EXHIBIT(A)(1)
OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF CURTIS INTERNATIONAL LTD.
COMMON SHARES AT $0.80 NET PER SHARE IN CASH
BY
CURTIS INTERNATIONAL LTD.
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., EASTERN
STANDARD TIME, ON JULY 9, 2001, UNLESS EXTENDED. A SUMMARY OF THE PRINCIPAL
TERMS OF THE OFFER APPEARS ON PAGES 3 THROUGH 6 OF THIS OFFER TO PURCHASE. YOU
SHOULD READ THIS ENTIRE DOCUMENT CAREFULLY BEFORE DECIDING WHETHER TO TENDER
YOUR SHARES. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION, PASSED
UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION, OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THE DISCLOSURE CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
IMPORTANT
Any shareholder who would like to tender all or any portion of his or
her shares of common stock of Curtis International Ltd., no par value (the
"Common Shares") should either (1) complete and sign the Letter of Transmittal
(or a facsimile thereof) in accordance with the instructions in the Letter of
Transmittal, mail or deliver it (or such facsimile) and any other required
documents to the Continental Stock Transfer & Trust Company (referred to herein
as the "Depositary"), and either deliver the certificates for such Common Shares
and any other required documents to the Depositary or tender such Common Shares
pursuant to the procedure for book entry transfer set forth in "THE OFFER--3.
Procedures for Accepting the Offer and Tendering Shares," or (2) request his or
her broker, dealer, commercial bank, trust company or other nominee to effect
the transaction for him or her. Shareholders having Common Shares registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
must contact the broker, dealer, commercial bank, trust company or other nominee
if they desire to tender their Common Shares.
A shareholder who desires to tender the Common Shares and whose
certificates for the Common Shares are not immediately available, or who cannot
deliver the certificates for Common Shares and all other required documents to
the Depositary on or prior to the expiration date, or who cannot comply with the
procedure for book entry transfer on a timely basis, may tender their Common
Shares by following the procedures for guaranteed delivery set forth in "THE
OFFER--3. Procedures for Accepting the Offer and Tendering Common Shares."
Questions and requests for assistance may be directed to the Company at
the address and telephone number set forth on the back cover of this Offer to
Purchase. Additional copies of this Offer to Purchase, the Letter of Transmittal
and the Notice of Guaranteed Delivery may also be obtained from the Company.
July 3, 2001
TABLE OF CONTENTS
SUMMARY TERM SHEET................................................................................................3
INTRODUCTION......................................................................................................7
.........
SPECIAL FACTORS...................................................................................................7
1. OPERATING HISTORY; PAYMENT OF DIVIDENDS AND REDEMPTION OF COMMON SHARES UNCERTAIN........................7
2. PURPOSE AND FAIRNESS OF THE OFFER........................................................................7
3. INTERESTS OF CERTAIN PERSONS IN THE OFFER...............................................................21
4. MATERIAL FEDERAL INCOME TAX CONSEQUENCES................................................................21
5. FINANCING OF THE OFFER..................................................................................23
6. BENEFICIAL OWNERSHIP OF THE COMMON SHARES...............................................................23
7. TRANSACTIONS AND ARRANGEMENTS CONCERNING THE COMMON SHARES..............................................24
8. CERTAIN EFFECTS OF THE TRANSACTION......................................................................24
THE OFFER........................................................................................................26
1. TERMS OF THE OFFER......................................................................................26
2. ACCEPTANCE FOR PAYMENT AND PAYMENT......................................................................27
3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING THE COMMON SHARES......................................28
4. WITHDRAWAL RIGHTS.......................................................................................30
5. PRICE RANGE OF THE COMMON SHARES; DIVIDENDS.............................................................30
6. POSSIBLE EFFECTS OF THE OFFER ON THE MARKET FOR THE COMMON SHARES AND EXCHANGE ACT REGISTRATION.........31
7. CERTAIN INFORMATION CONCERNING CURTIS INTERNATIONAL LTD.................................................31
8. CONDITIONS TO THE OFFER.................................................................................34
9. LEGAL MATTERS...........................................................................................35
10. FEES AND EXPENSES.......................................................................................36
11. MISCELLANEOUS...........................................................................................36
3
SUMMARY TERM SHEET
Curtis International Ltd. is offering to purchase all the outstanding
shares of its common stock (the "Common Shares") for $0.80 net per share, in
cash, without interest. The following are some of the questions you, as one of
our shareholders, may have and answers to those questions. We urge you to read
this Offer to Purchase carefully because the information in this summary is not
complete. Additional important information is contained in the remainder of this
Offer to Purchase and the accompanying Letter of Transmittal.
Who Is Offering to Buy My Shares?
We are making an offer to buy your shares of the Common Shares. See "THE
OFFER--1. Terms of the Offer."
What Are The Classes And Amounts of Securities Sought in The Offer?
We are offering to buy all of the outstanding shares of the Common Shares. See
"THE OFFER--1. Terms of the Offer".
How Much Are You Offering to Pay? What Is the Form of Payment? Will I Have to
Pay Any Fees or Commissions?
We are offering to pay $0.80 per share for the Common Shares, net to you in cash
without interest. If you are the record owner of your Common Shares and you
tender them to us in the offer (which we refer to as the "Offer"), you will not
have to pay brokerage fees or commissions. If you own your Common Shares through
a broker or other nominee, and your broker tenders your Common Shares on your
behalf, your broker or nominee may charge you a fee for doing so. You should
consult with your broker or nominee to determine whether any charges will apply.
See "INTRODUCTION".
What Is The Market Value of The Common Shares?
The Common Shares are traded in the Nasdaq Small Cap Market. See "THE OFFER__5.
Price Range of the Common Shares" for the bid history of the Common Shares. We
believe that the trading in the Common Shares has been limited and sporadic. On
April 27, 2001, the bid price for Common Shares was $0.44 per share. See
"SPECIAL FACTORS--2. Purpose and Fairness of the Offer" and "THE OFFER__5. Price
Range of the Common Shares".
Do You Have The Financial Resources to Make Payment?
We will need approximately $1.37 million to purchase all the outstanding Common
Shares, excluding the Common Shares beneficially owned by Aaron and Jacob
Herzog, our Chief Executive Officer and President and our Chairman and Principal
Accounting Officer, respectively, the A&E Herzog Family Trust and the Herzog
Family Trust (collectively, the "Herzog Group"), and to pay all the expenses
involved in the Offer. We intend to pay the purchase price and related expenses
using cash and other liquid assets owned by us. See "SPECIAL FACTORS-3.
Interests of Certain Persons in the Offer" and "SPECIAL FACTORS-5. Financing of
the Offer."
Is Your Financial Condition Relevant to My Decision Whether to Tender in The
Offer?
Because tendering your Common Shares in the Offer will end your ownership
interest in us, we believe that our financial condition is relevant to your
determination of whether the price at which the Common Shares are offered (the
"Common Share Offer Price") is fair and whether you should tender in the Offer.
The financial statements for us are included in the reports we have filed with
the Securities and Exchange Commission (the "Commission"). You can obtain copies
of these reports in the manner described in "The Offer--7. Certain Information
Concerning the Company."
How Long Do I Have to Decide Whether to Tender in The Offer?
You may tender your Common Shares anytime prior to the expiration of the Offer.
The Offer will expire at 5:00 p.m., Eastern Standard Time, on July 9, 2001,
unless extended in our sole discretion. See "THE OFFER--3. Procedures for
Accepting the Offer and Tendering Common Shares."
Can The Offer Be Extended, And If So Under What Circumstances?
Yes. We have the right to extend the Offer deadline at any time by giving
written notice to Continental Stock Transfer & Trust Company ("Continental"),
the depositary for the Offer. See "THE OFFER--1. Terms of the Offer".
How Will I Be Notified If The Offer Is Extended?
If we decide to extend the offering period, we will publicly announce the
extension before 9:00 a.m., Eastern Standard Time, on the next business day
after the previously scheduled expiration date. See "THE OFFER--1. Terms of the
Offer."
4
What Will Happen to Common Shares Not Tendered in The Offer?
Common Shares not tendered in the Offer will remain outstanding, at least for a
limited time. However, the trading market for any Common Shares not tendered may
be even more limited than it currently is, particularly because of the expected
reduction in the public float after the tendered shares have been cancelled. In
addition, the Herzog Group intends to acquire all the outstanding Common Shares
by way of a merger (the "Merger") which will result in the creation of a new
company ("NewCo") immediately prior to consummating a so-called going-private
transaction (the "Transaction"), all as further described below. The Merger and
the Transaction are conceptually discrete events, but the interim period between
them will be so short as to the render the distinction meaningless.
If you do not accept the Offer your Common Shares will, after having
been converted into shares of preferred stock of NewCo as described below, be
redeemed at the Common Share Offer Price immediately following the Merger.
However, shareholders would be subject to a 25% (at minimum) Canadian
withholding tax on such redemption and it would be the responsibility of each
non-Canadian resident to make the requisite filings and apply for a refund of
such withholding tax (if applicable). If you do not approve the Merger and the
Transaction, you will be accorded rights of appraisal as provided for under the
Ontario Business Corporations Act (the "Ontario Act"). We cannot give any
assurance as to what a court of competent jurisdiction before which the matter
would be heard would award you as a fair price for your Common Shares or whether
it would be more or less than the Common Share Offer Price, though the Fairness
Opinion (the "Fairness Opinion") rendered by Rodman & Renshaw, Inc. ("Rodman")
indicates that the Common Share Offer Price is indeed a fair price. If you
sought appraisal rights, you would be responsible for the costs of the
litigation, unless otherwise determined by the Ontario court of competent
jurisdiction. In addition, you would be subject to the above-mentioned 25% (at
minimum) withholding tax. If you are eligible to receive the refund, you will be
required to take certain steps, as more fully described herein. The procedure
will likely not be free of cost, and your inconvenience may be considerable.
The fact that only Common Shares tendered through the Offer are exempt
from this withholding tax contributed to our decision to engage in the Offer, in
that it increases the benefit to our shareholders considerably. See "SPECIAL
FACTORS--8. Certain Effects of the Transaction."
How Will the Merger and The Transaction Be Effectuated?
The Herzog Group intends to form another company, the tentative name of which is
Curtis Acquisition Corp (which we refer to as the "Acquisition Corp."). The
Herzog Group will own all the shares of the Acquisition Corp. Promptly after the
expiration of the Offer, the Common Shares owned by the Herzog Group will be
reorganized into a new class of shares. These shares will have features somewhat
different from the Common Shares. After the reorganization has occurred, we will
consummate the Merger, resulting in the creation of NewCo, and the cessation of
Curtis International Ltd. and the Acquisition Corp. as separate entities. As a
result of the current concentration of ownership, we do not anticipate requiring
the affirmative vote of the Common Shares not held by the Herzog Group in order
to effectuate the Merger.
After the Merger has been completed, NewCo will have three classes of
shares: any untendered Common Shares, which will be converted into redeemable,
non-voting shares of preferred stock of NewCo (the "Preferred Shares") in the
Merger; the Herzog Group's shares that were previously Common Shares, and; the
Herzog Group's shares that were previously shares in the Acquisition Corp.
The Transaction will be completed by the immediate redemption of the
Preferred Shares at the Common Share Offer Price. The Transaction will occur
promptly after the Merger, and will not be subject to a vote of shareholders.
The Preferred Shares will not be registered under the Securities Act of 1933, as
amended (the "Securities Act"), but will be issued under an exemption therefrom
to be found in Section 4(2) of the Securities Act. Consequently, your ability to
sell or transfer the Preferred Shares will be restricted. However, the period
during which the Preferred Shares would exist is so short as to render such
restriction inconsequential.
Do I have the right to vote on the Merger?
5
Yes, you do. However, it will not in any way affect the final result of the
Merger or the Transaction.
We are an Ontario company incorporated under the Ontario Act. The
Merger will require the affirmative vote of sixty-six and two thirds percent
(66 2/3%) of the outstanding Common Shares. As of the date hereof, the Herzog
Group owns or controls over sixty-seven percent (67%) of the outstanding Common
Shares and will tender none of their Common Shares through the Offer.
Consequently, you may retain your Common Shares, and you may cast them against
the resolution to approve the Merger. However, such negative vote will not
affect approval of the Merger or the Transaction.
We are stating this clearly because we believe it important that you
understand the reason for the Offer. The Herzog Group could, by virtue of its
ownership of the required 66 2/3% of the outstanding Common Shares as provided
for under the Ontario Act, have proceeded directly with the Merger and the
Transaction. From a legal perspective, the Offer is completely incidental
thereto. The net effect of a decision to engage in no more than the Merger and
the Transaction would have been two-fold; the Herzog Group would have faced far
lower costs and you would, absent the Offer, have been afforded no premium over
the market price of the Common Shares. In addition, there would have been no way
for you to avoid being subject to the Canadian withholding tax, to the extent
such tax is applicable to you. The purpose of the Offer is to provide you with a
fair price for your Common Shares and to avoid the Canadian withholding tax.
We hereby remind you that a failure to vote against the Merger will not
constitute a waiver of your rights to seek appraisal of your Common Shares under
Ontario law. You will retain your appraisal rights provided that they are
perfected pursuant to Ontario law.
Are You Making Any Recommendation About The Offer?
No. We express no opinion and remain neutral with respect to whether you should
tender Common Shares in response to the Offer. You should determine whether or
not to accept the Offer based upon your own assessment of current market value,
liquidity needs, investment objectives and certain other factors, each as more
fully described below. See "SPECIAL FACTORS--2. Purpose and Fairness of the
Offer".
Has the Board of Directors Approved the Offer?
Yes. The Board has accepted and acted upon Rodman's opinion that the Common
Share Offer Price is fair to our shareholders.
What Are the Most Significant Conditions to the Offer?
We are not required to complete the Offer unless the conditions to the Offer are
met. A significant condition is the absence of any litigation, proceedings or
other events that would, in the opinion of Messrs. Herzog, prohibit, prevent,
restrict or delay consummation of the Offer. Other important conditions to the
Offer are described in "THE OFFER--8. Conditions to the Offer." We may waive any
of these conditions.
The Offer to Purchase as filed on May 4, 2001 included the condition
that there be 300 or fewer holders of record of the Common Shares. We have
determined to eliminate this condition from consideration due to the varying
definitions of the term "holder of record" and the resulting potential for
confusion among our shareholders, as well as with a view to establishing clearly
that any condition referred to herein is waivable. See "THE OFFER--8. Conditions
to the Offer."
How Do I Tender My Common Shares?
To tender your Common Shares, you must do one of the following:
(1) If you are a record holder (i.e., a stock certificate has been issued to
you in your own name), you must complete and sign the applicable enclosed
Letter(s) of Transmittal and send it with your stock certificate to Continental,
or follow the procedures described in this Offer to Purchase for book-entry
transfer in "THE OFFER--3. Procedures for Accepting the Offer and Tendering
Common Shares." These materials must reach Continental before the Offer expires.
Detailed instructions are contained in the Letter of Transmittal and in "THE
OFFER--3. Procedures for Accepting the Offer
6
and Tendering Common Shares."
(2) If you are a record holder, but your stock certificate is not available, or
you cannot deliver it to Continental before the Offer expires, you may be able
to tender your Common Shares using the enclosed Notice of Guaranteed Delivery.
Please call Continental at 1-(212) 509-4000 for assistance.
(3) If you hold your Common Shares through a broker, bank or other nominee, you
should contact your nominee and instruct them to tender your Common Shares. See
"THE OFFER--3. Procedures for Accepting the Offer and Tendering Common Shares".
Until What Time Can I Withdraw Previously Tendered Common Shares?
You can withdraw previously tendered Common Shares until 5:00 p.m., Eastern
Standard Time, July 9, 2001, unless we further extend the Offer. If we further
extend the Offer, you may withdraw previously tendered Common Shares until the
end of the extension period. In addition, your Common Shares may be after by the
fortieth business day after the commencement date of the Offer if the Common
Shares have not been accepted for payment, i.e., on June 22, 2001. See "THE
OFFER--4. Withdrawal Rights."
How Do I Withdraw Previously Tendered Common Shares?
You can withdraw previously tendered Common Shares by instructing Continental.
If you tendered your Common Shares by giving instructions to a broker or bank,
you must instruct the broker or bank to arrange for a withdrawal of your Common
Shares. See "THE OFFER--4. Withdrawal Rights".
To Whom Can I Talk If I Have Questions About The Tender Offer?
You can call MacKenzie Partners, Inc., our information agent for the Offer, who
can be reached Toll-Free at (800) 322-2885 or collect at (212) 929-5500. You may
also access our public filings on the Commission's Web site at
http://www.sec.gov/edgar/searchedgar/formpick.htm.
7
INTRODUCTION
Curtis International Ltd., an Ontario corporation (the "Company")
hereby offers to purchase all outstanding shares of its Common Shares, no par
value (the "Common Shares"), at a purchase price of $0.80 per share, net to the
selling shareholder in cash, without interest thereon (the "Common Share Offer
Price"), on the terms and subject to the conditions set forth in this Offer to
Purchase and in the Letter of Transmittal (which, as amended or supplemented
from time to time, together constitute the "Offer"). The Offer is being made
prior to a merger (the "Merger") and a going-private transaction (the
Transaction"), as more fully described below.
If you are the record owner of your Common Shares and you tender your
Common Shares to the Company in the Offer, you will not have to pay brokerage
fees or commissions. If you own your Common Shares through a broker or other
nominee, and your broker tenders your Common Shares on your behalf, your broker
or nominee may charge you a fee for doing so. You should consult with your
broker or nominee to determine whether any charges will apply. Except as
described in Instruction 6 of the Letter of Transmittal, you will not be
required to pay stock transfer taxes on the purchase of Common Shares in the
Offer. However, if you do not complete and sign the Substitute Form W-9 that is
included in the Letter of Transmittal, you may be subject to a required backup
federal income tax withholding of 31% of the gross proceeds payable to you. See
"THE OFFER__3. Procedures for Accepting the Offer and Tendering Common Shares".
The Company will pay all charges and expenses of Continental as depositary (the
"Depositary") incurred in connection with the Offer. See "THE OFFER--3.
Procedures for Accepting the Offer and Tendering Common Shares."
The Offer will expire at 5:00 p.m., Eastern Standard Time, on July 9,
2001, unless further extended in the Company's sole discretion.
This Offer to Purchase and the Letter of Transmittal contain important
information which you should read carefully before you make any decision with
respect to the Offer.
SPECIAL FACTORS
1. Operating History; Payment of Dividends And Redemption of Common Shares
Uncertain
The Company has never paid dividends on the Common Shares. Accordingly,
there can be no assurance that the Company will achieve profitability at a level
sufficient to assure payment of dividends on the Commons Shares that remain
outstanding, assuming any such dividends were to be declared. In addition, there
are no restrictions on the ability of the Company to incur indebtedness. Any
indebtedness incurred by the Company would be senior to the rights conferred on
the holders of the Common Shares, whether to receive dividends or otherwise. The
existence of current or future indebtedness of the Company or its subsidiaries
may make payment of dividends on, or redemption of, the Common Shares less
probable. The Company has no present intention to pay dividends on the Common
Shares.
2. Purpose and Fairness of the Offer
Purposes, Alternatives Reasons and Effects in a Going-Private
Transaction
Purposes
The purpose of the Transaction is to take the Company private. The
purpose of the Offer is to provide the Company's shareholders fair value for
their Common Shares prior to engaging in the Transaction.
Alternatives
The Company does not believe that there is currently a viable
alternative to going private. Please see "Significant Corporate Events" in this
section for a delineation of the steps taken by management in its earlier,
fruitless attempts to pursue such alternatives.
In addition to the measures described in such section, the Company's
management believes that it is exceedingly
8
unlikely that a third party would make an offer for the publicly held Common
Shares. Few investors would be willing to make an offer for the publicly held
shares of a company in the knowledge that insiders held a controlling interest
therein. Accordingly, the Company did not seek such a potential purchaser, not
deeming it worthy of serious consideration.
Further, Messrs. Herzog are personally responsible for the vast
majority of the Company's business and any third party assuming control of the
Company at more than liquidation price would need them to remain active in their
current capacities if operations are to be maintained. Messrs. Herzog are not
willing to work for a third party, nor to sell what has historically been a
family-run business.
There has been no third party offer made for the Common Shares. The
Company received a letter (the "Letter") dated June 1, 2001, stating an intent
to file a tender offer for all its outstanding Common Shares from D.G. Jewelry,
Inc. on behalf of its wholly owned subsidiary, Diamonair, Inc., by June 7, 2001,
but none was made. The Letter stated that the offer would be for all of the
issued and outstanding Common Shares of the Company, subject to receiving
tenders for no less than forty percent (40%) of such issued and outstanding
Common Shares. Management notes that the Letter was conditioned on obtaining at
least 40% of the outstanding Common Shares, which would require the Herzog group
to tender its shares. The Herzog Group has indicated that it would not sell any
of its shares, rendering the purported offer illusory. No tender offer was filed
with the Commission by June 7, 2001 or any other date.
As more fully described under Significant Corporate Events (see below),
the Company retained two consulting firms to seek suitable candidates for
acquisition, but few potentially attractive candidates were found. In addition,
none of such candidates could have been acquired given the declining market
price of the Common Shares.
The Company could have selected a more direct and far less costly means
of completing the Merger and the Transaction. The Herzog Group was not required
to make an Offer for the Common Shares but could, under the Ontario Act, have
proceeded directly with the Merger and the Transaction, to which the Offer is,
from a legal perspective, entirely unnecessary. The net effect of a decision to
engage solely in the Merger and the Transaction would have been two-fold; the
Herzog Group would have faced far lower costs and shareholders would have been
offered no premium over the market price of the Common Shares and become subject
to the Canadian withholding tax, as applicable. Shareholders who accept the
Offer are being offered a considerable premium to the market price and avoid
being subject to the Canadian withholding tax and are spared the expenditure,
time, effort and personal funds in pursuing appraisal rights and any applicable
refund from the Canadian government.
Reasons
The primary reasons the Offer is being made is to provide shareholders
fair value for their Common Shares and to enable them to avoid being subject to
the Canadian withholding tax. The Board reviewed the Fairness Opinion provided
by Rodman and, in reliance thereon, confirmed its proposed offering price for
the Common Shares of $0.80 net to the shareholder (the "Common Share Offer
Price").
The primary reasons that led to the Board's determination to take the
Company private are provided below (but see also Significant Corporate Events
hereinafter).
The Company incurs significant costs in being a public company. The
Company estimates that it incurs approximately $100,000 annually in connection
with (1) preparing and filing with the Commission periodic reports under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (2) preparing,
filing with the Commission and mailing to shareholders a proxy statement in
connection with the annual shareholders meeting, (3) the annual audit of the
Company' financial statements, (4) directors' fees and other expenses and (5)
directors and officers liability insurance, all of which expenses could be
eliminated if the Company were no longer subject to the reporting requirements
of the Exchange Act.
Further, the trading market for the Common Shares is extremely limited.
Since the Company's initial public offering in November 1998, the average daily
trading volume by quarter has been as follows; approximately 30,555
9
Common Shares in 1999, 24,757 Common Shares in 2000, 10,888 in the first quarter
of 2001 and 7,002 in the current quarter to date. As a result, the holders of
the Common Shares do not have what is considered one of the main advantages of
owning shares in a public company; a liquid market for their shares. Please see
http://quotes.nasdaq.com.
The recent bid prices for the Common Shares reflect the impact of
recent trends, fundamental as well as technical, on their fair value. The Board
of Directors believes that the low stock price is caused by the general lack of
interest in micro cap securities and the Company' poor recent operating results
in addition to general market conditions, which are particularly harmful to
companies with a modest market capitalization, as well as by the
industry-specific decrease in growth (see "SPECIAL FACTORS--1. Operating
History; Payment of Dividends and Redemption of Common Shares Uncertain").
According to Rule 4310(c)(8)(B) (the "Marketplace Rule") of the Nasdaq
Stock Market, Inc. promulgated by the National Association of Securities
Dealers, Inc. (the "NASD"), shares that trade on the Nasdaq Small Cap Market
(the "SCM") must meet a minimum bid price of one dollar. Any deficiency in this
regard for a period of thirty (30) consecutive trading days will cause Nasdaq
notify the Company of its non-compliance with the Marketplace Rule and alert it
to the fact that it may seek a hearing to determine a course of action whereby
the Company may be brought into compliance with such Marketplace Rule. The
closing price of the Common Shares has been below one dollar since November 9,
2000 (see, e.g., http://stockcharts.com). Nasdaq set a date for the hearing,
which was canceled due to the filing of the Offer to Purchase and the related
documents. The "increasingly probable likelihood" of delisting from the Nasdaq
SCM previously referred to has become a reality. The Board had long attempted to
bring the minimum bid price of the Common Shares within the requirements of the
Marketplace Rule but was not successful in so doing. The failure represents one
of the major reasons for the Board's determination to engage in the Transaction.
As of June 12, 2001, the Common Shares trade on the OTC BB rather than on the
Nasdaq SCM.
Management believes that taking the Company private is currently its
best option available for the reasons delineated above and in view of the events
and conditions discussed under Significant Corporate Events. The timing of the
Merger and the Transaction were not determined with respect to any particular
date, or with reference to some external event. Rather, the time has come to
recognize that the Company's past efforts in exploring other options with the
intent to increase shareholder value have not succeeded and that it is presently
in a position in which it cannot reasonably expect success from such options.
Management believes that the Company's ability to withstand the downturn in the
retail environment will be greatly enhanced as a private entity.
In reaching its determination to pursue taking the Company private at
this time, the Board was influenced by the fact that there are costs and
requirements to meet short-term objectives associated with being a public
company that do not affect private companies. Management believes that the
Company could far more easily sustain its business in the retail environment in
the short term if it were privately held. The Company could in such case adopt a
lower profile rather than pursue short-term revenue or earnings growth, with a
view to its long-term financial condition rather than the numbers reportable in
the next fiscal quarter. In addition, and perhaps of greatest weight, pursuing
the course required to satisfy public shareholders would entail assuming
otherwise unnecessary risks. These risks would not be assumed were the Company
private in that they would not be considered worthwhile under a cost/benefit
analysis carried out with a view to the Company's long-term interests. The
reduced availability of insurance on accounts receivable with respect to many of
the Company's customers in the current retail environment is representative of
the factors contributing to its concern. A public company cannot act based on
such a strategy without inviting further decreases in the market price of its
securities, since shareholders reasonably desire improvements to the issuer's
top and particularly bottom lines.
The Board has regretfully concluded that the market price of the Common
Shares will not rise to a satisfactory level in the future. Having drawn that
conclusion, the Board sees no further advantage in remaining public.
Effects
Effects on the Company
Reduced liquidity of the Common Shares
Trading in the Common Shares has been very limited. See "SPECIAL FACTORS--2.
Purpose and Fairness of the
10
Offer." There can be no assurance that any trading market will exist for the
Common Shares following consummation of the Offer. The extent of the public
market for the Common Shares following a consummation of the Offer will depend
on the number of holders that remain at such time, the interest in maintaining a
market in the Common Shares on the part of securities firms, and other factors.
An issue of securities with a smaller float may trade at lower prices than would
a comparable issue of securities with a greater float. Accordingly, the market
price for Common Shares that are not tendered in the Offer may be adversely
affected to the extent that the amount of Common Shares purchased pursuant to
the Offer reduces the float. The reduced float also may have the effect of
causing the trading prices of the Common Shares that are not tendered or
purchased to be more volatile. It must be considered highly unlikely that there
will be a public market after the consummation of the Offer.
In addition it is, in point of fact, the express intention of the
Herzog Group that there not be a public market for the Common Shares at all. Any
Common Shares acquired by the Company in the Offer will be cancelled.
Shareholders who remain shareholders of the Company after the Offer has expired
will have their Common Shares converted, through the Merger, into redeemable
preferred shares of NewCo, which will then immediately be redeemed with no
consent required on the part of such preferred shareholders as a measure
necessary to the completion of the Transaction.
Exchange Act Registration
The Common Shares are currently registered under the Exchange Act.
Registration of the Common Shares under the Exchange Act may, given the
conditions applicable to the Company, be terminated upon application of the
Company to the Commission if the Common Shares are no longer held by no less
than 300 holders of record. If the Exchange Act registration for the Common
Shares is terminated as a result of the Offer, the amount of information
publicly available to the remaining shareholders of the Company would be
significantly reduced, which could adversely affect the trading market and
market value for the remaining Common Shares.
However, the fact that the Company intends to engage in the Merger
followed shortly by the Transaction renders the foregoing irrelevant. The
termination of the registration of the Common Shares under the Exchange Act will
occur by virtue of their extinction.
The Merger
The reason the Offer for the Common Shares is being tendered is that
the Herzog Group intends that the Company go private, which will be accomplished
through the Merger followed by the Transaction. Unless every shareholder of the
Common Shares accepts the Offer, the Herzog Group intends to achieve its aims
through merging the Company with a non-public vehicle, which vehicle is referred
to herein as the Acquisition Corp. The separate corporate existence of the
Company shall cease, and the Company and the Acquisition Corp. shall become one
merged corporation, referred to herein as NewCo. Shareholders of the Common
Shares who do not accept the Company's Offer will have their currently issued
and outstanding Common Shares converted into shares of redeemable, non-voting
preferred stock of NewCo. Consequently, the current shareholders of the Common
Shares who do not accept the Company's Offer will possess shares in a private
company that will immediately be redeemed with no consent required on the part
of the shareholders, whether on the conversion or the redemption. While the
shareholders are granted rights of appraisal by the Ontario Act, it is
impossible to predict what the court of competent jurisdiction would determine
the fair market value of the Common Shares to be. In addition, the Canadian
withholding tax, as more fully described herein, will in all likelihood be
applied to shareholders who do not reside in Canada unless they accept the
Offer.
Conduct of business as a private company
The Company will, as a private company, face a far different
environment that the one in which it currently operates. The positive
differences are discussed in the penultimate paragraph under Reasons
hereinabove, as supplemented by the savings of over an estimated $100,000 fees
payable in relation to compliance with the Exchange Act (see above) but the
privatization will likely also lead to the following: (i) the greater difficulty
in obtaining financing resulting from the loss of the greater confidence
typically instilled by virtue of being a public company, (ii) decreased
visibility leading to greater obstacles in terms of advertising and promotion of
its goods and services due to the absence of name recognition and (iii) the
potential disinclination on the part of some customers to do business with a
private company about which no information would be publicly available.
Notwithstanding the impact of the immediately foregoing unfavorable effects,
however, the Company believes that it is far outweighed by the positive effects
11
anticipated from going private.
Effects on the Affiliated Shareholders
See "SPECIAL FACTORS -- 3. Interests of Certain Persons in the Offer"
for a non-financial discussion.
The direct benefit to the affiliated shareholders will, assuming that
all Common Shares are tendered and accepted for payment, be a fifty percent
(50%) increase in their share of the Company's net book value and net earnings
(or, from another perspective, an increase of thirty-three percent (33%) of the
total net book value and net earnings) less the amount required to pay
shareholders for the Common Shares and the expenses of the Offer. The net book
value of the Company as of February 28, 2001 was $10,845,854 and the net
earnings (loss) for the nine (9) months ended at such date was $(443,798). The
price payable for all the Common Shares would be $1,460,116 which, when
aggregated with the assumed expenses of the Offer of $97,077, results in total
assumed expenditures related to the Offer of $1,557,193. One third of the net
book value is approximately $3,615,285. The net gain, in terms of book value, to
the affiliated shareholders would be ($3,615,285 - $1,557,193) approximately
$2,058,092. The direct effect on the net earnings of the affiliated shareholders
will be an increase in the loss, as of February 28, 2001, of approximately
$147,933.
Effects on the Unaffiliated Shareholders
Shareholders who accept the Offer will receive a direct benefit of a
premium of 81.8% over the $0.44 closing price of the Company's Common Shares on
April 27, 2001. The net earnings (loss) per such Common Share was $ (0.08) as of
February 28, 2001. See below for a discussion of the outlook of the Company's
business, financial condition, results of operations and future prospects.
Shareholders who do not accept the Offer will have their Preferred
Shares redeemed immediately upon issuance at the Common Share Offer Price as
part of the Transaction. However, shareholders who do not reside in Canada would
be subject to the 25% (at minimum) Canadian withholding tax on such redemption
and it would be the responsibility of each such shareholder to make the
requisite filings and apply for a refund of such withholding tax (if
applicable). A shareholder who does not approve the Merger and the Transaction
will be accorded rights of appraisal as provided for under the Ontario Act.
There can be no assurance as to what a court of competent jurisdiction would
award such dissenting shareholder. Any shareholder who were to seek appraisal
rights would be responsible for the costs of the litigation, unless otherwise
determined by the Ontario court of competent jurisdiction. In addition, such
dissenting shareholder would be subject to the above-mentioned 25% (at minimum)
withholding tax. The steps required to receive a refund from the Canadian
federal government will not be free of cost, and the inconvenience may be
considerable.
In addition to the foregoing effects, unaffiliated shareholders who
tender their Common Shares through this Offer will be unable to benefit from the
potential appreciation in the market price of the Common Shares, had such Common
Shares remained publicly tradable. Since this Amendment II is filed in
connection with not only a tender offer but also a going-private transaction,
the same will of course apply to unaffiliated shareholders who do not tender
their Common Shares, as well as to the affiliated shareholders, i.e., the Herzog
Group.
Unaffiliated security holders have access to the Company's public
filings on the Commission's Web site at
http://www.sec.gov/edgar/searchedgar/formpick.htm. No other information or
service is provided to the unaffiliated security holders. Unaffiliated security
holders are asked to contact MacKenzie Partners, Inc., the Company's Information
Agent, collect at (212) 929-5500 or Toll-Free at (800) 322-2885.
Fairness of the Going-Private Transaction
Fairness
The Company is not taking a position or recommending that unaffiliated
shareholders accept the Offer. Neither the Company nor its management wishes or
intends to exert any influence over the unaffiliated shareholders' decisions
with respect to their acceptance of the Offer since the Herzog Group may be
affected by the aggregate number of Common Shares that are tendered. The Board
believes that the Offer is fair, but has not resolved that the Company take a
position on the Offer or how it relates to the fairness of the Merger and the
Transaction, an entirely different concept. The Board notes that dissenters'
rights of appraisal are available under the Ontario Act in the event that any
shareholder
12
desires to exercise such right. The Board does not believe that it is called
upon to recommend a course of action to the unaffiliated shareholders, nor that
it would be appropriate to do so, but believes the Offer is fair based upon the
extensive review of the elements delineated below and in reliance on the
Fairness Opinion.
The Board of Directors, including Messrs. Herzog, has determined the
Common Share Offer Price to be fair, in view of all the relevant circumstances,
to shareholders of the Common Shares. The Board can state categorically that its
view is based upon an extensive review of all material factors.
Certain Factors Considered in Determining Fairness
- - The average daily closing bid prices on the Nasdaq SCM over the thirty
(30), sixty (60) and ninety (90) day periods ending as of the date of
this Offer to Purchase, which were $0.5397, $0.5496 and $0.5833,
respectively;
- - The lack of an active trading market for the Common Shares;
- - The fact that the Company's ability to engage in acquisitions, a key
advantage of being a public company upon which the decision to
undertake the Company's initial public offering was predicated, has
been drastically undermined as a result of the low market price of the
Common Shares;
- - The most recently reported sale price of the Common Shares prior to the
public notification of the Offer ($0.48), and
- - The fact that the Common Shares were, in management's considered
opinion, soon to be delisted from Nasdaq as a result of their current
price (see above).
Management has been involved in the business of the Company for a
significant period, and believes itself capable of evaluating the discrete
factors that affect the Company and its business and what degree of weight to
ascribe to each such factor. The principal financial issues taken into account
prior to the making of the decision to engage in the Transaction and the
fairness of the consideration offered to the holders of the Common Shares are
discussed below. While the Board stakes no claim to perfect knowledge, it can
assert that no factor other than those discussed in this section influenced its
evaluation of a fair value to offer the Company's unaffiliated shareholders and
subsequent acceptance of the Common Share Offer Price to be proposed for
Rodman's appraisal as a fair price for the Common Shares (though they do not
encompass the entirety of the reasons impelling the Transaction, for which the
reader is advised to see "Reasons," above). Readers are advised that the
discussion is properly understood to concern neither the Transaction nor the
Common Share Offer Price independently of the other, but that it details a set
of variables severally affecting the equity of the latter in the context of the
former. Management has reviewed the factors it deems material from the
perspective of an executive of a small company, gauging the importance of each
factor as it pertains to Curtis International Ltd. in particular, while Rodman's
evaluation is, necessarily, based on a broader evaluation of other companies
that engaged in similar transactions.
Current Market Price
The low market price of the Common Shares has the effect of reducing
the Company's ability to conduct placements, whether private or public, of its
securities in order to raise capital and to perform acquisitions with its paper,
means by which it could otherwise have accomplished its plans for expansion, a
criterion management unreservedly believes represents an indispensable
constituent in fostering the long-term success of the Company's business.
The low volume of trading results in a lack of a liquid market for the
Common Shares and offers little in the way of exit strategies for investors,
which clearly influences the investment decisions of persons or entities who
might have been willing to purchase Common Shares. Management places heavy
emphasis on this factor.
Historical Market Prices
13
The market price of the Common Shares has been subjected to a
continual, downward trend despite the fact that the Company was reporting
significant growth in both the top and bottom lines. Management sees little
reason to believe that its future results in terms of both revenues and net
income would reverse this trend. The plausibility of material, sustained
appreciation in the market price of the Common Shares is deemed negligible,
particularly in light of the delisting from the SCM. Management's conviction is
easily illustrated by examining the Common Shares where historical market
prices, whatever be the period examined (see, e.g., http://stockcharts.com).
Concurrently therewith, support for the Common Shares among broker-dealers has
seen a sharp decline, which is a frequent feature of shares in which investors
have lost confidence, interest or both. Management deems this factor to be of
critical importance.
Net Book Value
The Company's net book value per Common Share, as of February 28, 2001,
was $2.05. Management believes that net book value is among the most illusory of
financial indicators for a company that markets serviceable products, because
the value of the products such as those marketed by the Company is dependent on
a warranty, the absence of which would negatively impact value. Inventory and
accounts receivable represent 76% of the Company's book value. In light of the
Company's exposure to the current weak retail environment, and the fact that the
Company's products would be worth significantly less without the benefits of an
ongoing warranty, management did not place a great deal of emphasis on this
factor.
Going Concern Value
Management believes that the current low market price and trading
volume of the Common Shares represents a ceiling that will persist for the
foreseeable future, since it appears to management that investors have lost
interest in the Company. The market price of the Common Shares has declined
despite management's ability, until recently, to generate revenues and derive
earnings therefrom. Consequently, management questions whether even a return to
profitability would inspire investors and materialize in a positive movement in
the market price of the Common Shares. Compounded by the Company's resulting
inability to make the acquisitions called for by its business model, this
disinterest implies a clear and present going concern.
Furthermore, the general retail environment including, but not limited
to, the attenuation and disappearance of the regional chains is an issue of
tremendous importance to the Company's ability to market its products. The
demonstrated aggressiveness of the major brands in pursuing the fewer remaining
retailers diminishes the Company's opportunities for market entry and highlights
its difficulty in competing with these major manufacturers and distributors.
Another factor impinging upon the Company's business is the marked
diminution of its customer base, both actual and potential, resulting from the
number of companies that have resorted to chapter 7 and 11, as aggravated by its
related unwillingness to enter into contractual relationships with a number of
retailers that may never provide adequate consideration for the Company's
products and services. In addition, others pose severe credit risks and
accordingly do not constitute dependable business partners. The decreasing
revenues seen in the context of selling serviceable products entails a
disadvantageous, from the Company's perspective, effect on the ratio of cost of
sales over earnings. Because this factor encompasses a plurality of material
factors ignored by concepts such as net book value (or related ones, e.g., net
tangible assets, etc.), management attributes far greater weight to this
element, though somewhat less than it accords the first two factors delineated
hereinabove.
Management has not conducted a going concern analysis of the type that
investment banking firms produce per se. Nonetheless, it has assessed the
Company's value to the best of its ability using principles similar to those
employed by research departments of financial institutions. A conventional going
concern analysis was not deemed appropriate, due to its limited applicability,
for the reasons discussed under "Preparer and summary of the report, opinion or
appraisal" (see below), foremost among which is the fact that the abrupt, sharp
plunge in the Company's recent sales and earnings renders such analyses
unreliable.
Liquidation Value
The decrease in sales has led to a corresponding increase in the
Company's inventory. In addition, the Company markets serviceable products. The
requirement that there be a viable warranty guaranteeing service of the products
would, in a liquidation scenario, drastically reduce the price payable therefor;
the potential occurrence of a necessarily
14
irremediable malfunction would unquestionably reduce the products' appeal.
Accordingly, the Company did not undertake an in-depth liquidation value
analysis, as the Board quickly realized that it would clearly not be in the
unaffiliated shareholders' best interests. There were, therefore, no steps taken
to conduct an analysis of the Company's liquidation value beyond the measures
undertaken with respect to the Company's going concern value (see immediately
above). This factor is deemed significant, though it was not seen as crucial.
Purchase Price Paid in Previous Purchases
As discussed under the rubric Significant Corporate Events, management
took steps to attempt to resuscitate the market price of the Common Shares
during the fall of 2000. When repurchasing the Common Shares on the open market,
it obviously paid the market price therefor. This factor was considered in
determining the Common Share Offer Price, but less as a factor like the others
referred herein than as a standard against which the Common Share Offer Price
may be comparable. Management deems it an expression of its fiduciary duty to
the Company's shareholders that it pay its shareholders $0.80, which represents
a premium in excess of eighty percent (80%) on the prevailing market price on
April 27, 2001, one (1) business day before the Offer was formally approved by
the Board and four (4) business days before it was filed with the Commission and
disseminated to the shareholders. Management believes, with which belief the
Board agrees, that $0.80 is a fair price for the Common Shares.
Purchase Price Paid in Previous Tender Offers
As discussed in Premiums Paid Analysis hereinafter, Rodman performed
various analyses in connection with its conclusion that the Common Share
Offering Price is fair to shareholders from a financial point of view. The Board
recognizes, as does Rodman, that whereas the comparability of the reviewed
transactions to the Offer and the Transaction described herein is somewhat
limited in terms of size and industry, the reviewed transactions are all similar
to the instant case in that each one consisted of acquisitions made by majority
shareholders for minority positions in public companies. Accordingly, the Board
was satisfied that Rodman had conducted its analysis using the most closely
resembling transactions available and that the differences were, if certainly a
factor, not dispositive, and that the premiums paid analysis was the most
significant factor in determining that the Common Share Offering Price was fair.
See "Premiums Paid Analysis" hereunder.
The Fairness Opinion
Management has relied on Rodman's Fairness Opinion in supporting its
conclusion that the Common Share Offer Price is fair to shareholders in
acknowledgment of Rodman's experience in the field. The Board agrees with
management's conclusion that the Common Share Offer Price is fair to the
shareholders.
Additional Factors
The imminent delisting of the Common Shares from the Nasdaq SCM (which
has now occurred) self-evidently exerted a great deal of influence over
management's decision-making. Management was motivated by the impulse of
securing as much of a benefit to the Company's shareholders as feasible within
the applicable temporal constraints imposed by the Marketplace Rule. Management
anticipated that delisting would have a material, adverse effect on, above all,
the Company's Current Market Price and its Going Concern Value.
As a result of the foregoing, management does not foresee any material
improvements to the Company's business, financial condition, results of
operations or future prospects and can therefore state categorically that it
believes the Common Share Offer Price to be fair to the Company's shareholders
in the context of the Transaction.
Neither the Board nor management ever discussed soliciting a third
offer for the publicly held shares in any depth, not believing that any such
offer would be seriously undertaken in that (1) the Herzog Group has no
intention of selling its Common Shares, and (2) there is a minimal market for
acquiring minority positions in companies of this size. The Company is not
making the Offer as a means of acquiring a controlling interest in the Company,
since it already controls a super-majority and can effect whatever corporate
decision the Herzog Group deems in the Company's best interests. Further, it is
not engaging in the Transaction as a reaction engineered to pre-empt or prevent
some external event, but solely for the reasons discussed elsewhere in this
Amendment II, as evidenced by the summary of the Board's discussions over the
recent past and narrated under the section Significant Corporate Events
hereinafter. Consequently, the issue of soliciting third party offers was never
considered a viable option by the Board, and was
15
accordingly never factored in to the consideration offered to the unaffiliated
shareholders as a variable in determining the Common Share Offer Price. Messrs.
Herzog and the Company all believe the Common Share Offer Price to be fair to
the Company's unaffiliated shareholders.
No unaffiliated representative was hired to negotiate on behalf of the
unaffiliated shareholders. The aggregate market value of the Common Shares held
by the unaffiliated shareholders was approximately $755,000 immediately prior to
public notification of the Offer (whereas the purchase of the Common Shares held
by the unaffiliated shareholders at the Common Share Offer Price will cost the
Company well in excess of $ 1,400,000). While the Company believed it entirely
reasonable to comply with the request made of the Board by its independent
director to retain an investment banking firm to opine on the fairness of the
Common Share Offer Price, any unaffiliated representative retained to negotiate
on behalf of the unaffiliated shareholders would have had to factor its own fees
in such negotiation. In light of the fact that the Company is by any measure a
small business possessed of limited and decreasing liquid resources as
reinforced by due regard to its full legal power to consummate the Merger and
the Transaction without making any tender offer to unaffiliated shareholders
whatsoever, management of the Company is fully comfortable in stating that it
believes the Common Share Offer Price to be fair to unaffiliated shareholders, a
position concurred in by the independent director in reliance upon Rodman's
Fairness Opinion.
Similar reasoning pertains to the question of approval of the
unaffiliated shareholders. The Company reiterates that it is under no obligation
to seek the approval of its unaffiliated shareholders, nor to make them a tender
offer. The Offer is being made as an expression of the Board's desire to treat
such unaffiliated shareholders in the most equitable manner at its disposal,
having unsuccessfully attempted other means to accomplish aims shared by all the
Company's shareholders. In conclusion, the Company harbors no qualms about, and
sees no need to vacillate with respect to, the procedural fairness of the
context in which the Merger and the Transaction are to be consummated, because
it firmly believes that the fairness of the Merger and the Transaction,
understood within this context to include the making of the Offer, is
constituted by its substance rather than its procedural details, the latter of
which is in any case within the purview of the Ontario Act.
Finally, the Company discussed the procedural steps of engaging in the
Transaction with its Canadian counsel. Based on the advice rendered thereby, the
Company was able to offer its shareholders a solution that offered them not only
a considerable premium over the market price of the Common Shares, but was also
able to devise means by which shareholders who do not reside in Canada are able
to avoid Canadian federal income tax withholding, thus further ameliorating the
terms offered to the shareholders.
In summary, the Board believes that by reviewing the factors considered
in determining fairness as set forth in this section and the protections
afforded to non-tendering shareholders by Ontario law, it believes that it has a
reasonable basis for its determination that the Offer is procedurally fair to
unaffiliated shareholders.
Approval of Security Holders
The Transaction is not structured so as to require the approval of a
majority of the unaffiliated shareholders. Approval of the resolution
authorizing the Merger, which is a prerequisite of the Transaction, will not
require the vote of any unaffiliated shareholder, whereas the Transaction itself
necessitates no shareholder vote whatsoever.
The Company is an Ontario company incorporated under the Ontario Act.
The Merger will require the affirmative vote of sixty-six and two thirds percent
(66 2/3%) of the outstanding Common Shares. Prior to the Offer, the Herzog Group
owned or controlled over sixty-seven percent (67%) of the outstanding Common
Shares and will tender no such Common Shares through the Offer. Consequently,
unaffiliated shareholders may retain their Common Shares, and may cast them
against the resolution whereby the Merger will be approved, but passage thereof
will not be affected by the vote. Dissenting shareholders are granted appraisal
rights under the Ontario Act.
Unaffiliated Representative
There have been no negotiations between the Company and any
unaffiliated shareholders, whether retained by the non-employee Director of the
Board or otherwise. However, the Board of Directors has, at the request of David
Ben-David, the Company's non-employee Director, retained Rodman to produce a
Fairness Opinion. No independent
16
committee was appointed to negotiate on behalf of the unaffiliated shareholders.
Approval of Directors
The Offer for the Common Shares has been unanimously approved by the
Company's Board of Directors. The Company believes that the Offer is fair, but
is not making a recommendation to its shareholders because it is an interested
party, as are its affiliates. While the number of Common Shares tendered will be
of little practical significance, and the Company could have accomplished its
stated goals without making shareholders the Offer, the Company does not intend
to exert direct influence over the decision to be made by the shareholders. The
Board retained Rodman to determine whether the Common Share Offer Price is fair,
and is relying on Rodman's opinion that it is. Holders of Common Shares should
determine whether to accept the Offer based upon their own assessment of, among
other factors, current market value as well as the trading volume of the Common
Shares, liquidity needs and investment objectives. The Transaction has been
approved by Board, including by the Company's non-employee director.
Reports, Opinions, Appraisals and Negotiations
Report, opinion or appraisal
The Board of Directors has received a Fairness Opinion from Rodman &
Renshaw, Inc, a national investment banking firm, which Fairness Opinion is
based on Rodman's analysis as contained within the report relating thereto (the
"Report") and concludes that the Common Share Offer Price is fair to
unaffiliated shareholders from a financial point of view.
Preparer and summary of the report, opinion or appraisal
The Board of Directors retained Rodman to provide a Fairness Opinion
with respect to the Transaction and the Report, filed herewith as Exhibits
(A)(2) and (A)(8), respectively.
Rodman is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
The method the Company used in its selection of Rodman was a resolution
adopted by the Company's Board after discussions with several investment banks.
The Company, after consulting with its securities counsel, felt that Rodman had
the requisite expertise to provide the Fairness Opinion. This determination was
based primarily on the extensive experience of Rodman's Senior Managing Director
and his staff. At the behest of the independent director, the Company
subsequently acted on such request pursuant to the method referred to above.
There was no relationship, material or otherwise, between Rodman and
the Company prior to the Company's retention of Rodman to provide the Fairness
Opinion. Rodman is to be paid a fee of $38,500 for its services.
The Common Share Offer Price was proposed by the Board, subject to the
conclusions of the Fairness Opinion performed by Rodman. Upon receipt of the
Fairness Opinion, which determined that the Common Share Offer Price was a fair
price for the Common Shares from a financial point of view, and in view of the
Company's business, financial condition, results of operations and future
prospects, the Board confirmed the establishment of $0.80 net in cash per Common
Share as the Common Share Offer Price.
In preparing the Fairness Opinion and the underlying Report, Rodman
utilized several methods to arrive at its conclusion, including comparing the
premium over the prevailing market price received by stockholders in similar
transactions, especially in light of the liquidity of the Company's Common
Shares. The Report provides depictions and demonstrations, as the case may be,
historical income statement data, the trading range of the Common Shares,
comparative stock performance and analyses based on the valuation of the Common
Shares, as expressed through premiums paid, comparable companies and comparable
transaction. See the Report filed herewith, a summary of which is provided
below.
17
Comparable transactions analysis
Rodman reviewed publicly available information for completed
acquisitions of target companies in the consumer electronics industry announced
since January 1, 1999. Only one transaction fulfilled these criteria, Polk
Audio's self-tender offer. The ratios of total consideration to revenue,
Earnings Before Interest and Taxes ("EBIT") and Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA") for Polk's offer were 0.3, 3.0 and 2.2,
respectively. The ratios for the Offer are 0.1, 1.6 and 1.5, respectively. In
other words, the consideration Curtis is offering its shareholders is
approximately ten percent (10%) of its annual revenues, one hundred and sixty
percent (160%) of its net earnings and one hundred and fifty percent (150%) of
its net earnings as adjusted for depreciation and amortization.
Comparable companies analysis
Rodman used a comparable company analysis to analyze the Company
relative to its peers with respect to trailing twelve months operating
performance and public market valuation. Rodman compared the Company with
selected public consumer electronics companies with trailing twelve month
revenues below $500 million. The peer group consisted of Boston Acoustics, Inc.,
Emerson Radio Corp. and Koss Corporation. Although these companies were
considered comparable to the Company for the purpose of this analysis based on
certain characteristics of their respective businesses and financial
performance, none of these companies possesses characteristics identical to
those of the Company. The comparable company analysis shows that the Company
was, before public notification of the Offer, trading at a steep discount to its
peers by any metric. The average multiples of total market capitalization to
trailing twelve month revenue, EBIT and EBITDA for the peer group were 0.9, 6.6
and 5.9. The corresponding multiples for the Company, as adjusted for bad debt
expense, were 0.03, 0.7 and 0.6. On an unadjusted basis, the multiple for
revenue was 0.03 while the EBIT and EBITDA multiples were not meaningful due to
the negative reported EBIT and EBITDA.
Discounted cash-flow analysis
Rodman did not review the Company's projections due to a lack of
forward visibility with respect to the Company's operations. Rodman's view of
the uncertainty surrounding the future prospects of the Company was based on the
recent substantial decline in its operating performance, the bankruptcy of
several major customers, the volatility of the micro-cap market and the downturn
in retail sales in general. The fact that the Company's sales dropped by 50% in
the quarter ended February 28, 2001 illustrates the inadequacy of discounted
cash-flow analyses (a.k.a. going concern analyses) in this instance. Because
Rodman did not believe in the reliability of any result derived from a
discounted cash-flow analysis, it neither requested projections nor evaluated
the fairness of the Common Share Offer Price using such projections.
Premiums paid analysis
Rodman's analysis of premiums paid was based upon the review and
analysis of the range of premiums paid in similar acquisitions of minority
ownership positions. Rodman reviewed 20 recent transactions (the "20
Transactions") that it deemed relevant where the ownership of the acquiror in
the target six months prior to the announcement of the transaction was greater
than 50%. Using publicly available information, Rodman obtained the premium of
the offer price per share relative to the target company's stock price one day,
one week and one month prior to the date of announcement of the transaction (the
"Announcement Date"). The mean and median range of premiums paid to the target
company's stock price one day, one week, and one month prior to the Announcement
Date were 52.5% and 33.4%, 55.3% and 43.6%, 58.6% and 54.4%, respectively. The
corresponding figures for the Common Shares, where May 4, 2001, was the
Announcement Date, are 45.5%, 81.8% and 60%. The sole instance in which the
premium represented by the Common Share Offering Price is lower than the median
and mean figures is the mean for one day prior to the Announcement Date. The
Common Share Offer Price of $0.80 represents a premium of 81.8% over the $0.44
closing price of the Company's Common Shares on April 27, 2001, the date Rodman
used to perform its analysis.
The 20 Transactions Rodman reviewed are given below.
Transaction Date Target Acquiror Target Market Cap. ($)
- --------------------------------------------------------------------------------------------------------------------
04/19/00 Conning Corp Metropolitan Life Insurance Co 131,518,217
04/28/00 Metrika Systems Corp Thermo Instrument Systems Inc 71,399,482
04/13/00 ONIX Systems Inc Thermo Instrument Systems Inc 125,628,335
18
04/07/00 Thermedics Detection Inc Thermedics 153,326,179
04/14/00 Thermo BioAnalysis Thermo Instrument Systems Inc 381,613,579
05/12/00 Thermo Optek Corp Thermo Instrument Systems Inc 740,840,612
03/31/00 Thermo Sentron Inc Thermedics 136,231,929
05/12/00 ThermoQuest Corp Thermo Instrument Systems Inc 632,038,500
09/15/00 Vastar Resources Inc BP Amoco PLC 6,975,598,515
04/20/00 Travelers Property Casualty Citigroup Inc 12,974,985,484
06/08/00 Homestead Village Inc Security Capital Group Inc 330,086,562
06/27/00 Hartford Life Hartford Fin Svcs Group Inc 5,956,032,847
07/17/00 Cherry Corp Investor Group 130,545,350
11/16/00 JLK Direct Distribution Inc Kennametal Inc 143,998,659
09/27/00 800-JR Cigar Inc Investor Group 127,519,714
11/08/00 Minolta-QMS Inc Minolta Investments Co 39,798,393
11/29/00 Trex Medical Corp Thermo Electron Corp 33,945,384
12/22/00 pcOrder.com Trilogy Software Inc 58,038,712
03/16/01 Azurix Corp Enron Corp 418,001,538
04/12/01 Vitaminshoppe.com Inc Vitamin Shoppe Industries Inc 6,362,211
As the table demonstrates, only one of the 20 Transactions completed
since January 1, 2000 was of comparable size to the Transaction. None of the
companies referenced above was involved in consumer electronics, the industry in
which the Company operates. For a full discussion of the analysis of such 20
Transactions, see the Report filed herewith.
Rodman also considered the recent downturn in the Company's operating
performance, the potential negative impact of the recent bankruptcy of several
key customers on the Company's future prospects and the potential delisting from
Nasdaq of the Company's Common Shares, among other factors.
Although none of the transactions reviewed occurred in the same
industry as that in which the Company operates and only one transaction was of a
similar size, the reviewed transactions are all similar to the instant case in
that each one consisted of acquisitions made by majority shareholders for
minority positions in public companies. Since January 2000, there has been no
such transaction in the Company's industry and only one of comparable size.
In arriving at its conclusion, Rodman did not attribute any particular
weight to the analyses or factors it considered, but rather made qualitative
judgments as to the significance and relevancy of each piece of analysis and
factor. Accordingly, Rodman believes that its finding must be considered as a
whole and that placing greater reliance on one portion of its analyses and of
the factors than another could result in a misleading or incomplete view of the
process underlying its conclusion. See the Report filed as an exhibit hereto for
further information in relation thereto.
Availability of documents
The Fairness Opinion was mailed to shareholders with the Offer to
Purchase and is available for review at the Commission's Web site at
www.sec.gov, as is the Report, filed herewith as Exhibit (A)(8).
Past Contacts, Transactions, Negotiations and Agreements
Transactions
See "SPECIAL FACTORS -- 7. Transactions and Arrangements Concerning the
Common Shares."
Significant Corporate Events
Management of the Company began considering, with the backdrop of a
decline in the market price of the Common Shares, means to improve such price
during discussions held during the summer of 2000, including the possibility of
a privatization or a share buyback. Management initiated consideration of a
repurchase program of the Common Shares early in August, and discussed the
matter with the Board shortly thereafter.
19
The Company repurchased 95,400 Common Shares for cancellation on August
10, 2000 (see "SPECIAL FACTORS -- 7. Transactions and Arrangements Concerning
the Common Shares"). The Common Shares were purchased at market price on the
date of such purchase.
On August 15, 2000 the Board discussed, at Aaron Herzog's request, the
declining market price of the Common Shares, and the relative merit of various
potential solutions in restoring the Common Shares' former price range.
The Board discussed the following remedial actions:
1. Engagement of a public relations firm - The Company had previously retained
PR firms, the effect of which was to provide no more than minor, temporary
increases in the market price of the Common Shares. Accordingly, the Board had
little faith in the prospects of this option.
2. Acquisition of other companies - between March 1999 and March 2000, the
Company asked two consulting firms to find companies that could prove suitable
candidates for acquisitions. However, the Board was not presented with
compatible firms that could be acquired at reasonable prices. The decline in the
market price of the Common Shares had drastically curtailed the Company's
ability to finance acquisitions with its Common Shares, eliminating from
consideration the few attractive prospects found.
3. Privatization - Jacob Herzog brought up the idea of privatization by the
majority shareholders in light of the general trend of the retail environment,
the illiquidity of the Common Shares, the bear market with respect to micro-cap
issues in general and the declining market price of the Common Shares in
particular, the latter of which severely hampered the Company's ability to
utilize its securities to finance acquisitions, the strategy that appeared to
the members of the Board to constitute the optimal means of restoring the market
price of the Common Shares to its former level. The Herzog Group had no
intention of selling the their majority interest in the Company, but were
willing to consider the purchase of the publicly held Common Shares if that
course of action were in the shareholders' best interests. Jacob Herzog
submitted that this strategy would at least have the advantage of procuring a
viable exit strategy for the public shareholders, many of whom had purchased the
Common Shares at higher valuations with expectations that appeared increasingly
unlikely, given the projections for the market as a composite, to be met within
the foreseeable future.
The Board believed that it was premature to seriously consider
privatization at the time, preferring an attempt to resuscitate the market price
of the Common Shares through proceeding with a share repurchase program and
relying on the Company's positive numbers to balance the prevailing negative
influence exerted on not only the Common Shares but also many other micro-cap
issues.
4. Share repurchase - The rationale for this approach was that an expression of
the Board's confidence in the Company and its results of operations could prompt
greater attention being paid to the Common Shares by the investment community,
as well as stimulate renewed optimism therein. Since any Common Shares
repurchased would be cancelled, the Board was also motivated by the beneficial
effect that the repurchase would have on the ratio of earnings per share. The
Board decided to pursue this option as it was determined to be the most feasible
and most apt to achieve the desired result. On August 22, 2000, the Board passed
a resolution confirming the authorization of the share repurchase.
During the following two months, the Board viewed with dismay the
negligible effect of the repurchase program on the market price of the Common
Shares, and its trepidation was further aggravated when, in early November, the
market price sank below one dollar per share, triggering the running period of
the Marketplace Rule (see "SPECIAL FACTORS 2. - Purpose and Fairness of the
Offer"). The fact that continued listing on the SCM had become jeopardized
compelled management to resume discussions of the Company's options.
In a conversation held by the Board in early November it was determined
that no real acquisition opportunities had surfaced and that the relentless
deterioration of the market price of the Common Shares was making it steadily
more difficult to use acquisition strategies as means of countering the market's
attenuated support. Management was at a loss to explain why the Company's
positive results did not translate into greater willingness to purchase and hold
the Common Shares. The Board discussed the widespread decline in the micro-cap
market, and deliberated on how much of the
20
Common Shares' depreciation was merely emblematic thereof and how much was due
to the Company's individual situation. During this meeting Aaron Herzog brought
up the strategy of privatization by the majority shareholders, conceding that it
was becoming an alternative that appeared increasingly unavoidable. However, he
made no motion that it be undertaken, believing that a resurgence in the market
price was still plausible, if not likely. Since the other members of the Board
were equally disinclined to privatize the Company, finding the surrender that it
would represent severely unpalatable, it was agreed that no such approach be
pursued at this stage.
Conversely, the Board decided to make another attempt at revitalizing
the market price of the Common Shares through another repurchase, in the
anticipation that such an action would demonstrate the Board's continued
confidence, remaining hopeful that the Company would be able to report some
major positive news which would have a significant, enduring impact on the
market price.
Nonetheless, the depreciation continued unabatedly despite the
repurchase of an additional 14,500 Common Shares on December 1, 2000. The Common
Shares were once again purchased at market price on the date of such purchase.
On December 27, 2000, the Company was notified by the Nasdaq that the Common
Shares had traded below $1.00 for 30 consecutive days and was therefore
confronted by the delisting of the Common Shares unless the Common Shares could
sustain a price above $1.00 for 10 consecutive days within the following 90 day
period. This prospect led management to reconsider the possibility, if not the
desirability, of maintaining the Company's listing on the Nasdaq SCM.
Accordingly, management again considered the issue of taking the Company
private.
In late December, the Company's predicament was further aggravated when
it was made aware that Montgomery Wards, one of its major customers had filed
for bankruptcy protection under Chapter 11 of Title 11 of the United States
Code. Management was initially unsure as to the impact of the loss; the customer
was a subsidiary of General Electric Co., clearly a major corporation, leading
Aaron and Jacob Herzog to believe that no material default would result from the
filing. When the full consequences were clarified - approximately one month
after the announcement of the Chapter 11 filing - Messrs. Herzog were forced to
confront the dilemma posed by the fact that the market price of the Common
Shares had been in steady decline despite the Company having shown positive
results of operations; the question of what would occur now that the Company's
performance could no longer be contrasted with the market's persistently
negative evaluation seemed unanswerable. As it became increasingly likely that
the loss would effectively expunge the entirety of the profits achieved over the
preceding nine-month period, the outlook for maintaining the listing of the
Common Shares appeared futile. Accordingly, Messrs. Herzog brought the matter to
the Board's attention in late January. Notwithstanding the members' growing
misgivings, it was determined to do no more than monitor the situation closely
and await definitive confirmation of the development. Management was to date not
convinced of the precise effect of the Chapter 11 filing on the Company's
business, which was also impacted by the general retail environment.
Implementing the privatization of the Company was considered but, since the
Board remained strongly reticent to take action that might with hindsight prove
to have been precipitate, postponed once again.
On March 28, 2001, the Company received notice from Nasdaq that the 90
day period had expired. Management had at this point seriously considered taking
the Company private after an extensive review of all the plausible scenarios
(see above). Management then discussed privatization with the Board, undertaking
a careful examination of the Company's outlook. See "SPECIAL FACTORS - 2.
Purpose and Fairness of the Transaction."
In light thereof, Aaron Herzog initiated discussions with the Board on
March 29 and 30, 2001 to review the Company's situation and options. The
discussion was wide-ranging, and encompassed all the events that had taken place
since the Company's initial public offering, most notably (i) the Company's
inability to make acquisitions, and (ii) the lack of effect of the repurchase
program. In addition, the members of the Board examined the cumulative effect to
date as well as the probable outlook for the Company as seen through the prism
of the external elements that had altered or reinforced, as the case may be, the
Company's position since the repurchase program was initiated, including (i) the
micro-cap market's continued decline and concomitant illiquidity, (ii) the
material, adverse effects on the Company's financial condition resulting from
the required write-offs of accounts receivable, (iii) the major loss to the
Company, in terms of future revenues and earnings, of key customers currently in
Chapter 11 proceedings, (iv) the general, deteriorating retail climate in North
America and the impact thereof on the Company on a going forward basis, (v) the
devastating results of operations in the recent quarter, expressed in terms of
revenues and earnings and (vi) the tightening
21
availability of insurance on accounts receivable with respect to many retailers,
leading to increased difficulty in obtaining such insurance, if available at
all; this last factor indicated to the Board that the retail environment of the
industry in which the Company operates was headed for a severe contraction.
The totality of the foregoing events and conditions contributed to the
pessimism in not only the Company's ability to announce very positive news but
also sowed doubt as to the effect on the market price of the Common Shares any
such development, however unlikely, would have. Based upon the experience of the
previous three quarters, the Board anticipated that the market price would
continue to decline.
Messrs. Herzog proposed to present a privatization option to be made by
the majority, to be preceded by a tender offer, as the best option available for
all shareholders as well as the Company's business. The tender offer would
afford the shareholders an exit strategy in an illiquid market and would provide
the shareholders a premium over the persistently declining market price of the
Common Shares. The Company would also be able to operate in a lower-cost
environment and would more easily be able to adapt its business strategy in the
depressed and increasingly volatile retail environment, which strategy would
include maintaining a lower profile. The Board agreed that the time had come to
give privatization serious consideration, and asked the Herzog Group to submit
its proposal. David Ben-David requested that the Board seek a fairness opinion
from an independent investment banking firm. Rodman & Renshaw, Inc. was selected
to perform a Fairness Opinion.
In the period between April 3 and April 20, 2001, the Board repeatedly
discussed the variables to consider in determining the price to be offered to
the shareholders in light of the issues delineated throughout this Amendment II,
with particular reference to "SPECIAL FACTORS - 2. Purpose and Fairness of the
Offer," including but not limited to the present market price of the Common
Shares and the value of the Company on a forward-basis. In the first week of
April, Aaron and Jacob Herzog proposed to offer the shareholders $.80 per share
(the "Common Share Offer Price"), a figure they deemed fair. David Ben-David
agreed that the suggested Common Share Offer Price seemed fair and reasonable
under the circumstances, but requested that the Board await the receipt of
Rodman's Fairness Opinion prior to making a final determination.
Having completed its assessment, the Board preliminarily approved a
resolution to engage in the Offer with a view to engaging in the Transaction on
April 25, 2001.
On April 30, 2001, the Board received the Fairness Opinion from Rodman
stating that the Common Share Offer Price was fair to unaffiliated shareholders
from a financial point of view. The Offer to Purchase was filed with the
Commission shortly thereafter.
On May 1, 2001, the Board passed a resolution confirming the acceptance
of Rodman's Fairness Opinion and authorizing the Company to make the tender
offer prior to engaging in the Merger and the subsequent Transaction.
Agreements Involving the Subject Company's Securities
The members of the Herzog Group are party to a voting agreement
stipulating that they shall vote together on any matter put before the
shareholders.
3. Interests of Certain Persons in the Offer
Aaron Herzog, the Company's Chief Executive Officer and President and
Jacob Herzog, its Chairman, Treasurer and Secretary, and their respective family
trusts, collectively own approximately 67% of the Common Shares of the Company.
The Herzog Group intends to form Curtis Acquisition Corp., an entity that the
Herzog Group anticipates being able, subsequent to the completion of the Offer,
to control. To the extent that holders of Common Shares accept the Offer, the
Herzog Group's beneficial ownership percentage in the Company will increase
proportionately. Consequently, the Herzog Group will be free to operate the
business of the Company under the aegis of NewCo, after the Merger has been
consummated, which would not be subject to the reporting requirements imposed by
the Exchange Act. Accordingly, the members of the Herzog Group stand to benefit
substantially from the Transaction. There can be no assurance that benefits will
accrue to the shareholders of the Company to a comparable degree, if at all.
22
The address for Messrs. Herzog is care of the Company at 315 Attwell
Drive, Etobicoke, Ontario, M9W 5C1.
4. Material Federal Income Tax Consequences
This summary of federal income tax consequences is not intended to be a
complete discussion of all possible federal income tax consequences that
shareholders may have by selling their Common Shares in the Offer to Purchase.
It is not intended as a substitute for careful tax planning. The applicability
of federal income tax laws to shareholders owning Common Shares will vary from
one shareholder to another, depending upon each shareholder's tax situation.
Accordingly, shareholders are advised to consult with their own attorneys,
accountants and other tax advisors as to the effect on their own tax situation
of selling their Common Shares.
The following discussion of the federal income tax consequences does
not purport to discuss all aspects of federal, state and local tax laws which
may affect shareholders. Instead, it focuses on the federal income tax
consequences of a typical shareholder. This discussion of federal income tax
consequences is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), and upon regulations, revenue rulings, court decisions and
administrative authorities governing the Code, as of the date of this Offer to
Purchase, and related documents and factual representations made by the Company.
Many of the provisions of the Code which are discussed in this summary were
added or amended by one or more of the tax acts passed by Congress from 1987 to
the present, including 1999 legislation. Legislation proposed in 2000, but not
signed into law or enacted, is not considered in this discussion. In many
instances, the Internal Revenue Service ("IRS") has not issued regulations or
rulings setting forth its interpretation of provisions discussed in this
summary, or the courts have not yet ruled on relevant issues. Where neither the
IRS nor the courts have provided any guidance as to their position on an issue,
this summary contains an interpretation of legal counsel to the Company of such
provisions, which merely represents the judgment of such legal counsel and is
not binding upon the IRS or the courts. The following discussion presumes the
accuracy of facts and assumptions, and continued applicability of legislative,
administrative and judicial authorities, all of which authorities are subject to
change, possibly retroactively. Subsequent changes in such authorities may cause
the tax consequences to vary substantially from the consequences described
below, and any such change could be retroactively applied in a manner that could
adversely affect the tax consequences to shareholders of disposing of the Common
Shares.
Furthermore, in an effort to provide guidance to taxpayers as
expeditiously as possible, the IRS in many cases adopts its proposed regulations
in temporary form or issues announcements or notices of its position. Temporary
regulations, announcements and notices may differ significantly from, or be
contrary to, the interpretation ultimately adopted by the IRS or the courts.
Where the IRS has not released any guidance as to its position, the
interpretations in this Offer to Purchase may be based almost entirely upon Tax
Counsel's interpretation of the Code provisions. There can be no assurance that
Tax Counsel's interpretation will prove to be correct in light of future IRS or
judicial decisions. Shareholders are urged, therefore, to seek independent
advice in evaluating the merits of this discussion, and specifically, evaluating
those provisions of the Code which may have a material affect on the disposition
of Common Shares.
The discussion below is directed primarily to shareholders who own
Common Shares in the Company and who are United States persons (as determined
for federal income tax purposes). Except as specifically noted, the discussion
does not address all of the federal income tax consequences that may be relevant
to shareholders in light of each individual shareholder's particular
circumstances. In particular, if a shareholder holds Common Shares in the name
of a partnership, corporation, trust or estate, or if shareholders are subject
to special rules, such as certain financial institutions, tax exempt entities,
foreign corporations, non-resident alien individuals, regulated investment
companies, insurance companies, dealers in securities or traders in securities
who elect to mark-to-market, or if shareholders own Common Shares of the Company
as part of a "straddle," "synthetic security," "hedge," "conversion transaction"
or other integrated investment, then such shareholders should seek independent
advice in evaluating the merits of this discussion and, specifically, in
evaluating the provisions of the Code which may have a material effect upon a
decision to dispose of Common Shares in the Company. Furthermore, the discussion
deals only with Common Shares held as "capital assets" within the meaning of
Section 1221 of the Code.
Sale or Exchange Treatment for Shareholders
Assuming that the Company purchases all of the Common Shares that
shareholders own in the Company so that their interest in the Company is
completely terminated, then each individual shareholder will, upon the sale of
the
23
Common Shares, recognize a gain or loss for federal income tax purposes in an
amount equal to the difference between the amount realized and their adjusted
tax basis in the Common Shares so purchased. Such gain or loss will be long-term
capital gain or loss if the Common Shares were held for more than one year.
Shareholders are required to hold their Common Shares for more than one year in
order for the investment to qualify as a long-term capital gain, which is
subject to an effective maximum federal income tax rate of 20%. If shareholders
sell their Common Shares after having held them more than five years, such
shareholders may qualify for a lower maximum federal income tax rate on the
long-term capital gain. If shareholders sell their Common Shares at a profit
within 12 months of purchasing them, any gain would be taxed at ordinary income
tax rates. Any loss upon the sale of their Common Shares will generally be a
capital loss. Net capital losses may offset no more than $3,000 of ordinary
income in the case of individuals and may only offset capital gain in the case
of a corporation. If the shareholder is an individual, unused portions of such
capital loss can be carried over to be used in later tax years until such net
capital loss is exhausted. If the Common Shares are held in the name of a
corporation, an unused capital loss may be carried back three years from the
loss year and carried forward five years from the loss year to offset capital
gains.
The Company May be Required to Withhold Taxes from Payments Otherwise Made to
Shareholders
Under certain circumstances, the Company is required to engage in
backup withholding. Under Code ss. 3406, the Company may be required to withhold
31% of the distributions (known as "backup withholding") that would otherwise be
made to shareholders. These rules apply to shareholders who fail to furnish
information to the Company or if the Company receives a notice that a
shareholder has failed to include interest or dividend payments on returns that
were to have been filed with the IRS. Any tax that is withheld can be claimed as
a credit on a shareholder's federal income tax return. Shareholders should
consult with their own tax advisor as to the impact of the backup withholding
rules upon such shareholder's situation. These rules may apply whether the
payments are treated as capital gain transactions or as dividend distributions
under the discussion immediately above.
Conclusion Regarding Tax Treatment of the Company and Shareholders
This synopsis of the federal income tax consequences is not intended to
be a complete summary of the tax consequences to shareholders of accepting the
Offer to Purchase, nor is it intended as a substitute for careful tax planning.
The applicability of the tax laws to shareholders will vary from one shareholder
to another, depending upon each such shareholder's individual tax situation.
Accordingly, shareholders are advised to consult with one of their own
attorneys, accountants and other personal tax advisors as to the effect on their
tax situation of the proposed purchase of the Common Shares.
Shareholders should also be aware that any sale of the Common Shares
will likely have income tax consequences to them under state income tax laws,
depending upon the state in which they are domiciled. Shareholders should
consult their tax advisor about the income tax impact upon them of any state
income taxation of the offered Common Shares if they believe they may be subject
to state income taxation.
The federal income tax discussion set forth above is included for
general information only. Shareholders are urged to consult their tax advisor
with respect to the specific tax consequences to them of the Offer, including
federal, state, local and foreign tax consequences.
5. Financing of the Offer
The total amount of funds required by the Company to purchase all the
outstanding Common Shares, other than those owned by the Herzog Group, is
expected to be approximately $1.37 million. The Company will provide the funds
needed from cash, cash equivalents and other marketable securities. The Company
currently has $2,036,000 in cash, cash-equivalents and marketable securities.
6. Beneficial Ownership of the Common Shares
The following table sets forth certain information regarding beneficial
ownership of the Common Shares as of May 30, 2001 by (a) each shareholder who is
known by the Company to beneficially own, directly or indirectly, more than 5%
of the Common Shares, (b) each executive officer of the Company, (c) each
director of the Company and (d)
24
all directors and executive officers of the Company as a group. As of May 30,
2001, there were 5,263,245 Common Shares outstanding, of which the Herzog Group
owns 3,548,000.
Percentage of
Common Shares
Name (1) Common Shares Held Outstanding (2)
- -------- ------------------ ---------------
Aaron Herzog(3) (5) 1,799,000 34%
Jacob Herzog (4)(5) 1,799,000 34%
David Ben-David (6) 12,500 *
All Executive Officers and
Directors as a Group 3,610,500 68.3%
* Less than one percent.
(1) Unless otherwise indicated, the address of each person listed below is c/o
Curtis International Ltd., at 315 Attwell Drive, Etobicoke, Ontario, M9W
5C1.
(2) Pursuant to the rules and regulations of the Securities and Exchange
Commission, shares of common stock that an individual or group has a right to
acquire within 60 days pursuant to the exercise of options or warrants are
deemed to be outstanding for the purposes of computing the percentage ownership
of such individual or group, but are not deemed to be outstanding for the
purposes of computing the percentage ownership of any other person shown in the
table.
(3) Consists of: (i) 1,689,208 Common Shares owned directly by Aaron Herzog;
(ii) 84,792 Common Shares owned by the A&E Herzog Family Trust of which Aaron
Herzog and Evelyn Fisher Herzog are the Trustees; and (iii) 25,000 Common Shares
issuable upon the exercise options granted under the Company's Stock Option
plan.
(4) Consists of: (i) 1,663,882 Common Shares owned by Jacob Herzog; (ii)
110,118 Common Shares owned by the Herzog Family Trust of which Jacob Herzog,
Beatrice Herzog and Aaron Grubner are the Trustees; and (iii) 25,000 Common
Shares issuable upon the exercise of options granted under the Company's Stock
Option plan.
(5) Aaron and Jacob Herzog, the members of the Herzog Group, are parties to a
voting trust agreement which provides that they will vote their Common Shares
together.
(6) Consists of 12,500 Common Shares issuable upon the exercise of options
granted under the Company's Stock Option Plan. The exercise price of the options
is higher than the Common Share Offer Price.
7. Transactions and Arrangements Concerning the Common Shares
To the Company' knowledge, no transaction in the Common Shares has been
effected during the past two (2) years by the Company or its executive officers,
directors, affiliates or subsidiaries, or by any executive officers, directors
or affiliates of its subsidiaries other than the 95,400 Common Shares
repurchased by the Company for cancellation on August 10, 2000, and the 14,500
Common Shares repurchased by the Company for cancellation on December 1, 2000
under the repurchase program. Both transactions were recorded as reductions of
capital stock and both purchases were made at the then prevailing market price,
to wit, $1.00 and $0.75 per share, respectively.
8. Certain Effects of the Transaction
Reduced liquidity of the Common Shares
Trading in the Common Shares has been very limited. See "SPECIAL
FACTORS--2. Purpose and Fairness of the Offer." There can be no assurance that
any trading market will exist for the Common Shares following consummation of
the Offer. The extent of the public market for the Common Shares following a
consummation of the Offer will depend on the number of holders that remain at
such time, the interest in maintaining a market in the Common
25
Shares on the part of securities firms, and other factors. An issue of
securities with a smaller float may trade at lower prices than would a
comparable issue of securities with a greater float. Accordingly, the market
price for Common Shares that are not tendered in the Offer may be adversely
affected to the extent that the amount of Common Shares purchased pursuant to
the Offer reduces the float. The reduced float also may have the effect of
causing the trading prices of the Common Shares that are not tendered or
purchased to be more volatile. It must be considered highly unlikely that there
will be a public market after the consummation of the Offer.
In addition it is, in point of fact, the express intention of the
Herzog Group that there not be a public market for the Common Shares at all. Any
Common Shares acquired by the Company in the Offer will be cancelled.
Shareholders who remain shareholders of the Company after the Offer has expired
will have their Common Shares converted, through the Merger, into redeemable
preferred shares of NewCo, which will then be immediately redeemed with no
consent required on the part of such preferred shareholders as a measure
necessary to the completion of the Transaction.
Exchange Act Registration
The Common Shares are currently registered under the Exchange Act.
Registration of the Common Shares under the Exchange Act may, given the
conditions applicable to the Company, be terminated upon application of the
Company to the Commission if the Common Shares are no longer held by no less
than 300 holders of record. If the Exchange Act registration for the Common
Shares is terminated as a result of the Offer, the amount of information
publicly available to the remaining shareholders of the Company would be
significantly reduced, which could adversely affect the trading market and
market value for the remaining Common Shares.
However, the Company intends to engage in the Merger followed
immediately thereafter by the Transaction, which will result in the cancellation
of all outstanding Common Shares. The termination of the registration of the
Common Shares under the Exchange Act will occur by virtue of their extinction.
The Merger
The reason the Offer for the Common Shares is being tendered is that
the Herzog Group intends that the Company go private, which will be accomplished
through the Merger followed by the Transaction. Unless every shareholder of the
Common Shares accepts the Offer, the Herzog Group intends to achieve its aims
through merging the Company with the Acquisition Corp. The Herzog Group controls
more than 662/3% of the issued and outstanding Common Shares, which is the
percentage required to bring its plans to fruition. Any Common Shares tendered
through the Offer described herein will increase the Herzog Group's percentage
ownership in the Company through the concomitant reduction in the number of
Common Shares outstanding. The separate corporate existence of the Company shall
cease, and the Company and the Acquisition Corp. shall become one merged
corporation, referred to herein as NewCo. Shareholders of the Common Shares who
do not accept the Company's Offer will have their currently issued and
outstanding Common Shares converted into shares of redeemable, non-voting
preferred stock of NewCo. Consequently, the current shareholders of the Common
Shares who do not accept the Company's Offer will possess shares in a private
company that will immediately be redeemed with no consent required on the part
of the shareholders, whether on the conversion or the redemption. The
shareholders are to be granted rights of appraisal under the Ontario Act, but it
is impossible to predict what the court of competent jurisdiction would
determine the fair market value of the Common Shares to be. In addition, the
Canadian withholding tax will in all likelihood be applied to the Company's
shareholders who are not Canadian residents unless such shareholders accept the
Offer, though such shareholders have the right, at their own expense, to apply
for an exemption from the withholding.
Management of the Company has regretfully concluded that the market
price of the Common Shares will not rise to a satisfactory level in the future.
Having drawn that conclusion, and seeing no advantage in remaining public, the
Company could at far lesser expense have proceeded directly to the Merger
described herein. However, the Company's management does not believe that such a
course of action would have been in the best interests of the Company's
shareholders, in contrast to the Offer made to shareholders hereby. The terms of
the Offer to Purchase represent, in the belief of the Company's management, the
best means currently available in providing value to its shareholders: Not only
are shareholders provided a significant premium over the current market price
and are not subject to the Canadian withholding tax, but are spared the
expenditure of time, effort and personal funds in pursuing appraisal rights or a
refund from the Canadian government.
26
THE OFFER
1. Terms of the Offer
Upon the terms and subject to the conditions of the Offer, the Company
will purchase all Common Shares at a purchase price of $0.80 net per share, in
cash, without interest, that are validly tendered and not withdrawn prior to the
expiration of the Offer. There are no accrued dividends on the Common Shares. If
at the Expiration Date, all of the Common Shares have not been tendered, the
Company may extend the Expiration Date for an additional period or periods of
time by making public announcement and giving oral or written notice of the
extension to the Depositary. During any such extension, all Common Shares
previously tendered and not withdrawn will remain subject to the Offer and
subject to the shareholder's right to withdraw the Common Shares. See "THE
OFFER--4. Withdrawal Rights."
Subject to the applicable regulations of the Commission, the Company
also reserves the right, in its sole discretion, at any time or from time to
time, to: (a) terminate the Offer (whether or not any Common Shares have been
purchased) if any condition referred to in "THE OFFER--8. Conditions to the
Offer" has not been satisfied or upon the occurrence of any event specified in
"THE OFFER--8. Conditions to the Offer"; and (b) waive any condition or
otherwise amend the Offer in any respect, in each case by giving oral or written
notice of the termination, waiver or amendment to the Depositary and, other than
in the case of any waiver, by making a public announcement thereof. The Company
acknowledges (a) that Rule 14e-l(c) under the Securities Act requires it to pay
the consideration offered or return the Common Shares tendered promptly after
the termination or withdrawal of the Offer and (b) that the Company may not
delay purchase of, or payment for, any Common Shares upon the occurrence of any
event specified in "THE OFFER--8. Conditions to the Offer" without extending the
period of time during which the Offer is open.
The rights the Company reserves in the preceding paragraph supplement
but do in no form replace its rights described in "THE OFFER--8. Conditions to
the Offer". Any extension, termination or amendment of the Offer will be
followed as promptly as practicable by a public announcement. An announcement in
the case of an extension will be made no later than 9:00 a.m., Eastern Standard
Time, on the next business day after the previously scheduled Expiration Date.
Without limiting the manner in which the Company may choose to make any public
announcement, subject to applicable law (including Rules 13e-4(e), 14d-4(d) and
14d-6(c) under the Exchange Act, which require that material changes be promptly
disseminated to holders of Common Shares), the Company will have no obligation
to publish, advertise or otherwise communicate any such public announcement
other than by issuing a press release to the Dow Jones News Service.
If the Company makes a material change in the terms of the Offer, or if
the Company waives a material condition to the Offer, the Company will extend
the Offer and disseminate additional tender offer materials to the extent
required by Rules 13e-3(e), 13e-4(e), 14d-4(d), 14d-6(c) and 14e-1 under the
Exchange Act. The minimum period during which a tender offer must remain open
following material changes in the terms of the offer, other than a change in
price or a change in percentage of securities sought, depends upon the facts and
circumstances, including the materiality of the changes. In the Commission's
view, an offer should remain open for a minimum of five business days from the
date the material change is first published, sent or given to shareholders, and,
if material changes are made with respect to information that approaches the
significance of price and the percentage of securities sought, a minimum of ten
business days may be required to allow for adequate dissemination and investor
response. With respect to a change in price, a minimum ten-business-day period
from the date of the change is generally required to allow for adequate
dissemination to shareholders. Accordingly, if prior to the Expiration Date, the
Company decreases the number of Common Shares being sought, or increases or
decreases the consideration offered pursuant to the Offer, and if the Offer is
scheduled to expire at any time earlier than the period ending on the tenth
business day from the date that notice of the increase or decrease is first
published, sent or given to holders of Shares, the Company will extend the Offer
at least until the expiration of such period of ten business days. For purposes
of the Offer, a "business day" means any day other than a Saturday, Sunday or a
federal holiday and consists of the time period from 12:01 a.m. through 12:00
midnight, Eastern Standard Time.
Consummation of the Offer is conditioned upon satisfaction of the
conditions set forth in "THE OFFER--8. Conditions to the Offer". The Company
reserves the right (but is not obligated), in accordance with applicable rules
and regulations of the Commission, to waive any or all of those conditions. If,
by the Expiration Date, any or all of those
27
conditions have not been satisfied, the Company may elect to (a) extend the
Offer and, subject to applicable withdrawal rights, retain all tendered Common
Shares until the expiration of the Offer, as extended, subject to the terms of
the Offer; or (b) terminate the Offer and not accept for payment any Common
Shares and return all tendered Common Shares to tendering shareholders. In the
event that the Company waives any condition set forth in "THE OFFER--8.
Conditions to the Offer", the Commission may, if the waiver is deemed to
constitute a material change to the information previously provided to the
shareholders, require that the Offer remain open for an additional period of
time and/or that the Company disseminates information concerning such waiver.
This Offer to Purchase, the Letter of Transmittal and other relevant
materials will be mailed to record holders of Shares and will be furnished to
brokers, dealers, commercial banks, trust companies and similar persons whose
names, or the names of whose nominees, appear on the security holder lists or,
if applicable, who are listed as participants in a clearing agency's security
position listing, for forwarding to beneficial owners of Common Shares.
2. Acceptance for Payment and Payment
Upon the terms and subject to the conditions of the Offer (including,
if the Company extends or amends the Offer, the terms and conditions of the
Offer as so extended or amended), the Company will purchase, by accepting for
payment, and will pay for, all Common Shares validly tendered and not properly
withdrawn (as permitted under "THE OFFER--4. Withdrawal Rights") promptly after
the Expiration Date if all of the conditions to the Offer set forth in "THE
OFFER--8. Conditions to the Offer" have been satisfied or waived on or prior to
the Expiration Date.
In all cases, the Company will pay for the Common Shares purchased in
the Offer only after timely receipt by the Depositary of (a) certificates
representing the Common Shares ("Share Certificates") or timely confirmation (a
"Book-Entry Confirmation") of the book-entry transfer of the Common Shares into
the Depositary's account at Continental (referred to herein, where appropriate,
as the "Book-Entry Transfer Facility") pursuant to the procedures set forth in
"THE OFFER--3. Procedures for Accepting the Offer and Tendering Common Shares";
(b) the appropriate Letter of Transmittal (or a facsimile), properly completed
and duly executed, with any required signature guarantees or an Agent's Message
(as defined below) in connection with a book-entry transfer; and (c) any other
documents that the Letter of Transmittal requires. Accordingly, payment may be
made to tendering shareholders at different times. See "THE OFFER--3. Procedures
for Accepting the Offer and Tendering Common Shares" for a description of the
procedure for tendering Common Shares pursuant to this Offer.
The term "Agent's Message" means a message, transmitted by the
Book-Entry Transfer Facility to, and received by, the Depositary and forming a
part of a Book-Entry Confirmation, which states that the Book-Entry Transfer
Facility has received an express acknowledgment from the participant in the
Book-Entry Transfer Facility tendering the Common Shares which are the subject
of the Book-Entry Confirmation that the participant has received and agrees to
be bound by the terms of the Letter of Transmittal and that the Company may
enforce that agreement against the participant.
For purposes of the Offer, the Company will be deemed to have accepted
for payment, and purchased, Common Shares validly tendered and not withdrawn if,
as and when the Company gives oral or written notice to the Depositary of
acceptance of the Common Shares for payment pursuant to the Offer. In all cases,
upon the terms and subject to the conditions of the Offer, payment for Common
Shares purchased pursuant to the Offer will be made by deposit of the purchase
price for the Common Shares with the Depositary, which will act as agent for
tendering shareholders for the purpose of receiving payment from the Company and
transmitting payment to validly tendering shareholders.
Under no circumstances will the Company pay interest on the Common
Share Offer Price for the Common Shares, regardless of any extension of the
Offer or any delay in making such payment.
If the Company does not purchase any tendered Common Shares pursuant to
the Offer for any reason, or if shareholders submit Share Certificates
representing more Common Shares than they wish to tender, the Company will
return Share Certificates representing unpurchased or untendered Common Shares,
without expense to the shareholder (or, in the case of Common Shares delivered
by book-entry transfer into the Depositary's account at the Book-Entry Transfer
Facility pursuant to the procedures set forth in "THE OFFER--3. Procedures for
Accepting the Offer and Tendering Shares", the Common Shares will be credited to
an account maintained within the Book-Entry Transfer
28
Facility), as promptly as practicable following the expiration, termination or
withdrawal of the Offer.
If, prior to the expiration date, the Company increases the price
offered to holders of Common Shares in the Offer, the Company will pay the
increased price to all holders of Common Shares that it purchases in the Offer,
whether or not the Common Shares were tendered before the increase in price.
3. Procedures for Accepting the Offer and Tendering the Common Shares
To tender Common Shares pursuant to this Offer, shareholders must
deliver before the expiration of this Offer to the Depositary at one of its
addresses set forth on the back cover of this Offer to Purchase (1) either (a)
the Letter of Transmittal (or a facsimile thereof), properly completed and duly
executed, together with any required signature guarantees (and any other
documents required by the Letter of Transmittal) or (b) an Agent's Message in
connection with a book-entry delivery of Common Shares and (2) either (a) the
Share Certificates for the tendered Common Shares must be received by the
Depositary at one of such addresses, (b) the Common Shares must be tendered
pursuant to the procedure for book-entry transfer described below and a
Book-Entry Confirmation must be received by the Depositary or (c) shareholders
must comply with the guaranteed delivery procedures described below.
The method of delivery of Common Shares, the Letter of Transmittal and
all other required documents, including delivery through the Book-Entry Transfer
Facility, is at the shareholder's option and sole risk, and delivery will be
considered made only when the Depositary actually receives the Common Shares. If
delivery is by mail, registered mail with return receipt requested, properly
insured, is recommended. In all cases, shareholders should allow sufficient time
to ensure timely delivery.
Book-Entry Transfer
The Depositary will make a request to establish an account with respect
to the Common Shares at the Book-Entry Transfer Facility for the purposes of the
Offer within two business days after the date of this Offer to Purchase. Any
financial institution that is a participant in the system of the Book-Entry
Transfer Facility may make book-entry delivery of Common Shares by causing the
Book-Entry Transfer Facility to transfer the Common Shares into the Depositary's
account at the Book-Entry Transfer Facility in accordance with the Book-Entry
Transfer Facility's procedures. However, although Common Shares may be delivered
through book-entry transfer into the Depositary's account at the Book-Entry
Transfer Facility, the Depositary must receive the Letter of Transmittal (or
facsimile), properly completed and executed, with any required signature
guarantees, or an Agent's Message in connection with a book-entry transfer, and
any other required documents, at one of its addresses set forth on the back
cover of this Offer to Purchase on or before the Expiration Date, or
shareholders must comply with the guaranteed delivery procedure set forth below.
Delivery of documents to the Book-Entry Transfer facility in accordance with the
Book-Entry Transfer Facility's procedures does not constitute delivery to the
Depositary.
Signature Guarantees
A bank, broker, dealer, credit union, savings association or other
entity which is a member in good standing of the Securities Transfer Agents
Medallion Program (an "Eligible Institution") must guarantee signatures on the
Letter of Transmittal, unless the Common Shares tendered are tendered (a) by a
registered holder of Common Shares who has not completed either the box labeled
"Special Payment Instructions" or the box labeled "Special Delivery
Instructions" on the Letter of Transmittal or (b) for the account of an Eligible
Institution. See Instruction 1 of the Letter of Transmittal.
If the Share Certificates are registered in the name of a person other
than the signer of the Letter of Transmittal, or if payment is to be made to, or
Share Certificates for unpurchased Common Shares are to be issued or returned
to, a person other than the registered holder, then the tendered certificates
must be endorsed or accompanied by appropriate stock powers, signed exactly as
the name or names of the registered holder or holders appear on the
certificates, with the signatures on the certificates or stock powers guaranteed
by an Eligible Institution as provided in the Letter of Transmittal. See
Instructions 1 and 5 of the Letter of Transmittal. If the Share Certificates are
forwarded separately to the Depositary, a properly completed and duly executed
Letter of Transmittal (or facsimile) must accompany each delivery of Share
Certificates.
Guaranteed Delivery
29
If shareholders want to tender Common Shares in the Offer but do not
have Share Certificates immediately available or time will not permit all
required documents to reach the Depositary on or before the Expiration Date or
the procedures for book-entry transfer cannot be completed on time, such Common
Shares may nevertheless be tendered if shareholders comply with all of the
following guaranteed delivery procedures:
(a) the tender is made by or through an Eligible Institution;
(b) the Depositary receives, as described below, a properly completed
and signed Notice of Guaranteed Delivery, substantially in the form made
available by the Company, on or before the Expiration Date; and
(c) the Depositary receives the Share Certificates (or a Book-Entry
Confirmation) representing all tendered Common Shares, in proper form for
transfer together with a properly completed and duly executed Letter of
Transmittal (or facsimile), with any required signature guarantees (or, in the
case of a book-entry transfer, an Agent's Message) and any other documents
required by the Letter of Transmittal within three (3) trading days after the
date of execution of the Notice of Guaranteed Delivery.
Shareholders may deliver the Notice of Guaranteed Delivery by hand,
mail or facsimile transmission to the Depositary. The Notice of Guaranteed
Delivery must include a guarantee by an Eligible Institution in the form set
forth in the Notice of Guaranteed Delivery.
Notwithstanding any other provision of the Offer, the Company will pay
for Common Shares only after the conditions to the Offer have been met and only
after timely receipt by the Depositary of Share Certificates for, or of
Book-Entry Confirmation with respect to, the Common Shares, a properly completed
and duly executed Letter of Transmittal (or facsimile thereof), together with
any required signature guarantees (or, in the case of a book-entry transfer, an
Agent's Message) and any other documents required by the appropriate Letter of
Transmittal. Accordingly, payment might not be made to all tendering
shareholders at the same time, and will depend upon when the Depositary receives
Share Certificates or Book-Entry Confirmation that the Common Shares have been
transferred into the Depositary's account at the Book-Entry Transfer Facility.
Backup Federal Income Tax Withholding
Under the backup federal income tax withholding laws applicable to
certain shareholders (other than certain exempt shareholders, including, among
others, all corporations and certain foreign individuals), the Depositary may be
required to withhold 31% of the amount of any payments made to those
shareholders pursuant to the Offer. To prevent backup federal income tax
withholding, shareholders must provide the Depositary with their correct
taxpayer identification number and certify that they are not subject to backup
federal income tax withholding by completing the Substitute Form W-9 included in
the Letter of Transmittal. See Instruction 9 of the Letter of Transmittal.
Determination of Validity
All questions as to the form of documents and the validity, eligibility
(including time of receipt) and acceptance for payment of any tender of Common
Shares will be determined by the Company, in its sole discretion, which
determination will be final and binding on all parties. The Company reserves the
absolute right to reject any or all tenders determined by it not to be in proper
form or the acceptance of or payment for which may, in the opinion of counsel
for the Company, be unlawful. The Company also reserves the absolute right to
waive any of the conditions of the Offer or any defect or irregularity in any
tender of Common Shares of any particular shareholder whether or not similar
defects or irregularities are waived in the case of other shareholders.
The Company' interpretation of the terms and conditions of the Offer
will be final and binding. No tender of Common Shares will be deemed to have
been validly made until all defects and irregularities with respect to the
tender have been cured or waived by the Company. None of the Company nor any of
its affiliates or assigns, the Depositary or any other person or entity will be
under any duty to give any notification of any defects or irregularities in
tenders or incur any liability for failure to give any such notification.
Binding Agreement
30
The Company' acceptance for payment of Common Shares tendered pursuant
to any of the procedures described above will constitute a binding agreement
between the Company and each individual shareholder upon the terms and subject
to the conditions of the Offer.
4. Withdrawal Rights
Except as described in this Section 4, tenders of Common Shares made in
the Offer are irrevocable. Shareholders may withdraw Common Shares that they
have previously tendered in the Offer at any time on or before the Expiration
Date.
In order for the withdrawal to be effective, shareholders must deliver
a written or facsimile transmission notice of withdrawal to the Depositary at
one of its addresses set forth on the back cover of this Offer to Purchase. Any
such notice of withdrawal must specify the shareholder's name, the number of
Common Shares that such shareholder wants to withdraw, and (if Share
Certificates have been tendered) the name of the registered holder of the Common
Shares as shown on the Share Certificate, if different from such shareholder's
name. If Share Certificates have been delivered or otherwise identified to the
Depositary, then prior to the physical release of such certificates,
shareholders must submit the serial numbers shown on the particular certificates
evidencing the Common Shares to be withdrawn and an Eligible Institution, as
defined in "THE OFFER--3. Procedures for Accepting the Offer and Tendering
Shares," must guarantee the signature on the notice of withdrawal, except in the
case of Common Shares tendered for the account of an Eligible Institution. If
Common Shares have been tendered pursuant to the procedures for book-entry
transfer set forth in "THE OFFER--3. Procedures for Accepting the Offer and
Tendering Shares," the notice of withdrawal must also specify the name and
number of the account at the appropriate Book-Entry Transfer Facility to be
credited with the withdrawn Common Shares, in which case a notice of withdrawal
will be effective if delivered to the Depositary by any method of delivery
described in the first sentence of this paragraph. Shareholders may not rescind
a withdrawal of Common Shares. Any Common Shares that shareholders withdraw will
be considered not validly tendered for purposes of the Offer, but shareholders
may tender their Common Shares again at any time before the Expiration Date by
following any of the procedures described in "THE OFFER--3. Procedures for
Accepting the Offer and Tendering Shares."
All questions as to the form and validity (including time of receipt)
of notices of withdrawal will be determined by the Company, in its sole
discretion, which determination will be final and binding. Neither the Company,
any of its respective affiliates or assigns, the Depositary or any other person
or entity will be under any duty to give any notification of any defects or
irregularities in any notice of withdrawal or incur any liability for failure to
give any such notification.
5. Price Range of the Common Shares; Dividends
The Company's Common Shares are traded in the Nasdaq SCM under the
symbol "CURT." The following table sets forth for the periods indicated the
range of the high and low bid quotations for the Company's Common Shares as
quoted on the Nasdaq SCM. The reported bid quotations reflect inter-dealer
prices, without retail markup, markdown or commissions, and may not necessarily
represent actual transactions.
2001
HIGH LOW
---- ----
1st Quarter $0.75 $0.531
2nd Quarter to date $0.78 $0.47
2000
HIGH LOW
1st Quarter $3.219 $1.875
2nd Quarter $2.0 $0.938
3rd Quarter $1.688 $0.906
4th Quarter $1.313 $0.625
1999
HIGH LOW
---- ----
1st Quarter $6.125 $5.25
31
2nd Quarter $7.125 $5.5
3rd Quarter $7.125 $1.75
4th Quarter $3.125 $1.531
The closing price for the Common Shares on April 27, 2001, was $0.44.
See, e.g., http://quotes.nasdaq.com.
Although the Company expects any untendered Common Shares to continue
to be traded after the consummation of the Offer, to the extent that the Common
Shares are traded, the prices of Common Shares may fluctuate depending on the
trading volume and the balance between buy and sell orders. The Company believes
that the trading market for the Common Shares that remain outstanding after the
Offer will be very limited. See "SPECIAL FACTORS--8. Certain Effects of the
Transaction--Reduced Liquidity of the Common Shares".
The Company and its affiliates, including its executive officers and
directors, will be prohibited under applicable federal securities law from
repurchasing additional Common Shares outside of the Offer until at least the
10th business day after the Expiration Date. Following such time, if any Common
Shares remain outstanding, the Company may purchase additional Common Shares in
the open market, in private transactions, through a subsequent offer, or
otherwise, any of which may be consummated at purchase prices higher or lower
than that offered in the Offer described in this Offer to Purchase. The decision
to repurchase additional Common Shares, if any, will depend upon many factors,
including the market price of the Common Shares, the results of the Offer, the
business and financial position of the Company, and general economic and market
conditions. Any such repurchase may be on the same terms or on terms more or
less favorable to shareholders than the terms of the Offer as described in this
Offer to Purchase. In addition, the Company intends to effectuate the Merger,
whereby the Common Shares will be converted into shares of NewCo, a private
company.
As of April 30, 2001, there were 18 registered holders of the Common
Shares. Dividends on the Common Shares have never been paid. There are no
accrued dividends on the Common Shares. The Company has no present intention to
pay dividends on the Common Shares in the near future.
6. Possible Effects of the Offer on the Market for the Common Shares and
Exchange Act Registration
The purchase of the Common Shares pursuant to the Offer will reduce the
number of Common Shares that might otherwise be traded and the number of holders
of Common Shares, which could adversely affect the liquidity and market value of
the remaining Common Shares held by the public and have other consequences with
respect to the Exchange Act registration of the Common Shares. See "SPECIAL
FACTORS--8. Certain Effects of the Transaction" and "THE OFFER--8. Conditions to
the Offer."
7. Certain Information Concerning Curtis International Ltd.
General
The Company is an Ontario corporation with its principal executive
offices located at 315 Attwell Drive, Etobicoke, Ontario, M9W 5C1 and its phone
number is (416) 674-2123.
Directors and Executive Officers
Each of the persons named below was elected to serve as a member of the
Company's Board of Directors until the 2001 Annual Meeting of Stockholders or
until his successor shall have been duly elected and qualified. The names of the
current directors and certain information about them, as of May 30, 2001, are
set forth below.
Name Age Position
----- --- --------
Aaron Herzog 40 President, Chief Executive Officer and Director
Jacob Herzog 49 Chairman, Treasurer and Secretary
David Ben-David 39 Director
32
Set forth below is a biographical description of each director and
executive officer of the Company based on information supplied by each of them.
Aaron Herzog is a co-founder of Curtis International Ltd., and has
served as the Company's President, Chief Executive Officer and Director since
its formation in 1990. Mr. Herzog also acts as sales director of the Company.
Mr. Herzog earned a degree in Management from McGill University in 1981.
Jacob Herzog is a co-founder of Curtis International Ltd., and has
served as the Company's Chairman, Treasurer, Secretary and Director since its
formation in 1990. Mr. Herzog has been in the consumer electronics business
since the early 1970's.
David Ben-David has been a Director of the Company since August 1998.
From July 1990 - June 1997, Mr. Ben-David served as Vice President and Chief
Financial Officer of NSI Communications, Inc. From June 1997 -present, Mr.
Ben-David has served as President and Chief Operating Officer of NSI
Communications, Inc. NSI Communications, Inc. is a manufacturer of
communications products. Mr. Ben-David earned a B.A. in Economics in 1983 from
Bar Ilan University in Israel, an M.B.A. in 1987 from McGill University and a
Public Accountant degree in 1989 from McGill University.
Aaron Herzog and Jacob Herzog are brothers. There are no other family
relationships among the Company's directors and executive officers.
All the Company's directors and executive officers are citizens of
Canada.
During the last five years, to the best knowledge of the Company, none
of the persons listed above has been convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors) or was a party to a civil
proceeding of a judicial or administrative body of competent jurisdiction and as
a result of such proceeding was or is subject to a judgment, decree or final
order enjoining future violations of, or prohibiting activities subject to,
federal or state securities laws or finding any violation of such laws.
Available Information
The Company is subject to the informational filing requirements of the
Exchange Act and, in accordance therewith, is required to file periodic reports,
proxy statements and other information with the Commission relating to its
business, financial condition and other matters. Information as of certain dates
concerning the Company's directors and officers, their remuneration, stock
options granted to them, the principal holders of the Company's securities and
any material interest of such persons in transactions with the Company is
required to be disclosed in proxy statements distributed to the Company's
shareholders and filed with the Commission. Such reports, proxy statements and
other information should be available for inspection at the public reference
facilities maintained by the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, and also should be available for inspection at the Commission's
regional offices located at Seven World Trade Center, Suite 1300, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may also be obtained (i) by mail, upon
payment of the Commission's customary fees, by writing to its principal office
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or (ii) at
the Commission's world-wide web site at www.sec.gov.
Historical Financial Information
The audited financial statements set forth on pages F-2 through F-20 of
the Company' Form 10-K for the fiscal year ended May 31, 2000 and the unaudited
financial statements in the Company' Forms 10-Q for the fiscal quarters ended
August 31, 2000, November 30, 2000 and February 28, 2001 are hereby incorporated
by reference into this Offer to Purchase. Such reports, documents and other
financial information may be inspected and copies may be obtained from the
Commission in the manner set forth above.
Summary Financial Information
A summary of the financial information is provided below. For complete
rendition of such financial information, see immediately above.
33
Income Statement Data:
February 28, 2001* May 31, 2000 May 31, 1999
----------------- ------------ ------------
Net Sales........................................... $35,873,160 $42,612,206 $39,309,062
Gross Margin........................................ 5,963,716 7,670,593 7,266,563
Other Expenses..................................... 6,798,378 4,878,426 4,814,041
Income from continuing operations................... (834,662) 2,792,167 2,452,522
Income from continuing operations per share......... (0.16) 0.52 0.53
Net income.......................................... (443,798) 1,649,105 1,343,757
Basic Earnings Per Share............................ (0.08) 0.31 0.29
Weighed Average Number of Common Shares............. 5,297,426 5,373,145 4,591,162
* As of the nine months ended on such date
Balance Sheet Data:
- -------------------
February 28, 2001 May 31, 2000 May 31, 1999
----------------- ------------ ------------
Current Assets...................................... $11,775,746 $13,227,924 $13,777,744
Total assets........................................ $12,484,516 $14,079,208 $14,663,946
Total liabilities................................... $ 1,638,662 $ 2,512,157 $ 4,494,470
Shareholders' Equity:
- --------------------
February 28, 2001 May 31, 2000 May 31, 1999
----------------- ------------ ------------
Capital Stock....................................... $7,236,199 $7,342,163 $7,342,163
Cumulative Translation Adjustment................... (470,027) (298,592) (47,062)
Retained Earnings................................... 4,079,682 4,253,480 2,874,375
Shareholders' equity................................ $10,845,854 $11,567,051 $10,169,476
Book Value per Common Share......................... $2.05 $2.15 $2.21
Total Liabilities and Shareholders' Equity.......... $12,484,516 $14,079,208 $14,663,946
34
8. Conditions to the Offer
Notwithstanding any other term of the Offer, the Company will not be
required to accept for payment or, subject to any applicable rules and
regulations of the Commission, including Rule 14e-1(c) under the Exchange Act
(relating to the Company's obligation to pay for or return tendered Common
Shares after the termination or withdrawal of the Offer), pay for any Common
Shares not theretofore accepted for payment or paid for, and may terminate or
amend the Offer, if:
(1) there will be pending or overtly threatened any suit, action or
proceeding brought by or on behalf of any governmental entity, or any suit,
action or proceeding brought by or on behalf of any shareholder of the Company
or any other person or party (A) challenging the acquisition of any Common
Shares pursuant to the Offer, seeking to restrain or prohibit the making or
consummation of the Offer, or alleging that any such acquisition or other
transaction relates to, involves or constitutes a breach of fiduciary duty by
the Company' directors or a violation of federal securities law or applicable
corporate law or (B) seeking to impose a material condition to the Offer which
would be adverse to the Company' shareholders;
(2) there will be any statute, rule, regulation, judgment, order or
injunction enacted, entered, enforced, promulgated or deemed applicable to the
Offer or any other action will be taken by any governmental entity or court,
that is reasonably likely to result, in any of the consequences referred to in
clauses (A) and (B) of paragraph (2) above;
(3) there will have occurred (A) any general suspension of, shortening of
hours for or limitation on prices for trading in the Common Shares in the
over-the-counter market (whether or not mandatory), (B) the declaration of a
banking moratorium or any suspension of payments in respect of banks in the
United States (whether or not mandatory), (C) the commencement of a war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States and having a material adverse effect on the Company
or materially adversely affecting (or materially delaying) the consummation of
the Offer, (D) any limitation or proposed limitation (whether or not mandatory)
by any U.S. governmental authority or agency, or any other event, that
materially adversely affects generally the extension of credit by banks or other
financial institutions, or (E) in the case of any of the situations described in
clauses (A) through (D) inclusive existing at the date of commencement of the
Offer, a material escalation or worsening thereof; or
(4) there will have occurred or be likely to occur any event or series of
events that, in the reasonable judgment of the Company, would or might prohibit,
prevent, restrict or delay consummation of the Offer or that will, or is
reasonably likely to, impair the contemplated benefits to the Company of the
Offer, or otherwise result in the consummation of the Offer not being or not
being reasonably likely to be in the best interest of the Company; which, in the
reasonable judgment of the Company, and regardless of the circumstances giving
rise to any such condition, makes it inadvisable to proceed with the Offer or
with such acceptance for payment or payment for Common Shares.
The foregoing conditions are for the sole benefit of the Company and
its affiliates and may be asserted by the Company regardless of the
circumstances giving rise to such condition or may, prior to the expiration of
the Offer, be waived by the Company in whole or in part at any time and from
time to time in its sole discretion. If any condition to the Offer is not
satisfied or waived by the Company prior to the Expiration Date, the Company
reserves the right (but shall not be obligated), subject to applicable law, (i)
to terminate the Offer and return the tendered Common Shares to the tendering
shareholders; (ii) to waive all unsatisfied conditions and accept for payment
and purchase all Common Shares that are validly tendered (and not withdrawn)
prior to the Expiration Date; (iii) to extend the Offer and retain the Common
Shares that have been tendered during the period for which the Offer is
extended; or (iv) to amend the Offer. The failure by the Company at any time to
exercise any of the foregoing rights will not be deemed a waiver of or otherwise
affect any other rights and each such right will be deemed an ongoing right
which may be asserted at any time and from time to time. Any determination by
the Company concerning the events described above will be final and binding upon
all parties.
The Company acknowledges that the Commission believes that (a) if the
Company is delayed in accepting the Common Shares it must either extend the
Offer or terminate the Offer and promptly return the Common Shares and (b) the
circumstances in which a delay in payment is permitted are limited and do not
include unsatisfied conditions of the
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Offer.
9. Legal Matters
The Company is not aware of any license or regulatory permit that
appears to be material to the business of the Company and that might be
adversely affected by the Company' acquisition of Common Shares pursuant to the
Offer, or of any approval or other action by any governmental, administrative or
regulatory agency or authority, domestic or foreign, that would be required for
the acquisition or ownership of Common Shares by the Company pursuant to the
Offer. Should any such approval or other action be required, it is presently
contemplated that such approval or action would be sought and if such approval
could not be obtained in a timely manner, the Offer would be terminated.
On June 19, 2001, the Company was served with a summons and complaint
(the "Complaint") filed in the United States District Court, Southern District
of New York, on June 14, 2001. The named plaintiff in the action is Anthony
Chiarenza. The Complaint was filed on behalf of the named plaintiff and any
other shareholder willing to participate as members of a class. The Complaint
also names Aaron Herzog, Jacob Herzog and David Ben-David as defendants.
The Complaint alleges violations of Section 14 of the Exchange Act,
Section 20 of the Exchange Act and breach of fiduciary duty as against the
shareholders. The claim under Section 14 is asserted against the Company and its
directors, and consists principally of allegations that such persons made
materially false and/or misleading statements in connection with the Offer. The
claim under Section 20 is asserted against the Company's directors, and consists
principally of allegations that such persons, in their capacity of controlling
persons of the Company, did not prevent the wrongful conduct complained of. The
claim with respect to fiduciary duty is asserted against the individuals named
in the Complaint and is based on principles of common law. The claim alleges
that the Company's directors violated their fiduciary duty to the shareholders.
The Complaint does not name a particular sum allegedly owed to the complaining
shareholders.
Each named defendant categorically and unequivocally denies the claims
made in the Complaint, deeming them to be utterly false and devoid of any merit
whatsoever be it in fact or law. The Company intends to vigorously defend the
action, as do the other named defendants.
In addition, the Company is reviewing all of its options and expressly
reserves the right to pursue any course of action recommended to it by its
counsel at a future date.
10. Fees and Expenses
Except as otherwise provided herein, all fees and expenses incurred in
connection with the Offer will be paid by the party incurring such fees and
expenses, except that the Company will pay for all fees and expenses relating to
the filing, printing and mailing of the documents in connection with the Offer.
Estimated fees and expenses to be incurred by the Company in connection with the
Offer are as follows:
Depositary Fees..................................................$ 3,500
Legal, Accounting and Other Professional Fees.................... 80,000
Printing and Mailing Costs....................................... 7,500
Commission Filing Fees........................................... 1,077
Miscellaneous.................................................... 5,000
=======
Total............................................................$97,077
=======
Directors, officers and regular employees of the Company and its
affiliates (who will not be specifically compensated for such services) may
contact shareholders by mail, telephone, telex, telegram messages, mailgram
messages, datagram messages and personal interviews regarding the Offer and may
request brokers, dealers and other
36
nominees to forward this Offer to Purchase and related materials to beneficial
owners of Common Shares. The Company will reimburse its affiliates for the time
that the employees of such affiliates spend performing such services.
Except as set forth above, neither the Company nor any person acting on
its behalf has employed, retained or compensated any person or class of persons
to make solicitations or recommendations on its behalf with respect to the
Offer.
11. Miscellaneous
The Depositary for the Offer is Continental Stock Transfer & Trust
Company. All deliveries, correspondence and questions sent or presented to the
Depositary relating to the Offer should be directed to the address or telephone
number set forth on the back cover of this Offer to Purchase. The Company will
pay the Depositary reasonable and customary compensation for its services in
connection with the Offer, plus reimbursement for reasonable out-of-pocket
expenses.
The Depositary does not assume any responsibility for the accuracy or
completeness of the information concerning the Company or its affiliates
contained in this Offer to Purchase or for any failure by the Company to
disclose events that may have occurred and may affect the significance or
accuracy of such information.
Brokers, dealers, commercial banks and trust companies will be
reimbursed by the Company for customary mailing and handling expenses incurred
by them in forwarding material to their customers. The Company will not pay any
fees or commissions to any broker, dealer or other person in connection with the
solicitation of tenders of Common Shares pursuant to the Offer.
The Company is not aware of any jurisdiction where the making of the
Offer is prohibited by any administrative or judicial action pursuant to any
valid state statute. If the Company becomes aware of any valid state statute
prohibiting the making of the Offer or the acceptance of the Common Shares, the
Company will make a good faith effort to comply with that state statute. If,
after a good faith effort, the Company cannot comply with the state statute, it
will not make the Offer to, nor will it accept tenders from or on behalf of, the
holders of Common Shares in that state.
The Company has filed with the Commission a combined Tender Offer
Statement on Schedule TO-I and Rule 13E-3 Transaction Statement on Schedule
13E-3 together with exhibits, furnishing certain additional information with
respect to the Offer, and may file amendments to such Schedule TO-I/13E-3. The
Schedule TO-I/13E-3 and any exhibits or amendments may be examined and copies
may be obtained from the Commission in the same manner as described in "THE
OFFER--7. Certain Information Concerning the Company" with respect to
information concerning the Company except that copies will not be available at
the regional offices of the Commission.
The Company has not authorized any person to give any information or to
make any representation on behalf of the Company not contained in this Offer to
Purchase or in the Letter of Transmittal and, if given or made, shareholders
should not rely on any such information or representation as having been
authorized.
Neither the delivery of this Offer to Purchase nor any purchase
pursuant to the Offer will under any circumstances create any implication that
there has been no change in the affairs of the Company since the date as of
which information is furnished or the date of this Offer to Purchase.
37
The Information Agent for the Offer is:
[LOGO] MACKENZIE PARTTNERS, INC.
156 Fifth Avenue
New York, New York 10010
(212) 929-5500 (Call Collect)
or
Call Toll-Free (800) 322-2885
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