<PAGE> 1
PROXY STATEMENT
PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(Amendment No. 3)
Filed by the Registrant __x__
Filed by a Party other than the Registrant ____
Check the appropriate box:
__x__ Preliminary Proxy Statement
_____ Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2)
_____ Definitive Proxy Statement
_____ Definitive Additional Materials
_____ Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
BOOK CENTERS, INC.
------------------
(Name of Registrant as Specified In Its Charter)
----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
_____ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2).
_____ $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
_____ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
__________________________________________________________________.
(2) Aggregate number of securities to which transaction applies:
__________________________________________________________________.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
__________________________________________________________________.
(4) Proposed maximum aggregate value of transaction:
__________________________________________________________________.
(5) Total fee paid:
__________________________________________________________________.
<PAGE> 2
__x__ Fee paid previously with preliminary materials.
__x__ Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $7.44
(2) Form, Schedule or Registration Statement No.: Schedule 13E-3
Transaction Statement
(3) Filing Party: Book Centers, Inc.
(4) Date Filed: April 26, 1996
<PAGE> 3
BOOK CENTERS, INC.
5600 N.E. Hassalo Street
Portland, Oregon 97213
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 8, 1996
To the Stockholders of Book Centers, Inc.:
Notice is hereby given that a Special Meeting of Stockholders of Book
Centers, Inc. (the "Corporation") will be held at the offices of the
Corporation, 5600 N.E. Hassalo Street, Portland, Oregon 97213, on Tuesday,
October 8, 1996, at 10:00 a.m., local time (the "Special Meeting"), for the
following purposes:
1. To consider and vote upon a proposal to approve and adopt
Articles of Amendment to the Corporation's Restated Articles of
Incorporation providing (a) for a reduction of the number of
authorized shares of common stock (the "Common Stock") from
50,000,000 shares to 500 shares (such new shares of Common Stock
to be referred to herein as the "New Common Stock"); (b) for a
100,000 to one reverse stock split of the Corporation's Common
Stock; and (c) for a cash payment in the amount of nine cents per
share (the "Cash Consideration") of the currently outstanding
Common Stock in lieu of the issuance of any resulting fractional
shares of the New Common Stock to stockholders who, after the
reverse stock split, own less than one share of the New Common
Stock (items (a), (b), and (c) will be considered one proposal
and will be referred to herein as the "Reverse Stock Split"), all
as described more fully in the accompanying Proxy Statement; and
2. To transact such other business as may properly be
brought before the Special Meeting or any adjournments or
postponements thereof.
Only holders of shares of Common Stock of record at the close of business
on September 6, 1996, are entitled to notice of and to vote at the Special
Meeting. Each share of Common Stock outstanding on such date is entitled to one
vote at the Special Meeting.
The text of the proposed Articles of Amendment is set forth in Annex A to
the accompanying Proxy Statement. If the proposed Reverse Stock Split is
approved, the stockholders of the Corporation, other than Messrs. Daniel P.
Halloran and Barry E. Fast, executive officers, directors, and also
stockholders of the Corporation, will cease to be stockholders of the
Corporation or to have any equity interest in the Corporation, such
stockholders will receive the Cash Consideration for each share of Common Stock
of which they are the owners, and the Corporation will no longer file any
reports with the Securities and Exchange Commission.
On February 29, 1996, the Corporation issued to Messrs. Halloran and Fast
488,267 of such shares at nine cents per share in payment of certain
compensation then owing and to be owing to them under their respective
Employment Agreements with the Corporation (the issuance of these shares is
referred to in the Proxy Statement as the "Stock Transaction"). This
compensation, which equaled in the aggregate $43,944, reflected compensation
owing to them since January 1995 and additional compensation to be owing to
them until December 31, 1996, the date of the expiration of their Employment
Agreements. They owned in the aggregate 232,514 shares of Common Stock prior
to the Stock Transaction, which represented approximately 37 percent of the
Corporation's issued and outstanding shares of Common Stock.
If the proposed Reverse Stock Split is approved, a stockholder who
strictly complies with the requirements of Sections 60.551 to 60.594 of the
Oregon Business Corporation Act (the "OBCA") may dissent from the proposed
Reverse Stock Split and, in lieu of the payment of the Cash Consideration,
obtain payment in cash of the "fair value" of such stockholder's shares of
Common Stock as determined under Sections 60.551 to 60.594 of the OBCA. A
stockholder who wishes to assert such dissenter's rights must deliver to the
Corporation a written notice before the vote on the Reverse Stock Split at the
Special Meeting of such stockholder's intent to demand payment for such
stockholder's shares of Common Stock if the Reverse Stock Split is effectuated.
A stockholder who wishes to assert such dissenter's rights also may not vote
any
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of the stockholder's shares of Common Stock for the Reverse Stock Split. See
"The Reverse Stock Split - Dissenting Stockholders' Rights" in the accompanying
Proxy Statement for a statement of the rights of dissenting stockholders and a
description of the procedures required to be followed to obtain the fair value
of the shares of Common Stock. A copy of Sections 60.551 to 60.594 of the OBCA
is attached as Annex B to the accompanying Proxy Statement.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF COMMON STOCK
YOU OWN. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
PREPAID ENVELOPE WITHOUT DELAY. ANY STOCKHOLDER PRESENT AT THE SPECIAL MEETING
MAY VOTE PERSONALLY ON EACH MATTER BROUGHT BEFORE THE SPECIAL MEETING AND ANY
PROXY GIVEN BY A STOCKHOLDER MAY BE REVOKED AT ANY TIME BEFORE IT IS EXERCISED.
By Order of the Board of Directors,
/s/ Daniel P. Halloran
Daniel P. Halloran
Chairman of the Board of Directors,
Chief Executive Officer, President, and
Secretary
Portland, Oregon
September 16, 1996
PLEASE DO NOT SEND ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
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PRELIMINARY PROXY STATEMENT
BOOK CENTERS, INC.
5600 N.E. HASSALO STREET
PORTLAND, OREGON 97213
-------------------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 8, 1996
-------------------------
This Proxy Statement is being furnished to the stockholders of Book
Centers, Inc., an Oregon corporation (the "Corporation"), in connection with
the solicitation of proxies by the Board of Directors of the Corporation (the
"Board of Directors") from holders of outstanding shares of common stock, no
par value, of the Corporation (the "Common Stock"), for use at the Special
Meeting of the Stockholders to be held on Tuesday, October 8, 1996, at the
Corporation's offices at 5600 N.E. Hassalo Street, Portland, Oregon 97213, and
any adjournments or postponements thereof (the "Special Meeting"). This Proxy
Statement and the attached Notice of Special Meeting of Stockholders and the
Proxy Card are first being mailed to stockholders on or about September 16,
1996.
At the Special Meeting, holders of shares of Common Stock on the
applicable record date will consider and vote upon the proposal by the Board of
Directors to approve and adopt Articles of Amendment to the Corporation's
Restated Articles of Incorporation (the "Articles of Amendment") providing (a)
for a reduction of the number of authorized shares of Common Stock from
50,000,000 shares to 500 shares (such new shares of Common Stock are referred
to herein as the "New Common Stock"); (b) for a 100,000 to one reverse stock
split of the Corporation's Common Stock; and (c) for a cash payment of nine
cents per share (the "Cash Consideration") of the currently outstanding Common
Stock in lieu of the issuance of any resulting fractional shares of the New
Common Stock to any stockholders who, after the reverse stock split, own less
than one share of New Common Stock (the "Fractional Stockholders") (items (a),
(b), and (c) will be considered one proposal and will be referred to herein as
the "Reverse Stock Split").
Pursuant to the Oregon Business Corporation Act, the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock is required
to approve the proposed Reverse Stock Split. Mr. Daniel P. Halloran, Chairman
of the Board of Directors, Chief Executive Officer, and President of the
Corporation, and Mr. Barry E. Fast, Vice President of the Corporation, have
advised the Corporation that they intend to vote their shares, representing
approximately 64 percent of the outstanding shares of Common Stock, in favor of
the Reverse Stock Split.
The text of the proposed Articles of Amendment is set forth in Annex A to
the accompanying Proxy Statement. If the proposed Reverse Stock Split is
approved, the stockholders, other than Messrs. Halloran and Fast, executive
officers, directors, and also stockholders of the Corporation, will cease to be
stockholders of the Corporation or to have any equity interest in the
Corporation, such stockholders will receive the Cash Consideration for each
share of Common Stock of which they are the owner, stockholders, and the
Corporation will no longer file any reports with the Securities and Exchange
Commission ("SEC").
STOCKHOLDERS ARE ENCOURAGED TO READ AND REVIEW CAREFULLY THIS PROXY
STATEMENT AND THE FINANCIAL INFORMATION AND ANNEXES INCLUDED HEREWITH,
INCLUDING WITHOUT LIMITATION THE SECTIONS ENTITLED "SPECIAL FACTORS -
RECOMMENDATIONS OF THE BOARD OF DIRECTORS; FAIRNESS OF THE REVERSE STOCK
SPLIT," "SPECIAL FACTORS - INTEREST OF CERTAIN PERSONS IN THE REVERSE STOCK
SPLIT; CONFLICTS OF INTEREST," "SPECIAL FACTORS - LACK OF REPORTS, OPINIONS,
AND APPRAISALS," "SPECIAL FACTORS - CERTAIN EFFECTS OF THE REVERSE STOCK
SPLIT," AND "THE REVERSE STOCK SPLIT - TRANSACTIONS IN SHARES OF COMMON STOCK
OF CORPORATION."
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN
CONNECTION
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WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE CORPORATION OR ANY OTHER PERSON.
-------------------------
The date of this Proxy Statement is September 16, 1996.
ii
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY 1
The Special Meeting 1
Special Factors 2
Other Risk Factors 4
Terms of the Reverse Stock Split 5
SPECIAL FACTORS 6
Background and Reasons for the Reverse Stock Split 6
Purpose of the Reverse Stock Split 10
Recommendations of the Board of Directors; Fairness of the Reverse
Stock Split 10
Interest of Certain Persons in the Reverse Stock Split; Conflicts
of Interest 19
Lack of Opinions, Appraisals, and Reports 20
Plans for the Corporation after the Reverse Stock Split 20
Certain Effects of the Reverse Stock Split 20
Certain Federal Income Tax Consequences 21
Source and Amounts of Funds for and Expenses of the Reverse Stock
Split 22
THE REVERSE STOCK SPLIT 23
Amendment of Restated Articles of Incorporation to Effect the
Reverse Stock Split 23
Exchange of Shares and Payment in Lieu of Issuance of Fractional
Shares 23
Voting; Vote Required 24
Dissenting Stockholders' Rights 24
Transactions in Shares of Common Stock of Corporation 25
MARKET PRICES OF SHARES OF COMMON STOCK; DIVIDENDS 28
DIRECTORS AND EXECUTIVE OFFICERS 30
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 31
INDEPENDENT PUBLIC ACCOUNTANTS 32
FINANCIAL INFORMATION 32
ADDITIONAL INFORMATION 33
INDEX TO FINANCIAL INFORMATION F-1
ANNEXES:
A -- Form of Proposed Articles of Amendment to Restated Articles
of Incorporation
B -- Sections 60.551 to 60.594 of the Oregon Business Corporation
Act
</TABLE>
iii
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SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement (the "Proxy Statement"). This summary is not
intended to be a complete description of the matters covered in this Proxy
Statement and is subject to and qualified in its entirety by reference to the
more detailed information contained elsewhere in this Proxy Statement,
including the Annexes hereto and the documents incorporated by reference
herein.
THE SPECIAL MEETING
Time, Date, and Place of Special Meeting.
A special meeting of the stockholders of the Corporation (the "Special
Meeting") will be held on Tuesday, October 8, 1996, at 10:00 a.m., local time,
at the Corporation's offices at 5600 N.E. Hassalo Street, Portland, Oregon
97213.
Purpose of the Special Meeting.
At the Special Meeting, holders of shares of Common Stock will consider
and vote upon a proposal to approve and adopt Articles of Amendment to the
Corporation's Restated Articles of Incorporation (the "Articles of Amendment")
providing (a) for a reduction in the number of authorized shares of Common
Stock from 50,000,000 shares to 500 shares (the "New Common Stock"), (b) for a
100,000 to one reverse stock split of the Corporation's Common Stock, and (c)
for a cash payment of nine cents per share (the "Cash Consideration") of the
currently outstanding Common Stock in lieu of the issuance of any resulting
shares of the New Common Stock to stockholders who, after the reverse stock
split, own less than one share of the New Common Stock (the "Fractional
Stockholders") (items (a), (b), and (c) are considered one proposal and will be
referred to herein as the "Reverse Stock Split"). The Board of Directors has
unanimously approved the Reverse Stock Split. The Board of Directors
unanimously recommends that the stockholders vote FOR the Reverse Stock Split.
Record Date; Quorum.
The close of business on September 6, 1996 (the "Record Date") has been
fixed as the record date for determining holders of shares of Common Stock
entitled to vote at the Special Meeting. Each share of Common Stock
outstanding on such date is entitled to one vote at the Special Meeting. As of
the Record Date, 1,125,156 shares of Common Stock were outstanding and held of
record by 814 holders. The presence, in person or by proxy, of the holders of
a majority of the outstanding shares of Common Stock entitled to vote at the
Special Meeting is necessary to constitute a quorum for the transaction of
business at the Special Meeting.
Required Vote.
Pursuant to the Oregon Business Corporation Act, the affirmative vote of
the holders of a majority of the shares of Common Stock is required to approve
the Reverse Stock Split. Abstentions and broker non-votes are counted for
purposes of determining whether a quorum exists for the transaction of business
at the Special Meeting but are not counted for purposes of determining whether
the holders of a majority of the shares of Common Stock present in person or by
proxy at the Special Meeting voted in favor of the Reverse Stock Split. Mr.
Daniel P. Halloran, Chairman of the Board of Directors, Chief Executive
Officer, and President of the Corporation, and Barry E. Fast, Vice President of
the Corporation, own collectively approximately 64 percent of the outstanding
shares of Common Stock. They have indicated that they intend to vote in favor
of the Reverse Stock Split.
Proxies.
Shares of Common Stock represented by properly executed proxies received
at or prior to the Special Meeting and which have not been revoked will be
voted in accordance with the instructions indicated thereon. If no
instructions are indicated on a properly executed proxy, such proxies will be
voted FOR the Reverse Stock Split.
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A stockholder who has given a proxy may revoke such proxy at any time
prior to its exercise at the Special Meeting by (i) giving written notice of
revocation to the Secretary of the Corporation, (ii) properly submitting to the
Corporation a duly executed proxy bearing a later date, or (iii) attending the
Special Meeting and voting in person. Attendance at the Special Meeting will
not in and of itself revoke a proxy. All written notices of revocation and
other communications with respect to revocation of proxies should be addressed
as follows: Book Centers, Inc., 5600 N.E. Hassalo Street, Portland, Oregon
97213, Attention: Daniel P. Halloran, Secretary.
If the Special Meeting is adjourned or postponed for any purpose, at any
subsequent reconvening of the Special Meeting, all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the meeting (except for any proxies which have theretofore effectively been
revoked or withdrawn), notwithstanding that they may have been effectively
voted on the same or any other matter at a previous meeting.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS. IF THE REVERSE STOCK SPLIT IS CONSUMMATED, THE PROCEDURE FOR THE
EXCHANGE OF CERTIFICATES REPRESENTING SHARES OF COMMON STOCK WILL BE AS SET
FORTH IN THIS PROXY STATEMENT. SEE "THE REVERSE STOCK SPLIT -- EXCHANGE OF
SHARES AND PAYMENT IN LIEU OF ISSUANCE OF FRACTIONAL SHARES."
Solicitation of Proxies.
The cost of solicitation of the stockholders of the Corporation will be
paid by the Corporation. Such cost will include the reimbursement of banks,
brokerage firms, nominees, fiduciaries, and custodians for the expenses of
forwarding solicitation material to beneficial owners of shares. In addition
to the solicitation of proxies by use of mail, the directors, officers, and
employees of the Corporation may solicit proxies personally or by telephone,
telegraph, or facsimile transmission. Such directors, officers, and employees
will be not be additionally compensated for such solicitation but may be
reimbursed for out-of-pocket expenses incurred in connection therewith.
SPECIAL FACTORS
Background and Reasons for the Reverse Stock Split.
Since the 1980s, the Board of Directors and Messrs Halloran and Fast
increasingly recognized (a) that significant financial and operational
constraints have prevented and will continue to prevent the Corporation's
stockholders from enjoying the benefits which usually flow from being a
public company, including the payment of dividends and any meaningful
appreciation of the value of their shares of Common Stock; () that the
Corporation has never developed and will likely not develop in the
foreseeable future any significant trading market for its shares of its
Common Stock; (c) the Corporation has incurred and will continue to incur
substantial costs as a result of its status as a public company under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (estimated to
be approximately $50,000 to $75,000 annually); (d) that the constraints of
public ownership have prevented and will continue to prevent the Corporation
from pursuing its long-term business plan; and (e) that the Corporation's
status as a public company has placed and will continue to place it at a
substantial competitive disadvantage.
In January 1996, since neither the Corporation nor its stockholders had
derived any material benefit from the registration of the Common Stock under
the Exchange Act, Messrs. Halloran and Fast concurred that it was both
appropriate and desirable to convert the Corporation to private ownership.
Accordingly, Mr. Halloran prepared a proposal to convert the Corporation to
private ownership.
Messrs. Halloran and Fast, in submitting the proposal to convert the
Corporation to private ownership to the Board of Directors at that time,
contemplated that the Board of Directors could then utilize an appraisal
the Corporation had recently obtained from an outside third party (referred to
in this Proxy Statement as the "Parrott Appraisal Report"). The Corporation
initially obtained the Parrott Appraisal Report for purposes of the payment of
certain compensation owing to Messrs. Halloran and Fast in the form of shares
of the Corporation's Common Stock (referred to in this Proxy Statement as the
"Stock Transaction"). They believed that the Parrott Appraisal Report could
assist the Board of Directors in determining
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the amount of the Cash Consideration to pay the Fractional Stockholders and
could prevent the Corporation from having to incur the substantial additional
expense of obtaining a new appraisal at a later time.
The Corporation first retained The Parrott Partnership to prepare the
Parrott Appraisal Report in November 1995 in connection with the payment of
certain compensation then owing and to be owing to Messrs Halloran and Fast
under their respective Employment Agreements. In August 1995, Messrs. Halloran
and Fast had informal discussions among themselves and the other member of the
Board of Directors, Mr. Frank L. Ford, with respect to the payment of the
agreed upon salary increases then owing and to be owing through December 31,
1996, the date of the expiration of their respective Employment Agreements
(such compensation is referred to in this Proxy Statement as the "Deferred
Compensation"). They proposed at that time that, instead of the Corporation
utilizing its limited cash resources to pay the Deferred Compensation to them,
the Corporation pay the Deferred Compensation to them in the form of shares of
the Corporation's Common Stock. The Parrott Partnership in its Parrott
Appraisal Report dated December 5, 1995, had determined that the fair market
value of the Corporation was $56,000 (or approximately nine cents per share).
At that time, Messrs. Halloran and Fast then asked that the Corporation issue
to them such number of shares of Common Stock equal to the amount of the
Deferred Compensation, multiplied by nine cents (the value of each share of
Common Stock as set forth in the Parrott Appraisal Report).
The Board of Directors of the Corporation first considered formally the
Stock Transaction at its meeting on February 29, 1996. It unanimously approved
the issuance at that meeting of 488,267 shares of Common Stock in payment of
the Deferred Compensation to Messrs. Halloran and Fast. Messrs. Halloran and
Fast, prior to the Stock Transaction, owned in the aggregate approximately 37
percent of the Corporation's issued and outstanding shares of Common Stock.
They now own approximately 64 percent of the Corporation's issued and
outstanding shares of Common Stock. It concluded that, in connection with its
determination of the Cash Consideration and the fairness of the Reverse Stock
Split, despite the dilutive effect of the issuance of the shares in the Stock
Transaction on the per value share of the Corporation's Common Stock, the
proposed Cash Consideration should not be less than the value at which the
Corporation issued the shares to Messrs. Halloran and Fast. It also concluded
that, even though the issuance of the shares of Common Stock to Messrs.
Halloran and Fast would result in them owing a majority of the outstanding
shares of the Corporation's Common Stock, the Stock Transaction would not
affect its fairness determination with respect to the Reverse Stock Split which
it intended to consider and vote on at this meeting immediately after it
considered and voted on the Stock Transaction. They concluded that Messrs.
Halloran, Fast, and Ford and the Corporation's Employee Stock Ownership Plan
("ESOP) would vote the shares currently owned by them in favor of the Reverse
Stock Split at the Special Meeting. As a result, the additional votes of
stockholders owning only three percent of the issued and outstanding shares of
Common Stock outstanding prior to the Stock Transaction would be required to
approve the Reverse Stock Split. They believed it highly unlikely that all of
the unaffiliated stockholders would vote against the Reverse Stock Split. They
also believed that the stockholders would approve the Reverse Stock Split, even
if the Board of Directors did not approve the issuance of the additional shares
of Common Stock to Messrs. Halloran and Fast. Accordingly, they concluded that
the Stock Transaction would not affect the outcome of the vote on the Reverse
Stock Split at the Special Meeting and, thus, that it would not have any
procedural or substantive impact on its fairness determination with respect to
the Reverse Stock Split. For a discussion of the Stock Transaction, see "The
Reverse Stock Split - Transactions in Shares of Common Stock of Corporation."
The Board of Directors at its meeting on February 29, 1996, also
considered and voted on Mr. Halloran's proposal to convert the Corporation to
private ownership. It also considered and voted on his proposal at its meeting
on March 28, 1996. It unanimously approved at these meetings the Reverse Stock
Split, including the payment of the Cash Consideration to Fractional
Stockholders. The Board of Directors also directed that the Reverse Stock
Split be placed on the agenda for consideration of the stockholders at the
Special Meeting. See "Special Factors - Background and Reasons for the Reverse
Stock Split."
Purpose of the Reverse Stock Split.
The purpose of the Reverse Stock Split is to cause the Corporation to
become a privately owned corporation with Messrs. Halloran and Fast becoming
the sole stockholders of the Corporation and to afford the Fractional
Stockholders a one time opportunity to receive, in the reasonable judgment
of the Board of Directors and Messrs. Halloran and Fast, a fair
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price for their shares without the Fractional Stockholders incurring the
attendant costs of sale. See "Special Factors - Background and Reasons for the
Reverse Stock Split" and "Special Factors - Purposes of the Reverse Stock
Split."
Recommendations of the Board of Directors; Fairness of the Reverse Stock
Split.
The Board of Directors concluded that the Reverse Stock Split is fair to,
and in the best interest of, the Corporation and its stockholders (including
the Fractional Stockholders). Accordingly, the Board of Directors has
unanimously approved the Reverse Stock Split and recommends a vote FOR the
Reverse Stock Split. See "Special Factors - Recommendations of the Board of
Directors of the Corporation; Fairness of the Reverse Stock Split."
Certain Federal Income Tax Consequences.
The Fractional Stockholders of the New Common Stock will recognize gain or
loss based on their adjusted basis in their shares. See "Special Factors -
Certain Federal Income Tax Consequences."
OTHER RISK FACTORS
Certain Effects of the Reverse Stock Split.
Upon the effectiveness of the Reverse Stock Split, the stockholders of the
Corporation, other than Messrs. Halloran and Fast, who are also stockholders of
the Corporation, will no longer have any continuing interest as stockholders of
the Corporation, no market will exist for the Corporation's shares of Common
Stock, and the Corporation will suspend the filing of reports under, and will
apply for termination of the registration of its shares of the New Common Stock
pursuant to, to the Exchange Act. See "Special Factors - Certain Effects of
the Reverse Stock Split."
Lack of Reports, Opinions, and Appraisals.
Neither the Corporation nor the Board of Directors received any report,
opinion, or appraisal from an outside party with respect to the Reverse Stock
Split generally or with respect to its fairness. The Corporation and Messrs.
Halloran and Fast had previously obtained from an outside party an appraisal
(referred to in this Proxy Statement as the "Parrott Appraisal Report") in
connection with the payment of compensation to Messrs. Halloran and Fast in the
form of shares of the Corporation's Common Stock. Although they did not obtain
the Parrott Appraisal Report for purposes of the Reverse Stock Split, the Board
of Directors and Messrs. Halloran and Fast accorded significant importance to
the Parrott Appraisal Report in connection with their determination of the Cash
Consideration and the fairness of the Reverse Stock Split. See "Special
Factors - Recommendations of the Board of Directors; Fairness of the Reverse
Stock Split," "Special Factors - Lack of Opinions, Appraisals, and Reports,"
and "The Reverse Stock Split - Transactions in Shares of Common Stock of
Corporation."
Conflicts of Interest.
Messrs. Halloran and Fast are the principal stockholders, two of the three
members of the Board of Directors, and the sole executive officers of the
Corporation. They will continue to be officers and directors of the
Corporation and its only stockholders after the consummation of the Reverse
Stock Split. They own, as of the date of this Proxy Statement, in the
aggregate 727,781 shares of the Common Stock, representing approximately 64
percent of the Corporation's issued and outstanding shares of Common Stock.
The Corporation, on February 29, 1996, issued to Messrs. Halloran and Fast
488,267 of such shares at nine cents per share in payment of certain
compensation then owing and to be owing to them under their respective
Employment Agreements with the Corporation (the issuance of these shares is
referred to in this Proxy Statement as the "Stock Transaction"). This
compensation, which equaled in the aggregate $43,944, reflected compensation
owing to them since January 1995 and additional compensation to be owing to
them until December 31, 1996, the date of the expiration of their Employment
Agreements. For Mr. Halloran, such compensation equaled $23,469 (with $11,600
of such amount representing compensation owing to him as of February 29, 1996,
and $11,869 representing compensation owing to him between February 29, 1996,
and December 31, 1996). For Mr. Fast, such compensation equaled $20,475 (with
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$10,121 of such amount representing the compensation owing to him as of
February 29, 1996, and $10,354 representing compensation owing to him between
February 29, 1996, and December 31, 1996). They owned in the aggregate 232,514
shares of Common Stock prior to the Stock Transaction, which represented
approximately 37 percent of the Corporation's issued and outstanding shares of
Common Stock. Messrs. Halloran and Fast collectively own a sufficient number
of shares of Common Stock to approve the Reverse Stock Split. They have
indicated that they will each vote their shares in favor of the approval of the
Reverse Stock Split. They were present and voted at the meetings of the Board
of Directors at which the Stock Transaction and the Reverse Stock Split were
considered and approved. The Board of Directors was aware of these potential
and actual conflicts of interest but concluded that, despite these conflicts,
the Stock Transaction was, and the Reverse Stock Split is, fair to the
Corporation and its stockholders. See "Special Factors - Interest of Certain
Persons in the Reverse Stock Split; Conflict of Interest" and "The Reverse
Stock Split - Transactions in Shares of Common Stock of the Corporation."
TERMS OF THE REVERSE STOCK SPLIT
Terms of the Reverse Stock Split.
The proposed Articles of Amendment provide (a) for a reduction of the
authorized shares of Common Stock of the Corporation from 50,000,000 shares of
Common Stock to 500 shares (the "New Common Stock"), (b) for a 100,000 to one
reverse stock split of the Corporation's Common Stock, and (c) for a cash
payment in the amount of nine cents per share (the "Cash Consideration") of the
currently outstanding Common Stock in lieu of the issuance of any resulting
fractional shares of the New Common Stock to stockholders who, after the
Reverse Stock Split, own less than one share of the New Common Stock (the
"Fractional Stockholders"). Immediately upon the filing of the Articles of
Amendment with the Secretary of State of the State of Oregon, every 100,000
shares of the Corporation's Common Stock issued on the date of the filing of
the Articles of Amendment will be automatically converted into one share of the
Corporation's New Common Stock. The Corporation will then acquire from the
Fractional Stockholders for cash all resulting fractional shares of New Common
Stock at a per share price equal to the Cash Consideration. The Corporation
will pay for such fractional shares upon the physical surrender by the
Fractional Stockholders of their share certificates pursuant to the transmittal
instructions to be mailed by the Corporation to the Fractional Stockholders.
See "The Reverse Stock Split - Amendment of Restated Articles of Incorporation
to Effect the Reverse Stock Split" and "The Reverse Stock Split - Exchange of
Shares and Payment in Lieu of Issuance of Fractional Shares of New Common
Stock." As a result of the Reverse Stock Split, Messrs. Halloran and Fast will
be the only remaining stockholders of the Corporation, the Fractional
Stockholders, who comprise all of the other stockholders of the Corporation
will receive a cash payment equal to the Cash Consideration for each share of
Common Stock of which such Fractional Stockholders are the owners, and the
Corporation, will no longer be subject to the reporting requirements of the
Exchange Act. See "Special Factors - Certain Effects of the Reverse Stock
Split," "The Reverse Stock Split - Amendment of Restated Articles of
Incorporation to Effect the Reverse Stock Split," and "The Reverse Stock Split
- - Exchange of Shares and Payment in Lieu of Issuance of Fractional Shares."
Dissenting Stockholders' Rights.
If the proposed Reverse Stock Split is approved, a stockholder who
strictly complies with the requirements of Sections 60.551 to 60.594 of the
Oregon Business Corporation Act (the "OBCA") may dissent from the proposed
Reverse Stock Split and, in lieu of the payment of the Cash Consideration,
obtain payment in cash of the "fair value" of such stockholder's shares of
Common Stock as determined under Sections 60.551 to 60.594 of the OBCA. A
stockholder who wishes to assert such dissenter's rights must deliver to the
Corporation a written notice before the vote on the Reverse Stock Split at the
Special Meeting of such stockholder's intent to demand payment for such
stockholder's shares of Common Stock if the Reverse Stock Split is effectuated.
A stockholder who wishes to assert such dissenter's rights also may not vote
any of the stockholder's shares of Common Stock for the Reverse Stock Split.
See "The Reverse Stock Split - Dissenting Stockholders' Rights" for a statement
of the rights of dissenting stockholders and a description of the procedures
required to be followed to obtain the fair value of the shares of Common Stock.
A copy of Sections 60.551 to 60.594 of the OBCA is attached as Annex B hereto.
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SPECIAL FACTORS
BACKGROUND AND REASONS FOR REVERSE STOCK SPLIT
The Corporation (formerly known as Industrial Investment Corporation) is
an Oregon corporation incorporated in 1961. The Corporation, after it was
incorporated, engaged principally in the businesses of agriculture and
ownership of real property.
In 1969, the Corporation filed a registration statement on Form 10 with
the SEC. At that time, it became subject to regulatory and reporting
requirements of the Exchange Act.
During the 1980s, the Corporation acquired all of the voting common stock
of Academic Book Center, Inc. ("Academic") and Scholarly Book Center, Inc.
("Scholarly"), Oregon and Illinois corporations, respectively, engaged in the
business of the distribution of books on a wholesale basis worldwide to
college, university, industrial, and other research libraries either for their
own use or for resale.
Also beginning in the 1980s, the Corporation began to divest itself of its
other businesses unrelated to the distribution of books and of its unprofitable
operations. It first divested its businesses of agriculture and real property
ownership. In June 1991, the Corporation's Board of Directors closed
Scholarly's operations, and then in 1992, the Corporation divested itself of
International Specialized Book Services, Inc., a division of Academic providing
marketing, promotional, warehousing order fulfillment, accounting, and
consulting services to publishers of books and periodicals. The Corporation
now operates its business through Academic only.
During this time, the Board of Directors and Messrs. Halloran and Fast
increasingly have recognized that neither the Corporation nor its stockholders
derive any material benefit from the continued registration of the Common Stock
under the Exchange Act. First, significant financial and operational
constraints have prevented the Corporation and its stockholders from enjoying
the benefits which traditionally flow from being a public company. The
Corporation has substantial liabilities, including accounts payable which, at
June 30, 1995, totaled $3,073,561. The Corporation also in part relies upon
two lines of credit which permit the Corporation to borrow up to $1,400,000 in
the aggregate to finance its operations. All of the Corporation's assets
secure these lines of credit, and Messrs. Halloran and Fast are required to
guarantee them and to pledge their personal assets as additional security for
their repayment. These lines of credit also do not permit the Corporation to
pay any dividends. On a long-term basis, these restraints will continue to
restrict the ability of the Corporation to obtain financing for working capital
or other purposes, make the Corporation more vulnerable to economic downturns,
and limit its ability to withstand competitive pressures. On a short term
basis, the Corporation has been required to devote a substantial portion of its
cash flow for operations to the payment of interest on the line of credit and
to the payment of other liabilities.
Most importantly, these constraints, together with the substantial
legal, accounting and other costs incurred as a result of being a public
company, have prevented and will continue to prevent for the foreseeable
future the payment of any dividends to its stockholders. They will continue
to prevent any meaningful appreciation in the value of the Corporation's
shares of Common Stock. Instead, they will continue to subject the
stockholders to the risks associated with an investment in a highly leveraged
company without the benefit of any return to them.
Second, the Corporation has never developed and will likely not develop
in the foreseeable future any significant trading market for its shares of
Common Stock. The Common Stock has never traded in any established market
and transactions occur infrequently and sporadically. The Corporation also
has never qualified and will not likely qualify in the foreseeable future
for listing on any national securities exchange or for quotation on an inter-
dealer quotation system of a registered national securities association (such
as NASDAQ). For the fiscal years ended June 30, 1994, 1995, and 1996, the
Corporation's market maker, Carr Securities, effected only five purchases and
sales of the shares of Common Stock. On August 23, 1994, it effected the sale
of 200 shares at 25 cents per share; on June 14, 1995, it effected the sale of
200 shares at 12 1/2 cents per share; on September 21, 1995, it effected the
sale of 100 shares at 87 1/2 cents per share; on April 17, 1996, it effected
the sale of 400 shares at 25 cents per share; and on April 25, 1996, it
effected the sale of 1,000 shares at 25 cents per share. For these fiscal
years, Messrs. Halloran and Fast each effected only four purchases, each
totaling in
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the aggregate 6,575 shares at prices ranging between ten and 15 cents. See
"Market Prices for Shares of Common Stock; Dividends."
Moreover, a significant number of the Corporation's stockholders hold less
than 500 shares. Of approximately 814 stockholders of record, 347
(approximately 43 percent of the Corporation's stockholders) hold 100 or fewer
shares of Common Stock and 673 (approximately 83 percent of the Corporation's
stockholders) hold 500 or fewer shares. The Corporation also does not have
current mailing or forwarding addresses for 211 stockholders (approximately 26
percent of the stockholders). Thus, if for any reason a trading market
developed for the Corporation's Common Stock, stockholders holding less than
500 shares would nonetheless have limited opportunities to realize any value
for their shares since the sales of their shares would ordinarily involve
disproportionately high brokerage commissions.
Third, the Corporation has incurred and will continue to incur substantial
costs as a result of its status as a public company under the Exchange Act
(estimated to be approximately $50,000 to $75,000 annually). It incurs costs,
including legal, accounting, and printing fees, to prepare annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, reports
and schedules required to be filed by the Corporation's officers and directors,
and proxy solicitation materials and formal annual reports for distribution to
stockholders prior to an annual meeting. The Corporation's management is also
required to devote substantial time and attention to the preparation and review
of these filings, the furnishing of information to stockholders, and to other
stockholder matters.
Fourth, the constraints of public ownership have prevented and will
continue to prevent the Corporation from pursuing its long-term business plan
of emphasizing product development and improvement, cost efficiencies,
productivity, technological innovation, facility upgrading, and superior
service. For example, the Corporation could explore capital acquisitions,
compensation programs for management and others, and establishment and funding
of retirement plans for employees without considering the immediate impact
thereof on the short-term profitability of the Corporation. These constraints
also have prevented and will continue to prevent management from having the
flexibility in the everyday operations of the Corporation inherent with private
ownership.
Fifth, the Corporation's status as a public company has placed and will
continue to place it at a substantial competitive disadvantage. The reports
the Corporation is required to file with the SEC provide to the Corporation's
competitors information and insight into the Corporation's operations and
financial status. On the other hand, almost all of the Corporation's
competitors are privately owned and, thus, are not required to disclose
publicly any information about their operations and financial status. The
Corporation's competitors which are publicly-held either are significantly
larger or are subsidiaries of larger, diversified public companies.
In January 1996, since neither the Corporation nor its stockholders had
derived any material benefit from the registration of the Common Stock under
the Exchange Act, Messrs. Halloran and Fast concurred that it was both
appropriate and desirable to convert the Corporation to private ownership.
Accordingly, Mr. Halloran prepared a proposal to convert the Corporation to
private ownership.
Messrs. Halloran and Fast desired to present such proposal to the Board of
Directors as soon as reasonably possible, because they contemplated that the
Board of Directors could then utilize an appraisal the Corporation had recently
obtained from an outside third party (referred to in this Proxy Statement as
the "Parrott Appraisal Report"). The Corporation had obtained the Parrott
Appraisal Report for purposes of the payment of certain compensation owing to
Messrs. Halloran and Fast in the form of shares of the Corporation's Common
Stock (referred to in this Proxy Statement as the "Stock Transaction"). See
"The Reverse Stock Split - Transactions in Shares of Common Stock." They
believed that the Parrott Appraisal Report could assist the Board of Directors
in determining the amount of the Cash Consideration to pay the Fractional
Stockholders and could prevent the Corporation from having to incur the
substantial additional expense of obtaining a new appraisal at a later time.
Mr. Halloran presented his proposal to convert the Corporation to private
ownership, and the Board of Directors first considered and voted on such
proposal, at its meeting on February 29, 1996, at which all of the
Corporation's three directors, Messrs. Halloran and Fast and Mr. Frank L. Ford,
were present. The terms of Mr. Halloran's proposal was outlined at this
meeting. It was proposed that the Board of Directors approve Articles of
Amendment to the Corporation's
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<PAGE> 15
Restated Articles of Incorporation providing for a reduction of the number of
authorized shares of common stock from 50,000,000 shares of common stock, no
par value (the "Common Stock") to 500 shares of common stock, no par value (the
"New Common Stock"), and for a 100,000 to one reverse stock split of the
Corporation's Common Stock (the "Reverse Stock Split") and that such Articles
of Amendment be placed on the agenda for consideration of the stockholders at a
special meeting. If the stockholders approved this proposal, then every
100,000 shares of Common Stock would automatically be converted into one share
of New Common Stock; no fractional shares of New Common Stock would be issued
to stockholders who would own less than 100,000 shares of Common Stock and,
consequently, whose ownership would, as a result of the reverse stock split, be
reduced to less than one share of New Common Stock (the "Fractional
Stockholders"). It was proposed that the Fractional Stockholders would instead
receive cash in lieu of the issuance of one share of New Common Stock. On the
effectiveness of the Reserve Stock Split, the Fractional Stockholders would no
longer have any continuing interest as stockholders in the Corporation; Messrs.
Halloran and Fast would be the only remaining stockholders of the Corporation;
and the Corporation's obligation to file reports pursuant to Section 15(d) of
the Exchange Act would be suspended and the registration of the shares of
Common Stock would be eligible for termination under Section 12(g)(4) of the
Exchange Act.
It was explained that Mr. Halloran believed that neither the Corporation
nor its stockholders derive any material benefit from the continued
registration of the Common Stock under the Exchange Act and that the monetary
expense and burden of management of continued registration significantly
outweighed any material benefit that the Corporation or its stockholders may
receive for such registration. Mr. Halloran provided the following reasons for
the proposed Reverse Stock Split: that significant financial and operational
constraints to which the Corporation is subject have prevented and will
continue to prevent the Corporation and its stockholders from enjoying the
benefits which traditionally flow from being a public company; that the
Corporation has not developed and will not develop in the foreseeable future
any significant trading market for its shares of Common Stock; that a
significant number of stockholders own less than 500 shares each; that the
Corporation incurs substantial general and administrative expense to comply
with the Exchange Act, that the constraints of public ownership have prevented
and will continue to prevent the Corporation from pursuing its long range
business plan; and that the Corporation's public status have placed and will
continue to place it at a substantial competitive disadvantage.
The fairness of the proposed reverse stock split, as set forth in Mr.
Halloran's proposal, was then outlined. It was explained that Mr. Halloran
believed that the Reverse Stock Split would be fair both to the Corporation and
to its stockholders. From a procedural point of view, the reverse stock split
would provide an opportunity for the stockholders to receive, in his view, fair
value for their shares without incurring any brokerage costs; the stockholders
would have appraisal rights under the Oregon Business Corporation Act; the
Reverse Stock Split would constitute the most expeditious, efficient, and least
expensive method to convert the Corporation from a reporting company to a
privately-held, non-reporting company in comparison to other alternatives
considered by him and explained to the Board of Directors.
From a financial point of view, Mr. Halloran also believed that the amount
he proposed that the Corporation pay to the Fractional Stockholders for their
fractional shares of New Common Stock (the "Cash Consideration") would be fair
to the stockholders. Mr. Halloran preliminarily suggested that the Cash
Consideration equal ten cents per share. First, it was explained that he
believed that a Cash Consideration equal to such amount would approximate the
value at which The Parrott Partnership valued the Corporation in the Parrott
Appraisal Report, the analyses and conclusions of which he had adopted in
support of his proposal, including his preliminary conclusions with respect to
the fairness of the proposed Reverse Stock Split to the Corporation and the
stockholders. (For a discussion of the Parrott Appraisal Report, see the
section entitled "Special Factors - Fairness of the Reverse Stock Split;
Recommendation of the Board of Directors.") It was explained that Mr. Halloran
believed such report to be the best and most realistic and reliable indication
of the fair market value of the Corporation's shares of Common Stock, even
though the Corporation did not obtain that report for the proposed Reverse
Stock Split, was prepared only for purposes of the Stock Transaction, it did
not address specifically the fairness of the Reverse Stock Split generally or
the fairness of the Reverse Stock Split from the point of view of the
unaffiliated stockholders, and several months had elapsed since September 30,
1995, the date at which The Parrott Partnership valued the Corporation. If The
Parrott Partnership consented to the use of the Parrott Appraisal Report upon
terms and conditions acceptable to the Board of Directors for purposes of the
Reverse Stock Split, it was then explained that such report would provide to
the Board of Directors a recent, thorough, and exhaustive analysis of the value
of the Corporation from a qualified, independent outside third party as one of
a variety of factors upon which it could rely in determining both the Cash
Consideration and the fairness of the Reverse Stock Split. Second, an analysis
of the current and historical market prices
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<PAGE> 16
of the shares of Common Stock of the Corporation, the net book, going concern,
and liquidation values of the Corporation on the basis of his analysis of the
Corporation's financial statements and on the basis of the Parrott Appraisal
Report, and the prices which the Corporation's Employee Stock Ownership Plan
and Messrs. Halloran and Fast recently paid to unaffiliated stockholders for
their shares of the Corporation's Common Stock did not provide any realistic or
reliable value of the Corporation to assist the Board of Directors in its
determination of the fairness of the proposed Reverse Stock Split and the Cash
Consideration.
The Board of Directors then discussed each of the aspects of Mr.
Halloran's proposal. The Board of Directors concurred with Mr. Halloran's
proposal that the Corporation consider going private at this time and the
reasons for such proposal. It also concurred with his preliminary conclusions
with respect to the fairness of the Reverse Stock Split from a procedural and
financial point of view.
The Board of Directors, notwithstanding it preliminarily concurred with
Mr. Halloran's proposal, decided to review Mr. Halloran's proposal in more
detail, to make such additional inquiries as each of the directors deemed
necessary to evaluate his proposal, and then to consider again the proposed
Reverse Stock Split at a subsequent meeting of the Board of Directors to be
scheduled at mutually agreeable date and time after such review and inquiries.
It also determined to hold in abeyance determining the proposed Cash
Consideration for the same reasons.
The Board of Directors at that meeting unanimously preliminarily approved
the proposed amendment to the Corporation's Articles of Incorporation in the
manner described by Mr. Halloran in his proposal and that such amendment be
placed on the agenda for consideration of the stockholders at a special
meeting, subject to the following terms and conditions.
1. That the Cash Consideration to be paid to the Fractional Stockholders
in lieu of the issuance of fractional shares of New Common Stock be agreed upon
at the next scheduled meeting of the Board of Directors.
2. That Mr. Halloran's proposal be ratified at such meeting, with such
changes therein as the Board of Directors approve at such meeting.
The Board of Directors at a special meeting thereof on March 28, 1996, at
which all of the directors were present, again considered the proposed Reverse
Stock Split. The Board of Directors first reiterated that it concurred with
Mr. Halloran's proposal, his reasons for it, and his conclusions with respect
to its fairness to the Corporation and the stockholders.
It next discussed the amount to pay to the Fractional Stockholders for
their shares. It recognized that the recent issuance of the shares of Common
Stock to Messrs. Halloran and Fast would reduce the value of the shares of
Common Stock to approximately six cents per shares on the basis of the Parrott
Appraisal Report. However, it concluded that the amount the Corporation paid
to the Fractional Stockholders should be not less than the value at which the
Corporation issued the shares to Messrs. Halloran and Fast, despite the
dilutive effect of the Stock Transaction on the per share value of the Common
Stock. (For a discussion of the Stock Transaction, see "The Reverse Stock
Split - Transactions in Shares of Common Stock of Corporation.") It,
therefore, determined that, on the basis of the Parrott Appraisal Report, the
fair market value of each of the shares of Common Stock of the Corporation
equaled nine, rather than either six or ten, cents and, therefore, the amount
of the Cash Consideration to pay to the Fractional Stockholders should equal
nine cents per share. The Board of Directors otherwise concurred with Mr.
Halloran's conclusions with respect to the fairness of the Reverse Stock Split.
The Board of Directors at this meeting unanimously concluded that the
Reverse Stock Split, both from a procedural and financial point of view, is
fair to the Corporation and its stockholders. It unanimously approved the
Reverse Stock Split, directed that it be placed on the agenda a special meeting
of the stockholders for their consideration, and recommended that the
stockholders vote for the Reverse Stock Split at such meeting.
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Other than as set forth in this Proxy Statement, the Corporation and
Messrs. Halloran and Fast do not have any reason for proposing the Reverse
Stock Split at this particular time and are not aware of any material
development affecting the future value of the Corporation or the Common Stock
which has not been discussed in this Proxy Statement.
PURPOSE OF THE REVERSE STOCK SPLIT
The purpose of the proposed Reverse Stock Split, from the standpoint of
the Corporation and Messrs. Halloran and Fast, is to cause the Corporation to
become a privately-owned corporation, with Messrs. Halloran and Fast becoming
the sole stockholders of the Corporation. The Corporation and its stockholders
do not derive any benefit from the Corporation's status as a public company,
including the development of any market for its shares of Common Stock, the
appreciation in value of such shares of Common Stock, and the payment of
dividends. On the other hand, the conversion of the Corporation from a
reporting company to a private, non-reporting company will result in
substantial benefits to the Corporation, including the elimination of the
substantial costs it incurs each year as a result of its status as a public
company, the ability to pursue its long-term business plan free of the
constraints of public ownership, and the elimination of the substantial
competitive disadvantage the Corporation's status as a public company places
it. It is also to afford the Fractional Stockholders a one time opportunity to
receive, in the reasonable belief of the Board of Directors and Messrs.
Halloran and Fast, a fair price for their shares without the Fractional
Stockholders incurring the attendant costs of sale. The Corporation does not
now and will not likely in the future develop any market for its shares of
Common Stock to permit the trading of them and its operational and financial
constraints now prevent and likely in the foreseeable future prevent the
payment of any dividends to the stockholders or any substantial appreciation in
the value of their shares.
The Corporation and Messrs. Halloran and Fast structured the transaction
as a Reverse Stock Split in order for the Corporation to become a privately-
owned corporation in the most expeditious, efficient, and least expensive
manner. They concluded that the other possible alternatives would not permit
the Corporation to become a privately-owned corporation or, even if such other
alternatives would permit such result, the transaction costs to implement such
alternatives would be substantially greater that the transaction costs to
implement the Reverse Stock Split.
RECOMMENDATIONS OF THE BOARD OF DIRECTORS; FAIRNESS OF THE REVERSE STOCK SPLIT
General.
The Board of Directors (including two of the three directors, Messrs.
Halloran and Fast, who also collectively own 64 percent of the shares of Common
Stock of the Corporation), at the meetings of the Board of Directors on
February 29, 1996, and March 28, 1996, considered the fairness of the proposed
100,000 to one Reverse Stock Split of the Corporation's Common Stock. The
Board of Directors, on the one hand, and Messrs. Halloran and Fast, on the
other hand, unanimously concluded that the Reverse Stock Split, both from a
financial and procedural point of view, is fair to, and in the best interests
of, both the Corporation and the stockholders (including the Fractional
Stockholders). At such meetings, they unanimously resolved to recommend to the
Corporation's stockholders to approve the Reverse Stock Split.
The Board of Directors and Messrs. Halloran and Fast did not structure the
Reverse Stock Split to require the approval of at least a majority of the
unaffiliated security holders. They concluded, despite not structuring the
Reverse Stock Split in such manner, that the Reverse Stock Split is fair to the
Corporation's unaffiliated stockholders.
The sole director of the Corporation who is not an employee of the
Corporation did not retain an unaffiliated representative to act solely on
behalf of unaffiliated stockholders for purposes of negotiating the terms of
the Reverse Stock Split or preparing a report with respect to the fairness of
the Reverse Stock Split. The Corporation and Board of Directors also did not
obtain any report, opinion, or appraisal from an outside party with respect to
the Reverse Stock Split, including any report, opinion, or appraisal with
respect to the fairness of the Reverse Stock Split from a financial or
procedural point of view to the Corporation, to any affiliate of the
Corporation, or to any unaffiliated stockholders of the Corporation. The Board
of Directors, including the sole director of the Corporation who is not an
employee of the Corporation, determined that the cost and expense to retain
such representative or to prepare such report, opinion, or appraisal were not
warranted in light of the expected Cash Consideration to be paid to the
Fractional Stockholders pursuant to the Reverse Stock Split and
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in light of the right of each of the Fractional Stockholders to dissent from
the Reverse Stock Split under the Oregon Business Corporation Act.
The Board of Directors was aware during the course of its deliberations
that, as one of the effects of the Reverse Stock Split, Messrs. Halloran and
Fast would be the only remaining stockholders of the Corporation. It was also
aware that the Reverse Stock Split presented potential or actual conflicts of
interest between the Corporation and Messrs. Halloran and Fast. The Board of
Directors, despite such effect and conflicts of interest, concluded that the
Reverse Stock Split is fair to the Corporation and the unaffiliated
stockholders.
Fairness of the Reverse Stock Split.
The Board of Directors and Messrs. Halloran and Fast, as a part of their
determination of the Cash Consideration and the fairness of the Reverse Stock
Split considered certain specified factors. They initially considered the
historical and current market prices for the shares of Common Stock, the
Corporation's net book, going concern, and liquidation values, the purchases
and sales of the shares of Common Stock by the Corporation and its affiliates
during the fiscal years and at June 30, 1994 and 1995, and the Stock
Transaction. They generally believed that these factors did not assist them
in their determination for the reasons set forth in this section and,
therefore, accorded no importance to them.
The Board of Directors and Messrs. Halloran and Fast, in considering the
historical and current market prices for the shares of Common Stock, noted that
the Corporation's shares of Common Stock did not trade on any established
market and that sales and purchases were infrequent and sporadic. For the
fiscal years ended June 30, 1994, 1995, and 1996, they noted that the
Corporation's market maker, Carr Securities, effected only five purchases and
sales of the shares of Common Stock. On August 23, 1994, it effected the sale
of 200 shares at 25 cents per share; on June 14, 1995, if effected the sale of
200 shares at 12 1/2 cents per share; on September 21, 1995, it effected the
sale of 100 shares at 87 1/2 cents per share; on April 17, 1996, it effected
the sale of 400 shares at 25 cents per share; and on April 25, 1996, it
effected the sale of 1,000 shares at 25 cents per share. For these reasons, the
Board of Directors and Messrs. Halloran and Fast accorded no importance to
these prices.
They noted, in their examination of the Corporation's net book, going
concern, and liquidation values, that, on the basis of the Corporation's
unaudited balance sheet at December 31, 1995, the net book value of the
Corporation equaled a negative $712,671 (determined by subtracting $6,376,052,
the amount of the Corporation's liabilities, from $5,663,381, the amount of the
Corporation's assets) and that the net book value of each share equaled a
negative $1.12 (determined by dividing the net book value of the Corporation by
636,889, the total number of the shares issued and outstanding at such date).
They did not accord any importance to this value, since such value is generally
historical cost (less, where applicable, accumulated depreciation) and,
therefore, does not necessarily consider the fair market value of the
Corporation's assets. They also noted that such value does not generally
consider certain assets, particularly intangible assets such as, generally,
goodwill or, specifically, the Corporation's net operating carryforward for
income tax purposes.
Moreover, they likewise did not accord any importance to adjusted book
value which, according to the Parrott Appraisal Report (a summary of which is
set forth below), equaled a negative $846,000 (or, after rounding, a negative
$1.33 per share), since such value did not reflect that Corporation's continued
operation as a going concern.
The Board of Directors and Messrs. Halloran and Fast, according to the
Parrott Appraisal Report, noted that the going concern value ranged from a
negative $759,000 (or, after rounding, a negative $1.19 per share) utilizing
the capitalization of excess earnings method, $261,000 (or, after rounding, 41
cents per share) utilizing the capitalization of earnings method, and $410,000
(or, after rounding, 64 cents per share) utilizing the discounted future
earnings method. The Board of Directors and Messrs. Halloran and Fast did not
assign any importance to these values, given the disparity between each of such
values and given that only one of the methods used, the capitalization of
excess earnings method, accounted for the Corporation's substantial negative
adjusted book value. Moreover, they noted that the Reverse Stock Split would
not result in a disposition of the Corporation's entire business. The Reverse
Stock Split would result only in the termination of the equity interest of the
Fractional Stockholders.
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They did not consider liquidation value an appropriate measure of value
and, therefore, did not accord any significance to it. They noted that, again
according to the Parrott Appraisal Report, such value equaled $0. They also
noted that the Corporation does not have any present intention of liquidating
the Corporation or selling any part of its assets.
The Board of Directors and Messrs. Halloran and Fast, in their
consideration of the purchases and sales of the shares of Common Stock by the
Corporation and its affiliates during the fiscal years ended June 30, 1994 and
1995, noted that Messrs. Halloran and Fast each effected only four
purchases and sales totaling in the aggregate 6,575 shares, all in response to
inquiries from unaffiliated stockholders seeking a purchaser for their shares,
during such fiscal years. They specifically noted that during the quarter
ended March 31, 1994, Messrs. Halloran and Fast each effected the purchase of
1,075 shares at an average price of twelve cents per share; during the quarter
ended June 30, 1994, 150 shares at fifteen cents per share, during the quarter
ended September 30, 1994, 300 shares at ten cents per share, and during the
quarter ended June 30, 1995, 5,050 shares at ten cents per share. They also
noted that the Corporation's Employee Stock Ownership Plan had not purchased
any shares during these fiscal years. They did not accord any importance to
these purchases and sales because they had been infrequent and sporadic and
they occurred between management and stockholders seeking a purchaser for their
shares and, therefore, in their view were not indicative of the Corporation's
value.
They likewise considered the recent issuance of 488,267 shares of Common
Stock to Messrs. Halloran and Fast in payment of certain compensation owing to
them. They specifically noted that the Corporation, on the basis of the
Parrott Appraisal Report, issued these shares to them at nine cents per share.
They concluded that, in connection with their determination of the Cash
Consideration and the fairness of the Reverse Stock Split, despite the dilutive
effect of the issuance of these shares on the per share value of the
Corporation's Common Stock, the proposed Cash Consideration should not be less
than the value at which the Corporation issued these shares to Messrs. Halloran
and Fast. They also concluded that, even though the issuance of such shares of
Common Stock to Messrs. Halloran and Fast resulted in them owning more than 50
percent of the issued and outstanding shares of Common Stock of the
Corporation, the Stock Transaction would not affect its fairness determination
with respect to the Reverse Stock Split. They concluded that Messrs. Halloran,
Fast, and Ford and the ESOP would vote the shares currently owned by them in
favor of the Reverse Stock Split at the Special Meeting. As a result, the
additional votes of stockholders owning only three percent of the issued and
outstanding shares of Common Stock outstanding prior to the Stock Transaction
would be required to approve the Reverse Stock Split. They believed it highly
unlikely that all of the unaffiliated stockholders would vote against the
Reverse Stock Split. They also believed that the stockholders would approve
the Reverse Stock Split, even if the Corporation did not issue the additional
shares of Common Stock to Messrs. Halloran and Fast. Accordingly, they
concluded that the Stock Transaction would not affect the outcome of the vote
on the Reverse Stock Split at the Special Meeting and, thus, it would not have
any procedural or substantive impact on its fairness determination with respect
to the Reverse Stock Split.
The Board of Directors and Messrs. Halloran and Fast as a part of their
determination of the Cash Consideration and the fairness of the Reverse Stock
Split, accorded significant importance to an appraisal the Corporation
obtained from The Parrott Partnership for purposes of the Stock Transaction
(the "Parrott Appraisal Report"). The Parrott Appraisal Report, dated December
5, 1995,concluded that the fair market value of the Corporation at September
30, 1995 (the "Valuation Date") was $56,000 (or, after rounding nine cents per
share). They acknowledged that the Corporation did not obtain the Parrott
Appraisal Report for purposes of the Reverse Stock Split; that, since the
Parrott Appraisal Report was prepared only for the purpose of the consideration
of the payment of compensation to Messrs. Halloran and Fast in the form of
shares of the Corporation's Common Stock, the Parrott Appraisal Report did not
address specifically the fairness of the Reverse Stock Split generally or the
fairness of the Reverse Stock Split from the point of view of the unaffiliated
stockholders; and that several months had elapsed since September 30, 1995, the
Valuation Date. However, they concluded, in their judgment, the Parrott
Appraisal Report was the best and most realistic and reliable indication of the
fair market value of the Corporation's shares of Common Stock for purposes of
their determination of the amount of the proposed Cash Consideration and their
analysis of the fairness of the Reverse Stock Split to the Fractional
Stockholders. It provided to them a recent, thorough, and exhaustive analysis
of the value of the Corporation from a qualified, independent outside third
party. For these reasons, the Board of Directors adopted the analyses and
conclusions of the Parrott Appraisal Report in support of their belief both
that the proposed Cash Consideration constitutes fair value and that the
Reverse Stock Split is fair to the Fractional Stockholders.
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<PAGE> 20
The Board of Directors and Messrs. Halloran and Fast considered updating
the Parrott Appraisal Report. However, they decided that, given the expense to
update such report and given that, on the basis of the most recent financial
statements of the Corporation, the financial condition and, thus, the value of
the Corporation had not materially changed September 30, 1995, updating such
report was neither warranted nor necessary.
The Parrott Partnership, whose address is Five Lincoln Center, 10200 S.W.
Greenburg Road, Suite 340, Portland, Oregon 97223-5505, is a full service
certified public accounting firm established in 1984. It also specializes in
consulting services to closely held companies and performs valuation
engagements. It is a member of the American Institute of Certified Public
Accountants, Oregon Society of Certified Public Accountants, Management
Consulting Services Division of the AICPA, and various civic and business
affiliations. The Corporation selected The Parrott Partnership on the basis of
its expertise in valuing companies. It also selected The Parrott Partnership
because it did not have any previous relationship with, and was independent of,
the Corporation and its officers and directors.
The Parrott Partnership used several different standard valuation methods
to arrive at its conclusion that the fair market value of the Corporation at
September 30, 1995, was $56,000. It relied on a weighted average of methods as
the best indication of fair market value.
The Parrott Partnership specifically limited the purpose of the valuation
to the consideration of compensation of employees, officers, and stockholders
in the form of equity interests. It also limited its report for internal
purposes only and, therefore, did not include any discussion of the background
and history of the Corporation, economic and industry conditions, and financial
analysis, including operations, management, strengths, and weaknesses, etc.
The Parrott Partnership also limited its valuation to the following other
assumptions and conditions:
1. The information, estimates, and opinions contained in the report were
obtained from sources considered to be reliable, but The Parrott Partnership
did not assume any liability for these sources.
2. The Corporation and its representatives warranted to The Parrott
Partnership that the information they supplied was complete and accurate to the
best of their knowledge and that the financial statement information reflected
the Corporation's results of operations and financial condition in accordance
with generally accepted accounting principles, unless otherwise noted.
3. The information supplied by the Corporation's management was accepted
as correct without further verification, and The Parrott Partnership expressed
no opinion on that information.
4. Possession of the report does not carry with it the right of
publication of all or any part of it or the right to use it for any purpose by
anyone but the Corporation without the previous written consent of the
Corporation or The Parrott Partnership and, in any event, only with a proper
attribution.
5. The Parrott Partnership is not required to give testimony in court or
to attend any hearings or depositions, unless previous arrangements have been
made.
6. The various estimates of value presented in the report apply to the
valuation only and may not be used out of the context presented in the report.
The valuation is valid only for the purpose or purposes specified in the
report.
7. The valuation assumed that the Corporation will continue to operate as
a going concern and that the character of its present business will remain
intact.
8. The valuation contemplated facts and conditions existing as of
September 30, 1995, the Valuation Date. Events and conditions occurring after
that date were not considered, and The Parrott Partnership expressly stated
that it did not have any obligation to update its report for such events and
conditions.
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<PAGE> 21
The Corporation provided to The Parrott Partnership the following
documents and other information to assist The Parrott Partnership in the
preparation of the Parrott Appraisal Report:
1. The Corporation's audited financial statements for the fiscal years
ended June 30, 1991 through 1995, its unaudited financial statements for the
interim periods through September 30, 1995, and its internal workpapers for
such financial statements.
2. The Corporation's income tax returns for the years 1991 through 1995.
3. A forecast of income prepared by the Corporation's management.
4. The Corporation's Annual Reports on Form 10-K for the fiscal year
ended June 30, 1995.
5. A letter prepared by management with respect to the background,
management, industry, financial condition, relationships with customers and
suppliers, ownership history and issues, etc.
6. Oral and written representations from management with respect to
various aspects and issues of operations and financial information, including
asset value, officer salaries, inventory, real property lease, etc.
7. The employment agreements between the Corporation and Messrs. Halloran
and Fast.
The Parrott Partnership based the Parrott Appraisal Report on these
documents and other information. The Parrott Partnership did not independently
verify any of the information the Corporation's management provided to it.
The Board of Directors and Messrs. Halloran and Fast, after the initial
preparation of the Parrott Appraisal Report, requested permission from The
Parrott Partnership to use such report as one of the variety of factors upon
which it could rely in determining the Cash Consideration and in analyzing the
fairness of the Reverse Stock Split. They also requested permission to include
such report as an exhibit to the Rule 13E-3 Transaction Statement to be filed
with the Securities and Exchange Commission ("SEC") and to summarize such
report in this Proxy Statement attached as an exhibit thereto. The Parrott
Partnership consented to the use of its report in this manner, but subject to
the express condition that such use did not modify or vary in any manner the
limitations and assumptions contained in the report, except in two instances.
First, The Parrott Partnership acknowledged that it limited its report for
internal purposes only (i.e., that it was directed to the Board of Directors of
the Corporation) and that, in connection with its consent to the use of its
report in the manner described herein, continued to limit its report for
internal purposes, but acknowledged that the stockholders would likely use the
summary of such report in this Proxy Statement as one of the factors they would
consider in evaluating the Reverse Stock Split. Second, although one of the
limitations of the valuation was that possession of the report did not carry
with it the right of publication of all or any part of it or the right to use
it for any other purpose by anyone but the Corporation without the previous
written consent of the Corporation or The Parrott Partnership and, in any
event, only with proper attribution, The Parrott Partnership acknowledged that
stockholders could obtain copies of it from the SEC and that the Corporation
would publish a summary of the Parrott Appraisal Report in this Proxy
Statement.
The Parrott Partnership considered several valuation approaches in its
report. It initially considered the asset approach. It stated that this
approach provides that the value of a business is directly related to the
assets of the business. It considered three valuation methods under this
approach. It determined that the book value of the Corporation, the first
method it considered under this approach, equaled a negative $817,000 as of
September 30, 1995 (or, after rounding, a negative $1.28 per share). It
defined book value to represent the historical cost (minus depreciation) of the
Corporation's assets instead of their actual fair market value minus its
liabilities as stated on its balance sheet as of September 30, 1995.
It next determined that the adjusted book value, the second method it
considered under this approach, equaled a negative $846,000 (or, after
rounding, a negative $1.33 per share) also at September 30, 1995. It defined
adjusted book value to represent the total equity of the Corporation set forth
on its balance sheet, but with the value of the assets and liabilities thereon
stated at fair market value.
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<PAGE> 22
It considered the liquidation value under this approach. It stated that
liquidation value estimates the remaining cash value if all the Corporation's
assets were sold in a quick and orderly, piecemeal manner, and all liabilities
were immediately paid with proceeds. It calculated the liquidation value at
$0 (or $0 per share). It did not select liquidation value as an appropriate
valuation method for purposes of estimating the fair market value of the
Corporation, since the Corporation is functioning as a going concern and is
anticipated to remain in operation.
The Parrott Partnership next considered the income approach. It stated
that the income approach theory states that the value of the business is
directly related to the earnings of the business.
In order to determine the value of the Corporation under this approach,
The Parrott Partnership first adjusted the Corporation's income statement. It
adjusted the business income of the Corporation to subtract nonbusiness
expenses and income and to add business expenses not borne by the business and
business income not reflected in the business operations. It determined, after
these adjustments, that the Corporation's adjusted net loss was $149,000 for
the fiscal year ended June 30, 1991, its adjusted net income was $222,000 for
the fiscal year ended June 30, 1992, its adjusted net loss was $65,000 for the
fiscal year ended June 30, 1993, its adjusted net income was $39,000 for the
fiscal year ended June 30, 1994, and its adjusted net income was $62,000 for
the fiscal year ended June 30, 1995.
The Parrott Partnership, after these adjustments, next determined the
capitalization rate to apply under this approach. It first acknowledged the
capitalization rates vary among particular types of businesses and from one
period of time to another. It stated that the more speculative the income
stream of a business, the higher the capitalization rate; and, conversely, the
more stable the income stream, the lower the capitalization rate. It defined
this stability or lack of stability as "risk."
In order to determine the capitalization rate, The Parrott Partnership
determined the discount rate. It defined the discount rate as the annual
return on investment or the cash return on investment available to a business
owner.
The Parrott Partnership first examined United States Treasury Bond market
yields which it considered risk free. The long term Treasury Bond yield at
September 30, 1995, equaled 7.5 percent. Since it did not consider investing
in a company risk free, it then added a premium of 7 percent above the Treasury
Bond yield for an equity investment on the basis of a publication entitled
"Stocks, Bonds, Bills and Inflation (SBBI) Yearbook" for large common stocks
published by SBBI-Ibbotson Associates, Inc. It then added a premium of 5.2
percent, again on the basis of this publication, since it considered small
companies generally a higher risk than large common stocks on stock exchanges.
It next added an additional subjective premium, based on certain specific
factors enumerated in the report, such as returns on equity and assets,
profitability percentage, current ratio, and the like, totaling 26 percent,
since it believed an investment in the Corporation represents an additional
risk over similar businesses in the same area. Finally, it added an additional
premium of 3 percent, which represented the difference between the return on
investment based on earnings instead of cash. On the basis of each of these
factors, it concluded that the discount rate for the Corporation equaled 48.7
percent.
Finally, in order to calculate the capitalization rate, The Parrott
Partnership subtracted from the discount rate 3.8 percent, an amount it
calculated to be equal to the long term growth rate of the business. On this
basis, it concluded that the capitalization rate equaled 44.9 percent for
forecasted earnings. It then converted such capitalization rate to the
Corporation's earnings. It concluded, after such conversion, that the earnings
capitalization rate equaled 43.3 percent.
The Parrott Partnership did not add an excess earnings premium, which it
stated is added for companies in the upper quartile of their industry, since it
did not identify such a premium for the Corporation. It, thus, concluded that
the excess earnings capitalization rate also equaled 43.3 percent.
After making these preliminary adjustments to the Corporation's income
statement and then determining a capitalization rate, The Parrott Partnership
considered first the capitalization of earnings method under the income
approach. It stated that this method considers the business as a single
investment. It determined that the value of the Corporation utilizing the
capitalization of earnings method was $261,000 at September 30, 1995 (or, after
rounding, 41 cents per share). To arrive at this value, it first weighted the
adjusted net income for each of the Corporation's five most recent fiscal years
and then calculated the average of such net income. It then capitalized these
earnings utilizing its capitalization rate. The
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<PAGE> 23
value after capitalizing these earnings of the Corporation equaled $87,000. It
then added $174,000, the amount of the net nonoperating assets, to this value.
The Parrott Partnership then determined that the value of the Corporation
was a negative $759,000 (or, after rounding, a negative $1.19 per share)
utilizing the capitalization of excess earnings method. It defined the
capitalization of excess earnings method as an income approach to valuation in
which the adjusted book value and the intangible assets of the business are
valued independently. This method then combines these assets to determine the
fair market value of the business. To arrive at this value, it first
determined the excess earnings in each of the Corporation's five most recent
fiscal years, weighted them for each such year, and then calculated an average.
It then capitalized such excess earnings by the excess earnings capitalization
rate. Such value equaled $87,000. It then added to that value a negative
$846,000, the adjusted book value of the Corporation.
Finally, it determined that the value of the Corporation using the
discounted future earnings method was $410,000 (or, after rounding, 64 cents
per share). It defined the discounted future earnings analysis as an income
approach to valuation which the total entity value is determined by estimating
ten years of forecasted future earnings and then discounting those earnings
back to the date of valuation. To arrive at this value, it discounted the
annual earnings flows to present value by applying its discount rate of 48.7
percent. The value of $410,000 equaled the sum of the discounted future
earnings flows, plus the income residual and net operating assets of the
Corporation.
The Parrott Partnership next considered the market approach. It stated
this approach provides that the value of a business is directly related to
comparable sales. It did not determine a value for the Corporation under this
approach, since it did not find any sales of public or private companies for
comparison purposes.
The Parrott Partnership, on the basis of its analysis under each of these
approaches, determined that the value of the Corporation before any minority or
marketability discounts equaled $87,000 at September 30, 1995 (or, after
rounding, 14 cents per share).
It then considered the appropriateness of either a minority or a
marketability discount. It defined the minority discount as a reduction in
value due to a lack of control. It defined the marketability discount as a
reduction in value due to a stock restriction or prohibition, such as a lack of
a ready market, securities law restrictions, buy-sell agreements, right of
first refusal restrictions, and shareholder agreements. It concluded that it
should discount its determination of the value of the Corporation due to a lack
of control and marketability. It discounted such value of ten percent for
Messrs. Halloran and Fast and 25 percent for all other stockholders for lack of
control and by 20 percent for all stockholders for lack of marketability.
After taking into account these discounts, it concluded that the fair market
value of the Corporation at September 30, 1995, was $56,000 (or, after
rounding, nine cents per share).
The Parrott Partnership accorded different weights to each valuation
approach. On one hand, it did not accord any weight to either the asset
or market approaches. It did not accord any weight to the asset approach,
because, in the view of The Parrott Partnership, the value of the Corporation
was not directly related to the value of its assets. Book value and the
adjusted book value, as determined by The Parrott Partnership, were a negative
$817,000 and a negative $846,000, respectively. Moreover, it did not select
liquidation value as an appropriate valuation for the same reason. It rejected
that valuation, since the Corporation is functioning as a going concern and is
anticipated to remain in operation. It did not accord any weight to the market
approach, since it did not locate any comparable sales of public or private
companies.
On the other hand, The Parrott Partnership accorded significant weight to
the income approach in determining its valuation of the Corporation. It, in
turn, accorded different weights to each of the three methods employed by it
under this approach. On the basis of each of the methods employed by it, it
calculated the value of the Corporation (before any minority and marketability
discounts) by weighting each of the values determined under this approach and
then averaging such values. It multiplied the capitalization of earnings value
of $261,000 by three to equal $783,000. It then added to such amount the
capitalization of excess earnings value (a negative $759,000) and the
discounted future earnings value ($410,000). It then divided such amount,
$434,000, by five to reach its value (before any marketability and minority
discount) to reach $87,000 as the value of the Corporation.
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<PAGE> 24
The Parrott Partnership accorded significant weight to a marketability and
minority discount. It determined, after taking into account these discounts,
that the value of the Corporation equaled $56,000 at September 30, 1995.
The foregoing is only a general description of the Parrott Appraisal
Report and is qualified in its entirety by reference to the Parrott Appraisal
Report (including the assumptions and limiting conditions contained therein).
The Corporation will make available a copy of the Parrott Appraisal Report for
inspection and copying at the principal offices of the Corporation at 5600 N.E.
Hassalo Street, Portland, Oregon during its regular business hours by any
interested stockholder of the Corporation or such stockholder's representative
who has been so designated in writing. The Corporation will also transmit a
copy of the Parrott Appraisal Report to the interested stockholder or such
stockholder's representative who has so designated in writing upon written
request and at the expense of the requesting stockholder.
The Board of Directors and Messrs. Halloran and Fast reviewed another
valuation which the Corporation's Employee Stock Ownership Plan and Trust
("ESOP") obtained from Alpen Securities, Inc. ("Alpen") for the purpose of
determining the value of the ESOP's assets, comprised primarily of shares of
Common Stock as of December 31, 1994. The ESOP requires that the trustee
thereof determine the fair market value of such assets based on at least an
annual appraisal. This valuation represented the most recent annual appraisal
obtained by the trustee. This valuation (the "Alpen Report"), in the form of a
two page letter to Mr. Halloran dated April 26, 1995, concluded that the fair
market value of the Corporation as of December 31, 1994, was $280,000 (or,
after rounding, 44 cents per share).
Alpen first stated in the Alpen Report that the operating statements of
the Corporation reflected 18 months of profitable operations and the absence of
disturbing peaks and valleys of business activity that marked prior periods.
It then noted that such operating statements were comforting, since they
provided some basis to assume that the current level of revenues can be
maintained and that management had achieved effective control of profit margins
and expenses. Second, Alpen noted that, by December 31, 1994, the
Corporation's recent operations had made a noticeable improvement in the
balance sheet of the Corporation. It noted that such balance sheet still
reflected a negative net worth, but that the components were now much sounder
than they had been for many years. Alpen stated that, as in prior analyses
Alpen had conducted for the ESOP, it did not adjust the value to reflect
limited marketability, minority or control interests, or other factors. Alpen
did not describe its valuation methods, approaches, and calculations, did not
describe the documents and other information on which it based its analyses and
conclusions, and, except to state that it did not adjust the value to reflect
limited marketability, minority or control interest, or other factors, it did
not set forth its limiting assumptions and conditions.
The Board of Directors and Messrs. Halloran and Fast did not believe that
the Alpen Report provided a realistic indication of the Corporation's value.
The Alpen Report, unlike the Parrott Appraisal Report, did not describe its
valuation methods, approaches, and calculations, did not include a minority or
marketability discounts, did not describe the documents and other information
on which it based its analyses and conclusions, and did not set forth its
limiting assumptions and conditions.
The Board of Directors and Messrs. Halloran and Fast finally considered
the Corporation's business, prospects, and business strategy and its financial
condition, results of operations, assets, and liabilities in their
determination of the Cash Consideration and in their evaluation of the fairness
of the Reverse Stock Split from a financial point of view. They likewise
considered current industry, economic, and market conditions.
They acknowledged during the course of their deliberations that certain of
the per share values considered, such as prices previously paid by management
and others, going concern values utilizing the capitalization of earnings and
the discounted future earnings methods in the Parrott Appraisal Report, and the
valuation in the Alpen Report, exceeded the proposed Cash Consideration. They
did not accord any importance to those prices and values, because, for the
reasons set forth in this section, they did reflect the Corporation's value.
Instead, they concluded on the basis of all of the factors considered that the
Cash Consideration reflects the Corporation's fair value and, for this reason,
that the Reverse Stock Split is fair to the Fractional Stockholders from a
financial point of view.
The Board of Directors and Messrs. Halloran and Fast likewise concluded
that the Reverse Stock Split is fair to the Fractional Stockholders from a
procedural point of view. They reiterated that, in the determination of the
amount of the Cash Consideration and in their evaluation of the fairness of the
Reverse Stock Split from a financial point of view, they
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<PAGE> 25
specifically adopted the analyses and conclusions of the Parrott Appraisal
Report, an appraisal from an independent third party. Second, they noted that
the Reverse Stock Split, given the lack of any market for the Corporation's
shares of Common Stock, afforded stockholders a one time opportunity to
receive, in the view of the Board of Directors and Messrs. Halloran and Fast,
fair value for their shares. Third, the Reverse Stock Split constituted the
most expeditious, efficient, and least expensive method to convert the
Corporation from a reporting company to a privately held non-reporting company
in comparison to other alternatives considered by them. Fourth, they noted
that a stockholder may dissent from the proposed Reverse Stock Split and, in
lieu of the payment of the Cash Consideration, obtain payment in cash of the
"fair value" of such stockholder's shares of Common Stock under the Oregon
Business Corporation Act.
The Board of Directors and Messrs. Halloran and Fast, either did not
assign any weight to a specified factor if, in their view, such factor did not
assist them in their determination either of the Cash Consideration or the
fairness of the Reverse Stock Split. If any factor assisted them in their
determination, they also did not assign a relative weight to such factor and
did not make a determination as to why any particular factor, as a result of
the deliberations by them, should be assigned any weight. However, the Board
of Directors and Messrs. Halloran and Fast considered the following factors as
most important: the Parrott Appraisal Report, the lack of any established
trading market for the Corporation's shares of Common Stock, and the Fractional
Stockholders' dissenting stockholders' rights under the Oregon Business
Corporation Act.
Consideration of Alternatives.
The Board of Directors and Messrs. Halloran and Fast considered the merits
of various other alternatives to the Reverse Stock Split. They determined that
the first alternative considered, of privately negotiated or open market
purchases, would not be feasible because the vast majority of the Corporation's
stockholders hold small numbers of the shares of Common Stock and the
Corporation does not have current or forwarding addresses for many of its
stockholders. They also determined that, in all likelihood, it would not be
possible, in any reasonable period of time, to purchase a significant number of
the shares of the Corporation's Common Stock to ensure the reduction of the
number of the holders of the shares of its Common Stock to less than 300.
Finally, they determined that the legal and other transaction costs to
implement this alternative would be substantially greater than the costs to
implement the Reverse Stock Split.
Similarly, they determined that either the Corporation or Messrs. Halloran
and Fast commencing a tender offer would not be feasible for the same reasons
that the alternative of privately negotiated or open market purchases would not
be feasible.
Third, the Board of Directors and Messrs. Halloran and Fast determined
that the sale of the Corporation (involving the sale of all or substantially
all of its assets, the merger of the Corporation into or with another
corporation, or other form of business combination) would not be a feasible
alternative. No third party had expressed any interest in purchasing any of
the assets of the Corporation, in merging with the Corporation, or otherwise in
entering into a business combination with the Corporation.
The Board of Directors and Messrs. Halloran or Fast likewise determined
that it would not be a feasible alternative to locate a third party to purchase
the Corporation. They reiterated, on the basis of informal discussions which
Messrs. Halloran and Fast have had with prospective purchasers in the past,
that no third party had expressed any interest in pursuing formal negotiations
for the purchase of the Corporation in light of the Corporation's existing
financial status. Moreover, in their judgment, if a third party desired to
purchase the assets of the Corporation, then the Corporation would be required
to utilize the sales proceeds to pay its indebtedness. Since the indebtedness
of the Corporation would exceed in all likelihood the amount of the purchase
price for the assets, given that the Corporation's indebtedness and other
liabilities exceed its assets, then the Corporation would not likely be in a
position to disburse any part of the proceeds from the sale of the assets to
the stockholders.
The Board of Directors likewise concluded that the liquidation and
dissolution of the Corporation would not be a feasible alternative for the same
reason that the sale of the Corporation would not be feasible. That is, the
proceeds from the liquidation of the Corporation's assets would likely not be
sufficient to pay in full the Corporation's indebtedness and
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<PAGE> 26
other liabilities and, therefore, the Corporation would not be in a position to
pay to its stockholders any amount for their shares of Common Stock in
liquidation.
Finally, the Board of Directors considered the alternative of additional
public or private financing. It concluded that this alternative would not be
feasible. The Corporation would be required to sell a substantial number of
additional shares of its Common Stock in order to raise any significant amount
of capital, given the current value of such shares, resulting in the dilution
of all of the stockholders' interest in the Corporation. They reiterated that,
on the basis of informal discussions which Messrs. Halloran and Fast have had
with prospective purchasers in the past, no third party had expressed any
interest in pursuing formal negotiations to provide any financing to the
Corporation in light of the Corporation's existing financial status. The
Corporation would also remain subject to the regulatory and reporting
requirements of the Exchange Act without in all likelihood the development of
any significant trading market for the Common Stock.
Recommendations of the Board of Directors.
The Board of Directors unanimously concluded that, on the basis of these
factors, the Reverse Stock Split, both from a procedural and financial point of
view, is fair to the Corporation, the Fractional Stockholders, and Messrs.
Halloran and Fast. For these reasons and the reasons described in "Special
Factors - Background and Reasons for the Reverse Stock Split" and "Special
Factors - Purpose of the Reverse Stock Split," the Board of Directors,
including the only director who is not an employee of the Corporation,
unanimously approved the Reverse Stock Split and recommended that the
stockholders vote FOR the Reverse Stock Split.
INTEREST OF CERTAIN PERSONS IN THE REVERSE STOCK SPLIT; CONFLICTS OF INTEREST
Messrs. Halloran and Fast are the principal stockholders, two of the three
members of the Board of Directors, and the sole executive officers of the
Corporation. They will continue to be officers and directors of the
Corporation and its only stockholders after the consummation of the Reverse
Stock Split. They own, as of the date of this Proxy Statement, in the
aggregate 720,781 shares of Common Stock, representing approximately 64 percent
of the Corporation's issued and outstanding shares of Common Stock. The
Corporation, on February 29, 1996, issued to Messrs. Halloran and Fast 488,267
of such shares at nine cents per share in payment of certain compensation then
owing and additional compensation to be owing to them under their respective
Employment Agreements with the Corporation (the issuance of these shares is
referred to in this Proxy Statement as the "Stock Transaction"). This
compensation, which equaled in the aggregate $43,944, reflected compensation
owing to them since January 1995 and to be owing to them until December 31,
1996, the date of the expiration of such Employment Agreement. For Mr.
Halloran, such compensation equaled $23,469 (with $11,600 of such amount
representing compensation owing to him as of February 29, 1996, and $11,869
representing compensation owing to him between February 29, 1996, and December
31, 1996). For Mr. Fast, such compensation equaled $20,475 (with $10,121 of
such amount representing the compensation owing to him as of February 29, 1996,
and $10,354 representing compensation owing to him between February 29, 1996,
and December 31, 1996). A complete description of the Stock Transaction is set
forth in "The Reverse Stock Split - Transactions in Shares of Common Stock of
Corporation." They owned in the aggregate 232,514 shares of Common Stock prior
to the Stock Transaction, which represented approximately 37 percent of the
Corporation's issued and outstanding shares of Common Stock. Messrs. Halloran
and Fast collectively own a sufficient number of shares of Common Stock to
approve the Reverse Stock Split. They have indicated that they will each vote
their shares in favor of the approval of the Reverse Stock Split. They were
present at the meetings of the Board of Directors at the Reverse Stock Split
was considered and approved. The Board of Directors was aware of these
potential and actual conflicts of interest but concluded that the Reverse Stock
Split, despite these conflicts, is fair to the Corporation and its
stockholders.
The directors of the Corporation who are not employees of the Corporation
did not retain an unaffiliated representative to act solely on behalf of
unaffiliated stockholders for the purpose of negotiating the terms of the
Reverse Stock Split or for the purpose of preparing a report with respect to
the fairness of the Reverse Stock Split. The Board of Directors, including the
sole director of the Corporation who is not an employee of the Corporation,
determined that the cost and expense to retain such representative or to
prepare such report were not warranted in light of the expected Cash
Consideration to be paid to the Fractional Stockholders pursuant to the Reverse
Stock Split and in light of the right of each of the Fractional Stockholders to
dissent from the Reverse Stock Split under the Oregon Business Corporation Act.
The
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<PAGE> 27
Board of Directors also did not appoint an independent committee of the Board
of Directors to review the fairness of the Reverse Stock Split for the same
reasons.
LACK OF OPINIONS, APPRAISALS, AND REPORTS
Neither the Corporation nor the Board of Directors received any report,
opinion, or appraisal from an outside party with respect to the Reverse Stock
Split, including, but not limited to, any report, opinion, or appraisal with
respect to the fairness of the Reverse Stock Split to the Corporation, any
affiliates of the Corporation, or any unaffiliated stockholders of the
Corporation. The Corporation obtained an appraisal from The Parrott
Partnership (referred to in this Proxy Statement as the "Parrott Appraisal
Report") for the Stock Transaction. Although the Corporation did not obtain
the Parrott Appraisal Report for the Reverse Stock Split, the Board of
Directors accorded it significant importance in determining the Cash
Consideration and evaluating the fairness of the Reverse Stock Split.
A description of the Parrott Appraisal Report is set forth in "Special Factors
- - Recommendations of the Board of Directors; Fairness of the Reverse Stock
Split." See "The Reverse Stock Split - Transactions in Shares of Common Stock
of Corporation."
PLANS FOR THE CORPORATION AFTER THE REVERSE STOCK SPLIT
Except as indicated in this Proxy Statement, the Corporation and Messrs.
Halloran and Fast do not have any present plans or proposals which relate to or
would result in an extraordinary corporate transaction, such as a merger,
reorganization, or liquidation, involving the Corporation or any of its
subsidiaries; a sale or transfer of a material amount of assets of the
Corporation or any of its subsidiaries; any change in the present Board of
Directors or management of the Corporation including, but not limited to, any
plan or proposal to change the number or term of directors, to fill any
existing vacancy on the Board of Directors or to change any material term of
the employment contract of any executive officer; or any material change in the
present dividend rate or policy or indebtedness or capitalization of the
Corporation. Upon consummation of the Reverse Stock Split, the assets,
business, and operations of the Corporation will be continued substantially as
they are currently being conducted.
CERTAIN EFFECTS OF THE REVERSE STOCK SPLIT
General Effects.
If the Reverse Stock Split is approved by the vote of a majority of the
outstanding shares of Common Stock, the number of authorized shares of Common
Stock will be decreased from 50,000,000 to 500. After giving effect to the
Reverse Stock Split, the Corporation will have only two stockholders of record,
Messrs. Halloran and Fast. The interest of Messrs. Halloran and Fast in the
net book value and net earnings of the Corporation in terms of both dollar
amounts and percentages will change. On the basis of the financial statement
information contained in the Corporation's Form 10-Q for the quarter ended
March 31, 1996, Mr. Halloran's interest in the accumulated deficit of the
Corporation will increase from $219,681 or 33.7 percent to $325,936 or 50
percent, and his interest in the net earnings will increase from $56,993 or
33.7 percent to $84,559 or 50 percent. Also on the basis of such financial
statement information, Mr. Fast's interest in the accumulated deficit of the
Corporation will increase from $197,517 or 30.3 percent to $325,936 or 50
percent, and his interest in the net earnings will increase from $51,243 or
30.3 percent to $84,559 or 50 percent. On the other hand, each share of Common
Stock owned by the Fractional Stockholders will be automatically converted into
the right to receive from the Corporation, in lieu of fractional shares of New
Common Stock, cash in the amount of nine cents for each share of Common Stock.
The Fractional Stockholders will cease to be stockholders or to have any equity
interest in the Corporation and, therefore, will not share in its future
earnings and growth, if any, and will not have any right to vote on any
corporate matter.
Termination of Exchange Act Registration.
The shares of Common Stock are currently registered under the Exchange
Act. Such registration may be terminated upon application of the Corporation
to the SEC if the Corporation has fewer than 300 record holders of the shares.
The Corporation currently intends to make an application for termination of
registration of the shares of New Common Stock as promptly as possible after
filing the Articles of Amendment. Termination of registration of the shares of
New Common Stock under the Exchange Act would substantially reduce the
information required to be furnished by the Corporation to its
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<PAGE> 28
stockholders and to the SEC and would be make certain provisions of the
Exchange Act, such as the short-swing profit recovery provisions of Section
16(b) of the Exchange Act, the requirement of furnishing a proxy or information
statement in connection with stockholder meetings pursuant to Section 14(a) of
the Exchange Act, and the requirements of Rule 13e-3 promulgated by the SEC
under the Exchange Act with respect to "going private" transactions, no longer
applicable to the Corporation. Termination of the registration of the shares
of the New Common Stock would also deprive "affiliates" of the Corporation and
persons holding "restricted securities" of the Corporation of the ability to
dispose of such securities pursuant to Rule 144 promulgated under the
Securities Act of 1933, as amended.
Effect on Market for Shares.
If the Reverse Stock Split is approved and, as contemplated, the shares of
New Common Stock are deregistered under the Exchange Act, the Corporation will
not have any market for its shares of New Common Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The receipt by each Fractional Stockholder of cash in lieu of fractional
shares of New Common Stock pursuant to the Reverse Stock Split will be a
taxable transaction for federal income tax purposes under the Internal Revenue
Code of 1986, as amended (the "Code").
Under Section 302 of the Code, a Fractional Stockholder will recognize
gain or loss upon receiving cash in lieu of fractional shares of New Common
Stock if (i) the Reverse Stock Split results in a "complete redemption" of all
of the Fractional Stockholder's shares of Common Stock, (ii) the receipt of
cash is "substantially disproportionate" with respect to the Fractional
Stockholder, or (iii) the receipt of cash is "not essentially equivalent to a
dividend" with respect to the Fractional Stockholder. These three tests are
applied by taking into account not only shares that a Fractional Stockholder
actually owns, but also shares that a Fractional Stockholder constructively
owns pursuant to Section 318 of the Code, described below.
If any one of these three tests is satisfied, the Fractional Stockholder
will recognize gain or loss equal to the difference between the amount of cash
received by the Fractional Stockholder pursuant to the Reverse Stock Split and
the tax basis in the existing shares of Common Stock held by the Fractional
Stockholder. Provided that the shares of Common Stock constitute a capital
asset in the hands of the Fractional Stockholder, this gain or loss will be
long-term capital gain or loss if the shares of Common Stock are held for more
than one year and will be short-term capital gain or loss if the shares of
Common Stock are held for one year or less.
Pursuant to the constructive ownership rules of Section 318 of the Code, a
stockholder is deemed to constructively own shares owned by certain related
individuals and entities in addition to shares actually owned by the
stockholder. For instance, an individual stockholder is considered to own
shares owned by or for his or her spouse and his or her children,
grandchildren, and parents ("family attribution"). A stockholder is also
considered to own a proportionate number of shares owned by estates or certain
trusts in which the stockholder has a beneficial interest, by partnerships in
which the stockholder is a partner, and by corporations in which 50 percent or
more of the value of the stock is owned directly or indirectly by or for such
stockholder. Similarly, shares directly or indirectly owned by beneficiaries
of estates of certain trusts, by partners of partnerships and, under certain
circumstances, by stockholders of corporations may be considered owned by these
entities ("entity attribution"). A stockholder is also deemed to own shares
which the stockholder has the right to acquire by exercise of an option.
The receipt of cash by a Fractional Stockholder pursuant to the Reverse
Stock Split will result in a "complete redemption" of all of the Fractional
Stockholder's shares of Common Stock, so long as the Fractional Stockholder
does not constructively own any shares of New Common Stock immediately after
the Reverse Stock Split. However, a Fractional Stockholder may qualify for
gain or loss treatment under the "complete redemption" test even though such
Fractional Stockholder constructively owns shares of New Common Stock provided
that (i) the Fractional Stockholder constructively owns shares of New Common
Stock as a result of the family attribution rules (or, in some cases, as a
result of a combination of the family and entity attribution rules), and (ii)
the Fractional Stockholder qualifies for a waiver of the family attribution
rules (such waiver being subject to several conditions, one of which is that
the Fractional Stockholder has no interest in the
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<PAGE> 29
Corporation immediately after the Reverse Stock Split (including as an officer,
director, or employee), other than an interest as a creditor).
It is anticipated that most Fractional Stockholders will qualify for
capital gain or loss treatment as a result of satisfying the "complete
redemption" requirements. However, if the constructive ownership rules prevent
compliance with these requirements, a Fractional Stockholder may nevertheless
qualify for capital gain or loss treatment by satisfying either the
"substantially disproportionate" or the "not essentially equivalent to a
dividend" requirements. In general, the receipt of cash pursuant to the
Reverse Stock Split will be "substantially disproportionate" with respect to
the Fractional Stockholder if the percentage of shares of New Common Stock
constructively owned by the Fractional Stockholder immediately after the
Reverse Stock Split is less than 80 percent of the percentage of Existing
shares of Common Stock actually and constructively owned by the Fractional
Stockholder immediately before the Reverse Stock Split. Alternatively, the
receipt of cash pursuant to the Reverse Stock Split will, in general, be "not
essentially equivalent to a dividend" if the Reverse Stock Split results in a
"meaningful reduction" in the Fractional Stockholder's proportionate interest
in the Corporation.
If none of the three tests described above is satisfied, the Fractional
Stockholder will be treated as having received a taxable dividend in an amount
equal to the entire amount of cash received by the Fractional Stockholder
pursuant to the Reverse Stock Split.
The receipt of shares of New Common Stock in the Reverse Stock Split by
stockholders of the Corporation who are not Fractional Stockholders will be a
non-taxable transaction for federal income tax purposes. Consequently, a
stockholder of the Corporation receiving shares of New Common Stock will not
recognize gain or loss, or dividend income, as a result of the Reverse Stock
Split with respect to the shares of New Common Stock received. In addition,
the basis and holding period of such stockholder's shares of Common Stock will
carry over as the basis and holding period of such stockholder's shares of New
Common Stock.
Various legislative proposals have been introduced in Congress that would
reduce the rate of federal income taxation of certain capital gains. Such
legislation, if enacted, might apply only to gain realized on transactions
occurring after a date specified in the legislation. It cannot be predicted
whether any such legislation ultimately will be enacted and, if enacted, what
its effective date will be.
THE FOREGOING IS ONLY A GENERAL DESCRIPTION OF CERTAIN OF THE FEDERAL
INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT TO THE STOCKHOLDERS WITHOUT
REFERENCE TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY PARTICULAR
STOCKHOLDER. EACH STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR
TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER OF THE REVERSE
STOCK SPLIT (INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND
OTHER TAX LAWS).
SOURCE AND AMOUNTS OF FUNDS FOR AND EXPENSES OF THE REVERSE STOCK SPLIT
Estimated fees and expenses incurred or to be incurred by the Corporation
in connection with the Reverse Stock Split are approximately as follows:
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<PAGE> 30
<TABLE>
<CAPTION>
Approximate
Item Amount
- ---- -----------
<S> <C>
1
Payment of Cash Consideration $ 37,219
Legal Fees and Expenses $ 25,000
Accounting Fees and Expenses $ 2,500
Commission Filing Fees $ 125
Printing and Mailing Expenses $ 2,500
Proxy Solicitation Fees and Expenses $ 500
Miscellaneous Expenses $ 1,000
-------
Total $ 68,844
</TABLE>
The Corporation has paid or will be responsible for paying all of such
expenses. It will pay such expenses out of available cash reserves. It will
not borrow any part of such funds to pay these expenses from its existing line
of credit. If the Corporation is required to borrow all or any part of such
funds to pay such expenses, it will borrow such funds from Messrs. Halloran and
Fast upon mutually agreeable terms and conditions. The Corporation has not
made any such plans or arrangements as of the date of this Proxy Statement.
Messrs. Halloran and Fast will lend such funds to the Corporation from their
personal funds.
THE REVERSE STOCK SPLIT
AMENDMENT OF RESTATED ARTICLES OF INCORPORATION TO EFFECT THE REVERSE STOCK
SPLIT
Pursuant to the terms of the Articles of Amendment, if approved, the
authorized shares of Common Stock will be reduced from 50,000,000 to 500, each
100,000 shares of the Corporation's Common Stock then issued will be
automatically converted into one share of the Corporation's New Common Stock,
and each share of Common Stock owned by a stockholder whose share ownership
would, as a result of the Reverse Stock Split, be reduced to less than one
share of New Common Stock (a "Fractional Stockholder"), will be automatically
converted into the right to receive from the Corporation, in lieu of the
issuance of fractional shares of New Common Stock, cash in the amount of nine
cents for each share of Common Stock. The form of the Articles of Amendment is
attached as Annex A to this Proxy Statement. If the Reverse Stock Split is
approved at the Special Meeting by the holders of a majority of the currently
issued and outstanding Common Stock the Corporation expects to file the
Articles of Amendment to the Restated Articles of Incorporation with the
Secretary of State of the State of Oregon on October 8, 1996, immediately
following the Special Meeting, or as soon as practicable thereafter (the
"Effective Date").
EXCHANGE OF SHARES AND PAYMENT IN LIEU OF ISSUANCE OF FRACTIONAL SHARES
Within 10 days after the Effective Date, the Corporation will mail to the
Fractional Stockholders a notice of the filing of the Articles of Amendment
(the "Notice of Filing") and a letter of transmittal (the "Letter of
Transmittal") containing instructions with respect to the submission of shares
of Common Stock to the Corporation. Fractional Stockholders will be entitled
to receive, and the Corporation will be obligated to make payment of, cash in
lieu of fractional shares of New Common Stock only by transmitting stock
certificate(s) for shares of Common Stock to the Corporation, together with the
properly executed and completed Letter of Transmittal and such evidence of
ownership of such shares as the Corporation may require.
The Corporation will use its best efforts to locate each of the Fractional
Stockholders, including contacting the Department of Motor Vehicles of the
State of Oregon (as well as any similar agency located in states in which other
Fractional Stockholder reside) and contacting other stockholders to inquire
with respect to the location of any missing Fractional Stockholders. If the
Corporation cannot locate a missing Fractional Stockholder or a Fractional
Stockholder does
- ----------------------
1 Calculated by dividing 413,541, the number of shares of Common Stock owned
by the Fractional Stockholders, by nine cents, the Cash Consideration.
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<PAGE> 31
not return such Fractional Stockholder's certificate(s) and Letter of
Transmittal and request payment therefor, then such Fractional Stockholder
generally has a period of five years from the date of the Reverse Stock Split
to claim the cash payment payable to such Fractional Stockholder. For example,
with respect to Fractional Stockholders whose last known addresses are in
Oregon, as shown by the records of the Corporation, the period is five years.
At the expiration of such five year period, the Uniform Disposition of
Unclaimed Property Act of the State of Oregon would cause the cash payments to
escheat to the State of Oregon. For Fractional Stockholders who reside in
other states or whose last known addresses, as shown by the records of the
Corporation, are states other than Oregon, such states may have abandoned
property laws which permit such state to obtain custodial possession of
property that has been unclaimed until the owner reclaims it or which permit
the escheat of such property to the state. Under the laws of such other
jurisdictions, the "holding period" or the time period which must elapse before
the property is deemed to be abandoned may be shorter or longer than five
years.
VOTING; VOTE REQUIRED
The proposed Reverse Stock Split must be approved by a vote of not less
than a majority of the shares of Common Stock. Each share of Common Stock is
entitled to one vote on each matter submitted to a vote at the Special Meeting.
The Board of Directors has been informed that the executive officers and
directors of the Corporation will vote in favor of that Reverse Stock Split.
They presently hold sufficient shares of Common Stock to approve the Reverse
Stock Split at the Special Meeting. There are no contracts, arrangements,
understandings, or relationships in connection with the Reverse Stock Split
between the Corporation (including its officers or its directors) and any other
person with respect to any securities of the Corporation.
THE NOTICE OF FILING AND THE LETTER OF TRANSMITTAL WILL BE TRANSMITTED BY
THE CORPORATION TO STOCKHOLDERS AT A DATE SUBSEQUENT TO THE EFFECTIVE DATE.
STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THE NOTICE OF FILING
AND LETTER OF TRANSMITTAL ARE RECEIVED AND SHOULD SURRENDER THEIR CERTIFICATES
ONLY WITH SUCH LETTER OF TRANSMITTAL.
There will be no service charges payable by the Fractional Stockholders in
connection with the payment of cash in lieu of the issuance of fractional
shares of New Common Stock. These costs will be borne by the Corporation.
DISSENTING STOCKHOLDERS' RIGHTS
Stockholders who do not vote in favor of the approval of the Reverse Stock
Split have the right, in lieu of the payment of the Cash Consideration, to seek
payment in cash of the fair value of their shares of Common Stock by strictly
complying with the requirements of Sections 60.551 to 60.594 of the Oregon
Business Corporation Act (the "OBCA"). Failure of a stockholder to strictly
adhere to the requirements of Sections 60.551 to 60.594 of the OBCA may result
in the loss of such stockholder's dissenter's rights.
A stockholder who wishes to assert such stockholder's dissenter's rights
must deliver to the Corporation a written notice before the vote on the Reverse
Stock Split at the Special Meeting to be held on October 8, 1996, of the
stockholder's intent to demand payment for the stockholder's shares of Common
Stock if the Reverse Stock Split is effectuated (the "Notice of Intent to
Demand Payment"). The written Notice of Intent to Demand Payment should be
delivered to Book Centers, Inc., 5600 N.E. Hassalo Street, Portland, Oregon
97213, Attention: Daniel P. Halloran, Secretary, prior to the Special Meeting.
A dissenting stockholder may not dissent as to less than all shares of Common
Stock beneficially owned by the stockholder. A dissenting stockholder also may
not vote any of such stockholder's shares of Common Stock for the Reverse Stock
Split.
If the stockholders approve the Reverse Stock Split, the Corporation must
then give, within ten days after the approval of the Reverse Stock Split, a
written dissenters' notice (the "Dissenters' Notice") to each stockholder who
delivered to the Corporation a Notice of Intent to Demand Payment in accordance
with the OBCA. The Dissenters' Notice must: (a) state where the payment
demand will be sent and where and when certificates of shares will be
deposited; (b) inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is received; (c)
supply a form for demanding payment that (i) includes the date of the first
announcement of the terms of the proposed corporate action to news media or to
shareholders and (ii) that requires that the person asserting dissenters'
rights certify
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<PAGE> 32
whether or not the person acquired beneficial ownership of the shares before
that date; (d) set a date by which the Corporation must receive the payment
demand (which date may not be fewer than 30 and no more than 60 days after the
date the Dissenters' Notice is delivered); and (e) be accompanied by a copy of
Sections 60.551 to 60.594 of the OBCA.
A stockholder sent a Dissenters' Notice must (a) demand payment, (b)
certify whether the stockholder acquired beneficial ownership of the shares
before the date required to be set forth in the Dissenters' Notice, and (c)
deposit the stockholder's certificates in accordance with the terms of the
Dissenters' Notice. A stockholder who does not demand payment or deposit the
stockholder's certificates where required, each by the date set forth in the
Dissenters' Notice, is not entitled to payment for the stockholder's shares
under Section 60.551 to 60.594 of the OBCA.
As soon as the proposed corporate action is taken or upon receipt of a
payment demand in accordance with the OBCA, the Corporation must pay each
dissenter the amount the Corporation estimates to be the fair value of the
stockholder's shares, plus accrued interest. The payment must be accompanied
by (a) the Corporation's balance sheet as of the end of the fiscal year, ending
not more than 16 months before the date of payment, income statement for that
year, and the latest available interim financial statements, if any; (b) a
statement of the Corporation's estimate of the fair value of the shares; (c) an
explanation of how the interest was calculated; (d) a statement of the
dissenter's rights to demand payment if the dissenter is not satisfied with
such payment; and (e) a copy of Sections 60.551 to 60.594 of the OBCA.
A dissenter may notify the Corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, if the dissenter believes
that the amount paid is less than the fair market value of the dissenter's
shares or believes that the interest due is incorrectly calculated, if the
Corporation fails to make payment within 60 days after the date set for
demanding payment, or if the Corporation, having failed to take the proposed
action, does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within 60 days after the date set
for demanding payment. A dissenter waives the right to demand payment, unless
the dissenter notifies the Corporation of the dissenter's demand in writing
within 30 days after the Corporation made or offered payment for the
dissenter's shares.
If a demand for payment remains unsettled, the Corporation must commence a
proceeding within 60 days after receiving the payment demand and petition the
court to determine the fair value of the shares and accrued interest. If the
Corporation does not commence the proceeding within the 60 day period, it will
pay each dissenter whose demand remains unsettled the amount demanded.
A vote AGAINST approval of the Reverse Stock Split does not constitute the
written objection required to be filed by a dissenting stockholder. However,
failure by a stockholder to vote AGAINST approval of the Reverse Stock Split
will not constitute a waiver of rights under Sections 60.551 to 60.594 of the
OBCA provided that a written notice has been properly delivered to the
Corporation and such stockholder has not voted any of such stockholder's shares
FOR the approval of the Reverse Stock Split.
The foregoing does not purport to be a complete statement of the
provisions of Section 60.551 to 60.594 of the OBCA and is qualified in its
entirety by reference to such sections, which are reproduced in full as Annex B
to this Proxy Statement.
THE PROVISIONS OF SECTION 60.551 TO 60.594 OF THE OBCA ARE COMPLEX AND
TECHNICAL IN NATURE. STOCKHOLDERS DESIRING TO EXERCISE DISSENTERS' RIGHTS MAY
WISH TO CONSULT COUNSEL, SINCE THE FAILURE TO COMPLY STRICTLY WITH THESE
PROVISIONS WILL RESULT IN THE LOSS OF THEIR DISSENTERS' RIGHTS.
TRANSACTIONS IN SHARES OF COMMON STOCK OF CORPORATION
Introduction.
On February 29, 1996, the Corporation issued to Messrs. Halloran and Fast
488,267 shares of Common Stock in payment of certain compensation then owing
and to be owing to them under their respective Employment Agreements with
25
<PAGE> 33
the Corporation. The issuance of these shares of Common Stock to them is
referred to in this Proxy Statement as the "Stock Transaction." The following
is a description of the Stock Transaction.
Background and Reasons for the Stock Transaction.
Effective January 1, 1992, Messrs. Halloran and Fast each entered into
four year Employment Agreements with the Corporation. Each agreement expires
on December 31, 1996, and thereafter is automatically extended for additional
one year terms, unless terminated according to each such Employment Agreement.
Each Employment Agreement requires, in the event of the termination of
employment, that the Corporation use its best efforts to cause the
Corporation's lender (as identified in each of the Employment Agreements) to
release certain personal guarantees and security interests in their personal
assets which Messrs. Halloran and Fast provided to such lender in order to
obtain financing for the Corporation. Each Employment Agreement also requires
the Corporation to pay them a base salary and to increase that base salary not
less than seven percent per year.
Beginning in January 1995, Messrs. Halloran and Fast voluntarily deferred
the agreed upon increases in their salaries in order to permit the Corporation
to use its limited cash resources for other purposes. Messrs. Halloran and
Fast in August 1995 began informally discussing with the Board of Directors the
payment of the agreed upon increases in their salaries(such compensation is
referred to in this section as the "Deferred Compensation"). They proposed at
that time that, instead of the Corporation utilizing its limited cash resources
to pay them the Deferred Compensation the Corporation pay the Deferred
Compensation in the form of shares of the Corporation's Common Stock. Messrs.
Halloran and Fast desired that the Corporation address the issue of the payment
of the Deferred Compensation then, because both Messrs. Halloran and Fast had
entered into their respective Employment Agreements subject to the condition
that, in consideration for them guaranteeing the Corporation's lines of credit
and for pledging their personal assets as additional security the Corporation
pay to them all of the agreed upon compensation owing to them under their
Employment Agreements. Messrs. Halloran and Fast did not wish to delay the
resolution of this issue until the expiration of the initial terms of their
Employment Agreements.
The Corporation, in order to evaluate their proposal to pay the Deferred
Compensation, retained The Parrott Partnership in November 1995 to determine
the fair market value of the Corporation. The Corporation obtained the Parrott
Appraisal Report for the limited purpose of the payment of compensation to
Messrs. Halloran and Fast in the form of shares of the Corporation's Common
Stock. It did not obtain such appraisal for the purpose of evaluating the
fairness of the Stock Transaction to the Corporation, to Messrs. Halloran and
Fast, or to the Corporation's unaffiliated stockholders or for any other
purpose. It determined that the cost and expense to obtain another appraisal
for these purposes was not warranted, since The Parrott Partnership was an
independent outside third party. Neither the Board of Directors nor its sole
director who is not an employee of the Corporation retained an unaffiliated
representative to act solely on behalf of the unaffiliated stockholders for the
purposes of negotiating the terms of the Stock Transaction or for the purpose
of preparing a report with respect to the fairness of the Stock Transaction.
The Parrott Partnership provided to the Corporation the Parrott Appraisal
Report on December 5, 1995. It determined in such report that the fair market
value of the Corporation was $56,000 at September 30, 1995 (or, after rounding,
nine cents per share).
Messrs. Halloran and Fast, on the basis of the Parrott Appraisal Report,
then proposed that the Corporation issue to them such number of additional
shares of Common Stock equal to the amount of the Deferred Compensation,
multiplied by nine cents (the value of each share of Common Stock as set forth
in the Parrott Appraisal Report). On the basis of this formula, they proposed
that the Corporation issue to them 488,267 shares of Common Stock in payment of
the Deferred Compensation, with 260,767 shares being issued to Mr. Halloran in
payment of $23,469 of the Deferred Compensation owing to him and 227,500 shares
being issued to Mr. Fast in payment of $20,475, the Deferred Compensation owing
to him.
Approval of the Stock Transaction.
The Board of Directors, at its meeting on February 29, 1996, at which all
of the directors were present, including Messrs. Halloran and Fast and Mr.
Frank L. Ford, first formally considered and voted on the Stock Transaction.
It unanimously approved the issuance of 488,267 shares of Common Stock in
the aggregate to Messrs. Halloran and Fast at
26
<PAGE> 34
nine cents per share in payment of the Deferred Compensation. For Mr.
Halloran, the Board of Directors approved the issuance of 260,767 shares in
payment of Deferred Compensation in the total amount of $23,469 (with $11,600
of such amount representing Deferred Compensation owing to him as of February
29, 1996, and $11,869 representing Deferred Compensation owing to him between
February 29, 1996, and December 31, 1996). For Mr. Fast, the Corporation
approved the issuance of 227,500 shares of Common Stock in payment of Deferred
Compensation in the total amount of $20,475 (with $10,121 of such amount
representing the Deferred Compensation owing to him as of February 29, 1996,
and $10,354 representing Deferred Compensation owing to him between February
29, 1996, and December 31, 1996).
It also determined at that meeting that the issuance of the shares of
Common Stock to the Corporation was in the best interest of and fair to both
the Corporation and its stockholders. It determined that the issuance of the
shares to them would pay in full the Deferred Compensation currently owing to
them under their Employment Agreements without the Corporation using its
limited cash resources or making any additional advances on its lines of
credit. It stated that such issuance would fulfill the current and future
obligations of the Corporation under the Employment Agreements with respect to
the payment of the Deferred Compensation without the utilization of the
Corporation's cash resources. It stated that, on the basis of the Parrott
Appraisal Report, Messrs. Halloran and Fast would be issued Common Stock the
value of which would be equal to the Deferred Compensation and would be
receiving no extra or special economic benefit, particularly in light of the
lack of marketability of the Common Stock.
The Board of Directors, at such meeting, discussed alternatives to the
payment of the Deferred Compensation in such manner, including Messrs. Halloran
and Fast continuing to defer the payment of the Deferred Compensation until a
later time or the payment of such compensation all in cash or in part in cash
and in part in shares (including issuing only such number of shares that
Messrs. Halloran and Fast, after such issuance, would continue to be the owners
of less than 50 percent of the Corporation's issued and outstanding shares of
Common Stock or issuing such shares in installments). The Board of Directors
rejected these alternatives, because they either did not provide for the
payment in full of such Deferred Compensation or required that the Corporation
utilize limited cash resources to pay it.
It also considered only issuing such number of shares to Messrs. Halloran
and Fast in proportion to the Deferred Compensation which they had deferred to
date and then issuing to them additional shares of Common Stock as the balance
of the Deferred Compensation thereafter became due and owing. It, however,
rejected this alternative because the initial term of their Employment
Agreements would soon expire on December 31, 1996 and that the amount of the
Deferred Compensation owed to them after February 29, 1996 was neither
unreasonable nor excessive and was relatively minimal in relation to their
total compensation. As a result, in light of the continued agreement of
Messrs. Halloran and Fast to guarantee the Corporation's lines of credit and to
pledge their assets as additional security for the payment of such lines of
credit, it determined that the delay in the payment of the Deferred
Compensation in such manner was not warranted in light of the relatively
minimal amount of the Deferred Compensation yet to be earned after February 29,
1996 in relation to their total compensation, the financial risk to which they
subjected themselves for the benefit of the Corporation, and the key role they
played in the Corporation's management and operation. It also concluded that
issuing such shares of Common Stock for both the compensation which they had
deferred to date and for the compensation which thereafter would become due and
owing would not affect its subsequent fairness determination with respect to
the Reverse Stock Split. It concluded that, even if the Corporation delayed
the issuance of such shares until such compensation became due and payable, the
stockholders would approve the Reverse Stock Split. It concluded that the
issuance of such shares would not affect the outcome of the vote on the Reverse
Stock Split and, thus, would not have any procedural or substantive impact on
its subsequent fairness determination with respect to the Reverse Stock Split.
The Board of Directors acknowledged that, after the Stock Transaction,
Messrs. Halloran and Fast would own a majority of the outstanding shares of the
Corporation's Common Stock. It also acknowledged that as a result of the
issuance thereof, Messrs. Halloran and Fast would own a sufficient number of
shares in order to ensure the approval of any proposal submitted to the
stockholders, including the Reverse Stock Split which it intended to consider
and vote on immediately after considering and voting on the Stock Transaction.
It determined, that, despite the issuance of such shares, Messrs. Halloran and
Fast currently owned a sufficient number of the shares of the Corporation's
Common Stock to in all likelihood ensure the approval of any proposal submitted
to the stockholders requiring the vote of only a majority of the shares of
Common Stock present in person or by proxy at any meeting of the stockholders
at which a quorum was present. It noted that, if Messrs. Halloran, Fast, and
Ford (the owner of 10,000 shares) and if the Corporation's Employee Stock
Ownership Plan
27
<PAGE> 35
("ESOP") (the owner of 65,167 shares) voted their shares currently held by them
in favor of any proposals requiring the approval of a majority of all
outstanding shares of Common Stock, such as the Reverse Stock Split, only a
small percentage of the shares held by the unaffiliated stockholders
(approximately three percent or 19,930 shares) would be required to vote in
favor of any such proposal in order to ensure its approval. In this regard,
Mr. Halloran reported that, as the ESOP's administrator, the ESOP had
historically voted its shares in favor of proposals which the Board of
Directors had submitted to the stockholders for their consideration and which
it had recommended that the stockholders approve. He believed that all or
substantially all of the participants in the ESOP comprising employees of the
Corporation would direct him to vote in favor of the Reverse Stock Split. Mr.
Ford also indicated that he would vote in favor of the Reverse Stock Split. It
also acknowledged that the Corporation often had difficulty obtaining a quorum
for meetings of stockholders, particularly given that the Corporation has never
used any professional proxy solicitors, but it believed that Messrs. Halloran
and Fast could nonetheless solicit sufficient proxies to ensure a quorum at any
meetings of the stockholders. The Board of Directors thus concluded that, if
Messrs. Halloran, Fast, and Ford and the ESOP voted in favor of any proposal
requiring the approval of a majority of all outstanding shares of Common Stock,
such as the Reverse Stock Split, then the Stock Transaction would not have any
impact on the outcome of the vote on the Reverse Stock Split. Finally, it
reiterated that the unaffiliated stockholders have dissenting stockholders'
rights under the Oregon Business Corporation Act with respect to extraordinary
corporate actions, including the Reverse Stock Split which the Board of
Directors intended to consider next and vote on at the meeting.
The Board of Directors discussed the effects of the Stock Transaction on
the Corporation and its stockholders, including the unaffiliated stockholders.
Messrs. Halloran and Fast currently owned in the aggregate 232,514 shares of
the Corporation's Common Stock or approximately 36.51 percent of the issued and
outstanding shares of the Corporation's Common Stock. After the Stock
Transaction, Messrs. Halloran and Fast would own 720,781 shares of the Common
Stock of the Corporation, representing approximately 64 percent of the
Corporation's issued and outstanding shares of Common Stock. The percentage
interest of the unaffiliated stockholders in the issued and outstanding shares
of the Corporation's Common Stock, after the Stock Transactions, would decrease
from approximately 65 percent to approximately 38 percent. The Stock
Transaction would also dilute the value of each share of the Common Stock of
the Corporation. On the basis of the Parrott Appraisal Report, the value of
each share of Common Stock prior to the Stock Transaction equaled approximately
nine cents per share. After the Stock Transaction, the value of each share of
Common Stock would equal approximately five cents per share (without taking
into account the impact of the payment of the Deferred Compensation on the
calculation of such per share value). On the other hand, they stated that from
the standpoint of the Corporation, the Stock Transaction would eliminate a
liability of the Corporation and convert such liability into additional
stockholder's equity.
The Board of Directors and Messrs. Halloran and Fast reasonably believed
that the Stock Transaction was fair from a financial and procedural point of
view to the Corporation and to the stockholders, including the unaffiliated
stockholders. First, the Corporation obtained an appraisal from an independent
outside party to determine the value of the Corporation for purposes of the
issuance of the shares of Common Stock to Messrs. Halloran and Fast. Second,
on the basis of the Parrott Appraisal Report, the Corporation issued such
shares to Messrs. Halloran and Fast at fair market value and at a value equal
to the Deferred Compensation owing without any extra or special benefit
accorded to them. Third, the Corporation insured the continued employment of
its key executive employees and their continued agreement to guarantee the
Corporation's lines of credit and to pledge their assets as additional security
for the payment of such lines of credit for the benefit of the Corporation.
Fourth, the issuance of such shares in payment of the Deferred Compensation
eliminated an outstanding liability of the Corporation without the use of
available cash resources of the Corporation and without the Corporation making
additional advances under its lines of credit. The Board of Directors and
Messrs. Halloran and Fast concluded that, despite the dilution of the interest
of the unaffiliated stockholders in the Corporation and despite the fact that
the issuance of such shares resulted in Messrs. Halloran and Fast owning a
majority of the issued and outstanding shares of Common Stock of the
Corporation, the issuance of such shares to Messrs. Halloran and Fast both from
a procedural and a financial point of view was fair both to the Corporation and
its stockholders, including its unaffiliated stockholders.
MARKET PRICES FOR SHARES OF COMMON STOCK; DIVIDENDS
The Corporation's Common Stock is not traded on any exchange or quoted on
any inter-dealer quotation system of a registered national securities
association. An established public trading market for the stock has not
existed for the past 15 years.
28
<PAGE> 36
Carr Securities in New York, New York, serves as the "market maker" for
the Corporation. It has served in such position since 1985. For the fiscal
years ended June 30, 1994, 1995, and 1996, Carr Securities effected only five
purchases and sales of the shares of Common Stock. On August 23, 1994, it
effected the sale of 200 shares at 25 cents per share; on June 14, 1995, it
effected the sale of 200 shares at 12 1/2 cents per share; on September 21,
1995, it effected the sale of 100 shares at 87 1/2 cents per share; on April
17, 1996, it effected the sale of 400 shares at 25 cents per share; and on
April 25, 1996, it effected the sale of 1,000 shares at 25 cents per share.
Prospective purchasers and sellers have engaged Carr Securities only
sporadically since 1985 with the stock price ranging from a low bid of 1/8 to a
high bid of 1/2. Information on stock prices on a quarterly basis and for
years prior to 1985 is not available due to the absence of an established
market.
Messrs. Daniel P. Halloran and Barry E. Fast and the Corporation's
Employee Stock Ownership Plan ("ESOP") from time to time have purchased shares
of Common Stock from stockholders. The number of shares of Common Stock
purchased by Mr. Halloran and the price he paid for them during each of the
quarters of the fiscal years ended June 30, 1994, and 1995, were as follows:
<TABLE>
<CAPTION>
Number of
1
Quarter Ended Shares Purchased <F1> Range of Prices Average Price
- ------------- --------------------- --------------- -------------
<S> <C> <C> <C>
September 30, 1993 -- -- --
December 31, 1993 -- -- --
March 31, 1994 1,075 $0.12 to $0.15 $0.12
June 30, 1994 150 $0.15 $0.15
September 30, 1994 300 $0.10 $0.10
December 31, 1994 -- -- --
March 31, 1995 -- -- --
June 30, 1995 5,050 $0.10 $0.10
</TABLE>
The number of shares of Common Stock purchased by Mr. Fast and the price
he paid for them during each of the quarters of the fiscal years ended June 30,
1994, and 1995, were as follows:
<TABLE>
<CAPTION>
Number of
2
Quarter Ended Shares Purchased <F2> Range of Prices Average Price
- ------------- --------------------- --------------- -------------
<S> <C> <C> <C>
September 30, 1993 -- -- --
December 31, 1993 -- -- --
March 31, 1994 1,075 $0.12 to $0.15 $0.12
June 30, 1994 150 $0.15 $0.15
September 30, 1994 300 $0.10 $0.10
December 31, 1994 -- -- --
March 31, 1995 -- -- --
June 30, 1995 5,050 $0.10 $0.10
- ----------------------
<FN>
<F1>
1 Does not include shares allocated to Mr. Halloran's account pursuant to the
Corporation's during such quarters.
<F2>
2 Does not include shares allocated to Mr. Fast's account pursuant to the
Corporation's ESOP during such quarters.
</FN>
</TABLE>
29
<PAGE> 37
During such fiscal years, the ESOP did not purchase any Common Stock. For
the fiscal year ended June 30, 1996, neither Messrs. Halloran and Fast nor the
ESOP have purchased any Common Stock.
The Corporation has not declared any dividends since its incorporation.
The payment of dividends in the future is subject to the discretion of the
Board of Directors. The Corporation does not plan to pay dividends in the
foreseeable future.
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
The following table shows, as to each director and executive officer of
the Corporation, the identified information as of September 15, 1996:
<TABLE>
<CAPTION>
Director Term as
and/or Director
Name and Executive and/or
Position with Principal Occupation During Officer Executive
Corporation Age Past Five Years Since Officer Ends
- --------------- --- -------------------------------- --------- ------------
<S> <C> <C> <C> <C>
Daniel P. 48 Chief Executive Officer, 1985 1996
Halloran President, Chairman of the Board
of Directors, Chief Financial
Officer, Secretary/Treasurer,
Chief Executive and Director of Book Centers,
Officer, Inc., and Scholarly Book Center,
President, Inc.; previously Executive Vice
Chief Financial President and Director of
Officer, Industrial Investment
Controller, Corporation and Vice President,
Secretary, Treasurer, and General Manager
Treasurer, of Scholarly Book Center, Inc.,
Chairman of the and Academic Book Center, Inc.
Board of
Directors, and
Director
Barry E. Fast 52 Vice President and Director of 1986 1996
Book Centers, Inc., Academic
Vice President Book Center, Inc., and
and Director Scholarly Book Center, Inc.;
President of Taylor Carlisle's
Bookstore, Inc. (book seller);
previously Vice President of
East Woods Press (publisher)
Frank L. Ford 45 Registered Representative for 1988 1996
Minnesota Mutual and owner of
Director Certified Bookkeeping Services;
Director of S. I. Ford Designs,
Inc.; previously owner of Frank
Ford & Associates (management
consultants)
</TABLE>
30
<PAGE> 38
Directors are elected to hold office until their successors are elected and
qualified, subject to prior death, resignation, or removal.
EXECUTIVE OFFICERS
Certain of the directors also serve as the executive officers of the
Corporation. Under the Corporation's Bylaws, executive officers are elected by
the Board of Directors and serve until their successors are elected and
qualified, subject to prior death, resignation, or removal. Those officers
are:
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
Daniel P. Halloran Chief Executive Officer, President, Chief Financial
Officer, Controller, Secretary/Treasurer, and Chairman
of the Board of Directors
Barry E. Fast Vice President
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of September 15, 1996, with
respect to persons known to the Corporation to be beneficial owners of more
than 5 percent of the Corporation's outstanding shares of Common Stock. Unless
otherwise indicated, the beneficial ownership of securities includes sole
investment and voting power with respect to such securities.
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address Beneficial Percent of
1
Title of Class of Beneficial Owner Ownership Class <F1>
- -------------- ------------------- ------------ ----------------
<S> <C> <C> <C>
2
Common Stock Daniel P. Halloran 379,625.815 <F2> 33.7%
2538 N.E. 32nd Avenue
Portland, Oregon 97212
3
Common Stock Barry E. Fast 341,155.027 <F3> 30.3%
11 Orlando Avenue
Ardsley, New York 10502
4
Common Stock Book Centers, Inc. 65,167.00 <F4> 5.8%
Employee Stock
Ownership Plan
5600 N.E. Hassalo Street
Portland, Oregon 97213
- ----------------------
<FN>
<F1>
1 Percentages are calculated based upon the number of total shares outstanding
(1,125,156).
<F2>
2 The number listed includes 7,584.815 shares held by the Book Centers, Inc.
Employee Stock Ownership Plan ("ESOP") which are allocated to the account of
Mr. Halloran as of December 31, 1994, all of which are vested to Mr.
Halloran's account as of such date. Mr. Halloran has voting and investment
power with respect to such shares in the manner set forth in footnote 4.
<F3>
3 The number listed includes 1,581.027 shares held by the ESOP which are
allocated to the account of Mr. Fast as of December 31, 1994, all of which
are vested for Mr. Fast's account as of such date. Mr. Fast has voting and
investment power with respect to such shares in the manner set forth in
footnote 4.
<F4>
4 All of the shares of Common Stock held by the ESOP are generally voted by
the trustee of the ESOP, as directed by the administrator of the ESOP. Each
participant in the ESOP is entitled to direct the trustee as to the exercise
of any and all voting rights attributable to the shares of Common Stock then
allocated to his or her account. If a participant directs the trustee as to
the voting of the shares of Common Stock allocated to his or her account,
all allocated shares of Common Stock as to which such instructions have been
received are voted in accordance with such instructions. The trustee votes
any unallocated shares of Common Stock held by the ESOP or any allocated
shares of Common Stock as to which no voting instructions have been
received, in such a manner as directed by the administrator. A participant
may not sell or otherwise transfer any shares of Common Stock allocated to
his or her account until the ESOP distributes such shares to him or her,
subject to the Corporation's right of first refusal to purchase any shares
the ESOP distributes to a participant in the manner and subject to the
conditions set forth in the ESOP. At June 30, 1995, all of the shares held
by the ESOP are allocated among the accounts of the participants.
</FN>
</TABLE>
31
<PAGE> 39
SECURITY OWNERSHIP OF MANAGEMENT
The following table shows the shares of the Corporation's Common Stock
owned by all directors and by all executive officers and directors as a group
as of September 15, 1996. Unless otherwise indicated, beneficial ownership
included sole voting and investment power as to the shares.
<TABLE>
<CAPTION>
Amount and
Nature of
Name of Beneficial Percent of
1
Title of Class Beneficial Owner Ownership Class <F1>
- -------------- ---------------------- ------------ ----------------
<S> <C> <C> <C>
2
Common Stock Daniel P. Halloran 379,625.815 <F2> 33.7%
3
Common Stock Barry E. Fast 341,155.027 <F3> 30.3%
Common Stock Frank L. Ford 10,000.00 0.8%
Common Stock All executive officers
and directors as a
group (3 persons) 730,780.842 64.9%
</TABLE>
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements and schedules included in the
Corporation's Annual Report on Form 10-K for the fiscal year ended June 30,
1995 (the "1995 10-K"), as amended and restated in the Corporation's Amendment
No. 1 to Annual Report on Form 10-K for the fiscal year ended June 30, 1995
(the "1995 10-K Amendment"), incorporated by reference in this Proxy Statement,
have been audited by Deloitte & Touche, LLP, independent public accountants, as
stated in its report with respect thereto. It is expected that representatives
of Deloitte & Touche, LLP, will be present at the Special Meeting, both to
respond to appropriate questions of stockholders of the Corporation and to make
a statement if they desire.
FINANCIAL INFORMATION
The Corporation hereby incorporates by reference the financial information
contained in Part II, Item 8, of the 1995 10-K, as amended and restated in the
1995 10-K Amendment, the report of the independent accountants thereon
contained in Part II, Item 8, of the 1995 10-K, as amended and restated in the
1995 10-K Amendment, and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in Part II, Item 7 of the 1995
10-K, as amended and restated in the 1995 10-K Amendment, and the financial
information contained in Part I, Item 1, of the Corporation's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996 (the "March 1996 10-Q"), as
amended and restated in the Corporation's Amendment No. 2 to the March 1996
Form 10-Q (the "March 1996 10-Q Amendment"), and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in Part 1,
Item 2, of the March 1996 10-Q, as amended and restated in the March 1996 10-Q
Amendment, attached to this Proxy Statement.
- ----------------------
1 Percentages are calculated based upon the number of total shares outstanding
(1,125,156).
2 The number listed includes 7,584.815 shares held by the ESOP which are
allocated to the account of Mr. Halloran as of December 31, 1994, all of
which are vested to Mr. Halloran's account as of such date. Mr. Halloran
has voting and investment power with respect to such shares in the manner
set forth in footnote 4 on page 18.
3 The number listed includes 1,581.027 shares held by the ESOP which are
allocated to the account of Mr. Fast as of December 31, 1994, all of which
are vested for Mr. Fast's account as of such date. Mr. Fast has voting and
investment power with respect to such shares in the manner set forth in
footnote 4 on page 18.
32
<PAGE> 40
ADDITIONAL INFORMATION
The Corporation is subject to the informational requirements of the
Exchange Act and in accordance therewith files reports, proxy statements, and
other information with the SEC. Such reports, proxy statements, and other
information can be inspected and copied at the public reference facilities of
the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549 and at the regional offices of the SEC located at 7 World Trade Center,
13th Floor, Suite 1300, New York, New York 10048 and Suite 1400, Citicorp
Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661. Copies
of such materials can also be obtained at prescribed rates by writing to the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549.
This Proxy Statement includes information required by the SEC to be
disclosed pursuant to Rule 13e-3 under the Exchange Act, which governs so-
called "going private" transactions by certain issuers or their affiliates. In
accordance with that rule, the Corporation and Messrs. Daniel P. Halloran and
Barry E. Fast have filed with the SEC, under the Exchange Act, a Rule 13E-3
Transaction Statement with respect to the Reverse Stock Split and the Stock
Transaction. This Proxy Statement does not contain all of the information set
forth in the Rule 13E-3 Transaction Statement, parts of which are omitted in
accordance with the regulations of the SEC. The Rule 13E-3 Transaction
Statement, and any amendments thereto, including exhibits filed as a part
thereof, will be available for inspection and copying at the offices of the SEC
as set forth above.
By Order of the Board of Directors
/s/ Daniel P. Halloran
--------------------------------------
Daniel P. Halloran
Chairman of the Board of Directors,
Chief Executive Officer, and
President
33
<PAGE> 41
INDEX TO FINANCIAL INFORMATION
Description Page
- ----------- ----
[S] [C]
Management's Discussion and Analysis of Financial Condition and F-2
Results of Operations (Item 7 of Part II of the 1995 10-K (as
amended and restated in the 1995 10-K Amendment))
Audited Financial Statements (Item 8 of Part II of the 1995 10-K
(as amended and restated in the 1995 10-K Amendment)):
Report of Independent Certified Public Accountants Relating F-6
to the Consolidated Financial Statements and Notes Thereto
Consolidated Balance Sheets as of June 30, 1995 and 1994 F-7
Consolidated Statements of Operations and Accumulated F-8
Deficit for the Years Ended June 30, 1995, 1994, and 1993
Consolidated Statements of Cash Flows for the Years Ended F-9
June 30, 1995, 1994, and 1993
Notes to Consolidated Financial Statements F-10
Management's Discussion and Analysis of Financial Condition and F-15
Results of Operations (Item 2 of Part I of the March 1996
10-Q (as amended and restated in the March 1996 10-Q
Amendment))
Unaudited Financial Statements (Item 1 of Part I of the March
1996 10-Q (as amended and restated in the March 1996 10-Q
Amendment)):
Consolidated Balance Sheet at March 31, 1996, and June 30, F-17
1995
Consolidated Statement of Stockholders Equity at March 31, F-18
1996 and June 30, 1995
Consolidated Statements of Operations for the Three Month F-19
Periods Ended March 31, 1996 and 1995
Consolidated Statements of Cash Flows for the Nine Month F-20
Periods Ended March 31, 1996 and 1995
Consolidated Statements of Operations for the Nine Month F-21
Periods Ended March 31, 1996 and 1995
Notes to Consolidated Financial Statements F-22
F-1
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS
- ----------
(a) Results of Operations.
---------------------
1995 Compared to 1994
- ---------------------
The Company's sales increased in the fiscal year ended June 30, 1995, in the
amount of $1,498,433, from $21,496,122 to $22,994,555, a 6.5 percent increase.
The Company classifies its sales as either sales to customers in North America
or sales to customers outside of North America. Sales to customers in North
America in the fiscal year ended June 30, 1995, increased by $318,721 from
$13,151,297 to $13,470,018, an increase of 2.42 percent. Sales to customers
outside of North America in the fiscal year ended June 30, 1995, increased by
$1,179,712 from $8,344,825 to $9,524,537, a 14.14 percent increase. During the
fiscal year ended June 30, 1995, sales to customers in North America as a
percent of overall sales declined from 61.88 percent to 58.58 percent while
sales to customers outside of North America increased from 38.82 percent to
41.42 percent. These changes in sales to customers in North America and sales
to customers outside of North America as a percent of overall sales were caused
by increased sales activity outside of North America. Although the Company
does not keep specific data on sales to customers in North America by country,
i.e. the United States, Canada, and Mexico, management estimates that 90
percent of these sales are to customers in the United States and 10 percent are
to customers in Canada. The Company does not sell to customers in Mexico.
Management believes that sales to customers in the United States and Canada
increased in equal proportions. Thus, with respect to the increase in sales to
customers in North America during the fiscal year ended June 30, 1995, of
$318,721, it is estimated that approximately $286,849 was attributable to sales
to customers in the United States and $31,872 was attributable to sales to
customers in Canada.
Other Sales declined in the fiscal year ended June 30, 1995, by $36,350, a
decline of 54.44 percent. Other Sales for the fiscal year ended June 30, 1994,
included payments of $29,000 from publishers for cooperative advertising and
marketing campaigns that did not recur in the fiscal year ended June 30, 1995,
causing most of the change in Other Sales on a year-to-year basis.
These increases in sales are attributable to improvement in the Company's
ability to supply books in a timely, accurate, and cost effective manner. As
discussed herein, the Company has developed new software that provides to the
Company's customers access to the Company's databases and the ability to order,
claim, cancel, and query on specific titles ordered or desired by customers.
This improvement in a key feature of the Company's service is believed to be
deemed beneficial by its customers, thus, providing an additional reason to use
the Company's services. Sales to customers outside North America has increased
at a higher rate than sales to customers in North America, thus, making sales
to customers outside North America a higher percentage of overall sales than in
the past.
The Cost of Goods for the period ended June 30, 1995, increased by $1,450 from
$17,930,209 in the fiscal year ended June 30, 1994, to $19,380,974 in the
fiscal year ended June 30, 1995, or 8.09 percent. This was caused by a 6.5
percent increase in sales, as previously discussed, and the continuing erosion
of discounts from publishers and other suppliers. Operating and Administrative
Expenses for the period ended June 30, 1995, decreased by $25,895 from
$3,443,153 in the fiscal year ending June 30, 1995, to $3,417,258 in the fiscal
year ended June 30, 1995, or about 75/100 of one percent. Continuing efforts
to improve staff efficiency through training and education, increases in
efficiency because of new computer programs that give staff and customers
easier and faster access to the Company's databases, and ongoing efforts to
negotiate better terms for suppliers and services account for this change. The
new computer system gives employees access to a database of more than 1,000,000
bibliographic records. Employees can access this database for order input,
order clarification, customer service, and other functions rather than having
to either reenter data each time it is used or consult other printed and
electronic databases when researching problems. In addition, customers now
control access to the Company's proprietary databases containing both
bibliographic and customer order information. This access allows functional
customer use of the databases for normal library acquisitions functions
eliminating the need for Company employee interface when customers use these
functions. Interest expense for the fiscal year ended June 30, 1995, increased
by $10,579 from $168,998 in the fiscal year ended June 30, 1994, to $179,577 in
the fiscal year ended June 30, 1995, or 6.3 percent. This is primarily
attributable to an increase in the weighted interest rate from 12.27 percent
for the fiscal year ending June 30, 1994, to 14.33 percent for the fiscal year
ending June 30, 1995. See Note 4 in the Notes to Financial Statements.
F-2
<PAGE> 43
Negative pressures on the Company include increased competition from large
competitors, information being produced in electronic formats, increased use of
library materials budgets to purchase journals, and budgetary constraints of
state-supported educational institutions.
1994 Compared to 1993
- ---------------------
The Company experienced a decline in sales in the fiscal year ended June 30,
1994, of $410,634 from $21,906,122 to $21,496,122, a decline of 1.87 percent.
There were two primary reasons for this overall reduction sales. One was the
lower sales to several commercial customers. The other was in 1993 the Company
sold about $125,000 worth of an expensive reference work to libraries. There
were no comparable sales in 1994. The cost of goods sold declined for the
first time, because of efforts to work with major suppliers to get better
terms, an ongoing process. The Company classifies its sales as either sales to
customers in North America or sales to customers outside of North America.
Sales to customers in North America in the fiscal year ended June 30, 1994,
decreased by $1,573,400 from $14,725,237 to $13,151,837, a decline of 10.69
percent. Sales to customers outside of North America in the fiscal year ended
June 30, 1994, increased by $1,163,306 from $7,181,519 to $8,344,825. During
the fiscal year ended June 30, 1994, sales to customers in North America as a
percent of overall sales declined from 67.22 percent to 61.88 percent, while
sales to customers outside of North America increased from 32.78 percent to
38.82 percent. These changes in sales to customers in and outside of North
America as a percent of overall sales were caused by sales to customers in
North America declining and by increased sales to customers outside of North
America. Although the Company does not keep specific data on sales to
customers in North America by country, i.e. the United States, Canada, and
Mexico, management estimates that 90 percent of these sales are to customers
in the United States and 10 percent are to customers in Canada. The Company
does not sell to customers in Mexico. Management believes that sales to
customers in the United States and Canada decreased in equal proportions.
Thus, with respect to the decrease in sales to customers in North America
during the fiscal year ended June 30, 1994, of $1,573,400, it is estimated that
approximately $1,416,060 was attributable to sales to customers in the United
States and $141,606 was attributable to sales to customers in Canada.
Other Sales declined in the fiscal year ended June 30, 1994, by $86,559, a
decline of 56.45 percent. This was caused because of the gain of approximately
$86,000 realized on the sale of Scholarly in the period ending June 30, 1993,
with no comparable activity in the period ending June 30, 1994.
The decrease in sales is attributable to the fact that the Company does not
presently provide its customers with on-line access to its databases and the
ability to perform meaningful actions on that database such as placing,
claiming, and canceling orders, and making electronic queries to appropriate
Company staff concerning the status of pending orders. Several of the
Company's competitors offer this feature and are attracting business away
from the Company.
Operating and administrative costs declined $58,734 from $3,501,887 for the
fiscal year ended June 30, 1993, to $3,443,153 for the fiscal year ended June
30, 1994, although as a percentage of sales they increased 3/100 of one
percent. The Company will continue efforts to improve the productivity of
employees and to negotiate better terms with suppliers of goods and services in
an effort to reduce operating and administrative costs. The Company introduced
new software for its Firm Order operations in June, 1994. Interest expense
slightly decreased in the fiscal year ended June 30, 1994, in the amount of
$4,380, from $173,378 to $168,998, or 2.53%.
As noted in previous years, there are several negative factors affecting the
Company. Libraries continue to spend larger portions of their budgets on non-
book materials such as journals, audio-visual material and data base access.
During 1991, the Company closed its one hundred percent owned subsidiary
Scholarly, recording restructuring charges of $600,000. These charges included
loss on equipment disposal, employee severance liability, lease termination
costs, and other incremental costs associated with the closure of these
operations. The remaining accrual at June 30, 1993, and 1992, was for lease
termination costs. These leases substantially expired during the year ended
June 30, 1994, and the remaining restructuring accrual of $200,366 was reversed
against operating expenses.
F-3
<PAGE> 44
1993 Compared to 1992
- ---------------------
The Company experienced a decline in sales in the fiscal year ended June 30,
1993, of $1,865,602 from $22,772,358 to $21,906,756, a decline of 7.85 percent.
The Company classifies its sales as sales either to customers in North America
or to customers outside of North America. Sales to customers in North America
in the fiscal year ended June 30, 1993, decreased by $2,981,266 from
$17,706,503 to $14,725,237, a decline of 16.84 percent. Sales to customers
outside of North America in the fiscal year ended June 30, 1993, increased by
$1,115,664 from $6,065,855 to $7,181,519, an increase of 18.39 percent. During
the fiscal year ended June 30, 1993, sales to customers in North America as a
percent of overall sales declined from 74.48 percent to 67.22 percent while
sales to customers outside of North America increased from 25.52 percent to
32.78 percent. These changes in sales to customers in and outside of North
America and as a percent of overall sales were caused by sales to customers in
North America declining because of the change in proximity, personnel, and
perception of the quality of service and by increased sales to customers
outside of North America. The cost of goods sold continued to increase for
several reasons. Publishers continue to lower discounts to the Company in
order to prevent the list price of their material from increasing. Publishers
also switch the mix of trade, technical, and text discounts such that their
overall discounts decline even though their price structure remains the same.
The Company is also actively soliciting orders from its customers for audio-
visual material that carries little, if any discount.
Operating and administrative expenses declined by $225,244 from $3,727,131 for
the fiscal year ended June 30, 1992, to $3,501,887 for the fiscal year ended
June 30, 1993, a decrease of 6.04 percent. They continue to decline for two
reasons: declining volume, thus decreasing the need for labor, supplies, and
shipping charges; and efforts to reduce expenditures by scrutinizing purchasing
procedures and better monitoring of the use of supplies and services purchased
by the Company.
Two negative factors facing the Company are the continued upward spiral in the
cost of serials (the library term for magazines) and the pressure on
governmental agencies and departments at all levels to decrease costs. Serials
are bought from the same materials budget that a library uses to buy books. As
serials absorb a larger portion of the budget, the number of books purchased by
many institutions declines. This trend will not be reversed until the national
economy improves.
The Company continues to work against these trends by reducing staff,
introducing labor-saving technologies, and working with the suppliers of its
goods and services to improve prices and the quality of service provided. The
Company will introduce a newly programmed Firm Order system in late 1993. It
is hoped that this will improve and enhance the quality of the services the
Company provides to its customers. It is impossible, at this point, to predict
the effect on increased sales or lower costs.
(b) Inflation, Market Trends, and Business Factors Beyond Company Control.
---------------------------------------------------------------------
Inflation is not considered to be a factor in the Company's business at this
time.
Negative pressures on the Company, as previously stated, include increased
competition from large competitors, information being produced in electronic
formats, increased use of library materials budgets to purchase journals, and
budgetary constraints of state-supported educational institutions.
(c) Liquidity and Capital Resources.
-------------------------------
The Company anticipates that cash flows from operating activities and financing
will be sufficient to meet the Company's liquidity need over the next 12 months
and thereafter. The Company's cash flows from operating activities during each
of the fiscal years ended June 30, 1995, and 1994, have equaled $310,260 and
$164,396, respectively, permitting the Company to decrease its bank overdraft
in such fiscal years by $522,300 and $284,052, respectively. The Company has
continued to reduce its operating and administrative expense, including
implementing where necessary cost cutting measures and deferring the payment of
planned increases in salaries for management and other employees. In June
1995, the Company terminated its existing line of credit with a lending
institution, entered into two new lines of credit with a bank, and used the
proceeds from such new lines of credit to pay in full its old line of credit.
The new lines of credit are on more favorable terms than the old line of
credit. First, the old line of credit, which the Company entered into with a
lending institution in June, 1991, permitted the Company to borrow up to
$1,250,000. The new lines of credit permit the Company to borrow in the
F-4
<PAGE> 45
aggregate up to $1,400,000 (subject to certain limitations). Second, the new
lines of credit reduced the interest rates the Company pays to its lender. The
old line of credit bore interest at the rate of six percent above the prime
rate (15 percent, 13.25 percent, and 12 percent at June 30, 1995, 1994, and
1993, respectively). The weighted average interest rate under this line of
credit in 1995 and 1994 was 14.33 and 12.27 percent, respectively. One of the
new lines of credit, which permits the Company to borrow up to $750,000 and
which expires September 1, 1996, bears interest at three and one-half percent
above the bank's reference rate (the "Index"). The bank's reference rate
equaled nine percent and the interest rate under this line of credit equaled
12.5 percent at June 30, 1995. Borrowings under this line of credit totaled
$529,136 at June 30, 1995. The other line of credit, which permits the Company
to borrow up to $650,000 and expires June 28, 1996, bears interest at the rate
of two and one-half percent above the prime rate. At June 30, 1995, the
interest rate under this line of credit equaled 10.75 percent. Borrowings
under this line of credit totaled $500,000 at June 30, 1995. The new lines of
credit, like the old line of credit, are secured by the Company's accounts
receivable, inventory, and equipment, and are guaranteed by the present
officers of the Company who are also stockholders. The new lines of credit,
also like the old line of credit, are used by the Company primarily for working
capital purposes. At June 30, 1995, the Company's bank overdraft totaled
$216,421 and its working capital deficit totaled $935,163 (current assets less
current liabilities).
The Company does not have any other unused sources of liquid assets. The
Company will continue to improve its working capital situation through
profitable operations.
The Company did not make any material capital expenditures during the fiscal
year ended June 30, 1995.
(d) General.
-------
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for
the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed
of, requires that, if the estimated fair value of any long lived assets,
certain identifiable intangibles, and goodwill related to those long lived
assets and identifiable intangibles is determined to be less than the carrying
value of such assets, intangibles, and goodwill, then an impairment of those
assets, intangibles, and goodwill is required to be reported as a component of
income from continuing operations before income tax. Effective July 1, 1996,
the Company will adopt SFAS No. 121. The Company does not expect that the
adoption of SFAS No. 121 will have any material effect on its financial
statements.
This report contains forward-looking statements which are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements, which are based on current expectations,
involve risks and uncertainties that could cause actual results to differ
materially from the forward-looking statements, including, without limitation,
variability in freight costs, price pressures from both suppliers and
customers, delays in collecting account receivables (particularly, from foreign
customers), trends in the library industry toward non-book materials,
cancellation of orders, and the risk factors and assumptions specifically
mentioned in this report and those listed from time to time in the Company's
SEC reports. The forward-looking statements should be considered in light of
these risks and uncertainties.
F-5
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
The Stockholders of Book Centers, Inc.
Portland, Oregon
We have audited the accompanying consolidated balance sheets of Book Centers,
Inc. and subsidiaries as of June 30, 1995 and 1994, and the related
consolidated statements of operations and accumulated deficit and of cash flows
for each of the three years in the period ended June 30, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Book Centers, Inc. and
subsidiaries at June 30, 1995 and 1994, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1995
in conformity with generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, Book Centers,
Inc. and subsidiaries changed their method of accounting for income taxes
effective July 1, 1993 to conform with Statement of Financial Accounting
Standards No. 109.
DELOITTE & TOUCHE LLP
Portland, Oregon
August 24, 1995
F-6
<PAGE> 47
<TABLE>
BOOK CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND 1994
- ----------------------
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable (less allowance for
doubtful accounts of $24,525 and $12,155
in 1995 and 1994, respectively) $ 3,453,628 $ 3,151,717
Book inventories 1,083,856 1,233,136
Prepaid expenses and other 254,381 282,445
---------- ----------
Total current assets 4,791,865 4,667,298
OFFICE FURNISHINGS AND EQUIPMENT (Less
accumulated depreciation and amortization
of $650,667 and $583,515 in 1995 and 1994,
respectively) 157,370 186,570
---------- ----------
TOTAL $ 4,949,235 $ 4,853,868
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdraft $ 216,421 $ 738,721
Current portion of long-term debt (Note 5) 16,649 25,729
Accounts payable 3,073,561 3,089,979
Notes payable (Note 4) 1,029,136 752,567
Deferred revenue 1,129,164 725,201
Accrued expenses 262,097 329,135
---------- ----------
Total current liabilities 5,727,028 5,661,332
---------- ----------
LONG-TERM DEBT (Note 5) 43,201 60,698
---------- ----------
COMMITMENTS (Note 3) - -
STOCKHOLDERS' DEFICIT:
Common stock, no par value, 50,000,000
shares authorized, 636,889 shares issued 688,837 688,837
Paid-in capital 428,988 428,988
Accumulated deficit (1,938,819) (1,985,987)
---------- ----------
Total stockholders' deficit (820,994) (868,162)
---------- ----------
TOTAL $ 4,949,235 $ 4,853,868
========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-7
<PAGE> 48
BOOK CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Sales $22,994,555 $21,496,122 $21,906,756
Other 30,422 66,772 153,331
---------- ---------- ----------
23,024,977 21,562,894 22,060,087
---------- ---------- ----------
OPERATING EXPENSES:
Cost of goods sold 19,380,974 17,930,209 18,475,858
Operating and administrative 3,417,258 3,443,153 3,501,887
Reversal of restructuring charge
accrual (Note 1) - (200,366) -
Interest 179,577 168,998 173,378
---------- ---------- ----------
22,977,809 21,341,994 22,151,123
---------- ---------- ----------
INCOME (LOSS) BEFORE TAXES 47,168 220,900 (91,036)
INCOME TAXES (Note 6) - - -
---------- ---------- ----------
NET INCOME (LOSS) 47,168 220,900 (91,036)
ACCUMULATED DEFICIT, BEGINNING
OF PERIOD (1,985,987) (2,206,887) (2,115,851)
---------- ---------- ----------
ACCUMULATED DEFICIT, END OF
PERIOD $(1,938,819) $(1,985,987) $(2,206,887)
========== ========== ==========
NET INCOME (LOSS) PER SHARE $ 0.07 $ 0.35 $ (0.14)
========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING 636,889 636,889 636,889
========== ========== ==========
- -------------------------
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-8
<PAGE> 49
BOOK CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 47,168 $ 220,900 $ (91,036)
Adjustments to reconcile net
income (loss) to net cash
used in operating activities:
Depreciation and amortization 67,152 78,370 81,186
Gain on sale of division - - (16,047)
Loss on disposal of property - 3,306 -
Restructuring charges - (200,366) -
Change in assets and
liabilities net of effects of
sale of division:
Accounts receivable (301,911) 221,912 777,944
Book inventories 149,280 (338,909) 80,406
Prepaid expenses and other 28,064 32,924 13,448
Other assets - - 15,000
Accounts payable (16,418) (108,127) (594,402)
Restructuring reserve - - (13,118)
Deferred revenue 403,963 210,874 (447,875)
Accrued expenses (67,038) 43,512 (9,649)
---------- ---------- ----------
Net cash provided by
(used in) operating
activities 310,260 164,396 (204,143)
---------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES -
Capital expenditures (37,952) (8,588) (41,369)
---------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Bank overdraft (522,300) (284,052) 156,157
Net increase in notes payable 276,569 164,394 116,641
Long-term debt:
Borrowings - - 8,100
Repayments (26,577) (36,150) (35,746)
---------- ---------- ----------
Net cash provided by
(used in) financing
activities (272,308) (155,808) 245,512
----------- ----------- -----------
NET INCREASE IN CASH - - -
CASH AT BEGINNING OF YEAR - - -
---------- ---------- ----------
CASH AT END OF YEAR $ - - -
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING ACTIVITIES:
Book value of assets sold $ - $ - $ 32,272
Liabilities assumed by buyer - - 48,319
Capital expenditures financed
by long-term debt - 73,263 -
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
F-9
<PAGE> 50
BOOK CENTERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995, 1994, AND 1993
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company - Book Centers, Inc. is an Oregon corporation organized in
1961. The Company engages in the business of marketing, warehousing and
distributing books worldwide to research and academic libraries.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its 100%-owned subsidiary, Academic Book
Center, Inc. ("Academic"). All significant intercompany accounts and
transactions have been eliminated upon consolidation.
Restructuring - During 1991, the Company closed its one hundred percent
owned subsidiary Scholarly Book Center, Inc. ("Scholarly"), recording
restructuring charges of $600,000. These charges included loss on
equipment disposal, employee severance liability, lease termination costs
and other incremental costs associated with the closure of these
operations. The remaining accrual at June 30, 1993 and 1992, was for lease
termination costs. These leases substantially expired during the year
ended June 30, 1994 and the remaining restructuring accrual of $200,366 was
reversed against operating expenses.
Statements of Cash Flows - For purposes of the statement of cash flows, the
Company considers interest bearing deposits with maturities of 90 days or
less to be cash. Cash paid for interest was $177,581, $169,711, and
$176,346 for the years ended June 30, 1995, 1994, and 1993, respectively.
Accounts Receivable - Trade receivables are recorded at estimated
collectible value.
Book Inventories - Inventories are valued at lower of cost or market value
using the specific identification method.
Income Taxes - Effective July 1, 1993, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes, which requires the provision of deferred income taxes based upon an
asset and liability approach and represents the change in deferred income
tax accounts during the year, including the effect of enacted tax rate
changes. A consolidated federal income tax return is filed by the Company
for the consolidated group. Federal tax credits are accounted for, when
applicable, under the flow-through method whereby the credit is reflected
as a reduction of federal income tax expense in the year in which the
credit is used.
Deferred Revenue - The subsidiary companies receive advance payments from
certain customers. These amounts are recognized as revenue when the
related books are shipped.
Office Furnishings and Equipment and Depreciation - Office furnishings and
equipment are stated at cost. Maintenance and repairs are charged to
expenses as incurred, and improvements are capitalized. Depreciation is
computed on a straight-line method over the estimated useful lives
(generally three to ten years) of the related assets. Upon disposal of
property subject to depreciation, the accounts are relieved of the related
costs and accumulated depreciation and resulting gains and losses are
reflected in operations.
Net Income (Loss) Per Share - Net income (loss) per share of common stock
is computed based on the weighted average number of shares of common stock
outstanding during each year. The weighted average number of shares for
each of the three years ended June 30, 1995 was 636,889.
Reclassifications - Certain amounts from prior periods have been
reclassified in order to conform to the 1995 presentation.
F-10
<PAGE> 51
2. EMPLOYEE STOCK OWNERSHIP PLAN
During 1985, the Company adopted a qualified Employee Stock Ownership Plan.
This Plan was initially funded with a $25,000 contribution and is available
to all eligible personnel who have been employed by the Company for a least
one year. As of June 30, 1995, 65,167 shares of the Company's outstanding
common stock had been acquired by the Plan. There were no contributions to
the Plan for the years ended June 30, 1995, 1994, and 1993.
The Company has a 401(k) plan for employees who have completed one year of
service with a minimum of 1,000 hours and who are at least 21 years of age.
Participants may contribute up to 15% of their annual compensation which
the Company may match at its discretion. Participants become vested in
employer contributions at 20% per year starting in year three. The Company
made contributions to the Plan of $28,884, $25,184, and $12,405 for the
years ended June 30, 1995, 1994, and 1993, respectively.
3. LEASE COMMITMENTS
The Company and one of its subsidiaries are lessees under noncancelable
real property leases through 1996. Other leases shown are for automobiles
and office equipment. In September 1992, the Company sold certain assets
related to an operating division of its wholly-owned subsidiary, Academic.
In addition to the purchase of assets, the buyer assumed responsibility for
certain liabilities, including the lease for the operating division's
primary facility. The sale agreement provided that the Company would
guarantee this lease until the expiration of its original term at
October 31, 1995.
Minimum future rentals under capital and operating leases having initial or
remaining terms of one year or more as of June 30, 1995 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1996 $12,284 $37,556
1997 12,419 1,776
1998 12,419 888
1999 4,677 -
2000 - -
------ ------
Total 41,799 $40,220
======
Less amount representing interest 9,227
------
Present value of minimum lease payments $32,572
======
</TABLE>
Total rent expense was $129,640, $116,210, and $114,830 for the years ended
June 30, 1995, 1994, and 1993, respectively.
4. NOTES PAYABLE
In June 1991, the Company entered into a new line of credit with a lending
institution. Beginning July 1, 1993, the line renewed annually unless the
Company elected to terminate the agreement. Under this agreement, the
Company could borrow up to a capacity of $1,250,000. The line bore
interest at 6% above the prime rate (15%, 13.25%, and 12% at June 30, 1995,
1994, and 1993, respectively), was secured by accounts receivable,
inventory and equipment and was personally guaranteed by present officers
who are stockholders of the Company. The weighted average interest rate in
1995 and 1994 was 14.33% and 12.27%, respectively.
F-11
<PAGE> 52
In June, 1995, the Company paid off their line of credit with this lending
institution by using funds from two new lines of credit entered into with a
bank. The new lines are a $750,000 line expiring September 1, 1996, and
secured by domestic accounts receivable, bearing interest at 3.5% above the
bank's reference rate which was 9.0% at June 30, 1995. Borrowings under
this line totaled $529,136 at June 30, 1995. The other line is for
$650,000, expires June 28, 1996, and is secured by foreign accounts
receivable. This line bears interest at 2.5% above prime, which was 8.25%
at June 30, 1995. Borrowings under this line totaled $500,000 at June 30,
1995. These borrowings are secured by assets of the Company and are
guaranteed by stockholders of the Company who are also officers.
5. LONG-TERM DEBT
Long-term debt at June 30, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Note payable to related parties at 12% interest,
payable monthly through June 1995
collateralized by computer equipment $ - $ 8,483
Note payable to related parties at 12% interest,
payable monthly through November 1998,
collateralized by computer equipment 22,138 27,079
Note payable to a bank, at 8.9% interest,
payable monthly through February 1997,
collateralized by an automobile 5,140 7,879
Capital lease obligations (Note 3) 32,572 42,986
---------- ----------
Total 59,850 86,427
Less current portion 16,649 25,729
---------- ----------
Total long-term debt $ 43,201 $ 60,698
========== ==========
</TABLE>
Maturities of long-term debt, including minimum capital lease payments, net
of interest portion, at June 30, 1995 were as follows:
1996 $ 16,649
1997 17,738
1998 17,868
1999 7,595
2000 -
----------
Total $ 59,850
==========
The above notes payable to related parties are to individuals who are
present officers and stockholders of the Company.
6. INCOME TAXES
The Company adopted SFAS No. 109, Accounting for Income Taxes, effective
July 1, 1993. The statement requires the provision of deferred income
taxes based upon an asset and liability approach and represents the change
in deferred income tax accounts during the year, including the effect of
enacted tax rate changes. The statement also provides for the recognition
of net operating loss ("NOL") carryforwards as a deferred tax asset.
Income tax expenses attributable to operations consisted of the following:
F-12
<PAGE> 53
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State - - -
Deferred:
Federal - - -
State - - -
---------- ---------- ----------
Total income tax expense $ - - -
========== ========== ==========
</TABLE>
Reconciliation between the statutory federal income tax rate and the
effective tax is as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Computed federal income taxes $ 16,000 $ 75,000 $ -
State taxes, net of federal
benefit 2,000 9,000 -
Nondeductible expenses 10,000 13,000 -
Operating loss carryforwards (28,000) (97,000) -
---------- ---------- ----------
Total income tax expense $ - $ - $ -
========== ========== ==========
</TABLE>
The tax effect of temporary differences that give rise to significant
deferred tax assets and deferred tax liabilities at June 30, 1995 and 1994
are presented below:
<TABLE>
<CAPTION>
June 30, June 30,
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Depreciation $ 70,000 $ 62,000
Accrued expenses 100,000 90,000
NOL carryforwards 254,000 297,000
Investment tax and jobs credit carryforward 21,000 51,000
---------- ----------
445,000 500,000
Valuation allowance (445,000) (500,000)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
</TABLE>
There were no deferred tax liabilities at June 30, 1995. Deferred tax
assets have been reduced by a valuation allowance as realization of some
portion of these future tax benefits is subject to significant
uncertainties. The net change in the valuation allowance for the year
ended June 30, 1995, was $55,000.
At June 30, 1995, the Company's net operating loss carryforwards totaled
approximately $1,220,000 for financial reporting purposes expiring through
2008. Net operating loss carryforwards totaled approximately $649,000 for
tax purposes and expire as follows:
F-13
<PAGE> 54
<TABLE>
<CAPTION>
Amount of
Year of Loss
Expiration Carryforward
---------- ------------
<S> <C>
2002 $ 67,000
2003 224,000
2006 65,000
2007 238,000
2008 55,000
-------
Total $649,000
=======
</TABLE>
Investment tax and new jobs credit carryovers approximate $21,000 at June
30, 1995 and expire at various dates through 2000.
7. BUSINESS SEGMENT INFORMATION
The Company's principal industry segment is book wholesaling. Other
segments and transfers between segments are immaterial. Export sales were
$9,524,537, $8,344,825, and $7,181,519 for the years ended June 30, 1995,
1994, and 1993, respectively, of which approximately 80% were made to
Pacific Rim countries. In addition, accounts receivable from export sales
were $1,726,442, $1,418,251, and $1,529,259 at June 30, 1995, 1994, and
1993, respectively. Foreign sales are transacted in U.S. dollars.
F-14
<PAGE> 55
Management's Discussion and Analysis
of Financial Condition
and Results of Operations
------------------------------------
Sales in the three months ended March 31, 1996, decreased by $52,621 from
$5,974,607 in the three month period ended March 31, 1995, to $5,921,986, or
about 88/100 of one percent decrease. The Company classifies its sales as
either sales to customers in North America or sales to customers outside of
North America. Sales to customers in North America decreased $115,510 in the
three month period ending March 31, 1996, from $3,499,925 to $3,384,415, or
3.30 percent and sales to customers outside of North America in the three month
period ending March 31, 1996, increased by $224,543 from $2,474,682 to
$2,537,571, or 9.07 percent. Although the Company does not keep specific data
on sales in North America broken down by country, i.e., the United States,
Canada, and Mexico, management estimates that 90 percent of the sales to
customers in North America are to customers in the United States and 10 percent
are to customers in Canada. The Company does not sell to customers in Mexico.
Management believes that sales to customers in the United States and Canada
decreased in equal proportions. Thus, with respect to the decrease in sales
to customers in North America during the three month period ended March 31,
1996, of $115,510, it is estimated that approximately $103,959 was attributable
to sales to customers in the United States and $11,551 was attributable to
sales to customers in Canada. During the three month period ending March 31,
1996, sales to customers outside North America slightly declined from 58.58
percent to 57.15 percent. The changes were too small for the Company to draw
any conclusions concerning the reasons for the changes. The Cost of Goods in
the three months ended March 31, 1996, declined by $72,854 to $4,953,800
in the three month period ending March 31, 1996, from $5,026,654 in the three
month period ending March 31, 1995, or a decrease of 1.2 percent. This
decrease in Cost of Goods is a result of attempts to improve terms on which the
Company purchases its books from its suppliers and the decrease in sales.
Operating and Administrative Expenses during the period ending March 31, 1996,
increased by $47,239 from $845,282 in the three month period ending March 31,
1995, to $892,521 in the three month period ending March 31, 1996, or 5.59
percent. This is a result of an increased transportation costs for inbound and
outbound freight and a charge of $14,565 related to the payment in stock of
amounts owed to two employees under existing employment agreements. Interest
expense during the period ending March 31, 1996, declined by $20,838 from
$50,333 in the three month period ending March 31, 1995, to $29,494 in the
three month period ending March 31, 1996, decreased by $6,218 from $52,388
during the three month period ending March 31, 1995, to $46,170 during the
three month period ending March 31, 1996, or 15.97 percent. This is
attributable to the decrease in interest expense resulting from the new banking
arrangement into which the Company entered in June 1995, offset by higher
transportation costs and the payment in stock mentioned above. This new
banking arrangement benefits the Company in comparison to its previous banking
arrangement by lower overall interest rates--prime rate plus six percent in the
old arrangement compared to prime rate plus either 2 1/2 percent for amounts
secured by non-North American accounts receivable or prime rate plus four
percent secured by North American accounts receivable. In addition, the
current banking arrangement credits cash deposited with the bank against
borrowed amounts after only a holding period of two days compared with a
holding period of five days plus transportation time from Portland, Oregon to
the previous bank's location in New York City. With the current banking
arrangement, there is not transportation time because the bank is located in
Portland, Oregon and funds are deposited the day they are received. At April
1, 1996, the Company had available for borrowing under its lines of credit an
amount equal to $419,485.
Sales in the nine month period ending March 31, 1996, increased by $305,749
from $17,247,205 in the nine month period ending March 31, 1995, to
$17,552,954, or 1.77 percent. The Cost of Goods in the nine month period
ending March 31, 1996, increased by $304,639 from $14,433,214 during the nine
month period ending March 31, 1995, to $14,737,853 during the nine month
period ending March 31, 1996, or 2.11 percent. Most of the change in Cost of
Goods can be explained by increased sales. There was a slight decrease in
discounts from suppliers of books and increase in discounts to customers that
account for the 28/100 of one percent increase in Cost of Goods from the nine
month period ending March 31, 1995, to March 31, 1996. Operating and
Administrative costs increased by $50,573 from $2,530,393 in the nine month
period ending March 31, 1995, to $2,580,966 in the nine month period ending
March 31, 1996, or two percent. Most of this change can be attributed to
higher transportation costs both for freight arriving from publishers,
suppliers, and distributors, and outbound freight to customers. Interest
expense decreased during the nine month period ending March 31, 1996, from
$132,611 in the nine month period ending March 31,1995, to $65,017, or 50.97
percent. The discussion concerning the changes in the Company's banking
arrangement that affect the Company's interest expenses also applies to the
nine month period ending March 31, 1996. Net income increased during the nine
month period ending March 31, 1996,
F-15
<PAGE> 56
by $3,566 from $150,987 during the nine month period ending March 31, 1995, to
$154,553 during the nine month period ending March 31, 1996, or 2.36 percent.
This increase is attributable to the factors discussed above including
increases in sales, Cost of Goods, Operating and Administrative costs, and a
decrease in interest expense.
Net cash used in operating activities was $859,000 for the nine month period
ended March 31, 1996. Approximately $688,000 and $234,000 of this amount
related to a decrease in accounts payables and an increase in book inventories,
respectively, while $322,000 related to an increase in the Company's
receivables offset by a $216,000 increase in deferred revenues and net income
of $154,553. Net cash used in investing activities consisted of approximately
$75,000 for additions to office furnishings and equipment. Net cash provided
by financing activities was approximately $934,000 due mainly to an increase
in the bank overdraft of $1,112,000 offset by a decrease of $20,000 in payments
on long term debt. The net change in cash was zero due to the fact that the
Company had a bank overdraft at the end of the period. At March 31, 1996, the
Company's bank overdraft equaled $1,328,600 and its working capital deficit
equaled $774,772 (current assets less current liabilities).
Overdue foreign receivables continue to run at high levels with approximately
17 percent of foreign receivables over normal terms. Foreign receivables over
normal terms represent eight percent of total receivables of the Company. As
stated in prior periods, it is expected that this will improve with the end of
many foreign libraries' fiscal years in March as well as continued collection
efforts. These efforts will include a series of actions beginning with dunning
letters to the libraries' Accounts Payable Office from the Company's Accounts
Receivable Clerk accompanied by copies of statements of all of the invoices
which are open and outstanding with the particular customer, and copies of
particular invoices which are overdue. If no action or acknowledgment of the
issues raised is received within 30 days from the date of the original dunning
letter, another dunning letter to the libraries' Accounts Payable Office is
sent this time from the Company's Controller asking for action and response
directly to the Controller. The Controller's telephone number, electronic mail
address, and the Company's facsimile number are all included to make
communication as quick and easy as possible. The Salesperson and Customer
Service Representative for the libraries involved are also notified at this
time and requested to provide background on any issues that may effect the
libraries' payments. These issues can include problems with items billed on
particular invoices, staffing problems at the library, invoicing issues related
to the preparation of the invoices by the Company, or issues related to a
customs clearance. If no action or acknowledgment of the issues raised is
received within another 30 days from the date of the last dunning letter and no
extenuating circumstances are raised by either the Salesperson or the Customer
Service Representative, another dunning letter to the libraries' Accounts
Payable Office is sent this time from the Company's President asking for action
and response directly to the President. The President's telephone number,
electronic mail address, and the Company's facsimile number are all included to
make communication as quick and easy as possible with an additional statement
that the President will be contacting the Librarian personally if no response
is received or efforts to resolve outstanding issues are not made. Since
virtually all of the Company's library customers outside of North America are
financed by governmental agencies, payment is usually received after this
process has begun. It is anticipated that this process will be successful, but
the Company is prepared to take steps not outlined above if particular
situations arise that are not resolved. This situation occurred only once in
the Company's history when a payment was made by a customer outside of North
America, but the check was non-collectable, because the bank on which the check
was drawn declared insolvency before the check cleared. The Company sought
legal help in the country where the customer was located and the issue was
resolved to the Company's satisfaction.
The Company has no plans to change its marketing and sales activities in
countries outside of North America, because of this problem. The Company looks
at all cost aspects of each of its customers and makes appropriate adjustments
in pricing for customers based on the nature of the services and other issues
related to servicing each customer. One of the aspects considered in this
process is the collectability of accounts receivable.
This report contains forward-looking statements which are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements, which are based on current expectations,
involve risks and uncertainties that could cause actual results to differ
materially from the forward-looking statements, including, without limitation,
variability in freight costs, price pressures from both suppliers and
customers, delays in collecting account receivables (particularly, from foreign
customers), trends in the library industry toward non-book materials,
cancellation of orders, and the risk factors and assumptions specifically
mentioned in this report and those listed from time to time in the Company's
SEC reports. The forward-looking statements should be considered in light of
risks and uncertainties.
F-16
<PAGE> 57
BOOK CENTERS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
3/31/96 6/30/95
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, net of allowance for
doubtful accounts of $40,274 and $24,525 $3,775,625 $3,453,628
Book inventories 1,317,719 1,083,856
Prepaid expenses 266,586 254,381
--------- ---------
Total current assets 5,359,930 4,791,865
Office furnishings and equipment, at cost
less accumulated depreciation of
$255,492 and $650,667 175,734 157,370
Other assets 2,395 ----
--------- ---------
$5,538,059 $4,959,235
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $1,328,600 $ 216,421
Notes payable 830,515 1,029,136
Current portion of long-term debt 24,757 16,649
Accounts payable 2,385,456 3,073,561
Deferred revenue 1,344,851 1,129,164
Accrued expenses 220,523 262,097
--------- ---------
Total current liabilities 6,134,702 5,727,028
Long-term debt, less current portion 55,233 43,201
--------- ---------
Total liabilities 6,189,935 5,770,229
Stockholders' equity:
Common stock, no par value, 50,000,000 shares
authorized, 636,889 shares issued as of
June 30, 1995, and 1,125,156 shares issued
as of March 31, 1996 1,216,160 688,837
Paid in capital 0 428,988
Deferred compensation expense ( 22,222) ----
Accumulated deficit (1,845,814) (1,938,819)
--------- ---------
Total stockholders' deficit ( 651,876) ( 820,994)
--------- ---------
$5,538,059 $4,949,235
========= =========
See notes to consolidated financial statements.
</TABLE>
F-17
<PAGE> 58
BOOK CENTERS, INC.
AND SUBSIDIARIES
Statement of Stockholders Equity
For the Nine Month Period Ended March 31, 1996
<TABLE>
<CAPTION>
Common Stock
---------------------- Additional Deferred Total
Number Paid in Accumulated Compensation Stockholders
of Shares Amount Capital Deficit Expense Deficit
--------- ---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1995 636,889 $ 688,837 $ 428,988 $(1,936,819) $ - $ (820,994)
Compensation expense in 79,522 $ 85,884 $ (78,727) $ (7,157) $ - $ -
the form of shares
issued to directors of
the Company for the
period January 1,
1995, through June 30,
1995
Compensation expense in 161,833 $ 174,778 $(160,213) $ - $ - $ 14,565
the form of shares
issued to directors of
the Company for the
period July 1, 1996,
through March 31, 1996
Unearned compensation 246,912 $ 266,661 $(190,048) $ (54,391) $ (22,222) $ -
expense for the period
April 1, 1996, through
December 31, 1996
Net income - $ - $ - $ 154,553 $ - $ 154,553
--------- --------- -------- ---------- --------- ----------
Balances, March 31, 1996 $1,125,158 $1,216,160 $ - $(1,845,814) $ (22,222) $ (651,876)
========= ========= ======== ========== ========= ==========
See notes to consolidated financial statements.
</TABLE>
F-18
<PAGE> 59
BOOK CENTERS, INC.
AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the
Three Month Periods
Ended March 31,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Net sales $5,921,986 $5,974,607
Expenses:
Cost of goods sold 4,953,800 5,026,654
Operating and administrative 892,521 845,282
Interest 29,495 50,333
--------- ---------
Total expenses 5,875,816 5,922,269
Income (loss) before taxes 46,170 52,388
Income taxes ---- ----
--------- ---------
Net income (loss) 46,170 52,388
========= =========
Earnings (loss) per share based on weighted
weighted average number of shares
outstanding of 808,587):
Income (loss) $ .06 $ .08
--------- ---------
Net income (loss) per share $ .06 $ .08
========= =========
See notes to consolidated financial statements.
</TABLE>
F-19
<PAGE> 60
BOOK CENTERS, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the
Nine Month Periods
Ended March 31,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Operations:
Net income (loss) $ 154,553 $ 150,987
Gain on sale of equipment ---- ----
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 56,353 49,838
Shares issued to directors 14,565 ----
Changes in account balances:
Accounts receivable ( 321,997) ( 476,060)
Book inventories ( 233,863) ( 277,112)
Prepaid expenses and other ( 14,605) ( 47,567)
Accounts payable ( 688,105) ( 221,260)
Deferred revenue 215,687 578,018
Accrued expenses ( 41,574) ( 52,448)
--------- ---------
Net cash provided by (used in)
operating activities ( 858,986) ( 295,604)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to office furnishings
and equipment ( 74,712) ( 35,057)
Other ---- ( 13)
--------- ---------
Net cash used in investing activities ( 74,712) ( 35,070)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in bank overdraft 1,112,179 725,680
Net increase (decrease) in notes payable
to commercial factors ( 198,621) ( 375,169)
Net (payments) borrowings on long term debt 20,140 ( 19,837)
--------- ---------
Net cash provided by (used in)
financing activities 933,698 330,674
--------- ---------
Net increase (decrease) in cash 0 0
Cash, beginning of period 0 0
Cash, end of period $ 0 $ 0
========= =========
See notes to consolidated financial statements.
</TABLE>
F-20
<PAGE> 61
BOOK CENTERS, INC.
AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the
Nine Month Periods
Ended March 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net sales $17,552,954 $17,247,205
Expenses:
Cost of goods sold 14,737,853 14,433,214
Operating and administrative 2,595,531 2,530,393
Interest 65,017 132,611
---------- ----------
Total expenses 17,398,401 17,096,218
Income (loss) before taxes 154,553 150,987
Income taxes ---- ----
---------- ----------
Net income (loss) $ 154,553 $ 150,987
========== ==========
Earnings (loss) per share (based on
weighted average shares outstanding
of 694,544):
Income (loss) .22 .24
---------- ----------
Net income (loss) per share $ .22 $ .24
========== ==========
See notes to consolidated financial statements.
</TABLE>
F-21
<PAGE> 62
BOOK CENTERS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE A: Earnings (loss) per Common Share
- -----------------------------------------
Earnings (loss) per common shares based on the average weighted number of
common shares outstanding. The number of shares outstanding at March 31, 1996,
was 1,125,156 and at March 31, 1995, was 636,889.
The Company and Mr. Daniel P. Halloran, an executive officer, director, and
shareholder, entered into an amendment to his Employment Agreement on May 6,
1996, effective February 29, 1996, by the terms of which the Company issued to
him 260,767 shares of common stock, at nine cents per share in payment of
compensation in the amount of $23,469 the Company owed and would owe to him
under his Employment Agreement. The Company and Mr. Barry E. Fast, an
executive officer, director, and shareholder, also entered into an amendment to
his Employment Agreement on May 8, 1996, effective February 29, 1996, by the
terms of which the Company issued to him 227,500 shares of common stock, at
nine cents per share, in payment of compensation in the amount of $20,475 the
Company owed and would owe to him under his Employment Agreement. On February
29, 1996, the Company's Board of Directors approved the issuance of these
shares in order to pay to Messrs. Halloran and Fast the compensation they had
deferred since the beginning of 1995 and would defer through the expiration of
the term of their Employment Agreements on December 31, 1996, to permit the
Company to pay interest on its line of credit and to finance its operations.
The Board of Directors approved the issuance of these shares to them as of
February 29, 1996, but subject to the Company's subsequent determination of the
amount of compensation they had deferred and would defer under their Employment
Agreements through December 31, 1996, and of the number of shares to be issued
and subject to the negotiation and execution of written amendments to their
Employment Agreements. A copy of the amendments were included with the March
1996 Form 10-Q filed on May 15, 1996 as Exhibits 10.20 and 10.21.
NOTE B: Stockholders' Equity
- ----------------------------
Additional paid-in capital was reduced to zero as a result of the difference
between the par value and the market value of the common stock on the date of
the issuance of the shares of common stock to Messrs. Halloran and Fast in
February 1996. See Note A to Consolidated Financial Statements. Any remaining
difference was allocated to accumulated deficit as follows:
Shares issued to directors 488,384
Multiplied by:
Difference between par value and
market value of common stock
[($1.08 per less $.09 market) = $.99] $.99
--------
Subtotal $438,988
Less:
Total additional paid-in capital ($428,988)
--------
Remaining amount allocated to
accumulated deficit $54,396
F-22
<PAGE> 63
ANNEX A
ARTICLES OF AMENDMENT
OF
BOOK CENTERS, INC.
Pursuant to the provisions of ORS 60.431, the undersigned corporation
executes the following Articles of Amendment to its Restated Articles of
Incorporation filed June 15, 1988 (as amended by Articles of Amendment filed
October 4, 1990):
1. The name of the corporation prior to amendment is: Book Centers,
Inc.
2. State the article number(s) and set forth the article(s) as it is
amended to read. Indicate the date each amendment was adopted.
The following amendment to Section 1 of Article III of the Restated
Articles of Incorporation was adopted on October 8, 1996:
1. Classes of Shares. The Corporation is authorized to issue
two classes of shares to be designated respectively "Preferred" and
"Common." The total number of Preferred shares is 20,000,000 and
the total number of Common shares is 500. Upon the filing of these
Articles of Amendment, each 100,000 issued and outstanding Common
shares shall be reverse split into one Common share. Each record
holder of Common shares whose aggregate number of Common shares
held of record is less than 100,000 Common shares shall be deemed
by the Corporation to hold a fractional Common share. All such
fractional Common shares are hereby cancelled immediately. The
holder of such fractional Common share shall be entitled to a cash
payment equal to nine cents per Common share (pre-reverse split)
upon proper surrender of the holder's certificate or certificates
therefor.
3. Check the appropriate statement:
_____ Shareholder action was not required to adopt the amendment(s).
__x__ Shareholder action was required to adopt the amendment(s).
The shareholder vote was as follows:
<TABLE>
<CAPTION>
Number of Number of
Shares Votes Entitled Number of Number Votes
Class of Shares Outstanding to be Cast Votes Cast For Cast Against
- --------------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Common 1,125,156 1,125,156
</TABLE>
Page 1 - ARTICLES OF AMENDMENT
A-1
<PAGE> 64
4. Other provisions, if applicable: None.
Execution:
Daniel P. Halloran President
- -------------------------------------------------------------------------------
Signature Printed Name Title
Person to contact about this filing:
David R. Ludwig (503) 228-6044
- -------------------------------------------------------------------------------
Name Daytime Phone Number
Page 2 - ARTICLES OF AMENDMENT
A-2
<PAGE> 65
ANNEX B
SECTIONS 60.551 TO 60.594 OF THE
OREGON BUSINESS CORPORATION ACT
(Right to Dissent and Obtain Payment for Shares)
60.551 Definitions for 60.551 to 60.594. As used in ORS 60.551 to
60.594:
(1) "Beneficial shareholder" means the person who is a beneficial owner
of shares held in a voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under ORS 60.554 and who exercises that right when and in the
manner required by ORS 60.561 to 60.587.
(4) "Fair value," with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
60.554 Right to dissent. (1) Subject to subsection (2) of this section,
a shareholder is entitled to dissent from, and obtain payment of the fair value
of the shareholder's shares in the event of, any of the following corporate
acts:
(a) Consummation of a plan of merger to which the corporation is a party
if a shareholder approval is required for the merger by ORS 60.487 or the
articles of incorporation and the shareholder is entitled to vote on the merger
or if the corporation is a subsidiary that is merged with its parent under ORS
60.491;
(b) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
(c) Consummation of a sale or exchange of all or substantially all of the
property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to court order or a sale for cash pursuant to
a plan by which all or substantially all of the net proceeds of the sale will
be distributed to the shareholders within one year after the date of sale;
(d) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preemptive right of the holder of the shares to
acquire shares or other securities; or
B-1
<PAGE> 66
(B) Reduces the number of shares owned by the shareholder to a fraction
of a share if the fractional share so created is to be acquired for cash under
ORS 60.141; or
(e) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under ORS 60.551 to 60.594 may not challenge the corporate
action creating the shareholder's entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(3) Dissenters' rights shall not apply to the holders of shares of any
class or series if the shares of the class or series were registered on a
national securities exchange or quoted on the National Association of
Securities Dealers, Inc. Automated Quotation System as a National Market System
issue on the record date for the meeting of shareholders at which the corporate
action described in subsection (1) of this section is to be approved or on the
date a copy or summary of the plan or merger is mailed to shareholders under
ORS 60.491, unless the articles of incorporation otherwise provide.
60.557 Dissent by nominees and beneficial owners. (1) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in the shareholder's name only if the shareholder dissents with
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
the shareholder asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares regarding which the
shareholder dissents and the shareholder's other shares were registered in the
names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of
which such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote.
(Procedure for Exercise of Rights)
60.561 Notice of dissenters' rights. (1) If proposed corporate action
creating dissenters' rights under ORS 60.554 is submitted to a vote at a
shareholder's meeting, the meeting notice must state that shareholders are or
may be entitled to assert dissenters' rights under ORS 60.551 to 60.594 and be
accompanied by a copy of ORS 60.551 to 60.594.
(2) If corporate action creating dissenters' rights under ORS 60.554 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was
taken and send the shareholders entitled to dissenters' rights the dissenters'
notice described in ORS 60.567.
60.564 Notice of intent to demand payment. (1) If proposed corporate
action creating dissenters' rights under ORS 60.554 is submitted to a vote at a
shareholders' meeting, a shareholder who wishes to assert dissenters' right
shall deliver to the corporation before the vote is taken written notice of the
shareholder's intent to demand payment for the shareholder's shares if the
proposed action is effectuated and shall not vote such shares in favor of the
proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1)
of this section is not entitled to payment for the shareholders' shares under
this chapter.
B-2
<PAGE> 67
60.567 Dissenters' notice. (1) If proposed corporate action creating
dissenters' rights under ORS 60.554 is authorized at a shareholders' meeting,
the corporation shall deliver a written dissenters' notice to all shareholders
who satisfied the requirements of ORS 60.564.
(2) The dissenters' notice shall be sent no later than 10 days after the
corporate action was taken, and shall:
(a) State where the payment demand shall be sent and where and when
certificated shares shall be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement of the terms of the proposed corporate action to news media
or to shareholders and requires that the person asserting dissenters' rights
certify whether or not the person acquired beneficial ownership of the shares
before that date;
(d) Set a date by which the corporation must receive the payment demand.
This date may not be fewer than 30 nor more than 60 days after the date the
subsection (1) of this section notice is delivered; and
(e) Be accompanied by a copy of ORS 60.551 to 60.594.
60.571 Duty to demand payment. (1) A shareholder sent a dissenters'
notice described in ORS 60.567 must demand payment, certify whether the
shareholder acquired beneficial ownership of the shares before the date
required to be set forth in the dissenters' notice pursuant to ORS
60.567(2)(c), and deposit the shareholder's certificates in accordance with the
terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's
shares under subsection (1) of this section retains all other rights of a
shareholder until these rights are canceled or modified by the taking of the
proposed corporate action.
(3) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this chapter.
60.574 Share restrictions. (1) The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received until the proposed corporate action is taken or the restrictions
released under ORS 60.581.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
60.577 Payment. (1) Except as provided in ORS 60.584, as soon as the
proposed corporate action is taken, or upon receipt of a payment demand, the
corporation shall pay each dissenter who complied with ORS 60.571, the amount
the corporation estimates to be the fair value of the shareholder's shares,
plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year ending
not more than 16 months before the date of payment, an income statement for
that year and the latest available interim financial statements, if any;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated;
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(d) A statement of the dissenter's right to demand payment under ORS
60.587; and
(e) A copy of ORS 60.551 to 60.594.
60.581 Failure to take action. (1) If the corporation does not take the
proposed action within 60 days after the date set for demanding payment and
depositing share certificates, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under ORS 60.567 and repeat the payment demand procedure.
60.584 After-acquired shares. (1) A corporation may elect to withhold
payment required by ORS 60.577 from a dissenter unless the dissenter was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders
of the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares plus accrued interest and shall pay
this amount to each dissenter who agrees to accept it in full satisfaction of
such demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares an explanation of how the interest was
calculated and a statement of the dissenter's right to demand payment under ORS
60.587.
60.587 Procedure if shareholder dissatisfied with payment or offer. (1)
A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under ORS
60.577 or reject the corporation's offer under ORS 60.584 and demand payment of
the dissenter's estimate of the fair value of the dissenter's shares and
interest due, if:
(a) The dissenter believes that the amount paid under ORS 60.577 or
offered under ORS 60.584 is less than the fair market value of the dissenter's
shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under ORS 60.577 within 60 days
after the date set for demanding payment; or
(c) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions imposed
on uncertificated shares within 60 days after the date set for demanding
payment.
(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within 30 days after the
corporation made or offered payment for the dissenter's shares.
(Judicial Appraisal of Shares)
60.591 Court action. (1) If a demand for payment under ORS 60.587
remains unsettled, the corporation shall commence a proceeding within 60 days
after receiving the payment demand under ORS 60.587 and petition the court
under subsection (2) of this section to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding
within the 60-day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the circuit court of
the county where a corporation's principal office is located, or if the
principal office is not in this state, where the corporation's registered
office is located. If the corporation is a foreign corporation, without a
registered office in this state, it shall commence the proceeding in the county
in this state where the registered office of the domestic corporation merged
with or whose shares were acquired by the foreign corporation was located.
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(3) The corporation shall make all dissenters, whether or not residents
of this state, whose demands remain unsettled parties to the proceeding as in
an action against their shares. All parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The jurisdiction of the circuit court in which the proceeding is
commenced under subsection (2) of this section is plenary and exclusive. The
court may appoint one or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have the
powers described in the court order appointing them, or in any amendment to the
order. The dissenters are entitled to the same discovery rights as parties in
other civil proceedings.
(5) Each dissenter made a party to the proceeding is entitled to judgment
for:
(a) The amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the corporation;
or
(b) The fair value, plus accrued interest, of the dissenter's after-
acquired shares for which the corporation elected to withhold payment under ORS
60.584.
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60.594 Court costs and counsel fees. (1) The court in an appraisal
proceeding commenced under ORS 60.591 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in
demanding payment under ORS 60.587.
(2) The court may also assess the fees and expenses of counsel and
experts of the respective parties in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of ORS 60.561 to 60.587; or
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously or not in good faith with respect to
the rights provided by this chapter.
(3) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that
the fees for those services should not be assessed against the corporation, the
court may award to counsel reasonable fees to be paid out of the amount awarded
the dissenters who were benefitted.
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BOOK CENTERS, INC.
5600 N.E. HASSALO STREET
PORTLAND, OREGON 97213
PROXY SOLICITED FOR SPECIAL MEETING OF STOCKHOLDERS, OCTOBER 8, 1996
The undersigned hereby appoints Daniel P. Halloran and Barry E. Fast, and each
of them, the proxy and attorney-in-fact for the undersigned, with full power of
substitution in each, to vote on behalf of the undersigned at the Special
Meeting of Stockholders of BOOK CENTERS, INC. to be held at 5600 N.E. Hassalo
Street, Portland, Oregon 97213, on Tuesday, October 8, 1996, at 10:00 a.m.,
local time, and at any adjournment or postponement of such meeting, all shares
of Common Stock, no par value, of BOOK CENTERS, INC. standing in the name of
the undersigned or which the undersigned may be entitled to vote on the matters
described herein.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF BOOK CENTERS,
INC. PLEASE MARK, SIGN, AND DATE THIS PROXY CARD ON THE REVERSE SIDE AND
RETURN IT PROMPTLY USING THE ENCLOSED ENVELOPE.
THIS PROXY MAY BE REVOKED BY A PROXY EXECUTED AT A LATER DATE OR OTHERWISE, AS
SET FORTH IN THE BOOK CENTERS, INC. PROXY STATEMENT WHICH ACCOMPANIED THIS
CARD.
THE PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED BELOW BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED
FOR THE PROPOSAL TO APPROVE AND ADOPT THE ARTICLES OF AMENDMENT (AS DESCRIBED
IN BOOK CENTERS, INC.'S PROXY STATEMENT DATED SEPTEMBER 16, 1996).
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT
THE ARTICLES OF AMENDMENT (AS DESCRIBED IN BOOK CENTERS, INC.'S PROXY STATEMENT
DATED SEPTEMBER 16, 1996).
1. THE PROPOSAL TO APPROVE AND ADOPT THE ARTICLES OF AMENDMENT (as the same is
described in Book Centers, Inc.'s Proxy Statement dated August 20, 1996.
FOR [__] AGAINST [__] ABSTAIN [__]
2. In their discretion, the parties are authorized to vote upon such other
business as may properly come before the meeting or any adjournment or
postponement thereof.
SIGNATURE(S) _____________________________________ DATED ________________, 1996
Please sign exactly as name appears on this card. Joint owners should each
sign. If signing as attorney, executor, administrator, trustee, or guardian,
please indicate the capacity in which signing. If a corporation, please sign
full corporate name and sign authorized officer's name and title. If a
partnership, please sign in partnership name and sign authorized person's name
and title.
