<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
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Eastbay, Inc.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.01 per share; Options to purchase shares of Common
Stock issued pursuant to Eastbay, Inc. 1994 Stock Incentive Plan ("Employee
Options"); and Options to purchase shares of Common Stock issued pursuant to
Outside Directors Stock Option Plan ("Directors' Options")
- - ----------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
6,071,028 shares of Common Stock; 63,847 Employee Options; and 15,000 Diretors'
Options
- - -------------------------------------------------------------------------------
(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):
<TABLE>
<CAPTION>
Title of Security Amount of Shares* Consideration Per Share Aggregate Consideration Amount of Filing Fee
- - ----------------- ----------------- ----------------------- ----------------------- --------------------
<S> <C> <C> <C> <C>
Common Stock held by 3,510,978 $23.75 $ 83,385,727.50 -
Management Shareholders
Common Stock held by 2,560,050 $24.00 $ 61,441,200.00 -
Other Shareholders
Employee Options 63,847 $18.78 $ 1,199,046.66 -
exercisable at $5.22
per share
Employee Options 40,350 $ 9.00 $ 363,150.00 -
exercisable at $15.00
per share
Employee Options
exercisable at $14.25 70,550 $ 9.75 $ 687,862.50 -
per share
Directors' Options 15,000 $ 9.75 $ 146,250.00 -
---------------
Total $147,223,236.66 $29,444.66
=============== ==========
</TABLE>
- - -----------------------------
* Based on the number of shares outstanding on November 30, 1996
(4) Proposed maximum aggregate value of transaction:
$147,223,236.66
- - -------------------------------------------------------------------------------
(5) Total fee paid:
$29,444.66
- - -------------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
- - -------------------------------------------------------------------------------
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- - -------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- - -------------------------------------------------------------------------------
(3) Filing Party:
- - -------------------------------------------------------------------------------
(4) Date Filed:
- - -------------------------------------------------------------------------------
<PAGE>
EASTBAY, INC.
427 THIRD STREET
WAUSAU, WISCONSIN 54403
715-845-5538
Dear Shareholder:
You are cordially invited to attend a Special Meeting of the Shareholders of
Eastbay, Inc. ("Eastbay" or the "Company"), to be held at the Company's
principal executive offices at 427 Third Street, Wausau, Wisconsin 54403 on
January 31, 1997 at 11:00 a.m. local time. A notice of the Special Meeting, a
proxy statement and a proxy card are enclosed. All holders of the Company's
outstanding shares of Common Stock as of January 3, 1997 (the "Record Date"),
will be entitled to notice of and to vote at the Special Meeting.
At the Special Meeting, you will be asked to consider and to vote upon a
proposal to approve and adopt an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of November 30, 1996, by and among Woolworth Corporation
("Woolworth"), East Acquisition Corporation, an indirect wholly-owned
subsidiary of Woolworth ("Woolworth Sub"), and the Company, pursuant to which
Woolworth Sub will be merged with and into the Company (the "Merger"). If the
Merger Agreement is approved and the Merger becomes effective, each
outstanding share of Common Stock of the Company (except as provided in the
next two sentences), will be converted into the right to receive $24.00 in
cash, without interest. Each outstanding share of Common Stock owned by Arthur
H. Juedes, Richard C. Gering or Harry H. Colcord, the Company's Co-Chairman,
Co-Chairman and President and Chief Executive Officer, respectively (the
"Management Shares"), will be converted into the right to receive $22.00 in
cash, without interest and, if the Company achieves certain earnings after the
Merger, contingent consideration of up to an additional $1.75 in cash, without
interest. Each outstanding share held by the Company, Woolworth or Woolworth
Sub, if any, will be canceled and retired and cease to exist. Approval of the
Merger Agreement requires the affirmative vote of the holders of a majority of
all outstanding shares of the Company's Common Stock voting as a group.
Details of the proposed Merger and other important information are set forth
in the accompanying Proxy Statement which you are urged to read carefully.
Your Board of Directors has carefully reviewed and considered the terms and
conditions of the proposed Merger. In addition, the Board of Directors has
received the opinion of its financial advisor, Robert W. Baird & Co.
Incorporated, that the $24.00 per share consideration to be received pursuant
to the Merger Agreement by the holders of the Company's Common Stock, other
than the holders of the Management Shares, is fair to such shareholders from a
financial point of view.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND RECOMMENDS
THAT YOU VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
Whether or not you plan to attend the Special Meeting, please complete, sign
and date the accompanying proxy card and return it in the enclosed prepaid
envelope. If you attend the Special Meeting, you may revoke such proxy and
vote in person if you wish, even if you have previously returned your proxy
card. Your prompt cooperation will be greatly appreciated.
Very truly yours,
Harry H. Colcord, President and
Chief Executive Officer
, 1997
<PAGE>
EASTBAY, INC.
NOTICE OF SPECIAL MEETING
OF SHAREHOLDERS
ON JANUARY 31, 1997
To Shareholders of Eastbay, Inc.
A special meeting of the shareholders of Eastbay, Inc. ("Eastbay" or the
"Company"), will be held at the Company's principal executive offices at 427
Third Street, Wausau, Wisconsin on January 31, 1997 at 11:00 a.m. local time
(the "Special Meeting"), for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger (the "Merger Agreement"), dated as of November 30, 1996,
by and among Woolworth Corporation, a New York corporation ("Woolworth"),
East Acquisition Corporation, a Wisconsin corporation and an indirect
wholly-owned subsidiary of Woolworth ("Woolworth Sub"), and the Company.
Pursuant to the Merger Agreement, among other things, Woolworth Sub will be
merged with and into the Company (the "Merger") and, except as provided in
the next two sentences, each outstanding share of common stock, par value
$.01 per share, of the Company (the "Common Stock" or "Company Shares"),
will be converted into the right to receive $24.00 in cash, without
interest. Each outstanding share of Common Stock owned by Arthur H. Juedes,
Richard C. Gering or Harry H. Colcord, the Company's Co-Chairman, Co-
Chairman and President and Chief Executive Officer, respectively, will be
converted into the right to receive $22.00 in cash, without interest and,
if the Company achieves certain earnings after the Merger, contingent
consideration of up to an additional $1.75 in cash. Each outstanding share
of Common Stock held by the Company, Woolworth or Woolworth Sub, if any,
will be canceled and retired and cease to exist. A copy of the Merger
Agreement is attached as Exhibit A to the accompanying Proxy Statement.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment or adjournments thereof.
The close of business on January 3, 1997 is the record date for the Special
Meeting and only shareholders of record at that time will be entitled to
notice of and to vote at the Special Meeting or any adjournment or
adjournments thereof.
Your attention is called to the Proxy Statement accompanying this Notice for
a more complete statement regarding the matters to be acted upon at the
Special Meeting. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF
THE MERGER AGREEMENT.
By Order of the Board of Directors,
John V. Schaefer, Secretary
Wausau, Wisconsin
, 1997
YOUR VOTE IS IMPORTANT. ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE
SPECIAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE MARK, SIGN AND DATE
THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOU MAY
NEVERTHELESS VOTE IN PERSON IF YOU ATTEND THE SPECIAL MEETING.
<PAGE>
PROXY STATEMENT
EASTBAY, INC.
427 THIRD STREET
WAUSAU, WISCONSIN 54403
715-845-5538
This Proxy Statement is being furnished to the shareholders of Eastbay, Inc.
("Eastbay" or the "Company") in connection with the solicitation of proxies by
the Company's Board of Directors to be voted at the Special Meeting of
shareholders to be held on January 31, 1997 at 11:00 a.m. local time, at the
Company's principal executive offices at 427 Third Street, Wausau, Wisconsin
(the "Special Meeting") and at any adjournments or postponements thereof. The
enclosed proxy card, the accompanying Notice of Special Meeting of
Shareholders and this Proxy Statement are being first mailed to shareholders
of the Company on or about . At the Special Meeting, the
shareholders of the Company will consider and vote upon a proposal to approve
and adopt an Agreement and Plan of Merger dated as of November 30, 1996 (the
"Merger Agreement") by and among Woolworth Corporation, a New York corporation
("Woolworth"), East Acquisition Corporation, a Wisconsin corporation and an
indirect wholly-owned subsidiary of Woolworth ("Woolworth Sub"), and the
Company.
If the Merger is consummated, Woolworth Sub will be merged into the Company,
with the Company being the surviving corporation (the "Surviving
Corporation"). Pursuant to the Merger Agreement, except as provided in the
next two sentences, each outstanding share of the Company's $.01 par value
common stock (the "Common Stock" or "Company Shares"), will be converted into
the right to receive $24.00 per share in cash, without interest. Each
outstanding share of Common Stock (the "Management Shares") owned by Arthur H.
Juedes, Richard C. Gering or Harry H. Colcord, the Company's Co-Chairman, Co-
Chairman and President and Chief Executive Officer, respectively (the
"Management Shareholders"), will be converted into the right to receive $22.00
in cash, without interest and, if the Company achieves certain earnings after
the Merger as defined in certain agreements entered into between Woolworth and
each of the Management Shareholders, contingent consideration of up to an
additional $1.75 in cash, without interest. Each outstanding share of Common
Stock held by the Company, Woolworth or Woolworth Sub, if any, will be
canceled and retired and cease to exist. All outstanding shares of Woolworth
Sub common stock will be converted into an aggregate of 1,000 shares of the
Company's Common Stock and the Company will become an indirect, wholly-owned
subsidiary of Woolworth.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY
General.................................................................... 5
The Special Meeting...................................................... 5
Purpose of The Special Meeting; Quorum; Vote Required.................... 5
The Parties to the Merger................................................ 5
The Merger............................................................... 6
Certain Effects of the Merger............................................ 6
Procedures for Exchange of Certificates.................................. 6
Opinion of the Company's Financial Advisor............................... 6
Recommendation of Board of Directors..................................... 7
Interests of Certain Persons in the Merger............................... 7
Accounting Treatment..................................................... 7
Federal Income Tax Consequences.......................................... 7
The Merger Agreement....................................................... 7
Effective Time of the Merger............................................. 7
Conditions to Consummation of the Merger................................. 7
Termination of the Merger Agreement...................................... 8
Amendments to the Merger Agreement....................................... 8
Dissenters' Rights....................................................... 8
Comparative Market Price Data............................................ 9
Selected Financial Data of the Company..................................... 10
INTRODUCTION............................................................... 11
Proposal to be Considered at the Special Meeting......................... 11
Voting Rights; Vote Required for Approval................................ 11
Proxies.................................................................. 11
THE MERGER................................................................. 12
Effects of the Merger.................................................... 12
Effective Time........................................................... 13
Procedures for Exchange of Certificates.................................. 13
Background of the Merger................................................. 14
The Company's Reasons for the Merger; Recommendation of the Company's
Board of Directors...................................................... 15
Opinion of Financial Advisor to Eastbay.................................. 16
Interests of Certain Persons in the Merger............................... 19
Stock Options.......................................................... 19
Forgiveness of Indebtedness............................................ 19
Employment Agreements.................................................. 20
Company Bonus Plan..................................................... 20
Indemnification and Insurance.......................................... 20
Accounting Treatment..................................................... 21
Certain Federal Income Tax Consequences of the Merger to the Company's
Shareholders............................................................ 21
Amount of Funds.......................................................... 22
Dissenters' Rights of Appraisal.......................................... 22
Regulatory Approvals..................................................... 22
THE MERGER AGREEMENT....................................................... 23
General.................................................................. 23
Effective Time........................................................... 23
Consideration to be Received by Shareholders of the Company.............. 23
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Representations and Warranties........................................... 24
Covenants................................................................ 24
Conditions to Consummation of the Merger................................. 26
Termination.............................................................. 26
Termination Fee.......................................................... 27
Amendments and Waivers................................................... 27
Shareholder Agreements................................................... 27
Appreciation Right..................................................... 28
Contingent Consideration............................................... 28
Covenants of the Management Shareholders............................... 29
Expenses................................................................. 29
DISSENTERS' RIGHTS......................................................... 29
BUSINESS................................................................... 29
General.................................................................. 29
History and Philosophy of Eastbay........................................ 30
Company Strategy......................................................... 30
The Eastbay Catalogs..................................................... 31
Major Sports Season Catalogs........................................... 31
Secondary Catalogs..................................................... 31
Final Score(TM) Sale Catalogs.......................................... 32
Miscellaneous Catalogs................................................. 32
The Eastbay Customer..................................................... 32
Mailing List Development............................................... 32
Customer Asset Management.............................................. 32
Products and Merchandising............................................... 32
Products............................................................... 32
Product Acquisition and Planning....................................... 33
Direct Marketing Operations.............................................. 34
Teleservices and Order Entry........................................... 34
Catalog Publication.................................................... 34
Distribution and Fulfillment........................................... 34
Customer Service and Returns........................................... 34
Information Systems and Technology..................................... 34
Competition.............................................................. 35
Employees................................................................ 35
Trademarks and Tradenames................................................ 35
Properties............................................................... 35
Legal Proceedings........................................................ 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................ 37
Overview................................................................. 37
Results of Operations.................................................... 37
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995.................................................... 38
Fiscal 1996 Compared to Fiscal 1995.................................... 38
Fiscal 1995 Compared to Fiscal 1994.................................... 39
Liquidity and Capital Resources........................................ 40
Seasonality............................................................ 40
Forward Looking Statements............................................. 40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 41
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
DIRECTORS AND EXECUTIVE OFFICERS.......................................... 42
Directors............................................................... 42
Executive Officers...................................................... 42
OTHER MATTERS............................................................. 42
SHAREHOLDER PROPOSALS..................................................... 42
EXPENSES OF SOLICITATION.................................................. 43
INDEPENDENT PUBLIC ACCOUNTANTS............................................ 43
AVAILABLE INFORMATION..................................................... 43
INDEX TO FINANCIAL STATEMENTS............................................. F-1
EXHIBITS
Exhibit A--Agreement and Plan of Merger dated November 30, 1996 among
Woolworth Corporation, East Acquisition Corporation and Eastbay,
Inc.
Exhibit B--Agreement With Shareholder dated November 30, 1996 between
Woolworth Corporation and Arthur H. Juedes
Exhibit C--Agreement With Shareholder dated November 30, 1996 between
Woolworth Corporation and Richard C. Gering
Exhibit D--Agreement With Shareholder dated November 30, 1996 between
Woolworth Corporation and Harry H. Colcord
Exhibit E--Opinion of Robert W. Baird & Co. Incorporated
</TABLE>
4
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement. The summary is not intended to be complete and is qualified in
its entirety by reference to the more detailed information contained in this
Proxy Statement and the exhibits hereto. Shareholders are urged to review the
entire Proxy Statement carefully.
GENERAL
The Special Meeting
The Special Meeting of shareholders of Eastbay, Inc. ("Eastbay" or the
"Company") will be held on January 31, 1997 at 11:00 a.m., local time, at the
Company's principal executive offices at 427 Third Street, Wausau, Wisconsin
(the "Special Meeting"). Only holders of record of shares of the $.01 par value
common stock of the Company (the "Common Stock" or "Company Shares") at the
close of business on January 3, 1997 are entitled to notice of and to vote at
the Special Meeting. On that date, there were Company Shares
outstanding, with each share entitled to cast one vote at the Special Meeting.
See "INTRODUCTION--Voting Rights; Vote Required for Approval."
Purpose of the Special Meeting; Quorum; Vote Required
At the Special Meeting, shareholders will consider and vote upon a proposal
to approve and adopt the Agreement and Plan of Merger, a copy of which is
attached as Exhibit A to this Proxy Statement (the "Merger Agreement"). The
Merger Agreement provides for the merger of East Acquisition Corporation into
the Company (the "Merger"), such that the Company, as the surviving corporation
(the "Surviving Corporation"), would become an indirect, wholly-owned
subsidiary of Woolworth Corporation. The presence at the Special Meeting, in
person or by proxy, of the holders of a majority of the outstanding Company
Shares is necessary to constitute a quorum at the Special Meeting. Under
Wisconsin law, approval of the Merger Agreement requires the affirmative vote
of the holders of a majority of the outstanding Company Shares. Pursuant to
certain Agreements with Shareholder dated November 30, 1996 between Woolworth
and each of the Management Shareholders, copies of which are attached as
Exhibits B, C and D hereto (the "Shareholder Agreements"), the Management
Shareholders, who collectively own 3,510,978 shares of Common Stock,
representing approximately 58% of the Company's outstanding Common Stock, have
agreed to vote their shares in favor of approval and adoption of the Merger
Agreement unless the Company's Board of Directors determines, after
consultation with counsel, that recommending the Merger and adoption of the
Merger Agreement to the Company's shareholders is inconsistent with the Board
of Directors' fiduciary duties to the Company's shareholders. Accordingly, if
the Management Shareholders vote their shares in favor of the Merger Agreement,
the Merger will be approved. See "INTRODUCTION--Voting Rights; Vote Required
for Approval," and "THE MERGER AGREEMENT--Conditions to Consummation of the
Merger."
The Parties to the Merger
Woolworth Corporation. Woolworth Corporation ("Woolworth") and its retail
divisions operate a multinational retailing business selling a broad range of
merchandise through approximately 8,000 stores in the United States, Canada,
Mexico, Germany, Austria, England, Belgium, Luxembourg, the Netherlands,
France, Spain, Italy, Australia and Hong Kong. The principal executive offices
of Woolworth are located at 233 Broadway, New York, New York 10279 and the
telephone number is 212-553-2000.
Eastbay, Inc. Eastbay is a leading direct marketer of athletic footwear,
apparel, equipment and licensed and private label products. The principal
executive offices of the Company are located at 427 Third Street, Wausau,
Wisconsin 54403 and the telephone number is 715-845-5538.
East Acquisition Corporation. East Acquisition Corporation ("Woolworth Sub")
is an indirect, wholly-owned subsidiary of Woolworth, formed solely for the
purpose of the Merger. Woolworth Sub has not engaged in any business activity
unrelated to the Merger. The principal executive offices of Woolworth Sub are
located at 233 Broadway, New York, New York 10279 and the telephone number is
212-553-2000.
5
<PAGE>
The Merger
Pursuant to the Merger Agreement, Woolworth Sub will merge into the Company,
with the Company being the Surviving Corporation. Except as provided in the
next two sentences, each outstanding share of the Company's Common Stock will
be converted into the right to receive from Woolworth $24.00 in cash, without
interest. Each outstanding share of Common Stock (the "Management Shares")
owned by Arthur H. Juedes, Richard C. Gering or Harry H. Colcord, the Company's
Co-Chairman, Co-Chairman and President and Chief Executive Officer,
respectively (the "Management Shareholders"), will be converted into the right
to receive $22.00 in cash, without interest and, if the Company achieves
certain earnings after the Merger as defined in the Shareholder Agreements,
contingent consideration of up to an additional $1.75 in cash, without
interest. Each outstanding Company Share held by Woolworth, Woolworth Sub or by
the Company as treasury shares will be canceled and retired without
consideration. The consideration to be received by the Company's shareholders
pursuant to the Merger Agreement is sometimes referred to herein as the "Merger
Consideration." Woolworth intends to fund payment of the Merger Consideration
from current and projected cashflows, as well as available credit lines to the
extent needed. All outstanding shares of Woolworth Sub's $.01 par value common
stock (the "Woolworth Sub Shares") will be converted into 1,000 shares of
common stock of the Surviving Corporation. At the effective time of the Merger
(the "Effective Time"), Woolworth will indirectly own 100% of the outstanding
Company Shares. See "THE MERGER AGREEMENT."
Certain Effects of the Merger
As a result of the Merger, Woolworth will indirectly acquire the entire
equity interest in the Company. Therefore, following the Merger the present
holders of the Company Shares will no longer have an equity interest in the
Company and will no longer share in future earnings and growth of the Company,
the risks associated with achieving such earnings and growth, or the potential
to realize greater value for their Company Shares through divestitures,
strategic acquisitions or other corporate opportunities that may be pursued by
the Company in the future. Instead, each such holder of Company Shares
immediately prior to the Effective Time will have the right to receive the
Merger Consideration to which such holder is entitled under the Merger
Agreement. The Company Shares will no longer be listed or traded on the Nasdaq
National Market and the registration of the Company Shares under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") will be terminated. See
"THE MERGER--Effects of the Merger."
Procedures for Exchange of Certificates
Promptly after the Effective Time, a letter of transmittal and instructions
for surrendering stock certificates evidencing shares of the Company's Common
Stock will be mailed to each holder of the Company's Common Stock for use in
exchanging such holder's stock certificates for the Merger Consideration to
which such holder is entitled under the Merger Agreement. SHAREHOLDERS SHOULD
NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS. See "THE MERGER--
Procedures for Exchange of Certificates."
Opinion of the Company's Financial Advisor
On November 30, 1996, Robert W. Baird & Co. Incorporated ("Baird") rendered
its opinion to the effect that, as of such date, the $24.00 per share was fair,
from a financial point of view, to the holders of Company Shares (other than
the Management Shareholders, Woolworth and its affiliates). The full text of
Baird's written opinion, dated November 30, 1996, which sets forth the
assumptions made, matters considered, the scope and limitations of the review
undertaken and procedures followed by Baird in rendering its opinion, is
attached hereto as Exhibit E. HOLDERS OF COMPANY SHARES ARE URGED TO AND SHOULD
READ SUCH OPINION CAREFULLY IN ITS ENTIRETY. See "THE MERGER--Opinion of
Financial Advisor to Eastbay."
6
<PAGE>
Recommendation of Board of Directors
The Board of Directors has determined that the Merger and the Merger
Consideration are fair to, and in the best interests of, the Company's
shareholders. The Board of Directors has unanimously approved the Merger
Agreement and recommends that shareholders vote FOR the proposal to approve and
adopt the Merger Agreement. See "THE MERGER--The Company's Reasons for the
Merger; Recommendation of the Company's Board of Directors."
Interests of Certain Persons in the Merger
In considering the recommendation of the Board of Directors of the Company
with respect to the Merger Agreement and the transactions contemplated thereby,
shareholders should be aware that certain members of management of the Company
and the Board of Directors of the Company have certain interests in the Merger
that are in addition to the interests of shareholders of the Company generally.
See "THE MERGER--Interests of Certain Persons in the Merger."
Accounting Treatment
The Merger will be accounted for by Woolworth under the purchase method of
accounting. See "THE MERGER--Accounting Treatment."
Federal Income Tax Consequences
The receipt of the Merger Consideration for Company Shares pursuant to the
Merger will be a taxable transaction for federal income tax purposes under the
Internal Revenue Code of 1986, as amended, and also may be a taxable
transaction under applicable state, local, foreign and other tax laws. For
federal income tax purposes, a shareholder of the Company, other than a
Management Shareholder, will realize taxable gain or loss as a result of the
Merger equal to the difference, if any, between the amount of cash received by
the shareholder in the Merger (i.e., $24.00 per share) and the shareholder's
adjusted tax basis in such stock. The Management Shareholders will recognize
gain or loss upon the surrender of the Management Shares and receipt of the
Merger Consideration. To the extent that the receipt of the Merger
Consideration is treated as an open transaction under federal tax law, the
amount of the gain or loss recognized on receipt of the initial Merger
Consideration will be equal to the difference between (a) the amount of cash
received and (b) such holder's aggregate adjusted tax basis in the Company
Shares surrendered. The gain or loss recognized on the receipt of the remaining
Merger Consideration, if any, should be fully taxable, either as additional
gain or a smaller loss or as imputed interest. See "THE MERGER--Certain Federal
Income Tax Consequences of the Merger to the Company's Shareholders."
THE MERGER AGREEMENT
Effective Time of the Merger
The Merger will become effective (the "Effective Time") on the later of (a)
the date the Department of Financial Institutions of the State of Wisconsin
receives for filing Articles of Merger or (b) the effective date and time
specified in such Articles of Merger. The filing will occur after all
conditions to the Merger contained in the Merger Agreement have been satisfied
or waived. The Company, Woolworth and Woolworth Sub anticipate that the Merger
will be consummated promptly following the Special Meeting. See "THE MERGER
AGREEMENT--General" and "--Effective Time."
Conditions to Consummation of the Merger
The respective obligations of the Company, Woolworth and Woolworth Sub to
effect the Merger are subject to the satisfaction at or prior to the Effective
Time of various closing conditions. Such conditions include, among others, the
approval and adoption of the Merger Agreement by the holders of a majority of
the outstanding Company Shares, the receipt of necessary regulatory approvals
and the correctness in all material respects of the representations and
warranties of the parties to the Merger Agreement. See "THE MERGER AGREEMENT--
Conditions to Consummation of the Merger" and "--Termination."
7
<PAGE>
Termination of the Merger Agreement
The Merger Agreement may, under specified circumstances, be terminated and
the Merger abandoned at any time prior to the Effective Time, notwithstanding
approval of the Merger Agreement by the shareholders of the Company. The Merger
Agreement requires the Company to pay Woolworth a termination fee (the
"Termination Fee") of $4 million (approximately $0.66 per Company Share) if
Eastbay terminates the Merger Agreement (a) due to the Merger not being
consummated on or before March 31, 1997; (b) due to Eastbay's shareholders
failing to approve the Merger Agreement by the requisite vote required by law;
or (c) because the Board of Directors of the Company determines, in exercise of
its judgment as to its fiduciary duties to the Company's shareholders after
consultation with counsel, that such termination is required by reason of any
Takeover Proposal (as defined in the Merger Agreement), in each such case if
such termination occurs after a bona fide "Takeover Proposal" has been received
by Eastbay and, within one year after the date of such termination, Eastbay
enters into an agreement for a "Business Combination" (as defined in the Merger
Agreement) which is subsequently consummated. The Termination Fee in any of
these circumstances must be paid at the time of consummation of the Business
Combination. In addition, if either party terminates the Merger Agreement due
to the shareholders of the Company failing to approve and adopt the Merger
Agreement by the requisite vote required by law at a time when no bona fide
Takeover Proposal has been received by the Company, the Company is required to
pay Woolworth the Termination Fee promptly upon such termination.
Notwithstanding the foregoing, the Company is not required to pay Woolworth the
Termination Fee in any circumstance if (a) Woolworth is in material breach of
its obligations under the Merger Agreement at the time of termination; (b) the
waiting period applicable to the Merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act") shall not have terminated or expired
at the time of termination of the Merger Agreement if, at the time of
termination of the Merger Agreement, 60 days have passed since the HSR Act
filing; or (c) the conditions to the Company's obligation to effect the Merger
shall not have been satisfied prior to such termination. See "THE MERGER
AGREEMENT--Termination."
If the Merger Agreement is terminated by the Company, certain appreciation
rights granted by the Management Shareholders to Woolworth pursuant to the
Shareholder Agreements become operative. Pursuant to this appreciation right,
each Management Shareholder has agreed that, except in certain circumstances,
if at any time prior to the first anniversary of the date the Merger Agreement
is terminated by the Company, (a) any third party makes a bona fide Takeover
Proposal and subsequently (b) the Management Shareholder, by sale, transfer,
assignment or any other means, receives cash or property for any of the
Management Shares in excess of $23.75 per share, the Management Shareholder
will promptly pay (including, in the case of deferred consideration, when such
consideration is received) the amount of such excess to Woolworth; provided
that if a Takeover Proposal which provides for the payment of a higher price
per share to the public than that set forth in the Merger Agreement (i.e.,
$24.00 per share) is received by the Company within 37 days of the date of the
Merger Agreement (i.e., by January 6, 1997), this payment is subject to a
maximum of $1.139284 per share (for an aggregate maximum payment among all of
the Management Shareholders of approximately $4 million). See "THE MERGER
AGREEMENT--Shareholder Agreements."
Amendments to the Merger Agreement
The Merger Agreement may not be amended except by action of the Company,
Woolworth and Woolworth Sub set forth in an instrument in writing signed on
behalf of each of the parties. After approval of the Merger Agreement by the
shareholders of the Company and without the further approval of such
shareholders, no amendment may be made which decreases the Merger Consideration
or otherwise materially affects the rights of the Company's shareholders. See
"THE MERGER AGREEMENT--Amendments and Waivers."
Dissenters' Rights
Under the Wisconsin Business Corporation Law ("WBCL"), holders of a class of
stock traded on the Nasdaq National Market (such as the Company Shares) do not
have dissenters' rights except in certain circumstances, none of which are
present with respect to the Merger. See "DISSENTERS' RIGHTS."
8
<PAGE>
Comparative Market Price Data
Effective September 29, 1995, the Company's Common Stock was listed for
trading on the Nasdaq National Market under the symbol "EBAY." As of December
6, 1996, there were approximately 244 shareholders of record. The following
table sets forth the high and low sales price per share of the Company's Common
Stock on the Nasdaq National Market for the periods indicated. The Company has
not paid any dividends on its Common Stock since its initial public offering.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended June 30, 1996
Second Quarter........................................... $24.75 $19.00
Third Quarter............................................ 19.25 14.75
Fourth Quarter........................................... 18.50 14.75
Fiscal Year Ended June 30, 1997
First Quarter............................................ $18.25 $14.25
Second Quarter (through December 6, 1996)................ $24.50 $16.00
</TABLE>
On November 27, 1996, the last full day of trading prior to the announcement
by the Company and Woolworth of the execution of the Merger Agreement, the
reported high and low sales prices per share of Common Stock were $19.00 and
$18.00, respectively. On , the last full day of trading prior to
the printing of this Proxy Statement, such reported high and low sales prices
per share were $ and $ , respectively.
9
<PAGE>
SELECTED FINANCIAL DATA OF THE COMPANY
The following selected financial data for the five years ended June 30, 1996
are derived from the financial statements of Eastbay which have been audited by
Wipfli Ullrich Bertelson, independent auditors. The selected financial data for
the three-month periods ended September 30, 1995 and 1996 are derived from
unaudited financial statements of Eastbay and include all adjustments,
consisting of only normal recurring accruals, that Eastbay considers necessary
for a fair presentation of the financial position and results of operations for
those periods.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE
THREE MONTHS
ENDED FOR THE
SEPTEMBER 30, YEARS ENDED JUNE 30,
--------------- --------------------------------------------
1996 1995 1996 1995 1994 1993 1992
------- ------- -------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales............... $30,816 $28,539 $117,639 $98,770 $76,908 $53,028 $40,416
Cost of Sales........... 15,105 15,762 62,520 54,464 43,191 30,766 25,961
------- ------- -------- ------- ------- ------- -------
Gross Profit........... 15,711 12,777 55,119 44,306 33,717 22,262 14,455
Selling, general and
administrative expense. 12,328 10,132 46,815 36,858 28,472 18,036 12,202
------- ------- -------- ------- ------- ------- -------
Income from operations.. 3,383 2,645 8,304 7,448 5,245 4,226 2,253
Interest income
(expense).............. 87 (316) (343) (843) (342) (121) (193)
Other income (expense).. 2 -- 240 12 (3,423) 1 4
------- ------- -------- ------- ------- ------- -------
Income before taxes.... $ 3,472 $ 2,329 $ 8,201 $ 6,617 $ 1,480 $ 4,106 $ 2,064
Provision for income
taxes or pro forma
adjustment for income
taxes(1)............... 1,372 920 2,750 2,614 585 1,622 315
------- ------- -------- ------- ------- ------- -------
Pro forma net income.... $ 2,100 $ 1,409 $ 5,451 $ 4,003 $ 895 $ 2,484 $ 1,249
======= ======= ======== ======= ======= ======= =======
Pro forma net income per
share(2)............... $ 0.35 $ 0.31 $ 0.96 $ 0.88
======= ======= ======== =======
Pro forma weighted
average shares
outstanding(2)......... 6,071 4,537 5,673 4,537
======= ======= ======== =======
Supplemental pro forma
net income per
share(3)............... $ 0.35 $ 0.26 $ 0.93 $ 0.74
======= ======= ======== =======
Supplemental pro forma
weighted average shares
outstanding(3)......... 6,071 6,071 6,071 6,071
======= ======= ======== =======
SELECTED OPERATING DATA:
Number of catalogs
mailed................. 15,938 13,065 45,614 37,766 27,124 16,101 13,584
Active accounts(4)...... 5,475 4,485 5,372 4,192 2,626 1,878 1,318
BALANCE SHEET DATA:
Working capital......... $36,787 $11,707 $ 34,815 $24,211 $13,821 $ 6,356 $ 4,605
Total assets............ 52,943 40,364 48,729 40,072 26,371 16,767 11,909
Short-term debt......... -- 6,559 -- 1,630 200 1,546 2,294
Long-term debt excluding
current maturities..... -- 12,259 -- 12,309 7,709 -- 174
Shareholders' equity.... 39,953 2,282 37,853 14,803 9,492 8,868 6,443
</TABLE>
- - --------
(1) Pro forma adjustment for income taxes reflects income taxes as if the
Company had been a C corporation rather than an S corporation for all
periods prior to October 3, 1995, the date the Company's S corporation
status terminated, assuming a combined federal and state tax rate of 39.5%.
(2) Pro forma weighted average shares have been adjusted to include 766,666
shares deemed to be issued at the initial offering price of $15 per share
to fund an $11,500,000 distribution of previously taxed S corporation
earnings and profits to the Company's shareholders prior to the offering
paid from offering proceeds, as if such distribution was made at the
beginning of fiscal 1995.
(3) Supplemental pro forma net income per share is based upon pro forma net
income adjusted for a pro forma reduction in interest expense, less the
related income tax effect, associated with the public offering proceeds
used to retire indebtedness, divided by the number of shares outstanding
after the offering.
(4) Active accounts are those customers who have made at least one purchase or
requested a catalog from the Company in the preceding 36 months, determined
from the end of the applicable fiscal year.
10
<PAGE>
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Eastbay, Inc. ("Eastbay" or the
"Company") to be voted at a Special Meeting of shareholders to be held on
January 31, 1997 (the "Special Meeting") and any adjournments or postponements
thereof. Shares represented by properly executed proxies received by the
Company will be voted at the Special Meeting or any adjournment thereof in
accordance with the terms of such proxies, unless revoked. Proxies may be
revoked at any time prior to the voting thereof either by written notice filed
with the Secretary or Acting Secretary of the meeting or by oral notice to the
presiding officers during the meeting.
PROPOSAL TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the shareholders of the Company will consider and
vote upon a proposal to approve and adopt an Agreement and Plan of Merger,
dated as of November 30, 1996 (the "Merger Agreement"), between Woolworth
Corporation ("Woolworth"), East Acquisition Corporation, a newly-formed
Wisconsin corporation which is an indirect wholly-owned subsidiary of
Woolworth ("Woolworth Sub"), and the Company.
The Merger Agreement provides for the merger (the "Merger") of Woolworth Sub
into the Company, with the Company being the surviving corporation (the
"Surviving Corporation"). Pursuant to the Merger, (a) except as provided in
(b) and (c), each outstanding share of the common stock, $.01 par value, of
the Company (the "Common Stock" or "Company Shares"), will be converted into
the right to receive $24.00 per share in cash, without interest; (b) each
outstanding share of Common Stock (the "Management Shares") held by Arthur H.
Juedes, Richard C. Gering or Harry H. Colcord, the Company's Co-Chairman, Co-
Chairman and President and Chief Executive Officer, respectively (the
"Management Shareholders"), will be converted into the right to receive $22.00
in cash, without interest and, if the Company achieves certain earnings after
the Merger as defined in the Shareholder Agreements, contingent consideration
of up to an additional $1.75 in cash, without interest; (c) each outstanding
Company Share held by Woolworth, Woolworth Sub or by the Company as treasury
shares will be canceled and retired without consideration; and (d) all
outstanding shares of Woolworth Sub common stock, $.01 par value per share
(the "Woolworth Sub Shares"), will be converted into 1,000 shares of Common
Stock of the Surviving Corporation. The consideration to be received by the
Company's shareholders pursuant to the Merger is sometimes referred to herein
as the "Merger Consideration." A copy of the Merger Agreement is attached as
Exhibit A to this Proxy Statement.
VOTING RIGHTS; VOTE REQUIRED FOR APPROVAL
The record date for the Special Meeting is the close of business on January
3, 1997. At that date, there were Company Shares outstanding. Each
Company Share entitles its holder to one vote concerning all matters properly
coming before the Special Meeting. Any shareholder entitled to vote may vote
either in person or by duly authorized proxy. A majority of the shares
entitled to vote, represented in person or by proxy, will constitute a quorum.
Abstentions and broker non-votes (i.e., shares held by brokers in street name,
voting on certain matters due to discretionary authority or instructions from
the beneficial owner but not voting on other matters due to lack of authority
to vote on such matters without instructions from the beneficial owner) are
counted for the purpose of establishing a quorum. Under the Wisconsin Business
Corporation Law ("WBCL"), for the Merger to be approved by shareholders, the
Merger Agreement must be approved and adopted by the holders of a majority of
the outstanding Company Shares. Accordingly, abstentions and broker non-votes
have the same effect as a vote "AGAINST" approval of the Merger.
PROXIES
All Company 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. IF NO INSTRUCTIONS ARE INDICATED,
SUCH PROXIES WILL BE VOTED FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER
AGREEMENT AND, IN THE DISCRETION OF THE PERSONS NAMED IN THE PROXY, ON SUCH
OTHER MATTERS AS MAY PROPERLY BE PRESENTED AT THE SPECIAL MEETING.
11
<PAGE>
A shareholder may revoke his, her or its proxy at any time prior to its use
by delivering to the Secretary of the Company a signed notice of revocation or
a later dated and signed proxy or by attending the Special Meeting and voting
in person. Attendance at the Special Meeting will not in itself constitute the
revocation of a proxy.
Expenses in connection with the solicitation of proxies will be paid by the
Company. Upon request, the Company will reimburse brokers, dealers and banks
or their nominees, for reasonable expenses incurred in forwarding copies of
the proxy material to the beneficial owners of shares which such persons hold
of record. Solicitation of proxies will be made principally by mail. Proxies
may also be solicited in person, or by telephone or facsimile, by officers and
regular employees of the Company who will receive no additional compensation
in connection with the solicitation.
THE MERGER
The following information describes the material aspects of the Merger. This
description does not purport to be complete and is qualified in its entirety
by reference to the exhibits hereto, including the Merger Agreement, which is
attached to this Proxy Statement as Exhibit A and is incorporated herein by
reference. All shareholders are urged to read Exhibit A in its entirety. See
also "THE MERGER AGREEMENT."
The Board of Directors of the Company has unanimously approved the Merger
Agreement and recommended approval and adoption of the Merger Agreement by the
shareholders and has determined that the transactions contemplated by the
Merger Agreement are fair to, and in the best interests of, the Company's
shareholders. See "--The Company's Reasons for the Merger; Recommendation of
the Company's Board of Directors."
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS A VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
EFFECTS OF THE MERGER
Upon consummation of the Merger, (a) Woolworth Sub will merge with and into
the Company, with the Company being the Surviving Corporation; (b) the Company
will become an indirect, wholly-owned subsidiary of Woolworth; (c) each
Company Share outstanding immediately prior to the Effective Time, other than
Management Shares, will be converted, in a taxable transaction, into the right
to receive $24.00 in cash, without interest; (d) each Management Share
outstanding immediately prior to the Effective Time will be converted, in a
taxable transaction, into the right to receive $22.00 in cash, without
interest and, if the Company achieves certain earnings after the Merger as
defined in the Shareholder Agreements, contingent consideration of up to an
additional $1.75 in cash, without interest; (e) each Company Share outstanding
immediately prior to the Effective Time and held by the Company as treasury
shares or by Woolworth or Woolworth Sub will be canceled and retired without
consideration; and (f) the Woolworth Sub Shares will be converted into 1,000
shares of Common Stock of the Surviving Corporation.
As of the record date, there were Company Shares outstanding and
Company Shares reserved for future issuance pursuant to currently
outstanding stock options. Assuming that no additional Company Shares or stock
options are outstanding at the Effective Time, then, upon consummation of the
Merger, holders of Company Shares and stock options would be entitled to
receive, in the aggregate, approximately $ million. In addition, if the
Company achieves certain earnings after the Merger, as defined in the
Shareholder Agreements, the Management Shareholders would have the right to
receive contingent consideration of up to an additional $6,144,211.50 ($1.75
per share) after the Company's twelve month periods ended June 30, 1998 and
1999.
After the Effective Time, each certificate previously representing Company
Shares will represent only the right to receive the Merger Consideration to
which such certificate is entitled pursuant to the Merger Agreement.
Certificates previously representing Company Shares may be exchanged for the
Merger Consideration as provided below. Each Company Share held by Woolworth,
Woolworth Sub or the Company will be canceled and retired and no payment will
be made with respect thereto.
12
<PAGE>
For a description of the procedures for exchanging certificates representing
Company Shares, see "--Procedures for Exchange of Certificates."
EFFECTIVE TIME
If the Merger Agreement is adopted by the requisite vote of the Company's
shareholders and the other conditions to the Merger are satisfied (or waived
to the extent permitted), the Merger will be consummated and effective at the
later of (a) the date the Department of Financial Institutions for the State
of Wisconsin receives for filing Articles of Merger or (b) the effective date
and time specified in such Articles of Merger. The date and time the Merger is
effective is referred to herein as the "Effective Time."
The Merger Agreement provides that the parties will cause the Effective Time
to occur as promptly as practicable after the adoption of the Merger Agreement
by the shareholders of the Company and the satisfaction (or waiver, if
permissible) of the other conditions set forth in the Merger Agreement. In
certain circumstances, Woolworth or the Company may terminate the Merger
Agreement prior to the Effective Time, whether before or after approval and
adoption of the Merger Agreement by the Company's shareholders. See "THE
MERGER AGREEMENT--Termination."
PROCEDURES FOR EXCHANGE OF CERTIFICATES
At or prior to the Effective Time, Woolworth will deposit, or will cause to
be deposited, with a bank or trust company to be designated by Woolworth (the
"Exchange Agent") approximately $ million (the "Exchange Fund"), for the
benefit of the holders of Company Shares for exchange in accordance with the
terms of the Merger Agreement. Pursuant to irrevocable instructions, the
Exchange Agent will deliver out of the Exchange Fund the portion of the Merger
Consideration associated with the outstanding Company Shares pursuant to the
Merger Agreement.
At or after the Effective Time there will be no transfers of Company Shares
on the stock transfer books of the Company.
Promptly after the Effective Time, Woolworth will instruct the Exchange
Agent to mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented outstanding Company Shares
(the "Certificates") (a) a letter of transmittal in customary form (which will
specify that delivery will be effected, and risk of loss and title to the
Certificates will pass, only upon proper delivery of the Certificates to the
Exchange Agent), and (b) instructions for use in effecting the surrender of
the Certificates in exchange for the Merger Consideration. Upon surrender of a
Certificate for cancellation to the Exchange Agent together with a letter of
transmittal, duly executed, and any other documents as may be required
pursuant to such instructions, the holder of a Certificate will be entitled to
receive in exchange therefor the Merger Consideration to which such
Certificate is entitled. The Certificate so surrendered will forthwith be
canceled. In the event of a transfer of ownership of Company Shares which is
not registered in the stock transfer records of the Company, it shall be a
condition to such exchange that a Certificate representing the proper number
of Company Shares be presented by a transferee to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
evidence that any applicable stock transfer taxes have been paid. Until
surrendered, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon surrender the Merger
Consideration to which such certificate is entitled.
SHAREHOLDERS OF THE COMPANY SHOULD NOT FORWARD THEIR STOCK CERTIFICATES TO
THE EXCHANGE AGENT WITHOUT A LETTER OF TRANSMITTAL AND SHOULD NOT RETURN THEIR
STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
Any portion of the Exchange Fund remaining undistributed 180 days after the
Effective Time will be returned to Woolworth, and any holders of theretofore
unsurrendered Company Shares will thereafter be able to look only to Woolworth
for any portion of the Exchange Fund to which they are entitled. Woolworth
will not be liable to any holder of Company Shares for Merger Consideration
delivered to a public official pursuant to any abandoned property, escheat or
similar law.
13
<PAGE>
BACKGROUND OF THE MERGER
From time to time in the past, officers and employees of the Company and
Woolworth have had discussions and meetings regarding potential commercial
relationships and business matters. On July 25, 1996, Woolworth informed
Eastbay that it was interested in pursuing a possible acquisition of Eastbay
and desired to begin discussions in connection therewith. Eastbay's Board of
Directors, at a meeting on July 30, 1996, authorized Mr. Colcord to negotiate
with Woolworth with the assistance, to the extent he deemed appropriate, of
Baird and Eastbay's legal counsel. Although at the time Eastbay was not
considering a sale, Eastbay's Board of Directors felt that it was in Eastbay's
best interests to entertain discussions with Woolworth.
On August 19, 1996, Eastbay's Board of Directors decided to retain Robert W.
Baird & Co. Incorporated to assist the Board of Directors in evaluating any
offer made by Woolworth and, if an offer was made, to assist in the
negotiations with Woolworth. On August 20, 1996, Eastbay and Woolworth
executed a confidentiality agreement agreeing to maintain the secrecy of each
other's confidential information. On August 28, 1996, representatives of
Woolworth began a due diligence investigation of Eastbay to determine whether
Woolworth was interested in pursuing an acquisition or other business
transaction with Eastbay.
During the period from August 20, 1996 to early November 1996, Mr. Colcord
engaged in numerous negotiations and discussions with representatives of
Woolworth regarding the business terms of a proposed acquisition including
whether the form of consideration would be Woolworth stock or cash. Mr.
Colcord was in frequent contact with the other directors of the Company
regarding the negotiations and also consulted with Eastbay's financial and
legal advisers. On November 13, 1996, Woolworth's legal counsel delivered a
proposed draft of the Merger Agreement and Shareholder Agreements to Eastbay
and its financial and legal advisors.
On November 19, 1996, Messrs. Colcord, Gering and Juedes and representatives
of Baird and Eastbay's legal counsel met with representatives of Woolworth and
a representative of Woolworth's outside corporate counsel. At this meeting,
the parties reviewed and negotiated the terms of the Merger Agreement and
related documentation. These discussions and negotiations continued on a
frequent basis from November 19, 1996 to November 30, 1996. The directors of
the Company were provided with several drafts of these documents during this
period to solicit their review and comment and to assist in the negotiations.
Eastbay's Board of Directors met on November 19, 1996 to discuss the terms
of the current drafts of the proposed agreements and the results of the
meeting with representatives of Woolworth. Eastbay's legal counsel outlined
the terms of the agreements and explained the Board of Directors' fiduciary
duties to its shareholders. At the conclusion of the meeting, the Board of
Directors authorized Mr. Colcord to continue negotiating with Woolworth.
During the week of November 25, the parties continued extensive negotiations
to finalize the agreements and the proposed terms of the transaction,
including the proposed amount of the Merger Consideration. On November 29,
1996, the Board of Directors met to discuss the terms of the revised
agreements and reviewed and discussed in detail the proposed transaction. At
this meeting, Eastbay's legal counsel described the changes in the terms of
the agreements from those contained in the agreements previously reviewed by
the Board of Directors, and Baird reviewed its financial analyses, including
its valuation methods, analysis of comparable companies, analysis of
comparable acquisition transactions and discounted cash flow analysis. The two
outside directors also met separately with Eastbay's corporate counsel and
Baird to further review the terms of the agreements and the transaction. The
entire Board of Directors then reconvened and several Board members made
suggestions and comments regarding the terms of the agreements and further
issues for negotiation. At the conclusion of this meeting, Mr. Colcord was
authorized to continue negotiation with Woolworth in an effort to finalize the
agreements and present the final agreements to the Board of Directors on
November 30, 1996.
The parties continued their negotiations and the Board of Directors met
again on November 30, 1996. At this meeting, Eastbay's corporate counsel
explained the final terms of the agreements and Baird rendered its
14
<PAGE>
oral opinion (subsequently confirmed in writing) to the effect that, as of
such date, the $24.00 per share was fair, from a financial point of view, to
the holders of Company Shares (other than the Management Shareholders,
Woolworth and its affiliates). See "THE MERGER--Opinion of Financial Advisor
to Eastbay." Again, the two outside directors met separately with
representatives of Eastbay's counsel and Baird and further discussed the terms
of the transaction. The full Board then reconvened and the Board of Directors
unanimously determined that the Merger was in the best interests of Eastbay's
shareholders, unanimously approved the Merger Agreement and the transactions
contemplated by the Merger Agreement and unanimously resolved to recommend
that Eastbay's shareholders vote for adoption of the Merger Agreement.
THE COMPANY'S REASONS FOR THE MERGER; RECOMMENDATION OF THE COMPANY'S BOARD OF
DIRECTORS
At a special meeting of the Board of Directors held on November 30, 1996, at
which all directors were present, the Company's Board of Directors unanimously
determined that the Merger is in the best interests of the Company's
shareholders, unanimously approved the Merger Agreement and the transactions
contemplated by the Merger Agreement and unanimously resolved to recommend
that the Company's shareholders vote for adoption of the Merger Agreement. As
described above under "--Background of the Merger," at meetings held on
November 29, and November 30, 1996, the Company's Board of Directors received
advice or presentations from, and reviewed the then-current terms of the
Merger Agreement and the Shareholder Agreements with, the Company's management
and its financial and legal advisors. The financial analyses conducted by
Baird in connection with its fairness opinion are summarized below under "--
Opinion of Financial Advisor to Eastbay." The presentations by Reinhart,
Boerner, Van Deuren, Norris & Rieselbach, s.c., the Company's legal advisors,
described and explained (i) the terms and conditions of the proposed Merger as
set forth in the draft of the Merger Agreement, (ii) the terms of the proposed
Shareholder Agreements as set forth in the draft of the Shareholder
Agreements, and (iii) the fiduciary duties applicable to the Company's Board
of Directors in the evaluation of the proposed transaction.
In reaching its conclusion to enter into the Merger Agreement and recommend
that the Company's shareholders vote for adoption of the Merger Agreement, the
Company's Board of Directors considered a number of factors, including,
without limitation, the following:
(i) The amount and type of consideration to be received in the Merger by
the shareholders of the Company and the historical trading prices of the
Company's Common Stock, including the fact that the Merger Consideration
represented a significant premium over the then-prevailing market price of
the Company Shares, and the relationship between the Merger Consideration
and the Company's reported earnings and certain other measures.
(ii) The opinion of Baird to the effect that, as of November 30, 1996,
the $24.00 per share was fair, from a financial point of view, to the
holders of Company Shares (other than the Management Shareholders,
Woolworth and its affiliates), together with Baird's related financial
analyses.
(iii) Current market conditions and historical market prices, volatility
and trading information with respect to the Company Shares.
(iv) The condition, prospects and strategic direction of the Company's
business.
(v) The terms and conditions of the Merger and the Merger Agreement,
including the amount and the form of the consideration, as well as the
parties' mutual representations, warranties and covenants, and the
conditions to their respective obligations.
(vi) The terms of the Merger Agreement that permit the Company's Board of
Directors, in the exercise of their fiduciary duties and subject to certain
conditions, to respond to inquiries regarding potential business
combination transactions, to provide information to, and negotiate with,
third parties making an unsolicited proposal to acquire the Company in such
a transaction and to terminate the Merger Agreement if the Company's Board
of Directors determines in the exercise of its judgment as to its fiduciary
duties to the Company's shareholders, after consultation with counsel, that
such termination is required by reason of a
15
<PAGE>
subsequent Takeover Proposal. In that regard, the Board of Directors
specifically considered the applicability of the Termination Fee (see "THE
MERGER AGREEMENT--Termination Fee") and the appreciation rights granted by
the Management Shareholders under the Shareholder Agreements (see "THE
MERGER AGREEMENT--Shareholder Agreements"). The Company's Board of
Directors did not view the Termination Fee provision of the Merger
Agreement and the potential effect which the appreciation right provisions
of the Shareholder Agreements could have on a subsequent bidder, taken
together, as unreasonably impeding any interested third party from
proposing a superior transaction. In view of the $24.00 per share
consideration offered by Woolworth and the Board of Directors' judgment
that it was unlikely a higher offer could be obtained, the Board of
Directors determined these provisions were not unreasonable.
(vii) The likelihood that the Merger will be consummated.
In view of the wide variety of factors considered in connection with its
evaluation of the terms of the Merger, the Company's Board of Directors did
not find it practicable to, and did not, quantify or otherwise attempt to
assign relative weights to the specific factors considered in reaching its
conclusions.
OPINION OF FINANCIAL ADVISOR TO EASTBAY
Robert W. Baird & Co. Incorporated ("Baird") has acted as financial advisor
to Eastbay in connection with the Merger and has assisted the Board of
Directors of Eastbay in its examination of the fairness, from a financial
point of view, of the $24.00 per share cash consideration (the
"Consideration") proposed to be paid in the Merger to the holders of Company
Shares (other than the Management Shareholders, Woolworth and its affiliates).
On November 30, 1996, Baird rendered its opinion to the Board of Directors of
Eastbay to the effect that, as of such date, the Consideration was fair, from
a financial point of view, to such holders.
THE FULL TEXT OF BAIRD'S OPINION, DATED NOVEMBER 30, 1996, WHICH SETS FORTH
THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY BAIRD IN RENDERING ITS
OPINION, IS ATTACHED AS EXHIBIT E TO THIS PROXY STATEMENT AND IS INCORPORATED
HEREIN BY REFERENCE. BAIRD'S OPINION IS DIRECTED ONLY TO THE FAIRNESS, AS OF
NOVEMBER 30, 1996 AND FROM A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO
THE HOLDERS OF EASTBAY SHARES (OTHER THAN THE MANAGEMENT SHAREHOLDERS,
WOOLWORTH AND ITS AFFILIATES) AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
EASTBAY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE
MERGER AGREEMENT. BAIRD DID NOT RECOMMEND TO EASTBAY THE AMOUNT OF
CONSIDERATION TO BE PAID TO EASTBAY'S SHAREHOLDERS. THE SUMMARY OF BAIRD'S
OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION ATTACHED AS EXHIBIT E. SHAREHOLDERS ARE URGED TO READ THE
OPINION CAREFULLY IN ITS ENTIRETY.
In conducting its investigation and analysis in arriving at its opinion
attached as Exhibit E, Baird reviewed such information and took into account
such financial and economic factors as it deemed relevant under the
circumstances. In that connection, Baird among other things (i) reviewed
certain internal information, primarily financial in nature, including
projections, concerning the business and operations of Eastbay furnished to
Baird for purposes of its analysis, as well as publicly available information
including, but not limited to, Eastbay's recent filings with the Securities
and Exchange Commission (the "Commission"), and equity analyst research
reports prepared by various investment banking firms including Baird; (ii)
reviewed the Merger Agreement in the form presented to the Board of Directors
of Eastbay; (iii) compared the historical market prices and trading activity
of the Eastbay Common Stock and Woolworth common stock with those of certain
other publicly traded companies Baird deemed relevant; (iv) compared the
financial position and operating results of Eastbay with those of other
publicly traded companies Baird deemed relevant; and (v) compared the proposed
financial terms of the Merger with the financial terms of certain other
business combinations Baird deemed relevant. Baird held discussions with
members of Eastbay's and Woolworth's respective senior management concerning
Eastbay's
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and Woolworth's historical and current financial condition and operating
results as well as the future prospects of Eastbay and Woolworth,
respectively. Baird was not requested to, and did not, solicit third party
indications of interest in acquiring all or any part of Eastbay. Baird also
considered such other information, financial studies, analysis and
investigations and financial, economic and market criteria which it deemed
relevant for the preparation of its opinion. The Consideration was determined
by Eastbay and Woolworth in arms-length negotiations. Eastbay did not place
any limitation upon Baird with respect to the procedures followed or factors
considered by Baird in rendering its opinion.
In arriving at its opinion, Baird assumed and relied upon the accuracy and
completeness of all of the financial and other information provided to it by
or on behalf of Eastbay and Woolworth, or publicly available, and were not
engaged, and did not attempt, to verify any such information. Baird also
assumed, with Eastbay's consent, that (i) the Merger will be accounted for
under the purchase method and (ii) all material assets and liabilities
(contingent or otherwise, known or unknown) of Eastbay are as set forth in
Eastbay's financial statements. Baird assumed that the financial forecasts
examined by it had been reasonably prepared on bases reflecting the best
available estimates and good faith judgments of Eastbay's senior management as
to the future performance of Eastbay. In conducting its review, Baird did not
undertake nor obtain an independent evaluation or appraisal of any of the
assets or liabilities (contingent or otherwise) of Eastbay, nor did Baird make
a physical inspection of the properties or facilities of Eastbay. Baird
expressed no opinion as to the fairness, from a financial point of view, of
the consideration proposed to be paid by Woolworth to the Management
Shareholders for their shares of Eastbay Common Stock. Baird's opinion was
based upon economic, monetary and market conditions as they existed on and to
the extent that they could be evaluated as of the date of such opinion and did
not predict or take into account any changes which may occur or information
which may become available thereafter.
In connection with preparing its opinion on November 30, 1996, Baird
conducted a variety of financial analyses summarized below with respect to
Eastbay.
Analysis of Eastbay Valuation Multiples. Baird calculated multiples of the
"Equity Value" of Eastbay represented by the Consideration (i.e., $148.1
million, obtained by multiplying the Consideration by the total number of
fully diluted Eastbay shares, including shares from the assumed conversion of
options, less net proceeds from such stock options) to Eastbay's latest twelve
months ("LTM") net income and its projected net income for calendar years 1996
and 1997 (based on estimates of Eastbay's management), and multiples of
Eastbay's "Enterprise Value" (defined as the Equity Value plus $3.0 million of
forecasted average monthly seasonal debt for fiscal 1997, less cash and cash
equivalents) to its LTM revenues, its LTM operating income before depreciation
and amortization, interest and taxes ("EBITDA") and its LTM operating income
("EBIT"). For this purpose, LTM represents the twelve month period ended
September 30, 1996. The calculations resulted in ratios of the Equity Value to
net income ("P/E Ratios") of 23.7x based on LTM results; 25.3x based on
projected calendarized 1996 results; and 19.2x based on projected calendarized
1997 results. The ratio of Enterprise Value to LTM revenues was 1.3x, the
ratio of Enterprise Value to LTM EBITDA was 15.0x and the ratio of Enterprise
Value to LTM EBIT was 16.7x.
Analysis of Selected Publicly-Traded Eastbay Comparable Companies. Baird
reviewed certain publicly available financial information as of the most
recently reported period and stock market information as of November 26, 1996
for two groups of selected publicly traded companies which Baird deemed
relevant. The first group, Direct Marketing, consisted of Black Box
Corporation, CDW Computer Centers, Inc., Express Scripts, Inc., Fingerhut
Companies, Inc., Global DirectMail Corp., Lands' End, Inc., Micro Warehouse,
Inc., Multiple Zones International, Inc., Insight Enterprises, Inc., Viking
Office Products, Inc. and Williams-Sonoma, Inc. The second group, the Athletic
Group, consisted of Just for Feet, Inc., The Finish Line, Inc., Footstar,
Inc., Sport Supply Group, Inc., Hibbett Sporting Goods, Inc., Nike, Inc.,
Reebok International, Ltd., Starter Corporation, The Sports Authority, Inc.
and Sports & Recreation, Inc. For each company, Baird calculated multiples as
of November 26, 1996 of Enterprise Value to LTM revenues, LTM EBITDA and LTM
EBIT. An analysis of the multiples of the Enterprise Value to LTM revenues,
LTM EBITDA and LTM EBIT yielded 1.3x, 15.0x and 16.7x, respectively, for
Eastbay compared to medians of 0.8x, 14.0x and 14.8x, respectively, for the
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Direct Marketers; 0.8x, 12.8x and 16.7x, respectively, for the Athletic Group,
and 0.9x, 13.3x and 15.9x, respectively, for the two groups combined. For
Eastbay and each comparable company, Baird also calculated P/E ratios as of
November 26, 1996 based on market stock prices as of such date and LTM
earnings per share and estimated earnings per share (derived from FirstCall
estimates, except for Eastbay, which were based on forecasts of Eastbay's
Management) for calendar years 1996 and 1997. An analysis of the P/E Ratios
based on earnings per share for LTM, 1996 and 1997 yielded 23.7x, 25.3x and
19.2x, respectively, for Eastbay compared to medians of 26.8x, 24.6x and
20.0x, respectively, for the Direct Marketers; 29.5x, 26.2x and 19.3x,
respectively, for the Athletic Group; and 29.3x, 26.7x and 19.3x,
respectively, for the two groups combined. In rendering its opinion, Baird
noted, among other items, the fact that the Eastbay multiples were generally
modestly higher, and the Eastbay P/E Ratios were generally similar to, the
corresponding multiples of the comparable companies.
Analysis of Selected Comparable Acquisition Transactions. Baird reviewed
selected acquisition transactions which it deemed relevant based on a review
of acquired companies which possessed general business operating and financial
characteristics representative of companies in the industry in which Eastbay
operates. Baird noted that none of the selected transactions were identical to
the Merger and that, accordingly, the analysis of comparable transactions
necessarily involves complex consideration and judgments concerning
differences in financial and operating characteristics of Eastbay and other
factors that would affect the acquisition value of comparable transactions.
For each comparable transaction, Baird calculated multiples of enterprise
value to LTM revenues, LTM EBITDA and LTM EBIT; calculated P/E ratios based on
LTM earnings per share; and calculated the premium paid for the equity in
these transactions over the public market value of the equity at various times
prior to the announcement of such transaction. Baird then compared those
multiples and premiums to the relevant Eastbay multiples and premiums based on
the Consideration. For the transactions selected, these calculations yielded
multiples of enterprise value to LTM revenues, LTM EBITDA and LTM EBIT of
1.3x, 15.0x and 16.7x, respectively, for Eastbay compared to medians of 0.9x,
12.5x and 16.4x, respectively, and means of 1.3x, 12.5x and 15.7x,
respectively for the comparable acquisition transactions. An analysis of the
P/E Ratios based on LTM earnings per share yielded 23.7x for Eastbay compared
to a median of 24.9x and a mean of 27.3x for the comparable transactions. An
analysis of the Consideration to the market value of Eastbay Common Stock as
of November 26, 1996, 30 days and 90 days prior thereto, compared to the
prices paid for the equity in such comparable acquisition transactions
relative to the market value of equity 1 day, 30 days and 90 days prior to the
announcement date of such transactions, yielded premiums of 26.3%, 29.7% and
64.1% respectively, for Eastbay, compared to median premiums of 1.7%, 14.5%
and 14.3% respectively, and means of 13.9%, 24.7% and 17.1%, respectively, for
the comparable acquisition transactions. Baird noted, among other items, the
fact that the Eastbay multiples were generally similar or modestly higher
(except for the Eastbay P/E Ratio, which was slightly lower), and price
premiums ranged from higher to significantly higher, to the corresponding
premiums of the comparable acquisition transactions.
Discounted Cash Flow Analysis. Baird performed a discounted cash flow
analysis of Eastbay on a stand alone basis using Eastbay management
projections of future EBIT for fiscal years 1997 through 2001 and free cash
flow without taking into account cost savings and synergies which may be
realized following the Merger. In such analysis, Baird assumed terminal value
multiples of 8.0x to 12.0x EBIT in the year 2001 and discount rates of 13.0%
to 15.0%. Such analysis produced implied values of Eastbay shares ranging from
$21.00 to $33.00.
The foregoing summary does not purport to be a complete description of the
analyses performed by Baird or of its presentation to the Eastbay Board of
Directors. The preparation of financial analyses and a fairness opinion is a
complex process and is not necessarily susceptible to partial analyses or
summary description. Baird believes that its analyses (and the summary set
forth above) must be considered as a whole, and that selecting portions of
such analyses and of the factors considered by Baird, without considering all
of such analyses and factors, could create an incomplete view of the processes
underlying the analyses conducted by Baird and its opinion. Baird did not
attempt to assign specific weights to particular analyses. Any estimates
contained in Baird's analyses are not necessarily indicative of actual values,
which may be significantly more or less favorable than as set forth therein.
Estimates of values of companies do not purport to be appraisals or
necessarily to reflect the prices at which companies may actually be sold.
Because such estimates are inherently subject to uncertainty, Baird does not
assume responsibility for their accuracy.
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Baird, as part of its investment banking business, is continually engaged in
the evaluation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements, and
valuations for estate, corporate and other purposes. In the ordinary course of
business, Baird may from time to time trade the securities of Eastbay or
Woolworth for its own account and for accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Compensation. Pursuant to an engagement letter agreement dated August 19,
1996 between Eastbay and Baird, Eastbay agreed to pay Baird a fee of $200,000,
payable upon delivery of its opinion, regardless of the conclusions reached by
Baird in such opinion (such fee to be creditable against the transaction fee
described below), and a transaction fee, payable upon consummation of the
Merger, equal to the greater of (i) $1,000,000 and (ii) .75 percent of the
consideration paid or payable in connection with the Merger. Eastbay has also
agreed to reimburse Baird for its reasonable out-of-pocket expenses, including
fees and disbursements of counsel. Eastbay has also agreed to indemnify Baird,
its affiliates and their respective directors, officers, employees and agents
and controlling persons against certain liabilities relating to or arising out
of its engagement, including liabilities under the federal securities laws. In
the past, Baird has provided investment banking services to Eastbay, including
acting as the lead manager in connection with the initial public offering of
Eastbay Common Stock in September 1995, for which Baird received customary
compensation.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of the Company
with respect to the Merger Agreement and the transactions contemplated
thereby, shareholders should be aware that certain members of the Company's
management and the Board of Directors have certain interests in the Merger
that are in addition to the interests of shareholders of the Company
generally.
Stock Options
In 1994, the Company issued options to purchase 63,847 Company Shares under
the Company's 1994 Stock Incentive Plan (the "1994 Options") and, in 1995 and
1996, the Company issued options to purchase 110,900 Company Shares under this
plan (the "1996 Options"). In addition, the Company has issued options to
purchase 15,000 Company Shares under the Company's Outside Director Stock
Option Plan (the "Outside Director Stock Options"). Pursuant to the Merger
Agreement, prior to the Effective Time, the Company and Woolworth have agreed
to take all actions necessary to cause the holders of the 1996 Options to
receive options for shares of Common Stock of Woolworth ("Substitute
Options"). Such Substitute Options will have the same expiration date and
vesting schedule as the options for which they were substituted and shall
otherwise be exercisable on the same terms and conditions as were applicable
to the related options immediately prior to the Effective Time. In addition,
the Merger Agreement provides that each holder of a vested 1994 Option will,
at the Effective Time, become entitled to receive $18.78 in cash per option,
representing the difference between the $24.00 per share Merger Consideration
and the $5.22 per share option exercise price. The Merger Agreement also
provides that each holder of an unvested 1994 Option will have the right to
elect (prior to the Effective Time) to receive (a) Substitute Options for such
unvested 1994 Option or, (b) unless it will cause excess parachute payments
under section 280(G) of the Internal Revenue Code of 1986, $18.78 in cash per
option. Lastly, the Merger Agreement provides that each holder of an Outside
Director Stock Option shall, at the Effective Time, become entitled to receive
$9.75 in cash per option, representing the difference between the $24.00 per
share Merger Consideration and the $14.25 per share exercise price of such
Outside Director Stock Options.
Forgiveness of Indebtedness
In connection with Mr. Colcord's Executive Employment Agreement dated July
1, 1992, as amended on June 30, 1994 and September 11, 1995, Mr. Colcord
received an award of 472,378 shares of Nonvoting Class B Common Stock of the
Company (which were converted into shares of Common Stock upon completion of
the
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Company's initial public offering) with a value of $2,381,000 and a cash bonus
of $1,071,000 to cover Mr. Colcord's tax liabilities in connection therewith.
In addition, the Company agreed to loan Mr. Colcord $532,000 to cover his tax
liabilities associated with the cash bonus. The loan bears interest at the
Company's cost of funds and is due in full on July 1, 1999. However, the terms
of the Employment Agreement require the Company to forgive a portion of the
loan on July 1 of each year 1995 through 1999, and make a cash bonus to Mr.
Colcord sufficient to cover his income tax liability resulting from such debt
forgiveness and bonus payment, if the Company achieved certain targeted
performance criteria for the prior fiscal year. As a result of meeting certain
of these performance criteria, the current balance of the loan has been
reduced to $366,000. Due to the proposed Merger and the substantial services
provided by Mr. Colcord to Eastbay, Eastbay has agreed to forgive the
remaining balance of the loan and pay Mr. Colcord a cash bonus to cover his
tax liability associated with such forgiveness and payment immediately prior
to a "change in control" of the Company. Such a "change in control" will occur
upon consummation of the Merger. Accordingly, if the Merger is consummated,
immediately prior thereto the $366,000 loan to Mr. Colcord will be forgiven,
and Mr. Colcord will receive a bonus payment of approximately $300,000 to
cover his tax liabilities associated with such forgiveness and bonus payment.
Employment Agreements
Each of Arthur H. Juedes and Richard C. Gering currently have employment
agreements with the Company. In connection with the Merger Agreement,
Woolworth required that each of these officers and Harry H. Colcord execute a
new employment agreement which will supersede any existing agreements. The new
employment agreements will be effective upon consummation of the Merger. The
employment agreements with each of Arthur H. Juedes and Richard C. Gering
provide for a base salary of $160,500 per year and a yearly bonus of up to
87.5% of base salary if the Company achieves certain performance criteria
established by Woolworth. The employment agreement with Mr. Colcord provides
for a base salary at the rate of $225,000 per year for the period from the
Effective Time to April 30, 1998, $250,000 for the period from May 1, 1998 to
April 30, 1999 and $275,000 per year for the period commencing on May 1, 1999.
In addition, Mr. Colcord's employment agreement provides for a yearly bonus of
up to 87.5% of base salary if the Company achieves certain performance
criteria established by Woolworth. Pursuant to the employment agreement, after
the Effective Time, Mr. Colcord will also receive options to purchase 66,000
shares of Woolworth's Common Stock for an exercise price equal to the fair
market value of such stock on the date of grant and may receive additional
options in the future if he remains employed by the Company. The employment
agreements with Messrs. Juedes, Gering and Colcord also provide for other
fringe benefits applicable to similarly situated executives of Woolworth and
its subsidiaries.
Company Bonus Plan
Pursuant to the Merger Agreement, promptly after determination of the
Company's results of operations for the six-month period ended December 31,
1996, the Company will make interim payments to its employees under the
Company's bonus plan in amounts consistent with such plan (unless such
payments would cause excess parachute payments under section 280G of the
Internal Revenue Code of 1986, as amended). Such payments are subject to
Woolworth's approval, which cannot be unreasonably withheld. Pursuant to the
terms of this plan, the Company normally makes these bonus payments at fiscal
year end. The Company anticipates that the aggregate amount of these payments
will total approximately $450,000.
Indemnification and Insurance
Woolworth has agreed to cause the Surviving Corporation in the Merger to
adopt and retain, for a period of at least six years following the Merger, the
same provisions contained in the Company's Articles of Incorporation and By-
Laws relating to indemnification of officers, directors and employees as are
contained in the Articles of Incorporation and By-Laws of the Company on the
date of the Merger Agreement. Woolworth has also agreed that such provisions
shall continue to indemnify the persons indemnified thereunder on the date of
the Merger Agreement and has agreed to cause the Surviving Corporation to
honor the indemnities in such provisions and make prompt reimbursements, to
the fullest extent provided therein and to the fullest extent provided in the
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WBCL. In addition, Woolworth has agreed to cause the Surviving Corporation to
maintain in full force and effect for a period of at least three years
following the date of the Merger the fiduciary liability, professional
liability and directors and officers liability insurance policies currently
covering the Company or any company subsidiary or any of the Company's
directors, officers, employees or agents, provided: (a) the Surviving
Corporation is not required to expend more than $60,000 per year for such
coverage, (b) the expense of such coverage will be included in the budget of
the Surviving Corporation as an operating cost and (c) Woolworth may elect to
substitute an alternative policy or carrier for the existing policy or carrier
provided that comparable coverage is maintained.
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting
under which the total consideration paid in the Merger will be allocated among
the Surviving Corporation's assets and liabilities based on the fair values of
the assets acquired and liabilities assumed and any amount of consideration in
excess of the total fair value of such assets and liabilities will be booked
as goodwill. At the Effective Time, Eastbay will become an indirect, wholly-
owned subsidiary of Woolworth.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO THE COMPANY'S
SHAREHOLDERS
Set forth below is a description of certain federal income tax aspects of
the Merger to holders of Company Shares disposed of in the Merger under
current law and regulations. The discussion is based on the Internal Revenue
Code of 1986, as amended. The Company will not seek any rulings from the
Internal Revenue Service ("IRS") or an opinion of counsel with respect to the
transactions contemplated by the Merger Agreement.
The following discussion is limited to the material federal income tax
aspects of the Merger for a holder of Company Shares who is a citizen or
resident of the United States, and who, on the date of disposition of such
holder's Company Shares, holds such shares as capital assets. All holders are
urged to consult their own tax advisors regarding the federal, foreign, state
and local tax consequences of dispositions of Company Shares in the Merger.
The following discussion does not address potential foreign, state, local and
other tax consequences, nor does it address taxpayers subject to special
treatment under the federal income tax laws, such as life insurance companies,
tax-exempt organizations, S corporations, regulated investment companies and
taxpayers subject to alternative minimum tax.
A holder of Company Shares, other than the Management Shareholders, will
recognize gain or loss upon the surrender of such holder's Company Shares and
receipt of the Merger Consideration pursuant to the Merger in an amount equal
to the difference, if any, between (a) the amount of cash received, and (b)
such holder's aggregate adjusted tax basis in the Company Shares surrendered
therefor. Management Shareholders will recognize gain or loss upon the
surrender of the Management Shares and receipt of the Merger Consideration. To
the extent that the receipt of the Merger Consideration is treated as an open
transaction under federal tax law, the amount of the gain or loss recognized
on the receipt of the initial Merger Consideration will be equal to the
difference between (a) the amount of cash received and (b) such holder's
aggregate adjusted tax basis in the Company Shares surrendered. The gain or
loss recognized on the receipt of the remaining Merger Consideration, if any,
should be fully taxable, either as additional gain or a smaller loss or as
imputed interest. The amount of the gain or loss is treated as described
below.
In general, any gain or loss recognized by a shareholder in the Merger will
be eligible for capital gain or loss treatment. Any capital gain or loss
recognized by shareholders will be long-term capital gain or loss if the
Company Shares giving rise to such recognized gain or loss have been held for
more than one year; otherwise such capital gain or loss will be short term. An
individual's long-term capital gain is subject to federal income tax at a
maximum rate of 28% while any capital loss (assuming there are no capital loss
carryovers from prior years) can be offset only against other capital gains
plus $3,000 ($1,500 for married persons filing separately) of other income in
any tax year. Any unutilized capital loss will carry over as a capital loss to
succeeding years for an unlimited time until the loss is exhausted.
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For corporations, a capital gain is subject to federal income tax at a
maximum rate of 39% while any capital loss can be offset only against other
capital gains. Any unutilized capital loss generally can be carried back three
years and forward five years to be offset against net capital gains generated
in such years.
Under the federal income tax backup withholding rules, unless an exemption
applies, the Exchange Agent will be required to withhold, and will withhold,
31% of all cash payments to which a holder of Company Shares or other payee is
entitled pursuant to the Merger Agreement, unless the shareholder or other
payee provides a tax identification number (social security number, in the
case of an individual, or employer identification number, in the case of other
Company shareholders) and certifies that such number is correct and that the
shareholder or other payee is not subject to backup withholding. Each Company
shareholder, and, if applicable, each other payee, should complete and sign
the Substitute Form W-9 included as part of the letter of transmittal to be
returned to the Exchange Agent unless an applicable exemption exists and is
proved in a manner satisfactory to the Exchange Agent, in order to provide the
information and certification necessary to avoid backup withholding.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE ARE FOR GENERAL
INFORMATION ONLY. EACH HOLDER OF COMPANY SHARES IS URGED TO CONSULT HIS OR HER
OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO
SUCH SHAREHOLDER (INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE,
LOCAL AND OTHER TAX LAWS).
AMOUNT OF FUNDS
Woolworth intends to fund payment of the Merger Consideration from current
and projected cash flows, as well as available credit lines to the extent
needed.
The aggregate cost to Woolworth of acquiring all of the Company Shares in
the Merger, making required payments to holders of stock options (see "THE
MERGER--Interests of Certain Persons in the Merger") and payment of its fees
and expenses will be approximately $141 million, not including the up to $1.75
per share ($6,144,211.50 the aggregate) contingent consideration which will be
paid to the Management Shareholders in 1998 and 1999 if the Company achieves
certain earnings after the Merger. See "THE MERGER--Shareholder Agreements."
DISSENTERS' RIGHTS OF APPRAISAL
Holders of the Company Shares are not entitled to dissenters' rights of
appraisal under the WBCL in connection with the Merger because the Company
Shares are listed on the Nasdaq National Market and the Merger is not a
"business combination" as defined in the WBCL. See "DISSENTERS' RIGHTS."
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act") and the rules promulgated thereunder by the Federal Trade Commission
(the "FTC"), certain acquisition transactions may not be consummated unless
notice has been given and certain information has been furnished to the
Antitrust Division of the United States Department of Justice (the "Antitrust
Division") and the FTC and certain waiting period requirements have been
satisfied. The Merger is subject to these requirements.
The Company and Woolworth each filed with the Antitrust Division and the FTC
a Notification and Report Form with respect to the Merger on December 10,
1996. Under the HSR Act, the Merger may not be consummated until the
expiration of a waiting period of at least 30 days following the receipt of
each filing, unless the waiting period is earlier terminated by the FTC and
the Antitrust Division or unless the waiting period is extended by a request
for additional information.
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The FTC and the Antitrust Division frequently scrutinize the legality of
transactions such as the Merger under the antitrust laws. At any time before
or after the Effective Time, the FTC or the Antitrust Division could take such
action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the Merger or seeking the
divestiture of the Company by Woolworth, in whole or in part, or the
divestiture of substantial assets of Woolworth, the Company or their
respective subsidiaries. State Attorneys General and private parties may also
bring legal actions under the federal or state antitrust laws under certain
circumstances. There can be no assurance that a challenge to the proposed
Merger on antitrust grounds will not be made or of the result if such a
challenge is made.
THE MERGER AGREEMENT
The following discussion of the Merger Agreement is qualified in its
entirety by reference to the complete text of the Merger Agreement, which is
included in this Proxy Statement as Exhibit A (exclusive of all exhibits and
schedules) and is incorporated herein by reference.
GENERAL
The Merger Agreement provides for the merger of Woolworth Sub into the
Company. The Company will be the Surviving Corporation of the Merger and, as a
result of the Merger, Woolworth will indirectly own all of the Surviving
Corporation's Common Stock. In the Merger, the shareholders of the Company,
other than Woolworth and Woolworth Sub, will receive the Merger Consideration
described below.
EFFECTIVE TIME
The Effective Time of the Merger will occur upon the later of (a) the date
the Department of Financial Institutions of the State of Wisconsin receives
for filing Articles of Merger as required by the WBCL or (b) the effective
date and time specified in such Articles of Merger. It is anticipated that
such Articles of Merger will be filed promptly after the approval and adoption
of the Merger Agreement by the shareholders of the Company at the Special
Meeting. Such filing will be made, however, only upon satisfaction or waiver
of all conditions to the Merger contained in the Merger Agreement.
CONSIDERATION TO BE RECEIVED BY SHAREHOLDERS OF THE COMPANY
In connection with the Merger, each outstanding Company Share at the
Effective Time (except Management Shares and those shares held by the Company
as treasury shares or by Woolworth or Woolworth Sub) will be converted into
the right to receive $24.00 in cash, without interest. Each outstanding share
of Common Stock (the "Management Shares") owned by Arthur H. Juedes, Richard
C. Gering and Harry H. Colcord, the Company's Co-Chairman, Co-Chairman and
President and Chief Executive Officer, respectively (the "Management
Shareholders"), will be converted into the right to receive $22.00 in cash,
without interest and, if the Company achieves certain earnings after the
Merger, as defined in the Shareholder Agreements, contingent consideration of
up to an additional $1.75 in cash, without interest. Each Company Share owned
by Woolworth Sub, Woolworth or held by the Company as treasury shares will be
canceled and retired without consideration. Instructions with regard to the
surrender of certificates formerly representing Company Shares, together with
the letter of transmittal to be used for that purpose, will be mailed to
shareholders as soon as practicable after the Effective Time. The Exchange
Agent as soon as practicable following receipt from the shareholder of a duly
executed letter of transmittal, together with certificates formerly
representing Company Shares and any other items specified by the letter of
transmittal, shall pay, by check or draft, to such shareholder, the Merger
Consideration to which such holder is entitled.
All of the outstanding Woolworth Sub Shares will automatically be converted
into 1,000 shares of common stock, par value $.01 per share, of the Surviving
Corporation.
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SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES FOR COMPANY SHARES WITH
THE ENCLOSED PROXY CARD.
After the Effective Time, the holder of a certificate formerly representing
Company Shares shall cease to have any rights as a shareholder of the Company,
and such holder's sole right will be to receive the Merger Consideration with
respect to such shares. If payment is to be made to a person other than the
person in whose name the surrendered certificate is registered, it will be a
condition of payment that the certificate so surrendered 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 such
payment or establish to the satisfaction of the Surviving Corporation that
such taxes have been paid or are not applicable. No transfer of shares
outstanding immediately prior to the Effective Time will be made on the stock
transfer books of the Surviving Corporation after the Effective Time.
Certificates formerly representing Company Shares presented to the Surviving
Corporation after the Effective Time will be canceled in exchange for the
Merger Consideration to which such shares are entitled.
In no event will holders of Company Shares be entitled to receive any
interest on the Merger Consideration to be distributed to them in connection
with the Merger.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties
relating to, among other things, (a) corporate organization, existence, good
standing and power and authority to own and operate properties and carry on
business; (b) corporate power and authority to enter into, and the due, valid
and binding execution and delivery of, the Merger Agreement; (c) the absence
of any violations of applicable law by the Company; (d) consents and approvals
of public bodies; (e) the Merger not resulting in conflicts with respect to
the articles of incorporation or By-Laws, breaches of any agreements or
instruments or violations of orders relating to the Company, Woolworth or
Woolworth Sub; (f) the capital structure of the Company; (g) the proper filing
by the Company with the Securities and Exchange Commission (the "Commission")
of all required documents and the accuracy of the information contained in
such documents; (h) the fair presentation of financial statements supplied by
the Company to Woolworth; (i) the absence of certain material adverse changes
concerning the Company; (j) the absence of certain undisclosed liabilities of
the Company; (k) the absence of litigation involving the Company; (l) certain
matters pertaining to federal, state and local taxes and employee benefit
plans of the Company; (m) the status of the Company's inventory; and (n) the
absence of undisclosed transactions between the Company and its officers and
directors or their relatives.
None of the representations and warranties described above survive the
Effective Time of the Merger.
COVENANTS
Each of the parties to the Merger Agreement has agreed to use its reasonable
best efforts to take all such action as may be necessary or appropriate to
effectuate the Merger under the WBCL, including cooperation in the preparation
and filing of this Proxy Statement, expiration or termination of governmental
filings and waiting period requirements, and execution of any additional
instruments reasonably necessary to effect the transactions contemplated by
the Merger Agreement.
Pursuant to the Merger Agreement, the Company has agreed that, except as
expressly contemplated by the Merger Agreement or consented to in writing by
Woolworth, from the date of the Merger Agreement until the Merger, the Company
will carry on its business in, and only in, the usual, regular and ordinary
course in substantially the same manner as conducted prior to the date of the
Merger Agreement and, to the extent consistent with such business, will use
its reasonable best efforts to preserve intact its present business
organization, keep available the services of its present officers and
employees and preserve its relationships with customers, consultants,
suppliers and others having material business dealings with it. In addition,
the Company has agreed that, except as expressly contemplated by the Merger
Agreement or consented to in writing by Woolworth, from the date of the Merger
Agreement until the Merger, neither the Company nor any of its subsidiaries
shall cause or permit the Company to:
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(a) Enter into purchase orders other than in the ordinary course of
business in accordance with the Company's budget.
(b) Dispose of or encumber any of the Company's assets, other than sales
of inventory and collections of receivables or other actions in the
ordinary course of business.
(c) Split, combine or reclassify any Company Shares or declare any
dividends on or make other distributions in respect of the Company Shares
nor amend the Company's Articles of Incorporation or By-Laws or similar
governing documents.
(d) Issue, sell, authorize, grant or propose the sale or issuance of, or
purchase, acquire or propose the purchase or acquisition of, any shares of
stock of the Company or securities convertible into, or rights, warrants or
options (including employee stock options, restricted stock or other
equity-based compensation) to acquire, any such shares or other convertible
securities (other than the issuance of Company Shares upon the exercise, in
accordance with the present terms thereof, of stock options outstanding on
the date of the Merger Agreement).
(e) Acquire or agree to acquire by merging or consolidating with or into,
purchasing substantially all of the assets or stock of or otherwise, (i)
any assets which would be material to the Company, (ii) any assets outside
of the ordinary course of business or (iii) any business or any
corporation, partnership, association or other business organization or
division thereof.
(f) Adopt, enter into, extend the term of, or amend in any material
respect any collective bargaining, employee pension, profit-sharing,
retirement, insurance, incentive compensation, severance, vacation,
employment agreement or other plan, agreement, trust, fund or arrangement
for the benefit of any director, officer or employee (whether or not
legally binding) or make any changes in compensation, severance or
termination, bonus or fringe benefits payable or to become payable to any
director, officer or employee; provided, however, that the Company shall
forgive the loan to Harry H. Colcord in the amount of $366,000 and will
provide Mr. Colcord with a payment representing the tax liability to be
incurred by him in respect of such forgiveness and such payments.
(g) Pay any bonus or other extraordinary compensation to any officer,
director or employee and, except as otherwise contemplated by the Merger
Agreement, accelerate or vest any employee options, restricted stock or
other equity-based compensation.
(h) (i) Incur, assume or prepay any long-term debt or, except in the
ordinary course of business under existing lines of credit, incur or assume
any short-term debt, (ii) assume, guaranty, endorse or otherwise become
liable or responsible (whether directly, contingently or otherwise) for the
obligations of any other person except wholly-owned subsidiaries of the
Company in the ordinary course of business and consistent with past
practices, or (iii) make any loans, advances or capital contributions to,
or investments in, any other person (other than customary loans or advances
to employees).
The Merger Agreement also provides that neither the Company nor any officer,
director or employee of (or any investment banker, attorney, accountant or
other representative retained by) the Company shall, directly or indirectly,
solicit, initiate or encourage (including by way of furnishing information)
any inquiries or proposals by, or engage in any discussions or negotiations
with, any corporation, partnership, person or other entity or group which it
is reasonably expected may lead to, or which relates to, any "Takeover
Proposal" (as defined below); provided that the Company and its Board of
Directors, officers or employees (or any investment banker, attorney,
accountant or other representative retained by the Company) is not prohibited
from: (a) taking and disclosing to the Company's shareholders a position with
respect to a tender offer by a third party pursuant to Rules 14d-9 and 14e-
2(a) promulgated under the Exchange Act, (b) making such disclosure to the
Company's shareholders which, in the judgment of the Board of Directors of the
Company with the advice of counsel, may be required under applicable law, or
(c) taking any action that the Board of Directors determines, after
consultation with counsel of recognized experience in the WBCL, is reasonably
necessary under the WBCL, as interpreted, or is reasonably necessary in order
for the Board of Directors to comply with its fiduciary duties
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under applicable law. The Company has agreed to promptly advise Woolworth
orally and in writing of the receipt and content of any such inquiries or
proposals. The Merger Agreement defines "Takeover Proposal" as any proposal for
a merger or other business combination involving the Company or any subsidiary
of the Company or for the acquisition of a substantial equity interest in the
Company or any subsidiary of the Company or a substantial portion of the assets
of the Company or any subsidiary of the Company other than the one contemplated
by the Merger Agreement (a "Business Combination").
CONDITIONS TO CONSUMMATION OF THE MERGER
The Merger Agreement provides that the obligations of the parties to effect
the Merger are subject to the satisfaction or waiver at or prior to the
Effective Time of the following conditions: (a) the Company's shareholders
shall have approved the Merger Agreement and the Merger; (b) no statute, rule,
regulation, executive order, decree, order or injunction shall have been
enacted, entered, promulgated or enforced by any court or governmental
authority which prohibits or materially and adversely restricts the
consummation of the Merger; and (c) any waiting period applicable to the Merger
under the HSR Act shall have terminated or expired.
The Company's obligation to effect the Merger is also subject to the
satisfaction, at or prior to the Effective Time, of the following additional
conditions, any or all of which may be waived in whole or in part by the
Company: (a) the representations and warranties of Woolworth and Woolworth Sub
contained in the Merger Agreement shall be true and correct in all material
respects at and as of the Effective Time; and (b) Woolworth and Woolworth Sub
shall have performed in all material respects their obligations required to be
performed by them under the Merger Agreement prior to the Effective Time.
The obligation of Woolworth and Woolworth Sub to effect the Merger is also
subject to the satisfaction, at or prior to the Effective Time, of the
following additional conditions: (a) the representations and warranties of the
Company contained in the Merger Agreement shall have been true and correct in
all material respects when made and such representations and warranties, as
updated by any update schedule ("Update Schedule") delivered by the Company to
Woolworth, shall be true and correct in all material respects at and as of the
Effective Time; (b) no state of fact shall have been disclosed to Woolworth in
an Update Schedule which shall constitute a material adverse change in the
value of the Company; (c) the Company shall have performed in all material
respects the obligations required to be performed by it under the Merger
Agreement at or prior to the Effective Time; (d) no suit, action, claim,
proceeding or investigation challenging the validity or propriety of the
transactions contemplated by the Merger Agreement shall be pending which is
reasonably likely to result in a judgment materially adverse to Woolworth or
the Company (including, with respect thereto, amounts payable to any person
subject to indemnification by the Company); and (e) the Company shall have
entered into employment agreements with Arthur H. Juedes, Richard C. Gering and
Harry H. Colcord, in a form attached as an exhibit to the Merger Agreement.
These individuals have already satisfied this condition by signing employment
agreements which will become effective at the Effective Time.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, notwithstanding approval of the Merger Agreement
by the shareholders of the Company:
(a) by mutual written consent of Woolworth, Woolworth Sub and the
Company;
(b) by either Woolworth or the Company if the Merger shall not have been
consummated on or before March 31, 1997; provided, however, that the right
to terminate pursuant to this section is not available to any party whose
failure to fulfill materially any covenant or obligation under the Merger
Agreement has been the cause of, or resulted in, the failure of the Merger
to occur on or before such date;
(c) by either Woolworth or the Company if any court of competent
jurisdiction or other governmental body in the United States shall have
issued an order, judgment or decree (other than a temporary restraining
order) restraining, enjoining or otherwise prohibiting the Merger and such
order, judgment or decree shall have become final and not appealable;
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(d) by either Woolworth or the Company if the shareholders of the Company
fail to approve the Merger Agreement and the Merger by the requisite vote
required by law at the Shareholder's meeting (and any adjournments
thereof); or
(e) by the Company if the Company's Board of Directors, in exercise of
its judgment as to its fiduciary duties to the Company's shareholder's
after consultation with counsel, determines that such termination is
required by reason of any Takeover Proposal.
In the event of the termination of the Merger Agreement and the Merger for
any reason, the Merger Agreement will become void, all rights of each party
thereto shall cease and none of the Company, Woolworth, Woolworth Sub or their
respective officers, directors, shareholders, agents or advisors will have any
liability except, in the case of the Company, Woolworth, or Woolworth Sub, for
a material and intentional breach by any such party of its covenants and
agreements contained in the Merger Agreement and except for provisions in the
Merger Agreement with respect to payment of the termination fee described
below. In addition, the termination of the Merger Agreement does not affect
the parties' obligations under the Confidentiality Agreement dated August 20,
1996, which obligations survive such termination.
TERMINATION FEE
Pursuant to the Merger Agreement, Eastbay must pay Woolworth a Termination
Fee of $4 million (or approximately $.66 per Company Share outstanding on
November 30, 1996) if the Merger Agreement is terminated by the Company
pursuant to the sections of the Merger Agreement described in paragraphs (b),
(d) or (e) of the above section after a bona fide Takeover Proposal has been
received by the Company and, within one year after the date of such
termination, the Company enters into an agreement for a Business Combination
which is subsequently consummated. In this circumstance, the Company is
required to pay the $4 million Termination Fee to Woolworth at the time of
consummation of such Business Combination. In addition, the Company is
required to pay Woolworth the $4 million Termination Fee promptly upon
termination of the Merger Agreement if the Merger Agreement is terminated by
either party pursuant to the section described in paragraph (d) of the above
section at a time when no bona fide Takeover Proposal has been received by the
Company. The Termination Fee is Woolworth's sole and exclusive remedy upon any
such termination of the Merger Agreement. Notwithstanding the foregoing, the
Company is not required to pay Woolworth the Termination Fee in any
circumstance if (a) Woolworth was in material breach of its obligations under
the Merger Agreement at the time of its termination, (b) the waiting period
applicable to the Merger under the HSR Act shall not have terminated or
expired at the time of the termination of the Merger Agreement if, at the time
of such termination, 60 days have passed since the HSR Act filing or (c) the
conditions to the obligation of the Company to effect the Merger described
above shall not have been satisfied at the time of such termination.
AMENDMENTS AND WAIVERS
At any time prior to the Effective Time of the Merger (notwithstanding any
shareholder approval) if authorized by Woolworth, Woolworth Sub and the
Company and to the extent permitted by law, (a) the parties to the Merger
Agreement may, by written agreement, modify, amend or supplement any term or
provision of the Merger Agreement and, (b) any term or provision of the Merger
Agreement may be waived by any party which is entitled to the benefits
thereof, provided that after such shareholder approval, no amendment may be
made which decreases the Merger Consideration or otherwise materially affects
the rights of the Company's shareholders unless such amendment is approved by
shareholders.
SHAREHOLDER AGREEMENTS
Simultaneously with entering into the Merger Agreement, each of the
Management Shareholders and Woolworth entered into a separate Agreement with
Shareholder (the "Shareholder Agreements"). The material terms of the
Shareholder Agreements are summarized below. This summary is qualified in its
entirety by reference to the Shareholder Agreements which are attached hereto
as Exhibits B, C and D to this Proxy Statement and are incorporated herein by
reference.
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Appreciation Right
Pursuant to the Shareholder Agreements, each Management Shareholder has
agreed that if, at any time prior to the first anniversary of the date the
Merger Agreement is terminated by the Company, (a) any third party makes a
bona fide Takeover Proposal and subsequently (b) the Management Shareholder
shall, by sale, transfer, assignment or any other means whatsoever, receive
cash or property for any of the Management Shares held by such Management
Shareholder in excess of $23.75 per share, the Management Shareholder must
promptly pay (including, in the case of deferred consideration, when such
consideration is received) the amount of such excess to Woolworth; provided
that if a Takeover Proposal which provides for the payment of a higher price
per share to the public than the $24.00 per share set forth in the Merger
Agreement is received by the Company within 37 days of the date of the Merger
Agreement (i.e., by January 6, 1997), such payment is subject to a maximum of
$1.139284 per share (for an aggregate maximum payment by all of the Management
Shareholders of approximately $4 million). Notwithstanding the foregoing, this
appreciation right terminates if (a) Woolworth materially breaches any of its
obligations under the Merger Agreement; or (b) the Merger shall fail to be
consummated as a result of the failure to obtain clearance under the HSR Act;
(c) the conditions to the Company's obligation to effect the Merger shall not
have been satisfied; or (d) at the time of termination of the Merger Agreement
a statute, rule, regulation, executive order, decree, order, or injunction
shall have been enacted, entered, promulgated or enforced by any court or
governmental authority which prohibits or materially and adversely restricts
the consummation of the Merger.
Contingent Consideration
If the Merger is consummated, each Management Shareholder (whether or not
employed by the Company and including his heirs, beneficiaries,
representatives and assigns) is entitled to receive from Woolworth a payment
of up to $1.75 per share as specified below. Any payment so made is deemed to
be and is treated for all purposes by the parties to the Shareholder Agreement
as a contingent payment in consideration of the Management Shares sold by the
Management Shareholder pursuant to the Merger.
If the Company's earnings before interest and taxes ("EBIT") in the 12-month
period ended June 30, 1998 ("1998 EBIT") exceeds $20,271,000 then the
Management Shareholder shall be entitled to receive from Woolworth (in cash
paid promptly after the amount is finally calculated) $X per share (the "1998
Payment"), where X is calculated as follows:
(a) If the 1998 EBIT is less than $24,473,000, then X shall be equal to
[1998 EBIT minus $20,271,000] divided by $4,202,000 times $0.777737 and the
1998 Unpaid Amount shall be equal to [$0.777737 minus X].
(b) If the 1998 EBIT is greater than or equal to $24,473,000, then X
shall be equal to $0.777737 and the 1998 Unpaid Amount shall be equal to
$0.
In no event shall the 1998 Payment exceed $0.777737 per share.
If the EBIT of the Company for the 12-month period ended June 30, 1999
("1999 EBIT") exceeds $25,316,000, then the Management Shareholder shall be
entitled to receive from Woolworth (in cash promptly after the amount is
finally calculated), $Y per share (the "1999 Payment") where Y is calculated
as follows:
(a) If the 1999 EBIT is less than or equal to $30,569,000, then Y shall
be equal to [1999 EBIT minus $25,316,000] divided by $5,253,000 times
$0.972263.
(b) If the 1999 EBIT is greater than $30,569,000 and the 1998 Unpaid
Amount is greater than $0, then Y shall be equal to $0.972263 plus [1999
EBIT minus $30,569,000] divided by [$24,473,000 minus 1998 EBIT] times 1998
Unpaid Amount, provided, however, that in no event shall Y exceed $0.972263
plus the 1998 Unpaid Amount.
(c) If the 1999 EBIT is greater than $30,569,000 and the 1998 Unpaid
Amount equals $0, then Y shall be equal to $0.972263.
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Notwithstanding the foregoing, in no event shall the sum of the 1998 Payment
and the 1999 Payment exceed $1.75 per share.
As a result of the foregoing, the maximum consideration which the Management
Shareholders can receive for their Management Shares in the Merger is $23.75
per share, without interest.
Covenants of the Management Shareholders
Pursuant to the Shareholder Agreement, each Management Shareholder has
agreed that prior to the date of termination of the Merger Agreement, the
Management Shareholder will not, directly or indirectly, sell, transfer,
assign, pledge, hypothecate, create a security interest in or lien on, place
in trust or otherwise encumber or dispose of or limit his right to vote in any
manner any of the Management Shares except pursuant to the terms of the
Shareholder Agreement. The Management Shareholders have also agreed to vote
all of their Management Shares in favor of adoption of the Merger Agreement;
provided, however, that the Management Shareholders are not required to vote
their Management Shares in favor of adoption of the Merger Agreement and the
Merger if the Board of Directors of the Company determines, after consultation
with counsel, that recommending the Merger and adoption of the Merger
Agreement to the Company's shareholders is inconsistent with the Board of
Directors' fiduciary duties to the Company's shareholders. The Management
Shareholders have also agreed that, prior to the date of termination of the
Merger Agreement, they will not vote or execute any written consent in favor
of any amendment to the Articles of Incorporation or By-Laws of the Company or
any Business Combination transaction without the prior written consent of
Woolworth.
The Management Shareholders have also agreed that prior to the termination
of the Merger Agreement, they will not in their individual capacity, directly
or indirectly, solicit, encourage, or initiate or participate in any
discussions or negotiations with, or provide any information to, any
corporation, partnership, person or other entity or group concerning any
merger, sale of substantial assets, sale of substantial amounts of securities,
or similar transaction involving the Company or any sale of the Company
Shares. This prohibition does not, however, prohibit any Management
Shareholder from taking any action, including, but not limited to, those
enumerated above, in connection with his exercise of any fiduciary duty owed
to the Company or its shareholders in the Management Shareholder's capacity as
an officer or director.
Under the Shareholder Agreements, each of the Management Shareholders have
also agreed not to compete with the Company or Woolworth for a period of five
years from the Effective Date of the Merger.
EXPENSES
Except for the Termination Fee discussed above, the Merger Agreement
provides that, whether or not the Merger is consummated, all costs and
expenses incurred in connection with the Merger Agreement and the transactions
contemplated thereby shall be paid by the party incurring such expenses.
DISSENTERS' RIGHTS
Holders of stock listed on the Nasdaq National Market (such as the Company
Shares) generally have no dissenters' rights under the WBCL. See Wisconsin
Statutes section 180.1302(4). The WBCL provides an exception to this general
rule where the subject transaction constitutes a "business combination" as
defined in the WBCL. The Merger does not constitute a "business combination"
and, accordingly, holders of the Company Shares do not have dissenters'
rights.
BUSINESS
GENERAL
The Company is a leading direct marketer of athletic footwear, apparel,
equipment and licensed and private label products. Through its distinctive
full-color catalogs, the Company markets a broad selection of athletic
products primarily to 12- to 24-year olds who participate in organized
athletics ("technical athletes"). The Company's established relationships with
leading suppliers enable it to offer an exceptionally broad and deep product
selection, including premier branded products, the distribution of which is
typically limited. With over
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70,000 total stock keeping units ("SKUs"), Eastbay believes no other direct
marketer currently offers as complete a line of athletic footwear, apparel and
equipment covering the breadth of sports and depth of products as offered by
the Company. In addition, the Company believes it is the only direct marketer
of a full line of Nike Air(R) products.
The Company has grown rapidly in recent years. From fiscal 1992 to fiscal
1996 catalog circulation has increased from 13.6 million to 45.6 million
catalogs; active accounts have grown from 1.3 million names to 5.4 million
names; annual net sales have grown from $40.4 million to $117.6 million; and
annual income from operations has grown from $2.3 million to $8.3 million.
Eastbay mails three major catalogs each year, which correspond to the
beginning of (i) the football, soccer, cross-country and volleyball seasons
(Fall Sports); (ii) the basketball and wrestling seasons (Winter Sports); and
(iii) the track and field, baseball and softball seasons (Spring Sports). The
Company also mailed 26.4 million secondary catalogs and 2.0 million close-out
catalogs in fiscal 1996 and delivered approximately 45.6 million total
catalogs during the year. Eastbay has one retail and two outlet stores.
HISTORY AND PHILOSOPHY OF EASTBAY
The Company was founded in 1980 in Wausau, Wisconsin. The coaching and
teaching backgrounds of Art Juedes and Rick Gering, two of the Company's
founders, convinced them that technical athletes needed the proper athletic
equipment to succeed in their chosen sports and that high quality and
specialized equipment was difficult to obtain from traditional athletic
retailers, particularly in rural areas. The Company's original merchandising
strategy was to market track and field products to high school coaches within
a 50 mile radius of Wausau and to conduct seminars or demonstrations
explaining the technical advantages of the products offered by Eastbay and the
resulting benefits to their team members. The Company quickly developed a
reputation for providing a wide selection of performance enhancing, specialty
athletic merchandise at competitive prices with superior customer service.
Over time, the Company identified the direct marketing approach as a means to
increase product offerings and improve delivery and has grown rapidly since
the mailing of the first Eastbay catalog in 1984.
COMPANY STRATEGY
The Company attributes its success primarily to its ability to distribute
distinctive catalogs with a broad selection of performance enhancing products
to a targeted audience on a frequent basis, its high level of customer service
and its close relationships with its suppliers. Specifically, the Company
pursues the following strategies:
. Focus on the Technical Athlete. The Company focuses its marketing efforts
on athletes between the ages of 12 and 24, many of whom participate in
organized athletics. The Company offers a broad selection of high quality
products to these technical athletes to help them enhance their athletic
performance during their middle school, high school, and college years.
The Company's distinctive catalogs provide a convenient means to obtain
these products, especially for athletes located in rural or inner city
areas who are not conveniently able to obtain the products offered by the
Company from other retailers.
. Provide Superior Customer Service. The Company strives to provide prompt,
courteous and knowledgeable service to its customers in order to build
customer loyalty and promote and enforce the customer's belief in the
ease and convenience of catalog shopping with Eastbay. The Company trains
its teleservices representatives to be knowledgeable in the
specifications and features of the products offered by the Company. These
teleservices representatives are also supported by technical support,
team service and customer service personnel. The technical support
personnel are available to assist customers with detailed questions about
product specifications and capabilities. The teleservices representatives
and technical support personnel are also able to use the Company's
management information systems to provide customers with comparative
information regarding various products, product alternatives and
accessories. The Company also unconditionally guarantees its products.
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. Offer Broad Product Selection. Eastbay seeks to differentiate itself from
both traditional store-front retailers and other direct marketers by
providing an exceptionally broad and deep selection of high performance
branded and private label athletic products. With over 70,000 total SKUs,
Eastbay believes that no other direct marketer currently offers as
complete a line of athletic footwear, apparel and equipment covering the
breadth of sports and depth of products as offered by the Company. These
product offerings include premier branded products, difficult-to-find
sizes, men's, women's and children's styles and special team colors.
. Develop and Manage Proprietary Customer List. The Company has developed a
proprietary customer list with approximately 8.0 million names, primarily
consisting of 12- to 24-year olds. The Company actively manages its list
by targeting catalogs to various customer groups based on marketing and
list segmentation analysis. The Company's circulation management strategy
seeks to strike a balance between prospecting for new customers and
efficiently generating revenue from existing customers and those
requesting catalogs. Unlike many direct marketing companies which develop
their lists primarily through leasing or purchasing of names, Eastbay's
list has been developed primarily through referrals, returns of catalog
request cards, telephone requests for catalogs and association with or
attendance at numerous coaching clinics, sports camps, athletic
competitions and similar events.
. Maintain Close Supplier Relationships. The Company has established close
relationships with most of the leading suppliers of athletic footwear,
apparel and equipment, and licensed apparel. These suppliers include,
among others, Nike, Reebok, adidas, Converse, Champion, Starter, Asics,
New Balance, Mizuno, Easton and Fila. In certain cases, Eastbay believes
it is the only authorized direct marketer of a supplier's product.
Through these relationships, the Company is able to obtain the premier
products offered by these suppliers in a timely fashion. This enhances
the Company's ability to offer a broad array of products to serve its
customers' needs.
THE EASTBAY CATALOGS
The Company publishes distinctive catalogs which include detailed product
descriptions and specifications, full color photographs and pricing
information, often including comparisons of suggested retail prices with a
discount or sale price when applicable. The catalogs often feature original
characters and artwork on the cover designed to appeal to its customers and
background stories and features inside the catalog to stimulate the reader's
interest and promote purchasing decisions.
Eastbay's catalogs are created and produced in-house by the Company's
designers, photographers and production artists using a computer desktop
publishing system. The Company's in-house preparation of catalogs provides the
Company with greater flexibility and creativity in catalog production and
product selection, and results in significant cost savings. The Company mailed
45.6 million catalogs in fiscal 1996 compared to 37.8 million catalogs in
fiscal 1995. The Company's most active customers receive an Eastbay catalog as
often as every four weeks. The Company uses the following catalog formats.
Major Sports Season Catalogs
The Company mails three major sports season catalog editions each year,
corresponding to the beginning of (i) the football, soccer, cross-country and
volleyball seasons (Fall Sports); (ii) the basketball and wrestling seasons
(Winter Sports); and (iii) the track and field, baseball and softball seasons
(Spring Sports). These catalogs generally contain 88 to 128 pages and are
mailed to a selected portion of existing Eastbay customers. These catalogs
target specific sports and highlight the newest products in these sports.
Secondary Catalogs
The Company mailed 26.4 million secondary catalogs in fiscal 1996. The
secondary catalogs typically contain 48 to 88 pages. The secondary catalogs
focus on a narrower selection of new and better products for the major sports
which, based on the Company's experience, are attractive to customers. These
catalogs occasionally use selected promotional activities to help generate
purchases. These catalogs are also sent to prospects who meet the Company's
targeted demographic profile and whose names are obtained from mailing lists
rented from other direct marketing companies and from mailing lists generated
internally.
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Final Score(TM) Sale Catalogs
In addition to receiving the major sports season catalogs, the most active
customers are periodically mailed special offering catalogs of approximately
16 to 48 pages. These customers are offered exclusive products, special
markdowns and new products with limited quantities. The Company mailed 2.0
million Final Score catalogs in fiscal 1996.
Miscellaneous Catalogs
Based upon analyses of customer purchasing patterns, the Company has
developed single category catalogs for specific sports to be delivered to
particular buying groups such as coaches. The Company mailed 0.9 million
sport-specific catalog editions in fiscal 1996.
THE EASTBAY CUSTOMER
Eastbay differentiates itself from other direct marketers by targeting
technical athletes who range from 12 to 24 years in age. The Company's product
selection, marketing and operations are focused on serving the needs of these
athletes, including athletes living in rural or inner city areas where the
breadth and depth of products offered by the Company may not otherwise be
available. Eastbay has found that referrals from current customers are its
best source for new customers.
Mailing List Development
Eastbay seeks to expand its customer list on a cost-efficient basis. Eastbay
relies primarily on referrals from coaches, teammates and friends for new
customer generation. This referral network is fostered through the Company's
association with or attendance at numerous coaching clinics, sports camps,
athletic competitions and similar events. A catalog request postcard is also
included in most Eastbay catalogs. During fiscal years 1994, 1995 and 1996,
approximately 1.5 million, 1.8 million and 2.2 million new names,
respectively, were added to the Eastbay proprietary customer list. Eastbay's
customer list maintenance policies include an annual review to drop inactive
names from the list. Eastbay's proprietary customer list includes
approximately 8.0 million names, of whom approximately 5.4 million had made at
least one purchase or requested a catalog within the preceding 36 months.
Customer Asset Management
The Company believes that the active and effective management of its
customer list is critical to its ability to increase its customer base and
sales. As a result, the Company devotes considerable resources to catalog
circulation and customer asset management. Through marketing and merchandising
analysis, the Company seeks to maximize long-term product purchases by its
existing customers. Analysis of historical purchasing patterns of existing
customers, including timing and frequency modeling, is performed to increase
revenues from and maximize the profitability of these customers. The Company
mails to repeat customers catalogs which highlight new products and give these
customers frequent opportunities to shop with the Company during the major
sporting seasons.
PRODUCTS AND MERCHANDISING
Products
The Company's merchandising strategy is to provide a full range of
performance enhancing athletic footwear, apparel and equipment including
branded and private label products. The Company offers over 70,000 SKUs,
including difficult-to-find sizes, men's, women's and children's styles, and
special team colors and product color combinations designed for Eastbay. New
products are offered at or near full manufacturers' suggested retail price.
Discontinued, overstock and clearance items are sold at approximately 50-70%
of their original retail price. As the Company has grown, it has been able to
provide a greater breadth and depth of new products.
32
<PAGE>
The Company offers a variety of items in five major product categories:
<TABLE>
<CAPTION>
PRODUCT CATEGORY SELECTED PRODUCTS SELECTED BRAND NAMES
- - ---------------- ----------------- --------------------
<S> <C> <C>
Athletic Footwear....... Basketball, Cross Training, Nike, Reebok, adidas, Fila,
Training/Track and Field, Asics, Converse, New Balance,
Volleyball, Tennis, Football, Pony, Puma, Saucony, Etonic,
Soccer, Baseball, Wrestling, Mizuno, CCM and British
Street Hockey, Ice Hockey, Knights
Hiking and Cheerleading
Athletic Equipment...... Baseball Bats and Gloves, Rawlings, Easton, Louisville
Footballs, Basketballs, Hockey Slugger, Mizuno, Wilson, CCM
Equipment, Soccer Balls and and Rollerblade
Equipment, Protective Gear,
Bags and In-Line Skates
Athletic Apparel........ Jerseys, Warm-up Suits, Wind Nike, Champion, Starter,
Suits, Socks, Uniforms, Sweats, Adidas, Reebok, Mizuno and
Shorts, Hats, Tee-Shirts and Umbro
Jackets
Eastbay Private Label... Wind Suits, Tee-Shirts, Sweats, Eastbay
Uniforms, Practice Gear and Bags
Licensed Products....... NBA, NFL, NHL, MLB and Champion, Starter, Reebok,
NCAA Jackets, Hats, Shorts, Nike, Apex I and Wilson
Athletic Jerseys and Sweatshirts
</TABLE>
The Company's overall product profit margin depends in part upon the mix of
sales among the five primary product categories. Changes in the sales mix of
the product categories generally reflect changes in the product offerings in
the Company's catalogs, which are made in response to changes in consumer
demand. The Company's private label products generally yield a greater profit
margin and allow the Company to establish the Eastbay name as a "brand."
Product Acquisition and Planning
Eastbay's executives, merchandisers and inventory control specialists work
closely to evaluate new product offerings based upon quality, emerging
merchandise trends, consumer demand, performance histories, current inventory
positions and expected profitability. The Company is committed to finding
state-of-the-art products for its customers and selectively tests merchandise
for fit and quality before offering products for sale.
To assist in product acquisition and inventory control, the Company analyzes
past product sales and frequently talks to coaches and other customers to
forecast future customer purchases. Utilizing this analysis, the Company
determines the appropriate quantity of each product acquisition. When
significant demand is forecast for new products, the Company purchases large
quantities to assure product availability and to realize savings in product
acquisition. In the event the Company purchases too large a quantity of a
particular product, the Company attempts to sell the excess product through a
combination of outlet stores, "sales" sections of catalogs, package inserts,
Final Score liquidation catalogs, tent sales and return privileges.
The Company's merchandisers are responsible for building relationships with
suppliers. Eastbay's senior management also regularly contacts many of the
Company's suppliers to enhance and develop these relationships. The Company's
merchandisers regularly discuss with these suppliers attractive purchasing
opportunities and general market conditions. Management believes the
relationships which the Company has developed with its suppliers, and the
Company's ability to bring products to market quickly, enhance its ability to
acquire desirable products at favorable prices.
33
<PAGE>
DIRECT MARKETING OPERATIONS
The Company has structured its operations to meet the needs of its customers
and to provide prompt, courteous and knowledgeable service and a satisfactory
buying experience. The ordering and fulfillment process consists of
teleservices and order entry, credit approval, distribution, customer service
and returns.
Teleservices and Order Entry
The Company attempts to simplify catalog shopping by offering prompt,
courteous and knowledgeable order entry services through the use of its toll
tree telephone numbers which may be called 24 hours per day, seven days per
week to place orders or to request a catalog. Approximately 87% of the
Company's orders are received by telephone and approximately 13% of its orders
are received by mail and facsimile. The Company processes telephone orders in
an average of two to four minutes depending upon the nature of the order and
whether the customer is a first time buyer or a repeat customer. The Company
has 300 in-house phone and mail processing stations. The Company's phone
system allows it to efficiently schedule operators by shifting calls among the
telephone service groups if one group is too busy and also allows for the
shifting of calls among the Company's toll-free 800 numbers. In fiscal 1996,
the Company handled approximately 6.2 million calls.
Teleservices representatives process orders directly into the Company's on-
line data processing system which provides customer history information,
product availability information, product specifications, available
substitutes and accessories, expected ship date and order number. The
teleservices representatives use a scripted catalog sales system, are
knowledgeable in key product specifications and features and are trained to
cross-sell accessories and related products but are not allowed to "hard sell"
customers. Teleservices representatives have the ability to transfer calls to
technical support, team service or customer service personnel, as appropriate.
New teleservices representatives participate in a two-week training program,
which includes a mentor system for working with more experienced personnel.
Teleservices representatives are monitored to review performance and are
retrained periodically, including vendor-sponsored training programs on
specific product features two times each year. As teleservices representatives
gain more experience, they may be trained in other areas such as customer
service, technical support and team service.
Catalog Publication
Eastbay's catalogs are created and produced in-house by the Company's
designers, photographers and production artists using a computer desk-top
publishing system. The Company has also invested in its own in-house digital
film prepress system and photographic studio. These internal capabilities
allow the Company to control its catalog production schedule, which reduces
the lead time necessary to produce catalogs and the costs of preparing pages
for the printing of catalogs. These capabilities provide the Company with
greater flexibility and creativity in catalog production and in selecting the
products to be included in its catalogs.
Distribution and Fulfillment
The goal of fulfillment is the delivery of ordered merchandise to the
customer promptly and in good condition. The Company believes that
accomplishing this goal increases customer loyalty and repeat buying.
Management estimates that approximately 85% of goods ordered by customers are
in stock and of those orders, approximately 90% are shipped within 24 hours of
credit approval. Customers normally receive their items within three to five
business days after shipping. During fiscal 1996, approximately 84% of all
shipments were made through UPS. Each order is usually charged a shipping and
handling fee which is based upon the number of items in each order.
Eastbay uses an integrated picking, packing and shipping system. The system
monitors the in-stock status of each item ordered, processes the order and
generates warehouse selection tickets and packing slips for order fulfillment
operations. Eastbay has the capacity to ship up to 10,000 orders per shift and
adjusts the number of employees and the processing system to meet variable
demand levels.
Customer Service and Returns
Customer service activities are principally concerned with responding to
questions regarding order and refund status, products and authorization of
customer returns. The Company maintains separate teleservices departments that
are devoted specifically to customer service, team and coaches orders.
34
<PAGE>
The Company has an unconditional return policy for its products. In fiscal
years 1995 and 1996, the Company experienced customer returns of approximately
13% and 14%, respectively, of gross product sales. Return experience is
closely monitored at the SKU level to identify trends in product offerings,
chronic product defects and quality issues in an attempt to assess future
purchases, enhance customer satisfaction and reduce overall returns.
Information Systems and Technology
The Company has developed an integrated management information system which
allows telephone orders to be captured on-line and mail orders to be
efficiently entered. The Company's system is a fully mirrored on-line
transaction processing system. The information system also provides support
for merchandising, inventory management and control, marketing, financial and
management reporting. On-line access to information allows management to
monitor daily trends, market conditions and performance of the product
acquisition and planning functions. For example, analysis of historical
purchasing patterns of existing customers, including timing and frequency
modeling, is performed to increase revenues from customers and to assist in
the inventory management and control process.
COMPETITION
The market for athletic footwear, apparel and equipment is highly
competitive. The Company competes with a wide variety of traditional retail
stores, including athletic specialty stores such as Foot Locker (which is
owned by Woolworth) and Athletes Foot, and sporting goods superstores such as
Sports Authority. The Company also competes with other direct marketers such
as Spike Nashbar (volleyball), Road Runner (running and fitness) and Western
Athletic (baseball). The Company competes primarily on the basis of product
selection, customer service and convenience. Some of the Company's traditional
retail competitors have greater financial, distribution and marketing
resources than the Company.
EMPLOYEES
The size of the Company's workforce varies, ranging from approximately 850
to 1,200 individuals. During the peak seasons of fiscal 1996, approximately
80% of the Company's employees were part-time employees. The Company
emphasizes the recruiting and training of high-quality personnel and, to the
extent possible, promotes people to positions of increased responsibility from
within the Company.
The Company's employees are not covered by collective bargaining agreements,
and the Company considers its employee relations to be excellent. The
Company's continued success will depend in part on its ability to attract,
train and retain qualified personnel at all of its locations.
TRADEMARKS AND TRADE NAMES
The marks "Eastbay" and "Final Score" have been registered by the Company
with the U.S. Patent and Trademark Office. Other registrations are currently
pending. The Company also uses the trademarks, trade names, logos and
endorsements of its suppliers with their permission.
PROPERTIES
The Company's leased facilities are as follows:
<TABLE>
<CAPTION>
DESCRIPTION SQ. FT. LOCATION LEASE EXPIRATION
- - ----------- ------- ------------- -----------------------
<S> <C> <C> <C>
Corporate Headquarters, Retail
Store and Phone Center.......... 43,000 Wausau, WI July 1997
Distribution and Warehouse (five
locations)...................... 208,148 Wausau, WI August and October 1997
Outlet Store #l.................. 25,000 Wausau, WI June 1997
Outlet Store #2.................. 7,200 Madison, WI September 1997
Private Label Division........... 9,700 Schofield, WI October 1997
Phone Center..................... 4,000 Oshkosh, WI August 1998
-------
Total.......................... 297,048
</TABLE>
35
<PAGE>
In addition to the leased facilities described above, in November 1996 the
Company purchased a shopping center of approximately 90,000 square feet
located in Wausau, Wisconsin for a purchase price of approximately $1.4
million, part of which will be paid in installments. The Company expects to
use the property for its headquarters, a phone center and a retail store
commencing in July 1997, and will also lease a portion of the property to
various existing commercial tenants for a period of time thereafter. The
Company has also entered into a contract to purchase a warehouse and
distribution facility in Oshkosh, Wisconsin for a purchase price of
approximately $3.5 million, and the Company expects to complete the purchase
of this Oshkosh facility in June 1997.
LEGAL PROCEEDINGS
In the normal course of business the Company may be involved in various
legal proceedings from time to time. The Company does not believe it is
currently involved in any claim or action the ultimate disposition of which
would have a material adverse effect on the Company or its financial
condition.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Eastbay is a leading direct marketer of athletic footwear, apparel,
equipment, and licensed and private label products. Through distinctive full
color catalogs, the Company markets a broad selection of athletic products
primarily to 12-to-24 year olds who participate in organized athletics. The
Company's established relationships with leading suppliers enable it to offer
an exceptionally broad and deep product selection, including premier branded
products, the distribution of which is typically limited. With over 70,000
total stock keeping units, Eastbay believes no other direct marketer currently
offers as complete a line of athletic footwear, apparel and equipment covering
the breadth of sports and depth of products as offered by the Company. The
Company was founded in 1980 and has grown rapidly since the mailing of its
first catalog in 1984.
Catalog operations accounted for 95.0% and 96.4% of net sales in fiscal 1995
and 1996, respectively. Eastbay mails three major seasonal catalogs each year,
which correspond with the beginning of (i) football, soccer, cross country and
volleyball seasons, (Fall Sports); (ii) basketball and wrestling seasons,
(Winter Sports); (iii) track and field, baseball and softball seasons (Spring
Sports). The Fall Sports season, which the Company regards as three months
long, includes the peak selling month of August in the Company's first fiscal
quarter. The Winter Sports season, which the Company regards as three months
long, includes the peak selling month of November in the Company's second
fiscal quarter. The Spring Sports season, which the Company regards as four
months long, includes the peak selling month of March and falls in the
Company's third and fourth fiscal quarters. The remaining two months, which
fall in the Company's fourth fiscal quarter, are regarded as the Company's
"sales" and liquidation period. As a result, the fourth quarter generally has
lower gross margins due to lower unit selling prices and higher operating costs
as a percent of net sales. During the last three fiscal years, net sales for
the fourth quarter ranged from 22.0% to 24.3% of net sales for the full fiscal
year, and income from operations for the fourth quarter ranged from 5.0% to
12.0% of income from operations for the full fiscal year.
In addition to its three major season catalogs, the Company mails
approximately eighteen secondary and miscellaneous catalogs and three to four
"Final Score" liquidation catalogs each year. The secondary catalogs focus on a
narrower selection of new and better products for the major sports, which based
on the Company's experience are attractive to customers. The Company mails
catalogs to repeat customers which highlight new products and give these
customers frequent opportunities to shop with the Company during the major
sporting seasons. Eastbay delivered 37.8 million catalogs in fiscal 1995 and
45.6 million catalogs in fiscal 1996.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented by
certain items reflected in the Company's statements of income, as well as the
percentage change in such items compared to the prior year.
<TABLE>
<CAPTION>
PERCENTAGE OF NET THREE MONTHS
SALES YEARS ENDED ENDED
JUNE 30, SEPTEMBER 30,
----------------- -------------
1994 1995 1996 1995 1996
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales.................................... 100.0 100.0 100.0 100 100
Cost of sales................................ 56.2 55.1 53.1 55.2 49.0
Gross profit................................. 43.8 44.9 46.9 44.8 51.0
Selling, general & administrative expenses... 37.0 37.3 39.8 35.5 40.0
Income from operations....................... 6.8 7.6 7.1 9.3 11.0
Interest expense............................. .4 .9 .3 1.1 0.0
Pro forma income tax expense*................ .7 2.6 2.3 3.2 4.5
Pro forma net income*........................ 1.2 4.1 4.6 4.9 6.8
</TABLE>
- - --------
* Assuming a 39.5% combined federal and state tax rate for fiscal 1995 and
1994.
37
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
Net sales for the three months ended September 30, 1996 increased 8% to
$30.8 million compared to the three months ended September 30, 1995. The
increase is primarily attributable to increased catalog circulation and
increased average order value due to a change in product mix. Retail and
private label sales as a percent of total sales have not significantly changed
from prior quarters.
Demand for premiere product, especially Nike(R), continued to exceed current
allocations. This resulted in a 40% increase in out of stock in the first
quarter orders over last year. The Company continues to work with vendors on
product allocations. The Company's allocation of Nike product to be received
in the second quarter of fiscal 1997 is more than double the amount received
in the second quarter last year. In the third quarter of fiscal 1997 the
Company's expected allocation of Nike product increased four fold over the
same quarter last year. Nike product represented 48% of total sales for the
first quarter this year versus 43% last year. No other vendors represented
more than 10% of total sales.
During the quarter, gross profit increased 23% over the same period last
year from $12.8 million to $15.7 million. The Company's gross margin
percentage for the first quarter of fiscal 1997 increased to 51% compared to
45% during the same period in the prior year. This increase is due principally
to higher product margins due to a change in product mix, fewer liquidation
sales and better control over freight expenses compared to the prior year.
Operating expenses for the three months ended September 30, 1996 were 22%
greater than in the three months ended September 30, 1995. Increases in
operating expenses resulted principally from variable publicity costs
associated with catalog product and circulation. Paper prices were consistent
with the prior year. Circulation increased 29% over the first fiscal quarter
of 1996.
Surplus cash not required for day to day operations generated interest
income of $90,000 for the three months ended September 30, 1996 compared to $0
for the three months ended September 30, 1995.
Interest expense for the three months ended September 30, 1996 was $3,000
compared to $316,000 for the three months ended September 30, 1995. This
decrease is attributable to the elimination of bank debt early in the second
quarter of fiscal 1996 with the proceeds received from the initial public
offering.
The tax provision for the three months ended September 30, 1996 is
$1,372,000 for an effective tax rate of 39.5%. This compares to a $920,000
provision for income taxes for prior periods representing a pro forma
adjustment to reflect income taxes as if the Company had been a C corporation
rather than an S corporation, based on an assumed combined federal and state
tax of 39.5% for the first quarter of fiscal 1996.
For the three months ended September 30, 1996, pro forma net income was $2.1
million, up 49% from the $1.4 million achieved during the first three months
of fiscal 1996. Pro forma earnings per share for the three months ended
September 30, 1996 increased to $.35 per share compared to $.31 per share for
the three months ended September 30, 1995.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased 19.1% from $98.8 million in fiscal 1995 to $117.6
million in fiscal 1996. This increase is principally attributed to increased
aggregate circulation of catalogs from 37.8 million in fiscal 1995 to 45.6
million in fiscal 1996.
Gross profit increased from 44.9% of net sales in fiscal 1995 to 46.9% in
fiscal 1996. This improvement is primarily due to the gradual change in the
product mix offered by the Company to more nonshoe offerings. The gross
margins on nonshoe items are typically higher than the margins on shoe items.
In addition, the Company increased the price on its private label products
approximately 7% in January 1996 which also had a positive impact on gross
margin.
38
<PAGE>
Selling, general and administrative expenses increased 27.0% from $36.9
million, or 37.3% of net sales, in fiscal 1995 to $46.8 million, or 39.8% of
net sales, in fiscal 1996, principally as a result of variable expenses
associated with increased aggregate circulation of catalogs. Despite the
increase in the price of paper, the Company aggressively increased the number
of catalogs put into circulation but kept the total pages sent equal to the
prior fiscal year. The Company mailed 2.70 billion pages in fiscal 1995 and
2.68 billion pages in fiscal 1996. Publicity costs from paper, print, postage
and related expenses were 17.9% of net sales in fiscal 1995 and 20.8% of net
sales in fiscal 1996.
Interest expense decreased to $.3 million in fiscal 1996 from $.8 million in
fiscal 1995. The decrease is due to the proceeds from the Company's initial
public offering in October 1995 used to pay outstanding debt as well as stable
inventory levels maintained throughout the fiscal year.
Income before taxes increased 23.9% from $6.6 million in fiscal 1995 to $8.2
million in fiscal 1996. Net income in fiscal 1996 was $5.5 million. The
Company's effective tax rate was 33.5% in fiscal 1996. The rate was favorably
affected by the change in tax status as a result of the Company's initial
public offering in October 1995 which resulted in a one-time deferred tax
benefit of $.5 million. The Company was classified as a subchapter "S"
corporation prior to the initial public offering and did not pay corporate
income taxes.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales increased 28.4% from $76.9 million in fiscal 1994 to $98.8 million
in fiscal 1995. This increase is principally attributed to increased aggregate
circulation of catalogs from 27.1 million in fiscal 1994 to 37.8 million in
fiscal 1995.
Gross profit increased from 43.8% of net sales in fiscal 1994 to 44.9% of
net sales in fiscal 1995. This improvement is primarily attributable to the
addition of Nike Air(R) athletic shoes in the main catalogs as well as the
continued gradual change in the Company's merchandise mix to include higher
margin, nonshoe items such as equipment, private label apparel and licensed
products.
Selling, general and administrative expenses increased 29.5% from $28.5
million, or 37.0% of net sales, in fiscal 1994 to $36.9 million, or 37.3% of
net sales, in fiscal 1995, principally as a result of variable expenses
associated with increased aggregate circulation of catalogs. In anticipation
of increased postage and paper costs expected in the second half of fiscal
1995, the Company adopted a strategy in the first half of fiscal 1995 to
decrease average costs per catalog by reducing the number of pages per catalog
and to control total catalog expense by limiting the number of catalogs
delivered to new prospects. This strategy was successful as sales per catalog
(exclusive of six specialty catalogs mailed in 1995) increased slightly while
the costs per catalog were reduced due to the reduction in the average number
of pages per catalog. During the second half of fiscal 1995, the net margin
improvements resulting from this strategy were partially offset by (i)
increased postage and paper costs, (ii) the added costs associated with a test
of a new secondary catalog which had disappointing sales results in the fourth
fiscal quarter, and (iii) the costs associated with a second tent sale at a
new location. Including the six specialty catalogs, sales per catalog
decreased from $2.71 in fiscal 1994 to $2.50 in fiscal 1995.
Interest expense increased by 146.5%, from $.3 million in fiscal 1994 to $.8
million in fiscal 1995. The increase in interest expense was due primarily to
an increase in borrowing to fund additional inventory and increased postage
costs which required cash payments prior to sales generation for each catalog.
Income before taxes increased 34.2% (after adding back a one-time
compensation charge of $3.5 million in fiscal 1994) from $4.9 million in
fiscal 1994 to $6.6 million in fiscal 1995. This increase was primarily
attributable to increasing gross margin as a result of the addition of Nike
Air(R) products and continued changes in the Company's merchandise mix, as
well as to the Company's overall strategy to control catalog costs.
39
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On October 4, 1995, the Company completed a public offering of 2,300,000
shares of common stock at $15.00 per share. Net proceeds received by the
Company, after deducting offering expenses and underwriting discounts, were
approximately $31,529,000.
The Company used $11,500,000 of the net proceeds to pay a dividend of
undistributed previously taxed "S" corporation earnings and profits to the
Company's shareholders prior to the offering. The balance of the proceeds was
used for the repayment of bank debt and working capital needs.
The Company has met working capital needs through funds generated from
operations and bank financing. The Company's principal requirements for
working capital have been increased catalog circulation and inventory buildup
to meet seasonal requirements and increasing sales volumes. Capital resources
have also been used to expand the Company's telephone center capabilities and
increase catalog production capabilities. The Company's credit facility
consists of a $5 million demand line of credit and a $5 million revolving
credit agreement. At September 30, 1996, there were no outstanding borrowings
under the credit facility. The Company believes borrowing under the demand
line of credit will occur during the second quarter of the current fiscal year
due to further expansion of inventory levels necessary to meet sales demand of
the Christmas selling season.
The Company leases its warehouse facilities in Wausau, Wisconsin and
continues to evaluate the need to purchase or construct a permanent
distribution center. The Company believes additional financing is readily
available should it be needed to fund this expansion.
Inventory levels increased to $34.1 million at June 30, 1996 compared to
$32.5 million at June 30, 1995. The stability of the inventory balance is due
to the Company's efforts to reduce liquidation inventory while maintaining the
proper mix of new product offerings from major vendors.
During fiscal 1996, the Company made capital expenditures of approximately
$1.2 million. These expenditures were for computer and phone systems and
equipment, warehouse racking and office furniture and equipment. Capital
expenditures totaled $405,000 during the first quarter of 1997. This was
attributable to purchase of computer equipment and furnishings for a second
phone center in Oshkosh, Wisconsin and upgrades to computer equipment and
software at the corporate headquarters in Wausau, Wisconsin. Capital
expenditures for the first quarter last year were $158,000.
The Company announced an agreement to purchase a 90,000 square foot building
which will serve as its future headquarters and retail store. This purchase
will require a cash outlay of approximately $1.4 million in November 1996. An
additional $1.6 million will be expanded for building renovations during
fiscal 1997. Cash provided by operations and the credit facility are expected
to meet working capital needs and planned capital expenditure requirements.
Cash used in operations totaled $3 million during the quarter due mainly to
increased inventory levels. This compares with $1.6 million of cash used in
operations during the first quarter of fiscal 1996.
SEASONALITY
The operations of the Company are somewhat seasonal. In particular, gross
profit and income from operations have historically been weaker during the
fourth quarter, which includes the Company's "sales" and liquidation period.
As a result, results of operations for the three month period ended September
30, 1996 should not be considered to be indicative of results to be reported
for the balance of the year.
FORWARD LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Proxy Statement
that are not historical or current facts deal with potential future
circumstances and developments. These include expected future financial
results, liquidity needs, financing ability, management's or the Company's
expectations and beliefs and similar matters
40
<PAGE>
discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operations. The discussions of such matters and subject areas is
qualified by the inherent risk and uncertainties surrounding future
expectations generally, and also may materially differ from the Company's
actual future experience. The Company's business, operations and financial
performance are subject to certain risks and uncertainties which could result
in material differences in actual results from the Company's current
expectations. These risks and uncertainties include, but are not limited to,
general economic conditions, demand for the Company's products, product
availability, inventory selection, and costs of operation such as paper prices
and freight costs.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock by each director, the Chief Executive
Officer ("CEO") and the four most highly compensated executive officers other
than the CEO, each person known to own more than 5% of the Company's Common
Stock, and all directors and executive officers as a group, as of December 9,
1996. Except as indicated in the footnotes such persons have sole voting and
investment power of the shares beneficially owned.
<TABLE>
<CAPTION>
TOTAL NUMBER OF
SHARES
BENEFICIALLY PERCENTAGE
NAME OF BENEFICIAL OWNER OWNED OF CLASS
------------------------ --------------- ----------
<S> <C> <C>
Arthur H. Juedes(1)................................. 1,522,000 25.0%
Richard C. Gering(2)................................ 1,521,600 25.0%
Harry H. Colcord.................................... 467,378 7.7%
James A. Cronin III(3).............................. 7,500 *
John J. Stollenwerk(4).............................. 8,500 *
John V. Schaefer.................................... -- *
Richard A. Johnson.................................. -- *
All directors and executive officers as a group
(seven persons)(5)................................. 3,526,978 57.7%
The Columbia Funds Management Company(6)............ 549,300 9.0%
State of Wisconsin Investment Board(7).............. 500,000 8.2%
</TABLE>
- - --------
*Less than 1%.
(1) Does not include 117,800 shares of Common Stock owned by the Juedes
Descendants' Trust dated December 5, 1994 for the benefit of the
descendants of Mr. Juedes and for which Mr. Juedes does not have or share
voting or investment power.
(2) Does not include 117,800 shares of Common Stock owned by the Gering
Descendants' Trust dated December 23, 1994 for the benefit of the
descendants of Mr. Gering and for which Mr. Gering does not have or share
voting or investment power.
(3) Represents shares subject to stock options which are currently exercisable
but have not yet been exercised.
(4) Includes 7,500 shares subject to stock options which are currently
exercisable but have not yet been exercised.
(5) Includes 15,000 shares subject to stock options which are currently
exercisable but have not yet been exercised.
(6) The address of The Columbia Funds Management Company is 1300 SW Sixth
Avenue, P.O. Box 1350, Portland, Oregon 97207. The shares beneficially
owned are as reported in a Form 13F for the quarter ended September 30,
1996.
(7) The address of the State of Wisconsin Investment Board is P.O. Box 7842,
Madison, Wisconsin 53707. The shares beneficially owned are as reported in
a Form 13F for the quarter ended September 30, 1996.
The above beneficial ownership information is based on information
furnished, or 13F filings made, by the specified persons and is determined in
accordance with Rule 13d-3, as required for purposes of this Proxy Statement.
It is not necessarily to be construed as an admission of beneficial ownership
for other purposes.
41
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
Information regarding the Company's directors is set forth in the following
table.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND DIRECTOR
NAME AGE BUSINESS EXPERIENCE SINCE
---- --- ------------------------ --------
<C> <C> <S> <C>
Arthur H. Juedes... 44 Co-founder of the Company and Co-Chairman 1981
since July 1995. Chairman of the Company
from 1981 until July 1995.
Richard C. Gering.. 44 Co-founder of the Company and Co-Chairman 1981
since July 1995. Chief Executive Officer of
the Company from 1981 until July 1995.
John J. 56 President of Allen-Edmonds Shoe Corporation 1995
Stollenwerk....... (a manufacturer of men's dress and casual
footwear) since 1974. Also a director of
Badger Meter, Incorporated and Koss
Corporation.
Harry H. Colcord... 45 President of the Company since 1992 and 1995
Chief Executive Officer since July 1995.
From 1982 to 1992, President and Chief
Operating Officer of the Window Fabrication
Division of Apogee Enterprises, a
diversified manufacturer of architectural
products.
James A. Cronin 41 Executive Vice President and Chief 1995
III............... Operating Officer of Ascent Entertainment
Group (a diversified entertainment and
media company)
since June 1996. From June 1992 to June
1996, served as a financial management
consultant. From 1989 to June 1992,
employed as an investment banker with
Alfred Checci & Associates. Also a director
of Landair Services, Inc.
</TABLE>
EXECUTIVE OFFICERS
Information concerning those executive officers of the Company who are not
directors is set forth in the following table:
<TABLE>
<CAPTION>
NAME AGE POSITION AND EXPERIENCE
---- --- -----------------------
<C> <C> <S>
John V. Schaefer... 37 Vice President-Operations, Chief Financial Officer
and Secretary (since August 1993). From 1992 to
August 1993, Controller of the Company. From 1989 to
1992, Vice President and General Manager of the
Window Fabrication Division of Apogee Enterprises.
Richard A. Johnson. 38 Vice President-Merchandising (since August 1993).
From 1991 to August 1993, Manager of Transportation
Economics of Graebel Van Lines. From 1988 to 1991,
Systems Engineer for the Electronic Data Systems
division of General Motors.
</TABLE>
OTHER MATTERS
The Board of Directors of the Company is not aware of any matters to be
presented for action at the Special Meeting other than those described herein
and does not intend to bring any other matters before the Special Meeting.
However, if other matters should come before the Special Meeting, it is
intended that the holders of proxies solicited hereby will vote thereon in
their discretion, unless such authority is withheld.
SHAREHOLDER PROPOSALS
As described in the Company's Proxy Statement relating to its 1996 Annual
Meeting (in the event the Merger is not consummated for any reason), proposals
of shareholders intended to be presented at the 1997 Annual Meeting of
Shareholders must be received by the Company at its principal executive offices
not later than May 19, 1997, for inclusion in the Company's proxy statement and
form of proxy relating to that meeting. Shareholders should mail any proposals
by certified mail-return receipt requested.
42
<PAGE>
EXPENSES OF SOLICITATION
The expenses in connection with solicitation of the enclosed form of proxy,
will be borne by the Company. In addition to solicitation by mail, officers or
regular employees of the Company, who will receive no compensation for such
services other than their regular salaries, may solicit proxies personally or
by telephone or facsimile. Arrangements will be made with brokerage houses,
nominees, participants in central certificate depository systems and other
custodians and fiduciaries to supply them with solicitation material for
forwarding to their principals, and arrangements may be made with such persons
to obtain authority to sign proxies. The Company may reimburse such persons
for reasonable out-of-pocket expenses incurred by them in connection
therewith.
INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements of the Company as of June 30, 1996 and 1995, and
for each of the years in the three-year period ended June 30, 1996, have been
audited by Wipfli Ullrich Bertelson LLP, independent public accountants, as
stated in their report.
A representative of Wipfli Ullrich Bertelson will be at the Special Meeting
to answer questions by shareholders and will have the opportunity to make a
statement if so desired.
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and
other information are available for inspection and copying at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at the Commission's
regional office located at 7 World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can also be obtained from the
Public Reference Section of the Commission at its Washington address at
prescribed rates. Such reports and other information filed with the Commission
may also be available at the Commission's site on the World Wide Web at
http:\\www.sec.gov.
By order of the Board of Directors
Harry H. Colcord, President and
Chief Executive Officer
Wausau, Wisconsin
, 199
43
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OR REPORT PAGE
- - ------------------------------ ----
<S> <C>
Independent Auditor's Report............................................... F-2
Eastbay, Inc. Balance Sheets............................................... F-3
Eastbay, Inc. Statements of Income......................................... F-4
Eastbay, Inc. Statements of Shareholders' Equity........................... F-5
Eastbay, Inc. Statements of Cash Flows..................................... F-6
Eastbay, Inc. Notes to Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
Eastbay, Inc.
Wausau, Wisconsin
We have audited the accompanying balance sheets of EASTBAY, INC. as of June
30, 1995 and 1996, and the related statements of income, shareholders' equity
and cash flows for each of the years in the three-year period ended June 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of EASTBAY, INC. at June 30,
1995 and 1996, and the results of its operations and its cash flows for each
of the years in the three-year period ended June 30, 1996, in conformity with
generally accepted accounting principles.
/s/ Wipfli Ullrich Bertelson
-------------------------------------
Certified Public Accountants
July 29, 1996
Wausau, Wisconsin
F-2
<PAGE>
EASTBAY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------- SEPTEMBER 30,
1995 1996 1996
------- ------- -------------
(IN THOUSANDS) (UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 17 $ 7,509 $ 4,087
Accounts receivable--Net............................ 1,705 875 1,372
Refundable income taxes............................. -- 62 --
Inventories......................................... 32,465 34,109 39,863
Catalog costs....................................... 1,515 1,716 3,051
Income tax deposit.................................. 839 -- --
Deferred income taxes............................... -- 660 660
Other............................................... 630 760 744
------- ------- -------
Total current assets............................ 37,171 45,691 49,777
------- ------- -------
Property and equipment:
Leasehold improvements.............................. 493 558 570
Furniture and equipment............................. 4,160 5,302 5,694
------- ------- -------
Totals.......................................... 4,653 5,860 6,264
Less-Accumulated depreciation......................... 2,191 3,228 3,504
------- ------- -------
Total property and equipment.................... 2,462 2,632 2,760
------- ------- -------
Other assets:
Shareholder advances................................ 439 358 358
Deferred income taxes............................... -- 48 48
------- ------- -------
Total other assets.............................. 439 406 406
------- ------- -------
Total assets.................................... $40,072 $48,729 $52,943
======= ======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term notes payable....... $ 200 $ -- $ --
Demand line of credit............................... 1,430 -- --
Accounts payable.................................... 9,477 8,415 10,049
Accrued salaries and wages.......................... 560 988 725
Reserve for returns................................. 300 397 427
Advance payments on orders.......................... 389 498 439
Accrued and other liabilities....................... 604 578 281
Accrued income taxes................................ 1,069
------- ------- -------
Total current liabilities....................... 12,960 10,876 12,990
------- ------- -------
Long-term liabilities--Notes payable.................. 12,309 -- --
------- ------- -------
Commitments and contingencies.........................
Shareholders' equity:
Common stock--(20,000,000 shares authorized) $.01
par value:
6,070,778 shares issued and outstanding--1996..... -- 61 61
3,770,778 shares issued and outstanding--1995..... 21 -- --
Additional paid-in capital.......................... 2,377 33,750 33,750
Retained earnings................................... 12,405 4,042 6,142
------- ------- -------
Total shareholders' equity...................... 14,803 37,853 39,953
------- ------- -------
Total liabilities and shareholders' equity...... $40,072 $48,729 $52,943
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
EASTBAY, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
FOR THE YEARS ENDED JUNE ENDED SEPTEMBER
30, 30,
-------------------------- ----------------
1994 1995 1996 1995 1996
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales........................ $76,908 $98,770 $117,639 $28,539 $30,816
Cost of sales.................... 43,191 54,464 62,520 15,762 15,105
------- ------- -------- ------- -------
Gross profit..................... 33,717 44,306 55,119 12,777 15,711
Selling, general and
administrative expenses......... 28,472 36,858 46,815 10,132 12,328
------- ------- -------- ------- -------
Income from operations........... 5,245 7,448 8,304 2,645 3,383
Other income (expense):
Interest income................ -- 14 243 -- 90
Stock award.................... (3,452) -- -- -- --
Interest expense............... (342) (843) (343) (316) (3)
Other.......................... 29 (2) (3) -- 2
------- ------- -------- ------- -------
Income before income taxes....... 1,480 6,617 8,201 2,329 3,472
Provision for income taxes or pro
forma adjustment for income
taxes........................... 585 2,614 2,750 920 1,372
------- ------- -------- ------- -------
Pro forma net income............. $ 895 $ 4,003 $ 5,451 $ 1,409 $ 2,100
======= ======= ======== ======= =======
Pro forma net income per share... $ 0.88 $ 0.96 $ 0.31 $ 0.35
======= ======== ======= =======
Pro forma weighted average shares
outstanding..................... 4,537 5,673 4,537 6,071
======= ======== ======= =======
Supplemental pro forma net income
per share....................... $ 0.74 $ 0.93 $ 0.26 $ 0.35
======= ======== ======= =======
Supplemental pro forma weighted
average shares outstanding...... 6,071 6,071 6,071 6,071
======= ======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
EASTBAY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- -------- -------- --- --- ---
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1993... 3,298,400 $17 $ -- $ 8,851 $ 8,868
Net income, 1994........ 1,480 1,480
Dividends declared...... (3,237) (3,237)
Issuance of stock award. 472,378 4 2,377 2,381
--------- --- ------- -------- --------
Balance June 30, 1994... 3,770,778 21 2,377 7,094 9,492
Net income, 1995........ 6,617 6,617
Dividends declared...... (1,306) (1,306)
--------- --- ------- -------- --------
Balance June 30, 1995... 3,770,778 21 2,377 12,405 14,803
Dividends declared...... (14,850) (14,850)
Reclassification of
legal capital.......... 17 (17)
Net income July 1, 1995
to October 2, 1995..... 2,329 2,329
Termination of "S"
corporation status..... (116) 116
Proceeds from initial
public offering........ 2,300,000 23 32,062 32,085
Offering costs.......... (556) (556)
Net income October 3,
1995 to June 30, 1996.. 4,042 4,042
--------- --- ------- -------- --------
Balance June 30, 1996... 6,070,778 $61 $33,750 $ 4,042 $ 37,853
Net income (unaudited).. 2,100 2,100
--------- --- ------- -------- --------
Balance September 30,
1996 (unaudited)....... 6,070,778 $61 $33,750 $ 6,142 $ 39,953
========= === ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
EASTBAY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE THREE MONTHS ENDED
30, SEPTEMBER 30,
--------------------------- -------------------
1994 1995 1996 1995 1996
------- -------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating activities:
Pro forma net income....... $ 895 $ 4,003 $ 5,451 $ 1,409 $ 2,100
Noncash items:
Provision for
depreciation and
amortization............ 732 808 1,042 225 277
Pro forma adjustment for
income taxes............ 585 2,614 920 920 --
Deferred income taxes.... -- -- (708) -- --
Provision for stock
award................... 2,381 -- -- -- --
Provision for forgiveness
of shareholder advances. -- 107 110 -- --
Loss (gain) on sales of
property and equipment.. (29) 1 3 -- --
Changes in operating assets
and liabilities:
Accounts receivable...... (301) (917) 830 (316) (497)
Refundable income taxes.. -- -- (62) -- --
Inventories.............. (7,766) (11,977) (1,644) 233 (5,754)
Other assets............. (795) (208) (574) (506) (1,319)
Accounts payable......... 2,313 2,067 (1,062) (3,240) 1,634
Accrued and other
liabilities............. 635 293 608 (326) (589)
Accrued income taxes..... -- -- -- -- 1,131
------- -------- -------- -------- ---------
Net cash provided by
(used in) operating
activities............ (1,350) (3,209) 4,914 (1,601) (3,017)
------- -------- -------- -------- ---------
Investing activities:
Purchase of property and
equipment................. (826) (916) (1,221) (158) (405)
Shareholder (advances)
repayments of advances.... (185) (583) 214 214 --
Income tax deposit (paid)
refunded.................. (510) -- 839 -- --
Proceeds from sales of
property and equipment.... 10 1 6 -- --
------- -------- -------- -------- ---------
Net cash used in
investing activities.. (1,511) (1,498) (162) 56 (405)
------- -------- -------- -------- ---------
Financing activities:
Net borrowings (repayments)
under revolving credit
agreement................. 7,200 4,800 (12,000) 4,929 --
Net increase (decrease) in
demand line of credit..... (1,425) 1,430 (1,430) -- --
Principal payments on long-
term debt................. (213) (200) (509) (50) --
Proceeds from issuance of
long-term debt............ 800 -- -- -- --
Dividends paid............. (3,567) (1,306) (14,850) (3,350) --
Net proceeds from common
stock offering............ -- -- 31,529 -- --
------- -------- -------- -------- ---------
Net cash provided by
financing activities.. 2,795 4,724 2,740 1,529 --
------- -------- -------- -------- ---------
Net increase (decrease) in
cash and cash equivalents... (66) 17 7,492 (16) (3,422)
Cash and cash equivalents at
beginning of period......... 66 -- 17 17 7,509
------- -------- -------- -------- ---------
Cash and cash equivalents at
end of period............... $ -- $ 17 $ 7,509 $ 1 $ 4,087
======= ======== ======== ======== =========
Supplemental cash flow
information:
Interest paid.............. $ 358 $ 689 $ 492 355 3
Income taxes paid.......... -- -- 2,600 -- 241
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
EASTBAY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principal Business Activity
The Company's principal business activity is direct mail retail sales of
athletic footwear, clothing, equipment and accessories. The Company represents
a substantial number of suppliers and merchandises a wide variety of athletic
products to its customers throughout the United States and in a number of
foreign countries.
Use of Estimates in Preparation of Financial Statements
The preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires the use of certain estimates
and assumptions that directly affect the results of reported assets,
liabilities, revenue and expenses. Actual results may differ from these
estimates.
Revenue Recognition
Revenue is recognized when the merchandise is shipped to the customer. The
Company grants credit to customers in the ordinary course of business. The
carrying amount for customer accounts receivable on credit sales as reported
on the balance sheet, net of allowances for doubtful accounts, approximates
fair value.
Cash Equivalents
The Company defines cash equivalents as highly liquid, short-term
investments with an original maturity of three months or less.
Inventories
Inventories, which consist of merchandise held for sale, are valued at the
lower of average cost, determined on the first-in, first-out (FIFO) method, or
market.
Catalog Costs
The Company amortizes catalog production and mailing costs over the expected
revenue stream, which is approximately three months from the date catalogs are
mailed. The Company's recording of such advertising costs is in conformance
with the provisions of the AICPA Statement of Position No. 93-7, "Reporting on
Advertising Costs." Catalog production and mailing costs charged to expense
for 1994, 1995 and 1996 were $14,506,000, $18,284,000 and $25,181,000,
respectively.
Property, Equipment and Depreciation
Property and equipment are valued at cost. Maintenance and repair costs are
charged to expense as incurred. Gains or losses on disposition of property and
equipment are reflected in income. Depreciation is computed on the straight-
line method over the estimated useful lives of the assets, which are three to
ten years for furniture and equipment. Leasehold improvements are being
amortized over the lives of the related operating leases.
Reserve for Returns
At the time of sale, the Company provides a reserve equal to the gross
profit on projected merchandise returns, based on its prior returns
experience.
F-7
<PAGE>
EASTBAY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
Prior to October 3, 1995, the Company elected to be taxed under the
provisions of subchapter "S" of the Internal Revenue Code and comparable state
regulations. Under these provisions, the Company did not pay federal or state
corporate income tax on its taxable income. Instead, the shareholders reported
on their personal income tax returns their proportionate share of the
Company's taxable income and tax credits. Dividends to shareholders were, at a
minimum, declared each year sufficient to reimburse the personal tax liability
incurred as a result of the subchapter "S" election.
As discussed in Note 6, the Company completed an initial public offering of
common stock on October 4, 1995. In connection with the offering, the
shareholders elected to terminate the subchapter "S" election on October 3,
1995. On that date the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred income taxes are computed based on the difference between the
financial statement and income tax basis of assets and liabilities based on
enacted tax laws. Cumulative deferred income taxes were recorded resulting in
an adjustment of $520,000 to the Company's reported income tax expense and a
corresponding increase in deferred tax assets.
As an "S" corporation with a fiscal year-end, the Company was required to
have on deposit with the Internal Revenue Service an amount equal to the
income tax liability deferred by having a fiscal year ending on a date other
than December 31. Accordingly, a deposit of $839,000 is presented as an asset
at June 30, 1995. The deposit was returned to the Company in 1996.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation.
NOTE 2--DEBT
The Company's bank credit facility consists of a demand line of credit and a
revolving credit agreement.
The demand line of credit of up to $5,000,000 provides for monthly interest
payments at bank prime or, at the Company's option, the London Interbank
Offered Rate (LIBOR) plus 1.25 percent. There was no amount outstanding under
the demand line of credit as of June 30, 1996. An amount of $1,430,000 was
outstanding under the demand line of credit at June 30, 1995 at an interest
rate of 9.0 percent. The Company had a $750,000 stand-by letter of credit
outstanding against the demand line of credit at June 30, 1995. This letter of
credit expired in 1996.
The long-term bank credit facility consists of the following at June 30:
<TABLE>
<CAPTION>
1995 1996
------- ----
(IN
THOUSANDS)
<S> <C> <C>
Revolving credit agreement.................................. $12,000 $--
Term note................................................... 509 --
------- ----
Totals.................................................. 12,509 --
Less--Current maturities.................................... 200 --
------- ----
Long-term portion........................................... $12,309 $--
======= ====
</TABLE>
F-8
<PAGE>
EASTBAY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1996, the Company amended the revolving credit agreement it had
previously established. The amended agreement, which allows borrowings of up
to $5,000,000, is effective through November 1, 1996 and requires monthly
interest payments at bank prime or, at the Company's option, LIBOR plus 1.25
percent. Borrowings under this agreement, with original maturities of 30 to 90
days, are classified as long-term because the Company has the intent and
ability to refinance these loans on a long-term basis. The weighted average
interest rate on borrowings under this agreement was 8.5 percent at June 30,
1995.
The term note called for quarterly principal payments of $50,000 and monthly
interest payments at bank prime plus 0.3 percent which was 9.3 percent at June
30, 1995. The term note was paid in 1996.
Amounts outstanding under the bank credit facility cannot exceed a stated
percent of eligible inventory and are collateralized by substantially all of
the Company's assets. In addition, the bank credit facility requires the
Company to comply with certain restrictive covenants, one of which requires
the Company to maintain minimum tangible net worth. At June 30, 1996, the
entire balance of retained earnings was available for the payment of cash
dividends without violation of the minimum tangible net worth covenant.
NOTE 3--RETIREMENT PLAN
The Company's retirement plan consists of a defined contribution 401(k)
retirement plan covering substantially all full-time employees and eligible
part-time employees meeting age and service requirements. The Company matches
30 percent of the employee's salary deferral contributions up to a maximum
matching contribution of 1.8 percent of compensation.
Employer contributions to the plan totaled $27,000, $35,000 and $38,000 in
1994, 1995, and 1996, respectively.
NOTE 4--INCOME TAXES
The provision for income taxes or pro forma adjustment for income taxes
consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................. $504 $2,250 $2,804
State............................................... 81 364 654
---- ------ ------
Total current..................................... 585 2,614 3,458
---- ------ ------
Deferred:
Change in tax status................................ -- -- (520)
Federal............................................. -- -- (163)
State............................................... -- -- (25)
---- ------ ------
Total deferred.................................... -- -- (708)
---- ------ ------
Totals............................................ $585 $2,614 $2,750
==== ====== ======
</TABLE>
Income tax provisions for 1994 and 1995 represent pro forma adjustments to
reflect income taxes as if the Company had been a "C" corporation rather than
an "S" corporation. The income tax provision for 1996 also includes a pro
forma adjustment of $920,000 for the period of the year prior to the Company's
change in tax status on October 3, 1995. The pro forma adjustments for income
taxes have been calculated based upon an assumed combined federal and state
tax rate of 39.5 percent.
F-9
<PAGE>
EASTBAY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table reconciles the federal statutory income tax rate and the
Company's effective income tax rate for the year ended June 30, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Provision for income taxes at federal statutory rate........ $2,788 34.0%
State taxes net of federal tax benefits..................... 490 6.0
Change in tax status........................................ (520) (6.4)
Other....................................................... (8) (0.1)
------ ----
Effective income tax........................................ $2,750 33.5%
====== ====
</TABLE>
The major temporary differences that give rise to deferred tax assets at
June 30, 1996 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Property and equipment.............................................. $ 48
Allowances on accounts receivable................................... 19
Inventories......................................................... 384
Reserve for returns................................................. 146
Accrued expenses not yet deductible................................. 111
----
Total deferred tax assets....................................... $708
====
</TABLE>
The deferred tax assets are presented in the accompanying June 30, 1996,
balance sheet as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Net current deferred tax assets..................................... $660
Net noncurrent deferred tax asset................................... 48
----
Total deferred tax assets....................................... $708
====
</TABLE>
NOTE 5--RELATED PARTY TRANSACTIONS
Stock Award
On June 30, 1994, the Company awarded 472,378 shares, as restated, of common
stock with a value of $2,381,000 to its President for past performance. In
addition, the Company paid a cash bonus of $1,071,000 and agreed to loan him
additional amounts to cover personal income tax liabilities created by this
award. Since the stock award and related cash bonus were awarded for past
performance, the entire amount totaling $3,452,000 was charged to income on
June 30, 1994.
Shareholder Advances
The stock award agreement called for the Company to advance the President
additional amounts sufficient to cover personal income taxes created by his
1994 stock award. The advance, secured by Company stock, bears interest at the
Company's cost of funds and is due in full on July 1, 1999. However, if the
Company reaches certain targeted annual levels of performance through July 1,
1999, the loan principal, plus accrued interest, will be forgiven. In
addition, annual cash bonuses will be paid sufficient to cover the personal
income taxes generated from such forgiveness. Any amounts forgiven by the
Company will be expensed when forgiven.
F-10
<PAGE>
EASTBAY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In addition, during 1995, the Company advanced the President $222,000 for
personal estimated income tax payments created by the President reporting his
proportionate share of 1995 Company income on his personal tax return. The
advance is secured by Company stock and bears interest at the Company's cost
of funds.
The following is a summary of the shareholder advance activity:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance, June 30, 1994.............................................. $185
Advance under stock award agreement................................. 347
Advance forgiven under stock award agreement........................ (107)
Advance for estimated income tax payments........................... 222
Interest accrued.................................................... 14
----
Balance, June 30, 1995.............................................. 661
Repayment of advance for estimated income tax payments.............. (214)
Advance forgiven under stock award agreement........................ (110)
Interest accrued.................................................... 29
----
Balance, June 30, 1996.............................................. 366
Less--Current portion............................................... 8
----
Long-term portion................................................... $358
====
</TABLE>
The advances forgiven under the stock award agreement were recorded as
compensation expense in 1996 and 1995. In addition, cash bonuses of $90,000
and $87,000 were paid to the President to cover the personal income taxes
generated by the forgiveness of the advance in 1996 and 1995, respectively.
Employment Agreements
Prior to the initial public offering, the Company entered into separate
Employment Agreements with the Company's two Co-Chairmen and amended its
existing Executive Employment Agreement with the Company's President. The
agreements, which have a remaining term of two years, provide for base
salaries, annual bonuses, fringe benefits and certain severance benefits in
the event their employment with the Company is terminated.
NOTE 6--SHAREHOLDERS' EQUITY
Initial Public Offering
On October 4, 1995, the Company completed a public offering of 2,000,000
shares of common stock at $15.00 per share, and on the same date sold an
additional 300,000 shares in connection with the underwriters' exercise of
their over-allotment option. Net proceeds received by the Company, after
deducting offering expenses and underwriting discounts, were approximately
$31,529,000.
The Company used $11,500,000 of the net proceeds to pay a dividend of
undistributed previously taxed "S" corporation earnings and profits to the
Company's shareholders prior to the offering. The balance of the proceeds was
used for the repayment of bank debt and working capital needs.
Stock Split
In connection with the initial public offering, the Company recapitalized
its Class "A" voting common stock (no par value) and its Class "B" nonvoting
common stock (no par value, $10 stated value). There were 2,800 shares of
Class "A" voting common stock authorized, issued and outstanding. There were
601 shares of
F-11
<PAGE>
EASTBAY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Class "B" voting common stock authorized, 401 shares of which were authorized
and outstanding. The recapitalization increased the authorized shares of
voting common stock to 20,000,000 shares. The Class "A" and Class "B" shares
were split 1,178-for-1 into shares of newly authorized voting common stock.
The accompanying financial statements have been restated to reflect this stock
split. The initial public offering resulted in the issuance of 2,300,000
shares, increasing the total number of issued and outstanding shares to
6,070,778.
Subchapter "S" Distributions
In September 1995, the Company paid a dividend of undistributed previously
taxed "S" corporation earnings and profits of $3,350,000 to enable
shareholders to pay personal income taxes on their pro rata share of the
Company's taxable income for all periods through the termination of the
Company's "S" corporation status.
NOTE 7--STOCK OPTIONS
During fiscal 1995, the Company established the 1994 Stock Incentive Plan.
The Plan, which makes 235,600 shares, as restated, available and reserved for
issuance, specifies the purchase price, time and method of exercise. Optionees
are selected by the Company's Board of Directors. All employees are eligible
to receive incentive stock options and/or nonqualified options. Consultants
are eligible to receive nonqualified options. Options are granted for a term
not to exceed 10 years. The option price of any incentive stock options
granted to any shareholder owning greater than 10 percent of the total
combined voting power of all classes of Company stock may not be less than 110
percent of the fair market value at the date of grant. Other incentive stock
options granted shall not have an option price that is less than the fair
market value at the date of grant. The option price for nonqualified stock
options granted shall be established by the Company's Board of Directors at
the date of grant.
During fiscal 1996, the Company established the Outside Director Stock
Option Plan. The Plan, which makes 30,000 shares, as restated, available and
reserved for issuance, specifies that new members of the Board of Directors
who are not employees of the Company receive nonqualified stock options to
purchase 7,500 shares of Company stock at the fair market value at the date of
grant. Options are granted for a period of ten years.
The following table summarizes the activity relating to the Company's stock
option plans:
<TABLE>
<CAPTION>
1995 1996
------ ------------
(NUMBER OF SHARES)
<S> <C> <C>
Options outstanding at beginning of the year........ -- 63,847
Granted............................................. 63,847 53,950
Terminated.......................................... -- (500)
------ ------------
Options outstanding at end of the year.............. 63,847 117,297*
====== ============
Options exercisable at end of the year.............. -- 27,769**
====== ============
Price range of outstanding options.................. $ 5.22 $5.22-$15.50
====== ============
</TABLE>
- - --------
* 102,297 and 15,000 options remain outstanding under the 1994 Stock
Incentive Plan and the Outside Director Stock Option Plan, respectively.
** 12,769 and 15,000 options are exercisable under the 1994 Stock Incentive
Plan and the Outside Director Stock Option Plan, respectively.
F-12
<PAGE>
EASTBAY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
Future Accounting Change: Statement of Financial Accounting Standard (SFAS)
No. 123, "Accounting for Stock-Based Compensation," is effective July 1, 1996
for the Company. The new standard encourages companies to adopt a fair value
based method of accounting for employee stock options but allows companies to
continue to account for those plans using the accounting prescribed by APB
Opinion 25, "Accounting for Stock Issued to Employees." The Company will adopt
the disclosure requirements of the standard in fiscal 1997 and plans to
continue accounting for stock compensation using APB 25, making pro forma
disclosures of net income and net income per share as if the fair value method
had been applied.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases warehouse, store and office space and office equipment
under various lease arrangements. The leases are accounted for as operating
leases. Future minimum lease payments, by year and in the aggregate, under
noncancelable operating leases with initial or remaining terms of one year or
more consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997................................ $531
1998................................ 121
----
Total future minimum lease
payments....................... $652
====
</TABLE>
Rent expense for all operating leases totaled $434,000, $490,000 and
$573,000 for 1994, 1995 and 1996, respectively.
Legal Contingencies
In the normal course of business the Company may be involved in various
legal proceedings from time to time. It is the opinion of management that any
judgment or settlement resulting from pending or threatened litigation would
not have a material adverse effect on the financial position or operations of
the Company.
NOTE 9--PRO FORMA DISCLOSURES
Pro Forma Net Income Per Share
Pro forma net income per share for periods presented has been computed by
dividing pro forma net income by the number of shares outstanding, assuming
that the 1,178-for-1 stock split and recapitalization in connection therewith
were completed at the beginning of fiscal 1995. In addition, pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 55, pro forma
shares outstanding have been adjusted to include 766,666 of the shares issued
by the Company in the offering at the initial public offering price of $15.00
per share, the proceeds of which were used to pay the $11,500,000 dividend of
undistributed previously taxed "S" corporation earnings and profits. Dilution
of pro forma net income per share due to common stock equivalents (stock
options) is negligible and, accordingly, no dilution has been reported.
Supplemental Pro Forma Net Income Per Share
Supplemental pro forma net income per share is based on pro forma net income
adjusted for a pro forma elimination of interest expense, less the related tax
effect, associated with the portion of the offering proceeds used to retire
indebtedness. The increase in pro forma net earnings due to this supplemental
adjustment is $510,000 and $201,000 in 1995 and 1996, respectively.
Supplemental pro forma net income per share is calculated by dividing
supplemental pro forma net income by the number of shares outstanding after
the offering.
F-13
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
AMONG
WOOLWORTH CORPORATION,
East Acquisition Corporation
AND
EASTBAY, INC.
DATED AS OF NOVEMBER 30, 1996
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Heading Page
- - ------- ----
ARTICLE I
THE MERGER
<S> <C>
1.1 The Merger............................................ 1
1.2 Effective Time of the Merger.......................... 1
1.3 Effects of the Merger................................. 2
1.4 Articles of Incorporation............................. 2
1.5 By-Laws............................................... 2
1.6 Directors............................................. 2
1.7 Officers.............................................. 2
</TABLE>
ARTICLE II
CONVERSION OF SHARES
<TABLE>
<CAPTION>
<S> <C>
2.1 Conversion of Shares.................................. 3
2.2 Exchange of Certificates.............................. 3
2.3 Closing of Company Transfer Books..................... 4
2.4 Dissenting Shares..................................... 4
</TABLE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
<TABLE>
<CAPTION>
<S> <C>
3.1 (a) Corporate Organization........................... 5
3.2 Authorization......................................... 5
3.3 Consents and Approvals; No Violations................. 6
3.4 Capitalization........................................ 7
3.5 Subsidiaries.......................................... 8
3.6 SEC Reports........................................... 8
3.7 Financial Statements.................................. 8
3.8 Absence of Undisclosed Liabilities.................... 9
3.9 Absence of Material Adverse Change.................... 10
3.10 Legal Proceedings, etc. .............................. 10
3.11 Compliance with Applicable Law........................ 10
3.12 Proxy Statement....................................... 11
3.13 Intellectual Property................................. 11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
3.14 Brokers and Finders................................... 11
3.15 Contracts and Leases.................................. 12
3.16 Inventory............................................. 12
3.17 Taxes................................................. 13
3.18 Employee Benefit Plans; ERISA......................... 14
3.19 Certain Interests..................................... 17
3.20 Employees............................................. 17
</TABLE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND SUB
<TABLE>
<CAPTION>
<S> <C>
4.1 Corporate Organization................................ 17
4.2 Authorization......................................... 18
4.3 Consents and Approvals; No Violations................. 18
4.4 Proxy Statement....................................... 19
4.5 Brokers and Finders................................... 19
</TABLE>
ARTICLE V
CONDUCT OF THE COMPANY'S BUSINESS
ARTICLE VI
ADDITIONAL AGREEMENTS
<TABLE>
<CAPTION>
<S> <C>
6.1 Access to Properties and Records...................... 22
6.2 Proxy Statement....................................... 23
6.3 Stockholder Approval.................................. 23
6.4 Stock Option and Other Plans.......................... 24
6.5 Reasonable Best Efforts; etc. ........................ 25
6.6 HSR Act............................................... 25
6.7 Material Events....................................... 25
6.8 Public Announcements.................................. 26
6.9 Indemnification....................................... 26
6.10 Update Disclosure..................................... 26
</TABLE>
ii
<PAGE>
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
<TABLE>
<CAPTION>
<S> <C>
7.1 Conditions to Each Party's Obligation
to Effect the Merger................................. 27
7.2 Conditions to the Obligation of the
Company to Effect the Merger......................... 27
7.3 Conditions to Obligations of Parent
and Sub to Effect the Merger......................... 28
</TABLE>
ARTICLE VIII
CLOSING
8.1 Time and Place........................................ 29
8.2 Deliveries at the Closing............................. 29
ARTICLE IX
TERMINATION AND ABANDONMENT
9.1 Termination............................................ 29
9.2 Effect of Termination.................................. 30
ARTICLE X
MISCELLANEOUS
<TABLE>
<CAPTION>
<S> <C>
10.1 Expenses; Fees....................................... 31
10.2 No Survival of Representations and
Warranties.......................................... 31
10.3 Headings............................................. 32
10.4 Notices.............................................. 32
10.5 Assignment........................................... 33
10.6 Complete Agreement................................... 33
10.7 Modifications, Amendments and Waivers................ 33
10.8 Counterparts......................................... 34
10.9 Governing Law........................................ 34
10.10 Accounting Terms..................................... 34
10.11 Parties in Interest.................................. 34
10.12 Severability......................................... 34
10.13 Definitions.......................................... 34
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of November
30, 1996, among Woolworth Corporation, a New York corporation ("Parent"), East
Acquisition Corporation, a Wisconsin corporation and an indirect wholly owned
subsidiary of Parent ("Sub"), and Eastbay, Inc., a Wisconsin corporation (the
"Company").
WHEREAS, the Boards of Directors of Parent, Sub and the Company have
approved the acquisition of the Company by Parent pursuant to this Agreement;
and
WHEREAS, the Boards of Directors of the Parent, Sub and the Company
have approved the merger of Sub with and into the Company (the "Merger"), upon
the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties and agreements, herein contained, and intending to
be legally bound hereby, Parent, Sub and the Company agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2),
Sub shall be merged with and into the Company (the "Merger") and the separate
existence of Sub shall thereupon cease, with the Company being the surviving
corporation in the Merger (the "Surviving Corporation").
1.2 Effective Time of the Merger. The Merger shall become effective
on the later of (a) the date the Department of Financial Institutions of the
State of Wisconsin (the "Department of State") receives for filing the articles
of merger in accordance with Section 180.0120 of the Business Corporation Law of
the State of Wisconsin (the "Wisconsin Corporation Law") or (b) the effective
date specified in such articles of merger. The articles of merger shall be
delivered by the Company and Sub to the Department of State as soon as
practicable
1
<PAGE>
before the closing of the Merger contemplated by this Agreement in accordance
with Section 8.1. As used in this Agreement, the term "Effective Time" shall
mean the date and time at which such articles become effective as specified
above.
1.3 Effects of the Merger. The Merger shall have the effects set
forth in Section 180.1106 of the Wisconsin Corporation Law. As of the Effective
Time, the Company shall be an indirect wholly owned subsidiary of the Parent.
1.4 Articles of Incorporation. The Articles of Incorporation of Sub,
as in effect immediately prior to the Effective Time, shall be the Articles of
Incorporation of the Surviving Corporation, except that Article First thereof
shall be amended to read as follows:
"FIRST: The name of the Corporation is Eastbay, Inc."
and thereafter may be amended in accordance with its terms and as provided by
law.
1.5 By-Laws. The By-Laws of Sub as in effect immediately prior to
the Effective Time shall be the By-Laws of the Surviving Corporation.
1.6 Directors. The directors of Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation, who shall
serve until their respective successors are duly elected and qualified in the
manner provided in the Articles of Incorporation and By-Laws of the Surviving
Corporation, or as otherwise provided by law.
1.7 Officers. The officers of the Surviving Corporation shall
initially consist of the officers of the Company immediately prior to the
Effective Time, until their successors are duly elected and qualified in the
manner provided in the Articles of Incorporation and By-Laws of the Surviving
Corporation, or as otherwise provided by law.
2
<PAGE>
ARTICLE II
CONVERSION OF SHARES
2.1 Conversion of Shares. As of the Effective Time, by virtue of the
Merger and without any action on the part of any holder thereof:
(a) All Shares (as defined below) which are held by the Company,
any subsidiary of the Company, Parent, Sub or any other subsidiary of Parent,
shall be cancelled and retired and shall cease to exist.
(b) All issued and outstanding shares of capital stock of Sub
shall be converted into an aggregate of 1,000 validly issued, fully paid and
nonassessable shares of Common Stock of the Surviving Corporation.
(c) Except as provided in the next sentence, each remaining
outstanding share of Common Stock, $.01 par value ("Shares"), of the Company,
other than Dissenting Shares (as hereinafter defined), if applicable, shall be
converted into the right to receive $24.00 in cash, without any interest
thereon. Each Share held by Arthur H. Juedes, Richard C. Gering and Harry H.
Colcord shall be entitled to receive $22.00 in cash and, if certain earnings (as
defined in the applicable agreements with such shareholders) are achieved,
contingent consideration of up to an additional $1.75 in cash.
2.2 Exchange of Certificates. (a) After the Effective Time, a bank
or trust company designated by Parent shall act as paying agent (the "Paying
Agent") in effecting the exchange of cash for certificates which, prior to the
Effective Time, represented Shares entitled to payment pursuant to Section
2.1(c). Upon the surrender and exchange of such a certificate the holder
thereof shall be paid, without interest thereon, the amount of cash to which he
is entitled hereunder and such certificate shall forthwith be cancelled. All
holders of Shares other than Arthur H. Juedes, Richard C. Gering and Harry H.
Colcord shall be entitled to receive $24.00 for each Share. Messrs. Juedes,
Gering and Colcord shall be entitled to receive $22.00 per Share and contingent
consideration of up to $1.75 per Share payable in accordance with the terms of
certain agreements, of even date herewith, between Parent and each of Messrs.
Juedes,
3
<PAGE>
Gering and Colcord. Until so surrendered and exchanged, each such certificate
shall represent solely the right to receive the cash into which the Shares it
theretofore represented shall have been converted pursuant to Section 2.1(c) and
become entitled to receive pursuant to this Section 2.2(a).
(b) At or prior to the Effective Time, Parent will provide the
Paying Agent with the funds necessary to make the payments contemplated by
Sections 2.1(c) and 2.2(a).
(c) Promptly after the Effective Time, the Paying Agent shall
mail to each record holder of certificates, which immediately prior to the
Effective Time represented Shares, a form letter of transmittal and instructions
for use in surrendering certificates and receiving payment therefor.
2.3 Closing of Company Transfer Books. At the Effective Time, the
stock transfer books of the Company shall be closed and no transfer of Shares
shall thereafter be made. If, after the Effective Time, certificates
representing Shares are presented to the Surviving Corporation or the Paying
Agent, they shall be cancelled and exchanged for cash as provided herein.
2.4 Dissenting Shares. If dissenter's rights are available to
holders of Shares pursuant to the Wisconsin Corporation Law, then,
notwithstanding anything in this Agreement to the contrary, Shares which are
issued and outstanding immediately prior to the Effective Time and which are
held by stockholders who have delivered a written objection to the Merger in the
manner provided in Section 180.1321 of the Wisconsin Corporation Law (the
"Dissenting Shares") shall not be converted into the right to receive or be
exchangeable for the consideration provided in Section 2.1(c) of this Agreement,
unless and until such holder shall have failed to perfect or shall have
effectively withdrawn or lost his right to fair value or appraisal and payment
under the Wisconsin Corporation Law, as the case may be. If such holder shall
have so failed to perfect or shall have effectively withdrawn or lost such
right, his Shares shall thereupon be deemed to have been converted into and to
have become exchangeable for, at the Effective Time, the right to
4
<PAGE>
receive the consideration set forth in Section 2.1(c) hereof, without any
interest thereon.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to Parent and Sub that, except as
previously disclosed to Parent in writing:
3.1 (a) Corporate Organization. Each of the Company and the Company
Subsidiaries (as defined in Section 3.5 hereof) (i) is a corporation duly
organized, validly existing and in active status under the laws of the
jurisdiction of its incorporation, (ii) has all requisite corporate power and
authority to own, operate and lease the properties and assets it now owns,
operates and leases and to carry on its business as now being conducted and
(iii) is qualified or licensed to do business and in good standing in every
jurisdiction in which the ownership, operation or lease of property by it or the
conduct of its business requires such qualification or licensing, except for
such failures, if any, to be so qualified and in good standing, which, when
taken together with all such other failures, would not in the aggregate have a
Material Adverse Effect (as defined in section 10.13) on the Company.
(b) Articles of Incorporation and By-Laws. The Company has
previously delivered to Parent complete and correct copies of the Articles of
Incorporation and all amendments and restatements thereto to the date hereof and
By-laws (or comparable governing documents), as presently in effect, of the
Company and the Company Subsidiaries, and none of the Company and the Company
Subsidiaries is in default in the performance, observation or fulfillment of
either of its Articles of Incorporation or By-Laws (or comparable governing
documents).
3.2 Authorization. The Company has full corporate power and
authority to execute and deliver this Agreement and, subject to the conditions
specified herein, to consummate the transactions contemplated hereby. The Board
of Directors of the Company has duly approved
5
<PAGE>
this Agreement and has duly authorized the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby and as of
the date of this Agreement has resolved to recommend that its stockholders adopt
this Agreement and approve the Merger, and no other corporate proceedings (other
than the adoption of this Agreement by the holders of a majority of the issued
and outstanding Shares in order to consummate the Merger) on the part of the
Company or any Company Subsidiary are necessary to approve and authorize the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Company and constitutes (assuming due authorization, execution
and delivery of this Agreement by the other parties hereto), the valid and
binding agreement of the Company, enforceable against the Company in accordance
with its terms. The Company hereby represents and warrants that the Merger has
been approved by the Board of Directors pursuant to Section 180.1141(1) of the
Wisconsin Corporation Law.
3.3 Consents and Approvals; No Violations. Except as set forth in
Schedule 3.3 hereto and for (a) the applicable requirements of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (b) the requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
relating to the Proxy Statement (as defined in Section 3.12 hereof) and (c) the
filing of the articles of merger and other appropriate merger documents and such
other actions, if any, as required by the laws of the State of Wisconsin, the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not: (i) violate any provision of the
Articles or Certificate of Incorporation or By-Laws (or comparable governing
documents) of the Company or any Company Subsidiary; (ii) violate any statute,
ordinance, rule, regulation, order or decree of any court or of any public,
governmental or regulatory body, agency or authority applicable to the Company
or any Company Subsidiary or by which any of their respective property or assets
may be bound; (iii) require any filing with, or permit, consent, or approval of,
or the giving of any notice to, any public, government or regulatory body,
agency or authority; or (iv) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default
6
<PAGE>
(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, franchise, permit, agreement or other instrument or
obligation to which the Company or any Company Subsidiary is a party, or by
which any of them or any of their respective properties or assets may be bound,
excluding from the foregoing clauses (ii), (iii) and (iv) violations, breaches
and defaults which, and filings, notices, permits, consents and approvals the
absence of which, in the aggregate, would not have a Material Adverse Effect on
the Company and would not prevent or delay in any material respect the
consummation of the transactions contemplated hereby.
3.4 Capitalization. The authorized capital stock of the Company
consists of 20,000,000 Shares and 500,000 shares of Class B Common Stock, par
value $0.01, ("Class B Shares"). As of the date hereof, no Shares are held by
the Company in its treasury, and no Shares are held by any of the Company
Subsidiaries. As of the date hereof, (i) 6,071,028 Shares are issued and
outstanding and no Class B Shares are issued and outstanding, (ii) no more than
174,747 Shares are reserved for issuance pursuant to the 1994 Stock Incentive
Plan (the "Plan Options") of which options to purchase Shares 63,847 were issued
during 1994 (the "1994 Plan Options") and options to purchase no more than
110,900 Shares were issued during 1995 and 1996 (the "1996 Plan Options"), and
(iii) no more than 15,000 Shares are reserved for issuance pursuant to the
Outside Director Stock Option Plan (the "Outside Director Stock Options"). All
shares of capital stock of the Company which are outstanding as of the date
hereof are duly authorized, validly issued, fully paid and non-assessable,
except as set forth in section 180.0622(2)(b) of the Wisconsin Corporation Law,
as interpreted, and are not subject to, nor were they issued in violation of,
any preemptive rights. Except as set forth above, there are no shares of
capital stock of the Company authorized or outstanding. Except as set forth
above, there are not any, and at the Effective Time there will not be any,
subscriptions, options, conversion or exchange rights, warrants or other
agreements, claims or commitments of any nature whatsoever obligating the
Company or any Company Subsidiary to issue, transfer, deliver or sell, or cause
to be issued, transferred, delivered or sold, additional shares of the capital
stock
7
<PAGE>
of the Company or any Company Subsidiary or obligating the Company or any
Company Subsidiary to grant, extend or enter into any such agreement or
commitment.
3.5 Subsidiaries. All the outstanding shares of capital stock of
each corporation of which the Company owns, directly or indirectly, 50 percent
or more of the outstanding capital stock (a "Company Subsidiary") have been
validly issued and are fully paid, nonassessable and are not subject to, nor
were they issued in violation of, any preemptive rights. The name and
jurisdiction and ownership of each such Company Subsidiary is set forth on
Schedule 3.5 hereto. All outstanding shares of capital stock of the Company
Subsidiaries are owned, directly or indirectly, by the Company, free and clear
of all liens, charges, encumbrances, security interests, equities, options,
restrictions on voting rights or rights of disposition, and claims or third
party rights of whatever nature. Except for Company Subsidiaries, the Company
does not own, directly or indirectly, any capital stock or other equity
securities of any corporation or have any direct or indirect equity or ownership
interest in any business and neither the Company nor any Company Subsidiary is
subject to any obligation or requirement to provide funds for or to make any
investment (in the form of a loan, capital contribution or otherwise) in any
entity.
3.6 SEC Reports. The Company has previously delivered to Parent all
reports, registration statements, proxy statements and other documents filed by
the Company with the SEC since September 28, 1995. The Company has filed all
reports, registration statements, proxy statements and other documents with the
SEC required to be filed since September 28, 1995, all of which complied, as of
their respective dates, in all material respects, with all applicable
requirements of the Exchange Act and the Securities Act of 1933, and none of
which, as of their respective dates, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
3.7 Financial Statements. The Company has previously delivered to
Parent (i) the audited consolidated balance sheets of the Company and its
subsidiaries
8
<PAGE>
as of June 30, 1996, June 30, 1995 and June 30, 1994 and its audited
consolidated statements of income, changes in shareholders' equity and changes
in financial position for the respective fiscal years then ended, including the
notes thereto, in each case examined by and accompanied by the report of Wipfli
Ullrich Bertelson, independent certified public accountants and (ii) the
unaudited consolidated balance sheet of the Company and its Subsidiaries as of
September 30, 1996 and its unaudited consolidated statements of income, changes
in shareholders' equity and changes in financial position for the period then
ended (all of the financial statements referred to above in this Section are
hereinafter collectively referred to as the "Company Financial Statements").
The Company Financial Statements have been prepared from, and are in accordance
with, the books and records of the Company and its consolidated subsidiaries and
present fairly the consolidated financial position, consolidated results of
operations and changes in financial position of the Company and its consolidated
subsidiaries as of the dates and for the periods indicated, in each case in
conformity with generally accepted accounting principles, consistently applied
during such periods, except as otherwise stated in such financial statements or
in the notes thereto or in the auditor's certifying report thereon or in the
case of interim financial statements, subject to normal year-end adjustments
which in the aggregate will not be material.
3.8 Absence of Undisclosed Liabilities. Except as and to the extent
reflected in the balance sheet dated as of September 30, 1996 included in the
Company Financial Statements (the "Balance Sheet"), or in the notes thereto, and
except for obligations pursuant to purchase orders, neither the Company nor any
Company Subsidiary had at that date any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise and whether due or to become
due), which individually exceed $75,000. Since the date of the Balance Sheet,
except as set forth in Schedule 3.8 hereto or for liabilities incurred in the
ordinary course of business and which have been reported to Parent pursuant to
an Update Schedule (as defined in Section 6.10), neither the Company nor any
Company Subsidiary has incurred any liabilities or obligations of any nature
(whether accrued, absolute, contingent or otherwise, and whether due or to
become due) which individually exceed $75,000.
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3.9 Absence of Material Adverse Change. Since September 30, 1996,
there has not been, occurred or arisen any Material Adverse Effect on the
Company.
3.10 Legal Proceedings, etc. Except as set forth in Schedule 3.10
hereto, there are no suits, actions, claims, proceedings or investigations
(collectively, "claims") pending, or, to the knowledge of the Company, are there
any material claims threatened, against, relating to or involving the Company or
any Company Subsidiary (or any of their respective officers or directors in
connection with the business or affairs of the Company and the Company
Subsidiaries) or any properties or rights of the Company or any Company
Subsidiary, before any court, arbitrator or administrative or governmental body,
United States or foreign. As of the date hereof, there are no such suits,
actions, claims, proceedings or investigations pending or, to the knowledge of
the Company, threatened challenging the validity or propriety of the
transactions contemplated by this Agreement. Neither the Company nor any
Company Subsidiary is subject to any judgment, decree, injunction, rule or order
of any court or, to the knowledge of the Company, any governmental restriction
applicable to the Company or any Company Subsidiary, which is reasonably likely
to have a Material Adverse Effect on the Company, or which materially adversely
affects the ability of the Company or any Company Subsidiary to acquire any
property or conduct business in any geographical area other than any such items
applicable to companies generally.
3.11 Compliance with Applicable Law. The Company and each Company
Subsidiary currently holds and is in compliance in all material respects with
the terms of all licenses, permits and authorizations necessary for the lawful
conduct of their respective businesses, and has complied with, and neither the
Company nor any Company Subsidiary is in violation of, or in default in any
respect under, the applicable statutes, ordinances, rules, regulations, orders
or decrees of all federal, state, local and foreign governmental bodies,
agencies and authorities having jurisdiction over it or any part of its
operations or assets, except for such failures of compliance, violations and
defaults which in the aggregate would not have a Material Adverse Effect on the
Company.
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3.12 Proxy Statement. The definitive proxy statement and related
materials to be furnished to the stockholders of the Company in connection with
the Merger pursuant to Section 6.2 hereof (the "Proxy Statement") will comply in
all material respects with the Exchange Act and the rules and regulations
thereunder. If at any time prior to the Effective Time any event occurs which
would be required to be described in a supplement or amendment to the Proxy
Statement or any supplement or amendment thereto, any supplement or amendment
required pursuant to the provisions of the Exchange Act will comply in all
material respects with the Exchange Act and the rules and regulations
thereunder. Notwithstanding the foregoing, no representation or warranty is
made with respect to any information with respect to Parent or Sub or their
officers, directors or affiliates provided to the Company by Parent in writing
for inclusion in the Proxy Statement or the supplements or amendments thereto.
3.13 Intellectual Property. Except as previously disclosed to Parent
in writing, the Company and each of the Company Subsidiaries owns, or is
licensed to use, or otherwise has the full right to use, all copyrights,
trademarks, tradenames, patents, technology, know-how, formulae and processes
currently utilized by it and necessary to operate the business of the Company
and Company Subsidiaries taken as a whole ("Intellectual Property"). Without
limiting the generality of the foregoing, the Company has full right, title, and
interest to the service mark EASTBAY in the United States and each of the
countries outside of the United States in which it is presently being used for
use on retail catalog services for the sale of footwear and clothing, and is the
owner of United States Service Mark Registration Nos. 1304300 and 1962110 for
such mark. To the knowledge of the Company (i) no claim is being asserted by
any person with respect to the use of any such Intellectual Property, and (ii)
the use of such Intellectual Property does not infringe on the rights of any
person, except for any such claims or infringements which are not material to
the Company.
3.14 Brokers and Finders. Except for Robert W. Baird & Co.,
Incorporated, neither the Company nor any Company Subsidiary nor any of its
officers, directors or employees has employed any broker or finder or incurred
any liability for any brokerage fees, commissions,
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finders' fees or similar fees or expenses and no broker or finder has acted
directly or indirectly for the Company or any Company Subsidiary in connection
with this Agreement or the transactions contemplated hereby and thereby. Except
for the fees and expenses of Robert W. Baird & Co. Incorporated (a copy of the
agreement providing for which has been delivered to Parent), no investment
banking, financial advisory or similar fees have been incurred or are or will be
payable by the Company or any Company Subsidiary in connection with this
Agreement or the transactions contemplated hereby.
3.15 Contracts and Leases. Neither the Company nor any Company
Subsidiary is in default, and no event has occurred which (whether with or
without notice or lapse of time) would constitute a default, under any material
contract or lease, except for any immaterial defaults. To the knowledge of the
Company, no other party to any such material contract or lease is in default,
and no event has occurred which (whether with or without notice or lapse of
time) would constitute a default, under any such material contract or lease,
except for any immaterial defaults. Except as set forth in Schedule 3.15
hereto, neither the execution or delivery of this Agreement nor the consummation
of the transactions contemplated hereby will constitute (whether with or without
notice or lapse of time) a material default or a cause for termination or
material modification of any lease of real property to which the Company or any
Company Subsidiary is a party. The Company is not now and for the past three
years has not been party to any agreement which provided for or contemplated a
transaction which would constitute a Business Combination (as defined herein).
The Company is not party to or bound by any collective bargaining or similar
agreement with any labor organization.
3.16 Inventory. All inventory of the Company and the Company
Subsidiaries reflected on the Balance Sheet consisted only of goods useable and
saleable in the ordinary course of business of the Company and the Company
Subsidiaries in accordance with past practices. Items of inventory which were,
as of June 30, 1996, soiled, damaged or otherwise physically defective were
written down on the Balance Sheet to the lower of cost or market value. From
June 30, 1996 to the date hereof, the inventory of the Company and the Company
Subsidiaries has
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increased or decreased in a manner consistent with the seasonal nature of the
business of the Company and the Company Subsidiaries and their historic business
practices and, at all times during such period, has consisted of goods useable
and saleable in the ordinary course of business of the Company and the Company
Subsidiaries in accordance with past practices. The present quality, quantity
and mix of all inventory of the Company and the Company Subsidiaries is
reasonable and warranted by the present circumstances of the business of the
Company and the Company Subsidiaries as construed in accordance with past
practices.
3.17 Taxes. Each of the Company and each Company Subsidiary has duly
filed all Tax Returns (as hereinafter defined) required to be filed by any of
them. Each of the Company and each Company Subsidiary has duly paid (or the
Company has paid on its behalf), or has set up a reserve which is adequate for
the payment of, all Taxes (as hereinafter defined) required to be paid in
respect of the periods covered by such Tax Returns except for failures to pay
amounts which are not material. Neither the Company nor any of the Company
Subsidiaries is delinquent in the payment of any amount of Taxes which would
have a Material Adverse Effect on the Company. No material deficiencies for any
Taxes have been proposed, asserted or assessed against the Company or any of the
Company Subsidiaries, and, with respect to United States federal and state
taxes, no waivers of the time to assess any Taxes have been given or requested
except to the extent previously disclosed to Parent in writing. All income tax
returns of the Company and the Company Subsidiaries have been audited for all
years ended on or before June 30, 1992, or the statutes of limitations with
respect to the periods covered by such returns have expired. No issues have
been raised (and are currently pending) by the Internal Revenue Service (the
"IRS") or any other taxing authority in connection with any of the Tax Returns
referred to above for which adequate reserves have not been established on the
books of the Company and the Company Subsidiaries and which, individually or in
the aggregate, are likely to have a Material Adverse Effect on the Company.
There are no liens with respect to Taxes (except for liens with respect to real
property taxes not yet due) upon any of the properties or assets of the Company
or any of the Company Subsidiaries. Neither the Company nor any of the Company
Subsidiaries,
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with regard to any property or assets held or acquired by them at any time, has
filed a consent pursuant to Section 341(f) of the Internal Revenue Code of 1986,
as amended (the "Code"). For purposes of this Section 3.17, (i) the term
"Taxes" shall include all taxes, assessments and governmental charges
(including, without limitation, sales taxes) imposed by the United States or any
state, local and foreign government or subdivision or agency thereof, including
any interest, penalties or additions thereto, and (ii) the term "Tax Return"
shall include any return, report or other information required to be supplied to
a taxing authority with respect to Taxes.
3.18 Employee Benefit Plans; ERISA.
-----------------------------
(a) Schedule 3.18(a) hereto contains a true and complete list of
each bonus, deferred compensation, incentive compensation, stock purchase, stock
option, severance or termination pay, hospitalization or other medical, life or
other insurance, supplemental unemployment benefits, profit-sharing, pension, or
retirement plan, program, agreement or arrangement, and each other employee
benefit plan, program, agreement or arrangement, maintained or contributed to or
required to be contributed to by the Company or by any trade or business,
whether or not incorporated (an "ERISA Affiliate"), that together with the
Company would be deemed a "single employer" within the meaning of Section 4001
of the Employee Retirement Income Security Act of 1974, as amended, and the
rules and regulations promulgated thereunder ("ERISA"), for the benefit of any
employee or terminated employee of the Company or any ERISA Affiliate, whether
or not written (the "Plans"). Schedule 3.18 indicates each plan which is an
"employee benefit plan," as that term is defined in section 3(3) of ERISA
("ERISA Plans"). Neither the Company nor any ERISA Affiliate has any formal plan
or commitment to create any additional Plan or modify or change any existing
Plan (other than changes of general applicability as required by law) that would
affect any employee or terminated employee of the Company or any ERISA
Affiliate. None of the Plans is a "multiemployer pension plan," as such term is
defined in section 3(37) of ERISA nor has the Company ever been a party to any
such "multiemployer pension plan."
(b) With respect to each of the Plans, the Company has heretofore
delivered or made available to
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Parent true and complete copies of each of the following documents:
(i) a copy of the Plan (including all amendments
thereto);
(ii) a copy of the annual report, if required under ERISA,
with respect to each such Plan for the last two years;
(iii) a copy of the actuarial report, if required under
ERISA, with respect to each such Plan for the last two years;
(iv) a copy of the most recent Summary Plan Description,
together with each Summary of Material Modifications, required under ERISA
with respect to such Plan, and all material employee communications
relating to such Plan;
(v) if the Plan is funded through a trust or any third
party funding vehicle, a copy of the trust or other funding agreement
(including all amendments thereto) and the latest financial statements
thereof; and
(vi) the most recent determination letter received from the
IRS with respect to each Plan that is intended to be qualified under
section 401 of the Code.
(c) No liability under Title IV of ERISA has been incurred by the
Company or any ERISA Affiliate since the effective date of ERISA that has not
been satisfied in full, and no condition exists that presents a material risk to
the Company or an ERISA Affiliate of incurring a liability under such Title,
other than liability for premiums due the Pension Benefit Guaranty Corporation
("PBGC"). To the extent this representation applies to sections 4064, 4069 or
4204 of Title IV of ERISA, it is made with respect to any employee benefit plan,
program, agreement or arrangement subject to Title IV of ERISA to which the
Company or an ERISA Affiliate made, or was required to make, contributions
during the
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five (5) year period ending on the last day of the last plan year.
(d) Neither the Company nor any ERISA Affiliate, nor any ERISA
Plan, nor any trust created thereunder, nor any trustee or administrator thereof
has engaged in a transaction in connection with which the Company or any ERISA
Affiliate, any ERISA Plan, any such trust, or any trustee or administrator
thereof, or any party dealing with any ERISA Plan or any such trust could be
subject to either a civil penalty assessed pursuant to section 409 or 502(i) of
ERISA or a tax imposed pursuant to section 4975 or 4976 of the Code.
(e) Each of the Plans has been operated and administered in all
material respects in accordance with applicable laws, including but not limited
to ERISA and the Code.
(f) No amounts payable under the Plans or any other agreement by
reason of the transactions contemplated by this Agreement will fail to be
deductible for federal income tax purposes by virtue of section 280G of the
Code.
(g) No Plan provides benefits, including without limitation
death or medical benefits (whether or not insured), with respect to current or
former employees of the Company or any ERISA Affiliate beyond their retirement
or other termination of service (other than (i) coverage mandated by applicable
law, (ii) death benefits or retirement benefits under any "employee pension
plan," as that term is defined in section 3(2) of ERISA, (iii) deferred
compensation benefits accrued as liabilities on the books of the Company or the
ERISA Affiliates, or (iv) benefits the full cost of which is borne by the
current or former employee (or his beneficiary).
(h) The consummation of the transactions contemplated by this
Agreement will not (i) entitle any current or former employee or officer of the
Company or any ERISA Affiliate to severance pay, unemployment compensation or
any other payment, except as expressly provided in this Agreement or (ii)
accelerate the time of payment or vesting, or increase the amount of
compensation due any such employee or officer.
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(i) There are no pending claims or, to the Company's knowledge,
threatened or anticipated claims by or on behalf of any of the Plans, by any
employee or beneficiary covered under any such Plan, or otherwise involving any
such Plan (other than routine claims for benefits).
3.19 Certain Interests. To the knowledge of the Company, since the
date of the Company's Proxy Statement dated September 16, 1996 relating to the
Company's 1996 Annual Meeting or as otherwise disclosed to the Parent in
writing, no officer or director of the Company, or any relative of such officer
or director, has acquired any interest in any property of the Company or any of
the Company Subsidiaries (except as a stockholder of the Company) or has entered
into any business relationship with the Company or any of the Company
Subsidiaries (except as an officer, director or stockholder thereof), in any
such case, of a nature which would be required to be disclosed in a proxy
statement relating to the election of directors filed under the Exchange Act.
3.20 Employees. The Company has provided to the Parent a true and
complete schedule of all employees who earned (including base pay and any
bonuses) in the fiscal year ended June 30, 1996 or have the right to earn in the
fiscal year ending June 30, 1997, more than $50,000 per annum. For each such
employee, the aforementioned schedule shall have included true, correct and
complete information as to the following: (i) current annual base pay; (ii)
current bonus eligibility, (iii) total compensation during the last fiscal year,
(iv) date of last base pay increase and prior base pay; and (v) date of hire.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND SUB
Parent and Sub jointly and severally represent and warrant to the
Company that:
4.1 Corporate Organization. Each of Parent and Sub is a corporation
duly organized, validly existing
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and in good standing under the laws of the jurisdiction of its incorporation.
4.2 Authorization. Each of Parent and Sub has full corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The Board of Directors of each of Parent and
Sub, and Parent as the sole stockholder of Sub, have duly authorized the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, and no other corporate proceedings on the part
of Parent or Sub are necessary to approve and authorize the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby. This Agreement has been duly executed and delivered by Parent and Sub
and constitutes (assuming due authorization, execution and delivery of this
Agreement by the Company), the valid and binding agreement of Parent and Sub,
enforceable against each of them in accordance with its terms.
4.3 Consents and Approvals; No Violations. Except for (a) the
applicable requirements of the HSR Act, (b) the requirements of the Exchange Act
relating to the Proxy Statement and (c) the filing of articles of merger and
other appropriate merger documents, if any, as required by the laws of the State
of Wisconsin, the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby, will not: (i) violate any provision of
the Articles or Certificate of Incorporation or By-Laws (or other comparable
governing documents) of Parent or Sub; (ii) violate any statute, ordinance,
rule, regulation, order or decree of any court or of any public, governmental or
regulatory body, agency or authority applicable to Parent or Sub or by which any
of their respective properties or assets may be bound; (iii) require any filing
with or permit, consent or approval of, or the giving of any notice to, any
public, governmental or regulatory body or authority; or (iv) 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, franchise, permit, agreement or other
instrument or obligation to which Parent or Sub is a party, or by which either
of them or any of their respec-
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tive properties or assets may be bound, excluding from the foregoing clauses
(ii), (iii) and (iv) violations, breaches and defaults which, and filings,
notices, permits, consents and approvals the absence of which, in the aggregate,
would not have a Material Adverse Effect on Parent and its subsidiaries taken as
a whole and would not prevent or delay the consummation of the transactions
contemplated hereby.
4.4 Proxy Statement. The information supplied by Parent and Sub for
inclusion in the Proxy Statement of the Company filed in connection with the
Merger will be true and correct in all material respects and will not omit to
state any material facts.
4.5 Brokers and Finders. Neither Parent nor any of its subsidiaries
nor any of their respective officers, directors or employees, has employed any
broker or finder or incurred any liability for any brokerage fees, commissions,
finders' fees or similar fees or expenses and no broker or finder has acted
directly or indirectly for Parent or Sub or any of their respective subsidiaries
in connection with this Agreement or the transactions contemplated hereby. No
investment banking, financial advisory or similar fees have been incurred or are
or will be payable by Parent or any of its subsidiaries in connection with this
Agreement or the transactions contemplated hereby.
ARTICLE V
CONDUCT OF THE COMPANY'S BUSINESS
During the period commencing on the date hereof and continuing until
the Effective Time, the Company agrees (except as expressly contemplated by this
Agreement or to the extent that Parent shall otherwise consent in writing; such
consent, in the case of clause (b) of this Article V not to be unreasonably
withheld) that:
(a) The Company and each Company Subsidiary will carry on its
business in, and only in, the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and, to the extent
consistent with such business, use its reasonable best efforts to preserve
intact its present business organiza-
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tion, keep available the services of its present officers and employees and
preserve its relationships with customers, consultants, suppliers and others
having material business dealings with it.
(b) The Company will not, and will not permit any Company Subsidiary
to, enter into purchase orders other than in the ordinary course of business in
accordance with the Company's budget.
(c) The Company will not, and will not permit any Company Subsidiary
to, dispose of or encumber any of its properties and assets, other than sales of
inventory and collections of receivables or other actions in the ordinary course
of business.
(d) The Company will not split, combine or reclassify any Shares or
declare any dividends on or make other distributions in respect of the Shares.
Neither the Company nor any Company Subsidiary will amend its Articles or
Certificate of Incorporation or By-laws or similar governing documents.
(e) Neither the Company nor any Company Subsidiary will issue, sell,
authorize, grant or propose the sale or issuance of, or purchase, acquire or
propose the purchase or acquisition of, any shares of the capital stock of the
Company or any Company Subsidiary or securities convertible into, or rights,
warrants or options (including employee stock options, restricted stock or other
equity-based compensation) to acquire, any such shares or other convertible
securities (other than the issuance of Shares upon the exercise, in accordance
with the present terms thereof, of stock options outstanding on the date of this
Agreement).
(f) Neither the Company, nor any Company Subsidiary, officer,
director or employee of (or any investment banker, attorney, accountant or other
representative retained by) the Company or any Company Subsidiary shall,
directly or indirectly, solicit, initiate or encourage (including by way of
furnishing information) any inquiries or proposals by, or engage in any
discussions or negotiations with, any corporation, partnership, person or other
entity or group which it is reasonably expected may lead to, or which relates
to, any takeover proposal; provided that the Company and its Board of
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Directors, officers or employees (or any investment banker, attorney, accountant
or other representative retained by the Company) shall not be prohibited from
(i) taking and disclosing to the Company's stockholders a position with respect
to a tender offer by a third party pursuant to Rules 14d-9 and 14e-2(a)
promulgated under the Exchange Act, (ii) making such disclosure to the Company's
stockholders which, in the judgment of the Board of Directors with the advice of
counsel, may be required under applicable law or (iii) taking any action that
the Board of Directors determines, after consultation with counsel of recognized
experience in the Wisconsin Corporation Law (which may be Reinhart, Boerner, Van
Deuren, Norris & Rieselbach, s.c.) is reasonably necessary under the Wisconsin
Corporation Law, as interpreted, or is reasonably necessary in order for the
Board of Directors to comply with their fiduciary duties under applicable law.
The Company will promptly advise Parent orally and in writing of the receipt and
content of any such inquiries or proposals. As used in this subsection (f),
"takeover proposal" shall mean any proposal for a merger or other business
combination involving the Company or any Company Subsidiary or for the
acquisition of a substantial equity interest in the Company or any Company
Subsidiary or a substantial portion of the assets of the Company or any Company
Subsidiary other than the one contemplated by this Agreement (a "Business
Combination").
(g) Except as disclosed to Parent prior to the date hereof, the
Company will not and will not permit any Company Subsidiary to acquire or agree
to acquire by merging or consolidating with or into, purchasing substantially
all of the assets or stock of or otherwise, (i) any assets which would be
material to the Company and the Company Subsidiaries taken as a whole, (ii) any
assets outside of the ordinary course of business or (iii) any business or any
corporation, partnership, association or other business organization or division
thereof.
(h) The Company will not and will not permit any Company
Subsidiary to adopt, enter into, extend the term of, or amend in any material
respect any collective bargaining, employee pension, profit-sharing, retirement,
insurance, incentive compensation, severance, vacation, employment agreement or
other plan, agreement,
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trust, fund or arrangement for the benefit of any director, officer or employee
(whether or not legally binding) or make any changes in compensation, severance
or termination, bonuses or fringe benefits payable or to become payable to any
director, officer or employee; provided, that, the Company shall forgive the
loan to Harry H. Colcord in the amount of $366,000, and will provide Colcord
with a payment representing the tax liability to be incurred by him in respect
of such forgiveness and such payments.
(i) The Company will not and will not permit any Company
Subsidiary to pay any bonus or other extraordinary compensation to any officer,
director or employee and, except as otherwise contemplated by this agreement,
accelerate or vest any employee options, restricted stock or other equity-based
compensation.
(j) Neither the Company nor any of the Company Subsidiaries will
(i) incur, assume or prepay any long-term debt or, except in the ordinary course
of business under existing lines of credit, incur or assume any short-term debt,
(ii) assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any other
person except wholly owned subsidiaries of the Company in the ordinary course of
business and consistent with past practices or (iii) make any loans, advances or
capital contributions to, or investments in, any other person (other than
customary loans or advances to employees).
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Access to Properties and Records. Between the date of this
Agreement and the Effective Time, the Company will, and will cause each Company
Subsidiary to, provide Parent and its accountants, counsel, advisors and other
authorized representatives full access, during reasonable business hours and
under reasonable circumstances, to any and all premises, properties, contracts,
commitments, books, records and other information (including Tax Returns filed
and those in preparation) of the Company and each Company Subsidiary and will
cause
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their officers to furnish to Parent and its authorized representatives any and
all financial, technical and operating data and other information pertaining to
the business of the Company and the Company Subsidiaries, as Parent shall from
time to time reasonably request; provided, however, that neither the Company nor
any Company Subsidiary shall be required to produce or provide any information
which is not readily available to such entity or capable of production without
undue disruption to the entity's business.
6.2 Proxy Statement. The Company will prepare and file a preliminary
Proxy Statement with the SEC as soon as practicable after the date hereof and
will use reasonable best efforts to respond to the comments of the SEC in
connection therewith. Parent and Sub will cooperate in such preparation and
response to the extent reasonably requested by the Company and will furnish all
information required to prepare the definitive Proxy Statement (including,
without limitation, financial statements and supporting schedules and
certificates and reports of independent public accountants). The Company will
cause the definitive Proxy Statement to be mailed to the stockholders of the
Company and, if after the definitive Proxy Statement shall have been so mailed
but prior to the date of the stockholders' meeting, it is required by law, the
Company will, promptly circulate amended, supplemental or supplemented proxy
material. The Company will not use any proxy material in connection with the
meeting of stockholders without Parent's prior approval which shall not be
unreasonably withheld. Parent and the Company will furnish each other with all
information concerning themselves, their subsidiaries, directors, officers and
stockholders and such other matters as may be necessary or advisable for the
Proxy Statement and any other statement or applications made by or on behalf of
Parent or the Company to any public, governmental or regulatory body in
connection with the Merger and the other transactions contemplated by this
Agreement.
6.3 Stockholder Approval. The Company shall call a meeting of its
stockholders for the purpose of voting upon this Agreement and the Merger and
the Company agrees that this Agreement and the Merger shall be submitted at a
meeting of the stockholders of the Company and the Company shall take all steps
reasonably necessary to duly call, give notice of, convene and hold such
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meeting as promptly as reasonably practicable. The Company agrees that its
Board of Directors will recommend that its stockholders approve and adopt this
Agreement and approve the Merger unless the Board of Directors determines, after
consultation with counsel of recognized experience in the Wisconsin Corporation
Law (which counsel may be Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
s.c.) that such recommendation would be inconsistent with its fiduciary duties
to stockholders. Parent will cause all Shares owned by Parent and its
subsidiaries (if any) to be voted in favor of the Merger.
6.4 Stock Option and Other Plans. (a) Prior to the Effective Time,
the Company and Parent shall take all actions necessary such that all 1996 Plan
Options shall become and represent options for shares of Common Stock of Parent
("Substitute Options"). Such Substitute Options shall have the same expiration
date and vesting schedule as the Plan Options for which they were substituted
and shall otherwise be exercisable on the same terms and conditions as were
applicable to the related Plan Option immediately prior to the Effective Time.
Without limiting the foregoing, Parent shall take all action necessary to
register the sale of the shares underlying such options on a Form S-8
Registration Statement. The Substitute Option will be exercisable for a number
of Shares of Common Stock and have an exercise price computed pursuant to
Section 424(a) of the Code. Each vested 1994 Plan Option shall, at the
Effective Time, become entitled to receive $18.78 in cash per option. The
holder of each unvested 1994 Plan Option shall have the right to elect (prior to
the Effective Time) to receive (i) Substitute Options for such 1994 Plan Option
or (unless it would cause excess parachute payments under Section 280G of the
Code) (ii) an amount of cash per option as computed in the prior sentence. Each
Outside Director Stock Option shall, at the Effective Time, become entitled to
receive $9.75 in cash per option. The Company will take all such actions as are
necessary to ensure that neither the Company nor any of its subsidiaries is or
will be bound by any options, warrants, rights or agreements which would entitle
any person, other than Parent or its affiliates, to own any capital stock of the
Surviving Corporation or to receive any payment in respect thereof.
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<PAGE>
(b) Promptly after determination of results of the Company's
operations for the six month period ended December 31, 1996, the Company shall
make interim payments (unless it would cause excess parachute payments under
Section 280G of the Code) under its bonus plan in amounts consistent with such
plan, such payments to be subject to approval of Parent, such approval not to be
unreasonably withheld.
6.5 Reasonable Best Efforts; etc. Subject to the terms and
conditions herein provided and subject to the provisory clause in the first
sentence of subsection (f) of Article V, each of the parties hereto agrees to
use its reasonable best efforts to take, or cause to be taken, all action, 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 obtaining any consents,
authorizations, exemptions and approvals from, and making filings with, any
governmental, regulatory or public body or authority which are necessary or, in
the judgment of Parent and the Company, desirable in connection with the
transactions contemplated by this Agreement. Parent and the Company shall each
have the right to review and approve in advance all characterizations of the
information relating to Parent or the Company, as the case may be, and any of
their respective subsidiaries, which appear in any filings made in connection
with the transactions contemplated by this Agreement with any governmental body.
6.6 HSR Act. The Company and Parent shall, as soon as practicable,
file Notification and Report Forms under the HSR Act with the Federal Trade
Commission (the "FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division") and shall use reasonable best efforts to respond as
promptly as practicable to all inquiries received from the FTC or the Antitrust
Division for additional information or documentation.
6.7 Material Events. At all times prior to the Effective Time, each
party shall promptly notify the other in writing of the occurrence of any event
which will or is reasonably likely to result in the failure to satisfy any of
the conditions specified in Article VII hereof.
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6.8 Public Announcements. At all times until the Effective Time,
each party shall promptly advise and cooperate with the other prior to issuing,
or permitting any of its subsidiaries, directors, officers, employees or agents
to issue, any press release or other information to the press or any third party
with respect to this Agreement or the transactions contemplated hereby.
6.9 Indemnification. Prior to the Effective Time Parent shall cause
Sub to adopt, and for a period of six years following the Effective Time Parent
shall cause the Surviving Corporation to adopt and retain, the same provisions
contained in the Articles of Incorporation and By-laws relating to
indemnification as are contained in the Articles of Incorporation and By-laws of
the Company on the date of this Agreement, which provisions shall indemnify
those persons presently indemnified therein on the date hereof pursuant to the
terms of such provisions, and Parent shall cause the Surviving Corporation to
honor the indemnities in such provisions, and make prompt reimbursements, to the
fullest extent provided therein and to the fullest extent provided in the
Wisconsin Corporation Law. Parent shall cause the Surviving Corporation to
maintain in full force and effect for a period of at least three years the
fiduciary liability, professional liability, and directors and officers
liability insurance policies currently covering the Company or any Company
Subsidiary or any of the Company's directors, officers, employees or agents,
provided (i) the Surviving Corporation shall not be required to expend more than
$60,000 per year for such coverage, (ii) the expense of such coverage shall be
included in the budget of such Surviving Corporation as an operating cost and
(iii) the Parent may elect to substitute an alternative policy or carrier for
the existing policy or carrier provided that comparable coverage is maintained.
6.10 Update Disclosure. From and after the date of this Agreement
until the Effective Time, the Company may notify Parent by written update to the
Company's disclosure schedules (an "Update Schedule") of any changes to the
information contained in its disclosure schedule (including any change to any
representations or warranties in this Agreement as to which no schedule has been
created as of the date of this Agreement but as to which a schedule would have
been required under this
26
<PAGE>
Agreement to have been created on or before the date hereof if such change had
existed as of the date hereof).
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger are subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions:
(a) This Agreement shall have been approved and adopted by the
affirmative vote of the stockholders of the Company by the requisite vote in
accordance with applicable law.
(b) No statute, rule, regulation, executive order, decree, order
or injunction shall have been enacted, entered, promulgated or enforced by any
court or governmental authority which prohibits or materially and adversely
restricts the consummation of the Merger.
(c) Any waiting period applicable to the Merger under the HSR
Act shall have terminated or expired.
7.2 Conditions to the Obligation of the Company to Effect the Merger.
The obligation of the Company to effect the Merger is further subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) The representations and warranties of Parent and Sub
contained in this Agreement shall be true and correct in all material respects
at and as of the Effective Time as if made at and as of such time, except as
affected by the transactions contemplated hereby.
(b) Each of Parent and Sub shall have performed in all material
respects its obligations under this Agreement required to be performed by it at
or prior to the Effective Time pursuant to the terms hereof.
27
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Parent and Sub will furnish the Company with such certificates and other
documents to evidence the fulfillment of the conditions set forth in this
Section 7.2 as the Company may reasonably request.
7.3 Conditions to Obligations of Parent and Sub to Effect the Merger.
The obligations of Parent and Sub to effect the Merger are further subject to
the satisfaction at or prior to the Effective Time of the following conditions:
(a) The representations and warranties of the Company contained
in this Agreement shall have been true and correct in all material respects when
made and such representations and warranties, as updated by any Update Schedule
or subsequent written disclosure made by the Company to Parent, be true and
correct in all material respects at and as of the Effective Time as if made at
and as of such time, except as affected by the transactions contemplated hereby
and except that any representation or warranty that speaks as of a specific date
shall be true and correct only as of such date.
(b) No state of fact shall have been disclosed to Parent in an
Update Schedule which shall constitute a material adverse change in the value of
the Company.
(c) The Company shall have performed in all material respects
each of its obligations under this Agreement required to be performed by it at
or prior to the Effective Time pursuant to the terms hereof.
(d) No suit, action, claim, proceeding or investigation
challenging the validity or propriety of the transactions contemplated by this
Agreement shall be pending which is reasonably likely to result in a judgment
materially adverse to Parent or the Company (including, with respect thereto,
amounts payable to any person subject to indemnification by the Company).
(e) The Company shall have entered into employment agreements
with Arthur H. Juedes, Richard C. Gering and Harry H. Colcord, in a form
attached hereto as an Exhibit, which among other things shall modify and
supersede any pre-existing employment agreements with such persons.
28
<PAGE>
The Company will furnish Parent and Sub with such certificates and other
documents to evidence the fulfillment of the conditions set forth in this
Section 7.3 as Parent or Sub may reasonably request.
ARTICLE VIII
CLOSING
8.1 Time and Place. Subject to the provisions of Articles VII and IX
hereof, the closing (herein sometimes referred to as the "Closing") of the
Merger contemplated hereby shall take place at the offices of Skadden, Arps,
Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York, at 10:00 a.m.,
local time, on a date (the "Closing Date") which is the third business day after
the satisfaction or waiver of the conditions set forth in Article VII hereof or
such other place, at such other time, or on such other date as Parent, Sub and
the Company may mutually agree upon for the Closing to take place.
8.2 Deliveries at the Closing. At the Closing:
(a) There shall be delivered to Parent, Sub and the Company the
certificates and other documents and instruments, if any, required to be
delivered under Article VII hereof.
(b) Sub and the Company shall cause the articles of merger to be
filed in accordance with the provisions of Wisconsin Corporation Law and shall
take any and all other lawful actions and do any and all other lawful things
necessary to effect the Merger and to enable the Merger to become effective.
ARTICLE IX
TERMINATION AND ABANDONMENT
9.1 Termination. Notwithstanding approval and adoption of this
Agreement by the stockholders of the Company, this Agreement may be terminated,
and the Merger abandoned, at any time prior to the Effective Time of the Merger:
29
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(a) by the consent of Parent, Sub and the Company;
(b) by either Parent or the Company if, the Merger shall not have
been consummated on or before March 31, 1997; provided, however, that the right
to terminate this Agreement pursuant to this Section 9.1(b) shall not be
available to any party whose failure to fulfill materially any covenant or
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Merger to occur on or before such date;
(c) by either Parent or the Company, if any court of competent
jurisdiction or other governmental body in the United States shall have issued
an order, judgment or decree (other than a temporary restraining order)
restraining, enjoining or otherwise prohibiting the Merger and such order,
judgment or decree shall have become final and nonappealable;
(d) by either Parent or the Company if the shareholders of the
Company fail to approve this Agreement and the Merger by the requisite vote
required by law at the shareholders' meeting referred to in section 6.1 (and any
adjournments thereof); or
(e) by the Company if the Company's Board of Directors, in
exercise of its judgment as to its fiduciary duties to the Company's
shareholders after consultation with counsel, determines that such termination
is required by reason of any "takeover proposal" (as defined in Article V,
paragraph (f)).
9.2 Effect of Termination. In the event of the termination of this
Agreement and the Merger for any reason, this Agreement shall become void, all
rights of each party hereto shall cease and there shall be no liability
hereunder on the part of Parent, Sub or the Company or any of their respective
officers, directors, shareholders, agents or advisors except, in the case of
Parent, Sub or the Company, for a material and intentional breach by any such
party of its covenants and agreements contained in this Agreement and except as
provided in the Confidentiality Agreement dated August 20, 1996 and Section 10.1
hereof, which confidentiality agreement and Section shall survive any such
termination and continue in effect thereafter.
30
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ARTICLE X
MISCELLANEOUS
10.1 Expenses; Fees. (a) Except as provided in paragraphs (b) and
(c) hereof, 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) If this Agreement is terminated by the Company pursuant to
Section 9.1(b), 9.1(d) or 9.1(e) after a bona fide takeover proposal has been
received by the Company and, within one year after the date of such termination,
the Company enters into an agreement for a Business Combination which is
subsequently consummated, then, unless (x) the Parent was in material breach of
its obligations hereunder at the time of such termination, (y) the condition in
Section 7.1(c) shall not have been satisfied at the time of such termination and
60 days shall have passed since the HSR Act filing or (z) the condition in
Section 7.2 shall not have been satisfied at the time of such termination, the
Company shall promptly pay to Parent (in cash by wire transfer of federal funds
to an account designated by Parent) $4,000,000 at the time of consummation of
such Business Combination as the sole and exclusive remedy for such termination.
(c) If this Agreement is terminated pursuant to Section 9.1(d) at
a time when no bona fide takeover proposal has been received by the Company,
then, unless (x) the Parent is in material breach of its obligations hereunder,
(y) the condition in Section 7.1(c) shall not have been satisfied and 60 days
shall have passed since the HSR Act filing or (z) the condition in Section 7.2
shall not have been satisfied, the Company shall promptly pay to Parent (in cash
by wire transfer of federal funds to an account designated by Parent) $4,000,000
as the sole and exclusive remedy for such termination.
10.2 No Survival of Representations and Warranties. The respective
representations and warranties of the Company, Parent and Sub contained in
Articles III and IV or in any schedule, certificate or letter delivered pursuant
hereto shall expire with, and be terminated
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and extinguished by, the effectiveness of the Merger or the termination of this
Agreement (whichever is earlier) and shall not survive the Effective Time or
such termination.
10.3 Headings. The descriptive headings of the several Articles and
Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
10.4 Notices. Any notices or other communications required or
permitted hereunder shall be sufficiently given if sent by certified or
registered mail, postage prepaid, addressed as follows:
(a) If to Parent or Sub, to:
Woolworth Corporation
233 Broadway
New York, New York 10279
Attention: General Counsel
Copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022-3897
Attention: Thomas H. Kennedy, Esq.
(b) if to the Company, to:
Eastbay Inc.
427 Third Street
Wausau, Wisconsin 54403
Attention: President and Chief Executive
Officer
Copy to:
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c.
1000 N. Water Street
Milwaukee, Wisconsin 53202
32
<PAGE>
Attention: Michael T. Pepke, Esq.
James M. Bedore, Esq.
or such other address as shall be furnished in writing by either party, and any
such notice or communication shall be deemed to have been given as of the date
so mailed, except a notice of change of address which shall be effective only
upon receipt.
10.5 Assignment. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests, or obligations hereunder, shall be assigned by any of
the parties hereto without the prior written consent of the other parties,
except that Sub may assign all of its rights, interests and obligations
hereunder to Parent or another wholly owned subsidiary of Parent, provided that
such subsidiary agrees in writing to be bound by all of the terms, conditions
and provisions contained herein.
10.6 Complete Agreement. This Agreement, including the schedules,
exhibits and other writings referred to herein or delivered pursuant hereto and
the Confidentiality Agreement dated August 20, 1996 between Parent and the
Company, together contain the entire understanding of the parties with respect
to the Merger and the related transactions and supersede all prior arrangements
or understandings with respect thereto.
10.7 Modifications, Amendments and Waivers. At any time prior to the
Effective Time of the Merger (notwithstanding any stockholder approval), if
authorized by Parent, Sub and the Company and to the extent permitted by law,
(i) the parties hereto may, by written agreement, modify, amend or supplement
any term or provision of this Agreement and (ii) any term or provision of this
Agreement may be waived by the party which is entitled to the benefits thereof,
provided that after such stockholder approval, no amendment shall be made which
decreases the Merger Amount or otherwise materially affects the rights of the
Company's shareholders without stockholder approval. Any written instrument or
agreement referred to in this paragraph shall be validly and sufficiently
authorized for the purposes of this Agreement if signed
33
<PAGE>
on behalf of Parent, the Company and Sub by a person authorized to sign this
Agreement.
10.8 Counterparts. This Agreement may be executed in two or more
counterparts all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
10.9 Governing Law. This Agreement shall be governed by the laws of
the State of Wisconsin (regardless of the laws that might be applicable under
principles of conflicts of law) as to all matters, including but not limited to
matters of validity, construction, effect, performance and remedies.
10.10 Accounting Terms. All accounting terms used herein which are
not expressly defined in this Agreement shall have the respective meanings given
to them in accordance with generally accepted accounting principles.
10.11 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 confer upon any other person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
Notwithstanding the foregoing, (a) any shareholder of the Company shall have the
right to enforce the provisions of Section 2.2 hereof with respect to amounts
due such shareholder and (b) any indemnified party under Section 6.9 shall have
the right to enforce the provisions thereof.
10.12 Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void, unenforceable or against its regulatory policy,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
10.13 Definitions. (a) "Material Adverse Effect" means any change
in or effect on the business of the referenced corporation or any of its
subsidiaries, taken as a whole, that is or will be materially adverse to the
business, operations, prospects, properties,
34
<PAGE>
condition (financial or otherwise), assets or liabilities of such referenced
corporation and its subsidiaries taken as a whole, but shall not include the
effects of changes that are generally applicable in (i) the United States or
world economy, or (ii) the United States securities markets.
(b) "Knowledge," "known," "know" or terms with like meaning,
means the actual knowledge of, the executive officers (in the case of the
Company, Messrs. Colcord, Gering, Juedes, Schaefer and Johnson) of the
referenced party. The Company represents that Messrs. Colcord, Gering, Juedes,
Johnson and Schaefer have made reasonable inquiry with respect to the
representations and warranties of the Company prior to the execution hereof by
an officer of the Company.
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<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
WOOLWORTH CORPORATION
By:______________________________
EAST ACQUISITION CORPORATION
By:______________________________
EASTBAY, INC.
By:______________________________
36
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Exhibit B
AGREEMENT WITH SHAREHOLDER
--------------------------
AGREEMENT WITH SHAREHOLDER (the "Agreement"), dated November 30, 1996,
between Woolworth Corporation, a New York corporation (the "Purchaser"), and
Arthur H. Juedes (the "Shareholder").
WHEREAS, the Purchaser, Eastbay, Inc., a Wisconsin corporation (the
"Company"), and East Acquisition Corporation, a Wisconsin corporation and an
indirect wholly owned subsidiary of the Purchaser ("Acquisition"), are entering
into an Agreement and Plan of Merger (the "Merger Agreement"), which would
provide, among other things, that Acquisition, upon the terms and subject to the
conditions thereof, would be merged with the Company (the "Merger"); and
WHEREAS, as a condition to its willingness to execute the Merger
Agreement, and as a material inducement with respect thereto the Purchaser has
required that the Shareholder agree, and the Shareholder has agreed, to enter
into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein, the parties hereto agree as follows:
I. GRANT OF APPRECIATION RIGHT
1.1 If, at any time prior to the first anniversary of the date the
Merger Agreement is terminated by the Company, (i) any third party shall have
made a bona fide "takeover proposal" (as defined in the Merger Agreement) and
subsequently (ii) the Shareholder shall, by sale, transfer, assignment or any
other means whatsoever, receive cash or property (including the retained value
of any security and the present value of any right to receive a payment in the
future (whether or not after the first anniversary)) for any share of common
stock, par value $.01 per share, of the Company ("Shares") held by such
Shareholder as of the date hereof (which the Shareholder represents is 1,522,000
Shares) in excess of $23.75 per Share, the Shareholder shall promptly pay
(including, in the case of deferred consideration, when such consideration is
received) the amount of such excess to the Purchaser, provided that if a
"takeover proposal" (as
<PAGE>
defined in the Merger Agreement) which provides for the payment of a higher
price per share to the public than that set forth in the Merger Agreement is
received by the Company within 37 days of the date of the Merger Agreement, such
payment shall be subject to a maximum of $1.139284 per share. This provision
shall apply to the extent set forth herein to any sale, transfer, assignment or
other action with respect to any interest in or right with respect to, such
Shares, whether the sale, transfer, assignment or other action occurs in a
single transaction or a series of transactions, and shall be generally broadly
construed in order to protect the interests of the Purchaser. The provisions of
this Article I shall be of no further force and effect in the event that (i) the
Purchaser shall be or shall have been in material breach of its obligations
under the Merger Agreement or (ii) the Merger shall fail to be consummated as a
result of the failure to obtain clearance under the HSR Act (as defined in the
Merger Agreement) or (iii) the conditions set forth in Section 7.1(b) or 7.2 of
the Merger Agreement shall not have been satisfied at the time of termination of
the Merger Agreement.
II. CONTINGENT CONSIDERATION
2.1 In the event that the Merger is consummated, the Shareholder
(whether or not employed by the Company, and including his heirs, beneficiaries,
representatives and assigns) shall be entitled to receive from the Purchaser a
payment pursuant to this Article II to the extent the conditions hereof are
satisfied. Any payment so made shall be deemed to be, and shall be treated for
all purposes by the parties hereto as, contingent payment in consideration of
the Shares sold by the Shareholder and the parties agree to treat the payment as
such on all tax returns filed by the parties.
(i) If the earnings before interest and taxes ("EBIT") of the
Company in the twelve-month period ended June 30, 1998 ("1998 EBIT") exceeds
$20,271,000, then the Shareholder shall be entitled to receive from the
Purchaser (in cash paid promptly after the amount is finally calculated) $X per
Share (the "1998 Payment"), where X is calculated as follows:
(a) If the 1998 EBIT is less than $24,473,000, then X shall be equal to
2
<PAGE>
[1998 EBIT - $20,271,000)] / $4,202,000 x $0.777737 and the 1998
Unpaid Amount shall be equal to [$0.777737 - X].
(b) If the 1998 EBIT is greater than or equal to $24,473,000, then X
shall be equal to $0.777737 and the 1998 Unpaid Amount shall be equal
to $0.
In no event shall the 1998 Payment exceed $0.777737 per Share.
(ii) If the EBIT of the Company for the twelve-month period
ended June 30, 1999 ("1999 EBIT") exceeds $25,316,000, then the Shareholder
shall be entitled to receive from the Purchaser (in cash promptly after the
amount is finally calculated), $Y per Share (the "1999 Payment"), where Y is
calculated as follows:
(a) If the 1999 EBIT is less than or equal to $30,569,000, then Y shall
be equal to [1999 EBIT - $25,316,000] / $5,253,000 x $0.972263.
(b) If the 1999 EBIT is greater than $30,569,000 and the 1998 Unpaid
Amount is greater than $0, then Y shall be equal to $0.972263 plus
[1999 EBIT - $30,569,000] / [$24,473,000 - 1998 EBIT] x 1998 Unpaid
Amount, provided however, that in no event shall Y exceed $0.972263
plus the 1998 Unpaid Amount.
(c) If the 1999 EBIT is greater than $30,569,000 and the 1998 Unpaid
Amount equals $0, then Y shall be equal to $0.972263.
(iii) Notwithstanding the foregoing, in no event shall the sum
of the 1998 Payment and the 1999 Payment exceed $1.75 per share.
(iv) The Purchaser intends to maintain the business and
financial affairs of the Company as a discrete entity in accordance with their
conditions as of
3
<PAGE>
the Effective Time of the Merger. If any material change is made to the
Company as currently operated prior to the payment (if earned) of the 1999
Payment, the parties will cooperate in good faith to determine the necessary
amendments (if any) to this Article II so as to fairly and equitably treat both
parties to this Agreement.
(v) Any calculation of EBIT made pursuant to this Article II
shall be prepared based upon the books and records of the Company in accordance
with generally accepted accounting principles, consistently applied. By way of
illustration and not limitation, EBIT shall not include any intercompany charges
which do not replace other charges which would be paid by the Company or any
expenses related to costs of the Merger.
III. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER
The Shareholder represents and warrants to the Purchaser that:
3.1 The Shareholder has all necessary power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby and this Agreement constitutes a valid and binding agreement of the
Shareholder.
3.2 The Shareholder beneficially owns 1,522,000 Shares free and clear
of all claims, liens, encumbrances, security interests and charges of any kind,
including rights of first refusal and restrictions or other impediments on the
Shareholder's voting rights or rights of disposition pertaining thereto.
3.3 Neither the execution, delivery and performance of this Agreement
nor the consummation by the Shareholder of the transactions contemplated hereby
will require the consent, waiver, approval, license or authorization of or
filing with any person or public authority and will not conflict with,
constitute a violation of or default under or result in a breach of any
contract, commitment, agreement, arrangement, certificate of incorporation or
bylaw, judgment, order, ordinance, regulation, decree or restriction of any kind
to which the Shareholder is a party or by which the Shareholder is bound.
4
<PAGE>
IV. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Shareholder that:
4.1 This Agreement has been duly authorized by all necessary
corporate action on the part of the Purchaser and has been duly executed by a
duly authorized officer of the Purchaser and constitutes a valid and binding
obligation of the Purchaser.
V. COVENANTS OF THE SHAREHOLDER
5.1 The Shareholder hereby covenants and agrees that prior to the
date of termination of the Merger Agreement the Shareholder will not, directly
or indirectly, sell, transfer, assign, pledge, hypothecate, create a security
interest in or lien on, place in trust (voting or otherwise) or otherwise
encumber or dispose of or limit its right to vote in any manner any of the
Shares which are the subject matter of this Agreement except pursuant to the
terms hereof. The Shareholder will not take any action in his individual
capacity which would have the effect of preventing or disabling the Shareholder
from performing its obligations under this Agreement.
5.2 (a) The Shareholder agrees to vote all voting securities of the
Company held by such holder in favor of adoption of the Merger Agreement;
provided, however, that the Shareholder shall not be required to vote his voting
securities in favor of adoption of the Merger Agreement if the Board of
Directors of the Company determines, after consultation with counsel, that
recommending the Merger and adoption of the Merger Agreement to the Company's
shareholders is inconsistent with the Board of Directors' fiduciary duties to
the Company's shareholders.
(b) The Shareholder agrees that, prior to the date of
termination of the Merger Agreement (the "Termination Date") such holder will
not vote or execute any written consent in favor of any amendment to the
Articles of Incorporation or By-laws of the Company or any Business Combination
Transaction without the prior written consent of the Purchaser. As used herein,
"Business Combination Transaction" shall mean any transaction,
5
<PAGE>
including, without limitation, a merger, consolidation, reclassification,
liquidation, dissolution or sale of substantially all of the assets of the
Company, other than a transaction to which the Purchaser is a party, which
requires a vote of stockholders of the Company pursuant to the Wisconsin
Business Corporation Law or the rules and regulations of the NASDAQ Stock
Market.
5.3 For a period of five years from the Effective Date (as defined in
the Merger Agreement), the Shareholder shall not (a)(i) compete with the Company
or the Purchaser, in the Territory in the conduct of the Business, or (ii)
engage or participate, directly or indirectly, in any business or businesses
substantially similar to the Business, (b) solicit or cause to be solicited
within or without the Territory any customers of the Business for services or
products that compete with these of the Company or the Business, or (c) recruit,
solicit, or induce any employee of the Business, the Purchaser, or any
subsidiary of the Purchaser to terminate their employment with, or otherwise
cease their relationship with, the Business, the Purchaser, or any such
subsidiary, as the case may be. For purposes of this provision, "Territory"
shall mean the United States, Canada, Japan, the United Kingdom, Germany,
France, Spain and Italy, and "Business" shall mean the business of selling and
marketing by mail order footwear and apparel and selling and marketing athletic
footwear and apparel through retail stores. The parties agree that the
Purchaser is not making any separate payment for the Shareholder's agreement
contained in this Section 5.3 and the parties agree not to allocate or report
any part of the contingent payment in Article II of this Agreement or any part
of the consideration received under the Merger Agreement for tax or any other
purposes to the Shareholder's agreement in this Section 5.3.
VI. NEGOTIATIONS
Following the execution of this Agreement and prior to the Termination
Date, the Shareholder shall not in his individual capacity, directly or
indirectly, solicit, encourage, or initiate or participate in any discussions or
negotiations with, or provide any information to, any corporation, partnership,
person, or other entity or group (other than the Purchaser or an affiliate or an
associate of the Purchaser or an officer, employee
6
<PAGE>
or other authorized representative of the Purchaser or such affiliate or
associate) concerning any merger, sale of substantial assets, sale of
substantial amounts of securities, or similar transaction involving the Company
or any sale of the Shares. The foregoing prohibition shall not prohibit the
Shareholder from taking any action, including but not limited to, those
enumerated above, in connection with his exercise of any fiduciary duty owed to
the Company or its shareholders in his capacity as an officer or director.
VII. MISCELLANEOUS
7.1 This Agreement will be governed by and construed in accordance
with the laws of the State of New York (regardless of the laws that might be
applicable under principles of conflicts of laws). This Agreement may be
executed simultaneously in counterparts, each of which will be deemed to be an
original but all of which together will constitute one and the same instrument.
7.2 The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
7.3 All representations, warranties and agreements made by the
Shareholder and the Purchaser in this Agreement shall survive the Closing
hereunder and any investigation at any time made by or on behalf of any party
hereto.
7.4 This Agreement will be binding upon, inure to the benefit of and
be enforceable by (i) the Shareholder and his respective heirs, beneficiaries,
representatives and assigns, and (ii) the Purchaser and its successors and
assigns. This Agreement may not be assigned by the parties hereto, except that
the Purchaser may assign its rights hereunder to any wholly owned subsidiary of
Purchaser.
7.5 The Shareholder agrees that damages would be an inadequate remedy
for breach of this Agreement and that the Purchaser may obtain specific
performance of this Agreement and injunctive relief against any breach hereof.
7
<PAGE>
7.6 This Agreement, and the documents referred to herein or delivered
pursuant hereby which form a part hereof, contain the entire understanding of
the parties hereto with respect to its subject matter. There are no
restrictions, agreements, promises, warranties, covenants or undertakings with
respect to the subject matter hereof other than those expressly set forth
herein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to its subject matter. This Agreement may be
amended only by a written instrument duly executed by both the parties hereto.
Any condition to a party's obligations hereunder may be waived in writing by
such party .
7.7 The article and section headings contained herein are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
7.8 All notices, claims, certificates, requests, demands and other
communications hereunder ("notices) will be given in writing and will be deemed
to have been duly given if delivered or mailed (registered or certified mail,
postage prepaid, return receipt requested) as follows:
(a) If to the Purchaser, to:
Woolworth Corporation
233 Broadway
New York, New York 10279
Attention: General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022-3897
Attention: Thomas H. Kennedy, Esq.
(b) If to the Shareholder, to the address set forth below the
Shareholder's signature at the end of this Agreement,
8
<PAGE>
with a copy to:
Michael T. Pepke, Esq.
James M. Bedore, Esq.
Reinhart, Boerner, Van Deuren,
Norris & Rieselbach, s.c.
1000 North Water Street
Milwaukee, Wisconsin 53202
or, in either case, such other address as the person to whom notice is to be
given may have previously furnished to the others in the manner set forth above.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date hereof.
WOOLWORTH CORPORATION
By: _________________________________
Name:
Title:
--------------------------------------
Name of Shareholder: Arthur H. Juedes
9
<PAGE>
EXHIBIT C
AGREEMENT WITH SHAREHOLDER
--------------------------
AGREEMENT WITH SHAREHOLDER (the "Agreement"), dated November 30, 1996,
between Woolworth Corporation, a New York corporation (the "Purchaser"), and
Richard C. Gering (the "Shareholder").
WHEREAS, the Purchaser, Eastbay, Inc., a Wisconsin corporation (the
"Company"), and East Acquisition Corporation, a Wisconsin corporation and an
indirect wholly owned subsidiary of the Purchaser ("Acquisition"), are entering
into an Agreement and Plan of Merger (the "Merger Agreement"), which would
provide, among other things, that Acquisition, upon the terms and subject to the
conditions thereof, would be merged with the Company (the "Merger"); and
WHEREAS, as a condition to its willingness to execute the Merger
Agreement, and as a material inducement with respect thereto the Purchaser has
required that the Shareholder agree, and the Shareholder has agreed, to enter
into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein, the parties hereto agree as follows:
I. GRANT OF APPRECIATION RIGHT
1.1 If, at any time prior to the first anniversary of the date the
Merger Agreement is terminated by the Company, (i) any third party shall have
made a bona fide "takeover proposal" (as defined in the Merger Agreement) and
subsequently (ii) the Shareholder shall, by sale, transfer, assignment or any
other means whatsoever, receive cash or property (including the retained value
of any security and the present value of any right to receive a payment in the
future (whether or not after the first anniversary)) for any share of common
stock, par value $.01 per share, of the Company ("Shares") held by such
Shareholder as of the date hereof (which the Shareholder represents is 1,521,600
Shares) in excess of $23.75 per Share, the Shareholder shall promptly pay
(including, in the case of deferred consideration, when such consideration is
received) the amount of such excess to the Purchaser, provided that if a
"takeover proposal"
<PAGE>
(as defined in the Merger Agreement) which provides for a payment of a higher
price per share to the public than that set forth in the Merger Agreement is
received by the Company within 37 days of the date of the Merger Agreement, such
payment shall be subject to a maximum of $1.139284 per share. This provision
shall apply to the extent set forth herein to any sale, transfer, assignment or
other action with respect to any interest in or right with respect to, such
Shares, whether the sale, transfer, assignment or other action occurs in a
single transaction or a series of transactions, and shall be generally broadly
construed in order to protect the interests of the Purchaser. The provisions of
this Article I shall be of no further force and effect in the event that (i) the
Purchaser shall be or shall have been in material breach of its obligations
under the Merger Agreement or (ii) the Merger shall fail to be consummated as a
result of the failure to obtain clearance under the HSR Act (as defined in the
Merger Agreement) or (iii) the conditions set forth in Section 7.1(b) or 7.2 of
the Merger Agreement shall not have been satisfied at the time of termination of
the Merger Agreement.
II. CONTINGENT CONSIDERATION
2.1 In the event that the Merger is consummated, the Shareholder
(whether or not employed by the Company, and including his heirs, beneficiaries,
representatives and assigns) shall be entitled to receive from the Purchaser a
payment pursuant to this Article II to the extent the conditions hereof are
satisfied. Any payment so made shall be deemed to be, and shall be treated for
all purposes by the parties hereto as, contingent payment in consideration of
the Shares sold by the Shareholder and the parties agree to treat the payment as
such on all tax returns filed by the parties.
(i) If the earnings before interest and taxes ("EBIT") of the
Company in the twelve-month period ended June 30, 1998 ("1998 EBIT") exceeds
$20,271,000, then the Shareholder shall be entitled to receive from the
Purchaser (in cash paid promptly after the amount is finally calculated) $X per
Share (the "1998 Payment"), where X is calculated as follows:
2
<PAGE>
(a) If the 1998 EBIT is less than $24,473,000, then X shall be equal to
[1998 EBIT - $20,271,000)] / $4,202,000 x $0.777737 and the 1998
Unpaid Amount shall be equal to [$0.777737 - X].
(b) If the 1998 EBIT is greater than or equal to $24,473,000, then X
shall be equal to $0.777737 and the 1998 Unpaid Amount shall be equal
to $0.
In no event shall the 1998 Payment exceed $0.777737 per Share.
(ii) If the EBIT of the Company for the twelve-month period
ended June 30, 1999 ("1999 EBIT") exceeds $25,316,000, then the Shareholder
shall be entitled to receive from the Purchaser (in cash promptly after the
amount is finally calculated), $Y per Share (the "1999 Payment"), where Y is
calculated as follows:
(a) If the 1999 EBIT is less than or equal to $30,569,000, then Y shall
be equal to [1999 EBIT - $25,316,000] / $5,253,000 x $0.972263.
(b) If the 1999 EBIT is greater than $30,569,000 and the 1998 Unpaid
Amount is greater than $0, then Y shall be equal to $0.972263 plus
[1999 EBIT - $30,569,000] / [$24,473,000 - 1998 EBIT] x 1998 Unpaid
Amount, provided however, that in no event shall Y exceed $0.972263
plus the 1998 Unpaid Amount.
(c) If the 1999 EBIT is greater than $30,569,000 and the 1998 Unpaid
Amount equals $0, then Y shall be equal to $0.972263.
(iii) Notwithstanding the foregoing, in no event shall the sum of
the 1998 Payment and the 1999 Payment exceed $1.75 per share.
3
<PAGE>
(iv) The Purchaser intends to maintain the business and
financial affairs of the Company as a discrete entity in accordance with their
conditions as of the Effective Time of the Merger. If any material change is
made to the Company as currently operated prior to the payment (if earned) of
the 1999 Payment, the parties will cooperate in good faith to determine the
necessary amendments (if any) to this Article II so as to fairly and equitably
treat both parties to this Agreement.
(v) Any calculation of EBIT made pursuant to this Article II
shall be prepared based upon the books and records of the Company in accordance
with generally accepted accounting principles, consistently applied. By way of
illustration and not limitation, EBIT shall not include any intercompany charges
which do not replace other charges which would be paid by the Company or any
expenses related to costs of the Merger.
III. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER
The Shareholder represents and warrants to the Purchaser that:
3.1 The Shareholder has all necessary power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby and this Agreement constitutes a valid and binding agreement of the
Shareholder.
3.2 The Shareholder beneficially owns 1,521,600 Shares free and clear
of all claims, liens, encumbrances, security interests and charges of any kind,
including rights of first refusal and restrictions or other impediments on the
Shareholder's voting rights or rights of disposition pertaining thereto.
3.3 Neither the execution, delivery and performance of this Agreement
nor the consummation by the Shareholder of the transactions contemplated hereby
will require the consent, waiver, approval, license or authorization of or
filing with any person or public authority and will not conflict with,
constitute a violation of or default under or result in a breach of any
contract, commitment, agreement, arrangement, certificate of incorporation or
bylaw, judgment, order, ordinance, regulation, decree or restriction of any kind
to which the
4
<PAGE>
Shareholder is a party or by which the Shareholder is bound.
IV. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Shareholder that:
4.1 This Agreement has been duly authorized by all necessary
corporate action on the part of the Purchaser and has been duly executed by a
duly authorized officer of the Purchaser and constitutes a valid and binding
obligation of the Purchaser.
V. COVENANTS OF THE SHAREHOLDER
5.1 The Shareholder hereby covenants and agrees that prior to the
date of termination of the Merger Agreement the Shareholder will not, directly
or indirectly, sell, transfer, assign, pledge, hypothecate, create a security
interest in or lien on, place in trust (voting or otherwise) or otherwise
encumber or dispose of or limit its right to vote in any manner any of the
Shares which are the subject matter of this Agreement except pursuant to the
terms hereof. The Shareholder will not take any action in his individual
capacity which would have the effect of preventing or disabling the Shareholder
from performing its obligations under this Agreement.
5.2 (a) The Shareholder agrees to vote all voting securities of the
Company held by such holder in favor of adoption of the Merger Agreement;
provided, however, that the Shareholder shall not be required to vote his voting
securities in favor of adoption of the Merger Agreement if the Board of
Directors of the Company determines, after consultation with counsel, that
recommending the Merger and adoption of the Merger Agreement to the Company's
shareholders is inconsistent with the Board of Directors' fiduciary duties to
the Company's shareholders.
(b) The Shareholder agrees that, prior to the date of
termination of the Merger Agreement (the "Termination Date") such holder will
not vote or execute any written consent in favor of any amendment to the
Articles of Incorporation or By-laws of the Company or
5
<PAGE>
any Business Combination Transaction without the prior written consent of the
Purchaser. As used herein, "Business Combination Transaction" shall mean any
transaction, including, without limitation, a merger, consolidation,
reclassification, liquidation, dissolution or sale of substantially all of the
assets of the Company, other than a transaction to which the Purchaser is a
party, which requires a vote of stockholders of the Company pursuant to the
Wisconsin Business Corporation Law or the rules and regulations of the NASDAQ
Stock Market.
5.3 For a period of five years from the Effective Date (as defined in
the Merger Agreement), the Shareholder shall not (a)(i) compete with the Company
or the Purchaser, in the Territory in the conduct of the Business, or (ii)
engage or participate, directly or indirectly, in any business or businesses
substantially similar to the Business, (b) solicit or cause to be solicited
within or without the Territory any customers of the Business for services or
products that compete with those of the Company or the Business, or (c) recruit,
solicit, or induce any employee of the Business, the Purchaser, or any
subsidiary of the Purchaser to terminate their employment with, or otherwise
cease their relationship with, the Business, the Purchaser, or any such
subsidiary, as the case may be. For purposes of this provision, "Territory"
shall mean the United States, Canada, Japan, the United Kingdom, Germany,
France, Spain and Italy, and "Business" shall mean the business of selling and
marketing by mail order footwear and apparel and selling and marketing athletic
footwear and apparel through retail stores. The parties agree that the
Purchaser is not making any separate payment for the Shareholder's agreement
contained in this Section 5.3 and the parties agree not to allocate or report
any part of the contingent payment or any part of the consideration under the
Merger Agreement for tax or any other purposes in Article II of this Agreement
to the Shareholder's agreement in this Section 5.3.
VI. NEGOTIATIONS
Following the execution of this Agreement and prior to the Termination
Date, the Shareholder shall not in his individual capacity, directly or
indirectly, solicit, encourage, or initiate or participate in any
6
<PAGE>
discussions or negotiations with, or provide any information to, any
corporation, partnership, person, or other entity or group (other than the
Purchaser or an affiliate or an associate of the Purchaser or an officer,
employee or other authorized representative of the Purchaser or such affiliate
or associate) concerning any merger, sale of substantial assets, sale of
substantial amounts of securities, or similar transaction involving the Company
or any sale of the Shares. The foregoing prohibition shall not prohibit the
Shareholder from taking any action, including but not limited to, those
enumerated above, in connection with his exercise of any fiduciary duty owed to
the Company or its shareholders in his capacity as an officer or director.
VII. MISCELLANEOUS
7.1 This Agreement will be governed by and construed in accordance
with the laws of the State of New York (regardless of the laws that might be
applicable under principles of conflicts of laws). This Agreement may be
executed simultaneously in counterparts, each of which will be deemed to be an
original but all of which together will constitute one and the same instrument.
7.2 The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
7.3 All representations, warranties and agreements made by the
Shareholder and the Purchaser in this Agreement shall survive the Closing
hereunder and any investigation at any time made by or on behalf of any party
hereto.
7.4 This Agreement will be binding upon, inure to the benefit of and
be enforceable by (i) the Shareholder and his respective heirs, beneficiaries,
representatives and assigns, and (ii) the Purchaser and its successors and
assigns. This Agreement may not be assigned by the parties hereto, except that
the Purchaser may assign its rights hereunder to any wholly owned subsidiary of
Purchaser.
7.5 The Shareholder agrees that damages would be an inadequate remedy
for breach of this Agreement and
7
<PAGE>
that the Purchaser may obtain specific performance of this Agreement and
injunctive relief against any breach hereof.
7.6 This Agreement, and the documents referred to herein or delivered
pursuant hereby which form a part hereof, contain the entire understanding of
the parties hereto with respect to its subject matter. There are no
restrictions, agreements, promises, warranties, covenants or undertakings with
respect to the subject matter hereof other than those expressly set forth
herein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to its subject matter. This Agreement may be
amended only by a written instrument duly executed by both the parties hereto.
Any condition to a party's obligations hereunder may be waived in writing by
such party.
7.7 The article and section headings contained herein are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
7.8 All notices, claims, certificates, requests, demands and other
communications hereunder ("notices) will be given in writing and will be deemed
to have been duly given if delivered or mailed (registered or certified mail,
postage prepaid, return receipt requested) as follows:
(a) If to the Purchaser, to:
Woolworth Corporation
233 Broadway
New York, New York 10279
Attention: General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022-3897
Attention: Thomas H. Kennedy, Esq.
(b) If to the Shareholder, to the address set forth below the
Shareholder's signature at the end of this Agreement,
8
<PAGE>
with a copy to:
Michael T. Pepke, Esq.
James M. Bedore, Esq.
Reinhart, Boerner, Van Deuren,
Norris & Rieselbach, s.c.
1000 North Water Street
Milwaukee, Wisconsin 53202
or, in either case, such other address as the person to whom notice is to be
given may have previously furnished to the others in the manner set forth above.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date hereof.
WOOLWORTH CORPORATION
By: ____________________________________
Name:
Title:
-----------------------------------------
Name of Shareholder: Richard C. Gering
9
<PAGE>
Exhibit D
AGREEMENT WITH SHAREHOLDER
--------------------------
AGREEMENT WITH SHAREHOLDER (the "Agreement"), dated November 30, 1996,
between Woolworth Corporation, a New York corporation (the "Purchaser"), and
Harry H. Colcord (the "Shareholder").
WHEREAS, the Purchaser, Eastbay, Inc., a Wisconsin corporation (the
"Company"), and East Acquisition Corporation, a Wisconsin corporation and an
indirect wholly owned subsidiary of the Purchaser ("Acquisition"), are entering
into an Agreement and Plan of Merger (the "Merger Agreement"), which would
provide, among other things, that Acquisition, upon the terms and subject to the
conditions thereof, would be merged with the Company (the "Merger"); and
WHEREAS, as a condition to its willingness to execute the Merger
Agreement, and as a material inducement with respect thereto the Purchaser has
required that the Shareholder agree, and the Shareholder has agreed, to enter
into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein, the parties hereto agree as follows:
I. GRANT OF APPRECIATION RIGHT
1.1 If, at any time prior to the first anniversary of the date the
Merger Agreement is terminated by the Company, (i) any third party shall have
made a bona fide "takeover proposal" (as defined in the Merger Agreement) and
subsequently (ii) the Shareholder shall, by sale, transfer, assignment or any
other means whatsoever, receive cash or property (including the retained value
of any security and the present value of any right to receive a payment in the
future (whether or not after the first anniversary)) for any share of common
stock, par value $.01 per share, of the Company ("Shares") held by such
Shareholder as of the date hereof (which the Shareholder represents is 467,378
Shares) in excess of $23.75 per Share, the Shareholder shall promptly pay
(including, in the case of deferred consideration, when such consideration is
received) the amount of such excess to the Purchaser, provided that if a
"takeover proposal"
<PAGE>
(as defined in the Merger Agreement) which provides for a payment of a higher
price per share to the public than that set forth in the Merger Agreement is
received by the Company within 37 days of the date of the Merger Agreement, such
payment shall be subject to a maximum of $1.139284 per share. This provision
shall apply to the extent set forth herein to any sale, transfer, assignment or
other action with respect to any interest in or right with respect to, such
Shares, whether the sale, transfer, assignment or other action occurs in a
single transaction or a series of transactions, and shall be generally broadly
construed in order to protect the interests of the Purchaser. The provisions of
this Article I shall be of no further force and effect in the event that (i) the
Purchaser shall be or shall have been in material breach of its obligations
under the Merger Agreement or (ii) the Merger shall fail to be consummated as a
result of the failure to obtain clearance under the HSR Act (as defined in the
Merger Agreement) or (iii) the conditions set forth in Section 7.1(b) or 7.2 of
the Merger Agreement shall not have been satisifed at the time of termination of
the Merger Agreement.
II. CONTINGENT CONSIDERATION
2.1 In the event that the Merger is consummated (whether or not
employed by the Company, and including his heirs, beneficiaries, representatives
and assigns), the Shareholder shall be entitled to receive from the Purchaser a
payment pursuant to this Article II to the extent the conditions hereof are
satisfied. Any payment so made shall be deemed to be, and shall be treated for
all purposes by the parties hereto as, contingent payment in consideration of
the Shares sold by the Shareholder and the parties agree to treat the payment as
such on all tax returns filed by the parties.
(i) If the earnings before interest and taxes ("EBIT") of the
Company in the twelve-month period ended June 30, 1998 ("1998 EBIT") exceeds
$20,271,000, then the Shareholder shall be entitled to receive from the
Purchaser (in cash paid promptly after the amount is finally calculated) $X per
Share (the "1998 Payment"), where X is calculated as follows:
2
<PAGE>
(a) If the 1998 EBIT is less than $24,473,000, then X shall be equal to
[1998 EBIT - $20,271,000)] / $4,202,000 x $0.777737 and the 1998
Unpaid Amount shall be equal to [$0.777737 - X].
(b) If the 1998 EBIT is greater than or equal to $24,473,000, then X
shall be equal to $0.777737 and the 1998 Unpaid Amount shall be equal
to $0.
In no event shall the 1998 Payment exceed $0.777737 per Share.
(ii) If the EBIT of the Company for the twelve-month period
ended June 30, 1999 ("1999 EBIT") exceeds $25,316,000, then the Shareholder
shall be entitled to receive from the Purchaser (in cash promptly after the
amount is finally calculated), $Y per Share (the "1999 Payment"), where Y is
calculated as follows:
(a) If the 1999 EBIT is less than or equal to $30,569,000, then Y shall
be equal to [1999 EBIT - $25,316,000] / $5,253,000 x $0.972263.
(b) If the 1999 EBIT is greater than $30,569,000 and the 1998 Unpaid
Amount is greater than $0, then Y shall be equal to $0.972263 plus
[1999 EBIT - $30,569,000] / [$24,473,000 - 1998 EBIT] x 1998 Unpaid
Amount, provided however, that in no event shall Y exceed $0.972263
plus the 1998 Unpaid Amount.
(c) If the 1999 EBIT is greater than $30,569,000 and the 1998 Unpaid
Amount equals $0, then Y shall be equal to $0.972263.
(iii) Notwithstanding the foregoing, in no event shall the sum
of the 1998 Payment and the 1999 Payment exceed $1.75 per share.
3
<PAGE>
(iv) The Purchaser intends to maintain the business and financial
affairs of the Company as a discrete entity in accordance with their conditions
as of the Effective Time of the Merger. If any material change is made to the
Company as currently operated prior to the payment (if earned) of the 1999
Payment, the parties will cooperate in good faith to determine the necessary
amendments (if any) to this Article II so as to fairly and equitably treat both
parties to this Agreement.
(v) Any calculation of EBIT made pursuant to this Article II
shall be prepared based upon the books and records of the Company in accordance
with generally accepted accounting principles, consistently applied. By way of
illustration and not limitation, EBIT shall not include any intercompany charges
which do not replace other charges which would be paid by the Company or any
expenses related to costs of the Merger.
III. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER
The Shareholder represents and warrants to the Purchaser that:
3.1 The Shareholder has all necessary power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby and this Agreement constitutes a valid and binding agreement of the
Shareholder.
3.2 The Shareholder beneficially owns 467,378 Shares free and clear
of all claims, liens, encumbrances, security interests and charges of any kind,
including rights of first refusal and restrictions or other impediments on the
Shareholder's voting rights or rights of disposition pertaining thereto.
3.3 Neither the execution, delivery and performance of this Agreement
nor the consummation by the Shareholder of the transactions contemplated hereby
will require the consent, waiver, approval, license or authorization of or
filing with any person or public authority and will not conflict with,
constitute a violation of or default under or result in a breach of any
contract, commitment, agreement, arrangement, certificate of incorporation or
bylaw, judgment, order, ordinance, regulation, decree or restriction of any kind
to which the
4
<PAGE>
Shareholder is a party or by which the Shareholder is bound.
IV. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Shareholder that:
4.1 This Agreement has been duly authorized by all necessary
corporate action on the part of the Purchaser and has been duly executed by a
duly authorized officer of the Purchaser and constitutes a valid and binding
obligation of the Purchaser.
V. COVENANTS OF THE SHAREHOLDER
5.1 The Shareholder hereby covenants and agrees that prior to the
date of termination of the Merger Agreement the Shareholder will not, directly
or indirectly, sell, transfer, assign, pledge, hypothecate, create a security
interest in or lien on, place in trust (voting or otherwise) or otherwise
encumber or dispose of or limit its right to vote in any manner any of the
Shares which are the subject matter of this Agreement except pursuant to the
terms hereof. The Shareholder will not take any action in his individual
capacity which would have the effect of preventing or disabling the Shareholder
from performing its obligations under this Agreement.
5.2 (a) The Shareholder agrees to vote all voting securities of the
Company held by such holder in favor of adoption of the Merger Agreement;
provided, however, that the Shareholder shall not be required to vote his voting
securities in favor of adoption of the Merger Agreement if the Board of
Directors of the Company determines, after consultation with counsel, that
recommending the Merger and adoption of the Merger Agreement to the Company's
shareholders is inconsistent with the Board of Directors' fiduciary duties to
the Company's shareholders.
(b) The Shareholder agrees that, prior to the date of
termination of the Merger Agreement (the "Termination Date") such holder will
not vote or execute any written consent in favor of any amendment to the
Articles of Incorporation or By-laws of the Company or
5
<PAGE>
any Business Combination Transaction without the prior written consent of the
Purchaser. As used herein, "Business Combination Transaction" shall mean any
transaction, including, without limitation, a merger, consolidation,
reclassification, liquidation, dissolution or sale of substantially all of the
assets of the Company, other than a transaction to which the Purchaser is a
party, which requires a vote of stockholders of the Company pursuant to the
Wisconsin Business Corporation Law or the rules and regulations of the NASDAQ
Stock Market.
5.3 For a period of five years from the Effective Date (as defined in
the Merger Agreement), the Shareholder shall not (a)(i) compete with the Company
or the Purchaser, in the Territory in the conduct of the Business, or (ii)
engage or participate, directly or indirectly, in any business or businesses
substantially similar to the Business, (b) solicit or cause to be solicited
within or without the Territory any customers of the Business for services or
products that compete with those of the Company or the Business, or (c) recruit,
solicit, or induce any employee of the Business, the Purchaser, or any
subsidiary of the Purchaser to terminate their employment with, or otherwise
cease their relationship with, the Business, the Purchaser, or any such
subsidiary, as the case may be. For purposes of this provision, "Territory"
shall mean the United States, Canada, Japan, the United Kingdom, Germany,
France, Spain and Italy, and "Business" shall mean the business of selling and
marketing by mail order footwear and apparel and selling and marketing athletic
footwear and apparel through retail stores. The parties agree that the Purchaser
is not making any separate payment for the Shareholder's agreement contained in
this Section 5.3 and the parties agree not to allocate or report any part of the
contingent payment in Article II of this Agreement or any part of the
consideration received under the Merger Agreement for tax or any other purposes
to the Shareholder's agreement in this Section 5.3.
VI. NEGOTIATIONS
Following the execution of this Agreement and prior to the Termination
Date, the Shareholder shall not in his individual capacity, directly or
indirectly, solicit, encourage, or initiate or participate in any
6
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discussions or negotiations with, or provide any information to, any
corporation, partnership, person, or other entity or group (other than the
Purchaser or an affiliate or an associate of the Purchaser or an officer,
employee or other authorized representative of the Purchaser or such affiliate
or associate) concerning any merger, sale of substantial assets, sale of
substantial amounts of securities, or similar transaction involving the Company
or any sale of the Shares. The foregoing prohibition shall not prohibit the
Shareholder from taking any action, including but not limited to, those
enumerated above, in connection with his exercise of any fiduciary duty owed to
the Company or its shareholders in his capacity as an officer or director.
VII. MISCELLANEOUS
7.1 This Agreement will be governed by and construed in accordance
with the laws of the State of New York (regardless of the laws that might be
applicable under principles of conflicts of laws). This Agreement may be
executed simultaneously in counterparts, each of which will be deemed to be an
original but all of which together will constitute one and the same instrument.
7.2 The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
7.3 All representations, warranties and agreements made by the
Shareholder and the Purchaser in this Agreement shall survive the Closing
hereunder and any investigation at any time made by or on behalf of any party
hereto.
7.4 This Agreement will be binding upon, inure to the benefit of and
be enforceable by (i) the Shareholder and his respective heirs, beneficiaries,
representatives and assigns, and (ii) the Purchaser and its successors and
assigns. This Agreement may not be assigned by the parties hereto, except that
the Purchaser may assign its rights hereunder to any wholly owned subsidiary of
Purchaser.
7.5 The Shareholder agrees that damages would be an inadequate remedy
for breach of this Agreement and
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that the Purchaser may obtain specific performance of this Agreement and
injunctive relief against any breach hereof.
7.6 This Agreement, and the documents referred to herein or delivered
pursuant hereby which form a part hereof, contain the entire understanding of
the parties hereto with respect to its subject matter. There are no
restrictions, agreements, promises, warranties, covenants or undertakings with
respect to the subject matter hereof other than those expressly set forth
herein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to its subject matter. This Agreement may be
amended only by a written instrument duly executed by both the parties hereto.
Any condition to a party's obligations hereunder may be waived in writing by
such party.
7.7 The article and section headings contained herein are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
7.8 All notices, claims, certificates, requests, demands and other
communications hereunder ("notices") will be given in writing and will be deemed
to have been duly given if delivered or mailed (registered or certified mail,
postage prepaid, return receipt requested) as follows:
(a) If to the Purchaser, to:
Woolworth Corporation
233 Broadway
New York, New York 10279
Attention: General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022-3897
Attention: Thomas H. Kennedy, Esq.
(b) If to the Shareholder, to the address set forth below the
Shareholder's signature at the end of this Agreement,
8
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with a copy to:
Michael T. Pepke, Esq.
James M. Bedore, Esq.
Reinhart, Boerner, Van Deuren,
Norris & Rieselbach, s.c.
1000 North Water Street
Milwaukee, Wisconsin 53202
or, in either case, such other address as the person to whom notice is to be
given may have previously furnished to the others in the manner set forth above.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date hereof.
WOOLWORTH CORPORATION
By: __________________________________
Name:
Title:
---------------------------------------
Name of Shareholder: Harry H. Colcord
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Exhibit E
[LETTERHEAD OF ROBERT W. BAIRD & CO. INCORPORATED]
November 30, 1996
Board of Directors
Eastbay, Inc.
427 Third Street
Wausau, WI 54403
Gentlemen:
Eastbay, Inc. (the "Company") proposes to enter into an Agreement and Plan of
Merger (the "Agreement") with Woolworth Corporation ("Parent") and East
Acquisition Corporation, an indirect wholly owned subsidiary of Parent ("Sub").
Pursuant to the Agreement, at the Effective Time (as defined in the Agreement),
Sub will be merged with and into the Company (the "Merger") and each outstanding
share of common stock, par value $.01 per share ("Company Common Stock") of the
Company (other than shares held by (A) the Company, Parent, any of their
respective subsidiaries, or holders perfecting appraisal rights and (B) the
Management Holders (as hereinafter defined)) will be converted solely into the
right to receive $24.00 in cash (the "Consideration").
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of Company Common Stock (other than the Management Holders
and Parent and its affiliates) of the Consideration.
Robert W. Baird & Co. Incorporated ("Baird"), as part of its investment banking
business, is engaged in the evaluation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements, and valuations for estate, corporate and other purposes.
In conducting our investigation and analysis and in arriving at our opinion
herein, we have reviewed such information and taken into account such financial
and economic factors as we have deemed relevant under the circumstances. In that
connection, we have, among other things: (i) reviewed certain internal
information, primarily financial in nature, including projections, concerning
the business and operations of the Company furnished to us for purposes of our
analysis, as well as publicly available information including but not limited to
the Company's recent filings with the Securities and Exchange Commission (the
"SEC") and equity analyst research reports prepared by various investment
banking firms including Baird; (ii) reviewed the
<PAGE>
Eastbay, Inc.
November 30, 1996
Page 2
Agreement in the form presented to the Company's Board of Directors; (iii)
compared the historical market prices and trading activity of the Company Common
Stock and the common stock of Parent with those of certain other publicly traded
companies we deemed relevant; (iv) compared the financial position and operating
results of the Company with those of other publicly traded companies we deemed
relevant; and (v) compared the proposed financial terms of the Merger with the
financial terms of certain other business combinations we deemed relevant. We
have held discussions with certain members of the Company's and Parent's senior
management concerning the Company's and Parent's respective historical and
current financial condition and operating results, as well as the future
prospects of the Company and Parent, respectively. We have not been requested
to, and did not, solicit third party indications of interest in acquiring all or
any part of the Company. We have also considered such other information,
financial studies, analysis and investigations and financial, economic and
market criteria which we deemed relevant for the preparation of this opinion.
In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of all of the financial and other information provided us by or on
behalf of the Company and Parent, or publicly available, and have not assumed
any responsibility to verify any such information independently. We have also
assumed, with your consent, that (i) the Merger will be accounted for under the
purchase method and (ii) all material assets and liabilities (contingent or
otherwise, known or unknown) of the Company are as set forth in the Company's
financial statements. We have assumed that the financial forecasts examined by
us were reasonably prepared on bases reflecting the best available estimates and
good faith judgments of the Company's senior management as to future performance
of the Company. In conducting our review, we have not undertaken nor obtained an
independent evaluation or appraisal of any of the assets or liabilities
(contingent or otherwise) of the Company nor have we made a physical inspection
of the properties or facilities of the Company. We express no opinion as to the
fairness, from a financial point of view, of the consideration proposed to be
paid by Parent to Messrs. Arthur H. Juedes, Richard C. Gering and Harry H.
Colcord (collectively, the "Management Holders") for their shares of Company
Common Stock. Our opinion necessarily is based upon economic, monetary and
market conditions as they exist and can be evaluated on the date hereof, and
does not predict or take into account any changes which may occur, or
information which may become available, after the date hereof.
Our opinion has been prepared solely for the information of the Company's Board
of Directors, and shall not be used for any other purpose or disclosed to any
other party without the prior written consent of Baird; provided, however, that
this letter may be reproduced in full in the Proxy Statement to be provided to
the Company's stockholders in connection with the Merger. This opinion does not
address the relative merits of the Merger and any other potential transactions
or business strategies considered by the Company's Board of Directors, and does
not constitute a recommendation to any shareholder of the Company as to how any
such shareholder should vote
<PAGE>
Eastbay, Inc.
November 30, 1996
Page 3
with respect to the Merger. Baird has acted as financial advisor to the Company
in connection with the Merger and will receive a fee for our services, part of
which is payable upon the preparation and delivery of this fairness opinion and
part of which is contingent upon consummation of the Merger. In the past, we
have provided investment banking services to the Company, including acting as
lead manager for the initial public offering of Company Common Stock, for which
we received our customary compensation.
In the ordinary course of our business, we may from time to time trade the
securities of the Company or Parent for our own account or accounts of our
customers and, accordingly, may at any time hold long or short positions in
such securities.
Based upon and subject to the foregoing, we are of the opinion that, as of the
date hereof, the Consideration is fair, from a financial point of view, to the
holders of Company Common Stock (other than the Management Holders and Parent
and its affiliates as to which we expressed no opinion).
Sincerely yours,
ROBERT W. BAIRD & CO. INCORPORATED
<PAGE>
PROXY
EASTBAY, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Harry H. Colcord and John V. Schaefer, or
either one of them, with full power of substitution and resubstitution, as proxy
or proxies of the undersigned to attend the Special Meeting of Shareholders of
Eastbay, Inc. to be held on January 31, 1997 at 11:00 a.m., local time, at
_____________, and at any adjournment thereof, to vote all shares of Common
Stock which the undersigned would be entitled to vote if personally present as
specified upon the following matters.
1. APPROVAL AND ADOPTION OF AGREEMENT AND PLAN OF MERGER, DATED AS OF
NOVEMBER 30, 1996, BY AND AMONG WOOLWORTH CORPORATION, EAST ACQUISITION
CORPORATION AND EASTBAY, INC.
[_] FOR [_] AGAINST [_] ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such other
matters as may properly come before the meeting.
(continued on reverse side)
<PAGE>
PROXY NO. NO. OF SHARES
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Shareholders and accompanying Proxy Statement, ratifies all that said
proxies or their substitutes may lawfully do by virtue hereof, and revokes all
former proxies.
Please sign exactly as your name appears hereon, date and return this Proxy.
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED TO GRANT AUTHORITY TO
APPROVE AND ADOPT THE MERGER AGREEMENT. IF OTHER MATTERS COME BEFORE THE
MEETING, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE BEST JUDGMENT OF THE
PROXIES APPOINTED.
DATED: ___________________, 1997
_________________________________________
(SIGNATURE OF SHAREHOLDER)
_________________________________________
(SIGNATURE IF JOINTLY HELD)
in signing as attorney, executor,
administrator, trustee or guardian,
please add your full title as such.
If shares are held by two or more
persons, all holders must sign the Proxy.
2
