vernon and David Hochberg were required
by Investor to continue as minority owners of the Company after the Effective
Time as a condition to execution of the Merger Agreement.
Upon the consummation of the Merger, Equity Partners, Lillian Vernon and
David Hochberg will each have approximately a 70%, 17% and 10% interest,
respectively, in the net book value and net earnings of the Company.
POSITION OF INVESTOR, LILLIAN VERNON AND DAVID HOCHBERG REGARDING FAIRNESS OF
THE MERGER
Investor, Lillian Vernon and David Hochberg have considered the analyses
of and the factors examined by the Board (described in detail in "SPECIAL
FACTORS--Recommendation of the Board of Directors") and believe these
analyses and factors, in particular factors (i) through (v) of that section,
provide a reasonable basis for them to believe, as they do, that the Merger
is fair to the stockholders of the Company. This belief should not, however,
be construed as a recommendation by them to the Company's stockholders to
vote to approve and adopt the Merger Agreement.
Although none of Investor, Lillian Vernon or David Hochberg has quantified
or assigned specific relative weights to any of the factors referred to in
the previous paragraph, each has relied principally on and adopted the
opinion and analyses of Goldman Sachs as set forth in Annex C hereto and the
conclusion of the Board of Directors that the Merger is fair to the Company's
stockholders.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors with respect
to the Merger, stockholders should be aware that certain members of
management and the Board of Directors at the time of approval of the Merger
Agreement had certain interests which may present them with potential
conflicts of interest in connection with the Merger, as summarized below.
After consummation of the Merger, a total of 657,895 and 394,737 Shares
registered in the names of Lillian Vernon and David Hochberg, respectively,
shall remain outstanding after the Merger. Upon consummation of the Merger
(i) Lillian Vernon shall receive $27,678,592 in Merger Consideration and
$2,473,600 in option cash out payments; (ii) David Hochberg shall receive
$15,907,997 in Merger Consideration and $515,250 in option cash out payments;
(iii) Fred Hochberg shall receive $11,696,606 in Merger Consideration and
$18,750 in option cash out payments. The Company's other executive officers,
directors and affiliates shall receive, in aggregate, approximately
$1,412,973 in Merger Consideration (assuming no Shares held by such
individuals are retained) and, in aggregate approximately $2,248,180, in
option cash payments (assuming no options are exercised).
After the Merger, certain members of management, other than Lillian Vernon
and David Hochberg, will retain Shares, or purchase Surviving Corporation
Common Stock having an aggregate value of approximately $2.5 million, which
will represent approximately 3% of the Surviving Corporation Common Stock. If
any of such members of management own Shares, they will retain such Shares
and enter into a Subscription Agreement pursuant to a Stock Subscription Plan
with respect to additional Shares they will purchase. Under the Stock
Subscription Plan expected to be adopted by the Company immediately after
consummation of the Merger, a number of Shares of Surviving Corporation
Common Stock are expected to be offered to certain members of management of
the Company such that this number combined with the number of Shares retained
by the certain members of management will be approximately 131,500. In
connection with the Merger, certain members of management will be able to
elect not to receive all or a portion of the cash consideration such member
is entitled to receive in exchange for stock options as described in the
following paragraph, in exchange for a right to receive an equal amount as
deferred compensation. Members of management purchasing stock may give a full
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recourse note to the Company for between 50% and 100% of the purchase price.
Upon consummation of the Merger, the Company is expected to establish a
Performance Option Plan (the "Performance Option Plan") which will provide
for the issuance of options covering up to approximately 190,000 shares of
Surviving Corporation Common Stock to certain employees of the Company.
Options will vest only if certain performance criteria are met or a certain
period of time has elapsed. Lillian Vernon is to receive a significant
portion of the options available under the Performance Option Plan.
Pursuant to the Merger Agreement, except as may otherwise be agreed by
Investor and certain members of management as described above, each stock
option, whether or not vested, to acquire Shares under the Company's 1993
Stock Option Plan for Non-Employee Directors (the "Directors Plan") and,
subject to any necessary consents from the holders thereof, each stock
option, whether or not vested, to acquire Shares under the Company's 1987
Plan shall be canceled for the right to receive an amount in cash equal to
the product of (i) the excess of the Merger Consideration over the exercise
price per Share of such stock option, multiplied by (ii) the number of Shares
subject to such stock option.
Indemnification and Insurance. Directors' and officers' indemnification
and insurance policies shall be in effect for six years from the Effective
Time with respect to matters occurring before the Effective Time; provided
that the Surviving Corporation shall not be required to pay premiums in
excess of 175% of the amount currently paid by the Company. See "THE
MERGER--The Merger Agreement-- Indemnification and Insurance."
Executive Severance Agreements and Change in Control Arrangements. Andrew
Gregor, Vice President-Chief Financial Officer, has a change in control
agreement with the Company which expires on the earlier of April 27, 1997 or
the termination of Mr. Gregor's employment prior to a Change in Control (as
such term is defined in the agreement) of the Company. If, within two years
after a Change in Control (the "Two-Year Period"), Mr. Gregor's employment is
terminated under circumstances constituting a "Trigger Termination"
(generally, a resignation by Mr. Gregor with "good reason" or a termination
by the Company other than for "cause") Mr. Gregor will be entitled to a lump
sum payment in cash equal to a multiple of his most recent annual total
compensation (excluding income attributable to the exercise of stock options)
ranging from 50% to 200% of such total compensation, such multiple depending
upon the timing of the termination. In addition, after a Change in Control
has occurred, with respect to any outstanding stock options Mr. Gregor may
hold at such time, (i) if the Shares are then publicly traded, such options
will become freely exercisable whether or not vested by their terms, or (ii)
in the event the Shares are not publicly traded at such time, Mr. Gregor will
receive a cash payment in an amount equal to the product of (A) the aggregate
number of Shares subject to such options (whether or not vested) multiplied
by (B) the difference between (1) the exercise price of each series of
options and (2) the highest tender price paid for the Shares in the effort to
retire the Shares. The agreement contains restrictive covenants related to
confidentiality and solicitation.
Employment Agreements. The Employment Terms of Lillian Vernon, Chairman of
the Board and Chief Executive Officer, expire on February 28, 1997. Lillian
Vernon currently receives a base salary of $520,000 per annum. Her salary is
reviewed annually by the Compensation Committee of the Board of Directors and
may be increased at the Board of Directors' discretion. Lillian Vernon also
receives a bonus at the discretion of the Board of Directors. Upon
consummation of the Merger, Lillian Vernon's Employment Terms shall be
extended until three years from the Effective Time. Upon consummation of the
Merger, Lillian Vernon will enter into a non-compete agreement. See "THE
MERGER--The Voting Agreement."
Larry Blum, Executive Vice President, has an employment agreement with the
Company which expires on February 28, 1998. Mr. Blum currently receives a
base salary of $250,000 per annum. His salary is reviewed on the anniversary
date of the commencement of the agreement, and thereafter at 18 month
intervals. In addition to Mr. Blum's base compensation, Mr. Blum is entitled
to receive a bonus pursuant to the Company's executive bonus policy of up to
50% of his annual base salary. Upon consummation of the Merger, this
agreement will continue as currently in effect.
It is currently intended that prior to consummation of the Merger, David
Hochberg, Vice President -- Public Affairs of the Company, will enter into an
employment agreement with the Company, which will
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become effective as of the Effective Time on the same terms as he is
currently employed. The agreement will have an initial term of three years
(the "Initial Term"). After the expiration of the Initial Term the agreement
will continue at will, terminable on 90 days' written notice by either party
to the other. Under the agreement, Mr. Hochberg will be initially entitled to
receive a base salary equal to that which Mr. Hochberg was entitled
immediately prior to the Effective Time. David Hochberg's current base salary
is $166,950 and he receives a bonus at the discretion of the Board. The
agreement will contain standard termination provisions and restrictive
covenants relating to competition and confidentiality.
Employee Benefits. Pursuant to the Merger Agreement, Investor intends
that for a period of two years immediately following the Effective Time, it
shall, or shall cause the Surviving Corporation to, continue to maintain
employee benefit and welfare plans, programs, contracts, agreements, policies
and executive incentives and perquisites, for the benefit of active and
retired employees of the Company which, in the aggregate, provide benefits
that are no less favorable to employees than the benefits provided to such
active and retired employees on the date of the Merger Agreement.
Each of the indemnification, insurance, employment and severance
agreements described above grants rights to the relevant directors and
officers with respect to the Company that are in addition to the rights such
directors and officers enjoy solely in their capacity as stockholders.
Therefore, such officers and directors have interests in these arrangements
that potentially conflict with those of the Company and its other
stockholders.
Deferred Compensation Agreements. Lillian Vernon, Fred Hochberg, and David
Hochberg (collectively the "Executives") are parties to individual deferred
compensation agreements with the Company. The agreements provide the
Executives with the following fully vested benefits: (i) total retirement
benefits to be paid over a period of ten years commencing when the Executive
reaches a specified age (70 in the case of Lillian Vernon and 65 in the case
of the Hochbergs) in the amounts of $4,634,500, $5,525,000, and $3,540,000,
respectively; (ii) payment of the balance of retirement benefits to the
Executive's designated beneficiaries if the Executive dies after reaching the
specified age; and (iii) lump sum death benefits to be paid to the
Executive's designated beneficiaries in the amount of the discounted present
value of the total retirement benefit if the Executive dies before reaching a
specified age (70 in the case of Lillian Vernon and 60 in the case of the
Hochbergs) or 75% of the total retirement benefit (only for the Hochbergs) if
the Executive dies between the ages of 60 and 65. Upon consummation of the
Merger, Lillian Vernon's deferred compensation agreement will be amended so
that she will not receive benefits until one year after she ceases to receive
payments pursuant to the Employment Terms.
MANAGEMENT OF THE COMPANY'S BUSINESS AFTER THE MERGER; CERTAIN EFFECTS OF THE
MERGER
Investor is continuing to conduct a detailed review of the Company and its
assets, businesses, labor practices, operations, properties, corporate
structure, capitalization, management and personnel and is considering and
discussing with the Company what further changes, if any, will be desirable.
Subject to the foregoing, Investor expects that the day to day business and
operations of the Company will be conducted substantially as they are
currently being conducted by the Company and its subsidiaries. The Company
currently plans on introducing new catalog concepts from time to time and may
expand its existing retail operations. In addition, the Company may grow its
business through strategic acquisitions, although none are contemplated at
this time. It is anticipated that the Board of Directors and stockholders of
the Surviving Corporation will from time to time evaluate and review the
Company's business, operations and properties and make such changes as they
deem appropriate. Investor does not currently intend to dispose of any assets
of the Company, other than in the ordinary course of business. Investor also
does not currently contemplate any material change in the composition of the
Company's management, although after the Merger, the Company's Board will be
composed of four nominees designated by FSEP III and FSEP International, one
nominee designated by Lillian Vernon and two nominees jointly designated by
FSEP III and FSEP International and Lillian Vernon, one of whom shall be an
outside director of the Company at the Effective Time. FSEP III, FSEP
International, Lillian Vernon and David Hochberg have also negotiated certain
other agreements, which were executed concurrently with the Merger Agreement
or will be executed immediately prior to the consummation of the Merger and
will govern the operation of the Company after the Merger. See "THE
MERGER--The Voting Agreement" and "THE MERGER--The Stockholders Agreement."
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As a result of the Merger, the Company's current stockholders (other than
Lillian Vernon, David Hochberg and certain members of management who will
retain Shares, purchase Surviving Corporation Common Stock, or both) will be
cashed out and will not have an opportunity to continue their equity interest
in the Company as an ongoing corporation and therefore will not share in the
future earnings and potential growth of the Company.
If the Merger is consummated, the Shares will cease to be listed on the
AMEX, public trading of the Shares will cease and the registration of the
Shares under the Exchange Act will be terminated. The termination of
registration of the Common Stock under the Exchange Act will reduce the
information required to be furnished by the Company to the Commission and
will make certain of the provisions of the Exchange Act, such as the
short-swing profit recovery provisions of Section 16(b) and the requirement
of furnishing a proxy or information statement in connection with
stockholders' meetings, no longer applicable to the Company. THE RECEIPT OF
CASH PURSUANT TO THE MERGER WILL BE A TAXABLE TRANSACTION. SEE "CERTAIN
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES."
ACCOUNTING TREATMENT OF THE TRANSACTION
The Merger will be accounted for as a recapitalization, consisting of
additional borrowings by the Company under the Credit Facilities (as defined
below), an equity investment by FSEP III and FSEP International of not less
than $52 million and the cancellation of certain Shares in the Merger in
exchange for a cash payment. This accounting treatment was an important
factor in the willingness of Investor to participate in the Merger and
related transactions on the terms and conditions described in this Proxy
Statement.
REGULATORY APPROVALS
On [ ], 1995, the waiting period under the Hart-Scott Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") applicable to
the Merger expired.
Investor and the Company know of no remaining federal or state regulatory
requirements that must be complied with or approvals that must be obtained in
order to consummate the Merger, other than the filing of the Certificate of
Merger or the Merger Agreement with the Secretary of State of the State of
Delaware.
CERTAIN STOCKHOLDER LITIGATION
Several purported class action lawsuits relating to the Merger Agreement
have been filed in Delaware Chancery Court: Crandon Capital Partners v.
Lilyan H. Affinito, et al., Civil Action No. 14353, filed June 14, 1995;
Dennis Johnson v. David C. Hochberg, et al., Civil Action No. 14356, filed
June 14, 1995; Thakor T. Patel and Kanta T. Patel v. Lillian Vernon
Corporation, et al., Civil Action No. 14358, filed June 15, 1995; and Roy
McGeady v. Lillian Vernon Corporation, et al., Civil Action No. 14363, filed
June 16, 1995. Each of the foregoing actions purports to be a stockholder
class action on behalf of all stockholders of the Company (other than the
defendants and their affiliates) against the Company and the members of its
Board of Directors. The Johnson action also names Freeman Spogli & Co. as a
defendant. The Crandon Capital Partners and McGeady actions name Paul J.
Bergmoser as a defendant although Mr. Bergmoser has not been a director of
the Company since August 1994, and do not name one of the current directors,
as a defendant. Each of the actions alleges, among other things, that in
implementing the Merger Agreement, the individual defendants have breached
their fiduciary duties to the stockholders of the Company and have acted to
the detriment of the class members for their own personal benefit. Each of
the lawsuits seeks a preliminary and permanent injunction preventing the
Company from proceeding with the Merger Agreement, rescission of the Merger
Agreement if it is consummated, as well as unspecified damages, attorney's
fees and other relief. The defendants believe that the complaints are without
merit and intend to defend the cases vigorously.
Other than as described above, and other than ordinary routine litigation
incidental to its business, no legal proceedings to which the Company is a
party, or to which any of its properties are subject, are pending or are
known to be contemplated, and the Company knows of no material legal
proceedings, pending or threatened, or judgments entered against any director
or officer of the Company in his or her capacity as such.
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THE MERGER
VOTE REQUIRED; RECORD DATE
A majority of the outstanding shares, other than shares held in the
treasury of the Company, of the common stock, $.01 par value per share, of
the Company (each, a "Share") entitled to vote, represented in person or by
proxy, is required for a quorum at the Special Meeting. Under Section 251 of
the DGCL, the affirmative vote of the holders of a majority of the Shares is
required to approve and adopt the Merger Agreement. Pursuant to the Voting
Agreement, each of Lillian Vernon, and her sons, David Hochberg and Fred
Hochberg, has agreed to vote all of her or his Shares in favor of the Merger.
Lillian Vernon, David Hochberg and Fred Hochberg collectively own
approximately 40.7% of the outstanding Shares as of the date hereof. To the
Company's knowledge after reasonable inquiry, each of the Company's executive
officers, directors and affiliates, holding in aggregate 74,367 Shares
(approximately 0.8% of the outstanding Shares), presently intends to vote all
Shares held of record or beneficially owned by such person in favor of the
Merger. See "PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP OF MANAGEMENT."
Except for the recommendation of the Board contained in this Proxy Statement,
to the Company's knowledge after reasonable inquiry, no executive officer,
director or affiliate of the Company has made a recommendation in support of
or opposed to the Merger.
Only stockholders of record on the "Record Date" are entitled to vote at
the Special Meeting or any adjournments or postponements thereof. At the
close of business on such date, there were [ ] Shares issued and
outstanding each of which is entitled to one vote at the Special Meeting. As
of the Record Date, there were [ ] holders of record. As of June 30, 1995
there were 9,731,838 Shares and 421 stockholders of record.
Shares represented by a properly signed, dated and returned proxy will be
treated as present at the meeting for purposes of determining a quorum,
without regard to whether the proxy is marked as casting a vote or
abstaining. Brokers who hold Shares of Company Common Stock as nominees will
not have discretionary authority to vote such Shares in the absence of
instructions from the beneficial owners. Votes which are not cast for this
reason (the "broker non-votes") will also have the same legal effect as votes
cast against the approval and adoption of the Merger Agreement. ACCORDINGLY,
ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS VOTES AGAINST
THE APPROVAL OF THE MERGER AGREEMENT.
PAYMENT FOR SHARES
As a result of the Merger, holders of certificates formerly representing
Shares will cease to have any equity interest in the Company. At the
Effective Time, each outstanding Share (other than (i) 657,895 and 394,737
Shares registered in the names of Lillian Vernon and David Hochberg,
respectively, which shall not be canceled but shall remain outstanding and
which will represent approximately 27% of the Surviving Corporation Common
Stock, and Shares retained by certain members of management, (ii) Shares held
in the treasury of the Company, or owned by the Company or Investor which
will be extinguished and canceled without conversion, no payment being made
in respect thereof, and (iii) any Shares that are held by stockholders who
have not voted in favor of the Merger or consented thereto in writing and who
shall have demanded properly in writing appraisal for such Shares in
accordance with Section 262) shall be canceled and converted automatically
into the right to receive the Merger Consideration payable to the holder
thereof, without interest, upon surrender of the certificate formerly
representing such Share in the manner provided in the Merger Agreement.
DETAILED INSTRUCTIONS WITH REGARD TO THE SURRENDER OF CERTIFICATES,
TOGETHER WITH A LETTER OF TRANSMITTAL, WILL BE FORWARDED TO FORMER
STOCKHOLDERS BY THE PAYING AGENT PROMPTLY FOLLOWING THE EFFECTIVE TIME.
STOCKHOLDERS SHOULD NOT SUBMIT THEIR CERTIFICATES TO THE PAYING AGENT UNTIL
THEY HAVE RECEIVED SUCH MATERIALS. PAYMENT FOR SHARES WILL BE MADE TO FORMER
STOCKHOLDERS AS PROMPTLY AS PRACTICABLE FOLLOWING RECEIPT BY THE PAYING AGENT
OF THEIR CERTIFICATES AND OTHER REQUIRED DOCUMENTS.
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THE MERGER AGREEMENT
The following is a summary of the material provisions of the Merger
Agreement, a conformed copy of which is included with this Proxy Statement as
Annex A. Such summary is qualified in its entirety by reference to the Merger
Agreement.
General Terms of the Merger. Upon the terms and subject to the conditions
of the Merger Agreement, Investor will be merged with and into the Company
with the Company to continue as the Surviving Corporation of the Merger. The
Merger will become effective at the Effective Time. At the Effective Time,
each outstanding Share (other than (i) 657,895 and 394,737 Shares registered
in the names of Lillian Vernon and her son, David Hochberg, respectively,
which shall not be canceled but shall remain outstanding and which will
represent approximately 27% of the Surviving Corporation Common Stock after
the Merger and Shares retained by certain members of management, (ii) Shares
held in the treasury of the Company, or owned by the Company or Investor
which will be extinguished and canceled without conversion, no payment being
made in respect thereof, and (iii) any Shares that are held by stockholders
who have not voted in favor of the Merger or consented thereto in writing and
who shall have demanded properly in writing appraisal for such Shares in
accordance with Section 262) shall be canceled and converted automatically
into the right to receive an amount equal to the Merger Consideration payable
to the holder thereof, without interest, upon surrender of the certificate
formerly representing such Share in the manner provided in the Merger
Agreement. Investor has been organized by FS&Co. Certain affiliates of FS&Co.
own 100% of the outstanding capital stock of Investor. At the Effective Time,
the shares of Investor Common Stock will be converted into approximately
2,763,158 shares of the Surviving Corporation Common Stock, which will
represent approximately 70% of the Surviving Corporation Common Stock. Upon
consummation of the Merger, certain members of management, other than Lillian
Vernon and David Hochberg, will retain Shares or purchase Surviving
Corporation Common Stock having an aggregate value of approximately $2.5
million, which will represent approximately 3%, of the Surviving Corporation
Common Stock. Upon consummation of the Merger, each option to acquire Shares
under the Company's Directors Plan and, subject to any necessary consents
from the holders thereof, each option to acquire Shares under the Company's
1987 Plan shall be canceled for the right to receive an amount in cash equal
to the product of (i) the excess of the Merger Consideration over the
exercise price per Share of such stock option, multiplied by (ii) the number
of Shares subject to such option.
As promptly as practicable after the approval of the Merger Agreement and
the satisfaction or waiver of the other conditions to consummation of the
Merger, the parties thereto shall file the Merger Agreement or a certificate
of merger with the Secretary of State of the State of Delaware, in such form
as required by, and executed in accordance with the relevant provisions of,
the DGCL. The Merger will become effective when such filing is made.
Exchange of Shares. At the Effective Time, Investor will make available,
or cause to be made available to the Paying Agent, an amount in cash,
together with funds to be provided by the Company pursuant to the Commitment
Letter, sufficient to pay the aggregate Merger Consideration payable pursuant
to the terms of the Merger Agreement.
Promptly after the Effective Time, the Paying Agent shall mail to each
record holder of an outstanding certificate or certificates, which
immediately prior to the Effective Time represented outstanding Shares (the
"Certificates"), a form of letter of transmittal and instructions for use in
effecting the surrender of Certificates for payment therefor. Stockholders
should not surrender their Certificates with their proxy cards. Upon
surrender to the Paying Agent of a Certificate, together with such letter of
transmittal, duly executed and any other required documents, the holder of
such Certificate will be entitled to receive in exchange therefor cash in an
amount equal to the product of the number of Shares represented by such
Certificate multiplied by the Merger Consideration, and such Certificate
shall then be canceled. No interest will be paid or accrued on the cash
payable upon the surrender of the Certificate. If payment is to be made to a
person other than the person in whose name the Certificate surrendered is
registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly endorsed or otherwise in proper form for
transfer and that the person requesting such payment shall pay transfer or
other taxes required by reason of the payment to a person other than the
registered holder of
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the Certificate surrendered or establish to the satisfaction of the Paying
Agent that such tax has been paid or is not applicable. Until so surrendered,
each Certificate (other than Certificates representing (i) Shares held by the
Company as treasury stock, or owned by the Company or Investor, (ii) 657,895
and 394,737 Shares held by Lillian Vernon and David Hochberg, respectively,
and Shares, held by certain members of management, and (iii) Dissenting
Shares, as such term is defined in the Merger Agreement) shall represent for
all purposes solely the right to receive the Merger Consideration, without
any interest thereon. Any funds remaining with the Paying Agent six months
following the Effective Time shall be delivered to the Surviving Corporation,
after which time former holders of Shares, subject to the applicable law,
shall look only to the Surviving Corporation for payment of their claims for
the Merger Consideration for their Shares, without interest thereon, and
shall have no greater rights against the Surviving Corporation than may be
accorded to general creditors of the Surviving Corporation under Delaware
law.
Agreements of the Company and Investor. The Merger Agreement provides
that, at the Effective Time, unless otherwise determined by Investor prior to
the Effective Time, the Certificate of Incorporation of the Company, as in
effect immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation, until thereafter amended as
provided by law and such Certificate of Incorporation. The Merger Agreement
also provides that, unless otherwise determined by Investor prior to the
Effective time, the By-laws of the Company, as in effect immediately prior to
the Effective Time, shall be the By-laws of the Surviving Corporation until
thereafter amended as provided by law, the Certificate of Incorporation of
the Surviving Corporation and its By-laws. The Merger Agreement provides that
the directors of Investor immediately prior to the Effective Time, together
with Lillian Vernon, shall be the initial directors of the Surviving
Corporation. The officers of the Company immediately prior to the Effective
Time shall be the initial officers of the Surviving Corporation.
Conditions to the Merger. The Merger will occur only if the Merger
Agreement and all other matters necessary to effectuate the transactions
provided for therein and to vest Investor with the rights provided for
therein are approved at the Special Meeting by the adoption of the Merger
Agreement by the affirmative vote of the stockholders of the Company, in
accordance with Section 251 of the DGCL. In addition, the obligations of
Investor, on the one hand, and the Company, on the other, to consummate the
transactions contemplated by the Merger Agreement are subject to the
satisfaction of certain conditions (any of which may be waived by the party
or parties entitled to the benefit thereof), including (i) the absence of any
action by any governmental authority or other agency or commission or court
of competent jurisdiction that has the effect of making illegal or otherwise
preventing or prohibiting consummation of the Merger; (ii) the termination or
expiration of any waiting period applicable to the Merger under the HSR Act;
(iii) the continuing accuracy, as of the Effective Time, of the
representations and warranties of the other party provided in the Merger
Agreement; (iv) the performance by the other party of all obligations
required to be performed by it under the Merger Agreement; (v) the
procurement of the Debt Financing (as defined below) necessary to finance the
merger (see "FINANCING OF THE MERGER"); (vi) the resignation, effective as of
the Effective Time, of all directors on the Board except for Lillian Vernon;
(vii) the Company not having suffered a material adverse effect; and (viii)
holders of a sufficient number of options pursuant to the 1987 Plan shall
have consented to the cancellation of such stock options in exchange for cash
consideration such that the sum of (A) such options, (B) the number of
options for which alternative agreements are reached and (C) stock options
issued pursuant to the Directors Plan, is in excess of 95% of all outstanding
options.
Representations and Warranties. The Merger Agreement contains
representations, warranties, covenants and agreements by each of the parties
regarding, among other things, their organization, authority to enter the
transaction, requisite consents and approvals and brokers and finders. In
addition, the Company makes certain representations and warranties regarding,
among other things, its capitalization, compliance with all applicable laws,
the content and submission of forms and reports required to be filed by the
Company with the Securities and Exchange Commission (the "Commission"), the
absence of certain changes in the Company's business since February 25, 1995,
absence of litigation to which the Company is a party, intellectual property,
related party agreements, employee benefit plans, tax matters,
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compliance with applicable laws, title to its properties and environmental
matters. In addition, Investor makes certain representations and warranties
regarding the Debt Financing. The representations and warranties of each of
the parties to the Merger Agreement will expire at the Effective Time.
Covenants. In the Merger Agreement, the Company has agreed that except as
otherwise contemplated by the Merger Agreement, prior to the Effective Time,
the Company, and each of its subsidiaries, will conduct its operations
according to its ordinary course of business consistent with past practice,
and the Company, and each of its subsidiaries, will use its best efforts to
preserve intact its business organization, to keep available the services of
its officers and employees and to maintain existing relationships with
customers, suppliers and other persons with which the Company or any
subsidiary has significant business relationships. In addition, prior to the
Effective Time, neither the Company nor any of its subsidiaries will, without
the prior written consent of Investor: (a) amend its Certificate of
Incorporation or By-laws; (b) authorize or effect the issuance, sale, pledge,
disposition or encumbrance (whether through the issuance or granting of
options, warrants, convertible securities or otherwise) of (x) any capital
stock, except as required by any incentive stock plan or (y) any assets of
the Company or its any of its subsidiaries; (c) declare, set aside or pay any
dividend or distribution (whether in cash, stock or property or combination
thereof) in respect of its capital stock, except for the regular quarterly
dividend of $.07 per Share; (d) reclassify, split, combine, purchase, or
otherwise acquire, directly or indirectly, any shares of its capital stock,
except for any acquisition of securities in connection with any stock option
plan; (e) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof; (ii) incur any debt or assume, guarantee or endorse or
otherwise become responsible for the obligations of any person, or make any
loans or advances, except pursuant to credit facilities in existence on
February 25, 1995 and the Debt Financing; (iii) authorize any new capital
expenditure or expenditures for the Company or any of its subsidiaries which,
individually, is in excess of $100,000 or, in the aggregate, are in excess of
$500,000, provided that none of the foregoing shall limit any capital
expenditure already included in the capital expenditure budget for the fiscal
year ending February 24, 1996; or (iv) make any investment in any person (as
that term is defined in the Merger Agreement), except in certificates of
deposit maturing within 90 days or obligations maturing within 90 days and
guaranteed by the full faith and credit of the United States; (f) (i) grant
any increases in the compensation of any of its officers and employees,
excepts for increases in salary of employees who are not officers of the
Company in the ordinary course of business; (ii) enter into any employment,
consulting or severance agreement with any present or former director,
officer or other employee of the Company or any of its subsidiaries; or (iii)
establish any new benefit plan for any directors, officers, or employees; (g)
enter into, amend, or cancel any agreement or transaction involving the
Company or any of its subsidiaries that (x) involves consideration in excess
of $500,000 (except inventory acquisitions and dispositions or contracts for
the purchase of paper or contracts for the printing of catalogs in the
ordinary course of business, with a term of less than 180 days) or (y)
involves the sale, acquisition or lease of any material assets; (h) fail to
maintain its advertising and promotional expenditures in the ordinary course
of business; (i) modify any existing insurance coverage protecting the
business, assets or employees of the Company except in the ordinary course of
business; (j) cancel any indebtedness or obligation owed to the Company or
any of its subsidiaries; (k) revalue any of its assets, including, without
limitation, the write-offs of notes, increases in any reserves except in the
ordinary course of business and any write-up of the value of inventory or any
other asset; (l) change any accounting method or practice, except for changes
required by United States generally accepted accounting principles; or (m)
plan, commit, or enter into an agreement to take any of the actions described
above.
Indemnification and Insurance. In the Merger Agreement, Investor and the
Company have agreed that all rights of indemnification existing in favor of
the Company's present or former directors, officers or employees, provided
for under the Company's Certificate of Incorporation and By-laws, as in
effect on the date of the Merger Agreement, will survive the Merger and
continue as an obligation of the Surviving Corporation for a period of six
years from the Effective Time. In the event of any such claim, action or
suit, the Company or the Surviving Corporation will pay the reasonable fees
and expenses of counsel selected by the parties to be indemnified.
The Surviving Corporation will use its best efforts to maintain in effect
for six years from the Effective Time the current directors' and officers'
liability insurance policies maintained by the Company
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(provided that the Surviving Corporation may substitute therefor policies
reasonably satisfactory to the Indemnified Parties, as defined in the Merger
Agreement, of at least the same coverage containing terms and conditions
which are not materially less advantageous) with respect to matters occurring
prior to the Effective Time; provided that in no event will the Surviving
Corporation be required to pay premiums for such insurance in excess of 175%
of premiums currently paid by the Company. In the event that the Surviving
Corporation consolidates with or merges into any other person and shall not
be the surviving corporation of such consolidation or merger, or transfers
all or substantially all of its assets to any person, then in each such case,
proper provision shall be made so that the successors and assigns of the
Surviving Corporation shall assume these obligations relating to insurance
and indemnification.
Employee Benefits. Pursuant to the Merger Agreement, Investor intends that
for a period of two years immediately following the Effective Time, it shall,
or shall cause the Surviving Corporation to, continue to maintain employee
benefit and welfare plans, programs, contracts, agreements, policies and
executive incentives and perquisites, other than equity based plans, for the
benefit of active and retired employees of the Company which, in the
aggregate, provide benefits that are no less favorable to employees than the
benefits provided to such active and retired employees on the date of the
Merger Agreement.
No Solicitation. The Merger Agreement provides that the Company and its
officers and directors may not initiate or solicit any proposal or offer or
have discussions or participate in any negotiations or furnish to any other
person any information with regard to any exchange offer, merger,
consolidation, tender offer, share exchange or other business combination,
except that the Company may furnish information to and enter into discussions
and negotiations with any person in connection with an unsolicited proposal
if, after consultation with independent legal counsel, the Board of Directors
of the Company determines that such action is required for the Board to
comply with its fiduciary duties to stockholders imposed by Delaware law. The
Company is required to notify Investor promptly if any such proposal is made
and shall in any such notice to Investor, subject to the fiduciary
obligations of the Board under applicable law, indicate in reasonable detail
the identity of the person making such proposal.
Further Action. The Merger Agreement provides that Investor will use
reasonable best efforts to obtain on behalf of the Company up to $110 million
of bank term credit and $23 million pursuant to a revolving credit facility
to be available for drawing at closing (the "Debt Financing") prior to the
Special Meeting. Investor will provide the Investor Equity Contribution at
the time of the closing. In the event that any portion of the Debt Financing
becomes unavailable, Investor will use its reasonable best efforts to obtain
alternative financing from other sources on terms and conditions no less
favorable to the Company than the portion of the Debt Financing that has
become unavailable. In the event that the Merger is not consummated, Investor
shall pay all fees (including commitment fees), costs and expenses in
connection with arranging the Debt Financing. The Company will cooperate with
Investor with respect to obtaining the Debt Financing, including taking all
actions necessary to authorize the Debt Financing.
The Merger Agreement further provides that, subject to its terms and
conditions, each of the parties thereto shall use all reasonable efforts to
take action under any applicable laws to consummate the Merger, including
making prompt submissions under the HSR Act with respect to the Merger and
using all reasonable efforts to obtain all licenses, permits, consents,
approvals, authorizations, qualifications and orders of governmental
authorities and parties to contracts with the Company and its subsidiaries as
are necessary to the consummation of the Merger. Neither party, however,
shall be obligated to sell or otherwise dispose of or hold separate any
substantial business asset or product line in order to obtain any required
governmental approval.
The Merger Agreement also provides that the Company will cooperate with
any reasonable requests of Investor or the Commission related to the
recording of the Merger as a recapitalization for financial reporting
purposes, including, without limitation, to assist Investor and its
affiliates with any presentation to the Commission with regards to such
recording and to include appropriate disclosure with regard to such
recordings in all filings with the Commission and all mailings to
stockholders made in connection with the Merger. In the case that the Company
receives notice of any claim, complaint or litigation to which it is a party,
then the Company shall give Investor notice of such claim, and the Company
will
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cooperate with Investor in the defense of such claim, complaint or
litigation. No such matter may be settled by the Company without Investor's
prior written consent, which consent shall not be unreasonably withheld. If
at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of the Merger Agreement, the proper
officers and directors of each party to the Merger Agreement then in office
are required to use their reasonable best efforts to take all such action.
Amendments. The Merger Agreement provides that at any time prior to the
Effective Time the Merger Agreement may be amended by the parties to the
Merger Agreement by action taken by or on behalf of their respective Boards
of Directors; provided, however, that after the approval and adoption of the
Merger Agreement and the transactions contemplated thereby by the
stockholders of the Company, no amendment may be made which would reduce the
amount or change the type of consideration into which each Share shall be
converted upon consummation of the Merger.
Termination. The Merger Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time whether before or after
approval by the Company's stockholders: (a) by mutual written consent duly
authorized by the Boards of Directors of Investor and the Company; (b) by
either Investor or the Company if (i) the Effective Time shall not have
occurred by October 31, 1995; provided that this termination right will not
be available to any party whose failure to fulfill any obligations under the
Merger Agreement causes or results in the failure of the Effective Time to
occur by such date, and provided further that if any condition shall fail to
be satisfied by reason of the existence of an injunction or order, then
either party may request a 60 day extension or (ii) any court or other
governmental authority shall have issued an order or injunction prohibiting
any condition to the Merger Agreement and the parties shall not have
succeeded in having such order reversed or injunction vacated by December 30,
1995; (c) by either Investor or the Company, if a court or other governmental
body shall have issued an order, decree, or ruling or taken any other action
prohibiting the Merger, and such order, decree, ruling or other action shall
have become final and nonappealable; (d) by the Company, at any time prior to
the Effective Time, if (i) Investor shall have failed to comply in any
material respect with any of the covenants or agreements contained in the
Merger Agreement to be complied with or performed by Investor, which failure
to perform cannot be cured by October 31, 1995, or (ii) any representation or
warranty of Investor in the Merger Agreement shall not be true and correct in
any material respect, which failure cannot be cured prior to October 31,
1995, as if such representation or warranty was made as of such time on or
after the date of the Merger Agreement, unless such representation or
warranty speaks as of a specified date; (e) by Investor, at any time prior to
the Effective Time, if (i) the Company shall have failed to comply in any
material respect with any of the covenants or agreements contained in the
Merger Agreement to be complied with or performed by the Company, which
failure to perform cannot be cured by October 31, 1995, or (ii) any
representation or warranty of the Company in the Agreement shall not be true
and correct in any material respect, which failure to be true and correct
cannot be cured prior to October 31, 1995, as if such representation or
warranty was made as of such time on or after the date of the Merger
Agreement, unless such representation or warranty speaks as of a specified
date; (f) by Investor or the Company, if the Board of Directors of the
Company (i) shall have withdrawn or modified its approval or recommendation
of the Merger or (ii) shall have recommended another merger, consolidation,
business combination with, or acquisition of, the Company or its assets or
tender offer for Shares, or shall have resolved to do any of the foregoing;
or (g) by Investor, if another person (i) acquires Shares or shall have been
granted an option or right to acquire Shares representing more than 30% of
the then outstanding voting power of the Company or (ii) announces a proposal
to acquire a majority of the Shares of the Company and at the Special Meeting
(A) such proposal remains outstanding and (B) the Merger is not approved by
the affirmative vote of a majority of the stockholders of the Company.
In the event of the termination of the Merger Agreement, it shall become
void and there shall be no liability thereunder on the part of any party
thereto except under the provisions of the Merger Agreement related to
termination fees and expenses; provided that no party shall be relieved from
liability for a breach of the Merger Agreement.
Termination Fees and Expenses. The Merger Agreement provides that the
Company shall pay to FS&Co. a termination fee of $3.5 million in the event
that the Merger Agreement is terminated (a) by Investor or the Company
because the Board of Directors withdrew its recommendation of the Merger or
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recommended another business combination with the Company; (b) by Investor
because another person acquired Shares or was granted an option or right to
acquire Shares representing more than 30% of the then-outstanding voting
power of the Company; or (c) by Investor because another person announced a
proposal to acquire a majority of Shares of the Company, the stockholders did
not approve the Merger and such a transaction was consummated within 12
months of such termination of the Merger Agreement.
The Merger Agreement also provides that the Company shall reimburse FS&Co.
up to $1.5 million for all out-of-pocket fees and expenses incurred in
connection with the transactions contemplated in the Merger Agreement, if the
Agreement is terminated under the circumstances described in the preceding
paragraph or by Investor, by reason of (i) the failure of the Company to
comply in any material respects with any of the covenants and agreements in
the Merger Agreement which failure cannot be cured by October 31, 1995 or
(ii) the failure of certain representations and warranties of the Company in
the Merger Agreement to be true and correct in any material respect, which
failure cannot be cured by October 31, 1995.
Expenses. Upon consummation of the Merger, the Surviving Corporation shall
pay all expenses of the Company and Investor in connection with the
transactions contemplated by the Merger Agreement, and shall pay a $3 million
transaction fee to FS&Co. See "--The Voting Agreement--Expenses."
THE VOTING AGREEMENT
FSEP III and FSEP International, Lillian Vernon, David Hochberg and Fred
Hochberg have entered into an agreement dated as of June 13, 1995 to take
certain actions in support of the transactions contemplated by the Merger
Agreement (the "Voting Agreement"). Pursuant to the Voting Agreement, each of
Lillian Vernon, David Hochberg and Fred Hochberg agreed to vote all Shares
held by her or him (i) in favor of the Merger and (ii) against the following
actions (other than the Merger and the transactions contemplated by the
Merger Agreement): (a) a merger, consolidation or other business combination
involving the Company, (b) a sale, lease or transfer of a material amount of
assets of the Company or its subsidiaries, (c) a reorganization,
recapitalization, dissolution or liquidation of the Company or its
subsidiaries, (d) any material change in the present capitalization of the
Company or any amendment of the Company's Certificate of Incorporation, or
(e) any other action which could reasonably be expected, to impede, interfere
with, delay, postpone, discourage or materially adversely affect the Merger
or the transactions contemplated by the Merger Agreement. These voting
provisions terminate upon the earlier of (i) the Effective Time or (ii) 10
months from the date of the Voting Agreement, except for the provisions in
clauses (c) and (d), which terminate 6 months from the date of the Voting
Agreement. Lillian Vernon, David Hochberg and Fred Hochberg own, in
aggregate, approximately 40.7% of the outstanding Shares as of the date
hereof.
In the Voting Agreement, each of Lillian Vernon, David Hochberg and Fred
Hochberg grants to certain affiliates of FS&Co. her or his irrevocable proxy
and appoints an attorney-in-fact to vote her or his Shares in accordance with
the foregoing. The Voting Agreement also provides that none of Lillian
Vernon, David Hochberg or Fred Hochberg shall (i) transfer, exchange or
pledge, hypothecate or encumber in any way the Shares beneficially owned by
her or him; provided, however, that Fred Hochberg may transfer by gift up to
120,000 Shares, and such transferees shall not be subject to the terms of the
Voting Agreement, (ii) solicit or initiate negotiations with any other party
concerning (A) a tender offer, merger or sale of any or substantially all
assets involving the Issuer or (B) any sale of shares of capital stock or an
option or warrant to purchase shares of capital stock or any acquisition of
the Company.
Lillian Vernon and David Hochberg have each entered into noncompete
agreements, pursuant to which they shall not participate in the ownership or
control of any business engaged anywhere in the marketing of products
currently sold or intended to be sold by the Company, other than through
employment or ownership interests in the Company. However, Lillian Vernon or
David Hochberg may invest in securities of any company listed on a securities
exchange as long as such investment does not exceed 5% of the outstanding
shares or principal amount of such class of securities. This noncompete
covenant terminates five years after the consummation of the Merger. Fred
Hochberg has entered into a similar noncompete agreement except that he may
retain certain existing equity interests, and serve as a director of any
company that operates a catalog business if the catalog business does not
account for more than one-third of such company's revenues.
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Expenses. Upon consummation of the Merger, the Company will pay all
reasonable expenses of FSEP III, FSEP International, Lillian Vernon, David
Hochberg and Fred Hochberg incurred in connection with the Merger. See "THE
MERGER--The Merger Agreement--Expenses."
THE STOCKHOLDERS AGREEMENT
After the execution of the Merger Agreement, the Company, FSEP III and
FSEP International, Lillian Vernon and David Hochberg will enter into the
Stockholders Agreement, which relates to certain voting arrangements,
transfer restrictions, corporate governance, preemptive rights, and other
matters as follows.
Certain Preemptive Rights. FSEP III and FSEP International, and each of
Lillian Vernon and David Hochberg have the right to purchase her, his or its
pro rata portion (which is the percentage of outstanding Shares owned by such
party) of issuances of capital stock and certain other equity securities by
the Company at the same price to be paid by other purchasers in connection
with such issuance. This right terminates upon the consummation of an initial
public offering by the Company of voting securities or upon the sale by FSEP
III, FSEP International or Lillian Vernon or David Hochberg of 50% of her,
his or its Shares as of the date of the Stockholders Agreement.
Tag-Along Rights. The Stockholders Agreement permits each of Lillian
Vernon and David Hochberg to participate in sales of Shares of the Company by
FSEP III or FSEP International (the "Tag-Along Rights"). The maximum number
of Shares that may be sold by FSEP III, FSEP International, and Lillian
Vernon or David Hochberg and all other holders of Common Stock who may choose
to participate in such proposed sale is equal to the product of (A) the
aggregate number of Shares to be sold to the proposed transferee and (B) a
fraction with a numerator equal to the number of Shares owned by FSEP III,
FSEP International or Lillian Vernon or David Hochberg or each other
Tag-Along Rights holder who has elected to participate in such sale and a
denominator equal to the number of Shares held by FSEP III, FSEP
International, and Lillian Vernon or David Hochberg or other Tag-Along Rights
holders who elect to participate in such proposed sale. The Tag-Along Rights
of each of Lillian Vernon and David Hochberg, and the corresponding
obligations of FSEP III and FSEP International, terminate upon the sale by
each of Lillian Vernon and David Hochberg of 50% of its Shares as of the date
of the Stockholders Agreement.
Drag-Along Rights. If FSEP III and FSEP International sell all of their
Shares to a third party, FSEP III and FSEP International have the right to
require that each of Lillian Vernon and David Hochberg sell all of her or his
shares to the third party on the same terms (the "Drag-Along Rights"). The
Drag-Along Rights of FSEP III and FSEP International, and the corresponding
obligations of Lillian Vernon and David Hochberg, terminate upon the sale by
FSEP III and FSEP International of 50% of their Shares as of the date of the
Stockholders Agreement.
Right of First Offer. Pursuant to the terms of the Stockholders Agreement,
neither Lillian Vernon nor David Hochberg may sell to a third party Shares
held by such person unless FSEP III and FSEP International are first given
the right to acquire such Shares on the terms of the proposed sale to the
third party (the "Right of First Offer"). The Right of First Offer of FSEP
III and FSEP International, and the corresponding obligations of Lillian
Vernon and David Hochberg, terminate upon the sale by FSEP III and FSEP
International of 50% of their Shares as of the date of the Stockholders
Agreement.
Termination of Tag-Along Rights, Drag-Along Rights and Right of First
Offer. After the consummation of a public offering (a "Public Offering") of
securities by the Company which results in proceeds greater than $20 million,
Lillian Vernon has the option to terminate all of the parties' rights and
obligations under the foregoing Tag-Along Rights, Drag-Along Rights and Right
of First Offer, or to extend such rights for successive one year periods.
Registration Rights. After a Public Offering, the Stockholders Agreement
grants, subject to certain restrictions, FSEP III, FSEP International,
Lillian Vernon and David Hochberg (each, a "Holder") the right to demand, on
up to two occasions, the registration of their Shares (a "Demand
Registration") under the Securities Act of 1933, as amended, provided,
however, that the Company shall not be required to effect more than two
Demand Registrations within any 18-month period. The other Holder shall be
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entitled to include his or her Shares in any Demand Registration, unless the
Holder that requested the Demand Registration does not consent to the
inclusion of the Shares of such other Holder.
In addition, the Stockholders Agreement grants the Holders certain
"piggy-back" registration rights. If the Company proposes to file a
registration statement under the Securities Act with respect to an offering
of Shares by it for its own account or for the account of any of its equity
holders, then the Company shall offer the Holders the opportunity to register
such number of Shares as each Holder may request (a "Piggy-Back
Registration"). The Company shall include in each such registration statement
all Shares requested to be included in the registration statement for such
offering. However, if the managing underwriter or underwriters of a proposed
Demand Registration or Piggy-Back Registration advise the Company that in
their opinion the total amount of securities to be included in such offering
is sufficiently large to cause an adverse effect on such offering, then in
such event the Shares to be included in such offering shall be allocated
first to the Holder which initiated the request to a Demand Registration
(with respect to a Demand Registration) or to the Company (with respect to a
Piggy-Back Registration) and then, to the extent that any additional Shares
can, in the opinion of such managing underwriter or underwriters, be sold
without any such adverse effect, pro rata among the remaining Holders
requesting to have their Shares included therein.
The Company is required to pay the expenses in connection with the
registration of such Shares, other than underwriting fees, discounts or
commissions attributable to the sale of the Shares. The Stockholders
Agreement also contains standard indemnification and contribution provisions
with respect to the registration rights granted thereunder.
Board of Directors. FSEP III, FSEP International, Lillian Vernon and David
Hochberg have agreed to vote their Shares to cause the Company's Board of
Directors to consist of seven directors to be nominated as follows: (i)
Lillian Vernon shall nominate one director as long as she owns at least 10%
of the Shares; (ii) FSEP III and FSEP International shall nominate four
directors as long as they own at least 80% of the Shares they owned on the
date of the Stockholders Agreement; and (iii) FSEP III and FSEP
International, and Lillian Vernon shall agree on two additional directors, at
least one of whom shall be an outside director of the Company on the date of
the Stockholders Agreement. In the event that FSEP III and FSEP International
sell 20% of the Shares they owned as of the date of the Stockholders
Agreement, then FSEP III and FSEP International, and Lillian Vernon shall
nominate directors in proportion to their percentage ownership of the Shares.
The Stockholders Agreement provides that Lillian Vernon will be entitled to
approve her replacement as Chief Executive Officer of the Company.
Approval Rights. Without the affirmative vote of the members of the Board
designated by Lillian Vernon, the Company may not, subject to certain
exceptions, take certain action, including: (i) sell assets with a value in
excess of $50 million, (ii) purchase assets with a value in excess of $75
million, (iii) incur indebtedness in excess of $70 million in the aggregate,
(iv) enter into any transaction with a stockholder of the Company or any
affiliate on terms that are not arm's-length, (v) appoint or remove the
Company's independent accountant or (vi) engage in a public offering of
Shares within one year of the consummation of the merger (the "Approval
Rights"). These Approval Rights expire on the earlier of the second
anniversary of the Stockholders Agreement and the date on which Lillian
Vernon's board representation rights terminate.
Termination. Except as provided elsewhere in the Stockholders Agreement,
the Stockholders Agreement will terminate on the tenth anniversary thereof.
37
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion is a summary of certain United States federal
income tax consequences of the Merger. Tax consequences under state, local
and foreign laws are not addressed herein. The summary is based upon the
Internal Revenue Code of 1986, as amended, laws, regulations, rulings and
decisions in effect as of the date of this Proxy Statement. No assurance can
be given that future legislation, regulations or interpretations will not
significantly change such authorities. Any such change may or may not apply
retroactively. The discussion below does not purport to address federal tax
consequences relating to all categories of Company stockholders, some of
which may be subject to special rules.
Tax Consequences to Company Stockholders. The receipt of cash for Shares
or upon the cancellation of options 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. The retention of Shares in the
Merger will not be a taxable event. Generally, a stockholder who disposes of
all of her or his Shares in connection with the Merger and to whom no Shares
owned by any person after the Merger would be attributed under certain
constructive ownership rules will recognize gain or loss for such purposes
equal to the difference between the cash received for the Shares and such
stockholder's tax basis for the Shares such stockholder sells in the Merger.
For federal income tax purposes, such gain or loss will be capital gain or
loss if the Shares are a capital asset in the hands of the stockholder, and
long-term capital gain or loss if the stockholder's holding period is more
than one year as of the Effective Time. There are significant limitations on
the deductibility of capital losses.
In general, in order to prevent backup federal income tax withholding at a
rate of 31% on the Merger Consideration to be received, each Company
stockholder who is not otherwise exempt from such requirements must provide
such holder's correct taxpayer identification number (and certain other
information) by completing a Substitute Form W-9, which will be provided to
each stockholder.
Tax Consequences to the Company. No gain or loss will be recognized, for
federal income tax purposes, by the Company pursuant to the Merger.
THE SUMMARY OF TAX CONSEQUENCES SET FORTH ABOVE IS FOR GENERAL INFORMATION
ONLY. THE TAX TREATMENT OF EACH STOCKHOLDER WILL DEPEND IN PART UPON HER OR
HIS PARTICULAR SITUATION. THIS SUMMARY DOES NOT ADDRESS THE TAX CONSEQUENCES
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 THROUGH THE EXERCISE
OF AN EMPLOYEE STOCK OPTION OR OTHERWISE AS COMPENSATION, PERSONS WHO
RECEIVED PAYMENTS IN RESPECT OF OPTIONS TO ACQUIRE SHARES AND PERSONS WHO
CONTINUE TO OWN ANY SHARES (INCLUDING OPTIONS TO ACQUIRE ANY SHARES)
(DIRECTLY OR BY ATTRIBUTION) AFTER THE MERGER. 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.
38
<PAGE>
FINANCING OF THE MERGER
GENERAL
Approximately $189,000,000 (the "Transaction Costs") is required to pay
(i) the Merger Consideration payable to stockholders (approximately
$165,100,000 in the aggregate, assuming all stockholders are paid the Merger
Consideration except for the shares retained by Lillian Vernon and David
Hochberg), (ii) the holders of all outstanding options to purchase Common
Stock an amount for each option equal to the difference between the Merger
Consideration and the exercise price of such option multiplied by the number
of shares subject to such option (approximately $6,100,000 in the aggregate),
(iii) repayment of debt of $4,500,000, (iv) the expenses of the Company,
Equity Partners, Investor, Lillian Vernon, David Hochberg and Fred Hochberg
(estimated at approximately $10,300,000 in the aggregate) and (v) a
transaction fee of $3 million payable to FS&Co. by the Company. It is
currently expected that Investor and the Company will obtain the amounts
necessary to fund the aggregate amount of the Merger Consideration from not
less than $55 million contributed by Equity Partners and management to
purchase Surviving Corporation Common Stock, with the balance of the
Transaction Costs to be paid from the Company's available funds and from the
Credit Facilities described below.
The following table sets forth the approximate sources and uses of funds
in connection with the Merger.
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
- ------------------------------------------------ --------------
<S> <C>
SOURCES OF FUNDS
Senior Secured Term Loans
Tranche A ..................................... $ 25,000
Tranche B ..................................... 45,000
Tranche C ..................................... 40,000
Capital contributions of Investor and management 55,000
Cash on hand and Initial Revolver Drawdown ..... 24,000
--------------
TOTAL SOURCES OF FUNDS ........................ $189,000
==============
USES OF FUNDS
Payment for shares of the Company ............... $165,100
Prepayment of 10% Senior Notes Due 1998 and
10.09% Senior Notes Due 1998 ................... 4,500
Payment of estimated transaction costs ......... 13,300
--------------
Option cashout payments ......................... 6,100
--------------
TOTAL USES OF FUNDS ........................... $189,000
==============
</TABLE>
BANK FINANCING
Pursuant to a commitment letter dated as of June 13, 1995 between Merrill
Lynch and Investor (the "Commitment Letter"), and subject to certain
conditions, Merrill Lynch committed to lend the Company an aggregate amount
up to $190 million (the "Credit Facilities"). Merrill Lynch will act as sole
and exclusive arranger and documentation agent (the "Agent") for a syndicate
of financial institutions (the "Lenders"). The Commitment Letter is filed as
an exhibit to the Schedule 13E-3 and is available for inspection and copying
by any holder of Shares or representative of such person who has been so
designated in writing, at the principal executive offices of the Company. The
following constitutes only a summary of the principal terms and conditions of
the Commitment Letter and is qualified in its entirety by reference to the
actual terms of the Commitment Letter. The definitive credit agreement (the
"Credit Agreement") has not yet been fully negotiated and may contain more or
less restrictive provisions than are contained in the Commitment Letter.
Pursuant to the Commitment Letter Merrill Lynch has committed to provide
up to $190 million principal amount of senior secured Credit Facilities in
the form of (a) four Senior Secured Term Loan
39
<PAGE>
Facilities to be provided to the Company in an aggregate principal amount of
$140 million (the "Term Loan Facilities"), such aggregate principal amount to
be allocated between (i) the Tranche A Term Loan Facility in an aggregate
principal amount of $25 million, (ii) the Tranche B Term Loan Facility in an
aggregate principal amount of $45 million, (iii) the Tranche C Term Loan
Facility in an aggregate principal amount of $40 million, and (iv) a Deferred
Draw Term Loan Facility in an aggregate principal amount of $30 million, to
be drawn at a time or times subsequent to the consummation of the
Transaction, and (b) a Revolving Facility to be provided to the Company in an
aggregate principal amount of $50 million, a portion of which, not to exceed
$23 million, may be drawn at the time of the consummation of the Merger.
Merrill Lynch intends to syndicate the Credit Facilities to a group of
financial institutions, but to the extent the syndication is not complete by
the Effective Time, Merrill Lynch will provide the balance.
The Tranche A Term Loan Facility will mature five and one-half years
following the date of execution of the Credit Agreement (the "Credit Closing
Date"). The Tranche B Term Loan Facility will mature seven and one-half years
following the Credit Closing Date. The Tranche C Term Loan Facility will
mature eight and one-half years following the Credit Closing Date. The
Deferred Draw Term Loan Facility will mature six and one-half years following
the Credit Closing Date. The Company will be required to make scheduled
amortization payments in connection with the Term Loan Facilities.
All amounts outstanding under the Credit Facilities shall bear interest at
a customary base rate plus a margin that ranges initially from 1.75% to 2.75%
or LIBOR rate plus a margin that ranges initially from 2.75% to 3.75%.
The Commitment Letter provides for certain customary affirmative and
negative covenants and events of default, including, but not limited to,
covenants regarding the Company's leverage, net worth and interest coverage,
as well as limitations on other indebtedness and contingent obligations,
liens, capital expenditures, operating leases and sale/leasebacks,
investments and joint ventures, restricted junior payments (dividends,
redemptions and payments on subordinated debt) and fundamental changes,
mergers, acquisitions (and asset sales). In addition, each direct and
indirect subsidiary (existing or hereafter acquired), including Lillian
Vernon International, Ltd. and Lillian Vernon Fulfillment Services, Inc.
shall unconditionally guarantee all obligations of the Company under the
Credit Facilities. The Credit Facilities and the subsidiary guarantees will
be secured by a perfected first priority lien on, and pledge of,
substantially all the assets (subject to exceptions to be agreed upon) of the
Company and its subsidiaries as applicable.
Initial funding of the Credit Facilities is subject to certain conditions
precedent including that the definitive documentation evidencing the Credit
Facilities be in form and substance satisfactory to Merrill Lynch and that
there shall have occurred no material adverse change in the businesses,
operations, properties, assets, condition (financial or otherwise) or
prospects of the Company and its subsidiaries, taken as a whole, since the
date of the Company's last audited financial statements. The Commitment
Letter is also subject to Merrill Lynch's continuing due diligence and if
information is disclosed that Merrill Lynch believes may have a material
adverse effect on the condition (financial or otherwise), assets, properties,
business or prospects of the Company and its subsidiaries, Merrill Lynch may,
in its sole discretion, suggest alternative financing amounts or structure or
decline to participate in the proposed financing. In connection with the
Credit Facilities and joint ventures, the Company shall pay to Merrill Lynch
a financing fee equal to 2.75% of the aggregate principal amount of the
Credit Facilities. In addition, the Credit Facilities provide that the
Company shall pay (i) a commitment fee equal to .50% per annum of the unused
portion of the Credit Facilities and (ii) an annual administrative fee. The
consummation of the Merger is subject to the obtaining of the Credit
Facilities.
40
<PAGE>
ESTIMATED COSTS AND FEES
Estimated costs and fees in connection with the Merger and the related
transactions, which will be paid by the Company, are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
------------
<S> <C>
Financial Advisory Fees ........... $ 1,500
Bank Financing and Commitment Fees $ 5,400
Legal Fees ........................ $ 1,750
Accounting Fees ................... $ 300
Printing and Mailing Fees ......... $ 75
SEC Filing Fees ................... $ 35
FS&Co. Transaction Fee ............ $ 3,000
Miscellaneous ..................... $ 1,240
------------
Total ............................ $13,300
============
</TABLE>
See "THE MERGER--The Merger Agreement--Termination Fees and Expenses" and
"THE MERGER--The Voting Agreement--Expenses" for a description of certain
provisions for the reimbursement by the Company of certain fees and expenses,
incurred by Investor, Equity Partners, Lillian Vernon, David Hochberg, and
Fred Hochberg. See "SPECIAL FACTORS--Opinion of Financial Advisor" for a
description of the fees payable to the Financial Advisor. See "--Bank
Financing" for a description of the fees payable to Merrill Lynch.
CERTAIN PROJECTIONS
The Company does not, as a matter of course, make public forecasts as to
future financial results. However, management of the Company, in connection
with the possible sale of the Company, prepared and provided to Investor and
Goldman Sachs certain projections for fiscal years 1996 through 2000 (the
"Projections"). The projections do not reflect the debt to be incurred by the
Company in connection with the Merger. See "FINANCING OF THE MERGER."
NONE OF THESE PROJECTIONS WERE PREPARED WITH A VIEW TO PUBLIC DISCLOSURE
OR COMPLIANCE WITH PUBLISHED GUIDELINES OF THE COMMISSION OR THE GUIDELINES
ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
REGARDING PROJECTIONS. THE COMPANY'S AUDITORS HAVE NOT PERFORMED ANY
PROCEDURES WITH RESPECT TO THE PROJECTIONS AND ASSUME NO RESPONSIBILITY FOR
THEM. NONE OF THE COMPANY, THE BOARD OF DIRECTORS NOR ANY OF THEIR ADVISORS,
AGENTS OR REPRESENTATIVES ASSUMES ANY RESPONSIBILITY FOR THE ACCURACY OF ANY
OF THESE PROJECTIONS AND EACH BELIEVES THAT, BECAUSE PROJECTIONS OF THIS TYPE
ARE BASED ON A NUMBER OF ESTIMATES AND ASSUMPTIONS AND ARE INHERENTLY SUBJECT
TO SIGNIFICANT UNCERTAINTIES AND CONTINGENCIES, ALL OF WHICH ARE DIFFICULT TO
PREDICT AND MOST OF WHICH WILL BE BEYOND THE CONTROL OF THE COMPANY, THERE
CAN BE NO ASSURANCE THAT ANY OF THESE PROJECTIONS WILL BE REALIZED.
SUMMARY OF ASSUMPTIONS USED FOR MANAGEMENT PROJECTIONS
The Projections are based on revenue and operating assumptions that
include: (i) a projected compound annual growth rate for mail order revenues
of 14.2% versus a historical 3-year average of 9.7% and (ii) an increase in
the operating margin from 9% in fiscal year 1995 to 11.2% in fiscal year 2000
versus a 3-year historical average of 9.5%. The revenue growth projections
include growth in circulation and average order size for the Company's
existing catalog titles, as well as the addition of spin-off catalogs in the
future. The increase in operating margin is primarily due to projected
general and administrative expenses declining as a percentage of revenue. The
1996 projections reflect the Company's detailed operating plan. The remaining
years were developed by the Company in connection with the sale of the
Company. Revenue and margins for fiscal year 1997 to fiscal year 2000 were
determined by senior management, including the executives responsible for
individual catalogs. The projections were prepared using the Company's
internal financial statement format, which classifies certain revenue and
expense items (in particular, the revenues and expenses of the List Rental,
Special Markets and Retail divisions) differently from the format used in SEC
filings.
41
<PAGE>
PROJECTED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY
------------------------------------------------
1996E 1997E 1998E 1999E 2000E
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net Mail Order Revenues $233.7 $268.4 $311.4 $355.7 $399.9
Cost of Sales ........ 85.3 98.6 115.6 131.9 150.6
-------- -------- -------- -------- --------
Gross Profit ........... 148.4 169.8 195.8 223.8 249.3
Total Expenses (a) .... 127.5 144.0 165.1 186.6 204.7
-------- -------- -------- -------- --------
Total Operating Income 20.9 25.8 30.7 37.2 44.6
Pretax Income .......... 22.0 27.1 31.3 37.9 45.9
Income Tax Expense .. 7.2 9.5 11.0 13.3 16.1
-------- -------- -------- -------- --------
Net Income ............. $ 14.7 $ 17.6 $ 20.4 $ 24.6 $ 29.9
======== ======== ======== ======== ========
Shares Outstanding .... 10.0 10.0 10.1 10.2 10.2
Earnings per Share .... $ 1.47 $ 1.76 $ 2.01 $ 2.42 $ 2.93
======== ======== ======== ======== ========
</TABLE>
- ------------
(a) Expenses are net of the income of the List Rental, Special Markets and
Retail divisions.
PROJECTED CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY
----------------------------------------------
1996E 1997E 1998E 1999E 2000E
------- -------- -------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net Cash Provided by Operating Activities $19.3 $ 9.5 $ 17.7 $24.0 $26.3
Net Cash Used in Investing Activities ... (5.0) (20.0) (14.0) (4.0) (4.0)
Net Cash from Financing Activities ...... (2.8) (3.2) (3.7) (4.3) (3.6)
------- -------- -------- -------- -------
Net Increase (Decrease) in Cash &
Equivalents ............................. 11.5 (13.7) (--) 15.7 18.7
------- -------- -------- -------- -------
Cash & Cash Equivalents at Beginning of
Period .................................. 38.8 50.3 36.6 36.5 52.2
------- -------- -------- -------- -------
Cash & Cash Equivalents at End of Period
$50.3 $ 36.6 $ 36.6 $ 52.2 $ 70.9
======= ======== ======== ======== =======
</TABLE>
- ------------
The cash flow projections include capital expenditures totaling $34
million for expansion of the Company's National Distribution Center.
42
<PAGE>
BUSINESS OF THE COMPANY
The Company is a direct mail specialty catalog company concentrating on
the marketing of gift, household, gardening, decorative, Christmas and
children's products. The Company, a predecessor of which was founded in 1951,
seeks to provide customers with reasonably priced products that can be
differentiated from competitive products either by design, price or
personalization. In fiscal 1995, the Company published 26 catalog editions,
and mailed over 179,000,000 catalogs to past and prospective customers.
The Company has developed a proprietary customer data base containing
information about its customers, including such data as order frequency, size
and date of last order, and type of items purchased. These and other factors
are analyzed by computer to rank and segment customers to determine those
most likely to purchase products offered in the Company's catalogs. The data
base contains information with respect to approximately 17,600,000 people,
approximately 3,400,000 of whom have placed orders with the Company during
the last fiscal year. The Company derives a small portion of its revenue from
the rental of its customer list to direct mail marketers and other
organizations. The Company also has a Special Markets division, which makes
sales of premium and incentive products, and sells to the wholesale market.
The Company also operates a chain of outlet stores which offer Lillian Vernon
merchandise. Further information regarding the Company is set forth in the
10-K, which is incorporated herein by reference. The Company's principal
executive offices are located at 543 Main Street, New Rochelle, New York
10801; telephone (914) 576-6400.
MARKET PRICES AND DIVIDENDS ON THE COMPANY'S CAPITAL STOCK
The Company's Shares are traded on the AMEX (symbol: LVC). The following
table sets forth the high and low sales prices for each quarterly period for
the two most recent fiscal years. The stock prices are rounded to the nearest
1/8 point.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ----------------- ------ -----
<S> <C> <C>
May 29, 1993 ..... 14 11 1/2
August 28, 1993 . 14 1/4 11 7/8
November 27, 1993 18 1/2 13 7/8
February 26, 1994 18 7/8 16 1/8
May 28, 1994 ..... 22 5/8 17
August 27, 1994 . 20 1/4 17 1/4
November 26, 1994 20 1/4 15 5/8
February 25, 1995 18 1/8 14 1/2
May 27, 1995 ..... 22 1/4 17 1/4
</TABLE>
On March 9, 1995, the last full trading day prior to the issuance of a
press release by the Company that the Company was considering a number of
strategic alternatives including a possible sale, the closing price per Share
as reported on the AMEX was $18 1/8 . On June 13, 1995, the last full trading
day prior to the announcement of the execution of the Merger Agreement, the
closing price per Share as reported on the AMEX was $20 1/8 . On [ ],
1995, the last full trading day prior to the mailing of this Proxy Statement,
the closing price per Share as reported on the AMEX was $[ ].
The Company has paid quarterly cash dividends on its common stock since an
initial quarterly dividend of five cents ($.05) per share was paid in May of
1992 and each June 1, September 1, December 1 and March 1 thereafter until
September 1, 1994. Since September 1, 1994, a quarterly dividend of seven
cents ($.07) per share has been paid to stockholders each December 1, March
1, June 1 and September 1. The Board of Directors intends to continue to
declare and pay a quarterly cash dividend until the Effective Time. The
Credit Facilities will prohibit the Company from declaring cash dividends
after the consummation of the Merger.
43
<PAGE>
RIGHTS OF DISSENTING STOCKHOLDERS
If the Merger is consummated, holders of Shares are entitled to appraisal
rights under Section 262 of the DGCL, provided that they comply with the
conditions established by Section 262.
SECTION 262 IS REPRINTED IN ITS ENTIRETY AS ANNEX B TO THIS PROXY
STATEMENT. THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW
RELATING TO APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
ANNEX B. THIS DISCUSSION AND ANNEX B 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 who makes the demand described below with
respect to such Shares, who continuously is the record holder of such Shares
through the Effective Time, who otherwise complies with the statutory
requirements of Section 262 and who neither votes in favor of the Merger
Agreement nor consents thereto in writing will be entitled to an appraisal by
the Delaware Court of Chancery (the "Delaware Court") of the fair value of
his or her Shares. Except as set forth herein, stockholders of the Company
will not be entitled to appraisal rights in connection with the Merger.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the Special Meeting, not less than 20 days
prior to the meeting, a constituent corporation must notify each of the
holders of its stock for which appraisal rights are available that such
appraisal rights are available and include in each such notice a copy of
Section 262. This Proxy Statement shall constitute such notice to the record
holders of the Shares.
Holders of Shares who desire to exercise their appraisal rights must not
vote in favor of the Merger Agreement and must deliver a separate written
demand for appraisal to the Company prior to the vote by the stockholders of
the Company on the Merger Agreement. A stockholder who signs and returns a
proxy without expressly directing by checking the applicable boxes on the
reverse side of the proxy card enclosed herewith that his or her Shares be
voted against the proposal or that an abstention be registered with respect
to his or her Shares in connection with the proposal will effectively have
thereby waived his or her appraisal rights as to those Shares because, in the
absence of express contrary instructions, such Shares will be voted in favor
of the proposal. Accordingly, a stockholder who desires to perfect appraisal
rights with respect to any of his or her Shares must, as one of the
procedural steps involved in such perfection, either (i) refrain from
executing and returning the enclosed proxy card and from voting in person in
favor of the proposal to approve the Merger Agreement or (ii) check either
the "Against" or the "Abstain" box next to the proposal on such card or
affirmatively vote in person against the proposal or register in person an
abstention with respect thereto. 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 record
stockholder intends thereby to demand appraisal of the Shares. A person
having a beneficial interest in Shares that are held of record in the name of
another person, such as a broker, fiduciary 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 whatever appraisal rights are
available. If the Shares are owned of record by a person other than the
beneficial owner, including a broker, fiduciary (such as a trustee, guardian
or custodian) or other nominee, such demand must be executed by or for the
record owner. If the Shares 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.
A record owner, such as a broker, fiduciary or other nominee, who holds
Shares 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 outstanding in the name of such record owner.
A stockholder who elects to exercise appraisal rights should mail or
deliver his or her written demand to: Lillian Vernon Corporation, 543 Main
Street, New Rochelle, New York 10801, Attention: Susan N. Cortazzo,
Secretary.
44
<PAGE>
The written demand for appraisal should specify the stockholder's name and
mailing address, the number of Shares owned, and that the stockholder is
thereby demanding appraisal of his or her Shares. A proxy or vote against the
Merger Agreement will not by itself constitute such a demand. Within ten days
after the Effective Time, the Surviving Corporation must provide notice of
the Effective Time to all stockholders who have complied with Section 262.
Within 120 days after the Effective Time, either the Surviving Corporation
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
Surviving Corporation 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 Investor to file an
appraisal petition and stockholders seeking to exercise appraisal rights
should not assume that the Surviving Corporation will file such a petition or
that the Surviving Corporation will initiate any petitions with respect to
the fair value of such Shares. Accordingly, stockholders 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
Surviving Corporation a statement setting forth the aggregate number of
Shares not voting in favor of the Merger Agreement 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 Surviving Corporation.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which stockholders are entitled
to appraisal rights. The Delaware Court may require the stockholders who have
demanded an appraisal for their Shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Delaware
Court may dismiss the proceedings as to such stockholder. Where proceedings
are not dismissed, the Delaware Court will appraise the Shares 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. In determining fair value, the
Delaware Court is to take into account all relevant factors. In Weinberger v.
UOP Inc., the Delaware Supreme Court discussed the factors that could be
considered in determining fair value in an appraisal proceeding, stating 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, and that "fair price obviously requires consideration
of all relevant factors involving the value of a company." The Delaware
Supreme Court stated that in making this determination of fair value, the
court must consider market value, asset value, dividends, earnings prospects,
the nature of the enterprise and any other facts which could be ascertained
as of the date of the merger which throw light on future prospects of the
merged corporation. In Weinberger, the Delaware Supreme Court stated 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." Section 262, however, provides
that fair value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger."
Holders of Shares 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 consideration they are entitled to receive
pursuant to the Merger Agreement 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 attorney's
fees and the fees and expenses of experts, be charged pro rata against the
value of all Shares entitled to appraisal.
45
<PAGE>
Any holder of Shares who has duly demanded appraisal in compliance with
Section 262 will not, after the Effective Time, 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 terms
offered in the Merger; after this period, the stockholder may withdraw such
demand for appraisal only with the consent of the Surviving Corporation. 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 will be entitled to receive the consideration offered
pursuant to the Merger Agreement. Inasmuch as the Surviving Corporation has
no obligation to file such a petition, and Investor has no present intention
to do so, any holder of Shares 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 Surviving Corporation
a written withdrawal of his or her demand for appraisal and acceptance of the
Merger, except (i) that any such attempt to withdraw made more than 60 days
after the Effective Time will require written approval of the Surviving
Corporation and (ii) that 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.
46
<PAGE>
SELECTED HISTORICAL AND
FINANCIAL DATA OF THE COMPANY
The following table presents selected consolidated financial data of the
Company as of and for the fiscal years ended February 25, 1995, February 26,
1994, February 27, 1993, February 29, 1992 and February 23, 1991 and for the
fiscal quarters ended May 27, 1995 and May 28, 1994. This financial data,
excluding the quarterly data, was derived from the audited historical
consolidated financial statements of the Company. The financial data set
forth below should be read in conjunction with the financial statements of
the Company and "Management's Discussion and Analysis of Results of
Operations and Financial Conditions" incorporated herein by reference from
the 10-K.
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
----------------------------------------------------------- ------------------------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY MAY 27, MAY 28,
25, 1995 26, 1994 27, 1993 29, 1992(1) 23, 1991 1995 1994
---------- ---------- ---------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues ............................... $222,211 $196,331 $172,932 $162,397 $160,293 $ 29,614 $ 26,002
Income (loss) before income taxes ..... 19,134 19,495 16,323 14,319 13,898 (4,218) (1,522)
Net income (loss) ...................... 13,620 12,772 10,773 9,493 9,270 (2,826) (989)
PER SHARE (2)
Net income ............................. $ 1.38 $ 1.35 $ 1.15 $ 1.02 1.00 $ (.29) $ (.10)
Book Value ............................. $ 11.44 $ 10.22 $ 9.07 $ 8.10 $ 7.08 $ 11.09 $ 10.07
Dividends .............................. $ .26 $ .20 $ .20 --- -- $ .07 $ .07
FINANCIAL POSITION AT YEAR END
Cash and cash equivalents .............. $ 38,779 $ 52,880 $ 51,063 $ 43,540 $ 35,710 $ 39,101 $ 39,735
Working capital (3) .................... 79,068 72,665 59,698 56,475 44,400 74,806 67,982
Total assets ........................... 137,768 130,937 115,040 104,561 101,769 132,160 119,636
Long-term obligations (4) .............. 5,755 7,150 8,525 12,505 14,035 5,086 6,486
Stockholders' equity ................... 110,187 97,255 85,104 75,507 65,792 107,647 95,941
STATISTICS
Return on revenues ..................... 6.1% 6.5% 6.2% 5.8% 5.8% (9.5%) (3.8%)
Return on average equity ............... 13.1% 14.0% 13.4% 13.4% 15.2% (2.6%) (1.0%)
Long-term obligations to equity (4) ... 5.2% 7.4% 10.0% 16.6% 21.3% 4.7% 6.8%
Ratio of earnings to fixed charges (5) 27.1:1 23.3:1 14.6:1 10.9:1 8.0:1 -- --
AVERAGE SHARES OUTSTANDING (000'S) (2) 9,892 9,448 9,355 9,310 9,289 9,686 9,520
</TABLE>
- ------------
(1) This fiscal year was comprised of 53 weeks.
(2) Reflects a 3 for 2 stock split effective July 30, 1990.
(3) Certain reclassifications have been made to conform to the current
year's presentation.
(4) Includes current installments and long-term portions of debt.
(5) Represents the ratio of pretax income before interest expense to
interest expense for the fiscal periods presented.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the results of
operations as a percentage of revenues. The table reflects certain
reclassifications made to conform to the current year's presentation.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED QUARTER ENDED
---------------------------------- --------------------
FEBRUARY FEBRUARY FEBRUARY MAY 27, MAY 28,
25, 1995 26, 1994 27, 1993 1995 1994
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues ...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Product and delivery costs .................. (43.8) (42.8) (41.2) (51.4%) (46.3%)
Selling, general and administrative expenses (47.8) (47.3) (49.5) (64.1%) (60.4%)
---------- ---------- ---------- --------- ---------
Operating income (loss) ..................... 8.4 9.9 9.3 (15.5%) (6.7%)
Interest income ............................... .5 .5 .8 1.8% 1.5%
Interest expense .............................. (.3) (.5) (.7) (.5%) (.7%)
---------- ---------- ---------- --------- ---------
Income (loss) before income taxes ........... 8.6 9.9 9.4 (14.2%) (5.9%)
(Provision for) benefit from income taxes .... (2.5) (3.4) (3.2) 4.7% 2.1%
---------- ---------- ---------- --------- ---------
Net income (loss) ............................. 6.1% 6.5% 6.2% (9.5%) (3.8%)
---------- ---------- ---------- --------- ---------
</TABLE>
QUARTERS ENDED MAY 27, 1995 AND MAY 28, 1994
Revenues for the quarter ended May 27, 1995 of $29.6 million increased by
$3.6 million, or 13.9%, as compared to the same period last year. The
increase in revenues was primarily attributable to an increase of
approximately 5% in the volume of orders shipped and approximately 8% in the
average revenue per order. Catalog circulation was approximately 7% higher
than in the prior year due to the introduction of the Lillian Vernon's
Kitchen catalog.
Product and delivery costs increased by $3.2 million, or 26.6%, in the
quarter ended May 27, 1995, as compared to the same period last year. As a
percentage of revenues, these costs increased from 46.3% to 51.4% in the
current quarter. The increase in costs was partially attributable to higher
sales volume. In addition, both the gross margin amount and percentage were
negatively impacted by the expansion of the Company's free gift-with-purchase
promotion, and a higher level of markdowns in the current quarter.
Selling, general and administrative expenses ("SG&A"), the largest
component of which is the cost of producing, printing and distributing the
Company's catalogs, increased $3.3 million, or 20.8% in the current quarter,
and as a percentage of revenues, rose from 60.4% to 64.1%. A portion of the
increase was due to 7% higher circulation. In addition, significant increases
in the cost of paper due to tight supply, and higher postage costs resulting
from a U.S. Postal rate increase in January 1995, raised the cost of
producing and mailing the Company's catalog an average of 18% this quarter,
compared to the first quarter of fiscal 1995. While the Company's marketing
and merchandising strategies were responsible for raising average revenue per
catalog by 7%, catalog costs rose at a faster rate, causing SG&A as a
percentage of revenues to increase.
Interest income for the quarter ended May 27, 1995 of $.5 million
increased by $.1 million as compared to the first quarter of the prior year,
principally due to higher interest rates and a higher average investment
balance. Interest expense for the quarter ended May 27, 1995 of $.2 million
was comparable with that of the same period last year.
The effective income tax rate was 33% in the current quarter, as compared
to 35% in the first quarter of fiscal 1995.
FINANCIAL CONDITION
The Company's current ratio at May 27, 1995 was 5.42 to 1, as compared to
5.07 to 1 at February 25, 1995 and 5.58 to 1 at May 28, 1994. The Company's
working capital needs have been met with funds generated from operations.
48
<PAGE>
During the quarter ended May 27, 1995, the Company used less funds for net
working capital needs than in the same quarter last year. Higher receivables
from the deferred billing program were collected in the current quarter as
compared with the first quarter last year. The Company also spent less on
future catalog editions than last year, when it made earlier commitments for
certain catalog production costs. The net change in inventory levels in the
quarter also declined as compared to last year. During the quarter, the
Company spent $591,000 on capital expenditures, including an amount related
to planning and designing the expansion of its National Distribution Center.
In addition, the Company received $666,000 for the issuance of stock,
principally from the exercise of stock options which were expiring. The
Company also paid a $.07 per share cash dividend totalling $679,000.
On June 13, 1995, the Company entered into a definitive merger agreement
with VB Investment Corporation, a corporation controlled by an affiliate of
Freeman Spogli & Co. Incorporated. (See Note 3 to the Unaudited Financial
Statements). As a result of the merger, the Company's leverage and debt
service requirements will increase significantly. Upon consummation of the
merger, the Company's common stock will no longer be publicly held.
FISCAL 1995 AND FISCAL 1994
Revenues for fiscal 1995 were $222.2 million, an increase of $25.9
million, or 13.2%, over fiscal 1994. The increase in revenues was primarily
attributable to an increase of approximately 8% in the volume of orders
shipped and approximately 4% in the average revenue per order. Catalog
circulation was approximately 18% higher than in fiscal 1994.
Product and delivery costs of $97.4 million increased $13.5 million, or
16%, in fiscal 1995 as compared to fiscal 1994. The increase was primarily
attributable to the higher volume of orders, as well as higher telephone
charges and labor costs from implementing a toll-free 800 telephone number.
As a percentage of revenues, these costs increased from 42.8% in fiscal 1994
to 43.8% in fiscal 1995, principally due to the 800-number costs. Gross
profit on products sold declined slightly because a greater amount of
overstocked and discontinued merchandise was sold at discounted prices
through the Company's outlet stores and through promotions to customers.
Selling, general and administrative ("SG&A") expenses were $106.1 million
in fiscal 1995, compared to $93.0 million in fiscal 1994, an increase of
$13.2 million, or 14.2%. The largest component of these expenses are the
costs of producing, printing and distributing the Company's catalogs. The
rise in SG&A costs in fiscal 1995 principally reflected an 18% increase in
catalog circulation. As a percentage of revenues, SG&A expenses increased
from 47.3% in fiscal 1994 to 47.8% in fiscal 1995, driven by a rise in the
ratio of catalog costs to revenues. This was partially offset by the
relatively fixed nature of SG&A costs compared to the higher revenue level.
While the Company's cost of producing and mailing one of its catalogs
remained relatively constant year-to year, catalog costs rose as a percentage
of revenues in fiscal 1995 because of lower average revenue per catalog
mailed. The Company increased its catalog circulation to prospect for new
customers and to contact inactive customers, especially in view of a January
1995 postal rate increase. These mailings included less active segments of
its customer data base, whose lower response reduced the overall revenue per
catalog.
The costs of producing, printing and mailing its catalogs, as well as
packaging and shipping merchandise to its customers, are major costs of doing
business for the Company. These costs are expected to rise substantially in
fiscal 1996, principally driven by high paper prices due to very tight
supply, and because of the increase in postal rates effective January 1995.
Through careful management of its circulation strategy, catalog production
alternatives, and merchandise mix, the Company will attempt to reduce the
impact of these cost increases wherever possible, and to maximize the revenue
produced by its catalog expenditures. Nevertheless, the Company believes that
its ratio of selling costs to revenues will rise in fiscal 1996 as compared
to 1995, having a negative impact on operating profit.
Interest income in fiscal 1995 was $1.2 million, as compared to $.9
million in fiscal 1994. The increase of $.3 million was principally caused by
higher interest rates. Interest expense declined by $.l million in fiscal
1995 as compared to fiscal 1994 because of scheduled debt repayments.
49
<PAGE>
The Company's effective income tax rate in fiscal 1995 was 28.8% as
compared to 34.5% in fiscal 1994, principally due to the favorable settlement
of an outstanding tax matter, and the related reversal of tax reserves not
ultimately needed. See Note 2 to Financial Statements.
FISCAL 1994 AND FISCAL 1993
Revenues for fiscal 1994 were $196.3 million, an increase of $23.4
million, or 13.5%, over fiscal 1993. The increase in revenues was primarily
attributable to an increase of approximately 5% in the volume of orders
shipped and approximately 7% in the average revenue per order. Catalog
circulation was approximately 6% higher than in fiscal 1993.
Product and delivery costs of $83.9 million increased $12.7 million, or
17.9%, in fiscal 1994 as compared to fiscal 1993. As a percentage of
revenues, these costs increased from 41.2% in fiscal 1993 to 42.8% in fiscal
1994. The increase in fiscal 1994 product and delivery costs was primarily
attributable to the higher revenues. The increase, as a percentage of
revenues, was principally the result of lower gross profit on merchandise
sold. Gross profit declined due to a variety of factors, including price
reductions because of promotions, inventory liquidation, and competition, as
well as higher costs due to sourcing a greater percentage of products
domestically. Fulfillment and delivery costs in fiscal 1994 were comparable
to fiscal 1993 as a percentage of revenues.
Selling, general and administrative expenses were $93.0 million in fiscal
1994, compared to $85.7 million in fiscal 1993, an increase of $7.3 million,
or 8.5%. The rise in SG&A costs in fiscal 1994 principally reflected a 6%
increase in catalog circulation, as well as higher employee compensation and
benefits, marketing promotions and the costs of operating certain outlet
stores for a full year as compared to a partial year in fiscal 1993. As a
percentage of revenues, SG&A expenses decreased from 49.5% in fiscal 1993 to
47.3% in fiscal 1994, driven by an improvement in the ratio of catalog costs
to revenues, as well as to the fixed nature of certain SG&A costs compared to
the higher revenue level. The improvement in the catalog cost ratio was
achieved by generating higher revenue per catalog in fiscal 1994 as compared
to fiscal 1993. Average sales per catalog rose in each of our different
catalog titles because of the strength of our merchandise and targeting of
our data base. In addition, expanded circulation of our specialty catalogs,
Lilly's Kids, Christmas Memories, and Welcome, allowed us to offer a broader
spectrum of merchandise to customers and prospects.
Interest income in fiscal 1994 was $.9 million, as compared to $1.5
million in fiscal 1993. The reduction of $.6 million was principally caused
by lower interest rates and higher utilization of funds for inventory and
outstanding receivables during portions of the year. Interest expense
declined by $.3 million in fiscal 1994 as compared to fiscal 1993 because of
scheduled debt repayments.
The Company's effective income tax rate in fiscal 1994 was 34.5% as
compared to 34.0% in fiscal 1993, principally because of higher Federal
income tax rates enacted under the Omnibus Budget Reconciliation Act of 1993.
See Note 2 to Financial Statements.
SEASONALITY
The Company's business is seasonal. Historically, a substantial portion of
the Company's revenue and net income has been realized during the third and
fourth fiscal quarters, which encompass the period September through
February. Revenue and net income have been lower during the first and second
fiscal quarters, comprising the period March through August. The Company
believes this is the general pattern associated with the mail order and
retail industries.
Because of slower demand for its products in the first half of its fiscal
year, the Company incurred a cumulative net loss during the first six months
of fiscal 1995, 1994, and 1993, although to a lesser extent each year. Due to
these seasonal factors, as well as to the major increases in paper and
postage costs that are discussed above, management expects to incur a loss
for the first half of fiscal 1996 as well.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet and liquidity are strong. At the end of fiscal
1995, cash and investments totalled $38.8 million; the current ratio was
5.1:1; stockholders' equity totalled $110.2 million; and debt obligations
(including current maturities) represented 5.2% of equity.
50
<PAGE>
In fiscal 1995, the Company utilized $5.7 million of cash for operating
activities, after net cash outflows of $10.3 million and $3.1 million because
of increases in accounts receivable and inventory, respectively. The rise in
the accounts receivable balance was due to higher sales under the Company's
deferred billing program. The higher inventory level was in anticipation of
increased sales during the 1995 Spring season. The Company used $1.4 million
and $6.3 million of operating funds for debt repayments and capital
investments, respectively. It generated $1.6 million from the sale of common
stock through its employee stock option and purchase plans.
Capital spending in fiscal 1995 totalled $6.3 million. Expenditures of
$2.8 million were made to purchase and equip a 154,000 square foot building
in Virginia Beach for additional distribution and warehouse space. The
Company's other major capital expenditures in fiscal 1995 and also in fiscal
1994 were made to upgrade its computer equipment and its distribution center
machinery and equipment. In fiscal 1996 and over the next several years, the
Company expects to make significant new investments to expand the capacity of
its National Distribution Center to handle the anticipated growth of its
business.
The Company has an agreement with Crestar Bank for a revolving line of
credit, convertible into a five year term loan, of up to $10 million, bearing
interest at the prime rate. The Company's total available credit facilities
are $12 million. Although no amounts have been drawn down under these
agreements, they are available for future borrowings, if necessary. See Note
3 to Financial Statements.
The Company has paid quarterly cash dividends since May 1992, increased
its quarterly dividend from $.05 to $.07 per share in September 1994, and
anticipates continuing to pay cash dividends to its stockholders in the
future.
The Company believes that its cash flow from operations, current
investment balance, and credit facilities will be sufficient to meet its
operating needs.
SUBSEQUENT EVENT
On March 10, 1995, the Company announced that it is exploring strategic
alternatives, including a possible business combination or sale of the
Company. The Company emphasized that there can be no assurances that a
transaction will result, and that its retention of financial and legal
advisors was part of the Company's continuing efforts to ensure that it
considered all possibilities that could be in the best interests of the
Company and its stockholders.
EFFECTS OF INFLATION AND FOREIGN EXCHANGE
The Company is generally able to reflect cost increases and decreases
resulting from the effects of inflation and foreign currency fluctuation in
its selling prices. In addition, most foreign purchase orders are denominated
in U.S. dollars. Accordingly, the results of operations for the periods
discussed have not been significantly affected by these factors.
RECENTLY ISSUED ACCOUNTING STANDARDS
For its fiscal year ending February 1995, the Company adopted Statement of
Financial Accounting Standards No. 115 - "Accounting for Certain Investments
in Debt and Equity Securities." This statement did not have a material effect
on the Company's financial statements.
The Company adopted Statement of Financial Accounting Standards No. 109 -
"Accounting for Income Taxes," in the first quarter of fiscal 1994. The
provisions of this statement did not have a material effect on the Company's
financial statements.
51
<PAGE>
CAPITALIZATION
The following table sets forth as of May 27, 1995, the unaudited
consolidated capitalization of the Company and its subsidiaries. This
material should be read in conjunction with the Consolidated Financial
Statements and the related notes appearing elsewhere herein.
<TABLE>
<CAPTION>
MAY 27, 1995
(DOLLARS IN
THOUSANDS)
-------------
<S> <C>
Short-term debt:
Long-term debt due within one year ........................... $ 1,276
Capital lease obligation ..................................... 152
--------------
Total short-term debt ...................................... $ 1,428
Long-term debt:
Senior notes due September 1998 .............................. 1,500
Senior notes due October 1998 ................................ 1,675
Industrial Revenue Bond of the City of
New Rochelle Industrial Development Agency .................. 9
Capital lease obligation ..................................... 474
--------------
Total long-term debt ....................................... 3,658
Stockholders' Equity:
Common stock ................................................. 99
Additional paid-in capital ................................... 26,146
Retained earnings ............................................ 85,416
Less 224,349 shares of common stock held in treasury, at
cost ......................................................... (4,014)
---------------
Total stockholders' equity ................................. 107,647
---------------
Total capitalization ....................................... $112,733
===============
</TABLE>
52
<PAGE>
PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP OF MANAGEMENT
The following chart reflects, as of June 30, 1995, the beneficial
ownership of the Company's Shares by (i) persons who are believed to
beneficially own more than 5% of the Shares of the Company; (ii) the Chief
Executive Officer and the four other most highly compensated executive
officers of the Company; (iii) the directors; and (iv) all executive officers
and directors as a group.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND NATURE OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING
- ------------------------------------ -------------------- -------------
<S> <C> <C>
Lillian Vernon (1) .................. 2,114,663 (2)(3) 21.7%
David Hochberg (1) .................. 1,232,000 (4)(5) 12.7%
Fred P. Hochberg (6)(7) ............. 615,611 6.3%
Lilyan H. Affinito (8) .............. 7,050 (9) *
Leo Salon (10) ...................... 2,250 (9) *
William E. Phillips (11) ............ 5,000 (9) *
Bert W. Wasserman (12) .............. 5,000 *
Andrew Gregor (1) ................... 5,000 (13) *
Laura L. Zambano (1) ................ 7,537 (13) *
Stephen S. Marks (1)(15) ............ 5,000 (14) *
Larry R. Blum (1) ................... 5,000 (16) *
Lillian Menasche Vernon Foundation,
Inc. (17) .......................... 697,100 (2) 7.2%
Blackhill Capital, Inc. (18) ....... 638,400 (19) 6.6%
All Executive Officers and Directors
as a group (15 persons) (20) ...... 4,044,141 (20) 41.6%
</TABLE>
- ------------
* Less than 1%.
(1) The address of these stockholders is 543 Main Street, New Rochelle,
New York 10801.
(2) Does not include 697,100 Shares owned by the Lillian Menasche Vernon
Foundation (the "Foundation"). Lillian Vernon, Leo Salon and Fred
Hochberg are three of the directors of the Foundation. On May 17,
1995, Lillian Vernon transferred 500,000 shares to the Foundation.
(3) Does not include options to purchase 286,667 shares which are
presently exercisable or which become exercisable within 60 days of
June 30, 1995.
(4) Does not include options to purchase 60,000 shares which are
presently exercisable or which become exercisable within 60 days of
June 30, 1995.
(5) Does not include 85,000 shares of common stock held by the David
Hochberg Foundation. David Hochberg is the trustee of this Foundation.
(6) The address of Fred Hochberg is c/o Lillian Vernon Corporation, 543
Main Street, New Rochelle, New York 10801.
(7) Does not include 35,000 shares of common stock held by the Heyday
Foundation. Fred Hochberg is the sole Trustee of the Foundation. Does
not include options to purchase 5,000 shares which are presently
exercisable or which become exercisable within 60 days of June 30,
1995. On June 15, 1995, Fred Hochberg gave an aggregate of 7,620
shares to various charitable organizations and individuals.
(8) The address of Lilyan H. Affinito is c/o Lillian Vernon Corporation,
543 Main Street, New Rochelle, New York 10801.
(9) Does not include options to purchase 14,000 shares which are
presently exercisable or which become exercisable within 60 days of
June 30, 1995.
(10) The address of Leo Salon is c/o Lillian Vernon Corporation, 543 Main
Street, New Rochelle, New York 10801.
(11) The address of William E. Phillips is c/o Lillian Vernon Corporation,
543 Main Street, New Rochelle, New York 10801.
(12) The address of Bert W. Wasserman is c/o Lillian Vernon Corporation,
543 Main Street, New Rochelle, New York 10801.
(13) Does not include options to purchase 45,000 shares which are
presently exercisable or which become exercisable within 60 days of
June 30, 1995.
(14) Does not include options to purchase 35,000 shares which are
presently exercisable or which become exercisable within 60 days of
June 30, 1995.
53
<PAGE>
(15) Stephen S. Marks terminated his employment with the Company effective
May 29, 1995. Shares owned by Stephen Marks are not included in
references to Shares owned by Directors and Officers elsewhere in this
Proxy Statement.
(16) Does not include options to purchase 47,500 shares which are
presently exercisable or which become exercisable within 60 days of
the date of June 30, 1995.
(17) The address of the Foundation is c/o Salon, Marrow & Dyckman, LLP,
685 Third Avenue, 21st Floor, New York, New York 10017.
(18) The address of Blackhill Capital, Inc. is 161 Madison Avenue,
Morristown, New Jersey 07960.
(19) Number of shares is based upon a Schedule 13G filed by Blackhill
Capital, Inc. as of January 9, 1995.
(20) Includes shares owned by Jane Ries who resigned as Senior Vice
President--New Catalog Development on April 7, 1995. Does not include
options to purchase 656,167 shares which are presently exercisable or
which become exercisable within 60 days of June 30, 1995. Shares owned
by Jane Ries are not included in references to shares owned by
Directors and Others elsewhere in this Proxy Statement.
54
<PAGE>
CERTAIN INFORMATION CONCERNING INVESTOR AND AFFILIATES
Investor was formed for the purpose of engaging in and effecting the
Merger and has conducted no business otherwise. Investor has its principal
executive offices at 11100 Santa Monica Boulevard, Suite 1900, Los Angeles,
California 90025.
FS Holdings, Inc., a California corporation ("FS Holdings"), is the
general partner of FS Capital Partners, L.P., a California limited
partnership ("Capital Partners"), which is the general partner of FSEP III.
FS International Holdings Limited, a Cayman Islands exempted company limited
by shares ("International Holdings"), is the general partner of FS&Co.
International, L.P., a Cayman Islands exempted limited partnership ("FS&Co.
International"), which is the general partner of FSEP International.
FSEP III, Capital Partners, FS Holdings, FSEP International, FS&Co.
International, International Holdings and Investor may be deemed to
beneficially own the Shares held by Lillian Vernon, David Hochberg and Fred
Hochberg by virtue of the Voting Agreement, which requires them to cause all
such Shares to be voted in favor of approving the Merger Agreement and
against certain other actions and which prohibits them from transferring such
Shares (other than in connection with the Merger; provided, however, that
Fred Hochberg may transfer by gift 120,000 Shares). See "SPECIAL FACTORS--The
Voting Agreement." Capital Partners, as the general partner of FSEP III, FS
Holdings, as the general partner of Capital Partners, FS&Co. International,
as the general partner of FSEP International, International Holdings, as the
general partner of FS&Co. International share with FSEP III, FSEP
International and Investor beneficial ownership with respect to Shares held
by Lillian Vernon, David Hochberg and Fred Hochberg, who own, in aggregate,
approximately 40.7%, of the outstanding Shares.
The principal business of FS Holdings and Capital Partners is to organize
and manage the transactions in which FSEP III is the principal investor. The
principal business of FS&Co. International and International Holdings is to
organize and manage the transactions in which FSEP International is the
principal investor. FSEP III, Capital Partners, FS Holdings, FSEP
International, FS&Co. International and International Holdings each has its
principal executive offices at 11100 Santa Monica Boulevard, Suite 1900, Los
Angeles, California 90025.
Bradford M. Freeman, Ronald P. Spogli, William M. Wardlaw, J. Frederick
Simmons, John M. Roth and Charles P. Rullman, Jr. are the directors,
executive officers and sole shareholders of FS Holdings and International
Holdings. Mr. Spogli is the President of Investor, Mr. Roth is a Vice
President of Investor, Mark J. Doran is Secretary of Investor and Mr. Wardlaw
is the sole Director, a Vice President and Assistant Secretary of Investor.
Messrs. Freeman, Spogli, Wardlaw, Simmons, Roth, Rullman and Doran is each
a citizen of the United States of America.
Messrs. Freeman, Spogli, Wardlaw, Simmons and Roth has been a director,
officer and shareholder of FS&Co. since its organization in 1994. Mr. Rullman
has been a director, officer and shareholder of FS&Co. since 1995. FS&Co. is
a private investment firm whose principal business is to make private equity
investments through the formation and operation of investment limited
partnerships such as FSEP III and FSEP International. Messrs. Freeman and
Spogli are also founding partners of Freeman Spogli & Co., a California
general partnership ("FS"), which was founded in 1983 and whose principal
business is similar to that of FS&Co. Mr. Simmons joined FS in 1986 and
became a general partner in January 1991. Mr. Wardlaw joined FS in March 1988
and became a general partner in January 1991. Mr. Roth joined FS in 1988 and
became a general partner in March 1993. Mr. Doran joined FS in 1988. FS&Co.
and FS each has its principal executive offices at 11100 Santa Monica
Boulevard, Suite 1900, Los Angeles, California 90025. Messrs. Freeman,
Spogli, Wardlaw and Rullman and Simmons each has as his business address
11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California 90025.
Messrs. Roth and Doran each has as his business address 599 Lexington Avenue,
18th Floor, New York, New York 10022.
REVOCATION OF PROXIES
If the Special Meeting is adjourned, for whatever reason, the approval of
the Merger Agreement shall be considered and voted upon by stockholders at
the subsequent "adjourned meeting" (as such term is used in Section 222 of
the DGCL), if any.
55
<PAGE>
You may revoke your proxy at any time prior to its exercise by attending
the Special Meeting and voting in person (although attendance at the Special
Meeting will not in and of itself constitute revocation of a proxy), by
giving notice of revocation of your proxy at the Special Meeting, or by
delivering a written notice or revocation or a duly executed proxy relating
to the matters to be considered at the Special Meeting and bearing a later
date to the Secretary of the Company at 543 Main Street, New Rochelle, New
York 10801. Unless revoked in the manner set forth above, proxies in the form
enclosed will be voted at the Special Meeting in accordance with your
instructions.
INDEPENDENT AUDITORS
The financial statements as of February 25, 1995 and February 26, 1994,
and the related Consolidated Statements of Income, Stockholders' Equity and
Cash Flows for each of the three fiscal years in the period ended February
25, 1995, included in this Proxy Statement, have been audited by Coopers &
Lybrand L.L.P., independent accountants, as stated in their report and
appearing in the Company's Annual Report on Form 10-K for the fiscal year
ended February 25, 1995 incorporated herein by reference. A representative of
Coopers & Lybrand will be at the Special Meeting to answer questions from
stockholders and will have the opportunity to make a statement if so desired.
PROXY SOLICITATION
The Company will solicit proxies, and the Company's directors, officers
and employees may also solicit proxies by telephone, telegram or personal
interview. These persons will receive no additional compensation for these
services. In addition, the Company has retained [] to solicit proxies for a
fee of $[ ] plus expenses. The cost of soliciting proxies will be borne by
the Company. Arrangements will be made to furnish copies of proxy materials
to fiduciaries, custodians and brokerage houses for forwarding to beneficial
owners of the Shares. Such persons will be paid reasonable out-of-pocket
expenses.
STOCKHOLDER PROPOSALS
THE COMPANY'S ANNUAL MEETING OF STOCKHOLDERS SCHEDULED TO BE HELD ON JULY
20, 1995 HAS BEEN POSTPONED. IF THE MERGER IS CONSUMMATED, THE 1995 ANNUAL
MEETING OF STOCKHOLDERS WILL NOT OCCUR. If the Merger is not consummated,
proposals of stockholders intended to be presented at the 1995 Annual Meeting
of Stockholders must be received by the Company on or before [ ], 1995 in
order to be eligible for inclusion in the Company's Proxy Statement and form
of Proxy. As to each person whom a stockholder proposes to nominate for
election or re-election as a director, the stockholder's notice shall set
forth all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or as
otherwise required, in each case pursuant to Regulation 14A under the
Exchange Act, including such person's written consent to being named in the
Proxy Statement as a nominee and to serving as a director if elected. The
stockholder's notice must also set forth (i) the name and address of the
stockholder, as it appears in the Company's books, (ii) the class and number
of shares of the Company that are beneficially owned by such stockholder,
(iii) as to the beneficial owner, if any, on whose behalf the nomination or
proposal is made, the name and address of such person, and the class and
number of shares of the Company that are beneficially owned by such person,
and (iv) with respect to any stockholder proposal, any material interest of
such stockholder or the beneficial owner, if any, on whose behalf the
proposal is made, in such business. Any stockholder wishing to nominate
directors must notify the Company at least one hundred and twenty (120) days
before the one year anniversary of the date on which notice of the meeting
was sent with respect to the prior year's annual meeting of stockholders.
No person nominated by a stockholder shall be eligible to serve as a
director of the Company unless nominated in accordance with the procedures
set forth above. The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination or proposal was not
made in accordance with the procedures prescribed by the Bylaws of the
Company and, if he or she should so determine, the chairman may so declare at
the meeting and the defective nomination or proposal shall be disregarded.
Notwithstanding the foregoing, a stockholder must also comply with all
applicable requirements of the Exchange Act and the rules and regulations
thereunder with respect to nominations of persons for election to the Board
of Directors of the Company.
56
<PAGE>
INCORPORATION BY REFERENCE
The following documents filed with the Commission by the Company (File No.
1-9637) pursuant to the Exchange Act are incorporated herein by reference in
this proxy statement:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
February 25, 1995 (the "10-K");
2. The Company's Current Reports on Form 8-K, dated June 22, 1995 and
June 27, 1995 (the "8-Ks").
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the date of the Special Meeting are hereby incorporated
by reference into this Proxy Statement and shall be deemed a part hereof from
the date of filing such documents or reports. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Proxy Statement
to the extent that a statement contained herein or in any other subsequently
filed document which also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS
TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT IS DELIVERED, ON WRITTEN OR
ORAL REQUEST TO THE COMPANY AT 543 MAIN STREET, NEW ROCHELLE, NEW YORK 10801
(TELEPHONE NUMBER (914) 576-6400), ATTENTION: SUSAN N. CORTAZZO, SECRETARY.
IN ORDER TO ENSURE DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETING OF
STOCKHOLDERS, REQUESTS SHOULD BE RECEIVED BY [ ], 1995.
57
<PAGE>
OTHER MATTERS
The Board of Directors of the Company does not intend to bring any other
matters before the Special Meeting and does not know of any other matters
that may be brought before the Special Meeting by others.
By Order of the Board of Directors,
----------------------------------
Susan N. Cortazzo
Secretary
July [ ], 1995
58
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets -- May 27, 1995, May 28, 1994, and February 25, 1995
(audited) ................................................................................... F-2
Consolidated Statements of Operations for the Fiscal Quarters ended May 27, 1995
and May 28, 1994 ............................................................................ F-3
Consolidated Statements of Cash Flows for the Fiscal Quarters ended May 27, 1995 and
May 28, 1994 ................................................................................ F-4
Notes to Consolidated Financial Statements ................................................... F-5
Audited Consolidated Financial Statements:
Consolidated Balance Sheets -- February 25, 1995 and February 26, 1994 ....................... F-6
Consolidated Statements of Income for the three Fiscal Years ended 1995, 1994 and 1993 ...... F-7
Consolidated Statements of Stockholders' Equity for the three Fiscal Years ended 1995, 1994
and 1993 ..................................................................................... F-8
Consolidated Statements of Cash Flows for the three Fiscal Years ended 1995, 1994 and 1993 .. F-9
Notes to Consolidated Financial Statements ................................................... F-10
</TABLE>
F-1
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 27, MAY 28, FEBRUARY 25,
1995 1994 1995
---------- ---------- --------------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 39,101 $ 39,735 $ 38,779
Accounts receivable .................................... 10,717 4,865 21,482
Merchandise inventories ................................ 32,878 32,322 30,418
Deferred income taxes .................................. -- -- 331
Prepayments and other current assets ................... 9,038 5,900 7,495
---------- ---------- --------------
Total current assets .................................. 91,734 82,822 98,505
Property, plant and equipment, net (Note 1) ............. 29,534 26,410 29,587
Deferred catalog costs .................................. 7,874 7,317 6,632
Other assets ............................................ 3,018 3,087 3,044
---------- ---------- --------------
Total ................................................. $132,160 $119,636 $137,768
========== ========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses ........... $ 15,284 $ 12,822 $ 14,056
Customer deposits ...................................... 158 58 385
Current portion of long-term debt and lease obligations 1,428 1,400 1,420
Income taxes payable ................................... -- -- 3,576
Deferred income taxes .................................. 58 560 --
---------- ---------- --------------
Total current liabilities ............................. 16,928 14,840 19,437
Long-term debt, less current portion .................... 3,184 4,460 3,820
Capital lease obligations, less current portion ........ 474 626 515
Deferred compensation ................................... 3,071 2,463 2,913
Deferred income taxes ................................... 856 1,306 896
---------- ---------- --------------
Total liabilities ..................................... 24,513 23,695 27,581
---------- ---------- --------------
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding ......... -- -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; issued -- 9,934,537 shares, 9,616,515
shares and 9,771,744 shares ........................... 99 96 98
Additional paid-in capital ............................. 26,146 20,844 23,300
Retained earnings ...................................... 85,416 76,326 88,922
Unearned compensation .................................. -- (51) (2)
Treasury stock, at cost -- 227,699 shares, 92,774
shares and 139,892 shares ............................. (4,014) (1,274) (2,131)
---------- ---------- --------------
Total stockholders' equity ............................ 107,647 95,941 110,187
---------- ---------- --------------
Total ................................................. $132,160 $119,636 $137,768
========== ========== ==============
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
---------------------
MAY 27, MAY 28,
1995 1994
---------- ---------
<S> <C> <C>
Revenues ............................................. $29,614 $26,002
Costs and expenses:
Product and delivery costs .......................... 15,229 12,031
Selling, general and administrative expenses ....... 18,972 15,700
---------- ---------
34,201 27,731
---------- ---------
Operating loss .................................... (4,587) (1,729)
Interest income ...................................... 521 391
Interest expense ..................................... (152) (184)
---------- ---------
Loss before income taxes .......................... (4,218) (1,522)
Provision for (benefit from) income taxes:
Current ............................................. (1,741) (1,598)
Deferred ............................................ 349 1,065
---------- ---------
(1,392) (533)
---------- ---------
Net loss .......................................... $(2,826) $ (989)
---------- ---------
Net loss per common share ............................ $ (.29) $ (.10)
---------- ---------
Weighted average number of common shares outstanding 9,686 9,520
---------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
----------------------
MAY 27, MAY 28,
1995 1994
---------- ----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $(2,826) $ (989)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation ..................................................... 644 482
Amortization ..................................................... 87 119
(Increase) decrease in accounts receivable ....................... 10,765 6,360
(Increase) decrease in merchandise inventories ................... (2,460) (4,983)
(Increase) decrease in prepayments and other current assets ..... (1,543) (927)
(Increase) decrease in deferred catalog costs .................... (1,242) (3,086)
(Increase) decrease in other assets .............................. (59) (73)
Increase (decrease) in trade accounts payable and accrued
expenses .......................................................... 1,228 (5,647)
Increase (decrease) in customer deposits ......................... (227) (171)
Increase (decrease) in income taxes payable ...................... (3,576) (4,191)
Increase (decrease) in deferred compensation ..................... 158 150
Increase (decrease) in deferred income taxes ..................... 349 1,067
---------- ----------
Net cash provided by (used in) operating activities ............ 1,298 (11,889)
---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment ........................ (591) (241)
---------- ----------
Net cash used in investing activities ........................... (591) (241)
---------- ----------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations (669) (664)
Proceeds from issuance of common stock ............................ 666 117
Dividends paid .................................................... (679) (476)
Other ............................................................. 297 8
---------- ----------
Net cash used in financing activities ........................... (385) (1,015)
---------- ----------
Net increase (decrease) in cash and cash equivalents ........... 322 (13,145)
---------- ----------
Cash and cash equivalents at beginning of period ................... 38,779 52,880
---------- ----------
Cash and cash equivalents at end of period ......................... $39,101 $ 39,735
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ......................................................... $ 288 $ 358
Income taxes ..................................................... 3,884 4,671
</TABLE>
Supplemental disclosure of noncash financing activities--see Note 2.
See Notes to Consolidated Financial Statements
F-4
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The year-end condensed balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. The interim
financial statements furnished with this report reflect all adjustments,
consisting only of items of a normal recurring nature, which are, in the
opinion of management, necessary for the fair statement of the consolidated
financial condition and consolidated results of operations for the interim
periods presented. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended February 25, 1995.
1. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
MAY 27, MAY 28, FEBRUARY 25,
1995 1994 1995
--------- --------- --------------
<S> <C> <C> <C>
Land and buildings ............................. $20,196 $17,186 $19,985
Machinery and equipment ........................ 22,214 18,916 21,840
Furniture and fixtures ......................... 3,040 2,781 3,033
Leasehold improvements ......................... 3,574 3,537 3,575
Capital leases ................................. 1,262 1,262 1,262
--------- --------- --------------
Total property, plant & equipment, at cost ... 50,286 43,682 49,695
Less accumulated depreciation and amortization 20,752 17,272 20,108
--------- --------- --------------
Property, plant and equipment--net ............. $29,534 $26,410 $29,587
--------- --------- --------------
</TABLE>
2. NONCASH FINANCING ACTIVITIES
During the three months ending May 27, 1995, non-qualified stock options
aggregating 105,000 shares were exercised by one of the Company's Directors,
with a total exercise price of $1,662,150. As consideration for the exercise
price and for income taxes required to be withheld, the Company received an
aggregate of 87,807 shares of Lillian Vernon Common Stock, which are reported
as Treasury Stock on the balance sheet. The number of shares was determined
by the market price of the Company's common stock on the exercise date.
3. SUBSEQUENT EVENT--MERGER AGREEMENT
On June 13, 1995, the Company and VB Investment Corporation, a Delaware
corporation controlled by FS Equity Partners III, L.P. ("FSEP III"), which is
an affiliate of Freeman Spogli & Co. Incorporated, entered into a definitive
merger agreement pursuant to which FSEP III will become a majority
stockholder of the Company in a merger transaction that will be accounted for
as a recapitalization. In this transaction, stockholders of the Company will
receive $19.00 per share in cash for certain shares of the Company's stock.
The merger agreement is subject to the approval by the Company's
stockholders, receipt of financing, and other customary closing conditions.
The merger will be submitted to stockholders at a special stockholders'
meeting expected to be held in August 1995.
4. RECLASSIFICATIONS
Certain reclassifications have been made in the prior year financial
statements to conform with the current presentation.
F-5
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 25, FEBRUARY 26,
1995 1994
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 38,779 $ 52,880
Accounts receivable ................................................... 21,482 11,225
Merchandise inventories ............................................... 30,418 27,339
Deferred income taxes (Note 2) ........................................ 331 531
Prepayments and other current assets (Note 4) ......................... 7,495 4,973
-------------- --------------
Total current assets ................................................. 98,505 96,948
Property, plant and equipment, net (Notes 5 and 7) ..................... 29,587 26,651
Deferred catalog costs ................................................. 6,632 4,231
Other assets ........................................................... 3,044 3,107
-------------- --------------
Total ................................................................ $137,768 $130,937
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses (Note 4) .................. $ 14,056 $ 18,469
Customer deposits ..................................................... 385 229
Current portion of long-term debt and lease obligations (Notes 6 and
7) .................................................................... 1,420 1,394
Income taxes payable (Note 2) ......................................... 3,576 4,191
-------------- --------------
Total current liabilities ............................................ 19,437 24,283
Long-term debt, less current portion (Note 6) .......................... 3,820 5,097
Capital lease obligations, less current portion (Note 7) .............. 515 659
Deferred compensation (Note 8) ......................................... 2,913 2,313
Deferred income taxes (Note 2) ......................................... 896 1,330
-------------- --------------
Total liabilities .................................................... 27,581 33,682
-------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized; no
shares issued and outstanding ........................................ -- --
Common stock, $.01 par value; 20,000,000 shares authorized; issued --
9,771,744 shares in 1995 and 9,606,437 shares in 1994 ................ 98 96
Additional paid-in capital ............................................ 23,300 20,672
Retained earnings ..................................................... 88,922 77,792
Unearned compensation ................................................. (2) (31)
Treasury stock, at cost -- 139,892 shares in 1995 and 92,774 shares
in 1994 .............................................................. (2,131) (1,274)
-------------- --------------
Total stockholders' equity ........................................... 110,187 97,255
-------------- --------------
Total ................................................................ $137,768 $130,937
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------
FEBRUARY 26, FEBRUARY 27, FEBRUARY 25,
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues .......................................... $222,211 $196,331 $172,932
Costs and expenses:
Product and delivery costs ....................... 97,390 83,934 71,190
Selling, general and administrative expenses .... 106,143 92,973 85,702
-------------- -------------- --------------
203,533 176,907 156,892
-------------- -------------- --------------
Operating income ................................ 18,678 19,424 16,040
Interest income ................................... 1,189 946 1,482
Interest expense .................................. (733) (875) (1,199)
-------------- -------------- --------------
Income before income taxes ...................... 19,134 19,495 16,323
Provision for (benefit from) income taxes (Note
2):
Current .......................................... 5,802 7,913 5,871
Deferred ......................................... (288) (1,190) (321)
-------------- -------------- --------------
5,514 6,723 5,550
-------------- -------------- --------------
Net income ...................................... $13,620 $12,772 $10,773
-------------- -------------- --------------
Net income per common and common
equivalent share (Note 1) ........................ $1.38 $1.35 $1.15
-------------- -------------- --------------
Weighted average number of common and common
equivalent shares (Note 1) ....................... 9,892 9,448 9,355
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
--------------------- ---------------
PAID-IN RETAINED UNEARNED
TOTAL SHARES AMOUNT CAPITAL EARNINGS COMPENSATION SHARES AMOUNT
---------- ----------- ------ --------- ---------- -------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 29, 1992 ............. $ 75,507 9,322,323 $93 $17,479 $58,012 $ (30) (3,350) $ (47)
Shares issued to employees at $.01 per
share pursuant to Restricted Stock
Plan .................................. -- 5,000 -- 79 (79)
Exercise of non-qualified stock options 333 44,500 1 332
Amortization of unearned compensation . 100 100
Shares purchased by employees pursuant
to Employee Stock Purchase Plan ...... 148 13,055 -- 148
Dividends Paid ($.20) per share) ...... (1,872) (1,872)
Other .................................. 115 115
Net income ............................. 10,773 10,773
------- --------- --- ------- ------- ------- ---------- ------
BALANCE, FEBRUARY 27, 1993 ............. 85,104 9,384,878 94 18,153 66,913 (9) (3,350) (47)
Shares issued to employees at $.01 per
share pursuant to Restricted Stock
Plan .................................. -- 10,000 -- 136 (136)
Exercise of non-qualified stock options 621 200,500 2 1,846 (89,424) (1,227)
Amortization of unearned compensation . 114 114
Shares purchased by employees pursuant
to Employee Stock Purchase Plan ...... 131 11,059 -- 131
Dividends Paid ($.20 per share) ....... (1,893) (1,893)
Other .................................. 406 406
Net income ............................. 12,772 12,772
------- --------- --- ------- ------- ------- ---------- ------
BALANCE, FEBRUARY 26, 1994 ............. 97,255 9,606,437 96 20,672 77,792 (31) (92,774) (1,274)
Shares issued to employees at $.01 per
share pursuant to Restricted Stock
Plan .................................. -- 2,500 -- 46 (46)
Exercise of non-qualified stock options 1,322 147,500 2 2,177 (47,118) (857)
Amortization of unearned compensation . 75 75
Shares purchased by employees pursuant
to Employee Stock Purchase Plan ...... 234 15,307 -- 234
Dividends Paid ($.26 per share) ....... (2,490) (2,490)
Other .................................. 171 171
Net income ............................. 13,620 13,620
------- --------- --- ------- ------- ------- --------- -------
BALANCE, FEBRUARY 25, 1995 ............. $110,187 9,771,744 $98 $23,300 $88,922 $ (2) (139,892) $(2,131)
------- --------- --- ------- ------- ------- --------- -------
------- --------- --- ------- ------- ------- --------- -------
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------
FEBRUARY 25, FEBRUARY 26, FEBRUARY 27,
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ....................................... $ 13,620 $12,772 $10,773
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation .................................... 3,366 3,101 2,812
Amortization .................................... 525 1,033 1,518
(Gain) loss on sale of assets ................... (9) 53 (707)
(Increase) decrease in accounts receivable ..... (10,257) (6,860) (2,271)
(Increase) decrease in merchandise inventories . (3,079) (7,402) 2,805
(Increase) decrease in prepayments and other
current assets ................................. (2,522) (1,610) (543)
(Increase) decrease in deferred catalog costs .. (2,401) 612 607
(Increase) decrease in other assets ............. (387) (609) (684)
Increase (decrease) in trade accounts payable
and accrued expenses ........................... (4,413) 5,503 2,603
Increase (decrease) in customer deposits ....... 156 (346) 510
Increase (decrease) in income taxes payable .... (615) 1,012 1,578
Increase (decrease) in deferred compensation ... 600 600 573
Increase (decrease) in deferred income taxes ... (234) (2,179) (402)
-------------- -------------- --------------
Net cash provided by (used in) operating
activities .................................... (5,650) 5,680 19,172
-------------- -------------- --------------
Cash flows from investing activities:
Purchases of property, plant and equipment ...... (6,305) (1,761) (7,542)
Proceeds from sale of assets ..................... 12 8 1,149
-------------- -------------- --------------
Net cash used in investing activities ......... (6,293) (1,753) (6,393)
-------------- -------------- --------------
Cash flows from financing activities:
Principal payments on long-term debt and capital
lease obligations ............................... (1,395) (1,375) (3,980)
Proceeds from issuance of common stock .......... 1,556 752 481
Dividends paid ................................... (2,490) (1,893) (1,872)
Other ............................................ 171 406 115
-------------- -------------- --------------
Net cash used in financing activities ......... (2,158) (2,110) (5,256)
-------------- -------------- --------------
Net increase (decrease) in cash and cash
equivalents ................................... (14,101) 1,817 7,523
-------------- -------------- --------------
Cash and cash equivalents at beginning of period . 52,880 51,063 43,540
-------------- -------------- --------------
Cash and cash equivalents at end of period ....... $ 38,779 $52,880 $51,063
-------------- -------------- --------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ........................................ $ 752 $ 901 $ 1,263
Income taxes .................................... 6,863 6,215 4,112
</TABLE>
Supplemental disclosure of noncash financing activities --see Note 9.
See Notes to Consolidated Financial Statements
F-9
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Lillian Vernon Corporation is a direct mail specialty catalog company,
concentrating on the marketing of gift, household, gardening, decorative,
Christmas and children's products.
The consolidated financial statements include the accounts of Lillian
Vernon Corporation and its wholly-owned subsidiaries, Lillian Vernon
Fulfillment Services, Inc. and Lillian Vernon International, Ltd. (the
"Company"). All material intercompany balances and transactions have been
eliminated.
The Company has a fiscal year consisting of 52 or 53 weeks ending on the
last Saturday in February. Under this policy, fiscal 1995, 1994 and 1993
consisted of 52 weeks. The Company's fiscal quarters end on the last Saturday
of the quarterly period.
Cash Equivalents
Cash equivalents, for purposes of the Statements of Cash Flows, consist
principally of municipal securities, U.S. Treasury securities and commercial
paper, with remaining maturities at acquisition of less than three months. In
the first quarter of fiscal 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115 -- "Accounting for Certain Investments in
Debt and Equity Securities." Under SFAS No. 115, the Company's investments,
totalling $42.0 million as of February 25, 1995, are classified as
held-to-maturity securities, and as such, are stated at amortized cost, which
approximates market value. The adoption of SFAS No. 115 did not have a
material effect on the Company's financial statements.
Merchandise Inventories
Merchandise inventories are principally stated at the lower of average
cost or market, determined by the retail inventory method.
Catalog Costs
Catalog costs are deferred and amortized over the estimated productive
life of the catalog, generally three months. Such deferred costs are
considered direct-response advertising in accordance with AICPA Statement of
Position No. 93-7, "Reporting on Advertising Costs," and are reflected as
long-term assets in the accompanying Balance Sheets.
Capitalized Software Costs
Direct costs of developing new software applications are capitalized and
are being amortized over five years. Amortization of capitalized software
costs totalled $435,000 in fiscal 1995, $902,000 in fiscal 1994, and
$1,370,000 in fiscal 1993.
Capitalized software costs, net of accumulated amortization, are included
in other assets, and amounted to $919,000 and $1,197,000 at February 25, 1995
and February 26, 1994 respectively.
Depreciation and Amortization
Depreciation is provided on the straight line method for assets placed in
service over estimated useful lives of approximately 30 and 8 years for
building and building improvements, respectively, and for other property,
over estimated useful lives ranging from 3 to 10 years. Leasehold
improvements and assets under capital leases are amortized over approximately
15 years.
F-10
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Income Taxes
Deferred income taxes arise from differences in the timing of income and
expense recognition for financial and income tax reporting purposes.
Effective February 28, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 -- "Accounting for Income Taxes." The Statement
requires the Company to compute deferred income taxes on the difference
between the financial statement and tax basis of the assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. Financial statements for prior years have not been
restated and the cumulative effect of the accounting change was not material.
Per Share Data
Net income per common share is computed by dividing the net income for the
period by the sum of the weighted average number of outstanding shares and
share equivalents (if the addition of such share equivalents has a materially
dilutive effect). The Company's common share equivalents consist of stock
options issued to key employees and directors. For the year ended February
25, 1995, the number of common share equivalents outstanding resulted in a
materially dilutive effect on the net income per share computation. For
fiscal 1994 and 1993, however, such common share equivalents did not result
in material dilution, and therefore were not reflected in the net income per
share calculation on the Statements of Income.
Reclassifications
Certain reclassifications have been made in the prior year financial
statements to conform with the fiscal 1995 presentation.
2. INCOME TAXES
The current income tax provision consists of (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------
FEBRUARY FEBRUARY 26, FEBRUARY 27,
25, 1995 1994 1993
-------------- -------------- ----------------
<S> <C> <C> <C>
Federal . $5,202 $7,189 $5,274
State .... 600 724 597
-------------- -------------- --------------
$5,802 $7,913 $5,871
-------------- -------------- --------------
</TABLE>
The deferred income tax provision (benefit) consists of (dollars in
thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------
FEBRUARY 25, FEBRUARY 26, FEBRUARY 27,
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Charitable contributions .............. $ (668) $ (364) $ 28
Depreciation .......................... (169) (79) 250
Capitalized software development costs (77) (255) (325)
Catalog costs ......................... 1,023 (275) (170)
Other, net ............................ (397) (217) (104)
-------------- -------------- --------------
$ (288) $(1,190) $(321)
-------------- -------------- --------------
</TABLE>
The exercise of non-qualified stock options and the vesting of restricted
stock (see Note 9) result in a tax deduction to the Company equivalent to the
taxable compensation recognized by the individuals. For accounting purposes,
the tax benefit of these deductions is credited directly to additional
paid-in capital. These amounts totalled $171,000, $406,000 and $115,000 for
fiscal 1995, 1994 and 1993, respectively.
F-11
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The Company's effective income tax rate is reconciled to the U.S. federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------
FEBRUARY 25, FEBRUARY 26, FEBRUARY 27,
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Federal statutory tax rate ............... 35.0% 35.0% 34.0%
State income taxes, net of federal tax
benefit ................................. 2.0 2.0 2.3
Charitable contributions of merchandise . (3.2) (2.6) (1.8)
Reversal of tax provisions of prior years (2.8) - -
Other, net ............................... (2.2) 0.1 (0.5)
-------------- -------------- --------------
28.8% 34.5% 34.0%
-------------- -------------- --------------
</TABLE>
During the fourth quarter of fiscal 1995, the Company favorably settled an
outstanding tax matter that resulted in a one-time reduction in income tax
expense of $740,000, including the reversal of excess tax reserves.
The deferred tax assets and deferred tax liabilities recorded on the
balance sheets are as follows (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 25, 1995 FEBRUARY 26, 1994
----------------------- -----------------------
DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Current:
Catalog deferrals ....... $ -- $2,616 $ -- $1,594
Charitable contributions 1,437 -- 780 --
Inventory capitalization 791 -- 728 --
Accrued expenses ........ 557 -- 473 --
Other ................... 268 106 144 --
Valuation allowance .... -- -- -- --
-------- ------------- -------- -------------
Total current .......... 3,053 2,722 2,125 1,594
-------- ------------- -------- -------------
Non-current:
Depreciation ............ -- 1,943 -- 2,110
Amortization ............ 148 225 163 276
Deferred compensation .. 1,124 -- 893 --
-------- ------------- -------- -------------
Total non-current ..... 1,272 2,168 1,056 2,386
-------- ------------- -------- -------------
Total ................. $4,325 $4,890 $3,181 $3,980
======== ============= ======== =============
</TABLE>
As of February 25, 1995, the Company has $3,634,000 of charitable
contribution carryforwards for Federal income tax purposes, which expire from
fiscal 1996 to 2000.
3. CREDIT FACILITIES
During fiscal 1995 and 1994, the Company maintained credit facilities with
two banks that provided for total borrowings of up to $12,000,000, bearing
interest at the prime rate. The Company has an agreement which allows
$10,000,000 to be converted by the Company into a five year term loan. The
Company incurred quarterly commitment fees of approximately 1/4 % per annum
in both fiscal 1995 and 1994, and 3/8 % per annum in fiscal 1993. No amounts
were outstanding under the Company's credit facilities as of February 25,
1995 and February 26, 1994.
The Company had outstanding letters of credit approximating $3,930,000 and
$3,048,000 as of February 25, 1995 and February 26, 1994, for the purchase of
inventory in the normal course of business.
F-12
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
4. OTHER
Prepayments and other current assets include prepaid catalog costs of
$5,463,000 and $3,717,000 as of February 25, 1995 and February 26, 1994,
respectively (see Note 1).
Trade accounts payable and accrued expenses consist of (dollars in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 25, FEBRUARY 26,
1995 1994
-------------- --------------
<S> <C> <C>
Trade accounts payable .. $ 5,006 $ 7,509
Catalog costs ............ 2,266 2,612
Bonus and profit sharing 1,575 2,225
Salaries and compensation 1,441 1,182
Other .................... 3,768 4,941
-------------- --------------
$14,056 $18,469
-------------- --------------
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
FEBRUARY 25, FEBRUARY 26,
1995 1994
-------------- --------------
<S> <C> <C>
Land and buildings ........................... $19,985 $17,124
Machinery and equipment ...................... 21,840 18,765
Furniture and fixtures ....................... 3,033 2,769
Leasehold improvements ....................... 3,575 3,521
Capital leases ............................... 1,262 1,262
-------------- --------------
Total property, plant & equipment, at cost .. 49,695 43,441
Less, accumulated depreciation & amortization 20,108 16,790
-------------- --------------
Property, plant & equipment, net ............. $29,587 $26,651
-------------- --------------
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
FEBRUARY 25, FEBRUARY 26,
1995 1994
-------------- --------------
<S> <C> <C>
Senior Notes due September 1998, payable in
semi-annual installments of $300,000 with
interest at 10.09% ........................ $2,400 $3,000
Senior Notes due October 1998, payable in
semi-annual installments of $335,000 with
interest at 10.0% ......................... 2,680 3,350
Industrial Revenue Bond of the City of New
Rochelle Industrial Development Agency,
payable in quarterly installments of
$1,500 with interest at prime rate
(February 1995 = 8.5%; February 1994 =
6.0%) through October 1997 ................ 16 23
-------------- --------------
$5,096 $6,373
Less, current portion .................... 1,276 1,276
-------------- --------------
$3,820 $5,097
-------------- --------------
</TABLE>
F-13
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The Company's debt agreements require that the Company meet certain
financial covenants, principally related to working capital and tangible net
worth, both as defined in the agreements.
Long-term debt as of February 25, 1995 matures as follows (dollars in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
- -------------
<S> <C>
1996 ......... $1,276
1997 ......... 1,276
1998 ......... 1,276
1999 ......... 1,268
--------
$5,096
--------
</TABLE>
7. LEASES
The Company leases its New Rochelle, New York corporate headquarters under
a capital lease arrangement with a partnership, Port Chester Properties, the
partners of which are directors and stockholders of the Company. The leased
asset consists of land and a building with a cost of $1,262,000 and
accumulated amortization of $986,000 as of February 25, 1995. The lease
expires July 30, 1998 and provides for the payment by the Company of all real
estate taxes, insurance, and certain other costs. Effective August 1, 1992,
the minimum annual rent of $264,000 increased to the present minimum annual
rent of $430,000 based upon the change in the Consumer Price Index from June
1, 1982 to June 1, 1992, pursuant to the lease agreement, and the leasing of
additional space.
The Company has operating lease agreements for certain computer and other
equipment used in its operations and for its outlet store locations, with
existing lease terms ranging from fiscal 1996 through fiscal 2003, and
various renewal options through fiscal 2008. Most of the store leases also
provide for payment of common charges such as maintenance and real estate
taxes. Five stores require the payment of additional rent based upon a
percentage of sales. Minimum rental payments required under these agreements
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
- -------------
<S> <C>
1996 ......... $ 938
1997 ......... 924
1998 ......... 815
1999 ......... 745
2000 ......... 569
Thereafter .. 437
-------
$4,428
-------
</TABLE>
Rent expense for fiscal 1995, 1994 and 1993 amounted to $2,363,000,
$2,726,000 and $2,190,000, respectively, which included $11,000, $4,000 and
$6,000 in fiscal 1995, 1994 and 1993, respectively, for contingent rentals
based upon a percentage of outlet store sales.
8. EMPLOYEE BENEFIT PLANS
The Company maintains a profit sharing plan for the benefit of all
employees who meet certain minimum service requirements. The Company's profit
sharing contribution is discretionary, as determined by the Board of
Directors. Employees fully vest in their profit sharing account balance after
seven years. The authorized profit sharing contributions for fiscal 1995,
1994 and 1993 were $500,000, $500,000 and $400,000, respectively.
Effective October 1, 1993, the Company amended its profit sharing plan to
include an employee contribution and employer matching contribution (401k)
feature. Under the 401k feature of the plan, eligible employees may make
pre-tax contributions up to 10% of their annual compensation. Employee
contributions of up to 6% of compensation are currently matched by the
Company at a rate of 50%. The matching contribution is made with Company
stock. Employees are 100% vested in their pre-tax
F-14
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
contributions at all times, and become fully vested in the employer matching
contribution after two years of service. The Company's matching contributions
to the plan for fiscal 1995 and 1994 were $355,000 and $124,000 respectively.
The Company has deferred compensation agreements to provide additional
retirement benefits for certain principal stockholders of the Company. The
deferred compensation agreements also provide for death benefits to be paid
to each party's beneficiary. The Company has purchased life insurance
policies to fund, in part, the payment of these benefits. In each of the
fiscal years 1995, 1994 and 1993, $600,000 was expensed in connection with
these agreements.
9. EMPLOYEE STOCK OWNERSHIP PLANS
The Company has a Performance Unit, Restricted Stock, Non-Qualified Option
and Incentive Stock Option Plan and a total of 2,000,000 shares of common
stock have been reserved for issuance thereunder.
The Company has granted and sold shares of restricted stock to certain
executives at a nominal price per share. In connection with the issuance of
restricted stock, unearned compensation is recorded and amortized over the
respective vesting periods.
Restricted shares were granted and vest as follows:
<TABLE>
<CAPTION>
NUMBER OF
DATE GRANTED SHARES DATE VESTED
- -------------- ----------- --------------------
<S> <C> <C>
August 1987 .. 60,000 February 1989
11,250 in April 1992
March 1989 .... 22,500 11,250 in April 1993
March 1992 .... 5,000 March 1993
March 1993 .... 5,000 February 1994
August 1993 .. 5,000 August 1994
March 1994 .... 2,500 March 1995
</TABLE>
The Company has also granted non-qualified stock options to employees.
Such options have been granted at market value, vest within three years from
the date of grant and expire within ten years from the date of grant.
Non-qualified stock option activity has been as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE PER
SHARES SHARE
----------- ----------------
<S> <C> <C>
Balance at February 29, 1992 1,065,000 $6.25 to $15.83
Granted ..................... 231,000 $13.75 to $16.38
Canceled .................... (5,000) $ 6.25 to $15.83
Exercised ................... (44,500) $ 6.25 to $ 8.92
Expired ..................... (1,500) $ 6.25
----------- ----------------
Balance at February 27, 1993 1,245,000 $ 7.09 to $16.38
Granted ..................... 265,500 $12.50 to $13.63
Canceled .................... (174,500) $ 8.00 to $15.83
Exercised ................... (200,500) $ 7.09 to $14.25
Expired ..................... 0
-----------
Balance at February 26, 1994 1,135,500 $ 8.00 to $16.38
----------- ----------------
Granted ..................... 278,000 $18.13 to $18.50
Canceled .................... (15,000) $18.50
Exercised ................... (145,000) $ 8.00 to $15.83
Expired ..................... 0
-----------
Balance at February 25, 1995 1,253,500 $ 8.00 to $18.50
----------- ----------------
</TABLE>
F-15
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
As of February 25, 1995, non-qualified options totalling 737,500 shares
are exercisable at dates ranging from March 1995 to July 1997. As of February
25, 1995 and February 26, 1994, 240,000 and 505,500 shares, respectively,
were available for grant under the Performance Unit, Restricted Stock,
Non-Qualified Option and Incentive Stock Option Plan.
During fiscal 1995, non-qualified stock options totalling 78,000 shares
were exercised by three plan participants, with an aggregate exercise price
of $1,147,800. As consideration for the exercise price and for income taxes
required to be withheld, the Company received cash totalling $376,947 and an
aggregate of 47,118 shares of Lillian Vernon Common Stock, which are reported
as Treasury Stock on the Balance Sheet. In fiscal 1994, the Company received
89,424 shares of Treasury Stock as consideration for stock option exercises
aggregating 130,000 shares. The number of Treasury Stock shares accepted as
consideration for stock option exercises was determined by the market price
of the Company's common stock on the exercise dates. These transactions, for
purposes of the Statements of Cash Flows, are deemed to be noncash financing
activities and, as such, have not been reflected on the Statements.
In July 1993, the stockholders of the Company approved the Lillian Vernon
Corporation Stock Option Plan for Non-Employee Directors and reserved 100,000
shares of common stock for issuance thereunder. These options are
non-qualified stock options, are granted at market value, vest one year from
the date of grant and expire within ten years from the date of grant. The
Company has granted options totalling 25,000 shares to its eligible
non-employee directors. In fiscal 1995, 2,500 option shares were exercised
and 2,500 option shares were canceled. As of February 25, 1995, 77,500 shares
are available for grant under this plan.
The Company also has an Employee Stock Purchase Plan. 150,000 shares of
common stock were reserved for issuance, of which 112,719 shares have been
issued.
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
FISCAL QUARTERS ENDED
-------------------------------------------------------
MAY 28, AUGUST 27, NOVEMBER 26, FEBRUARY 25,
FISCAL 1995 1994 1994 1994 1995
- ---------------------------------- --------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Revenues .......................... $26,002 $33,659 $91,923 $70,627
Income (loss) before income taxes (1,522) 1,191 14,439 5,026
Net income (loss) ................. (989) 774 9,667 4,168
Net income (loss) per common share (.10) .08 .98 .42
Market price of shares outstanding
-- market high ................... 22 5/8 20 1/4 20 1/4 18 1/8
-- market low .................... 17 17 1/4 15 5/8 14 1/2
</TABLE>
<TABLE>
<CAPTION>
FISCAL QUARTERS ENDED
-------------------------------------------------------
MAY 29, AUGUST 28, NOVEMBER 27, FEBRUARY 26,
FISCAL 1994 1993 1993 1993 1994
- ---------------------------------- --------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Revenues .......................... $20,837 $29,695 $83,205 $62,594
Income (loss) before income taxes (2,198) 836 13,894 6,963
Net income (loss) ................. (1,329) 543 9,032 4,526
Net income (loss) per common share (.14) .06 .95 .48
Market price of shares outstanding
-- market high ................... 14 14 1/4 18 1/2 18 7/8
-- market low .................... 11 1/2 11 7/8 13 7/8 16 1/8
</TABLE>
F-16
<PAGE>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
11. SUBSEQUENT EVENT
On March 10, 1995, the Company announced that it is exploring strategic
alternatives, including a possible business combination or sale of the
Company. The Company emphasized that there can be no assurances that a
transaction will result, and that its retention of financial and legal
advisors was part of the Company's continuing efforts to ensure that it
considered all possibilities that could be in the best interests of the
Company and its stockholders.
F-17
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
VB INVESTMENT CORPORATION
AND
LILLIAN VERNON CORPORATION
DATED AS OF JUNE 13, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
ARTICLE I THE MERGER ....................................................
Section 1.01 The Merger .................................................... 1
Section 1.02 Effective Time; Closing ....................................... 1
Section 1.03 Effect of the Merger .......................................... 1
Section 1.04 Certificate of Incorporation; By-laws ......................... 1
Section 1.05 Directors and Officers ........................................ 2
Section 1.06 Conversion of Securities ...................................... 2
Section 1.07 Employee Stock Options and Other Equity Awards ................ 2
Section 1.08 Dissenting Shares ............................................. 2
Section 1.09 Surrender of Shares; Stock Transfer Books ..................... 3
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY .................
Section 2.01 Organization and Qualification; Subsidiaries .................. 4
Section 2.02 Certificate of Incorporation and By-laws ...................... 4
Section 2.03 Capitalization ................................................ 4
Section 2.04 Authority Relative to This Agreement .......................... 5
Section 2.05 No Conflict; Required Filings and Consents .................... 5
Section 2.06 Compliance .................................................... 5
Section 2.07 SEC Filings; Financial Statements ............................. 6
Section 2.08 Absence of Certain Changes or Events .......................... 6
Section 2.09 Employee Benefits ............................................. 7
Section 2.10 Absence of Litigation ......................................... 8
Section 2.11 Proxy Statement ............................................... 8
Section 2.12 Vote Required ................................................. 8
Section 2.13 Brokers ....................................................... 8
Section 2.14 Intellectual Property Rights .................................. 9
Section 2.15 Real Property ................................................. 9
Section 2.16 Environmental Matters ......................................... 9
Section 2.17 Taxes ......................................................... 10
Section 2.18 Related Party Agreements ...................................... 12
Section 2.19 Labor Matters ................................................. 12
Section 2.20 Contracts ..................................................... 12
ARTICLE III REPRESENTATIONS AND WARRANTIES OF INVESTOR ....................
Section 3.01 Corporate Organization ........................................ 13
Section 3.02 Authority Relative to This Agreement .......................... 13
Section 3.03 No Conflict; Required Filings and Consents .................... 13
Section 3.04 Financing ..................................................... 13
Section 3.05 Proxy Statement ............................................... 14
Section 3.06 Brokers ....................................................... 14
ARTICLE IV CONDUCT OF BUSINESS PENDING THE MERGER ........................
Section 4.01 Conduct of Business by the Company Pending the Merger ........ 14
ARTICLE V ADDITIONAL AGREEMENTS .........................................
Section 5.01 Stockholders' Meeting ......................................... 15
Section 5.02 Proxy Statement ............................................... 16
Section 5.03 Financing ..................................................... 16
Section 5.04 Access to Information; Confidentiality ........................ 16
Section 5.05 Employee Benefits Matters ..................................... 16
i
<PAGE>
PAGE
--------
Section 5.06 Directors' and Officers' Indemnification and Insurance ....... 16
Section 5.07 No Solicitation of Transactions ............................... 18
Section 5.08 Notification of Certain Matters ............................... 18
Section 5.09 Further Action ................................................ 18
Section 5.10 Public Announcements .......................................... 19
Section 5.11 Environmental Assessment ...................................... 19
Section 5.12 Termination Fees and Expenses ................................. 19
Section 5.13 Management Shares ............................................. 20
Section 5.14 Employee Options .............................................. 20
ARTICLE VI CONDITIONS TO THE MERGER ......................................
Section 6.01 Conditions to Each Party's Obligations ........................ 20
Section 6.02 Conditions to Obligations of Investor ......................... 20
Section 6.03 Conditions to Obligations of the Company ...................... 21
ARTICLE VII TERMINATION ...................................................
Section 7.01 Termination ................................................... 21
Section 7.02 Effect of Termination ......................................... 22
ARTICLE VIII GENERAL PROVISIONS ............................................
Section 8.01 Non-Survival of Representations, Warranties and Agreements ... 22
Section 8.02 Expenses ...................................................... 22
Section 8.03 Amendment ..................................................... 22
Section 8.04 Waiver ........................................................ 22
Section 8.05 Notices ....................................................... 22
Section 8.06 Certain Definitions ........................................... 23
Section 8.07 Severability .................................................. 23
Section 8.08 Entire Agreement; Assignment .................................. 24
Section 8.09 Parties in Interest ........................................... 24
Section 8.10 Specific Performance .......................................... 24
Section 8.11 Governing Law ................................................. 24
Section 8.12 Headings ...................................................... 24
Section 8.13 Counterparts .................................................. 24
</TABLE>
ii
<PAGE>
GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
LOCATION OF
DEFINED TERM DEFINITION
- ----------------------------------- -------------------
<S> <C>
Acquisition Proposal ............... Section 5.07
affiliate .......................... Section 8.06(a)
Agreement .......................... Preamble
Benefit Plans ...................... Section 2.09(a)
Blue Sky Laws ...................... Section 2.05(b)
Board .............................. Recitals
business day ....................... Section 8.05(b)
CERCLA ............................. Section 2.16(b)
Certificate of Merger .............. Section 1.02
Certificates ....................... Section 1.09(b)
Claim .............................. Section 5.09(c)
Closing ............................ Section 1.02
Closing Date ....................... Section 1.02
Code ............................... Section 2.09(d)
Commitment Letter .................. Recitals
Company ............................ Preamble
Company Common Stock ............... Section 1.06(a)
Company Preferred Stock ............ Section 2.03
Confidentiality Agreement .......... Section 5.04(b)
control ............................ Section 8.06(c)
Costs and Expenses ................. Section 5.12(b)
Debt Financing ..................... Section 3.04
Delaware Law ....................... Recitals
Directors Plan ..................... Section 1.07
Disclosure Schedule ................ Section 2.05
Dissenting Shares .................. Section 1.08(a)
Effective Time ..................... Section 1.02
Environmental Laws ................. Section 2.16(f)
Environmental Permits .............. Section 2.16(a)
ERISA .............................. Section 2.09
Exchange Act ....................... Section 2.07(a)
Financing .......................... Section 3.04
FS & Co. ........................... Section 5.12
Government Antitrust Authority .... Section 5.08(b)
Group .............................. Section 7.01(f)
HSR Act ............................ Section 2.05(b)
Hazardous Materials ................ Section 2.16
Indemnified Parties ................ Section 5.06(b)
Intellectual Property .............. Section 2.14
Investor ........................... Preamble
Investor Equity Contribution ...... Section 3.04
Leased Property .................... Section 2.15(b)
Leases ............................. Section 2.15(b)
Material Adverse Effect ............ Section 2.01
Maximum Amount ..................... Section 5.06(c)
Merger ............................. Recitals
Merger Consideration ............... Section 1.06(a)
iii
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<CAPTION>
LOCATION OF
DEFINED TERM DEFINITION
- ----------------------------------- -------------------
<S> <C>
Named Executives ................... Section 2.09(e)
1987 Plan .......................... Section 1.07
Options ............................ Section 1.07
Option Plans ....................... Section 1.07
Owned Real Property ................ Section 2.15(a)
Paying Agent ....................... Section 1.09(a)
Permitted Real Property Liens ..... Section 2.15(a)
person ............................. Section 8.06(d)
Proxy Statement .................... Section 2.11
Real Properties .................... Section 2.15(b)
Returns ............................ Section 2.17(a)
Schedule 13E-3 ..................... Section 2.11
SEC ................................ Section 2.07(a)
SEC Reports ........................ Section 2.07(a)
Securities Act ..................... Section 2.07(a)
Shares ............................. Section 1.06(a)
Sites .............................. Section 2.16(a)
Stockholders' Meeting .............. Section 5.01(a)
Subsidiaries or Subsidiary ......... Section 8.06(e)
Surviving Corporation .............. Section 1.01
Taxes .............................. Section 2.17(a)
</TABLE>
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AGREEMENT AND PLAN OF MERGER, dated as of June 13, 1995 (this
"Agreement"), between VB INVESTMENT CORPORATION, a Delaware corporation
("Investor"), and LILLIAN VERNON CORPORATION, a Delaware corporation (the
"Company").
WHEREAS, the Boards of Directors of Investor and the Company have each
approved the merger (the "Merger") of Investor with and into the Company in
accordance with the General Corporation Law of the State of Delaware
("Delaware Law") upon the terms and subject to the conditions set forth
herein;
WHEREAS, the Boards of Directors of Investor and the Company have approved
the obtaining of financing by the Company pursuant to the terms of the letter
from Merrill Lynch Capital Corporation to Investor, dated June 13, 1995 (the
"Commitment Letter"); and
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that the Merger is fair to, and in the best interests of, the
stockholders of the Company and has resolved and agreed to adopt this
Agreement and the transactions contemplated hereby and to recommend approval
of the Merger and approval and adoption of this Agreement by such
stockholders;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Investor and the Company hereby agree as follows:
ARTICLE I
THE MERGER
Section 1.01. The Merger. Upon the terms and subject to the conditions set
forth in Article VI, and in accordance with Delaware Law, at the Effective
Time (as hereinafter defined) Investor shall be merged with and into the
Company. As a result of the Merger, the separate corporate existence of
Investor shall cease and the Company shall continue as the surviving
corporation of the Merger (the "Surviving Corporation").
Section 1.02. Effective Time; Closing. As promptly as practicable, but in
any event no more than five business days, after the satisfaction or waiver
of the conditions set forth in Article VI, the parties hereto shall cause the
Merger to be consummated by filing this Agreement or a certificate of merger
or a certificate of ownership and merger (the "Certificate of Merger") with
the Secretary of State of the State of Delaware, in such form as required by,
and executed in accordance with the relevant provisions of, Delaware Law (the
date and time of the filing of the Certificate of Merger with the Secretary
of State of the State of Delaware being the "Effective Time"). Immediately
prior to the filing referred to in this Section 1.02, a closing shall be held
at the offices of Shearman & Sterling, 599 Lexington Avenue, New York, New
York, or such other place as the parties shall agree, for the purpose of
confirming all of the foregoing (the "Closing"; the date of the Closing being
the "Closing Date").
Section 1.03. Effect of the Merger. At the Effective Time, the effect of
the Merger shall be as provided in the applicable provisions of Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time all the property, rights, privileges, powers and franchises of
the Company and Investor shall vest in the Surviving Corporation, and all
debts, liabilities, obligations, restrictions, disabilities and duties of the
Company and Investor shall become the debts, liabilities, obligations,
restrictions, disabilities and duties of the Surviving Corporation.
Section 1.04. Certificate of Incorporation; By-laws.
(a) Unless otherwise determined by Investor prior to the Effective Time,
at the Effective Time the Certificate of Incorporation of the Company, as in
effect immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as
provided by law and such Certificate of Incorporation.
(b) Unless otherwise determined by Investor prior to the Effective Time,
the By-laws of the Company, as in effect immediately prior to the Effective
Time, shall be the By-laws of the Surviving Corporation until thereafter
amended as provided by law, the Certificate of Incorporation of the Surviving
Corporation and such By-laws.
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Section 1.05. Directors and Officers. The directors of Investor
immediately prior to the Effective Time, together with the Chairman of the
Company, shall be the initial directors of the Surviving Corporation, each to
hold office in accordance with the Certificate of Incorporation and By-laws
of the Surviving Corporation, and the officers of the Company immediately
prior to the Effective Time shall be the initial officers of the Surviving
Corporation, in each case until their respective successors are duly elected
or appointed and qualified.
Section 1.06. Conversion of Securities. At the Effective Time, by virtue
of the Merger and without any action on the part of Investor, the Company or
the holders of any of the following securities:
(a) each share of Common Stock, par value $.01 per share, of the
Company ("Common Stock") (shares of Common Stock being hereinafter
collectively referred to as "Shares" and individually as a "Share") issued
and outstanding immediately prior to the Effective Time (other than any
Shares to be cancelled pursuant to Section 1.06(b), each Share to remain
outstanding under Section 1.06(c) and any Dissenting Shares (as defined in
Section 1.08(a)) shall be cancelled and shall be converted automatically
into the right to receive an amount equal to $19.00 in cash (the "Merger
Consideration") payable to the holder thereof, without interest, upon
surrender of the certificate formerly representing such Share in the
manner provided in Section 1.09;
(b) each Share held in the treasury of the Company and each Share
owned by Investor or the Company immediately prior to the Effective Time
shall be cancelled without any conversion thereof and no payment or
distribution shall be made with respect thereto;
(c) 657,895 Shares and 394,737 Shares registered in the names of
Lillian Vernon and David Hochberg, respectively, shall not be cancelled as
provided above but shall remain outstanding; and
(d) a number of shares of common stock, par value $.01 per share, of
Investor equal to the quotient of (i) the Investor Equity Contribution and
(ii) $19.00 shall be converted into and exchanged for the same number of
validly issued, fully paid and nonassessable shares of Common Stock, par
value $.01 per share, of the Surviving Corporation.
Section 1.07. Employee Stock Options and Other Equity Awards. Except as
may otherwise be agreed by Investor and any holder of any outstanding
employee or director options to purchase Company Common Stock, including any
related tandem stock appreciation right ("Options"), granted under the
Company's 1987 Performance Unit, Restricted Stock, Nonqualified Option and
Incentive Stock Option Plan (the "1987 Plan") and 1993 Stock Option Plan for
Non-Employee Directors (the "Directors Plan" and, together with the 1987
Plan, the "Option Plans"), each of such holder's Options under the Directors
Plan, whether or not vested, shall be cancelled without further action
required on the part of the holder of such Option, and each of such holder's
Options under the 1987 Plan, upon the consent of such holder, whether or not
vested, shall be cancelled, for the right to receive at the Effective Time an
amount in cash equal to the product of (i) the excess of the Merger
Consideration over the exercise price per share of such Option, and (ii) the
number of shares of Common Stock subject to such Option.
Section 1.08. Dissenting Shares. (a) Notwithstanding any provision of this
Agreement to the contrary, Shares that are outstanding immediately prior to
the Effective Time and which are held by stockholders who shall have not
voted in favor of 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 Delaware Law (collectively, the "Dissenting Shares")
shall not be converted into or represent the right to receive the Merger
Consideration. Such stockholders shall be entitled to receive payment of the
appraised value of such Shares held by them in accordance with the provisions
of such Section 262, except that all Dissenting Shares held by stockholders
who shall have failed to perfect or who effectively shall have withdrawn or
lost their right to appraisal of such Shares under such Section 262 shall
thereupon be deemed to have been converted into and to have become
exchangeable for, as of the Effective Time, the right to receive the Merger
Consideration, without any interest thereon, upon surrender, in the manner
provided in Section 1.09, of the certificate or certificates that formerly
evidenced such Shares.
(b) The Company shall give Investor (i) prompt notice of any demands for
appraisal received by the Company, withdrawals of such demands, and any other
instruments served pursuant to Delaware Law and
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received by the Company and (ii) the opportunity to direct all negotiations
and proceedings with respect to demands for appraisal under Delaware Law. The
Company shall not, except with the prior written consent of Investor, make
any payment with respect to any demands for appraisal or offer to settle or
settle any such demands.
Section 1.09. Surrender of Shares; Stock Transfer Books. (a) Prior to the
Effective Time, Investor shall designate a bank or trust company to act as
agent for the holders of Shares in connection with the Merger (the "Paying
Agent") to receive the funds to which holders of Shares shall become entitled
pursuant to Section 1.06(a). At the Effective Time, Investor will make
available to the Paying Agent sufficient funds, together with funds to be
provided by the Company pursuant to the Commitment Letter, to pay the Merger
Consideration in respect of all Shares (other than any Shares to be cancelled
pursuant to Section 1.06(b), each Share to remain outstanding under Section
1.06(c) and any Dissenting Shares). Such funds shall be invested by the
Paying Agent as directed by the Surviving Corporation, provided that such
investments shall be in obligations of or guaranteed by the United States of
America or of any agency thereof and backed by the full faith and credit of
the United States of America, in commercial paper obligations rated A-1 or
P-1 or better by Moody's Investors Service, Inc. or Standard & Poor's
Corporation, respectively, or in deposit accounts, certificates of deposit or
banker's acceptances of, repurchase or reverse repurchase agreements with, or
Eurodollar time deposits purchased from, commercial banks with capital,
surplus and undivided profits aggregating in excess of $500 million (based on
the most recent financial statements of such bank which are then publicly
available at the SEC or otherwise).
(b) Promptly after the Effective Time, the Surviving Corporation shall
cause to be mailed to each record holder, as of the Effective Time, of an
outstanding certificate or certificates which immediately prior to the
Effective Time represented 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 effecting
the surrender of the Certificates for payment of the Merger Consideration
therefor. Upon surrender to the Paying Agent of a Certificate, together with
such letter of transmittal, duly completed and validly executed in accordance
with the instructions thereto, and such other documents as may be required
pursuant to such instructions, the holder of such Certificate shall be
entitled to receive in exchange therefor the Merger Consideration for each
Share formerly evidenced by such Certificate, and such Certificate shall then
be cancelled. No interest shall accrue or be paid on the Merger Consideration
payable upon the surrender of any Certificate for the benefit of the holder
of such Certificate. If payment of the Merger Consideration is to be made to
a person other than the person in whose name the surrendered Certificate is
registered on the stock transfer books of the Company, it shall be a
condition of payment that the Certificate so surrendered shall be endorsed
properly or otherwise be in proper form for transfer and that the person
requesting such payment shall have paid all transfer and other taxes required
by reason of the payment of the Merger Consideration to a person other than
the registered holder of the Certificate surrendered or shall have
established to the satisfaction of the Surviving Corporation that such taxes
either have been paid or are not applicable. The right to receive the Merger
Consideration shall be subject to and reduced by the amount of any required
tax withholding obligation.
(c) At any time following the sixth month after the Effective Time, the
Surviving Corporation shall be entitled to require the Paying Agent to
deliver to it any funds which had been made available to the Paying Agent and
not disbursed to holders of Shares (including, without limitation, all
interest and other income received by the Paying Agent in respect of all
funds made available to it), and thereafter such holders shall be entitled to
look to the Surviving Corporation (subject to abandoned property, escheat and
other similar laws) only as general creditors thereof with respect to any
Merger Consideration payable upon due surrender of the Certificates held by
them. Notwithstanding the foregoing, neither the Surviving Corporation nor
the Paying Agent shall be liable to any holder of a Share for any Merger
Consideration delivered in respect of such Share to a public official
pursuant to any abandoned property, escheat or other similar law.
(d) At the close of business on the day of the Effective Time, the stock
transfer books of the Company shall be closed and thereafter there shall be
no further registration of transfers of Shares on the
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records of the Company (other than with respect to Shares to be outstanding
after the Effective Time under Section 1.06(c) or 1.06(d)). From and after
the Effective Time, the holders of Shares (other than with respect to Shares
to remain outstanding under Section 1.06(c) or 1.06(d)) outstanding
immediately prior to the Effective Time shall cease to have any rights with
respect to such Shares except as otherwise provided herein or by applicable
law.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Investor that:
Section 2.01. Organization and Qualification; Subsidiaries. Each of the
Company and each Subsidiary of the Company is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation and has the requisite power and authority to own, lease and
operate its properties and to carry on its business as it is now being
conducted. Each of the Company and its Subsidiaries has all necessary
licenses, permits, authorizations and governmental approvals to own, lease
and operate its properties and to carry on its business as it is now being
conducted, except where the failure to have such licenses, permits and
governmental approvals would not, individually or in the aggregate, have a
Material Adverse Effect (as defined below). The Company and each Subsidiary
is duly qualified or licensed as a foreign corporation to do business, and is
in good standing, in each jurisdiction where the character of the properties
owned, leased or operated by it or the nature of its business makes such
qualification or licensing necessary, except for such failures to be so
qualified or licensed and in good standing that would not, individually or in
the aggregate, have a Material Adverse Effect. When used in connection with
the Company or any Subsidiary, the term "Material Adverse Effect" means any
change in or effect on the Company and its Subsidiaries that is materially
adverse to the financial condition, operations, business, results of
operations or assets of the Company and its Subsidiaries taken as a whole.
All of the Company's Subsidiaries are set forth on Schedule 2.01. Each
Subsidiary is wholly owned by the Company.
Section 2.02. Certificate of Incorporation and By-laws. The Company has
heretofore furnished to Investor a complete and correct copy of the
Certificate of Incorporation and the By-laws of the Company and each of the
Subsidiaries, in each case, as amended through the date hereof. Such
Certificates of Incorporation and By-laws are in full force and effect. None
of the Company and its Subsidiaries is in violation of any of the provisions
of its Certificate of Incorporation or By-laws.
Section 2.03. Capitalization. The authorized capital stock of the Company
consists of 20,000,000 Shares and 2,000,000 shares of Preferred Stock, par
value $.01 per share ("Company Preferred Stock"). As of the date hereof, (i)
9,931,187 Shares are issued and outstanding, all of which are duly
authorized, validly issued, fully paid and nonassessable, of which 224,349
Shares are held in the treasury of the Company, and (ii) 1,023,500 Shares are
reserved for future issuance pursuant to stock options granted pursuant to
the Company's Option Plans. As of the date hereof, no shares of Company
Preferred Stock are issued and outstanding. Except as set forth on Schedule
2.03, there are no options, warrants or rights of conversion, preemptive
rights, or other rights, agreements, arrangements or commitments of any
character relating to the issued or unissued capital stock of the Company or
any Subsidiary or obligating the Company or any Subsidiary to issue or sell
any shares of capital stock of, or other equity interests in, the Company or
any Subsidiary. All Shares subject to issuance as aforesaid, upon issuance on
the terms and conditions specified in the instruments pursuant to which they
are issuable, will be duly authorized, validly issued, fully paid and
nonassessable. There are no outstanding contractual obligations of the
Company or any Subsidiary to repurchase, redeem or otherwise acquire any
Shares or any capital stock of any Subsidiary or to provide funds to, or make
any investment (in the form of a loan, capital contribution or otherwise) in,
any Subsidiary or any other person. Each outstanding share of capital stock
of each Subsidiary is duly authorized, validly issued, fully paid and
nonassessable and each such share owned by the Company or another Subsidiary
is free and clear of all security interests, liens, claims, pledges, options,
rights of first refusal, agreements and limitations on the Company's or such
other Subsidiary's voting rights, charges and other encumbrances of any
nature whatsoever.
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Section 2.04. Authority Relative to This Agreement. (a) The Company has
all necessary corporate power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and to consummate the Merger.
The execution, delivery and performance of this Agreement by the Company and
the consummation by the Company of the Merger have been duly and validly
authorized by all necessary corporate action and no other corporate
proceedings on the part of the Company are necessary to authorize this
Agreement or to consummate the Merger (other than, with respect to the
Merger, the approval and adoption of this Agreement by the holders of a
majority of the then outstanding Shares and the filing and recordation of
appropriate merger documents as required by Delaware Law). This Agreement has
been duly and validly executed and delivered by the Company and, assuming the
due authorization, execution and delivery by Investor, constitutes the legal,
valid and binding obligation of the Company enforceable against the Company
in accordance with its terms.
(b) The Company hereby represents that (i) the Board, at a meeting duly
called and held on June 13, 1995, at which three members of the Board did not
vote, (A) determined that this Agreement and the transactions contemplated
hereby, including the Merger, are fair to and in the best interests of the
stockholders of the Company, (B) approved and adopted this Agreement and the
Merger and (C) recommended that the stockholders of the Company approve and
adopt this Agreement and the Merger (provided that such recommendation may
only be withdrawn if the Board determines in good faith after consultation
with independent counsel that such action is required for the Board to comply
with its fiduciary duties to stockholders imposed by Delaware Law), and (ii)
Goldman, Sachs & Co. has delivered to the Board an oral opinion that the
consideration to be received by the holders of Shares pursuant to the Merger
is fair to the holders of Shares from a financial point of view.
Section 2.05. No Conflict; Required Filings and Consents. (a) The
execution and delivery of this Agreement by the Company do not, and the
performance of this Agreement by the Company will not, (i) conflict with or
violate the Certificate of Incorporation or By-laws or equivalent
organizational documents of the Company or any Subsidiary, (ii) assuming that
all consents, approvals, authorizations and other actions described in
subsection (b) have been obtained and all filings and obligations described
in subsection (b) have been made, conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to the Company or any
Subsidiary or by which any property or asset of the Company or any Subsidiary
is bound or affected, or (iii) except as disclosed in Section 2.05 of the
Disclosure Schedule, require any consent under, result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any right of termination,
amendment, acceleration or cancellation of, or result in the creation of a
lien or other encumbrance on any property or asset of the Company or any
Subsidiary pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or
obligation except, with respect to clauses (ii) and (iii), for any such
conflicts, violations, breaches, defaults, or other occurrences which would
not, individually or in the aggregate, have a Material Adverse Effect.
(b) The execution and delivery of this Agreement by the Company do not,
and the performance of this Agreement by the Company will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any third party or governmental or regulatory authority, domestic or
foreign, except (i) for applicable requirements, if any, of the Exchange Act,
state securities or "blue sky" laws ("Blue Sky Laws") and state takeover
laws, the pre-merger notification requirements of the Hart-Scott- Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and regulations
thereunder (the "HSR Act"), or (ii) where failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, would not prevent or delay consummation of the Merger, or
otherwise prevent the Company from performing its obligations under this
Agreement, and would not, individually or in the aggregate, have a Material
Adverse Effect.
Section 2.06. Compliance. Neither the Company nor any Subsidiary is in
conflict with, or in default or violation of, (i) any law, rule, regulation,
order, judgment or decree applicable to the Company or any Subsidiary or by
which any property or asset of the Company or any Subsidiary is bound or
affected, or (ii) any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which
the Company or any Subsidiary is a party or by which the Company or any
Subsidiary or any property or asset of the Company or any Subsidiary is bound
or affected, except for any such conflicts, defaults or violations that would
not, individually or in the aggregate, have a Material Adverse Effect.
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Section 2.07. SEC Filings; Financial Statements. (a) The Company has
filed all forms, reports and documents required to be filed by it with the
Securities and Exchange Commission (the "SEC") since February 23, 1992
(collectively, the "SEC Reports"). The SEC Reports (i) were prepared in
accordance and complied with the requirements of the Securities Act of 1933,
as amended (the "Securities Act"), or the Securities Exchange Act of 1934
(the "Exchange Act"), as the case may be, (ii) did not at the time they were
filed contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements made therein, in the light of the circumstances under which they
were made, not misleading, and (iii) were filed in a timely manner. No
Subsidiary was or is required to file any form, report or other document with
the SEC.
(b) Each of the Company's consolidated financial statements (including, in
each case, the Company's consolidated balance sheets and statements of
income, stockholders' equity and cash flows and any notes and schedules
thereto) contained in the SEC Reports (i) was prepared in accordance with
United States generally accepted accounting principles applied on a
consistent basis throughout the periods indicated (except as may be indicated
in the notes thereto) and each fairly presented the consolidated financial
position of the Company and the consolidated Subsidiaries as at the
respective dates thereof and for the respective periods indicated therein
except as otherwise noted therein (subject, in the case of unaudited
statements, to normal and recurring year-end adjustments which were not and
are not expected, individually or in the aggregate, to have a Material
Adverse Effect), and (ii) was based on and prepared in accordance with the
books and records of the Company and its Subsidiaries, which books and
records were accurately maintained in all material respects.
Section 2.08. Absence of Certain Changes or Events. Since February 25,
1995, except as contemplated by this Agreement, disclosed in any SEC Report
filed since February 25, 1995 to the date of this Agreement, or as described
on Schedule 2.08, the Company and its Subsidiaries have conducted their
businesses only in the ordinary course and in a manner consistent with past
practice and, since such date, there has not been (i) any Material Adverse
Effect, without regard, however, to changes generally applicable to the
industries in which the Company and its Subsidiaries are involved or general
economic conditions, (ii) any change in accounting methods, principles,
practices, policies or procedures affecting any of the Company's consolidated
assets, liabilities, results of operations or business or any increase or
change in any assumptions underlying, or methods of calculating, any bad
debt, contingency or other reserves, except for changes required by United
States generally accepted accounting principles, (iii) any declaration,
setting aside or payment of any dividend or distribution, whether in cash,
stock, property or otherwise, with respect to any of its capital stock, or
any redemption, purchase or other acquisition of any of its securities other
than regular quarterly dividends on the Shares of $.07 per Share, (iv) except
as set forth on Schedule 2.08, any increase in or establishment of any bonus,
insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including, without limitation, the granting of stock
options, stock appreciation rights, performance awards, or restricted stock
awards), stock purchase or other employee benefit plan, or any other increase
in the compensation payable or to become payable to any directors, officers
or employees of the Company or any Subsidiary, except in the ordinary course
of business consistent with past practice or any grant of severance or
termination pay to, or entering into any employment, consulting or severance
agreement with any present or former director, officer or other employee of
the Company or any of its Subsidiaries, (v) any amendment to the Company's or
any Subsidiaries' Certificate of Incorporation or By-laws, (vi) any
reclassification, combination, split, subdivision or redemption, purchase or
other acquisition, directly or indirectly, by the Company or any Subsidiary
of any of the Company's or any of its Subsidiaries' capital stock (other than
in connection with the Option Plans), (vii) any acquisition (whether by
merger, consolidation, acquisition of stock or assets or otherwise) of any
corporation, partnership or other business organization or division thereof,
(viii) any agreement or transaction or any amendment, modification,
cancellation or termination thereof involving the Company or any of its
Subsidiaries that (A) involved consideration in excess of $500,000 (other
than inventory acquisitions and dispositions, paper purchase contracts or
contracts for the printing of catalogs in the ordinary course of business
consistent with prior practice, in each case for a term of less than 180
days); or (B) involved the sale or acquisition or lease of any material
assets, (ix) any cancellation of indebtedness or obligation owed to the
Company or any of its Subsidiaries, or settlement or compromise of any claims
thereof, in an aggregate amount, or having an aggregate value, greater than
$500,000, or
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waiver of any rights of similar value to the Company or any of its
Subsidiaries relating to any of their respective business activities or
properties, (x) any capital expenditure in excess of $250,000, except in
accordance with the Company's capital expenditure budget for the fiscal year
ending February 23, 1996, a copy of which is attached as Schedule 4.01, (xi)
any material revaluation of any assets, including, without limitation, any
write-offs of material notes, material increases in any reserves or any
material write-up of the value of inventory, property, plant, equipment or
any other asset, (xii) any damage, destruction or loss (whether or not
covered by insurance) affecting any office or warehouse involved in the
Company's business or any other asset of the Company and resulting in a loss
in excess of $500,000, or (xiii) any plan, commitment to, or any agreement to
do, or take any action in preparation for, any of the foregoing.
Section 2.09. Employee Benefits. For purposes of this Section 2.09, the
term "Company" shall include its Subsidiaries. No breach of the following
provisions of this Section 2.09 shall be considered to exist (i) if it is set
forth in Schedule 2.09, or (ii) unless it, when considered together with all
other breaches of this Section 2.09, shall have a Material Adverse Effect.
(a) Schedule 2.09 sets forth a true and complete list of:
(i) All employee benefit plans, as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974 ("ERISA"); and
(ii) All other profit-sharing, deferred compensation, bonus, stock
option, stock purchase, stock bonus, vacation pay, holiday pay,
severance, dependent care assistance, excess benefit, incentive,
salary continuation, and other compensation arrangements (including
employment and consulting agreements) maintained or contributed to by
the Company for the benefit of its employees (or former employees)
and/or their beneficiaries. Both of these types of plans shall be
collectively referred to as "Benefit Plans." An arrangement will not
fail to be a "Benefit Plan" simply because it only covers one
individual.
(b) The Company has delivered to Investor a true and complete copy of:
(i) Each Benefit Plan and any related funding agreements, as well
as all amendments thereto;
(ii) The current draft of the Summary Plan Description of each
Benefit Plan (if applicable);
(iii) The most recent Internal Revenue Service determination letter
(if applicable) for each Benefit Plan, which determination letter
reflects all amendments that have been made to the plan; and
(iv) The actuarial report and/or financial statement for the most
recently completed plan year of the Benefit Plan for which the Company
has had an actuarial report and/or a financial statement prepared.
(c) With respect to each Benefit Plan that is subject to Title IV of
ERISA, the value, determined on a termination basis using the actuarial
assumptions stated in the plan, of all accrued and ancillary benefits
(whether or not vested) under each such plan did not exceed, as of the
most recent valuation date, and will not exceed as of the Closing Date,
the then current fair market value of the assets of the plan.
(d) Each Benefit Plan complies currently, and has complied in the
past, in form and operation, with all applicable law, such as ERISA and
the Code (including Section 4980B thereof). Each Benefit Plan has been
operated in accordance with its terms. Furthermore, the Internal Revenue
Service has issued a favorable determination letter with respect to each
Benefit Plan that is intended to qualify under Section 401(a) of the Code,
and no event has occurred before or after the date of the letter that
would disqualify the plan.
(e) Other than payments that may be made to the persons listed on
Schedule 2.09 ("Named Executives"), no amount that could be received
(whether in the form of cash, property, or the vesting of an interest in
property) as a result of any of the transactions contemplated by this
Agreement by any person who is a "disqualified individual" (as defined in
Section 280G(c) of the Code) under any
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agreement, would be characterized as an "excess parachute payment" (as is
defined in Section 280G(b)(1) of the Code). Set forth in Schedule 2.09 is
(i) the maximum amount that could be paid to each Named Executive as a
result of the transactions contemplated by this Agreement and (ii) the
"base amount" (as such term is defined in Section 280G(b)(3) of the Code)
for each Named Executive calculated as of the date of this Agreement.
(f) The Company does not maintain any plan that provides (or will
provide) medical or death benefits to one or more former employees
(including retirees), other than benefits that are required to be provided
pursuant to Section 4980B of the Code or state law continuation coverage
rights.
(g) There are no investigations, proceedings, or lawsuits, either
currently in progress or expected to be instituted in the future, relating
to any Benefit Plan, by any administrative agency, whether local, state,
or federal.
(h) There are no lawsuits or other claims, pending or threatened
(other than routine claims for benefits under the plan) against or
involving (i) any Benefit Plan, or (ii) any Fiduciary of such plan (within
the meaning of Section 3(21)(A) of ERISA) brought on behalf of any
participant, beneficiary, or Fiduciary thereunder, nor is there any
reasonable basis for any such claim.
(i) The Company has no intention or commitment, whether legally
binding or not, to create any additional Benefit Plan, or to modify or
change any existing Benefit Plan. The benefits under all Benefit Plans are
as represented, and have not been, and will not be increased subsequent to
the date documents are provided to Buyer. The Company does not participate
in any Multiemployer plans (as defined in ERISA).
(j) None of the persons performing services for the Company have been
improperly classified as independent contractors or as being exempt from
the payment of wages for overtime.
Section 2.10. Absence of Litigation. Except as disclosed in the SEC
Reports filed on or before the date hereof and in Schedule 2.10, there are no
suits, arbitrations, mediations, complaints, claims, actions, proceedings or
investigations pending or, to the knowledge of the Company, threatened
against the Company or any Subsidiary, or any properties or rights of the
Company or any Subsidiary, before any court, arbitrator or administrative,
governmental or regulatory authority or body, domestic or foreign, that (i)
individually or in the aggregate, would have a Material Adverse Effect or
(ii) seek to delay or prevent the consummation of the Merger. As of the date
hereof, neither the Company nor any Subsidiary nor any of their properties is
subject to any order, writ, judgment, injunction, decree, determination or
award having a Material Adverse Effect.
Section 2.11. Proxy Statement. Neither the proxy statement to be sent to
the stockholders of the Company in connection with the Stockholders' Meeting
(such proxy statement, as amended or supplemented, being referred to herein
as the "Proxy Statement"), nor the transaction statement on Schedule 13E- 3
to be filed with the SEC (such transaction statement, as amended or
supplemented, being referred to herein as the "Schedule 13E-3") shall, at the
date the Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to stockholders of the Company or the Schedule 13E-3 (or any
amendment thereof) is filed with the SEC, at the time of the Stockholders'
Meeting and at the Effective Time, be false or misleading with respect to any
material fact, or omit to state any material fact required to be stated
therein or necessary in order to make the statements made therein, in the
light of the circumstances under which they are made, not misleading or
necessary to correct any statement in any earlier communication with respect
to the solicitation of proxies for the Stockholders' Meeting which shall have
become false or misleading. The Proxy Statement and the Schedule 13E-3 shall
comply in all material respects as to form and content with the requirements
of the Exchange Act and the rules and regulations thereunder.
Section 2.12. Vote Required. The affirmative vote of the holders of a
majority of the outstanding Shares is the only vote of the holders of any
class or series of capital stock of the Company necessary to approve this
Agreement and the Merger.
Section 2.13. Brokers. No broker, finder or investment banker (other than
Goldman, Sachs & Co.) is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger based upon
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arrangements made by or on behalf of the Company. The Company has heretofore
furnished to Investor a complete and correct copy of all agreements between
the Company and Goldman, Sachs & Co. pursuant to which such firm would be
entitled to any payment relating to the Merger.
Section 2.14. Intellectual Property Rights. Schedule 2.14 contains a
complete and accurate list of all material trade names, trademarks, brand
names, trade secrets, service marks, patents, copyrights and other
proprietary intellectual property (collectively, the "Intellectual
Property"), including all contracts, agreements and licenses relating
thereto, owned or used by the Company or any Subsidiary, or in which any of
them has any rights. No proceedings have been instituted against or notices
received by the Company or any Subsidiary that are currently unresolved
alleging that the Company or any Subsidiary has infringed or is now
infringing on any Intellectual Property belonging to any other person, firm
or corporation, except such infringements which in the aggregate would not
have a Material Adverse Effect. The Company and the Subsidiaries own or hold
adequate licenses or other rights to use all Intellectual Property necessary
for them to conduct their respective businesses as they are being conducted,
except for such title, license or use imperfections which, in the aggregate,
would not have a Material Adverse Effect. Except as disclosed on Schedule
2.14, none of the Company or any of its Subsidiaries has granted any licenses
with respect to any of their respective Intellectual Property. None of the
Company or any of its Subsidiaries has received any notice, nor does the
Company know of, any conflict or claimed conflict with respect to the rights
of others to the use of their corporate name or any of their Intellectual
Property, except such conflicts or claimed conflicts which, in the aggregate,
would not have a Material Adverse Effect.
Section 2.15. Real Property. (a) Owned Real Property. Schedule 2.15
attached hereto contains a complete and accurate list of all real property
owned in whole or in part by the Company or its Subsidiaries ("Owned Real
Property") and includes the name of the record title holder thereof and a
list of all indebtedness secured by a lien, mortgage or deed of trust
thereon. The Company or its Subsidiaries has good, valid, marketable and
insurable title in fee simple to all the Owned Real Property, free and clear
of all encumbrances, liens, charges or other restrictions of any kind or
character, except for Permitted Real Property Liens. For purposes of this
Agreement, the term "Permitted Real Property Liens" shall mean (i) liens
reflected in Schedule 2.15, (ii) liens consisting of zoning or planning
restrictions, easements, and other customary restrictions or limitations on
the use of real property or other liens, charges or encumbrances which do not
materially detract from the value of, or impair the use of, such property by
the Company or its Subsidiaries in the operation of the business, or (iii)
liens for current taxes, assessments or governmental charges or levies on
property not yet due and payable.
(b) Leased Real Property. Schedule 2.15 attached hereto sets forth a list,
copies of which have been delivered to Investor, of (i) all leases and
subleases under which the Company or its Subsidiaries is the lessor, lessee
or occupant of any real property, together with all amendments, supplements,
nondisturbance agreements and other agreements pertaining thereto (the
"Leased Property", and together with the Owned Real Property, the "Real
Properties"); (ii) all material options held by the Company or its
Subsidiaries or contractual obligations on the part of the Company or its
Subsidiaries to purchase or acquire any interest in real property; and (iii)
all options granted by the Company or its Subsidiaries or contractual
obligations on the part of the Company or its Subsidiaries to sell or dispose
of any interest in real property. The Company or its Subsidiaries has good,
valid, marketable and insurable leasehold title to all such Leased Property,
free and clear of all encumbrances, liens, charges or other restrictions of
any kind or character, except for Permitted Real Property Liens. Each lease,
sublease or other agreement (collectively, the "Leases") set forth in
Schedule 2.15 (or required to be set forth in Schedule 2.15) is in full force
and effect; and except as set forth on Schedule 2.15, there exists no event
of default or event, occurrence, condition or act (including the transactions
contemplated hereby) which, with the giving of notice, the lapse of time or
the happening of any further event or condition, would become a default under
such Lease other than defaults which would not, in the aggregate, have a
Material Adverse Effect.
Section 2.16. Environmental Matters. (a) Except as disclosed in Schedule
2.16 and except as would not, individually or in the aggregate, have a
Material Adverse Effect, (i) the Company and each Subsidiary is in compliance
with all, and has no liability under any Environmental Laws, (ii) the Company
and each Subsidiary holds all the permits, licenses and approvals of
governmental authorities and agencies
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necessary for the current use, occupancy or operation of the Business under
Environmental Laws ("Environmental Permits"), (iii) the Company is in
compliance with all its Environmental Permits, (iv) each of the Real
Properties and each site previously owned, leased or operated by the Company
or any of its Subsidiaries (collectively, the "Sites") is in compliance with
all Environmental Laws, (v) no spill, release, discharge or disposal of
Hazardous Materials has occurred at, on, under or about any Site, and (vi)
none of the Company or any of its Subsidiaries has received notice that the
Company, its Subsidiaries or any Site has been alleged to be in violation of
any Environmental Law.
(b) Except as disclosed in Schedule 2.16, none of the Company or any of
its Subsidiaries has received any written request for information, or been
notified that it is a potentially responsible party, under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), or any other Environmental Law with respect to any Owned Real
Property, Leased Real Property or any other location.
(c) Except as disclosed in Schedule 2.16, none of the Company or any of
its Subsidiaries has entered into or agreed to any consent decree or order
and is not subject to any judgment, decree or judicial order relating to
compliance with or the cleanup of Hazardous Materials under any applicable
Environmental Law or Environmental Permit.
(d) Except as disclosed in Schedule 2.16, none of the Owned Real Property,
Leased Real Property or Sites is listed or, to the knowledge of the Company
or any of its Subsidiaries, proposed for listing on the "National Priorities
List" under CERCLA, or on the Comprehensive Environmental Response,
Compensation and Liability Information System maintained by the United States
Environmental Protection Agency, as updated through the date hereof, or any
similar state list of sites requiring investigation or cleanup.
(e) Schedule 2.16 discloses all information relating to the following
items: (i) all environmental audits or other studies or reports prepared by
third parties to assess Hazardous Material risks at any Site or relating to
the business of the Company or any of its Subsidiaries, and (ii) all
communications and agreements with any governmental authority or agency
(federal, state or local), or any private entity or individual, relating in
any way to the presence, release, threat of release, placement at, on, under
or about any Site, or the use, manufacture, handling, generation, storage,
treatment, discharge, burial or disposal at, on, under or about any Site, or
the transportation to or from any Site, of any Hazardous Materials.
(f) The matters disclosed on Schedule 2.16 do not individually, or in the
aggregate, have a Material Adverse Effect.
For purposes of this Section 2.16, "Hazardous Materials" shall mean
asbestos, petroleum products, underground tanks of any type and all other
materials now or hereafter defined as "hazardous substances", "hazardous
wastes", "toxic substances" or "solid wastes", or otherwise now or hereafter
listed or regulated pursuant to (collectively, the "Environmental Laws"): the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
42 U.S.C. Section 9601 et seq., and any amendments thereto; the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., and any
amendments thereto; the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801 et seq.; and any other similar federal, state or local statute,
regulation, ordinance, order, decree, or any other law, common law theory or
reported decision of any state or federal court, as now or at any time
hereafter in effect, relating to, or imposing liability or standards of
conduct concerning, any hazardous, toxic or dangerous waste, substance or
material.
(g) Investor acknowledges that the representations and warranties
contained in this Section 2.16 are the only representations and warranties
being made with respect to compliance with or liability under Environmental
Laws or with respect to Environmental Permits, and no other representation
contained in this Agreement shall apply to any such matters and no other
representation or warranty, express or implied, is being made with respect
thereto.
Section 2.17. Taxes. Except for such items as would not result in a
Material Adverse Effect, and except for such items as are set forth on
Schedule 2.17:
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(a) the Company has timely filed or been included in, or will timely
file or be included in, all returns, reports and forms ("Returns")
required to be filed by it before the Closing Date or in which it is
required to be included before the Closing Date with respect to all
federal, state, local, foreign and other net income, gross income,
estimated, gross receipts, sales, use, ad valorem, transfer, franchise,
profits, license, lease, service, withholding, value added, payroll,
employment, excise, severance, stamp, occupation, premium, property,
windfall profits, commercial rent or withholding, unemployment insurance,
social security, workers' compensation, customs duties or other taxes,
fees, assessments, duties or governmental charges of any kind whatever,
together with any interest and any penalties, additions to tax or
additional amounts payable with respect thereto (collectively, "Taxes")
for any period ending on or before the Closing Date, taking into account
any extension of time to file granted to or obtained by or on behalf of
the Company;
(b) all Taxes due and owing by the Company (whether or not shown on
any Return) for the period through February 25, 1995 have been paid or are
shown as taxes payable on the February 25, 1995 financial statements, and
any Taxes that become due and owing by the Company after February 25, 1995
and before the Closing Date (whether or not shown on any Return) will be
incurred in the ordinary course of business in a manner consistent with
past practice;
(c) the Company has withheld and paid all Taxes required to be
withheld and paid in connection with amounts paid or owing to any
employee, creditor, independent contractor, shareholder or other third
party;
(d) there are no liens on any of the assets of the Company as a result
of any Tax liabilities except for Taxes not yet due and payable;
(e) to the best of the knowledge of the Company and its employees, no
Tax deficiency of any kind has been claimed, proposed, assessed against or
relating to the Company or on any of its assets with respect to any
taxable period ending on or before the Closing Date; the Company is not a
party to any action or proceeding by any governmental authority for the
assessment or collection of Taxes nor has any such event been asserted or
threatened against or discussed with the Company by any taxing authority;
(f) all Tax deficiencies determined as a result of any past completed
audit have been satisfied;
(g) the Company has delivered to Investor complete and correct copies
of all federal, state, local and foreign income or franchise Returns filed
by the Company for the three most recent taxable years for which such
Returns have been filed immediately preceding the date of this Agreement;
(h) the Company has delivered to Investor complete and correct copies
of all audit reports and statements of deficiencies with respect to any
Tax assessed against or agreed to by the Company for the three most recent
taxable periods for which such audit reports and statements of
deficiencies have been received by the Company;
(i) the Company is not presently under audit, examination or
investigation by any federal, state, local or foreign taxing authority and
there are no pending or (to the best of the knowledge of the Company and
its employees) threatened audits, examinations, investigations or claims
relating to the Company for or with respect to any Taxes;
(j) the Company (i) has not filed a consent pursuant to the
collapsible corporation provisions of section 341(f) of the Code (or any
similar provision of state or other tax law) or agreed at any time to
apply section 341(f)(2) of the Code (or any similar foreign tax provision)
to any disposition of its assets, (ii) other than is reflected in a Return
described in clause (g) above, has not agreed, or is not required under
section 481(a) of the Code (or any similar state or other tax provision),
to make any adjustment by reason of a change in accounting method or
otherwise;
(k) the Company is not a party to or bound by any tax sharing, tax
indemnity or tax allocation agreement or other similar arrangement;
(l) other than with respect to employment agreements or other
arrangements that have already been made known to Investor, the Company
has not made any payments, is not obligated to make any payments or is not
a party to any agreement that under certain circumstances could obligate
it to make any payments that will not be deductible under section 280G of
the Code;
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(m) other than with respect to such matters as have already been made
known to Investor, the Company is not subject to any joint venture,
partnership or other arrangement or contract which could be treated as a
partnership for Tax purposes;
(n) other than with respect to Taxes shown on Returns described in
clause (g) above, the Company is not subject to any Tax imposed on net
income in any jurisdiction or by any taxing authority; and
(o) the Company has not executed or entered into any closing agreement
pursuant to section 7121 of the Code, or any predecessor provision thereof
or any similar provision of state or other law.
Section 2.18. Related Party Agreements. Except as set forth in the SEC
Reports filed on or before the date hereof, there are no contracts,
agreements or understandings by and between or among the Company and its
Subsidiaries and any of their respective stockholders, directors or officers.
Section 2.19. Labor Matters. There are no activities or proceedings of any
labor union (or representatives thereof) to organize any employees employed
by the Company or any of the Subsidiaries, nor any strikes, slowdowns, work
stoppages, lockouts or, to the Company's knowledge, threats thereof, by or
with respect to any of the employees of the Company or any of the
Subsidiaries. Except as set forth on Schedule 2.19, there are no claims that
the Company or any of its Subsidiaries has not complied in any respect with
any laws relating to the employment of labor including, without limitation,
any provisions thereof relating to wages, hours, collective bargaining, the
payment of social security and similar taxes, equal employment opportunity,
employment discrimination or employment safety, except such claims which, in
the aggregate, would not have a Material Adverse Effect.
Section 2.20. Contracts. Schedule 2.20 lists, as of the date hereof
(excluding leases, subleases and amendments thereto set forth on Schedule
2.15 and benefit plans and other contracts set forth on Schedule 2.09) (i)
all contracts, agreements and commitments whether or not fully performed
pursuant to which the Company or any of its Subsidiaries has since February
25, 1995 acquired or disposed of any material portion of its assets; (ii) all
agreements containing covenants not to compete on the part of the Company or
any of its Subsidiaries or otherwise materially restricting the ability of
the Company to engage in business; (iii) all joint venture or partnership
agreements to which the Company or any of its Subsidiaries is a party; (iv)
all agreements with brokers, representatives, dealers or trading companies in
connection with the purchase of in excess of $500,000 of the Company's or any
Subsidiary's products; (v) all other contracts, agreements or arrangements
(other than inventory acquisitions, contracts for the purchase of paper or
contracts for the printing of catalogs entered into in the ordinary course of
business consistent with past practice, in each case with a term of less than
180 days) involving estimated future payments in excess of $500,000 by the
Company or any of its Subsidiaries per year that may not be cancelled upon 90
or fewer days' notice without any liability on the part of the Company; and
(vi) all agreements of the Company or any of its Subsidiaries with respect to
indebtedness or financial obligations (contingent or otherwise) in excess of
$500,000. The items required to be listed in Schedule 2.20 together with (i)
all contracts for the purchase of paper or contracts for the printing of
catalogs with terms of more than 180 days and (ii) and each other agreement
that is material to the conduct of the business of the Company and its
Subsidiaries taken as a whole are hereinafter referred to as the "Contracts."
With respect to each Contract and except as set forth in Schedule 2.20: (i)
such Contract is valid, binding and enforceable against the Company in
accordance with its terms; and (ii) there does not exist, as of the date
hereof, any event that, with the giving of notice or the lapse of time or
both, would constitute on the part of the Company a breach of or a default
under such Contract, and the Company has not received or been given notice of
any such breach or default, except for such breaches or default which would
not, in the aggregate, have a Material Adverse Effect.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Investor hereby represents and warrants to the Company that:
Section 3.01. Corporate Organization. Investor is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has the requisite corporate power and authority and all
necessary governmental approvals to own, lease and operate its properties and
to carry on its business as it is now being conducted, except where the
failure to be so organized, existing or in good standing or to have such
power, authority and governmental approvals would not, individually or in the
aggregate, prevent or materially delay consummation of the Merger, or
otherwise prevent or materially delay Investor from performing its material
obligations under this Agreement.
Section 3.02. Authority Relative to This Agreement. Investor has all
necessary corporate power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and to consummate the Merger.
The execution, delivery and performance of this Agreement by Investor and the
consummation by Investor of the Merger have been duly and validly authorized
by all necessary corporate action on the part of Investor other than the
filing and recordation of appropriate merger documents as required by
Delaware Law. This Agreement has been duly and validly executed and delivered
by Investor and, assuming the due authorization, execution and delivery by
the Company, constitutes legal, valid and binding obligations of Investor
enforceable against Investor in accordance with its terms.
Section 3.03. No Conflict; Required Filings and Consents. (a) The
execution and delivery of this Agreement by Investor do not, and the
performance of this Agreement by Investor will not, (i) conflict with or
violate the Certificate of Incorporation or By-laws of Investor, (ii)
assuming that all consents, approvals, authorizations and other actions
described in subsection (b) have been obtained and all filings and
notifications described in subsection (b) have been made, conflict with or
violate any law, rule, regulation, order, judgment or decree applicable to
Investor or by which any property or asset of either of them is bound or
affected, or (iii) require any consent under, result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of a
lien or other encumbrance on any property or asset of Investor pursuant to,
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which Investor is a
party or by which Investor or any property or asset of Inventory is bound or
affected, except, with respect to clauses (ii) and (iii), for any such
conflicts, violations, breaches, defaults or other occurrences which would
not, individually or in the aggregate, prevent or materially delay
consummation of the Merger, or otherwise prevent or materially delay Investor
from performing its material obligations under this Agreement.
(b) The execution and delivery of this Agreement by Investor do not, and
the performance of this Agreement by Investor will not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, domestic or foreign, except (i) for
applicable requirements, if any, of the Exchange Act, Blue Sky Laws and state
takeover laws, the HSR Act and filing and recordation of appropriate merger
documents as required by Delaware Law and (ii) where failure to obtain such
consents, approvals, authorizations or permits, or to make such filings or
notifications, would not prevent or materially delay consummation of the
Merger, or otherwise prevent or materially delay Investor from performing its
material obligations under this Agreement.
Section 3.04. Financing. Investor has furnished the Company with the
Commitment Letter with respect to which up to $110 million of bank term
credit and $23 million pursuant to a revolving credit facility may be drawn
at Closing (the "Debt Financing"). The Debt Financing, together with a cash
equity contribution by Investor of not less than $52 million (the "Investor
Equity Contribution") will provide all funds necessary to pay the Merger
Consideration in respect of all Shares (other than Shares to be cancelled
pursuant to Section 1.06(b) and each Share to remain outstanding under
Section 1.06(c)), and pay all related fees and expenses in connection with
this Agreement.
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Section 3.05. Proxy Statement. The information supplied by Investor for
inclusion in the Proxy Statement and the Schedule 13E-3 will not, on the date
the Proxy Statement (or any amendment thereof or supplement thereto) is first
mailed to stockholders of the Company or the Schedule 13E-3 (or any amendment
thereof) is filed with the SEC, at the time of the Stockholders' Meeting and
at the Effective Time, contain any statement which, at such time and in light
of the circumstances under which it is made, is false or misleading with
respect to any material fact, or omits to state any material fact required to
be stated therein or necessary in order to make the statements therein not
false or misleading or necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the
Stockholders' Meeting which shall have become false or misleading.
Section 3.06. Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
Merger based upon arrangements made by or on behalf of Investor.
ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER
Section 4.01. Conduct of Business by the Company Pending the Merger. The
Company covenants and agrees that, between the date of this Agreement and the
Effective Time, except as otherwise expressly provided in this Agreement or
unless Investor shall otherwise agree in writing, the businesses of the
Company and its Subsidiaries shall be conducted only in, and the Company and
its Subsidiaries shall not take any action except in, the ordinary course of
business and in a manner consistent with past practice; and the Company shall
use its reasonable best efforts to preserve substantially intact the business
organization of the Company and its Subsidiaries, to keep available the
services of the current officers, employees and consultants of the Company
and its Subsidiaries and to preserve the current relationships of the Company
and its Subsidiaries with customers, suppliers and other persons with which
the Company or any Subsidiary has significant business relations. By way of
amplification and not limitation, neither the Company nor any of its
Subsidiaries shall, between the date of this Agreement and the Effective
Time, except as otherwise expressly provided in this Agreement or as
previously disclosed in the SEC Reports or by the Company to Investor,
directly or indirectly do, or propose or commit to do, any of the following
without the prior written consent of Investor:
(a) amend or otherwise change its Certificate of Incorporation or
By-laws, as amended, or equivalent organizational documents;
(b) issue, sell, pledge, dispose of or encumber, or authorize the
issuance, sale, pledge, disposition or encumbrance of, (A) any shares of
capital stock of any class, or any options, warrants, convertible
securities or other rights of any kind to acquire any shares of capital
stock, or any other ownership interest, of the Company or any of its
Subsidiaries (except for the issuance of a maximum of 1,023,500 shares of
Company Common Stock issuable in accordance with the terms of employee
stock options outstanding on the date hereof) or (B) any assets of the
Company or any of its Subsidiaries, except in the ordinary course of
business and in a manner consistent with past practice;
(c) declare, set aside, make or pay any dividend or distribution,
payable in cash, stock, property or otherwise, with respect to any of its
capital stock, except for the regular quarterly dividend on the Shares in
the amount of $.07 per Share;
(d) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock
(except for any acquisition of securities in connection with the Option
Plans);
(e) (i) acquire (by merger, consolidation, or acquisition of stock or
assets or otherwise) any corporation, partnership or other business
organization or division thereof; (ii) incur any indebtedness for borrowed
money or issue any debt securities or assume, guarantee or endorse or
otherwise as an accommodation become responsible for, the obligations of
any person, or make any loans or advances, except pursuant to credit
facilities in existence at February 25, 1995 and the Debt Financing; (iii)
except for expenditures in accordance with the Company's capital
expenditure budget
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for the fiscal year ended February 23, 1996, a copy of which is attached
as Schedule 4.01, authorize any capital expenditure or commitment for a
future capital expenditure in excess of $100,000, individually or $500,000
in the aggregate for the Company and its Subsidiaries taken as a whole; or
(iv) make any investment in any person, except investments in certificates
of deposit maturing within 90 days of a bank which is organized under the
laws of the United States or any state thereof having capital surplus and
undivided profits aggregating in excess of $500,000,000, or obligations
maturing within 90 days guaranteed by the full faith and credit of the
United States Government;
(f) except to the extent required under existing employee and director
benefit plans, agreements, company policies or other arrangements,
increase the compensation payable or to become payable to its officers or
employees, except for increases in salary or wages of employees of the
Company or its Subsidiaries who are not officers of the Company in the
ordinary course of business in accordance with past practices, or grant
any severance or termination pay to, or enter into any employment,
consulting or severance agreement with any present or former director,
officer or other employee of the Company or any of its Subsidiaries, or
establish, adopt, enter into or amend any bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination, severance or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any
directors, officers or employees;
(g) enter into, amend, modify, cancel or terminate any agreement or
transaction involving the Company or any of its Subsidiaries that (i)
involves consideration in excess of $500,000 (other than (A) inventory
acquisitions and dispositions, contracts for the purchase of paper or
contracts for the printing of catalogs in the ordinary course of business
consistent with prior practice, in each case with a term of less than 180
days or (B) contracts entered into consistent with the Company's prior
practice in materially the same form as the drafts of the four proposed
contracts listed on Schedule 2.20), or (ii) involves the sale, acquisition
or lease of any material assets;
(h) fail to maintain its advertising and promotional expenditures in
the ordinary course of business consistent with past practice;
(i) modify any existing insurance coverage protecting the business,
assets or employees of the Company except in the ordinary course of
business consistent with past practice;
(j) cancel any indebtedness or obligation owed to the Company or any
of its Subsidiaries, or settle or compromise any material claim or waive
any material rights relating to any of their respective business
activities or properties;
(k) revalue any of its assets, including, without limitation, any
write-offs of notes, increases in any reserves except in the ordinary
course of business consistent with past practice or any write-up of the
value of inventory, property, plant, equipment or any other asset;
(l) change any accounting method, principle, practice, policy or
procedure affecting any of the Company's consolidated assets, liabilities,
results of operations or business or increase or change any assumption
underlying, or method of calculating, any bad debt, contingency or other
reserves, except for changes required by United States generally accepted
accounting principles; or
(m) plan, commit, or enter into an agreement, to do, or take any
action in preparation for, any of the things described in clauses (a)
through (l).
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.01. Stockholders' Meeting. (a) The Company, acting through the
Board, shall, (i) in accordance with Delaware Law and the Company's
Certificate of Incorporation and By-laws, as amended, duly call, give notice
of, convene and hold an annual or special meeting of its stockholders as soon
as practicable following the date hereof for the purpose of considering and
taking action on this Agreement and the transactions contemplated hereby (the
"Stockholders' Meeting") and (ii) subject to its fiduciary duties under
applicable law as advised by independent counsel, (A) include in the Proxy
Statement the
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recommendation of the Board that the stockholders of the Company approve and
adopt this Agreement and the Merger and (B) use its reasonable best efforts
to obtain such approval and adoption including the solicitation from its
stockholders of proxies and the retention of a proxy solicitation firm if the
Company or Investor, in its good faith judgment, deems such retention
advisable. At the Stockholders' Meeting, Investor shall cause all Shares then
owned by it to be voted in favor of the approval and adoption of this
Agreement and the Merger.
Section 5.02. Proxy Statement. As soon as practicable following the date
hereof, the Company shall file the Proxy Statement and the Schedule 13E-3
with the SEC under the Exchange Act, and shall use all reasonable efforts to
have the Proxy Statement and the Schedule 13E-3 cleared by the SEC. Investor
and the Company shall cooperate with each other in the preparation of the
Proxy Statement and the Schedule 13E-3; without limiting the generality of
the foregoing, Investor will furnish to the Company the information relating
to Investor required by the Exchange Act to be set forth in the Proxy
Statement and the Schedule 13E-3. Each of the Company and Investor agrees to
use all reasonable efforts, after consultation with the other parties hereto,
to respond promptly to all such comments of and requests by the SEC and to
cause the Proxy Statement and all required amendments and supplements thereto
to be mailed to the holders of Shares entitled to vote at the Stockholders'
Meeting at the earliest practicable time. Notice of the Stockholders' Meeting
and the Fairness Opinion shall be mailed to the stockholders of the Company
along with the Proxy Statement. Goldman, Sachs & Co. shall deliver a written
opinion to the Board dated as of the date of mailing of the Proxy Statement
that the consideration to be received pursuant to the Merger by the holders
of the Shares is fair from a financial point of view.
Section 5.03. Financing. Investor will make the Investor Equity
Contribution at Closing. Investor will use its reasonable best efforts to
arrange on behalf of the Company the Debt Financing prior to the
Stockholders' Meeting. In the event that any portion of the Debt Financing
becomes unavailable, regardless of the reason therefore, Investor will use
its reasonable best efforts to arrange on behalf of the Company alternative
financing from other sources on terms and conditions no less favorable to the
Company than the portion of the Debt Financing that has become unavailable.
In the event the Merger is not consummated, Investor shall pay all fees
(including commitment fees), costs and expenses in connection with arranging
the Debt Financing. The Company will cooperate with Investor with respect to
obtaining the Debt Financing, including taking all actions necessary to
authorize the Debt Financing.
Section 5.04. Access to Information; Confidentiality. (a) From the date
hereof to the Effective Time, the Company shall, and shall cause its
Subsidiaries, officers, directors, employees, auditors and other agents to,
provide the officers, employees, auditors and other agents of Investor, and
financing sources who shall agree to be bound by the provisions of this
Section 5.04 as though a party hereto, complete access at all reasonable
times to its officers, employees, agents, properties, offices, plants and
other facilities and to all books and records, and shall furnish Investor and
such financing sources with all financial, operating and other data and
information as Investor, through its officers, employees or agents, or such
financing sources may reasonably request; provided, that no investigation
pursuant to this Section 5.04 shall alter any representation, warranty or
covenant of any party to this Agreement or any condition to the obligations
of the parties hereto.
(b) All information obtained by Investor pursuant to this Section 5.04
shall be kept confidential in accordance with the confidentiality agreement,
dated February 10, 1995 (the "Confidentiality Agreement"), between Investor
and the Company.
Section 5.05. Employee Benefits Matters. Investor intends that for a
period of twenty-four months immediately following the Effective Time, it
shall, or shall cause the Surviving Corporation to, continue to maintain
employee benefit and welfare plans, programs, contracts, agreements policies
and executive incentives and perquisites, other than equity-based plans for
the benefit of active and retired employees of the Company or the Surviving
Corporation which in the aggregate provide benefits that are no less
favorable to employees than the benefits provided to such active and retired
employees on the date hereof.
Section 5.06. Directors' and Officers' Indemnification and Insurance. (a)
The Certificate of Incorporation and By-laws of the Surviving Corporation
shall contain provisions no less favorable with
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respect to indemnification for events occurring at or before the Effective
Time than are set forth in Article Tenth of the Certificate of Incorporation
and Article IV of the By-laws of the Company, as amended, which provisions
shall not be amended, repealed or otherwise modified for a period of six
years from the Effective Time in any manner that would affect adversely the
rights thereunder of individuals who at the Effective Time were directors,
officers, employees or agents of the Company, or who were, at the Effective
Time, serving at the request of the Company as a director, officer, trustee,
partner, fiduciary, employee or agent of another corporation, partnership,
joint venture, trust, pension or other employee benefit plan or other
enterprise, unless such modification shall be required by law.
(b) The Company shall, to the fullest extent permitted under applicable
law and regardless of whether the Merger becomes effective, indemnify and
hold harmless, and, after the Effective Time, the Surviving Corporation
shall, to the fullest extent permitted under applicable law, indemnify and
hold harmless, each present and former director, officer, employee and agent
of the Company and each Subsidiary and each person who served at the request
of the Company or any Subsidiary as a director, officer, trustee, partner,
fiduciary, employee or agent of another corporation, partnership, joint
venture, trust, pension or other employee benefit plan or enterprise
(collectively, the "Indemnified Parties") against all costs and expenses
(including attorneys' fees), judgments, fines, losses, claims, damages,
liabilities and settlement amounts paid in connection with any claim, action,
suit, proceeding or investigation (whether arising before or after the
Effective Time), whether civil, criminal, administrative or investigative,
arising out of or pertaining to any action or omission in their capacity as
an officer, director, employee, fiduciary, trustee, partner or agent,
occurring at or before the Effective Time. Any Indemnified Party wishing to
claim indemnification under this Section 5.06, upon learning of any action
shall promptly notify the Company or the Surviving Corporation, as the case
may be, thereof, but the failure to so notify shall not relieve the Company
or the Surviving Corporation, as the case may be, of any liability it may
have to such Indemnified Party. In the event of any such claim, action, suit,
proceeding or investigation (whether arising before or after the Effective
Time), (i) the Company or the Surviving Corporation, as the case may be,
shall pay the reasonable fees and expenses of counsel selected by the
Indemnified Parties, which counsel shall be reasonably satisfactory to the
Company or the Surviving Corporation, promptly after statements therefor are
received (provided that the Indemnified Parties shall undertake to repay any
expenses paid in the event the Indemnified Party is determined to be not
entitled to indemnification) and (ii) the Company and the Surviving
Corporation shall cooperate in the defense of any such matter; provided,
however, that neither the Company nor the Surviving Corporation shall be
liable for any settlement effected without its written consent (which consent
shall not be unreasonably withheld); and provided further that neither the
Company nor the Surviving Corporation shall be obligated pursuant to this
Section 5.06 to pay the fees and expenses of more than one counsel for all
Indemnified Parties in any single action except to the extent that two or
more of such Indemnified Parties shall have conflicting interests in the
outcome of such action; and provided further that, in the event that any
claim for indemnification is asserted or made within such six-year period,
all rights to indemnification in respect of such claim shall continue until
the disposition of such claim.
(c) Surviving Corporation shall use its best efforts to maintain in effect
for six years from the Effective Time the current directors' and officers'
liability insurance policies maintained by the Company (provided that
Surviving Corporation may substitute therefor policies reasonably
satisfactory to the Indemnified Parties of at least the same coverage
containing terms and conditions which are not materially less advantageous)
with respect to matters occurring prior to the Effective Time; provided, that
in no event shall the Surviving Corporation be required to pay premiums for
such insurance in excess of 175% of premiums currently paid by the Company
(the "Maximum Amount") and if current insurance coverage cannot be maintained
or obtained for the Maximum Amount, the Surviving Corporation shall obtain as
much directors' and officers' liability insurance as can be obtained by
paying an annual premium not in excess of the Maximum Amount.
(d) In the event the Surviving Corporation or any of its respective
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 all or substantially all of its
properties and assets to any person, then, and in each such case, proper
provision shall be made so that the successors and assigns of the Surviving
Corporation shall assume the obligations set forth in this Section 5.06.
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Section 5.07. No Solicitation of Transactions. Until this Agreement shall
have been terminated pursuant to Section 7.01, neither the Company nor any
Subsidiary shall, directly or indirectly, through any officer, director,
agent or otherwise, solicit, initiate or encourage the submission of any
proposal or offer from any person relating to any acquisition or purchase of
all or (other than in the ordinary course of business) any substantial
portion of the assets of, or any equity interest in, the Company or any
Subsidiary or any business combination with the Company or any Subsidiary
(whether by a tender offer, exchange offer, merger, consolidation or
otherwise) or, except to the extent required by fiduciary obligations under
applicable law as advised in writing by independent counsel, participate in
any negotiations regarding, or furnish to any other person any information
with respect to, or otherwise cooperate in any way with, or assist or
participate in, facilitate or encourage, any effort or attempt by any other
person to do or seek any of the foregoing (an "Acquisition Proposal");
provided, however, that nothing contained in this Section 5.07 shall prohibit
the Board from furnishing information to, or entering into discussions or
negotiations with, any person in connection with an unsolicited (from the
date of this Agreement) Acquisition Proposal in writing by such person, if,
and only to the extent that, (i) the Board, after consultation with
independent legal counsel (which may include its regularly engaged
independent legal counsel), determines in good faith that such action is
required for the Board to comply with its fiduciary duties to stockholders
imposed by Delaware Law and (ii) prior to furnishing such information to, or
entering into discussions or negotiations with, such person the Company uses
all reasonable efforts to obtain from such person an executed confidentiality
agreement on terms no less favorable to the Company than those contained in
the Confidentiality Agreement. The Company immediately shall cease and cause
to be terminated all existing discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing. The Company shall
notify Investor promptly if any such proposal or offer, or any inquiry or
contact with any person with respect thereto, is made and shall in any such
notice to Investor, subject to the fiduciary obligations of the Board under
applicable law, indicate in reasonable detail the identity of the person
making such proposal, offer, inquiry or contact and the terms and conditions
of such proposal, offer, inquiry or contact. The Company agrees not to
release any third party from, or waive any provision of, any confidentiality
or, subject to the fiduciary duties of the Board, standstill agreement to
which the Company is or may become a party.
Section 5.08. Notification of Certain Matters. The Company shall give
prompt notice to Investor, and Investor shall give prompt notice to the
Company, of (i) the occurrence, or non-occurrence, of any event the
occurrence, or non-occurrence, of which would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate and (ii) any failure of the Company or Investor, as the case may
be, 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 5.08 shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
Section 5.09. Further Action. (a) Upon the terms and subject to the
conditions hereof, each of the parties hereto shall (i) make promptly its
respective filings, and thereafter make any other required submissions, under
the HSR Act with respect to the Merger; provided, however, that nothing in
this Agreement shall obligate any party (or any affiliate) to sell or
otherwise dispose of or hold separate any substantial business asset or
product line in order to obtain any required governmental approval, (ii) use
all reasonable efforts to take, or cause to be taken, all other appropriate
action, and to do, or cause to be done, all other things necessary, proper or
advisable under applicable foreign and domestic laws and regulations to
consummate and make effective the Merger, including, without limitation, (A)
using all reasonable efforts to obtain all licenses, permits, consents,
approvals, authorizations, qualifications and orders of governmental
authorities and parties to contracts with the Company and its Subsidiaries
(other than consents pursuant to the 10.09% and 10.0% Senior Promissory Notes
listed on Schedule 2.05 as are necessary for the consummation of the Merger
and (B) causing to be lifted or rescinded any injunction or restraining order
or other order adversely affecting the ability of the parties to consummate
the transactions contemplated hereby. In case at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes
of this Agreement, the proper officers and directors of each party to this
Agreement shall use reasonable efforts to take all such action.
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(b) The Company shall cooperate with any reasonable requests of Investor
or the Securities and Exchange Commission (the "SEC") related to the
recording of the Merger as a recapitalization for financial reporting
purposes, including, without limitation, to assist Investor and its
affiliates with any presentation to the SEC with regard to such recording and
to include appropriate disclosure with regard to such recordings in all
filing with the SEC and all mailings to stockholders made in connection with
the Merger. In furtherance of the foregoing, the Company shall provide to
Investor for the prior review of Investor's advisors any description of the
transactions contemplated by this Agreement which is meant to be
disseminated.
(c) If the Company shall receive notice of any claim, complaint or
litigation to which the Company is a party (a "Claim"), the Company shall
give the Investor notice of such Claim. The Company shall consult with the
Investor in the Company's defense of such Claim and make available to the
Investor, at the Investor's expense, all witnesses, pertinent records,
materials and information in the Company's possession or under the Company's
control relating thereto as is reasonably requested by the Investor. No such
Claim, or any litigation to which the Company is a party on the date hereof,
may be settled by the Company without the prior written consent of Investor,
which consent shall not be unreasonably withheld.
Section 5.10. Public Announcements. Investor and the Company shall consult
with each other before issuing any press release or otherwise making any
public statements with respect to this Agreement or any Transaction and shall
not issue any such press release or make any such public statement prior to
such consultation, except as may be required by law or any listing agreement
with a national securities exchange to which Investor or the Company is a
party.
Section 5.11. Environmental Assessment. Upon reasonable prior notice, the
Company shall provide Investor or its agents with access to the Property to
conduct, at Investor's option and at Investor's expense, an environmental
assessment of the Real Property. Such environmental assessment shall not
include any intrusive sampling without the prior written consent of the
Company, which consent shall not be unreasonably withheld. In connection with
such audit, the Company shall provide Investor or its agents, upon reasonable
prior notice, with (i) reasonable access to existing records of matters which
are the subject of the assessment and (ii) reasonable access to the employees
of the Company who are most familiar with such matters. The Company and the
Investor shall cooperate in the conduct of the environmental assessment,
including by scheduling site visits as necessary in order to complete the
assessment prior to the Closing.
Section 5.12. Termination Fees and Expenses. (a) If this Agreement shall
be terminated (i) by the Company or Investor pursuant to Section 7.01(f),
(ii) by Investor pursuant to Section 7.01(g)(i), or (iii) by Investor
pursuant to Section 7.01(g)(ii) and within twelve months of such termination
the Company shall have consummated a transaction involving more than 50% of
the Common Stock pursuant to an Acquisition Proposal; then, the Company shall
promptly (and in any event within five business days of written notice from
Investor) pay to Freeman Spogli & Co. Incorporated ("FS & Co.") an amount
equal to $3,500,000 as a termination fee.
(b) If this Agreement is terminated in accordance with paragraph (a) above
or by Investor pursuant to Section 7.01(e) (other than (i) termination as a
result of the failure of Section 2.08(i) to be true and correct after the
date hereof, or (ii) the failure of representations and warranties to be true
and correct, and such failure does not, individually or in the aggregate (A)
have a Material Adverse Effect or (B) prevent or materially delay the
consummation of the Merger), then the Company shall promptly (and in any
event within five business days of written notice from Investor) pay to FS &
Co. all reasonable out-of-pocket fees and expenses incurred by Investor and
FS & Co. in connection with the transactions contemplated by this Agreement,
including, but not limited to, fees and expenses of counsel, filing fees,
agency, commitment, accounting fees, appraisal fees, and all other
out-of-pocket expenses, up to a maximum aggregate amount of $1,500,000
("Costs and Expenses").
(c) Each of the parties acknowledges that the agreement contained in this
Section 5.12 is an integral part of the transactions contemplated by this
Agreement and that without such agreement, Investor would not enter into this
Agreement; accordingly, if the Company fails to pay promptly the amount due
pursuant
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to Section 5.12, the Company shall also pay FS & Co.'s costs and expenses
(including reasonable attorneys' fees) incurred in connection with collecting
such amount, together with interest on the amounts payable at the corporate
base rate publicly announced by Merrill Lynch from the date such amount was
required to be paid to the date of payment.
Section 5.13. Management Shares. If the parties agree that members of
management shall retain certain Shares and such Shares shall remain
outstanding after the Effective Time, the parties will amend this Agreement
accordingly.
Section 5.14. Employee Options. The Company shall use all reasonable
efforts to obtain the consent of all holders of Options under the 1987 Plan
to the cancellation of all such options, whether or not vested, in exchange
for cash in accordance with Section 1.07.
ARTICLE VI
CONDITIONS TO THE MERGER
Section 6.01. Conditions to Each Party's Obligations. The respective
obligations of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by the affirmative vote of the stockholders of
the Company in accordance with the Certificate of Incorporation of the
Company and Delaware Law;
(b) HSR Act. Any waiting period (and any extension thereof) applicable
to the consummation of the Merger under the HSR Act shall have expired or
been terminated; and
(c) No Order. No governmental authority or other agency or commission
or court of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any law, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary
or permanent) which is then in effect and has the effect of making illegal
or otherwise preventing or prohibiting consummation of the Merger.
Section 6.02. Conditions to Obligations of Investor. The obligations of
Investor to effect the Merger are subject to the satisfaction of the
following conditions unless waived by Investor in writing:
(a) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and as
of the Closing Date as though made on and as of the Closing Date, except
as otherwise permitted by this Agreement, and Investor shall have received
a certificate signed on behalf of the Company by the chief executive
officer and by the chief financial officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company shall have
performed all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and Investor shall have
received a certificate signed on behalf of the Company by the chief
executive officer and by the chief financial officer of the Company to
such effect.
(c) Financing. The Debt Financing shall have been obtained.
(d) Director Resignations. All Directors on the Board except for the
Chairman, shall have tendered their resignations, effective as of the
Effective Time.
(e) Material Adverse Effect. After the date hereof there shall not
have been a Material Adverse Effect, without regard, however, to changes
generally applicable to the industries in which the Company and its
Subsidiaries are involved or general economic conditions.
(f) Consent of Option Holders. Holders of a sufficient number of
Options pursuant to the 1987 Plan shall have consented to the cancellation
of such Options in exchange for cash consideration in accordance with
Section 1.07 such that the sum of (i) such Options, (ii) the number of
Options for
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which alternative agreements are reached as contemplated by Section 1.07
and (iii) Options issued pursuant to the Directors Plan, is in excess of
95% of all outstanding Options.
Section 6.03. Conditions to Obligations of the Company. The obligation of
the Company to effect the Merger is subject to the satisfaction of the
following conditions unless waived by the Company in writing:
(a) Representations and Warranties. The representations and warranties
of Investor set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date, except as otherwise
permitted by this Agreement, and the Company shall have received a
certificate signed on behalf of Investor by the chief executive officer
and by the chief financial officer of Investor to such effect.
(b) Performance of Obligations of Investor. Investor shall have
performed all obligations required to be performed by it under this
Agreement prior to the Closing Date, and the Company shall have received a
certificate signed on behalf of Investor by the chief executive officer
and by the chief financial officer of Investor to such effect.
ARTICLE VII
TERMINATION
Section 7.01. Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, notwithstanding
approval thereof by the stockholders of the Company:
(a) by mutual written consent duly authorized by the Boards of
Directors of Investor and the Company;
(b) by either Investor or the Company if the Effective Time shall not
have occurred on or before October 31, 1995; provided, however, that the
right to terminate this Agreement under this Section 7.01(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date; and provided further that
if any condition to this Agreement shall fail to be satisfied by reason of
the existence of an injunction or order of any court or governmental or
regulatory body, then at the request of either party the deadline date
referred to above shall be extended for a reasonable period of time, not
in excess of 60 days, to permit the parties to have such injunction
vacated or order reversed;
(c) by either Investor or the Company if any court of competent
jurisdiction or other governmental authority located or having
jurisdiction in the United States shall have issued an order, decree,
ruling or taken any other action prohibiting the Merger and such order,
decree, ruling or other action shall have become final and nonappealable;
(d) by the Company, at any time prior to the Effective Time, if (i)
Investor shall have failed to comply in any material respect with any of
the covenants or agreements contained in this Agreement to be complied
with or performed by Investor at or prior to such date of termination,
which failure to perform cannot be cured by October 31, 1995, or (ii) any
representation or warranty of Investor in the Agreement shall not be true
and correct in any material respect, which failure to be true and correct
cannot be cured prior to October 31, 1995, as if such representation or
warranty was made as of such time on or after the date of the Agreement,
unless such representation or warranty speaks as of a specified date;
(e) by Investor, at any time prior to the Effective Time, if (i) the
Company shall have failed to comply in any material respect with any of
the covenants or agreements contained in this Agreement to be complied
with or performed by the Company at or prior to such date of termination,
which failure to perform cannot be cured by October 31, 1995, or (ii) any
representation or warranty of the Company in the Agreement shall not be
true and correct in any material respect, which failure to be true and
correct cannot be cured prior to October 31, 1995, as if such
representation or warranty was made as of such time on or after the date
of the Agreement, unless such representation or warranty speaks as of a
specified date; or
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(f) by Investor or the Company, if the Board (i) shall have withdrawn
or modified its approval or recommendation of the Merger or (ii) shall
have recommended another merger, consolidation, business combination with,
or acquisition of, the Company or its assets or tender offer for Shares,
or shall have resolved to do any of the foregoing.
(g) by Investor, if another entity, person or group, as defined in
Section 13(d) of the Exchange Act and the regulations promulgated
thereunder (a "Group") (i) acquires Shares or shall have been granted any
option or right to acquire Shares representing more than 30% of the then
outstanding voting power of the Company or (ii) announces an Acquisition
Proposal involving a majority of the Common Stock, and at the
Stockholders' Meeting (A) such Acquisition Proposal remains outstanding
and (B) the Merger is not approved and adopted by the affirmative vote of
a majority of the stockholders of the Company.
Section 7.02. Effect of Termination. In the event of the termination of
this Agreement pursuant to Section 7.01, this Agreement shall forthwith
become void, and there shall be no liability on the part of any party hereto
except as set forth in Sections 5.12 and 8.01 hereof; provided, however,
nothing herein shall relieve any party from liability for any breach hereof.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.01. Non-Survival of Representations, Warranties and
Agreements. The representations, warranties and agreements in this Agreement
shall terminate at the Effective Time or upon the termination of this
Agreement pursuant to Section 7.01, as the case may be, except that the
agreements set forth in Article I and Sections 5.05, 5.06, 5.08 and 5.09, and
Article VIII shall survive the Effective Time indefinitely and those set
forth in Sections 5.04(b) and 5.12, and Article VIII shall survive
termination indefinitely, and other than any representation or covenant the
breach of which has resulted in the termination of this Agreement.
Section 8.02. Expenses. Upon consummation of the Merger, the Surviving
Corporation shall pay all expenses of the Company and Investor in connection
with the transactions contemplated by this Agreement, and shall pay a
$3,000,000 transaction fee to FS & Co. If the Merger is not consummated, each
party hereto shall bear its respective fees and expenses, except as otherwise
provided in Section 5.03 and Section 5.12.
Section 8.03. Amendment. This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective Boards of
Directors at any time prior to the Effective Time; provided, however, that,
after the approval and adoption of this Agreement and the transactions
contemplated hereby by the stockholders of the Company, no amendment may be
made which would reduce the amount or change the type of consideration into
which each Share shall be converted upon consummation of the Merger. This
Agreement may not be amended except by an instrument in writing signed by the
parties hereto.
Section 8.04. Waiver. At any time prior to the Effective Time, any party
hereto may (i) extend the time for the performance of any obligation or other
act of any other party hereto, (ii) waive any inaccuracy in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any agreement or condition
contained herein. Any such extension or waiver shall be valid if set forth in
an instrument in writing signed by the party or parties to be bound thereby.
Section 8.05. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by cable,
telecopy, telegram or telex or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties at the following
addresses (or at such other address for a party as shall be specified in a
notice given in accordance with this Section 8.04):
A-22
<PAGE>
if to Investor:
VB Investment Corporation
599 Lexington Avenue, 18th Floor
New York, New York 10022
Telephone: (212) 758-2555
Telecopier: (212) 758-7499
Attention: John M. Roth
with a copy to:
Riordan & McKinzie
300 South Grand Avenue, 29th Floor
Los Angeles, California 90071
Telephone: (213) 629-4824
Telecopier: (213) 229-8550
Attention: Richard J. Welch
if to the Company:
Lillian Vernon Corporation
543 Main Street
New Rochelle, New York 10801
Telephone: (914) 637-5700
Telecopier: (914) 637-5602
Attention: Susan Cortazzo
with a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Telephone: (212) 848-4000
Telecopier: (212) 848-7179
Attention: David W. Heleniak
Section 8.06. Certain Definitions. For purposes of this Agreement, the
term:
(a) "affiliate" of a specified person means a person who directly or
indirectly through one or more intermediaries controls, is controlled by,
or is under common control with, such specified person;
(b) "business day" means any day on which the principal offices of the
SEC in Washington, D.C. are open to accept filings, or, in the case of
determining a date when any payment is due, any day on which banks are not
required or authorized to close in the City of New York;
(c) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of
voting securities, as trustee or executor, by contract or credit
arrangement or otherwise;
(d) "person" means an individual, corporation, partnership, limited
partnership, syndicate, person (including, without limitation, a "person"
as defined in Section 13(d)(3) of the Exchange Act), trust, association or
entity or government, political subdivision, agency or instrumentality of
a government; and
(e) "Subsidiaries" or "Subsidiary" of the Company, the Surviving
Corporation, Parent or any other person means any corporation a majority
of the outstanding voting securities of which are owned directly or
indirectly by such entity.
Section 8.07. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other conditions and provisions of this
A-23
<PAGE>
Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the Merger is not affected in any manner
materially adverse to any party. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as
to effect the original intent of the parties as closely as possible in a
mutually acceptable manner in order that the Merger be consummated as
originally contemplated to the fullest extent possible.
Section 8.08. Entire Agreement; Assignment. This Agreement constitutes the
entire agreement among the parties with respect to the subject matter hereof
and supersedes all prior agreements and undertakings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof.
This Agreement shall not be assigned by operation of law or otherwise, except
that Investor may assign (i) all or any of its rights and obligations
hereunder to any affiliate of Investor provided that no such assignment shall
relieve the assigning party of its obligations hereunder if such assignee
does not perform such obligations and (ii) all or any of its rights hereunder
as security for the Financing.
Section 8.09. Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever under or by
reason of this Agreement, other than Sections 5.05 and 5.06 (which is
intended to be for the benefit of the persons covered thereby and may be
enforced by such persons).
Section 8.10. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties
shall be entitled to specific performance of the terms hereof, in addition to
any other remedy at law or equity.
Section 8.11. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
contracts executed in and to be performed in that State.
Section 8.12. Headings. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect
in any way the meaning or interpretation of this Agreement.
Section 8.13. Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of
which taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, Investor and the Company have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
Attest: VB INVESTMENT CORPORATION
/s/ Mark J. Doran By /s/ John M. Roth
- ---------------------------- -------------------------------
Name: MARK J. DORAN Name: JOHN M. ROTH
Title: SECRETARY Title: VICE PRESIDENT
Attest: LILLIAN VERNON CORPORATION
/s/ Susan Cortazzo By /s/ Lillian Vernon
- ----------------------------- --------------------------------
Name: SUSAN CORTAZZO Name: LILLIAN VERNON
Title: SECRETARY Title: CHAIRMAN
A-24
<PAGE>
ANNEX B
SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW
SECTION 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 Section 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 Section 251, 252, 254, 257, 258, 263 or 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 holders of the surviving corporation as
provided in subsection (f) of Section 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 Sections 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 Section 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.
B-1
<PAGE>
(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 subsections (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 Section228
or 253 of this title, the surviving or resulting corporation, either
before the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
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.
(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
B-2
<PAGE>
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 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,
B-3
<PAGE>
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.
B-4
<PAGE>
ANNEX C
[OPINION OF GOLDMAN, SACHS & CO.]
Dated the date of the Proxy Statement.
To come later.
C-1
<PAGE>
ANNEX D
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is the name, business address and five-year employment
history of each of the directors and executive officers of the Company. Each
person listed below is a citizen of the United States. The business address
of each of the individuals listed below is care of Lillian Vernon
Corporation, 543 Main Street, New Rochelle, New York 10801. (a)
<TABLE>
<CAPTION>
NAME PRESENT PRINCIPAL OCCUPATION AND FIVE-YEAR EMPLOYMENT HISTORY
- -------------------------- -----------------------------------------------------------------------
<S> <C>
Lillian Vernon(b) Chairman of the Board and Chief Executive Officer. Lillian Vernon is
the founder of the Company and has served as its Chairman of the Board
and Chief Executive Officer since the Company's inception. She served
as President from inception until July 1989. Lillian Vernon is the
mother of Fred and David Hochberg.
Lilyan Affinito(c,d) Lilyan Affinito was formerly a Director and Vice Chairman of the Board
of Maxxam Group, Inc. She had been associated with Maxxam Group, Inc.
since 1968 in various capacities including President and Chief
Operating Officer. She serves on the Boards of Directors of Tambrands,
Jostens, Caterpillar, Chrysler Corporation, New York Telephone, New
England Telephone and K Mart Corporation. She also serves on the boards
of several not-for-profit organizations. Ms. Affinito has been a
director since 1987.
Fred P. Hochberg Fred P. Hochberg spent seventeen years with the Company and served as
President and Chief Operating Officer from July 1989 until February
1993, at which time he resigned from this position with the Company's
consent. Mr. Hochberg served as a consultant to the Company from that
time through February 1995. Pursuant to a consulting agreement, Mr.
Hochberg was paid $94,800 in fiscal year 1995 for consulting services
rendered to the Company. Mr. Hochberg serves on the boards of several
not-for-profit organizations. Mr Hochberg has been a director since
1975.
David C. Hochberg(b) David C. Hochberg joined the Company in 1978 and was subsequently
promoted to Director-Public Affiars. He became Vice President-Public
Affairs in 1986. He has been a director since 1978.
William E. Phillips(c) William E. Phillips spent thirty years with Ogilvy & Mather, serving as
Chairman and Chief Executive Officer Worldwide from 1982 to 1988. In
1989, he taught at the Johnson Graduate School, Cornell University,
where he also serves as a Trustee. Since then, Mr. Phillips has
operated Osprey Consulting, advising companies and serving on boards.
Mr. Phillips is a director of Sun Glass Hut International and serves on
the Boards of Directors of three small private companies. Mr. Phillips
also serves on the boards of several not-for-profit organizations. Mr.
Phillips has been a director since 1991.
Leo Salon(d) Leo Salon is a senior partner of the law firm of Salon, Marrow &
Dyckman, which acts as general and securities counsel to the Company.
Mr. Salon has been a director since 1988.
D-1
<PAGE>
<CAPTION>
NAME PRESENT PRINCIPAL OCCUPATION AND FIVE-YEAR EMPLOYMENT HISTORY
- -------------------------- -----------------------------------------------------------------------
<S> <C>
Bert W. Wasserman(c, d) Bert W. Wasserman served as Executive Vice President and Chief
Financial Officer of Time Warner, Inc. from 1990 through 1994, having
served on the Board of Directors of Time Warner, Inc. and its
predecessor company from 1981 to 1993. He joined Warner Communications
in 1966 and had been an officer of that company since 1970. Mr.
Wasserman is a director of several investment companies in the Dreyfus
Family of Funds. He serves as a member of the National Advisory Board
of Chemical Bank and a director of The New Germany Fund. Mr. Wasserman
is a trustee of Baruch College of the City University of New York. Mr.
Wasserman is a Certified Public Accountant. Mr. Wasserman was appointed
a director in January 1995, replacing J. Paul Bergmoser, who retired as
a director in August 1994, after serving eight years on the Board.
Larry R. Blum Larry R. Blum was promoted to Executive Vice President in March 1995.
From January 1993 until his promotion, he served as Senior Vice
President-Administration. Mr. Blum served as Vice President-Human
Resources from August 1990, when he joined the Company, until his
promotion in January 1993. From September 1986 until he joined the
Company, Mr. Blum was Director, Human Resources for Crazy Eddie, Inc.,
an electronics retailer. Prior to joining Crazy Eddie, Inc., Mr. Blum
was President of LRB Inc., a consulting company, and President of
Betlar Realty, Inc., a real estate company. Prior to his association
with LRB Inc. and Betlar Realty, Inc., Mr. Blum was employed by various
corporations in the human relations area.
Laura L. Zambano Laura L. Zambano has served as Senior Vice President-General
Merchandise Manager since July 1989. From 1983 until her promotion in
1989, she was Vice President of Merchandising. Ms. Zambano joined the
Company in 1978 as a catalog coordinator; she became Associate Vice
President in 1982. Prior to joining the Company, Ms. Zambano was
employed as an advertising production manager by H.O. Gerngross & Co.
John V. Fermelia John V. Fermelia has served as Vice President-Operations since joining
the Company in January 1988. From June 1987 until he joined the
Company, Mr. Fermelia was a Vice-President of The Sharper Image, a
direct mail catalog and retail company. From August 1986 through May
1987, Mr. Fermelia was Vice President of Operations of Newark
Electronics, a repair parts distribution company. From 1973 to January
1986, Mr. Fermelia held various positions with Spiegel Inc., a direct
mail catalog company, including Vice President-Operations from February
1983 until he left that Company in January 1986.
Andrew Gregor Andrew Gregor joined the Company in March 1992 as Vice President-Chief
Financial Officer. From 1986 until he joined the Company, Mr. Gregor
was Senior Vice President of Finance and Chief Financial Officer of
McCrory Corporation, a retail company. From 1984 to 1986, Mr. Gregor
was Vice President and Treasurer of Transway International Corporation,
a company engaged in transportation and distribution.
D-2
<PAGE>
<CAPTION>
NAME PRESENT PRINCIPAL OCCUPATION AND FIVE-YEAR EMPLOYMENT HISTORY
- -------------------------- -----------------------------------------------------------------------
<S> <C>
Paul C. Pecorin Paul C. Pecorin has served as Vice President-Chief Information Officer
since joining the Company in 1984. From 1982 until he joined the
Company, Mr. Pecorin was Vice President-Systems of Lands' End, Inc., a
direct mail catalog company marketing clothes and related products.
Prior to his employment at Lands' End, Inc., Mr. Pecorin was Manager,
Systems Development for Pratt & Whitney Aircraft Co.
Susan N. Cortazzo Susan N. Cortazzo joined the Company in April 1989 as Corporate
Controller and Secretary. She was promoted to Vice President in July
1994. From 1982 to April 1989, Ms. Cortazzo was employed by Coopers &
Lybrand, Certified Public Accountants, in various capacities, the last
position being as audit manager. Ms. Cortazzo is a certified public
accountant.
</TABLE>
- ------------
(a) The employment of Stephen S. Marks as President and Chief Operating
Officer of the Company was terminated effective as of May 29, 1995. The
employment fo Jane Ries as Senior Vice President-New Catalog
Development was terminated effective as of April 7, 1995.
(b) Member of the Executive Committee
(c) Member of the Compensation Committee
(d) Member of the Audit Committee
D-3
<PAGE>
PRELIMINARY COPIES
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
LILLIAN VERNON CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD [ ], 1995
The undersigned shareholder here appoints [ ], and [ ], jointly and
severally, proxies, with full power of substitution, to vote, as specified
below, all shares of Lillian Vernon Corporation (the "Company") which the
undersigned is entitled to vote at the Special Meeting of Stockholders of the
Company to be held at [the Company's offices at 543 Main Street, New
Rochelle, New York 10801] at 10:00 a.m. on [ ], 1995, or any adjournment or
postponement thereof (the "Meeting"), and directs said proxies to vote as
instructed on the matters set forth below and otherwise at their discretion.
Receipt of a copy of the Notice of said Meeting and the accompanying Proxy
Statement is hereby acknowledged.
1. Approve and adopt the Merger Agreement as described in the Company's Proxy
Statement. The Board of Directors recommends a vote FOR the Merger Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUE AND SIGN ON OTHER SIDE)
<PAGE>
LILLIAN VERNON CORPORATION
2. In their discretion with respect to such other matters as may properly
come before the Meeting or any postponement or adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED HEREIN BY THE
STOCKHOLDER. IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE
PROPOSAL SET FORTH IN ITEM 1 AND WITH REGARD TO OTHER MATTERS THAT MAY COME
BEFORE THE MEETING OR ANY POSTPONEMENT OR ADJOURNMENT THEREOF, IN THE
DISCRETION OF THE PROXYHOLDERS AS DESCRIBED IN THE PROXY STATEMENT.
---------------------------------
SIGNATURE
Dated: , 1995
-------------------------------------------
-------------------------------------------
PLEASE SIGN EXACTLY AS NAME APPEARS HEREON,
AND IN SIGNING AS ATTORNEY, ADMINISTRATOR,
GUARDIAN, TRUSTEE OR CORPORATE OFFICER,
PLEASE ADD YOUR TITLE AS SUCH.
P
R
O
X
Y
EXHIBIT (d)(2)
BUSINESS
General
Lillian Vernon Corporation (the "Company") is a direct mail specialty
catalog company concentrating on the marketing of gift, household, gardening,
decorative, Christmas and children's products. The Company, a predecessor of
which was founded in 1951, seeks to provide customers with reasonably priced
products that can be differentiated from competitive products either by
design, price or personalization. In fiscal 1995, the Company published 26
catalog editions, and mailed over 179,000,000 catalogs to past and
prospective customers.
The Company has developed a proprietary customer data base containing
information about its customers, including such data as order frequency, size
and date of last order, and type of items purchased. These and other factors
are analyzed by computer to rank and segment customers to determine those
most likely to purchase products offered in the Company's catalogs. The data
base contains information with respect to approximately 17,600,000 people,
approximately 3,400,000 of whom have placed orders with the Company during
the last fiscal year. The Company derives a small portion of its revenue from
the rental of its customer list to direct mail marketers and other
organizations. The Company also has a Special Markets division, which makes
sales of premium and incentive products, and sells to the wholesale market.
The Company also operates a chain of outlet stores which offers Lillian
Vernon merchandise.
The following table reflects the Company's history in the areas of
circulation of its catalogs, number of orders received and average revenue
per order received, over the last five fiscal years.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------------------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
23, 1991 29, 1992(1) 27, 1993 26, 1994 25, 1995
---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Number of catalogs mailed (000's)(2) . 148,861 137,949 140,999 150,846 179,424
Number of catalog editions ............ 19 18 20 22 26
Number of orders received (000's) .... 4,337 4,286 4,405 4,602 4,940
Average revenue per order received(3) $38.13 $39.01 $40.09 $42.86 $44.61
<FN>
(1) This fiscal year was comprised of 53 weeks.
(2) "Number of catalogs mailed" includes catalog circulation to the extent
that related orders are received in that fiscal year.
(3) "Average revenue per order received" is not reduced for refunds, nor does
it include shipping and handling or state sales tax remittance.
</TABLE>
Catalogs and Products
The Company's catalogs are designed to capture the reader's interest
through the use of distinctive covers, colorful product presentations and
product descriptions that highlight significant features. The catalogs are
created and produced by the Company's in-house creative staff, which includes
designers, writers and production assistants. The Company also hires
free-lance designers and photographers, as needed. The combination of
in-house and free-lance staff enables the Company to maintain both quality
control and flexibility in the production of its catalogs.
The Company varies the quantity of its catalog mailings based on the
selling season, anticipated revenue per catalog and its capacity to process
and fill orders. In fiscal 1995, the Company produced 26 different catalog
editions (5 Lillian Vernon spring catalogs, 5 Lillian Vernon fall catalogs, 5
Private Sale catalogs, 4 Lilly's Kids, 3 Christmas Memories, 1
Personalization, 1 Lillian Vernon's Kitchen and 2 Welcome editions) and
mailed over 179,000,000 catalogs. A typical spring Lillian Vernon catalog
contains 84 to 96 pages, offering approximately 500 to 600 items. A typical
fall Lillian Vernon catalog contains from 96 to 120 pages offering 550 to 725
items, reflecting increased demand during the fall and Holiday season. A
typical Private Sale catalog contains from 84 to 96 pages, offering between
400 and 500 items. A typical
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Lilly's Kids catalog contains 40 to 80 pages and offers between 200 and 400
items. A typical Christmas Memories catalog contains 48 to 64 pages and
offers approximately 250 to 350 items. A typical Welcome catalog contains 60
pages and offers approximately 300 items. The Personalization catalog
contains 36 pages and offers 300 items. Lillian Vernon's Kitchen catalog
contains 48 pages and offers 300 items.
Merchandise offered by the Company includes gifts, holiday products, toys
and children's products, personal and home accessories, kitchen and
housewares, garden and outdoor products. The Company employs a staff of
experienced buyers, who seek reliable sources for what the Company believes
to be unique, quality merchandise. The buyers attend numerous domestic and
international trade and merchandise shows, study merchandising trends and
review the performance of merchandise previously offered. The Company also
uses both its creative staff and free-lance artists to develop distinctive
designs for many of its products, which the Company copyrights and has
manufactured to its specifications. The Company provides free monogramming
and full name personalization on many of the products it sells. In the past
fiscal year, products which can be personalized or which were manufactured to
the Company's exclusive design specifications accounted for about half of the
items offered by the Company.
Private Sale catalogs are primarily used to sell merchandise overstocks
and deleted products, and are generally mailed only to customers on the
Company's data base.
The Company's Lilly's Kids catalogs feature toys, games, baby products,
room decor and fashion accessories for children.
The Company's Christmas Memories catalogs are targeted to the Christmas
season and offer ornaments, holiday decor, gifts, cards and many unique and
exclusive products.
The Company's Welcome catalogs offer a variety of home decor,
organizational products and housewares.
The Company's Personalization catalog primarily features gift items, all
offered with available personalization.
Lillian Vernon's Kitchen catalog, which was introduced at the end of
fiscal 1995, offers products which include cookware, dinnerware, gourmet
accessories, cutlery, glassware, flatware and gifts, many of them exclusive
to this catalog. Two editions of Lillian Vernon's Kitchen are planned for
fiscal 1996.
All products sold, including personalized products, are unconditionally
guaranteed. An unsatisfied customer may return any product, even if
personalized, for any reason. The dollar value of refunds requested by
customers under the guarantee in fiscal 1995 was approximately 3.9% of
revenues.
The Company purchases its products from approximately 850 suppliers.
Approximately 80% of the items sold by the Company are purchased abroad,
predominantly from manufacturers located in Taiwan, Hong Kong, the People's
Republic of China, Italy and Germany. Although no manufacturer is
individually material to the Company's operations, the Company buys
significant quantities through several Far East trading companies which
utilize multiple manufacturers. Also, the Company buys approximately 13% of
its purchases through one Far Eastern buying agent, which acts as the
Company's representative in its dealings with many different manufacturers in
the People's Republic of China and Hong Kong. As a result of its reliance
upon foreign suppliers, the Company is subject to the risks of doing business
abroad. To date, the Company has experienced no material disruptions.
Marketing
The Company maintains a proprietary customer data base containing
information with respect to approximately 17,600,000 customers, gift
recipients and people who have requested its catalogs, approximately
3,400,000 of whom have placed orders with the Company during the last fiscal
year. In addition, the Company rents from and exchanges lists or specific
portions of lists with direct marketers and other organizations in an attempt
to gain new customers. Over 179,000,000 catalogs were mailed in fiscal 1995,
of which approximately 75% were mailed to people whose names were in the
Company's proprietary data base and approximately 25% were mailed to
prospects derived from rented lists.
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<PAGE>
The Company believes that its ability to analyze its computerized data
base, as well as rented lists, and to select recipients for a particular
mailing are significant factors in its growth. The Company analyzes various
factors (e.g., frequency of order, date of last order, order size, type of
products purchased and demographic data) to rank its customer and prospect
groups in order to target its catalog mailings to those most likely to
purchase its merchandise. The Company updates its data base to include new
customers and eliminate non-responders. The Company does not engage in
unresearched, speculative mailings.
List Rental
The Company derives a small portion of its revenue from the rental of its
data base to direct mail marketers and other organizations, and from the
placement of advertisements for other companies' products in its outgoing
packages.
Order Fulfillment and Distribution
Orders for merchandise are received by mail, telephone and fax. All orders
are received and processed at the Company's National Distribution Center in
Virginia Beach, Virginia. Customer service operations are also conducted at
this facility. The Company receives telephone credit card orders on a 24-hour
basis, seven days a week, with orders generally entered directly into the
computer. Mail orders are opened, compared to payments, batched and entered
into computer terminals. The Company uses its own data processing personnel
to enter mail and telephone orders, as well as service bureaus to enter
telephone orders on an as-needed basis. During fiscal 1995, the Company
continued upgrading its computer capacity to enable it to handle an increase
in telephone orders. The Company is considering the need to establish a
second telemarketing facility to enable it to effectively process an
increased volume of telephone calls.
All orders are processed, packed and shipped at the Company's National
Distribution Center. Approximately 47% of customer orders are shipped by
United Parcel Service, with nearly all other orders being sent by the U.S.
Postal Service. The Company also offers Federal Express delivery as an option
to its customers, for an extra charge.
The Company's National Distribution Center, a 486,000 square foot facility
located in Virginia Beach, Virginia, is owned and operated by the Company's
wholly-owned subsidiary, Lillian Vernon Fulfillment Services, Inc. All of the
Company's distribution, and a majority of its warehousing activities, are
conducted at this facility. The National Distribution Center is operated on a
five-day-a-week basis, except during the Holiday season, when, depending upon
demand, it may operate on a six- or seven-day-a-week, three-shift basis.
Personalization of products is done at the Company's National Distribution
Center. The Company also owns a 154,000 square foot building in Virginia
Beach used for additional distribution and warehousing space, and utilizes
public warehouse space as needed.
The Company is in the process of planning and designing an expansion of
the size and capacity of its National Distribution Center. It is presently
anticipated that construction will commence in the summer of 1995, with
completion presently scheduled for 1997.
Paper and Mailing Costs
The Company expends significant amounts on paper in the production of its
catalogs. The Company also uses substantial amounts of packing supplies and
corrugated paper for boxes in which it ships its products. In fiscal 1995,
the Company spent approximately $22.7 million in total paper costs and
approximately $52.5 million in mailing catalogs and packages to its
customers. In recent years, the U.S. Postal Service has increased its rates
for both the mailing of catalogs and packages. In January 1995, the U.S.
Postal Service increased the postage rate paid by the Company by 14%. United
Parcel Service has also increased its rates, with increases occurring in
February of 1994 and February of 1995. The price of paper has risen
significantly, and the supply is extremely tight. It is expected that the
price of paper will continue to be high, with tight supply for the
foreseeable future. Higher costs of paper and mailing increase the Company's
cost of doing business. While the Company has been able to recover a portion
of these cost increases through an increase in shipping and handling charges,
a reduction in the dimensions
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and weight of the catalog, circulation adjustments and improved efficiencies
in shipping, the Company cannot estimate what portion of the increased paper
and/or postage costs it will be able to recover. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
Merchandise Overstocks
The Company sells its overstocks to its customers at reduced prices,
primarily through its Private Sale catalogs and, to a lesser extent, through
its outlet stores and through special offers made to customers placing orders
by telephone.
Seasonality
The Company's business is seasonal. Historically, a substantial portion of
the Company's revenues and net income have been realized during its third and
fourth fiscal quarters, which encompass the period September through
February. Revenues and net income have been lower during its first and second
fiscal quarters, comprising the period March through August. The Company
believes this is the general pattern associated with the mail order and
retail industries. Further discussion of the effect of seasonality upon
revenues and income is contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Government Regulations
The Company must comply with Federal, state and local laws affecting its
business. In particular, the Company is subject to Federal Trade Commission
regulations governing the Company's advertising and trade practices and
Consumer Product Safety Commission regulations governing the standards its
products, particularly toys, must meet. While the Company believes it is
presently in compliance with such regulations, in the event of noncompliance,
the Company may be subject to cease and desist orders, injunctive
proceedings, civil fines and other penalties. To date, such governmental
regulations have not had a material adverse effect on the Company. On
occasion, products offered by the Company have been subject to voluntary
recall; however, no such recall has had a material adverse effect on the
Company.
The United States and the other countries in which the Company's products
are manufactured may, from time to time, impose new or adjust existing
quotas, duties, tariffs or other restrictions, with the result that the
Company's operations and its ability to continue to import merchandise at
required levels could be adversely affected. The Company cannot now predict
the likelihood of any such events occurring or the effect on its business of
any such event.
In the past, various states had taken action to require mail order
retailers to collect sales tax from residents in their states, even if the
only contact with such states is the mailing of catalogs into the states. On
May 26, 1992, the Supreme Court ruled that state governments could not
require out of state mail order companies to collect and remit sales and use
taxes without Congressional authorization. Since that time, bills have been
introduced in Congress which would allow states to impose sales tax
collection responsibility upon mail order companies. Management is unable to
predict the likelihood of Congress passing this or similar legislation, and
whether the Company will, in the future, be required to collect sales and use
taxes in the various states. The collection of sales tax by mail order
companies could have an adverse effect on the Company's competitive position
by increasing both its cost of doing business and the effective price of its
products to its customers. Although the Company believes the aforementioned
adverse effect will not be of a material nature, the Company is unable, at
this time, to predict the impact of the collection of sales tax on its
financial position and results of operations. The Company does not expect
that the collection of sales tax would have a material effect on its
liquidity.
Trademarks and Copyrights
The Company has federally registered service marks and/or logos for
"Lillian Vernon" and several of its catalog titles. In the opinion of the
management of the Company, the service mark "Lillian Vernon" is of
significant value because of its market recognition as a result of many years
of use and the significant quantity of catalogs circulated.
4
<PAGE>
The Company also possesses numerous copyrights and/or trademarks on its
products, none of which individually is material to the Company.
Employees
As of February 25, 1995, the Company and its subsidiaries employed
approximately 1,400 employees. The Company also uses the services of various
consultants, service bureaus and freelance and temporary employees. During
the peak Holiday season, the Company employs approximately 3,100 employees
including seasonal employees working in the telephone order, order processing
and distribution areas. Employees are not covered by collective bargaining
agreements. The Company considers its employee relations to be satisfactory.
Competition
The retail business in general, and mail order in particular, is highly
competitive. The Company competes primarily with other mail order catalogs
and secondarily with retail stores, including specialty shops and department
stores, many of which have substantially greater financial resources than the
Company. The Company competes on the basis of its product selection,
personalization, its proprietary customer list, the quality of its customer
service and its unconditional guarantee. Although the Company attempts to
market products not available elsewhere, many products similar to those
marketed by the Company can be purchased through other mail order catalogs or
in retail stores.
5
