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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934

 

 

Filed by the Registrant  ☐                             Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

  Preliminary Proxy Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14a6(e)(2))
  Definitive Proxy Statement
  Definitive Additional Materials
  Soliciting Material under §240.14a-12

STEIN MART, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

  No fee required.
  Fee computed on table below per Exchange Act Rules 14(a)-6(i)(1) and 0-11.
  (1)  

Title of each class of securities to which transaction applies:

 

Common stock, par value $0.01 per share, of Stein Mart, Inc. (“Company Common Stock”)

  (2)  

Aggregate number of securities to which transaction applies:

 

31,743,115 shares of Company Common Stock (including 761,569 shares of time vesting restricted stock units, 343,219 shares of time vesting restricted stock and 29,734 shares that could be issued under the Stein Mart, Inc. Employee Stock Purchase Plan prior to the completion of the merger).

  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

The maximum aggregate value was determined based upon 31,743,115 shares of Company Common Stock (including 761,569 shares of time vesting restricted stock units, 343,219 shares of time vesting restricted stock and 29,734 shares that could be issued under the Stein Mart, Inc. Employee Stock Purchase Plan prior to the completion of the merger) multiplied by $0.90 per share. In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, the filing fee was determined by multiplying the maximum aggregate value calculated in the preceding sentence by 0.0001298.

  (4)  

Proposed maximum aggregate value of transaction:

 

$28,568,804.

  (5)  

Total fee paid:

 

$3,708.

  Fee paid previously with preliminary materials.
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)  

Amount Previously Paid:

 

     

  (2)  

Form, Schedule or Registration Statement No.:

 

     

  (3)  

Filing Party:

 

     

  (4)  

Date Filed:

 

     

 

 

 


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PRELIMINARY SHAREHOLDER LETTER, SUBJECT TO COMPLETION,

DATED MARCH 2, 2020

 

 

LOGO

STEIN MART, INC.

1200 Riverplace Blvd.

Jacksonville, Florida 32207

[●], 2020

Dear Shareholder:

You are cordially invited to attend a Special Meeting of the shareholders (the “Special Meeting”) of Stein Mart, Inc. (“Stein Mart” or the “Company”), which will be held at [●], Eastern Time, on [●], 2020 at [●]. The Special Meeting is being held for the following purposes, as more fully described in the accompanying Proxy Statement:

 

1.

To hold a vote on a proposal to adopt the Agreement and Plan of Merger, dated as of January 30, 2020 (as it may be amended from time to time, the “merger agreement”), by and among the Company, Stratosphere Holdco, LLC, a Delaware limited liability company (“Parent”), and Stratosphere Merger Sub, Inc., a Florida corporation and an indirect wholly-owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will be merged with and into the Company (the “merger”), with the Company surviving as an indirect wholly-owned subsidiary of Parent;

 

2.

To hold an advisory (non-binding) vote to approve certain items of compensation that are based on or otherwise related to the merger that may become payable to the Company’s named executive officers under existing agreements with the Company (the “merger-related executive compensation”); and

 

3.

To hold a vote on a proposal to adjourn the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to adopt the merger agreement.

If the merger is completed, each share of common stock, par value $0.01 per share, of the Company (“Company Common Stock”) that you own immediately prior to the effective time of the merger, other than as provided below, will be converted into the right to receive $0.90 in cash (the “per share merger consideration”), without interest and less applicable withholding taxes. The following shares of Company Common Stock will not be converted into the right to receive the per share merger consideration in connection with the merger: (i) shares of Company Common Stock held by the Company or any of its subsidiaries, (ii) shares of Company Common Stock held by Parent or any of its subsidiaries (including shares of Company Common Stock contributed by Stein Family Holdco LLC, an entity managed by Jay Stein, the Chairman of the Company’s board of directors (the “Rollover Investor”) to Parent immediately prior to the effective time of the merger), and (iii) shares of Company Common Stock whose holders have not voted in favor of adopting the merger agreement and have demanded and perfected their appraisal rights in accordance with, and have complied in all respects with, the Florida Business Corporation Act (the “FBCA”). Following the completion of the merger, Parent will indirectly own all of the Company’s issued and outstanding capital stock and the Company will continue its operations as an indirect wholly-owned subsidiary of Parent. As a result, the Company will no longer have Company Common Stock listed on the Nasdaq Capital Market and will no longer be required to file periodic and other reports with the Securities and Exchange Commission with respect to Company Common Stock. After the merger, you will no longer have an equity interest in the Company and will not participate in any potential future earnings of the Company.

The Rollover Investor has also entered into a voting agreement with Parent that covers approximately 36% of the outstanding shares of Company Common Stock, pursuant to which, unless the voting agreement is terminated in accordance with its terms (including upon a termination of the merger agreement in accordance with its terms),


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the Rollover Investor has agreed to, among other things, vote, or cause to be voted, its shares of Company Common Stock in favor of the adoption of the merger agreement and approval of any related proposal in furtherance of the merger and the transactions contemplated by the merger agreement. Moreover, adoption of the merger agreement and the transactions contemplated by the merger agreement will require the affirmative vote of the holders of a majority of the outstanding shares of the Company Common Stock as of the close of business on [●], 2020, the record date for the Special Meeting.

The Rollover Investor has committed to contribute, immediately prior to the effective time of the merger, all of the outstanding Company Common Stock to Parent, representing approximately 36% of the Company Common Stock outstanding as of the date of the merger agreement, in exchange for equity securities of Parent.

The board of directors formed a special committee comprised entirely of independent and disinterested directors, consisting of Richard Sisisky (Chairman), Irwin Cohen, Thomas Cole and Timothy Cost (the “Special Committee”) to consider and negotiate the terms and conditions of the merger and to recommend to the board of directors whether to pursue the merger and, if so, on what terms and conditions.

The Special Committee, after careful consideration, voted unanimously to recommend to the board of directors that it, and thereafter the board of directors (other than Jay Stein), after careful consideration and acknowledging the participation of Jay Stein in the merger, voted unanimously to (i) approve and declare advisable the merger agreement, the merger and the transactions contemplated by the merger agreement, (ii) declare that it is fair to and in the best interests of the Company and our unaffiliated shareholders that the Company enter into the merger agreement and consummate the merger on the terms and subject to the conditions set forth in the merger agreement, (iii) direct that the adoption of the merger agreement be submitted to a vote at a meeting of the shareholders of the Company and (iv) recommend to the shareholders of the Company that they vote FOR the adoption of the merger agreement. In arriving at its recommendations, the board of directors and Special Committee carefully considered a number of factors described in the accompanying Proxy Statement.

The Special Committee and the board of directors also recommend that you vote FOR the advisory (non-binding) approval of the “merger-related executive compensation” and FOR the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to adopt the merger agreement. Adoption of the merger agreement and approval of the “merger-related executive compensation” are subject to separate votes by the Company’s shareholders, and approval of the “merger-related executive compensation” is not a condition to the completion of the merger.

In considering the recommendation of the board of directors, you should be aware that certain of the Company’s directors and executive officers have interests in the merger that are different from, or in addition to, the interests of our shareholders generally as further described in the accompanying Proxy Statement. You should also be aware that the Rollover Investor has interests in the merger that are different from, or in addition to, the interests of the Company’s other shareholders, as further described in the accompanying Proxy Statement.

Any holder of Company Common Stock who does not vote in favor of the adoption of the merger agreement or has not consented to it in writing will have the right to seek appraisal of the fair value of such holder’s shares of Company Common Stock if the merger is completed in lieu of receiving the per share merger consideration, but only if such holder does not vote in favor of adopting the merger agreement or consent to it in writing and otherwise complies with the procedures of Sections 607.1301 through 607.1340 of the FBCA, which is the appraisal rights statute applicable to Florida corporations. These appraisal rights are summarized in the accompanying Proxy Statement. The accompanying Proxy Statement constitutes notice to you from the Company of the availability of appraisal rights under the FBCA.

Your vote is important. Whether or not you plan to attend the Special Meeting in person, to ensure the presence of a quorum and that your shares are represented at the Special Meeting, please vote via the Internet or by telephone as instructed in the accompanying proxy materials or complete, date and sign and


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return a proxy card as promptly as possible. Even if you plan to attend the Special Meeting, please take advantage of one of the advance voting options to ensure that your shares are represented at the Special Meeting. You may revoke your proxy at any time before it is voted by following the procedures described in the accompanying Proxy Statement. The merger cannot be completed unless the merger is adopted by an affirmative vote of the holders of a majority of the outstanding shares of the Company Common Stock as of the record date for the Special Meeting.

Thank you for your continued support.

 

By Order of the Board of Directors,

 

 

LOGO

James B. Brown

Secretary

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved the merger, passed upon the merits or fairness of the merger agreement or the transactions contemplated thereby, including the proposed merger, or passed upon the adequacy or accuracy of the information contained in this document or the accompanying Proxy Statement. Any representation to the contrary is a criminal offense.

The accompanying Proxy Statement and form of proxy are dated [], 2020 and are first being mailed to the Company’s shareholders on or about [], 2020.


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PRELIMINARY PROXY STATEMENT, SUBJECT TO COMPLETION, DATED MARCH 2, 2020

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON [], 2020

 

 

LOGO

STEIN MART, INC.

Dear Shareholder:

You are cordially invited to attend a Special Meeting of the shareholders (the “Special Meeting”) of Stein Mart, Inc. (“Stein Mart” or the “Company”) which will be held at [], Eastern Time, on [], 2020 at []. The Special Meeting is being held for the following purposes, as more fully described in the accompanying Proxy Statement:

 

1.

To hold a vote on a proposal to adopt the Agreement and Plan of Merger, dated as of January 30, 2020 (as it may be amended, the “merger agreement”), by and among the Company, Stratosphere Holdco, LLC, a Delaware limited liability company (“Parent”), and Stratosphere Merger Sub, Inc., a Florida corporation and an indirect wholly-owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will be merged with and into the Company (the “merger”), with the Company surviving as an indirect wholly-owned subsidiary of Parent (Proposal 1);

 

2.

To hold an advisory (non-binding) vote to approve certain items of compensation that are based on or otherwise related to the merger that may become payable to the Company’s named executive officers under existing agreements with the Company (the “merger-related executive compensation”) (Proposal 2); and

 

3.

To hold a vote on a proposal to adjourn the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to adopt the merger agreement (Proposal 3).

In addition, shareholders will be asked to consider and vote upon any other matters that properly come before the Special Meeting or any adjournment, postponement or recess thereof.

The merger agreement and the merger, the “merger-related executive compensation” arrangements and adjournment proposal are more fully described in the accompanying Proxy Statement, which the Company urges you to read carefully and in its entirety. A copy of the merger agreement is attached as Appendix A to the accompanying Proxy Statement, which the Company also urges you to read carefully and in its entirety.

The board of directors (other than Jay Stein), based in part on the unanimous recommendation of a special committee comprised entirely of independent and disinterested directors, has approved and authorized the merger agreement and recommends a vote FOR Proposal 1, FOR Proposal 2 and FOR Proposal 3. The Company does not expect a vote to be taken on any other matters at the Special Meeting or any adjournment, postponement or recess thereof. If any other matters are properly presented at the Special Meeting or any adjournment, postponement or recess thereof for consideration, however, the holders of the proxies will have discretion to vote on these matters in accordance with their best judgment.

Only shareholders that owned shares of common stock, par value $0.01 per share, of the Company (“Company Common Stock”), at the close of business on [], 2020, the record date, are entitled to notice of and to vote at the Special Meeting and any adjournment, postponement or recess thereof.

Stein Family Holdco LLC, an entity managed by Jay Stein, the Chairman of the Company’s board of directors (the “Rollover Investor”) has entered into a voting agreement with Parent that covers approximately 36% of the outstanding shares of Company Common Stock, pursuant to which, unless the voting agreement is terminated in


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accordance with its terms (including upon a termination of the merger agreement in accordance with its terms), it has agreed to, among other things, vote, or cause to be voted, its shares of Company Common Stock in favor of the adoption of the merger agreement and any related proposal in furtherance of the merger and the transactions contemplated by the merger agreement. The adoption of the merger agreement and the transactions contemplated by the merger agreement will require the affirmative vote of the holders of a majority of the outstanding shares of the Company Common Stock as of [●], 2020 (the “record date” for the Special Meeting).

The Rollover Investor has committed to contribute, immediately prior to the effective time of the merger, approximately 36% of the outstanding Company Common Stock to Parent in exchange for equity securities of Parent.

In considering the recommendations of the board of directors, you should be aware that certain of the Company’s directors and executive officers have interests in the merger that are different from, or in addition to, the interests of our shareholders generally, as further described in the accompanying Proxy Statement. You should also be aware that the Rollover Investor has interests in the merger that are different from, or in addition to, the interests of the Company’s other shareholders, as further described in the accompanying Proxy Statement.

Any holder of Company Common Stock who does not vote in favor of the adoption of the merger agreement or has not consented to it in writing will have the right to seek appraisal of the fair value of such holder’s shares of Company Common Stock if the merger is completed in lieu of receiving the per share merger consideration, but only if such holder does not vote in favor of adopting the merger agreement or consent to it in writing and otherwise complies with the procedures of Sections 607.1301 through 607.1340 of the Florida Business Corporation Act (the “FBCA”), which is the appraisal rights statute applicable to Florida corporations. These appraisal rights are summarized in the accompanying Proxy Statement. The accompanying Proxy Statement constitutes notice to you from the Company of the availability of appraisal rights under the FBCA.

Your vote is important. Whether or not you plan to attend the Special Meeting in person, to ensure the presence of a quorum and that your shares are represented at the Special Meeting, please vote via the Internet or by telephone as instructed in the accompanying proxy materials or complete, date and sign and return a proxy card as promptly as possible. Even if you plan to attend the Special Meeting, please take advantage of one of the advance voting options to ensure that your shares are represented at the Special Meeting. You may revoke your proxy at any time before it is voted by following the procedures described in the accompanying Proxy Statement. The merger cannot be completed unless the merger is adopted by an affirmative vote of the holders of a majority of the outstanding shares of the Company Common Stock as of the record date for the Special Meeting. The approval of the “merger-related executive compensation” is advisory (non-binding) and is not a condition to the completion of the merger.

The Company urges you to read the Proxy Statement and merger agreement carefully and in their entirety.

 

By Order of the Board of Directors,

 

 

LOGO

James B. Brown

Secretary

[●], 2020

Please do not send your Company Common Stock certificates to the Company at this time. If the merger is completed, you will be sent instructions regarding the surrender of your Company Common Stock certificates.

 

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SUMMARY TERM SHEET

     1  

QUESTIONS AND ANSWERS ABOUT THE MERGER, THE “MERGER-RELATED EXECUTIVE COMPENSATION” AND THE SPECIAL MEETING

     10  

SPECIAL FACTORS

     17  

Background of the Merger

     17  

Recommendation of the Special Committee and Our Board of Directors; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger

     34  

Opinion of PJ Solomon Securities, LLC

     39  

Purposes and Reasons of the Company for the Merger

     49  

Purposes and Reasons of the Acquiring Group Filing Persons for the Merger

     49  

Positions of the Kingswood Group Filing Persons Regarding the Fairness of the Merger

     50  

Positions of the Rollover Investor Regarding the Fairness of the Merger

     52  

Certain Effects of the Merger

     54  

Plans for the Company

     55  

Alternatives to the Merger

     55  

Effects on the Company if the Merger is not Completed

     56  

Projected Financial Information

     56  

Financing of the Merger

     62  

Limited Guarantee

     63  

Interests of the Company’s Directors and Executive Officers in the Merger

     64  

Indemnification of Directors and Officers; Directors’ and Officers’ Insurance

     64  

Merger Proceeds in Respect of Company Equity-Based Awards

     65  

Voting Agreement

     69  

Dividends

     70  

Appraisal Rights

     70  

Material U.S. Federal Income Tax Consequences

     73  

Regulatory Approvals

     76  

Delisting and Deregistration of Company Common Stock

     76  

Effective Time of Merger

     77  

Payment of Merger Consideration and Surrender of Stock Certificates

     77  

Fees and Expenses

     78  

Provisions for Unaffiliated Shareholders

     78  

FORWARD-LOOKING STATEMENTS

     79  

THE PARTIES TO THE MERGER

     81  

IMPORTANT INFORMATION REGARDING THE COMPANY

     82  

Background of the Company

     82  

Business and Background of Natural Persons Related to the Company

     82  

Markets and Market Price

     85  

Selected Historical Financial Information

     86  

Security Ownership of Certain Beneficial Owners and Management

     87  

Prior Public Offerings

     88  

IMPORTANT INFORMATION REGARDING PARENT, MERGER SUB, AND THE KINGSWOOD GROUP FILING PERSONS

     89  

IMPORTANT INFORMATION REGARDING THE ROLLOVER INVESTOR

     90  

COMMON STOCK TRANSACTION INFORMATION

     91  

Transactions by the Acquiring Group Filing Persons

     91  

Transactions by the Company

     92  

Transactions by the Company’s Directors and Executive Officers

     92  

THE SPECIAL MEETING

     94  

Time, Place and Purpose of the Special Meeting

     94  

Special Committee and Board Recommendation

     94  

 

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Who is Entitled to Vote at the Special Meeting?

     94  

How Do I Vote?

     95  

How Many Votes Do I Have?

     95  

What If I Request and Return a Proxy Card But Do Not Make Specific Choices?

     96  

Can I Change My Vote After I Return My Proxy Card?

     96  

How Are Votes Counted?

     96  

How Many Votes Are Needed to Approve Each Proposal?

     96  

What Should I Do With My Stock Certificates at this Time?

     97  

How Many Shares Must Be Present to Constitute a Quorum for the Special Meeting?

     97  

Stock Ownership and Interests of Certain Persons

     97  

Expenses of Proxy Solicitation

     98  

Adjournments, Postponements and Recesses

     98  

Rights of Shareholders Who Object to the Merger

     98  

Other Matters

     99  

Questions and Additional Information

     99  

THE MERGER AGREEMENT

     100  

General; The Merger

     100  

Closing and Effective Time of the Merger

     101  

Certificate of Incorporation; Bylaws

     101  

Conversion of Securities

     101  

Payment Procedures

     102  

Representations and Warranties

     103  

Covenants of the Company

     106  

Covenants of Parent and/or Merger Sub

     113  

Certain Covenants of Each Party

     115  

Conditions to the Completion of the Merger

     119  

Termination

     120  

Effect of Termination; Fees and Expenses

     122  

Amendment; Extension; Waiver

     125  

Special Committee Approval

     125  

Breach of Rollover Investor Disregarded

     125  

ADVISORY VOTE ON “MERGER-RELATED EXECUTIVE COMPENSATION”

     126  

Merger-Related Executive Compensation

     126  

Vote Required and Board of Directors Recommendation

     127  

ADJOURNMENT OF THE SPECIAL MEETING

     128  

Adjournment of the Special Meeting

     128  

Vote Required and Board of Directors Recommendation

     128  

SHAREHOLDER PROPOSALS AND NOMINATIONS

     129  

HOUSEHOLDING

     130  

WHERE SHAREHOLDERS CAN FIND MORE INFORMATION

     131  

APPENDIX A: MERGER AGREEMENT

APPENDIX B: OPINION OF PJ SOLOMON SECURITIES, LLC

APPENDIX C: SECTIONS 607.1301 THROUGH 607.1340 OF THE FLORIDA BUSINESS CORPORATION ACT

 

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LOGO

STEIN MART, INC.

1200 Riverplace Blvd.

Jacksonville, Florida 32207

This Proxy Statement contains information related to a Special Meeting of shareholders (the “Special Meeting”) of Stein Mart, Inc. to be held on [], 2020, at [] at [] Eastern Time, and at any adjournments, postponements or recesses thereof. We are furnishing this Proxy Statement to our shareholders as part of the solicitation of proxies by our board of directors for use at the Special Meeting. At the Special Meeting you will be asked to, among other things, consider and vote on the adoption of the merger agreement (as defined immediately below). This Proxy Statement is first being mailed to shareholders on or about [], 2020.

SUMMARY TERM SHEET

This following summary term sheet highlights the material information contained in this Proxy Statement and may not contain all of the information that is important to you. We urge you to read this entire Proxy Statement carefully, including the appendices, before voting. We have included section references to direct you to a more complete description of the topics described in this summary term sheet. You may obtain the information incorporated by reference into this Proxy Statement without charge by following the instructions in “Where Shareholders Can Find More Information” beginning on page 131. Unless the context requires otherwise, references in this Proxy Statement to “we,” “us,” “our,” the “Company” or “Stein Mart” refer to Stein Mart, Inc., a Florida corporation, and its subsidiaries.

We refer to Stratosphere Holdco, LLC, a Delaware limited liability company, as “Parent,” and Stratosphere Merger Sub, Inc., a Florida corporation, as “Merger Sub.”

We refer to Stein Family Holdco LLC, an entity managed by Jay Stein, the Chairman of the Company’s board of directors, as the “Rollover Investor.”

We refer to Parent, Merger Sub, Kingswood Stratosphere Investor, LLC (“TopCo”), Kingswood Intermediary I, Inc. (“Kingswood Intermediary I”), Kingswood Intermediary II, Inc. (“Kingswood Intermediary II”), Kingswood Capital Opportunities Fund I, L.P. (“Kingswood Fund I”), Kingswood Capital Opportunities Fund II, L.P. (“Kingswood Fund II” and together with Kingswood Fund I, the “Kingswood Funds”) and Kingswood Capital Management, L.P., collectively, as the “Kingswood Group” or the “Kingswood Group Filing Persons.” We refer to the Rollover Investor and the Kingswood Group Filing Persons, collectively, as the “Acquiring Group” or the “Acquiring Group Filing Persons.” We refer to the board of directors of the Company as the “board of directors” or the “Board.” We refer to the special committee of the board of directors comprised entirely of independent and disinterested directors as the “Special Committee.”

 

   

Parties to the Merger. See “The Parties to the Merger” beginning on page 81.

 

   

The Company, a Florida corporation headquartered in Jacksonville, Florida, is a national specialty off-price retailer offering designer and name-brand fashion apparel, home décor, accessories and shoes at everyday discount prices. Additional information about the Company is contained in its public filings, which are incorporated by reference herein. See “Where Shareholders Can Find Additional Information,” beginning on page 131.

 

   

Parent is a Delaware limited liability company that was formed by TopCo, an affiliate of Kingswood Capital Management, L.P., solely for the purpose of entering into the merger agreement and consummating the transactions contemplated by the merger agreement, including the merger.




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Merger Sub is a Florida corporation and an indirect wholly-owned subsidiary of Parent. Merger Sub was formed by Kingswood Intermediary II for the sole purpose of entering into the merger agreement and consummating the transactions contemplated by the merger agreement, including the merger.

 

   

Purpose of Shareholders’ Vote. You are being asked to:

 

   

consider and vote upon a proposal (the “merger proposal”) to adopt the Agreement and Plan of Merger, dated as of January 30, 2020, by and among the Company, Parent and Merger Sub, as it may be amended from time to time (the “merger agreement”). A copy of the merger agreement is attached as Appendix A to this Proxy Statement. Pursuant to the merger agreement, Merger Sub will be merged with and into the Company (the “merger”), and the Company will continue as the surviving corporation and become an indirect wholly-owned subsidiary of Parent. If the merger is completed, each issued and outstanding share of common stock, par value $0.01 per share, of the Company (“Company Common Stock”), other than as provided below, will be converted into the right to receive $0.90 in cash, without interest and less applicable withholding taxes (the “per share merger consideration”). The following shares of Company Common Stock will not be converted into the right to receive the per share merger consideration in connection with the merger: (i) shares of Company Common Stock held by the Company or any of its subsidiaries or by Parent or its subsidiaries, (ii) shares of Company Common Stock held by the Rollover Investor, which will be contributed to Parent by the Rollover Investor pursuant to its rollover commitment letter (the “Rollover Letter”) under which, and subject to the terms and conditions of which, the Rollover Investor has committed to contribute to Parent the amount of shares of Company Common Stock set forth therein (the “Rollover Investment”), and (iii) shares of Company Common Stock whose holders have not voted in favor of adopting the merger agreement or consented to it in writing and have demanded and perfected their appraisal rights in accordance with, and have complied in all respects with, Sections 607.1301 through 607.1340 of the Florida Business Corporation Act (the “FBCA”). See “Special Factors” beginning on page 17; “The Special Meeting” beginning on page 94; and “The Merger Agreement—Conversion of Securities” beginning on page 101;

 

   

approve on an advisory (non-binding) basis specified items of compensation that may be paid or become payable to the Company’s named executive officers in connection with the merger under existing agreements with the Company (which is referred to in this Proxy Statement as the “merger-related executive compensation”). See “Advisory Vote on Merger-Related Executive Compensation” beginning on page 126; and

 

   

approve a proposal to adjourn the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to adopt the merger agreement.

 

   

Voting Agreement. The Rollover Investor has entered into a voting agreement with Parent that covers approximately 36% of the outstanding shares of Company Common Stock as of the date of the merger agreement, pursuant to which it has agreed to, among other things, vote, or cause to be voted, its shares of Company Common Stock in favor of the adoption of the merger agreement and any related proposal in furtherance of the merger and the transactions contemplated by the merger agreement. The voting agreement will terminate automatically at the earliest of (i) the mutual agreement of the parties thereto to terminate the voting agreement; (ii) the termination of the merger agreement in accordance with its terms, and (iii) the effective time of the merger. See “Special Factors—Voting Agreement” beginning on page 69.

 

   

Rollover Investment. Pursuant to the Rollover Letter, the Rollover Investor has committed to contribute, immediately prior to the effective time of the merger, approximately 36% of the outstanding Company Common Stock as of the date of the merger agreement to Parent in exchange for equity securities of Parent.



 

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Conditions to the Merger. The completion of the merger is subject to the satisfaction or waiver of certain conditions, which are described in “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page 119. These conditions include, among others:

 

   

the adoption of the merger agreement by the affirmative vote of the holders of a majority of the outstanding shares of the Company Common Stock as of the record date for the Special Meeting;

 

   

the absence of certain governmental injunctions or orders that enjoin or otherwise prohibit the consummation of the merger;

 

   

the absence of a material adverse effect on the Company including if, among other things, at the time when the closing of the merger is to occur, the Company does not satisfy a minimum liquidity condition requiring at least 35% of excess availability under its credit agreement at the time of closing;

 

   

the Company’s, Parent’s and Merger Sub’s performance in all material respects of their agreements and covenants in the merger agreement and delivery of all required deliverables and certifications; and

 

   

the accuracy of the representations and warranties of the Company, Parent and Merger Sub (subject to certain qualifications).

 

   

Reasons for the Merger; Special Committee and Board Recommendation. The Special Committee, after careful consideration, voted unanimously to recommend to the board of directors that it, and thereafter the board of directors (other than Jay Stein), after careful consideration and acknowledging the participation of Jay Stein in the merger, voted unanimously to (i) approve and declare advisable the merger agreement, the merger and the transactions contemplated by the merger agreement, (ii) declare that it is fair to and in the best interests of the Company and the unaffiliated shareholders of the Company that the Company enter into the merger agreement and consummate the merger on the terms and subject to the conditions set forth in the merger agreement, (iii) direct that the adoption of the merger agreement be submitted to a vote at a meeting of the shareholders of the Company and (iv) recommend to the shareholders of the Company that they vote FOR the adoption of the merger agreement. The Special Committee and the board of directors also recommend that you vote FOR approval of the “merger-related executive compensation” and FOR approval of the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to adopt the merger agreement. For purposes of the Rule 13e-3 “going private” transaction described in this Proxy Statement, and as used in this Proxy Statement, “unaffiliated shareholders” means all shareholders of the Company other than the Rollover Investor. See “Special Factors—Recommendation of the Special Committee and Our Board of Directors; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger” beginning on page 34, see “Special Factors—Purposes and Reasons of the Company for the Merger” beginning on page 49, and see “Advisory Vote on Merger-Related Executive Compensation” beginning on page 126.

 

   

Opinion of the Special Committee’s Financial Advisor. In connection with the merger, the Special Committee received a written opinion, dated January 30, 2020, from the Special Committee’s financial advisor, PJ Solomon Securities, LLC (“PJS” or “PJ Solomon”), as to the fairness, from a financial point of view and as of the date of such opinion and based upon and subject to the factors and assumptions set forth therein, of the $0.90 in cash per share to be paid to the shareholders (other than Parent and its affiliates), including the Company’s “unaffiliated security holders” (as defined in Rule 13e-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), pursuant to the merger agreement. See the full text of PJS’ written opinion, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached to this Proxy Statement as Appendix B and see “Special Factors—Opinion of PJ Solomon Securities, LLC” beginning on page 39. PJS provided its opinion for the information and assistance of the Special Committee in connection with its consideration of the merger. The opinion does not constitute a recommendation to any shareholder as to how any such shareholder should vote on the merger or act on any matter relating to the merger.



 

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Financing of the Merger.

 

   

On January 30, 2020, Parent and TopCo entered into an equity commitment letter with the Kingswood Funds pursuant to which the Kingswood Funds have committed to, directly or indirectly, invest and contribute to Parent prior to the effective time of the merger with an aggregate equity contribution equal to approximately $29 million in cash (the “equity financing”). The equity financing will be used by Parent solely to fund the merger consideration payable to the shareholders of the Company and holders of Company equity awards pursuant to and in accordance with the merger agreement at the closing of the merger, together with related fees and expenses of Parent. The obligation of the Kingswood Funds to make the equity financing is subject to the satisfaction or waiver, prior to or contemporaneously with the closing of the merger, of the following conditions: (a) the satisfaction or waiver, prior to or contemporaneously with the closing of the merger, of all conditions precedent to the obligations of Parent to consummate the transactions contemplated by the merger agreement, (b) the debt financing has been funded (or will be concurrently funded if the equity financing is funded by the Kingswood Funds) as provided in the merger agreement, and (c) the contemporaneous consummation of the merger. The equity commitment letter provides, among other things, that the Company is an express third party beneficiary thereof with the right to cause Parent and TopCo to enforce the Kingswood Funds’ obligation to fund the equity financing under certain specified circumstances.

 

   

Additionally, concurrently with the execution of the merger agreement, the Rollover Investor entered into the Rollover Letter pursuant to which it will contribute immediately prior to the effective time of the merger shares of Company Common Stock representing, as of the date of the merger agreement, approximately 36% of the total outstanding shares of Company Common Stock in exchange for equity securities of Parent.

 

   

Wells Fargo Bank, National Association (“Wells Fargo”), and Pathlight Capital LP (“Pathlight”) have agreed to provide Parent, directly or indirectly, with debt financing in an aggregate principal amount sufficient, together with the equity financing, to make the payments and pay the expenses in order to consummate the merger and as otherwise provided in the merger agreement. The obligations of the lenders to provide debt financing under the debt commitment letters is subject to customary terms and conditions.

 

   

Limited Guarantee. In connection with the execution of the merger agreement, the Kingswood Funds have executed and provided the Company with a limited irrevocable guarantee in favor of the Company to guarantee, subject to the limitations described therein, the payment of certain monetary obligations that may be owed by Parent pursuant to the merger agreement, including the payment of any reverse termination fee that may become payable by Parent following a termination of the merger agreement in specified circumstances, subject to an overall cap of $2,229,000. See “Special Factors—Limited Guarantee” beginning on page 63.

 

   

Interests of the Company’s Directors and Executive Officers in the Merger. In considering the recommendation of the board of directors, you should be aware that certain of the Company’s directors and executive officers have interests in the merger that may be different from, or in addition to, their interests as Company shareholders. Jay Stein, Chairman of the Company’s board of directors, is a member of the Acquiring Group and will have equity interests in Parent after the consummation of the merger. These interests may create conflicts of interest. The Special Committee and the board of directors were aware of these interests during their respective deliberations on the merits of the merger and in making their decisions to recommend and approve, respectively, the merger agreement and the transactions contemplated by the merger agreement, including the merger. These interests are discussed in “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 64, “Advisory Vote on Merger-Related Compensation” beginning on page 126.



 

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Interests of Other Shareholders in the Merger. In considering the recommendation of the board of directors, you should be aware that the Rollover Investor has interests in the merger that are different from, or in addition to, the interests of the Company’s other shareholders. The Rollover Investor will have equity interests in Parent after the consummation of the merger. These interests may create conflicts of interest. The Special Committee and the board of directors were aware of these interests during their respective deliberations on the merits of the merger and in making their decisions to recommend and approve, respectively, the merger agreement and the transactions contemplated by the merger agreement, including the merger. These interests are discussed in “Special Factors—Positions of the Kingswood Group Filing Persons Regarding the Fairness of the Merger” beginning on page 50 and in “Special Factors—Positions of the Rollover Investor Regarding the Fairness of the Merger” beginning on page 52.

 

   

Material U.S. Federal Income Tax Consequences of the Merger. The exchange of shares of Company Common Stock for cash pursuant to the merger generally will be a taxable event for U.S. federal income tax purposes. Each U.S. holder (as defined in the section entitled “Special Factors—Material U.S. Federal Income Tax Consequences” beginning on page 73) whose shares of Company Common Stock are converted into the right to receive cash in the merger will generally recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference, if any, between the amount of the cash received with respect to such shares and the U.S. holder’s adjusted tax basis in such shares. Gain or loss will be determined separately for each block of shares of Company Common Stock (i.e., shares of Company Common Stock acquired at the same cost in a single transaction). See “Special Factors—Material U.S. Federal Income Tax Consequences” beginning on page 73 for a discussion of certain material U.S. federal income tax consequences of the merger to certain U.S. holders and certain non-U.S. holders. The determination of the actual tax consequences of the merger to a holder of Company Common Stock will depend on the holder’s specific situation. Holders are urged to consult their tax advisors regarding the U.S. federal income tax consequences of the merger to them based on their particular circumstance, as well as tax consequences arising under the laws of any state, local or foreign taxing jurisdiction.

 

   

Treatment of Outstanding Options, Restricted Stock Units and Restricted Stock. In connection with the consummation of the merger, (i) each stock option, whether or not then exercisable or vested, will be converted into the right to receive at the closing cash equal to the product of (a) the excess, if any, of the per share merger consideration over the per share exercise price of the applicable option and (b) the number of shares of Company Common Stock underlying such option; (ii) each share of restricted stock and each restricted stock unit not subject to any performance-based vesting condition will be automatically vested and converted into the right to receive at the closing cash equal to the per share merger consideration; and (iii) each restricted stock award or unit subject to any performance-based vesting condition will be converted into a right to receive at the closing cash equal to the product of: (a) the per share merger consideration and (b) the number of shares of Company Common Stock subject to such restricted stock award or unit that would have vested based on target level achievement. The Company has no outstanding stock options with a per share exercise price less than the per share merger consideration. In addition, no restricted stock awards or units subject to performance-based vesting conditions are expected to vest in connection with the merger. For more details about the treatment of Company equity-based awards, please see the section entitled “The Merger Agreement—Conversion of Securities—Treatment of Outstanding Options, Restricted Stock Units and Restricted Stock Awards” beginning on page 101.

 

   

Anticipated Closing of the Merger. The merger is expected to be completed after all of the conditions to the merger are satisfied or waived. The Company currently expects the merger to be completed in the first half of the calendar year 2020, although the Company cannot assure completion by any particular date, if at all. The Company will issue a press release once the merger has been completed. See “The Merger Agreement—Conditions to the Completion of the Merger” beginning on page 119.

 

   

Limitations on Solicitations of Other Offers. The Company has agreed to cease and terminate any previous discussions or negotiations with respect to “takeover proposals” (as defined in “The Merger



 

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Agreement—Covenants of the Company—No Solicitation of Takeover Proposals; Fiduciary Out” beginning on page 110). Under the merger agreement, the Company is subject to “nonsolicitation” restrictions that prohibit the Company, its subsidiaries and their respective representatives from soliciting, induce the making of, initiating, knowingly encourage or knowingly facilitate (including by way of furnishing or providing access to any non-public information) any inquiries regarding, or the making of any proposal or offer that constitutes or could reasonably be expected to lead to a takeover proposal or offers or providing information to or engaging in discussions or negotiations with third parties regarding a takeover proposal. Prior to the effective time or the termination of the merger agreement (whichever occurs earlier), the “nonsolicitation” restrictions are subject to “fiduciary out” provisions. See “The Merger Agreement—Covenants of the Company—No Solicitation of Takeover Proposals; Fiduciary Out” beginning on page 110 and “The Merger Agreement—Effect of Termination; Fees and Expenses” beginning on page 122.

 

   

Termination. The merger agreement may be terminated at any time prior to the completion of the merger:

 

   

by mutual written consent of both Parent and the Company (but with respect to the Company, only pursuant to a resolution adopted by the Special Committee);

 

   

by either Parent or the Company if (but with respect to the Company, only pursuant to a resolution adopted by the Special Committee):

 

   

the merger is not consummated by July 29, 2020 (the “termination date”), except that such right to terminate the merger agreement will not be available to the party seeking to terminate the merger agreement if such party has breached any of its representations, warranties, covenants or agreements in the merger agreement, which breach has been the principal cause of the failure to consummate the merger by such date;

 

   

the merger agreement has been submitted to the Company’s shareholders for adoption at a duly convened shareholders meeting (or adjournment, postponement or recess thereof) at which a quorum is present and the requisite shareholder vote is not obtained; or

 

   

a final and nonappealable order of any governmental authority having jurisdiction over any party to the merger agreement permanently enjoins or prohibits consummation of the merger; provided that the party seeking to terminate the merger agreement must have used reasonable best efforts to challenge such order and cause such order to be withdrawn, rescinded, terminated, cancelled or otherwise nullified;

 

   

by Parent if:

 

   

prior to the adoption of the merger agreement by the Company’s shareholders, the Special Committee or the board of directors has changed, withdrawn, modified or amended its recommendation (or the Special Committee recommends that the board of directors take any such action) that the Company’s shareholders adopt the merger agreement in any manner adverse to Parent (or the Special Committee or the board of directors has publicly proposed to do so);

 

   

prior to the adoption of the merger agreement by the Company’s shareholders, (i) the board of directors or the Special Committee approves, endorses or recommends any takeover proposal (or publicly proposes to do so) or approves, recommends or allows the Company to enter into a contract relating to a takeover proposal (other than an acceptable confidentiality agreement); (ii) any tender offer or exchange offer that if consummated would result in any person beneficially owning 20% or more of any class of equity or securities of the Company then outstanding is commenced and the board of directors or Special Committee recommends in favor of such tender offer or exchange offer by its shareholders (or publicly proposes to do so) or within ten business days after the commencement thereof the board of directors fails to recommend against such tender offer or exchange offer; or (iii) if a takeover proposal shall have been publicly announced



 

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or disclosed and the board of directors or the Special Committee fails to reaffirm the board of director’s recommendation to shareholders upon written request by Parent within five business days after such request; or

 

   

a breach by the Company of any of its representations, warranties, covenants or agreements under the merger agreement has occurred, which breach would give rise to a failure of certain specified conditions to closing and such breach is not capable of being cured prior to the termination date or is not cured by the Company within 20 business days after the Company’s receipt of written notice of such breach from Parent, but only so long as neither Parent nor Merger Sub are in breach of their respective representations, warranties, covenants or agreements under the merger agreement which breach would give rise to the failure of specified conditions to the Company’s obligations to close;

 

   

by the Company (only pursuant to a resolution adopted by the Special Committee before the effective time of the merger) if:

 

   

pursuant to the “no-shop” provisions in the merger agreement as described under the heading “The Merger Agreement—Covenants of the Company—No Solicitation of Takeover Proposals; Fiduciary Out” beginning on page 110;

 

   

a breach by Parent or Merger Sub of any of their respective representations, warranties, covenants or agreements under the merger agreement has occurred, which breach would give rise to a failure of certain specified conditions to closing and such breach is not capable of being cured prior to the termination date, or is not cured by Parent within 20 business days after Parent’s receipt of written notice of such breach from the Company, but only so long as the Company is not in breach of its representations, warranties, covenants or agreements under the merger agreement which breach would give rise to the failure of specified conditions to Parent’s obligations to close; or

 

   

if (i) all of the conditions to the respective obligations of the parties and to Parent’s obligations to close have been satisfied or waived (other than any condition the failure of which to be satisfied is attributable to a breach by Parent or Merger Sub of their respective representations, warranties, covenants or agreements contained in the merger agreement and other than conditions that, by their nature, are to be satisfied at the closing and which were, at the time of termination, capable of being satisfied), (ii) the Company confirmed to Parent in writing that all conditions to the Company’s obligations to close have been satisfied (or that it is willing to waive (to the extent permitted by law) any unsatisfied conditions to the Company’s obligations to close) and that it stands and will stand ready, willing and able to consummate the merger and (iii) Parent and Merger Sub have failed to consummate the closing by the earlier of (x) the date that is five business days after receipt of such confirmation by the Company and (y) the termination date.

In connection with the merger agreement, the Kingswood Funds have executed a limited irrevocable guarantee in favor of the Company to guarantee, subject to the limitations described therein, certain obligations of Parent pursuant to the merger agreement. Under the limited guarantee, the Kingswood Funds have guaranteed the payment of any reverse termination fee that may become payable by Parent following a termination of the merger agreement in specified circumstances and certain expense reimbursement and indemnification obligations of Parent in connection with the Company’s cooperation with the debt financing, subject to an overall cap of $2,229,000.

See “The Merger Agreement—Termination” beginning on page 120.

 

   

Termination Fees. The merger agreement contains certain termination rights for both the Company and Parent. The merger agreement provides that, upon termination of the merger agreement under specified circumstances, the Company would be required to pay Parent or its designee a termination fee in an amount



 

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equal to $2,229,000 (including, under certain circumstances, if the Company or any of its subsidiaries enters into a definitive agreement for or consummates an alternative takeover proposal during the 12-month “tail” period following termination of the merger agreement, or under other certain circumstances. The merger agreement also provides that Parent would be required to pay the Company a reverse termination fee, upon termination of the merger agreement under specified circumstances, of $2,229,000, and, in certain circumstances, the fees and expenses of the Company, but subject to an overall cap of $2,229,000. The merger agreement provides that under no circumstances may the Company be permitted or entitled to receive both payment of the reverse termination fee and payment of other monetary damages. See “The Merger Agreement—Effect of Termination; Fees and Expenses” beginning on page 122 and “Special Factors—Limited Guarantee” beginning on page 63.

 

   

Specific Performance. Under certain circumstances, the Company, on the one hand, and Parent and Merger Sub, on the other hand, are entitled to an injunction or injunctions to prevent breaches or threatened breaches of the merger agreement and to enforce specifically the terms and provisions thereof, this being in addition to any other remedy at law or in equity to which they are entitled. However, the right of the Company to seek specific performance to enforce Parent’s and/or Merger Sub’s obligation to effect the closing as provided by the merger agreement or the Company’s ability, as a third-party beneficiary, to cause the equity commitment to be funded pursuant to the equity commitment letter is subject to the requirements that (i) all of the conditions to the parties’ respective obligations and to Parent’s and Merger Sub’s obligations to consummate the merger would have been satisfied if the closing were to have occurred at the date closing is required to occur under the merger agreement (other than those conditions that, by their terms, are to be satisfied at the closing, each of which shall be capable of being satisfied at the closing, or the failure of which to be satisfied is attributable primarily to a breach by Parent or Merger Sub of their respective representations, warranties, covenants or agreements contained in the merger agreement), (ii) the debt financing has been funded or will be funded at the date the closing is required to occur in accordance with the terms of the merger agreement upon delivery of a drawdown notice by Parent and/or notice from Parent that the Rollover Investment will be funded at such date, (iii) Parent and Merger Sub fail to complete the closing on the date the closing is required to have occurred as provided in the merger agreement, and (iv) the Company has irrevocably confirmed in writing to Parent that all of the conditions to the parties’ respective obligations and to the Company’s obligations to consummate the merger have been satisfied (or that the Company would be willing to waive any unsatisfied conditions for purposes of consummating the merger) and that if specific performance is granted and if the debt financing and Rollover Investment were funded, it would take such actions that are required by the merger agreement to cause the closing to occur.    In no event will the Company be entitled to specifically enforce, as a third-party beneficiary, to cause the equity commitment to be funded or to complete the merger if the debt financing has not or will not be funded at the closing nor may the Company seek specific performance against any of the financing sources. The merger agreement provides that under no circumstances may the Company be permitted or entitled to receive both a grant of specific performance or other equitable relief pursuant to which the merger is consummated and the aggregate merger consideration is received, on the one hand, and payment of all or a portion of the reverse termination fee or other monetary damages, on the other hand. See “The Merger Agreement—Effect of Termination; Fees and Expenses” beginning on page 122 and “Special Factors—Limited Guarantee” beginning on page 63.

 

   

Appraisal Rights. Shareholders who do not vote in favor of the adoption of the merger agreement or have not consented to it in writing may exercise their right to seek appraisal of the fair value of their shares of Company Common Stock if the merger is completed in lieu of receiving the per share merger consideration, but only if they do not vote in favor of adopting the merger agreement and otherwise comply with the procedures of Sections 607.1301 through 607.1340 of the FBCA, which is the appraisal rights statute applicable to Florida corporations. A copy of Sections 607.1301 through 607.1340 of the FBCA is included as Appendix C to this Proxy Statement and the procedures are summarized in this Proxy Statement. See “Special Factors—Appraisal Rights” beginning on page 70 and Appendix C to this Proxy Statement.



 

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Additional Information. You can find more information about the Company in the periodic reports and other information the Company files with the Securities and Exchange Commission (the “SEC”). This information is available at the SEC’s public reference facilities and at the website maintained by the SEC at www.sec.gov and on the Company’s website at http://ir.steinmart.com (click on “SEC Filings”). For a more detailed description of the additional information available, see “Where Shareholders Can Find More Information” beginning on page 131.



 

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QUESTIONS AND ANSWERS ABOUT THE MERGER,

THE “MERGER-RELATED EXECUTIVE COMPENSATION” AND THE SPECIAL MEETING

The following questions and answers, which are for your convenience only, briefly address some commonly asked questions about the merger, the “merger-related executive compensation” and the Special Meeting and are qualified in their entirety by the more detailed information contained elsewhere in this Proxy Statement. These questions and answers may not address all questions that may be important to you as a shareholder of Stein Mart. You should still carefully read this entire Proxy Statement, including the attached appendices.

 

Q:

When and where is the Special Meeting?

 

A:

The Special Meeting will be held at [], Eastern Time, on [], 2020. The Special Meeting will be held at [].

 

Q:

What items will be voted upon at the Special Meeting?

 

A:

There are three matters scheduled for a vote at the Special Meeting:

1. A vote on the adoption of the merger agreement, pursuant to which Merger Sub will merge with and into the Company and the Company will continue as the surviving corporation and become an indirect wholly-owned subsidiary of Parent;

2. An advisory (non-binding) vote to approve the “merger-related executive compensation” that may become payable to the Company’s named executive officers in connection with the merger; and

3. A vote on a proposal to approve the adjournment, postponement or recess of the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to adopt the merger agreement.

In addition, shareholders will be asked to consider and vote upon any other matters that properly come before the Special Meeting or any adjournment, postponement or recess thereof.

 

Q:

What will happen in the merger?

 

A:

In the merger, Merger Sub will be merged with and into the Company and the Company will continue as the surviving corporation and become an indirect wholly-owned subsidiary of Parent. As a result of the merger, Company Common Stock will no longer be publicly traded, and you will no longer have any interest in the Company’s future earnings or growth. In addition, Company Common Stock will be delisted from the Nasdaq Capital Market and deregistered under the Exchange Act, and the Company will no longer be required to file periodic reports with the SEC with respect to Company Common Stock.

 

Q:

What will I receive in the merger?

 

A:

If the merger is completed, you will be entitled to receive $0.90 in cash, without interest and less any applicable withholding taxes, for each share of Company Common Stock that you own immediately prior to the effective time of the merger. For example, if you own 100 shares of Company Common Stock, you will receive $90 in cash in exchange for your shares of Company Common Stock, without giving effect to any applicable withholding taxes. This does not apply to (i) shares of Company Common Stock held by the Company or any of its subsidiaries, (ii) shares of Company Common Stock held by Parent or its subsidiaries (including shares of Company Common Stock contributed to Parent by the Rollover Investor immediately prior to consummation of the merger), and (iii) shares of Company Common Stock whose holders have not voted in favor of adopting the merger agreement or consented to it in writing and have demanded and perfected their appraisal rights in accordance with, and have complied in all respects with, the FBCA. You will not own, directly or indirectly, any shares of the capital stock in the surviving corporation.

In connection with the consummation of the merger, (i) each stock option, whether or not then exercisable or vested, will be converted into the right to receive at the closing cash equal to the product of (a) the

 

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excess, if any, of the per share merger consideration over the per share exercise price of the applicable option and (b) the number of shares of Company Common Stock underlying such option; (ii) each share of restricted stock and each restricted stock unit not subject to any performance-based vesting condition will be automatically vested and converted into the right to receive at the closing cash equal to the per share merger consideration; and (iii) each restricted stock award or unit subject to any performance-based vesting condition will be converted into a right to receive at the closing cash equal to the product of: (a) the per share merger consideration and (b) the number of shares of Company Common Stock subject to such restricted stock award or unit that would have vested based on target level achievement. The Company has no outstanding stock options with a per share exercise price less than the per share merger consideration. In addition, no restricted stock awards or units subject to performance-based vesting conditions are expected to vest in connection with the merger.

 

Q:

Is the merger expected to be taxable to owners of the Company Common Stock?

 

A:

Yes. The exchange of shares of Company Common Stock for cash pursuant to the merger generally will be a taxable event for U.S. federal income tax purposes. Each U.S. holder (as defined in the section entitled “Special Factors—Material U.S. Federal Income Tax Consequences” beginning on page 73) whose shares of Company Common Stock are converted into the right to receive cash in the merger will generally recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference, if any, between the amount of the cash received with respect to such shares and the U.S. holder’s adjusted tax basis in such shares. Gain or loss will be determined separately for each block of shares of Company Common Stock (i.e., shares of Company Common Stock acquired at the same cost in a single transaction). See “Special Factors—Material U.S. Federal Income Tax Consequences” beginning on page 73 for a discussion of certain material U.S. federal income tax consequences of the merger to certain U.S. holders and certain non-U.S. holders. The determination of the actual tax consequences of the merger to a holder of Company Common Stock will depend on the holder’s specific situation. Holders are urged to consult their tax advisors regarding the U.S. federal income tax consequences of the merger to them based on their particular circumstance, as well as tax consequences arising under the laws of any state, local or foreign taxing jurisdiction.

 

Q:

How does the per share merger consideration compare to the market price of Company Common Stock prior to announcement of the merger?

 

A:

The $0.90 per share to be paid in respect of each share of Company Common Stock represents a premium of approximately 38% to the closing price per share of Company Common Stock on January 30, 2020, the last trading day before the announcement that the Company, Parent and Merger Sub had entered into the merger agreement, of $0.65.

 

Q:

How will our directors and executive officers vote on the proposal to adopt the merger agreement?

 

A:

Our directors and executive officers (other than Jay Stein who manages the Rollover Investor) have informed us that, as of the date of this Proxy Statement, they intend to vote all of the shares of Company Common Stock owned directly by them, in favor of the adoption of the merger agreement. As of [], 2020, the record date for the Special Meeting, our directors and executive officers (other than Jay Stein who manages the Rollover Investor) beneficially owned, in the aggregate, [] shares of Company Common Stock entitled to vote at the Special Meeting, or collectively approximately [●]% of the outstanding shares of Company Common Stock entitled to vote at the Special Meeting. See “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 64.

As of [], 2020, the record date for the Special Meeting, the Rollover Investor owned 17,339,544 shares of Company Common Stock entitled to vote at the Special Meeting, or approximately 36% of the outstanding shares of Company Common Stock entitled to vote at the Special Meeting. The Rollover Investor has entered into a voting agreement with Parent pursuant to which, unless the voting agreement is terminated in accordance with its terms (including upon a termination of the merger agreement in accordance with its terms), it has agreed to, among other things, vote, or cause to be voted, its shares of Company Common

 

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Stock in favor of the adoption of the merger agreement and any related proposal in furtherance of the merger and the transactions contemplated by the merger agreement. See “Special Factors—Voting Agreement” beginning on page 69. The Rollover Investor has interests in the merger that are different from, or in addition to, the interests of the Company’s other shareholders. For more information, please see “Special Factors—Financing of the Merger” beginning on page 62.

 

Q:

Who will own the Company after the merger?

 

A:

After the merger, the Company will be an indirect wholly-owned subsidiary of Parent, which will be owned by affiliates of Kingswood Capital Management, L.P., including TopCo, and the Rollover Investor.

 

Q:

Who can attend and vote at the Special Meeting?

 

A:

All holders of Company Common Stock at the close of business on [], 2020, the record date for the Special Meeting, will be entitled to vote (in person or by proxy) at the Special Meeting.

 

Q:

What vote is required to adopt the merger agreement?

 

A:

The merger agreement must be adopted by the affirmative vote of the holders of a majority of the outstanding shares of the Company Common Stock as of the record date for the Special Meeting. Because the required vote is based on the number of shares of Company Common Stock outstanding rather than on the number of votes cast, failure to vote your shares and abstentions will have the same effect as voting against the adoption of the merger agreement. Whether or not you plan to attend the Special Meeting in person, to ensure the presence of a quorum and that your shares are represented at the Special Meeting, please vote via the Internet or by telephone as instructed in the accompanying proxy materials or complete, date and sign and return a proxy card as promptly as possible.

The Rollover Investor has entered into a voting agreement with Parent that covers approximately 36% of the outstanding shares of Company Common Stock, pursuant to which it has agreed to, among other things, vote its shares FOR the adoption of the merger agreement and the approval of the merger and any related proposal in furtherance of the merger and the transactions contemplated by the merger agreement.

 

Q:

What is “merger-related executive compensation” and why am I being asked to cast an advisory (non-binding) vote to approve “merger-related executive compensation” that may become payable to the Company’s named executive officers under existing agreements with the Company in connection with the merger?

 

A:

The “merger-related executive compensation” is certain compensation that is paid or may become payable to the Company’s named executive officers under existing agreements with the Company in connection with the merger. See “Advisory Vote on Merger-Related Executive Compensation” beginning on page 126. The SEC has adopted rules that require the Company to seek approval on an advisory (non-binding) basis with respect to certain compensation that will or may be payable to the Company’s named executive officers in connection with the merger.

 

Q:

What vote is required to approve on an advisory basis the “merger-related executive compensation” that may become payable to the Company’s named executive officers under existing agreements with the Company in connection with the merger?

 

A:

The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote on the proposal is required for approval of the advisory (non-binding) proposal on “merger-related executive compensation.”

 

Q:

What will happen if shareholders do not approve the “merger-related executive compensation” at the Special Meeting?

 

A:

Approval of the “merger-related executive compensation” is not a condition to the completion of the merger. The vote with respect to the “merger-related executive compensation” is an advisory vote and will not be binding on the Company or Parent. Further, the underlying plans and arrangements are contractual in

 

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  nature and not, by their terms, subject to shareholder approval. Accordingly, regardless of the outcome of the non-binding, advisory vote, if the merger agreement is adopted by the shareholders and the merger is completed, our named executive officers will be eligible to receive the various “merger-related executive compensation” payments.

 

Q:

What is a quorum?

 

A:

A quorum will be present if holders of a majority in the aggregate voting power of all outstanding shares of Company Common Stock entitled to vote on a matter at the Special Meeting are present in person or represented by proxy at the Special Meeting. The quorum for the Special Meeting is not broken by the subsequent withdrawal of any shareholder. If a quorum is not present at the Special Meeting, the Special Meeting may be adjourned to another time and place.

If you hold the shares of common stock in your own name and submit a proxy but fail to provide voting instructions or abstain on any of the proposals listed on the proxy card, your shares will be counted for purpose of determining whether a quorum is present at the special meeting. If your shares are held in “street name” by your broker, bank or other nominee and you do not tell the nominee how to vote your shares, these shares will not be counted for purposes of determining whether a quorum is present for the transaction of business at the special meeting.

 

Q:

How many votes do I have?

 

A:

You have one vote for each share of Company Common Stock that you own as of the close of business on the record date.

 

Q:

How are votes counted and what happens if I do not vote?

 

A:

Votes will be counted separately in respect of each proposal by the inspector of election appointed for the Special Meeting, who will separately count FOR and AGAINST votes as well as abstentions.

Because the affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock is required to approve the adoption of the merger agreement, the failure to vote and abstentions will have the same effect as a vote AGAINST the adoption of the merger agreement.

The advisory (non-binding) proposal on the “merger-related executive compensation” and the proposal to adjourn the Special Meeting if there are not sufficient votes to adopt the merger proposal will be approved if the votes cast “FOR” the proposal exceed the votes cast “AGAINST” the proposal. Abstentions will have no effect on the advisory (non-binding) proposal on the “merger-related executive compensation” or the adjournment proposal. As noted above, the vote with respect to the “merger-related executive compensation” is an advisory vote and will not be binding on the Company or Parent. Accordingly, regardless of the outcome of the non-binding, advisory vote, if the merger agreement is adopted by the shareholders and completed, our named executive officers will be eligible to receive the various “merger-related executive compensation” payments.

As noted above, the Rollover Investor has entered into a voting agreement with Parent that covers approximately 36% of the outstanding shares of Company Common Stock as of the date of the merger agreement, pursuant to which, unless the voting agreement is terminated in accordance with its terms (including upon a termination of the merger agreement in accordance with its terms), it has agreed to vote its shares FOR the adoption of the merger agreement and the approval of the merger and any related proposal in furtherance of the merger and the transactions contemplated by the merger agreement. The adoption of the merger agreement and the transactions contemplated by the merger agreement will require the affirmative vote of the holders of a majority of the outstanding shares of the Company Common Stock as of the record date for the Special Meeting.

 

Q:

If my shares are held in “street name” by my broker, bank or other nominee, will my broker, bank or other nominee vote my shares for me?

 

A:

Your broker will not vote your shares on your behalf unless you provide instructions to your broker on how to vote. You should follow the directions provided by your broker regarding how to instruct it to vote your

 

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  shares. Without those instructions, your shares will not be voted, which will have the same effect as voting AGAINST the adoption of the merger agreement for purposes of the Company shareholder approval, but will have no effect for purposes of the proposal to adjourn the Special Meeting, if necessary or appropriate, to solicit additional proxies or on the outcome of the advisory (non-binding) vote on “merger-related executive compensation.”

 

Q:

Will my shares held in “street name” or another form of record ownership be combined for voting purposes with shares I hold of record?

 

A:

No. Because any shares you may hold in “street name” will be deemed to be held by a different shareholder than any shares you hold of record, any shares so held will not be combined for voting purposes with shares you hold of record. Similarly, if you own shares in various registered forms, such as jointly with your spouse, as trustee of a trust or as custodian for a minor, you will receive, and will need to sign and return, a separate proxy card for those shares because they are held in a different form of record ownership. Shares held by a corporation or business entity may be voted by the officer, agent or proxy designated by the bylaws of such corporate shareholder or, in the absence of any applicable bylaw, by such person or persons as the board of directors of the corporate shareholder may designate. In the absence of any such designation, or, in case of conflicting designation by the corporate shareholder, the chairman of the board, the president, any vice president, the secretary and the treasurer of the corporate shareholder, in that order, shall be presumed to be fully authorized to vote such shares. Shares held by an administrator, executor, guardian, personal representative, or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name or the name of his nominee. Shares held by or under the control of a receiver, a trustee in bankruptcy proceedings, or an assignee for the benefit of creditors may be voted by such person without the transfer thereof into his name. If shares stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or if two or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary of the Company is given notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, then acts with respect to voting shall have the following effect: (a) if only one votes, in person or by proxy, his act binds all; (b) if more than one votes, in person or by proxy, the act of the majority so voting binds all; (c) if more than one votes, in person or by proxy, but the vote is evenly split on any particular matter, each faction is entitled to vote the share or shares in question proportionally; or (d) if the instrument or order so filed shows that any such tenancy is held in unequal interest, a majority or a vote evenly split for purposes hereof shall be a majority or a vote evenly split in interest.

 

Q:

May I vote in person?

 

A:

Yes. You may attend the Special Meeting and vote your shares in person whether or not you sign and return your proxy card. If your shares are held of record by a broker, bank or other nominee and you wish to vote at the Special Meeting, you must obtain a proxy from such record holder.

 

Q:

May I change my vote after I have mailed my signed proxy card?

 

A:

Yes. If you are the shareholder of record of your shares, you may revoke your proxy in any one of three ways:

 

   

You may submit another properly completed proxy bearing a later date which is received by [●], our proxy tabulator, by the close of business on [], 2020;

 

   

You may send a written notice which is received by the close of business on [], 2020 that you are revoking your proxy to 1200 Riverplace Boulevard, Jacksonville, Florida 32207, Attention: James B. Brown, Secretary; or

 

   

You may attend the Special Meeting and notify the election officials that you wish to revoke your proxy and vote in person. Your attendance at the Special Meeting will not, by itself, revoke your proxy.

 

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If your shares are held by your broker, bank or other agent as your nominee, you should follow the instructions provided by your broker, bank or other agent.

 

Q:

What does it mean if I receive more than one set of proxy materials?

 

A:

This means you own shares of Company Common Stock that are registered under different names or are in more than one account. For example, you may own some shares directly as a shareholder of record and other shares through a broker or you may own shares through more than one broker. In these situations, you will receive multiple sets of proxy materials. You must vote, sign and return all of the proxy cards or follow the instructions for any alternative voting procedure on each of the proxy cards that you receive in order to vote all of the shares you own. Each proxy card you receive comes with its own prepaid return envelope. If you submit your proxy by mail, make sure you return each proxy card in the return envelope that accompanies that proxy card.

 

Q:

If the merger is completed, how will I receive cash for my shares?

 

A:

If the merger agreement is adopted and the merger is consummated, and if you are the record holder of your shares of Company Common Stock (i.e., you have a stock certificate (or affidavit of loss in lieu thereof) or you hold shares in book-entry), as soon as reasonably practicable, and in any event within three business days after the effective time of the merger, you will be sent a letter of transmittal to complete and return to a paying agent to be designated by Parent, referred to herein as the “paying agent.” In order to receive the $0.90 per share merger consideration, you must send the paying agent, according to the instructions provided, your validly completed and signed letter of transmittal together with your Company stock certificates (or affidavit of loss in lieu thereof) or book-entry shares, as applicable, and other required documents as instructed in the separate mailing. Once you have properly submitted these materials, you will receive cash for your shares. If your shares of Company Common Stock are held in “street name” by your broker, bank or other nominee, you will receive instructions after the effective time of the merger from your broker, bank or other nominee as to how to effect the surrender of your “street name” shares and receive cash for those shares.

 

Q:

What happens if the merger is not completed?

 

A:

If the merger agreement is not adopted by the shareholders of the Company or if the merger is not completed for any other reason, the shareholders of the Company will not receive any payment for their shares of Company Common Stock in connection with the merger. Instead, the Company will remain a stand-alone company, Company Common Stock will continue to be listed and traded on the Nasdaq Capital Market and registered under the Exchange Act, and the Company will continue to file periodic reports with the SEC with respect to Company Common Stock. Under specified circumstances, the Company may be required to pay to Parent, or may be entitled to receive from Parent, a fee with respect to the termination of the merger agreement, as described under “The Merger Agreement—Effect of Termination; Fees and Expenses” beginning on page 122.

 

Q:

When should I send in my stock certificates?

 

A:

If the merger agreement is adopted you will receive the letter of transmittal following the consummation of the merger. You should send your stock certificates (or affidavit of loss in lieu thereof) together with the letter of transmittal in accordance with the instructions provided after the merger is consummated and not now.

 

Q:

I do not know where my stock certificate is—how will I get my cash?

 

A:

The materials you are sent after the completion of the merger will include the procedures that you must follow if you cannot locate your stock certificate. This will include an affidavit that you will need to sign attesting to the loss of your stock certificate. The Company may also require that you provide a customary indemnity agreement to the Company in order to cover any potential loss.

 

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Q:

What happens if I sell my shares of Company Common Stock before the Special Meeting?

 

A:

The record date for shareholders entitled to vote at the Special Meeting is earlier than the consummation of the merger. If you transfer your shares of Company Common Stock after the record date but before the Special Meeting you will, unless special arrangements are made, retain your right to vote at the Special Meeting, but will transfer the right to receive the merger consideration to the person to whom you transfer your shares.

 

Q:

What rights do I have to seek a valuation of my shares?

 

A:

Shareholders who do not vote in favor of the adoption of the merger agreement or have not consented to it in writing may exercise their right to seek appraisal of the fair value of their shares of Company Common Stock if the merger is completed in lieu of receiving the per share merger consideration, but only if they do not vote in favor of adopting the merger agreement and otherwise comply with the procedures of Sections 607.1301 through 607.1340 of the FBCA, which is the appraisal rights statute applicable to Florida corporations. A copy of Sections 607.1301 through 607.1340 of the FBCA is included as Appendix C to this Proxy Statement and the procedures are summarized in this Proxy Statement. See “Special Factors—Appraisal Rights” beginning on page 70 and Appendix C to this Proxy Statement.

 

Q:

What do I need to do now?

 

A:

You should carefully read this Proxy Statement, including the appendices, in their entirety, and consider how the merger would affect you. Whether or not you plan to attend the Special Meeting in person, to ensure the presence of a quorum and that your shares are represented at the Special Meeting, please vote via the Internet or by telephone as instructed in the accompanying proxy materials or complete, date, sign and return a proxy card as promptly as possible.

 

Q:

Who can help answer my questions?

 

A:

If you have questions about the merger agreement or the merger, including the procedures for voting your shares, you should contact Kingsdale Advisors, our proxy solicitor, by telephone at 1.866.581.1479 toll-free in North America (+1.416.867.2272 for collect calls outside of North America) or by e-mail at contactus@kingsdaleadvisors.com.

 

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SPECIAL FACTORS

The following, together with the summary of the merger agreement set forth under “The Merger Agreement,” is a description of the material aspects of the merger. While we believe that the following description covers the material aspects of the merger, the description may not contain all of the information that is important to you. We encourage you to read carefully this entire document, including the Agreement and Plan of Merger attached to this Proxy Statement as Appendix A, for a more complete understanding of the merger. The following description is subject to, and is qualified in its entirety by reference to, the merger agreement. You may obtain additional information without charge by following the instructions in “Where Shareholders Can Find More Information” beginning on page 131 of this Proxy Statement.

Background of the Merger

The board of directors (the “Board”) and the Company’s senior management from time to time and in the ordinary course of business consider and evaluate potential strategic alternatives relating to the Company’s businesses, including potential business combinations, strategic partnerships, acquisitions and other potential strategic transactions, all with a view towards enhancing shareholder value.

The retail industry has generally experienced difficult business conditions during the past several years. In general, retailers have experience decreased store traffic and have lost market share to fast-growing e-commerce retailers. The declines in store traffic have been especially pertinent for broadline retailers, which have also experienced lower operating margins as a result.

During fiscal year 2017, the Company’s comparable same store sales (including gross licensed departments sales and online orders) and adjusted EBITDA declined significantly from the Company’s prior year performance. During the fall of 2017, management became concerned that a reduction in trade credit would impinge on the Company’s ability to purchase merchandise and continue operating the business in the normal course. Additionally, as of the end of fiscal year 2017, the Company had significant borrowings on its revolving credit facility, which left it with limited capacity to borrow additional funds to invest in the business and improve its operations and competitiveness. The Company’s existing high leverage, combined with its deteriorating performance raised significant questions internally about its ability to continue receiving sufficient trade credit to continue operating on a normal basis in the long-term.

As a result, during the fall of 2017, the Company engaged Alvarez & Marsal (“A&M”), a nationally recognized turnaround advisor, to review its operations for performance enhancements and to assist the Company with developing a strategy for managing its relationship with trade creditors and for increasing cash flow.

On October 9, 2017, the Board held a special meeting to receive an update from management regarding recent business developments and to discuss how the Company could more effectively respond to the current challenges in its business and in the retail industry. At the meeting, the Board received advice from its counsel, Foley & Lardner LLP (“Foley”) and from A&M regarding the Company’s financial condition and legal considerations, including the fiduciary duties of directors of a potentially financially distressed company. After discussion, the Board formed a special committee of the Board (the “Special Committee”), consisting of three independent members of the Board – Richard Sisisky, Tom Cole and Irwin Cohen. The Board delegated to the Special Committee the power (i) to oversee the Company’s turnaround strategy and initiatives to maximize enterprise value; (ii) to oversee management’s financial and operational performance improvement initiatives; (iii) to oversee the Company’s cash management initiatives, including cash flow forecasting, working capital management and vendor management; (iv) to oversee management’s investigation of potential sources of additional capital; and (v) to oversee management’s contingency planning. The Board expressly granted the Special Committee full power and authority to explore and evaluate all potential options to maximize the value of the enterprise.

During the last week of November 2017, together with representatives of A&M, management met in-person with the Company’s five largest factors, which are financial institutions that purchase the Company’s accounts receivable from vendors at a discount, to present management’s turnaround plan and to reassure the group that the Company had sufficient liquidity to continue to operate normally for the foreseeable future.

 

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On December 27, 2017, the Board held a special meeting to discuss the Company’s available trade credit and a continuing trend of disappointing sales, which resulted from reduced traffic in stores. At the meeting, a representative from A&M briefed the Board on liquidity-related issues and business strategy and Foley briefed the Board regarding potential bankruptcy and non-bankruptcy alternatives.

On January 5, 2018, the Board held another special meeting to discuss the Company’s challenges in funding its working capital, the steps being taken to turn around the Company and potential options available to the Company. At the meeting, a representative from A&M briefed the Board on liquidity-related issues and Foley briefed the Board regarding the directors’ fiduciary duties, including their responsibilities in connection with potential sale of the Company. Foley’s briefing also addressed the directors’ duties when the Company may be in the potential zone of insolvency.

On January 8, 2018, management, with the assistance and support of A&M, met in New York with the Company’s vendors and factors to address liquidity concerns and the Company’s turnaround efforts. Following that meeting, some of the Company’s vendors and factors began to restrict access to credit to a point that affected the Company’s operations. The Company was, however, able to maintain sufficient liquidity to continue operations.

On January 26, 2018, the Special Committee engaged PJ Solomon Securities, LLC (“PJS”) to serve as its financial advisor in connection with the Special Committee’s work to identify and explore all potential strategic alternatives available to the Company, including a potential sale of the Company.

On January 29, 2018, the Company issued a press release announcing that the Special Committee had engaged PJS and A&M to assist the Company with exploring all opportunities to improve operating performance and identify potential strategic alternatives.

During January and February of 2018, PJS conducted a sale process and contacted 15 parties, which included a mix of both strategic companies and financial sponsors. Because of the public announcement, PJS received four inbound queries from prospective financial sponsor buyers, all of which were invited to participate in the process. Of the 19 parties, five signed non-disclosure agreements and four received access to the Company’s data room (one party who signed a non-disclosure agreement declined the opportunity before receiving access to the Company’s data room). Upon reviewing the information provided in the data room and the available public information regarding the Company, three of the parties declined to pursue the opportunity. The remaining party, a private equity firm (“Firm A”), continued to show interest in pursuing an acquisition of the Company. On February 1, 2018, Firm A met with Company management and was provided with an overview of the business from management, discussed recent performance and asked preliminary diligence questions. On February 8, 2018, Firm A submitted a preliminary non-binding indication of interest to the Special Committee. The indication of interest stated that Firm A was interested in an acquisition of the Company, but it did not put forth a price (or range of prices) nor did it describe transaction structure. Instead, Firm A expressed its interest in investing in the Company in multiple scenarios depending on how the situation evolved. When PJS asked Firm A to clarify its interest, Firm A stated that it wanted to continue due diligence and then, depending on the findings, it would either propose a price and structure for the acquisition of the Company or it would provide a private financing proposal (although no such financing proposal was specifically sought out by the Special Committee at that time). Firm A continued its due diligence to determine if it would submit a bid that the Special Committee could evaluate.

 

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Beginning January 31, 2018 and concurrent with the sale process, PJS, at the direction of the Special Committee, began contacting potential first-in-last-out (FILO) term loan financing sources to replace the existing $25 million Wells Fargo A-1 Term Loan. The Special Committee and Company management believed replacing and upsizing this existing Wells Fargo A-1 Term Loan would provide the Company with additional liquidity to help maximize the Company’s operational flexibility and facilitate the turnaround. PJS contacted four parties which specialized in providing FILO Term Loans and received one inbound indication of interest from a private equity firm. In mid-March, the Company closed a $50 million subordinated first-in-last-out (FILO) loan with Gordon Brothers, which provided funds to repay the existing $25 million Wells Fargo A-1 Term Loan. The Gordon Brothers Term Loan increased the Company’s unused availability under the Company’s credit facility by $25 million.

On February 23, 2018, the Board met, with members of management and representatives from Foley, PJS and A&M present. At the meeting, PJS reported that it had contacted 15 potential strategic and financial buyers and that it fielded inquiries from four additional inbound buyers, and that all buyers had withdrawn from the sale process, with the exception of Firm A. Given the lack of interest in acquiring the Company, the Board, after its discussion with A&M and PJS, believed that it was in the best interest of the shareholders to explore the possibility of securing additional financing and/or improving operational results in order to provide the capital management believed necessary to effect a turnaround.

Following the meeting on February 23, 2018, PJS continued the process to explore potential financing sources that would provide the Company with a longer-term capital solution for its operational turnaround.

On March 2, 2018, the Special Committee met with members of management, as well as representatives from Foley, PJS and A&M. PJS reported that but for Firm A, all parties contacted had declined to submit an indication of interest for an acquisition of the Company. Firm A remained the only third party that had a reasonable possibility of completing a transaction to acquire the Company, although actionability was unclear given that the indication of interest contained no information on the price or structure of the transaction. While Firm A had continued to conduct due diligence, it had yet to provide a price or range of prices for the Special Committee to consider. PJS highlighted for the Special Committee a timeline of potential alternative transactions involving the Company, including a potential Chapter 11 bankruptcy filing.

As part of the continuing process to explore potential financing sources, PJS contacted 14 capital providers, seeking to raise approximately $100 million of debt and/or preferred equity. Of the 14 parties contacted, seven of the capital providers signed a non-disclosure agreement. One of the 14 capital providers contacted was Firm A. Except for Firm A, all the other capital providers declined to submit an indication of interest to provide debt or preferred equity financing to the Company, citing the Company’s recent financial performance and high existing leverage.

On March 21, 2018, Firm A submitted a new non-binding indication of interest that proposed a new capital structure solution in the form of a refinancing to provide more liquidity for the Company. Firm A’s revised non-binding indication of interest contemplated a $60-$70 million senior secured term loan, with penny warrants that when exercised would give the private equity fund 19.9% ownership of equity of the Company. The proposed senior secured term loan would have had a 15% coupon, with up to 10% of the coupon paid-in-kind. Additionally, the indication of interest proposed replacing two existing Board members and the Chief Executive Officer with Firm A’s designees.

PJS examined precedent senior secured term loans and other debt issuances and concluded that the terms proposed were too expensive and dilutive to the shareholders relative to other transactions in similar situations. On March 29, 2018, the Special Committee, after consultation with PJS, concluded that this proposal was not in the best interest of shareholders of the Company. At the direction of the Special Committee, PJS then communicated to Firm A that the Special Committee had concluded, after consultation with PJS that the terms of Firm A’s proposal were too expensive and dilutive to the shareholders, and asked Firm A to improve its existing proposal.

 

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On May 1, 2018, Firm A contacted the Special Committee to revisit its interest in acquiring all of the Company. The closing market price of the Company’s common stock on the trading day prior to the meeting, May 2, 2018, was $2.40 per share. On May 3, 2018, representatives of Firm A met in-person with the Special Committee and PJS in New York to discuss valuation and a potential acquisition and, at such meeting, Firm A indicated on a non-binding basis that it was willing to pay $2.25—$2.50 per share for all of the shares of the Company, except the shares owned by Jay Stein which Firm A would request to be rolled-over.    However, on May 7, 2018, Firm A contacted PJS to report that it did not see a deal as possible at the then current market price of the Company’s stock, which had risen to $2.48 per share. Instead, Firm A reverted to its March 27, 2018 senior secured term loan financing proposal. PJS, at the direction of the Special Committee, reiterated its feedback that the terms of the March 27, 2018 financing proposal remained too expensive and dilutive to the shareholders. Following that feedback, Firm A amended its proposal. First, it increased the size of the proposed senior secured term loan to $75 million, of which $50 million would be used to refinance the existing Gordon Brother’s FILO Term Loan. Second, the interest rate was reduced to a LIBOR plus 3% floating rate payable in cash plus a 7% coupon paid-in-kind. Finally, Firm A proposed adding two Board seats to the Board for its designees, rather than replacing two existing Board members as contemplated in its March 27, 2018 proposal. All other terms were the same as the March 27, 2018 proposal.

On May 8, 2018, PJS reported to the Special Committee the recent events that had taken place with Firm A. During this time, Firm A requested that it be permitted to continue to conduct due diligence regarding the Company. The Special Committee allowed Firm A to do so.

During the same meeting on May 8, 2018, Foley advised the Special Committee of the potential legal issues that could arise if Jay Stein was considered a controlling shareholder of the Company and treated differently from other shareholders in a transaction, including the potential conflict of interest if he were to participate as an equity investor in the acquisition of the Company by “rolling over” his equity in the Company into equity in the acquiror while all other shareholders received cash.

On May 11, 2018, the Special Committee met, with representatives of Foley and PJS present. Foley began the meeting by providing the Special Committee with a review of the Special Committee’s fiduciary duties with a particular focus on transactions involving a controlling shareholder. Following a discussion with Foley and PJS, it was recommended that Foley and PJS reach out to Jay Stein’s attorney to explain the process the Special Committee would expect Jay Stein to follow if he ever desired to pursue a going private transaction in the future. It was emphasized that management would not provide Jay Stein with information outside of the ordinary course of business that related to a potential acquisition of the Company, that all communications regarding any transaction would be exclusively handled by PJS and that Jay Stein would not participate in Board deliberations regarding the potential transaction. The Special Committee also discussed the Company’s performance and the need to successfully implement its turnaround plan.

From the May 11, 2018 meeting forward, none of the directors had any material communication with Jay Stein regarding any potential transaction. All material communication with Jay Stein and his advisors relating to a potential transaction occurred through PJS and Foley. Jay Stein did not attend any Board meeting at which a potential transaction was discussed.

On May 15, 2018, the Special Committee met, with representatives of Foley and members of the Company’s management present. Management reported that while the Company’s liquidity position had improved since January 2018, a material negative change in results could result in a liquidity issue. The Special Committee requested that management provide it with weekly liquidity forecasts and monthly financials.

 

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Beginning on July 3, 2018, PJS conducted a marketing process to refinance the Company’s senior secured asset-based credit facility. Based on the Company’s improved performance, Company management wanted to survey the market to see if it could reduce the Company’s interest expense and improve its borrowing availability. PJS, at the direction of the Special Committee, contacted nine asset-backed credit facility providers and two FILO term loan lenders, including the Company’s existing lenders Wells Fargo and Gordon Brothers. All the parties signed NDAs and received marketing materials describing the Company’s operations and financial performance. Starting on July 10, 2018, the potential lenders were granted access to a data room to review financial information on the Company. At the direction of the Special Committee, PJS conducted numerous calls between the Company’s management and the potential lenders. On July 26, 2018, PJS, on behalf of the Special Committee, received ten term sheets from the various potential lenders. PJS analyzed and reviewed the proposals with the Special Committee at a meeting on July 26, 2018. Subsequently, the Special Committee invited four lenders to meet with Company management in Boston, Massachusetts, to conduct further due diligence on the Company. At the direction of the Special Committee, PJS negotiated with all the lenders to maximize the potential availability of the credit facility while minimizing the interest costs and fees to the Company. Ultimately, the Company’s incumbent lenders, Wells Fargo and Gordon Brothers, agreed to improve terms on the Company’s existing debt to increase the advance rates on its credit facility to improve borrowing availability and reduce the size of the FILO Term Loan facility to $35 million which decreased the Company’s annual interest expense and avoided payment of fees to a new lender. These changes became effective on September 18, 2018.

On January 4, 2019, all the independent members of the Board met with representatives of Foley and PJS to discuss the Company’s financial challenges. At the request of the independent directors of the Company, PJS reported on the prevailing trends in the retail industry over the past nine months, noting that retailers faced a worsening retailing environment over the prior months, and the effects on smaller companies, such as the Company, were potentially magnified. PJS further reported that private equity firms were generally no longer investing in the retail sector and that with respect to strategic investors, the situation was dependent on the retailer having compelling strategic rationale and sufficient financial flexibility. PJS reviewed with the independent directors the efforts to identify a potential buyer in February and March 2018 that had resulted in only Firm A’s proposal, which was ultimately rescinded on May 7, 2018. At the request of the independent directors of the Company, PJS reviewed the potential strategic buyers’ performance since they were last contacted and gave its views as to whether such strategic players would be interested in re-engaging with the Company regarding a potential sale transaction. PJS reported that several of the strategic buyers PJS had contacted at the request of the Special Committee the prior year had experienced stock price declines and deterioration in their own financial performance, which would likely make it difficult for them to pursue a transaction. PJS also reported that it believed it was unlikely that any of the lenders contacted in July 2018 would be willing to re-engage to provide additional liquidity to the Company either on a secured or an unsecured basis. Therefore, PJS conveyed its view that that the Company’s current debt arrangements likely represented the maximum debt available to the Company at this time. The independent directors discussed the Company’s liquidity and inability to borrow additional money, its ability to complete a turnaround and the need for the Special Committee to oversee management’s turnaround efforts and to consider strategic options available to the Company.

Beginning January 2019, management, under the supervision of the Special Committee, began working on an initiative to transform the Company’s core business model, grow sales volume and increase gross margin by adapting lessons learned from mass off-price retailers. The Special Committee believed adopting a modified off-price business model presented the best prospect for a turnaround of the Company’s business. The Special Committee met with Foley and members of management, on March 12 and March 26, 2019, to discuss the progress of the new initiative and the Company’s financial status and prospects.

 

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In late March, 2019, Jay Stein contacted the Chairman of the Special Committee (Richard Sisisky) as a courtesy to advise that he was discussing with Moelis & Company (“Moelis”) the possibility that there could be other parties interested in acquiring the Company, and that these parties might be more interested in the Company if Mr. Stein and his affiliates and related parties agreed to roll over their equity in such a transaction. They agreed all communication regarding a potential transaction would be through Moelis, on behalf of Jay Stein, to PJS, on behalf of the Special Committee. Mr. Stein also determined not to attend any subsequent meetings of the Board to avoid any implication that he influenced its decision-making regarding whether or not to proceed with any transaction.

On March 28, 2019, Moelis advised PJS that it had reached out to 30 potential equity partners with public information regarding the Company. Moelis had identified three parties that expressed serious interest in such a transaction. PJS had previously contacted one of these three parties in connection with the March 2018 refinancing. On April 2, 2019, PJS communicated to Moelis that the Special Committee would control discussions with any potential third-party acquirors, as well as the dissemination of any necessary confidential information. On April 5, 2019, Moelis contacted PJS to report that Jay Stein had agreed to (i) sign a non-disclosure agreement to receive confidential information; (ii) forgo contact with any potential debt or equity investors without the Special Committee’s approval; (iii) if required by the acquiror, consider rolling over his equity as part of an acquisition of the Company; (iv) follow a sale process led by the Special Committee, and (v) if he was treated differently from other shareholders (e.g., in the case he rolled-over his equity) in the acquisition, use commercially reasonable efforts to have the acquiror condition the acquisition on the approval of a majority of the disinterested shareholders.

On April 8, 2019, the Special Committee met, with representatives of PJS and Foley present. The meeting commenced with a presentation by Foley outlining the Special Committee members’ fiduciary duties when evaluating a potential sale of the Company or other change-of-control transaction in which Jay Stein would participate. Following the presentation, PJS reported on Jay Stein’s willingness to consider rolling over his equity into a new transaction with any of the three private equity firms that Moelis had identified as potential buyers. PJS discussed the Company’s capitalization and performance, and that, given current market conditions, the Company should not reasonably expect to obtain additional financing if the Company encountered further liquidity issues.

On April 11, 2019, the Board convened a meeting at which all directors (other than Jay Stein) were present. Also present were representatives of Foley and PJS. After a presentation by Foley, the Board expanded the power of the Special Committee, giving it exclusive power to (i) evaluate the terms and conditions of any proposal involving Jay Stein or any alternative thereto, and determine whether such or any alternative thereto is advisable, fair, and in the best interest of the Company and its shareholders, (ii) negotiate with any party regarding any proposal involving Jay Stein or any alternative thereto, (iii) determine whether any proposal involving Jay Stein or any alternative thereto is beneficial to the Company and its shareholders and (iv) recommend to the Board what action, if any, should be taken with respect to any proposal involving Jay Stein or any alternative thereto, including the rejection of such proposal or any alternative thereto. In addition, the Board resolved that it would not approve a transaction with Jay Stein without (i) the approval of the Special Committee and (ii) the express condition that any transaction be approved by a majority of the disinterested shareholders.

 

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On April 15, 2019, PJS, at the request of the Special Committee on April 8, 2019, began contacting potential strategic and financial buyers, totaling 71 parties (13 strategic buyers and 58 financial sponsors), of which Moelis had previously contacted 30, to discuss a sale of the Company. Moelis provided PJS with the names of the 30 parties which it had already contacted, so PJS could revisit the opportunity with them and ensure that the parties understood the terms under which they could engage in the strategic review process. Of the entire group, 16 parties executed non-disclosure agreements. The non-disclosure agreements, among other provisions, prohibited parties from discussing the transaction with potential financing sources, including Jay Stein without the permission of the Special Committee. The non-disclosure agreements also had standstill provisions which prohibited potential buyers from acquiring any shares of the Company or proposing any transaction with the Company outside of the process being conducted by the Special Committee. All the parties which signed a non-disclosure agreement received a confidential information memorandum providing buyers with non-public information on the Company’s recent performance, its initiatives and its store-level financials. On May 3, 2019, the 16 parties received access to the Company’s data room, which contained information on the Company’s recent financial performance, store-level financials and merchandising data and other non-public information concerning the company. The 16 parties executing the non-disclosure agreement also received a process letter on May 17, 2019, that requested non-binding indications of interest by May 30, 2019. The process letter again stated that the potential buyers should not have conversations with any financing sources, including Jay Stein, without the express permission of the Special Committee. The process letter noted that the Special Committee would entertain any acquisition proposal, whether or not Jay Stein participated in the buyout group.

On May 2 and May 7, 2019, the Special Committee met with representatives from Foley and PJS. At each meeting, PJS reported on its outreach to date. At the May 7, 2019 meeting, the Special Committee approved a proposed budget for fiscal year 2019 and a projected five-year financial plan that would be provided on a confidential basis to prospective buyers. See “Special Factors—Projected Financial Information—May 2019 Management Projections” beginning on page 58.

On May 14, 2019, the Board (other than Jay Stein) met, with members of management and representatives from Foley and PJS present. Management first reported that the retail market remained challenging. Management then presented the Board with the proposed budget and five-year financial plan that had previously been approved by the Special Committee. Following such presentation, the Board (other than Jay Stein) unanimously approved the proposed budget and five-year financial plan presented by management.

On May 30, 2019, two parties, Kingswood Capital Management (“Kingswood”) and another private equity firm (“Firm B”), submitted non-binding indications of interest, which proposed a per share cash purchase price of $1.50 (Kingswood) and $1.20 (Firm B), respectively. PJS reported to the Special Committee that a third interested party did not submit an indication of interest, but verbally indicated that it was interested in being matched with an equity partner (the party had no fund of its own or plans to raise a fund in the near future). Furthermore, PJS reported to the Special Committee that no other interested party was interested in partnering with this party. Firm A, which had submitted an indication of interest in May 2018 for an acquisition of the Company, was contacted, but declined to participate in the process.

On June 3, 2019, the Special Committee met, with representatives from Foley and PJS present. The meeting commenced with Foley reviewing with the Special Committee the fiduciary duties of directors in connection with a proposed sale of the Company. PJS provided its preliminary analysis of the two non-binding indications of interest. After consultation with PJS, the Special Committee noted that it believed the two bids were worth pursuing and that it had conducted a broad marketing process and believed no further bids were forthcoming. PJS then provided the Special Committee with a summary of the upcoming process and, per direction from the Special Committee, noted that it would attempt to keep both interested parties involved without granting exclusivity to either party.

 

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On July 9, 2019, the Special Committee met, with representatives from Foley and PJS present as well as members of management. Management provided the Special Committee with a general business update, including the status of a potential Nasdaq de-listing related to having a stock price less than $1.00 per share. In addition, PJS provided an update on the two non-binding indications of interest from Kingswood and Firm B and the diligence process to date, noting that Kingswood and Firm B remained interested at that time and that discussions with Kingwood’s potential lenders was on-going.

On July 17, 2019, at the direction of the Special Committee, PJS contacted both interested parties to ask each for a revised indication of interest by July 24, 2019. In order to move expeditiously toward a definitive agreement, at the direction of the Special Committee, PJS sent a process letter on the same day to Kingswood and Firm B, requesting each party either affirm its initial indication, or update the Special Committee of any proposed changes to its initial indication by July 24, 2019. The process letter stated that the Board and Special Committee had adopted a resolution that it would not approve a roll-over transaction unless it was conditioned upon the non-waivable condition requiring approval or tender of a majority of the shares of the Company not owned by or affiliated with the roll-over shareholders. Additionally, the process letter requested a detailed description of the parties’ proposed debt financing sources and identification of their proposed equity sources, including any commitments received from the respective sources.

On July 22, 2019, Firm B submitted a presentation for the Special Committee to PJS detailing its findings from its diligence process (which was shared with the Special Committee on July 23, 2019). The presentation noted that although Firm B had spent considerable time and resources evaluating the Company and the transaction, it would need to employ additional resources to understand the Company and create a strategy for improving the business before it would put forth a letter of intent. Further, Firm B requested that the Company pay for an estimated $550,000 of intensive third-party consulting over the course of four to six weeks to further understand the business and identify a strategy for improving the business before it would put forth a letter of intent. Firm B confirmed that it would not be submitting a letter of intent at that time.

On July 24, 2019, PJS received a non-binding indication of interest to the Special Committee from Kingswood, whereby it (i) reduced its proposed purchase price from $1.50 to $1.10; (ii) requested exclusivity until the earlier of signing a definitive agreement or August 30, 2019, or expense reimbursement of up to $600,000 and (iii) detailed its expected financing of the transaction.

On July 26, 2019, the Special Committee met, with representatives from Foley and PJS present, to discuss the status of the sale process. After consultation with PJS, the Special Committee believed that at that time Kingswood was the only viable potential acquiror. PJS reviewed the terms of the Kingswood proposal with the Special Committee, noting that the proposed price represented an approximate 28% premium to $0.86, the closing market price of the Company’s common stock on July, 24, 2019, the day on which the Kingswood proposal had been received. The Special Committee also considered that the Company’s actual performance to date in 2019 was considerably below management’s forecasts. The Special Committee discussed the challenges faced by the Company in the face of continuing declining sales in a difficult retail environment. The Special Committee and PJS discussed Kingswood’s request for exclusivity with the Special Committee, noting that time was of the essence given the Company’s deteriorating performance and that, following a long and robust sale process, there was only one potential buyer that had submitted an indication of interest. After receiving advice from its legal counsel, the Special Committee decided to move forward with Kingswood, and requested a price increase in the proposed merger price in exchange for exclusivity. PJS conveyed this request to Kingswood. On July 30, 2019, Kingswood delivered a revised indication of interest reflecting its willingness to increase the proposed per share cash price by $0.05 (to a total of $1.15 per share) conditioned on being granted exclusivity through August 30, 2019 or provided a $600,000 expense reimbursement.

 

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On the same date, the Special Committee met, with representatives from Foley and PJS present, to review Kingswood’s revised indication of interest. PJS reported to the Special Committee that at this time Firm B was unlikely to re-engage in the process without the $550,000 Company-funded consulting arrangement Firm B had previously noted was a condition to continuing to evaluate a potential acquisition. After discussing a variety of factors, including the risk of further financial deterioration of the Company’s business and the potential disadvantages of granting exclusivity, the Special Committee unanimously agreed to move forward with the exclusivity arrangement with Kingswood through August 30, 2019.

On August 1, 2019, the Company executed an agreement providing Kingswood with exclusivity through August 30, 2019. Also on August 1, 2019, Foley delivered a draft merger agreement to Kingswood and Kingswood’s legal counsel, Goodwin Procter LLP (“Goodwin”). Throughout the month of August 2019, Kingswood conducted diligence and engaged several advisors. Kingswood met with Company management in Jacksonville from August 6-8, 2019, to discuss the Company’s operations and conduct due diligence.

On August 22, 2019, the Special Committee met, with representatives from Foley and PJS present. PJS reported that Kingswood and its advisors continued to conduct diligence on the Company and pursue financing sources. The Special Committee also discussed the Company’s July 2019 results, noting they were below the projected plan results. The Special Committee resolved to have management update its projections while noting the difficulty inherent in producing accurate projections in the current challenging retail environment.

On August 27, 2019, the Special Committee met, with representatives from Foley and PJS present as well as members of management. The purpose of the meeting was to review management’s updated financial projections. The Special Committee expressed concern that the strategic plan was largely contingent on revenue from new initiatives, primarily in kids and fine jewelry, but that the core business sales continued to decline. The new initiatives were still unproven and had yet to show a material impact to the Company’s financials. Following a management presentation, the revised plan (the “August 2019 Management Projections”) was approved by the Special Committee. See “Special Factors—Projected Financial Information—August 2019 Management Projections” beginning on page 60.

On August 28, 2019, the Special Committee met with representatives from Foley and PJS. PJS provided the Special Committee with an update on the transaction process, noting that Kingswood continued to conduct due diligence and had refined its plan for debt financing and intended to seek debt financing from the Company’s current lenders and Pathlight Capital LP. PJS reported that Kingswood requested a three-week extension of its exclusivity period. In light of the progress made by Kingswood and the lack of other available alternatives, the Special Committee agreed to extend the exclusivity period until September 18, 2019.

On August 28, 2019, the Board (other than Jay Stein) met, with management and representatives from Foley and PJS present. The purpose of the meeting was for management to present the Board with the August 2019 Management Projections previously approved by the Special Committee. Following the presentation, the Board approved the August 2019 Management Projections which reflected a decline in comparable same store sales from the prior year and a decline in adjusted EBITDA compared to the fiscal year 2019 budget approved by the Board in May 2019. See “Special Factors—Projected Financial Information—August 2019 Management Projections” beginning on page 60.

 

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On September 2, 2019, Goodwin provided a revised draft of the merger agreement to Foley, which, among other revisions, included a minimum liquidity threshold as a closing condition and the removal of the requirement that the transaction be conditioned on receiving a vote of the majority of the disinterested shareholders and provided specific performance rights to the Company if Kingswood failed to close for any reason.

On September 9, 2019, Foley provided Goodwin with a further revised draft of the merger agreement, which, among other revisions, reinstated the requirement that the transaction was contingent on the approval of the majority of the disinterested shareholders, deleted the minimum liquidity condition for closing, and proposed that Kingswood may be required to pay a reverse termination fee if it failed to close.

On September 10, 2019, the Special Committee met, with representatives from Foley and PJS present. Among other matters, the Special Committee discussed with its advisors open issues in the merger agreement, including the requirement that any transaction be contingent on an affirmative vote by a majority of the disinterested shareholders of the Company. Following this discussion, the Special Committee unanimously reaffirmed to its advisors its desire to require the majority of the disinterested vote as a condition to any transaction. Next, the Special Committee reviewed the Company’s financial performance for August 2019, which was below the forecast approved two weeks prior, and discussed the likely impact of such deteriorating performance on the Company sale process and Kingswood’s willingness to proceed.

On September 17, 2019, the Special Committee met, with management and representatives from Foley and PJS present. First, management reviewed the Company’s August 2019 performance and the forecast for performance in September with the Special Committee. Next, Foley reported that Kingswood’s legal counsel, Goodwin, had informed Foley that it had been instructed by Kingswood to stop all work on the potential transaction in light of the disagreement regarding the Special Committee’s proposal to recquire a majority of the disinterested shareholder vote. Counsel to Kingswood had noted, among other objections, that companies with large retail stockholder bases often experienced difficulties in obtaining high levels of stockholder participation. The Special Committee discussed its general opinion that the proposed transaction with Kingswood was desirable for the disinterested shareholders, and resolved to investigate whether the retail investor base presented challenges to the closure of the transaction.

On September 20, 2019, the Special Committee met, with representatives from Foley and PJS present. In addition, Tim Cost, a member of the Board, also attended the meeting at the invitation of the Special Committee in light of his prior experience serving as the chair of the special committee in a similar transaction. After a discussion, the Special Committee resolved to appoint Mr. Cost to the Special Committee subject to a resolution by the Board. The Special Committee members discussed the open issue concerning the approval of the merger by a majority of the disinterested shareholders of the Company as a condition to the merger. Representatives from Kingsdale Advisors, a proxy advisory firm, briefed the Special Committee on the Company’s shareholder base, the potential difficulty of obtaining the approval of the merger by a majority of the disinterested shareholders and the general composition of the Company’s shareholder base. At the conclusion of the meeting, the Special Committee determined it would not concede the issue at this point in the process, but if the Special Committee reached final agreement on a transaction that it believed was otherwise in the best interests of the disinterested shareholders and the majority of the disinterested shareholder vote was the last issue outstanding, the Special Committee would revisit the issue.

PJS communicated the Special Committee’s above position to Kingswood, which agreed to continue negotiations on that basis. As Kingswood continued its diligence, it raised concerns with the Special Committee and PJS over certain items, such as (i) the continued deterioration of the Company’s financial performance; and (ii) the Company’s level of contractual liabilities. On October 8, 2019, the Special Committee met, with management and members of Foley and PJS present. PJS provided the Special Committee with an update on progress with Kingswood.

 

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On October 14, 2019, Goodwin provided a revised draft of the merger agreement to Foley, which, among other revisions, reflected negotiations between counsel on the open issues, including revisions with respect to the representations and warranties, covenants, conditions to closing and remedies. Following this, Kingswood requested to meet in person with members of the Company’s management team as part of its due diligence.

On October 18, 2019, the Special Committee met, with representatives of Foley and PJS present. PJS reported Kingswood’s desire to conduct in-person meetings with members of the Company’s management team, including the Company’s senior merchants, as part of its due diligence. Foley also briefed the Special Committee on the status of negotiations on the merger agreement.

On November 15, 2019, the Special Committee met, with management and members of Foley and PJS present. The Special Committee discussed whether to grant Kingswood’s request to interview certain managers as part of its diligence process, including the potential negative reaction of the executives and the potential that news of the transaction could potentially leak throughout the organization. In addition, the Special Committee directed Foley to attempt to resolve the remaining material legal issues in the merger agreement prior to such meetings occurring between these managers and Kingswood.

On November 18, 2019, the Special Committee met, with members of Foley and PJS present. PJS reported that Kingswood’s financial due diligence appeared to be completed, and that Kingswood had made progress with the potential lenders. Foley then updated the Special Committee on the open issues in the merger agreement and its discussions with Goodwin. Foley reported that the material open issues had been resolved other than Kingswood’s request for a minimum liquidity condition to closing and some issues with respect to a covenant regarding post-closing employee matters. The Special Committee authorized Kingswood’s requested meetings with the management team, including the Company’s senior merchants, to proceed.

On November 22, 2019, representatives of Kingswood met with the Company’s management team, including the Company’s senior merchants.

On November 22, 2019, the Special Committee met, with representatives of Foley and PJS present. PJS reported on the progress of diligence meetings between Kingswood and certain of the Company’s employees and of Kingswood’s discussions with the Company’s lenders, Wells Fargo and Gordon Brothers. Foley advised the Special Committee on the status of the merger agreement negotiations.

Following weak November financial performance by the Company, PJS reported to the Special Committee that Kingswood had decided to monitor the Company’s financial performance during the holiday 2019 period before proceeding with the proposed transaction.

During the period from November 26, 2019 to December 7, 2019, the parties negotiated the terms and exchanged several drafts of the merger agreement and related transaction documents. The revisions and changes negotiated between Kingswood and the Company related to a minimum liquidity condition requiring a set percentage of the Company’s excess availability under its credit agreement at the time of closing, certain covenants regarding post-closing employee matters, and the elimination of the requirement that the transaction be approved by a majority of the shares held by disinterested shareholders. On December 19, 2019, Kingswood sent drafts of the Rollover Investor’s voting agreement, equity rollover commitment, and documents related to governance and related rights following the closing of the potential transaction to Latham & Watkins LLP (“Latham”), legal counsel for Jay Stein and his affiliates and related parties.

 

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On December 12, 2019, at the direction of the Special Committee, PJS contacted a potential strategic buyer deemed to be the most synergistic and whom had expressed preliminary interest during the 2018 process in acquiring all of the Company. This strategic buyer had been contacted in both the early 2018 sale process and again in the 2019 sale process and had not submitted an indication of interest either time. When PJS contacted this potential buyer and gave them an update on the situation, the potential buyer stated it was still not interested in pursuing the opportunity to acquire all of the Company as it was focused on its own operations. On the same day, PJS communicated to the Special Committee that this party was not interested in pursuing the opportunity.

On December 13, 2019, the Special Committee met, with representatives of Foley and PJS present. PJS reported that the continued disappointing financial results may put the transaction in jeopardy, noting that the November sales were significantly below the August 2019 Management Projections. Foley then briefed the Special Committee on the status of negotiations of the merger agreement, including the lack of a majority of the disinterested shareholder vote provision and other matters. The members of the Special Committee discussed a variety of potential alternatives available to the Special Committee, including whether to accept the merger agreement “as is” (other than for price) in an effort to get a transaction completed with Kingswood, to continue to negotiate the merger agreement, to attempt to significantly change the Company’s business model, or to continue with the historical business model under increasingly difficult circumstances. Members of the Special Committee repeatedly expressed concern that the Company did not have the necessary resources to successfully accomplish a significant change in the Company’s business model. Members of the Special Committee also discussed at length the concern that the Company was not well positioned to survive over the longer-term in the increasingly competitive and difficult current retail market. The members of the Special Committee discussed their concern that the Company’s vendors and factors may withdraw credit from the Company, which would likely result in the financial collapse of the Company. Members of the Special Committee discussed with PJS the lack of alternative sources of financing and other potential buyers. The general consensus of the Special Committee was the Company did not have viable alternatives that would be in the better interests of the Company’s shareholders and that a transaction with Kingswood was likely the only viable alternative to maximize the Company’s value for shareholders. The Special Committee expressed a desire to receive an update from management regarding management’s most recent projections for the Company’s financial performance in December and for the balance of the fourth quarter prior to reporting back to Kingswood. Following this meeting, Foley sent a revised draft of the merger agreement to Goodwin.

On December 16, 2019, the Special Committee met, with members of management present as well as representatives from Foley and PJS. Management provided the Special Committee with an update regarding the Company’s recent poor financial performance and management’s expectations for the holiday season and the fourth quarter.

After the first week of January 2020, the Special Committee received an update on the holiday season. Because of the deteriorating financial performance and the poor performance during the holidays, the Special Committee requested that Company’s management re-forecast its fiscal year 2019 estimates and update its five-year financial plan (the “January 2020 Management Projections”). See “Special Factors—Projected Financial Information—January 2020 Management Projections” beginning on page 61. On January 15, 2020, the Special Committee met with members of management as well as representatives from Foley and PJS. Management presented the updated financial projection, which forecast further deterioration of the business during 2019. The Special Committee approved management’s revised plan, which projected comparable store sales and adjusted EBITDA to be down significantly from the prior year.

 

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During the first two weeks of January, Goodwin and Latham continued to negotiate the terms of the voting agreement, equity rollover commitment, and governance and related rights following the closing of the potential transaction, and Goodwin sent revised drafts of the related documentation to Latham on January 13, 2020.

On January 17, 2020, Kingswood communicated to PJS its position regarding the open items in the merger agreement in order to reach a deal: (i) a $0.75 per share purchase price; (ii) a minimum liquidity condition requiring at least 32.5% of excess availability under its credit agreement at the time of closing, (iii) a termination fee equal to approximately 5% of the Company’s equity value for both parties, and (iv) elimination of the requirement that the transaction be approved by a majority of the shares held by disinterested shareholders.

On January 20, 2020, the Special Committee met with representatives of PJS and Foley to consider Kingswood’s revised proposal, after which PJS conveyed to Kingswood the Special Committee’s disappointment regarding the proposed price and intention to discuss the matter at the upcoming January 27, 2020 Board meeting. At the direction of the Special Committee, PJS told Kingswood that the Special Committee would not accept the proposed $0.75 purchase price per share. Additionally, PJS communicated to Kingswood that the Special Committee would discuss with the Board at the January 27, 2020, Board meeting whether it was in the best interest of the Company’s shareholders to continue pursuing this transaction in light of Kingswood’s revised proposal.

On January 22, 2020, representatives of PJS and Foley and the Chairman of the Special Committee met with Burton Tansky and Lisa Galanti, the two independent directors who did not serve on the Special Committee, to brief them on the history of negotiations and the matters currently under consideration by Special Committee, which would be discussed at the upcoming Board meeting.

On January 22, 2020, Kingswood conveyed to PJS that (i) it would increase the per share price to $0.85 per share and (ii) provided PJS with debt commitment letters from Wells Fargo and Pathlight Capital LP indicating that the minimum excess availability at closing would be $75 million. After a conversation with PJS on January 24, 2020, Kingswood confirmed that instead of the $75 million excess availability which was presented in the debt commitment letters on January 22, 2020, that both (i) the minimum excess availability clause in the executed debt commitment letters with Wells Fargo and Pathlight Capital LP and (ii) the merger agreement liquidity condition would be increased to 35% of excess availability under the line of credit.

On January 27, 2020, the Board (other than Jay Stein) held a special meeting at the request of the Special Committee to be briefed by, and provide input to, the Special Committee. At the beginning of the January 27, 2020 special meeting, Foley explained that the Special Committee, not the Board, would make the initial decision regarding whether to accept or reject Kingswood’s then latest proposal. In light of the difficulty of the decision and the multiple competing considerations, the Special Committee desired to receive the best available advice and counsel, and therefore the Special Committee desired to learn the views and recommendations of all the directors (other than Jay Stein).

Foley reviewed with the Board the directors’ fiduciary duties, including directors’ special responsibility in connection with sale of the Company and when the Company faces potential financial distress.

Management provided the Board (other than Jay Stein) with a detailed presentation regarding the results of the Company’s test of the new prototype store model in the Detroit and Richmond markets, management’s recommendation that the test be expanded to additional test markets and the potential strategy, cost and timetable for eventually rolling out the new business model throughout the Company.

 

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Management presented the January 2020 Management Projections and discussed the challenges and opportunities for the business. Management reported on other initiatives to improve the Company’s sales and margins. The Board asked management about the opportunity to increase sales and reduce expenses and inventory level. The Board and management acknowledged the very challenging retail environment and the difficulty of growing sales and further reducing expenses. The Board asked management questions about the continued viability of the Company as a stand-alone, independent business and the potential risks to the Company which likely would result from a downturn in the U.S. economy and/or further contraction in credit availability as a result of unforeseen negative developments in the retail industry.

PJS reviewed the sale process to date in detail, starting with the beginning of its engagement in January 2018. PJS also presented a review of the Company’s financial performance and the difficulty facing the retail industry, including substantial increase during the past five years in retail bankruptcies and store closings. PJS representatives reviewed the Company’s stock performance, enterprise value, debt level, market valuation, credit statistics and other information relevant to the Company. PJS representatives also reviewed the Company’s historical financial results over the past five years, including annual sales, adjusted EBITDA, gross profit margin, debt coverage ratio, and the condition of the Company’s balance sheet. The presentation by PJS noted that the Company appeared to underperform its projected monthly comparable store sales during 17 of the last 19 observable months. PJS representatives presented preliminary financial analyses of the Company based on selected public companies, selected precedent transactions and discounted cash flow. PJS also reviewed the premiums paid on recent transactions. Finally, PJS reviewed the minimum availability requirement proposed by Kingswood and the Company’s 26-week borrowing base forecast compared to the proposed minimum at close.

The directors discussed with management the possibility of accelerating the rollout of the new off-price business model throughout the Company, the uncertainty regarding success of the initiative, the attendant costs, and the numerous risks of proceeding too quickly.

The Board discussed the potential impact of the transaction on employees of the Company. The Special Committee believed the current terms of the draft merger agreement were as favorable to shareholders as they could possibly negotiate and that further efforts to improve the terms could likely cause Kingswood to terminate further discussions.

The Board discussed with Foley the directors’ fiduciary duties. The Board expressed concern that, over the long-term, the Company faced the potential risk of failure as a result of any future contraction of working capital, continued decline in sales or one of the many other challenges facing the Company and that such failure would likely result in major financial losses to the unsecured trade creditors and the loss of the jobs of all the employees and loss of value for the shareholders.

The Board discussed with representatives of Foley and PJS the potential for a Chapter 11 bankruptcy reorganization and concluded the Company likely would not survive bankruptcy as a going concern due to the likely contraction of available credit from vendors and factors.

The Board discussed with representatives of Foley and PJS the majority of the disinterested shareholder vote issue.

The Board engaged in discussion, including deliberations in executive session without management present, regarding a range of considerations, including the difficult challenges of a Chapter 11 bankruptcy reorganization and the likelihood the Company could not survive as a going concern, the long-term prospects and interests of the Company and its shareholders, and the social, economic, legal, or other effects of any action on the employees, suppliers, customers of the Company and the communities in which the

 

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Company operates. After such discussions, all of the directors reached the conclusion that in light of the challenges facing the Company and the challenging retail industry environment, a sale to Kingswood represented the best alternative to maximize the shareholders’ value in the Company (other than the Rollover Investor). After concluding the proposed sale was the best option available, each of the directors expressed his or her opinion that the better choice would be to waive the requirement for majority of the disinterested shareholder approval if that was necessary in order to effect a sale the Company.

Following the special Board meeting, the Special Committee directed PJS to attempt to secure a higher price. The closing market price of the Company’s common stock on January 27, 2020 was $0.64.

On the evening of January 27, 2020, and the morning of January 28, 2020, PJS and Kingswood engaged in further discussions and Kingswood agreed to increase its offer to $0.90 per share, as Kingswood’s best and final offer. The closing market price of the Company’s common stock on January 28, 2020 was $0.65.

On January 29, 2020, the Special Committee met to consider Kingswood’s offer of $0.90 per share. At the beginning of the meeting, a representative of Foley reviewed the directors’ fiduciary duties, including their special responsibilities in connection with sale of the Company and the directors’ duties if in the future the Company entered the zone of insolvency.

Representatives of PJS reviewed the details of the Kingswood offer, the Company’s stock market performance and the Company’s financial performance during the past five years. PJS reviewed financial information regarding the Company, including debt level, margin, debt coverage ratios and EBITDA. The representatives of PJS presented their financial analysis of the transaction, including analysis based on selected public companies, precedent transactions and discounted cash flow, and delivered the opinion of PJS that the transaction was fair to the disinterested shareholders from a financial point of view.

Following discussion of the advantages and disadvantages of the proposed transaction, the challenges facing the Company, the potential options available to the Company, including continuing as a stand-alone business and attempting to accelerate the transformation of the core business model contemplated by the business transformation initiative, the Special Committee unanimously approved the transaction and recommended that the Board approve the transaction.

On January 29, 2020, the Board met to receive the recommendation of the Special Committee and to consider approval of the transaction. At the beginning of the meeting, Foley reviewed with the Board their fiduciary duty as directors when considering the potential sale of the Company and the directors’ responsibility when the Company may be in the potential zone of insolvency.

Representatives of PJS presented its financial analysis of the proposed transaction and delivered its oral opinion to the Special Committee that, as of January 29, 2020 and based upon and subject to the factors and assumptions set forth by PJS, the $0.90 in cash per share of the Company Common Stock to be paid to the shareholders (other than Jay Stein and his affiliates and related parties) pursuant to the merger agreement was fair from a financial point of view to such shareholders. The presentation by PJS included a summary of terms of Kingswood’s offer, the history of the sale process, an update regarding the challenging retail environment, a summary of the Company’s stock performance and stock market valuation, a review of the Company’s operating performance compared with other retailers and a review of the Company’s financial performance during the past five years. In connection with PJS’ financial analysis of the transaction and the Company, the PJS representatives discussed selected public company data, selected precedent transactions and a discounted cash flow analysis.

 

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The members of the Board discussed with PJS the premiums obtained in other select transactions, the cost of capital used in the discounted cash flow analysis and the fact the discounted cash flow valuation assumed the Company performed according to management’s updated plan even though the Company generally underperformed its projected results, which created potential downside risk to the values presented in the presentation.

The Board discussed the likelihood of whether the United States economy would experience a downturn during the next five years and the potential negative impact on the Company’s performance.

The Board discussed the Company’s access to trade credit, the current level of debt and lack of practical opportunity to borrow more money in the exiting credit environment. The directors discussed the risk that further retail bankruptcies may cause factors and vendors to reduce the Company’s trade credit, and the potential negative impact on the Company’s business.

The Board discussed the Company’s prospects in a bankruptcy reorganization and the consensus view that a Chapter 11 reorganization, with re-emergence as a more profitable business was not realistic.

The directors discussed the sweeping changes occurring in the retail industry, the large number of recent retail bankruptcies and the specific challenges facing the Company, including declining sales and aging core customer base.

The Board discussed the majority of disinterested shareholder vote provision and Kingswood’s unwillingness to accept this provision, including the possibility that a failure to concede this issue would result in Kingswood withdrawing its proposal.

The Board discussed the losses to unsecured creditors who had historically supported the Company by providing trade credit, which would result from a failure of the Company to survive. The Board recognized the likelihood that all employees would eventually lose their jobs if the Company could not turn around the current decline in sales and profitability. In light of the Company’s continuing financial difficulties, the Board believed an appropriate consideration when evaluating Kingswood’s offer was whether it presented the best chance for survival of the Company.

The Board (other than Jay Stein) unanimously adopted resolutions (a) authorizing and approving the execution, delivery and performance of the merger agreement and the transactions contemplated thereby; (b) approving and declaring advisable the merger agreement, the merger and the transactions contemplated thereby; (c) declaring that it is in the best interests of the Company other than the Rollover Investor that the Company enter into the merger agreement and consummate the merger on the terms and conditions set forth in the agreement; (d) directing the adoption of the merger agreement be submitted to a vote at a meeting of shareholders of the Company; and (e) recommending to the shareholders of the Company that they adopt the merger agreement.

The Special Committee and Board anticipated that the merger agreement would be signed later during the day. However, an administrative delay unrelated to the terms of the transaction delayed execution of the merger agreement. The closing market price of the Company’s common stock on January 29, 2020 was $0.64.

 

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On January 30, 2020, the Special Committee and Board (other than Jay Stein) conducted a joint meeting with PJS present to revisit the Special Committee’s and the Board’s prior recommendations, approvals and authorizations.

At the joint meeting of the Special Committee and Board (other than Jay Stein), representatives of PJS presented an updated financial analysis of the transaction based on the closing price of the Company’s stock and the selected public companies on January 30, 2020. The PJS presentation included updated comparison with selected public companies, selected precedent transactions and discounted cash flow. PJS also presented a comparison of these three analyses and summarized the changes between the Board meeting on January 27, 2020, the meeting on January 29, 2020, and the current meeting. The Board asked PJS questions regarding the changes in PJS’ financial analysis from the materials presented at the meeting the previous day, and discussed the risks that, among other things, the Company would fail to meet management’s most recent projections, that the Company’s limited access to additional borrowing and potential risk of decrease in trade credit may increase its cost of capital, the Company may not be able to survive in the longer-term in light of the challenges facing the Company’s business and the retail industry generally, and that the latest offer from Kingswood was a “best and final” offer which would provide guaranteed cash for shareholders and increase the likelihood the company could survive. Representatives of PJS then delivered an oral opinion to the Special Committee, which was subsequently confirmed by delivery of a written opinion dated January 30, 2020, to the effect that, as of the date of such written opinion and based upon and subject to various assumptions made, procedures followed, matters considered and qualifications and limitations upon the review undertaken in preparing its opinion as set forth in such written opinion, the $0.90 in cash per share of the Company Common Stock to be paid to the shareholders (other than Jay Stein and his affiliates and related parties) pursuant to the merger agreement was fair from a financial point of view to such shareholders.

At the conclusion of the meeting, the Special Committee unanimously reaffirmed and ratified its prior approval of the merger and recommendation that it be approved by the Board and shareholders. Thereafter, the entire Board (other than Jay Stein) unanimously ratified and reaffirmed its prior approval of the merger and its recommendation that the shareholders approve the merger. The Board (other than Jay Stein) unanimously directed that the merger agreement and related documents immediately be executed and delivered on behalf of the Company.

The Company and Kingswood executed and delivered the merger agreement shortly after the combined Special Committee and Board meeting.

On January 31, 2020, the Company issued a press release announcing that it had entered into a definitive merger agreement under which an affiliate of Kingswood Capital Management would acquire all of the outstanding common stock not already beneficially owned by affiliates of Jay Stein for $0.90 cents a share. The announcement also stated that the agreed upon purchase price represented a premium of approximately 38% to the Company’s closing stock price on January 30, 2020, and that the transaction was unanimously approved by the Board (other than Jay Stein), acting on the unanimous recommendation of the Special Committee.

 

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Recommendation of the Special Committee and Our Board of Directors; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger

On January 29, 2020, the Special Committee, after careful consideration and receipt of a fairness opinion from PJ Solomon, voted unanimously to recommend to the board of directors that it, and thereafter the board of directors (other than Jay Stein), after careful consideration and acknowledging the participation of Jay Stein in the merger, voted unanimously to (i) approve and declare advisable the merger agreement, the merger and the transactions contemplated by the merger agreement, (ii) declare that it is fair to and in the best interests of the Company and the unaffiliated shareholders of the Company that the Company enter into the merger agreement and consummate the merger on the terms and subject to the conditions set forth in the merger agreement, (iii) direct that the adoption of the merger agreement be submitted to a vote at a meeting of the shareholders of the Company and (iv) recommend to the shareholders of the Company that they vote FOR the adoption of the merger agreement. On January 30, 2020, after receiving an updated fairness opinion from PJ Solomon and further consideration, the Special Committee and the board of directors (without Mr. Stein participating) unanimously ratified and reaffirmed their prior votes to authorize and recommend the merger to the shareholders.

In evaluating the merger, the Special Committee and the board of directors consulted with the Company’s senior management and outside legal and financial advisors and, in reaching their respective determinations, the Special Committee and the board of directors considered a number of factors that they believed supported their decision to approve and recommend the merger agreement and the merger, including, but not limited to, the following:

 

   

the $0.90 per share to be paid in respect of each share of Company Common Stock represents a premium of approximately 38%, based on the closing price per share of Company Common Stock on January 30, 2020, the last trading day before the announcement that the Company, Parent and Merger Sub had entered into the merger agreement, of $0.65;

 

   

the current and historical market prices for the Company Common Stock, which has a median closing price of $0.75 for the six-month period ending on January 30, 2020, $0.82 for the one-year period ending on January 30, 2020, $1.05 for the two-year period ending on January 30, 2020 and $1.19 for the three-year period ending on January 30, 2020;

 

   

the Company Common Stock traded as low as $0.60 during the 52 weeks prior to the announcement of the January 30, 2020 execution of the merger agreement;

 

   

the global and U.S. domestic retail economies have experienced unprecedented contraction which has had a dramatic adverse impact on the Company’s customer base and forced multiple distribution outlets and retailers to file for bankruptcy;

 

   

during the fall of 2017, the Company experienced a severe contraction of available trade credit. Although the Company re-established adequate working capital, the availability of adequate trade credit remains a major concern to the Company;

 

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the Company’s management forecast for fiscal year 2019 approved by the Board on May 14, 2019 projected adjusted EBITDA of approximately $36 million. In light of disappointing financial performance during 2019, the Company repeatedly revised downward the management forecast with the most recent management forecast for fiscal year 2019 plan, approved by the Special Committee on January 15, 2020, projecting adjusted EBITDA of $25 million. The projected margin declined from 2.8% in the initial plan to 2.0% in the final revised plan;

 

   

the Company’s comparable store sales (including gross licensed departments sales and online orders) were down (5.5%) in fiscal year 2017, (1.1%) in fiscal year 2018 and (1.7%) year-to-date for the period ending January 4, 2020;

 

   

the Company’s stock has declined approximately 88% since January 27, 2017. In comparison, the PJS Select Broadline Department Store stock index (which excludes any bankrupt Department Store companies) has only declined approximately 10%;

 

   

the Company’s adjusted EBITDA margin for the twelve-month period ended January 4, 2020 is 2.3% compared with a median of 6.5% for the PJS Select Broadline Department Store index (which excludes any bankrupt Department Store companies);

 

   

the Company’s total revenue was down (3.1%) in fiscal year 2017, (4.5%) in fiscal year 2018 and (4.4%) in the twelve months ended January 4, 2020;

 

   

the fact that the Special Committee and the board of directors believed that the $0.90 per share price to be paid in respect of each share of Company Common Stock was the highest price that the Acquiring Group Filing Persons would be willing to pay and represented the best value reasonably available to the Company’s unaffiliated shareholders;

 

   

the fact that the consideration to be paid in the proposed merger is all cash, which provides certainty of value and liquidity to the unaffiliated shareholders and allows the unaffiliated shareholders not to be exposed to the risks and uncertainties relating to the prospects of the Company (including the prospects described in management’s projections summarized under “Special Factors—Projected Financial Information” beginning on page 56);

 

   

the possibility that it could take a considerable period of time before, and that there could be significant uncertainty as to whether, the trading price of Company Common Stock would reach and sustain a trading price of at least equal to the per share merger consideration of $0.90, as adjusted for present value, following any withdrawal of the Acquiring Group Filing Persons’ offer;

 

   

the Special Committee’s and board of directors’ belief, based on their knowledge of the business, operations, management, financial condition, earnings and prospects of the Company, including the prospects of the Company as a stand-alone company, that the merger is desirable at this time, as compared with other times in the Company’s operating history;

 

   

the possible alternatives to the merger, including, but not limited to, continuing as a stand-alone company or revising the current operating strategy, which alternatives the Special Committee and board of directors evaluated with the assistance of the Company’s senior management and advisors and determined were likely to be less favorable to the Company’s shareholders than the merger given the potential risks and uncertainties associated with those alternatives;

 

   

the fact that after a long a public process, which consisted of a strategic alternative review process whereby PJS contacted numerous parties and the Acquiring Group was the only bidder for all of the outstanding shares of the Company Common Stock;

 

   

the opinion of PJS, dated January 30, 2020, to the Special Committee as to the fairness, from a financial point of view and as of the date of the opinion, of the $0.90 in cash per share to be paid to the shareholders (other than the Rollover Investor, Parent and its affiliates), including the Company’s “unaffiliated security holders” (as defined in Rule 13e-3 under the Exchange Act), pursuant to the merger agreement, as well as the related financial presentation, both of which the Special Committee and the board of directors expressly adopted. See “Special Factors—Opinion of PJ Solomon Securities LLC” beginning on page 39;

 

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the likelihood that the merger would be completed based on, among other things (not in any relative order of importance):

 

   

the Special Committee’s and board of directors’ belief that the debt financing required for the merger will be obtained, given (i) the fact that Parent had obtained commitments for such debt financing, (ii) the reputation of the financing sources and (iii) the obligation of Parent to use commercially reasonable efforts to obtain such debt financing;

 

   

the absence of a financing condition in the merger agreement;

 

   

the likelihood and anticipated timing of completing the merger in light of the scope of the closing conditions;

 

   

the Special Committee’s and board of directors’ belief that no significant antitrust or other regulatory issue exists;

 

   

the fact that (i) Parent will be required to pay to the Company a reverse termination fee of $2,229,000 if the merger agreement is terminated under certain circumstances, (ii) the Company will not need to prove damages as a condition to receiving such reverse termination fee, and (iii) the Kingswood Funds have executed a limited guarantee in favor of the Company guaranteeing Parent’s obligation to pay such reverse termination fee;

 

   

the Company’s right to seek specific performance of Parent’s obligations under the merger agreement, including, under certain circumstances, specific performance of Parent’s obligations to cause the Kingswood Funds to make the equity contribution to Parent pursuant to the equity commitment letter; and

 

   

the Kingswood Funds’ execution of a limited guarantee in favor of the Company guaranteeing, subject to the limitations described therein, the payment of certain payment obligations that may be owed by Parent pursuant to the merger agreement, including the payment of any reverse termination fee that may become payable following termination of the merger agreement in specified circumstances, subject to an overall cap of $2,229,000.

 

   

the other terms of the merger agreement and the related agreements, including:

 

   

the Special Committee’s and the board of directors’ ability to withdraw, modify or amend its recommendation that the Company’s shareholders vote to adopt the merger agreement, subject to certain conditions in the merger agreement;

 

   

the Special Committee’s and the board of directors’ ability to (i) respond to takeover proposals and (ii) terminate the merger agreement for a superior proposal prior to adoption of the merger agreement by the Company’s shareholders, in each case, subject to certain conditions in the merger agreement, including in the case of a termination of the merger agreement, the payment of a termination fee of $2,229,000 by the Company;

 

   

the termination fee of $2,229,000 payable by the Company to Parent under certain circumstances, including as described above, in connection with a termination of the merger agreement, which the Special Committee and board of directors concluded was reasonable in the context of termination fees payable in comparable transactions and considering the overall terms of the merger agreement, including the per share merger consideration of $0.90;

 

   

the fact that the voting agreement entered into by the Rollover Investor with Parent will terminate automatically if the merger agreement is terminated in accordance with its terms, including a termination of the merger agreement for a superior proposal prior to adoption of the merger agreement by the Company’s shareholders; and

 

   

the availability of appraisal rights under the FBCA to the unaffiliated shareholders who comply with all of the required procedures under the FBCA, which allows such holders to seek appraisal of the fair value of their shares of Company Common Stock in lieu of receiving the per share merger consideration.

 

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The Special Committee and board of directors also believed that sufficient procedural safeguards were and are present to ensure the fairness of the merger and to permit the Special Committee and board of directors to represent effectively the interests of the Company’s unaffiliated shareholders. These procedural safeguards include, but are not limited to, the following:

 

   

the fact that the Special Committee consists solely of independent and disinterested directors who are not officers or employees of the Company or affiliated with the Acquiring Group;

 

   

the fact that the board of directors vested the Special Committee with the exclusive power and authority of the board of directors to take any and all actions it considers necessary, desirable or appropriate: (1) to evaluate the terms and conditions and determine the advisability of the proposed merger, or any alternative thereto, and whether in the judgment of the Special Committee the proposed merger, or any alternative thereto, is advisable, fair and in the best interests of the Company and its shareholders; (2) to negotiate with any party the Special Committee deems appropriate with respect to the terms and conditions of the proposed merger, or any alternative thereto, and, if the Special Committee deems appropriate and permissive under applicable law, approve the execution and delivery of documents in connection with the transactions contemplated by the proposed merger, or any alternative thereto, on behalf of the Company; (3) to determine whether the proposed merger or any alternative thereto negotiated by the Special Committee is beneficial to the Company and its shareholders; and (4) to recommend to the full board of directors what action, if any, should be taken by the board of directors with respect to the proposed merger, or any alternative thereto;

 

   

the recognition by the Special Committee that it had the authority not to recommend the merger or any other transaction to the board of directors;

 

   

the recognition by the independent directors that they, collectively representing a majority of the board of directors, had the authority not to approve the merger or any other transaction;

 

   

the fact that each of the members of the Special Committee (comprised of all independent and disinterested directors) unanimously voted to recommend to the board of directors that it, and thereafter the board of directors (other than Jay Stein) unanimously voted to, approve and declare advisable the merger agreement, the merger and the transactions contemplated by the merger agreement, and declare that it is fair to and in the best interests of the Company and the unaffiliated shareholders of the Company that the Company enter into the merger agreement and consummate the merger on the terms and subject to the conditions set forth in the merger agreement; and

 

   

the fact that the Special Committee was advised by PJS, as financial advisor, and Foley & Lardner LLP, as legal advisor, a nationally recognized firm selected by the Special Committee.

In the course of its deliberations, the Special Committee and board of directors also considered a variety of risks and other countervailing factors related to the merger agreement and the merger, including, but not limited to, the following:

 

   

the risk that the merger might not be completed in a timely manner or at all, including the risk that the merger might not be completed because the financing contemplated by the acquisition financing commitments, described under the caption “Special Factors—Financing of the Merger” beginning on page 62, is not obtained, as Parent does not on its own possess sufficient funds to complete the merger;

 

   

the risk that all of the conditions to the parties’ obligations to effect the merger (including, without limitation, minimum liquidity) will not be satisfied prior to the termination date set forth in the merger agreement;

 

   

the fact that the Company’s unaffiliated shareholders will not have any equity in the surviving company following the merger, meaning that the Company’s unaffiliated shareholders will cease to participate in the Company’s future earnings or growth, or to benefit from any increases in the value of the equity in the Company;

 

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the restrictions on the conduct of the Company’s business prior to the completion of the merger, which may delay or prevent the Company from pursuing business opportunities that may arise or taking any other action it would otherwise take with respect to its business operations;

 

   

the risk that, while the closing of the merger is pending, there could be disruptive effects on the business, customer relationships and employees of the Company;

 

   

the risk of incurring substantial expenses related to the merger, including in connection with any future litigation;

 

   

the fact that the Company could be required to pay a termination fee of $2,229,000 if the merger agreement was terminated under certain circumstances, including, but not limited to, a termination of the merger agreement by Parent after the board of directors or Special Committee had withdrawn, modified or amended its recommendation in respect of the merger and the merger agreement in a manner adverse to Parent;

 

   

the absence of a “go-shop” provision in the merger agreement that would permit the Company to actively solicit a superior proposal after execution of the merger agreement;

 

   

the possibility that the termination fee of $2,229,000 payable by the Company upon the termination of the merger agreement under certain circumstances could discourage potential acquirors from making a competing bid to acquire the Company;

 

   

the fact that the Company will generally be required, if the proposed merger is not completed, to pay its own expenses associated with the merger agreement, the merger and the other transactions contemplated by the merger agreement;

 

   

the fact that (i) Parent and Merger Sub are newly formed companies with essentially no assets other than the equity commitment of the Kingswood Funds and the rollover commitment of the Rollover Investor, (ii) the Company’s remedy in the event of breach of the merger agreement by Parent or Merger Sub could be limited to receipt of the reverse termination fee of $2,229,000, and (iii) under certain circumstances, the Company would not be entitled to any reverse termination fee if the merger agreement was terminated;

 

   

the fact that an all cash transaction would be taxable to the Company’s shareholders that are U.S. holders for U.S. federal income tax purposes; and

 

   

the fact that certain of our directors and executive officers have interests in the transaction that are different from, or in addition to, those of our unaffiliated shareholders; see the section captioned “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 64.

In evaluating the merger and in reaching its determination as to the fairness of the transactions contemplated by the merger agreement, the Special Committee and the board of directors considered the factors set forth above, including an evaluation of the going concern value of the Company. The Special Committee and the board of directors did not consider liquidation value as a factor because they consider the Company is more likely to be a viable going concern business and the trading history of the Company Common Stock to generally be an indication of its value as such. However, the Special Committee and the board of directors believed that shareholders likely would receive nothing in the event the Company was forced to liquidate. In addition, due to the fact that the Company is being sold as a going concern, the Special Committee and the board of directors did not consider the liquidation value of the Company relevant to a determination as to whether the proposed merger is fair to the Company’s unaffiliated shareholders as the Special Committee and the board of directors believed the value of the Company’s assets that might be realized in a liquidation would be significantly less than its going concern value. The Special Committee also did not consider net book value, which is an historical accounting measure, in determining the fairness of the merger to the Company and its unaffiliated shareholders, because of its belief that net book value is not a material indicator of the value of the Company as a going concern but rather is indicative of historical acquisition costs and therefore not a relevant measure in the determination of the fairness of the merger. Net book value does not take into account the prospects of the Company, contingent liabilities, market conditions, trends in the industries in which the Company operates or the

 

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business risks inherent in those industries. Further, the Special Committee did not believe that net book value accurately reflects the Company’s present market value. The Company’s net book value per share and net tangible book value per share of Company Common Stock as of November 2, 2019 was approximately $0.66, which is lower than the $0.90 per share merger consideration and higher than the $0.65 closing price of the Company Common Stock on January 30, 2020, the last trading day before the announcement that the Company, Parent and Merger Sub had entered into the merger agreement.

The Special Committee and the board of directors considered each of the financial analyses presented by PJS (as summarized under “Special Factors—Opinion of PJ Solomon Securities, LLC” beginning on page 39) together as a whole and did not assign relative importance or weight to any specific analysis by PJS or consider any such analysis in isolation from the other analyses.

The foregoing discussion of the factors considered by the Special Committee and the board of directors is not intended to be exhaustive, but rather includes the principal factors considered by the Special Committee and the board of directors. The Special Committee reached the conclusion to unanimously recommend that the board of directors approve, and thereafter the board of directors reached the conclusion to unanimously approve, the merger agreement, the merger and the other transactions contemplated by the merger agreement in light of the various factors described above and other factors that the members of the Special Committee and board of directors believed were appropriate. In view of the wide variety of factors considered by the Special Committee and board of directors in connection with their evaluation of the proposed merger and the complexity of these matters, the Special Committee and board of directors did not consider it practical, and did not attempt, to quantify, rank or otherwise assign relative weights to the specific factors they considered in reaching their decision and did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of the Special Committee and the board of directors. Rather, the Special Committee made its recommendation, and the board of directors made its decision to approve, based on the totality of information that they reviewed and the investigation that they conducted. In considering the factors discussed above, individual members of the Special Committee and the individual members of the board of directors may have given different weights to different factors. In light of the procedural protections described above, and given the independent directors’ majority status and the engagement of PJS and Foley and Lardner LLP by the Special Committee, the Special Committee and the board of directors did not consider it necessary to make any provision to grant unaffiliated shareholders access to the Company’s corporate files or to obtain counsel or appraisal services for unaffiliated shareholders.

In connection with the consummation of the merger, certain of the Company’s directors may receive benefits and compensation that may differ from the per share merger consideration you would receive. See “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 64.

Based upon the foregoing, the Company believes that the merger agreement, the merger and the other transactions contemplated by the merger agreement, are fair to, and in the best interests of, the Company’s unaffiliated shareholders.

Our Board of Directors recommends that the shareholders of the Company vote “FOR” the adoption of the merger agreement.

Opinion of PJ Solomon Securities, LLC

PJS delivered its opinion to the Special Committee that, as of January 30, 2020 and based upon and subject to the factors and assumptions set forth therein, the $0.90 in cash per share of Company Common Stock to be paid to the shareholders (other than Parent and its affiliates), including the Company’s “unaffiliated security holders” (as defined in Rule 13e-3 under the Exchange Act), pursuant to the merger agreement was fair from a financial point of view to such shareholders.

 

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The full text of the written opinion of PJS, dated January 30, 2020, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Appendix B. PJS provided its opinion for the information and assistance of the Special Committee in connection with its consideration of the merger. The PJS opinion does not constitute a recommendation to any shareholder of the Company as to how any such shareholder should vote on the merger or act on any matter relating to the merger.

At the January 30, 2020 meeting of the Special Committee, representatives of PJS delivered its oral opinion, subsequently confirmed by delivery of a written opinion, that, as of such date and based upon and subject to the factors and assumptions set forth therein, the $0.90 in cash per share of the Company Common Stock to be paid to the shareholders (other than Parent, the Rollover Investor and their affiliates) pursuant to the merger agreement was fair from a financial point of view to such shareholders.

For purposes of its opinion, PJS:

 

   

reviewed certain publicly available financial statements and other information of the Company;

 

   

reviewed certain internal financial statements and other financial and operating data concerning the Company prepared and provided to PJS by the management of the Company and approved for PJS’s use by the Special Committee;

 

   

reviewed certain financial projections for the Company prepared and provided to PJS by the management of the Company and approved for PJS’s use by the Special Committee (the “Projections”);

 

   

discussed the past and current operations, financial condition and prospects of the Company with management of the Company;

 

   

reviewed the reported prices and trading activity of the Company Common Stock;

 

   

compared the financial performance and condition of the Company and the reported prices and trading activity of the Company Common Stock with that of certain other publicly traded companies that PJS deemed relevant;

 

   

reviewed publicly available information regarding the financial terms of certain transactions that PJS deemed relevant, in whole or in part, to the merger;

 

   

participated in certain discussions among management and other representatives of each of Parent and the Company;

 

   

reviewed a near-final form of the merger agreement dated January 29, 2020; and

 

   

performed such other analyses and reviewed such other material and information as PJS deemed appropriate.

PJS assumed and relied upon the accuracy and completeness of the information reviewed by PJS for the purposes of its opinion and PJS did not assume any responsibility for independent verification of such information and relied on such information being complete and correct. PJS relied on assurances of the management of the Company that they are not aware of any facts or

 

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circumstances that would make such information inaccurate or misleading in any respect material to PJS’s opinion. With respect to the Projections, PJS assumed that the Projections were reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of the Company. PJS did not conduct a physical inspection of the facilities or property of the Company. PJS did not assume any responsibility for or perform any independent valuation or appraisal of the assets or liabilities of the Company, nor was PJS furnished with any such valuation or appraisal. Furthermore, PJS did not consider any tax, accounting or legal effects of the merger or transaction structure on any person or entity.

PJS assumed that the final form of the merger agreement will be substantially the same as the last draft reviewed by PJS and will not vary in any respect material to PJS’s analysis. PJS also assumed that the merger will be consummated in accordance with the terms of the merger agreement, without waiver, modification or amendment of any material term, condition or agreement (including, without limitation, the per share merger consideration to be paid to the shareholders of the Company (other than Parent, the Rollover Investor and their affiliates) in the merger) and that, in the course of obtaining the necessary regulatory or third party approvals, consents and releases for the merger, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on the Company or the contemplated benefits of the merger. PJS further assumed that all representations and warranties set forth in the merger agreement were and will be true and correct as of all the dates made or deemed made and that all parties to the merger agreement will comply with all covenants of such parties thereunder.

PJS’s opinion is necessarily based on economic, market and other conditions as in effect on, and the information made available to PJS as of, January 30, 2020. In particular, PJS does not express any opinion as to the prices at which the Company Common Stock may trade at any future time or as to the impact of the merger on, or as to, the solvency or viability of the Company, Parent, the Rollover Investor or Merger Sub or the ability of the Company, Parent, the Rollover Investor or Merger Sub to pay their respective obligations when they come due. Furthermore, PJS’s opinion does not address the Company’s underlying business decision to undertake the merger, and the opinion does not address the relative merits of the merger as compared to any alternative transactions or business strategies that might be available to the Company. PJS’s opinion does not address any other aspect or implication of the merger or any other agreement, arrangement or understanding entered into in connection with the merger or otherwise except as expressly identified therein. PJS expresses no view as to, and PJS’s opinion does not address, the fairness (financial or otherwise) of the amount or nature or any other aspect of any compensation to any officers, directors or employees of any parties to the merger, or any class of such persons, relative to the per share merger consideration to be paid to the shareholders (other than Parent, the Rollover Investor and their respective affiliates) pursuant to the merger agreement. The issuance by PJS of its opinion was authorized by PJS’s fairness opinion committee.

The following summarizes the significant financial analyses performed by PJS and provided to, and reviewed with, the Special Committee in connection with the delivery of PJS’s opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand PJS’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses.

 

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Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of PJS’s financial analyses. The following summary, however, does not purport to be a complete description of the financial analyses performed by PJS, nor does the order of analyses described represent relative importance or weight given to those analyses by PJS. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before January 30, 2020 and is not necessarily indicative of current market conditions.

Selected Publicly Traded Companies Analysis

PJS reviewed and compared certain financial information for the Company to corresponding financial information for the following publicly traded corporations in the retail industry (collectively, the “selected companies”):

 

   

J.C. Penney;

 

   

Nordstrom;

 

   

Dillard’s;

 

   

Kohl’s;

 

   

Macy’s;

 

   

The Cato Corporation; and

 

   

Stage Stores.

Although none of the selected companies is directly comparable to the Company, the companies included were chosen because they are U.S. domestic, publicly traded companies which engage in a similar business as the Company and with operations that, for purposes of analysis, may be considered similar to certain operations of the Company.

PJS also calculated and compared various financial multiples for the selected companies and the Company based on historical financial data from publicly available sources and forecasts from Wall Street research available as of January 30, 2020 for the selected companies and based on the Projections.

With respect to the selected companies, PJS calculated:

 

   

the enterprise value (which represents the equity value plus book values of total debt, including preferred stock and minority interest, less cash) (“EV”) as a multiple of last twelve months as of the end of the last quarter for which financials were publicly available (“LTM”) adjusted earnings before interest, tax, depreciation, amortization (“Adjusted EBITDA”);

 

   

EV as a multiple of Adjusted EBITDA for calendar year 2019;

 

   

price per share as a multiple of estimated earnings per share (“EPS”) for calendar year 2020; and

 

   

price per share as a multiple of EPS for calendar year 2021.

 

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The tables below summarize the results of these calculations:

 

            Selected Companies  

Enterprise Value as a Multiple of:

     

LTM Adjusted EBITDA(1)

     Range:        3.6x - 5.9x  

CY2019E Adjusted EBITDA(2)

     Range:        4.3x - 5.5x  

Price Per Share as a Multiple of:

     

CY2020E EPS(3)

     Range:        7.0x - 17.6x  

CY2021E EPS(3)

     Range:        7.4x - 24.0x  

 

(1)

Excludes Stage Stores as not material and excludes J.C. Penney as not being relevant due to its high debt levels that distorted its trading multiple.

(2) 

Excludes Stage Stores and The Cato Corporation as not material and excludes J.C. Penney as not being relevant due to its high debt levels that distorted its trading multiple.

(3)

Excludes the Stage Stores, The Cato Corporation and J.C. Penney as not material.

PJS then used an illustrative range of multiples derived from the selected companies to calculate a range of implied values for the Company Common Stock based on the Projections, as summarized below. The ranges of multiples used by PJS were chosen by PJS utilizing its professional judgment and experience, taking into account PJS’s review of the multiples of the selected companies.

 

     Valuation Multiples      Implied Value Per Share of
Company Common Stock
 

Enterprise Value as a Multiple of:

     

LTM Adjusted EBITDA

     3.6x - 5.9x        $0.09 - $1.51  

CY 2019E Adjusted EBITDA

     4.3x - 5.5x        $0.33 - $1.02  

Price as a Multiple of:

     

Calendar Year 2020E Adjusted EPS

     7.0x - 17.6x        $0.13 - $0.32  

Calendar Year 2021E Adjusted EPS

     7.4x - 24.0x        $0.22 - $0.70  

Selected Precedent Transactions Analyses

PJS analyzed certain publicly available information relating to the following selected transactions in the retail industry for North America-based targets since August 2016 (collectively, the “selected transactions”):

 

Target

   Acquiror    Announcement Date

Sears Outlet

   Liberty Tax    August 2019

Lord & Taylor

   Le Tote    August 2019

Barnes & Noble Inc.

   Elliott Management    June 2019

Gander Mountain

   Camping World    May 2017

Golfsmith

   Dick’s    October 2016

Vestis Retail Group

   Versa Capital Management    August 2016

 

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Although none of the selected transactions is directly comparable to the merger, the target companies in the selected transactions were North America-based companies in the retail industry that were acquired since August 2016 and therefore had operations that, for the purposes of analysis, may be considered similar to certain of the Company’s operations and profile, and as such, for purposes of analysis, the selected transactions may be considered similar to the merger.

For each of the selected transactions, PJS calculated and compared the EV of the target company implied by the transaction as a percentage of the last twelve months ended December 2019 total revenue of the target (“LTM Total Revenue”) and the enterprise value implied by the transaction as a multiple of the last twelve months ended December 2019 Adjusted EBITDA (“LTM December 2019 EBITDA”) of the target. The following tables present the results of this analysis:

 

     Selected Transactions
Range
 

Transaction Enterprise Value as a Percentage of:

  

LTM Total Revenue*

     8.7% - 28.8%  

 

*

Excludes Le Tote / Lord & Taylor as not material.

 

     Selected Transactions
Range
 

Transaction Enterprise Value as a Multiple of:

  

LTM December 2019 EBITDA*

     3.7x - 4.6x  

 

*

Excludes Le Tote / Lord & Taylor and Versa Capital Management / Vestis Retail Group as not material and excludes Camping World / Gander Mountain and Dick’s / Golfsmith as not publicly disclosed.

PJS used the Projections to calculate an illustrative range of implied values per share of the Company Common Stock by applying a range of valuation percentages of 8.7% to 28.8% to the LTM December 2019 Total Revenue of the Company and 3.7x to 4.6x to the LTM December 2019 Adjusted EBITDA of the Company.

The following table presents the results of this analysis:

 

     Valuation Percentage /
Multiple
     Implied Value per share
of

Company Common
Stock
 

LTM Total Revenue

     8.7% - 28.8%        $    0.07 - $5.08  

LTM December 2019 Adjusted EBITDA

     3.7x - 4.6x        $ (0.02) - $0.49  

 

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Illustrative Discounted Cash Flow Analysis

PJS performed illustrative discounted cash flow analyses on the Company using the Projections.

Using discount rates ranging from 9.5% to 11.5%, reflecting estimates of the Company’s weighted average cost of capital (derived by the application of the Capital Asset Pricing Model, which requires certain inputs, including the median of selected public companies’ target capital structure weightings, the cost of long-term debt, after-tax yield on permanent excess cash, if any, and a beta for the Company, as well as the future applicable marginal cash tax rate of the Company, and certain financial metrics for the United States financial markets generally), PJS discounted to present value as of January 30, 2020, (i) estimates of unlevered free cash flow for the Company through fiscal year-end 2024 as reflected in the Projections, and (ii) a range of illustrative terminal values for the Company, which were calculated by applying an illustrative range of exit terminal year adjusted EBITDA multiples of 3.5x to 6.0x (which range was selected by PJS using its judgment after taking into account the EBITDA multiples included in the Selected Publicly Traded Companies) to projected terminal year adjusted EBITDA for the Company as reflected in the Projections (for the terminal year estimate of the free cash flow to be generated by the Company per the Projections). PJS then added the ranges of present values it derived above to derive a range of illustrative EVs for the Company. PJS then subtracted the amount of the Company’s adjusted net debt, as provided by the management of the Company, from the range of illustrative EVs it derived for the Company to derive a range of illustrative equity values for the Company. PJS then divided the range of illustrative equity values it derived by the number of fully diluted shares of Company Common Stock as of January 27, 2020, as provided by the management of the Company, to derive a range of illustrative present values per share of Company Common Stock of $0.03 to $1.49.

Using discount rates ranging from 9.5% to 11.5%, reflecting estimates of the Company’s weighted average cost of capital (derived by the application of the Capital Asset Pricing Model, which requires certain inputs, including the median of selected public companies’ target capital structure weightings, the cost of long-term debt, after-tax yield on permanent excess cash, if any, and a beta for the Company, as well as the future applicable marginal cash tax rate of the Company, and certain financial metrics for the United States financial markets generally), PJS also discounted to present value as of January 30, 2020, (i) estimates of unlevered free cash flow for the Company through fiscal year-end 2024 as reflected in the Projections, and (ii) a range of illustrative terminal values for the Company, which were calculated by applying perpetuity growth rates ranging from 0.0% to 2.0% to the estimate of the terminal year unlevered free cash flow of the Company as reflected in the Projections. The range of perpetuity growth rates were estimated by PJS utilizing its professional judgment and experience, taking into account the Projections and market expectations regarding long-term real growth of gross domestic product and inflation. PJS then added the ranges of present values it derived above to derive a range of illustrative EVs for the Company. PJS then subtracted the amount of the Company’s adjusted net debt, as provided by the management of the Company, from the range of illustrative EVs it derived for the Company to derive a range of illustrative equity values for the Company. PJS then divided the range of illustrative equity values it derived by the number of fully diluted shares of Company Common Stock as of January 27, 2020, as provided by the management of the Company, to derive a range of illustrative present values per share of Company Common Stock of $(0.64) to $0.06.

 

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Historical Company Share Trading Analysis

PJS reviewed the historical trading prices and volumes for the Company Common Stock for the 52-week period ending January 30, 2020. In addition, PJS analyzed the per share merger consideration to be paid to shareholders of the Company pursuant to the merger agreement in relation to, among other things, (i) the closing price per share of the Company Common Stock on January 30, 2020, (ii) the volume weighted average price per share of the Company Common Stock for the 180-day period ending on January 30, 2020, (iii) the volume weighted average price per share of the Company Common Stock for the 90-day period ending on January 30, 2020, (iv) the volume weighted average price per share of the Company Common Stock for the 60-day period ending on January 30, 2020, (v) the volume weighted average price per share of the Company Common Stock for the 30-day period ending on January 30, 2020, (vi) the highest closing price per share of the Company Common Stock for the 52-week period ending on January 30, 2020, and (vii) the lowest closing price per share of the Company Common Stock for the 52-week period ending on January 30, 2020.

This analysis indicated that the per share merger consideration of $0.90 to be paid to shareholders of the Company pursuant to the merger agreement represented:

 

   

a premium of 38.4% based on the closing price per share of the Company Common Stock, as of January 30, 2020, of $0.65;

 

   

a premium of 20.7% based on the volume weighted average price per share of the Company Common Stock for the 180-day period ending on January 30, 2020, of $0.75;

 

   

a premium of 25.4% based on the volume weighted average price per share of the Company Common Stock for the 90-day period ending on January 30, 2020, of $0.72;

 

   

a premium of 30.8% based on the volume weighted average price per share of the Company Common Stock for the 60-day period ending on January 30, 2020, of $0.69;

 

   

a premium of 34.3% based on the volume weighted average price per share of the Company Common Stock for the 30-day period ending on January 30, 2020, of $0.67;

 

   

a discount of 26.8% based on the highest closing price per share of the Company Common Stock, achieved February 14, 2019, for the 52-week period ending on January 30, 2020, of $1.23; and

 

   

a premium of 41.0% based on the lowest closing price per share of the Company Common Stock, achieved January 28, 2020, for the 52-week period ending on January 30, 2020, of $0.64.

PJS’s historical company share trading analysis was not a fundamental valuation methodology and was not used by PJS as a basis for rendering its fairness opinion.

 

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Miscellaneous

In arriving at PJS’s opinion, PJS performed a variety of financial analyses, the material portions of which are summarized above. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying PJS’s opinion. In arriving at its fairness determination, PJS considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis considered by it. Rather, PJS made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the above analyses as a comparison is directly comparable to the Company or the merger.

PJS prepared these analyses for purposes of PJS’s providing its opinion to the Special Committee as to the fairness from a financial point of view to the shareholders of the Company (other than Parent, the Rollover Investor and their affiliates) of the $0.90 in cash per share of the Company Common Stock to be paid to such shareholders of the Company pursuant to the merger agreement. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of the Company, Parent, PJS or any other person assumes responsibility if future results are materially different from those forecast.

The $0.90 in cash per share of the Company Common Stock was determined through arm’s-length negotiations between the Special Committee and Parent and was approved by the board of directors. PJS provided advice to the Special Committee during these negotiations. PJS did not, however, recommend any specific amount of consideration to the Special Committee, the Company or the board of directors or that any specific amount of consideration constituted the only appropriate consideration for the merger.

As described above, PJS’s opinion to the Special Committee was one of many factors taken into consideration by the board of directors in making its determination to approve the merger agreement. The foregoing summary does not purport to be a complete description of the analyses performed by PJS in connection with the fairness opinion and is qualified in its entirety by reference to the written opinion of PJS attached as Appendix B.

Natixis, S.A. (“Natixis”), which became the holder of a majority of PJS’s outstanding equity on June 8, 2016, is, together with its affiliates, engaged in advisory, underwriting and financing, principal investing, sales and trading, research, investment management, insurance and other financial and non-financial activities and services for various persons and entities. Natixis and its affiliates and employees, and funds or other entities they manage or in which they invest or have other economic interests or with which they co-invest, may at any time purchase, sell, hold or vote long or short positions and investments in securities, derivatives, loans, commodities, currencies,

 

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credit default swaps and other financial instruments of the Company, Parent, the Rollover Investor, any of their respective affiliates and third parties, including Kingswood Capital, an affiliate of Parent, Jay Stein, an affiliate of the Rollover Investor, and their respective affiliates and, in the case of Kingswood Capital, portfolio companies, or any currency or commodity that may be involved in the Merger. In addition, Natixis and its affiliates may have co-invested with Kingswood Capital and its affiliates from time to time and may have invested in limited partnership units of affiliates of Kingswood Capital from time to time and may do so in the future.

The Special Committee selected PJS as its financial advisor because it is a recognized financial advisory firm that has substantial experience in transactions similar to the merger. Pursuant to a letter agreement dated January 26, 2018 (as amended), the Special Committee engaged PJS to act as its financial advisor in connection with the merger. The engagement letter between the Special Committee and PJS provides for a transaction fee that is estimated, based on the information available as of the date of announcement of the merger agreement, approximately $2.6 million, a substantial portion of which is contingent upon the closing of the merger and a portion of which was payable upon the delivery by PJS of its oral opinion, as of January 29, 2020, and its oral opinion, subsequently confirmed in writing, as of January 30. 2020. In addition, the Company has agreed to reimburse PJS for its expenses and to indemnify PJS against certain liabilities arising out of its engagement by the Special Committee. PJS has not during the two years prior to the date of its opinion provided any financial advisory services to the Company, Parent, the Rollover Investor, Kingswood Capital, Jay Stein, or their respective affiliates or, in the case of Kingswood Capital, portfolio companies for which PJS received payment, in each case, other than serving as financial advisor to the Special Committee in connection with the refinancing of the Company’s asset-backed loan facility in September 2018 and other than having delivered an oral opinion on January 29, 2020 to the Special Committee as to the fairness to the shareholders (other than Parent, the Rollover Investor and their respective affiliates) from a financial point of view of the consideration to be paid to such shareholders pursuant to the merger agreement. In the future, PJS, Natixis and their respective affiliates may provide financial advisory services to the Company, Parent, the Rollover Investor, Kingswood Capital, Jay Stein, their respective affiliates or, in the case of Kingswood Capital, portfolio companies, and in the future may receive compensation for rendering these services.

 

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Purposes and Reasons of the Company for the Merger

The Company’s purpose for engaging in the merger is to enable its shareholders to receive $0.90 per share of Company Common Stock, which represents a premium of approximately 38%, based on the closing price per share of Company Common Stock on January 30, 2020, the last trading day before the announcement that the Company, Parent and Merger Sub had entered into the merger agreement, of $0.65. The Company has determined to undertake the merger at this time based on the conclusions, determinations and reasons of the Special Committee and the board of directors described in detail above under “Special Factors—Background of the Merger” beginning on page 17 and “Special Factors—Recommendation of the Special Committee and Our Board of Directors; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger” beginning on page 34.

Purposes and Reasons of the Acquiring Group Filing Persons for the Merger

Under the SEC rules governing “going-private” transactions, each Acquiring Group Filing Person is considered an affiliate of the Company and, therefore, each of the Acquiring Group Filing Persons is required to express its purposes and reasons for the merger to the Company’s “unaffiliated shareholders”, as such term is defined in Rule 13e-3 under the Exchange Act. Each of the Acquiring Group Filing Persons is making the statements included in this section of this proxy statement solely for the purpose of complying with the requirements of Rule 13e-3 and the related rules under the Exchange Act. The views of each of the Acquiring Group Filing Persons should not be construed as a recommendation to any unaffiliated shareholder as to how such unaffiliated shareholder should vote on the proposal to adopt the Merger Agreement.

For the Kingswood Group Filing Persons, the primary purpose of the merger is to allow Parent to indirectly own equity interests in the Company and to bear the rewards and risks of such ownership after the merger is completed and the common stock ceases to be publicly traded. The Kingswood Group Filing Persons believe that structuring the transaction in such manner is preferable to other transaction structures because it (i) will enable Parent to indirectly acquire all of the outstanding common stock of the Company at the same time, (ii) will allow the Company to cease to be a publicly registered and reporting company, (iii) represents an opportunity for the Company’s unaffiliated shareholders to receive $0.90 in cash per share of Common Stock and (iv) allows the Rollover Investor to maintain a portion of its investment in the Company through direct ownership in Parent. The Kingswood Group Filing Persons did not consider any other alternative transaction structures or other alternative means to accomplish the foregoing purposes.

For the Rollover Investor, the primary purpose of the merger for the Company is to enable the unaffiliated shareholders to, as of the closing of the merger, immediately realize the value of their investment in the Company through the receipt of the per share merger consideration price of $0.90 in cash. In connection with the merger, the Rollover Investor will contribute 17,339,544 shares of Common Stock in exchange for equity interests in Parent and thereby be able to indirectly own equity interests in the Company and to bear the rewards and risks of such ownership after the merger is completed and the common stock ceases to be publicly traded. The Rollover Investor also believes that the merger will provide the Company with flexibility to pursue certain strategic alternatives that it would not be practicable to pursue as a public company, including the ability to pursue business initiatives without focusing on the short-term market reaction of the Company’s public shareholders with respect to such initiatives.

 

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Positions of the Kingswood Group Filing Persons Regarding the Fairness of the Merger

Under the SEC rules governing “going-private” transactions, each of the Kingswood Group Filing Persons is considered an affiliate of the Company and, therefore, each of the Kingswood Group Filing Persons is required to express its beliefs as to the fairness of the merger to the unaffiliated shareholders of the Company. Each of the Kingswood Group Filing Persons are making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act. The views of each of the Kingswood Group Filing Persons should not be construed as a recommendation to any unaffiliated shareholder as to how such unaffiliated shareholder should vote on the proposal to adopt the Merger Agreement. The Kingswood Group Filing Persons attempted to negotiate with the Board the terms of a transaction that would be most favorable to the Kingswood Group Filing Persons, and not necessarily to the Company’s unaffiliated shareholders, and, accordingly, did not negotiate the merger agreement with a goal of obtaining terms that were fair to such unaffiliated shareholders.

None of the Kingswood Group Filing Persons participated in the deliberations of the Board regarding, or received advice from the Company’s legal advisors or financial advisors as to, the substantive or procedural fairness of the merger to the Company’s unaffiliated shareholders. None of the Kingswood Group Filing Persons has performed, or engaged a financial advisor to perform, any valuation or other analysis for the purposes of assessing the fairness of the merger to the Company’s unaffiliated shareholders. Based on the knowledge and analysis by the Kingswood Group Filing Persons of available information regarding the Company, as well as discussions with the Company regarding its business and the factors considered by, and the analysis and resulting conclusions of, the Board discussed in this proxy statement in “Special Factors—Recommendation of the Special Committee and Our Board of Directors; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger” beginning on page 34 (which analysis and resulting conclusions the Kingswood Group Filing Persons adopt), the Kingswood Group Filing Persons believe that the merger is substantively and procedurally fair to the Company’s unaffiliated shareholders. In particular, the Kingswood Group Filing Persons believe that the merger is both procedurally and substantively fair to the unaffiliated shareholders based on their consideration of the following factors, among others:

 

   

the fact that the Special Committee consists solely of independent and disinterested directors who are not officers or employees of the Company or affiliated with the Kingswood Group;

 

   

the fact that each of the members of the Special Committee (comprised of all independent and disinterested directors) unanimously voted to recommend to the board of directors that it, and thereafter the board of directors (other than Jay Stein) unanimously voted to, approve and declare advisable the merger agreement, the merger and the transactions contemplated by the merger agreement, and declare that it is fair to and in the best interests of the Company and the unaffiliated shareholders of the Company that the Company enter into the merger agreement and consummate the merger on the terms and subject to the conditions set forth in the merger agreement;

 

   

the fact that Jay Stein and the Rollover Investor did not participate in the Kingswood Group’s negotiations with the Company with respect to the merger agreement, and Jay Stein did not participate in any Board deliberations relating to the merger;

 

   

the fact that the $0.90 per share to be paid in respect of each share of Company Common Stock represents a premium of approximately 38%, based on the closing price per share of Company Common Stock on January 30, 2020, the last trading day before the announcement that the Company, Parent and Merger Sub had entered into the merger agreement, of $0.65;

 

   

the fact that the Company Common Stock traded as low as $0.60 during the 52 weeks prior to the announcement of the January 30, 2020 execution of the merger agreement;

 

   

the fact that the Special Committee and the board of directors believed that the $0.90 per share price to be paid in respect of each share of Company Common Stock was the highest price that the Acquiring Group Filing Persons would be willing to pay and represented the best value reasonably available to the Company’s unaffiliated shareholders;

 

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the fact that the merger consideration is all cash, allowing the Company’s unaffiliated shareholders to immediately realize a certain value for all of their shares of Common Stock (without incurring brokerage or other costs typically associated with market sales) and, as a result, to no longer be exposed to risks and uncertainties relating to the performance and prospects of the Company;

 

   

the fact that the merger agreement permits the Company, subject to specific limitations and requirements set forth therein, to consider and respond to an unsolicited third-party takeover proposal, and to furnish confidential information to, and engage in discussions or negotiations with, the person or parties making such takeover proposal prior to the time the Company’s shareholders approve the proposal to adopt the merger agreement;

 

   

the fact that the Special Committee was advised by PJS, as financial advisor, and Foley & Lardner LLP, as legal advisor, a nationally recognized firm selected by the Special Committee;

 

   

notwithstanding that the opinion of PJS was provided solely for the benefit of the Special Committee and that the Kingswood Group Persons are not entitled to, and did not, rely on such opinion, the fact that the Board received an opinion, dated as of January 30, 2020, from PJS to the effect that, as of the date of the opinion and based upon and subject to the assumptions made, procedures followed, matters considered and limitations and qualifications set forth in such opinion, the merger consideration consisting of $0.90 per share of Common Stock to be received in the merger by the unaffiliated shareholders, was fair, from a financial point of view, to such holders;

 

   

the fact that the Kingswood Group obtained debt and equity financing commitments for the transaction, the limited number and nature of the conditions to the debt and equity financing, the absence of a financing condition in the merger agreement and the obligation of Kingswood Group to use its reasonable best efforts to consummate the debt financing; and

 

   

the fact that the Company’s shareholders have the ability to exercise appraisal rights under Sections 607.1301 through 607.1340 of the FBCA, which is the appraisal rights statute applicable to Florida corporations and allows such shareholders to seek appraisal of the fair value of their shares of Company Common Stock in lieu of receiving the per share merger consideration.

In their consideration of the fairness of the merger, the Kingswood Group did not find it practicable to, and did not, appraise the assets of the Company to determine the liquidation value for the Company’s unaffiliated shareholders because (i) of their belief that liquidation sales generally result in proceeds substantially less than the sales of a going concern, (ii) of the impracticability of determining a liquidation value given the significant execution risk involved in any breakup, (iii) they considered the Company to be a viable going concern and (iv) the Company will continue to operate its business following the merger.

The Kingswood Group did not consider net book value, which is an accounting concept, for purposes of determining the fairness of the merger consideration to the Company’s unaffiliated shareholders because, in their view, net book value is not indicative of the Company’s market value but rather is an indicator of historical costs.

The Kingswood Group did not seek to establish a pre-merger going concern value for the common stock to determine the fairness of the merger consideration to the Company’s unaffiliated shareholders because following the merger the Company will have a significantly different capital structure. However, to the extent the pre-merger going concern value was reflected in the price of the common stock immediately prior to the announcement of the merger, the merger consideration of $0.90 per share of common stock represented a premium to the going concern value of the Company.

None of the Kingswood Group Filing Persons was aware of, and thus did not consider in its fairness determination, any firm offers during the prior two years by any person for (i) the merger or consolidation of the Company with or into another company, (ii) the sale or transfer of all or a substantial part of the Company’s assets, or (iii) the purchase of the Company’s securities that would enable the holder to exercise control of the Company.

 

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The foregoing is a summary of the information and factors considered by the Kingswood Group in connection with their evaluation of the fairness of the merger to the Company’s unaffiliated shareholders, which is not intended to be exhaustive but is believed to include all material factors considered by the Kingswood Group. The Kingswood Group did not find it practicable to assign, and did not assign, quantify or otherwise attach relative weights to the individual factors considered in reaching their conclusions as to the fairness of the merger. Rather, the Kingswood Group Filing Persons made their fairness determination after considering all of the foregoing factors as a whole. The Kingswood Group believe that these factors provide a reasonable basis for their belief that the merger is fair to the Company’s unaffiliated shareholders. This belief should not, however, be construed as a recommendation to any Company shareholder to vote in favor of the proposal to adopt the merger agreement. None of the Kingswood Group makes any recommendation as to how Company shareholders should vote their shares of common stock on any proposals to be voted upon at the special meeting.

Positions of the Rollover Investor Regarding the Fairness of the Merger

Under the SEC rules governing “going-private” transactions, the Rollover Investor is considered an affiliate of the Company and, therefore, the Rollover Investor is required to express its beliefs as to the fairness of the merger to the unaffiliated shareholders of the Company. The Rollover Investor is making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act. The views of the Rollover Investor should not be construed as a recommendation to any unaffiliated shareholder as to how such unaffiliated shareholder should vote on the proposal to adopt the Merger Agreement. The views of the Rollover Investor should not be construed as a recommendation to any unaffiliated shareholder as to how such unaffiliated shareholder should vote on the proposal to adopt the Merger Agreement.

To avoid unduly influencing the Board in connection with its independent consideration of the fairness of the merger, the Rollover Investor did not participate in the deliberations of the Board regarding, or receive advice from the Company’s legal advisors or financial advisors as to, the substantive or procedural fairness of the merger to the Company’s unaffiliated shareholders. The Rollover Investor did not perform, or engage a financial advisor to perform, any valuation or other analysis for the purposes of assessing the fairness of the merger to the Company’s unaffiliated shareholders. Based on the knowledge and analysis by the Rollover Investor of available information regarding the Company, as well as discussions with the Company regarding its business and the factors considered by, and the analysis and resulting conclusions of, the Board discussed in this proxy statement in “Special Factors—Recommendation of the Special Committee and Our Board of Directors; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger” beginning on page 34 (which analysis and resulting conclusions the Rollover Investor adopts), the Rollover Investor believes that the merger is substantively and procedurally fair to the Company’s unaffiliated shareholders. In particular, the Rollover Investor believes that the merger is both procedurally and substantively fair to the unaffiliated shareholders based on their consideration of the following factors, among others:

 

   

the fact that the Special Committee consists solely of independent and disinterested directors who are not officers or employees of the Company or affiliated with the Rollover Investor;

 

   

the fact that each of the members of the Special Committee (comprised of all independent and disinterested directors) unanimously voted to recommend to the board of directors that it, and thereafter the board of directors (other than Jay Stein) unanimously voted to, approve and declare advisable the merger agreement, the merger and the transactions contemplated by the merger agreement, and declare that it is fair to and in the best interests of the Company and the unaffiliated shareholders of the Company that the Company enter into the merger agreement and consummate the merger on the terms and subject to the conditions set forth in the merger agreement;

 

   

the fact that Jay Stein and the Rollover Investor did not participate in the Kingswood Group’s negotiations with the Company with respect to the merger agreement, and Jay Stein did not participate in any Board deliberations relating to the merger;

 

   

the fact that the $0.90 per share to be paid in respect of each share of Company Common Stock represents a premium of approximately 38%, based on the closing price per share of Company

 

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Common Stock on January 30, 2020, the last trading day before the announcement that the Company, Parent and Merger Sub had entered into the merger agreement, of $0.65;

 

   

the fact that the Company Common Stock traded as low as $0.60 during the 52 weeks prior to the announcement of the January 30, 2020 execution of the merger agreement;

 

   

the fact that the Special Committee and the board of directors believed that the $0.90 per share price to be paid in respect of each share of Company Common Stock was the highest price that the Acquiring Parties would be willing to pay and represented the best value reasonably available to the Company’s unaffiliated shareholders;

 

   

the fact that the merger consideration is all cash, allowing the Company’s unaffiliated shareholders to immediately realize a certain value for all of their shares of Common Stock (without incurring brokerage or other costs typically associated with market sales) and, as a result, to no longer be exposed to risks and uncertainties relating to the performance and prospects of the Company;

 

   

the fact that the merger agreement permits the Company, subject to specific limitations and requirements set forth therein, to consider and respond to an unsolicited third-party takeover proposal, and to furnish confidential information to, and engage in discussions or negotiations with, the person or parties making such takeover proposal prior to the time the Company’s shareholders approve the proposal to adopt the merger agreement;

 

   

the fact that the Special Committee was advised by PJS, as financial advisor, and Foley & Lardner LLP, as legal advisor, a nationally recognized firm selected by the Special Committee;

 

   

notwithstanding that the opinion of PJS was provided solely for the benefit of the Special Committee and that the Rollover Investor is not entitled to, and did not, rely on such opinion, the fact that the Board received an opinion, dated as of January 30, 2020, from PJS to the effect that, as of the date of the opinion and based upon and subject to the assumptions made, procedures followed, matters considered and limitations and qualifications set forth in such opinion, the merger consideration consisting of $0.90 per share of Common Stock to be received in the merger by the unaffiliated shareholders, was fair, from a financial point of view, to such holders;

 

   

the fact that the Kingswood Group obtained debt and equity financing commitments for the transaction, the limited number and nature of the conditions to the debt and equity financing, the absence of a financing condition in the merger agreement and the obligation of Kingswood Group to use its reasonable best efforts to consummate the debt financing; and

 

   

the fact that the Company’s shareholders have the ability to exercise appraisal rights under Sections 607.1301 through 607.1340 of the FBCA, which is the appraisal rights statute applicable to Florida corporations and allows such shareholders to seek appraisal of the fair value of their shares of Company Common Stock in lieu of receiving the per share merger consideration.

In its consideration of the fairness of the merger, the Rollover Investor did not find it practicable to, and did not, appraise the assets of the Company to determine the liquidation value for the Company’s unaffiliated shareholders because (i) of its belief that liquidation sales generally result in proceeds substantially less than the sales of a going concern, (ii) of the impracticability of determining a liquidation value given the significant execution risk involved in any breakup, (iii) it considered the Company to be a viable going concern and (iv) the Company will continue to operate its business following the merger.

The Rollover Investor did not consider net book value, which is an accounting concept, for purposes of determining the fairness of the merger consideration to the Company’s unaffiliated shareholders because, in its view, net book value is not indicative of the Company’s market value but rather is an indicator of historical costs.

The Rollover Investor did not seek to establish a pre-merger going concern value for the common stock to determine the fairness of the merger consideration to the Company’s unaffiliated shareholders. However, to the

 

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extent the pre-merger going concern value was reflected in the price of the common stock immediately prior to the announcement of the merger, the merger consideration of $0.90 per share of common stock represented a premium to the going concern value of the Company.

The Rollover Investor was not aware of, and thus did not consider in its fairness determination, any firm offers during the prior two years by any person for (i) the merger or consolidation of the Company with or into another company, (ii) the sale or transfer of all or a substantial part of the Company’s assets, or (iii) the purchase of the Company’s securities that would enable the holder to exercise control of the Company.

The foregoing is a summary of the information and factors considered by the Rollover Investor in connection with its evaluation of the fairness of the merger to the Company’s unaffiliated shareholders, which is not intended to be exhaustive but is believed to include all material factors considered by the Rollover Investor. The Rollover Investor did not find it practicable to assign, and did not assign, quantify or otherwise attach relative weights to the individual factors considered in reaching its conclusions as to the fairness of the merger. Rather, the Rollover Investor made its fairness determination after considering all of the foregoing factors as a whole. The Rollover Investor believes that these factors provide a reasonable basis for its belief that the merger is fair to the Company’s unaffiliated shareholders. This belief should not, however, be construed as a recommendation to any Company shareholder to vote in favor of the proposal to adopt the merger agreement. The Rollover Investor makes no recommendation as to how Company shareholders should vote their shares of common stock on any proposals to be voted upon at the special meeting.

Certain Effects of the Merger

If the merger agreement is adopted by the Company’s shareholders and the other conditions to the closing of the merger are either satisfied or, to the extent permitted, waived, Merger Sub will be merged with and into the Company with the Company surviving the merger as an indirect, wholly owned subsidiary of Parent. No current Company shareholder (other than the Rollover Investor) will have any ownership interest in, or be a shareholder of, the Company following consummation of the merger. As a result, the Company’s shareholders (other than the Rollover Investor) will no longer benefit from any increases in the Company’s value, nor will they bear the risk of any decreases in the Company’s value. Following the merger, Parent (and the Rollover Investor through its ownership of Parent) will benefit from any increases in the value of the Company and also will bear the risk of any decreases in the value of the Company. The directors and officers of Merger Sub immediately prior to the effective time of the merger will be the directors and officers of the surviving corporation.

If the merger is completed, each share of Company Common Stock owned immediately prior to the effective time of the merger, other than as provided below, will be converted into the right to receive $0.90 in cash, without interest and less any applicable withholding taxes. The following shares of Company Common Stock will not be converted into the right to receive the per share merger consideration in connection with the merger: (i) shares of Company Common Stock held by the Company or any of its subsidiaries or by Parent or its subsidiaries, (ii) shares of Company Common Stock held by the Rollover Investor, and (iii) shares of Company Common Stock whose holders have not voted in favor of adopting the merger agreement and have demanded and perfected their appraisal rights in accordance with, and have complied in all respects with, the FBCA.

In connection with the consummation of the merger, (i) each stock option, whether or not then exercisable or vested, will be converted into the right to receive at the closing cash equal to the product of (a) the excess, if any, of the per share merger consideration over the per share exercise price of the applicable option and (b) the number of shares of Company Common Stock underlying such option; (ii) each share of restricted stock and each restricted stock unit not subject to any performance-based vesting condition will be automatically vested and converted into the right to receive at the closing cash equal to the per share merger consideration; and (iii) each restricted stock award or unit subject to any performance-based vesting condition will be converted into a right to receive at the closing cash equal to the product of: (a) the per share merger consideration and (b) the number of shares of Company Common Stock subject to such restricted stock award or unit that would have vested based

 

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on target level achievement. The Company has no outstanding stock options with a per share exercise price less than the per share merger consideration. In addition, no restricted stock awards or units subject to performance-based vesting conditions are expected to vest in connection with the merger. If the merger is completed, the Company Common Stock will be delisted from the Nasdaq Capital Market (and no longer publicly traded) and deregistered under the Exchange Act, and the Company will no longer file periodic reports with the SEC with respect to the Company Common Stock.

Plans for the Company

If the merger is consummated, the Acquiring Group currently anticipates that the Company’s operations initially will be conducted following the closing substantially as they are currently being conducted (except that the Company will cease to be a public company and will instead be an indirect wholly owned subsidiary of Parent). The Acquiring Group is currently conducting a review of the Company and its business and operations with a view towards determining how to redirect the Company’s operations to improve the Company’s long-term earnings potential as a private company (including by reducing the Company’s costs and expenses following the merger), and expect to complete such review following consummation of the merger. Further, following consummation of the merger, the Acquiring Group will continue to assess the Company’s assets, corporate and capital structure, capitalization, operations, business, properties and personnel to determine what additional changes, if any, would be desirable following the merger to enhance the business and operations of the Company.

Parent does not currently own any equity interest in the Company. Following consummation of the merger, Parent will indirectly own 100% of the outstanding Company Common Stock and will have a corresponding interest in our net book value and net earnings. The Rollover Investor, as an equityholder of Parent following the Closing, will have an interest in our net book value and net earnings in proportion to the Rollover Investor’s ownership interest in Parent.

The table below sets forth the direct and indirect interest in the Company’s net book value and net earnings of the Rollover Investor and the Kingswood Group prior to and immediately after the merger, based upon the Company’s net book value as of November 2, 2019 and the Company’s net earnings for the thirty-nine weeks ended November 2, 2019.

 

    Ownership Prior to the
Merger
          Ownership After the
Merger
       
    %
Ownership
at
November 2,
2019
    Net book
value at
November 2,
2019
    Net income (loss)
for the 39 weeks
ended
November 2,
2019
    %
Ownership
    Net book
value at
November 2, 2019
    Net income (loss)
for the 39 weeks
ended
November 2, 2019
 
    (in thousands, except for percentages)  

Rollover Investor

    35.5   $ 11,455     $ (3,665     33.33     $ 10,636     $ (3,403

Kingswood Group

    —       $ —       $ —         66.67     $ 21,271     $ (6,805

From and after the effective time of the merger, (i) the directors of Merger Sub immediately prior to the effective time of the merger shall be the directors of the surviving corporation until their successors are duly elected and qualified or until their earlier death, resignation or removal in accordance with the surviving corporation’s certificate of incorporation, bylaws and applicable law, and (ii) the officers of the Company immediately prior to the effective time of the merger shall continue to be the officers of the surviving corporation until their successors are duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the surviving corporation’s certificate of incorporation, bylaws and applicable law.

Alternatives to the Merger

As noted above, the Special Committee evaluated potential strategic alternatives, including a potential sale of the Company, with the assistance of the Company’s senior management and advisors. While the Special Committee

 

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was responding to the indications of interest for, and the inquiries about, the sale of the Company that the Company received from other potential acquirors during the course of 2018 and 2019, the Special Committee also considered the potential benefits to the Company (and the Company’s shareholders) of certain strategic alternatives, including, but not limited to, continuing as a stand-alone company, raising capital, revising strategy or other potential strategic transaction. In considering those alternatives, the Special Committee took into account all information that was available to the Special Committee, including the information contained in management’s projections summarized under “Special Factors—Projected Financial Information” beginning on page 56, as well as the Special Committee’s knowledge and understanding of the business, operations, management, financial condition, earnings and prospects of the Company, including the prospects of the Company as a stand-alone company. For more information on the process behind the Special Committee’s determination, see “Special Factors—Background of the Merger” beginning on page 17, “Special Factors—Recommendation of the Special Committee and Our Board of Directors; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger” beginning on page 34 and “Special Factors—Purposes and Reasons of the Company for the Merger” beginning on page 49. As discussed above under “Special Factors—Background of the Merger” beginning on page 17.

While the Company had received, prior to the date of the merger agreement, certain expressions of interest for, and certain inquiries about, the sale of the Company to a potential acquiror, the Acquiring Group made the only firm offer to acquire the Company that the Company had ever received during the past two years.

Effects on the Company if the Merger is not Completed

If the Company’s shareholders do not adopt the merger agreement or if the merger is not completed for any other reason, the Company’s shareholders will not receive any payment for their shares of Company Common Stock unless the Company is sold to a third party. Instead, unless the Company is sold to a third party, we will remain a public company, Company Common Stock will continue to be listed and traded on the Nasdaq Capital Market, and our shareholders will continue to be subject to similar risks and opportunities as they currently are with respect to their ownership of Company Common Stock. If the merger is not completed, there is no assurance as to the effect of these risks and opportunities on the future value of your shares of Company Common Stock, including the risk that the market price of Company Common Stock may decline to the extent that the current market price of Company Common Stock reflects a market assumption that the merger will be completed. From time to time, the board of directors will evaluate and review the business operations, properties, and capitalization of the Company and, among other things, make such changes as are deemed appropriate and continue to seek to maximize shareholder value. If the Company’s shareholders do not adopt the merger agreement or if the merger is not completed for any other reason, there is no assurance that any other transaction acceptable to the Company will be offered or that the business, prospects or results of operations of the Company will not be adversely impacted, including as a result of the significant costs and expenses incurred by the Company in connection with the merger. Pursuant to the merger agreement, under certain circumstances, the Company is permitted to terminate the merger agreement and recommend an alternative transaction. See “The Merger Agreement—Termination” beginning on page 120.

Under certain circumstances, if the merger is not completed, the Company may be obligated to pay to Parent a termination fee. See “The Merger Agreement—Effect of Termination; Fees and Expenses” beginning on page  122.

Projected Financial Information

The Company provided the Acquiring Group certain prospective financial information concerning the Company, including projected revenues, gross margins, net income and adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”). The Acquiring Group also received other financial information related to its due diligence of the Company. The Acquiring Group also had access to publicly available analysts’

 

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projections for years subsequent to 2020. The Acquiring Group received the following prospective financial information:

 

   

the Company’s management projections, which were projections for the fiscal years 2019 – 2024 prepared by the Company’s management in May 2019 (as summarized below, the “May 2019 Management Projections”);

 

   

the Company’s updated management projections, which were projections for the fiscal years 2019 – 2024 prepared by the Company’s management in August 2019 (as summarized below, the “August 2019 Management Projections”);

 

   

the Company’s further updated management projections, which were projections for the fiscal years 2019 – 2024 prepared by the Company’s management in January 2020 (as summarized below, the “January 2020 Management Projections”); and

 

   

the Company’s preliminary monthly budget for the 2020 fiscal year (as summarized below, the “FY2020 Budget”), which was the product of the Company’s routine annual planning process for fiscal year 2020 and was substantially completed in January 2020.

The FY2020 Budget, the 11+1 Forecast (as defined below) and the January 2020 Management Projections are, as set forth below, material summaries of the projections used by PJS in connection with its fairness analysis as described in “Special Factors—Opinion of PJ Solomon Securities, LLC” beginning on page 39. The summary of the prospective financial information set forth below is included solely to give shareholders access to certain information that was made available to the Acquiring Group and the Special Committee’s financial advisor, and reviewed by the Special Committee and board of directors. It is not included in this Proxy Statement in order to influence any shareholder to make any investment decision with respect to the merger or any other purpose, including whether or not to seek appraisal rights with respect to the shares of Company Common Stock.

The prospective financial information was not prepared with a view toward public disclosure, or with a view toward compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial forecasts, or U.S. generally accepted accounting principles (“GAAP”). Neither the Company’s independent registered public accounting firm, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the prospective financial information included below, or expressed any opinion or any other form of assurance on such information or its achievability. The projected financial information includes non-GAAP financial measures, which were presented because Company management believed that they could be useful indicators of the Company’s projected future operating performance and cash flow. However, non-GAAP measures presented in the projected financial information may not be comparable to similarly titled measures of other companies. The FY2020 Budget was prepared as part of the Company’s annual planning process for fiscal year 2020.

The process by which management created the prospective financial information reflect numerous qualitative estimates and assumptions. Among others, these assumptions include management’s confidence in the Company’s business and outlook, management’s ability to extrapolate future performance from information at hand, and management’s capability of foreseeing micro-economic and macro-economic factors. In its qualitative analysis and aggregation of various inputs, management applied several limiting factors to the assumptions that underlie the prospective financial information. For example, management’s view of the Company’s business and outlook was restrained by the risks and opportunities faced by the Company, recent performance and competitive environment. Similarly, management’s extrapolation of future performance was tempered with the demands of the Company’s long-term strategy.

The prospective financial information does not take into account any circumstances or events occurring after the date it was prepared, including the transactions contemplated by the merger agreement. Further, the prospective financial information does not take into account the effect of any failure of the merger to occur and should not be viewed as accurate or continuing in that context.

The inclusion of the prospective financial information herein should not be deemed an admission or representation by the Company, the Acquiring Group, the Special Committee or the board of directors that it is viewed by the Company, the Acquiring Group, the Special Committee or the board of directors as material information of the Company, and in fact the Company, the Acquiring Group, the Special Committee and the

 

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board of directors view the prospective financial information as non-material because of the inherent risks and uncertainties associated with such long-range forecasts. The inclusion of this information should not be regarded as an indication that the Company, the Acquiring Group, any of their respective financial advisors or anyone who received this information then considered, or now considers, it as necessarily predictive of actual or future events, and this information should not be relied upon as such. None of the Company, the Acquiring Group or any of their affiliates or representatives intends to, and each of them disclaims any obligation to, update, revise or correct the prospective financial information if any of it is or becomes inaccurate (even in the short term).

The prospective financial information constitutes forward-looking information and is subject to risks and uncertainties that could cause actual results to differ materially from the results forecasted in such prospective information, including, but not limited to, the Company’s performance, industry performance, general business, economic, regulatory, market and financial conditions, and the various risks set forth in this Proxy Statement and should be evaluated, if at all, in conjunction with the historical financial statements and other information regarding the Company contained herein and in the Company’s public filings with the SEC, which are available without charge at www.sec.gov (see also “Where Shareholders Can Find More Information” beginning on page 131). Such prospective information cannot, therefore, be considered a guaranty of future operating results, and there can be no assurance that the prospective financial information will be realized or that actual results will not be significantly higher or lower than as set forth in the prospective financial information. In light of the foregoing factors and the uncertainties inherent in the Company’s prospective financial information, shareholders are cautioned not to place undue, if any, reliance on the prospective financial information included in this Proxy Statement.

May 2019 Management Projections

Set forth below is a material summary of the five-year projections that were reviewed and approved by the Special Committee and the board of directors and provided to the Acquiring Group and the Special Committee’s financial advisor in May 2019 ($ in thousands). The May 2019 Management Projections were based on two months of actual 2019 financial data and ten months of forecasted data.

 

 

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May 2019 Management Projections

 

($ in 000’s, except EPS)

   2019
2+10
    2020
Projection
     2021
Projection
     2022
Projection
     2023
Projection
     2024
Projection
 

Total revenue

   $  1,270,040     $  1,295,912      $  1,310,434      $  1,328,113      $  1,353,133      $  1,393,919  

Gross profit

     330,065       339,486        341,857        345,641        351,537        360,522  

Selling, general and administrative expenses

     343,518       345,528        346,550        346,769        349,517        356,706  

Operating income

     4,994       12,774        14,175        17,790        21,292        23,581  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ (4,672   $ 3,212      $ 4,310      $ 7,581      $ 10,737      $ 14,329  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per share

   $ (0.10   $ 0.07      $ 0.09      $ 0.16      $ 0.22      $ 0.30  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA(1)

   $ 35,731     $ 40,612      $ 39,868      $ 40,515      $ 41,185      $ 42,316  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 725,986     $ 706,146      $ 695,991      $ 688,512      $ 686,838      $ 688,761  

Total liabilities

     682,877       656,607        638,834        620,373        604,465        588,462  

Cash flows from operating activities

   $ 37,391     $ 30,461      $ 31,876      $ 35,048      $ 27,135      $ 27,982  

 

(1) 

Adjusted EBITDA is a non-GAAP financial measure and is earnings before interest, income taxes, depreciation and amortization, and excludes store impairment and certain store pre-opening costs.


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August 2019 Management Projections

Due to the passage of time and the failure by the Company to meet its prior projections, Company management updated the May 2019 Management Projections in August 2019. Set forth below is a material summary of the five-year projections that were reviewed and approved by the Special Committee and the board of directors and provided to the Acquiring Group and the Special Committee’s financial advisor in August 2019 ($ in thousands). The August 2019 Management Projections were based on six months of actual 2019 financial data and six months of forecasted data.

 

($ in 000’s, except EPS)

   2019
6+6
    2020
Projection
     2021
Projection
     2022
Projection
     2023
Projection
     2024
Projection
 

Total revenue

   $ 1,256,031     $ 1,280,324      $ 1,295,906      $ 1,313,141      $ 1,337,529      $ 1,377,899  

Gross profit

     326,329       336,391        338,668        342,239        348,116        356,978  

Selling, general and administrative expenses

     340,208       343,069        345,029        345,661        348,881        356,089  

Operating income

     3,723       9,820        11,704        14,839        17,642        19,954  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ (5,926   $ 1,121      $ 2,449      $ 5,142      $ 7,571      $ 11,082  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per share

   $ (0.13   $ 0.02      $ 0.05      $ 0.11      $ 0.16      $ 0.23  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA(1)

   $ 31,273     $ 37,658      $ 37,397      $ 37,565      $ 37,535      $ 38,689  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 724,883     $ 705,735      $ 695,954      $ 688,523      $ 686,891      $ 688,850  

Total liabilities

     688,874       665,380        649,834        633,853        621,144        608,417  

Cash flows from operating activities

   $ 36,641     $ 28,343      $ 29,489      $ 28,769      $ 24,707      $ 25,462  

 

(1) 

Adjusted EBITDA is a non-GAAP financial measure and is earnings before interest, income taxes, depreciation and amortization, and excludes store impairment and certain store pre-opening costs.

 

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January 2020 Management Projections

At the time of the Special Committee meeting on January 15, 2020, Company’s management had not completed its 2019 forecast based on eleven months of actual 2019 financial data and one month of forecasted data (the “11+1 Forecast”), but stated to the Special Committee that the 11+1 Forecast would not be materially different from ten months of actual 2019 financial data and two months of forecasted data (the “10+2 Forecast”). As a result, the Special Committee approved the January 2020 Management Projections with the 10+2 Forecast on January 15, 2020 and approved the 11+1 Forecast on condition that it not be materially different from the 10+2 Forecast. Set forth below is a material summary of the five-year projections containing the 10+2 Forecast that were reviewed and approved by the Special Committee and provided to the Acquiring Group and the Special Committee’s financial advisor on January 15, 2020 ($ in thousands).

January 2020 (10+2) Management Projections

 

($ in 000’s, except EPS)

   2019
10+2
    2020
Projection
     2021
Projection
     2022
Projection
     2023
Projection
     2024
Projection
 

Total revenue

   $ 1,234,978     $ 1,255,505      $ 1,277,639      $ 1,297,265      $ 1,321,507      $ 1,366,153  

Gross profit

     317,748       334,380        337,115        341,549        348,345        358,939  

Selling, general and administrative expenses

     337,453       340,336        345,674        347,596        350,161        357,341  

Operating income (loss)

     (2,412     9,236        8,227        10,770        15,251        19,256  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ (11,982   $ —        $ 310      $ 2,204      $ 5,735      $ 10,478  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per share

   $ (0.26   $ —        $ 0.01      $ 0.05      $ 0.12      $ 0.22  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA(1)

   $ 24,924     $ 37,530      $ 34,155      $ 33,700      $ 35,364      $ 38,135  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 755,335     $ 733,810      $ 720,454      $ 708,569      $ 702,224      $ 700,508  

Total liabilities

     725,183       701,455        685,527        669,114        654,647        639,999  

Cash flows from operating activities

   $ 18,737     $ 28,441      $ 25,436      $ 25,193      $ 24,436      $ 21,835  

 

(1) 

Adjusted EBITDA is a non-GAAP financial measure and is earnings before interest, income taxes, depreciation and amortization, and excludes store impairment and certain store pre-opening costs.

The 11+1 Forecast, provided to the Acquiring Group on January 15, 2020, is included below ($ in thousands):

January 2020 (11+1) Management Projections

A material summary of the 11+1 Forecast provided to the Acquiring Group on January 15, 2020 is included below ($ in thousands):

 

($ in 000’s, except EPS)

   Jan Forecast     Q4 Forecast     Full Forecast     FY Forecast  

Total revenue

   $ 64,402     $ 338,108     $ 618,532     $ 1,234,246  

Gross profit

     14,392       86,675       156,089       318,211  

Selling, general and administrative expenses

     24,095       89,717       173,003       337,609  

Operating income (loss)

     (7,962     524       (9,058     (2,352
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (8,674   $ (1,697   $ (13,788   $ (11,905
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share

   $ (0.18   $ (0.04   $ (0.29   $ (0.25
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(1)

   $ (4,612   $ 8,519     $ 4,100     $ 24,942  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 765,600     $ 765,600     $ 765,600     $ 765,600  

Total liabilities

     735,325       735,325       735,325       735,325  

Cash flows from operating activities

   $ (28,952   $ 15,255     $ 15,255     $ 15,255  

 

(1) 

Adjusted EBITDA is a non-GAAP financial measure and is earnings before interest, income taxes, depreciation and amortization, and excludes store impairment and certain store pre-opening costs.

In addition, at the direction of Company management, PJS calculated, from the January 2020 monthly forecast, the 2020 budget and the management projections for 2021-2024, unlevered free cash flow as set forth below.

 

($ in 000’s)

   January 2019
Forecast
    2020
Budget
    2021
Projection
    2022
Projection
    2023
Projection
    2024
Projection
 

Tax-effected adjusted EBIT(1)

   $ (5,222   $ 7,675     $ 7,299     $ 9,214     $ 12,780     $ 15,997  

Depreciation and amortization

   $ 2,350     $ 27,296     $ 24,422     $ 21,415     $ 18,324     $ 16,806  

Capital expenditures

   $ (2,234     (10,619     (15,991     (14,823   $ (15,777   $ (15,154

Changes in net working capital

   $ (23,816   $ 1,766     $ (2,685   $ (1,838   $ (2,944   $ (8,796

Unlevered Free Cash Flow

   $ (28,922   $ 26,118     $ 13,045     $ 13,968     $ 12,383     $ 8,853  

 

(1) 

Calculated as earnings before interest and taxes plus depreciation and amortization using a 25% effective tax rate.

 

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The FY2020 Budget

The following is a summary of the fiscal year 2020 prospective financial information from the FY2020 Budget provided to the Acquiring Group and the Special Committee’s financial advisor ($ in thousands except for per share data):

 

FY2020 Budget

 

Net Sales

   $ 1,240,346  

Total Revenue

     1,254,786  

Gross Margin

     492,343  

Gross Profit

     334,329  

Credit Card, Breakage and Other Income

     14,440  

Net SG&A Expenses

     339,534  

Operating Income

     9,236  

Pretax Income

     1,200  

Net Income

     (0

Diluted EPS

     (0.00

Financing of the Merger

On January 30, 2020, Parent and TopCo entered into an equity commitment letter with the Kingswood Funds pursuant to which the Kingswood Funds have committed to, directly or indirectly, invest and contribute to Parent prior to the effective time of the merger with an aggregate equity contribution equal to approximately $29 million in cash (the “equity financing”). The equity financing will be used by Parent solely to fund the merger consideration payable to the shareholders of the Company and holders of Company equity awards pursuant to and in accordance with the merger agreement at the closing of the merger, together with related fees and expenses of Parent. The obligation of the Kingswood Funds to make the equity financing is subject to the satisfaction or waiver, prior to or contemporaneously with the closing of the merger, of the following conditions:

 

   

the satisfaction or waiver, prior to or contemporaneously with the closing of the merger of all conditions precedent to the obligations of Parent to consummate the transactions contemplated by the merger agreement;

 

   

the funding of the debt financing as provided in the merger agreement; and

 

   

the contemporaneous consummation of the merger.

The equity commitment letter provides, among other things, that the Company is an express third party beneficiary thereof with the right to cause Parent and TopCo to enforce the Kingswood Funds’ obligation to fund the equity financing under certain specified circumstances. The equity commitment letter provides that it may be amended or waived in writing by the Kingswood Funds, TopCo, Parent, Merger Sub and the Company.

The Kingswood Funds’ obligations under the equity commitment letter expire and terminate automatically and immediately upon the earliest to occur of:

 

   

the termination of the merger agreement in accordance with its terms;

 

   

the funding of the equity commitment funds at the closing of the merger; and

 

   

the Company or certain of its controlled affiliates asserting any claim related to the merger agreement or the equity commitment letter, or the related transactions, against the Kingswood Funds, TopCo,

 

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Parent, Merger Sub or certain Parent-related parties (with the exception of certain retained claims as defined in the equity commitment letter).

Additionally, concurrently with the execution of the merger agreement, the Rollover Investor entered into the Rollover Letter pursuant to which it will contribute immediately prior to the effective time of the merger their shares of Company Common Stock representing, as of the date of the merger agreement, approximately 36% of the total outstanding shares of Company Common Stock. The foregoing summary of the Rollover Letter does not purport to be complete and is qualified in its entirety by reference to the Rollover Letter. A copy of the Rollover Letter is attached as exhibit (d)(2) to the statement on Schedule 13E-3, filed by the Company and the filing persons listed thereon with the SEC and incorporated herein by reference.

Wells Fargo has committed under that certain commitment letter dated January 30, 2020 (the “WF Commitment Letter”) to provide debt financing to Parent, consisting of up to $240.0 million senior secured credit facility (the “Credit Facility”). Additionally, Pathlight has committed under that certain commitment letter dated January 30, 2020 (the “Pathlight Commitment Letter”) to provide to Parent a $35.0 million senior secured term loan facility (the “Term Loan”). The commitments to be provided by each of Wells Fargo and Pathlight under each of the Credit Facility and the Term Loan remain subject to the finalization of definitive documentation and the satisfaction of customary closing conditions to be set forth in such definitive documentation. Pathlight is not expected to syndicate the Term Loan and Wells Fargo is not expected to syndicate the Credit Facility.

Wells Fargo’s obligation to provide the Credit Facility and Pathlight’s obligation to provide the Term Loan are subject to customary conditions precedent for financings of these types, including the following (subject to certain exceptions and qualifications as set forth in the WF Commitment Letter and Pathlight Commitment Letter, as applicable):

 

   

the merger shall have been consummated or will be consummated concurrently with the initial fundings under the Credit Facility and the Term Loan;

 

   

the rollover investment shall have been received (or, substantially concurrently with the execution of the Credit Facility and Term Loan, shall be received) pursuant to the Rollover Letter;

 

   

the refinancing of the existing credit facility with Wells Fargo shall have been consummated, or substantially concurrently with the initial borrowings under the Credit Facility and the Term Loan; and

 

   

the negotiation, execution and delivery of appropriate definitive loan documents with respect to each of the Credit Facility and the Term Loan shall be negotiated by the parties to each in good faith in a manner consistent with the WF Commitment Letter and Pathlight Commitment Letter, as applicable, together with other terms and provisions mutually agreed to be reasonable and customary for transactions of these types.

Limited Guarantee

In connection with the merger agreement, the Kingswood Funds have executed a limited irrevocable guarantee in favor of the Company to guarantee, subject to the limitations described therein, certain obligations of Parent pursuant to the merger agreement. Under the limited guarantee, the Kingswood Funds have guaranteed the payment of any reverse termination fee that may become payable by Parent following a termination of the merger agreement in specified circumstances and certain expense reimbursement and indemnification obligations of Parent in connection with the Company’s cooperation with the debt financing, subject to an overall cap of $2,229,000.

The limited guarantee will terminate upon the earliest to occur of (i) the effective time of the merger, (ii) the payment in full of the guaranteed obligations under the limited guarantee and (ii) 60 days following the termination of the merger agreement in accordance with its terms, unless one or more claims with respect to one or more guaranteed obligations has been asserted by the Company in writing against the Kingswood Funds prior

 

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to the end of such 60-day period, in which case the limited guarantee will continue in effect until the resolution of such claims and satisfaction, to the extent required, of such guaranteed obligations, whereupon the limited guarantee will terminate.

The foregoing summary of the limited guarantee does not purport to be complete and is qualified in its entirety by reference to the limited guarantee. A copy of the limited guarantee is attached as exhibit (d)(5) to the statement on Schedule 13E-3, filed by the Company and the filing persons listed thereon with the SEC and incorporated herein by reference.

Interests of the Company’s Directors and Executive Officers in the Merger

In considering the recommendation of the board of directors, you should be aware that certain directors and executive officers of the Company have interests in the merger, including those described below and as described in “Advisory Vote on Merger-Related Executive Compensation” beginning on page 126, that are different from, or in addition to, their or your interests as a shareholder. Jay Stein, the Chairman of our board of directors, is a member of the Acquiring Group and the manager of the Rollover Investor and will have equity interests in Parent after the consummation of the merger. These interests may create conflicts of interest. The Special Committee and the board of directors were aware of these interests during their deliberations on the merits of the merger and in making their decision to recommend and approve, respectively, the merger agreement and the transactions contemplated by the merger agreement, including the merger.

Certain of the directors and executive officers of the Company participated in the negotiation of the terms of the merger agreement, and the Special Committee, after careful consideration, voted unanimously to recommend to the board of directors that it, and thereafter the board of directors (other than Jay Stein), after careful consideration and acknowledging the participation of Jay Stein in the merger, voted unanimously to, recommend that the Company shareholders vote in favor of (i) the merger agreement, the merger and the transactions contemplated by the merger agreement, (ii) the “merger-related executive compensation” and (iii) the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to adopt the merger agreement. These directors and executive officers may have interests in the merger that are different from, or in addition to, those of the Company’s shareholders. These interests include the continued employment of certain executive officers of the Company by the surviving corporation, the treatment of equity-based awards in the merger, severance and other benefits under the change in control severance plan and the employment agreements and other rights held by the board of directors and executive officers and the indemnification of members of the board of directors and officers by the surviving corporation. Company shareholders should be aware of these interests when they consider the board of directors’ recommendation that they vote in favor of (i) the merger agreement, the merger and the transactions contemplated by the merger agreement, (ii) the “merger-related executive compensation” and (iii) the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to adopt the merger agreement.

Indemnification of Directors and Officers; Directors’ and Officers’ Insurance

Parent has agreed to maintain, and to cause the surviving corporation to maintain for at least six years following the effective time of the merger the current policies of directors’ and officers’ liability insurance or policies of at least the same coverage and amounts containing terms and conditions that are no less advantageous with respect to claims arising out of or relating to events which occurred before or at the effective time of the merger (including in connection with the negotiation and execution of the merger agreement and the consummation of the merger). Such policies shall not have an annual premium in excess of 250% of the renewal premium being paid by the Company in connection with its most recent renewal. In lieu of Parent purchasing such policy after the effective time of the merger, the Company may, prior to the effective time of the merger, purchase a “tail” directors’ and officers’ liability policy covering the aforementioned matters at a cost not to exceed 250% of the renewal premium paid by the Company in connection with its most recent renewal and if the Company purchases

 

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such a policy prior to the effective time of the merger, the surviving corporation shall maintain such policy for six years following the effective time of the merger.

In addition, for a period of six years after the effective time of the merger, Parent and the surviving corporation have agreed to indemnify and hold harmless each present and former director, officer or employee of the Company or any of its subsidiaries against all costs or expenses (including reasonable legal fees and disbursements), judgments, fines, losses, claims, damages, liabilities, and amounts paid in settlement in connection with any action, arbitration, litigation, suit or other civil or criminal proceeding, including liabilities with respect to all acts and omissions arising out of or relating to their services as directors, officers or employees of the Company or its subsidiaries occurring prior to the effective time of the merger, whether asserted or claimed before, at or after the effective time of the merger.

For a period of six years following the effective time of the merger, Parent and the surviving corporation have also agreed to cause all rights to indemnification, advancement of expenses and exculpation now existing in favor of any present or former director or officer of the Company or any of its subsidiaries as provided in (i) the Company’s organizational and governing documents, or (ii) any indemnification agreement to survive the merger and to continue in full force and effect for a period of not less than six years after the effective time of the merger or, if longer, for such period as is set forth in any applicable indemnification agreement.

Merger Proceeds in Respect of Company Equity-Based Awards

Treatment of Stock Options, Restricted Stock Units and Restricted Stock Awards

In connection with the consummation of the merger, (i) each stock option, whether or not then exercisable or vested, will be converted into the right to receive at the closing cash equal to the product of (a) the excess, if any, of the per share merger consideration over the per share exercise price of the applicable option and (b) the number of shares of Company Common Stock underlying such option; (ii) each share of restricted stock and each restricted stock unit not subject to any performance-based vesting condition will be automatically vested and converted into the right to receive at the closing cash equal to the per share merger consideration; and (iii) each restricted stock award or unit subject to any performance-based vesting condition will be converted into a right to receive at the closing cash equal to the product of: (a) the per share merger consideration and (b) the number of shares of Company Common Stock subject to such restricted stock award or unit that would have vested based on target level achievement. The Company has no outstanding stock options with a per share exercise price less than the per share merger consideration. In addition, no restricted stock awards or units subject to performance-based vesting conditions are expected to vest in connection with the merger.

 

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The following table shows, for each member of the board of directors and for each executive officer of the Company, as applicable: (1) the number of shares of Company Common Stock underlying outstanding stock options and the number of shares of Company Common Stock subject to unvested Company restricted stock units and awards and (2) the value of such awards. The values in the table below have been determined using the per share merger consideration of $0.90, and are based on applicable holdings as of February 11, 2020 (and without regard to any grants that may be made after such date), which date is the assumed date of the consummation of the merger solely for purposes of this compensation-related disclosure.

 

Name

   Stock
Options (#)
     Value
($)
     Time Vesting
Restricted
Stock/Units
(#)(1)
     Value ($)  

Directors

           

Jay Stein

     —        $ —          —        $ —    

Irwin Cohen

     —          —          7,112        6,401  

Thomas L. Cole

     4,000        —          7,112        6,401  

Timothy Cost

     4,000        —          7,112        6,401  

Lisa Galanti

     4,000        —          7,112        6,401  

Richard L. Sisisky

     —          —          7,112        6,401  

Burton M. Tansky

     5,748        —          7,112        6,401  

Executive Officers

           

D. Hunt Hawkins*

     801,631        —          133,334        120,001  

MaryAnne Morin*

     500,000        —          116,667        105,000  

James B. Brown

     —          —          66,667        60,000  

 

*

Also a member of the board of directors.

(1)

Amounts in this column include restricted shares of Company Common Stock that vest based on continued service. No restricted stock awards or units subject to performance-based vesting conditions are expected to vest in connection with the merger.

Employee-Related Interests

Outstanding Shares Held by Directors and Executive Officers

The members of the board of directors and the executive officers of the Company own Company Common Stock and, other than Jay Stein (whose shares are being rolled over in connection with the consummation of the merger), will receive the same per share merger consideration of $0.90 on the same terms and conditions as other Company shareholders.

 

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The following table shows, for each member of the board of directors and each executive officer, as applicable: (1) the number of shares of Company Common Stock held by such individual and (2) the value of such shares. The values in the table below have been determined assuming the per share merger consideration of $0.90, are based on applicable holdings as of February 11, 2020 (and without regard to any acquisitions or dispositions that may be made after such date), and exclude restricted shares of Company Common Stock and Company Common Stock subject to issuance pursuant to granted and outstanding stock options and restricted stock units.

 

Name

   Shares of
Common Stock (#)
    Value ($)  

Directors

    

Jay Stein

     17,339,544 (1)    $ 15,605,590  

Irwin Cohen

     53,696       48,326  

Thomas L. Cole

     13,706       12,335  

Timothy Cost

     13,706       12,335  

Lisa Galanti

     13,706       12,335  

Richard L. Sisisky

     138,905       125,015  

Burton M. Tansky

     22,593       20,334  

Executive Officers

    

D. Hunt Hawkins*

     347,946       313,151  

MaryAnne Morin*

     86,658       77,992  

James B. Brown

     33,333       30,000  

 

*

Also a member of the board of directors.

(1)

All shares beneficially owned by the Rollover Investor, of which Jay Stein is the Manager. The shares of Company Common Stock beneficially owned by the Rollover Investor are being exchanged for equity securities of Parent.

Rollover Commitment

On January 30, 2020, pursuant to the Rollover Letter, the Rollover Investor committed to contribute, immediately prior to the consummation of the merger, 17,339,544 shares of Company Common Stock to Parent. The Rollover Investor will receive equity securities of Parent in exchange for the Company Common Stock contributed to Parent.

Employment Arrangements with Company Executive Officers

Each of our executive officers is entitled to certain severance benefits pursuant an individual employment agreement, the terms of which are described below. The merger, if and when consummated, will constitute a change in control under the applicable employment agreement.

In the event Mr. Hawkins, Ms. Morin or Mr. Brown is terminated by us without cause, or if one of them terminates their employment for good reason, within two years following a change in control, then in addition to payment of base salary through the termination date, each executive is entitled to receive 200% of the sum of (i) executive’s then-current annual base salary, and (ii) an amount equal to the target short-term incentive for the year in which the termination occurs (without proration) payable, with respect to Mr. Hawkins and Mr. Brown, in a lump sum payment not earlier than six months nor later than seven months, following the date of termination and, with respect to Ms. Morin, in a lump sum payment within 60 days following the termination date. Each executive also receives continued coverage under our medical, life and disability insurance programs during a continuation period of 24 months following his or her termination.

Under the employment agreement, “good reason” includes, among other things, (i) a material and continuing failure to pay compensation and benefits earned by the executive, (ii) a material reduction in the executive’s

 

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compensation or benefits which, with respect to Messrs. Hawkins and Brown, is materially more adverse to the executive than similar reductions applicable to other executives of a similar level of status within Stein Mart or, with respect to Ms. Morin, is not a uniform reduction applied to all executive officers of not more than ten percent of base salary, (iii) with respect to Messrs. Hawkins and Brown, a reduction in the incentive compensation or deferred compensation or contribution matching levels where such reductions are applicable to the executive only, without similar reductions for all other executive officers, (iv) a material breach of the employment agreement by us, (v) any requirement that the executive perform duties inconsistent with ethical or lawful business practices, (vi) the required relocation of the executive to a principal place of employment more than 100 miles (50 miles for Mr. Brown) from his or her current principal place of employment, (vii) following a change in control, a material change in the executive’s duties, roles or responsibilities or, (viii) with respect to Ms. Morin, following the appointment of a CEO other than Mr. Hawkins, Mr. Stein or Ms. Morin, a material change in Ms. Morin’s duties.

“Cause” includes, among other things, that the executive (i) has been convicted of, or pleads guilty or nolo contendere to, a felony involving dishonesty, theft, misappropriation, embezzlement, fraud, crimes against property or person, or moral turpitude which negatively impacts us; (ii) intentionally furnishes materially false, misleading, or incomplete information concerning a substantial matter to us or persons to whom the executive reports; (iii) intentionally fails to fulfill any assigned responsibilities for compliance with the Sarbanes-Oxley Act of 2002 or violates the same; (iv) intentionally and wrongfully damages material assets of ours; (v) intentionally and wrongfully discloses material confidential information of ours; (vi) intentionally and wrongfully engages in any competitive activity which would constitute a material breach of the duty of loyalty; (vii) intentionally breaches any stated material employment policy or any material provision of our ethics policy which could reasonably be expected to expose us to liability, (viii) intentionally commits a material breach of the employment agreement, or (ix) intentionally engages in acts or omissions which constitute failure to follow reasonable and lawful directives.

Benefit Arrangements of the Surviving Corporation

As described under “The Merger Agreement—Covenants of Parent and/or Merger Sub—Employee Matters” beginning on page 114, the merger agreement requires the surviving corporation to continue to provide certain compensation and benefits following the completion of the merger to all Stein Mart employees, including its executive officers, who remain employed by the Company following completion of the merger.

New Management Arrangements

As of the date of this Proxy Statement, Parent has not entered into any employment agreements with any of the Company’s executive officers (or other employees of the Company) and, except for the accelerated vesting of stock options and restricted stock and unit awards, as provided in the merger agreement and described above, the Company has not amended or modified any existing employment agreements or other arrangements with its executive officers in connection with the merger. Parent or its affiliates may pursue agreements, arrangements or understandings with the Company’s executive officers, which may include cash, stock and co-investment opportunities, and Parent or its affiliates may initiate negotiations of these arrangements, arrangements and understandings regarding employment with, or the right to participate in the equity of, the surviving corporation or Parent on a going-forward basis following the completion of the merger. However, in each case, there is no present contractual obligation to do so and neither Parent nor its affiliates has initiated any such negotiation as of the date of this Proxy Statement.

Intent to Vote in Favor of the Merger

Our directors and executive officers (other than Jay Stein who manages the Rollover Investor) have informed us that, as of the date of this Proxy Statement, they intend to vote all of the shares of Company Common Stock owned directly by them in favor of the adoption of the merger agreement. As of [], 2020, the record date for the

 

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Special Meeting, our directors and executive officers (other than Jay Stein who manages the Rollover Investor) directly owned, in the aggregate, [] shares of Company Common Stock entitled to vote at the Special Meeting, or collectively approximately [] of the outstanding shares of Company Common Stock entitled to vote at the Special Meeting.

As of [], 2020, the record date for the Special Meeting, the Rollover Investor owned 17,339,544 shares of Company Common Stock entitled to vote at the Special Meeting, or approximately 36% of the outstanding shares of Company Common Stock entitled to vote at the Special Meeting. The Rollover Investor has entered into a voting agreement with Parent pursuant to which, unless the voting agreement is terminated in accordance with its terms (including upon a termination of the merger agreement in accordance with its terms), it has agreed to, among other things, vote, or cause to be voted, its shares of Company Common Stock in favor of the adoption of the merger agreement and any related proposal in furtherance of the merger and the transactions contemplated by the merger agreement. See “Special Factors—Voting Agreement” beginning on page 69. The Rollover Investor has interests in the merger that are different from, or in addition to, the interests of the Company’s other shareholders. For more information, please see “Special Factors—Financing of the Merger” beginning on page 62.

Voting Agreement

Concurrently with the execution and delivery of the merger agreement, the Rollover Investor has entered into a voting agreement with Parent that covers approximately 36% of the outstanding shares of Company Common Stock (the “Shares”). Under the terms of the voting agreement, the Rollover Investor has agreed to vote, or cause to be voted, the Shares (A) to approve and adopt the merger agreement and the transactions contemplated thereby, including the merger, at least four business days prior to the Special Meeting, and at any adjournment, postponement or recess thereof, at which such merger agreement is submitted for the consideration and vote of the shareholders of the Company, (B) against (i) any takeover proposal and (ii) any other action, agreement or transaction that would reasonably be expected to impede, interfere with, delay, postpone, discourage or adversely affect the consummation of the merger or the other transactions contemplated by the merger agreement, and (C) in favor of any other matter necessary to the consummation of the transactions contemplated by the merger agreement and considered and voted upon by the shareholders of the Company.

The Rollover Investor further agreed in the voting agreement with Parent to irrevocably appoint Parent as the sole and exclusive attorney-in-fact and irrevocable proxy of the Rollover Investor, for and in the name, place and stead of the Rollover Investor, with full power of substitution and resubstitution, to vote, grant a consent or approval in respect of, or execute and deliver a proxy to vote, the Shares solely in accordance with the obligations of the Rollover Investor discussed above.

The Rollover Investor has also agreed in the voting agreement with Parent not to, directly or indirectly, without the prior written consent of Parent and the Company, (i) grant any proxy or power of attorney with respect to any Shares or deposit any Shares into any voting trust or enter into any agreement or arrangement with respect to the voting of any Shares or any agreement or arrangement that is inconsistent with the voting agreement; (ii) offer for sale, sell (constructively or otherwise), transfer, assign, tender in any exchange offer, pledge, grant, encumber, hypothecate or similarly dispose of (by testamentary disposition, operation of law or otherwise) or enter into any contract, option or other arrangement with respect to the transfer of, any Shares, or any interest therein, including, without limitation, any swap transaction, option, warrant, forward purchase or sale transaction, futures transaction, cap transaction, floor transaction, collar transaction or any other similar transaction (including any option with respect to any such transaction) or combination of any such transactions, in each case, involving any Shares, (iii) knowingly take any action that would have the effect of preventing or delaying the Rollover Investor from performing any of its obligations under the voting agreement, or (iv) agree or commit (whether or not in writing) to take any of the actions referred to in clauses (i), (ii) and (iii).

 

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The voting agreement was entered into by the Rollover Investor solely in its capacity as a shareholder of the Company, and the voting agreement does not limit or affect any actions taken by any officer or director of the Company solely in his or her capacity as a director or officer of the Company.

The Rollover Investor’s obligations under the voting agreement will automatically terminate without any further action required by any person upon the earliest to occur of (i) the mutual agreement of the parties thereto to terminate the voting agreement; (ii) the termination of the merger agreement in accordance with its terms, and (iii) the effective time of the merger.

The foregoing summary of the voting agreement does not purport to be complete and is qualified in its entirety by reference to the voting agreement. A copy of the voting agreement is attached as exhibit (d)(4) to the statement on Schedule 13E-3 filed by the Company and the filing persons listed thereon with the SEC and incorporated herein by reference.

Dividends

Pursuant to the merger agreement, we are prohibited from declaring or paying any dividends following execution of the merger agreement on January  30, 2020.

Appraisal Rights

Holders of Company Common Stock as of the record date are entitled to appraisal rights under the FBCA. Pursuant to the FBCA, a Company shareholder who does not wish to accept the consideration to be received pursuant to the terms of the merger agreement may dissent from the merger and elect to receive the fair value of his or her shares of Company Common Stock immediately prior to the date of the Special Meeting to vote on the proposal to approve the merger agreement, excluding any appreciation or depreciation in anticipation of the merger unless exclusion would be inequitable.

In order to exercise appraisal rights, a dissenting Company shareholder must strictly comply with the statutory procedures of Sections 607.1301 through 607.1340 of the FBCA, which are summarized below. A copy of the full text of those Sections is included as Appendix C to this Proxy Statement. Company shareholders are urged to read Appendix C in its entirety and to consult with their legal advisors. Each Company shareholder who desires to assert his or her appraisal rights is cautioned that failure on his or her part to adhere strictly to the requirements of Florida law in any regard will cause a forfeiture of any appraisal rights.

Procedures for Exercising Dissenters’ Rights of Appraisal

The following summary of Florida law is qualified in its entirety by reference to the full text of the applicable provisions of the FBCA, a copy of which are included as Appendix C to this Proxy Statement.

 

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A dissenting shareholder, who desires to exercise his or her appraisal rights, must file with the Company, prior to the taking of the vote on the merger, a written notice of intent to demand payment for his or her shares if the merger is effectuated. A vote against the adoption and approval of the merger agreement will not alone be deemed to be the written notice of intent to demand payment and will not be deemed to satisfy the notice requirements under the FBCA. A dissenting shareholder need not vote against the merger agreement, but cannot vote, or allow any nominee who holds such shares for the dissenting shareholder to vote, any of his or her shares of Company Common Stock in favor of adoption and approval of the merger agreement. A vote in favor of adoption and approval of the merger agreement will constitute a waiver of the shareholder’s appraisal rights. Such written notification should be delivered either in person or by mail (certified mail, return receipt requested, being the recommended form of transmittal) to:

Stein Mart, Inc.

1200 Riverplace Boulevard

Jacksonville, Florida 32207

Attention: James B. Brown, Secretary

All such notices must be signed in the same manner as the shares are registered on the books of the Company. If a Company shareholder has not provided written notice of intent to demand fair value before the vote on the proposal to adopt and approve the merger agreement is taken at the Special Meeting, then the Company shareholder will be deemed to have waived his or her appraisal rights.

Within 10 days after the completion of the merger, the surviving corporation must have delivered to each Company shareholder who filed a notice of intent to demand payment for his or her shares a written appraisal notice and an appraisal election form that specifies, among other things:

 

   

the date of the completion of the merger;

 

   

the surviving corporation’s estimate of the fair value of the shares of Company Common Stock;

 

   

where to return the completed appraisal election form and the shareholder’s stock certificates and the date by which they must be received by the surviving corporation or its agent, which date may not be fewer than 40, nor more than 60, days after the date the surviving corporation sent the appraisal notice and appraisal election form to the shareholder; and

 

   

the date by which a notice from the Company shareholder of his or her desire to withdraw his or her appraisal election must be received by the surviving corporation, which date must be within 20 days after the date set for receipt by the surviving corporation of the appraisal election form from the Company shareholder.

The form must also contain the surviving corporation’s offer to pay to the Company shareholder the amount that it has estimated as the fair value of the shares of Company Common Stock, and request certain information from the Company shareholder, including:

 

   

the shareholder’s name and address;

 

   

the number of shares as to which the shareholder is asserting appraisal rights;

 

   

that the shareholder did not vote for the merger;

 

   

whether the shareholder accepts the offer of the surviving corporation to pay its estimate of the fair value of the shares of Company Common Stock to the shareholder; and

 

   

if the shareholder does not accept the offer of the surviving corporation, the shareholder’s estimated fair value of the shares of Company Common Stock and a demand for payment of the shareholder’s estimated value plus interest.

A dissenting shareholder must submit the certificate(s) representing his or her shares with the appraisal election form. Any dissenting shareholder failing to return a properly completed appraisal election form and his or her

 

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stock certificates within the period stated in the form will lose his or her appraisal rights and be bound by the terms of the merger agreement.

Upon returning the appraisal election form, a dissenting shareholder will be entitled only to payment pursuant to the procedure set forth in the applicable sections of the FBCA and will not be entitled to vote or to exercise any other rights of a shareholder, unless the dissenting shareholder withdraws his or her demand for appraisal within the time period specified in the appraisal election form.

A dissenting shareholder who has delivered the appraisal election form and his or her Company Common Stock certificates may decline to exercise appraisal rights and withdraw from the appraisal process by giving written notice to the surviving corporation within the time period specified in the appraisal election form. Thereafter, a dissenting shareholder may not withdraw from the appraisal process without the written consent of the surviving corporation. Upon such withdrawal, the right of the dissenting shareholder to be paid the fair value of his or her shares will cease, and he or she will be reinstated as a shareholder and will be entitled to receive the merger consideration.

If the dissenting shareholder accepts the offer of the surviving corporation in the appraisal election form to pay the surviving corporation’s estimate of the fair value of the shares of Company Common Stock, payment for the shares of the dissenting shareholder is to be made within 90 days after the receipt of the appraisal election form by the surviving corporation or its agent. Upon payment of the agreed value, the dissenting shareholder will cease to have any right to receive any further consideration with respect to such shares.

A shareholder must demand appraisal rights with respect to all of the shares registered in his or her name, except that a record shareholder may assert appraisal rights as to fewer than all of the shares registered in the record shareholder’s name but which are owned by a beneficial shareholder or a voting trust beneficial owner, if the record shareholder objects with respect to all shares owned by the beneficial shareholder or voting trust beneficial owner. A record shareholder must notify the Company in writing of the name and address of each beneficial shareholder or voting trust beneficial owner on whose behalf appraisal rights are being asserted. A beneficial shareholder or a voting trust beneficial owner may assert appraisal rights as to any shares held on behalf of the beneficial shareholder or voting trust beneficial owner only if the beneficial shareholder or voting trust beneficial owner submits to the Company the record shareholder’s written consent to the assertion of such rights before the date specified in the appraisal notice, and does so with respect to all shares that are beneficially owned by the beneficial shareholder or voting trust beneficial owner.

Section 607.1330 of the FBCA addresses what should occur if a dissenting shareholder fails to accept the offer of the surviving corporation to pay the value of the shares as estimated by the surviving corporation, and the surviving corporation fails to comply with the demand of the dissenting shareholder to pay the value of the shares as estimated by the dissenting shareholder, plus accrued interest.

If a dissenting shareholder refuses to accept the offer of the surviving corporation to pay the value of the shares as estimated by the surviving corporation, and the surviving corporation fails to comply with the demand of the dissenting shareholder to pay the value of the shares as estimated by the dissenting shareholder, plus accrued interest, then within 60 days after receipt of a written demand from any dissenting shareholder given within 60 days after the date on which the merger was effected, the surviving corporation shall, or at its election at any time within such period of 60 days may, file an action in the circuit court in the county in which the surviving corporation’s principal office in Florida is located requesting that the fair value of such shares and accrued interest from the date of the corporate action be determined by the court.

If the surviving corporation fails to institute a proceeding within the above-prescribed period, any dissenting shareholder may do so in the name of the surviving corporation. A copy of the initial pleading will be served on each dissenting shareholder. The surviving corporation is required to pay each dissenting shareholder the amount found to be due within 10 days after final determination of the proceedings, which amount may, in the discretion

 

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of the court, include a fair rate of interest, which will also be determined by the court. Upon payment of the judgment, the dissenting shareholder shall cease to have any rights to receive any further consideration with respect to such shares other than any amounts ordered to be paid for court costs and attorney fees.

Section 607.1331 of the FBCA provides that the costs of a court appraisal proceeding, including reasonable compensation for, and expenses of, appraisers appointed by the court, will be determined by the court and assessed against the surviving corporation, except that the court may assess costs against all or some of the dissenting shareholders, in amounts determined by the court, to the extent that the court finds such shareholders acted arbitrarily, vexatiously or not in good faith with respect to their appraisal rights. The court also may assess the fees and expenses of counsel and experts for the respective parties, in amounts determined by the court, against: (i) the surviving corporation and in favor of any or all dissenting shareholders if the court finds the surviving corporation did not substantially comply with the notification provisions set forth in Sections 607.1320 and 607.1322 of the FBCA; or (ii) either the surviving corporation or a dissenting shareholder, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the appraisal rights. If the court in an appraisal proceeding finds that the services of counsel for any dissenting shareholder were of substantial benefit to other dissenting shareholders, and that the fees for those services should not be assessed against the surviving corporation, the court may award to such counsel reasonable fees to be paid out of the amounts awarded the dissenting shareholders who were benefited. To the extent that the surviving corporation fails to make a required payment when a dissenting shareholder accepts the surviving corporation’s offer to pay the value of the shares as estimated by the surviving corporation, the dissenting shareholder may sue directly for the amount owed and, to the extent successful, shall be entitled to recover from the surviving corporation all costs and expenses of the suit, including attorney fees.

Based on Florida’s appraisal rights statute as well as principles of waiver and estoppel, the Company intends to take the position with respect to any lawsuit seeking recovery outside of the appraisal rights process that appraisal rights represent the exclusive remedy to challenge the merger consideration and that any shareholder who either (i) votes for the adoption of the merger agreement, (ii) does not exercise appraisal rights or (iii) accepts merger consideration pursuant to the merger agreement, will have waived and relinquished all claims arising out of or relating to the consideration provided to the Company’s shareholders under the merger agreement and be barred from seeking recovery of other consideration.

BECAUSE OF THE COMPLEXITY OF THE PROVISIONS OF FLORIDA LAW RELATING TO DISSENTERS’ APPRAISAL RIGHTS, SHAREHOLDERS WHO ARE CONSIDERING DISSENTING FROM THE MERGER ARE URGED TO CONSULT THEIR OWN LEGAL ADVISORS.

Material U.S. Federal Income Tax Consequences

The following is a discussion of certain material U.S. federal income tax consequences of the merger to “U.S. holders” and “non-U.S. holders” (in each case, as defined below) of Company Common Stock whose shares of Company Common Stock are converted into the right to receive cash in the merger. This discussion assumes that U.S. holders and non-U.S. holders hold shares of Company Common Stock as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”) (generally, property held for investment), and will not own (actually or constructively) any equity interests in the surviving corporation or Parent after the merger. The following discussion is based upon the Code, judicial decisions, administrative rulings and existing and proposed Treasury regulations, all as in effect as of the date hereof. All of the preceding authorities are subject to change, possibly with retroactive effect, so as to result in U.S. federal income tax consequences different from those discussed below. The Company has not requested, and will not request, a ruling from the U.S. Internal Revenue Service (the “IRS”) with respect to any of the U.S. federal income tax consequences described below, and as a result there can be no assurance that the IRS will not disagree with or challenge any of the conclusions the Company has reached and described herein.

 

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This discussion is not a complete analysis or listing of all of the possible tax consequences of the merger and does not address all tax considerations that might be relevant to particular holders in light of their personal circumstances or to persons that are subject to special tax rules. In addition, this discussion of the material U.S. federal income tax consequences does not address the tax treatment of special classes of holders, including, without limitation: banks, insurance companies or other financial institutions; mutual funds; real estate investment trusts or regulated investment companies; tax-exempt organizations or governmental organizations; an entity or arrangement treated for U.S. federal income tax purposes as a partnership, S-corporation or other pass-through entity (or an investor in such an entity or arrangement); controlled foreign corporations, passive foreign investment companies or corporations that accumulate earnings to avoid U.S. federal income tax (or shareholders of such corporations); retirement plans, pension funds or other tax-deferred accounts; persons holding shares of Company Common Stock as part of a hedging, straddle, synthetic security, conversion or other integrated transaction; persons deemed to have sold their shares of Company Common Stock under the constructive sale provisions of the Code; persons who acquired Company Common Stock through the exercise or cancellation of employee stock options, through a tax qualified retirement plan or otherwise as compensation for their services; U.S. expatriates or entities covered by the U.S. anti-inversion rules; dealers, traders or brokers in stocks and securities or currencies; U.S. holders (as defined below) whose functional currency is not the U.S. dollar; traders in securities that elect mark-to-market treatment; U.S. holders (as defined below) who hold shares of Company Common Stock through a bank financial institution or other entity, or a branch or office thereof, that is located, organized or resident outside the United States; or persons that are required to report income no later than when such income is reported in an “applicable financial statement.” This discussion also does not address the receipt of cash in connection with the cancellation of restricted stock units or options to purchase shares of Company Common Stock and does not address any other matters relating to equity compensation or benefit plans.

This discussion does not address alternative minimum tax, the Medicare tax on net investment income, the rules regarding “qualified small business stock” within the meaning of Section 1202 of the Code, any estate and gift tax consequences, any tax consequences arising under any state, local or non-U.S. laws, or any tax consequences other than U.S. federal income tax consequences.

For purposes of this section, the term “U.S. holder” means a beneficial owner of Company Common Stock that is for U.S. federal income tax purposes: (i) an individual citizen of the United States or a resident of the United States as determined for U.S. federal income tax purposes, (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States or any state thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source or (iv) a trust (a) if a court within the United States is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have authority to control all substantial decisions of the trust or (b) that has a valid election in effect under applicable Treasury regulations to be treated as a domestic trust.

The term “non-U.S. holder” means a beneficial owner of Company Common Stock that is, for U.S. federal income tax purposes, a non-resident alien individual or a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) organized under laws other than the laws of the United States or any state thereof or the District of Columbia. The term “holder” means a U.S. holder or a non-U.S. holder.

If an entity treated as a partnership (or other pass-through entity) for U.S. federal income tax purposes is a beneficial owner of Company Common Stock, the U.S. federal income tax treatment of a partner or other owner will generally depend upon the status of the partner (or other owner) and the activities of the partner (or other owner) and the entity. If you are a partner (or other owner) of a partnership or other pass-through entity for U.S. federal income tax purposes, you are urged to consult your tax advisor regarding the tax consequences of the merger.

The following discussion is for general information only and is not intended to be, nor should it be construed to be, legal or tax advice to any holder or prospective holder of Company Common Stock and

 

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no opinion or representation with respect to the U.S. federal income tax consequences to any such holder or prospective holder is made. Each holder of Company Common Stock is urged to consult such holder’s tax advisors as to the particular consequences to such holder of the merger under U.S. federal, state and local, and applicable non-U.S. tax laws.

U.S. Holders

General. The exchange of shares of Company Common Stock for cash in the merger will be a taxable transaction for U.S. federal income tax purposes. A U.S. holder of Company Common Stock whose shares are converted into the right to receive cash in the merger generally will recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference, if any, between the amount of cash received (determined prior to reduction for any applicable withholding taxes) and the U.S. holder’s adjusted tax basis in such shares. A U.S. holder’s adjusted tax basis generally will equal the price the U.S. holder paid for such shares. Such gain or loss will be capital gain or loss and will be treated as long-term capital gain or loss if the holding period for the shares of Company Common Stock exceeds one year at the effective time of the merger. If the holding period for such shares is one year or less at the effective time of the merger, any capital gain or loss generally will be treated as short-term capital gain or loss. Long-term capital gains of non-corporate U.S. holders (including individuals) are generally eligible for reduced rates of taxation. The deductibility of capital losses is subject to certain limitations. If a U.S. holder acquired different blocks of Company Common Stock at different times or different prices, such U.S. holder must determine its adjusted tax basis and holding period separately with respect to each block of Company Common Stock.

Information Reporting and Backup Withholding. Information reporting and backup withholding may apply to payments made in connection with the merger. Backup withholding will not apply, however, to a U.S. holder of Company Common Stock that (1) furnishes a correct taxpayer identification number (“TIN”), certifies that such U.S. holder is not subject to backup withholding on the IRS Form W-9 (or appropriate successor form) included in the transmittal materials that such U.S. holder will receive, and otherwise complies with all applicable requirements of the backup withholding rules; or (2) provides proof that such U.S. holder is otherwise exempt from backup withholding. Backup withholding is not an additional tax, and any amounts withheld under the backup withholding rules may be refunded or credited against a U.S. holder’s U.S. federal income tax liability, if any; provided, that such U.S. holder furnishes the required information to the IRS in a timely manner. The IRS may impose a penalty upon any taxpayer that fails to provide the correct TIN.

Non-U.S. Holders

General. A non-U.S. holder’s receipt of cash in exchange for shares of Company Common Stock pursuant to the merger generally will not be subject to U.S. federal income tax unless:

 

   

the gain, if any, on such shares is effectively connected with the conduct of a trade or business of the non-U.S. holder in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment (or, in the case of an individual non-U.S. holder, a fixed base) maintained by the non-U.S. holder in the United States);

 

   

the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the merger, and certain other conditions are met; or

 

   

the Company is or has been a “United States real property holding corporation” as such term is defined in Section 897(c) of the Code (a “USRPHC”) for U.S. federal income tax purposes and certain other conditions are met.

A non-U.S. holder described in the first bullet point immediately above will generally be subject to tax on any gain derived from the merger in the same manner as if it were a U.S. holder. In addition, such a non-U.S. holder that is a corporation may be subject to a branch profits tax equal to 30% of its effectively connected earnings and

 

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profits or such lower rate as may be specified by an applicable income tax treaty. A non-U.S. holder described in the second bullet point immediately above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty) on any gain realized as a result of the merger, which may be offset by certain U.S. source capital losses recognized in the same year.

If the Company is or has been a USRPHC at any time within the shorter of the five-year period preceding the effective time of the merger or a non-U.S. holder’s holding period with respect to the applicable shares of Company Common Stock, the exchange of Company Common Stock for cash in the merger by such non-U.S. holder will be subject to U.S. federal income tax at rates generally applicable to U.S. holders, except that the branch profits tax will not apply; provided, that, so long as Company Common Stock is regularly traded on an established securities market, the Company’s treatment as a USRPHC would cause only a non-U.S. holder who holds or held, directly or indirectly under certain ownership rules of the Code, more than 5% of Company Common Stock (at any time during the shorter of the five-year period preceding the merger or the period that the non-U.S. holder held Company Common Stock), and is not eligible for a treaty exemption. The Company believes that it is not, and has not been, a USRPHC at any time during the five-year period preceding the offer.

Information Reporting and Backup Withholding. Information reporting and backup withholding will generally apply to payments made pursuant to the merger to a non-U.S. holder effected by or through the U.S. office of any broker, U.S. or foreign, unless the holder certifies its status as a non-U.S. holder properly and correctly on an appropriate version of IRS Form W-8 and satisfies certain other requirements, or otherwise establishes an exemption. Copies of applicable information returns reporting such payments and any withholding may also be made available to the tax authorities in the non-U.S. holder’s country in which such holder resides under the provisions of an applicable treaty or agreement. Payments of disposition proceeds to a non-U.S. holder where the transaction is effected through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting. However, if such broker is for U.S. federal income tax purposes: a U.S. person; a controlled foreign corporation; a non-U.S. person 50% or more of whose gross income is effectively connected with a U.S. trade or business for a specified three-year period; or a non-U.S. partnership with certain connections to the United States, then information reporting will be required unless the broker has in its records documentary evidence that the beneficial owner is not a U.S. person and certain other conditions are met or the beneficial owner otherwise establishes an exemption. Backup withholding may apply to any payment that such broker is required to report if the broker has actual knowledge or reason to know that the beneficial owner is a U.S. person. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder can be refunded or credited against the non-U.S. holder’s U.S. federal income tax liability (if any) provided, that an appropriate claim is timely filed with the IRS.

Regulatory Approvals

In connection with the merger, the Company is required to make certain filings with, and comply with certain laws of, various federal and state governmental agencies, including:

 

   

filing the articles of merger with the Department of State of the State of Florida in accordance with the FBCA at the closing of the merger; and

 

   

complying with U.S. federal securities laws.

No filings or approvals under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 are required in connection with the merger.

Delisting and Deregistration of Company Common Stock

If the merger is completed, the shares of Company Common Stock will no longer be publicly traded. In addition, Company Common Stock will be delisted from the Nasdaq Capital Market and deregistered under the Exchange Act, and the Company will no longer be required to file periodic reports with the SEC with respect to Company Common Stock.

 

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Effective Time of Merger

The merger will be completed and become effective at the time the articles of merger is filed with the Department of State of the State of Florida or any later time as the Company and Parent agree upon and specify in the articles of merger. The parties intend to complete the merger as soon as practicable following the adoption of the merger agreement by the Company’s shareholders and satisfaction or waiver of the conditions to closing of the merger set forth in the merger agreement.

The parties to the merger agreement currently expect to complete the merger in the first half of calendar year 2020. Because the merger is subject to a number of conditions, the exact timing of the merger cannot be determined, if it is completed at all.

Payment of Merger Consideration and Surrender of Stock Certificates

At the effective time of the merger, the Company will become an indirect wholly-owned subsidiary of Parent and each shareholder of record immediately prior to the effective time of the merger will be entitled to receive $0.90 in cash, without interest and less any applicable withholding taxes, for each share of Company Common Stock such shareholder holds immediately prior to the effective time of the merger. This does not apply to (i) shares of Company Common Stock held by the Company or any of its subsidiaries or by Parent or its subsidiaries, (ii) shares of Company Common Stock held by the Rollover Investor, and (iii) shares of Company Common Stock whose holders have not voted in favor of adopting the merger agreement and have demanded and perfected their appraisal rights in accordance with, and have complied in all respects with, the FBCA. Parent will designate a paying agent, satisfactory to the Company in its reasonable discretion, to make the cash payments contemplated by the merger agreement. At the effective time of the merger, Parent will deposit with the paying agent, for the benefit of the holders of Company Common Stock, funds sufficient for payment of the aggregate merger consideration. The paying agent will deliver to you your merger consideration according to the procedure summarized below.

As soon as reasonably practicable, and in any event, within three business days after the effective time of the merger, Parent will cause the paying agent to send you a letter of transmittal and instructions advising you how to surrender your stock certificates (of affidavit of loss in lieu thereof) or book-entry shares in exchange for the merger consideration.

The paying agent will promptly pay you your merger consideration after you have (i) surrendered your stock certificates (or affidavit of loss in lieu thereof) or book-entry shares to the paying agent, together with a properly completed and signed letter of transmittal and any other documents required by the paying agent, and (ii) provided to the paying agent any other items specified by the letter of transmittal.

Interest will not be paid or accrue in respect of any cash payments of merger consideration. The surviving corporation will reduce the amount of any merger consideration paid to you by any applicable withholding taxes.

If the paying agent is to pay some or all of your merger consideration to a person other than you, you must have your stock certificates properly endorsed or otherwise in proper form for transfer, and you must pay any transfer or other taxes payable by reason of the transfer or establish to the surviving corporation’s reasonable satisfaction that the taxes have been paid or are not required to be paid.

You should not forward your stock certificates to the paying agent without a letter of transmittal, and you should not return your stock certificates with the enclosed proxy.

The transmittal instructions will tell you what to do if you have lost your stock certificate, or if it has been stolen or destroyed. You will have to provide an affidavit to that fact and, if required by the surviving corporation, post a bond in an amount that the surviving corporation reasonably directs as indemnity against any claim that may be made against it in respect of the stock certificate.

 

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After the completion of the merger, you will cease to have any rights as a Company shareholder, other than the right to receive the per share merger consideration.

Upon demand, the paying agent will return to Parent all funds in its possession six months after the merger occurs, and the paying agent’s duties will terminate. After that time, if you have not received payment of the merger consideration, you may look only to Parent and/or the surviving corporation for payment of the merger consideration, without interest, subject to applicable abandoned property, escheat and similar laws. If any certificate representing Company Common Stock has not been surrendered prior to six months after the completion of the merger (or such earlier date as shall be immediately prior to the date that such unclaimed funds would otherwise become subject to any abandoned property, escheat or similar law), the payment with respect to such certificate will, to the extent permitted by applicable law, become the property of the surviving corporation, free and clear of all claims or interest of any person previously entitled to any claims or interest.

Fees and Expenses

Except as otherwise described in “The Merger Agreement—Effect of Termination; Fees and Expenses” beginning on page 122, all fees, expenses and costs incurred in connection with the merger agreement, including legal, accounting, investment banking and other fees, expenses and costs, will be paid by the party incurring such fees, expenses and costs, whether or not the merger is consummated.

Estimated fees and expenses to be incurred by the Company and the Acquiring Group in connection with the merger are as follows:

 

Description

   Amount  

Financial advisors fee and expenses

   $ 2,600,000  

Legal fees and expenses

   $    

Accounting fees and expenses

   $    

SEC filing fee

   $ 3,708  

Printing, proxy solicitation, filing fees and mailing costs

   $    

Miscellaneous

   $    

Total fees and expenses

   $    

These fees and expenses will not reduce the merger consideration to be received by our shareholders.

Provisions for Unaffiliated Shareholders

No provision has been made (i) to grant the Company’s unaffiliated shareholders access to the corporate files of the Company, any other party to the merger or any of their respective affiliates, or (ii) to obtain counsel or appraisal services at the expense of the Company or any such other party or affiliate.

 

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FORWARD-LOOKING STATEMENTS

This Proxy Statement contains, and oral statements made by our representatives from time to time may contain, forward-looking statements (statements which are not historical facts). Forward-looking statements are based on current expectations rather than historical facts and they are indicated by words or phrases such as “anticipate,” “believe,” “budget,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “guidance,” “indicate,” “intend,” “may,” “might,” “plan,” “possibly,” “potential,” “predict,” “probably,” “project,” “seek,” “should,” “target,” or “will” or the negative thereof or other variations thereon and similar words or phrases or comparable terminology.

We have based such forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, many of which are beyond our control.

These factors include: dependence on our ability to purchase merchandise at competitive terms through relationships with our vendors and their factors, consumer sensitivity to economic conditions, competition in the retail industry, changes in fashion trends and consumer preferences, ability to implement our strategic plans to sustain profitable growth, effectiveness of advertising and marketing, capital availability and debt levels, ability to negotiate acceptable lease terms with current and potential landlords, ability to successfully implement strategies to exit under-performing stores, extreme and/or unseasonable weather conditions, adequate sources of merchandise at acceptable prices, dependence on certain key personnel and ability to attract and retain qualified employees, increases in the cost of compensation and employee benefits, impacts of seasonality, disruption of the Company’s distribution process, dependence on imported merchandise, information technology failures, data security breaches, single supplier for shoe department, single provider for Ecommerce website, acts of terrorism, ability to adapt to new regulatory compliance and disclosure obligations, material weaknesses in internal control over financial reporting and other risks and uncertainties described in the Company’s filings with the SEC.

Forward-looking statements also may include information concerning the proposed merger transaction, including unexpected costs or liabilities, delays due to regulatory review, failure to timely satisfy or have waived certain closing conditions, failure to obtain the financing for the merger, the commencement of litigation relating to the merger, whether or when the proposed merger will close and changes in general and business conditions. Investors are cautioned that all forward-looking statements involve risks and uncertainties and factors relating to the proposed transaction, including those risks and uncertainties detailed in the Company’s filings with the SEC, all of which are difficult to predict and many of which are beyond its control. You are cautioned not to place undue reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise, except as required by law.

Additionally, important factors concerning the merger could cause the Company’s actual results, performance and achievements to differ materially from such forward-looking statements. Such risks, uncertainties and other important factors include, among others:

 

   

the failure of the Company’s shareholders to adopt the merger agreement or the risk that the other conditions to the completion of the merger will not be satisfied;

 

   

the risk that if the merger is not completed for any reason, the price of the Company Common Stock will likely decline to the extent the market price of the Company Common Stock reflects market assumptions the merger will be completed;

 

   

the risk of the occurrence of an event, change or circumstance that could give rise to the payment of a termination fee to Parent pursuant to the terms of the merger agreement;

 

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the risk of an adverse outcome of any legal proceedings that have been or may be instituted against the Company and others relating to the transactions contemplated by the merger agreement;

 

   

the risk of the failure to consummate the merger for any reason or the failure of Parent to obtain the necessary debt financing set forth in the debt commitment letters provided to the Company in connection with the merger;

 

   

the restrictions imposed on the Company’s business, properties and operations pursuant to the affirmative and negative covenants set forth in the merger agreement and the potential impact of such covenants on our business;

 

   

the risk that the proposed transaction will divert management’s attention resulting in a potential disruption of the Company’s current business plan;

 

   

the effect of the announcement of the merger on our business relationships, operating results and business generally;

 

   

the amount of fees, expenses and charges incurred by the Company in connection with the merger; and

 

   

failure of the merger to close, or a delay in its closing, may have a negative impact on the Company’s ability to pursue alternative strategic transactions or ability to implement alternative business plans.

All information contained in this Proxy Statement concerning Parent and Merger Sub has been supplied by Parent and Merger Sub and has not been independently verified by the Company.

 

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THE PARTIES TO THE MERGER

Stein Mart, Inc.

Headquartered in Jacksonville, Florida, Stein Mart, Inc. is a national specialty off-price retailer offering designer and name-brand fashion apparel, home décor, accessories and shoes at everyday discount prices. The Company provides real value that customers love every day both in stores and online. Begun in the early 1900s as a single store in Greenville, Mississippi, Stein Mart, Inc. was organized in Mississippi in 1968 before merging into a Florida corporation in 1992. Stein Mart, Inc. operated 281 stores in 30 states and an Ecommerce retail selling site as of February 28, 2020.

The principal business address and phone number of the Company are:

Stein Mart, Inc.

1200 Riverplace Blvd.

Jacksonville, Florida 32207

Telephone: (904) 346-1500

Stratosphere Holdco, LLC

Parent is a Delaware limited liability company formed solely in anticipation of the merger by TopCo, an entity affiliated with Kingswood Capital Management, L.P., a leading private investment firm primarily focused on businesses that are undergoing varying degrees of operational, financial or market-driven change. The Rollover Investor is expected to exchange its shares of Company Common Stock for equity interests in Parent in connection with the merger. Parent currently has de minimis assets and has not conducted any activities to date other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement.

The principal business address and phone number of Parent are:

Stratosphere Holdco, LLC

c/o Kingswood Capital Management, L.P.

11777 San Vincente Blvd., Suite 650

Los Angeles, CA 90049

Telephone: (424) 291-2811

Stratosphere Merger Sub, Inc.

Merger Sub is a Florida corporation formed solely for purposes of entering into the merger agreement and consummating the transactions contemplated by the merger. Merger Sub is an indirect wholly-owned subsidiary of Parent. Subject to the terms and conditions of the merger agreement, at the effective time of the merger, Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation. Merger Sub currently has de minimis assets and has not conducted any activities to date other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement.

The principal business address and phone number of Merger Sub are:

Stratosphere Merger Sub, Inc.

c/o Kingswood Capital Management, L.P.

11777 San Vincente Blvd., Suite 650

Los Angeles, CA 90049

Telephone: (424) 291-2811

 

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IMPORTANT INFORMATION REGARDING THE COMPANY

Background of the Company

Headquartered in Jacksonville, Florida, Stein Mart, Inc. is a national specialty off-price retailer offering designer and name-brand fashion apparel, home décor, accessories and shoes at everyday discount prices. The Company provides real value that customers love every day both in stores and online. Begun in the early 1900s as a single store in Greenville, Mississippi, Stein Mart, Inc. was organized in Mississippi in 1968 before merging into a Florida corporation in 1992.

Business and Background of Natural Persons Related to the Company

A biography for each of our current directors and executive officers is set forth below. None of the Company nor any of the Company’s directors or executive officers has, during the past five years, been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). Each of the Company’s directors and executive officers listed below is a United States citizen. None of the Company nor any of the Company’s directors or executive officers listed below has, during the past five years, been a party to any judicial or administrative proceeding (except for matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws.

Directors

 

Name

Age

  

Positions with Stein Mart;

Principal Occupations and Other Directorships

During Past Five (5) Years; Special Experiences,

Qualifications and Skills

  

Year First

Became Director

of Stein Mart

Jay Stein

(74)

   Chairman of the Board of Stein Mart since 1989; Chief Executive Officer of Stein Mart from June 2013 to March 2016, Interim Chief Executive Officer of Stein Mart from September 2011 to June 2013 and Chief Executive Officer of Stein Mart from 1990 to September 2001. Mr. Stein brings extensive knowledge of the retail environment and outstanding merchandising skills to the Board, as well as extensive historical and operational knowledge based on many years of experience with Stein Mart.    1968

Irwin Cohen †ß¥

(79)

   Director of Stein Mart; Senior Advisor with the Peter J. Solomon Company, an investment banking firm, from June 2003 to retirement in October 2013; Global Managing Partner of the Retail and Consumer Products Practice of Deloitte & Touche LLP from 1998 to May 2003; director of Supervalu, Inc. from June 2003 through the sale of the company in October 2018. Mr. Cohen adds extensive financial and accounting experience and expertise in evaluating financial controls as well as extensive experience within the retail segment.    2008

Thomas L. Cole ¥†

(71)

   Director of Stein Mart; Chief Administrative Officer of Macy’s, Inc., from February 2009 to retirement in June 2013; Vice Chair of Federated Department Stores from February 2003 to February 2009; various executive positions with Federated Department Stores from 1980 to 2003; and various positions with divisions of the former Allied Stores, from 1972 to 1980. Mr. Cole serves as a Director of Beall’s Department Stores (since January 2015), and on the Fashion Advisory Board at Kent State University.    2016

 

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Name

Age

  

Positions with Stein Mart;

Principal Occupations and Other Directorships

During Past Five (5) Years; Special Experiences,

Qualifications and Skills

  

Year First

Became Director

of Stein Mart

   Mr. Cole greatly broadens the Board’s retail and apparel experience and offers invaluable advice as to Stein Mart’s administrative policies and procedures including, but not limited to, logistics, supply chain management and information technology.   

Timothy Cost ¥ ∎

(60)

   Director of Stein Mart; President of Jacksonville University since February 2013; Executive Vice President, Global Corporate Affairs, of PepsiCo, Inc. from December 2010 to January 2013; Chairman of Global Health Care of APCO Worldwide, a public affairs and communications firm, from June to November 2010; Senior Vice President, Corporate Affairs for Wyeth, a healthcare company, from February 2008 until December 2009; Executive Vice President of ARAMARK from 2003 to early 2008; and, in prior years, service in investor relations and communications roles with Pharmacia Corporation, Eastman Kodak Company and Bristol-Myers Squibb. Mr. Cost served on the Board of Web.com Group, Inc. from December 2014 through the sale of the company in October 2018, as well as serving on various civic, cultural and educational boards in the Jacksonville, Florida area. Mr. Cost’s strong background in corporate affairs and communications adds invaluable expertise to Stein Mart’s shareholder engagement process.    2016

Lisa Galanti ¥ ∎

(64)

   Director of Stein Mart; co-founder of Fitzgerald & Co. in 1983 and Managing Director from 1987 until her retirement in 2015. Fitzgerald & Co is a leading marketing communications and advertising agency and an Interpublic Group agency since 1998. Ms. Galanti brings invaluable expertise in marketing and communications to the Board.    2016

D. Hunt Hawkins

(60)

   Director of Stein Mart; Named Chief Executive Officer of Stein Mart in January 2017; promoted to Interim Chief Executive Officer and Director of Stein Mart in September 2016; President and Chief Operating Officer of Stein Mart in April 2014; Executive Vice President and Chief Operating Officer of Stein Mart in December 2011; Executive Vice President and Chief Administrative Officer of Stein Mart in October 2007; Executive Vice President of Operations of Stein Mart in September 2006; Senior Vice President, Human Resources of Stein Mart, February 1994. As a long-time executive of Stein Mart, Mr. Hawkins brings extensive operational knowledge to the Board.    2016

MaryAnne Morin

(57)

   President of Stein Mart since February 2017; Chief Merchant, Executive Vice President of Lord & Taylor and Hudson’s Bay from 2015 to January 2017; Executive Vice President, Merchandising and Senior Vice President, General Merchandising Manager of Lord & Taylor and Hudson’s Bay from 2009 through 2015; Merchandise Manager/Product Director for Macy’s Merchandising Group from 2007 through 2009; Managing Director for Echo Design Group/Monsac from 2002    2018

 

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Name

Age

  

Positions with Stein Mart;

Principal Occupations and Other Directorships

During Past Five (5) Years; Special Experiences,

Qualifications and Skills

  

Year First

Became Director

of Stein Mart

   through 2006. Ms. Morin brings extensive knowledge of the retail industry and outstanding merchandising experience.   

Richard L. Sisisky ∎ ß ¥ ×

(65)

   Director of Stein Mart; President of The Shircliff & Sisisky Company, a management consulting company, since 2003; Partner, SilverSolutions Consulting, LLC, a transportation and logistics consulting firm, since 2018; President and Chief Operating Officer and director of ParkerVision, Inc. from 1998 to 2003. Mr. Sisisky’s material knowledge of the general business environment and management skills are invaluable to the Board’s strategic insight and analysis.    2003

Burton M. Tansky ∎ † ß ¥

(82)

   Director of Stein Mart; Senior Advisor with Marvin Traub Associates, a global business development and strategy consulting firm focused on working with brands, retailers, developers and related businesses, since 2017; Chief Executive Officer of the Neiman Marcus Group from 2001 to 2010; President and CEO of The Neiman Marcus Stores from 1994 to 2001; Director of the Howard Hughes Corporation and the Donald Pliner Company. Mr. Tansky brings extensive experience in retail management to the Board.    2014

 

Member of the Audit Committee

Member of the Compensation Committee

ß

Member of the Corporate Governance Committee

×

Lead Director

¥

Independent Director in accordance with applicable NASDAQ rules

Executive Officers

 

Name (Age)

  

Position

D. Hunt Hawkins (60)

   Chief Executive Officer

MaryAnne Morin (57)

   President

James B. Brown (51)

   Executive Vice President and Chief Financial Officer

Mr. Hawkins joined the Company in February 1994 as Senior Vice President, Human Resources. He was promoted to Executive Vice President of Operations in September 2006, to Executive Vice President, Chief Administrative Officer in October 2007, to Executive Vice President, Chief Operating Officer in December 2011, to President and Chief Operating Officer in April 2014, to Interim Chief Executive Officer in September 2016 and to Chief Executive Officer in January 2017.

Ms. Morin joined the Company in February 2017 as President. Prior to joining us, Ms. Morin was the Chief Merchant, Executive Vice President of Lord & Taylor and Hudson’s Bay from 2015 to January 2017. Before that, she held several leadership positions within Lord & Taylor and Hudson’s Bay from 2009 through 2015 including Executive Vice President, Merchandising and Senior Vice President, General Merchandising Manager. From 2007 through 2009 Ms. Morin was Merchandise Manager/Product Director for Macy’s Merchandising Group. From 2002 through 2006 she was Managing Director for Echo Design Group/Monsac.

Mr. Brown joined the Company in December 2018 as Executive Vice President and Chief Financial Officer. Prior to joining us, Mr. Brown was the Chief Financial Officer at Adrianna Papell Group since 2017.

 

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Prior to joining Adrianna Papell Group, he served as Chief Financial Officer for Gordmans Stores from 2015 to 2017 and Hancock Fabrics from 2013 to 2015 and Senior Vice President, Finance of Fred’s, Inc. from 2006 to 2013.

Markets and Market Price

Shares of Company Common Stock are listed and traded on the Nasdaq Capital Market under the symbol “SMRT.” The following table shows the high and low sales prices, as reported by Nasdaq, and the dividends paid for the periods indicated.

 

     High      Low      Dividend  

Year Ended February 3, 2018

        

First Quarter

   $ 3.92      $ 2.41      $ 0.075  

Second Quarter

     2.49        1.00        —    

Third Quarter

     1.49        1.09        —    

Fourth Quarter

     1.30        0.56        —    

Year Ended February 2, 2019

        

First Quarter

     2.65        0.48        —    

Second Quarter

     4.04        2.07        —    

Third Quarter

     3.28        1.64        —    

Fourth Quarter

     2.25        0.93        —    

Year Ended February 1, 2020

        

First Quarter

     1.25        0.83        —    

Second Quarter

     1.48        0.65        —    

Third Quarter

     0.95        0.66        —    

Fourth Quarter

     0.93        0.60        —    

Year Ended January 30, 2021

        

First Quarter (through February 20, 2020)

     0.89        0.88        —    

The closing price of the common stock on January 30, 2020, which was the last trading day before the public announcement of the merger agreement, was $0.65 per share.

The Company’s shareholders should obtain a current market quotation for Company Common Stock before making any decision with respect to the merger. On [●], 2020 (the record date for shareholders entitled to vote at the Special Meeting), there were approximately [●] holders of record of Company Common Stock.

Dividends

The declaration and payment of cash dividends is at the discretion of our Board of Directors and will be dependent upon our future earnings, cash flows, financial condition and capital requirements. On May 17, 2017, we suspended our quarterly cash dividend and we do not plan to pay dividends for the foreseeable future.

 

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Selected Historical Financial Information

 

     As Adjusted
Year Ended
February 2,
2019(1)
    As Adjusted
Year Ended
February 3,
2018(2)
    39 Weeks
Ended
November 2,
2019
(unaudited)
    39 Weeks
Ended
November 3,
2018
(unaudited)
 
     (In thousands, except per share data)  

Income Statement Data:

        

Net sales

   $ 1,257,598     $ 1,318,633     $ 882,658     $ 916,511  

Other revenue

     15,134       13,936       13,479       11,765  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     1,272,732       1,332,569       896,137       928,276  

Cost of merchandise sold

     919,810       987,692       651,122       671,426  

Selling, general and administrative expenses

     348,236       376,111       247,891       258,071  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     4,686       (31,234     (2,876     (1,221

Interest expense, net

     10,882       4,788       7,024       8,406  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (6,196     (36,022     (9,900     (9,627

Income tax (benefit) expense

     (25     (11,698     308       291  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (6,171   $ (24,324   $ (10,208   $ (9,918
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share:

        

Basic and diluted

   $ (0.13   $ (0.52   $ (0.22   $ (0.21

Cash dividends paid per share

   $ —       $ 0.075     $ —       $ —    

Gross profit

   $ 337,788     $ 330,941     $ 231,536     $ 245,085  

 

     As Adjusted
As of
February 2,
2019(1)
     As Adjusted
As of
February 3,
2018(2)
     As of
November 2,
2019
(unaudited)
     As of
November 3,
2018
(unaudited)
 
     (In thousands, except per share data)  

Balance Sheet Data:

           

Current assets

   $ 293,259      $ 307,257      $ 343,445      $ 354,532  

Noncurrent assets

     143,848        176,101        495,898        154,277  

Current liabilities

     167,296        211,579        287,700        204,062  

Noncurrent liabilities

     226,858        223,461        519,736        267,197  

Total shareholders’ equity

     42,953        48,318        31,907        37,550  

Other Financial Data (unaudited):

           

Book value per share

   $ 0.90      $ 1.01      $ 0.66      $ 0.78  

 

(1)

The February 2, 2019 financial statements were revised to correct a misstatement related to previous impairment calculations.

(2)

The February 3, 2018 financial statements were revised to incorporate the impact of the Company’s adoption of ASU No. 2014-09.

No separate financial information is provided for Parent because Parent is a newly formed entity formed in connection with the merger and has no independent operations. No pro forma data giving effect to the merger has been provided. The Company does not believe that such information is material to shareholders in evaluating the proposed merger and merger agreement because (i) the proposed per share merger consideration is all-cash, and (ii) if the merger is completed, Company Common Stock will cease to be publicly traded.

 

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Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information known to the Company regarding the beneficial ownership of Company Common Stock as of February 11, 2020 (unless otherwise indicated), the most recent practicable date by (i) each of the Company’s “named executive officers” as determined pursuant to SEC rules, (ii) each director, (iii) all of the Company’s directors and executive officers as a group and (iv) each person who is known by the Company to be the beneficial owner of more than 5% of any class or series of the Company’s capital stock.

The amounts and percentages of Company Common Stock beneficially owned are reported on the basis of the regulations of the SEC governing the determination of beneficial ownership of securities. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of such security, or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities. Except as otherwise indicated, the named persons below have sole voting and investment power, or share voting and investment power with their spouses, with respect to beneficially owned shares listed below.

The percentages included in the table below are based on 48,291,356 outstanding shares of Company Common Stock, outstanding as of February 11, 2020. The address for all persons listed below other than the Rollover Investor is Stein Mart Corporate Headquarters, 1200 Riverplace Blvd., Jacksonville, Florida 32207.

 

Name

   Amount and Nature
of Beneficial Ownership
     Percent
of Class(*)
 

Stein Family Holdco LLC(1)

     17,339,544        35.9

James B. Brown

     66,666        *  

Irwin Cohen(2)

     55,474        *  

Thomas L. Cole(2)

     18,124        *  

Timothy Cost(2)

     18,124        *  

Lisa Galanti(2)

     18,124        *  

D. Hunt Hawkins(2)

     979,577        2.0  

MaryAnne Morin(2)

     386,658        *  

Richard L. Sisisky(2)

     140,683        *  

Burton M. Tansky(2)

     30,119        *  
  

 

 

    

 

 

 

All directors and executive officers as a group (10 persons)(2)

     19,053,093        39.5

 

(*)

Amount is less than one percent (1%) of total outstanding common stock.

(1)

All shares beneficially owned by the Rollover Investor, of which Jay Stein is the Manager. The shares of Company Common Stock beneficially owned by the Rollover Investor are being exchanged for equity securities of Parent. The principal executive offices of the Rollover Investor are located at c/o 8265 Bayberry Road, Jacksonville, FL 32256.

(2)

Includes the following shares which are not currently outstanding but which the named shareholders are entitled to receive upon exercise of options that are currently exercisable or that become exercisable within sixty (60) days of February 11, 2020:

 

Thomas L. Cole

     2,640  

Timothy Cost

     2,640  

Lisa Galanti

     2,640  

D. Hunt Hawkins

     631,631  

MaryAnne Morin

     300,000  

Burton M. Tansky

     5,748  
  

 

 

 

All directors and executive officers as a group (10 persons)

     945,299  

 

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Also includes the following shares of restricted stock which are currently outstanding and will be delivered to each individual upon vesting or which are not currently outstanding but which the individuals are entitled to receive upon the vesting of restricted stock units that are scheduled to vest within sixty (60) days of February 11, 2020:

 

Irwin Cohen

     1,778  

Thomas L. Cole

     1,778  

Timothy Cost

     1,778  

Lisa Galanti

     1,778  

James B. Brown

     33,333  

Richard L. Sisisky

     1,778  

Burton W. Tansky

     1,778  
  

 

 

 

All directors and executive officers as a group (10 persons)

     44,001  

Prior Public Offerings

During the past three years, the Company has not made any underwritten public offering of Company Common Stock for cash that was registered under the Securities Act of 1933, as amended, or exempt from registration under Regulation A.

 

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IMPORTANT INFORMATION REGARDING PARENT, MERGER SUB,

AND THE KINGSWOOD GROUP FILING PERSONS

Set forth below is the name, business address and business telephone number and certain other information for each of the Kingswood Group Filing Persons and each of their directors, executive officers and other controlling persons, as applicable. During the past five years, none of the persons or entities described below has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). In addition, during the past five (5) years, none of the Kingswood Group Filing Persons nor any of their respective directors or executive officers have been a party to any judicial or administrative proceeding (except for matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws.

Parent and TopCo are Delaware limited liability companies. Merger Sub is a Florida corporation. Kingswood Intermediate I and Kingswood Intermediate II are Delaware corporations. Kingswood Capital Management, Kingswood Fund I and Kingswood Fund II are Delaware limited partnerships. Each of TopCo, Parent, Kingswood Intermediate I, Kingswood Intermediate II and Merger Sub were formed solely for purposes of entering into the merger agreement and/or the related transaction documents and consummating the transactions contemplated thereby and have not engaged in any business except for the activities incident to entity formation. Kingswood Capital Management, Kingswood Fund I and Kingswood Fund II are Delaware limited partnerships that were formed for the purpose of engaging in the private equity and leveraged buyout business. The principal executive offices for each of these entities are located at c/o Kingswood Capital Management, L.P., 11777 San Vincente Blvd., Suite 650 Los Angeles, CA 90049 and the business telephone number for each of these entities is (424) 291-2811.

Merger Sub is a wholly owned subsidiary of Kingswood Intermediate II. Kingswood Intermediate II is a wholly owned subsidiary of Kingswood Intermediary I. Kingswood Intermediary I is a wholly owned subsidiary of Parent. Parent is a wholly owned subsidiary of TopCo. TopCo is a jointly owned subsidiary of Kingswood Fund I and Kingswood Fund II. Each of Parent and TopCo acts through its manager, Kingswood Capital Management. Each of Kingswood Fund I and Kingswood Fund II acts through its general partner, Kingswood Capital Opportunities Fund I GP, L.P. Upon consummation of the merger, Merger Sub will cease to exist and the Company will continue as the surviving corporation and a wholly owned subsidiary of Kingswood Intermediate II and indirect wholly owned subsidiary of Parent.

Set forth below for each of the directors, executive officers and other natural persons with control of Kingswood Group Filing Persons is his respective present principal occupation or employment, the name, principal business and address of the corporation or other organization in which such occupation or employment is conducted and the five-year employment history of such director or executive officer. All such persons are citizens of the United States of America.

Alexander Wolf is the managing partner and the founder of Kingswood Capital Management, which he founded in 2013. Mr. Wolf’s principal business address is c/o Kingswood Capital Management, L.P., 11777 San Vincente Blvd., Suite 650, Los Angeles, CA 90049. Mr. Wolf is a director and the president of each of Merger Sub, Kingswood Intermediate I and Kingswood Intermediate II and the managing partner of each of Kingswood Capital Management and Kingswood Capital Opportunities Fund I GP, L.P.

James Renna is a partner and lead operating partner of Kingswood Capital Management, where he has worked since January 2015. Mr. Renna’s principal business address is c/o James Renna, 1900 North Pearl Street, Dallas, TX 75201. Mr. Renna is a director and the treasurer of each of Merger Sub, Kingswood Intermediate I and Kingswood Intermediate II.

Michael Niegsch is a partner at Kingswood Capital Management, where he has worked since November 2017. Prior to that, Mr. Niegsch was a principal at Comvest Partners from March 2010 to November 2017. Mr. Niegsch’s principal business address is c/o Kingswood Capital Management, L.P., 11777 San Vincente Blvd., Suite 650, Los Angeles, CA 90049. Mr. Niegsch is a director and the secretary of each of Merger Sub, Kingswood Intermediate I and Kingswood Intermediate II.

 

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IMPORTANT INFORMATION REGARDING THE ROLLOVER INVESTOR

Stein Family Holdco is a Delaware limited liability company. The principal executive offices of Stein Family Holdco are located at c/o 8265 Bayberry Road, Jacksonville, FL 32256. Stein Family Holdco was formed for the purpose of serving as a holding company for shares of Common Stock. During the past five years, neither Stein Family Holdco nor any of its managers, directors or executive officers has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). In addition, during the past five (5) years, neither Stein Family Holdco nor any of its managers, directors or executive officers have been a party to any judicial or administrative proceeding (except for matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws.

Set forth below for the manager of Stein Family Holdco is his present principal occupation or employment, the name, principal business and address of the corporation or other organization in which such occupation or employment is conducted and the five-year employment history of such manager. The manager is a citizen of the United States of America. Stein Family Holdco has no directors or executive officers.

Jay Stein is Manager of Stein Family Holdco, which he has managed since Stein Family Holdco’s formation in January 2020. Mr. Stein’s principal business address is c/o 8265 Bayberry Road, Jacksonville, FL 32256. Mr. Stein has served as Chairman of the Board of Stein Mart since 1989, Chief Executive Officer of Stein Mart from June 2013 to March 2016, Interim Chief Executive Officer of Stein Mart from September 2011 to June 2013 and Chief Executive Officer of Stein Mart from 1990 to September 2001. Stein Mart’s principal business address is 1200 Riverplace Blvd., Jacksonville, Florida 32207.

 

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COMMON STOCK TRANSACTION INFORMATION

Transactions by the Acquiring Group Filing Persons

None of the Acquiring Group Filing Persons have purchased or sold any securities of the Company during the past two years, except as provided below:

Jay Stein:

 

Quantity

   Price ($)    Transaction Date     

Transaction Description

(1,837,670)    0.00      05/14/2018      Gifted(1)
1,837,670    0.00      05/14/2018      Gifted(1)
(7,162,330)    2.56      06/28/2018      Sale of Company Stock(2)
7,162,330    2.56      06/28/2018      Purchase of Company Stock(2)
(9,000,000)    0.00      06/29/2018      Gifted
9,000,000    0.00      06/29/2018      Gifted
(9,000,000)    1.37      11/30/2018      Sale of Company Stock(3)
9,000,000    1.37      11/30/2018      Purchase of Company Stock(3)
(9,000,000)    0.00      12/03/2018      Gifted
9,000,000    0.00      12/03/2018      Gifted
(9,000,000)    1.09      03/18/2019      Sale of Company Stock(4)
9,000,000    1.09      03/18/2019      Purchase of Company Stock(4)
(9,000,000)    0.00      03/19/2019      Gifted
9,000,000    0.00      03/19/2019      Gifted
234,197    (5)      01/29/2020      Acquisition of Company Stock(5)
(9,908,996)    0.00      01/30/2020      Gifted(6)
9,908,996    0.00      01/30/2020      Gifted(6)

 

(1)

Annuity payments made in the form of shares of common stock by two (2) annuity trusts to the sole annuitant, Jay Stein.

(2)

In accordance to the terms of certain Grantor Retained Annuity Trusts (“GRATs”) whereby Jay Stein is the sole annuitant, Jay Stein elected to substitute certain assets for a total 7,162,330 shares of common stock of the Company from such GRATs.

(3)

In accordance to the terms of certain GRATs whereby Jay Stein is the sole annuitant, Jay Stein elected to substitute certain assets for a total 9,000,000 shares of common stock of the Company from such GRATs.

(4)

In accordance to the terms of certain GRATs whereby Jay Stein is the sole annuitant, Jay Stein elected to substitute certain assets for a total 9,000,000 shares of common stock of the Company from such GRATs.

(5)

Represents shares received by Jay Stein pursuant to a private settlement agreement with a third party.

(6)

All shares previously reported as directly or indirectly beneficially owned by Jay Stein were contributed to Stein Family Holdco LLC. Jay Stein is the manager of Stein Family Holdco LLC.

 

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Transactions by the Company

There have been no transactions in shares of Company Common Stock by the Company during the past two years, except as provided below:

 

     Number of
Shares Purchased
     Range of
Prices Paid
     Average
Purchase Price
 

Fiscal Year Ended February 2, 2019

        

First Quarter

     45,103      $ 0.54 to $2.05      $ 0.73  

Second Quarter

     3,306      $ 2.17 to $3.69      $ 2.57  

Third Quarter

     3,832      $ 1.83 to $2.71      $ 2.24  

Fourth Quarter

     69,560      $ 1.05 to $2.01      $ 1.14  

Fiscal Year Ended February 1, 2020

        

First Quarter

     102,543      $ 0.93 to $1.23      $ 1.00  

Second Quarter

     11,886      $ 0.73 to $0.95      $ 0.90  

Third Quarter

     8,483      $ 0.69 to $0.85      $ 0.71  

Fourth Quarter

     7,132      $ 0.67 to $0.80      $ 0.69  

Fiscal Year Ended January 30, 2021

        

First Quarter (through February 11, 2020)

     65,656      $ 0.88      $ 0.88  

There have been no transactions in shares of Company Common Stock by the Company within the 60 days prior to the date of this Proxy Statement, except as provided below:

 

Quantity

  Price ($)   Transaction Date  

Transaction Description

150   $0.67   1/23/2020   Withheld shares to pay taxes resulting from vesting of restricted stock awards.
35   $0.67   1/23/2020   Withheld shares to pay taxes resulting from vesting of restricted stock awards.
4,942   $0.68   1/24/2020   Withheld shares to pay taxes resulting from vesting of restricted stock units.
639   $0.67   1/23/2020   Withheld shares to pay taxes resulting from vesting of restricted stock awards.
58,685   $0.88   2/4/2020   Withheld shares to pay taxes resulting from vesting of restricted stock awards.
6,971   $0.88   2/7/2020   Withheld shares to pay taxes resulting from vesting of restricted stock awards.

Transactions by the Company’s Directors and Executive Officers

There have been no transactions in shares of Company Common Stock by our directors and executive officers within the 60 days prior to the date of this Proxy Statement, except as provided below:

Jay Stein (Chairman of the Board of Directors):

 

Quantity

  Price ($)   Transaction Date  

Transaction Description

234,197     01/29/2020  

Shares were received pursuant to a private settlement

agreement with a third party.

9,908,996   $0.00   01/30/2020  

Shares previously reported as directly or indirectly

beneficially owned were contributed to Stein Family

Holdco LLC.

Richard L Sisisky (Director):

 

Quantity

  Price ($)   Transaction Date  

Transaction Description

1,777   0.00   01/22/2020   Vesting of Restricted Stock Units

Burton M. Tansky (Director):

 

Quantity

  Price ($)   Transaction Date  

Transaction Description

1,777   0.00   01/22/2020   Vesting of Restricted Stock Units

 

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Timothy Cost (Director):

 

Quantity

  Price ($)   Transaction Date  

Transaction Description

1,777   0.00   01/22/2020   Vesting of Restricted Stock Units

Thomas L. Cole(Director):

 

Quantity

  Price ($)   Transaction Date  

Transaction Description

1,777   0.00   01/22/2020   Vesting of Restricted Stock Units

Irwin Cohen (Director):

 

Quantity

  Price ($)   Transaction Date  

Transaction Description

1,777   0.00   01/22/2020   Vesting of Restricted Stock Units

Lisa Galanti (Director):

 

Quantity

  Price ($)   Transaction Date  

Transaction Description

1,777   0.00   01/22/2020   Vesting of Restricted Stock Units

James Brown (Chief Financial Officer, Executive Vice President):

 

Quantity

  Price ($)   Transaction Date  

Transaction Description

33,333   0.00   01/22/2020   Vesting of Restricted Stock Units

 

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THE SPECIAL MEETING

Time, Place and Purpose of the Special Meeting

The enclosed proxy is solicited on behalf of the board of directors for use at a Special Meeting to be held on [], 2020 at [], Eastern Time, or at any adjournments, postponements or recesses thereof, for the purposes set forth in this Proxy Statement and in the accompanying notice of Special Meeting. The Special Meeting will be held at [].

At the Special Meeting, the Company’s shareholders are being asked to consider and vote upon a proposal to adopt the merger agreement. The Company’s shareholders are also being asked to approve the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to adopt the merger agreement.

Further, the Company’s shareholders are being asked to cast an advisory (non-binding) vote to approve “merger-related executive compensation” that may become payable under existing agreements to the Company’s named executive officers in connection with the merger.

The Company does not expect a vote to be taken on any other matters at the Special Meeting or any adjournment, postponement or recess thereof. If any other matters are properly presented at the Special Meeting or any adjournment, postponement or recess thereof for consideration, however, the holders of the proxies will have discretion to vote on these matters in accordance with their best judgment.

Special Committee and Board Recommendation

The Special Committee, after careful consideration, voted unanimously to recommend to the board of directors that it, and thereafter the board of directors (other than Jay Stein), after careful consideration and acknowledging the participation of Jay Stein in the merger, voted unanimously to (i) approve and declare advisable the merger agreement, the merger and the transactions contemplated by the merger agreement, (ii) declare that it is fair to and in the best interests of the Company and the unaffiliated shareholders of the Company that the Company enter into the merger agreement and consummate the merger on the terms and subject to the conditions set forth in the merger agreement, (iii) direct that the adoption of the merger agreement be submitted to a vote at a meeting of the shareholders of the Company and (iv) recommend to the shareholders of the Company that they vote FOR the adoption of the merger agreement. For a discussion of the material factors considered by the Special Committee and the board of directors in reaching its conclusions, see “Special Factors—Recommendation of the Special Committee and Our Board of Directors; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger” beginning on page 34.

The board of directors recommends that you vote FOR the proposal to adopt the merger agreement, FOR the proposal to approve the “merger-related executive compensation” and FOR the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies.

Who is Entitled to Vote at the Special Meeting?

Only shareholders of record at the close of business on the record date, [], 2020, are entitled to receive notice of and to vote at the Special Meeting or any adjournment, postponement or recess thereof. As of the close of business on [], 2020, there were outstanding [] shares of Company Common Stock.

Shareholder of Record: Shares Registered in Your Name. If, on [], 2020, your shares were registered directly in your name with the Company’s transfer agent, Computershare Investor Services, then you are a shareholder of record. As a shareholder of record, you may vote in person at the Special Meeting or vote by proxy.

 

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Beneficial Owner: Shares Registered in the Name of a Broker, Bank or Other Agent. If, on [], 2020, your shares were held in an account at a broker, bank or other agent, then you are the beneficial owner of shares held in “street name.” The organization holding your account is considered to be the shareholder of record for purposes of voting at the Special Meeting. As a beneficial owner, you have the right to direct your broker, bank or other agent how to vote the shares in your account. You are also invited to attend the Special Meeting. Because you are not the shareholder of record, however, you may not vote your shares in person at the Special Meeting unless you request and obtain a valid proxy from your broker, bank or other agent.

How Do I Vote?

For Proposals 1, 2 and 3, you may vote FOR or AGAINST or abstain from voting. The procedures for voting are set forth below:

Shareholder of Record: Shares Registered in Your Name. If you are a shareholder of record, you may vote in person at the Special Meeting or by mailing your completed, dated and signed proxy card in the enclosed return envelope or by giving your proxy authorization via the Internet or by telephone. Whether or not you plan to attend the Special Meeting, we encourage you to vote by proxy or give your proxy authorization to ensure your vote is counted. You may still attend the Special Meeting and vote in person if you have already voted by proxy or given your proxy authorization.

 

   

To vote in person, attend the Special Meeting, and we will provide you with a ballot when you arrive.

 

   

To vote by mail, submit a proxy by simply marking, signing and dating it, and return it in the postage-paid envelope provided.

 

   

To vote via telephone, submit a proxy by calling the toll-free number on the proxy card before 11:59 p.m., Eastern Time, on [], 2020. You will then be prompted to enter the control number printed on your proxy card and to follow the subsequent instructions. Submitting a proxy by telephone is available 24 hours a day.

 

   

To vote via the Internet, access the website indicated on the enclosed proxy card before 11:59 p.m., Eastern Time, on [], 2020. You will then be prompted to enter the control number printed on your proxy card and to follow the subsequent instructions. Submitting a proxy via the Internet is available 24 hours a day.

We provide Internet proxy authorization on-line with procedures designed to ensure the authenticity and correctness of your proxy authorization instructions. Please be aware, however, that you must bear any costs associated with your Internet access, such as usage charges from Internet access providers and telephone companies.

Beneficial Owner: Shares Registered in the Name of a Broker, Bank or Other Agent. If you are a beneficial owner of shares registered in the name of your broker, bank or other agent, you should have received the Proxy Statement and proxy card from that organization rather than from the Company. You should follow the instructions provided by your broker, bank or other agent as to how to vote your shares. To vote in person at the Special Meeting, you must obtain a valid proxy from your broker, bank or other agent. To do this, follow the instructions provided by your broker, bank or other agent or contact your broker, bank or other agent to request a proxy card.

How Many Votes Do I Have?

For each matter to be voted upon, you have one vote for each share of Company Common Stock that you own as of the close of business on [], 2020. Shareholders that own shares of Company Common Stock will vote together as a single class on all matters hereby submitted to shareholders and such other matters as may properly come before the Special Meeting and any adjournment, postponement or recess thereof.

 

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What If I Request and Return a Proxy Card But Do Not Make Specific Choices?

If you request a proxy card and return the proxy card signed and dated without marking any voting selections, all of your shares of Company Common Stock will be voted FOR the adoption of the merger agreement, FOR the approval of the “merger-related executive compensation” and FOR the approval of the proposal to adjourn the Special Meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the Special Meeting to approve the proposal to adopt the merger agreement. You should return a proxy even if you plan to attend the Special Meeting in person.

Can I Change My Vote After I Return My Proxy Card?

Yes. If you are the shareholder of record of your shares, you may revoke your proxy in any one of three ways:

 

   

You may submit another properly completed proxy bearing a later date which is received by [●], our proxy tabulator, by the close of business on [], 2020;

 

   

You may send a written notice which is received by the close of business on [], 2020 that you are revoking your proxy to 1200 Riverplace Boulevard, Jacksonville, Florida 32207, Attention: James B. Brown, Secretary; or

 

   

You may attend the Special Meeting and notify the election officials that you wish to revoke your proxy and vote in person. Your attendance at the Special Meeting will not, by itself, revoke your proxy.

If your shares are held by your broker, bank or other agent as your nominee, you should follow the instructions provided by your broker, bank or other agent.

How Are Votes Counted?

Votes will be counted by the inspector of election appointed for the Special Meeting, who will separately count FOR and AGAINST votes and abstentions and separately count votes in respect of each proposal.

Because the affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock is required to approve the adoption of the merger agreement, the failure to vote and abstentions will have the same effect as a vote AGAINST the merger proposal.

The advisory (non-binding) proposal on the “merger-related executive compensation” and the proposal to adjourn the Special Meeting if there are not sufficient votes to adopt the merger proposal will be approved if the votes cast “FOR” the proposal exceed the votes cast “AGAINST” the proposal. Abstentions will have no effect on the advisory (non-binding) proposal on the “merger-related executive compensation” or the adjournment proposal. As noted above, the vote with respect to the “merger-related executive compensation” is an advisory vote and will not be binding on the Company or Parent. Accordingly, regardless of the outcome of the non-binding, advisory vote, if the merger agreement is adopted by the shareholders and completed, our named executive officers will be eligible to receive the various “merger-related executive compensation” payments.

If a shareholder’s shares are held of record by a broker, bank or other nominee and the shareholder wishes to vote at the Special Meeting, the shareholder must obtain from the record holder a proxy issued in the shareholder’s name. Brokers who hold shares in “street name” for clients typically have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. Absent specific instructions from the beneficial owner of the shares, however, brokers are not allowed to exercise their voting discretion with respect to the approval of non-routine matters, such as the merger agreement. Abstentions are counted for purposes of determining whether a quorum exists at the special meeting.

How Many Votes Are Needed to Approve Each Proposal?

 

   

For Proposal 1, the adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of the Company Common Stock as of the record date for the Special

 

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Meeting. Because adoption of the merger agreement requires the approval of shareholders representing a majority of the outstanding shares of Company Common Stock, failure to vote your shares of Company Common Stock (including failure to provide voting instructions if you hold through a broker, bank or other nominee) will have the same effect as a vote AGAINST the merger agreement.

 

   

Proposal 2, the vote to approve the “merger-related executive compensation,” will be approved if the votes cast “FOR” the proposal exceed the votes cast “AGAINST” the proposal. However, the vote on Proposal 2 is advisory only and will not be binding on the Company or Parent and is not a condition to the consummation of the merger. Accordingly, regardless of the outcome of the non-binding, advisory vote, if the merger agreement is adopted by the shareholders and completed, our named executive officers will be eligible to receive the various “merger-related executive compensation” payments. Abstentions will have no effect on the vote to approve the “merger-related executive compensation.”

 

   

Proposal 3, the vote to adjourn the Special Meeting if there are not sufficient votes to adopt the merger agreement, will be approved if the votes cast “FOR” the proposal exceed the votes cast “AGAINST” the proposal. Abstentions will have no effect on the vote to approve the adjournment proposal. The persons named as proxies may propose and vote for one or more adjournments of the Special Meeting, including adjournments to permit further solicitations of proxies.

The Rollover Investor has entered into a voting agreement with Parent that covers approximately 36% of the outstanding shares of Company Common Stock on the date of the merger agreement, pursuant to which it has agreed to vote its shares FOR the adoption of the merger agreement and the approval of the merger and any related proposal in furtherance of the merger and the transactions contemplated by the merger agreement.

What Should I Do With My Stock Certificates at this Time?

Please do not send in stock certificates at this time. If the merger is completed, you will be sent a letter of transmittal regarding the procedures for exchanging the existing Company’s stock certificates for the payment of $0.90 per share in cash, without interest and less any applicable withholding taxes.

How Many Shares Must Be Present to Constitute a Quorum for the Special Meeting?

A quorum of shareholders is necessary to hold a valid meeting. The presence at the meeting, in person or by proxy, of the holders of a majority of the aggregate voting power of the common stock outstanding on the record date will constitute a quorum, permitting the conduct of business at the meeting. Proxies received but marked as abstentions will be included in the calculation of the number of votes considered to be present at the meeting for the purposes of a quorum. Only shareholders of record at the close of business on the record date, [], 2020, are entitled to receive notice of and to vote at the Special Meeting or any adjournment, postponement or recess thereof. As of the close of business on [], 2020, there were outstanding [] shares of Company Common Stock.

Your shares will be counted towards the quorum only if you vote in person at the Special Meeting or if you submit a valid proxy (or one is submitted on your behalf by your broker, bank or other agent).

Stock Ownership and Interests of Certain Persons

Our directors and executive officers (other than Jay Stein who manages the Rollover Investor) have informed us that, as of the date of this Proxy Statement, they intend to vote all of the shares of Company Common Stock owned directly by them in favor of the adoption of the merger agreement. As of [], 2020, the record date for the Special Meeting, our directors and executive officers (other than Jay Stein who manages the Rollover Investor) directly owned, in the aggregate, [] shares of Company Common Stock entitled to vote at the Special Meeting, or collectively approximately [] of the outstanding shares of Company Common Stock entitled to vote at the Special Meeting. Certain of our directors and executive officers have interests that may be different from, or in addition to, those of the Company’s shareholders generally. As of [], 2020, the record date for the Special

 

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Meeting, our directors and executive officers directly owned, in the aggregate, [] shares of Company Common Stock entitled to vote at the Special Meeting, or collectively approximately [] of the outstanding shares of Company Common Stock entitled to vote at the Special Meeting. For more information, please see “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 64.

As of [], 2020, the record date for the Special Meeting, the Rollover Investor owned 17,339,544 shares of Company Common Stock entitled to vote at the Special Meeting, or approximately 36% of the outstanding shares of Company Common Stock entitled to vote at the Special Meeting. The Rollover Investor has entered into a voting agreement with Parent pursuant to which, unless the voting agreement is terminated in accordance with its terms (including upon a termination of the merger agreement in accordance with its terms), it has agreed to, among other things, vote, or cause to be voted, its shares of Company Common Stock in favor of the adoption of the merger agreement and any related proposal in furtherance of the merger and the transactions contemplated by the merger agreement. See “Special Factors—Voting Agreement” beginning on page 69. The Rollover Investor has interests in the merger that are different from, or in addition to, the interests of the Company’s other shareholders. For more information, please see “Special Factors—Financing of the Merger” beginning on page  62.

Expenses of Proxy Solicitation

The Company will pay for the entire cost of soliciting proxies. In addition to the costs of mailing the proxy materials and posting the proxy materials on the Internet, the Company’s directors (other than Jay Stein) and employees also may solicit proxies in person, by telephone or by other means of communication. Directors and employees will not be paid any additional compensation for soliciting proxies. The Company also may reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners. Kingsdale Advisors has been retained by the Company to assist it in the solicitation of proxies, using the means referred to above, and will receive a fee of approximately $12,500. The Company will reimburse Kingsdale Advisors for reasonable expenses and costs incurred by it in connection with its services and will indemnify Kingsdale Advisors for certain losses.

Adjournments, Postponements and Recesses

Although the Company does not expect to do so, if the Company has not received sufficient proxies to constitute a quorum or sufficient votes for the adoption of the merger agreement, the Special Meeting may be adjourned, postponed or recessed for the purpose of soliciting additional proxies. The proposal to approve the adjournment, postponement or recess of the Special Meeting, if necessary or appropriate, to solicit additional proxies requires the affirmative vote of the holders of a majority of the shares of Company Common Stock present or represented by proxy at the Special Meeting and entitled to vote on the matter. Any signed proxies received by the Company that approve the proposal to adjourn, postpone or recess the Special Meeting will be voted in favor of an adjournment or postponement in these circumstances. Any adjournment, postponement or recess of the Special Meeting for the purpose of soliciting additional proxies will allow shareholders who have already sent in their proxies to revoke them at any time prior to their use.

Rights of Shareholders Who Object to the Merger

Shareholders are entitled to statutory appraisal rights under the FBCA in connection with the merger. This means that holders of Company Common Stock who do not vote in favor of the adoption of the merger agreement or have not consented to it in writing may be entitled to have the value of their shares determined by a circuit court of competent jurisdiction in Duval County, Florida, and to receive payment based on that valuation instead of receiving the $0.90 per share merger consideration. The ultimate amount received in an appraisal proceeding may be more than, the same as or less than the amount that would have been received under the merger agreement.

 

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Shareholders who do not vote in favor of the adoption of the merger agreement or have not consented to it in writing may exercise their right to seek appraisal of the fair value of their shares of Company Common Stock as determined by a circuit court of competent jurisdiction in Duval County, Florida if the merger is completed in lieu of receiving the per share merger consideration, but only if they do not vote in favor of adopting the merger agreement and otherwise comply with the procedures of Sections 607.1301 through 607.1340 of the FBCA, which is the appraisal rights statute applicable to Florida corporations. A copy of Sections 607.1301 through 607.1340 of the FBCA is included as Appendix C to this Proxy Statement and the procedures are summarized in this Proxy Statement. See “Special Factors—Appraisal Rights” beginning on page 70 and Appendix C to this Proxy Statement.

Other Matters

The board of directors is not aware of any business to be brought before the Special Meeting other than that described in this Proxy Statement. If, however, other matters are properly presented at the Special Meeting, the persons named as proxies will vote in accordance with their best judgment with respect to those matters.

Questions and Additional Information

If you have questions about the Special Meeting or the merger after reading this Proxy Statement, or if you would like additional copies of this Proxy Statement or the proxy card, you should contact Kingsdale Advisors, our proxy solicitor, by telephone at 1.866.581.1479 toll-free in North America (+1.416.867.2272 for collect calls outside of North America) or by e-mail at contactus@kingsdaleadvisors.com.

 

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THE MERGER AGREEMENT

This section of the Proxy Statement summarizes the material provisions of the merger agreement, but is not intended to be an exhaustive discussion of the merger agreement. We encourage you to read carefully this entire document, including the Agreement and Plan of Merger attached to this Proxy Statement as Appendix A, for a more complete understanding of the merger. The following description is subject to, and is qualified in its entirety by reference to, the merger agreement. The rights and obligations of the parties are governed by the express terms and conditions of the merger agreement and not the summary set forth in this section or any other information contained in this Proxy Statement.

The summary of the merger agreement in this Proxy Statement is included to provide you with information regarding some of its material provisions. Factual disclosures about the Company contained in this Proxy Statement or in the Company’s public reports filed with the SEC may supplement, update or modify the factual disclosures about the Company contained in the merger agreement and described in this summary. The merger agreement contains representations and warranties made by and to the parties thereto as of specific dates. The statements embodied in those representations and warranties were made for purposes of that contract between the parties and are subject to qualifications and limitations agreed by the parties in connection with negotiating the terms of that contract. In particular, in your review of the representations and warranties contained in the merger agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the merger agreement may have the right not to close the merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise, and allocating risk between the parties to the merger agreement, rather than establishing matters as facts. Furthermore, some of those representations and warranties may not be accurate or complete as of any particular date because they are subject to a contractual standard of materiality different from that generally applicable to public disclosures to shareholders and reports and documents filed with the SEC and in some cases were qualified by disclosures that were made by each party to the other, which disclosures are not reflected in the merger agreement. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this Proxy Statement, may have changed since the date of the merger agreement and subsequent developments or new information qualifying a representation or warranty may have been included in this Proxy Statement. The merger agreement is described in, and included as Appendix A to, this Proxy Statement only to provide you with information regarding its terms and conditions and not to provide any factual information regarding the Company, Parent or the Company’s or Parent’s respective businesses. The representations and warranties in the merger agreement and the description of them in this document should not be read alone, but instead should be read in conjunction with the other information contained in the reports, statements and filings the Company publicly files with the SEC.

General; the Merger

The merger agreement provides for the merger of Merger Sub with and into the Company upon the terms, and subject to the conditions, set forth in the merger agreement and in accordance with the FBCA. After the completion of the merger, the separate corporate existence of Merger Sub will cease and the Company will continue its corporate existence under the FBCA as the surviving corporation in the merger and will become an indirect wholly-owned subsidiary of Parent. If the merger is completed, the shares of Company Common Stock will be delisted from the Nasdaq Capital Market, will be deregistered under the Exchange Act and will no longer be publicly traded, and the Company will no longer be required to file periodic reports with the SEC with respect to the Company Common Stock. The Company will be a privately held corporation and the Company’s current shareholders (other than the Rollover Investor) will cease to have any ownership interest in the Company or rights as the Company’s shareholders. Therefore, following the completion of the merger, the Company’s current shareholders (other than the Rollover Investor) will not participate in any of the Company’s future earnings or growth and will not benefit from any appreciation in the Company’s value, if any.

 

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Closing and Effective Time of the Merger

Subject to the satisfaction or waiver of all of the conditions to closing contained in the merger agreement, the closing of the merger will take place (a) on the second business day after the day on which the conditions to closing set forth in the merger agreement (other than those conditions that by their terms are to be satisfied by actions taken at the closing, but subject to the satisfaction or waiver of those conditions) are satisfied or waived or (b) at such other time as Parent and the Company may agree in writing.

If the merger is not consummated by July 29, 2020, the Company or Parent may terminate the merger agreement, except such right to terminate the merger agreement will not be available to such party if such party has breached any of its representations, warranties, covenants or agreements in the merger agreement, which breach has been the principal cause of the failure to consummate the merger by such date.

The effective time of the merger will occur upon the filing of the articles of merger with the Department of State of the State of Florida (or at such later date as the Company and Parent may agree and specify in the articles of merger) in accordance with the FBCA.

Certificate of Incorporation; Bylaws

At the effective time of the merger, the certificate of incorporation of the Company will be amended and restated to be the certificate of incorporation of Merger Sub with the name of the surviving corporation changed to “Stein Mart, Inc.,” until amended in accordance with its terms or by applicable law. The bylaws of the Company shall by the bylaws of the surviving corporation, until amended in accordance with its terms, the terms of the amended and restated certificate of incorporation or by applicable law.

Conversion of Securities

Common Stock

Except for (i) shares of Company Common Stock held by the Company or any of its subsidiaries or by Parent or its subsidiaries immediately before the effective time of the merger, (ii) shares of Company Common Stock held by the Rollover Investor immediately before the effective time of the merger, and (iii) shares of Company Common Stock whose holders have not voted in favor of adopting the merger agreement and have demanded and perfected their appraisal rights in accordance with, and have complied in all respects with, the FBCA ((i) through (iii) collectively, the “excluded shares”), each share of Company Common Stock issued and outstanding immediately prior to the effective time of the merger shall, without any action on the part of the holder thereof, be converted into the right to receive $0.90 in cash, without interest and less applicable withholding taxes. At the effective time of the merger, each share of Company Common Stock theretofore issued and outstanding will be cancelled automatically and cease to exist.

Treatment of Outstanding Options, Restricted Stock Awards and Restricted Stock Units

Unless otherwise agreed upon between Parent and any applicable stock option holder, at the effective time of the merger, each option to acquire shares of Company Common Stock under the Company equity plan, outstanding immediately prior to the effective time of the merger, whether or not then vested or exercisable, by virtue of the merger, will be canceled and converted into the right to receive an amount in cash, without interest, equal to the excess, if any, of the merger consideration over the per share exercise price of the applicable stock option at the time of calculation multiplied by the aggregate number of shares of Company Common Stock that may be acquired upon exercise of such stock option. The Company has no outstanding stock options with a per share exercise price less than the per share merger consideration.

Unless otherwise agreed upon between Parent and any restricted common stock award holder, at the effective time of the merger, each share of restricted Company Common Stock that vests solely based on continued service outstanding immediately prior to the effective time of the merger, by virtue of the merger will be converted into the right to receive the per share merger consideration.

 

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Unless otherwise agreed upon between Parent and any restricted common stock unit holder, at the effective time of the merger, each award of restricted stock units payable in shares of Company Common Stock or whose value is determined with reference to the value of shares of Company Common Stock outstanding immediately prior to the effective time of the merger, by virtue of the merger will be converted into the right to receive a cash award determined by multiplying the merger consideration by the number of shares of Company Common Stock subject to each restricted stock unit award.

Unless otherwise agreed upon between Parent and any restricted common stock award holder, at the effective time of the merger, each share of restricted Company Common Stock that vests based on the achievement of performance goals outstanding immediately prior to the effective time of the merger, by virtue of the merger will be converted into the right to receive a cash award determined by multiplying the merger consideration by the number of shares of Company Common Stock that would vest based on the achievement of any applicable performance goals at the target level. No restricted stock awards or units subject to performance-based vesting conditions are expected to vest in connection with the merger.

Payment Procedures

No less than three business days before the effective time of the merger, Parent will select a bank or trust company, satisfactory to the Company in its reasonable discretion, to act as the paying agent in the merger and will enter into a paying agent agreement with the paying agent, the terms and conditions of which shall be satisfactory to the Company in its reasonable discretion. The surviving corporation will be responsible for all fees and expenses of the paying agent. Immediately prior to the effective time of the merger, Parent will deposit or cause to be deposited with the paying agent sufficient funds to pay the per share merger consideration for all issued and outstanding shares of Company Common Stock (other than the excluded shares) entitled to payment thereof. As soon as reasonably practicable, and in any event, within three business days after the effective time of the merger, Parent will cause the paying agent to mail a letter of transmittal in the paying agent’s standard form (and reasonably satisfactory to Parent and the Company) and instructions to each holder of record of Company Common Stock. The letter of transmittal and instructions will tell such holder: (i) that delivery shall be effected, and risk of loss and title to such holder’s shares shall pass, only upon proper delivery of such holder’s stock certificates (or affidavit of loss in lieu thereof) to the paying agent or, in the case of book-entry shares, upon adherence to the procedures set forth in the letter of transmittal and (ii) instructions for surrendering such certificates or book-entry shares (if the holder’s shares are not certificated) in exchange for the merger consideration. Such instructions will provide that: (A) at the election of the holder, stock certificates may be surrendered by hand delivery or otherwise and (B) the merger consideration payable in exchange for the stock certificates and/or book-entry shares will be payable by wire transfer to the surrendering holder.

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

You will not be entitled to receive the merger consideration until you surrender your stock certificate or certificates (if your shares are certificated) (or affidavit of loss in lieu thereof) to the paying agent, together with a duly completed and executed letter of transmittal and any other documents reasonably required by the paying agent. The merger consideration may be paid to a person other than the person in whose name the corresponding stock certificate is registered if (i) the surrendered stock certificate (or affidavit of loss in lieu thereof) is accompanied by all documents required by Parent to evidence and effect that transfer and (ii) the person requesting such payment pays any applicable transfer taxes or other taxes required by reason of payment of the merger consideration to a person other than the registered holder or establishes to the satisfaction of Parent and the paying agent that such tax has been paid or is not applicable.

No interest will be paid or will accrue on the cash payable upon surrender of the stock certificates. Parent, Merger Sub, the surviving corporation and the paying agent will be entitled to deduct and withhold from any consideration otherwise payable under the merger agreement as may be required to deduct and withhold with

 

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respect to the payment of such consideration under the Code, or any applicable state, local or foreign tax law. To the extent that any amounts are so deducted and withheld and paid to the appropriate taxing authorities, those amounts will be treated as having been paid to the person in respect of whom such deduction or withholding was made for all purposes under the merger agreement.

None of Parent, the surviving corporation or the paying agent will be liable to any holder of stock certificates or book-entry shares for any amount properly paid to a public official under any applicable abandoned property, escheat or similar law.

The paying agent will invest the payment fund as directed by Parent, provided, that such investment shall be in obligations of, or guaranteed by, the United States, in commercial paper obligations of issuers organized under the law of a state of the United States, rated A-1 or P-1 or better by Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Service, respectively, or in certificates of deposit, bank repurchase agreements or bankers’ acceptances of commercial banks with capital exceeding $10.0 billion, or in mutual funds investing solely in such assets, and, in any such case, no such instrument shall have a maturity exceeding three (3) months. Any such investment will be for the benefit, and at the risk, of Parent, and any interest or other income resulting from such investment will be for the benefit of Parent; provided, however, no such investment or losses thereon will affect the merger consideration payable to the holders of Company Common Stock immediately prior to the effective time of the merger and Parent will promptly provide, or will cause the surviving corporation to promptly provide, additional funds to the paying agent for the benefit of the holders of Company Common Stock, stock options, performance stock awards and restricted stock awards immediately prior to the effective time of the merger in the amount of any such losses to the extent necessary to satisfy the obligations of Parent and the surviving corporation in connection with the merger.

Any portion of the payment fund which remains unclaimed by former shareholders of the Company six months after the effective time of the merger will be delivered by the paying agent to Parent upon demand, and any former shareholders who have not surrendered their shares in exchange for the merger consideration will thereafter look only to Parent and/or the surviving corporation for payment of the merger consideration.

Representations and Warranties

The representations and warranties of the Company contained in the merger agreement are the product of negotiations among the parties thereto and are solely for the benefit of Parent and Merger Sub. Any inaccuracies in such representations and warranties are subject to waiver by the parties to the merger agreement and are qualified by a confidential disclosure letter containing non-public information and made for the purposes of allocating contractual risk between the parties instead of establishing these matters as facts. Consequently, the Company’s representations and warranties in the merger agreement may not be relied upon by persons other than the parties thereto as characterizations of actual facts or circumstances as of the date of the merger agreement or as of any other date, nor may you rely upon them in making the decision to approve and authorize the merger agreement and the transactions contemplated by the merger agreement. The merger agreement may only be enforced against the Company by Parent and Merger Sub. Moreover, information concerning the subject matter of the representations and warranties of the Company may change after the date of the merger agreement, which subsequent information may or may not be reflected fully in the Company’s public disclosures.

The Company’s representations and warranties in the merger agreement relate to, among other things:

 

   

corporate organization, good standing and corporate power and authority, and other corpora