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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] FOR THE FISCAL YEAR ENDED FEBRUARY 26, 2000
OR
[ ] FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9637
LILLIAN VERNON CORPORATION
----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2529859
- ------------------------ --------------------------------------
(STATE OF INCORPORATION) (I. R. S. EMPLOYER IDENTIFICATION NO.)
ONE THEALL ROAD, RYE, NEW YORK 10580
- ---------------------------------------- ------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (914) 925-1200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
COMMON STOCK, PAR VALUE AMERICAN STOCK EXCHANGE
$.01 PER SHARE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K (section.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY INFORMATION STATEMENT, INCORPORATED BY REFERENCE IN PART III OF THIS FORM
10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
THE AGGREGATE MARKET VALUE FOR THE VOTING STOCK HELD BY NON-AFFILIATES (BASED
UPON THE CLOSING PRICE ON MAY 17, 2000) WAS APPROXIMATELY $43,738,000.
AS OF MAY 17, 2000, THERE WERE 8,706,279 SHARES OF COMMON STOCK, PAR VALUE $.01
PER SHARE, OUTSTANDING.
PART III IS INCORPORATED BY REFERENCE TO THE REGISTRANT'S PROXY STATEMENT
PURSUANT TO REGULATION 14A, COVERING THE ANNUAL MEETING OF STOCKHOLDERS TO BE
HELD JULY 19, 2000.
THE INDEX TO EXHIBITS APPEARS ON PAGE 23.
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<PAGE>
1
LILLIAN VERNON CORPORATION
FISCAL 2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business ...................................................... 1
Item 2. Properties .................................................... 11
Item 3. Legal Proceedings ............................................. 12
Item 4. Submission of Matters to a Vote of
Security Holders ............................................ 12
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters ...................... 13
Item 6. Selected Financial Data ....................................... 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................................. 15
Item 7a. Quantitative and Qualitative Disclosure
about Market Risk ........................................... 21
Item 8. Financial Statements and Supplementary Data ................... 21
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure ....................................................21
PART III
Item 10. Directors and Executive Officers of the
Registrant, Executive Compensation .......................... 22
Item 11. Security Ownership of Certain Beneficial
Owners and Management ....................................... 22
Item 12. Certain Relationships ......................................... 22
Item 13. Related Transactions .......................................... 22
PART IV
Item 14. Exhibits, Financial Statements, Schedules
and Reports on Form 8-K ..................................... 22
i
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PART I
ITEM 1. BUSINESS
GENERAL
Lillian Vernon Corporation (the "Company") is a direct mail specialty
catalog and online company concentrating on the marketing of gift, household,
gardening, kitchen, 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 2000, the Company
published 33 catalog editions, and mailed approximately 166,000,000 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 products 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 over 23 million customers, gift
recipients and people who have requested the Company's catalogs.
The Company derives a small portion of its revenue from the rental of its
customer list to direct mail marketers and other organizations and from a
magazine subscription sales program. The Company has a Business to Business
operation which sells premium and incentive items, and other products to
numerous businesses, including Fortune 500 companies. Business to Business also
sells to the wholesale market. The Company also operates a chain of outlet
stores which sell Lillian Vernon merchandise. In addition to offering its
products through its catalogs, the Company offers its products over the
Internet.
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.
1
<PAGE>
Fiscal Years Ended
--------------------------------------------------------
February February February February February
26, 2000 27, 1999 28, 1998(3) 22, 1997 24, 1996
-------- -------- -------- -------- --------
Number of ............ 165,855 188,678 178,917 175,232 179,539
catalogs
mailed
(000's) (1)
Number of ............ 33 34 34 29 27
catalog
editions
Number of ............ 4,627 4,812 4,936 4,643 4,903
orders
received
(000's)
Average .............. $ 55.56 $ 55.23 $ 54.13 $ 52.57 $ 49.31
revenue per
order
received (2)
--------------------
(1) "Number of catalogs mailed" includes catalog circulation to the extent
that related orders are received in that fiscal year.
(2) "Average revenue per order received" is not reduced for refunds, nor
does it include shipping and handling or applicable state sales tax.
(3) Fiscal 1998 contained 53 weeks.
CATALOGS AND PRODUCTS
The Company's catalogs are designed to capture the readers' 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 personnel. 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, the price of paper and other
catalog costs, and its capacity to process and fill orders.
2
<PAGE>
Merchandise offered by the Company includes gifts, holiday products, toys
and children's products, personal and home accessories, kitchen and houseware
products, gardening and outdoor products. The Company employs a staff of
experienced buyers, who seek reliable sources for 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 product development 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 products offered by the Company.
COMPANY CATALOGS AND INTERNET ACTIVITIES
The Lillian Vernon catalog (the "Core Catalog") offers a wide variety of
products including gifts, holiday products, toys and children's products,
personal and home accessories, kitchen and houseware products and outdoor
products. Depending on the time of the year, the Core Catalog contains between
84 and 120 pages, offering between 500 and 700 products. In fiscal 2000, the
Company produced 9 editions of its Core Catalog.
The Super Sale catalog is primarily used to sell overstocked and deleted
merchandise, and is generally mailed only to customers in the Company's data
base. The Super Sale catalog typically contains between 84 and 96 pages,
offering between 480 and 560 products. In fiscal 2000, the Company produced 4
editions of its Super Sale catalog.
The Company's Lilly's Kids catalog features toys, games, baby products,
room decor and fashion accessories for children. Depending upon the time of the
year, the Lilly's Kids catalog has between 48-80 pages, offering between 300 and
550 products. In fiscal 2000, the Company produced 6 editions of its Lilly's
Kids catalog.
The Company's Christmas Memories catalog is targeted to the Christmas
season and offers ornaments, holiday decor, gifts, cards and many unique and
exclusive products. The Christmas Memories catalog typically is 84 pages,
offering 450 items. In fiscal 2000, the Company produced 1 edition of the
Christmas Memories catalog.
The Favorites catalog features many of the best-selling products from all
Lillian Vernon catalogs. The Favorites catalog has between 48 and 72 pages,
offering between 350 and 500 products. In fiscal 2000, the Company produced 4
editions of its Favorites catalog.
3
<PAGE>
The Company's Personalized Gifts catalog features gift items, all offered
with personalization. The Personalized Gifts catalog is typically between 56 and
64 pages and offers between 350 and 500 products. In fiscal 2000, the Company
produced 3 editions of its Personalized Gifts catalog.
The Neat Ideas catalog offers products which include closet, food
preparation, kitchen accessories, kitchen decor, tabletop, organization, bath,
laundry, car/garage and outdoor products. The Neat Ideas catalog has between 48
and 64 pages, offering between 350 and 400 products. In fiscal 2000, the Company
produced 3 editions of its Neat Ideas Catalog.
The Lillian Vernon Gardening catalog features a cross-section of functional
garden products, as well as garden and floral-themed decorative accessories. A
typical Lillian Vernon Gardening catalog has 48 pages offering 300 products. In
fiscal 2000, the Company produced 3 editions of the Lillian Vernon Gardening
catalog.
In March 2000 (fiscal year 2001), the Company launched a redesigned
Internet site, www.lillianvernon.com. This new e-commerce web site integrates
upgraded shopping capabilities and graphic enhancements to offer customers a
user-friendly experience, featuring the Company's most popular products.
Additionally, all of the Company's 6,000-plus products from all of its catalog
titles can be ordered online using an electronic order form. The Company
anticipates that current and new customers' use of the website will continue to
grow.
The Company offers a deferred billing program to its customers, in which it
agrees to charge the customers' credit cards for the full amount of their
purchase at a future date specified in each catalog. The Company does not charge
interest to the customers who participate in the deferred billing program.
All products sold, including personalized products, are unconditionally
guaranteed. A customer may return any product, even if personalized, for any
reason. The dollar value of refunds requested by customers under the guarantee
in fiscal 2000 approximated 4.5% of net revenues.
4
<PAGE>
The Company purchases its products from approximately 1,100 suppliers.
Approximately 79% of the merchandise is purchased abroad, predominantly from
manufacturers located in Hong Kong, Taiwan, India, the Peoples' Republic of
China, Italy, Thailand and Germany. Most purchase orders are denominated in U.S.
dollars. 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. The Company buys
approximately 4% 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 Peoples' Republic of China, including Hong Kong. The
Company also buys approximately 5% of its purchases through one Hong Kong
vendor. As a result of its use of foreign suppliers, the Company is subject to
the risks of doing business abroad, but has experienced no disruptions. The
Asian economic downturn did not materially affect the Company's sourcing of
products in the region. Management continues to closely monitor the situation
and believes that adequate replacement sources are available to the Company if
any of the Company's suppliers fail to meet their obligations.
MARKETING
The Company maintains a proprietary customer data base containing
information with respect to over 23 million customers, gift recipients and
people who have requested its catalogs. In addition, the Company rents from, and
exchanges mailing lists or specific portions of lists with direct marketers and
other organizations to gain new customers. Approximately 166,000,000 catalogs
were mailed in fiscal 2000, of which approximately 81% were mailed to people
whose names were in the Company's proprietary data base and approximately 19%
were mailed to prospects derived from rented lists.
The Company consistently offers customers special promotions such as gifts
with purchase, free shipping and handling, and a deferred billing option, in
order to increase sales.
The Company believes that the size of its computerized data base and its
ability to analyze it, as well as rented lists, and to select recipients for a
particular mailing are important factors in its success. 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 periodically conducts focus groups and participates in customer
surveys to enhance its marketing efforts.
5
<PAGE>
MAGAZINE SALES PROGRAM
The Company launched a new telemarketing program in fiscal 1999 in which
inbound order callers are offered the opportunity to subscribe to a magazine of
their choice at the guaranteed lowest subscription price. A third party marketer
of magazine subscriptions provides reimbursement to the Company for costs
related to this program and provides revenue to the Company for every magazine
sold and upon the completion of the billing cycles of the magazine
subscriptions.
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 telephone, mail, fax, and the
Internet. 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. Recently the Company expanded its telemarketing
center in Las Vegas, Nevada, which supplements its Virginia Beach telemarketing
facility. The Company also operates a telephone order call center in New
Rochelle, New York. The Company receives telephone orders on a 24-hour basis,
seven days a week, with orders entered directly into the computer. Mail orders
are opened, compared to payments, batched and entered into computer terminals.
The Company completed an internal upgrading of its existing order entry
system during fiscal 2000. The upgrade allows the Company cross-selling
capabilities in which a customer is offered a substitute product if the product
they ordered is unavailable, or an additional product related to the one ordered
by the customer.
In April of 2000 (fiscal year 2001) the Company began providing
telemarketing services to another company.
The majority of orders are processed, packed and shipped at the Company's
National Distribution Center. Some products are drop-shipped from vendors
directly to customers; this is the most cost-effective way of satisfying the
customer. Approximately 95% of customer orders were shipped by the U.S.Postal
Service in fiscal 2000. The Company shipped the balance of its orders via UPS
Second Day Air delivery as an option to its customers, for an extra charge.
6
<PAGE>
The Company's National Distribution Center, an 821,000 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 generally
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 also 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.
The Company continually assesses the need to upgrade the capacity of its
telemarketing and distribution facilities. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations.")
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 boxes to ship its products. In fiscal 2000, the Company spent
approximately $21.9 million in total paper costs and also spent approximately
$52.0 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. The U.S. Postal Service increased its
rates in late fiscal 1999 by 3%. There was no change in postal rates in fiscal
2000, and no increases are expected until January 2001. No assurance can be
given that postal rates will not continue to increase in the future. United
Parcel Service, which increased its rates in each of the last several years,
also increased its rates in late fiscal 1999 by 5%. As of May 1, 1999, the
Company began utilizing the U.S. Postal Service for regular delivery of all
packages. The Company, after substantial testing and review, chose the U.S.
Postal Service as its principal carrier; this decision was made to maintain
service to its customers and reduce costs for fiscal 2000 and beyond. United
Parcel Service is utilized as an optional delivery service for Second Day Air
delivery at the customer's request for an additional charge.
The price of paper is dependent upon supply and demand in the marketplace.
The Company's paper cost per page decreased approximately 13% in fiscal 2000 as
compared to fiscal 1999, and is expected to be approximately 8% higher in fiscal
year 2001 as compared to fiscal 2000.
7
<PAGE>
The Company has secured paper supply commitments for the majority of its
fiscal 2001 paper needs at market prices (for high-volume purchasers) in effect
at the time orders are placed. The Company continually monitors the paper market
and periodically meets with its paper suppliers in advance of its purchases in
order to react to changes in the paper supply market. In addition, the Company
entered into a four year paper hedge contract in September 1999 with Enron
Capital and Trade Resources Corporation which provides the Company with price
protection in the form of a floor and ceiling in purchasing certain of its paper
requirements (see Item 7(A) - "Quantitative and Qualitative Disclosure About
Market Risk" for further discussion). While the Company cannot estimate the
magnitude of future paper and postage increases or decreases, such changes may
impact the Company's future earnings. (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 Super Sale catalogs, its outlet stores and through special
offers made to customers placing orders by telephone and on the Internet. In
addition, the Company enters into barter transactions to eliminate excess
merchandise.
SEASONALITY
The Company's business is seasonal. Historically, approximately 70% - 75%
of the Company's revenues and substantially all of its net income have been
realized during its third and fourth fiscal quarters, which encompass the period
September through February. Lower revenue and net losses are typically incurred
during its first and second fiscal quarters, comprising the period March through
August. The Company believes this is the general pattern associated with other
mail order and retail gift businesses. 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 complies 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.
8
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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
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 periodically been
introduced in Congress which would allow states to impose sales tax collection
responsibility upon mail order companies. No bills have been enacted into law.
In October 1998, the Internet Tax Freedom Act was signed into law by
Congress. Among the provisions of this Act is a three-year moratorium on the
collection of sales taxes on Internet sales activities. An advisory commission
was appointed by Congress to study and recommend whether, and how Internet sales
activities should be taxed. The commission recently was unable to reach a
consensus opinion, and is no longer in existence. Congress is currently studying
the Internet taxation issues, but to date has not enacted any bills into law.
Although management is unable to predict the likelihood of Congress passing
sales tax legislation in the future, the Company does not expect that the
collection of sales tax will have a material effect on its results of operations
in fiscal 2001.
TRADEMARKS AND COPYRIGHTS
The Company has federally registered service marks and/or logos for
"Lillian Vernon" and many 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
large quantity of catalogs circulated.
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 26, 2000, the Company and its subsidiaries employed
approximately 1,500 employees. During the peak Holiday season, the Company
utilizes approximately 5,500 people 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 good.
9
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COMPETITION
The retail business in general, and mail order in particular, is highly
competitive. The Company competes primarily with other mail order catalogs, as
well as Internet websites and 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 exclusive product
selection, its personalization capabilities, its proprietary customer list, the
quality of its customer service and its unconditional guarantee. Although the
Company attempts to market products not available elsewhere, certain products
similar to those marketed by the Company may be purchased through other mail
order catalogs, online, or in retail stores.
ACQUISITION - RUE DE FRANCE, INC.
On April 6, 2000 the Company completed the purchase of the assets of Rue de
France, Inc., a privately owned catalog company based in Newport, Rhode Island.
The Company agreed to pay a cash purchase price of up to $3 million, subject to
post closing net worth adjustments. Additionally, the Company agreed to make
future payments, contingent upon Rue de France, Inc. achieving certain projected
earnings before taxes during the five year fiscal period of the Company
commencing on February 27, 2000.
Rue de France, Inc., a 15 year-old retailer of home furnishings, markets
its products through catalogs, a web site and a retail store in Newport, Rhode
Island. Rue de France, Inc.'s founder has joined Lillian Vernon Corporation
under a multi-year employment contract as President of a newly formed Company
subsidiary which acquired the assets of Rue de France, Inc.
10
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ITEM 2. PROPERTIES
The Company's corporate headquarters and administrative offices are located
in a 65,000 square foot building in Rye, New York. The corporate headquarters
includes the executive offices, merchandising, creative, marketing and finance
departments, as well as the Business to Business operation. This facility is
leased under a sublease agreement expiring on January 30, 2005. In addition to
base rent, the sublease provides that the Company is responsible for increases
in real estate taxes and operating costs over a base year. The Company has
received two renewal options, each for five years, from the owners of the
building, an unaffiliated entity, upon the expiration of the sublease, in 2005.
The Company believes that its headquarters facility is adequate for its
anticipated growth needs.
Until July 1998, the Company's corporate headquarters and administrative
offices were located in a 41,664 square foot building in New Rochelle, New York
which was leased from two related parties under a net sub-lease which expired on
July 30, 1998, with an annual net rental of $430,000, plus all real estate
taxes, insurance and capital improvements.
The Company's 821,000 square foot National Distribution Center is located
on approximately 61 acres in Virginia Beach, Virginia. The facility, which
became fully operational during the summer of 1988, is owned and operated by the
Company's wholly-owned subsidiary, Lillian Vernon Fulfillment Services, Inc.
The Company also owns a 154,000 square foot building in Virginia Beach
which it utilizes for additional distribution and warehousing space.
All distribution and warehousing activities, as well as mail order
processing, customer service and most telemarketing activities, are conducted at
the Virginia Beach facilities.
In fiscal 1999, the Company leased a 14,905 square foot space in an office
complex in Las Vegas, Nevada, as an additional telemarketing facility. The
original lease was scheduled to expire on February 28, 2004. In fiscal 2000, the
Company signed an amendment to the original lease, which added an additional
4,928 square foot space and extended the lease term until March 31, 2005. The
Company is responsible for its share of operating expenses, real estate taxes
and utility charges. The Company has an option to extend the amended lease for a
period of five years. Additionally, the Company has a right of first offer with
respect to any contiguous rental space which may become vacant.
The Company leases 11,000 square feet in an office building in New
Rochelle, New York, which provides additional telemarketing facilities. The
current lease runs through December 31, 2002.
The Company leases thirteen retail locations, which serve as outlet stores,
in the states of Virginia, New York, Delaware and South Carolina. The typical
retail store is approximately 3,000 square feet. The retail store leases expire
from fiscal 2001 through fiscal 2005, and contain various renewal options
through fiscal 2009. The Company leases additional outlet store locations on a
short-term basis, particularly during the holiday season.
11
<PAGE>
The Company believes that its facilities are adequate and that its
properties are in good condition.
ITEM 3. LEGAL PROCEEDINGS
The Company knows of no material legal proceedings, pending or threatened,
or judgments entered against the Company or any Director or Officer of the
Company in his or her capacity as such. See "Government Regulations" for
additional discussion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the American Stock Exchange
(symbol: LVC). The following table sets forth the high and low sale prices for
each quarterly period for the two most recent fiscal years. The stock prices are
rounded to the nearest 1/16 point.
QUARTER ENDED HIGH LOW
------------- ---- ---
May 30, 1998 ..................... 18 5/8 16 5/8
August 29, 1998 .................. 18 1/4 16
November 28, 1998 ................ 16 3/4 12 11/16
February 27, 1999 ................ 19 3/16 13 11/16
May 29, 1999 ..................... 14 7/8 12
August 28, 1999 .................. 14 5/8 12 1/2
November 27, 1999 ................ 13 5/16 12 3/4
February 26, 2000 ................ 12 5/8 10 1/2
As of May 17, 2000, there were 364 registered holders of the Company's
Common Stock.
The Company has paid 33 consecutive quarterly cash dividends on its Common
Stock since an initial quarterly dividend of five cents ($.05) per share was
paid in May of 1992. The quarterly dividend was increased to seven cents ($.07)
per share payable September 1, 1994, and to eight cents ($.08) per share in
March 1998. The Board of Directors intends to continue to declare and pay a
quarterly dividend. The amount of any such dividends will depend on the
Company's earnings, financial position, capital requirements and other relevant
factors.
On October 10, 1995, the Board of Directors authorized the Company to
repurchase up to 1 million shares of its Common Stock in the open market from
time to time, subject to market conditions. As of September 3, 1998, the Company
completed the one million share repurchase program. The total cost of the
program was $15.1 million. On October 7, 1998, the Board of Directors approved a
new stock repurchase program which authorizes the Company to repurchase up to an
additional one million shares of its Common Stock in the open market from time
to time, subject to market conditions. On September 28, 1999, the Board of
Directors authorized the Company to repurchase an additional 500,000 shares of
its Common Stock. As of May 17, 2000, the Company had repurchased 631,392
shares, at a total cost of approximately $7.1 million. The Company uses these
shares to make matching contributions to its Profit Sharing/401(k) Plan and to
issue shares under its Stock Option and Employee Stock Purchase Plans.
13
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------
February February February February February
OPERATING RESULTS 26, 2000 27, 1999 28, 1998(1) 22, 1997 24, 1996
- ----------------- -------- -------- -------- -------- --------
(000's)
<S> <C> <C> <C> <C> <C>
Revenues ........... $241,773 $255,220 $258,429 $240,053 $238,192
Income before income
taxes ............ 10,350 5,079 14,740 7,925 8,243
Net income ......... 6,289 3,139 9,728 5,231 5,609
PER SHARE
- ---------
Net income-Basic ... $ .69 $ .34 $ 1.02 $ .54 $ .58
Net Income-
Diluted .......... .69 .34 1.01 .54 .56
Book value ......... 12.75 12.37 12.46 11.83 11.70
Dividends .......... .32 .32 .29 .28 .28
FINANCIAL POSITION AT
- ---------------------
YEAR END (000's)
- --------
Cash and cash
equivalents ........ $ 35,364 $ 31,834 $ 26,136 $ 24,098 $ 25,771
Working capital ...... 75,031 69,996 73,951 70,739 76,721
Total assets ......... 141,318 138,206 144,359 138,955 135,626
Long-term
obligations (2) .... - - 1,394 2,883 4,335
Stockholders' equity . 114,378 113,264 116,839 113,702 112,692
AVERAGE SHARES
- --------------
OUTSTANDING (000's)
- -------------------
Basic ........... 9,128 9,221 9,532 9,658 9,713
Diluted ......... 9,130 9,319 9,636 9,664 9,981
- --------------------
</TABLE>
(1) Fiscal year 1998 contained 53 weeks.
(2) Includes current installments and long-term portions of debt and capital
lease obligations.
14
<PAGE>
ITEM 7. 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.
FISCAL YEARS ENDED
February 26, February 27, February 28,
2000 1999 1998
---------------------------------
Revenues ....................... 100.0% 100.0% 100.0%
Costs and expenses:
Product and delivery costs .... (48.5) (47.1) (48.2)
Selling, general and
administrative expenses ..... (47.9) (50.1) (46.3)
Other income ................... 0.3 - -
Write-off computer project,
severance costs ............. - (0.9) -
----- ----- ----
Operating income .......... 3.9 1.9 5.5
Net interest income ............ 0.4 0.1 0.2
----- ----- ----
Income before income taxes .... 4.3 2.0 5.7
Provision for income taxes ..... (1.7) (0.8) (1.9)
------ ----- -----
Net income ..................... 2.6% 1.2% 3.8%
------ ----- -----
FISCAL 2000 COMPARED TO FISCAL 1999
Revenues for fiscal 2000 were $241.8 million, a decrease of $13.4 million,
or 5.3%, compared to fiscal 1999, principally as a result of a strategic
decision to reduce circulation to improve profits. Catalog circulation was 12.1%
lower in fiscal 2000 compared to the prior year. Order volume declined by 3.9%
in fiscal 2000, and average revenue per order was slightly higher. Revenue per
catalog increased in fiscal 2000 by approximately 10.0%, due principally to
higher response rates. The significant factors which led to increased revenue
per catalog were more new product offerings, targeted circulation, and the
Company's continued value pricing.
Product and delivery costs include the cost of merchandise sold, the cost
of receiving, personalizing, filling and shipping orders, reduced by shipping
and handling revenue collected from customers. These costs ($117.4 million)
declined by $2.8 million, or 2.3% in fiscal 2000 compared to fiscal 1999, due
principally to the lower volume of orders shipped. As a percentage of revenues,
product and delivery costs increased from 47.1% in fiscal 1999 to 48.5% in
fiscal 2000 primarily due to higher wage rates at the Company's National
Distribution Center, the operation of a third call center in Las Vegas, Nevada,
and increased shipping and handling costs to satisfy demand for backordered
products.
Selling, general and administrative ("SG&A") expenses, the single largest
component of which is the cost of producing, printing, and mailing the Company's
catalogs, were $115.8 million in fiscal 2000, compared to $128.0 million in
fiscal 1999, a decrease of $12.2 million, or 9.5%, principally due to reduced
15
<PAGE>
catalog circulation. As a percentage of revenues, SG&A expenses decreased from
50.1% in fiscal 1999 to 47.9% in fiscal 2000 primarily because the average
catalog generated higher revenue, and also cost less to produce. Specifically,
the Company's paper cost per page decreased approximately 13% in fiscal 2000
compared to fiscal 1999, and paper cost per page is expected to be approximately
8% higher in fiscal year 2001.
SG&A costs in fiscal 2000 also included approximately $500,000 in computer
costs related to the Company's Year 2000 compliance project; this was in
addition to the $1 million spent in fiscal year 1999. The Company completed its
Year 2000 compliance project on time and at less than its projected cost and
experienced no significant computer problems related to Year 2000. Higher SG&A
expenses related to the expansion of the Company's online sales and customer
base were incurred during fiscal 2000 compared to the prior year. In addition,
postal rates increased in January 1999 by approximately 3%; another increase is
not expected until January 2001.
The Company has secured paper supply commitments to purchase the majority
of its expected paper needs for the fiscal year ending February 24, 2001 at
market prices (for high-volume purchasers) in effect at the time orders are
placed. The Company continually monitors the paper market and periodically meets
with its paper suppliers in advance of its purchases in order to react to
changes in the paper supply market. In addition, the Company entered into a four
year paper hedge contract in September 1999 with Enron Capital and Trade
Resources Corporation which provides the Company with price protection in the
form of a floor and ceiling in purchasing certain of its paper requirements (see
Item 7(A)- "Quantitative and Qualitative Disclosure About Market Risk" for
further discussion).
Other income of $.7 million was a result of the sale of stock received from
the de-mutualization of an insurance company which insures the lives of two
Company officers ($.6 million), and profit from the sale of Company-owned land
under an easement order in the City of Virginia Beach, Virginia ($.1 million).
Net interest income in fiscal 2000 was $1.0 million, compared to $.2
million in fiscal 1999. The increase of $.8 million was principally the result
of interest earned on substantially higher cash investments. Interest expense
was also lower in the current fiscal year, principally due to the repayment of
all long-term debt in the third quarter of the prior fiscal year and no
short-term borrowings during fiscal year 2000.
The Company's effective income tax rate in fiscal 2000 increased to 39.2%,
as compared to 38.2% in fiscal 1999. The increase in the effective tax rate was
principally related to the Company's inability to fully deduct its entire
charitable contribution tax carryforward prior to its expiration.
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues for fiscal 1999 were $255.2 million, a decrease of $3.2 million,
or 1.2%, compared to fiscal 1998. Order volume declined by approximately 3% in
fiscal 1999, partially due to one less week in the fiscal year (52 weeks), as
compared to fiscal 1998 (53 weeks). Catalog circulation was higher by 5.5% in
fiscal 1999. Average revenue per catalog declined in fiscal 1999 by
16
<PAGE>
approximately 5.7%, due to lower response rates which were partially offset by
higher average order size. The decline in revenues per catalog was the result of
the Company's circulation increase to prospective new customers who were less
responsive than existing customers, as well as less than anticipated response in
the existing customer data base. The 1999 fiscal year includes $1.6 million of
revenue generated from the sale of magazine subscriptions by the Company's
telemarketing representatives, a new revenue source in fiscal 1999.
Product and delivery costs include the cost of merchandise sold, the cost
of receiving, personalizing, filling and shipping orders, reduced by shipping
and handling revenue collected from customers. These costs of $120.1 million
declined by $4.5 million, or 3.6%, in fiscal 1999 compared to fiscal 1998,
principally due to the lower volume of orders shipped. As a percentage of
revenues, product and delivery costs decreased from 48.2% in fiscal 1998 to
47.1% in fiscal 1999. The decrease in the percentage of revenues was primarily
due to higher gross profit on products sold, a result, in part, of higher
initial markups. United Parcel Service rates for packages increased by 9% in
early fiscal 1999. As of May 1, 1999, the Company utilized the U.S. Postal
Service for regular delivery of all packages. The Company, after substantial
testing and review, chose the U.S. Postal Service as its principal carrier; this
decision will maintain service to its customers and reduce costs for fiscal 2000
and beyond. United Parcel Service will be used as an optional delivery service
for second day delivery at the customers' request, for an additional charge.
Management continually implements strategies to attempt to increase revenues,
and reduce costs; in May 1998 the fees for shipping and handling that are
charged to its customers were increased.
Selling, general and administrative ("SG&A") expenses were $128.0 million
in fiscal 1999, compared to $119.5 million in fiscal 1998, an increase of $8.5
million, or 7.1%. The single largest component of these expenses is the cost of
producing, printing, and mailing the Company's catalogs. The increase in SG&A
expenses was principally caused by 5.5% higher catalog circulation, as well as
an increase in the unit cost to produce a catalog. As a percentage of revenues,
SG&A expenses increased from 46.3% in fiscal 1998 to 50.1% in fiscal 1999
primarily because the average catalog generated lower revenue and also cost more
to produce. Paper costs increased approximately 10% in fiscal 1999 as compared
to fiscal 1998. Postal rates increased in January 1999 by approximately 3%. SG&A
costs in fiscal 1999 also included approximately $1 million in computer costs
related to the Company's Year 2000 compliance project.
Fiscal 1999 earnings reflected several non-recurring charges. In the third
quarter of fiscal 1999, the Company wrote-off its investment of $1.4 million
pre-tax ($920,000 after-tax) in a computer project related to a new order entry
system. This write-off had an earnings per share impact of $.10. The Company
decided to internally upgrade its existing order entry system; the upgrade was
completed in mid-1999 (fiscal 2000) at a substantially lower cost than
originally anticipated. In the fourth quarter of fiscal 1999, the Company
incurred one-time severance costs of approximately $765,000 pre-tax ($497,000
after-tax) due to the departure of several executives. These severance costs had
an earnings per share impact of $.05.
Net interest income in fiscal 1999 was $.2 million, compared to $.4 million
in fiscal 1998. The decrease of $.2 million was the result of reduced interest
income due to a lower average investment balance. Interest expense in fiscal
17
<PAGE>
1999 was comparable to fiscal 1998.
The Company's effective income tax rate in fiscal 1999 increased to 38.2%,
as compared to 34% in fiscal 1998. The increase in the effective tax rate was
principally due to the Company's inability to fully deduct its entire charitable
contribution tax carryforward prior to expiration.
SEASONALITY
The Company's business is seasonal. Historically, approximately 70% - 75%
of the Company's revenue and substantially all of its net income have been
realized during the third and fourth fiscal quarters, which encompass the period
September through February. Lower revenue and net losses are typically incurred
during the first and second fiscal quarters, comprising the period March through
August. The Company believes this is the general pattern associated with other
mail order and retail gift businesses.
Because of slower demand for its products in the first half of its fiscal
year, and because of added fixed costs to increase sales year-round and invest
in future growth, the Company incurred a cumulative net loss during the first
six months of fiscal 2000, 1999, and 1998. Due to these seasonal factors,
management expects to incur a loss for the first half of fiscal 2001 as well.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet and liquidity are strong. Cash and cash
equivalents increased $3.5 million during fiscal 2000 to $35.4 million; the
current ratio remained at the same level of 4.4:1 at February 26, 2000 and
February 27, 1999. The Company has not borrowed money in the current fiscal
year; its working capital needs have been met with funds generated from
operations.
In fiscal 2000, the Company generated $11.4 million of cash from operating
activities. Inventory increased by $7.2 million as of the end of fiscal 2000
compared to fiscal 1999, due to lower than expected sales in the second half of
fiscal 2000, more purchases to provide for higher anticipated Spring sales in
fiscal 2001, as well as the addition of many new products. The Company's prepaid
catalog costs declined by $6.2 million in fiscal 2000 due to significantly lower
year-end paper inventory.
The Company generated $1.1 million from the issuance of common stock
through its employee benefit plans.
Capital spending in fiscal 2000 of $1.6 million was made to upgrade the
Company's computer equipment and its distribution machinery and equipment. The
Company has no material capital commitments for fiscal 2001. During fiscal 2001,
the Company is studying the need to expand the capacity of the National
Distribution Center in the future.
The Company has a $42 million four-year revolving credit facility with two
banks which expires in August 2000, and is anticipated to be renewed at that
time. This credit facility can be used for general corporate purposes, including
working capital needs, capital expenditures, and up to $12 million of letters of
credit. At the Company's option, up to $20 million of the facility can be
converted into term loans, with maturity dates no later than 2003. Interest is
payable at LIBOR plus 50 basis points, prime rate, bankers' acceptance rate plus
50 basis points, or a fixed rate, at the Company's
18
<PAGE>
option. The credit facility is unsecured, and the Company is subject to
financial covenants principally relating to its working capital, net worth,
interest coverage ratio and capital spending restrictions. The Company is in
compliance with all financial covenants.
The Company has paid 33 consecutive quarterly cash dividends commencing May
1992. It increased its quarterly dividend from $.05 to $.07 per share in
September 1994, and from $.07 to $.08 per share in March 1998. The Company
anticipates continuing to pay dividends to its stockholders in the future. The
amount of any such dividends will depend on the Company's earnings, financial
position, capital requirements, and other relevant factors. Dividends in fiscal
2000 totaled $2.9 million, or $.32 per share.
On October 10, 1995, the Board of Directors authorized the Company to
repurchase up to 1 million shares of its common stock in the open market from
time to time, subject to market conditions. As of September 3, 1998, the Company
had completed the 1 million share repurchase program at a total cost of
$15,118,000.
On October 7, 1998, the Board of Directors authorized the Company to
repurchase up to 1 million additional shares of its common stock in the open
market from time to time, subject to market conditions. On September 28, 1999,
the Board of Directors authorized the Company to repurchase an additional
500,000 shares of its common stock. In fiscal 2000, the Company repurchased
275,900 shares under the current program at a total cost of $3.3 million. As of
February 26, 2000, the Company had purchased 350,900 shares since inception of
the current program at a total cost of $4.3 million.
On April 6, 2000, the Company purchased the assets of Rue de France, Inc.,
a privately owned catalog company based in Newport, Rhode Island for a cash
purchase price of up to $3 million, subject to post closing net worth
adjustments. Additionally, the Company agreed to make future payments contingent
upon Rue de France, Inc. achieving certain projected earnings before taxes
during the five fiscal years commencing February 27, 2000.
The Company believes that its cash flow from operations, current investment
balance, and credit facilities will be sufficient to meet its operating needs
for the upcoming fiscal year.
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 fluctuations 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.
YEAR 2000 COMPLIANCE PROGRAM
The Company is fully Year 2000 compliant and experienced no interruptions
to its normal operations at the start of calendar year 2000 or through the
current date. The Company utilized both its in-house staff as well as outside
resources to modify its systems at a total cost of approximately $1.5 million.
These amounts have been funded from operating cash flow. The Company has not
experienced any significant problems with the computer systems or software
19
<PAGE>
applications of its third party vendors and service providers, and will continue
to monitor these third party entities.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" which established accounting and
reporting standards for derivative instruments and hedging activities. In June
1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
which changed the effective date of SFAS 133 from all fiscal quarters of all
fiscal years beginning after June 15, 1999 to all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company plans to adopt SFAS 133 and
SFAS 137 in the first quarter of its fiscal year commencing February 25, 2001.
The Company does not expect adoption of these statements to have a material
impact on its financial statements.
FORWARD LOOKING STATEMENTS
Except for historical information contained herein, this Form 10-K contains
forward-looking statements which are based on the Company's current expectations
and assumptions. Various factors could cause actual results to differ materially
from those set forth in such statements. These factors include, but are not
limited to, the strength of the economy and overall level of consumer spending,
the performance of the Company's products within the prevailing retail
environment, increasing competition in the direct mail industry and the
expanding Internet market, changes in government regulations, dependence on
foreign suppliers, and possible future increases in operating costs, including
postage and paper costs.
20
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's earnings are impacted by significant increases in paper
prices. In order to mitigate this risk, the Company implemented a price
protection program beginning in September 1999 by signing a collar hedge
contract with Enron Capital and Trade Resources Corporation. This four year
contract covers 56,000 short tons of a certain grade of paper which the Company
uses, among other grades, to produce its catalogs. There is a floor and ceiling
to paper prices within the contract. If paper prices remain within the range of
the contract, there will be no payment to either party to the contract. If paper
prices exceed the established ceiling, the Company will be reimbursed by the
counterparty for the excess. Conversely, if paper prices fall below the
established floor, the Company would pay the counterparty. The Company did not
pay a premium in connection with the establishment of the contract. No amounts
are required to be recorded in the accompanying financial statements. As of
February 26, 2000, market prices for paper remained within the ranges specified
in the contract and as a result, no payments have been required to be made by
either party under the agreement.
The Company has performed a sensitivity analysis to determine what the
impact would be under the hedge contract if the price of paper covered by this
contract were to change by 10% over the next 12 months. The current price as of
February 26, 2000 for the grade of paper subject to this contract is $985 per
short ton. If the price of this grade of paper should increase by 10% over the
next 12 months, there would be no payment to the Company by the counterparty. If
the price of this grade of paper should decrease by 10% over the next 12 months,
the Company would be required to make payment to the counterparty. However, any
payments made would be offset by the corresponding cost savings the Company
would achieve in the lower prices it would pay for its purchases of paper.
Therefore, the overall cost would not be material to the Company's Consolidated
Statement of Income, Balance Sheet or Statement of Cash Flows as of February 24,
2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are found in Part IV at
pages F-1 through F-21 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE>
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT, AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these Items is omitted because the Company will
file a definitive proxy statement pursuant to Regulation 14A with the
Commission, not later than 120 days after the end of the fiscal year, which
information is herein incorporated by reference as if set out in full.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2). The response to this portion of Item 14 is submitted as a
separate section of this report on pages F-1 through F-21.
(a)(1) Consolidated Financial Statements
- -Balance Sheets - February 26, 2000 and February 27, 1999 ................ F- 2
- -Statements of Income for the three Fiscal Years ended
2000, 1999 and 1998...................................................... F- 3
- -Statements of Stockholders' Equity for the three
Fiscal Years ended 2000, 1999 and 1998................................... F- 4
- -Statements of Cash Flows for the three Fiscal Years
ended 2000, 1999 and 1998................................................ F- 5
- -Notes to Financial Statements ........................................... F- 6
- -Report of Independent Accountants ....................................... F-21
(a)(2) Schedules
All schedules called for under Regulation S-X are not submitted because they are
not applicable or not required or because the required information is not
material or is included in the financial statements or notes thereto.
(b) Reports on Form 8-K.
No Form 8-K reports have been filed by the Registrant during the last
quarter of the period covered by this report.
(a)(3) and (c). Exhibits (numbered in accordance with Item 601 of
Regulation S-K).
22
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
2.1 - Plan and Agreement of Merger dated June 29, 1987 between
Lillian Vernon Corporation, a New York corporation, and
the Company incorporated in Delaware ......................... (1)
2.2 - Certificate of Ownership and Merger between Lillian Vernon
Corporation and the Company incorporated in Delaware filed
in Delaware .................................................. (1)
2.3 - Certificate of Merger between Lillian Vernon Corporation
and the Company incorporated in Delaware filed in New York ... (2)
3.1 - Certificate of Incorporation with Amendments of Lillian
Vernon Corporation ........................................... (2)
3.2 - By-Laws of Lillian Vernon Corporation ........................ (1)
10.1 - Amended and Restated Lillian Vernon Corporation Profit
Sharing Plan ................................................. (10)
10.3 - 1987 Performance Unit, Restricted Stock, Non-Qualified
Option and Incentive Stock Option Plan ....................... (1)
10.4 - First Amendment to Employment Agreement with Lillian
Vernon, formerly Lillian M. Katz ............................. (3)
10.5 - Executive Deferred Compensation Agreement and first
amendment thereto with Lillian Vernon, formerly
Lillian M. Katz .............................................. (4)
10.6 - Second Amendment to Deferred Compensation Agreement with
Fred P. Hochberg ............................................. (5)
10.7 - Second Amendment to Deferred Compensation Agreement with
David C. Hochberg ............................................ (6)
10.8 - Form of Indemnification Agreement with officers and
directors .................................................... (1)
10.9 - Lease for Company's facility at New Rochelle, New York ....... (1)
23
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10.10 - Trademark Registrations for Lillian Vernon Corporation -
Service Mark and Logo ........................................ (1)
10.16 - Sublease between Fred P. and David C. Hochberg and Company -
New Rochelle facility ........................................ (5)
10.17 - Lillian Vernon Corporation 1993 Stock Option Plan for Non-
Employee Directors ........................................... (7)
10.21 - Revolving Credit Agreement, Letter of Credit and Bankers
Acceptance facility dated as of August 19, 1996 among
Lillian Vernon Corporation as Borrower, Lillian Vernon
Fulfillment Services, Inc., LVC Retail Corporation and
Lillian Vernon International Ltd. as Guarantors, the Banks
named therein and The Chase Manhattan Bank as agent .......... (8)
10.22 - 1997 Performance Unit, Restricted Stock, Non-Qualified
Option and Incentive Stock Option Plan ....................... (9)
10.23 - 1997 Stock Option Plan for Non-Employee Directors ............ (9)
10.24 - Form of Agreement re: Change of Control with certain
executive officers ........................................... (11)
10.25 - Agreement of Sublease dated January 30, 1998 between CVS
New York, Inc. and the Company and exhibits .................. (11)
10.26 - Agreement between Lillian Vernon Corporation and Robert S.
Mednick dated June 11, 1998 .................................. (12)
10.27 - Employment Agreement with Richard P. Randall dated
August 11, 1998 .............................................. (13)
10.28 - Employment Agreement with George Mollo, Jr. dated
September 25, 1998 ........................................... (14)
10.29 - Rights Agreement dated as of April 15, 1999 between
the Company and Continental Stock Transfer & Trust Co. ....... (15)
10.30 - Supplement to Rights Agreement dated as of April 15, 1999
between the Company and Continental Stock Transfer & Trust
Co. .......................................................... (16)
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.31 - Industrial Real Estate Lease between the Company
and Howard Hughes Properties, Limited Partnership ............ (16)
10.32 - Master Agreement between Registrant and Enron Capital &
Trade Resources Corporation .................................. (17)
10.33 - Amendment to Industrial Real Estate Lease between the
Company and Howard Hughes Properties, Limited Partnership .... E-1
10.34 - Asset Purchase Agreement by and among RDF Acquisition
Corporation and Lillian Vernon Corporation and Rue de
France, Inc., and Pamela F. Kelley and Brendan P. Kelley
dated as of March 31, 2000 ................................... E-9
10.35 - Proprietary Rights Assignment between Pamela Kelley and
RDF Acquisition Corporation .................................. E-82
10.36 - Right of First Refusal Agreement between Lillian Vernon
Corporation and Pamela F. Kelley dated as of March 31, 2000 .. E-85
10.37 - Employment Agreement between RDF Acquisition Corporation
and Pamela F. Kelley dated as of March 31, 2000 .............. E-90
10.38 - Intellectual Property Protection Agreement between RDF
Acquisition Corporation and Pamela F. Kelley dated
as of March 31, 2000 ......................................... E-100
21 - Subsidiaries of registrant ................................... E-107
23 - Consent of PricewaterhouseCoopers LLP ........................ E-108
27 - Financial Data Schedule ...................................... E-109
</TABLE>
- ------------------------------
(1) Filed with Registration Statement on Form S-1 (File No. 33-15430) and
incorporated by reference herein.
(2) Filed with Quarterly Report on Form 10-Q for the quarter ended August 28,
1987 and incorporated by reference herein.
(3) Filed with Annual Report on Form 10-K for the year ended February 29, 1992
and incorporated by reference herein.
(4) Amendment filed with Quarterly Report on Form 10-Q for the quarter ended
May 30, 1992 and incorporated by reference herein. Original deferred
compensation agreement filed with Registration Statement - see (1) above.
25
<PAGE>
(5) Filed with Annual Report on Form 10-K for the year ended February 27, 1993
and incorporated by reference herein. Original deferred compensation
agreement filed with Registration Statement. See (1) above.
(6) Filed with Quarterly Report on Form 10-Q for the quarter ended August 28,
1993 and incorporated by reference herein. Original deferred compensation
agreement filed with Registration Statement - see (1) above.
(7) Filed with Registration Statement on Form S-8 (File No.33-71250) and
incorporated by reference herein.
(8) Filed with Quarterly Report on Form 10-Q for the quarter ended August 24,
1996 and incorporated by reference herein.
(9) Filed with Registration Statement on Form S-8 on September 26, 1997 (File
No. 333-36467) and incorporated by reference herein.
(10) Filed with Registration Statement on Form S-8 on March 31,1998 (File
No.333-48951)and incorporated by reference herein.
(11) Filed with Annual Report on Form 10-K for the year ended February 28, 1998,
and incorporated by reference herein.
(12) Filed with Quarterly Report on Form 10-Q for the quarter ended May 30,
1998, and incorporated by reference herein.
(13) Filed with Quarterly Report on Form 10-Q for the quarter ended August 29,
1998, and incorporated by reference herein.
(14) Filed with Quarterly Report on Form 10-Q for the quarter ended November 28,
1998, and incorporated by reference herein.
(15) Filed with Report on Form 8-K dated April 22, 1999, and incorporated by
reference herein.
(16) Filed with Annual Report on Form 10-K for the year ended February 27, 1999,
and incorporated by reference herein.
(17) Filed with Quarterly Report on Form 10-Q for the quarter ended August 28,
1999, and incorporated by reference herein.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, duly authorized.
LILLIAN VERNON CORPORATION
Dated May 24, 2000 By: /S/ LILLIAN VERNON
-----------------------------
Lillian Vernon, Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ LILLIAN VERNON
- --------------------------
Lillian Vernon Chairman of the Board May 24, 2000
of Directors (Principal
Executive Officer)
/S/ SUSAN C. HANDLER
- --------------------------
Susan C. Handler Vice President- May 24, 2000
Controller
(Principal Financial
and Accounting Officer)
- -------------------
Jonah Gitlitz Acting President, May , 2000
and Director
/S/ DAVID C. HOCHBERG
- --------------------------
David C. Hochberg Vice President - Public May 24, 2000
Affairs and Director
/S/ JOEL SALON
- --------------------------
Joel Salon Director May 24, 2000
/S/ BERT W. WASSERMAN
- --------------------------
Bert W. Wasserman Director May 24, 2000
/S/ ELIZABETH M. EVEILLARD
- --------------------------
Elizabeth M. Eveillard Director May 24, 2000
/S/ RICHARD A. BERMAN
- --------------------------
Richard A. Berman Director May 24, 2000
27
<PAGE>
LILLIAN VERNON CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULES AND REPORTS
F-1
<PAGE>
<TABLE>
<CAPTION>
PART II FINANCIAL INFORMATION
ITEM 8. FINANCIAL STATEMENTS
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
February 26, February 27,
ASSETS 2000 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................. $ 35,364 $ 31,834
Accounts receivable, net of allowances of $576 and $818 22,403 21,093
Merchandise inventories ............................... 33,926 26,700
Deferred income taxes ................................. 1,355 1,355
Prepayments and other current assets .................. 4,241 9,671
----------- -----------
Total current assets ................................ 97,289 90,653
Property, plant and equipment, net ...................... 35,092 37,811
Deferred catalog costs .................................. 5,624 6,192
Other assets ............................................ 3,313 3,550
----------- -----------
Total ............................................... $141,318 $138,206
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued expenses ........... $ 17,853 $ 17,437
Cash overdrafts ....................................... 758 1,920
Customer deposits ..................................... 171 228
Income taxes payable .................................. 3,476 1,072
----------- -----------
Total current liabilities ........................... 22,258 20,657
Deferred compensation ................................... 3,392 3,049
Deferred income taxes ................................... 1,290 1,236
----------- -----------
Total liabilities ................................... 26,940 24,942
----------- -----------
Commitments & Contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding
Common stock, $.01 par value; 100,000,000 shares and
20,000,000 shares authorized in 2000 and 1999
respectively;Issued - 10,389,674 shares in 2000
and 1999 ............................................ 104 104
Additional paid-in capital ............................ 31,331 31,322
Retained earnings ..................................... 103,847 100,760
Treasury stock, at cost - 1,419,433 shares in 2000
and 1,231,806 shares in 1999 ........................ (20,904) (18,922)
----------- -----------
Total stockholders' equity .......................... 114,378 113,264
----------- -----------
Total ............................................... $ 141,318 $ 138,206
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
<TABLE>
<CAPTION>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Fiscal Years Ended
-----------------------------------------
February 26, February 27, February 28,
2000 1999 1998
----------- ----------- ----------
<S> <C> <C> <C>
Revenues ......................................... $ 241,773 $ 255,220 $ 258,429
Costs and expenses:
Product and delivery costs ..................... 117,369 120,125 124,624
Selling, general and administrative expenses ... 115,792 128,002 119,471
Write-off - computer project and severance costs 2,180
Other income ................................... (746)
----------- ----------- ----------
232,415 250,307 244,095
----------- ----------- ----------
Operating income ............................. 9,358 4,913 14,334
Net interest income .............................. 992 166 406
----------- ----------- ----------
Income before income taxes ................... 10,350 5,079 14,740
Provision for income taxes:
Current ........................................ 3,998 1,220 4,566
Deferred ....................................... 63 720 446
----------- ----------- ----------
4,061 1,940 5,012
----------- ----------- ----------
Net income ................................... $ 6,289 $ 3,139 $ 9,728
----------- ----------- ----------
Net income per common share - Basic .............. $ .69 $ .34 $ 1.02
----------- ----------- ----------
Net income per common share - Diluted ............ $ .69 $ .34 $ 1.01
----------- ----------- ----------
Weighted average number of common shares -
Basic .......................................... 9,128 9,221 9,532
Weighted average number of common shares and
common share equivalents - Diluted ............. 9,130 9,319 9,636
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
<TABLE>
<CAPTION>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
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 22, 1997 ....... $113,702 10,363,320 $ 104 $ 30,783 $ 93,929 $ (94) (753,458) $(11,020)
Exercise of non-qualified
stock options .................. 297 16,000 200 (17) 7,667 114
Amortization of unearned
compensation ................... 88 88
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan .................. 140 10,354 140
Purchase of treasury stock ....... (4,396) (270,700) (4,396)
Dividends ($.29 per share) ...... (2,757) (2,757)
Other ............................ 37 37
Net income ....................... 9,728 9,728
------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 28, 1998 ....... 116,839 10,389,674 104 31,160 100,883 (6) (1,016,491) (15,302)
Exercise of non-qualified
stock options .................. 2,048 (311) 154,833 2,359
Amortization of unearned
compensation ................... 6 6
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan .................. 157 (33) 12,367 190
Shares issued for 401-k Plan
matching contribution .......... 476 22 29,785 454
Purchase of treasury stock ....... (6,623) (412,300) (6,623)
Dividends ($.32 per share) ...... (2,940) (2,940)
Other ............................ 162 162
Net income ....................... 3,139 3,139
------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 27, 1999 ....... 113,264 10,389,674 104 31,322 100,760 0 (1,231,806) (18,922)
Exercise of non-qualified
stock options .................. 319 (48) 23,867 367
Shares purchased by employees
pursuant to Employee Stock
Purchase Plan .................. 286 (111) 25,992 397
Shares issued for 401-k Plan
matching contribution .......... 465 (121) 38,414 586
Purchase of treasury stock ....... (3,332) (275,900) (3,332)
Dividends ($.32 per share) ...... (2,922) (2,922)
Other ............................ 9 9
Net income ....................... 6,289 6,289
------------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 26, 2000 ....... $114,378 10,389,674 $ 104 $ 31,331 $103,847 $ 0 (1,419,433) $(20,904)
------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Fiscal Years Ended
--------------------------------
February February February
26, 2000 27, 1999 28, 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 6,289 $ 3,139 $ 9,728
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation ......................................................... 4,321 4,488 4,672
Amortization ......................................................... 250 250 324
Write-off - computer project ......................................... 1,414
Gain on sale of assets ............................................... (81) (7)
(Increase) decrease in accounts receivable ........................... (1,310) 1,539 1,844
(Increase) decrease in merchandise inventories ....................... (7,226) 10,235 (6,455)
Decrease in prepayments and other current assets ..................... 5,430 502 265
(Increase) decrease in deferred catalog costs ........................ 568 (270) 218
Increase in other assets ............................................. (13) (2,002) (1,040)
Increase in trade accounts payable and accrued expenses .............. 416 1,106 1,846
Increase (decrease) in customer deposits ............................. (57) 81 (113)
Increase (decrease) in income taxes payable .......................... 2,404 (3,509) 1,866
Increase (decrease) in deferred compensation ......................... 343 (377) (74)
Increase in deferred income taxes .................................... 54 776 595
-------- -------- --------
Net cash provided by operating activities .......................... 11,388 17,372 13,669
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment ............................. (1,621) (4,476) (3,122)
Proceeds from sale of assets ........................................... 100 7
-------- -------- --------
Net cash used in investing activities ................................ (1,521) (4,476) (3,115)
-------- -------- --------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations ..... (1,394) (1,489)
Proceeds from issuance of common stock ................................. 437
Reissuance of treasury stock for stock option and employee benefit plans 1,070 2,681
Increase (decrease) in cash overdrafts ................................. (1,162) 916 (348)
Dividends paid ......................................................... (2,922) (2,940) (2,757)
Payments to acquire treasury stock ..................................... (3,332) (6,623) (4,396)
Other .................................................................. 9 162 37
-------- -------- --------
Net cash used in financing activities ................................ (6,337) (7,198) (8,516)
-------- -------- --------
Net increase in cash and cash equivalents ............................ 3,530 5,698 2,038
-------- -------- --------
Cash and cash equivalents at beginning of period ......................... 31,834 26,136 24,098
-------- -------- --------
Cash and cash equivalents at end of period ............................... $ 35,364 $ 31,834 $ 26,136
-------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................. $ $ 370 $ 347
Income taxes ......................................................... 1,612 4,567 2,646
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<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 and online
company, concentrating on the marketing of gift, household, gardening, kitchen,
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., Lillian Vernon International, Ltd., and LVC Retail Corporation
(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 2000 and fiscal 1999 each
consisted of 52 weeks and fiscal 1998 consisted of 53 weeks.
Cash Equivalents
Cash equivalents consist principally of commercial paper with remaining
maturities at acquisition of less than three months. Under Statement of
Financial Accounting Standards (SFAS) No. 115 - "Accounting for Certain
Investments in Debt and Equity Securities", the Company's investments, totaling
$34.8 million and $30.9 million as of February 26, 2000 and February 27, 1999,
respectively, are classified as held-to-maturity securities, and as such, are
stated at amortized cost, which approximates market value.
Revenue Recognition
The Company records revenue at the time of shipment for catalog and online
sales, and at the point of sale in its retail stores.
Merchandise Inventories
Merchandise inventories are principally stated at the lower of average
cost, determined by the retail inventory method, or market.
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. Prepaid catalog costs, consisting mostly of
paper to be used to print future catalogs, are included in prepayments and other
current assets in the accompanying Balance Sheets.
F-6
<PAGE>
Capitalized Software Costs
Direct costs of purchasing and developing new software applications are
capitalized and are being amortized over five years. Amortization of capitalized
software costs totaled $113,000 in fiscal 2000, $127,000 in fiscal 1999, and
$188,000 in fiscal 1998.
Capitalized software costs are included in other assets, and amounted to
$8,488,000 and $7,882,000 at February 26, 2000 and February 27, 1999,
respectively. Accumulated amortization of capitalized software costs amounted to
$7,783,000 and $7,670,000 at February 26, 2000 and February 27, 1999,
respectively.
Depreciation and Amortization
Depreciation is recorded on the straight line method over maximum estimated
useful lives of 30 and 8 years for buildings 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, or the term of the applicable leases,
whichever is shorter.
Income Taxes
Deferred income taxes arise from differences in the timing of income and
expense recognition for financial and income tax reporting purposes. Statement
of Financial Accounting Standards No. 109 requires the Company to compute
deferred income taxes on such differences using enacted tax rates in effect in
the years in which the differences are expected to reverse. Valuation allowances
are required to be established to reduce deferred tax assets to the amounts more
likely than not to be realized.
Per Share Data
Earnings per share are computed and reported on a dual presentation basis.
Basic earnings per share are computed by dividing net income by the weighted
average number of outstanding shares for the period. Diluted earnings per share
are computed by dividing net income by the sum of the weighted average number of
outstanding shares and share equivalents computed. The Company's common share
equivalents consist of stock options issued to key employees and Directors.
F-7
<PAGE>
Basic and diluted earnings per share were calculated as follows (amounts in
thousands):
Fiscal Years Ended
--------------------------------
February February February
26, 2000 27, 1999 28, 1998
-------- -------- --------
Net Income-Basic and Diluted ......... $6,289 $3,139 $9,728
-------- -------- --------
Weighted average number of
outstanding shares for Basic EPS ..... 9,128 9,221 9,532
Add: incremental shares from
stock option exercises .............. 2 98 104
-------- -------- --------
Weighted average number of outstanding
shares for Diluted EPS ............... 9,130 9,319 9,636
-------- -------- --------
In fiscal 2000, 1999, and 1998, options on 1,097,000, 394,000, and 369,000
shares of common stock, respectively, were not included in the calculation of
weighted average shares for diluted EPS because their effects were antidilutive.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments does not materially
differ from their carrying values.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Stock-Based Employee Compensation
The Company follows the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for stock-based compensation
arrangements. Under the guidelines of Opinion 25, compensation cost for
stock-based employee compensation plans is recognized based on the difference,
if any, between the quoted market price of the stock on the date of grant and
the amount an employee must pay to acquire the stock. The Company implemented
the disclosure requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," but continues its current
accounting for stock-based employee compensation under APB Opinion No. 25.
F-8
<PAGE>
Comprehensive Income
The Company does not have any items of "other comprehensive income" to
report for fiscal years 2000, 1999, and 1998 pursuant to Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
Segment and Geographic Information
The Company operates primarily in one business segment. The Company derives
all revenues from customers in the United States, and no individual customer
accounted for 10% or more of revenues for any of the periods presented.
Substantially all identifiable assets are located in the United States.
Reclassifications
Certain reclassifications have been made in the prior years' financial
statements to conform with the fiscal 2000 presentation.
2. Income Taxes
The current income tax provision consists of (dollars in thousands):
Fiscal Years Ended
---------------------------------------
February 26, February 27, February 28,
2000 1999 1998
----------- ----------- -----------
Federal .......................... $ 3,642 $ 1,026 $ 4,198
State ............................ 356 194 368
----------- ----------- -----------
$ 3,998 $ 1,220 $ 4,566
----------- ----------- -----------
The deferred income tax provision (benefit) consists of (dollars in thousands):
Fiscal Years Ended
---------------------------------------
February 26, February 27, February 28,
2000 1999 1998
----------- ----------- -----------
Charitable contributions ......... $ 448 $ - $ 124
Depreciation ..................... 99 848 245
Catalog costs .................... (275) 135 (96)
Capitalized software ............. (17) (175) (74)
Valuation allowance-charitable
contributions carryforward .... 202 250 -
Other, net ....................... (394) (338) 247
----------- ----------- -----------
$ 63 $ 720 $ 446
----------- ----------- -----------
The exercise of non-qualified stock options and the vesting of restricted stock
(see Note 9) results 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 totaled $9,000, $162,000, and $37,000 for fiscal 2000, 1999, and
1998, respectively.
F-9
<PAGE>
The Company's effective income tax rate is reconciled to the U.S. Federal
statutory tax rate as follows:
Fiscal Years Ended
---------------------------------------
February 26, February 27, February 28,
2000 1999 1998
----------- ----------- -----------
Federal statutory tax rate ....... 34.0% 34.0% 34.0%
State income taxes, net of
Federal tax benefit ............ 2.3 2.5 1.9
Charitable contributions of
merchandise .................... - (2.0) (1.2)
Valuation allowance-charitable
contributions carryforward ..... 1.9 4.9 -
Other, net ....................... 1.0 (1.2) (0.7)
----------- ----------- -----------
39.2% 38.2% 34.0%
----------- ----------- -----------
The deferred tax assets and deferred tax liabilities recorded on the Balance
Sheets are as follows (dollars in thousands):
February 26, 2000 February 27, 1999
--------------------- ---------------------
Deferred Tax Deferred Tax
--------------------- ---------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Current:
Catalog deferrals .......... $ - $2,130 $ - $2,406
Charitable contributions ... 1,432 - 1,894 -
Inventory capitalization ... 963 - 873 -
Accrued expenses ........... 1,104 - 959 -
Valuation allowance ........ (452) - (250) -
Other ...................... 447 9 294 9
------ ------ ------ ------
Total current ............ 3,494 2,139 3,770 2,415
------ ------ ------ ------
Non-current:
Depreciation ............... - 2,630 - 2,529
Amortization ............... 7 (9) 7 8
Deferred compensation ...... 1,324 - 1,294 -
------ ------ ------ ------
Total non-current ........ 1,331 2,621 1,301 2,537
------ ------ ------ ------
Total .................... $4,825 $4,760 $5,071 $4,952
====== ====== ====== ======
As of February 26, 2000, the Company has $2,754,000 of charitable contributions
carryforward for Federal income tax purposes, which expire from fiscal 2001 to
fiscal 2002. The Company established deferred tax valuation allowances in fiscal
2000 and fiscal 1999 related to management's current assessment of the Company's
inability to utilize its entire charitable contributions tax carryforward prior
to expiration.
F-10
<PAGE>
3. Credit Facilities
The Company entered into a $42 million four-year revolving credit facility
in August 1996 with two banks. This credit facility can be used for general
corporate purposes, including working capital needs, capital expenditures, and
up to $12 million of letters of credit. At the Company's option, up to $20
million of the facility can be converted into term loans, with maturity dates no
later than 2003. Interest is payable at LIBOR plus 50 basis points, prime rate,
bankers' acceptance rate plus 50 basis points, or a fixed rate, at the Company's
option. The credit facility is unsecured, and the Company is subject to various
financial covenants principally relating to its working capital, net worth,
interest coverage ratio and capital spending restrictions. The Company is in
compliance with all financial covenants.
In fiscal years 2000, 1999, and 1998, the Company incurred commitment fees
on the credit facility ranging from 5 basis points on the letters of credit to
20 basis points on the available revolving credit line.
During fiscal years 2000 and 1999, there were $0 and $21 million
outstanding, respectively, under the revolving credit agreement (excluding
letters of credit). No amounts were outstanding under the Company's credit
facilities as of February 26, 2000 or February 27, 1999 (excluding letters of
credit).
The Company had outstanding letters of credit approximating $5,517,000 and
$4,845,000 as of February 26, 2000 and February 27, 1999, respectively, for the
purchase of inventory in the normal course of business.
4. Other
Prepayments and other current assets include prepaid catalog costs of
$1,045,000 and $7,246,000 as of February 26, 2000 and February 27, 1999,
respectively.
Trade accounts payable and accrued expenses consist of (dollars in
thousands):
February 26, February 27,
2000 1999
----------- -----------
Trade accounts payable ....................... $ 5,671 $ 5,025
Catalog costs ................................ 1,738 4,612
Salaries and compensation .................... 2,386 2,514
Accrued refunds .............................. 1,403 888
Other ........................................ 6,655 4,398
----------- -----------
$ 17,853 $ 17,437
----------- -----------
F-11
<PAGE>
5. Property, Plant and Equipment
Property, plant and equipment consists of the following (dollars in
thousands):
February 26, February 27,
2000 1999
----------- -----------
Land and buildings .......................... $ 32,578 $ 32,507
Machinery and equipment ..................... 30,751 32,577
Furniture and fixtures ...................... 3,832 3,670
Leasehold improvements ...................... 985 896
----------- -----------
Total property, plant & equipment, at cost . 68,146 69,650
Less: accumulated depreciation & amortization 33,054 31,839
----------- -----------
Property, plant & equipment, net ........... $ 35,092 $ 37,811
----------- -----------
6. Paper Hedge Contract
The Company's earnings are impacted by significant increases in paper
prices. In order to mitigate this risk, the Company implemented a price
protection program beginning in September 1999 by signing a collar hedge
contract with Enron Capital and Trade Resources Corporation. This four year
contract covers 56,000 short tons of a certain grade of paper which the Company
uses, among other grades, to produce its catalogs. There is a floor and ceiling
to paper prices within the contract. If paper prices remain within the range of
the contract, there will be no payment to either party to the contract. If paper
prices exceed the established ceiling, the Company will be reimbursed by the
counterparty for the excess. Conversely, if paper prices fall below the
established floor, the Company would pay the counterparty. The Company did not
pay a premium in connection with the establishment of the contract. No amounts
are required to be recorded in the accompanying financial statements. As of
February 26, 2000, market prices for paper remained within the ranges specified
in the contract and as a result, no payments have been required to be made by
either party under the agreement.
7. Leases
The Company's corporate headquarters and administrative offices are located
in a 65,000 square foot building in Rye, New York. This facility is leased under
a sublease agreement expiring on January 30, 2005. The sublease provides that
the Company, in addition to base rent, is only responsible for increases in real
estate taxes and operating costs over the initial lease year base costs. The
Company has the right to renew the lease, for two five-year periods, with the
building owner upon expiration of the sublease.
F-12
<PAGE>
Until July 1998, the Company's corporate headquarters and administrative
offices were located in a 41,664 square foot building in New Rochelle, New York
which was leased from two related parties under a net sub-lease which expired on
July 30, 1998, with an annual net rental of $430,000, plus all real estate
taxes, insurance and capital improvements.
The Company has operating lease agreements for certain computer and other
equipment used in its operations, for its outlet store locations, and for its
New Rochelle, New York and Las Vegas, Nevada Call Centers, with existing lease
terms ranging from fiscal 2001 through fiscal 2006, and various renewal options
through fiscal 2015. Most of the store leases also provide for payment of common
charges such as maintenance and real estate taxes. Ten stores require the
payment of additional rent based upon a percentage of sales. Minimum rental
payments required under these agreements, as well as the Corporate Headquarters
sublease, are as follows (dollars in thousands):
Fiscal Year
- -----------
2001 $ 3,334
2002 3,242
2003 2,804
2004 1,815
2005 1,490
2006 27
-------
$12,712
-------
Rent expense for fiscal 2000, 1999, and 1998 amounted to $4,536,000, $3,882,000,
and $2,612,000 respectively, which included $3,000, $18,000 and $30,000 in
fiscal 2000, 1999 and 1998 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 2000, 1999, and 1998 were
$500,000, $500,000, and $480,000, respectively.
The Company's profit sharing plan includes 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
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 2000, 1999, and 1998 were $479,000, $509,000, and $460,000
respectively.
F-13
<PAGE>
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. Amounts expensed in connection
with these agreements were $930,000 in fiscal 2000, $129,000 in fiscal 1999 and
$353,000 in fiscal 1998.
9. Stock Compensation Plans
At February 26, 2000, the Company had three stock-based compensation plans,
which are described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its stock compensation plans. Accordingly, no
compensation cost has been recognized for its non-qualified stock options
granted and for shares issued through its Employee Stock Purchase Plan. If
compensation cost for the Company's non-qualified stock options issued and
shares purchased through its stock purchase plan had been determined based on
the fair value at the grant dates for awards under those plans consistent with
the requirements of Statement of Financial Accounting Standards No. 123, the
Company's net income and earnings per share would have been reduced to the
proforma amounts indicated below (dollars in thousands, except per share
amounts):
February 28, February 27, February 26,
Fiscal Years Ended 1998 1999 2000
- ------------------ ----------- ----------- -----------
Net Income As reported $9,728 $3,139 $6,289
Pro forma $9,367 $2,724 $5,892
Basic earnings As reported $ 1.02 $ 0.34 $ 0.69
per share Pro forma $ 0.98 $ 0.30 $ 0.65
Diluted earnings As reported $ 1.01 $ 0.34 $ 0.69
per share Pro forma $ 0.97 $ 0.29 $ 0.65
The Company has a 1997 Performance Unit, Restricted Stock, Non-Qualified Option
and Incentive Stock Option Plan, and a total of 750,000 shares of common stock
have been reserved for issuance thereunder. Prior to adoption of the 1997 Plan,
the Company's 1987 Plan, which expired in fiscal 1998, had a total of 2,000,000
shares reserved for issuance.
The Company has granted and sold shares of restricted stock to certain
executives at a nominal price per share.
F-14
<PAGE>
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. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
February 28, February 27, February 26,
Fiscal Years Ended 1998 1999 2000
- ------------------ ----------- ----------- -----------
Expected volatility ........ 29.0% 29.3% 29.3%
Dividend yield ............. 2.0% 2.0% 2.3%
Risk-free interest rate .... 5.7% 5.3% 6.2%
Expected option term ....... 5 yrs. 5 yrs. 5 yrs.
Forfeiture rate ............ 25.0% 25.0% 25.0%
A summary of the Company's non-qualified stock option activity and weighted
average exercise prices for the three years ended February 26, 2000 follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------------------------------------
February 28, 1998 February 27, 1999 February 26, 2000
----------------------- ------------------------ -----------------------
Number Weighted Number Weighted Number Weighted
Of Average Of Average Of Average
Shares Exer.Price Shares Exer.Price Shares Exer.Price
--------- ---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
at beginning
of year .............. 878,500 $14.20 1,054,333 $14.72 898,004 $14.96
Granted .............. 209,500 $16.29 40,000 $15.42 261,500 $13.84
Exercised ............ (23,667) $12.62 (154,833) $13.21 (23,867) $13.36
Forfeited ............ (10,000) $14.25 (41,496) $15.77 (63,136) $14.68
--------- ------- ---------
Outstanding
at end of year ....... 1,054,333 $14.72 898,004 $14.96 1,072,501 $14.74
========= ====== ======= ====== ========= ======
Options
exercisable
at year-end .......... 628,165 676,841 742,498
Weighted-average
fair value of
options granted
during the year ...... $2.85 $2.87 $2.49
</TABLE>
The following table summarizes information about stock options outstanding
at February 26, 2000:
Options Outstanding Options Exercisable
------------------------------------- ------------------------
Weighted Avg.
Remaining Weighted Weighted
Range of Shares Contractual Average Shares Average
Exer.Prices Outstanding Life Exer.Price Exercisable Exer.Price
- ------------ ----------- ----------- ---------- ----------- ----------
$12.50-$18.13 1,072,501 6.0 Yrs. $14.74 742,498 $14.92
F-15
<PAGE>
The Company also has a 1997 Stock Option Plan for Non-Employee Directors,
and has reserved a total of 100,000 shares of common stock for issuance
thereunder. Prior to the adoption of the 1997 Plan, the Company's 1993 Plan,
which expired in fiscal 1998, had a total of 100,000 shares reserved for
issuance. The Company has granted non-qualified stock options to its
non-employee Directors both pursuant to the Plan and outside the Plan. These
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 fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
February 28, February 27, February 26,
Fiscal Years Ended 1998 1999 2000
- ------------------ ----------- ----------- -----------
Expected volatility 29.0% 29.3% 29.3%
Dividend yield 2.0% 2.0% 2.3%
Risk-free interest rate 5.7% 5.2% 6.2%
Expected option term 5 yrs. 5 yrs. 5 yrs.
Forfeiture rate 6.0% 6.0% 6.0%
A summary of the Company's stock option activity under the Non-Employee
Directors Plan, and options granted to non-employee Directors outside the Plan,
for the three years ended February 26, 2000 follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------------------------------------
February 28, 1998 February 27, 1999 February 26, 2000
----------------------- ------------------------ -----------------------
Number Weighted Number Weighted Number Weighted
Of Average Of Average Of Average
Shares Exer.Price Shares Exer.Price Shares Exer.Price
--------- ---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
at beginning
of year .............. 40,000 $14.19 60,000 $14.92 80,000 $15.41
Granted .............. 20,000 $16.38 20,000 $16.88 15,000 $14.13
--------- --------- --------
Outstanding
at end of year ....... 60,000 $14.92 80,000 $15.41 95,000 $15.21
========= ========= ========
Options
exercisable
at year-end .......... 40,000 60,000 80,000
Weighted-average
fair value of
options granted
during the year ...... $4.59 $4.63 $3.97
</TABLE>
F-16
<PAGE>
The following table summarizes information about stock options outstanding
at February 26, 2000:
Options Outstanding Options Exercisable
------------------------------------- ------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Shares Contractual Average Shares Average
Exer.Prices Outstanding Life Exer.Price Exercisable Exer.Price
- ------------ ----------- ----------- ---------- ----------- ----------
$12.38-$18.00 95,000 7.0 Yrs. $15.21 80,000 $15.41
The Company also has an Employee Stock Purchase Plan, with a total of
100,000 shares reserved for issuance. Under the Employee Stock Purchase Plan,
eligible employees can purchase shares of the Company's stock at the end of each
fiscal quarter, at a price equal to 85% of the average price of the stock on the
last trading day of the fiscal quarter. A maximum of $25,000 of common stock may
be purchased by an eligible employee in each calendar year. Under the Plan,
employees elected to purchase 22,857 shares, 18,207 shares, and 9,450 shares in
fiscal 2000, 1999, and 1998, respectively.
F-17
<PAGE>
10. Quarterly Results of Operations (Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Quarters Ended
---------------------------------------
May 28, August 28, November 27, February 26,
Fiscal 2000 1999 1999 1999 2000
- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ........................ $ 29,118 $ 35,499 $ 105,630 $ 71,527
Income (loss) before
income taxes ................... (4,054) (2,712) 15,350 1,766 (1)
Net income (loss) ............... (2,554) (1,708) 9,670 881 (1)
Net income (loss) per
common share-Basic ............. (.28) (.19) 1.06 .10 (1)
Net income (loss) per
common share-Diluted ........... (.28) (.19) 1.06 .10 (1)
Market price of shares
outstanding
- -market high .................... 14 7/8 14 5/8 13 5/16 12 5/8
- -market low ..................... 12 12 1/2 12 3/4 10 1/2
<CAPTION>
Fiscal Quarters Ended
---------------------------------------
May 30, August 29, November 28, February 27,
Fiscal 1999 1998 1998 1998 1999
- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ........................ $ 32,040 $ 39,510 $ 107,872 $ 75,796
Income (loss) before
income taxes ................... (4,129) (2,982) 11,644 (1) 546 (1)
Net income (loss) ............... (2,725) (1,968) 7,638 (1) 194 (1)
Net income (loss) per
common share-Basic ............. (.29) (.21) .84 (1) .02 (1)
Net income (loss) per
common share-Diluted ........... (.29) (.21) .84 (1) .02 (1)
Market price of shares
outstanding
- market high .................. 18 5/8 18 1/4 16 3/4 19 3/16
- market low ................... 16 5/8 16 12 11/16 13 11/16
</TABLE>
(1) See Note 11 - Other Income (Expense)
11. Other Income (Expense)
During the fourth quarter of fiscal 2000, the Company recorded two items of
other income. One was a pre-tax gain of $665,000 ($404,000 after-tax), which
resulted from the sale of stock received from the de-mutualization of an
insurance company which insures the lives of two Company officers. The second
item was a pre-tax gain of $81,000 ($49,000 after-tax) on the sale of Company
owned land under an easement order in the City Of Virginia Beach, Virginia.
During the third quarter of fiscal 1999, the Company recorded a
non-recurring charge related to the termination of the installation of a
purchased order entry computer system, and wrote off its investment of $1.4
million on a pre-tax basis ($920,000 after-tax).
F-18
<PAGE>
In the fourth quarter of fiscal 1999, the Company recorded severance costs
of $765,000 on a pre-tax basis ($497,000 after-tax) related to the departure of
several executives.
12. Stock Repurchase Programs
On October 10, 1995, the Board of Directors authorized the Company to
repurchase up to 1 million shares of its common stock in the open market from
time to time, subject to market conditions. As of September 3, 1998, the Company
completed the 1 million share repurchase program at a total cost of $15,118,000.
On October 7, 1998, the Board of Directors authorized the Company to
repurchase up to 1 million additional shares of its common stock in the open
market from time to time, subject to market conditions. On September 28, 1999
the Board of Directors authorized the Company to repurchase an additional
500,000 shares of its common stock. As of February 26, 2000, the Company had
repurchased 350,900 shares of its common stock under the current 1.5 million
share repurchase program at a total cost of $4,300,000.
The repurchased shares are used by the Company to make matching
contributions to its Profit Sharing/401(k) Plan, to issue shares under its
Performance Unit, Restricted Stock, Non-Qualified and Incentive Stock Option
Plans, to issue shares under its Stock Option Plans for Non-Employee Directors,
and to issue shares under its Employee Stock Purchase Plan.
13. Shareholder Rights Plan
On April 15, 1999, the Company's Board of Directors unanimously adopted a
shareholder rights plan (the "Plan"), commonly referred to as a poison pill.
Under the Plan, shareholders of record on April 30, 1999, and shareholders who
acquire the Company's common stock after that date (unless as excepted under the
terms of the Plan) will receive rights to purchase a unit consisting of one
one-thousandth of a Series A Preferred Share of the Company at $70.00 per unit.
The rights are not exercisable until the Board of Directors declares a
distribution date.
The Board of Directors may declare a distribution date within 10 days
following (i)the acquisition of or right to acquire by a person or group, 20% or
more of the outstanding common shares of the Company or (ii) the commencement of
a tender offer or exchange offer that would, if completed, result in a person or
group beneficially owning 20% or more of the Company's common shares. A
distribution date will not be declared if a person or group owns more than 20%
but less than 25% on April 30, 1999, and that person or group does not become
the beneficial owner of any additional shares of common stock. Upon the
declaration of a distribution date, each holder of the right will have the right
to receive, upon exercise, common shares having a value equal to two times the
exercise price of the right. In the
F-19
<PAGE>
alternative, the Board of Directors at its option may exchange all outstanding
and exercisable rights for common shares at an exchange ratio of one common
share per each right. The Board may redeem the rights prior to an event
triggering a distribution date at $.001 per right.
14. Subsequent Event
On April 6, 2000 the Company purchased the assets of Rue de France, Inc., a
privately owned catalog company based in Newport, Rhode Island. The Company
agreed to pay a cash purchase price of up to $3 million, subject to post closing
net worth adjustments. Additionally, the Company agreed to make future payments
contingent upon Rue de France, Inc., achieving certain projected earnings before
taxes during the five year period commencing on February 27, 2000.
Rue de France, Inc., a 15 year-old retailer of home furnishings, markets
its products through catalogs, a web site and a retail store in Newport, Rhode
Island. Rue de France, Inc.'s founder has joined Lillian Vernon Corporation
under a multi-year employment contract as President of a newly formed Company
subsidiary which acquired the assets of Rue de France, Inc.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Lillian Vernon
Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Lillian
Vernon Corporation and its subsidiaries (the "Company") at February 26, 2000 and
February 27, 1999, and the results of their operations and their cash flows for
each of the three years in the period ended February 26, 2000, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
April 25, 2000
F-21
FIRST AMENDMENT
THIS FIRST AMENDMENT is entered into on this 30th day of
December 1999, by and between HOWARD HUGHES PROPERTIES, LIMITED PARTNERSHIP, a
Delaware limited partnership ("Landlord") and LILLIAN VERNON CORPORATION, a
Delaware corporation ("Tenant").
R E C I T A L S:
- - - - - - - -
A. Landlord and Tenant entered into that certain Lease dated August
10, 1998 (the "Lease") for space consisting of approximately 14,905 rentable
square feet located at Hughes Airport Center, at 750 Pilot Road, Las Vegas,
Nevada (the "Original Premises").
B. Landlord and Tenant have agreed to expand the Original Premises by
the addition of an area containing 4,928 rentable square feet as more
specifically depicted on the floor plan attached to this First Amendment as
Exhibit "A-1" and incorporated herein by reference (the "Expansion Space").
NOW THEREFORE, based upon the covenants and promises contained herein
and other good and valuable consideration, the parties mutually agree as
follows:
1. Notwithstanding any provision to the contrary contained in the
Lease, and subject to the terms and conditions contained herein, Landlord and
Tenant agree as follows:
(a) The Lease Term as defined in Section 1.01(k) of the Lease shall be
amended to seventy-four (74) months causing a lease expiration date of March 31,
2005.
(b) The commencement date for the Expansion Space shall occur on the
earlier of (i) the date Tenant commences conducting its business in the
Expansion Space, (ii) the date the Work is substantially completed in the
Expansion Space (as defined below) or (iii) December 15, 1999, except as delayed
pursuant to this First Amendment (the "Expansion Space Commencement Date").
(c) Landlord will be deemed to have delivered possession of the
Expansion Space to Tenant on the Expansion Space Commencement Date, as it may be
adjusted pursuant to this First Amendment. Tenant acknowledges that neither
Landlord nor its agents or employees have made any representations or warranties
as to the suitability or fitness of the Expansion Space for the conduct of
Tenant's business or for any other purpose, nor has Landlord or its agents or
employees agreed to undertake any alterations or construct any tenant
improvements to the Original Premises or Expansion Space except as expressly
provided in this First Amendment. If for any reason, Landlord cannot deliver
possession of the Expansion Space to Tenant on or before the fixed date
component of the Expansion Space Commencement Date, the Lease and this First
Amendment will not be void or voidable, and Landlord will not be liable to
Tenant for any resultant loss or damage.
In the event the Expansion Space is not substantially completed by
July 1, 2000 ("Guaranteed Completion Date"), Tenant shall have the right to
terminate this First Amendment by providing Landlord with thirty (30) days prior
written notice ("Termination Notice"). If Landlord substantially completes the
Expansion Space prior to the lapse of thirty (30) days after Landlord's receipt
of the Tenant's Termination
-1-
<PAGE>
Notice, the Termination Notice shall become void and Tenant shall lose all
rights Tenant has to terminate this First Amendment under this Section. The
Guaranteed Completion Date shall be extended by one (1) day for each day
attributable to (a) an event of Force Majeure or (b) any Tenant Delays.
Notwithstanding the foregoing, in the event this First Amendment is
terminated, Landlord shall, within forty-five (45) days refund to Tenant the
Base Rent that has been paid to Landlord in connection with the Expansion Space.
(d) If, by the fixed date component of the Expansion Space
Commencement Date specified above, the Work has not been substantially completed
due to any cause other than Landlord's default or "Force Majeure Delays" (as
defined below), Landlord shall have no liability, and the Expansion Space
Commencement Date shall nonetheless commence as of said fixed date component of
the Expansion Space Commencement Date.
(e) If, however, the Work is not substantially completed by the fixed
date specified above due to default on the part of Landlord or Force Majeure
Delays, then as Tenant's sole remedy for the delay in Tenant's occupancy of the
Expansion Space, the fixed date component of the definition of the Expansion
Space Commencement Date shall be delayed for the period of delay in substantial
completion of the Work. The Work shall be deemed "substantially completed" when
(i) Landlord has provided reasonable access to the Expansion Space to Tenant,
(ii) Landlord has completed the Work other than punchlist items which do not
materially interfere with Tenant's use of the Expansion Space, and (iii)
Landlord has obtained a permanent or temporary certificate of occupancy for the
Expansion Space (or its equivalent). For purposes of this Section 1 "Force
Majeure Delays" shall mean and refer to a period of delay or delays encountered
by Landlord affecting the Work because of delays due to excess time in obtaining
governmental permits or approvals beyond the time period normally required to
obtain such permits or approvals for similar space within the Hughes Airport
Center; fire, earthquake or other acts of God; acts of the public enemy; riot;
insurrection; public unrest; governmental regulations of the sales of materials
or supplies or the transportation thereof; strikes or boycotts; shortages of
material or labor or any cause beyond the reasonable control of Landlord.
(f) Effective as of the Expansion Space Commencement Date and during
the Lease Term:
(i) The term "Premises" shall mean the office/warehouse space
outlined on the plan attached to this First Amendment as Exhibit "A",
and incorporated herein by reference.
(ii) The term "Tenant's Rentable Square Feet" shall mean 19,833
square feet.
(g) Effective as of the Expansion Space Commencement Date and during
the Lease Term, the Base Rent for the Premises shall be as follows:
MONTHLY ANNUAL
PERIOD INSTALLMENT BASE RENT
------- ----------- ---------
12/15/99 - 12/31/00: $21,816.30 $261,795.60
1/1/01 - 12/31/01: $24,791.25 $297,495.00
1/1/02 - 12/31/02: $25,584.57 $307,014.84
1/1/03 - 12/31/03: $26,179.56 $314,154.72
1/1/04 - 3/31/05: $26,774.55 $401,618.25
-2-
<PAGE>
(h) Effective as of the Expansion Space Commencement Date and during
the Lease Term, Tenant's Share shall be thirty-five and fifteen hundredths
percent (35.15%).
(i) Effective as of the Expansion Space Commencement Date and during
the Lease Term, Tenant shall be entitled to use an additional thirty-five (35)
unreserved uncovered parking spaces at no charge.
(j) Effective as of the Expansion Space Commencement Date, Exhibit "B"
of this First Amendment shall supersede and replace the Exhibit "B" attached to
the Lease.
(k) Tenant's Address as defined in Section 1.01 (s) of the Lease shall
be amended to: 2600 International Parkway, Virginia Beach, Virginia 23452-7878,
Attention: Michael Burg, and 1 Theall Road, Rye, New York 10580, Attention: Mr.
Larry Blum. With a copy to: 1 Theall Road, Rye New York 10580, Attention: Dick
Randall.
2. Notwithstanding any provision to the contrary contained in the Lease,
Landlord and Tenant agree as follows:
(a) WORK. Subject to subsection 2(f) below, Landlord shall, at
Tenant's expense, construct certain improvements on or about the Original
Premises and the Expansion Space (the "Work") in accordance with certain plans
and specifications referenced on Exhibit "C" attached hereto and incorporated
herein by this reference. Tenant hereby approves the plans and specifications
referenced on Exhibit "C."
(b) PRELIMINARY PLANS. If the plans and specifications referenced in
Exhibit "C" are final plans and specifications, such final plans and
specifications are hereinafter referred to as the "Final Plans," and the
remainder of this Section shall be inoperative. If the plans and specifications
referenced in Exhibit "C" are preliminary plans, Landlord shall prepare final
working drawings and outlined specifications for the Work and submit such plans
and specifications to Tenant for its approval as soon as reasonably possible
after execution of this First Amendment. Tenant shall approve or disapprove such
drawings and specifications within ten (10) days after receipt from Landlord.
Tenant shall have the right to disapprove such drawings and specifications only
if they materially differ from the plans and specifications attached hereto. If
Tenant disapproves such drawings and specifications, Landlord and Tenant shall
promptly meet in an attempt to resolve any dispute regarding such drawings and
specifications. If the parties are unable to agree upon the final working
drawings and specifications for the Work within ten (10) days, Landlord may, at
Landlord's option, either (1) terminate this First Amendment upon ten (10) days
prior written notice to Tenant, in which case neither Landlord nor Tenant shall
have further liability to the other, or (2) submit the matter to conclusive and
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association to determine whether Tenant properly
disapproved the drawings and specifications, given the standard for disapproval
specified in this Section 2. Final working drawings and specifications prepared
in accordance with this subsection 2(b) approved by Landlord and Tenant are
hereinafter referred to as the "Final Plans."
(c) COMPLETION OF WORK AND EXPANSION SPACE COMMENCEMENT DATE. Landlord
and Tenant agree that the Expansion Space Commencement Date shall be the earlier
of the dates set forth in Section 1 of this First Amendment. The Work shall be
deemed "substantially completed" in accordance with the definition set forth in
Section 1 of this First Amendment.
(d) CHANGES. Landlord's obligation to prepare the Expansion Space for
Tenant's
-3-
<PAGE>
occupancy is limited to the completion of the Work set forth in the
plans and specifications attached hereto as Exhibit "C" or in the Final Plans.
Landlord shall not be required to furnish, construct or install any items not
shown thereon. If Tenant, however, requests in writing any change, addition or
alteration ("Changes") in such plans and specifications or in the construction
of the Work, and, if Landlord approves the proposed Changes, Landlord shall
notify Tenant of the cost to perform the Changes and Tenant and Landlord shall
mutually agree upon the amount to be paid by the Tenant for the Changes and
Tenant shall pay such amount to Landlord before Landlord shall perform the
Changes. Any delay caused by Tenant's request for any Changes or from the
construction of any Changes shall not, in any event, delay the Expansion Space
Commencement Date, which shall occur on the date it would have occurred but for
such Changes. The Work shall be the property of Landlord and shall remain upon
and be surrendered with the Premises (as defined in Section 1 of this First
Amendment) upon the expiration of the Lease Term.
(e) COST OF WORK. As used herein, cost of the Work shall mean all the
costs and charges incurred by Landlord to construct the Work, including, without
limitation, (i) the actual contractor costs and charges for material and labor,
contractor's profit, overhead and general conditions incurred by Landlord in
having the Work constructed in accordance with the Final Plans, (ii)
Governmental agency plan check, permit and other fees and sales and use taxes,
(iii) testing and inspection costs, (iv) any paint touch-up or repair work
necessary to the Premises due to Tenant's move into the Expansion Space, (v) all
other costs expended or to be expended by Landlord in the construction of the
Work including those costs incurred by Landlord for construction of elements of
the Work, which construction was performed by Landlord prior to the execution of
this First Amendment by Landlord and Tenant and which construction has been
performed for the benefit of tenants and is customarily performed by Landlord
prior to the execution of leases for such space in the Building for reasons of
economics. Examples of such construction would include the extension of
mechanical (including heating, ventilating and air conditioning systems) and
electrical distribution systems outside of the core area of the Building, wall
construction, column enclosures, and painting outside of the core of the
Building, ceiling hangar wires and window treatment.
(f) ALLOWANCE FOR COST OF WORK. In the event the cost of the Work (as
defined in subsection 2(e) above) being constructed pursuant to the Final Plans
exceeds One Hundred Forty-Seven Thousand Eight Hundred Forty Dollars and No
Cents ($147,840.00) (the "Allowance"), Tenant shall pay to Landlord the cost of
the Work in excess of the Allowance (the "Excess Cost") as provided herein. The
Excess Cost shall be paid to Landlord in cash prior to the commencement of
construction of the Work unless otherwise agreed by the parties. Any delay
caused by Tenant's failure to timely pay an Excess Cost or any cost Tenant is
responsible for paying resulting from Changes shall not, in any event, delay the
Expansion Space Commencement Date, which shall occur on the date it would have
occurred but for such delay.
(g) TENANT'S REPRESENTATIVE. Tenant has designated Mike Burg as its
sole representative with respect to the matters set forth in this First
Amendment, who shall have full authority and responsibility to act on behalf of
the Tenant as required in this First Amendment.
(h) LANDLORD'S REPRESENTATIVE. Landlord has designated Richard Whelan
as its sole representative with respect to the matters set forth in this First
Amendment, who, until further notice to Tenant, shall have full authority and
responsibility to act on behalf of the Landlord as required in this First
Amendment.
-4-
<PAGE>
3. Notwithstanding any provision to the contrary contained in the Lease,
Landlord represents and warrants to Tenant, and Tenant represents and warrants
to Landlord, that no broker, leasing agent or finder has been engaged in
connection with the transaction contemplated by this First Amendment. However,
in the event of any claims for brokers' or finders' fees or commissions in
connection with this First Amendment, Landlord and Tenant hereby indemnify and
hold each other harmless against any loss, claim, expense or liability with
respect to any commissions or brokerage fees claimed as a result of the
execution of this First Amendment and/or the renewal of the Lease due to any
action of the indemnifying party.
4. Except as modified herein, the Lease shall remain in full force and
effect.
5. All capitalized terms not defined herein shall have the same meaning as
defined in the Lease.
IN WITNESS THEREOF, this First Amendment has been executed on the day and
year above written.
LANDLORD: TENANT:
- --------- -------
HOWARD HUGHES PROPERTIES, LILLIAN VERNON CORPORATION,
LIMITED PARTNERSHIP, a a Delaware corporation
Delaware limited partnership
By its sole general partner: By: ______________________
THE HOWARD HUGHES CORPORATION,
A Delaware corporation Print Name: ______________________
By:____________________________ Print Title: ______________________
Print Name:____________________
Print Title:___________________
<PAGE>
EXHIBIT "A"
-----------
TO FIRST AMENDMENT
------------------
FLOOR PLAN OF PREMISES
----------------------
A-1
<PAGE>
EXHIBIT "A-1"
-------------
TO FIRST AMENDMENT
------------------
FLOOR PLAN OF EXPANSION SPACE
-----------------------------
A-2
<PAGE>
B-1
EXHIBIT "B"
-----------
TO FIRST AMENDMENT
------------------
LEGAL DESCRIPTION OF BUILDING SITE
----------------------------------
B-1
<PAGE>
EXHIBIT "C"
-----------
TO FIRST AMENDMENT
------------------
PLANS AND SPECIFICATIONS
------------------------
The Preliminary Plans are those preliminary space plans as depicted below
that were submitted by the Tenant and shall be finalized by JMA Architecture
Studios and approved by Tenant.
C-2
================================================================================
ASSET PURCHASE AGREEMENT
BY AND AMONG
RDF ACQUISITION CORP.
AND
LILLIAN VERNON CORPORATION
AND
RUE DE FRANCE, INC.
AND
PAMELA F. KELLEY and BRENDAN P. KELLEY
Executed on April 6, 2000 as of March 31, 2000
================================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I PURCHASE AND SALE OF ASSETS..............................1
Section 1.1 Purchase and Sale of Assets..............................1
Section 1.2 Purchase Price; Assumption of Certain Liabilities;
and Non-Assumption of all other Liabilities..............2
Section 1.3 Net Worth Adjustment of the Fixed Portion of the
Purchase Price...........................................5
Section 1.4 Manner of Payment........................................8
Section 1.5 The Calculation and Payment of the Contingent
Portion of the Purchase Price............................8
ARTICLE II CLOSING.................................................10
Section 2.1 Time and Place..........................................10
Section 2.2 Deliveries by the Company and the Shareholders..........11
Section 2.3 Deliveries by the Purchaser.............................12
ARTICLE III CERTAIN COVENANTS OF THE COMPANY,THE SHAREHOLDERS
AND THE PURCHASER.......................................13
Section 3.1 Confidentiality; Non-Competition........................13
Section 3.2 Allocation of Purchase Price............................17
Section 3.3 Accounts Receivable Indemnity...........................18
Section 3.4 Employment Agreement....................................19
Section 3.5 Assignment of Proprietary Rights........................19
Section 3.6 Lease Agreement.........................................19
Section 3.7 Bulk Sales Law Compliance...............................19
Section 3.8 Successor Employer......................................19
Section 3.9 Right of First Refusal Agreement........................20
Section 3.10 Stock Options...........................................20
i
<PAGE>
Section 3.11 Determination Letter....................................21
Section 3.12 Retail Credit Card Sales................................21
ARTICLE IV REPRESENTATIONS AND WARRANTIES BY THE COMPANYAND
THE SHAREHOLDERS WITH RESPECT TO THE COMPANY............21
Section 4.1 Organization, Authorization and Valid and
Binding Agreement.......................................21
Section 4.2 Capitalization..........................................22
Section 4.3 No Equity Investments or Subsidiaries...................23
Section 4.4 Consents; No Violation..................................23
Section 4.5 Financial Statements....................................23
Section 4.6 No Undisclosed Liabilities..............................24
Section 4.7 Absence of Certain Changes..............................25
Section 4.8 Certain Tax Matters.....................................26
Section 4.9 Title to Properties; Encumbrances.......................27
Section 4.10 Fixed and Other Tangible Assets.........................28
Section 4.11 Leases..................................................28
Section 4.12 Databases and Software..................................29
Section 4.13 Patents, Trademarks, Copyrights.........................30
Section 4.14 Litigation..............................................30
Section 4.15 Insurance...............................................31
Section 4.16 Catalogs and Customer Profiles..........................31
Section 4.17 Cancellations...........................................32
Section 4.18 Employee Benefit Plans..................................32
Section 4.19 Customer Lists and Disclosure of Confidential
Information.............................................38
Section 4.20 Contracts and Commitments...............................39
Section 4.21 Personnel; Sales Representatives........................40
Section 4.22 Labor Relations.........................................41
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Section 4.23 Compliance with Applicable Law..........................42
Section 4.24 Environmental Matters...................................42
Section 4.25 Accounts Receivable.....................................44
Section 4.26 Inventory and Supplies..................................45
Section 4.27 Full Disclosure.........................................45
Section 4.28 (intentionally omitted).................................45
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS......45
Section 5.1 Authorization and Valid and Binding Agreement...........45
Section 5.2 Consents; No Violation..................................46
Section 5.3 Ownership of Shares.....................................46
Section 5.4 No Business Arrangements with Affiliates................47
Section 5.5 (intentionally omitted).................................47
ARTICLE VI REPRESENTATIONS AND WARRANTIES BY THE PURCHASER.........47
Section 6.1 Organization............................................47
Section 6.2 Authorization...........................................47
Section 6.3 Valid and Binding Agreement.............................48
Section 6.4 Consents; No Violation..................................48
ARTICLE VII CONDUCT OF BUSINESS OF THECOMPANY SUBSEQUENT
TO CLOSING DATE.........................................49
Section 7.1 (intentionally omitted) ................................50
Section 7.2 (intentionally omitted).................................50
Section 7.3 (intentionally omitted).................................50
Section 7.4 (intentionally omitted).................................50
ARTICLE VIII CERTAIN COVENANTS OF THE PARTIES........................50
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Section 8.1 Consents; Third Parties.................................50
Section 8.2 Supplemental Disclosure.................................50
Section 8.3 Further Assurances......................................51
Section 8.4 Transfer Taxes..........................................51
ARTICLE IX CLOSING CONDITIONS......................................51
Section 9.1 Conditions to the Obligations of the Purchaser..........51
Section 9.2 Conditions to the Obligations of the Shareholders.......52
ARTICLE X SURVIVAL OF REPRESENTATIONS AND INDEMNIFICATIONS........54
Section 10.1 Survival of Representations of the Company and
the Shareholders........................................54
Section 10.2 Statements as Representations...........................54
Section 10.3 Indemnification of Purchaser Group for Breach of
Representation or Warranty..............................54
Section 10.4 Indemnification of Purchaser Group with respect
to Third Party Claims...................................55
Section 10.5 Indemnification of the Shareholder Group................55
Section 10.6 Indemnification of Shareholder Group with respect
to Third Party Claims...................................56
Section 10.7 Procedure...............................................56
Section 10.8 Remedies Cumulative.....................................58
Section 10.9 Limits on Indemnification Obligations...................58
ARTICLE XI MISCELLANEOUS...........................................59
Section 11.1 Finder's Fees...........................................59
Section 11.2 Expenses................................................59
Section 11.3 Parties in Interest.....................................59
Section 11.4 Entire Agreement........................................59
Section 11.5 Modification............................................60
Section 11.6 Notices.................................................60
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Section 11.7 Law Governing...........................................61
Section 11.8 Interpretation and Construction.........................61
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SCHEDULE OF EXHIBITS
Exhibit A Pamela F. Kelley Employment Agreement
Exhibit B Proprietary Rights Assignments
Exhibit C Lease Agreement
Exhibit D Right of First Refusal Agreement
Exhibit E Lawson & Weitzen, LLP Opinion
Exhibit F Salon, Marrow, Dyckman & Newman , LLP
Opinion
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LIST OF SCHEDULES
Schedule 1 Index of Defined Terms
Schedule 1.1 Excluded Assets
Schedule 1.2 Assumed Contracts
Schedule 1.3(a) Form of Audit Report for Closing Net Worth Statement
Schedule 1.5(a) Projected EBT
Schedule 1.5(b) EBT Cost Calculation
Schedule 4.1(f) Licenses and Permits
Schedule 4.4 Required Consents
Schedule 4.6 Undisclosed Liabilities
Schedule 4.7 Absence of Certain Changes
Schedule 4.9 Liens
Schedule 4.10 List of Owned Tangible Assets
Schedule 4.11 Leases
Schedule 4.12 List of Software
Schedule 4.13 List of Patents, Trademarks, Copyrights and Disclosure
of Defects
Schedule 4.14(a) Pending or Threatened Litigation
Schedule 4.14(b) Notice of Claims or Investigations regarding Product
Defects
Schedule 4.15 Insurance
Schedule 4.16(a) Catalog Mailing Information
Schedule 4.16(b) Catalog Customer Information
Schedule 4.18(b) List of Employee Plans
Schedule 4.18(c) Exceptions to ERISA Representations
Schedule 4.18(c)(5) Accelerated Vesting Exceptions
Schedule 4.19 Unfulfilled List Rental Obligations
Schedule 4.20(a) List of Material Contracts
Schedule 4.20(b) List of Adverse Material Contracts
Schedule 4.21(a) Employee and Consultant Compensation
Schedule 4.21(b) Sales Representative Commission Rates
Schedule 4.22 Labor Relations Disclosures
Schedule 4.23(a) Violations of Law
Schedule 4.23(b) Notification of Violations of Law
Schedule 4.24 Hazardous Substances and Underground Tanks
Schedule 5.3 Ownership of Shares
Schedule 5.4 Business Arrangements with Affiliates
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ASSET PURCHASE AGREEMENT
------------------------
ASSET PURCHASE AGREEMENT (the "Agreement") executed on April 6, 2000
as of March 31,, 2000 by and among RDF ACQUISITION CORP., a Delaware corporation
(the "Purchaser"), LILLIAN VERNON CORPORATION ("LVC"), a Delaware corporation,
RUE DE FRANCE, INC., a Rhode Island corporation (the "Company") and PAMELA F.
KELLEY and BRENDAN P. KELLEY (collectively, the "Shareholders").
WHEREAS, upon the terms and subject to the conditions contained in
this Agreement, the Purchaser desires to purchase from the Company, and the
Company desires to sell to the Purchaser all of its assets of every kind and
description real, personal and mixed, tangible and intangible, and wheresoever
located other than the Excluded Assets;
WHEREAS, the Shareholders own all of the issued and outstanding
capital stock of the Company and have agreed to be jointly and severally liable
with respect to the obligations of the Company hereunder to the Purchaser;
WHEREAS, LVC, the parent of the Purchaser, has agreed to be jointly
and severally liable with respect to the obligations of the Purchaser hereunder
to the Company and the Shareholders; and
WHEREAS, an index of the meaning of capitalized terms is set forth in
Schedule 1 hereof.
NOW, THEREFORE, in consideration of the premises set forth above and
the mutual covenants and agreements set forth herein, the parties hereto,
intending to be legally bound, do hereby agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
---------------------------
SECTION 1.1 PURCHASE AND SALE OF ASSETS. Upon the terms and subject to
the conditions contained in this Agreement and effective as of the close of
business on March 31, 2000 (the
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"Closing Date"), the Company shall sell, transfer, convey, assign and deliver to
the Purchaser free and clear of all security interests, liens, encumbrances and
liabilities other than Assumed Liabilities and Assumed Contractual Liabilities,
and the Purchaser shall purchase, all of the assets of the Company of every kind
and description real, personal and mixed, tangible and intangible, and
wheresoever located, excepting only those assets (the "Excluded Assets")
identified on Schedule 1.1 annexed hereto as the same shall exist on the Closing
Date (the "Purchased Assets") including, without limitation, the following:
(i) cash, cash equivalents, prepaid expenses, deposits, rebates,
refunds and marketable securities;
(ii) accounts receivable;
(iii) inventory including work-in-process;
(iv) catalogs, fliers, brochures, artwork and work in process on
catalogs;
(v) supplies;
(vi) machinery, equipment, fixtures, leasehold improvements,
furniture and other fixed assets;
(vii) trademark "Rue de France" and all variations thereof, other
trademarks, servicemarks, logos, tradenames, copyrights, patents, customer
lists, telephone numbers, domain names, customer and supplier records,
manufacturing records and manuals, computer software and all other records and
intangibles of the Company and the goodwill associated therewith; and
(viii) contract rights including, without limitation, open customer
purchase orders and warranty rights.
SECTION 1.2 PURCHASE PRICE; ASSUMPTION OF CERTAIN LIABILITIES; AND
NON-ASSUMPTION OF ALL OTHER LIABILITIES.
------------------------------------------------------
(a) Upon the terms and subject to the conditions contained in this
Agreement, in reliance upon the representations, warranties and agreements of
the Shareholders and the Company contained in this Agreement, and in
consideration of the aforesaid sale, transfer,
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conveyance, assignment and delivery of the Purchased Assets as of the Closing
Date, the Purchaser and LVC jointly and severally agree to: (i) pay to the
Company an aggregate amount equal to Three Million ($3,000,000) Dollars (the
"Fixed Portion of the Purchase Price"), to be adjusted as set forth in Section
1.3, and to be paid in accordance with the provisions of Section 1.4; (ii) pay
to the Company a contingent purchase price of up to Two Million ($2,000,000)
Dollars based upon earnings of the Purchaser during the five (5) year period
following the Closing Date in accordance with the provisions of Section 1.5 (the
"Contingent Portion of the Purchase Price"); (iii) assume the Assumed
Liabilities; and (iv) assume the liabilities (the "Gap Liabilities") created by
the Company during the period between the Closing Date and the Closing and which
remain unpaid at the Closing, provided, however, that such liabilities were
incurred in the ordinary course of the business of the Company and consistent
with past practice and are not Unassumed Liabilities or Default Liabilities and
are not shown on the Final Closing Net Worth Statement. For purposes hereof (i)
"Assumed Liabilities" shall mean the liabilities accrued on the Final Closing
Net Worth Statement and (ii) "Assumed Contractual Liabilities" shall mean
liabilities accruing after the Closing Date with respect to the contracts which
are listed on Schedule 1.2 hereof (the "Assumed Contracts") and are assigned to
Purchaser as of the Closing Date (excluding, however, liabilities accruing on or
after the Closing Date with respect to defaults or events occurring prior to the
Closing Date, which with the giving of notice or the passage of time, or both,
would constitute defaults under any such contract ("Default Liabilities")).
(b) Except as expressly provided in Subsection 1.2(a) above, neither
the Purchaser nor LVC shall be obligated to assume or become liable for, and
shall not assume or be liable for, any of the Company's liabilities,
obligations, debts, contracts or other commitments of any kind whatsoever, known
or unknown, fixed or contingent (collectively, the "Unassumed Liabilities"). The
Company shall, and the Shareholders shall cause the Company to, discharge the
Funded Debt at Closing and all other Unassumed Liabilities in a timely manner as
such become due and
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payable, except as and to the extent same are contested by the Company in good
faith. It is expressly agreed, without limiting the generality or the effect of
the preceding provisions, that neither the Purchaser nor LVC shall be obligated
to assume or become liable for, and shall not assume or be liable for, any of
the Company's liabilities or obligations, known or unknown, fixed or contingent,
now existing or hereafter arising, which shall relate to (aa) liabilities for
borrowed monies including, without limitation, sums owing to the Shareholders
and sums owing by the Company to PNC Bank, National Association ("Funded Debt"),
(bb) any Taxes payable with respect to operations of the Company on, prior or
subsequent to the Closing Date, including but not limited to Taxes of the
Company or the Shareholders which may become due as a result of the transaction
herein described; (cc) any product liability claim, product recalls or other
product-related claims or expenses with respect to products of the Company
shipped on or prior to the Closing Date; (dd) any employee-related liabilities
(including, without limitation, employee benefit liabilities and liabilities
under Employee Plans) accruing on or prior to the Closing Date, except only that
the Company's liability for accrued vacation pay and sick pay as of the Closing
Date shall be used in computing Net Worth pursuant to Section 1.3(a)(x) and
shall be assumed by Purchaser pursuant to Section 1.2(a); (ee) liabilities
arising under Environmental Laws and resulting from actions taken or omitted to
be taken by the Company or others on or prior to the Closing Date; (ff)
liabilities which arise as a result of, or the existence of which constitutes, a
breach of any representation or warranty hereunder; (gg) any Default
Liabilities; (hh) any sums owing to the Shareholders or any Affiliates of the
Shareholders; (ii) liabilities incurred in violation of any of the terms or
provisions of this Agreement; (jj) the expenses referred to in Section 11.2
hereof and (kk) escheat liabilities.
(c) The Company's payroll for the period through April 2, 2000 (the
"Final Payroll") is payable on April 7, 2000. The parties agree that (i) no part
of the Final Payroll shall be used in computing Net Worth; (ii) the Company
shall pay the Final Payroll in full on April 7, 2000; and (iii) subsequent to
Closing, Purchaser shall reimburse the Company but only for that portion of
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the Final Payroll attributable to services rendered by employees to the Company
on April 1, 2000 and April 2, 2000.
SECTION 1.3 NET WORTH ADJUSTMENT OF THE FIXED PORTION OF THE
PURCHASE PRICE.
------------------------------------------------
(a) Within forty-five (45) days after the Closing, the Company shall
prepare and deliver to Purchaser a statement (the "Closing Net Worth Statement")
of the Net Worth of the Company determined as of the close of business on the
Closing Date (the "Closing Net Worth Statement Date" and the "Closing Net
Worth"), together with the audit report thereon of Casten, Victor & Company LLP,
the Company's and Shareholders' independent auditors (the "Company's
Accountants"), which report shall be in the form set forth in Schedule 1.3(a)
attached. Thereafter, the Purchaser shall cause PricewaterhouseCoopers LLP
("PWC"), the Purchaser's independent auditors, to review such Closing Net Worth
Statement and report and, in furtherance thereof, PWC shall be granted access to
the workpapers prepared by the Company's Accountants in connection with its
audit of the Closing Net Worth Statement. If PWC or Purchaser object to any
aspect of the Closing Net Worth Statement (each item objected to being referred
to as a "Disputed Item"), then PWC, Purchaser or LVC shall issue a letter to the
Company's Accountants summarizing the Disputed Item, such letter to be issued
within forty-five (45) days after Purchaser's receipt of the Closing Net Worth
Statement and report thereon of the Company's Accountants. Purchaser shall cause
a copy of such letter to promptly be sent to the Shareholders and to their
counsel at the addresses set forth in Section 11.6. The fees and expenses of PWC
shall be borne by the Purchaser and the fees of the Company's Accountants shall
be borne by the Company. For purposes of this Agreement and except as otherwise
set forth in this Section, the term "Net Worth" shall mean total assets of the
Company minus total liabilities of the Company, calculated in accordance with
generally accepted accounting principles applied in a manner consistent with
that reflected in the Company's audited financial statements for the years ended
December 31, 1999 and December 31, 1998. In computing Net Worth: (v) Excluded
Assets, Unassumed Liabilities and Default Liabilities shall be omitted,
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(w) there shall be no reserve for bad debts as the Company and the Shareholders
have in this Agreement guaranteed payment of the same, (x) appropriate
liabilities and/or reserves shall be established for sales returns and refunds,
accrued vacation pay and sick pay, excess and obsolete inventory and outstanding
gift certificates, if any, (y) footnotes to the financial statement shall be
omitted, and (z) the provisions of Section 1.2(c) shall be complied with.
(b) If the Company and the Purchaser cannot agree as to the appropriate
treatment of any Disputed Item within twenty (20) business days after issuance
of the said letter summarizing the Disputed Items, then the Company and the
Purchaser shall select within twenty (20) business days thereafter a mutually
acceptable nationally recognized accounting firm. For each Disputed Item then
remaining, said third accounting firm shall, within ten (10) business days after
being selected and in consultation with the Company's Accountants and PWC,
determine on an item by item basis whether the Company's Accountants' or PWC's
calculation of the Disputed Item(s) shall be used to determine the Closing Net
Worth, which determination shall be final and binding (such determination, or
earlier calculation agreed to by the Company and the Purchaser, being referred
to as the "Final Closing Net Worth", and such statement computing the Final
Closing Net Worth being referred to as the "Final Closing Net Worth Statement").
Such third accounting firm shall be permitted complete access to the Company's
personnel and financial records, and to workpapers prepared by the Company's
Accountants and by PWC to the extent that the Company's Accountants or PWC, as
the case may be, considers reasonably necessary. If the parties cannot agree
upon a third accounting firm within the time period provided therefor, then
either party may apply to the American Arbitration Association for appointment
of the same. The fees and expenses of such third nationally recognized
accounting firm and of the American Arbitration Association shall be borne
equally by the Purchaser and the Company.
(c) If the Final Closing Net Worth exceeds Five Hundred Thousand
($500,000) Dollars, Purchaser and LVC shall be jointly and severally obligated
to pay to the Company the amount of such excess plus the Purchase Price
Holdback. If the Final Closing Net Worth is less
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than Four Hundred Thousand ($400,000) Dollars, the Company and the Shareholders
shall be jointly and severally obligated to pay to the Purchaser the amount of
such shortfall to the extent the same exceeds the Purchase Price Holdback and
the Purchaser shall in such case retain the full Purchase Price Holdback,
otherwise the amount of such shortfall shall be deducted from the Purchase Price
Holdback and retained by Purchaser and the balance of the Purchase Price
Holdback shall then be paid to the Company. If the Final Closing Net Worth is
between Four Hundred Thousand ($400,000) Dollars and Five Hundred Thousand
($500,000) Dollars, then Purchaser and LVC shall be jointly and severally
obligated to pay the amount of the Purchase Price Holdback to the Company. Any
payment required to be made pursuant to this Section 1.3 shall be made in full
by wire transfer of immediately available funds within five (5) business days
after delivery of the Final Closing Net Worth Statement; provided, however, that
notwithstanding anything set forth to the contrary herein, no portion of the
Purchase Price Holdback shall be paid to the Company unless and until the
Company delivers to Purchaser a Letter of Good Standing, issued by the Rhode
Island Division of Taxation, indicating that no Taxes or Tax Returns are owed by
the Company to the State of Rhode Island as of the Closing Date. The following
hypothetical examples are intended to illustrate the parties' intent as to the
calculations described above in this Section 1.3(c):
FINAL CLOSING NET WORTH PAYMENTS
-0- Full Purchase Price Holdback of $375,000 to Purchaser plus
additional $25,000 to Purchaser.
$250,000 $150,000 to Purchaser from Purchase Price Holdback; balance
of $225,000 to Company.
$375,000 $25,000 to Purchaser from Purchase Price Holdback; balance
of $350,000 to Company.
$400,000 Full Purchase Price Holdback of $375,000 to Company.
$550,000 Full Purchase Price Holdback of $375,000 to the Company plus
additional $50,000 to Company.
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SECTION 1.4 MANNER OF PAYMENT. (a) At the Closing, the Purchaser shall
pay to the Company the Fixed Portion of the Purchase Price less the sum of Three
Hundred Seventy-Five Thousand ($375,000) Dollars (the "Purchase Price
Holdback").
(b) The Contingent Portion of the Purchase Price shall be paid as, if
and when earned in accordance with the provisions of Section 1.5 hereof.
SECTION 1.5 THE CALCULATION AND PAYMENT OF THE CONTINGENT PORTION OF
THE PURCHASE PRICE.
--------------------------------------------------------
(a) In addition to the Fixed Portion of the Purchase Price the
Purchaser and LVC jointly and severally agree to pay to the Company the
Contingent Portion of the Purchase Price contingent upon the Purchaser achieving
the earnings before taxes projected by the Company ("EBT") as set forth in
Schedule 1.5(a) annexed hereto ("Projected EBT") during the five (5) fiscal year
period of LVC commencing February 27, 2000 (each an "EBT Year" and collectively,
the "Earn Out Period") as follows:
(x) One Million ($1,000,000) Dollars if the Purchaser achieves
the Projected EBT for the first three (3) EBT Years on a
cumulative basis;
(y) Five Hundred Thousand ($500,000) Dollars if the Purchaser
achieves the Projected EBT for the fourth EBT Year; and
(z) Five Hundred Thousand ($500,000) Dollars if the Purchaser
achieves the Projected EBT for the fifth EBT Year.
(b) EBT shall be determined in accordance with generally accepted
accounting principles consistently applied except that the EBT of the Company
for the period March 1, 2000 through the Closing Date shall be added to
Purchaser's EBT for the First EBT Year and except that the amortization of any
goodwill or any other intangible assets created as a result of the purchase of
the Purchased Assets shall not be deducted and if any functions are performed
for the Purchaser by LVC or any of its Affiliates such as, but not limited to,
accounting, warehousing, purchasing or distribution, then the cost for such
functions shall be charged to Purchaser as set
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forth in Schedule 1.5(b). In computing EBT, the Purchaser shall be charged
interest, fees and costs on all borrowings both short term and long term,
outstanding intercompany balances, capital invested in Purchaser by LVC
(excepting the Fixed Portion of the Purchase Price and the Contingent Portion of
the Purchase Price) and letters of credit at LVC's cost to borrow money or to
establish letter of credits, as the case may be.
(c) The sales of all products using the Rue de France service mark as
well as the sales of any other collection of products under any other name
whether similar or dissimilar to the Company's current line of products or price
points and whether through a catalog, website or other direct marketing medium
or through retail stores (each, a "New Business Initiative") which New Business
Initiative was developed by Pamela F. Kelley with the approval of LVC shall be
conducted by the Purchaser or if conducted by LVC, the Purchaser shall be given
credit for the EBT generated by the sales of such products. The foregoing shall
not prevent LVC from including in its catalogs products offered for sale by
Purchaser and VICE VERSA. Any such New Business Initiative proposed by Pamela F.
Kelley shall be subject to the same review and capital budget process as is
required by the policies or practices of LVC in effect from time to time with
respect to such matters for LVC.
(d) Payments, if any, due with respect to the Contingent Portion of
the Purchase Price ("Contingent Purchase Price Payments") shall be made within
ninety (90) days following the end of the third, fourth and fifth EBT Year, as
the case may be, and shall be accompanied by a calculation of the Purchaser's
EBT in reasonable detail. Purchaser shall also provide the Company with a
calculation of Purchaser's EBT within ninety (90) days after the close of the
first and second EBT Year. The payment of any earned Contingent Purchase Price
Payments shall be conditioned upon Pamela F. Kelley being employed by Purchaser
through the end of the applicable EBT Year; provided, however, the foregoing
condition shall not apply if she has terminated her employment for cause, the
Purchaser has terminated her employment without cause or her employment is
terminated by reason of her death or disability. The calculation of
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the Purchaser's EBT shall be final and binding upon the Company unless the
Company objects to the same within thirty (30) days after it receives
Purchaser's calculation of the same. Such objection shall be in writing and
shall set forth in reasonable detail the basis of such objections. If the
calculation of the Purchaser's EBT is timely disputed by the Company and the
Company and the Purchaser cannot resolve such dispute within thirty (30) days
after the Purchaser receives the Company's written objections, then such dispute
shall be submitted to the American Arbitration Association in the City of New
York for determination in accordance with its rules, and the fees and expenses
of the arbitrators and the American Arbitration Association shall be borne
equally by the parties.
(e) Payment of up to one-third (1/3) of the Contingent Portion of the
Purchase Price may, at the option of Purchaser, be made by delivering Lillian
Vernon Corporation stock (or the stock of any successor corporation) to the
Company which shall be valued at the average of the high and low value quoted
for such stock on the American Stock Exchange, NASDAQ, or any other recognized
exchange or market upon which LVC stock (or the stock of any successor
corporation) is traded on the business day immediately preceding the date on
which the stock is issued to the Company. Such stock shall bear the customary
securities legend recommended by the issuer's counsel at the time of issuance.
If LVC stock or the stock of its successor are not listed for trading on a
recognized exchange or market, then LVC shall not have the option to pay any
part of the Contingent Portion of the Purchase Price by the delivery of Lillian
Vernon Corporation stock.
ARTICLE II
CLOSING
-------
SECTION 2.1 TIME AND PLACE. Upon the terms and subject to the
conditions contained in this Agreement, the closing of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Salon, Marrow, Dyckman & Newman, LLP, 685 Third Avenue,
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New York, New York 10017, at 10:00 a.m. local time, on April 6, 2000, or at such
other place, time and date as may be agreed upon by the parties.
SECTION 2.2 DELIVERIES BY THE COMPANY AND THE SHAREHOLDERS. At the
Closing, the Company and the Shareholders shall deliver or cause to be delivered
to the Purchaser the following:
(a) Duly executed bills of sale, trademark, copyright and domain name
assignments, assignments of leases, assignments of contracts or other
instruments of transfer as shall be appropriate to transfer ownership of the
Purchased Assets to the Purchaser all in form and substance reasonably
satisfactory to Purchaser and its counsel.
(b) Certificate of Good Standing, certified as of the most recent
practicable date by the Secretary of State of the State of Rhode Island.
(c) (INTENTIONALLY OMITTED)
(d) A certificate of the Secretary of the Company stating that (i) the
resolutions referred to in Section 4.1(b) were duly and validly adopted, have
not been modified, revoked or rescinded in any respect and are in full force and
effect at the Closing and (ii) the Certificate of Incorporation and by-laws of
the Company previously delivered to the Purchaser have not been amended or
modified since the date of such delivery.
(e) The officer's and Shareholders' certificates referred to in
Section 9.1(b).
(f) The opinions of Company's and the Shareholders' counsel referred
to in Section 9.1(d).
(g) Any consents from third parties required in connection with the
execution, delivery and performance of this Agreement (including, without
limitation, required consents to the assignment to Purchaser of each of the
Assumed Contracts), the Proprietary Rights Assignments, the Employment
Agreement, the Lease Agreement and the consummation of the transactions
contemplated hereby and thereby.
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(h) The Employment Agreement shall be duly executed and delivered by
Pamela F. Kelley.
(i) The Proprietary Rights Assignments shall be duly executed and
delivered by each of the Shareholders.
(j) The Lease Agreement shall be duly executed and delivered by
Captain Vose Associates.
(k) The Right of First Refusal Agreement shall be duly executed and
delivered by Pamela F. Kelley.
(l) A certificate of amendment to the Certificate of Incorporation of
the Company duly executed and in form to be filed changing its name to Ford &
Kelley, Inc. or any other name which does not contain any of the words "Rue",
"de" or "France".
(m) All other documents, instruments and writings required to be
delivered by the Company or the Shareholders to the Purchaser at the Closing
pursuant to this Agreement or otherwise required or reasonably requested in
connection herewith.
(n) A certificate of an officer of the Company stating that the
resolutions referred to in Section 4.18(c)(13) were duly and validly adopted,
have not been modified, revoked or rescinded in any respect and are in full
force and effect at the Closing.
SECTION 2.3 DELIVERIES BY THE PURCHASER. At the Closing, the Purchaser
and LVC shall deliver or cause to be delivered to the Company the following:
(a) Payment of the Fixed Portion of the Purchase Price less the
Purchase Price Holdback to the Company by wire transfer of immediately available
funds.
(b) A certificate of an officer of the Purchaser with respect to the
resolutions referred to in Section 6.2.
(c) The officers' certificate referred to in Section 9.2(b).
(d) The opinion of the Purchaser's counsel referred to in Section
9.2(c).
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(e) The Employment Agreement shall be duly executed and delivered by
the Purchaser and LVC.
(f) The Lease Agreement shall be duly executed and delivered by the
Purchaser.
(g) The Right of First Refusal Agreement shall be duly executed and
delivered by LVC.
(h) All other documents, instruments and writings required to be
delivered by the Purchaser or LVC to the Company at the Closing pursuant to this
Agreement or otherwise required or reasonably requested in connection herewith.
ARTICLE III
CERTAIN COVENANTS OF THE COMPANY,
THE SHAREHOLDERS AND THE PURCHASER
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SECTION 3.1 CONFIDENTIALITY; NON-COMPETITION.
---------------------------------
(a) Each of the Shareholders and the Company does hereby acknowledge that
the Purchaser would be irreparably damaged if Confidential Information of the
business and affairs of the Company as conducted and existing on or prior to the
Closing were disclosed or utilized on behalf of any person, firm, corporation or
other business organization. The Shareholders and the Company, jointly and
severally, covenant and agree not to, and to use diligent efforts to cause their
agents, employees, affiliates or associates (as the terms "affiliate" and
"associate" are defined by the Rules and Regulations promulgated under the
Securities Act of 1933, as amended, (collectively "Affiliates")) not to, except
as required in the ordinary course of employment with the Company, disclose or
use any such Confidential Information. "Confidential Information" as used herein
shall mean information relating to or concerning any of the products or
processes of the Company, its customers or their respective Affiliates and the
research, development, sale, manufacture, distribution, marketing, maintenance,
support and licensing of the same and the development and exploitation of
proprietary rights relating thereto, whether or not any of the foregoing are
patentable or copyrightable, including, without limitation, all know-how,
technical
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information, inventions, ideas, concepts, processes, procedures, operations,
computer programs and software, research and development plans and results, data
bases, specifications, documentation, algorithms, source codes, object codes,
program listings, product platforms and architectures, concepts, screens,
formats, "look and feel" of proprietary software, trade secrets, technology,
product information, customer and supplier lists, financial information,
business and marketing plans, the practices and methods of the Company, its
customers or their respective Affiliates, and marketing and other relationships
between the Company, its customers or their respective Affiliates, employees,
agents, consultants and independent contractors, in each case as such
information exists on the Closing Date. Confidential Information shall not
include information which (i) is disclosed in a printed publication available to
the public, is otherwise in the public domain at the time of disclosure, or
becomes publicly known through no wrongful act on the part of the recipient, the
Company or either of the Shareholders, (ii) is obtained by the recipient
lawfully from a third party who is not under an obligation of secrecy to the
Company or the Purchaser and is not under any similar restrictions as to use or
(iii) is generally disclosed to third parties by the Company or Purchaser
without similar restrictions on such third parties.
(b) Each of the Shareholders and the Company agrees that neither such
Shareholder nor the Company nor any other person or entity under the control of
such Shareholder or the Company shall for a period of five (5) years following
the Closing Date (the "Restricted Period"), for their account or on behalf of
any other person or entity, directly or indirectly, individually (including,
without limitation, acting as an employer, employee, consultant, manager, agent,
broker, contractor, director, officer) or as a member of any business
organization (including, without limitation, as a stockholder, investor, owner,
lender, partner, joint venturer, licensor, licensee, distributor but excluding
the holding of up to three (3%) percent of the equity securities of any publicly
traded company and except as required in the ordinary course of their
employment, if any, with the Purchaser) or otherwise:
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(i) engage in the retail or wholesale sale or distribution in the
United States of products of the type currently sold by the Company or products
of the type sold by the Purchaser during the Restricted Period (collectively,
"Restricted Products") whether by direct marketing, through retail stores, over
the internet or otherwise;
(ii) solicit or entice any person who is employed or engaged by the
Purchaser or LVC (either as an employee or as an independent contractor) on the
Closing Date or thereafter during the Restricted Period to leave the employ of
the Purchaser or LVC or to cease rendering services to Purchaser or LVC;
(iii) employ or engage any person (either as an employee or
independent contractor) who is employed or engaged by the Purchaser or LVC on
the Closing Date or thereafter during the Restricted Period except with the
consent of the Purchaser; provided, however that nothing shall preclude the
Shareholders or any person or entity under their control from so employing or
engaging any such person who has ceased performing services for the Purchaser or
LVC for a period of six (6) months or more provided such person was not
solicited or enticed to cease performing services for Purchaser or LVC by the
Shareholders or such person or entity.
(iv) molest or interfere with the goodwill and relationship of the
Purchaser with any of the former customers or suppliers of the Company or any
customers or suppliers hereafter obtained by Purchaser during the Restricted
Period;
(v) persuade, induce or solicit any of the former customers of the
Company or any customers thereafter obtained by the Purchaser during the
Restricted Period, to purchase Restricted Products from anyone other than the
Purchaser.
(c) The Shareholders and the Company each acknowledge that the violation by
such Shareholder or the Company of any of the foregoing covenants could not
reasonably or adequately be compensated by damages in an action at law.
Therefore, in addition to any other remedies or sanctions provided by law,
whether criminal or civil, and without limiting the right
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of the Purchaser, its Affiliates or any of their successors or assigns to pursue
all other or legal and equitable rights available to them, the Purchaser and its
respective Affiliates shall have the right during the Restricted Period to
compel specific performance hereof by the Shareholders and the Company or to
obtain temporary and permanent injunctive relief against violations hereof by
her, him or it, without the necessity of posting a bond or other security, and
to require the Company and the Shareholders to account for and pay over to the
Purchaser all compensation, profits, monies, accruals, increments or other
benefits derived or received as a result of any act constituting a breach of the
covenants contained in this Section 3.1, and, in furtherance thereof, to apply
to any court with jurisdiction over the parties hereto to enforce the provisions
hereof.
(d) The Purchaser may assign the covenants set forth in this Section 3.1
and all rights and obligations hereunder to any third party who succeeds to all
or substantially all of the business and assets of the Purchaser which are
acquired from the Company at the Closing. Upon any such assignment by the
Purchaser, the term "Purchaser" as used in this Section 3.1 shall be deemed to
include any such assignee of the Purchaser, and the assignee shall have the
right to enforce all of the Purchaser's rights and remedies hereunder in its own
name as if a party hereto in the place and stead of the Purchaser.
(e) If any provision of this Section or any part hereof or the application
hereof to any person or circumstances shall be finally determined by a court of
competent jurisdiction to be invalid or unenforceable to any extent, the
remainder of the provisions of this Section, or the remainder of such provision
or the application of such provision to persons or circumstances other than
those as to which it has been held invalid or unenforceable, shall not be
affected thereby and each provision of this Section shall remain in full force
and effect to the fullest extent permitted by law. The parties also agree that
if any portion of this Section, or any part hereof or application hereof, to any
person or circumstance shall be finally determined by a court of competent
jurisdiction to be invalid or unenforceable to any extent, then such
objectionable
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provision shall be deemed modified or shall be modified by such court to the
extent necessary so as to make it valid, reasonable and enforceable.
SECTION 3.2 ALLOCATION OF PURCHASE PRICE.
(a) The Fixed Portion of the Purchase Price as adjusted pursuant to Section
1.3 hereof shall be allocated among the Purchased Assets as follows:
(i) all assets shall be valued at the same value established therefor
on the Final Closing Net Worth Statement as finally adjusted with respect to
accounts receivable as provided in Section 3.3 hereof;
(ii) One Hundred Thousand ($100,000) Dollars in the aggregate shall be
allocated to the covenants set forth in Section 3.1 hereof (the "Restrictive
Covenant Allocation"); and
(iii) the balance of the Fixed Portion of the Purchase Price, as
adjusted, shall be allocated to goodwill.
(b) The Contingent Portion of the Purchase Price shall be allocated first
to imputed interest pursuant to the provisions of Internal Revenue Code
Regulation Section 1.1275-4 and related provisions, and the balance shall be
allocated to goodwill.
(c) Each of the Shareholders, the Company, the Purchaser and LVC covenants
and warrants:
(i) that in no tax return hereafter filed by it, or any of its
successors or assigns, or by such Shareholder, will it or any of its successors
or assigns, or such Shareholder, treat the allocation of the aggregate
consideration paid hereunder for the Purchased Assets or the Restrictive
Covenant Allocation inconsistently with that set forth in this Section; and
(ii) that in no tax audit, tax examination, tax review or tax
litigation will it or any of its successors or assigns, or such Shareholder,
claim or assert that the allocation of the aggregate consideration paid
hereunder for the Purchased Assets or the Restrictive Covenant Allocation should
be inconsistent with that set forth in this Section; provided, however, that the
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foregoing shall not be construed to prevent any of the parties from settling
with the Internal Revenue Service if it challenges the allocation on such terms
as a party may negotiate in its complete discretion.
SECTION 3.3 ACCOUNTS RECEIVABLE INDEMNITY.
(a) Within thirty (30) days after the expiration of four (4) months
following the Closing the Purchaser shall account to the Company and the
Shareholders, in such detail and with such documentation as the Company and the
Shareholders may reasonably request, for the payments received by the Purchaser
during such four (4) month period (the "Actual Payments") on account of the
total amount of accounts receivable reflected on the Final Closing Net Worth
Statement ("Statement Accounts").
(b) If the amount of Actual Payments is less than the Statement Accounts,
the Company and the Shareholders shall be jointly and severally obligated to pay
to the Purchaser the amount of such difference and upon receipt of such payment
the Purchaser shall assign to the Company all of its right, title and interest
in and to the Statement Accounts then remaining unpaid.
(c) Payment pursuant to this Section 3.3 shall be made promptly after
acceptance by the Company and the Shareholders of the Purchaser's accounting for
the Actual Payments. The Company and the Shareholders shall be deemed to have
accepted such accounting if it is not objected to in writing by them within
twenty (20) days following receipt of the same. If any objection is timely
asserted in writing by the Company or the Shareholders concerning the amount of
Actual Payments, and such objection is not resolved within ten (10) days
following the Purchaser's receipt of such objection, then either party may refer
the matter for arbitration in New York, New York under the rules of the American
Arbitration Association, and the fees and expenses of the arbitrator(s) and of
the American Arbitration Association shall be borne equally by the parties.
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SECTION 3.4 EMPLOYMENT AGREEMENT. Effective as of the Closing Date Pamela
F. Kelley and the Purchaser and LVC shall execute and deliver an employment
agreement and intellectual property protection agreement in the form annexed
hereto as Exhibit A (collectively, the "Employment Agreement").
SECTION 3.5 ASSIGNMENT OF PROPRIETARY RIGHTS. Effective as of the Closing
Date each of the Shareholders shall execute and deliver to the Purchaser the
Proprietary Rights Assignment in the form annexed hereto as Exhibit B
(collectively, the "Proprietary Rights Assignments").
SECTION 3.6 LEASE AGREEMENT. Effective as of the Closing Date Pamela F.
Kelley as general partner of Captain Vose Associates and the Purchaser shall
execute and deliver a lease to the premises known as 78 Thames Street, Newport,
Rhode Island consisting of approximately 2,250 square feet on the first floor
and mezzanine and 1,500 square feet on the third floor in the form annexed
hereto as Exhibit C (the "Lease Agreement").
SECTION 3.7 BULK SALES LAW COMPLIANCE. Effective as of the Closing Date the
Company agrees to provide to the Purchaser all information as may be necessary
to enable Purchaser to timely comply with "bulk sales" laws of the State of
Rhode Island with respect to sales tax or other taxes.
SECTION 3.8 SUCCESSOR EMPLOYER.
(a) The Company and the Purchaser each will (i) treat Purchaser as a
"successor employer" and the Company as a "predecessor employer", within the
meaning of section 3121(a)(1) and 3306(b)(1) of the Internal Revenue Code, with
respect to the employees of the Company who become employees of the Purchaser
("Transferred Employees") for purposes of taxes imposed under the United States
Federal Insurance Contributions Act ("FICA") and the United States Federal
Unemployment Tax Act ("FUTA") and (ii) cooperate with each other to avoid, to
the extent possible, the filing of more than one IRS Form W-2 with respect to
each such Transferred Employee for the calendar year within which the Closing
Date occurs.
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(b) At the request of the Purchaser with respect to any particular
applicable tax law relating to employment, unemployment insurance, social
security, disability, workers' compensation, payroll, health care or other
similar tax other than taxes imposed under FICA and FUTA, the Company and the
Purchaser each will (i) treat the Purchaser as a successor employer and the
Company as a predecessor employer, within the meaning of the relevant provisions
of such tax law, with respect to Transferred Employees and (ii) cooperate with
each other to avoid, to the extent possible, the filing of more than one
individual information reporting form pursuant to each such tax law with respect
to each Transferred Employee for the calendar year within which the Closing Date
occurs.
SECTION 3.9 RIGHT OF FIRST REFUSAL AGREEMENT. Effective as of the Closing
Date Pamela F. Kelley and LVC shall execute and deliver a Right of First Refusal
Agreement in the form annexed hereto as Exhibit D (the "Right of First Refusal
Agreement").
SECTION 3.10 STOCK OPTIONS. (a) If, at any time from and after the date
hereof, options to acquire an ownership interest in MyMaison.com, LLC (the
"LLC") are granted to Pamela F. Kelley ("Pamela"), which options relate to or
result from services rendered to the LLC by Pamela at any time on or prior to
the date hereof or any time during the period of five (5) years from and after
the date hereof, then Pamela shall give prompt written notice to Purchaser of
all pertinent details and shall, without further consideration, take all actions
reasonably necessary or appropriate in order to transfer and assign such options
to Purchaser or as directed by it; provided, however, that (i) Purchaser shall
have the right, in its sole and absolute discretion, to reject such transfer and
assignment upon written notice to Pamela, in which event Pamela shall be deemed
to be discharged from her obligations under and pursuant to this Section 3.10
from and after such written rejection by Purchaser and (ii) Pamela makes no
representation that such options will be transferable or assignable, but if they
are not transferable or assignable then Pamela agrees, upon Purchaser's payment
of the option exercise price, to exercise such options
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and to promptly thereafter transfer and assign the resulting ownership interest
in the LLC to Purchaser or as directed by it.
(b) Except as set forth in Section 3.10(a), neither of the Shareholders at
the date hereof has been informed that he or she will hereafter receive any
ownership interests or options to purchase the same, which interests or options
relate to or result from services heretofore rendered by them.
SECTION 3.11 DETERMINATION LETTER. The Company shall deliver to Purchaser a
true, complete and correct copy of any determination letter that it receives
from the Internal Revenue Service with regard to termination by the Company of
its 401(k) plan, such delivery to Purchaser to be made within ten (10) days
after the Company or its accountant, lawyer or plan consultant first receives
such letter.
SECTION 3.12 RETAIL CREDIT CARD SALES. All revenues arising from or related
to the Purchased Assets and generated by the Company or by Purchaser subsequent
to the Closing Date are for Purchaser's account. In furtherance thereof, if the
proceeds of any retail credit card sales made on or after the date hereof are
credited to the Company's account, then the Company shall remit such collections
weekly to the Purchaser. As soon as reasonably practical after the date hereof,
the Purchaser will arrange for such sale proceeds to instead be credited to its
own account.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES BY THE COMPANY
AND THE SHAREHOLDERS WITH RESPECT TO THE COMPANY
------------------------------------------------
The Company and the Shareholders jointly and severally hereby
represent and warrant to the Purchaser as follows:
SECTION 4.1 ORGANIZATION, AUTHORIZATION AND VALID AND BINDING
AGREEMENT.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Rhode Island and has the corporate
power and authority to
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enter into this Agreement, to carry out the transactions contemplated hereby, to
own and lease the properties and other assets it presently owns or leases and to
carry on its business as presently conducted.
(b) The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by the
Shareholders and the Board of Directors of the Company and the resolutions
adopted by the Shareholders and the Board of Directors of the Company evidencing
such authorization were duly and validly adopted, and have not been modified,
revoked or rescinded in any respect and are in full force and effect. No other
corporate proceedings on the part of the Company are necessary to authorize this
Agreement, or the transactions contemplated hereby.
(c) This Agreement constitutes a valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, except as such
enforcement may be affected by bankruptcy, insolvency and similar laws affecting
creditors rights.
(d) The copy of the Certificate of Incorporation, and all amendments
thereto, of the Company, as certified by the Secretary of State of the State of
Rhode Island, and the By-Laws, as amended to date, of the Company, as certified
by its Secretary previously delivered to the Purchaser are true, complete and
correct copies of the Certificate of Incorporation and By-Laws of the Company,
as amended and presently in effect.
(e) The Company is not required to be duly licensed or qualified to do
business as a foreign corporation in any jurisdiction nor is it required to nor
has it collected sales taxes in any jurisdiction other than the State of Rhode
Island.
(f) The Company has obtained and kept in force all governmental licenses
and permits necessary to permit it to carry on the business of the Company as
presently conducted, copies of which are annexed hereto as Schedule 4.1(f).
SECTION 4.2 CAPITALIZATION. The authorized capital stock of the Company
consists solely of four thousand (4,000) shares of common stock, no par value,
of which a total of four thousand
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(4,000) shares are outstanding. The Shareholders are the only stockholders of
the Company and own all of the outstanding shares of the common stock of the
Company free and clear of all liabilities, obligations, claims, liens, options,
charges, pledges, encumbrances and restrictions of any kind whatsoever. There
are no options, warrants or convertible securities of the Company presently
outstanding.
SECTION 4.3 NO EQUITY INVESTMENTS OR SUBSIDIARIES. The Company does not own
nor does it have the right to acquire any interest in any other corporation,
limited liability company, joint venture, partnership, limited partnership or
any other business organization.
SECTION 4.4 CONSENTS; NO VIOLATION. Except as set forth in Schedule 4.4,
neither the execution nor delivery of this Agreement, the consummation of the
transactions contemplated hereby and thereby (including, without limitation, the
assignment of the Assumed Contracts), nor the compliance with any of the
provisions hereof and thereof, (i) violates any statute or law or any rule,
regulation, order, award, judgment or decree of any court or governmental
authority, affecting the Company in any material way, (ii) violates or conflicts
with or constitutes a default under any contract, commitment, agreement,
understanding, arrangement, trust or restriction of any kind to which the
Company is a party, by which it is bound or which otherwise in any way affects
it, (iii) will cause, or give any persons valid grounds to cause (with or
without notice, the passage of time or both), the maturity of any debt, any
liability or obligation of the Company to be accelerated, or will increase any
such liability or obligation, (iv) requires any filing with, the notification
of, or the obtaining of any permit, authorization, consent or approval of any
third party or governmental or regulatory authority, foreign or domestic, or (v)
violates or conflicts with the Certificate of Incorporation or By-Laws, as
amended, of the Company.
SECTION 4.5 FINANCIAL STATEMENTS.
(a) The Company has previously delivered to the Purchaser the audited
balance sheet of the Company as at December 31, 1997, December 31, 1998 and
December 31, 1999 (the latter balance sheet being referred to herein as the
"December 31, 1999 Balance Sheet"), and the
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related statements of income, stockholders' equity and cash flow of the Company
for the years then ended, together with the unqualified opinion thereon of the
Company's Accountants (the "Financial Statements"). The balance sheets included
in such Financial Statements are correct and complete and fairly present the
financial position and assets and liabilities (whether absolute, accrued or
contingent) of the Company as of the respective dates thereof, in accordance
with generally accepted accounting principles applied on a consistent basis, and
the statements of income, stockholders' equity and cash flow included in such
Financial Statements are correct and complete and fairly present the results of
operations and financial position of the Company for the periods indicated, in
accordance with generally accepted accounting principles applied on a consistent
basis.
(b) (INTENTIONALLY OMITTED)
SECTION 4.6 NO UNDISCLOSED LIABILITIES. Except as and to the extent of the
amount specifically reflected or accrued for or reserved against in the December
31, 1999 Balance Sheet or disclosed in Schedule 4.6, as of the Closing the
Company had no liabilities or obligations of any nature, whether absolute,
accrued, contingent or otherwise, and whether due or to become due, other than
liabilities incurred subsequent to December 31, 1999 in the ordinary course of
business and consistent with past practice. The liabilities and reserves
(including allowances and accruals) reflected in the December 31, 1999 Balance
Sheet are adequate, appropriate and reasonable. Except as set forth in Schedule
4.6, to the Best Knowledge of the Shareholders there is no basis for the
assertion against the Company of any such liability or obligation not fully
reflected or accrued for or reserved against in the December 31, 1999 Balance
Sheet. For purposes of this Agreement "Best Knowledge of the Shareholders" or
"Knowledge of the Shareholders" or words of similar import shall mean actual
knowledge of any one or more of the Shareholders after due inquiry is made by
the Shareholders of the accountants, attorneys and executive officers of the
Company.
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SECTION 4.7 ABSENCE OF CERTAIN CHANGES. Except as and to the extent set
forth in Schedule 4.7 or as reflected in the December 31, 1999 Balance Sheet,
during the period from December 31, 1999 to Closing the Company has not: (i)
suffered any material adverse change in its working capital, financial
condition, assets, liabilities, or to the Best Knowledge of the Shareholders,
its business or prospects, (ii) experienced any labor relations difficulty, or
suffered any material casualty loss (whether or not insured); (iii) made any
material change in its business or operations or in the manner of conducting its
business other than changes in the ordinary course of business; (iv) incurred
any obligations or liabilities (whether absolute, accrued, contingent or
otherwise and whether due or to become due), except items incurred in the
ordinary course of business and consistent with past practice, or experienced
any change in any assumptions underlying or methods of calculating prepaid
catalog expenses, any bad debt, contingency or other reserves; (v) paid,
discharged or satisfied any claim, lien, encumbrance or liability (whether
absolute, accrued, contingent or otherwise and whether due or to become due),
other than claims, liens, encumbrances or liabilities (A) which are reflected or
accrued for or reserved against in the December 31, 1999 Balance Sheet and which
were paid, discharged or satisfied since December 31, 1999, or (B) which were
incurred and paid, discharged or satisfied since December 31, 1999 in the
ordinary course of business and consistent with past practice; (vi) permitted or
allowed any of its properties or assets (whether real, personal or mixed,
tangible or intangible), to be mortgaged, pledged or subjected to any lien or
encumbrance, except liens or encumbrances for taxes not yet delinquent; (vii)
written-down or determined to write-down or written-up or determined to write-up
the value of any inventory, or written-off or determined to write-off as
uncollectible any notes or accounts receivable or any portion thereof, except
for immaterial write-downs and write-offs in the ordinary course of business,
consistent with past practice and at a rate no greater than during the prior
twelve (12) months; (viii) cancelled any debts or claims, or waived any rights,
of substantial value; (ix) sold, transferred or conveyed any of its properties
or assets (whether real, personal or mixed, tangible or intangible), except in
the
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ordinary course of business and consistent with past practice; (x) granted any
increase in the compensation of any officer or employee or accrued or paid any
bonus (including, without limitation, any increase pursuant to any bonus,
pension, profit-sharing or other plan or commitment) or instituted or adopted
any new benefit programs, plans or other arrangements for officers or employees,
and no such increases or new programs, plans or arrangements are customary on a
periodic basis or required by agreement or understanding other than wage
increases to hourly employees and annual salary increases to salaried employees
in the ordinary course consistent with past practices; (xi) made any pension,
retirement, profit-sharing, bonus or other employee welfare or benefit payment,
other than payments by persons other than the Company for which the Company has
no liability or obligation to do so; (xii) made any change in any method of
accounting or accounting practice; (xiii) paid, loaned or advanced any amount to
or in respect of, or sold, transferred or leased any properties or assets
(whether real, personal or mixed, tangible or intangible) to, or entered into
any agreement, arrangement or transaction with, any Shareholder, any of the
officers or directors of the Company, or any Affiliate thereof; (xiv) paid or
declared any dividend or made any other distribution to its Shareholders in
respect of their shares or in respect to any loans made by them to the Company
or made to the Company and guaranteed by them or (xv) agreed, whether in writing
or otherwise, to take any action described in this Section 4.7. Except as and to
the extent set forth in Schedule 4.7, since December 31, 1999, the Company has
not made any capital expenditures or commitments in excess of Ten Thousand
($10,000) Dollars in the aggregate for additions to property, plant, equipment
or intangible capital assets.
SECTION 4.8 CERTAIN TAX MATTERS.
(a) The Company has duly filed all Tax Returns required to be filed by it.
All such Tax Returns are true, correct and complete, and the Company has duly
paid or made provision for the payment of all Taxes which are shown to be due
and payable on such Tax Returns. No Federal, state or foreign income tax returns
of the Company have been audited by any appropriate
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taxing authority. No state of facts exists or has existed which would constitute
grounds for the assessment of any material liability for Taxes with respect to
the periods which have not been audited by the Internal Revenue Service or other
taxing authority.
(b) The Company has withheld from its employees and any other applicable
payees (and timely paid to the appropriate governmental entity) proper and
accurate amounts for all periods through the date hereof in compliance with all
tax withholding provisions of applicable federal, state, local and foreign laws
(including, without limitation, income, social security and employment tax
withholding for all types of compensation, and withholding on payments to
non-United States persons).
(c) For purposes of this Agreement, (i) "Taxes" means all taxes, however
denominated, including any interest, penalties or additions to tax that may
become payable in respect thereof, imposed by any federal, state, local or
foreign government or any agency or political subdivision of any such
government, which taxes shall include, without limiting the generality of the
foregoing, all income taxes (including, but not limited to, United States
federal income taxes and state income taxes), payroll, employee and other
withholding taxes, unemployment insurance, social security, sales and use taxes,
excise taxes, franchise taxes, net worth taxes, gross receipts taxes, occupation
taxes, real and personal property taxes, stamp taxes, transfer taxes, workers'
compensation, and other obligations of the same or of a similar nature whether
arising before, on or after the Closing Date, and (ii) "Tax Returns" means all
reports, elections, estimates, information statements (including 1099
statements) and returns relating to, or required to be filed in connection with,
any Taxes pursuant to the statutes, rules and regulations of any federal, state,
local or foreign government taxing authority.
SECTION 4.9 TITLE TO PROPERTIES; ENCUMBRANCES.
(a) The Company has good, valid and marketable title to all of its
respective properties and assets, tangible and intangible, including, without
limitation, all the properties and assets reflected in the December 31, 1999
Balance Sheet (except for inventory sold since
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December 31, 1999). None of such properties or assets (or any other properties
or assets used in the business of the Company) are subject to any mortgage,
pledge, lien, security interest, conditional sale agreement, encumbrance or
charge of any kind, except (i) liens described on Schedule 4.9 as securing
specific liabilities (with respect to which no default exists) and which liens,
except as otherwise noted on Schedule 4.9, will be satisfied on or prior to
Closing and (ii) liens for current taxes not yet delinquent and taxes for which
adequate provision is made in the December 31, 1999 Balance Sheet.
(b) The Company does not own any real property.
SECTION 4.10 FIXED AND OTHER TANGIBLE ASSETS. Schedule 4.10 contains an
accurate and complete description of all material fixed and other tangible
material assets (other than Excluded Assets and inventory and goods for which
invoices have not yet been received by the Company) which are owned by the
Company on the date of this Agreement. All such assets are currently in use as
of the date of this Agreement. The Company has not received notification that it
is in violation of any applicable building, zoning, antipollution, health or
other law, ordinance or regulation in respect of any of its assets or their
operation, which violation remains uncured and no such violation exists.
Schedule 4.10 includes all material fixed and other tangible material assets
(other than Excluded Assets and inventory and goods for which invoices have not
yet been received by the Company) that are at the date hereof physically located
at premises occupied by the Company, except only for assets that are leased
pursuant to leases disclosed in Schedule 4.11.
SECTION 4.11 LEASES. Schedule 4.11 contains a complete list of each lease
pursuant to which the Company leases real property or personal property. The
Company has previously delivered to the Purchaser complete and accurate copies
of all such scheduled leases. All such scheduled leases are valid, binding and
enforceable in accordance with their terms and are in full force and effect;
there are no existing defaults by the Company with respect to the lease of the
premises occupied by it in Middletown, Rhode Island and there are no material
defaults by the
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Company with respect to any other lease; and, to the Best Knowledge of the
Shareholders, there are no existing material defaults by any other party
thereunder; no event has occurred which (whether with or without notice, lapse
of time or the happening or occurrence of any other event) would constitute a
default by the Company with respect to the lease of the premises occupied by it
and there are no material defaults by the Company with respect to any other
lease; and, to the Best Knowledge of the Shareholders, no event has occurred
which (whether with or without notice, lapse of time or the happening or
occurrence of any other event) would constitute a material default by any other
party thereunder. Except for the consents disclosed in Schedule 4.4 which
consents will be obtained on or prior to Closing, all such scheduled leases are
assignable to Purchaser without the consent, approval or act of any other party.
SECTION 4.12 DATABASES AND SOFTWARE. Schedule 4.12 accurately identifies
and adequately describes the functions of all significant databases and software
owned, sold, licensed, leased or otherwise used in connection with the business
of the Company, whether purchased or internally developed ("Software"). The
Company has previously delivered to the Purchaser complete and accurate copies
of all agreements for such Software. All such agreements are valid, binding and
enforceable in accordance with their terms and are in full force and effect;
there are no existing defaults by the Company; and, to the Best Knowledge of the
Shareholders, there are no existing defaults by any other party thereunder; no
event has occurred which (whether with or without notice, lapse of time or the
happening or occurrence of any other event) would constitute a default by the
Company thereunder; and, to the Best Knowledge of the Shareholders, no event has
occurred which (whether with or without notice, lapse of time or the happening
or occurrence of any other event) would constitute a default by any other party
thereunder. The Company has documentation in reasonable detail relating to all
such scheduled Software. All such scheduled Software and, with respect to owned
Software, the source codes thereof, have been maintained only at the Company's
office in Middletown, Rhode Island. The Company has not sold, licensed, leased
or otherwise transferred any ownership interest in or
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granted any ownership rights to any of its Software. Except for the consents
disclosed in Schedule 4.4 which consents will be obtained prior to Closing, all
scheduled Software is assignable to Purchaser without the consent, approval or
act of any other party. All such software is year 2000 compliant.
SECTION 4.13 PATENTS, TRADEMARKS, COPYRIGHTS. The Company has the right to
use the trademark "Rue de France"and the other trademarks, service marks, logos,
trade names and assumed names listed on Schedule 4.13 in the business of the
Company as presently conducted; and none other are necessary for the conduct of
the business of the Company. Other than copyrights to its catalogs, the Company
owns no copyrights. The Company owns no patents. Except as set forth on Schedule
4.13, no party has claimed or asserted that any of the products or copy, nor any
processes, methods, designs, formulae, know-how, trade secrets, proprietary
information, tradenames, trademarks, service marks, trade dress, trade styles,
logos, trade names, assumed names, or designations used by the Company, infringe
any patents, trademarks, copyrights, confidential or proprietary rights or any
other rights, of another. The Company has the right to manufacture, produce,
market, distribute, deliver and sell its products and conduct its business as
heretofore conducted under the above referenced tradenames and marks, and the
Company has not sold, licensed or otherwise disposed of or transferred or
granted any interest in any such rights.
SECTION 4.14 LITIGATION.
(a) Except as set forth in Schedule 4.14(a), there is no claim, action,
suit, proceeding or investigation pending or threatened against or affecting the
Company or the transactions contemplated hereby and to the Best Knowledge of the
Shareholders there exists no valid basis for any such claim, action, suit,
proceeding or investigation. No claim, action, suit, proceeding or investigation
set forth in Schedule 4.14(a) could be reasonably expected to, if adversely
decided, have a material adverse effect on the condition (financial or
otherwise), assets, liabilities, earnings, prospects or business of the Company
("Material Adverse Effect").
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(b) Except as set forth on Schedule 4.14(b), (i) the Company is not in
receipt of any notice, demand or claim, nor is there any action, suit, inquiry,
hearing, proceeding or investigation of a civil, criminal or administrative
nature by or before any court or governmental or other regulatory or
administrative agency, commission or authority which is pending or threatened,
directly or indirectly concerning, relating to, or resulting from any accident,
happening, condition or event caused or allegedly caused by any alleged hazard
or alleged defect in manufacture, design, material, workmanship or claims made
(including, without limitation, any alleged failure to warn or any breach of
express or implied warranties or representations) with respect to any product
manufactured, produced, distributed, marketed, delivered or sold by the Company,
nor, to the Best Knowledge of the Shareholders, is there any valid basis
therefor; and (ii) since January 1, 1994 there has not been any recall, rework,
retrofit or post-sale warning or labeling change relating to any risks or
warnings, in any such case by the Company concerning any such product or, to the
Best Knowledge of the Shareholders, any investigation or consideration of or
decision made by any governmental or regulatory entity concerning whether to
undertake or not to undertake any such labeling change or recall.
SECTION 4.15 INSURANCE. Schedule 4.15 sets forth a complete and accurate
list of all policies (including their respective expiration dates) of fire,
liability, product liability, workmen's compensation, health, title and other
forms of insurance presently in effect with respect to the Company. All such
policies (i) are valid, outstanding and enforceable policies and (ii) will
remain in full force and effect at least through the Closing, subject to the
payment of additional premiums when due in the ordinary course.
SECTION 4.16 CATALOGS AND CUSTOMER PROFILES.
(a) Schedule 4.16(a) sets forth the catalog mailings made by the Company in
1997, 1998 and 1999, the number of catalogs mailed for each such mailing event,
the average amount of dollars per order received, the response rate and the
sales per thousand catalogs for each such
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catalog mailing. The Company does not maintain a record of refunds by catalog or
by product nor does it maintain data to enable it to compute its fill rate.
(b) Schedule 4.16(b) sets forth as of December 31, 1999, the number of mail
order customers in the Company's data base (excluding non-United States
customers) segmented by recency of purchase, frequency of purchase and amount of
purchase.
SECTION 4.17 CANCELLATIONS. Except for consents required to be obtained
from third parties on or before the Closing, neither the execution and delivery
of this Agreement, the Lease Agreement, the Proprietary Rights Assignments, the
Employment Agreement and the Right of First Refusal Agreement, nor the
consummation of the transactions contemplated hereby or thereby, will result in
or permit any party (other than parties who have waived such rights prior to the
Closing) to terminate or modify any contract including, without limitation, any
lease, license, distribution agreement or other Material Contract to which the
Company is a party or to cancel or withdraw any unfilled customer orders.
SECTION 4.18 EMPLOYEE BENEFIT PLANS.
(a) DEFINITIONS.
(1) BENEFIT ARRANGEMENT. "Benefit Arrangement" shall mean any employment,
consulting, severance or other similar contract, arrangement, policy or plan and
each plan, arrangement (written or oral), program, agreement or commitment
providing for insurance coverage (including any self-insured arrangements),
workers' compensation, disability benefits, supplemental unemployment benefits,
vacation benefits, retirement benefits, life, health or accident benefits
(including, without limitation, any "voluntary employees' beneficiary
association" as defined in Section 501(c)(9) of the Internal Revenue Code as
amended (the "Code") providing for the same or other benefits) or for deferred
compensation, profit-sharing bonuses, stock options, stock appreciation rights,
stock purchases or other forms of incentive compensation or post-retirement
insurance, compensation or benefits which (A) is not a Welfare Plan, Pension
Plan or Multiemployer Plan, (B) is, or within the prior five years was, entered
into,
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maintained, contributed to or required to be contributed to by the Company, an
ERISA Affiliate, or any predecessor thereof, or under which the Company or any
ERISA Affiliate may incur any liability, and (C) covers or covered any employee
or former employee, independent contractor or former independent contractor,
officer, director or agent of the Company, or any ERISA Affiliate.
(2) EMPLOYEE PLANS. "Employee Plans" shall mean all Benefit
Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans.
(3) ERISA. "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended.
(4) ERISA AFFILIATE. "ERISA Affiliate" shall mean (A) any entity which
is (or at any relevant time was) a member of a "controlled group of
corporations" with or under "common control" with the Company as defined in
Section 414(b) or (c) of the Code, or (B) any entity which is (or at any
relevant time was) a member of an "affiliated service group" (as such term is
defined in Section 414(m) of the Code) which includes the Company.
(5) MULTIEMPLOYER PLAN. "Multiemployer Plan" shall mean any
"multiemployer plan," as defined in Section 4001(a)(3) of ERISA (A) which the
Company, or any ERISA Affiliate maintains, administers, contributes to or is
required to contribute to, or, after September 25, 1980, maintained,
administered, contributed to or was required to contribute to, or under which
the Company, or any ERISA Affiliate may incur any liability and (B) which covers
any employee or former employee, officer, director or agent of the Company, or
any ERISA Affiliate.
(6) PBGC. "PBGC" shall mean the Pension Benefit Guaranty Corporation.
(7) PENSION PLAN. "Pension Plan" shall mean any "employee pension
benefit plan" as defined in Section 3(2) of ERISA (other than a Multiemployer
Plan) (A) which is or was maintained, administered, contributed to or required
to be contributed to, by the Company, any ERISA Affiliate or any predecessor
thereof or under which the Company, or any ERISA Affiliate
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may incur any liability and (B) which covers or covered any employee or former
employee, officer, director or agent of the Company, any ERISA Affiliate or any
predecessor thereof.
(8) WELFARE PLAN. "Welfare Plan" shall mean any "employee welfare
benefit plan" as defined in Section 3(1) of ERISA (A) which the Company, or any
ERISA Affiliate maintains, administers, contributes to or is required to
contribute to, or under which the Company or any ERISA Affiliate may incur any
liability and (B) which covers any employee or former employee, independent
contractor or former independent contractor, officer, director, or agent of the
Company, or any ERISA Affiliate.
(b) DISCLOSURE; DELIVERY OF COPIES OF RELEVANT DOCUMENTS AND OTHER
INFORMATION. Schedule 4.18(b) contains a complete list of Employee Plans. True
and complete copies of each of the following documents have been delivered or
made available by the Company to Purchaser (i) each Welfare Plan, Pension Plan
and Multiemployer Plan (and, if applicable, related trust, funding and
investment agreements) and all amendments thereto, all written interpretations
thereof and written descriptions thereof which have been distributed to the
Company's or any ERISA Affiliate's employees and all annuity contracts or other
funding instruments, (ii) each Benefit Arrangement (and, if applicable, related
trust, funding or investment agreement), including written interpretations
thereof and written descriptions thereof which have been distributed to the
Company's or any ERISA Affiliate's employees (including descriptions of the
number and level of employees covered thereby) and a complete description of any
such Benefit Arrangement which is not in writing, (iii) the most recent
determination letter issued by the Internal Revenue Service with respect to each
Pension Plan, (iv) for the three most recent plan years, Annual Reports on Form
5500 Series required to be filed with any governmental agency for each Pension
Plan, (v) all actuarial reports prepared for the last three plan years for each
Pension Plan, (vi) a description of complete age, salary, service and related
data as of the last day of the last fiscal year for employees and former
employees of the Company and each ERISA Affiliate who are entitled to benefits
under such plan, and (vii) a description setting forth the
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amount of any liability of the Company as of the Closing Date for payments more
than thirty days past due with respect to each Welfare Plan.
(c) REPRESENTATIONS AND WARRANTIES. Except as set forth in Schedule
4.18(c), the Company represents and warrants as follows:
(1) PENSION PLANS.
(A) No Pension Plan is or has ever been subject to (A) the
minimum funding requirements of ERISA or the Code, or (B) Title IV of
ERISA. Neither the Company nor any ERISA Affiliate has, or will as of
the Closing have, any liability for unpaid contributions with respect
to any Pension Plan.
(B) Each Pension Plan which is intended to be a tax-qualified
plan as described in Section 401(a) of the Code, and each related
trust agreement, annuity contract or other funding instrument, has
been established and operated so as to be qualified and tax-exempt
under the provisions of Code Sections 401(a) (or 403(a), as
appropriate) and 501(a) from its adoption to date. To the Best
Knowledge of the Shareholders, nothing has occurred or, in connection
with the transaction contemplated by this Agreement, will occur, that
could adversely affect the qualified status of any such Pension Plan.
(C) Each Pension Plan and each related trust, funding or
investment agreement, annuity contract or other funding instrument
presently complies and has been maintained in compliance with its
terms and, both as to form and in operation, in all material respects
with the requirements prescribed by any and all statutes, orders,
rules and regulations which are applicable to such plans, including
but not limited to ERISA and the Code.
(D) Neither the Company, nor any ERISA Affiliate has engaged in,
or is a successor or parent corporation to an entity that has engaged
in, a transaction described in Section 406 of ERISA.
(2) MULTIEMPLOYER PLANS.
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None of the Company, any ERISA Affiliate nor any predecessor thereof has,
at any time, been a party to or withdrawn from a Multiemployer Plan in a
"complete withdrawal" or a "partial withdrawal" as defined in Sections 4203 and
4205 of ERISA, respectively.
(3) WELFARE PLANS.
(A) Each Welfare Plan has been maintained in material compliance with
its terms and, both as to form and operation, with the requirements
prescribed by any and all statutes, orders, rules and regulations which are
applicable to such Welfare Plan, including but not limited to ERISA and the
Code.
(B) The Company and its ERISA Affiliates have no liability for life,
health, medical or other welfare benefits to former employees or
beneficiaries or dependents thereof, except for health continuation
coverage as required by Section 4980B of the Code or Part 6 of Title I of
ERISA and at no expense to the Company or any of its ERISA Affiliates.
(C) Each Welfare Plan which is a "group health plan," as defined in
Section 607(1) of ERISA, has been operated in material compliance with the
provisions of Part 6 and Part 7 of Title I of ERISA, and Sections 162(l),
4980B and 9801 through 9812 of the Code at all times.
(4) BENEFIT ARRANGEMENTS. Each Benefit Arrangement has been
maintained, in all material respects, in compliance with its terms and with
the requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to such Benefit Arrangement, including but
not limited to ERISA and the Code.
(5) EFFECT OF TRANSACTION. Except as described in Schedule 4.18(c)(5),
the execution of and performance of the transactions contemplated by this
Agreement will not constitute an event under any Employee Plan or agreement
that will result in any payment (whether severance pay or otherwise),
acceleration, vesting or increase of benefits with respect to
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any employee, former employee, independent contractor or former independent
contractor, officer, director or agent of the Company or any ERISA
Affiliate.
(6) UNRELATED BUSINESS TAXABLE INCOME. No Employee Plan (or trust or
other funding vehicle pursuant thereto) is subject to any tax under Code
Section 511.
(7) DEDUCTIBILITY OF PAYMENTS. There is no contract, agreement, plan
or arrangement covering any employee or former employee of the Company, or
any ERISA Affiliate that, individually or collectively, provides for the
payment by the Company, or any ERISA Affiliate of any amount (i) that is
not deductible under Section 162(a)(1) or 404 of the Code or (ii) on
account of a change in ownership or effective control as described in
Section 280G of the Code.
(8) FIDUCIARY DUTIES AND PROHIBITED TRANSACTIONS. To the Best
Knowledge of the Shareholders, none of the Company, any ERISA Affiliate,
nor any plan fiduciary of any Welfare Plan or Pension Plan has engaged in
or, in connection with the transaction contemplated by this Agreement, will
engage in, any transaction in violation of Sections 404 or 406 of ERISA or
any "prohibited transaction," as defined in Section 4975(c)(1) of the Code,
for which no exemption exists under Section 408 of ERISA or Section
4975(c)(2) or (d) of the Code.
(9) VALIDITY AND ENFORCEABILITY. Each Welfare Plan, Pension Plan,
related trust agreement, annuity contract or other funding instrument and
Benefit Arrangement is legally valid and binding and in full force and
effect.
(10) LITIGATION. There are no pending or threatened claims (other than
claims for benefits in the ordinary course), lawsuits, audits,
investigations or arbitrations which have been threatened, asserted or
instituted against the Company, any ERISA Affiliate, any Employee Plan, any
fiduciaries of Employee Plans with respect to their duties to any Employee
Plan or the assets of any of the trusts under any Employee Plan. To the
Best Knowledge of the Shareholders, there do not exist any facts or events
which could form the basis for any such claim, lawsuit, audit,
investigation or arbitration.
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(11) NO AMENDMENTS. Neither the Company, nor any ERISA Affiliate has
any announced plan or legally binding commitment to create any additional
Employee Plans or to amend or modify any existing Employee Plan.
(12) NO OTHER MATERIAL LIABILITY. To the Best Knowledge of the
Shareholders, no event has occurred in connection with which the Company or
any ERISA Affiliate or any Employee Plan, directly or indirectly, could be
subject to any material liability (i) under any statute, regulation or
governmental order relating to any Employee Plans or (ii) pursuant to any
obligation of the Company, any ERISA Affiliate to indemnify any person
against liability incurred under any statute, regulation or order as they
relate to the Employee Plans.
(13) 401(K) TERMINATION. On or before the Closing Date, the Board of
Directors of the Company adopted resolutions terminating the Company's
401(k) plan as of March 31, 2000 and authorizing the officers of the
Company to submit that plan to the Internal Revenue Service for a favorable
determination as to the effect of the termination of that plan, and such
resolutions were not subsequently modified, revoked or rescinded in any
respect and are in full force and effect at Closing.
SECTION 4.19 CUSTOMER LISTS AND DISCLOSURE OF CONFIDENTIAL INFORMATION. (a
Schedule 4.19 sets forth the status as of March 4, 2000 of all list exchange
balances and unfilled rental and exchange orders for the Company's customer
list. Except for changes in the ordinary course of business, the Company will
not have any unfulfilled obligations to exchange list rental names or to rent
its customer list. To the Best Knowledge of the Shareholders, the
confidentiality of the Company's customer lists has not been breached and has
been protected by the customer list brokers and service bureaus employed by the
Company to maintain and rent the Company's customer lists.
(b) The Company has not within the last two years disclosed any
confidential information to any third party other than its directors,
accountants and attorneys whether pursuant to a confidentiality agreement or not
and, to the Best Knowledge of the Shareholders, the
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confidentiality of the Company's proprietary information has not been breached
during such two year period.
SECTION 4.20 CONTRACTS AND COMMITMENTS.
(a) Schedule 4.20(a) sets forth a true and complete list of all Material
Contracts, by which the Company or any of its assets or any of its employees are
bound. For purposes of the foregoing, a "Material Contract" shall mean (whether
written or oral) (i) any contract, judgment, order, decree or settlement
agreement not made in the ordinary course of business, (ii) any contract which
restricts or limits in any way the manner in which the Company conducts its
business or uses any of its assets or restricts or limits the activities of any
of its employees, (iii) any license to or by the Company of intellectual
property rights (other than standard software licenses associated with standard
software used by the Company), (iv) any sales agency, dealership, distribution,
supply or similar contract, (v) any contract whose remaining term exceeds one
(1) year, (vi) any contract which may require the payment of money or the
delivery of products or services the aggregate value of which contract will or
may exceed Ten Thousand ($10,000) Dollars during the term thereof excluding
purchase and sales orders for inventory, supplies, printing services and list
rental orders entered into in the ordinary course of business consistent with
past practices provided that no such order will require the payment of money or
the delivery of products or services the aggregate value of which will or may
exceed Twenty-five Thousand ($25,000) Dollars during the term thereof, (vii) any
employment or consulting contract, (viii) any contract with a labor union (ix)
any contract with a credit card processor, (x) any contract with a commercial
delivery service, (xi) any telecommunication agreement, (xii) any website,
software, database development or maintenance contract, or (xiii) any contract
with a lender to or other creditor of the Company. The Company has previously
delivered or made available to the Purchaser complete and accurate copies of all
such scheduled Material Contracts. All such scheduled Material Contracts are
valid, binding and enforceable in accordance with their terms and are in full
force and effect; there are no existing defaults by the Company; and, to
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the Best Knowledge of the Shareholders there are no existing defaults by any
other party thereunder; no event has occurred which (whether with or without
notice, lapse of time or the happening or occurrence of any other event) would
constitute a default by the Company thereunder; and, to the Best Knowledge of
the Shareholders, no event has occurred which (whether with or without notice,
lapse of time or the happening or occurrence of any other event) would
constitute a default by any other party thereunder. The legal enforceability
after the Closing Date by the Company of any Material Contract will not be
affected in any manner by the execution and delivery of this Agreement, the
Lease Agreement, the Proprietary Rights Assignments, the Employment Agreement,
the Right of First Refusal Agreement, or the consummation of the transactions
contemplated hereby and thereby and except as set forth on Schedule 4.4, which
consents will be obtained on or prior to Closing, all Material Contracts that
are also Assumed Contracts are assignable to Purchaser without the consent,
approval or act of any other party.
(b) Except as set forth in Schedule 4.20(b), no purchase commitment of the
Company nor any other Material Contract by which the Company is bound, requires
the Company to purchase goods or services or lease property in excess of the
normal, ordinary and usual requirements of the Company or at an excessive price
nor does any Material Contract require the Company to sell goods or provide
services at below market prices.
SECTION 4.21 PERSONNEL; SALES REPRESENTATIVES.
(a) Schedule 4.21(a) sets forth (i) the names, ages and titles of all
employees of and consultants to the Company and (ii) the amount of the annual
compensation payable to each employee and consultant to the Company as of
February 29, 2000. As of Closing no such employees are out on leave.
(b) Schedule 4.21(b) sets forth a complete and correct list of the name and
address of each non-employee sales representative or agent currently engaged by
the Company and the applicable commission rates with respect to each such
person. All agreements between the
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Company and any such person described in Schedule 4.21(b) are in full force and
effect and, except as noted in Schedule 4.21(b), are cancelable by the Company
on not more than ninety (90) days' notice, without penalty.
(c) The employee policy manual heretofore delivered to the Purchaser
contains all current employee policies which have been communicated to the
employees of the Company.
SECTION 4.22 LABOR RELATIONS.
Except as and to the extent set forth in Schedule 4.22: (i) no collective
bargaining agreement presently covers (nor has any, in the past, covered) any
employees of the Company, nor is any currently being negotiated by the Company;
(ii) the Company is in material compliance with all federal, state and local
laws and has made all filings required thereby with federal, state and local
authorities, including, without limitation, the rules and regulations of the
Department of Labor and the Office of Federal Contract Compliance Programs,
respecting employment and employment practices, terms and conditions of
employment and wages and hours, and is not engaged in any unfair labor practice;
(iii) there is no unfair labor practice complaint against the Company pending or
threatened before the National Labor Relations Board; (iv) there is no labor
strike, dispute, slowdown or stoppage actually pending or threatened against or
involving the Company; (v) to the Knowledge of the Shareholders, no attempt to
organize any group or all of the employees has been made or proposed in the past
five (5) years; (vi) no charges with respect to or relating to the Company are
pending before the Equal Employment Opportunity Commission or any state, local
or foreign agency responsible for the prevention of unlawful practices; (vii)
the Company has not received notice of the intent of any federal, state, local
or foreign agency responsible for the enforcement of labor or employment laws to
conduct an investigation of or relating to the Company and no such investigation
is in progress; (viii) no private agreement restricts the Company from
relocating, closing or terminating any of its operations or facilities; (ix) the
Company has not in the past five (5) years experienced any work stoppage or
other labor difficulty, and (x) the Company received no notice
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of any claim or complaint of sexual or other harassment or age or other
discrimination made by any employee.
SECTION 4.23 COMPLIANCE WITH APPLICABLE LAW.
(a) Except as set forth in Schedule 4.23(a), the Company is not in
violation of, except violations which have been waived or cured and which have
not recurred and with respect to which there is no ongoing liability, in respect
of its operations, real property, intellectual property, equipment and all other
aspects of its businesses, any applicable law (whether statutory or otherwise),
rule, regulation, order, ordinance, judgment or decree of any governmental
authority (federal, state, local or otherwise) (collectively, "Laws"), including
but not limited to the Federal Occupational Safety and Health Act, the Federal
Trade Commission mail order regulations, U.S. postal regulations, the Worker
Adjustment Retraining and Notification Act, the Americans With Disabilities Act
and ERISA, which violation or violations, individually or in the aggregate,
could have a Material Adverse Effect.
(b) Except as accurately and completely described in Schedule 4.23(b), the
Company has not received any notification of any asserted present or past
failure of the Company to comply with any of such Laws, except failures of
compliance which have been waived or cured and which have not recurred and with
respect to which there is no ongoing liability and failures of compliance which,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect.
SECTION 4.24 ENVIRONMENTAL MATTERS.
(a) DEFINITIONS.
(1) "ENVIRONMENTAL PROCEEDINGS" means any and all administrative,
regulatory or judicial actions, orders, suits, demands, demand letters,
claims, liens, notices of noncompliance or violation, investigations or
proceedings relating to any Environmental Law or Environmental Permit,
including, without limitation, (A) any and all Environmental Proceedings by
governmental or regulatory authorities for enforcement, cleanup, removal,
response, remedial or
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other actions or damages pursuant to any applicable Environmental Law, and
(B) any and all Environmental Proceedings by any third party seeking
damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from Hazardous Substances or arising from
alleged injury or threat of injury to the environment.
(2) "ENVIRONMENTAL LAWS" means any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law in effect and in each case as amended, and any judicial or
administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgment, relating to the
environment or Hazardous Substances, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended by the Superfund Amendments and Reauthorization Act of
1986, 42 U.S.C. 9601 et seq.; the Emergency Planning and Community
Right-to-Know Act, 42 U.S.C. 11001 et seq.; the Resource Conservation and
Recovery Act, 42 U.S.C. 6901 et seq.; the Federal Water Pollution Control
Act, 33 U.S.C. 1251 et seq.; the Clean Air Act, as amended, 42 U.S.C. 7401
et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C.
136 et seq.; the Safe Drinking Water Act, 42 U.S.C. 300f et seq.; the Toxic
Substances Control Act, 15 U.S.C. 2601 et seq.; the Oil Pollution Act of
1990, 33 U.S.C. 1001 et seq.; the Hazardous Materials Transportation Act,
as amended, 49 U.S.C. 1801 et seq.; the Atomic Energy Act, as amended, 42
U.S.C. 2011 et seq.; The Occupational Safety and Health Act, as amended, 29
U.S.C. 651 et seq.; or the Federal Food, Drug and Cosmetic Act, as amended,
21 U.S.C. 301 et seq., and any laws regulating the use of biological agents
or substances including medical or infectious wastes and the corresponding
State laws, regulations and local ordinances, etc. which may be applicable,
as any such laws, rules, regulations, etc. have been or may be amended.
(3) "ENVIRONMENTAL PERMITS" means all permits, approvals,
identification numbers, licenses and other authorizations required under
any applicable Environmental Law.
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(4) "HAZARDOUS SUBSTANCES" means (A) any chemicals, materials or
substances defined as or included in the definition of "hazardous
substances," "hazardous wastes," "hazardous materials," "extremely
hazardous wastes," "restricted hazardous wastes," "toxic substances,"
"toxic pollutants," "hazardous air pollutants," "pollutants,"
"contaminants," "toxic chemicals," "petroleum or petroleum products,"
"toxics," "hazardous chemicals," "extremely hazardous substances,"
"pesticides" or related materials, as now, in the past, or hereafter
defined in any applicable Environmental Law; (B) any petroleum or petroleum
products, natural or synthetic gas, radioactive materials,
asbestos-containing materials, urea formaldehyde foam insulation, and
radon; and (C) any other chemical, material or substance, exposure to which
is prohibited, limited or regulated by any governmental authority.
(b) Except as set forth on Schedule 4.24, (i) the Company has not violated
nor is it in violation of any applicable Environmental Law; (ii) the Company has
all Environmental Permits necessary to conduct its business and is in compliance
with their requirements; (iii) to the Best Knowledge of the Company and the
Shareholders none of the properties currently or formerly owned, leased or used
by the Company (including, without limitation, soils and surface, ground waters
and buildings) is contaminated with any Hazardous Substances as the result of
any action or omission of the Company; (iv) there are no past, pending or
threatened Environmental Proceedings or circumstances that could reasonably be
anticipated to form the basis thereof against the Company; (v) to the best
knowledge of the Shareholders, there are not now and never have been any
underground storage tanks located on the properties currently or formerly owned,
leased or used by the Company.
SECTION 4.25 ACCOUNTS RECEIVABLE. All accounts receivable reflected on the
December 31, 1999 Balance Sheet and all accounts receivable created thereafter
are bona fide accounts receivable created in the ordinary course of business on
the Company's standard terms and conditions and none of such accounts receivable
represent consignment or guaranteed sale arrangements.
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SECTION 4.26 INVENTORY AND SUPPLIES. The Company has inventory and supplies
of a quantity and quality sufficient to conduct its business as currently
conducted by it and all such inventory is in merchantable condition and, other
than inventory that has been written off, is either offered for sale in its
current catalog or is planned to be offered for sale in future catalogs or in
its retail store or through its web site, and all such supplies are usable.
SECTION 4.27 FULL DISCLOSURE. (a The Company has fully provided the
Purchaser with all information which the Purchaser has requested for deciding
whether to purchase the Purchased Assets and all information that the Company
believes is reasonably necessary to enable the Purchaser to make an informed
decision.
(b Neither this Agreement nor any other statements or certificates made or
delivered in connection herewith contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein, in light of the circumstances in which they were made, not
misleading. To the Best Knowledge of the Shareholders, there is no fact that the
Company has not disclosed to the Purchaser that could reasonably be anticipated
to have a Material Adverse Effect.
SECTION 4.28 (INTENTIONALLY OMITTED)
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
Each Shareholder jointly and severally represents and warrants to the
Purchaser as follows:
SECTION 5.1 AUTHORIZATION AND VALID AND BINDING AGREEMENT. Such Shareholder
has full power and authority to enter into this Agreement, the Proprietary
Rights Assignment and, in the case of Pamela F. Kelley, the Employment
Agreement, the Right of First Refusal Agreement and Lease Agreement on behalf of
Captain Vose Associates and to carry out the transactions contemplated hereby
and thereby and all proceedings, if any, required to be taken by such
Shareholder to authorize the execution, delivery and performance of this
Agreement, the Lease
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Agreement, the Proprietary Rights Assignment, the Employment Agreement and the
Right of First Refusal Agreement and all agreements, instruments and documents
relating hereto and thereto ("Related Instruments") have been properly taken, or
will be taken prior to the Closing. This Agreement has been duly executed and
delivered by such Shareholder and the Lease Agreement, Proprietary Rights
Assignment, Employment Agreement, the Right of First Refusal Agreement and
Related Instruments will upon execution and delivery at the Closing constitute
the legal, valid and binding obligation of such Shareholder signing the same
enforceable in accordance with its respective terms, except as such enforcement
may be affected by bankruptcy, insolvency and similar laws affecting creditors'
rights.
SECTION 5.2 CONSENTS; NO VIOLATION. Neither the execution or delivery of
this Agreement, the Lease Agreement, the Proprietary Rights Assignment, the
Employment Agreement, the Right of First Refusal Agreement or the Related
Instruments, the consummation of the transactions contemplated hereby or
thereby, nor the compliance with any of the provisions hereof or thereof by such
Shareholder does or will, with or without the giving of notice or the passage of
time, or both, violate, conflict with, result in a default, right to accelerate
or loss of rights under, or result in the creation of any lien, charge or
encumbrance pursuant to any franchise, mortgage, deed of trust, lease, license,
agreement, law, rule or regulation or any order, judgment or decree to which any
of the Shareholders or the Company is a party or by which such Shareholder may
be bound or affected. None of the execution, delivery or performance of this
Agreement, the Lease Agreement, the Proprietary Rights Assignment, the
Employment Agreement, the Right of First Refusal Agreement or the Related
Instruments by such Shareholder requires the consent or approval of any
governmental body or entity.
SECTION 5.3 OWNERSHIP OF SHARES. Such Shareholder is the lawful record and
beneficial owner of the number of Shares set forth opposite such Shareholder's
name on Schedule 5.3. On the date hereof such Shares are owned by the
Shareholder free and clear of any claims, pledges, security interests, liens or
encumbrances or other restrictions or limitations of any kind.
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SECTION 5.4 NO BUSINESS ARRANGEMENTS WITH AFFILIATES. Except as set forth
on Schedule 5.4, neither such Shareholder nor any members of his or her family
or Affiliates of any of the foregoing or any business organization in which any
of the foregoing owns a five (5%) percent or greater equity interest has or has
had within the last five (5) years any business dealings either as a supplier of
goods or services or as a customer or as a lessor or lessee or otherwise with
the Company.
SECTION 5.5 (INTENTIONALLY OMITTED).
ARTICLE VI
REPRESENTATIONS AND WARRANTIES BY THE PURCHASER
The Purchaser and LVC hereby jointly and severally represent and warrant to
the Company as follows:
SECTION 6.1 ORGANIZATION. Each of LVC and the Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of its
respective state of incorporation and has the corporate power and authority to
enter into this Agreement and to carry out the transactions contemplated hereby.
SECTION 6.2 AUTHORIZATION. The execution and delivery of this Agreement,
the Lease Agreement, the Employment Agreement and the Right of First Refusal
Agreement and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by the Board of Directors of the Purchaser and
LVC, as the case may be, and the resolutions adopted by the Board of Directors
of the Purchaser and LVC, as the case may be, evidencing such authorization were
duly and validly adopted, and have not been modified, revoked or rescinded in
any respect and are in full force and effect. No other corporate proceedings on
the part of the Purchaser and LVC are necessary to authorize this Agreement, the
Lease Agreement, the Employment Agreement, the Right of First Refusal Agreement
or the transactions contemplated hereby or thereby.
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SECTION 6.3 VALID AND BINDING AGREEMENT. This Agreement, the Lease
Agreement, the Employment Agreement and the Right of First Refusal Agreement
each constitutes a valid and binding agreement of the Purchaser and LVC, as the
case may be, enforceable against the Purchaser and LVC, as the case may be, in
accordance with its respective terms, except as said enforcement may be affected
by bankruptcy, insolvency and similar laws affecting creditors rights.
SECTION 6.4 CONSENTS; NO VIOLATION. Neither the execution or delivery
of this Agreement, the Lease Agreement, the Employment Agreement or the Right of
First Refusal Agreement, the consummation of the transactions contemplated
hereby and thereby, nor the compliance with any of the provisions hereof and
thereof, (i) violates any statute or law or any rule, regulation, order, award,
judgment or decree of any court or governmental authority, affecting the
Purchaser or LVC in any way, (ii) violates or conflicts with or constitutes a
default under any contract, commitment, agreement, understanding, arrangement,
trust or restriction of any kind to which the Purchaser or LVC is a party, by
which it is bound or which otherwise in any way affects it, (iii) will cause, or
give any persons valid grounds to cause (with or without notice, the passage of
time or both), the maturity of any debt, liability or obligation of the
Purchaser or LVC to be accelerated, or will increase any such liability or
obligation, (iv) requires any filing with, the notification of, or the obtaining
of any permit, authorization, consent or approval of any third party or
governmental or regulatory authority, foreign or domestic, or (v) violates or
conflicts with or constitutes a default under the Certificate of Incorporation
or By-Laws, as amended, of the Purchaser or LVC.
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ARTICLE VII
CONDUCT OF BUSINESS OF THE
COMPANY SUBSEQUENT TO CLOSING DATE
[The balance of this page is intentionally left blank.]
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The Company and the Shareholders represent that, during the period from the
Closing Date to Closing, the Company has conducted its business in the ordinary
course and consistent with past practice and exclusively through the Company.
SECTION 7.1 (INTENTIONALLY OMITTED)
SECTION 7.2 (INTENTIONALLY OMITTED)
SECTION 7.3 (INTENTIONALLY OMITTED)
SECTION 7.4 (INTENTIONALLY OMITTED)
ARTICLE VIII
CERTAIN COVENANTS OF THE PARTIES
SECTION 8.1 CONSENTS; THIRD PARTIES. The Company and the Shareholders
covenant and agree to use their respective diligent efforts to obtain all
requisite consents and to secure all requisite actions of third parties prior to
the Closing and to deliver to the Purchaser, promptly after receipt thereof but
in no event later than the Closing, executed counterparts of all such consents
or other evidence of such actions. At the request of the Purchaser, the Company
will use its best efforts to cause designated insurance policies to be
transferred to the Purchaser as of the Closing Date.
SECTION 8.2 SUPPLEMENTAL DISCLOSURE. The Company and the Shareholders shall
have the continuing obligation until Closing to promptly supplement or amend the
Schedules hereto with respect to any matter hereafter arising or discovered
which, if existing or known at the date of this Agreement, would have been
required to be set forth or described in the Schedules; provided, however, that
for the purposes of the rights and obligations of the parties hereunder, any
such supplemental or amended Schedules, and any matters discovered by the
Purchaser in the course of its due diligence prior to the Closing Date, shall
not be deemed to cure any breach
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of any representation or warranty made in this Agreement or to have been
disclosed as of the date of this Agreement.
SECTION 8.3 FURTHER ASSURANCES. From time to time (whether at or after the
Closing Date), at the request of any other party and without further
consideration, and at its own expense, each party will execute and deliver to
such other party such other documents, and take such other action, as the other
party may reasonably request in order to consummate more effectively the
transactions contemplated hereby.
SECTION 8.4 TRANSFER TAXES. Any and all sales and transfer taxes, if any,
incurred in connection with this Agreement and the transactions contemplated
hereby or resulting from the sale, assignment, transfer and delivery hereunder
of the Purchased Assets by the Company, shall be borne by the Company.
ARTICLE IX
CLOSING CONDITIONS
SECTION 9.1 CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER. All obligations
of the Purchaser hereunder are subject to the fulfillment or waiver, prior to or
at the Closing, of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES; PERFORMANCE. The representations and
warranties made by the Company and the Shareholders in this Agreement shall be
true when made and the Company and the Shareholders shall have performed and
complied with all covenants, agreements, obligations and conditions required by
this Agreement to be so performed or complied with by them on or prior to the
Closing.
(b) OFFICER'S AND SHAREHOLDERS' CERTIFICATES. The Company by its chief
financial officer and each of the Shareholders shall have delivered to the
Purchaser a certificate signed by each, dated the Closing Date, certifying as to
the fulfillment of the conditions specified in Section 9.1(a).
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(c) CONSENTS. At the Closing, all consents and approvals required by the
terms hereof shall continue to be in full force and effect.
(d) OPINION OF COUNSEL TO THE COMPANY AND THE SHAREHOLDERS. The Purchaser
shall have received an opinion of counsel to the Company and the Shareholders,
Lawson & Weitzen, LLP and/or such other counsel satisfactory to the Purchaser,
dated the Closing Date, in form and substance reasonably satisfactory to the
Purchaser, to the effect set forth in Exhibit E.
(e) (intentionally omitted)
(f) NO INJUNCTION. There shall not be in effect at the Closing any
judgment, order, injunction or decree of any court enjoining the consummation of
the transactions contemplated by this Agreement.
(g) NO GOVERNMENT PROCEEDING OR LITIGATION. There shall not be threatened,
instituted or pending any suit, action, investigation, inquiry or other
proceeding by or before any governmental or other regulatory or administrative
agency or commission which in the reasonable judgment of the Purchaser may have
a material adverse effect on the business, prospects, financial condition or
results of operation of the Company or seeks the imposition of limitations on
the ability of the Company to sell or the Purchaser to own the assets of the
Company.
(h) DELIVERIES AT CLOSING. All agreements, instruments, documents, actions
and payments required to be executed and delivered or taken or made pursuant to
the provisions of Section 2.2 hereof and any other section hereof by one or more
of the Company and the Shareholders shall have been duly executed and delivered
or taken or made, as the case may be.
SECTION 9.2 CONDITIONS TO THE OBLIGATIONS OF THE SHAREHOLDERS. All
obligations of the Company hereunder are subject to the fulfillment or waiver,
prior to or at the Closing, of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES; PERFORMANCE. The representations and
warranties made by the Purchaser and LVC in this Agreement shall be true when
made and the Purchaser
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and LVC shall have performed and complied with all covenants, agreements,
obligations and conditions required by this Agreement to be so performed or
complied with by it on or prior to the Closing.
(b) OFFICER'S CERTIFICATE. The Purchaser and LVC shall each have delivered
to the Company a certificate of its officer, dated the Closing Date, certifying
to the fulfillment of the conditions specified in Section 9.2(a).
(c) OPINION OF COUNSEL TO THE PURCHASER. The Company shall have received an
opinion of counsel to the Purchaser and LVC, Salon, Marrow, Dyckman & Newman,
LLP, dated the Closing Date, in form and substance reasonably satisfactory to
the Company, to the effect set forth in Exhibit F.
(d) NO INJUNCTION. There shall not be in effect at the Closing any
judgment, order, injunction or decree of any court enjoining the consummation of
the transactions contemplated by this Agreement.
(e) NO GOVERNMENTAL PROCEEDING OR LITIGATION. There shall not be
threatened, instituted or pending any suit, action, investigation, inquiry or
other proceeding by or before any governmental or other regulatory or
administrative agency or commission which seeks the imposition of limitations on
the ability of the Company to sell or Purchaser to own the assets of the
Company.
(f) DELIVERIES AT CLOSING. All agreements, instruments, documents, actions
and payments required to be executed and delivered or taken or made pursuant to
the provisions of Section 2.3 hereof and any other section hereof by the
Purchaser shall have been duly executed and delivered or taken or made, as the
case may be.
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ARTICLE X
SURVIVAL OF
REPRESENTATIONS AND INDEMNIFICATIONS
SECTION 10.1 SURVIVAL OF REPRESENTATIONS OF THE COMPANY AND THE
SHAREHOLDERS. All representations and warranties made by the Company and the
Shareholders in this Agreement or pursuant hereto shall survive the Closing and
any investigation at any time made by or on behalf of any party hereto;
provided, however, that, except with respect to the representations and
warranties of the Shareholders contained in Article 5 hereof and the
representations and warranties contained in Sections 4.1 ("Organization,
Authorization and Valid and Binding Agreement"), 4.2 ("Capitalization"), 4.8
("Certain Tax Matters"), 4.9 ("Title to Properties; Encumbrances") and 4.24
("Environmental Matters") hereof each of which representations and warranties
shall survive for the applicable statue of limitations, the representations and
warranties contained in this Agreement shall expire on the date which is three
(3) years after the Closing Date unless a claim has been made by a member of the
Purchaser Group on or prior to such date or a member of the Purchaser Group has
given notice of a potential claim setting forth the facts with respect thereto
on or prior to such date.
SECTION 10.2 STATEMENTS AS REPRESENTATIONS. All statements contained in
this Agreement, the Schedules or any certificate delivered pursuant hereto shall
be deemed representations and warranties for all purposes of this Agreement.
SECTION 10.3 INDEMNIFICATION OF PURCHASER GROUP FOR BREACH OF
REPRESENTATION OR WARRANTY. Upon the terms and subject to the conditions of this
Article X, the Company and the Shareholders hereby agree jointly and severally
to indemnify, defend and hold harmless the Purchaser and each Affiliate of the
Purchaser (collectively, the "Purchaser Group") from and against all losses,
damages, liabilities, costs and expenses, including, without limitation,
Environmental Response Costs, interest, penalties, costs of defense, and
reasonable attorneys' and expert fees and expenses asserted against, resulting
to, imposed upon or incurred by any
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member of the Purchaser Group, directly or indirectly, by reason of or resulting
from (i) a breach of any agreement, covenant, representation or warranty of the
Company or any of the Shareholders contained in or made pursuant to this
Agreement, the Proprietary Rights Assignment or the Employment Agreement or any
facts or circumstances constituting such a breach or (ii) any of the matters
disclosed in Schedule 4.14(a) or Schedule 4.14(b) (collectively "Purchaser
Claims"). Environmental Response Costs shall mean the cost of any required or
necessary investigation, testing, monitoring, repair, clean up, detoxification,
decontamination, preparation of any closure or other required plans, removal,
response or remedial action at or relating to the properties currently or
formerly owned, leased or used by the Company or its predecessors or arising out
of activities undertaken prior to Closing by the Company.
SECTION 10.4 INDEMNIFICATION OF PURCHASER GROUP WITH RESPECT TO THIRD PARTY
CLAIMS. Upon the terms and subject to the conditions of this Article X, the
Company and the Shareholders hereby agree jointly and severally to indemnify,
defend and hold harmless the Purchaser Group from and against all claims,
demands, causes of action, assessments, liabilities, costs and expenses
including, without limitation, Environmental Response Costs, interest,
penalties, costs of defense and reasonable attorney and expert fees and expenses
(collectively, "Third Party Claims") asserted against any member of the
Purchaser Group by any third party with respect to liabilities of the Company or
acts or omissions of the Company accruing or taken or omitted to be taken on or
prior to the Closing including, without limitation, any such Third Party Claim
asserted by any governmental instrumentality or any customer, supplier, employee
or consultant of or to the Company other than Third Party Claims arising out of
the failure of the Purchaser to timely pay or perform the Assumed Liabilities or
Assumed Contractual Liabilities.
SECTION 10.5 INDEMNIFICATION OF THE SHAREHOLDER GROUP. Upon the terms and
subject to the conditions of this Article X, the Purchaser and LVC hereby agree
jointly and severally to indemnify, defend and hold harmless the Company and the
Shareholders (collectively, the "Shareholder Group") from and against all
losses, damages, liabilities, costs and expenses,
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including, without limitation, interest, penalties, costs of defense, and
reasonable attorneys' and expert fees and expenses asserted against, resulting
to, imposed upon or incurred by any member of the Shareholder Group, directly or
indirectly, by reason of or resulting from (i) a breach of any agreement,
covenant, representation or warranty of the Purchaser contained in or made
pursuant to this Agreement or the Employment Agreement or any facts or
circumstances constituting such a breach and (ii) the conduct of Purchaser's
business and the ownership of the Purchased Assets after the Closing
(collectively, "Shareholder Claims").
SECTION 10.6 INDEMNIFICATION OF SHAREHOLDER GROUP WITH RESPECT TO THIRD
PARTY CLAIMS. Upon the terms and subject to the conditions of this Article X,
the Purchaser and LVC hereby agree jointly and severally to indemnify, defend
and hold harmless the Shareholder Group from and against any Third Party Claims
asserted against any member of the Shareholder Group with respect to liabilities
of the Purchaser or acts or omissions of the Purchaser accruing or taken or
omitted to be taken after the Closing, including, without limitation, any such
Third Party Claim asserted by any governmental instrumentality or any customer,
supplier, employee or consultant of or to the Purchaser arising out of the
failure of the Purchaser to timely pay or perform the Assumed Liabilities or the
60-month Lease Agreement by and between AT&T Capital Corporation and Rue de
France, Inc. dated July, 1998 for telephone equipment or any other Assumed
Contractual Liabilities.
SECTION 10.7 PROCEDURE.
(a) Whenever any Purchaser Claim, Third Party Claim or Shareholder Claim
(collectively, a "Claim") shall arise for indemnification hereunder, the party
seeking indemnification (the "Indemnified Party") shall promptly notify each
party from whom indemnification is due (the "Indemnifying Party") of the Claim
and, when known, the facts which form the basis for such Claim. In the event of
any such Claim for indemnification hereunder resulting from or in connection
with any claim or legal proceedings by a third person, the notice to the
Indemnifying Party shall specify, if known, the amount or an estimate of the
amount of the
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liability arising therefrom. The failure to promptly give any such notice shall
not relieve the Indemnifying Party of its obligations hereunder except to the
extent such failure adversely prejudices the Indemnifying Party. The Indemnified
Party shall not settle or compromise any claim by a third party for which it is
entitled to indemnification hereunder without the prior written consent of the
Indemnifying Party, which shall not be unreasonably withheld or delayed, unless
a proceeding shall have been instituted against the Indemnified Party and the
Indemnifying Party shall not have acknowledged its obligations to indemnify the
Indemnified Party and have taken control of such proceeding after notification
thereof, as provided in Section 10.7(b) of this Agreement.
(b) In connection with any Claim giving rise to indemnity hereunder
resulting from or arising out of any claim, tax assessment or legal proceeding
by a person who is not a party to this Agreement, the Indemnifying Party at its
sole cost and expense may, upon written notice to the Indemnified Party
acknowledging its obligations to indemnify the Indemnified Party hereunder with
respect to such Claim, assume the defense of any such claim or legal proceeding
with counsel reasonably satisfactory to the Indemnified Party; provided that the
Indemnified Party may participate in any such proceeding and be represented by
attorneys of its or their own choosing, with the fees and expenses of such
counsel to be at the sole expense of the Indemnified Party unless (i) the
Indemnifying Party shall not have notified the Indemnified Party in writing that
it will assume the defense of such claim and pay all liabilities relating
thereto and employed counsel reasonably acceptable to the Indemnified Party as
contemplated by this sentence or (ii) the named parties to any such proceeding
include both (x) any or all of the Indemnified Parties hereunder and (y) any or
all of the Indemnifying Parties hereunder and representation of both groups by
the same counsel would be inappropriate due to the conflict of interest between
them, and in either of such circumstances the fees and expenses of such counsel
shall be the sole expense of Indemnifying Party. The foregoing notwithstanding,
if such proceeding involves both a Claim or Claims subject to indemnification
hereunder and a claim or claims not subject to
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indemnification hereunder, then the expenses of counsel shall be equitably
shared. The Indemnifying Party shall not settle or compromise such action
without the prior written consent of the Indemnified Party, which consent shall
not be unreasonably withheld or delayed (other than settlements that involve
only the payment of money as to which no consent shall be required). If the
Indemnifying Party does not assume the defense of any such claim or litigation
resulting therefrom within twenty-five (25) days after notice of such Claim is
given, (i) the Indemnified Party may defend against such claim or litigation in
such manner as it may deem appropriate, including, but not limited to, settling
such claim or litigation, after giving notice of the same to the Indemnifying
Party, on such terms as the Indemnified Party may in its sole discretion deem
appropriate, and (ii) the Indemnifying Party shall be entitled to participate in
(but not control) the defense of such action, with its counsel and at its own
expense.
SECTION 10.8 REMEDIES CUMULATIVE. The remedies provided herein shall be
cumulative and shall not preclude assertion by any party of any other rights or
the seeking of any other remedies against any other party hereto.
SECTION 10.9 LIMITS ON INDEMNIFICATION OBLIGATIONS. The Company and the
Shareholders shall have no liability or obligation to the Purchaser for breaches
of representations or warranties under Article X of this Agreement (other than
any such liability or obligation arising under Sections 1.3, 3.1 and 3.3 hereof
or pertaining to Unassumed Liabilities and all costs incurred by Purchaser in
defending against any such claim or enforcing its rights hereunder including,
without limitation, legal and accounting fees) until the aggregate amount of
such liabilities and obligations exceed Twenty-five Thousand Dollars ($25,000),
in which event the Company and the Shareholders shall be jointly and severally
liable and obligated for the entire amount of the excess thereof. The aggregate
liability of the Company and the Shareholders for breaches of representations or
warranties under Article X of this Agreement hereby shall be limited to (x) the
sum of (A) the Fixed Portion of the Purchase Price plus (B) the Assumed
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Liabilities less (y) federal and state taxes actually paid by the Shareholders
with respect to the foregoing purchase price and assumption of liabilities.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1 FINDER'S FEES. Each of the Shareholders, the Company, the
Purchaser and LVC represents and warrants that it has not dealt with any third
party as a finder, broker or advisor in connection with the transactions
contemplated by this Agreement except that LVC has dealt with PaineWebber
Incorporated whose fees and expenses it shall be solely responsible for.
SECTION 11.2 EXPENSES. The Company and the Shareholders shall bear all fees
and expenses incurred by any of the Shareholders or the Company in connection
with the negotiation, execution and delivery of this Agreement, the Lease
Agreement, the Proprietary Rights Assignments, the Employment Agreement, Right
of First Refusal Agreement and Related Instruments and the consummation of the
transaction contemplated thereby, and all prior activities related to the sale
of the assets of the Company. The Purchaser shall bear all fees and expenses
incurred by the Purchaser and its affiliates in connection with the negotiation,
execution and delivery of this Agreement, the Lease Agreement, the Proprietary
Rights Assignments, the Employment Agreement, and Related Instruments and the
consummation of the transaction contemplated thereby.
SECTION 11.3 PARTIES IN INTEREST. All the terms and provisions of this
Agreement shall be binding upon, shall inure to the benefit of and shall be
enforceable by the respective heirs, personal representatives, successors and
assigns of the parties hereto.
SECTION 11.4 ENTIRE AGREEMENT. This Agreement, including the Exhibits and
Schedules referred to herein or delivered pursuant hereto, contains the entire
understanding of the parties with respect to its subject matter and supersedes
all prior agreements and understandings between the parties with respect to its
subject matter including, without limitation, the letter of intent among the
parties dated February 15, 2000.
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SECTION 11.5 MODIFICATION. This Agreement may not be altered, modified or
amended unless such alteration, modification or amendment is in writing and
signed by the parties to this Agreement nor may this Agreement be terminated
except by a writing signed by the parties to this Agreement; and no waiver of
any breach of any condition, provision or term of this Agreement on any one
occasion shall be deemed to be a waiver of any subsequent breach of any
condition, provision or term of this Agreement on any other occasion whether of
like or different nature.
SECTION 11.6 NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered in person, or by recognized overnight courier service
such as Federal Express, Airborne or DHL, or sent by registered or certified
mail, postage prepaid, return receipt requested, or sent by fax (if confirmed),
as follows: If to the Company:
Ford & Kelley, Inc.
28 Jacome Way
Middletown, Rhode Island 02842
Fax No. (401) 846-6821
Attention: Pamela F. Kelley
If to the Shareholders:
Pamela F. Kelley
Brendan P. Kelley
20 Willow Street
Newport, Rhode Island 02840
Copy in each case to:
Lawson & Weitzen, LLP
425 Summer Street
Boston, Massachusetts 02210
Fax No. (617) 439-4990
Attention: George E. Christodoulo
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If to the Purchaser or LVC:
c/o Lillian Vernon Corporation
One Theall Road
Rye, New York 10580-1450
Fax No. (914) 925-1444
Attention: Chief Executive Officer
Copy in each case to: .....
Salon, Marrow, Dyckman & Newman, LLP
685 Third Avenue
New York, New York 10017
Fax No. (212) 661-3339
Attention: Joel Salon, Esq.
Any such notice, report, claim, demand or other communication shall be effective
upon delivery if given or delivered in person or by overnight courier service,
or upon receipt if sent by fax which is confirmed by regular mail, or on the
third business day following mailing if mailed as provided above. Failure to
accept a notice shall not invalidate the same. Any party may change its address
for purposes hereof by written notice in accordance herewith, except that
notices of change of address shall only be effective upon receipt.
SECTION 11.7 LAW GOVERNING.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York for agreements entered into
and to be performed entirely within the State of New York, without regard to its
conflict of laws rules.
SECTION 11.8 INTERPRETATION AND CONSTRUCTION.
(a) The captions set forth in this Agreement, and the titles set forth in
the Schedules attached hereto, are for convenience only and shall not be
considered as part of this Agreement or the Schedules, respectively, or as in
any way limiting or amplifying the terms and provisions hereof or thereof.
(b) This Agreement shall be construed according to its fair meaning as if
prepared jointly by the parties hereto.
61
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(c) Each section, subsection and lesser section of this Agreement
constitutes a separate and distinct undertaking, covenant and/or provision
hereof.
(d) If any provision of this Agreement is held invalid, such invalidity
shall not affect the other provisions hereof which can be given effect without
the invalid provisions, and, to this end, the provisions of this Agreement are
intended and shall be deemed severable. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereby waive any provision of law which renders
any provision of this Agreement prohibited or unenforceable in any way. In the
event any such provision is found to be unlawful or otherwise unenforceable, the
parties hereto agree to negotiate in good faith to modify the void or
unenforceable provision, but only to the extent necessary to make such provision
valid and enforceable having full regard for all applicable laws and the
interests and purposes of the parties in entering into this Agreement.
(e) This Agreement may be executed in counterparts and by fax, each of
which shall be deemed an original, and all of which shall constitute but one and
the same instrument which may be sufficiently evidenced by one counterpart.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the undersigned on the date first above written.
RUE DE FRANCE, INC.
By:_________________________________
Pamela F. Kelley, President
62
<PAGE>
RDF ACQUISITION CORP.
By:_________________________________
Kevin A. Green, President
LILLIAN VERNON CORPORATION
By:_________________________________
Lillian Vernon, CEO
____________________________________
Pamela F. Kelley
____________________________________
Brendan P. Kelley
As to Section 3.6 only:
CAPTAIN VOSE ASSOCIATES
By:_________________________________
Pamela F. Kelley, General Partner
63
<PAGE>
SCHEDULE 1 -- INDEX OF DEFINED TERMS
DEFINITION LOCATION
- ---------- --------
"Actual Payments" Section 3.3(a)
"Affiliate" Section 3.1(a)
"affiliated service group" Section 4.18(a)(4)
"Agreement" Preamble
"Assumed Contracts" Section 1.2
"Assumed Contractual Liabilities" Section 1.2(a)
"Assumed Liabilities" Section 1.2(a)
"Benefit Arrangement" Section 4.18(a)(1)
"Best Knowledge of the Shareholders" Section 4.6
"Claim" Section 10.7(a)
"Closing" Section 2.1
"Closing Date" Section 1.1
"Closing Net Worth" Section 1.3(a)
"Closing Net Worth Statement" Section 1.3(a)
"Closing Net Worth Statement Date" Section 1.3(a)
"Code" Section 4.18(a)
"Company" Preamble
"Company's Accountants" Section 1.3(a)
"Confidential Information" Section 3.1(a)
"Contingent Portion of the Purchase Price" Section 1.2(a)
"Contingent Purchase Price Payments" Section 1.5(d)
"December 31, 1999 Balance Sheet" Section 4.5(a)
"Default Liabilities" Section 1.2(a)
"Disputed Item" Section 1.3(b)
"Earn Out Period" Section 1.5(a)
"EBT" Section 1.5(a)
"EBT Year" Section 1.5(a)
"employee pension benefit plan" Section 4.18(a)(7)
"Employee Plans" Section 4.18(a)(2)
"employee welfare benefit plan" Section 4.18(a)(8)
"Employment Agreement" Section 3.4
"Environmental Claims" Section 10.3(c)
"Environmental Laws" Section 4.24(a)(2)
"Environmental Permits" Section 4.24(a)(3)
"Environmental Proceedings" Section 4.24(a)(1)
"Environmental Response Costs" Section 10.3
"ERISA" Section 4.18(a)(3)
"ERISA Affiliate" Section 4.18(a)(4)
"Excluded Assets" Section 1.1
"FICA" Section 3.8
"Final Closing Net Worth" Section 1.3(b)
"Final Closing Net Worth Statement" Section 1.3(b)
"Final Payroll" Section 1.2(c)
"Financial Statements" Section 4.5
"Fixed Portion of the Purchase Price" Section 1.2(a)
"Funded Debt" Section 1.2(b)
64
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SCHEDULE 1 (CONT'D.)
DEFINITION . LOCATION
- ---------- --------
"FUTA" Section 3.8
"Gap Liabilities" Section 1.2(a)
"Hazardous Substances" Section 4.24(a)(4)
"Indemnified Party" Section 10.7(a)
"Indemnifying Party" Section 10.7(a)
"Knowledge of the Shareholders" Section 4.6
"LLC Section 3.10
"Laws" Section 4.23(a)
"Lease Agreement" Section 3.6
"Material Adverse Effect" Section 4.14(a)
"Material Contracts" Section 4.20(a)
"multiemployer plan" Section 4.18(a)(5)
"Net Worth" Section 1.3(a)
"New Business Initiatives" Section 1.5(c)
"Pamela" Section 3.10
"PBGC" Section 4.18(a)(6)
"Pension Plan" Section 4.18(a)(7)
"Predecessor Employer" Section 3.8
"Proprietary Rights Assignments" Section 3.5
"Projected EBT" Section 1.5(a)
"Purchase Price Holdback" Section 1.3(c)
"Purchased Assets" Section 1.1
"Purchaser" Preamble
"Purchaser Claims" Section 10.3(a)
"Purchaser Group" Section 10.3(a)
"PWC" Section 1.3(a)
"Related Instruments" Section 5.1
"Restricted Period" Section 3.1(b)
"Restricted Products" Section 3.1(b)
"Restrictive Covenant Allocation" Section 3.2(a)(ii)
"Right of First Refusal Agreement" Section 3.9
"Shareholder Claims" Section 10.5
"Shareholder Group" Section 10.5
"Shareholders" Preamble
"Software" Section 4.12
"Statement Accounts" Section 3.3(a)
"Successor Employer" Section 3.8
"Tax Returns" Section 4.8(c)
"Taxes" Section 4.8(c)
"Third Party Claims" Section 10.4(d)
"Transferred Employees" Section 3.8
"Unassumed Liabilities" Section 1.2(b)
"voluntary employee' beneficiary association" Section 4.18(a)(1)
"Welfare Plan" Section 4.18(a)(8)
65
PROPRIETARY RIGHTS ASSIGNMENT
WHEREAS, RDF ACQUISITION CORP. ("Purchaser") has this day acquired all
of the assets of RUE DE FRANCE, INC. (the "Company"); and
WHEREAS, the undersigned, Pamela F. Kelley (the "Assignor"), is a
principal shareholder of the Company and its president; and
WHEREAS, Assignor has agreed to execute this Proprietary Rights
Assignment to induce Purchaser to purchase the assets of the Company.
NOW, THEREFORE, for One ($1.00) Dollar and other good and valuable
consideration, the receipt of which is hereby acknowledged, the Assignor does
hereby assign and agree with Purchaser as follows:
1. ASSIGNMENT. Assignor does hereby assign to Purchaser Assignor's
entire right, title and interest in and to all Proprietary Property and
Documents (collectively, "Proprietary Rights") as such terms are hereinafter
defined.
2. CONSENT TO USE OF NAME AND PHOTOGRAPH. Assignor does hereby further
grant to Purchaser the right to use in perpetuity her name and photograph in
connection with a "Dear Friends" or similar letter in the Rue de France catalog,
website or advertisement or other media in connection with the promotion of the
business of the Purchaser as currently appearing in the Rue de France "Summer
2000" catalog. If the Purchaser shall desire to change the photograph or copy
(other than changes to reflect changes in the description of products or their
location in the catalog or other minor changes not of a substantive nature),
then such proposed changes shall be submitted to the Assignor in writing, if
Assignor is then living, for Assignor's approval, which approval will not be
unreasonably withheld. If the Assignor fails to object to any such proposed
change in writing within ten (10) days after the same is submitted to Assignor,
then such proposed change shall be deemed approved. All proposed changes shall
be personally delivered to Assignor or mailed to Assignor at 20 Willow Street,
Newport, Rhode Island 02840 or at such other address as Assignor may from time
to time submit to Purchaser in writing.
3. GENERAL. The Assignor agrees that any and all Documents made or kept
by Assignor of work performed by Assignor in connection with the business of the
Company or which are otherwise in Assignor's possession and relate or pertain to
the business of the Company, its customers or their respective Affiliates (as
hereinafter defined), shall be and are the sole and exclusive property of the
Company and have been assigned to and have become the sole and exclusive
property of the Purchaser. The Assignor represents that she has delivered all
Documents to the Purchaser at the Company's place of business and will not take
with Assignor any Documents or reproductions thereof except as may be necessary
for her to perform her duties under the employment agreement between her and the
Purchaser dated the date hereof.
The Assignor acknowledges and agrees that the Proprietary Rights are
the exclusive and valuable property of the Purchaser, its customers, suppliers
or their respective Affiliates, as the case may be, and the Assignor shall
neither have, nor claim to have, any right, title or interest therein or
thereto. All opportunities relating to the Proprietary Rights whether or not
involving
<PAGE>
third parties shall belong to the Purchaser, its customers, suppliers or their
respective Affiliates, as the case may be.
Any and all Proprietary Property shall be deemed to have been work
specifically ordered or commissioned by the Company and assigned to the
Purchaser and each such work shall be considered a "work made for hire" within
the meaning of 17 U.S.C. ss.101 of the United States Copyright Act, if
applicable, and all rights to such work shall belong entirely to the Purchaser.
The Assignor shall from time to time upon the request of the Purchaser (and at
the Purchaser's expense) promptly execute and deliver to the Purchaser, its
customers, suppliers or their respective Affiliates, as the case may be, any
instruments necessary to effect the irrevocable assignment of all of Assignor's
right, title and interest, including inventor, copyright and author rights, in
such works to the Purchaser, its customers, suppliers or their respective
Affiliates, as the case may be, and for the Purchaser, its customers, suppliers
or their respective Affiliates, as the case may be, to obtain proprietary rights
in connection therewith.
The Assignor represents that Assignor has communicated and fully
disclosed to the Purchaser any and all Proprietary Property made or conceived by
Assignor prior to the date hereof.
The Assignor shall assist the Purchaser in every proper way upon
request (and at the Purchaser's expense) to obtain for its benefit patents,
copyrights, trade names, trademarks, service names, service marks and domain
names for any and all Proprietary Rights in the United States and all foreign
countries. All such patents, copyrights, trade names, trademarks, service names,
service marks, domain names and any registrations and applications therefor are
to be, and remain, the exclusive property of the Purchaser and the Assignor
agrees that Assignor will, whenever so requested by the Purchaser or its duly
authorized agent, make, execute and deliver to the Purchaser its Affiliates,
successors, assigns, or nominees, without charge for Assignor's time (it being
agreed that any out-of-pocket expenses will be borne or reimbursed by the
Purchaser), any and all applications, assignments and all other instruments
which the Purchaser or its Affiliates shall deem necessary or appropriate in
order to apply for and obtain such patents, copyrights, trade names, trademarks,
service names, service marks and domain names or in order to assign and convey
to the Purchaser or its Affiliates, their successors, assigns or nominees, the
sole and exclusive right, title and interest therein and thereto.
Assignor acknowledges that the violation by Assignor of any of the
foregoing covenants could not reasonably or adequately be compensated by damages
in an action at law. Therefore, in addition to any other remedies or sanctions
provided by law, and without limiting the right of the Purchaser, its Affiliates
or any of their successors or assigns to pursue all other or legal and equitable
rights available to them, the Purchaser and its Affiliates shall have the right
to compel specific performance hereof by the Assignor, and, in furtherance
thereof, to apply to any court with jurisdiction over the Assignor to enforce
the provisions hereof.
The Purchaser may assign its rights hereunder to any third party. Upon
any such assignment by the Purchaser, the term "Purchaser" as used herein shall
be deemed to include any such assignee of the Purchaser, and the assignee shall
have the right to enforce all of the Purchaser's rights and remedies hereunder
in its own name as if a party hereto in the place and stead of the Purchaser.
This Assignment shall be binding upon the Assignor and Assignor's
respective successors-in-interest, heirs and personal representatives.
2
<PAGE>
This Assignment shall be governed by and construed and enforced in
accordance with the laws of the State of New York, without regard to its
conflict of laws rules.
Assignor agrees to execute and deliver without further compensation,
such other agreements, instruments, documents, certificates, affidavits or other
writings as the Purchaser may reasonably require to more fully vest in the
Purchaser all rights to the Proprietary Rights.
For purposes of this Assignment the following definitions shall apply:
i) "Affiliates" shall mean an affiliate or associate as those
terms are defined by the Rules and Regulations promulgated under the Securities
Act of 1933, as amended;
ii) "Documents" means any and all: (i) books, textbooks, letters,
pamphlets, drafts, memoranda, notes, records, drawings, files, documents,
manuals, compilations of information, correspondence or other writings of any
kind and all copies, abstracts and summaries of any of the foregoing which
relate to any aspect of the business of the Company, and (ii) computer programs
and software created, developed or enhanced by the Assignor or in Assignor's
possession which relate to any aspect of the business of the Company, whether
embodied in a computer disc, print-out or other format;
iii) "Proprietary Property" means all tangible and intangible
property either made, conceived or developed, in whole or in part, by the
Assignor which relates or pertains to any aspect of the business of the Company
or its customers, suppliers or their respective Affiliates whether as an
officer, director, employee, consultant, independent contractor or otherwise or
owned by, or licensed to, the Company or its customers, suppliers or their
respective Affiliates, including, without limitation, discoveries, designs,
methods, formulas, techniques, ideas, concepts, programs, computer software or
hardware, data bases, specifications, documentation, algorithms, source codes,
object codes, program listings, product platforms and architectures, screens,
websites, formats, technology, know-how, inventions, research and development
whether or not any of the foregoing is patentable, trademarkable or
copyrightable and patents, copyrights, trademarks, trade names, service names,
service marks, logos, domain names and designs and other proprietary rights and
registrations and applications and the rights to apply therefor.
IN WITNESS WHEREOF, the undersigned has executed this Assignment on the
_____ day of April, 2000.
------------------------------
PAMELA F. KELLEY
3
RIGHT OF FIRST REFUSAL AGREEMENT
Agreement made as of the 31st day of March, 2000, by and between
LILLIAN VERNON CORPORATION ("LVC") and PAMELA F. KELLEY ("KELLEY").
BACKGROUND
WHEREAS:
A. LVC, RDF Acquisition Corp. (the "Company"), Rue de France, Inc.
("RDF"), Kelley and Brendan P. Kelley have entered into an Asset Purchase
Agreement dated as of March 31, 2000 (the "Asset Purchase Agreement");
B. The Company and Kelley have entered into an Employment Agreement
dated the date hereof (the "Employment Agreement");
C. LVC is the parent of the Company and has agreed to grant Kelley a
right of first refusal to purchase all of the capital stock of the Company
before LVC consummates a Change of Control Transaction (defined below); and
D. Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Employment Agreement.
NOW, THEREFORE, the parties agree as follows:
1. RIGHT OF FIRST REFUSAL. Before LVC consummates a Change of Control
Transaction (defined below) with respect to the Company during the Right of
First Refusal Period (defined below) it shall first offer ("Offer") to Kelley in
writing the right to purchase all of the outstanding capital stock of the
Company for a fixed purchase price (the "Purchase Price") payable in cash at the
closing of such purchase by Kelley. Kelley shall have twenty (20) days from the
date of such Offer to accept the same. Such acceptance shall be in writing and
shall be accompanied by a deposit equal to ten (10%) percent of the Purchase
Price and shall specify a date for closing at the headquarters of LVC which
shall be not later than thirty (30) days from the date of Kelley's acceptance of
the Offer. A Change of Control Transaction shall mean a sale of all or
substantially all of the assets of the Company to an unaffiliated third party,
or a sale of more than fifty (50%) percent of the voting stock of the Company to
an unaffiliated third party or a merger, consolidation or other reorganization
of the Company with an unaffiliated third party such that after such merger,
consolidation or other reorganization LVC owns less than fifty (50%) percent of
the voting stock of the surviving entity. A spin-off of the shares of the
Company or a public offering of stock of the Company shall not be considered a
Change of Control Transaction and Kelley's right of first refusal shall
terminate upon the happening of
<PAGE>
either of such events. If Kelley does not timely exercise her right of first
refusal, then LVC or the Company, as the case may be, may proceed to consummate
a Change of Control Transaction; provided, however, if the sale is an asset
sale, then the consummation of such sale shall be conditioned upon the purchaser
of the assets assuming in writing the obligations of the Company to Kelley under
the Employment Agreement and the obligations of the Company to RDF under the
provisions of Section 1.5 (The Calculation and Payment of the Contingent Portion
of the Purchase Price) of the Asset Purchase Agreement. Such assumption shall
release both the Company and LVC from any further obligation under the
Employment Agreement and under Section 1.5 of the Asset Purchase Agreement. If
the Change of Control Price (defined below) is less than the Purchase Price,
then, before consummating such Change of Control Transaction, LVC shall reoffer
to Kelley the right to purchase the capital stock of the Company at the lower
Change of Control Price except in such case Kelley shall have ten (10) days in
which to accept the same. If LVC and Kelley cannot agree upon the cash
equivalent value of the consideration offered in the Change of Control
Transaction (the "Change of Control Price"), then the same shall be determined
by an investment banker mutually acceptable to the parties. If the parties
cannot agree upon a mutually acceptable investment banker, then either party may
apply to the American Arbitration Association in the City of New York for the
appointment of the same. The fees and expenses of such investment banker and, if
necessary, the American Arbitration Association shall be borne equally by the
parties. The Right of First Refusal Period shall mean the period commencing on
the date hereof and ending on the earlier of (x) five (5) years from the date
hereof, (y) the termination of the Employment Agreement by Kelley without Good
Reason or the termination of the Employment Agreement by the Company for Cause
and (z) the death of Kelley.
2. GENERAL PROVISIONS
(a) ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the
entire agreement between the parties hereto with respect to the transactions
contemplated hereby and supersedes all prior agreements or understandings
between the parties with respect thereto. This Agreement shall not be altered or
otherwise amended or terminated (except as provided in Section 1 hereof) except
pursuant to an instrument in writing signed by each of the parties hereto.
(b) DESCRIPTIVE HEADINGS. Descriptive headings are for
convenience only and shall not control or affect the meaning or construction of
any provisions of this Agreement.
(c) NOTICES. All notices or other communications pursuant to
this Agreement shall be in writing and shall be deemed to be sufficient if
telecopied or sent by nationally-recognized, overnight courier to the parties at
the following addresses (or at such other address for a party as shall be
specified by like notice):
2
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if to LVC, to:
c/o Lillian Vernon Corporation
One Theall Road
Rye, New York 10580-1450
Attention: Chief Executive Officer
Telecopier: (914) 925-1444
with copies to:
Salon, Marrow, Dyckman & Newman, LLP
685 Third Avenue
New York, New York 10017
Attention: Joel Salon
Telecopier: (212) 661-3339
if to the Executive, to:
Pamela F. Kelley
20 Willow Street
Newport, Rhode Island 02840
with copies to:
Lawson & Weitzen, LLP
425 Summer Street
Boston, Massachusetts 02210
Attention: George Christodoulo
Telecopier: (617) 439-3987
All such notices and other communications shall be deemed to have been delivered
and received (A) in the case of delivery by telecopy, on the date of such
delivery if delivery is confirmed on that date by telephone call with the
recipient and (B) in the case of delivery by nationally-recognized, overnight
courier, on the Business Day (defined below) following dispatch. As used herein,
"Business Day" shall mean any day that is not a Saturday, Sunday or a day on
which banking institutions in New York, New York are not required to be open.
Failure to accept a notice does not invalidate same.
(d) ARBITRATION. Except as hereinafter provided with respect
to injunctive relief, the parties agree to arbitrate any and all claims,
controversies or disputes arising under or out of this Agreement or relating in
any way thereto. All such claims, controversies or disputes shall be submitted
to arbitration in the City of New York, State of New York, to arbitrators
designated under and pursuant to the Rules of the American Arbitration
Association, and the
3
<PAGE>
arbitration shall be had under the auspices of said Association and subject to
its rules. The parties consent to the jurisdiction of the Supreme Court of the
State of New York and of any United States District Court sitting in the State
of New York with respect to any and all proceedings relating to any such
arbitration, and the parties further agree that any and all process and notices
of motions or applications in relation to any such arbitration may be served
upon a party personally or by registered or certified mail, return receipt
requested. Such service may be accomplished either within or without the State
of New York, and such notice shall be given of all applications and hearings as
is provided by the laws of the State of New York. The award of the arbitrators
shall be final and binding upon the parties and judgment thereon may be entered
as provided by the laws of the State of New York.
(e) GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF
THE STATE OF NEW YORK OR ANY OTHER JURISDICTION OTHER THAN THE STATE OF NEW
YORK) TO BE APPLIED. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE
STATE OF NEW YORK WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS
AGREEMENT, EVEN IF UNDER SUCH JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW
ANALYSIS, THE SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
(f) BENEFITS OF AGREEMENT; ASSIGNMENT. The terms and
provisions of this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors, assigns, representatives,
heirs and estate, as applicable. If this Agreement is assigned by LVC in
connection with the sale of all or substantially all of the operating assets of
LVC and the obligations hereunder of LVC are assumed in writing by the purchaser
of such assets, then in such event LVC shall have no further liability hereunder
to the Executive. Anything contained herein to the contrary notwithstanding,
this Agreement shall not be assignable by the Executive.
(g) WAIVER OF BREACH. The waiver by either party of a breach
of any provision of this Agreement by the other party must be in writing and
shall not operate or be construed as a waiver of any subsequent breach by such
other party.
(h) SEVERABILITY. It is the desire and intent of the parties
hereto that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction.
4
<PAGE>
(i) INTERPRETATION AND CONSTRUCTION.
(i) This Agreement shall be construed according to
its fair meaning as if prepared jointly by the parties hereto.
(ii) Each section, subsection and lesser section of
this Agreement constitutes a separate and distinct undertaking,
covenant and/or provision hereof.
(iii) This Agreement may be executed in counterparts,
each of which shall be deemed an original, and all of which shall
constitute but one and the same instrument which may be sufficiently
evidenced by one counterpart.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
LILLIAN VERNON CORPORATION
BY:
--------------------------------
Lillian Vernon,
Chairman and Chief Executive
Officer
-----------------------------------
PAMELA F. KELLEY
5
Employment Agreement dated as of March 31, 2000, between RDF ACQUISITION
CORP., a Delaware corporation (the "Company") and PAMELA F. KELLEY (the
"Executive").
BACKGROUND
WHEREAS:
A. The Company has entered into an Asset Purchase Agreement with RUE DE
FRANCE, INC. ("RDF"), the shareholders of RDF and LILLIAN VERNON CORPORATION
("LVC") dated as of March 31, 2000, (the "Asset Purchase Agreement") to purchase
substantially all of the assets of RDF;
B. The Executive has been a shareholder, director and officer of RDF, and
as such has substantial experience that has value to the Company;
C. The Company desires to employ the Executive on the terms and subject to
the conditions hereinafter set forth; and
D. Capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in the Asset Purchase Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and obligations hereinafter set forth, the parties hereto agree as
follows:
1. EMPLOYMENT. (a) The Company hereby employs the Executive, and the
Executive hereby accepts employment with the Company, upon the terms and
conditions set forth in this Agreement for the period beginning on the date
hereof and ending five (5) years from the date hereof unless sooner terminated
pursuant to the terms hereof (the "Initial Employment Period").
(b) After the expiration of the Initial Employment Period, this Agreement
shall continue at will terminable upon six (6) months' prior written notice by
either party to the other, which notice may be given at any time provided the
effective date of termination set forth in such notice is on or after the end of
the Initial Employment Period. (The entire period of employment is hereinafter
referred to as the "Employment Period".)
2. DUTIES. During the Employment Period, the Executive shall be employed by
the Company as its President and shall perform such duties and services
consistent with such position as may be assigned to the Executive by the Board
of Directors of the Company. In
<PAGE>
addition, Executive shall perform such other services for LVC and its Affiliates
as may be reasonably requested by the President or Chief Executive Officer or
Chairman of the Board of Directors of LVC, all without further compensation
hereunder from LVC or any such Affiliate; provided, however, that the parties
recognize that Executive's primary responsibilities shall be to manage and
promote the business of the Company and, accordingly, such other services shall
not be of a nature such that they would materially detract from the ability of
Executive to fulfill such responsibilities. The Executive shall devote
Executive's business time, attention and energies on a full-time basis to the
performance of the duties and responsibilities hereunder.
3. COMPENSATION; BENEFITS; REIMBURSEMENT.
(a) BASE SALARY. During the Employment Period, the Company shall pay to the
Executive an annual base salary of One Hundred Thousand ($100,000) Dollars (such
salary being referred to herein as the "Base Salary"). The Base Salary shall be
payable in such installments (but not less frequently than monthly) as is the
policy of the Company.
(b) BENEFITS. During the Employment Period, the Executive shall be entitled
to such benefits (the "Benefit Arrangements") as are generally made available
from time to time to Vice Presidents of LVC who are not members of LVC's
Management Committee (other than benefits under LVC's bonus policy) subject to
the right of the Company to amend or terminate any or all such Benefit
Arrangements.
(c) REIMBURSEMENT OF EXPENSES. During the Employment Period, the Company
shall reimburse the Executive, in accordance with the policies and practices of
LVC in effect from time to time with respect to Vice Presidents of LVC who are
not members of its Management Committee, for all reasonable and necessary
traveling expenses and other disbursements incurred by Executive for or on
behalf of the Company in connection with the performance of Executive's duties
hereunder upon presentation by the Executive to the Company of appropriate and
timely documentation therefor.
(d) DEDUCTIONS. The Company shall deduct from any payments to be made by it
to the Executive under this Agreement any amounts required to be withheld in
respect of any Federal, state or local income or other taxes and any amounts
required to be deducted pursuant to the terms of the Benefit Arrangements.
4. PERFORMANCE BONUSES.
(a) The Company agrees to pay to the Executive a bonus of Fifty Thousand
($50,000) Dollars for each EBT Year during the Employment Period in which the
Company earns one-half (1/2) or more of the Projected EBT for such year set
forth in Schedule 1.5(a) to the Asset Purchase Agreement (the "Annual
Performance Bonus").
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(b) EBT shall be determined in accordance with generally accepted
accounting principles consistently applied except that the EBT of the Company
for the period March 1, 2000 through the Closing Date shall be added to the
Company's EBT for the First EBT Year and except that the amortization of any
goodwill or any other intangible assets created as a result of the purchase of
the Purchased Assets shall not be deducted and if any functions are performed
for the Company by LVC or any of its Affiliates such as, but not limited to,
accounting, warehousing, purchasing or distribution, then the cost for such
functions shall be charged to the Company as set forth in Schedule 1.5(b) to the
Asset Purchase Agreement. In computing EBT, the Company shall be charged
interest, fees and costs on all borrowings both short term and long term,
outstanding intercompany balances, capital invested in the Company by LVC
(excepting the Fixed Portion of the Purchase Price and the Contingent Portion of
the Purchase Price) and letters of credit at LVC's cost to borrow money or to
establish letter of credits, as the case may be.
(c) The sales of all products using the Rue de France service mark as well
as the sales of any other collection of products under any other name whether
similar or dissimilar to RDF's current line of products or price points and
whether through a catalog, website or other direct marketing medium or through
retail stores (each, a "New Business Initiative") which New Business Initiative
was developed by Executive with the approval of LVC shall be conducted by the
Company or if conducted by LVC, the Company shall be given credit for the EBT
generated by the sales of such products. The foregoing shall not prevent LVC
from including in its catalogs products offered for sale by the Company and VICE
VERSA. Any such New Business Initiative proposed by Executive shall be subject
to the same review and capital budget process as is required by the policies of
LVC in effect from time to time with respect to such matters for LVC.
(d) A calculation of the Company's EBT in reasonable detail shall be
delivered to Executive within ninety (90) days following the end of each EBT
Year during the Initial Employment Period, and, if it shows that the Annual
Performance Bonus has been earned for such EBT Year, then it shall be
accompanied by payment of the same. The payment of any earned Annual Performance
Bonus shall be conditioned upon Executive being employed by the Company through
the end of the applicable EBT Year; provided, however, the foregoing condition
shall not apply if the Company has terminated Executive's employment without
Cause or Executive has terminated Executive's employment hereunder for Good
Reason (as Cause and Good Reason are hereinafter defined), provided, further,
however, if Executive's employment is terminated by reason of Executive's death
or because Executive becomes disabled (defined below), then any Annual
Performance Bonus which would otherwise be due Executive shall be pro rated in
the year this Agreement is so terminated by multiplying such Annual Performance
Bonus by a fraction, the numerator of which is equal the number of days elapsed
from the beginning of such EBT Year until the termination of this Agreement and
the denominator of which is equal to 365 days. The calculation of the Company's
EBT shall be final and binding upon the Executive unless the Executive objects
to the same within thirty (30) days after Executive receives the Company's
calculation of the same. Such objections shall be in writing and shall set forth
in reasonable detail the basis of such objections. If the calculation of the
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Company's EBT is timely disputed by the Executive and the Executive and the
Company cannot resolve such dispute within thirty (30) days after the Company
receives the Executive's written objections, then such dispute shall be
submitted to the American Arbitration Association in the City of New York for
determination in accordance with its rules, and the fees and expenses of the
arbitrators and the American Arbitration Association shall be borne equally by
the parties.
5. TERMINATION
(a) The Company shall be entitled, in accordance with the procedures set
forth below, to terminate this Agreement and to discharge the Executive for
"Cause" without further obligation or liability on the part of the Company under
the terms of this Agreement or otherwise relating to Executive's employment
except for accrued compensation and benefits. The term Cause shall be limited to
the following grounds:
(i) The Executive materially breaches any of Executive's obligations
to the Company hereunder or fails to comply with any material written
policy of the Company which is generally applicable to employees at
Executive's level; provided, however, if such breach is capable of being
remedied (a "Remediable Obligation"), then the Executive shall have a
period of ten (10) business days to cure such breach after Executive has
received written notice from the Company specifying such breach in
reasonable detail;
(ii) The Executive shall materially breach any such Remediable
Obligation on a second occasion after Executive has received written notice
of such breach as provided in subsection 5(a)(i) above;
(iii) Conviction of a felony crime;
(iv) Theft or misappropriation of the property of the Company or of
any of its Affiliates;
(v) Intentionally making a material false written statement regarding
the affairs of the Company to a director or auditor or attorney, or to an
officer, of either the Company or LVC;
(vi) Intentionally making a material false oral statement regarding
the affairs of the Company to a director or auditor or attorney, or to an
officer, of either the Company or LVC; provided, however, that such oral
statement shall have been made by Executive to two (2) or more of such
persons at either the same or different times; and
(vii) Executive shall become disabled.
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For purposes of this Agreement, "disabled" shall mean an illness,
disability or other incapacity (whether physical or mental) which has prevented
Executive from performing Executive's regular duties on a full-time basis for
ninety (90) consecutive days, or ninety (90) days in any consecutive twelve (12)
month period. In the event Executive disputes that Executive is disabled and
provides to the Company a written opinion of a licensed physician of the State
of Rhode Island (the "Executive's Physician") to that effect at Executive's
expense, then Executive agrees to submit to a physical examination by a licensed
physician of the State of New York chosen by the Company (the "Company's
Physician") at the Company's expense. If the Company's Physician issues a
written opinion to the effect that Executive is disabled, then such dispute
shall be submitted to a third physician chosen jointly by the Executive and the
Company (the "Neutral Physician"). If the Executive and the Company cannot agree
upon the Neutral Physician within ten (10) days after the issuance of the
Company's Physician's opinion, then either party may apply to the American
Arbitration Association for the appointment of the Neutral Physician. The
determination of the Neutral Physician shall be final and binding upon the
parties hereto. The fees and expenses of the Neutral Physician and, if
necessary, the American Arbitration Association shall be borne equally by the
parties.
(b) (i) In the event the Company terminates Executive's employment
without Cause during the Initial Employment Period (i.e., not pursuant to
the provisions of Section 5(a) above) or if Executive shall terminate this
Agreement during the Initial Employment Period for Good Reason as defined
below, then the Company shall pay to Executive in accordance with its then
customary payroll practices a severance amount equal to One Hundred
Thousand ($100,000) Dollars per annum (such amount not to be increased if
Executive's Base Salary is increased hereunder after the date hereof) plus,
if earned, the Annual Performance Bonus until the earlier of (x) the
expiration of the Initial Employment Period and (y) the date Executive
becomes employed by or becomes a consultant to anyone else (the "Severance
Period"). Executive shall be entitled to terminate this Agreement for "Good
Reason" if the Company materially breaches any of its obligations to
Executive hereunder; provided, however, if such breach is capable of being
remedied, then the Company shall have a period of ten (10) business days to
cure such breach after it has received written notice from Executive
specifying such breach in reasonable detail. Executive shall not be
obligated to mitigate damages. Although Executive shall not be considered
an employee of the Company during the Severance Period for vesting or any
other purpose whatsoever, Executive shall be entitled to continued medical
insurance and life insurance coverage under the Company's medical and life
insurance plans in effect from time to time during the Severance Period.
(ii) The above provisions are intended to fully compensate Executive
for a termination by the Company without Cause or a termination by
Executive for Good Reason and Executive shall have no other or further
claim against the Company for wrongful discharge under the terms of this
Agreement, pursuant to the Company's policies or under any Federal, state
or local law relating to termination of Executive's employment by the
Company.
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(iii) Notwithstanding the termination of this Agreement by the Company
without Cause or by the Executive with Good Reason, Executive's obligations
under Section 3.1 of the Asset Purchase Agreement and Executive's
obligations under the Intellectual Property Protection Agreement executed
simultaneously herewith shall continue and in addition to any and all other
legal and equitable remedies available to the Company under Section 3.1 of
the Asset Purchase Agreement or under the Intellectual Property Protection
Agreement, the Company's obligation to pay severance and, if earned, the
Annual Performance Bonus to Executive under this Section 5(b) shall
terminate if Executive violates any of the provisions thereof.
(c) The term of employment of Executive hereunder shall terminate in the
event of the death of Executive without further obligation or liability on the
part of the Company under the terms of this Agreement or otherwise relating to
Executive's employment, except that Executive shall be entitled to receive all
accrued Base Salary and, if earned, a pro rata portion of the Annual Performance
Bonus as provided in Section 4 hereof.
(d) If the Executive terminates her employment at any time without Good
Reason, then the Company shall have no further obligation or liability to
Executive under the terms of this Agreement or otherwise relating to Executive's
employment except for Base Salary and benefits accrued to the termination date
and payment of the Annual Performance Bonus but only if earned and payable to
her pursuant to the provisions of this Agreement. Notwithstanding any
termination of this Agreement by the Executive without Good Reason, Executive
shall remain obligated under Section 3.1 of the Asset Purchase Agreement and
under the Intellectual Property Protection Agreement.
6. CONFIDENTIALITY; NON-COMPETITION; RIGHTS TO PROPRIETARY PROPERTY.
In consideration of Executive's employment hereunder and the consummation
of the transactions contemplated under the Asset Purchase Agreement, the
Executive agrees to execute the Intellectual Property Protection Agreement
annexed hereto as Exhibit A. In addition, Executive acknowledges that she is
bound by the provision of Section 3.1 of the Asset Purchase Agreement, which
Section is titled "Confidentiality; Non-Competition".
7. KEY PERSON LIFE INSURANCE. Executive agrees to cooperate with the
Company including submitting to medical examinations and providing medical and
other information to life insurance carriers to enable the Company to obtain key
person life insurance on Executive's life for the benefit of the Company.
Executive hereby represents and warrants to the Company that to Executive's
knowledge Executive's life is insurable at no worse than standard rates.
8. EXECUTIVE'S REPRESENTATIONS. The Executive hereby represents and
warrants to the Company that (i) the execution, delivery and performance of this
Agreement by the Executive does not and will not conflict with, breach, violate
or cause a default under any agreement, contract or instrument to which the
Executive is a party or any judgment, order or decree to
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which the Executive is subject, (ii) the Executive is not a party to or bound by
any employment agreement, consulting agreement, noncompete agreement,
confidentiality agreement or similar agreement with any other person or entity
and (iii) upon the execution and delivery of this Agreement by the Company, this
Agreement will be a valid and binding obligation of the Executive, enforceable
in accordance with its terms.
9. GENERAL PROVISIONS.
(a) ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire
agreement between the parties hereto with respect to the transactions
contemplated hereby and supersedes all prior agreements or understandings
between the parties with respect thereto. This Agreement shall not be altered or
otherwise amended or terminated (except as provided in Sections 1(b) and 5
hereof) except pursuant to an instrument in writing signed by each of the
parties hereto.
(b) DESCRIPTIVE HEADINGS. Descriptive headings are for convenience only and
shall not control or affect the meaning or construction of any provisions of
this Agreement.
(c) NOTICES. All notices or other communications pursuant to this Agreement
shall be in writing and shall be deemed to be sufficient if telecopied or sent
by nationally-recognized, overnight courier to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
if to the Company, to:
c/o Lillian Vernon Corporation
One Theall Road
Rye, New York 10580-1450
Attention: Chief Executive Officer
Telecopier: (914) 925-1444
with copies to:
Salon, Marrow, Dyckman & Newman, LLP
685 Third Avenue
New York, New York 10017
Attention: Joel Salon
Telecopier: (212) 661-3339
if to the Executive, to:
Pamela F. Kelley
20 Willow Street
Newport, Rhode Island 02840
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with copies to:
Lawson & Weitzen, LLP
425 Summer Street
Boston, Massachusetts 02210
Attention: George Christodoulo
Telecopier: (617) 439-3987
All such notices and other communications shall be deemed to have been delivered
and received (A) in the case of delivery by telecopy, on the date of such
delivery if delivery is confirmed on that date by telephone call with the
recipient and (B) in the case of delivery by nationally-recognized, overnight
courier, on the Business Day (defined below) following dispatch. As used herein,
"Business Day" shall mean any day that is not a Saturday, Sunday or a day on
which banking institutions in New York, New York are not required to be open.
Failure to accept a notice does not invalidate same.
(d) ARBITRATION. Except as hereinafter provided with respect to injunctive
relief, the parties agree to arbitrate any and all claims, controversies or
disputes arising under or out of this Agreement or relating in any way thereto.
All such claims, controversies or disputes shall be submitted to arbitration in
the City of New York, State of New York, to arbitrators designated under and
pursuant to the Rules of the American Arbitration Association, and the
arbitration shall be had under the auspices of said Association and subject to
its rules. The parties consent to the jurisdiction of the Supreme Court of the
State of New York and of any United States District Court sitting in the State
of New York with respect to any and all proceedings relating to any such
arbitration, and the parties further agree that any and all process and notices
of motions or applications in relation to any such arbitration may be served
upon a party personally or by registered or certified mail, return receipt
requested. Such service may be accomplished either within or without the State
of New York, and such notice shall be given of all applications and hearings as
is provided by the laws of the State of New York. The award of the arbitrators
shall be final and binding upon the parties and judgment thereon may be entered
as provided by the laws of the State of New York. Executive acknowledges that
the Company's remedy at law for breach by Executive of the provisions of the
Intellectual Property Protection Agreement is inadequate. Accordingly, Executive
agrees that in addition to all other rights and remedies which the Company may
have, the Company shall have the right to apply for injunctive relief in the
Supreme Court of the State of New York or the United States District Courts
sitting in the State of New York (or any other court of competent jurisdiction)
and Executive consents to the IN PERSONAM jurisdiction of the Supreme Court of
the State of New York or the United States District Courts sitting in the State
of New York whether or not Executive is then residing in the State of New York.
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(e) GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF THE
STATE OF NEW YORK OR ANY OTHER JURISDICTION OTHER THAN THE STATE OF NEW YORK) TO
BE APPLIED. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF
NEW YORK WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT,
EVEN IF UNDER SUCH JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE
SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.
(f) BENEFITS OF AGREEMENT; ASSIGNMENT. The terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors, assigns, representatives, heirs and estate, as
applicable. If this Agreement is assigned by the Company in connection with the
sale of all or substantially all of the operating assets of the Company and the
obligations hereunder of the Company are assumed in writing by the purchaser of
such assets, then in such event the Company shall have no further liability
hereunder to the Executive. Anything contained herein to the contrary
notwithstanding, this Agreement shall not be assignable by the Executive.
(g) WAIVER OF BREACH. The waiver by either party of a breach of any
provision of this Agreement by the other party must be in writing and shall not
operate or be construed as a waiver of any subsequent breach by such other
party.
(h) SEVERABILITY. It is the desire and intent of the parties hereto that
the provisions of this Agreement be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision of this
Agreement shall be adjudicated by a court of competent jurisdiction to be
invalid, prohibited or unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction.
(i) INTERPRETATION AND CONSTRUCTION.
(i) This Agreement shall be construed according to its fair meaning as
if prepared jointly by the parties hereto.
(ii) Each section, subsection and lesser section of this Agreement
constitutes a separate and distinct undertaking, covenant and/or provision
hereof.
(iii) This Agreement may be executed in counterparts, each of which
shall be deemed an original, and all of which shall constitute but one and
the same instrument which may be sufficiently evidenced by one counterpart.
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IN WITNESS WHEREOF, the parties have duly executed this Employment
Agreement as of the date first above written.
RDF ACQUISITION CORP.
By:
-----------------------------------
Kevin A. Green, President
--------------------------------------
PAMELA F. KELLEY
The undersigned LILLIAN VERNON CORPORATION does hereby unconditionally
guaranty the due and timely performance by the Company of its obligations under
the foregoing Employment Agreement between the Company and Pamela F. Kelley.
Dated: As of March 31, 2000
LILLIAN VERNON CORPORATION
By:
----------------------------------
Lillian Vernon,
Chief Executive Officer
INTELLECTUAL PROPERTY PROTECTION AGREEMENT
In consideration of my employment -- and of my continued employment --
and my compensation, and the equipment, materials, facilities and the Company's
Confidential Information supplied to me, the Company and I understand and agree
that:
1. RECORDS OF INVENTIONS AND WORKS OF AUTHORSHIP. I will keep complete
and current written records of all Inventions and Works of Authorship (including
illustrations, writings, mask works, software and computer programs) I make
during the period of time I am employed by the Company and promptly and
completely disclose all such Inventions and Works of Authorship in writing to
the Company for the purpose of adequately determining the Company's rights in
each such Invention and Work of Authorship. I will supplement any such
disclosures to the extent the Company may request. If I have any doubt as to
whether or not to disclose an Invention or Work of Authorship to the Company, I
will disclose it. In this connection, I will not file any patent or copyright
application relating to any Invention or Work of Authorship I Make during the
period of time I am employed by the Company without the prior written approval
of the Company.
2. OWNERSHIP OF INVENTIONS AND WORKS OF AUTHORSHIP. Each and every
Invention and Work of Authorship I Make during the period of time I am employed
by the Company which (a) relates to the business of the Company or to the
Company's actual or demonstrably anticipated research or development, (b)
results from any work I perform for the Company, or (c) relates to the Company's
Confidential Information, is the sole and exclusive property of the Company and
I will assign my entire right, title and interest in each such Invention or Work
of Authorship to the Company, except those excluded from any obligation to
assign to the Company as a matter of law existing at the time such Invention or
Work of Authorship is Made. If I assert any property right in an Invention or
Work of Authorship I Make during the period of time I am employed by the Company
as provided by law, I will promptly notify the Company in writing.
3. DISCLOSURE OF INVENTION OR WORK OF AUTHORSHIP AFTER TERMINATION. I
will promptly and completely disclose in writing to the Company all Inventions
or Works of Authorship which I Make during the one year period immediately
following the end of my employment with the Company which (a) relates to the
business of the Company or to the Company's actual or demonstrably anticipated
research or development, (b) results from work I performed for the Company, or
(c) relates to the Company's Confidential Information, for the purpose of
determining the Company's rights in each such Invention or Work of Authorship.
During this period, I will not file any patent or copyright application relating
to any such Invention or Work of Authorship without the prior written consent of
the Company. If I do not prove that I Made the Invention or Work of Authorship
entirely after leaving the Company's employment or if I do not prove that the
Invention or Work of Authorship does not in any way relate to my work assignment
at the Company, to the Company's business, or to the Company's Confidential
Information, the Invention or Work of Authorship shall conclusively be presumed
to be the property of the Company. I acknowledge that the conditions of this
paragraph are no greater than is necessary for protecting the Company's
interests in the Company's Confidential Information and in Inventions or Works
of Authorship to which it is rightfully entitled. I agree to assign to the
Company all of my interest in such Inventions or Works of Authorship belonging
to the Company and I will execute any papers and do any acts which the Company
considers necessary to secure to it any all rights relating to such Inventions
or Works of Authorship.
4. COOPERATION WITH THE COMPANY. I will assist and fully cooperate with
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Company in obtaining and maintaining the fullest measure of legal protection
which the Company elects to obtain for Inventions and Works of Authorship in
which it has a property right. I will execute any lawful document the Company
requests me to execute relating to obtaining and maintaining legal protection
for any said Invention or Work of Authorship (including, but not limited to,
executing applications, assignments, oaths, declarations, and affidavits) and I
will make myself available for interviews, depositions and testimony relating to
any said Invention or Work of Authorship.
5. PRE-EMPLOYMENT INVENTIONS OR WORKS OF AUTHORSHIP. On Schedule A (an
integral part of this Agreement on page 6) I have completely identified, without
disclosing any trade secret or other confidential information, every Invention
or Work of Authorship I made before my employment by the Company in which I have
an ownership interest, and which is not the subject matter of an issued patent
or printed publication at the time I sign this Agreement. If I become aware of
any projected or actual use of any such Invention or Work of Authorship by the
Company, I will promptly notify the Company in writing of said use. Except as to
the Inventions or Works of Authorship listed on Schedule A or those which are
the subject matter of an issued patent or printed publication at the time I sign
this Agreement, I will not assert any rights against the Company with respect to
any Invention or Work of Authorship made before my employment with the Company.
6. THE COMPANY'S CONFIDENTIAL INFORMATION; RESTRICTIVE COVENANTS.
During the period of time I am employed by the Company and indefinitely
thereafter with respect to Confidential Information which constitute trade
secrets and for a period of five years after my employment with the Company
terminates with respect to Confidential Information which does not constitute
trade secrets, I will not, directly or indirectly, use the Company's
Confidential Information except in the furtherance of the Company's business nor
will I disclose or disseminate the Company's Confidential Information to anyone
who is not an officer, director, employee, attorney or authorized agent of the
Company without the prior written consent of the Company, unless the specific
item of the Company's Confidential Information is now in, or hereafter (through
no breach of this Agreement) becomes part of the public domain; provided,
however, I agree that none of the provisions of this Agreement including the
foregoing exception for Confidential Information which becomes part of the
public domain and the five year time period with respect to certain Confidential
Information shall be construed to constitute: (a) a waiver by the Company of any
of its right in, or to protect specific items of the Company's Confidential
Information which constitute trade secrets, or (b) a release of or limit to my
legal obligation not to disclose or misappropriate any such Company trade
secrets, during or after my employment with the Company. I understand that such
use, disclosure or dissemination of the Company's Confidential Information would
become accessible to and reasonably be considered useful to a competitor of the
Company or to a third party which would be assisted in becoming a competitor of
the Company. I will execute any agreement relating to the protection of the
Company's Confidential Information or the Confidential Information of any third
party with whom the Company is under legal obligation to protect that third
party's confidential information if the Company requests.
During the period of time that I am employed by the Company, and for a
period (the "Restricted Period") equal to the longer of (x) five years after the
date hereof and (y) ninety days after the termination of my employment with the
Company, regardless of the reasons for or circumstances surrounding such
termination of employment, I will not without prior written consent of the
Company become in competition with the Company, or directly or indirectly accept
employment with, or render services on behalf of, a competitor of the Company or
any other third party in any capacity where the Confidential Information of the
Company acquired by
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me during my employment with the Company would reasonably be considered to be
useful to the competitor or to such other third party to become a competitor of
the Company based in whole or in part on such Confidential Information or where
it could be reasonably anticipated that I would use, disclose or otherwise
compromise the integrity of such Confidential Information.
Without limiting the foregoing, during the Restricted Period I will not
attempt to divert nor assist others to acquire any Company business by
soliciting, contacting or communicating with any customer or supplier of the
Company's products or services with whom I had contact during the year preceding
termination of my employment.
I acknowledge that all documents and tangible things embodying or
containing the Company's Confidential Information are the Company's exclusive
property. I have access to them solely for performing the duties of my
employment for the Company. I will protect the confidentiality of their content
and I will return all of them and all copies, facsimiles and specimens of them
(including excerpts or portion thereof) and any other forms of the Company's
Confidential Information in my possession, custody or control to the Company
before leaving the employment of the Company.
I recognize that irreparable and incalculable injury will result to the
Company, its business and property, in the event of a breach by me of the
restrictions imposed by this Agreement. I therefore agree that in the event of
any such breach, the Company shall be entitled, in addition to any other
remedies and damages, to an injunction restraining further violation of such
restrictions by me and/or by any other person for whom I may be acting or who is
acting for me or in concert with me. If the Company is awarded an injunction or
other remedy in connection with the enforcement of such restrictions, I further
agree to pay all costs and expenses (including attorney's fees) reasonably
incurred by the Company in such enforcement effort. I waive any requirement for
security or the posing of any bond or other surety and proof of damages in
connection with any temporary or permanent award of injunctive, mandatory or
other equitable relief and I further agree to waive the defense in any action
for specific performance that a remedy at law would be adequate. I WAIVE THE
RIGHT TO A JURY TRIAL OF ANY SUCH ACTION.
In the event that any of the provisions of this Paragraph 6 should ever
be adjudicated to exceed the time, geographic, product or service, or other
limitations permitted by applicable law in any jurisdiction, then the court
shall have the power and shall reform the provisions of this Paragraph 6 in such
jurisdiction to the maximum time, geographic, product or service, or other
limitation permitted by applicable law.
By entering into this Agreement, I acknowledge that: (i) I am familiar
with the nature of the Company's business; (ii) I have read and understand the
nature and scope of the restrictions set forth in this Agreement; and (iii) that
the Company has invested and will continue to invest substantial effort and sums
of money to develop and promote the Company products, services and goodwill
together with Confidential Information. I THEREFORE ACKNOWLEDGE AND REPRESENT
THAT THE SCOPE OF SUCH RESTRICTIONS ARE APPROPRIATE, NECESSARY AND REASONABLE
FOR THE PROTECTION OF THE BUSINESS, GOODWILL AND PROPERTY RIGHTS OF THE COMPANY
AND WILL NOT PREVENT OR HINDER ME FROM EARNING A LIVING IN THE EVENT OF, AND
AFTER, TERMINATION OF MY EMPLOYMENT WITH THE COMPANY.
7. CONFIDENTIAL INFORMATION FROM PREVIOUS EMPLOYMENT. I certify that I
have not, and will not, disclose or use during my employment with the Company,
any confidential
3
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information which I acquired as a result of any previous employment or under a
contractual obligation of confidentiality before my employment by the Company
except as may be otherwise consented to by the owner thereof in writing.
8. PRIOR RESTRICTIVE OBLIGATIONS. On Schedule B (an integral part of
this Agreement on page 6) I have completely identified all prior obligations
(written and oral), such as confidentiality agreements or covenants restricting
future employment, that I have entered into which restrict my ability to perform
the duties of my employment for the Company. I agree to indemnify and hold the
Company harmless from all liabilities and expenses resulting from my failure to
identify all my prior obligations.
9. NOTICE TO FUTURE EMPLOYERS. During the Restricted Period I will
inform each new employer, prior to my employment, of the existence of this
Agreement and provide the new employer with a copy of this Agreement. I further
agree that the Company may, if it so desires, send a copy of this Agreement to,
or otherwise make the provisions hereof known to, any such new employer.
10. MISCELLANEOUS. This Agreement binds my heirs, executors,
administrators, legal representatives and assigns and inures to the benefit of
the Company and its successors and assigns.
Only a written amendment executed by both myself and the Company can
constitute a waiver or modification of any provision of this Agreement.
This Agreement becomes effective when I sign it, my obligations under
it continue throughout the entire period of time I am employed by the Company,
without regard to the business organization within the Company with which I am
associated, and these obligations will continue after, and survive, the end of
my employment by the Company. I acknowledge that the foregoing obligations of
mine and the rights and remedies of the Company hereunder shall be in addition
to and not in derogation of any obligations to the Company which I may have and
the rights and remedies which the Company may have by reason of the operation of
law or by reason of any other agreements between me and the Company whether
executed prior to, or on or after the date hereof.
If a court of competent jurisdiction determines that any portion of
this Agreement is illegal, invalid or unenforceable, then, subject to the
provisions regarding reformation set forth in paragraph 6 hereof, that portion
shall be considered to be removed from this Agreement and it shall not affect
the legality, validity or enforceability of the remainder of this Agreement and
the remainder of this Agreement shall continue in full force and effect. This
Agreement shall be governed by, and construed under, the laws of the State of
New York without regard to its conflicts of law rules.
11. DEFINITIONS.
a. "The Company" refers collectively to RDF Acquisition Corp.,
a Delaware corporation, having a place of business at 28 Jacome Way, Middletown,
Rhode Island 02842, Lillian Vernon Corporation and its subsidiaries and
affiliates and their respective predecessors, designees and successors and their
past, present and future operating companies, divisions, parents, subsidiaries,
affiliates and other business units;
b. "The Company Confidential Information" is any information
used in the
4
<PAGE>
Company's business which gives the Company an advantage over competitors who do
not know or use such information (for example, a formula, manufacturing process,
manufacturing equipment, proprietary compound, customer list, marketing plans,
financial data, business data, etc.) and includes not only information
designated by the Company as confidential information but also the Company's
other trade secrets and other confidential or proprietary information, or
confidential information entrusted to it;
c. "Inventions" or "Works of Authorship" include not only
inventions (whether or not patentable) or works of authorship (whether or not
copyrightable), but also innovations, improvements, discoveries, ideas and all
other forms of intellectual property - whether or not any of the foregoing
constitutes trade secrets or other confidential or proprietary information; and
d. "Make" or "Made", used in relating to Inventions or Works
of Authorship includes any one or any combination of (i) conception; (ii)
reduction to practice, or (iii) development of, any Invention or Work of
Authorship and is without regard to whether I am sole or joint inventor or
author.
Employee:
Dated: As of March 31, 2000
------------------------------------------
(Identified throughout this Agreement by the
use of the first person singular)
Printed
Name: PAMELA F. KELLEY
RDF ACQUISITION CORP.
Dated: As of March 31, 2000 By:
---------------------------------------
Kevin A. Green, President
5
<PAGE>
SCHEDULE A
PRE-EMPLOYMENT INVENTIONS AND WORKS OF AUTHORSHIP
Note: Please describe each such Invention and Work of Authorship you
made prior to your employment by the Company in which you have an
ownership interest and which is not the subject matter of an issued
patent or printed publication at the time you sign this Agreement. DO
NOT DISCLOSE CONFIDENTIAL INFORMATION.
N O N E
- ------------------------------------------------------------------------------
SCHEDULE B
PRIOR RESTRICTIVE OBLIGATIONS
Please identify all prior restrictive obligations (written and oral),
such as confidentiality agreements or covenants restricting future
employment that are in effect and which restrict your ability to
perform the duties of employment for the Company.
N O N E
6
<PAGE>
EXHIBIT A - INTELLECTUAL PROPERTY PROTECTION AGREEMENT
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Lillian Vernon International, Ltd., A New York corporation
Lillian Vernon Fulfillment Services, Inc., A Virginia corporation
LVC Retail Corporation, a Delaware corporation
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Lillian Vernon Corporation on Form S-8 (File Nos. 33-18849, 33-37694, 33-71250,
33-71252, 333-36467, 333-48951, 333-62283 and 333-63559) of our report dated
April 25, 2000, relating to the financial statements which appear in the 2000
Annual Report to Shareholders, which is incorporated in this Annual Report on
Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
May 24, 2000
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<ARTICLE> 5
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<S> <C>
<FISCAL-YEAR-END> FEB-26-2000
<PERIOD-END> FEB-26-2000
<PERIOD-TYPE> 12-MOS
<CASH> 35,364
<SECURITIES> 0
<RECEIVABLES> 22,403
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<INVENTORY> 33,926
<CURRENT-ASSETS> 97,289
<PP&E> 68,146
<DEPRECIATION> 33,054
<TOTAL-ASSETS> 141,318
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0
0
<COMMON> 104
<OTHER-SE> 114,274
<TOTAL-LIABILITY-AND-EQUITY> 141,318
<SALES> 241,773
<TOTAL-REVENUES> 241,773
<CGS> 117,369
<TOTAL-COSTS> 233,161
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 257
<INCOME-PRETAX> 10,350
<INCOME-TAX> 4,061
<INCOME-CONTINUING> 6,289
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,289
<EPS-BASIC> 0.69
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