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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(D)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
AMERICAN STUDIOS, INC.
(Name of Subject Company)
AMERICAN STUDIOS, INC.
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class of Securities)
030102 10 7
(CUSIP Number of Class of Securities)
J. ROBERT WREN, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AMERICAN STUDIOS, INC.
11001 PARK CHARLOTTE BOULEVARD
CHARLOTTE, NORTH CAROLINA 28273
(704) 588-4351
(Name, Address and Telephone Number of Person Authorized to Receive Notice and
Communications on Behalf of the Person(s) Filing Statement)
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WITH A COPY TO:
E. LYNWOOD MALLARD
PETREE STOCKTON, L.L.P.
3500 ONE FIRST UNION CENTER
301 SOUTH COLLEGE STREET
CHARLOTTE, NORTH CAROLINA 28202-6001
(704) 338-5000
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ITEM 1. SECURITY AND SUBJECT COMPANY
The name of the subject company is American Studios, Inc., a North Carolina
corporation (the "Company"), which has its principal executive offices at 11001
Park Charlotte Boulevard, Charlotte, North Carolina 28273. The title of the
class of equity securities to which this Solicitation/Recommendation Statement
on Schedule 14D-9 ("Schedule 14D-9") relates is the common stock, par value
$.001 per share, of the Company (the "Common Stock"). Unless the context
requires otherwise, as used herein, the term "Shares" shall mean the outstanding
shares of the Common Stock.
ITEM 2. TENDER OFFER OF THE BIDDER
This Schedule 14D-9 relates to the tender offer (the "Offer") disclosed in
a Tender Offer Statement on Schedule 14D-1, dated December 20, 1996 (the
"Schedule 14D-1") by ASI Acquisition Corp., a North Carolina corporation (the
"Purchaser") and a wholly owned subsidiary of PCA International, Inc., a North
Carolina corporation (the "Parent") (the Purchaser and the Parent referred to
collectively as "PCA"), to purchase all of the Shares, at a price of $2.50 per
Share (the "Offer Price"), net to the seller in cash, upon the terms and
conditions set forth in the Offer to Purchase dated December 20, 1996, as
amended or supplemented (the "Offer to Purchase"), and the related Letter of
Transmittal (which together with the Offer to Purchase constitute the "Offer
Documents").
The Offer is being made pursuant to an Agreement and Plan of Merger dated
as of December 17, 1996, by and among the Company, the Purchaser and Parent (the
"Merger Agreement"). The Merger Agreement provides, among other things, that,
promptly following completion of the Offer and subject to the terms and
conditions of the Merger Agreement, the Purchaser will be merged with and into
the Company (the "Merger"), with the Company being the surviving corporation
(the "Surviving Corporation"). At the time the Merger is effective (the
"Effective Time"), each Share then outstanding (other than Shares held by the
Purchaser, Parent, the Company or any of their respective subsidiaries and other
than Shares held by shareholders who have exercised their right to demand and to
receive the fair value of such Shares under North Carolina law) will be
cancelled and converted into the right to receive from the Surviving Corporation
$2.50 in cash. A copy of the Merger Agreement is filed herewith as Exhibit 1 and
is incorporated herein by reference.
According to the Schedule 14D-1, the principal executive office of PCA is
815 Matthews -- Mint Hill Road, Matthews, North Carolina 27102.
ITEM 3. IDENTITY AND BACKGROUND
(a) The name and business address of the Company, which is the person
filing this Schedule 14D-9, are set forth in Item 1 above.
(b) Each material contract, agreement, arrangement or understanding, and
each actual or potential conflict of interest, between the Company or its
affiliates and either (1) the Company, its executive officers, directors, or
affiliates or (2) PCA, its executive officers, directors, or affiliates is
described in Annex I attached to this Schedule 14D-9 and incorporated herein by
reference or is set forth below.
EMPLOYMENT AND NONCOMPETE AGREEMENTS WITH PARENT
Parent has executed an employment agreement with each of J. Robert Wren,
Jr., R. Kent Smith, Randy J. Bates, James O. Mattox, Shawn W. Poole and Ed J.
Tepera (together, the "Employment Agreements"). All of the foregoing persons
except Mr. Bates and Mr. Smith are executive officers of the Company and Mr.
Bates, Mr. Wren and Mr. Smith are directors of the Company. The Employment
Agreements, executed by Parent, have been placed in escrow, pursuant to an
escrow agreement between Parent and the Company dated December 17, 1996 (the
"Escrow Agreement"), a summary of certain terms of which is set forth in this
Schedule 14D-9. Such summary is not a complete description of the terms and
conditions thereof and is qualified in its entirety by reference to the Escrow
Agreement, a copy of which is filed herewith as Exhibit 2 and is incorporated
herein by reference. Pursuant to the Escrow Agreement, among other things, the
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Employment Agreements will become effective one day following the consummation
of the Offer. The following is a summary of the material terms of the Employment
Agreements. This summary is not a complete description of the terms and
conditions thereof and is qualified in its entirety by reference to the
Employment Agreements, copies of which are together filed herewith as Exhibit 3
and are incorporated herein by reference.
Pursuant to his Employment Agreement, Mr. Wren will serve as Executive Vice
President, General Counsel and Assistant to the Chief Executive Officer of
Parent. Mr. Wren's base annual compensation will be $250,000 and he will be
eligible to participate in bonus programs available to other executive vice
presidents of Parent. Mr. Wren's term of employment is three years. If he is
terminated by Parent without cause during such three year term or if he
voluntarily terminates following one year of employment, he will receive a
severance payment the amount of which will depend upon the time of termination
but which will be not less than one year's base compensation nor more than his
aggregate base annual compensation for the remaining term of employment.
Pursuant to Mr. Wren's Employment Agreement, Parent has agreed to grant Mr. Wren
an option to purchase 150,000 shares of the common stock of Parent ("Parent
Stock") pursuant to Parent's 1996 Omnibus Long-Term Compensation Plan (the
"Plan") at an exercise price equal to the trading price of the Parent Stock on
the effective date of the grant as defined in the Plan. Such option will become
exercisable in three equal annual increments, or immediately upon the
termination of such agreement by Mr. Wren or by the Parent without cause, and
terminates 10 years from the date of grant without regard to a termination of
employment other than a termination for cause.
Mr. Smith and Mr. Bates each will serve as a special advisor to Parent for
a four month period pursuant to their Employment Agreements. Mr. Smith will
receive monthly compensation of $12,833, and Mr. Bates will receive monthly
compensation of $13,750. After such four month period, Mr. Smith and Mr. Bates
each will be prohibited by non-compete covenants under such agreements from
competition with Parent for a period of five years and eight months in
consideration of the same monthly payments through the end of such period.
Pursuant to the Employment Agreements of Mr. Smith and Mr. Bates, Parent has
agreed to grant each such person an option to purchase 100,000 shares of Parent
Stock pursuant to the Plan at an exercise price equal to the trading price of
the Parent Stock on the effective date of the grant as defined in the Plan. Such
options become exercisable on the date of grant and terminate five years from
such date.
Pursuant to his Employment Agreement, Mr. Mattox will serve as a Senior
Vice President of Parent for a term of one year at a base annual compensation of
$125,000. Under such agreement, if Mr. Mattox is terminated by Parent without
cause during or after such one year term, or if he voluntarily terminates his
employment after such one year term, he will receive a severance payment of
$195,000. If he voluntarily terminates prior to the end of his one year term,
his severance payment will be $70,000. Mr. Mattox will be eligible to
participate in bonus programs made available to other senior vice presidents of
Parent. Pursuant to Mr. Mattox's Employment Agreement, Parent has agreed to
grant Mr. Mattox an option to purchase 25,000 shares of Parent Stock pursuant to
the Plan at an exercise price equal to the trading price of the Parent Stock on
the effective date of the grant as defined in the Plan. Such option will become
exercisable in five annual equal increments and terminates 10 years following
the date of the grant or three months after the termination of Mr. Mattox's
employment with Parent, whichever is earlier.
Pursuant to his Employment Agreement, Mr. Poole will be employed by Parent
for a period of four months under the supervision of the Chief Financial Officer
of Parent. Mr. Poole will receive monthly compensation of $15,624. Under such
agreement, if Mr. Poole is terminated by Parent without cause during or after
such four month term, or if he voluntarily terminates such employment following
such four month term, he will receive a severance payment of $31,248.
Pursuant to his Employment Agreement, Mr. Tepera will serve as a Senior
Vice President -- Manufacturing of Parent for a term of one year at a base
annual compensation of $115,000. Under such agreement, if Mr. Tepera is
terminated by Parent without cause during or after such one year term, he will
receive a severance payment of 50% of his base annual compensation. Mr. Tepera
will be eligible to participate in bonus programs available to other senior vice
presidents of Parent. Pursuant to Mr. Tepera's Employment Agreement, Parent has
agreed to grant Mr. Tepera an option to purchase 20,000 shares of Parent Stock
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pursuant to the Plan at an exercise price equal to the trading price of the
Parent Stock on the effective date of the grant as defined in the Plan. Such
option will become exercisable in five annual equal increments and terminates 10
years following the date of the grant or three months after the termination of
Mr. Tepera's employment with Parent, whichever is earlier.
The foregoing Employment Agreements of Mr. Wren, Mr. Mattox and Mr. Tepera
contain certain noncompetition covenants of varying duration pursuant to which
each such officer is prohibited from providing portrait photography services to
certain persons and entities within certain geographic areas following the
expiration of the terms of such agreements (without regard to the termination of
employment prior to the expiration of the terms of such agreements).
STOCK OPTIONS
Pursuant to the Merger Agreement, the Company has agreed to cause, as of
the earlier of the Effective Time or the expiration of the Offer (if at such
time the Shares tendered and not withdrawn pursuant to the Offer equal 80% or
more of the Shares) (such earlier date the "Acceleration Time"), all outstanding
options to purchase shares of the Common Stock (the "Options") outstanding under
the Company's 1992 Stock Option Plan, Equity Compensation Plan or Non-Employee
Directors' Plan to become exercisable in full. The Company has obtained or will
obtain the agreement of all holders of Options to the cancellation of the
Options as of the Acceleration Time in consideration for which, at the
Acceleration Time, Parent will cause the Company (or the Purchaser as provided
in the Merger Agreement) to pay each such holder of an Option the product of the
excess, if any, of the Offer Price over the exercise price of such Option and
the number of shares of Common Stock subject to such Option at the Acceleration
Time or, with regard to certain holders of Options having an exercise price
equal to or greater than the Offer Price, not more than $100 per optionee. As a
result of the foregoing, each non-employee director of the Company (Mr. Bolger,
Mr. Cost, Mr. Ferrell, and Mr. Shaw) will receive $6,250 in respect of
outstanding Options held by him, and Mr. Wren, Mr. Smith, Mr. Mattox, Mr. Poole
and Mr. Tepera will receive $168,750, $112,500, $112,500, $112,500 and $56,250,
respectively, in respect of outstanding Options held by them.
SEVERANCE AND RELATED MATTERS
In May 1996, in connection with his initial employment by the Company, Mr.
Poole entered into an employment agreement with the Company providing for, among
other things, a payment to Mr. Poole in the event of a change in control of the
Company, as defined in such agreement, followed by a termination of Mr. Poole's
employment by the Company, in an amount equal to two times his then base annual
salary, payable in a lump sum. In September 1996, the employment agreements
between the Company and each of Mr. Wren, Mr. Mattox and Mr. Tepera, as well as
certain other officers of the Company, were amended to provide for similar
payments to each such person. Pursuant to their employment agreements with the
Company, as so amended, each of Mr. Wren and Mr. Mattox will receive payments
equal to two times his then base annual salary, payable in a lump sum, and Mr.
Tepera will receive a payment in an amount equal to one and one-half times his
then base annual salary, also payable in a lump sum, in each case, upon a change
in control of the Company, as defined in such agreements, followed by a
termination of employment.
In addition, pursuant to the terms of their employment agreements with the
Company, upon a termination without cause, each of Mr. Bates and Mr. Smith will
receive 100% of his then base annual salary for a period of 12 months and,
thereafter, 50% of such salary for a period of 24 months.
Pursuant to the Escrow Agreement, the Company has agreed, at Parent's
request, to terminate the employment of Mr. Wren, Mr. Mattox, Mr. Poole, Mr.
Tepera, Mr. Bates and Mr. Smith on the day following the consummation of the
Offer (at which time such persons will become employees of Parent pursuant to
the Employment Agreements as discussed above) and to pay the amounts to which
such persons are entitled under their employment agreements with the Company as
a result of such terminations (except as otherwise agreed) in a lump sum and
Parent has agreed to provide funds to the Company necessary for the Company to
pay such amounts. As a result of the foregoing, upon the consummation of the
Offer and a termination of
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employment by the Company, Mr. Wren, Mr. Bates, Mr. Smith, Mr. Mattox, Mr. Poole
and Mr. Tepera will receive lump sum payments of $539,000, $550,000, $423,971,
$180,000, $250,000 and $172,500 respectively.
STOCK AGREEMENTS
Parent and the Purchaser have entered into stock agreements, dated December
17, 1996 (the "Stock Agreements"), with each of Merrill Lynch Capital
Corporation (the owner of 5,950,177 Shares); Randy J. Bates (a founder and
director of the Company), his spouse, irrevocable trusts for the benefit of each
of his three children, a non-profit corporation of which Mr. Bates serves as an
officer and a director and another unrelated non-profit corporation (the owners
of an aggregate of 2,438,345 Shares); R. Kent Smith (a founder and director of
the Company) and irrevocable trusts for the benefit of each of his two children
(the owners of an aggregate of 1,205,567 Shares); J. Robert Wren, Jr. (an
executive officer and director of the Company) and a non-profit corporation of
which he serves as an officer and director (the owners of an aggregate of
343,785 Shares); Tom E. DuPree (the owner of 1,455,000 Shares); Alan P. Shaw (a
director of the Company and the owner of 347,600 Shares); and Norman V. Swenson,
Jr., (a founder and director of the Company) and irrevocable trusts for the
benefit of each of his three children (the owners of an aggregate of 795,157
Shares) (each referred to herein as a "Designated Shareholder" or collectively
as the "Designated Shareholders") with respect to an aggregate of 12,535,631
Shares owned by them representing approximately 58% of the Shares. The following
is a summary of the material terms of the Stock Agreements. This summary is not
a complete description of the terms and conditions thereof and is qualified in
its entirety by reference to the Stock Agreements, the forms of which are
together filed herewith as Exhibit 4 and are incorporated herein by reference.
The Stock Agreements between Parent and Purchaser and each of Mr. DuPree, Mr.
Shaw, Mr. Swenson and the irrevocable trusts for the benefit of Mr. Swenson's
children do not contain the provision relating to the granting to Parent of an
irrevocable option to purchase their Shares under certain circumstances as
described below. It is anticipated that Parent and the Purchaser will enter into
agreements similar to the Stock Agreements of the persons identified in the
preceding sentence with certain family members of Mr. Shaw with respect to an
aggregate of approximately 50,000 Shares owned by them.
Tender of Shares. Upon the terms and subject to the conditions of the
Stock Agreements, the Designated Shareholders have agreed to validly tender (and
not withdraw) pursuant to and in accordance with the terms of the Offer, not
later than the fifth (or, in the case of Merrill Lynch Capital Corporation, the
tenth) business day after commencement of the Offer, the number of Shares owned
beneficially by the Designated Shareholders, an aggregate of 12,535,631 Shares,
representing approximately 58% of the Shares (or approximately 54% of the Shares
calculated on a fully diluted basis).
Stock Option. Certain of the Designated Shareholders who beneficially own
an aggregate of 9,937,874 Shares, representing approximately 46% of the Shares
(or approximately 43% of the Shares calculated on a fully diluted basis), have
each granted to Parent an irrevocable option (a "Stock Option") to purchase such
Designated Shareholder's Shares (the "Option Shares") at a purchase price per
Share equal to the Offer Price. Pursuant to the Stock Agreement of each such
Designated Shareholder, if (i) the Offer is terminated, abandoned or withdrawn
by Parent or the Purchaser, or (ii) the Merger Agreement is terminated in
accordance with its terms, the Stock Option will, in any such case (but provided
neither Parent nor the Purchaser is in material breach of the Merger Agreement),
become exercisable, in whole or in part, upon the first to occur of any such
event and remain exercisable, in whole or in part, until the date which is
forty-five days after the date of the occurrence of such event (the "45 Day
Period"), so long as: (i) all waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), required for the
purchase of the Option Shares upon such exercise shall have expired or been
waived, and (ii) there shall not be in effect any preliminary or final
injunction or other order issued by any court or governmental, administrative or
regulatory agency or authority or legislative body or commission prohibiting the
exercise of the Stock Option pursuant to such Stock Agreement. Each such Stock
Agreement provides that if all HSR Act waiting periods have not expired or been
waived, or there shall be in effect any such injunction or order, in each case
on the expiration of the 45 Day Period, the 45 Day Period shall be extended
until five business days after the later of (A) the date of expiration or waiver
of all HSR Act waiting periods and (B) the date of removal or lifting of such
injunction or order but in no event shall the 45 Day Period be extended beyond
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June 30, 1997. Pursuant to the Stock Agreements of such Designated Shareholders,
Parent has agreed that in the event it exercises the Stock Options and purchases
the Option Shares (i) prior to the commencement of the Offer and (ii) in the
absence of an Acquisition Proposal (as defined in the Stock Agreements) for the
Company providing consideration greater than the Offer Price, Parent will, to
the extent permitted by law, seek to purchase all of the remaining shares of
Common Stock of the Company outstanding at the Offer Price pursuant to the
Merger Agreement and/or the Offer.
Provisions Concerning the Shares. Each Designated Shareholder has agreed
that during the period commencing on the date of the Stock Agreements and
continuing until the first to occur of the Effective Time or termination of the
Merger Agreement in accordance with its terms, at any meeting of the Company's
shareholders or in connection with any written consent of the Company's
shareholders, the Designated Shareholders will vote (or cause to be voted) the
Shares then held of record or beneficially owned by such Designated Shareholder,
(i) in favor of the Merger, the execution and delivery by the Company of the
Merger Agreement and the approval of the terms thereof and each of the other
actions contemplated by the Merger Agreement and the Stock Agreements and any
actions required in furtherance thereof; (ii) against any action or agreement
that would result in a breach in any respect of any covenant, representation or
warranty or any other obligation or agreement of the Company under the Merger
Agreement or the Stock Agreements and (iii) except as otherwise agreed to in
writing in advance by Parent, against the following actions (other than the
Merger and the transaction contemplated by the Merger Agreement): (A) any
extraordinary corporate transaction, such as a merger, consolidation or other
business combination involving the Company or its subsidiaries; (B) a sale,
lease or transfer of a material amount of assets of the Company or its
subsidiaries, or a reorganization, recapitalization, dissolution or liquidation
of the Company or its subsidiaries and (C) (1) any change in a majority of the
persons who constitute the Board; (2) any change in the present capitalization
of the Company or any amendment of the Company's Articles of Incorporation or
Bylaws (3) any other material change in the Company's corporate structure or
business or (4) any other action which, in the case of each of the matters
referred to in clauses (C)(1), (2) or (3), is intended, or could reasonably be
expected, to impede, interfere with, delay, postpone, or materially adversely
affect the Merger and the transactions contemplated by the Stock Agreements and
the Merger Agreement. Each Designated Shareholder has further agreed not to
enter into any agreement or understanding with any person or entity the effect
of which would be inconsistent or violative of the provisions and agreements
described above.
Other Covenants, Representations, Warranties. In connection with each
Stock Agreement, each Designated Shareholder made certain customary
representations, warranties and covenants, including with respect to (i)
ownership of the Shares, (ii) the Designated Shareholder's authority to enter
into and perform obligations under the Stock Agreement, (iii) the receipt of
requisite governmental consents and approvals, (iv) the absence of liens and
encumbrances on and in respect of the Designated Shareholder's Shares, and (vi)
the solicitation of Acquisition Proposals (except that no Designated Shareholder
will be prevented from exercising any fiduciary duty that he may have in his
capacity as a directory or officer of the Company, if any) and (vii) the waiver
of the Designated Shareholder's appraisal rights. Parent and the Purchaser have
made certain representations and warranties with respect to Parent and the
Purchaser's authority to enter into each Stock Agreement and the receipt of
requisite governmental consents and approvals.
Pursuant to the Stock Agreements, Parent has agreed to indemnify the
Designated Shareholders in certain circumstances.
ADDITIONAL CONFLICTS
Historically, the Company has not paid directors' fees for attendance at
telephonic meetings of the Board and has not paid for attendance at telephonic
or in person meetings of committees of the Board. Given the numerous meetings of
the Board and the Stock Option/Compensation Committee of the Board, most of
which were required to be held by telephone, relating to the Merger Agreement
and the transactions contemplated thereby, the Company determined to pay its
non-employee directors (Mr. Bolger, Mr. Cost, Mr. Ferrell, Mr. Shaw and Mr.
Swenson) the regular per meeting fee of $1,500 for each meeting (in person or
telephonic) of the Board or the Stock Option/Compensation Committee attended by
any such director with regard to the Merger Agreement or the transactions
contemplated thereby, not to exceed $20,000 per director.
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In connection with a verbal agreement with Mr. Swenson relating to the
termination of his consulting agreement with the Company in November 1995, the
Company has determined to pay Mr. Swenson $56,000 (the amount that would have
been payable during the remainder of the term of his consulting agreement had it
not been terminated). Such agreement was terminated by the Company at such time
in connection with the modification of the Company's credit facility. At the
time of such termination, the Company verbally agreed with Mr. Swenson that it
would resume its consulting agreement with him at such time as it was
permissible to do so under the credit facility.
The Company and Parent have had discussions concerning the possible payment
of discretionary cash bonuses to certain employees of the Company. The amount
and other conditions of any such bonuses have not been determined. If any such
bonuses are paid, the recipients may include executive officers of the Company
and the amounts thereof may be material.
THE MERGER AGREEMENT
The following is a summary of certain material terms of the Merger
Agreement. This summary is not a complete description of the terms and
conditions thereof and is qualified in its entirety by reference to the Merger
Agreement, a copy of which is filed herewith as Exhibit 1 and is hereby
incorporated herein by reference.
The Offer. The Merger Agreement provides that the Purchaser will commence
the Offer and that upon the terms and subject to prior satisfaction or waiver of
the conditions of the Offer, the Purchaser will purchase all Shares validly
tendered pursuant to the Offer. The Merger Agreement provides that, without the
written consent of the Company, the Purchaser will not decrease the Offer Price,
decrease the number of Shares sought in the Offer, amend or waive the condition
that there shall be validly tendered and not withdrawn prior to the expiration
of the Offer at least a majority of the Shares on a fully diluted basis (the
"Minimum Condition"), change the form of consideration payable in the Offer or
modify or change any condition of the Offer, except that if on the initial
scheduled expiration date all conditions to the Offer shall not have been
satisfied or waived, the Purchaser may extend from time to time for a period of
not greater than twenty business days following the initially scheduled
Expiration Date; provided that the expiration date may not be extended beyond
March 31, 1997. The Merger Agreement provides that the Purchaser shall, on the
terms and subject to the prior satisfaction or waiver of the conditions of the
Offer, accept for payment and pay for Shares tendered as soon as it is legally
permitted to do so under applicable law; provided, however, that if, immediately
prior to the expiration date of the Offer, as it may be extended, the Shares
tendered and not withdrawn pursuant to the Offer equal less than 90% of the
Shares outstanding, the Purchaser may extend, but not beyond March 31, 1997, the
Offer for a period not to exceed twenty business days. In addition, the Merger
Agreement provides that, without the consent of the Company, the Offer Price may
be increased and the Offer may be extended, but not beyond March 31, 1997, to
the extent required by law in connection with such an increase in the Offer
Price.
The Merger. Following consummation of the Offer, the Merger Agreement
provides that, subject to the terms and conditions thereof, and in accordance
with North Carolina law, at the Effective Time, the Purchaser shall be merged
with and into the Company. As a result of the Merger, the separate corporate
existence of the Purchaser will cease and the Company will continue as the
surviving corporation (the "Surviving Corporation").
The respective obligations of Parent and the Purchaser, on the one hand,
and the Company, on the other hand, to effect the Merger are subject to the
satisfaction on or prior to the Closing Date (as defined in the Merger
Agreement) of each of the following conditions, any and all of which may be
waived in whole or in part, to the extent permitted by applicable law: (i) the
Merger Agreement shall have been approved and adopted by the requisite vote of
the holders of Shares, if required by applicable law and the Articles of
Incorporation, in order to consummate the Merger; (ii) no statute, rule, order,
decree or regulation shall have been enacted or promulgated by any government or
any governmental agency or authority of competent jurisdiction which prohibits
the consummation of the Merger and all governmental consents, orders and
approvals required for the consummation of the Merger and the transactions
contemplated by the Merger
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Agreement will have been obtained and shall be in effect at the Effective Time;
(iii) there shall be no order or injunction of a court or other governmental
authority of competent jurisdiction in effect precluding, restraining, enjoining
or prohibiting consummation of the Merger; (iv) Parent, the Purchaser or their
affiliates shall have purchased Shares pursuant to the Offer; and (v) the
applicable waiting period under the HSR Act shall have expired or been
terminated.
At the Effective Time of the Merger (i) each issued and outstanding Share
(other than Shares that are owned by the Company as treasury stock, any Shares
owned by Parent, the Purchaser or any other wholly-owned subsidiary of Parent,
or any Shares which are held by shareholders exercising appraisal rights under
North Carolina law) shall be converted into the right to receive the Offer Price
and (ii) each issued and outstanding share of the Purchaser shall be converted
into one share of common stock of the Surviving Corporation.
The Company's Board of Directors. The Merger Agreement provides that
promptly after the purchase by Parent of at least a majority of the Shares (on a
fully diluted basis) pursuant to the Merger Agreement, Parent shall be entitled
to designate such number of directors, rounded up to the next whole number, on
the Board as is equal to the product of the total number of directors on the
Board multiplied by the percentage that the number of Shares so accepted for
payment bears to the total number of Shares then outstanding. The Company will,
upon request of the Purchaser, use its best efforts promptly to either increase
the size of its Board of Directors or secure the resignations of such number of
its incumbent directors as is necessary to enable Parent's designees to be
elected to the Board. Until the Effective Time, the Company shall use all
reasonable efforts to retain as members of the Board at least two directors who
are neither officers of Parent, or designees, shareholders or affiliates of
Parent. The Company's obligation to appoint Parent's designees to the Board is
subject to Section 14(f) of the Securities Exchange Act of 1934, as amended, and
Rule 14f-1 thereunder.
Shareholders' Meeting. Pursuant to the Merger Agreement, the Company will,
if required by applicable law in order to consummate the Merger, duly call, give
notice of, convene and hold a special meeting of its shareholders (the "Special
Meeting") as soon as practicable following the acceptance for payment and
purchase of Shares by the Purchaser pursuant to the Offer for the purpose of
considering and taking action upon the Merger Agreement. The Merger Agreement
provides that the Company will, if required by applicable law in order to
consummate the Merger, prepare and file with the Securities and Exchange
Commission (the "Commission") a preliminary proxy or information statement
relating to the Merger and the Merger Agreement and use its best efforts (i) to
obtain and furnish the information required to be included by the Commission in
the Proxy Statement (as defined herein) and, after consultation with Parent, to
respond promptly to any comments made by the Commission with respect to the
preliminary proxy or information statement and cause a definitive proxy or
information statement (the "Proxy Statement") to be mailed to its shareholders
and (ii) to obtain the necessary approvals of the Merger and the Merger
Agreement by its shareholders. If the Purchaser acquires at least a majority of
the Shares, the Purchaser will have sufficient voting power to approve the
Merger, even if no other shareholder votes in favor of the Merger. Pursuant to
the Stock Agreements, shareholders owning approximately 58% of the Shares have
agreed to tender such Shares, and therefore the Purchaser will acquire at least
a majority of the Shares. The Company has agreed, subject to the fiduciary
obligations of the Board under applicable law as advised by independent counsel,
to include in the Proxy Statement the recommendation of the Board that
shareholders of the Company vote in favor of the approval of the Merger and the
adoption of the Merger Agreement. Parent has agreed that it will vote, or cause
to be voted, all of the Shares then owned by it, the Purchaser or any of its
other subsidiaries and affiliates in favor of the approval of the Merger and the
adoption of the Merger Agreement.
The Merger Agreement provides that in the event that Parent, the Purchaser
or any other subsidiary of Parent acquires at least 90% of the outstanding
Shares, pursuant to the Offer or otherwise, Parent, the Purchaser and the
Company will, at the request of Parent and subject to the terms of the Merger
Agreement, take all necessary and appropriate action to cause the Merger to
become effective as soon as practicable after such acquisition, without a
meeting of shareholders of the Company, in accordance with North Carolina law.
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Options. Pursuant to the Merger Agreement, effective as of the earlier of
(i) Effective Time or (ii) the expiration date of the Offer (if at such time the
Shares tendered and not withdrawn pursuant to the Offer equal 80% or more of the
Shares) (such earlier date the "Acceleration Time"), the Company shall cause
each outstanding employee stock option to purchase Shares (the "Employee
Options") granted under the Company's 1992 Stock Option Plan and the Company's
Equity Compensation Plan (collectively, the "Employee Option Plans") and each
outstanding non-employee director option to purchase Shares ("Director Options"
and collectively with Employee Options, the "Options") granted under the
Company's Stock Option Plan for Non-Employee Directors (together with the
Employee Option Plans, the "Option Plans"), whether or not then exercisable or
vested, to become fully exercisable and vested. The Company has obtained the
agreement of each optionee under the Option Plans to the cancellation of all
outstanding Options as of the Acceleration Time, in consideration for which
(except to the extent that Parent or the Purchaser and the holder of any such
Option otherwise agree), at the Acceleration Time Parent will cause the Company
(or, at Parent's option, the Purchaser and, in the event the Company is unable
to do so, the Purchaser (which obligation of the Purchaser Parent agrees to fund
on a timely basis)) to pay to such holders of Options an amount equal the
product of (i) the excess, if any, of the Offer Price over the exercise price of
each such Option and (ii) the number of Shares previously subject to the Option
immediately prior to its cancellation. Cancellation of Options having an
exercise price equal to or in excess of the Offer Price shall be not in excess
of $100 per optionee. The Merger Agreement also provides that notwithstanding
the provisions of this paragraph, the Company shall reasonably cooperate with
Parent and the Purchaser in structuring transactions described in this paragraph
with respect to Options so as to optimize the tax treatment of Parent or the
Purchaser in connection therewith.
Interim Operations. Pursuant to the Merger Agreement, the Company has
agreed that, except as expressly contemplated or provided by the Merger
Agreement or agreed to in writing by Parent, prior to the time the designees of
Parent constitute a majority of the Board of the Company pursuant to the terms
of the Merger Agreement (the "Appointment Time"), the business of the Company
and its subsidiaries shall be conducted only in the ordinary and usual course
and, to the extent consistent therewith, each of the Company and its
subsidiaries shall use its commercially reasonable best efforts to preserve its
business organization intact and maintain its existing relations with customers,
suppliers, employees, creditors and business partners, and the Company and its
subsidiaries will not, directly or indirectly, except as permitted by Parent (i)
sell, transfer or pledge, or agree to sell, transfer or pledge, any Shares,
preferred stock or capital stock of any of its subsidiaries beneficially owned
by it; (ii) amend its Articles of Incorporation or Bylaws or similar
organizational documents; (iii) split, combine or reclassify the outstanding
Shares or any outstanding capital stock of any of the subsidiaries of the
Company; (iv) declare, set aside or pay any dividend or other distribution
payable in cash, stock or property with respect to its capital stock; (v) issue,
sell, pledge, dispose of or encumber any additional shares of, or securities
convertible into or exchangeable for, or options, warrants, calls, commitments
or rights of any kind to acquire any shares of, capital stock of any class of
the Company or its subsidiaries, other than shares reserved for issuance on
December 17, 1996 pursuant to the exercise of the Options outstanding on
December 17, 1996; (vi) transfer, lease, license, sell, mortgage, pledge,
dispose of, or encumber any material assets other than in the ordinary and usual
course of business and consistent with past practice, or incur or modify any
material indebtedness or other liability; (vii) redeem, purchase or otherwise
acquire directly or indirectly any of its capital stock; (viii) grant any
increase in the compensation payable or to become payable by the Company or any
of its subsidiaries to any of its employees, or adopt any new or amend or
otherwise increase or accelerate the payment or vesting of the amounts payable
or to become payable under any existing bonus, incentive compensation, deferred
compensation, severance, profit sharing, stock option, stock purchase,
insurance, pension, retirement or other employee benefit plan, agreement or
arrangement; (ix) enter into any employment or severance agreement with, or,
except in accordance with the existing written policies of the Company, grant
any severance or termination pay to any officer, director or employee of the
Company or any of its subsidiaries; (x) modify, amend or terminate any of its
material contracts or waive, release or assign any material rights or claims
thereunder; (xi) permit any material insurance policy naming it as a beneficiary
or a loss payable payee to be canceled or terminated without notice to Parent;
(xii) incur or assume any long-term debt or assume any short-term indebtedness;
(xiii) assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for
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the obligations of any other person, except in the ordinary course of business
and consistent with past practice; (xiv) make any loans, advances or capital
contributions to, or investments in, any other person (other than to wholly
owned subsidiaries of the Company or customary loans or advances to employees in
accordance with past practice); (xv) enter into any material commitment or
transaction (including, but not limited to, any borrowing, capital expenditure
or purchase, sale or lease of assets or real estate; (xvi) change any of the
accounting principles used by it unless required by generally accepted
accounting principles; (xvii) pay, discharge or satisfy any material claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction of
any such claims, liabilities or obligations reflected or reserved against in, or
contemplated by, the consolidated financial statements (or the notes thereto of
the Company and its consolidated subsidiaries, (xviii) adopt a plan of complete
or partial liquidation, dissolution, merger, consolidation, restructuring,
recapitalization or other reorganization of the Company or any of its
subsidiaries (other than the Merger); (xix) take, or agree to commit to take,
any action that would make any representation or warranty of the Company
contained in the Merger Agreement, in the case of any representation or warranty
not qualified by materiality, materially inaccurate or, in the case of any
representation or warranty, inaccurate in any respect at, or as of any time
prior to, the Effective Time; or (xx) enter into an agreement, contract,
commitment or arrangement to do any of the foregoing, or to authorize,
recommend, propose or announce an intention to do any of the foregoing.
No Solicitation. In the Merger Agreement, the Company has agreed that
neither the Company nor any of its subsidiaries or affiliates shall (and the
Company shall use its best efforts to cause its officers, directors, employees,
representatives and agents not to), directly or indirectly, encourage, solicit,
participate in or initiate discussions or negotiations with, or provide any
information to, any corporation, partnership, person or other entity or group
(other than Parent, or any of its affiliates or representatives) concerning any
merger, tender offer, exchange offer, sale of assets, sale of shares of capital
stock or debt securities or similar transactions involving the Company or any
subsidiary, division or operating or principal business unit of the Company (an
"Acquisition Proposal"). The Company also agreed to immediately cease any
existing activities, discussions or negotiations with any parties conducted
prior to the date of the Merger Agreement with respect to any of the foregoing.
The Merger Agreement provides that the Company may furnish information
concerning its business, properties or assets to any corporation, partnership,
person or other entity or group pursuant to appropriate confidentiality
agreements, and may negotiate and participate in discussions and negotiations
with such entity or group concerning an Acquisition Proposal if (1) such entity
or group has submitted a bona fide written proposal on an unsolicited basis to
the Board of the Company relating to such transaction which the Board determines
represents a superior transaction to the Offer and the Merger and (2) if, the
Board determines, only after receipt of advice from independent legal counsel,
the failure to provide such information or access or to engage in such
discussions or negotiations could cause the Board to violate its fiduciary
duties to the Company's shareholders under applicable law. The Company will
immediately communicate to Parent the terms of any proposal, discussion,
negotiation or inquiry (and will disclose any written materials in connection
therewith), and the identity of the party making such proposal or inquiry which
it may receive in respect of any such transaction.
Indemnification and Insurance. Pursuant to the Merger Agreement, after the
earlier of (1) the Effective Time or (2) the consummation of the Offer, Parent
shall and shall cause the Surviving Corporation (or any successor to the
Surviving Corporation) to indemnify, defend and hold harmless the present and
former officers and directors of the Company and its subsidiaries with respect
to matters occurring at or prior to the Effective Time to the full extent
permitted under North Carolina law. The Merger Agreement also provides that
Parent or the Surviving Corporation shall maintain the Company's existing
officers' and directors' liability insurance ("D&O Insurance") for a period of
not less than three years after the Effective Time, provided that Parent may
substitute therefor policies of substantially similar coverage and amounts
containing terms no less favorable to such former directors or officers. Parent
has also agreed that if the existing D&O Insurance expires, is terminated or
canceled during such period, Parent or the Surviving Corporation will use all
reasonable efforts to obtain substantially similar D&O Insurance, but in no
event shall it be required to pay aggregate annual premiums for such insurance
in excess of 150% of the aggregate annual premiums paid in 1996 and, in the
event that the annual premium for insurance required to be obtained under
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the Merger Agreement exceeds such amount, Parent shall maintain as much of such
insurance as may be maintained for such amount.
Representations and Warranties. In the Merger Agreement, the Company has
made customary representations and warranties to Parent and the Purchaser with
respect to, among other things, its organization, capitalization, financial
statements, public filings, conduct of business, employee benefit plans,
insurance, compliance with laws, intellectual property, licenses, contracts,
related party transactions, litigation, tax matters, real property, consent and
approvals, vote required to approve the Merger Agreement, undisclosed
liabilities and the absence of any material adverse changes in the Company since
December 31, 1995.
Termination; Fees. The Merger Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time, whether before or after
approval of the shareholders of the Company, (a) by mutual consent of the Board
of Directors of Parent or Purchaser and the Board of Directors of the Company,
(b) by either the Board of Directors of the Company (in accordance with the
terms of the Merger Agreement) or the Board of Directors of Parent or the
Purchaser (i) if the Offer shall have expired without any Shares being purchased
therein, provided that such right to terminate shall not be available to any
party whose failure to fulfill any material obligation under the Merger
Agreement was the cause of, or resulted in, the failure of Parent or the
Purchaser, as the case may be, to purchase the Shares pursuant to the Offer on
or before such date; or (ii) if any Governmental Entity (as defined therein)
shall have issued an order, decree or ruling or taken any other action (which
order, decree, ruling or other action the parties shall use their reasonable
efforts to lift), in each case permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by the Merger Agreement and such
order, decree, ruling or other action shall have become final and
non-appealable, (c) by the Board of Directors of the Company (in accordance with
the terms of the Merger Agreement) (i) if, prior to the purchase of Shares
pursuant to the Offer, the Board of Directors of the Company shall have (A)
withdrawn, or modified or changed in a manner adverse to Parent or the Purchaser
its approval or recommendation of the Offer, the Merger Agreement or the Merger
in order to permit the Company to execute an agreement in principle or a
definitive agreement providing for the acquisition of the Company by merger,
consolidation or otherwise, on terms (including the per share consideration)
determined by the Board of Directors of the Company, to be superior to the
shareholders of the Company as compared to the terms of the acquisition of the
Company contemplated by the Merger Agreement, and (B) determined, only after
receipt of advice from independent legal counsel to the Company, that the
failure to take such action as set forth in the preceding clause (A) could cause
the Board of Directors to violate its fiduciary duties to the Company's
shareholders under applicable law; or (ii) if, prior to the purchase of Shares
pursuant to the Offer, Parent or the Purchaser breaches or fails in any material
respect to perform or comply with any of its material covenants and agreements
contained in the Merger Agreement or breaches its representations and warranties
in any material respect; or (iii) if Parent or the Purchaser shall have
terminated the Offer, or the Offer shall have expired, without Parent or the
Purchaser, as the case may be, purchasing any Shares pursuant thereto; provided,
that the Company may not terminate the Merger Agreement pursuant to this clause
(iii) if such termination or expiration without purchase is the result of the
Company being in material breach of the Merger Agreement; or (iv) if Parent, the
Purchaser or any of their affiliates shall have failed to commence the Offer on
or prior to five business days following the initial public announcement of the
Offer; provided, that the Company may not terminate the Merger Agreement
pursuant to this clause (iv) if such termination or failure is the result of the
Company being in material breach of the Merger Agreement, (d) by the Board of
Directors of Parent or the Purchaser (i) if prior to the purchase of Shares
pursuant to the Offer, the Board of Directors of the Company shall have
withdrawn or modified or changed in a manner adverse to Parent or the Purchaser
its approval or recommendation of the Offer, the Merger Agreement or the Merger
or shall have recommended an Acquisition Proposal or offer, or shall have
executed an agreement in principle (or similar agreement) or definitive
agreement providing for a tender offer or exchange offer for any shares of
capital stock of the Company, or a merger, consolidation or other business
combination with a person or entity other than Parent, the Purchaser or their
affiliates (or the Board of Directors of the Company resolves to do any of the
foregoing); or (ii) if Parent or the Purchaser shall have terminated the Offer,
or the Offer shall have expired without Parent or the Purchaser purchasing any
Shares thereunder, provided that Parent or the Purchaser may not terminate the
Merger Agreement pursuant to this clause (ii) if Parent or the Purchaser has
failed to purchase Shares in the Offer in violation of the material
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terms thereof; or (iii) if, due to an occurrence that if occurring after the
commencement of the Offer would result in a failure to satisfy any of the
conditions set forth in Annex A to the Merger Agreement, Parent, the Purchaser
or any of their affiliates shall have failed to commence the Offer on or prior
to five business days following the date of the initial public announcement of
the Offer.
In accordance with the Merger Agreement, if (1) the Board terminates the
Merger Agreement pursuant to clause (c)(i) of the immediately preceding
paragraph, (2) the Board of Directors of Parent or the Purchaser terminates the
Merger Agreement pursuant to clause (d)(i) of the immediately preceding
paragraph, (3) the Board of Directors of Parent or the Purchaser terminates the
Merger Agreement pursuant to clause (d)(ii) or (d)(iii) of the immediately
preceding paragraph and the event set forth in paragraph (e) of Annex A to the
Merger Agreement shall have occurred, (4) the Board of Directors of Parent or
the Purchaser terminates the Merger Agreement pursuant to clause (d)(ii) or
(d)(iii) of the immediately preceding paragraph as a result of any event set
forth in paragraph (d) of Annex A to the Merger Agreement shall have occurred or
(5) the Board of Directors of Parent or the Purchaser terminates the Merger
Agreement pursuant to clause (d)(ii) or (d)(iii) of the immediately preceding
paragraph as a result of any representation or warranty of the Company in the
Merger Agreement being untrue when made or breach or failure to perform or
comply with any material obligation, agreement or covenant by the Company set
forth in paragraph (c) of Annex A to the Merger Agreement having occurred, then
the Company will pay Parent an amount equal to $1.5 million and shall assume and
pay, or reimburse Parent for, all reasonable out-of-pocket fees and expenses
incurred, or to be incurred, by Parent or the Purchaser and their affiliates, in
connection with the Offer, the Merger and the consummation of the transactions
contemplated by the Merger Agreement.
CONFIDENTIALITY AGREEMENT
Parent and the Company entered into the confidentiality agreement, dated
November 22, 1996 (the "Confidentiality Agreement"), a copy of which is filed
herewith as Exhibit 5 and incorporated herein by reference. Pursuant to the
Confidentiality Agreement, Parent agreed, among other things, that it would keep
confidential certain information ("Evaluation Material") furnished to it by the
Company and to use the Evaluation Material solely for the purpose of evaluating
a business transaction between Parent and the Company.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
(a) Recommendation of the Board of Directors. The Board has unanimously
approved the Merger Agreement and the transactions contemplated thereby,
including the Offer and the Merger, and has determined that each of the Merger
Agreement, the Offer and the Merger are fair to and in the best interests of the
shareholders of the Company and recommends that all shareholders of the Company
accept the Offer and tender all their Shares pursuant to the Offer. This
recommendation is based in part upon opinions received by the Company from The
Robinson-Humphrey Company, Inc. ("Robinson-Humphrey") and Croft & Bender LLC
("Croft & Bender") that the consideration to be received by the Company's
shareholders in the Offer and the Merger is fair to the shareholders from a
financial point of view. Copies of the fairness opinions received by the Company
from its financial advisors are filed together herewith as Exhibit 6 and are
also attached hereto as Annex II and incorporated herein by reference.
Shareholders are urged to read such opinions in their entirety.
As set forth in the Offer Documents, the Purchaser will purchase Shares
tendered prior to the close of the Offer if the Minimum Condition has been
satisfied by that time and if all other conditions to the Offer have been
satisfied (or waived). Shareholders considering not tendering their Shares in
order to wait for the Merger should note that if the Minimum Condition is not
satisfied or any of the other conditions to the Offer are not satisfied, the
Purchaser is not obligated to purchase any Shares, and can terminate the Offer
and the Merger Agreement and not proceed with the Merger. Under North Carolina
law, the approval of the Board and the affirmative vote of the holders of a
majority of the outstanding Shares are required to approve the Merger.
Accordingly, if the Minimum Condition is satisfied, and the Purchaser
consummates the Offer, the Purchaser will have sufficient voting power to cause
the approval of the Merger without the affirmative vote of any other
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shareholder of the Company. Parent and the Purchaser have entered into the Stock
Agreements with the Designated Shareholders pursuant to which persons owning an
aggregate of approximately 58% of the Shares (or approximately 54% of the Shares
calculated on a fully diluted basis) have agreed to tender their Shares pursuant
to the Offer.
The Offer is scheduled to expire at 12:00 Midnight, New York City time, on
January 22, 1997, unless and until the Purchaser, in its sole discretion, elects
to extend the period of time for which the Offer is open. A copy of the press
release issued jointly by the Company and Parent on December 18, 1996 announcing
the Merger and the Offer is filed herewith as Exhibit 7 and is incorporated
herein by reference.
(b) Background; Reasons for Recommendation of the Board of
Directors. During the fiscal year ended December 31, 1995 the Company
experienced a pretax loss of approximately $9.5 million, due principally to
manufacturing and resulting operational difficulties and a new product program,
and, to a lesser extent, competitive pressures and a generally weak retail
market. The trading price for the Shares decreased from an average of
approximately $2.80 during January 1995 to an average of approximately $1.20
during December 1995. The Company responded by implementing a turnaround program
at the beginning of 1996 including cost-cutting measures, restructuring its
manufacturing operations and retaining a management consulting firm. The Company
also engaged Robinson-Humphrey in February 1996 as its financial advisor,
principally to explore equity and debt financing alternatives for the Company.
This engagement was later modified to include Croft & Bender.
As a result of the Company's turnaround program, the Company experienced
decreasing losses during the first three quarters of 1996. While the pretax loss
in the first quarter of 1996 was approximately $3.9 million, the total pretax
loss for the first three quarters of 1996 was $5.1 million as opposed to $10.3
million for the first three quarters of 1995. The Company's business is highly
seasonal, with the fourth quarter historically accounting for approximately 35%
of the Company's net sales and being the quarter in which the Company earns the
majority of its profits. Therefore, management and the Board believed that the
Company's performance during the fourth quarter of 1996 would significantly
impact its 1996 results. Notwithstanding the Company's improvements through its
third quarter of 1996, the average trading price for the Shares in November 1996
(prior to the November 22, 1996 public announcement that the Company and Parent
had entered into a non-binding letter of intent (the "Letter of Intent")
providing for the acquisition of the Company by Parent), remained at
approximately $1.20 per Share.
Merrill Lynch Capital Corporation ("Merrill Lynch"), which owns
approximately 27.8% of the Shares, indicated to management in August 1996 its
willingness to sell all of its Shares.
On September 4, 1996, J. Robert Wren, Chief Executive Officer of the
Company, R. Kent Smith, President of the Company, and John Grosso, President of
Parent, met at the request of Mr. Grosso to discuss Parent's opening of
permanent studios in certain Wal-Mart stores, which stores had previously been
served by the Company. In light of the physical proximity of the Company and
Parent in Charlotte, North Carolina and similarities in their respective
businesses, the Company and Parent have been familiar with each other's business
and operations. During the meeting, Mr. Grosso orally expressed Parent's
interest in acquiring the Company. Mr. Grosso did not make an offer or identify
any price or terms. Management of the Company informed the Board and contacted
Wal-Mart Stores, Inc. ("Wal-Mart") to determine Wal-Mart's view of a potential
acquisition of the Company by Parent. All of the Company's revenues are
generated from its operations in Wal-Mart stores. A representative of Wal-Mart
advised management that Wal-Mart could give no assurances regarding Parent's
continuation of the Company's operations in Wal-Mart stores following any
acquisition of the Company. During a September 27, 1996 meeting held at Mr.
Grosso's request, Mr. Grosso stated to Mr. Wren that Parent was considering an
all-cash offer of $1.75 per Share for the Shares.
At a special meeting of the Board held on October 1, 1996, Mr. Wren and Mr.
Smith reviewed with the other members of the Board the discussions that had
taken place with Parent. Although Parent had not presented a formal offer to the
Company, after full discussion and consideration of the information provided to
the Board, it was the consensus of the Board that a price of $1.75 per Share
would not be adequate financially. Due to the adverse effect further discussions
could have on the Company's fourth quarter operations, the Board instructed
management to inform Parent that no further discussions would be had at that
time in order
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to allow the Company to complete its fourth quarter and further evaluate the
results of its turnaround program and to allow the market to respond to the
Company's operating results. On October 2, 1996, Mr. Wren advised Mr. Grosso of
the Board's determination and discussions between the Company and Parent ceased.
On November 14, 1996, Mr. Grosso called Mr. Wren to request a meeting with
Mr. Wren, Mr. Smith and Randy J. Bates, Chairman of the Board. On November 15,
1996, Mr. Wren, Mr. Smith and Mr. Bates met with Mr. Grosso. Mr. Grosso
delivered to Mr. Wren, Mr. Smith and Mr. Bates a letter in which Parent offered
to acquire all of the Shares at a price of $2.25 per Share in cash. Mr. Grosso
also stated that Parent would contact Merrill Lynch about the possible
acquisition by Parent of the Company and, in the event an agreement could not be
reached promptly between the parties, Parent would consider commencing a tender
offer for the Shares. Mr. Wren, Mr. Smith and Mr. Bates informed Mr. Grosso that
they would deliver Parent's statement of its position and the written offer to
the Board.
At a special meeting of the Board held on November 18, 1996, the Board
reviewed the proposed transaction with Parent, including but not limited to the
written offer from Parent and Parent's statement of its position concerning
approaching Merrill Lynch about the possible acquisition of the Company and
commencement of a tender offer for the Shares. The Board and management
expressed concern regarding engaging in negotiations during the Company's fourth
quarter. After considering various factors, including but not limited to
Parent's anticipated approach to Merrill Lynch, it was the consensus of the
Board that management continue discussions with Parent to determine the
structure and terms of Parent's offer and to negotiate the price per Share. The
Board emphasized that these discussions were solely to determine Parent's level
of interest in the Company, and did not reflect a decision by the Board that a
sale of the Company for such negotiated amount would be in the best interests of
the Company and its shareholders.
On November 19, 1996, the Company notified Robinson-Humphrey and Croft &
Bender, which were at the time engaged by the Company principally to explore
financing alternatives, that the Company desired to engage them to assist in the
evaluation of the proposal made by Parent and, in connection therewith, to make
certain revisions to their then existing engagement letter, or enter into a new
engagement letter, and to act as the Company's financial advisors in connection
with the possible sale of the Company.
On November 19, 1996, Mr. Bates met with Mr. Grosso principally to discuss
the price per Share of Parent's offer and certain related matters. Mr. Bates
reiterated the Company's desire to delay substantive negotiations until after
the fourth quarter. Mr. Grosso stated that, although Parent had offered $2.25
per Share, Parent would consider offering up to $2.50 per Share in cash for all
of the Shares in a negotiated transaction with the Company. The Company
understood any offer by Parent to be subject to the satisfactory completion of
due diligence, receipt of necessary approvals of the boards of directors of each
party, and the preparation, negotiation and execution of mutually satisfactory
documentation. Mr. Grosso also stated that in the event the Company and Parent
failed to reach an agreement regarding Parent's acquisition of the Company,
Parent intended to proceed promptly to seek to acquire the Shares held by
Merrill Lynch and to commence a tender offer for the remaining Shares at a price
per Share below the price offered for a negotiated acquisition. Subsequently, on
November 19, 1996, Mr. Grosso and Mr. Bates spoke by telephone, principally to
continue their discussions as to the price per Share of Parent's offer.
On November 20, 1996 the Company's financial advisors discussed the terms
of the proposed acquisition with Parent's financial advisors. Parent's financial
advisors stated that Parent would offer $2.50 per Share in cash for all of the
Shares, conditioned upon, among other things, the grant to Parent and the
Purchaser, by certain shareholders owning a majority of the Shares, of
agreements to sell their Shares to Parent at such price per Share. In addition,
the Parent's financial advisors stated again Parent's intention to seek to
acquire Merrill Lynch's Shares and to commence a tender offer for the remaining
Shares at a price per Share below the price offered for a negotiated transaction
in the event the Company and Parent failed to reach an agreement regarding
Parent's acquisition of the Company.
On November 20, 1996, the Company engaged the law firm of Morris, Nichols,
Arsht & Tunnell to act as its special counsel in connection with Parent's
actions. On November 20, 21 and 22, 1996, the Board held special meetings to
review the proposed transaction with Parent and the status of discussions with
Parent. At these meetings, the Board discussed with the Company's special
counsel the Board's alternatives in light of
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Parent's actions. During this time, discussions regarding the possibility of an
acquisition of the Company by Parent and the terms thereof continued. In
addition, during this time, representatives of the parties discussed Parent's
retention of certain key employees of the Company, including certain of the
Company's officers, in connection with an acquisition of the Company. The
parties also negotiated the terms of a letter of intent. On November 20, 1996,
Merrill Lynch advised representatives of the Company that Merrill Lynch was
prepared to accept an all cash offer of $2.50 per Share for the Shares owned by
Merrill Lynch and Wal-Mart indicated to management that Wal-Mart would allow
Parent to continue the Company's operations in Wal-Mart stores subsequent to an
acquisition of the Company by Parent. On November 22, 1996, the Company and
Parent entered into the Confidentiality Agreement and Parent subsequently
commenced its due diligence review of the Company.
The Board held a special meeting on November 23, 1996 to review the status
of the proposed acquisition. After full discussion and review of the information
presented to the Board, including but not limited to the explanation by special
counsel to the Company regarding the advantages of signing the Letter of Intent,
such as the fact that it would give any potential competing bidder an
opportunity to come forward prior to the Company's entering into a definitive
merger agreement, the Board approved the execution of the Letter of Intent. The
Board expressly did not approve the acquisition of the Company by Parent or the
terms of the proposed acquisition, including but not limited to price, set forth
in the Letter of Intent. The Company and Parent also decided to continue working
on all aspects of the transaction immediately so that, if agreement could be
reached, the agreement could be completed as soon as possible and the necessary
documents filed with the Securities and Exchange Commission (the "Commission")
promptly thereafter. Accordingly, representatives of the Company and Parent
participated in due diligence and discussions as to the Merger Agreement on
November 23, 1996 and thereafter.
On November 24, 1996, representatives of the Company and Parent executed
the Letter of Intent. In a special meeting of the Board on November 24, 1996,
the Board reviewed a commitment letter (the "Commitment Letter") delivered by
NationsBank, N.A. ("NationsBank") and NationsBanc Capital Markets, Inc. ("NCMI")
dated November 21, 1996 among NationsBank, NCMI and Parent regarding certain
debt financing in connection with the Offer and Merger, subject to the terms and
conditions set forth therein. The Board also reviewed the executed Letter of
Intent and a press release regarding the Letter of Intent.
On November 25, 1996, the Company publicly announced that the Company had
entered into the Letter of Intent providing for the acquisition of the Company
by Parent for $2.50 per Share in cash, subject to the approval by the boards of
directors of both the Company and Parent and the negotiation of a definitive
merger agreement.
During the period from November 22, 1996 to December 17, 1996,
representatives of the Company and Parent met numerous times with their
respective legal counsel and financial advisors, to negotiate the transaction
and a definitive Merger Agreement. From November 20, 1996 to December 17, 1996,
certain members of the Company's senior management met with senior management of
Parent to negotiate the terms of the Employment Agreements and the termination
of their employment agreements with the Company. Parent conducted a due
diligence review of the Company. During the week of November 25th, Tom E.
DuPree's financial advisor informed the Company's financial advisors that Mr.
DuPree (who owns approximately 6.8% of the Shares) was prepared to accept an all
cash offer of $2.50 per Share for his Shares.
The Board held special meetings on November 25th and November 27th to
review the status of the proposed transaction. Prior to the November 27, 1996
meeting, the Board received preliminary written materials from Robinson Humphrey
and Croft & Bender with regard to the fairness of the Merger and preliminary
drafts of the Merger Agreement. At the November 27th meeting, the Company's
financial advisors reviewed their written materials in a summary fashion in
order to give the directors an overview and opportunity to study the materials
more closely prior to a scheduled December 2, 1996 meeting. During the November
27th meeting, certain directors requested that in preparation for the
presentation of the financial advisors at the December 2nd meeting, the
financial advisors perform additional analyses. The Board also asked questions
regarding certain assumptions underlying the written materials. The Board also
received an
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update from the Company's Chief Financial Officer regarding the status of
negotiations relating to the Company's current credit facility.
On December 2, 1996, the Board met for approximately seven hours to review
the status of the proposed transaction with Parent. At that meeting, management
delivered an oral report on the progress of the turnaround program implemented
at the beginning of the year and discussed management's plans for the future,
including the risks and uncertainties inherent in such plans. Robinson-Humphrey
and Croft & Bender delivered their oral report to the Board that an all cash
price per Share of $2.50 for the Shares would be fair from a financial point of
view to the shareholders of the Company. In addition, the financial advisors
stated their view that the Company should proceed with the Merger given all the
facts and circumstances. Counsel for the Company then described the terms of the
Merger Agreement, including certain provisions still under negotiation. In
addition, the members of the Board who were not members of management met
separately with the Company's counsel to discuss the terms of the management
severance arrangements and employment agreements to be entered into by members
of management. It was reported by Mr. Wren that, following the public
announcement that the Company had entered into the Letter of Intent, no party
had contacted the Company or its executive officers or financial advisors
expressing any interest in acquiring the Company.
On December 16, 1996 NationsBank and NCMI delivered a revised Commitment
Letter, dated December 16, 1996 and Parent provided a copy thereof to the
Company.
The Board met again on December 17, 1996. Robinson-Humphrey and Croft &
Bender delivered their written fairness opinions. After full discussion and
consideration of the information provided to them, review of the transactions
contemplated by the Merger Agreement with its legal and financial advisors and
consideration of the report of its financial advisors, the Board unanimously
approved the Merger Agreement and the transactions contemplated thereby,
including the Offer and the Merger, and determined that each of the Merger
Agreement, the Offer and the Merger are fair to and in the best interests of the
Company's shareholders.
The Merger Agreement was then executed on December 17, 1996 and was
publicly announced on December 18, 1996. Concurrently with the execution of the
Merger Agreement, Parent executed the Employment Agreements and delivered them
into escrow. In addition, on or about December 17, 1996, the Designated
Shareholders executed and delivered the Stock Agreements. A joint press release
announcing the Merger Agreement and the transactions contemplated thereby is
filed herewith as Exhibit 7 and incorporated hereby by reference. On December
20, 1996 the Purchaser commenced the Offer.
Prior to approving the Merger Agreement and the transactions contemplated
thereby, the Board received presentations and reviewed the terms and conditions
of the Offer and the Merger with the Company's management, legal counsel and
financial advisors. In reaching its conclusions described in paragraph (a)
above, the Board considered a number of factors, including, but not limited to,
the following:
(i) the financial and other terms and conditions of the Offer and the
Merger Agreement;
(ii) information with respect to the Company's business, financial
condition, results of operations, assets, liabilities and business
strategy, on both a historical and a prospective basis, various
uncertainties and risks associated with the operation of Company's
business, particularly as such factors would affect shareholder value in
the future, historical market prices, price to earnings multiples and
trading patterns of the Shares, market prices and financial data relating
to the Company's principal competitors, and the Board's determination, on
the basis of such information, that the price to be paid in the Offer and
the Merger fairly reflects the Company's prospects and risks and
uncertainties;
(iii) the presentations of Robinson-Humphrey and Croft & Bender to the
Board as to various financial and other matters deemed relevant to the
Board's consideration; including, among other things (a) a review of the
Company's historical and projected operating performance, (b) a review of
various financial forecasts and other data provided to Robinson-Humphrey
and Croft & Bender relating to the Company's business, operations and
prospects, (c) a review of the historical market prices and trading
activity for the Shares and comparisons with those of certain similar
publicly traded companies, including Parent, (d) a review and analysis of
selected mergers and acquisitions in the retail industry, (e) a review
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and analysis of merger and acquisition premiums of comparably sized
transactions involving companies in various industries, (f) a discounted
cash flow valuation of the Company taking into consideration that such
valuation was based on assumptions subject to a number of risks and
uncertainties, and (g) an analysis of the Offer Price as a multiple of
various measures of the Company's operating performance;
(iv) the written opinions of Robinson-Humphrey and Croft & Bender,
each dated December 17, 1996, that, as of such date and subject to certain
matters stated therein, the cash consideration to be received by the
holders of the Shares pursuant to the Offer and the Merger is fair to such
holders from a financial point of view (a copy of the written opinions of
Robinson-Humphrey and Croft & Bender are attached to this Schedule 14D-9
together as Annex II and are incorporated herein by reference and should be
read in their entirety for a description of the procedures followed,
assumptions and qualifications made, matters considered and limitations of
the review undertaken by Robinson-Humphrey and Croft & Bender);
(v) the fact that the $2.50 per Share price to be received by the
holders of the Shares in both the Offer and the Merger represents a premium
of 90% over the last sale price of the Common Stock of $1.3125 per Share on
November 22, 1996, the last full trading day prior to the public
announcement that Parent and the Company had entered into the Letter of
Intent, premiums of 109% and 176% over the average of the last sale prices
of the Common Stock for the 30-day period and the 60-day period,
respectively, preceding November 22, 1996 and a premium of 25% over the
highest last sale price of the Common Stock during the 12 months preceding
November 22, 1996; and that such price would be payable in cash, thus
eliminating any uncertainties in valuing the consideration to be received
by the holders of the Shares;
(vi) the fact that the Offer and the Merger are not subject to
Purchaser obtaining financing to consummate the Offer and the Merger and
that the Company received, prior to executing the Merger Agreement,
evidence that Parent has a signed commitment from a commercial bank to
finance the Offer and the Merger and that Parent has agreed that the funds
necessary to consummate the Offer will be provided to Purchaser;
(vii) the fact that the structure of the acquisition of the Company by
Parent as provided for in the Merger Agreement involves a cash tender offer
for all Shares to be commenced within five business days of the public
announcement of the Merger Agreement to be followed promptly by a merger
for the same consideration, thereby enabling the holders of the Shares to
obtain cash for their Shares at the earliest possible time;
(viii) the fact that since the public announcement on November 22,
1996 that the Company and Parent had entered into the Letter of Intent, no
other potential acquiror had contacted the Company or any of its officers
or financial advisors expressing any interest in the Company and no
acquisition proposals had been received;
(ix) the fact that the Designated Shareholders, owners of
approximately 58% of the Shares, were willing to enter into the Stock
Agreements with Parent pursuant to which they agreed, among other things,
to tender all of their Shares pursuant to the Offer and vote their Shares
in favor of the Merger;
(x) management's belief, based on discussions between management and
representatives of Wal-Mart, that Parent's acquisition of the Company is
acceptable to Wal-Mart;
(xi) the fact that during the third and fourth quarters of 1996, the
Company had discussions with several potential lenders and additional
financing on terms and conditions acceptable to the Company was not
available from such sources;
(xii) the fact that the Company had worked with its financial advisors
since February 1996 to develop strategies as to financing alternatives;
(xiii) the potential adverse effect on the Company's business of a
tender offer other than pursuant to a negotiated transaction; and
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(xiv) the advice of the financial advisors that the Company should
proceed with the Merger given all the facts and circumstances.
THE COMPANY'S SHAREHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE
OPINIONS OF ROBINSON-HUMPHREY AND CROFT & BENDER IN THEIR ENTIRETY.
The foregoing discussion of the information and factors considered and
given weight by the Board is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the Merger
Agreement and the Offer, the Board did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors considered
in reaching its determination. In addition, individual members of the Board may
have given different weights to different factors.
ITEM 5. PERSONS RETAINED, EMPLOYED, OR TO BE COMPENSATED
Neither the Company nor any person acting on its behalf has employed,
retained, or compensated any person to make solicitations or recommendations to
shareholders with respect to the Offer. Robinson-Humphrey and Croft & Bender
have been retained by the Company to act as the Company's financial advisors
with respect to the Offer and the Merger. Pursuant to its engagement letter with
Robinson-Humphrey and Croft & Bender, the Company has agreed to pay
Robinson-Humphrey and Croft & Bender for such services, including fairness
opinions, an aggregate fee of $600,000 (payable to each firm on an equal (50/50)
basis), an aggregate of $300,000 of which is payable upon delivery of the
fairness opinions and the remaining $300,000 of which is payable at, and
conditioned on, the consummation of the Offer. The Company has also agreed to
reimburse Robinson-Humphrey and Croft & Bender their reasonable out-of-pocket
expenses, including reasonable fees and disbursements of counsel, and to
indemnify Robinson-Humphrey and Croft & Bender and certain related parties
against certain liabilities, including liabilities under the federal securities
laws arising out of their engagement. Robinson-Humphrey has provided investment
banking services to the Company in the past and has received customary fees for
such services. In the ordinary course of business, Robinson-Humphrey actively
trades in the Common Stock for its own account and the accounts of its customers
and, accordingly, may at any time hold a long or short position in such
securities.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES
(a) During the sixty (60) days preceding the date of this Schedule 14D-9 no
transactions have been effected in the Shares by the Company, or, to the best
knowledge of the Company, any executive officer, director or affiliate of the
Company, except as follows:
(i) On December 5, 1996, Mr. Wren's spouse transferred 281,685 Shares
to Mr. Wren and 40,000 Shares to a nonprofit corporation of which Mr. Wren
is an officer and a director.
(ii) On December 5, 1996, Mr. Bates transferred 50,000 Shares to a
nonprofit corporation of which Mr. Bates is an officer and a director and
300,000 Shares to another nonprofit corporation.
(iii) The Designated Shareholders entered into the Stock Agreements.
(b) To the best knowledge of the Company, (i) all of its executive officers
and directors, have agreed to or presently intend to tender the Shares owned by
them to the Purchaser pursuant to the Offer (other than Shares which if tendered
could cause any such person to incur liability under Section 16(b) of the
Securities Exchange Act of 1934, as amended) and (ii) none of its executive
officers and directors presently intends to otherwise sell any Shares which are
owned beneficially or held of record by such persons; provided that pursuant to
the Stock Agreements, a Designated Shareholder may transfer Shares to a family
member of such shareholder or a charitable organization provided any such
transferee agrees to be bound by the Stock Agreement. As noted above, the
Designated Shareholders have executed the Stock Agreements pursuant to which,
among other things, they have agreed to tender their Shares pursuant to the
Offer.
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ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
(a) Except as set forth in this Schedule 14D-9, the Company is not engaged
in any other negotiation in response to the Offer which relates to or would
result in (i) an extraordinary transaction such as a merger or reorganization,
involving the Company or any subsidiary of the Company; (ii) a purchase, sale,
or transfer of a material amount of assets by the Company or any subsidiary of
the Company; (iii) a tender offer for or other acquisition of securities by or
of the Company; or (iv) any material change in the present capitalization or
dividend policy of the Company.
(b) Except as set forth in this Schedule 14D-9, there are no transactions,
resolutions of the Board, agreements in principle, or signed contracts in
response to the Offer, which relate or would result in one or more of the
matters referred to in Item 7(a) above.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
PARENT'S RIGHT TO DESIGNATE DIRECTORS. The information statement attached
to this Schedule 14D-9 as Annex I is being furnished in connection with the
possible designation by Parent, pursuant to the Merger Agreement, of certain
persons to be appointed to the Board other than at a meeting of the Company's
shareholders.
NORTH CAROLINA TENDER OFFER DISCLOSURE ACT. The North Carolina Tender
Offer Disclosure Act (the "Tender Offer Disclosure Act") applies to tender
offers for equity securities of a North Carolina corporation. The Tender Offer
Disclosure Act requires the purchaser to file a statement with the North
Carolina Secretary of State relating to the Offer and contains prohibitions
against deceptive practices in connection with making a tender offer. In Eure v.
Grand Metropolitan Limited, a North Carolina superior court held that the Tender
Offer Disclosure Act's 30 day notice period prior to the commencement of a
tender offer is unenforceable and preempted by the Exchange Act.
ANTITRUST. Under the provisions of the HSR Act applicable to the Offer,
the purchase of Shares under the Offer may be consummated following the
expiration of a 15 calendar day waiting period following the filing by Parent of
a Notification and Report Form with respect to the Offer, unless either the
Antitrust Division of the Department of Justice (the "Antitrust Division") or
the Federal Trade Commission (the "FTC") requests additional information or
documentary material or unless early termination of the waiting period is
granted. The Company expects to file a Notification and Report Form with respect
to the Offer no later than 10 calendar days following the filing by Parent. If,
within the initial 15 day waiting period, either the Antitrust Division or the
FTC requests additional information or documentary material from the Company
concerning the Offer, the waiting period will be extended and would expire at
11:59 p.m., New York City time, the tenth calendar day after the date of
substantial compliance by the Company with such request. Only one extension of
the waiting period pursuant to a request for additional information is
authorized by the HSR Act. Thereafter, such waiting period may be extended only
by court order or with the consent of the Company. In practice, complying with a
request for additional information and documentary material can take a
significant amount of time. In addition, if the Antitrust Division or the FTC
raises substantive issues in connection with a proposed transaction, the parties
frequently engage in negotiations with the relevant governmental agency
concerning possible means of addressing those issues and may agree to delay
consummation of the transaction while such negotiations continue.
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ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
Exhibit 1 -- Agreement and Plan of Merger dated as of December 17, 1996 among Parent, the
Purchaser and the Company.
Exhibit 2 -- Escrow Agreement dated December 17, 1996 between Parent and the Company.
Exhibit 3.1 -- Employment Agreement between Parent and Randy J. Bates.
Exhibit 3.2 -- Employment Agreement between Parent and James O. Mattox.
Exhibit 3.3 -- Employment Agreement between Parent and Shawn W. Poole.
Exhibit 3.4 -- Employment Agreement between Parent and R. Kent Smith.
Exhibit 3.5 -- Employment Agreement between Parent and J. Robert Wren, Jr.
Exhibit 3.6 -- Employment Agreement between Parent and Ed J. Tepera.
Exhibit 4 -- Forms of Stock Agreement dated December 17, 1996 among Parent, the Purchaser
and the Designated Shareholders (as defined in Section 3(b) of this Schedule
14D-9).
Exhibit 5 -- Confidentiality Agreement dated November 22, 1996 between Parent and the
Company.
Exhibit 6* -- Opinions of Croft & Bender LLC and The Robinson-Humphrey Company, Inc., each
dated December 17, 1996.
Exhibit 7 -- Joint Press Release of Parent and the Company issued on December 18, 1996.
Exhibit 8* -- Letter dated December 23, 1996 to the Company's shareholders from its Chief
Executive Officer.
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* Included in the materials sent to the shareholders of the Company
SIGNATURE
After reasonable inquiry and to the best of his knowledge and belief, the
undersigned certifies that the information set forth in this statement is true,
complete, and correct.
AMERICAN STUDIOS, INC.
By: /s/ J. ROBERT WREN, JR.
------------------------------------
Name: J. Robert Wren, Jr.
Title: Chief Executive Officer
Date: December 23, 1996
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ANNEX I
AMERICAN STUDIOS
11001 PARK CHARLOTTE BOULEVARD
CHARLOTTE, NORTH CAROLINA 28273
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER
This Information Statement is being mailed on or about December 23, 1996,
as part of the Solicitation/Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") of American Studios, Inc. (the "Company"). You are receiving
this Information Statement in connection with the possible election of persons
designated by Parent to a majority of the seats on the Board of Directors of the
Company (the "Board") pursuant to the Merger Agreement. The Merger Agreement
requires the Company, at the request of the Purchaser, to take all actions
available to the Company to cause the Parent Designees (as defined below) to be
elected to the Board under the circumstances described therein.
This Information Statement is required by Section 14(f) of the Exchange Act
and Rule 14f-1 thereunder. You are urged to read this Information Statement
carefully. You are not, however, required to take any action. Capitalized terms
used and not otherwise defined herein shall have the meaning set forth in the
Schedule 14D-9.
Pursuant to the Merger Agreement, the Purchaser commenced the Offer on
December 20, 1996. The Offer is scheduled to expire at 12:00 midnight on January
22, 1997, unless extended, at which time, upon the expiration of the Offer, if
all conditions of the Offer have been satisfied or waived, the Purchaser has
agreed with the Company that it will purchase all Shares validly tendered
pursuant to the Offer and not withdrawn.
The information contained in this Information Statement concerning Parent
and the Purchaser has been furnished to the Company by Parent and the Purchaser,
and the Company assumes no responsibility for the accuracy or completeness of
such information.
GENERAL INFORMATION REGARDING THE COMPANY AND THE BOARD
The Common Stock is the only class of voting securities of the Company
outstanding. As of December 19, 1996, 21,433,163 shares of Common Stock, having
one vote each, were issued and outstanding. As of such date, an additional
1,637,200 shares of Common Stock were subject to outstanding options.
The number of directors of the Company is presently fixed at eight. The
Company's Bylaws provide that the number of directors of the Company shall be
not less than three or more than twenty-one, as determined by the Board or the
shareholders. The Company's Bylaws provide that in the event the Company has
seven or more directors, at least a majority of the directors shall be persons
other than officers or employees of the Company. Four of the eight individuals
presently serving as directors of the Company, Mr. Bolger, Mr. Cost, Mr. Ferrell
and Mr. Shaw, have never been officers or employees of the Company and Mr.
Swenson is not presently an officer or employee of the Company.
RIGHT TO DESIGNATE DIRECTORS; PARENT DESIGNEES
The Merger Agreement provides that promptly after the purchase by Parent
(or any of its subsidiaries), of at least a majority of the Shares (on a fully
diluted basis) pursuant to the Merger Agreement, Parent shall be entitled to
designate such number of directors, rounded up to the next highest whole
director, on the Board as is equal to the product of the total number of
directors on the Board multiplied by the percentage that the aggregate number of
Shares so accepted for payment bears to the number of Shares. Such individuals
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designated by Parent are referred to herein as the "Parent Designees." The
Company has agreed, pursuant to the Merger Agreement upon request of the
Purchaser, to use its best efforts promptly to either increase the size of the
Board or secure the resignations of such number of its incumbent directors as is
necessary to enable the Parent Designees to be elected to the Board.
Notwithstanding the foregoing, the Merger Agreement provides that until the
Effective Time, the Company shall use all reasonable efforts to retain as
members of the Board at least two directors who are neither officers of Parent
nor designees, shareholders or affiliates of Parent and that Parent and
Purchaser will not prevent or inhibit the foregoing. The Merger Agreement
further provides that, following the election or appointment of the Parent
Designees and prior to the Effective Time, any amendment of the Merger Agreement
by the Company will require the affirmative vote of a majority of directors of
the Company that have not been designated by Parent.
Parent has advised the Company that it will choose the Parent Designees
from the directors and executive officers listed on Schedule I to the Offer to
Purchase, a copy of which is being mailed to the Company's shareholders together
with this Information Statement. Parent has informed the Company that each of
the directors and executive officers listed in Schedule I to the Offer to
Purchase has consented to act as a director, if so designated. The information
on such Schedule I is incorporated herein by reference.
It is expected that the Parent Designees may assume office at any time
following the purchase by Parent (or any of its subsidiaries) of at least a
majority of the outstanding Shares on a fully diluted basis pursuant to the
Offer, which purchase cannot be earlier than January 22, 1997.
CURRENT DIRECTORS AND OFFICERS OF THE COMPANY
To the extent the Board will consist of persons who are not the Parent
Designees, the Board is expected to continue to consist of those persons who are
currently directors of the Company who do not resign. Set forth below are the
names and certain other information concerning the current directors, as well as
the current executive officers, of the Company.
J. Robert Wren, Jr......... Mr. Wren, 49, has served as Chief Executive Officer
of the Company since July 1995 and as President
since December 1996. Mr. Wren served as Executive
Vice President and Chief Operating Officer from
February 1995 to July 1995 and as Executive Vice
President, General Counsel and Assistant to the
Chief Executive Officer of the Company from
January 1993 to February 1995. From July 1986 to
December 1992, Mr. Wren was a partner in the law
firm of Garland & Wren, P.A., Gastonia, North
Carolina. Mr. Wren has been a director of the
Company since May 1995 and also served as a
director of the Company from 1982 to 1988, and
from March 1992 to May 1992.
Randy J. Bates............. Mr. Bates, 46, a founder of the Company, has served
as Special Advisor to the Chief Executive Officer
and the Board of Directors since July 1995. From
April 1988 to June 1995, Mr. Bates served as
Chief Executive Officer of the Company and from
April 1986 to April 1988, Mr. Bates served as
Executive Vice President of the Company. Mr.
Bates has been a director of the Company since
1982 and has been Chairman of the Board of
Directors since December 1991. Prior to founding
the Company, Mr. Bates was employed for 11 years
by PCA International, Inc. ("PCA"), a provider of
portrait photography services through permanent
and traveling studios. While at PCA, Mr. Bates
served in various capacities, including as Vice
President -- Operations, and as such was
responsible for PCA's southeastern and
southwestern divisions.
R. Kent Smith.............. Mr. Smith, 47, a founder of the Company, has served
as Special Advisor to the Chief Executive Officer
and the Board of Directors since December 1996.
From November 1982 to November 1996, Mr. Smith
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served as President of the Company. Prior to
founding the Company, Mr. Smith was employed for
12 years by PCA and served in various capacities,
including as Director of National Accounts, and
as such was responsible for account relations
between PCA and its retail accounts. Mr. Smith
has been a director of the Company since 1982.
James O. Mattox............ Mr. Mattox, 43, has served as Executive Vice
President -- Operations of the Company since
October 1995 and as Chief Operating Officer since
December 1996. Mr. Mattox joined the Company in
March 1993 and served as Vice
President -- Operations of the Company from July
1993 to October 1995. Prior to joining the
Company, Mr. Mattox was employed for 15 years by
PCA and served in various capacities, including
as Senior Vice President -- Operations from
February 1992 to February 1993 and as Vice
President -- Operations from 1986 to February
1992.
Shawn W. Poole............. Mr. Poole, 37, has served as Executive Vice
President, Secretary, Treasurer and Chief
Financial Officer of the Company since May 1996.
Prior to joining the Company, he served as Vice
President and Chief Financial Officer of Worldway
Corporation (formerly Carolina Freight
Corporation) from January 1990 to November 1995.
Ed J. Tepera............... Mr. Tepera, 46, has served as Senior Vice
President -- Manufacturing and Technology of the
Company since October 1995 and served as a Vice
President of the Company from January 1995 to
October 1995. Prior to joining the Company, from
March 1987 to December 1994, Mr. Tepera was
employed by, and served as President of, CVS,
Inc., a company engaged principally in services
in the photography aftermarket. The Company
acquired substantially all of the assets of CVS,
Inc. in January 1995. Mr. Tepera was employed by
PCA for 13 years from 1974 to 1987 and held
various positions in equipment manufacturing and
research and development, including Director of
Equipment Manufacturing from March 1985 to
February 1987.
Joseph P. Bolger........... Mr. Bolger, 66, has been self-employed as a
certified public accountant since December 1994
and was also self-employed as a certified public
accountant from June 1991 to October 1992. From
November 1992 to November 1994, Mr. Bolger was a
registered representative of the Equitable Life
Assurance Society. Mr. Bolger served as Vice
President and Controller of JCP Realty, Inc., a
real estate investment company, from April 1987
to May 1991. Mr. Bolger has been a director of
the Company since 1992 and is a member of the
Audit Committee and the Stock Option/Compensation
Committee.
Bradley P. Cost............ Mr. Cost, 43, has been a partner in the law firm of
Haythe & Curley, New York, New York, since 1988.
Mr. Cost has been a director of the Company since
1992 and is a member of the Audit Committee and
the Stock Option/Compensation Committee.
John D. Ferrell............ Mr. Ferrell, 52, has been a private investor since
January 1993. He served as a Senior Vice
President of Merrill Lynch Interfunding Inc. (now
Merrill Lynch Capital Corporation) for
approximately 10 years prior to January 1993. Mr.
Ferrell has been a director of the Company since
December 1992 and is a member of the Audit
Committee and the Stock Option/Compensation
Committee. Mr. Ferrell also served as a director
of the Company from July 1988 to August 1992.
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Alan P. Shaw............... Mr. Shaw, 53, has served as Chief Executive Officer
and Chairman of the Board of Frame Warehouse,
Inc., a manufacturer, wholesaler and retailer of
picture frames and framing services, since 1982.
He was one of the three founders of PCA and
served as its President and Chief Executive
Officer from 1979 to 1981. Mr. Shaw served as a
consultant to the Company from December 1988 to
July 1993. Mr. Shaw has been a director of the
Company since 1983 and is a member of the Audit
Committee and the Stock Option/Compensation
Committee.
Norman V. Swenson, Jr...... Mr. Swenson, 49, has been a private investor since
September 1995. He served as Chief Executive
Officer of Southern Wholesale Company, a
wholesale distributor of various beer brands,
from August 1994 to September 1995. He served as
Executive Vice President -- Marketing and
Corporate Support of the Company from December
1991 to December 1994 and as Executive Vice
President of the Company from November 1982 to
December 1991. Prior to founding the Company, Mr.
Swenson was employed by PCA for 12 years and
served in various capacities, including as Vice
President -- Operations and Vice
President -- Administration, and as such was
responsible for PCA's northwestern division and
for customer service and other support functions,
respectively. Mr. Swenson has been a director of
the Company since 1982.
Each executive officer of the Company serves pursuant to an employment
agreement between such officer and the Company. There are no family
relationships among any executive officers of the Company.
BOARD MEETINGS AND COMMITTEES
In 1995, the Board of Directors held nine meetings, five of which were
telephonic meetings, and took action by unanimous written consent six times.
Each director attended all meetings of the Board of Directors, except that Mr.
Swenson did not attend two telephonic meetings and Mr. Bolger did not attend one
such meeting.
The Board of Directors presently has a Stock Option/Compensation Committee,
an Audit Committee and a Nominating Committee. The Stock Option/Compensation
Committee is responsible for reviewing, determining and establishing the
salaries, bonuses and other compensation of the Company's executive officers and
administering the Company's equity-based compensation plans including, to the
extent applicable or allowable with regard to a plan or an award thereunder, the
designation of persons to whom options or other equity-based awards may be
granted, the type and terms of an award and the number of shares of Common Stock
subject to any such award. The Audit Committee is responsible for recommending
the independent auditors, reviewing with the independent auditors the scope and
results of the audit engagement, establishing and monitoring the Company's
financial policies and control procedures, reviewing and monitoring the
provision of non-audit services by the Company's independent auditors and
reviewing all potential conflict of interest situations. The Nominating
Committee is responsible for interviewing and nominating the nominees for
election as directors at the Company's Annual Meetings of Shareholders. The
Stock Option/Compensation Committee and the Audit Committee are each presently
composed of Mr. Bolger, Mr. Cost, Mr. Ferrell and Mr. Shaw, none of whom has
ever been an officer or employee of the Company. Pursuant to a resolution
adopted by the Board of Directors, at least a majority of the members of each of
these committees must be persons who are not officers or employees of the
Company. Mr. Shaw is the Chairman of the Stock Option/Compensation Committee and
Mr. Bolger is the Chairman of the Audit Committee. The Nominating Committee is
composed of Mr. Bates, Mr. Cost and Mr. Wren. In 1995, the Stock
Option/Compensation Committee held three meetings and took action by unanimous
written consent two times and the Audit Committee held one meeting and took
action by unanimous written consent one time. Each director attended all
meetings of the committees of which he is a member. The Nominating Committee was
created in May 1996.
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SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of December 15, 1996 by (i) each director of
the Company and each nominee for election as a director, (ii) each person that
is known by the Company to beneficially own more than 5% of the outstanding
shares of Common Stock, (iii) each executive officer named in the Summary
Compensation Table who was employed by the Company as of December 15, 1996 and
(iv) all current directors and executive officers of the Company as a group. The
shareholders named below have sole voting and dispositive power with respect to
the Shares shown as beneficially owned by them, except as expressly disclosed to
the contrary. The information set forth in the following table is based
principally on information provided to the Company by such beneficial owners.
NUMBER OF SHARES PERCENT OF
BENEFICIALLY SHARES
NAME OWNED OUTSTANDING
- --------------------------------------------------------------- ---------------- -----------
Merrill Lynch Capital Corporation (formerly Merrill Lynch
Interfunding Inc.)........................................... 5,950,177(1) 27.8
Tom E. DuPree, Jr.............................................. 1,455,000 6.8
Randy J. Bates................................................. 2,058,094(2) 9.6
R. Kent Smith.................................................. 1,395,567(3) 6.5
J. Robert Wren, Jr............................................. 541,785(4) 2.5
Ed J. Tepera................................................... 28,750(5) *
Joseph P. Bolger............................................... 9,500(6) *
Bradley P. Cost................................................ 10,500(6) *
John D. Ferrell................................................ 36,000(7) *
Alan P. Shaw................................................... 356,600(6) 1.7
Norman V. Swenson, Jr.......................................... 810,157(8) 3.8
All executive officers and directors as a group (11 persons)... 5,311,387 24.2
- ---------------
(1) In a Schedule 13G, dated February 7, 1994, filed with the Securities and
Exchange Commission, Merrill Lynch Interfunding Inc. ("MLIF") (which has
changed its name to Merrill Lynch Capital Corporation), direct beneficial
owner of such shares, ML IBK Positions, Inc. ("MLIBK"), the owner of 100%
of the outstanding stock of MLIF, Merrill Lynch Group, Inc. ("MLG"), the
owner of 100% of the outstanding capital stock of MLIBK and Merrill Lynch &
Co., Inc., the owner of 100% of the outstanding capital stock of MLG,
reported ownership as a group of, and shared voting and dispositive power
with respect to, such shares.
(2) Includes (i) 127,005 shares of Common Stock owned by Mr. Bates' spouse, (ii)
an aggregate of 160,502 shares of Common Stock held for the benefit of Mr.
Bates' children in irrevocable trusts and (iii) 114,400 shares of Common
Stock owned by the Bates Family Foundation, a nonprofit corporation of
which Mr. Bates is an officer and director, as to which shares Mr. Bates
disclaims beneficial ownership.
(3) Includes an aggregate of 166,702 shares of Common Stock held for the benefit
of Mr. Smith's children in irrevocable trusts and an aggregate of 190,000
shares of Common Stock subject to presently exercisable options.
(4) Includes (i) 10,000 shares of Common Stock owned by Mr. Wren's spouse, (ii)
an aggregate of 198,000 shares of Common Stock subject to presently
exercisable options and (iii) 49,100 shares of Common Stock by the Wren
Family Foundation, a nonprofit foundation of which Mr. Wren is an officer
and director, as to which shares Mr. Wren disclaims beneficial ownership.
(5) Represents shares of Common Stock subject to presently exercisable options.
(6) Includes for each of Mr. Bolger, Mr. Cost and Mr. Shaw 9,000 shares of
Common Stock subject to presently exercisable options.
(7) Represents 7,000 shares of Common Stock owned by a limited partnership of
which Mr. Ferrell is the sole general partner and 29,000 shares of Common
Stock subject to presently exercisable options.
(8) Includes an aggregate of 230,997 shares of Common Stock held for the benefit
of Mr. Swenson's children in irrevocable trusts and 15,000 shares of Common
Stock subject to a presently exercisable option.
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26
The addresses of the persons named in the preceding table who beneficially
own 5% or more of the outstanding Common Stock are as follows: Merrill Lynch
Capital Corporation, North Tower, World Financial Center, New York, New York
10281-1327, Mr. DuPree, Hancock at Washington, Madison, Georgia 30650, and Mr.
Bates and Mr. Smith, 11001 Park Charlotte Boulevard, Charlotte, North Carolina
28273.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
Summary Compensation Table
The following table sets forth certain compensation information for the
years indicated for each person who served as the Company's Chief Executive
Officer during 1995 and for the Company's four additional most highly
compensated executive officers for 1995 who were serving as executive officers
at December 31, 1995 and whose total salary and bonus for 1995 exceeded $100,000
(the "Named Executive Officers").
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL SECURITIES
COMPENSATION UNDERLYING ALL
------------------ OPTIONS/ OTHER
NAME & SALARY BONUS SARS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) (#)(1) ($)(2)
- -------------------------------------------------------------- ---- ------- ------ ------------ ------------
Randy J. Bates,............................................... 1995 316,832 0 150,000/0 400
Chief Executive Officer until July 17, 1995 and 1994 339,157 0 0/0 167
Chairman of the Board and Special Assistant to the Chief 1993 328,149 0 0/0 0
Executive Officer and the Board of Directors after such
date(3)
J. Robert Wren, Jr.,.......................................... 1995 256,202 24,500 150,000/0 400
Executive Vice President and Chief Operating Officer until 1994 222,500 0 120,000/0 167
July 17, 1995 and Chief Executive Officer after such 1993 194,615 0 188,000/0 0
date(3)(4)
R. Kent Smith,................................................ 1995 195,679 0 31,000/0 400
President(3) 1994 209,462 0 0/0 167
1993 209,667 0 0/0 0
Ed J. Tepera,................................................. 1995 97,804 5,100 115,000/0 400
Senior Vice President(5) 1994 -- -- -- --
1993 -- -- -- --
Robert J. Consoli,............................................ 1995 89,981 25,000 75,000/0 400
Senior Vice President and Chief Administrative Officer until 1994 70,673 0 50,000/0 167
October 18, 1995 and Chief Financial Officer after such 1993 -- -- -- --
date(6)
John A. Ingraham,............................................. 1995 98,750 11,700 0/0 400
Senior Vice President(7) 1994 90,000 0 32,500/0 167
1993 75,288 0 0/0 0
- ---------------
(1) In November 1995, Mr. Bates and the Company agreed to the cancellation for
no value of an option to purchase 150,000 shares of Common Stock granted to
Mr. Bates in 1995. The option awarded in 1994 to Mr. Wren was granted in
replacement of an option granted in 1993 which was surrendered and
terminated as a condition to such replacement. The number of shares of
Common Stock subject to such replacement option is equal to the number of
shares of Common Stock subject to the previously granted option that it
replaced. In addition, in 1994, Mr. Wren surrendered and terminated an
option to purchase 68,000 shares of Common Stock granted in 1993 that was
not replaced.
(2) Represents the Company's contribution to the account of the Named Executive
Officer under the Company's 401(k) Profit Sharing Plan.
(3) In November 1995, in an effort to reduce the Company's salary costs and in
connection with obtaining a new credit facility from its commercial bank
lender, (i) the Company and each of Mr. Bates and Mr. Smith agreed that
neither Mr. Bates nor Mr. Smith would receive any base salary (but would
continue to receive certain perquisites) and (ii) Mr. Wren and the Company
agreed that his base salary
I-6
27
would be reduced by 16% from $269,500 to $225,000, with all of the
foregoing salary changes to commence December 1995 and to continue until
the maturity date of such credit facility (January 1997). The salary for
1995 for Mr. Bates, Mr. Wren and Mr. Smith reflects such changes. In
addition, although Mr. Bates resigned as Chief Executive Officer of the
Company in July 1995, he continued thereafter as a full-time employee of
the Company, with no change in salary, other than as discussed in the
preceding sentence, for the remainder of 1995.
(4) Mr. Wren was hired by the Company in January 1993 and the base salary shown
for 1993 represents the amount paid to him subsequent to such date.
(5) Mr. Tepera was hired by the Company in January 1995 and the base salary
shown for 1995 represents the amount paid to him subsequent to such date.
Mr. Tepera became an executive officer of the Company in October 1995.
(6) Mr. Consoli was hired by the Company in January 1994 and the base salary
shown for 1994 represents the amount paid to him subsequent to such date.
Mr. Consoli became an executive officer of the Company in February 1995. He
resigned from the Company in February 1996 and, as a result, (i) he became
entitled to receive $77,404 from the Company pursuant to the terms of his
employment agreement with the Company and (ii) his unexercisable options
terminated prior to becoming exercisable and his exercisable options
terminated in May 1996.
(7) Mr. Ingraham resigned from the Company in February 1996 and, as a result,
(i) he became entitled to receive $67,308 from the Company pursuant to the
terms of his employment agreement with the Company and (ii) his
unexercisable options terminated and his exercisable options terminated in
May 1996.
Option Tables
The following table sets forth certain information with respect to options
granted to the Named Executive Officers in 1995 under the Company's Equity
Compensation Plan (the "Equity Compensation Plan").
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
PERCENT OF ANNUAL RATES
NUMBER OF TOTAL OF STOCK
SECURITIES OPINIONS/ PRICE
UNDERLYING SARS/ APPRECIATION
OPTIONS/ GRANTED TO EXERCISE FOR
SARS EMPLOYEES OR BASE OPTION TERM
GRANTED IN FISCAL PRICE EXPIRATION ---------------------
NAME (#)(1) YEAR(2) ($/SH) DATE 5%($) 10%($)
- --------------------------------- ----------- ---------- -------- ---------- ------- -------
Randy J. Bates(3)................ 150,000 18.5 2.50 05/10/05 N/A N/A
J. Robert Wren, Jr............... 150,000 18.5 1.38 11/01/05 129,710 328,709
R. Kent Smith.................... 31,000 3.8 1.38 11/01/05 26,807 67,933
Ed J. Tepera..................... 65,000 8.0 2.50 05/10/05 102,195 258,983
50,000 6.2 1.38 11/01/05 43,237 109,570
Robert J. Consoli(4)............. 75,000 9.2 1.38 11/01/05 64,855 164,355
John A. Ingraham................. 0 N/A N/A N/A N/A N/A
- ---------------
(1) The exercise price of all options granted under the Equity Compensation Plan
in 1995 was the fair market value on the date of grant. The options granted
(i) become exercisable in annual increments of 25% on each of the first
through fourth anniversaries of the respective option grant dates so long
as employment with the Company continues except for the options granted to
Mr. Wren and Mr. Smith which became exercisable in February 1996 and (ii)
terminate within a limited period following a termination of employment as
specified in the related award agreement, except for the options granted to
Mr. Wren and Mr. Smith which terminate 10 years from the option grant date
regardless of a termination of employment. The option grant date for the
options granted to the Named Executive Officers was November 1, 1995 except
for the option granted to Mr. Bates and an option to purchase 65,000 shares
of
I-7
28
Common Stock granted to Mr. Tepera, each of which had an option grant date
of May 10, 1995. The options granted are not intended to qualify as
incentive stock options under Section 422 of Internal Revenue Code of 1986,
as amended. Pursuant to the Equity Compensation Plan, the Stock
Option/Compensation Committee of the Board of Directors may, in its
discretion and in accordance with the terms thereof, (i) in the event of a
change of control as defined therein, accelerate the exercisability of, and
authorize cash settlement payments in respect of, outstanding options under
the Plan and (ii) allow payment of the exercise price of an option to be
made in Common Stock.
(2) Options to purchase an aggregate of 812,150 shares of Common Stock were
granted to employees of the Company in 1995, including an option to
purchase 150,000 shares of Common Stock granted to Mr. Bates in May 1995
which was cancelled for no value in November 1995 pursuant to the agreement
of Mr. Bates and the Company.
(3) This option was cancelled for no value in November 1995 pursuant to the
agreement of Mr. Bates and the Company.
(4) This option terminated prior to becoming exercisable as a result of Mr.
Consoli's resignation from the Company in February 1996.
The following table sets forth certain information with respect to the
value of unexercised options to purchase shares of Common Stock held by the
Named Executive Officers as of December 31, 1995. No options were exercised by
these individuals during 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT FISCAL IN-THE-MONEY OPTIONS/SARS
YEAR-END (#)(1) AT FISCAL YEAR-END ($)(2)
------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------------------------------- ------------------------- -------------------------
Randy J. Bates................................. None Not Applicable
J. Robert Wren, Jr............................. 24,000/246,000 0/0
R. Kent Smith.................................. 90,000/31,000 0/0
Ed J. Tepera................................... 0/115,000 0/0
Robert J. Consoli.............................. 12,500/112,500 0/0
John A. Ingraham............................... 7,000/25,500 0/0
- ---------------
(1) The unexercisable options held by Mr. Ingraham terminated in February 1996,
the unexercisable options held by Mr. Consoli terminated in February 1996
or terminated prior to becoming exercisable and the exercisable options
held by Mr. Ingraham and Mr. Consoli terminated in May 1996. All such
option terminations occurred as a result of the resignations of the holders
thereof from the Company.
(2) With regard to all options held by the Named Executive Officers as of
December 31, 1995, the exercise price of such options exceeded the fair
market value of the Common Stock on such date.
Compensation of Directors
Pursuant to a resolution of the Board, each director who is not an officer
or employee of the Company receives an annual fee of $8,000 and $1,500 for each
meeting of the Board that he attends. Pursuant to this arrangement, Mr. Bolger,
Mr. Cost, Mr. Ferrell, Mr. Shaw and Mr. Swenson each earned $14,000 for 1995. In
addition, the Company reimburses each director who is not an officer or employee
of the Company for out-of-pocket expenses incurred in connection with attending
meetings of the Board of Directors.
Historically, the Company has not paid directors' fees for attendance at
telephonic meetings of the Board and has not paid for attendance at telephonic
or in person meetings of the committees of the Board. Given the numerous
meetings of the Board and the Stock Option/Compensation Committee of the Board,
most of which were required to be held by telephone, relating to the Merger
Agreement and the transactions contemplated thereby, the Company determined to
pay its non-employee directors (Mr. Bolger, Mr. Cost, Mr. Ferrell, Mr. Shaw and
Mr. Swenson) the regular per meeting fee of $1,500 for each meeting (in person
or
I-8
29
telephonic) of the Board or the Stock Option/Compensation Committee attended by
any such director with regard to the Merger Agreement or the transactions
contemplated thereby, not to exceed $20,000 per director.
Effective December 31, 1994, Mr. Swenson, a founder of the Company,
resigned as an employee and executive officer of the Company (he was then
serving as an Executive Vice President of the Company) and, effective January 1,
1995, became a consultant of the Company. In connection with such resignation
and consulting arrangement, Mr. Swenson entered into a consulting agreement with
the Company. This agreement extended to June 30, 1996 and provided for an annual
consulting fee of $96,000 and for Mr. Swenson to provide consulting services to
the Company of an average of 40 hours each month. In November 1995, in
connection with obtaining a new credit facility from its commercial bank lender,
Mr. Swenson and the Company agreed to the termination of Mr. Swenson's
consulting agreement, effective December 1995. Prior to such termination, Mr.
Swenson was paid $88,000 pursuant to the terms of such agreement for 1995.
Under the Company's Stock Option Plan for Non-Employee Directors (the
"Directors' Plan"), each non-employee director of the Company, as defined in the
Directors' Plan, is automatically granted a nonqualified stock option to
purchase 5,000 shares of the Common Stock on June 1st of each year, beginning
June 1, 1995. Such options become exercisable in full one year from the date of
grant if the non-employee director remains a non-employee director on such date.
The exercise price for all options granted under the Directors' Plan is the fair
market value on the date of grant. Such options are treated as nonqualified
stock options for federal income tax purposes. Under the Directors' Plan, on
each of June 1, 1995 and June 1, 1996, Mr. Bolger, Mr. Cost, Mr. Ferrell and Mr.
Shaw were each granted an option to purchase 5,000 shares of Common Stock having
an exercise price of $2.625 and $1.25 per share, respectively.
Employment Agreements and Termination of Employment Arrangements
Each executive officer of the Company is a party to an employment agreement
with the Company.
Mr. Bates resigned as Chief Executive Officer of the Company in July 1995,
but continued thereafter as an employee of the Company in the position of
Special Advisor to the Chief Executive Officer and the Board of Directors. In
connection with his new position with the Company, the Company and Mr. Bates
amended his employment agreement in July 1995. Such agreement as then amended
extended to December 31, 2000. Pursuant to such agreement as then amended, Mr.
Bates' employment was on a full-time basis for the remainder of 1995 and is on a
part-time basis thereafter as follows: 1,000 hours for 1996, 750 hours for each
of 1997 and 1998 and 500 hours for each of 1999 and 2000. The annual base salary
to be paid to Mr. Bates pursuant to his employment agreement as then amended
remained at $343,236 for the remainder of 1995 and decreases thereafter as
follows: $275,000 for 1996, $250,000 for each of 1997 and 1998 and $225,000 for
each of 1999 and 2000. The employment agreement between the Company and Mr.
Bates was further amended in November 1995 as discussed below.
In November 1995, in an effort to reduce the Company's salary costs and in
connection with the Company obtaining a new credit facility from its commercial
bank lender, (i) the Company and each of Mr. Bates and Mr. Smith agreed that
neither Mr. Bates nor Mr. Smith would receive any base salary pursuant to his
employment agreement, but would continue to receive certain perquisites,
commencing December 1995 and continuing until the maturity date of such facility
(January 1997) and to extend the term of each such employee's employment
agreement (to December 31, 2001 for Mr. Bates and to January 31, 2000 for Mr.
Smith) and (ii) the company and Mr. Wren agreed that Mr. Wren's base annual
salary would be reduced by 16% for the period commencing December 1995 and
continuing through such maturity date, to extend the term of his employment
agreement to January 31, 1999 and to increase to the amount discussed below the
payment to him in the event of a termination of employment other than for cause.
The Company and Mr. Bates further agreed that his required time commitments to
the Company and the Company's obligation to pay him a base salary under his
employment agreement, would commence on the maturity date of such facility. The
annual base salary paid to Mr. Smith pursuant to his employment agreement prior
to December 1995, and which the Company has agreed to pay him commencing upon
the maturity date of its credit facility, is $211,986. The annual salary paid to
Mr. Wren pursuant to his employment agreement prior to December 1995, and which
the Company has agreed to pay him commencing on such maturity date, is
I-9
30
$269,500 and the annual salary payable to Mr. Wren from December 1995 to such
maturity date is $225,000. The Company and each of Mr. Bates, Mr. Smith and Mr.
Wren amended his employment agreement to reflect the foregoing modifications to
his employment agreement. If the employment of Mr. Bates or Mr. Smith is
terminated other than for cause, the Company will pay such individual 100% of
his annual base salary at the time of such termination for a period of 12 months
and, thereafter, 50% of his annual base salary for a period of 24 months. If the
employment of Mr. Wren is terminated other than for cause or if the Company does
not renew Mr. Wren's employment agreement at the time of expiration of the term
thereof, the Company will pay him the greater of $314,000 or his base annual
salary at the time of such termination or failure to renew for a period of 12
months. In addition, pursuant to Mr. Wren's employment agreement as amended in
September 1996, in the event of a change in control of the Company, as defined
in such agreement, followed by a termination of his employment by the Company,
Mr. Wren will receive a payment equal to two times his then base annual salary
payable in a lump sum.
The employment agreements between the Company and James O. Mattox,
Executive Vice President -- Operations, and Mr. Tepera extend to July 1998 and
January 1997, respectively, unless terminated sooner in accordance with the
provisions thereof. The current annual base salaries paid to Mr. Mattox and Mr.
Tepera pursuant to the terms of their agreements are $125,000 and $115,000,
respectively. If the employment of Mr. Mattox or Mr. Tepera are terminated other
than for cause, the Company will pay Mr. Mattox his base annual salary for a
period of three months and will pay Mr. Tepera his base annual salary for a
period of two months. In addition, pursuant to their employment agreements as
amended in September 1996, in the event of a change in control of the Company,
as defined in such agreements, followed by a termination of employment, Mr.
Mattox will receive a payment equal to two times his then base annual salary and
Mr. Tepera will receive a payment equal to one and one-half times his then base
annual salary, in each case, payable in a lump sum.
Mr. Consoli and Mr. Ingraham each resigned as an employee and executive
officer of the Company in February 1996. Pursuant to the terms of their
employment agreements with the Company, Mr. Consoli and Mr. Ingraham became
entitled to receive $77,400 and $67,310, respectively, from the Company as a
result of such resignations.
The foregoing employment agreements contain certain noncompetition
covenants pursuant to which each officer is prohibited from providing portrait
photography services to certain persons and entities within certain geographic
areas following the expiration of the terms of such agreements (without regard
to the termination of employment prior to the expiration of the terms of the
agreements). The duration of the noncompetition covenants is for five years
following the expiration of the terms of the Company's employment agreements
with each of Mr. Bates and Mr. Smith and for two years following the expiration
of the terms of the Company's employment agreements with its other executive
officers, including the Named Executive Officers. The foregoing employment
agreements entitle the Company to specific performance and liquidated damages of
$3.0 million each if Mr. Bates or Mr. Smith breaches his noncompetition covenant
with the Company.
Pursuant to the Company's Equity Compensation Plan, the Stock
Option/Compensation Committee of the Board of Directors (which administers such
plan) may, in its discretion and in accordance with the terms thereof, in the
event of a change of control as defined therein, accelerate the exercisability
of, and authorize cash settlement payments in respect of, outstanding awards,
including options, under the Plan.
Report of the Stock Option/Compensation Committee of the Board of Directors on
Executive Compensation
The Company's compensation program for its executive officers is
administered by the Stock Option/ Compensation Committee of the Board of
Directors (the "Committee"). The present members of the committee are Mr.
Bolger, Mr. Cost, Mr. Ferrell and Mr. Shaw, none of whom has ever been an
officer or employee of the Company. The Committee is responsible for determining
the compensation of the Company's executive officers and administering the
Company's equity-based compensation plans.
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31
Compensation Policy
The Committee's present policy regarding executive officer compensation is
designed principally to (i) attract and retain experienced and capable
management, an increasingly challenging goal given the increasing complexities
and challenges of the Company's business as well as the relatively small number
of companies operating in the Company's industry, (ii) motivate and reward
exceptional individual performances by the Company's executive officers and
(iii) motivate the Company's executive officers to improve shareholder return on
the Common Stock. The Committee believes that exceptional individual
performances by the Company's executive officers will positively impact the
performance of the respective areas of the Company's operations for which such
officers are responsible which will, in turn, positively impact the Company's
results of operations. The Committee further believes that improvements in
shareholder return on the Common Stock will occur principally as a result of
improvements in the Company's results of operations.
The Company's executive officer compensation for 1995 consisted of base
annual salary, stock option grants under the Equity Compensation Plan and, with
regard to certain executive officers, discretionary cash bonuses. The Company
presently has no short-term or long-term incentive program for its executive
officers other than the Company's 1992 Stock Option Plan and the Equity
Compensation Plan. The Committee's determinations as to exceptional performance
by an executive officer and the impact of such performance on the areas of the
company's operations for which such offer is responsible, as well as the further
impact, if any, of such performance on the company's results, are made
principally on a subjective basis. The determination as to exception individual
performance is based principally on a subjective assessment of the executive
officer's job performance against his job responsibilities. Such determination
is also based, to a lesser extent, on the adherence to cost budgets established
by the Company's finance department for the areas of the Company's operations
for which such executive officer is responsible. To the extent that the
exceptional performance by an executive officer, as determined on the foregoing
basis, results in a promotion or other increases in responsibilities, the
Committee typically rewards such performance with an increase in base annual
salary. To the extent that the Committee determines, on the foregoing basis,
that such exceptional performance has had a positive impact on the area of the
Company's operations for which such executive officer is responsible, which, in
turn, has had a positive impact on the Company's results of operations, the
Committee typically rewards such officer with a discretionary cash bonus and/or
an increase in base annual salary.
As discussed below, the Committee increased the base salaries of all
executive officers, other than Mr. Bates and Mr. Smith, effective April 1995.
Also as discussed below, the Committee awarded, during April and May 1995, cash
bonuses to several executive officers based upon individual performance or a
previously existing contractual arrangement to pay a bonus. In addition, during
October 1995, the Committee increased the salaries of Mr. Tepera, Mr. Consoli
and James O. Mattox, Executive Vice President-Operations, and granted stock
options to such executive officers, as well as to Mr. Wren and Mr. Smith, in
recognition of the promotions and increased responsibilities of these three
individuals in connection with the Company's restructuring of certain areas of
its senior management and to provide incentives to the key members of the
Company's restructured management in dealing with the challenges of restoring
the Company to profitability by cutting the costs and increasing sales. In
November 1995, in an effort to reduce salaries and in connection with the
Company's obtaining a new credit facility from its commercial bank lender, the
Company and each of Mr. Wren and Mr. Smith (as well as Mr. Bates) agreed to
certain salary reductions as discussed below.
The Compensation Committee has reviewed its compensation policies with
respect to the Company's executive officers and determined that Section 162(m)
of the Internal Revenue Code of 1986, as amended, should have no impact on such
policies in 1996, since no executive officer is expected to receive compensation
in 1996 in excess of the $1.0 million threshold. Section 162(m) does not
prohibit a company from paying annual compensation in excess of $1.0 million but
may limit a company's ability to deduct such excess amounts for income tax
purposes.
Base Salaries
Effective April 1995, based on the recommendations of Mr. Bates, the
Company's then Chief Executive Officer, the Committee increased the base
salaries of Mr. Wren, Mr. Consoli and Mr. Ingraham and the
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32
Company's then Chief Financial Officer. With regard to Mr. Wren and Mr. Consoli,
such increases were due to promotions and increased responsibilities. The amount
of the increase for each such executive officer was based on the level of
responsibility of each such officer in comparison to that of other executive
officers and the internal equity of executive officer salaries based on such
responsibility levels. Mr. Ingraham's salary increase was due to the change in
his job responsibilities in the first quarter of 1995 and was based on the
salary of another officer of the Company with similar job responsibilities. The
then Chief Financial Officer's salary increase was due to the significant amount
by which the 1994 salaries of the chief financial officers of each of the two
companies in the Peer Group Index in the Comparative Performance Graph exceeded
his 1994 salary.
In October 1995, the Committee increased the base salaries of Mr. Tepera,
Mr. Consoli and Mr. Mattox in recognition of their promotions (to executive
officers in the case of Mr. Tepera and Mr. Mattox) and resulting increased
responsibilities in connection with the Company's restructuring of certain areas
of its senior management and to provide incentives to the key members of the
Company's restructured senior management in dealing with the challenges of
restoring the Company to profitability by cutting costs and increasing sales.
In November 1995, in an effort to reduce its salary costs and in connection
with obtaining a new credit facility from its commercial bank lender, (i) the
Company and each of Mr. Bates and Mr. Smith agreed that neither Mr. Bates and
Mr. Smith would receive a salary (but would continue to receive certain
perquisites) and (ii) Mr. Wren and the Company agreed that his salary would be
reduced by 16% from $269,500 to $225,000, with all of the foregoing salary
changes to commence December 1995 and to continue until the maturity date of
such credit facility (January 1997).
In reviewing base salaries of executive officers, the Committee reviews the
available compensation information of the two companies in the Peer Group Index
in the Comparative Performance Graph. However, this information does not
typically affect the decisions of the Committee with regard to setting executive
officer compensation.
Short Term Incentive Opportunities -- Discretionary Cash Bonuses
The Committee determined that several of the Company's executive officers
performed exceptionally during 1994 and that such performances positively
impacted the respective areas of the Company's operations for which they were
responsible as well as the Company's results of operations for 1994. Therefore,
based upon the recommendation of Mr. Bates, cash bonuses were awarded to Mr.
Wren and Mr. Ingraham in April 1995 in amounts of approximately 10.7% and 12.3%,
respectively, of their respective base salaries. The Committee also awarded Mr.
Consoli a cash bonus in April 1995, based upon a contractual obligation to do
so, in an amount equal to approximately 33% of his base salary.
Long Term Incentive Opportunities -- 1992 Stock Option Plan and Equity
Compensation Plan
For many years, the Company has provided equity awards as a key element of
its program for motivating and rewarding its associates, including its executive
officers. Prior to its initial public offering, the Company made restricted
equity awards to its associates, and, in connection with its initial public
offering, the Company adopted the 1992 Stock Option Plan. In February 1995, the
Company established the Equity Compensation Plan, which could be used to grant
stock options or other forms of equity-based compensation, and in connection
therewith, ended the Company's ability to grant stock options under the 1992
Stock Option Plan. In May 1995, the Committee awarded an option to Mr. Bates in
recognition of his contribution to the Company since it was founded in 1982 and
to help insure his continued interest and involvement in the improvement of
shareholder return on the Common Stock following his resignation as Chief
Executive Officer. The Company and Mr. Bates agreed to the cancellation of the
option awarded Mr. Bates for no value in November 1995 in recognition of the
need for the availability of additional shares of Common Stock for awards under
the Plan to other executive officers and employees of the Company. In November
1995, the Committee awarded stock options to Mr. Smith, Mr. Wren, Mr. Consoli,
Mr. Tepera and Mr. Mattox for the reasons discussed above, and, to a lesser
extent, as to Mr. Wren and Mr. Smith, in recognition of their cooperation in
reducing their base salaries in connection with the Company's efforts to reduce
salaries and its obtaining of a new credit facility from its commercial bank
lender. The number of options awarded to each
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such executive officer was based on internal equity with regard to the number of
options held by and the level of responsibility of, in each instance, each such
officer as compared to that of other executive officers.
The Committee believes that options awarded under the Equity Compensation
Plan motivate executive officers to improve the Company's performance in the
respective areas for which they are responsible and encourage them to remain
employed by the Company. The Committee does not have a specific time during the
year when it awards options.
Chief Executive Officer
In May 1995, the Committee awarded stock options to Mr. Bates which were
subsequently cancelled for no value as discussed above. In July 1995, Mr. Bates
resigned as Chief Executive Officer of the Company but continued thereafter in
the position of Special Advisor to the Chief Executive Officer and the Board of
Directors. In connection with his new position with the Company, the Committee
and Mr. Bates amended his employment agreement with the Company as discussed
above. Also as discussed above, the Company and Mr. Bates further amended his
employment agreement in November 1995 in an effort to reduce the Company's
salary costs and in connection with the Company obtaining a new credit facility.
On July 17, 1996, Mr. Bates resigned as the Chief Executive Officer of the
Company and Mr. Wren was appointed to such position. In November, 1995, the
Committee awarded certain stock options to Mr. Wren and the Company, with the
agreement of Mr. Wren, reduced Mr. Wren's base salary all as discussed above.
STOCK OPTION/COMPENSATION COMMITTEE
Joseph P. Bolger
Bradley P. Cost
John D. Ferrell
Alan P. Shaw, Chairman
Stock Option/Compensation Committee Interlocks And Insider Participation
Bradley P. Cost is a partner in the law firm of Haythe & Curley, New York,
New York, which provides legal services to the Company from time to time.
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34
Comparative Performance Graph
The graph set forth below compares cumulative total shareholder return on
the Company's Common Stock with the cumulative total return of the companies
listed on The NASDAQ Stock Market (U.S. Companies) ("NASDAQ Market Index") and a
peer group consisting of PCA International, Inc. and CPI Corp., two
publicly-traded companies in the Company's line of business (the "Peer Group
Index"), for the period from September 17, 1992 (the date of the Company's
initial public offering) to December 31, 1995. The comparison assumes the
investment of $100 in the Common Stock, the NASDAQ Market Index and the Peer
Group Index on September 17, 1992 and the reinvestment of all dividends. The
shareholder return of each of the companies in the Peer Group Index has been
weighted according to market capitalization at the beginning of each measurement
period. With regard to the Peer Group Index, although CPI Corp.'s principal line
of business is the provision of portrait photography services, it also engages
in certain other lines of business, principally retail photo processing.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG AMERICAN STUDIOS, INC.,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
SEPTEMBER 17, 1992 TO DECEMBER 31, 1995
MEASUREMENT PERIOD AMERICAN NASDAQ MARKET PEER GROUP
(FISCAL YEAR COVERED) STUDIOS, INC. INDEX INDEX
9/17/92 100 100 100
12/31/92 235 109 119
12/31/93 52 130 96
12/31/94 24 137 101
12/31/95 12 177 97
CERTAIN TRANSACTIONS
The spouse of J. Robert Wren, Jr., Chief Executive Officer of the Company,
is a partner in the law firm of Petree Stockton, L.L.P., Charlotte, North
Carolina, the Company's general counsel.
In connection with a verbal agreement relating to the termination of his
consulting agreement with the Company in November 1995, the Company has
determined to pay Mr. Swenson $56,000 (the amount that would have been payable
during the remainder of the term of his consulting agreement had it not been
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terminated). Such agreement was terminated by the Company at such time in
connection with the modification of the Company's credit facility. At the time
of such termination, the Company verbally agreed with Mr. Swenson that it would
renew its consulting agreement with him as soon as it was permissible to do so
under the credit facility.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, requires that the
Company's directors, executive officers and persons who own more than 10% of the
outstanding shares of the Common Stock file with the Securities and Exchange
Commission certain reports relating to their ownership of Common Stock and
changes in such ownership. The Company is required to identify herein any person
subject to this requirement who failed to file any such report on a timely
basis. Based on its review of the copies of such reports furnished to the
Company and written representations that no other reports were required during
1995, the Company believes that during 1995 applicable Section 16(a) reporting
requirements were met except that Ed. J. Tepera and James O. Mattox each filed
late his initial Form 3 and Mr. Mattox filed late a Form 4 reporting his
purchase of shares of Common Stock.
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ANNEX II
[Croft & Bender Letterhead]
December 17, 1996
Board of Directors
American Studios, Inc.
11001 Park Charlotte Boulevard
Charlotte, North Carolina 28273
To the Members of the Board:
We understand that American Studios, Inc. (the "Company"), PCA
International, Inc. (the "Acquiror") and PCA Acquisition Corp. (the
"Purchaser"), a wholly-owned subsidiary of the Acquiror, propose to enter into
an Agreement and Plan of Merger (the "Agreement") pursuant to which the
Purchaser will make a tender offer (the "Offer") for all shares of the Company's
common stock, par value $.001 per share (the "Shares"), at $2.50 per Share, net
to the seller in cash. The Offer is expected to commence not later than five
business days after the public announcement of the execution of the Agreement.
The Agreement also provides that, following consummation of the Offer, the
Purchaser will be merged with and into the Company in a transaction (the
"Merger") in which each remaining Share will be converted into the right to
receive $2.50 in cash.
You have asked us whether, in our opinion, the proposed cash consideration
to be received by the holders of the Shares in the Offer and the Merger is fair
to such shareholders from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed publicly available information concerning the Company
which we believe to be relevant to our analysis;
(2) Reviewed certain information, including financial and operating
information with respect to the business, operations and prospects of the
Company, furnished to us by the Company;
(3) Conducted discussions with members of senior management of the
Company concerning its business, operations and prospects;
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(4) Reviewed the historical market prices and trading activity for the
Shares and compared them with those of certain publicly-traded companies
which we deemed to be reasonably similar to the Company;
(5) Compared the results of operations and present financial condition
of the Company with those of certain publicly-traded companies which we
deemed to be reasonably similar to the Company;
(6) Compared the proposed financial terms of the transactions
contemplated by the Agreement with the financial terms of certain other
mergers and acquisitions which we deemed to be relevant;
(7) Performed certain financial analyses with respect to the Company's
projected future operating performance, including a discounted cash flow
analysis;
(8) Reviewed the final execution draft of the Agreement; and
(9) Reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we
deemed necessary.
In preparing our opinion, we have relied on the accuracy and completeness
of all information supplied or otherwise made available to us by the Company,
and, although we have discussed such information with management, we have not
independently verified such information. With respect to the financial forecasts
for the years 1997 through 2000 furnished by the Company, we have assumed that
they have been reasonably prepared and reflect the best currently available
estimates and judgment of the Company's management as to the expected future
financial performance of the Company. We have not conducted a physical
inspection of the properties and facilities of the Company, and we have not made
nor obtained any evaluations or appraisals of the assets or liabilities of the
Company. In addition, you have not authorized us to solicit, and we have not
solicited, any indications of interest from any third party with respect to the
purchase of all or a part of the Company's business. Our opinion is necessarily
based upon market, economic and other conditions as they exist and can be
evaluated as of the date of this letter.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent. We hereby consent to the inclusion of this letter in the
regulatory filings required in connection with the Offer and the Merger,
including Schedule 14D-9 and the proxy statement to be filed in connection with
the Board's recommendation regarding the Offer and the Merger. This opinion is
not intended to be and shall not constitute a recommendation to any shareholder
of the Company as to whether to tender Shares pursuant to the Offer.
We have acted as financial advisor to the Company in connection with the
proposed transaction and will receive a fee for our services which is in part
contingent upon the consummation of the proposed transaction. In addition, the
Company has agreed to indemnify us for certain liabilities arising out of the
rendering of this opinion.
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On the basis of, and subject to the foregoing, we are of the opinion as of
the date hereof that the proposed cash consideration to be received by the
holders of the Shares pursuant to the Offer and the Merger is fair to such
shareholders from a financial point of view.
Very truly yours,
/s/ CROFT & BENDER LLC
CROFT & BENDER LLC
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39
[The Robinson-Humphrey Company, Inc. Letterhead]
December 17, 1996
Board of Directors
American Studios, Inc.
11001 Park Charlotte Boulevard
Charlotte, North Carolina 28273
To the Members of the Board:
We understand that American Studios, Inc. (the "Company"), PCA
International, Inc. (the "Acquiror") and PCA Acquisition Corp. (the
"Purchaser"), a wholly owned subsidiary of the Acquiror, propose to enter into
an Agreement and Plan of Merger (the "Agreement") pursuant to which the
Purchaser will make a tender offer (the "Offer") for all shares of the Company's
common stock, par value $.001 per share (the "Shares"), at $2.50 per Share, net
to the seller in cash. The Offer is expected to commence not later than five
business days after the public announcement of the execution of the Agreement.
The Agreement also provides that, following consummation of the Offer, the
Purchaser will be merged with and into the Company in a transaction (the
"Merger") in which each remaining Share will be converted into the right to
receive $2.50 in cash.
You have asked us whether, in our opinion, the proposed cash consideration
to be received by the holders of the Shares in the Offer and the Merger is fair
to such shareholders from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed publicly available information concerning the Company
which we believe to be relevant to our analysis;
(2) Reviewed certain information, including financial and operating
information with respect to the business, operations and prospects of the
Company, furnished to us by the Company;
(3) Conducted discussions with members of senior management of the
Company concerning its business, operations and prospects;
(4) Reviewed the historical market prices and trading activity for the
Shares and compared them with those of certain publicly traded companies
which we deemed to be reasonably similar to the Company;
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40
(5) Compared the results of operations and present financial condition
of the Company with those of certain publicly traded companies which we
deemed to be reasonably similar to the Company;
(6) Compared the proposed financial terms of the transactions
contemplated by the Agreement with the financial terms of certain other
mergers and acquisitions which we deemed to be relevant;
(7) Performed certain financial analyses with respect to the Company's
projected future operating performance, including a discounted cash flow
analysis;
(8) Reviewed the final execution draft of the Agreement; and
(9) Reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as we
deemed necessary.
In preparing our opinion, we have relied on the accuracy and completeness
of all information supplied or otherwise made available to us by the Company,
and, although we have discussed such information with management, we have not
independently verified such information. With respect to the financial forecasts
for the years 1997 through 2000 furnished by the Company, we have assumed that
they have been reasonably prepared and reflect the best currently available
estimates and judgment of the Company's management as to the expected future
financial performance of the Company. We have not conducted a physical
inspection of the properties and facilities of the Company, and we have not made
nor obtained any evaluations or appraisals of the assets or liabilities of the
Company. In addition, you have not authorized us to solicit, and we have not
solicited, any indications of interest from any third party with respect to the
purchase of all or a part of the Company's business. Our opinion is necessarily
based upon market, economic and other conditions as they exist and can be
evaluated as of the date of this letter.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent. We hereby consent to the inclusion of this letter in the
regulatory filings required in connection with the Offer and the Merger,
including Schedule 14D-9 and the proxy statement to be filed in connection with
the Board's recommendation regarding the Offer and the Merger. This opinion is
not intended to be and shall not constitute a recommendation to any shareholder
of the Company as to whether to tender Shares pursuant to the Offer.
We have acted as financial advisor to the Company in connection with the
proposed transaction and will receive a fee for our services which is in part
contingent upon the consummation of the proposed transaction. In addition, the
Company has agreed to indemnify us for certain liabilities arising out of the
rendering of this opinion. The Robinson-Humphrey Company, Inc. has provided
investment banking services for the Company in the past and has received
customary fees for these services. In the ordinary course of business, The
Robinson-Humphrey Company, Inc. actively trades in the common stock of the
Company for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
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41
On the basis of, and subject to the foregoing, we are of the opinion as of
the date hereof that the proposed cash consideration to be received by the
holders of the Shares pursuant to the Offer and the Merger is fair to such
shareholders from a financial point of view.
Very truly yours,
/s/ THE ROBINSON-HUMPHREY COMPANY, INC.
THE ROBINSON-HUMPHREY COMPANY, INC.
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