SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)
FILED BY REGISTRANT [X]
Filed by a Party other than Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
Specialty Catalog Corp.
-----------------------
(Name of Registrant as Specified In Its Charter)
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
2) Aggregate number of securities to which transaction applies: 2,820,577
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): The proposed maximum aggregate
value of the transaction for purposes of calculating the filing fee is
$12,207,772. The filing fee was determined by adding (a) the product of (i) the
2,820,577 shares of Common Stock that are proposed to be retired in the merger
and (ii) the merger consideration of $3.75 per share of Common Stock, plus (b)
$1,630,609 expected to be paid upon cancellation of all outstanding options (the
"Total Consideration"). The filing fee equals one-fiftieth of one percent of the
Total Consideration.
4) Proposed maximum aggregate value of transaction: $12,207,772 (includes
amounts being paid with respect to the termination of stock options).
5) Total fee paid: $2,445.00
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of the filing.
1) Amount Previously Paid: $2,445.00
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2) Form, Schedule or Registration Statement No.: Schedule 14A
3) Filing Party: Specialty Catalog Corp.
4) Date Filed: May 21, 2001
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SPECIALTY CATALOG CORP.
21 Bristol Drive, South Easton, Massachusetts 02375
(508) 238-0199
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON __________ ___, 2001
To Specialty Catalog Corp. stockholders:
We will hold a special meeting of the stockholders of Specialty Catalog
Corp., a Delaware corporation, at ____________________________________________,
at _____ a.m. on ________________ ___, 2001. At this special meeting, or any
adjournment or postponement thereof, we will ask you to consider and vote upon
the following proposals as further described in the accompanying proxy
statement:
1. Approval and adoption of the Agreement and Plan of Recapitalization and
Merger, dated as of May 4, 2001, between Specialty Catalog Corp., a
Delaware corporation, and Specialty Acquisition Corp. ("Acquisition
Corp."), a Delaware corporation which was organized to effect the
merger and related transactions, pursuant to which the stockholders of
Specialty Catalog Corp., other than Acquisition Corp. and dissenting
stockholders who perfect their dissenters' rights, will receive $3.75
in cash for each share of Specialty Catalog Corp. common stock that
they own and Specialty Acquisition Corp. will be merged with and into
Specialty Catalog Corp., with Specialty Catalog Corp. continuing as the
surviving corporation.
The board of directors has fixed ___________, 2001 as the record date for
the determination of stockholders entitled to notice of and to vote at the
special meeting, or any adjournment or postponement thereof. Accordingly, only
stockholders of record at the close of business on _______, 2001 will be
entitled to notice of and to vote at such meeting. A list of our stockholders
entitled to vote will be kept by us at 21 Bristol Drive, South Easton,
Massachusetts 02375, for a period of ten days before the special meeting.
If the merger is completed, each share (other than shares owned by
Acquisition Corp. and shares owned by stockholders who have perfected their
appraisal rights) of Specialty Catalog common stock outstanding at the closing
of the merger will be canceled and converted into the right to receive $3.75 in
cash, without interest. The accompanying proxy statement contains detailed
information about the merger and the actions to be taken in connection with the
merger. The terms of the merger are more fully described in the merger agreement
which is attached as Annex A to the accompanying proxy statement.
Stockholders who properly demand appraisal rights prior to the stockholder
vote at the special meeting, who do not vote in favor of approval and adoption
of the merger and the merger agreement and who otherwise comply with the
provisions of Section 262 of the General Corporation Law of the State of
Delaware (the "DGCL") will be entitled, if the merger is completed, to statutory
appraisal of the fair value of their shares of common stock. See the section
entitled "Dissenters' Rights" in the accompanying proxy statement and the full
text of Section 262 of the DGCL, which is attached as Annex C to the
accompanying proxy statement, for a description of the procedures that you must
follow in order to exercise your appraisal rights.
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In order to evaluate the advisability of the merger, your board of
directors formed a special committee of the Specialty Catalog board of
directors, consisting of one independent director. The special committee has
recommended to your board of directors that the board of directors approve and
declare advisable the merger and the merger agreement. In its evaluation of the
merger, the special committee and the board of directors considered, among other
things, the written opinion of Burnham Securities Inc., the financial advisor of
the special committee, which states that, as of the date of the opinion, the
merger consideration of $3.75 per share to be received by the stockholders of
Specialty Catalog is fair to such stockholders of Specialty Catalog (other than
Acquisition Corp. and its current and future stockholders) from a financial
point of view. Burnham Securities Inc.'s opinion is subject to the assumptions
and qualifications set forth in its written opinion, which is attached as Annex
B to the enclosed proxy statement.
EACH OF THE MEMBERS OF THE BOARD OF DIRECTORS OF SPECIALTY CATALOG, UPON
THE RECOMMENDATION OF THE SPECIAL COMMITTEE, AND THE SPECIAL COMMITTEE
DETERMINED THAT THE MERGER AND THE MERGER AGREEMENT ARE FAIR TO, ADVISABLE AND
IN THE BEST INTERESTS OF SPECIALTY CATALOG'S STOCKHOLDERS (OTHER THAN
ACQUISITION CORP. AND ITS CURRENT AND FUTURE STOCKHOLDERS) AND RECOMMENDS THAT
YOU APPROVE AND ADOPT THE MERGER AND THE MERGER AGREEMENT.
The attached proxy statement provides you with detailed information about
the proposed merger and merger agreement. We urge you to read the entire
document carefully. The affirmative vote of holders of a majority of the
outstanding shares of Specialty Catalog common stock is required to approve and
adopt the merger and the merger agreement.
REGARDLESS OF THE NUMBER OF SHARES YOU OWN, YOUR VOTE IS VERY IMPORTANT.
Therefore, whether or not you plan to attend the meeting, please complete your
proxy and return it in the enclosed envelope, which requires no postage if
mailed in the United States. If you attend the meeting and wish to vote in
person, your proxy will not be used.
Please do not send any certificates for your shares at this time.
Instructions for the purpose of exchanging your shares for the consideration to
be received upon consummation of the merger will be sent to you following the
consummation of the merger.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION, OR DETERMINED IF
THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Dated: _________, 2001 By order of the Board of Directors,
-------------------------------------
Thomas McCain, Senior Vice
President, Chief Financial Officer
and Secretary
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SPECIALTY CATALOG CORP.
21 Bristol Drive, South Easton, Massachusetts 02375
(508) 238-0199
---------------
PROXY STATEMENT
--------------
GENERAL INFORMATION
The enclosed proxy is solicited on behalf of the board of directors of
Specialty Catalog Corp. for use at the special meeting of
our stockholders to be held on ________, ___________, 2001, and at any
adjournments or postponements thereof (the "Special Meeting"). This proxy
statement is first being mailed to our stockholders on or about _______, 2001.
Our principal executive office is located at 21 Bristol Drive, South
Easton, Massachusetts 02375.
You may revoke your proxy at any time prior to its use by giving written
notice to our Secretary, by executing a revised proxy at a later date or by
attending the special meeting and voting in person. Proxies in the form
enclosed, unless previously revoked, will be voted at the Special Meeting in
accordance with the specifications made by you thereon or, in the absence of
such specifications, in favor of the proposal to approve and adopt the Agreement
and Plan of Recapitalization and Merger (the "merger agreement") between
Specialty Catalog and Specialty Acquisition Corp. in order to effect the merger
and the related transactions contemplated therein. If, in a proxy submitted on
your behalf by a person acting solely in a representative capacity, the proxy is
marked clearly to indicate that the shares represented thereby are not being
voted with respect to the proposal, then your proxy will not be counted as
present at the special meeting with respect to the proposal. Proxies submitted
with abstentions as to the proposal will be counted as present for purposes of
establishing a quorum for the proposal.
Only stockholders of record at the close of business on July __, 2001 are
entitled to notice of, and to vote at, the special meeting, or any adjournment
or postponement thereof. We had 4,337,886 shares of common stock, par value
$0.01 per share, outstanding on July 18, 2001, each of which is entitled to one
vote upon the matters to be presented at the special meeting. The presence, in
person or by proxy, of one third of the issued and outstanding shares of common
stock will constitute a quorum for the transaction of business at the special
meeting.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION, OR DETERMINED IF
THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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SUMMARY TERM SHEET
The following summary briefly describes the material terms of the proposed
merger. This summary does not contain all the information that may be important
for you to consider when evaluating the merger. We encourage you to read this
proxy statement and the documents we have incorporated by reference before
voting. We have included section references to direct you to a more complete
description of the topics described in this summary.
o The Companies. Specialty Catalog Corp. is a Delaware corporation that
targets niche consumer product categories, primarily via direct
marketing. SC Direct, our principal operating subsidiary in the United
States, is the U.S.'s leading retailer of women's wigs and hairpieces.
Daxbourne International Limited, a subsidiary of SC Direct, is a
leading United Kingdom retailer and wholesaler of women's wigs and
hairpieces. SC Publishing, another subsidiary of SC Direct, provides
continuing education courses, seminars, and conferences to nurses and
other health care professionals.
Specialty Acquisition Corp. is a Delaware corporation newly formed at
the direction of Mr. Guy Naggar for the sole purpose of effecting the
merger. Without taking into effect the consummation of the subscription
agreements, Mr. Naggar is currently the owner of 22% of the outstanding
shares of Acquisition Corp. common stock. At the closing of the merger,
Acquisition Corp. will be merged with and into Specialty Catalog.
Please read "SUMMARY--The Participants" and "INFORMATION ABOUT THE
TRANSACTION PARTICIPANTS--The Continuing Stockholders."
o The Continuing Stockholders. Certain members of Specialty Catalog's
board of directors and significant stockholders of Specialty Catalog,
who hold approximately 57% of the outstanding shares of Specialty
Catalog common stock, will continue to be stockholders of Specialty
Catalog after the merger. The Continuing Stockholders are Acquisition
Corp. and the stockholders of Acquisition Corp., which currently
includes Mr. Naggar, who is a member of Specialty Catalog's board of
directors, First Global Holdings Limited, Oracle Investments and
Holdings Limited, Ionic Holdings LDC, Three Greens Holdings Limited,
and Alexander Enterprise Holding Corp. and, upon consummation of the
transactions contemplated by the subscription agreements which shall
occur prior to the merger, will include Martin Franklin, who is a
member of Specialty Catalog's board of directors, The David Cicurel
Settlement, Wynnefield Partners Small Cap Value, L.P., Wynnefield
Partners Small Cap Value, L.P. I, and Wynnefield Partners Small Cap
Value Offshore Fund, Ltd. In addition, upon consummation of the
transactions contemplated by a note and warrant purchase agreement to
be entered into among Specialy Catalog, Acquisition Corp., LEG Partners
III, SBIC, L.P., and LEG Partners Debenture SBIC, L.P., it is expected
that LEG Partners III LBIC, L.P., who currently holds approximately 14%
of the outstanding shares of Specialty Catalog common stock, will
continue to be a stockholder of Specialty Catalog after the merger. The
Continuing Stockholders, other than Acquisition Corp., will continue to
hold shares of Specialty Catalog after the merger. Pursuant to the
terms of the merger, all of the shares of common stock of Acquisition
Corp. will, upon completion of the merger, automatically be converted
into shares of common stock of Specialty Catalog, which will be the
surviving corporation in the merger. For a more detailed description of
these arrangements and the Continuing Stockholders, please read
"SPECIAL FACTORS--Interests of Certain Persons in the Merger" and
"INFORMATION ABOUT THE TRANSACTION PARTICIPANTS--The Continuing
Stockholders."
o Required Vote. The merger and the merger agreement must be approved and
adopted by the affirmative vote of the holders of at least a majority
of the outstanding shares
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of Specialty Catalog common stock. The Continuing Stockholders, who as
of July 18, 2001, beneficially owned (excluding options), in the
aggregate, approximately 2.5 million shares of common stock of
Specialty Catalog, or approximately 57% of the outstanding shares of
common stock, have agreed, pursuant to the terms of subscription
agreements, to vote their shares for the approval and adoption of the
merger and the merger agreement. The merger agreement does not provide
that approval of at least a majority of our stockholders not affiliated
with Acquisition Corp. or any of the Continuing Stockholders is
required to consummate the merger. Accordingly, since the Continuing
Stockholders will vote for the approval and adoption of the merger and
the merger agreement, the affirmative vote of no other stockholder will
be required to approve and adopt the merger and the merger agreement.
Please read "THE SPECIAL MEETING--Record date and Voting; Quorum; and
Required Vote" and "SPECIAL FACTORS--Related Agreements-Subscription
Agreements."
o Merger Consideration. If the merger is completed, you as a stockholder
(other than Acquisition Corp.) will receive $3.75 per share in cash for
each of your shares of Specialty Catalog common stock unless you are a
dissenting stockholder and you perfect your dissenters' rights. In
connection with the merger, the Continuing Stockholders will exchange
all of their shares of common stock of Acquisition Corp. for shares of
common stock of Specialty Catalog. Please read "QUESTIONS AND ANSWERS
ABOUT THE MERGER," and "SPECIAL FACTORS--Interests of Certain Persons
in the Merger" and "SPECIAL FACTORS--Appraisal Rights".
o Effects of the Merger. As a result of the merger:
o Specialty Catalog's stockholders, other than the Continuing
Stockholders, will no longer have any equity interest in Specialty
Catalog; and
o Specialty Catalog's common stock will no longer be quoted on The
Nasdaq National Market and the registration of Specialty Catalog
common stock under the Securities Exchange Act of 1934 will be
terminated. Please read "SPECIAL FACTORS--Structure of the
Transaction; Participants."
o Tax Consequences. The receipt of cash in the merger by you will be a
taxable transaction to you. Please read "SPECIAL FACTORS--Material
Federal Income Tax Consequences of the Merger".
o Recommendation. Because certain directors of Specialty Catalog have
actual or potential conflicts of interest in evaluating the merger, the
Specialty Catalog board of directors appointed a special committee,
consisting of one independent director, that was authorized to evaluate
the merger. The board of directors, upon the recommendation of the
special committee, and the special committee determined that the merger
and the merger agreement are fair to, advisable and in the best
interests of Specialty Catalog's stockholders (other than Acquisition
Corp. and its current and future stockholders) and recommends that you
approve and adopt the merger and the merger
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agreement. Please read "SPECIAL FACTORS--Recommendation of the Special
Committee, and the Board of Directors; Considerations in Connection
with the Merger; Fairness of the Merger". The Continuing Stockholders
believe that the merger and the merger agreement are fair to and in the
best interests of the unaffiliated stockholders of Specialty Catalog.
Please read "SPECIAL FACTORS--Position of the Continuing Stockholders
as to the Fairness of the Merger".
o Opinion of Financial Advisor. The special committee and the board of
directors received a written opinion from Burnham Securities Inc. to
the effect that, subject to certain assumptions and qualifications set
forth in its opinion, as of the date of the opinion, the merger
consideration of $3.75 per share to be received by the stockholders of
Specialty Catalog is fair to such stockholders (other than Acquisition
Corp. and its current and future stockholders) from a financial point
of view. Please read "SPECIAL FACTORS--Opinion of Burnham Securities
Inc.".
o Dissenters' Rights. If you do not wish to vote in favor of the approval
and adoption of the merger and the merger agreement and you fulfill
several procedural requirements, including not voting in favor of the
approval and adoption of the merger and the merger agreement, Delaware
law entitles you to a judicial appraisal of the fair value of your
shares. Please read "SPECIAL FACTORS--Appraisal Rights".
o Sources and Uses of Funds
The table below shows the sources of funds to be used in this
transaction and the specific use of such funds. See "SPECIAL FACTORS --
Amount and Source of Funds and Financing of the Merger."
Sources of Funds
----------------
Available cash balances $ 1,001,000
Available under revolving credit agreement 2,847,000
Senior loan 7,650,000
Capital lease obligations 170,000
Mezzanine financing 7,500,000
Capital contribution (a) 1,673,000
Rollover common equity (b) 8,006,000
Outstanding letters of credit 1,753,000
------------
Total $30,600,000
Uses of Funds
-------------
Repurchase common equity (c) $ 8,757,000
Cash for stock option value over exercise price (d) 1,147,000
Fees and expenses (e) 1,073,000
Available under revolving credit agreement 2,043,000
Rollover common equity (f) 8,006,000
Refinace existing debt and capital leases (g) 7,820,000
Refinance outstanding letters of credit (g) 1,753,000
------------
$30,600,000
Total
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(a) Mr. Nagger and Alexander have agreed to purchase for cash additional
shares of common stock of Acquisition Corp. That cash will be available
to redeem the common stock of Specialty Catalog in the merger. See
"SPECIAL FACTORS -- Amount and Source of Funds and Financing of the
Merger - Equity Contributions."
(b) These shares of common stock of Specialty Catalog will not be canceled
or paid for in the merger. See "SUMMARY TERM SHEET -- The Continuing
Stockholders."
(c) Includes the amounts that would be payable to Acquisition Corp. if the
transaction was structured such that the shares of Specialty Catalog
held by Acquisition Corp. were being cancelled and paid in connection
with the merger. See "SPECIAL FACTORS -- Related Agreements -
Subscription Agreements."
(d) See "SPECIAL FACTORS--Treatment of Stock Options."
(e) See "SPECIAL FACTORS--Estimated Fees and Expenses."
(f) See "SPECIAL FACTORS--Related Agreements--Stock Option Exercise
Agreements."
(g) Specialty Catalog will refinance its existing debt and letters of
credit with Fleet National Bank. See "SPECIAL FACTORS--Amount and
Source of Funds and Financing of the Merger--Fleet Bank Proposal."
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QUESTIONS AND ANSWERS ABOUT THE MERGER
The following questions and answers are intended to briefly address some
commonly asked questions regarding the merger. It should be read together with
the Summary that follows. These questions and answers may not address all
questions that may be important to you as a stockholder of Specialty Catalog.
Please refer to the more detailed information contained elsewhere in this proxy
statement, the appendices to this proxy statement, and the documents referred to
or incorporated by reference in this proxy statement.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: You are being asked to vote to approve and adopt the Agreement and Plan of
Recapitalization and Merger (the "merger agreement") and the transactions
contemplated by such merger agreement, including the merger of Acquisition Corp.
with and into Specialty Catalog.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: Each share of Specialty Catalog common stock will be automatically converted
into the right to receive $3.75 per share, without interest, other than the
shares owned by Acquisition Corp. and shares owned by stockholders who have
demanded appraisal rights and satisfied the procedures relating to appraisal
rights. See "SUMMARY-- The Merger".
Q: WHO ARE THE CONTINUING STOCKHOLDERS?
A: The Continuing Stockholders are Acquisition Corp. and the stockholders of
Acquisition Corp., which currently includes Mr. Naggar, who is a member of
Specialty Catalog's board of directors, First Global Holdings Limited ("First
Global"), Oracle Investments and Holdings Limited ("Oracle"), Ionic Holdings LDC
("Ionic"), Three Greens Holdings Limited ("Three Greens"), and Alexander
Enterprise Holding Corp. ("Alexander") and, upon consummation of the
transactions contemplated by the subscription agreements which shall occur prior
to the merger, will include Martin Franklin, who is a member of Specialty
Catalog's board of directors, The David Cicurel Settlement, Wynnefield Partners
Small Cap Value, L.P. ("Wynnefield Partners"), Wynnefield Partners Small Cap
Value, L.P. I ("Wynnefield Partners I"), and Wynnefield Partners Small Cap Value
Offshore Fund, Ltd. ("Wynnefield Offshore"). In addition, upon consummation of
the transactions contemplated by a note and warrant purchase agreement to be
entered into among Specialty Catalog, Acquisition Corp., LEG Partners III, SBIC,
L.P. ("LEG Partners III"), and LEG Partners Debenture SBIC, L.P., it is expected
that LEG Partners III, who currently holds approximately 14% of the outstanding
shares of Specialty Catalog common stock, will continue to be a stockholder of
Specialty Catalog after the merger. The Continuing Stockholders, other than
Acquisition Corp., will continue to hold shares of Specialty Catalog after the
merger. Pursuant to the terms of the merger, all of the shares of common stock
of Acquisition Corp. will, upon completion of the merger, automatically be
converted into shares of common stock of Specialty Catalog, which will be the
surviving corporation in the merger. For a more detailed description of these
arrangements, please read "SPECIAL FACTORS--Interests of Certain Persons in the
Merger".
Q: CAN I CHOOSE TO BE A CONTINUING STOCKHOLDER?
A: No. The Continuing Stockholders will include only Acquisition Corp. and the
stockholders of Acquisition Corp. who are identified in this proxy statement and
described in the preceding answer.
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Q: WHY WAS THE SPECIAL COMMITTEE FORMED?
A: Your board of directors formed a special committee consisting of Mr. David
Moore to protect the interests of the stockholders of Specialty Catalog, other
than Acquisition Corp. and its current and future stockholders, in evaluating
and negotiating the merger agreement. Mr. Moore, an independent director, is not
an employee of Specialty Catalog, an employee or director of Acquisition Corp.
or a Continuing Stockholder. The special committee independently selected and
retained legal and financial advisors to assist it. For further details about
the special committee see "SPECIAL FACTORS -- Special Committee."
Q: WHERE AND WHEN IS THE SPECIAL MEETING?
A: The special meeting will be held at __________________________________,
__________________________, at ______a.m., local time, on ________, 2001.
Q: WHAT IS THE SPECIAL COMMITTEE'S AND THE BOARD OF DIRECTORS' RECOMMENDATION?
A: The board of directors, upon the recommendation of the special committee, and
the special committee recommend that you vote your shares "FOR" the approval and
adoption of the merger and the merger agreement.
Q: WHAT WILL HAPPEN TO SPECIALTY CATALOG AFTER THE MERGER?
A: After the merger, our common stock will no longer be publicly traded and,
therefore, the public will no longer participate in the future earnings and
growth of Specialty Catalog, which will be privately owned. After the merger,
shares of our common stock will no longer be listed on The Nasdaq National
Market. See "SPECIAL FACTORS--Structure of the Transaction; Participants".
Q: ARE OUR STOCKHOLDERS ENTITLED TO APPRAISAL RIGHTS?
A: Yes. Under the Delaware General Corporation Law, our stockholders are
entitled to appraisal rights. The rules governing satisfaction of the
requirements for exercising appraisal rights must be strictly complied with or a
stockholder's appraisal rights may be lost. For a description of these rights
and how to satisfy the applicable requirements, see "SPECIAL FACTORS --
Appraisal Rights".
Q: WHO CAN VOTE AT THE SPECIAL MEETING?
A: Holders of our common stock at the close of business on ________, 2001 (the
"record date") may vote at the special meeting. Each share of common stock is
entitled to one vote. See "SPECIAL MEETING - Record date and Voting; Quorum."
Q: WHAT VOTE IS REQUIRED?
A: The merger and the merger agreement must be approved and adopted by the
holders of a majority of the shares of our common stock outstanding on the
record date. The Continuing
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Stockholders, who as of July 18, 2001, beneficially owned (excluding options),
in the aggregate, approximately 2.5 million shares of common stock of Specialty
Catalog, or approximately 57% of the outstanding shares of common stock, have
agreed, pursuant to the terms of subscription agreements, to vote their shares
for the approval and adoption of the merger and the merger agreement. The merger
agreement does not provide that approval of at least a majority of our
stockholders not affiliated with Acquisition Corp. or any of the Continuing
Stockholders is required to consummate the merger. Accordingly, since the
Continuing Stockholders will vote for the approval and adoption of the merger
and the merger agreement, the affirmative vote of no other stockholder will be
required to approve and adopt the merger and the merger agreement.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME REGARDING THE MERGER?
A: No. The law does not allow your broker to vote your shares for the approval
and adoption of the merger and the merger agreement at the special meeting
without your direction. You should have received instructions from your broker
regarding how to vote your shares. Please follow the directions your broker
provided to you. Shares that are not voted because you do not instruct your
broker are called "broker non-votes," and will have the effect of a vote
"AGAINST" the approval and adoption of the merger and the merger agreement. See
"SPECIAL MEETING -- Required Vote".
Q: IF I SEND IN MY PROXY CARD BUT FORGET TO INDICATE MY VOTE, HOW WILL MY SHARES
BE VOTED?
A: If you sign and return your proxy card but do not indicate how your shares
are to be voted at the special meeting, the shares represented by your proxy
will be voted "FOR" the approval and adoption of the merger and the merger
agreement.
Q: WHAT SHOULD I DO NOW TO VOTE AT THE SPECIAL MEETING?
A: Sign, mark and mail your proxy card indicating your vote on the approval and
adoption of the merger and the merger agreement in the enclosed return envelope
as soon as possible, so that your shares of common stock can be voted at the
special meeting.
Q: MAY I CHANGE MY VOTE AFTER I MAIL MY PROXY CARD?
A: Yes. You may change your vote at any time before your proxy is voted at the
special meeting. You can do this in three ways: First, you can send a written
statement that you would like to revoke your proxy (which to be effective must
be received by us prior to the vote at the special meeting). Second, you can
send a new proxy card prior to the vote at the special meeting (which to be
effective must be received by us prior to the vote at the special meeting). You
should send your revocation or new proxy card to the Secretary of Specialty
Catalog at the address on the cover of this proxy statement. Third, you can
attend the special meeting and vote in person. However, your attendance alone
will not revoke your proxy; you must attend and cast your vote at the special
meeting. If your shares are held by a broker, you must follow the directions
provided by your broker to have your shares voted or to change your
instructions.
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Q: DO I SEND IN MY STOCK CERTIFICATES NOW?
A: No. Assuming the merger is completed, you will receive written instructions
for delivering your stock certificates in order to receive the $3.75 merger
consideration in the merger, without interest, from Continental Stock Transfer
and Trust Company, which will be appointed as the exchange agent in connection
with the merger. DO NOT SEND YOUR CERTIFICATES NOW.
Q: WHAT DOES IT MEAN TO INCORPORATE CERTAIN DOCUMENTS BY REFERENCE?
The Securities and Exchange Commission ("SEC") allows Specialty Catalog to
"incorporate by reference" information into this proxy statement. This means
that we can disclose important information to you by referring you to another
document filed separately with the SEC. The information incorporated by
reference is considered to be a part of this proxy statement, except for any
information that is superseded by information that is included directly in this
document. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
In addition, for information about Specialty Catalog, we refer you to our
Annual Report to stockholders for the year ended December 30, 2000 and our
Quarterly Report on Form 10-Q for the period ended March 31, 2001, which
accompany this proxy statement.
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SUMMARY
This summary may not contain all of the information that is important to
you to evaluate the terms of the merger. For a more complete understanding of
the merger and the other information contained in this document, you should read
this entire document carefully, as well as the additional documents to which it
refers. For instructions on obtaining more information, see "Where You Can Find
More Information."
THE PARTICIPANTS
Specialty Catalog Corp.
21 Bristol Drive
South Easton, Massachusetts 02375
Telephone (508) 238-0199
Specialty Catalog was incorporated in Delaware on November 30, 1994, as a
holding company for SC Direct and SC Publishing, which emerged from bankruptcy
on November 23, 1994. We target niche consumer product categories, primarily via
direct marketing. SC Direct, our principal operating subsidiary in the United
States, is the US's leading retailer of women's wigs and hairpieces. Daxbourne
International Limited, a subsidiary of SC Direct, is a leading United Kingdom
retailer and wholesaler of women's wigs and hairpieces. SC Publishing, another
subsidiary of SC Direct, provides continuing education courses, seminars, and
conferences to nurses and other health care professionals. For further
information regarding Specialty Catalog, see "INFORMATION ABOUT THE TRANSACTION
PARTICIPANTS - Specialty Catalog."
References in this proxy statement to "we," "our" or "us" refers to
Specialty Catalog, and not to Acquisition Corp. When we refer to Specialty
Catalog's management, we mean one or more of Specialty Catalog's principal
executive officers.
Specialty Acquisition Corp.
c/o Kane Kessler, P.C.
1350 Avenue of the Americas, 26th Floor
New York, NY 10019
Telephone (212) 541-6222
Acquisition Corp. is a Delaware corporation organized at the direction of
Mr. Guy Naggar, a member of Specialty Catalog's board of directors, for the
purpose of effecting the merger. If the merger is consummated, Acquisition Corp.
will be merged with and into Specialty Catalog. Acquisition Corp. has no
material assets and has not engaged in any activities except in connection with
entering into the merger agreement and carrying out the transactions
contemplated by the merger agreement. For further information, see "INFORMATION
ABOUT THE TRANSACTION PARTICIPANTS --The Continuing Stockholders."
All information contained in this proxy statement relating to Acquisition
Corp. and its stockholders has been supplied by them for inclusion and has not
been independently verified by us. No persons have been authorized to give any
information or to make any representations other than those contained in this
proxy statement.
14
INFORMATION CONCERNING THE MEETING
Time, Date And Place.
The special meeting will be held on _______, ________, 2001 at ____ a.m.,
local time, at 21 Bristol Drive, South Easton, Massachusetts 02375. See
"SPECIAL MEETING -- General."
Purpose Of The Meeting.
At the special meeting, holders of our common stock at the close of
business on the record date, which is July __, 2001, will consider and vote upon
a proposal to approve and adopt the merger and the merger agreement. If the
merger agreement is adopted at the special meeting and the merger is
consummated, Acquisition Corp. will be merged with and into Specialty Catalog.
All shares of our common stock outstanding immediately prior to the time when
the merger is consummated (other than shares owned by Acquisition Corp. and
shares owned by stockholders who have perfected their appraisal rights) will be
converted into the right to receive $3.75 in cash per share, payable to the
holder thereof, without interest. See "SPECIAL MEETING -- What will be Voted
On".
Record Date For The Meeting; Quorum Requirements.
The close of business on July __, 2001 has been fixed as the record date
for determining stockholders entitled to notice of, and to vote at, the special
meeting. Each share of common stock outstanding on the record date is entitled
to one vote at the special meeting. As of the record date, 4,337,886 shares of
Specialty Catalog's common stock were outstanding. The presence, in person or by
proxy, of one third of all outstanding shares of Specialty Catalog's common
stock is required to constitute a quorum for the transaction of business at the
special meeting. See "SPECIAL MEETING -- Record date and Voting; Quorum."
Voting Requirements.
Under the Delaware General Corporation Law, the affirmative vote of at
least a majority of all of the outstanding shares of our common stock is
required to approve and adopt the merger and the merger agreement. The
Continuing Stockholders, who, as of July 18, 2001, beneficially owned (excluding
options), in the aggregate, approximately 2.5 million shares of common stock, or
approximately 57% of the outstanding shares of common stock, have agreed
pursuant to the terms of subscription agreements, to vote their shares for the
approval and adoption of the merger and the merger agreement. See "SPECIAL
FACTORS--Related Agreements-Subscription Agreements."
The merger agreement does not provide that approval of at least a majority
of our stockholders not affiliated with Acquisition Corp. or any of the
Continuing Stockholders is required to consummate the merger. Accordingly, since
the Continuing Stockholders will vote for the approval and adoption of the
merger and the merger agreement, the affirmative vote of no other stockholder
will be required to approve and adopt the merger and the merger agreement.
Proxies.
15
A proxy card is enclosed for your use in voting by mail. A proxy may be
revoked at any time prior to its exercise at the special meeting. Common stock
represented by properly executed proxies received at or prior to the special
meeting, and which have not been revoked, will be voted in accordance with the
instructions indicated on the proxy. See "SPECIAL MEETING -- Voting Your Shares
by Proxy" and "SPECIAL MEETING -- Revoking Your Proxy."
You should not send any certificates representing shares of common stock
with your proxy card. If the merger is consummated, information outlining the
procedure for the exchange of your certificates will be sent to you.
GOING PRIVATE TRANSACTION
The merger constitutes a "going private" transaction for Specialty Catalog
under the Federal securities laws. Following the merger, (i) the separate
corporate existence of Acquisition Corp. will cease and Specialty Catalog will
be the surviving corporation, (ii) the common stock of Specialty Catalog will no
longer be publicly traded or quoted on The Nasdaq National Market, and (iii)
Specialty Catalog will no longer be required to file periodic and other reports
with the United States Securities and Exchange Commission and will formally
terminate its reporting obligations under the Securities Exchange Act of 1934.
As a result of the merger, the holders of our common stock will be entitled to
receive the merger consideration and will no longer have any interest in
Specialty Catalog, including its future earnings or growth, the risk associated
with its business and the fluctuation of the price of its common stock.
RECOMMENDATION TO STOCKHOLDERS
Our board of directors, upon the recommendation of the special committee,
and the special committee have determined that the merger and the merger
agreement are fair to, advisable and in the best interests of Specialty Catalog
and its stockholders (other than Acquisition Corp. and its current and future
stockholders) and unanimously recommend that you vote "FOR" approval and
adoption of the merger and the merger agreement. Mr. Naggar did not vote as a
director on any matter of the board of directors relating to the merger. See
"SPECIAL FACTORS -- Recommendation of the Special Committee and the Board of
Directors; Considerations in Connection with the Merger; Fairness of the
Merger." Our stockholders should be aware that a number of our officers and
directors may have interests in the merger that may be different from, or in
addition to, the interests of our stockholders. See "SPECIAL FACTORS--Interests
of Certain Persons In The Merger." However, the board of directors established
the special committee consisting of an independent director to review and
evaluate the proposed transaction. The sole member of the special committee is
not an employee of Specialty Catalog, an employee or director of Acquisition
Corp. or a Continuing Stockholder. See "SPECIAL FACTORS--Special Committee."
CONSIDERATIONS IN CONNECTION WITH THE MERGER
During the course of its deliberations and in recommending approval and
adoption of the merger and the merger agreement, the special committee
considered, with the assistance of its financial and legal advisors, a number of
factors, including:
16
o the results of operations, financial condition, business and prospects
of Specialty Catalog;
o the economic and market conditions affecting Specialty Catalog and the
catalog/specialty distributor industry;
o financial projections for Specialty Catalog compiled by our management;
o the May 4, 2001 presentation and opinion of Burnham Securities;
o the premium of the $3.75 per share merger consideration over the prices
at which the shares have traded over the previous twelve months;
o the conclusion of the special committee that Specialty Catalog has
obtained the highest price per share that Acquisition Corp. is willing
to pay;
o the likelihood that a third party would not be willing to offer a
higher per share price than Acquisition Corp.;
o the possible delisting, and the resultant lack of liquidity in the
event of a delisting, of the Specialty Catalog shares from The Nasdaq
National Market;
o that under Delaware law, Specialty Catalog's stockholders have the
right to an appraisal of the value of their shares in connection with
the merger;
o that the merger consideration is payable in cash, thereby eliminating
any uncertainties in valuing the consideration;
o that the per share merger consideration and the other terms and
conditions of the merger agreement were the result of good faith
negotiations among the special committee and Mr. Naggar and their
respective advisors; and
o that the merger agreement does not unduly deter a third party from
making an acquisition proposal.
See "SPECIAL FACTORS-- Recommendation of the Special Committee and the
Board of Directors; Considerations in Connection with the Merger; Fairness of
the Merger."
FAIRNESS OPINION
Burnham Securities served as financial advisor to the special committee.
Burnham Securities has delivered a written opinion to the special committee and
our board of directors to the effect that, subject to certain assumptions and
qualifications set forth in its opinion, as of the date of the opinion, the
merger consideration of $3.75 per share to be received by the stockholders of
Specialty Catalog is fair to such stockholders (other than Acquisition Corp. and
17
its current and future stockholders) from a financial point of view. A copy of
Burnham Securities' opinion, which includes a discussion of the information
reviewed, assumptions made and matters considered by Burnham Securities, is
attached to this proxy statement as Appendix B. You should read this opinion in
its entirety, as well as the other information described under "SPECIAL FACTORS
- -- Opinion of Burnham Securities Inc."
THE MERGER
The merger agreement is the legal document that governs the merger. We have
attached the merger agreement as Appendix A to this proxy statement, and we
encourage you to read it carefully. See "SUMMARY OF THE MERGER AGREEMENT."
Structure of the Merger and Consequences to Specialty Catalog's Stockholders
Acquisition Corp., a Delaware corporation newly formed to effect the
merger, will be merged with and into Specialty Catalog, with Specialty Catalog
being the surviving corporation.
In the merger, each outstanding share of Specialty Catalog's common stock
(other than shares held by Acquisition Corp. and shares held by stockholders who
have perfected their appraisal rights) will be converted into the right to
receive $3.75 in cash, without interest. Generally, each outstanding unexercised
option, warrant, or other right to purchase Specialty Catalog common stock
issued pursuant to the 1996 Stock Incentive Plan, as amended, and the 2000 Stock
Incentive Plan will be canceled immediately prior to the merger and converted
into the right to receive cash for the difference, if positive, between $3.75
per share and the exercise price of the option. See "SPECIAL FACTORS--Structure
of the Transaction; Participants," "SPECIAL FACTORS--Treatment of Options," and
"SPECIAL FACTORS--Related Agreements-Stock Option Exercise Agreements."
Appraisal Rights
Our stockholders are entitled to have the fair value of their shares of
common stock appraised by a court and paid to them in cash. To do this, the
holders of our common stock who choose to exercise their appraisal rights must
follow these required procedures:
o deliver a written demand for appraisal to us on or before the vote is
taken at the special meeting;
o do not vote in favor of, or abstain from, voting on the merger; and
o hold such shares of common stock from the date of the making of the
demand through the closing of the merger.
If a stockholder follows the required formalities, his/her shares will not
be converted in the merger into the right to receive the $3.75 per share in
cash, without interest. Instead, such holder's only right will be to receive the
appraised value of his/her shares in cash as determined by a court. See "SPECIAL
FACTORS - Appraisal Rights."
Interest of Officers and Directors in the Mergers
18
Our stockholders should be aware that a number of our officers and
directors may have interests in the merger that may be different from, or in
addition to, the interests of our stockholders. See "SPECIAL FACTORS --
Interests of Certain Persons in the Merger," "SPECIAL FACTORS--Related
Agreements," and "SPECIAL FACTORS--Amount and Source of Funds and Financing of
the Merger."
Accounting Treatment
It is anticipated that the merger is expected to be accounted for under the
purchase method of accounting. The merger is structured as a leveraged buyout
transaction with certain stockholders of Specialty Catalog continuing to be
stockholders in the surviving corporation. The assets and liabilities of
Specialty Catalog will be recorded at fair value for the interests acquired by
the new investors and at the carryover, or predecessor, basis for continuing
stockholders from Specialty Catalog.
Conditions to Completion of the Merger
The obligations of each of Specialty Catalog and Acquisition Corp. to
complete the merger and the other transactions contemplated by the merger
agreement are subject to the satisfaction, or waiver, of numerous conditions. To
review the conditions to completion of the merger, see "SUMMARY OF THE MERGER
AGREEMENT -- Conditions to Completion of the Merger."
Regulatory Approvals
Specialty Catalog does not believe there are any material governmental or
regulatory approvals required for completion of the mergers, other than
compliance with applicable corporate law of Delaware, the Federal Securities
Laws and various blue sky laws.
MERGER FINANCING
Acquisition Corp. has made arrangements with Fleet National Bank and LEG
Partners III SBIC, L.P. and LEG Partners Debenture SBIC, L.P., who are
affiliates of Golub Associates Incorporated, to finance the merger. In addition,
each of Mr. Naggar and Alexander intend to make equity contributions to
Acquisition Corp. prior to the merger of approximately $1.67 million, in the
aggregate. Acquisition Corp.'s receipt of cash proceeds from debt and equity
financing sufficient to consummate the transactions contemplated by the merger
is a condition precedent to Acquisition Corp.'s obligation to consummate the
merger. There can be no assurance that Acquisition Corp. will satisfy its
financing obligations under the merger agreement. For additional information,
please see "SPECIAL FACTORS--Amount and Source of Funds and Financing of the
Merger."
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, this proxy
statement includes and incorporates by reference "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including, but not limited to, Specialty
Catalog's expected future revenues, operations and expenditures, estimates of
the potential markets for our products, assessments of competitors and potential
19
competitors and projected timetables for the market introduction of our
products. Investors are cautioned that forward-looking statements are inherently
uncertain. Because there is no safe harbor for forward-looking statements under
the Private Securities Litigation Reform Act of 1995 in connection with a
going-private transaction such as the proposed merger, the documents
incorporated by reference herein are incorporated exclusive of the language
claiming the safe harbor. Actual performance and results of operations may
differ materially from those projected or suggested in the forward-looking
statements due to certain risks and uncertainties, including, but not limited
to, the following risks and uncertainties: (i) our indebtedness and future
capital requirements, (ii) increasing postal rates, paper prices and media
costs, (iii) limited sources of fiber used to make our products, (iv) the
limited number of suppliers of our products, (v) our dependence upon foreign
suppliers, especially in China, Korea and Indonesia, (vi) the customary risks of
doing business abroad, including fluctuations in the value of currencies, (vii)
the potential development of a cure for hair loss and cancer treatment
improvements, (viii) the effectiveness of our catalogs and advertising programs,
(ix) our competition, and (x) the impact of acquisitions on our prospects. The
forward-looking statements contained herein represent our judgment as of the
date of this statement, and we caution readers not to place undue reliance on
such statements.
HISTORICAL MARKET INFORMATION
Our common stock is traded on The Nasdaq National Market under the symbol
"CTLG." The following table sets forth the high and low sale prices on The
Nasdaq National Market for our shares of common stock for the periods indicated:
HIGH LOW
2001
First Quarter............................. $2.656 $1.875
Second Quarter............................ $3.600 $2.270
Third Quarter (through _________, 2001)... $_____ $_____
2000
First Quarter............................. $5.250 $2.625
Second Quarter............................ $3.125 $2.000
Third Quarter............................. $3.000 $2.313
Fourth Quarter............................ $2.969 $1.563
1999
First Quarter............................. $4.375 $3.000
Second Quarter............................ $4.000 $3.188
Third Quarter............................. $4.500 $3.125
Fourth Quarter............................ $6.000 $3.375
The number of registered holders of record of our common stock as of March
23, 2001 was approximately 50.
In December 2000, we were notified by The Nasdaq Stock Market, Inc. that
our common stock failed to maintain a minimum market value of public float and
was below its continued listing standards and that Specialty Catalog's current
listing was subject to review by Nasdaq in accordance with its continued listing
procedures. However, since the first public announcement
20
of the proposed merger, our common stock increased by over___% as of July __,
2001, thereby causing our market value of public float to be in compliance with
all requirements for continued listing on The Nasdaq National Market and we are
not currently subject to review by The Nasdaq Stock Market, Inc. Accordingly,
while an established public trading market exists with respect to our common
stock, there can be no assurance that, in the event the merger is not
consummated, the common stock will remain listed on The Nasdaq National Market
or otherwise be subject of an established trading market.
We have not paid a dividend with respect to our common stock and we do not
anticipate paying dividends in the foreseeable future. Under the terms of our
existing debt agreement, we are not permitted to pay dividends.
On April 24, 2001, the trading day prior to the day that Mr. Naggar filed
an amended Schedule 13D announcing that he was preparing to make a preliminary
proposal regarding, among other things, a transaction involving the purchase of
all or substantially all of the outstanding shares of Specialty Catalog, the
closing price of Specialty Catalog's common stock on the Nasdaq Market was
$2.63.
On April 27, 2001, the last full trading day prior to the first public
announcement of the proposed transaction, the closing price of Specialty
Catalog's common stock on The Nasdaq National Market was $3.05. On May 3, 2001,
the last full trading day prior to the announcement of the execution of the
merger agreement, the closing price of Specialty Catalog's common stock on The
Nasdaq National Market was $3.40 per share. On July 18, 2001, the closing price
of Specialty Catalog's common stock on the Nasdaq National Market was $3.65 per
share. Our stockholders are urged to obtain a current market quotation for the
shares.
HISTORICAL BOOK VALUE, DIVIDENDS, AND NET EARNINGS
Set forth below is a summary of selected consolidated financial data with
respect to Specialty Catalog excerpted or derived from the information contained
in Specialty Catalog's Annual Report on Form 10-K for the year ended December
30, 2000 and Specialty Catalog's Quarterly Report on Form 10-Q for the period
ended March 31, 2001, which are being delivered to Specialty Catalog's
stockholders simultaneously with this proxy statement and are incorporated
herein by reference. More comprehensive financial information is included in
such report and other documents filed by Specialty Catalog with the SEC. The
following summary is qualified by reference to such report and other documents
and all of the financial information, including any related notes, contained
therein. Such report and other documents not otherwise delivered with this proxy
statement may be inspected and copies may be obtained from the offices of the
SEC. See "WHERE YOU CAN FIND MORE INFORMATION."
Book Value per Diluted Earnings Cash Dividends Merger
Share at End of per Share for per Share during Consideration Per
Period Period Period Share
Fiscal Year ended December 30, 2000 $ 2.01 $ 0.25 $ --
========= ========= ===========
21
Thirteen Weeks ended March 31, 2001 $ 2.07 $ 0.09 $ -- $ 3.75
========= ========= =========== =========
Specialty Catalog has not provided any pro forma data giving effect to the
proposed merger as it does not believe such information is material to its
stockholders in evaluating the merger agreement since the proposed merger
consideration is all cash and, if the proposed merger is completed, Specialty
Catalog's common stock would cease to be publicly traded. No financial
information has been provided for Acquisition Corp. since it was formed for the
sole purpose of effecting the merger and has no independent operations.
22
THE SPECIAL MEETING
GENERAL
This proxy statement is being furnished to our stockholders as part of the
solicitation of proxies by our board of directors for use at a special meeting
to be held on ____________, 2001, starting at _____ __.m. local time, at
21 Bristol Drive, South Easton, Massachusetts 02375 or any adjournment or
postponement thereof.
WHAT WILL BE VOTED ON
The purpose of the special meeting is for our stockholders to consider and
vote upon the approval and adoption of the merger and the merger agreement. A
copy of the merger agreement is attached to this proxy statement as Appendix A.
RECORD DATE AND VOTING; QUORUM
The holders of record of Specialty Catalog shares as of the close of
business on July __, 2001, are entitled to receive notice of, and to vote at,
the special meeting. On the record date, there were 4,337,886 shares of our
common stock outstanding. The holders of one third of the shares of our common
stock outstanding on the record date will constitute a quorum for purposes of
the special meeting. Any shares of our common stock held in treasury are not
considered to be outstanding for purposes of determining a quorum. Once a share
is represented at the special meeting, it will be counted for the purpose of the
special meeting, unless the holder is present solely to object at the special
meeting.
REQUIRED VOTE
Each share of our common stock outstanding on July __, 2001, entitles the
holder to one vote at the special meeting. Completion of the merger requires the
approval and adoption of the merger and the merger agreement by the affirmative
vote of the holders of a majority of the outstanding shares of our common stock.
You may vote your shares (1) by returning the enclosed proxy or (2) by appearing
at the special meeting and voting.
The Continuing Stockholders, who, as of July 18, 2001, beneficially owned
(excluding options), in the aggregate, approximately 2.5 million shares of
common stock, or approximately 57% of the outstanding shares of common stock,
have agreed pursuant to the terms of subscription agreements, to vote their
shares for the approval and adoption of the merger and the merger agreement.
The merger agreement does not provide that approval of at least a majority
of our stockholders not affiliated with Acquisition Corp. or any of the
Continuing Stockholders is required to consummate the merger. Accordingly, since
the Continuing Stockholders will vote for the approval and adoption of the
merger and the merger agreement, the affirmative vote of no other stockholder
will be required to approve and adopt the merger and the merger agreement.
VOTING SHARES HELD IN "STREET NAME" BY PROXY
23
Under applicable rules, brokers who hold shares in street name for
customers have the authority to vote on "routine" proposals when they have not
received instructions from beneficial owners. Under these rules, brokers are
precluded from exercising their voting discretion with respect to the approval
of non-routine matters such as the merger proposal and thus, absent specific
instructions from the beneficial owner of such shares, brokers may not vote such
shares with respect to the approval of such proposals (i.e., "broker
non-votes"). Abstentions and properly executed broker non-votes will be treated
as shares that are present and entitled to vote at the special meeting for
purposes of determining whether a quorum exists and will have the same effect as
votes against approval and adoption of the merger and merger agreement.
DISSENTING HOLDERS
Our stockholders have the right to dissent from approval and adoption of
the merger and the merger agreement, and, subject to strict compliance with
certain requirements and procedures set forth in Section 262 of the Delaware
General Corporation Law, to receive payment of the "fair value" of shares of
common stock. Failure to follow such procedures precisely will result in a loss
of dissenters' rights. See "SPECIAL FACTORS - Appraisal Rights."
VOTING YOUR SHARES BY PROXY
If you vote your shares of common stock by signing a proxy, your shares
will be voted at the special meeting as you indicate on your proxy card. If no
instructions are indicated on your signed proxy card, your shares of common
stock will be voted "FOR" the approval and adoption of the merger and the merger
agreement.
REVOKING YOUR PROXY
A proxy that is properly submitted to Specialty Catalog may be revoked at
any time before it is exercised. For a stockholder "of record" (meaning one
whose shares are registered in his or her own name) to revoke a proxy, the
stockholder may either:
o send in another signed proxy card with a later date;
o submit a written revocation to the Secretary of Specialty Catalog at
the address on the cover of this proxy statement; or
o attend the special meeting, notify us in writing that the you are
revoking your proxy and vote in person. However, simply attending the
special meeting will not revoke a proxy.
A "beneficial holder" whose shares are registered in another name (for example
in "street name") must follow the procedures required by the holder of record,
which is usually a brokerage firm or bank, to revoke a proxy. You should contact
the holder of record directly for more information on these procedures.
COSTS OF SOLICITING THESE PROXIES
24
All expenses incurred in connection with solicitation of the enclosed proxy
will be paid by Specialty Catalog. Officers and employees of Specialty Catalog
may solicit proxies by telephone or in person. However, they will not be paid
for soliciting proxies. We will also request that persons and entities holding
shares in their names or in the names of their nominees that are beneficially
owned by others send proxy materials to and obtain proxies from those beneficial
owners, and will reimburse those holders for their reasonable expenses in
performing those services.
ADJOURNMENTS OR POSTPONEMENTS
Although it is not expected, the special meeting may be adjourned or
postponed for the purpose of allowing Specialty Catalog or Acquisition Corp.
additional time to satisfy certain conditions to closing the merger as set forth
in the merger agreement. Any adjournment or postponement of the special meeting
may be made without notice, other than by an announcement made at the special
meeting, by approval of the holders of a majority of the shares of common stock
present in person or represented by proxy at the special meeting, whether or not
a quorum exists. Any signed proxies received by us in which the stockholder has
voted for the approval and adoption of the merger and the merger agreement will
be voted in favor of an adjournment or postponement of the special meeting. Any
signed proxies received by us in which the stockholder has not voted or voted
against the approval and adoption of the merger and the merger agreement will
be voted against the adjournment of the special meeting for the purpose of
providing additional time. Any adjournment or postponement of the special
meeting will allow stockholders who have already sent in their proxies to revoke
them at any time prior to their use.
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SPECIAL FACTORS
STRUCTURE OF THE TRANSACTION; PARTICIPANTS
If the merger and the merger agreement are approved and adopted by our
stockholders and the other conditions to the closing of the merger are either
satisfied or waived, Acquisition Corp. will be merged with and into Specialty
Catalog, with Specialty Catalog being the surviving corporation. After the
merger, Specialty Catalog will be privately owned. For a chart describing the
equity ownership of Specialty Catalog following the merger, see "SPECIAL FACTORS
- - Interests of Certain Persons in the Merger."
When the merger is completed, each share of Specialty Catalog common stock
issued and outstanding at the closing of the merger (other than those shares
held by Acquisition Corp. and those shares held by Specialty Catalog
stockholders who have perfected their appraisal rights) will be canceled and
converted into the right to receive $3.75 in cash, without interest. The
Continuing Stockholders are Acquisition Corp. and the stockholders of
Acquisition Corp., which currently includes Mr. Naggar, who is a member of
Specialty Catalog's board of directors, First Global Holdings Limited, Oracle
Investments and Holdings Limited, Ionic Holdings LDC, Three Greens Holdings
Limited, and Alexander Enterprise Holding Corp. and, upon consummation of the
transactions contemplated by the subscription agreements which shall occur prior
to the merger, will include Martin Franklin, who is a member of Specialty
Catalog's board of directors, The David Cicurel Settlement, Wynnefield Partners,
Wynnefield Partners I and Wynnefield Offshore. In addition, upon consummation of
the transactions contemplated by a note and warrant purchase agreement to be
entered into among Specialty Catalog, Acquisition Corp., LEG Partners III, and
LEG Partners Debenture SBIC, L.P., it is expected that LEG Partners III, who
currently holds approximately 14% of the outstanding shares of Specialty Catalog
common stock, will continue to be a stockholder of Specialty Catalog after the
merger. Our stockholders should be aware that the Continuing Stockholders have
interests in the merger that are different from, or in addition to, the
interests of our stockholders. Pursuant to the terms of the subscription
agreements entered into between each of the Continuing Stockholders and
Acquisition Corp., the Continuing Stockholders have agreed to contribute some or
all of their shares of Specialty Catalog common stock for shares of Acquisition
Corp. common stock immediately prior to the merger. These shares of Acquisition
Corp. common stock acquired by the Continuing Stockholders will, upon completion
of the merger, automatically be converted into shares of common stock of
Specialty Catalog, which will be the surviving corporation in the merger. The
shares of Specialty Catalog common stock currently held by the Continuing
Stockholders which are not contributed to Acquisition Corp., pursuant to the
merger, will be cancelled and converted into the right to receive the merger
consideration. Mr. Naggar, First Global, Ionic, Oracle, Three Greens, and
Alexander will be contributing all of their shares of Specialty Catalog to
Acquisition Corp. The other Continuing Stockholders will contribute
approximately thirty-two percent (32%) of their shares of Specialty Catalog
common stock to Acquisition Corp. in exchange for shares of Acquisition Corp.
common stock and, pursuant to the merger, will receive the merger consideration
upon cancellation of the remaining sixty-eight percent (68%) of their shares of
Specialty Catalog common stock. See "SPECIAL FACTORS -- Interest in Certain
Persons in the Merger" and "SPECIAL FACTORS--Related Agreements-Subscription
Agreements."
As a result of the merger, Specialty Catalog will become a privately held
company and there will be no public market for its common stock, which will no
longer be quoted on The Nasdaq National Market and price quotations for sales of
shares in the public market will no
26
longer be available. In addition, the registration of Specialty Catalog common
stock under the Securities Exchange Act of 1934 will be terminated.
For income tax purposes, the receipt of the merger consideration by holders
of common stock pursuant to the merger will be a taxable sale of the holders'
common stock. See "Material Federal Income Tax Consequences of the Merger."
The principal benefits of the merger to stockholders of Specialty Catalog
(other than Acquisition Corp. and its current and future stockholders) after the
merger include the following:
o the receipt by such stockholders of $3.75 per share in cash,
representing a substantial premium over the market prices for Specialty
Catalog common stock over the previous twelve months;
o the avoidance of the risk associated with any decrease in the future
earnings, growth or value of Specialty Catalog following the merger;
and
o the avoidance of owning a security that lacks liquidity and may no
longer be traded on a national exchange.
The principal detriments to stockholders of Specialty Catalog (other than
Acquisition Corp. and its current and future stockholders) after the merger
include the following:
o Specialty Catalog's stockholders (other than Acquisition Corp. and
its current and future stockholders) will cease to have an interest in
Specialty Catalog and therefore will no longer benefit from increases
in the future earnings, growth or value of Specialty Catalog or payment
of dividends on Specialty Catalog common stock, if any; and
o the receipt of cash in the merger will be a taxable transaction for
U.S. federal income tax purposes under the Internal Revenue Code of
1986 and may also be a taxable transaction under applicable state,
local, foreign and other tax laws.
The principal benefits of the merger to the Continuing Stockholders are
that, because its common stock will be privately held, Specialty Catalog will
enjoy certain efficiencies, such as:
o a reduction of the cost and time devoted by its management and certain
other employees to compliance with certain Securities and Exchange
Commission reporting requirements;
o its directors, officers and beneficial owners of more than 10% of its
shares of common stock will be relieved of the reporting requirements
under Section 16 of the Securities Exchange Act of 1934;
o Specialty Catalog will be relieved of The Nasdaq National Market
listing and reporting requirements; and
27
o Specialty catalog will no longer be required to disclose material
confidential information concerning its business.
The principal detriments of the merger to the Continuing Stockholders
include the following:
o all of the risk of any decrease in the earnings, growth or value of
Specialty Catalog following the merger will be borne by Acquisition
Corp. and the other Continuing Stockholders; and
o Specialty Catalog will have substantially more debt outstanding after
the merger (approximately $8.5 million in new debt), which may
adversely affect the equity value held by the Continuing Stockholders.
In general, higher levels of debt can have the effect of increasing the
risk to equity holders of losing the entire value of their investment.
In addition, such indebtedness may:
(1) increase the vulnerability of Specialty Catalog to general adverse
economic and industry conditions;
(2) require Specialty Catalog to dedicate a portion of its cash flow
from operations to payments on its indebtedness, thereby reducing
the availability of its cash flow to fund working capital, capital
expenditures, acquisitions and investments and other general
corporate purposes;
(3) result in a reduction in the ability of Specialty Catalog to borrow
additional funds;
o much of the common stock of Specialty Catalog that will be held by the
Continuing Stockholders after the merger will be subject to
restrictions pursuant to the terms of a Stockholders Agreement. See
"SPECIAL FACTORS--Related Agreements - Stockholders Agreement;" and
o following the merger, there will be no public trading market for
Specialty Catalog's shares.
MATERIAL CONTACTS AND BOARD DELIBERATIONS
The determination of the special committee and the board of directors that
the merger and the merger agreement are fair to, advisable and in the best
interests of our stockholders (other than Acquisition Corp. and its current and
future stockholders) and their recommendation of approval and adoption of the
merger and the merger agreement was the result of an extended evaluation
process. Since becoming a public company in 1996, the board of directors of
Specialty Catalog has from time to time evaluated and considered various
alternatives for enhancing stockholder value. During the last few years, the
board of directors believed that the trading prices of Specialty Catalog common
stock (to the extent unaffected by publicity concerning Specialty Catalog's
possible sale) have not reflected the inherent value of Specialty
28
Catalog. The board of directors and the management of Specialty Catalog believe,
based in part on the advice of their financial advisors, that the market price
of Specialty Catalog common stock has been adversely affected by several
factors, including:
o a lack of investor appreciation for the long-term earnings prospects of
Specialty Catalog, its products, the markets that Specialty Catalog
services, prospects for growth in unit sales and growth in gross margin
which has led to a low price/earnings ratio.
o the small market capitalization and low average daily trading volume of
Specialty Catalog common stock on The Nasdaq National Market;
o an insufficient number of market makers and securities trading firms
preparing research reports with respect to Specialty Catalog;
o the existence of few comparable public companies against which
investors could evaluate Specialty Catalog's performance; and
o that stocks with small market capitalizations, so called "microcap"
stocks have underperformed in the last two years.
On July 9, 1998, in an effort to maximize stockholder value the board of
directors thought it was appropriate and authorized management to explore
various strategic alternatives, including a possible sale or recapitalization of
Specialty Catalog and to contact investment bankers in this regard. On September
8, 1998, the board of directors authorized Specialty Catalog to engage an
investment bank for the purpose of exploring a sale of Specialty Catalog.
During December, 1998, the board engaged BNY Capital Markets, Inc.
(successor to Patricof & Co. Capital Corp.) for the purpose of pursing strategic
alternatives, including the possible sale of Specialty Catalog. Specialty
Catalog, with the assistance of BNY Capital Markets, engaged in a marketing
effort to be sold consisting of a Confidential Information Memorandum, which was
dated September of 1998 and distributed to fifty-three prospective purchasers
(who were made up of investment funds, retailers, individual investors and
catalog retailers). On or about November 2, 1998, from these efforts, two
preliminary indications of interest were received. Due diligence was commenced,
but, in each case, the expression of interest was withdrawn and due diligence
was terminated by the prospective purchasers prior to completion. The viability
of any interest was assessed in consultation with BNY Capital Markets.
During December, 1998, in accordance with its belief that Specialty
Catalog's common stock was undervalued at a price of $3.125 per share, upon
approval of the board of directors, Specialty Catalog repurchased 700,000 shares
of common stock (approximately 14% of the then outstanding common stock), from
Dickstein Partners at $3.125 per share.
29
On January 11, 1999, having received no viable indications of interest to
purchase Specialty Catalog, the board of directors ended the process of pursuing
a possible sale of Specialty Catalog. Additionally, the board of directors
authorized the repurchase of up to $1,000,000 of Specialty Catalog's common
stock. Pursuant to this authorization, throughout 1999 and 2000, Specialty
Catalog reacquired a total of 144,000 shares of common stock at an average price
of $3.56 per share.
Despite the formal termination of the efforts to sell Specialty Catalog in
early 1999, management continued to evaluate its strategic alternatives and
options on an ongoing basis.
On June 24, 1999, LEG Partners III, an affiliate of Golub Associates
Incorporated ("Golub Associates"), who later in January 2000 executed a merger
agreement with Specialty Catalog, purchased 602,689 shares of Specialty
Catalog's common stock. The shares were purchased in a privately negotiated
transaction directly from Dickstein Partners for approximately $3.25 per share
or $1,958,739, in the aggregate, which represented approximately 13.7% of the
then outstanding common stock.
During August, 1999, Specialty Catalog announced that Steven L. Bock,
former Chairman, President and CEO of Specialty Catalog, had decided to resign
from those positions effective at the end of the term of his employment
agreement on December 31, 1999. Specialty Catalog understands that Mr. Bock
resigned in order to pursue other interests.
On October 4, 1999, Mr. Samuel Katz, a director of Specialty Catalog,
received a phone call from Mr. Lawrence Golub, the president of Golub
Associates, who expressed an interest in acquiring Specialty Catalog for $4.50
per share in a merger transaction, subject to his due diligence review and his
ability to obtain adequate financing commitments. Following numerous discussions
and negotiations relating to the cash consideration with Messrs. Samuel Katz and
Martin Franklin and the other members of the special committee of the board of
directors, on October 12, 1999. Mr. Golub confirmed that he was prepared to
offer $5.00 per share in a merger transaction subject to due diligence and
standard contingencies. Specialty Catalog understands that Mr. Golub was willing
to increase his offer to $5.00 per share based upon discussions with Mr. Bock
and Mr. Golub's assessment of Specialty Catalog operating as a private rather
than public company.
On October 13, 1999, the board of directors met and appointed Messrs.
Franklin and Katz as members of a special committee to negotiate a transaction
with Mr. Golub.
Following the October 13, 1999 meeting, the parties and their counsel held
numerous discussions which culminated on December 2, 1999, in the execution of a
non-binding letter of intent between the parties.
On December 2, 1999 Specialty Catalog and Mr. Bock entered into an
amendment to his employment agreement wherein Mr. Bock agreed to remain with
Specialty Catalog until the earlier of June 30, 2000 or the closing of the
transaction with Golub Associates.
On December 3, 1999 Specialty Catalog issued a press release announcing the
execution of the letter of intent with Mr. Golub in which he agreed to purchase
all outstanding shares of our
30
common stock for a price of $5.00 per share in cash. The letter of intent with
Golub provided for a cash consideration of $5.00 per share and contained
financing and other contingencies.
On December 22, 1999, the special committee retained Burnham Securities to
review and render an opinion on the fairness, from a financial point of view, of
the consideration to be received by Specialty Catalog's stockholders in the
proposed transaction.
On January 13, 2000, the special committee met and resolved to recommend to
the full board of directors that it approve the merger. Following the special
committee meeting on January 13, the board of directors approved the terms of
the merger agreement with Golub Associates.
On January 18, 2000, the parties executed the final form of merger
agreement with Golub Associates and option agreement. The merger agreement with
Golub Associates, which superceded the letter of intent, provided for the
following terms:
o merger consideration of $5.00 per share;
o the cancellation of all unexercised options of Specialty Catalog for a
cash payment equal to the merger consideration payable to the holder
had he exercised the option less the exercise price per share of the
option;
o customary representations and warranties;
o a break up fee of 5% in the event another proposal was accepted; and
o the satisfaction of certain conditions to the consummation of the
merger including:
o approval of Specialty Catalog's stockholders;
o Specialty Catalog entering into an employment agreement with
Mr. Bock in a form acceptable to Golub Associates; and
o Golub Associates obtaining financing necessary to complete the
transaction.
Pursuant to the option agreement, Specialty Catalog granted Golub
Associates an option to purchase 500,000 shares of its common stock at $5 per
share, which was exercisable by Golub Associates in the event Specialty Catalog
accepted or recommended to its stockholders a competing offer.
On January 19, 2000 Specialty Catalog issued a press release announcing the
execution of the merger agreement and the option agreement.
On March 8, 2000, the merger agreement with Golub Associates was terminated
primarily because of the failure to satisfy the condition relating to the
continued employment of Mr. Bock with Specialty Catalog.
Following the termination of discussions with Golub, Specialty Catalog
focused its efforts on operating the business under a new CEO. On May 9, 2000,
the Company announced the appointment of Joseph J. Grabowski as president of
Specialty Catalog effective as of May 8, 2000. On July 1, 2000, Mr. Grabowski
assumed the title of CEO, replacing Steven L. Bock whose resignation was
effective June 30, 2000.
31
On December 6, 2000, Specialty Catalog was notified by The Nasdaq National
Market that the public float of Specialty Catalog common stock failed to
maintain a minimum market value above the continued listing standards for The
Nasdaq National Market and that Specialty Catalog's listing was subject to
review by The Nasdaq Listing Qualifications Panel in accordance with The Nasdaq
National Market's continued listing procedures.
Specialty Catalog's poor performance over an extended period, coupled with
The Nasdaq National Market's notification, led the board to again consider
strategic options.
On February 16, 2001, in view of the fact that Specialty Catalog was
unsuccessful in its recent attempts to maximize stockholder value through the
aborted merger with Golub and the sale process with BNY Capital, Specialty
Catalog engaged Marlin Holdings, LLC ("Marlin") to assist Specialty Catalog with
the structure, financing and coordination of any management buyout or other
privatization transaction. Mr. Martin Franklin is the Chairman and Chief
Executive Officer of Marlin and a member of the board of directors of Specialty
Catalog. The board of directors believed that Marlin had the necessary expertise
and knowledge of Specialty Catalog to assist the board of directors as it
considered alternatives to maximize shareholder value. At the time, Mr. Franklin
was neither interested in buying nor participating in a transaction to buy
Specialty Catalog. One of the attractions of retaining Marlin over another
potential adviser was the detailed knowledge Mr. Franklin already had of
Specialty Catalog from his role as a director, and the board of directors did
not believe that this factor caused a conflict of interest as Mr. Franklin was
neither interested in buying nor participating in a transaction to buy Specialty
Catalog at that time. Marlin provided services to the board in considering the
merits of alternative ways of creating liquidity and value for the stockholders,
as well as assisting with discussions among Acquisition Corp., the proposed
mezzanine lender, the senior bank and Specialty Catalog. The decision to retain
Marlin was approved by all members of the board of directors other than Mr.
Franklin, who abstained. Marlin continued to provide services throughout the
negotiation of the transaction until the last week of April, 2001.
On March 15, 2001, Specialty Catalog was notified again by The Nasdaq
National Market that Specialty Catalog did not regain compliance with The Nasdaq
National Market's listing standards and would be delisted. Thereupon, Specialty
Catalog requested a hearing to appeal The Nasdaq National Market's
determination, which stayed such delisting.
On March 26, 2001, the entire board of directors consisting of Messrs.
David Cicurel, Martin E. Franklin, Samuel L. Katz and Guy Naggar, held a meeting
to discuss, among other things, the notification from The Nasdaq National
Market. The members of the board of directors engaged in a lengthy discussion
regarding, among other things, various alternatives for enhancing stockholder
value. At the meeting Mr. Naggar, also a substantial stockholder of Specialty
Catalog, indicated that he was considering the possibility of pursuing
discussions pertaining to entering into an extraordinary transaction with
Specialty Catalog which could result in a change of ownership or structure of
Specialty Catalog, including a transaction to take Specialty Catalog private
through the purchase of all or substantially all of the outstanding shares of
Specialty Catalog. Some other members of the board of directors then expressed
an interest in possibly participating in any transaction led by Mr. Naggar. The
board of directors determined to increase the board of directors size and elect
a new independent member to the board of directors.
32
On March 26, 2001, Mr. Naggar held discussions with Mr. Franklin regarding
the possibility of Mr. Franklin participating in such a transaction. At that
time, Mr. Franklin did not agree to participate with Mr. Naggar as a potential
buyer of Specialty Catalog. There were no further discussions regarding Mr.
Franklin's involvement with Acquisition Corp. until the end of April.
On or about March 26, 2001, Mr. Naggar and Mr. Franklin held discussions
with Mr. Joseph Grabowski, the President and Chief Executive Officer of
Specialty Catalog, to solicit Mr. Grabowski's interest in continuing as
Specialty Catalog's CEO after a possible transaction. Mr. Grabowski indicated
that he would be interested in continuing to work for Specialty Catalog after a
possible transaction, but certain terms of his employment arrangement would need
to be revisited and revised. Mr. Naggar approached Mr. Grabowski for a variety
of reasons, but primarily due to the fact that Mr. Naggar believed that Mr.
Grabowski was a good CEO and he wanted him to stay in this position if a
successful privatization transaction were completed.
Subsequent to March 26, 2001, Mr. Naggar and Mr. Franklin held discussions
with Golub Associates and its representatives to explore the interest of Golub
Associates in providing subordinated mezzanine financing for use in a
transaction.
On or about April 10, 2001, at Mr. Naggar's request, Mr. Grabowski and
Thomas McCain, our Chief Financial Officer, initiated discussions with Fleet
National Bank, Specialty Catalog's primary lender, with respect to obtaining the
consent of Fleet National Bank to the proposed transaction and to continuing and
amending its credit facility, and allowing borrowings under the credit facility
after and in connection with a transaction.
On April 17, 2001, by unanimous written consent of the board of directors
of Specialty Catalog, David L. Moore was elected as a director of Specialty
Catalog. Mr. Moore was selected as an independent director of Specialty Catalog
on the basis of his experience as an executive officer or a member of the board
of directors of several companies, including two companies involved in direct
marketing. In particular, Mr. Moore previously has served as the Chairman of
Paradigm Direct LLC, Garden State Exterior Remodeling, Inc., and US Remodelers,
Inc.
On April 18, 2001, the board of directors held a telephonic special meeting
at which Mr. Naggar indicated he was considering making an offer to acquire for
cash, through a merger, all the outstanding shares of common stock of Specialty
Catalog at a price of $3.25 per share. Mr. Naggar believed that this price
represented a good premium over Specialty Catalog's recent historical trading
range and would allow him to achieve a satisfactory economic return in this
proposed transaction. Each of Messrs. Cicurel, Franklin and Katz also noted that
they had an interest in participating in the transaction. In response to Mr.
Naggar's indication, the board of directors voted to establish a special
committee comprised of directors who did not have actual or potential conflicts
of interest with such transaction and who were not officers or employees of
Specialty Catalog or its subsidiaries nor affiliated with Mr. Naggar, nor
current or possible future stockholders of any acquisition company formed by Mr.
Naggar. Mr. Moore was appointed as the sole member of the special committee,
which was thereupon authorized to review and evaluate any acquisition proposal,
including a proposal made by Mr. Naggar. If it deemed advisable, the special
committee was thereupon authorized to enter into negotiations and discussions
with Mr. Naggar, his representatives and advisors, and with any other person
making
33
an unsolicited proposal to acquire Specialty Catalog, to investigate and
evaluate any such transactions, and to make recommendations to the board of
directors. The board of directors did not authorize the special committee
to solicit indications of interest from third parties who might be interested in
acquiring Specialty Catalog or to conduct an auction of Specialty Catalog for
reasons which include (i) the fact that between 1998 and the April 30, 2001,
Specialty Catalog and its advisors have solicited indications of interest
regarding a possible sale of Specialty Catalog, including presenting fifty-three
prospective purchasers with detailed information concerning Specialty Catalog,
and did not receive any offer from any other buyer, other than Golub Associates,
of an interest relating to a merger or consolidation, sale or other transfer of
all or a substantial part of the assets of Specialty Catalog or a purchase of
the securities of Specialty Catalog that would enable the holder to exercise
control of Specialty Catalog at a price in excess of $3.25 per share, (ii) the
fact that the board of directors understood that it would not enter into an
agreement to sell Specialty Catalog to an affiliate of Specialty Catalog which
would contain a provision that would unduly deter a third party from making an
acquisition proposal, and (iii) Mr. Naggar indicated that he would be interested
in acquiring Specialty Catalog only if the transaction could be done
expeditiously. The board of directors also authorized and directed the special
committee to retain such legal, financial and other advisors as the special
committee deemed necessary to fulfill its duties, the cost, fees and expenses of
such advisors to be paid by Specialty Catalog. Thereafter, Mr. Naggar contacted
the other Continuing Stockholders and each of Messrs. Katz and Cicurel to
discuss their interest in possibly participating in a proposed transaction.
On April 19, 2001, the special committee contacted the law firm of Sullivan
& Cromwell to inquire about retaining Sullivan & Cromwell as counsel for the
special committee.
On April 23, 2001, the special committee held a telephonic meeting with
representatives of Sullivan & Cromwell. The representatives of Sullivan &
Cromwell indicated that Sullivan & Cromwell was prepared to act as counsel to
the special committee. After due inquiry, the special committee determined that
Sullivan & Cromwell was independent of Mr. Naggar and the other stockholders of
Specialty Catalog who were or might later become Continuing Stockholders and the
special committee approved the engagement of Sullivan & Cromwell as its counsel.
The representatives of Sullivan & Cromwell then made a presentation to the
special committee regarding such committee's fiduciary duties, responsibilities
and prerogatives as a special committee. The representatives of Sullivan &
Cromwell and the special committee also discussed the need for the special
committee to begin contacting investment banks as candidates to serve as
financial advisor to the special committee.
On April 23, 2001, the special committee held a teleconference with Mr.
Franklin, as representative of Mr. Naggar, representatives of Kane Kessler,
counsel to Mr. Naggar and which had previously served as counsel to Specialty
Catalog, together with representatives of Sullivan & Cromwell. Mr. Franklin
provided an overview of the history of Specialty Catalog as well as Mr. Naggar's
relationship with Specialty Catalog. There was also discussion during the
meeting of:
34
o the formation of the special committee by the board of directors on
April 18, 2001, and the scope of authority of the special committee
determined by the board of directors also on April 18, 2000, including
the fact that the board of directors did not authorize the special
committee to solicit indications of interest from third parties
relating to a possible acquisition of Specialty Catalog or to conduct
an auction of Specialty Catalog to third parties;
o the threat of Specialty Catalog being delisted from The Nasdaq National
Market and the consequences of such delisting;
o the intention of Mr. Naggar to establish a group of current
stockholders of Specialty Catalog to purchase Specialty Catalog and the
percent of outstanding shares of Specialty Catalog expected to be
represented in such group;
o the actions previously taken by the board of directors to prevent the
actions of Mr. Naggar and possibly other stockholders participating
with him from triggering the anti-takeover provisions of Section 203 of
the DGCL, so that Specialty Catalog was legally able to consummate the
merger;
o the actions previously taken by the board of directors to eliminate or
negate the effects of Specialty Catalog's Right Plan, so that Specialty
Catalog could engage in the transaction with Mr. Naggar without
triggering the "poison pill" contained in the Specialty Catalog Rights
Plan;
o the anticipated structure, process and timing of a proposal or draft
form of merger agreement from Mr. Naggar;
o financing of a proposal from Mr. Naggar; and
o preliminary review of the material terms expected to be contained in
the draft form of merger agreement to be submitted by Mr. Naggar to the
special committee and its counsel.
The special committee also asked to be provided with the most recent
projections, financial information and budgets of Specialty Catalog prepared by
the management of Specialty Catalog. At the request of the special committee,
management of Specialty Catalog subsequently arranged to make a presentation to
the special committee and arranged for the special committee to conduct its own
on site due diligence of Specialty Catalog's facilities.
On April 24, 2001, Mr. Franklin and Mr. Grabowski entered into preliminary
discussions concerning Mr. Grabowski's participation in the transaction and
continuing as Chief Executive Officer of Specialty Catalog following completion
of a transaction.
On April 25, 2001, the special committee received information regarding two
investment banks that the special committee was considering as possible
financial advisors to the special committee. The special committee also received
confidential non-public financial projections for Specialty Catalog for the
balance of 2001 and for years 2002 through 2005 which had been prepared by the
management of Specialty Catalog for the use of the board of directors as well as
extensive background information on Specialty Catalog, all of which was reviewed
by the
35
special committee.
On April 25, 2001, the special committee met telephonically with
representatives of Sullivan & Cromwell to discuss the status of the special
committee's discussions with potential financial advisors to the special
committee as well as to discuss various legal, financial and operational due
diligence issues relating to Specialty Catalog.
Late in the day on April 25, 2001, Mr. Naggar filed a Schedule 13D
(Amendment No. 2) with the SEC which disclosed the possibility of his making a
preliminary proposal regarding a transaction.
On April 26, 2001, Messrs. Grabowski and McCain attended a hearing at The
Nasdaq Stock Market, Inc. regarding our continued failure to meet certain
listing standards.
On April 26, 2001, the special committee met telephonically with
representatives of Sullivan & Cromwell to review the due diligence and
investigations regarding Specialty Catalog conducted by the special committee
and Sullivan & Cromwell as of such date and to discuss its schedule of further
due diligence for the upcoming week.
On April 26, 2001, Mr. Naggar contacted Mr. Moore by telephone to formally
propose a transaction in which an entity formed by Mr. Naggar would acquire all
of the shares of Specialty Catalog not owned by Mr. Naggar or the other
Continuing Stockholders for $3.25 in cash per share. During the course of the
discussion, Mr. Naggar outlined his interest in and concerns about Specialty
Catalog and explained his valuation of the shares to be purchased. Mr. Naggar
explained that he had run a number of different economic scenarios through his
returns analysis and that while he had a long interest and belief in the
Specialty Catalog business, he believed that there are significant business
risks inherent in the direct marketing of wigs as had been apparent in Specialty
Catalog's performance over the last couple of years. Taking into account these
risks, Mr. Naggar believed that his offer of $3.25 per share was reasonable. Mr.
Naggar did not indicate which other stockholders of Specialty Catalog he
expected would also become Continuing Stockholders.
On April 27, 2001, the special committee interviewed Mr. Mike Patile of
Fleet Securities, Inc. and Mr. Richard Lewisohn of Burnham Securities in
connection with retaining a financial advisor for the special committee. After
discussing the credentials of Burnham Securities to serve as financial advisor
to the special committee, Burnham Securities provided Mr. Moore with a draft
form of engagement letter.
36
On April 28, 2001, Mr. Naggar had a telephone meeting with Mr. Moore to
discuss the $3.25 merger consideration per share previously offered by Mr.
Naggar. Mr. Moore indicated to Mr. Naggar prior to such discussions of the
merger consideration that he was in the process of becoming fully informed about
Specialty Catalog and its value and that the special committee had not yet
engaged a financial advisor. Mr. Moore noted, however, that he had conducted his
own preliminary review of Specialty Catalog and had engaged in preliminary
discussions with Burnham Securities regarding the range of fair values for the
common stock of Specialty Catalog, and that based on this preliminary review and
discussions he believed that $3.25 per share was an inadequate price. During
such discussions and in reaction to Mr. Moore's statement that $3.25 per share
was an inadequate price, Mr. Naggar increased his offer to $3.50 cash per share.
Mr. Moore indicated that this offer was still inadequate.
On April 29, 2001, Mr. Naggar had further telephonic discussions with Mr.
Moore during which he increased his offer to $3.75 cash per share. Mr. Naggar
believed that while there was more risk in undertaking a transaction at $3.75
per share it was still within his acceptable returns analysis and if Specialty
Catalog was not willing to enter into a transaction at a lower price he was
willing to offer $3.75 per share but no higher. Mr. Naggar indicated to Mr.
Moore that this was his best and final offer and that his offer would expire at
the close of business on May 4, 2001 if a definitive merger agreement with
Specialty Catalog was not signed and if the special committee did not receive a
fairness opinion from Burnham Securities.
On April 29, 2001, the special committee met telephonically with
representatives of Sullivan & Cromwell. The special committee relayed the
substance of its discussions with Mr. Naggar during the preceding three days
regarding Mr. Naggar's offer, which discussions had culminated in the proposed
merger consideration being increased by Mr. Naggar from $3.25 per share to $3.75
per share. The special committee also reported on its discussions with
investment banking firms and indicated its desire to retain Burnham Securities
as its financial advisor subject to confirmation that Burnham Securities was
independent of Mr. Naggar and the other stockholders of Specialty Catalog, who
were or might later become Continuing Stockholders. The special committee chose
Burnham Securities because of its general reputation, its prior experience in
advising the previous special committee of the board of directors of Specialty
Catalog in connection with the proposed acquisition of Specialty Catalog by
Golub Associates in 1999, which transaction had not been consummated, the fact
that Burnham Securities' proposed fee was less than that proposed by the other
investment bank interviewed, and the fact that Burnham Securities indicated that
it could perform its fairness analysis and tender its fairness opinion in the
time frame contemplated by Mr. Naggar's offer.
On April 30, 2001, at the direction of the special committee,
representatives of Sullivan & Cromwell contacted representatives of Burnham
Securities to inquire into the independence of Burnham Securities for purposes
of it potentially serving as financial advisor to the special committee.
Following this telephone call, Burnham Securities sent a proposed form of
engagement letter to Sullivan & Cromwell. Later that day, representatives of
Sullivan & Cromwell met telephonically with the special committee to report on
the results of the inquiry. Representatives of Sullivan & Cromwell advised the
special committee about the standards of independence under applicable law.
Representatives of Sullivan & Cromwell also reviewed for the special committee
its relatively minor drafting comments on the language of the engagement letter
for Burnham Securities. The special committee then
37
determined that Burnham Securities was independent and approved the engagement
of Burnham Securities as financial advisor to the special committee, subject to
finalizing the engagement letter with Burnham Securities. Representatives of
Sullivan & Cromwell and representatives of Burnham Securities subsequently
satisfactorily resolved all of Sullivan & Cromwell's drafting comments regarding
the engagement letter and such engagement letter was executed by Burnham
Securities and Specialty Catalog, dated as of April 30, 2001. The special
committee subsequently directed representatives of Burnham Securities to
undertake a financial analysis of Mr. Naggar's offer in order to permit Burnham
Securities to render an opinion as to the fairness, from a financial point of
view, of such offer to the stockholders of Specialty Catalog (other than
Acquisition Corp. and its current and future stockholders).
Mr. Moore subsequently had discussions with the management of Specialty
Catalog regarding the projections. Management indicated that these projections
were target projections that were based upon achieving the assumptions set forth
in the projections which changes were intended to yield more realistically
achievable projections since Burnham Securities believed the assumptions used
in the projections were aggressive. After discussions with Burnham Securities,
management agreed to certain changes to the assumptions used in the projections.
However, after receiving the adjusted projections, it was still the view of the
special committee and Burnham Securities that the adjusted projections remained
overly optimistic and did not take into account the history of Specialty Catalog
missing its projections, the current state of the economy and the market in
which Specialty Catalog operates, and other events expected to lower operating
results.
On April 30, 2001, the board of directors held a telephonic meeting. Mr.
Moore reviewed the status of the negotiations of the special committee with Mr.
Naggar, including the discussions of the merger consideration offered and other
material terms of the transaction. Mr. Moore noted that he had rejected the
initial offer from Mr. Naggar of $3.25 per share and that after several
conversations Mr. Naggar agreed to increase the offer to $3.75 per share, which
Mr. Naggar had stated was his best and final offer. Mr. Moore also reported to
the board of directors that Mr. Naggar had stated that his offer would expire at
the close of business on May 4, 2001, if a definitive merger agreement with
Specialty Catalog was not signed and if the special committee did not receive a
fairness opinion from Burnham Securities. The board of directors also discussed
the advisability of disclosing Mr. Naggar's offer and all of the directors
(other than Mr. Naggar who abstained) determined that Specialty Catalog should
issue a press release. After the meeting, Specialty Catalog issued a press
release announcing that Mr. Naggar had made an offer to acquire for cash,
through merger, all of the issued and outstanding shares of common stock of
Specialty Catalog, other than shares held by Acquisition Corp. for $3.75 per
share.
From the morning of April 30, 2001 to late in the day on May 1, 2001, the
special committee had a series of conversations with Messrs. Franklin, Grabowski
and McCain regarding the results of operations, financial condition, business
and prospects of Specialty Catalog, including the financial projections supplied
by Specialty Catalog to the special committee, economic and market conditions
and the catalog/specialty distributor industry. The special committee also
requested, received and reviewed further information on Specialty Catalog and
its industry.
On and continuing after April 30, 2001, discussions among Messrs. Naggar
and Franklin, independently and jointly, were held with Golub Associates and its
representatives relating to Golub Associates providing subordinated mezzanine
financing for use in a transaction and the possibility of LEG Partners III
participating in a transaction as a Continuing Stockholder.
On or about April 30, 2001, Golub Associates negotiated the terms of the
subordinated mezzanine financing with Messrs. Naggar and Franklin and circulated
several drafts of a proposed letter of intent.
On April 30, 2001, Specialty Catalog received a summary term sheet from
Fleet National Bank relating to the extension of credit to Specialty Catalog by
Fleet National Bank after the merger under an amendment to Specialty Catalog's
current bank facility.
38
On or about April 30, 2001, Mr. Naggar and Mr. Franklin held discussions
regarding Mr. Franklin's potential involvement with Acquisition Corp. Mr.
Franklin indicated that he was not interested in taking an active role as a
potential buyer of Specialty Catalog. However, Mr. Franklin indicated that he
may be interested in participating as a passive equity investor at a later date,
once the deal structure and definitive agreement had been finalized.
On May 1, 2001, Mr. Franklin, filed a 13D (Amendment No. 2) with the SEC in
which Mr. Franklin indicated that he was considering the possibility of
participating in a possible transaction involving Specialty Catalog.
On May 1, 2001, Nicolas Berggruen, who in his capacity as an investment
advisor of Alexander is the beneficial owner of 279,700 shares of common stock
of Specialty Catalog, also filed a 13D (Amendment No. 1) indicating that
Alexander Enterprise Holding Corp. and its representatives had various
preliminary discussions with Mr. Naggar concerning the possibility of
participating with Mr. Naggar in a transaction.
On May 2, 2001, the special committee, representatives of Sullivan &
Cromwell and representatives of Burnham Securities, participated in a telephonic
presentation by Messrs. Grabowski and McCain regarding Specialty Catalog at
which numerous legal and financial due diligence questions were posed to and
answered by the management of Specialty Catalog.
The special committee and its counsel received a draft form of merger
agreement from legal counsel to Mr. Naggar on May 2, 2001. Later in the day, the
special committee held a telephonic meeting with representatives of Sullivan &
Cromwell, during which representatives of Sullivan & Cromwell reviewed and
discussed the significant terms of the draft form of merger agreement with the
special committee including: (i) termination events and the reimbursement of
Acquisition Corp.'s expenses in connection with certain termination events; (ii)
the scope of Specialty Catalog's representations and warranties; (iii) the scope
of the parties' closing conditions, including financing conditions; and (iv)
limits on Acquisition Corp.'s expenses to be incurred or reimbursed by Specialty
Catalog. The special committee also discussed with Sullivan & Cromwell comments
and proposed changes to the draft of the merger agreement for submission to
legal counsel to Mr. Naggar. During the evening of May 2, 2001, representatives
of Sullivan & Cromwell negotiated with counsel for Mr. Naggar changes to the
draft of the merger agreement, as sought by the special committee. The special
committee also contacted Mr. Naggar to request that Mr. Naggar increase the
merger consideration proposed from $3.75 per share to $4.25 per share. In making
this counterproposal, the special committee believed, based on its own review of
Specialty Catalog and the advice of Burnham Securities, that $3.75 per share was
within the range of fair consideration. However, the special committee made the
counterproposal in an effort to obtain not only a fair price for the
stockholders of Specialty Catalog (other than Acquisition Corp. and its current
and future stockholders) but also to obtain the best price obtainable from Mr.
Naggar.
On May 2, 2001, Golub Associates filed a 13D (Amendment No. 4) indicating
it had held preliminary discussions with Mr. Naggar and other stockholders
concerning the possibility of participating with Mr. Naggar in a transaction in
addition to the mezzanine financing. Golub Associates further indicated that it
had discussions with Mr. Naggar regarding various proposals to provide a portion
of the financing needed by Mr. Naggar to fund a transaction.
39
On May 3, 2001, First Global, Ionic, Oracle and Three Greens, and others
filed a Schedule 13D (Amendment No. 2) with the SEC in which the filers
indicated that they had held preliminary discussions with Mr. Naggar concerning
the possibility of participating with Mr. Naggar in a transaction.
On May 3, 2001, negotiations continued between the special committee and
its representatives and Mr. Naggar's representatives. Counsel for Mr. Naggar
subsequently distributed a revised draft of the merger agreement. After
reviewing the revised draft of the merger agreement, the special committee met
with its legal and financial advisors to discuss unresolved issues in the
agreement. Representatives of Sullivan & Cromwell were provided with detailed
direction from the special committee and were directed to continue negotiations
with counsel for Mr. Naggar. Prior to commencing such further negotiations, the
special committee was informed by Mr. Naggar in writing that the proposed merger
consideration of $3.75 per share would not be increased and constituted the best
and final offer that Mr. Naggar would make. Mr. Naggar also emphasized that his
proposal would expire at the close of business on May 4, 2001, if a definitive
merger agreement with Specialty Catalog was not signed and if the special
committee did not receive a fairness opinion from Burnham Securities.
Representatives of Sullivan & Cromwell, with continued guidance from the special
committee, continued negotiations with counsel for Mr. Naggar regarding the
draft of the merger agreement throughout May 3, 2001 and into the morning of May
4, 2001.
On May 3, 2001, Messrs. Franklin and Grabowski held formal discussions
regarding proposed arrangements for Mr. Grabowski's participation in the
transaction and continuation as Chief Executive Officer of Specialty Catalog
after the merger.
On the morning of May 4, 2001, Mr. Moore and representatives of Burnham
Securities undertook a tour of our facilities and posed numerous due diligence
inquires to the management of Specialty Catalog. Later that day, the special
committee met telephonically with its legal and financial advisors to review the
substantially finalized merger agreement. Representatives of Burnham Securities
presented to the special committee an extensive written and oral financial
analysis of the proposed transaction. Mr. Moore relayed to representatives of
Burnham Securities and Sullivan & Cromwell that he had requested that Mr. Naggar
increase the merger consideration proposed from $3.75 per share to $4.25 per
share but that Mr. Naggar had responded to such request in writing indicating
that the proposed merger consideration of $3.75 per share would not be increased
and constituted the best and final offer that Mr. Naggar would make. At the end
of such presentation, representatives of Burnham Securities delivered their oral
opinion to the special committee, which opinion was subsequently confirmed in
writing, to the effect that, as of May 4, 2001, the merger consideration of
$3.75 per share was fair, from a financial point of view, to the stockholders of
Specialty Catalog (other than Acquisition Corp. and its current and future
stockholders). The special committee adopted the conclusion and analyses of
Burnham Securities. The special committee then determined that the merger and
the merger agreement are fair to, advisable and in the best interests of
Specialty Catalog and its stockholders (other than Acquisition Corp. and its
current and future stockholders). The special committee then resolved to
recommend that the board of directors of Specialty Catalog approve and declare
advisable the merger and the merger agreement; and resolved to recommend that
the stockholders of Specialty Catalog approve and adopt the merger and the
merger agreement if submitted for their approval.
40
Following the special committee meeting on May 4, 2001, the board of
directors met telephonically (Mr. Naggar recused himself from the meeting). At
that meeting, the board of directors discussed the terms of the merger
agreement; and Mr. Moore summarized Burnham Securities' analyses regarding the
fairness of the transaction, reviewed the process undertaken by the special
committee, and advised the board of directors that Burnham Securities had
provided its opinion orally and would provide a written opinion that the
consideration to be received by the stockholders of Specialty Catalog was fair,
from a financial point of view, to such stockholders (other than Acquisition
Corp. and its current and future stockholders). The special committee then
recommended that the board of directors approve and declare advisable the merger
and the merger agreement.
After receiving the recommendation of the special committee, the board of
directors, with all members voting in favor, other than Mr. Naggar who was not
in attendance, among other things: (1) determined that the merger and the merger
agreement are fair to, advisable and in the best interests of Specialty Catalog
and its stockholders (other than Acquisition Corp. and its current and future
stockholders), (2) approved the merger and the merger agreement and declared the
merger and merger agreement advisable; and (3) recommended that Specialty
Catalog stockholders approve and adopt the merger and the merger agreement if
submitted for their approval.
On May 4, 2001, Specialty Catalog, Acquisition Corp., Golub Associates, LEG
Partners III, and LEG Partners Debenture SBIC, L.P. entered into a letter of
intent regarding Golub Associates' consideration of a potential subordinated
debt and warrant investment in Acquisition Corp. to finance the merger.
On May 4, 2001, the merger agreement was executed by Specialty Catalog and
Acquisition Corp. and Specialty Catalog issued a news release announcing the
execution of the merger agreement.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS;
CONSIDERATIONS IN CONNECTION WITH THE MERGER; FAIRNESS OF THE MERGER
Each of the special committee and the board of directors recommends that
the stockholders approve and adopt the merger and the merger agreement. Both the
special committee and the board of directors, upon the recommendation of the
special committee, have determined that the merger and the merger agreement are
fair to, advisable and in the best interests of Specialty Catalog and its
stockholders (other than Acquisition Corp. and its current and future
stockholders).
Recommendation of the Special Committee and the Board of Directors
The special committee has determined that the merger and the merger
agreement are fair to, advisable and in the best interests of Specialty Catalog
and its stockholders (other than Acquisition Corp. and its current and future
stockholders). The special committee expressed no opinion as to the fairness of
the merger and the merger agreement to Acquisition Corp. or the other Continuing
Stockholders. Accordingly, the special committee has recommended to the
41
board of directors that it approve and declare advisable the merger and the
merger agreement and has recommended that Specialty Catalog stockholders vote to
approve and adopt the merger and the merger agreement. The board of directors,
upon the recommendation of the special committee, has approved the merger and
the merger agreement and declared the merger and the merger agreement advisable
and has recommended that Specialty Catalog stockholders adopt and approve the
merger and the merger agreement.
Considerations of the Special Committee
During the course of its deliberations and in recommending adoption of the
merger agreement and approval of the merger, the special committee considered,
with the assistance of its financial and legal advisors, a number of factors,
including the following material factors:
o Information with respect to the results of operations, financial condition,
business and prospects of Specialty Catalog and the economic and market
conditions affecting Specialty Catalog and the catalog/specialty distributor
industry. This information allowed the special committee to consider Specialty
Catalog and its performance and prospects in the context of the industry in
which it operates and the economy as a whole. The special committee considered
this to be a factor that weighed in favor of the merger.
o Non-public financial projections for Specialty Catalog prepared by the
management of Specialty Catalog, the risks and uncertainties associated with
meeting these financial projections and the possible future values of the shares
of Specialty Catalog if the financial projections are, or are not, met. These
projections are based upon numerous assumptions relating to, among other things,
industry performance, market and financial conditions, as well as factors not
within the control of a company, that must be made in attempting to determine
the value of a company by projecting future cash flows. Although the special
committee was aware that the upper range of implied value obtained from Burnham
Securities' valuation analyses derived from the financial projections of
Specialty Catalog was in excess of the per share merger consideration, the
special committee believed that the merger was a superior alternative to
attempting to achieve value in excess of the per share merger consideration as
an independent publicly traded company. This is because of the special
committee's view that there were significant risks and uncertainties associated
with Specialty Catalog being able to achieve the performance assumptions
underlying an implied value of the shares of Specialty Catalog in excess of the
per share merger consideration. These assumptions include achieving the
financial results set forth in the financial projections for Specialty Catalog
as well as market conditions occurring that would provide favorable valuation
multiples. In determining the independent going concern value of Specialty
Catalog for purposes of determining the fairness of the merger, the special
committee relied to a significant extent upon the financial analyses performed
by Burnham Securities summarized below. On balance, the special committee
considered the financial projections for Specialty Catalog to be a factor that
weighed in favor of the merger.
o The presentation made by Burnham Securities to the special committee on May 4,
2001 and Burnham Securities' oral opinion as of that date, which was confirmed
in writing, dated as of May 4, 2001, to the effect that, based upon the
assumptions made, matters considered and limitations on the review described in
the written opinion, as of the date of the opinion, the $3.75
42
per share merger consideration to be received by the Specialty Catalog
stockholders is fair from a financial point of view to the stockholders of
Specialty Catalog (other than Acquisition Corp. and its current and future
stockholders). The special committee relied on the financial analyses performed
by Burnham Securities to determine the going concern value of Specialty Catalog.
In its review of the analyses performed by Burnham Securities, the special
committee did not weigh each of the analyses prepared by Burnham Securities
separately, but rather considered them as a whole. The special committee
considered the presentation by and opinion of Burnham Securities to be a factor
that weighed in favor of the merger.
o The $3.75 per share merger consideration represents a significant premium over
the prices at which the shares have traded over the previous twelve months. The
historical market prices of the shares were deemed relevant because they
indicate the arm's length trading prices of shares as determined in the open
market. The special committee considered the fact that the shares had traded at
prices as high as $3.00 per share and as low as $1.78 per share during the
twelve month period prior to the public disclosure of Mr. Naggar's intent to
make a merger proposal on April 25, 2001. The special committee also considered
the fact that the $3.75 per share merger consideration represented a premium of
approximately 42%, 58%, 50%, 25% and 110%, respectively, over the per share
closing market price one day, one week, four weeks, at the 52-week high and at
the 52-week low, respectively, prior to the public disclosure of the potential
merger on April 25, 2001. The special committee realized the shares had at times
traded at prices in excess of $6.00 per share during 1997 and 1998; however, the
special committee believed, according to the financial analyses undertaken by
Burnham Securities, that the earnings, operations, and prospects of Specialty
Catalog no longer supported such a price per share. The special committee
considered the historical trading price of the shares to be a factor that
weighed in favor of the merger since it would allow stockholders of Specialty
Catalog to realize a significant premium over prices at which the shares could
have been sold over the past twelve months.
o The conclusion of the special committee, based on the extensive negotiations
by and on behalf of the special committee with Mr. Naggar and his advisors, that
Specialty Catalog has obtained the highest price per share that Acquisition
Corp. is willing to pay. This determination was the result of the special
committee's good faith negotiations with Mr. Naggar and his advisors in an
attempt to obtain the highest possible price and the fact that the per share
merger consideration was increased by Mr. Naggar by approximately fifteen
percent to a price which is $0.50 per share more than the initial proposal of
$3.25 per share made by Mr. Naggar. The special committee considered this to be
a factor that weighed in favor of the merger since the special committee
believed no third party would offer a higher price to stockholders of Specialty
Catalog for their shares than the price offered by Mr. Naggar.
o The likelihood that a third party would not be willing to offer a higher per
share price than Acquisition Corp. in light of:
(1) the fact that prior to the April 30, 2001 public disclosure of Mr.
Naggar's offer to acquire Specialty Catalog and since 1998 Specialty
Catalog and its advisors have solicited indications of interest
regarding a possible sale of Specialty Catalog, including presenting
fifty-three prospective purchasers with detailed information concerning
Specialty Catalog, and did not receive any offer from any other buyer,
43
other than Golub Associates, of an interest relating to a merger or
consolidation, sale or other transfer of all or a substantial part of
the assets of Specialty Catalog or a purchase of the securities of
Specialty Catalog that would enable the holder to exercise control of
Specialty Catalog at a price in excess of $3.75 per share.
(2) the fact that, as discussed in detail under "SPECIAL FACTORS --
Material Contacts And Board of Directors Deliberations," an offer was
made by Golub Associates, an unaffiliated entity, in 1999 and that the
resulting merger agreement between Specialty Catalog and Golub
Associates was terminated;
(3) the fact that, in the period of time between April 25, 2001, when Mr.
Naggar filed an Amended Schedule 13D with the SEC indicating his intent
to submit a proposal to acquire Specialty Catalog, and the special
committee's decision to recommend approval and adoption of the merger
and the merger agreement on May 4, 2001, Specialty Catalog did not
receive any proposals from any third party regarding a potential
acquisition transaction.
The special committee considered these to be factors that decreased the
likelihood that a third party would make a superior offer and, as such,
considered these to be factors that weighed in favor of the merger. The special
committee also considered these to be factors that enabled the special committee
to determine that the merger was fair to stockholders of Specialty Catalog
(other than Acquisition Corp. and its current and future stockholders) despite
the special committee not being authorized to solicit other indications of
interest.
o In light of the relatively thin trading market and lack of liquidity of the
shares, the merger will afford stockholders an opportunity to dispose of their
shares without the possible diminution of value resulting from the lack of an
active trading market. The liquidity of the shares may be further decreased if
the shares are delisted from The Nasdaq National Market. Specialty Catalog
received a Nasdaq Staff Determination Letter indicating that the market value of
its public float was below $5,000,000 as required by The Nasdaq National Market
for over thirty consecutive trading days and therefore the shares are subject to
delisting from The Nasdaq National Market. Specialty Catalog requested and was
given a hearing before the Nasdaq Listing Qualifications Panel to review the
staff determination in an attempt to retain its listing on The Nasdaq National
Market. However, since the first public announcement of the proposed merger, our
common stock increased by over___% as of July ___,2001, thereby causing our
market value of public float to be in compliance with all requirements for
continued listing on The Nasdaq National Market and we are not currently subject
to review by The Nasdaq Stock Market, Inc. Accordingly, while an established
public trading market exists with respect to our common stock, there can be no
assurance that, in the event the merger is not consummated, the common stock
will remain listed on The Nasdaq National Market or otherwise be subject of an
established trading market. These factors affect the likelihood that a share
price in excess of the per share merger consideration offered under the merger
agreement would be achieved in the foreseeable future and, as such, the special
committee considered them to be factors that weighed in favor of the merger.
o Approval and adoption of the merger and the merger agreement requires the
affirmative vote of a majority of the outstanding shares entitled to vote
thereon and, under Delaware law, Specialty Catalog's stockholders have the right
to an appraisal of the value of their shares in
44
connection with the merger. Therefore, the merger cannot proceed without the
support of a majority of stockholders, and stockholders who do not support the
merger and pursue their appraisal rights will be entitled to have their shares
purchased at a price to be determined in a judicial proceeding. The special
committee considered this to be a factor that weighed in favor of the merger.
o The consideration to be received in the merger is payable in cash, thereby
eliminating any uncertainties in valuing the consideration to be received by
Specialty Catalog's stockholders. The special committee considered this
to be a factor that weighed in favor of the merger.
o Specialty Catalog repurchased a block of its shares of common stock at an
average price of $2.63 per share based on repurchases during 2000 and at an
average price of $3.56 per share based on repurchases during 1999 and 2000. The
special committee considered this to be a factor that weighed in favor of the
merger.
o The $3.75 per share merger consideration represents an amount in excess of the
net book value per share of $2.01 as of December 30, 2000. The special committee
considered this to be a factor that weighed in favor of the merger.
o The board of directors delegated broad powers to the special committee to
conduct its evaluation and review of the merger proposal and negotiate with Mr.
Naggar and his advisors and, to advise the board of directors in connection with
these matters, the special committee engaged Burnham Securities as its financial
advisor and Sullivan & Cromwell as its legal advisor. Accordingly, the per share
merger consideration and the other terms and conditions of the merger agreement
were the result of good faith negotiations among the special committee and Mr.
Naggar and their respective advisors. The special committee considered this to
be a factor that weighed in favor of the merger.
o The merger agreement does not unduly deter a third party from making an
acquisition proposal, inhibit the special committee from withdrawing or
modifying its approval or recommendation of the merger or the merger agreement,
or inhibit the board of directors from approving, recommending or accepting an
acquisition proposal that the special committee determines to be of a higher
price per share and more favorable to the stockholders of Specialty Catalog than
the merger. Specifically, the merger agreement includes provisions which permit
the special committee to withdraw its recommendation of the merger if there is a
more favorable acquisition proposal, permit the board of directors to terminate
the merger agreement in order to accept a more favorable acquisition proposal
with a third party, and limit the aggregate amount of expenses that Specialty
Catalog may incur on behalf of Acquisition Corp. and its affiliates and expenses
for which Acquisition Corp. and its affiliates may seek reimbursement from
Specialty Catalog upon termination of the merger agreement to $400,000, except
if Specialty Catalog consummates an acquisition proposal that was inquired or
made prior to the termination of the merger agreement. Since the merger would
not preclude a third party from making a superior proposal prior to consummation
of the merger, the special committee considered this to be a factor that weighed
in favor of the merger. The special committee also considered this to be a
factor that enabled the special committee to determine that the merger was fair
to the
45
stockholders of Specialty Catalog (other than Acquisition Corp. and its current
and future stockholders) despite the special committee not being authorized to
solicit other indications of interest.
o The merger is subject to a financing condition. Although the special committee
and the board of directors anticipate that Acquisition Corp. will be able to
secure the financing required to consummate the merger, there is no assurance
that Acquisition Corp. will be successful in securing such financing and
therefore the financing contingency increases the risk that the merger will not
be consummated. Due to this risk, the special committee considered this to be a
factor that weighed against the merger.
o The possible conflicts of interest of certain directors and members of
management of Specialty Catalog, discussed below. The special committee
considered this to be a factor that weighed against the merger.
o The likelihood that although some stockholders of Specialty Catalog may prefer
to receive cash for their shares, others may prefer to maintain an equity
ownership interest in Specialty Catalog. If the merger is consummated, Specialty
Catalog stockholders, other than the Continuing Stockholders, will receive cash
for their shares, and thus it will no longer be possible for Specialty Catalog
stockholders, other than Acquisition Corp. and its current and future
stockholders, to maintain an equity ownership interest in Specialty Catalog. The
special committee considered this to be a factor that weighed against the
merger.
o The board of directors did not authorize the special committee to solicit
indications of interest from third parties relating to a possible acquisition of
Specialty Catalog or to conduct an auction of Specialty Catalog to third
parties. The special committee considered this to be a factor that weighed
against the merger.
o If the merger is completed, the member of the special committee will receive
(solely in his capacity as a holder of options of Specialty Catalog) $13,750 in
merger consideration. The special committee, however, believes that his
interests are consistent with the interests of all other stockholders of
Specialty Catalog other than Acquisition Corp. and its current and future
stockholders. The member of the special committee will also receive compensation
for his services as a member of the board of directors. See "SPECIAL FACTORS -
Special Committee." The special committee believes that this payment does not
present a conflict of interest because this compensation is payable for serving
on the board of directors whether or not the merger is completed. The special
committee considered this to be a neutral factor with respect to the merger.
o The experience and familiarity of the special committee with Specialty
Catalog. Mr. Moore, the sole member of the special committee, was elected to the
board of directors of Specialty Catalog on April 17, 2001. The merger agreement
was executed on May 4, 2001. During the period from April 17, 2001 to May 4,
2001, Mr. Moore undertook an intensive and extensive review of Specialty Catalog
and the catalog/specialty distributor industry. Mr. Moore also had numerous
discussions with the management and certain directors of Specialty Catalog as
well as with the financial advisors to the special committee regarding the
results of operations, financial condition, business and prospects of Specialty
Catalog. See "SPECIAL FACTORS -
46
Material Contacts and Board of Directors Deliberations." The special committee
considered this to be a neutral factor with respect to the merger.
The foregoing discussion of the information and factors considered by the
special committee includes all of the material factors considered by the special
committee in reaching its conclusions and recommendation but is not meant to be
exhaustive. In view of the variety of factors considered in reaching its
determination, the special committee did not find it practicable to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its conclusions and recommendation.
The special committee did not consider book value to be a material factor
because it does not believe that book value is a true indication of the value of
Specialty Catalog. The special committee also did not view the liquidation value
of the assets of Specialty Catalog to be a material factor because it believes
that the value that could be obtained through a liquidation of the assets of
Specialty Catalog would be significantly less than the value that could be
obtained through a sale of Specialty Catalog as a going concern.
Considerations of the Board of Directors
The board of directors consists of five directors, one of whom served on
the special committee. At the May 4, 2001 meeting of the board of directors,
during which all directors except Mr. Naggar attended, the special committee
reported to the other members of the board of directors on its review of the
merger agreement and the related financing commitments and the factors taken
into account by the special committee in reaching its determination that the
merger and the merger agreement are fair to, advisable and in the best interests
of Specialty Catalog and its stockholders (other than Acquisition Corp. and its
current and future stockholders). Accordingly, the same factors considered by
the special committee were taken into account by the entire board of directors.
In addition, Specialty Catalog's board of directors considered the
determinations and recommendations of the special committee and believes that
these factors support the board of directors' fairness determination.
Furthermore, the board of directors considered the fact that the $3.75 per share
merger consideration and the terms and conditions of the merger agreement were
the result of good faith negotiations among the special committee and Mr. Naggar
and their respective advisors. The board of directors believes that this factor
supports the board of directors' fairness determination.
Additionally, in arriving at the board of directors fairness determination,
the board of directors considered the fact that it had engaged Marlin Holdings
to, among other things, help structure and coordinate a management buyout or
other privatization transaction, that Mr. Franklin, who is the Chairman and
Chief Executive Officer of Marlin Holdings, is a director of Specialty Catalog
and that Marlin Holdings will receive a payment of approximately $250,000 upon
closing of the merger as provided under the terms of the Marlin Engagement
Agreement. See "SPECIAL FACTORS--Related Agreements-Engagement of Marlin
Holdings, LLC". The board of directors considered this to be a neutral factor
with respect to the board of directors' fairness determination.
The board of directors, including the member of the special committee, also
believes that the merger is procedurally fair because, among other things:
o The special committee consisted of one non-employee, independent director
appointed by the board of directors to represent solely the interests of
Specialty Catalog's stockholders, other than Acquisition Corp. and its current
and future stockholders.
o The member of the special committee is not a Continuing Stockholder.
o The special committee retained and received advice from independent financial
and legal advisors.
47
o The $3.75 per share merger consideration and the other terms and conditions of
the merger agreement resulted from active good faith negotiating between the
special committee and its representatives, and Mr. Naggar and his
representatives. The special committee conducted extensive negotiations on
behalf of Specialty Catalog, and the negotiations were extensive. The special
committee devoted substantial time and effort in evaluating the terms and
conditions of the merger agreement and the merger consideration.
o Neither the special committee nor the special committee's advisors, who
negotiated the terms and conditions of the merger agreement with Acquisition
Corp., had a financial interest in the merger that could present them with
actual or potential conflicts of interest.
o All stockholders of Specialty Catalog (other than Acquisition Corp. and its
current and future stockholders) will be treated the same in the merger, i.e.,
all will receive a cash payment of $3.75 per share. Acquisition Corp. and
certain Continuing Stockholders are, by contrast, making additional investments
in Specialty Catalog, which investments are necessary to pay out the merger
consideration and to restructure the capitalization of Specialty Catalog.
o The fairness of the $3.75 per share merger consideration to the stockholders
of Specialty Catalog (other than Acquisition Corp. and its current and future
stockholders) is subject to evaluation by an independent state court - the
Delaware Court of Chancery - through the mechanism of appraisal rights in
accordance with the Delaware General Corporation Law. This gives the
stockholders of Specialty Catalog (other than Acquisition Corp. and its current
and future stockholders) an opportunity (provided they preserve and perfect
their appraisal rights as more fully described in "SPECIAL FACTORS--Appraisal
Rights") to present in a neutral forum their basis for objecting to the value of
the merger consideration and, if the Delaware court deems it appropriate, the
court may order the payment of more than $3.75 per share.
The board of directors believes that each of these factors supports its
procedural fairness determination.
The members of the board of directors, including the member of the special
committee, evaluated the merger in light of their knowledge of the business,
financial condition and prospects of Specialty Catalog, and based upon the
advice of financial and legal advisors to the special committee. In light of the
number and variety of factors that the board of directors considered in
connection with their evaluation of the merger, the board of directors did not
find it practicable to assign relative weight to any of the foregoing factors.
OPINION OF BURNHAM SECURITIES INC.
As of April 30, 2001, the special committee of the Specialty Catalog board
of directors engaged Burnham Securities to act as its financial advisor in
connection with the proposed transaction and to render an opinion as to the
fairness, from a financial point of view, to the stockholders, other than
Acquisition Corp. and its current and future stockholders, of the consideration
to be received by the stockholders of Specialty Catalog in the merger. Burnham
Securities was selected based on Burnham Securities' qualifications, experience
and reputation
48
in mergers and acquisitions. Burnham Securities rendered its oral opinion (as
confirmed in writing) on May 4, 2001 to the special committee that, as of such
date, the consideration to be received in the merger by holders of Specialty
Catalog common stock was fair, from a financial point of view, to such holders
(other than Acquisition Corp. and its current and future stockholders). The
amount of the consideration was determined through negotiations between the
special committee and the Acquisition Corp. Burnham Securities did not recommend
that any specific consideration was appropriate for the transaction.
The full text of the opinion delivered by Burnham Securities to the special
committee, dated as of May 4, 2001, which sets forth, among other things, the
assumptions made, general procedures followed, matters considered and
limitations on the scope of review undertaken by Burnham Securities in rendering
its opinion, is attached as Appendix B to this proxy statement and is
incorporated herein by reference. Burnham Securities' opinion is directed to
both the special committee of the board of directors and to the board of
directors of Specialty Catalog, and addresses only the fairness, from a
financial point of view, to the stockholders of Specialty Catalog (other than
Acquisition Corp. and its current and future stockholders) of the consideration
to be received by such holders. Burnham Securities' opinion does not constitute
a recommendation as to how any Specialty Catalog stockholder should vote with
respect to the merger. Burnham Securities' opinion does not address the relative
merits of the merger or any other transactions or business strategies discussed
by the board of directors to proceed with the transaction. The summary of
Burnham Securities' opinion set forth below is qualified in its entirety by
reference to the full text of its opinion. You are urged to read the opinion
carefully in its entirety.
In undertaking its analysis as to the fairness of the merger, Burnham
Securities has relied on traditional valuation techniques, conducted other
financial studies and analyses and performed such other investigations and took
into account such other factors as it deemed necessary or appropriate for
purposes of the opinion expressed, including:
1. reviewing publicly available information concerning Specialty Catalog
since August 1996;
2. analyzing certain financial statements and other financial and
operating data concerning Specialty Catalog prepared by and for the
management of Specialty Catalog including a term sheet, dated April 30,
2001, from Specialty Catalog's senior lender, a treasury stock buyback
summary which details stock buybacks from 1998 through 2000 and an
internal presentation which provided a detailed overview of the
business and financial prospects of Specialty Catalog;
3. analyzing financial projections for the years 2001 through 2005
prepared by the management of Specialty Catalog;
4. discussing the past and current operations and financial condition and
the prospects of Specialty Catalog with the management of Specialty
Catalog;
5. visiting the South Easton, MA facility of Specialty Catalog and
engaging in discussions with the management of Specialty Catalog;
6. comparing the financial performance of Specialty Catalog and the prices
and trading activity of Specialty Catalog common stock with that of
certain other comparable publicly-traded companies and their
securities;
49
7. comparing the merger with other transactions involving public and
private companies that were deemed to be comparable;
8. considering the average price per share paid by Specialty Catalog for
the 144,000 shares purchased in the open market in 1999 and 2000;
9. analyzing transactions concluded by Specialty Catalog (Daxbourne and
American Healthcare Institute);
10. considering the dearth of interest in acquiring Specialty Catalog by
fifty three candidates whose interest was solicited within the
preceding two years and the failed acquisition of Specialty Catalog by
Golub Associates in 2000;
11. considering the potential consequences to Specialty Catalog
shareholders if the shares of common stock of Specialty Catalog were
delisted from The Nasdaq National Market; and
12. reviewing the public announcements and filings relating to the merger
and the drafts of the merger agreement as they became available and
certain other related documents.
Burnham Securities did not assume responsibility for the independent
verification of, and did not independently verify, any of the financial and
other information concerning Specialty Catalog in connection with its review of
the merger and, in preparing its opinion, Burnham Securities assumed and relied
upon the accuracy, completeness and fairness of all such information. In
connection with its opinion, Burnham Securities did not prepare or obtain any
independent evaluation or appraisal of any of the assets or liabilities of
Specialty Catalog nor had Burnham Securities been furnished with any such
evaluation or appraisal. With respect to the financial projections and business
prospects used in its analysis, Burnham Securities assumed such information was
reasonably prepared on a consistent basis with prior practice, that they
reflected the best currently available estimates and judgments of Specialty
Catalog's management as to expected future financial performance of Specialty
Catalog and that they provided a reasonable basis upon which Burnham Securities
could form its opinion. Burnham Securities was not requested to opine upon, and
its opinion did not in any manner address Specialty Catalog's underlying
business decision to proceed with the transaction. Burnham was not requested to
and did not, solicit or entertain any other offers of the purchase of the stock
or assets of Specialty Catalog or any other transaction involving Specialty
Catalog. Burnham Securities assumed that, in all respects material to its
analysis, the representations and warranties of Acquisition Corp. and Specialty
Catalog contained in the merger agreement were true and correct, that
Acquisition Corp. and Specialty Catalog will each perform all of the covenants
and agreements to be performed by them under the merger agreement, and that all
conditions to the obligations of Acquisition Corp. and Specialty Catalog to
effect the merger will be satisfied in the merger agreement, in each case
without any waiver or modification of any material terms or conditions by any
party thereto.
Burnham Securities' opinion is necessarily based upon market, economic,
financial and other conditions as they existed and can be evaluated on, and
information made available to Burnham Securities as of, the date of the opinion
and any subsequent change in such conditions would require a reevaluation of
such opinion. Burnham Securities assumes no obligation to update, revise or
affirm its opinion. Burnham Securities expresses no opinion on the fairness of
other potential transactions between Specialty Catalog, Acquisition Corp., and
the stockholders, or any other parties.
50
The preparation of a fairness opinion is a complex process and involves
various subjective judgments and determinations as to the most appropriate and
relevant assumptions and financial analyses and the application of these methods
to the particular circumstances involved. Such an opinion is therefore not
necessarily susceptible to partial analysis or summary description. Accordingly,
Burnham Securities believes that its analyses and the summaries set forth below
must be considered as a whole and that selecting portions of its analyses,
without considering all analyses, or of the following summary, without
considering all factors and analyses, could create an incomplete and misleading
view of the processes underlying the analyses performed by Burnham Securities in
connection with its opinion. In arriving at its opinion, Burnham Securities did
attribute particular weights to analyses or factors considered by it, and made
qualitative judgments as to the significance and relevance of each analysis and
factor. Burnham Securities did not form an opinion as to whether any individual
analysis or factor (positive or negative), considered in isolation, supported or
failed to support the Burnham Securities' opinion. In performing its analyses,
Burnham Securities made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which may be beyond Specialty Catalog's control. The analyses performed by
Burnham Securities do not necessarily confirm actual values and are not
necessarily indicative of actual future results, which may be significantly more
or less favorable than suggested by such analyses, and Burnham Securities
assumes no responsibility if actual values or future results are materially
different from its assumptions or the results of its analyses. Such analyses
were prepared solely as part of the Burnham Securities' evaluation of the
fairness to the Specialty Catalog stockholders (other than Acquisition Corp. and
its current and future stockholders), from a financial point of view, of the
consideration to be received by such stockholders in the merger. Additionally,
analyses relating to the values of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually can or may be acquired.
The following is a brief summary of the material financial analyses
performed by Burnham Securities in connection with providing its opinion to the
special committee of the board of directors and the board of directors of
Specialty Catalog on May 4, 2001. Some of the summaries of the financial
analyses included information presented in tabular format. To fully understand
the financial analyses, you should read the tables together with the text of
each summary. Considering the data set forth in the tables without considering
the narrative description of the financial analyses, including the methodologies
and assumptions underlying the analyses, could create a misleading or incomplete
view of the financial analyses.
In rendering its opinion, Burnham Securities, among other things, performed
four primary valuation analyses of Specialty Catalog:
(i) Market Multiple Analysis: This method utilizes certain market
information from selected companies that are in comparable
businesses and/or have similar sales levels, growth prospects and
overall profit margins.
(ii) Comparable Transactions Multiple: This method is based on a review
of comparable transactions in the catalog/specialty distributor
industry over a two-year period. These transactions provide a better
picture of how companies were actually valued by market participants
with regard to size, structure, and value based on the implied and
explicit market multiples.
51
(iii) Discounted Cash Flow Analysis: This analysis involves a review of
Specialty Catalog's internal forecasts and projections regarding its
future operations and the cash flows derived therefrom in order to
value the shares of Specialty Catalog.
(iv) Stock Buy-Back Analysis: This analysis involves a review of
Specialty Catalog's buy-back of its shares from shareholders over
the last two years in the public market.
After Burnham Securities arrived at its valuation ranges, it then weighted
each estimate according to its relative importance. The following weights were
applied for each method: Market Multiple - 35%, Comparable Transactions Multiple
- - 25%, Discounted Cash Flow - 20%, and Stock Buy-Back Analysis - 20%. Burnham
Securities granted the Market Multiple and Comparable Transactions Multiple a
higher weighting because Burnham Securities believes the public markets' current
assessments of comparable companies and transactions are more efficient in
valuing ongoing businesses. In addition, the discounted cash flow analysis was
underweighted due to the view of Burnham Securities that the projections were
based on overly optimistic assumptions and did not take into account the
history of Specialty Catalog missing its projections and other events expected
to lower operating results and the preference of small specialty catalog
companies to consider historical and current cash flows from operations more
importantly than projected results when evaluating prospective acquisitions or
strategic alliances. Stock buy-backs were underweighted due to the relatively
low percentages of shares re-acquired by Specialty Catalog as well as the timing
of its purchases.
1. Market Multiple Analysis of Publicly Traded Reference Companies:
Burnham Securities compared the historical financial, operating and stock
market performances of certain publicly traded companies that it considered
relevant with the historical financial and operating performance of Specialty
Catalog based upon publicly available financial information to that of the
following, publicly traded companies:
o BLAIR CORPORATION (AMEX:BL) Blair Corporation's business consists of
the sale of fashion apparel for men and women, plus a wide range of
home products that are primarily marketed through direct mail
merchandising. The company's targeted customers are from the over "50,
low-to-moderate income" market.
o CONCEPTS DIRECT, INC. (NASDAQ:CDIR) Concepts Direct, Inc. is a direct
marketing company that owns and operates five catalog titles and
related niche marketing vehicles. It sells personalized paper products
and a diverse line of merchandise (gift items, home decorative items
and apparel).
o GAIAM, INC. (NASDAQNM:GAIA) Gaiam, Inc. is a multi-channel lifestyle
company dedicated to providing a broad selection of natural and healthy
alternatives to traditional information, goods and services. The
company uses a multi-channel marketing approach, through catalogs,
e-commerce, business-to-business channels, media broadcasts and 21,000
retail points.
52
o INTEGRITY INCORPORATED (NASDAQ:ITGR) Integrity, Inc. is engaged in the
production, distribution and publishing of Christian lifestyle products
developed to facilitate worship, entertainment and education. It sells
directly through consumer marketing and wholesale trade methods. It has
niche consumer product lines targeting customers who are
budget-conscious (Fairhope), African-American (Urban Praise), and
greeting cards.
o J. JILL GROUP, INC. (NASDAQ:JILL) The J. Jill Group, Inc. is a
specialty marketer of high quality women's apparel, accessories and
gifts. These apparel offerings are almost entirely private label, with
emphasis on natural fibers and unique details. J. Jill's target
customers are active, affluent women age 35 to 55. The company markets
its products through the J. Jill catalog, retail stores and the
Internet.
o MOVIE STAR, INC. (AMEX:MSI) Movie Star, Inc. designs, manufactures,
markets and sells an extensive line of ladies' sleepwear, robes,
leisurewear, loungewear, panties and daywear. The company's products
consist of ladies' pajamas, nightgowns, baby dolls, nightshirts, and
daywear.
o RIGHT START, INC. (NASDAQ:RTST) The Right Start, Inc. is a specialty
retailer of high quality, developmental, educational and care products
for infants and children. RightStart.com's nationally distributed
catalog, and RightStart.com's online store are located at
www.rightstart.com.
Burnham Securities selected these companies, which operate in the catalog
specialty distributor industry, as comparable because they are publicly traded
companies that provide products meeting the lifestyle needs of a particular
niche customer base or community. For the purpose of this analysis, these
companies may be considered comparable to Specialty Catalog in one or more
respects. Burnham Securities analyzed, among other things, the market values and
certain other financial data for these companies, including their revenues,
earnings before interest, taxes, depreciation and amortization (or EBITDA),
earnings per share, enterprise value (market value of equity plus net debt) and
all other relevant financial information, in each case for the most recent
12-month period for which information was available.
Burnham Securities used Specialty Catalog's actual fiscal results for the
year ended December 31, 2000 to derive the following multiples:
Multiple: Adjusted Average Price Per Share
- -----------------------------------------------------------------------------
Price/Sales 0.29x $3.67
Enterprise Value/EBITDA 5.58x $3.81
Price/Earnings 13.21x $3.08
Price/ Operating Cash Flow 5.83x $2.79
Price/Book 1.21x $2.21
These multiples were applied against management's operating statistics to
derive an estimated value for each parameter. A composite valuation was
determined by weighing each multiple parameter by its relative importance as a
valuation measure.
53
Burnham Securities derived a valuation range from $10.5 million (or $2.21
per share) to $18.2 million ($3.81 per share) by compiling a list of average
trailing historical multiples that were based upon historical financial
information from the composite group of companies.
2. Comparable Transactions Analysis:
During its deliberations, Burnham Securities reviewed over 77 transactions
under $50 million of total invested capital (the total amount of capital
including debt and equity offered in each transaction) that involved companies
in the catalog/specialty distributor industry that exhibited similar financial
and operating characteristics and that sell to similar niche customer bases as
does Specialty Catalog. In selecting the representative transactions Burnham
Securities considered a number of criteria. They include: industry similarities,
size of transaction, closely held companies and date of transaction. None of the
comparable transactions are representative of a "going private" transaction. The
six transactions Burnham Securities considered involved entities comparable to
Specialty Catalog such as: Gaiam, Inc., Concepts Direct Inc., and a former
competitor (previously noted in Specialty Catalog's filings) Real Goods Trading
Company.
GAIAM, INC. (NASDAQ:GAIA), based in Broomfield, Colorado, is a leading
direct marketer (e.g., catalog and online) of alternative energy products such
as battery storage systems, solar heaters and refrigerators. In January, 2001,
Gaiam, Inc. acquired the publicly traded Real Goods Trading Corp, which had
trailing twelve-month revenues of $18.0 million, for a total invested capital of
$11.73 million. Gaiam, Inc. paid a multiple of 0.65 to revenues to acquire RGTC.
ADVANTAGE MARKETING SYSTEM, (AMEX:AMM), based in Oklahoma City, Oklahoma,
is a direct marketer of weight management, dietary supplement and personal care
products. It reported nine-month revenues of $27.1 million as of September,
2000. It has been pursuing an expansion strategy for its network of independent
distributors and acquired Life Science Technologies, Inc., another marketing
company, to execute that strategy. Advantage Marketing System paid 0.22 times
revenues to acquire Life Science Technologies, Inc.
NATURAL WONDERS INC. (NASDAQ:NATWQ), based in Fremont, California, is a
specialty retailer of unique and affordable gifts inspired by the wonders of
science and nature. Natural Wonders Inc. reported 1999 revenues of over $147.1
million and in September, 2000 acquired World of Science stores for a total of
$10.55 million (a combination of $5.4 million in cash and assumption of
liabilities of $5.1 million). Natural Wonders Inc. paid World of Science
shareholders a multiple of 2.93 to EBITDA and a multiple of 0.18 to revenues.
POTPOURRI HOLDINGS, INC., based in Medfield, Massachusetts, is a leading
home/gift and knitting craft cataloger. Potpourri Holdings, Inc., which is
privately held, distributes more than 30 million catalogs per year and reported
2000 revenues of over $100 million. Potpourri Holdings, Inc. has acquired 11
companies since 1998 including its October, 1999 purchase of Catalog Ventures
from ValueVision for $10.5 million. Catalog Vision had trailing twelve-month
revenues, at the time of the acquisition, of over $31 million. Potpourri paid a
multiple of 0.3 times revenues. This acquisition was expected to help extend
Potpourri's catalog business.
54
In June, 1999, GUITAR CENTER (NASDAQ:GTRC), a retailer of musical
instruments based in Agoura Hills, California, acquired Musician's Friend Inc.
for $29.9 million in stock plus $18.4 million in assumption of debt. Musician's
Friends, Inc. is a retailer of music products through mail order, catalog, and
the Internet. Guitar Center paid a multiple of 0.5 to revenues to expand its
reach into more diversified sales channels.
In March, 1999, Interiors, Inc. (NASDAQOTC:INTXA), based in Mount Vernon,
New York, acquired Petals Inc. for a total of $8.4 million ($6 million in cash
and assumption of $2.4 million of liabilities). Interiors, which reported 2000
revenues of over $96 million, is in the decorative accessories business. Petals,
which had trailing twelve month revenues of $39.6 million at the time of the
acquisition also manufactures, markets, and distributes decorative silk flowers.
Interiors, Inc. paid 3.23 times EBITDA and 0.21 times revenues.
Burnham Securities compared multiples for the merger implied by the merger
consideration and certain financial data of Specialty Catalog to the
corresponding multiples in the selected merger and acquisition transactions.
Burnham Securities focused on (i) total invested capital to revenues for the
respective transaction as a multiple of revenues for the latest twelve months
preceding the transaction and (ii) total invested capital as a multiple of
EBITDA for the last twelve months preceding the respective transaction. The
transactions that Burnham Securities used generated the following adjusted
average multiples:
Multiple: Adjusted Average Price Per Share
- --------------------------------------------------------------------------------
Total Invested Capital/Revenues 0.35x $4.41
Total Invested Capital/EBITDA 3.07x $1.42
Multiple: Adjusted Average Price Per Share
These multiples were applied against management's operating statistics to
derive an estimated value for each parameter. In order to arrive at an average
valuation, Burnham took the average value based on the comparable transactions'
multiples.
Using the comparable transactions multiple, Burnham Securities derived a
valuation range for Specialty Catalog from $6.8 million (or $1.42 per share) to
$ 21.0 million ($4.41 per share).
3. Discounted Cash Flow Analysis:
This analysis involved a review of Specialty Catalog's internal forecasts
and projections regarding its future operations and the cash flows derived
therefrom in order to value the shares of Specialty Catalog. The free operating
cash flows of Specialty Catalog were discounted and then adjusted for special
items as deemed appropriate. In order to arrive at the free cash flow estimates
by year, after-tax free cash flows from operations were utilized and adjusted
for capital expenditures, changes in working capital and other appropriate
adjustments. This provided a measure of Specialty Catalog's ability to generate
consistent free cash flows for the benefit of its stockholders.
Once each year's free cash flows were determined, a discount rate was
applied to such cash flows to provide an aggregate present value of the future
cash flows. A range of discount
55
rates were utilized ranging from 11.61% to 16.54%. Specialty Catalog's historic
weighted average cost of capital of 14.03% was also used as a discount rate.
Burnham Securities derived a valuation range from $19.3 million (or $4.06
per share) to $28.5 million (or $5.98 per share), with a value of $23.1 million
(or $4.84 per share) using the weighted average cost of capital discount rate,
based on an analysis of management's projections for fiscal years 2001 to 2005.
Given Burnham Securities' current assessment of the industry in which Specialty
Catalog competes and the overall state of the economy, Burnham Securities
assumed management's projections to be acceptable and consistent with previous
projections that Burnham Securities previously evaluated, as well as with
projections periodically presented to Specialty Catalog's board of directors.
Management projects Specialty Catalog's revenue growth will compound annually
from 2001 to 2005 at approximately 5%.
Due to the recent history of Specialty Catalog and its utilization of
leverage (in the form of a senior credit facility), Specialty Catalog currently
has a Net Operating Loss Carryforward of $9 million. Specialty Catalog is
limited to use $1.55 million annually to offset operating profit. Burnham
Securities took into consideration the management estimates of the company's
(Net Operating Loss) into its analysis.
Financial projections used by Burnham Securities in its analysis were based
on Specialty Catalog's estimates. Burnham Securities makes no representations as
to the accuracy or attainability of the projections for the future performance
of Specialty Catalog used in this analysis.
4. Stock Buyback Analysis:
Specialty Catalog's management provided Burnham Securities with the
financial details (the price and number of shares involved) of its fifteen
separate buybacks of Specialty Catalog common stock from investors during 1999
and 2000. Specialty Catalog purchased a total of 144,000 shares of its common
stock at an average price of $3.56 per share. Based on this average price and
the 4,768,000 outstanding shares involved in the merger, this resulted in a
valuation of Specialty Catalog of $16.9 million (or $3.56 per share).
When these shareholders sold their shares, an analyst might assume that the
sellers believed that they were receiving the best possible price at the time of
the transactions. The average stock buyback price reflects an aggregate price
that a number of sophisticated and knowledgeable sellers received for their
shares over a measurable period of time (as opposed to a single transaction,
that could be influenced by a specific event).
Valuation estimate
Based on its analysis of the range of valuations derived from the preceding
four methods, Burnham Securities arrived at a weighted average valuation range
for Specialty Catalog from $12.6 million (or $2.65 per share) to $20.7 million
(or $4.35 per share).
Other Considerations
56
In early 1999, the board of directors of Specialty Catalog authorized the
repurchase of Specialty Catalog's shares in the open market, implying (if not
announcing) that stockholder value would best be served by buying back its
shares. Throughout 1999 and 2000, Specialty Catalog re-acquired a total of
144,000 shares at an average price of $3.56. This decision by the board of
directors followed a lengthy process by a highly reputable investment bank that,
over a period lasting six months, had been engaged to identify a purchaser for
all the shares of Specialty Catalog Corp. Over the course of the engagement,
fifty-three prospective purchasers (many of them being highly regarded and
active acquirers of companies) were contacted and presented with detailed
information concerning Specialty Catalog's history, current operations and
future prospects. According to the management, not one bona fide proposal was
forthcoming. During the course of the engagement, which had been publicly
announced, Specialty Catalog's shares traded in a range between $3 and $4 per
share.
Specialty Catalog's former Chairman announced his resignation in the summer
of 1999, but his successor did not emerge until July, 2000 after the aborted
takeover attempt of Specialty Catalog in the first quarter of 2000. Since then,
the stock has traded primarily between a low of $1.56 per share and a high of
$3.50 per share.
From an external perspective, Specialty Catalog has suffered from
inattention by the financial marketplace community. Institutional investors who
require liquidity as a primary factor for their stock selections dominate the
major markets.
On March 21, 2001, Specialty Catalog announced in a press release that it
had received a Nasdaq Staff Determination Letter indicating that it failed to
maintain a minimum market value of its "public" float of $5,000,000 over 30
consecutive trading days and that failure to cure this deficiency would cause
the NASDAQ to de-list Specialty Catalog and relegate its shares to trade on the
NASDAQ SmallCap Market, a significantly less reliable exchange for existing and
prospective shareholders. However, since the first public announcement of the
proposed merger, Specialty Catalog's common stock increased by over___% as of
July __, 2001, thereby causing its market value of public float to be in
compliance with all requirements for continued listing on The Nasdaq National
Market and is not currently subject to review by The Nasdaq Stock Market, Inc.
Accordingly, while an established public trading market exists with respect to
our common stock, there can be no assurance that, in the event the merger is not
consummated, the common stock will remain listed on The Nasdaq National Market
or otherwise be subject of an established trading market.
Immediately prior to Mr. Guy Naggar's 13D filing on April 25, 2001, which
indicating his intention to purchase all or substantially all of the outstanding
shares of Specialty Catalog that he and his affiliates do not own, Specialty
Catalog's stock closed at $2.63, a 30% discount from the $3.75 proposed
acquisition price. The merger price represents a 43% premium to the last sale
prior to the public filing. A press release of Specialty Catalog was made on
Monday, April 30 stating that that Mr. Guy Naggar, a British investor and
substantial shareholder of the company, had submitted a final proposal to
acquire for cash, through merger, all of the issued and outstanding shares of
common stock of the company, other than his shares and the shares of others who
may join him, for $3.75 a share. The last reported sale of Specialty Catalog
stock prior to the release was $3.05 per share. The merger price represents a
23% premium to the last sale prior to the corporate announcement.
57
Fee Arrangements
Burnham Securities, as part of its investment banking services, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, strategic transactions, corporate
restructurings, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. In December, 1999, Burnham Securities was engaged by the then existing
independent committee of the board of directors of Specialty Catalog to provide
financial advice and advise on the fairness of the consideration to be received
by Specialty Catalog stockholders in a proposed merger that was not consummated.
Burnham Securities has acted as a financial advisor to the special committee in
connection with the merger. Burnham Securities may in the future provide
investment banking or other financial advisory services to Specialty Catalog.
Pursuant to an engagement letter dated April 30, 2001, the special
committee agreed to pay Burnham Securities a fee of $62,500 in connection with
the delivery of the fairness opinion rendered on May 4, 2001, which was
comprised of $25,000 payable to Burnham Securities upon execution of the letter
agreement and $37,500 payable to Burnham Securities at the time the opinion was
rendered. Such amount has been paid in its entirety. Specialty Catalog also has
agreed to reimburse Burnham Securities for its reasonable out-of-pocket
expenses, including reasonable fees and expenses of its counsel. Specialty
Catalog has also agreed to indemnify Burnham Securities against certain
liabilities, including liabilities under the federal securities laws or relating
to or arising out of Burnham Securities' engagement as financial advisor.
POSITION OF THE CONTINUING STOCKHOLDERS AS TO THE FAIRNESS OF THE MERGER
By virtue of their potential status as a "group" for purposes of Rule 13d-5
of the Securities Exchange Act of 1934, each of the Continuing Stockholders may
be deemed to beneficially own approximately 57% of Specialty Catalog common
stock and, as a result, is deemed to be an "affiliate" of Specialty Catalog
under applicable SEC regulations. Rule 13e-3 of the Exchange Act governs
"going-private" transactions by certain issuers and their affiliates.
Accordingly, in compliance with Rule 13e-3, the Continuing Stockholders are
required to consider the fairness of the merger to Specialty Catalog's
unaffiliated stockholders, who in this transaction are the stockholders of
Specialty Catalog other than the Continuing Stockholders.
Each of the Continuing Stockholders has considered the factors examined by
the special committee and the board of directors described in detail above. In
particular, the Continuing Stockholders considered the following factors:
o The historical results of operations, financial condition, assets,
liabilities, business strategy and prospects of Specialty Catalog and
the nature of the industry in which Specialty Catalog competes. The
Continuing Stockholders considered this to be a positive factor in
their determination that the merger is fair to the unaffiliated
stockholders.
o The relationship of the $3.75 per share merger consideration offered in
the merger to the current market price and the market prices for
Specialty
58
Catalog common stock over the previous twelve months during which the
weighted average trading price had been $2.43 per share and 25% of the
trading volume had been at prices below $2.35 per share, 60% of the
trading volume had been at prices below $2.50, and 83% of the trading
volume had been at prices below $2.75. The Continuing Stockholders
considered this to be a positive factor in their determination that the
merger is fair to the unaffiliated stockholders.
o The recent market prices for Specialty Catalog's shares including the
fact that the $3.75 per share merger consideration represented (i) a
42.6% premium over the closing price on May 3, 2001, the last trading
day prior to the public announcement of the merger agreement, and (ii)
approximately 49.8% over the average closing price for the thirty day
period immediately preceding the day that Mr. Naggar filed an amendment
to his Schedule 13D announcing that he was preparing to make a
preliminary proposal regarding, among other things, a transaction
involving the purchase of all or substantially all of the outstanding
shares of Specialty Catalog. The Continuing Stockholders considered
this to be a positive factor in their determination that the merger is
fair to the unaffiliated stockholders.
o Specialty Catalog had repurchased a block of its shares during 2000 at
an average price of $2.63 per share. The Continuing Stockholders
considered this to be a positive factor in their determination that the
merger is fair to the unaffiliated stockholders.
o The per share merger consideration of $3.75 represents an amount in
excess of the net book value per share of $2.01 as of December 30,
2000. The Continuing Stockholders considered this to be a positive
factor in their determination that the merger is fair to the
unaffiliated stockholders.
o During the last two years, other than the terminated merger with Golub
Associates, Specialty Catalog has not received any offers relating to a
merger or consolidation, sale or other transfer of all or a substantial
part of its assets or a purchase of its securities that would enable
the holder to exercise control of Specialty Catalog. The Continuing
Stockholders considered this to be a positive factor in their
determination that the merger is fair to the unaffiliated stockholders.
o Notwithstanding that the Burnham Securities opinion, dated May 4, 2001,
was provided solely for the information and assistance of the special
committee and the board of directors, the fact that Specialty Catalog's
board of directors received an opinion from Burnham Securities that the
consideration to be received by Specialty Catalog's stockholders in the
merger is fair to such stockholders (other than Acquisition Corp. and
its current and future stockholders) from a financial point of view
demonstrates the fairness of the merger consideration. The Continuing
59
Stockholders considered this to be a positive factor in their
determination that the merger is fair to the unaffiliated stockholders.
o In light of the relatively thin trading market and lack of liquidity of
the shares of Specialty Catalog common stock, the merger will afford
stockholders an opportunity to dispose of their shares without the
possible diminution of value resulting from the lack of an active
trading market and without incurring transaction costs. The liquidity
of the shares may be further decreased if the shares are delisted from
The Nasdaq National Market. The Continuing Stockholders considered
this to be a positive factor in their determination that the merger is
fair to the unaffiliated stockholders.
o The consideration to be received in the merger is payable in cash,
thereby eliminating any uncertainties in valuing the consideration to
be received by Specialty Catalog's stockholders. The Continuing
Stockholders considered this to be a positive factor in their
determination that the merger is fair to the unaffiliated stockholders.
o The merger agreement does not unduly deter a third party from making an
acquisition proposal, inhibit the special committee from withdrawing or
modifying its approval or recommendation of the merger or the merger
agreement, or inhibit the board of directors from approving,
recommending or accepting an acquisition proposal that the special
committee determines to be of a higher price per share and more
favorable to the stockholders of Specialty Catalog than the merger. The
Continuing Stockholders considered this to be a positive factor in
their determination that the merger is fair to the unaffiliated
stockholders.
o Mr. Naggar, First Global, Ionic, Oracle, Three Greens, and Alexander
will be contributing all of their shares of Specialty Catalog to
Acquisition Corp. The other Continuing Stockholders will contribute
approximately thirty-two (32%) percent of their shares of Specialty
Catalog common stock to Acquisition Corp. in exchange for shares of
Acquisition Corp. common stock and, pursuant to the merger, will
receive the merger consideration upon cancellation of the remaining
seventy (70%) percent of their shares of Specialty Catalog common
stock. The Continuing Stockholders considered this to be a positive
factor in their determination that the merger is fair to the
unaffiliated stockholders.
In consideration of the fairness of the merger to Specialty Catalog's
unaffiliated stockholders, the Continuing Stockholders did not find it
practicable to, and did not, appraise the assets of Specialty Catalog to
determine a liquidation value for Specialty Catalog. The Continuing Stockholders
considered Specialty Catalog as a viable going concern business and did not
consider the liquidation value as a relevant valuation methodology.
In addition, based upon the following factors, each of the Continuing
Stockholders believes that the procedures used by the special committee in
negotiating the merger agreement
60
and the transactions contemplated therein were fair to the unaffiliated
stockholders of Specialty Catalog:
o A special committee consisting of an independent director was
established. The special committee retained its own financial and legal
advisors and conducted a vigorous process of evaluation and negotiation
of the merger. Negotiations were considered to be an important element
of a fair bargaining process and the fact that there were effective
negotiations in this case indicated that the process leading to the
merger was fair.
o The special committee and board of directors have determined that the
merger and the merger agreement are fair to, advisable and in the best
interest of Specialty Catalog and its stockholders (other than
Acquisition Corp. and its current and future stockholders) and
recommend that the stockholders approve and adopt the merger and the
merger agreement. In light of their fiduciary duties to the
stockholders of Specialty Catalog and their careful consideration of
the merger, the Continuing Stockholders believe the fact that the
special committee and Specialty Catalog's board of directors reached
these determinations indicates that the merger and the consideration
offered in the merger are fair to the unaffiliated stockholders of
Specialty Catalog.
o The special committee consisted of one non-employee, independent
director appointed by the board of directors to represent the interests
of Specialty Catalog's public stockholders; the sole member of the
special committee was not a Continuing Stockholder; and the special
committee retained and received advice from independent financial and
legal advisors.
o Specialty Catalog's stockholders (other than Acquisition Corp. and its
current and future stockholders), who object to the merger will obtain
"fair value" for their shares if they exercise and perfect their
dissenters' rights under Delaware law.
o The $3.75 per share merger consideration and the terms and conditions
of the merger agreement were the result of good faith negotiations
among the special committee and Mr. Naggar and their respective
advisors described under "SPECIAL FACTORS - Material Contacts and Board
Deliberations".
o If the merger is completed, the member of the special committee will
receive (solely in his capacity as a holder of options of Specialty
Catalog) $13,750 in merger consideration, and this interest is
consistent with the interests of the unaffiliated stockholders of
Specialty Catalog.
61
o During the period from April 17, 2001 to May 4, 2001, the special
committee undertook an intensive and extensive review of Specialty
Catalog and the catalog/specialty distributor industry and had numerous
discussions with the management and certain directors of Specialty
Catalog as well as with the financial advisors for the special
committee regarding the results of operations, financial condition,
business and prospects of Specialty Catalog.
The Continuing Stockholders have interests in the merger transaction not
shared by other stockholders of Specialty Catalog. These interests are described
below under the heading "Interests of Certain Persons in the Merger." Each of
the Continuing Stockholders intends to vote in favor of the approval and
adoption of the merger and the merger agreement at the special meeting of the
stockholders. See "SUMMARY TERM SHEET--Required Vote," "QUESTIONS AND ANSWERS
ABOUT THE MERGER--What Vote is Required?" and "SUMMARY--Information Concerning
the Meeting-Voting Requirements."
None of the Continuing Stockholders participated in the deliberations of
the special committee regarding, or received advice from the special committee's
financial advisor as to, the merger. Each of the Continuing Stockholders has,
however, considered the analyses and findings of the special committee and the
board of directors (described in detail under "SPECIAL FACTORS-- Recommendation
of the Special Committee and the Board of Directors; Considerations in
Connection with the Merger; Fairness of the Merger"), as well as the opinion of
Burnham Securities (described in detail under " SPECIAL FACTORS -- Opinion of
Burnham Securities Inc."), with respect to the fairness of the merger to the
unaffiliated stockholders.
As of the date of this proxy statement, each of the Continuing Stockholders
believes that the factors considered provide a reasonable basis for their belief
that the merger and the merger agreement are fair to and in the best interests
of Specialty Catalog's unaffiliated stockholders. This belief should not be
construed as a recommendation by the Continuing Stockholders to vote to approve
and adopt the merger and the merger agreement. The Continuing Stockholders make
no recommendation as to how the unaffiliated stockholders should vote their
shares. The Continuing Stockholders have not undertaken any formal evaluation of
the fairness of the merger to the unaffiliated stockholders, and do not believe
it is possible to assign specific relative weights to the factors considered by
them.
PURPOSE, REASONS AND PLANS
Purpose.
The purpose of the merger is for Acquisition Corp. to acquire, in
accordance with Delaware law, all of the shares of common stock of Specialty
Catalog issued and outstanding at the consummation of the merger.
Reasons Of Specialty Catalog For The Merger.
Specialty Catalog's primary reason for entering into the merger agreement
at this time is the view of its board of directors that it is unlikely (i) that
the trading price of Specialty Catalog shares will exceed and sustain a trading
price of $3.75 per share if Specialty Catalog remains a
62
publicly traded company, and (ii) that Specialty Catalog will be able to effect
an alternative transaction in which stockholders will receive $3.75 per share or
more in the forseeable future. The board of directors and the special committee
believe, based upon the reasons discussed above under the caption "SPECIAL
FACTORS -- Recommendation of the Special Committee and the Board of Directors;
Considerations in Connection with the Merger; Fairness of the Merger," that the
merger is being undertaken now because it is the best available opportunity to
enhance stockholder value at this time. Although the board of directors at its
meeting in the spring of 2001 considered only this merger to enhance stockholder
value, since 1998 Specialty Catalog and its advisors have solicited indications
of interest regarding a possible sale of Specialty Catalog, including presenting
fifty-three prospective purchasers with detailed information concerning
Specialty Catalog, and did not receive any offer from any other buyer, other
than Golub Associates, of an interest relating to a merger or consolidation,
sale or other transfer of all or a substantial part of the assets of Specialty
Catalog or a purchase of the securities of Specialty Catalog that would enable
the holder to exercise control of Specialty Catalog at a price in excess of
$3.75 per share.
Reasons Of The Continuing Stockholders For The Merger.
Each of the Continuing Stockholders believes that it is in Specialty
Catalog's best interest to operate as a privately held entity. For a discussion
of the reasons for the structure of the transaction, see "SPECIAL
FACTORS--Structure of the Transactoion; Participants." Despite Specialty Catalog
being a market leader with what the Continuing Stockholders believe to be a
solid management team, Specialty Catalog's historical stock prices have been at
levels below what the Continuing Stockholders believe to be full value of shares
of Specialty Catalog common stock. Each of the Continuing Stockholders believes
that this trend has prevented stockholders from realizing appropriate value for
their interests in Specialty Catalog. As a privately held entity which will no
longer be subject to the reporting requirements of the Exchange Act, Specialty
Catalog will have the flexibility to focus on continuing improvements to the
business without the constraints and distractions of being a public company,
including the following:
o Specialty Catalog may be more likely to make decisions that may
negatively affect quarterly earnings but that may, in the long-run,
increase the value of Specialty Catalog's assets or earnings.
o Specialty Catalog will be able to eliminate the cost and time devoted
by its management and certain other employees, as well as outside
advisors, to matters relating exclusively to having equity securities
publicly traded.
o Specialty Catalog will no longer be required to disclose material
confidential information concerning its business.
These assessments are based upon publicly available information regarding
Specialty Catalog and the Continuing Stockholders' due diligence, investigation
or knowledge of Specialty Catalog and its industry and the experience of the
Continuing Stockholders in investing in or managing public companies generally.
While the Continuing Stockholders believe that there will be significant
opportunities associated with their investment in Specialty Catalog and that
63
the value of such an equity investment could be considerably greater than the
original cost thereof, they realize that there also are substantial and
significant risks that such opportunities may never be fully realized.
Based on (1) assumed total equity of Specialty Catalog of $9,558,032
(including the accounting value of warrants to be issued to the mezzanine lender
in the amount of $1,129,432) after the merger, (2) 4,337,886 shares of Specialty
Catalog common stock issued and outstanding, (3) net option value of $1,643,104,
(4) the $3.75 per share price being paid to current holders of Specialty Catalog
common stock and (5) the net option value, equal to $1,135,193 minus the
applicable exercise price, being paid to certain current holders of Specialty
Catalog options, the effect of the merger on each of the Continuing
Stockholders and LEG Partners III's interest in the net book value and net
earnings of Specialty Catalog in terms of both dollar amounts and percentages is
set forth below:
- -----------------------------------------------------------------------------------------------------------------------
IMPLIED VALUE CURRENT
NUMBER OF OF CURRENT PERCENTAGE OF PERCENTAGE OF
SHARES OF INVESTMENT SPECIALTY SPECIALTY
SPECIALTY (STOCK AND CATALOG'S IMPLIED VALUE CATALOG'S
CATALOG BEFORE OPTION VALUE) STOCK AND OF INVESTMENT EQUITY AFTER
MERGER ($) OPTION VALUE AFTER MERGER MERGER
- -----------------------------------------------------------------------------------------------------------------------
Alexander Enterprise Holdings 279,700 $1,048,875 5.9% $2,196,610 26.1%
Corp.
- -----------------------------------------------------------------------------------------------------------------------
Guy Naggar 405,267(1) $1,518,750 8.5% $1,496,134 17.7%
- -----------------------------------------------------------------------------------------------------------------------
First Global Holdings Limited 244,655 $917,456 5.1% $798,966 9.5%
- -----------------------------------------------------------------------------------------------------------------------
Oracle Investments and 244,656 $917,460 5.1% $798,969 9.5%
Holdings Limited
- -----------------------------------------------------------------------------------------------------------------------
Ionic Holdings LDC 244,655 $917,456 5.1% $798,966 9.5%
- -----------------------------------------------------------------------------------------------------------------------
Three Greens Holdings Limited 98,376 $368,910 2.1% $321,265 3.8%
- -----------------------------------------------------------------------------------------------------------------------
Martin Franklin 368,455(1) 1,368,206 7.6% $413,302 4.9%
- -----------------------------------------------------------------------------------------------------------------------
The David Cicurel Settlement 40,111 150,416 1.0% $52,157 0.6%
- -----------------------------------------------------------------------------------------------------------------------
LEG Partners III SBIC, L.P. 602,689 2,260,084 12.6% $620,381 7.4%(2)
- -----------------------------------------------------------------------------------------------------------------------
Wynnefield Partners Small Cap 206,549 774,559 4.3% $212,615 2.5%
Value, L.P.
- -----------------------------------------------------------------------------------------------------------------------
Wynnefield Partners Small Cap 248,050 930,188 5.2% $255,331 3.0%
Value, L.P. I
- -----------------------------------------------------------------------------------------------------------------------
Wynnefield Partners Small Cap 104,008 390,030 2.2% $107,061 1.3%
Value Offshore Fund, Ltd.
- -----------------------------------------------------------------------------------------------------------------------
Acquisition Corp. 0 0 0 0 0
- -----------------------------------------------------------------------------------------------------------------------
(1) Excludes out-of-the-money options and includes in-the-money options.
(2) Excludes warrants to purchase 13.4% of the fully diluted common stock of
Specialty Catalog, at the time of exercise, subject to adjustment, with an
accounting value of $1,129,432.
Plans For Specialty Catalog.
It is expected that, following the merger, the operations and business of
Specialty Catalog will be conducted substantially as they are currently
conducted. Neither Specialty Catalog nor
64
any of the Continuing Stockholders have any present plans or proposals that
relate to or would result in an extraordinary corporate transaction involving
Specialty Catalog's corporate structure, business or management, such as a
merger, reorganization, liquidation, relocation of any operations or sale or
transfer of a material amount of assets. However, after the merger, Specialty
Catalog and the Continuing Stockholders will continue to evaluate Specialty
Catalog's business and operations and, from time to time, may propose or develop
new plans and proposals which they consider to be in the best interests of
Specialty Catalog and its stockholders, including the disposition or acquisition
of material assets, alliances, joint ventures and other forms of cooperation
with third parties or other extraordinary transactions.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the special committee and of the
board of directors with respect to the merger, the directors and officers of
Specialty Catalog who are Continuing Stockholders have interests in the merger
that are different from the interests of stockholders of Specialty Catalog in
general. The members of Specialty Catalog's board of directors were aware of
certain of the directors' and officers' interests in the merger when deciding to
approve the merger, as was the special committee when deciding to recommend such
approval. See "SPECIAL FACTORS - Material Contacts and Board Deliberations and
"SPECIAL FACTORS--Recommendation of the Special Committee and the Board of
Directors; Considerations in Connection with the Merger; Fairness of the
Merger." These interests include those described below.
The Continuing Stockholders, LEG Partners III, and certain members of
management have interests in the merger as employees and/or directors of
Specialty Catalog, or as stockholders with a continuing equity interest in
Specialty Catalog, that are different from, or in addition to, yours as a
stockholder. In particular, (i) the Continuing Stockholders will continue to
hold all or part of their common stock of Specialty Catalog after the merger;
see "SPECIAL FACTORS--Related Agreements-Subscription Agreements," (ii) any
options to acquire Specialty Catalog stock held by Continuing Stockholders will
be surrendered or converted into shares of common stock of Specialty Catalog
after the merger pursuant to the terms and provisions of the stock option
exercise agreements entered into by the Continuing Stockholders; see "SPECIAL
FACTORS--Related Agreements-Stock Option Exercise Agreements," and (iii) the
Continuing Stockholders will not recognize a taxable transaction for U.S.
federal income tax purposes from the receipt of shares of Specialty Catalog
common stock by such Continuing Stockholders in exchange for shares of common
stock of Acquisition Corp.; see "SPECIAL FACTORS--Material Federal Income Tax
Consequences of the Merger." When making the determination to approve and
recommend approval of the merger transactions to Specialty Catalog's
stockholders, both the board of directors and the special committee of
independent directors appointed to review and evaluate the merger were aware of
the interests of the Continuing Stockholders and certain members of management
and considered these interests, together with the other factors described under
"SPECIAL FACTORS -- Recommendation of the Special Committee and the Board of
Directors; Considerations in Connection with the Merger; Fairness of the
Merger."
As of July 18, 2001, there were 4,337,886 shares of our common stock
outstanding. The table below sets forth the number of shares and the percentage
ownership of Specialty Catalog which were held as of July 18, 2001 by each of
the Continuing Stockholders and LEG Partners III before the
65
consummation of the merger and are expected to be held by the Continuing
Stockholders and LEG Partners III after the merger. In the table, shares that
the Continuing Stockholders and LEG Partners III have the right to acquire by
September 18, 2001 by exercising options, warrants or conversion privileges are
deemed to be beneficially owned and outstanding for the purpose of computing
their respective percentage ownership of common stock of Specialty Catalog
before the merger. Except as indicated in the footnotes to the table, we believe
that the Continuing Stockholders have sole voting and investment power with
respect to the shares shown to be beneficially owned by them, based on
information provided by these stockholders. Also see "SPECIAL FACTORS--Amount
and Source of Funds and Financing of the Merger-Equity Contributions," "SPECIAL
FACTORS--Related Agreements-Subscription Agreements," "SPECIAL FACTORS--Related
Agreements-Stock Option Exercise Agreements," "SPECIAL FACTORS--Related
Agreements-Option Agreements," and "INFORMATION ABOUT THE TRANSACTION
PARTICIPANTS--Security Ownership of Certain Beneficial Owners and Management."
- -------------------------------------------------------------------------------------------------------------
PERCENTAGE NUMBER OF PERCENTAGE
NUMBER OF OWNERSHIP SHARES OWNERSHIP
SHARES BEFORE AFTER AFTER
BEFORE MERGER MERGER MERGER (11) MERGER (11)
- -------------------------------------------------------------------------------------------------------------
Alexander Enterprise Holdings Corp. (1) 279,700 6.4% 672,634 26.1%
- -------------------------------------------------------------------------------------------------------------
Guy Naggar (2) 405,267 9.3% 458,138 17.7%
- -------------------------------------------------------------------------------------------------------------
First Global Holdings Limited (3) 244,655 5.6% 244,655 9.5%
- -------------------------------------------------------------------------------------------------------------
Oracle Investments and Holdings Limited (3) 244,656 5.6% 244,656 9.5%
- -------------------------------------------------------------------------------------------------------------
Ionic Holdings LDC (3) 244,655 5.6% 244,655 9.5%
- -------------------------------------------------------------------------------------------------------------
Three Greens Holdings Limited (4) 98,376 2.3% 98,376 3.8%
- -------------------------------------------------------------------------------------------------------------
Martin Franklin (5) 368,455 8.5% 126,559 4.9%
- -------------------------------------------------------------------------------------------------------------
The David Cicurel Settlement (6) 40,111 0.9% 12,659 0.5%
- -------------------------------------------------------------------------------------------------------------
LEG Partners III SBIC, L.P. (7) 602,689 13.9% 190,215 7.4%
- -------------------------------------------------------------------------------------------------------------
Wynnefield Partners Small Cap Value, L.P. (8) 206,549 4.8% 65,190 2.5%
- -------------------------------------------------------------------------------------------------------------
Wynnefield Partners Small Cap Value, L.P. I (8) 248,050 5.7% 78,287 3.0%
- -------------------------------------------------------------------------------------------------------------
Wynnefield Partners Small Cap Value Offshore Fund, 104,008 2.4% 32,826 1.3%
Ltd. (8)
- -------------------------------------------------------------------------------------------------------------
Acquisition Corp. 0 0.0% 0 0.0%
- -------------------------------------------------------------------------------------------------------------
TOTAL (9) 3,184,679 72.9% 2,468,850 95.7%
- -------------------------------------------------------------------------------------------------------------
(1) Nicolas Berggruen acts as an investment advisor to Alexander.
(2) Number of shares before merger includes options to purchase 3,600 shares of
our common stock.
(3) Marion Naggar's Children's Settlement is the sole shareholder of each of
Oracle, First Global and Ionic. Abacus (CI) Limited and Abacus Trustees (Jersey)
Limited are the trustees of the Marion Naggar's Children's Settlement and have
the authority to appoint the directors of First Global, Oracle and Ionic.
(4) GA Naggar 1982 Settlement is the sole shareholder of Three Greens. Abacus
(CI) Limited and Abacus Trustees (Jersey) limited are the trustees of the GA
Naggar 1982 Settlement and have the authority to appoint the directors of Three
Greens.
66
(5) Number of shares before merger includes options to purchase 20,267 shares of
our common stock.
(6) Abacus (CI) Limited is the sole trustee of The David Cicurel Settlement.
(7) Golub Associates provides administrative and operational services to LEG
Partners III. Golub PS-GP, LLC is the general partner of LEG Partners III, L.P.
Lawrence E. Golub is the managing member of Golub PS-GP, LLC and the president
of Golub Associates. In connection with the financing of the merger, LEG
Partners III and LEG Partners Debenture SBIC, L.P., an affiliate of Golub
Associates, will be issued warrants to purchase, in the aggregate, 13.4% of the
fully diluted common stock of Specialty Catalog at the time of exercise, subject
to adjustment. See "SPECIAL FACTORS--Amount and Source of Funds and Financing of
the Merger."
(8) Wynnefield Capital Management, LLC, is the general partner of Wynnefield
Partners Small Cap Value, L.P. and Wynnefield Partners Small Cap Value, L.P. I
and Wynnefield Capital, Inc., is the investment manager of the Wynnefield Small
Cap Value Offshore Fund, Ltd. Nelson Obus and Joshua Landes are the managing
members of Wynnefield Capital Management, LLC and the principal executive
officers of Wynnefield Capital, Inc.
(9) Number of shares before merger includes options to purchase 30,800 shares
of our common stock. Number of shares after merger does not include 112,110
shares held by other members of management. See "SPECIAL FACTORS--Related
Agreements-Stock Option Exercise Agreements."
(10) Excludes options issued pursuant to option agreements, see "SPECIAL
FACTORS--Related Agreements- Option Agreements" and shares issued upon the
conversion of options pursuant to stock option exercise agreements, see "SPECIAL
FACTORS--Related Agreements-Stock Option Exercise Agreements." Also excludes
warrants to purchase, in the aggregate, 13.4% of the fully diluted common stock
of Specialty Catalog, at the time of exercise, subject to adjustment, to be
issued to LEG Partners III and LEG Partners Debenture SBIC, L.P. in connection
with the financing of the merger. See "SPECIAL FACTORS--Amount and Source of
Funds and Financing of the Merger."
SPECIAL COMMITTEE
The board of directors voted to establish a special committee
comprised of directors who did not have actual or potential conflicts of
interest with such transaction and who were not officers or employees of
Specialty Catalog or its subsidiaries nor affiliated with Mr. Naggar, nor
current or possible future stockholders of any acquisition company formed by Mr.
Naggar. The sole member of the special committee, Mr. Moore, is not an employee
of Specialty Catalog, an employee or director of Acquisition Corp., or a
Continuing Stockholder, and he does not have interests in the merger different
from the interests of Specialty Catalog's stockholders other than Acquisition
Corp. and its current and future stockholders. See "SPECIAL FACTORS - Material
Contacts and Board Deliberations."
Mr. Moore was granted no additional compensation for his service on the
special committee. Mr. Moore holds options to purchase 10,000 shares of common
stock, which equals the number of options which were granted to each member of
the board of directors on August 25, 2000, at $2.375 per share upon his
appointment as a member of the board of directors. Mr. Moore is also entitled to
certain indemnification rights like all other directors, and to directors' and
officers' liability insurance that will be continued by Specialty Catalog
following the merger as described above for the current and former officers and
directors of Specialty Catalog. The board of
67
directors and the special committee believe that the foregoing arrangements do
not affect the special committee's independence or impartiality.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the material U.S. federal income tax
considerations relevant to the merger that are generally applicable to holders
of our common stock. This discussion is based on currently existing provisions
of the Internal Revenue Code of 1986, existing and proposed U.S. Treasury
Regulations, and current administrative rulings and court decisions, all of
which are subject to change. Any such change, which may or may not be
retroactive, could alter the tax consequences. Special tax consequences not
described below may be applicable to particular classes of taxpayers, including
financial institutions, broker-dealers, persons who are not citizens or
residents of the United States or who are foreign corporations, foreign
partnerships, or foreign estates or trusts as to the United States, persons who
will own, actually or constructively, stock of Specialty Catalog after the
merger, and holders who acquired their stock through the exercise of an employee
stock option or otherwise as compensation.
Your receipt of the merger consideration in the merger will be a taxable
transaction for U.S. federal income tax purposes. Your gain or loss per share
will be equal to the difference between $3.75 and your adjusted basis in that
particular share of common stock. Such gain or loss generally will be a capital
gain or loss. In the case of individuals, trusts, and estates, such capital gain
will be subject to a maximum U.S. federal income tax rate of 20% for shares of
common stock held for more than 12 months prior to the date of the merger.
Those certain Continuing Stockholders that will receive cash in the merger
transaction will recognize a taxable transaction for U.S. federal income tax
purposes. The gain or loss per share that will be recognized for U.S. federal
income tax purposes will be equal to the difference between $3.75 and the
Continuing Shareholder's adjusted basis for the particular share of common
stock. Such gain or loss generally will be a capital gain or loss.
The receipt of shares of Specialty Catalog common stock by the Continuing
Stockholders in exchange for shares of common stock of Acquisition Corp. will
not be a taxable transaction for U.S. federal income tax purposes. Each
Continuing Stockholder's basis in his shares of Specialty Catalog common stock
will be equal to such Continuing Stockholder's basis in his shares of
Acquisition Corp. exchanged for shares of Specialty Catalog in the merger
transaction.
You may be subject to backup withholding at the rate of 31% with respect to
the merger consideration received by you, unless you (1) are a corporation or
come within certain other exempt categories and, when required, demonstrate this
fact, or (2) provide a correct taxpayer identification number ("TIN"), certify
as to no loss of exemption from backup withholding, and otherwise comply with
applicable requirements of the backup withholding rules. To prevent the
possibility of backup U.S. federal income tax withholding on payments made
pursuant to the merger, you must provide the paying agent with your correct TIN
by completing a Form W-9 or substitute Form W-9. If you do not provide the
Paying Agent with your correct TIN, you may be subject to penalties imposed by
the Internal Revenue Service as well as backup withholding. Any amount withheld
under these rules will be creditable against your U.S. federal income tax
liability. Specialty Catalog (or its agent) will report to you and the IRS the
amount of any
68
"reportable payments," as defined in Section 3406 of the Internal Revenue Code,
and the amount of tax, if any, withheld with respect thereto.
The foregoing tax discussion is based upon present law. The foregoing
discussion does not discuss tax consequences under the laws of states or local
governments or of any other jurisdiction or tax consequences to categories of
stockholders that may be subject to special rules, such as foreign persons,
tax-exempt entities, insurance companies, financial institutions, and dealers in
stocks and securities. The foregoing discussion may not be applicable to a
stockholder who continues to own, actually or constructively, stock of Specialty
Catalog after the merger or who acquired his or her shares of common stock
pursuant to the exercise of stock options or otherwise as compensation. You
should consult your own tax advisor as to the specific tax consequences of the
merger to you, including the application and effect of U.S. federal, state,
local, and other tax laws and the possible effect of changes in such tax laws.
ACCOUNTING TREATMENT OF THE MERGER
The merger is expected to be accounted for under the purchase method of
accounting. The merger is structured as a leveraged buyout transaction with
certain stockholders of Specialty Catalog continuing to be stockholders in the
surviving corporation. The assets and liabilities of Specialty Catalog will be
recorded at fair value for the interests acquired by the new investors and at
the carryover, or predecessor, basis for continuing stockholders from Specialty
Catalog.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE MERGERS
Specialty Catalog does not believe there are any material governmental or
regulatory approvals required for completion of the mergers, other than
compliance with applicable corporate law of Delaware, the federal securities
laws and various blue sky laws.
APPRAISAL RIGHTS
If the merger is consummated, holders of shares of common stock are
entitled to appraisal rights under Section 262 of the Delaware General
Corporation Law ("Section 262"), provided that they comply with the conditions
established by Section 262.
Section 262 is reprinted in its entirety as Appendix C to this proxy
statement. The following discussion is not a complete statement of the law
relating to appraisal rights and is qualified in its entirety by reference to
Appendix C. This discussion and Appendix C should be reviewed carefully by any
holder who wishes to exercise statutory appraisal rights or who wishes to
preserve the right to do so, as failure to comply with the required procedures
will result in the loss of appraisal rights.
A record holder of the common stock who makes the demand described below
with respect to such shares, who is continuously the record holder of such
shares through the effective time of the merger, who otherwise complies with the
statutory requirements of Section 262 and who neither votes in favor of approval
and adoption of the merger and the merger agreement nor consents to the merger
and the merger agreement in writing will be entitled to an appraisal by the
Delaware Court of Chancery of the fair value of his or her shares of common
stock. Except as set forth herein, stockholders will not be entitled to
appraisal rights in connection with the merger.
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Under Section 262, we are required to notify you not less than 20 days
prior to the special meeting that the appraisal rights are available and include
in each such notice a copy of Section 262. This proxy statement constitutes our
notice to you. Holders of shares who desire to exercise their appraisal rights
must not vote in favor of the approval and adoption of the merger and the merger
agreement and must deliver a separate written demand for appraisal to us prior
to the vote by the stockholders at the special meeting. A demand for appraisal
must be executed by or on behalf of the stockholder of record and must
reasonably inform us of the identity of the stockholder of record and that such
stockholder intends thereby to demand an appraisal of his Specialty Catalog
common stock. A proxy or vote against the approval and adoption of the merger
and the merger agreement will not by itself constitute such a demand. Within ten
days after the effective time of the merger, we must provide notice of the
effective time to all stockholders who have complied with Section 262.
A stockholder who elects to exercise appraisal rights should mail or
deliver his or her written demand to: Corporate Secretary c/o Specialty Catalog
Corp., 21 Bristol Drive, South Easton, Massachusetts 02375.
A person having a beneficial interest in shares of Specialty Catalog common
stock that are held of record in the name of another person, such as a broker,
fiduciary, depositary or other nominee, must act promptly to cause the record
holder to follow the steps summarized herein properly, and in a timely manner,
to perfect appraisal rights. If the shares of common stock are owned of record
by a person other than the beneficial owner, including a broker, fiduciary (such
as a trustee, guardian or custodian), depositary or other nominee, such demand
must be executed by or for the record owner. If the shares of common stock are
owned of record by more than one person, as in a joint tenancy or tenancy in
common, such demand must be executed by or for all joint owners. An authorized
agent, including an agent for two or more joint owners, may execute the demand
for appraisal for a stockholder of record; however, the agent must identify the
record owner and expressly disclose the fact that, in exercising the demand,
such person is acting as agent for the record owner. If a stockholder holds
shares of common stock through a broker who in turn holds the shares through a
central securities depository nominee, such as Cede & Co., a demand for
appraisal of such shares must be made by or on behalf of the depository nominee
and must identify the depository nominee as record holder.
A record holder, such as a broker, fiduciary, depositary or other nominee,
who holds shares of common stock as a nominee for others, may exercise appraisal
rights with respect to the shares held for all or less than all beneficial
owners of shares as to which such person is the record owner. In such case, the
written demand must set forth the number of shares covered by such demand. Where
the number of shares is not expressly stated, the demand will be presumed to
cover all shares of common stock outstanding in the name of such record owner.
Within 120 days after the effective time of the merger, either Specialty
Catalog or any stockholder who has complied with the required conditions of
Section 262 may file a petition in the Delaware Court of Chancery, with a copy
served on Specialty Catalog in the case of a petition filed by a stockholder,
demanding a determination of the fair value of the shares of all dissenting
stockholders. Stockholders seeking to exercise appraisal rights should not
assume that we will file such a petition or that we will initiate any
negotiations with respect to the fair value of such shares. Accordingly, holders
of common stock who desire to have their shares appraised
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should initiate petitions necessary for the perfection of their appraisal rights
within the time periods and in the manner prescribed in Section 262. Within 120
days after the effective time of the merger, any stockholder who has theretofore
complied with the applicable provisions of Section 262 will be entitled, upon
written request, to receive from us a statement setting forth the aggregate
number of shares of common stock not voting in favor of the approval and
adoption of the merger and the merger agreement and with respect to which
demands for appraisal were received by us and the number of holders of such
shares. We are obligated to mail that statement within 10 days after we receive
a written request therefor.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court of Chancery will determine which stockholders are
entitled to appraisal rights. The Delaware Court of Chancery may require the
stockholders who have demanded an appraisal for their shares and who hold stock
represented by certificates to submit their certificates of stock to the
Register in Chancery for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such direction, the
Delaware Court of Chancery may dismiss the proceedings as to such stockholder.
Where proceedings are not dismissed, the Delaware Court of Chancery will
appraise the shares of Specialty Catalog common stock owned by such
stockholders, determining the fair value of such shares exclusive of any element
of value arising from the accomplishment or expectation of the merger, together
with a fair rate of interest, if any, to be paid upon the amount determined to
be the fair value.
Although we believe that the merger consideration is fair, no
representation is made as to the outcome of the appraisal of fair value as
determined by the Delaware Court of Chancery and stockholders should recognize
that such an appraisal could result in a determination of a value higher or
lower than, or the same as, the merger consideration. Moreover, we do not
anticipate offering more than the merger consideration to any stockholder
exercising appraisal rights and reserve the right to assert, in any appraisal
proceeding, that, for purposes of Section 262, the fair value of shares of
Specialty Catalog's common stock is less than the merger consideration. In
determining fair value, the Delaware Court of Chancery is required to take into
account all relevant factors. These factors will include market value, asset
value, dividends, earnings prospects, the nature of the enterprise and any other
facts which could be ascertained as of the date of the merger which throw light
on future prospects of Specialty Catalog.
Holders of shares of common stock considering seeking appraisal should
recognize that the fair value of their shares determined under Section 262 could
be more than, the same as or less than the consideration they are entitled to
receive pursuant to the merger agreement if they do not seek appraisal of their
shares. The cost of the appraisal proceeding may be determined by the Delaware
Court of Chancery and taxed against the parties as the court deems equitable in
the circumstances. Upon the application of a dissenting stockholder, a court may
order that all or a portion of the expenses incurred by any dissenting
stockholder in connection with the appraisal proceeding, including without
limitation reasonable attorneys' fees and the fees and expenses of experts, be
charged pro rata against the value of all shares of stock entitled to appraisal.
Any holder of shares of common stock who has duly demanded appraisal in
compliance with Section 262 will not, after the effective time of the merger, be
entitled to vote for any purpose any shares subject to such demand or to receive
payment of dividends or other
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distributions on such shares, except for dividends or distributions payable to
stockholders of record at a date prior to the effective time.
At any time within 60 days after the effective time of the merger, any
stockholder will have the right to withdraw such demand for appraisal and to
accept the terms offered in the merger; after this period, the stockholder may
withdraw such demand for appraisal only with the consent of Specialty Catalog.
If no petition for appraisal is filed with the Delaware Court within 120 days
after the effective time of the merger, stockholders' rights to appraisal will
cease, and all holders of shares of Specialty Catalog's common stock will be
entitled to receive the consideration offered pursuant to the merger agreement.
Inasmuch as we have no obligation to file such a petition, and have no present
intention to do so, any stockholder who desires such a petition to be filed is
advised to file it on a timely basis. Any stockholder may withdraw such
stockholder's demand for appraisal by delivering to Specialty Catalog a written
withdrawal of his or her demand for appraisal and acceptance of the merger
consideration, except (i) that any such attempt to withdraw made more than 60
days after the effective time of the merger will require our written approval
and (ii) that no appraisal proceeding in the Delaware Court of Chancery will be
dismissed as to any stockholder without the approval of the court, and such
approval may be conditioned upon such terms as the court deems just.
AMOUNT AND SOURCE OF FUNDS AND FINANCING OF THE MERGER
Immediately following the merger, Specialty Catalog will pay to the
stockholders of Specialty Catalog, other than Acquisition Corp., an aggregate
amount of approximately $12.2 million to cancel the outstanding shares of
Specialty Catalog common stock and stock options, assuming (i) no Specialty
Catalog stockholders exercise and perfect their dissenters' rights in connection
with the merger, (ii) certain stock options of members of management are
converted into options of Specialty Catalog after the merger and (iii) no other
stockholders participate with the Continuing Stockholders. Moreover, Specialty
Catalog will incur approximately $0.9 million in fees and expenses in connection
with the merger and related transactions. In addition to these cash
expenditures, the transaction contemplates that certain executives will roll
over an aggregate of $340,613.75 of option value of Specialty Catalog for stock
and option value in the surviving corporation, while the Continuing Stockholders
will exchange $7.5 million of common stock value of Specialty Catalog into
common stock of Acquisition Corp. Acquisition Corp.'s receipt of cash proceeds
from debt and equity financing sufficient to consummate the transactions
contemplated by the merger agreement is a condition precedent to Acquisition
Corp.'s obligation to consummate the merger agreement, the merger and the
transactions contemplated thereby. There can be no assurance that Acquisition
Corp. will satisfy this financing condition. However, the following arrangements
are intended to provide the necessary financing for the merger.
Fleet Bank Proposal
On December 27, 2000, Specialty Catalog entered into a $12.25 million
credit agreement (the "credit agreement") with Fleet National Bank ("Fleet") for
the purpose of refinancing its existing senior debt and to provide for its
working capital needs. The new credit facility, which may be increased to $13.0
million in 2002, replaced our former credit facilities with the Fleet. The
credit agreement includes a $9.0 million five-year term note (the "term loan")
and a $3.25
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million two-year revolving credit agreement (the "line of credit"). The amount
available on the line of credit increases as principal amortization payments on
the term loan are paid, such that the total credit agreement remains at $12.25
million over the two years of the line of credit agreement. The line of credit
provides for revolving credit loans and letters of credit with floating rates
based on margins over LIBOR or prime at our option. The term loan is for five
years and is being amortized at the rate of $450,000 a quarter beginning January
1, 2001.
As of December 30, 2000, $6.4 million of the term loan was under LIBOR
contract rates ranging from 8.6625 percent to 9.02813 percent and the remainder
of the term loan was at the base rate of 9.75 percent. As of December 30, 2000,
approximately $788,000 of the line of credit was at the base rate of 9.75
percent. We are required to pay a commitment fee of 0.375 percent per annum on
the unused portion of the commitment. At December 30, 2000, $2.5 million was
available under this line of credit.
The credit agreement is collateralized by a first perfected security
interest in all tangible and intangible assets of Specialty Catalog, subject to
certain permitted liens. The Agreement is subject to certain consolidated
covenants, including but not limited to leverage and debt service coverage
ratios, minimum earnings requirements, and a restriction on the payment of cash
dividends on Specialty Catalog common stock.
On April 30, 2001, Specialty Catalog received a term sheet from Fleet
relating to terms and conditions upon which Fleet might extend credit to
Specialty Catalog under an amended credit facility to be entered into in
connection with the merger.
The proceeds of the financing will be used to provide a portion of the
proceeds required to consummate the merger and, to provide working capital and
other general corporate needs of Specialty Catalog as the surviving corporation
and its subsidiaries. A copy of the Fleet term sheet is filed as an exhibit to
the Schedule 13E-3 filed by Specialty Catalog and its affiliates and is
incorporated herein by reference.
Senior Subordinated Notes
Specialty Catalog anticipates that it will obtain approximately $7.5
million of financing from LEG Partners III SBIC, L.P. and LEG Partners Debenture
SBIC, L.P. (collectively, "LEG Partners"), which are each affiliates of Golub
Associates, for use in connection with the merger agreement, the merger and the
transaction contemplated thereby. For a detailed description of LEG Partners,
please read "INFORMATION ABOUT THE TRANSACTION PARTICIPANTS." It is anticipated
that LEG Partners, III, who currently holds approximately 14% of the outstanding
shares of Specialty Catalog common stock, will continue to be a stockholder of
Specialty Catalog after the merger.
On May 4, 2001, Specialty Catalog, Acquisition Corp., Golub Associates and
LEG Partners III, entered into a letter of intent (the "Golub letter of intent")
regarding Golub Associates consideration of a potential subordinated debt and
warrant investment in Acquisition Corp. to finance the merger. Pursuant to the
terms of the letter of intent, Golub Associates and its affiliates are to
receive (i) $7.5 million of senior subordinated debt, at the annual rate of
interest of 14.0% (12.5% in cash and 1.5% deferred), and (ii) warrants to
purchase approximately 13.4% of the fully diluted equity of Specialty Catalog.
Pursuant to the Golub letter of intent, the senior subordinated notes (the
"Notes") will have the following features:
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o a maturity of the shorter of (i) six months longer than the senior term
loan or (ii) sixty-six months;
o subordinated to the senior bank financing;
o quarterly principal payments equal to 4.5% of the original principal
amount commencing June 30, 2003, with the balance due upon maturity;
and
o cash interest payable quarterly.
Pursuant to the Golub letter of intent, the senior subordinated note will
contain covenants customary for this type of financing, including, without
limitation, pro rata rights of first refusal on subsequent financing, minority
investor protections including certain put rights, and board of director
participation.
In addition, LEG Partners III has the right, at its option, to roll over,
on the same basis as other equity investors of Acquisition Corp., a portion of
its common stock ownership of Specialty Catalog.
The Golub letter of intent provides that in the event Specialty Catalog and
Acquisition Corp. proceed with such a transaction, the parties may not use
subordinated debt financing from any other source other than Golub Associates to
finance the transaction. The letter of intent also provides that Golub
Associates is to be reimbursed for certain expenses incurred in connection with
the financing of the transaction.
The Golub letter of intent is not a financing commitment from Golub
Associates. A commitment letter for the financing is presently being discussed
and may contain terms and provisions that are different than those discussed
above. Neither Golub Associates nor its investment affiliates are under any
obligation to provide this financing until each of the terms in the Golub letter
of intent has been met to their sole satisfaction and all of the financing
documents in form and substance satisfactory to Golub Associates and its
investment affiliates have been executed by the parties.
The foregoing is a brief summary of the material provisions of the Golub
letter of intent. This summary is qualified in its entirety with reference to
the Golub letter of intent, a copy of which is filed as an exhibit to the
Schedule 13E-3 filed by Specialty Catalog incorporated herein by reference.
Note and Warrant Purchase Agreement
The following describes the material terms of the note and warrant purchase
agreement based upon a draft which is believed to be in substantially the form
to be entered into prior to the merger.
The full text of the proposed form of draft note and warrant purchase
agreement is filed as an exhibit to the Schedule 13E-3 filed by Specialty
Catalog and its affiliates and is incorporated herein by reference. We encourage
you to read the note and warrant purchase agreement, because it contains
substantially all of the material provisions that will govern the subordinated
debt portion of financing for the merger.
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Pursuant to the note and warrant purchase agreement, Specialty Catalog will
issue and sell to LEG Partners, for cash (i) $7,500,000 principal amount of
its 14% Series A Senior Subordinated Notes due June 30, 2006 (the "Notes") and
(ii) warrants to purchase shares of the common stock of Specialty Catalog.
Terms of the Notes. The Notes represent a promise to repay the principal
amount of $7,500,000, payable in quarterly installments of 4 1/2 % each,
commencing on June 30, 2003 and continuing until June 30, 2006. Interest will
accrue quarterly at a rate of 14% (including a current payment of 12.5%). At
least approximately 89% of the interest is to be paid in cash by wire transfer
of immediately available funds at each interest payment date, and the balance of
any unpaid interest will be added to the principal due. The interest rate on the
Notes in the event of a default on payment of principal of the Notes is 18%.
Each of SC Corporation (d/b/a SC Direct), SC Publishing, Inc. and Daxbourne
International Limited are expected to be parties to the note purchase and
warrant agreement.
The note and warrant purchase agreement provides that Specialty Catalog may
prepay the Notes in an amount of at least $250,000 at any time, subject to
certain premium charges. Following three-day notice, an amount of the principal
of the Notes, together with accrued interest thereon, may be paid if, in the
twelve month period after the sale of the Notes is consummated, Specialty
Catalog pays a premium of 7% of the principal amount to be prepaid. Similarly,
in each of the 24, 36 and 48 month periods following consummation of the sale of
the Notes, a 6%, 5% or 3% premium, respectively, will be assessed on any
prepayment. Sixty months after the consummation of the sale of Notes, no premium
is required to accompany any prepayment of the notes.
Unless a majority of the holders of the Notes consent to forgo the
applicable restrictions, a mandatory prepayment of the Notes must be made if the
following events occur:
o A change of control of Specialty Catalog, among other things (as more
fully described in the note and warrant purchase agreement): the Notes
must be prepaid in full.
o Sale of 25% or more of Specialty Catalog's assets or another
transaction accomplishing same: the Notes must be prepaid in full.
o 90 days after the end of each fiscal year, Specialty Catalog must
prepay the Notes in an amount equal to the greater of (a) one-half of
25% of the consolidated excess cash flow, or (b) 25% of such
Consolidated Excess Cash Flow less the amount required to be paid to
Fleet Bank, Specialty Catalog's senior lender.
Conditions Precedent. The note and warrant purchase agreement stipulates
certain conditions which must be satisfied in order to obligate LEG Partners to
purchase the Notes. The majority of these conditions are customary provisions,
while some are tailored to the circumstances of the merger and the particular
terms of the Notes. Accordingly, the following is a summary of certain
restrictions and requirements that require compliance by Specialty Catalog and
Acquisition Corp. together and separately, as applicable:
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o On the date the note and warrant purchase agreement is consummated, and
after allowing for the payment of the merger consideration, Specialty
Catalog and Acquisition Corp. must have, on a consolidated basis,
$2,000,000 of "excess cash or senior debt available."
o LEG Partners must receive their pro rata shares of: (i) a funding fee
of $150,000, less any amounts paid by Specialty Catalog, as a
commitment fee prior to consummation of the sale and purchase of the
Notes, and (ii) costs and expenses incurred in connection with the
transaction.
o LEG Partners must be satisfied with the terms of the merger documents
and with the legal structure and capitalization of Specialty Catalog
post-merger.
o Specialty Catalog must have minimum EBITDA for the twelve-month period
ending on the date of the latest financial statements, of not less than
$5,810,000 (as adjusted for certain permitted exceptions).
Affirmative and Negative Covenants. The note and warrant purchase agreement
provides that Specialty Catalog will agree to provide the holders of the Notes
with certain rights, to abide by certain ongoing requirements and to use the
proceeds from the sale of the Notes for specified purposes in a particular
manner. In summary, Specialty Catalog will agree to the following covenants:
o LEG Partners will have the right to have two representatives attend
all meetings of the board of directors, and at all times after either
the repayment in full of the Notes or upon and during the continuance
of a default under the note and warrant purchase agreement, LEG
Partners shall have a right to designate one member to the Board of
Directors, with permitted exceptions.
o Specialty Catalog cannot create or suffer to exist any lien upon its
property, income or profits except: (a) liens less than $50,000 in
value that arise in the ordinary course of business or from tax
obligations; (b) purchase money liens; (c) liens securing a
subsidiary's debt to Specialty Catalog; and (d) reservations, easements
and rights of way affecting real property.
o Specialty Catalog cannot incur any debt other than certain permitted
indebtedness.
o Specialty Catalog cannot make any acquisitions or loans other than: (a)
fixed assets used in the business and constituting capital
expenditures; (b) goods used in the manufacture of products or services
offered by Specialty Catalog in the ordinary course; (c) loans to
employees less than $50,000 in the aggregate, outstanding.
o Specialty Catalog cannot sell, lease or otherwise dispose of any
property, assets or rights except: (a) inventory in the ordinary
course; (b) obsolete equipment and inventory; (c) arms-length sales in
which (i) 75% of the consideration is cash, (ii) the sale price is at
least fair market value, and (iii) the proceeds of the sale are applied
to payment of indebtedness for money borrowed (provided the value of
all property sold by Specialty Catalog in any year does not exceed 5%
of Specialty Catalog tangible assets as valued at the beginning of such
year).
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o Specialty Catalog cannot pay or increase any salaries, bonuses or other
compensation to officers, directors, stockholders or affiliates or pay
any management, consulting, advisory or similar fees to its officers,
directors, stockholders or affiliates unless such compensation is at
the same level set as of the date of the consummation of the note and
warrant purchase agreement or consistent with past practice and certain
other permitted exceptions.
o Specialty Catalog cannot enter into any leases, other than capital
leases, that would cause the annual aggregate payment obligations
thereunder to exceed $800,000.
o Specialty Catalog cannot transfer any cash or property to any officer,
director, employee or affiliate, enter into any contract or transaction
with any such person or modify any outstanding contract with any such
person, except in permitted circumstances.
o Specialty Catalog also agreed to maintain compliance with certain
financial covenants.
Warrant Agreement
The following describes the material terms of the warrant agreement based
upon a draft which is believed to be in substantially the form to be entered
into prior to the merger. The full text of the proposed form of the warrant
agreement is filed as an exhibit to the Schedule 13E-3 filed by Specialty
Catalog and its affiliates and is incorporated herein by reference.
In connection with the sale of the Notes, Specialty Catalog has agreed to
issue warrants to purchase the common stock of Specialty Catalog in an amount
equal to thirteen and four tenths percent (13.4%) of Specialty Catalog's fully
diluted common stock, at the time of exercise, subject to certain adjustments.
The aggregate percentage of shares of common stock into which the warrants are
convertible may be lower as a result of certain capital stock issuances and
grants of permitted dilutive options, as more fully described in the warrant
agreement.
Terms of the Warrants. The exercise price for a holder's warrant will be
$.01 per share for each share of Specialty Catalog's common stock issuable upon
exercise of such warrant. The warrants will be exercisable for ten years from
issuance. Holders of shares underlying the warrants will be entitled to
customary registration rights with respect to registrations of Specialty
Catalog's securities under the Securities Act.
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Put Option. At the written request and upon due notice, as required, of any
holder or holders of 50% or more of the warrants outstanding at any time,
Specialty Catalog will purchase the number of warrants specified by such
requesting holder. The put option may be exercised after five years following
the date of the warrant agreement or upon the occurrence of certain put events,
including an initial public offering of Specialty Catalog common stock, the sale
of 25% or more of Specialty Catalog's assets or certain other transactions
constituting a change of control. The "Put Price" of a warrant to be repurchased
by the Company will be an amount equal to the quotient of the fair value of the
company (as computed according to more detailed terms included in the warrant
agreement) divided by the number of shares of common stock constituting the
company's fully-diluted common stock.
Equity Contributions
Each of Alexander and Mr. Naggar intend to make capital contributions to
Acquisition Corp. in such amount that is required (after taking into account the
proceeds from Fleet and Golub Associates) in exchange for common stock of
Acquisition Corp. in order to enable Acquisition Corp. to consummate, the merger
and the transactions contemplated by the merger agreement. Pursuant to the
terms of their subscription agreements, Mr. Naggar and Alexander will contribute
to Acquisition Corp. approximately $200,000 and $1.47 million, respectively, in
exchange for shares of common stock of Acquisition Corp. See "SPECIAL
FACTORS--Related Agreements-Subscription Agreements."
At this time, the Continuing Stockholders do not have any alternative
financing plans. However, the Continuing Stockholders believe that Fleet will
extend credit to Specialty Catalog under an amended credit facility, that LEG
Partners will close on the $7.5 million loan and the transactions contemplated
by the subscription agreements will close in accordance with their respective
terms. Therefore, the Continuing Stockholders believe that they will have
sufficient financing to close the transactions contemplated by the merger
agreement.
TREATMENT OF OPTIONS
Immediately prior to the effective time of the merger, and except as
otherwise consented to by Acquisition Corp., each outstanding, unexercised
option to purchase the common stock (an "Option") granted under each of the
Specialty Catalog 1996 Stock Incentive Plan, as amended, and the Specialty
Catalog 2000 Stock Incentive Plan (collectively, the "Specialty Catalog Stock
Option Plans") other than Options held by the Continuing Stockholders and
certain members of management, whether or not exercisable, shall be cancelled by
Specialty Catalog in consideration of a cash payment, if applicable, from the
surviving corporation in an amount equal to the product of multiplying (a) the
excess, if any, of (x) $3.75, over (y) the per share exercise price of such
Option, by (b) the number of shares (of common stock) subject to such Option.
Any cash payment shall be net of any required withholding taxes. In other words,
all holders of Options exercisable at a price greater than $3.75 per share will
receive no consideration in return for the cancellation of their Options.
However, for each Option exercisable at a price less than $3.75 per share, the
option holder will receive for each Option to purchase a share an amount equal
to the excess of $3.75 over the per share exercise price of such Option, less
any required withholding taxes. The obligation to make any cash payment for
options issued outside of the Specialty Catalog Stock Option Plans shall be
handled on a
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negotiated basis and subject to obtaining any necessary consents of optionees to
the cancellation of such options. Also see "SPECIAL FACTORS--Related
Agreements-Stock Option Exercise Agreements."
RELATED AGREEMENTS
Employment Agreements
Joseph Grabowski. On May 8, 2000, Specialty Catalog entered into an
employment agreement with Mr. Grabowski. The term of the employment agreement
commenced on May 8, 2000 and, unless extended, terminates on May 7, 2002. Under
this employment agreement, Mr. Grabowski will receive an annual salary of
$300,000, along with other benefits and will be eligible for a performance bonus
of up to 100 percent of his annual salary, based upon performance as compared
against the annual performance plan. Upon executing the employment agreement,
Mr. Grabowski was granted options under our 2000 Stock Incentive Plan to
purchase 250,000 shares of our common stock at $2.50 per share, the then trading
price of the stock. Mr. Grabowski is also eligible to receive an additional
grant of 250,000 stock options, at a price which shall equal the trading price
on the date of the grant, as defined in the 2000 Stock Incentive Plan, after the
end of the first fiscal year in which our gross revenues exceed $120,000,000.
Specialty Catalog may terminate Mr. Grabowski's employment upon his death
or permanent disability, or if he engages in conduct that constitutes "cause"
under the employment agreement. Mr. Grabowski may terminate his employment for
"Good Reason" as defined in the employment agreement. In the event Mr.
Grabowski's employment is terminated by Specialty Catalog other than for
"cause", Mr. Grabowski will receive a "Termination Payment" as defined in the
employment agreement. The employment agreement contains non-competition and
other restrictions effective during the term of employment and for a one-year
period thereafter.
Prior to the closing of the merger, Specialty Catalog and Mr. Grabowski
will enter into an amendment to his employment agreement that will, among other
things, extend his term of employment until December 31, 2004, increase his
annual salary to $312,500, award Mr. Grabowski a bonus payment of $100,000 upon
the effectiveness of the amendment, and provides that Mr. Grabowski will be
granted options to purchase 54,135 shares of common stock under our 2001 Stock
Incentive Plan at an exercise price of $3.75 per share. The amendment will be
effective upon the consummation of the merger and the transactions contemplated
by the stock option exercise agreement between Specialty Catalog and Mr.
Grabowski and the option agreement between Specialty Catalog and Mr. Grabowski.
See "SPECIAL FACTORS--Related Agreements-Employment Agreements," "SPECIAL
FACTORS--Related Agreements-Stock Option Exercise Agreements" and "SPECIAL
FACTORS--Related Agreements-2001 Stock Incentive Plan"
The foregoing is a brief summary of the material provisions of the
amendment to Mr. Grabowski's employment agreement. A draft of the form of
amendment to Mr. Grabowski's employment agreement which is expected to be
entered into prior to the closing of the merger is filed as an exhibit to
Schedule 13E-3 filed by Specialty Catalog and its affiliates and is incorporated
herein by reference.
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Thomas McCain.
Thomas McCain has served as Specialty Catalog's Senior Vice President and
Chief Financial Officer since June 22, 1999. Specialty Catalog intends to enter
into an employment agreement with Mr. McCain. The term of the employment
agreement commences upon the closing of the merger and, unless extended,
terminates on August 31, 2003. Under this employment agreement, Mr. McCain will
receive an annual salary of $185,000, along with other benefits and will be
eligible for a performance bonus of $40,000 for fiscal year 2001 and 20 percent
of his annual salary for each fiscal year thereafter based upon certain
business-related performance goals. The employment agreement also provides that
Mr. McCain will be granted options to purchase 23,049 shares of Specialty
Catalog common stock under our 2001 Stock Incentive Plan at an exercise price of
$3.75 per share.
Specialty Catalog may terminate Mr. McCain's employment for any reason
including, but not limited to, his death or permanent disability, or if he
engages in conduct that constitutes "cause" under the employment agreement. In
the event Mr. McCains' employment is terminated by Specialty Catalog for any
reason, Mr. McCain will receive a termination payment as more fully described in
the employment agreement. The employment agreement contains non-competition and
other restrictions effective during the term of employment and for a one-year
period thereafter. This employment agreement will be effective upon the
consummation of the merger and the transactions contemplated by the stock option
exercise agreement between Specialty Catalog and Mr. McCain. See "SPECIAL
FACTORS--Related Agreements-Stock Option Exercise Agreements" and "SPECIAL
FACTORS--Related Agreements-2001 Stock Incentive Plan."
The foregoing is a brief summary of the material provisions of Mr. McCain's
employment agreement. A copy of a draft of Mr. McCain's employment agreement
which is in substantially the form that is intended to be entered into prior to
the closing of the merger is filed as an exhibit to Schedule 13E-3 filed by
Specialty Catalog and its affiliates and is incorporated herein by reference.
Stockholders Agreement
The following is a brief summary of the material provisions of the
stockholders agreement. A copy of the stockholders agreement is filed as an
exhibit to Schedule 13E-3 filed by Specialty Catalog and is incorporated herein
by reference.
Immediately prior to the signing of the merger agreement, on May 4, 2001,
each of the stockholders of Acquisition Corp. entered into the stockholders
agreement. The stockholders agreement provides that the board of directors of
Acquisition Corp. shall consist of six directors and that all parties to the
stockholders agreement will vote all of their shares of Acquisition Corp. to
elect to the board of directors:
o two directors designated by Alexander Enterprise Holding Corp. which
shall initially include Martin Franklin and Eric Hansen,
o two directors, designated by Mr. Naggar together with First Global,
Oracle, Ionic and Three Greens which shall initially include Guy Naggar
and David Cicurel; and
o two directors, mutually designated by each of the designators above
which initially include Mr. Grabowski and Mr. McCain.
Pursuant to the terms of the stockholders agreement, simultaneously with
the closing of the transactions contemplated by the merger agreement and
immediately prior to the merger, the Continuing Stockholders other than
Acquisition Corp. shall purchase shares of common stock of Acquisition Corp. by
(i) contributing to Acquisition Corp., any or all of their shares of our common
stock, owned by each stockholder, (ii) making an additional cash contribution to
Acquisition Corp.; or (iii) a combination of (i) and (ii) above, in accordance
with the terms and conditions of a subscription agreement, to be entered into by
Specialty Catalog and each of the respective stockholders of Acquisition Corp.
See "SPECIAL FACTORS--Related Agreements-Subscriptions Agreements" below.
The stockholders agreement also provides for restrictions on the transfer
of shares, "take-along" obligations, "come-along" rights, pre-emptive rights and
rights of first offer with respect to the securities of Acquisition Corp.
Upon consummation of the merger, the stockholders agreement shall survive
and remain in full force and effect as the stockholders agreement of Specialty
Catalog.
Subscription Agreements
Each of the Continuing Stockholders entered into a subscription agreement
with Acquisition Corp. for a number of shares of Acquisition Corp. Pursuant to
the terms of their respective subscription agreements, the Continuing
Stockholders have agreed to contribute, and LEG Partners III is likely to
contribute,
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immediately prior to the closing of the merger, the number of shares of common
stock of Specialty Catalog indicated in the table set forth below to Acquisition
Corp. in exchange for the number of shares of common stock of Acquisition Corp.
indicated in the table set forth below
In addition, the subscription agreements entered into by each of Mr. Naggar
and Alexander provide that, immediately prior to the closing of the merger, Mr.
Naggar and Alexander shall purchase from Acquisition Corp. such number of shares
of Acquisition Corp. indicated in the table set forth below, for the aggregate
cash purchase price as indicated in the table set forth below. See "AMOUNT AND
SOURCE OF FUNDS AND FINANCING OF THE MERGER--Equity Contributions."
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES OF SHARES OF PURCHASE NUMBER OF
SPECIALTY ACQUISITION PRICE OF SHARES OF TOTAL NUMBER
CATALOG CORP. ADDITIONAL ACQUISITION OF SUBSCRIBED
CONTRIBUTED TO ACQUIRED SHARES OF CORP. SHARES OF
ACQUISITION PURSUANT TO ACQUISITION ACQUIRED BY ACQUISITION
CORP. CONTRIBUTION CORP. PURCHASE CORP.
- --------------------------------------------------------------------------------------------------------------------
Alexander Enterprise Holdings Corp. (1) 279,700 279,667 $1,473,501 392,934 672,634 (1)
- --------------------------------------------------------------------------------------------------------------------
Guy Naggar (2) 401,667 401,645 $199,268 53,138 454,805 (2)
- --------------------------------------------------------------------------------------------------------------------
First Global Holdings Limited (3) 244,655 244,642 - - 244,655 (3)
- --------------------------------------------------------------------------------------------------------------------
Oracle Investments and Holdings 244,656 244,643 - - 244,656 (3)
Limited (3)
- --------------------------------------------------------------------------------------------------------------------
Ionic Holdings LDC (3) 244,655 244,642 - - 244,655 (3)
- --------------------------------------------------------------------------------------------------------------------
Three Greens Holdings Limited (4) 98,376 98,370 - - 98,376 (4)
- --------------------------------------------------------------------------------------------------------------------
Martin Franklin 109,892 109,892 - - 109,892
- --------------------------------------------------------------------------------------------------------------------
The David Cicurel Settlement 12,659 12,659 - - 12,659
- --------------------------------------------------------------------------------------------------------------------
LEG Partners III SBIC, L.P. 190,215 190,215 - - 190,215
- --------------------------------------------------------------------------------------------------------------------
Wynnefield Partners Small Cap Value, 65,190 65,190 - - 65,190
L.P.
- --------------------------------------------------------------------------------------------------------------------
Wynnefield Partners Small Cap Value, 78,287 78,287 - - 78,287
L.P. I
- --------------------------------------------------------------------------------------------------------------------
Wynnefield Partners Small Cap Value 32,826 32,826 - - 32,826
Offshore Fund, Ltd.
- --------------------------------------------------------------------------------------------------------------------
(1) Pursuant to the stockholders agreement, Alexander also holds 33 shares of
common stock of Acquisition Corp. prior to entering into its subscription
agreement.
(2) Pursuant to the stockholders agreement, Mr. Naggar also holds 22 shares of
common stock of Acquisition Corp. prior to entering into its subscription
agreement.
(3) Pursuant to the stockholders agreement, each of First Global, Oracle, and
Ionic also hold 13 shares of common stock of Acquisition Corp. prior to
entering into its subscription agreement.
(4) Pursuant to the stockholders agreement, Three Greens also holds 6 shares of
common stock of Acquisition Corp. prior to entering into its subscription
agreement.
Among other things, each of the Continuing Stockholders also agreed (i) to
certain voting and transfer restrictions with respect to the portion of their
shares of Specialty Catalog, and (ii) to vote all of their shares of Specialty
Catalog in favor of the merger and the merger agreement. See "SUMMARY TERM
SHEET--Required Vote," "QUESTIONS AND ANSWERS ABOUT THE MERGER--What Vote is
Required," and "SUMMARY--Information Concerning the Meeting-Voting
Requirements."
The foregoing is a brief summary of the material provisions of the
subscription agreements. A copy of each of Mr. Naggar and Alexander's
subscription agreement is filed as an exhibit to the Schedule 13E-3 filed by
Specialty Catalog and is incorporated herein by reference. A form of the other
Continuing Stockholders' subscription agreement is filed as an exhibit to the
Schedule 13E-3 filed by Specialty Catalog and is incorporated herein by
reference.
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Stock Option Exercise Agreements
Under stock option exercise agreements entered into with Specialty Catalog,
each of the employees, officers, and directors listed below will, at the time of
the merger and pursuant to options granted under our 2000 Stock Incentive Plan,
purchase the number of shares of common stock of Specialty Catalog listed below,
payment for which shall be made in whole with shares of common stock of
Specialty Catalog obtained through the exercise of such options and surrendered
in lieu of the payment of cash for such exercise.
- -------------------------------------------------------------------------------------------------------------
NUMBER OF
NUMBER OF NUMBER OF ACQUIRED
OPTIONS TOTAL OPTIONS AGGREGATE NUMBER OF VALUE OF SHARES OF
EXCHANGED EXERCISED EXERCISE OPTIONS OPTIONS SPECIALTY
OPTIONEE FOR CASH PRICE SURRENDERED SURRENDERED CATALOG
- -------------------------------------------------------------------------------------------------------------
Joseph Grabowski (1) 0 250,000 $625,000.00 166,667 $208,333.75 83,333
- -------------------------------------------------------------------------------------------------------------
Richard Lipton 10,000 20,000 $50,000.00 13,333 $16,666.25 6,667
- -------------------------------------------------------------------------------------------------------------
Thomas McCain 6,667 13,333 $33,332.50 8,889 $11,111.25 4,444
- -------------------------------------------------------------------------------------------------------------
Stuart Rose 10,000 20,000 $50,000.00 13,333 $16,666.25 6,667
- -------------------------------------------------------------------------------------------------------------
Colleen Cheney 3,333 6,667 $16,667.50 4,445 $5,556.25 2,222
- -------------------------------------------------------------------------------------------------------------
Bradford Bishop 3,333 6,667 $16,667.50 4,445 $5,556.25 2,222
- -------------------------------------------------------------------------------------------------------------
Jan Santolla 3,333 6,667 $16,667.50 4,445 $5,556.25 2,222
- -------------------------------------------------------------------------------------------------------------
Richard Harris 5,000 2,500 $5,625.00 1,500 $2,250.00 1,000
- -------------------------------------------------------------------------------------------------------------
Guy Naggar 0 10,000 $25,000.00 6,667 $8333.75 3,333
- -------------------------------------------------------------------------------------------------------------
David Cicurel 0 10,000 $25,000.00 6,667 $8333.75 3,333
- -------------------------------------------------------------------------------------------------------------
Martin Franklin 0 50,000 $125,000.00 33,333 $41,666.25 16,667
- -------------------------------------------------------------------------------------------------------------
(1) The shares purchased by Mr. Grabowski will be fully vested and not subject
to forfeiture.
The stock option exercise agreements (other than the agreement with Mr.
Grabowski) also provide that the purchased shares shall vest in accordance with
a vesting schedule set forth therein. Unvested shares are subject to forfeiture
upon the option holder's termination of employment with Specialty Catalog. The
option holders have also agreed to become a party to, and be bound by the terms
and provisions of, the stockholders agreement.
The foregoing is a brief summary of the material provisions of the stock
option exercise agreements, a draft of the form of which is filed as an exhibit
to the Schedule 13E-3 filed by Specialty Catalog and is incorporated herein by
reference. A draft of the form of Mr. Grabowski's stock option exercise
agreement is also filed as an exhibit to the Schedule 13E-3 filed by Specialty
Catalog and is incorporated herein by reference.
Option Agreements
Certain officers and employees of Specialty Catalog or any of its
subsidiaries will be eligible to participate in the 2001 Stock Incentive Plan
pursuant to which the compensation
82
committee of the board of directors of Specialty Catalog will be authorized to
grant options to acquire up to approximately 10% of the outstanding capital
stock of Specialty Catalog after the closing of the merger. See "SPECIAL
FACTORS--Related Agreements-2001 Stock Incentive Plan."
It is expected that upon the consummation of the merger, each of our
employees listed below will enter into stock option agreements to purchase
shares of Specialty Catalog at an exercise price of $3.75, subject to certain
vesting requirements specified in their option agreement. The options will be
granted pursuant to the 2001 Stock Incentive Plan. For information concerning
the 2001 Stock Incentive Plan, please read "SPECIAL FACTORS--Related
Agreements-2001 Stock Incentive Plan."
--------------------------------------------------------
OPTIONEE NUMBER OF OPTIONS
--------------------------------------------------------
Joseph Grabowski 54,135
--------------------------------------------------------
Richard Lipton 20,855
--------------------------------------------------------
Thomas McCain 23,049
--------------------------------------------------------
Stuart Rose 3,333
--------------------------------------------------------
Colleen Cheney 7,778
--------------------------------------------------------
Bradford Bishop 7,778
--------------------------------------------------------
The foregoing is a brief summary of the material provisions of the option
agreements, the form of which is filed as an exhibit to the Schedule 13E-3 filed
by Specialty Catalog and is incorporated herein by reference.
In addition, in accordance with the terms of the amendment to Mr.
Grabowski's employment agreement, Mr. Grabowski's option agreement contains
additional provisions regarding vesting. The vesting of options granted to Mr.
Grabowski under the 2001 Stock Incentive Plan shall be accelerated and become
immediately exercisable upon certain events including (i) a "change of control"
of Specialty Catalog or (ii) the termination of Mr. Grabowski's employment by
Specialty Catalog for any reason other than his death or disability or for
"cause." See "SPECIAL FACTORS--Related Agreements-Employment Agreements" and
"SPECIAL FACTORS--Related Agreements-2001 Stock Incentive Plan."
A draft of the form of Mr. Grabowski's option agreement is filed as an
exhibit to the Schedule 13E-3 filed by Specialty Catalog and is incorporated
herein by reference.
2001 Stock Incentive Plan
Administration and Eligibility. The Specialty Catalog Corp. 2001 Stock
Incentive Plan authorizes the issuance of a number of shares representing
approximately 10% of the issued and outstanding capital stock of Specialty
Catalog at the closing of the merger upon the exercise of stock options or in
connection with the issuance of restricted stock and stock bonuses. The 2001
Stock Incentive Plan authorizes the granting of stock options, restricted stock
and stock bonuses to employees, officers, directors, consultants, independent
contractors and advisors of Specialty Catalog and its parents, affiliates, and
subsidiaries provided such
83
consultants, independent contractors and advisors render bona fide services not
in connection with the offer and sale of securities in a capital-raising
transaction.
The 2001 Stock Incentive Plan provides for its administration by either a
committee consisting solely of two or more outside directors or the Board of
Directors (the "Administrator"). In general, the Administrator, in its sole
discretion, determines which eligible employees, officers, directors,
consultants, independent contractors and advisors of Specialty Catalog and its
subsidiaries may participate in the 2001 Stock Incentive Plan and the type,
extent and terms of the equity-based awards to be granted to them. The 2001
Stock Incentive Plan provides for the grant of both incentive stock options
("ISOs") that qualify under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and non-qualified stock options ("NQSOs"). ISOs may be
granted only to employees of Specialty Catalog or of a parent or subsidiary of
Specialty Catalog. NQSOs (and all other awards other than ISOs) may be granted
to employees, officers, directors, consultants, independent contractors and
advisors that render bona fide services not in connection with the offer and
sale of securities in a capital-raising transaction. The exercise price of ISOs
must be at least equal to the fair market value of the Specialty Catalog common
stock on the date of grant. The exercise price of ISOs granted to 10%
shareholders must be at least equal to 110% of that value. The exercise price of
NQSOs may be above or below the fair market value of the Specialty Catalog
common stock on the date of grant. The maximum term of options granted under the
2001 Stock Incentive Plan is ten years. Awards granted under the 2001 Stock
Incentive Plan may not be transferred in any manner other than by will or by the
laws of descent and distribution, except as determined by the Administrator, and
may be exercised during the lifetime of the optionee only by the optionee
(unless otherwise determined by the Administrator and set forth in the award
agreement with respect to awards that are NQSOs). Options granted under the 2001
Stock Incentive Plan generally expire three months after the termination of the
optionee's service to Specialty Catalog or a parent, affiliate, or subsidiary of
Specialty Catalog, except in the case of death or disability, in which case the
options generally may be exercised up to 6 months following the date of death or
termination of service. Options will generally terminate immediately upon
termination for cause.
Restricted Stock. The Administrator may make grants of restricted stock for
cash or other consideration, as the Administrator determines. The number of
shares of Common Stock granted to each grantee will be determined by the
Administrator. Grants of restricted stock will be made subject to such
restrictions and conditions as the Administrator may determine in its sole
discretion, including periods of restriction on transferability during which
time the grant may be required to be deposited with an escrow agent, if the
Administrator so determines.
Other. Among other things, the 2001 Stock Incentive Plan also provides for
awards of stock bonuses for past or future services rendered to Specialty
Catalog.
The foregoing is a brief summary of the material provisions of the 2001
Stock Incentive Plan. A draft of the 2001 Stock Incentive Plan is filed as an
exhibit to the Schedule 13E-3 filed by Specialty Catalog and is incorporated
herein by reference.
Engagement of Marlin Holdings, LLC
84
On February 16, 2001, Specialty Catalog engaged Marlin Holdings, LLC
("Marlin") to assist Specialty Catalog with the structure, financing and
coordination of any management buyout or other privatization transaction. The
agreement with Marlin provides for reimbursement of expenses incurred by Marlin
on any such endeavors, and payment of $250,000 upon closing of a transaction,
subject to downward adjustment as provided in the agreement. Martin Franklin, a
director of Specialty Catalog, is Chairman and Chief Executive Officer of
Marlin.
The foregoing is a brief summary of the material provisions of the Marlin
engagement letter. This summary is qualified in its entirety with reference to
the Marlin engagement letter, a copy of which is filed as an exhibit to Schedule
13E-3 filed by Specialty Catalog and incorporated herein by reference.
ESTIMATED FEES AND EXPENSES
Estimated fees and expenses to be incurred by Specialty Catalog upon
consummation of the merger are approximately as follows:
Financing Fees and Expenses................................... $241,875
Advisory Fees and Expenses.................................... 215,000
Legal, Accounting and Consulting Fees and Expenses............
Sullivan & Cromwell....................................... 100,000
Kane Kessler.............................................. 310,680
Management Bonus.............................................. 100,000
Directors and Officers' Insurance............................. 46,000
Depositary and Paying Agent Fees and Expenses................. 10,000
SEC Filing Fee................................................ 2,445
Printing, Mailing and Miscellaneous Costs..................... 47,000
----------
Total................................................ $1,073,000
==========
Specialty Catalog, as the surviving company, will be responsible for all of
the foregoing fees and expenses if the merger occurs. If the merger is not
consummated, each of Specialty Catalog, on the one hand, and Acquisition Corp.,
on the other, will pay its own fees and expenses, provided that Specialty
Catalog will be obligated under certain circumstances to reimburse Acquisition
Corp. for its expenses. See "THE MERGER AGREEMENT -- Termination Fee and
Expenses."
PROVISIONS FOR UNAFFILIATED SECURITY HOLDERS
No provision has been made to grant unaffiliated stockholders of Specialty
Catalog (i.e., stockholders of Specialty Catalog other than the Continuing
Stockholders) access to the corporate files of Specialty Catalog or any other
party to the merger or to obtain counsel or appraisal services at the expense of
Specialty Catalog or any other such party.
85
SUMMARY OF THE MERGER AGREEMENT
The following describes the material terms of the merger agreement. The
full text of the merger agreement is attached to this proxy statement as
Appendix A and is incorporated herein by reference. We encourage you to read the
entire merger agreement. It is the legal document that governs the merger.
Effective Time of the Merger. The merger agreement provides that the
closing of the merger will take place as soon as practicable after the
satisfaction or waiver of the conditions to the merger. At the closing, the
parties will file the necessary documents with the Secretary of State of the
State of Delaware to complete the merger. We expect that, if all conditions to
the merger have been satisfied or waived, the effective time will occur in the
summer of the year 2001.
General. The merger agreement provides that, subject to satisfaction of
several conditions, Acquisition Corp. will be merged with and into Specialty
Catalog, and that following the merger, the separate existence of Acquisition
Corp. will cease and Specialty Catalog will continue as the surviving
corporation. At the effective time, and subject to the terms and conditions set
forth in the merger agreement, each of the following will occur:
o the stockholders of Specialty Catalog will receive $3.75 in cash,
without interest, for each share of Specialty Catalog common stock that
they own, other than (i) shares owned by Acquisition Corp. and (ii)
shares owned by stockholders who have perfected their dissenters'
appraisal rights. Shares held in the treasury of Specialty Catalog will
be canceled in the merger;
o each outstanding, unexercised option, warrant or other right to
purchase Specialty Catalog's common stock issued pursuant to the 1996
Stock Incentive Plan, as amended, and the 2000 Stock Incentive Plan
will be canceled and converted into consideration of a cash payment
equal to for the difference between $3.75 per share and the exercise
price of the option if the exercise price is less than $3.75 per share,
less any required withholding taxes; and
o Specialty Catalog common stock will no longer be publicly traded.
Surrender and Exchange of Stock Certificates. Prior to the effective time
of the merger, Acquisition Corp. will deposit with an exchange agent, cash equal
to the amount to be paid to holders of Specialty Catalog common stock as a
result of the merger. Promptly after the effective time of the merger, the
exchange agent will send to each record holder of Specialty Catalog common stock
instructions how to exchange such holder's Specialty Catalog common stock
certificate for $3.75 in cash. Upon surrender to the exchange agent of an
outstanding certificate or certificates which represent Specialty Catalog common
stock and acceptance of such certificate or certificates by the exchange agent,
the exchange agent will deliver to the holder of such certificate or
certificates the amount of merger consideration owed to the holder. No
86
interest will be paid or accrue on any cash payable to any holder of Specialty
Catalog common stock.
Any portion of the merger consideration payable to holders of Specialty
Catalog common stock which remains undistributed for 180 days after the
effective time shall be delivered to the surviving corporation. After that
period of time, any holder of Specialty Catalog common stock who has not
previously exchanged his certificates may only look to the surviving corporation
and only as a general creditor for payment of that portion of the merger
consideration owed to him under the merger agreement.
If you do not have your Specialty Catalog common stock certificate, you may
make an affidavit of that fact. In addition, the surviving corporation may
require that you indemnify it against any claim that may be made against it or
Acquisition Corp. with respect to the missing stock certificate. Upon receipt of
the affidavit and any required indemnity, the exchange agent will issue the
merger consideration payable to you.
Stock Option Plan and Related Matters. Specialty Catalog has agreed to
effect the cancellation at the effective time of all outstanding, unexercised
options, warrants or other rights to purchase Specialty Catalog's common stock
issued pursuant to the 1996 Stock Incentive Plan, as amended, and the 2000 Stock
Incentive Plan in exchange for a cash payment. For each canceled option,
warrant, or other right to purchase common stock, the holder will receive a cash
payment equal to the difference between $3.75 per share and the exercise price
of the option if the exercise price is less than $3.75 per share, less any
required withholding taxes. Upon Acquisition Corp.'s request, we must take all
necessary action to terminate our current employee stock option plans, the 1996
Stock Incentive Plan and the 2000 Stock Incentive Plan, as of the effective time
of the merger.
Representations and Warranties. The merger agreement contains customary
representations and warranties of Specialty Catalog and its subsidiaries
relating to various aspects of its business and financial statements and other
matters, including among other things:
o its organization, qualification, standing and power,
o its certificate of incorporation, bylaws and stock transfer records,
o its capital structure,
o its subsidiaries,
o its authority to enter into and the validity and effectiveness of the
Merger Agreement,
o the absence of conflicts, violations or defaults under its certificate
of incorporation, bylaws and certain other agreements in connection
with the merger,
o the consents and approvals required of certain governmental entities
relating to the merger,
o the documents and reports filed with the Securities and Exchange
Commission and the accuracy and completeness of the information
contained therein,
o the absence of defaults under its certificate of incorporation, bylaws
and material contracts,
87
o its compliance with applicable laws,
o the absence of certain changes since December 30, 2000,
o the absence of undisclosed liabilities,
o any litigation or other third-party claims relating to the merger or
the transactions contemplated thereby,
o this proxy statement and the Schedule 13E-3 filed with the S.E.C. and
the accuracy and completeness of the information contained herein and
therein,
o environmental matters,
o the inapplicability or waiver of any anti-takeover laws,
o the determinations of the special committee and the board of directors
and the fairness of the merger, and
o the identity of its financial advisor.
The merger agreement also contains customary representations and warranties
of Acquisition Corp. relating to various aspects of their businesses, including
among other things:
o its organization, qualification, standing and power,
o its authority to enter into and the validity and effectiveness of the
merger agreement,
o the absence of conflicts, violations or defaults under their
organizational documents and certain other agreements in connection
with the merger,
o the absence of required consents and approvals of certain governmental
entities relating to the merger,
o the vote of the Board of Directors and stockholders of Acquisition
Corp. in favor of the merger,
o its payment of any brokers, finders or investment banker fees, and
o the accuracy and completeness of the information contained in the
Schedule 13E-3 filed herewith.
The representations and warranties expire at the effective time of the
merger, or upon the termination of the merger agreement in accordance with its
terms, unless waived earlier by either party.
Conduct of Business Prior to the Merger. Specialty Catalog has agreed that
prior to the merger it will operate its business in the ordinary course
consistent with past practices and will use its reasonable efforts to preserve
intact its business organization, retain the services of its current officers
and employees, maintain satisfactory relationships with third parties and
maintain its insurance coverage.
In addition, the merger agreement places specific restrictions on the
ability of Specialty Catalog and its subsidiaries to:
o amend its certificate of incorporation or bylaws (or other charter
documents);
o authorize for issuance, issue, sell, deliver, or pledge any capital
stock, debt or other securities convertible into capital stock or
equivalents, or amend
88
any of the terms of the foregoing, other than the issuance of Specialty
Catalog common stock upon the exercise of outstanding rights under its
stock option plans;
o except for the issuance of Specialty Catalog common stock upon the
exercise of options or the repurchase of common stock to the extent
required under existing employee stock repurchase agreements or the
cancellation of non-vested options of terminated employees:
o split, combine or reclassify any shares of Specialty Catalog capital
stock, or authorize or propose the issuance or authorization of any
other securities in respect of, in lieu of, or in substitution for
shares of Specialty Catalog capital stock, or declare, set aside or
pay any dividend or other distribution (whether in cash, stock or
property or any combination thereof) in respect of Specialty Catalog
capital stock, adopt or approve any rights plan, or repurchase,
redeem or otherwise acquire any of Specialty Catalog's securities or
its subsidiaries' securities, or
o declare or pay any dividend of any kind, make any payment of cash or
other property to stockholders or to terminate, cancel or otherwise
settle any outstanding options under the Specialty Catalog stock
option plan;
o issue any new options or equivalent instruments of any kind;
o without prior consultation with Acquisition Corp., commence any
litigation or arbitration other than in accordance with past practice
or settle any litigation or arbitration involving payments by Specialty
Catalog of more than $50,000, or if as part of such settlement, agree
to any restrictions on the operations of Specialty Catalog or its
subsidiaries;
o waive, release or amend its rights under any confidentiality,
"standstill" or similar agreement that Specialty Catalog entered into
in connection with its consideration of a potential strategic
transaction; provided, however, that Specialty Catalog may waive,
release or amend its rights under any such confidentiality,
"standstill" or similar agreement if the board of directors of
Specialty Catalog determines, based on the advice of independent legal
counsel, that failure to do so would be reasonably likely to constitute
a breach of Specialty Catalog's duties to its stockholders; and
o agree to take any actions prohibited by the merger agreement.
No Solicitation. In the merger agreement, Specialty Catalog has agreed
that:
o it will not, and will not authorize or permit any of its
subsidiaries or any of its directors, officers, employees or other
representatives (including all of its advisors) to, directly or
indirectly, solicit, initiate, request or take any other action to
facilitate (including by way of providing non-public information)
any inquiries or the
89
making of any Acquisition Proposal (as defined below) or participate
in any discussions or negotiations regarding any Acquisition
Proposal;
o it will immediately communicate to Acquisition Corp. orally and in
writing any request for non-public information, any Acquisition
Proposal, and any decision by Specialty Catalog to furnish
information regarding Specialty Catalog and its subsidiaries to a
third party who has made an Acquisition Proposal and plans to
participate in discussions regarding the Acquisition Proposal,
including the material proposed terms of the Acquisition Proposal
and the identity of the third party, and subject to certain
specified confidentiality obligations, will keep Acquisition Corp.
reasonably informed of the status of such request or Acquisition
Proposal and will provide updated information with respect to the
material terms and the third party upon request by Acquisition
Corp.; and
o it will communicate to Acquisition Corp., orally and in writing, at
least 24 hours (but notice given on a non-business day, or after
6:00 p.m. on a business day, takes effect on the first business day
thereafter) prior to entering into an acquisition agreement related
to a Superior Proposal (as defined below), the identity of the third
party and the material proposed terms of the Superior Proposal, and,
subject to certain specified confidentiality obligations, will
provide updated information with respect to such third party and the
material proposed terms of such Superior Proposal upon request by
Acquisition Corp.
However, the merger agreement does not prohibit:
o the Specialty Catalog board of directors from determining, in good
faith, after consulting with outside counsel or its financial advisor,
that in order to act in a manner consistent with its fiduciary duties
to the Specialty Catalog stockholders under applicable law, that
Specialty Catalog may, following receipt from a third party of an
Acquisition Proposal that may lead to a Superior Proposal:
o furnish information about Specialty Catalog and its subsidiaries
pursuant to a confidentiality agreement with such third party which
contains certain terms specified in the merger agreement, and
o participate in discussions or negotiations regarding the Acquisition
Proposal with the party making the Acquisition Proposal; or
o the Specialty Catalog board of directors from determining, in good
faith, after consulting with outside counsel or its financial advisor,
that in order to act in a manner consistent with its fiduciary duties
to the Specialty Catalog stockholders under applicable law, the board
of directors must:
90
o withdraw, modify, or propose publicly to withdraw or modify, its
approval or recommendation of the merger agreement and the merger,
o approve or recommend, or propose publicly to approve or recommend, a
Superior Proposal, or
o cause Specialty Catalog to enter into an agreement related to a
Superior Proposal and terminate the merger agreement and accept the
Superior Proposal.
The term "Acquisition Proposal" means any inquiries or the making of any
proposal or offer from any third party other than Acquisition Corp. or its
affiliates regarding any merger, consolidation, share exchange,
recapitalization, sale of substantial assets (other than in the ordinary course
of business), sale or purchase of (or right to sell or purchase) shares of
capital stock (other than pursuant to the exercise of stock options outstanding
on the date of the Merger Agreement) tender offer or similar transactions
involving Specialty Catalog or any of its subsidiaries.
The term "Superior Proposal" means any Acquisition Proposal that the
Specialty Catalog board of directors determines in good faith (after
consultation with and based upon the advise of outside counsel or its financial
advisor) to be of a higher price per share and more favorable than the merger.
Conditions to the Merger. The respective obligations of each party to
complete the merger are subject to the satisfaction prior to the effective time
of the following conditions:
o adoption of the merger agreement and the merger by the affirmative vote
of the holders of a majority of shares of Specialty Catalog common
stock;
o no temporary restraining order, preliminary or permanent injunction,
judgment or other order, decree or ruling, nor any statute, rule,
regulation, SEC stop order or other order preventing the consummation
of the merger will be in effect; and
o upon the written request of either Acquisition Corp., or Specialty
Catalog, Specialty Catalog shall deliver to the Acquisition Corp. or
the special committee, (i) a pro forma balance sheet of Specialty
Catalog, on a consolidated basis, as of the effective time of the
merger (and reflecting any debt incurred by the Specialty Catalog to
finance the merger), (ii) a Solvency Certificate regarding solvency
matters of Specialty Catalog, and (iii) projections for Specialty
Catalog's operations, on a consolidated basis, for the period covered
by the solvency certificate.
The obligation of Acquisition Corp. to effect the merger is further subject
to the following conditions:
o the receipt of cash proceeds from debt and equity financings sufficient
to consummate the transactions contemplated by this Agreement;
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o the representations and warranties of Specialty Catalog and its
subsidiaries set forth in the merger agreement will be true and correct
in all material respects both as of the date of the merger agreement
and as of the closing date of the merger, except for any
representations and warranties that address matters only as of a
particular date (which shall remain true and correct as of such date);
o Specialty Catalog will have performed and complied, individually or in
the aggregate, with the covenants required to be performed by it under
the merger agreement at or prior to the closing date;
o there shall not have occurred any event or condition, or series of
events or conditions, that has had or would reasonably be expected to
have a material adverse effect on the business, properties, assets,
results of operations or financial condition of Specialty Catalog and
its subsidiaries taken as a whole;
o Specialty Catalog will have obtained consent to the merger from certain
third parties necessary to consummate the merger;
o the Rights Plan of Specialty Catalog will have been terminated at
Acquisition Corp.'s reasonable satisfaction; and
o Specialty Catalog stockholders holding voting stock representing more
than 5% of its outstanding stock will not have exercised their
dissenters' rights.
The obligation of Specialty Catalog to effect the merger is further subject
to the following conditions:
o the representations and warranties of Acquisition Corp. set forth in
the merger agreement will be true and correct in all material respects
both as of the date of the merger agreement and as of the closing date
of the merger, except for any representations and warranties that
address matters only as of a particular date (which shall remain true
and correct as of such particular date);
o Acquisition Corp. will have performed and complied in all material
respects with the covenants required to be performed by it under the
merger agreement at or prior to the closing date; and
o Acquisition Corp. will have deposited the deposit amount with the
exchange agent to be held in trust for the benefit of the holders of
certificates of Specialty Catalog common stock.
Termination. The merger agreement may be terminated at any time prior to
the merger as follows:
o by mutual written consent of the boards of directors of Specialty
Catalog and Acquisition Corp.;
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o by either Specialty Catalog or Acquisition Corp. if any court of
competent jurisdiction in the United States or other governmental
entity issues a final and non-appealable order, decree or ruling, or
takes any other action restraining, enjoining or otherwise prohibiting
the merger;
o by either Specialty Catalog or Acquisition Corp. if there has been a
material breach by the other party of any representation, warranty,
covenant or agreement contained in the merger agreement, unless the
breach is cured within 20 days after the giving of written notice of
the breach;
o by either Specialty Catalog or Acquisition Corp., if Specialty
Catalog's board of directors has withdrawn or modified, in any manner
which is adverse to Acquisition Corp., its recommendation or approval
of the merger agreement and the merger, or has approved an alternative
acquisition proposal, or has failed to endorse the merger with
Acquisition Corp. in the proxy statement or publicly resolved to do any
of the foregoing;
o by Acquisition Corp. if Specialty Catalog enters into an acquisition
agreement relating to an Acquisition Proposal, or if there has been a
material breach by Specialty Catalog of any covenant or agreement set
forth in merger, which breach arises primarily from the actions taken,
or the failure to act, by the Special Committee, unless cured within 20
days after the giving of written notice of the material breach;
o by Specialty Catalog, if it enters into an acquisition agreement
relating to an Acquisition Proposal provided Specialty Catalog has made
all regulatory filings pursuant to the merger; or
o by either Specialty Catalog or Acquisition Corp. if the effective time
has not occurred by August 31, 2001.
o Termination Fees and Expenses. Whether or not the merger is
consummated, most expenses incurred in connection with the merger
agreement and the merger will be paid by the party incurring those
expenses. In the event of the termination of the merger agreement,
additional expenses outlined below will be paid by the corresponding
party.
o Specialty Catalog will reimburse Acquisition Corp. for all its
reasonable out-of-pocket expenses incurred in connection with the
merger and the consummation of the transactions contemplated by the
merger (including, reasonable attorneys' fees and disbursements,
depository fees and expenses, fees payable to lenders, the fees of
accountants and financial advisors, and filing fees and printing costs)
as liquidated damages if the merger agreement is terminated:
o by Acquisition Corp. if Specialty Catalog enters into an acquisition
agreement relating to an Acquisition Proposal, or if there has been a
material breach by Specialty Catalog of any covenant or agreement set
forth in merger, which breach arises primarily from the actions taken,
or the failure to act, by the special committee, cured within 20 days
after the giving of written notice of the material breach, or
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o by Specialty Catalog, if it enters into an acquisition agreement
relating to an Acquisition Proposal provided Specialty Catalog has made
all regulatory filings pursuant to the merger.
Acquisition Corp. is entitled to reimbursement in an amount up to
$400,000.00; provided, however, that the limitation of $400,000 shall not be
applicable in the event that Specialty Catalog consummates an Acquisition
Proposal that was inquired or made prior to the termination of the merger.
However, in the event that at the special meeting relating to the merger, the
merger and the merger agreement are not approved and adopted by the affirmative
vote of a majority of the shares held by the stockholders of Specialty Catalog,
Specialty Catalog shall not be obligated to reimburse Acquisition Corp. for any
expenses.
Indemnification . The merger agreement provides that, for a period of six
years after the effective time, the surviving corporation will indemnify the
present and former officers, directors, employees and agents of Specialty
Catalog from liabilities arising out of actions or omissions in their capacity
as such prior to or at the effective time of the merger, to the full extent
provided for in Specialty Catalog's certificate of incorporation and by-laws.
Furthermore, none of these documents will be amended to limit the indemnity
rights of the above persons. In addition, the surviving entity will maintain
directors' and officers' insurance coverage for six years after the effective
time on terms no less favorable to such indemnified parties than existing
insurance coverage, but the surviving corporation will not be required to pay an
annual premium in excess of 150% of the last premium paid prior to the date of
the merger agreement.
Amendment. The merger agreement may be amended, modified or supplemented,
only by written agreement of Acquisition Corp. and Specialty Catalog at any time
prior to the effective time. However, after the required Specialty Catalog
stockholder approval, no amendment may be made without further approval by the
stockholders of Specialty Catalog to the extent such approval is required by
law. Any amendment or modification of the merger agreement must be approved by
the special committee.
Waiver. At any time prior to the effective time, whether before or after
the special meeting, by written instrument, Acquisition Corp. or Specialty
Catalog may extend the time for performance of any of the obligations or other
acts of the other party or waive compliance with any of the agreements of the
other party or with any conditions to its own obligations. However, any waiver
by Specialty Catalog must be approved by the special committee. The
determination to extend or waive a condition to closing of the merger will be
based upon the facts and circumstances of the particular situation. However, we
would only expect to resolicit stockholders' votes in the event there is a
change in the form, timing, or amount of the merger consideration. At this time,
we are unaware of any conditions that will not be satisfied prior to closing.
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INFORMATION ABOUT THE TRANSACTION PARTICIPANTS
THE CONTINUING STOCKHOLDERS
The Continuing Stockholders are Acquisition Corp. and the stockholders of
Acquisition Corp., which currently includes Mr. Naggar, who is a member of
Specialty Catalog's board of directors, First Global, Oracle, Ionic, Three
Greens, and Alexander. And, upon consummation of the transactions contemplated
by the subscription agreements which shall occur prior to the merger, will also
include Mr. Franklin, who is a member of Specialty Catalog's board of directors,
The David Cicurel Settlement, Wynnefield Partners, Wynnefield Partners I, and
Wynnefield Offshore. In addition, upon consummation of the transactions
contemplated by a note and warrant agreement to be entered into among Specialty
Catalog, Acquisition Corp., LEG Partners III, and LEG Partners Debenture SBIC,
L.P., it is expected that LEG Partners III, who currently holds approximately
14% of the outstanding shares of Specialty Catalog common stock, will continue
to be a stockholder of Specialty Catalog after the merger.
Acquisition Corp. Specialty Acquisition Corp. is a Delaware corporation
formed at the direction Mr. Guy Naggar, a director of the Specialty Catalog, for
the purpose of merging with and into the Specialty Catalog.
Guy Naggar, an Italian citizen, has been Chairman of Dawnay, Day & Co.
Limited, a UK investment bank founded in 1928, which is a member of the London
Investment Banking Association, since 1981. Immediately prior to becoming
Chairman of Dawnay, Day & Co. Limited, Mr. Naggar was a Director of the
Charterhouse Group Plc and Deputy Chairman of its subsidiary, Charterhouse
Bank. Mr. Naggar has been a Director of Paramount Plc, a UK listed company
since May 3, 2001 and he is a board member of various other private companies.
First Global, Oracle, Ionic, and Three Greens. First Global Holdings
Limited, Three Greens Holdings Limited, and Oracle Investments and Holdings
Limited are entities formed under the laws of the British Virgin Islands, whose
principal business is investments. Ionic Holdings LDC is an entity organized
under the laws of the Cayman Islands. The Marion Naggar's Children's Settlement
(the "Marion Trust") and the GA Naggar 1982 Settlement (the "GA Naggar Trust")
are trusts organized under the laws of England and Wales. The Marion Trust was
formed for the benefit of Marion Naggar's children. Marion Naggar, Mr. Naggar's
wife, is not a beneficiary of the Marion Naggar Trust. The GA Naggar Trust was
formed for the benefit of Guy Naggar, Marion Naggar, and Mr. and Mrs. Naggar's
children. The Marion Trust is the sole stockholder of each of First Global,
Oracle and Ionic. The GA Naggar Trust is the sole stockholder of Three Greens.
Abacus (C.I.) Limited and Abacus Trustees (Jersey) Limited, both entities
organized under the laws of Jersey, are the trustees of each of the trusts and
have the authority to appoint the directors of First Global, Oracle, Three
Greens, and Ionic.
Alexander. Alexander Enterprise Holding Corp. is a private investment
company formed under the laws of the British Virgin Islands. Nicolas Berggruen,
investment advisor to Alexander, is also the president of Alpha Investment
Management LLC, a registered investment adviser based in New York, New York. He
previously worked for the real estate arm of Bass Brothers Enterprise, a family
held investment company. He later joined Jacobson & Co., a firm that specialized
in leveraged buyouts, and was a principal at that firm until 1987. Mr. Berggruen
received a Bachelor of Science in Finance and International Business from New
York University in 1981.
The David Cicurel Settlement. The David Cicurel Settlement was formed by
David Cicurel. Abacus (CI) Limited is the sole trustee of The David
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Cicurel Settlement. David E. Cicurel has served as one of our directors since
June 1999. Mr. Cicurel is a consultant with substantial experience in
restructuring both publicly-held and privately-held companies. He restructured
and took private Continental Foods plc., a snack foods company that was listed
on the International Stock Exchange. He also restructured International
Communication & Data plc., a U.K. listed consumer database company. He is also
an outside director of Dawnay Day & Co. Limited, a U.K. investment bank.
Martin E. Franklin. Martin E. Franklin has served as one of our directors
since November 1994. Mr. Franklin has been Chairman and Chief Executive Officer
of Marlin Holdings, LLC and the general partner of Marlin Capital, L.P., a
private investment firm since October 1996. From February 1997 through February
2000, Mr. Franklin served as Chairman of the Board of Directors of Bolle Inc.,
an AMEX company, which is a manufacturer, marketer and distributor of premium
eyewear. From May 1996 until March 1998, Mr. Franklin served as Chairman and
Chief Executive Officer of Lumen Technologies, Inc., a NYSE company, which is a
manufacturer and distributor of specialty lighting equipment, and served as
Executive Chairman of Lumen Technologies, Inc. from March 1998 until December
1998. Mr. Franklin was Chairman of the Board and Chief Executive Officer of
Lumen's predecessor, Benson Eyecare Corporation, from October 1992 to May 1996
and President of Benson Eyecare Corporation from November 1993 until May 1996.
Mr. Franklin was non-executive Chairman and a director of Eyecare Products plc,
a London Stock Exchange Company, from December 1993 until February 1999. Mr.
Franklin has served as a director of Corporate Express, Inc., a Nasdaq listed
company from March 1999 through November 1999. Mr. Franklin also serves on the
boards of a number of privately held companies and charitable organizations. Mr.
Franklin received a B.A. in Political Science from the University of
Pennsylvania in 1986.
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Wynnefield. Wynnefield Partners and Wynnefield Partners I, each a Delaware
limited partnership, and Wynnefield Offshore, a Cayman Islands corporation, are
private investment companies. Wynnefield Capital Management, LLC, a New York
limited liability company, is the general partner of Wynnefield Partners and
Wynnefield Partners I and Wynnefield Capital, Inc., a Delaware corporation, is
the investment manager of the Wynnefield Offshore. Nelson Obus and Joshua Landes
are the managing members of Wynnefield Capital Management, LLC and the principal
executive officers of Wynnefield Capital, Inc.
LEG Partners III. LEG Partners III SBIC, L.P. is a privately owned
investment partnership which is in the business of acquiring for investment and
trading purposes, securities and other financial instruments. Golub PS-GP, LLC,
a Delaware limited liability company is the general partner of LEG Partners III.
Golub Associates Incorporated, a Delaware corporation, provides administrative
and operational services to LEG Partners III. Lawrence E. Golub is the managing
member of Golub PS-GP, LLC and the president of Golub Associates Incorporated.
LEG Partners Debenture SBIC, L.P. is an affiliate of Golub Associates
Incorporated.
During the last five years, none of the Continuing Stockholders has been
convicted in a criminal proceeding (excluding traffic violations or similar
misdemeanors). During the last five years, none of the Continuing Stockholders
was a party to a civil proceeding of a judicial or administrative body of
competent jurisdiction as a result of which any person was or is subject to a
judgment, decree or final order enjoining future violations of, or prohibiting
or mandating activities subject to, federal or state securities laws or finding
any violation with respect to such laws.
SPECIALTY CATALOG
Specialty Catalog Corp. is a Delaware corporation that targets niche
consumer product categories, primarily via direct marketing. SC Direct, our
principal operating subsidiary in the United States ("SC Direct"), is the US's
leading retailer of women's wigs and hairpieces. Daxbourne International
Limited, a subsidiary of SC Direct, is a leading United Kingdom retailer and
wholesaler of women's wigs and hairpieces. SC Publishing, another subsidiary of
SC Direct, provides continuing education courses, seminars, and conferences to
nurses and other health care professionals.
This Proxy Statement is accompanied by a copy of our Annual Report to
stockholders for the year ended December 30, 2000 and our Quarterly Report on
Form 10-Q for the period ended March 31, 2001, which contains important
information about Specialty Catalog.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and footnotes sets forth certain information regarding
the beneficial ownership of the Specialty Catalog common stock as of July 18,
2001, by: (i) each person known by Specialty Catalog to own beneficially five
per cent or more of the Common Stock, (ii) each of Specialty Catalog's
directors, (iii) each of the executive officers named in the Summary
Compensation Table and (iv) all directors and executive officers as a group.
Specialty Catalog believes that each of the beneficial owners of the common
stock listed in the table, based on information furnished by such owner, has
sole investment and voting power with respect to such shares, except as may be
otherwise noted in the footnotes hereto. Unless otherwise indicated, the address
of each person named in the table below is c/o Specialty Catalog Corp., 21
Bristol Drive, South Easton, MA 02375.
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NUMBER OF SHARES
BENEFICIALLY
NAME OWNED PERCENTAGE (1)
---- ----- --------------
Joseph Grabowski.......................................... 94,333 (2) 2.1%
Thomas K. McCain.......................................... 38,267 (3) *
David E. Cicurel.......................................... 42,611 (4) *
David Cicurel Investments Limited
14 New Burlington Street
London, England W1X 1FF
Martin E. Franklin........................................ 368,455 (5) 8.5%
Marlin Holdings, Inc.
555 Theodore Fremd Avenue
Rye, New York 10580
Samuel L. Katz............................................ 97,508 (6) 2.2%
Cendant Corporation
9 West 57th Street
New York, New York 10019
David L. Moore 0 *
Sonostar Ventures, LLC
2 Executive Drive, Suite 900
Fort Lee, NJ 07024
Guy Naggar................................................ 405,267 (7) 9.3%
Dawnay, Day & Co., Ltd.
15 Grosvenor Gardens
London, England SW1W 0BD
Steven L. Bock............................................ 425,160 (8) 9.0%
10 Graystone Lane
Weston, MA 02193
LEG Partners III SBIC, L.P................................. 602,689 (9) 13.9%
555 Madison Ave. 30th Floor
New York, New York 10022
Alexander Enterprise Holding Corp.......................... 279,700 (10) 6.4%
499 Park Avenue
New York, New York 10022
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NUMBER OF SHARES
BENEFICIALLY
NAME OWNED PERCENTAGE (1)
---- ----- --------------
Marion Naggar's Children Settlement Trust................. 733,966 (11) 16.9%
Abacus (CI) Limited. .................................. 733,966 (11) 16.9%
Abacus Trustees (Jersey) Limited....................... 733,966 (11) 16.9%
First Global Holdings Limited.......................... 244,655 (11) 5.6%
Geneva Place, 2nd Floor
Wickham's Cay
Road Town
Tortola
British Virgin Islands
Oracle Investments & Holdings Limited.................. 244,656 (11) 5.6%
Geneva Place, 2nd Floor
Wickham's Cay
Road Town
Tortola
British Virgin Islands
Ionic Holdings LDC..................................... 244,655 (11) 5.6%
First Home Tower
British American Center
George Town, Grand Cayman
Cayman Islands
GA Naggar 1982 Settlement 98,376(11) 2.3%
Three Greens Holdings Limited............................ 98,376(11) 2.3%
Geneva Place, 2nd Floor
Wickham's Cay
Road Town
Tortola
British Virgin Islands
Wynnefield Partners Small Cap Value, L.P. ................ 206,549 (12) 13.9%
450 Seventh Avenue, Suite 509
New York, New York 10123
Wynnefield Partners Small Cap Value, L.P.I................. 248,050 (12) 5.7%
450 Seventh Avenue, Suite 509
New York, New York 10123
Wynnefield Small Cap Value Offshore 104,008 (12) 2.4%
Fund, Ltd. .........................................
450 Seventh Avenue, Suite 509
New York, New York 10123
All executive officers and directors as a group (7 1,046,441 (13) 23.4%
persons)..................................................
* Indicates less than 1%
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(1) Applicable percentage of ownership is based upon 4,337,886 shares
outstanding. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission (the "SEC" or "Commission") and generally
includes voting and investment power with respect to securities. Shares of
common stock issued upon the exercise of options and warrants currently
exercisable or exercisable within 60 days are deemed outstanding for computing
the percentage ownership of the person holding such options or warrants, but are
not deemed outstanding for computing the percentage ownership of any other
person.
(2) Includes 83,333 shares of common stock underlying stock options under the
2000 Stock Incentive Plan (the "2000 Plan") that are exercisable June 22, 2001
at a price of $2.50 per share.
(3) Includes 6,667 shares of common stock underlying stock options under the
2000 Plan that are exercisable June 22, 2001 at a price of $2.50 per share.
Includes 20,000 shares of common stock underlying stock options under the 1996
Stock Incentive Plan (the "1996 Plan") that are exercisable June 21, 2001 at a
price of $6.50 per share. Includes 1,600 shares held in trust for Mr. McCain's
son, with respect to which he disclaims beneficial ownership.
(4) Includes 40,111 shares of common stock held by The David Cicurel Settlement.
Includes 2,500 shares of common stock underlying stock options under the 1996
Plan that are exercisable at a price of $6.50 per share.
(5) Includes 16,667 shares of common stock underlying stock options under the
2000 Plan that are exercisable June 22, 2001 at a price of $2.50 per share.
Includes 4,100 shares of common stock underlying stock options issued under the
1996 Plan that are exercisable at a price of $6.50 per share. Includes 15,000
shares held in trust for Mr. Franklin's minor children with respect to which he
disclaims beneficial ownership.
(6) Includes 3,333 shares of common stock underlying stock options under the
2000 Plan that are exercisable June 22, 2001 at a price of $2.50 per share.
Includes 4,100 shares of common stock underlying stock options issued under the
1996 Plan that are exercisable at a price of $6.50 per share.
(7) Includes 4,100 shares of common stock underlying stock options issued under
the 1996 Plan that are exercisable at a price of $6.50 per share.
(8) Includes 310,226 shares of common stock underlying stock options which
became exercisable upon the consummation of Specialty Catalog's initial public
offering at a price of $0.3072 per share; and 75,000 shares of common stock
underlying stock options which became exercisable upon his termination from
Specialty Catalog at a price of $5.33 per share.
(9) LEG Partners III beneficially owns the 602,689 shares. Golub Associates
Incorporated provides administrative and operational services to LEG Partners
III. Golub PS-GP, LLC is the general partner of LEG Partners III. Lawrence E.
Golub is the managing member of Golub PS-GP, LLC and the president of Golub
Associates Incorporated. Each of LEG Partners III, Golub PS-GP, LLC and Lawrence
E. Golub may be deemed the beneficial owner of the 602,689 shares.
(10) Nicolas Berggruen, in his capacity as investment advisor, may be deemed to
beneficially own 279,700 shares which are held of record by Alexander, a British
Virgin Islands corporation. Alexander has the right to receive, or the power to
direct the receipt of, dividends from, or the proceeds from the sale of, such
securities.
(11) Of the 733,966 total shares reported as beneficially owned by the Marion
Trust, First Global owns beneficially 244,655 of such shares, Oracle owns
beneficially 244,656 of such shares and Ionic owns beneficially 244,655 of such
shares. Marion Naggar is the spouse of Guy Naggar, a director and beneficial
stockholder of Specialty Catalog. The Marion Trust is the sole shareholder of
each of Oracle, First Global and Ionic. Of the 98,376 total shares reported as
beneficially owned by the GA Naggar Trust, Three Greens owns beneficially 98,376
of such shares. The Naggar Trust was formed for the benefit of Guy Naggar,
Marion Naggar, and Mr. And Mrs. Naggar's children and is the sole shareholder of
Three Greens. Abacus (CI) Limited and Abacus Trustees (Jersey) Limited are the
trustees of each trust and share power over the activities of each trust. Abacus
(CI) Limited and Abacus Trustees (Jersey) Limited have no direct voting or
dispositive power over shares held by either trust, but have the power to direct
the trusts to appoint directors of Oracle, First Global, Three Greens, and Ionic
and accordingly may
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be deemed to be the beneficial owners of shares owned by each of Oracle, First
Global, Three Greens, and Ionic. Abacus (CI) Limited and Abacus Trustees
(Jersey) Limited serve as trustees in a fiduciary capacity and disclaim any
beneficial ownership over any shares held by the trusts. First Global disclaims
beneficial ownership of the shares owned by Oracle, Three Greens and Ionic.
Oracle disclaims beneficial ownership of the shares owned by First Global, Three
Greens and Ionic. Ionic disclaims beneficial ownership of the shares owned by
First Global, Three Greens, and Oracle. Three Greens disclaims beneficial
ownership of the shares owned by First Global, Oracle, and Ionic.
(12) Wynnefield Partners, in its capacity as investment advisor, may be deemed
to beneficially own 206,549 shares that are held of record by its clients. Those
clients have the right to receive, or the power to direct the receipt of,
dividends from, or the proceeds from the sale of, such securities. Wynnefield
Partners, in its capacity as investment advisor, may be deemed to beneficially
own 248,050 shares that are held of record by its clients. Those clients have
the right to receive, or the power to direct the receipt of, dividends from, or
the proceeds from the sale of, such securities. Wynnefield Offshore, in its
capacity as investment advisor, may be deemed to beneficially own 104,008 shares
that are held of record by its clients. Those clients have the right to receive,
or the power to direct the receipt of, dividends from, or the proceeds from the
sale of, such securities. Wynnefield Partners disclaims beneficial ownership of
the shares that may be deemed to be beneficially owned by Wynnefield Partners I
and Wynnefield Offshore, respectively. Wynnefield Partners I disclaims
beneficial ownership of the shares that may be deemed to be beneficially owned
by Wynnefield Partners and Wynnefield Offshore, respectively. Wynnefield
Offshore disclaims beneficial ownership of the shares which may be deemed to be
beneficially owned by Wynnefield Partners and Wynnefield Partners I,
respectively.
(13) Includes 143,300 shares of common stock underlying stock options that are
currently exercisable.
TRANSACTIONS IN SHARES OF COMMON STOCK BY CERTAIN PERSONS
There were no transactions in shares of Specialty Catalog common stock that
were effected during the past 60 days by Specialty Catalog, Acquisition Corp.,
the Continuing Stockholders, or any of their respective subsidiaries, directors,
executive officers or controlling persons, other than the purchase of 7,000
shares of common stock made in a market transaction by Alexander Enterprise
Holding Corp. on March 21, 2001, for the aggregate purchase price of
approximately $14,875.
CERTAIN PURCHASES OF SPECIALTY CATALOG COMMON STOCK
The following purchases of Specialty Catalog common stock were made by
Specialty Catalog, the Continuing Stockholders, or any of their respective
subsidiaries, directors, executive officers or controlling persons, since May
17, 1999:
(1) Guy Naggar. On August 25, 2000, your board of directors granted to
Mr. Naggar options to purchase 10,000 shares of our common stock.
(2) Three Greens. On March 20, 2000, New Henley Overseas Investments
Inc. ("New Henley"), a Panamanian company, transferred 98,376 shares
of our common stock to Three Greens for a total purchase price of
$288,979.50. The sole shareholder of each of New Henley and Three
Greens is the GA Naggar 1982 Trust.
(3) No purchases of our common stock were made by Alexander in 1999.
Alexander made the following purchases of our common stock in 2000:
March 16: 40,000 shares; March 17: 20,000 shares; March 20: 30,000
shares; March 30: 1,600
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shares; April 4: 8,400 shares; April 12: 500 shares; April 13: 600
shares; April 14: 11,000 shares; May 22: 500 shares; May 25: 7,400
shares; September 5: 50,000 shares; September 29: 16,700 shares;
October 3: 2,700 shares; October 4: 25,200 shares; October 11: 2,800
shares; October 13: 12,900 shares; November 28: 500 shares; November
29: 9,500 shares; November 30: 4,000 shares; December 14: 500
shares; December 15, 1,500 shares; December 18: 1,500 shares; and
December 19: 1,600 shares. Alexander has made the following
purchases of our common stock in 2001: January 9: 5,500 shares;
January 10: 6,600 shares; January 11: 7,900 shares; January 29: 600
shares; January 31: 2,000 shares; February 7: 700 shares; and March
21: 7,000 shares. All shares of our common stock purchased by
Alexander were purchased with the working capital of Alexander.
RECENT DEVELOPMENTS
On May 8, 2001, one of our subsidiaries, SC Publishing, Inc., sold our home
study Continuing Professional Education program for certified public accountants
under the "Western Schools" registered trade name to the California Certified
Public Accountants Education Foundation for the aggregate consideration of
approximately $150,000.
LEGAL PROCEEDINGS
We are, from time to time, a party to routine litigation arising in the
normal course of business. At the present time, we are not involved in any
litigation, nor are we aware of any potential litigation.
We currently have several registered trademarks and may seek additional
legal protection for our products and trade names. We have invested substantial
resources in developing several distinctive catalog trademarks as well as
branded products and product lines. There can be no assurance that the steps
taken by us to protect our rights will be sufficient to deter misappropriation.
Failure to protect these intellectual property assets could have a material
adverse effect on the our business operations. Moreover, although we do not
currently know of any lawsuit alleging the infringement of intellectual property
rights that could have a material adverse effect on our business, there can be
no assurance that any such lawsuit will not be filed against us in the future
or, if such a lawsuit is filed, that we would ultimately prevail.
INDEPENDENT AUDITORS
Specialty Catalog's consolidated financial statements as of December 30,
2000, January 1, 2000, and January 2, 1999 and for the three fiscal years ended
December 30, 2000, January 1, 2000, and January 2, 1999, incorporated by
reference into this proxy statement, have been audited by Deloitte & Touche LLP,
independent public accountants, as stated in their report with respect thereto.
It is expected that representatives of Deloitte & Touche LLP will be present at
the special meeting, both to respond to appropriate questions of stockholders of
Specialty Catalog and to make a statement if they desire.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
102
The Securities and Exchange Commission ("SEC") allows Specialty Catalog to
"incorporate by reference" information into this proxy statement. This means
that we can disclose important information to you by referring you to another
document filed separately with the SEC. The information incorporated by
reference is considered to be a part of this proxy statement, except for any
information that is superseded by information that is included directly in this
document.
This proxy statement incorporates by reference the documents listed below
that Specialty Catalog has previously filed with the SEC (SEC file number
0-21499). The documents contain important information about Specialty Catalog
and its financial condition. Because there is no safe harbor for forward-looking
statements under the Private Securities Litigation Reform Act of 1995 in
connection with a going-private transaction such as the proposed merger, the
documents incorporated by reference herein are incorporated exclusive of the
language claiming the safe harbor.
(1) Specialty Catalog's Annual Report on Form 10-K for the fiscal year
ended December 30, 2000;
(2) Specialty Catalog's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2001.
(3) Specialty Catalog's Current Report on Form 8-K dated May 7, 2001.
This proxy statement incorporates by reference the portions of Specialty
Catalog's Annual Report on Form 10-K for the fiscal year ended December 30, 2000
relating to Item 301 of Regulation S-K (selected financial data), Item 303 of
Regulation S-K (management's discussion and analysis of financial condition and
results of operations), Item 304 of Regulation S-K (changes in and disagreements
with accountants on accounting and financial disclosure), and Item 305 of
Regulation S-K (quantitative and qualitative disclosures about market risk).
This proxy statement also incorporates by reference the portions of Specialty
Catalog's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2001 relating to Item 303 of Regulation S-K (management's discussion and
analysis of financial condition and results of operations) and the financial
information presented in Part I of the Quarterly Report.
We hereby incorporate by reference in this proxy statement additional
documents that we may file with the SEC between the date of this proxy statement
and the date of the special meeting. These documents include periodic reports,
such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as well as proxy statements. Any statements contained in a
document incorporated by reference in this proxy statement will be deemed to be
modified or superseded for purposes of this proxy statement to the extent that a
statement contained in this proxy statement (or in any other subsequently filed
document which is also incorporated by reference in this proxy statement)
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed to be a part of this proxy statement except as so modified
or superseded.
103
In addition, for information about Specialty Catalog, we refer you to our
Annual Report to stockholders for the year ended December 30, 2000 and our
Quarterly Report on Form 10-Q for the period ended March 31, 2001, which
accompany this proxy statement.
STOCKHOLDER PROPOSALS FOR PRESENTATION
AT THE 2001 ANNUAL MEETING
Specialty Catalog will hold its 2001 annual meeting of Specialty Catalog
stockholders only if the merger is not consummated. In the event that the 2001
annual meeting is held, stockholders wishing to submit a proposal to be
considered for inclusion in the proxy material for Specialty Catalog 2001 annual
meeting must send it to the Corporate Secretary, Specialty Catalog 21 Bristol
Drive, South Easton, MA 02375, not later than September 28, 2001 to be eligible
for inclusion in the proxy statement distributed by Specialty Catalog in
connection with its annual meeting. The annual meeting of stockholders, if it is
held, will be held on a day in the period from November 13 through December 13,
2001.
OTHER MATTERS
The board of directors of Specialty Catalog knows of no other matters
to be presented at the special meeting. However, if any other matters properly
come before the special meeting, the persons named in the enclosed proxy will
vote on such matters in accordance with their best judgment.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and other
information with the SEC. You may read and copy any reports, statements, or
other information that we filed at the SEC's public reference rooms in
Washington, D.C., New York, New York, and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our
public filings are also available to the public from commercial document
retrieval services and at the Internet World Wide Website maintained by the SEC
at http://www.sec.gov. The SEC allows us to "incorporate by reference"
information into this document, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be a part of
this document, except for any information superseded by information contained
directly in this document. This document incorporates by reference certain
documents that we have previously filed with the SEC. These documents contain
important business information about Specialty Catalog and its financial
condition.
We may have sent to you some of the documents incorporated by reference,
but you can obtain any of them through us or the SEC or the SEC's Internet World
Wide Web site described above. Documents incorporated by reference are available
from us without charge, excluding all exhibits unless specifically incorporated
by reference as an exhibit to this document. Stockholders may obtain documents
incorporated by reference in this document upon written or oral request to the
following address or telephone number: Specialty Catalog Corp., 21 Bristol
Drive, South Easton, MA 02375, Attention: Thomas McCain, Corporate Secretary.
104
We will send any document so requested to the requesting stockholder by
first class mail or other equally prompt means within one day of receiving such
request.
We have filed a Schedule 13E-3 with the SEC with respect to the merger. As
permitted by the SEC, this proxy statement omits certain information contained
in the Schedule 13E-3. The Schedule 13E-3, including any amendments and exhibits
filed or incorporated by reference as a part thereof, is available for
inspection or copying as set forth above. Statements contained in this proxy
statement or in any document incorporated herein by reference as to the contents
of any contract or other document referred to herein or therein are not
necessarily complete and in each instance reference is made to such contract or
other document filed as an exhibit to the Schedule 13E-3 or such other document,
and each such statement shall be deemed qualified in its entirety by such
reference.
If you would like to request documents from the company, please do so at
least five business days before the date of the special meeting in order to
receive timely delivery of such documents prior to the special meeting.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the special meeting. The
company has not authorized anyone to provide you with information that is
different from what is contained in this document. This document is dated
_________________, 2001. You should not assume that the information contained in
this document is accurate as of any date other than that date, and the mailing
of this document to stockholders does not create any implication to the
contrary.
By Order of the Board of Directors
-----------------------------------
Thomas McCain, Senior Vice President,
Chief Financial Officer and Secretary
South Easton, Massachusetts
Dated: __________, 2001
Appendices
Appendix A -- Agreement and Plan of Recapitalization and Merger
Appendix B -- Opinion of Burnham Securities Inc.
Appendix C -- Section 262 of the Delaware General Corporation Law
105
PLEASE VOTE, SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
FOLD AND DETACH HERE
SPECIALTY CATALOG CORP.
PROXY FOR 2001 SPECIAL MEETING OF STOCKHOLDERS
__________, 2001
SOLICITED BY THE BOARD OF DIRECTORS
The undersigned, having received notice of the 2001 special meeting of
stockholders to be held on __________, 2001 at ______ a.m., local time, at
_________ and the Proxy Statement relating to the meeting, hereby revokes all
prior proxies and appoints Thomas McCain and David Moore, and each of them
acting singly, with full power of substitution, as proxies to represent and vote
on behalf of the undersigned, as designated below, all shares of common stock,
par value $0.01 per share, of Specialty Catalog Corp., a Delaware corporation,
that the undersigned would be entitled to vote if present in person at the 2001
special meeting of stockholders and any adjournment or adjournments thereof.
These proxies are authorized to vote in their discretion upon such other matters
as may properly come before the special meeting.
When properly executed, this proxy will be voted in the manner directed herein
by the undersigned. If a choice is not specified with respect to any proposal,
this proxy will be voted FOR such proposal.
Attendance of the undersigned at the special meeting will not be deemed to
revoke this proxy unless the undersigned shall revoke this proxy in writing and
shall vote in person at the special meeting.
EACH STOCKHOLDER SHOULD SIGN THIS PROXY PROMPTLY AND RETURN IT IN THE ENCLOSED
ENVELOPE. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
SPECIALTY CATALOG CORP.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE COMMENTS?
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PROXY
INSTRUCTIONS FOR VOTING YOUR PROXY
Mark, sign and date the attached proxy card and return it in the postage-paid
envelope enclosed.
[ ] Votes must be indicated, as in example to the left, in black or blue ink.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE PROPOSALS.
1. To approve and adopt the Agreement and Plan of Recapitalization and Merger by and between Specialty
Catalog Corp. and Specialty Acquisition Corp., dated as of May 4, 2001, and any amendments thereto
pursuant to which the stockholders of Specialty Catalog Corp., other than Specialty Acquisition Corp.
and dissenting stockholders who perfect their dissenters' rights, will receive $3.75 in cash for each
share of Specialty Catalog Corp. common stock that they own:
[ ]FOR [ ] AGAINST [ ] ABSTAIN
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED, OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR PROPOSAL 1.
DATED: _________________, 2001
SIGNATURE(S)
Please sign name(s) exactly as appearing on
your stock certificate. If shares are held
jointly, each joint owner should sign. When
signing as attorney, executor, administrator,
trustee or guardian, please give full title as
such. If a corporation, please sign full
corporate name by president or other
authorized officer. If a partnership, please
sign in partnership name by authorized person.
Signature:________________________
ANNEX A
AGREEMENT AND PLAN OF RECAPITALIZATION AND MERGER
BY AND BETWEEN
SPECIALTY ACQUISITION CORP.
AND
SPECIALTY CATALOG CORP.
DATED MAY 4, 2001
TABLE OF CONTENTS
TABLE OF DEFINED TERMS............................................................................................1
AGREEMENT AND PLAN OF RECAPITALIZATION AND MERGER..............................................................1
RECITALS..........................................................................................................1
ARTICLE I.........................................................................................................2
THE MERGER........................................................................................................2
1.1 The Merger...............................................................................................2
1.2 Company Action...........................................................................................2
1.3 Effects of the Recapitalization and Merger...............................................................2
1.4 Consummation of the Recapitalization and Merger..........................................................2
1.5 Certificate of Incorporation; Bylaws; Directors and Officers.............................................3
1.6 Conversion of Securities.................................................................................3
1.7 Company Stock Options....................................................................................3
1.8 Dissenting Shares........................................................................................4
1.9 Exchange of Certificates.................................................................................4
1.10 Supplementary Action...................................................................................5
1.11 Lost, Stolen or Destroyed Company Certificates.........................................................6
ARTICLE II........................................................................................................6
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.....................................................................6
2.1 Organization and Qualification...........................................................................6
2.2 Certificate of Incorporation; Bylaws; and Stock Transfer Records.........................................6
2.3 Capitalization of the Company............................................................................6
2.4 Corporate Power, Authorization and Enforceability........................................................7
2.5 No Conflict; Required Filings and Consents...............................................................7
2.6 SEC Reports; Financial Statements........................................................................8
2.7 No Default; Violation; Dispute...........................................................................8
2.8 Compliance with Law......................................................................................9
2.9 Absence of Certain Changes...............................................................................9
2.10 No Undisclosed Liabilities.............................................................................9
2.11 Litigation; Claims.....................................................................................9
2.12 INTENTIONALLY OMITTED.................................................................................10
2.13 Disclosure Documents..................................................................................10
2.14 INTENTIONALLY OMITTED.................................................................................10
2.15 Environmental Matters.................................................................................10
2.16 Takeover Laws.........................................................................................11
2.17 Board Recommendation; Fairness Opinion................................................................11
2.18 INTENTIONALLY OMITTED.................................................................................11
2.19 Brokers and Finders...................................................................................11
ARTICLE III......................................................................................................11
REPRESENTATIONS AND WARRANTIES OF PURCHASER......................................................................11
3.1 Organization and Qualification..........................................................................12
3.2 Corporate Power, Authorization and Enforceability.......................................................12
3.3 No Conflict; Required Filings and Consents..............................................................12
3.4 Board and Stockholder Approval..........................................................................12
3.5 Brokers and Finders.....................................................................................12
3.6 Disclosure Documents....................................................................................13
ARTICLE IV COVENANTS.............................................................................................13
4.1 Conduct of Business by the Company......................................................................14
4.2 Access to Information; Confidentiality..................................................................15
4.3 Preparation of Proxy Statement; Stockholders Meeting; Schedule 13E-3....................................16
4.4 Regulatory Filings......................................................................................17
4.5 Acquisition Proposals...................................................................................17
4.6 Public Announcements....................................................................................18
4.7 Notification of Certain Matters.........................................................................18
4.8 Officers' and Directors' Indemnification; Insurance.....................................................19
4.9 Additional Agreements...................................................................................20
4.10 Company Indebtedness..................................................................................20
4.11 Other Actions by the Company..........................................................................20
4.12 Litigation Cooperation................................................................................21
4.13 Future Filings........................................................................................21
4.14 Board Action Relating to Stock Option Plans...........................................................21
4.15 Knowledge of Inaccuracies.............................................................................21
4.16 Financing Matters.....................................................................................21
4.17 Voting................................................................................................22
4.18 Exemption from Liability Under Section 16(B)..........................................................22
4.19 Delisting.............................................................................................22
ARTICLE V........................................................................................................22
CONDITIONS OF MERGER.............................................................................................22
5.1 Conditions to the Obligations of Each Party to Effect the Merger........................................22
5.2 Conditions Precedent to Purchaser's Obligations.........................................................23
5.3 Conditions to Obligations of the Company................................................................24
ARTICLE VI.......................................................................................................24
TERMINATION, AMENDMENT AND WAIVER................................................................................24
6.1 Termination.............................................................................................24
6.2 Procedure and Effect of Termination.....................................................................25
6.3 Expenses................................................................................................25
6.4 Amendment...............................................................................................26
6.5 Waiver..................................................................................................26
6.6 Termination decisions by the Company....................................................................26
ARTICLE VII DEFINITIONS..........................................................................................26
ARTICLE VIII MISCELLANEOUS.......................................................................................28
8.1 Severability............................................................................................28
8.2 Notices.................................................................................................28
8.3 Headings................................................................................................29
8.4 Representations and Warranties, etc.....................................................................29
8.5 Miscellaneous...........................................................................................29
8.6 Attorneys Fees..........................................................................................29
8.7 Governing Law...........................................................................................29
8.8 Jurisdictionand Venue...................................................................................29
8.9 BindingEffect...........................................................................................29
8.10 Assignment............................................................................................30
8.11 FurtherAssurances.....................................................................................30
8.12 Publicity.............................................................................................30
TABLE OF DEFINED TERMS
Section
-------
2000 10-K....................................................................................................2.3(b)
Acquisition Proposal.........................................................................................4.5(a)
Affiliate...............................................................................................Article VII
Agreement..............................................................................................Introduction
Board......................................................................................................Recitals
Board of Directors.........................................................................................Recitals
CERCLA......................................................................................................2.15(a)
Certificate..................................................................................................1.6(a)
Closing.........................................................................................................1.4
Closing Date....................................................................................................1.4
Commitments....................................................................................................4.16
Common Stock...............................................................................................Recitals
Company................................................................................................Introduction
Company Acquisition Agreement................................................................................4.5(a)
Company Disclosure Documents................................................................................2.13(a)
Company Disclosure Letter.......................................................................................1.7
Company Notice...............................................................................................4.5(b)
Company Proxy Statement......................................................................................4.3(b)
Company Requisite Vote..........................................................................................2.4
Company Rights Plan.....................................................................................Article VII
Company Stock Option Plan.......................................................................................1.7
Confidential Information.............................................................................4.2(d). 4.2(b)
Constituent Corporations........................................................................................1.3
D&O Insurance................................................................................................4.8(f)
Deposit Amount...............................................................................................1.9(a)
DGCL............................................................................................................1.1
Dissenting Shares...............................................................................................1.8
Dissenting Stockholder..........................................................................................1.8
Effective Time..................................................................................................1.4
Eligible Shares.................................................................................................1.7
Engagement Letter..............................................................................................2.19
Environmental Laws..........................................................................................2.15(a)
Exchange Act.................................................................................................2.5(b)
Exchange Agent...............................................................................................1.9(a)
Expenses.....................................................................................................6.3(b)
Fairness Opinion............................................................................................2.17(b)
Financial Advisor..........................................................................................Recitals
Financial Statements............................................................................................2.6
Financing Condition..........................................................................................5.2(a)
GAAP............................................................................................................2.6
Golub Engagement Letter.....................................................................................4.16(c)
Governmental Entities........................................................................................2.5(b)
Hazardous Substances........................................................................................2.15(b)
HSR Act......................................................................................................2.5(b)
Indebtedness............................................................................................Article VII
Lending Sources.............................................................................................4.16(a)
Material Adverse Effect...................................................................................Article V
Maximum Premium..............................................................................................4.8(f)
Merger..........................................................................................................1.1
Option..........................................................................................................1.7
Per Share Merger Consideration...............................................................................1.6(a)
Permitted Investments........................................................................................1.9(a)
Person..................................................................................................Article VII
Preliminary Proxy Statement..................................................................................4.3(b)
Purchaser..............................................................................................Introduction
Purchaser Disclosure Documents...............................................................................3.6(a)
RCRA........................................................................................................2.15(a)
Regulatory Consents..........................................................................................2.5(b)
Representatives..............................................................................................4.2(a)
Rights Plan..................................................................................................2.3(a)
SARA........................................................................................................2.15(a)
Schedule 13E-3...............................................................................................4.3(b)
SEC.............................................................................................................2.6
SEC Reports.....................................................................................................2.6
Securities Act..................................................................................................2.6
Shares.......................................................................................................1.6(a)
Special Committee..........................................................................................Recitals
Subsidiary..............................................................................................Article VII
Superior Proposal............................................................................................4.5(a)
Surviving Corporation...........................................................................................1.1
Tax or Taxes............................................................................................Article VII
AGREEMENT AND PLAN OF RECAPITALIZATION AND MERGER
THIS AGREEMENT AND PLAN OF RECAPITALIZATION AND MERGER (the
"Agreement") is made and entered into as of this 4th day of May, 2001, by and
between SPECIALTY ACQUISITION CORP., a Delaware corporation ("Purchaser"), and
SPECIALTY CATOLOG CORP., a Delaware corporation (the "Company").
RECITALS
WHEREAS, Purchaser desires to acquire the entire equity interest in the
Company and to provide for the payment of $3.75 per share in cash for all shares
of the common stock, par value $.01 per share, of the Company (the "Common
Stock") not held by Purchaser; and
WHEREAS, the stockholders of Purchaser intend to contribute shares of
Common Stock held by them to the Purchaser and to acquire in exchange therefor
common stock of the Purchaser; and
WHEREAS, the Special Committee (the "Special Committee") of the Board
of Directors of the Company (the "Board of Directors" or the "Board") has
approved this Agreement, determined that this Agreement, the Merger and the
other transactions contemplated hereby are fair to, advisable, and in the best
interests of, the Company's stockholders (other than the Purchaser and its
current and future stockholders) and adopted the Merger as set forth herein and
has recommended approval of the Merger and adoption of the Agreement by the
Board of Directors and the stockholders of the Company;
WHEREAS, the Special Committee has received the opinion of Burnham
Securities Inc. (the "Financial Advisor"), dated as of the date of this
Agreement, to the effect that, based on, and subject to, the various assumptions
and qualifications set forth therein, as of the date of such opinion, the Per
Share Merger Consideration (as hereinafter defined) to be received by the
holders of the Common Stock (other than the Purchaser and its current and future
stockholders) pursuant to the Merger (as hereinafter defined) is fair from a
financial point of view to such holders;
WHEREAS, the Board of Directors, after receiving the recommendation of
the Special Committee, has approved this Agreement, determined that this
Agreement, the Merger and the other transactions contemplated hereby are fair
to, advisable and in the best interests of the Company's stockholders (other
than the Purchaser and its current and future stockholders) and has adopted the
Merger as set forth herein and has recommended approval of the Merger and
adoption of this Agreement by the stockholders of the Company;
WHEREAS, the Board of Directors of the Purchaser has approved this
Agreement, determined that this Agreement, the Merger and the other transactions
contemplated hereby are fair to, advisable and in the best interests of the
Purchaser's stockholders and adopted the Merger as set forth herein and has
recommended approval of the Merger and adoption of this Agreement by the
stockholders of the Company; and
WHEREAS, the stockholders of Purchaser have, by unanimous written
consent, approved the Merger and adoption of this Agreement by the Purchaser;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Purchaser and Company
hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger.
----------
At the Effective Time (as defined in Section 1.4 hereof), in
accordance with this Agreement and Section 251 of the Delaware General
Corporation Law (the "DGCL"), Purchaser shall be merged with and into the
Company, the separate existence of the Purchaser (except as may be continued by
operation of law) shall cease, and the Company shall continue as the surviving
corporation under the corporate name it possesses immediately prior to the
Effective Time (the "Merger"). The Company after the Merger sometimes is
referred to hereinafter as the Surviving Corporation (the "Surviving
Corporation").
1.2 Company Action.
--------------
The Company hereby consents to the Merger and represents that
each of the Special Committee and the Board of Directors, upon the
recommendation of the Special Committee, each at meetings duly called and held,
have (i) determined, that this Agreement, the Merger and the other transactions
contemplated hereby are fair to, advisable and in the best interests of the
Company's stockholders (other than Purchaser and its current and future
stockholders), (ii) approved this Agreement, and the transactions contemplated
hereby, including the Merger, which approvals, and prior actions taken by such
Board immediately prior to the execution of this Agreement, are sufficient to
render entirely inapplicable to the Merger and Purchaser and its Affiliates, as
of the date hereof, the provisions of Section 203 of the DGCL, (iii) resolved to
recommend approval of this Agreement and adoption of the Merger by its
stockholders and (iv) resolved to amend the Company Rights Plan (as hereinafter
defined) so as to render it inapplicable to the Merger and Purchaser, or to
redeem all of the outstanding rights under the Company Rights Plan.
1.3 Effects of the Recapitalization and Merger.
------------------------------------------
At the Effective Time, the effect of the Merger shall be as provided in
the applicable provisions of this Agreement and as set forth in Section 251 of
the DGCL. Without limiting the generality of the foregoing, and subject thereto,
at the Effective Time all the rights and property of the Company and the
Purchaser (the "Constituent Corporations") shall vest in the Surviving
Corporation, and all debts and liabilities of the Company and the Purchaser
shall become the debts and liabilities of the Surviving Corporation.
1.4 Consummation of the Recapitalization and Merger.
-----------------------------------------------
Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
6.1 hereof, in the event of, and as soon as is practicable after, the
satisfaction or waiver of the conditions set forth in Article V hereof, the
parties hereto will cause the Merger to be consummated by filing with the
Secretary of State of the State of Delaware, a certificate of merger or other
appropriate documents, executed in accordance with the relevant provisions of
the DGCL (the time of confirmation of such filing or such later time as is
specified in such certificate of merger being the "Effective Time").
Contemporaneous with the filing referred to in this Section 1.4, a closing (the
"Closing") will be held at the offices of Kane Kessler, P.C., 1350 Avenue of the
Americas, New York, NY 10019 or at such other location as the parties
2
may establish for the purpose of confirming all the foregoing. The date and time
of such Closing is referred to as the "Closing Date."
1.5 Certificate of Incorporation; Bylaws; Directors
and Officers.
------------
The Certificate of Incorporation and Bylaws of the Surviving
Corporation shall be the Certificate of Incorporation and Bylaws of the Company,
as in effect immediately prior to the Effective Time, until thereafter amended
as provided therein and under the DGCL. The directors of Purchaser immediately
prior to the Effective Time will be the initial directors of the Surviving
Corporation, and the officers of the Company immediately prior to the Effective
Time will be the initial officers of the Surviving Corporation, in each case
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be.
1.6 Conversion of Securities.
------------------------
At the Effective Time, by virtue of the Merger and without any
action on the part of the Purchaser, the Company, the Surviving Corporation or
the holder of any of the following securities:
(a) Each share of Common Stock, $.01 par value per share of
the Company (the "Shares"), issued and outstanding immediately prior to
the Effective Time (other than Shares to be cancelled pursuant to
Section 1.6(b) hereof, and, subject to Section 1.6(d) and Section 1.8
hereof, any Dissenting Shares (as hereinafter defined)), shall be
cancelled and extinguished and be automatically converted into and
become a right to receive $3.75 per share in cash (the "Per Share
Merger Consideration") upon surrender in the manner provided in Section
1.9 of the certificate that evidenced the Shares (the "Certificate").
(b) Each Share which is issued and held in the treasury of the
Company immediately prior to the Effective Time or issued and
outstanding and owned by the Company or by the Purchaser, shall be
cancelled and retired, and no payment shall be made with respect
thereto.
(c) Each share of capital stock of the Purchaser issued and
outstanding immediately prior to the Effective Time shall be converted
into capital stock of the Surviving Corporation with the same rights
and terms as immediately prior to the Merger.
(d) The holders of Dissenting Shares (as hereinafter defined),
if any, shall be entitled to payment for such Shares only to the extent
permitted by and in accordance with the provisions of the DGCL;
provided, however, that if, in accordance with the applicable
provisions of the DGCL, any holder of Dissenting Shares shall forfeit
such right to payment of the fair cash value of such Shares, such
Shares shall thereupon be deemed to have been converted into and to
have become exchangeable for, as of the Effective Time, the right to
receive the Per Share Merger Consideration provided in Section 1.6(a),
without interest.
1.7 Company Stock Options.
---------------------
Immediately prior to the Effective Time, and except as may be
set forth on Schedule 1.7 of the Company's Disclosure Letter annexed hereto (the
"Company Disclosure Letter") or otherwise consented to by the Purchaser, each
outstanding, unexercised option, warrant or other right to purchase the
Company's Common Stock (an "Option"), including but not limited to Options to
purchase Shares heretofore granted under each of the
3
Company's 1996 Stock Incentive Plan, as amended, and the Company's 2000 Stock
Incentive Plan (collectively, the "Company Stock Option Plan"), whether or not
exercisable, shall be cancelled by the Company in consideration of a cash
payment, if applicable, from the Surviving Corporation in an amount equal to the
product of multiplying (a) the excess, if any, of (x) the Per Share Merger
Consideration over (y) the per Share exercise price of such Option, by (b) the
number of Eligible Shares (as defined below) subject to such Option. Such cash
payment shall be net of any required withholding taxes. The term "Eligible
Shares" shall mean the aggregate number of Shares that shall then be subject to
purchase under any option which shall be vested and exercisable as of the
Effective Time. The obligation to make any such cash payment (1) shall be
subject to the obtaining of any necessary consents of optionees to the
cancellation of such Options, in form and substance reasonably satisfactory to
Purchaser, and (2) shall not require any action which violates the Company Stock
Option Plan. Options with an exercise price equal to or greater than the Per
Share Merger Consideration will be cancelled without any consideration. The
Company shall, at Purchaser's request, use its commercially reasonable efforts
to effectuate the provisions of this Section 1.7. From and after the Effective
Time, other than as expressly set forth in this Section 1.7, no holder of an
Option shall have any other rights in respect thereof other than to receive
payment for his or Options as set forth in this Section 1.7. The Company shall,
at Purchaser's request, take all necessary actions to terminate effective as of
the Effective Time the Company Stock Option Plans, stock option agreements and
similar arrangements.
1.8 Dissenting Shares.
-----------------
Notwithstanding anything in this Agreement to the contrary,
Shares issued and outstanding immediately prior to the Effective Time and held
by a holder (a "Dissenting Stockholder"), if any, who has the right to demand,
and who properly demand, an appraisal of such shares in accordance with Section
262 of the DGCL or any successor provision ("Dissenting Shares") shall not be
converted into a right to receive the Per Share Merger Consideration unless such
Dissenting Stockholder fails to perfect or otherwise loses or withdraws such
Dissenting Stockholder's right to such appraisal, if any. Provided the holder of
any Dissenting Shares complies with the provisions of the DGCL, such holder
shall have with respect thereto solely the appraisal rights provided under
Section 262 of the DGCL. If, after the Effective Time, such Dissenting
Stockholder fails to perfect or otherwise loses or withdraws any such right to
appraisal, each such share of such Dissenting Stockholder shall be treated as a
share that had been converted as of the Effective Time into the right to receive
the Per Share Merger Consideration in accordance with this Section 1.8. The
Company shall give prompt notice to Purchaser of any demands received by the
Company for appraisal of any Dissenting Shares, and Purchaser shall have the
right to participate in and direct all negotiations and proceedings with respect
to such demands. The Company shall not, except with the prior written consent of
Purchaser, which consent shall not be unreasonably withheld, make any payment
with respect to, or settle or offer to settle, any such demands.
1.9 Exchange of Certificates.
------------------------
(a) Prior to the Effective Time, a bank or trust company to be
designated by the Purchaser (the "Exchange Agent") shall act as exchange agent
in effecting the exchange of the Per Share Merger Consideration for Certificates
which, prior to the Effective Time, represented Shares entitled to payment
pursuant to Section 1.6 hereof. Prior to the Effective Time, the Purchaser shall
deposit with the Exchange Agent the aggregate Per Share Merger Consideration
necessary to make the payments contemplated hereby on a timely basis (the
"Deposit Amount") in trust for the benefit of the holders of Certificates.
Pending distribution pursuant to this Section 1.9(a) of the Deposit Amount
deposited with the Exchange Agent, the Surviving Corporation may direct the
Exchange Agent to invest such Deposit Amount, provided that such investments (i)
shall be obligations of or guaranteed by the United States of America, in
commercial paper obligations receiving the highest rating from either Moody's
Investors Services, Inc. or Standard & Poor's Ratings Services, a division of
The McGraw Hill Companies, Inc., or in certificates of deposit, bank repurchase
agreements or bankers acceptances of commercial banks with capital exceeding
$500,000,000 (collectively "Permitted Investments") or in money market funds
which are invested solely in Permitted Investments and (ii) shall have
maturities that will not prevent or delay payments to be made pursuant to this
Section 1.9(a). Upon the surrender of each such
4
Certificate and the issuance and delivery by the Exchange Agent of the Per Share
Merger Consideration in exchange therefor, such Certificate shall forthwith be
cancelled. Until so surrendered and exchanged, each such Certificate (other than
Certificates representing Shares held by the Company or the Purchaser and by
Dissenting Shares) shall represent solely the right to receive the Per Share
Merger Consideration, without interest, multiplied by the number of Shares
represented by such Certificate. Promptly after the Effective Time, the Exchange
Agent shall mail to each record holder of Certificates which immediately prior
to the Effective Time represented Shares a form of letter of transmittal and
instructions for use in surrendering such Certificates and receiving the Per
Share Merger Consideration therefor. Upon the surrender to the Exchange Agent of
such an outstanding Certificate together with such letter of transmittal, duly
completed and validly executed in accordance with the instructions thereto, and
such other documents as may be required pursuant to such instructions, the
holder shall receive the Per Share Merger Consideration, without any interest
thereon. If any Per Share Merger Consideration is to be paid to a name other
than the name in which the Certificate representing Shares surrendered in
exchange therefor is registered, it shall be a condition to such payment or
exchange that the Person requesting such payment or exchange shall pay to the
Exchange Agent any transfer or other taxes required by reason of the payment of
such Per Share Merger Consideration to a name other than that of the registered
holder of the Certificate surrendered, or such Person shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable. Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to a holder of Shares for any Per Share Merger
Consideration delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(b) The Surviving Corporation shall not be entitled to the return of
any amount in the possession of the Exchange Agent relating to the transactions
described in this Agreement until the date which is 180 days after the Effective
Time. Thereafter, each holder of a Certificate representing a Share may
surrender such Certificate to the Surviving Corporation and (subject to
applicable abandoned property, escheat and similar laws) receive in exchange
therefor the Per Share Merger Consideration, without any interest thereon, but
shall have no greater rights against the Surviving Corporation than may be
accorded to general creditors of the Surviving Corporation.
(c) At and after the Effective Time, the holders of Certificates to be
exchanged for the Per Share Merger Consideration pursuant to this Agreement
shall cease to have any rights as stockholders of the Company except for the
right to surrender such holder's Certificates in exchange for payment of the Per
Share Merger Consideration, and after the Effective Time there shall be no
transfers on the stock transfer books of the Surviving Corporation of the Shares
which were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation or the
Exchange Agent, they shall be cancelled and exchanged for the Per Share Merger
Consideration, as provided in this Article I, subject to applicable law in the
case of Dissenting Shares.
(d) The provisions of this Section 1.9 shall also apply to Dissenting
Shares that lose their status as such, except that the obligations of the
Exchange Agent under this Section 1.9 shall commence on the date of loss of such
status.
1.10 Supplementary Action.
--------------------
5
If at any time after the Effective Time, any further
assignments or assurances in law or any other things are necessary or desirable
to vest or to perfect or confirm of record in the Surviving Corporation the
title to any property or rights of either the Company or Purchaser, or otherwise
to carry out the provisions of this Agreement, the officers and directors of the
Surviving Corporation are hereby authorized and empowered, in the name of and on
behalf of the Company and Purchaser, to execute and deliver any and all things
necessary or proper to vest or to perfect or confirm title to such property or
rights in the Surviving Corporation, and otherwise to carry out the purposes and
provisions of this Agreement.
1.11 Lost, Stolen or Destroyed Company Certificates.
----------------------------------------------
In the event any Certificates shall have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed Certificates, upon making of an affidavit of the fact by the holder
thereof, certificates representing such shares of Company Common Stock to be
exchanged in the manner described in this Article I; provided, however, that
Purchaser may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificates to
indemnify Purchaser against any claim that may be made against Purchaser the
Surviving Corporation or the Exchange Agent with respect to the Certificates
alleged to have been lost, stolen or destroyed.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser that:
2.1 Organization and Qualification.
------------------------------
The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Each Subsidiary of
the Company is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation. The Company
and its Subsidiaries have all requisite corporate power and authority to own,
operate and lease their properties and to carry on their business in all
material respects as it is now being conducted. Each of the Company and its
Subsidiaries is duly qualified as a foreign corporation, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary, other than in jurisdictions where the failure to be so qualified,
individually and in the aggregate, has not had and would not reasonably be
expected to have a Material Adverse Effect. Other than the Company's ownership
interest in its Subsidiaries, and except as set forth on Schedule 2.1 to the
Company Disclosure Letter, the Company has no direct or indirect equity interest
in any partnership, corporation, limited liability company, joint venture,
business association or other entity.
2.2 Certificate of Incorporation; Bylaws; and Stock
Transfer Records.
------------------------------------------------
The Company has made available to the Purchaser prior to the
date of this Agreement complete and correct copies of (i) the Certificate of
Incorporation (or other charter document) and By-laws of the Company and each of
its Subsidiaries, and (ii) a shareholder list of each of the Company and each of
its Subsidiaries.
2.3 Capitalization of the Company.
-----------------------------
(a) As of the date of this Agreement, the authorized capital
stock of the Company consists of (i) 1,000,000 shares of Preferred Stock, par
value $.01 per share, of which none are issued and outstanding, and (ii)
10,000,000 shares of Common Stock, par value $.01 per share, of which 5,239,774
Shares are issued and 4,337,886 Shares are outstanding. Except for (i) the
rights created pursuant to this Agreement, the Company Stock Option Plan and the
Company Rights Plan and (ii) as set forth in Schedule 1.7 and Schedule 2.3(a) of
the Company Disclosure Letter, there are no other options, warrants, calls,
rights, commitments or agreements of any character to which the Company is a
party or by which it is bound obligating the Company to issue, sell, deliver,
repurchase or redeem or cause to be issued, sold, delivered, repurchased or
redeemed any shares of capital stock of, or equity interests in, the Company.
All outstanding Shares are, and all Shares subject to issuance as aforesaid,
upon issuance on the terms
6
and conditions specified in the instruments pursuant to which they are issuable,
will be, duly authorized, validly issued, fully paid and nonassessable and free
of preemptive rights or rights of first refusal. None of the Company or any of
its Subsidiaries is required to redeem, repurchase or otherwise acquire shares
of capital stock of the Company or any of its Subsidiaries, respectively, as a
result of the transactions contemplated by this Agreement. Except as set forth
in Schedule 2.3(a) of the Company Disclosure Letter or other than the Company
Rights Plan, the Company has no stockholder rights plan or agreement in force
providing for the issuance to holders of Shares of rights to purchase or receive
stock, cash or other assets upon the acquisition or proposed acquisition of
Shares by a Person (a "Rights Plan"), nor has the Company's Board of Directors
or stockholders ever adopted a Rights Plan.
(b) All of the Company's Subsidiaries are listed in Schedule
2.3(b) of the Company Disclosure Letter. Except as set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (the
"2000 10-K") or Schedule 2.3(b) of the Company Disclosure Letter, the Company
owns all of the outstanding capital stock of its Subsidiaries.
2.4 Corporate Power, Authorization and Enforceability.
-------------------------------------------------
The Company has all requisite corporate power and authority to
enter into this Agreement and to perform its obligations hereunder and to
consummate all the transactions contemplated hereby. The execution and delivery
of this Agreement by the Company, the performance by the Company of its
obligations hereunder and the consummation by the Company of the transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors and no other corporate action on the part of the Company is necessary
to authorize this Agreement or to consummate the transactions contemplated
hereby (other than, with respect to the Merger, the approval and adoption of
this Agreement by stockholders holding a majority of the outstanding Shares
entitled to vote thereon (the "Company Requisite Vote")). This Agreement has
been duly executed and delivered by the Company and is a legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, subject to the effect of any applicable bankruptcy, moratorium,
insolvency, reorganization or other similar law affecting the enforceability of
creditors' rights generally and to the effect of general principles of equity
which may limit the availability of remedies (whether in a proceeding at law or
in equity). The Company Requisite Vote is the only vote of the holders of any
class or series of capital stock of the Company necessary to adopt this
Agreement and approve the transactions contemplated hereby, including the
Merger. No other vote or consent of the stockholders of the Company is required
by law, the Certificate of Incorporation or Bylaws of the Company or otherwise
in order for the Company to adopt this Agreement or to approve the transactions
contemplated hereby, including the Merger.
2.5 No Conflict; Required Filings and Consents.
------------------------------------------
(a) Except as set forth on Schedule 2.5 of the Company
Disclosure Letter, and assuming satisfaction of any applicable requirements
referred to in Section 2.5(b) below, the execution and delivery by the Company
of this Agreement, the compliance by the Company with the provisions hereof and
the consummation by the Company of the transactions contemplated hereby:
(A) will not conflict with or violate any statute, law,
ordinance, rule, regulation, order, writ, judgment, award,
injunction, decree or ruling applicable to the Company or any
of its Subsidiaries or any of their properties, or conflict
with, violate or result in any breach of or constitute a
default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any
rights of termination, amendment, cancellation or acceleration
of, or the loss of a benefit under, or result in the creation
of a lien, security interest, charge or encumbrance on any of
the properties or assets of the Company or any of its
Subsidiaries, including pursuant to (i) the Certificate of
Incorporation (or other charter document) or Bylaws of the
Company or any of its Subsidiaries, or (ii) any contract,
lease, agreement, note, bond, mortgage, indenture, deed of
trust, or other instrument or obligation, or any license,
authorization, permit, certificate or other franchise, other
than such conflicts, violations, breaches, defaults, losses,
7
rights of termination, amendment, cancellation or
acceleration, liens, security interests, charges or
encumbrances as to which requisite waivers have been obtained
or which in either case individually or in the aggregate have
not had and would not reasonably be expected to have a
Material Adverse Effect; and
(B) subject to shareholder dissenters' rights, do not
and will not result in any grant of rights to any other party
under the Certificate of Incorporation (or other charter
document) or Bylaws of the Company or any of its Subsidiaries
or restrict or impair the ability of the Purchaser or any of
its Subsidiaries to vote, or otherwise exercise the rights of
a stockholder with respect to shares of the Company or any of
its Subsidiaries that may be directly or indirectly acquired
or controlled by them.
(b) Other than in connection with or in compliance with the
provisions of the DGCL, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the "blue sky" laws of various states, approvals,
registrations, permits, licenses, authorizations, waivers or consents required
to be obtained under applicable state or local laws, including but not limited
to NASDAQ rules, applicable state takeover laws, the premerger notification
requirement of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), if applicable to the transactions contemplated hereby,
and the filing and recordation of the Certificate of merger as required under
the DGCL (collectively, "Regulatory Consents"), (i) the Company is not required
to submit any notice, report, registration, declaration or other filing with any
federal, state or local government, court, administrative agency or commission
or other governmental authority or instrumentality, domestic or foreign
(collectively, "Governmental Entities"), in connection with the execution or
delivery of this Agreement by the Company or the performance by the Company of
its obligations hereunder or the consummation by the Company of the transactions
contemplated by this Agreement and (ii) no waiver, consent, approval, order or
authorization of any Governmental Entity is required to be obtained in
connection with the execution or delivery of this Agreement by the Company or
the performance by the Company of its obligations hereunder or the consummation
by the Company of the transactions contemplated by this Agreement, other than
such notices, reports, registrations, declarations, filings, waivers, consents,
approvals, orders, or authorizations, the absence of which would not,
individually and in the aggregate, subject the Company or its Subsidiaries to
any criminal penalties or otherwise reasonably be expected to have a Material
Adverse Effect.
2.6 SEC Reports; Financial Statements.
---------------------------------
The Company has filed all required reports, schedules, forms,
statements and other documents with the Securities and Exchange Commission (the
"SEC") from January 1, 1998 through the date hereof (collectively, the "SEC
Reports"). The financial statements contained in the SEC Reports (or
incorporated therein by reference) and the consolidated financial statements of
the Company and its Subsidiaries for the fiscal year ended December 30, 2000
included in the 2000 10-K (collectively, the "Financial Statements"), were
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods involved ("GAAP") (except as may be
indicated in the notes or schedules thereto and except, in the case of the
unaudited interim statements, as may be permitted under Form 10-Q of the
Exchange Act) and present fairly in all material respects the consolidated
financial position of the Company and its consolidated Subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows as
of the dates and for the fiscal periods indicated therein (subject, in the case
of unaudited interim financial statements, to normal year-end adjustments). On
the date of filing thereof, and as of the date hereof, each SEC Report filed
with the SEC complied in all material respects with the then applicable
requirements of the Exchange Act and the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations of the SEC promulgated
thereunder and do not contain any untrue statement of a material fact or omit 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. None of the Company's Subsidiaries is required to file any
statements or reports with the SEC.
2.7 No Default; Violation; Dispute.
------------------------------
8
Neither the Company nor any of its Subsidiaries is in default
or violation, and, to the Company's knowledge, no claims exist with respect to
(and no event has occurred which with or without notice, the lapse of time or
the happening or occurrence of any other event would constitute a default or
violation or claim) any term, condition or provision of (i) its Certificate of
Incorporation (or other charter document) or Bylaws, or (ii) except as set forth
in Schedule 2.7 of the Company Disclosure Letter, any contract, lease,
agreement, license, note, bond, employee benefit agreement or plan, arrangement
under which it owns or leases real or personal property, mortgage, indenture,
deed of trust or other instrument or obligation to which the Company or any of
its Subsidiaries is a party or by which the Company or its Subsidiaries or any
of their properties or assets may be bound (nor to the knowledge of the Company
is any other party thereto in breach thereof or default thereunder), except in
the case of this clause (ii) for any defaults, violations or claims that
individually and in the aggregate would not have a Material Adverse Effect.
2.8 Compliance with Law.
-------------------
Except as set forth in Schedule 2.8 of the Company Disclosure
Letter, each of the Company and its Subsidiaries is in compliance, and has
conducted its respective businesses so as to comply with, all statutes, laws,
ordinances, rules, regulations, permits and approvals applicable to its
operations, except for violations which, individually and in the aggregate, do
not and insofar as reasonably can be foreseen in the future would not have a
Material Adverse Effect. Except as disclosed in the SEC Reports, as of the date
hereof no investigation or review by any Governmental Entity with respect to the
Company, any of its Subsidiaries or any property owned or leased by the Company
or any of its Subsidiaries is pending or, to the knowledge of the Company,
threatened, except for any investigation or review that would not individually
and in the aggregate have a Material Adverse Effect.
2.9 Absence of Certain Changes.
--------------------------
As of the date of this Agreement, except as disclosed in
Schedule 2.9 of the Company Disclosure Letter, or in the 2000 10-K, since
December 30, 2000, the Company and its Subsidiaries have conducted their
business in the ordinary course consistent with past practice and have not taken
any of the actions set forth in paragraphs (i) through (vi) of Section 4.1, and
there has not been any occurrence, including the commencement or to the
knowledge of the Company, threat of any action, suit, investigation or
proceeding against the Company or its Subsidiaries, that has had or would
reasonably be expected to have a Material Adverse Effect, other than occurrences
relating to or arising out of the economy in general or the industries of the
Company and its Subsidiaries in general and not specifically relating to the
Company or any of its Subsidiaries, occurrences related to the execution of this
Agreement and the announcement of the transactions contemplated hereby, or
occurrences otherwise agreed to in writing by Purchaser.
2.10 No Undisclosed Liabilities.
--------------------------
Except for liabilities and obligations incurred since December
30, 2000 in the ordinary course of business, liabilities and obligations
incurred in connection with this Agreement or any of the agreements to be
entered into pursuant to this Agreement, and liabilities and obligations
identified in Schedule 2.10 of the Company Disclosure Letter, neither the
Company nor any of its Subsidiaries has any liabilities or obligations of any
nature whatsoever, including guarantees or other similar obligations, (whether
absolute, accrued, fixed, contingent, liquidated, unliquidated or otherwise),
other than liabilities or obligations recognized or disclosed in the Financial
Statements or disclosed in the 2000 10-K, or which individually or in the
aggregate would not have a Material Adverse Effect.
2.11 Litigation; Claims.
------------------
There are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against the Company arising out of or in
any way related to this Agreement, the Merger or any of the transactions
contemplated hereby or thereby.
9
2.12 INTENTIONALLY OMITTED.
2.13 Disclosure Documents.
--------------------
(a) Each document required to be filed by the Company with the
SEC in connection with the transactions contemplated by this Agreement,
including on Schedule 13E-3, (the "Company Disclosure Documents") and any
amendments or supplements thereto, will, when filed, comply as to form with the
applicable requirements of the Exchange Act and the rules and regulations
thereunder.
(b) At the time any Company Disclosure Document or any
amendment or supplement thereto is first mailed to stockholders of the Company,
it will not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the
light of the filing of any Company Disclosure Documents or any amendment or
supplement thereto, not misleading, and from the time of any distribution
thereof through the Effective Time each such Company Disclosure Document will
not contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The representations
and warranties contained in paragraphs (a) and (b) of this Section 2.13 will not
apply to statements or omissions included in the Company Disclosure Documents,
if any, based upon information furnished to the Company in writing by Purchaser
specifically for use therein.
(c) The information with respect to the Company or any
Subsidiary that the Company furnishes to Purchaser in writing specifically for
use in the Schedule 13E-3 (as defined herein), the Preliminary Proxy Statement
and the Company Proxy Statement will not, at the time of the filing thereof, and
from the time of any distribution thereof through the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. The representations and warranties contained in this Section 2.13(c)
will not apply to statements or omissions included in the Schedule 13E-3, the
Preliminary Proxy Statement (as hereinafter defined) and Company Proxy Statement
(as hereinafter defined), if any, based upon information furnished by Purchaser,
or its Affiliates specifically for use therein.
2.14 INTENTIONALLY OMITTED.
2.15 Environmental Matters. Except as would not
individually or in the aggregate have a Material Adverse Effect:
(a) Neither the Company nor any of its Subsidiaries nor to the
knowledge of the Company as of the date of this Agreement any operator or owner
of their respective past or present properties is in violation, or alleged
violation, of any judgment, decree, order, law, license, rule or regulation
pertaining to environmental matters, including without limitation, those arising
under the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), the Super fund Amendments and Reauthorization Act of 1986 ("SARA"),
the Federal Water Pollution Control Act, the Solid Waste Disposal Act, as
amended, the Federal Clean Water Act, the Federal Clean Air Act, the Toxic
Substances Control Act, the Occupational Safety and Health Act of 1970, as
amended, or any state or local statute, regulation, ordinance, order or decree
relating to health, safety or the environment (hereinafter "Environmental
Laws").
(b) There have been no releases (i.e., any past or present
releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, disposing or dumping) or threatened releases of any
hazardous waste as defined by 42 U.S.C. (S)6903(5), any hazardous substances as
defined by 42 U.S.C.(S)9601(33) or any toxic substance, oil or
10
hazardous materials or other chemicals or substances regulated by any
Environmental Laws ("Hazardous Substances ") on, upon, into or from any
properties of the Company or its Subsidiaries.
(c) As of the date of this Agreement, no amounts of Hazardous
Substance has been discharged, generated, treated, manufactured, handled,
stored, transported, emitted, released or is present at any property now or
previously owned, leased or operated by the Company except in compliance with
all applicable Environmental Laws.
2.16 Takeover Laws.
-------------
The provisions of Sections 203 of the DGCL either does not
apply to the execution, delivery and performance of this Agreement and the
consummation of the Merger or has been rendered inapplicable because of a vote
of the Board of Directors approving the consummation of the Merger and the
transactions contemplated by this Agreement. No "fair price," "control share
acquisition" or other similar anti-take over statute or regulation enacted in
any jurisdiction other than Delaware is applicable to the execution, delivery
and performance of this Agreement, or the consummation of the Merger.
2.17 Board Recommendation; Fairness Opinion.
--------------------------------------
(a) The Company represents that each of the Special Committee
and the Board of Directors, upon the recommendation of the Special Committee,
each at meetings duly called and held, have (i) determined, that this Agreement,
the Merger and the other transactions contemplated hereby are fair to, advisable
and in the best interests of the Company's stockholders (other than Purchaser
and its current and future stockholders), (ii) approved this Agreement, and the
transactions contemplated hereby, including the Merger, which approvals, and
prior actions taken by such Board immediately prior to the execution of this
Agreement, are sufficient to render entirely inapplicable to the Merger and
Purchaser and its Affiliates, as of the date hereof, the provisions of Section
203 of the DGCL, (iii) resolved to recommend approval of this Agreement and
adoption of the Merger by its stockholders and (iv) resolved to amend the
Company Rights Plan so as to render it inapplicable to the Merger and Purchaser,
or to redeem all of the outstanding rights under the Company Rights Plan.
(b) The Special Committee has received the written opinion of
its Financial Advisor, dated as of the date of this Agreement, to the effect
that, based on, and subject to, the various assumptions and qualifications set
forth therein, as of the date of such opinion, the Per Share Merger
Consideration to be received by holders of Shares (other than Purchaser and its
current and future stockholders) pursuant to the Merger is fair from a financial
point of view to such holders (the "Fairness Opinion"). The Company has
delivered to the Purchaser a copy of the Fairness Opinion, together with the
Financial Advisor's written consent to the inclusion of or reference to the
Fairness Opinion in the Schedule 13E-3, the Preliminary Proxy Statement and the
Company Proxy Statement.
2.18 INTENTIONALLY OMITTED.
2.19 Brokers and Finders.
-------------------
The Special Committee has furnished to Purchaser or its
counsel a true and complete copy of the letter agreement (the "Engagement
Letter") between the Company and the Financial Advisor, such Engagement Letter
being the only agreement pursuant to which such firm would be entitled to any
payment relating to the transactions contemplated hereunder. Other than as set
forth herein or in Schedule 2.19 of the Company Disclosure Letter, no broker,
financial advisor or investment banker or other person is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company or any of its Subsidiaries.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to the Company that:
11
3.1 Organization and Qualification. The Purchaser is a
corporation or other entity duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, and has all
requisite power and authority to own, operate and lease its properties and to
carry on its business in all material respects as it is now being conducted.
Purchaser is a new corporation that was formed for the purpose of consummating
the transactions contemplated by this Agreement. Purchaser has not conducted any
business or engaged in any activities unrelated to the transactions contemplated
by this Agreement. Purchaser has no material liabilities other than in
connection with the transactions contemplated by this Agreement and the
financing arrangements with the Lending Sources.
3.2 Corporate Power, Authorization and Enforceability. The
Purchaser has all requisite power and authority to enter into this Agreement and
to perform its obligations hereunder and to consummate all the transactions
contemplated hereby. The execution and delivery of this Agreement by Purchaser,
the performance by the Purchaser of its obligations hereunder and the
consummation by Purchaser of the transactions contemplated hereby have been duly
and validly authorized by the Board of Directors of Purchaser and the
stockholders of the Purchaser, and no other corporate action on the part of
Purchaser is necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Purchaser and is a legal, valid and binding obligation of the
Purchaser, enforceable against the Purchaser in accordance with its terms.
3.3 No Conflict; Required Filings and Consents.
(a) Assuming satisfaction of all applicable requirements
referred to in Section 3.3(b) below, the execution and delivery of this
Agreement by the Purchaser, the compliance by the Purchaser with the provisions
hereof and the consummation by the Purchaser of the transactions contemplated
hereby will not conflict with or violate any statute, law, ordinance, rule,
regulation, order, writ, judgment, award, injunction, decree or ruling
applicable to the Purchaser or any of its properties, or conflict with, violate
or result in any breach of or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, cancellation or acceleration of, or the
loss of a benefit under, or result in the creation of a lien, security interest,
charge or encumbrance on any of the properties or assets of Purchaser pursuant
to (i) the organizational documents of the Purchaser or (ii) any contract,
lease, agreement, note, bond, mortgage, indenture, deed of trust, or other
instrument or obligation, or any license, authorization, permit, certificate or
other franchise, other than such conflicts, violations, breaches, defaults,
losses, rights of termination, amendment, cancellation or acceleration, liens,
security interests, charges or encumbrances as to which requisite waivers have
been obtained or which individually and in the aggregate would not have a
material adverse effect on the ability of the Purchaser to perform its
obligations under this Agreement.
(b) Other than in connection with or in compliance with the
provisions of the DGCL, the Exchange Act, the "blue sky" laws of various states
and the HSR Act, if applicable (i) the Purchaser is not required to submit any
notice, report, registration, declaration or other filing with any Governmental
Entity in connection with the execution or delivery of this Agreement by
Purchaser or the performance by Purchaser of its obligations hereunder or the
consummation by Purchaser of the transactions contemplated by this Agreement and
(ii) no waiver, consent, approval, order or authorization of any Governmental
Entity is required to be obtained by the Purchaser in connection with the
execution or delivery of this Agreement by Purchaser or the performance by the
Purchaser of its obligations hereunder or the consummation by the Purchaser of
the transactions contemplated by this Agreement.
3.4 Board and Stockholder Approval. The Board of Directors and
stockholders of the Purchaser has approved this Agreement and the Merger and has
authorized the proper officers to execute and deliver this Agreement and all
necessary action has been taken in connection therewith.
3.5 Brokers and Finders. No broker, finder or investment
banker, other than any whose fees and expenses will be paid by the Purchaser, is
entitled to any brokerage, finder's or other fee or commission in
12
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Purchaser.
3.6 Disclosure Documents.
--------------------
(a) Each document required to be filed by the Purchaser with
the SEC in connection with the transactions contemplated by this Agreement,
including on Schedule 13E-3 (the "Purchaser Disclosure Documents") and any
amendments or supplements thereto, will, when filed, comply as to form with the
applicable requirements of the Exchange Act and the rules and regulations
thereunder.
(b) The information with respect to the Purchaser that
Purchaser furnishes to the Company in writing specifically for use in any
Company Disclosure Documents will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in the light of the
circumstances under which they made, not misleading; provided that no
representation is made by Purchaser with respect to statements or omissions in
the Company Disclosure Documents based upon information furnished to Purchaser
by the Company specifically for use therein.
(c) The Schedule 13E-3, the Preliminary Proxy Statement and
Company Proxy Statement will comply with the applicable requirements of the
Exchange Act and will not, at the time of the filing thereof, or from the time
of any distribution thereof through the Effective Time contain any untrue
statement of material fact or omit to state any material fact required to be
stated therein or necessary to make the statements made therein, in the light of
the circumstances under which they were made, not misleading; provided, that no
representation is made by the Purchaser with respect to the statements or
omissions in the Schedule 13E-3, the Preliminary Proxy Statement or the Company
Proxy Statement based upon information furnished to Purchaser in writing by the
Company specifically for use therein.
(d) The information contained in the Schedule 13D and the
amendments thereto filed by the current stockholders of Purchaser is true and
accurate in all material respects. In addition, neither Purchaser nor any of its
Affiliates were, prior to the execution of this Agreement, subject to the
prohibitions on transactions generally applicable to "interested stockholders"
within the meaning of Section 203 of the DGCL.
ARTICLE IV
COVENANTS
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4.1 Conduct of Business by the Company. Except as required or
permitted by this Agreement, during the period from the date of this Agreement
until the Effective Time, the Company agrees as to itself and its Subsidiaries
that (except to the extent that Purchaser shall otherwise consent in writing)
the Company and its Subsidiaries shall conduct their respective operations in
the ordinary course of business consistent with past practice, and each of the
Company and its Subsidiaries will use its commercially reasonable efforts to
preserve intact its present business organization, to keep available the
services of its present officers and employees and to maintain satisfactory
relationships with licensors, licensees, suppliers, contractors, distributors,
customers and others having business relationships with it and to maintain
insurance on the same terms as are in effect on the date of this Agreement.
Without limiting the generality of the foregoing, during the period from the
date of this Agreement to the Effective Time, neither the Company nor any of its
Subsidiaries shall, without the prior written consent of Purchaser:
(i) amend its Certificate of Incorporation or other charter
document or Bylaws;
(ii) authorize for issuance, issue, sell, deliver, pledge
or agree or commit to issue, sell, deliver or pledge (whether through the
issuance or granting of options, warrants, commitments, subscriptions, rights to
purchase or otherwise) any capital stock of any class or any debt or other
securities convertible into capital stock or equivalents (including, without
limitation, stock appreciation rights), or amend any of the terms of any of the
foregoing, other than the issuance of shares of capital stock upon the exercise
of outstanding options under the Company Stock Option Plan;
(iii) (A) split, combine or reclassify any shares of its
capital stock, or authorize or propose the issuance or authorization of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock, or declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
its capital stock, adopt or approve any Rights Plan, or repurchase, redeem or
otherwise acquire any of its securities or any securities of its Subsidiaries,
or (B) declare or pay any dividend of any kind, make any payment of cash or
other property to shareholders or to terminate, cancel or otherwise settle any
outstanding Options under the Company Stock Option Plan, other than in the case
of clauses (A) or (B) above for the issuance of Shares in connection with the
exercise of options or the repurchase of Shares to the extent contractually
required pursuant to the terms of existing employee stock repurchase agreements
or this Agreement, or the cancellation of non-vested options of terminated
employees; or issue any new Options or equivalent instruments of any kind;
(iv) without prior consultation with the Purchaser (in
addition to the consent requirement described above) commence any litigation or
arbitration other than in accordance with past practice or settle any litigation
or arbitration for money damages or other relief in excess of $50,000 or if as
part of such settlement the Company or any Subsidiary would agree to any
restrictions on its operations;
(v) waive, release or amend its rights under any
confidentiality, "standstill" or similar agreement that the Company entered into
in connection with its consideration of a potential strategic transaction;
provided, however, that the Company may waive, release or amend its rights under
any such confidentiality, "standstill" or similar agreement if the Company's
Board determines, after consultation with its independent legal counsel, that
failure to do so would be reasonably likely to constitute a breach of its
fiduciary duties to the Company's stockholders under applicable law; or
14
(vi) take, or agree in writing or otherwise to take, any of
the actions described in Sections 4.1(i) through 4.1(v).
4.2 Access to Information; Confidentiality.
--------------------------------------
(a) From the date of this Agreement to the Effective
Time, the Company shall, and shall cause its Subsidiaries, officers, directors,
employees and agents to, afford the officers, employees and agents of Purchaser
and its Affiliates and the attorneys, accountants, banks, other financial
institutions and investment banks working with Purchaser, and its respective
officers, employees and agents ("Representatives") reasonable access, at all
reasonable times upon reasonable notice and in such manner as will not
unreasonably interfere with the conduct of the Company's business, to its
officers, employees, agents, properties, books, records and contracts, and shall
furnish, Purchaser and its Affiliates and the attorneys, banks, other financial
institutions and investment banks working with Purchaser, all financial,
operating and other data and information as they reasonably request.
(b) Any information heretofore or hereafter furnished by
the Company which is non-public, confidential or proprietary in nature is
referred to in this Agreement as "Confidential Information". The Purchaser
agrees that the Confidential Information will be used solely for the purpose of
consummating the transactions contemplated by this Agreement, and until the
Effective Time, such information will be kept confidential by the Purchaser and
its Representatives (as defined below), except that the Confidential Information
or portions thereof may be disclosed to those Representatives of the Purchaser
who need to know such information solely for the purpose of evaluating the
transactions contemplated by this Agreement.
(c) In the event that the Purchaser or any of its
Representatives become legally compelled (by deposition, interrogatory, request
for documents, subpoena, civil investigative demand or similar process) to
disclose any of the Confidential Information, the Purchaser shall provide the
Company with prompt prior written notice of such requirement so that the Company
may seek a protective order or other appropriate remedy and/or waive compliance
with the terms of this Section 4.2. In the event that such protective order or
other remedy is not obtained, or that the Company waives compliance with the
provisions hereof, the Purchaser agree, to furnish only that portion of the
Confidential Information which the Purchaser is advised by counsel is legally
required and to exercise commercially reasonable efforts to obtain assurance
that confidential treatment will be accorded such Confidential Information.
(d) The term "Confidential Information" does not include
any information that the Purchaser can demonstrate that at the time of
disclosure or thereafter is generally available to the public (other than as a
result of its disclosure directly or indirectly by the Purchaser or its
Representatives).
(e) If this Agreement is terminated pursuant to Article
VI, upon the Company's request, the Purchaser will promptly return to the
Company any and all copies of the Confidential Information in its possession or
in the possession of its Representatives, and the Purchaser and its
Representatives will promptly destroy all copies of any analyses, compilations,
studies or other documents prepared by or for the Purchaser which reflect or
contain any Confidential Information, except for any of the foregoing which
Purchaser or its counsel deems advisable to retain in connection with pending or
future litigation, provided that such Confidential Information is retained by
the Purchaser's counsel and only for so long as considered advisable in light of
any pending or future litigation.
15
(f) No investigation pursuant to this Section 4.2 shall
affect any representations or warranties of the parties herein or the conditions
to the obligations of the parties hereto.
4.3 Preparation of Proxy Statement; Stockholders Meeting;
Schedule 13E-3.
-----------------------------------------------------
(a) The Company will, as promptly as practicable following the
date of this Agreement and in consultation with Purchaser, duly call, give
notice of, convene and hold a meeting of its stockholders (the "Stockholders'
Meeting") for the purpose of approving this Agreement, the Merger and the
transaction contemplated by this Agreement, except as otherwise provided in
Section 4.3(f) below. Nothing herein shall prevent the company from adjourning
or postponing the Company's stockholders meeting if there are insufficient
shares of Company Common Stock necessary to conduct business at its meeting of
the Stockholders. Subject to Section 4.5, the Company will, through the Board of
Directors and the Special Committee, recommend to its stockholders approval of
the foregoing matters and seek to obtain all necessary votes and approvals
thereof by the stockholders required to approve the Merger.
(b) In connection with the Stockholders' Meeting contemplated
hereby, the Company will promptly prepare and file, and Purchaser will cooperate
with the Company in the preparation and filing of, a preliminary proxy statement
(the "Preliminary Proxy Statement") with the SEC and will use its commercially
reasonable efforts to respond to the comments of the SEC concerning the
Preliminary Proxy Statement and to cause a final proxy statement (the "Company
Proxy Statement") to be mailed to the Company's stockholders, in each case as
soon as reasonably practicable. The Purchaser will promptly prepare, and the
Company will cooperate with the Purchaser in the preparation and filing of the
Rule 13E-3 Transaction Statement on Schedule 13E-3 (the "Schedule 13E-3") with
the SEC and will use its commercially reasonable efforts to respond to comments
by the SEC concerning the Schedule 13E-3. Purchaser shall be given a reasonable
opportunity to review and comment on all filings with the SEC and all mailings
to the Company's stockholders in connection with the Merger prior to the filing
or mailing thereof, and the Company shall use its commercially reasonable
efforts to reflect all such comments. The Company shall pay the filing fees for
any Company Schedule 13E-3 and the Preliminary Proxy Statement. Each party to
this Agreement will notify the other parties promptly of the receipt of the
comments of the SEC, if any, notification of SEC approval of the Company Proxy
Statement and of any request by the SEC for amendments or supplements to the
Schedule 13E-3, the Preliminary Proxy Statement or the Company Proxy Statement
or for additional information, and will promptly supply the other parties with
copies of all correspondence between such party or its representatives, on the
one hand, and the SEC or members of its staff, on the other hand, with respect
to the Schedule 13E-3, the Preliminary Proxy Statement, the Company Proxy
Statement or the Merger.
(c) If at any time prior to the Stockholders' Meeting, any
event should occur relating to the Company or any of the Subsidiaries which
should be set forth in an amendment of, or a supplement to, the Schedule 13E-3
or the Company Proxy Statement, the Company will promptly inform Purchaser. If
at any time prior to the Stockholders' Meeting, any event should occur relating
to Purchaser or any of its Associates or Affiliates, or relating to the plans of
any such persons for the Surviving Corporation after the Effective Time of the
Merger, or relating to the Financing, that should be set forth in an amendment
of, or a supplement to, the Schedule 13E-3 or the Company Proxy Statement, the
Purchaser, with the cooperation of Company, will, upon learning of such event,
promptly prepare, file and, if required, mail such amendment or supplement to
the Company's stockholders; provided that, prior to such filing or mailing, the
Company shall consult with Purchaser with respect to such amendment or
supplement and shall afford Purchaser reasonable opportunity to comment thereon.
16
(d) Purchaser shall furnish to the Company the information
relating to Purchaser and its Affiliates and the plans of such persons for the
Surviving Corporation after the Effective Time of the Merger, and relating to
any financing matters, which is required to be set forth in the Preliminary
Proxy Statement or the Company Proxy Statement under the Exchange Act and the
rules and regulations of the SEC thereunder. The Company shall cause, to the
extent available, to be included as an exhibit to the Preliminary Proxy
Statement and the Company Proxy Statement, the written Fairness Opinion as an
exhibit to the Schedule 13E-3, and any reports or opinion delivered to the Board
of Directors or the Special Committee by the Financial Advisor in connection
with the delivery of the Fairness Opinion which are required under Schedule
13E-3 to be filed as exhibits.
(e) The Company will cause its transfer agent to make stock
transfer records relating to the Company available to the extent reasonably
necessary to effectuate the intent of this Agreement.
(f) The parties hereto understand and agree that if the
Special Committee withdraws its approval or recommendation of the Merger
pursuant to and in compliance with the provisions of Section 4.5 below, the
Company will not convene or hold a Stockholder Meeting without obtaining the
prior consent of the Special Committee.
4.4 Regulatory Filings. Promptly after the delivery of the
Commitments, the parties will cooperate in making any filings necessary under
any government regulatory requirements that may be applicable to the Merger,
including filings, if any, necessary under the HSR Act.
4.5 Acquisition Proposals.
---------------------
(a) Except as expressly permitted by this Section 4.5, neither
the Board of Directors nor the Special Committee shall (i) withdraw or modify,
or propose publicly to withdraw or modify, in a manner adverse to the Purchaser,
its approval or recommendation of the Merger or this Agreement, (ii) approve or
recommend, or propose publicly to approve or recommend, any Acquisition
Proposal, or (iii) cause the Company to enter into any outline, letter of
intent, agreement in principle, acquisition agreement or other similar
agreement, whether or not binding on the parties, (each, a "Company Acquisition
Agreement") related to any Acquisition Proposal (as hereinafter defined).
Notwithstanding the foregoing, if at anytime the Board of Directors or the
Special Committee determines in good faith, after consultation with and receipt
of advice from outside counsel or its financial advisor, that it is necessary to
do so in order to act in a manner consistent with its fiduciary duties to the
Company's stockholders under applicable law, subject to compliance with
paragraph (b) below, (x) either the Board of Directors or the Special Committee
may withdraw or modify, or propose publicly to withdraw or modify, its approval
or recommendation of the Merger or this Agreement, (y) the Board of Directors
may approve or recommend, or propose publicly to approve or recommend, a
Superior Proposal, and (z) the Board of Directors may cause the Company to enter
into a Company Acquisition Agreement upon termination of this Agreement pursuant
to Section 6.1(d) and accept such Superior Proposal. For purposes of this
Agreement, a "Superior Proposal" means an Acquisition Proposal that the Special
Committee of the Board of Directors of the Company, in good faith, after
consultation with its outside counsel and its financial advisor, and taking into
account the proposed financing thereof, determines to be of a higher price per
Share and more favorable to the stockholders of the Company than the transaction
contemplated hereunder. For purposes of this Agreement, an "Acquisition
Proposal" means any inquiry or the making of any proposal or offer from any
third party, other than the Purchaser or its Affiliates regarding any merger,
consolidation, share exchange, recapitalization, business combination, the sale
of substantial assets (other than in the ordinary course of business), the sale
or purchase of (or right to sell or
17
purchase) shares of capital stock (other than pursuant to the exercise of stock
options outstanding on the date of this Agreement), tender offer or similar
transactions, whether in a single transaction or a series of transactions,
involving the Company or any of its Subsidiaries.
(b) In addition to the obligations of the Company as set forth
in Section 4.5(a), the Company promptly shall advise the Purchaser orally and in
writing of any request for non-public information, any Acquisition Proposal,
including all of the material proposed terms of such Acquisition Proposal, the
identity of the third party, or any decision by the Company to take any actions
with respect to any of the foregoing (with any such notice referred to as a
"Company Notice"). Any such Company Notice will be delivered promptly after (and
in no event later than 24 hours after) receipt of any request for non-public
information or of any Acquisition Proposal and prior to the Company taking any
of such actions. In addition, in the event the Company intends to enter into a
Company Acquisition Agreement, the Company will deliver a Company Notice at
least twenty-four (24) hours (but Company Notices given on a non-business day,
or after 6:00 p.m. on a business day, shall take effect on the first business
day thereafter) prior to entering into such Company Acquisition Agreement, which
Company Notice will identify the third party and the material proposed terms of
such Company Acquisition Agreement. Subject to confidentiality agreement
requirements imposed by any such third party which shall be substantially
similar to those set forth in Section 4.2 hereof and which the Board of
Directors determines in good faith, after consultation with its outside counsel,
are necessary to enter into in order to act in a manner consistent with its
fiduciary duties to the Company's stockholders under applicable law, the Company
will update the information required to be provided in the Company Notice upon
the request of the Purchaser.
4.6 Public Announcements. Purchaser on the one hand, and the
Company on the other hand, will consult with each other before, and obtain the
other party's consent with respect to, issuing any press release, any filing
with the SEC on Form 8-K or otherwise making any public statements with respect
to this Agreement or the Merger or the other transactions contemplated hereby,
and shall not issue any such press release, SEC Form 8-K filing or make any such
public statement prior to such consultation and consent, except to the extent
that compliance with legal requirements and NASDAQ rules require a party to
issue a press release or public announcement or make an 8-K filing. Any consent
required pursuant to the preceding sentence shall not be unreasonably withheld
or delayed.
4.7 Notification of Certain Matters.
-------------------------------
(a) The Company shall give prompt notice (which notice shall
state that it is delivered pursuant to Section 4.7 of this Agreement) in writing
to Purchaser, and Purchaser shall give prompt notice in writing to the Company,
of (i) the occurrence, or failure to occur, of any event which occurrence or
failure would be likely to cause any representation or warranty of such party
contained in this Agreement to be untrue or inaccurate in any material respect
as of the time such representation or warranty is made and (ii) any material
failure of the Company, Purchaser, as the case may be, or of any officer,
director, employee or agent thereof, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement; provided, however, no such notification shall affect the
representations or warranties of the parties or the conditions to the
obligations of the parties hereunder.
(b) The Company shall give reasonably prompt notice (which
notice shall state that it is delivered pursuant to Section 4.7 of this
Agreement) in writing to Purchaser, of any occurrence that has had or may
reasonably be expected to have a Material Adverse Effect, other than occurrences
relating to or arising out of the economy in general or the industries of the
Company and its Subsidiaries in general and not specifically relating to the
Company or any of
18
its Subsidiaries and occurrences related to the execution of this Agreement
and the announcement of the transactions contemplated hereby.
4.8 Officers' and Directors' Indemnification; Insurance.
---------------------------------------------------
(a) The Purchaser and Surviving Corporation agree that for a
period ending on the sixth anniversary of the Effective Time, the Surviving
Corporation will maintain all rights to indemnification (including with respect
to the advancement of expenses incurred in the defense of any action or suit)
existing on the date of this Agreement in favor of the present and former
directors, officers, employees and agents of the Company as provided in the
Company's Certificate of Incorporation and Bylaws, in each case as in effect on
the date of this Agreement, and that during such period, neither the Certificate
of Incorporation nor the Bylaws of the Surviving Corporation shall be amended to
reduce or limit the rights of indemnity afforded to the present and former
directors, officers, employees and agents of the Company, or the ability of the
Surviving Corporation to indemnify them, nor to hinder, delay or make more
difficult the exercise of such rights or indemnity or the ability to indemnify;
provided; however, that in the event any claim or claims are asserted or made
within such six-year period, all rights to indemnification in respect to any
such claim or claims shall continue until the disposition of any and all such
claims.
(b) The Purchaser and Surviving Corporation agree to cause the
Surviving Corporation to indemnify to the fullest extent permitted under its
Certificate of Incorporation, its Bylaws and applicable law the present and
former directors, officers, employees and agents of the Company against all
losses, damages, liabilities or claims made against them arising from their
service in such capacities prior to and including the Effective Time, to at
least the same extent as such persons are currently permitted to be indemnified
pursuant to the Company's Certificate of Incorporation and Bylaws, for a period
ending on the sixth anniversary of the Effective Time.
(c) Should any claim or claims be made against any present or
former director, officer, employee or agent of the Company, on or prior to the
sixth anniversary of the Effective Time, arising from such person's service as
such at any time prior to the Effective Time, the provisions of this Section 4.8
respecting the Certificate of Incorporation and Bylaws and the obligation of
indemnity of the Surviving Corporation shall continue in effect until the final
disposition of all such claims.
(d) The Company and the Purchaser agree that in the event that
the Surviving Corporation or any of its successors or assigns consolidates with
or merges into any other Person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger, then and in each such
case, proper provisions shall be made so that the successors and assigns of the
Surviving Corporation shall assume the obligations of the surviving Corporation,
set forth in this Section 4.8. The provisions of this Section 4.8(d) are in
addition to, and not substitution for, any other rights or indemnification that
any such person may have by contract or otherwise.
(e) The provisions of this Section 4.8 are intended to be for
the benefit of, and shall be enforceable by, each indemnified party and such
party's heirs and representatives.
19
(f) The Surviving Corporation shall maintain for a period of
six years from the Effective Time the Company's current directors' and officers'
insurance and indemnification policy to the extent that it provides coverage for
events occurring prior to the Effective Time (the "D&O Insurance") for all
persons who are directors and officers of the Company on the date of this
Agreement, so long as such insurance is available on commercially reasonable
terms and the annual premium therefor would not be in excess of 200% of the last
annual premium paid prior to the date of this Agreement (the "Maximum Premium").
If the existing D&O Insurance expires, is terminated or
cancelled during such six-year period, the Purchaser will use all reasonable
efforts to cause to be obtained as much D&O Insurance as can be obtained for the
remainder of such period for an annualized premium not in excess of the Maximum
Premium, on terms and conditions no less advantageous than the existing D&O
Insurance.
4.9 Additional Agreements.
---------------------
(a) Subject to the terms and conditions hereof, each of the
parties to this Agreement agrees to use commercially reasonable efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement (including consummation of the Merger) and to
cooperate with each other in connection with the foregoing.
(b) Subject to the terms and conditions hereof, each of the
parties to this Agreement agrees to use commercially reasonable efforts to: (i)
obtain all necessary waivers, consents and approvals from other parties to loan
agreements, leases, licenses and other contracts, (ii) obtain all necessary
consents, approvals and authorizations as required to be obtained under any
federal, state or foreign law or regulations, including, but not limited to,
those required under the HSR Act, if required, (iii) defend all lawsuits or
other legal proceedings challenging this Agreement or the consummation of the
transactions contemplated hereby, (iv) lift or rescind any injunction or
restraining order or other order adversely affecting the ability of the parties
to consummate the transactions contemplated hereby, (v) effect all necessary
registrations and filings, including, but not limited to, filings under the HSR
Act and submissions of information requested by Governmental Entities, and (vi)
fulfill all conditions to this Agreement.
4.10 Company Indebtedness. Prior to the Effective Time, the
Company and Purchaser shall cooperate with each other in taking such actions
requested by the Purchaser as are reasonably appropriate or necessary in
connection with obtaining the prior written consent of Fleet National Bank, N.A.
prior to the Effective Time.
4.11 Other Actions by the Company. If any "fair price,"
"control share acquisition," "shareholder protection" or other form of
anti-takeover statute, regulation or charter provision or contract is or shall
become applicable to the Merger or the transactions contemplated hereby, the
Company, the Special Committee and the Board of Directors shall, promptly upon
the request of the Purchaser, grant such approvals and take such actions as are
necessary under such laws and provisions so that the transactions contemplated
hereby may be consummated as promptly as practicable on the terms contemplated
hereby and otherwise act to the extent allowable to eliminate or minimize the
effects of such statute, regulation, provision or contract on the transactions
contemplated hereby. The Board of Directors and the Company have taken and shall
continue to take such actions as are necessary to either amend the Company
Rights Plan or redeem any outstanding rights under the Company Rights Plan, so
that the
20
transactions contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated by this Agreement, and otherwise act to
eliminate or minimize the effects of such Company Rights Plan on such
transaction.
4.12 Litigation Cooperation. Promptly upon execution of this
Agreement and until the Effective Time, each of the Company and Purchaser shall
cooperate with each other in connection with any litigation by a third party
arising out of or in connection with this Agreement or any of the transactions
contemplated by this Agreement.
4.13 Future Filings. The Company will deliver to the Purchaser
as soon as they become available true and complete copies of any report or
statement mailed by it to its stockholders generally or filed by it with the SEC
subsequent to the date of this Agreement and prior to the Effective Time. The
Purchaser shall deliver to the Company as soon as they become available, true
and complete copies of any report or statement mailed by it to the Company's
stockholders generally or filed by it with the SEC subsequent to the date of
this Agreement and prior to the Effective Time.
4.14 Board Action Relating to Stock Option Plans. As soon as
practicable following the date of this Agreement, the Board of Directors of the
Company (or, if appropriate, any committee administering a Company Stock Option
Plan) shall adopt such resolutions or take such actions as may be required to
adjust the terms of all outstanding Company Stock Options in accordance with
Section 1.7 and shall make such other changes to the Company Stock Option Plan
in accordance with the terms of the Company Stock Option Plan as the Purchaser,
the Special Committee and the Company deem appropriate to give effect to the
Merger, and, at Purchaser's request, to terminate such plans as of the Effective
Time.
4.15 Knowledge of Inaccuracies. In the event that Purchaser,
its stockholders or any senior executive officer of the Company shall have
knowledge on or prior to the date of this Agreement of the existence or
occurrence of any fact, circumstance, or event the failure of the Company to
disclose which in this Agreement or the Company Disclosure Schedule otherwise
would cause, or be reasonably likely to cause, any inaccuracy or breach by the
Company of any representation, warranty, covenant or other obligation hereunder,
then such fact, circumstance or event shall be deemed to have been disclosed by
the Company to the Purchaser in this Agreement or Company Disclosure Letter.
4.16 Financing Matters.
-----------------
(a) Purchaser has had discussions with one or more banks, financial
institutions or other public or private financing sources (the "Lending
Sources") to determine the available terms of financing and reasonably expects
that such commitments regarding junior or subordinated debt financing, together
with equity contributions to the Purchaser made or to be made by certain
stockholders of the Purchaser (collectively, the "Commitments"), sufficient to
consummate the transactions contemplated by the Merger Agreement, will be
obtainable from such Lending Sources and stockholders of the Purchaser, as the
case may be. The Company acknowledges that the Lending Sources have not had the
opportunity to complete due diligence on all aspects of the Company's
operations, agreements and finances, including with respect to the Company's
operations for the period ended December 30, 2000, and that the results of such
investigation may result in the Commitments being unavailable or available only
in amounts and on terms not acceptable to the Purchaser.
(b) The Company agrees to provide, and will cause its Subsidiaries and
its and their respective officers, employees and advisors to provide, all
cooperation reasonably necessary in connection with the arrangement of any
financing to be consummated contemporaneously with or at or after the expiration
of the Effective Time in respect of the transactions contemplated by this
Agreement, including participation in meetings and, due diligence sessions, the
execution and delivery of any commitment letters, underwriting or placement
agreements, pledge and security documents, other definitive financing documents,
or other requested certificates or documents, including a certificate of the
chief financial officer of the Company, comfort letters of accountants and legal
opinions as may be reasonably requested by Purchaser and taking such
21
other actions as are reasonably required to be taken by the Company in the
Commitments, provided that Purchaser shall use reasonable efforts not to
materially interfere with the duties of such officers, employees and
advisors such that the Company's business and results of operations would be
materially adversely affected thereby.
(c) The Company has entered into or agrees to enter into the engagement
letter agreement (the "Golub Engagement Letter") among Golub Associates
Incorporated, LEG Partners III SBIC, L.P., LEG Partners Debentures SBIC, L.P.
the Purchaser and the Company.
(d) Notwithstanding anything to the contrary contained in this
Agreement, the Company shall not enter into any Commitments or any other
letters, agreements or other documents contemplated by Sections 4.16(b), 4.16(c)
or 5.2(f) if, in the aggregate, such Commitments, letters, agreements or other
documents obligate the Company to pay more than $400,000.00 of fees, costs and
expenses (excluding contingent liabilities such as indemnification obligations),
without the prior consent of the Special Committee.
4.17 Voting. Each of the Purchaser and its stockholders will
vote any and all shares of the Company's Common Stock held by them, or which
they have the right to vote, in favor of approval of the Merger, in person, or
by proxy.
4.18 Exemption from Liability Under Section 16(B). Purchaser
and the Company shall take all such steps as may be required or reasonably
requested to cause the transactions contemplated by this Agreement and any other
dispositions of Company equity securities (including derivative securities) in
connection with this Agreement by each individual who is a director, officer or
ten (10%) percent stockholder of the Company to be exempt under Rule 16b-2
promulgated under the Exchange Act and the rules and regulations promulgated
thereunder, such steps to be taken in accordance with the No-Action Letter dated
January 12, 1999, issued by the SEC to Skadden, Arps, Slate, Meagher & Flom LLP,
or as may otherwise be reasonably requested by the Company.
4.19 Delisting. Each of the parties agrees to cooperate with
each other in taking, or causing to be taken, all actions necessary to delist
the Company Common Stock from NASDAQ and to terminate registration under the
Exchange Act, provided that such delisting and termination shall not be
effective until after the Effective Time of the Merger.
ARTICLE V
CONDITIONS OF MERGER
5.1 Conditions to the Obligations of Each Party to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of each of the
following conditions:
(a) This Agreement and the Merger shall have been approved and adopted
by the affirmative vote of a majority of Shares held by the stockholders of the
Company, as required under the laws of the State of Delaware;
(b) No temporary restraining order, preliminary or permanent
injunction, judgment or other order, decree or ruling nor any statute, rule,
regulation, SEC stop order or other order shall be in effect which would make
the acquisition or holding by Purchaser or its Affiliates of Shares or shares of
Common Stock of the Surviving Corporation illegal or otherwise prevent the
consummation of the Merger; and
22
(c) Upon the written request of either the Purchaser or the Special
Committee prior to the Closing, the Company shall have delivered to the
Purchaser or the Special Committee, as applicable, (i) a pro forma balance sheet
of the Surviving Corporation, on a consolidated basis, as of the Effective Time
(and reflecting any debt incurred by the Surviving Corporation to finance the
Merger), (ii) projections for the Surviving Corporation's operations, on a
consolidated basis, for such period reasonably necessary to deliver the
certificate described in clause (iii) below, and (iii) a Solvency Certificate
(as hereinafter defined), duly executed by the Company's Chief Financial Officer
or such other mutually acceptable person, in form and substance reasonably
satisfactory to the Purchaser or the Special Committee, as applicable.
5.2 Conditions Precedent to Purchaser's Obligations. In
addition to the conditions set forth in Section 5.1, the Purchaser shall be
obligated to perform the acts contemplated for performance by them under Article
I only if each of the following conditions is satisfied at or prior to the
Closing Date, unless any such condition is waived in writing by Purchaser:
(a) The receipt of cash proceeds from debt and equity financings
sufficient to consummate the transactions contemplated by this Agreement
("Financing Condition").
(b) The representations and warranties of the Company set forth in
Article 2 shall be true and correct in all material respects as of the Closing
Date with the same force and effect as though made again at and as of the
Closing Date, except for any representations and warranties that address matters
only as of a particular date specifically set forth in such representation,
other than the date hereof, (which shall remain true and correct as of such
date).
(c) The Company shall have performed and complied in all material
respects, individually or in the aggregate, (without giving duplicative effect
to any materiality qualification contained in the applicable obligation) with
all other covenants and agreements contained in this Agreement required to be
performed or complied with by it on or before the Closing Date.
(d) Since the date of this Agreement, there shall not have been the
occurrence of any event or condition, or series of events or conditions, that
has had or would reasonably be expected to have a Material Adverse Effect.
(e) The Company shall have executed and delivered to Purchaser at and
as of the Closing a certificate, duly executed by the Company's Chief Financial
Officer, in form and substance reasonably satisfactory to Purchaser and
Purchaser's counsel, certifying that to such officers' knowledge, the conditions
specified in (b), (c) and (d) have been satisfied.
(f) The Company shall have obtained the material third party consents
necessary to consummate the Merger including the consent of Fleet National Bank,
N.A..
(g) As of the Effective Time, the effects of the Company Rights Plan
shall have been eliminated to the Purchaser's reasonable satisfaction.
(h) Shareholders holding Common Stock representing more than five
percent (5%) of the Company's outstanding stock shall not have dissented from
the Merger and exercised their rights under Section 262 of the DGCL.
23
5.3 Conditions to Obligations of the Company. In addition to
the conditions set forth in Section 5.1, the Company shall be obligated to
perform the acts contemplated for performance by it under Article I only if each
of the following conditions is satisfied at or prior to the Closing Date, unless
any such condition is waived in writing by the Company:
(a) The representations and warranties of the Purchaser set forth in
Article III shall be true and correct in all material respects as of the Closing
Date with the same force and effect as though made again at and as of the
Closing Date, except for any representations and warranties that address matters
only as of a particular date specifically set forth in the particular
representation or warranty which shall remain true and correct as of such
particular date.
(b) The Purchaser shall have performed and complied in all material
respects, individually or in the aggregate, (without giving duplicative effect
to any materiality qualification contained in the applicable obligation) with
all covenants and agreements contained in this Agreement required to be
performed or complied with by them on or before the Closing Date.
(c) The Purchaser shall have deposited with the Exchange Agent the
Deposit Amount in trust for the benefit of the holders of certificates.
(d) The Purchaser shall have executed and delivered to the Company at
and as of the Closing a certificate, duly executed by the Purchaser's President
and/or Chief Financial Officer, in form and substance reasonably satisfactory to
the Company and the Company's counsel, certifying that to such officers'
knowledge, the conditions specified in (a), (b) and (c) have been satisfied.
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
6.1 Termination. This Agreement may be terminated, at any time
prior to the Effective Time, whether before or after approval by the
stockholders of the Company:
(a) by mutual written agreement of the boards of directors of
Purchaser and the Company; or
(b) by either Purchaser or Company:
(i) if any court of competent jurisdiction or other
governmental body shall have issued an order, decree or ruling or taken
any other action restraining, enjoining or otherwise prohibiting the
Merger and such order, decree, ruling or other action shall have become
final and non appealable; or
(ii) if there has been a material breach by the other party of
any representation or warranty set forth in this Agreement unless such
breach is capable of being cured and is cured within 20 days after the
giving of written notice of the material breach.
24
(iii) if there has been a material breach by the other party
of any covenant or agreement set forth in this Agreement unless such
breach is capable of being cured and is cured within 20 days after the
giving of written notice of the material breach.
(c) by Company, in the case of (i), (ii) or (iii) below, or by
Purchaser, (i) if the Board of Directors shall have approved or recommended or
proposed publicly to approve or recommend an Acquisition Proposal by a third
party, or (ii) the Board of Directors or the Special Committee shall have
withdrawn or modified in a manner adverse to Purchaser its approval or
recommendation of this Agreement or the transactions contemplated hereby, or
(iii) the Board of Directors or the Special Committee shall have failed to
include in the Company Proxy Statement such recommendation (including the
recommendation that the stockholders of the Company vote in favor of the Merger)
or publicly announced an intention to do any of the foregoing, (iv) if the
Company enters into a Company Acquisition Agreement, or (v) if there has been a
material breach by the Company of any covenant or agreement set forth in this
Agreement including, a material breach of Section 4.5 hereof, which breach
arises primarily from the actions taken, or the failure to act, by the Special
Committee, unless such breach is capable of being cured and is cured within 20
days after the giving of written notice of the material breach;
(d) by the Company, pursuant to Section 4.5, in the event the Company
has complied with all the provisions of Section 4.5 and has determined to enter
into a Company Acquisition Agreement.
(e) by either Purchaser or Company, if the Effective Time shall not
have occurred on or before August 31, 2001, or it becomes manifestly evident
that the conditions to the transaction shall not be satisfied by such date;
provided, however, that the right to terminate this agreement under this Section
6.1(e) shall not be available to any party whose failure to fulfill any
obligation under this Agreement shall have principally caused, or resulted in,
the failure of the Effective Time to occur on or before such date.
6.2 Procedure and Effect of Termination. In the event of the
termination of this Agreement by the Company or Purchaser or both of them
pursuant to Section 6.1, the terminating party shall provide written notice of
such termination to the other party and this Agreement shall forthwith become
void and there shall be no liability on the part of Purchaser or the Company,
except as set forth in this Section 6.2 and in Sections 4.2(b)-(f) and 6.3 of
this Agreement. The foregoing shall be an exclusive remedy and shall relieve any
party for liability for any and all damages actually incurred as a result of any
breach of this Agreement or otherwise, except for any deliberate and wilful
breach of this Agreement. Sections 4.2(b)-(f), 6.2, 6.3 and Article VIII of this
Agreement shall survive the termination of this Agreement.
6.3 Expenses.
(a) Except as otherwise provided in this Agreement and whether or not
the transactions contemplated by this Agreement are consummated, all costs and
expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses.
(b) In the event that the Company or Purchaser terminates this
Agreement pursuant to Section 6.1(c) or the Company terminates this Agreement
pursuant to Section 6.1(d), then the Company shall reimburse Purchaser for all
of the Purchaser's reasonable Expenses (as defined below) as liquidated damages;
provided, that such Expenses for which Purchaser is entitled to
25
reimbursement shall not exceed an amount equal to $400,000.00 less the aggregate
amount of Company obligations paid by the Company contemplated by Section
4.16(d) hereof; and provided, however, that such limitation of $400,000 shall
not be applicable in the event that the Company consummates an Acquisition
Proposal that was inquired or made prior to the termination of this Agreement.
Any such payment shall be made within five (5) business days after a termination
by the Purchaser pursuant to Section 6.1(c) or at the time of any termination by
the Company pursuant to Sections 6.1(c) or 6.1(d). For purposes of this
Agreement, "Expenses" shall mean out-of-pocket expenses incurred by the
Purchaser or on its behalf (other than by the Company) in connection with the
Merger and the consummation of the transactions contemplated by this Agreement,
(including, reasonable attorneys' fees and disbursements, depository fees and
expenses, fees payable to the Lending Sources, the fees of accountants and
financial advisors, and filing fees and printing costs). Notwithstanding
anything to the contrary contained above, in the event that this Agreement and
the Merger shall not have been approved and adopted by the affirmative vote of a
majority of the Shares held by the stockholders of the Company at a duly called
Stockholders' Meeting, then in such event the Purchaser shall not be entitled to
reimbursement by the Company of any Expenses.
6.4 Amendment. This Agreement may be amended by each of the
parties by action taken by or on behalf of their respective boards of directors
at any time prior to the Effective Time; provided, however, that (i) such
amendment shall be in writing signed by all of the parties, and (ii) after
adoption of this Agreement and the Merger by the stockholders of the Company, no
amendment may be made without the further approval of the stockholders of the
Company to the extent such approval is required by applicable law; provided,
however, that any modification or amendment hereto shall have been approved by
the Special Committee.
6.5 Waiver. Subject to the requirements of applicable law, at
any time prior to the Effective Time, whether before or after the Special
Meeting, any party hereto, by action taken by its Board of Directors, may (i)
extend the time for the performance of any of the obligations or other acts of
any other party hereto or (ii) waive compliance with any of the agreements of
any other party or with any conditions to its own obligations; provided,
however, that any waiver by the Company shall have been approved by the Special
Committee. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party by a duly authorized officer of such party. Notwithstanding
the above, any waiver given shall not apply to any subsequent failure of
compliance with agreements of the other party or conditions to its own
obligations.
6.6 Termination decisions by the Company. The Board of
Directors shall terminate this Agreement in connection with any action by the
Special Committee contemplated by Section 6.1(c)(ii) or (iii) hereof upon, and
only upon, the recommendation of the Special Committee.
ARTICLE VII
DEFINITIONS
As used herein the following terms not otherwise defined have the
following respective meanings:
"Affiliate" means, with respect to any specified Person, any other
Person that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, such specified
Person. As used in this definition the term "control" (including the terms
"controlled by" and "under common control with") means, with respect to the
relationship between or among two or more Persons, the possession, directly or
indirectly or as trustee or executor, of the power to direct or cause the
direction of the affairs or management of a Person,
26
whether through the ownership of voting securities, as trustee or executor, by
contract or otherwise, including, without limitation, the ownership, directly or
indirectly, of securities having the power to elect a majority of the board of
directors or similar body governing the affairs of such Person.
"Company Rights Plan" means the Company's stockholder rights plan
pursuant to a Rights Agreement dated as of April 11, 2000, between the Company
and Continental Stock Transfer and Trust Company as Rights Agreement.
"Indebtedness" means (i) all indebtedness of the Company or any of its
Subsidiaries for borrowed money, whether current or funded, or secured or
unsecured, (ii) all indebtedness of the Company or any of its Subsidiaries for
the deferred purchase price of property or services represented by a note or
other security, (iii) all indebtedness of the Company created or arising under
any conditional sale or other title retention agreement with respect to property
acquired by the Company or any of its Subsidiaries (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (iv) all indebtedness of
the Company or any of its Subsidiaries secured by a purchase money mortgage or
other lien to secure all or part of the purchase price of property subject to
such mortgage or lien, (v) all obligations under leases which shall have been or
must be, in accordance with generally accepted accounting principles, recorded
as capital leases in respect of which the Company or any of its Subsidiaries is
liable as lessee,(vi) any liability of the Company or any of its Subsidiaries in
respect of banker's acceptances or letters of credit, and (vii) all indebtedness
referred to in clause (i), (ii), (iii), (iv), (v) or (vi) above which is
directly or indirectly guaranteed by the Company or any of its Subsidiaries or
which the Company or any of its Subsidiaries has agreed (contingently or
otherwise) to purchase or otherwise acquire or in respect of which it has
otherwise assured a creditor against loss.
"Material Adverse Effect" means any material adverse effect on the
business, properties, assets, results of operations or financial condition of
the Company and its Subsidiaries taken as a whole.
"Person" means any corporation, association, partnership, limited
liability company, organization, business, individual, government or political
subdivision thereof or governmental agency.
"Solvency Certificate" shall mean a certificate of the Chief Financial
Officer of the Company regarding solvency matters of the Company in
substantially the form previously delivered by the Company to the Purchaser.
"Subsidiary" means, with respect to any Person, any corporation a
majority (by number of votes) of the outstanding shares of any class or classes
of which shall at the time be owned by such Person or by a Subsidiary of such
Person, if the holders of the shares of such class or classes (a) are
ordinarily, in the absence of contingencies, entitled to vote for the election
of a majority of the directors (or persons performing similar functions) of the
issuer thereof, even though the right so to vote has been suspended by the
happening of such a contingency, or (b) are at the time entitled, as such
holders, to vote for the election of a majority of the directors (or persons
performing similar functions) of the issuer thereof, whether or not the right so
to vote exists by reason of the happening of a contingency.
27
"Tax" or "Taxes" means any federal, state, local, or foreign income,
gross receipts, franchise, estimated, alternative minimum, add-on minimum,
sales, use, transfer, registration, value added, excise, natural resources,
severance, stamp, occupation, premium, windfall profit, environmental, customs,
duties, real property, personal property, capital stock, intangibles, social
security, unemployment, disability, payroll, license, employee, or other tax or
levy, of any kind whatsoever, including any interest, penalties, or additions to
tax in respect of the foregoing.
ARTICLE VIII
MISCELLANEOUS
8.1 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by rule of law or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
8.2 Notices. All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given or made as of the date delivered if sent via telecopier or delivered
personally(including, without limitation, delivery by commercial carrier
warranting next-day delivery) to the parties at the following addresses (or at
such other address for a party as shall be specified by similar notice, except
that notices of changes of address shall be effective upon receipt):
(a) If to Company:
Specialty Catalog Corp.
21 Bristol Drive
South Easton, MA 02375
Attention: Special Committee
Fax: (508) 238-3305
With copies to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attention: Stephen Kotran, Esq.
Fax: (212) 558-3588
If to Purchaser:
Specialty Acquisition Corp.
c/o Kane Kessler, P.C.
1350 Avenue of the Americas
26th Floor
New York, New York 10019
Attn: Guy Naggar and
Jeffrey S. Tullman, Esq.
Fax: (212) 245-3009
With copies to:
28
Kane Kessler, P.C.
1350 Avenue of the Americas
New York, New York 10019
Attention: Robert L. Lawrence, Esq.
Fax: (212) 245-3009
8.3 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Any reference in this Agreement to a section,
exhibit or schedule shall, unless otherwise expressly indicated, refer to a
section of or an exhibit or schedule to this Agreement.
8.4 Representations and Warranties, etc. The respective
representations and warranties of the Company and Purchaser contained herein
shall survive until, and shall expire with, and be terminated and extinguished
upon the earlier to occur of (a) the termination of this Agreement pursuant to
Section 6.1 and (b) the Effective Time. This Section 8.4 shall have no effect
upon any other obligation of the parties hereto, whether to be performed before
or after the consummation of the Merger.
8.5 Miscellaneous. This Agreement and the documents delivered
pursuant hereto or in connection herewith (i) constitute the entire agreement
and supersede all other prior agreements and undertakings, both written and oral
(including, without limitation, any agreement or proposed agreement relating to
the timing of execution of this Agreement and the payment of any amount in
connection therewith), among the parties, or any of them, with respect to the
subject matter hereof, (ii) are not intended to confer upon any Person other
than the parties hereto any rights or remedies hereunder, other than Sections
4.8 (which is intended for the benefit of the present and former directors,
officers, employees and agents of the Company and may be enforced by any such
indemnified persons), and (iii) the Purchaser may assign this Agreement to its
lenders as collateral security; provided, however, that no such assignment shall
relieve the assignor of its obligations hereunder. This Agreement may be
executed in one or more counterparts which together shall constitute a single
agreement.
8.6 Attorneys Fees. If any legal proceeding is initiated by
any party to enforce this Agreement or otherwise with respect to the subject
matter of this Agreement, the prevailing party or parties shall be entitled to
recover reasonable attorney's fees incurred in connection with such proceedings.
8.7 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of Delaware, regardless of the laws that
might otherwise governs under applicable principals of conflicts of laws
thereof.
8.8 Jurisdiction and Venue. This Agreement shall be subject to
the exclusive jurisdiction of the state or federal courts sitting in New York
County, New York. The parties to this Agreement agree that any breach of any
term or condition of this Agreement shall be deemed to be a breach occurring in
the State of New York by virtue of a failure to perform an act required to be
performed in the State of New York and irrevocably and expressly agree to submit
to the jurisdiction of the United States District Court for the Southern
District of New York or courts of the State of New York for the purpose of
resolving any disputes among the parties relating to this Agreement or the
transactions contemplated hereby. The parties irrevocably waive, to the fullest
extent permitted by law, any objection which they may now or hereafter have to
the laying of venue of any suit, action or proceeding arising out of or relating
to this Agreement, or any judgment entered by any court in respect hereof
brought in New York County, New York, and further irrevocably waive any claim
that any suit, action or proceeding brought in New York County, New York has
been brought in an inconvenient forum. The parties hereto agree to service of
process by certified or registered United States mail, postage prepaid,
addressed to the party in question.
8.9 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
29
8.10 Assignment. This Agreement may not be assigned by any
party without the written consent of the other party; provided, that the
Purchaser may assign this Agreement to a corporation, partnership, or limited
liability company of which the stockholders of the Purchaser maintain majority
control.
8.11 Further Assurances. The parties hereto shall deliver any
and all other instruments or documents reasonably requested by the other party
in order to give effect to all of the terms and provisions of this Agreement.
8.12 Publicity. No public announcement or other publicity
regarding this Agreement or the transactions contemplated hereby shall be made
without the prior written consent of the Purchaser and the Company as to form,
content, timing and manner of distribution. Notwithstanding the foregoing,
nothing in this Agreement shall preclude the Company from making any public
announcement or filing required pursuant to any federal or state securities laws
or stock exchange rules; provided that prior to such filing Purchaser shall be
given a reasonable opportunity to review and comment on such public announcement
or filing.
[SIGNATURE PAGE FOLLOWS]
30
IN WITNESS WHEREOF, Purchaser and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
SPECIALTY ACQUISITION CORP.
By: /s/ Guy Naggar
-------------------
Name: Guy Naggar
Title: President
SPECIALTY CATALOG CORP.
By: /s/ Thomas McCain
-------------------
Name: Thomas McCain
Title: Senior Vice President, Chief Financial
Officer, Secretary, and Treasurer
31
ANNEX B
May 4, 2001
Special Committee of the Board of Directors
Board of Directors
Specialty Catalog Corp.
21 Bristol Drive
South Easton, MA 02375
Member of the Special Committee and Members of the Board of Directors:
We understand that Specialty Catalog Corp. ("SC" or the "Company") intends to
enter into a Merger Agreement with Specialty Acquisition Corp. (the
"Purchaser"), dated May 4, 2001, which provides for, among other things, each
share of Common Stock, $.01 par value per share, of the Company (other than
shares held by Purchaser) to be cancelled and extinguished and be automatically
converted into and become a right to receive $3.75 per share in cash upon
surrender of the certificate that evidenced the Shares (the "Proposed
Transaction").
The Special Committee has asked our opinion as investment bankers as to the
fairness, from a financial point of view, to the shareholders of SC (other than
Purchaser and its shareholders) of the consideration to be received by such
shareholders in the Proposed Transaction.
In the course of our engagement, we have, among other things:
1) reviewed publicly available information concerning SC issued from
12/31/95 through the date of this opinion;
2) analyzed certain financial statements and other financial and operating
data concerning SC prepared by the management of the Company;
3) analyzed certain financial projections prepared by the management of SC
with regard to its business prospects;
4) discussed the past and current operations and financial condition and
the prospects of SC with senior executives of SC;
5) visited the South Easton, MA facility of SC and engaged in discussions
with management;
6) compared the financial performance of SC and the prices and trading
activity of SC Common Stock with that of certain other comparable
publicly-traded companies and their securities;
7) compared the Proposed Transaction with other transactions involving
public and private companies that we deemed to be comparable;
8) considered the average price per share paid by SC for the 144,000
shares purchased in the open market in 1999 and 2000;
9) analyzed transactions concluded by SC (Daxbourne and AHI);
10) considered the dearth of interest in acquiring SC by 53 candidates less
than two years ago and the failed acquisition of the Company last year;
11) considered the potential consequences to SC shareholders if the notice
to delist SC shares from NASDAQ were to become effective;
12) reviewed the public announcements and filings relating to the Proposed
Transaction and the drafts of the Merger Agreement as they became
available and certain related documents; and
13) conducted other financial studies and analyses and performed such other
investigations and took into account such other factors as we deemed
necessary or appropriate for purposes of the opinion expressed herein.
Special Committee of the Board of Directors
Board of Directors
Specialty Catalog Corp.
May 4, 2001
Page Two
In preparing our opinion, we have assumed and relied upon, without independent
verification, the accuracy and completeness of all of the financial and other
information, which we reviewed, and analyzed in connection with this opinion.
With respect to the projected financial information and business prospects, we
have assumed that such information has been reasonably prepared on a consistent
basis with prior practice and that such information reflects the best currently
available estimates and judgments of the Company's management as to expected
future financial performance. In addition, we have not made an independent
evaluation or appraisal of the assets or liabilities of SC, nor have we been
furnished with any such evaluation or appraisal. Our opinion is necessarily
based on economic, market and other conditions as they exist and as they can be
evaluated as of the date of this opinion. We have not been requested to opine
upon, and our opinion does not in any manner address SC's underlying business
decision to proceed with the transaction. Furthermore, we have not been
requested to, and did not, solicit or entertain any other offers of the purchase
of the stock or the assets of the Company or any other transaction involving the
Company.
We have acted as financial advisor to the Special Committee of the Board of
Directors of the Company in connection with this transaction and will receive a
fee for our services. The Company has agreed to indemnify us from certain
liabilities arising out of our engagement. Prior to this engagement, Burnham
Securities Inc. has provided no financial services to the Company except that in
December 1999 Burnham was engaged by the then existing Independent Committee of
the Board of Directors of the Company to provide financial advice and advise on
the fairness of the consideration to be received by SC shareholders in a
proposed merger that was not consummated.
It is understood that this letter is for the information of the Special
Committee of the Board of Directors and the Board of Directors of the Company in
its consideration of the fairness of the Proposed Transaction to the
shareholders of the Company (other than the Purchaser and its shareholders) from
a financial point of view. Our opinion does not constitute a recommendation as
to how any member of the Special Committee of the Board of Directors, the Board
of Directors or any shareholder of the Company should vote on the Proposed
Transaction and is not to be quoted or referred to, in whole or in part, in any
document, nor shall it be used for any other purpose without our prior written
consent, except that we hereby consent to the inclusion of this opinion in its
entirety in any filing made by the Company with the Securities and Exchange
Commission with respect to the Proposed Transaction.
Subject to the foregoing, on the basis of our review and analyses and such other
factors as we deemed relevant, and subject to our review of the definitive
Merger Agreement, it is our opinion that as of the date hereof the consideration
to be received by the shareholders of SC (other than the Purchaser and its
shareholders) in the Proposed Transaction is fair, from a financial point of
view, to such shareholders.
Very truly yours,
BURNHAM SECURITIES INC.
By: /s/ Richard Lewisohn, III
Richard Lewisohn, III
Senior Managing Director
ANNEX C
DELAWARE GENERAL CORPORATION LAW,SS.262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of
this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or consolidation,
were either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote of the
stockholders of the surviving corporation as provided in subsection (f) of ss.
251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant to
ss.ss. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or
depository receipts in respect thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares
of stock (or depository receipts in respect thereof)
or depository receipts at the effective date of the
merger or consolidation will be either listed on a
national securities
exchange or designated as a national market system
security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or
held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing
subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or
fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss. 253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record date
for such meeting with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights are available for
any or all of the shares of the constituent corporations, and shall include in
such notice a copy of this section. Each stockholder electing to demand the
appraisal of such stockholder's shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of such stockholder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not constitute
such a demand. A stockholder electing to take such action must do so by a
separate written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting corporation
shall notify each stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to ss. 228 or
ss. 253 of this title, each consitutent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constitutent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constitutent corporation shall send a second
notice before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constitutent corporation
that are entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constitutent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections
(a) and (d) hereof, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after such stockholder's written
request for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
determination of the stockholder entitled to an appraisal. Any stockholder whose
name appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of this section and who has submitted such
stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
* * *