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NAUTICA ENTERPRISES, INC.
(Name of Registrant as Specified in Its Charter)
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BARINGTON COMPANIES EQUITY PARTNERS, L.P.,
JEWELCOR MANAGEMENT, INC., RCG AMBROSE
MASTER FUND, LTD. and RAMIUS SECURITIES, LLC
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
--------------------------------------------------------------------------------
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2
ISS PROXY ALERT
Institutional Shareholder Services
Nautica Enterprises, Inc.
Ticker: NAUT
Annual Meeting: July 8, 2003
Record Date: May 29, 2003
Business: Designer and manufacturer of men's apparel
State of Inc: Delaware
Index Industry
Ranking
78.1 85.9
--------------------------------------------
NAUT outperformed 78.1% of the
companies in the S&P 600 and 85.9%
of the companies in the Consumer Durables
& Apparel group.
MEETING AGENDA
Item Code Proposals Mgt. ISS
Rec. Rec.
DISSIDENT PROXY (GREEN CARD)
1.1 MO225 Elect Director William J. Fox FOR FOR
1.2 M0225 Elect Director James A. Mitarotonda FOR FOR
2.1 M0225 Elect Director David Chu FOR FOR
2.2 M0225 Elect Director Harvey Sanders FOR FOR
2.3 M0225 Elect Director Steven H.Tisman FOR FOR
2.4 M0225 Elect Director Ronald G. Weiner FOR FOR
2.5 M0225 Elect Director Robert Bank FOR FOR
2.6 M0225 Elect Director Israel Rosenzweig FOR FOR
3 M0101 Ratify Auditors FOR FOR
3
4 M0661 Authorize stockholders holding 10% FOR FOR
or more of common stock to call
special meetings
MANAGEMENT PROXY (WHITE
CARD)
1.1 M0201 Elect Director Robert B. Bank FOR Do Not
Vote
1.2 M0201 Elect Director David Chu FOR Do Not
Vote
1.3 M0201 Elect Director Israel Rosenzweig FOR Do Not
Vote
1.4 M0201 Elect Director Harvey Sanders FOR Do Not
Vote
1.5 M0201 Elect Director Charles H. Scherer FOR Do Not
Vote
1.6 M0201 Elect Director Steven H. Tishman FOR Do Not
Vote
1.7 M0201 Elect Director John Varvatos FOR Do Not
Vote
1.8 M0201 Elect Director Ronald G. Weiner FOR Do Not
Vote
1.9 M0201 Ratify Auditors FOR Do Not
Vote
NOTE:
PROPOSALS
Items 1.1-2.6: Elect Directors
Contest Summary
Company Name: Nautica Enterprises, Inc.
Dissidents: The Barington Companies
D&O ownership: 18.8 percent of the outstanding shares as of May 29, 2003
Dissident ownership: Barington owns 3.1 percent of the company's shares
Stakes: Two board seats
Dissident's concerns: Nautica's board and management have failed
to fulfill its obligation to maximize value for all of the company's
stockholders; The board contains a limited number of independent directors
focused on representing the interests of all stockholders and advocating the
4
maximization of shareholder value; Barington states that its nominees have broad
industry, management, and financial experience necessary to assist the board in
improving Nautica's operating performance
Dissident's plan: Barington intends to replace one inside director and one
affiliated director with two independents to (1) revitalize the Nautica brand;
(2) remove the company's poison pill; (3) allow shareholders to call meetings;
and (4) restructure management's compensation package.
Management's platform: Nautica's board is committed to
building shareholder value; The Barington Group is not committed to serving the
best interests of shareholders; The board is currently taking steps to improve
corporate governance at Nautica
Management's plan: Management has a strategy for transforming the company based
on (1) Maximizing operational efficiencies; (2) rationalizing business for
improved performance; and (3) initiatives for enhancing shareholder value.
Solicitation costs/reimbursement: The Barington Companies plan to spend
approximately $250,000 in its solicitation efforts in this contest. Barington
does not intend to request solicitation expenses. Nautica plans to spend
approximately $1 million in its solicitation efforts in this contest.
ISS Recommendation: We recommend that shareholders vote FOR the dissidents'
slate and FOR Item 2 (Management's remaining nominees), Item 3 (Ratify Auditors)
and Item 4 (Authorize stockholders holding 10% or more of common stock to call
special meetings).
Background:
Business Summary
Nautica
Nautica Enterprises, Inc. is a $448.8 million company that designs, sources,
markets and distributes apparel under the brands Nautica, Nautica Competition,
Nautica Jeans Company, Earl Jean, John Varvatos, E. Magrath and Byron Nelson.
Through its wholesale business, the company sells Nautica branded apparel
primarily to department and specialty stores throughout the U.S. Earl Jean and
John Varvatos products are sold primarily to high-end department stores, upscale
specialty retailers and fashion-forward boutiques, primarily throughout the U.S.
and certain European markets. In addition to its wholesale business, the company
operates Nautica outlet stores, as well as Earl Jean and John Varvatos stores.
The company also licenses the Nautica name and related trademarks for a range of
products consistent with Nautica's design concepts and image through Nautica
Apparel, Inc. The company sells through some 2,300 retailers in the U.S., 1,500
in-store shops, a flagship store in New York, direct retail stores, and over 100
of its own outlet stores.
The Barington Companies Group
The Barington Companies Group (henceforth, "Barington") consists of Barington
Companies Equity Partners, L.P., Jewelcor Management, Inc, RGC Ambrose Master
Fund, Ltd., and Ramius Securities, LLC. Barington Capital Group, L.P. was formed
in 1992 to serve the special needs of emerging growth and small capitalization
companies. Prior to April 1999, Barington provided services in all phases of
investment banking, including raising capital through public offerings and
private placements of debt and equity securities, advising on mergers and
acquisitions, and engaging in research, sales and trading.
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Barington successfully completed transactions for small capitalization companies
in such diverse areas as computer hardware and software, banking,
telecommunications, healthcare, media and entertainment, retail and consumer
products and manufacturing. Barington completed 32 public equity offerings and
29 private placements of debt, including high yield, and equity and has raised
over $690 million in capital. From 1996-1999, Barington's M&A advisory group
closed 13 transactions with an aggregate value of $300 million.
The Parties
Management Nominees
Management's eight nominees are Harvey Sanders, president, chairman, and CEO
of Nautica, David Chu, vice-chairman of Nautica, John Varvatos, senior
vice-president of Nautica and president of John Varvatos Company, a
wholly-owned subsidiary of Nautica, Charles Scherer, a partner at Hughes
Hubbard & Reed LLP, an international law firm that provides legal services to
Nautica, and four outside directors, Israel Rosenzweig, Steven H. Tishman,
Ronald G. Weiner, CPA, and Robert B. Bank. Mr. Rosenzweig has been a senior
vice president of BRT Realty Trust for the past five years. Mr. Tishman is
currently a managing director of Rothschild Inc. Mr. Weiner is president of
Perelson Weiner LLP, a certified public accounting firm. Mr. Bank is
president of Robert B. Bank Advisory Services, a private capital investment
and consulting firm.
Dissident Nominees
Barington seeks to elect six of management's eight nominees. The two
directors Barington wishes to unseat are Charles Scherer and John Varvatos.
Barington's two nominees are William J. Fox and James Mitarotonda. Mr. Fox
is president, chairman, and CEO of AKI, Inc., an international multi-sensory
marketing, advertising, and sample systems business. Prior to joining AKI,
Mr. Fox held a number of senior management positions with Revlon, Inc.,
including CFO, senior executive vice-president, and CEO of Revlon
Technologies. Mr. Mitarotonda is the president, chairman, and CEO of
Barington Capital Group, L.P. His background includes several retail
management positions at Bloomingdale's.
Timeline
Fall 2000: Nautica introduces the John Varvatos line of apparel targeting the
upscale men's segment.
April 2001: Nautica acquires Earl Jean for approximately $65 million in cash and
stock, as well as an earn-out provision.
April 15, 2003: Representatives of Barington meet with Nautica's senior
management to discuss board representation.
April 17, 2003: The Barington Companies Group begins to accumulate Nautica
shares.
June 10, 2003: A group of investors headed by The Barington Companies Equity
Partners files a preliminary proxy statement seeking the addition of three
nominees to go along with five incumbent Nautica directors.
June 16, 2003: Nautica recommends that shareholders reject Barington's agenda.
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June 18, 2003: Barington announces that its proposed slate has shrunk by one
nominee from three to two. Barington explains that Michael Steinberg has decided
not to run for personal reasons. Nautica CEO Harvey Sanders meets with
institutional shareholders to discuss Nautica's strategy and intent to fight
Barington, adding that the company is not for sale.
June 20, 2003: Nautica's management team announces that they are in talks to
sell the company.
June 23, 2003: Barington files its definitive proxy materials.
June 26, 2003: Nautica announces that it has filed an amendment to its
shareholder rights agreement. The amendment provides that the shareholder rights
agreement will be automatically redeemed under certain circumstances in the
event of certain qualifying tender offers, unless stockholders vote to keep the
rights outstanding.
Dissident's Position
o Nautica's board and management have failed to fulfill their obligation to
maximize value for all of the company's stockholders
o The board contains a limited number of independent directors focused on
representing the interests of all stockholders and advocating the
maximization of shareholder value
o Barington's nominees have broad industry, management, and financial
experience necessary to assist the board in improving Nautica's operating
performance
Nautica's board and management have failed to fulfill their obligation to
maximize value for all of the company's stockholders
Barington believes that the board and management have failed to address certain
operational issues such as a significant expense base, ineffective management of
the brand, and an unproven brand expansion and diversification strategy that has
required significant capital investment. The result, according to the
dissidents, has been the considerable loss of shareholder value. Barington
believes that the company has been slow to establish an appropriate cost
structure in light of the company's reduced business prospects. Barington notes
that SG&A expenses as a percentage of net sales increased to approximately 36.7
percent in fiscal year 2003 from approximately 31.4 percent in fiscal year 2001.
In addition, Barington notes that during the same period, total headcount
increased 15.8 percent from 2,850 to 3,300 and operating profit, excluding
special charges, as a percentage of net sales, fell from approximately 11.5
percent in fiscal year 2001 to approximately 7.3% in fiscal year 2003. According
to statements made by the company during its earnings conference call on May 1,
2003, the company expects SG&A expenses in both actual dollars and as a
percentage of net sales to remain at fiscal year 2003 levels during fiscal year
2004.
Barington also argues that the company has been unsuccessful in addressing core
strategic weaknesses that continue to dilute the value of the Nautica brand in
the retail marketplace, and believes that management has been unable to improve
declines in net sales within the company's men's sportswear line. According to
Nautica's most recent Form 10-K, net sales in its men's sportswear business
decreased 9.2 percent from fiscal year 2002 to fiscal year 2003 and are expected
to decline further by approximately 13 percent to 15 percent during fiscal year
2004 due to ongoing pressure facing the men's collection business in department
stores. Barington
7
fears that continued competition in both the department store and specialty
retail channels could result in markdowns at the retail level, which will
further dilute the value of the Nautica brand in the men's apparel market. The
dissidents further note that Nautica has continued to experience weakness in its
women's collections, citing the company's earnings conference call on May 1,
2003, in which the company acknowledged that its women's jeans business is not
performing at management's target profitability levels.
The dissidents further claim that Nautica ineffectively deployed the company's
capital on an unproven brand expansion and diversification strategy. According
to a company press release dated April 7, 2003, Nautica has decided to
transition its Nautica Europe business to a licensing arrangement and reduce its
investment in Europe, and a result, the company expects to incur an after-tax
special charge of $6 million to $7 million relating to closure costs, impairment
of goodwill, the writedown of fixed assets and the termination of certain lease
obligations. Barington also claims that management's efforts to create a greater
brand identity through the operation of a Nautica full-price retail store have
proven unsuccessful, noting an after-tax charge of $6.5 million to write down
the assets associated with its Rockefeller Plaza Nautica store. Barington also
questions Nautica's decision to acquire Earl Jean, Inc., an upscale denim brand,
for approximately $65.3 million, or in excess of 12 times the "estimated fair
value of the net assets acquired." During its 2003 earnings conference call, the
company acknowledged that it is experiencing weakness in its U.S. based Earl
Jean women's business. According to Barington, Nautica admitted that its John
Varvatos business, which was launched in 2000, has not performed at desired
levels.
The board contains a limited number of independent directors focused on
representing the interests of all stockholders and advocating the maximization
of shareholder value
Barington argues that Nautica's current board has failed to align its own
interests with those of the stockholders. The dissidents are quick to cite
Nautica's executive compensation practices as an example of this. Barington
points out that David Chu currently receives 50 percent of the net royalty
income earned by Nautica Apparel, Inc. for the Nautica name and trademark.
Earned compensation from this agreement amounted to $7.8 million and $9.2
million for FY 2002 and FY 2003, respectively. Moreover, Barington states that
Harvey Sanders, president, chairman and CEO earned a cash bonus of nearly
$500,000 in FY 2003, an increase of over 200 percent from the prior fiscal year,
despite the nearly 50 percent decrease in the company's stock price over the
past two years. Barington concludes that Nautica's executive compensation
packages should be restructured so that a meaningful portion of the annual cash
salary expense is eliminated and replaced with equity-based compensation in the
company. In addition to reducing the company's SG&A expenses and producing
greater free cash flow, the dissidents argue that tying the amount of
compensation received by executives to specified improvement levels in
shareholder value will help to maximize the value of the company's stock.
Barington also argues that the board approved change of control provisions in
certain company contracts that have the potential to misalign the interests of
the board of directors and the stockholders and impair shareholder value.
Barington points to employment agreements, for Harvey Sanders, David Chu, and
John Varvatos, which provide that if the company's current directors fail to
constitute a majority of the board, a change of control has occurred, and these
individuals would receive a lump-sum payment aggregating $9.3 million. In
addition, such a change in control would also result in the immediate vesting of
stock options previously granted. Barington believes that these provisions
weaken the rights of Nautica's stockholders to elect new
8
members to the board of directors as the removal of incumbent members of the
board of directors may trigger a significant payment by the company and thereby
reduce shareholder value. Furthermore, Barington notes that Mr. Varvatos's
employment agreement provides that if Mr. Sanders ceases to be employed by the
company during Mr. Varvatos's term of employment, Nautica is obligated to
spin-off or sell its subsidiary, John Varvatos Company, or make specified
payments to Mr. Varvatos. Barington argues that this provision could diminish
shareholder value, as it limits the board of directors' ability to make
executive changes at the company and forces the company to change its management
or financial relationship with a subsidiary regardless of such subsidiary's
operating or financial condition.
The dissidents also question the commitment of directors Varvatos and Scherer.
Barington notes that Mr. Scherer serves as managing partner of a law firm that
provided $3.5 million in legal services to the company for the past three fiscal
years ended March 1, 2003. Barington further states that Samuel Sultanik, Esq.,
brother-in-law of the Nautica CEO Harvey Sanders is a partner of this firm.
Barington also questions the commitment of Mr. Varvatos, who attended fewer than
75 percent of the company's board meetings.
Barington's nominees have broad industry, management, and financial experience
necessary to assist the board in improving Nautica's operating performance
Barington believes that its nominees have the experience and ability to work
with the current board to maximize shareholder value. If they are elected to the
board, Barington nominees plan to: 1) reduce the company's operating expenses to
improve profitability and enhance cash flow generation; 2) separate the role of
chairman and CEO at the company; 3) revise the company's strategic plan in order
to enhance the Nautica brand and improve its competitive position in the retail
marketplace; 4) restructure compensation packages of selected executives at the
company to align their interests with those of stockholders; 5) review change of
control provisions in selected company contracts to align the interests of the
board of directors and the stockholders; and 6) implement formal processes at
the company to explore value-enhancing strategic initiatives, including a
possible sale or merger of the Company. In addition, the dissidents' nominees
will push for termination of the company's stockholder rights plan, which they
feel imposes draconian penalties on stockholders or stockholder groups that
beneficially own or commence a tender offer or exchange offer for 15 percent or
more of the company's stock. Barington feels that not only does such plan
effectively prohibit accumulation of stockholdings in excess of this threshold,
it may also have the effect of discouraging stockholders from collectively
exercising their corporate democracy rights out of concern that they will be
deemed to be a group owning 15 percent or more of the company's shares. Finally,
subject to stockholder approval, Barington will attempt to amend the company's
restated certificate of incorporation to eliminate the prohibition on
stockholder action by written consent.
Management's Position
o Nautica's board is committed to building shareholder value
o The Barington Group is not committed to serving the best interests of
shareholders
o The board is currently taking steps to improve corporate governance at
Nautica
Nautica's board is committed to building shareholder value
9
Management believes that Nautica Enterprises enjoys a number of key strengths
such as the worldwide recognition and global strength of its Nautica brand. In
addition, management notes that global sales of Nautica-branded products
increased 7.6 percent over the 2001-2003 fiscal years. Nautica-branded products,
including those licensed by the company to other manufacturers, achieved
approximately $2 billion in sales (at retail value) during this time period. The
company has also diversified its brand portfolio in recent years with the 2000
launch of its John Varvatos line and acquisition of the Earl Jean brand.
In response to challenges presented by a continuing weak retail environment,
management has been pursuing a three-phase strategy of transformation designed
to grow its businesses and build stockholder value. This first phase of this
strategy, which was largely completed over the 2002-2003 fiscal years,
emphasized maximizing Nautica's operational efficiency. Among the initiatives
undertaken by the company was the consolidation of its distribution facilities
into one distribution center in Martinsville, Virginia. According to management,
this is currently generating cost savings of $3 to $4 million annually and has
resulted in improved transit time and lower freight expenses.
The second phase of management's plan involves rationalizing businesses for
improved performance. The company recently transitioned its Earl Jean operations
from Los Angeles to New York and is in the process of eliminating its investment
exposure in Nautica Europe. At the same time, Nautica is pursuing cost reduction
opportunities in connection with its Rockefeller Plaza store in New York and
exploring licensing and other growth initiatives for its John Varvatos business.
Most importantly, management is intensely focused on improving the performance
of its Nautica Men's Sportswear business. With new leadership installed in May
2003, management plans to return to its fashion roots and concentrate on its
traditional core outerwear, swimwear and activewear categories. Supporting this
initiative is an enhanced marketing and advertising plan.
The third phase of its strategic plan involves enhancing stockholder value over
the long term. Management believes that central to this is a program of
diversification and brand expansion that leverages the power of the Nautica
brands and extends it into high-growth areas. Management considers Nautica Men's
Jeans business, Nautica Sleepwear and Underwear lines among its primary
successes and claims that its licensing expansion into home collection, women's
swimwear and fragrance has yielded favorable results. Going forward, Nautica
states that it has planned a number of diversification and brand expansion
initiatives that will allow the company to leverage its existing infrastructure
more fully. These include the expansion of the Earl Jean brand into new market
categories, as well as the Fall 2003 launch of Nautica Necessities -- an infant
clothing line -- and Nautica Men's Jeans, Sleepwear and Underwear.
The company also points out that it has also maintained a strong balance sheet
providing the means with which to fund its diversification and brand extension
plans, as well as a range of possible initiatives to enhance shareholder value.
As of March 1, 2003, the company had nearly $83 million in cash and cash
equivalents and virtually no bank debt.
The Barington Group is not committed to serving the best interests of
shareholders
Nautica's board believes that the Barington Group's proposal is not in the best
interests of shareholders. According to management, Barington Equity Partners,
L.P. is an investment firm that in the past two years alone has engaged in
successive proxy fights against six primarily
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micro-cap companies in the internet and financial services fields. Moreover,
management claims that Barington and its nominees have no direct experience in
the apparel manufacturing industry, no track record for building sustained
sustained stockholder value, and have a history of quick-buck strikes at
unrelated businesses.
The board is currently taking steps to improve corporate governance at Nautica
Nautica's board claims that it is working to improve its corporate governance
procedures. For example, the board, in a recent proxy statement, expressed its
desire to add two new independent board members by the company's 2004 annual
meeting. Moreover, on June 24, 2003 Nautica's board approved an amendment to the
company's stockholder rights agreement, which provides among other things, that
the rights issued under the stockholders rights agreement will be automatically
redeemed under certain circumstances in the event of certain qualifying tender
offers, unless stockholders vote to keep the rights outstanding.
Analysis
ISS held discussions with Nautica and the Barington Companies Group. With
respect to Nautica, the participants included Harvey Sanders, president,
chairman and CEO, Wayne Marino, CFO, and Shannon Froehlich, vice president,
corporate investor relations. With respect to Barington Companies Group, the
participants included James Mitarotonda, president, chairman and CEO of
Barington Capital Group, William Fox, president, chairman, and CEO of AKI, Inc.,
Seymour Holtzman of Jewlcor Management Inc., and Jeffrey Smith, a partner of
Ramius Capital Group, LLC.
Barington is looking to replace two of eight of the company's nominees while
supporting management's six remaining nominees. The issue at hand is whether
replacing two of the company's nominees with two of the Barington's nominees is
warranted. ISS considered the following factors as key to its determination:
Nautica's performance, the company's corporate governance, and the nominees.
Nautica's performance
Nautica's current business strategy is to return to its roots as a provider of
outerwear, swimwear, and activewear attire and to diversify and expand in a
manner consistent with this image. The company recently took in its children's
line from licensing and anticipates considerable success for it in its retail
outlets. In addition, the company is planning to expand the licensing of its
home collection, women's swimwear, and fragrance lines. The company expressed
confidence in its Nautica Women's Jeans line for fall/holiday 2003. Moreover,
management indicated that some of its women's lines might find additional
distribution channels in stores such as Target, Kohl's, or J.C. Penny.
According to the Bloomberg, Nautica's annualized returns for the one, three, and
five-year periods ended May 30, 2003 were -18.77 percent, -5.18 percent, and
-18.43 percent. The annualized returns over the same period for the company's
two closest competitors, Polo Ralph Lauren Corp. and Tommy Hilfiger Corp. were
2.25 percent, 23.68 percent, & -2.79 percent and -44.24 percent, 6.38 percent, &
-24.02 percent, respectively, indicating that Nautica's performance is fairly
consistent with that of its peers. On June 11, 2003, shares of Nautica surged
20.5 percent on Barington's announcement that it would seek representation on
the board.
11
According to CNN Financial News, Nautica's price-to book ratio for the most
recent quarter was 1.25 while its price-to-sales ratio was 0.64 for the trailing
12 months. The price-to-book ratios for Polo and Tommy Hilfiger for the most
recent quarter were 2.07 and 0.78, respectively, and the price-to-sales ratios
for the trailing 12 months for Polo and Tommy Hilfiger were 1.03 and 0.43,
respectively, placing Nautica in line with its peers on both measures. Unlike
its peers, Nautica is virtually debt-free. It's most recent 10-K shows a
debt/equity ratio of 0.04, while Polo's is 0.31 and Tommy Hilfiger's is 0.51.
Nautica has faced serious operating problems such as the termination of its
investment in Nautica Europe and subsequent after-tax charge, an additional
charge related to its Rockefeller Plaza store, a questionable diversification
strategy, and weakened brand equity. These have in turn resulted in the
company's inability to create value for shareholders. While management has
instituted a strategic plan to revitalize the company, it is uncertain if this
plan adequately addresses the issues plaguing the company. The company is
currently in the second phase of its three-phase plan, yet its stock price
remains depressed. Moreover, the sharp increase in the company's stock price
upon the dissidents' announcement to seek board representation could suggest the
lack of stockholder confidence in management.
Corporate governance
Management acknowledged that it could improve its corporate governance practices
and promised a number of changes. The company has indicated in its proxy
materials that it plans to add two new independent directors to its board.
According to CEO Harvey Sanders, the board hopes to add one director within
approximately 120 days and the second by the 2004 meeting. The company's
independent nominating committee in accordance with the company's procedures
would select these individuals. With regard to executive compensation, the
company has stated that executive compensation packages are similar to those of
its peers. Moreover, on June 24, 2003, Nautica filed a Form 8-K with the SEC
calling for automatic rights redemptions in the event of offers for the company,
and ensuring that rights issued under the stockholders rights agreement will be
automatically redeemed under certain circumstances in the event of certain
qualifying tender offers, unless stockholders vote to keep the rights
outstanding. Finally, on July 1, 2003 management filed definitive proxy
materials addressing director John Varvatos' absences. According to the filing,
Mr. Varvatos has pledged that he will attend all future board meetings unless he
is unable to do so by reason of illness or family emergency, and that if he
defaults on this pledge he will promptly resign from the board.
Barington argues that the company needs additional independent directors
immediately, not by the 2004 annual meeting. In addition, Barington supports
restructuring Nautica's executive compensation packages in a manner that ties
compensation to shareholder value and terminating the company's poison pill.
Furthermore, Barington has proposed that shareholders owning more than 10
percent of the company's stock to have the ability to call shareholder meetings
and supports eliminating the prohibition on shareholders acting by written
consent. Finally, Barington has advocated separating the chairman and CEO roles.
ISS supports measures that improve a company's corporate governance practices,
including measures advocated by both parties. While we applaud management for
modifying its poison pill and monitoring John Varvatos' attendance, management
has not addressed issues such as enabling 10 percent shareholders to call
meetings, separating the chairman and CEO roles, and eliminating the prohibition
on shareholders acting by written consent.
12
The nominees
The company has nominated John Varvatos, an employee of the company, and Charles
Scherer, a partner at a law firm that provides legal services to the company.
Mr. Varvatos is an award-winning designer of apparel and president of the
eponymous subsidiary of the company. However, he has a track record of poor
attendance that the company attributes to schedule conflicts, which we do not
view as an acceptable excuse. Moreover, we believe that as an employee of the
company, Mr. Varvatos' views and experience may already be represented by
Messrs. Sanders and Chu. As counsel to the company, Mr. Scherer's knowledge and
experience are valuable to the company. Moreover, management has stated that it
prefers to have an attorney on the board and values Mr. Scherer's input.
However, we are not aware if he possesses the industry experience, management
expertise, or financial expertise that the company needs to address its current
operational problems.
Conclusion
The critical issue here is whether there is enough evidence to support the
replacement of two of Nautica's eight board nominees, an insider and an
affiliated director, with two independent outside directors. In addition, we
must decide which slate is in the best interests of shareholders.
Like many of its peers, Nautica has experienced a considerable amount of
difficulty in this troubled retail environment. In addition to weathering a
depressed retail market, the company is trying to revitalize its brand identity.
Nautica must also overcome numerous operational issues that have resulted in
lower earnings per share. Competition in retail apparel is fierce, and in recent
weeks, analysts have characterized Nautica's merchandise as "sporty, not sexy"
like Abercrombie & Fitch and other current industry winners. Going forward, it
is imperative that Nautica address these issues in order to maximize value for
shareholders.
With regard to Barington's nominees, Mr. Fox possesses an array of skills gained
from an extensive background in retail, finance, and management. While Mr.
Mitarotonda's retail background is limited, he possesses financial expertise and
has experience maximizing shareholder value at troubled companies that might
prove valuable to Nautica's board. In addition, both of Barington's nominees are
seasoned board veterans. We believe that as independent outsiders, they would
provide checks and balances on the board, challenge the other board members to
add value to the company and represent the interests of all of Nautica's
shareholders.
We believe that Nautica's board requires directors with solid credentials and a
strong track record of adding value. Such directors must be willing and able to
address the strategic and financial issues facing Nautica today. That said, we
do not believe that Messrs. Varvatos and Scherer offer the best outlook for
Nautica shareholders. Mr. Varvatos has been unable to fulfill his obligations as
a member of the board due to company commitments overseas and Mr. Scherer lacks
the retailing, strategic, and financial experience that we believe the board
needs to create value for shareholders. Management maintains that these
individuals make important contributions to Nautica's board, and we do not
disagree. However, we believe that the operational and value-adding experience
possessed by the Barington's nominees are most suited to the company's immediate
needs. While the current board contains nominees with consulting and financial
experience, it is not clear if they have the value-adding experience that we
believe Nautica requires. Moreover, Barington's nominees have expressed a
willingness to work with
13
management, and because they are only seeking two board seats, they would be
limited to influencing, not controlling the board. Furthermore, we believe that
Barington's nominees provide added diversity of viewpoints which would ensure
that the interests of all shareholders are represented in the event of a sale or
merger involving the company. Finally, Barington's nominees have expressed the
desire to institute corporate governance reforms that we believe are ultimately
in the best interests of Nautica's shareholders.
Vote FOR Items 1.1-2.6.
Item 3: Ratify Auditors
The board recommends that Grant Thornton LLP be approved as the company's
independent accounting firm for the coming year. Note that the auditor's report
contained in the annual report is unqualified, meaning that in the opinion of
the auditor, the company's financial statements are fairly presented in
accordance with generally accepted accounting principles.
Vote FOR Item 3.
Item 4: Authorize stockholders holding 10% or more of common stock to call
special meetings
This item seeks shareholder approval of an article amendment that would allow
shareholders to call special meetings. Specifically, the amendment would allow
holders of ten percent or more of the company's stock to call special meetings.
In terns of day-to-day governance, shareholders may gain an important right -
the ability to remove directors or initiate a shareholder resolution without
having to wait for the next scheduled meeting - if they are able to act at a
special meeting of their calling. As such, we believe that approval of this item
is in shareholders' best interests.
Vote FOR Item 4.
Items 1.1-1.8: Elect Directors
DIRECTOR PROFILES
Term Dir. No Stock
Name Classification Ends Since Attendance
Nominees
Ronald G. Weiner, CPA IO 2004 1995
John Varvatos I 2004 2000
Steven H. Tishman IO 2004 2001
Charles H. Scherer1 AO 2004 1994
14
Harvey Sanders I 2004 1977
(CEO/Chair) I 2004 1990
Israel Rosenzweig IO 2004 1987
David Chu I 2004 1987
Robert B. Blank IO 2004 1989
Dissident
Nominees
William J. Fox (new IO 2004
nominee)
James A. Mitaratonda IO 2004
(new nominee)
Notes
1. Hughes Hubbard & Reed LLP provides legal services to the company. Charles H.
Scherer is a managing partner of that firm. Source: Nautica Enterprises,
Inc. 2003 Proxy Statement, p. 8
COMPOSTION OF COMMITTEES
Name Type
Audit
Israel Rosenzweig IO
Robert B. Bank IO
Ronald G. Weiner, CPA IO
Compensation
Robert B. Bank IO
Ronald G. Weiner, CPA IO
Nominating
Israel Rosenzweig IO
Robert B. Bank IO
Ronald G. Weiner, CPA IO
Steven H. Tishman IO
See proxy contest analysis above.
No vote required for Items 1.1-1.8.
15
Item 2: Ratify Auditors
The board recommends that Grant Thornton LLP be approved as the company's
independent accounting firm for the coming year. Note that the auditor's report
contained in the annual report is unqualified, meaning that in the opinion of
the auditor, the company's financial statements are fairly presented in
accordance with generally accepted accounting principles.
Do Not Vote Item 2.
16
Institutional Shareholder Services Proxy Analysis
Nautica Enterprises, Inc.
Ticker: NAUT
Annual Meeting: July 8, 2003
Record Date: May 29, 2003
Business: Designer and manufacturer of men's apparel
State of Inc: Delaware
Index Industry
Ranking
49.1 71.3
------------------------------------------
NAUT outperformed 49.1% of the
companies in the S&P 600 and 71.3%
of the companies in the Consumer Durables
& Apparel group.
ANALYSIS CONTENTS
Meeting Agenda Director Profiles
ISS Corporate Governance Rating Composition of Committees
Performance Summary Proposals
Audit Summary Vote Record Form
MEETING AGENDA
Item Code Proposals Mgt. Rec ISS Rec.
1.1 M0201 Elect Director Robert B. Blank FOR FOR
1.2 M0201 Elect Director David Chu FOR FOR
1.3 M0201 Elect Director Israel Rosenzweig FOR FOR
1.4 M0201 Elect Director Harvey Sanders FOR FOR
1.5 M0201 Elect Director Charles H. FOR FOR
Scherer
1.6 M0201 Elect Director Steven H. Tishman FOR FOR
17
1.7 M0201 Elect Director John Varvatos FOR WITHHOLD
1.8 M0201 Elect Director Ronald G. FOR FOR
Weiner, CPA
2 M0101 Ratify Auditors FOR FOR
ISS CORPORATE
GOVERNANCE
RATING
Goverance Factor Positive Impact Negative Impact
The full board of directors is
elected annually [x]
The last time ISS evaluated the [x]
company's option plans, ISS deemed
the shareholder value transfer of the
plan to be reasonable
The average options granted in the [x]
past three years as a percentage of
basic shares outstanding is less or
equal to 1%
All stock-based incentive plans [x]
have been approved by
shareholders
The board is controlled by a majority [x]
of insiders and affiliated outsiders
(insiders and affiliated outsiders
greater than or equal to 50%)
The company has a poison pill in [x]
place that was not approved by
shareholders
The company's option plan [x]
provides for company loans to
pay for the exercise price of
options
The company does not expense [x]
stock option grants on its
income statement
18
PERFORMANCE SUMMARY
1- year 3-year 5-year
Annualized Shareholder Returns, Company -31.47% -5.76% -19.87%
Annualized Shareholder Returns, Index -25.14% -34.83% -5.12%
Annualized Shareholder Returns, Peer Group -25.52% -34.83% -38.76%
AUDIT SUMMARY
Accountants: Grant Thornton LLP
Audit Fees: Currently, the SEC requires that all fees paid
to the company's auditor be broken out into
three categories: audit fees, financial systems
design and implementation, and all other fees.
Many companies have argued that the SEC's
definition of "all other fees" is overly broad
and covers many services that are closely
related to the audit function and/or that should
be performed by a company's auditor.
In January 2003, the SEC approved new disclosure
standards that embody four fee categories: audit
fees, audit-related fees, taxes, and all other
fees. The SEC also outlined what services should
fall under each designation. The new provisions
will become effective for annual filings for the
first fiscal year after Dec. 15, 2003, though
the SEC is encouraging issuers to adopt them
earlier. In those cases, or where companies
provide a more detailed breakdown of "other
fees" than currently required, ISS will
apportion the fees into the above four
categories, to the extent the company's
disclosure allows.
19
In this case, the company enumerates its "other
fees." For further understanding of the fees
paid to the company's auditors, we recommend
shareholders review the company's proxy
statement.
Audit Fees: $342,110.00
Audit-Related Fees: $84,193.00
Taxes* $0.00
Other Fees: $256,024.00
*Excluding tax strategies/tax shelters. Note: If the proxy disclosure does not
indicate the nature of the tax services, those fees will be included in "other
fees".
CORPORATE GOVERNANCE PROFILE
Governance Provisions:
|_| The full board of directors is elected
annually
|_| Shareholders do not have cumulative voting
rights in director elections
|_| The positions of chairman and CEO are held by
the same person and the company has not
designated a lead director
|_| The company has a poison pill in place that
was not approved by shareholders
|_| A simple majority vote of shareholders is
required to amend the charter or bylaws
|_| A simple majority vote of shareholders is
required to approve a merger
|_| Shareholders may not act by written consent
|_| Shareholders may not call special meetings
|_| The board may amend the bylaws without
shareholder approval
|_| Common stock and blank check preferred stock
are authorized
|_| There is no disclosure of stock ownership
guidelines for executives
|_| There is no disclosure of stock ownership
guidelines for outside directors
20
|_| The company does not expense stock option
grants on its income statement
Non-Shareholder Approved
Incentive Plans:
|_| All stock-based incentive plans have been
approved by shareholders
State Statutes: Delaware
|_| The company is incorporated in a state with
anti-takeover provisions
|_| The company is incorporated in a state
without a control share acquisition statute
|_| The company is incorporated in a state
without a cash out statute
|_| The company is subject to a freezeout
provision
|_| The company is incorporated in a state
without a fair price provision
|_| The company is incorporated in a state
without stakeholder laws
|_| The state of incorporation does not endorse
poison pills
DIRECTOR PROFILES
Term Dir. No Stock
Name Classification Ends Since Attendance
Nominees
Ronald G. Weiner, CPA IO 2004 1995
John Varvatos I 2004 2000
Steven H. Tishman IO 2004 2001
Charles H. Scherer1 AO 2004 1994
Harvey Sanders I 2004 1977
(CEO/Chair)
Israel Rosenzweig IO 2004 1990
21
David Chu I 2004 1987
Robert B. Bank IO 2004 1989
Notes
1. Hughes Hubbard & Reed LLP provides legal services to the company. Charles H.
Scherer is a managing partner of that firm. Source: Nautica Enterprises, Inc.
2003 Proxy Statement, p. 8
COMPOSITION OF COMMITTEES
Name Type
Audit
Israel Rosenzweig IO
Robert B. Bank IO
Ronald G. Weiner, CPA IO
Compensation
Robert B. Bank IO
Ronald G. Weiner, CPA IO
Nominating
Israel Rosenzweig IO
Robert B. Bank IO
Ronald G. Weiner, CPA IO
Steven H. Tishman IO
NOTE:
As of May 23, 2003, all directors and executive officers as a group,
beneficially owned 18.80 percent of the company's common stock.
PROPOSALS
|_|Items 1.1-1.8: Elect Directors
22
John Varvatos's absences were due to schedule conflicts.
- The board is not majority independent by ISS standards. ISS may
recommend withholding votes from board members in the future if majority
independence has not been established.
- We support the independent nature of the key board committees, which
include no insiders or affiliated outsiders.
- We believe that John Varvatos's absences due to schedule conflicts is
not a valid excuse.
We recommend a vote FOR the directors with the exception of insider John
Varvatos. We recommend that shareholders WITHHOLD votes from John Varvatos
for poor attendance.
Vote FOR Items 1.1-1.6 and 1.8.
WITHHOLD a vote on Item 1.7.
|_| Item 2: Ratify Auditors
The board recommends that Grant Thornton LLP be approved as the company's
independent accounting firm for the coming year. Note that the auditor's
report contained in the annual report is unqualified, meaning that in the
opinion of the auditor, the company's financial statements are fairly
presented in accordance with generally accepted accounting principles.
Vote FOR Item 2.
-------------------
Nautica Enterprises, Inc.
40 WEST 57TH STREET
NEW YORK NY 10019
2125415990
Shareholder Proposal Deadline: February 6, 2004
Solicitor: None
Security ID: 2842103 (SEDOL), 5749706 (SEDOL), 639089101 (CUSIP),
US6390891017 (ISIN)
23
This vote recommendation has not been submitted to, nor received approval from,
the Securities and Exchange Commission. While ISS exercised due care in
compiling this analysis, we make no warranty, express or implied, regarding the
accuracy, completeness, or usefulness of this information and assume no
liability with respect to the consequences of relying on this information for
investment or other purposes.
This issuer may be the parent of, or affiliated with, a client of ISS. Neither
the issuer, nor any of its subsidiaries or affiliates, played any role in
preparing this report.
Two of our stockholders, Warburg Pincus Private Equity VIII, L.P. and Hermes USA
Investors Venture, L.L.C., are institutional investors whose business activities
include making equity and debt investments in public and privately-held
companies. As a result, from time to time one or more of our stockholders or
their affiliates (or their representatives who serve on our Board of Directors)
may hold securities, serve on the board of directors or have the right to
nominate representatives to the board of a company which is the subject of one
of our analyses or recommendations. We have established policies and procedures
to restrict the involvement of our non-management stockholders, their affiliates
and board members in the editorial content of our analyses and recommendations.
Neither our non-management stockholders, their affiliates nor our non-management
board members are informed of the contents of any of our analyses or
recommendations prior to their publication or dissemination.
(C) 2003, Institutional Shareholder Services, Inc. All Rights Reserved. The
information contained in this ISS Proxy Analysis may not be republished,
broadcast, or redistributed without the prior written consent of Institutional
Shareholder Services, Inc.
24
Vote Record Form
[x] Vote Record Form
Nautica Enterprises, Inc.
Ticker: NAUT Record Date: May 29, 2003
Annual Meeting: July 8, 2003 Shares Held on Record
Account ID Code: Date:
Shares Voted: Date Voted:
MEETING AGENDA
Item Code Proposals Mgt. Rec. ISS Rec Vote Cast
|_| 1.1 M0201 Elect Director Robert B. Bank FOR FOR
|_| 1.2 M0201 Elect Director David Chu FOR FOR
|_| 1.3 M0201 Elect Director Israel Rosenzweig FOR FOR
|_| 1.4 M0201 Elect Director Harvey Sanders FOR FOR
|_| 1.5 M0201 Elect Director Charles H. Scherer FOR FOR
|_| 1.6 M0201 Elect Director Steven H. Tishman FOR FOR
|_| 1.7 M0201 Elect Director John Varvatos FOR WITHHOLD
|_| 1.8 M0201 Elect Director Ronald G. Weiner, FOR FOR
CPA
|_| 2 M0101 Ratify Auditors FOR FOR
25