<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, For Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Little Switzerland, Inc.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Little Switzerland, Inc.
------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
________________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
________________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
________________________________________________________________________
________________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
________________________________________________________________________
(5) Total fee paid:
________________________________________________________________________
[X] Fee paid previously with preliminary materials:
$14,247.00 paid previousy with preliminary proxy materials filed with the
Commission on March 5, 1998
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number
of the Form or Schedule and the date of its filing.
________________________________________________________________________
(1) Amount Previously paid:
________________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
________________________________________________________________________
(3) Filing Party:
________________________________________________________________________
(4) Date Filed:
________________________________________________________________________
<PAGE>
LITTLE SWITZERLAND, INC.
161-B CROWN BAY CRUISE SHIP PORT
ST. THOMAS, USVI 00804
April 3, 1998
Dear Little Switzerland Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of Little Switzerland, Inc. (the "Company") to be held on
Friday, May 8, 1998, at 10:00 a.m., local time, at State Street Bank and Trust
Company, Board Room, 33rd Floor, 225 Franklin Street, Boston, Massachusetts.
At the Special Meeting, you will be asked to approve the Agreement and Plan
of Merger, dated as of February 4, 1998 (the "Merger Agreement"), by and among
the Company, Destination Retail Holdings Corporation ("Parent"), LSI
Acquisition Corp., a wholly-owed subsidiary of Parent ("Sub"), Young Caribbean
Jewellery Company Limited, Alliance International Holdings Limited and CEI
Distributors Inc., providing for, among other things, the merger of Sub with
and into the Company (the "Merger"), with the Company as the surviving
corporation. As a result of the Merger, you will be entitled to receive $8.10
in cash, without interest, for each share of common stock, par value $.01 per
share, of the Company (the "Shares") held by you at the effective time of the
Merger. The affirmative vote of the holders of a majority of the outstanding
Shares entitled to vote at the Special Meeting is necessary to approve the
Merger Agreement and the transactions contemplated thereby.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO
APPROVE THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
Wasserstein Perella & Co., Inc., the Company's financial advisor, has rendered
its opinion, a copy of which is attached as Annex B to the accompanying Proxy
Statement, that states that, as of January 31, 1998, and based upon and subject
to certain matters stated therein, the cash consideration to be received by the
Company's stockholders (other than Stephen G.E. Crane and his affiliates)
pursuant to the Merger was fair to such stockholders from a financial point of
view.
The accompanying Proxy Statement provides detailed information concerning the
proposed Merger, the reasons for your Board of Directors' recommendation to
approve the Merger Agreement and the transactions contemplated thereby and
certain additional information. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED
AT THE SPECIAL MEETING, REGARDLESS OF THE NUMBER OF SHARES YOU HOLD. THEREFORE,
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY CARD AS SOON AS POSSIBLE,
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. THIS WILL NOT PREVENT
YOU FROM VOTING YOUR SHARES IN PERSON IF YOU SUBSEQUENTLY CHOOSE TO ATTEND THE
SPECIAL MEETING.
On behalf of your Board of Directors, thank you for your cooperation and
continued support.
Very truly yours,
/s/ C. William Carey
C. WILLIAM CAREY
Chairman of the Board
<PAGE>
LITTLE SWITZERLAND, INC.
161-B CROWN BAY CRUISE SHIP PORT
ST. THOMAS, USVI 00804
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FRIDAY, MAY 8, 1998
----------------
NOTICE IS HEREBY GIVEN that the Special Meeting of Stockholders (the
"Special Meeting") of Little Switzerland, Inc., a Delaware corporation (the
"Company"), will be held on Friday, May 8, 1998, at 10:00 a.m., local time, at
State Street Bank and Trust Company, Board Room, 33rd Floor, 225 Franklin
Street, Boston, Massachusetts for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Merger, dated as of February 4, 1998 (the "Merger Agreement"), by and
among the Company, Destination Retail Holdings Corporation, a Nevis
corporation ("Parent"), LSI Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of Parent ("Sub"), Young Caribbean Jewellery
Company Limited, Alliance International Holdings Limited and CEI
Distributors Inc., providing for among other things, the merger of Sub with
and into the Company (the "Merger"), with the Company as the surviving
corporation. As a result of the Merger, each stockholder of the Company
will be entitled to receive $8.10 in cash, without interest, for each share
of common stock, par value $.01 per share, of the Company (the "Shares")
held by such stockholder at the effective time of the Merger. The Merger
Agreement, the Merger and other related matters are more fully described in
the accompanying Proxy Statement and the Annexes thereto.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
The Board of Directors of the Company has fixed the close of business on
Monday, March 30, 1998 as the record date (the "Record Date") for the
determination of stockholders entitled to notice of and to vote at the Special
Meeting. Only holders of Shares of record at the close of business on the
Record Date are entitled to notice of and to vote at the Special Meeting and
any adjournment or postponement thereof.
If the Merger is consummated, certain record stockholders of the Company who
comply with Section 262 of the Delaware General Corporation Law shall be
entitled to an appraisal by the Delaware Court of Chancery of the fair value
of their Shares. See "Terms of the Merger--Appraisal Rights" in the
accompanying Proxy Statement for a statement of the rights of dissenting
stockholders and a description of the procedures required to be followed to
obtain the fair value of the Shares, and Annex C thereto for a complete copy
of Section 262 of the Delaware General Corporation Law.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SIGN, DATE AND
MAIL THE ENCLOSED PROXY CARD IN THE ENCLOSED, POSTAGE PAID ENVELOPE. YOU MAY,
IF YOU WISH, REVOKE THE PROXY AT ANY TIME PRIOR TO THE SPECIAL MEETING,
INCLUDING BY VOTING IN PERSON AT THE SPECIAL MEETING. IF YOU HAVE ANY
QUESTIONS OR REQUIRE ASSISTANCE IN VOTING YOUR SHARES, PLEASE CALL D.F. KING &
CO., INC., WHICH IS ASSISTING THE COMPANY, TOLL-FREE AT 1-800-848-3410.
BY ORDER OF THE BOARD OF DIRECTORS
OF LITTLE SWITZERLAND, INC.
RICHARD E. FLOOR
Secretary
Boston, Massachusetts
April 3, 1998
IMPORTANT
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
PROMPTLY AFTER THE MERGER, A LETTER OF TRANSMITTAL WILL BE MAILED TO YOU
TO USE IN CONNECTION WITH SURRENDERING YOUR CERTIFICATES.
<PAGE>
LITTLE SWITZERLAND, INC.
161-B CROWN BAY CRUISE SHIP PORT
ST. THOMAS, USVI 00804
(340) 776-2010
---------------
PROXY STATEMENT
---------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FRIDAY, MAY 8, 1998
This Proxy Statement is being furnished to the holders (collectively, the
"Stockholders" and individually, a "Stockholder") of common stock, par value
$.01 per share (the "Common Stock"), of Little Switzerland, Inc., a Delaware
corporation (the "Company"), in connection with the solicitation of proxies by
the Board of Directors of the Company (the "Board") for use at a Special
Meeting of Stockholders of the Company (the "Special Meeting") to be held on
Friday, May 8, 1998, at 10:00 a.m., local time, at State Street Bank and Trust
Company, Board Room, 33rd Floor, 225 Franklin Street, Boston, Massachusetts.
This Proxy Statement, the Notice of Special Meeting of Stockholders and the
accompanying proxy card are first being mailed to the Stockholders on or about
Friday, April 3, 1998, in connection with the solicitation of proxies for the
Special Meeting. Only Stockholders of record at the close of business on
Monday, March 30, 1998 (the "Record Date") will be entitled to vote at the
Special Meeting.
At the Special Meeting, you will be asked to consider and approve the
Agreement and Plan of Merger, dated as of February 4, 1998 (the "Merger
Agreement"), by and among the Company, Destination Retail Holdings
Corporation, a Nevis corporation ("Parent"), LSI Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Parent ("Sub"), Young Caribbean
Jewellery Company Limited, a Cayman Islands corporation and a subsidiary of
Parent ("YCJCL"), Alliance International Holdings Limited, a Bahamian
corporation and a wholly-owned subsidiary of Parent ("AIHL"), and CEI
Distributors Inc., a British Virgin Islands corporation and a wholly-owned
subsidiary of Parent ("CEI" and, together with YCJCL and AIHL, the "Parent
Related Entities"), providing for, among other things, the merger of Sub with
and into the Company (the "Merger"), with the Company as the surviving
corporation (the "Surviving Corporation"). In connection with the Merger, (i)
each share of Common Stock of the Company (the "Shares") issued and
outstanding immediately prior to the effective time of the Merger (other than
Shares held in the treasury of the Company, or held by Parent, Sub, the Parent
Related Entities or any of their direct or indirect subsidiaries or by
Stockholders who perfect their appraisal rights under Delaware General
Corporation Law ("DGCL")) will be converted into the right to receive $8.10 in
cash, without interest, and (ii) each holder of an outstanding option to
purchase Shares (each, an "Option") under the Company's 1991 Stock Option
Plan, as amended (the "1991 Option Plan"), and 1992 Non-Employee Director
Stock Option Plan (the "1992 Option Plan," and, together with the 1991 Option
Plan, the "Option Plans") will be entitled to receive in settlement thereof a
cash payment equal to the excess (if any) of $8.10 over the per Share exercise
price of such Option multiplied by the total number of Shares subject to the
Option. In addition, immediately prior to the consummation of the Merger, the
Company will redeem all outstanding rights (the "Rights") under the
Shareholder Rights Agreement, dated as of July 25, 1991, between the Company
and State Street Bank and Trust Company, a Massachusetts trust company, as
amended (the "Shareholder Rights Agreement"), and each Stockholder will
receive the redemption price of $.01 for each Right held as of the effective
time of such redemption. See "The Merger and Related Transactions--Terms of
the Merger" and "The Merger Agreement."
All summaries and references to the Merger Agreement and the transactions
contemplated thereby in this Proxy Statement are qualified in their entirety
by reference to the text of the Merger Agreement that is attached hereto as
Annex A. It is not anticipated that any other matter will be brought before
the Special Meeting. If, however, other matters are presented, proxies will be
voted in accordance with the best judgment of the proxyholders. IN DETERMINING
WHETHER TO APPROVE THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY AT THE SPECIAL MEETING, STOCKHOLDERS SHOULD CONSIDER ALL OF THE
INFORMATION INCLUDED IN THIS PROXY STATEMENT, INCLUDING THE ANNEXES HERETO.
THE MERGER HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF SUCH MERGER OR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
THE DATE OF THIS PROXY STATEMENT IS APRIL 3, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational filing requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations promulgated thereunder and, in accordance therewith,
files periodic reports, proxy statements and other information with the
Commission relating to its business, financial condition and other matters.
Such reports, proxy statements and other information may be inspected and
copied at the Commission's public reference facilities at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and also should be
available for inspection and copying at the regional offices of the Commission
located at 75 Park Place, Room 1400, 14th floor, New York, New York 10007 and
at 73 Tremont Street, Boston, Massachusetts 02108-3912. Copies of such
material may be obtained upon payment of the Commission's customary fees by
writing to its principal office at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding the Company and other registrants that have been filed
electronically with the Commission. The address of such site is
http://www.sec.gov.
All information contained in this Proxy Statement with respect to the
Company and its subsidiaries has been supplied by the Company, and all
information with respect to Parent, Sub, the Parent Related Entities and Aspen
(as hereinafter defined) has been supplied by Parent.
All summaries and references to provisions of documents are qualified in
their entirety by reference to the copy of the applicable document if attached
as an Annex hereto.
(i)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY.................................................................... 1
Parties to the Merger Agreement.......................................... 1
Terms of the Merger...................................................... 1
Reasons for the Merger; Recommendation of the Board...................... 2
Fairness Opinion of the Financial Advisor................................ 3
Interests of Certain Officers and Directors in the Merger................ 3
Certain Federal Income Tax Consequences.................................. 3
Accounting Treatment..................................................... 4
Appraisal Rights......................................................... 4
The Special Meeting...................................................... 4
Record Date; Vote Required to Approve the Merger Agreement............... 5
The Merger Agreement..................................................... 5
Selected Financial Data of the Company................................... 7
Comparative Market Data.................................................. 8
THE MERGER AND RELATED TRANSACTIONS........................................ 9
Parties to the Merger Agreement.......................................... 9
Terms of the Merger...................................................... 9
Merger Financing......................................................... 11
Background of the Merger................................................. 11
Reasons for the Merger; Recommendation of the Board...................... 18
Fairness Opinion of the Financial Advisor................................ 21
Interests of Certain Officers and Directors in the Merger................ 26
Certain Effects of the Merger............................................ 28
Purpose and Structure of the Merger...................................... 29
Certain Federal Income Tax Consequences.................................. 29
Accounting Treatment..................................................... 30
Appraisal Rights......................................................... 30
THE SPECIAL MEETING........................................................ 33
Date, Time and Place of Special Meeting.................................. 33
Record Date and Outstanding Shares....................................... 33
Voting Rights and Quorum................................................. 33
Vote Required to Approve the Merger...................................... 34
Proxies and Revocation................................................... 34
Solicitation of Proxies and Expenses..................................... 35
Presence of Accountants.................................................. 35
THE MERGER AGREEMENT....................................................... 35
The Merger............................................................... 35
Conversion of Shares..................................................... 35
Conversion of Options.................................................... 36
Payment for Shares....................................................... 36
Redemption of Rights..................................................... 37
Representations and Warranties........................................... 37
Conduct of Business of the Company....................................... 38
No Solicitation.......................................................... 39
Indemnification and Insurance............................................ 40
Certain Other Covenants.................................................. 40
Conditions to the Merger................................................. 41
Termination; Termination Fee............................................. 42
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Amendment, Extension and Waiver.......................................... 43
INFORMATION ABOUT THE COMPANY.............................................. 43
Business of the Company.................................................. 43
Properties of the Company................................................ 47
Certain Legal Proceedings................................................ 47
SECURITY OWNERSHIP......................................................... 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION................ 50
Employee Defalcation Loss................................................ 50
The Company's Relationship with Rolex.................................... 51
Three and Six Month Periods Ended November 29, 1997 Compared to
Periods Ended November 30, 1996......................................... 51
Fiscal 1997 Compared to Fiscal 1996...................................... 52
Fiscal 1996 Compared to Fiscal 1995...................................... 53
Fiscal 1995 Compared to Fiscal 1994...................................... 54
Liquidity and Capital Resources.......................................... 55
Seasonality.............................................................. 56
Inflation................................................................ 56
Exchange Rates........................................................... 56
SUBMISSION OF STOCKHOLDER PROPOSALS........................................ 57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................. F-1
ANNEXES
Annex A: Merger Agreement
Annex B: Wasserstein Fairness Opinion
Annex C: Section 262 of DGCL
</TABLE>
(iii)
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement and the Annexes hereto relating to the proposed Merger.
In connection with the Merger, each Share issued and outstanding immediately
prior to the effective time of the Merger (other than Shares held in the
treasury of the Company, or held by Parent, Sub, the Parent Related Entities or
any of their direct or indirect subsidiaries or by Stockholders who perfect
their appraisal rights under DGCL) will be converted into the right to receive
$8.10 in cash, without interest. Unless the context indicates otherwise, all
references to the Company include on a consolidated basis all of its direct and
indirect subsidiaries. As used throughout this Proxy Statement, the terms
fiscal 1997, fiscal 1996, fiscal 1995, fiscal 1994 and fiscal 1993 refer to the
Company's twelve month periods ended May 31, 1997, June 1, 1996, May 31, 1995,
May 31, 1994 and May 31, 1993, respectively. This summary does not purport to
contain all material information relating to the Merger and is qualified in its
entirety by the more detailed information and financial statements contained in
this Proxy Statement. Stockholders should read this Proxy Statement and the
Annexes attached hereto carefully and in their entirety.
PARTIES TO THE MERGER AGREEMENT
The Company. The Company is a leading specialty retailer of luxury items,
including watches, jewelry, crystal, china, fragrances, gifts and accessories,
operating 24 stores on ten Caribbean islands and three stores in Alaskan cruise
ship destinations. The Company also has eight franchise locations in the
Bahamas. The Company's primary market consists of vacationing tourists
attracted by duty free pricing, lack of sales taxes and a wide variety of
quality merchandise. The Company's principal executive offices are located at
161-B Crown Bay Cruise Ship Port, St. Thomas, U.S.V.I. 00804, and its telephone
number is (340) 776-2010. For a more detailed description of the Company's
business, see "The Merger and Related Transactions--Parties to the Merger" and
"Information About The Company."
Parent. Parent is a privately owned Nevis corporation that operates 60 retail
stores located in the Bahamas, the Caribbean and Alaska. The merchandise
presently offered at such stores consists of emeralds and other gemstone
jewelry, watches and other luxury products. Parent's principal executive
offices are located at International Bazaar, P.O. Box F 40349, Freeport,
Bahamas, and its telephone number is (242) 352-5464. See "The Merger and
Related Transactions--Parties to the Merger."
Sub. Sub is a Delaware corporation recently formed by Parent for the sole
purpose of facilitating the Merger. Sub is a wholly-owned subsidiary of Parent
with no assets (other than those received in connection with its initial
capitalization) or liabilities, and Sub has conducted no activities to date
except for those incident to the Merger. Sub's principal executive offices are
located at International Bazaar, P.O. Box F 40349, Freeport, Bahamas, and its
telephone number is (242) 352-5464. See "The Merger and Related Transactions--
Parties to the Merger."
The Parent Related Entities. The Parent Related Entities comprise certain of
Parent's subsidiaries through which Parent conducts its business. See "The
Merger and Related Transactions--Parties to the Merger."
TERMS OF THE MERGER
The Merger Agreement provides for the merger of Sub with and into the
Company, with the Company being the Surviving Corporation. The Merger will
become effective upon the filing of a certificate of merger with the Secretary
of State of the State of Delaware (the "Effective Time"). In connection with
the Merger, (i) each issued and outstanding Share (other than Shares held in
the treasury of the Company, or held by Parent, Sub, the Parent Related
Entities or any of their direct or indirect subsidiaries, or by Stockholders
who perfect their appraisal rights under DGCL) will be converted into the right
to receive $8.10 in cash, without interest, and (ii)
<PAGE>
each holder of an outstanding Option will be entitled to receive in settlement
thereof a cash payment equal to the excess (if any) of $8.10 over the per Share
exercise price of such Option multiplied by the total number of Shares subject
to such Option. See "The Merger and Related Transactions--Terms of the Merger,"
"The Merger and Related Transactions--Certain Effects of the Merger" and "The
Merger and Related Transactions--Purpose and Structure of the Merger."
Prior to the execution of the Merger Agreement, the Board adopted the Third
Amendment to Shareholder Rights Agreement, dated as of February 4, 1998,
between the Company and State Street Bank and Trust Company, as rights agent
(the "Third Amendment"), amending the Shareholder Rights Agreement. As a result
of such Third Amendment, the Rights remain attached to, and are not tradeable
separately from, the outstanding Shares, notwithstanding the execution of the
Merger Agreement. Immediately prior to the Effective Time, the Company will
redeem all outstanding Rights, and Stockholders will receive the redemption
price of $.01 for each Right held as of the effective time of such redemption.
See "The Merger and Related Transactions--Terms of the Merger."
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD
The Board unanimously approved the Merger Agreement and the transactions
contemplated thereby at a special meeting of the Board held on January 31,
1998. THE BOARD BELIEVES THAT THE TERMS OF THE MERGER ARE IN THE BEST INTEREST
OF THE STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" APPROVAL OF
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
In reaching its determination, the Board consulted with the Company's
management, as well as its financial advisors, legal counsel and accountants,
and considered the short-term and long-term interests of the Company and its
Stockholders. In particular, the Board considered the following material
factors, all of which it deemed favorable: (i) the value of the per Share
consideration to be received by Stockholders in the Merger as compared to
historical and recent market prices of the Common Stock; (ii) information
relating to the historical financial performance, condition and business
operations of the Company; (iii) information relating to the retail market
conditions in general, the conditions of the luxury retail market in particular
and the prospects of the Company and, in connection therewith, the benefits and
risks to the Company of implementing its Long-Term Business Plan (as
hereinafter defined), which was developed with the assistance of a leading
international consulting firm; (iv) the lack of any feasible alternatives to
the Merger available to the Company that were as likely in the near term to
provide significant market value appreciation; (v) the Board's belief that the
Merger was the best offer reasonably available to the Stockholders, based in
part on the fact that, of the approximately 30 prospective strategic and
financial buyers whom the Company and Wasserstein solicited, Parent's offer was
the only firm offer received by the Company as a result of the sales process;
and (vi) the terms of the Merger Agreement, including the fixed cash
consideration, the absence of a financing condition for Parent and the specific
exclusion of, among other matters, any termination or change in terms by
Montrex Rolex, S.A. or any of its affiliates (collectively, "Rolex") of the
Company's relationship with Rolex from the condition that there be no material
adverse effect on the Company between execution of the Merger Agreement and
consummation of the Merger. The Board also considered as favorable to its
determination the analyses and presentations of Wasserstein and Wasserstein's
opinion, dated as of January 31, 1998, to the effect that, as of such date, and
based upon and subject to certain matters stated therein, the cash
consideration to be received by the Stockholders (other than Mr. Crane and his
affiliates) pursuant to the Merger was fair to such Stockholders from a
financial point of view. See "The Merger and Related Transactions--Fairness
Opinion of the Financial Advisor."
The Board also considered the following potentially negative factors, among
others, in its deliberations concerning the Merger Agreement and the
transactions contemplated thereby: (i) the Merger Agreement prohibits the
solicitation of other acquisition proposals and provides for the payment of a
termination fee of $2,481,100 by the Company under certain circumstances, and,
thus, renders it less likely that a more attractive offer for the
2
<PAGE>
acquisition of the Company would be presented to the Company and the
Stockholders; (ii) the potential termination or change in terms of the
Company's relationship with Rolex, the products of which accounted for more
than 20% of fiscal 1997 sales, following execution of the Merger Agreement, and
its potential adverse effect on the Company's business; (iii) information
relating to the rapid growth of the international travel retail shopping
industry and the Board's belief that the Company was well positioned to take
advantage of this growing industry; and (iv) the significant transaction costs
involved in consummating the Merger. The Board was also aware of the potential
benefits to certain directors and officers of the Company occurring as a result
of the Merger, discussed below under "--Interests of Certain Officers and
Directors in the Merger," and considered them, in addition to the factors set
forth above, in approving the Merger Agreement and the transactions
contemplated thereby. Overall, however, the Board concluded that the
potentially negative factors considered by it were not sufficient, either
individually or collectively, to outweigh the positive factors considered by
the Board in its deliberations relating to the Merger Agreement and the
transactions contemplated thereby.
For a discussion of the circumstances surrounding the Merger and the reasons
for the recommendation of the Board, see "The Merger and Related Transactions--
Background of the Merger" and "The Merger and Related Transactions--Reasons for
the Merger; Recommendation of the Board."
FAIRNESS OPINION OF THE FINANCIAL ADVISOR
On January 31, 1998, Wasserstein delivered its opinion to the Board to the
effect that, as of such date, and based upon and subject to certain matters
stated therein, the cash consideration to be received by the Stockholders
(other than Mr. Crane and his affiliates) pursuant to the Merger was fair to
such Stockholders from a financial point of view. The full text of
Wasserstein's opinion accompanies this Proxy Statement as Annex B.
Wasserstein's opinion is directed to the Board and addresses only the fairness
from a financial point of view of the consideration to be received by the
Stockholders (other than Mr. Crane and his affiliates) in connection with the
Merger. Wasserstein's opinion does not address the Company's underlying
business decision to effect the transactions contemplated by the Merger
Agreement, nor does it address the relative merits of the Merger as compared to
any alternative transaction or business strategy that may have been discussed
by the Board as alternatives to the Merger nor does it constitute a
recommendation to any Stockholder as to how to vote at the Special Meeting. For
a description of Wasserstein's opinion, including the procedures followed, the
matters considered and the assumptions made by Wasserstein in arriving at its
opinion, see "The Merger and Related Transactions--Fairness Opinion of the
Financial Advisor."
INTERESTS OF CERTAIN OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendation of the Board to approve the Merger
Agreement and the transactions contemplated thereby, Stockholders should be
aware that certain members of the management of the Company and the Board have
certain interests in, and will receive benefits as a consequence of, the Merger
that are separate from the interests of, and benefits to, the Stockholders
generally. Subject to certain conditions, upon consummation of the Merger,
members of the Investment Banking Committee of the Board are entitled to
receive a success fee equal to two-thirds of one percent of the aggregate value
of the Merger (approximately $645,000 in the aggregate). In addition, certain
directors and officers of the Company have interests in Options, severance and
other benefits, which may be triggered in connection with the Merger, and are
receiving certain indemnification and insurance protection under the terms of
the Merger Agreement. See "The Merger and Related Transactions--Interests of
Certain Officers and Directors in the Merger" and "The Merger Agreement--
Indemnification and Insurance." The Board was aware of these interests and
considered them, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is not covered by an opinion of counsel, nor did the
Company request a private letter ruling from the Internal Revenue Service (the
"IRS") with respect to any tax consequence of the Merger. Accordingly, no
assurance can be given that the IRS will agree with the statements that appear
below.
3
<PAGE>
The receipt of cash in exchange for Shares pursuant to the Merger, and the
receipt of cash by a Stockholder who exercises his, her or its appraisal rights
under DGCL, will be a taxable transaction for federal income tax purposes. A
Stockholder will generally recognize gain or loss for federal income tax
purposes in an amount equal to the difference between such Stockholder's
adjusted tax basis in the Shares and the amount of cash received in exchange
therefor (other than amounts received pursuant to a Stockholder's statutory
rights of appraisal that are denominated as interest, which amounts would be
taxable as ordinary income). Such gain or loss will be a capital gain or loss
if such Stockholder has held such Shares as capital assets within the meaning
of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code").
Such capital gain or loss will be a long-term capital gain or loss if such
Stockholder has held such Shares for more than 12 months as of the date of
exchange. In the case of a non-corporate Stockholder, the long-term capital
gain will be taxed at a minimum rate of 20% if such Stockholder has held such
Shares for more than 18 months and 28% if said Shares have been held for more
than 12 months but not more than 18 months. There are certain limitations on
the deductibility of capital losses. Cash received in exchange for Shares in
the Merger may be subject to a backup withholding tax at a rate of 31%, unless
the relevant Stockholder is an exempt recipient or complies with certain
identification procedures. For a more detailed discussion of the tax
consequences of the Merger, see "The Merger and Related Transactions--Certain
Federal Income Tax Consequences."
ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase," as such term is used under
generally accepted accounting principles, for accounting and financial
reporting purposes. See "The Merger and Related Transactions--Accounting
Treatment."
APPRAISAL RIGHTS
Stockholders (i) who continuously are the record holders of Shares between
the date of the making of a proper demand pursuant to the Section 262 of DGCL
and the Effective Time, (ii) who do not vote in favor of the Merger and (iii)
who otherwise perfect their appraisal rights in accordance with Section 262 of
DGCL, will be entitled to receive, following a statutory appraisal proceeding
in the Delaware Court of Chancery, cash in the amount of the fair value of
their Shares (exclusive of any element of value arising from the accomplishment
or expectation of the Merger) as determined by the Court in such appraisal
proceeding, in lieu of the $8.10 per Share cash consideration to be received in
the Merger. For a summary of the procedures applicable to the perfection of
appraisal rights, see "The Merger and Related Transactions--Appraisal Rights,"
and for a complete copy of Section 262 of DGCL, see Annex C hereto. Because of
the complexity of the procedures for exercising these rights, Stockholders who
consider exercising such rights are urged to seek the advice of counsel.
Stockholders electing to exercise their appraisal rights must not vote for
approval of the Merger Agreement. If a Stockholder returns a signed proxy card
but does not specify a vote against the approval of the Merger Agreement or a
direction to abstain, the proxy will be voted FOR the approval of the Merger
Agreement and the transactions contemplated thereby, which will have the effect
of waiving that Stockholder's appraisal rights. FAILURE TO TAKE ANY REQUIRED
STEP ON A TIMELY BASIS IN CONNECTION WITH THE EXERCISE OF APPRAISAL RIGHTS MAY
RESULT IN THE TERMINATION OR WAIVER OF SUCH RIGHTS.
As a condition to consummation of the Merger, no more than 5% of the total
number of Shares outstanding immediately prior to the Effective Time of the
Merger may be subject to a proper demand for appraisal rights under Section 262
of DGCL. See "Terms of the Merger--Conditions to the Merger."
THE SPECIAL MEETING
The Special Meeting will be held on Friday, May 8, 1998, at 10:00 a.m., local
time, at State Street Bank and Trust Company, Board Room, 33rd Floor, 225
Franklin Street, Boston, Massachusetts. The purpose of the Special Meeting is
to consider and vote upon a proposal to approve the Merger Agreement and the
transactions contemplated thereby, including the Merger. See "The Special
Meeting."
4
<PAGE>
RECORD DATE; VOTE REQUIRED TO APPROVE THE MERGER AGREEMENT
Only holders of Shares of record at the close of business on Monday, March
30, 1998 will be entitled to vote at the Special Meeting. A quorum being
present, the affirmative vote of the holders of a majority of the outstanding
Shares entitled to vote on the matter at the Special Meeting is required to
approve the Merger Agreement and the transactions contemplated thereby.
Approval of the Merger Agreement by the Stockholders is required under DGCL and
the Amended and Restated Certificate of Incorporation of the Company (as
amended from time to time, the "Certificate of Incorporation") and is a
condition to consummation of the Merger pursuant to the terms of the Merger
Agreement. See "The Special Meeting--Vote Required to Approve the Merger" and
"The Merger Agreement--Conditions to the Merger."
THE MERGER AGREEMENT
In addition to providing for the conversion of and payment for the Shares and
Options and the redemption and payment of the Rights, the Merger Agreement
includes certain additional provisions governing the rights and obligations of
the parties thereto, including the provisions summarized below. See "The Merger
Agreement."
Conduct of Business of the Company. The Company has agreed that, prior to the
Effective Time, it will, and will cause each of its subsidiaries to, conduct
its business in the ordinary course consistent with past practice and use all
reasonable efforts consistent with good business judgment to preserve intact
its current businesses. In addition, the Company has agreed that, prior to the
Effective Time, it will, and will cause its subsidiaries to, conduct its
business consistent with certain customary covenants. See "The Merger
Agreement--Conduct of Business of the Company."
No Solicitation. Each of the Company, its subsidiaries and their respective
directors, officers, employees, agents and representatives, including
Wasserstein, is generally prohibited from initiating, soliciting, encouraging,
entering into any agreement or participating in negotiations with respect to,
providing non-public information or cooperating with a third party in
connection with, or otherwise facilitating a proposal of an acquisition by or
business combination with a party other than Parent, Sub, the Parent Related
Entities and any of their respective directors, officers, partners, members,
managers, employees, representatives and agents. See "The Merger Agreement--No
Solicitation."
Conditions to Consummation of the Merger. The consummation of the Merger is
subject to satisfaction or waiver of certain conditions, including, among other
things, (i) requisite approval of the Stockholders, (ii) termination or
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended (the "HSR Act"), and any other applicable
anti-trust law and (iii) the lack of any changes or events since execution of
the Merger Agreement which, individually or in the aggregate, have had a
material adverse effect on the Company. See "The Merger Agreement--Conditions
to the Merger." Under the HSR Act and the rules promulgated thereunder by the
U.S. Federal Trade Commission (the "FTC"), the Merger may not be consummated
until notifications have been given and certain information has been furnished
to the FTC and the Antitrust Division of the U.S. Department of Justice (the
"DOJ") and the applicable waiting period has expired or been terminated. Each
of the Company and Mr. Crane, the controlling stockholder of Parent, filed
notification and report forms under the HSR Act with the FTC and the DOJ on
Friday, March 6, 1998. As requested by the Company and Mr. Crane, the wating
period was terminated early on March 16, 1998 by the FTC and the DOJ, without
any request for additional information from the Company or Mr. Crane.
Accordingly, the condition to the Merger regarding such waiting period has been
satisfied.
5
<PAGE>
Termination; Termination Fee. The Merger Agreement may be terminated under
certain circumstances at any time prior to the Effective Time, whether before
or after the approval of the Merger Agreement by the Stockholders. The Company
is obligated to pay Parent a termination fee (the "Termination Fee") equal to
$2,481,100 under the following circumstances: (i) if the Company terminates the
Merger Agreement because it has received a superior acquisition proposal and
the Board determines in good faith (A) upon advice of its financial advisor
that the proposal, if consummated as proposed, would result in a transaction
more favorable to the Stockholders from a financial point of view than the
Merger (including consideration of, among other things, the ability of the
third party to obtain any financing necessary to consummate a transaction ) and
(B) after consultation with and based upon advice from its outside legal
counsel, that the failure to accept such superior acquisition proposal could
reasonably be expected to be a breach of the directors' fiduciary duties; or
(ii) if Parent terminates the Merger Agreement because the Board withdrew or
modified in any adverse respect its approval or recommendation of the Merger
Agreement and the transactions contemplated thereby, failed to include in a
proxy statement such recommendation, endorsed or recommended to its
Stockholders any other acquisition proposal or resolved to do any of the
foregoing. See "The Merger Agreement--Termination; Termination Fee."
6
<PAGE>
SELECTED FINANCIAL DATA OF THE COMPANY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
--------------------------- ---------------------------------------------------
NOVEMBER 29, NOVEMBER 30, MAY 31, JUNE 1, MAY 31, MAY 31, MAY 31,
1997 1996 1997 1996 1995 1994 1993
------------ ------------ ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $41,404 $33,326 $88,314 $62,895 $72,240 $64,312 $63,396
Operating income
(loss)................. 388 (854) 2,661 1,666 4,736 5,221 6,556
Net income (loss)....... (326) (1,329) $ 1,159 $ 915 $ 3,694 $ 4,098 $ 5,191
======= ======= ======= ======= ======= ======= =======
Net income (loss) per
Share (1).............. $ (0.04) $ (0.16) $ 0.14 $ 0.11 $ 0.44 $ 0.49 $ 0.62
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA:
Total assets............ $89,403 $85,962 $77,391 $77,877 $58,446 $52,869 $54,160
Long-term debt.......... 5,281 7,513 6,119 8,068 -- -- --
OPERATING DATA:
Gross profit margin..... 42.7% 43.6% 43.7% 42.5% 42.8% 44.1% 46.2%
Operating income (loss)
margin................. 0.9% (2.6%) 3.0% 2.7% 6.6% 8.1% 10.3%
Stores open at period
end (2)................ 27(10) 25(9) 27(8) 27(7) 24(6) 23(5) 18(4)
Comparable store net
sales (decrease)
increase (3)........... 17.0% (23.6%) (14.3%) 17.3% 4.1% 0.6% 6.2%
</TABLE>
- --------
(1) See Notes 2 and 13 of Notes to Consolidated Financial Statements for the
fiscal year ended May 31, 1997, attached hereto, and Notes 5, 8 and 11 of
Notes to Consolidated Financial Statements for the quarter ended November
29, 1997, attached hereto.
(2) In addition to the stores described, the Company's franchisee, Solomon
Brothers Ltd., operates stores in the Bahamas pursuant to a franchise
agreement originally entered into in fiscal 1988 and amended and restated
as of November 1, 1996.
(3) Comparable store sales are calculated using sales of stores which were open
for the full period.
(4) During fiscal 1993, the Company opened a new store in St. Lucia.
(5) In fiscal 1994, the Company opened two "Little Treasures" stores in Curacao
and St. Thomas, a Little Switzerland store in St. Thomas and reopened a
Little Switzerland store in Aruba, which had been closed since November
1992 due to remodeling of the hotel in which it is located. In April 1994,
the Company acquired "La Parfumerie," a fragrance store in Antigua.
(6) In fiscal 1995, the Company opened a new Little Switzerland store on the
island of St. Martin on the French side and in Ketchikan, Alaska. Also, it
closed one store in St. Thomas due to the expiration of its lease.
(7) In fiscal 1996, the Company opened two new stores in Aruba and one in
Juneau, Alaska. In addition, it acquired two stores previously operating
under the name "Louis Bayley" on the island of Barbados. It also closed its
American Yacht Harbor and Little Treasures stores on St. Thomas.
(8) In fiscal 1997, the Company opened a new Little Switzerland store on the
island of St. Lucia and in Skagway, Alaska. Also, it closed a Little
Treasures store in Curacao and its accessories store in Aruba.
(9) During the six months ended November 30, 1996, the Company closed a Little
Treasures store in Curacao and its accessories store in Aruba.
(10) During the six months ended November 29, 1997, no new stores were opened
and no stores were closed.
7
<PAGE>
COMPARATIVE MARKET DATA
The Company's Common Stock is traded on the NASDAQ National Market System
under the symbol "LSVI." The following table sets forth, for the periods
indicated, the quarterly high and low closing sale prices per Share of the
Common Stock of the Company on the NASDAQ National Market System, as reported
by NASDAQ. The Company has never paid cash dividends on its Common Stock and
does not anticipate paying any cash dividends in the foreseeable future.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal 1996:
First Quarter............................................ 6 3/8 4
Second Quarter........................................... 6 1/8 3 1/2
Third Quarter............................................ 4 1/4 3 5/8
Fourth Quarter........................................... 6 3 13/16
Fiscal 1997:
First Quarter............................................ 5 3/4 4
Second Quarter........................................... 5 1/4 4 1/4
Third Quarter............................................ 5 4 1/2
Fourth Quarter........................................... 6 3/16 4 5/16
Fiscal 1998:
First Quarter............................................ 7 3/8 5 5/8
Second Quarter........................................... 7 6
Third Quarter............................................ 7 27/32 6 11/16
Fourth Quarter (through March 27, 1998).................. 7 25/32 7 21/32
</TABLE>
The following table sets forth the range of bid and ask prices per Share of
the Common Stock of the Company on the NASDAQ National Market System, as
reported by NASDAQ, on (i) January 15, 1998, the last trading day prior to the
Company's first public announcement of a possible transaction with Parent and
(ii) March 27, 1998.
<TABLE>
<CAPTION>
HIGH LOW
------ -------
<S> <C> <C>
January 15, 1998........................................... 7 3/16 6 15/16
March 27, 1998............................................. 7 3/4 7 21/32
</TABLE>
BECAUSE THE MARKET PRICE OF THE SHARES OF COMMON STOCK OF THE COMPANY ARE
SUBJECT TO FLUCTUATION, STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR THE COMMON STOCK.
----------------
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY RECOMMENDS
THAT THE STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY. SEE "THE MERGER AND RELATED TRANSACTIONS--
BACKGROUND OF THE MERGER," "THE MERGER AND RELATED TRANSACTIONS--REASONS FOR
THE MERGER; RECOMMENDATION OF THE BOARD" AND "THE MERGER AND RELATED
TRANSACTIONS--INTERESTS OF CERTAIN OFFICERS AND DIRECTORS IN THE MERGER."
8
<PAGE>
THE MERGER AND RELATED TRANSACTIONS
The following discussion summarizes the material aspects of the Merger and
certain related transactions, as set forth in the Merger Agreement. This
summary is not intended to be a complete description of the Merger and is
subject to, and qualified in its entirety by, reference to the Merger
Agreement, a copy of which is attached hereto as Annex A and incorporated
herein by reference and which Stockholders are urged to read carefully and in
its entirety.
PARTIES TO THE MERGER AGREEMENT
The Company. The Company is a leading specialty retailer of brand name
watches, jewelry, crystal, china, fragrances and accessories, operating 24
stores on ten Caribbean islands and three stores in Alaskan cruise ship
destinations. The Company also has eight franchise locations in the Bahamas.
The Company's primary market consists of vacationing tourists attracted by
freeport pricing, lack of sales taxes and a wide variety of quality
merchandise. The Company's stores are designed to place the customer in an
environment that is conducive to the purchasing of luxury items. Stores are
located in areas which are easily accessible to tourists, often in so-called
"duty-free" ports which are visited by cruise ships. The quantity and mix of
products carried by the Company's stores vary from location to location based
on store size and tourist buying patterns and preferences in that location. To
meet the demands and interests of tourists, the Company stocks a broad
selection of luxury products and carries a significant inventory so that most
items offered by a particular store are available for immediate delivery. The
Company's markets contain numerous retail stores and the competition for
tourist dollars is intense. The Company also competes with stores selling
similar products in the United States and in other markets where tourists
travel. The Company seeks to price its merchandise at levels which compare
favorably to prices generally available in the United States. The Company's
principal executive offices are located at 161-B Crown Bay Cruise Ship Port,
St. Thomas, U.S.V.I. 00804, and its telephone number is (340) 776-2010. See
"Information About The Company."
Parent. Parent is a privately owned Nevis corporation that operates 60
retail stores located in the Bahamas, the Caribbean and Alaska. Parent was
recently formed in October 1997 in order to serve as a holding company for the
Colombian Emeralds International group of companies. The merchandise presently
offered at such stores consists of emeralds and other gemstone jewelry,
watches and other luxury products. Mr. Crane is the Chief Executive Officer
and controlling stockholder of Parent, owning one hundred percent (100%) of
its outstanding common stock. Mr. Crane and his affiliates, including, without
limitation, Aspen Investments, Inc., a Panamanian corporation ("Aspen"),
beneficially own, in the aggregate, 261,400 Shares of the Common Stock of the
Company. Parent's principal executive offices are located at International
Bazaar, P.O. Box F 40349, Freeport, Bahamas, and its telephone number is (242)
352-5464.
Sub. Sub is a Delaware corporation recently formed by Parent for the sole
purpose of facilitating the Merger. Sub is a wholly-owned subsidiary of Parent
with no assets (other than those received in connection with its initial
capitalization) or liabilities and has conducted no activities to date except
for those incident to the Merger. Sub's principal executive offices are
located at International Bazaar, P.O. Box F 40349, Freeport, Bahamas, and its
telephone number is (242) 352-5464.
The Parent Related Entities. The Parent Related Entities comprise certain of
Parent's subsidiaries through which Parent conducts its business.
TERMS OF THE MERGER
The Merger. Pursuant to the Merger Agreement, as soon as practicable
following satisfaction or waiver of all conditions to the consummation of the
Merger, Sub will be merged with and into the Company, with the Company being
the Surviving Corporation in the Merger operating under the name "Little
Switzerland, Inc." The Merger will become effective upon the filing of a
certificate of merger with the Secretary of State of the State of Delaware.
9
<PAGE>
In connection with the Merger, (i) each issued and outstanding Share (other
than Shares held in the treasury of the Company, or held by Parent, Sub, the
Parent Related Entities or any of their direct or indirect subsidiaries, or by
Stockholders who perfect their appraisal rights under DGCL) will be converted
into the right to receive $8.10 in cash, without interest, and (ii) each
holder of an outstanding Option will be entitled to receive in settlement
thereof a cash payment equal to the excess (if any) of $8.10 over the per
Share exercise price of such Option multiplied by the total number of Shares
subject to the Option. See "The Merger Agreement--Conversion of Shares" and
"The Merger Agreement--Conversion of Options." Each holder of a certificate
(each, a "Certificate") representing such Shares (other than Shares held in
the treasury of the Company, or held by Parent, Sub, the Parent Related
Entities or any of their direct or indirect subsidiaries, or by Stockholders
who perfect their appraisal rights under DGCL) will, after the Effective Time,
cease to have any rights with respect to such Shares, except the right to
receive such payment therefor pursuant to the Merger, without interest, upon
the surrender of such Certificate. Promptly after the Effective Time, the
paying agent, as designated by Parent (the "Paying Agent"), will mail a letter
of transmittal and instructions to each person who was a record holder of a
Certificate as of the Effective Time for use in effecting the surrender of
such Certificate in exchange for payment thereof. After the Effective Time,
the holders of Shares outstanding at the Effective Time shall cease to have
any rights with respect to such Shares except as provided in the Merger
Agreement or by applicable law. See "The Merger Agreement--Payment for
Shares."
The consummation of the Merger is subject to satisfaction or waiver, where
permissible, on or prior to the Effective Time, of certain conditions
including, among other things, approval by the Stockholders, termination or
expiration of the waiting period under the HSR Act and any other applicable
anti-trust law and the lack of any changes or events since February 4, 1998
which, individually or in the aggregate, have had a material adverse effect on
the Company. Subject to certain conditions, however, the occurrence of any of
the following events shall not be deemed to have a material adverse effect on
the Company: (i) the termination or change in terms by Rolex of its
relationship or agreement with the Company, (ii) a reduction of sales of Rolex
products from the date of any such termination or change in terms, (iii) the
termination or change in terms of any relationship or agreement between the
Company and any of its existing vendors or suppliers (other than Rolex) whose
products in the aggregate accounted for 5% or less of the Company's sales (not
including sales attributable to Rolex) for fiscal 1997 or (iv) any increase in
the amounts outstanding under the Company's working capital borrowings
pursuant to credit facilities in existence on the date of the Merger
Agreement. See "The Merger Agreement--Conditions to the Merger." Since the
last shipment of Rolex products in January, 1998, Rolex has suspended
shipments of its products to the Company and has orally informed the Company
that it will continue to suspend all shipments unless and until the Merger
Agreement is terminated. In that regard, the Company has received copies of
correspondence from Rolex to Parent, which indicate that Rolex does not
believe it would be in its best interest to begin a business relationship with
Parent. See "Management's Discussion and Analysis of Financial Condition--The
Company's Relationship with Rolex."
Shareholder Rights Agreement; Redemption of Rights. Prior to the execution
of the Merger Agreement, the Board adopted the Third Amendment, which
provides, among other things, that neither Parent, Sub nor any of the Parent
Related Entities, nor any of their affiliates or associates, shall be deemed
to be an "Acquiring Person" or an "Adverse Person" (as such terms are defined
in the Shareholder Rights Agreement), and no "Stock Acquisition Date,"
"Distribution Date," "Section 11(a)(ii) Event" or "Section 13 Event" (as such
terms are defined in the Shareholder Rights Agreement) shall occur, as a
result of (i) the execution and delivery of the Merger Agreement; (ii) any
action taken by Parent, Sub, the Parent Related Entities or any of their
affiliates or associates in accordance with the provisions of the Merger
Agreement; or (iii) the consummation of the Merger in accordance with the
provisions of the Merger Agreement. Thus, following execution of the Merger
Agreement, the Rights remain attached to, and are not tradeable separately
from, the outstanding Shares, notwithstanding the execution of the Merger
Agreement. Immediately prior to the Effective Time, the Company will redeem
all outstanding Rights, and Stockholders will receive the redemption price of
$.01 for each Right held as of the effective time of such redemption.
10
<PAGE>
MERGER FINANCING
Parent will require up to $135,000,000 to finance the Merger and certain
related transactions. Parent currently contemplates that the Merger and
certain related transactions will be financed with (i) the proceeds of an
offering by Parent of $115,000,000 in principal amount of Senior Notes; (ii)
the proceeds of the sale of shares of Senior Exchangeable Preferred Stock of
Parent and Warrants to purchase common stock of Parent to certain affiliates
of Donaldson, Lufkin & Jenrette, Inc. ("DLJ, Inc.") for $15,000,000, pursuant
to the terms of a commitment letter to Parent from DLJ, Inc., subject to the
conditions set forth in such commitment letter; and (iii) available cash on
hand of Parent and the Company. In the event that the offering of Senior Notes
is not consummated, DLJ Bridge Finance, Inc. ("Bridge Finance") has agreed,
subject to the conditions set forth in a commitment letter from Bridge Finance
to Parent, to provide Parent and Sub with bridge financing in the amount of
$115,000,000. The Merger Agreement does not contain a financing condition and,
therefore, the obligation of Parent and Sub to consummate the Merger is not
subject to obtaining financing from the sources identified above or otherwise.
DLJ, Inc. and Bridge Finance are hereinafter collectively referred to as
"DLJ."
BACKGROUND OF THE MERGER
In November 1994, the Board established an Investment Banking Committee to
assist the Board in its consideration of strategic alternatives available to
the Company and, if appropriate, to engage an investment banking firm in
connection therewith. See "The Merger and Related Transactions--Interests of
Certain Officers and Directors in the Merger." After reviewing potential
investment banking firms, the Board engaged Wasserstein and Triumph Corporate
Finance Group, Inc. ("Triumph") in December, 1994, as the Company's exclusive
financial advisors with respect to the consideration and implementation of its
strategic and financial alternatives. As part of this engagement, Wasserstein
and Triumph, with input from the Investment Banking Committee, requested
preliminary indications of interest from certain companies to enter into a
strategic transaction with the Company. As a result of this process, the Board
received inquiries from third parties regarding a possible strategic
transaction with the Company and, with the assistance of Wasserstein and
Triumph, evaluated and responded to such inquiries. This sale process was
terminated by the Board, however, after the Company's stores and business were
severely damaged as a result of two major hurricanes that occurred within a
ten day period in September, 1995. The Board did not believe it would obtain a
fair value for the Company by continuing the sale process at that time because
of the damaged state of the Company's stores and of the infrastructures of
certain islands on which the Company does business.
In the spring of 1997, with the restoration of the Company's stores and the
islands' infrastructures largely completed, the Board re-engaged Wasserstein
to assist it in evaluating the Company's strategic alternatives, including,
without limitation, pursuing its long-term strategy as an independent company
and consummating a strategic transaction with a third party. During this
period, the Board also hired a leading international consulting firm (the
"Consulting Firm") to assist the Board in its operational and strategic review
of the Company and in its exploration of the options available to it in
seeking to enhance long-term stockholder value.
Prior to completion of the Consulting Firm's review, on May 5, 1997,
ValueVest Partners, L.P. ("ValueVest") and Donald L. Sturm filed a Schedule
13D with the Commission, indicating that they had acquired approximately 9.89%
of the Company's outstanding Shares with a view to possibly seeking to acquire
the Company. On that date, Mr. Sturm (on behalf of himself and ValueVest) also
sent a letter to the Board, requesting an opportunity to perform due diligence
with respect to the Company and stating that he and ValueVest would be willing
to pay $5.55 per Share in cash, without due diligence and without a financing
contingency. The Board met with Wasserstein and the Company's legal counsel on
May 5, 1997 and May 6, 1997, among other reasons, to consider and evaluate
this proposal. The Board agreed that, in considering whether to pursue a sale
of the Company, it must review current financial data and update its strategic
plan for the Company. In this regard, while the Board indicated a willingness
to explore strategic alternatives, the Board agreed not to respond
specifically to the proposal by ValueVest and Mr. Sturm until after completion
of the Consulting Firm's strategic review of the Company. At the direction of
the Board, these decisions were communicated to ValueVest and Mr. Sturm by
Wasserstein.
11
<PAGE>
On July 11, 1997, the Colombian Emeralds International group of companies,
each of which is an affiliate of Parent (collectively, "CEI"), made an
unsolicited expression of interest to the Company in the form of a stock-for-
stock transaction, pursuant to which CEI's controlling stockholder would
acquire at least a majority of the Shares. On July 23, 1997, CEI submitted to
the Board a second unsolicited proposal to enter into a stock-for-stock
merger, pursuant to which (i) CEI would contribute all of the capital stock of
the entities that comprise its business to the Company and (ii) Mr. Crane,
CEI's controlling stockholder, would acquire approximately 75% of the Shares
following consummation of the transaction. At the direction of the Investment
Banking Committee and consistent with the Board's prior guidance, Wasserstein
informed CEI's financial advisor that, while the Board would seriously
consider CEI's expressions of interest, the Company was not prepared to
discuss a business combination at that time, pending completion of the
Consulting Firm's strategic review of the Company.
While the Board was awaiting completion of the Consulting Firm's review of
the Company prior to setting a date for the 1997 Annual Meeting of
Stockholders (the "Annual Meeting"), three Stockholders of the Company,
including Mr. Sturm and Aspen, an affiliate of Parent and CEI, submitted
nominations to the Company for election of their own nominees as Class III
directors of the Company. In connection therewith, the Company settled
litigation brought by Aspen, permitting Aspen's nomination of candidates for
election as directors of the Company to be considered at the Annual Meeting.
Representatives of the Consulting Firm delivered an interim report of the
preliminary results of its strategic review to the Board on June 23, 1997, and
a final report of its proposed long-term strategic business plan for the
Company (the "Long-Term Business Plan") to the Board on July 24, 1997 (which
meeting was continued on July 25, 1997). As part of the July 24, 1997
presentation, representatives of the Consulting Firm presented their
conclusions as to future trends in the retail markets, operational and
strategic improvement opportunities for the Company's stores and growth
options and objectives for the Company. The Board considered the
implementation choices presented by the Consulting Firm and the risks
associated with each such choice, the expenses that would be incurred by the
Company in future fiscal years in connection with such implementation,
resource constraints on the Company, store closures and restructuring,
inventory and accessory liquidation, timing and valuation issues and the long-
term growth potential of the Company. The Board then discussed with
Wasserstein the process and implications for the Company of implementing the
Long-Term Business Plan and of pursuing other strategic alternatives,
including, without limitation, a sale of the Company. After further
discussion, including with regard to the Board's ability to obtain a fair
value for the Company now that the Company's business had been rebuilt after
the hurricanes, the Board decided to proceed with the implementation of the
first steps of the Long-Term Business Plan and, at the same time, to consider
its other strategic alternatives. The Board agreed to consider a sale of the
Company or other transaction that may result in a change of control in order
to compare (i) the value to Stockholders expected to be realized from the
Long-Term Business Plan with (ii) the value Stockholders would receive in a
strategic transaction, thereby enabling the Board to pursue that course of
action that was in the best interest of the Stockholders of the Company. The
Board then discussed with Wasserstein the process by which its other strategic
alternatives would be explored. In that regard, the Board evaluated the
positives and negatives, generally, of selling the Company through a sale
process versus a negotiated deal with an interested party and, more
specifically, the merits of the proposals that had been received to date from
ValueVest and CEI. Based on their knowledge of the industry and their personal
experiences, members of the Board expressed concern that Rolex, the Company's
largest vendor, might not continue to supply its products to the Company after
consummation of a transaction with CEI. Therefore, in light of the potential
damage to the Surviving Corporation that would result from a loss of Rolex,
the Board was interested in pursuing a cash transaction rather than a stock
transaction with CEI. As a result of such discussions, the Board voted to
authorize Wasserstein to explore options available to the Company to enter
into a negotiated sale transaction with an interested party. With the guidance
of the Investment Banking Committee, Wasserstein responded to ValueVest and
CEI, and contacted a short list of other potential acquisition parties, on
behalf of the Company with an expression of interest in negotiating a sale
transaction with such party if such party were willing to pay the appropriate
value for the Company. Wasserstein also communicated to CEI the Board's
position concerning a stock transaction with CEI and the reasons for such
position.
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On behalf of the Board, Wasserstein engaged in numerous discussions with Mr.
Sturm between July 24, 1997 and July 29, 1997, regarding the possibility of
Mr. Sturm making a preemptive bid for the Company. As a result of those
discussions, Mr. Sturm indicated (on behalf of himself and ValueVest) that he
would be willing to offer $7.375 per Share in cash, the then trading price of
the Common Stock. At a meeting of the Board on July 29, 1997, the Board
discussed Mr. Sturm's offer and, with Wasserstein's advice, agreed that the
offered price was not sufficient to preempt a controlled sale process. The
Board discussed with Wasserstein various strategies by which it could obtain a
higher price from Mr. Sturm and ValueVest with the benefit of a floor on the
price equal to their latest offer. Based on advice from the Board, Wasserstein
recontacted Mr. Sturm and suggested that, if Mr. Sturm and ValueVest would
give the Company the right to accept a $7.375 per Share cash offer for a
period of time, the Board would give them the opportunity to conduct due
diligence on an accelerated schedule. In addition, if Mr. Sturm and ValueVest
would pay at least $8.00 per Share in cash, the Board would recommend such a
transaction to the Stockholders. On August 1, 1997, the Board discussed the
current state of negotiations with ValueVest and Mr. Sturm and the draft
confidentiality agreement and plan of merger, which had been prepared by
Company counsel. Pursuant to the Board's authorization at its August 1, 1997
meeting, the Investment Banking Committee and the Company's advisors began
negotiations with ValueVest and Mr. Sturm on substantially the terms set forth
in such draft agreements. Despite the Company's efforts to negotiate with
ValueVest and Mr. Sturm, ValueVest and Mr. Sturm indicated that they were no
longer interested in entering into a confidentiality agreement with the
Company or pursuing an acquisition of the Company at that time.
Shortly following the termination of negotiations with ValueVest and Mr.
Sturm, the Company announced on August 14, 1997 that it was pursuing various
strategic alternatives with a goal toward maximizing stockholder value and
that Wasserstein would discuss possible business combinations with certain
third parties. All such efforts were suspended, however, as a result of the
delay in the filing of the Company's Annual Report on Form 10-K for fiscal
1997 with the Commission. This filing was delayed by over a month because of
events surrounding an employee theft, which required Arthur Andersen LLP
("Arthur Andersen") to expand the scope and duration of its regular audit. See
"Management's Discussion and Analysis of Financial Condition--Employee
Defalcation Loss."
While the Company focused on the employee theft and related expanded audit,
CEI made a revised proposal to the Board on September 8, 1997 concerning a
stock-for-stock merger. Because the Board had previously raised concerns
regarding Rolex's willingness to continue to supply products to the Company
following consummation of a transaction with CEI, this proposal was expressly
not conditioned upon Rolex confirming its intent to maintain its current
business arrangements with the Company following consummation of the proposed
transaction. In addition, this proposal provided that (i) the record
Stockholders of the Company on the business day immediately prior to the
proposed transaction closing date would be granted a one-time, non-
transferable right to put the Shares held by them of record as of such date to
the Company at a price of $6.15 per Share in cash on the first anniversary of
the proposed transaction and (ii) Stockholders desiring increased liquidity
would be given the opportunity to participate in a registered secondary
redistribution of their Shares. The Board discussed the merits of this
proposal with Wasserstein at a meeting held on September 15, 1997. Considering
the structure of the proposed transaction as a stock-for-stock merger and the
effect the potential loss of Rolex could have on the Company's sales and
earnings, the Board agreed at that meeting that the price at which
Stockholders could put their Shares to the Company was important to its
evaluation of CEI's proposal. Given a put price of $6.15 per Share and the
fact that the put price would be discounted both for the time value of money
and as a result of the non-transferability of the put, Wasserstein raised
concerns about CEI's proposed transaction. After further discussion with its
advisors, the Board agreed that, while communication should be kept open and
confidentiality agreements entered into with CEI and other interested parties,
the Company should not proceed with CEI's proposed transaction or continue the
sale process until audited financial statements for fiscal 1997 had been made
available. On September 15, 1997, Wasserstein advised CEI's financial advisor
of these decisions of the Board regarding CEI's proposal and the deferral of
the sale process.
Once the Company's financial statements for fiscal 1997 were completed in
early October, the Company announced that the Annual Meeting had been
scheduled for January 16, 1998, and, through Wasserstein and the
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Investment Banking Committee, began actively pursuing possible strategic
alternatives, including a possible business combination with a third party.
The Board decided to conduct a controlled sale process rather than continue in
its pursuit of a negotiated deal because of the withdrawal of interest by
ValueVest and the Board's conclusions regarding CEI's proposals to date. In
that regard, the Board noted that Rolex had sent a letter to CEI indicating
that Rolex would not sell its products to the Company after any consolidation
of the Company with CEI. While the Investment Banking Committee handled the
daily issues related to the sale process, the Board held meetings on October
16, 1997, October 28, 1997 and November 3, 1997, at which the Board, among
other things, discussed the status of the sale process with its advisors and
instructed its advisors and the Investment Banking Committee as to the course
of action to take in conducting such sale process.
In addition, at the November 3, 1997 meeting, the Board adopted an amendment
to the Company's Amended and Restated By-laws (as amended from time to time,
the "By-laws") requiring that all of the Company's directors enter into a
confidentiality agreement with the Company and providing that certain persons
who are employed or affiliated with competitors of the Company are not
qualified to serve as directors of the Company. This amendment was intended to
protect the Company's ability to disseminate confidential and/or proprietary
information to members of the Board without a risk of improper further
dissemination or misuse of that information. Two of the three Stockholders who
had submitted nominees had satisfied the requirements of the amendment, and
Aspen, which did not satisfy such requirements, was given an opportunity to
designate new nominees who qualified for election as directors under the
amendment. Accordingly, Aspen submitted a revised nomination, designating two
candidates who complied with the provisions of the By-laws, and later filed
preliminary and definitive proxy materials with the Commission and distributed
such materials to the Stockholders, soliciting proxies for election to the
Board of its nominees.
During the sale process, Wasserstein contacted approximately 30 prospective
strategic and financial buyers, 15 of whom entered into confidentiality
agreements with the Company. Although ValueVest and Mr. Sturm were contacted
and provided with a form confidentiality agreement, they reiterated that they
were no longer interested in pursuing a transaction with the Company. Each
interested party who entered into a confidentiality agreement with the Company
received a Confidential Offering Memorandum, inviting such party to submit a
preliminary indication of interest in the Company no later than November 20,
1997. At this time, CEI opted not to enter into a confidentiality agreement
with the Company and, therefore, did not receive a Confidential Offering
Memorandum. The Company, however, invited CEI to participate in the sale
process and to submit a preliminary indication of interest in the Company.
As a result of this process, the Company received three indications of
interest from prospective purchasers, including CEI's affiliate, Parent. On
November 21, 1997, the Investment Banking Committee held a meeting with
representatives of Wasserstein and the Company's legal counsel to review and
analyze the preliminary indications of interest that had been submitted by
potential bidders. In Parent's preliminary indication of interest, Parent
offered to acquire all of the issued and outstanding Shares by means of a
merger in which each Share would be exchanged for $7.65 in cash. Parent
indicated that it had received a firm commitment from DLJ and that the offer
was not conditioned upon Parent conducting any due diligence. The second
preliminary indication of interest was submitted by one ("Bidder A") of the
original third parties who had entered into confidentiality agreements with
the Company. Bidder A proposed a total transaction value for the cash
acquisition of the Company in the range of $80,000,000 to $95,000,000
(although Bidder A indicated that it was prepared to consider a stock
transaction). Assuming the number of Shares outstanding as of October 10, 1997
and exercise of all in-the-money Options, the offered transaction value from
Bidder A translated into approximately $7.34 to $8.94 per Share. Bidder A
indicated that the transaction would be financed with its own funds, those of
certain investors and from arrangements with nationally recognized commercial
banking and/or investment banking institutions. In addition, Bidder A's offer
was conditioned on satisfactory completion of confirmatory due diligence. The
third preliminary indication of interest was submitted by another party
("Bidder B") who had entered into a confidentiality agreement with the
Company. Bidder B's offer did not specify a price or type of consideration,
but indicated that the price would "substantially exceed net book value,"
which at that time was approximately $5.78 per Share. Bidder B's offer was
conditioned upon full diligence, including store visits. Bidder B indicated
that it was in the process of engaging a nationally known firm of investment
bankers, which
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would be responsible for providing it with the financing for the transaction.
The terms of the preliminary indications of interest received by the Company
were discussed at length by the participants of the November 21, 1997 meeting.
While the indications of interest received from Bidder A and Bidder B did not
include firm financing commitments and were less complete than that of Parent,
Bidder A offered a range of valuation that, at its high end, exceeded the
valuation proposed by Parent. After extensive discussions regarding the
credibility and seriousness of the offers, the financial capabilities and
business reputations of the bidders, the likely position of Rolex with respect
to each bidder, the formulation of a tentative valuation of the Company and a
review of other strategic options available to the Company, the Investment
Banking Committee agreed to proceed to the next stage of the sale process with
all three bidders.
Shortly after receipt of the preliminary indications of interest,
Wasserstein notified those bidders who had entered into a confidentiality
agreement with the Company that they would be provided with access to the
senior management and properties of the Company as well as additional
financial, operating and legal information during the weeks of December 1,
1997 and December 8, 1997 to enable them to formulate formal proposals. By
letters dated November 24, 1997 and December 2, 1997, Wasserstein informed
Parent that the Company had received other timely indications of interest,
and, as a result, the Board had determined to continue the sale process and
solicit another round of bids. In response to Parent's interest in
participating in the diligence process, those letters also indicated that
Parent would be provided with access to senior management but that full access
to the confidential and proprietary information of the Company would not be
provided unless it entered into a confidentiality agreement with the Company
similar to that entered into by the other prospective purchasers. On December
9, 1997 and December 10, 1997, representatives of Bidder B met with senior
management at the Company's headquarters for a management presentation and
visited the data room at the offices of the Company's legal counsel to conduct
due diligence. While Bidder A scheduled similar meetings with management of
the Company and the Company's legal counsel, Bidder A did not attend such
meetings and never conducted any on-site due diligence regarding the Company.
By letter dated December 17, 1997, each of the three bidders who had submitted
preliminary indications of interest, including Parent, were supplied with a
form tender and merger agreement specifying the terms upon which the Company
would propose to enter into a strategic transaction and were formally invited
to submit a firm written offer to the Board, together with a mark-up of such
agreement, no later than January 6, 1998. Because of the on-going sale process
then being conducted by the Board, the Company announced on December 24, 1997
that the Annual Meeting had been rescheduled for February 5, 1998.
On January 8, 1998, the Board met with its advisors to discuss the results
of the second round of bidding. Wasserstein indicated that only one offer had
been submitted in the second round of bidding. Parent had submitted an offer
to acquire all of the issued and outstanding Shares by means of a merger in
which each Share would be exchanged for $7.65 in cash; in effect, the same
offer made in its preliminary indication of interest on November 20, 1997,
except that Parent had indicated that it was prepared to increase its offer
price to a level it believed Stockholders would support "in connection with
the negotiation of a mutually satisfactory merger agreement." Parent did not
include a mark-up of the form tender and merger agreement but, instead, noted
its desire to structure the transaction as a merger, rather than a tender
offer followed by a back-end merger. The members of the Board then discussed
with each other and the Company's advisors a number of issues, including the
following: (i) the underlying earning power of the Company, offset by the
large expenses that would likely be charged against earnings were the Company
to remain independent as a result of the implementation of the Long-Term
Business Plan and by expenses relating to the proxy contest initiated by
Parent's affiliate, Aspen, and possible Stockholder suits; (ii) the valuation
of the Company and the presentation by Wasserstein as to their analysis of
Parent's offer; (iii) the likelihood of a termination or change in terms of
the Company's relationship with Rolex and other vendors upon execution of a
definitive agreement with Parent and its effect on the Company; (iv) the
business risk to the Company of changing the structure of the transaction from
a tender offer followed by a back-end merger to a merger, which would likely
take a longer amount of time to consummate, and the resulting need to limit
Parent's ability to terminate the agreement as a result of a material adverse
effect on the business of the Company during this interim period between
signing and closing; (v) Parent's financial capability and ability to
consummate a transaction in a timely manner; and (vi) their fiduciary duties
as members
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of the Board. After further discussion, the Board decided to negotiate with
Parent in order to determine the highest price per Share that Parent would be
willing to offer to the Stockholders and instructed Wasserstein and the
Company's legal counsel to begin such negotiations on its behalf.
Between January 8, 1998 and February 4, 1998, while Parent and the Company
each solicited proxies from the Stockholders for use at the Annual Meeting,
Parent and the Company and their respective advisors held several meetings
during which they negotiated the per Share purchase price and the other terms
of a definitive merger agreement. Parent provided an initial mark-up of the
form of tender and merger agreement to the Company on the evening of January
8, 1998. At the Board's meeting on January 9, 1998, Wasserstein informed the
Board about the status of its negotiations with Parent with respect to price,
during which Parent had indicated a willingness to pay $8.00 per Share and
possibly more, depending on the results of further due diligence on the
Company. After further discussion, the Board determined that the Company
should continue to negotiate price but should not meet with Parent to
negotiate the terms of the proposed merger agreement until after completion of
Parent's due diligence. As a result, on January 10, 1998, the Company entered
into an abbreviated confidentiality agreement with Parent (without any
standstill provision similar to that included in the Company's standard form)
and agreed to permit Parent to perform a due diligence review of the Company.
After meeting with senior management at the Company's headquarters for a
management presentation and visiting the data room at the offices of the
Company's legal counsel to conduct due diligence, Parent increased its offer
to $8.10 per Share in cash in a transaction structured as a merger and
informed the Company that this was its best and final offer. On January 14,
1998, the Board (which now consisted of only five members as a result of the
death of Mr. Correra on such date) met again to discuss Parent's ability to
finance the transaction and Parent's revised offer. Legal counsel for the
Company updated the Board as to their discussions with DLJ with respect to its
financing commitment and the extent to which DLJ was prepared to provide
financing to Parent in the event Rolex were to terminate or change the terms
of its relationship with the Company. After explaining the structure of DLJ's
financing, Wasserstein discussed Parent's revised offer with the Board and
expressed its belief that Parent was not constrained by its financing
commitments. Members of the Board then discussed with the Company's advisors
strategies to negotiate for a higher price and the risks associated with doing
so. In particular, the Board expressed its concern that Parent would walk away
from the negotiations and attempt to pursue its other alternatives. After
further discussion, the Board unanimously agreed to authorize the Company's
financial and legal advisors to negotiate a higher price and the terms of a
definitive agreement.
On January 16, 1998, Parent issued a press release publicly announcing that
it had made a fully financed, all-cash bid of $8.10 per Share and that its
affiliate, Aspen, had commenced mailing its proxy materials to Stockholders
seeking to replace two directors of the Company. After such announcement,
several substantial Stockholders communicated to the Company and its advisors
that they would support an attempt by the Board to obtain a higher price but
that they believed the Board should ultimately accept an offer at $8.10 per
Share if such attempt was unsuccessful.
Advisors of the Company and of Parent met in New York City on January 20,
1998, to discuss the terms of the proposed merger agreement. After this
meeting, representatives of the parties held numerous conference calls during
which the following issues, among others, were negotiated: (i) the per Share
purchase price; (ii) the structure of the transaction as a merger rather than
a tender offer followed by a back-end merger; (iii) the scope of the condition
that there be no material adverse effect on the Company during the interim
period between signing and closing; (iv) the termination provisions and the
request for liquidated damages to be paid to the Company in the event Parent
did not close the transaction after satisfaction of all conditions; (v) the
withdrawal of Aspen's nominees for election as directors at the Annual
Meeting; (vi) Parent's representation regarding its financial ability to
consummate a transaction; (vii) the benefits to be provided to employees of
the Company after consummation of a transaction; (viii) the conduct of the
Company's business after execution of the proposed merger agreement; (ix) the
extent of the Company's representations and warranties; (x) the terms of
indemnification and directors' and officers' liability policy coverage; (xi)
the ability of the Company to ensure the retention of vendors, suppliers and
employees and the actions of its officers and directors in connection
therewith; and (xii) the obligation of the Company to pay the success fee due
to C. William Carey as a member
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of the Investment Banking Committee in the event he resigns prior to the
Effective Time. The Board was updated by Wasserstein, the Company's legal
counsel and the Investment Banking Committee as to the progress of such
negotiations during meetings held on January 23, 1998 and January 31, 1998.
As a result of such negotiations, the Company agreed to structure the
transaction as a merger rather than a tender offer followed by a back-end
merger, but indicated to Parent that the revised structure made the condition
that there be no material adverse effect on the Company during the interim
period between signing and closing even more problematic. In that regard, the
Board, through its advisors, pointed out its concerns regarding the loss of
Rolex upon execution of an agreement with Parent and stressed that there must
be a specific exclusion stating that neither the loss of Rolex nor any effect
on the business of the Company related thereto (including the loss of other
vendors, employees and revenues) would constitute a material adverse effect on
the Company. The Board believed that Parent should bear the risk of these
events, given that both the Company and Parent had been informed by Rolex that
it intended to terminate its relationship with the Company once the Company
has been consolidated with Parent. The Company was concerned not only about
the termination of vendor relationships but also about the effect any change
in the terms of a relationship (including a change to "cash on delivery")
might have on the Company. Parent, however, indicated that it was not willing
to accept the business risk of having a more restricted right to terminate the
proposed merger agreement than DLJ's right to terminate and withdraw its
financing commitment in the event of a material adverse effect on the Company
during the interim between signing and closing. After extensive negotiations
between the parties and their advisors, the parties agreed to exclude from the
definition of material adverse effect, subject to certain conditions, (i) the
termination or change in terms by Rolex of its relationship or agreement with
the Company, (ii) a reduction of sales of Rolex products from the date of any
such termination or change in terms, (iii) the termination or change in terms
of any relationship or agreement between the Company and any of its existing
vendors or suppliers (other than Rolex) whose products in the aggregate
accounted for 5% or less of the Company's sales (not including sales
attributable to Rolex) for fiscal 1997 and (iv) any increase in the amounts
outstanding under the Company's working capital borrowings pursuant to credit
facilities in existence on the date of the proposed merger agreement.
Other negotiations focused on the Annual Meeting, then scheduled for
February 5, 1998. Parent believed that the Annual Meeting should be postponed,
while the Company desired to go forward with the Annual Meeting, but with the
withdrawal of Aspen's nominees. In the event the Company entered into a
definitive merger agreement with Parent but such agreement was not
consummated, the Board did not believe that the Company should bear the
expense of another proxy contest with Parent's affiliate, Aspen. After further
discussion, the parties agreed to postpone the Annual Meeting, but, in the
event of certain terminations of the proposed merger agreement, Aspen's
nominees would withdraw as candidates for election and would not be considered
for election as directors of the Company at the Annual Meeting.
Because of the Board's concerns regarding the condition that there be no
material adverse effect on the Company during the interim period between
signing and closing, the Company believed that, if Parent failed to consummate
the transaction after satisfaction of all conditions, Parent should pay
liquidated damages to the Company. See "--Merger Financing." While the Company
acknowledged that such a provision was not customary in the context of the
type of transaction contemplated, the Board believed that the situation facing
the Company was unique and that protecting the Company from such risks was in
the best interest of the Stockholders. When Parent would not agree to a pre-
agreed amount of liquidated damages after extensive negotiations, the Company
sought to include language in the proposed merger agreement that would, in
effect, make any litigation related to Parent's failure to consummate the
proposed merger solely with respect to damages and not liability. Parent
informed the Board that it would not enter into a definitive agreement
containing such a liquidated damages provision or such additional language
regarding litigation on this matter. In deciding to execute a definitive
merger agreement without the inclusion of such provisions, the Board noted
that its two nominees for election as Class III directors of the Company would
likely be replaced with Aspen's two nominees at the Annual Meeting, which was
to be held in the next few days, and, accordingly, that the Company was
unlikely to be successful in obtaining any concessions from Parent with
respect to the inclusion of these
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provisions. The Board, therefore, believed that the benefits of entering into
a definitive merger agreement and obtaining a price of $8.10 per Share in cash
for its Stockholders outweighed the costs to the Company of bearing the risk
of not having such protective provisions in the merger agreement.
On January 31, 1998, prior to the parties entering into the Merger
Agreement, the Board (i) discussed with its advisors the status of
negotiations regarding the per Share purchase price, the no material adverse
effect condition, the requested liquidated damages provision and the payment
to Mr. Carey of his portion of the success fee due to him as a member of the
Investment Banking Committee; (ii) provided guidance on the parameters of
concessions the Company's advisors could make in order to come to a resolution
on the open issues; (iii) reviewed with the Company's legal advisors the
fiduciary duties of the Board to the Stockholders; (iv) received an oral
opinion from Wasserstein to the effect that, as of the date of such opinion
and based upon and subject to certain matters stated therein, the cash
consideration to be received by the Stockholders (other than Mr. Crane and his
affiliates) in the Merger was fair to such Stockholders from a financial point
of view; (v) approved the proposed merger agreement in the form of the draft
dated January 29, 1998, with such changes thereto as may be approved by
certain authorized officers of the Company, including the Chairman of the
Board; (vi) determined that the consideration to be received by the
Stockholders for each outstanding Share in the Merger was in the best interest
of the Stockholders; and (vii) resolved to recommend that the Stockholders
approve and adopt the Merger Agreement and the transactions contemplated
thereby. See "--Fairness Opinion of the Financial Advisor." For a discussion
of the factors considered by the Board in connection with these
determinations, approvals and recommendations, see "--Reasons for the Merger;
Recommendation of the Board."
On February 4, 1998, after final negotiations between the parties with
respect to the open matters set forth above, the Merger Agreement was executed
and delivered by the Company, Parent, Sub, the Parent Related Entities and,
with respect to certain matters, Aspen. As a result, on such date, the Company
and Parent issued a press release announcing the transaction and the
postponement of the Annual Meeting. See "--Interests of Certain Officers and
Directors in the Merger" for a summary of the agreement regarding the payment
of a success fee to Mr. Carey for his services on the Investment Banking
Committee and "The Merger Agreement" for a summary of the terms of the final,
negotiated Merger Agreement.
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD
The Board unanimously approved the Merger Agreement and the transactions
contemplated thereby at a special meeting of the Board held on January 31,
1998. THE BOARD BELIEVES THAT THE TERMS OF THE MERGER ARE IN THE BEST INTEREST
OF THE STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" APPROVAL
OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. See "--
Background of the Merger."
In unanimously approving the Merger Agreement and the transactions
contemplated thereby and in recommending that the Stockholders approve the
Merger Agreement and the transactions contemplated thereby, the Board
consulted with the Company's management, as well as its financial advisors,
legal counsel and accountants, and considered a number of factors, including,
without limitation, the following material factors (all of which the Board
deemed to support approval of the Merger Agreement and the transactions
contemplated thereby):
(i) the value of the per Share consideration to be received by
Stockholders in the Merger as compared to historical and recent market
prices of the Common Stock. The consideration to be paid by Parent to the
Stockholders represents a 15.7% premium over the market price of the Common
Stock on January 15, 1998 (the last trading day prior to the Company's
first public announcement of a possible transaction with Parent) and a
17.8% premium over the market price of the Common Stock on the date which
was four weeks prior to such announcement. The Board also noted that the
consideration to be paid by Parent to the Stockholders pursuant to the
Merger represents a 60.0% premium over the market price of the Common Stock
on May 4, 1997 (the last trading day prior to the filing of a Schedule 13D
by ValueVest and Mr. Sturm, indicating their potential interest in
acquiring the Company) and a 77.5% premium over the market price of the
Common Stock on the date which was four weeks prior to such filing. See
"--Background of the Merger." In addition, the consideration to be paid by
Parent to the Stockholders pursuant to the Merger represents an
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8.9% premium over the highest closing price of the Common Stock over the
three year period prior to the first public announcement of a possible
transaction with Parent. See "--Fairness Opinion of the Financial Advisor."
(ii) information relating to the historical financial performance,
condition and business operations of the Company. Despite the Company's
top-line revenue growth between fiscal 1992 and fiscal 1996 resulting from
the addition of 16 stores, expense growth combined with reduced asset
productivity resulted in a decline in the Company's net income over such
period. Specifically, the Board noted that net income had declined from
approximately $6,714,000 or $0.80 per Share in fiscal 1992 to $915,000 or
$0.11 per Share in fiscal 1996. The Board attributed this poor performance
to, among others, the following factors: (a) a decline in operating margin,
largely driven by post-hurricane growth in insurance premiums, growth in
depreciation expenses resulting from hurricane maintenance and new stores
and higher occupancy expenses for new store openings; (b) growth in
inventory levels, with a decline in inventory productivity; and (c) the
addition of a series of underperforming stores at variance with the
Company's traditional full line format. While the Company's financial
performance has improved since fiscal 1996, the Board was concerned about
the adverse impact on the Company of the expense growth and reduced asset
productivity that resulted from its expansion efforts, both of which were
exacerbated by resource constraints at the Company and the effects of
severe hurricanes that had hit the Caribbean. In addition, the Company
experienced difficulty in attracting and retaining an effective management
team, with four different individuals serving as Chief Executive Officer of
the Company since its initial public offering. Given the operational and
resource issues facing the Company, together with the uncertainty of future
damage as a result of inclement weather in the Caribbean, the Board
realized that there were no assurances that the Company would be able to
continue its improved operating performance were the Company to remain
independent.
(iii) information relating to retail market conditions in general, the
conditions of the luxury retail market in particular and the prospects of
the Company. The Board analyzed its Long-Term Business Plan, which had been
developed with the assistance of a leading international consulting firm,
after an operational and strategic review of the Company conducted in the
spring of 1997. The Board considered the underlying earning power of the
Company and the offsetting expenses that would likely be charged against
earnings were the Company to remain independent as a result of the
implementation of their Long-Term Business Plan and as a result of the
proxy contest and possible Stockholder suits. Because of the uncertainty
related to the Company's ability to implement successfully the Long-Term
Business Plan, and the costs involved in doing so, the Board believed that
remaining independent raised certain risks to Stockholders that the
Company's long-term goals would not be met and that the market price of the
Common Stock would suffer as a result. See "--Background of the Merger."
(iv) the possible alternatives to the Merger for enhancing Stockholder
value, such as acquiring new stores or entering into a strategic
transaction as a buyer. In this regard, the Board noted that there appeared
to be no feasible alternatives available to the Company that were as likely
in the near term to provide significant market value appreciation. The
Board further noted that the Company's earlier strategic efforts between
fiscal 1995 and fiscal 1997 had not been productive. See "--Background of
the Merger." In light of the extensive analysis conducted by management,
the Board and Wasserstein with respect to strategic options available to
the Company, the Board decided that the Merger represented the best
available course of action for the Stockholders.
(v) the Board's belief that the Merger was the best offer reasonably
available for the Stockholders. In seeking to enhance stockholder value,
during the three month period prior to execution of the Merger Agreement,
the Company and Wasserstein solicited the interest of approximately 30
potential strategic and financial buyers for potential strategic scenarios
for the Company (including mergers and sales of assets), entered into 15
confidentiality agreements with potential buyers, screened prospects, and
received and reviewed three preliminary indications of interest. The Board
noted that Parent's offer was the only firm offer received by the Company
as a result of the sale process and that, in connection with its offer,
Parent financing commitments from DLJ, which should enable Parent to have
access to sufficient financing to consummate the Merger. After reviewing
Parent's offer and analyzing other options available to the
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Company, the Board began negotiations with Parent on the terms of a
definitive agreement. The Board concluded, based on these and other factors
more fully described herein, that the Merger, pursuant to which
Stockholders would be entitled to receive $8.10 per Share in cash, was the
best offer reasonably available to the Stockholders. See "--Background of
the Merger."
(vi) the terms of the Merger Agreement, including the fixed cash
consideration, the absence of a financing condition for Parent and the
specific exclusion of certain matters from the condition that there be no
material adverse effect on the Company between execution of the Merger
Agreement and consummation of the Merger. Specifically, the Board noted
that, subject to certain conditions, the occurrence of any of the following
events will not be deemed to have a material adverse effect on the Company:
(i) the termination or change in terms by Rolex of its relationship or
agreement with the Company, (ii) a reduction of sales of Rolex products
from the date of any such termination or change in terms, (iii) the
termination or change in terms of any relationship or agreement between the
Company and any of its existing vendors or suppliers (other than Rolex)
whose products in the aggregate accounted for 5% or less of the Company's
sales (not including sales attributable to Rolex) for fiscal 1997 or (iv)
any increase in the amounts outstanding under the Company's working capital
borrowings pursuant to credit facilities in existence on the date of the
Merger Agreement. See "--Background of the Merger," "--Terms of the Merger"
and "The Merger Agreement."
(vii) the analyses and presentations of Wasserstein and Wasserstein's
opinion to the effect that, as of January 31, 1998, and based upon and
subject to certain matters stated in its opinion, the cash consideration to
be received by the Stockholders (other than Mr. Crane and his affiliates)
pursuant to the Merger was fair to such Stockholders from a financial point
of view. The Board viewed Wasserstein's opinion as favorable to its
determination, in part, because Wasserstein is an internationally
recognized investment banking firm with experience in the valuation of
businesses and their securities in connection with transactions similar to
the Merger and in providing advisory services for companies in the retail
industry. See "--Background of the Merger" and "--Fairness Opinion of the
Financial Advisor."
The Board also considered the following material, potentially negative
factors in its deliberations concerning approval of the Merger:
(i) each of the Company and its directors, officers, employees, agents
and representatives, including Wasserstein, is generally prohibited, under
the terms of the Merger Agreement, from initiating, soliciting,
encouraging, participating in negotiations or otherwise facilitating a
proposal of an acquisition by or business combination with a party other
than Parent, Sub and the Parent Related Entities, and the Company may be
required, if the Merger Agreement is terminated under certain
circumstances, to pay Parent a Termination Fee of $2,481,100 (approximately
3.5% of the aggregate consideration to be received by the Stockholders and
Option holders of the Company pursuant to the Merger). See "The Merger
Agreement--No Solicitation" and "The Merger Agreement--Termination;
Termination Fee." The Board recognized that the inclusion of such
provisions in the Merger Agreement would render it less likely that a more
attractive offer for the acquisition of the Company would be presented to
the Company and the Stockholders. The Board, however, believed that, based
on its efforts to find a buyer for the Company and Wasserstein's fairness
opinion, the Merger represents the best offer reasonably available to the
Company and its Stockholders. In addition, the Board determined that a 3.5%
Termination Fee was within the range of acceptable fees payable in
comparable transactions and that such a break-up fee was typically given in
comparable transactions in exchange for a "fiduciary out" provision.
(ii) the potential termination or change in terms of the Company's
relationship with Rolex following execution of the Merger Agreement and its
potential adverse effect on the Company's business. The Company is the
exclusive retailer of Rolex watches on all of the islands on which it
operates. Rolex watches accounted for more than 20% of fiscal 1997 sales.
The Board noted the significant impact the termination or change in terms
of the Company's relationship with Rolex could have on the Company's
business. This issue was addressed in part by the terms of the Merger
Agreement, which limits Parent's ability to terminate
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the Merger Agreement in the event Rolex or certain other vendors terminate
or change the terms of their relationship with the Company. Recognizing
that Parent did have the ability to terminate the Merger Agreement in
certain other circumstances, the Board was concerned about its ability to
maintain the Company's strong relationships with Rolex and its other
vendors and the adverse impact on the Company's business that would result
if the Merger Agreement was terminated and the Company was unable to
maintain such relationships. See "The Merger Agreement--Conditions to the
Merger" and "The Merger Agreement--Termination; Termination Fee."
(iii) information relating to the rapid growth of the international
travel retail shopping industry (the "ITRS Industry") in which it
participates. The Board noted that the ITRS Industry has been expanding at
a double-digit compound annual growth rate over the last three decades. The
Board believed that the Company was well positioned to take advantage of
this growing industry, with its name recognition, exclusive and semi-
exclusive brand relationships, advantageous pricing, sustainable
competitive position and potential profit improvement through strategic
initiatives. In fact, the Company's performance has improved since fiscal
1996. Given resource constraints at the Company and the Company's history,
however, the Board was concerned that the Company may not have the
resources necessary to implement its Long-Term Business Plan. In addition,
the Board realized that, even if the Company were successful in
implementing the Long-Term Business Plan, large offsetting expenses would
likely be charged against earnings as a result.
(iv) the significant transaction costs involved in consummating the
Merger, including the substantial management time and effort required to
effectuate the Merger and the related disruption to the Company's
operations associated with consummating the Merger.
The Board was also aware of the potential benefits to certain directors and
officers of the Company occurring as a result of the Merger, discussed below
under "--Interests of Certain Officers and Directors in the Merger," and
considered them, in addition to the factors set forth above, in approving the
Merger Agreement and the transactions contemplated thereby.
In considering the Merger and the related transactions, the Board considered
the impact of the above material, potentially negative factors on the
Stockholders. In view of the wide variety of factors considered by the Board,
the Board did not find it practicable to, and did not, quantify or otherwise
attempt to assign relative weights to the specific factors that it considered
in making its determination. However, in the opinion of the Board, the
potentially negative factors considered by it were not sufficient, either
individually or collectively, to outweigh the positive factors considered by
the Board in its deliberations relating to the Merger. Accordingly, the Board
unanimously voted to approve the Merger Agreement and the transactions
contemplated thereby.
In the event that the Merger is not consummated for any reason, the Company
intends to continue to transact business and to consider its strategic and
financial options. Such options may include, without limitation, remaining
independent and pursuing the Long-Term Business Plan proposed by the
Consulting Firm or seeking another strategic transaction. In light of the
reasons summarized above, the Board believes there are no feasible
alternatives to the Merger available to the Company that are likely to result
in greater stockholder value.
FOR THE REASONS SUMMARIZED ABOVE, THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU
VOTE TO APPROVE THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
FAIRNESS OPINION OF THE FINANCIAL ADVISOR
The Board retained Wasserstein to provide certain investment banking advice
and services in connection with the Merger, including rendering its opinion as
to the fairness from a financial point of view of the consideration to be
received by the Stockholders of the Company (other than Mr. Crane and his
affiliates).
On January 31, 1998, at a special meeting of the Board, Wasserstein
delivered its oral opinion, which opinion was subsequently confirmed by
Wasserstein's written opinion dated January 31, 1998 (collectively, the
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"Wasserstein Opinion"), to the effect that, as of the date of such opinion and
based upon and subject to certain matters specified in the Wasserstein
Opinion, the cash consideration of $8.10 per Share to be received by the
Stockholders (other than Mr. Crane and his affiliates) in the Merger was fair,
from a financial point of view, to such Stockholders. Wasserstein also
presented to the Board the analyses described below at the January 31, 1998
special meeting of the Board.
A copy of the Wasserstein Opinion is attached as Annex B to this Proxy
Statement. Stockholders are urged to read the Wasserstein Opinion carefully
and in its entirety for information with respect to the procedures followed,
assumptions made, matters considered and limits of the review by Wasserstein
in rendering the Wasserstein Opinion. References to the Wasserstein Opinion
herein and the summary of the Wasserstein Opinion set forth below are
qualified by reference to the full text of the Wasserstein Opinion, which is
incorporated herein by reference. The Wasserstein Opinion is directed to the
Board and addresses only to the fairness from a financial point of view to the
Stockholders (other than Mr. Crane and his affiliates) of the cash
consideration of $8.10 per Share and it does not address any other aspect of
the Merger. The Wasserstein Opinion does not constitute a recommendation to
any Stockholder with respect to whether to vote in favor of the Merger and
should not be relied upon by any Stockholder as such.
In arriving at its opinion, Wasserstein reviewed, among other things, (i) a
draft dated January 29, 1998 of the Merger Agreement, and assumed that, except
for changes to the Merger Agreement that were discussed at the January 31,
1998 special meeting of the Board, the Merger Agreement did not differ in any
material respect from the January 29, 1998 draft, (ii) certain publicly
available business and financial information with respect to the Company for
recent years and interim periods that were available as of the date of the
Wasserstein Opinion, (iii) certain internal financial and operating
information, including financial forecasts, analyses and projections prepared
by or on behalf of the Company and provided to Wasserstein for purposes of its
analysis, (iv) certain financial and stock market data relating to the
Company, and compared such data with similar data for certain other companies,
the securities of which are publicly traded, that Wasserstein believed to be
relevant or comparable in certain respects to the Company or one or more of
its businesses or assets, and (v) the financial terms of certain recent
acquisitions and business combination transactions in the duty free and
jewelry industry specifically, and in other industries generally, which
Wasserstein believed to be reasonably comparable to the Merger or otherwise
relevant to its inquiry.
In arriving at its opinion, Wasserstein also took into account the results
of the sale process for the Company, which it conducted on the Company's
behalf, and the fact that such sale process had been widely publicized through
press releases. Wasserstein contacted approximately 30 potential strategic and
financial buyers to inquire whether they had any interest in acquiring all or
any substantial part of the Company. Although a number of such buyers signed a
confidentiality agreement and submitted preliminary indications of interest,
Parent submitted the only firm offer in the sale process.
Wasserstein had discussions with the management of the Company concerning
its businesses, operations, assets, financial condition and future prospects.
Wasserstein also performed such studies, analyses and investigations and
reviewed such other information as it considered appropriate for purposes of
arriving at and preparing the Wasserstein Opinion.
In its review and analysis and in formulating its opinion, Wasserstein
assumed and relied upon the accuracy and completeness of all financial and
other information that was provided to or discussed with it or was publicly
available, and did not assume any responsibility for independent verification
of such information. Wasserstein also reviewed the financial projections,
forecasts and analyses provided to it by the Company's management but did not
express any opinion with respect to such projections, forecasts and analyses
or the assumptions upon which they were based. In addition, Wasserstein did
not review any of the books and records of the Company, except as described
above, or assume any responsibility for conducting a physical inspection of
the properties or facilities of the Company, or for making or obtaining an
independent valuation or appraisal of the assets, lease portfolio or
liabilities of the Company, and Wasserstein was not provided with any such
independent valuation
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or appraisal. No special instructions were given to Wasserstein relating to
its review, and no limitations were imposed with respect to investigations
made or procedures followed by Wasserstein in rendering the Wasserstein
Opinion. Wasserstein also assumed that the transactions described in the
Merger Agreement would be consummated on the terms set forth therein, without
material waiver or modification.
The Wasserstein Opinion was necessarily based on economic and market
conditions and other circumstances as they existed and could be evaluated by
Wasserstein on the date thereof. Wasserstein does not have any obligation to
update, review or reaffirm the Wasserstein Opinion.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial and comparative
analysis and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Furthermore, in arriving at its opinion and making its
presentation to the Board, Wasserstein did not attribute any particular weight
to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Wasserstein believes that its analyses must be considered as a
whole and that selecting portions of its analyses and the factors considered
by it, without considering all factors and analyses, could create a misleading
view of the process underlying the Wasserstein Opinion. In performing its
analyses for the Wasserstein Opinion, Wasserstein made numerous macroeconomic,
operating and financial assumptions with respect to industry performance,
general business, regulatory and economic conditions and other matters, many
of which are beyond the control of the Company. Any estimates incorporated in
the analyses performed by Wasserstein are not necessarily indicative of actual
past or future results or values, which may be significantly more or less
favorable than such estimates. In addition, estimated values do not purport to
be appraisals and do not necessarily reflect the prices at which businesses or
companies may be sold. Because such estimates are inherently subject to
uncertainty, Wasserstein does not assume any responsibility for their
accuracy. No company analyzed for comparative purposes is identical to the
Company or the business segment for which a comparison is being made.
Accordingly, an analysis of comparative companies and comparative business
combinations is not simply mathematical but rather involves complex
considerations and judgments concerning financial and operating
characteristics of the companies involved and other factors that affect value.
The summary set forth below does not purport to be a complete description of
the analyses performed by Wasserstein or of Wasserstein's presentation to the
Board.
Comparable Acquisitions Analysis. Using publicly available information,
Wasserstein calculated a range of implied equity values per Share by reviewing
certain publicly available financial and other information relating to certain
selected completed business combination transactions (the "Comparable
Transactions") in the duty free and jewelry industry since 1989, including BAA
Plc's acquisition of Duty Free International, Inc., LMVH Moet Hennessey Louis
Vuitton's acquisition of DFS Group and Nuance's (Swissair) acquisition of
Allders International.
In conducting its analysis, Wasserstein calculated the following transaction
multiples for each Comparable Transaction based on the latest publicly
available information as of the date of each such Comparable Transaction: (i)
"Adjusted Purchase Price" (defined as total shares of common stock outstanding
times the purchase price per share minus cash and cash equivalents plus total
debt, preferred stock and minority interest) as a multiple of sales, earnings
before interest, taxes, depreciation and amortization ("EBITDA") and earnings
before interest and taxes ("EBIT") calculated on a first-in-first-out ("FIFO")
basis for the latest twelve months ("LTM") and (ii) "Equity Purchase Price"
(defined as total shares of common stock outstanding times the purchase price
per share) as a multiple of net income and of book value for the LTM and as of
the most recent balance sheet date, respectively.
Based on such calculations, Wasserstein determined that the appropriate
range of implied multiples of Adjusted Purchase Price or Equity Purchase
Price, as the case may be, for the Comparable Transactions was 1.00x to 1.10x
LTM sales, 11.0x to 12.0x LTM EBITDA (determined on a FIFO basis), 12.0x to
14.0x LTM EBIT (determined on a FIFO basis), 20.0x to 23.0x LTM net income and
2.8x to 3.0x book value.
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Based on such analyses, Wasserstein determined ranges of implied equity
values for the Company based on the Comparable Transactions by applying each
of the above ranges of multiples to the relevant LTM financial information of
the Company. These ranges of implied equity values were then divided by
approximately 8.7 million fully diluted Shares (including Shares issuable
pursuant to all exercisable Options using the treasury method) (the "Fully
Diluted Exercisable Shares") to yield a range of implied per Share public
market equity values with respect to each type of multiple based on the
Comparable Transactions.
Comparable Companies Analysis. Using publicly available information,
Wasserstein compared selected financial data of the Company with similar data
of selected companies, the securities of which are publicly traded and which
are engaged in businesses that Wasserstein believed to be comparable in
certain respects to that of the Company. Specifically, Wasserstein included in
its review Friedman's, Inc., Mark Bros. Jewelers, Inc., Reeds Jewelers, Inc.,
Tiffany & Co. and Zale Corp. (the "Comparable Companies"). Wasserstein
calculated the following market trading multiples for each of the Comparable
Companies based on most recent LTM data as of January 23, 1998 and, where
available, estimates for each of their respective next fiscal years ("Next
FY"): "Adjusted Market Value" (defined as total shares of common stock
outstanding, plus in-the-money exercisable options using the treasury method
times the closing price per share as of January 23, 1998 minus cash and cash
equivalents plus total debt, preferred stock and minority interest) as a
multiple of sales, EBITDA (determined on a FIFO basis) and EBIT (determined on
a FIFO basis); and "Market Value" (defined as total shares of common stock
outstanding plus in-the-money exercisable options using the treasury method
times the closing price per share as of January 23, 1998) as a multiple of net
income and book value. Financial data with respect to Next FY was based upon
publicly available research analysts reports and Wasserstein estimates.
Wasserstein's Comparable Companies analysis was prepared both with and without
giving effect to any change-of-control premium that is inherent in the
acquisition of a controlling interest in a company. For such purpose,
Wasserstein included a control premium of 35% to imputed equity value.
Based on such calculations, Wasserstein determined that the appropriate
range of LTM market multiples was: 1.00x to 1.10x sales; 8.0x to 9.0x EBITDA;
10.0x to 12.0x EBIT; 14.5x to 17.5x net income; and 1.8x to 2.0x book value.
Using the same approach, Wasserstein determined that the appropriate range of
market multiples for 1998 estimated financial information was 0.95x to 1.05x
sales; 7.0x to 8.0x EBITDA; 9.0x to 11.0x EBIT; and 12.5x to 15.5x net income.
Based on such analyses, Wasserstein determined ranges of implied equity
values for the Company by applying the above ranges of multiples to the
relevant LTM financial information of the Company and to the relevant 1998
estimated financial information of the Company. These ranges of implied public
equity values of the Company were then divided by the Fully Diluted
Exercisable Shares to yield a range of implied per Share public market equity
values with respect to each type of multiple based on LTM and 1998 estimated
financial information.
Applying a 35% control premium to the implied equity values described in the
preceding paragraph resulted in new ranges of implied equity values for the
Company. Wasserstein divided such increased ranges of implied equity values by
the Fully Diluted Exercisable Shares, which yielded a range of implied per
Share equity values with respect to each type of multiple based on LTM and
1998 estimated financial information.
Premium Analysis. Using publicly available information, Wasserstein analyzed
the purchase price per share of common stock for each acquired company in
selected public change-in-control transactions from $50 million to $125
million completed between January 1996 and November 1997, excluding financial
institutions, as a premium to such company's stock price on the days that were
one day, one week and four weeks prior to the transaction's public
announcement. The mean transaction premiums one day, one week and four weeks
before the date of the original announcement of a transaction were 23.1%,
29.0% and 44.4%, respectively, while the median transaction premiums were
17.7%, 27.5% and 34.8%, respectively. The transaction premiums for the Company
based on a price of $8.10 per Share and the relevant stock trading prices one
day, one week and four weeks before the date of original announcement of the
transaction were 15.7%, 8.9% and 17.8%, respectively. The transaction premiums
for the Company based on a price of $8.10 per Share and the relevant stock
trading
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prices one day, one week and four weeks before the date of original
announcement by ValueVest that it had acquired a 9.9% stake in the Company
were 60.0%, 70.5% and 77.5%, respectively.
Discounted Cash Flow Analysis. Wasserstein performed a discounted cash flow
("DCF") analysis of the business of the Company. A DCF analysis is a
traditional valuation methodology used to derive a valuation of a corporate
entity by capitalizing the estimated future earnings and calculating the
estimated future unlevered free cash flows of such corporate entity and
discounting such aggregate results back to a present value. The DCF analysis
considered the projected operating performance of the Company over the five
year period from fiscal 1998 through 2002 based on a management case utilizing
projections prepared by management of the Company that made certain
assumptions concerning, among others, comparable store growth rates, gross
profit rates and tax rates. Wasserstein also performed a DCF analysis using a
sensitivity case that made more conservative assumptions concerning such
factors.
In conducting the DCF analysis, Wasserstein reviewed with the Company's
management the prospects and risks associated with the Company's business to
derive what it believes are appropriate discount rates and terminal year
EBITDA multiples. Based on this review, Wasserstein applied discount rates of
12% to 14% with respect to the management case, and 11% to 13% with respect to
the sensitivity case, to the Company's unlevered free cash flow for the period
from fiscal 1997 through fiscal 2001 and applied such discount rates and
terminal multiples of 8.0x to 9.0x to projected EBITDA determined on a FIFO
basis for fiscal 2002 to yield, after subtracting net debt, a range of implied
equity values. The range of implied equity values was then divided by the
Fully Diluted Outstanding Shares. Based on this analysis, the management case
generated an implied equity value range of $14.23 to $17.19 per Share, and the
sensitivity case generated an implied equity value range of $7.68 to $9.09 per
Share.
With respect to the DCF analysis, Wasserstein noted that the selection of an
appropriate discount rate is an inherently subjective process and is affected
by such factors as the Company's cost of capital, the uncertainty associated
with achieving the projections provided by the management of the Company and
transaction risk generally. Wasserstein also noted that DCF analysis is a
widely used valuation methodology, but that it relies on numerous assumptions
regarding the future performance of a company and the future economic
environment, including earnings growth rates, unlevered free cash flows,
terminal values and discount rates, all of which are inherently uncertain
because they are predicated upon future events and circumstances.
Wasserstein performed such other valuation analyses as it deemed appropriate
in determining the fairness to the Stockholders (other than Mr. Crane and his
affiliates) of the cash consideration of $8.10 per Share from a financial
point of view. Wasserstein concluded that, as of January 31, 1998, in its
judgment, including the full range of its analyses described above, such
consideration was fair, from a financial point of view, to the Stockholders
(other than Mr. Crane and his affiliates).
Wasserstein is an investment banking firm engaged in, among other things,
the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities and private placements.
Wasserstein was selected as the Company's financial advisor and to render its
opinion because Wasserstein is an internationally recognized investment
banking firm and members of Wasserstein have substantial experience in
transactions such as the Merger and in valuing companies, particularly in the
retail industry.
Pursuant to the terms of a letter agreement dated as of December 19, 1994,
as amended and supplemented by letter agreements dated as of January 5, 1996
and May 6, 1997 (as amended and supplemented, the "Engagement Letter"),
Wasserstein was retained as the Company's sole and exclusive financial advisor
for the purpose of assisting the Company with the following: (a) evaluating
the extent to which it might be subject to any particular change in control
that might, in the opinion of the Board, not be in the best interests of the
Company and its Stockholders, and in considering the Company's alternatives to
reduce the likelihood of any such change in control; (b) evaluating offers
received by the Company or its Stockholders relating to an acquisition of or
similar business combination transaction involving the Company or a majority
of the value of
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the Company's assets; (c) attempting to design and implement a strategy with
the objective of successfully consummating the transactions contemplated by
any such offer, if the Board determines that such offer is in the best
interests of the Company and its Stockholders; (d) seeking to promote the best
interests of the Company and its Stockholders, if the Board determines that
such offer is not in the best interests of the Company and its Stockholders;
(e) considering the desirability of effecting any transaction relating to or
in response to any such offer and, if the Company believes such alternative
transaction is desirable, effecting such alternative transaction; and (f)
seeking to promote the best interests of the Company and its Stockholders, as
determined by the Board, in the event of any acquisition or proposed
acquisition by any person or group of persons of 5% or more of any class of
the Company's equity securities or in the event of any solicitation of proxies
or Stockholders' consent in opposition to, or without the support of, the
Board. The Company paid Wasserstein a retainer fee of $200,000 upon execution
of the Engagement Letter. The Company has also agreed to pay Wasserstein an
additional fee of approximately $1.9 million upon consummation of the Merger.
In the event that the Merger or a similar transaction is not consummated on or
before May 6, 1998, the Company has agreed to pay Wasserstein an additional
fee of $500,000, which Wasserstein has agreed to waive if the Merger is
consummated. The Company has further agreed to reimburse Wasserstein, whether
or not the Merger is consummated, for its reasonable out-of-pocket expenses,
including all reasonable fees and disbursements of its counsel. The Company
also agreed to indemnify Wasserstein and its affiliates, their respective
directors, officers, partners, agents and employees and each person, if any,
controlling Wasserstein or any of its affiliates against certain liabilities
and expenses, including certain liabilities under the Federal securities laws
relating to or arising out of its engagement.
In recognition of Triumph's role in introducing Wasserstein to the Company
and in the initial phases of the Company's review of its strategic
alternatives, Wasserstein paid Triumph one-half of its retainer fee and has
agreed to pay Triumph one-third of any additional transaction fees paid to
Wasserstein in accordance with the Engagement Letter summarized above.
In the ordinary course of its business, Wasserstein may actively trade the
securities of the Company for the account of Wasserstein and for the accounts
of its customers and, accordingly, may at any time hold a long or short
position in such securities.
INTERESTS OF CERTAIN OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendation of the Board to approve the Merger
Agreement and the transactions contemplated thereby, Stockholders should be
aware that certain members of the management of the Company and the Board have
certain interests in, and will receive benefits as a consequence of, the
Merger that are separate from the interests of, and benefits to, the
Stockholders generally.
Executive Officers' Employment Agreements. On November 1, 1995, John E.
Toler entered into an employment agreement with the Company (the "Toler
Employment Agreement"), pursuant to which Mr. Toler serves as President and
Chief Executive Officer of the Company for a five-year term. Under the Toler
Employment Agreement, in the event of a Terminating Event (as defined in the
Toler Employment Agreement) within one year from a Change in Control (as
defined in the Toler Employment Agreement), Mr. Toler will be entitled to
receive (i) an amount equal to 18 months of his base salary ($300,000) plus
any accrued and unpaid bonus which he has earned and (ii) reimbursement for
any and all expenses incurred in relocating to the United States.
On November 12, 1997, Thomas S. Liston entered into an employment agreement
with the Company (the "Liston Employment Agreement"), pursuant to which Mr.
Liston serves as Vice President, Chief Financial Officer and Treasurer of the
Company for a two-year term. Under the Liston Employment Agreement, in the
event of a Terminating Event (as defined in the Liston Employment Agreement)
within one year from a Change in Control (as defined in the Liston Employment
Agreement), Mr. Liston will be entitled to receive (i) an amount equal to (x)
six months of his base salary ($160,000) if a Change in Control is consummated
on or prior to May 31, 1998 or nine months of his base salary if such Change
in Control is consummated after May 31, 1998
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plus (y) any accrued and unpaid bonus which he has earned and (ii)
reimbursement for any and all expenses incurred in relocating to the State of
Arizona.
Consulting Agreement. On June 2, 1996, C. William Carey entered into a
consulting agreement with the Company (the "Consulting Agreement"), pursuant
to which Mr. Carey agreed to make himself available for a period of three
years commencing on June 2, 1996 to provide consulting services to the
Company, including, without limitation, advice with respect to business and
product planning, marketing strategy, leasing and new store development and
executive recruitment. Under the Consulting Agreement, in the event of a
Terminating Event (as defined in the Consulting Agreement) within one year
from a Change in Control (as defined in the Consulting Agreement), Mr. Carey
will be entitled to receive (i) a lump sum payment in the amount of $150,000
(or if less than one year remains in the term of the Consulting Agreement,
then a lump sum payment in an amount equal to the remaining portion of the
$150,000 annual consulting fee) and (ii) reimbursement for any and all
expenses incurred by him in connection with the performance of his obligations
under the Consulting Agreement.
Investment Banking Committee Compensation. In connection with the
establishment of the Investment Banking Committee, on November 28, 1994, the
Board voted to compensate the members of the Investment Banking Committee for
the significant additional time commitment that would be required of such
members in connection with fulfilling their duties and responsibilities as
members of the Investment Banking Committee. Pursuant to such vote, the
members of the Investment Banking Committee are entitled to an aggregate
success fee equal to two-thirds of one percent of the aggregate value of any
transaction, including any sale, purchase, merger, joint venture or
combination thereof, entered into and completed by the Company (estimated to
be approximately $645,000). The members of the Investment Banking Committee at
the time of its establishment by the Board were Francis X. Correra and C.
William Carey. These directors continued to serve as the members of the
Investment Banking Committee until Mr. Correra's death on January 14, 1998,
after which the Investment Banking Committee consisted solely of Mr. Carey. On
February 4, 1998, in anticipation of the execution of the Merger Agreement,
Mr. Carey entered into a Success Fee Agreement with the Company (the "Carey
Success Fee Agreement"), pursuant to which the Company is obligated to pay Mr.
Carey an amount equal to 83.33% of two-thirds of one percent of the aggregate
value (as defined in the Carey Success Fee Agreement) of any such transaction
at the closing of such transaction; provided, however, that the Company is not
obligated to make such payment if Mr. Carey resigns as a member of the Board
on or before the effective time of such transaction. The Company is obligated
to pay the estate of Mr. Correra the remaining 16.67% of the fee to be paid to
the Investment Banking Committee at the closing of such transaction.
Indemnification. Pursuant to the Merger Agreement, the Surviving Corporation
and Parent have agreed to provide, for a period of six years after the
Effective Time, exculpation and indemnification for each person who is now or
has been at any time prior to the date of the Merger Agreement, or who becomes
prior to the Effective Time, an officer, director, employee, fiduciary or
agent of the Company or any of its subsidiaries (the "Indemnified Parties") to
the same extent as provided to them by the Company immediately prior to the
Effective Time in the Company's Certificate of Incorporation or By-laws;
provided, however, that such exculpation and indemnification only covers
actions on or prior to the Effective Time, including, without limitation, all
transactions contemplated by the Merger Agreement. In addition, the Merger
Agreement provides that the Surviving Corporation and Parent shall indemnify
and hold harmless, as and to the fullest extent permitted by applicable law,
each Indemnified Party against any losses, claims, liabilities, costs,
expenses (including reasonable attorneys' fees and expenses), judgments, fines
and amounts paid in settlement in connection with any threatened or actual
claim, action, suit, proceeding or investigation, whether civil, criminal or
administrative, including without limitation, any action by or on behalf of
any Stockholder, or by or in the right of the Company, in which such
Indemnified Party is, or is threatened to be, made a party based on, or
arising out of, (i) the fact that he or she is or was an officer, employee or
director of the Company or any of its subsidiaries or any action or omission
by such person in his or her capacity as a director of the Company or any of
its subsidiaries, or (ii) the Merger Agreement or the transactions
contemplated thereby, whether in any case asserted before or after the
Effective Time. After the Effective Time, the Surviving Corporation and Parent
shall
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be obligated to promptly pay and advance reasonable expenses and costs
incurred by such Indemnified Party as they become due and payable in advance
of the final disposition of the claim, action, suit, proceeding or
investigation to the fullest extent and in the manner permitted by law. See
"The Merger Agreement--Indemnification and Insurance."
Insurance. Parent agreed to the purchase of, and the Company was obligated
to purchase immediately following the execution of the Merger Agreement,
liability insurance policy coverage for the Company's directors and officers
for a period of six years following the Effective Time, the premium of which
could not exceed $150,000, which will provide the directors and officers with
coverage on substantially similar terms as currently provided by the Company
to such directors and officers. Since execution of the Merger Agreement, the
Company has arranged for the purchase of such policy. See "The Merger
Agreement--Indemnification and Insurance."
Town & Country. Mr. Carey is a controlling stockholder of Town & Country
Corporation ("Town & Country"). Town & Country and certain of its subsidiaries
presently supply the Company with jewelry. The aggregate amount of purchases
by the Company from these entities totaled approximately $2.5 million, $1.4
million and $640,000 in Fiscal 1995, 1996 and 1997 respectively. Pursuant to
written agreements among Town & Country, these subsidiaries and the Company,
Town & Country and the subsidiaries have agreed to supply jewelry to the
Company at the Company's option, on the terms and conditions in effect prior
to the Company's initial public offering. These agreements are automatically
renewed each year unless either party terminates upon 60 days' notice prior to
the end of a year. Following the consummation of the Merger, the Surviving
Corporation will evaluate whether or not to continue the existing relationship
with Town & Country under such agreements.
Options. As of March 20, 1998, the Company had granted to certain of its
executive officers Options to purchase a total of 385,000 Shares under the
1991 Option Plan as follows: 300,000 to Mr. Toler, 25,000 to Mr. Liston and
60,000 to William Canfield. As of such date, all of the Shares subject to such
Options were vested as a result of the execution of the Merger Agreement,
pursuant to the terms of the 1991 Option Plan. In the event such executive
officers consent to the cancellation of such Options in connection with the
Merger, then such executive officers will receive in payment thereof (net of
the exercise price) $1,535,062 in the aggregate, pursuant to the terms of the
Merger Agreement, including $1,380,000 to Mr. Toler for his Options, $41,562
to Mr. Liston for his Options and $113,500 to Mr. Canfield for his Options.
See "The Merger Agreement--Conversion of Options."
As of March 20, 1998, the Company had granted to its non-employee directors
Options to purchase a total of 138,000 Shares under the Option Plans as
follows: 30,000 to Mr. Carey, 30,000 to Ilene B. Jacobs, 27,000 to Kenneth W.
Watson, 21,000 to Timothy Donaldson and 30,000 to Francis X. Correra, all of
which vested on the date of grant. In the event these directors consent to the
cancellation of such Options in connection with the Merger, then such
directors (or their representatives) will receive in payment for all such
Options that are in-the-money (net of the exercise price) $141,975 in the
aggregate, pursuant to the terms of the Merger Agreement, including $32,325 to
Mr. Carey for his Options, $32,325 to Ms. Jacobs for her Options, $27,525 to
Mr. Watson for his Options, $17,475 to Mr. Donaldson for his Options and
$32,325 to the estate of Mr. Correra for his Options. See "The Merger
Agreement--Conversions of Options."
CERTAIN EFFECTS OF THE MERGER
If the Merger is consummated, the Stockholders will not have an opportunity
to continue their equity interest in the Company as an ongoing corporation and
therefore will not have the opportunity to share in its future earnings and
potential growth, if any.
At the Effective Time, (i) Sub will merge with and into the Company and the
separate corporate existence of Sub will cease, (ii) the Surviving Corporation
will be a wholly-owned subsidiary of Parent, (iii) all the rights, privileges,
immunities, powers and franchises of the Company and Sub will vest in the
Surviving Corporation and (iv) all obligations, duties, debts and liabilities
of the Company and Sub will be the obligations, duties, debts and liabilities
of the Surviving Corporation. The Certificate of Incorporation of the Company
will be amended such that the certificate of incorporation of Sub, in effect
immediately prior to the Effective Time, will be the
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certificate of incorporation of the Surviving Corporation and the by-laws of
Sub, in effect immediately prior to the Effective Time, will be the by-laws of
the Surviving Corporation. Immediately after the Effective Time, the directors
of Sub will be the directors of the Surviving Corporation.
The Shares are currently registered under the Exchange Act. Such
registration may be terminated 90 days after the Company certifies to the
Commission that there are fewer than 300 holders of Shares and the Exchange
Act registration is no longer required. Termination of registration of the
Shares under the Exchange Act would eliminate the requirement that the Company
furnish information periodically to the Commission and its Stockholders and
would render inapplicable the provisions of the Exchange Act, including
requirements that the Company furnish Stockholders with proxy materials
regarding stockholders' meetings, requirements of Rule 13e-3 under the
Exchange Act with respect to "going private" transactions and requirements
that the Company's officers, directors and 10% Stockholders file certain
reports concerning ownership of the Company's securities and pay over to the
Company so-called "short-swing" profits from transactions in such securities.
As soon as practicable after the consummation of the Merger, the Surviving
Corporation intends to file with the Commission a Certification on Form 15,
requesting termination of Exchange Act registration of the Shares. Such
certification normally becomes effective 90 days from the date of such filing,
although the Company's obligation to furnish periodic information to the
Commission and its Stockholders will terminate automatically on the date of
filing.
PURPOSE AND STRUCTURE OF THE MERGER
The purpose of the Merger is for Parent and Sub to acquire control of, and
the entire equity interest in, the Company. The acquisition of the Shares from
the holders of such Shares is structured as a cash merger in order to transfer
ownership of the Shares to Parent and Sub and to provide cash to the holders
of such Shares in one transaction. In addition, this Merger structure provides
flexibility with respect to certain financial, operational and tax planning
considerations. After the Merger, the Surviving Corporation will be a wholly-
owned subsidiary of Parent.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material federal income tax
consequences to the Stockholders relevant to consummation of the Merger. The
discussion does not deal with all of the tax consequences of the Merger that
may be relevant to every Stockholder. STOCKHOLDERS SHOULD THEREFORE CONSULT
THEIR OWN TAX ADVISORS AS TO THE TAX CONSEQUENCES OF THE MERGER TO THEM UNDER
APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS. The discussion of tax
consequences that follows is based upon the Code, the income tax regulations
promulgated under the Code, IRS rulings and judicial decisions now in effect,
all of which are subject to change at any time. Any such change, which may or
may not be retroactive, could alter the tax consequences to the Stockholders
as described herein. The following discussion is for general information only,
and may not apply to particular categories of Stockholders, such as financial
institutions, broker-dealers, tax-exempt entities, Stockholders who acquired
their Shares pursuant to the exercise of Options or other compensation
arrangements with the Company and Stockholders who are not citizens or
residents of the United States. The discussion is not covered by an opinion of
counsel, nor did the Company request a private letter ruling from the IRS with
respect to any tax consequence of the Merger. Accordingly, no assurance can be
given that the IRS will agree with the statements that appear below.
The receipt of cash in exchange for Shares pursuant to the Merger, and the
receipt of cash by a Stockholder who exercises his, her or its appraisal's
rights under DGCL, will be a taxable transaction for federal income tax
purposes. A Stockholder will generally recognize gain or loss for federal
income tax purposes in an amount equal to the difference between such
Stockholder's adjusted tax basis in the Shares and the amount of cash received
in exchange therefor (other than amounts received pursuant to a Stockholder's
statutory rights of appraisal that are denominated as interest, which amounts
would be taxable as ordinary income). Such gain or loss will be a capital gain
or loss if such Stockholder has held such Shares as capital assets within the
meaning of Section 1221 of the
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Code. Such capital gain or loss will be a long-term capital gain or loss if
such Stockholder has held such Shares for more than 12 months as of the date
of exchange. In the case of a non-corporate Stockholder, the long-term capital
gain will be taxed at a minimum rate of 20% if such Stockholder has held such
Shares for more than 18 months and 28% if said Shares have been held for more
than 12 months but not more than 18 months. There are certain limitations on
the deductibility of capital losses.
Cash received in exchange for Shares in the Merger may be subject to a
backup withholding tax at a rate of 31%, unless the relevant Stockholder is an
exempt recipient or complies with certain identification procedures. Upon the
consummation of the Merger, the Paying Agent will forward to each Stockholder
a Form W-9 which, when properly completed and returned, would fulfill such
identification procedures.
ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase," as such term is used under
generally accepted accounting principles, for accounting and financial
reporting purposes. Accordingly, a determination of the fair value of the
Company's assets and liabilities will be made to allocate the purchase price
to the assets acquired and the liabilities assumed.
APPRAISAL RIGHTS
Stockholders who continuously are the record holders of Shares between the
date of the making of a proper demand pursuant to Section 262 of DGCL
("Section 262") and the Effective Time, and who otherwise follow the
procedures specified in Section 262, will be entitled to have their Shares
appraised by the Delaware Court of Chancery and to receive payment of the
"fair value" of such Shares, exclusive of any element of value arising from
the accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, as determined by such Court. THE PROCEDURES SET FORTH IN
SECTION 262 SHOULD BE STRICTLY COMPLIED WITH. FAILURE TO FOLLOW ANY OF SUCH
PROCEDURES MAY RESULT IN A TERMINATION OR WAIVER OF APPRAISAL RIGHTS UNDER
SECTION 262.
The following discussion of the provisions of Section 262 is not intended to
be a complete statement of its provisions and is qualified in its entirety by
reference to the full text of that section, a copy of which is attached as
Annex C to this Proxy Statement.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, such as the Special Meeting, not less than 20 days
prior to the meeting a constituent corporation must notify each of the holders
of its stock for whom appraisal rights are available that such appraisal
rights are available and include in each such notice a copy of Section 262.
This Proxy Statement shall constitute such notice to Stockholders.
Under Section 262, a Stockholder of record electing to exercise appraisal
rights must comply with both of the following two requirements.
(a) Such Stockholder must deliver to the Company, before the date of the
Special Meeting, a written demand for appraisal of his, her or its Shares that
reasonably informs the Company of the identity of the Stockholder and that
such Stockholder intends thereby to demand the appraisal of his, her or its
Shares. This written demand is in addition to and separate from any proxy
relating to the Merger Agreement. Voting against, abstaining from voting or
failing to vote on the Merger Agreement will not constitute a demand for
appraisal within the meaning of Section 262. Such written demand for appraisal
should be delivered either in person to the Secretary of the Company or by
mail (certified mail, return receipt requested, being the recommended form of
transmittal) to the Secretary, Little Switzerland, Inc., 161-B Crown Bay
Cruise Ship Port, St. Thomas, U.S.V.I. 00804, prior to the date of the Special
Meeting.
(b) Such Stockholder must not vote in favor of the Merger Agreement. Neither
an abstention from voting with respect to, nor failure to vote in person or by
proxy against approval of the Merger constitutes a waiver of the rights of a
dissenting Stockholder.
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A person having a beneficial interest in Shares of the Company that are held
of record in the name of another person, such as a broker, fiduciary,
depositary or other nominee, must act promptly to cause the record holder to
follow the steps summarized herein properly and in a timely manner to perfect
appraisal rights. If the Shares are owned of record by a person other than the
beneficial owner, including a broker, fiduciary (such as a trustee, guardian
or custodian), depositary or other nominee, such demand must be executed by or
for the record owner. If the Shares are owned of record by more than one
person, as in a joint tenancy or tenancy in common, such demand must be
executed by or for all joint owners. An authorized agent, including an agent
for two or more joint owners, may execute the demand for appraisal for a
Stockholder of record; however, the agent must identify the record owner and
expressly disclose the fact that, in exercising the demand, such person is
acting as agent for the record owner. If a Stockholder holds Shares through a
broker who in turn holds the Shares through a central securities depository
nominee such as Cede & Co., a demand for appraisal of such Shares must be made
by or on behalf of the depository nominee and must identify the depository
nominee as record holder.
A record holder, such as a broker, fiduciary, depositary or other nominee,
who holds Shares as a nominee for others, may exercise appraisal rights with
respect to the Shares held for all or less than all beneficial owners of
Shares as to which such person is the record owner. In such case, the written
demand must set forth the number of Shares covered by such demand. Where the
number of Shares is not expressly stated, the demand will be presumed to cover
all Shares outstanding in the name of such record owner.
Within ten days after the Effective Time, the Surviving Corporation is
required to and will provide notice of the Effective Time to each Stockholder
who has satisfied the conditions of Section 262. Within 120 days after the
Effective Time, the Surviving Corporation or any such Stockholder who has
satisfied the conditions of Section 262 and is otherwise entitled to appraisal
rights under Section 262, may file a petition in the Delaware Court of
Chancery demanding a determination of the value of the Shares held by all
Stockholders entitled to appraisal rights. If no such petition is filed,
appraisal rights will be lost for all Stockholders who had previously demanded
appraisal of their Shares. Stockholders seeking to exercise appraisal rights
should not assume that the Surviving Corporation will file a petition with
respect to the appraisal of the value of their Shares or that the Surviving
Corporation will initiate any negotiations with respect to the "fair value" of
such Shares. ACCORDINGLY, STOCKHOLDERS WHO WISH TO EXERCISE THEIR APPRAISAL
RIGHTS SHOULD REGARD IT AS THEIR OBLIGATION TO TAKE ALL STEPS NECESSARY TO
PERFECT THEIR APPRAISAL RIGHTS IN THE MANNER PRESCRIBED IN SECTION 262.
Within 120 days after the Effective Time, any Stockholder who has complied
with the provisions of Section 262 is entitled, upon written request, to
receive from the Surviving Corporation a statement setting forth the aggregate
number of Shares not approving the Merger and with respect to which demands
for appraisal were received and the number of holders of such Shares. Such
statement must be mailed within ten days after the written request therefor
has been received by the Surviving Corporation or within ten days after
expiration of the time for delivery of demands for appraisal under Section
262, whichever is later.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Court of Chancery will determine the Stockholders entitled to
appraisal rights. The Court may require the Stockholders who have demanded an
appraisal for their Shares and who hold stock represented by Certificates to
submit their Certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any Stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such Stockholder. Where proceedings are not dismissed, the Court will
appraise the Shares owned by such Stockholders, determining their fair value,
exclusive of any element of value arising from the accomplishment or
expectation of the Merger. The Court will direct the payment of the fair value
of such Shares together with interest, if any, on such fair value to
Stockholders entitled thereto upon surrender to the Surviving Corporation of
Certificates representing such Shares.
Although the Company, Parent and Sub believe that the cash consideration of
$8.10 per Share is fair, none of such parties can make any representation as
to the outcome of the appraisal of fair value as determined by the Delaware
Court of Chancery, and Stockholders should recognize that such an appraisal
could result in a
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determination of a value that is lower, higher or equivalent to the cash
consideration of $8.10 per Share. Moreover, the Company does not anticipate
offering more than the cash consideration of $8.10 per Share to any
Stockholder exercising appraisal rights and reserves the right to assert, in
any appraisal proceeding, that, for purposes of Section 262, the "fair value"
of a Share is less than the cash consideration of $8.10 per Share. In
determining "fair value," the Court is required to take into account all
relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court
discussed the factors that could be considered in determining fair value in an
appraisal proceeding, stating that "proof of value by any techniques or
methods which are generally considered acceptable in the financial community
and otherwise admissible in court" should be considered and that "[f]air price
obviously requires consideration of all relevant factors involving the value
of a company." The Delaware Supreme Court has stated that, in making this
determination of fair value, the court must consider market value, asset
value, dividends, earnings prospects, the nature of the enterprise and any
other facts which could be ascertained as of the date of the merger which
throw any light on future prospects of the merged corporation. Section 262
provides that fair value is to be "exclusive of any element of value arising
from the accomplishment or expectation of the merger." In Cede & Co. v.
Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a
"narrow exclusion [that] does not encompass known elements of value," but
which rather applies only to the speculative elements of value arising from
such accomplishment or expectation. In Weinberger, the Delaware Supreme Court
construed Section 262 to mean that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the
date of the merger and not the product of speculation, may be considered." In
addition, Delaware courts have decided that the statutory appraisal remedy,
depending on the factual circumstances, may or may not be a stockholder's
exclusive remedy in connection with transactions such as the Merger.
The cost of the appraisal proceeding may be determined by the Delaware Court
of Chancery and taxed against the parties as the Court deems equitable in the
circumstances. However, costs do not include attorneys' and expert witness
fees. Each dissenting Stockholder is responsible for his, her or its
attorneys' and expert witness expenses, although, upon application of a
Stockholder, the Court may, in its discretion, order that all or a portion of
the expenses incurred by any Stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, be charged pro rata against the value of all the
Shares entitled to an appraisal.
Any Stockholder who has demanded an appraisal in compliance with Section 262
will not, from and after the Effective Time, be entitled to vote his, her or
its Shares for any purpose nor be entitled to the payment of dividends or
other distributions on his, her or its Shares (other than those payable to
Stockholders of record at a date prior to the date of the Effective Time).
If no petition for an appraisal is filed within the time provided, or if a
Stockholder delivers to the Company a written withdrawal of his, her or its
demand for an appraisal either within 60 days after the Effective Time, or
thereafter with the written approval of the Surviving Corporation, then the
right of such Stockholder to an appraisal will cease and such Stockholder
shall be entitled to receive the consideration to which he, she or it would
have been entitled pursuant to the Merger had such Stockholder not demanded
appraisal of his, her or its Shares. Notwithstanding the foregoing, no
appraisal proceeding in the Delaware Court of Chancery will be dismissed as to
any Stockholder without the approval of the Court, which approval may be
conditioned on such terms as the Court deems just.
As a condition to consummation of the Merger, no more than 5% of the total
number of Shares outstanding immediately prior to the Effective Time of the
Merger may be subject to a proper demand for appraisal rights under Section
262 of DGCL. See "The Merger Agreement--Conditions to the Merger."
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THE SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING
This Proxy Statement is being furnished to the holders of record of the
Shares as of the Record Date and is accompanied by a form of proxy, which is
being solicited by the Board for use at the Special Meeting to be held on
Friday, May 8, 1998, at 10:00 a.m., local time, at State Street Bank and Trust
Company, Board Room, 33rd Floor, 225 Franklin Street, Boston, Massachusetts,
and any adjournments or postponements thereof. At the Special Meeting, holders
of record of the Shares as of the Record Date will be asked to consider and
vote upon a proposal to approve the Merger Agreement and the transactions
contemplated thereby, including the Merger. This proposal will be approved if
it receives the affirmative vote of holders of a majority of the outstanding
Shares entitled to vote on the matter at the Special Meeting. The Stockholders
also will be asked to consider and vote upon such other matters as may
properly come before the Special Meeting. Proxies may be voted on such other
matters as may properly come before the Special Meeting or any adjournments
thereof, in the best judgment of the proxyholders named therein.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SIGN, DATE AND
MAIL THE ENCLOSED PROXY CARD IN THE ENCLOSED, POSTAGE PAID ENVELOPE. FAILURE
TO RETURN YOUR PROPERLY EXECUTED PROXY OR TO VOTE AT THE MEETING WILL HAVE THE
SAME EFFECT AS A VOTE AGAINST THE MERGER AGREEMENT.
STOCKHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH THEIR PROXIES.
RECORD DATE AND OUTSTANDING SHARES
Record Date. The Board has fixed the close of business on Monday, March 30,
1998 as the Record Date for determination of Stockholders entitled to notice
of and to vote at the Special Meeting. Only Stockholders of record at the
close of business on the Record Date are entitled to notice of and to vote at
the Special Meeting or any adjournment or postponement thereof.
Capital Stock. The Company's authorized capital stock consists of 20,000,000
Shares of Common Stock and 5,000,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"), of which 100,000 shares have been
designated as "Series A Junior Participating Cumulative Preferred Stock" and
reserved for issuance upon exercise of the Rights issued pursuant to the
Shareholder Rights Agreement. On the Record Date, the Company had issued and
outstanding 8,554,202 Shares of Common Stock, held by approximately 138
Stockholders of record. No shares of Preferred Stock have been issued or
reserved for issuance except pursuant to the Shareholder Rights Agreement. See
"The Merger and Related Transactions--Terms of the Merger."
VOTING RIGHTS AND QUORUM
Voting Rights. The securities that can be voted at the Special Meeting
consist of issued and outstanding Shares of Common Stock, with each Share
entitling its owner to one vote on all matters. There is no cumulative voting
of Shares. Stockholders' votes will be tabulated by the persons appointed by
the Board to act as inspectors of election for the Special Meeting. Votes may
be cast at the Special Meeting in person or by properly executed proxy. See
"--Proxies and Revocation."
Reason for Seeking Stockholder Approval. Approval of the Merger Agreement
and the transactions contemplated thereby by the Stockholders is required
under DGCL and the Certificate of Incorporation of the Company and is a
condition to consummation of the Merger pursuant to the terms of the Merger
Agreement. See "The Merger Agreement--Conditions to the Merger." If the
requisite Stockholder vote is not obtained, the Merger will not be
consummated, in which case, the Company will continue to transact business and
to pursue strategic options available to the Company. See "The Merger and
Related Transactions--Reasons for the Merger; Recommendation of the Board."
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Quorum. The By-laws of the Company provide that holders of a majority in
interest of all stock issued, outstanding and entitled to vote at the Special
Meeting, represented in person or by proxy, shall constitute a quorum at the
Special Meeting. Abstentions and broker non-votes (i.e., Shares represented at
the Special Meeting held by brokers or nominees as to which instructions have
not been received from the beneficial owners or persons entitled to vote such
Shares and with respect to which the broker or nominee does not have
discretionary voting power to vote such Shares) will be treated as Shares that
are issued, outstanding and entitled to vote, represented in person or by
proxy for purposes of determining the presence of a quorum at the Special
Meeting. If a quorum is not present at the Special Meeting, the Stockholders
who are present and entitled to vote at the Special Meeting may, by majority
vote, adjourn the Special Meeting from time to time without notice or other
announcement until a quorum is present.
VOTE REQUIRED TO APPROVE THE MERGER
A quorum being present, the affirmative vote by Stockholders holding a
majority of the outstanding Shares entitled to vote is necessary to approve
the Merger Agreement. Under Delaware law, abstentions and broker non-votes on
this proposal have the same effect as votes against the Merger Agreement.
Approval of the Merger Agreement by Stockholders holding a majority of the
outstanding Shares entitled to vote is a condition to consummation of the
Merger under the terms of the Merger Agreement. See "The Merger Agreement--
Conditions to the Merger." The receipt of the requisite Stockholder approval
will, therefore, satisfy Delaware law, the Certificate of Incorporation and
the terms of the Merger Agreement. THE BOARD RECOMMENDS YOU TO VOTE FOR THE
APPROVAL OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY BY
SIGNING AND RETURNING THE ENCLOSED PROXY OR ATTENDING THE SPECIAL MEETING.
PROXIES AND REVOCATION
This Proxy Statement is furnished to holders of Shares as of the Record Date
in connection with the solicitation of proxies by the Board for use at the
Special Meeting. If a Stockholder does not return a properly executed proxy,
and does not attend the Special Meeting, such Stockholder's Shares will not be
voted, which will have the same effect as a vote against approval and adoption
of the Merger Agreement. If signed and returned, the proxy will authorize the
persons named as proxies to vote on the matters referred to therein. Shares
represented by properly executed proxies received prior to or at the Special
Meeting and not revoked will be voted in accordance with the instructions
indicated in such proxies. The Board knows of no matters other than those
described above which are expected to be presented at the Special Meeting.
However, if any other matters are properly presented at the Special Meeting
for action, the persons named in the proxies and acting thereunder will have
discretion to vote on such matters in accordance with their best judgment.
EXECUTED PROXIES THAT CONTAIN NO INSTRUCTIONS TO THE CONTRARY WILL BE VOTED
FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. STOCKHOLDERS ARE URGED TO
MARK THE RELEVANT BOXES ON THE PROXY TO INDICATE HOW THEIR SHARES ARE TO BE
VOTED.
The presence of a Stockholder at the Special Meeting will not automatically
revoke such Stockholder's proxy. However, a Stockholder giving a proxy in the
form accompanying this Proxy Statement has the power to revoke the proxy prior
to its exercise by (i) filing prior to the Special Meeting a written notice of
revocation bearing a later date than the proxy with the Secretary, Little
Switzerland, Inc., 161-B Crown Bay Cruise Ship Port, St. Thomas, U.S.V.I.
00804, (ii) delivering to the Company at or before the Special Meeting a duly
executed proxy, relating to the same Shares bearing a later date or (iii)
attending the Special Meeting and voting in person.
If the Special Meeting is adjourned for any reason, at any subsequent
reconvening of the Special Meeting, all proxies will be voted in the same
manner as such proxies would have been voted at the original convening of the
Special Meeting (except for any proxies that have theretofore effectively been
revoked or withdrawn).
Stockholders are requested to sign and date the enclosed proxy card and mail
it promptly to the Company in the postage-paid envelope that has been
provided.
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SOLICITATION OF PROXIES AND EXPENSES
This solicitation of proxies for use at the Special Meeting is being made by
the Board. The cost of this proxy solicitation will be borne by the Company.
In addition to solicitations by mail, solicitations also may be made by
advertisement, telephone, telegram, facsimile transmission or other electronic
media, and personal meetings and interviews. In addition to solicitation
services to be provided by D.F. King & Co., Inc. ("D.F. King"), as described
below, proxies may be solicited by the Company and its directors, officers and
employees (who will receive no compensation therefor in addition to their
regular salaries). Arrangements also will be made with brokerage houses and
other custodians, nominees and fiduciaries to forward solicitation materials
to the beneficial owners of the Shares of the Company, and such persons will
be reimbursed for their expenses.
The Company has retained D.F. King at a fee estimated not to exceed $7,500,
plus reimbursement of reasonable out-of-pocket expenses, to assist in the
solicitation of proxies in connection with the Special Meeting. The Company
has also agreed to indemnify D.F. King against certain liabilities and
expenses, including liabilities under the Federal securities laws.
STOCKHOLDERS SHOULD NOT FORWARD ANY CERTIFICATES WITH THEIR PROXY CARDS. A
TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF CERTIFICATES WILL BE
MAILED TO STOCKHOLDERS SHORTLY AFTER THE EFFECTIVE TIME OF THE MERGER.
PRESENCE OF ACCOUNTANTS
The Company's independent accountants for the current year and for the most
recently completed fiscal year are Arthur Andersen. The firm of Arthur
Andersen has served as the Company's independent public accountants since its
incorporation and has served as the accountant for certain of its subsidiaries
since 1980. Accordingly, there have been no changes in the Company's
accountants during the two most recent fiscal years and no material
disagreements between the Company and its accountants. Representatives of
Arthur Andersen are expected to be present at the Special Meeting, will have
the opportunity to make a statement if they desire to do so and will be
available to respond to appropriate questions.
THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the Merger
Agreement, which is qualified in its entirety by, and made subject to, the
full text of the Merger Agreement attached to this Proxy Statement as Annex A
and incorporated herein by reference.
THE MERGER
Pursuant to the Merger Agreement, as soon as practicable following the
satisfaction or waiver of all conditions to the consummation of the Merger,
Sub will be merged with and into the Company, with the Company as the
Surviving Corporation. The Merger will become effective upon the filing with
the Secretary of State of the State of Delaware of a certificate of merger.
CONVERSION OF SHARES
Each Share issued and outstanding immediately prior to the Effective Time
(other than Shares held in the treasury of the Company or held by Parent, Sub,
the Parent Related Entities or any of their direct or indirect subsidiaries or
by Stockholders who perfect their appraisal rights under DGCL) will, at the
Effective Time, be converted into the right to receive $8.10 in cash, without
interest, upon the surrender of the Certificate formerly representing such
Share. See "The Merger and Related Transactions--Appraisal Rights" for a
summary of the rights and obligations of Stockholders who choose to have their
Shares appraised in accordance with Section 262 of DGCL, as provided for in
the Merger Agreement.
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CONVERSION OF OPTIONS
Each outstanding Option that was not vested immediately prior to execution
of the Merger Agreement, became fully vested and exercisable upon such
execution, without any further action on the part of the Company or the holder
of such Options. Upon consummation of the Merger, each Option Plan of the
Company and each Option issued and outstanding pursuant thereto will terminate
in accordance with its terms. Parent and the Company agreed to use their
reasonable best efforts to provide that, at the Effective Time, each
outstanding Option will be canceled and each holder of an Option will be
entitled to receive in settlement thereof a cash payment (with respect to each
Option, the "Option Price") equal to the excess (if any) of $8.10 over the per
Share exercise price of such Option multiplied by the total number of Shares
subject to the Option, without interest. The Company agreed to use its
reasonable best efforts to obtain from each holder of an Option a written
consent to the foregoing cancellation of each Option and payment of the Option
Price, acknowledging that the surrender of such Option will be deemed a
release of any and all rights such holder had or may have had in such Option,
other than the right to receive the Option Price in respect thereof. In the
event that any holder of an Option does not provide such consent, such holder
will be entitled to all rights afforded to such holder under the terms of the
applicable Option Plan as in effect on February 4, 1998, including, without
limitation, the right, for at least 15 days prior to the date of termination
of such Option Plan, to exercise any unexercised portion of such holder's
outstanding Option which is vested and exercisable at such time.
PAYMENT FOR SHARES
Prior to the Effective Time, Parent will designate a Paying Agent and, at or
immediately prior to the Effective Time, Parent will provide the Paying Agent
with the funds necessary to make the payments required under the Merger
Agreement.
Promptly after the Effective Time, the Paying Agent will deliver to each
Stockholder who was a record holder of an outstanding Certificate (i) a form
letter of transmittal specifying that delivery will be effected, and risk of
loss and title to a Certificate will pass, only upon proper delivery of such
Certificate to the Paying Agent and (ii) instructions for use in effecting the
surrender of such Certificate for payment therefor. Upon surrender of a
Certificate, together with a duly executed letter of transmittal and any other
required documents, to the Paying Agent, the holder of such Certificate will
be entitled to receive $8.10 in cash in exchange for each Share represented by
such Certificate, and such Certificate will forthwith be canceled.
No interest will be paid or accrued on the cash payable upon the surrender
of a Certificate. If payment is to be made to a person other than the person
in whose name the Certificate surrendered is registered, it will be a
condition of payment that the Certificate so surrendered be properly endorsed
or otherwise in proper form for transfer. Furthermore, the person requesting
such payment must pay any transfer or other required taxes or establish to the
satisfaction of the Surviving Corporation that such tax has been paid or is
not applicable. Until surrendered in accordance with these provisions, each
Certificate (other than Certificates representing Shares of Stockholders who
perfected their appraisal rights under DGCL) will represent only the right to
receive $8.10 in cash for each Share represented thereby, without any interest
thereon.
At any time following the sixth month after the Effective Time, the
Surviving Corporation will be entitled to require the Paying Agent to deliver
to it any funds which had been made available to the Paying Agent and not
disbursed to holders of Shares (including, without limitation, all interest
and other income received by the Paying Agent in respect of all funds made
available to it). Thereafter, such holders will be entitled to look to the
Surviving Corporation (subject to abandoned property, escheat and other
similar laws) only as general creditors thereof with respect to any
consideration that may be payable upon due surrender of the Certificates held
by them. Neither the Surviving Corporation nor the Paying Agent will be liable
to any holder of a Share for any consideration delivered in respect of such
Share to a public official pursuant to any abandoned property, escheat or
other similar law.
After the Effective Time, there will be no transfers of the Shares on the
stock transfer books of the Surviving Corporation and the stock ledger of the
Company will be closed. The holders of Shares outstanding at the
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Effective Time will cease to have any rights with respect to such Shares after
the Effective Time, except as provided by the Merger Agreement or by
applicable law.
REDEMPTION OF RIGHTS
In accordance with the terms of the Merger Agreement, the Company entered
into the Third Amendment, pursuant to which neither the execution and delivery
of the Merger Agreement nor the consummation of the Merger triggers or
otherwise affects any rights or obligations under the Shareholder Rights
Agreement. See "The Merger and Related Transactions--Terms of the Merger."
Each Stockholder will be entitled to receive $.01 per Right from the Company
for the redemption of all outstanding Rights held as of the effective time of
such redemption.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement includes representations and warranties made by the
Company as to the following: (i) the due organization, good standing and
corporate power of the Company and its subsidiaries; (ii) the capitalization
of the Company and its subsidiaries; (iii) the enforceability of the Merger
Agreement against the Company; (iv) the authorization by the Company of the
Merger Agreement and, subject to the requisite approvals, the transactions
contemplated thereby; (v) the noncontravention (except as specified) of any
agreement, instrument, law, order or charter or by-law or other organizational
document applicable to the Company or any of its subsidiaries as a result of
the execution and delivery of the Merger Agreement or the consummation of the
transactions contemplated thereby; (vi) the compliance of all required forms,
reports and documents of the Company required to be filed with the Commission
with the requirements of the Securities Act of 1933, as amended, and the
Exchange Act; (vii) except as specified, the absence of any changes that have
a material adverse effect on, or other specified changes in, the business,
financial condition or results of operations of the Company since the date of
the Company's most recent audited financial statements through the date of the
Merger Agreement; (viii) certain pending or threatened litigation; (ix) the
disclosure of all material transactions involving any affiliate or former
affiliate of the Company; (x) the terms, existence, operations, liabilities
and compliance with applicable laws of all employee benefit plans of the
Company; (xi) payment of taxes and certain other tax matters; (xii) compliance
with applicable laws; (xiii) the receipt by the Board of a fairness opinion by
Wasserstein; (xiv) brokers, finders and financial advisors engaged by the
Company; and (xv) the lack of any interference by the employees, officers or
directors of the Company, since October 1, 1997, in the Company's
relationships with its vendors, suppliers or other entities with whom the
Company has a material commercial relationship.
The Merger Agreement also contains representations and warranties made by
Parent, Sub and the Parent Related Entities as to the following: (i) the due
organization, good standing and corporate power of Parent, Sub and the Parent
Related Entities; (ii) the combined net worth of Parent, Sub and the Parent
Related Entities; (iii) the enforceability of the Merger Agreement against
Parent, Sub and the Parent Related Entities; (iv) the authorization by each of
Parent, Sub and the Parent Related Entities of the Merger Agreement and,
subject to the requisite approvals, the transactions contemplated thereby; (v)
the noncontravention of any agreement, instrument, law, order or charter or
by-law or other organizational document applicable to Parent, Sub or any of
the Parent Related Entities as a result of the execution and delivery of the
Merger Agreement or the consummation of the transactions contemplated thereby;
(vi) the financing commitments of Parent and Sub and the sufficiency of funds
to consummate the Merger; (vii) the ownership of Shares by Parent, Sub and the
Parent Related Entities; and (viii) brokers, finders and financial advisors
engaged by Parent, Sub or any of the Parent Related Entities.
The respective representations and warranties of the Company, Parent, Sub
and the Parent Related Entities will terminate at the Effective Time.
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CONDUCT OF BUSINESS OF THE COMPANY
Except as otherwise contemplated by the Merger Agreement, during the period
from the date of the Merger Agreement to the Effective Time, the Company will,
and will cause its subsidiaries to, (i) conduct their respective businesses in
the ordinary course consistent with past practice and (ii) use all reasonable
efforts consistent with good business judgement to preserve intact its current
businesses. In addition, except as otherwise contemplated by the Merger
Agreement or consented to by Parent, neither the Company nor any of its
subsidiaries will:
(i) declare any dividend or other distribution, other than dividends and
distributions by a subsidiary of the Company, split, combine or reclassify
its capital stock or repurchase, redeem or otherwise acquire any of its
securities;
(ii) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver any stock of any class or any other securities or
equity equivalents, except pursuant to the Company's 1992 Employee Stock
Purchase Plan, Options outstanding on the date of the Merger Agreement and
the Rights;
(iii) acquire, sell, lease, encumber, transfer or dispose of any assets
outside the ordinary course of business, which are material to the Company
and its subsidiaries taken as a whole, except as otherwise specified;
(iv) incur any indebtedness, guarantee any indebtedness, issue or sell
debt securities or warrants or rights to acquire any debt securities,
guarantee (or become liable for) any debt of others, make any loans,
advances or capital contributions, mortgage, pledge or otherwise encumber
any material assets, create or suffer any material lien thereupon, other
than working capital borrowings pursuant to credit facilities in existence
on the date hereof; provided, however, that the Company may not amend in
any material respect any credit facility in existence on the date of
execution of the Merger Agreement, including, without limitation, to
increase the aggregate amount of credit available thereunder;
(v) pay, discharge, settle or satisfy any claims, liabilities or
obligations, other than any payment, discharge, settlement or satisfaction
(A) in the ordinary course of business consistent with past practice, (B)
in connection with the transactions contemplated by the Merger Agreement or
(C) in accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the consolidated financial statements of
the Company and its consolidated subsidiaries contained in the reports
required to be filed by the Company with the Commission;
(vi) change any of the accounting principles or practices used by it
(except as required by generally accepted accounting principles);
(vii) except as required by law or as specified, (A) enter into, adopt,
amend or terminate any employee benefit plan, (B) enter into, adopt, amend
or terminate any agreement, arrangement, plan or policy between the Company
and one or more of its directors or officers, (C) increase in any manner
the compensation or fringe benefits of any employee (excluding executive
officers whose compensation or fringe benefits are subject to clause (D)
below) or pay any benefit not required by any plan and arrangement as in
effect as of the date of execution of the Merger Agreement, except for
normal increases in the ordinary course of business consistent with past
practice or (E) increase in any manner the compensation or fringe benefits
of any executive officer or director or pay any benefit not required by any
plan and arrangement as in effect as of the date of execution of the Merger
Agreement;
(viii) adopt any amendments to the Company's or any of its subsidiaries'
certificates of incorporation or by-laws (or other organizational
documents);
(ix) acquire or agree to acquire, by any manner, any business, business
organizations or assets, except purchases of inventory, furnishings and
equipment in the ordinary course of business consistent with past practice
or purchases of other assets the cost of which do not equal, in the
aggregate, more than $750,000;
(x) make any new capital expenditure(s), other than capital expenditures
not to exceed, in the aggregate, $750,000;
(xi) enter into a new agreement or amend or terminate any existing
agreement which could reasonably be expected to have a Material Adverse
Effect (as hereinafter defined);
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(xii) expand the number of persons on the Board or add any other person
to the Board, including, without limitation, by filling the vacancy on the
Board caused by the death of Mr. Correra;
(xiii) adopt any amendments to the Shareholder Rights Agreement;
provided, however, that the Company may amend the Shareholder Rights
Agreement in connection with an Acquisition Proposal (as hereinafter
defined) upon the satisfaction of certain conditions;
(xiv) amend, supplement or modify the Carey Success Fee Agreement or make
any payments to Mr. Carey except (A) pursuant to the Carey Success Fee
Agreement, (B) pursuant to the Consulting Agreement, (C) as provided by the
Merger Agreement with respect to any Shares or Options issued to or
beneficially owned by Mr. Carey or (D) for any director or similar fees as
Chairman of the Board or reimbursement of expenses incurred in connection
therewith; or
(xv) enter into an agreement to take any of the foregoing actions or
take, or enter into an agreement to take, any action that would result in
any of the conditions to the Merger not being satisfied.
NO SOLICITATION
Unless the Merger Agreement is terminated in accordance with its terms, the
Company and its subsidiaries have agreed not to, and the Company will use its
best efforts to ensure that none of its affiliates, officers, directors,
representatives or agents, including, without limitation, Wasserstein,
directly or indirectly, initiate, solicit, encourage or enter into any
agreement with respect to or participate in negotiations with, provide any
non-public information to or otherwise cooperate with, any Third Party (as
hereinafter defined) concerning any Acquisition Proposal (as hereinafter
defined). The Merger Agreement defines "Acquisition Proposal" as (i) any offer
or proposal relating to any acquisition or purchase of more than 15% of the
outstanding Shares, (ii) any merger, consolidation, recapitalization or other
business combination involving the Company, (iii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of all or substantially all of
the assets of the Company and its subsidiaries in a single transaction or
series of related transactions or (iv) any tender offer or exchange offer for
15% or more of the outstanding Shares. The Merger Agreement defines "Third
Party" as any corporation, partnership, person or other entity or group (as
defined in Section 13(d)(3) of the Exchange Act) other than Parent, Sub or any
of the Parent Related Entities or any of their respective directors, officers,
partners, members, managers, employees, representatives and agents.
The Company may, however, negotiate with, and furnish information to, any
Third Party in response to any unsolicited written bona fide offer to
consummate an Acquisition Proposal if the Board determines in good faith (x)
upon advice of its financial advisor that the Acquisition Proposal, if
consummated as proposed, would result in a transaction more favorable to the
Stockholders from a financial point of view than the transactions contemplated
by the Merger Agreement, including consideration of, among other things, the
ability of the Third Party to obtain any financing necessary to consummate the
Acquisition Proposal (a "Superior Proposal") and (y) based on the advice of
its outside legal counsel, that the failure to do so could reasonably be
expected to be a breach of the directors' fiduciary duties. The Company or the
Board may also take and disclose a position with respect to any tender offer
by a Third Party in accordance with applicable securities laws, and make other
disclosures required under applicable law.
The Company must provide notice, including, without limitation, notice of
the terms and conditions of such Acquisition Proposal but not the identity of
the Third Party making such Acquisition Proposal, to Parent no later than 24
hours after receipt by the Company of any Acquisition Proposal, unless the
Board determines in good faith, after receiving advice from its outside legal
counsel and based upon such advice, that doing so could reasonably be expected
to be a breach of the directors' fiduciary duties.
The Board may withdraw, modify or amend its recommendation of approval of
the Merger Agreement, if the Board determines in good faith, based on the
advice of outside legal counsel, that such recommendation could reasonably be
expected to be a breach of the directors' fiduciary duties.
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INDEMNIFICATION AND INSURANCE
The Surviving Corporation and Parent have agreed to provide, for a period of
six years after the Effective Time, exculpation and indemnification for each
Indemnified Party to the same extent as provided to such Indemnified Party by
the Company immediately prior to the Effective Time in its Certificate of
Incorporation or By-laws; provided, however, that such exculpation and
indemnification only covers actions on or prior to the Effective Time,
including, without limitation, all transactions contemplated by the Merger
Agreement.
In addition, subject to certain exceptions, the Company will indemnify and
hold harmless and, after the Effective Time, the Surviving Corporation and
Parent will indemnify and hold harmless, as and to the fullest extent
permitted by applicable law, each Indemnified Party against any losses,
claims, damages, liabilities, costs, expenses (including reasonable attorneys'
fees and expenses), judgments, fines and amounts paid in settlement in
connection with any threatened or actual claim, action, suit, proceeding or
investigation, whether civil, criminal or administrative, including without
limitation, any action by or on behalf of any Stockholder, or by or in the
right of the Company, or any claim, action, suit, proceeding or investigation
in which such Indemnified Party is, or is threatened to be, made a party based
on, or arising out of, (i) the fact that he or she is or was an officer,
employee or director of the Company or any of its subsidiaries or any action
or omission by such person in his or her capacity as an officer, employee or
director of the Company or any of its subsidiaries, or (ii) the Merger
Agreement or the transactions contemplated thereby, whether in any case
asserted before or after the Effective Time. Subject to certain conditions,
the Company will, and, after the Effective Time, the Surviving Corporation and
Parent will, promptly pay and advance reasonable expenses and costs incurred
by such Indemnified Party as they become due and payable in advance of the
final disposition of the claim, action, suit, proceeding or investigation to
the fullest extent and in the manner permitted by law.
Parent agreed to the purchase of, and the Company was obligated to purchase
immediately following the execution of the Merger Agreement, directors' and
officers' liability insurance policy coverage for the Company's directors and
executive officers for a period of six years following the Effective Time, the
premium of which could not exceed $150,000, which will provide the directors
and officers with coverage on substantially similar terms as currently
provided by the Company to such directors and officers. Since execution of the
Merger Agreement, the Company has arranged for the purchase of such policy.
The Indemnified Parties and their heirs have third party rights with respect
to these covenants regarding indemnification and insurance, and the
obligations of the Company and the Surviving Corporation thereunder will be
binding on their respective successors and assigns. In addition, in the event
Parent and the Surviving Corporation fail to satisfy their obligations
thereunder, each of the Parent Related Entities agrees to assume such
obligations.
CERTAIN OTHER COVENANTS
In addition to the foregoing, each of the parties to the Merger Agreement
have agreed to use its best efforts to do all things advisable to consummate
the Merger and, except as required by law, to obtain the other party's prior
written consent before issuing any press release or other public announcement
concerning the transactions contemplated by the Merger Agreement.
The Company has agreed to several other covenants under the Merger
Agreement, including, among others, the following: (i) upon reasonable notice
and subject to the requirements of any confidentiality agreements by which the
Company is bound, to afford the representatives of Parent, during normal
business hours prior to the Effective Time, access to all of the Company's
properties, books, contracts, commitments and records and reasonable contact
with the Company's officers and managers regarding the Company's business,
operations, properties, and personnel; (ii) not to interfere with, and to use
its commercially reasonable efforts (other than incurring any expenses) to
cooperate with Parent in, Parent's efforts in seeking to ensure the retention
by the Surviving Corporation of the Company's employees, suppliers, vendors
and any other entities with whom the Company has a material commercial
relationship; (iii) to provide Parent with records and information regarding
the employee defalcation described herein under "Management's Discussion and
Analysis of Financial
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Condition--Employee Defalcation Loss," to consult in good faith with Parent
with respect to methods for improving its internal controls and to implement
any additional internal controls deemed appropriate by the Company in its sole
discretion after such consultation with Parent; (iv) to cooperate with the
representatives of Parent in connection with the preparation of offering
documents relating to securities to be issued by Parent to finance the Merger,
except that Parent must pay for all costs and expenses incurred in connection
with the foregoing; (v) to postpone the Annual Meeting, previously scheduled
for February 5, 1998, until the earliest practicable date following the
earlier of June 30, 1998 or the date of termination of the Merger Agreement;
and (vi) after consultation with Parent in good faith, to use its commercially
reasonable efforts to mitigate the impact of any termination or change in the
terms of any relationship or agreement between Rolex and the Company.
Parent, and in certain circumstances Sub, the Parent Related Entities and
Aspen, have also agreed to several other covenants under the Merger Agreement,
including, among others, the following: (i) to honor all cash bonus plans,
stock option and stock incentive plans, employment agreements, consulting
agreements, change-of-control agreements and severance agreements or plans
between the Company and any of its officers, directors or employees in effect
prior to the Effective Time and to permit the Company's employees to
participate in any and all employee benefit plans of Parent or the Surviving
Corporation generally made available to similarly situated employees thereof
on the same basis and without distinction (and the Company's employees as of
the Effective Time have third party rights with respect thereto); (ii)
immediately following the termination of the Merger Agreement in certain
circumstances, to cause Aspen to withdraw any and all nominations of
candidates submitted for election as Class III directors of the Company at the
Annual Meeting and to refrain from submitting any nominations of candidates
for election or soliciting any proxies from the Stockholders in connection
with the Annual Meeting; and (iii) to obtain the Company's prior written
consent before issuing any press release or other public announcement
concerning the employees of the Company or Parent's or the Surviving
Corporation's plans for such employees, except with respect to any disclosure
contained in an offering memorandum or prospectus relating to a sale of
securities by Parent, as long as Parent provides the Company with preliminary
copies of such documents and has consulted in good faith with the Company
regarding such disclosure.
CONDITIONS TO THE MERGER
The respective obligations of each party to effect the Merger are subject to
satisfaction or waiver, where permissible, on or prior to the Effective Time,
of the following conditions: (i) the Merger Agreement must be approved by the
Stockholders; (ii) no injunction, order, decree or ruling (an "Injunction")
issued by any court of competent jurisdiction or other legal restraint
prohibiting the consummation of the Merger or making such consummation illegal
may be in effect; and (iii) the waiting period under the HSR Act and any other
applicable anti-trust law must have terminated or expired. Under the HSR Act
and the rules promulgated thereunder by the FTC, the Merger may not be
consummated until notifications have been given and certain information has
been furnished to the FTC and the DOJ and the applicable waiting period has
expired or been terminated. Each of the Company and Mr. Crane, the controlling
stockholder of Parent, filed notification and report forms under the HSR Act
with the FTC and the DOJ on Friday, March 6, 1998. As requested by the Company
and Mr. Crane, the waiting period was terminated early on March 16, 1998 by
the FTC and the DOJ, without any request for additional information from the
Company or Mr. Crane. Accordingly, the condition to the Merger regarding such
waiting period has been satisfied.
The obligations of Parent and Sub to consummate the Merger are also subject
to the satisfaction or waiver on or prior to the Effective Time of the
following conditions: (i) the representations and warranties of the Company
that are qualified as to materiality or Material Adverse Effect (as
hereinafter defined) must be true and correct and the representations and
warranties of the Company that are not so qualified must be true and correct
except to the extent that any failure to be true and correct would not have a
Material Adverse Effect, in each case, as of the date of the Merger Agreement
and as of the Effective Time as though made on and as of the Effective Time;
(ii) the Company must perform in all material respects all obligations
required to be performed by it under the Merger Agreement at or prior to the
Effective Time; (iii) the number of Shares held by Stockholders who perfect
their appraisal rights under DGCL must constitute no greater than 5% of the
total number of Shares outstanding immediately prior to the Effective Time;
and (iv) there must not have been any
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changes or events which, individually or in the aggregate, have had a Material
Adverse Effect, excluding the occurrence of certain events described below. A
"Material Adverse Effect" means a material adverse effect on the business,
properties, results of operations or financial condition of the Company and
its subsidiaries taken as a whole. However, subject to certain conditions,
Material Adverse Effect, does not included any of the following events: (i)
the termination or change in terms by Rolex of any relationship or agreement
with the Company; (ii) a reduction of sales of Rolex products from the date of
any such termination or change in terms; (iii) the termination or change in
terms of any relationship or agreement between the Company and any of its
existing vendors or suppliers (other than Rolex) whose products in the
aggregate accounted for 5% or less of the Company's sales (not including sales
attributable to Rolex) for fiscal 1997; or (iv) any increase in the amounts
outstanding under the Company's working capital borrowings pursuant to credit
facilities in existence on the date of the Merger Agreement.
The obligations of the Company to consummate the Merger are further subject
to the satisfaction or waiver on or prior to the Effective Time of the
following conditions: (i) the representations and warranties of Parent, Sub
and the Parent Related Entities that are qualified as to materiality must be
true and correct and the representations and warranties of Parent, Sub and the
Parent Related Entities that are not so qualified must be true and correct in
all material respects, in each case, as of the date of the Merger Agreement
and as of the Effective Time as though made on and as of the Effective Time;
and (ii) Parent and Sub must perform in all material respects all obligations
required to be performed by them under the Merger Agreement at or prior to the
Effective Time.
TERMINATION; TERMINATION FEE
The Merger Agreement may be terminated at any time prior to the Effective
Time for any one of the following reasons: (i) by mutual consent of Parent and
the Company; (ii) by either Parent or the Company, if any Injunction issued by
any court of competent jurisdiction or other governmental entity permanently
restraining or prohibiting the Merger has become final and non-appealable;
(iii) by the Company, if Parent, Sub or any of the Parent Related Entities
fail to perform in any material respect any of their respective obligations
and such failure continues for a period of five days after receipt by Parent
of written notice from the Company; (iv) by the Company, if the Company has
received a Superior Proposal and the Board determines in good faith (A) upon
advice of its financial advisor that the Superior Proposal, if consummated as
proposed, would result in a transaction more favorable to the Stockholders
from a financial point of view than the Merger (including consideration of,
among other things, the ability of the Third Party to obtain any financing
necessary to consummate the Acquisition Proposal) and (B) after consultation
with and based upon advice from its outside legal counsel, that the failure to
accept such Superior Proposal could reasonably be expected to be a breach of
the directors' fiduciary duties; provided, however, that such termination will
not be effective prior to the payment of the Termination Fee; (v) by the
Company, if, within ten business days after receipt by Parent of notice that
all the conditions have been satisfied or waived, the Merger has not been
consummated and neither Parent nor Sub has deposited the necessary funds to
consummate the Merger with the Paying Agent; (vi) by Parent, if the Board has
withdrawn or modified in any adverse respect its approval or recommendation of
the Merger Agreement and the transactions contemplated thereby, failed to
include in a proxy statement such recommendation, endorsed or recommended to
its Stockholders any Acquisition Proposal or resolved to do any of the
foregoing; (vii) by either Parent or the Company, if, without any material
breach by such terminating party of its obligations under the Merger
Agreement, the Merger is not consummated by June 30, 1998; provided, however,
that neither Parent nor the Company may terminate the Merger Agreement prior
to the expiration of 240 days following the date of the Merger Agreement if
the Merger has not occurred because the waiting period under the HSR Act or
any other applicable anti-trust law has not terminated or expired or because
of the pendency of a non-final Injunction (and Parent, Sub and the Company
must use their best efforts to cause the termination or expiration of any such
waiting period, including, without limitation, complying with the requirements
of the FTC or other comparable governmental entity to divest any assets or
otherwise, and to have any such Injunction stayed or reversed); (viii) by
either Parent or Company, if the Stockholders fail to approve the Merger
Agreement; or (ix) by Parent, if the Company fails to perform in any material
respect any of its obligations and such failure continues for a period of five
days after receipt by the Company of written notice from Parent.
42
<PAGE>
In the event of termination of the Merger Agreement, no party to the Merger
Agreement will have any liability under the Merger Agreement, other than with
respect to the obligation of the Company to pay the Termination Fee in certain
circumstances as set forth herein and the obligations of Parent, Sub and the
Parent Related Entities relating to confidentiality of information regarding
the Company. Notwithstanding the foregoing, nothing in the Merger Agreement
will relieve any party from liability for any breach of the Merger Agreement.
In the event the Merger Agreement is terminated under the circumstances set
forth under clauses (iv) or (vi) of the immediately preceding paragraph, then
the Company is obligated to pay Parent a Termination Fee equal to $2,481,100.
Except as described above, each party bears its own costs and expenses in
connection with the Merger Agreement and the transactions contemplated
thereby.
AMENDMENT, EXTENSION AND WAIVER
The Merger Agreement may be amended by an instrument in writing signed on
behalf of all of the parties at any time before or after approval of the
Merger Agreement by the Stockholders, but after any such approval, no
amendment may be made which by law requires the further approval by such
Stockholders without obtaining such further approval.
At any time prior to the Effective Time, the parties to the Merger Agreement
may (i) extend the time for the performance of any of the obligations or other
acts of the other parties, (ii) waive any inaccuracies in the representations
and warranties contained in the Merger Agreement or in any document delivered
pursuant to the Merger Agreement and (iii) waive compliance with any of the
agreements or conditions contained in the Merger Agreement. Any agreement on
the part of a party to the Merger Agreement to any such extension or waiver
must be set forth in a written instrument signed on behalf of such party in
order to be valid.
INFORMATION ABOUT THE COMPANY
BUSINESS OF THE COMPANY
General
The Company is a specialty retailer of luxury items. The Company operates 27
distinctively-designed retail stores on ten Caribbean islands and in Alaska
and has eight franchise locations in the Bahamas. The Company markets a wide
selection of high quality products including watches, jewelry, crystal, china,
fragrances, gifts and accessories. The Company is the exclusive retailer of
certain brand name products on some islands. The Company's customers are
primarily tourists from the United States.
The Company was incorporated in the State of Delaware on May 23, 1991, as a
subsidiary of Switzerland Holding, Inc. ("Switzerland Holding"), which was a
subsidiary of Town & Country. At that time, Town & Country transferred to the
Company all of the stock of L.S. Holding, Inc. ("Holding") and L.S. Wholesale,
Inc. ("Wholesale"). On July 17, 1991, Switzerland Holding sold approximately
68% of the outstanding Shares of the Company in a public offering.
In November 1994, approximately 2.4 million Shares of Town & Country's
remaining Shares of the Company were distributed to holders of Town &
Country's Exchangeable Preferred Stock upon exercise of their right to
exchange such shares for the Company's Shares on a share-for-share basis. As
of March 20, 1998, 127,241 Shares were held in a trust for the benefit of Town
& Country and the holders of Town & Country's Exchangeable Preferred Stock.
As of the date of this Proxy Statement, there were ten subsidiaries of
Holding incorporated in various jurisdictions. Wholesale acts as purchasing
agent for items sold by the Company's stores.
Merchandising
High-Quality Merchandise. The Company offers high-quality merchandise
generally available in the world's finest stores and, on some islands, is the
exclusive retailer of certain brand name products. The Company
43
<PAGE>
sells internationally renowned product lines such as Rolex, Rado and Cartier
watches, Baccarat, Waterford, Atlantis and Swarovski crystal and Wedgwood,
Rosenthal, Lladro and Herend china. See "Management's Discussion and Analysis
of Financial Condition--The Company's Relationship with Rolex."
Advantageous Pricing. The Company offers tourists visiting the Caribbean
many of the same luxury products available in fine stores in the United
States, often at significant savings. The Company seeks to price its
merchandise at levels which compare favorably to prices generally available in
the United States. In addition, United States tourists shopping at the
Company's stores take advantage of duty-free allowances upon returning home.
Presentation of Merchandise. The Company places particular emphasis on
effective marketing and merchandise presentation through well-designed stores
situated in prime retail locations. The layout, fixtures and upscale
presentation of merchandise create an inviting and relaxed atmosphere which is
conducive to shopping for luxury items. Superior customer service is a high
priority, and a knowledgeable and courteous sales staff is available to assist
customers.
Availability of Merchandise. The Company's customers are tourists who may be
staying in one location only a short time. Often they travel as couples or
families and while on vacation they find themselves with time to shop. To meet
the demands and interests of these tourists, the Company stocks a broad
selection of luxury products and carries a significant inventory so that most
items offered by a particular store are available for immediate delivery.
Name Recognition. The Company enjoys excellent name recognition in the
United States and locally in the Caribbean. It has an established reputation
for providing a wide variety of high-quality product lines, and its stores are
recognized as desirable places to purchase luxury products.
Product Lines
The principal product lines offered by the Company are watches, jewelry,
crystal, china, fragrances, gifts and accessories.
Watches. The most significant product line for the Company is watches. Sales
of watches comprised approximately 44%, 43% and 43% of sales in fiscal 1997,
fiscal 1996 and fiscal 1995, respectively. The primary watch lines marketed by
the Company include such quality brand names as Rolex, Rado, Omega, Audemars-
Piguet, Cartier, Tag-Heuer, Breitling and Raymond Weil, prices for which
generally range from $50 to $30,000. The Company has been the exclusive
authorized retailer for Rolex watches on the islands on which the Company
operates. Sales of Rolex watches accounted for 24%, 23% and 25% of the
Company's sales in fiscal 1997, fiscal 1996 and fiscal 1995, respectively.
Rolex is the only manufacturer whose products accounted for more than 10% of
the Company's sales in any of the last three fiscal years. See "Management's
Discussion and Analysis of Financial Condition--The Company's Relationship
with Rolex."
Jewelry. The second most significant product line for the Company is
jewelry. Most of the jewelry is produced by international manufacturers and
sales of such items accounted for approximately 27%, 24% and 22% of sales in
fiscal 1997, fiscal 1996 and fiscal 1995, respectively. Jewelry items include
rings, earrings, bracelets, necklaces, pendants and charms, which range in
price from $30 to $5,000.
Crystal, China, Gifts and Flatware. The Company sells numerous lines of
crystal, china, gifts and flatware, including Baccarat, Lalique, Swarovski,
Goebel, Waterford, Orrefors, Kosta Boda, Aynsley, Lladro, Herend, Villeroy &
Boch, Christofle and Rosenthal, prices for which generally range from $20 to
$3,000. Sales of this product category accounted for approximately 17%, 22%
and 25% of sales in fiscal 1997, fiscal 1996 and fiscal 1995, respectively.
Fragrances and Accessories. The Company carries in excess of 90 fragrance
lines, including Yves Saint-Laurent, Estee Lauder, Chanel, Calvin Klein,
Guerlain and Christian Dior, prices for which generally range from $15 to
$150. The Company also offers leather good lines including Paloma Picasso,
Versace, Bally, Moschino and writing instrument lines including Mont Blanc and
Waterman.
44
<PAGE>
Pricing
The Company seeks to price its merchandise at levels which compare favorably
to prices generally available for the same products in the United States. The
cost of much of the inventory purchased by the Company is often lower than the
cost to retail stores in other markets because the Company is not required to
pay a duty or tariff on most incoming products in the Caribbean. In addition,
the Company can offer price advantages because inventory purchases are
generally directly from manufacturers and large quantities are purchased at
the same time for multiple store locations. Within the Caribbean, there are no
sales taxes in the jurisdictions in which the Company operates. In addition,
tourists from the United States may bring certain amounts of merchandise home
from the Caribbean duty-free. The Company regularly monitors prices available
for comparable merchandise in the United States and adjusts pricing structures
to maintain the Company's competitive advantage.
The Company makes manufacturers' warranties available to its customers and
generally accepts the return of merchandise within 30 days of its purchase.
Merchandise returns historically have been nominal.
Purchasing and Distribution
The Company purchases its merchandise from suppliers worldwide. The Company
has developed long-term relationships with a number of its key suppliers. The
Company believes that these relationships are an important factor in its
success and have enabled it to become the exclusive authorized retailer of
certain important brands of merchandise on certain islands. Most of these
exclusive relationships are not based on binding agreements with suppliers,
but rather are based on factors such as the Company's effective representation
of product lines, its prompt payment for inventory and the suppliers' long-
standing relationships with the Company. The Company believes that the loss of
any major supplier, including Rolex, could adversely affect the Company's
results of operations. See "Management's Discussion and Analysis of Financial
Condition--The Company's Relationship with Rolex."
Many of the Company's suppliers manufacture merchandise only to specific
order, and the time required for manufacture may be considerable. As a result,
orders for many key items may be placed only two or three times a year. The
Company's inventory levels are typically high, particularly as the winter
tourist season approaches, to assure tourists immediate delivery of items. The
Company's buyers continually seek to identify new product lines with an
emphasis on non-branded items which usually carry more attractive margins. The
Company utilizes its information on buying patterns in each store and
management experience and expertise to anticipate trends in customer demand.
The Company's merchandise is shipped by vendors to three distribution
centers owned by the Company which supply the stores in their respective
region.
The Company's stores are designed to place the customer in an environment
which is conducive to the purchasing of luxury items. Most stores are designed
by the same architectural firm and decorated in similar fashion to present a
consistent theme of luxury retailing throughout the network of stores. Stores
are located in areas which are easily accessible to tourists, often in so-
called "duty-free" ports which are visited by cruise ships. The quantity and
mix of products carried by the Company's stores vary from location to location
based on store size and tourist buying patterns and preferences.
Marketing and Advertising
The Company's marketing plan includes targeted advertising in national,
high-circulation travel magazines and in a large selection of local
publications which are distributed to overnight guests wherever the Company's
stores are located and elsewhere throughout the Caribbean. The Company's
choices of print media are shaped by customer and tourist demographics, local
and historical sales trends which provide information about the types of
tourists who are likely to purchase merchandise and by retail buying patterns
in the United States.
Participation in promotional programs offered by many of the world's largest
cruise ship lines is another key element in the Company's strategy to gain
greater name recognition for the Company and increase store
45
<PAGE>
traffic. Presentations by "Port Lecturers" aboard the major cruise ships
provide cruise ship passengers with highly targeted shopping information on
retailers who participate in the program before the passengers disembark at
each port of call. Similar hotel promotions which focus on overnight guests
also contribute to the Company's overall effort to increase its market share
of the Caribbean retail industry.
Inventory Control and Security
The Company's management utilizes modern inventory control and security
systems, careful personnel screening and well-articulated policies and
procedures to control losses and shrinkage. The Company has inventory control
and management information systems which integrate sales, inventory and
financial reporting and control. These systems provide vital management
information such as store-by-store data, which includes sales, profitability
and inventory levels by product category.
Given the high value of the merchandise offered by the Company, security is
a high priority. Sophisticated alarm systems are in place in each location,
and security guards are assigned at individual stores as needs dictate. Most
jewelry and watches are returned to vaults each day at closing under close
scrutiny. The Company's cycle count inventory program provides the Company
with periodic verification of merchandise. The Company carries insurance
coverage on its inventory in amounts which it believes to be customary and
adequate.
Competition
The Company's markets contain numerous retail stores and the competition for
tourist dollars is intense. The Company also competes with stores selling
similar products in the United States and in other markets where tourists
travel. The majority of the Company's local competitors are independently
owned stores and do not offer the variety of brand name luxury products which
the Company markets. The Company believes that its status as the exclusive
authorized retailer of certain brand name products in a number of markets
enhances its competitive position. The loss of one or more of these exclusive
relationships could adversely affect the Company's ability to compete. See
"Management's Discussion and Analysis of Financial Condition--The Company's
Relationship with Rolex."
Employees
The Company employs an average of approximately 480 people, with the number
of sales personnel varying from season to season. Currently, the Company has
no collective bargaining agreements and has never experienced a work stoppage.
In February 1995, the employees of the Company's subsidiary in St. Marten,
Netherlands Antilles voted to be represented by a local labor union. While the
Company entered into negotiations with the union, the Company is no longer
engaged in such negotiations, and no collective bargaining agreement has been
consummated. The Company considers relations with its employees to be good.
Working Capital and Seasonality
The Company's primary needs for working capital are to support its inventory
requirements, which fluctuate during the year due to the seasonal nature of
the Company's business, to maintain and remodel its existing stores and to
finance the opening or acquisition of new stores. In addition, a significant
investment in inventory is required at all times in order to meet the demands
of its customers who, as tourists, require immediate delivery of purchased
goods.
As a general policy, the Company does not sell merchandise on account.
Virtually all sales are paid by cash, check or major credit card.
The Company's business is seasonal in nature, reflecting travel patterns to
the Caribbean. The peak selling season in the Caribbean runs from late fall
through spring. The peak selling season in Alaska runs from late spring
through the summer. Working capital requirements generally reflect this
seasonality as the Company increases its inventory in anticipation of the peak
selling season. Because the Company has less cash available from operations in
the off-season, it may be required to borrow to finance its build-up of
inventory and any expansion of Company operations. See "Management's
Discussion and Analysis of Financial Conditions--Seasonality."
46
<PAGE>
Inflation
Historically, the Company has generally been able to increase prices to
reflect cost increases resulting from inflation and expects to be able to do
so in the future. While the Company cannot precisely determine the effect of
inflation on its operations, the Company does not believe that its operations
have been materially affected by inflation during the three most recent fiscal
years.
Other Matters
Foreign and Domestic Operations. See Note 2 of Notes to Consolidated
Financial Statements for the fiscal year ended May 31, 1997.
Environmental. In the opinion of the Company, compliance with current laws
and regulations pertaining to the environment, health and safety has not
materially affected its business or financial condition and will not do so in
the foreseeable future.
Customers. The Company is not dependent upon any single customer or upon any
single group of customers, the loss of which would have a material effect on
the Company.
Patents and Trademark. The Company holds a number of licenses, trademarks
and trade names. None of the foregoing is believed to be material to the
Company.
Other. The Company does not have significant research and development
expenditures.
The Company does not have significant backlog of orders and inventory. The
Company must carry adequate inventory to enable tourists to receive immediate
delivery of items.
The Company does not have any business under government contract.
PROPERTIES OF THE COMPANY
The Company's 27 stores are all situated in prime retail locations. The
Company owns its facility in Philipsburg, St. Marten and leases the 26 other
stores it operates. Most of its stores are free-standing. In addition to
approximately 70,000 square feet of selling space, the Company has
approximately 33,000 square feet of warehouse space, 11,000 square feet of
which is at the Company's main warehouse on St. Thomas. The Company owns the
building which houses its headquarters and warehouse on St. Thomas and leases
the underlying real property from the Virgin Islands Port Authority under a
ten-year ground lease. The ground lease is subject to two five-year renewal
terms and may be terminated by the lessor prior to the expiration of its term
subject to payment to the Company of the fair market value of the Company's
improvements. The Company anticipates that in most cases retail space for new
stores opened or acquired will be leased. This arrangement provides the
Company not only with greater flexibility in selecting prime retail locations
for its stores, but also allows the Company to utilize its capital to more
effectively design and decorate its stores with quality furnishings
commensurate with the prestigious image the Company maintains.
CERTAIN LEGAL PROCEEDINGS
The Company is involved in various legal proceedings which, in the opinion
of management, will not result in a material adverse effect on the financial
condition or results of operations of the Company.
47
<PAGE>
SECURITY OWNERSHIP
The table sets forth below, to the best knowledge and belief of the Company,
certain information regarding the beneficial ownership of the Company's Common
Stock as of March 20, 1998 by (i) each person known by the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, (ii) each of
the Company's directors, (iii) each of the named executive officers of the
Company and (iv) all of the Company's executive officers and directors as a
group.
<TABLE>
<CAPTION>
DIRECTORS, EXECUTIVE OFFICERS AND 5% SHARES BENEFICIALLY PERCENT OF
STOCKHOLDERS OWNED(1) CLASS(2)
- ------------------------------------ ------------------- ----------
<S> <C> <C>
Franklin Advisory Services, Inc................ 843,000(3) 9.0%
One Parker Plaza, Sixteenth Floor
Fort Lee, NJ 07024
ValueVest Partners L.P......................... 837,400(4) 9.0%
1 Sansome Street, 39 Floor,
San Francisco, CA 94104
The TCW Group, Inc............................. 637,300(5) 6.8%
865 South Figueroa Street
Los Angeles, CA 90017
1838 Investment Advisors, LP................... 439,795(6) 4.7%
5 Radnor Corporation Center, Suite 320
Radnor, PA 19087
Kenneth S. Hackel.............................. 431,000(7) 4.6%
11 Marcotte Lane
Tenafly, NJ 07670
Heartland Advisors, Inc........................ 423,000(8) 4.5%
790 North Milwaukee Street
Milwaukee, WI 53202
William Canfield............................... 60,000(9) *
C. William Carey............................... 55,000(10) *
Denis X. Comment............................... 86,000(11) *
Timothy B. Donaldson........................... 21,000(12) *
Ilene B. Jacobs................................ 30,000(13) *
Ronald J. Lataille............................. 79,658(14) *
Thomas S. Liston............................... 25,000(15) *
John E. Toler, Jr.............................. 300,000(16) 3.2%
Kenneth W. Watson.............................. 27,000(17) *
All directors and executive officers as a group
(9 persons)................................... 683,658 7.3%
</TABLE>
- --------
* Less than 1%.
(1) Beneficial Share ownership is determined pursuant to Rule 13d-3 under the
Exchange Act. Accordingly, a beneficial owner of a security includes any
person who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares the power to vote
such security or the power to dispose of such security. The amounts set
forth as beneficially owned include Shares owned, if any, by spouses and
relatives living in the same home as to which beneficial ownership may be
disclaimed. The amounts set forth as beneficially owned include Shares
which such directors or officers have the right to acquire under Options
previously granted pursuant to the 1991 Option Plan and the 1992 Option
Plan.
(2) Percentages are calculated on the basis of 9,348,702 Shares outstanding as
of March 20, 1998, which includes 88,000 Shares subject to Options vested
pursuant to the 1992 Option Plan, and 706,500 Shares subject to Options
vested pursuant to the 1991 Option Plan.
48
<PAGE>
(3) The above information is based on copies of a statement on Schedule 13G
filed with the Commission on February 5, 1998, which indicates that the
Franklin Advisory Services, Inc. has sole voting power with respect to
543,000 Shares and sole dispositive power with respect to all 843,000
Shares. These securities are owned by one or more open or closed-end
investment advisory subsidiaries of Franklin Resources, Inc. The filing of
this Schedule 13G was also made on behalf of Franklin Resources, Inc.,
Charles B. Johnson and Rupert H. Johnson, Jr., 777 Mariners Island
Boulevard, San Mateo, CA 94404.
(4) The above information is based on copies of a statement on Schedule 13D
filed with the Commission on May 5, 1997, as amended by Amendment No. 1 to
Schedule 13D filed with the SEC on August 4, 1997, which indicates that
ValueVest Partners L.P. has sole voting and dispositive power with respect
to 395,300 Shares and Donald L. Sturm has sole voting and dispositive
power with respect to 442,100 Shares. The filing of this Schedule 13D was
also made on behalf of Donald L. Sturm, 3033 East First Avenue, Suite 200,
Denver, CO 80206.
(5) The above information is based on copies of a statement on Schedule 13G
filed with the Commission on February 12, 1998, which indicates that The
TCW Group, Inc. and Robert Day each have sole voting and dispositive power
with respect to all 637,300 Shares. The filing of this Section 13D was
also made on behalf of Robert Day, 200 Park Avenue, Suite 2200, New York,
New York 10166.
(6) The above information is based on copies of a statement on Schedule 13G
filed with the Commission on February 12, 1998, which indicates that 1838
Investment Advisors, LP has sole voting power with respect to 374,995
Shares and sole dispositive power with respect to all 439,795 Shares.
(7) The above information is based on copies of a statement on Schedule 13D
filed with the Commission on October 20, 1997, which indicates that
Kenneth S. Hackel has sole voting and dispositive power with respect to
all 431,000 Shares.
(8) The above information is based on copies of a statement on Schedule 13G
filed with the Commission on February 3, 1998, which indicates that the
Heartland Advisors, Inc. has sole voting and dispositive power with
respect to all 423,000 Shares.
(9) Represents Shares deemed to be beneficially owned by Mr. Canfield which
are subject to Options previously granted pursuant to the 1991 Option
Plan.
(10) Includes 10,000 Shares and 20,000 Shares deemed to be beneficially owned
by Mr. Carey which are subject to Options previously granted pursuant to
the 1991 Option Plan and 1992 Option Plan, respectively. Includes 25,000
Shares deemed to be beneficially owned by Mr. Carey which were acquired
pursuant to the conversion of Shares of exchangeable preferred stock of
Town & Country, which Mr. Carey purchased on June 9, 1994 for $7.1875 per
share. Does not include 127,241 Shares held in the Trust by Linchmen
Company, c/o State Street Bank & Trust Company, as trustee for the Trust
established in connection with the recapitalization of Town & Country, of
which Mr. Carey is a controlling stockholder.
(11) Represents Shares deemed to be beneficially owned by Mr. Comment which
are subject to Options previously granted pursuant to the 1991 Option
Plan.
(12) Represents 10,000 Shares and 11,000 Shares deemed to be beneficially
owned by Mr. Donaldson which are subject to Options previously granted
pursuant to the 1991 Option Plan and 1992 Option Plan, respectively.
(13) Represents 10,000 Shares and 20,000 Shares deemed to be beneficially
owned by Ms. Jacobs which are subject to Options previously granted
pursuant to the 1991 Option Plan and 1992 Option Plan, respectively.
(14) Includes 8,500 Shares deemed to be beneficially owned by Mr. Lataille
which are subject to Options previously granted pursuant to the 1991
Option Plan.
(15) Represents Shares deemed to be beneficially owned by Mr. Liston which are
subject to Options previously granted pursuant to the 1991 Option Plan.
(16) Represents Shares deemed to be beneficially owned by Mr. Toler which are
subject to Options previously granted pursuant to the 1991 Option Plan.
(17) Represents 10,000 Shares and 17,000 Shares deemed to be beneficially
owned by Mr. Watson which are subject to Options previously granted
pursuant to the 1991 Option Plan and 1992 Option Plan, respectively.
49
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
This Proxy Statement contains certain statements that are "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 and releases issued by the Commission. The words "believe,"
"expect," "anticipate," "intend," "estimate" and other expressions which are
predictions of or indicate future events and trends and which do not relate to
historical matters identify forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of the Company
to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements. The
Company undertakes no obligation to publicly update or revise any forward-
looking statement, whether as a result of new information, future events or
otherwise.
The future operating results and performance trends of the Company may be
affected by a number of factors, including, without limitation, the following:
(i) the frequency of tourist visits to the locations where the Company
maintains retail stores, (ii) the Company's ability to retain relationships
with its major suppliers of product for resale, (iii) weather in the Company's
markets, (iv) actions of the Company's competitors and the Company's ability
to respond to such actions, (v) economic conditions that affect the buying
patterns of the Company's customers, (vi) availability of new tourist markets
for expansion and (vii) the continued success of the Company's efforts to
implement its planned strategic initiatives. In addition to the foregoing, the
Company's actual future results could differ materially from those projected
in the forward-looking statements as a result of the risk factors set forth in
the Company's various filings with the Commission and of changes in general
economic conditions, changes in interest rates and/or exchange rates and
changes in the assumptions used in making such forward-looking statements.
The following represents the components of operating results for the three
years ended:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------
MAY 31, JUNE 1, MAY 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net sales............................................... 100.0% 100.0% 100.0%
Cost of sales........................................... 56.3 57.5 57.2
Gross profit............................................ 43.7 42.5 42.8
Selling, general and administrative expenses............ 41.3 47.3 36.3
Gain on insurance proceeds.............................. (0.6) (7.5) --
----- ----- -----
Operating Income........................................ 3.0 2.7 6.5
Interest expense, net................................... 1.7 0.9 0.3
----- ----- -----
Income before Provision for Income Taxes................ 1.3 1.8 6.2
Provision for Income Taxes.............................. 0.0 0.3 1.1
----- ----- -----
Net income.............................................. 1.3% 1.5% 5.1%
===== ===== =====
</TABLE>
EMPLOYEE DEFALCATION LOSS
In July, 1997 management disclosed to its independent auditors that certain
transactions may have been recorded in error on the books of the Company. As a
result, the Company engaged Arthur Andersen to evaluate the matter and
determine the impact, if any, on the Company's previously and currently
reported consolidated financial statements. After extensive review, analysis
and evaluation, which focused on unlocated differences in cash balances,
management believes that an employee defalcation occurred during fiscal 1997.
The employee was able to circumvent existing internal controls largely due to
lapses in appropriate segregation of duties regarding cash deposits and
disbursements, inter-bank transfers and bank account reconciliations. This
lapse in the segregation of such duties was further exacerbated by the
resignation of the Company's Assistant Treasurer on February 28, 1997, which
office was not filled until April 29, 1997. Two individuals, one of whom was
an employee of the Company, were arrested on February 10, 1998 in connection
with this defalcation and charged
50
<PAGE>
with embezzlement and appropriation of the property of the Company. The
Company will continue to pursue all possible remedies to the fullest extent of
the law in the prosecution of these two individuals and any other persons
determined to be involved in the theft.
The estimated loss of approximately $2.4 million has been classified as a
general and administrative expense in the accompanying Consolidated Financial
Statements for the fiscal year ended May 31, 1997. As a result of the charge,
the Company filed amended financial statements on Form 10-Q for each of the
quarters within fiscal 1997. Accordingly, the comparative Consolidated
Statements of Income for the three month period ended November 30, 1996
reflect a net loss of $560,000 or $0.07 per Share, including a charge to
administrative expense of $481,000 which, after tax, negatively impacted net
income and earnings per Share by $394,000 and $.05, respectively. For the six
month period ended November 30, 1996, the comparative Consolidated Statements
of Income reflect a net loss of $1.3 million or $0.16 per Share, including a
charge to administrative expense of $758,000 which, after tax, negatively
impacted net income and earnings per Share by $621,000 and $0.08,
respectively.
The Company has insurance coverage which calls for a maximum claim
limitation of $1,000,000 (with a $25,000 deductible). A claim for the full
amount of the loss has been submitted and an interim payment of $305,000 has
been made. The Company also intends to seek full restitution from the charged
individuals, however, the Company does not know what, if any, of the funds are
still in the possession of such individuals. The amount of insurance recovery
from its insurance carrier, if any, relating to these losses has not been
reflected in the financial statements accompanying this Proxy Statement.
Since the defalcation, the Company's accounting system has been revised to
facilitate the closer monitoring of detail transactions, so that each separate
transaction is posted rather than posting totals by category. In addition, the
Company's Treasury and Accounting staffs have been increased and their
functions upgraded and reorganized to provide adequate segregation of duties
and timely bank account reconciliations. Accordingly, unlike at the time of
the defalcation, no one person has control over cash deposits and
disbursements, inter-bank transfers and bank account reconciliations. As an
additional check on the system, a new cash flow report is prepared daily and
reviewed by the Company's Chief Financial Officer. This cash flow report sets
forth, for each day, the bank balance, the book balance, disbursements,
transfers and float (i.e., checks outstanding against the Company's credit
line).
THE COMPANY'S RELATIONSHIP WITH ROLEX
The Company typically orders and receives products from Rolex during most
months of the year. Since the last shipment of Rolex products in January,
1998, Rolex has suspended shipments of its products to the Company and has
orally informed the Company that it will continue to suspend all shipments
unless and until the Merger Agreement is terminated. In that regard, the
Company has received copies of correspondence from Rolex to Parent, which
indicate that Rolex does not believe it would be in its best interest to begin
a business relationship with Parent.
The Company believes that the loss of any major supplier, including Rolex,
could adversely affect the Company's results of operations. Sales of Rolex
watches accounted for 24%, 23% and 25% of the Company's sales in fiscal 1997,
fiscal 1996 and fiscal 1995, respectively. In order to mitigate the impact on
sales during fiscal 1998 of the suspension of shipments of Rolex products, the
Company has redistributed Rolex products from lower traffic stores to higher
traffic stores. There can be no assurances that Rolex will resume shipments of
its products in the future or that the effect on the Company's sales will be
mitigated by such redistribution efforts.
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 29, 1997 COMPARED TO PERIODS ENDED
NOVEMBER 30, 1996
Net sales for the second quarter ended November 29, 1997 were $21.0 million
or 20.5% higher than net sales of $17.5 million for the same period last year.
Net sales of $41.4 million for the six month period ended November 29, 1997
were 24.2% higher than net sales of $33.3 million for the corresponding period
last year.
51
<PAGE>
Net sales for the stores which were open for the full three month period this
year and last year improved to $20.1 million or 15.6% from $17.4 million last
year. Net sales of $38.7 million for stores which were open for the full six
month period this year increased 17.0% from net sales of $33.1 million for the
same period last year. Management attributes both improvements to strong sales
in Alaska, an increase in tourism in the Caribbean, concentration on core
product lines and suppliers and the Company's aggressive promotional programs
directed toward Caribbean cruise ships, hotels and resorts.
Gross profit as a percentage of net sales during the three and six month
periods ended November 29, 1997 were 43.0% and 42.7%, respectively, compared
to the three and six month periods ended November 30, 1996 of 43.7% and 43.6%,
respectively. Management attributes the decline in gross margin percentage to
clearance markdowns to liquidate discontinued product lines and the effect of
relative changes in the sales mix.
Second quarter selling, general and administrative ("SG&A") expenses
increased 10.1% to $8.8 million for the three month period ended November 29,
1997 from $8.0 million for the same period last year. As a percent to net
sales, SG&A expenses decreased to 42.0% for the quarter ended November 29,
1997 from 45.9% for the same quarter last year. Six month SG&A increased 8.5%
to $17.3 million for the period ended November 29, 1997 from $15.9 million for
the same period last year. As a percent to net sales, SG&A decreased to 41.8%
for the six month period this year from 47.9% for the same period last year.
The dollar increase of approximately $1.4 million is primarily due to new
stores in St. Lucia and in Skagway, Alaska, and non-recurring professional
fees of approximately $400,000 for the three month period and $660,000 for the
six month period ended November 29, 1997, which are related to the Company's
strategic planning efforts. Also, the three and six month periods last year
include $481,000 and $758,000, respectively, of defalcation loss expense. The
percent to sales decrease is primarily due to the effect of the sales
increases on fixed expenses.
Net interest expense for the quarter was $426,000 compared to $436,000 in
the same period last year. For the six month period, net interest expense was
$796,000 compared to $768,000 in the same period last year. This increase
reflects higher average borrowings this year.
The Company's effective tax rates for the three and six month periods ended
November 29, 1997 was approximately 21% and 20%, respectively. For the three
and six month periods ended November 30, 1996, the effective tax rate was
approximately 18%.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for the fiscal year ended May 31, 1997 increased approximately
$25.4 million or 40% from $62.9 million in fiscal 1996 to $88.3 million in
fiscal 1997. Sales for stores open in all of fiscal 1997 and fiscal 1996
decreased approximately $3.5 million or 14.3% from $24.7 million in fiscal
1996 to $21.1 million in fiscal 1997. Both the large increase in overall sales
and the comparable store sales decline are attributable to the impact in
fiscal 1996 of hurricanes Luis and Marilyn which inflicted damage to several
of the Company's stores and caused significant damage to various islands'
infrastructures. Those stores that were not damaged and did remain open in
fiscal 1996 benefited from the closure of neighboring stores and thus reported
higher than normal sales. The store located on the harbor in Marigot, St.
Martin, the last of the hurricane damaged stores, reopened in November, 1996.
While the reopening of the Company's hurricane damaged stores and the opening
of two new stores in fiscal 1997 contributed to the overall increase in sales
in fiscal 1997 compared to fiscal 1996, management believes that the impact of
the hurricanes continued to have a negative impact on sales into fiscal 1997.
Gross profit margin improved slightly from 42.5% of net sales in fiscal 1996
to 43.7% of net sales in fiscal 1997. Management attributes this improvement
to the stronger U.S. Dollar measured against European currencies partially
offset by the impact on margins of certain inventory liquidation efforts.
SG&A expenses for the year ended May 31, 1997 increased 23% from $29.8
million in fiscal 1996 to $36.5 million in fiscal 1997. The increase is
largely due to the estimated loss of approximately $2.4 million resulting
52
<PAGE>
from the employee theft described above, which has been classified as a
general and administrative expense in the accompanying consolidated financial
statements for the fiscal year ended May 31, 1997. See "Management's
Discussion and Analysis of Financial Condition--Employee Defalcation Loss." In
addition, management further attributes the increase to the lower than normal
SG&A expenses in the prior year from the closed stores as well as additional
expense associated with its new store in Alaska. Management also noted higher
depreciation associated with stores remodeled after the hurricanes.
Net interest expense increased from $558,000 in fiscal 1996 to $1.5 million
in fiscal 1997 primarily due to higher average borrowings, caused by the
Company's acquisition of the inventory, leasehold rights, and fixed assets of
its two stores in Barbados. Additionally, the weighted average interest rate
increased from 6.5% in fiscal 1996 to 7.9% in fiscal 1997.
The Company's income is subject to taxation in each of the jurisdictions in
which it operates at rates currently ranging from 3.7% to 42%, and,
accordingly, the effective tax rate for any given year is a function of the
relative mix of taxable income generated at each of the Company's locations.
The Company's wholly-owned subsidiary, Wholesale which acts as a purchasing
agent for items sold by the Company's stores and charges fees for acting as
such an agent, has elected to be treated as a "936 Company" under section 936
of the Code. Under an agreement which expires in 1998 (subject to renewal),
Wholesale benefits from a lower tax rate on its income earned outside the U.S.
Virgin Islands, which is taxed at a rate of 3.74%. The lower tax rate had the
effect of increasing earnings per Share by $0.12 in both fiscal 1997 and
fiscal 1996. This Agreement expires at the end of August, 1998 and, while the
Company anticipates that the agreement will be renewed at the same or less
favorable benefit, it has no assurance at this time that such a renewal will
be granted. If it is not renewed, all of the Company's USVI based income will
be taxed at the statutory rate of 37.4%. The Company's effective tax rate was
0.0% and 17.4% in the fiscal years ended May 31, 1997 and June 1, 1996,
respectively.
The Company utilizes software and related technologies throughout its
business that will be affected by the "Year 2000 problem," which is common to
most corporations, and concerns the inability of information systems,
primarily computer software programs, to recognize and process date sensitive
information properly as the year 2000 approaches. An internal study is
currently under way to determine the full scope and related costs of the Year
2000 problem to ensure that the Company's systems continue to meet its
internal needs and those of its customers. The Company currently believes it
will be able to modify or replace its affected systems in time to minimize any
detrimental effects on operations. While it is not possible, at present, to
give an accurate estimate of the cost of this work, the Company expects that
such costs may be material to its results of operations in one or more fiscal
quarters or years, but will not have a material adverse impact on the long-
term results of operations, liquidity or consolidated financial position of
the Company. System maintenance or software modification costs will be
expensed as incurred, while the costs of new software will be capitalized and
amortized over the software's useful life.
FISCAL 1996 COMPARED TO FISCAL 1995
In September, 1995, Hurricanes Luis and Marilyn inflicted damage on several
of the Company's stores and caused significant damage to various islands'
infrastructures, including hotels and other tourist facilities. As of July 30,
1996, all stores had reopened with the exception of one store in Marigot, St.
Martin, which reopened in November, 1996.
The Company has settled all outstanding claims related to the hurricanes
with its insurance carriers. In connection with the final settlement, the
Company received approximately $13.4 million in property and business
interruption proceeds. The Company recorded a net gain of approximately $4.7
million in fiscal 1996, after write-offs related to damaged assets of
approximately $8.1 million, including furniture and fixtures, inventory and
other assets related to stores affected by the hurricanes. In addition,
approximately $560,000, representing lost profits for the as yet unopened
Marigot store related to fiscal 1997, has been recorded as deferred income on
the Company's Consolidated Balance Sheet as of June 1, 1996.
53
<PAGE>
Net sales for the fiscal year ended June 1, 1996, decreased approximately
$9.3 million or 13% from $72.2 million in fiscal 1995 to $62.9 million in
fiscal 1996. Sales for stores open in all of fiscal 1995 and fiscal 1996
increased approximately $3.6 million or 17.3% from $20.6 million in fiscal
1995 to $24.2 million in fiscal 1996. The sales trends were dictated by the
impact of hurricanes Luis and Marilyn, which struck the Caribbean in September
1995, forcing stores closures on the island of St. Thomas, St. Maarten, St.
Barths, St. Kitts and Antigua. As of year-end, all but two of the Company's
stores reopened. One Marigot, St. Martin store reopened in mid-June 1996,
while the other Marigot store reopened in November, 1996. As a result of the
store closures and damaged island infrastructures, management believes tourism
was redirected to other destinations, thereby benefitting the Company's stores
on undamaged islands.
Gross profit margin decreased from 42.8% of sales in fiscal 1995 to 42.5% of
sales in fiscal 1996. The Company attributes this decline to the weak U.S.
Dollar as compared to European currencies during the early portion of the year
as well as the impact of certain fixed components of cost-of-sales as measured
against a much lower sales base.
SG&A expenses were $29.8 million or $3.6 million and 13.6% higher than a
year ago. Management attributes these increases mostly to new stores opened
during fiscal 1996.
Net interest expense increased from $240,000 in fiscal 1995 to $558,000 in
fiscal 1996. The increase reflects higher average borrowings, primarily due to
the Company's acquisition of the inventory, leasehold rights and fixed assets
of two stores in Barbados in February, 1996. The weighted average interest
rate decreased from 7.9% in fiscal 1995 to 6.5% in fiscal 1996.
The Company's income is subject to taxation in each of the jurisdictions in
which it operates at rates currently ranging from 3.7% to 42.0%, and,
accordingly, the effective tax rate for any given year is a function of the
relative mix of taxable income generated at each of the Company's locations.
The Company's wholly-owned subsidiary, Wholesale, which acts as a purchasing
agent for items sold by the Company's stores and charges fees for acting as
such an agent, has elected to be treated as a "936 Company" under Section 936
of the Code. Under an agreement which expires in 1998 (subject to renewal),
Wholesale benefits from a lower tax rate on its income earned outside the U.
S. Virgin Islands, which is taxed at a rate of 3.74%. The lower tax rate had
the effect of increasing earnings per Share by $0.12 and $0.11 in fiscal 1996
and fiscal 1995, respectively. This agreement expires at the end of August,
1998 and, while the Company anticipates that the agreement will be renewed at
the same or less favorable benefit, it has no assurance at this time that such
a renewal will be granted. If it is not renewed, all of the Company's USVI
based income will be taxed at the statutory rate of 37.4%. The Company's
effective tax rate was 17.8% in fiscal 1995 and 17.4% in fiscal 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales for the fiscal year ended May 31, 1995 increased approximately
$7.9 million or 12.3% from $64.3 million in fiscal 1994 to $72.2 million in
fiscal 1995. Sales for stores open in all of fiscal 1994 and fiscal 1995
increased approximately $2.6 million or 4.1% from $64.3 million in fiscal 1994
to $66.9 million in fiscal 1995. The Company's stores in St. Barth, Aruba,
Antigua and St. Lucia experienced sales increases in fiscal 1995. St. Thomas
sales were flat due to ongoing street and sewer construction which affected
the downtown area where most of the stores are located as well as a weak
summer tourist season which negatively impacted sales in the first half of the
fiscal year. The increase in total net sales is largely attributable to new
stores in St. Thomas, Ketchikan, Antigua and Marigot, St. Martin. The
comparable store increase resulted from sales increases in St. Barths, Aruba,
Antigua and St. Lucia.
Gross profit margins decreased from 44.1% of net sales in fiscal 1994 to
42.8% in fiscal 1995 thereby impairing overall net income. The Company
attributes this decline to its program to reduce aged inventory levels and to
refine its product mix as well as a decline in the value of the U.S. Dollar
relative to European currencies in which much of its merchandise purchases are
denominated.
54
<PAGE>
SG&A increased approximately $3.1 million or 13.3% from $23.1 million in
fiscal 1994 to $26.2 million in fiscal 1995. As a percentage of net sales,
SG&A increased from 36.0% in fiscal 1994 to 36.3% in fiscal 1995. The $3.1
million increase in SG&A was due mostly to costs of new stores. On a
comparable store basis SG&A expenses increased 3.7% from the prior fiscal
year.
Net interest expense increased slightly from $225,000 in fiscal 1994 to
$240,000 in fiscal 1995. The increase reflects higher interest rates. The
weighted average interest rate increased from 5.6% in fiscal 1994 to 7.9% in
fiscal 1995. The borrowing represented utilization of the Company's short-term
credit facilities to finance inventory buildup prior to the high selling
season.
The Company's effective tax rate was 18.0% in fiscal 1994 and 17.8% in
fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary needs for liquidity are to support its inventory
requirements, which fluctuate during the year due to the seasonal nature of
the Company's business, and to maintain and remodel its existing stores and
finance the opening or acquisition of new stores. Inventory is maintained at
levels to adequately meet the demands of customers who, as tourists, require
immediate delivery of purchased goods.
Net cash used in operations during the six month period ended November 29,
1997 was $3.3 million, compared to $4.4 million for the comparable six month
period last year. The decrease in net cash used in operations primarily
reflects a lower net loss, an increase in accrued expenses and a lower
decrease in accrued taxes this year, partially offset by higher seasonal
increases in account receivables and merchandise inventories this year. Cash
provided by operations during fiscal 1997, fiscal 1996 and fiscal 1995 was
$0.4 million, $3.8 million and $2.5 million, respectively. The decrease in
fiscal 1997 was primarily due to the loss of approximately $2.4 million in
cash as a result of the alleged employee theft during fiscal 1997 more fully
disclosed above. See "--Employee Defalcation Loss."
The Company's working capital position as of November 29, 1997 decreased
slightly to $30.2 million from $30.5 million at May 31, 1997. Current ratios
were 1.9 and 2.5 as of the same periods, respectively.
As of November 29, 1997, the Company has available a total of $22.2 million
in unsecured credit facilities, of which $2.5 million is available for
borrowing. Approximately $4.2 million of the credit facilities is utilized to
secure customs bonds and other bank guarantees required in the normal course
of business. Any unfunded portion of the facilities can be withdrawn at the
bank's discretion. Outstanding borrowings against these credit facilities
totaled approximately $15.5 million and $8.1 million as of November 29, 1997
and May 31, 1997, respectively. Additionally, in February, 1996, the Company
secured term debt of approximately $8.9 million from its two lead banks to
finance its acquisition of the fixtures, leasehold rights and inventories of
two stores in Barbados. Interest on this debt accrues at an annual interest
rate of approximately 7.25% and is payable monthly. The principal is payable
in equal quarterly payments over a four year period, commencing March, 1997.
As of November 29, 1997, the Company had $7.5 million of term debt outstanding
and was in compliance with all restrictive covenants related to its unsecured
and term debt agreements. Additionally, the Company has available separate
facilities for foreign exchange contracts.
Capital expenditures (excluding acquisitions) were approximately $582,000
during the six month period ended November 29, 1997, compared to $2.7 million
during the same period last year. Capital expenditures during fiscal 1997,
fiscal 1996 and fiscal 1995 were approximately $4.4 million, $6.8 million and
$4.5 million, respectively. Capital expenditures during fiscal 1997 include
approximately $3.6 million for the refurbishment of existing stores and
approximately $800,000 for computer and point-of-sale hardware and software
upgrades. Capital expenditures during fiscal 1996 included approximately $3.4
million for new stores and fixtures and $2.5 million for the refurbishment of
existing stores and approximately $715,000 for computer and point-of-sale
hardware and software upgrades.
55
<PAGE>
The Company currently leases 26 of its 27 stores and anticipates obtaining
retail space for new stores through leases. This arrangement allows the
Company to more effectively design and decorate its stores with quality
furnishings consistent with the prestigious image the Company maintains.
SEASONALITY
The Company's business is seasonal in nature, reflecting travel patterns to
the Caribbean. The peak selling season in the Caribbean runs from late fall
through spring. The peak selling season in Alaska runs from late spring
through the summer. Accordingly, approximately one-third of the Company's
sales have historically occurred during the third fiscal quarter, and the
Company may incur losses in the first and second fiscal quarters. Working
capital requirements generally reflect this seasonality as the Company
increases its inventory in anticipation of the peak selling season. Since the
Company has less cash available in the off season, it may be necessary to
borrow to finance its build-up of inventory and any expansion of the Company's
operations. Unaudited quarterly financial information for the Company for
fiscal 1996 and fiscal 1995 is included in Note 9 of Notes to Consolidated
Financial Statements for the fiscal year ended May 31, 1997.
INFLATION
Historically, the Company has generally been able to increase prices to
reflect cost increases resulting from inflation and expects to be able to do
so in the future. While the Company cannot precisely determine the effect of
inflation on its operations, the Company does not believe that its operations
have been materially affected by inflation during the three most recent years.
EXCHANGE RATES
While the Company receives U.S. dollars for most of its sales, a significant
portion of the Company's inventory purchases are transacted in foreign
currencies. Because of the Company's need to maintain adequate levels of
inventory, the Company must place large orders for merchandise many months in
advance of when it will receive payment for the merchandise from customers.
The Company's ability to offer attractive pricing of luxury goods purchased in
foreign currency depends in part on the relative exchange rates between the
U.S. dollar and the various foreign currencies. The Company engages in hedging
transactions to minimize the effects of fluctuating foreign exchange rates on
the Company's results of operations. The Company enters into foreign exchange
contracts to hedge against foreign currency fluctuations for purchase
commitments and accounts payable denominated in foreign currencies. The
Company believes that foreign currency hedging has been effective in
minimizing the impact of foreign currency fluctuations on gross margin in
prior years and expects to continue this program. See Note 2 of Notes to
Consolidated Financial Statements for the fiscal year ended May 31, 1997.
56
<PAGE>
SUBMISSION OF STOCKHOLDER PROPOSALS
In the event the Merger is not consummated, stockholder proposals intended
to be presented at the next annual meeting of Stockholders must be received by
the Company on or before June 15, 1998 in order to be considered for inclusion
in the Company's proxy statement and form of proxy for that meeting. The
Company's By-laws provide that any Stockholder of record wishing to have a
stockholder proposal considered at an annual meeting must provide written
notice of such proposal and appropriate supporting documentation, as set forth
in the By-laws, to the Company at its principal executive office not less than
75 days nor more than 120 days prior to the first anniversary of the date of
the preceding year's annual meeting; provided, however, that in the event the
annual meeting is advanced by more than seven days from the anniversary date,
notice must be so delivered not later than (i) the 20th day after public
disclosure of the date of such meeting or (ii) if such public disclosure
occurs more than 75 days prior to such scheduled date of such meeting, then
the later of the 20th day after the date of public disclosure or the 75th day
prior to such scheduled date of such meeting. Any such proposal should be
mailed to the Company's principal executive office: Secretary, Little
Switzerland, Inc., 161-B Crown Bay Cruise Port, St. Thomas, U.S.V.I. 00804.
In the event the Merger is consummated, the Surviving Corporation intends to
terminate the registration of the Shares under the Exchange Act. See "The
Merger and Related Transactions--Certain Effects of the Merger." Termination
of registration of the Shares under the Exchange Act would eliminate, among
other responsibilities, the requirement that the Company furnish the
Stockholders with proxy materials regarding stockholders' meetings and the
requirements of Rule 14a-8 under the Exchange Act with respect to the
submission of proposals by the Stockholders for such proxy materials.
Accordingly, the foregoing statements regarding the submission of stockholder
proposals would not be applicable to any annual meeting after the Effective
Time of the Merger if such registration is in fact terminated.
57
<PAGE>
LITTLE SWITZERLAND, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MAY 31, 1997
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets as of May 31, 1997 and June 1, 1996............ F-3
Consolidated Statements of Income for the years ended May 31, 1997,
June 1, 1996 and May 31, 1995............................................. F-4
Consolidated Statements of Changes in Stockholders' Equity................. F-5
Consolidated Statements of Cash Flows for the years ended
May 31, 1997, June 1, 1996 and May 31, 1995............................... F-6
Notes to Consolidated Financial Statements................................. F-7
FINANCIAL STATEMENTS FOR THE QUARTER ENDED NOVEMBER 29, 1997
Consolidated Balance Sheets as of November 29, 1997 (unaudited)
and May 31, 1997.......................................................... F-19
Consolidated Statements of Income (unaudited) for the three
and six months ended November 29, 1997 and November 30, 1996.............. F-20
Consolidated Statements of Cash Flows (unaudited) for the
six months ended November 29, 1997 and November 30, 1996.................. F-21
Notes to Consolidated Financial Statements (unaudited)..................... F-22
</TABLE>
F-1
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Little Switzerland, Inc.:
We have audited the accompanying consolidated balance sheets of Little
Switzerland, Inc. (a Delaware corporation) and subsidiaries as of May 31, 1997
and June 1, 1996, and the related consolidated statements of income, changes
in stockholders' equity and cash flows for each of the fiscal years ended May
31, 1997, June 1, 1996 and May 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Little Switzerland, Inc. and subsidiaries as of May 31, 1997 and June 1,
1996, and the results of their operations and their cash flows for each of the
fiscal years ended May 31, 1997, June 1, 1996 and May 31, 1995, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
September 25, 1997
F-2
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MAY 31, JUNE 1,
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes 2 and 13)................... $ 1,710 $ 5,393
Accounts receivable.......................................... 2,083 1,892
Inventory (Note 2)........................................... 44,728 43,678
Prepaid expenses and other current assets.................... 2,172 1,607
------- -------
Total current assets....................................... 50,693 52,570
------- -------
Property, plant and equipment, at cost, (Note 2)............... 38,565 34,247
Less--Accumulated depreciation............................... 15,201 12,522
------- -------
23,364 21,725
Other assets (Note 2).......................................... 3,334 3,582
------- -------
Total assets............................................... $77,391 $77,877
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt (Note 4)................... $ 2,225 $ 832
Unsecured notes payable (Note 4)............................. 8,100 7,100
Accounts payable............................................. 7,002 6,839
Accrued and currently deferred income taxes (Notes 2 and 5).. 429 2,002
Other accrued expenses and deferred income (Notes 2 and 12).. 2,431 3,225
------- -------
Total current liabilities.................................. 20,187 19,998
Long term debt................................................. 6,119 8,068
Deferred income taxes (Notes 2 and 5).......................... 186 90
------- -------
Total liabilities.......................................... 26,492 28,156
======= =======
Commitments and contingencies (Note 6)
Minority interest (Note 11).................................... 1,619 1,619
------- -------
Stockholders' equity (Notes 1, 3 and 10):
Preferred stock, $.01 par value--
Authorized--5,000 shares
Issued and outstanding--none................................ -- --
Common stock, $.01 par value--
Authorized--20,000 shares
Issued and outstanding--8,462 shares at May 31, 1997
and 8,457 at June 1, 1996.................................. 85 85
Capital in excess of par..................................... 14,811 14,792
Retained earnings............................................ 34,384 33,225
------- -------
Total stockholders' equity................................. 49,280 48,102
======= =======
Total liabilities, minority interest and stockholders'
equity.................................................... $77,391 $77,877
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------
MAY 31, JUNE 1, MAY 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net sales............................................. $88,314 $62,895 $72,240
Cost of sales......................................... 49,721 36,164 41,307
------- ------- -------
Gross profit.......................................... 38,593 26,731 30,933
Selling, general and administrative expenses (Notes 2
and 13).............................................. 36,492 29,778 26,197
Gain on insurance proceeds (Note 12).................. 560 4,713 --
------- ------- -------
Operating income.................................... 2,661 1,666 4,736
Interest expense, net................................. 1,502 558 240
------- ------- -------
Income before provision for income taxes............ 1,159 1,108 4,496
Provision for income taxes (Notes 2 and 5)............ -- 193 802
------- ------- -------
Net income............................................ $ 1,159 $ 915 $ 3,694
======= ======= =======
Net income per share (Note 2)......................... $ 0.14 $ 0.11 $ 0.44
======= ======= =======
Weighted average shares outstanding (Notes 1 and 2)... 8,526 8,456 8,451
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
------------- EXCESS OF RETAINED
SHARES AMOUNT PAR EARNINGS TOTAL
------ ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, May 31, 1994................ 8,449 $ 84 $14,758 $28,616 $43,458
Net income......................... -- -- -- 3,694 3,694
Shares issued under stock purchase
plan (Note 10).................... 3 1 18 -- 19
----- ---- ------- ------- -------
Balance, May 31, 1995................ 8,452 $ 85 $14,776 $32,310 $47,171
Net income......................... -- -- -- 915 915
Shares issued under stock purchase
plan (Note 10).................... 5 -- 16 -- 16
----- ---- ------- ------- -------
Balance, June 1, 1996................ 8,457 $ 85 $14,792 $33,225 $48,102
Net income......................... -- -- -- 1,159 1,159
Shares issued under stock purchase
plan (Note 10).................... 5 -- 19 -- 19
----- ---- ------- ------- -------
Balance, May 31, 1997................ 8,462 $ 85 $14,811 $34,384 $49,280
===== ==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------
MAY 31, JUNE 1, MAY 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 1,159 $ 915 $ 3,694
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities
Depreciation and amortization.............. 3,077 2,489 2,157
Deferred gain from insurance proceeds...... (560) -- --
Loss on retirement of fixed assets......... 22 2,918 --
Increase (decrease) in deferred income
taxes..................................... 96 (144) (122)
Changes in assets and liabilities:
(Increase) in accounts receivable............ (191) (72) (244)
(Increase) in inventory...................... (1,050) (3,499) (4,477)
(Increase) decrease in prepaid expenses and
other current assets........................ (522) 178 (489)
Increase in accounts payable................. 163 355 1,350
Increase (decrease) in other accrued expenses
and deferred income......................... (234) 1,065 100
Increase (decrease) in accrued and currently
deferred income taxes....................... (1,573) (395) 536
-------- -------- --------
Net cash provided by operating
activities.............................. 387 3,810 2,505
-------- -------- --------
Cash flows from investing activities:
Capital expenditures........................... (4,388) (6,806) (4,542)
Decrease (increase) in other assets............ (145) (1,609) 286
Acquisition of inventory and fixed assets
(Notes 2 and 11).............................. -- (8,917) --
-------- -------- --------
Net cash used in investing activities.... (4,533) (17,332) (4,256)
-------- -------- --------
Cash flows from financing activities:
Borrowing under unsecured notes payable........ 26,950 32,400 36,297
Repayment of unsecured notes payable........... (25,950) (25,300) (36,297)
Proceeds from (repayments of) long term
borrowings.................................... (556) 8,900 --
Issuance of common stock....................... 19 16 18
-------- -------- --------
Net cash provided by financing
activities.............................. 463 16,016 18
Net (decrease) increase in cash and cash
equivalents..................................... (3,683) 2,494 (1,733)
Cash and cash equivalents, beginning of year..... 5,393 2,899 4,632
-------- -------- --------
Cash and cash equivalents, end of year........... $ 1,710 $ 5,393 $ 2,899
======== ======== ========
Cash paid during the year for:
Income Taxes................................... $ 1,543 $ 762 $ 620
======== ======== ========
Interest....................................... $ 1,450 $ 590 $ 289
======== ======== ========
Non-cash activity:
Issuance of Preferred Stock by subsidiary in
acquisition of
inventory and fixed assets.................... -- 1,619 --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
(1) ORGANIZATION
Little Switzerland, Inc. (the "Company") was incorporated in May 1991. A
wholly owned subsidiary of Town & Country Corporation ("Town & Country")
contributed to the Company all of the outstanding shares of L.S. Holding, Inc.
and L.S. Wholesale, Inc. in exchange for 10,000,000 shares of the Company's
Common Stock. On June 3, 1991, the Company declared an 84 for 100 reverse
stock split resulting in outstanding shares of Common Stock of 8,400,000,
which has been retroactively reflected in the accompanying consolidated
financial statements.
L.S. Holding, Inc. was incorporated in July 1980 and, as of May 31, 1997,
had ten (10) operating subsidiaries: Montres et Bijoux, S.A.R.L.; World Gifts
Imports N.V.; L.S. Holding (Aruba) N.V.; L.S. Holding (Curacao) N.V.; Little
Switzerland (St. Kitts & Nevis) Limited; Little Switzerland (Antigua) Limited;
Little Switzerland (St. Lucia) Limited, Little Switzerland (BVI) Limited, L.S.
Holding (USA), Inc. and World Gift Imports (Barbados) Limited, (Note 2) which
operate retail stores in the Virgin Islands, Aruba, St. Kitts, Antigua, St.
Lucia, the French and Netherlands Antilles, and Barbados. Little Switzerland
(BVI) Limited, incorporated in the British Virgin Island, was not yet in
operation at June 1, 1996. L.S. Wholesale, Inc. was incorporated in October
1987 and purchases inventory for distribution to L.S. Holding, Inc.'s retail
stores.
In July 1991, the Company completed an initial public offering (the
"Offering") whereby Switzerland Holding Inc., a wholly-owned subsidiary of
Town & Country, sold 5,700,000 shares of the Company's Common Stock at $12 per
share. Switzerland Holding, Inc. received all of the proceeds and paid
substantially all of the costs of the Offering.
Subsequent to the Offering, Switzerland Holding owned 2,700,000 shares of
the Company's Common Stock (approximately 32% of the issued and outstanding
Common Stock as of May 31, 1994) which were not registered in the Offering. In
connection with the consummation of the recapitalization of Town & Country in
May 1993 (the "Recapitalization"), Switzerland Holding was dissolved and
2,533,279 shares of the Company's Common Stock were transferred to a trust
(the "Trust") established for the benefit of Town & Country and the holders of
Town & Country's Exchangeable Preferred Stock (the "T&C Exchangeable Preferred
Stock"). Each holder of a share of T&C Exchangeable Preferred Stock may
exchange such share for one share of the Company's Common Stock held in the
Trust.
On April 6, 1993, Town & Country exercised its rights under a Registration
Rights Agreement and requested that the Company file with the SEC a
registration statement covering the shares of the Company's Common Stock
currently held in the Trust. In accordance with the terms of the Registration
Rights Agreement, the Company caused such shares to be registered with the
SEC.
In November 1994, holders of an aggregate of 2,381,038 shares of T&C
Exchangeable Preferred Stock exercised their right to exchange such shares for
Little Switzerland Common Stock on a share-for-share basis. Accordingly, as of
May 31, 1997, the Trust held 152,241 shares of Little Switzerland Common Stock
for the benefit of Town & Country and the holders of T&C Exchangeable
Preferred Stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Presentation
The accompanying consolidated financial statements include the operations of
the Company and its wholly owned subsidiaries, L.S. Holding, Inc. and L.S.
Wholesale, Inc. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the May 31, 1997 presentation.
All significant intercompany balances have been eliminated in consolidation.
F-7
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1997
Effective with the second quarter of fiscal 1996, the Company adopted a "4-
5-4" fiscal calendar wherein each fiscal quarter contains two four week
periods and one five week period, with each period beginning on a Sunday and
ending on a Saturday. Previously, the Company used calendar months for its
fiscal periods. The purpose of this change is to provide more consistent
comparability between fiscal periods. The change in fiscal calendar added one
day to fiscal 1996 as compared to fiscal 1997. Management estimates that the
one day gained from this calendar change had no material effect on the
reported net income for fiscal 1996.
Risks and Uncertainties
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Operations
Net sales and operating income from foreign operations (non-U.S.
possessions) amounted to 62%, 61% and 54%, and 22%, 174% and 40% of total net
sales and operating income, respectively, in fiscal 1997, 1996 and 1995,
respectively. Inter-segment sales were not material for all periods presented.
Identifiable assets of foreign operations amounted to 63%, 53% and 54% of
total assets as of May 31, 1997, June 1, 1996 and May 31, 1995, respectively.
Inventory
Inventory is valued at the lower of cost (first-in, first-out) or market
value and consists almost entirely of finished merchandise purchased for
resale.
Advertising
The Company expenses the costs of advertising as advertisements are printed
and distributed. The Company's advertising consists primarily of
advertisements with local and national travel magazines which are produced on
a periodic basis and distributed to visiting tourists and fees paid for
promotional "port lecturer" programs directed primarily at cruise passengers.
Advertising expense for fiscal 1997, 1996 and 1995 was approximately
$3,138,000, $3,008,000 and $2,078,000, respectively. Prepaid advertising of
approximately $663,000 and $461,000 at May 31, 1997 and June 1, 1996,
respectively, is included in the consolidated balance sheets as prepaid
expenses and other current assets.
Property, Plant and Equipment
Fixed assets are depreciated over their estimated useful lives, principally
using the straight-line method. Property, plant and equipment consist of the
following:
<TABLE>
<CAPTION>
ESTIMATED MAY 31, JUNE 1,
USEFUL LIFE RANGE 1997 1996
-------------------- ----------- -----------
<S> <C> <C> <C>
Land and buildings............. 20-40 Years $ 7,215,000 $ 7,191,000
Furniture and fixtures......... 3-10 Years 12,338,000 11,671,000
Equipment...................... 3-20 Years 4,735,000 3,615,000
Construction in progress....... -- 162,000 414,000
Leasehold improvements......... Life of the lease
or useful life,
whichever is shorter 14,115,000 11,356,000
----------- -----------
$38,565,000 $34,247,000
=========== ===========
</TABLE>
F-8
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1997
Income Taxes
The Company follows the liability method of accounting for income taxes as
set forth in SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. The amount of deferred tax asset or liability is based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Other Assets
Other assets consist primarily of amounts related to non-competition
agreements, rental deposits and the excess of cost over the fair market value
of the net assets of the business acquired (goodwill). Amounts related to non-
competition agreements are amortized over the lives of the respective
agreements. Amounts related to goodwill are being amortized over periods of up
to 10 years. Accumulated amortization totaled $340,821 and $33,132 at May 31,
1997 and June 1, 1996, respectively.
The Company accounts for long-lived and intangible assets in accordance with
SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for Long-
lived Assets to be Disposed of. The Company continually reviews applicable
assets for events or changes in circumstances which might indicate the
carrying amount of the assets may not be recoverable. The Company assesses the
recoverability of these assets by determining whether the amortization over
their remaining lives can be recovered through projected undiscounted future
results. The amount of impairment, if any, is measured based on projected
discounted future results using a discount rate commensurate with the risks
involved. No such impairment existed as of May 31, 1997 or June 1, 1996.
Foreign Exchange Contracts
The Company enters into foreign exchange contracts to hedge against foreign
currency fluctuations for purchase commitments and accounts payable
denominated in foreign currencies. Gains and losses on contracts to hedge
purchase commitments are included in the cost basis of the related purchases.
Deferred (losses) gains of approximately ($296,000) and $213,000,
respectively, are included in the inventory balances at May 31, 1997 and June
1, 1996, respectively.
At May 31, 1997, the Company had various contracts maturing during the
period from June through September, 1997 at contractually predetermined rates
totaling approximately $4,800,000.
The Company's functional currency, under Statement of Financial Accounting
Standards No. 52, Foreign Currency Translation, for all foreign locations is
the U.S. dollar. Accordingly, all transaction and translation gains and losses
are included in the accompanying consolidated income statements. Gains and
losses for all periods presented were not material.
Other Accrued Expenses and Deferred Income
Other accrued expenses and deferred income are comprised of the following:
<TABLE>
<CAPTION>
MAY 31, JUNE 1,
1997 1996
---------- ----------
<S> <C> <C>
Deferred income (Note 12)............................. $ -- $ 560,000
Customer deposits..................................... 484,000 512,000
Payroll and related items............................. 1,028,000 1,569,000
Other................................................. 919,000 584,000
---------- ----------
$2,431,000 $3,225,000
========== ==========
</TABLE>
F-9
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1997
Fair Value of Financial Instruments
In accordance with the requirements of SFAS No. 107, Disclosures About Fair
Value of Financial Instruments, the Company has determined the estimated fair
value amounts of its financial instruments using appropriate market
information and valuation methodologies. Considerable judgement is required to
develop the estimates of fair value; thus, the estimates are not necessarily
indicative of the amounts that could be realized in a current market exchange.
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and bank debt. The carrying value of these assets and
liabilities are a reasonable estimate of their fair value at May 31, 1997.
Net Income per Share
Net Income per share is computed based on the weighted average number of
common and common equivalent shares outstanding, where dilutive, during each
period. Common equivalent shares result from the assumed exercise of stock
options (Note 10). In February, 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings per Share" and SFAS No. 129, "Disclosure of
Information about Capital Structure" effective for fiscal years ending after
December 15, 1997. Earlier adoption is not permitted. The Company's adoption
of SFAS No. 128 for fiscal 1997 will not materially impact its earnings per
share calculation and the adoption of SFAS No. 129 will have no impact on the
Company's current disclosures.
Cash Flows
For the purpose of the Consolidated Statements of Cash Flows, the Company
considers all highly liquid instruments with a purchased maturity of three
months or less to be cash equivalents. The carrying amount of cash and cash
equivalents approximates fair value due to the short maturities.
(3) TRANSACTIONS WITH AFFILIATES
The Company enters into a number of transactions with Town & Country of
which one of the Company's Directors is an Executive Officer. The Company
purchases a portion of its merchandise from Town & Country and its affiliated
companies at prices that management believes approximate arm's-length
transactions. Such purchases totaled approximately $640,000, $1,443,000 and
$2,502,000 in fiscal 1997, 1996 and 1995, respectively.
(4) CREDIT ARRANGEMENTS
The Company has available a total of $19.3 million in unsecured credit
facilities, of which $7.6 million is available for borrowing with maturities
ranging from one to three years from May 31, 1997. Any unfunded portion of the
facilities can be withdrawn at the bank's discretion. Outstanding borrowings
against these credit facilities totaled $8.1 million and $7.1 million as of
May 31, 1997 and June 1, 1996, respectively. Outstanding letters of credit
against these credit facilities totaled $3.6 million and $3.0 million as of
May 31, 1997 and June 1, 1996, respectively. Additionally, in February 1996,
the Company secured term debt of approximately $8.9 million from its two lead
banks to finance its acquisition of the fixtures, leasehold rights and
inventories of two stores in Barbados. Interest on this debt accrues at an
annual interest rate of approximately 7.25% and is payable monthly. The
principal is payable in equal quarterly payments over a four year period
commencing March 1997. As of May 31, 1997, the Company was in compliance with
all restrictive covenants related to its unsecured and term debt agreements.
Additionally, the Company has available separate facilities for foreign
exchange contracts. The weighted average interest rates incurred during fiscal
1997, 1996 and 1995 were approximately 7.9%, 6.5% and 7.9%, respectively.
F-10
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1997
(5) INCOME TAXES
The domestic (United States Virgin Islands "USVI", and Ketchikan, Juneau and
Skagway, Alaska) and foreign components of income before income taxes are as
follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
---------------------------------
MAY 31, JUNE 1, MAY 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Domestic................................... $2,010,000 $ 202,000 $3,583,000
Foreign.................................... (851,000) 906,000 913,000
---------- ---------- ----------
$1,159,000 $1,108,000 $4,496,000
========== ========== ==========
</TABLE>
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
------------------------------
MAY 31, JUNE 1, MAY 31,
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Current:
Domestic................................... $(96,000) $ 137,000 $ 522,000
Foreign.................................... -- 200,000 402,000
-------- --------- ---------
(96,000) 337,000 924,000
-------- --------- ---------
Deferred:
Domestic................................... 96,000 (144,000) (122,000)
Foreign.................................... -- -- --
-------- --------- ---------
$ -- $ 193,000 $ 802,000
======== ========= =========
</TABLE>
The deferred tax provision (benefit) results primarily from the use of
different depreciation methods for financial reporting and tax purposes as
well as the difference in timing as to when insurance recoveries are taxable
and when they are recorded as income in the financial statements.
The Company's effective tax rate is less than the USVI statutory rate of
37.4% due to the following:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
----------------------------------
MAY 31, JUNE 1, MAY 31,
1997 1996 1995
--------- ----------- ----------
<S> <C> <C> <C>
Computed tax provision at statutory
rate................................... $ 434,000 $ 426,000 $1,682,000
Increases (reductions) resulting from--
Differences between foreign provisions
recorded and provisions at USVI
rate................................. (441,000) (59,000) 62,000
Effect of earnings of subsidiary in USVI
subject to lower tax rate.............. (891,000) (1,032,000) (942,000)
Effect of subsidiary net operating
losses not benefited................... 898,000 858,000 --
--------- ----------- ----------
$ -- $ 193,000 $ 802,000
========= =========== ==========
</TABLE>
The lower tax rate in effect on certain of the income of a subsidiary in the
USVI expires, subject to renewal, in 1998 and had the effect of increasing
earnings per share by $0.12, $0.12 and $0.11 in fiscal 1997, 1996 and 1995,
respectively.
F-11
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1997
The net effective tax rate was approximately 0.0%, 17.4% and 17.8% for
fiscal 1997, 1996 and 1995, respectively.
The deferred tax liability of $186,000 and $90,000 at May 31, 1997 and June
1, 1996, respectively, is the result of the use of accelerated depreciation
methods for tax purposes as well as the difference in timing as to when
insurance proceeds are taxable and when they are recorded as income in the
financial statements. The Company's only deferred tax assets consist of net
operating loss carryforwards totaling approximately $1,756,000 and $858,000 as
of May 31, 1997 and June 1, 1996, for which a full valuation reserve has been
recorded. The valuation allowance relates to uncertainty surrounding the
realizability of the deferred tax assets in excess of the deferred tax
liabilities, principally the net operating loss carryforwards. For tax
reporting purposes, the Company has net operating loss carryforwards of
approximately $2,402,000 and $2,294,000 as of May 31, 1997 and June 1, 1996,
respectively. Utilization of the net operating loss carryforward is contingent
on the Company's ability to generate income in future years. The net operating
loss carryforwards will expire from 2011 to 2012 if not utilized.
(6) COMMITMENTS AND CONTINGENCIES
Certain of the Company's facilities and retail stores are occupied under
operating leases expiring at various dates. The Company's rental commitments
under the noncancelable portion of these leases for each of the next five
years and, in total, thereafter at May 31, 1997 are as follows:
<TABLE>
<CAPTION>
TOTAL LEASE
YEAR COMMITMENT
---- -----------
<S> <C>
1998............................................................. $ 3,859,000
1999............................................................. 3,254,000
2000............................................................. 2,761,000
2001............................................................. 2,314,000
2002............................................................. 1,369,000
Thereafter....................................................... 1,529,000
-----------
$15,086,000
===========
</TABLE>
Rental expense included in the accompanying consolidated statements of
income amounted to approximately $4,167,000, $3,345,000 and $3,027,000 in
fiscal 1997, 1996 and 1995, respectively.
The Company owns the building which houses its headquarters and warehouse on
St. Thomas and leases the underlying real property from the Virgin Islands
Port Authority under a 10-year ground lease. The ground lease is subject to
two five-year renewal terms and may be terminated by the lessor prior to the
expiration of its term subject to payment to the Company of the fair market
value of the Company's improvements.
Prior to the Company's initial public offering, Town & Country and several
of its wholly-owned subsidiaries had supplied the Company with jewelry.
Pursuant to written agreements entered into between Town & Country and each of
its subsidiaries and the Company, the subsidiaries have continued to supply
jewelry to the Company at the Company's option on the same terms and
conditions as were in effect prior to the initial public offering (Note 1).
These agreements are automatically renewed each year unless either party
terminates upon 60 days notice prior to the end of a year.
The Company is not a party to any material pending legal proceedings, other
than ordinary litigation incidental to the business. In the opinion of
management of the Company, these suits and claims should not result in final
judgments or settlements which, in the aggregate, would have a material
adverse effect on the Company's financial condition or results of operations.
F-12
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1997
During 1997, the Company received an assessment from the local government in
Aruba that relates to the Company's 1987-1991 local income tax returns
regarding the deductibility of goodwill. The government in Aruba has failed to
provide the Company with the details of the assessment. The outcome of this
matter is uncertain, and as a result, management is not able to quantify the
related financial exposure, if any, at this time. However, in the opinion of
management of the Company, this assessment should not result in a final
judgment which would have a material adverse effect on the Company's financial
condition or results of operations.
(7) FRANCHISE AGREEMENT
In fiscal 1988, the Company entered into a 10-year franchise agreement with
Solomon Brothers Limited ("Solomon"), a Bahamian company engaged in the
wholesale and retail distribution of jewelry, gift items and consumables in
the Bahamas. The Company signed a new franchise agreement with Solomon,
effective November 1, 1996, with a two year term and option to renew for an
additional two years. Solomon is responsible for developing each store, in
accordance with the Company's specifications, once a new location has been
agreed upon. The Company provides ongoing assistance in retail and
merchandising methods. Solomon is responsible for the operation of each store,
but the general operating methods are dictated by the Company. Currently,
Solomon operates eight locations in the Bahama Islands under the name of
"Little Switzerland."
In return for the use of the Little Switzerland name and the services
provided by Little Switzerland, the Company receives an annual franchise fee
which enables the Company to participate in the revenue of both Little
Switzerland stores operated by Solomon and other Solomon retail stores which
are not operated under the Little Switzerland name. Franchise fees are accrued
by the Company as earned based upon Solomon's revenues, as defined, or a
minimum annual fee of $100,000, and for fiscal 1997, 1996 and 1995 were
approximately $100,000, $100,000 and $37,000, respectively.
(8) EMPLOYEE BENEFIT PLANS
The Company provided a tax-qualified discretionary contribution retirement
plan for eligible USVI employees to which the Company, at its discretion,
contributed. Each employee became a participant following completion of one
year's employment, or, if later, the attainment of age 21. All participants
became fully vested after seven years of service. The amount accrued and
charged to expense for fiscal 1995 in connection with this plan was
approximately $50,000.
Effective June 1, 1996, the Company replaced its Discretionary Contribution
Plan with a 401(k) Plan under which the Company matches each employee's
contribution up to 3% of compensation. During fiscal 1997 and 1996 the Company
matching totaled approximately $82,000 and $92,000, respectively. The
Company's contributions vest based on the employee's years of service, with
full vesting after five years of service.
F-13
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1997
(9) QUARTERLY DATA (UNAUDITED)
The following presents the unaudited quarterly results of operations for
fiscal 1997 and 1996 (in thousands except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
AUGUST 31 NOVEMBER 30 MARCH 1 MAY 31
--------- ----------- ------- -------
<S> <C> <C> <C> <C>
FISCAL 1997
Net sales................................ $15,868 $17,458 $32,624 $22,364
Gross profit............................. 6,896 7,638 14,498 9,561
Net income (loss)........................ (769) (560) 2,411 77
Net income (loss) per share.............. $ (0.09) $ (0.07) $ 0.28 $ 0.01
<CAPTION>
AUGUST 31 DECEMBER 2 MARCH 2 JUNE 1
--------- ----------- ------- -------
<S> <C> <C> <C> <C>
FISCAL 1996
Net sales................................ $14,068 $ 9,751 $20,680 $18,396
Gross profit............................. 6,091 4,170 8,886 7,584
Net income (loss)........................ (250) (1,891) 397 2,659
Net income (loss) per share.............. $ (0.03) $ (0.22) $ 0.05 $ 0.31
</TABLE>
(10) STOCKHOLDERS' EQUITY
Stock Options
During 1991, the Company established the 1991 Option Plan to cover option
awards to key employees and directors who are also full time employees of the
Company. Under this plan, the Company may grant stock options for the purchase
of up to 500,000 shares of the Company's Common Stock at an exercise price
equal to the fair market value of the Common Stock on the date of grant.
During 1996, the Company amended the 1991 Option Plan to increase the
aggregate number of shares of the Common Stock of the Company available for
grant under the Plan from 500,000 to 900,000. As of May 31, 1997, 815,500
option shares were outstanding under the 1991 Plan. Options granted under the
Plan vest ratably over a three to five year period and must be exercised
within 10 years of the date of grant.
During 1992, the Company established the 1992 Option Plan for non-employee
directors of the Company. Under this plan, the Company may grant stock options
for the purchase of up to 150,000 shares of the Company's Common Stock at an
exercise price equal to the fair market value of the Common Stock on the date
of grant. As of May 31, 1997, 88,000 option shares have been granted and were
outstanding under the 1992 Plan. Options granted under the 1992 Option Plan
vest immediately and must be exercised within 10 years of the date of grant.
A summary of the status of the Company's stock option plan at May 31, 1997,
June 1, 1996 and May 31, 1995 together with changes during the periods then
ended are presented in the following table:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE PRICE AVERAGE PRICE AVERAGE PRICE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
------- ------------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period............... 839,344 6.36 531,844 8.02 425,594 10.50
Grants during period..... 65,000 4.79 315,000 3.61 232,000 5.13
Exercised during period.. -- -- -- -- -- --
Forfeitures/Cancellations
during period........... 844 10.00 7,500 8.67 125,750 10.82
Outstanding at end of
period.................. 903,500 6.24 839,344 6.36 531,844 8.02
Options exercisable at
end of period........... 402,800 7.28 279,999 8.59 222,498 9.48
</TABLE>
F-14
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1997
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123")
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock Based Compensation, which defines a fair value based
method of accounting for an employee stock option or similar equity
instruments and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans.
The Company has elected to account for its stock-based compensation plans
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during fiscal 1997 and 1996, using
the Black-Scholes option pricing model as prescribed by SFAS No. 123 and the
following weighted average assumptions used for grants:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Risk-free interest rate.................................. 6.41% 6.07%
Expected dividend yield.................................. 0% 0%
Expected lives........................................... 10 Years 10 Years
Expected volatility...................................... 32.21% 41.35%
</TABLE>
Adjustments are made for options forfeited prior to vesting. The total value
of options granted was computed and would be amortized on a straight-line
basis over the vesting period of the options. If the Company had accounted for
these plans in accordance with SFAS No. 123, the Company's net income and pro
forma net income per share would have been reported as follows:
NET INCOME:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, JUNE 1,
1997 1996
---------- ----------
<S> <C> <C>
As Reported............................................ $1,159,266 $914,921
Pro Forma.............................................. $ 967,129 $776,527
</TABLE>
PRO FORMA NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MAY 31, JUNE 1
1997 1996
---------- ----------
<S> <C> <C>
As Reported............................................ $0.14 $0.11
Pro Forma.............................................. $0.11 $0.09
</TABLE>
Employee Stock Purchase Plan
During 1992, the Company approved an Employee Stock Purchase Plan permitting
eligible employees to purchase Common Stock, semiannually on June 30 and
December 31, at the average trading price during the six-month period, but not
less than specified minimums. Under this plan, 23,537 shares have been issued
as of May 31, 1997.
Shareholder Rights Agreement
On July 24, 1991, the Board of Directors adopted a Shareholder Rights Plan
and declared a dividend distribution of one preferred stock purchase right for
each outstanding share of Common Stock to stockholders of record as of the
close of business on July 25, 1991. Such rights only become exercisable, and
transferable
F-15
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1997
apart from the Common Stock upon the earliest to occur of (I) ten business
days after the first public announcement that a person or group of affiliated
or associated persons has acquired beneficial ownership of 15% or more of the
outstanding shares of Common Stock (an "Acquiring Person") (the date of the
public announcement is hereinafter referred to as the "Stock Acquisition
Date"); (ii) ten business days following the commencement of tender or
exchange offer that would result in a person or group becoming an Acquiring
Person, or (iii) the declaration by the Board of Directors that any person is
an Adverse Person. A "Grandfathered Person" (as defined below) shall not
become an Acquiring Person unless such Person shall become the beneficial
owner of more than the Grandfathered Percentage (as defined below) of the
outstanding shares of Common Stock. In the event that a person becomes an
Acquiring Person or the Board of Directors determines that a person is an
Adverse Person, proper provision will be made so that each holder of a Right
will thereafter have the right to receive upon exercise that number of Units
of Series A Preferred Stock having a market value of two times the exercise
price of the Right. In the event that, at any time following the Stock
Acquisition Date, the Company is acquired in a merger or other business
combination transaction or 50% of the Company's assets or earning power is
sold, the rights entitle holders to acquire common stock of the acquiring
company having a value equal to two times the exercise price of the rights
(such right is referred to as the "Merger Right"). The rights may be redeemed
in whole by the Company at $.01 per right at any time prior to (I) the date on
which a person is declared an Adverse Person, (ii) the tenth business day
after the Stock Acquisition Date, or (iii) the occurrence of an event giving
right to a Merger Right. The rights will expire on July 24, 2001.
A Grandfathered Person is generally defined as any person who or which,
together with its affiliates and associates, was, as of the close of business
on July 25, 1991, the beneficial owner of 15% or more of the shares of Common
Stock then outstanding. The Grandfathered Percentage is generally defined as
the percentage of outstanding shares of Common Stock beneficially owned by a
Grandfathered Person as of the close of business on July 25, 1991 plus an
additional two percentage points.
The Shareholder Rights Agreement was amended in April 1993 in connection
with the recapitalization of Town & Country to permit, among other things, the
shares of Common Stock owned by Town & Country to be transferred to a trust
established for the benefit of Town & Country and the holders of shares of
Town & Country's Exchangeable Preferred Stock.
(11) ACQUISITIONS
On February 16, 1996, World Gift Imports (Barbados), Inc., a subsidiary of
LS Holding, Inc. which is a subsidiary of the Company, purchased the leasehold
rights, fixtures and inventories of two retail stores located in Barbados,
West Indies from Dacosta Mannings Inc., a subsidiary of Barbados Shipping &
Trading Company Limited. The two stores were previously operated under the
name of Louis Bayley and sold merchandise similar to that carried in the
Company's retail stores such as name brand watches, jewelry, china, crystal
and gift items at duty free prices. The Company began operating the two stores
as "Little Switzerland" stores on February 19, 1996.
The purchase price of approximately $10.6 million was financed by bank
borrowing provided by the Company's two primary banks, Chase Bank and Bank of
Nova Scotia, of approximately $9 million and the issuance of preferred stock
of approximately $1.6 million by World Gift Imports (Barbados), Inc. to the
seller. The preferred stock has been presented as a minority interest in a
consolidated subsidiary in the accompanying financial statements. The purchase
price is subject to adjustment three and four years after the closing date,
based on the sales performance of the two purchased stores and any additional
stores that may be opened by the Company in Barbados during that period. No
dividends or interest are paid or accrued on the preferred stock. The Company
pays to the seller a management fee of 2.5% of its Barbados stores annual
sales up to $15 million
F-16
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1997
and 1.25% of annual sales in excess of $15 million, so long as the preferred
stock is unredeemed. These management fees totaled approximately $190,000 and
$55,000 in 1997 and 1996, respectively, and are included in SG&A in the
accompanying Consolidated Statements of Income. The preferred stock may be
redeemed by the Company at face value at any time after three years from the
date of close through nine years from the date of close. Following that
period, the Company retains the right of first refusal to match any bona fide
offer from a third party to purchase the preferred stock.
The transaction was accounted for as a purchase transaction whereby the
purchase price, including transactions costs, was allocated to the tangible
and intangible assets acquired, based on their estimated fair value as of
February 16, 1996.
Unaudited pro forma operating results of the Company for the years ended
June 1, 1996 and May 31, 1995 as adjusted for the debt financing and estimated
effects of the acquisition as if it had occurred on June 1, 1994, are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------
JUNE 1, MAY 31,
1996 1995
----------- -----------
<S> <C> <C>
Net sales........................................... $68,661,000 $77,932,000
Net income.......................................... 1,103,000 2,944,000
Net income per share................................ .13 .35
Weighted average shares outstanding................. 8,456,000 8,451,000
</TABLE>
(12) GAIN ON INSURANCE PROCEEDS
In September, 1995, Hurricanes Luis and Marilyn inflicted damage on several
of the Company's stores and caused significant damage to various islands'
infrastructures, including hotels and other tourist facilities. All damaged
stores had reopened by November 30, 1996.
The Company settled all outstanding claims related to the hurricanes with
its insurance carrier. In connection with the final settlement, the Company
received approximately $13.4 million in property and business interruption
proceeds. The Company recorded a net gain of approximately $4.7 million in
fiscal 1996, after write-offs related to damaged assets of approximately $8.1
million, including furniture and fixtures, inventory and other assets related
to stores affected by the hurricanes. Approximately $560,000 of deferred
income as of June 1, 1996 representing fiscal 1997 lost profits for the
Marigot store, has been recorded as income in the Company's consolidated
statement of income for fiscal 1997.
(13) EMPLOYEE DEFALCATION LOSS
In July, 1997 management disclosed to its independent auditors that certain
transactions may have been recorded in error on the books of the Company. As a
result, the Company engaged Arthur Andersen LLP to evaluate the matter and
determine the impact, if any, on the Company's previously and currently
reported consolidated financial statements. After extensive review, analysis
and evaluation, which focused on unlocated differences in cash balances,
management believes that an employee defalcation occurred during fiscal 1997.
The employee was able to circumvent existing internal controls largely due to
lapses in appropriate segregation of duties regarding cash deposits and
disbursements, inter-bank transfers and bank account reconciliations. This
lapse in the segregation of such duties was further exacerbated by the
resignation of the Company's Assistant Treasurer on February 28, 1997, which
office was not filled until April 29, 1997. The estimated loss of
F-17
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1997
approximately $2.4 million has been classified as a general and administrative
expense in the accompanying consolidated financial statements for the fiscal
year ended May 31, 1997. The Company has insurance coverage which calls for a
maximum claim limitation of $1,000,000 (with a $25,000 deductible). A claim
for the full amount of the loss has been submitted and an interim payment has
been agreed. The Company also intends to seek full restitution from the
employee, however, the Company does not know what, if any, of the funds are
still in the possession of the employee. The amount of insurance recovery from
its insurance carrier, if any, relating to these losses has not been reflected
in the accompanying financial statements.
F-18
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOVEMBER 29, MAY 31,
1997 1997
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 4,416 $ 1,710
Accounts receivable................................... 3,288 2,083
Inventory............................................. 52,075 44,728
Prepaid income taxes.................................. 83 --
Prepaid expenses and other current assets............. 3,715 2,172
-------- --------
Total current assets................................ 63,577 50,693
-------- --------
Property, plant and equipment, at cost.................. 39,147 38,565
Less--Accumulated depreciation........................ (16,483) (15,201)
-------- --------
22,664 23,364
Other assets............................................ 3,162 3,334
-------- --------
Total assets........................................ $ 89,403 $ 77,391
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt..................... $ 2,225 $ 2,225
Unsecured notes payable............................... 15,525 8,100
Accounts payable...................................... 12,572 7,002
Accrued and currently deferred income taxes........... -- 429
Other accrued expenses and deferred income............ 3,037 2,431
-------- --------
Total current liabilities........................... 33,359 20,187
Long term debt.......................................... 5,281 6,119
Deferred income taxes................................... 186 186
-------- --------
Total liabilities................................... 38,826 26,492
======== ========
Commitments and contingencies........................... -- --
Minority interest....................................... 1,619 1,619
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value--
Authorized--5,000 shares
Issued and outstanding--none......................... -- --
Common stock, $.01 par value--
Authorized--20,000 shares
Issued and outstanding--8,462 shares at November 29,
1997
and at May 31, 1997................................. 85 85
Capital in excess of par.............................. 14,814 14,811
Retained earnings..................................... 34,059 34,384
-------- --------
Total stockholders' equity.......................... 48,958 49,280
======== ========
Total liabilities, minority interest and
stockholders' equity............................... $ 89,403 $ 77,391
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-19
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
------------------------- -------------------------
NOVEMBER 29, NOVEMBER 30, NOVEMBER 29, NOVEMBER 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales................. $21,034 $17,458 $41,404 $33,326
Cost of sales............. 11,997 9,820 23,710 18,792
------- ------- ------- -------
Gross profit.............. 9,037 7,638 17,694 14,534
Selling, general and
administrative expenses.. 8,826 8,019 17,306 15,948
Business interruption
insurance (proceeds)..... -- (132) -- (560)
------- ------- ------- -------
Operating income
(loss)................. 211 (249) 388 (854)
Interest expense, net..... 426 436 796 768
------- ------- ------- -------
(Loss) before income
taxes.................. (215) (685) (408) (1,622)
(Benefit) for income
taxes.................... (47) (125) (82) (293)
------- ------- ------- -------
Net (loss)................ $ (168) $ (560) $ (326) $(1,329)
======= ======= ======= =======
Net (loss) Per share...... $ (0.02) $ (0.07) $ (0.04) $ (0.16)
======= ======= ======= =======
Weighted average shares
outstanding.............. 8,676 8,494 8,679 8,476
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-20
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-------------------------
NOVEMBER 29, NOVEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss)........................................... $ (325) $(1,329)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities--
Depreciation..................................... 1,282 1,571
Changes in assets and liabilities:
(Increase) decrease in accounts receivable..... (1,206) 28
(Increase) in inventory........................ (7,347) (6,148)
(Increase) in prepaid income taxes............. (83) --
(Increase) in prepaid expenses and other
current assets................................ (1,542) (1,587)
Decrease in other assets....................... 171 119
Increase in accounts payable................... 5,570 5,152
Increase (decrease) in other accrued expenses
and deferred income........................... 606 (757)
(Decrease) in accrued and currently deferred
income taxes.................................. (428) (1,490)
-------- -------
Net cash used in operating activities........ (3,302) (4,441)
-------- -------
Cash flows from investing activities:
Capital expenditures............................... (582) (2,651)
-------- -------
Net cash used in investing activities........ (582) (2,651)
-------- -------
Cash flows from financing activities:
Proceeds from unsecured notes payable.............. 21,125 12,600
Repayments of unsecured notes payable.............. (13,700) (6,100)
Repayments of long term borrowings................. (838) --
Issuance of common stock........................... 3 9
-------- -------
Net cash provided by financing activities.... 6,590 6,509
-------- -------
Net increase (decrease) in cash and cash
equivalents......................................... 2,706 (583)
Cash and cash equivalents, beginning of period....... 1,710 5,393
-------- -------
Cash and cash equivalents, end of period............. $ 4,416 $ 4,810
======== =======
</TABLE>
During the six months ended November 29, 1997 and November 30, 1996, the
Company paid income taxes of $428 and $1,197, respectively, and paid interest
of $785 and $709, respectively.
See accompanying notes to consolidated financial statements
F-21
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 29, 1997
1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements include the operations of
Little Switzerland, Inc. (the "Company") and its wholly owned subsidiaries,
L.S. Holding, Inc. and L.S. Wholesale, Inc. All significant intercompany
balances have been eliminated in consolidation. The interim financial
statements are unaudited and, in the opinion of management, contain all
adjustments necessary to present fairly the Company's financial position as of
November 29, 1997 and November 30, 1996 and the results of its operations and
cash flows for the interim periods presented. It is suggested that these
interim financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest report on
Form 10-K.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for a full fiscal year,
due to the seasonal nature of the Company's operations.
2. 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Company enters into a number of transactions with Town & Country
Corporation and its affiliates ("Town & Country"), of which one of the
Company's directors is controlling shareholder and one of the Company's
directors is an executive officer. The Company purchases a portion of its
merchandise from Town & Country at prices that management believes approximate
arm's-length transactions.
4. CREDIT ARRANGEMENTS
The Company has available a total of $22.2 million in unsecured credit
facilities, of which $2.5 million is available for borrowing. Approximately
$4.2 million of the credit facilities is utilized to secure customs bonds and
other bank guarantees required in the normal course of business. Any unfunded
portion of the facilities can be withdrawn at the bank's discretion.
Outstanding borrowings against these credit facilities totaled approximately
$15.5 million as of November 29, 1997. Additionally, in February 1996, the
Company secured term debt of approximately $8.9 million from its two lead
banks to finance the acquisition of the fixtures, leasehold rights and
inventories of two stores in Barbados. Interest on this debt accrues at an
annual interest rate of approximately 7.25%, and is payable monthly. The
principal is payable in equal quarterly payments over a four year period,
commencing March 1997. As of November 29, 1997, the Company had $7.5 million
of term debt outstanding and was in compliance with all restrictive covenants
related to its unsecured and term debt agreements. Additionally, the Company
has available separate facilities for foreign exchange contracts.
5. EARNINGS PER SHARE
Earnings per share is based on the weighted average number of common and
dilutive common equivalent shares (stock options) outstanding during each
period.
6. ACCOUNTING FOR INCOME TAXES
The Company follows the liability method of accounting for income taxes as
set forth in SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets and liabilities are recognized for the
F-22
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 29, 1997
expected future tax consequences of events that have been included in the
financial statements or tax returns. The amount of deferred tax asset or
liability is based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
7. OTHER ASSETS
Other assets consist primarily of amounts related to non-competition
agreements, rental deposits and the excess of cost over the fair market value
of the net assets of the business acquired (goodwill). Amounts related to non-
competition agreements are amortized over the lives of the respective
agreements. Amounts related to goodwill are being amortized over periods of up
to 10 years. Accumulated amortization totaled approximately $495,000 and
$340,000 at November 29, 1997 and May 31, 1997, respectively.
The Company accounts for long-lived and intangible assets in accordance with
SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for Long-
lived Assets to be Disposed of. The Company continually reviews applicable
assets for events or changes in circumstances which might indicate the
carrying amount of the assets may not be recoverable. The Company assesses the
recoverability of these assets by determining whether the amortization over
their remaining lives can be recovered through projected undiscounted future
results. The amount of impairment, if any, is measured based on projected
discounted future results using a discount rate commensurate with the risks
involved. No such impairment existed as of November 29, 1997.
8. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128--EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), Earnings per Share,
which supersedes Accounting Principles Board Opinion 15, the existing
authoritative guidance. SFAS No. 128 is designed to improve the earnings per
share information provided in the financial statements by simplifying the
existing computational guidelines, revising the disclosure requirements and
increasing the comparability of earnings per share on an international basis.
SFAS No. 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997 and requires restatement of all prior-
period earnings per share data presented.
The new statement modifies the calculations of primary and fully diluted
earnings per share and replaces them with basic and diluted earnings per
share. Basic earnings per share includes no dilution and is calculated by
dividing net income by the weighted average number of common shares
outstanding for the period. Diluted-earnings per share reflects the potential
dilution of stock options that could share in the earnings of an entity,
similar to fully diluted earnings per share. Earnings per share in these
financial statements would not be affected under the new pronouncement.
9. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123--ACCOUNTING FOR STOCK-
BASED COMPENSATION
In December 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which became effective for
fiscal years beginning after December 15, 1995. SFAS No. 123 requires employee
stock-based compensation to be either recorded or disclosed at its fair value.
Management continues to account for employee stock-based compensation under
Accounting Principles Board Opinion No. 25 and did not adopt the new
accounting provision for employee stock-based compensation under SFAS No. 123.
The additional required disclosures will be included in the Company's fiscal
year end financial statements.
10. ADVERTISING
The Company expenses the costs of advertising as advertisements are printed
and distributed. The Company's advertising consists primarily of
advertisements with local, regional and national travel magazines
F-23
<PAGE>
LITTLE SWITZERLAND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOVEMBER 29, 1997
which are produced on a periodic basis and distributed to visiting tourists,
and fees paid for promotional "port lecturer" programs directed primarily at
cruise ship passengers.
11. COMMITMENTS AND CONTINGENCIES
Hurricane Damage
In September 1995, Hurricanes Luis and Marilyn inflicted damage to several
of the Company's stores and caused significant damage to various islands'
infrastructures, including hotels and other tourist facilities. As of November
20, 1996, all stores had reopened.
The Company has settled all outstanding claims related to the hurricanes
with its insurance carrier. In connection with this final settlement, the
Company received approximately $13.4 million in property and business
interruption insurance proceeds. The Company recorded a net gain of
approximately $4.7 million in fiscal 1996, after write-offs related to damaged
assets of approximately $8.1 million, including furniture and fixtures,
inventory and other assets related to stores affected by the hurricanes. In
addition, approximately $560,000, representing fiscal 1997 lost profits for a
store in Marigot not reopened until November 1996, was recorded as deferred
income on the Company's consolidated balance sheet as of June 1, 1996. In the
three and six month periods ended November 30, 1996, the Company recorded
$132,000 and $560,000, respectively, as business interruption insurance
proceeds.
Employee Defalcation
In July 1997, management disclosed to its independent auditors that certain
transactions may have been recorded in error on the books of the Company for
the fiscal year ended May 31, 1997. As a result, the Company engaged Arthur
Andersen, LLP to evaluate the matter and determine the impact, if any, on the
Company's previously and currently reported consolidated financial statements.
After extensive review, analysis and evaluation, which focused on unlocated
differences in cash balances, management believes that an employee defalcation
occurred during the 1997 fiscal year. The employee was able to circumvent
existing internal controls largely due to lapses in appropriate segregation of
duties regarding cash deposits and disbursements, inter-bank transfers and
bank account reconciliations. These lapses in the segregation of such duties
were further exacerbated by the resignation of the Company's Assistant
Treasurer on February 28, 1997, which office was not filled until April 29,
1997. The estimated loss of approximately $2.4 million was classified as
Selling, General and Administrative expense in the consolidated financial
statements for the fiscal year ended May 31, 1997. Selling, General and
Administrative expenses for the three and six month periods ended November 30,
1996 include $481,000 and $758,000, respectively, of defalcation loss expense.
The Company has insurance coverage with a maximum claim limitation of
$1,000,000 (less a $25,000 deductible). A claim has been submitted to the
Company's fidelity bond carrier and the Company is seeking restitution from
the employee, but the Company does not know what, if any, of the funds are
still in the possession or under the control of the employee. Recoveries
relating to these losses, if any, will be recorded as income in the period(s)
received.
F-24
<PAGE>
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- --------------------------------------------------------------------------------
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
LITTLE SWITZERLAND, INC.,
DESTINATION RETAIL HOLDINGS CORPORATION,
LSI ACQUISITION CORP.,
YOUNG CARIBBEAN JEWELLERY COMPANY LIMITED,
ALLIANCE INTERNATIONAL HOLDINGS LIMITED
AND
CEI DISTRIBUTORS INC.
DATED AS OF FEBRUARY 4, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
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<C> <S> <C>
ARTICLE I--THE MERGER................................................... A-1
Section 1.01. The Merger............................................ A-1
Section 1.02. Effective Time........................................ A-1
Section 1.03. Effects of the Merger................................. A-2
Section 1.04. Certificate of Incorporation and By-Laws.............. A-2
Section 1.05. Directors............................................. A-2
Section 1.06. Officers.............................................. A-2
Section 1.07. Conversion of Shares.................................. A-2
Section 1.08. Conversion of Sub's Common Stock...................... A-2
Section 1.09. Stock Options......................................... A-2
Section 1.10. Filing of Certificate of Merger....................... A-3
ARTICLE II--DISSENTING SHARES; PAYMENT FOR SHARES....................... A-3
Section 2.01. Dissenting Shares..................................... A-3
Section 2.02. Payment for Shares.................................... A-4
ARTICLE III--REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............. A-5
Section 3.01. Organization.......................................... A-5
Section 3.02. Capitalization........................................ A-5
Section 3.03. Authority Relative to this Agreement.................. A-6
Section 3.04. Consents and Approvals; No Violations................. A-6
Section 3.05. SEC Reports........................................... A-6
Section 3.06. Absence of Certain Changes............................ A-7
Section 3.07. Litigation............................................ A-7
Section 3.08. Affiliate Transactions................................ A-7
Section 3.09. Employee Benefit Plans................................ A-8
Section 3.10. Taxes................................................. A-9
Section 3.11. Compliance with Applicable Laws....................... A-9
Section 3.12. Opinion of Financial Advisor.......................... A-9
Section 3.13. Brokers............................................... A-9
Section 3.14. No Interference....................................... A-10
ARTICLE IV--REPRESENTATIONS AND WARRANTIES OF PARENT, SUB AND THE PARENT
RELATED ENTITIES....................................................... A-10
Section 4.01. Organization.......................................... A-10
Section 4.02. Authority Relative to this Agreement.................. A-10
Section 4.03. Consents and Approvals; No Violations................. A-10
Section 4.04. Financing............................................. A-11
Section 4.05. Stockholdings......................................... A-11
Section 4.06. Brokers............................................... A-11
ARTICLE V--COVENANTS.................................................... A-11
Section 5.01. Conduct of Business of the Company.................... A-11
Section 5.02. No Solicitations...................................... A-13
Section 5.03. Preparation of the Proxy Statement; Stockholder
Meeting............................................... A-14
Section 5.04. Access to Information and Management.................. A-15
</TABLE>
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<TABLE>
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SECTION PAGE
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<C> <S> <C>
Section 5.05. Best Efforts; Cooperation............................. A-15
Section 5.06. Indemnification and Insurance......................... A-16
Section 5.07. Certain Benefits...................................... A-18
Section 5.08. Redemption of Rights.................................. A-18
Section 5.09. Annual Meeting; Director Nominations.................. A-18
Section 5.10. Public Announcements.................................. A-19
Section 5.11. Rolex................................................. A-19
ARTICLE VI--CONDITIONS.................................................. A-19
Section 6.01. Conditions to Each Party's Obligation to Effect the
Merger................................................ A-19
Section 6.02. Conditions to Obligations of Parent and Sub........... A-20
Section 6.03. Conditions to Obligations of the Company.............. A-20
ARTICLE VII--TERMINATION AND AMENDMENT.................................. A-21
Section 7.01. Termination........................................... A-21
Section 7.02. Effect of Termination................................. A-22
Section 7.03. Amendment............................................. A-22
Section 7.04. Extension; Waiver..................................... A-22
ARTICLE VIII--MISCELLANEOUS............................................. A-22
Section 8.01. Nonsurvival of Representations and Warranties......... A-22
Section 8.02. Notices............................................... A-22
Section 8.03. Descriptive Headings.................................. A-23
Section 8.04. Counterparts.......................................... A-23
Section 8.05. Entire Agreement; Assignment.......................... A-23
Section 8.06. Governing Law......................................... A-24
Section 8.07. Specific Performance.................................. A-24
Section 8.08. Expenses and Termination Fees......................... A-24
Section 8.09. Publicity............................................. A-25
Section 8.10. Parties in Interest................................... A-25
Section 8.11. Severability.......................................... A-25
</TABLE>
DISCLOSURE SCHEDULE
Schedule 3.01 - Organization
Schedule 3.02 - Capitalization
Schedule 3.04 - Consents and Approvals; No Violation
Schedule 3.05 - SEC Reports
Schedule 3.06 - Absence of Certain Changes
Schedule 3.07 - Litigation
Schedule 3.08 - Affiliate Transactions
Schedule 3.09 - Employee Benefit Plans
Schedule 3.10 - Taxes
Schedule 3.11 - Compliance with Applicable Laws
Schedule 3.13 - Brokers
Schedule 4.05 - Stockholdings
Schedule 4.06 - Brokers
Schedule 5.01 - Conduct of Business of the Company
Schedule 5.07 - Certain Benefits
ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of February 4, 1998 (this
"Agreement"), by and among Little Switzerland, Inc., a Delaware corporation
(the "Company"), Destination Retail Holdings Corporation, a Nevis corporation
("Parent"), LSI Acquisition Corp., a Delaware corporation and a wholly- owned
subsidiary of Parent ("Sub"), Young Caribbean Jewellery Company Limited, a
Cayman Islands corporation and a subsidiary of Parent ("YCJCL"), Alliance
International Holdings Limited, a Bahamian corporation and a wholly-owned
subsidiary of Parent ("AIHL"), and CEI Distributors Inc., a British Virgin
Islands corporation and a wholly-owned subsidiary of Parent ("CDI" and,
together with YCJCL and AIHL, the "Parent Related Entities").
WHEREAS, the Board of Directors of the Company (the "Board") has, in light
of and subject to the terms and conditions set forth herein (i) determined
that the consideration to be received by the stockholders of the Company for
each of the Company's outstanding shares of common stock, par value $.01 per
share (the "Shares"), in the Merger (as defined below) is in the best
interests of the stockholders of the Company and (ii) resolved to approve this
Agreement and the transactions contemplated hereby and to recommend approval
and adoption of this Agreement by the stockholders of the Company, and such
approval by the Board is effective for purposes of Section 203 of the General
Corporation Law of the State of Delaware (the "DGCL") and in order to exempt
the Merger from the provisions of Article V of the Company's Certificate of
Incorporation; and
WHEREAS, also in furtherance of such acquisition, the Boards of Directors of
Parent and Sub have each approved the merger (the "Merger") of Sub with and
into the Company in accordance with the DGCL, pursuant to which the holders of
Shares (other than the Company, Sub, Parent, the Parent Related Entities and
any direct or indirect subsidiary of any of them), shall receive $8.10 in cash
per Share.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
Company, Parent, Sub and the Parent Related Entities hereby agree as follows:
ARTICLE I
The Merger
Section 1.01. The Merger. Upon the terms and subject to the conditions
hereof, and in accordance with the relevant provisions of the DGCL, the Merger
shall occur as soon as practicable following the satisfaction or waiver of the
conditions set forth in Article VI hereof. Following the Merger, the Company
shall continue as the surviving corporation under the laws of the State of
Delaware under the name "Little Switzerland, Inc." (the "Surviving
Corporation"), and the separate corporate existence of Sub shall cease. At the
election of Parent, any direct or indirect wholly-owned subsidiary of Parent
may be substituted for Sub as a constituent corporation in the Merger. In the
event such a subsidiary is substituted for Sub, Parent will cause such
subsidiary to become a party to this Agreement and to assume and perform the
obligations of Sub hereunder. Notwithstanding the foregoing, Parent may elect,
at any time prior to the fifth (5th) business day immediately preceding the
date on which the Proxy Statement (as hereinafter defined) is initially mailed
to the Company's stockholders, that instead of merging Sub into the Company as
hereinabove provided, to merge the Company into Sub or another direct or
indirect wholly-owned subsidiary of Parent; provided that the Company shall
not be deemed to have breached any of its representations, warranties or
covenants herein, nor shall any condition to Parent's or Sub's or the Parent
Related Entities' obligations hereunder be deemed to be unsatisfied, by reason
of such election. In such event, the parties agree to execute an appropriate
amendment to this Agreement in order to reflect the foregoing and to provide
that Sub or such other subsidiary of Parent shall be the Surviving Corporation
under the name "Little Switzerland, Inc."
Section 1.02. Effective Time. The Merger shall become effective upon the
filing with the Secretary of State of the State of Delaware of the certificate
of merger executed in accordance with the relevant provisions of the DGCL (the
"Certificate of Merger") (the time the Merger becomes effective being referred
to herein as the "Effective Time").
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Section 1.03. Effects of the Merger. The Merger shall have the effects set
forth in this Agreement and in the applicable provisions of the DGCL.
Section 1.04. Certificate of Incorporation and By-Laws.
(a) At the Effective Time, the Certificate of Incorporation of Sub (or at
the election of Parent, the Certificate of Incorporation of the Company), in
each case as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation, except that the
name of the Surviving Corporation shall be amended to be "Little Switzerland,
Inc."
(b) The By-Laws of Sub (or at the election of Parent, the By-Laws of the
Company), in each case as in effect immediately prior to the Effective Time,
shall be the By-Laws of the Surviving Corporation, until duly amended in
accordance with applicable law, the Certificate of Incorporation of the
Surviving Corporation and such By-Laws.
Section 1.05. Directors. The directors of Sub immediately prior to the
Effective Time shall be the initial directors of the Surviving Corporation.
Section 1.06. Officers. The officers of the Surviving Corporation shall be
appointed by the directors of the Surviving Corporation.
Section 1.07. Conversion of Shares.
(a) Each Share issued and outstanding immediately prior to the Effective
Time (other than Shares to be canceled pursuant to Section 1.07(b) hereof and
other than Dissenting Shares (as hereinafter defined)) shall, at the Effective
Time, by virtue of the Merger and without any action on the part of Parent,
Sub, the Parent Related Entities, the Company or the holder thereof, be
converted into the right to receive $8.10 in cash per Share (the "Merger
Price"), payable to the holder thereof, without interest thereon, upon the
surrender of the certificate formerly representing such Share. The aggregate
cash consideration to be delivered to the holders of the Shares in accordance
herewith (equal to the product of (i) the aggregate number of Shares issued
and outstanding immediately prior to the Effective Time (other than Shares to
be canceled pursuant to Section 1.07(b) hereof and other than Dissenting
Shares) and (ii) the Merger Price) shall be referred to herein as the "Merger
Consideration."
(b) Each Share held in the treasury of the Company and each Share held by
Parent, Sub, the Parent Related Entities or by any direct or indirect
subsidiary thereof or of the Company immediately prior to the Effective Time
shall, at the Effective Time, by virtue of the Merger and without any action
on the part of the holder thereof, be canceled and retired and cease to exist
and no payment shall be made with respect thereto.
(c) If at any time during the period from the date of this Agreement to the
Effective Time any change in the outstanding Shares shall occur, including by
reason of any reclassification, recapitalization, stock dividend, stock split,
combination, exchange or readjustment of Shares, the Merger Price shall be
appropriately adjusted.
Section 1.08. Conversion of Sub's Common Stock. Each share of common stock,
par value $.01 per share, of Sub issued and outstanding immediately prior to
the Effective Time shall, at the Effective Time, by virtue of the Merger and
without any action on the part of Parent, Sub, the Parent Related Entities,
the Company or the holder thereof, be converted into and become one (1)
validly issued, fully paid and nonassessable share of the common stock, par
value $.01 per share, of the Surviving Corporation.
Section 1.09. Stock Options.
(a) Each outstanding option to purchase Shares (the "1991 Plan Options")
granted under the Company's 1991 Stock Option Plan, as amended (the "1991
Stock Option Plan"), shall become fully vested and exercisable in accordance
with and pursuant to the terms of the 1991 Stock Option Plan upon the
execution of this
A-2
<PAGE>
Agreement, without any further action on the part of the Company or the
holders of the 1991 Plan Options. Each outstanding option to purchase Shares
(the "1992 Plan Options" and, together with the 1991 Plan Options, the
"Options") granted under the 1992 Non-Employee Director Stock Option Plan (the
"1992 Stock Option Plan" and, together with the 1991 Stock Option Plan, the
"Option Plans") is fully vested and exercisable upon grant. In accordance with
the Option Plans, the Option Plans and all outstanding Options issued
thereunder shall automatically terminate at the Effective Time, without any
further action on the part of the Company or the holders thereof, and no
payment shall be made or due after the Effective Time with respect thereto
except in accordance with the applicable Option Plan and as provided herein.
(b) As soon as practicable after the date hereof, Parent and the Company
shall use their reasonable best efforts (including, without limitation, by
amending the provisions of the Option Plans or the option agreements issued
thereunder to the extent permitted thereunder) to provide that, at the
Effective Time, each Option shall be canceled and each holder of an Option
shall be entitled to receive a cash payment from the Company equal to the
product of (i) the excess, if any, of the Merger Price over the per Share
exercise price of such Option and (ii) the number of Shares subject thereto
(with respect to each Option, the "Option Price"), payable to the holder
thereof, without interest thereon, upon surrender of the Option; provided that
the foregoing shall be subject to the obtaining of any necessary consents of
optionees and that any cash payments shall be treated as compensation and
shall be net of any applicable federal or state withholding tax. As soon as
practicable after the date hereof, the Company shall give written notice of
the termination of the Option Plans and the Options upon consummation of the
Merger to each holder of an Option, in accordance with the terms of the Option
Plans. The Company shall use its reasonable best efforts to obtain from each
holder of an Option a written consent to the foregoing cancellation of each
Option and payment of the Option Price with respect thereto, acknowledging
that the surrender of such Option shall be deemed a release of any and all
rights such holder had or may have had in such Option, other than the right to
receive the Option Price in respect thereof.
(c) In the event any holder of an Option does not consent to the foregoing,
such holder shall be entitled to all rights afforded to such holder under the
terms of the applicable Option Plan as in effect on the date hereof,
including, without limitation, the right, for a period of at least fifteen
(15) days prior to the date of such termination, to exercise any unexercised
portion of such holder's outstanding Options which is vested and exercisable
at that time in accordance with such Option Plan; provided, however, that in
no event shall Options be exercisable after the applicable expiration date for
an Option.
Section 1.10. Filing of Certificate of Merger. Upon the terms and subject to
the conditions hereof, as promptly as practicable following the satisfaction
or waiver of the conditions set forth in Article VI hereof, the Company shall
execute and file the Certificate of Merger in the manner required by the DGCL,
and the parties hereto shall take all such other further actions as may be
required by applicable law to make the Merger effective. Prior to the filing
referred to in this Section, a closing will be held at the offices of Goodwin,
Procter & Hoar LLP, Exchange Place, Boston, Massachusetts (or such other place
as the parties may agree) for the purpose of confirming all of the foregoing.
ARTICLE II
Dissenting Shares; Payment for Shares
Section 2.01. Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, Shares
that are outstanding immediately prior to the Effective Time and which are
held by stockholders who shall have not voted in favor of the Merger or
consented thereto in writing and who shall have demanded properly in writing
appraisal for such Shares in accordance with Section 262 of the DGCL
(collectively, the "Dissenting Shares") shall not be converted into or be
exchangeable for the right to receive the Merger Price with respect to each
such Share. Such stockholders shall be entitled to receive payment of the
appraised value of such Shares held by them in
A-3
<PAGE>
accordance with the provisions of such Section 262 of the DGCL, except that
all Dissenting Shares held by stockholders who shall have failed to perfect or
who effectively shall have withdrawn or lost their rights to appraisal of such
Shares under Section 262 of the DGCL shall thereupon be deemed to have been
converted into and to have become exchangeable for, as of the Effective Time,
the right to receive the Merger Price with respect to each such Share without
any interest thereon.
(b) The Company shall give Parent (i) prompt notice of any demands for
appraisal received by the Company, withdrawals of such demands, and any other
instruments served pursuant to Section 262 of the DGCL and received by the
Company and (ii) the opportunity to direct all negotiations and proceedings
with respect to demands for appraisal under the DGCL. The Company shall not,
except with the prior written consent of Parent, make any payment with respect
to any demands for appraisal or offer to settle or settle any such demands.
Section 2.02. Payment for Shares.
(a) Prior to the Effective Time, Parent shall designate a bank or trust
company to act as paying agent (the "Paying Agent") in connection with the
Merger. At, or immediately prior to, the Effective Time, Parent will take all
steps necessary to enable and will cause Sub to provide the Paying Agent with
the funds necessary to make the payments contemplated by Section 1.07 hereof,
including, without limitation, by depositing the Merger Consideration with the
Paying Agent. Such funds shall be invested by the Paying Agent as directed by
Parent, provided that such investments shall be in obligations of or
guaranteed by the United States of America or of any agency thereof and backed
by the full faith and credit of the United States of America, in commercial
paper obligations rated A-1 or P-1 or better by Moody's Investors Services,
Inc. or Standard & Poors' Corporation, respectively, or in deposit accounts,
certificates of deposit or banker's acceptances of, repurchase or reverse
repurchase agreements with, or Eurodollar time deposits purchased from,
commercial banks with capital, surplus and undivided profits aggregating in
excess of $50 million (based on the most recent financial statements of such
bank which are then publicly available at the Securities and Exchange
Commission (the "SEC") or otherwise).
(b) Promptly after the Effective Time, the Surviving Corporation shall cause
the Paying Agent to mail to each person who was a record holder, as of the
Effective Time, of an outstanding certificate or certificates which
immediately prior to the Effective Time represented Shares (the
"Certificates"), a form letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon proper delivery of the Certificates to the Paying Agent)
and instructions for use in effecting the surrender of the Certificates for
payment therefor. Upon surrender to the Paying Agent of a Certificate,
together with such letter of transmittal duly executed, and any other required
documents, the holder of such Certificate shall be entitled to receive in
exchange for each Share represented thereby the Merger Price, and such
Certificate shall forthwith be canceled. No interest will be paid or accrued
on the cash payable upon the surrender of the Certificates. If payment is to
be made to a person other than the person in whose name the Certificate
surrendered is registered, it shall be a condition of payment that the
Certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer, and that the person requesting such payment shall pay any
transfer or other taxes required by reason of the payment to a person other
than the registered holder of the Certificate surrendered or establish to the
satisfaction of the Surviving Corporation that such tax has been paid or is
not applicable. Until surrendered in accordance with the provisions of this
Section 2.02, each Certificate (other than Certificates representing Shares
canceled pursuant to Section 1.07(b) hereof and Dissenting Shares) shall
represent for all purposes only the right to receive the Merger Price for each
Share represented thereby, without any interest thereon.
(c) At any time following the sixth (6th) month after the Effective Time,
the Surviving Corporation shall be entitled to require the Paying Agent to
deliver to it any funds which had been made available to the Paying Agent and
not disbursed to holders of Shares (including, without limitation, all
interest and other income received by the Paying Agent in respect of all funds
made available to it), and thereafter such holders shall be entitled to look
to the Surviving Corporation (subject to abandoned property, escheat and other
similar laws) only as general creditors thereof with respect to any
consideration set forth in Section 1.07 hereof that may be payable upon due
surrender of the Certificates held by them. Notwithstanding the foregoing,
neither the Surviving Corporation nor
A-4
<PAGE>
the Paying Agent shall be liable to any holder of a Share for any
consideration set forth in Section 1.07 hereof delivered in respect of such
Share to a public official pursuant to any abandoned property, escheat or
other similar law.
(d) After the Effective Time, there shall be no transfers of the Shares on
the stock transfer books of the Surviving Corporation which were outstanding
immediately prior to the Effective Time, and the stock ledger of the Company
shall be closed. After the Effective Time, the holders of Shares outstanding
at the Effective Time shall cease to have any rights with respect to such
Shares except as provided herein or by applicable law. If, during the six (6)
months immediately following the Effective Time, Certificates representing
Shares are presented to the Paying Agent, they shall be canceled and exchanged
for cash as provided in this Article II. If, after six (6) months following
the Effective Time, Certificates representing Shares are presented to the
Surviving Corporation, they shall be canceled and exchanged for cash as
provided in this Article II.
ARTICLE III
Representations and Warranties of the Company
The Company represents and warrants to Parent, Sub and the Parent Related
Entities, except as set forth in the schedules contained in the attached
Disclosure Schedule, as follows:
Section 3.01. Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
All subsidiaries of the Company are corporations duly organized, validly
existing and in good standing under the laws of their respective jurisdictions
of incorporation, except where failure thereof would not individually or in
the aggregate have a material adverse effect on the business, properties,
results of operations or financial condition of the Company and its
subsidiaries taken as a whole (a "Material Adverse Effect"). The Company and
its subsidiaries have the requisite corporate power to conduct their
businesses as they are currently conducted and are duly qualified to do
business in each jurisdiction in which the property owned, leased or operated
by it or the nature of the business conducted by it makes such qualification
necessary, except where the lack of such qualification would not individually
or in the aggregate have a Material Adverse Effect. The copies of the
Company's and each of its subsidiaries' Certificate of Incorporation and By-
Laws (or other organizational documents, as applicable) previously made
available to Parent are true, complete and correct as of the date hereof.
Schedule 3.01 sets forth a correct and complete list of all subsidiaries of
the Company.
Section 3.02. Capitalization. The authorized capital stock of the Company
consists of 20,000,000 Shares and 5,000,000 shares of preferred stock, $.01
par value per share (the "Preferred Shares"). As of January 28, 1998, (i)
8,469,202 Shares were issued and outstanding, (ii) 879,500 Shares were
reserved for issuance upon the exercise of Options, and (iii) no Shares were
held in the Company's treasury. As of such date, there were no Preferred
Shares outstanding or subject to options, and 100,000 Preferred Shares have
been designated as "Series A Junior Participating Cumulative Preferred Stock"
and reserved for issuance upon exercise of the rights (the "Rights") issued
pursuant to the Shareholder Rights Agreement, dated as of July 25, 1991,
between the Company and State Street Bank and Trust Company, a Massachusetts
trust company, as amended (the "Rights Agreement"). All of the outstanding
Shares have been duly authorized and validly issued and are fully paid and
non-assessable and free of preemptive rights. Except as set forth in Schedule
3.02, the Company does not have any outstanding options, warrants,
subscriptions or other rights, agreements or commitments to purchase shares of
capital stock (other than Options to purchase 879,500 Shares, Shares reserved
for issuance under the Company's 1992 Employee Stock Purchase Plan and the
Rights) which obligates the Company to issue, sell or transfer any shares of
capital stock of the Company or any other securities convertible into or
evidencing the right to subscribe for any shares of capital stock of the
Company. Schedule 3.02 sets forth a correct and complete list setting forth as
of the date hereof (i) the number of Options outstanding, (ii) the date on
which such Options were granted, (iii) the exercise price of each outstanding
Option and (iv) the number of Shares subject to the Options. Except as set
forth in Schedule 3.02, the Company owns, directly or indirectly, all of the
outstanding
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<PAGE>
shares of capital stock of each of its subsidiaries, and such shares are duly
authorized, validly issued, fully paid and non-assessable, and free and clear
of all preemptive rights and all liens, charges, encumbrances, equities,
claims and options whatsoever. Except as set forth in Schedule 3.02, there are
no outstanding subscriptions, options, warrants or other rights, agreements or
commitments to purchase any additional shares of capital stock of any of the
Company's subsidiaries or any other securities convertible into or evidencing
the right to subscribe for any capital stock of such subsidiaries.
Section 3.03. Authority Relative to this Agreement. The Company has all
necessary corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by the Company and the consummation by the Company
of the transactions contemplated hereby have been duly and validly authorized
by the Board and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or to consummate the transactions so
contemplated (other than, with respect to the Merger, the approval and
adoption of this Agreement by the holders of a majority of the outstanding
Shares and the filing and recordation of appropriate merger documents as
required by the DGCL). This Agreement has been duly and validly executed and
delivered by the Company and, assuming this Agreement constitutes a valid and
binding obligation of Parent, Sub and the Parent Related Entities, constitutes
a valid and binding agreement of the Company, enforceable against the Company
in accordance with its terms.
Section 3.04. Consents and Approvals; No Violations.
(a) The Board has approved the Merger and this Agreement, and such approval
is sufficient to render the provisions of Section 203 of the DGCL and
Article V of the Company's Certificate of Incorporation inapplicable to the
Merger and the transactions contemplated by this Agreement.
(b) Except as set forth in Schedule 3.04, the execution and delivery of this
Agreement by the Company do not, and the performance of this Agreement by the
Company will not, require any filing with or notification to, or any consent,
approval, authorization or permit from, any governmental or regulatory
authority (a "Governmental Entity") except (i) for applicable requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), state
securities or "blue sky" laws, the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act") or other applicable anti-trust laws,
and the filing and recordation of the Certificate of Merger, as required by
the DGCL, or (ii) where failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent or delay consummation of the Merger, or otherwise prevent the Company
from performing its obligations under this Agreement and would not,
individually or in the aggregate, have a Material Adverse Effect.
(c) Except as set forth in Schedule 3.04, the execution and delivery of this
Agreement by the Company do not, and the performance of this Agreement by the
Company and the consummation of the transactions contemplated by this
Agreement, will not (i) conflict with or violate the Certificate of
Incorporation or By-Laws (or other organizational documents, as applicable) of
the Company or of any of its subsidiaries, (ii) result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both)
a default (or give rise to any right of termination, cancellation or
acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, contract, agreement or other instrument or
obligation to which the Company or any of its subsidiaries is a party or by
which any of them or any of their respective properties or assets may be bound
or (iii) violate any order, judgment, writ, injunction, decree, statute,
treaty, rule or regulation applicable to the Company or any of its
subsidiaries or any of their respective properties or assets, in each case,
excepting such conflicts, violations, breaches, defaults, terminations,
cancellations or accelerations which would not individually or in the
aggregate have a Material Adverse Effect.
Section 3.05. SEC Reports.
(a) Except as set forth in Schedule 3.05, the Company has filed all required
forms, reports and documents with the SEC since May 31, 1994 (collectively,
the "SEC Reports"), all of which were prepared in accordance
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with and complied in all material respects with the applicable requirements of
the Securities Act of 1933, as amended, and the Exchange Act.
(b) None of the SEC Reports, including, without limitation, any financial
statements or schedules included therein, as of the dates they were
respectively filed with the SEC, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading and the
balance sheets (including the related notes) included in the SEC Reports
fairly present the consolidated financial position of the Company and its
consolidated subsidiaries as of the respective dates thereof, and the other
related statements (including the related notes) included therein fairly
present the results of operations and cash flows of the Company and its
consolidated subsidiaries for the respective fiscal periods set forth therein
in accordance with generally accepted accounting principles applied on a
consistent basis, except in the case of interim financial statements for
normal recurring and certain non-recurring adjustments necessary for a fair
presentation of the financial position and operating results of the Company
and its consolidated subsidiaries for the interim periods.
Section 3.06. Absence of Certain Changes. Except as set forth in Schedule
3.06, since November 29, 1997, there have not occurred any changes concerning
the Company or its subsidiaries (other than changes generally affecting the
industries in which the Company operates, including changes due to actual or
proposed changes in law or regulation, or changes relating to the transactions
contemplated by this Agreement, including the change in control contemplated
hereby) having a Material Adverse Effect. Except as set forth in Schedule
3.06, since November 29, 1997, there has not been (A) any change, destruction,
damage, loss or event which has had, individually or in the aggregate, a
Material Adverse Effect; (B) any declaration, setting aside or payment of any
dividend or other distribution in respect of shares of the Company's capital
stock, or any repurchase, redemption or other acquisition by the Company or
its subsidiaries of any shares of their respective capital stock or equity
interests, as applicable; (C) any increase in the rate or terms of
compensation payable or to become payable by the Company or its subsidiaries
to their directors, officers or key employees, except increases occurring in
the ordinary course of business consistent with past practices or as was
required under any employment, severance or termination agreements or under
applicable law; (D) any entry into, or increase in the rate or terms of, any
bonus, severance, pension or other employee or retiree benefit plan, payment
or arrangement made to, for or with any such directors, officers or employees,
except increases occurring in the ordinary course of business consistent with
past practices or as was required under employment agreements or employee or
director benefit plans or under applicable law; (E) any labor dispute
involving the employees of the Company or its subsidiaries which has had a
Material Adverse Effect; (F) any material change by the Company in accounting
methods, principles or practices, except as required or permitted by generally
accepted accounting principles; (G) any write-off or write-down of, or any
determination to write-off or write-down, any asset of the Company or any of
its subsidiaries or any portion thereof which write-off, write-down, or
determination through the date hereof exceeds $250,000 in the aggregate; (H)
any split, combination or reclassification of any of the Company's capital
stock or issuance or authorization relating to the issuance of any other
securities in respect of, in lieu of or in substitution for shares of the
Company's capital stock; or (I) any agreements by the Company to do any of the
things described in the preceding clauses (A) through (H) other than as
contemplated or provided for herein.
Section 3.07. Litigation. Except as set forth in Schedule 3.07, there is no
litigation, suit, action or proceeding pending or, to the knowledge of the
Company, threatened against the Company or any of its subsidiaries, as to
which there is a reasonable likelihood of an adverse determination and which,
if adversely determined, individually or in the aggregate with other such
litigation, suits, actions or proceedings, could reasonably be expected to (i)
have a Material Adverse Effect, (ii) materially and adversely affect the
Company's ability to perform its obligations under this Agreement or (iii)
prevent the consummation of any of the transactions contemplated by this
Agreement.
Section 3.08. Affiliate Transactions. Except as set forth in Schedule 3.08,
the Company has disclosed in the SEC Reports each material transaction
involving the transfer of any cash, property or rights to or from the Company
or any subsidiary of the Company from, to or for the benefit of any affiliate
or former affiliate of the Company or of any subsidiary of the Company
("Affiliate Transactions") during the period commencing
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May 31, 1994 through the date hereof and any existing commitments of the
Company or any subsidiary of the Company to engage in the future in any
material Affiliate Transactions. Except as contemplated by this Agreement and
except pursuant to the Company's Certificate of Incorporation and By-laws, the
Company has not entered into any indemnification agreements or arrangements
with the current directors of the Company.
Section 3.09. Employee Benefit Plans. With respect to all the employee
benefit plans, programs and arrangements including, but not limited to,
"employee benefit plans" as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and including deferred
compensation, stock option, stock purchase, stock appreciation right, stock
based, incentive and bonus plans, severance plans, and any agreements
providing retirement, medical or life insurance benefits, which are maintained
or contributed to by the Company for the benefit of any current or former
employee, officer or director of the Company or any of its subsidiaries (the
"Company Benefit Plans"), except as set forth on Schedule 3.09 and except as
would not, individually or in the aggregate, have a Material Adverse Effect
(a) with respect to each Company Benefit Plan and each management, employment,
severance, consulting or similar agreement or contract between the Company and
any current employee (a "Company Employee Agreement"), the Company has made
available to Parent (i) true and complete copies (or, to the extent no such
copy exists, an accurate description) thereof, including any trust agreements
and insurance contracts forming a part of any Company Benefit Plan and all
amendments thereto and written interpretations thereof; (ii) the most recent
annual actuarial valuations, if any, prepared for each Company Benefit Plan;
and (iii) the two most recent annual reports (Series 5500 and all schedules
thereto), if any, required under ERISA in connection with each Company Benefit
Plan or related trust; (b) each Company Benefit Plan and any related trust
intended to be qualified under Sections 401(a) and 501(a) of the United States
Internal Revenue Code of 1986, as amended (the "Code"), which is not
maintained pursuant to a standardized prototype plan, has received a favorable
determination letter from the Internal Revenue Service that it is so
qualified, and nothing has occurred since the date of such letter that could
reasonably be expected to affect the qualified status of such Company Benefit
Plan or related trust; (c) each Company Benefit Plan has been established,
maintained and operated in accordance with its terms and the requirements of
applicable law and all required returns and filings for each Company Benefit
Plan and all contributions thereto have been timely made; (d) neither the
Company nor any of its subsidiaries nor any of their "ERISA Affiliates" has
incurred any direct or indirect liability under, arising out of or by
operation of Title I or Title IV of ERISA, in connection with any Company
Benefit Plan or other retirement plan or arrangement, and no fact or event
exists that could reasonably be expected to give rise to any such liability;
(e) the Company and its subsidiaries and their ERISA Affiliates and the
Company Benefit Plans have not incurred any liability under, and have complied
in all respects with, the provisions of the Consolidated Omnibus Budget
Reconciliation Act of 1985, the Worker Adjustment Retraining Notification Act,
the Americans with Disabilities Act and the Family and Medical Leave Act, and
no fact or event exists that could give rise to liability under any such act,
(f) there are no Company Benefit Plans subject to Title IV or ERISA or Section
412 of the Code, (g) there are no actions, suits or claims pending (other than
routine claims for benefits) against any Company Benefit Plan or against the
assets of any Company Benefit Plan; (h) neither the Company, any subsidiary
nor any ERISA Affiliate has engaged in a transaction with respect to a Company
Benefit Plan which, assuming the taxable period of such transaction expires as
of the date hereof, could subject such entity to a tax or penalty imposed by
either Section 4975 of the Code or Section 502(i) of ERISA; (i) neither the
Company nor any subsidiary maintains or contributes to any Company Benefit
Plan which provides, or has any liability to provide, life insurance, medical
or other employee welfare benefits to any current employee upon their
retirement or termination of employment, except as may be required by law; (j)
the execution of, and performance of the transactions contemplated by, this
Agreement will not (either alone or upon the occurrence of any additional or
subsequent events) constitute an event under any Company Benefit Plan which
will or may result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase in
benefits or obligation to fund benefits with respect to any current or former
employee or director and will not result in any breach or violation of, or
default under, any such Company Benefit Plan; and (k) no payment or benefit
which will or may be made by the Company or any subsidiary will be
characterized as an "excess parachute payment" within the meaning of Section
280G(b)(1) of the Code or which will be disallowed as a deduction pursuant to
Section 162(m) of the Code. For purposes of this Agreement, "ERISA Affiliate"
shall mean any business or entity which is a member of a "controlled
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group" or an "affiliated service group" with the Company, within the meaning
of any of Sections 414(b), (c), (m) or (o) of the Code, or is under common
control with the Company, within the meaning of Section 4001 of ERISA.
Section 3.10. Taxes.
(a) Except as set forth on Schedule 3.10, each of the Company and its
subsidiaries (i) has filed all Tax Returns (as defined below) which the
Company was aware it was required to file (after giving effect to any filing
extension properly granted by a Governmental Entity having authority to do so)
and all such Tax Returns are accurate and complete in all material respects,
and (ii) has paid all Taxes (as defined below) shown on such Tax Returns as
required to be paid by it, except, in each case, those where the failure to
file such Tax Returns or pay such Taxes would not have a Material Adverse
Effect. Except as set forth on Schedule 3.10, the most recent audited
financial statements contained in the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended November 29, 1997 reflect, to the knowledge of
the Company, an adequate reserve for all material Taxes payable by the Company
and its subsidiaries for all taxable periods and portions thereof through the
date of such financial statements. Except as set forth on Schedule 3.10, no
event has occurred, and no condition or circumstance exists, which presents a
material risk that any material Tax described in the preceding sentence will
be imposed upon the Company. To the knowledge of the Company, and except as
set forth on Schedule 3.10, no deficiencies for any Taxes have been proposed,
asserted or assessed against the Company or any of its subsidiaries, and no
requests for waivers of the time to assess any such Taxes are pending.
Schedule 3.10 lists all (i) Tax sharing agreements and (ii) agreements for
exemptions with Governmental Entities to which the Company or its subsidiaries
is a party.
(b) For purposes of this Agreement, "Taxes" means all federal, state, local
and foreign income, property, sales, franchise, employment, excise and other
taxes, tariffs or governmental charges of any nature whatsoever, together with
any interest, penalties or additions to Tax with respect thereto.
(c) For purposes of this Agreement, "Tax Returns" means all reports,
returns, declarations, statements or other information required to be supplied
to a taxing authority in connection with Taxes.
Section 3.11. Compliance with Applicable Laws. Except as set forth on
Schedule 3.11, the business of the Company and its subsidiaries are not being
conducted in violation of any law, ordinance or regulation of any Governmental
Entity, except for possible violations which individually or in the aggregate
do not, and, insofar as reasonably can be foreseen, in the future will not,
have a Material Adverse Effect. Except as set forth on Schedule 3.11, no
investigation or review by any Governmental Entity concerning any such
possible violations by the Company or any of its subsidiaries is pending or,
to the knowledge of the Company, threatened, nor has any Governmental Entity
indicated an intention to conduct the same, in each case, other than those the
outcome of which have not, or which, insofar as reasonably can be foreseen, in
the future are not reasonably likely to have, a Material Adverse Effect.
Section 3.12. Opinion of Financial Advisor. The Board has received the
opinion of Wasserstein Perella & Co., Inc. ("Wasserstein"), dated January 31,
1998, that, as of such date, the consideration to be received by the
stockholders of the Company (other than Stephen GE Crane ("Crane") and his
affiliates) pursuant to the Merger is fair to such stockholders from a
financial point of view, a copy of which opinion has been made available to
Parent.
Section 3.13. Brokers. Except as set forth on Schedule 3.13, no broker,
investment banker, financial advisor or other person is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company. The Company has made
available to Parent true, complete and correct copies of all agreements or
arrangements between the Company and any broker, investment banker, financial
advisor or other such person relating to such fee or commission.
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Section 3.14. No Interference. Since October 1, 1997, none of the officers
or directors of the Company have contacted (i) any vendor or supplier of the
Company or other entity with whom the Company has a material commercial
relationship concerning any transfer of such person's existing relationship
with the Company to another business entity which would compete with the
Company or the Surviving Corporation or (ii) any employee of the Company
concerning the termination of such employee's employment with the Company and
their employment with another business entity which would compete with the
Company or the Surviving Corporation.
ARTICLE IV
Representations and Warranties of Parent, Sub
and the Parent Related Entities
Parent, Sub and the Parent Related Entities jointly and severally represent
and warrant to the Company as follows:
Section 4.01. Organization. Each of Parent, Sub and the Parent Related
Entities is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization and has the
requisite corporate power to conduct its business as it is currently
conducted. The copies of each of Parent's, Sub's and the Parent Related
Entities' Certificate of Incorporation and By-Laws (or other organizational
documents, as applicable) previously delivered to the Company are true,
complete and correct as of the date hereof. Parent, Sub and the Parent Related
Entities have a combined net worth in excess of $48 million. "Net worth" is
defined for purposes of this Section 4.01 as an amount equal to the difference
between (i) total assets of Parent, Sub and the Parent Related Entities and
(ii) total liabilities thereof, all as determined in accordance with United
States generally accepted accounting principles applied on a consistent basis.
Section 4.02. Authority Relative to this Agreement. Each of Parent, Sub and
the Parent Related Entities has all necessary corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by each of
Parent, Sub and the Parent Related Entities and the consummation by each of
Parent, Sub and the Parent Related Entities of the transactions contemplated
hereby have been duly and validly authorized by the Board of Directors of
Parent, Sub and the Parent Related Entities, respectively, and, if necessary,
the stockholders of each of Sub and the Parent Related Entities, and no other
organizational proceedings on the part of Parent, Sub or the Parent Related
Entities are necessary to authorize this Agreement or to consummate the
transactions so contemplated (other than, with respect to the Merger, the
filing and recordation of the appropriate merger documents as required by the
DGCL). This Agreement has been duly and validly executed and delivered by each
of Parent, Sub and the Parent Related Entities and, assuming this Agreement
constitutes a valid and binding obligation of the Company, constitutes a valid
and binding agreement of each of Parent, Sub and the Parent Related Entities,
enforceable against each of Parent, Sub and the Parent Related Entities in
accordance with its terms.
Section 4.03. Consents and Approvals; No Violations. Except for applicable
requirements of the Exchange Act, the HSR Act or other applicable anti-trust
laws and the filing and recordation of the Certificate of Merger, as required
by the DGCL, no filing with or notification to, and no consent, approval,
authorization or permit from, any Governmental Entity, is necessary for the
execution and delivery of this Agreement by Parent, Sub or the Parent Related
Entities or the consummation by Parent of the transactions contemplated by
this Agreement. The execution and delivery of this Agreement by each of
Parent, Sub and the Parent Related Entities do not, and the performance of
this Agreement by each of Parent, Sub and the Parent Related Entities, will
not (i) conflict with or violate any provision of the Certificate of
Incorporation or By-Laws (or other organizational documents, as applicable) of
Parent, Sub or any Parent Related Entity, (ii) result in a violation or breach
of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, cancellation or
acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, contract, agreement or other instrument or
obligation to which Parent, Sub or any Parent
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Related Entity is a party or by which any of them or any of their respective
properties or assets may be bound or (iii) violate any order, writ,
injunction, decree, statute, treaty, rule or regulation applicable to Parent,
Sub or any Parent Related Entity or any of their respective properties or
assets, in each case, excepting such violations, breaches, defaults,
terminations, cancellations or accelerations which will not prevent or
materially delay the consummation by Parent, Sub and the Parent Related
Entities of the transactions contemplated hereby.
Section 4.04. Financing. Parent and Sub have financing commitments in place
which, together with cash presently on hand, will provide sufficient funds to
purchase and pay for the Shares pursuant to the Merger in accordance with the
terms of this Agreement and to consummate the transactions contemplated
hereby. Neither Parent, Sub nor any of the Parent Related Entities has any
reason to believe that any condition to such financing commitments cannot or
will not be waived or satisfied prior to the Effective Time. Parent has
provided to the Company true, complete and correct copies of all financing
commitment letters, including any exhibits, schedules or amendments thereto.
Section 4.05. Stockholdings. Except as set forth in Schedule 4.05, neither
Parent, Sub nor any of the Parent Related Entities nor any of their affiliates
owns any Shares.
Section 4.06. Brokers. Except as set forth on Schedule 4.06, no broker,
investment banker, financial advisor or other person is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Parent, Sub or the Parent Related
Entities.
ARTICLE V
Covenants
Section 5.01. Conduct of Business of the Company. Except as otherwise
contemplated by this Agreement, during the period from the date of this
Agreement to the Effective Time, the Company shall, and shall cause its
subsidiaries to: (i) carry on their respective businesses in the ordinary
course consistent with past practice and (ii) use all reasonable efforts
consistent with good business judgment to preserve intact their current
businesses. Except as otherwise contemplated by this Agreement, during the
period from the date of this Agreement to the Effective Time, neither the
Company nor any of its subsidiaries will (except as expressly contemplated or
permitted by this Agreement or to the extent that Parent shall otherwise
consent in writing):
(a) (i) Declare, set aside or pay any dividend or other distribution
(whether in cash, stock, or property or any combination thereof) in respect
of any of its capital stock, other than dividends and distributions by any
wholly-owned subsidiary of the Company or dividends and distributions on
the common stock by World Gift Imports (Barbados) Limited, a corporation
organized under the laws of Barbados and subsidiary of the Company, (ii)
split, combine or reclassify any of its capital stock or (iii) repurchase,
redeem or otherwise acquire any of its securities;
(b) Authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise) any stock of any class or any other securities (including
indebtedness having the right to vote) or equity equivalents (including,
without limitation, stock appreciation rights), except pursuant to the
Company's 1992 Employee Stock Purchase Plan as currently in effect (or as
amended as contemplated by Schedule 5.01), Options outstanding on the date
of this Agreement in accordance with their present terms and the Rights in
accordance with their present terms;
(c) Acquire, sell, lease, encumber, transfer or dispose of any assets
outside the ordinary course of business, which are material to the Company
and its subsidiaries taken as a whole, except as set forth in Schedule
5.01;
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(d) Incur any indebtedness for borrowed money, guarantee any
indebtedness, issue or sell debt securities or warrants or rights to
acquire any debt securities, guarantee (or become liable for) any debt of
others, make any loans, advances or capital contributions, mortgage, pledge
or otherwise encumber any material assets, create or suffer any material
lien thereupon other than working capital borrowings pursuant to credit
facilities in existence on the date hereof; provided, however, that the
Company shall not amend in any material respect any credit facility in
existence on the date hereof including, without limitation, in order to
increase the aggregate amount of credit available thereunder;
(e) Pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than any payment, discharge, settlement or satisfaction
(i) in the ordinary course of business consistent with past practice; (ii)
in connection with the transactions contemplated by this Agreement; or
(iii) in accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the consolidated financial statements (or
the notes thereto) of the Company and its consolidated subsidiaries
contained in the SEC Reports;
(f) Change any of the accounting principles or practices used by it
(except as required by generally accepted accounting principles);
(g) Except as required by law or contemplated by this Agreement or as set
forth on Schedule 5.01, (i) enter into, adopt, amend or terminate any
employee benefit plan, (ii) enter into, adopt, amend or terminate any
agreement, arrangement, plan or policy between the Company and one or more
of its directors or officers, (iii) increase in any manner the compensation
or fringe benefits of any employee (excluding executive officers whose
compensation or fringe benefits will be subject to clause (iv) below) or
pay any benefit not required by any plan and arrangement as in effect as of
the date hereof, except for normal increases in the ordinary course of
business consistent with past practice or (iv) increase in any manner the
compensation or fringe benefits of any executive officer or director or pay
any benefit not required by any plan and arrangement as in effect as of the
date hereof;
(h) Adopt any amendments to the Company's or any of its subsidiaries'
Certificates of Incorporation or By-Laws (or other organizational
documents, as applicable);
(i) Acquire or agree to acquire (A) by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership or other business
organization or (B) any assets, including real estate, except (x) purchases
of inventory, furnishings and equipment in the ordinary course of business
consistent with past practice or (y) purchases of other assets the cost of
which do not equal, in the aggregate, more than $750,000;
(j) Make any new capital expenditure or expenditures, other than capital
expenditures not to exceed, in the aggregate, $750,000;
(k) Enter into a new agreement or amend or terminate any existing
agreement which could reasonably be expected to have a Material Adverse
Effect;
(l) Expand the number of persons on the Board or add any other person to
the Board, including, without limitation, by filling the vacancy on the
Board caused by the death of Francis X. Correra;
(m) Adopt any amendments to the Rights Agreement; provided, however, that
the Company may amend the Rights Agreement in connection with an
Acquisition Proposal (as hereinafter defined) after the Board (i) receives
advice from its financial advisors that such Acquisition Proposal, if
consummated as proposed, would result in a transaction more favorable to
the Company's stockholders from a financial point of view than the
transactions contemplated by this Agreement (including consideration of,
among other matters, the ability of a Third Party (as hereinafter defined)
to obtain any financing necessary to consummate the Acquisition Proposal)
and (ii) receives advice from its outside legal counsel and based upon such
advice that the failure to take such action could reasonably be expected to
be a breach of its fiduciary duties under applicable law;
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(n) Amend, supplement or modify the Success Fee Agreement, dated February
4, 1998, between C. William Carey ("Carey") and the Company (the "Success
Fee Agreement") or make any payments to Carey except (i) pursuant to the
Success Fee Agreement, (ii) pursuant to the Consulting Agreement, dated
June 2, 1996, between the Company and Carey, (iii) pursuant to Sections
1.07 and 1.09 hereof with respect to any Shares or Options issued to or
beneficially owned by Carey or (iv) for any director or similar fees as
Chairman of the Board or reimbursement of expenses incurred in connection
therewith; or
(o) Enter into an agreement to take any of the foregoing actions or take,
or enter into an agreement to take, any action that would result in any of
the conditions to the Merger set forth in Article VI not being satisfied.
Section 5.02. No Solicitations.
(a) Unless this Agreement is terminated in accordance with its terms, and
except as otherwise provided in this Section 5.02, neither the Company nor any
of its subsidiaries shall, and the Company shall use its best efforts to
ensure that none of its affiliates, officers, directors, representatives or
agents shall, directly or indirectly, initiate, solicit, encourage or enter
into any agreement with respect to or participate in negotiations with,
provide any non-public information to, or otherwise cooperate in any way in
connection with, or enter into any agreement with respect to, any Third Party
concerning (i) any offer or proposal relating to any acquisition or purchase
of more than fifteen percent (15%) of the outstanding shares of capital stock
of the Company; (ii) any merger, consolidation, share exchange,
recapitalization, business combination or other similar transaction involving
the Company; (iii) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition of all or substantially all of the assets of the Company and
its subsidiaries in a single transaction or series of related transactions; or
(iv) any tender offer or exchange offer for fifteen percent (15%) or more of
the outstanding shares of capital stock of the Company (each, an "Acquisition
Proposal"); except that nothing contained in this Section 5.02 or in any other
provision hereof shall prohibit the Company or the Board from (i) taking and
disclosing to the Company's stockholders a position in good faith with respect
to a tender or exchange offer by a Third Party pursuant to Rules 14d-9 and
14e-2 promulgated under the Exchange Act (and in the event that such position
taken by the Board shall be its recommendation of acceptance to the
stockholders of the Company with respect to such tender offer or exchange
offer (x) upon advice of its financial advisors that the tender offer or
exchange offer, if consummated as proposed, would result in a transaction more
favorable to the Company's stockholders from a financial point of view than
the transactions contemplated by this Agreement (including consideration of,
among other matters, the ability of the Third Party to obtain any financing
necessary to consummate the Acquisition Proposal), and (y) after receiving
advice from its outside legal counsel and based upon such advice that the
failure to take such position could reasonably be expected to be a breach of
its fiduciary duties under applicable law), (ii) making such disclosure to the
Company's stockholders as, in the good faith judgment of its Board, after
receiving advice from its outside legal counsel and based upon such advice, is
required under applicable law or (iii) failing to make or withdrawing or
modifying its recommendations, consents or approvals referred to in Section
5.03 hereof if the Board, after receiving advice from its outside legal
counsel and based upon such advice, determines in good faith that the failure
to take such action could reasonably be expected to be a breach of the
directors' fiduciary duties under applicable law. For purposes of this
Agreement, "Third Party" shall mean any corporation, partnership, person, or
other entity or "group" (as defined in Section 13(d)(3) of the Exchange Act)
other than Parent, Sub or any of the Parent Related Entities or any of their
respective directors, officers, partners, members, managers, employees,
representatives, and agents. Notwithstanding the foregoing, the Company may
negotiate with, and provide information to, any Third Party which after the
date hereof makes an unsolicited written bona fide offer (including any
unsolicited written bona fide offer subject to customary due diligence) to
consummate an Acquisition Proposal if the Board determines in good faith, (x)
upon advice of its financial advisors that the Acquisition Proposal, if
consummated as proposed, would result in a transaction more favorable to the
Company's stockholders from a financial point of view than the transactions
contemplated by this Agreement, including consideration of, among other
matters, the ability of the Third Party to obtain any financing necessary to
consummate the Acquisition Proposal (any such Acquisition Proposal being
referred to herein as a "Superior Proposal"); and (y) after receiving advice
from its outside legal counsel and based upon such advice that the failure to
take any such action could reasonably be expected to be a breach of the
directors'
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fiduciary duties under applicable law. The Company agrees to terminate,
immediately following the execution of this Agreement, any pending discussions
or negotiations with Third Parties (other than Parent, Sub and the Parent
Related Entities) with respect to any possible Acquisition Proposal.
(b) The Company shall notify Parent no later than 24 hours after receipt by
the Company of any Acquisition Proposal, unless the Board determines in good
faith, after receiving advice from its outside legal counsel and based upon
such advice, that doing so could reasonably be expected to be a breach of the
directors' fiduciary duties under applicable law. To the extent notice is
provided to Parent in accordance with the previous sentence, such notice shall
indicate in reasonable detail the terms and conditions of such Acquisition
Proposal, including, without limitation, the amount and form of the proposed
consideration and whether such Acquisition Proposal is subject to financing,
due diligence or any other material conditions. Notwithstanding the foregoing,
the Company is not required to disclose to Parent the identity of the Third
Party making such Acquisition Proposal.
Section 5.03. Preparation of the Proxy Statement; Stockholder Meeting.
(a) As soon as practicable after the date hereof, the Company shall, in
consultation with Parent and Sub, prepare and file with the SEC a preliminary
proxy statement (the "Preliminary Proxy Statement") relating to the Merger and
the transactions contemplated by this Agreement in accordance with the
Exchange Act and the rules and regulations under the Exchange Act. The
Company, Parent, Sub and the Parent Related Entities shall cooperate with each
other in the preparation of the Preliminary Proxy Statement. The Company shall
use all reasonable efforts to respond promptly to any comments made by the SEC
with respect to the Preliminary Proxy Statement, and to cause the definitive
proxy statement and related materials (together with any amendments or
supplements thereto, the "Definitive Proxy Statement" and together with the
Preliminary Proxy Statement, the "Proxy Statement") to be mailed to the
Company's stockholders at the earliest practicable date. The Company agrees to
afford Parent and its legal counsel a reasonable opportunity (i) to review and
comment upon the Preliminary Proxy Statement prior to its being filed with the
SEC and to provide Parent and its legal counsel with copies of any comments
the Company or its counsel may receive from the SEC or its staff with respect
thereto promptly after the receipt of such comments and (ii) to review and
comment upon the Definitive Proxy Statement prior to its being mailed to the
Company's stockholders.
(b) The Proxy Statement to be sent to the Company's stockholders in
connection with the Stockholders' Meeting (as defined below) will not, on the
date the Proxy Statement is filed with the SEC, on the date the Proxy
Statement is first mailed to the Company's stockholders and at the time of the
Stockholders' Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading or necessary to correct any statement in any earlier
communication with respect to the Stockholders' Meeting or the solicitation of
proxies therefor which has become false or misleading, in each case, other
than with respect to information supplied by Parent, Sub or any of the Parent
Related Entities or any of their respective affiliates or representatives in
writing expressly for inclusion in the Proxy Statement. On the date the Proxy
Statement is filed with the SEC, on the date the Proxy Statement is first
mailed to the Company's stockholders and at the time of the Stockholders'
Meeting, none of the information supplied in writing by Parent, Sub or any of
the Parent Related Entities or any of their respective affiliates or
representatives expressly for inclusion in the Proxy Statement will contain
any untrue statement of a material fact or will omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading or necessary to correct any statement in any earlier
communication with respect to the Stockholders' Meeting or the solicitation of
proxies therefor which has become false or misleading. The Company shall use
its best efforts to ensure that the Proxy Statement complies as to form in all
material respects with the Exchange Act and the rules and regulations
thereunder.
(c) The Company shall take all action necessary, in accordance with the
DGCL, the Exchange Act and other applicable law, the rules of the Nasdaq
National Market Inc. ("Nasdaq"), and its Certificate of Incorporation and By-
Laws, to convene a special meeting of its stockholders (the "Stockholders'
Meeting"), for the purpose of considering and voting upon this Agreement and
the transactions contemplated hereby, including the Merger
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unless, after receiving advice from its outside legal counsel and based upon
such advice, such action could reasonably be expected to be a breach of the
directors' fiduciary duties under applicable law. The Board shall recommend
that the holders of the Shares vote in favor of and approve this Agreement and
the Merger at the Stockholders' Meeting; provided, however, that prior to such
Stockholders' Meeting, such recommendation may be withdrawn, modified or
amended if a majority of the Board determines in good faith, after receiving
advice from its outside legal counsel and based upon such advice, that such
recommendation could reasonably be expected to be a breach of the directors'
fiduciary duties under applicable law.
Section 5.04. Access to Information and Management.
(a) Upon reasonable notice and subject to restrictions contained in
confidentiality agreements by which the Company is bound, the Company shall
(and shall cause its subsidiaries to) afford to the officers, employees,
accountants, counsel and other representatives of Parent reasonable access,
during normal business hours during the period prior to the Effective Time, to
all its properties, books, contracts, commitments and records and permit such
persons to make such inspections as they may reasonably require and, during
such period, the Company shall (and shall cause its subsidiaries to) furnish
promptly to Parent all information concerning the Company's business,
operations, properties and personnel as Parent may reasonably request. In
addition, upon reasonable notice, the Company shall (and shall cause its
subsidiaries to) afford to the officers, accountants, counsel and other
representatives of Parent reasonable contact, during normal business hours
during the period prior to the Effective Time, with the Company's officers and
managers regarding the Company's business, operations, properties and
personnel.
(b) All information obtained by the officers, employees, accountants,
counsel or other representatives of Parent pursuant to Section 5.04(a) hereof,
Section 5.05 hereof or any other Section of this Agreement shall be
"Evaluation Material", as defined in the Confidentiality Agreement between the
Company and Parent, except as otherwise provided in such Confidentiality
Agreement. By execution of this Agreement, each of Sub and the Parent Related
Entities agree to be bound by the terms of such Confidentiality Agreement to
the same extent as if they were parties thereto. In the event of termination
of this Agreement for any reason, each party shall promptly return all
"Evaluation Material" obtained from the Company or its representatives or
advisers, and any copies made of, or reports or analyses based on, such
Evaluation Material, to the Company.
Section 5.05. Best Efforts; Cooperation.
(a) Subject to the terms and conditions of this Agreement, each of the
parties hereto agrees to use its best efforts to take, or cause to be taken,
all actions, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement including, without
limitation, (i) the preparation and filing of all applicable forms under the
HSR Act and any other applicable anti-trust laws and (ii) the preparation and
filing of all other forms, registrations, proxy statements and notices
required to be filed to consummate the transactions contemplated hereby and
the taking of such actions as are necessary to obtain any requisite approvals,
consents, orders, exemptions, and waivers by any public or private third
party, except in each such case to the extent that the Board may determine in
good faith, after receiving advice from its outside legal counsel and based
upon such advice, that any such action could reasonably be expected to be a
breach of the directors' fiduciary duties under applicable law. Each party
shall promptly consult with the other with respect to, provide any necessary
information with respect to and provide the other (or its counsel) copies of,
all filings made by such party with any Governmental Entity in connection with
this Agreement and the transactions contemplated hereby.
(b) The Company agrees, and will cause its officers and directors, not to
interfere with Parent's efforts in seeking to ensure the retention by the
Surviving Corporation of the Company's suppliers, vendors and any other
entities with whom the Company has a material commercial relationship. The
Company agrees, and will cause its officers and directors, not to contact any
(i) supplier, vendor or other entity with whom the Company has a material
commercial relationship concerning any transfer of such person's existing
relationship with the Company to another business entity which would compete
with the Company or the Surviving Corporation or
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(ii) employee of the Company concerning the termination of such employee's
employment with the Company and their employment with another business entity
which would compete with the Company or the Surviving Corporation. The Company
agrees to use its commercially reasonable efforts to cooperate with Parent in
its efforts in seeking to ensure the retention by the Surviving Corporation of
the Company's suppliers, vendors and any other entities with whom the Company
has a material commercial relationship. The parties hereto acknowledge and
agree that such cooperation by the Company may take the form of assisting
Parent in contacting and setting up meetings with the Company's suppliers and
vendors and providing to Parent reasonable information with respect to such
suppliers and vendors; provided, however, that the Company shall not be
required to incur any material expenses in cooperating with Parent in
connection with the foregoing. The Company further agrees, and will cause its
officers and directors, not to interfere with Parent's efforts in seeking to
ensure the retention by the Surviving Corporation of the Company's employees.
The Company agrees to use its commercially reasonable efforts to cooperate
with Parent in its efforts in seeking to ensure the retention by the Surviving
Corporation of the Company's employees. The parties hereto acknowledge and
agree that such cooperation by the Company may take the form of introducing
Parent to such employees and providing to Parent reasonable information with
respect to such employees; provided, however, that the Company shall not be
required to incur any expense (including, without limitation, any liability to
pay any stay bonus to any such employee) in cooperating with Parent in
connection with the foregoing.
(c) Upon the execution hereof, the Company (i) shall provide Parent with
true, correct and complete records and information regarding the employee
defalcation described in the SEC Reports, (ii) shall provide to Parent
reasonable information with respect to its existing internal controls to
prevent defalcations and consult in good faith with Parent with respect to
methods for improving such internal controls and (iii) shall implement any
additional internal controls deemed appropriate by the Company in its sole
discretion after such consultation with Parent. The Company agrees to
cooperate with the officers, investment bankers, accountants, counsel and
other representatives of Parent in connection with the preparation of offering
documents relating to securities to be issued by Parent in order to pay the
Merger Consideration, including, without limitation, by obtaining from its
independent public accountants (i) consents to include or incorporate by
reference the Company's consolidated financial statements in such offering
documents and (ii) customary comfort letters with respect to such securities
offering; provided, however, that Parent shall pay any and all costs and
expenses incurred in connection with the foregoing.
Section 5.06. Indemnification and Insurance.
(a) From the Effective Time and for a period of six (6) years thereafter,
the Surviving Corporation and Parent (collectively, the "Indemnifying
Parties") shall provide exculpation and indemnification for each person who is
now or has been at any time prior to the date hereof or who becomes prior to
the Effective Time, an officer, director, employee, fiduciary or agent of the
Company or any of its subsidiaries (the "Indemnified Parties") which is the
same as the exculpation and indemnification provided to the Indemnified
Parties by the Company and its subsidiaries immediately prior to the Effective
Time in its Certificate of Incorporation or By-Laws as in effect on the date
hereof; provided, however, that such exculpation and indemnification only
covers actions on or prior to the Effective Time, including, without
limitation, all transactions contemplated by this Agreement.
(b) In addition to the rights provided in Section 5.06(a) above, in the
event of any threatened or actual claim, action, suit, proceeding or
investigation, whether civil, criminal or administrative, including without
limitation, any action by or on behalf of any or all security holders of the
Company or by or in the right of the Company or any claim, action, suit,
proceeding or investigation in which any Indemnified Party is, or is
threatened to be, made a party based on, or arising out of (i) the fact that
he is or was an officer, employee or director of the Company or any of its
subsidiaries or any action or omission by such person in his capacity as an
officer, employee or director of the Company or any of its subsidiaries, or
(ii) this Agreement or the transactions contemplated by this Agreement,
whether in any case asserted before or after the Effective Time, the Company,
the Indemnifying Parties and the Indemnified Parties hereby agree to use their
reasonable best efforts to cooperate in the defense of such claim, action,
suit, proceeding or investigation. The Indemnified Parties shall have the
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right to select counsel, subject to the consent of the Indemnifying Parties
(which consent shall not be unreasonably withheld or delayed). It is
understood and agreed that the Company shall indemnify and hold harmless, and,
after the Effective Time, the Indemnifying Parties shall indemnify and hold
harmless, as and to the full extent permitted by applicable law, each
Indemnified Party against any losses, claims, damages, liabilities, costs,
expenses (including reasonable attorneys' fees and expenses), judgments, fines
and amounts paid in settlement in accordance herewith (collectively, the
"Losses") in connection with any such threatened or actual claim, action,
suit, proceeding or investigation. In addition, in the event of any such
threatened or actual claim, action, suit, proceeding or investigation, the
Company shall, and, after the Effective Time, the Indemnifying Parties shall,
promptly pay and advance reasonable expenses and costs (as evidenced by a
written invoice therefor) incurred by each Indemnified Person as they become
due and payable in advance of the final disposition of the claim, action,
suit, proceeding or investigation to the fullest extent and in the manner
permitted by law. Notwithstanding the foregoing, neither the Company nor the
Indemnifying Parties shall be obligated to advance any expenses or costs prior
to receipt of an undertaking by or on behalf of the Indemnified Party to repay
any expenses advanced if it shall ultimately be determined by a court of
competent jurisdiction that the Indemnified Party is not entitled to be
indemnified against such expense. Notwithstanding anything to the contrary set
forth in this Agreement, neither the Company nor the Indemnifying Parties, as
the case may be, (i) shall be liable for any settlement affected without their
prior written consent, as applicable, and (ii) shall have any obligation
hereunder to any Indemnified Party to the extent that a court of competent
jurisdiction shall determine in a final and non-appealable order that such
indemnification is prohibited by applicable law. In the event of a final and
non-appealable determination by a court that any payment of expenses is
prohibited by applicable law, the Indemnified Party shall promptly refund to
the Company or the Indemnifying Parties, whichever is applicable, the amount
of all such expenses theretofore advanced pursuant hereto. Any Indemnified
Party wishing to claim indemnification under this Section 5.06, upon learning
of any such claim, action, suit, proceeding or investigation, shall promptly
notify the Company and the Indemnifying Parties of such claim and the relevant
facts and circumstances with respect thereto; provided, however, that the
failure to provide such notice shall not affect the obligations of the Company
or the Indemnifying Parties except to the extent that such failure has caused
the Indemnifying Parties to be liable for additional Losses, in which event
the Indemnifying Parties shall not be liable for such additional Losses.
(c) The Company shall use its best efforts to purchase, immediately
following the execution of this Agreement, directors' and officers' liability
insurance policy coverage for the Company's directors and executive officers
for a period of six (6) years following the Effective Time, the premium for
which shall not exceed $150,000 in the aggregate (provided that if the premium
of such coverage exceeds such amount, the Company shall be obligated to obtain
a policy with the greatest dollar amount of coverage available for a cost not
exceeding such amount), which will provide the directors and officers with
coverage on substantially similar terms as currently provided by the Company
to such directors and officers.
(d) This Section 5.06 is intended for the irrevocable benefit of, and to
grant third party rights to, the Indemnified Parties and their heirs and shall
be binding on all successors and assigns of the Company. Each of the
Indemnified Parties shall be entitled to enforce the covenants contained in
Section 5.06, and Parent, Sub, the Parent Related Entities and the Surviving
Corporation acknowledge and agree that each Indemnified Party would suffer
irreparable harm and that no adequate remedy at law exists for a breach of
such covenants and such Indemnified Party shall be entitled to injunctive
relief and specific performance in the event of any breach of any provision of
this Section. Each Parent Related Entity acknowledges the obligations set
forth in this Section 5.06, which obligations are expressly intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party covered
hereby. In the event the Indemnifying Parties fail to satisfy their
obligations hereunder, each of the Parent Related Entities hereby agrees to
assume those obligations as if each were an Indemnifying Party hereunder.
(e) In the event that the Surviving Corporation or any of its respective
successors or assigns (i) consolidates with or merges into any other person
and shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any person, then,
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and in each such case, the successors and assigns of such entity shall assume
the obligations set forth in this Section 6.05, which obligations are
expressly intended to be for the irrevocable benefit of, and shall be
enforceable by, each Indemnified Party covered hereby.
Section 5.07. Certain Benefits.
(a) Each of Parent, Sub and the Parent Related Entities acknowledges that
consummation of the transactions contemplated by this Agreement will
constitute a change in control of the Company (to the extent such concept is
applicable) for the purposes of all employee or employee benefit agreements,
contracts, plans, programs, policies or arrangements of the Company as set
forth in Schedule 5.07. From and after the Effective Time, the Company,
Parent, the Parent Related Entities and their subsidiaries (including the
Surviving Corporation) will honor in accordance with their terms all cash
bonus plans, stock option and stock incentive plans, employment agreements,
consulting agreements, change-of-control agreements, and severance agreements
or plans between the Company or any of its subsidiaries and any officer,
director, or employee of the Company or any of its subsidiaries in effect
prior to the Effective Time which are set forth on Schedule 5.07.
(b) Upon consummation of the Merger, each employee of the Company or any of
its subsidiaries shall be eligible to participate in any and all employee
benefit plans of Parent or the Surviving Corporation generally made available
to similarly situated employees thereof on the same basis and without
distinction. To the extent that any employee of the Company or any of its
subsidiaries becomes a participant in any such plan, such employee shall be
given credit under such plans for all service prior to the Effective Time with
the Company and its subsidiaries, or any predecessor employer (to the extent
such credit was given by the Company under a similar plan) and prior to the
time such employee becomes such a participant, for all purposes (including,
without limitation, eligibility, waiting periods and vesting, excluding
benefit accruals). In addition, if any employees of the Company or any of its
subsidiaries employed as of the Effective Time become covered by a medical
plan of Parent, any of its affiliates or the Surviving Corporation, such
medical plan shall not impose any exclusion on coverage for preexisting
medical conditions with respect to these employees, which exclusion is not
generally applicable to employees of Parent, any of its affiliates or the
Surviving Corporation.
(c) This Section 5.07 is intended for the irrevocable benefit of, and to
grant third party rights to, the employees of the Company employed as of the
Effective Time, and shall be binding on all successors and assigns of Parent,
the Company and the Surviving Corporation. Each of the employees of the
Company employed as of the Effective Time shall be entitled to enforce the
covenants contained in this Section 5.07. Notwithstanding the foregoing,
(i) but subject to the terms of the agreements described in Section 5.07(a),
nothing in this Agreement shall be interpreted or construed to confer upon the
employees of the Company any right with respect to continuance of employment
by the Company, Parent or the Surviving Corporation, nor shall this Agreement
interfere in any way with the right of the Company, Parent or the Surviving
Corporation to terminate the employee's employment at any time and (ii)
nothing in this Agreement shall interfere in any way with the right of the
Parent or the Surviving Corporation to amend, terminate or otherwise
discontinue any or all plans, practices or policies of Parent or the Surviving
Corporation in effect from time to time. Finally, the parties hereto agree
that Parent in its sole discretion shall determine which employees are
similarly situated; provided, however, that such determination shall be made
in good faith and may not be based on whether the employee was, prior to the
Effective Time, an employee of the Company or any of its subsidiaries.
Section 5.08. Redemption of Rights. The Board shall have duly amended the
Rights Agreement prior to the execution of this Agreement so that neither the
execution nor the delivery of this Agreement will trigger or otherwise affect
any rights or obligations under the Rights Agreement, including causing the
occurrence of a "Distribution Date" or a "Stock Acquisition Date," as defined
in the Rights Agreement. The Company shall redeem all outstanding Rights at a
redemption price of $.01 per Right effective immediately prior to the
Effective Time; the Rights Agreement permits and shall permit such redemption.
Section 5.09. Annual Meeting; Director Nominations. Immediately following
the execution and delivery of this Agreement by the parties hereto, the
Company agrees to postpone the 1997 Annual Meeting of
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Stockholders of the Company (the "Annual Meeting") currently scheduled to be
held on February 5, 1998 until the earliest practicable date following the
earlier of (x) June 30, 1998 or (y) the date of termination of this Agreement
pursuant to Section 7.01 hereof. If this Agreement is terminated pursuant to
Section 7.01(a), 7.01(b), 7.01(c), 7.01(e) or 7.01(h) hereof, then: (i)
immediately following any such termination, Parent shall cause Aspen
Investments, Inc. ("Aspen") to, and Aspen shall, withdraw any and all
nominations of candidates for election as Class III Directors of the Company
at the rescheduled Annual Meeting, including, without limitation, its
nominees, Charles R. Scott and Ralph O. Hellmold (and, in the event Aspen does
not withdraw such nominations in writing to the Company, any and all such
nominations shall be deemed to have been withdrawn as of the date of such
termination of this Agreement and to have not satisfied the requirements of
Section 3 of Article II of the Company's By-laws); (ii) neither Parent, Sub,
any of the Parent Related Entities nor Aspen, nor any affiliate thereof
(including, without limitation, Crane), shall submit or cause the submission
of any nominations of candidates for election as Class III Directors of the
Company, and no nominees thereof shall be placed on the ballot or otherwise
considered at the rescheduled Annual Meeting; and (iii) none of Parent, Sub,
any of the Parent Related Entities nor Aspen, nor any affiliate thereof
(including, without limitation, Crane), shall solicit any proxies from the
stockholders of the Company in connection with the rescheduled Annual Meeting.
Aspen acknowledges the obligations set forth in this Section 5.09 and has
executed this Agreement to bind itself to its obligations hereunder. The
obligations set forth herein are expressly intended to be for the irrevocable
benefit of, and shall be enforceable by, the Company.
Section 5.10. Public Announcements. Notwithstanding anything to the contrary
in this Agreement, including, without limitation, Section 8.09 hereof, prior
to the Effective Time, neither Parent, Sub, any of the Parent Related Entities
nor Aspen shall, or shall permit any of its subsidiaries or affiliates
(including, without limitation, Crane) to, issue or cause the publication of
any press release or other public announcement concerning the employees of the
Company or Parent's or the Surviving Corporation's plans for such employees
without the prior written consent of the Company, which consent shall not be
unreasonably withheld; provided, however, that the provisions of this Section
5.10 shall not apply to any disclosure contained in an offering memorandum or
prospectus relating to a sale of securities by Parent, as long as Parent has
provided the Company with preliminary copies of any such offering memorandum
or prospectus (and copies of any changes thereto) and has consulted in good
faith with the Company with respect to any disclosure therein concerning the
employees of the Company or Parent's or the Surviving Corporation's plans for
such employees.
Section 5.11. Rolex. If Montrex Rolex, S.A. or any of its affiliated
entities (collectively, "Rolex") terminates or changes the terms of any
relationship or agreement between Rolex and the Company (or its subsidiaries),
the Company agrees, after consultation with Parent in good faith, to use its
commercially reasonable efforts to mitigate the impact of such termination or
change, including, without limitation, by transferring the Company's existing
inventory of Rolex products among the Company's stores. In addition, the
Company agrees not to liquidate in any manner its existing inventory of Rolex
products, including, without limitation, by selling such inventory back to
Rolex or by selling such inventory on a wholesale basis.
ARTICLE VI
Conditions
Section 6.01. Conditions to Each Party's Obligation to Effect the
Merger. The obligation of each party to effect the Merger shall be subject to
the satisfaction or waiver, where permissible, on or prior to the Effective
Time of the following conditions:
(a) This Agreement shall have been adopted by the requisite affirmative
vote of the stockholders of the Company, if any, required by the Company's
Certificate of Incorporation, By-Laws and applicable law.
(b) The consummation of the Merger shall not be prohibited by any
injunction, order, decree or ruling (an "Injunction") of a United States
federal or state court of competent jurisdiction (each party agreeing to
use its best efforts to have any such Injunction stayed or reversed), and
there shall not have been any action
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taken or any statute, rule or regulation enacted, promulgated or deemed
applicable to the Merger, or any executive order or decree issued, by any
Governmental Entity that is in effect and that makes consummation of the
Merger illegal.
(c) Any waiting period applicable to the Merger under the HSR Act and any
other applicable anti-trust laws shall have terminated or expired.
Section 6.02. Conditions to Obligations of Parent and Sub. The obligations
of Parent and Sub to effect the Merger are further subject to the satisfaction
or written waiver on or prior to the Effective Time of the following
conditions:
(a) Representations and Warranties. The representations and warranties of
the Company set forth in Article III that are qualified as to materiality or
Material Adverse Effect shall be true and correct and the representations and
warranties of the Company set forth in Article III that are not so qualified
shall be true and correct except to the extent that any failure to be true and
correct would not have a Material Adverse Effect, in each case as of the date
of this Agreement and as of the Effective Time as though made on and as of the
Effective Time, except to the extent such representations and warranties speak
as of an earlier date, and Parent shall have received a certificate signed on
behalf of the Company by the chief executive officer and the chief financial
officer of the Company to the effect set forth in this paragraph.
Notwithstanding the foregoing, the occurrence of any Excluded Event (as
defined herein) or any change or event that occurs as a result of an Excluded
Event shall not be taken into account in determining whether a representation
or warranty of the Company set forth in Article III is true and correct for
purposes of this Section 6.02(a).
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Effective Time, and Parent shall
have received a certificate signed on behalf of the Company by the chief
executive officer and the chief financial officer of the Company to such
effect.
(c) Dissenting Shares. The number of Dissenting Shares shall constitute no
greater than five percent (5%) of the total number of Shares outstanding
immediately prior to the Effective Time.
(d) No Company Material Adverse Effect. Since the date hereof, there shall
not have been any changes or events which, individually or in the aggregate,
have had a Material Adverse Effect; provided, however, that the occurrence of
any Excluded Event shall not be deemed to have a Material Adverse Effect. The
term "Excluded Event" shall mean any or all of the following events: (i) if
the Company has complied with the provisions of Section 5.05(b) hereof, the
termination or the change in terms (for any reason) by Rolex of any
relationship or agreement between the Company (or its subsidiaries) and Rolex;
(ii) in the event of any termination or change in terms (for any reason) by
Rolex of any relationship or agreement between the Company (or its
subsidiaries) and Rolex, a reduction of sales of Rolex products by the Company
and its subsidiaries on a consolidated basis from the date of any such
termination or change in terms until the Effective Time (as compared to the
same time period for the fiscal year ended May 31, 1997); (iii) if the Company
has complied with the provisions of Section 5.05(b) hereof, the termination or
the change in terms (for any reason) of any relationship or agreement between
the Company (or its subsidiaries) and any of its existing vendors or suppliers
(other than Rolex) whose products in the aggregate accounted for 5% or less of
the Company's sales (not including sales attributable to Rolex) for the fiscal
year ended May 31, 1997; or (iv) subject to compliance with Section 5.01(d)
hereof, any increase in the amounts outstanding under the Company's working
capital borrowings pursuant to credit facilities in existence on the date
hereof, including, without limitation, those which result from the occurrence
of an Excluded Event; provided, however, the occurrence of events or changes
which are not Excluded Events and/or exceed the levels or numbers set forth
above shall not be deemed by operation of this Section 6.02 to have a Material
Adverse Effect on the Company or its subsidiaries.
Section 6.03. Conditions to Obligations of the Company. The obligation of
the Company to effect the Merger is further subject to the satisfaction or
written waiver on or prior to the Effective Time of the following conditions:
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(a) Representations and Warranties. The representations and warranties of
Parent, Sub and the Parent Related Entities set forth in Article IV that are
qualified as to materiality shall be true and correct and the representations
and warranties of Parent, Sub and the Parent Related Entities set forth in
Article IV that are not so qualified shall be true and correct in all material
respects (provided, however, that the representations and warranties in the
first sentence of Section 4.04 hereof shall be true and correct in all
respects), in each case as of the date of this Agreement and as of the
Effective Time as though made on and as of the Effective Time (except for the
representation and warranty set forth in the third sentence of Section 4.01
hereof with respect to the net worth of Parent, Sub and the Parent Related
Entities, which shall be true and correct in all material respects as of the
date of this Agreement and as of the time immediately prior to the Effective
Time as though made on and as of the time immediately prior to the Effective
Time), and the Company shall have received a certificate signed on behalf of
Parent and Sub by the chief executive officer and the chief financial officer
of Parent and Sub to the effect set forth in this paragraph. Notwithstanding
the foregoing, the Company shall not have the right to terminate this
Agreement solely by reason of the failure of Parent, Sub and the Parent
Related Entities to satisfy the condition that the representation and warranty
set forth in the third sentence of Section 4.01 hereof with respect to the net
worth thereof be true and correct in all material respects as of the time
immediately prior to the Effective Time.
(b) Performance of Obligations of Parent and Sub. Parent and Sub shall have
performed in all material respects all obligations required to be performed by
them under this Agreement at or prior to the Effective Time, and the Company
shall have received a certificate signed on behalf of Parent and Sub by the
chief executive officer and the chief financial officer of Parent and Sub to
such effect.
ARTICLE VII
Termination and Amendment
Section 7.01. Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval and adoption of
this Agreement by the stockholders of the Company:
(a) by mutual consent of Parent and the Company;
(b) by either Parent or the Company, if any United States federal or
state court of competent jurisdiction or other Governmental Entity shall
have issued an Injunction or taken any other action (which the parties
shall use their best efforts to stay or reverse) permanently restraining,
enjoining or otherwise prohibiting the Merger, and such Injunction or other
action shall have become final and non-appealable;
(c) by the Company, if Parent, Sub or any of the Parent Related Entities
have failed to perform in any material respect any of their respective
obligations required to be performed by them under this Agreement and such
failure continues for five (5) business days after receipt by Parent of a
written notice from the Company describing such failure, unless failure to
so perform has been caused by or results from a breach of this Agreement by
the Company;
(d) by the Company, provided that the Company has complied with the
provisions of Section 5.02 hereof, if the Company shall have received a
Superior Proposal, and the Board determines in good faith (i) upon advice
of its financial advisors that the Superior Proposal, if consummated as
proposed, would result in a transaction more favorable to the Company's
stockholders from a financial point of view than the transaction
contemplated by this Agreement (including consideration of, among other
matters, the ability of the Third Party to obtain any financing necessary
to consummate the Acquisition Proposal); and (ii) after consultation with
and based upon advice from its outside legal counsel, that the failure to
accept such Superior Proposal could reasonably be expected to be a breach
of the directors' fiduciary duties under applicable law; provided, that
such termination pursuant to this Section 7.01(d) shall not be effective
until the Company has made payment in full of the fee required by Section
8.08(b) hereof;
(e) by the Company, if, within ten (10) business days after receipt by
Parent of notice from the Company that all of the conditions set forth in
Article VI hereof have been satisfied or waived, the Merger
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has not been consummated and neither Parent nor Sub has deposited the
Merger Consideration with the Paying Agent as provided in Section 2.02
hereof;
(f) by Parent, if the Board shall have (A) withdrawn, modified or amended
in any adverse respect its approval or recommendation of this Agreement,
the Merger or the transactions contemplated hereby, (B) failed to include
in the Proxy Statement such recommendation, (C) endorsed or recommended to
its stockholders any Acquisition Proposal or (D) resolved to do any of the
foregoing;
(g) by Parent or the Company, if, without any material breach by such
terminating party of its obligations under this Agreement, the Merger shall
not have occurred on or before June 30, 1998; provided, however, that
neither Parent nor the Company shall terminate this Agreement prior to the
expiration of two hundred forty (240) days following the date hereof if the
Merger has not occurred by reason of the nonsatisfaction of the condition
set forth in Section 6.01(c) hereof or the pendency of a non-final
Injunction, and Parent, Sub and the Company shall use their best efforts to
cause such condition to be satisfied (including, without limitation,
complying with the requirements of the Federal Trade Commission or other
comparable Governmental Entity to divest of assets or otherwise in
connection with the consummation of the transactions contemplated hereby or
in settlement of any action brought by it) or have any such Injunction
stayed or reversed;
(h) by either Parent or the Company, if the stockholders of the Company
shall have failed to give any required approval; or
(i) by Parent, if the Company shall have failed to perform in any
material respect any of its obligations under this Agreement and such
failure continues for five (5) business days after receipt by the Company
of a written notice from Parent describing such failure, unless failure to
so perform has been caused by or results from a breach of this Agreement by
Parent or Sub.
Section 7.02. Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 7.01 hereof, this Agreement
shall forthwith become void and have no effect, without any liability on the
part of any party hereto or its affiliates, directors, officers or
stockholders, other than the provisions of Sections 5.04(b) and 8.08 hereof.
Nothing contained in this Section 7.02 shall relieve any party from liability
for any breach of this Agreement.
Section 7.03. Amendment. This Agreement may be amended by the parties
hereto, at any time before or after approval of this Agreement by the
stockholders of the Company, but, after any such approval, no amendment shall
be made which by law requires further approval by such stockholders without
such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
Section 7.04. Extension; Waiver. At any time prior to the Effective Time,
the parties hereto may, to the extent legally allowed, (i) extend the time for
the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in a written instrument signed on behalf of such
party.
ARTICLE VIII
Miscellaneous
Section 8.01. Nonsurvival of Representations and Warranties. The
representations and warranties made herein shall not survive beyond the
Effective Time.
Section 8.02. Notices. All notices and other communications hereunder shall
be in writing (and shall be deemed given upon receipt) if delivered
personally, telecopied (which is confirmed) or mailed by registered or
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certified mail (return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Parent, Sub or any Parent Related Entity, to
Destination Retail Holdings Corporation
International Bazaar
P.O. Box F 40349
Freeport, Bahamas
Attention: Stephen GE Crane
Telephone: (242) 352-5464
Facsimile: (242) 352-6574
with a copy to
Battle Fowler LLP
Park Avenue Tower
75 East 55th Street
New York, New York 10022
Attention: Charles H. Baker, Esq.
Telephone: (212) 856-6944
Facsimile: (212) 856-7814
and
(b) if to the Company, to
Little Switzerland, Inc.
161-B Crown Bay Cruise Ship Port
P.O. Box 930
St. Thomas, U.S.V.I. 00802
Attention: John E. Toler, Jr.
Telephone: (809) 776-2010
Facsimile: (809) 774-9900
with a copy to
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attention: Kevin M. Dennis, Esq.
Telephone: (617) 570-1528
Facsimile: (617) 523-1231
Section 8.03. Descriptive Headings. The descriptive headings herein are
inserted for convenience only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.
Section 8.04. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
Section 8.05. Entire Agreement; Assignment. This Agreement (a) constitutes
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the
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subject matter hereof (other than the Confidentiality Agreement, any
provisions of such agreement which are inconsistent with the transactions
contemplated by this Agreement being waived hereby) and (b) shall not be
assigned by operation of law or otherwise, provided that Parent may cause Sub
to assign its rights and obligations to Parent or any other direct or indirect
wholly-owned subsidiary of Parent who becomes a party to this Agreement and
agrees to perform and assume the obligations of Sub hereunder, but no such
assignment shall relieve either Parent or Sub of its obligations hereunder if
such assignee does not perform such obligations.
Section 8.06. Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware without regard to any
applicable principles of conflicts of law. Each of the Company, Parent, Sub
and the Parent Related Entities hereby irrevocably and unconditionally consent
to the jurisdiction of the courts of the State of Delaware and the United
States District Court for the District of Delaware for any action, suit or
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby, and agrees not to commence any action, suit or proceeding
related thereto except in such courts. Each of the Company, Parent, Sub and
the Parent Related Entities further hereby irrevocably and unconditionally
waive any objection to the laying of venue of any lawsuit, claim or other
proceeding arising out of or relating to this Agreement in the courts of the
State of Delaware or the United States District Court for the District of
Delaware, and hereby further irrevocably and unconditionally waive and agree
not to plead or claim in any such court that any such lawsuit, claim or other
proceeding brought in any such court has been brought in an inconvenient
forum. Each of the Company, Parent, Sub and the Parent Related Entities
further agree that service of any process, summons, notice or document by U.S.
registered mail to its address set forth above shall be effective service of
process for any action, suit or proceeding brought against it in any such
court.
Section 8.07. Specific Performance. The parties hereto agree that if any of
the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached, irreparable damage would occur, no
adequate remedy at law would exist, and damages would be difficult to
determine, and that the parties shall be entitled to specific performance of
the terms hereof, without the posting of any bond whatsoever in addition to
any other remedy at law or equity.
Section 8.08. Expenses and Termination Fees.
(a) Subject to Sections 5.05 and 8.08(b) hereof, whether or not the Merger
is consummated, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs and expenses.
(b) As a condition to the willingness of Parent, Sub and the Parent Related
Entities to enter into this Agreement and to compensate Parent, Sub and the
Parent Related Entities for entering into this Agreement, taking action to
consummate the transactions hereunder and incurring the costs and expense
related thereto, the Company shall pay to Parent two million four hundred
eighty one thousand one hundred dollars ($2,481,100) (the "Termination Fee")
if the Company shall have terminated this Agreement pursuant to the provisions
of Section 7.01(d) hereof or Parent shall have terminated this Agreement
pursuant to the provisions of Section 7.01(f) hereof. Any payment required by
the previous sentence shall be payable by the Company to Parent (by wire
transfer of immediately available funds to an account designated by Parent)
within two (2) business days after demand by Parent. In the event that the
Company shall fail to pay the Termination Fee when due, the term "Termination
Fee" shall be deemed to include interest on such unpaid Termination Fee,
commencing on the date that the Termination Fee became due, at a rate per
annum equal to the rate of interest publicly announced by Citibank, N.A., from
time to time, in the City of New York, as such bank's Prime Rate.
Notwithstanding the foregoing, the Company shall have no obligation under this
subparagraph (b) if at the time of the termination of this Agreement, Parent,
Sub or any of the Parent Related Entities shall be in material breach of its
respective obligations under this Agreement; provided, that on the date of the
termination of this Agreement notice of such breach has been provided by the
Company and that such breach has not been cured within the requisite cure
period, then the Company shall not be obligated to make the payment required
under this subparagraph (b).
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<PAGE>
(c) Notwithstanding anything to the contrary in this Agreement, the parties
hereto expressly acknowledge and agree that, with respect to any termination
of this Agreement pursuant to Section 7.01(d) or Section 7.01(f) hereof, the
payment of any amount pursuant to Section 8.08(b) hereof shall constitute
liquidated damages with respect to any claim for damages or any other claim
which any party would otherwise be entitled to assert against any other party
with respect to this Agreement and the transactions contemplated hereby and
shall constitute the sole and exclusive remedy available to them, in each
case, other than with respect to any claim under Section 5.04(b) hereof. The
parties hereto further expressly acknowledge and agree that, in light of the
difficulty of accurately determining actual damages with respect to the
foregoing upon any termination of this Agreement pursuant to Section 7.01(d)
or Section 7.01(f) hereof, the rights to payment under Section 8.08(b) hereof:
(i) constitute a reasonable estimate of the damages that will be suffered by
reason of any such proposed or actual termination of this Agreement pursuant
to Section 7.01(d) or Section 7.01(f) hereof and (ii) shall be in full and
complete satisfaction of any and all damages arising as a result of the
foregoing (other than any claim under Section 5.04(b) hereof). Except for
nonpayment of the amount set forth in Section 8.08(b) hereof and any claim
under Section 5.04(b) hereof, the parties hereby agree that, upon any
termination of this Agreement pursuant to Section 7.01(d) or Section 7.01(f)
hereof, in no event shall either party seek or obtain any recovery or judgment
against any of the other party's assets or against any of the other party's
directors, officers, employees, partners, managers, members or shareholders
and in no event shall either party be entitled to seek or obtain any other
damages of any kind, including, without limitation, consequential, indirect or
punitive damages.
Section 8.09. Publicity. Except as otherwise required by law or the rules of
any national securities exchange or the National Association of Securities
Dealers, for so long as this Agreement is in effect, neither the Company nor
Parent, Sub or any of the Parent Related Entities shall, or shall permit any
of its subsidiaries to, issue or cause the publication of any press release or
other public announcement with respect to the transactions contemplated by
this Agreement without the prior written consent of the other party, which
consent shall be delivered promptly and not be unreasonably withheld.
Section 8.10. Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person or persons any rights, benefits or remedies of any nature whatsoever
under or by reason of this Agreement, except pursuant to Sections 5.06 and
5.07 hereof. Parent shall cause Sub to perform its obligations hereunder and
shall be fully liable, severally and jointly, for any failure of Sub to
perform such obligations.
Section 8.11. Severability. The invalidity or unenforceability of a
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
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<PAGE>
IN WITNESS WHEREOF, the Company, Parent, Sub and the Parent Related Entities
have caused this Agreement to be signed by their respective officers there unto
duly authorized as of the date first written above.
Attest: Little Switzerland, Inc.
/s/ Ilene B. Jacobs /s/ C. William Carey
_____________________________________ By: _________________________________
Name: C. William Carey
Title: Chairman of the Board of
Directors
Attest: Destination Retail Holdings
Corporation
/s/ David S. MacPhail
_____________________________________ /s/ Stephen G.E. Crane
By: _________________________________
Name: Stephen G.E. Crane
Title: President
Attest: LSI Acquisition Corp.
/s/ David S. MacPhail /s/ Stephen G.E. Crane
_____________________________________ By: _________________________________
Name: Stephen G.E. Crane
Title: President
Attest: Young Caribbean Jewellery Company
Limited
/s/ David S. MacPhail
_____________________________________ /s/ Stephen G.E. Crane
By: _________________________________
Name: Stephen G.E. Crane
Title: President
Attest: Alliance International Holdings
Limited
/s/ David S. MacPhail
_____________________________________ /s/ Robert E. Cordes
By: _________________________________
Name: Robert E. Cordes
Title: President
Attest: CEI Distributors Inc.
/s/ David S. MacPhail /s/ Robert E. Cordes
_____________________________________ By: _________________________________
Name: Robert E. Cordes
Title: President
This Agreement has been duly executed by the following party for the purpose
of acknowledging such party's obligations as set forth in Sections 5.09 and
5.10 hereof, which obligations are expressly intended to be for the irrevocable
benefit of, and shall be enforceable by, the Company against the following
party.
Attest: Aspen Investments, Inc.
/s/ Lynn Turnquest /s/ Robert E. Cordes
_____________________________________ By: _________________________________
Name: Robert E. Cordes
Title: President
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ANNEX B
[LETTERHEAD OF WASSERSTEIN, PERELLA & CO., INC.]
January 31, 1998
Board of Directors
Little Switzerland, Inc.
161-B Crown Bay, Cruise Ship Port
P.O. Box 930
St. Thomas, Virgin Islands 00804
Members of the Board:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to the holders of the common stock, par value $.01
per share (the "Shares"), of Little Switzerland, Inc. (the "Company") (other
than Stephen G.E. Crane and his affiliates) of the consideration to be
received by such holders pursuant to the terms of the Agreement and Plan of
Merger (the "Merger Agreement"), among the Company, Destination Retail
Holdings Corporation, a Nevis corporation ("Parent"), LSI Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of Parent ("Sub"), Young
Caribbean Jewellery Company Limited, a Cayman Islands corporation and a
subsidiary of Parent, Alliance International Holdings Limited, a Bahamian
corporation and a wholly-owned subsidiary of Parent, and CEI Distributors
Inc., a British Virgin Islands corporation and a wholly-owned subsidiary of
Parent. The Merger Agreement provides for, among other things, the merger (the
"Merger") of Sub with an into the Company pursuant to which each outstanding
Share will be converted into the right to receive $8.10 in cash (the
"Merger"). The terms and conditions of the Merger are set forth in more detail
in the Merger Agreement.
In connection with rendering our opinion, we have reviewed a draft, dated
January 29, 1998, of the Merger Agreement, and for purposes hereof, we have
assumed that, except for changes to the Merger Agreement which were discussed
at the Board meeting held on January 31, 1998, the final form thereof will not
differ in any material respect from the draft provided to us. We have also
reviewed and analyzed certain publicly available business and financial
information relating to the Company for recent years and interim periods to
date, as well as certain internal financial and operating information,
including financial forecasts, analyses and projections prepared by or on
behalf of the Company and provided to us for purposes of our analysis, and we
have met with management of the Company to review and discuss such information
and, among other matters, the Company's business, operations, assets,
financial condition and future prospects.
We have reviewed and considered certain financial and stock market data
relating to the Company, and we have compared that data with similar data for
certain other companies, the securities of which are publicly traded, that we
believe may be relevant or comparable in certain respects to the Company or
one or more of its businesses or assets, and we have reviewed and considered
the financial terms of certain recent acquisitions and business combination
transactions in the duty free and jewelry industry specifically, and in other
industries generally, that we believe to be reasonably comparable to the
Merger or otherwise relevant to our inquiry. We have also performed such other
financial studies, analyses, and investigations and reviewed such other
information as we considered appropriate for purposes of this opinion.
In our review and analysis and in formulating our opinion, we have assumed
and relied upon the accuracy and completeness of all the financial and other
information provided to or discussed with us or publicly available, and we
have not assumed any responsibility for independent verification of any of
such information. We have also reviewed the financial projections, forecasts
and analyses provided to us by the Company's management, and we express no
opinion with respect to such projections, forecasts and analyses or the
assumptions upon
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<PAGE>
which they are based. In addition, we have not reviewed any of the books and
records of the Company, or assumed any responsibility for conducting a
physical inspection of the properties or facilities of the Company, or for
making or obtaining an independent valuation or appraisal of the assets, lease
portfolio or liabilities of the Company, and no such independent valuation or
appraisal was provided to us. We have assumed that the transactions described
in the Merger Agreement will be consummated on the terms set forth therein,
without material waiver or modification. Our opinion is necessarily based on
economic and market conditions and other circumstances as they exist and can
be evaluated by us as of the date hereof.
We are acting as financial advisor to the Company and in connection with our
engagement to review various strategic alternatives available to the Company,
leading up to and including the proposed Merger, we have received and will
receive a fee for our services, a major portion of which is contingent upon
the consummation of the Merger. In addition, we have performed various
investment banking services for the Company from time to time in the past and
have received customary fees for rendering such services.
In the ordinary course of our business, we may actively trade the equity
securities of the Company for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
Our opinion addresses only the fairness from a financial point of view to
the holders of the Shares of the Company (other than Stephen G.E. Crane and
his affiliates) of the consideration to be received by such holders pursuant
to the Merger, and we do not express any views on any other terms of the
Merger. Specifically, our opinion does not address the Company's underlying
business decision to effect the transactions contemplated by the Merger
Agreement nor does our opinion address the relative merits of the Merger as
compared to any alternative transaction or business strategy that may have
been discussed by the Board of Directors of the Company as alternatives to the
Merger.
It is understood that this letter is for the benefit and use of the Board of
Directors of the Company in its consideration of the Merger and, except for
inclusion in its entirety in any registration statement, information statement
or proxy statement circulated to holders of Shares of the Company relating to
the Merger, may not be disseminated, quoted, used or reproduced at any time or
in any manner without our prior written consent. This opinion does not
constitute a recommendation to any holder of Shares of the Company as to how
such holder should vote with respect to the Merger, and should not be relied
upon by any holder as such.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that as of the date
hereof, the $8.10 per Share cash consideration to be received by the holders
of Shares of the Company pursuant to the Merger is fair to such holders (other
than Stephen G.E. Crane and his affiliates) from a financial point of view.
Very truly yours,
/s/ Wasserstein Perella & Co., Inc.
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ANNEX C
APPRAISAL RIGHTS
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing pursuant
to (S)228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S)251 (other than a merger effected pursuant to
(S)251(g) of this title), (S)252, (S)254, (S)257, (S)258, (S)263 or (S)264 of
this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to (S)(S)251,
252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
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<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S)228 or
(S)253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
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date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares. Such written statement shall be mailed to the stockholder
within 10 days after his written request for such a statement is received by
the surviving or resulting corporation within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register of
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the serving or resulting corporation. If the petition shall be
filed by the serving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems available. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisals rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in the Chancery for
notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determine their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value,
the Court shall take into account all relevant factors. In determine the fair
rate of interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had
to pay to borrow money during the pendency of the proceeding. Upon application
by the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon
the appraisal prior to the final determination of the stockholder entitled to
an appraisal. Any stockholder whose name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this section
and who has submitted his certificates of stock to the Register of Chancery,
if such is required, may participate fully in all proceedings until it is
finally determined that he is not entitled to appraisal rights under this
section.
(i) the Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as
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the Court may direct. Payment shall be so made to each such stockholder, in
the case of holders of uncertificated stock forthwith, and the case of holders
of shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 120, L.
97, eff. 7-1-97.)
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LOGO
LITTLE SWITZERLAND, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF LITTLE SWITZERLAND, INC. FOR THE
SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON FRIDAY, MAY 8, 1998
The undersigned hereby constitutes and appoints C. William Carey and John E.
Toler, Jr., and each of them, as Proxies of the undersigned, with full power to
appoint his substitute, and authorizes each of them to represent and to vote
all shares of Common Stock, par value $.01 per share, of Little Switzerland,
Inc. (the "Company") held of record by the undersigned as of the close of
business on Monday, March 30, 1998, at the Special Meeting of Stockholders (the
"Special Meeting") to be held on Friday, May 8, 1998, at 10:00 a.m., local
time, at State Street Bank and Trust Company, Board Room, 33rd Floor, 225
Franklin Street, Boston, Massachusetts, and at any adjournments or
postponements thereof.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED FOR APPROVAL OF THE AGREEMENT AND PLAN OF MERGER SPECIFIED IN
PROPOSAL 1. IN THEIR DISCRETION, THE PROXIES ARE EACH AUTHORIZED TO VOTE UPON
SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING AND ANY
ADJOURNMENTS OR POSTPONEMENTS THEREOF. A STOCKHOLDER WISHING TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS NEED ONLY SIGN AND DATE
THIS PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
The undersigned hereby acknowledge(s) receipt of a copy of the accompanying
Notice of Special Meeting and the Proxy Statement with respect thereto and
hereby revoke(s) any proxy or proxies heretofore given. This proxy may be
revoked at any time before it is exercised.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
PROPOSAL 1.
Approval of the FOR AGAINST ABSTAIN
Agreement and Plan of
Merger, dated as of
February 4, 1998, by
and among the Company, [_] [_] [_]
Destination Retail
Holdings Corporation
and certain of its
subsidiaries and the
transactions
contemplated thereby.
PLEASE VOTE ABOVE AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
<PAGE>
LOGO
In their discretion, the Proxies are each authorized to vote upon such other
business as may properly come before the Special Meeting and any adjournments
or postponements thereof.
PLEASE BE SURE TO SIGN AND DATE THIS PROXY.
Date: ____________________________
Stockholder(s) signature(s):
__________________________________
__________________________________
Please sign name exactly as
shown. Where there is more than
one holder, each should sign.
When signing as an attorney,
administrator, executor, guardian
or trustee, please add your title
as such. If executed by a
corporation or partnership, the
proxy should be signed by a duly
authorized person, stating his or
her title or authority.
PLEASE, SIGN, DATE AND PROMPTLY MAIL YOUR PROXY.
