If
I own fewer than 250 shares of common stock, is there any way I can continue to
be a stockholder of the Company after the Transaction?
If
you own fewer than 250 shares of our common stock before the Transaction, the
only way you can continue to be a stockholder of the Company after the
Transaction is to purchase, prior to the effective time of the Transaction,
sufficient additional shares to cause you to own a minimum of 250 shares at the
effective time of the Transaction. However, we cannot assure you that any
shares will be available for purchase.
Is
there anything I can do if I own 250 or more shares of common stock, but would
like to take advantage of the opportunity to receive cash for my shares as a
result of the Transaction?
If
you own 250 or more shares of our common stock before the Transaction, you can
only receive cash for all of your shares if, prior to the effective time of the
Transaction, you reduce your stock ownership to fewer than 250 shares by
selling or otherwise transferring shares. However, we cannot assure you that
any purchaser for your shares will be available.
Who
is entitled to vote at the Special Meeting?
Only
holders of record of our common stock as of the close of business on _________
__, 2008, which is the Record Date for the Special Meeting, are entitled to
notice of, and to vote at, the Special Meeting.
How
many shares were outstanding on the Record Date?
At
the close of business on _____________ __, 2008 there were 2,468,614
outstanding shares of our common stock. At the Special Meeting, each of those
shares of common stock will be entitled to one vote.
What
is a quorum for purposes of the Special Meeting?
In
order to conduct business at the Special Meeting, a quorum must be present. A
quorum is a majority of the issued and outstanding shares of our common
stock. The shares may be present in person or represented by proxy at the
Special Meeting. Both abstentions and broker non-votes are counted as present
for the purpose of determining the presence of a quorum.
What
vote is required to approve the proposal?
Once
a quorum has been established, for the Transaction to be approved, holders of a
majority of our issued and outstanding shares of common stock entitled to vote
at the meeting must vote FOR the proposal.
At
the close of business on the Record Date, 1,257,643 of our outstanding shares
of common stock (approximately 50.9%) were held by signatories to the
Stockholders Agreement. As we noted above, the Stockholders Agreement entitles
a four-person stockholders committee (presently consisting of Abe Ginsburg,
Robert Chestnov, Allan Ginsburg, and Howard Ginsburg) to direct the voting of
the shares of our common stock now or in the future owned by certain parties to
that agreement, or as to which they have or may have voting power. The
stockholders committee has indicated that it intends to direct the voting of
these shares of our common stock FOR the Transaction. Accordingly, if all of
the shares subject to the Stockholders Agreement are voted in favor of the
Transaction, the Transaction will be approved.
16
What
will happen if the Transaction is approved by the Companys stockholders?
Assuming
that we have fewer than 300 record holders of our common stock after the
Transaction, we will file applicable forms with the SEC to deregister our
shares of common stock under the federal securities laws and to delist our
shares from the American Stock Exchange. Upon the effectiveness of those
filings, the Company would no longer be subject to the reporting and related
requirements under the federal securities laws that are applicable to public
companies and American Stock Exchange rules applicable to listed companies. We
will also no longer be subject to the provisions of the Sarbanes-Oxley Act. In
addition, Cashed Out Stockholders will no longer have a continuing interest as
stockholders of the Company and will not share in any future increase in the
value of the Company. Also, any trading in our common stock will occur in
privately negotiated sales or on the OTCQX
SM
tier of the pink sheets.
What
will happen if the Transaction is not approved?
If
the Transaction is not approved by our stockholders, we will continue to
operate our business, and we will continue to incur the costs involved of being
a public company. We also may decide to evaluate and explore available
alternatives, although the Board of Directors has not yet made a determination
that any of those alternatives are feasible or advisable.
If
the Transaction is approved by the stockholders can the Board of Directors or
the Special Committee determine not to proceed with the Transaction?
If
the Transaction is approved by the stockholders, either the Board of Directors
or the Special Committee may determine not to proceed with the Transaction if
they believe that proceeding with the Transaction is not in the best interests
of the stockholders. If either the Board of Directors or the Special Committee
determines not to proceed with the Transaction we will continue to operate our
business as presently conducted.
What
are the federal income tax consequences of the Transaction to me?
If
you are not subject to any special rules that may be applicable to you under
federal tax laws, then generally, a Cashed Out Stockholder that receives cash
for a fractional share as a result of the Transaction will recognize capital
gain or loss for United States federal income tax purposes. A Continuing
Stockholder who does not receive cash for a fractional share as a result of the
Transaction will not recognize any gain or loss for United States federal
income tax purposes. We urge you to consult with your personal tax advisor with
regard to the tax consequences to you of the Transaction.
Should
I send in my certificates now?
No.
After the Transaction is completed, we will send instructions on how to receive
any cash payments to which you may be entitled.
What
is the total cost of the Transaction to the Company?
Since
we do not know how many record and beneficial holders of our common stock will
be Cashed Out Stockholders, we do not know the exact cost of the Transaction.
However, based on information we have received from our transfer agent,
Continental Stock Transfer & Trust Company, and from Broadridge Financial
Solutions, Inc. with regard to the size of holdings of those of you who may
hold shares in street name, as well our estimates of other Transaction
expenses, we believe that the total cash requirement of the Transaction to the
Company will be approximately $1,916,000. This amount includes approximately
$1,316,000 needed to cash out fractional shares, and approximately $600,000 of
17
legal, accounting, and financial advisory fees and
other costs to effect the Transaction. This total amount could be larger or
smaller depending on, among other things, the number of fractional shares that
will be outstanding after the Transaction as a result of purchases, sales and
other transfers of our shares of common stock by our stockholders.
Am
I entitled to appraisal rights in connection with the Transaction?
No.
Under Delaware law, our certificate of incorporation and our bylaws, no
appraisal or dissenters rights are available to our stockholders who vote
against the Transaction.
How
do I vote?
Sign
and date each proxy card you receive and return it in the enclosed envelope
prior to the Special Meeting or attend the meeting and vote in person.
Can
I change my vote?
Yes.
You may change your proxy instructions at any time before your proxy is voted
at the Special Meeting. Proxies may be revoked by taking any of the following
actions:
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filing a written notice with our corporate secretary
of revocation of any prior delivered proxy, or a duly executed proxy bearing
a later date, with our corporate secretary at our principal executive office
(197 West Spring Valley Road, Maywood, New Jersey 07607); or
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attending the Special Meeting, filing a written
notice of revocation of your proxy with our corporate secretary, and voting
in person (although attendance at the meeting will not, by itself, revoke a
proxy).
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What
does it mean if I get more than one proxy card?
If
your shares are registered differently and are in more than one account, you
will receive more than one proxy card. Sign and return all proxy cards to
ensure that all your shares are voted.
How
does the board of directors recommend that I vote on the proposal?
Following
a recommendation from the Special Committee, the Board of Directors unanimously
recommends that you vote FOR the proposal to approve the Transaction.
18
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This
proxy statement contains certain forward-looking statements concerning, among
other things, our anticipated results, and future plans and objectives that are
or may be considered to be forward-looking statements. Our ability to do this
has been fostered by the Private Securities Litigation Reform Act of 1995 which
provides a safe harbor for forward-looking statements to encourage companies
to provide prospective information so long as those statements are accompanied
by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those discussed. These
forward-looking statements are subject to a number of known and unknown risks
and uncertainties that could cause our actual results, performance or
achievements to differ materially from those described or implied in the
forward-looking statements, including, but not limited to, general economic and
business conditions, including the impact on consumer spending as a result of a
slower consumer economy, competition in the apparel and accessories markets,
potential changes in customer spending, acceptance of our product offerings and
designs, a highly promotional retail environment, any significant variations
between actual amounts and the amounts estimated for those matters identified
as our critical accounting estimates, as well as other significant accounting
estimates made in the preparation of our financial statements, and the impact
of the hostilities in the Middle East and the possibility of hostilities in
other geographic areas as well as other geopolitical concerns. Additional
uncertainty exists for the potential negative impact that a recurrence of
Severe Acute Respiratory Syndrome (SARS) in the Far East and other foreign
countries in which we source our products may have on our business. In light of
the uncertainty inherent in our forward-looking statements, you should not
consider their inclusion to be a representation that the forward-looking matters
will be achieved. In evaluating forward-looking statements, you should consider
all these risks and uncertainties, together with any other risks described in
our other reports and documents furnished or filed with the SEC, and you should
not place undue reliance on those statements. We assume no obligation for
updating any forward-looking statements, whether as a result of new
information, future events, or otherwise. However, to the extent that there are
any material changes in the information contained in this proxy statement, the
Company will promptly disclose the changes as and to the extent required by
applicable law and the rules and regulations of the SEC.
19
SPECIAL FACTORS
Purpose
of and Reasons for the Transaction
General.
The Special Committee and the
Board of Directors has determined that the costs of being a SEC reporting
company currently outweigh the benefits and, thus, it is no longer in our best
interests or the best interests of our stockholders, including our unaffiliated
stockholders (consisting of stockholders other than our executive officers and
directors and other than those stockholders who are parties to the Stockholders
Agreement), for us to remain a SEC reporting company. Accordingly, we are
proposing the Transaction for the purpose of reducing the number of record
stockholders of our common stock to fewer than 300, so we can then cease
registration of our common stock under the Exchange Act, terminate our
reporting and other obligations as a SEC reporting company under the Exchange Act,
and delist our common stock from the American Stock Exchange. The proposed
Transaction, among other things, will enable us to realize significant cost
savings by the elimination of many of the expenses related to our status as an
SEC reporting company, including expenses relating to the disclosure, reporting
and compliance requirements of the Exchange Act, the Sarbanes-Oxley Act and
other federal securities laws, and will relieve us of the administrative
burdens associated with being an SEC reporting company.
The
Forward Stock Split is not necessary for us to reduce the number of holders of
record of our shares of common stock and to deregister our shares of common stock under the Exchange
Act. However, we have decided that it
is in the best interests of our stockholders to effect the Forward Stock Split
to avoid an unusually high stock price after the Transaction, to facilitate
trading of the shares of Continuing Stockholders either in private transactions
or on the OTCQX
SM
tier of the pink sheets, and to mitigate any loss of liquidity in our shares of
common stock that may result from the Reverse Stock Split portion of the
Transaction.
Reduced Costs and Expenses
.
We incur both
direct and indirect costs to
comply with the filing and reporting requirements imposed on us as a result of
being an SEC reporting company. Professional fees of lawyers and accountants,
printing, mailing, and other costs incurred by us in complying with SEC
reporting and compliance requirements are substantial. We also incur direct and
indirect costs in complying with the Sarbanes-Oxley Act. Section 404 of the
Sarbanes-Oxley Act, which will become effective, in part, at the end of our
current fiscal year ending on June 30, 2008, would require that we test and
assess our internal control structure and, for the fiscal year ending June 30,
2009, that our external auditors report on our managements assessment of our
internal control structure. Compliance with these requirements will require
significant additional expenditures, including fees to third parties for
compliance planning, assessment, documentation and testing, as well as a
significant investment of time and energy by our management and employees. If
our SEC reporting obligations cease, we would not incur these expenses.
Our
estimated costs of remaining a SEC reporting company are described in greater
detail below:
20
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Costs
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Actual 2007
Expenses
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Projected 2008
Expenses
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Projected 2009
Expenses with
Auditor
Attestation
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Projected 2009
Expenses with
No Auditor
Attestation
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Audit of 10-K
and review of 10-Q
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$
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232,000
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$
|
264,000
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$
|
264,000
|
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$
|
264,000
|
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Sarbanes-Oxley
Initial Write-Up on Internal Controls
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140,000
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(1)
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Sarbanes-Oxley
Act Documentation and Testing
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|
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120,000
|
|
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120,000
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Sarbanes-Oxley
Act Audit
|
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60,000
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170,000
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(2)
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60,000
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(2)
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Sarbanes-Oxley
Act Compliance Officer
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50,000
|
|
|
50,000
|
|
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50,000
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SEC Counsel
|
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104,000
|
|
|
104,000
|
|
|
104,000
|
|
|
104,000
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Board of
Director Compensation
|
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110,000
|
|
|
110,000
|
|
|
110,000
|
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110,000
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Director and
Officer Insurance
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76,000
|
|
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76,000
|
|
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76,000
|
|
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76,000
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American Stock
Exchange Listing Fees
|
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17,000
|
|
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17,000
|
|
|
17,000
|
|
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17,000
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Proxy and Annual
Report Printing and Mailing, Transfer Agent Fees, Public Relations and
Stockholder Communications and other miscellaneous costs
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72,000
|
|
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72,000
|
|
|
72,000
|
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72,000
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Total
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$
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611,000
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$
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893,000
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$
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983,000
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$
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873,000
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(1) This is a one-time cost projected to be spent in
fiscal 2008 related to Sarbanes-Oxley Act compliance.
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(2) We understand that the SEC may consider, but has
not yet formally adopted, a proposal to delay for one year auditors
attestations on internal controls for non-accelerated filers (companies with
a public float of less than $75,000,000), which would include the Company. In
the event that the proposal is adopted, we expect that our projected 2009
expenses will be reduced by $110,000 to $873,000. See Special
FactorsBackground of the Transaction beginning on page 24.
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We
ultimately expect to realize recurring annual cost savings of
approximately $500,000. These estimated savings primarily reflects, among other things:
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a reduction in fees to our registered independent
public accounting firm of approximately $315,000 for internal control audits,
the review of our SEC periodic reports and related expenses;
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the elimination of annual costs attributable to
ongoing audits to comply the Sarbanes-Oxley Act and the employment of a
Sarbanes-Oxley Act compliance officer of approximately $50,000;
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the reduction in directors fees by reducing the
size of our Board of Directors from nine to seven members;
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a reduction in legal fees associated with securities
law compliance of approximately $25,000; and
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the net reduction in costs and expenses associated
with filing our annual, periodic and current reports and other documents,
such as proxy statements and Section 16 filings with the SEC, the annual
listing fees to the American Stock Exchange, and printing, mailing and other
costs of the annual report to stockholders, proxy statements and other
miscellaneous costs of approximately $79,000. We expect to save this amount
even after giving effect to the cost of our shares being quoted on the OTCQX
SM
tier of the pink
sheets.
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21
We
believe the projected fiscal 2009 costs are indicative of our annual costs
going forward if we remained a SEC reporting company. Please note, however,
that the annual costs are only estimates and the actual costs we realize may be
higher or lower than the estimates set forth in the table above. Likewise, our
projected annual cost savings are only estimates, and those cost savings could
be higher or lower than the amounts set forth above. As noted, our estimates
were based upon actual costs we incurred in fiscal 2007, but our estimates of
expenses in fiscal 2008 and 2009 and, accordingly our estimated cost savings,
are based, only in part, on historical costs. For example, if the Transaction
is effected, there will be an elimination of Sarbanes-Oxley Act documentation
and testing fees and a reduction in accounting fees. In addition, there will be
a more limited need for legal counsel if we no longer file reports with the
SEC, although we will need the assistance of legal counsel in complying with
the disclosure and other requirements of the pink sheets. Our auditing fees will be reduced
primarily because fees for certain interim services will be eliminated. Other
estimates were more subjective, such as savings in transfer agents fees
because of a reduction in the number of stockholder accounts to be handled by
it, and a reduction printing and other related costs of distributions to
stockholders.
Management Time and Expense; Operational
Flexibility.
The costs described above do not include the overall time expended by our
management on the preparation of our SEC filings. The time necessary to devote
to that preparation and review will likely increase, particularly for our chief
executive officer and our chief financial officer, who beginning at the end of
our current fiscal year must include in our annual report a report assessing
the effectiveness of our internal control over financial reports as required by
the Sarbanes-Oxley Act. We believe that this time could more effectively be
devoted to other purposes, such as operating our business and undertaking new
initiatives that may result in greater long-term growth. Additionally, due to
the public markets focus on quarterly results, smaller public companies such
as ours are required to focus on short-term goals, such as quarterly financial
results, often at the expense of longer-term objectives. As a non-SEC reporting
company, we believe management will have the flexibility by being able to
devote more time to sustaining long-term growth.
Limited Trading Volume and Liquidity for Small
Stockholdings.
The Board also believes that holders of small amounts
of shares of our common stock may be deterred from selling their shares because
of the lack of an active trading market and disproportionately high brokerage
costs. Based on our review of a list of record holders of our common stock
furnished to us by our transfer agent, as well as information we have received
regarding the holdings of beneficial owners of our common stock held in street
name, we estimate that there are approximately 361 holders of record of fewer
than 250 shares and approximately 244 holders of fewer than 250 shares in
street name. These holders are a large percentage of our unaffiliated
stockholders. The Transaction will offer each of these holders the opportunity
to obtain cash for their shares without the cost of dealing with a broker.
In
addition, the trading volume in our common stock has been and continues to be
thinly traded. The average daily trading volume of the stock from January 2,
2006 to December 4, 2007 (the trading day prior to the announcement of the
approval of the Transaction by the Company) was approximately 4,680 shares per
day, and during that period there were 139 trading days on which our common
stock did not trade at all. The trading of even a small number of shares may
have a disproportionate effect on the price of our shares in the public market.
Accordingly, the Transaction will provide our smallest stockholders with the
ability to liquidate their holdings in us and receive a fair price in cash for
their shares.
Special
Committee and Board of Directors Protections for Continuing Stockholders
In
order to mitigate any adverse effects of the Transaction on the liquidity or
value of the shares of common stock, and to foster a continuing trading market
in shares of common stock, the Special Committee and the Board of Directors
have conditioned the Transaction on the implementation of continuance of certain
corporate governance and other stockholder protections following the
Transaction, including:
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the preparation and public
dissemination quarterly and annual financial reports and the issuance of
quarterly and annual earnings press releases;
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the preparation and public
dissemination of annual audited financial statements which are accompanied by
a certification from each of our chief executive officer and our chief
financial officer, certifying that, among other things, the financial statements,
fairly present in all material respects the financial condition, results of
operations and cash flows of the Company as of and for, the periods presented
in the financial statements;
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the public dissemination
of press releases for material events;
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having at least two
directors on our Board who are independent under the rules of the American
Stock Exchange and under the Exchange Act;
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having the entire Board of
Directors, or a committee of the Board of Directors with at least one
independent director as a member, review and approve any non-compensatory
related person transactions that a SEC reporting company would be required to
disclose in a proxy statement prepared in accordance with the rules of the
SEC and publicly announce any such transactions at least on an annual basis;
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holding annual
stockholders meetings; and
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maintaining our current
code of ethics for finance professionals and code of business conduct for all
employees.
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These
corporate governance and the stockholder protections must remain in effect for
at least three years following the Transaction. Any change to those corporate
governance and other stockholder protections following this three year period
must be approved by a majority of the Board of Directors or a committee appointed
by the Board of Directors to consider any such changes. This three year
requirement will be applicable as long as there are unaffiliated Continuing
Stockholders during that time; it is not intended to restrict or otherwise
prohibit any merger, consolidation, sale of all or substantially all of our
assets, or similar extraordinary transaction during that three-year period. We
have no present plans or proposals for any such transaction, however, and our
intent is to operate our business after the Transaction substantially as it is
currently conducted. See Special FactorsConduct of the Companys Business
after the Transaction.
Additionally,
in order to ensure that our Continuing Stockholders will have continuing access
to a trading market, the Special Committee and the Board of Directors have also
required that our common stock be quoted by at least two market makers on the
OTCQX
SM
tier
of the pink sheets. The pink sheets is a tiered listing service that offers
trading, quotation and disclosure venue for over-the-counter securities in the
US markets and the OTCQX
SM
tier is the highest tier offered by the pink sheets. In order to
maintain a quotation on the OTCQX
SM
tier of the pink sheets, we will be required to meet certain reporting
and other requirements, including:
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preparing annual and
quarterly financial reports;
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performing annual audits;
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requiring our chief executive officer and chief
financial officer to each certify that (i) to his knowledge, the information
about us furnished in accordance with the rules of the pink sheets does not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by that information; (ii) to his knowledge, the financial
statements, and other financial information furnished in accordance with the
rules of the pink sheets, fairly present in all material respects our
financial condition, results of operations and cash flows as of, and for, the
periods presented; and (iii) based upon his reasonable belief, for at least
one year from the date of the certification, we have sufficient working
capital to continue operations and have the ability to continue to meet our
obligations as they become due; and
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preparing interim material event disclosure in
accordance with the reporting requirements of the OTCQX
SM
tier.
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Background
of the Transaction
The
passage of the Sarbanes-Oxley Act began a number of corporate governance
reforms that have increased the expenses of being a SEC reporting company
without enhancing, from a business and operational point of view, the benefits
of being a SEC reporting company. During our fiscal year ended June 30, 2007,
we spent approximately $611,000 in legal, accounting and other costs and
expenses related to compliance with the Sarbanes-Oxley Act and the rules and
regulations of the SEC, and we expect those costs to substantially increase.
Under current SEC regulations implementing the Sarbanes-Oxley Act, we will
become subject to the internal control audit requirements of Section 404 for
the first time beginning this fiscal year, and we expect that our costs and
expenses of compliance with Section 404 will initially increase by an
additional $234,000. Our independent registered public accounting firm will be
required to audit and provide an attestation report on our internal controls
beginning with our following fiscal year, although we note that the SEC has
publicly announced, but has not yet formally adopted, a proposal to delay our
auditors attestation for one year. We estimate that the current total costs
and expenses of compliance with the Sarbanes-Oxley Act and of continuing to be
a reporting company under SEC regulations will be approximately $893,000 for
this fiscal year. In addition, we understand that the SEC may consider, but has
not yet formally adopted, a proposal to delay for one year auditors
attestations on internal controls for non-accelerated filers (companies with a
public float of less than $75,000,000), which would include the Company. If the
proposal is adopted, we estimate our projected 2009 expenses will be
approximately $873,000. For the first year the auditor attestation requirement
becomes applicable to us, and for each subsequent year, we estimate our
projected total costs and expenses of continuing to be a reporting company
under SEC regulations to be approximately $983,000. None of these cash costs
include the overall time of our executive officers and our other employees that
is necessary to prepare and review our public filings.
In
the ordinary course, management has from time to time updated the Board of
Directors on the then current and anticipated costs relating to SEC reporting
and Sarbanes-Oxley Act compliance, particularly in connection with the pending
effectiveness of the internal control certification requirements of Section 404
of the Sarbanes-Oxley Act. At the September 26, 2006 Board of Directors
meeting, management was asked to discuss with the Board of Directors, at its
regularly scheduled January 2007 meeting, costs of compliance with its
obligations under the federal securities laws in light of the advance
preparation we would need to do prior to the potential effectiveness of Section
404 of the Sarbanes-Oxley Act. During the period prior to the scheduled January
2007 meeting, in consultation with its outside legal counsel, Troutman Sanders
LLP, and its independent registered public accounting firm, Deloitte &
Touche, LLP, management reviewed those costs, as well as ways of reducing those
costs, all in preparation for its scheduled discussion with the Board of
Directors.
24
At
the meeting of the Board held on January 26, 2007, the Board and our management
reviewed these costs and expenses in detail, including the pending increase in
Sarbanes-Oxley Act costs that the Board of Directors believed would
dramatically increase our public company expenses once the Sarbanes-Oxley Act
was fully implemented with respect to us. The Board of Directors also noted the
substantial time and effort that management would spend on preparation for
compliance with the internal control audit requirements contained in Section
404 of the Sarbanes-Oxley Act. At that meeting, the Board asked our management
to continue to review these costs and expenses and periodically report back to
the Board.
During
the months following the January meeting, our management continued to review
our direct and indirect costs associated with being an SEC reporting company.
Management considered the costs of Sarbanes-Oxley compliance, both presently
and in the future, including resources and costs required to test and assess
our internal control structure and our external auditors report on our
managements assessment of that internal control structure. Our management
explored alternatives that might be available to us to reduce our costs,
including ceasing the registration of our shares of common stock under the
Exchange Act. The alternatives discussed included a transaction, such as a
reverse stock split, tender offer, odd-lot tender offer and the continuation or
an expansion of our long-standing open market repurchase program, in order to
reach the goal of reducing the number of our record holders below 300 and allow
us to deregister under the Exchange Act.
At
a meeting of the Board held on May 23, 2007, management updated the entire
Board of Directors on its review. At that meeting, the Board generally
discussed the possibility of converting to a non-SEC reporting company, and
about the general process of conversion, including:
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evaluating the advantages
and disadvantages of being a non-reporting company under the Exchange Act;
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if we decided to
deregister our shares of common stock, reviewing the most appropriate method,
including, reviewing alternatives to reduce the number of our stockholders
below 300 so that we might deregister our common stock under the Exchange Act
and delist our common stock from trading on the American Stock Exchange;
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depending on the method
chosen, the possibility of holding a special meeting of our stockholders to
approve any proposed transactions;
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determining the
appropriate price at which to repurchase shares of our common stock;
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the preparation and filing
with the SEC of appropriate stockholder disclosure materials; and
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the preparation and filing
of appropriate forms and information with the SEC and the American Stock
Exchange to effect deregistration under the Exchange Act and delisting of our
common stock from trading on the American Stock Exchange.
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Managements
report to the Board at this meeting included how the SEC counts the record
number of stockholders for determining whether a corporation may deregister its
shares under the Exchange Act, including the treatment of holders of shares of
our common stock in street name, the methods that public companies use to
reduce its number of stockholders below 300, including a reverse stock split,
tender offer, odd-lot tender offer, and open-market purchases. Management
indicated that it believed, after reviewing the possible alternatives, that a
reverse stock split would be the most expeditious and cost-effective method of
deregistration. In the context of a reverse stock split, management noted that
25
the Company had a
significant number of small stockholders, with many of them having received
shares of common stock under the Companys terminated employee stock ownership
plan, and that a deregistration transaction may provide them with a way to
obtain a payment for their shares without brokerage fees or commissions.
Management also discussed certain disadvantages to any proposed deregistration,
including that the Company would no longer file information and other reports
with the SEC and that continuing stockholders would have access to much less
information than they would if the status quo was maintained, and the
possibility of decreased liquidity for continuing stockholders. Management
noted that transactions on the pink sheets would provide continuing
stockholders with alternative means to trade shares of common stock,
particularly given the somewhat thin trading market of our shares of common
stock over time on the American Stock Exchange.
Troutman
Sanders then discussed with the Board members the general process of a
deregistration transaction, including potential SEC filings, including proxy
materials depending on the method chosen. Troutman Sanders also reviewed with
the Board members their fiduciary duties and responsibilities as members of the
Board in the context of a deregistration transaction, including the importance
of the appointment of a special committee of independent directors to review
the transaction and to act on behalf of the Companys unaffiliated
stockholders. After considerable deliberation, the Board decided to further
investigate a possible transaction to reduce the number of our stockholders of
record below 300, and to deregister our common stock under the Exchange Act. At
this meeting the Board established a special committee of the Board for the
purpose of considering whether to engage in a transaction and, if so, the
appropriate alternative methods for converting to a non SEC-reporting company,
the related advantages and disadvantages to the Company and its stockholders of
each of those alternatives, the fairness of the any transaction to the
unaffiliated stockholders of the Company, and to make a recommendation to the
full Board of Directors. The Board placed no limitations on the authority of
the Special Committee. The Board resolutions describing the authority of the
Special Committee provided, among other things, that if the members of the
Special Committee determined that a deregistration or other transaction was not
in the best interests of stockholders, then the entire Board of Directors would
be bound by that decision. The Board also empowered the Special Committee to
retain independent legal counsel and independent investment bankers and other
advisors, all at the expense of the Company.
On
June 19, 2007, the Special Committee held its first meeting. At that meeting, the
Special Committee officially retained Day Pitney LLP as its independent legal
advisor. The Special Committee confirmed that its members would consist of
Norman Axelrod, who was appointed as Chairman of the Special Committee by its
members, Martin Brody and Harold Schechter, each of whom is independent within
the meaning of Section 121A of the American Stock Exchange Company Guide and
Rule 10A-3(b) of the Exchange Act. Day Pitney reviewed with the Special
Committee the independence rules and fiduciary duties for members of special
committees of boards of directors under Delaware law. The Special Committee reviewed and discussed certain
of the benefits and potential detriments to the Company and its stockholders of
any delisting and deregistration of the Companys common stock and also
discussed the significant increased cost of compliance with SEC, Sarbanes-Oxley
Act, and American Stock Exchange rules and regulations. The Special Committee
also reviewed generally the potential for the Company to continue trading on
the pink sheets following any potential transaction. The Special Committee then
reviewed information received from a number of investment banking firms that
had been contacted by Day Pitney in connection with the Special Committees
proposed engagement of an independent financial advisor. The Special Committee
then interviewed two such firms. At the end of the interview process, on the
basis that Houlihan is an experienced provider of independent valuation and
fairness opinions and does not have any potentially conflicting relationships
with the Company or its affiliates, the Special Committee approved the
engagement of Houlihan as its independent financial advisor and directed Day
Pitney to take all necessary steps to finalize the engagement.
26
On
July 12, 2007, the Special Committee met again, with Day Pitney and Houlihan in
attendance. The Special Committee members first confirmed their continued
independence and their understanding of the scope of their duties and
responsibilities, including their fiduciary duties. The Special Committee
discussed a number of alternative transactions, including maintaining the
status quo, purchasing shares of the Companys common stock in the open market,
undertaking an odd-lot tender offer, effecting a tender offer and considering a
sale of the Company. The Special Committee also reviewed materials provided by
Day Pitney regarding the potential advantages and disadvantages of a potential
delisting of the Companys common stock, and discussed preliminary information
provided to it by the Company on the estimated costs savings that the Company
may realize from a deregistration transaction. Day Pitney discussed recent
developments in the pink sheets trading market, including a new OTCQX
SM
tier listing service
that may provide a trading market for the Companys shares of common stock
after any potential deregistration/delisting transaction. In connection with
its review of each of these topics, the Special Committee discussed in detail
the additional information it would require in order to make an informed
recommendation to the Board as to whether a transaction would be in the best
interests of all of the Companys stockholders, particularly the unaffiliated
stockholders that would be cashed out in any potential transaction. The Special
Committee directed Day Pitney to request that the Company provide additional
information related to the proposed transaction, including, among other things,
the costs related to the Companys compliance with the rules of the SEC, the
Sarbanes-Oxley Act, and the American Stock Exchange that were currently being
incurred by the Company as well as the anticipated expenses and anticipated
cost-savings associated with the proposed transaction; the impact that the
proposed transaction may have on the Companys material agreements, financing
arrangements or ongoing business operations; and the impact that a proposed
transaction may have on the Companys executive officers, directors, and
affiliated stockholders. The Special Committee also directed Day Pitney to
provide the Special Committee with additional information regarding the
different transaction structures that could be utilized to effect the proposed
transaction as well as additional information on the mechanics and various
trading tiers of the pink sheets.
On
July 31, 2007, the Special Committee met, with Day Pitney and Houlihan in
attendance. The Special
Committee members first confirmed their continued independence. The Special
Committee reviewed and discussed certain Company information, including an
analysis regarding the potential impact of a 1-for-500 stock split on the
Companys stockholders, and financial and other data supplied by the Company
which included updated information on holdings under the Stockholders
Agreement, stock options lists, summary backlog figures as of June 30, 2007,
consolidated statement of earnings for the one month ended July 31, 2006 and
the eleven months ended May 31, 2007, a list of the Companys customers as of
June 30, 2007, and a list of owned and leased real property. Day Pitney also
reviewed and discussed with the Special Committee the reporting requirements of
the Sarbanes-Oxley Act and recently proposed amendments to certain SEC
disclosure requirements, which could potentially apply to the Company.
The
Special Committee then reviewed the trading history of the Company from January
1, 2006 through June 30, 2007, noting that on approximately 75% of the trading
days during this period, the daily trading volume of the Companys common stock
was less than 4,000 shares and that on approximately 32% of the trading days,
no trades occurred in the Companys common stock. The Special Committee noted
that although one advantage of being listed on a national securities exchange
is increased liquidity, it did not appear from the data that the Company
realized this benefit. Day Pitney then discussed with the Special Committee its
preliminary analyses regarding the impact to the Company and its stockholders
of reverse stock splits in general, information concerning different stock
split ratios, the potential number of record holders who would be cashed out,
the potential number of record holders who would remain as stockholders, and a
share range analyses of the number of owners of shares of our common stock held
in street name. At this meeting, Day Pitney also discussed with the Special
Committee various public materials that had been supplied to the Special
Committee, including information available from the pink
27
sheets regarding the various
tiers on which a companys securities may trade following a delisting and
deregistration transaction and an academic study that considered the impact of
a voluntary deregistration transactions on the price and liquidity of the
common stock of firms included in the study. Day Pitney and the Special
Committee discussed the potential impact that discontinuation of current
financial and other material event disclosure may have on the continuing
unaffiliated stockholders following a deregistration transaction. Day Pitney
advised the Special Committee that if it were to recommend a proposed
transaction, it could determine to place certain conditions on its
recommendation, including a requirement that the Company continue to provide
its stockholders with annual audited and quarterly unaudited financial
statements and other material event disclosure. Houlihan then provided
the Special Committee with a status update of its progress, noting that it had
begun its preliminary evaluations. Houlihan and Day Pitney then each discussed
with the Special Committee the advantages and disadvantages of alternative
structures the Special Committee might consider, including maintaining the
status quo and not effecting any transaction, an issuer tender offer, an
odd-lot tender offer, the continuance of the Companys share repurchase
program, a potential sale of the Company and a cash-out merger.
On
August 21, 2007 the Special Committee met again with Day Pitney and Houlihan in
attendance. The Special Committee members first confirmed their continued
independence. The Special Committee reviewed the information discussed during
the Special Committee meeting on July 31, 2007 regarding potential alternatives
to a transaction if the Special Committee determined that undertaking a
delisting/deregistration transaction was in the best interests of the Company
and its stockholders. The Special Committee preliminarily agreed that if the
Special Committee ultimately determined to recommend to the Board of Directors
that the Company undertake a delisting/deregistration transaction, such a
transaction should be structured as a reverse stock split immediately followed
by a forward stock split because the Special Committee believed that such a
structure provided the most fair, expeditious and cost-efficient method for
reducing the Companys stockholder base below 300 stockholders of record. The
Special Committee directed Day Pitney to collect additional information
regarding the impact various ratio alternatives would have on the number of
fractional shares purchased by the Company, the number of remaining
stockholders, and the ownership interests of the parties to the Stockholders
Agreement. The Special Committee also reviewed cost savings information
provided by the Company which outlined certain estimated cost savings that the
Company anticipated it would realize if a delisting/deregistration transaction
were undertaken noting the significant monetary expense and loss of management
time that the Company currently incurred, and currently anticipated that it
would incur in the future, in connection with the reporting requirements of the
Exchange Act and the Sarbanes-Oxley Act. Day Pitney also discussed with the
Special Committee the future potential legal, accounting, and financial
advisory fees and other miscellaneous costs (in addition to the cost associated
with the potential cash-out of stockholders) related to the proposed
transaction that may be incurred by the Company if the Board approved such a
transaction. The Special Committee reviewed the other information prepared by the
Company in response to the Special Committees request for information, taking
particular note that the Companys bank lender, TD Banknorth, N.A., had
indicated that it would allow the Company to use funds under its existing
revolving credit facility to complete a deregistration transaction. The Special
Committee also discussed that Company management did not presently believe that
its status as a public company has had a measurable impact on the Companys
ability to attract customers, bank financing or favorable financing terms or
suppliers or favorable credit terms and that the Company did not presently
anticipate using its securities for any future acquisitions or as a vehicle for
financings in the future. The Special Committee then discussed the possible
disadvantages of a deregistration/delisting transaction, including the
potential impact it may have on the price and liquidity of the Companys common
stock. The Companys management and Troutman Sanders joined the meeting and
answered the Special Committees questions regarding the information that had
been presented.
The
Special Committee held another meeting on September 18, 2007. The members
reviewed certain presentation materials that had been distributed, including
budget information prepared by the
28
Company,
information on disclosure categories of the pink sheets, and additional cost
savings and time savings information prepared by the Company. The Special
Committee discussed potential advantages and disadvantages associated with a
proposed transaction, including the different interests of unaffiliated Company
stockholders that would be cashed-out in a proposed transaction and those who
would continue to be stockholders. Among other factors considered, the Special
Committee noted that stockholders who would be cashed-out in a proposed
transaction would not be able to sell their stock at a time and price of their
own choosing and that the Special Committee would not be able to ensure that
the trading price of the Companys common stock would be within the cash-out
price either at the time of any transaction or at a later point in time. The
Special Committee continued to consider the potential impact that a proposed
transaction may have on the price and liquidity of the Companys common stock
and continued to review and consider possible measures to mitigate a potential
negative market reaction.
The
Special Committee held another meeting on September 26, 2007. Day Pitney and
Houlihan were again in attendance. After confirming their continued
independence, the members considered the threshold number of shares that a
stockholder of the Company would be required to hold in order to receive common
stock in the reverse stock split rather than a cash payment for fractional
shares. The Special Committee reviewed a recent share range analysis by Broadridge Financial Solutions, Inc. that showed the
distribution of beneficial owners stockholder accounts according to predefined
ranges based on share amount. The Special Committee also reviewed additional
information showing the potential number of record holders and beneficial
owners that may be cashed-out in various transaction ratios, the potential
number of fractional shares that the Company may be required to purchase from
both record holders and beneficial holders in connection with such transaction
ratios. The Special Committee also considered the approximate increase in
percentage ownership by the parties to the Stockholders Agreement that may
result from such transaction ratios. The Special Committee agreed that a
transaction ratio selected should bring the number of stockholders of record
sufficiently below 300 so as reasonably to avoid re-triggering reporting
requirements following any potential delisting/deregistration transaction. The
Special Committee noted that although it sought to select a transaction ratio
that sufficiently reduced the number of stockholders of record below 300 so
that the Company could realize its projected cost savings, the Special
Committee also sought to limit the potential expense that would be incurred by
the Company in connection with the repurchase of fractional shares to that
necessary to achieve the cost-savings goal, and the members discussed various
ratio alternatives. During this meeting, the Day Pitney also reviewed with the
Special Committee, as a potential alternative transaction structure for
accomplishing the purpose of a proposed transaction, the mechanics of
reclassification transactions. Following the Special Committees discussion and
consideration, the members determined that, in the event that they determined
to recommend a proposed transaction to the Board, the Special Committee
continued to believe that a reverse stock split, immediately followed by a
forward stock split, provided the most cost-efficient and fair manner in which
to effect a proposed transaction. Houlihan provided the Special Committee with
a status update of its progress, noting that as part of its diligence process
it was continuing to engage in discussions with management regarding the
financial condition and outlook of the Company. Houlihan then reviewed and
discussed with the Special Committee members the purpose and methodology of
each of the financial analyses Houlihan was performing in connection with its
analysis of a range of fair consideration that could be paid to the Companys
shareholders that would be cashed-out in a proposed transaction.
The
Special Committees next meeting was held on November 20, 2007. The Special
Committee reviewed the procedures and process that had been followed by the
Special Committee, the advice and information that it had reviewed, and
potential benefits, potential disadvantages, Company developments and other
factors that it had considered throughout its evaluation of the proposed
transaction, including the timing of the transaction and the Companys
financial position. The Special Committee then reviewed with its advisors the
terms of a proposed reverse stock split/forward stock split transaction,
29
including
conditions that would limit adverse effects on unaffiliated stockholders who
would remain stockholders after completion of the stock splits. Those
conditions included:
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The common
stock of the Company must be quoted on the OTCQX
SM
tier of pink
sheets by at least two market makers.
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The Company
must prepare audited annual financial statements and unaudited quarterly
financial statements and make them available to stockholders.
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The Company
must prepare and make available to stockholders annual and quarterly
financial reports as required by the pink sheets and issue quarterly and
annual press releases.
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The
Companys financial statements must be certified by its chief executive
officer and chief financial officer as required by the pink sheets.
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After the
Transaction, at least two directors who are independent within the
meaning of the rules of the American Stock Exchange would continue to be
members of the Board of Directors.
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Any
non-compensation transaction with any director or officer of the Company, and
their immediate families, must be reviewed and approved by the Board of
Directors or a committee of the Board having at least one independent
director as a member and any such transactions must be publicly announced at
least on an annual basis.
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The Company
must disclose material events to stockholders through the issuance of press
releases or in another acceptable manner.
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The
Companys Code of Business Conduct for Finance Professionals and General Code
of Ethics for Employees must remain in place after the Transaction.
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Annual
meetings of stockholders must be held.
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The
Special Committee determined that these corporate governance and stockholder
protections must remain in effect for at least three years following the
proposed transaction and any change following this period must be approved by a
majority of the Board or a majority of the members of a committee appointed by
the Board to consider any such change. The Special Committee also determined
that its recommendation would be conditioned on confirmation by the Company
that it had received from each lender from whom the Company intended to borrow
funds in connection with the Transaction written confirmation of the terms and
conditions of any borrowings to be made in connection with the Transaction and
confirmation from the Company that any debt incurred in connection with the
cash-out of fractional shares would not impair the liquidity or financial
condition of the Company.
Houlihan
then presented to the Special Committee its financial report dated November 20,
2007. Houlihan reviewed the information included in the financial report,
including the background to the Transaction and the proposed structure of the
Transaction, possible alternatives to the Transaction, potential benefits from
such a Transaction, Houlihans business and financial due diligence in
accessing, reviewing and evaluating the business and financial status and
prospects of the Company, the historic trading price trading volume of the
Companys common stock, the potential cost savings from the Transaction, and
the potential disposition of certain real estate by the Company. Houlihan then
reviewed with the Special Committee its approach to its financial analysis of the
Company, discussing the historical trading price and trading volume of the
Companys common stock and the financial methodology it used
30
in determining
the fair value of the cash consideration to be paid to the Cashed Out
Stockholders. Following Houlihans presentation, the Special Committee
discussed the financial report, Houlihans presentation and due diligence and
other matters in connection with determining a potential fair value of the cash
consideration to be paid to the Cashed Out Stockholders.
The
Special Committee determined that it was the Special Committees view and
belief, based on all of the factors which had been considered by the Special
Committee, although not relying upon any one factor but considering all factors
as a whole, that the Transaction would be in the best interests of all of the
Companys stockholders, including the unaffiliated stockholders who would be
cashed-out in the Transaction and unaffiliated stockholders who would continue
as owners of the Company, and that the Transaction should be recommended to the
Board of Directors. The Special Committee preliminarily determined that the
ratio of the Reverse Stock Split would be 1-for-250 and, accordingly, that the
ratio of the Forward Stock Split would be 250-for-1, but reserved the right to
change that ratio to the extent necessary to accomplish the goal of reducing
the number of record holders of the Company to below 300 or if it otherwise
determined that such a change was in the best interests of the Company and its
stockholders. The Special Committee also reserved the right to withdraw its
recommendation at any time prior to the effectiveness of the Transaction if it
believed that would be in the best interest of our stockholders. Following
further discussion, including consideration of various possible cash out stock
prices presented by Houlihan, the Special Committee determined that a cash out
price of $10.21 was appropriate and fair to all unaffiliated stockholders,
including minority stockholders who would be cashed out in the Transaction as
well as unaffiliated holders who would continue as stockholders of the Company.
Houlihan then orally confirmed to the Special Committee that, in the opinion of
Houlihan, the $10.21 per share was fair from a financial point of view to the
unaffiliated stockholders who would be cashed-out in such the Transaction and
also to the unaffiliated stockholders would continue as stockholders following
the Transaction. Pursuant to the Special Committees request, Houlihan
confirmed its oral fairness opinion with a written fairness opinion on November
28, 2007.
The
Board of Directors held a meeting on November 28, 2007 at which the Special
Committee made its recommendation to the full Board of Directors to proceed
with a reverse stock split, followed by a forward stock split, to effect a
deregistration of the Companys shares of common stock, and recommended a
$10.21 per fraction share price for those stockholders who would be cashed out
as a result of the reverse stock split. Day Pitney made a presentation to the
full Board of Directors concerning the Special Committees procedures and
deliberations during the course of the six months since the establishment of
the Special Committee, including an outline of the information that it had
reviewed and considered, alternative transactions that had been considered and
certain factors that it had considered in reaching its conclusions and
recommendation. Among the factors noted were the following:
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the
significant ongoing costs and management time and effort of compliance with
the Sarbanes-Oxley Act, including with the internal control provisions of
Section 404 of that act;
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the
significant ongoing costs and management time and effort involved in the
preparation and filing of periodic and other reports with the SEC;
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the limited
trading volume and liquidity of the Companys shares of common stock;
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the
relatively small effect of the proposed transaction on the relative voting
power of Continuing Stockholders, including the members of the Stockholders
Agreement;
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the business
and operations of the Company are expected to continue substantially as
presently conducted;
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enabling the
Companys smallest stockholders, who represent a disproportionately large
number of the Companys record holders, to liquidate their holdings in shares
of common stock and receive a premium over market prices prevailing at the
time of our public announcement of the Transaction;
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the
determination by Houlihan, the independent financial advisor to the Special
Committee, that the cash-out price of $10.21 for fractional shares was fair
from a financial point of view; and
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as a result
of the deregistration and delisting, the ability of the Companys management
and employees to focus their time, effort and resources on long-term growth
and increasing long-term stockholder value.
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The
recommendation of the Special Committee, however, was conditioned on the
continuation by the Company of certain protections for its unaffiliated
Continuing Stockholders. Day Pitney reviewed each of these protections for the
directors. These protections are described above in Special Factors--Special
Committee and Board of Directors Protections for Continuing Stockholders.
The
Special Committee noted that its recommendation of the ratio for the reverse
stock split and forward stock split proposal could change based on changes in
facts and circumstances. Since the goal of the Transaction would be to reduce
the number of record holders below 300, changes in the number of record holders
or shareholdings prior to the stock splits may warrant a re-examination and
change of the ratio. Further, there may be circumstances, such as an adverse
change in the financial condition of the Company, that may make the
deregistration inadvisable. Accordingly, the Special Committee reserved the
right to withdraw it recommendation at any time prior to the effectiveness of
the Transaction, even if stockholders had already approved it at the Special
Meeting.
Houlihan
then joined the meeting and reviewed with the directors in detail its financial
report that it presented to the Special Committee on November 20, 2007.
Houlihan summarized for the directors its findings, reviewed its due diligence
procedures and its methodologies, including its historical price and volume
analysis, guideline public company method analysis, comparable transactions
method analysis, and discounted cash flow method analysis. Houlihan also
confirmed to the Board of Directors that, in the opinion of Houlihan, the
$10.21 per share was fair from a financial point of view to the unaffiliated
stockholders who would be cashed out in the Transaction and to the unaffiliated
stockholders who would continue as stockholders of the Company. The Board then
asked and Houlihan then answered a number of questions of Houlihan as to its
methodologies, information considered by it, and the results of its analyses.
The
Board of Directors held another meeting on December 5, 2007 to further discuss
and consider the recommendation of the Special Committee to engage in a
deregistration transaction. At that meeting, the Board particularly noted the
measures the Board adopted so that the consideration of a proposed transaction
was fair to unaffiliated stockholders of the Company, including the
establishment of the Special Committee, who had engaged its own legal and
financial advisors to review and determine whether a proposed transaction was
advisable and, if so, the structure and other terms of that transaction. The
Board then reviewed in detail the recommendation of the Special Committee that
had been made at the November 28, 2007 meeting of the full Board. The Board
noted the advantages and other considerations of the proposal to the Company
and its stockholders and other relevant factors, including: the significant
ongoing costs and management time and effort of compliance with the
Sarbanes-Oxley Act, including with the internal control provisions of Section
404 of that act, and the preparation and filing of periodic and other reports
with the SEC; the limited trading volume and liquidity of our shares of common
stock, and that a deregistration transaction would provide our smallest
stockholders, who represent a disproportionately large number of total record
holders, the opportunity to obtain cash for their shares in a relatively
limited trading market and at a premium over market prices prevailing at the
time of
32
our public
announcement of the Transaction; the small effect of the proposed transaction
on the relative voting power of Continuing Stockholders, including that
Transaction would result in less than a 2% increase in the voting power of the
parties to the Stockholders Agreement; managements statements that the business
and operations of the Company were expected to continue substantially as
presently conducted; the Company historically had not taken advantage of the
benefits of being a public company, in that it used bank borrowings in lieu of
equity financings to funds its operations, and it did not use equity as an
incentive or retention device for its senior management, nor has the Company
used equity as consideration for acquisitions; the determination by Houlihan
that the cash-out price of $10.21 for fractional shares was fair from a
financial point of view; no change of control would occur as a result of the
deregistration transaction; and as a result of the deregistration and
delisting, the ability of our management and employees to focus their time,
effort and resources on long-term growth and increasing long-term stockholder
value. The Board also noted that the cost of the transaction would be able to
be funded under the Companys existing revolving credit facility and
managements belief that the use of those funds would not have any material
impact on the Companys normal business operations. The Board then reviewed
each of the special stockholder protection measures on which the Special
Committee had conditioned its recommendation, and that the Special Committee
has reserved the right to change the ratio if necessary to reduce the number of
the Companys record holders below 300, which is necessary to deregister under
the federal securities laws, or as otherwise determined to be in the best
interests of the Company and its stockholders. The Board also noted that the
Special Committee has also reserved the right to abandon the transaction if it
believes that the transaction is no longer in the best interests of
stockholders.
Based
on all of the factors which had been considered by the Board of Directors at
this and at its other meetings, and based on the information and recommendation
of the Special Committee, although not relying upon any one factor but
considering all factors as a whole, the Board, including all of non-employee
directors of the Company, specifically adopted the recommendations of the
Special Committee and all factors that the Special Committee took into account
in making its recommendations to the full Board of Directors. The Board of Directors
determined that the Transaction would be in the best interests of all Companys
stockholders, including the unaffiliated stockholders who would be cashed-out
in Transaction and unaffiliated stockholders who would continue as owners of
the Company, approved the Transaction, including the cash-out price of $10.21,
and recommended the Transaction to the stockholders of the Company. The Board
of Directors also retained the right to change the initial ratio of the stock
splits if necessary or advisable in order to accomplish the reduction of the
number of record holders below 300, and retained the right to withdraw its
approval of the Transaction, either before or after the vote of stockholders,
if the Board of Directors determined that the deregistration transaction was no
longer in our best interests or in the best interests of our stockholders.
Alternatives to the Transaction
In
making their determinations to proceed with the Transaction, the Special
Committee and the Board of Directors considered other methods of effecting a
deregistration transaction, including an issuer tender offer, an odd-lot tender
offer, a reclassification, a purchase of shares in the open market and a
cash-out merger, as well as maintaining the status quo. When considering the
various alternatives to the Transaction, the primary focus was the level of
assurance that the selected alternative would result in the Company having
fewer than 300 record owners of its common stock, thus allowing us to achieve
its objective, the time frame within which such alternative could reasonably be
expected to be achieved, again relative to the other alternatives under
consideration, as well as the potential costs of the alternative transactions.
Issuer
Tender Offer
. In this alternative, we would offer to
purchase a set number of shares within a specific timetable. The results of an
issuer tender offer would be unpredictable, however, due to
33
its voluntary
nature, and we would have no assurance that enough stockholders would tender
all of their shares of our common stock to reduce the number of record owners
of our common stock to fewer than 300. In addition, the rules governing tender
offers require equal treatment of all stockholders, including pro rata
acceptance of offers from stockholders. The Special Committee and the Board of
Directors considered that since they could not guarantee or predict with
certainty how many shares would be tendered, the possibility existed that such
a transaction would not reduce the number of holders of record to below 300,
and the estimated costs of this type of transaction potentially could be higher
than the costs of the Transaction. As a result of these disadvantages, the
Special Committee and the Board of Directors determined not to pursue this
alternative.
OddLot
Tender Offer
. Unlike a traditional tender offer, an
odd-lot tender offer would offer to purchase the shares of our common stock
only from those stockholders owning 99 or fewer. As of October 19, 2007, there
were approximately 275 holders of record owning 99 or fewer shares of our
common stock. However, like an issuer tender offer, this method would be
voluntary on the part of stockholders and there could be no assurance that a
requisite number of stockholders would participate. While the time frame for
completing an odd-lot tender offer is shorter than for the Transaction and
would be less expensive, the Special Committee and the Board of Directors
decided this alternative would not be preferable to the Transaction because of
the lack of assurance that an odd-lot tender offer would produce the intended
result.
Reclassification.
The Special Committee also considered a
reclassification, in which stockholders would receive a new class of preferred
stock in exchange for their shares of common stock, rather than receive a cash
payment for their shares. While stockholders would continue to participate as
stockholders of the Company, there could be no assurance that any trading
market would arise for this new class of stock. Further, this alternative would
not provided our smallest stockholders with the ability to receive a cash
payment for their shares without the payment of brokerage commissions and other
transaction costs. Accordingly, this alternative was not considered the
preferable structure.
Purchase
Of Shares in the Open Market
. The Special Committee
and the Board of Directors also considered expanding our existing traditional
stock repurchase program, under which the Company would make periodic repurchases
of its common stock in the open market or in privately negotiated transactions.
However, the Special Committee and the Board of Directors noted that this
method would be lengthy, and because it was voluntary, there was no assurance
of acquiring sufficient shares to reduce the number of record holders below
300.
Cash-Out
Merger
. The alternative considered by the Special
Committee and the Board of Directors as the most similar to the Transaction is
a merger with a shell company and the reissuance of stock to Continuing
Stockholders of the newly-formed entity. Stockholders owning fewer then 250
shares would be cashed-out and stockholders owning 250 or more shares would
become stockholders in the newly-formed entity. In considering this alternative,
the Special Committee and the Board of Directors noted that a cash-out merger
could potentially be more complex and less cost effective than a reverse stock
split and required the formation of a new entity and required more
documentation than the Transaction. Accordingly, the Special Committee and the
Board of Directors concluded that the Transaction would be more simple and
cost-effective than a cash-out merger.
Maintaining
the Status Quo.
The Special Committee and the Board of Directors also considered
maintaining the status quo. In that case, the Company would continue to incur
the significant expenses of being a SEC reporting company without enjoying the
benefits traditionally associated with SEC reporting company status, including,
but not limited to, raising capital in the public markets, stock liquidity,
business credibility and the ability to use its common stock as currency for
acquisitions.
34
However,
Special Committee and the Board of Directors believed that becoming a private
company would be in the best interests of the Company and its stockholders and
rejected this alternative.
After
carefully reviewing all of these alternatives, for the reasons discussed above,
the Special Committee recommended, and the Board of Directors approved, the
Transaction as the most expeditious and economical way of changing our status
from that of a reporting company to that of a non-reporting company.
Effects of the Transaction
Effect
of the Transaction on the Company.
The Transaction is
designed to reduce the number of our stockholders of record below 300, which
will allow us to terminate our reporting obligations with the SEC. Based on
information available to us as of the Record Date, we expect that as a result
of the Transaction the number of our stockholders of record would be reduced
from approximately 454 to approximately 155. In addition, we estimate that
there are approximately 244 holders in street name who own fewer than 250
shares of our common stock whose shares would be cashed out in the Transaction.
We also believe the Transaction will have the following additional effects:
Termination of Exchange Act Registration and Elimination of SEC Reporting
Obligations.
Our common stock is currently
registered under the Exchange Act. The registration may be terminated upon
application by us to the SEC if there are fewer than 300 holders of record of
our common stock. We intend to file a Form 25 with the SEC to delist our common
stock from the American Stock Exchange and to deregister our common stock under
Section 12(b) of the Exchange Act. We expect that the delisting of our common
stock will be effective 10 days after we file the Form 25 with the SEC and
deregistration of our common stock under Section 12(b) of the Exchange Act will
take effect 90 days after the filing of the Form 25. Our duty to file periodic
and current reports under Section 13(a) of the Exchange Act and the rules and
regulations thereunder as a result of our common stocks registration under
Section 12(b) of the Exchange Act will be suspended 10 days after we file the
Form 25 with the SEC. We will also be required to terminate our registration
under other applicable provisions of the Exchange Act. Accordingly, we will
also file with the SEC a Form 15 certifying that we have less than 300
stockholders. Our obligation to file periodic and current reports as a result
of our common stocks registration under those other provisions of the Exchange
Act will be suspended immediately upon the filing the Form 15 with the SEC
(which we anticipate we will file 10 days following the filing of the Form 25).
After the 90-day waiting period following the filing of the Form 15: (1) our
obligation to comply with the requirements of the proxy rules and to file proxy
statements under Section 14 of the Exchange Act will also be terminated;
(2) our executive officers, directors and 5% stockholders will no longer be
required to file reports relating to their transactions in our common stock
with the SEC and our executive officers, directors and 10% stockholders will no
longer be subject to the recovery of profits provision of the Exchange Act; and
(3) persons acquiring 5% of our common stock will no longer be required to
report their beneficial ownership under the Exchange Act. However, following
the filing of the Form 15 with the SEC, if on the first day of any fiscal year
we have more than 300 stockholders of record we will once again become subject
to the reporting requirements of the Exchange Act. The Company will continue to
be subject to the general anti-fraud provisions of applicable federal and state
securities laws.
Stockholder Protections.
As part of the corporate
governance and other stockholder protections adopted by the Special Committee
and the Board of Directors, we are required to be quoted by at least two market
makers on the OTCQX
SM
tier of the pink sheets. We will continue to
prepare and publicly disseminate quarterly and annual financial reports, issue
quarterly and annual earnings press releases, prepare and publicly disseminate
annual audited financial statements which are accompanied by a certification
from each of our chief executive officer and chief financial officer and comply
with the
35
disclosure and
other requirements of the OTCQX
SM
tier of the pink sheets. See
Special Factors--Special Committee and Board of Director Protections for
Continuing Stockholders.
Reduced
Costs and Expenses
. Our direct, out-of-pocket costs
resulting from our reporting and other obligations under the Exchange Act, the
Sarbanes-Oxley Act, and the American Stock Exchange rules was approximately
$611,000 in fiscal 2007 and we expect these costs to be approximately $893,000
in fiscal 2008 and between approximately $873,000 and $983,000 in fiscal 2009. We
expect to save approximately $500,000 on an annual basis by becoming a
non-reporting company. We also believe our management team, which currently
spends a significant amount of time on activities related to compliance with
the Exchange Act and Sarbanes-Oxley Act will have more time to devote to
business development and revenue enhancing activities. We realize that, as a
condition to completion of the Transaction, we are required to be quoted by at
least two market makers on the OTCQX
SM
tier of the pink sheets, to
prepare and publicly disseminate quarterly and annual financial reports,
prepare and publicly disseminate annual audited financial statements which are
accompanied by a certification from each of our chief executive officer and
chief financial officer and comply with the disclosure and other requirements
of the OTCQX
SM
tier of the pink sheets. However, we anticipate that
these reporting requirements will require less of our managements and
employees time than it currently does as a SEC reporting company, particularly
since we will no longer be subject to the Sarbanes-Oxley Act.
Financial Effect of the Transaction.
Based on
information we have received from our transfer agent, Continental Stock
Transfer & Trust Company, and from Broadridge Financial Solutions, Inc., we
estimate that the cost of payment to Cashed Out Stockholders, professional fees
and other expenses will total approximately $1,916,000. This total amount could
be larger or smaller depending on, among other things, the number of fractional
shares that will be outstanding after the Transaction as a result of purchases,
sales and other transfers of our shares of common stock by our stockholders.
The consideration to be paid to the Cashed Out Stockholders and the costs of the
Transaction will be paid from cash on hand and from funds under our existing
revolving loan agreement with TD Banknorth, N.A. See Special Factors--Source
of Funds and Expenses. These costs will be offset over time by the costs
savings of approximately $500,000 per year we estimate we expect to save as a
result of a Transaction. See Special Factors--Purpose of and Reasons for the
Transaction.
Conduct of our Business after the Transaction.
We
expect our business and operations to continue substantially as they are
currently conducted, and except as described in this proxy statement, the
Transaction is not expected to have any material effect upon the conduct of our
business. See Conduct of the Companys Business After the Transaction.
Aggregate Stockholders Equity.
Our aggregate
stockholders equity will decrease from approximately $19,445,000 as of
September 30, 2007 to approximately $17,865,000 on a pro forma basis (after
giving effect to payment of Transaction Costs in the amount of $1,756,000,
consisting of approximately $1,316,000 for the cash out of the shares of Cashed
Out Stockholders, and approximately $440,000 representing the amount of other
Transaction Costs that have not been included in our historical financial statements).
Book Value Per Share.
Our book value per share of
our common stock will decrease from $7.76 as of September 30, 2007 to
approximately $7.52 per share of common stock on a pro forma basis (after
giving effect to payment of Transaction Costs in the amount of $1,756,000).
Net Earnings Per Share
. As of June 30, 2007 net
earnings per fully diluted share for our fiscal year then ended were $0.28 and
at September 30, 2007 net earnings per fully diluted share for our fiscal
quarter then ended were $0.12. On a pro forma basis (after giving effect to the
payment of the
36
estimated
$145,000 and $34,000 for additional interests costs for the three month period
ended June 30, 2007 and September 30, 2007, respectively, in the Transaction),
net earnings per fully diluted share for those periods would have been $0.26
and $0.12, respectively.
Effect
on Holders of Fewer than 250 Shares of Common Stock.
Following the Transaction, holders of fewer than 250 shares of our common stock
would receive a cash payment of $10.21 per pre-split share, without interest,
and would cease to be stockholders of the Company. Cashed Out Stockholders will
have no further financial interest in us with respect to their cashed out
shares and thus will not have the opportunity to participate in the potential
appreciation in the value of such shares or our future growth.
We
intend to treat stockholders holding our common stock in street name in the
same manner as record holders. Prior to the effective date of the Transaction,
we will conduct an inquiry of all brokers, banks and other nominees that hold
shares of our common stock in street name, ask them to provide us with
information on how many fractional shares will be cashed out, and request that
they effect the Transaction for their beneficial holders. However, these banks,
brokers and other nominees may have different procedures then registered
stockholders for processing the Transaction. As a result, a stockholder holding
a total of 250 or more shares of common stock may nevertheless have those
shares cashed out if the stockholder holds a combination of street name shares
and shares of record, or holds shares in several brokerage firms. If you are in
this situation and desire to remain a stockholder of the Company after the
Transaction, you may consolidate your holdings into one brokerage account or
record holder position prior to the effective date. Conversely, if you hold
less than 250 shares in street name and want to ensure that your shares are
cashed out, you may want to change the manner in which your shares are held
from street name into your own name so that you will be a record owner of the
shares.
Effect
on Unaffiliated Stockholders Who Own 250 or More Shares.
For
those unaffiliated stockholders who own 250 or more shares of our common stock,
the Transaction may have the following effects:
Elimination of SEC Reporting Obligations and Compliance with the Sarbanes-Oxley
Act.
Our common stock is currently registered under the Exchange Act. The
registration may be terminated upon application by us to the SEC if there are
fewer than 300 holders of record of our common stock. We intend to file a Form
25 with the SEC to delist our common stock from the American Stock Exchange and
to deregister our common stock under Section 12(b) of the Exchange Act. We
expect that the delisting of our common stock will be effective 10 days after
we file the Form 25 with the SEC and deregistration of our common stock under
Section 12(b) of the Exchange Act will take effect 90 days after the filing of
the Form 25. Our duty to file periodic and current reports under Section 13(a)
of the Exchange Act and the rules and regulations thereunder as a result of our
common stocks registration under Section 12(b) of the Exchange Act will be
suspended 10 days after we file the Form 25 with the SEC. We will also be
required to terminate our registration under other applicable provisions of the
Exchange Act. Accordingly, we will also file with the SEC a Form 15 certifying
that we have less than 300 stockholders. Our obligation to file periodic and
current reports as a result of our common stocks registration under those
other provisions of the Exchange Act will be suspended immediately upon the
filing the Form 15 with the SEC (which we anticipate we will file 10 days
following the filing of the Form 25). After the 90-day waiting period following
the filing of the Form 15: (1) our obligation to comply with the requirements
of the proxy rules and to file proxy statements under Section 14 of the
Exchange Act will also be terminated; (2) our executive officers, directors and
5% stockholders will no longer be required to file reports relating to their
transactions in our common stock with the SEC and our executive officers,
directors and 10% stockholders will no longer be subject to the recovery of
profits provision of the Exchange Act; and (3) persons acquiring 5% of our
common stock will no longer be required to report their beneficial ownership
under the Exchange Act. However, following the filing of
37
the Form 15
with the SEC, if on the first day of any fiscal year we have more than 300
stockholders of record we will once again become subject to the reporting
requirements of the Exchange Act. The Company will continue to be subject to
the general anti-fraud provisions of applicable federal and state securities
laws.
Stockholder Protections
.
As part of the corporate
governance and other stockholder protections adopted by the Special Committee and
the Board of Directors, we are required to be quoted by at least two market
makers on the OTCQX
SM
tier of the pink sheets. We will continue to
prepare and publicly disseminate quarterly and annual financial reports, issue
quarterly and annual earnings press releases, prepare and publicly disseminate
annual audited financial statements (which are accompanied by a certification
from each of our chief executive officer and chief financial officer) and
quarterly unaudited financial statements and comply with the disclosure and
other requirements of the OTCQX
SM
tier of the pink sheets. See
Special Factors--Special Committee and Board of Director Protections for
Continuing Stockholders.
Effect on Market for Shares and Liquidity.
Our
common stock is currently listed on the American Stock Exchange. After the
termination of our reporting obligations under the Exchange Act, our common
stock would no longer be listed on the American Stock Exchange, which may have
an adverse effect on the liquidity of our common stock. Accordingly, any
trading in our common stock will occur on the OTCQX
SM
tier of the
pink sheets or in privately negotiated sales which may adversely affect the
liquidity of our common stock. The average daily trading volume of our common
stock from January 2, 2006 to December 4, 2007 (the trading day prior to the
announcement of the Transaction by the Company) was approximately 4,680 shares
per day. During that period, there were 139 trading days on which our common
stock did not trade at all.
As part of the corporate governance and other stockholder protections adopted
by the Special Committee and the Board, we are required to be quoted by at
least two market makers on the OTCQX
SM
tier of the pink sheets, and
we will continue to prepare and publicly disseminate quarterly and annual
financial reports, issue quarterly and annual earnings press releases, prepare
and publicly disseminate annual audited financial statements (which are
accompanied by a certification from each of our chief executive officer and
chief financial officer) and quarterly unaudited financial statements and
comply with certain other disclosure and other requirements. These measures are
intended to mitigate any adverse effects of the Transaction on the liquidity or
value of the shares of common stock and to foster a continuing trading market
in shares of common stock. See Special Factors--Special Committee and Board of
Director Protections for Continuing Stockholders.
Outstanding Stock Options.
The Transaction will
have no effect on outstanding options to purchase shares of our common stock.
Reduction in Publicly Available Information.
If we
complete the Transaction as described in this proxy statement, our common stock
will no longer be registered under the Exchange Act and we will no longer be a
reporting company under the Exchange Act. We will, therefore, cease to file
annual, quarterly, current, and other reports and documents with the SEC, and
stockholders will cease to receive annual reports and proxy statements. Persons
that remain stockholders after the Transaction is effected will, therefore,
have access to less information about the Company and our business, operations,
and financial performance. We will, however, continue to prepare and publicly
disseminate certain business and financial information under the rules of the
pink sheets and as required by the Special Committee and the Board of
Directors. While these disclosure requirements may be less comprehensive than
the disclosure requirements under the Exchange Act applicable to SEC reporting
companies they are
38
intended to
ameliorate the impact of the Transaction on our Continuing Stockholders. See
Special Factors--Special Committee and Board of Director Protections for Continuing
Stockholders.
Possible Decline in the Value of Our Common Stock.
Because
of the possible limited liquidity for our common stock, the termination of our
obligation to publicly disclose financial and other information following the
Transaction, and the deregistration of our common stock under the Exchange Act,
Continuing Stockholders may experience a significant decrease in the value of
their common stock. The adoption by the Board and the Special Committee of the
corporate governance and other special stockholder protections, including
continuing disclosure requirements and that we be listed on the OTCQX
SM
tier of the pink sheets, is intended to mitigate any reduction in the trading
price of our common stock. See Special Factors--Special Committee and Board of
Director Protections for Continuing Stockholders.
Aggregate Stockholders Equity.
Our aggregate
stockholders equity will decrease from approximately $19,445,000 as of
September 30, 2007 to approximately $17,865,000 on a pro forma basis (after
giving effect to payment of Transaction Costs in the amount of $1,756,000).
Book Value Per Share.
Our book value per share of
our common stock will decrease from $7.76 as of September 30, 2007 to
approximately $7.52 per share of common stock on a pro forma basis (after
giving effect to payment of Transaction Costs in the amount of $1,756,000).
Net Earnings Per Share
. As of June 30, 2007 net
earnings per fully diluted share for our fiscal year then ended were $0.28 and
at September 30, 2007 net earnings per fully diluted share for our fiscal
quarter then ended were $0.12. On a pro forma basis (after giving effect to the
payment of the estimated $145,000 and $34,000 for additional interests costs
for the three month period ended June 30, 2007 and September 30, 2007,
respectively, in the Transaction), net earnings per fully diluted share for
those periods would have been $0.26 and $0.12, respectively.
Effect
on Affiliated Stockholders.
On the Record Date,
1,257,643 shares, or approximately 50.9%, of the issued and outstanding shares
of our common stock, were held by certain parties to the Stockholders
Agreement. Abe Ginsburg, our Chairman of our Executive Committee, Allan
Ginsburg, our Chairman, Robert Chestnov, our President and Howard Ginsburg our
Vice Chairman, certain other family members, trusts and custodianships for the
benefit of such individuals and family members, unrelated individuals, and the
Company are parties to the Stockholders Agreement. The Stockholders Agreement,
among other things, entitles Abe Ginsburg, Allan Ginsburg, Robert Chestnov and
Howard Ginsburg, in their capacity as a stockholders committee, acting by the
vote of at least two-thirds, or by the unanimous written consent, of the
members of the stockholders committee, for a period of fifteen years from the
date of the Stockholders Agreement, to direct the voting of the shares of
common stock with respect to which the signatory stockholders have or share, or
may hereafter have or share, voting power with respect to all matters submitted
to our stockholders at any annual or special meeting of stockholders or
pursuant to a written consent in lieu thereof. Each of the members of the
stockholders committee is considered to be the beneficial owner of the shares
of our common stock subject to the Stockholders Agreement. The stockholders
committee has indicated that it intends to direct the vote of all of the shares
that are subject to the Stockholders Agreement
FOR
the Transaction. Accordingly,
if all those shares are voted in favor of the Transaction, the Transaction will
be approved.
Upon
the effectiveness of the Transaction, the aggregate number of shares of our
common stock owned by parties to the Stockholders Agreement will decrease by
200 shares. However, the ownership percentage of our shares of our common stock
subject to the Stockholders Agreement will increase from approximately 50.9% to
approximately 53.7% as a result of the reduction of the number of shares of our
39
common stock
outstanding by approximately 128,889 shares. The increase in the ownership
percentage of our shares of common stock subject to the Stockholders Agreement
and the reduction in the number of shares outstanding following the completion
of the Transaction is based on record holder information we received from our
transfer agent, Continental Stock Transfer & Trust Company, and a share
range analysis we received from Broadridge Financial Solutions, Inc.,
reflecting the distribution of the accounts of our stockholders who hold shares
in street name according to predefined ranges based on share amount. However,
the ownership percentage and the reduction in the number of shares outstanding
following the Transaction may increase or decrease depending the purchases,
sales and other transfers of our shares of common stock by our stockholders
prior to the effective time of the Transaction. The ownership percentage of our
shares of common stock subject to the Stockholders Agreement and the ownership percentage
of the Continuing Stockholders will proportionally increase or decrease as a
result of such purchases, sales and other transfers of our shares of common
stock by our stockholders prior to the effective time of the Transaction.
In
addition, our other directors and executive officers may have interests in the
Transaction that are different from your interests as a stockholder, and have
relationships that may present conflicts of interest, including the following:
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Richard
Chestnov, a director of the Company who is also a party to the Stockholders
Agreement, holds 33,150 shares of our common stock directly, and 31,123
shares of our common stock indirectly in his capacity as a trustee of trusts
for family members or as an officer and director of charitable entities. At
the effective time of the Transaction, 200 shares held indirectly by Mr.
Chestnov will be cashed out and he will retain an aggregate of 64,073 shares
after the Transaction.
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Martin
Brody, a director of the Company, owns 387 shares of our common stock and
will retain all of these shares after the Transaction. Mr. Brody has advised
us he intends to vote in favor of the Transaction.
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Anthony
Christon, our Vice President and Chief Financial Officer, owns 7,500 shares of
our common stock and will retain all of those shares after the Transaction.
Mr. Christon has advised us he intends to vote in favor of the Transaction.
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Each member
of the Board of Directors other than Albert Safer, Richard Chestnov and
Robert Chestnov holds options to purchase shares of our common stock. The
Transaction will not affect these stock options and they will remain
outstanding after the Transaction.
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After the
Transaction, the beneficial ownership of the executive officers and directors
who are not parties to the Stockholders Agreement will increase from
approximately 1.7% to approximately 1.8% as a result of the reduction of the
number of shares of common stock outstanding.
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See
Special Factors--Potential Conflicts of Interests of Officers,
Directors, and Certain Affiliated Persons and Information About the CompanyStockholders Agreement.
40
Examples.
The effect of the Transaction on both Cashed Out
Stockholders and Continuing Stockholders may be illustrated, in part, by the
following examples:
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Hypothetical Scenario
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Result
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Mr. Smith is
a registered stockholder who holds 50 shares of our common stock of record in
his name at the effective time of the Transaction. Mr. Smith holds no
other shares.
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Mr. Smith
will receive cash in the amount of $510.50, without interest, for the 50
shares of common stock held prior to the reverse stock split.
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Ms. Jones
holds 100 shares of our common stock in a brokerage account at the effective
time of the Transaction. Ms. Jones holds no other shares.
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We intend to
treat stockholders holding common stock in street name in the same manner as
stockholders whose shares are registered in their own names, and will ask
banks, brokers and nominees holding these shares to effect the Transaction
for their beneficial holders. Assuming that they do so, Ms. Jones will
receive cash in the amount of $1,021, without interest, for the 100 shares of
common stock held prior to the reverse stock split. If the bank, broker or
nominee holding Ms. Jones shares have different procedures, or do not
provide us with sufficient information on Ms. Jones holdings, then Ms. Jones
may or may not receive cash for her shares depending on the number of shares
held by the bank, broker or other nominee, which is the actual record holder
of her shares.
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Mr. Williams
holds 225 shares of our common stock of record in his name and 75 shares in a
brokerage account at the effective time of the Transaction. Mr. Williams
holds no other shares.
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Each of Mr.
Williams holdings will be treated separately. Accordingly, assuming the
brokerage firm with whom Mr. Williams holds his shares in street name effects
the Transaction for its beneficial holders, Mr. Williams will receive cash in
the amount of $3,063, without interest, for the 300 shares of common stock
held prior to the reverse stock split.
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Ms.
Washington holds 400 shares of our common stock in her name and 400 shares in
a brokerage account at the effective time of the Transaction
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Ms. Washington
will continue to hold 400 shares of common stock in her own name and 400
shares in a brokerage account after the Transaction.
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Mr. Adams
holds 200 shares of common stock in one brokerage account and 200 shares in
another brokerage account at the effective time of the Transaction
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Each of Mr.
Adams holdings will be treated separately. Assuming each of the brokerage
firms with whom Mr. Adams holds his shares in street name effect the
Transaction for their beneficial holders, Mr. Adams will receive cash in the
amount of $4,084, without interest, for the 400 shares of common stock held
prior to the reverse stock split.
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American Stock Exchange Listing; Pink Sheets
Listing
Our
common stock is currently listed on the American Stock Exchange. To obtain the
cost savings we anticipate by no longer preparing and filing annual, periodic
and current reports with the SEC, our common stock will need to be delisted
from the American Stock Exchange.
41
However,
in order to ensure that our Continuing Stockholders will the ability to trade
their shares after the Transaction, the Special Committees recommendation of
the Transaction to the full Board of Directors, and the Board of Directors
approval of the Transaction, is also contingent upon our common stock being
quoted by at least two market makers on the OTCQX
SM
tier of the pink
sheets. The pink sheets is a tiered listing service that offers trading,
quotation and disclosure venue for over-the-counter securities in the US
markets and the OTCQX
SM
tier is the highest tier offered by the pink
sheets. In order to maintain a quotation on the OTCQX
SM
tier, we
will be required to meet certain reporting and other requirements of the OTCQX
SM,
tier including, without limitation, the following:
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preparing quarterly and annual financial reports;
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performing
annual audits;
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requiring
our chief executive officer and chief financial officer to each certify that
(i) to his knowledge, the information about us furnished in accordance with
the rules of the pink sheets does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by that
information; (ii) to his knowledge, the financial statements, and other
financial information furnished in accordance with the rules of the pink
sheets, fairly present in all material respects our financial condition,
results of operations and cash flows as of, and for, the periods presented;
and (iii) based upon his reasonable belief, for at least one year from the
date of the certification, we have sufficient working capital to continue
operations and have the ability to continue to meet our obligations as they
become due; and
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preparing interim material event disclosure
in accordance with the reporting requirements of the OTCQX
SM
tier.
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Fairness of the Transaction
The
Special Committee and the Board of Directors fully considered and reviewed the
terms, purpose, alternatives and effects of the proposed Transaction, and each
has unanimously determined that the Transaction is procedurally and
substantively fair to all stockholders of the Company, including the unaffiliated
stockholders who will receive cash consideration in the Transaction and
unaffiliated stockholders who will continue as owners of the Company. The Board
of Directors has unanimously approved the Transaction and recommends that
stockholders vote FOR approval of the Transaction.
Substantive
Fairness
.
The Special Committee and the Board of
Directors considered, among other things, the factors listed below, as well as
the alternatives to the Transaction as noted above in Special
FactorsAlternatives to the Transaction in reaching their conclusions as to
the substantive fairness of the Transaction to our stockholders, including both
unaffiliated Cashed Out Stockholders and unaffiliated Continuing Stockholders.
The Special Committee and the Board of Directors did not assign specific weight
to any factors they considered, nor did they apply them in a formulaic fashion,
although they particularly noted the opportunity in the Transaction for
stockholders to sell their holdings at a premium, as well as the significant
cost and time savings for the Company resulting from the Transaction which will
benefit Continuing Stockholders. The discussion below is not meant to be
exhaustive, but we believe includes all material factors considered by the
Special Committee and the Board of Directors in their determinations.
Future
Cost and Time Savings
. The direct, out-of-pocket costs
resulting from our reporting and other obligations under the Exchange Act, the
Sarbanes-Oxley Act, and the American Stock Exchange
42
rules was
approximately $611,000 in fiscal 2007 and we expect these costs to be
approximately $893,000 in fiscal 2008 and between approximately $873,000 and
$983,000 in fiscal 2009. By eliminating these direct and indirect costs, the
Company ultimately expects to realize recurring annual cost savings of
approximately $500,000. In addition, the Special Committee and the Board of
Directors noted that the Company would eliminate the time and effort currently
spent by the Companys management to prepare and review the reports it files
with the SEC under the Exchange Act and the Sarbanes-Oxley Act, and after the
Transaction, management and our other employees will be able to reallocate this
time and effort to other areas of our businesses and operations.
Opportunity
to Liquidate Shares of Common Stock
. The Special Committee and Board of
Directors considered the opportunity the Transaction presents for stockholders
owning fewer than 250 shares to liquidate their holdings at a premium over the
closing price per share of our common stock at the time of the approval of the
Transaction, without incurring brokerage costs.
Limited
Liquidity for the Companys Common Stock
. The Special
Committee and the Board of Directors noted that the trading volume in our
common stock has been, and continues to be, relatively limited. The average
daily trading volume of the stock from January 2, 2006 to December 4, 2007 (the
trading day just prior to the announcement of the approval of the Transaction
by the Special Committee and the Board of Directors) was approximately 4,680
shares per day. During that period, however, there were 139 trading days on
which our common stock did not trade at all. Accordingly, the Transaction
provides a large number of our record holders and beneficial holders with the
opportunity to obtain cash for their shares in a relatively limited trading
market and at a premium over the closing price of our common stock at the time
of our announcement of the Transaction. With respect to the Continuing
Stockholders, the Special Committee and Board noted that any effect of this
Transaction on their liquidity may be mitigated by the fact that the shares
will be quoted on the OTCQX
SM
tier of the pink sheets.
Historical
Prices.
The Special Committee and the Board of
Directors considered both the historical market prices and recent trading
activity and current market prices of our common stock. Between January 2, 2006
and December 4, 2007, the day before the public announcement of the proposed
transaction, our share price has ranged from $2.10 to $14.25. The $10.21 cash
out price, therefore, represents an approximately 25% premium over the midpoint
of the range of the share price for that period and an approximately 70%
premium over the $6.00 closing sales price of common stock on December 4, 2007.
Opinion
of the Financial Advisor
. The Special Committee and
the Board of Directors considered a valuation report dated November 20, 2007
issued by Houlihan, and the opinion of Houlihan rendered to the Special
Committee on November 20, 2007 and confirmed in writing by Houlihan on November
28, 2007, to the effect that, as of the date of such opinion and based upon and
subject to certain matters stated therein, the $10.21 per share in cash to be
paid is fair, from a financial point of view to unaffiliated Cashed Out
Stockholders and unaffiliated Continuing Stockholders. For more information
about the opinion, you should read the discussion below under Special
FactorsFairness Opinion of Financial Advisor and a copy of the opinion of
Houlihan attached as Annex B to this proxy statement. Each of the valuation
report and the opinion of Houlihan is available for inspection and copying at
our principal executive offices, 197 West Spring Valley Avenue, Maywood, New
Jersey 07607.
Net
Book Value and Liquidation Value.
While the Houlihan
reviewed the net book value of our shares of common stock, none of Houlihan,
the Special Committee or the Board viewed it as being relevant for the fair
value to be paid to Cashed Out Stockholders. Net book value is based on the
historical cost of our assets. The value of items, such as our positive
business reputation and goodwill, particularly since we will continue as a
going concern, are not included in a determination of net book value.
Nevertheless, our stockholders equity (net book value) per share on September
30, 2007 was
43
$7.76, and the
cash out price of $10.21 represents a $2.45, or 32%, premium to net book value.
In addition, while Houlihan considered a liquidation analysis, it determined
that it also had no relevance in light of the fact that we will remain as a
continuing business and the Transaction will not result in a change of control
of the Company.
No
Firm Offers.
The Special Committee and the Board of
Directors is not aware of any firm offers during the past two years by any
unaffiliated person for the merger or consolidation of the Company, the sale or
other transfer or all or any substantial part of the assets of the Company, or
a purchase of our shares of common stock or other securities that would enable
the holder to exercise control of the Company.
Disadvantages
of the Transaction.
The Special Committee and the
Board of Directors also considered the disadvantages of the Transaction,
including that:
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No Participation in Future Growth by Cashed
Out Stockholders.
Cashed Out Stockholders will no
longer have any ownership interest in the Company and will no longer
participate in our future earnings and growth.
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Possible Reduction in Information about the
Company.
After completion of the Transaction, we
will cease to file annual, quarterly, current, and other reports and
documents with the SEC, and stockholders will cease to receive annual reports
and proxy statements, Continuing Stockholders will have access to less
information about the Company and our business, operations, and financial
performance. In order to mitigate this disadvantage to our Continuing
Stockholders, we will prepare quarterly
and annual financial reports, issue quarterly and annual earnings press
releases and make interim material event disclosures in accordance
with the reporting requirements of the OTCQX
SM
tier of the pink
sheets, and have instituted additional stockholder protections. See Special
Factors--Special Committee and Board of Director Protections for Continuing
Stockholders.
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Limited Liquidity.
After
the Transaction, we will no longer be listed on the American Stock Exchange
and our common stock will, instead, be quoted on the OTCQX
SM
tier
of the pink sheets. In addition, because of the possible limited liquidity
for our common stock, the termination of our obligation to publicly disclose
financial and other information following the Transaction, and the
deregistration of our common stock under the Exchange Act, Continuing
Stockholders may potentially experience a significant decrease in the value
of their common stock. In order to mitigate this disadvantage, a condition to
the Transaction is that we be quoted by at least two market makers on the
pink sheets, that we continue to prepare and publicly disseminate quarterly
and annual financial reports, issue quarterly and annual earnings press
releases, prepare and publicly disseminate annual audited financial statements
as well as interim material
event disclosure in accordance with the reporting requirements of the OTCQX
SM
tier of the pink sheets is intended to ameliorate the impact of the
deregistration and delisting.
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Limited Oversight
.
After completion of the Transaction, we will no longer be subject to the
provisions of the Sarbanes-Oxley Act, the liability provisions of the
Exchange Act or the oversight of the American Stock Exchange.
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Reporting Obligations of Certain Insiders.
Our
executive officers, directors and 5% stockholders will no longer be required
to file reports relating to their transactions in our common stock with the
SEC. In addition, our executive officers, directors and 10% stockholders will
no longer be subject to the recovery of profits provision of the Exchange
Act, and persons acquiring 5% of our common stock will no longer be required
to report their beneficial ownership under the Exchange Act.
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44
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Increased Debt
. We
estimate that the cost of payment to Cashed Out Stockholders, professional
fees and other expenses will total approximately $1,916,000. The
consideration to be paid to the Cashed Out Stockholders and the costs of the
Transaction will be paid from funds on hand and funds under our existing
revolving loan agreement with TD Banknorth, N.A. As a result, immediately
after the Transaction, we will have more debt outstanding than we would have
had if the Transaction did not occur.
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Filing Requirements Reinstituted
.
The filing of the Form 15 will result in the suspension and not the
termination of our filing obligations under the Exchange Act. This suspension
remains in effect so long as we have fewer than 300 stockholders of record.
Thus, subsequent to the time the Form 15 becomes effective, if on the first
day of any fiscal year, the we have more than 300 shareholders, then we must
resume reporting pursuant to Section 15(d) of the Exchange Act.
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Board Composition
.
After the completion of the Transaction we will have at least two independent
directors within the meaning of Section 121A of the American Stock Exchange
Company Guide and Rule 10A-3(b) of the Exchange Act. However, we cannot be
certain how long these directors will continue to be in office after the
Transaction has been effected.
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No Appraisal Rights
.
Under Delaware law, our certificate of incorporation and our bylaws, no
appraisal or dissenters rights are available to our stockholders who dissent
from the Transaction.
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Approval of the Transaction
.
As of the Record Date, over 50% of the issued and outstanding shares of our
common stock was held subject to the Stockholders Agreement. The stockholders
committee under the Stockholders Agreement has indicated that it intends to
direct the voting of the shares of our common stock (1,257,643 shares, or
approximately 50.9% of the issued and outstanding shares of our common stock)
FOR
the Transaction. Accordingly, if all those shares are voted in favor of the
Transaction, the Transaction will be approved.
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See
Special Factors--Effects of the Transaction.
Procedural
Fairness
.
No
unaffiliated representative acting solely on behalf of our unaffiliated
stockholders for the purpose of negotiating the terms of the Transaction or
preparing a report covering the fairness of the Transaction was retained by the
Company, nor were special provisions made to grant unaffiliated stockholders
access to our corporate files or to obtain counsel or appraisal services. The
Board of Directors established the Special Committee to consider possible alternatives
to the Transaction, the related advantages and disadvantages to the Company and
its stockholders of each of those alternatives, the fairness of the price to be
paid to Cashed Out Stockholders, and to make a recommendation to the full Board
of Directors concerning the advisability of the alternatives considered. The
Board of Directors believes that the Special Committee, whose members are each
independent within the meaning of Rule 121A of the American Stock Exchange
Company Guide and Section 10A-3(b) of the Exchange Act, was sufficient to
protect the interests of unaffiliated stockholders. In addition, the Special
Committee and the Board of Directors took note of the fact that the interests
of unaffiliated stockholders inherently varied depending upon whether any
particular unaffiliated stockholder held 250 shares or more or held fewer than
250 shares. The Special Committee and the Board of Directors each believe
that the separate representatives and advisors for each of these classes would
have provided no measurable additional protection to unaffiliated stockholders.
45
The
Special Committee and the Board of Directors also noted that this proxy
statement, along with our other filings with the SEC, provide a great deal of
information for unaffiliated stockholders to make an informed decision as to
the Transaction, and that no special provision for the review of our files was
necessary. The Special Committee and the Board of Directors noted, though, that
subject to certain conditions, Delaware law already provides stockholders with
the right to review our books and records.
The
Special Committee and the Board of Directors determined not to condition the
approval of the Transaction on approval by a majority of unaffiliated
shareholders. The Special Committee and the Board of Directors noted that
affiliated and unaffiliated stockholders will be treated equally in the
Transaction. If separate approval of unaffiliated stockholders were required,
our affiliated stockholders would receive lesser voting rights than
unaffiliated stockholders solely on the basis of their affiliate status even
though they will receive no additional benefits or different treatment in the
Transaction, and that any such requirement would prevent a majority of the
outstanding shares of our common stock from participating in the consideration
of the proposed Transaction. Holders of shares of common stock under the
stockholders agreement presently own 50.9% of the issued and outstanding shares
of our common stock (please see Special Factors Potential Conflicts of
Interests of Officers, Directors, and Certain Affiliated Persons).
Furthermore, a vote of the majority of unaffiliated stockholders is not
required under Delaware law. Finally, stockholders can increase, divide, or
otherwise adjust their existing holdings at any time prior to the effective
date of the Transaction, so as to retain some or all of their shares of common
stock, or to receive cash for some or all of their shares, as they see fit.
The
Special Committee and the Board of Directors also noted that there will be no
material change in the percentage ownership of the parties to the Stockholders
Agreement. Based on information provided by our transfer agent as to our record
holders and Broadridge Financial Solutions, Inc., reflecting the distribution
of the accounts of our stockholders who hold shares in street name according
to predefined ranges based on share amount, up to approximately 128,889 shares
out of 2,468,614 issued and outstanding shares of our common stock (consisting
of an estimated 21,029 shares owned by record holders and up to an estimated
107,860 owned by holders of shares in street name) will be eliminated as a
result of the Transaction. The Special Committee also noted that as of
________________, 2008, the parties to the Stockholders Agreement held
1,257,643 shares, or approximately 50.9%, of the issued and outstanding shares
of our common stock, and after the Transaction, those parties would hold
1,257,443 shares, or approximately 53.7% of the issued and outstanding shares,
subject to change based on the actual number of shares that would be purchased
in the Transaction.
Finally,
the Special Committee and the Board of Directors also have required that we
implement or maintain for a period of three years following the Transaction
certain corporate governance and other stockholder protections intended to
provide Continuing Stockholders with financial and other information about us,
and to mitigate any impact that the Transaction may have on the liquidity of
our shares of common stock. See Special Factors Special Committee and Board
of Directors Protections for Continuing Stockholders. This three-year
requirement will be applicable as long as there are unaffiliated Continuing
Stockholders during that time; it is not intended to restrict or otherwise
prohibit any merger, consolidation, sale of all or substantially all of our
assets, or similar extraordinary transaction during that three-year period. We
have no present plans or proposals for any such transaction, however, and our
intent is to operate our business after the Transaction substantially as it is
currently conducted. See Special FactorsConduct of the Companys Business
after the Transaction.
Recommendation
of the Special Committee.
Based on the foregoing analyses, including
a consideration of the disadvantages of the Transaction, the Special Committee
believed that the Transaction is procedurally and substantively fair to all
stockholders, including the unaffiliated stockholders, regardless of whether a
stockholder receives cash or continues to be a stockholder following the
Transaction, and believes the $10.21 cash amount to be fair consideration for
those stockholders holding less than 250 shares. As a result, the Special Committee
unanimously recommended the Transaction to the full Board of Directors.
46
Recommendation
of the Board of Directors
. At a meeting held on December 5, 2007,
the Board of Directors unanimously determined that the Transaction is fair to,
and in the best interests of, the Company and its stockholders, including all
unaffiliated stockholders, unanimously approved the Transaction and recommends
that you vote
FOR
approval. In reaching its determination
and recommendation, the Board of Directors considered and specifically adopted
the recommendations of the Special Committee and the factors that the Special
Committee took into account in making its recommendations to the full Board of
Directors.
Fairness Opinion of Financial Advisor
On
June 26, 2007, the Special Committee and the Board of Directors formally
retained Houlihan to consider the fairness, from a financial point of view, of
the cash consideration be paid to Cashed Out Stockholders. At a meeting of the
Special Committee held on November 20, 2007, Houlihan delivered its oral
opinion to the Special Committee that, as of November 20, 2007, the cash
consideration to be paid to those stockholders receiving the cash consideration
was fair, from a financial point of view, to unaffiliated Cashed Out
Stockholders and to unaffiliated Continuing Stockholders. At a meeting of the
Board of Directors on November 28, 2007, Houlihan delivered its oral opinion to
the Board of Directors that, as of November 28, 2007, the cash consideration to
be paid to those stockholders receiving the cash consideration was fair, from a
financial point of view, to unaffiliated Cashed Out Stockholders and to
unaffiliated Continuing Stockholders. Pursuant to the Special Committees
request, Houlihan confirmed its oral fairness opinion with a written fairness opinion
dated November 28, 2007 in which it stated that the cash consideration to be
paid to those stockholders receiving the cash consideration in the Transaction
is fair, from a financial point of view, to unaffiliated Cashed Out
Stockholders and to unaffiliated Continuing Stockholders. This fairness opinion
is attached to this proxy statement as Annex B.
The
Special Committee retained Houlihan based upon Houlihans experience in the
valuation of businesses of the Companys size and their experience in providing
independent financial opinions to special committees. Houlihan is a nationally
recognized investment banking firm of recognized standing. As part of its
investment banking services, it is regularly engaged in the valuation of
corporate entities on a stand-alone basis and in connection with capital
raising and merger and acquisition transactions and has provided investment
banking services related to going private transactions. The Special Committee
imposed no limitations upon Houlihan with respect to the investigations made or
procedures followed in rendering its valuation or its fairness opinion.
We
have agreed to pay Houlihan a fee of $125,000, plus reimbursement of its
out-of-pocket expenses, for providing its fairness opinion and related
financial advisory services. No portion of Houlihans fee is contingent upon
the conclusions reached in the Houlihan opinion or upon consummation of any
transaction. We have agreed to indemnify and hold harmless Houlihan, and its
employees, agents, officers, directors, principals and affiliates (and their
successors and assigns) against and from all losses arising out of or in
connection with its engagement by the Special Committee.
The
complete text of Houlihans opinion is attached to this proxy statement as
Annex B, and the following summary of that opinion is qualified in its entirety
by reference to that opinion. We urge you to read the opinion carefully for a
description of the procedures followed, the factors it considered and the
assumption it made.
In
connection with its opinion, Houlihan made such reviews, analyses and inquiries
as it deemed necessary and appropriate under the circumstances. Among other
items:
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reviewed the
financial terms and conditions of the Transaction;
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47
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reviewed the
Companys publicly available financial information and other data with
respect to the Company, including the Companys Form 10-Ks for the
fiscal years ended June 30, 2002 to June 30, 2007 and quarterly reports on
Form 10-Q for the three month periods ended from September 30, 2005 to
September 30, 2007, as well as certain other public filings;
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reviewed
certain internal financial information and other data relating to the
business and financial prospects of the Company provided by our senior
management, including fiscal year 2008 budgets;
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conducted an
on-site visit and held discussion with the Companys senior management
regarding the historic, current and future outlook and financial prospects of
the Company;
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discussed
with the Companys senior management details of a potential sale of
non-operating assets consisting of a warehouse facility and adjacent parcels
of land located in West New York and reviewed certain public filings relating
to the potential sale and performed a site visit (the Assets Held for
Sale);
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reviewed the
financial terms of certain recent business combinations in the apparel and
accessories industries specifically;
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analyzed
historic trading prices and volume in the Companys common stock;
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analyzed
other recent reverse and forward split transactions and premiums paid in such
transactions as fractional share consideration;
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reviewed the
annual cost savings projected by the Companys senior management to be
achieved through delisting from the American Stock Exchange and
deregistration under the federal securities laws as well as the cost savings
projected to be achieved through the disposition of non-operating assets
consisting of a warehouse facility and adjacent parcels of land located in
West New York; and
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reviewed
other financial studies, analyses and investigations, and considered such
other information as Houlihan deemed necessary or appropriate.
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Houlihan
used several methodologies to assess the fairness of the cash consideration to
be paid to those stockholders receiving the cash consideration in connection
with the Transaction. The following is a summary of the material financial
analyses used by Houlihan in connection with its appraisal. Houlihan utilized
each of the following analyses based upon its view that each is appropriate and
reflective of generally accepted valuation methodologies. Each analysis
provides an indication of the Companys per share value in order to assess the
fairness of the cash consideration to be paid to those stockholders receiving
the cash consideration in connection with the Transaction.
Historical
Stock Trading Analysis
. Houlihan reviewed the Companys common stock
based on an historical analysis of closing prices and trading volumes for the
five-year period prior to November 16, 2007. The shares of our common stock
presently are and during that period of time have been traded on the American
Stock Exchange. Houlihan noted that the Companys common stock has been
volatile over that period of time based on relatively thin trading volume.
The
following chart summarizes the average closing prices and average daily volume
of trading of the Companys common stock over the last year:
48
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Historical
Price and Volume Analysis (1)
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Current
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1 Week
Average
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1 Month
Average
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3 Month
Average
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6 Month
Average
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1 Year
Average
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Average
Price
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$
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6.25
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$
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5.39
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$
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5.89
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$
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7.54
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$
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8.95
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$
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10.08
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Average
Daily Volume
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2,200
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12,200
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8,771
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10,006
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6,517
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8,783
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(1)
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The source of all share data is CapitalIQ based on historical trading
in Jaclyns common stock as of November 16, 2007.
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The cash out
price of $10.21 to be paid to Cashed Out Stockholders is above the average
closing prices of the Companys common stock for the current, one-week,
one-month, three-month, six-month and one-year periods reviewed as part of the
historical stock trading analysis.
Guideline
Public Company Method
.
The guideline public company method
applies the trading multiples of publicly traded companies to the Company to
derive an indication of value. Houlihan sought guideline companies in
industries similar to our operating structures and target customers, and found
ten companies that were comparable to the Company based on size, growth,
leverage, profitability, turnover ratio and liquidity. Those companies are:
Tarrant Apparel Group, Ted Baker plc, Tandy Brands Accessories Inc., Maidenform
Brands Inc., Oxford Industries Inc., St. John Knits International Inc.,
Kellwood Co., G-III Apparel Group, Ltd., Delta Apparel Inc., and Cygne Designs
Inc.
Houlihan
determined that the valuations derived from EBITDA (earnings before interest,
taxes, depreciation and amortization), EBIT (earnings before interest and
taxes) and book value multiples of the guideline companies would provide the
most meaningful indications of value. Houlihan first multiplied the Companys
last twelvemonth EBITDA, EBIT and book value reported as of September 30, 2007
by the selected median multiples to calculate the indications of common equity
values. Then the cash that would be received upon exercise of outstanding
options was added to the equity value and the resulting value was divided by
the number of shares of the Companys common stock outstanding on a fully
diluted basis. Finally, Houlihan added the calculated range of values for the
sale of the assets of the Company that are classified as Assets Held for
Sale, consisting of the Companys former executive offices, warehouse facility
and adjacent parcels of land located in West New York, New Jersey, to determine
an indicated common equity value per share of $8.54 to $11.24. Houlihan
considered the price/earnings multiple approach, but did not use it in its
analysis given the fact that the Companys price/earnings multiple was much
lower than the guideline companies due to the Companys mature stage, low
growth, and historically low leverage.
Comparable
Transactions Method
.
The comparable transactions method is a
market approach which analyzes transactions involving target companies
operating in industries that are similar to the Companys industry. Although no
two companies are exactly alike, and no two transactions are structured exactly
the same, consideration is given to the similarity in capital structure,
operations and profitability, as well as other operating characteristics of the
target companies.
Houlihan
found twelve transactions within the apparel and accessories industries that
had comparability. Houlihan determined that the valuations from EBITDA and EBIT
multiples of the guideline companies would provide the most meaningful
indications of value and applied these multiples to the Companys financial
metrics over the last twelve month period ended September 30, 2007 to calculate
the enterprise value based upon the comparable transactions method.
49
The
comparable transactions considered by Houlihan are set forth below:
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Announced
Date
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Target/Issuer
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Total
Transac-
tion
Amount
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Industry
Classification/
[Target/Issuer]
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Implied
Enterprise
Value/EBITDA
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Implied
Enterprise
Value/EBIDTA
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10/03/2003
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Royal
Robbins Inc.
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$
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16.5
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Womens,
Misses, and Juniors Apparel
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10.3x
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11.9x
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10/02/2003
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GFSI
Holdings Inc.
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$
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268.6
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Womens,
Misses, and Juniors Apparel
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9.5x
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11.2x
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07/07/2003
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Nautica
Enterprises, Inc.
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$
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650.0
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Boys
Apparel, Girls Apparel, Womens, Misses, and Juniors Apparel
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6.8x
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10.5x
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07/10/2001
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Full Line
Distributors, Inc.
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$
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26.0
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Girls
Apparel, Womens, Misses, and Juniors Apparel
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8.2x
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10.0x
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06/04/2004
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The First
Years Inc.
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$
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170.1
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Girls
Apparel
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8.0x
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9.5x
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06/13/2005
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CFS
International Inc.
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$
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14.1
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Womens,
Misses, and Juniors Apparel
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5.7x
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6.8x
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07/02/2002
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Garan
Incorporated
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$
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275.6
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Boys
Apparel, Girls Apparel, Womens, Misses, and Juniors Apparel
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4.6x
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5.3x
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05/15/2002
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|
Gerber
Childrenswear Inc.
|
|
$
|
137.2
|
|
Girls
Apparel, Womens, Misses, and Juniors Apparel
|
|
3.8x
|
|
|
5.2x
|
|
|
09/27/2006
|
|
Hanesbrands
Inc.
|
|
$
|
43.0
|
|
Apparel,
Accessories and Luxury Goods
|
|
4.1x
|
|
|
5.2x
|
|
|
07/07/2003
|
|
M. J. Soffe
Co.
|
|
$
|
71.8
|
|
Boys
Apparel, Womens, Misses, and Juniors Apparel
|
|
4.1x
|
|
|
5.0x
|
|
|
02/04/2003
|
|
Salant
Corporation
|
|
$
|
86.8
|
|
Boys
Apparel, Womens, Misses, and Juniors Apparel
|
|
3.4x
|
|
|
4.6x
|
|
|
05/01/2006
|
|
Oxford
Industries Inc., Womenswear Group
|
|
$
|
37.0
|
|
Womens,
Misses, and Juniors Apparel
|
|
NA
|
|
|
3.7x
|
|
|
|
|
|
|
|
|
|
Median
|
|
5.7x
|
|
|
6.0x
|
|
|
(1)
The source of all data was CapitalIQ.
Houlihan
applied a comparable transactions method in its analyses of the Companys fair
value to calculate unadjusted indications of enterprise values. Houlihan
adjusted these values from the calculated range of values for the Assets Held for
Sale to determine a range of indicated enterprise values. Interest bearing debt
(adjusted for the retirement of the Companys mortgage on its Assets Held for
Sale) was then subtracted and cash received from exercise of options was added
to the indicated enterprise values. This equity value was divided by the number
of common shares outstanding on a fully diluted basis to calculate a range of
indicated values for the Companys common equity of $9.14 to $10.21 per share.
Discounted
Cash Flow
.
For this valuation approach, Houlihan
prepared a discounted cash flow analysis of the Company, which estimates the
present value of projected future earnings. In preparing its discounted cash
flow analysis Houlihan was provided with a fiscal year 2008 budget prepared by
senior management of the Company, further budgets and other financial
information prepared by senior management relating to material business and operational events, and also held extensive
discussions with the Companys senior management. Houlihan applied a discount
rate of 13% in determining discounted cash flows, based on Houlihans estimate,
utilizing the build-up method, of our weighted average cost of capital, which
represents a blended after-tax cost to us of debt and equity capital. Houlihan
utilized a long term growth rate of 3% which reflects the mature stage of the
Company, as well as discussions with
50
management as to, among other things,
managements view of general economic conditions, conditions in the apparel and
accessories industry, financial prospects and recent changes in the Companys
operations in particular. Houlihan used the financial projections to determine
the enterprise net cash flows of the Company over the projected five year
period. Houlihan used the enterprise net cash flows to calculate a fair
enterprise value, applying the discounted cash flow method. Houlihan added the
range of values calculated for the Companys Assets Held for Sale, added cash
received from exercise of options and subtracted interest bearing date
(adjusted for the retirement of the Companys mortgage on the Assets Held for
Sale) from the unadjusted indicated enterprise value. This value was divided by
the number of shares of common stock outstanding on a fully diluted basis. From
the discounted cash flow analysis, Houlihan concluded a range of values for the
Companys common equity of $9.00 to 11.18 per share.
Assets Held
for Sale
. In performing its analyses, Houlihan took in to account
Assets Held for Sale, which had been subject to a purchase and sale agreement
with a third-party purchaser at a purchase price of $8,000,000. Houlihan
reviewed the purchase and sale agreement and also held discussions with the
Companys senior management regarding the Assets Held for Sale. Management
indicated the proposed purchaser would use the real estate for residential
purposes. The closing of the purchase was contingent on the proposed
purchasers receipt of governmental approvals required for the construction of
residential, multi-family housing consisting of 150 residential units.
Management noted that it was likely the Company would be able to realize a net
benefit from the sale of the real estate after paying taxes and retiring the
outstanding mortgage debt on the assets being sole. Houlihan treated the Assets
Held for Sale as a non-operating asset and added the value of those assets to
the unadjusted equity value indicated in Houlihans analyses.
Houlihan
used the $8,000,000 stated purchase price only as an indication of value. However,
because of the high level of uncertainty related to the zoning approval,
Houlihan applied sensitivity analysis. After accounting for taxes and the
retirement of the outstanding mortgage debt, on the high end of its analysis,
Houlihan estimated that the Company may realize a net benefit of approximately
$2,448,940. On the low end, Houlihan determined the value of the property would
be considerably less, and estimated a net benefit of $0. Houlihan tested the
reasonableness of its range by reviewing comparable transactions, and also
analyzed local real estate market conditions.
On
December 12, 2007, the Company issued a press release indicating that the
proposed purchaser of the Assets Held for Sale had terminated the purchase and
sale agreement because it was not able to obtain governmental approvals
required to proceed with the residential housing project.
Fair Value
Summary
. Houlihan weighted each of its three approached equally to
calculate the fair value range per share for common equity of $8.89 to 10.88,
with a midpoint of $9.89.
|
|
|
|
|
|
|
|
Fair Value
Summary
|
|
|
|
|
Low
|
|
High
|
|
|
|
|
|
|
|
Guideline Public Company
Method
|
|
$
|
8.54
|
|
$
|
11.24
|
|
Comparable Transaction
Method
|
|
$
|
9.14
|
|
$
|
10.21
|
|
DCF Method
|
|
$
|
9.00
|
|
$
|
11.18
|
|
|
|
|
|
|
|
|
|
Implied Common Equity Value per Share Range
|
|
$
|
8.89
|
|
$
|
10.88
|
|
Houlihan noted
the volatility and relatively thin trading volume throughout the periods
Houlihan reviewed historical closing prices and trading volumes of our common
stock. Accordingly, Houlihan did not use historical price and volume data in
determining the fair value of our common stock.
51
Premium
Analysis.
Houlihan analyzed 37 reverse split transactions over the
last five years and found the medium premium over the average price over a one
day, 20 day, 60 day, 90 day, 120 day, and one year period ranged from 17% to
22%. Applying these premiums to the Companys average common stock price over
each respective period, Houlihan presented for illustrative purposes an applied
premium range of $7.16 to $12.09 as set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
Paid On Average Price Over The Following Periods
|
|
|
|
Median
Premium From Sample
|
|
|
21.4
|
%
|
|
22.0
|
%
|
|
17.8
|
%
|
|
18.5
|
%
|
|
17.0
|
%
|
|
20.0
|
%
|
Jaclyns
Common Equity Average Price
|
|
$
|
6.25
|
|
$
|
5.87
|
|
$
|
6.71
|
|
$
|
7.54
|
|
$
|
8.30
|
|
$
|
10.08
|
|
Premium
Applied to Jaclyns Average Price
|
|
$
|
7.59
|
|
$
|
7.16
|
|
$
|
7.91
|
|
$
|
8.94
|
|
$
|
9.71
|
|
$
|
12.09
|
|
Houlihan
noted an implied common equity value per share range of $8.89 to $10.88, with a
midpoint of $9.89. Applying premiums paid in comparable transactions to the
Companys average common stock price over multiple time periods, Houlihan
noted, for illustrative purposes an applied premium range of $7.16 to $12.09.
Houlihan
suggested a range of fractional share consideration of $8.89 to $10.88, with a
midpoint of $9.89. This represents a premium range of 42.2% to 74.1% over the
closing price on November 16, 2007 of $6.25, a premium range of 17.9% to 44.3%
over the 90-day average of $7.54 and a premium range of -11.8% to 7.9% over the
1-year average of $10.08.
Certain
Qualifying Statements Regarding the Fairness Opinion.
In
preparing its valuation of our shares of common stock and its fairness opinion,
Houlihan received and reviewed business and financial information provided to
Houlihan by the Company. Houlihan did not independently verify this
information, and has relied on its accuracy in all material respects, nor did
it obtain any independent appraisal of any of our assets.
HOULIHANS
OPINION DOES NOT ADDRESS THE BUSINESS DECISION BY THE COMPANY TO ENGAGE IN THE
TRANSACTION OR ADDRESS THE RELATIVE MERITS OF ANY ALTERNATIVES DISCUSSED BY THE
SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS. HOULIHANS OPINION DOES NOT
CONSTITUTE A RECOMMENDATION AS TO HOW ANY STOCKHOLDER SHOULD VOTE WITH RESPECT
TO THE TRANSACTION. HOULIHAN DID NOT MAKE, AND WAS NOT REQUESTED BY THE COMPANY
OR ANY OTHER PERSON TO MAKE, ANY RECOMMENDATIONS AS TO THE RELATIVE MERITS OF
ANY ALTERNATIVE DISCUSSED BY THE SPECIAL COMMITTEE.
The
summary set forth above describes what we believe are the material points of
the detailed analyses performed by Houlihan in arriving at its fairness
opinion. In arriving at its opinion, Houlihan employed several analytical
methodologies, while not regarding any one as critical to its overall
conclusion. Each of its methodologies had inherent strengths and weaknesses,
and the nature of available information may affect the value of particular
techniques. Accordingly, the conclusions Houlihan reached was based on all the
analyses and factors presented taken as a whole and on the application of its
own experience and judgment. Houlihan has given no opinion as to the value or
merit, standing alone, of any one of the analyses. Its opinion, and the analyses
it prepared, were based on market, economic and other conditions that existed
at the time and could be evaluated as of the date of its opinion. You or your
representative (who is designated in writing) may inspect and copy of
Houlihans valuation report at our principal executive offices, 197 West Spring
Valley Avenue, Maywood, New Jersey 07607, during our normal business hours.
52
Conduct of the Companys Business After the
Transaction.
Except
as described in this proxy statement, neither the Company nor its management
has any current plans or proposals to effect any extraordinary corporate
transaction, such as a merger, reorganization or liquidation, a sale or
transfer of any material amount of its assets, a change in management, a material
change in its indebtedness or capitalization, or any other material change in
its corporate structure or business. In that regard, we expect to conduct our
business and operations after the effective date of the Transaction in
substantially the same manner as currently conducted and, except as described
in this proxy statement with respect to: (1) the use of funds to finance
the Transaction and related costs and (2) our plans to deregister our
common stock under the Exchange Act and delist it from the American Stock
Exchange, the Transaction is not anticipated to have a material effect upon the
conduct of our business. We intend, however, to continue to evaluate and review
our businesses, properties, management and other personnel, corporate
structure, capitalization and other aspects of our operations in the same
manner as we historically have from time to time, and to make such changes as
we consider appropriate. We also intend to continue to explore acquisitions and
other business opportunities to expand or strengthen our businesses, as we have
done in the past. In that regard, we may review proposals or may propose the
acquisition or disposition of assets or other changes in our business,
corporate structure, capitalization, management or other changes which we then
consider to be in our best interests and in the best interests of Continuing
Stockholders.
In
addition, we may reduce the size of the Board of Directors from the current
number of nine directors, which contributes to the cost savings we expect to
receive as a result of the Transaction. See Special FactorsPurpose of and
Reasons for the Transaction. We therefore expect that certain members of the
Board of Directors, including the independent directors, may not continue in
office after the Transaction has been effected. However, for at least three
years after the Transaction has been effected, we will have at least two
independent directors within the meaning of Section 121A of the American Stock
Exchange Company Guide and Rule 10A-3(b) of the Exchange Act. We have not
identified those members of the Board of Directors who will continue after the
Transaction and those who may not continue. We expect, however, that Robert
Chestnov, Allan Ginsburg and Howard Ginsburg will continue to serve as
directors of the Company after the effective time of the Transaction.
The
corporate governance and other stockholder protections described above under
the caption Special Factors-- Special Committee and Board of Directors
Protections for Continuing Stockholders will remain in place for at least
three years following the Transaction. This three-year requirement will be
applicable as long as there are unaffiliated Continuing Stockholders during
that time; it is not intended to restrict or otherwise prohibit any merger,
consolidation, sale of all or substantially all of our assets, or similar
extraordinary transaction during that three-year period. We have no present
plans or proposals for any such transaction, however, and our intent is to operate
our business after the Transaction substantially as it is currently conducted.
Material Federal Income Tax Consequences
The following
is a summary of certain United States federal income tax consequences to the
Company and its stockholders resulting from the Transaction. This summary
addresses only those stockholders who have held their shares as capital assets.
This discussion does not address all United States federal income tax
considerations that may be relevant to particular stockholders in light of
their individual circumstances. Many types of stockholders (such as financial
institutions, tax-exempt organizations (including private foundations),
insurance companies, dealers in securities, foreign investors, and partnerships
and their partners), holders that received their shares pursuant to the
exercise of employee stock options or otherwise as compensation, and investors
that hold the shares as part of a straddle, hedge, conversion, constructive
sale, or other integrated transaction for United States federal income tax
purposes, may be subject to special tax rules. The following summary is based
upon United States federal
53
income tax
law, as currently in effect, which is subject to differing interpretations or
change, possibly on a retroactive basis, and does not address any state, local,
foreign, or other tax considerations. No assurance can be given that possible
changes in such United States federal income tax laws or interpretations will
not adversely affect this summary. This summary is not binding on the Internal
Revenue Service.
|
|
|
This summary
assumes that you are one of the following:
|
|
|
|
a citizen or
resident of the United States;
|
|
|
|
a
corporation or an entity taxable as a corporation created or organized under
U.S. law (federal or state);
|
|
|
|
an estate
the income of which is subject to federal income taxation regardless of its
sources;
|
|
|
|
a trust if a
U.S. court is able to exercise primary supervision over the administration of
the trust and one or more U.S. persons have authority to control all
substantial decisions of the trust; or
|
|
|
|
any other
person whose worldwide income and gain is otherwise subject to United States
federal income taxation on a net basis.
|
NO RULING
FROM THE INTERNAL REVENUE SERVICE OR OPINION OF COUNSEL HAS BEEN OR WILL BE
OBTAINED REGARDING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO
STOCKHOLDERS IN CONNECTION WITH THE TRANSACTION. ACCORDINGLY, EACH STOCKHOLDER
IS ENCOURAGED TO CONSULT THEIR OWN TAX ADVISOR AS TO THE PARTICULAR FEDERAL,
STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF THE TRANSACTION, IN LIGHT
OF THEIR INDIVIDUAL CIRCUMSTANCES.
Tax Consequences to the Company.
We believe
that the Transaction will be treated as a tax-free recapitalization for federal
income tax purposes. This will result in no material federal income tax
consequences to the Company.
Federal Income Tax Consequences to Stockholders Who Do
Not Receive Cash in the Transaction.
If
you receive no cash as a result of the Transaction, but continue to hold our
shares of Common Stock immediately after the Transaction, you will not
recognize any gain or loss for United States federal income tax purposes. The
aggregate adjusted tax basis of the shares you hold immediately after the Transaction
will equal the aggregate adjusted tax basis of the shares you held immediately
prior to the Transaction, and the holding period in those shares will be the
same as immediately prior to the Transaction.
Federal
Income Tax Consequences to Stockholders Who Receive Cash in the Transaction and
Who Will Own, or Will Be Considered under the Internal Revenue Code to Own,
Shares of Common Stock After the Transaction.
In some
instances you may be entitled to receive cash in the Transaction for shares of
our common stock you hold in one capacity, but continue to hold shares in
another capacity. For example, you may own fewer than 250 shares in your own
name (for which you will receive cash) and own 250 or more shares that are held
in your brokerage account in street name. Alternatively, for federal income tax
purposes you may be deemed to own shares held by others. For instance, if you
own fewer than 250 shares in your own name (for which you will receive cash)
and your spouse owns 250 or more shares (which will continue to be held
following the completion of the
54
Transaction),
the shares owned by your spouse will be attributable to you. Furthermore, in
determining whether you are considered to continue to hold shares of our common
stock, for federal income tax purposes, immediately after the Transaction, you
will be treated as owning shares actually or constructively owned by certain
family members and entities in which you have an interest (such as trusts and
estates of which you are beneficiary and corporations and partnerships of which
you are an owner, and shares you have an option to acquire). Accordingly, in
some instances the shares of common stock you own in another capacity, or which
are attributed to you, may remain outstanding.
If
you receive cash for a fractional share as a result of the Transaction, but are
treated as continuing to own shares of common stock through attribution as
described above, you will recognize capital gain or loss for federal income tax
purposes equal to the difference between the cash you receive for the shares of
common stock and your aggregate adjusted tax basis in those shares, provided
that the receipt of cash either is not essentially equivalent to a dividend,
or constitutes a substantially disproportionate redemption of stock, as
described below.
Not
Essentially Equivalent to a Dividend.
The receipt of cash is not
essentially equivalent to a dividend if the reduction in your proportionate
interest in us resulting from the Transaction (taking into account for this
purpose shares of common stock which you are considered to own under the
attribution rules described above) is considered a meaningful reduction given
your particular facts and circumstances. The Internal Revenue Service has ruled
that a small reduction by a minority stockholder whose relative stock interest
is minimal and who exercises no control over the affairs of a corporation can
satisfy this test.
Substantially
Disproportionate Redemption of Stock.
The receipt of cash in the
Transaction will be a substantially disproportionate redemption of stock if
(a) you own less than 50% of the total combined voting power of all
classes of stock entitled to vote, and (b) the percentage of our voting
stock owned by you (and by those other stockholders whose shares of common
stock you are considered to own under the attribution rules described above)
immediately after the Transaction is less than 80% of the percentage of shares
of voting stock owned by you immediately before the Transaction.
If
the receipt of cash in exchange for shares of common stock is not treated as
capital gain or loss under either of the tests, it will be treated first as
ordinary dividend income to the extent of the your ratable share of our current
and accumulated earnings and profits, then as a tax-free return of capital to
the extent of the your aggregate adjusted tax basis in the shares, and any
remaining amount will be treated as capital gain.
Capital
gain or loss recognized will be long-term if your holding period with respect
to the common stock surrendered is more than one year at the time of the
Transaction. The deductibility of capital loss is subject to limitations. If
you are an individual, long-term capital gain and dividend income should
generally be subject to United Stated federal income tax at a maximum rate of
15%. In general, dividends are taxed at ordinary income rates. However, you may
qualify for a 15% rate of tax on any cash received in the Transaction that is treated
as a dividend as described above, if (i) you are an individual or other
non-corporate stockholder; (ii) you have held the common stock with respect to
which the dividend was received for more that 60 days during the 120-day period
beginning 60 days before the ex-dividend date, as determined under the Internal
Revenue Code; and (iii) you were not obligated during such period (pursuant to
a short sale or otherwise) to make related payments with respect to positions
in substantially similar or related property. You should consult with your tax
advisor regarding your eligibility for such lower tax rates on dividend income.
If
you, or a person or entity whose ownership shares would be attributed to you,
will continue to hold common stock immediately after the Transaction, you are
urged to consult with your tax advisor as to the
particular federal, state, local, foreign, and other tax consequences of the
Transaction, in light of your specific circumstances.
55
Federal
Income Tax Consequences to Stockholders Who Receive Cash in the Transaction and
Who Will Not Own, or Will Not Be Considered under the Internal Revenue Code to
Own, Shares of Common Stock After the Transaction.
If you receive
cash as a result of the Transaction and you do not own, and are not considered
to own, shares of our common stock immediately after the Transaction, you will
recognize capital gain or loss for federal income tax purposes equal to the
difference between the cash you receive for the shares of common stock and your
aggregate adjusted tax basis in those shares.
Backup Withholding.
If you are to receive cash as
a result
of the Transaction, you will be required to provide your social security or
other taxpayer identification number (or, in some instances, additional
information) in connection with the Transaction to avoid backup withholding
requirements that might otherwise apply. The letter of transmittal and other
documentation we will send to you after the Transaction will require you to
deliver such information when the common stock certificates are surrendered
following the effective time of the Transaction. Failure to provide such
information may result in backup withholding. Backup withholding is not an
additional tax. Rather, the amount of the backup withholding can be credited
against your United States federal income tax liability provided that the
required information is given to the IRS. If backup withholding results in an
overpayment of tax, a refund can be obtained by you upon filing an appropriate
income tax return on a timely basis.
Potential Conflicts of Interests of Officers,
Directors, and Certain Affiliated Persons
On
the Record Date, 1,257,643 shares, or approximately 50.9%, of the issued and
outstanding shares of our common stock was held by parties to a Stockholders
Agreement. As noted above, the Stockholders Agreement entitles Abe Ginsburg,
Allan Ginsburg, Robert Chestnov and Howard Ginsburg, in their capacity as a
stockholders committee, to direct the voting of the shares of common stock
owned by signatories to the Stockholders Agreement. Each member of the
stockholders committee is considered to be the beneficial owner of the shares
of our common stock subject to the Stockholders Agreement. See Information
About the CompanyStockholders Agreement. The stockholders committee has
indicated that it intends to direct the vote of all of the shares that are
subject to the Stockholders Agreement
FOR
the Transaction. Accordingly, if all
those shares are voted in favor of the Transaction, the Transaction will be
approved.
Upon
the effectiveness of the Transaction, the aggregate number of shares of our
common stock owned by parties to the Stockholders Agreement will decrease by
200 shares. However, the ownership percentage of our shares of our common stock
subject to the Stockholders Agreement will increase from approximately 50.9% to
approximately 53.7% as a result of the reduction of the number of shares of our
common stock outstanding by up to approximately 128,889 shares. See Special
Factors Effects of the Transaction Effect on Affiliated Stockholders.
In
addition, our other directors and executive officers may have interests in the
Transaction that are different from your interests as a stockholder, and have
relationships that may present conflicts of interest, including the following:
|
|
|
Richard
Chestnov, a director of the Company who is also a party to the Stockholders
Agreement, holds 33,150 shares of our common stock directly, and 31,123
shares of our common stock indirectly in his capacity as a trustee of trusts
for family members or as an officer and director of charitable entities. At
the effective time of the Transaction, 200 shares held indirectly by Mr.
Chestnov in his capacity as
a trustee of a trust for a family member will be cashed out and he will
retain an aggregate of 64,073 shares after the Transaction.
|
56
|
|
|
Martin
Brody, a director of the Company, owns 387 shares of our common stock and
will retain all of those shares after the Transaction. Mr. Brody has advised
us he intends to vote in favor of the Transaction.
|
|
|
|
Anthony
Christon, our Vice President and Chief Financial Officer, owns 7,500 shares
of our common stock and will retain all of those shares after the Transaction.
Mr. Christon has advised us he intends to vote in favor of the Transaction.
|
|
|
|
Each member
of the Board of Directors other than Albert Safer, Richard Chestnov and
Robert Chestnov holds options to purchase shares of our common stock. The
Transaction will not affect these stock options and they will remain
outstanding after the Transaction.
|
|
|
|
After the
Transaction, the beneficial ownership of the executive officers and directors
who are not parties to the Stockholders Agreement will increase from approximately
1.7% to approximately 1.8% as a result of the reduction of the number of
shares of common stock outstanding.
|
Source of Funds and Expenses
Based
on information we have received from our transfer agent, Continental Stock
Transfer & Trust Company, as to holdings of our record holders, and from
Broadridge Financial Solutions, Inc. reflecting the distribution of the
accounts of our stockholders who hold shares in street name, as well our
estimates of other Transaction expenses, we believe that the total cash
requirement of the Transaction to the Company will be approximately $1,916,000.
This amount includes approximately $1,316,000 needed to cash out fractional
shares (although this amount could be larger or smaller depending on, among other
things, the number of fractional shares that will be outstanding at the time of
the Transaction as a result of purchases, sales and other transfers of our
shares of common stock by our stockholders), and approximately $600,000 of
legal, accounting, and financial advisory fees and other costs to effect the
Transaction as follows:
|
|
|
|
|
Legal Fees
|
|
$
|
350,000
|
|
Investment
Banker/Fairness Opinion
|
|
|
130,000
|
|
Accounting
Fees
|
|
|
50,000
|
|
Transfer
Agent Fees
|
|
|
20,000
|
|
Printing
Costs
|
|
|
16,000
|
|
Pink Sheets
Listing Fees and Related Costs
|
|
|
14,000
|
|
Miscellaneous
Other
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
$
|
600,000
|
|
|
|
|
|
|
We
expect that the consideration to be paid to the Cashed Out Stockholders and the
costs of the Transaction will be paid from cash on hand and from funds under
our existing revolving loan agreement with TD Banknorth, N.A. The revolving
loan agreement provides for short-term loans and the issuance of letters of
credit in an aggregate amount not to exceed $50,000,000. Based on a borrowing
formula, we may borrow up to $30,000,000 in short-term loans and up to
$50,000,000 including letters of credit. Substantially all of our personal
property assets are pledged to the bank as collateral. The revolving loan
agreement requires that we maintain a minimum tangible net worth, as defined,
and imposes certain debt to equity ratio requirements. We were in compliance
with all applicable financial covenants as of September 30, 2007. As long as no
default or event of default under the revolving loan agreement exists,
57
we may use the
proceeds of loans we borrow under that agreement for the repurchase by use of
our shares of common stock in the Transaction in an aggregate amount not to
exceed $3,000,000. We anticipate that our borrowings under the revolving loan
agreement will be repaid in the ordinary course of business and we have not
made any special plans or arrangements to repay loans made to us to complete
the Transaction.
Stockholder Approval
A
majority of the outstanding shares of our common stock will constitute a quorum
for the purposes of approving the amendments to our certificate of
incorporation to effect the Transaction. Assuming the presence of a quorum, the
affirmative vote of a majority of the shares of our common stock entitled to
vote at the Special Meeting is required for the adoption of the proposals to
approve the Transaction.
As
of the Record Date, over 50% of the issued and outstanding shares of our common
stock was held subject to the Stockholders Agreement. As noted above, the
stockholders committee under the Stockholders Agreement has indicated that it
intends to direct the voting of the shares of our common stock (1,257,643
shares, or approximately 50.9% of the issued and outstanding shares of our common
stock)
FOR
the
Transaction. Accordingly, if all those shares are voted in favor of the
Transaction, the Transaction will be approved.
Effective Date
The
Transaction will become effective as of the date that the Board of Directors
amends the certificate of incorporation of the Company through the filing of a
certificate of amendment to the certificate of incorporation with the State of
Delaware to effectuate the Reverse Stock Split and the Forward Stock Split. We
intend to effect the Transaction as soon as possible after the Transaction is
approved by our stockholders. Our common stock acquired by us in connection
with the Transaction either will be held as treasury shares, or restored to the
status of authorized but unissued shares. The suspension of our obligation to
file periodic reports and other documents under the Exchange Act will become
effective after the filing with the SEC of both a notice of removal from
listing of our common stock from listing on the American Stock Exchange and termination
of registration under Section 12(b) of the Exchange Act on Form 25, and a
certification and notice of termination of registration on Form 15. The
deregistration of our common stock under Section 12(b) of the Exchange Act will
take effect 90 days after the filing of the Form 25 and the deregistration of
our common stock under other provisions of the Exchange Act will become
effective 90 days after the filing of the Form 15. See Special FactorsEffects
of the Transaction
Termination of Exchange Act Registration and
Elimination of SEC Reporting Obligations
.
Termination of Transaction
Although
we are requesting your approval of the Transaction, the Special Committee and
the Board of Directors has retained authority, in their discretion, to withdraw
the Transaction from the agenda of the Special Meeting prior to any vote. In
addition, even if the Transaction is approved by stockholders at the Special
Meeting, the Special Committee or the Board may determine not to implement the
Transaction if subsequently it determines that the Transaction is not in the
best interests of the Company and stockholders. If for any reason the
Transaction is not approved, or if approved, is not implemented, our common
stock will not be deregistered until such time as we otherwise are eligible to
do so. Reasons to withdraw the Transaction from the agenda, or to abandon the
Transaction may include, among other things:
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any change
in the nature of the holdings of stockholders which would result in us not
being able to reduce the number of our record holders below 300 as a result
of the Transaction;
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58
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any change
in the number of record holders that would enable us to deregister our shares
of common stock without effecting the Transaction;
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any change
in the number of shares that will be exchanged for cash in connection with
the Transaction, including the shares owned by holders in street name, that
would increase in any material respect the cost and expense of the
Transaction compared to what we presently estimate; and
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any adverse
change in our financial condition that would cause us to believe that the
Transaction would no longer be in the best interests of the Company or our
stockholders.
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If
the Special Committee or the Board decides to withdraw the Transaction from the
agenda of the Special Meeting, or to abandon the Transaction, the Board will
promptly notify stockholders of the decision.
Exchange of Certificates and Payment for
Fractional Shares
Our
transfer agent, Continental Stock Transfer & Trust Company, will act as our
agent for purposes of exchanging certificates and paying for fractional shares
in connection with the Transaction.
No
service charge, brokerage commission, or transfer tax will be payable by any holder
of any old certificate evidencing shares of our common stock in connection with
the issuance of a new certificate in respect thereof, except that if any new
certificate is to be issued in a name other than that in which the old
certificate (that is surrendered for exchange) is registered, it will be a
condition to such issuance that: (i) the person requesting such issuance
pay to us any transfer taxes payable by reason of such transfer (or any prior
transfer of such surrendered certificate, if any) or establish to our
satisfaction that such taxes have been paid or are not payable; and
(ii) the surrendered certificate has been properly endorsed and otherwise
in proper form for transfer.
If
any certificate evidencing shares of our common stock has been lost or
destroyed, we may in our sole discretion accept in lieu thereof a duly executed
affidavit and indemnity agreement in a form satisfactory to us. The holder of
any shares of our common stock evidenced by any certificate that has been lost or
destroyed must submit, in addition to the (i) letter of transmittal sent
by us, (ii) the above-referenced affidavit, (iii) the
above-referenced indemnity agreement, and (iv) any other document required
by us, a bond or other security satisfactory to the us indemnifying us and our
other persons against any losses incurred as a consequence of issuing a
certificate evidencing new shares of our common stock or paying cash in lieu of
issuing fractional shares of our common stock in exchange for the existing shares
of our common stock evidenced or purported to be evidenced by such lost or
destroyed certificate. Additional instructions with respect to lost or
destroyed certificates will be included with the letter of transmittal that we
will send to stockholders after the Effective Date.
Stockholders
owning less than 250 shares on the effective date of the Transaction will
receive $10.21 for each pre-split share of common stock, without interest.
Stockholders who own 250 or more shares at the effective date of the
Transaction will not be entitled to receive any cash for their fractional share
interests resulting from the Reverse Stock Split. The Forward Stock Split that
will immediately follow the Reverse Stock Split will reconvert their whole
shares and fractional share interests back into the same number of shares of
our common stock they held immediately before the effective time of the
Transaction. As a result, the total number of shares held by such a stockholder
will not change after completion of
the Transaction, and the stockholder will not receive new certificates for his
or her shares of our common stock.
59
For
purposes of determining ownership of shares of our common stock on the
effective date of the Transaction, such shares will be considered held by the
person in whose name such shares are registered on our transfer agents
records. Upon effecting the Transaction, we intend to treat stockholders
holding shares of our common stock in street name in the same manner as registered
stockholders whose shares are registered in their names. Prior to the effective
date of the Transaction, we will conduct an inquiry of all brokers, banks and
other nominees that hold shares of our common stock in street name. We will ask
them to effect the Transaction for their beneficial holders holding shares of
our common stock in street name. We will rely on these brokers, banks and other
nominees to provide us with information on how many fractional shares will be
cashed out. However, these brokers, banks and other nominees may have different
procedures than registered stockholders for processing the Transaction. If you
hold your shares in street name with a bank, broker or other third party, and
if you have any questions in this regard, we encourage you to contact your
bank, broker or nominee.
Promptly
after the effective date of the Transaction, we will send to each holder of
record of our common stock, and to brokers, banks and other nominees, based on
information we receive from them in response to our inquiries, for each owner
of our common stock held in street name, instructions for surrendering any
certificates held thereby representing shares of our common stock which will be
converted to a right to receive cash as a result of the Transaction. Only
holders of 249 or fewer shares of our common stock immediately prior the
Transaction should surrender their shares. Holders of 250 or more shares should
not surrender their shares. Such instructions will include a letter of
transmittal to be completed and returned to the Transfer Agent by the holder of
such certificates, together with such certificates.
Promptly
after the Transfer Agent receives any surrendered certificate from a holder of
249 or fewer shares of our common stock immediately prior to the Transaction,
together with a duly completed and executed letter of transmittal with respect
thereto and such other documents as we may require, the Transfer Agent will
deliver to the person payment in an amount equal to $10.21, without
interest, for each pre-split share of common stock that is represented by
the fractional share.
There
will be no differences between the respective rights, preferences or
limitations of our common stock prior to the Transaction and our common stock
after the Transaction. There will be no differences with respect to dividend,
voting, liquidation or other rights associated with our common stock.
DO
NOT SEND SHARE CERTIFICATES TO THE COMPANY OR THE TRANSFER AGENT UNTIL AFTER
YOU HAVE RECEIVED THE A LETTER OF TRANSMITTAL AND ANY ACCOMPANYING
INSTRUCTIONS.
No Appraisal or Dissenters Rights
Under
Delaware law, our certificate of incorporation and our bylaws, no appraisal or
dissenters rights are available to stockholders of the Company who dissent
from the Transaction.
Escheat Laws
The
unclaimed property and escheat laws of each state provide that under
circumstances defined in that states statutes, holders of unclaimed or
abandoned property must surrender that property to the state. Persons whose
shares are cashed out and whose addresses are unknown to us, or who do not
return their stock certificates and request payment for their cashed-out
shares, generally will have a period of
60
years from the
effective date of the Transaction in which to claim the cash payment payable to
them. For example, with respect to stockholders whose last known addresses are
in New York, as shown by our records, the period is three years. Following the
expiration of that three-year period, the Unified Disposition of Unclaimed
Property Act of New York would likely cause the cash payments to escheat to the
State of New York. For stockholders who reside in other states or whose last
known addresses, as shown by our records, are in states other than New York,
such states may have abandoned property laws which call for such state to
obtain either (i) custodial possession of property that has been unclaimed
until the owner reclaims it; or (ii) escheat of such property to the
state. Under the laws of such other jurisdictions, the holding period or the
time period which must elapse before the property is deemed to be abandoned may
be shorter or longer than three years. If we do not have an address for the
holder of record of the shares, then unclaimed cash-out payments would be
turned over to our state of incorporation, the State of Delaware, in accordance
with its escheat laws.
61
INFORMATION
ABOUT THE COMPANY
Market Price of Common Stock
Our
common stock is traded on the American Stock Exchange under the symbol JLN.
The following table sets forth the high and low closing sales prices reported
by the American Stock Exchange for our common stock for our two most recent
fiscal years:
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Fiscal
Year Ended June 30, 2008
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High
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Low
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First quarter
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$
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11.50
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$
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6.55
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Second quarter
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$
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7.75
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$
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4.55
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(though December 19, 2007)
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Fiscal Year Ended June 30, 2007
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First quarter
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$
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7.70
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$
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7.30
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Second quarter
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$
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11.80
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$
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7.70
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Third quarter
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$
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14.25
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$
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10.36
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Fourth quarter
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$
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12.03
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$
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8.50
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Fiscal Year Ended June 30, 2006
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First quarter
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$
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7.97
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$
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6.34
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Second quarter
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$
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8.09
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$
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7.25
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Third quarter
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$
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8.90
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$
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7.40
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Fourth quarter
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$
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8.25
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$
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7.28
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On
December 4, 2007 the day before we announced the Transaction, the closing price
of our common stock on the American Stock Exchange was $6.00.
Dividends
We
did not pay cash dividends during fiscal 2007 or 2006 and do not anticipate
paying cash dividends in the foreseeable future.
Stockholders
As
of _________ __, 2008 there were approximately ________ holders of record of
our common stock.
Stock Purchases
Except
as described below, the Company has not purchased any shares of its common
stock within the past two years.
During
our last two fiscal years, the Company purchased an aggregate of 199,562 shares
of its common stock. The following table sets forth information by quarter
regarding such share repurchases:
62
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Fiscal Year Ended June 30, 2008
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(a) Total
Number of
Shares (or
Units)
Purchased
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(b) Range of
Prices Paid per
Share
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(c) Average
Price Paid per
Share
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First quarter
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Second quarter (though December 19, 2007)
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Fiscal Year Ended June 30, 2007
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First quarter
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Second quarter
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6,548
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$8.35 - $9.45
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$
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8.46
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Third quarter
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6,000
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$12.88
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$
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12.88
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Fourth quarter
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28,557
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$12.55 - $14.15
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$
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13.03
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Fiscal Year Ended June 30, 2006
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First quarter
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100,619
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$6.79 - $7.15
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$
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7.15
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Second quarter
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30,000
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$7.50 - $8.09
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$
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7.71
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Third quarter
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27,838
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$7.73 - $8.28
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$
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7.87
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Fourth quarter
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In
addition, during the last two years, none of our directors or executive
officers have purchased shares of our common stock except as follows:
On March 14, 2006 and June 20, 2006, respectively, Anthony Christon, our Vice
President and Chief Financial Officer, acquired 3,700 and 3,800 shares,
respectively, of our common stock upon the exercise of stock options previously
granted under a stockholder approved stock option plan of the Company, in each
case at an exercise price per share of $4.0625;
On November 8, 2006, Richard Chestnov, a director of the Company, acquired
2,000 shares of our common stock upon the exercise of a stock option previously
granted under a stockholder approved stock option plan of the Company at an
exercise price of $5.125 per share, and on February 15, 2007, Richard Chestnov
acquired 16,000 shares of our common stock upon the exercise of stock options
previously granted under a stockholder approved stock option plan of the
Company at exercise prices per share ranging from $2.42 to $6.70; and
On June 7, 2007, Robert Chestnov, our President and Chief Executive Officer,
acquired 15,000 shares of our common stock upon the exercise of a stock option
previously granted under a stockholder approved stock option plan of the
Company at an exercise price per share of $7.70.
63
Directors and Executive Officers
The
following sets forth certain information concerning our current directors and
executive officers:
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Name
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Age
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Position
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Abe Ginsburg
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90
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Chairman of the Executive Committee
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Allan Ginsburg
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65
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Chairman of the Board
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Robert Chestnov
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59
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President, Chief Executive Officer and Director
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Howard Ginsburg
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65
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Vice Chairman of the Board
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Martin Brody
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86
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Director
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Richard Chestnov
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62
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Director
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Albert Safer
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59
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Director
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Norman Axelrod
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55
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Director
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Harold Schechter
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63
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Director
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Anthony Christon
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62
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Chief Financial Officer
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Information Concerning the Board of Directors and Executive Officers
The
business experience during the last five years of the directors of the Company
is as follows:
Abe
Ginsburg has been Chairman of the Executive Committee of the Company since
November 29, 1988.
Allan
Ginsburg has been Chairman of the Board of the Company since November 29, 1988.
Robert
Chestnov has been the President and Chief Executive Officer of the Company
since November 29, 1988.
Howard
Ginsburg has been Vice Chairman of the Board of the Company since November 29,
1988.
Martin
Brody has been a private investor since his retirement on January 1, 1994. From
April 1990 through December 1993, Mr. Brody was Vice Chairman of the Board of
Restaurant Associates Corporation, the owner and operator of specialty
restaurants, and was Chairman of its Board for more than five years prior
thereto. Mr. Brody also serves as a director of a number of Salomon Smith
Barney mutual funds and preferred income funds.
Richard
Chestnov has been a private investor since 1992. Before then, he was a partner
of Chego International, an apparel importer.
Albert
Safer has been President of Safer Textile Processing and Kuttner Prints,
textile mills, for more than the past five years. Mr. Safer has also served as
President of Safer Development and Management, which is engaged in real estate
development and management, for more than the past five years.
Norman
Axelrod has been Chairman of the Board of Directors of General Nutrition
Centers, Inc., a specialty retailer of health and wellness products, and
certain affiliated companies, since March 2007. From March 2006 to March 2007,
Mr. Axelrod was a private investor. From 1988 until March 2006, Mr. Axelrod
served as Chief Executive Officer of Linens n Things, Inc., a leading,
national large format retailer of home textiles, housewares and home accessories,
was Chairman of the Board of that company from 1997 until March 2006, and
through 2000, he also held the additional post of President. Mr. Axelrod also
serves as a director of Maidenform Brands, Inc.
64
Harold
Schechter has been Chief Financial Officer of Global Design Concepts, Inc., a
manufacturer and distributor of handbags and related products, since January
2005. From October 2004 until January 2005, Mr. Schechter was the Chief
Financial Officer of Diamond Chemical Company Inc., a manufacturer of cleaning
chemicals. Mr. Schechter served as Vice President, Chief Operating Officer and
Chief Financial Officer of Creative Salon Products, an importer and distributor
of beauty products, from January 2003 to October 2004, and as Vice President, Chief
Operating Officer and Chief Financial Officer of William H. Ranney Associates
Inc., which was also an importer and distributor of beauty products, from May
2001 to December 2002. From January 1999 to April 2001, Mr. Schechter served as
Vice President-Operations and Purchasing of Monarch Luggage Inc., an importer
and distributor of luggage and related items.
Anthony
Christon has been Chief Financial Officer of the Company for more than the past
five years.
Family
Relationships.
Abe
Ginsburg, Chairman of the Executive Committee and a director of the Company, is
the father of Howard Ginsburg, Vice Chairman of the Board and a director of the
Company. Allan Ginsburg, Chairman of the Board and a director of the Company,
is a nephew of Abe Ginsburg and is a first cousin of Howard Ginsburg. Robert
Chestnov, President, Chief Executive Officer and a director of the Company,
and Richard Chestnov, a director of the Company, are brothers.
None
of our officers or directors has been involved in any transaction in the shares
of our common stock during the past 60 days.